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Jack Bogle transformed the investment management industry. Over a career lasting nearly half a century, Bogle was a crusader for individual investors, working to bring the interests of asset managers in line with those of their investment clients.
In 1975, Bogle founded the Vanguard Group, structuring the business as a mutual company, meaning that Vanguard is owned by the funds it manages and, as a result, the funds' investors. A year later, Bogle and Vanguard introduced the first-ever index mutual fund available to the general public, aiming to track the performance of the broader market while charging the lowest fees possible. At first, many in the investment industry snickered at Vanguard's new index funds, but over time, Bogle's idea took hold. While maintaining some of the lowest fees in the business, Vanguard has grown its assets under management from $1.8 billion at its founding to $5.3 trillion as of September 30, 2018, making Vanguard the second largest asset manager in the world.
Despite Vanguard's incredible success, Bogle didn't become fantastically rich. Instead, Jack passed on as much savings as possible to Vanguard investors, bringing fees for his funds to razor-thin levels (and dragging the rest of the fund market with him). As a result, Bogle helped all investors get better returns on their retirement savings, drastically reducing underperformance caused by high management fees. As Bogle said in 2012, "My ideas are very simple. In investing, you get what you don't pay for."
All investors are indebted to Jack Bogle for his efforts over 40+ years to make the investment industry better serve the interests of individuals. As we remember Bogle's life and his contributions, we hope you'll enjoy this conversation between Bogle and Motley Fool CEO Tom Gardner recorded in 2016.
A transcript follows the video.
Tom Gardner: So 39 years ago, almost to the day, a little bit longer than 39 years ago, you started The Vanguard Group. Jack Bogle, one of our heroes at The Motley Fool, for so many different reasons, which will come out hopefully in our conversation. It starts with simplicity and clarity, integrity, and a solution that is transparent in a financial industry that works so hard against those qualities, it seems. Many times, it seems.
So what was life like for you in 1974? Can you paint a little bit of a picture of what Vanguard was then, compared to what it is today?
Jack Bogle: Well, sure. And this will not be very surprising. Anybody that's ever started, what we call in the modern age, didn't use the term then, a disruptive technology. And we were shrinking. We had a bad ... when we finally broke up the Wellington Management Company into certain operating units and Vanguard took over the administration, we were going downhill. One of the directors said, "Bogle, do you realize, we're hemorrhaging?"
Realize that we had money pouring out, more money going out than coming in for 83 months. So you gotta be kind of blind. You've gotta be kind of stupid. And you've gotta think that it's great news when a month's cash flow goes from 20 million dollars out to 19 million dollars out. Everybody condemned the index fund. Ned Johnson said, "Our shareholders would never want a fund with average performance."
Gardner: Near average.
Bogle: And by the way, that was the year, in 1976 probably, when all the Fidelity funds had fallen out of bed. They weren't getting anything like average performance, by the way, just for the record. And for whatever that ... I don't know, philosophical bent was on his part, nice enough to say. They now have a 150 billion dollar index fund business. So you'd seen a huge swing. Help stamp out index funds. Bam, bam, bam. That big Wall Street poster. Everything was negative.
The Wellington Fund had been destroyed by our partners from Boston. From an investment standpoint. Fund dropped, that was kind of our flagship of the Vanguard fleet, dropped from 2.1 billion to 400 million dollars. The performance was the worst in the industry for any balance fund. There wasn't a lot of good news around. All the funds were part of the merger. Went out of business. Ivest fund, finally. Funds that people had never heard of. The dustbin of history, we say. One called Technivest, using technical market analysis. Yes, Wellington brought out such a fund. And a fund for trustees, called Trustees Equity Fund, first one. And it crumpled like tissue paper in a fire. Like a metaphor. So everything was bad.
You had to know you were right in the long run. You had to know the gross return in the financial markets. Minus cost equals net return. Pretty smart here. That's the underlying principle. And you also, and I didn't really phrase it this way in those days Tom, but when you think about it, we're all indexers. Every investor in America is an indexer. Because 25, 30 percent ... let's call it 25 percent is indexed. But the other 75 percent own the index, but one at a time. I mean, that's the total market. And if you have a total stock market fund, you either own it as a unity or you own little chunks of it and somebody else owns the rest.
So well, the unity ... let's call it the unity business of the index fund, do better than the trading business. For all these other people that own the index, trading with one another and trying to outpace them, which of course can't be true. And they pay their little helpers, so they have to lose. So it's also clear that it is a disruptive technology. And it works, but any time you try to introduce a new idea, first it's it'll never work. Then, it'll work but only for a short time. Then, the guy's really lucky. And finally, you know, he's right.
Gardner: Do you think during the "guy's really lucky phase" or is there a phase in there where it is "the guy's a threat and we're gonna say whatever we can to confuse people about the solution that he's putting in the market"?
Bogle: Well, they can try that, but it's too late for that. It's too late. And in the last five years, roughly, 400 billion dollars is going out of actively managed funds and 600 billion is going into index funds. It's a trillion dollar swing, just for the equity part of the business. It's probably around, I don't know, six or seven trillion. It's a huge swing in five little years. So the market is responding. Even the people that don't like it at all are doing it because the client insists on it. And part of the insistence has gone in the wrong direction, and that is, we have the ETF. Which is a way of trading the index fund all day long in real time. What kind of a nut would do that?
Gardner: Well there are a lot of nuts out there though, right? I mean, even though there's been a tremendous growth in index fund assets, simultaneously there's been a complete diminishment of long-term investment as a principle that is both adhered to by individuals, professionals, covered in the financial media that way. The average holding period for a stock or a fund, or holdings within an actively managed fund, turnover ratio is north of 100 percent. It used to be-
Bogle: It's actually much higher than that when you look at the cost of it. Because that's the lesser of portfolio sales and purchases that you count as the amount of turnover and then divided into the assets of the fund. And the fact is, whether it's more or less or even the same, you've got those two sets of transactions. You take money out of a stock, that costs money. And you put money back into another stock, and that costs money. So the costs are very, very high. The unit cost, in fairness, cost for trading a share, it's maybe 30 cents. 25 cents in the old days. And now they're probably less than a penny. But if you're trading ... I don't know, 500 times-
Gardner: Is there anything-
Bogle: ... 500 times as much-
Gardner: Is there anything good about trading, in your opinion?
Bogle: Yeah. I think the market needs a certain amount of liquidity. And I accept that. But how much liquidity do we need? Do we really need the market to turn over 250 percent a year? I grew up in this business. There wasn't a liquidity problem. The turnover was 25 percent a year. So I've been known to say, you'll like this expression, taking on or copying Samuel Johnson and what he said about patriotism. Liquidity is the last refuge of the scoundrel.
Gardner: And the scoundrel is transacting that frequently because ... what's motivating them? It's human nature, and they're blind to what they're doing? Or there's a built-in conflict of interest that's causing a professional to transact either in their retail client accounts or for reasons inside their fund?
Bogle: Well, first, there's a lot of ego out there. Even someone you know has a pretty big ego, but he doesn't use it on saying, "I'm smarter than other investors." But we all think we're smarter than the other guy. We all think we're better drivers. Sometimes I think we all think we're better lovers. I don't know about that. But we're all average. We know that. And have to be, and will be. And no Lake Wobegon here in the investment business.
And then we have this massive marketing initiative of paid salesmen who can always beat the index. Because if you've got a universe of 500 funds and someone says, "I want the index because it does better", your problem is you're looking at the average fund. I will give you a fund that's above average. And it's always easy to do. Very easy to do. For some period, for some fund, it's the easiest thing in the world to do. So the sales machine, and they have conviction they're doing the right thing, but they've gotta know deep down they're not doing the right thing.
Gardner: Now there have to be some that you believe are doing the right thing on the active management side. There have to be some investors that you've encounter over time that you think it's admirable what they're doing. And actually the results, insofar as we can draw conclusion off of a single sample of one person's lifetime, appear to be above average. Sustainably.
Bogle: Well, I'm not sure above average is quite the standard, and that's a really tough standard to meet. But you can do a perfectly good job. And the managers I like, and I don't hesitate to say who they are, you can look at Dodge & Cox. And you can look at ... what the hell's the name of that place, Mike? Down there?
Mike: Longleaf ?
Gardner: Longleaf? Yeah. Love that.
Bogle: Longleaf. You can look at that ... clip that out.
Gardner: Oh we're gonna ... no. We're gonna push the volume up on that.
Bogle: And you can look at Longleaf. And there are probably a number of other small firms. What is their ... what's so good about them? They are in the business of investment management and not in the business of marketing. This has become a great big marketing business. And they stick to their guns and they manage money. They slip, they stumble. They err. They make mistakes. This is a business for all that. But in the long run, I would bet on someone whose business is trying to be a professional investor, not a trader. Someone whose business is trying to serve you rather than serve the marketplace.
So there aren't a lot of them, and I don't want to put a curse on them, because they'll get too big and they won't be able to do it anymore. And that's a little ... one of the great secrets of this business. And that is if you're really good for a long enough time, you draw an awful lot of money and then you can't be good anymore.
Gardner: Too big to succeed.
Bogle: Too big to succeed. Or as Warren says, Warren Buffett says, "A fat wallet is the enemy of superior returns." And of course it is. So if you can get someone that can give an index a good run for its money, I wouldn't say you're gonna do a lot better. I don't think they would say you're gonna do a lot better. But it's a good alternative, because you don't have all this infinite number of choices. You know, I think Longleaf probably runs four, five funds. Dodge & Cox runs five, I think. And the rest of us run ... Fidelity runs 260 funds. Vanguard runs ... I think it's 170. Not sure anybody really knows. And that's tough on a whole lot of levels.
Gardner: Can you describe fundamentally how an index fund works? For somebody who's watching and owns a Vanguard index fund, how does the process work behind the scenes? Is it five robots, three monkeys and a bunch of data? Or are there human choices that are going into the index?
Bogle: Well first, you can match the index in a very casual way. This to mean by, if ... I don't know, Microsoft is two percent of the index, you just put two percent of the portfolio in Microsoft. And then the same thing is true of every other fund. Not very complicated. And if you don't do it with great professional skill, all kinds of quantitative support, you will do a perfectly good job but not a perfectly tracking job.
In the long run, you'll match the index, but you might beat the index by 50 basis points. Half of one percent in the year. And lose to it by half a percent in another year, the tolerance is very small. And people like to see, or investors like to see a tight tracking. And so you do all these quantitative things. They're definitely called for, you know, quantitative mathematical skills. Particularly when there are additions to the index, or subtractions. That happens more in the Standard & Poor's 500 than in the total stock market. But it's really, it's a very simple thing conceptually. But to do it with something that approaches perfection is just what you say. A lot of quantitative people hidden behind the walls.
Gardner: If we take the concept of "too big to succeed" and apply to capitalization-weighted index fund, isn't that a bad idea? Wouldn't it be better to set the index fund up on a different set of criteria rather than weighting it by capitalization? Aren't we buying the largest companies and the most successful companies which have the smallest future market opportunity? And under-weighting the small, potentially up-start, disruptive future Vanguards?
Bogle: Well, you're saying that the cap-weighting indexes are ... give you a flawed index, in effect. And I guess my first comment would be since such an index beats the heck out of money managers, what kind of trouble would we be in if there were a perfect index?
And then I'd also say, much more importantly than that, and that is if the idea of indexing, as Paul Simon described it when he wrote the foreword to my first book, is you will get better returns than your neighbors and sleep better than your neighbors. And your neighbors own the capitalization-weighted index. Now, will a valuated index do better? Will a dividend-weighted index do better? Probably it will do better some of the time, I do not believe it will do better in the long run. That remains to be seen.
But when you think about it, if ... let's say fundamental indexing, whatever that means, exactly. But a weighting by some company, corporation data rather than by market price. Still owns essentially all the stocks the S&P 500 owns, just somewhat different weights. Not huge, but somewhat different weights. So they may do better, they may do worse. But if they continue to do better, well, what will happen? Everybody will take their money out of the market-weighted index and put it into the valuated index, and then the opportunity will vanish. That's the way the markets work. I don't think it's gonna work.
And I don't think that it's worthwhile to add that risk. Now, I know what I can get. I can do better than my neighbors. I can own the whole market, it's a little beyond the S&P but it's a perfectly good way of looking at it. Do better than my neighbors. And should I give that, let's call certainty, of relative return up for the uncertainty of whether one of these schemes that's out there ... equal-weighting, value-weighting, dividend-weighting, fundamental-weighting, all kinds of weighting.
Gardner: I kind of feel like equal-weighting is not ... would be as smart. But I guess time will tell whether that plays out.
Bogle: Well it works sometimes. We have data going back forever. But don't let the past data impress you. You know, when people start actually doing these things, you know this from your own experience, that what comes out of the lab is seldom reflected in the real world.
Gardner: How many mutual funds of an indexed variety ... let's say somebody's indexing entirely. How many funds should they own, as an individual? What's too many and what's too few?
Bogle: Well, you can certainly do with one. And that would be something like the Vanguard Balanced Index Fund. It's 60 percent total stock market, 40 percent total bond market, both U.S. And that's fine.
Gardner: So a person out there could simplify their lives, make sure they're paying off all their high-interest debt, it's gone. They're saving a portion of their salary each year, and they're putting it all in the Vanguard Balanced Index Fund.
Gardner: And that three-step approach is gonna improve the outcomes for the majority of investors out there, number one. And you think it's completely reasonable to put it all in a single fund.
Bogle: Well, there are obviously a lot of nuances here. And one of them is, if you're younger, I would think you would want to be 80 or 85 percent equities.
Gardner: Okay, yeah.
Bogle: And if you're older, I would think well, interest rates are so terrible today, you have to rethink all these things as the markets change. But older, maybe 25 percent equities and 75 percent bonds, something like that. And these are just kind of age-based. Your bond percentage should equal your age. But that's a rule of thumb. And interestingly enough, it shows a gap in the way these target date funds that are very popular today are structured. Because they ignore the fact that 85 percent of their shareholders have Social Security. And if Social Security, when you begin it, has a capitalized value of maybe ... the stream of future payments that you will get is capitalized at around, say $350,000. If you have $350,000 totally invested in an equity index fund, you're 50/50. And you don't look at it that way. And your behavior may get you in trouble that way, because I got too much in stocks.
But what people should be doing, honestly Tom, is stop looking at the silly stock market every day. And look at the cash flow they get. And in a Social Security, those payments are gonna continue. They're gonna grow with the cost of living. And I'm certain, as certain as I can be, that Social Security will be repaired simply because it has to be. And I don't think it's future is in doubt. You can just wake up a few of those people down at the nation's capital.
And for stocks, you probably want to look more at a dividend bias. You can buy a high-yield, dividend index instead of the total stock market index if capital closes. And that dividend, if you look at the stream of dividends, it makes the stock market look violently volatile. The dividend stream goes up, up, up. And the fact of the matter is there's only been two significant dividend cuts since 1925. One was in '29, '32. And the other was a few years ago, 2007, 2009. When all the financial companies pretty much eliminated their dividends.
We've already recovered from that, that's over. The S&P, Standard & Poor's index is paying more dividend now than it was before the drop. So all of these things are clear in the past. And in a lot of ways, that doesn't matter. But if you assume that American business grows, that America grows, that the dividend stream will keep going up. As people ask all the time, corporations have got huge amounts of cash. So dividends should not be jeopardized, absent some real problem in the world, in the economy. And people should be aware of that. You know, nothing is a lead pipe cinch in this world.
But you have ... actually it's sort of amusing. You have a couple of big risks out there. You know, about the economy. You know, about international kind of hanging on by its own. You know, about the dollar. About the federal reserve buying all the securities and trying to bid the prices up of assets. Not a particularly wise move. And you have to assess those risks and try to make some kind of a judgment about how they come out. But you also have to realize a couple of things. Well, a second set of risks is really the incomprehensible risk, like nuclear warfare. Or a meteor. A meteorite hits the U.S.
Gardner: Or robots. Robots begin to control our society.
Bogle: Robot anything. It won't matter whether you have stocks or bonds or anything else.
Gardner: Club. You'll need a club.
Bogle: Yeah. Just a club. So there are all kinds of big and small risks. But as I've often said, we're sitting here knowing where the world is going to hell in a hand basket, but people were worried about that since the beginning.
Gardner: The known fears are not the ones to really fear, and by the way Jack I truly can't believe you are 84 years old are you 84% in bonds?
Gardner: Okay so you are violating your advice, I am kidding.
Bogle: That's my rule of thumb and of course by 84 your social security doesn't have a capitalized value of $350,000 either I would like the next check to come in, my wife doesn't think we should take the checks, we postpone them until we were 70, I can live on what I get on social security because we live in a fairly modest way, very modest compared to the standards of what you see in the financial world and corporate world, but pretty nice compared to the typical American worker.
And you start with a rule of thumb-
Gardner: And you work back.
Bogle: And you work back and you have got to think about, I figured out Tom how to do it, but when I first introduced this rule I remember back in 1999 in Morningstar I told them that I was reducing my equity position from about 75% of my holdings to I think 30% of my holding because the stock market was selling at 35 times earnings and the bond market was yielding 7% and I looked at the transcript a while back and I said honestly when I look at it I don't see why I would hold any stocks at all, because at 30 times, 35 times yearnings stocks were not going to give you a 7% return of the first decade of the 21st century.
Gardner: Now you look at the numbers and you are not really sure what to do about them.
Bogle: Now my own position is that stocks or less fairly valued probably a little on the high side but more like depending on whose numbers you are using, 15 to 17 times earnings, maybe 18 times earnings, that's a long way from 35 half and bonds are not yielding 7, they are yielding, depending on what you want to look at, 3%, 2.5%, 3.5% depending on corporate government mix, maturities and things of that nature. So you have to think a little bit differently but I haven't done anything about that I haven't changed my portfolio.
Gardner: I want to talk a little bit about financial advice and how that side of the business works because Vanguard has at least perceived to be exclusively a mutual fund company so a lot of individuals are trying to figure out how to put a portfolio together, it's helpful to hear the number of funds that you would put into a account for an individual and it's relatively small and it should manageable and a decision that an individual should make on their own, but yet many people come to their finances and say, please Jack just do it for me, I will literally give you the authority to make all transactions in my account, I don't want to know anything about which of course sets up a lot of people to be taken advantage of by financial advisors.
What do you think of the financial advice side of the decision making process?
Bogle: Well first let me take this, maybe you think it's a nuance, but I got a letter from a shareholder the other day saying you keep telling me you only need three or four funds, why do you have 170? I took the simple example for him, we have 60 bond funds, 60, why is that, well we invented or created or developed a system that you tell us the maturity, how much risk and how much income you want, so we have short, medium and long and also a couple of variations around that and then in the municipal area you only have the funds itself in different states and then we have some bond index funds and we probably have 60 bond funds out there.
So an investor either has to know and do the math, should they be in municipal bonds or in taxable bonds, very important decision and right now municipal bonds look very attractive simple on those kinds of numbers. Then you have to decide how you want to balance risk and return, obviously the higher yields no matter how depressed they are, are in long bonds but the greatest risk is there and the lowest yield is in short, but the greatest principle stability is there.
So those are decisions investors really have to think a little bit about, it's not just me buying the bond index to be sure and that turns out to be an intermediate-term bond in fact, and that's perfectly satisfactory. We nuanced ourselves to death a little bit and you shouldn't in terms of taxable and tax exempt deal with that issue and I would say a simple most investors should be in tax exempt just because they yield significantly more than Treasuries, even before you take into account the tax exemptions.
I think they are attractive and maybe you want some treasuries there as your bulwark and you buy a treasury bond fund and it gets to be a little nuanced. I think the interesting question is if you want financial advice, how much should you pay for it? Let me give you an interesting piece of math, I look at the stock market, investment return as a 2% divined yield at the present time, low but not nearly as low as the 1% we were and a 5% earnings growth, that is a 7% investment return and over the next 10 years I don't think it's going to go up because of higher PEs or down because of lower PEs, not that much anyway and so there won't be any [inaudible 00:25:55] return by my reckoning.
So we have got 7%, that nominal and so we go to real and if are lucky to get 2% inflation that's 5 and a typical fund manager is taking 2, that's 3, and if you give 1% to an investment advisor that is a third of three and you are down to 2.
Gardner: That's brutal.
Bogle: If you are a fund picker you lose around 2% by jumping on the latest bandwagon and 2% minus 2 is the number I won't recalculate for your audience.
Gardner: It's a reminder of what Warren Buffet is saying that the financial services industry isn't extractive.
Bogle: Sure, the economics call it rent-seeking industry, of course it is, it has to be and it has to shrink, it has to get its cost down, the trading volume has to come down and a lot of mutual funds are going to have to fight, they are going to be cash cows, the big mutual funds companies are fabulously profitable and they can't change what they are doing and do what we do because they would not be profitable to their owners. These are financial conglomerates, where all those partners at Capital Group or the Johnson Family up in Fidelity, their wealth is like 20 billion or something putting the family altogether. They have done great in this business, where the shareholders have done great is the question that interests me, that is where we should be focused and the financial conglomerates are the same thing.
They basically tried to destroy this industry, they own 40 of the 50 largest fund groups are publicly held and most of the 30 of them by financial conglomerates and think about buying a fund that is run by a financial conglomerates, why did their buy their way into this industry? [crosstalk 00:27:45] They wanted to jump on the wealth wagon of managing money and they will accomplish that whether by hook or by crook if their return capital threshold is at 15% and they pay a billion dollars for a mutual fund company they are going to have to take out 150 million a year and it's easy. All kinds of things they can do-
Gardner: You are a fund of capitalism, so if we look in the market place in finance and compared to actors out on the stage, one of them is a fee-only fiduciary financial planner with a basic flat fee dollar amount that sits down and builds a Vanguard based index low-cost portfolio acting as a fiduciary, the other is a financial advisor or broker. I am reminded of three that came to a book signing in San Diego years ago of ours and said you talk about the Vanguard index fund it's really funny you say that we now manage money we have left the firm that we were at, in our case they were at Merill and they said we couldn't sell the index fund to our clients because we couldn't make any month on it but we all owned it ourselves.
So it's the complete reversal of the fiduciary, I will be fiduciary for myself, and then fiduciary with my relationship with you is hey if you buy it, if you are willing to buy what I am selling then I haven't done anything that I should feel badly about. So the reality though in the market place is that the first actor, the fee-only financial fiduciary is living a relatively lean existence in terms of the financial make up and the VP of the big investment firm that has country house and is making a million dollar a year selling load funds and a whole bunch of booby traps in the portfolio to keep you locked in in different products. How you observe and what conclusions do you draw about capitalization given that?
Bogle: Well capitalization has very funny manifestation when you get to the fiduciary duty of managing other people's money. Most systems particularly when you begin with a new idea for example, if you want to get it sold you pay the salesman a lot of money, you advertise a lot and you deliver 70 cents on the dollar or something like that. In the investment business is really a business of mathematical candor, you can't hide, if you are selling a Mercedes Benz, salesman is selling it he is going to say look at the value you are going to get, your neighbor are going to be envious, blah blah, blah, whatever it is and you like the diesel fuel or the door slaps nicely or it has a great sounds system or air conditioning or I don't know what.
But in the financial business value is one thing, dollars, it can be measured, unlike all these esoteric things that characterize capitalism. And once you get to measuring value the problem becomes a very simple mathematical problem. Now how you get people to focus on that is a good question, how do you get them to focus on the role of cost in that is a good question, how do you get them to think about the long term, because in two or three or four years the difference in cost, let's face it just doesn't matter.
But over your investment lifetime, getting the market return in an index fund or almost the full market return compared to paying 2% which is roughly the right number for a managed fund, means you get in a lighter case maybe 30 cents on the dollars, 30 cents, but you have to look at 40, 50 years. But these young people today say they are 25, 50 years is 75, that's too short, they will live to 95, they should be looking at 70 years and these numbers just get further and further apart.
You do need a lot, a lot of people need help there is no question about that, but I think we have to rethink how we pay for that help, maybe the 1% is much too high, or 1% if you have a client with $25,000, 1% is probably not nearly enough, so I think eventually you will have a fee for service kind of thing, typical professional service, lawyers, accountants and so on, neither profession which I am particularly smitten with, going that way that's the way they conduct their business and it's more of a professional approach than a business approach but don't try to get me to tell you there are easy answers to this.
You need help out there, people need their hands held there is no question about that and paying a little bit for it is probably better than doing nothing, just trying to do it yourself. And the worse thing of all is not investing at all, that is the one guarantee we have in the financial business, actually two, one if you buy the index fund you will get the market return and guarantee too is if you don't invest you will get nothing.
Gardner: One of our members, Neil wants to know what you think, well let's take the family that I was raised in that taught us from relatively early age to buy stocks directly, I will make the arguments on behalf of it and then Neil wants to know what you think of that argument where you see strengths and weaknesses to it and feel free to knock it down entirely, you will just be knocking my whole life to the ground if you do.
Bogle: I am going to be doing it anyway.
Gardner: No, so we were raised in a family and taught to invest in stocks, it was a low-cost alternative, a one time payment, and we were taught to, I guess one of the primary piece of advice I would give to any investors buying stocks is double your holding period right now and if you want to do it right after you have done it great, double it again because just as with a great fund, a great business should be held over at least five years to really see the value of that organization play out in the market place.
We were taught to buy stocks, the low cost one-time transaction, find the great businesses with a great leader who is ... Howard Schultz has been in Starbucks, John Mackey at Whole Foods, these businesses have compounded incredible returns since they became public 20 years ago and hitch your wagon to the stars of these really great, often consumer-facing businesses that we can follow. You have to do a lot of numerical work and evaluation, etc., but that's how we have been building our portfolios in our family. So our perspective is and Neil wants to know what do you ... when is it appropriate in your opinion for an individual to buy stocks, is there a level of expertize or interest, an amount of time you should have, or capital or it should be a side [inaudible 00:34:25] in a base portfolio of index funds?
Bogle: That last sentence captures it best and that is you should have a serious money account, I might even call it a boring money account, where you put money in the stock market index fund and balance it out a little bit with some bonds, depending on age and so on and don't look at it for 50 years, don't peek, but when you retire open the envelope, be sure a doctor is nearby to revive you, you will go into a dead faint you can't believe there is that much money in the world and that's where we fool ourselves.
That is a serious money, boring money account. We have a gambling culture here in this country, maybe every country does you see it in its finest manifestation or maybe I should say worst manifestation in the lottery, state lottery, Las Vegas contributes its share, the races contributes their share, the track, and all of these is just gambling where a lot of people bet their money and a lot of people take their money out and the [inaudible 00:35:30] wins the-
Gardner: 3 to 20%-
Bogle: Of whatever it is, so I would say, if you have the gambling instinct and most people do, at least start off, I would say start off with an index fund period and for five years don't do anything else and then look around and see what's happened in the five years, see how it felt when the market dropped 50%, see how it felt when it came back, and those five year periods are going to be very different for one investor or another, because they are all over time. Then when you get there 5% in the funny money account.
Gardner: What would have happened to Warren Buffet if he had done that, a tremendous amount of value would not have been created by his understanding and ability to evaluate a business for investment?
Bogle: Well name two.
Gardner: Well Long Leaf, you mentioned Long Leaf-
Bogle: Well they don't have the sensational returns, they have something above returns or maybe a little bit below par from time to time. Don't forget in Warren's case he wasn't running a mutual fund, the mutual fund is a badly structured business for investment management, we say and this is why it has to be really you can take your money out whenever you want you have to be ready to put in whenever you want and so you ride on these waves of optimism and good performance and the money comes in up here and then reversion to the mean which is a big part of my recent book, a big part of the final chapter of my recent book called Clash of the Cultures.
And it's happened everywhere, it's happened in the Magellan fund, it's happened in T Rowe Price Growth Fund, it's happened in our [inaudible 00:37:14] Fund, it's happened in Fidelity Trend Fund that Johnson happened to have run, it happened in CGM, all the hot funds, they were all in there the last 23 years and they all look like this. You put them over each other, it looks like the Himalayan mountains.
The reversion to the mean is a constant pattern.
Gardner: For the individual, I am just going to poke around here a little bit just to get your full philosophy, for the individual it's unlikely that you are going to hit the mountain top of the Himalayas with your portfolio, so you may not have to ever see the other side of the mountain top unless you have so successfully invested that your personal account is moving up in the billion dollar-
Bogle: Let's say you bought Magellan before it was for sale which is where that record begins by the way, there is a lot of phoniness in this business but you are going to enjoy the mountain and you are not going to know it's a mountain, but when that mountain gets up there, my God I have found the holy grail-
Gardner: Now I am really going to go all in.
Bogle: Now I am going to go all out on there is a lot of behavioral kind of stuff not to use too fancy a word in the mutual fund industry, interestingly enough Tom there is no behavioralism in the field of stocks generally. How could that be, that's because I am a dumb behavior, the guys that buys my stock from me is a smart behavior, we offset each other, it's not as if I can make a behavioral mistake without somebody else making a successful behavior thing the other side of the trade, so I think we take a lot for granted. We listen to all these theories and big old boring indexing is the answer.
Gardner: Have you ever bought individual stocks and/or actively traded funds and if so what do you look for in those investments?
Bogle: When I came into the business, I had friends in the brokerage business, I bought this and that and the other thing, and then I had a broker and he would tell me this is good, get out of that and get into that, and it wasn't that they did badly which of course is what they did, but I just couldn't stand how my phone would ring when I was trying to do my work. I haven't own individual stocks since let me say 1960, I don't know, a long long time I have never bought anybody else's mutual fund, although I did buy a nice back up investment for my son John Bogle's fund, Bogle's Small Cap Growth and so I did that and it's done actually rather nicely of course. He is very smart. And so that's about it.
Gardner: Even the most successful actively traded funds at Vanguard have a period of three years, sometimes even five years where they underperform but net net they have outperformed. In the case of outperforming actively managed funds that, let's just say they have a few qualities that we probably both love. Very low turnover. Tenured leadership. A very fundamental business analytical approach. But, even in those cases, where the fund is very well run, or even the Warren Buffett, Charlie Munger are going to have a year, a period of a couple of years potentially where they lose to the market. What's the appropriate amount of time to hold something before saying, "This team doesn't really know what they're doing?"
Bogle: Well, let me start off with ... I should explain Vanguard's philosophy as I implemented it, not as the necessarily do today. And, that is very early after we closed Windsor Fund back in 1985, it was getting too big, and we started Windsor II. And, everybody said it would never do nearly as well as Windsor. And, of course, it's done better, a little. They track each other very closely, so I don't want to make an issue about that.
And then, we had US Growth, and that was run by Wellington. We decided we needed a new manager. And, I wasn't so sure about them. So, I did what set the standards for everything we did since ... everything I did since then, and that is bringing in another manager. And then, another manager, and then another manager, and then another. So, we have a lot of equity funds that have five managers. It's not that it's easy to pick five managers. But, if you're comparing yourself with the universe of let me say, large-cap value funds, and there are 50 funds in that universe. Five is gonna have the same returns. It's kind of the law of large numbers thing. So, most of our equity funds have five to seven managers.
So, there's not much premium on manager selection. You hope they will do well, we're happening to have a good year. Have been having a good year this year. But, we'll have a bad one, because that's the nature of the business. What you don't want is something that is so departing, departs so far from the market, particularly on the upside, and you don't like it on the downside. But, on the upside, it draws money in. It brings in these investors who are looking for the next big thing, the next hot thing.
And, we win by about a point-and-a-half a year on average. On average. Not because we pick better managers. Because, we have very low operating costs, our expense ratio. We negotiate the fees way down with the advisors. The fee rates. 'Cause, the advisors are not starving to death in terms of the dollar fees. And then, we've looked, as you've said, for long term managers and that with lower turnover, and then we had no lows.
So, if you look at all those numbers, if we're good enough to be average, or lucky enough to be average, we win by about a point-and-a-half a year, which is 20% over 10 years. And, I always thought that was quite good enough.
Gardner: Awesome. Is ever a ... just a few more questions. Is there ever a situation that you can imagine where an individual should own a load fund? They've sat down with a financial advisor, and now they're watching this video and they're looking through their portfolios, we're talking, and they see a number of funds that their advisor has put them in that carry a load. Is there ever a situation they should be happy about that?
Bogle: I'd say unequivocally not. You know, you can look back. The advisor's gonna sell you a load fund. He says, "This no load stuff is bunk." Here's the no load, here's the no load index, and this fund even counting the 5% commission, which is roughly where they are today. Although a lot of that has changed to advisory fees. And, even with that 5% commission we did 50% better. Well, hindsight is always 20/20. If they can't find a fund that beat the index, well, I don't know, they can't be very acute. They can't be paying much attention, it's the easiest thing in the world to do.
But, don't believe it. The past is not prologue. And, actually, if you look at the numbers carefully enough and long enough and thoughtfully enough, you'll see the past performance of a fund is anti-prologue. The better it is in the past, the more the regression to the mean it's gonna be, the greater that's gonna be in the future.
Gardner: Do you believe that we will have a unified fiduciary standard or not? Are you optimistic about that? Maybe and explain, I mean, I think we've explained what it is for some.
Bogle: Well, let me just say this. The issue is a very narrow issue at the moment. And, that is the fiduciary standard for people who are selling funds. Investment advisors, fee-only investment advisors, stock brokers, things like that, it's a firing line level. I think we are making a very big mistake, I've written to the SEC three times about this. And, that is the biggest problem of the fiduciary side, is in the fund manager side. And, we need a federal standard of fiduciary duty for fund managers. And, if you look at what's going on at the Labor Department, and I've talked to them down there about this. You looked at the ... and fiduciary duty for the corporation and for the evaluator and for this one and that one.
But, no fiduciary duty for the guy where you really need the fiduciary duty, the fund manager. So, we do need fiduciary duty. That would tend to get us out of this morass we're in of short-term trading, of high cost, those speculation versus long-term investment. Because, it's the antithesis of trading. And, it would probably eliminate the conflict of interest that is obvious if your fiduciary has two sets of fiduciary duties. One is fiduciary duty in the mutual funds. And, the other is the fiduciary duty to the shareholders in this publicly held company. Or, publicly held conglomerate.
And, that fiduciary duty is ... those two fiduciary duties are in direct conflict. And so, we of course, quote the bible. "No man can serve two masters." And then, we add to that, what Matthew said right after that. Or, Matthew quoted the Lord as saying right after that, I suppose. And that is, "For he will hate the one and love the other." Now, in this business, who pays the portfolio managers, who makes all the money, who has all the public stockholders? The manager gets all the love. And, I won't say they hate the shareholders, I wouldn't say that at all. But, they love the managers more.
Gardner: I want to just talk in the end, a little bit about the fact that you've been a business leader. You talk about investments, but you started a company and ran that business, and it has two trillion dollars in assets today and 14,000 employees. It's a massive, I mean, sure it's way beyond what you would have dreamed of in 1974-
Gardner: Although, I'm sure you were optimistic about your chances, and be given the solution you've created. But, how do you evaluate talent? The people that you work with, you know, what were some of the cultural features of Vanguard during your leadership?
Bogle: Well, one of them is exemplified by a story I tell about the time we got to around 200 employees. And, I think we really, what I have, a personnel department. Human Resources, it's called now. It seemed like a good idea. And, I was, you know, really a dictator. So, I looked around and tried to see who was not busy in the office. Very strapped for being able to spend any money.
And, there was a secretary in the Legal Department, a very lovely woman. And, I talked to our lawyer. We had one lawyer then, we have 140 now. 'Cause, it's called progress. And, I said, you know, could I use her to run a little personnel factory? Interview people. And, she said, "Yeah, I think she can do that." So, she comes to my office. I'd like you to do this. "Whatever you want Mr. Bogle."
So, we talked a little bit and she started to go out of the office. And, she was about to walk out the door and she turned around and came back in and she said, "You know, I want to do whatever you want me to do Mr. Bogle, but I don't know what it is you want me to do." And, I said, "Well, I'm not sure I know either." This is what happens when you're at a very small company. And, I had a lot of things on my mind, of course. And, I said, "I don't know what it is that I want you to do. But, let's start with this. Hire nice people. And then, make sure that they hire nice people. And, that's the best I can do on this." You know, most of the jobs at Vanguard, some of the technology jobs require a whole lot of professional skill. Most jobs can be done by intelligent human beings with a little experience and a motivation to do them.
I look at Vanguard, as not being some, you know, can we hire the best and the brightest? I mean, I'd say that it's a big universe and we probably have our share of them. But, you try and get people that you can work with, who can work well with others. They're going to maybe try and not make the same mistakes that you did. But, it's the change from a little, tiny organizational, embryonic organization, where there is a captain. And, the rest of the oarsmen down below. Along the galley. And, that's obviously oversimplified. But, we're very ... our mission is very simple. Or, presentation is very simple. When you think of what we can explain to people and what they should do in investing. It's right out of the proverbial hornbook. The ABCs of the old days. And, it works, it's understandable, and is guaranteed to give you your fair share, or whatever returns the stock and bond markets are generous to give us or mean enough to take away from us.
Gardner: There's a Gallup Survey that shows that seven out of 10 people going to work in America today basically say that they're indifferent or even downright negative about the organization they're working for.
So, in a funny way in that rowboat scenario, where we're all rowing together in many organizations. More than half of the people don't even really care about what they're doing. So, obviously, you found people who are passionate about the principles.
Bogle: Yeah, we have more turnover than I would like. But, that happens with kind of these middle grade job levels, how people are well paid, they've got terrific benefits, the partnership plans they share and the earnings we generate for shareholders, and I still spend an hour with each Award for Excellence Winner, the program I put in there all those years ago. And, there are probably about eight a quarter.
So, I get to sit down and talk to eight people a quarter. May not sound like much in an organization that big. 32 a year, 320 in ten years. 640 in 20 years. So, I feel I have a pretty good, now these are exceptional people that's why they got the Award for Excellence so, I'm not kidding myself. But, we have human conversations, talk about commitment, talk about opportunity. Talk about the lack of opportunity. Talk about anything they want to talk about. And, they're among the most engaging and pleasant moments of my carer.
Gardner: You're in the unique position of having started, run the company, and now, sit as an observer of your creation. Succession is such a big issue for so many that we have a lot of business, small business owners that are at The Motley Fool. And, thinking about that, what have you learned, or what do you think about? I mean, you're, in a very ... I find it to be a great thing, that you have minor lover's quarrels with thing that are happening at the company that you created. Which, I think is a ... intellectually stimulating, must be, for you and for the organization to think. And, so how is that experience for you?
Bogle: Well, it's difficult, to be honest about it, it's difficult. I've had to fall back on ... the company is not particularly smitten with my directness and outspokenness in my books. And, so, people don't like criticism, generally speaking. But, I'm just trying to tell it the way I see it. And, I'd say my book, The Clashes of Cultures, almost entirely reads like a great, big commercial for Vanguard.
I mean there are some things I don't like in there. Talking about the Wellington Fund fee increase, which I was ... believe was unjustified. I'm talking about our proxy voting policies. Talking about that possibility of having a transaction tax. And, a bunch of things that are similar to that. And, so I finally had developed a response. And, that when someone says, "Well, I understand you disagree with Vanguard." And, that point, I said "Absolutely not, I would never disagree with anyone. Vanguard disagrees with me."
Bogle: And, it's their right.
Gardner: Mm-hmm (affirmative). So, you're optimistic about what Vanguard will become over the next hundred years. That the-
Bogle: Where we are, I mean, you have to be optimistic. There are things, risks out there, where they were trying, de-mutualize the company, that was happening at a lot of places. I don't think it's gonna happen there, but anything can happen in this world when you get human beings involved. I think it's important, even as we maintain the letter or the implementation of a mutual structure, we have to maintain the spirit of that mutual structure, too.
And, that requires some doing. You've got to keep your mind on the mission that your mission is to serve. Day after day after day. It's very difficult to see anything that can get in the way of that except some massive thing like a huge stock market collapse. It would not be good for us. And, every once in a while, we depart some of these new funds. I have a little question mark about, you know, you must be batting there better than an index fund. I wouldn't even look, I'd just say, "I bet they're not." Because, nothing can be in the long run.
So, you know, I watch. I think people at Vanguard really, I don't want to overdo this, but I think they love me. You know, I'm a normal human being. More or less normal, anyway. And, I'm straightforward, they can identify with that. And, even the people that have been there for a very short period of time seem to know who I am.
Gardner: It's total authenticity, which means, sometimes we'll agree, sometimes we won't agree.
Gardner: It's a member of ours named Vicky was bringing up the importance of skin in the game. It's, you've had skin in the game with the business, and have your capital with the Vanguard funds to this day. So, the mix of those qualities, even though it may lead to some public disagreement is overall a benefit to both the organization to you and to the outcome for the customers of that.
Bogle: Yeah, I really don't care who benefits or who doesn't benefit, I have to tell it as I see it. And, I've been able to do that for a long, long time. It was key to Vanguard's, well, actually Vanguard going into business. You know, you walk a road that you think is the right road. You walk it as straight as you can. You'd be as honest as you can. I've gotten so, I find confessing my mistakes of which the number in my career, well, I don't even want to get in the hundreds, thousands, I don't know how many I've made, infinite maybe numbers in a career.
It's kind of liberating to say, "I really blew that one." And, I blew a lot of stuff. But, the underlying thesis, if you will, the underlying concept, the underlying idea of owning a market, whatever the market may be and getting your fair share has worked and will work. Who else can say that about what's going on in their own company?
Gardner: Small failures all the way to great success.
Gardner: My final question. How are you spending your time now? I mean, an incredible part of your story, which we haven't talked about, but when we've talked to you on the radio about you know, your human heart. How old is your heart right now?
Bogle: Well, my heart is ... I got it when it was 26. And, I've had it for almost 18 years.
Gardner: Mm-hmm (affirmative).
Gardner: You're younger than I am.
Bogle: 42, yeah. But, I'm starting to feel a little more like 84. And, you know, there's a trail in recent years, been a little difficult. Physical trail. I've had some very profoundly serious problems and long hospitalizations. But, you know, you go into them optimistically. You got to ... my wife is a powerful support. And, my kids are wonderful. And, you get over the bumps, you're always optimistic. You know, the idea when you go into a hospital again, is you, they put you down on the gurney and you just go ... here we go again.
And, like the whole business of the transplant, my reaction is just the same, Tom. If I thought jumping up and down on the kitchen table and screaming and yelling about the unfair fairness of life would help my condition, I would do it.
But, it occurs to me, it would make it even worse. So, you kinda go along, and you speak out with honesty. I mean, I'm not trying to say something to hurt somebody, but I'm not going to agree with something I don't agree with. And, you know, I think Vanguard benefits from that immensely. You know, the shareholders, still close to a lot of them. Still got a lot of correspondence. Still writing a lot. I have an article about to come out in the Journal of Portfolio Management. And, another article about to come out in the Financial Analyst Journal. I'll forward you a book about Paul Cabot, one of the founders in the industry, I wrote the foreword to. And, a book about John Maynard Keynes published by, I think it's Oxford University Press, which I write the final chapter called, Adam Smith and Capitalism.
And, so, oh, I did a foreword for John Wasik's book, on Keynes, John Maynard Keynes as an investor.
Gardner: Mm-hmm (affirmative). It's great.
Bogle: So, I got Keynes, I've got Adam Smith, I've got one of the industry's founders. And, I've got two academic articles. And, I'm starting to worry that I'm gonna run out of things to do.
Gardner: I don't think that's possible, Jack. And, you know, anytime you need any extra work that you'd want to do, just come hang out with Fools.
Bogle: Okay. Well, you've been a good Fool, Tom.
Gardner: Well, it all started with Bogle's Folly. So, there is-
Bogle: We're associated.
Gardner: We're bound by name. But, Bogle, thank you so much for taking time. And, it's ... we could definitely continue this conversation for another hour, but let's let you get on with your day.
Bogle: And, retire. Retire.
Gardner: Thanks, Jack.
Bogle: Thanks, Tom, very much.