The Wall Street Legend Who Quietly Gave Away $1 Trillion to the Masses

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Just about everyone who has ever decided to start investing in individual stocks has done so with this thought in mind: "If I'm smart about this, I can beat the market." And if you are, yes, you can -- but it sure isn't easy. That's partly why mutual funds got popular. You could hand your money over to a group of professionals -- people who had made careers out of stock picking -- and pay them to diversify you into a market beater. Only one problem with that, of course: Most of them don't outperform their benchmarks, even before the managers extract their not-insignificant fees.

Enter the great Jack Bogle, founder of Vanguard and inventor of the low-cost index fund. Bogle, who died on Jan. 16, was deservedly one of the most popular figures in the world of retail investing -- though not, perhaps, with the money managers whose business model he so thoroughly disrupted. In this "What's Up, Bro?" segment from the Motley Fool Answers podcast, hosts Alison Southwick and Robert Brokamp look back at Bogle's remarkable life, from his Great Depression upbringing to his long crusade on behalf of the retail investor. They also offer up a number brief tributes made to him by others, from Kevin O'Leary of Shark Tank to Warren Buffett to an ordinary Bogle fan.

A full transcript follows the video.

This video was recorded on Jan. 22, 2019.

Alison Southwick: So Bro, I have a feeling I already know what's up.

Robert Brokamp: Yes.

Southwick: And it's not us.

Brokamp: It's not us, no. Last Wednesday, Vanguard founder John Bogle passed away at the age of 89. As many longtime Fools and listeners will know, he was an inspiration and a hero to many of us. We have a room named in his honor, here, at Fool HQ. We've been lucky enough to host him here at Fool HQ a couple of times. He even rode in the Foolmobile several years ago at a convention in Houston. He's been such a figure in many of our lives that with his passing we thought we'd take this opportunity in this episode to do a tribute to him.

Let's start with a little bit of his biography. We've talked about him before, so some of this is going over information we've passed along. I'm sure many of you read some of it, so we won't go too deep into his biography.

He was born in 1929 to a relatively affluent family, but it didn't last very long because then came the Great Depression. His father lost most of the family fortune and then, according to John Bogle, turned to alcoholism. His parents got divorced and mostly disappeared from his life, at that point, from what I understand. That made Jack Bogle have to be in a situation where he had to work a lot as a young kid.

But he didn't think that was such a bad thing, even though in the course of all this they lost their family home and they had to move in with relatives. [He worked many jobs] -- as a newspaper boy, as a guy who set up pins at a bowling alley, all kinds of these things -- but he said, "They were tough times and I started working when I was 10 years old delivering papers and eventually becoming a waiter. I learned you work for what you get and I feel sorry for people who haven't had that upbringing." He really did see it as a disadvantage if you didn't have to work a little bit when you were younger.

He eventually got a full scholarship to Princeton, but he still had to work as a waiter at the school dining hall while he was there. He struggled a little bit academically at first, but then recovered and graduated magna cum laude. Then when he was there, even at that young age, he recognized that actively managed mutual funds were a challenge. It was difficult to beat the market and he wrote his senior thesis called, "The Economic Role of the Investment Company," in which he said that funds can make no claim to superiority over the market averages. He wrote, "A fund's management should operate in the most efficient, honest, and economical way possible."

He sent that thesis to Wellington Management. The guy who was running the company, then, liked it so much he hired Bogle, and Bogle really rose through the ranks. He was the golden boy there for a while. Unfortunately, in 1974, he ended up getting fired after an ill-advised merger and he called the mistake, "Shameful and excusable in reflection of my immaturity." But he also said that if he weren't fired, there never would have been a Vanguard.

The story usually goes that he then sets off and establishes Vanguard very quickly, but actually it was a really tough time for him. He told a biographer that one day he was on a train and he just started crying, because he didn't know what he was going to do. He said, "I was totally wiped out. I don't recall another time like that when I was wiped out by it all." Still, he managed to found Vanguard in 1975 with a lineup of 11 actively managed mutual funds.

What's key, here, is that Vanguard is not a publicly traded company. It's a true mutual company in that it is owned by the funds which are, in turn, owned by the shareholders. If you own a Vanguard fund you own part of the company, and what's great about that is as opposed to being a publicly traded company that has a profit motive, Vanguard just has to cover its costs, which is why they can keep their costs so low.

In 1976 came the thing that Vanguard is mostly known for these days and that was launching the first publicly available index fund. It was called First Index Investment Trust...

Southwick: Creatively named.

Brokamp: Creatively named and it was a flop. The banks that managed it were hoping to raise $150 million at launch, but it raised just over $11 million. Bogle was urged to close the fund. It was called "Bogle's Folly." It was called "un-American." He appears to have persevered and now the fund is the biggest mutual fund in the world.

It was also one of the first companies to offer funds directly to people who wanted to invest in them -- essentially, no-load funds. Up until that point, if you wanted to buy a mutual fund you had to pay a broker a commission upwards of 8%. Just another way that Vanguard has kept costs low for people.

That's all back then. Where are we now?

Vanguard is the second-biggest money manager in the world, managing more than $5 trillion. Bloomberg's Eric Balchunas once calculated that Bogle, through Vanguard, has saved investors upwards of $175 billion. That's just from the low costs. But then he estimated what the "Vanguard effect" is -- not only the low cost of Vanguard, but the competition in the industry that has caused people to drive down the cost of their funds. Now Fidelity is offering a no-fee index fund. He estimates that as a value of $1 trillion that Bogle and Vanguard have given to American investors.

Just a couple of personal notes about Bogle. He married Eve Sherrerd in 1956 and they were still married when he passed away, so it was a marriage of 62 years. They had six kids. She, I assume, is the complete opposite of him in terms of publicity because I did not find a single quote from her and if you look on the internet, there's like three pictures. She's obviously very different from him when it comes to the spotlight.

The other interesting thing about him is that he had a pretty bad heart. Over the course of his life, starting at age 30, he had anywhere between six and eight heart attacks until he eventually had a transplant in the '90s, which essentially rejuvenated his life. But after he had his first heart attack in his thirties, the doctors told he him that he would only live to his forties. That he needed to stop working, to stop exercising, and he shouldn't have any more kids. He obviously ignored all of that, because he then had two more kids.

I think if there's anything that shows the perseverance of Jack Bogle, it's the launching of that index fund and being able to make it what it is today despite all the troubles he had along the way and that he was able to do this with a bum ticker and still live to age 89.

Looking at his interviews over the last couple of months, he had some words of caution for investors. First of all, it seems he could sense the end was coming. He spoke at the Bogleheads Conference in October and he began by quoting the ancient Greek playwright Sophocles saying, "One must wait until the evening to see how the splendid day has been." Then he added, "I think my evening is here, and I don't much like that."

But he said at that meeting, as well as in an interview in Barron's in December, that investors should expect below-average returns. He estimated as low as 2%-4% from the stock market and about the same from bonds. When asked what people should do, the answer was you're going to have to save a little bit more and you're going to have to get costs out of the equation.

Since Bogle passed away last Wednesday there have been plenty of great tweets, tributes, and anecdotes about him. I want to read a few of those. Friend of this show Morgan Housel tweeted, "John Bogle built a non-profit business with $5 trillion under management. What would have been profit effectively went to retirees. He was the biggest undercover philanthropist of all time."

Rick Ferri, who's a money manager and author, very active in the Bogleheads group, a group devoted to John Bogle. That, itself, is kind of interesting. There's no one in the financial services industry that has groupies like John Bogle did.

Southwick: Buffett has groupies. They don't have a name, but he's got...

Brokamp: Right. It's close.

Southwick: He's got groupies.

Brokamp: Rick is also the person who does the Bogleheads podcast. He interviewed Jack Bogle in September, which I would recommend to anyone. It's a long podcast about the history of Vanguard. Rick said in his article, "You cannot measure the quality of a man by the size of his bank account, but in John Bogle's case, you can measure it by the size of your bank account. No one on this planet has done more to increase the lot of individual investors in the last 50 years than John C. Bogle."

Bogle, also, was a big fan of fiduciary rule, which requires all financial advisors to act in the best interests of their clients which, believe it or not, is a controversial thing. It still hasn't been approved for everyone, but Rick suggests that because Bogle is such a fan of it, if it ever does pass we call it the Bogle Rule.

Speaking of the Bogleheads, David J. on the Bogleheads' discussion boards wrote...

Southwick: It sounds like a band.

Brokamp: I know. He wrote, "He could have been a billionaire. Instead he made hundreds of thousands of us investors millionaires." In 2012 Bogle put his net worth in the low double-digit millions -- $10 [million]-$30 million. The guy wasn't poor, but compared to other people running mutual funds, he could have been a billionaire.

Bogle, himself, points out that the Johnson family that founded the Fidelity funds is worth billions of dollars. Abi Johnson is the chairwoman of Fidelity, now. She's the granddaughter of the founder, Ned Johnson. She, alone, is worth $15.4 billion, just in Fidelity. Vanguard's a bigger company, so you can only imagine what John Bogle would be worth if he structured the company differently, but he chose not to. He chose to, instead, pass all that along to the shareholders.

Kevin O'Leary of Shark Tank fame tweeted out that if the only free lunch in investing is diversification, then Jack Bogle ran the most popular diner on Wall Street. He served up indexing and never looked back. He was the rock star maverick of change and the founder of a trillion-dollar industry. His DNA is in every ETF traded.

Becky Quick, upon hearing of the death of Jack Bogle, called Warren Buffett. Warren Buffett said, "Jack did more for the American investor as a whole than any individual I've known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount."

I loved going through Twitter for personal anecdotes about John Bogle because he was famously accessible. He responded to people with handwritten notes. He sent me a handwritten note after he read one of my articles. Greg Ip, who's a journalist for The Wall Street Journal, tweeted out that, "A limo driver once told me about giving Jack Bogle a ride back from a TV interview. They got to talking, and Bogle told him about index funds. Upon arrival, Bogle personally helped the driver fill out the paperwork to open an index fund account on the hood of his car."

He was also famously frugal. I did not catch the person's name, but I read this also on Twitter. It was from a Vanguard employee. He was at the Vanguard cafeteria getting his salad. He put his salad dressing on the salad and looked to his right. There's John Bogle, and John Bogle says, "You know, if you keep the salad dressing on the side they don't charge you for it and it will save you a dollar. I've been doing it for years."

But my favorite quote and a good way to end this is from William Bernstein, who's also a money manager and author. A big indexer. He was quoted in The Philadelphia Inquirer as saying, "Jack could have been a multibillionaire on par with Gates and Buffett. Instead, he turned his company into one owned by its mutual funds and, in turn, their investors.

"He basically chose to forego an enormous fortune to do something right for millions of people. I don't know any other story like it in American business history. Simply put, Jack cared. He cared enough about his clients to personally answer their letters, he cared enough about his employees to be on a first-name basis with thousands of them, and to pitch in at the phone banks when things got busy.

"In the end he cared enough about his country that he spent much of the last two decades away from his home tirelessly crusading against the increasingly elephantine and dysfunctional financial system."

I'll close with a quote from Bogle himself: "It's about being a good husband, a good father, a good colleague, a good member of the community. Everything else pales by comparison. The accumulation of material goods is a waste. You can't take them with you, anyway, and the waste is typified by our financial system. The essential message is stop focusing on self and start thinking about service to others."