John Bogle is founder of The Vanguard Group, where he launched the first index mutual fund back in 1975. Fortune named him one of the four "investing giants" of the 20th century. He's the author of seven books, including the recently published Enough: True Measures of Money, Business, and Life. In this second of three installments, The Motley Fool's Robert Brokamp asks Bogle about market-beating returns, Wall Street reforms, and Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) Chairman Warren Buffett's success.
You can also access the audio version of this interview.
Robert Brokamp: You're not a big fan of picking individual stocks. I do find it interesting, though, that there seems to be a lot of mutual respect between you and people like Warren Buffett and David Swensen, who do pick individual securities. Do you think that they are among a small group of people who are actually skilled? Are they just lucky? Do they have resources that are not available to the average person?
Jack Bogle: Well, I would say 95% of what we seem to attribute to skill -- particularly among mutual fund managers, where we have the records completely available to us -- 95% of that skill is simply luck. Some of the very best managers have historically succumbed to really inferior performance during 2008 -- people like Chris Davis, certainly Bill Miller of Legg Mason (NYSE:LM), Longleaf, Dodge & Cox. What we would generally have regarded as the best mutual fund managers -- the most durable -- have had poor years.
That means two things: One, we have got to think a little bit more about luck versus skill; that is your question. No. 2, we have got to realize one of the great truisms of picking investments, particularly mutual fund managers: If you want to beat the market, you had better be prepared to lose to the market at least one year out of every three. The manager that can beat it two out of three years is to be desired, and therefore, I wouldn't want to put the knock on these managers. And I have to say, by the way, that we have had some unfortunate management experiences at Vanguard with some of our funds this year, so I don't mean to say that we stand above the fray. The index funds are jewels this year; some of our managed funds are not jewels at all. I am sure the management here regrets all that, but that is life.
So yet within all of this, there seemed to me to be some evidence of real skill. I would put Swensen in that category, his infinite time horizon, his ability to have an incredibly talented staff, his commitment to education and to Yale University, rather than to himself personally. Now, he is not engaged in some great big marketing program to sell the world to Yale Endowment Funds, where if you are up at Fidelity and selling Magellan, that is where you want to make your money and make the fund bigger, bigger, bigger and I will make more money. Swensen isn't driven by that kind of a thing at all, not psychosomatically, but not in terms of the objectives of his career and of the fund that he is running. So I would put him up there.
You have certainly got to keep Warren Buffett there, although his stocks, at his present size, really aren't going to prove very much, I don't think ever again, because as Warren Buffett has said, honestly -- and both Swensen and Buffett are honest people, which is refreshing in this business -- "a fat wallet is the enemy of superior returns," says Warren Buffett. And he has got a fat wallet, so he can't possibly let his skill take him to where his skill has taken him over the years.
You are pushing me a little bit, honestly, to go much beyond those two people. Buy [me] some time and I can think of more. But I … think I would call Dodge & Cox and Longleaf, for example, very sensible investors -- intelligent investors who tried to free themselves, or rid themselves, of the things that plague the mutual fund industry, like hyping past performance, letting funds go to too large a size. And if you can do that, you have a fighting chance to win. If you are looking at your funds to reflect your stewardship rather than your salesmanship and keep costs down, you have a fighting chance to win.
Brokamp: How are you invested these days?
Bogle: Well, I have followed what I refer to modestly as "Bogle's Rule" … at a certain stage in life, probably fairly early, your bond position should equal your age. So the fact of the matter is, when the market got ridiculously high in the spring of 2000, the dividend yield was under 1%, the price/earning multiple was somewhere between 35 and 40 times. Using my sources of returns data, there was no way we were looking at a good decade.
I reordered my portfolio in the spring of 2000. I … got out of some of the equity risk and potentially lower return and [had] 65% in bonds and 35% in stocks. I don't mean to be that precise about it, but that is just the way it worked out.
It is now nine years later. I have not changed my investment allocation during the past nine years, since those changes made in the spring of 2000, but because stocks are down a little bit and bonds are up nicely, right now, curiously, I am about 80% in bonds and 20% in the stocks. So the pain of the year 2000 and 2008 has been minimal to me. I have to confess that I feel kind of stupid -- because I could see this coming -- not getting out of stocks. But I just don't think I know that … a small stock position is probably something I am going to have for the rest of my life. I don't expect to change the allocation again, so bonds go up, go down, and stocks go up -- bonds really can't go down a lot because of the coupon, but if stocks go up, I will have more in equities and otherwise. And I am not going to rebalance, I don't think. I will probably stay with this program for the remainder of my days. I don't believe in changing things around a lot.
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