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Market Insights From an Investing Giant

On March 17th, The Motley Fool Radio Show interviewed John Bogle, the founder of mutual fund giant The Vanguard Group, the father of index funds, and the author of Common Sense on Mutual Funds and John Bogle on Investing: The First Fifty Years. Bogle and David Gardner discuss the current bear market and what you should do in response, the mutual fund industry, and Yahoo!'s future prospects.

Wrestling with the bear
David Gardner: You recently said that this stock market decline is for the best in the long run. Could you unpack that a little bit for our listeners?

John Bogle: To begin with, when you're up in the stratosphere, it's just healthy to return to reality, to get your feet on the ground again, to get some of the speculation out of the system and come back to real honest-to-God investing, which has to do with earnings and dividends.

A reminder of risk is always a good idea, for people who have unbridled expectations for the future. But even more than those two things, as a practical matter, let's say that Jim Glassman [author of Dow 36,000] is right, and the Dow is going to 36,000 sometime -- and I'm sure some time it's going to get there -- if you're accumulating money in the stock market, would you rather accumulate it with the Dow below 10,000, or above 40,000?

It makes a lot of sense for younger investors still putting money to work, particularly. This is a great break! Instead of buying stocks at ever-ascending prices, you can buy stocks when they're flat in their duffel bag.

Gardner: How does this bear market compare to some of the other bear markets you've seen?

Bogle: Honestly, in my bones I feel, this is the second-worst bear market I've ever seen. The worst one was 1973-1974, I'm one of the only, I think 11 people who remembers that one.... They were very tough years, and the market went off 50% from high to low, and at the bottom people were scared to death, and starting to think about selling.

But that's the time to start to see the bright side of things, and start to think about buying. The problem with investing is a real simple one: the economics of investing are great, the emotions of investing are terrible, because when the market's at a new high, you say, "Gee, I'm going to put some more in," and at new lows, you say, "I'd better take it out."

Mutual fund managers: comets and stars
Gardner: I was looking over a recent speech of yours, and I want you to talk a little bit about this one. It was entitled, "The Stock Market Universe: Stars, Comets, and the Sun." What are the comets?

Bogle: Well... I think it's easiest to start with the stars. This industry has produced, or reportedly produced, all kinds of star managers. And they're running Internet funds, or they're running... a hot growth fund, or they've been short in the market just before it went down, and they're proclaimed to be "new stars" in the mutual fund firmament. But the reality is that these stars aren't stars at all, they're comets. They last only for a brief moment, and then, like all comets, they black out, the fire goes out, and the ashes float gently down to earth.

Gardner: OK, so those are the comets. Are there stars, then? In your mind, are there people who are consistently good investors, who can beat the market over time?

Bogle: Well, Warren Buffett would have to be as close to a star as we've ever seen. How many more there are? Peter Lynch might be in that category, although he didn't manage money for very long. An investor's lifetime is 50 years, I don't know how many 50-year stars there will be. That's not to say there aren't some good [money] managers. But they don't light up the heavens. They do a little bit better in most years. And that's good management, that's professional management.

And of course, as we all know, there's a lot of luck in this equation. If you get 1,024 people in a room, and they're all flipping a coin, one [of them] is going to flip heads ten times in a row. The difference between the coin-flipping contest and the mutual fund business is that in this business we proclaim them a genius!

Gardner: OK, and let's close that analogy. What's the sun?

Bogle: I like to think of the sun as owning the whole stock market. It's going to brighten up your financial future over the long term, forever, just because the economics of American business, the most productive society in history, is going to grow earnings, and it's going to provide some dividends. So if you own the entire stock market [through a total-market index fund], you will enjoy a wonderful, long-term investment horizon.

Your funds are down: what to do?
Gardner: OK, Jack, let's take a look at the individual who's looking, right now, at his or her "ultra- technology, super-growth value" mutual fund, and has seen that fund lose a tremendous amount of its value over the last year. What are some things that investors should be looking at when deciding whether to bail out on that mutual fund or not?

Bogle: I'd say, in general, if you have a good, diversified growth fund, and that's where the biggest problems have come -- we've gone through about a year where value funds are hardly down at all, and growth funds are down an average 40-45% -- if you have a good growth fund that's down that much, I don't think this is the time to get out of it, if it's been well-managed, despite the fact that it's had a decline. I'd stay the course....

But I do think we're looking ahead to an era where these 15%, 17% market returns -- I think they're through for at least a generation, a generation. So I think people ought to look ahead and be much more cautious in what they can expect stocks to deliver.

Gardner: Now, we know your favorite investment vehicle is the index fund. Index funds now come in an array of shapes and sizes.... For the listener out there looking to take their first step in the stock market, which fund would you suggest?

Bogle: I would suggest the total stock market index fund. It owns a share in every company in America, and it owns them forever. It basically guarantees you -- and no other fund can do this -- it guarantees you your fair share of the stock market's return. And it turns out, over a long horizon, that's incredibly valuable. It's simplicity. Simplicity, simplicity, simplicity.

Gardner: A lovely word, especially in down times.

Let's close with our game "buy, sell, or hold." We're going toss out a person, place, concept, or event, and ask you, if it were a stock, would you be buying, selling, or holding.... First one up this time around is "The Future of Yahoo!" Would you be buying, selling, or holding, the future of the company Yahoo!(Nasdaq: YHOO)?

Bogle: Nervously holding ... They are reputed to be one of the three real companies on the Internet that's going to survive everything. But what we're seeing there is advertising is going way down, advertisers don't find the medium effective, and yet the people who use Yahoo!'s pricelessly valuable service don't want to pay anything. We've got the Internet market there that's been free, maybe for too long. So we've got to think about Yahoo! with some idea of permanent sources of revenue developing.

Gardner: Excellent. OK, next one up, Alan Greenspan. If he were a stock, would you be buying, selling or holding right now?

Bogle: Well, I'd be holding.... I don't think, however, a) that Alan Greenspan has all the answers, and I think he'd be the first one -- I know him personally -- I think he'd be the first one to say that, and b) I don't know how he'd feel about this, but I don't think the Federal Reserve can protect the markets from going down further if that's what they want to do. It's not the Fed's job to try and hold up the stock market or to keep a bubble from bursting.

For more about Fool Radio, check out our Fools on the Air page. David Gardner's holdings can be seen online, as can the Fool's disclosure policy.


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