David and Tom Gardner recently interviewed Vanguard Mutual Funds founder Jack Bogle on The Motley Fool Radio Show on NPR. Bogle, who is credited with popularizing the index fund, is currently the president of the Bogle Financial Markets Research Center. This is the last of four parts. All previous parts are linked to the right.
TMF: If you -- Mr. Index Fund -- were to buy stocks, where would you look? What industry or what size of company would you investigate?
Bogle: I just have never even thought of that issue. I don't believe in stock picking. I am too busy in my attempt to reform corporate America in the mutual fund business and the New York Stock Exchange to spend a lot of time on it, to be honest with you.
TMF: Jack, what do you think is the most common mistake that investors make today?
Bogle: I think they overrate their own ability to pick stocks. I think they are infinitely biased by past returns of the stock market. I think they are not sufficiently aware, even after a 50% market decline, how serious that risk can be. I don't think they pay nearly enough attention to cost and they haven't thought through the long-run implications of cost on the investment program and the difficulty of capturing the stock market's returns.
I believe that over a 50-year period, only about 3% or 4% of all investors out there today will beat the stock market. So, if those are the odds, and I believe they are, why do people want to take a lot of risk in trying to beat it when the odds against making that risk pay off are so small?
TMF: You have been engaged in financial reform for most of your career. It is an interest that we have as well. Something that we always ask ourselves is what else? What next? We have just seen this whole mutual fund market-timing thing hit the markets over the last two months. Continuous stories of mutual fund companies allowing certain people to trade after-hours and swap out their shares. Is there anything else that you think in the next five years is going to hit that we can know of now and be ready for?
Bogle: I honestly don't believe there is. Nobody knows what the markets will do and that is, of course, going to be the prime determinant of how fund investors do. But I think everybody is cleaning up their act.
Honestly, I think this industry's challenge is to do something that ought to be very simple, but will be very difficult. That is what I call "go back to the future." This industry was a good industry when I came into it in 1951. When I wrote about it in 1949, costs were lower and portfolio turnover was lower. Investors held their shares longer. Funds were run by investment committees and not stars, also known as comets. Giant financial conglomerates weren't even in the picture, but now they run most of the assets in this industry for their interest. So we need to go back somehow or another and get us where we were in that nice little idyllic Eden that we never should have left in the first place.
TMF: Jack, we are going to close with our game, "Buy, Sell, or Hold." You have played it many times before. We will be tossing out things happening in the world at large and ask you if these were stocks, even though you may not like stocks that much, would you be buying, selling, or holding and a sentence as to why. Are you ready?
TMF: OK, let's kick it off with the New York Yankees' loss to the Florida Marlins. There is a lot of talk that he might be making some major changes. Buy, sell, or hold, if he were a stock, Yankees owner George Steinbrenner?
Bogle: He's too overbearing. He interferes too much with the management of the team. He gets people that can't bear him. That is not good. A good leader may not be loved, but he shouldn't be hated.
TMF: I am guessing there isn't a lot of ambiguity about your feelings about this next buy, sell, or hold candidate. He is one of Philadelphia's most famous residents -- buy, sell, or hold the enduring wisdom of Ben Franklin?
Bogle: Buy, buy, buy, and buy. A great American. Great values. Great articulation. A model politician and a statesman and a leader that we should all emulate.
TMF: Who would you rather have managing your money if you were a 20-year-old with $1,000 a year for the rest of your life, Warren Buffett or Ben Franklin?
Bogle: I guess I would go for Warren Buffett.
TMF: Yeah, I mean Warren is more of an investor. It puts it in historical context. I think Franklin did pretty well as an investor. It is more like venture capital for Franklin. Ben Franklin understood compounding.
Bogle: Ben Franklin also understood something else that I really relate to. He thought the entrepreneurs should have serving characteristic, and he was an entrepreneur. You know, lightning rod, the Franklin stove, all kinds of things like that.
Bogle: He did it all for the public good. Didn't make a penny out them. He thought the job of the entrepreneur was to serve society. Not a bad thought for these CEOs that we see as so self-important and vain, glorious, and grotesquely overpaid rattling around our universe today.
TMF: You can read more on and from Jack Bogle at Vanguard.com. Jack Bogle, thanks for joining us again on The Motley Fool Radio Show.
Bogle: Good to be with you, gentlemen.
TMF: Good luck to you in all your future endeavors. We will be watching.
Bogle: Thank you.