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John Bogle on What to Do Now

February 10, 2008
Warren Boroson

Warren Boroson

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Referring to possible Academy Award-winning films the other day, while also talking about the current economic turbulence, John C. Bogle mentioned

“Into the Wild.”

“There Will Be Blood.” And:

“Atonement.”

Bogle, the founder of the estimable Vanguard Group, gave the following advice during a wonderful talk at the Princeton Club in New York City:

If you’re a speculator, trying to determine how other people will respond to events psychologically, get out of the market now and stay out. But if you’re an investor, and you own a balanced portfolio, stay the course.

Bear markets, he pointed out, have been followed by robust bull markets that erase the losses. (He himself, he said, at age 77 is around 68% in bonds, 32% in stocks.)

But we’re in for a bumpy ride, he warned, and we may be entering a recession, if we’re not already there.

He wrote his 1949 senior thesis at Princeton on mutual funds, he recalled, and received a top grade from his teacher. He then joined Wellington Management, but for doing something “stupid,” was later fired. He then started Vanguard, a fund family that would labor on behalf of its shareholders rather than management. At the time, he was, he said (tongue in cheek), “fired with enthusiasm.” In short, “No Princeton, no Vanguard,” he told the audience.

Vanguard launched the first index fund for retail investors, in 1974, with its philosophy of “owning everything and doing nothing.” (I was on the staff of Money magazine at the time, and scoffed, “Who would be satisfied with doing just average?”) Index funds have actually outperformed 90% of all active managers, Bogle noted. And if someone actually outperforms the market, 95% of that, he suspects, is due to pure luck.

For the next decade, Bogle believes that the market will return 7%--less than its historical 9% return.

Among other things, he said:



  • If he were applying to Princeton today, he probably wouldn’t get in. (He was recently named one of the 25 most important Princeton graduates. I wonder: Did Aaron Burr make the cut?) He almost flunked out of Princeton at one point – thanks to the pressure of jobs and too much school work.
  • He inveighed against the “soaring costs” of mutual funds, mentioning “the relentless rules of humble arithmetic.” If a total return is 7%, and costs are 2.5%, you’re left with 4.5%. Factor in inflation, and it’s 2%. Then figure in taxes, and your total return is a mere 1%.
  • He was a little skeptical of ETFs, simply because “They can be traded all day long in real time. What kind of nut would trade all day long? Why not take the kids to the park, or take the wife out to dinner, or read a good book?”
  • Other objects of his wrath and scorn: the derivative markets, hedge funds, Peter Lynch’s books urging people to buy companies making hot products, Alan Greenspan to a certain extent (“He held down interest rates too long – it will be interesting how history treats this icon”), Wall Street’s eagerness to sell something (like collateralized debt obligations), the conflict of interest that rating agencies have (they’re paid by the companies they rate), CEOs who screw up but emerge with $100 million in severance pay, the growing inequality of income in this country (20% of New Yorkers, he said, earn less than $8,300 a year).
  • Maybe what we should do now is let the markets clear themselves. “I don’t think the government can do much” to repair the economy. But he nonetheless suspects that “We shall muddle through.”
  • A great quote he gave from Chou En-Lai: Asked if the French Revolution was a good idea, the Chinese leader replied: “It’s too soon to tell.”
  • Asked what will happen when 60 million baby boomers retire in 2010 and presumably sell their stocks, Bogle said that the question is whether stocks are a good value then, not a question of supply vs. demand.
  • What he would like to see, among other things, is a Federal standard on advisers’ ethical obligations to their clients – overriding the variable state statutes.



***

His audience, needless to say, gave Bogle thunderous applause time and again. Listening to him, all of us were reminded of why he is sometimes called St. Jack.

About the author:

Warren Boroson
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 4.1/5 (33 votes)

Comments

queenofmay
Queenofmay - 6 years ago
Aaron Burr did NOT make it.

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