To encourage the rest of us to keep the investing faith, despite our bad decisions, Michael Batnick wrote “Big Mistakes: The Best Investors and Their Worst Investments.”
Published in 2018, the book makes the case that all the gurus had their bad days, including some that were very bad. We, as investors, can learn from those mistakes to make ourselves better investors.
John Bogle, the legendary developer of index funds, was no exception. Before his brilliant success with Vanguard Funds, he nearly wiped out the Wellington Fund, one of the most respected mutual funds for decades.
Back to the beginning: Walter Morgan had created an actively managed, balanced mutual fund in 1928, which was to become the Wellington Fund in later years. Thanks to Morgan’s cautious management, and the fact he had 38% of its assets in cash when the crash of 1929 hit, the fund came through the crash and Great Depression unscathed.
Morgan hired Bogle in 1951 and promoted him to the investment committee in 1960. In 1965, Morgan named Bogle to succeed him as president of the Wellington Group and, in 1970, he was given the CEO position.
This was also a time in which change was happening in the industry; Batnick wrote, “As the environment started to heat up and the conservative nature of Wall Street was transformed by the first generation of new blood to enter since the 1920s, management decided it needed to do something to keep up with the times.”
Bogle was blunt about it, saying, “Lured by the siren song of the Go”Go years, I too mindlessly jumped on the bandwagon.” The term “go-go” became widely used at the time and referred to the practice of “rapid in”and”out trading of huge blocks of stock, with an eye to large profits taken very quickly.”
One of those “mindless” things Bogle did was to merge with another firm, Thorndike, Doran, Paine & Lewis, which had all those bright young men who were so popular. Batnick described the deal this way: “The merger of these two companies was an odd pairing; it would be like Vanguard purchasing a crypto”currency trading firm today.” He added, “The merger turned the Wellington Fund into the antithesis of what led to its long”standing success.”
The once conservatively managed fund loaded up on stocks, taking the equity portion of this “balanced” fund to nearly 80%. It also pumped up its trading, with the portfolio turnover rate increasing from 15% to 25% in one year.
For a brief time, the go-go years were happy and exciting, but in 1969, the Dow Jones Industrial Average began tumbling—it was down 36% in 18 months and many individual stocks and mutual funds fell much further. Afterward, Bogle wrote, “The merger that I sought and accomplished not only failed to solve Wellington's problems, it exacerbated them.”
Batnick described the change in fortunes this way: “When the air came out of the stock market, they learned the meaning of not confusing brains with a bull market.” The damage was widespread at Wellington. For instance, a fund brought in by the merger, Ivest, was down 55%. Other new funds in the combined company included the Explorer Fund, which lost 52%, the Morgan Growth Fund plunged 47% and The Trustees Equity Fund had to close its doors. There was even a fund called Technivest, which was based on technical analysis. It folded too.
Most embarrassing for Bogle was the damage at the Wellington Fund; it lost 40%, which would have been a huge shock to longtime clients accustomed to a prudent and steady investment strategy. The average balanced fund was up 23% over the decade of the 1960s, while the Wellington gained just 2% (when dividends were included).
Not surprisingly, Bogle was fired as CEO, but did manage to persuade the board to let him stay on as chairman and president. He and some of his colleagues took a few months to follow up on research he had completed for his Princeton thesis in 1951. In that research, he discovered that mutual funds had trailed indexes by an average of 1.6% per year. As he wrote at the time, mutual funds “should make no claim to superiority over the market averages.”
Based on that work, Bogle eventually was able to persuade the Wellington board to let him go ahead with a new project, which would later become the Vanguard Group.
Batnick wasn’t shy in describing what happened in 1974: “Abject failure would give birth to the most important financial innovation the world has ever seen, the index fund,” he wrote. “Bogle had taken all of the lessons he learned and focused his attention into a better way of doing business.”
The fund began with just $11 million in assets under management and grew slowly in its first decade to $600 million. In its second decade, it took off like a rocket, growing from that $600 million to $91 billion. Batnick wrote, “Bogle was vindicated, and then some.”
The lesson from this chapter? Batnick argued that each of us must find a method of investing with which we are comfortable. In his own case, he said, “It took me around five years and nearly $20,000 in commissions to realize that I was not destined to be the next Paul Tudor Jones (Trades, Portfolio). I was too emotional to be a successful trader, which led me into the arms of Bogle's index funds.”
Not that he was arguing this was the way for all investors; each of us needs to discover what works and doesn’t work. In the end, you should have a method that is repeatable and contains a process. He concluded:
“With people living longer than ever, we need to expect and be prepared to fund a long retirement. In order to do this, you, like Bogle, need to find what works for you! Hopefully, after reading how a giant like Bogle was dealt a few blows, you'll realize that investing is a lifelong journey of self”discovery. If you're still on your journey, keep searching.”
Read more here:
- Â Big Mistakes: John Meriwether and Long-Term Capital Management
- Â Big Mistakes: Mark Twain
- Â Big Mistakes: Jesse Livermore
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
