The late Jack Bogle was known as the father of index investing, and rightly so. He founded the Vanguard Group and created the first index fund. In a November 2013 interview, he addressed the question of whether average people should invest in individual stocks at all.
Separate serious money from fun money
Bogle considered investing in individual equities to be equivalent to gambling. For this reason, he thought someone saving for retirement should first and foremost build up a safe nest egg before venturing out into the world of stock picking:
“You should have a serious money account, I would even call it a boring money account, where you put money in a stock market index fund and you balance it out with some bonds, depending on age and so on, and don’t look at it for 50 years. But when you retire, open the envelope. Be sure a doctor is nearby to revive you. You’ll go into a dead faint, you won’t believe there’s that much money in the world. And that’s a serious, boring money account.”
Bogle genuinely believed the desire to invest in stocks stemmed from a deeply-seated gambling instinct that is shared by Americans (and perhaps people of all cultures). He seemed resigned to the idea that this is unlikely to change anytime soon, which is why he advised investors to separate their "serious money" index account from their "fun money" investing accounts.
When asked how his belief that individual stock picking is essentially just gambling stacks up against Warren Buffett (Trades, Portfolio)’s success, Bogle responded, “OK, name two.” In other words, Buffett’s success is pretty unique (and I have argued that a sizeable proportion of his returns were generated in ways that are inaccessible to the average investor).
On mutual funds
Many people might agree with Bogle’s point of view, but may also consider mutual funds as an alternative to indexing. Unsurprisingly, he also did not have a particularly high opinion of those:
“The mutual fund is a badly-structured business for investment management. You can take your money out whenever you want and you have to be ready to put it in whenever you want. And so you ride on these waves of optimism and good performance, and then reversion to the mean [kicks in]. And it’s happened everywhere. It’s happened at Magellan Fund. It’s happened at T. Rowe Price Growth Fund...all the hot funds for the last 25 years for the last 25 years...look like the Himalaya mountains. The reversion to the mean is a constant pattern”.
Investors have a tendency to pile into the best-performing funds when they are at their highest valuations, and have an equal and opposite tendency to flee poorly-performing funds. In other words, they buy high and sell low. Bogle believed all mutual funds are ultimately mean-reverting in terms of their performance, so it makes little sense to invest in them, though as the inventor of the index fund, he was probably at least a little bit biased.
Read more here:
- Howard Marks: There Are No Opportunities in Distressed Debt Today
- How Joel Greenblatt Came Up With His Magic Formula
- The Dangers of Cigar-Butt Investing
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