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Interview with John Bogle in the Dallas Morning News
Admin - Jun 27, 2007

Dallas Morning News columnist Cheryl Hall recently interviewed Mr. Bogle about his Georgetown University speech. Following is her piece:

Vanguard founder questions money managers’ takes

Tuesday, June 26, 2007

When is enough, enough?That’s what John Bogle, the 78-year-old founder of Vanguard Group Inc. and pioneer of the index mutual fund, wants young people entering the business world to think about.

And if some of us older folks also would mull whether we’re contributing to or sapping from society, so much the better.

Last month, Mr. Bogle, who’s now president of Bogle Financial Markets Research Center in Malvern, Pa., addressed the MBA graduates at Georgetown University and began with an anecdote:

“At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel, Catch-22, over its whole history. Heller responds, ‘Yes, but I have something he will never have: Enough.’ ”

Mr. Bogle then asked the MBAers to let their consciences be their guides in a brave new financial world where money managers feast first.

“If you do enter this field, do so with your eyes wide open, recognizing that any endeavor that extracts value from its clients may, in times more troubled than these, find that it has been hoist by its own petard.”

An investment fund manager e-mailed me Mr. Bogle’s “Enough” commencement speech last week, saying he found it thought-provoking. I did, too, and called Mr. Bogle to discuss it.

“As Kurt once said, I was trying to poison their minds with a little humanity before they get positions in the world,” the mutual fund legend said.

I decided to spread the “poison” with salient points from his speech and our interview.

Money for nothing?

“This country is moving to a world where we’re no longer making anything,” Mr. Bogle says. “We’re merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune.”

Want proof?

“If you made less than $140 million dollars last year, you didn’t make enough to rank among the 25 highest-paid hedge fund managers,” he points out.

Mr. Bogle doesn’t claim to be an average John Smith in personal wealth. But he says his accumulated net worth is “pretty much a joke” when compared to that.

“I have no problem with people making a lot of money if they’re making contributions to society. But the financial industry withdraws money that businesses earn before it is passed down to investors at the bottom of the food chain.”

Taking a chunk of investors’ returns

Mr. Bogle says index mutual funds such as Vanguard’s offer the least expensive way for individual investors to get into the investing game.

The finance sector – hedge funds, mutual funds, brokerages, money managers, investment bankers, banks and insurance companies – now generates far more profits than the combined profits of the U.S. energy and health care sectors, and almost three times as much as either manufacturing or information technology, he says.

In the past 25 years, that share has gone from about 6 percent of the earnings of the 500 giant corporations in the Standard & Poor’s 500 index to an all-time high of 27 percent last year.

Add in the earnings of the financial affiliates of giant manufacturers – “think General Electric Capital or the auto financing arms of General Motors and Ford” – and that share rises to about a third.

By Mr. Bogle’s calculations, hedge funds, mutual funds, financial advisers, investment bankers, lawyers and their likes siphoned about $500 billion from shareholder returns last year. “That sum is surely enough to seriously undermine the odds of our citizens who are accumulating savings for retirement.”

‘Opportunity of a lifetime’

“Enough” also depends on what’s being measured, he says.

“Our world already has quite enough guns, political platitudes, arrogance, disingenuousness, self-interest, snobbishness, superficiality, war and the certainty that God is on one side or the other.

“But it never has enough conscience, tolerance, idealism, justice, compassion, wisdom, humility, self-sacrifice for the greater good, integrity, courtesy, poetry, laughter, and generosity of substance and spirit.”

Mr. Bogle says the Georgetown MBAers embraced his words.

“I believe profoundly that this generation – whether they are getting out of high school, graduating from college or from business school – is passionately seeking ways to improve the world that we damn fools have left them.”

Then he adds wryly, “It’s the opportunity of a lifetime.”

He says he’s not trying to dictate but wants to inspire.

“I’m not King Solomon. I’m not telling them to believe what I believe,” he says. “I’m just a guy who’s been around a long time and has a strong idea that this is a great country that has lost its way.

“I’m saying: Think about your contribution to society. Be careful when you get into a business that extracts value. Broaden your idea about what’s enough.

“And for God’s sake, think about who you are.”


John Bogle on ETFs
Admin - Jun 21, 2007

Dow Jones has posted a video of an interview Mr. Bogle did on the drawbacks of exchange traded funds.

Bogle interview


John Bogle responds to “Ask Jack” questions
Admin - Jun 15, 2007

Dear Jack:

I am in the process of reading your new book”The Little Book”and in your chapter on bond funds,you state that “the intermediate-term bond index fund is a truly superior performer”.

I owned that fund along with the Long Term Bond Index Fund.Then last year Vanguard developed a financial plan for me in which they recommended that I sell those two funds and purchase the Total Bond Market Index Fund.I did just that and now I am concerned that I made a mistake and should have at least kept the Intermediate fund. I realize you are comparing that fund to Muni Bonds and Gov’t Bonds but I am wondering how you feel about the Total Bond Market Index Fund vs.Intermediate. Would it make sense to hold both? I also own the European Index Fund and it has done very well and I am considering buying the Total International Stock Index Fund and also keeping the European Fund. Again,does it make sense to hold both? Does it ever make sense to hold a part of a total index fund and still hold the total fund.

As you can see I am confused so anything you can do to shed some light on all of this would REALLY be appreciated.

I look forward to hearing from you,
John D

Hi, John,

Thanks for asking about our bond funds. I like the (taxable) IT bond index fund because it provides more stability than the LT index fund, and more income than the ST index fund.  The Total Bond Market Index Fund is fine, but I vaguely wonder about a bond fund that has 35% of its portfolio in non-bonds (i.e., GNMA securities, with their risk of being prepaid early,  when interest rates tumble).

That said, TBMF happens to have a maturity profile that is intermediate-term on balance, and so differs from IT largely in its holdings of GMNAs and Treasurys. Their ten-year records are similar, based on the tabulation I’m sending separately (IT 6.49%, TBM 5.96%, which included a single year–2002–in which we sort of forgot to stick to index principles, costing 2.00%, or about 0.20% per year.  I’m assured by management that such an aberration will not recur.)

As it happens your previous 50LT/50IT strategy was a winning one, as the tabulation shows.  Of course we have no idea which of the above strategies will work best in the coming ten years, but it’s comforting to realize that the results of all six of those shown are almost certain to differ only in degree.

There’s no particular reason NOT to hold two overlapping index funds.  In your case, adding a similar investment in Total International to your present European would simply lower your European exposure from 100% to about 80% of your Intl holdings.  Not much difference, for Eur is about 60% of Intl.

I don’t know nearly enough about your assets and goals to advise you, but I hope this note helps clarify the issues.  Perhaps your Vanguard adviser can explain the reasoning behind your allocations, and discuss possible changes.

Best,
Jack Bogle

* * * * * * *

Jack,

I will be attending the Diehard meeting in Washington dc in June (and previously heard you speak in Chicago last fall).  Will be bringing my 20 yo son-who is relatively new to investing, but shows great promise.

Here is my question. I greatly appreciate making your collected wisdom available on the Web.  However, the files available on your sites are quite formidable.  Could I ask you to select a few that a person new to investing should read?  I would like my son to read these before coming to the meeting-I would also gladly buy whatever book of yours you would recommend.  However, I must admit it would be be difficult to expect a college student with a summer internship to complete one of your books before the June meeting!!

Early in the days of the WWW I came across the following statement:

“Finding information on the Web is like taking a drink from a fire-hose!”

I appreciate you are quite busy, and thank you for whatever insights you may offer. Looking forward to meeting you.

Bob K

Hi, Bob,

Thanks for your kind note.  And looking forward to meeting you and your son at Diehards in DC!

I’m probably, in your words, the Great Information Firehose of investing, and I’d shamelessly recommend my original Common Sense on Mutual Funds, still, despite its 1999 publication date, holding a top 1/10 of 1% ranking at Amazon after all these years.  I also like Malkiel’s Random Walk, Schultheis’s Coffee House, and the Bogleheads Guide, especially for new investors.  (CSMF may actually be a bit complex for such souls.)

And my new Little Book ought to be great for your son (my own grandson, age 13, is actually reading it!), for it’s a short and simple read, easily digestible in a couple of hours and therefore well within your son’s time constraints.

Hope the ideas help.

Best,
Jack B

* * * * * * *

Dear Mr. Bogle,

First of all, I want to thank-you for founding Vanguard and for promoting indexing.  I have had an account with Vanguard for about five years.  After spending many years of investing in managed funds and individuals stocks,  I have learned my lesson about the power of indexing.

This week I read your new book “The Little Book of Common Sense Investing,” in which you make a compelling case for limiting stock investments to an all stock market index.  It is a wonderful book with a clear and powerful message.

My question relates to pages 205-206 of the book.  While you favor the all-US stock and bond market approach, you state that adding a total international stock index fund (of no more than 20%) is a reasonable alternative.  With three such index funds in a portfolio (All-US Stock Market, All-US Bond Market & Total International Stock Index), is there a need for rebalancing on a periodic basis? 

I have heard many investment advisors talk of the need to rebalance a portfolio on a yearly basis  to maintain the original asset allocation.  I wonder if rebalancing is inconsistent with the premise of indexing and whether the power of indexing means that the investor should continue to make investments based on the original investment formula, regardless of how the funds  have performed in the past rather than constantly changing the mix of new investments to maintain the original the original investment balance.  I would greatly appreciate your views on whether rebalancing hurts or helps the benefits of indexing.

Thank-you very much and best wishes,
RJM 

Hi, Mr. M,

Sorry it’s taken me so long to respond to your thoughtful note.  Busy!

We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind.  Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually.  That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary.

We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50/50 US stock/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods.  Also, it seems to me, noise.  Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big.  (I’m asking my good right arm, Kevin, to send the detailed data to you.)

My personal conclusion.  Rebalancing is a personal choice, not a choice that statistics can validate.  There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio.  Maybe, for example, if your 50% equity position grew to, say, 55% or 60%.

In candor, I should add that I see no circumstance under which rebalancing through an adviser charging 1% could possibly add value.

Use your own judgment, but perhaps these comments will help.

Best,
Jack

* * * * * * *

Dear Jack,

First off, I want to thank you for all you have done over the years for
small investors. If nothing else, your demonstration of the long-term
effects of investment costs have given some of us the confidence to
break away from our high-cost brokerages and shift our funds into
broad-based index funds. I made this change myself about six months
before I read the “Little Book,” and I have never looked back. 

Since I keep lending the “Little Book” out, I can’t refer to it
specifically, but as I recall, you suggest that index investors may
expect continued long-term returns in the 10% range, in line with
historical results. I noticed that your friend William Bernstein
anticipates in the Four Pillars that future returns, based on the
Gordon Equation, are unlikely to be much above 6 percent. Is this
difference in outlook primarily attributable to methodology, or time
span (you primarily cover the last century, whereas Bernstein pretty
much goes back the the dawn of civilization!)? 

Realizing that neither of you is in the predicting business, I’m not
inclined to make too much of this. Both of you are simply making the
point that in the aggregate, investors will make the market return
minus expenses. But I am curious.

Carl C
Hi, Carl,

Thanks for your kind words!

When you get your copy of my “Little Book” back, you’ll see that my projection for equity returns is about 7%, not history’s 9 1/2% nor Bill Bernstein’s 6%.  The reasoning is in the book, but comes down simply to “rational expectations.”  (Of course, sometimes the market is irrational, as in the late 1990s through early 2000.)

We shall see!
Jack

* * * * * * *

Dear Mr. Bogle,

I’m recently divorced, in my 5th decade, and determined to fly independent!

My answer is simple:  My divorce-inherited after-tax and IRA money is currently in mutual funds that I want to convert into respective S&P 500 Index Funds.  Do you see any problem with timing or diversification? Should I invest some of my IRA money in bonds, and if so, can you recommend a few common sense index funds that would be appropriate, and a percentage .. I’m thinking 20% at the most.

I read your book “The Little Book of Common Sense Investing” and you confirmed what I thought the day I took over my former’s mutual funds. And you were right about another issue — advisors do NOT want to discuss commissions or fees by numbers, percentages, and just what that means to investor return. 

Thanks for reading this and I look forward to hearing from you.

Julie H.

Dear Ms. H,

Belated thanks for your note.  Busy!

While I understand your questions, I don’t know nearly enough about your assets, your goals, or your risk tolerance to give responsible answers.  But you’re right–advisors are expensive, and index funds–stock and bond alike–are “the way.”

Best,
Jack


New John Bogle speech
jcbadmin - Jun 13, 2007

Linked below is a speech Mr. Bogle delivered at the 60th reunion of his Blair Academy class.

Blair Academy speech


John Bogle responds to “Ask Jack” questions
Admin - Jun 01, 2007

Dear Jack,

I have just finished your latest book and totally agree with your analysis of Index funds vs. mutuals, as over the long run they will outperform the equity funds. My question is, however, what holding period do you recommend. That is, what is the “long run”? Is the run long enough for folks in their 70s and up to switch over a large portion of their savings to the Index funds ?

Finally, for folks in this age group, are Fixed Indexed annuities appropriate for a portion of their savings? Those products do link to the S&P500 index and, at the expense of not obtaining the full upward movement, they do protect against downturns in the index. With index funds, the Seniors might not be able to have the time to recover losses incurred in a short 7 to 10 year period.

Thanks,
Steve K

Hi Stephen,

With all respect, I believe that your question about the “long run” has more to do with asset allocation than with index funds.

Think about this: for equities, the stock market index fund is the only way to guarantee your fair share of the market’s returns, over the short run and the long run alike. The same thing is true for bonds. (I’ll leave aside here the issues of 1) percent of equities in international stocks, and 2) whether you should hold taxable or tax-exempt bonds.)

So for folks in their 70s, common sense suggests that bonds–which pay generous income and are fairly safe–should predominate the allocation, and stocks–stingy with income (and, for actively-managed equity mutual funds, pay almost nothing) and fairly risky–should make up a smaller portion.

Depending on the particular circumstances, annuities are a good idea, but only annuities available at very low cost and commensurately high return. I’m personally not particularly smitten with most index-linked annuities, because they charge more for the “put” than its actual value. Someone (maybe Vanguard) ought to figure out a better way.

Best,
Jack

* * * * * * *

Dear Mr. Bogle:

In your most recent book, you advocate the use of a broad-based index fund (with a greater preference for an all US equities approach) for the equity portion of ones portfolio. You emphasize that trying to guess which segment of the market will “win” in the future cannot be determined any better than the futile attempts by market gurus to time the market or select the best individual stocks (at least after taking into account the cost of financial intermediation). You also say that there is a tendency towards “reversion to the mean” of any segment of the market that is momentarily doing better (or worse) than the overall market.

Another book by a different author (Larry Swedroe’s “The Only Guide To A Winning Investment Strategy You’ll Ever Need”) also emphasizes the inherent sensibility of using a passive approach to investing. However, the author feels that certain segments of the market, such as small stocks, offer greater opportunity for larger returns due to the greater risk associated with these segments, which gets reflected in the pricing of such assets. The author recommends overcoming much of the greater risk of those market segments (or “asset classes”) by broadly diversifying within those segments using passively managed funds.

What is your view on placing greater (but certainly not exclusive) emphasis on some of the these riskier market segments by using passively managed index funds as a way of improving the returns on ones portfolio without a commensurate increase in risk?

I thoroughly enjoyed your Little Book on Common Sense Investing and am currently thinking through how to put its principles to work. The variation on your theme suggested in this other book was intriguing and I wondered how you view such “tweaks” on the general notion of passive investing that you’ve championed for so long. Your insights would be much appreciated.

Best wishes,
Jerry K

Jerry,

Good question!

Fact is, I’m not one for trying to guess which styles will outperform or underperform–or when–and the data clearly show such changes are anything but sustainable or predictable.

We’ll send you the data tomorrow on small-cap value stocks vs. the S&P 500. You’ll see that SCV underperformed from 1926 to1942 (14 years), did nothing from 1944 to 1963 (another 19 years) and again from 1968 to 1976 (eight years) and yet again from 1979 to 1999 (another 20 years). That’s a mere 61 years of the 79-year period where SCV was not a winning strategy.

Admittedly, the explosion in SCV relative returns from 1999 through 2004 was impressive to a fault. So I’d definitely advise you to follow the strategy . . . but only if you can buy the style at 1999 prices.

My guess–alas, it is little more than that–is that today will prove to be a bad time to commit your assets to yesterday’s winning strategy. So if the temptation to do so is overwhelming, just do a little teeny bit.

Good luck!
Jack

* * * * * * *

Hi Jack!

Thank you so much for your LITTLE COMMON SENSE BOOK OF INVESTING. It is my introduction to you and I appreciate the opportunity to get to know you. Towards the end of the book you say that you don’t imagine anyone would do exactly as you advocate with an all index portfolio, holding U.S. stocks and bonds. My opinion is that I can’t imagine anyone reading the entire book and NOT doing as you suggest!

My question is this. I now realize that holding the entire U.S. Stock Market does indeed give you international exposure. However is it really enough considering the amount of outsourcing that continues to climb? And as U.S. companies realize the tax benefits of setting up shop overseas, they will eventually not even be U.S. companies any more. Is it therefore wise to have a percentage of your serious money account in a foreign index fund?

Many Thanks,
John G

Hi John,

I’m delighted that you found TLBCSI to be persuasive. I’m so pleased that it’s doing so well in the stores. After all, what good’s a sermon without a congregation?

My own belief is that the US international exposure is adequate for most investors. In fact, outsourcing makes US firms more profitable (at least in the short run!), even as the weak dollar increases foreign purchases of US goods and services, adding to their profitability. Yes, “on the other hand” (as the economists say), the weak dollar also make foreign stocks more attractive relative to US stocks, and it would take more courage than I possess to predict a stronger dollar in the forseeable future.

My traditional position was that currency fluctuations are impossible to time, and that they wash out over the long run; hence foreign holding should not exceed 20% of equities. After the strong dollar’s long run in about 1991-2001, I thought foreign stocks should in fact represent about 20%. But today, with foreign markets–particularly emerging markets–having had such a long, strong run, I’d say don’t rush to hold that position–average in over the next few years.

All of this smacks of timing, and of course it is! And I pretend no expertise in that area. But I believe that the main benefit of international diversification will not come from timing, but from a broadenede array of companies that represent the widest possible variety of leading companies. (I.e., some of the better auto, health care, and technology companies are headquartered outside the US.)

With that, you’re on your own. Hope it helps.

Jack

* * * * * * *

Jack,

I brought your books common sense and the littlest book on audible.com. It is easy to listen to on my iPod. Enjoy listening while at the gym. Are you going to write another book?

Thanks,
Jim

Hi Jim,

I’m glad you liked my Little Book, and also enjoyed it on tape. (Though several listeners said it would have been more “alive” if I’d done the talking. Too late for that now.)

Another book? Who really knows? Writing is a disease with me, and sometimes I think that my passion for it will never stop. “On the other hand” (as the economists say), it’s demanding work. We age! And what seemed like a little hill yesterday may look like a mountain tomorrow. But, as the old saw goes, we climb it anyway, “because it’s there.”

Stay tuned, even though I can’t tell you what to listen for.

Jack