A Memo from John Bogle
Mike - Apr 16, 2014

To:          Veterans and Principals

From:    John C. Bogle

Date:     April 15, 2014

Re:         More Recognition for Our Firm, Part II

This follow-up note to my mailing of April 10 includes five more recent articles from the press:

1) “Vanguard Founder Discusses How to Invest.” This interview in Investor’s Business Daily was published on April 2. While several of the quotes are a bit casual (if not mystifying!), the overall tone of the story is highly positive.

2) “Michael Lewis is Wrong About Rigged Markets.”  Jonathan Berr’s April 3 story in Moneywatch is yet one more contribution(?) to the huge publicity campaign that kicked-off Flash Boys. While I didn’t have the benefit of knowing the opinion of later commentators, my position is not much different from those of Burton Malkiel, Arthur Levitt, Morningstar’s John Rekenthaler,  and other thought leaders.

3) “On Smart Beta, Smart Skeptics.” James Green’s thoughtful story in Investment Advisor magazine (March 31, 2014). Of course, my response is blunt—smart beta is a “marketing gimmick.” Might as well be honest!

4) “Vanguard Beats BlackRock . . .” Christopher Condon’s article in Bloomberg Business Week (April 1, 2014) is one more long, well, “commercial” for our firm, its mission, and the work we all do. It is surely a rare quarter when we capture 90%(!) of all ETF cash flows as we did in the three months ended March 31, 2014, but of course there’s a message there.

5) “The Inevitable Standard.” Investment News, April 7, 2014. The “Inevitable Standard” cited in Mark Schoeff Jr.’s perceptive story is a federal standard of fiduciary duty—something I’ve been seeking for many years. I’m certain that my dream will come true . . . some day.

 Keep fighting the good fight!

Best, always

                 Jack


Memo to Veterans and Principals
Mike - Apr 14, 2014

To: Veterans and Principals

 From: John C. Bogle

 Date: April 10, 2014

 Re: More Recognition for Our Firm

             The spate of attention focused on Vanguard that took me three consecutive mailings to send you (on March 4, March 5, and March 6, 2014) subsided. But, surprisingly, it resumed about 10 days ago, although this note requires only two mailings. This is the first such mailing; the second will be circulated on Tuesday, April 15.

 1)      “The Inspiration for John Bogle’s Great Invention.” On March 5, The Wall Street Journal’s MarketWatch began a series called “Things Written Long Ago That I Wish I Had Read Long Ago.” The first essay in the series was columnist George Sisti’s piece on Paul Samuelson’s essay, “Challenge to Judgment,” published in the very first issue of The Journal of Portfolio Management in 1974. As many of you know, it was this essay that helped inspire the creation of the world’s first index mutual fund. To this day, I remember in considerable detail this remarkable piece, and the credibility that this brilliant Nobel Laureate brought to my forthcoming creation.

2)      “You Don’t Know Jack: The Education of Jack Bogle.” On April 4, the Philadelphia Business Journal published this lengthy interview, focused on Vanguard’s history and my long career. Perhaps I was a bit too honest in responding to the final question, but that kind of candor is a small price to pay for the credibility that Vanguard has established with the press and the public.

3)      “Bogle: Tilt To Corporates for More Yield.” Olly Ludwig, financial editor of ETF.com (formerly IndexUniverse.com, not, for me, a happy change!) covers a wide range of issues relating to Vanguard and the fund industry. Some of the numbers are a bit garbled, but you’ll get the point. Despite another bit of controversy, stories don’t get much more positive for our firm than this one.

Happy reading! More to come.

 Best,

                                          Jack   


A Memo from John C. Bogle
Mike - Mar 06, 2014

To: Veterans and Principals

From: John C. Bogle

Date: March 6, 2014

Re: The Cascade of Press Coverage Abates . . . for a Moment.

 

Part III

As promised yesterday, just a single final addition to the recent flurry of favorable public recognition of Vanguard. (Part I, March 4, 2014. The ECONOMIST and The Financial Analysts Journal—“The Arithmetic of ‘All-In’ Investment Expenses.” Part II, March 5, 2014. The Warren Buffett endorsement, etc.)

 In Part III, Finance in Philadelphia–Leadership, Decline, Renaissance,” I’m sending along a major speech on the role of our Greater Philadelphia region in contributing to America’s economy. As you will note, Vanguard is now the leader of our region’s recent renaissance. In that role, each of us here has an obligation to represent our community with knowledge of the past, dedication to high standards, and conduct characterized by integrity and humility.

The text of the speech is preceded by an article in The Philadelphia Inquirer on February 7, 2014, reporting on the forum in which I delivered my remarks. One local journalist described my essay as “excellent, revelatory reading. I love the irony of how the Quaker precept of thrift has returned to fashion, thanks to Vanguard, vision, and perseverance.” My historical perspective begins with Robert Morris in 1776 (and, in the same year, the wisdom of Adam Smith). Today, as by far the largest firm in the giant mutual fund industry, we have become the embodiment of thrift and simplicity. These principles work!

 Q.E.D.           

                                     Best,

                                          Jack   


A Memo from John C. Bogle
Mike - Mar 06, 2014

To: Veterans and Principals

From: John C. Bogle

Date: March 5, 2014

Re: Lots More Public Recognition

 Part II

 1.  Buffett Endorsement of Vanguard 500 Index Fund. I first learned of the contents of Warren Buffett’s annual letter to his Berkshire Hathaway shareholders in a note from one of our veteran crewmembers (thanks!), who wrote that Mr. Buffett has now “confirmed that Bogle is right.” I next heard from investment adviser and author Frank Martin, who wrote, “Jack, it looks like you are now the number two salesman for Vanguard.”

Both were comments on Warren’s report that “his money is where his mouth is.” His will provides a bequest for his wife, directing that his trustee should “put 10% of [the bequest] in short-term government bonds and 90% in a very low-cost S&P 500 Index Fund. (I suggest Vanguard’s.)”

 The Buffett letter is also laced with the wisdom of Ben Graham, as outlined in The Intelligent Investor. Enclosed  are three pages of excerpts. Our crewmembers will find Vanguard’s investment philosophy echoed here . . . over and over again.

2.  Do ETFs Turn Investors into Market Timers? Wall Street Journal, March 1-2, 2014. Here, popular columnist Mark Hulbert uses a variety of quotes from me on the trading activity in ETFs, noting that “the typical investor in [Vanguard’s] ETFs trades less actively then investors [traders?] in ETFs sold by other fund firms.” His column ends with four recommended stock funds (all Vanguard funds) and four bond funds (including two Vanguard funds).

3.  How to Predict the Next Decade’s Bond Returns. Wall Street Journal, March 3, 2014. Relying on research provided by the Bogle Financial Market Research Center—and many conversations!—reporter Chris Gay accurately describes the analysis I’ve been producing for the past few decades: “current yield is the best indicator of how much you’ll earn over time from fixed-income holdings.” 92% of the future 10-year return is determined by the current yield. My “Seeing the Future” chart (illustrated here) could hardly make it clearer.

 4. Give Fees an Inch and They’ll Take a Mile. The New York Times, March 2, 2014. “Watch out for expenses. They will cut down your returns, shrink your nest egg, and may well prevent you from achieving your financial goals,” writes Times financial editor Jeff Sommer. He sums up his long article (largely focused on a study by the SEC) with this (I suppose) classic Bogle quote: “In investing, you get what you don’t pay for.”

5.  What was John Bogle Thinking? FORBES, February 10, 2014. Here, investment adviser (and Boglehead!) Rick Ferri, relying on my recent correspondence and the history of my indexing philosophy, as well as subsequent interviews, describes how I “revisited the idea of passive investing; which ultimately reversed [my] long-held view of active management, and changed Vanguard’s destiny.” Rick calls it, “John Bogle’s epiphany.” If you’re interested in Vanguard’s early history, you’ll love this article!

 6.  Are there any circumstances in which you’d own an actively-managed fund?, Kiplinger’s Personal Finance, February 2014. “Yes, although they are extremely rare,” is how I respond to the question, noting but two exceptions to my “rule.” (The tipster who showed me the article: a fellow-traveler on a recent airline flight!)

 7.  Bogle: Indexing Has Gone Too Far. Financial Planning, March 3, 2014. Here, journalist Paula Vasan (fairly) accurately reports the results of our luncheon conversation. The idea that indexing has “gone much too far” (with my reasoning for that view) is only a small part of a controversial discussion on financial services today. I conclude that, yes, “some investors really need advisors,” if only “to keep them from doing anything.”

 8.  Can Vanguard Become Too Big? Financial Planning, March 4, 2014. Allan S. Roth, journalist, money manager, and, yes, Boglehead, has asked a good question, and penned a thoughtful article in response. Several charts show Vanguard’s amazing rise to our record share of fund industry assets, to 17.75% in stock and bond funds—vs. 17.74% (interesting!) for our two largest rivals combined. Asked to predict (guess at) our market share in 2030, Rick Ferri and Bill Bernstein suggest 30% to 40%, Bogle “offers a best guess of 25%.” Who really knows?

But, yes, as Bill McNabb acknowledges, there are “dangers” of giant size, “including the possibility that a larger Vanguard could become bureaucratic and self-serving.” Best that we mind our P’s and Q’s!

 *   *   *

That’s it for this huge list of press stories featuring Vanguard, just in the past few days and weeks.

Good News! Part III of this recent series, to be sent to you tomorrow, has only a single item . . . but a good one!

 

Best to all,

                                         Jack


A Memo from John C. Bogle
Mike - Mar 06, 2014

 

To: Veterans and Principals

From: John C. Bogle

Date: March 4, 2014

Re: Banner Days for Vanguard!

 Part I

Ever since Vanguard began, almost 40 years ago, we’ve had many great “PR” conquests. But I can recall no short period during our long history in which our founding principles and values received such positive attention as in the past several weeks . . . so much so that I’m sending you three different mailings during the course of this week. Part I begins the series with reactions to my landmark article in the January/February 2014 issue of the Financial Analysts Journal.

I sent a copy of the paper, “The Arithmetic of ‘All-In’ Investment Expenses,” to each of you on January 2, 2014, and it remains available on my eblog, www.johncbogle.com.

You may recall that the paper demonstrated that investors in tax-deferred retirement plans can increase their wealth accumulation by 65%(!), simply by using a low-cost stock index fund rather than a typical actively-managed stock fund.

In an earlier paper, Nobel Laureate William F. Sharpe had estimated that enhancement at “more than 20%.” However, he applauded my “wonderful combination” of expense ratios and several other costs of investing that are too often ignored. And (as I mentioned earlier), he loved my final sentence “Do not allow the tyranny of compounding costs to overwhelm the magic of compounding returns.”[1]

But perhaps the greatest bonus of the paper for us was the fine essay in the Buttonwood column of the Economist of London, entitled Against the Odds,” illustrated (appropriately, I think) with a slot machine taking in dollars and shooting out a penny. In his column, “Buttonwood” notes potential criticisms of my work, but concludes that “the arguments do not make much of a dent in Mr. Bogle’s case.”

Two points: One, articles in professional and academic journals—given their relative rarity and detailed process of review and approval—are perhaps the most effective vehicle for spreading investment ideas. Two, the Economist is noted for the highest standards of journalism, and a level of intellectual depth and integrity only rarely matched by other publications.

Of course I’m pleased that the FAJ article represents my eleventh work in this professional publication and its competitor, Journal of Portfolio Management; and that the Economist has now done perhaps another eight major stories on my work over the years.

The attention on my FAJ essay has also brought further attention to Vanguard’s guiding principle that “Costs Matter.” In last Saturday’s New York Times (March 1, 2014), for example, journalist Paul Sullivan (who said nice things about my philosophy in another recent article) gave my FAJ essay a nice boost, noting that “. . . low-cost [index] funds in tax-deferred retirement account could add as much as 65% to a person’s savings over a high-cost actively managed fund.”  

Even earlier, on January 28, 2014, author, veteran journalist, and financial adviser Daniel Solin added his voice in U.S. News and World Report. In an article entitled “What Wall Street Doesn’t Want Investors To Know,” Mr. Solin carefully outlined the points in my FAJ paper, and then added a wonderful summary of the important “takeaways” that I’ve done my best to instill here as part of our corporate character. I’m confident that you’ll find his essay well worth reading . . . and re-reading.

And there’s much more to come.

Best to all. Part II will follow tomorrow.

 

                                         Jack


 

[1] Morningstar’s resident expert John Rekenthaler described my paper as, “the best treatment yet of the subject.”


More Good “Ink” for Vanguard
Mike - Jan 30, 2014

To: Veterans and Principals
Date: January 28, 2014
RE: More Good “Ink” for Vanguard

1. “Having Enough, but Hungry for More,” The New York Times, January 17, 2014. Here, journalist Paul Sullivan contrasts three recent examples of Wall Street’s legendary greed with my own philosophy, describing me as “not one for the endless pursuit of prestige and wealth,” as he quotes me, “I don’t need any more” things in life. (He nicely refers to Enough . . .)

2. “Long-Term Thinking: 1800-2013.” The headline for this witty but profound essay from The Motley Fool on January 3, 2014, could well have added R.I.P. For the author announces the sad death of “Long-Term Thinking” on January 1, with “his last true friend, Vanguard founder Jack Bogle . . . at his side. He was 213 years old.” (That’s Long-Term Thinking, not yours truly!)

3. “Philadelphia: a Bedrock of Assets,” Investment News, December 9, 2013. In a twist I have not seen before, journalist Bruce Kelly salutes Vanguard’s role in supporting the large universe of registered investment advisers (RIAs) in the greater Philadelphia region, who have benefitted greatly by attracting talented men and women who have earned their spurs through our renowned training programs.

4. “The Legacy of John Bogle, the Man in the Arena,” Investment Advisor, January 27, 2014. This extensive story by editor-at-large Bob Clark gives high praise to the new book (The Man in the Arena), and makes more than a few generous comments on my life, my career, and my legacy. I found his retelling of the Vanguard story a thrill to read, and perhaps you will have the same reaction.

Best to all,
Jack


Ring In the New
Mike - Jan 02, 2014

January 2, 2014

 

 

To VANGUARD VETERANS AND PRINCIPALS:

 

“Ring In the New” follows the “Ring Out the Old” note that I sent you on December 31, 2013.  As 2014 begins, I’m pleased to send my first mailing of the new year, an essay entitled, The Arithmetic of “All-In” Fund Expenses. (Financial Analysts Journal, January/February 2014, ahead of print.) This Perspectives piece is my eighth article for this top professional journal, aimed importantly at CFA charterholders. (Congratulations to our 200 Vanguard crewmembers who have met these demanding standards!)

 

            My FAJ essay breaks new ground in its attempt to fill a huge gap in the analysis of the impact of mutual fund costs on shareholder returns. Up until now, consideration of fund costs has been almost universally limited to expense ratios, which currently average 1.12 percent for actively-managed equity funds. My piece notes that there are other, even higher costs that must be taken into consideration: fund portfolio turnover costs, cash drag, and sales loads and fees paid to brokers and financial advisers. By my calculation, those costs come to about 1.15 percent (a conservative estimate), bringing total costs of actively-managed equity funds to 2.27 percent annually.

 

            I go even further in my article, and consider the impact of taxes for investors in active funds—I estimate 0.75 percentage points—and the costs of investor behavior (buying funds after they hit the jackpot). Based on Morningstar data, I use an estimate of 1.20 percentage points. Now we’re up to a total of 4.22 percent in costs of actively-managed funds.

 

Now, let’s assume a stock market annual return over the coming decade at a reasonable 7 percent in nominal terms. With, say, 2 ½ percent inflation, that’s a 4 ½ percent real return. “All-in” fund costs would confiscate 94 percent of the stock market’s annual real return. In essence, that’s why “costs matter,” and why low-cost index funds are thriving.

 

            My article represents an extension of the data produced by Nobel Laureate William F. Sharpe in the FAJ of a year ago on the subject of expense ratios of active funds vs. index funds. He likes my broader approach, and has already endorsed my new article: “What a wonderful combination! . . . Your final sentence says it once again, concisely and powerfully.”

 

            Morningstar’s veteran analyst (and noted skeptic) John Rekenthaler has also endorsed my essay: “The best treatment yet of the subject.” As John approvingly comments on my cost estimates, “Better roughly right than precisely wrong.”

 

            I hope those of you concerned with these issues will give “The Arithmetic of ‘All-In’ Investment Expenses” the attention I believe it merits in making an even stronger case for index funds, well beyond the data that we conventionally rely upon. The final three paragraphs of my long paper provide the essential message, and I encourage all crew members to consider this vital addition to the full understanding of the “all-in” costs of active investing.

 

                        Jack                                    

 

P.S. As is my practice, I’m also posting this paper on my eblog, www.johncbogle.com, where it is available to all crew members and to the public.

 


[1] The final sentence of my essay: Do not allow the tyranny of compounding costs to overwhelm the magic of compounding returns. (Italics in original.)


Ring Out the Old
Mike - Jan 02, 2014

December 31, 2013

 

TO VANGUARD VETERANS AND PRINCIPALS:

 

“Ring Out the Old, ring in the new,” Tennyson wrote, and continued, “ring out false pride in place and blood; . . .  ring in the love of truth and right; ring in the common place of good.”

In that spirit, as the old year 2013 ends I attach the following items from the financial press.

 

1.      Vanguard raked in almost every dollar that went into U.S. equity funds this year.  (InvestmentNews, December 18, 2013).

Here, the article is speaking of both actively managed and traditional index funds (TIFs) investing in U.S. equities, excluding exchange traded funds (ETFs). The total cash flows: Vanguard, $41.4 billion of the $42.4 billion total. (Our total includes $36 billion in our index funds and $5.4 billion in our “active” funds.) “Thanks to Mr. Bogle’s creation, the index fund,” journalist Jason Kephart says, “the U.S. Mint may have to replace George Washington with Mr. Bogle on all its quarters.” (Please don’t hang by your thumbs waiting!)

 

2.      Warren Buffett (again!) to the Motley Fool, (December 30, 2013). “If you invested in a very low-cost index fund . . . you’ll do better than 90% of [investors]. . . . Just pick a broad index like the S&P 500 . . . I recommend John Bogle’s books. Any investor in funds should read them. They have all that you need to know.”

 

3.      Bogle urges regulators to move on fiduciary. (InvestmentNews, December 16, 2013). I’m accurately quoted as saying, “if you’re touching other peoples’ money, you are a fiduciary . . . Put the principle first.” (Just what Tennyson said: “Ring in the love of truth and right.”)

 

Enjoy these three articles. Happy New Year, and best to all.

 

Jack


A Memo from John C. Bogle
Mike - Oct 22, 2013

 October 21, 2013

 To Veterans and Principals,

             The press reports mentioning Vanguard just keep pouring in! Here are a few that may be of special interest.

             WSJ-1: “Give me a B . . .Monday, October 7, 2013. An impressive piece about the Bogleheads coming to visit to our campus. A capacity crowd of 209 Bogleheads joined us on October 16-18, representing a “fan club” that now includes 37,000(!) members.

             WSJ-2: A Nobel for the Random Walk . . . Tuesday, October 15, 2013. This op-ed piece claimed that “one beneficiary of Mr. Fama’s insight [on the ‘Efficient Market Hypothesis’] was John Bogle.” Alas, wrong on two counts: (1) I have never accepted the EMH and don’t today. (2) It was Nobel Laureate Paul Samuelson who was the major inspiration for the creation of the first index fund. So . . .

             WSJ-3: Eugene Fama and Efficient Financial Market Theory. Saturday, October 19, 2013. My “no-punches-pulled” response to that op-ed, reaffirming my own CMH (look it up!) and its supremacy. I quickly received an apologetic note from the author of the original piece, reading simply, “I blew it.”

             WSJ-4: Should You Invest for the Fun of It? Saturday, October 19, 2013. A long piece of journalism, with numerous quotes from former Vanguard director Burton Malkiel and me. To sum up: funny money” should amount to no more than 5% of your investments . . .

             NYT-1: The Erosive Effect of Expenses . . . Wednesday, October 16, 2013. From a special Times section on WEALTH, some of my comments on why investors must consider not only the drag of fund expense ratios on their long-term investment returns, but also the “hidden” costs of fund portfolio transactions, cash drag, and sales loads and fees for distribution and advice.

             M*01: Bogle, Buffett, Dad: Readers’ Top Investment Influences. Sunday, October 6, 2013. From Morningstar’s Christine Benz, yet another poll, this one citing the opinions of investors naming the individuals who’ve had the biggest influence on their investment philosophies. You’ll have to read this short piece to see who it was that edged out the great Buffett for the top spot.

 MF-1: Investing Legend . . . Wednesday, October 2, 2013. A nice piece that honors Vanguard’s recent 39th birthday, and provides some welcome perspective on index funds, and on staying the course. “The trick to what I’ve done in investing is I don’t do anything. I look, and watch, and observe, and laugh.”

             Whether we should wish it to or not, the spate of positive mentions of our firm and our philosophy seems unlikely to slow down. Phew!

             Best to all,

                                     Jack


Happy Birthday to Us!
Mike - Sep 26, 2013

September 26, 2013

 

To: Vanguard Veterans and Principals:  Happy Birthday to Us!

 

            September 24, 2013 marked the 39th anniversary of the birth of Vanguard, incorporated on September 24, 1974.  We were tiny then, with only 28 crew members on board when we began operations in May 1975. The environment was difficult in those early days—we were suffering regular net cash outflows month after month. But we were all excited to be undertaking “The Vanguard Experiment” in a new model of mutual fund governance.

            In this industry’s then-half-century of existence, the idea of a mutual mutual fund organization had never been tried before. Our formation was novel, contentious, and politicized, and in truth our continuing existence was in doubt. Few in the finance community noticed the new firm, and those who did belittled it.

            But radical changes in finance were on the way. The creation of the world’s first index mutual fund (“Bogle’s Folly”) followed in short order, a direct result of our unique “at-cost” structure. Going “no-load” soon after and eliminating our entire broker-dealer distribution network was without precedent in the industry. The introduction of our novel defined-maturity bond fund strategy followed, changing almost overnight the bond fund landscape of the period. Other departures—less radical—followed in the years ahead.

It seems to me a long time ago when Vanguard began, but I still recall the trials and tribulations, the slings and the arrows, the successes and the profound disappointments, the hopes and fears that punctuated our nearly four-decade history. But it’s a treat to see that in recent weeks our astonishing acceptance in the marketplace continues to be celebrated in the media.  I have attached just four recent examples:

  1. 1.      Motley Fool “Father of the Index Fund,” commemorating Vanguard’s 39th anniversary and generously crediting Vanguard for “creating an entirely new way to invest.”
  2. 2.      Philadelphia Inquirer exclusive on the human aspects of my long career, headlined “John Bogle’s Enduring Wisdom.”
  3. 3.      Morningstar Rekenthaler Report describing your founder as one “who entered 2008 as the mutual fund industry’s leading figure, whose position, five years later is that much stronger . . . his legacy, never in much doubt has now been totally cemented.”
  4. 4.      The Wall Street Journal, September 14-15, 2013 “What We Learned From the Financial Crisis,” emphasizing the importance of “character” in investing. For whatever it may be worth, I was highly complimented to have this major story conclude with a paragraph citing words from a speech I gave almost 15 years ago (!): “To earn the highest returns that are realistically possible, you should invest with simplicity. Rely on the ordinary virtues that intelligent investors have relied on for centuries: common sense, thrift, realistic expectations, patience, and perseverance. Call them ‘character.’ And in investing, over the long run, character will be rewarded.”

Please revel with me as we mark our 39th birthday and thank you all for your commitment to our long-standing mission of serving investors.

 

                                                            Jack