Praise for John Bogle Compounds, Just Like His Returns
He showed that average returns were fine, keeping costs low was crucial, and putting investors first was paramount.
Bloomberg, January 17, 2019

In a sea of superlatives, one number stands above all others: $1 trillion dollars.

That is an estimate of how much money John Bogle, who died Wednesday at age 89, has saved investors since he started Vanguard Group more than 43 years ago.

That is the figure my Bloomberg colleague, Eric Balchunas, calculated in 2016. It includes the so-called Vanguard effect, or how the company has driven down fees in the rest of the money-management industry.

It isn’t an overstatement to say that few in modern finance did as much to change the industry as Bogle. If you look at a list of the major trends in money management today, most of them lead back to him. During the past decade, the biggest shift has been the acceptance of Bogle’s philosophy of investing in low-cost, diversified, passive indexes. Beyond Vanguard, investment managers such as BlackRock Inc. and State Street Corp., Vanguard’s biggest rivals, owe him a debt of gratitude. Even the exchange-traded fund industry — something Bogle was no fan of because they attract so many hair-trigger traders — can trace it’s rise to him.

Quite a legacy, and it dates back to his senior thesis at Princeton University in 1951. Bogle had several brilliant insights.

The first, as he observed not too long ago, was that mutual funds “make no claim to superiority over the market averages.” Almost no one consistently beats the averages over longer time periods, net of expenses and trading costs. That might be bad enough, but in their mad pursuit of market-beating returns, most managers fail to even capture beta, or the market average. Bogle’s insight was the advantages of simply achieving the average over time, provided the cost was kept low. This wasn’t cynicism, but the simple mathematics of compounding.

Perhaps the reason it took so long for Vanguard to become so dominant was that the effects of this approach are not quickly realized; it was literally decades before investors witnessed first-hand the benefits of this approach in actual investment returns. Once this theory was pointed out, academics embraced it; investors took a little longer waiting for the proof. Industry reluctance to embrace long-termism perhaps explains why when Bogle introduced his first index fund in 1976, he managed to raise a mere $11 million. “Bogle’s folly,” it was called, and it dogged him for years after.

His second insight was structural. Via an email exchange, Vanguard chairman and former chief executive officer William McNabb III noted that Bogle “was fond of saying, ‘Strategy follows structure. Everything Vanguard does is a result of our unique structure.’

Mutual ownership by clients is fairly common among insurance companies and credit unions. But it was almost unheard of on Wall Street; to this day, Vanguard is the only fund manager I am aware of with a legal structure in which the investors are essentially the owners.

The benefit to investors should be obvious. The company’s obsessive focus on keeping costs low means investors keep more of their returns. The difference between Vanguard and the rest of the industry has averaged about 100 basis points, or 1 percent, in terms of management fees. (It used to be more, but the Vanguard effect has driven down industry fees across the board.) Compound that over a few decades and substantial performance advantages accrue to investors.

Bogle’s third great insight was that the business should be a fiduciary to its clients. This has vexed politicians, regulators and Wall Street denizens alike. It’s the simple idea that customers’ interest always comes first. The Obama administration’s Fiduciary Rule, as it is known, has run into stiff opposition, especially among the commission-driven brokerage side of money management. But McNabb said that to Bogle, it was a simple truism: “When you serve only one master — your client — your priorities become very clear.” Rick Ferri, CEO of Ferri Investment Solutions, has proposed renaming this “the Bogle Rule.”

As a self-anointed Boglehead, I think I can say he would probably have liked that. It would be a fitting honorific that recognizes how much he did for average investors and how much the industry has changed because of his insights and influence.

~~~

I originally published this at Bloomberg, January 17, 2019. All of my Bloomberg columns can be found here and here.