E-mail a friendJohn C. Bogle
original airdate April 20, 2007
Named by Fortune magazine as one of the four "Investment Giants" of the 20th century, John Bogle is founder of the Vanguard Group and president of its Bogle Financial Markets Research Center. He created the first S&P 500 index fund and is often referred to as the father of index fund investing. Under his leadership, Vanguard became the world's second largest mutual fund company. Bogle is also a best-selling author. In The Little Book of Common Sense Investing, he offers his in-depth insights.
John C. Bogle
Tavis: We continue our Road to Wealth series now with John Bogle, the founder of the Vanguard Group, one of the largest mutual fund firms in the world. In 1999, Fortune Magazine named him one of the investment industry's four giants of the twentieth century. He is also a best-selling author whose latest book is called "The Little Book of Common Sense Investing." He joins us tonight from Vanguard headquarters in Malvern, Pennsylvania. Mr. Bogle, nice to have you on the program, sir.
John C. Bogle: Good to be with you, Tavis.
Tavis: I'm trying to figure out how one could be all of that in the twentieth century and only be eleven years old.
Bogle: (Laughter) Well, the answer to that is an easy one. I had a failing heart that was about to do me in, in 1995, and, by February of 1996, I got a heart, so I've had eleven extra years of life and I'm the luckiest guy on the face of the earth, Tavis.
Tavis: Take me back to that experience and tell me how, after all that you'd accomplished eleven years ago, you navigated your way through that particular procedure and how you look at life these eleven years later.
Bogle: Well, first of all, I've kind of lived a life where I've sort of had blinders on. I'm always focused and determined to do the task ahead and that doesn't leave a lot of room in worrying about what may happen tomorrow. We all know, particularly this week, that anything can happen tomorrow and some of the things that can happen tomorrow aren't going to be good.
So focus on making the most out of your day and just ignore everything else around you, all those distractions, and just try and do your best to work with other people and be good to other people. The rules of living are remarkably simple and you try to live them every day and just deal with the little bumps that are there along the road of life and try to keep smiling no matter, as my father used to tell me, no matter how painful.
Tavis: (Laughter) Let me ask if in any way the experience of having to get a new heart eleven years ago and not knowing how long you would live necessarily thereafter, if that experience in any way changed your outlook, your thoughts, your ideals about money and about investing.
Bogle: Well, I have to say that you would think having a second chance at life would make you an infinitely better human being. But I'm afraid, sad to say, we kind of are who we are and I am who I am. I'm still the same kind of flawed human being I was before the transplant, although it's not that I don't work at being a better human being. Maybe I've had a little success in that, but I'll keep trying to do better at whatever the case may be, Tavis.
Tavis: But it didn't change your views about investing, about money, at all?
Bogle: Well, it only solidified the views I've had since actually way back in 1951 when I wrote my senior thesis at Princeton University. It said, in essence, "mutual funds should be managed for their shareholders, they should cost less money, there should be much lower sales charges or no sales charges, and that funds ought to be managed in the most efficient, the most economical and the most honest way possible." Those eternal verities are what led me through really my entire career now in its fifty-sixth year.
Tavis: Before I get into what can be found in this little book of common sense investing, let me ask a couple of questions relative to the title that I think will be instructive and informative for our conversation. When you say, "The Little Book of Common Sense Investing," what does it mean to be a common sense investor?
Bogle: What it means is to kind of look at the reality of investing. Don't be deceived by all this jargon you hear on Wall Street, by all these people that pretend to have the answers, by all these commentators that are giving you stock tips, by trying to guess whether the market is going up or down. That is all noise that is merely a distraction from the business of investing.
I say in the book, I've got a sentence that gets it all across pretty well and that is, "When you think about it, the stock market is nothing more than a giant distraction." Okay, a distraction from what? Well, it's a distraction from the business of investing is about, which is owning businesses and holding them forever. You don't trade. Trading back and forth costs money and just does in your ability to earn returns.
The way I put it in the book, there's a winner's game out there in investing and the winner's game is investing in all of American business - or for that matter, all of the world's business - and owning those businesses, every single one of them, and holding them forever and capturing all those dividend yields and earnings growth they deliver. That's the winner's game, buying and holding businesses.
What becomes a zero sum game is trading back and forth because all of us together are, of course, average. If I make a smart trade, believe me, somebody out there has made a dumb one (laughter). I mean, that's the other side of the trade, so beating the market becomes a zero sum game, but only importantly do we get to from a winner's game to a zero sum game to a loser's game.
When we take out the cost of investing, we investors as a group are by definition losers. If the stock market gives an eight percent return, for example, and we're paying two percent to capture that return, we end up with six percent. So an eight percent market, the typical American investor gets a return of six percent or maybe only five and a half percent, so that's the loser's game. So the idea of the book is play the winner's game and get out of the system so you don't become a loser.
Tavis: Two follow-ups to what you've just suggested or shared with us now. One, I don't mean to show my naiveté in asking this question, but I'm curious as to your take. If the stock market, to use your own word, is a distraction, clearly the folk who are selling us on the stock market, this billion dollar cottage industry around these issues would clearly, I would assume in your judgment, be a distraction as well. Why does all that exist then? Why is there a billion dollar cottage industry if you're telling me the whole thing is a distraction?
Bogle: Well, I almost hate to correct the host, but the cost of our financial intermediation system, our brokers and our money managers and all the legal things that go on and regulatory things, all those costs, marketing costs, all those advertisements you see for mutual funds or for stocks or for brokerage firms doesn't cost a billion dollars. It costs, believe it or not, four hundred billion dollars a year.
So we investors lose to the market by four hundred - think of that - four hundred billion dollars a year. So why do we do that? Well, one, we seem to think the stock market is a kind of a game. What do we teach our kids in school? Here's a stock picking game and all the kids in the ninth grade or the twelfth grade or whatever it might be are picking stocks to see who's the winner. That's a loser's game.
We all think we're above average. We think we're above average drivers, we think we have above average judgment, we think we're above average investors, we think we can pick above average stocks and we think we can pick above average mutual fund managers. As a group, we can do none of the above (laughter). We're all average. We're not Lake Wobegone here, Tavis.
Tavis: (Laughter) You know, if I were going to be corrected by anybody, I'll take your correction, Mr. Bogle, any day of the week. Your correction and your investment tips, for that matter. We'll come to index funds, speaking of investing, in just a moment.
The subtitle of this book suggests that your common sense suggestions for investing are really the only way, says the subtitle, "to guarantee your fair share of stock market returns." I did not know that I could get or that I was even entitled to a fair share of stock market returns. You just enlightened me on that. What does that mean, though?
Bogle: Okay. What that means is an eight percent stock market. Let's use that same number. Probably a little bit higher than we'll get in the future, but an eight percent stock market. How can you capture your fair share at eight percent? Well, my answer to that would be capture about 7.9 percent. That is to say, all except about a tenth of one percent or two percent of that market return simply by buying - and this gets me to the index fund.
The index fund does not have a manager who charges you big advisory fees. It does not have a huge marketing force, a huge amount of advertising, a bunch of salesmen who are out there hawking it, so there are no distribution costs. The operating costs, as we do here at Vanguard, can be held to an absolute minimum. You can actually be guaranteed, if you own the market at very low cost, to capture your fair share of whatever returns the stock market is generous enough to provide us with in the years ahead.
You know, there may be managers who have done better than that in the past and I freely concede that there will be managers that will give you more than your fair share in that eight percent market. There may be some that can give you eight and a half or even nine percent over all that time.
But the fact of the matter is, there are only going to be about four percent of all investors - the data is in the book - who will in fact do better than the market return because of these horrendous costs that we've spoken of implementing investment programs and doing all this silly trading with one another.
Tavis: Let me ask you, for those who are watching right now, but might not be familiar with what an index fund is. We kind of jumped in that conversation making a particular assumption that I don't want to make. Let's back up right quick and why don't you share with the audience what an index fund is, for those who might not be in the know.
Bogle: Well, in the best sense, there are, of course, a whole variety of index funds now, but in the traditional sense or in the classic sense or in the sense of that first index fund that I created way back in 1976, an index fund is simply a fund that owns either all five hundred stocks in the Standard & Poor's 500 index or every stock in America weighted by their capitalization.
That is, you have much more money in Microsoft or General Electric or Exxon than you would have in the very small stocks. So you own American business in total or almost in total, depending on which of those strategies you follow, and just hang onto it. So indexing is just owning the stock market, in its best sense.
Tavis: The plan that you've laid out is rather simple, quite frankly, but I wonder whether or not the difficult part is getting people to change - to the earlier part of our conversation - the way they think about investing?
Bogle: Well, experience is hard-won in this business and also very expensive, but let me just give you, if I may, just a couple of numbers. In the last twenty-five years - and these numbers are all in the little book - the stock market has given a return in round numbers of about twelve and a half percent per year, a very high return historically.
The average mutual fund has given you a return of about ten percent. That's because the average mutual fund costs about two and a half percent a year in expense ratio, as we call it, operating expenses of one and a half percent, sales charges of around one percent and portfolio turnover. These funds do the same kind of trading we foolish investors do. Another one percent. So two and a half percent is a reasonable estimate.
That's why it's ten percent instead of twelve and a half percent. Two and a half percentage points of return lost on the market by costs. That's by economics, if you will. The other problem we have as investors is emotions. Emotions are our worst enemy. I've often said that the emotions of investing have destroyed far more investment programs than the economics of investing have ever dreamed of destroying.
Those emotions cause us to buy only a little stock when the market is cheap and low as investors as a group, and a lot of stock in mutual funds when the market is expensive and high. That's what we call a timing penalty. Investors were putting very small amounts of money in during the 1980s and early 1990s in the mutual fund industry and almost half a trillion dollars a year when the market reached its all-time high.
The other problem with investor emotions is the selection penalty. What kind of funds do we select? Why, it's easy. We select the funds that have done the best in the past. So in that great bubble that we had in the market, mutual fund investors were putting about eighty percent of all their dollars in technology funds, information age kind of things, in telecommunications funds, in internet funds even, pouring them into those very aggressive, highly priced stocks after they boomed. Of course, were all set for the bust that followed and lost a lot of money there.
So while the average fund earned ten percent, the average fund earned something like - we don't know very accurately, but we can guess pretty closely - six percent, the average fund investor, in a market that was going at twelve and a half percent a year. That's just not acceptable.
Tavis: Well, you can get your economics and your emotions in check by reading what really is literally "The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns" written by John C. Bogle. Mr. Bogle, an honor to have you on the program, sir. Thanks for your insight and thanks for the little book.
Bogle: It's a treat to be with you, and good luck.
Tavis: Thank you. You too.
Back to April 20, 2007