Jack Bogle, Founder of the Vanguard Group
Thursday, December 18, 2008SUSIE GHARIB: Well, if you are seriously contemplating a mattress as part of your asset allocation, you need some help. That's why we turned to legendary investor John Bogle. As founder of the Vanguard Group, Bogle has seen it all. Washington bureau chief Darren Gersh sat down with Bogle today and began by asking how best to navigate an economy and markets not seen in decades.
BOGLE: First you've got to make a very important distinction between the economy and the market. And we are in a serious recession already. I think that you are going to be facing -- we are going to be facing as a nation a more serious recession than we've had probably since the depression. I don't look for another depression. But it could go on for another year and a half to two years before we finally start to recover, the question with what strength. The stock market, however, is known, correctly known for anticipating what happens. So while the economy, GDP is down maybe 2 percent, 3 percent from its high, the stock market went down 50 percent from its high. Its reaction was huge compared to what happened to the economy. So the trick in the stock market is to try and figure out how much risk you are willing to take and the extent to which that has accurately anticipated that we are going into tough times.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is the thing, OK. And help me with this. Because I've taken your advice and I have been a buy and hold guy and tried to keep my costs down. But I looked at it. And for 10 years I've gone nowhere. Should I be doing something different?
BOGLE: No, you should not be doing something different. Buy and hold is eternal. What you have to understand is and I know you do understand it and that is the market moves in fits and starts. There is essentially nothing from 1960 to 1982, zero, just about the same level at the beginning as the end and then two booming -- two booming decades, 17 percent annual returns and then a decade where the return is, you are right, more or less zero.
GERSH: So maybe I have to get in my mind and everybody has to get in their mind that it could be two decades where we just kind of go sideways and you have to be there and you got to have that kind of time frame.
BOGLE: There is probably a decade of that behind us. So I think we can move toward more normal returns in the stock market now for some very fundamental reasons. First the dividend yield, an important part of long- term stock market returns. In fact, in the long-term the stock market return of 9.5 percent is a 4.5 percent dividend yield and 5 percent earnings growth. I think we're going to get higher than that earnings growth looking ahead here because earnings are down somewhat now. And if you get 7 percent earnings growth, that means the earnings on the Standard & Poor's 500 will double in the next 10 years. We had a 1 percent dividend yield back in 2000. Now that yield is up to 3 percent. So the fundamentals are stronger than they have been in a long time.
GERSH: Be devil's advocate though, right? A lot of companies used to be able to borrow more money than they had any business borrowing and consumers too. So we are de-leveraging. People can borrow less money. I see no reason that that is not going to continue for years. I don't know how long. In an environment where people can borrow less and spend less, companies too, doesn't that mean earnings should be lower for a long time?
BOGLE: Well, the one thing we know and this is really quite a well- known item and that is corporate earnings have grown at about the rate of our economy year after year after year. So if the economy is growing at a lower slower rate, let's say its normal growth has been in the last 100 years about 5 percent in nominal terms, 2 percent after adjusting for the cost-of-living. It may not seem like much, but that is where stock returns get created. So yes, corporate earnings will -- they are down sharply now. I think they will come back faster than the 5 percent growth.
GERSH: Here is the other thing about the market right now which is this whole Bernie Madoff thing and you can keep going down the sorry litany that we have had so far. Personally I'm having a crisis of confidence. I don't know who to believe or whether I should believe. And if I don't believe, my instinct is pull back, don't trust people. How do you operate in an environment? Should you trust people? Who should you trust?
BOGLE: Well, one of my early books said investing is an act of faith, including faith that our investment stewards will handle your money with the same care at which they handle their own and that faith has been hurt. And faith in our corporate enterprises has been hurt. And people should be mad as heck and not going to take it anymore. On the other hand, we have seen victims, companies that have done this going out of business. Individuals have led these companies have lost their jobs. So if you don't trust, ultimately you do nothing so whom should you trust? Trust people that are trying to serve you before they serve themselves. Beware of marketers. They're spreading the Madoff mystique all over the world we now know. And make sure are you investing rather than speculating. Know exactly what your costs are. It is a big part of the equation and make sure you are tremendously diversified in stocks and bonds and have an intelligent asset allocation. That's it.
GERSH: Jack Bogle, Vanguard founder, thank you for coming by. It's good to see you.
BOGLE: My pleasure Darren, always.
