Legendary John Bogle Shares the Investment Lessons of a Lifetime

John C. Bogle, the founder of Vanguard, now the largest mutual fund company in the world and the creator of index funds, which account for 28% of all stock mutual funds. 

John Bogle. Jack, as he is known to many of us, is the founder of Vanguard, the low-cost investment giant famous for the index funds which he created there in 1976. His first index mutual fund, now named the Vanguard 500 Index Fund because it is modeled on the S&P 500 market index, now has over $100 billion in assets, as does its equivalent fund for institutional investors. It’s growing rapidly because of its low cost, largely passive investment model.

  • Salesmenship vs. Stewardship
    • In the old days, there was a clear separation of the experts managing the funds vs. the salesmen selling the funds
    • Today, it’s more of the same where the managers are the funds are also the marketers of the fund where the managers are not always the professional but only a salesmen
    • Now instead of having 1 concentrated fund, there are now 300+ funds. How can a fund directly have fiduciary duty to 300+ funds?
    • Fiduciary duty has been superseded by marketing; so the focus now is making things that will sell vs. selling what we make
  • No man can serve 2 masters
    • Best interest of the funds is to making the highest return on capital which is primary done by increasing fees to investors
    • Best interest of the investor is opposed to the best interest of the fund because higher the fees, the lowest return the investor will make
    • Structure of the industry is inherently flawed and will have to change
  • Difficulty in picking outperforming managers
    • Idea of reversion to the mean: outperforming managers might outperform in specific periods, but lose in others. After looking at a long enough horizon, it ends up equating to the market
    • Survivorship bias: It’s not transparent how successful mutual funds are because the ones that go out of business aren’t transparent to the public
  • Investment vs. Speculation
    • Investor trading cost is about 1.5% a year which is generated from high turn over
    • Purpose of the capital market is to allocate capital to the best companies, best products, best innovation
    • Capital markets have now becoming a casino where the users are speculating on which stock to gamble on while the casino profits from the trading costs
  • 10 Important Lessons
    1. Reversion to the mean: don’t only look backwards. Funds will do well one period, but do bad in the next and vice versa.
    2. Time is your friend: value of compounding
    3. Buy right, hold tight: Don’t make mistakes from the start and hold it through thick and thin
    4. Have realistic expectations: Common stocks should earn a nominal annualized return of 7% returns before inflation
    5. Forget the needle in the haystack, buy the whole market: finding a good fund manager is like finding a needle in the haystack
    6. Minimize cost: go for low cost especially index funds
    7. There no escaping risk: even at 100% yields like a 1.5% on a savings account, there’s always the risk of inflation driving that 1.5% yield to a negative return
    8. Beware fighting the last war
    9. Hedgehog beats the fox: fox knows many things; hedgehog knows 1 great thing. In an investment perspective, there are many wall street analysts that have complicated algorithms and crunches a lot of data, and there’s John that knows that if you own the market, you will get the return of what the market will kindly give, and in a bear market, it will take away, but on average, in the long run it will out perform the fox
    10. Stay the course: many investors lose because of their own behaviour. They buy something that does well in the past and think will do well in the future. Investors are the most optimistic at the peak and the most pessimistic at the bottom.