Summary
- Jack Bogle created the Vanguard index investing approach as he saw “intermediaries” like brokers managers of actively managed funds added no value and impacted returns with their high costs.
- Bogle’s beliefs shaped Vanguard over two decades with an emphasis of simplicity and a goal of equalling the market rather than trying to beat it, which hardly anyone does consistently.
- Vanguard’s success drew investors by lowering costs, and Bogle disliked the cost of marketing, taking seriously the idea of making customers fellow owners, now more slogan than principle.
- Vanguard’s new Advice and Wealth Management unit may bring it back to being just another financial manager like Fidelity, BlackRock, and Schwab. Costs are up; customer service is down.
- A coda notes that the index fund has one major flaw – there are concerns when a selection of stocks dominates an index.
Jack Bogle was pretty much right about everything. He started with one basic idea, but that one idea was a doozie. Before Bogle came along, the great majority of individual investors had been talked into believing that brokers and actively managed fund managers produced higher returns. The revolutionary Bogle approach brought into the open many of the things investment “intermediaries” – a favorite Bogle term – had always tried to hide from both their customers and even themselves. A half-century of results was long enough to make it clear that neither brokers nor actively managed funds consistently added any value, while their costs and fees reduced value in a way that added up to a reduction of returns over the long term. Brokers and managers of actively managed funds were at pains to defend their self-interest by denying this obvious fact. In The Little Book of Common Sense Investing (which I strongly recommend), Bogle paraphrased social activist Upton Sinclair, who wrote that “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”
Bogle’s great innovation was, of course, the index fund – a fund designed to match an index, most prominently the S&P 500 or the total U.S. stock market index which also includes mid-caps and small caps. It was this innovation that created Vanguard and led Warren Buffett to tell Becky Quick that “Jack did more for American investors as a whole than any individual I’ve known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount.” For those who wish to go further in John Bogle’s studies, I suggest familiarizing yourself first with his 10 key rules for investing, which are available on many internet sites, including this one.
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