John Bogle passed away recently. He understood financial markets, as we do, that they have a stewardship responsibility inside capitalism to support real wealth creation which raises the living standards of all fairly.
He opened financial markets for ordinary people – the arms and legs of capitalism – by making no-frills, low cost index funds easily available. He started a company, Vanguard Group, in 1975.
Vanguard’s business model allowed investors to minimize their risks by investing in a diversified portfolio of company stocks and so avoid the fees charged by fund managers who bought and sold individual stocks for their clients but who most often failed to outperform the market.
Vanguard was set up as a non-profit with its mutual funds and fund shareholders as owners of the business. Profits were plowed back into the business to reduce fees charged to buyers of its funds. Vanguard now manages $5 trillion globally. Vanguard has an expense ratio substantially lower than any other fund complex in the world.
Then, in 1977, Vanguard marketed its funds directly to individual investors and did not require them to go through brokers, who took fees for their service.
Bogle’s investment philosophy was to mimic the market, not try to outsmart other investors in the short run. Rather, his approach was to grow the market over time – little by little, but steady, year after year. This minimized the risk of loss which kept many with small or no fortunes from putting their assets at hazard in equity markets. Investors could obtain a market rate of return at lower cost with index funds. Even today, almost half of all American households don’t invest for the future at all.
Taken altogether, many Americans are richer and the financial industry poorer thanks to John Bogle. Warren Buffet said that John “did more for American investors … than any individual I’ve known.”
Bogle understood that it was the financial service industry that chased risk in order to get higher returns – greed for money. He saw Wall Street as “Financialism,” not honest capitalism. Bogle argued that financial advisors had a duty to be good stewards of the best interests of their clients only.
Bogle’s strategy was encouraged by federal government tax policies in the authorization of IRAs (individual retirement accounts) and 401(k) savings plans. These two arrangements allowed investors to defer the payment of taxes on their earnings in such funds. Index funds are now just under 30% of the stock market.
He received me graciously in December 2012. He had liked what I had written in my book Moral Capitalism – ”Moral Responsibility is a form of stewardship, of agency, of fiduciary undertaking. … it is a vision of mutuality, of service, of both self and others.”
In giving me a copy of his book The Clash of Cultures, he signed it with this word of encouragement: “Press on – Regardless!”
John differentiated between investment and speculation. The first was good use of money and the second was just gambling to make a money play off the misjudgment of others about the odds of future contingencies happening or not. He understood that speculation did not necessarily create new wealth; it just moved money around from some to others, as happens in any poker game.
Bogle called his industry “The poster-boy for one of the most baneful chapters in the modern history of capitalism.”
Another one of his books, which I have, is just called Enough.