John Bogle – The Man

John Bogle’s heritage is heavily Scottish. John’s maternal grandmother immigrated to America in the 1700s to work in farming.  Bogle’s great-grandfather, Philander Banister Armstrong, was John’s “spiritual progenitor”. Philander worked to reform the fire and life insurance industries. John’s family history may explain his thriftiness and two of his characteristics: “stubbornness of an idealist” and “the soul of a street fighter.”

Picture of Bogle

John Bogle was born on May 8, 1929 in Montclair, NJ to William Yates Bogle, Jr, (a WWII aviator) and Josephine Lorraine Hopkins. The Bogle family lost their inheritance in the Depression and they had to sell their home. His father became an alcoholic and his parents divorced.

Bogle attended Manasquan High School at the Jersey Shore. His excellent academic record enabled him to enroll the prestigious Blair Academy, where he excelled in math. John graduated from Blair Academy cum laude in 1947 and then enrolled at Princeton University to study economics and investment.  John was interested in the mutual fund industry – one subject that had not been analyzed before. Bogle’s senior thesis was “The Economic Role of the Investment Company”.

Bogle graduated from Princeton in 1951 and began evening and weekend classes at the University of Pennsylvania.

Walter L. Morgan, founder of Wellington Fund, read Bogle’s thesis and liked it enough to hire him in 1951. Bogle was promoted to assistant manager in 1955

John became chairman of Wellington but was fired for an unwise merger he approved. He considers the merger his biggest mistake and said, “The great thing about that mistake, which was shameful and inexcusable, a reflection of immaturity and confidence beyond what the facts justified, was that I learned a lot.”

In 1974, Bogle launched the Vanguard Company and a year later founded the Vanguard 500 Index Fund (referred to as Bogle’s Folly), the first indexed mutual fund available to the general public. In 1999, Fortune Magazine recognized Bogle’s success and named him “one of the four investment giants of the twentieth century”.

Health concerns in the 1990s forced Bogle to relinquish his role as Vanguard CEO in 1996. He named John J. Brennan as his successor. That same year Bogle had a successful heart transplant, which enabled him to return to Vanguard, this time as senior chairman.

Bogle had a successful heart transplant in 1996 and returned to Vanguard as of senior chairman. Conflicts between Bogle and Brennan resulted in Bogle’s departure in 1999. Bogle started Bogle Financial Markets Research Center, a small research institute, unrelated to Vanguard.

Bogle is a member of the board of trustees at Blair Academy, an advisory board member of the Millstein Center for Corporate Governance and Performance at the Yale School of Management. Bogle received an honorary doctorate from Princeton University in 2005. Bogle also serves on the board of trustees of the National Constitution Center in Philadelphia, a museum dedicated to the U.S. Constitution

 

    The Clash of the Cultures: Investment vs. Speculation (2012) is John Bogle’s last book. In it he highlights how speculating (short-term) agency, mutual and hedge funds, have taken over from the investing long-term ownership culture. We will cover that in the other section.

 

Bogle’s Lessons of Investing

(What investors can do while the

financial system gets fixed)

 

  1. Remember reversion to the mean. The stock market reverts to fundamental returns over the long run.
  2. 2. Time is your friend; impulse is your enemy. Take advantage of compound interest.
  3. Buy right and hold tight.
  4. Have realistic expectations. You are not likely to get rich quickly.
  5. Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk.
  6. Minimize the “croupier’s” take. Beating the stock market and the casino are both zero-sum games, before costs.
  7. There’s no escaping risk. I’ve long searched for high returns without risk; despite the many claims that such investments exist, however, I haven’t found it. And a money market may be the ultimate risk because it will likely lag inflation.
  8. Beware of fighting the last war. What worked in the recent past is not likely to work in the future.
  9. Hedgehog beats the fox. Foxes represent the financial institutions that charge far too much for their artful, complicated advice. The hedgehog, which when threatened, simply curls up into an impregnable spiny ball, represents the index fund with its “price-less” concept.
  10. Stay the course. The secret to investing is – there is no secret. When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy. Discipline is best summed up by staying the course.

INFO FOR BOX VVV

…Using Keynes’s idea, I divide stock market returns into two parts: (1) Investment Return (enterprises), consisting of the initial dividend on stocks plus their subsequent earnings growth, which together we call “intrinsic value” and (2) Speculative Return, the impact of changing price/earnings multiples on stock prices. 

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INFO FOR BOX RIGHT AFTER BOX^^

Bogle wrote a number of books: Bogle on Mutual Funds: New Perspectives for the Intelligent Investor,  (1993),  John Bogle on Investing: The First 50 Years (2000), Character Counts: The Creation and Building of The Vanguard Group ( 2002), The Battle for the Soul of Capitalism  (2005Reflections on Investment Illusions,  and The Clash of the Cultures), The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (2007), Enough : True Measures of Money, Business, and Life (2008), Don’t Count on it!:: Investment vs. Speculation (2012)

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INFO FOR A NEW BOX

“If you are considering purchasing shares in a firm, you have two broad expectations for that firm: (1) it will pay annual dividends and the amount of those dividends will grow over time; or (2) rather than paying dividends, it will retain earnings so as to build the business.

     While the second expectation suggests that dividends need not always be a critical determinant of the returns on stocks, even when a company does not pay a dividend, investors implicitly value the firm’s stock based on the presumption of future dividends.”  (John Burr Williams’ definition of investment value.)

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Twelve Pillars of Wisdom

 

  1. Investing is not as difficult as it looks

Successful investing involves doing just a few things right and avoiding serious mistakes.

  1. When all else fails, fall back on simplicity

Here is a solution: commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstance change. Occam’s razor—a thesis set forth 600 years ago and often affirmed by experience since then—should encourage you: when there are multiple solutions to a problem, choose the simplest one.

  1. Time marches on

Time dramatically enhances capital accumulation as the magic of compounding accelerates. At an annual rate of return of +10%, that additional capital accumulations on a $10,000 investment is $1,000 in the first year, $2400 by the tenth year, and $10,000 by the twenty-fifth year. At the end of 25 years, the total value of the initial $10,000 investment is $108,000, nearly tenfold increase in value. Give yourself the benefit of all the time you can possibly afford.

  1. Nothing ventured, nothing gained

It pays to take reasonable interim risks in the search for higher long-term rates of return. The magic of compounding accelerates sharply with even modest increases in annual rate of return. While an investment of $10,000, earning an annual rate of return of +10% grows to a value of $108,000 over 25 years, at +12% the final value is $170,000. The difference of $62,000 is more than six times the initial investment itself.

5.Diversify, Diversify, Diversify

By owning a broadly diversified portfolio of stocks and bonds, the only remaining risk is the market. This risk is reflected in the volatility of the total value of your portfolio and should take care of itself over time, as reinvested dividends and interest are compounded.

  1. The eternal triangle

Never forget that risk, return and cost are the three sides of the eternal triangle of investing. Remember also that the cost penalty may sharply erode the risk premium to which the investor is entitled.

  1. The powerful magnetism of the mean

In the world of investing, the mean is a powerful magnet that pulls financial market returns towards it, causing returns to deteriorate after they exceed historical norms by substantial margins and to improve after they fall short.

  1. Do not overestimate your ability to pick

superior mutual funds, nor underestimate your ability to pick superior bond money market funds. In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority. Combing several low-cost equity funds to achieve diversification…so is the holding of a single low-cost index fund….

  1. You may have a stable principal value or a stable income stream, but you may not have both.
  2. Beware of “fighting the last war.” Too many investors are constantly making investments based

on long past or recent lessons. You should not ignore the past, but neither should you assume that a particular cyclical trend will last forever. None does.

  1. You rarely, if ever, know something the market does not. The financial markets reflect the knowledge, the hopes, the fears and even the greed of investors everywhere. It is usually unwise to act on insights that you think are your own, but are in fact shared by millions of others.
  2. Think long term

Stocks may remain overvalued, or undervalued, for years. Patience and consistency are valuable assets for the intelligent investor. The best rule is: stay the course.

 

INFO FOR A BOX vvv

The central task of a lifetime is to allocate financial resources so to balance the different market risks among three basic classes of liquid assets: (1) Common stocks, which carry the greatest short-term volatility and uncertainty, but—based on the underlying fundamentals of corporate earnings, dividends, and dividend growth—promise the highest expected returns over the long term; bonds, which normally provide lower returns than stocks and, depending on the length of maturity, carry significant risk of principal fluctuation but remarkable stability of income; and money market reserves (or cash), which usually engender minimal risk to capital and thus the lowest returns but, given their short- term nature, create an inevitable risk of income volatility.

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Mark’s Saunder’s Workshop Journal

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Regarding mutual funds, John Bogle wrote, “The principal giant (of an industry) upon whose shoulders I have stood in writing this book is Benjamin Graham…. My objective is to provide the same sort of framework for investing in mutual funds as Benjamin Graham provided for investing in individual stocks and bonds.”

Bogle promoted the idea of low cost index funds as a good way for investors, who seldom “beat the market,” to grow their assets. Investors can’t control their greed and fear so they jump in and out of the market at the wrong times. Institutions didn’t beat the markets because they were charging unreasonably high fees for the services and they busy trying to gather assets, rather than follow Ben Graham’s value principles that managed the emotionalism of “Mr. Market” (Graham’s name for the market).

Ben Graham’s shared his thoughts about developing a simple set of rules later in life with a university. The school said they weren’t interested because they couldn’t make as much money using simple rules. They weren’t following Bogle’s rules about-high fees and complexity.

The other fundamental investment giant is John Burr Williams, who believed in compounding and future incomes for dividend or interest. Williams would be appalled at the waste by corporate management, which is also a Bogle crusade.

 

Three Ways to Invest

 

  • The value methods of Ben Graham and John Burr Williams (from the 1930s) (investment based view)

 

  • Modern Portfolio Theory-for risk adverse investors (from the 1950s) (investor based view)

 

  • Low cost Index funds that Bogle pioneered (in 1976). This is an investor bad habit based view.

 

Bogle was influenced by the Efficient Market Theory of Eugene Fama, the Random Walk Theory of Burton Malkiel and Paul Samuelson, his economics professor. The two theories researched price movements and made a case for owning passive index funds over actively managed funds.

Index funds still have portfolio turnover. The important points are low fees, reasonable turnover and managers owning the fund. Look for those three points when choosing a fund.

  1. Why are investors supposed to “beat the market?”
  2. Benjamin Graham said, “The majority of investors should be satisfied with the reasonably good return obtainable from a defensive portfolio.”

 

Q: In these Twelve Pillars, where is it that investor risk tolerance is important?

A: Most important is the risk (amount of value) level in the market. Good market value increases the chances and amounts of gain. No value (distribution like today) increases chances of losses and lessens chance for much gain.

There are two ways to measure value that have proven themselves over at least the last 130 years-dividend yield and a price/earnings ratio (P-E).

 

Summary and Comments on the 12 Pillars

  • Keep it simple-and understandable (Pillar 2).
  • Compounding- increasing dollars and/or shares is the objective, not percentages or ignoring risks and feeling comfortable (Pillar 3).

Notes: An important part of compounding is limiting losses, not beating the market (Pillar 3).

  • Compounding requires regularly reinvested interest, dividends and capital gains, rather than unrealized appreciation or depreciation of asset values (Pillar 3).
  • Great and Good Value are the way to build profits; little or no value are the way to hurting returns (Pillar 4).
  • Only market risk remains. Manage it with value measures or be prepared to lose when there are

major corrections (Pillar 5).

  • Should implies it may never happen. When markets are highly over-valued or manipulated (i.e., the Fed’s low rates), investors are likely to face a major price correction that can significantly hurt their compounding efforts (Pillar 5).
  • Risk premiums on stocks and bonds can change over decades (Pillar 6).

 

    Balanced funds include stocks and bonds. Bogle’s Vanguard includes the Wellington Fund and was picked by Money magazine as the only fund you need if you had to make a choice. VWELX is an example of a fund for a simple investment plan. It has reasonable long-term returns with reasonable portfolio turnover.

 

END BOGLE THE MAN ARTICLE

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