I'm (Intellectually) in Love with John Bogle

It may come as a surprise coming from someone who does what I do, but I am (intellectually) in love with John Bogle.

Unfamiliar with Bogle? Bogle is the founder of the Vanguard Group and the person most responsible for the shift away from expensive actively-managed mutual funds towards low-cost index funds. Side note: Bogle was named one of Fortune mag’s four investing giants of the last century.

Bogle was one of two folks responsible for launching my own obsession with better understanding these markets. Even though we reached opposing conclusions about the best way to deploy capital (he to sit back and relax, me to duck and weave like a boxer caught on the ropes), his empirical approach to understanding what was really going on once the marketing crud had been scraped off the surface, sung to a young 20-something engineer.

Bogle challenged the old guard of his day, expensive actively-managed mutual funds, with the numbers and the undeniable fact that they had failed investors. And as I wrote in Buy & Hold: Dead or Alive?, his approach to investing: Buying a diversified portfolio of low cost index funds/ETFs and holding it indefinitely, is the only reasonable solution for the many.

But I call Bogle the New Old Guard because he’s so entrenched in this paradigm that rules the equity markets, that he no longer sees the trees in the forest.

This from a Motley Fool interview (hat tip Abnormal Returns), when asked about backtested approaches:

TMF: One of the challenges nowadays in defending buy and hold is that there are so many articles and even books now coming out showing that some other strategy would have beaten buy and hold, such as using a simple moving average or momentum strategies with ETFs…

Bogle: It is the easiest thing in the world to look backward on paper and pick out strategies that have won. If you can’t do that you are, for the want of a better word, a moron. (Laughter.) Right? So these back-testing things look great in retrospect. I mean, if it doesn’t look great, it isn’t in the book, right?

TMF: Right.

Bogle: I would call books like that a cheap shot. I like Sam, but it is not right because the idea that the past is prologue has been disproved time and time and time again. If I can quote Samuel Taylor Coleridge for you, “History is but a lantern over the stern.” Showing you where you have been, but not showing you where you were going. Did I make myself clear?

TMF: Very good point. Yes, I think you made yourself very clear. (Laughter.)

I appreciate and agree with Bogle’s conclusion for the many, but not for the few.

Bogle ignores the fact that there is a very, very small segment of the trading community that consistently outperforms the market regardless of market condition, EMH be damned.

I don’t understand how you could possibly follow our independently-audited real-time performance and not reach the same conclusion: that there are a handful of very special trees in that forest.

Having said all of that, I take comfort that the New Old Guard dismisses my ilk. Taking an quantitative, active approach to the markets requires that they move with some predictability, some semblance of structure. The New Old Guard, deploying capital with their broad overarching theories, provides that structure and keeps the trees like us fed.

Happy Trading.

Comments

[Indexor:]

As much good as John Bogle has done for the mutual fund business by championing low costs, he has equally damaged retail individual investors (and Vanguard fund buyers) with his mantra of "buy-and-hold." Simple common sense logically proves that lower costs can improve investment returns. However, preaching to the masses that "buy-and-hold" is an investment startegy that everyone should follow has destroyed more portfolios, investor confidence and long-term plans than any single idea in investment history.

Jun 21 10:19 AM

[American in...:]

Financial economists would love to be able to document your claim that a sliver of the market participants consistently out perform the market.

But remember that outperform means on a "risk adjusted basis".

Hedge funds are highly leveraged and take huge risks.

It's not obvious that hedge fund are really beating the market when
risk is taken into account.

Jun 21 10:26 AM

[Soldalma:]

John Bogle paints himself as a champion of the retail investor, but in reality index funds are very damaging to all investors.

Index funds can charge low fees because they are free riders. Other investors do research that create ballpark values for stocks, index funds take advantage of that. If all investors switched to index funds stock valuations would be completely arbitrary: any price vector would be self-fulfilling.

One of the main functions of the stock market is to serve as a signaling device, with stock prices reflecting the underlying economics of listed corporations. Index funds dilute that information and are socially damaging institutions.

Some people argue that mutual funds are inferior to index funds because 85% of mutual funds underperform the index. This reasoning is misguided. The underperformance is the price paid by society to have meaningful valuations for stocks.

Bottom line: there should be a tax on index funds, the proceeds could be used to subsidize stock research.

Jun 21 03:13 PM

[Uncle Larry:]

I do not like index funds like the S & P 500 which Bogle touts. It tells the investor that he has to leave his ethics outside and take whatever they want into their portfilio.
I personally, have a moral problem with encouraging gambling and pornography. I am told, with the S & P 500, that I have to finance casinos and Playboy (or had to when Playboy was large enough to make the 500). Yet this index is held up as the panacea to all of my problems.

Jun 21 04:42 PM

[untrusting ...:]

If you disagree with Bogel then what is your alternative? Certaintly Bogel is correct in that Vanguard or index funds with their lower costs are certainly preferable to almost every mutual fund. Also Bogel strongly recommends that investors diversify with at least some reasonable proportion of investments in bonds. In addition it has been shown that the vast majority of investors are very poor market timers, trade poorly, and generally make poor investment decisions/trades. Further very few small or retail investors have the time, expertise, or patience to learn more sophisticated market trading strategies. There are literally thousands or tens of thousands of "market experts" out there who claim they can beat the market, of course for usually a substantial fee. Yet few if any of them actually do this. So what then is the typical retail investor to do? Not an easy slam dunk answer to that question. However, in my view if the small retail investor followed Bogel's advice on the 2 key points being index funds and diversification they would be far far further ahead. If you add the timing componet of using moving averages to get in and out of the market, such as those on dshort.com, then the small investor would be able to avoid the significant losses of the buy and hold strategy in significant downturns as well. Such a simple three part approach is not that time-consuming or difficult for the small retail investor to follow and probably is about as good as the small investor can do. That is not to say that a few bright, sharp traders cannot do better but they will also have to spend considerably more time at it and also take on significantly more risk.


On Jun 21 10:19 AM Indexor wrote:

> As much good as John Bogle has done for the mutual fund business
> by championing low costs, he has equally damaged retail individual
> investors (and Vanguard fund buyers) with his mantra of "buy-and-hold."
> Simple common sense logically proves that lower costs can improve
> investment returns. However, preaching to the masses that "buy-and-hold"
> is an investment startegy that everyone should follow has destroyed
> more portfolios, investor confidence and long-term plans than any
> single idea in investment history.

Jun 22 02:10 AM