John Bogle, the father of index funds, died Jan. 16. But his legacy lives on through Vanguard, the juggernaut asset management firm he founded, and through the industry he shaped in his image. No living money manager can claim to have had as profound an influence on their trade.
Bogle’s passing comes at an uncertain time for markets, but his timeless wisdom lives on and may yet help guide investors through troubled waters ahead.
Let’s discuss a few of Bogle’s thoughts, and how they can translate to the present market.
On index funds
As the progenitor of the index fund, Bogle has produced a wealth of quotes, comments and writings in defense of the strategy over the decades. Indeed, for many years, index funds were thought of as novelties. It was only after the 2008 financial crisis that they finally came into their own, with the past decade delivering a staggering surge in allocations to passive investment vehicles. As Bogle said, index funds can get investors the market return at the market risk, something many active managers fail to do in practice:
"The index fund is a sensible, serviceable method for obtaining the market's rate of return with absolutely no effort and minimal expense. Index funds eliminate the risks of individual stocks, market sectors and manager selection, leaving only stock market risk."
Bogle’s basic case in defense of index funds merits consideration, even from value investors. While we here are engaged in the common pursuit of market-beating returns, many investors are not. And many who try to beat the market fail to do so. The woeful performance of hedge funds in recent years is evidence enough of that fact. Thus, it is worth thinking about index funds as part of any investing strategy. They do limit the extent of exogenous risks. Finding a needle in a haystack is trying work (and often fruitless), so there may be something to Bogle’s admonition to instead “buy the haystack.”
On market timing
While value investors might disagree with Bogle’s philosophy on many points, they are unlikely to disagree with his stance on market timing. The guru understood all too well that trying to time the market was, for the most part, a fool’s errand:
"The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently."
Serious value investors know they cannot hope to time the market. This long bull market offers all the evidence one could need to that end. As Warren Buffett (Trades, Portfolio) has pointed out on a number of occasions, knowing whether to buy stocks is not the same as knowing exactly when to buy them. Despite their philosophical differences, Buffett and Bogle share a fair few beliefs in common.
On speculation versus capital formation
One of Bogle’s most topical observations can be found in his 2012 book, “Clash of Cultures: Investment vs. Speculation,” in which he derides the market’s overwhelming preference for speculation over true capital formation:
"In recent years, annual trading in stocks — necessarily creating, by reason of the transaction costs involved, negative value for traders — averaged some $33 trillion. But capital formation — that is, directing fresh investment capital to its highest and best uses, such as new businesses, new technology, medical breakthroughs, and modern plant and equipment for existing business — averaged some $250 billion. Put another way, speculation represented about 99.2% of the activities of our equity market system, with capital formation accounting for 0.8%."
The market is full of speculators, with investors few and far between. True value creation is not happening to the degree the market would have us believe. That is something value investors understand only too well. The endless bull market has sent asset prices soaring, making bargain-hunting a tough enterprise for many. But we would contend bargains are out there.
While Bogle was more skeptical than we are concerning competent investors’ ability to ferret out opportunities, he was undeniably right about the problems of speculation. And he was very right about the sort of people who should be investing in the stock market, whether passively or actively:
"If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks."
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