Investment Greats: John Bogle

Published in Investing Strategy on 2 April 2009

As American investment giant Vanguard prepares to enter the UK market, we take a look at its founder, John Bogle, the man who invented the index tracker.

There was much excitement recently when American investment giant Vanguard announced that it would enter the British fund market this year. Vanguard already has $1.1 trillion of assets under management, but it wasn't the size of its business that caused the stir.

Vanguard is exceptional because it's a 'mutual', owned by its clients and managed in their interests, rather than being a profit generator for an investment company. As a result, fees and charges (at least in the US) are rock bottom, and this makes a big difference to investor returns over the long term. It also introduced the index tracker, an idea close to the hearts of many Fools.

Bogle's discovery

Vanguard was founded in 1975 by John C (Jack) Bogle, and the trackers he pioneered followed from his thesis at Princeton on the performance of fund managers. Bogle found that on average, fund managers fail to beat the market. Which is logical, since they are the market, but it's a fact that to this day continues to surprise people who pay fund managers to outperform.

The consequences of this single nugget of wisdom are profound: Instead of spending time and effort on ultimately futile attempts to beat the market, we should be content with market returns, and simply buy the market. To use Bogle's analogy, if you can't find the needle in the haystack, buy the haystack.

And if you're getting market returns, you shouldn't pay a premium for the privilege. That mean no chunky fees for investment managers. It also means minimising your trading, as transaction costs erode your returns over time.

Your timing's a little off...

A corollary of this concept is that we shouldn't try to time the markets, simply because we can't do that with any consistency. Just allocate your assets as appropriate between the different asset classes -- equities, bonds, etc -- and leave them alone.

In an interview with Bloomberg in January, he paraphrased from Macbeth: "The daily and momentary movements of the stock market are like a tale told by an idiot, full of sound and fury, signifying nothing".

His latest book, Enough: True Measures of Money, Business, and Life, discusses the excesses and delusions that led to the financial crisis, and role that money plays in our lives. Bogle is the antithesis of the archetypal 'fat cat' financier; he lives modestly, derives no joy from spending, and built his career by putting his clients' wellbeing first. He'll be 80 next month.

For a more detailed account of Bogle's philosophy in his own words, read his ten rules of common sense investing. And to hear his rigorous thinking expressed with clarity and wit, there's an excellent interview with him on our US website, Fool.com.

Investment Greats will be a regular series here on The Motley Fool for the next few months. If you'd like to see your favourite guru included, then let us know using the comment box at the foot of this article.

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Comments

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LaCatedra 07 Apr 2009 , 10:27am

It will be very interesting to see if the Vanguard index funds have the same low cost base as they have in the US. This is Fool investing at its best. The only funds I have are index funds and if Vanguard offer a range of funds which are cheaper they will be on my investment list. How the rest of the fund industry can still con the public with 4% upfront loads and 1.5% TERs I have never understood.

LC

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