A Mutual Fund Master, Too Worried to Rest
Vanguard, the penny-pinching mutual fund company founded by John C. Bogle, has become a colossus. Its index funds — once derided for not even trying to beat the market — are now the industry standard.
And after at least six heart attacks and one heart transplant, Mr. Bogle has managed to witness this triumph. “It’s all a kind of a miracle,” he says in a booming baritone. “It’s really nice that I’m able to see this happen in my own lifetime.”
With this kind of medical history, any other man of 83 might simply enjoy his success. But not John Bogle. He is still on a mission, as outspoken as ever and nearly as vigorous — thanks, he says, to the heart of a younger man. He’s not done yet.
“It’s urgent that people wake up,” he says. Why? This is the worst time for investors that he has ever seen — and after more than 60 years in the business, that’s saying a lot.
Start with the economy, the ultimate source of long-term stock market returns. “The economy has clouds hovering over it,” Mr. Bogle says. “And the financial system has been damaged. The risk of a black-swan event — of something unlikely but apocalyptic — is small, but it’s real.”
Even so, he says, long-term investors must hold stocks, because risky as the market may be, it is still likely to produce better returns than the alternatives.
“Wise investors won’t try to outsmart the market,” he says. “They’ll buy index funds for the long term, and they’ll diversify.
“But diversify into what? They need alternatives, bonds, for the most part. What’s so frightening right now is that the alternatives to equities are so poor.”
In the financial crises of the last several years, he says, investors have flocked to seemingly safe government bonds, driving up prices and driving down yields. The Federal Reserve and other central banks have been pushing down interest rates, too.
But low yields today predict low returns later, he says, and “the outlook for bonds over the next decade is really terrible.”
Dark as this outlook may be, he says, people need to “stay the course” if they are to have hope of buying homes or putting children through college or retiring in comfort.
He is still preaching the gospel of long-term, low-cost investing. “My ideas are very simple,” he says: “In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”
Still, because the market and the economy are deeply troubled, it’s time for action on many fronts, he says: “We’ve really got no choice. We’ve got to fix this system. All of us, as individuals, need to do it.”
That’s the message of his latest and 11th book, “The Clash of the Cultures: Investment vs. Speculation” (Wiley & Sons, $29.95). It offers a scathing critique of the financial services industry and updated guidance for investors. “A culture of short-term speculation has run rampant,” he writes, “superseding the culture of long-term investment that was dominant earlier in the post-World War II era.”
Too much money is aimed at short-term speculation — the seeking of quick profit with little concern for the future. The financial system has been wounded by a flood of so-called innovations that merely promote hyper-rapid trading, market timing and shortsighted corporate maneuvering. Individual investors are being shortchanged, he writes.
Corporate money is flooding into political campaigns. The American retirement system faces a train wreck. America’s fundamental values are threatened. Mr. Bogle remains a dyed-in-the-wool capitalist but says the system has “gotten out of balance,” threatening our entire society. “You can always count on Americans to do the right thing — after they’ve tried everything else,” he says, quoting Winston Churchill. Now, he says, it’s time to try something else.
He advocates taxes to discourage short-term speculation. He wants limits on leverage, transparency for financial derivatives, stricter punishments for financial crimes and, perhaps most urgently, a unified fiduciary standard for all money managers: “A fiduciary standard means, basically, put the interests of the client first. No excuses. Period.”
Disagreeing with current Vanguard management.
Those clients — the ordinary people to whom he has always appealed — need to protect themselves from peril, he says: “In an ideal world, Adam Smith-like, individuals would recognize what they need to do in their own self-interest, and they will make changes happen and look after themselves.”
MR. Bogle sometimes disagrees with current Vanguard management, but he remains proud of the company he created. Index funds are ever more popular, and Vanguard is gushing money, torrents of it. Thanks largely to its various index funds, Vanguard, which is based near Valley Forge, Pa., pulled in a net $87.7 billion in cash this year through June, excluding money market funds. That’s nearly 40 percent of the cash flow of the entire mutual fund industry.
Burton Malkiel, the Princeton economist and author of “A Random Walk Down Wall Street,” says: “Index funds are so popular now that it’s easy to forget how courageous and tenacious Jack Bogle was in starting them. They were called Bogle’s Folly because all they did was replicate the returns of the market. But, of course, that’s a great deal. In the academic world many people saw the wisdom of this — but Jack is the guy who actually made it happen.”
Mr. Bogle also tried to ensure that Vanguard funds would always be cheap to buy and hold. While Vanguard is his baby, he has never had an ownership stake in it aside from the shares he holds in its mutual funds. Vanguard fund shareholders own the place collectively because he planned it that way.
“Strategy follows structure,” he says, explaining that with no parent company or private owners to siphon profits, Vanguard can keep costs lower than anyone else. That was always his goal. “The only way anyone can really compete with us on costs is to adopt a mutual ownership structure,” he says. “I’ve been waiting all these years for someone to do it, but no one has.”
One reason is surely that there’s no profit in it. Despite Vanguard’s size and success, Mr. Bogle is no billionaire. For comparison, Forbes lists the personal wealth of Edward Johnson II, who stepped down as Fidelity’s chairman last year, as $5.8 billion.
By contrast, Mr. Bogle says his own wealth is in the “low double-digit millions.” Most of it is in Vanguard and Wellington mutual funds in which he invested via payroll deduction during his long career.
During his peak earning years at Vanguard, he regularly gave half his salary to charities, including two alma maters — the Blair Academy, a prep school in Blairstown, N.J., and Princeton University. He was a scholarship student at both, holding down part-time jobs to help pay his way. At Princeton, in a senior thesis, he sketched the rough outlines of the cost-cutting, shareholder-serving company that would become Vanguard.
Mr. Bogle continues to make donations to several causes. “My only regret about money is that I don’t have more to give away,” he says.
WHILE he has no operational role at Vanguard, he hasn’t entirely left it. He works on its campus, heading the Bogle Financial Markets Research Center, a small research institute that provides him with a bully pulpit, which he tries to use in the energetic mode of his hero, Theodore Roosevelt. “There aren’t many of us Roosevelt Republicans left,” he said.
Mr. Bogle may be a Republican, but he voted for Bill Clinton and Barack Obama, and plans to vote for Mr. Obama again. He says government regulation of the financial industry is insufficient, and he endorses the Volcker Rule, named for his friend, Paul A. Volcker, the former Fed chairman, who says regulated banks shouldn’t be making risky bets with their own money.
Mr. Volcker, in turn, embraces Mr. Bogle’s critique of the financial services industry. At a public forum held in Manhattan last winter to celebrate Mr. Bogle’s legacy, Mr. Volcker said that the only unequivocally good financial innovation out of Wall Street in the last 25 years was the bank A.T.M. (If he went back 40 years, Mr. Volcker said, he would include Mr. Bogle’s invention of the index fund.) And Mr. Volcker said that a unified fiduciary standard “is an excellent solution.”
The research institute is financed by Vanguard but is independent, allowing Mr. Bogle to write books and make fiery speeches that sometimes differ from Vanguard policies.
At the moment, for example, he supports a crucial part of a Securities and Exchange Commission proposal to tighten rules on money market funds. “Investors shouldn’t be misled into believing these funds are as safe as a bank account,” he says. “They’re not.”
In 2008, one fund, Reserve Primary, “broke the buck,” falling below the $1-a-share asset value that money market funds have traditionally maintained. That set off a panic and the government intervened. To prevent future crises, Mary L. Schapiro, the S.E.C. chairwoman, would require funds to let their net asset values float — so that $1 invested in a fund might be worth 99 cents.
Vanguard sides with other big firms like Charles Schwab and Fidelity in trying to block the proposal, which is set for a vote on Aug. 29. Allowing shares to float would “require significant, and expensive, changes” and would put off investors, many of whom would shift assets from firms like Vanguard into banks, Vanguard said in a filing.
Mr. Bogle sides with Ms. Schapiro and differs with Vanguard on that point. “A lot of things that are disruptive have to be done anyway, and this is one of them,” he says. “Mary Schapiro has a lot of courage in trying to do it.”
MR. BOGLE moved to the institute after leaving the company’s board in 1999 amid a conflict with John J. Brennan, his handpicked successor and second in command. Mr. Brennan, who has said little about the issue in public and declined to comment for this article, has since been succeeded by F. William McNabb III.
Mr. Bogle’s health was precarious in the 1990s. By 1996, when he relinquished his role as C.E.O. to Mr. Brennan, he had already had at least six heart attacks and was mortally ill, according to two people then at Vanguard. “At that point Jack Bogle couldn’t walk slowly across a room without getting out of breath,” one of those officials said. “Jack’s heart was failing. Either he’d get a transplant or basically have to say goodbye to the world.”
The transplant in early 1996 was spectacularly successful. “Physically, Jack was born again,” the official said. “That was wonderful. But it made things very complicated at Vanguard.”
Mr. Bogle had hired Mr. Brennan in 1982, and they worked together amicably for more than a decade. “The two Jacks are very different types,” said one Vanguard veteran, speaking on condition of anonymity because the issue is still sensitive within the company. “Jack Brennan is Mr. Inside, an operations man who doesn’t particularly like talking to journalists, and Jack Bogle is Mr. Outside, the ultimate marketer.” For a long while, it seemed to be a good match.
But things changed after Mr. Bogle returned with a new heart and renewed vigor. Now with the title of “senior chairman,” Mr. Bogle found that he disagreed with some of Mr. Brennan’s decisions, and said so openly. He criticized Mr. Brennan’s interest in starting narrowly focused sector equity funds. Mr. Bogle also worried that Vanguard was beginning to emphasize the sale of funds through investment advisers, these people said. Direct sales to investors had been a principal low-cost innovation in the company’s early days.
In 1999, as tensions rose, Mr. Bogle was asked to leave the board at the mandatory age of 70. “I thought there would be an exception for the company’s founder,” he says. The dispute became public, and the board offered to let Mr. Bogle extend his term. But he moved to the new research institute, which has been his base ever since.
Several Vanguard insiders say that after this, Mr. Brennan habitually walked past his former boss, rather than say hello. Journalists witnessed such scenes. Today, Mr. Bogle says he is puzzled by Mr. Brennan’s behavior.
Soon, contrary to Mr. Bogle’s advice, Vanguard began selling exchange-traded funds, or E.T.F.’s — index funds that may be bought or sold throughout the trading day. For years, Mr. Bogle had opposed this move, saying E.T.F.’s enable frequent trading, which generally hurts individual investors. He compared the innovation to “giving an arsonist a match.”
Now Mr. Bogle says that some E.T.F.’s, like those that mimic core Vanguard index funds, are fine if used carefully by buy-and-hold investors or by institutional investors for specific purposes. But he warns that they are dangerous for investors because many E.T.F.’s track relatively obscure sections of the market and all of them encourage the propensity to trade rapidly — “to speculate, rather than invest.”
In a telephone interview, Mr. McNabb, Vanguard’s current chief executive and chairman, wouldn’t comment on the Brennan-Bogle relationship. He praised both men, saying, for example, that Mr. Brennan’s introduction of E.T.F.’s expanded Vanguard’s influence and, therefore, Mr. Bogle’s legacy.
“We revere Jack Bogle here,” Mr. McNabb said. “Everybody can quote his sayings. He laid out a vision for the company and set up an ownership structure unlike anything the industry had ever seen.”
Mr. McNabb added: “We live and breathe the fact that we’re client-owned, that we’re built for the long-term, and that we serve only one constituency, our clients, who are also our owners. That’s all Jack Bogle.”
For his part, Mr. Bogle says the company embodies his ideas. Current executives are making “hard decisions and doing a good job and doing it very sincerely.” But, he adds, “I think it’s good that I have an independent voice.”
ON the Vanguard campus, on a lawn near the cafeteria, stands a 7-foot-high bronze statue of Mr. Bogle.
He is sheepish about it. “I’m not sure we should’ve done it, but there it is,” he says. “It’s a good likeness, isn’t it?”
Indeed, it is. Thomas J. Warren, the sculptor who created it in 1996, said the Vanguard board commissioned the statue when Mr. Bogle was ill, and that he became stronger as work proceeded.
“Mr. Bogle was very humble about it,” Mr. Warren says. “I went out to his house to ‘live cast’ his face one day, and I was late. He was dressed for a board meeting, but he was very gracious and got down on the kitchen floor, and we made the mold.” Mr. Bogle asked him not to prettify his image. “Mr. Bogle has arthritis, but he told me to go ahead and show him the way he really is, so the fingers on the statue are gnarled.”
One day earlier this year in the company cafeteria — the “galley,” as it’s called at the nautically themed Vanguard — Mr. Bogle ordered a grilled cheese sandwich and chatted with an endless stream of young well-wishers. On the walls were murals embellished with quotations from his speeches:
“Like a rock.”
“Even one person can make a difference.”
“Press on regardless.”
“Success must not be bought but earned.” And, of course, there is another, which may be his favorite. “Stay the course,” Mr. Bogle says.