Guide to Great Investors: John Bogle

There was much excitement recently when American investment giant Vanguard announced that it would enter the British fund market in 2009. Vanguard already had more than $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 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.

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