the bogle issue - IndexUniverse.com

If you asked experts in the financial industry what single individual
has done the most in the past 50 years to influence how
Americans invest, you’d get a wide-ranging list of names—but
one name you’d see over and over would be John Bogle. What
follows are excerpts from his 1951 college thesis, submitted to
Princeton University, including parts of Chapter 1, “Advantages
to the Individual Investor,” and the conclusion. In it, you can see
the original seeds of many of the ideas and concerns that would
later drive him to build the Vanguard Group and become an
outspoken advocate for the best interests of investors.
That the investment company has fulfilled its functions
to the individual investor appears manifest.
The very fact that the number of shareholders has
trebled in the last ten years seems to indicate that they
have found it a suitable means to accomplish their investment
ends. 1 It will be the place of this chapter to show
what advantages the investment company gives the investor,
using particular examples wherever practicable.
Several things must be made clear, however. First,
investment companies have generally tried to encourage
the purchase of their shares by investors, not savers.
Many funds point to the need for adequate cash reserves,
insurance, and perhaps additional savings or government
bonds before placing the remainder in a mutual fund.
This chapter, then, will be oriented toward those individual
investors who can afford investment, which by its
very nature entails a certain amount of risk.
Second, the funds can make no claim to superiority
over the market averages, which are in a sense investment
trusts with fixed portfolios; e.g., the stocks composing the
particular “average.” They state, rather, that their performance
must be judged against what the individual could
have done at the same cost over the same period, with the
same objectives as has a given fund.
Third, it is evident that the open-end investment company
cannot attain perfect fulfillment of all the objectives
stated below, but makes available the most adequate combination
of facilities for the individual investor; that is, it offers
the package with the greatest total amount of management,
diversification, income, liquidity, and dollar appreciation.
There will be no claim in this thesis that the management
of the investor’s capital will produce better results than that
of an investment counsel who handles large accounts individually;
that the diversification will be sounder than that
of insurance companies under legal list requirements; that
the income will be as stable as that of government bonds or
as high as that from a given common stock; that the liquidity
will be as great as that given by a savings bank; nor that
the share will appreciate in value with the cost-of-living as
a closed-end leverage share does. The only claim will be
that the investment company offers the best combination of
these facilities to the individual investor.
In offering to the investor a greater degree of diversification
and more expert management than he could otherwise
obtain, investment companies present a wide variety
of fund types with diversified objectives, from which
the investor may choose. He may pick the balanced fund,
which attempts to plan its portfolio with regard to current
conditions, especially by shifting its ratio of “aggressive”
common stocks and “defensive” bonds; or the common
stock fund, which maintains a largely fully invested position
with a view toward selecting seasoned issues; or the
bond fund, which maintains a portfolio solely of bonds. If
the investor prefers to exercise a greater degree of management,
he may choose the specialty fund, of which
there are two types: the industry type, in which a share
is backed by a diversified list of issues in an industry of
the investor’s choice; and the objective type, in which the
investor picks his objective and participates in a diversified
list of stocks most likely to fulfill it. Thus, the mutual
fund offers the investor a wide variety of shares from
which to choose, to suit his objectives of either capital
appreciation, capital preservation, or reasonable income,
or varying combinations of each.
The advantages of management, diversification, income,
liquidity, and inflation hedging which the funds provide
will be discussed in separate sections. However, the investment
companies perform several additional minor functions
which may be mentioned here: their portfolio shares
are held by a custodian—usually a bank—and are thus safe
from damage or loss (but not depreciation in value, as the
recent Securities and Exchange Commission Statement of
Policy indicated 2 ); the dividends are quarterly, not scattered
and small, and the investor need not be concerned
with proxies, warrants, and stock splits; and finally, there
is convenience in income tax returns, with the investment
company required to send a year-end statement of the taxability
of dividends. This chapter will now proceed with an
analysis of the degree of success the funds have attained in
providing the more important advantages to the investor.
Management
… the judicious selection of securities, based on extensive
research and systematic plan, in order to accomplish
the objectives of investment …
The individual investor in most cases has neither the
time nor the knowledge to manage his own investment
account. This lacking is made clear in the oft-quoted
statement by the late Louis D. Brandeis, Associate Justice
of the United States Supreme Court: 3
…the number of securities on the market is very
large. For the small investor to make an intelligent
selection from these—indeed, to pass an intelligent
judgment on a single one—is ordinarily impossible.
He lacks the ability, the facilities, the training, and
the time essential to a proper investigation. Unless
his purchase is to be little better than a gamble, he
needs the advice of an expert, who, combining special
knowledge with judgment, has the facilities and
incentive to make a thorough investigation.
The mutual fund supplies the investor with this expert
management, at relatively low cost, with its objectives
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