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[Are high-yielding equities] a better strategy? Only time will tell. But if everybody is doing it, look out. They’re not stupid choices. But I still would not abandon a bond position for a stock position, even with higher yield. Wiandt: Burton Malkiel’s commentary is interesting, because he is saying that we should look at the market to some degree, and bonds are not only going nowhere, they’re probably going backward in terms of yield. The traditional asset allocation says to buy the total bond market equivalent to how old you are. So when you’re 65 years old, you should be 65 percent bonds, etc. And he’s really been saying you should adjust that a little bit because the environment for bonds is very bad. Bogle: I think that’s a correct analysis. None of us know. He is, I’m sure, confident about that being the case. But think about it this way: When you’ve got a 6 percent government market, an 8 percent corporate market, the premium is 33 percent. When you’ve got a 2 percent government market and a 4 percent corporate market, the premium is 100 percent. These spreads haven’t changed much over time. I would just be very cautious about telling people not to take too much risk. I think I don’t need to get into a debate with Burt about this, because one of us will be right, but probably not by a lot, and one of us will be wrong, but probably not by a lot. Hougan: Do you think international bond exposure is going to become part of the core that every investor should have exposure to? Bogle: I think for the typical investor, it is not necessary. If you look back at the record of international bonds, I for one don’t see much to write home about. I don’t like the risk. I don’t like the currency risk. Wiandt: You don’t like the Greek bond market? Bogle: I don’t like the Greek bond market. And I don’t like the Italian bond market. And I don’t like the Brazilian bond market. And I don’t like the Portugal bond market. And I don’t like the Irish bond market. Shall I continue? I’m not even sure about the French bond market. I feel pretty good about the German bond market. But what’s the point of guessing? The yields probably take all that into account. The markets are very good, or have in the past been—and I believe in the future will be—very good arbitrageurs between the present and the future. That’s the way I feel, as you probably know, about international stocks. If they’re efficiently priced, I just don’t see why they would give you a higher return in the future than they’re giving you today. And let me say this about a better diversifier: “Better diversification” is the last refuge of the scoundrel. What were we talking about five years ago as a good diversifier? Well, I can’t remember, but it wasn’t gold. And when gold does well, as it certainly has, then someone says it’s a great diversifier. And when international bonds get a little ahead of U.S. bonds—not before, but after—then someone says it’s a great diversifier. Anything that’s done well recently is considered a great diversifier. Wiandt: What do you think about gold? Bogle: What people don’t get about gold and commodities in general is that they have no internal rate of return. I can tell you about stocks with a 2 percent yield and earnings growing with the economy, let’s call it 5 percent nominal, and say these are underlying strengths to deliver a 7 percent return. And I can talk about bonds and say there is a 3.5 percent interest coupon today, and that’s probably 91 percent of the future return of a bond. When you get to a commodity, there is no coupon, there is no dividend, there are no earnings. When I buy gold, I’m buying gold because I think I can sell it to somebody else at a higher price. If that isn’t the ultimate in speculation, I would not know what is. It may be a good speculation—I don’t make that argument—but I would full well doubt it. Hougan: You’ve said most U.S. investors don’t need exposure to international equities, that U.S. stocks at this point are international firms with 50 percent of their revenues overseas. Bogle: This is another one of my pet peeves. If you go through developed international nations your largest investment is Britain. And I think they’re in deep trouble. Everybody knows they’re putting on heavy austerity. They’ve got terrible financial problems. I think Keynes was right—economies around the world ought to be stimulating, rather than cutting back. So if you want 23 percent of your money in Britain, just understand that’s what you’re getting. The next one is Japan, at 18 percent of your portfolio. What’s so good about Japan? They’ve got a structured society. They’ve had a lot of innovation in the past. Will that continue? I don’t know. And then you go to France, who’s next in size, believe it or not. And I don’t know … they don’t work very hard over there. Next are Switzerland, Australia and Germany. They all look pretty good. The three largest countries, accounting for almost half of the international index, are countries that have significant problems. But when you put them in a single package of international, you don’t think about that. You ought to think about that. Hougan: What do you think about the future of the United States? Are you as pessimistic there as you are about Britain and Italy and France? Or do you think we’re a different case? Bogle: I think we are headed toward a catastrophe unless we do something. We simply can’t be the kind of nation we have been unless we can knock some sense into our elected officials. But that’s going to take some common sense on the part of those who elect them. The whole thing in politics is we get the politicians we deserve. And I hope we deserve better than the politicians I have seen on television night after night. I call them the seven dwarves plus Jon Huntsman. I’m deeply worried about the political system. I’m worried about the monied interest in our political sys- www.journalofindexes.com March / April 2012 21
tem. I’m worried about Citizens United and the disgraceful decision by the Supreme Court. Hougan: What would give you more confidence? What’s the single thing you think we need to fix or control most? How would we turn it around? Bogle: Well, it’s not easy to do. All these redistrictings that all these states are doing, it makes Elbridge Gerry, from whom the word “gerrymander” comes, look like a piker. Really not a good situation at all, the way seats are locked in. And it’s not good for the nation that extremist parties get entrenched, as with the Tea Party, which, to me, is thoughtless. It’s not a national asset. The role of money, particularly these special PACs that are out there, is simply a disgrace to a civilized nation. There must be better ways to get big money out of the system without violating the precious First Amendment— we could just decide that corporations aren’t persons. For example, we know that corporations can’t commit crimes, because they can’t go to jail. It’s a big project in which we need to engage our best citizens in trying to fix the system. And Congress has to, whether it likes it or not, do intelligent things to address the budget deficit. I happen to believe the president is maybe a little off target in his focus on taxing the rich. That sounds a little bit—and I’m talking more about image than anything else—not quite American. If only someone could tell him to tax the sources of income differently. Just think about a society that rewards who win during the day with a lower tax rate than people who run out of the house every morning, work hard all day, by the sweat of their brow, the sweat of their brain, and come home. That’s insane. That’s socially wrong, and it’s economically wrong. I say tax capital gains at least at the same rate as earned income. Tax dividends at least at the same rate as earned income. People talk about double taxation as dividends. Seventythree percent of all stocks are owned by institutions that aren’t really taxable—so we can think about it a little bit differently. I would say let the investor who’s focusing on his retirement have—just for the purpose of argument—each year, the first $25,000 of dividend income and capital gains with no tax. I don’t see anything the matter with that. And then I’d say increase capital gains taxes at least to the ordinary income rate. Maybe there’s somewhere we can carve out an exception and divide capital gains into two groups: One group is those who start companies that create value for society, and the other group is those who are gambling in the stock market and subtracting value from society. I’d like to be able to intellectually separate those two and tax the one that’s a waste for society and give a more favorable tax treatment to those that are a benefit. Wiandt: Even in the indexing industry, we have people reluctant to talk about politics. I’m of the mindset that enough is enough. Why aren’t we working in the interest of the country here? Bogle: I’m happy to make some suggestions. My tax suggestion, for example; I feel very strongly about that. I’m engaged in this battle over Citizens United. And I’ve recommended to the SEC that each corporation be presented with a resolution to present to its shareholders, saying, “Resolved, that this corporation shall make no political contributions without the approval of 75 percent of its shareholders.” Why should corporations be able to give money away, make gifts without a majority of shareholder approval? And a majority is not enough for me. Actually, a Delaware law, no longer in force, said corporations may make no gift of their assets without approval of 100 percent of their shareholders. One thing we badly need in our society is for investors to stand up and be counted and not let corporations run amok in the interest of their own agents. Executive compensation is a mess. Mergers are made just to make companies bigger or to fix the accounting mess they’re in, or whatever it might be—just simply to be larger and justify more compensation. Shareholders should get a vote on every one of those issues. Wiandt: Some people might say that indexing is partly responsible for that state of affairs, since almost by definition, in indexing, you’re buying the market, and so you have a lot of very large institutional investors that really aren’t holding accountable the companies that they’re investing in, just because it’s a massive task to read all the minutes of all 500 companies in the S&P 500, or whatever your index is. How would you respond to that? Bogle: The old so-called Wall Street rule is that if you don’t like the management, sell the stock. Index funds cannot sell a stock, so their rule has to be that if you don’t like the management, change the management. And index funds indeed do have an obligation to stand up and be counted. [The problem is that] people don’t organize mutual funds for their shareholders. They organize mutual funds because they think they can sell them. It’s quite clear in the record that we used to be an industry that sold what we made, and now we’re an industry that makes what will sell. And there is no finer example of this than the exchange-traded fund business. Hougan: You’ve definitely expressed concern about ETFs. Is that because they’ve become the venue for hot, new, thematic ideas? Is there anything wrong with ETFs? Can ETFs be used appropriately? Bogle: There’s nothing the matter with certain ETFs, properly used. So start off with the S&P 500, the SPDR. I tell the story in my book about the day Nate Most—a visionary for the ETF—stopped into my office, and he tried to sell me on the idea. I found flaws in what he showed me, and then I said even if he can fix the flaws, it’s not for Vanguard. Index funds are designed for long-term investors, not for short-term speculators. So we didn’t do anything with them, and he went to State Street, and they did it. And there’s nothing the matter with [SPY], except it turned over last year at 7,700 22 March / April 2012
Page 1 and 2: Plus an excerpt from Bogle’s fort
Page 3 and 4: Contributors Rolf Agather Rolf Agat
Page 5 and 6: Jim Wiandt Editor jwiandt@indexuniv
Page 7 and 8: FREE subscRiption oFFER! The Journa
Page 9 and 10: Editor’s Note Tipping Our Hats Ji
Page 11 and 12: The Economic Role Of The Investment
Page 13 and 14: stated so that the investor can car
Page 15 and 16: Jones 30-Stock average would cost $
Page 17 and 18: of cash to the shareholder. There a
Page 19 and 20: een increased in recent years due t
Page 21: A Fireside Chat The Bogle Interview
Page 25 and 26: The Bogle Impact: A Roundtable Coll
Page 27 and 28: ing him. That will be Jack’s lega
Page 29 and 30: JoI: What do you think John Bogle
Page 31 and 32: Bogle’s Corner Ideas Vs. Implemen
Page 33 and 34: Lessons Learned From SPIVA 10 obser
Page 35 and 36: Figure 3a % Of Funds With Top-Quart
Page 37 and 38: The Case For Indexing Revisiting th
Page 39 and 40: Figure 2 Annualized Excess Returns
Page 41 and 42: Figure 5 Inverse Relationship Betwe
Page 43 and 44: Figure 8 Shorter Time Periods And M
Page 45 and 46: Figure 10 Excess Returns Help Quant
Page 47 and 48: Indexes In Perspective The Index In
Page 49 and 50: Talking Indexes Keeping It Simple A
Page 51 and 52: News Index Providers To Form Trade
Page 53 and 54: News the pair would work on develop
Page 55 and 56: News Turkey, EEML mimics an index t
Page 57 and 58: Russell continued from page 47 nati
Page 59 and 60: Index Funds 58 March / April 2012
Page 61 and 62: Dow Jones U.S. Industry Review Perf
Page 63 and 64: Dash continued from page 35 of acti
Page 65 and 66: Test Your Skills A True Industry Va
Page 67 and 68: VOO Vanguard S&P 500 ETF For an exp

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