the bogle issue - IndexUniverse.com

percent. It’s a trading fund, mostly for institutional trading.
In a way, it’s failed to live up to its promise.
I see nothing the matter with an investor who wants
to buy and hold a broad market index fund. It’s a sound
way to participate.
But there’s a lot of marketing. I think Jeremy Siegel [of
WisdomTree] and Rob Arnott [of Research Affiliates] had
what were perfectly reasonable ideas, and that is to give
you an index fund that was slightly, only slightly, different
from the regular index. The so-called fundamental value
products don’t seem to be doing so well, now giving you
roughly the same return over their history—it’s five years
now—as the total stock market index, although the Arnott
one has quite a bit higher volatility.
The Jeremy Siegel idea of weighting by dividends I
kind of thought was good because I could understand it.
But you look at WisdomTree, and their dividend fund is
$200 million of their total assets. Nobody wants it. They
want rupees, and I don’t know, bahts, yen, renminbi, God
knows what they’re selling in the way of currency.
The main problem with ETFs, it seems to me, is the
narrow subdivision of the markets, which makes it almost
like picking stocks. If you look at the year-end Wall Street
Journal, in tiny type, it’s a page-and-a-third of ETFs, 1,617
of them. It’s like stock-picking, and that seems ridiculous
and offensive. Risk is concentrated in individual countries
and individual industries and subindustries, and sub-subsubindustries.
And it’s not enough to speculate whether
the market will go up or down, now you’ve got to have three
times leverage. And that’s going to hurt investors.
The original paradigm for index funds is to buy the
stock market and hold it forever. That is only the paradigm
for all of 1 percent of the ETF market—or be generous
and call it 5-10 percent.
The ETF is certainly the greatest marketing innovation
so far in the 21st century. Whether it’s the greatest
investment innovation or best innovation for shareholders
is totally in doubt.
[One more thing]: What I don’t understand, and I will
never understand, is why an ETF is an attractive vehicle for
an actively managed fund. It’s bad enough to guess each
minute whether an index is going up or down. But to guess
each minute whether a manager is doing a little bit worse or
a little bit better than the market strikes me as kind of crazy.
Hougan: For the past couple of years, there’s been a massive
tilt toward passive indexes and away from active. Is there
an element of investors coming to their senses? Do you think
this pattern will continue? Or do you think this is a shortterm
phenomenon and that active funds will be back?
Bogle: It’s only the beginning for passive investing.
Index funds are now around 25 percent of equity fund
assets. They’re going to be bigger with all these target
retirement funds. They’re going to be bigger in the bond
side. According to our data, in the last five years, $349
billion has flowed into equity funds. That’s $564 billion
into index funds and $214 billion out of active equity
funds. That’s pretty dramatic.
www.journalofindexes.com
And the numbers aren’t getting any better for the
active managers. I think people are waking up. How
many Bill Millers do investors have to observe? How
many Berkowitzes do investors have to observe?
The average mutual fund manager lasts for about six
years. And 50 percent of mutual funds themselves go out
of business every decade. How the heck do you invest for
the long term if your fund doesn’t live for the long term?
Some people say new managers do better, some people
say they do worse. All my instincts would say new managers
do the same as old if you just spread it across an
industry. But who knows, really?
When we trade shares, we’re trading with each other.
And who wins when we trade with each other? Not the
investors as a group. The croupiers of Wall Street win.
There’s no way around that, is there? Not that I know.
Wiandt: What’s your view on the current state of the global
markets? How should investors be looking at the market?
Bogle: My rule is: Don’t peek. There’s so much noise in the
markets, so much volatility, and if you get captivated by
that, you’re thinking like a speculator and not an investor.
What you want to do is be prepared. You’re going to put
away $500 a month for the rest of your life, or whatever
it might be—maybe it increases with your earnings. And
every five years expect a 20 percent drop in the market—
sometimes even more. Just know it’s coming. What happens
is, we put money in before the crash—and the mutual
fund record is crystal clear here—and take it out at the
bottom. We created hundreds of technology funds. When?
When the technology boom was at its peak.
We have to get marketing out and put management
in. I call it the wisdom of long-term investing versus the
folly of short-term speculation. That’s in the math—that
is not my opinion.
Assume that every company on the S&P 500 has half
of its shares held by long-term investors who don’t trade,
and half of its shares held by short-term speculators
who do. We know that those long-term investors as a
group will capture the exact return of the S&P 500. And
we know those speculative traders will capture the exact
same return because they own the same stocks. But by
trading among one another, they will underperform the
market by the amount of their trading costs.
So speculation is, by absolute mathematical tautology,
a loser’s game—losing to the market. And investment is,
by absolute mathematical tautology, a winner’s game—
capturing the market return, almost 100 percent of it.
Wiandt: What single accomplishment are you proudest of?
Bogle: It’s a little early to think about that, but the obvious
thing is that everybody else claims to have created
the index fund, but we actually did it. And we created
a mutual company that is yet to be emulated. We gave
substance to the no-load market. All these steps—
Vanguard, the index funds, the no-load decision, the
multi-tiered bond funds—I’ll put in one lump and say
we created a better world for investors.
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