the bogle issue - IndexUniverse.com

But no one ever promised that investing with indexes
guaranteed outsized or even merely positive returns. Indeed,
the only claim by those espousing index investing was that
the costs would probably be lower and diversification would
probably be greater with index investing than by attempting
to buy only the stocks that are supposed to rise. The idea
behind indexing as an investment strategy is that over the
long run, the market rises as the economy grows and the
costs of participating in economic growth can be quite modest.
Does buy-and-hold always work? No. No investment
strategy always works. Although there are promises of strategies
that can be replicated and that consistently outperform
buy-and-hold, few if any have succeeded. In investing (and
in many other pursuits), there are no sure things.
Finally, having worked at S&P on indexes for several
years, I can’t write about Jack Bogle without acknowledging
a debt to Jack’s daring idea to launch a retail index mutual
fund and basing the fund on the S&P 500. Since the S&P
500 took its current form in 1957, it has been part of many
investing innovations, including index mutual funds, ETFs,
and index futures and options. The Vanguard mutual fund
stands out among investment and financial history as one
of the first and most successful examples of borrowing from
financial science for investing results.
Roundtable continued from page 31
From the Foreword to “John Bogle on Investing: The First 50 Years” (2001)
If a modern day Rip van Winkle were to wake up
after a sleep of 50 years, he’d have a lot of trouble
understanding today’s financial markets or recognizing
the names of the major participants. But if Rip happened
to be, say, a Princeton professor who had monitored
or read John Bogle’s senior thesis, he wouldn’t
be at all surprised about one of the most significant
developments in the world of the stock market and
money management.
John Bogle didn’t invent the business of mutual investment
funds. They had started before he went to college,
but were barely visible. His curiosity about the business
was piqued by an article in a magazine as he was ruminating
about a thesis topic. That bit of serendipity led not
only to an honors thesis but to a lifelong vocation.
Today, mutual funds are the dominant investment
medium for American families. They directly own a
large fraction of all traded stock and a sizable share of
bonds and liquid assets as well.
The success of the industry is built on a solid
base—the demonstrable value of diversifying risk and
spreading costs by collective investment. Those were
concepts intuitively recognized and emphasized by the
Princeton senior.
John Bogle has not, of course, been alone in seeing
the basic merit of mutual funds, now counted in the
thousands. His great contribution—his single-minded
mission—has been to insist that those funds should be
managed, first and foremost, in a way truly to serve the
interests of the investing public.
That has meant strong emphasis on minimizing conflicts
of interest and operating at the lowest possible cost.
To those ends, the family of funds which John Bogle
established a quarter of a century ago---The Vanguard
Group—has remained independent of ties to other businesses.
It has long led the industry in operating without
sales charges and with minimal operating costs.
Early in its life, Vanguard established the industry’s
first index fund. Over time, the stress on the value of index
funds responded to the clear logic—a logic fully supported
by the plain evidence—that most “active” money
managers most of the time will not be able to “beat” the
market. These days, after all, mutual funds largely are the
market. On the average, they couldn’t do better, even if
they had no costs, operated with perfect efficiency, and
incurred no taxes. With those hurdles to jump, very few
funds can consistently outperform the averages.
That’s not an easy conclusion for money managers
to accept. John Bogle has not won many popularity
contests among his professional colleagues. Moreover,
he himself would readily confess that the unique
form of governance and style of management that he
instilled in Vanguard is not easy to replicate.
But from a distance, I along with many others have
enormously admired the force and eloquence with
which he has set forth his thinking. It is thinking that I
find fully persuasive as an analytic matter and entirely
consistent with the public interest. John Bogle’s basic
conviction that the mutual fund investor is entitled, in
his words, to a “fair shake” should serve as the motto of
every mutual fund.
All of us dependent on mutual funds or other collective
investment institutions to manage our savings,
and that is most of us, owe thanks to John Bogle for
insisting that our interests be placed front and center.
Even more broadly, the strong sense of fiduciary
responsibility, the objectivity of analysis, and the willingness
to take a stand—qualities that permeate all his
writings—set high standards for all those concerned
with the growth and integrity of our open and competitive
financial system.
Paul A. Volcker
Published in 2001 by the McGraw-Hill Companies
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