“Jack did more for American investors than any individual I’ve known,” said Warren Buffett (CNBC, Jan 16 2019). Last week, investment legend and the founder of Vanguard, John Clifton "Jack" Bogle, passed away at the age of 89. His lasting legacy is the dramatic reduction in fees charged by money managers and mutual funds across the world.
Bogle pioneered the idea of an index fund, a type of mutual fund that passively tracks a major index rather than pick specific stocks to create a portfolio. Since these funds don’t require much management, the fees could be a lot lower than the typical actively-managed mutual fund.
Bogle once summarised the underlying principle by saying, “don't look for the needle in the haystack. Just buy the haystack!” While the idea was controversial at the time, the model has since been accepted as a legitimately effective investment strategy. Passive index funds now account for $8 trillion in assets under management, representing 20% of the total mutual fund industry (Michael Cannivet, Forbes, June 27 2018).
In Bogle’s memory, here are some of his most well-known investment and business lessons:
1. Stay the course
Bogle championed consistency and persistence in investing. Investors, he argued, must hold onto their stocks when the market gets risky (Jeff Sommer, the New York Times, 11, 2012). Long-term investors are helped by the dual effects of compounding and dollar-cost averaging, however investors need a structured strategy to take advantage of these economic benefits.
2. Think independently
A contrarian approach to investing is exactly what led Jack Bogle to indexing while the rest of the financial services industry was obsessed with chasing returns and charging high fees. The business community derided him when he first introduced his index fund in 1976, calling it “Bogle’s Folly,” “a sure path to mediocrity” and even “un-American” (Steven Goldberg, Kiplinger, January 17, 2019). Being able to drown out the noise and focus on his underlying principles helped Bogle eventually revolutionise the industry he worked in.
3. Cut costs
Lowering costs is the cornerstone of the passive investment strategy. Every percentage point of cost savings can be reinvested into the fund that should compound at an accelerated pace over time. If you consider the $8 trillion invested in passive index funds now, every basis point of fees represents $800 million in annual savings. The difference between the average active and passive fund is estimated at 100 basis points (Kent Thune, the Balance, September 06, 2018).
4. Impulse is your enemy
Both good and bad investors have periods of over and under-performance. Investments are a non-linear endeavour and the worst thing an investor can do is act on impulse. Bogle championed a pragmatic approach based on realistic expectations of the future.
5. Culture trumps strategy
One of Bogle’s key principles extends beyond the realm of investing. He was a firm believer that an organisation’s culture mattered more than its strategy. According to Vanguard’s current CEO, F. William McNabb, the company’s culture is based on the late-founder’s principles of hard work, treating everyone with respect, always doing the right thing and putting clients’ interests first. Vanguard now manages over $5 trillion assets for 20 million investors in 170 countries (Shawn M. Carter, CNBC, Jan 18 2019).
The value of investments and income from them may go down as well as up and you may not get back the original amount invested.