Bogle’s Folly, Our Fortune

John C. “Jack” Bogle, the founder of the Vanguard Group and the father of the index mutual fund died at age 89 on January 16th. The pioneer’s impact on the world of investing and finance was transformative and we are all better off as a result of his innovation.

Starting with a thesis he wrote at Princeton University in 1951 about investment companies, Bogle entered the investment world when he joined the Pennsylvania-based Wellington Fund. More than two decades later, Bogle was stirred and inspired by economist Paul Samuelson’s 1974 article “Challenge to Judgment,” which called for the formation of a “no-load, no-management fee, virtually-no-transaction-turnover fund.”

In 1976, Bogle unveiled the Vanguard First Index Investment Trust, which eschewed the common wisdom that someone (now some algorithm) could consistently beat a market index. Instead, by driving costs down, individuals would be able to gain access to the stocks within the S&P 500 index, which as Bogle noted, “would guarantee that our investors would earn their fair share of stock market returns.” (This theory was also underscored by investment legend Charley Ellis’ 1975 article, The Loser’s Gamewhich quantified active managers’ disappointing results versus passive investments.)

Before the word fiduciary came into the modern investor lexicon, Bogle was putting the interests of investors first. Unlike its peers, Vanguard was a mutual company, which meant the investors in the funds owned the company. As a result, shareholders were “in the driver's seat (rather than reposing in the back seat, with the management company driving the car for a fee)”, enabling the company “to deliver extremely low operating and management costs to shareholders.”

It was such a breathtaking concept that the so-called stewards of investment dollars were quick to dismiss it as a cop-out, a search for mediocrity and my favorite, “Bogle's Folly.” 

Some folly! As it turns out, the index fund laid to bare the fallacy that even the most seasoned professionals could consistently beat the market over the long term. The reason, as Bogle noted, is just arithmetic: “Because of the costs of managing funds, the management fees, the operating expenses, the marketing costs, the sales loads, the hidden costs of portfolio turnover, the net return earned by the average fund must fall short of the return earned by the market itself.”

Though laughed at and chided early on, Bogle’s index fund came to be seen as a blockbuster breakthrough. Samuelson said, “I rank this Bogle invention along with the invention of the wheel, the alphabet, Gutenberg printing, and wine and cheese: a mutual fund that never made Bogle rich but elevated the long-term returns of the mutual-fund owners.”

The index fund also ended up in Financial Times journalist’s Tim Harford’sFifty Inventions That Shaped the Modern Economy” and when legendary investor Warren Buffet offered advice to the trustees of his estate in 2013, the Oracle of Omaha said: “Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund…I believe the trust's long-term results from this policy will be superior to those attained by most investors…who employ high-fee managers.”

More than four decades after Bogle unveiled his first index fund, there are trillions of dollars invested in passive investments. Those smart enough to utilize them realize that they will never “beat the stock market,” but by doing so, they can allow all of to focus our energy on the myriad of other financial matters that demand our attention. Bogle’s Foley has indeed become our fortune. The world of investing and more importantly, financial planning is far better off for his enormous contribution.