John Bogle on Investing: The First 50 Years

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Overview

A 20th Century Visionary Looks to the 21st Century

John C. Bogle --Vanguard Founder and No-Load Pioneer -- Talks about Finance, Economics, Mutual Funds, Stewardship, and Idealism

John C. Bogle is one of the 20th century's towering financial giants. Deeply concerned by the devastating impact of high mutual fund costs on the long-term returns earned by investors, he founded Vanguard in 1974. In the space of a few years, he introduced the index ...

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Overview

A 20th Century Visionary Looks to the 21st Century

John C. Bogle --Vanguard Founder and No-Load Pioneer -- Talks about Finance, Economics, Mutual Funds, Stewardship, and Idealism

John C. Bogle is one of the 20th century's towering financial giants. Deeply concerned by the devastating impact of high mutual fund costs on the long-term returns earned by investors, he founded Vanguard in 1974. In the space of a few years, he introduced the index mutual fund, pioneered the modern no-load mutual fund, and redefined bond fund management. By creating a novel mutual fund enterprise owned by its shareholders, he gave millions of investors a new and high-powered way to invest and was among the first authoritative voices to challenge the financial establishment.

And John Bogle is still in there fighting. John Bogle on Investing contains the best of the scores of speeches he's delivered over the years and revisits the important investment themes from which Bogle rarely strayed during his illustrious career:

  • The majesty of simplicity in investment strategy
  • The productive economics of long-term investing
  • The counterproductive emotions that can forfeit investment success
  • The universality of indexing in the financial markets
  • Minimizing the "fiscal drag" of sales charges, management fees, turnover costs, and opportunity cost
Within these covers you will find nothing less than the rock solid foundation of success in independent investing for the 21st century. Tough, insightful, and relentless in its drive for fairness and honesty, John Bogle on Investing creates a high standard for McGraw-Hill's new Great Ideas in Finance series-and then surpasses that standard, page after page.

"John C. Bogle ... has the mind of an economist and the personality of a preacher." -Washington Post

One half century ago, an "insecure but determined" Princeton undergrad was already showing signs of becoming a maverick. Barely out of his teens but already firm in his convictions that mutual fund shareholders were not receiving a fair shake, the budding financier turned in an exhaustively researched magna cum laude thesis entitled The Economic Role of the Investment Company.

That student was John Clifton Bogle, and that thesis -- groundbreaking, innovative, and reprinted word-for-word in these pages for the first time -- unalterably changed the future course of investing. John Bogle on Investing is a 50-year compendium that recounts in the best possible words -- his own -- the storied career of Jack Bogle, the man who has been called "the conscience of the mutual fund industry."

"Bogle is rattling the status quo among the mutual fund titans." -Fortune

In its 26 chapters, John Bogle on Investing presents 25 speeches and one masterful thesis. They all revolve around one common theme: Efficient, economical, and honest alternatives must be made available to all investors of all wealth levels. Just as important, these investors must understand the choices available to them. From sensible discussions of wealth accumulation and investment risk, through a provocative call-to-arms regarding investment costs, each selection is exceptionally well written and meticulously researched.

In all, the book is classic Bogle. Whether discussing the virtues of low-expense indexing ("Low cost, marginal in its annual impact, becomes overwhelming as the years roll on") or the hazards that bull markets may create ("When reward is at its pinnacle, risk is near at hand"), John C. Bogle never fails to lay his cards face-up on the table for all to see.

And we, the readers, emerge the winners.

If you are serious about substantially improving your long-term investment returns, and you read just one book this year, make it John Bogle on Investing. If you plan on reading two books, you should consider reading John Bogle on Investing twice.

It's that valuable, that entertaining, and that good. John C. Bogle is one of the great financial figures of the 20th century, and this book encapsulates much of the work and wisdom of his 50-year mutual fund career. By reading John Bogle on Investing, you can learn in one evening much of the knowledge John C. Bogle spent 50 years acquiring.

In a lifetime devoted to giving a fair shake to the human beings who invest to secure their financial future, this book may be Bogle's best bargain yet.

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Editorial Reviews

From Barnes & Noble
This book is the first comprehensive review of the distinguished career and contributions of John Bogle, the investing icon recently chosen by Fortune as one of the four key financial figures of the 20th century. From his never-before-published Princeton thesis to nearly two dozen essays covering five decades of market strategy, Bogle offers insights and methods of value to investors at all levels.
Publishers Weekly - Publisher's Weekly
The author of two classic books, Bogle on Mutual Funds (1993) and Common Sense on Mutual Funds (1999), Bogle has been a strong voice for sensible, efficient, honest financial management throughout his career. In 1951, for his undergraduate economics thesis at Princeton, he wrote the first comprehensive analysis of the modern mutual fund. He then spent 25 years working in the fund industry before founding Vanguard, and another 25 years running that company. This omnibus begins with the 1951 thesis and includes articles and speeches over the next half-century. Unfortunately, 17 of the 26 chapters are speeches from the two years leading up to publication, which are really the same recycled speech with a few introductory paragraphs tailored to the audience. The older material, especially the thesis and a 1975 speech about the founding of Vanguard, will be extremely interesting only to Bogle's biographer and to Ph.D. students writing about the history of the mutual fund industry. General readers will be impressed with Bogle's consistency, though that is hardly adequate reward for 480 pages of mostly dull reading. (Nov.) Copyright 2000 Cahners Business Information.
Library Journal
Bogle, founder of the enormous Vanguard family of no-load mutual funds, has long been one of the strongest voices for low-cost mutual funds and shareholder rights. Here, he gathers some of the speeches he has delivered over the past three decades (but most within the last few years). His themes are the failure of the mutual-fund industry to provide adequate returns, the value of index funds, the proper role of funds in corporate governance, the origins of Vanguard, and his own career. He also includes his 1951 Princeton undergraduate thesis on the economic role of mutual funds. Because so many of the speeches are recent, they hold timely information, though there is some repetition of ideas from one to another. This is an important collection by one of the major figures in mutual funds, and it belongs in every library with more than cursory holdings on investing. However, Bogle's other books, Bogle on Mutual Funds (LJ 10/15/93) or Common Sense on Mutual Funds (Wiley, 1999), would be more appropriate for the casual reader.--Lawrence R. Maxted, Gannon Univ. Lib., Erie, PA Copyright 2000 Cahners Business Information.
Kirkus Reviews
A 1951 Princeton thesis and 25 lectures from the founder of the Vanguard Mutual Funds. Bogle illustrates the tenets of his successful investing career in this collection, the first in the Great Ideas in Finance series. Three basic rules guide his work. First, investors should be aware of the costs of investing: since mutual funds charge an annual management fee that ranges from one percent of assets to over two percent, the difference of a percentage point compounded over many years adds up to a lot of money. Second, investors must be willing to invest for the long term: commissions on multiple trades and taxes on short-term gains eat away at profits. Third, investors should buy index funds (like Vanguard): index funds buy stocks in the same proportion as the S&P 500 or the Wilshire 500 indices and, with America growing perpetually, index funds will capture this increase. Index funds also have lower costs because of less required management and less trading. This advice—buy index funds, invest for the long term, and watch costs—is included in 24 of the 25 lectures. The one exception discusses organ donation: Bogle, the recipient of a heart transplant in 1995, writes of his experience and then tells the story of Nicholas Evans. A seven-year-old American boy, Evans died in Italy in 1995, and his family donated seven of his organs to Italian children—a story of American kindness in a dark hour. And Bogle's college thesis ("The Economic Role of the Investment Company"), while it may have been cutting-edge in 1951, is rather quaint today. A weird mixture of personal narrative and straightforward advice.
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Product Details

  • ISBN-13: 9780071364386
  • Publisher: McGraw-Hill Professional
  • Publication date: 9/13/2000
  • Pages: 455
  • Product dimensions: 6.34 (w) x 9.29 (h) x 1.57 (d)

Meet the Author

John Bogle
John C. Bogle is founder of the Vanguard Mutual Fund Group and President of its Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as chairman and chief executive officer until 1996 and senior chairman until 2000. In 1999, Fortune magazine named Mr. Bogle as one of the four "Investment Giants" of the twentieth century; in 2004, Time named him one of the world's 100 most powerful and influential people; and Institutional Investor presented him with its Lifetime Achievement Award.
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Table of Contents

Foreword
Introduction
Preface
Some Words of Appreciation
Pt. I Investment Strategies for the Intelligent Investor
1 Investing in the New Millennium: The Bagel and the Doughnut 5
2 The Clash of the Cultures in Investing: Complexity vs. Simplicity 17
3 Equity Fund Selection: The Needle or the Haystack? 33
4 Risk and Risk Control in an Era of Confidence (or Is It Greed?) 47
5 Buy Stocks? No Way! 66
6 The Death Rattle of Indexing 82
7 25 Years of Indexing: When Active Managers Win, Who Loses? 98
8 Selecting Equity Mutual Funds 108
9 The Third Mutual Fund Industry 122
Pt. II Taking on the Mutual Fund Industry
10 Mutual Funds: The Paradox of Light and Darkness 141
11 Economic 101: for Mutual Fund Investors ... For Mutual Fund Managers 153
12 Honing the Competitive Edge in Mutual Funds 168
13 Creating Shareholder Value: BY Mutual Funds ... or For Mutual Fund Shareholders? 180
14 The Silence of the Funds: Mutual Fund Investment Policies and Corporate Governance 196
15 Losing Our Way: Where Are the Independent Directors? 208
Pt. III Economics and Idealism: The Vanguard Experiment
16 Vanguard - Child of Fortune 221
17 The Winds of Change: The Vanguard Experiment in Internalized Management 231
18 Deliverance 246
19 The Lengthened Shadow, Economics, and Idealism 260
20 On the Right Side of History 270
Pt. IV Personal Perspectives
21 Changing the Mutual Fund Industry: The Hedgehog and the Fox 291
22 The Majesty of Simplicity 307
23 The Things by Which One Measures One's Life 312
24 Telltale Hearts 316
25 Press On Regardless 327
Pt. V The Princeton Thesis
The Economic Role of the Investment Company 341
Index 451
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First Chapter

CHAPTER 1
INVESTING IN THE NEW MILLENNIUM: THE BAGEL AND THE DOUGHNUT
Sunday Breakfast Club of Philadelphia
January 5, 2000

My title is inspired by William Safire's essay, "Bagels vs. Doughnuts," published just a few months ago in The New York Times. These baked goods, Safire tells us, are similar in shape but different in character: Bagels are "serious, ethnic, and hard to digest. Doughnuts are fun, crumbly, sweet, and fattening.... The triumph of bagelism in the 1980s and early 1990s meant that tough munching was ascendant; the decline of doughnutism meant that soft sweetness was in trouble." But, Safire commiserates, the doughnut is coming back into the mainstream. Why? Because, with the advent of-Heaven forbid!-the blueberry bagel and the bagel sandwich, "the bagel has moved toward the center, its crust going soft and spongy, and lost its distinctive hard-boiled nature."

Well, surprising as it may seem, in all of this food for thought (pun intended), I find a message about bagels and doughnuts in each of the three subjects on which I'd like to reflect with you this evening, a year before the start of the new millennium, which, as only a killjoy would point out, doesn't begin until January 1, 2001: (1) The outlook for the stock market; (2) the coming change in the mutual fund industry; and (3) the challenges faced by Vanguard-the enterprise I founded on September 24, 1974, just over a quarter-century ago-as the new century begins.

1. The Bagel and the Doughnut in the Stock Market
During the final two decades of the 20th century, the U.S. stock market has provided the highest returns ever recorded in its 200-year history-17.7% per year, as stock prices have doubled every four years. What have been the sources of this unparalleled growth? Well, complex and mysterious as the stock market may seem, its returns are determined by the simple interaction of just two elements: investment returns, represented by dividend yields and earnings growth; and speculative returns, represented by changes in the price that investors are willing pay for each dollar of earnings. It's that simple. It really is! It is hardly farfetched to consider that investment return is the bagel of the stock market. The investment returns on stocks reflect their underlying character, nutritious, crusty and hard-boiled. By the same token, speculative return is the spongy doughnut of the market. The speculative returns on stocks represent the impact of changing public opinion about stock valuations, from the soft sweetness of optimism to the acid sourness of pessimism. The bagel-like economics of investing are almost inevitably productive. Corporate earnings and dividends have provided a steady underlying return over the long pull, the result of the long-term growth of productivity and prosperity in our resilient American economy. But the flaky, doughnut-like emotions of investors are anything but steady-sometimes productive, sometimes counterproductive. Price-earnings ratios may soar or they may plummet, reflecting wide swings in investor valuations of the economy's future prospects. Over the past two decades, the investment returns on stocks have been solid. The initial dividend yield contributed a generous 4.5% to returns, and earnings growth set a good, but hardly remarkable, pace of 5.9% annually. Combining the two produced a fundamental return of 10.4%, closely in line with the 11% nominal return on stocks over the long term. But the speculative return was larger than either of those two fundamental elements of investment return. The market's price-earnings ratio rose from 7.3 times as 1980 began to 30 times as year 2000 begins, a rise that, spread over two decades, has contributed another 7.3% per year, the laboring oar in carrying the total return of the market to 17.7% annually.

If we cumulate these figures, the twenty-year return on the Standard & Poor's 500 Index came to ?2500%. Just 600 points-one-fourth of this gain-were accounted for by investment fundamentals; the other 1900 points represented the pendular swing from pervasive pessimism to overpowering optimism on the part of investors. Put another way, more than three-quarters of the cumulative increase in stock prices during this great bull market has simply reflected a sea change in public opinion about the future prospects for common stock returns, as price-earnings ratios more than quadrupled.

Now of course both history and common sense tell us that price-earnings ratios cannot rise forever. In the decade of the 1970s, for example, the price-earnings ratio fell by more than 50%, from 16 times to 7.3 times, an annual drag of ?7.5% that reduced the 13.3% fundamental return generated by earnings and dividends to just 5.8% per year. Yet ironically, that bagel of investment fundamentals-dividend yield of 3.4% and annual earnings growth of 9.9%-produced almost 30% more nutrition than the 10.4% investment return of the next two decades of soaring stock prices. The overriding difference between the inadequate 1970s and the golden 1980s and 1990s, then, was not better bagelism, but the swing of doughnutry from the sweetness of optimism to the sourness of pessimism in the 70s, and then back again in the 80s and 90s, to the greatest sweetness the market has ever recorded.

As we come to consider the outlook for the stock market in the first decade of the new millennium, we need answer on only two questions: Will the bagel of investment fundamentals give us its usual sustenance? And will the doughnut of speculation get even sweeter than it is today, or will it finally sour again? As to the fundamentals, please realize that we begin the decade with far less sustenance than when the bull market began. For the dividend yield on stocks is at an all-time low of just over 1%, meaning that it will take earnings growth of more than 9% to provide a fundamental return equal to the 10.4% total of the past two decades. I think that's too optimistic. But 8% growth maybe possible, given the revolution-and it is indeed no less than that-now taking place in global technology, communications, and productivity. We are clearly in a New Era for the economy.

Whether we are in a New Era for investing, however, is a far different question. If we are to have a continuation of 17%-plus returns-which, polls tell us, represent the public expectation-the doughnut of speculation will have to soar even beyond today's unprecedented peak of sweetness. To get there, assuming a fundamental return of 9.2% (1.2% yield and 8% earnings growth), the market's price-earnings ratio would have to rise from 30 times today to 67 times a decade from now. I simply can't imagine that happening.

Confession being good for the soul, however, I admit that a decade ago, I made a similar analysis of the market, and I was wrong. My fundamentals were about right-my projection of an investment return of 9.7% per year for the 1990s was remarkably close to the actual figure of 10.5%. But I guessed that the price-earnings ratio might ease back from 15.5 times to its then-historic-norm of 14 times. While, happily, I urged investors to maintain their equity positions, I waited and watched the price-earnings ratio rise, as we now know, to 30 times, more than double that figure, making my midrange projection of 9% stock returns-and even my optimistic projection of 13%-seem stodgy. Clearly history doesn't always repeat! And even if one believes that reversion to the mean in market returns will inevitably take place, it can take a long, long time to do so. As I reminded investors then-and I remind you tonight-be leery of projections, whether founded in reasonable expectations or just picked out of the proverbial hat. Anything can happen in the stock market.

But with that caution in mind, I'll nevertheless combine my (decidedly optimistic) fundamental forecast of 9.2% with a forecast that today's speculation will retreat from the market's heady optimism to something considerably less exuberant. Should the current price-earnings ratio ease back to 20 times-hardly bearish-the fundamental return would be reduced by -4.0% annually to bring the market return to 5.2% per year-well short of the 7.5% to 8% available on a high-grade bond portfolio today. That scenario would be a rare one, for bonds have outpaced stocks in but one of every six past decades. But it could easily happen in the coming decade. Only time will tell.

For whatever comfort-or discomfort-it's worth, my views are very close to those of the estimable Warren Buffett. In October's Fortune magazine, using a somewhat different methodology, he suggested 6% as a reasonable expectation for stock returns over the next decade. It's nice to find myself in such good company. But I hardly need warn you that the fact that Mr. Bogle and Mr. Buffett agree doesn't prove anything. Nonetheless, following two decades of record-setting market returns, it would be hard to be shocked by-or even dissatisfied with-a third decade that witnesses some consolidation of past gains. And if we face a decade in which we enjoy a continuation of the solid sustenance of the bagel, but without the added sweetness of the doughnut, I, for one, would count my blessings.

2. The Bagel and the Doughnut in the Mutual Fund Industry
In an environment of lower equity market returns, however, the mutual fund industry will not count its blessings. For lower market returns are the industry's bane. The extraordinarily high stock returns generated in the great bull market that has happily persisted for close to two full decades have blessed this market-sensitive industry, which is among the fastest growing of all American industries during the past twenty years. Since 1980 began, fund assets have risen nearly 70-fold, from less than $100 billion to some $6.5 trillion. Assets of stock funds alone, now almost $4.0 trillion of the total, have risen 120-fold. While the rising market tide has lifted nearly all mutual fund boats, very few equity funds have provided their shareholders with anything like the generous returns offered by the market. Indeed of the 426 fund boats that began the voyage 15 years ago, 113-nearly one of every four-have sunk along the way, despite the absence of even one protracted market storm. Fair weather for the market, yes, but foul weather for most funds. Still, the average diversified stock fund that survived the period-obviously excluding the poorer performers-provided an after-tax return of just 12.3%, compared to the 17.7% return of the stock market itself. Final value of $10,000 invested at the outset: total stock market, $115,000; average mutual fund, $57,000.

What was the problem? Simply this: in their frenetic search for sweet, fattening returns, the mutual fund doughnuts levied heavy sales charges, charged excessive fees, spent too much on marketing, and failed to share the economies of scale with the investors they were responsible to serve. On average, equity fund operating expenses and management fees cost some 1.2% of assets annually (they're now more than 1.5%); sales charges cost some 0.5%; and funds paid an opportunity cost of 0.6%, simply because funds were not fully invested in stocks as the market rose. That's a total hit to return of 2.3%.

But that's only the beginning. The doughnut-like mutual funds, ever-searching for the market's sweet spots, turn over their portfolios at an astonishing rate of 90% per year-clearly short-term speculation, not long-term investing. The cost of executing these transactions came to an estimated 0.7% per year. (Funds don't disclose this hidden cost.) And while all of that turnover has failed to add any value whatsoever to the returns of fund shareholders as a group, it has surely enriched the federal government, as taxes cost fund investors an estimated 2.7% of return per year. The combined transaction and tax costs: 3.4% per year. Hardly surprisingly, the surviving funds as a group appeared to be slightly above-average stock pickers, earning an estimated return of 18.0%. However, because of all-in annual costs of 5.7%, their return crumbled to just 12.3% for their owners. Contrary to the entirely reasonable expectations of their shareholders, the sinfully sweet and apparently addictive fund doughnuts failed abjectly to fatten their returns.

But this industry is not composed solely of doughnuts. There are some-but very few-fund bagels, maintaining the hard-crusted, long-term-focused, low-cost character that was in fact this industry's hallmark when I first analyzed it 50 years ago in my senior thesis at Princeton University. In its purest manifestation-no blueberry here!-the fund bagel is the market index fund. Stripped of all the proffered sweetness of mutual fund doughnutry, the index fund offers the ultimate in character-the broadest possible diversification, the lowest possible cost, the longest time horizon, and the highest possible tax efficiency. Simplicity writ large!

At the outset of the great bull market, there was but a single one of these hard bagels in the entire soft doughnut-filled fund bakery. The first index mutual fund was founded in 1975, designed simply to own the 500 stocks in the Standard & Poor's 500 Index, and hold them as long as they remain there. The second index fund wasn't introduced until 1984, after the lapse of nine years. But the idea behind this bagel-like manifestation of fund investment strategy-own the market and hold it forever-has finally moved from heresy to dogma.

That idea, simply put, is to capture almost 100% of the market's annual return simply by owning all of the stocks in the market and holding them forever, all the while operating at rock-bottom cost. Since the 500 giant corporations of the Standard & Poor's 500 constitute more than three-quarters of the market's total capitalization, the first index fund substantially captured this concept.

Recognizing that the remaining one-quarter of the stock market includes corporations with medium-sized and small market capitalizations, and that owning the entire market is an even better idea, the first total stock market index fund was founded in 1992. It is modeled on the Wilshire 5000 Index, now encompassing the more-than-8000 publicly held corporations in the United States.

I recognize, of course, the irony that the all-market index fund delivers so much but appears to offer so little. It can be accurately described as a fund that, because of its expenses-tiny as they are-rises slightly less than the market in good times, declines slightly more in bad times, and will never quite capture 100% of the market's long-term return. But it works. Before taxes, the all-market index fund provided 99% of the market's annual 17.7% annual return during the past 15 years, while the average fund captured just 85%. After taxes, the investor selecting a diversified stock fund at the outset in 1984 proved to have just one chance in 33 of outpacing the all-market fund by as little as a single percentage point on an annual basis. Like looking for a needle in a haystack, you say? Of course. So what is the alternative? Just buy the entire market haystack.

The all-market index mutual fund is the industry's consummate bagel, tough and crusty, serious and, above all, a blessing to the investor's wealth. The traditional managed mutual fund is the industry doughnut, fun, sweet, and crumbly to be sure, and looking swell in all of those chocolate-covered, as it were, mutual fund advertisements you see (and pay for) on television. But it has proved to be anything but fattening to investors' wallets. In fact-bereft of the kind of mandatory federal health warning-label carried on cigarette packs and liquor bottles-the typical equity mutual fund has proved dangerous to the wealth of investors who succumbed to its sugary smiles. Over the past 15 years, remember, after all expenses and federal taxes, $10,000 invested in the average mutual fund doughnut has grown to $57,000. By contrast, the all-market fund bagel has grown to $100,000. The bagel rewarded the investor with nearly double the reward of the doughnut. Looked at another way, the all-market bagel provided 87% of the stock market's return after all costs and taxes, compared to just 48% for the average stock fund.

It takes no brilliance to recognize that many fund investors are delighted to have made a $47,000 profit on their $10,000 stake. They don't realize they might have made a $90,000 profit simply by investing in the market and then doing absolutely nothing. But if I'm correct that the doughnut of market speculation that has driven returns upward in the past two decades will lose some of the sweetness in the years ahead, the mutual fund doughnuts will find themselves in a bad spot. For the lower the market return, the bigger the bite taken by fund costs. If the annual stock market return falls to 5.2%, fund all-in costs of even 2.5% would confiscate nearly one-half of the market's return, reducing the fund investor's return to 2.7%. While the fund bagels would hardly shine in this environment, they would at least produce a 5% return, generous by comparison.

3. Vanguard in the New Millennium: The Bagel in a Doughnut-Dominated Industry
I'm sure this audience of investment-savvy citizens of the Greater Philadelphia region is well aware that the great bagel in the doughnut-dominated mutual fund industry is Vanguard. While Mr. Safire was taking some literary license when he described the bagel-doughnut war as a test of America's national character, it is hardly hyperbole to describe Vanguard's pioneering of bagel-like, market-indexing-type, low-cost investing as a test of the character of a mutual fund industry, an industry heretofore slavishly devoted to the easy-but undeliverable-promise of doughnut-like sweetness in returns.

Safire is appalled by the bakery bagel's attempt at self-destruction-moving toward the center, reaching for an ever-wider audience by compromising its values. Sure, he concedes, sourdough and caraway (may I throw in an "everything?") are permissible variations, but the blueberry bagel-sweet and soft-reduces a bagel to the level of a stale doughnut. At the same time, the rival doughnut is defiantly reasserting its fattening identity, adding an excess of sweetness and slickness, exemplified by the soon-to-come frosted chocolate "Krispy Kreme," so Safire tells us. "The bagel, devoid of character and becoming half-baked, seeking to be all pastry to all men, reflects what is wrong with America at the fin de millenaire."

But the momentum in the fund industry, so far at least, lies with the bagelism of indexing. (Or is it the Bogleism of Vanguard?) While it took years for our rivals to copy our pioneer 500 Index Fund of 1975 and our pioneer Total Stock Market Index Fund of 1992, there are now 332 index mutual funds. While they represent but 10% of equity fund assets, index funds accounted for fully 35% of cash flow in 1999. I, for one, welcome these converts. For if we are to maintain our competitive edge, we need strong rivals who compete with us on the grounds of low investment cost, high-quality service, and giving the investor a fair shake. For while indexing comes at the direct expense, dollar-for-dollar, of the return on capital of the manager, it commensurately enhances the return on capital of the investor.

While our index pioneering was motivated by conviction and missionary zeal, our rivals have been motivated only by the growing public demand for index funds, and dragged kicking and screaming into the fray. Most other index funds, however, are fatally flawed by excessive expense ratios, although some waive their fees for "a temporary period of time," so as to appear to match Vanguard's low cost. This sort of "bait and switch" strategy (bait the investor, then switch to a higher fee later) may deceive gullible investors for a time, but will not, finally, stand public scrutiny. Emulating a market index is essentially a commodity-like strategy, with the expense ratio the major differentiator. Low costs, simply put, are better than high costs! What is more, the missionary zeal to offer an investment that serves has proven more successful than the reluctant decision to offer a product that sells.

How successful? Today, nearly $250 billion of Vanguard's assets are represented by pure index funds, with another $150 billion invested in high-quality, low-cost, defined asset-class bond and money market funds-$400 billion of our $535 billion total that is clearly dedicated to the bagel mandate. And most of our remaining funds are also bagel-like; that is, they offer clearly specified strategies, exceptionally low costs, and portfolio turnover that is modest by industry standards. To be fair, we have some-albeit far too few-competitors that can fairly be characterized as bagel-like in nature. But the overwhelming majority of mutual funds clearly meet the doughnut definition. And so the great bakery confrontation is joined. May the concept that provides the most financial nutrition for investors win!

In that confrontation, I remain, not on the sidelines, but in the heat of the battle. I begin the year 2000 just as I have begun every year since 1975: Ready to serve the Vanguard shareholders-now eight million in number-arm-in-arm with my fellow crewmembers-now 10,500 strong. In my role as Vanguard's Founder, I continue to act as ambassador to our crew and our owners; in my role as President of Vanguard's newly created Bogle Financial Markets Research Center, I continue to pursue my career-long mission with the enthusiasm and energy that only a now-29-year-old heart could muster. ("Thanks," to my guardian angels at Hahnemann Hospital!) My research, writing, and speaking come from a perspective that is without parallel in this industry, and my first two books, published in 1993 and 1999, will be followed by two more in 2000, with at least three more on the drawing board.

Many shareholders have asked: "What about Vanguard post-Bogle?" I can only answer: "Don't worry." First, I expect to be around Vanguard in body for as far ahead as I can see today, energetically pursuing my work. Second, I also expect to be around my firm in soul for as long as the simple investment principles and basic human values that I've invested in Vanguard make sense. As I said to our shareholders in my message in this year's fund annual reports, those principles and those values are not only enduring, but eternal.

Recently, a management consultant applied Emerson's aphorism, "an institution is the lengthened shadow of one man," to Vanguard. I simply don't believe it. None of what we have accomplished is one man's work; all is the result of a dedicated crew working together for the common good. Our managers and crew are strong; with each passing day, they are gaining experience and, I hope, wisdom. What is more, each passing day reaffirms the worthiness of the principles and values that are so much a part of my very spirit.

Happily, what I have strived for with missionary zeal all of these years has also proved to be a winning business formula. Not only has our strategy been singled out for praise by academics such as Harvard Business School strategic guru Michael Porter, it has also won for Vanguard an ever-growing market share in an industry that "just doesn't get it" when the job is to give mutual fund investors a fair shake. Responding to our challenge as the 2000s begin, some of our rivals are finally starting to get the business side of it right. But they won't capture the real message until they have, well, a change of heart, placing above all other values, not the marketing of financial products, which is what doughnutry is all about, but the stewardship of investor assets, the central principle of bagelism. HMS Vanguard will flourish so long as we stay the basic course we have set for ourselves-not, to be sure, blindly or complacently, but open always to midcourse corrections in the face of the sea changes now occurring in every activity on the globe in this truly new era of information, technology, and communications. Nonetheless, having stripped the mystery from investing, exposed the importance of cost, earned rather than bought our market share, propounded the essentially long-term character of successful investing, and held high the mission of stewardship, Vanguard must avoid at all costs emulating the periodic attempts of our rivals to pander to the fads and fashions of the day, even if it causes our vaunted market share-Heaven forfend!-to slip for a while. In the long run, staying the course will carry the day.

In that light, after I read Mr. Safire's October essay, I dispatched copies of it to each of Vanguard's 200 officers, with the hope and expectation that it would be circulated widely among our crew members. My aim was to warn them of the dangers of adopting even a hint of the doughnut's lightness, softness, and sweetness, and to remind them of our commitment to the bagel's hard-hitting and uncompromising standards, its crusty and nutritious character. The three lessons Safire cites in "Bagels vs. Doughnuts" are poignant for any enterprise, and remarkably relevant for Vanguard.

1. When you score a breakthrough and surge far ahead, never forget the reason for your success. In the bagel's case, that reason was a certain quality of tasty toughness against a crumbling opposition of sustained sweetness.
2. When you open up a long lead against the competition, never let up and freeze the case, lest hungry runners-up eat your lunch.
3. When greed for an ever-growing market share causes you to sacrifice your authenticity and compromise core principles, repent and take a stand-or your flavor will disappear into the mealy maw of moderation.

Put another way, Vanguard must-and we will-protect our brand name with our actions, and let our rivals use their own bland names to seek their own destinies in their own ways. Quoting Safire for the final time, "Let doughnuts be doughnuts, let bagels be bagels. Character counts. Authenticity attracts." I have not the slightest doubt that Vanguard-not only while I live here on earth, yes, but when I live beyond some far horizon, too-will maintain its character. The stamp of authenticity that Vanguard investors have come to rely on is here to stay.

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Preface

Though it happened more than a half-century ago, it seems like only yesterday that I was a junior at Princeton University, barely out of my teenage years, an insecure but determined young man with a crew cut, majoring in economics. Seated in the reading room of the newly opened Firestone Library, I was reading current business literature as I considered a topic for my forthcoming senior thesis. As the sun poured into the reading room, I paged through the December 1949 issue of Fortune magazine. Fate must have been looking on me with favor, for, as I came to page 116, my eye caught an article entitled, "Big Money in Boston." It appraised a business of which I was totally ignorant: The mutual fund industry. I guess it's fair to say that the rest is history.

After reading and re-reading the article, I quickly decided that, for a whole variety of reasons, the fund industry would be the perfect topic for my thesis. First, because I had long since decided I would write my thesis on a subject no previous thesis had ever tackled; there, by the process of elimination, went Adam Smith, Karl Marx, John Maynard Keynes, and a score of other noted economists. Second, because it was a subject on which little had been written, and thus represented a wonderful opportunity for original research. Indeed when I'd finished my research, the Fortune article turned out to be the only substantive mutual fund article in a major magazine that I ever found. And third, because the article described the industry as "tiny...but contentious." To me, tiny suggested an opportunity for growth, and contentious appealed to the argumentative, stubborn, and contrarian side of my persona.

It all seemed too good to be true. Within a few months, in a tiny carrel in Firestone, I began the arduous task of researching and writing my thesis. In the course of my work, I read scores of articles from The Wall Street Journal, The New York Times, and the trade press; three Investment Companies manuals, published annually by Arthur Weisenberger & Company; and the entire 4217-page report of the Securities and Exchange Commission to the Congress, a report that led to the passage of the Investment Company Act of 1940. I also interviewed a half-dozen fund industry executives, and evaluated the limited data made available by the fund industry's trade association (predecessor to today's Investment Company Institute), then with a one-man staff. (It took John Sheffey, that doubtless overburdened executive director, four months merely to acknowledge my request for information.) It was hard work, but it was a thrilling project. And in March 1951, I completed my hunt-and-peck typing and my hand-drawn charts, had the 140-page document bound in hard cover, and, right on deadline, handed my adviser the finished copy: "The Economic Role of the Investment Company."

It seems problematic, as some have generously alleged, that my thesis laid out the design for what Vanguard would become. But whatever the case, many of the practices I specified then would, 50 years later, prove to lie at the very core of the firm's success. "The principal function of mutual funds is the management of their investment portfolios. Everything else is incidental.... Future industry growth can be maximized by a reduction of sales loads and management fees.... Mutual funds can make no claim to superiority over the market averages.... The industry's tremendous growth potential rests on its ability to serve the needs of both individual and institutional investors." And, with a final rhetorical flourish, funds should operate "in the most efficient, honest, and economical way possible." Were those words of mine merely callow, even sophomoric, idealism? Or were they the early design for a sound enterprise? I'll leave it to you to decide. But whatever was truly in my mind all those years ago, the thesis clearly put forth the proposition that mutual fund shareholders must be given a fair shake.

Three Surprising Turnarounds
As it happened, the thesis brought my collegiate career to a wonderful and surprising climax. During my early years at Princeton, I had struggled to produce satisfactory grades. My lack of intellectual brilliance, the tough academic environment, the long hours I spent on campus jobs to earn the money I needed beyond the full scholarship the university had generously provided me, and perhaps my slow maturation-all combined to limit my scholastic achievements. Indeed, my midterm grade in the first economics course I took was a scholarship-threatening 4+ (D+ in today's terms), which endangered my very continuance at Princeton. But it may have been that early scholastic shock that led to the pinnacle of my collegiate career. My grades steadily improved, into the threes, then into the twos, and finally into the ones. With the coveted 1+ that I earned on my thesis, my diploma would read: magna cum laude.

A second surprising turnaround was in my relationship with Professor Paul M. Samuelson of the Massachusetts Institute of Technology. It was the first edition of his Economics: An Introductory Analysis that I had struggled with in Economics 101 in the autumn of 1948. But my baneful introduction to economics came to a blessed conclusion a half-century later, when Dr. Samuelson, by then a Nobel Laureate in Economics, wrote the foreword to my 1993 book, Bogle on Mutual Funds, and then endorsed my 1999 book, Common Sense on Mutual Funds.

The final turnaround in the series also required a full half-century. After I graduated from Princeton, I sent a copy of my thesis to Paul Johnston, the mutual fund editor of Barron's. To my amazement, he urged me to edit it for publication by Dow Jones & Company, owner of Barron's. Inspired and delighted, I did just that. Alas, they decided not to go forward. So it must be some form of poetic justice that, exactly a half-century after I sat down in the reading room of Firestone Library in December 1949, McGraw-Hill came to me with a proposal that my writings on investment philosophy and strategy over the years constitute the first volume of its new series, Great Ideas in Finance, using as its centerpiece that ancient thesis that began my career all those years ago. Just 50 years after I began to write it, my thesis is at last published! As John Milton reminded us: "They also serve who only stand and wait."

Great Ideas in Finance
The storybook career that followed my graduation, recounted in various sections of this book, requires no further mention here. Suffice it to say that in 1965, at the tender age of 36, I was put in charge of the mutual fund organization I had joined immediately following my graduation, and promptly arranged an unwise merger that came back to haunt me. I was fired in January 1974, and founded Vanguard in September of that year. By the mid-1960s I began to speak out publicly on industry affairs, first as the consummate insider and later, after the novel road taken by Vanguard-with our unique governance structure, unusual economics, singular investment philosophy, and enlightened approach to human values-as a maverick, regarded (generously put) as a heretic in the mutual fund temple.

In my speeches over the years, I've presented a chain of interlinked ideas that I hope merit inclusion as great ideas in finance. Together, they constitute a philosophy whose bedrock principle is that, because of the heavy frictional costs of investing, the odds against any investor's outpacing the market over the long pull are stunning-perhaps less than one chance out of 30. That being the case, the most effective means of building wealth is simply to emulate the annual returns provided by the financial markets, and reap the benefits of long-term compounding.

This goal, as it turns out, can best be achieved by minimizing the costs of investing-sales commissions, advisory fees, taxes, and the like-and seeking to earn the highest possible portion of the annual return earned in each sector of the financial markets in which you invest, recognizing, and accepting, that that portion will be less than 100%. To achieve this goal, the ideal investment program includes four elements:

  1. Simplicity: Matching, not beating, the markets; asset allocation that is strategic, not tactical.
  2. Focus: Maximizing the productive economics (earnings and dividends, interest yields) of investing; minimizing the counterproductive emotions of investing (changing price-earnings ratios).
  3. Efficiency: Economical operations; minimization of the frictional costs of fees and commissions and taxes.
  4. Stewardship: Placing the interest of the client first; unyielding emphasis on human beings and eternal values-integrity, honesty, candor.
"The majesty of simplicity in an empire of parsimony," pretty well sums it all up. And over the years, practice has confirmed theory. In the real world, investment experience has confirmed that these principles work.

In important measure, Vanguard's corporate structure, focus on cost and service to clients, and pioneering implementation of index (and index-like) mutual funds have combined to become a classic example of the link that I've long observed between idealism and economics: Enlightened idealism is sound economics. Even a casual reading of my ancient Princeton thesis would, I think, reflect that pervasive idealism. To this day, I use quotations from it to define the genesis of my views, from the forces that move financial markets (both enterprise and speculation, in Lord Keynes' timeless formulation), to the forces that fail to move fund managers to behave as responsible corporate citizens (Chapter 14, "The Silence of the Funds"). But the highest manifestation of this idealism comes in my long-standing view that the central principle of the mutual fund business should be, not the marketing of financial products to customers, but the stewardship of investment services for clients.

The fund industry, however, has moved in just the opposite direction. As striking as has been the rise of mutual funds to become the investment of choice of American families, the Great Bull Market that has fostered that growth, and the reversal of the role of stocks from engines of income to engines of capital growth, the change in the character of the industry has been equally dramatic. Marketing has displaced management as the industry's chief principle, and expenditures on investment advisory services are today dwarfed by expenditures on advertising and sales promotion, with boxcar past returns advertised-contrary to the vision in my thesis-as if they would recur into eternity. It is fund investors who pay all of these costs. Despite the exponential growth in industry assets, fund unit costs have actually risen, and the dollar costs paid directly by fund shareholders have leaped from $18 million in 1950 to an estimated $62 billion in 2000! ($125-plus billion if we include indirect costs such as those incurred in the execution of fund portfolio transactions.)

Not only has the industry become a "cash cow" for fund sponsors and managers as well as Wall Street brokers and bankers, it has increasingly become a vehicle for short-term speculation, a trend fostered in part by the industry's focus on marketing. Today, the average fund holds the average stock for about 400 days, compared with six years when I wrote my thesis. And the average fund shareholder holds each of his or her mutual funds for about three years, compared with 15 years a half-century ago. What a sad interregnum-and I'm confident it is no more than that-in the history of what should be the finest medium ever designed for the long-term investor.

How the Book Is Organized
This book is divided into five sections. The first four parts include the texts of 25 speeches, delivered over the past 30 years, that articulate my philosophy of sound investing.

Part I, "Investment Strategies for the Intelligent Investor," deals with equity fund selection and index funds ("The Bagel and the Doughnut" and "The Needle or the Haystack"); the relative merits of complexity and simplicity; the risks of investing as they appeared in year 2000 and in 1988 ("Buy Stocks? No Way"), and bond fund selection.

Part II, "Taking on the Mutual Fund Industry," describes past and future trends driving the fund industry ("Mutual Funds: The Paradox of Light and Darkness"); information about how the mutual fund business is conducted ("Economics 101: For Mutual Fund Investors...For Mutual Fund Managers"); and reflections on corporate governance, including the role played by mutual funds as investors, as well as fund governance itself ("Where Are the Independent Directors?").

Part III, "Economics and Idealism: The Vanguard Experiment," touches on the investment philosophy and human values that I've done my best to inculcate into our enterprise. This section includes "The Winds of Change: The Vanguard Experiment in Internalized Management," explaining our mission to industry executives six months after our 1974 founding; and one speech ("Deliverance") given in 1971, more than three years before our founding, that comes surprisingly close to describing the structure and the philosophy the yet-unborn Vanguard would adopt.

Part IV, "Personal Perspectives," presents five speeches to general audiences, including a lecture at Princeton University, where I received the Woodrow Wilson Award for "Princeton in the Nation's Service" in early 1999 ("The Hedgehog and the Fox"); and, later in 1999, an address to a high school graduating class on the theme, "The Things by Which One Measures One's Life"; and an appreciation of organ donation ("Telltale Hearts"), delivered in May 2000. This section concludes with a commencement speech to new masters of business administration at Vanderbilt University in 1992 ("Press On Regardless").

Part V, "The Princeton Thesis," includes the entire text, reset in type but unedited from the 1951 original that I typed by hand on my ancient Smith-Corona.

In publishing this compilation of speeches, we had to choose between two alternatives: (1) printing each speech in its entirety so it would stand completely on its own, at the cost of an inevitable repetition of data and themes; and (2) editing each speech to eliminate any repetition, at the cost of making the reader's course through the book somewhat bumpy and discontinuous. We chose the first alternative, though I did some minor editing to remove a few obvious overlaps. Even as Sunday after Sunday the minister in the pulpit speaks of God, the Golden Rule, and the Ten Commandments, so perhaps will my own repetition-in a far more parochial calling-serve the useful purpose of reinforcing my principles.

While none of my most basic ideas has changed over the years, I suspect you will note that I have become more assured, confident, and even strident in my expression of the validity of these bedrock principles. Nonetheless, when the passage of years proved some of my ideas misguided or wrongheaded, I did not change the original text. For I believe it is important to maintain the integrity of the speeches as they were written at the time. To the extent my views have been altered, I fall back on the words of Supreme Court Justice Felix Frankfurter. Explaining his change of heart on a legal matter, he said, "Wisdom too often never comes, and so one ought not to reject it just because it comes late."

Two Careers
In a sense, my long business career has been paralleled by a long writing career. I can fairly date the beginning of my major concern with the written word to the autumn of 1945, when, in my junior year at Blair Academy, I studied under my first truly challenging master of English by the name of, believe it or not, Henry Adams. He was an inspiring teacher, who in my senior year was succeeded by Marvin Garfield Mason, an even more memorable character. Mr. Mason seemed somehow to sense a grain of writing potential within me, for he marked my weekly themes with the enthusiasm of the devil himself, his red pencil flying across my every phrase, or so I recall it today. What he drummed into me, most of all, was what Macaulay wrote about Dr. Johnson: "The force of his mind overcame his every impediment."

Thanks to those two masters, I was well prepared for the extensive writing of themes and papers and examinations required at Princeton. During my first two years there, I became a passable-no more than that!-writer of expository prose. But it was the writing of my senior thesis that became the first magnum opus of my writing career. When you read my thesis, I imagine you will be bowled over neither by the grace of my prose nor the power of my arguments. But in my defense, I have done my best to recognize my inadequacies, striving for improvement in both areas ever since. I hope the demanding reader will recognize a gradual increase in the quality of my writing and the focus of my ideas during the half-century.

I love the English language. I check my set of the 20-volume second edition of the Oxford English Dictionary virtually every day, not only to make sure I get my words just right, but to enjoy learning from whence all those words come. Every word comes from somewhere! And words have power. As I wrote in the chapter "On Leadership" in my second book, Common Sense on Mutual Funds, the right words have the power to "shape the way investors look at us, and the way we look at ourselves." Employee, for example, is banned at Vanguard in favor of crewmember, customer is banned in favor of client; and product is banned in favor of mutual fund. I have a passion for the words of our splendid mother tongue, a passion that I hope is reflected in my writing.

As I have become a virtual missionary for the philosophy reflected in this book, it occurs to me that, after the huge output of writing I've produced over the years, there is a close link between my twin careers as investment executive and financial writer: The power of the word and the power of the book have played a major role in turning my vision of 1949 into the reality of year 2000. It is the power of words and books-explaining and dramatizing great ideas and articulating high ideals-that is the greatest weapon in the missionary's arsenal. And so it has been for this mundane advocate of the great ideas in finance that are set forth in this book-deceptively simple ideas that are gradually changing the way Americans invest. The gospel continues to spread, and the best is yet to be.

John C. Bogle

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Introduction

Vision and Character
Let me introduce the great ideas in finance presented in this book by focusing on the author of them. Virtue is a word that tends to embarrass us today. Perhaps we have lost a bit of the easy confidence that permitted earlier ages to believe in a fixed universe of good and evil. We are now very sensitive to the fact that in a diverse society we may not agree on the characteristics that constitute virtue, and today we may be on guard lest we be thought to impose our own contestable views of goodness on others who don't share them.

Yet in introducing the collected speeches of John Clifton Bogle I can start with no word other than virtuous to describe the author of these pieces, even if that word seems quaint to our ear. For John Bogle's life reflects such a deep commitment to the concepts of duty, honor, candor, diligence, and service to others that the most complete summarization of the man is to say that he is a man of high virtue. In an age that sometimes seems to have tried to raise gratification of the self to the status of a virtue, his life reminds us that the value of a life is measured by how one affects the lives of others, not by either celebrity or by balance sheet.

The power to affect the welfare of others positively is the aspect of business that gives it nobility. Bill Gates¾arguably our most successful businessman¾is, I suggest, not a great man because he is worth an astronomical sum. On that, I trust, we would all agree. If he is great, it is because, along with a team of others, he has done a great deal to bring the benefits of computers to millions of American homes. And in doing so has empowered others to achieve their various goals. His efforts have improved human welfare. The world is a noticeably better place because of his efforts.

Jack Bogle is a great businessman because he has changed the world in a way that confers huge benefits upon countless citizens, allowing them to better achieve their goals. He envisioned a firm that would be different from all those that had gone before and indeed is different still in a fundamental way. He worked with his team¾his crew¾to build that business into a great enterprise. He is a great man because of the content of his vision and the impact it has had on others.

Vanguard is not simply a successful company. It is an idea of service which, while not selfless, is deeply committed to fairness and the delivery of value. It is a cliché for business to be committed to delivery of value to customers in order to deliver value to shareholders. But in the mutual fund business at any rate, the best evidence suggested to Jack Bogle that an unconscionable share of value was being sidetracked from investors by excess costs. Of course neither Jack Bogle nor those who worked with him wear sackcloth. In creating a successful enterprise, Jack and his team created value that compensated them for their efforts. But his vision was from the beginning radically inconsistent with maximizing returns for the managers of the fund. The public was the principal beneficiary of his vision.

During decades in which average mutual funds charged fees of 150 basis points or considerably more, Vanguard's structure allowed it to offer comparable¾actually superior¾service for far less than a quarter as much. Today Vanguard manages about $500 billion in retirement and other savings. Thus, this year it will return some $4 billion more to its investors than they would have had if Jack Bogle had not had the vision to build this enterprise. But this estimated number underestimates Vanguard's annual impact upon the savings and retirement portfolio of Americans. There is every reason to suppose that, had Vanguard never been founded, the average costs of management of mutual funds would remain as high as they were in 1970. Considering that the existence of the Vanguard philosophy has forced other funds to reduce their fees and costs materially, it would be difficult indeed to estimate how many billions of dollars of savings go into the retirement savings of working men and women across this country today as a result of Mr. Bogle's vision.

An interesting fact about this unique enterprise is that it reflects an academic theory. When Jack Bogle encountered the efficient market hypothesis, he understood it and its implications quickly and intuitively. His years of pupilage with Walter Morgan in Philadelphia had trained him to understand that in the long term it would be exceedingly difficult for any investment adviser to produce substantial excess returns over the returns of the market itself. Thus his famously successful business plan was simply to reduce costs and diversify risks. He applied theory to practice, inventing the index mutual fund as a commercial alternative to savings. The idea of course is simple, not fancy; in that it reflects the character of the man. For Vanguard's founder is, like his company, world class in performance and straightforward and unaffected in manner.

Perhaps these characteristics were inculcated in the young man at the Blair Academy or at Princeton University. Perhaps he learned them at the side of his older brother and his twin brother, who is now gone. Certainly the idea of fair sharing and of duty to another are concepts that brothers share. Almost certainly the boys learned at home the characteristics that shine in the man today. Strength of character, belief in candor rather than artifice, in substance rather than in form, and in performance not promises.

Jack Bogle's life has not been without its moments of drama and tension and not without its keen and painful losses. The story of Vanguard's founding is an arresting business drama in which, at the beginning at least, the outcome did not seem foreordained. But Vanguard's rise to eminence in the world of finance attests to the soundness of its principles. The speeches that are collected in this volume capture in vivid outline the core concepts of Jack's vision and inevitably disclose as well the outstanding character of the man. That these two elements¾vision and character¾are inextricably linked is possibly the most fundamental and basic lesson that Jack Bogle's career teaches those of us interested in finance and investing.

William T. Allen
Professor of Law and Finance
Director, Center for Law and Business
New York University
Former Chancellor, Court of Chancery,
The State of Delaware

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Foreword

Fiduciary Responsibility, Objectivity of Analysis, and Willingness to Take a Stand

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 base¾the 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 contribution¾his single-minded mission¾has 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 ago¾The Vanguard Group¾has 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 logic¾a logic fully supported by the plain evidence¾that 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. This new volume happily makes that thinking easily available to a wider audience. John Bogle writes with unusual clarity and simplicity, clarity of the vision and simplicity of the written word. He has a rare ability to set out concisely and effectively the evidence to support his argument. A wry sense of humor can't quite disguise, and shouldn't disguise, his sense of frustration¾even outrage¾about some practices that permeate the industry that has been his life's work and personal passion.

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 stand¾qualities that permeate all his writings¾set high standards for all those concerned with the growth and integrity of our open and competitive financial system.

Paul A. Volcker
May 1, 2000

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Interviews & Essays

Exclusive Author Essay
Developing a Good Personal Finance Plan by John C. Bogle
Personal finance, it seems, is an area in which interest has grown by leaps and bounds over the past two decades -- an expansion that is due in large part to the incredible growth of the stock market during this period. The combination of the Internet, with its seemingly endless supply of information, and the bull market, which itself seems endless, has produced an environment in which more investors than ever before are ready, willing, and able to make their own investment decisions.

This wealth of information and guidance can be wonderful in helping you invest your nest egg, but I warn you that there are also a great many ideas that don't comport with at least my idea of common sense. I urge you to disregard each one of them in direct proportion to its complexity, its decibel level, and the conviction of its advocates that a favorable outcome is assured. Avoid complex strategies that seem to provide temptingly easy solutions to eternally complex problems. Complexity -- which I call "witchcraft" -- may seem to offer a perfect plan, but it rarely delivers on the dream it promises. What is more, complexity is expensive. The simplicity of a good plan, on the other hand, can work not only effectively, but economically as well. The good plan works, not despite being inexpensive, but because it is inexpensive.

Too often people mistake a simple plan for a naive plan, when the reality is just the opposite. The informed investor realizes the economy of simplicity and the importance of costs. The informed investor knows the importance of investing for the long term and avoiding the short-term diversions of the stock market casino that serve only to enrich the croupiers. And the informed investor knows that very few investors beat the market over the long term. The best investment plan, then, is to capture nearly all of the market's return and thereby, in the words of Paul Samuelson, Nobel Laureate in Economics, "become the envy of your neighbors -- while sleeping well in these eventful times."

How to get there? For now, I'll leave that to you to discover. I encourage you to seek out information, question the proponents, their strategies, and their underlying motives. Ultimately, I am confident that you will discover, as I did, the majesty, and effectiveness, of simplicity. And don't forget this: "The greatest enemy of a good plan is the dream of a perfect plan."

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Sort by: Showing all of 2 Customer Reviews
  • Anonymous

    Posted June 4, 2001

    The Whole Bogle in Bite-Sized Bits

    The Whole Bogle in Bite-Sized Bits, November 22, 2000 Reviewer: Donald Wayne Mitchell (see more about me) from Boston John Bogle is one of the investment legends of American finance. While still a student at Princeton University, he recognized the importance of strategic allocation of long-term investments into common stocks and the potential of creating great results by matching the market, rather than trying to exceed it. Depending on the length of time you choose, around 80 percent of professionally managed portfolios will underperform indexes like the Standard and Poor's 500. This volume contains his thesis, written in 1951, to show the original basis of his important insights. Mr. Bogle brings two dimensions to this volume that are well worth your reflection. First, he is an astute thinker about how the individual investor can make the most money with limited risk. Second, he is a man of great principle, and serves as a conscience for an important segment of our financial industry, the one containing mutual funds. The book primarily presents his ideas in the form of 25 speeches he made over the last several decades organized around four themes: Investment strategies for the intelligent investor The weaknesses of the mutual fund industry The experience of Vanguard (the mutual fund firm he founded) in providing good economic returns Personal perspectives on life. The investment ideas are consistent with what Mr. Bogle has written in his excellent books, such as Bogle on Mutual Funds: Keep it simple (match the market with an index of common stocks constantly owned) Focus on the potential for economic productivity of public companies rather than on the fluctuations in the prices of their shares (and the negative emotions those fluctuations can generate) Get your investing done in low-cost ways that minimize expenses and taxes (index funds do this) Stewardship should be the guiding principle for the mutual fund company (the client's interests come before the company's interests). I enjoyed seeing these ideas expressed as speeches. They are more powerful in this form because they are more concentrated than in a whole book. In addition, Mr. Bogle is a man of passion, and he lets his passion show in the speeches more than he does in the books. To me, however, the best part of the book was the section on personal perspectives. Later in his life, Mr. Bogle had a heart transplant, and these speeches reflect the changed perspectives that experience has had on his life. If you are like me, you will be touched in important ways by these reflections. One of the great potential benefits of reading this book is to see where the bar can be set in how one man can make a large difference through the clarity and consistency of his life. Mr. Bogle's commitment to inexpensive index funds has added tens of billions in wealth for millions of people. In the future, his influence will probably continue to expand. His principles around the idea of economic stewardship will probably live even longer in peoples' minds. Ask yourself: What needs to be done better about what I do for a

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  • Anonymous

    Posted December 12, 2000

    Indexing A Good Book By An Author Who Made Good.

    John Bogle is a household name among many circles within the world of finance and an ever-growing following of investors. This is the book which the average reader can tackle in small doses, because it is an edited compedium of previous speeches. I was able to handle the financial venacular and stay awake long enough to learn something more about this respectable man's ideas who has made life a little easier for us little people in the bewildering world of investments.

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