10 Questions for John Bogle

[Bylo Selhi]

From a dozen years ago: Income Risk on Common Stocks

Excerpted from Bogle on Mutual Funds by John C. Bogle, pages 34-36

Many investors do not give much thought to income generation until after they reach retirement. Then they seek not only a reasonable level of income, but income that tends to increase steadily over time. Of our three asset classes, only common stocks - by growing their dividends - can deliver this dual objective. Of course, by investing in common stocks you assume the risk that dividends will decline during periods of recession or depression - sharply, as during the early 1930s, or more moderately, as from 1941 to 1943.

What is truly remarkable is that the record of dividend payments by U.S. corporations heavily favors rising dividends over declining dividends, almost irrespective of prevailing business conditions. Using the 1926-92 base period, annual dividends increased in 57 years, declined moderately (less than 10%) in four years, and declined by more than 10% in another five years. In one year, dividends were unchanged. On average, dividends increased at an annual rate of +4.5% since 1926, nicely exceeding the inflation rate of 3.1%, resulting in real income growth of +1.4% per year. The relationship has been particularly strong since 1950...

[Bylo Selhi]

Evidently Brennan's pettiness knows no bounds

Vanguard's conspicuous omission

In its summer newsletter to shareholders, the Vanguard Group hailed the 30th anniversary of its S&P 500 index mutual fund, calling it a "permanent feature of the investing landscape." The cover article included interviews with John J. Brennan, Vanguard's chairman and CEO, as well as the economist Burton G. Malkiel, a former Vanguard director, and chief investment officer George U. "Gus" Sauter. But it did not mention John C. Bogle, the company founder who retired from Vanguard's board in 1999 and still keeps an office at its Malvern campus.

Much has been written about a feud between Bogle and his hand-picked successor, Brennan. A Vanguard spokesman would not comment on their relationship and said the firm recognized Bogle when it noted the fund's 25th anniversary in 2001. "We wanted to bring in additional voices from various people who have had a significant impact on indexing over the last 30 years," said the spokesman, John Demming.

"It seems funny to me," Bogle said. "I don't think anyone would want to leave Samuel Morse out of a discussion on the telephone or Thomas Edison out of a discussion of the electric light bulb. Would they?"

[Bylo Selhi]

'First of All, I'm an Honest Guy' [WSJ, 02Sep06]

Jack Bogle, founder of Vanguard, has earned his fame as the man who taught the small investor how to make the stock market work for him. He'll also be remembered as the guy who left $20 billion on the table... "Every once in a while, I think, God, have you really been stupid? On the other hand, not all the rewards in this life are financial. Compared to any normal person, I've had a staggering financial award. But am I worth one tenth of 1% as much as [Fidelity founder] Ned Johnson and his $25 billion? No. But I'm doing fine. And I have no complaints."

[Bylo Selhi]

Bogle shares his wisdom

Bogle believes investors should simply buy the lowest-cost index funds available and hold them forever. His rule of thumb is to take your age minus 10 and hold that percentage of your assets in a total bond market index fund and the rest in a total stock market index fund... This strategy nearly [neatly?] eliminates 'the two greatest enemies of equity investing -- expenses and emotions,' Bogle said...

At his speech in San Francisco and in an interview, Bogle expressed disdain for two nouveau styles of indexing. One is exchange-traded funds. Although they track indexes, they are -- increasingly -- narrow and esoteric ones. In one week last month, ProFunds sought SEC approval to sell 66 new exchange-traded funds, all of which will use some form of leverage to increase their potential gains -- or losses.

Unlike traditional, open-end funds, the exchange-traded variety can be bought and sold throughout the day and can also be sold short, a bet their prices will fall. Bogle sees nothing wrong with buying a broad-market exchange-traded fund and holding it for the long term. Although investors pay a brokerage commission, it can be offset if the fund charges lower annual fees than a traditional, open-end mutual fund. The problem is, "their use by long-term shareholders is minimal," Bogle says. "We know that ETFs are largely used by traders."...

Bogle also took shots at what he calls a "new breed of indexers" who are weighting their funds not by a company's market capitalization but by "so-called fundamental factors" such as revenue, cash flow, profit or dividends. The new breed includes Wisdom Tree, started by Wharton Professor Jeremy Siegel, and Research Affiliates, led by Robert Arnott. "They argue, fairly enough, that in a cap-weighted portfolio, half of the stocks are overvalued to a greater or lesser extent, and half are undervalued," Bogle says. To which he responded, "Of course, but who really knows which half is which?"

The new breed claims to know. "And the fundamental factors that they have identified as the basis for their portfolio selections actually have outpaced the traditional indexes in the past," Bogle says. The problem is, there's no guarantee that what worked in the past will work in the future. And if it does continue to work, investors will pile into that strategy until it no longer works...

[George$]

Bogle in the Feb 9, 2007 Wall Street Journal -- ETF's vs traditional Index funds

And some text

Currently, ETF assets total $420 billion of the $1
trillion total. But they are growing at a far faster rate,
taking in net new capital of $291 billion since 1999,
compared to just $173 billion for their traditional
cousins.
.....
But if long-term investing was the paradigm for the classic index fund, trading ETFs can
only be described as short-term speculation. And it was only a matter of time until trading
overwhelmed diversification as the driving force in the ETF world. Of the 690 ETFs in
existence today (including 343 in registration at the SEC), only 12 represent broad market
segments, such as the Standard & Poor's 500, the Dow Jones Wilshire Total (U.S.) Stock
Market Index, and the Morgan Stanley EAFE (Europe, Australia and Far East) Index of
non-U.S. stocks. With each passing day, the market segments available through ETFs
seem to get narrower. (Can you believe that we now have a "HealthShares Emerging
Cancer" ETF?)
These nouveau index funds starkly contradict each of the principal concepts underlying
the original index fund. If the broadest possible diversification was the original paradigm,
surely holding small segments of the market offers less diversification and
commensurately more risk. If the original paradigm was minimal cost, then holding
market-sector index funds that may themselves be low-cost obviates neither the
brokerage commissions entailed in trading them nor the tax burdens incurred if one has
the good fortune to do so successfully.
.....
So long as the truism that "the more financial intermediaries take, the less their clients
make" remains in effect, serious and intelligent investors ought to beware of moving their
investments out of classic index funds focused on low costs, broad diversification and
long-term, buy-and-hold strategies into index funds nouveau, with their overlay of costs,
limited diversification and short-term trading strategies. Industry participants, too, should
be concerned. For in the long run, any business that puts the interest of service to self
before service to clients will ultimately pay for this contradiction.

[Bylo Selhi]

But note also:

ETFs, simply put, are index funds that can be traded in the financial markets. In fairness, if they are not traded, they can often be the equal of the classic index funds. If they operate at lower expense ratios and provide potentially higher tax efficiency, they may provide the same diversification at even lower costs (provided that the initial brokerage commissions are amortized over a substantial span of years). In this format, used in that way, ETFs are solid competitors to their classic forebears.

For those of us located outside the US, the only way to benefit from Vanguard funds' low fees and shareholder-first philosophy is to buy them as ETFs.

P.S. A historical note re "Ironically, that first ETF, created in 1992, was modeled on the classic index fund I designed three decades ago (now known as Vanguard 500 Index Fund), tracking the returns of the Standard & Poor's 500 Index."

The first ETF (then called an Index Participation Unit or IPU) actually began trading on the Toronto Stock Exchange in March 1990. It tracked the largest 35 stocks listed there and was known as TIPS35. It's since been merged into what is today the largest Canadian ETF, BGI's XIU which now tracks the largest 60 Canadian stocks. Here's a copy of the Prospectus from 1997 [Word format]. Note the discussion of how ETF shares are created and can be redeemed for the underlying stock. Note also that since these securities were sponsored directly by the Toronto Stock Exchange, once the startup costs had been repaid, there were no management fees or other costs charged so TIPS35 also holds the record for the lowest-cost ETF. (BGI now charges an ER of 0.17%.)

Note also that the trustee and custodian of TIPS35 was State Street Trust Company Canada (until the merger into BGI's XIU.) It's therefore not surprising that SSgA, the sponsor of SPY, patterned their new ETF after the IPU.

[Bylo Selhi]

Video clip from CNBC in the wake of Bogle's WSJ piece, "Debating which is the better investment tool, ETFs or index funds, with Lee Kranefuss, iShares CEO; John Bogle, The Vanguard Group Founder & Former CEO and CNBC's Dylan Ratigan."

[Bylo Selhi]

More of Bogle's ongoing debates with Kranefuss in the WSJ.

Also from today's WSJ, Bogle Sees Tough Times Ahead For Stock-Market Investors

But there has been one change in Mr. Bogle's advice: He has become keener on international investing, in part because he foresees a weakening of both the dollar and America's position in the world.

He says investors might allocate up to 20% of their stock-market money to foreign shares, dividing this money equally between developed and emerging markets. But because foreign markets have lately done so well, he suggests moving slowly. "If somebody is at 0% and wants to go to 20%, take two years to do it," he says.

[Bylo Selhi]

Bogle: Still scolding after all these years

Question Boil down your new book for us.
Answer As an investor, you want to ignore the expectations market and instead just trust earnings growth and dividend yields to give you a return over time. And get cost out of the equation. The more your funds' managers make, the less you make.

Question What's the "expectations market"?
Answer Investors spend too much time focusing on what they think other people will think a stock will be worth; that's psychology, not reality. People don't focus nearly enough on what I call the "real market," or the value of real companies run by real people making real products and services.

Question But investing is all about the future. We need expectations.
Answer The stock market turns out to be a giant distraction from the reality of owning businesses, which is what investing really is. In the short run, expectations seem to drive the market, but in the long run nearly 100% of the returns on stocks come from the real market - the sum of dividend yield and earnings growth.

[kcowan]

Bogle on Investing
April 09, 2007, Featuring John Bogle
Includes links to the 58 minute podcast for streaming or download, and a running commentary of the podcast:

Why indexing works: More diversified than the average mutual fund at lower cost. Investors understand that the lower costs are desirable. Investors put up 100% of the capital and take all the risk, but after managerial costs end up with only 20% of the return, with 80% going to the managers. Yet many investors still believe they can pick the smart managers and thus do better with a managed fund than with the average index fund. For investors, it's easy to look back but difficult to look forward. "Performance comes and goes but costs go on forever, just like clockwork." Top ten funds in 1996-1999 were dead last three years later. Performance-chasing conventionally makes investor his own worst enemy. Typical mutual fund investor earns about 3 percentage points less per year less than the typical fund itself! Inflation eats away most of that, not to mention taxes.

It boggles the mind that his material has been around for so long. Yet still so many are being cheated. PT Barnum is still right!

[Bylo Selhi]

Having 'fun' in market is costly

Q: What will happen to all the stockbrokers, money managers, analysts and -- especially --financial writers if everyone just buys index funds?

Bogle: They could do something more useful. They could become plumbers, carpenters, craftsmen. Historians and poets. We'd wind up with a better society.

[parvus]

Or as an aspiring [s]critic[/s] financial writer from Trier once wrote :

society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, shepherd or critic.

[Bylo Selhi]

A two-fer.

Q&A with Burton Malkiel on occasion of the publication of 9th edition of A Random Walk Down Wall Street.

Q. What's the best way for retirees to minimize their capital loss if they find themselves taking money out of their portfolios during a downturn in the economy?

A. When you're taking money out of your portfolio during a down cycle, it's the opposite of dollar-cost averaging. No. 1 is, should you annuitize some part of your retirement savings when it makes sense to do that? You could buy an annuity like a fixed-income [annuity] or an annuity that will [adjust for] the CPI. You don't want to annuitize everything, however, because you want some parts that are flexible. An investor would want that flexibility, for example, for an around-the-world trip if he learns he has an incurable disease and has only a couple years to live.

There does seem to be some evidence of negative correlation between bond and stock markets [over time]. If you had retired at the beginning of 1999 and wanted to take money out of your portfolio at the end of 1999, if in addition to dividend income you have to sell some assets, [you would have done well to sell some of your stocks] to make the distribution help in rebalancing your portfolio when the stock market is high.

In 2002, interest rates were down and bond prices were up, so you would take [cash] out of the bond market to help you in rebalancing your portfolio. So it's advisable to have some part of your retirement portfolio in annuities and some part in a rebalancing strategy [between stocks and bonds]. Interest rates are going up now and the bond market is bad, so you take [your money] out of stocks. What you're always doing is trying to take money out of the best-performing asset class.

Burton Malkiel's review of Bogle's new book, The Little Book of Common Sense Investing

My only quibble is that Mr. Bogle takes an overly negative position on Exchange Trade Funds (ETFs) -- index funds that trade as stocks continuously during the day. He objects that they are designed for trading rather than investing and that their proliferation into a myriad of industry sectors and regions of the world is the antithesis of broad-based, buy-and-hold index investing. He worries that investors will do themselves great harm by attempting to time the market and to concentrate their portfolios in the "hottest" market sectors.

To be sure, ETFs can be misused and some have high expense ratios. Mr. Bogle is right that picking the right sectors and exactly the right time to buy and sell is a loser's game. But ETFs allow investors to diversify their investments by, for example, easily accessing real-estate markets as well as underrepresented sectors of the economy, such as emerging-market stocks and commodity producers. ETFs are also inherently more tax efficient than indexed mutual funds and can be run at lower costs...

Mr. Bogle complains in "Common Sense Investing" that ETFs are inimical to the basic purpose of indexing. He laments: "What have they done to my song, ma? They've turned it upside down." In certain respects, though, the ETF-class of indexed shares has made his song even better.

[Bylo Selhi]

Last week "Bogleheads" met in Washington, DC for their sixth annual get-together. Here's a summary of what was discussed [PDF; HTML is here], including Q&A with Jack Bogle, Bill Bernstein and several others.

[Bylo Selhi]

Vanguard Diehards Know the Secret

Recently I had the privilege of attending the Diehards VI Reunion in Alexandria, Va. I won't go through a recap of what was said, because that has already been ably done. I do want to reflect on some of the more important overarching principles that were conveyed...

To wrap up, I want to share this quote from Jack thanking the Diehards for hosting the reunion. It sums up his assessment of the group (and I think it also describes what many people see in Jack himself): He referred to the Diehards "a warm and witty group of human beings who are committed to helping one another puzzle through the investment maze, to avoid the potholes along the way, and to stand as living testimony to 'the majesty of simplicity,' at least when practiced in 'an empire of parsimony.'"

[Bylo Selhi]

Bogle: 'Hope Will Return'

We're seeing such problematic credit and stock markets. What do you think individual investors should do?

...Even if I was pretty confident that the decline will continue—and I think it's more likely than not—you've not only got to get out right, you've also got to get in right. You must be right twice. So if you get out now, and the market goes way down another 15 or 20%, which is quite possible, they will be so scared they won't get in. So I'm a stay-the-course person...

I'm very comfortable when these things happen. I don't much like them...

I'm an indexer. I own the market. And I'm happy. Markets come and go. In my book, I use a quotation that I stole from Shakespeare. A day in movements of the market are like "a tale told by an idiot—full of sound and fury, signifying nothing."

[veracity]

10 Questions for John Bogle [TIME, 04Sep05]

He is a hero to investors and a royal pain to money managers. Thirty years ago, John Bogle founded the Vanguard Group and invented the index fund--a low-cost option that revolutionized investing. At 76, he's still an iconoclast, most recently in The Battle for the Soul of Capitalism, which is coming out this fall...

e.g.
Q. YOU'RE A DIE-HARD INDEXER, BUT YOUR SON RUNS AN ACTIVELY MANAGED FUND. WHAT'S THANKSGIVING LIKE?
A. It's not a problem. Over a 50-year period, about 4% of all managers will beat the market. If you think I'm going to tell you it's impossible for my son to be in that 4%, you don't know me very well.

Wall Street seems to be about screwing the little guy, but John Bogle seems to go against that trend. Thank God for people like him.

[WishingWealth]

Bogle will be on Bill Moyer's Journal (PBS) tonight.

Time and station vary by area.

WW

[WishingWealth]

Transcript of the interview.
http://www.pbs.org/moyers/journal/09282 ... ript1.html


And the Bogle article mentionned on the show.
Democracy in corporate America

WW

[parvus]

Dishing it up with the $$$ boys now, are we WW?

[AltaRed]

The video tape is also on Moyer's site

[WishingWealth]

'Dishing it up with the $$$ boys now, are we WW?'

Every now and then I check if the allocation of my $12.00 follow the EMT and F&F orthodoxy.

WW (but must be careful not to get into an argument with arthur)

[parvus]

'Dishing it up with the $$$ boys now, are we WW?'

Every now and then I check if the allocation of my $12.00 follow the EMT and F&F orthodoxy.

WW (but must be careful not to get into an argument with arthur)

(I'd say more, but I've already mispoken meeself much too much. Carry on, while I get back to my Finanzkapital. )

[randomwalker]

Excellent interview with John Bogle, must viewing

http://www.pbs.org/moyers/journal/09282007/watch.html

[Bylo Selhi]

Yet another interview with Jack Bogle (thanks to Bogleheads forum.)

Advice from the index-fund mastermind

Don't-miss insights:
• History of the index fund
• Simplicity is key
• Switching to indexing
• Costs add up
• How much to pay
• Bogle's portfolio
• Money market investing
• ETFs vs. index funds
• Investing for everyone

Q. What is the most important piece of advice you have for someone who is new to investing?
A. Rely on simplicity; own American or global business in broadly diversified, low-cost funds.

Also, concerning the consequences of Bogle's decision to make Vanguard a mutual-mutual company, owned by investors rather than by him:

I never owned Vanguard, which is sad to relate because I'd be a billionaire, multibillionaire...

Vanguard 500 Index Fund is unequivocally the first index mutual fund. I don't dwell on my contributions such as they may be to the investing public. I've tried to do my best to build a better world for the average investor and, for that matter, for pension funds and institutional investors, too. Central to that was the creation of Vanguard, which was and is the only truly mutual mutual fund organization. The management company is owned by the funds; its profits, now running about $12 billion a year, are largely rebated -- 98 percent or something -- to our fund shareholders in the form of lower expenses.