Chapter 24
Jack Bogle and the bashing of index
funds
While no one ever has, if someone were to ask me what single thing has most impeded the growth of my personal wealth the answer would be my stubborn rejection of the concept of indexing for an embarrassingly long number of years. Indeed, when I hear the arguments against it, it is my own voice in my head I hear. I made them all too often and far too long.
So, why is it that the concept of indexing meets with such resistance in some quarters? First, a little background.
Jack Bogle founded the Vanguard Group in 1974. He is the creator of the modern low-cost index fund and my personal hero. If you aspire to be wealthy and financially independent, he should be yours as well.
Before Mr. Bogle, the financial industry was set up almost exclusively to enrich those selling financial products at the expense of their customers. It mostly still is.
Then Mr. Bogle came along and exposed industry stock-picking and advice as worthless at best, harmful at worst and always an expensive drag on the growth of your wealth. Not surprisingly, Wall Street howled in protest and vilified him incessantly.
Mr. Bogle responded by creating the first S&P 500 index fund. The wails and gnashing of teeth continued even as Bogle’s new fund went on to prove his theories in the real world.
As the years rolled on and the evidence piled ever higher, Mr. Bogle’s critics began to soften their voices; mostly I’d guess because they had begun to sound pretty silly. Other fund companies, realizing that people were becoming ever less willing to accept high fees for questionable performance, even began to offer their own low-cost index funds in an effort to keep their customers from walking out the door. Personally I’ve never believed their hearts were in it, and for that reason my money stays at Vanguard.
The basic concept behind Vanguard is that an investment firm’s interests should be aligned with those of its shareholders. This was a stunning idea at the time and to this day it is the only firm that is, and as such is the only firm I recommend.
The basic concept behind indexing is that, since the odds of selecting stocks that outperform is so very small, better results will be achieved by buying every stock in a given index. This was soundly ridiculed at the time and in some quarters it still is.
But increasingly over the past four decades the truth of Bogle’s idea has been repeatedly confirmed. With that confirmation, the amount of money invested in index funds has continued to gain share. Even Warren Buffett, perhaps history’s most successful stock-picker, has gone on record as recommending indexing, specifically for his wife’s trust once he has passed.
In the Berkshire Hathaway 2013 annual shareholder letter Buffett writes:
“My advice … could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
So with all this evidence piling up, why then do some still bash the concept? As we saw in Chapter 11, basically it boils down to human greed, psychology and money.
In short, there is too much money to be made and too much weakness in human psychology for actively managed funds and managers to ever go away. In fact, even with the growing acceptance of indexing, there are still about 4,600 equity (stock) mutual funds being offered as of this writing. To put this in perspective, there are only about 3,700 publicly traded U.S. companies for them to invest in. Yes, you read that correctly. As we saw in Part II, there are more stock mutual funds out there than there are stocks for them to buy.
Wall Street is endlessly creating new products and schemes to sell you, even as they systematically and quietly close those that have failed (which serves to make their track record seem better). But make no mistake, the objective is always to line their pockets, not yours.
My advice: Use the index funds and the company Mr. Bogle created and keep what is yours.