A Conversation With John C. Bogle

Tuesday, November 28, 2017
Council on Foreign Relations
John C. Bogle

Founder, Vanguard Group; President, Bogle Financial Markets Research Center

Rana Foroohar

Global Business Columnist and Associate Editor, Financial Times

FOROOHAR: OK. Well, welcome, everyone, to this pretty well-subscribed, if not over-subscribed, session today at the Council on Foreign Relations, the Peter McColough Series on International Economics with John Bogle, who needs absolutely no introduction, as the founder of Vanguard, and one of my absolute favorite people in the markets.

I’m Rana Foroohar. I’m the global business columnist at the Financial Times. And I’m going to be presiding over the discussion today. We’re going to be in conversation for about a half an hour and then we’re going to open it up to questions. And we will end promptly at 2:00, as always. And I’ll just remind you that the meeting today is on the record. And when we’re doing questions, if you can just introduce yourself and state your affiliation as well.

So, John, let me just start by thanking you for being here. It’s such a pleasure to see you. I think it’s been about three or four years since I came to see you and you gave me some great advice about my book.

BOGLE: Thanks for quoting me so often. (Laughter.)

FOROOHAR: Yeah, absolutely. Absolutely. And so it’s a pleasure to be here today. And it’s really timely in so many respects. We’re 10 years on from the financial crisis. We have a big changeover at the Fed this week. I think—actually, you know, I think Elizabeth Warren is protesting as we speak about Jay Powell’s most recent comments. Tons to talk about. Let’s just start, maybe, with a kind of a synopsis of the last 10 years. What are the lessons we’ve learned? And where are we right now, in the post-financial crisis world?

BOGLE: Well, this is a great time to ask that question, because it seems pretty clear, to those of us who are experts—who may know nothing, never forget that—(laughter)—that we’re going into an era of much lower returns than we’ve been accustomed to in the past. And how that will play out, nobody knows. I would be in the camp of saying the market is significantly—not grossly, but significantly—overvalued. And assuming that’s correct, there are only two things that can happen. You can have a long period of very low returns or a great, big drop in the market—30 percent, 40 percent, even 50 percent—and then get back to the good returns of the good old days.

That’s a hard way to do it, but it seems almost inevitable that returns will be lower somewhat in these 35 years or so that we’ve had the greatest bull market I recorded history, with the S&P 500 growing at 12 percent a year. Which means, mathematically speaking, simply enough that if you started with the S&P 500 35, 40 years ago, you’d now have $60 for every dollar you started with. And so it’s not genius; it’s the market. And you kind of wonder how the mutual fund industry has held itself together against the onslaught of indexing. And I think the answer to that is in this great bull market if you had a 10 percent return, which is roughly what the average fund is giving you, you got 40 times your money instead of 60.

Well, nobody’s looking at the 60. And they’re saying: Any manager that can take my dollar—or take my $10,000 and turn it into $40,000 is my friend forever. He’s a genius. And he’s actually falling way short of the market. So one of the lessons is, I think—or, one of the messages, perhaps more importantly, is, you know, the trees don’t grow to the sky. And I’m really quite confident about that. But confidence in this business is a dime a dozen. So I’ll just take a moment, maybe, to talk about my methodology. And this methodology is so good and so popular it has never been used by anybody but me. (Laughter.)

But for 25 years, I’ve been using the same methodology. So it’s all what actually happened after prediction. And I divide the market, the market return, into its two sources. One is investment return. One is speculative return. What is investment return? Today’s dividend yield plus whatever earnings growth we get in the future. You know, it’s averaged about 5 percent. Could get to 6 percent, 6 or 7 percent. It can’t really be much higher than that. And unless you get a depression, it’s not going to be much lower than 2. So there’s not a lot of room to differ there. But I’m using right now for the next—the long-term average is about 5 percent earnings growth. So we take today’s 2 percent dividend yield and my estimate, guestimate, gives us 6 percent investment return.

The other part of it, which is the more troublesome part, is speculative return. And speculative returns relates to valuations, which we can easily measure by changes in the price earning multiple. And the PE goes from 10 to 20. That’s 7 percent—in a decade. I don’t do anything short of a decade. If it goes from 10 to 20, that’s 7 percent of extra return. And we got that in the ’80s. And we got it again in the ’90s. And we’re not going to get it again, because Pes can go from 10 to 20 to 40. But I don’t think they can go to 80, which would be required if you follow the math. Sorry to bother you with those numbers.

So I think any responsible market projector, predictor, should look at these three elements of return, two elements of return, investment and speculation. And so I don’t accept: I expect the market return to be 12 percent of X. I accept: Here’s what I—the dividend yield is. We all know that. Here’s my estimate for earnings growth. We can’t be too far different on that—three or four percentage points would be a lot. And then here’s my belief on the valuation of the market.

And so I believe that we will probably go PE in the market is about 25 times today. That PE is based on GAAP earnings, accounting earnings, and not operating earnings. Operating earnings are much higher. Leaves out all the bad stuff. Always a good idea if you’re promoting something. And if it goes to 18 times, say that 6 percent that I gave you from investment return, take off 2 percentage points for the drop in the valuation, would give you about a 4 percent return in the stock market over the next decade.

Now, we’ve been doing this in 10-year periods for 25 years. That means we have 15 actual predictions. And they have a correlation of about .81 with the actual returns. Some of the errors were fantastic. You couldn’t imagine you could be so far off. And actually, my very first estimate was the worst one. And that is I said the market return was—would be about 11 percent in the decade of the 1990s—beginning of 1990. And it turned out to be 18 percent. But by 2003, the 13-year return is 11 percent, because the market went up, stopped at the high, and went down. So timing is a funny part of that.

But I still go with that. And because it’s the reality of life. And the question really today—the big question, I think, for the markers—the market itself, or market experts or investors for that matter, is will there be a reversion to the mean of the price earnings multiple? Or are we in some new lofty territory, “a permanently high plateau”. I’m quoting from somebody who said that right before 1929. I think it was Roger Babson.

FOROOHAR: (Laughs.) Yeah, I was going to say.

BOGLE: A permanently—I don’t believe in permanently high plateaus.

FOROOHAR: Yeah. Well, so when do we jump off this plateau and what triggers it?

BOGLE: Well, I would have no idea about when. (Laughs.) I just don’t know, so there’s not really much point in guessing. I mean, it could be today. And it could be not a big fall at all, but just low returns. But I think—I think the combination is pretty much set up to have returns in the range of 4 percent for stocks in the next decade. Now I’m a little embarrassed because that’s what most people are saying. That’s essentially what BlackRock is saying, Larry Fink. It’s essentially what Vanguard is saying. And I usually in my predictions—I don’t like company. The crowd—I was always taught the crowd is always wrong. So we will see. But I think it’s—for an investor who’s thinking ahead, it’s wise to be a little conservative. Never, never, never get out of the market. You know, if you want to reduce—in my—I should do this right now. (Laughter.)

FOROOHAR: A little marketing.

BOGLE: This is a present to you.

FOROOHAR: Aw, yay. We’ll have to see—

BOGLE: My new book, and I explore all this in there.

FOROOHAR: Oh, I love being a valued partner. Awesome.

BOGLE: This is the 10th anniversary edition of my new book, which I’m not really here to plug. There are two booksellers in the back and just—(laughter)—and just give them your club number. And we’re going to be fine. There are no booksellers back there, obviously.

But it’s—that’s where I go through the mathematics I just described to you, and a whole lot of other things about the fund business. But I fall back when you get to asset allocation. But if you go back to 1949 and read Benjamin Graham’s “The Intelligent Investor,” he said: Never less 25 percent or more than 75 percent in either of the two asset classes, bonds and stocks. So you can be 25 stocks and 75 bonds, or 75 stocks and 25 bonds. And stay in that range, and you want to make a few little adjustments. Do that, but don’t think there’s a scientific way to do it. Try and accommodate yourself.

FOROOHAR: So, without talking too much about timing, maybe we can talk about a few things in terms of what you’re thinking of about risk in the market right now. I mean, ETFs have been something that a lot of people have been sounding off on, looking for a potential correction there. You know, looking at the way in which all this money pouring into these funds has shifted things. What’s your view?

BOGLE: The chapter in my book on ETFs is called “A Trader to the Cause.” Trader, not traitor. I wouldn’t dare say that, but it is that too. And I’m bothered about ETFs. They are—think about it this way. We have passive investment strategies, called indexing. And there are two groups among them, passive investors and active investors. And there are traditional index forms, TIF I call them, an acronym which has never been picked up by anybody but me in four years or six years. And ETFs to give you the—and ETFs are clearly passive funds owned by active investors.

Active investing in trading. Active investing is speculation. Active investing is losing. And ETFs are a loser’s game. Let me be very clear about that. We were doing some mathematics—Mike Nolan, my—you want to wave your hand? My good assistant, who’s here with me. And I should introduce my son Andrew who’s here in the first row, of course. And so we—I was just playing some numbers games. I looked at the growth of exchange-traded funds and traditional index funds in the last decade, roughly. And they were virtually identical. They’d both grown at about 18 percent a year. And then I looked at the sources of that growth.

And the sources of that growth, for the traditional index funds, it was 65 percent appreciation and 35 percent new capital coming in. And for ETFs, it was exactly the opposite: 35 percent appreciation and 65 percent for capital coming in. You kind of know that from the press. They’re very popular. They do all kinds of wild things, that I could talk about for a minute later on. But in any event, I thought, well, wait a minute, there’s a message here. If all the—if all the appreciation—if the appreciation is heavily concentrated in the traditional index fund, what does that mean about the returns of the two? The returns of ETFs are considerably lower than the returns from traditional index funds.

And you can measure this pretty easily. Mike does it for me. I can’t tell you it’s easy firsthand. But, you know, we go over the data. And it turns out that the traditional index funds have had a return during that period of 7 percent, 7.1 percent. And the ETFs have had a return—the average ETF of 4.7 percent. That means you had your choice between a 10-year return of roughly 120 percent—I’m doing a little bit of this off the top of my head—or about 70—110 percent, a 120 percent from the traditional index funds and a return of about half that, 65 percent, from exchange-traded funds.

Why doesn’t anybody know that? Why is that news? And does nobody care? And the reality is that ETFs are one of the—are probably the greatest financial innovation of the 21st century. They are probably also the worst investment innovation of the 20th century, because people use ETFs badly. And the sponsorship is wild. Henry Kaufman would call them, if he were around at this meeting today, he would call them financial buccaneers. And what’s the response?

Rana, what they do—open up the paper two or three days ago, we have two new ETFs. One is ETFs that are long electronic marketing firms and short retail marketing firms. That’s an ETF. They’ve brought it out, just to capitalize on this momentary trend that’s going on there. Then we had one just brought out for distillers, people who like to drink or whatever. And then we have another brought out for people that believe GOP policies will win. And of course, another one who believe that Democratic policies. You have your choice.

FOROOHAR: Sounds like a risky bet.

BOGLE: It’s an insane marketing game in which—do I make myself clear? (Laughter.)

FOROOHAR: I think you do. I think you do.

BOGLE: In which salesmen need something to sell. So we throw out new red meat to be sold. It’s a marketing business still, the investment business. It should be much less of a marketing business and much more of a fiduciary business I think—I know. And it’s obvious that trading is your enemy—is the investor’s enemy, and the broker’s friend. I mean, this not complicated. So I’m really troubled.

And you see this in ETFs. The capital flows are wild, up and down, month after month. And sometimes those capital—changing capital flows is—or the capital flows themselves, maybe 80 or 90 percent, the SPDR of the Standard & Poor’s, they have their phases where everybody likes them or nobody likes them. So you take—you look at a given month and you see, let’s say, a $10 million inflow into ETFs. And it’s 9 million (dollars) in the SPDR. It’s a very market-moving thing that they’re very proud of at State Street. And they brag in the paper every day it’s the first time in history that any stock has turned over at 15 million shares an hour. They’re proud of that. They’re proud of that. Think of that. What is that to be proud of?

FOROOHAR: Well, so, this is something you and I have talked about a lot. You’ve written a lot about speculation, about the divide between Wall Street and Main Street. And, you know, I know that you have thoughts on how asset managers—you know, the role asset managers might play actually in bridging some of that gap. Do you want to talk a little bit about those issues?

BOGLE: Well, first we start off with a simple kind of equation, if you will. And that is when you take the total return of the market, that’s the return that all investors share in gross. And after you take cost out, it’s a loser’s game. Investors lose to the market. The total market has, however measured—S&P 500, total stock market, it really doesn’t make much different—and the total stock market index, the old Wilshire 5000. And take out about 2 percent a year for the cost of investing.

It may sound a little high, but you have, like, a 1 percent expense ratio for a typical mutual fund. A typical mutual fund turns over at about 80 percent a year. Just think of that. Short-term trading, and that’s the business. Average holding period for a stock, I don’t know, year and a half, something like that. And that costs money. And if you say that costs another percent, that’s the 2 percent. And you’ve eliminated the fees of an investment advisor to pick the fund, another 1 percent. You’ve eliminated sales loads, you haven’t counted them. That’s another one or two or three percent, however. So 2 percent is really a decent, but moderate, estimate.

And so if you’re in the market for a lifetime, and you earn a—don’t hold me to this—I think I just did maybe 50 years. And you earn, let’s say, a 7 percent return, you’ll end up with, say, $30 per dollar, something like that, invested. And if you do it and earn 5 percent, that’s the 7 percent in the market, less than 2 percent playing the game, you end up with $10. So you’ve given up two-thirds of your return—$30 versus $10. You’ve given up $20 of return to the marketing—market system. So think about it this way, Rana. You put up 100 percent of the capital. You took 100 percent of the risk. And you got one-third of the return.

FOROOHAR: Hmm, yeah. Not a great deal. (Laughs.)

BOGLE: If that seems like a great deal to you, maybe I’m not making myself clear. So all this depends on a long-term time horizon. Doesn’t matter much in a year. All this depends on low cost, which is come totally into its own. And all of this accounts for the burgeoning of indexing. In the last decade or so about $2 trillion has flowed into index mutual funds and about $1 trillion has flowed out of actively managed funds. That’s a $3 trillion shift in investor preferences on an asset base of probably, average, $6 or $7 trillion—50 percent, something like that. So it’s a major shift that means that people are probably recognizing the importance of cost, as reflected in indexing. And it’s going to continue. Indexing has gone from maybe—well, when I started the first index fund it was obviously 0 percent until that fund got started.

And as a little anecdote, we—I met with the underwriters. We had the four largest retail underwriters for the first index investment trust, now the S&P 500—Vanguard S&P 500, back in 1976. And they thought they could do 250 million (dollars). Think we can hit 150 million (dollars) OK. Hundred-million (dollars) looks sure. I know we can get 50 (million dollars). Think we can do 25 (million dollars) OK. And they hand me the check, $11,300,000—11 million (dollars) instead of 250 (million dollars). And one of the underwriters said at one of these kind of catch-up meetings—you all know what they’re about. There might be a cocktail involved and there might be a lot of old anecdotes involved. And one of them said: How is it possible that the worst underwriting in the history of Wall Street could be the most—the most major innovation in finance probably in a century?

FOROOHAR: (Laughs.) Well, maybe that’s a good point to ask about regulation. You know, as I mentioned at the beginning of the meeting, Jay Powell came out today and said: Look, we have enough regulation. We don’t need any more. Maybe we need to loosen it even a little bit. You know, you’re already hearing protests about that. Where do you think we are in terms of banking regulation and also mutual fund regulation?

BOGLE: Well, I like regulation as little as anybody else. It can be intrusive. It can be detailed. It can be bureaucratic. It can be unevenly administered. It can be unfair. But most regulations that we have for mutual funds and for banks are regulations that we earned. We did something wrong and we’re paying a price for it. I mean, think of the mutual fund market timing scandal. It’s a moral outrage, and not the only moral outrage. We could go into moral outrage as a separate component of the talk, Rana. (Laughter.) But so funds went out of business, or almost out of business. It had done that because investors saw they were in the wrong place.

And on the banking side, you know, I’m not the total banking expert at all, but I think the banking regulations, there are probably rough edges, but the idea of repealing the bill—Sarbanes-Oxley bill—is just plain crazy. It did a lot of very good things for us, continues to do good things for us. And I happened to be the chairman of an audit committee for Instanet at that time, independent director. And I was the chairman of the audit committee. And, man, did we go over all the filings you had to do. And the board of directors really depended on me to work directly with the auditors, which I did—not with the management but with the auditors—to make sure we complied fully with the various provisions of the act.

And they were painful, but they were right. They were correct. They were in the right direction. They brought things to light that had not been to light. So I’m not in favor of any vast overturning of Sarbanes-Oxley at all.

FOROOHAR: Dodd-Frank.

BOGLE: Or, Dodd-Frank, excuse me. The previous bill. (Laughs.) That was good enough.

FOROOHAR: Yeah, no, it’s all right. It’s hard to keep track.

BOGLE: No, thank you.

FOROOHAR: So do you think—your judgment then is that Dodd-Frank has taken us to a pretty good place? You think it’s a—you think it’s a good piece of legislation?

BOGLE: I think, on balance, an excellent piece of legislation. Now, there are always little things you can do. And it’s hard to administer, you know? I don’t know what’s going to happen to the so-called Volcker Rule. It’s a very hard rule to administer. It’s aimed in the right direction, but it’s very difficult to dictate behavior, to dictate ethics, to dictate morals, to dictate standards. So you try and do it legislatively. And that’s never an easy job. It’s often unfair. And I think if you can find those areas where it cuts too deeply—you know, gets into the muscle and toward the bone—it can be amended.

But then you get to—I don’t want to get into politics particularly here—but try and get something done in the Congress, and—or, try and get anything done. You know, I’ve found in my career the most difficult thing in life is to change something that is in place. It doesn’t matter how stupid it is. If it’s in place, it’s hard to change. And you go through the convoluted legislative process, the politics of it all—particularly at this time in our nation’s history. And it’s—there aren’t—there are no easy answers. I mean, that’s—you know, everybody in the room knows that without my telling them.

FOROOHAR: So, you’ve spoken to me about the oligopoly—I think that was your word that you used—of Vanguard, BlackRock, et cetera, and the power that you guys have in the market right now. I remember a story, actually, when I interviewed you for my book, talking about, you know, the fact that you were trying to convince, maybe 10 or 20 years ago, these same folks that, hey, you are the invisible hand. You know, you can change a lot that’s going on. That’s exponentially more so today. How should the mutual fund industry be regulated going forward? What rules are in place that are working? What’s not? What needs to happen?

BOGLE: Well—(laughs)—it’s a really great question, because the mutual fund regulatory scheme is totally outdated. The Investment Company Act of 1940 regulates mutual funds. And in 1940, most of us had—well, I didn’t get into the business until 1951, but I did a history of it in my Princeton senior thesis. And most of us had one fund, or maybe two. Regulating mutual fund activities—and there were a lot of conflicts, particularly in the closed-end side, a lot of very unethical things went on, more on the closed-end side than in the mutual fund or open-end side. But it was a fund regulation.

Today, the average major fund group—and I’m talking about 30 or 40 fund managers—had 262 funds—262 funds each, on average. And the industry should be regulated as a mutual fund complex industry or, to put it another way, it’s the managers that should be regulated rather than the funds themselves. And then I get back to the act of ’40, there is a provision in the act that says that no mutual fund may own more than—essentially, may own more than 10 percent of the voting securities of any company. Well, think of how that would ever bite.

Say you have a single S&P fund, for the purpose of argument, and you get to 10 percent ownership of all companies in the S&P. So what do you do? Start another S&P 500 fund. And the next thing you know, you’ve got 10 percent here and 10 percent there, and the same person may control—this is theoretically; not going to happen—but under the law there’s a 10 percent limit that simply doesn’t matter.

So will the law stand still and ignore the obvious intent of the ’40 act, was to keep any manager from owning more than 10 percent of the stock. They said any fund because they didn’t think in those terms. And the answer to me is there will have to be an amendment to the act to bring it into the 21st century. And I’m not madly loving that, but times change. And if a regulator or regulations are not appropriate to the circumstances, which can change a lot—as one might say, a lot can happen in 50 years. Whereas I might say, a lot can happen in 66 years—(laughter)—the amount of time I’ve been in this business. And a lot has happened. So we have to deal with that.

But at the moment, we’re dealing with—Vanguard probably owns about 7 or 8 percent of every company in America—10 percent, 7 or 8 percent. BlackRock probably owns 8 or 9. They have a business outside of their ETF business. And State Street probably owns about 3 percent. So that’s about 21 percent, whatever the number is, is owned by this oligopoly of three. I think it is too bad that there aren’t more people in the index fund business—particularly the traditional index fund business because that’s clearly the way of the future. The ETF has so many self-contradictions that it will not exist in its present form 10 or 15 years from now, cannot.

My opinion, but of course I won’t be around 15 years from now, I don’t think. Although, I could add that I’m only—I got a heart transplant from somebody 26 when I was—when I was—(laughter)—when I was—I guess I was 40 years old. Let me do the math again. I got a 26-year-old heart and I’ve had it 21 years. So I’m only 47. Whew.

FOROOHAR: There you go. (Laughter.)

BOGLE: For a moment I couldn’t do the math right.

FOROOHAR: You can work several more years.


FOROOHAR: Let me ask you one or two more questions before we open it up to the floor. I know you didn’t want to get too much into politics, but the tax bill. Given that that’s sort of top of mind this week for a lot of people. What’s your view?

BOGLE: It’s a moral abomination. (Laughter.)

FOROOHAR: Not once to mince words.

BOGLE: It’s an experiential abomination. And on the experiential side, I mean, just think about this. Corporate profits after taxes last year were the highest they have ever been in the history of the GDP, going back to 1929, or something. The highest ever. And we’re thinking about giving relief to the corporations at the highest levels ever. Individual wages are at the lowest level in about 15 years, as a percentage of GDP. So we’re helping the people that are doing very well and doing nothing for the people that are doing very badly.

And one of the flaws is that corporations are putting—I won’t get into my philosophy too much—corporations are putting their shareholders ahead of the people that built the corporation, and that is the people that put their heart and soul on the line and are committed to the company and come to work every day and make things work—the actual working guys, the working stiffs, of whom I still consider myself one. So it’s—the unfairness.

And one might ask, relative to this, how did we ever get going down a track where the money people earn by the sweat of their brow, more or less, is taxed at a higher rate than the money people get dividends for which they do nothing? It didn’t used to be that way. There was so-called unearned income tax much higher. It got up to 70 percent at the end of World War II. And it prevailed for seven or eight years. But that’s a kind of a wrong-headed thing.

But the worst part of it is that the companies are making so much money now that they don’t know what to do with it. They aren’t investing in new equipment and all those things—innovation, and whatever it might be. They’re buying back their own stock. And this helps the stock price which helps the capitalists. And I’m all for capitalists. Heck, I’m a capitalist myself. But there’s such a thing as too much. I did wrong a book called, “Enough.” Not to be confused with the biography of Donald Trump recently written called, “Never Enough.” (Laughter.)

FOROOHAR: Ouch. All right, well, with that maybe we’ll open it up for questions. We’ve got a couple mics on either side. And if you can just—we’ll start here—announce yourself as you pose your question.

Q: Thank you very much, Rana. I’m Charles Kolb with DisruptDC.

A comment and a question. The comment is a suggestion. Would you please share with John McCain what you just said about the tax bill? (Laughter.) The question: How do you change Wall Street’s time horizons to move more from short-term thinking to longer-term thinking? Thank you.

BOGLE: Well, I fall back a lot of the time on Adam Smith, who wrote his stuff, as it were, in 1776, more or less. And I rely on the invisible hand of the investor to do what’s best for himself and therefore change the world for the others. The matter is not in Wall Street’s hands. The matter is in investors’ hands. And if brokers or firms or mutual funds that trade too much are doing the clients a disservice, this will become very apparent and the clients will move their money. That’s why we had this huge move in indexing, which is now, I think, 40 percent—almost 30 percent of all mutual fund—equity mutual fund assets.

So Wall Street is a great marketing machine, a great selling machine. And if stocks don’t trade, Wall Street makes no money. There was a cartoon in Barron’s some years ago with a sober-looking announcer from CNBC saying: There was no trading on the New York Stock Exchange today, as well investors were satisfied with their positions. (Laughter.) That’s the nirvana day that I’m looking for. (Laughter.) Because we trade with each other. There’s no gain to be found for the market. If I trade with you I may be right or wrong. You may be right or wrong. And there’s only one person that makes money, the group (yea ?), in the middle.

So people will get wise to that. And they will get wiser, kind of the example I gave at the beginning, when returns are lower. Costs, 1 percent, let’s call it 2 percent. Of a 4 percent return is half of it. Where of a 15 percent return, we enjoyed 17 percent actually in the ’80s and ’90s, it’s only—and you’re still left with 15 after the 17 percent returns for each of those two decades. Unprecedented in American history. So experience will tell. And they will be moved by what the customer wants, what the client wants.

So there should be less trading, even as we bring the exchange-traded fund into a whole new world. It now—ETFs account for somewhere between 30 and 40 percent of the tradings of the New York Stock Exchange every day. There has to be something to sell all the time in Wall Street. And, you know, with all due respect, I mean, it’s an honest trade. But there’s just too much of it going on. And it can’t win, because if Trader A wins—I mean, I don’t want to beat this to death but I might as well make it clear—Trader B loses. And so trading is a loser’s game, relative to the stock market.

FOROOHAR: Let me follow up, if I may, just on that point before I take another question. That let’s say everybody’s indexed. There still may be policy work to be done in terms of bridging that divide you’re talking about between corporations, their wealth, their incentivization to invest in productive uses of capital, and the labor share, which is at, you know, post-war lows. How do you bridge that gap? How do you—I mean, should buy-backs be illegal, like they were pre-’82? Should—what else can we do to really encourage people to invest that capital horde?

And that—you know, frankly, I was a little bit surprised. I mean, I’m sure many people saw The Wall Street Journal CEO conference where Cohen was asked, you know, who’s going to invest if we get this repatriation through, and only about three hands went up, which was really disheartening. What do you say to that?

BOGLE: (Laughs.) Well, indexing has some limit. I don’t have any idea what it is, but it certainly easily could be 90 percent of all stocks and the market would still work fine. It’s easy to say, as you read in the Wall Street op-ed yesterday, that the market will then get inefficient—start to get inefficient as you creep into the 80 and 90 percent that’s not traded, just means a reduction in trading volume. But the reality is that it may get less efficient and it’ll be much easier to win. But it will also be much easier to lose, because the average manager is always going to do the same and the index, because they own the same stocks.

That’s what the market is. It’s a universe. This much is indexed. This much is held by active managers. So you will probably see at some point a division between—if you get way out there, years and years, decades from now, the market does get less efficient. But it doesn’t—it will—it will make it easier to lose and easier to win. You can never look at the market without realizing that for every buyer there’s a seller. It’s a very kind of simple thing that people seem to forget. So I don’t worry about that. I do worry about the lack of competition in indexing.

The big three so called—you mentioned Vanguard and BlackRock and State Street—are—there’s very little competition. We are—we, Vanguard, are 80 percent of the traditional index fund market. And nobody wants to compete there. The competition is over in the exchanged-traded market, which is a very different piece of cake, and not as good one, I’m sure. Not as good a track to be on at all for the investor. And so, why don’t more people join? Because all the damn money goes to the investors and not to the managers. It’s not an attractive business proposition.

And the mutual fund industry is basically an industry that is trying to make money on the return of the manager. And of course they want to make money on the returns of the people that invest with them. But they’re greatly handicapped by the fact that their prime job is to run a corporation in the traditional way, see how much profit you can make. And the more the manager takes, the less the investor makes. This is just the truth.

FOROOHAR: OK. Let’s take another question. Here in the sort of middle there.

Q: My name is Les from Alpine.

I was in Omaha when Warren Buffet called you the greatest hero to the American investor for—

BOGLE: Oh, go on with you. (Laughter.)

Q: —for a lot of your work that you did on what I guess we call traditional asset management. But plan sponsors, nonprofit institutions, and now even retail investors are being increasingly exposed to alternative asset management. So my question is, what’s your current thinking about alternative asset management—i.e., hedge funds, private equity firms? And from a fee perspective, what do you think is a perfect fee model, since you were so good with the fee model 40 years ago?

BOGLE: Well, those are big questions. Let me start off with a fact. I limit my own investing universe and the universe I recommend to the investors who read my books and so on, to stocks and bonds. I don’t see any magic in hedge funds. They had very good years when they were young and not much competition. And then they ran into about the last five years. And it’s been easy to outperform them in a balanced index fund—simple 60/40, unmanaged, passive balanced index fund—and I think their day is past. It could come back for a while, but in the long run, you heard it here—(laughter)—everything reverts to the mean, and that’s just the reality of investment life.

Right now—I say this a little nervously—Vanguard, at $4 ½ trillion, give or take, is bigger than the entire hedge fund industry at around 2.8 (trillion dollars), 2.9 trillion (dollars) I think is the number. So they haven’t done much growing or had much success in (recent years ?). Private equity, I just don’t see that that’s the road some—you know, road to free riches, wealth—(chuckles)—wealth without risk. There’s no such thing as wealth without risk.

And you look back at some of the big ones, like the Texas utilities, 55 billion (dollars) privatization, and it goes bankrupt—too much borrowing. As interest rates go up, if they do, all this private equity will—and all that easy leverage, if you will, will go away.

So I would limit myself, as an investor, to stocks and bonds. You know, every time there’s an easy way I put my hand over my wallet pocket because there is no easy way. This is a hard business to win at, very hard business to win at. And if you want to make a lot of money while you’re doing it, it’s probably an impossible business to win at.

FOROOHAR: OK. Question back here.

Q: Hi. I’m Strauss Zelnick.

Some thoughts on bitcoin? (Laughter.)

FOROOHAR: Talk about speculation. Oops, sorry. (Laughter.)

BOGLE: Bitcoin. (Laughter.) Well, bitcoin is a currency. Bitcoin has no underlying rate of return. You know, bonds have an interest coupon. Stocks have earnings and dividends. Gold has nothing, and bitcoin has nothing. There is nothing to support the bitcoin except the hope that you will sell it to somebody for more than you paid for it. I think that’s a factually correct statement.

How much of bitcoin is criminal, people that want to hide their transactions? Some people say it’s large. Some people say it’s small. I don’t really know the answer to that question. But I would say avoid bitcoin like the plague. (Laughter.) Did I make myself clear? (Laughter.)

FOROOHAR: You did. (Laughter.)

Question over here.

Q: Hi. Patricia Duff from The Common Good.

You’ve had such a great record as a—being fair to the investor. I wonder if you will comment a little bit about other regulatory issues, such as financial responsibility—(audio break).

BOGLE: (In progress following audio break)—from having a fiduciary duty to their clients. You know, we all think it may be there and it may not be there. It’s not codified anywhere. But we have to have—I would say fiduciary duty should apply to anybody that touches one dollar of other people’s money, so it should be vastly expanded, and I think it eventually will be. And that should have the happy result of making those of us who are going to be controlling American business—that is to say, large investment advisory organizations, which already own something like 22 percent, I think it is, of all stocks—to exercise fiduciary duty in our voting shares and the proxies, in our getting proxy—putting in proxy proposals.

And I’ve got to say, slight commercial—I don’t mean to do too much of this—but Vanguard is doing a—from a long way back, and I was very critical of the present management for a while, but I’ve come so long a way back to beef up our total response to the responsibility—what is the responsibility, fiduciary, in a corporation, a fiduciary owner representing others? And that is to make sure the corporation is run in the interest of its shareholders and not in the interest of its management. It’s not to tell them to do this or not to do that or get out of this line of business or whatever it might be. It’s to make sure the company’s run in the interest of the management—in the interest of the shareholders, not in the interest of the management.

And I think we will get there. Not in my lifetime, but we will definitely get there. And we’ll see an environment in which large institutional investors, which I don’t think there’s any way to really break up, any sensible way to break up, will be—and there may be just be a larger number with smaller units or a smaller number with larger units. But governance will change when we have institutions that care, institutions that are stock owners and not stock renters like the stock market today. And so the index fund turns out to be the answer to better governance.

FOROOHAR: Do you want to comment on CFPB at all and what the administration is—

BOGLE: (Laughs.) Well, I read with amazement who’s in charge here. I don’t know if they have two desks. I used to—I had a little like a partners desk. I only used half of it. And I guess the man and woman, I think they are, come in every day and greet each other happily and try and run the bureau.

I have no idea about the legalities of all that, but I would suspect that, given political pressures and all, that the administration will win and get its person running the consumer financial bureau. And like all of the bureaucrats down there that are appointed, their first task seems to be to get rid of the bureau they’re in charge of. (Laughter.) Well, I mean, you know that’s the case. And you see it in health and all the other—all the other things, and it’s not healthy.

We do need the government badly. And it’s—I am always amused to see nobody wants government. They don’t want a standing army to protect us. They don’t want a fire department. Get government out of my life. They don’t want their Social Security. I mean, who’s kidding who? (Laughter.)

FOROOHAR: Yeah, people don’t like government; they like government programs, I think.

Way in the back here.

Q: (Off mic)—THK in Hong Kong.

Jack, would you address in the abomination that is the tax bill the question that is raised on the other side, that the passthrough is important and that small business, with the tax going to the owner—the individual—is, in fact, going to have some effect on investment?

Secondly, what about all those earnings abroad? If you lower the repatriation tax, will they come home and be invested?

BOGLE: Those are the two tough questions. I mean, it seems to me the first one you can deal with, the terms and conditions in which it’s possible to get the passthrough, and you can make that as easy or as difficult. I’m not sure about the detail of the law that does that, but I think it’s still possible to get the passthrough if you’re willing to go through all of the bureaucratic hoops.

As to bringing the money back from abroad, there’s got to be some way to do that, but I don’t think it’s a wholesale reduction in corporate taxes. And who says 20 percent is a better number than 25 percent? Who says 35 percent is the existing number, the existing tax rate, when everybody in the room knows that most corporations pay less than 25 percent? It’s just a false—a false standard. Our corporate tax rates are very competitive with the rest of the world in terms of actual effective tax rates as compared to stated tax rates.

So we can—we could do—we could do so many improvements in the law that they’re not doing. We can make it clear. We can make it simpler.

And it reminds me of a—I was on a panel—not a panel, but a joint conversation with a television reporter with Paul Volcker. And I was talking about how easy it would be to fix Social Security. Just a little adjustment, a little adjustment here, wage adjustment, inflation adjustment, bring in different outside pension funds, that sort of thing. And I said to the moderator—I said, if you would let Paul—appoint Paul and me as czars, we could fix it in an hour. And Paul Volcker looked up and said, couldn’t we fix everything? (Laughter.)

FOROOHAR: OK. Question here in the front.

Q: Gerald Pollack.

At the annual shareholder meetings of corporations, the large mutual funds generally support management and do not involve themselves with the shareholder resolutions. Should the large shareholders, such as Vanguard, be more active in looking into the merits and demerits of the various shareholder resolutions?

FOROOHAR: Great question.

BOGLE: Well, the answer to that is yes they should be, and yes we should be speaking specifically for Vanguard. But we have gotten really an incredible step up in what we are, in fact, doing—we, Vanguard—on the proxy front. We put out a report about a month ago. It must be 12 or 14 pages, showing how we voted each way on every issue that—significant issue that came up. We have a staff, believe it or not, of about 33 persons who work on nothing but corporate governance issues. We don’t try and analyze the financial side of the corporation.

But things where the—sort of threadbare saying where the rubber meets the road, of which the biggest is executive compensation, which has gotten so much out of hand that if you came in here from—and hadn’t looked at it for 30 years, you’d say this is crazy. Well, of course it’s crazy to pay the executives so much, as if they did everything. You know, I’ve been a chief executive for more—(laughs)—and a board chairman and everything else for more years than I care to count, and I know you can only do so much. And I know the real work is done by the people that are doing the day-to-day work in the company. And why they get less and less as I get more and more—and that’s not the way we worked at Vanguard, by the way, at all, because I was very conscious of this—but it’s just—it’s ego, it’s—to use a recent example, it’s having a backup plane when you—(laughter). I mean, Ross Johnson in the Nabisco thing had had a special jet for his dog. (Laughter.) To be fair I think there were two dogs. (Laughter.)

FOROOHAR: Let’s see, was there a question in the back there? Yeah.

Q: Sandra from Tencent, China.

Two questions. First of all, even though right now we are like 10 years away from financial crisis, there is still a lot of risk in global economy. So let’s say what worries you the most that could ruin the whole market if we talk about the global economy?

The second one is, in your book you mentioned the funny accounts before, so, basically, an investor can have like 5 percent in your portfolio to have some kind of speculating investment. So, with (heart of 50-ish ?), what kind of asset class may be your thing to put some, you know, funny accounts? Thank you.

BOGLE: Well, on the second part, I’ve often said a little bit tongue in cheek that part of the romance of investing is the gambling instinct that we all seem to have, or that so many of us seem to have. And so you ought to have a funny money account, not a penny more than 5 percent of your assets. Do anything you want with it. Buy a—buy a stock, buy a commodity. But a bitcoin if you want to, if you’re crazy. (Laughter.) And by the way, the bitcoin may well go to 20,000 (dollars), but that won’t prove I’m wrong. When it gets back to 100 (dollars), we’ll—

FOROOHAR: How about a Chinese equity? What do you—

BOGLE: (Laughs.) China, sure—

FOROOHAR: Or a—or a Chinese tech stock.

BOGLE: In the funny money account, anything you want. One requirement: Look at it after five years and compare it with your serious money account. And if you’re doing much better, you may be some kind of a genius, but I’d stop anyway. And if you’re doing badly, just realize this is a hard business and don’t go any further.

So—and I don’t know how to go beyond that, and you’re going to have to repeat for me—poor old me—the first part of the question.

FOROOHAR: Well, she was asking about global risks. And I’d love to expand on that and ask you in particular about China, because I know that’s something that you’ve occasionally thought—

BOGLE: Well, let me tell you how—I got a letter about two years ago, a year and a half ago from, obviously, a young man, and he was concerned about his asset allocation. And he said he thinks about all the risks out there and he can’t figure out what to do. So I wrote him a letter, and I ended up ending one of my chapters in the book with this letter. And it says, essentially, look, you’re young and I’m old and experienced, and neither of us have any idea the outcome of the big risks that we all face today: nuclear war, religious war, global warming, trade wars, pandemics, the breakdown of governance in our country. You can name a lot more, and every one of them is worrisome, and every one of them this, let me say, 28-year-old young man has every bit as good an idea and ability to predict the outcome of those things as I do or as I think anybody in this room does. We just don’t know.

So I would put that aside in my asset allocation. And then I said, you know, I’m—this sums up the way I deal with risk. I said I’m 88 years old—actually, 88 ½—and I said I’m about 50 percent in stocks and 50 percent in bonds, and that satisfies me. And yet, I spend half my time wondering why I have so much in stocks and half of my time worrying about why I have so little in stocks. And that is the fog of an investment strategy that we never really know.

So I think scientific things, mathematical calculations. I would fall back on the name of yet another one of my books, called “Don’t Count on It!” (Laughter.)

FOROOHAR: All right, you’re hedging very, very well.

We’ll move on, Question here.

Q: Thank you. Joel Mentor at Barclays.

I just want to get your thoughts on the continued viability, from your perspective, of the 401(k) as an investment and retirement savings vehicle. Thank you.

BOGLE: The 401(k), the thrift plan—in those couple of words I’ve told you the big problem, and that is the 401(k) was designed as a thrift plan and not as a retirement plan. So we’ve turned it into a retirement plan now as pension funds move back, as corporations cut back on their pensions. Corporations—and state and local government’s a huge part of this whole issue—are starting to think more and more about going to defined-contribution retirement plans, if you will, but they are thrift plans at the moment. So we have to change the rules of the game for the 401(k) and turn it into a retirement plan, or at least have a retirement plan option and a thrift plan option separately.

You simply cannot allow withdrawals from any sensible retirement plan. Think of how much your Social Security would be worth if you’re sitting in New York City, let’s say, with an income below the median here of $25,000, and you have some needs and you want—you’ll take it out of your—kind of have an emergency withdrawal from your 401(k). And you can’t—you can’t do that in Social Security; there would be no Social Security left at the end. So you need much more discipline.

You also need a plan in which costs are a prime consideration. You know, the industry—the makeup of 401(k) plans is generally a whole—as a group, a whole total stock market is there one way or another represented. It’s going to look just like a total stock market, and you’re paying 2 to 3 percent a year—let’s use the 2 (percent) again. If you own the total stock market, by owning the total stock market as such, you’re going to pay 4 basis points. There has to be cost considerations, and I would even say there has to be some sort of a board that says yes you can be admitted to selling a retirement plan or 401(k) plan if you meet these kind of standards: these kind of funds that are not wild and crazy—I don’t know how to define that too well—these kind of funds that have lower costs, these kind of funds that have had management in place for X period of time and maybe a few other standards that you would like.

So it needs—for want of a better word, the 401(k) needs a lot of discipline if we’re going to turn it into a retirement plan or since we’ve turned it into a retirement plan. So, you know, it’s a good idea, if not an unusual idea. But it’s a good idea and it works. But it works as a thrift plan, and we have to turn it into a retirement plan with the kind of discipline that people do not like to have. But if you’re going to invest for retirement, you’re going to have to have a lot of discipline or a lousy retirement. It’s your choice.

FOROOHAR: All right. Well, in the minute or so we have left, because you have a 26-year-old heart, I can ask you, are you going to keep working for the next 10 years or are you going to hit the golf course at some point? What’s the story?

BOGLE: Well—

FOROOHAR: (Laughs.)

BOGLE: My golf vanished. And—

FOROOHAR: (Laughs.) Are you going to write another book? What’s the future hold?

BOGLE: Well, I am writing another book.


BOGLE: And I’ll just say a word about that. I’m starting that as soon as—as soon as I got this one finished, I started my next one, which will be number 12. And it’s going to be kind of a history of Vanguard—a history of each of the major funds, some things I’ve written that I think are worth reproducing, Adam Smith and modern capitalism, balancing professional and business interests in finance, a long monograph I did for the Financial Analysts Journal, and three or four other. And then it’s going to be kind of a memoir of things that I probably shouldn’t say, and—(laughter)—

FOROOHAR: Ooh, that sounds—

BOGLE: But not bad. I’m going to hide them. You’re going to have to read carefully. (Laughter.)

And I think I’ll say—oh, this is a good way to end—I didn’t want to give it a financial title, because it’s really much more than that. It’s about a whole change that I have had a lot to do with in the whole nature of investing through the index fund and through the not-yet-copied Vanguard mutual structure. You understand that Vanguard doesn’t have an outside manager, doesn’t pay—you know, when you—when you look at the fund industry and you look from afar—you’re a man from Mars, say, or a woman from Mars to be fair—and you look, and here are billion-dollar, trillion-dollar fund complexes that need to go out and hire an outside manager. You mean a trillion-dollar firm can’t run itself? You got to be pulling my leg. So you’ve got to start with an outside manager, and at some point the child grows up. And the mutual fund child will grow up, and there will be more mutuality where the funds are run in the interest of their shareholders.

So, anyway, these ideas—the mutual idea, the mutual structure, the index strategy—are eternal. So the title of the book, it’s the last line of this couplet: “The trees I planted still are young, the songs I sang will still be sung.” So the title will be “The Songs I Sang Will Still Be Sung,” and I will have to give credit to the author, Johnny Cash. (Laughter.) Thank you all.

FOROOHAR: Jack, you are the best. You rock. Thank you. (Applause.)


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