"John Bogle on Investing--The First 50 Years" A G

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"John Bogle on Investing--The First 50 Years" A G

Postby Taylor Larimore » Thu Sep 02, 2010 5:38 pm

Hi Bogleheads:

In September, 2001, Pat and I received a package with a treasured note from our mentor, Jack Bogle. The package contained, “hot-off the press,” John Bogle on Investing—The First 50 years. To my astonishment, Jack dedicated this book to members of this forum with these words:

"Dedicated to all of the human beings who have meant so much to me during the first 50 years of my career – and expecially those Bogleheads of the Internet, that dedicated and loyal cadre of Vanguard Diehards who give me strength to carry on my mission.”


Ten years ago I had not started my Investment Gems. However, I recently re-read Jack's earlier book and I would like to share with you a few of his many "gems" reflecting Jack’s long experience and great wisdom:

Many Princetoians paved the way for my career. The first was Charles Nichols who lent me $60 to pay the General Fee required before I could enroll. (I repaid him shortly after I went to work following my graduation.)

“I was fired in January 1974, and founded Vanguard in September of that year.”

“Because of the heavy fractional 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.”

“The central principle of the mutual fund business should be, not the marketing of financial product to customers, but the stewardship of investment services for clients.”

“The industry has become a ‘cash cow’ for fund sponsors and managers as well as Wall Street brokers and bankers.”

“The average fund shareholder holds each of his or her mutual funds for about 3 years, compared with 15 years a half-century ago.”

“Employee 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’ve constantly strived to translate abstract financial ideas into down-to-earth terms to which ordinary human beings can relate.”

“The odds against finding the winning mutual fund in the stock market haystack are demonstrably long, so I conclude: Don’t bother looking. Just buy the all-market haystack.”

“Yes, some managers inevitably beat the market by a solid margin, but they are impossible to identify in advance, and, once they reach the pinnacle of performance, almost never remain there.”


“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.”

“Who is to say, really, that we are not facing a decade which will parallel the lowest decade in market history (1964-74) when the annual real return of stocks was -4.1%.

“Over the past 15 years, after all expenses and federal taxes, $10,000 invested in the average mutual fund has grown to $57,000. By contrast, the all-market fund has grown to $100,000.”

“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.”

“Professional advisors who ignore today’s rife signs of market madness—of a bubble, if you will—are abrogating their fiduciary duty, and dishonoring their responsibility for the stewardship of their clients’ assets.”

“It may well be that not too far down the road, the long bull market of 1982-2000 will face its own Waterloo.” (On Sept 1, 2010, Vanguard’s S&P 500 Index Fund had a 10-year return of -1.64%.)

“Be leery of projections, whether founded in reasonable expectations or just picked out of the proverbial hat. Anything can happen in the stock market.”

“Taxes cost fund investors an estimated 2.7% of return per years. The combined transaction and tax costs: 3.4% per year.”

“The index fund offers the broadest possible diversification, the lowest possible cost, the longest time horizon, and the greatest possible tax efficiency. Simplicity writ large!”

“My judgment and my long experience have persuaded me that complex investment strategies are, finally, doomed to failure.”

“Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.”

“In the past 15 years, only 42 of the 287 fund that succeeded in surviving the period, outpaced the Wilshire 5000.”

“A new study by the Hulbert Financial Digest finds that, from the market high in August 1987, through the end of 1998, a fine period of analysis, including both bull and (a few) bear markets, the average fund newsletter provided an annual return of 7.3%, only one-half of the 14.1% return on the Wilshire 5000 Index.”

“During the past 50 years, the return on the S&P 500 Index has averaged 13.6% per year, a 1.8% margin over the average large growth and income mutual fund. Given the powerful compounding of returns over this long period, the final value of an initial investment of $10,000 in the 500 Index would be $5,782,000. For the equity mutual fund, $2,589,000 – less than half.”

“By focusing on the long term—always the long term—indexing holds the master key to your investment success.”

“No investor should forget that odds should never be mistaken for certainties.”

“I entered Hahnemann Hospital in Philadelphia on October 18, 1995, to await a transplant, and received my new heart on February 21, 1996.”

“I look to the future, keeping an eagle eye on the interests of Vanguard, our crew, and our shareholders, and energetically continuing my mission to give mutual fund investors everywhere a fair shake.”

“Let’s examine the funds Morningstar initially selected in 1991 as the investment options for their 401(k) plan. – Despite Morningstar’s unarguable expertise, nine of their 13 equity fund choices have lagged the market.”

“I happen to believe that the advantages of owning the total bond market index fund vastly outweigh the long odds against finding the needle in the haystack represented by a winning bond fund.”

“Common sense investing is grounded in simplicity, but it requires faith.”

“In the last year alone, all-industry costs absorbed an estimated $120 billon of the returns earned by mutual fund shareholders—an astonishing figure.”

“All of these statistics leave me apprehensive. Why? Because the future is not only unknown but unknowable. The stock market is not an actuarial table.”

“Make no mistake about it, even the best of intentions have a profound tendency to vanish when the stock market drops 50% as in 1973-74.” (It plunged 44% in 2000-2002.)

“It’s always tempting to make heavy sector bets, but betting is, well gambling, nowhere more obvious than in the devastation wroght upon value investment strategies during the past five years (S&P Growth Index up 304%, Value Index up 157%).

“In the ideal portfolio (the all-market index fund) all specific security risk is diversified away.”

“An extra percentage point of long-term return is priceless, and an extra percentage point of short-term standard deviation is meaningless.”

“Investors are unwise to diversify their equities ever more broadly merely for diversification’s sake.”

“The single most effective way to control risk is by controlling equity exposure.”

“We must base our asset allocation not on the probabilities of choosing the right allocation, but on the consequences of choosing the wrong allocation.”

“Luck is not a very reliable ingredient upon which an investor should stake his financial future.”

“I am an unabashed advocate of the concept of mutual fund investing as the optimum way to capitalize on the rewards and minimize the risks of investing.”

“Lucky managers and managers who take extreme risk are usually the managers at the very top (and very bottom) of the rankings over most short-term periods.”

“Indexing provides an ‘odds on’ bet that an investor can outpace most other equity funds, and a virtual guarantee that his performance will never be at the bottom of the deck.”

“I hope that we have finally heard the end of the silly myth that cash reserves and market timing give active managers an edge in down markets.”

“But the new index industry includes large numbers of creative marketers engaged in proving that the number of indexes that can be used to create new ‘products’ is virtually limitless.”

“The problem with small-cap index funds is that by maintaining what is called ‘style purity’ such a fund must sell its winners and begin all over again.”

“There is a critical difference between designing a product that sells, and creating an investment that serves.”

“Selection bias distorts fund industry returns. The worst offenders are incubator funds, which, if they fly, fly high, and if they flop, flop right out of the database.”

“Survivor bias plays a major roll in industry records. Analysts from academe have estimated survivor bias ranging from as little as 1.4 % annually in 1982-1991, to as much as 4.2% in 1976-1991.”

“Front-end sales charges are almost universally ignored in publicized performance data.”

“When confronted with multiple solutions to a complex problem, choose the simplest one.” (Occam’s Razor quote)

“Investment management is a field fraught with fragility and fallibility.”

“Indexing is decidedly counter-intuitive. Presumably few mutual fund investors have the patience to labor through the proof presented in my syllogism.”


“It is perhaps paradoxical that the diversity of types of stock funds pales by comparison with that of bond funds.”

“Do not take yield calculations at face value. There are simply too many ways to calculate yields.”

“Bond fund returns can be predictably enhanced by only two factors:--one, higher risk, and two, lower operating expenses.”

“The past records of top-performing funds are rarely, if ever, repeated in the future. But when investors select a fund, it is predominantly on the basis of its past performance.”

“In the long run it is dividend yields and earnings growth that are the fundamental driver of stock returns.”

“While fund shareholders put up 100% of the market risk, they receive only 65% of the stock market’s long-run return. These economics hardly represent capitalism’s finest hour.”

“I have said to our crew 1,000 times over: Let’s treat our clients as human being—honest-to-God, down-to-earth human beings with their own hopes, fears, and financial goals.”

“I urge you never to let ‘things’ as such—the material possessions you may come to accujulate—become the measure of your lives. Who you are is far more important than what you have.”

“Maybe that strange business called Vanguard isn’t a business at all. It’s a religion.” (Forbes quote)

“By investing in an index fund, the know-nothing investor can actually outperform the professionals.” (Buffett quote)

“Over the long pull, investment fundamentals, not market valuations, are the piper that calls the tune. Over the short run, however, the fundamentals are often overwhelmed by the deafening noise of speculation.”

“The quality of disclosure to fund shareholders in shareholder reports is too often superficial and the quantity minuscule.”

“Happily for our investors, I really hate to spend even my own money.”

“For 25 years—in a sense for 50 years—my mission has been to change the industry so that our nation’s citizens—the human being who invest in mutual funds—get a fair shake.”


Thank you, Jack!
"Simplicity is the master key to financial success." -- Jack Bogle
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Postby chaz » Thu Sep 02, 2010 5:44 pm

There are a lot of gems in that book - thanks.
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Postby Charybdis » Sun Oct 17, 2010 2:04 pm

“Selection bias distorts fund industry returns. The worst offenders are incubator funds, which, if they fly, fly high, and if they flop, flop right out of the database.”

“Survivor bias plays a major roll in industry records. Analysts from academe have estimated survivor bias ranging from as little as 1.4 % annually in 1982-1991, to as much as 4.2% in 1976-1991.”

Hahaha I found these very funny pictures (while searching for "incubator bias"), check this out :)

Incubator bias:
Image

Survivorship bias:
Image

Source: Index Funds Advisors
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Postby chaz » Sun Oct 17, 2010 2:06 pm

Charybdis wrote:“Selection bias distorts fund industry returns. The worst offenders are incubator funds, which, if they fly, fly high, and if they flop, flop right out of the database.”

“Survivor bias plays a major roll in industry records. Analysts from academe have estimated survivor bias ranging from as little as 1.4 % annually in 1982-1991, to as much as 4.2% in 1976-1991.”

Hahaha I found these very funny pictures (while searching for "incubator bias"), check this out :)

Incubator bias:
Image

Survivorship bias:
Image

Source: Index Funds Advisors


Funny pics - thanks.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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Re: "John Bogle on Investing--The First 50 Years"

Postby George-J » Sun Oct 17, 2010 2:20 pm

Taylor Larimore wrote: .....
“I was fired in January 1974, and founded Vanguard in September of that year.”

Thank you very much for providing these gems Taylor.

When I read the above quote, I got to wondering ....
"If Jack Bogle had NOT been fired in 1974, would there be a Vanguard today?"
This speaks to an interesting question. It also reminded me of a similar statement Steve Jobs made at his Stanford address a few years ago -- that with hindsight years later he could say that his being fired at Apple in his early years was the best thing that could have happened.

Interesting.

The amazing 2005 commencement speech by Jobs can be seen and heard at youtube
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