Investing Insights: Remembering Jack Bogle

[Music] welcome to the investing insights podcast for morningstar.com this podcast is brought to you by MSS investment management backed by 40 years of essential fixed income markets change but the role fixed income plays shouldn't that's why we stay true to our traditional approach essential fixed income find out more at MF Escom slash fixed income this week on the podcast we reflect on the life of Jack Bogle the Vanguard founder passed away Wednesday at age 89 Morningstar's experts interviewed Bogle a number of times over the years and this week we look back at some of our favorite clips let's start with the 2008 financial crisis Christine Benz asks Bogle about his take on the market environment and what investors should do hi I'm Christine Benz I'm here at the Vanguard diehards conference in San Diego and I'm happy to be sitting here with Jack Bogle who is really the epicenter of this conference Jack thanks for being here let's talk about the current market environment it's crazy give us your take on what's going on and what do you think investors should be doing well of course I've only been in business this business for 57 years and I have never seen anything like it in my life I've never seen anything like the amount of speculation that's going on on the market which is basically twice as much stock trading twice as much turnover as we had in 1929 the previous high and we have these frequent days we've had 37 of them in the last year where the markets going up or down 2% or more and when I came into this business in 1951 we might have had three or four days a year like that 12 times as many wild and woolly days as history would have said so we've just we've taken the whole focus of market participation in our capitalistic system here in the u.s. from one of investment to one of speculation and I happen to think that's a tragedy in which the investors are the losers and which of course somebody's a winner Wall Street wins they make six hundred and fifty billion dollars a year and fees and commissions and all that kind of thing which means that investors lose much to the market so it's it's a system that's crying out for change although I never would have guessed the change would be so abrupt I never would have guessed the speculation would have been so rampant I never would have guessed that credit would be so easy I never would have guessed that credit standards would be so devastatingly low so what what do you think are the solutions well unfortunately no one solution that we're gonna get this government intervention and I don't think there are very many people that really like or look forward to government intervention I don't know anybody that thinks the government can do a better job in the private enterprise side of the system so in the case of the financial system they certainly can't do a worse job but the government is the only vehicle the only body the only source of liquidity we have left so the government has no choice but intervene this is in fact the greatest financial crisis since the Great Depression so one thing I've been thinking about if you are not a speculative investor if you're a long-term investor and yet there are these speculative investors buffeting your returns about what should your reaction be should be you'd be doing anything differently and I think basically you should not be doing anything differently I mean investment is a pretty simple thing investment is owning businesses or I would say being an inveterate index fund person owning all of American business owning every company in America letting capitalism do its work those companies will grow it probably around 7% a year I'll pay you about a two and a half somewhat lower than history but a two and a half percent dividend yield and that should over time value out of anything that happens because of the wild swings I mean if you visualize investment as growing in kind of a steady line which it does and visualize the crazy market as being all these Jags up and down around this steady line upward upward always upward I think then you've got to say I know I'm not smart enough to get out the high I know I'm not smart enough to get back in at the low so I'm just gonna stay the course as we would say at Vanguard and hang on through all that and importantly if I'm trying to accumulate money for chairman or to buy a home or to educate my children what you want to do is keep investing and you know say how can I keep investing the day that the market goes down 600 points that's the greatest time in the world to invest certainly better better than doing it the day before our report goes down 600 points and I think I think people have lost sight of the fact that a sharp market decline is of course it's bad for sellers but it's good for buyers and since the stock market is the interactionists of sellers and buyers it's always good for somebody overwhelmed by the market Morningstar premium will help you cut through the noise and find the most promising investments get started today with Morningstar premium next up in 2009 Don Phillips inquires about capitalism as a card-carrying capitalist how do you feel about or what lessons are there about capitalism from what's happened here and how do you feel about the increased and expanded role of government well business brought it on themselves this is a certainly a crisis in capitalism and Judge Posner blames it all on the capitalistic system he's the Great Chicago School man everybody knows and I've been a University of Chicago Law School Chicago Business School all teaches this you know the markets have to clear they will produce great gains for us competition free markets unimpeded and so capitalism has basically failed us and I think even worse what would your law judge posner it's not not to not agree with this I think capitalists have failed us as well as capitalism and I'd blame the capitalists actually more than capitalism which gets to done you know kind of the endemic part of the system which means that the idea that the capitalism brought this crisis upon itself is is even more acceptable more understandable in the whole scheme of things and that is these businessmen take the bankers every all the other banks are doing these low loans their earnings are growing faster than ours are so our directors and and analysts on Wall Street say boy you better get on the bandwagon and follow its a little bit I've written on this in a number of different context but it's a little bit like the old ethical standard think about this all of you if you would and there's some things that one just didn't do that's the way I was brought up it's not gray it was black and white and now the ethical standard seems to be if everybody else is doing it I can do it too and carry that over into the banking everybody else is doing these funny loans and having earnings grow faster building up their margins levering those margins the more leverage a gets the more leverage B feels inclined to get so the system fed on itself and drove bankers to making decisions that they presumably should have known better than to make I don't like judge posner does however I don't blame government for this I was at a meeting of CEOs even though I haven't been one for quite a while and someone asked me to sum up the morning this is a bunch of bankers and other CEOs and I said what do you what do you think about us I said you know what I'm hearing here is you're blaming the government for allowing you to do what you should have had enough brains not to do in the first place and I I think there's a lot to that so it's endemic to the system and we have to learn to have a better capitalistic system I don't call it nationalism call what you will done if the government owns 35% of the bank it's not their fault they own 35 percent of it they had to bail the bank out and frankly other than the fiscal issues I don't see any difference in having Washington DC own 35 percent of Citibank than having Dubai on it except Dubai would drive a much harder bargain well it seems at the end of the day character still counts yes character still counts and we have lost a lot of that watch all the Morningstar content you love from your living room down low the Morningstar roku channel and get up-to-date independent insights on today's markets be comfortable be informed now bogel discusses corporate governance in 2010 Jack I know you're a big believer in holders of stock exercising their right to weigh in on governance matters vote against outlandish pay packages and so forth a question that I have actually my colleague Greg Wolper raised it to me is that if indexing continues to gain traction as it has does that sort of run at odds with the idea of governance and and if the corporation knows that the passive investor doesn't have that ultimate weapon of walking away can it just really ignore the index funds wishes well I mean I come with the exact opposite conclusion okay the index fund this is what we call the wall street rule if you don't like the management sell a stock and we can't an index fund cannot sell a stock so the only weapon we have if we don't like the management is to get a new management were to force the management to reform to me it's pretty simple and it's right out of benjamin graham's first book what governance should do what stockholders should do if a company is little governed take an active role nobody paid any attention to that advice and they haven't yet so I'd say index funds are the great hope for governance index funds are now about in round numbers 22 percent of all equity fund assets and when you get to state and local governments and and even even corporate pension plans indexing is probably every bit of 25% of all stock and that's the only recourse we have I suggested years ago post Enron the formation of a group to to do long term investors to get together and agree to some governance principles not telling people how to vote but to get involved in governance and it was very hard to get people even to talk about it why is that do you think I think it's first of all there's no money in governess you don't make more money by playing a lot of attention to governance second we run the money for corporate America we institutional investors and so if we take on a corporation as somebody's gonna lose that client and if someone doesn't want to take on one's biggest clients everybody says oh we would never do that it's a pretty subtle thing and it's hard to measure but the fact of the matter is that there's no evidence by the way that that that this happens that mutual funds or other institutional investors have a different stance on voting with clients as compared to with non clients but that I think that's because we have no interests in active voting at all it's not as if there's an active and inactive share it's all inactive and bringing in mind the the I don't know aphorism that I've used for a long time and that is the mutual fund from the fund managers perspective pension fund manager mutual fund management there are only two kinds of clients we don't want to offend actual and potential that's a lot of clients so if we start to gradually break down these walls where corporate protective moats that protect corporations from their shareholders I look at index funds as being right in the foreground think about the SEC proposal which i think is very modest but probably as much as we can do and therefore unfit for it and then as get 3% of the shareholders together three percent of the votes together but only three percent who have held shares for at least three years where are you gonna find institutional investors who hold shares for three years their turnover is 100% that's one year except for index funds so I think index funds are going to emerge as a powerful force in corporate governance now I'm an optimist and maybe I'll take a long time to happen but given the fact that indexing is not may but is going to be more and more dominant with each passing year there's no way around it that's the mathematics that's all it is and don't fight the math the indexing will get bigger and bigger and index funds will be called to the task and and will measure up to that I have to tell you this which is very disappointing someone I think it was a reasonable survey took a look at all mutual fund managers to see how what kind of scores they got in terms of activist activism and governance and right at the bottom of the list were the three in the bottom of the list for the three index fund large index fund firms and that would be Vanguard that would be State Street and that would be at Blackrock can you speak to vanguards placement on that list I don't know anything about it but I Anna and I do think I mean I had it I had an idea at the beginning of the year and when the Supreme Court made this insane ruling turning over decades precedent that corporations could give away money they could make up political contributions unlimited political contributions it's absurd on the facts it's absurd on the principles but I thought there would be some limitations self-imposed limitations by having to disclose what they did but I did do an editorial not bad that's that proposed that fund managers made the following proposal and corporate proxies resolved that this corporation shall make no political contributions without the approval of 75% of their shareholders and nobody paid any attention to it nobody was interested in doing it and probably because I pointed out seems obvious to me that we're gonna put those things in shareholder proxies corporate proxies that we first thought a pledge not to make political contributions ourselves because we're corporations too and that may have been the icing on the cake but I haven't given up on that yet because of course as everybody knows the situation has gotten much much worse because another Supreme Court ruling and which is allowed so-called 501 C 3 charitable organizations they can give half their money to political causes just so long as they don't name the candidate or something very very vague I mean you can it's so easy to help a candidate without using his name or her name that now it's going to be anonymous it's that last fragile check on corporate largesse is is pretty much gone so this is a bad era for corporate activism but if it's going to you know we're gonna see how it works out but the idea that corporations with these huge numbers of shareholders they're gonna be voting in the interest there of their executives not in the interest of their shareholders and you know this exact compensation issues come up that's how they're gonna vote and it's it's very serious one of the most serious problems we have in Financial America and that is what we call the agency problem and that is a corporate America scene no longer controlled by investors it's controlled by agents of investors it used to be that mutual funds and pension funds and endowment funds controlled about eight percent of all the stock in America today they control seventy percent all the stock in America they can make corporate America will march to their tune if they just wake up and say here's what you're gonna do I'm gonna tell you what to do think of the difference if the corporation corporation X had a single shareholder with 70% there'll be no question about who the boss of that corporation forget whose chief executive he doesn't count the boss counts and the boss doesn't have doesn't need any titles doesn't need to be the chairman the president and the CEO he owns 70% of the stock he's the owner that's the mood I want to get our institutional investors in and I will keep trying I'm sure you will attend it's always a pleasure to hear your insights and such a privilege to sit down with you today it's great to be with you Christine this podcast is brought to you by m FS investment management backed by 40 years of essential fixed income your fixed income strategies should aim to deliver the essentials for your clients income diversification and risk management find out more at MF Escom slash fixed income next from 2018 Vogel talks about the effect that indexing has on the market one question that you and I have talked about over the years is just the growth of indexing and the potential for it to make the market at large start to behave differently because so much money is in index tracking products I know you've said in the past you don't think we're there yet but let's discuss your view on that topic has it evolved since we last talked or do you still think that indexing would need to get a lot larger well it's amazing to me I was citing this certain statistics of the bolo heads this morning and that is I did a study for the Board of Directors in 1975 and had the previous 35 years of large cap funds that's what we had in those days mutual funds compared to the SP index and the S&P index outperformed by one point six percent a year an article I wrote for the Financial Analysts Journal a couple of years ago I updated that studying went 35 years up to 2015 the previous 35 years and the difference was 1.6 percent in favor of the index fund so why is that because the cost of mutual fund management is about 1.6 percent I mean I'm oversimplifying it's smaller at large cap funds and vigor it's small but it's telling us what we should know that the average manager is average before it cost I mean how else can I be and it's very competitive business very smart people competing with one another it's hard to get an edge so I think there's very little evidence that indexing even at 45% of the fund industry has changed the nature of the market I would add this supposing the market is less efficient and people will say AHA then managers can do well active managers have had their budget it will be a stock pickers market if they say no because of active manager a beats the market that manager B will lose to the market I mean there's no way around the fact that if these the that part of the market that's outside of indexing if somebody does better relevance the market somebody does worse relative to the market and as for a stock pickers market I mean I never saw a phrase it seems that such acceptance that meant so little when one thinks about it sure there's a stock pickers market but every stock that's picked is unpicked by somebody else everybody that buys is buying from a seller I mean it's the simplest thing in the world that people don't seem to get we're all consigned to average as a group and when you take costs out that's where the index advantage comes in go from one investment analyst to a hundred and fifty sign up today for Morningstar premium and let our independent and unbiased research staff help you find the best investments get started today with Morningstar premium now from 2016 Vogel's thoughts on 40 years of indexing hi I'm Christine Benz from Morningstar calm the index fund recently celebrated its 40th birthday i sat down with Jack Bogle Vanguard founder to discuss that milestone the index fund celebrated a big birthday anniversary whatever you want to call it forty years let's talk about that this was your doing and let's talk about whether the uptake of indexing was what you expected did you expect it to take off faster than it did I expected it to take off the two things one good one positive and one negative the negative as I expected it to take off much faster than it did it took 20 years until the midden until the mid-90s right for it to begin that gained real traction and then it accelerated and the growth from 1995 - to 2016 has been astonishing and it's sustained and the cash flows are over a hundred percent of the industry's vanguard leads in that and of course and so it's a lot of good for a lot of people people say why doesn't everybody start an index fund and I said the answer to that is very simple all the darn money goes to the investors this is a business the money's not in it for ya they're they're an eternal return on the capital particularly the capital owns the firm all those conglomerates that own these firms and the mutual fund division of that firm of the mutual fund organization it's a subsidiary has to produce a return on the buyers capital and if the buyer if you don't the buyer will get somebody who will I mean it's a hard capitalism is a hard business but the capitalism in our business should be focused on the shareholder who puts up the money puts up the capital takes the risk and want to get all the reward and he only gets about a third of it over time so it's it's amazing this thinking this index boom we have only one C release vaguely serious competitor that would be fidelity to Vanguard and and of course Blackrock is not as big as we are an indexing but overall they're much bigger for him than Vanguard to which I have zero Envy size is not a great blessing sizes carries with a lot of administrative baggage a lot of struggle to recognize the people that are doing the work around the company and a lot of bureaucracy and I was telling someone the other day Christine that I've been worried about size getting too big for as long as I can remember vanguard size though has really been increasing exponentially over the pl/i no no I'm not saying we should stop it you know my I mean that I used to be so arguments with the directors about slowing down I wrote they said well look you do that and there will be a whole lot of investors that deserve to be in Vanguard that won't be there and so in any event I've been worried about it for so long on a speech I gave in 1989 to the vanguard crew I said you know we're starting to get big and I hope we're very carefully we get bigger and bigger I'll do my best to make sure that we always said Vanguard is always a place where judgement has at least a fighting chance to triumph over process and I talked about the perils of looking like a giant mutual insurance company life insurance company casually company it's just impersonal and all rigid bureaucratic about the perils of getting anywhere near that and when I gave that speech our assets for 47 billion dollars and you know I'm not saying we should stop it I am saying we should be very focused on what we have within here we have terrific crew members a terrific crew under building they have great leaders and I think they're doing everything they can but size is a captivating capturing kind of thing that you know grabs you a little bit more with each passing day and we're still able to attract very wonderful young people and they're still able to retain terrific veterans I go to it and go to a lot of these retirement parties our 25-year parties and my god the quality of people we have here they're just people that are dedicated they know what they're doing they know about the company's values and they love the people they work with their little teams all over the country all over the company so it's I'm wary of size and everybody knows that I've said it so many times it would be a little ridiculous to try and deny it have you been concerned about the products that have cropped out cropped up outside of Vanguard mainly under the index umbrella that really don't in your view do justice to your original idea concerned angry astonished there is a fringe element it's almost entirely in the ETF industry that's how marketers dream you know people have no background in the business Andrey Kaufman calls them financial Buccaneers committed the business for the hot idea and they want to sell I won't name any nays they want to sell what's ever had and you the red interview with these managers and in in Barents kind of frightening and there's they say well I know that Japan and Europe too with our funds our currency neutral funds aren't gonna last forever so we'll think of something else when they fail that the way to be in this business to market products I don't even like the word product i banned it here actually years ago come back I used to pay a five dollar fine if you ever mentioned it I didn't think we were manufacturers selling products I thought we were trustees selling fiduciary services people would say you know that guy is a real SAP and he probably is but I have an idealistic view of the business can your portfolio whether the market use our premium portfolio tools to identify risks and streamline your holdings get started today with Morningstar premium and finally Morningstar zone tribute to Bogle [Music] I remember Jack for many many reasons but most of all for his optimism and the fact that he really believed in helping the small investor and ensuring that that investor could have that great outcome that he or she was looking for you could obviously fill books about mr. bogles contributions to the financial services industry and to individual investors I consider it one of the great privileges of my career that I got to meet mr. Bogle through our annual Bogle heads conference conversations we would do it video interviews and I'll also say that as a young analyst reading mr. Bogle getting to know his philosophy was a normal enormous Li clarifying to me as a young analyst it helped shape the types of products that I would recommend and also helped shape my career path he was Pro low-cost products of course but he was also against so much of the complicated gobbledygook that Wall Street puts out so hearing his philosophy was an incredible gift I don't believe that there has ever been nor will there ever be anyone who has given more to investors and taken less in return than Jack Bogle his premise was the more that we can save investors the more that ends up in their pockets the better the outcomes they achieve and in the fact that we now see millions of investors that are in index funds including Vanguard index funds I think stans's is a towering monument to to his legacy it's immeasurable in the sense that Jack really changed the psychology of investing his ethic was that you put the investor front and center where they belong they don't subordinate to other business interests instead you win when they win and that was not conventional wisdom in the industry some years ago when he was trying to popularize indexing and bring Vanguard up and yet he inverted the psychology of the industry he enshrined a new standard that put the investor front and center and and I think we owe a lot to Jack because now we see that sort of ethic that sort of standard being table stakes in the industry and I think that all investors not just Vanguard investors all investors are better off for Jack's effort so he's had an enormous impact both in measurable in immeasurable ways one of the things that's so impressive about Jack Bogle was his unrelenting focus on the end investor and he maintain that focus despite serious health issues and dust-ups along the way with other executives at Vanguard and so forth and I think when we look at the the impact that he's had across his life it's really tremendous and we all have him to thank for that he didn't just pioneer the first index fund he helped investors in all kinds of ways that get less recognition he pioneered closure of funds to help protect current shareholders he was an advocate in simplifying the language of prospectus --is so that your average investor could understand them and make intelligent choices he was a tireless advocate for others and he will be sorely missed [Music] [Music] that does it for this week's investing insights podcast from Morningstar comm we hope you have enjoyed our program and we welcome your feedback and send your comments and questions to podcast at Morningstar comm from everyone here at Morningstar thanks for listening [Music]

Channel: Morningstar, Inc.

Views: 53,559

Keywords: morningstar, investing, stocks, funds, etfs, mutual, market

Id: ZHN3XxCyWJM

Length: 31min 18sec (1878 seconds)

Published: Sat Jan 19 2019