Market Moralist

To Jack Bogle, the reckoning for Wall Street, "with all its sins," reaffirms Vanguard's pioneering course in funds.

Posted: October 19, 2008

His wife had tried to dissuade him. He was 79 years old, and lately his health had been shaky, complications involving his heart transplant of a dozen years ago. Why subject himself to the stress? At the airport the day before, while waiting for the 7:30 a.m. flight from Philadelphia to the West Coast, even he had exclaimed, "This is madness!"

But John Clifton Bogle - "Please, just call me Jack" - doesn't trifle with commitments. The founder and former chairman of Vanguard Group Inc., the mutual-fund giant headquartered in Malvern, had attended every reunion of the Boglehead Diehards, disciples brought together by the Internet, since their first gathering in Miami in 2000, and he wasn't about to miss this one, even if it meant traveling to San Diego.

Truth be told, it was immensely flattering, and nourishing to his ego (a not inconsiderable component of Bogle's personality), that a group of small "man-on-the-street" investors so admired him and his philosophy of growing money.

The Boglehead Diehards sponsor an increasingly popular Web forum where they answer questions, trade investment advice, and offer encouragement (www.bogleheads.org). Most entrust their money to Vanguard and religiously follow Bogle's principles: keep it simple; invest, don't speculate; put your money in low-cost index funds tied to the performance of the entire stock market; and keep it there forever, or at least a very long time.

At the reunion last month, the Bogleheads treated him like a wise and beloved grandfather. The current of events had heightened his appeal, making him seem prophetic. The week before, Wall Street had collapsed, and as Congress mulled a bailout, the 130 Bogleheads were eager to receive counsel from this éminence grise of the financial world.

"The handwriting was on the wall for all this to happen a long time ago," Bogle told them. "The financial sector, with all its sins, would in times less generous be hoist by its own petard - to wit, blown up by its own dynamite. And, of course, that is what happened."

Bogle looked natty in a Vanguard blazer over an orange-and-white striped polo shirt. His face was as craggy as the coast of Maine. His frame was lean, his shoulders were stooped, and he cinched his trousers north of his navel. He was courteous, congenial, chipper ("I love the morning! I can't wait to take on the day!"), displaying all the appealing traits of what used to be called "good breeding."

His crisp bass voice resonated with the confidence of his class, the extinct majesty of moral authority.

"Investment bankers caused this mess, and apparently they're not going to pay anything to get out of it!"

"Any time you have a system that privatizes the rewards of an enterprise and socializes the risks, you're going to be in trouble!"

"The stock market is a giant distraction from the business of investing. Investing is earning a return on your capital; speculation is betting on price. It's so insane to have a market where it's almost all rank speculation and no investment!"

"In Las Vegas, do the gamblers win? No. The croupiers win! That's the way the Wall Street system works. That's why we've got this overloading of wealth, the top one-tenth of 1 percent making obscene amounts of money for subtracting value from society. I don't like it!"

This bear market, his 10th, is unlike any other, he said; the contagion has spread from the financial sector to the "real economy," so expect a "tough slog" ahead. His advice: Stay the course; do nothing rash; this, too, shall pass. He also offered a preview of his book Enough: True Measures of Money, Business, and Life.

They stood in line for autographs. They posed for pictures with him. They thanked him for giving the small investor "a fair shake," for enabling them to retire early, to buy or build their dream houses, to finance their children's college education, to live in comfort and security.

"We're an affirmation of his life's work," said Michael LeBoeuf, 66, of Paradise Valley, Ariz., a coauthor of The Bogleheads' Guide to Investing, who was wearing a "Jack Bogle for President" button. "Some mutual-fund managers chose to make millions. Jack Bogle chose to make a difference."

"He has financially changed my life," said Jesse Payne, 66, a real estate investor and retired New York City police officer.

"There's God," he said, placing his hand over his head to indicate the Almighty's lofty position, before dropping it slightly, "and there's Bogle."

A new kind of firm

These days especially, Bogle is much in demand, a rock star of the financial world, and he is regularly recognized - and quizzed - at airports, on trains and in taxicabs.

But in Philadelphia, where he has lived since 1945, and where he built one of the region's largest, most successful businesses (Vanguard has 12,000 employees and oversees nearly $1.2 trillion in assets), and where he helped foster the National Constitution Center, serving as its chairman for nearly eight years, Bogle is less known than, say, Bill Giles of the Phillies or Brian Roberts of Comcast.

No doubt many Philadelphians would be surprised to learn that in 1999 Fortune magazine named Bogle one of the investment industry's four giants of the 20th century, and that in 2004 Time magazine included him in its first list of the 100 most powerful and influential people in the world.

"He's a phenom," said Gretchen Morgenson, a financial columnist for the New York Times. "Jack Bogle retains a reputation for excellence and integrity in a business that can be very tough and vicious."

"Jack could be a multibillionaire on a par with Gates and Buffett," said William Bernstein, an investment manager who wrote A Splendid Exchange: How Trade Shaped the World. "He chose instead to mutualize the company, to turn it into a nonprofit that exists to provide its customers the lowest price. I don't know any other story like it in American business history."

When Bogle launched Vanguard in 1974, his aim was to create a new kind of investment firm, a company that would serve investors "in the most honest, efficient and economical way possible."

Shareholders of Vanguard funds "own" the management company that administers the funds. Unlike other investment companies, Vanguard operates at cost, with each fund paying its share of the corporation's expenses. As Bogle is fond of saying, his greatest accomplishment was "putting the mutual back in mutual funds."

His other great accomplishment was creating, in 1975, the first index fund. Bogle has long argued that a mutual fund representing a broad range of businesses - for instance, the S&P 500, an index containing the stocks of 500 large publicly held U.S. companies - will not only match the market's average return but also generally surpass the performance of actively managed funds (in which stock pickers churn the portfolio, buying winners and selling losers, in an attempt to beat the market), especially when lower costs are taken into account.

"The cost is a handicap on the horse," Bogle has said. "If the jockey carries a lot of extra pounds, it's very tough for the horse to win the race."

When it comes to cost, Vanguard, like its founder, is cheap. At the end of last year, its average expense ratio (expenses as a percentage of average net assets) was a rock-bottom 0.2 percent - a mere $100 on a $50,000 investment. At other investment firms, fees can run as high as 2.5 percent, or $1,250 on that $50,000.

Had you put $10,000 in Vanguard's S&P 500 index fund when it set sail on Aug. 31, 1976, your nest egg would have been worth $281,500 on Sept. 30. By comparison, Bogle said, a $10,000 investment in the average general equity fund, which represents a broad spectrum of actively managed mutual funds, would have been worth $180,300.

Idealist that he is, Bogle had hoped Vanguard would spark a revolution. Yet no competitor has adopted the company's penny-pinching mutual-ownership model. While the crusade has been lonely - his first index fund was dismissed as "Bogle's folly" - he has, to use a pet phrase, pressed on regardless. Indeed, he draws strength from being the conscience of the financial-services industry.

"It's his oxygen," said James S. Riepe, retired vice chairman of T. Rowe Price, "the gasoline that drives his engine."

Along the way, Bogle has attracted his share of critics. He has been called a holier-than-thou scold who is undermining the pillars of capitalism. Some folks just wish the old coot would shut up.

"He has held our industry to a higher standard than it held itself, and I think a lot of people took umbrage," said Arthur Zeikel, 76, a former Merrill Lynch chief executive officer who has known Bogle for more than 40 years. "They think he's an extremist for his sense of purity."

Riepe, 65, worked as Bogle's right-hand man from 1969 to 1981, and they have remained good friends. Riepe called Bogle "a very principled guy," but added that "Jack is not perfect. There is always some truth at the base of his positions, but often he takes it to extremes. He's not above spinning things to support those positions that he believes in very sincerely.

"Are costs important in investing? Yes. But should you make choices based only on cost? No, not necessarily. With Jack, everything tends to be portrayed as black or white. I happen to think the world is often a little more gray."

Riepe and Bogle's other assistants convene annually in Philadelphia. About 15 years ago, they gave the boss a clerical collar. "We decided that since Jack had reached such high levels of self-righteousness," Riepe said, "he ought to have the appropriate uniform."

Big on toil, not the spoils

Disembarking in San Diego four weeks ago, Bogle was recognized by a fellow passenger who marveled that he had flown coach class. Instead of hailing a taxi, Bogle waited for the free van to the hotel.

His daughter Barbara recalled growing up in "a big old barn of a house" in Haverford, where the thermostat was set so low in winter that frost formed on the inside of the windows.

Today, Bogle, who detests arrogance and self-importance, lives with his wife, Eve, in a stately but modest brick house in Bryn Mawr. They own only one car, a seven-year-old Volvo station wagon.

"He has no desire to be ostentatious," his son Andrew, 37, said. "In his view, he's been lucky in his career, so there's no reason to advertise his success, no reason to aggrandize himself."

Bogle early realized the value of a penny, a lesson he has taught his six children and 12 grandchildren. One of his grandfathers was a prosperous merchant, and Bogle's early years in Montclair, N.J., were affluent. But the years of the Great Depression erased the family fortune. Bogle's father, an improvident charmer, was ill-equipped to cope. The Bogles - Jack, his parents, and his older brother, William, and twin brother, David - had to move in with relatives, the first of several relocations.

The Bogle boys went to work. Bogle is proud of the many jobs he held in his youth - newspaper delivery boy, waiter, ticket seller, mail clerk, cub reporter, brokerage-house runner, bowling-alley pinsetter. While his rich chums frolicked, Bogle toiled, and never resented it.

"I grew up in the best possible way," Bogle said, "because we had social standing or community standing - I never thought I was inferior to anybody because we didn't have any money - but I had to work for everything I got."

His mother secured scholarships for all three sons so they could enroll as boarding students at Blair Academy in northwestern New Jersey, a transformative experience. Bogle waited on tables and blossomed academically.

Princeton University was sufficiently impressed. It offered Bogle a full scholarship.

At first, Bogle floundered, and his low grades in his major, economics, almost cost him his scholarship. But he applied himself and slowly mastered the demands. In December 1949, he happened upon an article in Fortune about the embryonic mutual-fund industry, and Bogle rejoiced. He had a topic for his senior thesis.

Bogle fell in love with the subject and produced a scholarly opus that predicted Vanguard and proved to be a road map for his career. "The principal function of mutual funds is the management of their investment portfolios," Bogle wrote. "Everything else is incidental. . . . Future industry growth can be maximized by a reduction of sales loads and management fees."

Bogle graduated magna cum laude. After he sent his thesis to Walter Morgan, Princeton Class of 1920 and founder of the Wellington Fund in Philadelphia, Morgan hired Bogle and became his mentor. In early 1965, when Bogle was 35, Morgan anointed him his successor.

Wellington was flagging. Morgan charged Bogle to spur it. Bogle, "headstrong and impulsive," arranged a merger with some high-flying investment managers in Boston. For six go-go years, the partnership flourished, but in the 1974 bear market, stock prices plunged, and shareholders fled. Bogle and his partners quarreled; Bogle was fired from "his" company.

He refused to surrender. He persuaded the board of the Wellington funds to split from the management company that had canned him and appoint him to administer the funds at cost, thereby saving a bundle in fees.

But what to call the new firm? Inspired by Lord Nelson, Bogle chose Vanguard, after the British commander's ship.

The company has certainly prospered. It is one of the largest investment-management companies in the world, and vies with Fidelity Investments for the title of biggest mutual-fund group. The $1.2 trillion it oversees has grown from $1.4 billion when Bogle started Vanguard in 1974.

Success and a schism

Bogle, who will turn 80 in May, still works at Vanguard. Although he plays no role in managing or directing the company, he shows up every weekday to discharge his duties as president of the Bogle Financial Markets Research Center.

With his many projects and ventures, his three staffers confess they have trouble keeping pace.

Bogle spends most days writing speeches and guest editorials, crafting book blurbs, and answering calls and correspondence. A college student wants to make him the subject of her thesis. A lad of about 12 hopes to write an investment guide for kids based on Bogle's The Little Book of Common Sense Investing.

At "The Bogle eBlog" (http:// johncbogle.com/wordpress/), Bogle replies to "Ask Jack" queries from investors. His door is always open for Vanguard folks. "I don't like to say no. From a very young age, you just basically want to please people."

He hasn't always succeeded. It's no secret that there's a rift between Bogle and the man he groomed to succeed him, Jack Brennan, now Vanguard's chairman.

"We've had essentially no relationship," Bogle said. "Brennan hasn't talked to me for 10 years. There's been no eye contact; he looks the other way. I don't have any reason to say I don't have some responsibility for it, but I don't know what it is."

Brennan declines to discuss his former boss. But one reason for their schism may be Bogle's spectacular inability to retire. His energy and ambition are all the more remarkable because he has fought a lifelong battle with heart disease. At 31, he had the first of a series of heart attacks, the result of a congenital electrical defect. In 1996, Bogle's ailing heart was replaced, and his vigor and purpose surged. It must have been difficult for Brennan, who was supposed to be holding the reins. To the extent Bogle feels marginalized by Vanguard's management, it may explain some of his desire for recognition.

People who know, like and respect both men sorrow that the two are estranged, and wish for a reconciliation. Bogle has high hopes for a better relationship with Brennan's successor, Bill McNabb.

"On his first day on the job as CEO, Bill came by in the afternoon, and we spent an hour talking," Bogle said. "I was deeply touched."

However much Bogle may be troubled by the past, publicly he is philosophical. "You can't live a life of resentment. Every once in a while having a pebble in your shoe is annoying, I'll concede. But in a lot of ways, the last decade, an extra decade, has been the happiest of my life. I'm contributing to society. I'm doing what I want to do."

A return to old values

Bogle's new book, out next month, is his seventh. He describes Enough as "a combination of searing criticism and soaring idealism." It is part autobiography, part jeremiad, part apologia, and all Jack, "a desire to be remembered."

The publisher, John Wiley & Sons, has ordered a first printing of more than 100,000 copies.

The title works in two ways - enough as in fed up, and enough as in being satisfied, a radical notion in light of capitalism's relentless pressure for more.

Bogle calls for a return to 18th-century values - "the old-fashioned liberal humanitarianism that was the hallmark of the Age of Reason."

"To be called an 18th-century man is to me the ultimate accolade," Bogle said. "Years ago, there were things one simply did not do. Let's call it moral absolutism. Today, if everybody else is doing it, I can do it, too. And let's call that, obviously, moral relativism, and I don't think that's an improvement.

"The book is about being a good human being and living a good life. It's about being a good husband, a good father, a good colleague, a good member of the community. Everything else pales by comparison."

Blair and Princeton

Forging a new role for himself after Vanguard was challenging, Bogle admits. What sustained him was his devotion to two outside projects "of the highest social purpose": the National Constitution Center and Blair Academy.

"Getting these two institutions going, rebuilding them, working with great people in a very constructive, positive, contributing way has been a wonderfully refreshing, uplifting part of the last decade," Bogle said.

"Each of us who prospers in this great republic," he writes in his new book, "has a solemn obligation to recognize his good fortune by giving something back."

Bogle was chairman of the board of the National Constitution Center from September 1999 through January 2007, helping to guide it "from an articulated idea to a pretty stunning reality," said Joseph M. Torsella, the center's president.

"Being able to introduce the center to the nation with Jack Bogle as chairman was a huge advantage," Torsella said. "His counsel was always: Figure out how to go for the gold standard."

At Blair - "a good school that fell on hard times" - Bogle has been a mainstay since the early 1970s. For 15 years, he chaired the board of trustees. He chose the headmaster and helped finance the construction of several buildings.

"When Jack shows up, everything is better," said headmaster T. Chandler Hardwick III, who regards Bogle as a surrogate father. "He lifts the whole enterprise."

While Bogle may be frugal in the small transactions of daily life, he has been remarkably generous in a grand way. For the last 20 years, he has donated half his annual income to philanthropic causes.

At Blair and Princeton, he endowed the Bogle Brothers Scholarships, which have enabled 128 students to attend Blair and 110 undergraduates to attend Princeton.

"It's been the thrill of a lifetime," Bogle writes in Enough, "to meet so many of these exceptional young men and women."

On a splendid autumn day, Bogle visited Blair, where he spoke at a student assembly.

"I love Blair Academy," he declared. "Life is but a dream, but I can tell you my life has been better than any dream."

The students rose and applauded. Bogle smiled, his eyes moist.

Later that day, Bogle visited another cherished place. Princeton was at its most seductive as he savored familiar vistas, pointing out buildings where he took classes, dorms where he lived. "How I adore this campus!" he exclaimed.

Every moment at Princeton was magical, he said, and he was always grateful. One classmate remembers that Bogle constantly wore a smile.

As Nassau Hall's shadow lengthened, Bogle seemed wistful, almost melancholy. On unsteady legs, he headed for a stone bench and sat down wearily.

As he watched the undergrads, ripe with youth, vibrant with ambition, he lapsed into thought. "Life is all too short," he sighed.

"The only thing that gives me hope are members of the young generation, the smart kids in college today. They're devoted to service, to putting the interests of others ahead of their own."

He brightened. "Not everybody, but enough to persuade me we're going to be OK."

At play, with purpose

So what drives Jack Bogle? Why does he continue to work?

"I really don't work," he said. "I play all day, but it has a useful social purpose. I have more energy, idealism and passion now than I did 10 years ago.

"I feel an increasing sense of urgency about how much there is to do and how little time there is to do it. Deep down, I have a nervous feeling that if I stop I will die."

Bogle adores struggle. Opposition and antagonism test his mettle, hone his wits. But he does not battle blindly. He is a warrior who thinks and doubts. One of the most astonishing sentences in his new book is sequestered in parentheses: "Perhaps it will surprise you to learn that I do a lot of lonely wondering about the worth of my own life and career."

"At a certain stage in your life, you become more introspective, a quality that is so lacking in our society," Bogle elaborated. "You begin asking yourself: Why am I doing this? What am I doing this for? I think I added huge value to the investment business, but I wonder if I could have added huger value doing something else."

Bogle's friends have their theories about what makes him run.

"He's an evangelist, and evangelists don't stop," said Zeikel, the former Merrill Lynch CEO.

"It may sound totally hokey in this era," said Steve Galbraith, a partner at Maverick Capital in New York, "but I think he strives to be just a good citizen."

"He's had a long and continuing series of near-death experiences," Riepe said. "A person who has peeked over the edge of the cliff has a different outlook. It's clearly affected how he has led his life."

While working on The Little Book of Common Sense Investing, editor Bill Falloon overheard Bogle make this remark: "The only thing I'm trying to do is get to heaven with my reputation intact."

In August 1999, Bogle wrote an op-ed article comparing the stock market to a casino. "It turns out that it was his first, and still only, contribution to the New York Times," recounted his assistant, Kevin Laughlin. "I distinctly recall standing next to him as he looked at the page containing his article. I was absolutely petrified that he was going to spot an error I had allowed to slip through. But after looking at it for a minute or so, he said: 'Will you look at that? Little Jacky Bogle with a column in the New York Times. My mother would be so proud.' "


Jack Bogle's Rules For a Good Life

Rule No. 1: Get out of bed in the morning. If you don't do that, not very much is going to happen. Once you get out of bed, try to have a good day. Try to be a better parent. Try to be a better husband. Try to be a better colleague. Try to help those around you. Try to teach people. Try to learn. Try to do something completely off the wall. Be conscious of the world around you, and try to make it a tiny bit better today. If you do that, when you go to bed you'll get a good night's sleep.

Rule No. 2: Repeat Rule No. 1 the next day.


Jack Bogle's Five Rules of Investing

In times that try investors' souls, it's best not to let your emotions overwhelm your reason. Just as in bull markets we tend to think that stocks will keep on rising, so in bear markets we tend to think stocks will keep on falling. Neither, of course, can possibly be true. Never forget that "this, too, will pass away."

Whether times are good or bad, here are five proven principles that investors should follow:

1. Balance opportunity and risk. Allocate your assets between stocks and bonds consistent with your wealth, your tolerance for risk, and your age. (Your percentage allocation to bonds should equal your age.)

2. Diversify. Diversify. Diversify. Owning a very large number of individual stocks and bonds has always been a good idea. But in today's environment of financial failures, global competition and technological innovation, maximum diversification is essential. (Hint: owning a total stock-market index fund and a total bond-market index fund is a sound strategy.)

3. Focus on the long term. That is, be an investor who owns businesses, not a speculator who bets on stocks. In the short run, as Benjamin Graham has pointed out, the stock market is a voting machine, but in the long run it is a weighing machine.

4. Minimize the costs of investing. The beauty of indexing is not only that the diversification it offers is priceless, but that it is price-less. The management fees and expenses, sales loads, and hidden portfolio transaction costs of the typical actively managed mutual fund come to about 2 percent per year. Over, say, a 50-year investment lifetime, these costs will consume about 75 percent of your capital. The miracle of compounding returns can be overwhelmed by the tyranny of compounding costs.

5. Stay the course. The temptations to get out of the market (usually when it's gone way down) and to pile in (usually when it's setting new highs) are overwhelming, and clearly counterproductive. Do your best to follow these proven principles through the inevitable swings in the economy and in our financial markets, and do your best not to peek at your portfolio. When you build it over your career, and see what it's worth when it comes time to draw down some of it when you retire, you'll be amazed at how much wealth you've accumulated.


 

To see a slide show of Jack Bogle, and to read more of the series, go to http://go.philly.com/defining_lives


Contact staff writer Art Carey at 610-696-3249 or acarey@phillynews.com.

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