At the recent Morningstar Investment Conference in Chicago, John Bogle, founder of Vanguard, gave his take on the financial crisis: He didn't blame capitalism, but he did put the blame squarely on the shoulders of capitalists themselves.
"I think capitalists have basically failed us," Bogle said during an interview on stage with Morningstar Managing Director Don Phillips last week.
Bank directors and executives basically pressured each other "to get on the bandwagon" without giving enough thought to what they were doing, Bogle commented. "In the past, there were just some things you didn't do. Now there are no ethical standards. It's as if 'Everyone's doing it so I can do it too,'" he added.
Corporate stewards have become "imperial chief executives" who issue themselves enormous options and grant themselves total compensation that is way out of hand, he continued. "They are robbing the shareholders" while insiders are favored, Bogle added.
Although some people blame the government for the current debacle, Bogle doesn't. "You're blaming the government for allowing you to do what you should have had enough brains not to do in the first place," he says.
He went on to offer a familiar criticism he has leveled at the financial services sector: that it sucks far more out of consumers in fees and commissions than it deserves for the liquidity that it provides. He said stock market turnover last year was 320%; that compares to 25% to 30% in his first year in business 58 years ago.
But he believes people are beginning to figure out that they're being overcharged because more money is going to firms with lower costs (like Vanguard).
And the financial meltdown hasn't changed his thinking that indexing does a better job than most active managers. "I have never felt more confident in my beliefs, in my strategies, than at this very minute," he told Phillips.
He then ran through the mistakes that investors made AGAIN in 2008. No. 1 was buying actively managed funds. Although there are some good ones, he admitted, investors in such funds need to be prepared to lose to the market in at least one year out of every three.
Another Bogle key point: We don't know what the future holds. All of the quantitative analysis doesn't advance our understanding of what returns will be; it's the sources of returns that matter, he maintains. "We give more credence to past returns than they ever remotely deserve ... and if you agree with me, there goes Monte Carlo because it's based on past returns."