The death on January 16 of Jack Bogle, the founder of the investment company Vanguard Group, was met with a slew of flattering obituaries. Of course, obituaries often praise their subjects. But Bogle’s seemed more laudatory than usual. And I think there is a reason: Bogle was an unusually morally directed man.
Of course, we cannot judge his success by his personal wealth. When Bogle established Vanguard in 1975, he set it up as a nonprofit. The company has no outside shareholders; all profits are reflected in lower fees, not dividends.
By metrics other than founder wealth, the Vanguard Group is a huge success. It invests for 20 million people in 170 countries. It has $4.9 trillion in assets under management. It may be the world’s most significant investment company.
But this does not mean that we must agree with everything Bogle said, or malign others who are not nonprofit. His is not the only way to be moral.
Bogle’s morality was rooted in his conviction that trying to beat the market is futile. This was reflected in his 2007 book The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. His investment strategy is “the only way,” and the opening paragraph of the tenth-anniversary edition sums it up:
“Successful investing is all about common sense. As Warren Buffett, the Oracle of Omaha, has said, it is simple but it is not easy. Simple arithmetic suggests, and history confirms, that the winning strategy for investing in stocks is to own all of the nation’s publicly held businesses at very low cost.”
This means that one should simply invest in an index fund that represents the whole market and then call it a day. But it is a little odd to be quoting Buffett in support of such a strategy, given that the Oracle of Omaha owes his fame (and his moniker) entirely to his ability to outperform the market.
Bogle’s statement is best interpreted as applying to his audience of individual retail investors. Because the market portfolio is the average investment for all investors, the average investor can do no better than the average for the market. But the excitement of the market causes people to lose sight of that. As Bogle puts it in his book: “The stock market is a giant distraction from the business of investing.”
He is right about the distraction. People look for excitement, and the stock market is one game they can play. People will gamble anyway, if not in the stock market, then in a casino. On the other hand, it is no doubt better overall if people learn lessons about business and real economic activity, rather than card-counting tricks. There may be rough rides for some, but the hurly burly of the stock market is also a sign of a vibrant economy.
Advising people simply to hold the market is advising them to free-ride on the wisdom of others who do not follow such a strategy. If everyone followed Bogle’s advice, market prices would turn into nonsense and would provide no direction to economic activity.