e was a thorn in the side of anyone who managed money—or, like me, made a living tracking money managers. He was dogmatic and rigid. He was a sanctimonious scold. But he was right.
John C. Bogle, the titan of low-cost investing, died today at the age of 89. He leaves behind the $4.9 trillion Vanguard empire, a collection of devoted acolytes who go by the name Bogleheads and millions of investors whose retirements will be fatter because Bogle spread his gospel.
It took a lot of sermonizing before this message sank in. Bogle founded the Vanguard Group in 1975 and used it in 1976 to create the first retail index fund. The fund bought every stock in the S&P 500 index and set about delivering the market’s average return. The product was, at first, a sales flop. Who wanted guaranteed mediocrity?
But if you hire a money manager to beat the market you have to pay—and you pay whether or not the manager succeeds. You might get lucky for a year or five or ten. Eventually, though, your luck will run out. With each passing year it becomes more likely that you will be overtaken by the law of averages.
Decades into Bogle’s experiment, Wall Street recognized that he was onto something. Recent years have seen a flood of money out of costly active management into cheap indexing. Just one of Vanguard’s products, its Total Stock Market Fund, has $672 billion in it. Its fee is one twenty-fifth that of the typical active fund.
For most of the past half century, academics have been debating the “Efficient Market Hypothesis.” In its most extreme form EMH says that you might as well pick stocks with a dartboard because they are rationally priced. Wall Streeters respond by pointing out what they describe as pockets of inefficiency.
He leaves behind the $4.9 trillion Vanguard empire, a collection of devoted acolytes who go by the name Bogleheads and millions of investors whose retirements will be fatter from Bogle’s gospel.
Bogle, cleverly, did an end-run around the debate. You don’t have to believe in the efficient market hypothesis to see things his way, he said. All you have to believe in is what he called the CMH: the Cost Matters Hypothesis. It costs money to try to beat the market. When a group of people do that, some will win, some will lose, but collectively they will get the market’s return—before fees. After fees, they will get much less.
How much do investors save by signing up for the CMH? Bogle once calculated that active stock investors lose close to 3% a year in fees, trading costs and taxes. I think he overstated the case. Maybe the number is half that. But it’s not just Vanguard’s 20 million customers who benefit. Other firms have been forced to match Vanguard’s prices. Desperate to compete, Fidelity recently introduced index funds with no fee at all.
How much, then? I think Jack Bogle’s religion is saving investors something like $100 billion a year.
For this windfall, the investing public can thank the fact that Bogle was fired from his first big job.
He had risen to the top of a publicly traded fund management company that ran the Wellington Fund, a conservative blend of stocks and bonds. He made a big mistake. Chasing after performance, he merged the management company with the operator of a fund buying speculative stocks. When the hot stocks went cold in the 1973-74 crash, the directors of Wellington Management Co. voted to throw him out.
At 44, with six children to feed, Bogle was not just out of a job but sick. His weak heart had begun to send him on what was to be a string of a dozen trips to the hospital. A doctor had told him he had only a few years left. He did not take the doctor’s advice to retire to the seaside.
Instead, he came up with a scheme to carve a new fund management company out of Wellington. The new entity was to be called Vanguard. It would be mutually owned, like the savings banks of yore. It would handle Wellington’s back office work—processing deposits and withdrawals. Wellington would have the more glamorous job of managing the portfolios.
But if the people running Wellington thought they had the better end of the bargain they soon discovered otherwise. The legal structure gave Vanguard the whip hand, since, under the terms of the Investment Company Act, Vanguard’s board could hire and fire the portfolio managers. Bogle used that power to haggle down the portfolio managers’ fees. Then he undercut them with his index fund, which didn’t need an outside manager.
Forbes was skeptical of the arrangement. In May 1975, the magazine dismissed the split-up of Wellington in a story headlined “A Plague on Both Houses.”
And so began a long-lasting love-hate relationship. Bogle declared that the story was misguided—but he didn’t break off communication. On the contrary. He kept up a stream of correspondence calling attention to our failings.
At 44, with six children to feed, a doctor had told Bogle he had only a few years left. He did not take the doctor’s advice to retire to the seaside.
I got one of his letters in 1985 in which he calculated how a reader would have fared following our annually updated Mutual Fund Honor Roll. I thought his calculation was entirely unfair in assuming that investors would dump their holdings every year and pay sales loads all over again. He might have been wrong about the details, but he was right about the big point: It’s very hard for any list of top-performing funds to beat out indexing over a long stretch of time.
His heart failing, Bogle left the job running Vanguard in 1996 and started a long wait in a Philadelphia hospital for a transplant. He got one 23 years ago and resumed his energetic hectoring of Wall Street. For-profit mutual fund distributors—that would be just about every firm other than Vanguard—shouldn’t exist, in his view. They couldn’t honestly serve two masters, their owners and their fund investors.
In 2010, 35 years after Forbes’s article on Vanguard’s creation, I published what I called a belated retraction. About the evangelist for indexing, I said: “I think he has done more good for investors than any other financier of the past century.”
For that I got a hand-written note scolding me. I had failed to properly cite the Cost Matters Hypothesis.
Bogle was a Johnny One-Note. That’s what made him a great man.
Originally published at Forbes