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Bogle's Legacy of 'Common Sense' Investing

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A true investing icon, Vanguard founder John Bogle, passed away in early 2019 at age 89. Besides creating a fund company that grew while he was alive to serve more than 20 million investors worldwide, his pioneering work included development in 1976 of the first index mutual fund designed for mass consumption.

To IFA's Founder and President, Mark Hebner, Bogle was as an investing luminary. "John Bogle was the inspiration for starting Index Fund Advisors," he said. "After reading his first books and before starting IFA, I moved all of my personal investments to Vanguard. He's been an enormous influence on my entire career and the building of IFA."

Besides reshaping an entire industry by creating a mutual fund that passively follows the S&P 500 Index, Bogle was a prolific author. Among his dozen books were "Common Sense on Mutual Funds" and "The Little Book on Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns."

Long before fiduciary care became a popular calling card in financial services, Bogle sought to establish a legacy of helping others "get it right." As he told me in 2006: "The concept I've used throughout my career is to create a system that can best serve each individual and each situation at a time."

Bogle started the Vanguard Group in 1975 with some $1.4 billion in net assets. By the time he stepped down as chief executive and chairman in 1996, Vanguard had $180 billion in assets under management. By the time of his death in 2019, the funds complex managed nearly $5 trillion in assets.

William Bernstein, author of "The Four Pillars of Investing," once reminisced with me that "people laughed at him at first." He added that Bogle "refused to back down from his belief that individual investors would reward a company that was properly focused on their needs."

During a speech at Harvard University after he'd started Vanguard, Bogle urged business students to strive in their work to a higher calling. "When you can work well with other human beings and help human beings, it's more than just a great business strategy," he said. "It's also a great way to build a well-rounded and fulfilling life. It's something you can take home with you after work."

Bogle's career didn't follow a straight line. "Success takes a little bit of determination," Bogle related to me in an interview. "And it probably takes a little bit of some people getting mad at you. I regret that — I'd like everyone to love me."

Besides everything else, perhaps one of Bogle's most appreciated legacies to those who knew him was a never-ending sense of optimism. 

After rough market conditions in 1974, Bogle was fired as CEO of Wellington Management. The venerable fund company had been his only employer since graduating from college more than 20 years earlier.

"I had to pick myself up and form Vanguard," Bogle said. "But I don't recall being discouraged."

His friends simply called him "Jack." And, by all accounts, he had many. A prime example is how Bogle's new firm got off-the-ground. An early boost to his fledgling business came from deals to handle other managers' back-office and administrative duties. Many of those early Vanguard customers were connected in one way or another to the very company that had just pushed him out the door.

"When he worked at Wellington, Jack had arranged a merger with another company," former Vanguard Chief Investment Officer Gus Sauter explained to me years ago. "When their executives came on-board, they had strong representation on Wellington's management board. But they didn't have control of the boards set up to oversee the individual funds."

As a result, the fund executives were able to give contracts to Bogle's new firm for the back-office administration of hundreds of millions of dollars in assets.

That was just a start. Bogle also saw opportunities to reform an American marketplace in which funds were sold almost exclusively through brokers. "The thinking was that the more commissions you got paid, the more mutual funds you sold," he observed. 

Such a commission-based distribution system in Bogle's mind was "corrupting" the industry and souring many individuals on investing their hard-earned money in financial markets. "The mutual fund business isn't full of bad people," he told me. "The problem is that under the old rules, the incentive isn't always going to be for the broker-dealer to do what's best for the investor."

At Vanguard, Bogle wound up cutting the umbilical cord with brokers. "It was a very risky strategy," Sauter said. "When Vanguard told brokers they weren't going to get paid for selling its funds, they weren't too happy."

Bogle took the long view, however. While no-load funds weren't new at the time, it was still very much a niche marketplace. Few were willing like Bogle in the '70s to base an entire business on it; even fewer were able to build scale and prosper. 

While cutting out brokers and other middlemen might've provided the sauce in Bogle's investing soup, his real success came through an even bolder move -- bringing to market the first "retail" index mutual fund.

Rather than hiring high-cost managers to pick stocks, Bogle and his staff cut deals with index providers like Standard & Poor's to create funds that tracked these benchmarks. Their concept was greeted with widespread skepticism. Many in the industry publicly scoffed at it, referring to Vanguard's fund that mirrored the S&P 500 Index as "Bogle's folly."

But index investing using no-load mutual funds just made too much "common sense" to Bogle. So he persevered, and within a few years, his S&P 500 "experiment" grew to become the world's biggest mutual fund. In 1981, Dimensional Fund Advisors emerged to help pioneer even more advances in the field through the creation of mutual funds that systematically invest in factors known to drive higher expected returns. These include tilting to stocks with smaller capitalization sizes, higher market-to-book ratios (value) and greater profitability. 

Although Bogle is credited with developing the first retail index fund, it's also interesting to note that he turned down an opportunity to do the same with exchange-traded funds. Instead, State Street Global Advisors created the first ETF in 1993. But he never voiced any remorse about such a decision. 

Since ETFs are structured to be able to trade throughout the day, they're subject to arbitrage by big institutions. That was a major red flag raised by Bogle when fund developer Nathan Most approached him about cloning the Vanguard 500 Index Fund in an ETF wrapper. As he recalled in a 2015 column for the Financial Times: "The idea of using Vanguard's original index fund for frequent trading was anathema to my investment philosophy." 

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