Jack Bogle, Father of Index Investing
On January 16, 2019, John (Jack) Bogle, one of the legends in the investing world, passed away. Bogle was one of the most influential investors of the past half-century. He has influenced and impacted millions of investors, has saved investors billions (directly and indirectly) and has a legion of followers who call themselves Boglehead.
Index Funds & ETFs
Although I currently don’t hold mutual funds or ETFs (other than money market), it is something I’ve held in the past and will hold in the future. It’s a great investment vehicle, especially index funds, that offers broad diversification, exposure to various indices and low fees, thanks to Bogle. Index investing is one of the best investing methods for new investors or investors who prefer a hands-off approach. The average annual return for the S&P 500 since inception in 1928 through 2016 is 9.8%% (source CNBC). A $10,000 investment would be worth over $37 million (excluding fees and taxes).
Bogle is the founder of Vanguard Group, the largest Fund company by Assets Under Management (AUM) with over $5.1 trillion in global assets. Moreover, it has over 20 million investors, in approximately 170 countries as of January 31, 2018 (Vanguard). Vanguard is one of the lowest cost providers of mutual funds (MF) and exchange-traded funds (ETF). Thanks to the launch of the Vanguard Group and Vanguard’s S&P 500 index fund. Bogle is known as the father of index investing.
I conducted some research on Jack Bogle and outline some of the experiences that impacted his investment philosophy and how they shaped the Vanguard Group below.
Jack and his twin brother David were born on May 8, 1929, in Verona, New Jersey. The stock market crash forced his father to sell their family home. The crash wiped out the family’s small fortune and the boys had to work as soon as they were old enough to help support the family. John worked at an ice-cream parlour and delivered newspaper at the age of 10. His father developed a drinking problem and fell into depression and lost his job in the early 1940s. Jack’s parents separated shortly thereafter. This experience shaped Jack’s work ethic and his views on fiscal conservatism.
Jack went to Blair Academy, a private all-boys prep high school. Jack’s mother couldn’t afford the fees so his uncle arranged a work scholarship. Jack also excelled in sports and school, he graduated second in his class and was voted most likely to succeed. Jack felt great gratitude for Blair Academy. He later became their largest financial contributor and chairman of its board. After graduation from Blair Academy, the family decided that only one of the three children would attend college. The family voted to allow Jack to continue with his education. David and Jack’s older brother went to work full-time to support the family. This further fueled his drive for success, restore his family name and his obligation to his family.
Jack attended Princeton University where he majored in economics. Bogle received a scholarship and worked various student jobs to make ends meet. He did not receive any financial assistance from his family.
For his thesis, Bogle wrote a paper about the mutual fund industry and the basic principals for investing. This thesis led to his innovation in Index Fund passive investing and Vanguard’s unique organizational structure.
Through Princeton’s network, Walter Morgan was contacted and urged to hire Bogle. Morgan sent two of his managers to interview Bogle. They were so impressed that they encouraged Morgan to read Bogle’s thesis and to hire him. Morgan was so impressed with the thesis he made copies for all his fifty employees.
John started working for Wellington Management Company, at the time the fourth largest MF company in the US. Jack worked various jobs within Wellington until 1955 when he became Morgan’s assistant. Bogle spent the next seven years learning all aspects of the company. He also helped with the formation of several new funds including an all-stock fund.
Bogle became Wellington’s executive vice president and was charged with increasing the company’s revenue. Bogle thought the best way to grow revenue was to merge with another investment company. This led to the merger with Boston’s Thorndike, Doran, Paine and Lewis who managed the best performing fund at the time. Contrasting management style, investment philosophy and Bogle’s heart condition created conflict between him and the Boston group. Poor financial performance and the contraction in the stock market in 1973 caused Wellington’s AUM to drop from $2.6 million to $1.9 million in one year. The drop in AUM and poor financial performance negatively affected Wellington’s stock price. The stock dropped from $40 per share at the time of the merger to $8 per share which led to Bogle’s firing.
Furthermore, Wellington, like most MF companies at the time, was structured as two companies. The MF investing or investment management business and the management company. Traditionally the fund part of business reported into the management company (operations, sales and marketing). Upon being fired from Wellington Management, Bogle engaged the board of directors of Wellington funds. He was able to stay on as President of Wellington funds and investigated opportunities for new funds. Bogle then encouraged the fund company to assume responsibility for its own administrative function to allow the management company to serve as Investment Advisor and principal underwriter.
Bogle formed Vanguard Group to provide the administrative service for Wellington funds. Bogle’s commitment to the investor and focus on cost was the reason for how he structured Vanguard. To this day Vanguard is the only ‘mutual’ MF company in the world. This revolutionary and innovative structure distributes profits back to the fund and keeps management costs extremely low. All other MF companies distribute profits back to the management company and its shareholders.
Vanguard decided to bypass its normal distribution channel and distribute directly to the end investor. This change allowed Vanguard to remove sales commissions which drastically reduced management fees further. Today, Vanguard’s focus on cost reduction and size have allowed it to reduce average management expense to 0.30% while the industry average is 1.10%.
Also, Vanguard allowed Bogle to make innovations in the type of funds available to investors. The most notable innovations were the bond fund, the creation of the money market fund and the introduction of the stock market index fund. The index fund, introduced in 1976 mirrored the movement of the Standard and Poor’s 500 Stock Index, became Bogle’s prized innovation. This innovation and Vanguard’s mutual structure put pressure on other mutual fund companies and active managers. Bogle’s research proved that over 92% of fund managers lagged the S&P 500 index after cost.
Although Vanguard’s S&P 500 Index fund is now the largest MF by AUM in the world, it wasn’t always the case. When Vanguard launched its Index fund he was met with ridicule and disdain from the industry. It wasn’t until the start of the bull market in 1983 that flows increased and a new trend in passive investing began.
The success of Vanguard has made Bogle wealthy, but money was never his primary motivation. Bogle’s mission was to lower the cost of investing while continuously raising standards. He believed that Vanguard would succeed only if its investor succeeded. Bogle’s net worth is in the low double-digit millions, had Bogle structured Vanguard as a traditional shareholder model and initiated an Initial Public Offering, he would be worth tens of billions of dollars today.
After years of hard work, multiple setbacks (health and career) and early ridicule, Bogle is finally receiving the admiration he deserves. Warren Buffet wrote a letter to Bogle thanking him for his contributions. “Bogle probably (has) done more for the average investor than anyone.”
Have you been impacted by Jack Bogle’s contributions?