A New Hope: Jack Bogle And Vanguard
Hello dear,
Whew… Last week’s letter courted quite a bit of controversy eh?
Of course, most negative comments came from financial advisors.
Let me be clear, I never said all financial advisors are bad.
I simply said:
- The good ones are very, veeeeery hard to find. I don’t think anyone would disagree there.
- If you want an advisor, I recommended seeking a fiduciary. I don’t think anyone would disagree there.
- Unless you have several assets, you don’t need an advisor. I don’t think anyone would disagree there (unless they’re an advisor).
“Is this your opinion?”
Fair question.
Rest assured, none of this is my opinion.
The man who shed light on all this is the subject of today’s letter.
So get ready, and allow me to introduce you to the man, the myth, the legend *drum rolls*…
Jack Bogle!
Here’s what some of my favorite people have to say about John C. (Jack) Bogle:
“[Jack] Bogle has done so much in his long career for the individual investor and for business ethics as a whole that he is up for a presidential medal of freedom. I’d say he is a good candidate.” — Mr. Money Mustache
“He is a financial saint and a personal hero.[…] If you aspire to be wealthy and financially independent, he should be yours as well.” — JL Collins
“If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle.” — Warren Buffett
Wow… Who is this mysterious man? Why is he so admired by very smart financial people and legions of fans alike?
To get an idea, let’s go way back in time.
From the beginning of time to early 1975
These were scary times.
The world was filled with financial advisors who’d gladly take your money and try to beat the stock market.
However, as you already know, most of them failed. In fact, most of their returns were lower than the market!
Not only that, they would still get rich! Since they’d charge you many, many fees.
Alas, there was nothing else you could do.
Until…
May 1st, 1975 — Vanguard
On this beautiful day, a 46-year-old Jack Bogle launched The Vanguard Group.
“Why?”
You can watch the man telling you why, in this delightful little video.
Since then, the financial world has never been the same.
What made Vanguard so special? The most important thing you need to know is this: Vanguard is a mutual company.
This means that although it’s private, it doesn’t have a small group of “owners.” Every customer is a shareholder.
This is great news for you!
Since they don’t have a small group of shareholders, Vanguard doesn’t have to charge giant fees to repay anyone.
This is why their costs are so low (their average expense ratio is 0.18%(!!). The industry average is 1%).
They only charge the minimum needed to keep the business going.
“We live and breathe the fact that we’re client-owned, that we’re built for the long-term, and that we serve only one constituency, our clients, who are also our owners. That’s all Jack Bogle.” — F. William McNabb (Vanguard CEO)
“Why has no one beat their prices?”
Because most people are greedy.
If you start a company, you’ll want to own most of the shares.
Why? Because if the company ends up being worth a lot of money, you’ll be worth a lot of money (e.g.: Facebook is worth around $435Billion which is why it’s largest shareholder, Mark Zuckerberg, is worth around $63Billion).
Got it? Most people who start companies want to own as many shares as possible so they can (hopefully) be rich someday.
However, Jack Bogle doesn’t care about being ultra-rich. He wants the customers to be rich. That’s you and I.
“While Vanguard is his baby, he has never had an ownership stake in it aside from the shares he holds in its mutual funds. Vanguard fund shareholders own the place collectively because he planned it that way.” — New York Times
In fact look at it this way; Vanguard manages about $4Trillion(!!).
Can you guess Jack Bogle’s net worth?
“Low double-digit millions” according to him. $80Million according to some internet sources.
Of course, that’s still a lot of money. But, nowhere near as much as his peers… Not even close (just to give you a comparison, Edward Johnson III, son of the founder of Fidelity, is worth $8.3BILLION).
This means Jack is really putting his customers first. Even ahead of himself.
“The only way anyone can really compete with us on costs is to adopt a mutual ownership structure. I’ve been waiting all these years for someone to do it, but no one has.” — Jack Bogle
December 31st, 1975 — First Index Fund
Remember all those investors trying to beat the market?
Yeah, the vast majority couldn’t do it (not even nowadays).
So, what was Jack Bogle’s idea? Easy. Don’t try to beat the market, buy the market!
That’s when he launched the world’s first Index Fund (which you can still buy today).
“The creation of the first index fund by John Bogle was the equivalent of the invention of the wheel and the alphabet.” — Dr. Paul Samuelson of M.I.T.
What is an Index Fund? It’s a type of Mutual Fund (basically a place where a lot of people put their money so it can be invested).
Sidenote: I know I know, I tried to remove the words “Mutual Fund” from your mind last week, forever. And I stand by it, most of them suck. Except when it comes to Index Funds.
The main difference is:
- Most Mutual Funds will get your money and use it to “place bets” in the stock market. This is called Active Investing. Most of them fail.
- Index Funds will buy every stock in an index at once (so you don’t have to). After that, the best thing for you to do is invest in the fund, sit back, and let your money grow for 30+ years. This is called Passive Investing.
Passive Investing is how you become rich.
For example, let’s say you want to invest in every company in the US (all 3,591 of them). Instead of buying every single stock (and worrying about tracking), you can simply invest in this Index Fund, and let Vanguard do all the tracking for you (they only charge 0.04%).
Basically, Index Funds allow you to own MANY companies… Using only one fund.
This is how you win.
You don’t try to beat the market. You OWN the market.
Don’t try to pick which company will be big 10 years from now. Just buy them all!
“My advice … could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)” — Warren Buffett
Sidenote: I really hope this was easy to understand. I try my best to turn financial lingo into easy-to-understand lingo. If you don’t quite get it after a few re-reads, you can always e-mail me. Or better yet, give Vanguard a call and ask them for advice.
We’ll get into more details about which funds and why in a future letter.
What If You Can’t Invest In Vanguard?
I hate this question because every situation is different. It makes me sad I don’t have an answer for every single person.
I’m sorry.
… But let me try.
If you’re outside of the US. The best I can do is say Vanguard is growing very fast. Here’s the list of Vanguard options for people around the world.
If Vanguard is not an option, I’d look for similar low-cost funds in your country (a Google search like “[country] index fund” is a good start).
Besides, in some countries (like in the UK and Australia) they have a fiduciary standard. So my guess is you can simply find a financial advisor and ask her all your questions.
However, once Vanguard became available in your country, I’d switch to them.
I hope this helps in any way.
And that’s it for today!
Today, we learned the history of one of the greatest humans alive. He and the company he founded are the main reason there’s hope for people like you and I to one day become rich.
I’ll end with Jack’s favorite quote:
“Stay the course.” — Jack Bogle
See you next week (follow the series here to be notified).
Be well.
R
P.S.: If you can’t get enough of the man, here’s a great long interview.
Since I write about finance, legal jargon is obligatory (because the guys in suits made me). Before following any of my advice, read this disclaimer.
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