On the Investment Philosophy of the Late, Great John C. Bogle

Anyone who has invested in the stock market in the past 43 years owes a debt of gratitude to John C. Bogle, the recently departed founder of The Vanguard Group.

Without him, retail investors might very well still be paying hundreds of dollars in commissions to buy individual stocks. Professional fund management would most likely be out of reach for all but the wealthiest investors.

As it is, fintech startups like Robinhood and Vanguard competitors like Fidelity have been forced to lead the industry even further down the road toward zero fee management. That's because Vanguard now has $5 trillion of assets under management (AUM), which puts a lot of pressure on their fund industry counterparts to reduce fees in an attempt to retain (and try to increase) their own AUM.

How did Bogle start an asset management revolution?

As a professor and long-time academic myself, I am very proud to relate that Bogle's empire was founded upon a well-researched and distinguised undergraduate research paper. Yes, students, those assignments we give you that you think we don't even read can indeed lead to big opportunities!

Back in 1951, pretty much at the dawn of the mutual fund industry, Bogle's basic premise was that, in the long run, active investment managers do not beat the benchmark that they are given by which to measure their investing success. He reasoned that investors would therefore be better off investing in a broad basket of stocks that replicated the returns of the stock market overall.

He was right. Today, the exact number is certainly debated, but most people agree that between 80% and 98% of active fund managers fail to beat the market rate of return over the long term.

What's amazing is how he intuited that truth as a 21-year-old in an age without Big Data and massive computer processing power. Today, it's easy to pull up some returns data on a Bloomberg terminal and quickly build an investment thesis backed by all sorts of fancy graphs and pie charts. But to do that in the environment of 67 years ago is absolutely incredible.

And it got him a job at the up-and-coming (and still going strong) Wellington Fund upon his graduation.

What does Bogle's philosophy mean to today's investors?

As I tell my students when I talk about Mr. Bogle, the most important takeaway IMHO from Bogle's career is encapsulated in the following quote:

The most fundamental decision of investing is asset allocation.
How much should you own in stock?
How much should you own in bonds?
How much should you own in cash reserves? . . .
That decision [has been shown to account] for an astonishing 94% of the differences in total returns achieved by institutionally managed pension funds. . . .
There is no reason to believe that the same relationship does not also hold true for individual investors.

Ninety-four percent.

All based on just one simple investment decision.

So keep it simple.

And maybe you too one day can manage FIVE TRILLION DOLLARS.

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