John Bogle Analyzes Financial Crisis

Vanguard Group founder talks about how indexing is weathering the storm.


At a time when the American public is still fuming over outsize bonuses paid to some of the Wall Street executives who were at the epicenter of the global financial crisis, John Bogle, founder of $1 trillion-in-assets Vanguard Group, has written a book aptly titled Enough: True Measures of Money, Business and Life. The inventor of the first index mutual fund, the Vanguard 500 Index Fund, contemplates the financial trauma that has been battering markets and draining portfolios in recent months and then poses the question to readers: What is enough money? Bogle, 80 as of May 8, remains energetic and passionate. He sat down with Institutional Investor Staff Writer Julie Segal at Vanguard’s headquarters in Valley Forge, Pennsylvania, to talk about the forces that led to the worst financial mess since the Great Depression and, of course, how indexing is weathering the storm.

1 How did this happen?

Too much credit around the globe, an unbelievable relaxation of credit standards, people buying junk and then putting that junk on their balance sheets. They should have known it but apparently didn’t. A big factor was the dominance of speculation in our financial system over investment. If you’re a speculator, you’re betting on price, and if you’re an investor, you’re relying on intrinsic value of corporations to produce earnings on their capital over time. We forgot that. And with all this financial engineering that comes with a speculative market, people are able to make their earnings do whatever they want. You’d be amazed at how much easier it is to raise the price of your stock than to raise the intrinsic value of your corporation. Put all those things together, and you have a system with an awful lot of phantom wealth.

2 Will the government’s fixes work?

The economic stimulus package will help restore some growth to the economy, but the cost is staggering and there will be a lot of misfires. When you’re spending a couple trillion dollars that quickly, you’ll have to put up with inevitable waste. The Obama administration is doing about the right thing by focusing on health care, the stimulus package, extended unemployment benefits.

3 How has Vanguard navigated the crisis?


We’re structurally correct: We’re not owned by Citi, AIG or BofA. We’re owned by shareholders and we operate at very low cost, and that gives us a focus. Last year $233 billion was withdrawn from equity funds, of which $41 billion went into Vanguard. If you’re plus 41 and the rest are minus 233, you must be doing something right.

4 Has the index model held up through this crisis?

Our business is built on promising to give you your fair share of whatever the bond and stock markets are kind enough to give us, or to inflict on you whatever amount of pain the stock and bond markets are mean enough to inflict. It all comes as a package. The index went down the same amount the market did. I’ve been telling people for years they should have a bond position that equals their age. I follow my own advice, by the way, and have maybe 76 percent in bonds. Shareholders who followed that advice aren’t complaining.

5 Where does cost give you the biggest advantage?

Money market funds and bond funds. My philosophy has always been that if you have low cost, don’t fool around with low quality. You beat your competitors not by cheating on quality but by being fair to the shareholders on cost. Every bond and money market fund has that option. If you want to be more competitive with the yields you’re providing, you have two choices: Cut fees or cut quality, and nobody cuts their fees!