Just as Warren Buffett is the walking embodiment of value investing, John Bogle is index-investing incarnate. Founder and former CEO of the Vanguard Group, Bogle has spent decades preaching the virtues of the low-cost index funds he helped pioneer nearly 40 years ago.
Alas, the last half of Bogle's 60-year career has been marked by the rise of casino finance and a Masters of the Universe ethos that has infected the once-staid world of asset management. Bogle's new book, The Clash of the Cultures, laments the crowding out of investing by speculation, a development that has enriched fund managers but left lots of households backfilling their 401(k)s.
Even before the crash of 2008, the asset-management industry had become (arguably) a self-serving enterprise, sucking up excessive management fees in exchange for the promise of performance that, in the long run, it is mathematically certain not to achieve. Part of Clash dwells helpfully on concept of "mean reversion," key to understanding why most attempts to "generate alpha," as the industry calls beating the market, are ultimately futile. Hint: It's roughly the same reason that the house always wins.
We spoke with Bogle recently about his new book and about investing more broadly. An edited transcript:
The rise of speculation and short-termism in asset management seems to have paralleled similar developments throughout finance. Is there a link, or am I conflating disparate ideas?
No, you're right in both cases. The asset-management business, on the mutual-fund side, is an asset-gathering business. Managers want to maximize their revenues. And that means that salesmanship takes the front seat and stewardship takes the back seat. Both are still there, as I say in the book. But we used to be a profession with elements of business, and now we're a business with elements of professionalism. I think it's a very bad change for the investor.
What in particular has changed the nature of asset management?
When you go from being a little cottage, mom-and-pop industry to being in essence the largest financial institution in America—more assets even than the banks—everything changes. Your focus changes, your objectives change—and that's really the underlying cause of this. The mutual fund is an excellent, outstanding investment idea, but the bigger it gets, the more [fund companies] start to think about the marketing front. You start thinking about your competitors instead of yourself. When market share is the goal—I call it in the book "the Great God Market Share"—you've gone in the wrong direction. So, part of it's just plain getting big.
Think of the difference between running a mutual fund—that's your profession—and all of a sudden you're running as many as 350 mutual funds. When I started in this business, this was a one-fund business, pretty much, or perhaps a two-fund business—you might have a balanced fund and a stock fund. That's all there was. Now we've subdivided components, all for marketing reasons. There's no reason to think anybody can pick the best sectors of the market in advance.
Given the ratio of fees to performance, is it too harsh to say that the asset-management business is largely a rent-seeking business?
No, that's not too strong a statement. It's exactly what we are: We're extracting rents from society at large and basically shifting them from investors to money managers, brokers, marketers, administrators, accountants. And all that is rather unnecessary. An index fund really doesn't have to do much, and, equally important, the investor doesn't have to do much. The investor who just buys and holds the index fund forever will do fine. I occasionally get letters from a handful of people who bought [the Vanguard 500 Index fund (symbol: VFINX)] at the initial offering, saying "It's unbelievable! It works!"
Since the 2008-09 crash, people have migrated from actively managed funds into index funds. But once memories fade, will investors again become vulnerable to industry pitches that active management adds value?