Hi RIP friends, a quick one today.
Few days ago, on January 16th 2019, John Clifton “Jack” Bogle died at age 89.
John Bogle was the founder of Vanguard, the largest mutual funds and ETFs company in the world, and he was considered the father of index investing.
Vanguard, and (passive) index investing, brought cheap, accessible, diversified and (so far) profitable investments to the masses. Bogle did all of this without making Vanguard a money milking machine. He didn’t become a billionaire on fees and funds management. He didn’t start yet another 2/20 investing firm. He didn’t become billionaire at all. His net worth at the time of death is estimated to be around 80 Million Dollars, or 0.057% of another J.B.‘s net worth, a much more greedy J.B. who sells headbands with mullet hair attached on the internet.
Vanguard funds are mostly passively managed and their fees are in the range of 0.04-0.10%, i.e. they cost nothing and guarantee broad market performance, which is all we regular people need.
Vanguard societal structure is also special: it’s a kind of “cooperative” where funds’ shareholders are also Vanguard’s shareholders. Take a look at this evergreen J.L. Collins post in his stock series “What if Vanguard gets Nuked?”
Anyway, RIP John, you disrupted the finance industry and showed to 95% of active traders that they are essentially useless in the best case.
For those of you who have access to Financial Times, please go read this amazing article named Passive Attack. Btw, if you’re a Hooli colleague maybe you didn’t know we all can get a free Financial Times account, search for it internally 😉
The article tells the history of index funds, and the role of Bogle as mutual funds evangelist, along with other important figures in the rise of index investing.
Did you know it wasn’t Bogle who invented index investing but John McQuown?
Did you know that Bogle firmly rejected the ETF idea presented to him by a former submariner called Nate Most in early 1992? In 2016 he wrote this article on FT as “lesson learned“.
We all can’t thank enough for what John Bogle did. It would be much harder and more expensive to be able to invest effectively in the stock market today without index funds and ETFs.
But we can only see the past, and extrapolate from it, which is a practice Ray Dalio says it signals the end of a growth cycle.
There are warning signs everywhere about the dangers of index investing.
I’ve said my opinions in a not-so-recent post on the risks of an index investing economy. I was mostly concerned about “who drive the prices?”, i.e. if the majority of trades are made by bots according to simple predictable rules, in a second order chaotic system, what will happen? I don’t have the answer, of course, but I can’t be 100% optimistic like 99% of the FIRE community.
Since then, I stumbled upon other skeptical positions by more authoritative sources like… John Bogle himself! The original article appeared on The Wall Street Journal on November 29th 2018, less than 2 months before his death. Sadly I don’t have access to WSJ. Here’s an article on Time Magazine (I know, not exactly the same authority on financial topics) that reports more or less what Bogle said on the risks of Index Investing:
if current trends continue, index funds will soon own half of all U.S. stocks. He thinks that could lead to a dangerous vacuum in corporate governance – with nobody to effectively police the corporate executives who run America’s largest companies.
A handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation.
Bogle’s word sounds like a scary testament of a dying man. I raised my concern in terms of real freedom of a free market, Bogle raised a much more problematic concern: control.
Bogle’s fanbase (the bogleheads) is also concerned. Here’s the thread on boogleheads forum discussing Bogle’s WSJ article.
Other concerns on index investing:
- diversification: raised by WSJ, commented on hacker news and bogleheads forum
- Anti-competitions (original paper here)
So yes, I’m scared a bit about index funds. I perceive the long term risks, and we’re here for the long term, aren’t we?
Anyway, there are also authoritative (and not in conflict of interests) voices who speak about the sustainability of the system, or at least about not being in danger right now (which doesn’t sound good enough, does it?). If you have access to FT, go read the entire series names “Age of the ETF“.
That’s all for today!
P.S. on Reddit, you can find the entire Bogle’s WSJ article 😉
The Father of Index Funds Sounds a Warning on Index Funds from financialindependence
Thank you for the always wise thinking, and not following the sheep!
You’re welcome bro 🙂
This man changed my life. Index funds are a blessing!!!
I share your doubts about ETFs being the holy grail of investments and retirement planing. I see the stock market as a whole somehow as one entity. Yes, I know I own a tiny pieace form thousands of companies, still, when the market’s are down, they are down. But nobody knows how long the next global recession will be. The world is all connected and most of investors act like one group. It makes sense for me not to blindly trust in ETFs and diversify with RE, side hustles and skills.
My best insurance is that we’re minimalists, we have no problems living in rural Eastern Europe. We have no problems growing our own vegetables. Reducing our expences to 3-500€ a month would be pretty painless for us. In fact, it’d be a really fun challenge.
If the shit hits the fan and you’ll become millionaire in…forints rather then USD, you’re welcome to move over here 🙂
haha ok, prepare my mattress then 😀
Wow, Mr.W you are so right! “My best insurance is that we’re minimalists, we have no problems living in rural Eastern Europe. We have no problems growing our own vegetables. Reducing our expenses to 3-500€ a month would be pretty painless for us. In fact, it’d be a really fun challenge.”
I read you blog! And I tested it for many years in Romania, 500 euros/month for a family. No challenge, is doable. It is about the state of the mind, the stoicism in this “american” consumerist society. [And the power of FU money if i want to rise my cost to 2500 eur/moth for the next 30 years with-out working a day in my life]. But I am not in a rush to destroy this planet buying useless stuff just to show-off 🙂
The best antidote to lifestyle inflation is to NEVER come to Switzerland
About real expectations of [passive] investments return, may I quote Jacob, the USA poster-boy of extreme FIRE?
“I think the point of diminishing returns was reached some time ago in terms of competition as a viable strategy to a better life. It is much more efficient to learn to live well,on less, than to waste time and energy competing for more.”
Yeah, that was in 2010, right after the 2008-2009 crisis. He was wrong ~300%.
Not bad 😀
I like the point you are raising here and not many people takes into account.
I heard about the global risks of Index and ETF investing on the “Invested” Podcast a while ago for the first time. As more and more people are massively following this strategy, there will be a time when panick will overtake people’s emotion a trigger the sell button all at once. This could potentially make the biggest drop in the stock market in the shortest time that history has never seen, leaving wonderful business at a high retail price, as index and ETF selling will affect every company in the same level regardless their valuations.
My bet is more on the “genererational Ponzi scheme” failure.
Once the world population stops growing and there will be more retirees (selling) than accumulators (buying) the automation will crack