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Jack Bogle envisions 'chaos, catastrophe' in markets if everyone were to index

·Senior Markets Editor

The godfather of index investing knows there is a limit to the strategy’s usefulness.

“If everybody indexed, the only word you could use is chaos, catastrophe,” said Jack Bogle, founder of Vanguard, at the Berkshire Hathaway annual meeting on Saturday.

“There would be no trading,” Bogle told Yahoo Finance editor-in-chief Andy Serwer. “There would be no way to turn a stream of income into a pile of capital or a pile of capital into a stream of income.

“Now, what are the chances of everybody indexing? It’s zero.”

Currently, Bogle notes, about one-quarter of the U.S. stock market is currently indexed. In his view, indexing could account for 50% of the market “easily.”

“We have too much trading in the market,” Bogle said. “The index really just neutralizes x-percent of the market… And it just, those stocks don’t get traded. So the other stocks would get traded, the market would go on as ever.

“So [the market] gets a little less efficient, but if it gets less efficient some managers can win by more. And some managers will lose by more. This is the equation. So, I’m not concerned about it. It’s going to take a long, long time [for indexing to get] anywhere near 50% [of the market], and things will change a lot in other ways by then.

Vanguard founder Jack Bogle.
Vanguard founder Jack Bogle.

At the outset of the Berkshire Hathaway meeting, CEO Warren Buffett took a moment to specifically note Bogle’s presence at the event and laud the “hundreds of billions” Buffett estimates Vanguard’s low-cost index fund products will save investors over the years.

In his latest annual letter to Berkshire shareholders, Buffett wrote that Bogle is a “hero” to investors. “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle,” Buffett wrote.

“In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”

Asked by Serwer what level of indexing would concern him, Bogle said he expects indexing could exceed 75% of the market and not have it become dangerous. “But dangerous in what sense?” Bogle asked.

“Markets are going to be efficient as long as there are managers, or investors, trying to find little holes in the system… price discovery, as they call it,” Bogle said.

“And not to be too negative about it, but it’s certainly not going to happen during my lifetime.”

Bogle turns 88 on Monday.

Follow our Yahoo Finance’s coverage of Berkshire Hathaway’s annual meeting at Finance.Yahoo.com/BRKLiveStream.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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