John Bogle, who died yesterday aged 89, made himself the Caesar of our markets through his Vanguard index funds, which seek to track the market at the lowest possible cost to investors. Let the eulogy begin:
Friends, Americans, investors. I come to bury Bogle, not to praise him. The evil that men do lives after them; the good is oft interred with their bones; so let it be with Bogle.
Jack Bogle created the index fund, teaching that most people aren’t going to beat the market, and that if a fund merely reflects that market, ordinary investors can enjoy its fruits at very low cost.
In this, he was right … as right as right can be. If you put just $100 into the Vanguard 500 Index Fund (NYSEARCA:VFINX) when it was launched in 1976, about the time I graduated from college, you would have $733,400. If you just put $100 away every year, in that single fund, you’d be rich.
The Zombie Market
But even Bogle knew you can have too much of a good thing. Index funds are passive owners of stocks, taking the bad with the good, believing everything will even out.
Just last year Bogle warned, however, that passive funds could create problems for investors and the national interest specifically because of this passivity. Vanguard, Blackrock and State Street, the largest index fund sponsors, control 81% of all index funds, and index funds in turn own 17.2% of all U.S.-listed securities.
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) vice chairman Charlie Munger explained it this way in 2015. Index funds are permanent owners who never sell, he said, and usually vote management’s interests. Vanguard’s decisions in 2013 to vote against re-electing directors at Hewlett-Packard and Occidental Petroleum (NYSE:OXY) were notable for being unusual. They were not part of a trend.
When index funds own the market, figuring that good and bad management will even out, you create a zombie market, one that can no longer punish bad actions or control runaway boards. Corporate democracy is already under threat from two-tier ownership structures like those of Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Under Armour (NYSE:UAA), which guarantee the founders and their heirs control of the company through unequal voting weight, even if they sell out a majority stake, die or run off to some Caribbean island.
Index funds transform corporations from quasi-democracies into kingdoms.
What Hope Do We Have?
Bogle remains right. Most investors don’t have both the time and inclination to follow the stock market the way reporters or financial analysts do. For most investors, getting money into the market regularly, and at the lowest possible cost, is the right strategy.
The responsibility of index fund managers in overseeing corporate governance has thus become a subject of wide-ranging debate among market insiders. Vanguard will usually vote to re-elect directors if most are outsiders, but just how “outside” are “outside directors?” We usually don’t find out until there’s a scandal, and their faces are thrown up on TV like a criminal line-up.
If funds spend time and money policing boards, they’re no longer passive, and their fees must rise. If they don’t, corporate malfeasance runs rampant.
The Bottom Line
The story of my life is that regular investing is the way to wealth, just as Bogle says.
But that doesn’t mean investors should be as passive as the managers of their funds. My view is that once you have a nest egg you should be aggressive, placing bets on the leading edge of technology, which today means cloud applications and biotech. As you age, you should pull back, choosing big stocks that can afford dividends and bonds for income.
Jack Bogle’s great achievement was to overturn the conventional wisdom of his day, but his legacy was to create a new conventional wisdom, and as he said so often, “conventional wisdom is usually wrong.”
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in VTI, the Vanguard Total Stock Market fund, and VWIGX, the Vanguard International Growth Fund.
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