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Why Warren Buffett's Hero Is Wrong About Today's Stock Market

Dan Caplinger, The Motley Fool

Warren Buffett has a sterling reputation as a highly successful investor, and so it carries a lot of weight when the Oracle of Omaha gives praise to his peers in the industry. One person that Buffett has expressed respect and admiration for over his years heading Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is Jack Bogle, the founder of mutual fund giant Vanguard Group.

With more than 65 years of investing experience in his own right, Bogle certainly knows plenty about the topic. Yet recently, the 88-year-old made an interesting observation, and while what Bogle said matches up well with what most investors think, it's also wrong on an objective level. Below, we'll debunk the Vanguard founder's common mistake, but first, you should know what he did to attract such praise from Buffett and many other well-known investors.

Person looking at wall of digital down arrows and stock charts.

Image source: Getty Images.

Why Buffett likes Bogle

Bogle's role in helping to bring about the index investing revolution eventually transformed the mutual fund industry, refocusing investor attention away from the search for market-crushing returns and instead toward minimizing costs to match the overall stock market's long-term performance. That simple yet groundbreaking move made Bogle a hero in Buffett's eyes.

Given that Vanguard currently manages about $4.5 trillion -- much of which is invested in index funds -- it's easy to look back and think that the emergence of those funds as powerful tools in the investing world was inevitable. Yet Bogle struggled to get things started with the Vanguard 500 Index Fund (NASDAQMUTFUND: VFINX), raising less than a tenth of the capital he had hoped to attract and having to fight off calls to close the fund early in its existence.

Buffett gives Bogle credit for sticking with it and delivering an investment vehicle that has outperformed the vast majority of actively managed mutual funds during its more than 40-year history. As the Oracle of Omaha put it in his shareholder letter to Berkshire investors in 2016, "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."

Bogle's slip

Yet even market heroes can get caught up in the moment, and Bogle recently made a statement that fed into the increasing sense of fear among many investors in light of the market's current correction. The Vanguard founder told CNBC in an interview earlier this month, "I have never seen a market this volatile to this extent in my career." Referring even to the declines in the 1987 stock market crash, the brutal bear markets of the 1970s, early 2000s, and financial crisis in 2008 and 2009, Bogle still argued that this situation was unique in his experience.

It's easy to perceive the market's volatility in this way, and many have done so. After all, the recent correction has seen the first-ever 1,000-point daily move in the Dow, and rises and falls of several hundred points have become almost commonplace. During the first few months of the year, the market saw more than two dozen days in which the S&P 500 gained or lost 1% or more, with eight 2% moves so far this year. Often, those moves come in quick succession, with big losses followed by sharp gains or vice versa.

Yet in percentage terms, we've seen much more dramatic volatility over short periods of time. During the financial crisis, for instance, the S&P 500 posted gains or losses of more than 2% on fully 50 occasions between Sept. 2 and the first day of trading in 2009. The volatility that we've seen over the past four months has been tame by comparison, and although the financial crisis was certainly an unusual event in the context of stock market history, it shows how easy it is to focus solely on losses in terms of Dow points to support claims of "record volatility" in stocks.

Don't exaggerate the volatility -- use it

To his credit, Bogle kept his long-term mindset clear in his comments. "This volatility is of interest to speculators," the Vanguard founder said, "but it is not of interest to long-term investors." Quoting Shakespeare, Bogle likened the market "noise" as being "full of sound and fury, signifying nothing" to those who want to invest and grow their portfolios for the long haul.

That's undoubtedly true, but it's hard to do when you mistakenly think that the volatility we've seen lately is particularly unusual. The calm in recent years has been the true outlier, and in order to be successful investors need to get used to both the hassle of dealing with volatile markets and the opportunities that they can bring for long-term investors.

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Dan Caplinger owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.