360° Coverage : John Bogle's Epiphany Changes The World

2 Updates
John Bogle's Epiphany Changes The World

John Bogle's Epiphany Changes The World

Feb 3 2014, 9:11am CST | by

Great disappointment often brings great change. In business, the shattering of a long-held belief can create enough clarity and vision that it leads to a great idea and benefits millions. This is...

Filed under: news

 
 
 

29 weeks ago

John Bogle's Epiphany Changes The World

Feb 3 2014, 9:11am CST | by

Great disappointment often brings great change. In business, the shattering of a long-held belief can create enough clarity and vision that it leads to a great idea and benefits millions. This is what occurred in the 1970s. One man’s epiphany has changed the investment industry forever.

John C. Bogle is the founder and former CEO of the Vanguard Group of mutual funds. In 1976, his firm introduced the first “indexed” mutual fund to track the market’s return. The Vanguard Index Trust, later renamed the Vanguard 500 Index Fund (ticker: VFINX), tracks the performance of the S&P 500 Index benchmark index.

From its humble beginnings in 1976, VFINX has become an icon of success and at one point was the largest US equity mutual fund by asset value. Other index funds and exchange-traded funds (ETFs) spawned from Bogle’s idea. Today index funds and ETFs that track indices account for roughly one-third of equity mutual fund assets.

When you look into the past of any index fund diehard, you’ll often find a sobering story of deep disappointment and financial loss from active management. This period of shock and sorry is followed by an epiphany, an Aha! moment in investing. It occurred in the early 1970s in John Bogle’s case when four active managers that Bogle trusted ending up costing him his job and almost ended his career.

Bogle was a staunch advocate for active fund management early in his career. He was a rising executive at Wellington Management Company in the 1950s and 1960s, a prominent active management firm. Bogle wasn’t a money manager at the firm; rather, he gained a reputation as a keen marketer and administrator.

In 1960, writing as John B. Armstrong in the Financial Analyst Journal, Bogle lauded the benefits of active management and shunned the idea that an unmanaged portfolio of stocks would do better. He wrote this article under the pen name John B. Armstrong because he didn’t want to create a compliance issue for Wellington.

Bogle’s article built a compelling case against passive investing both nominally and on a risk-adjusted basis. In his words, “Leading common stock funds have shown better long-term results than the Dow Jones Industrial Average.” Industry icons were impressed with “The Case for Mutual Fund Management” and awarded Bogle an Honorable Mention in the Graham and Dodd Awards that year.

Bogle rose to prominence at Wellington during the aggressive “Go-Go” years from 1965-1968 in what was labeled as a “New Era” for the stock market. This era was similar to the tech stock boom in the late 1990s that many investors vividly remember. Stocks were driven by illusion rather than fundamentals. Aggressive “performance funds” quickly came to dominate the industry’s focus and cash flows.

Wellington’s fund managers were a conservative bunch and young Bogle wanted more action. He was determined not to let Wellington miss the Go-Go gravy train and he took advantage of his increased stature at the firm to shake things up a bit. During 1966, Bogle engineered a deal that merged Wellington with the Boston investment counseling firm Thorndike, Doran, Paine and Lewis. The Boston firm was managing the hottest Go-Go fund at the time.

The merger worked out well for both firms initially as Go-Go stocks surged. The brilliant young Bogle was promoted to the apex of his career at Wellington as Chief Executive Officer (CEO). He was not yet 40 years old and a Master of the Universe, taking the phrase from Tom Wolf’s book popular about Wall Street tycoons titled The Bonfires of the Vanities. It wouldn’t last.

By the early 1970s, the Go-Go years blew out and blew over Wellington shareholders, Bogle and the four Boston partners. They developed irreconcilable differences and open hostilities began.

Unfortunately for Bogle, the merger had given the Boston group 40% of Wellington Management’s shares to Bogle’s 28%. Bogle was ousted as CEO in 1974.

The mark of a strong man is his determination to lift himself up and overcome defeat. After being kicked out of Wellington’s board room, Bogle was able to convince the company to form a new firm that handled back office operations. He also successfully lobbied to run the new entity.

The Vanguard Group was formed in 1975 with Bogle at the helm. It would direct the day-to-day administrative, financial, and legal operations for the Wellington Group of Funds. It would not be allowed to conduct research, manage mutual funds or market them as part of its agreement with Wellington.

Bogle was back in business, but this is just the beginning of the story. Great disappointments often bring about great ideas. Bogle had been gravely hurt by the actions of the four Boston-based active managers and the entire Go-Go era. That led to serious soul searching.

An avid reader, Bogle began to heed the words about unmanaged mutual funds that followed popular indexes. He read about this idea from several people he admired in the media, academia and the investment industry./>/>

John Bogle decided to look more deeply into the growing claims of sub-par active manager returns. There was far more data in 1975 then there was in 1960 when he last studied this information. Bogle calculated by hand the annual returns generated by dozens of actively-managed US equity mutual funds over the previous 30 years. He then compared the performance of each fund with the S&P 500 Index, a broad measure of mostly large US companies.

Bogle’s analysis showed the active funds underperformed the S&P 500 index on an annual pre-tax margin by 1.5 percent. He also found that this shortfall was virtually identical to the costs incurred by fund investors during that period. See The First Index Mutual Fund for Bogle’s own analysis of his study.

That’s when it happened — an epiphany — an Aha moment. A revolution in thinking that was to be the lifelong destiny of Bogle and Vanguard.  Bogle realized that others were right – active money management solved the problem of diversification for small investors, but it wasn’t able to keep up with market averages. An index fund, on the other hand, solved both problems.

Although Vanguard was not authorized to manage mutual funds, the agreement with Wellington didn’t preclude the company from running a fund based on the management of others, even if they are members of the Standard and Poor’s Index Committee.

Bogle and his tiny staff went to work creating a proposal for an index fund. They met with Wellington’s board of directors in the fall of 1975 and explained that no advice would be involved in an index fund offering, and that the fund’s underwriting and marketing would be handled by an outside syndicate of brokerage firms so that Vanguard would not be breaking its agreement with Wellington.

The board accepted Bogle’s view and a Declaration of Trust for the Vanguard First Index Investment Trust was filed with the U.S. Securities and Exchange Commission on December 31, 1975. With little fanfare and fewer assets, the official launch of the world’s first index mutual fund occurred on August 31, 1976, according to the Vanguard website.

It grew slowly at first and under close scrutiny. Bogle was ridiculed by the fund industry. But then, aided by a raging bull market that began in 1983, fund assets started an exponential climb. Word spread, and the rest is history.

Fortune interviewed Bogle again in 2007 where he summed up his epiphany, “When I was 38, I became head of Wellington Management, and I did an extremely unwise merger. I got wrapped up in the excitement of the Go-Go era, and the Go-Go era ended. As a result of that stupid decision, I got fired. The great thing about that mistake, which was shameful and inexcusable and a reflection of immaturity and confidence beyond what the facts justified, was that I learned a lot. And if I had not been fired then, there would not have been a Vanguard.”

The investing world thanks you for your mistake, Mr. Bogle.

See Blog Disclosure here.

Source: Forbes Business

 
Update
2

1 day ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slashing the w ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

2 days ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

For DINK couples, outsourcing parenthood is cool
New York, Aug 31 (IANS) For double-income-no-kid (DINK) couples, raising a child is the most difficult part. For them, creches and day-care centres in the marketplace are no less than playing the role of real parents.
 
 
Ancient metal workers were not treated as slaves
London, Aug 31 (IANS) Ancient metal workers were highly regarded for their skills and were not treated as slaves as popular narratives suggest, says a study.
 
 
Five new monkey species discovered
London, Aug 31 (IANS) Conservationists have discovered five new monkey species in South America that have, since, been added to the animal record books.
 
 
Soon batteries to run on sugar
New York, Aug 31 (IANS) In a breakthrough to develop long-lasting batteries for smartphones and other gadgets, scientists have successfully created a sugar biobattery that completely converts the chemical energy in sugar substrates into electricity.
 
 
 

Latest from the Network

Aaron Paul enjoying 'lighter' role
Aaron Paul is enjoying starring in a ''lighter'' show after 'Breaking Bad'. The 34-year-old star played meth manufacturer Jesse Pinkman in the US drama series for five years and while he is pleased to be lending his...
Read more on Celebrity Balla
 
Self-critical Ariana Grande
Ariana Grande says she's too critical of her appearance. The 21-year-old beauty insists that although she's an international pop star, she still feels the same pressure to look good as other young women and is trying...
Read more on Celebrity Balla
 
Lily Allen's husband doesn't mind marriage songs
Lily Allen says her husband is comfortable with her discussing intimate details of their personal life. The London-born singer is preparing to hit the road with material from her new album 'Sheezus' and Lily insists her...
Read more on Celebrity Balla
 
Abe glad Modi visited Kyoto
Kyoto, Aug 31 (IANS) Japan Prime Minister Shinzo Abe Sunday said he was happy his Indian counterpart Narendra Modi toured the country's ancient capital Kyoto. "I am very glad that Modi enjoyed the cultural heritage of...
Read more on Politics Balla
 
Modi leaves for Tokyo
Kyoto, Aug 31 (IANS) Indian Prime Minister Narendra Modi departed for Tokyo Sunday evening, on the second day of his five-day visit to Japan. "Goodbye Kyoto," the external affairs ministry spokesman tweeted, as Modi...
Read more on Politics Balla
 
For DINK couples, outsourcing parenthood is cool
New York, Aug 31 (IANS) For double-income-no-kid (DINK) couples, raising a child is the most difficult part. For them, creches and day-care centres in the marketplace are no less than playing the role of real parents...
Read more on Celebrity Balla
 
Philippines seeking defence ties with India after China's moves
Manila, Aug 31 (IANS) Worried over increasingly aggressive moves of China to stake claim on disputed reefs in the South China Sea, the Philippines is looking at establishing defence cooperation with allies, including...
Read more on Politics Balla
 
Ancient metal workers were not treated as slaves
London, Aug 31 (IANS) Ancient metal workers were highly regarded for their skills and were not treated as slaves as popular narratives suggest, says a study. In the course of ongoing excavations at Timna Valley in...
Read more on Apple Balla
 
World Cup is all that matters, not rankings: Clarke
Melbourne, Aug 31 (IANS) Australia cricket captain Michael Clarke feels all that matters is winning the World Cup and not the rankings. Australia are currently the No.1 ranked ODI team followed by India and South...
Read more on Sport Balla
 
Kim's daughter to follow her beauty ritual soon?
Los Angeles, Aug 31 (IANS) It seems like reality TV star Kim Kardashian's 14-month-old daughter North will take after her mother when it comes to maintaining a strict beauty routine as the little one already likes...
Read more on Celebrity Balla