|Remarks by John C. Bogle
Vanguard GroupThe Free Library of PhiladelphiaPhiladelphia, PAMarch 9, 2000
It's an extraordinary honor for this mere businessman-author
to find himself before an audience that has had (or will shortly have) the
opportunity to listen to such distinguished and truly creative authors as
Frank McCourt, Scott Turow, Joyce Carol Oates, and P.D. James. Unlike any
of these award-winning writers of fiction, I ply my writing trade in the mundane
fields of the financial markets.
Despite my far lesser task of producing prose that is largely expository
and explanatory, writing comes not easily to me. While I've been at it, arguably,
for a full half-century, I still prepare a written outline, seek out appropriate
anecdotes and interesting illustrations, endeavor to prove my points with
statistical evidence from the past, and, when the opportunity arises, add
a modest rhetorical flourish. But the real work beginsperhaps this
is so for all authorswhen I sit down
at a table with a lined pad before me, frighteningly blank, and touch pen
to paper. Back and forth goes my pen, line after line, until the first chapter
is complete, and on and on, chapter after chapter, the beginning, the middle,
and the end, finally complete.
Alas, my first drafts are rarely pretty, for my gift for writing is
limited. I compensate by editing
first mercilessly, then for continuity, finally for style, and often as many
as eight times. And after the deadline arrives and the copy goes to the printer,
the first proofs return, only to be edited again. The second proofs get the
same treatment, albeit lighter. Publishers, you rightly suspect, do not care
at all for this practice, but best to make the book as good as you can before it is published for the world to see. Even as
nearly allif not allhuman endeavors, writing is hard work. Or
at least that is so in my case.
I can fairly date the beginning of my major concern with writing to
the autumn of 1945, when, in my junior year at Blair Academy, I studied under
my first truly challenging master of English by the name of, believe it or
not, Henry Adams. He was an inspiring teacher, who in my senior year was succeeded
by Marvin Garfield Mason, an even more memorable character. Mr. Mason seemed
somehow to sense a grain of writing potential within me, for he marked my
weekly themes with the enthusiasm of the devil himself, his red pencil flying
across my every phrase, or so I recall it today. What he drummed into me,
most of all, was what Macaulay wrote about Dr. Johnson: "The force of his
mind overcame his every impediment."
Thanks to those two masters under whose tutelage I served, I was well
prepared for the challenge of Princeton University. And during my first two
years there, I became a passableno more than that!writer of
themes and papers and examinations. But it was the writing of my senior thesis
that became the magnum opus of my writing career up to that time. And, as
it turned out, the genesis of my long career in the mutual fund industry.
For, determined to write my thesis on a subject which no previous thesis had
ever tackledthere went Adam Smith, Karl Marx, and John Maynard Keynes!in
December 1949 I stumbled across an extensive article in Fortune
magazine that would change my life. The article described the mutual fund
industry as "tiny but contentious." While I had never before even heard the
term "mutual fund," I decided on the spot that this industry should be the
topic of my thesis. I entitled it "The Economic Role of the Investment Company,"
and so, just 50 years ago last December, my long journey in this industry
The Power of Libraries
I must add that I came across that article in the reading room of the
splendid, then newly opened Firestone Library at Princeton. In that library,
I spent hour after hour studying during my college years, did my economic
research, and wrote my 140-page tome in the tiny carrel each senior was given
for his work. To this day, libraries are an important concern of mine, and
I was thrilled to present Blair's splendid new Timken Library with a full
set of the 20-volume second edition of the Oxford English Dictionary when
it was published a few years ago.
I love the English language, and I look at my own OED II virtually every
day, not only to make sure I get my words just right but to enjoy learning
from whence all those words come. Every word comes from somewhere!
Indeed, in my chapter "On Leadership" in Common Sense
on Mutual Funds, I devote several pages to describing the power
of the right words to "shape the way investors look at us, and the way we
look at ourselves." (Employee, for example,
is banned in favor of crew member; customer is banned in favor of client;
and product is banned in favor of mutual fund.) I know that all of you here this evening
share my passion for the words of our splendid mother tongue, and urge you
to pass that passion along to others, and to support your local libraries
with the same passion.
During those hours in Firestone Library in 19491951, my thesis
took shape. While it seems problematical, as some have generously alleged,
that it laid out the design for what Vanguard would become, many of the practices
I specified then would, 50 years later, prove to lie at the very core of our
The principal function of mutual funds is the management of their investment
portfolios. Everything else is incidental
Future industry growth
can be maximized by a reduction of sales loads and management fees
Mutual funds can make no claim to superiority over the market averages.And, with a final rhetorical flourish, funds should operate "in the
most efficient, honest, and economical way possible." Were these words an
early design for a sound enterprise? Or merely callow, even sophomoric, idealism?
I'll leave it to you to decide. But whatever was truly in my mind all those
years ago, the thesis clearly put forth the proposition that mutual fund shareholders
must be given a fair shake. Since our outset in 1974, that is what Vanguard
has been all about. And, I can assure you, it works!
My next wonderful piece of good fortune came my way when fellow Princetonianclass
of 1920Walter L. Morgan, who founded Wellington Management Company
and Wellington Fund in Philadelphia in 1928, read my thesis. He was impressed
enough to offer me a job after my graduation from college in 1951. While I
should have leapt at the chance offered to me by this great manand
my good friend until his death at age 100 in 1998I agonized about the
risks of going into what was then a tiny business. But, my courage strengthened
by the conclusion in my thesis that the industry's future would be bright,
I finally accepted the offer. And a good thing, too!
By 1965, Mr. Morgan had made it clear that I would be his successor.
At that time, the company was lagging its peers, and he told me to do whatever
it took to solve our problems. Young and headstrong (I was then but 36 years
of age), I put together a merger with a high-flying group of four "whiz kids"
who had achieved an extraordinary record of investment performance over the
preceding six years. (Such an approachbelieving that past
performance has the power to predict future
performanceis, of course, antithetical to everything I believe today.)
Together, we five whiz kids whizzed high for a few years, and then we whizzed
low. The speculative fever in the stock market during the "Go-Go Era" of the
mid-1960s died, and in the early 1970s was followed by a 50% market decline.
The once happy partners had a falling out, and in January 1974 I was fired
from what I had considered "my" company.
In the Business and Out
And In Again
But without both the 1951 hiring, which providentially brought me into this industry, and the 1974 firing, which abruptly
took me out of it, there would be no Vanguard
today. Nonetheless, removed from my position as head of Wellington Management
Company, I decided to pursue an unprecedented course of action. The Wellington
Management Company directors who fired me were a minority of the Board of
Wellington Fund itself, and I went to the fund
Board with a novel proposal: Have the fund, and its then ten associated funds,
declare their independence from their manager. It wasn't exactly
the Declaration of Independence telling King George III to get lost, as it
were, in 1776. But fund independencethe
right to operate in the interest of their own shareholders, free of conflict
and outside dominationwas at the heart of my proposal.
Thanks largely to the determination of a key Wellington Fund director,
a Philadelphian named Charles D. Root, Jr., the fund Board, after seven months
of heated debate, accepted my proposal by the narrowest of margins. Perhaps
because there are so few true leaders in our corporate society, such leadership
by an independent director is rare in America today. I can assure you that
it was even rarer all those years ago. But happen it did, yet another happy
accident, and the design of the new firma firm that would be owned,
not by outsiders, but by the funds themselveswas finally accepted by
the Board during the summer of 1974.
Whether each of these events was fortuitous, or accidental, or heaven-sent,
I'll leave for you to decide. But another was about to happen. The new firm
needed a name. In September, not a moment
too soon, a dealer in antique prints had come by my office with some small
engravings from the Napoleonic War era, illustrating the military battles
of the Duke of Wellington, for whom Mr. Morgan had named his first mutual
fund all those years before. When I bought them, he offered me some companion
prints of the British naval battles of the same era. Ever enticed by the sea
and its timeless mystery, I bought them too. Delighted, the dealer gave me
the book from which they had been removed. After he left, I browsed through
it, even as I had browsed through Fortune
25 years earlier. I came to the saga of the historic Battle of the Nile (recently
designated by The New York Times as the
greatest naval battle of the millennium). There, in 1798, Lord Nelson sank
Napoleon's fleet, ending his dream of world conquest. I paused, and noticed
Nelson's triumphant dispatch "from the deck of HMS Vanguard," his victorious
flagship. The naval tradition of the name "Vanguard," together with the leading-edge
implication of the noun vanguard, was more
than I could resist. And two weeks later, on September 24, 1974, "The Vanguard
Group, Inc." was bornin a profound sense, the child of fortune.
The Power of Ideas
But, truth told, there is more to Vanguard than this incredible series
of happy accidents. For the firm is, above all, driven by the power of a few
simple ideas. So let me take you now to the character and nature of the company
that had just come into existence. Our basic idea was to have the mutual funds
themselves responsible for their own governance and administrationafter
all, that's what independence was all about for the funds in 1974 even as
it was for the colonies in 1776. By taking this step, we broke new ground
in the fund industry. Not only would we operate the funds at cost, but we
would operate them at the lowest possible
cost, disciplined and sparing in every expenditure, always asking ourselves:
"Is this expenditure necessary?" Or, to put it another way: "If this were
my own money rather than the shareholders' money, would I spend it?" (Happily
for our investors, I really hate to spend my own money!)
In many businesses, all of this cost discipline could be merely a finicky
policy or a harmless diversion. But in investing, cost
matters. It doesn't stretch reality to point out that in most respects
the stock market is a casino. A casino in which the investor-gamblers swap
stocks with one another, a casino in which, inevitably, all investors as a
group share the stock market's returns, no more, no less. But
only until the rakes of the croupiers descend. Then, what was a
fruitless search by investors to beat the market before
costsa zero-sum gamebecomes a negative-sum game after
the costs of investing are deducteda loser's game.
And the way the mutual fund game is played today carries heavy costs
and entails lots of croupiers, each wielding a wide rake. The cost of sales
commissions when (most) funds are purchased. The opportunity cost when stock
funds hold cash reserves in rising markets. The cost of fund management fees,
operations, and marketingall those television advertisements you see.
The transaction costs expropriated by brokers and investment bankers when
fund managers buy and sell the stocks in fund portfolios. The costand
it is hugeof the excessive taxes to
which fund shareholders are subjected unnecessarily, the result of the incessant,
often mindless, turnover of fund portfoliosnow nearly 100% per year.
One can only be reminded of Pascal's words:
All human evil comes from this, man's inability to sit quietly in a
room.How much do costs matter? Hugely! Taking
into account sales charges, management fees, operating expenses, and portfolio
turnover, the average mutual fund deducts about 2½% per year from investor
returns. Assumingan arbitrary assumption indeedthat the manager
is able to match an annual stock market return of, say, 12½% before costs, the shareholder would receive a net return
of 10% after costs. Result: 20% of the investor's
return is consumed by costs in one year, 29% in a decade, and fully 45% of
the return is consumed in a quarter-century.
Nearly one-half of the cumulative return generated by the stock market
has been confiscated by the costs incurred by the typical mutual fund. And
that's before taxes. In a market returning
12½% annually, excess taxes generated by unnecessary turnover could
easily reach 2% per year, further slashing that 10% after-cost return to an
8% after-tax return. Now, the croupiers have consumed 36% of the investor's
return in a year. With compounding, it leaps to 48% in a decade andI'm
glad you're sitting down!fully 68% in a quarter-century. That leaves
but 32% of the market's return remaining for the investor, who put up 100%
of the capital and took 100% of the risk. Yes, costs
The Powerful Idea of the Index Fund
The power of the idea that costs are crucial quickly brought Vanguard
to the two major mutual fund innovations with which I've been most closely
identifiedone very well known, the other barely known at all. Well-knownindeed
it seems almost folklore nowis the very first investment idea we put
into practice, the very first step in the development of our corporate strategy:
Our pioneering formation of the first index mutual fund in mid-1975. Only
months after we began operations, I began to develop the rationale for the
index fund. A quarter-century earlier, the concept of an index fund had received
at least tangential focus in my Princeton senior thesis. (Remember, "mutual
funds can make no claim to superiority over the market averages.") And by
the mid-1970s, the academic financial journals had published several articles
outlining the case for an index fund. In order to prove that the gambling
casino theory that I mentioned earlier worked in practice, I calculated by
hand the annual returns generated by the average mutual fund during the previous
30 years, and then compared them with the returns of the Standard & Poor's
500 Index. The index won by an annual pretax margin of 1½%virtually
identical to the actual costs assessed by the mutual fund croupiers during
that earlier, lower cost era. Voilà! Practice
confirmed theory. By December 30, 1975, we had incorporated the
industry's first index fund.
Why was it that Vanguard, rather than some other fund firm, was the
pioneer? Many financial firms must have recognized, just as easily as I did,
the mathematics of the marketplace that define investment success by the apportionment
of returns between investors and managers, even as between gamblers and croupiers.
But external fund managers had a powerful vested interest in maintaining their
own extraordinarily high profitability. We alone had an internally managed
structure, and a mission to be the lowest-cost provider of financial services
in the world. So even if 100 mutual fund firms had grasped the opportunity
of a lifetime that indexing presented at the same instant we did, 99 would
have prayed that the cup of indexing pass quickly from their hands.
But, as fate would have it, as the evidence in favor of indexing began
to mount, one firm had just been formed thatlike the suspect in a good
murder mysteryhad both the opportunity and the motive to seize the day, and take the first
step that would one day relandscape the way we look at investing. We recognized
our opportunity. Then, only force of willpersistence, patience, and
determination, along with a healthy dollop of missionary zealwere required. Implementation, after all, has always been far tougher
than ideation! But we implemented with zeal,
watched acceptance follow, and have seen indexing move from heresy to dogma.
The Powerful Idea of the Multi-Series Bond Fund
No comparable sea change was required in our second major innovationthe
idea of managing bond funds with a new and different strategy. This powerful
idea came less than a year after we formed our index fund and had precisely
the same basisthe knowledge that, in any given sector of the financial
market, managers as a group must lose by the amount of the aggregate costs
of the croupiers. Since we had both the mission and the structure to provide
our services to investors at the lowest possible cost, we were again the pioneer.
Again, the intersection of both opportunity and motive!
In June 1976, Congress had passed a law making it possible to offer
municipal bond mutual funds. The first such funds were traditional, actively
managed bond funds, charging high costs. Ever the contrarian, I was deeply
skeptical that any manager could consistently
forecast interest rates with accuracy, and thus significantly outpace the
famously efficient bond market over the long run. This powerful, but simple,
idea that resulted from this insight presented Vanguard with the opportunity
to change not merely the structure of fixed-income management in mutual funds,
but its very nature. Given our low operating expenses, we were in a position
to offer a municipal bond fund that could deliver to our investors the highest net yields in the field, winning the performance derby
not by genius, but by combining minimal cost with a less-active approach to
But how would we deal with the question of managing bond maturities?
The proverbial lightbulb went on: an idea so simple and so obvious as to defy
description. We created not a single "managed" municipal bond fundas
was the accepted custom of the daybut three separate series: a long-term
fund; a short-term fund (essentially the first tax-exempt money market fund);
andyou guessed it!an intermediate-term fund. Each would own
high-grade tax-exempt bonds, rigorously maintain its defined maturity range,
employ professional managers, and minimize portfolio turnover. And the shareholders
would be rewarded with top performance.
It is difficult to be very proud of such an elemental idea. Yet the
simple notion of the three-tier bond fund proved to be remarkably powerful.
Indeed, it is now firmly established as the industry norm, for tax-exempt
and taxable bond funds alike. In its obviousness, its elemental simplicity,
and its reliance on rock-bottom costs, the three-tier, fixed-income strategy
we pioneered in 1976 had the same genesis as our 1975 pioneering of the index
stock fund: the banal insight that it is the costs
of investing that determine the gap between the returns the stock and bond
markets provide and the returns investors
as a group receive. Conclusion: To the victorsthe
shareholders of the lowest cost fundsbelong the spoils.
It is Vanguard's stock-indexing and bond-management investment strategiesand
the reputation earned for their efficient implementationthat have accounted
for the lion's share of Vanguard's growth. Fully $370 billion of the assets
managed by Vanguard todaytwo-thirds of the totalis accounted
for by funds following those two powerful strategic ideas. Of course, success
hardly came overnight. After a full decade, for example, the assets of our
first index fund (Vanguard now has 28 index funds, keyed to various stock
and bond market measures) totaled less than $500 million
compared with more than $105 billion today.
With our missionary zeal and our focus on simple investment strategies and
investor education, we have, I think, begun to make the mutual fund industry
a better place for investors to entrust their hard-earned dollars.
The Power of a Book: Common Sense on Mutual Funds
Our mission is to change not only the focus of the mutual fund industry,
but its very structure. I had no doubt that a book that expressed the words
and ideas I have relied on would have the power to bring this change all together
in a cogent way. Such a booka new and I hope better-written (and longer!)
senior thesiscould not only articulate and reinforce my message but
deliver it to intelligent investors all over the globe. And so I wrote my
second book on the subject of mutual fund investing. Emboldened by the power
of Thomas Paine's Common Sense, I called
it Common Sense on Mutual Funds. In it,
I aim to do two things: First, to help readers become more successful mutual
fund investors, and second, to chart a course for change in the mutual fund
While, just as a typical book, it is designed to be read sequentiallyit
is in fact a series of 22 essays, each of which can be read independently.
The first three parts of the book are purely about investment issues, encompassing
(1) investment strategy, including the nature of financial market returns
and asset allocation; (2) investment choices, including index funds, investment
styles, and stock, bond, and global funds; and (3) investment performance,
including the powerful role that reversion to the mean plays in the financial
markets, tax efficiency (and tax inefficiency),
and the effect of time on return, risk, and
The final two parts of the book turn a critical eye to industry issues
that have played a key role in the disappointing past records of mutual funds
of all types. Part four, "On Fund Management," describes the industry's deviation
from its original principles, discusses the ascendancy of marketing over management
as our talisman, rails at the failure of fund directors to uphold shareholder
interests, and suggests the positive implications of the change in industry
structure that I discussed a few moments ago. This subject matter, of course,
is unusual stuff for a book on fund investing, but the subject of part five,
"On Spirit," is even more unusual. Here, I conclude that a mutual structure, as helpful to shareholders as it may be,
is not enough. Irrespective of their structure, the firms in this industry
need a mutual attitude toward serving investors,
an attitude conspicuous only by its virtual absence today. So in part five,
I take the liberty of describing the mutual values and spirit that, as Vanguard's
founder and leader, I have endeavored to inculcate in our enterprise.
Common sense is the theme that suffuses each of the book's subjects.
Not only common sense as you and I understand it today, but Common
Sense as Thomas Paine used it in his pamphlets some 225 years ago,
presenting sentiments to the citizens of the Colonies "not yet sufficiently
fashionable to procure their general favor
offering nothing more
than simple facts and plain arguments," and asking the reader to "generously
enlarge his views beyond the present day." In my own book, I present similar
sentimentsand equally simple facts and plain argumentsto mutual
Except for the final section, the book is not
about Vanguard. It is largely about my deeply
held convictions on how to invest successfully in mutual funds. While my ideas
have been modified to a degree by my half-century of observing the financial
markets, the more important point is that they have been reinforced, annealed
in the crucible of experience and time. In the early years, I forthrightly
described our structure as "the Vanguard experiment" in mutual fund governance.
After 25 years, I guess it's fair to say it's an experiment no more. From
$1 billion at its founding, the assets Vanguard holds in stewardship for investors
have grown to more than $500 billion, and we've done our best to earn a reputation
for integrity, fair dealing, and sound investment principles that is second
to none in this industry. Vanguard's staggering growthwhich I never
soughthas come in important part as a result of the simple investment
ideas and basic human values that are the foundation of my personal philosophy.
And I have every confidence that they will long endure at Vanguard, for they
are the right ideas and right values, unshakable and enduring, even eternal.
Economics and Idealism
In retrospect, I believe that idealismthe dream of a better world;
fairness to one's fellow human beings; focus on simplicity; emphasis on stewardship;
a belief in the power of words and ideas and bookshas driven my long
life and exciting career. Happily, we've proved that the link between idealism
and economics is a powerful one. Indeed, both Vanguard's structure and the
index fund concept are classic examples of the fact that enlightened
idealism is sound economics.
Even a casual reading of my ancient thesis would, I think, reflect that
pervasive idealism. To this day, I use quotations from it to define the genesis
of my views, from the forces that move financial markets (both enterprise
and speculation, in Lord Keynes' timeless
formulation) to the forces that fail to move
fund managers to behave as responsible corporate citizens ("The Silence of
the Funds," as it were). But the highest manifestation of this idealism comes
in my long-standing view that the central principle of the mutual fund business
should be, not the marketing of financial products to
customers, but the stewardship of investment services for clients.
I'm happy to report that my 55-year chronicle of putting pen to papera
story that begins at Blair in 1945 with schoolmasters Adams and Mason, continues
in 1949 at Princeton's Firestone Library and my thesis, rolls on to 1951 with
Walter Morgan and Wellington, then to 1975 with Chuck Root and Vanguard, and
to 1999 with "Common Sense on Mutual Funds"is not yet over. Even as
we meet this evening, another storymore words, indeed another bookis
being written. McGraw-Hill Publishing Corporation came to me a few months
ago and proposed that Volume One of its forthcoming series, "Great Ideas in
Finance," be entitled Bogle on Investing
and consist of selections from the scores of speeches I've given over the
years, usingyes!my Princeton senior thesis as the centerpiece.
It may be some sort of poetic justice that, a half-century after it was written,
this modest, unassuming precursor of the idealism and economics that would
lead to Vanguard's remarkably fortuitous formation will at last see the light
of dayyet one more link in the long chain of words, ideas, and books
that I've recounted this evening.
The Inspiration of William Penn
On this grand occasion, right here in our great home state, it seems
only fair to attribute considerable credit for our growth to being here in
Pennsylvania. William Penn's remarkable American commonwealth has been the
source of fine governance and hospitality to business, the home of a splendid
labor force, and the historic nexus of Vanguard's loyal shareholder base.
What is more, we have been well served by practicing the kind of simplicity
William Penn cherished when he came to his newly chartered lands in 1621.
Penn's own words come preciously close to describing how we have conducted
Method goes far to prevent trouble in business: for it makes the task
easy, hinders confusion, saves abundance of time; and instructs those that
have business depending, both what to do and what to hope.And so, even as William Penn looked at Pennsylvania as his "Holy Experiment"
for human rights and perfect freedom, I began Vanguard as an experimentthough
hardly a holy onein what to do and what to hope. Our ideas and methods
would test whether a mutual fund enterprisea unique enterprise that
is of, by, and for the shareholderscould succeed in a competitive,
dog-eat-dog industry. With the Quaker-like simplicity of our investment philosophy
and the characteristic stubbornness, candor, and thrift of William Penn in
our business strategy, I believe that, so far, we've met that test. For that
belief that the economic functioning of a business enterprise cannot be separated
from the ideals it holds high has worked splendidly in practice.
But there are things that can make even a successful business bettereven
more focused on service to our fellow human beingsand I want to close
these remarks by acknowledging, more than ever at this stage of my long life,
my aspiration to live the remainder of my days by these words of William Penn:
I expect to pass through this world but once. Any good therefore that
I can do, or any kindness I can show to any fellow creature, let me do it
now. Let me not defer or neglect it, for I shall not pass this way again.
Comforted and inspired by those wonderful words, I shall press on with
my own words, my ideas, my ideals, and my books. May their power long outlive
Note: The opinions expressed in this article do not necessarily represent the views of Vanguard's present management.
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