Jack Bogle founder of Vanguard died in January, you may not have heard of him but he is one of the key figures of modern investment management. He helped create a global investment firm that has assets under management of $5.3 Trillion.
That is such a staggering large number that a reference point might help. 1,000 seconds ago was equal to almost 17 minutes. It would take almost 12 days for a million seconds to elapse and 31.7 years for a billion seconds. Therefore, a trillion seconds would amount to no less than 31,709.8 years. So, 5 trillion is 158,545 years. The end of the ice age was about 100,000 years ago.
Even if you’ve never heard of Jack (John really) Bogle you have a lot to thank him for. He was truly a legend in the world of investing and primarily for one simple reason, he had a simple and compelling message.
“In investing, you get what you don’t pay for”
Bogle wrote in a 1997 paper: “The facts are: (a) most professional managers fail to outpace appropriate market indexes, and (b) those who do so rarely repeat in the future their success in the past.”
In the same paper, Bogle outlined the essential theory of why the high fees charged by active managers were the enemy of long-term investing. “Investors as a group must underperform the market, because the costs of participation — largely operating expenses, advisory fees, and portfolio transaction costs — constitute a direct deduction from the market’s return,” he wrote. “Unlike actively managed funds, an index fund pays no advisory fees and limits portfolio turnover, thus holding these costs to minimal levels. And therein lies its advantage. That, essentially, is all you need to know to understand why index funds must provide superior long-term returns.”
His vision was expressed, much like Warren Buffett’s, in a highly accessible “folksy” manner so that we were never left in any doubt what he meant. For example; when talking about the chances of finding the next Google or Microsoft he would say; “Don’t look for the needle in the haystack. Just buy the haystack!”
His advice to investors to “buy the market” was consistent from his creating the world’s first index fund in 1975. The racing certainty that investors who bought index funds would literally be average drew criticism initially as “unamerican”.
Vanguard created a whole industry of copycat investment firms that forced other investment managers to reduce their fees to remain competitive, saving investors Billions every year.
He structured Vanguard as a mutual organisation, with the profits owned by the investors in the funds. Each year, profits were used to reduce fees meaning that investors keep more of the profits from investing.
In addition to being a pioneering investor this also made him a significant philanthropist. Compared with the average fees charged by U.S. mutual funds, according to Morningstar, Vanguard’s expenses saved its investors some $20 billion last year alone.
Contrast that with a hedge fund where the investment manager typically keeps 20% of profits over a benchmark and it is not hard to see how Vanguard became so successful and that is why we use Vanguard today as it one of the great investor champions.
Author: Marc Westlake is managing director of Portfoliometrix Ireland an award winning investment manager find out more on wwww.portfoliometrix.ie