As the world of personal finance noted, John Bogle passed away last week at the age of 89. Bogle’s invention of the modern index fund had a greater impact on investing than anything else in my lifetime. He’s also being lauded for his creation of a unique ownership structure at Vanguard, unduplicated anywhere else to my knowledge. In his structure, the mutual fund investors own the company that manages the fund. This frees the management company from needing to make a profit to satisfy outside shareholders. This two-fisted attack on traditional Wall Street management has resulted in nothing less than a shifting of wealth of billions of dollars from Wall Street to Main Street investors.
Bogle will receive the same praise for these accomplishments he’s been getting for the past decade. All of it is completely due. However, it’s not the most important legacy he leaves behind.
Bogle’s principal legacy to individual investors the should be lessons about individual behavior and how they affect ultimate investment returns.
Bogle on Humility
The first and foremost Bogle lesson about individual behavior is humility. Collectively we are all average. The return an average investor receives is the market return minus the costs of investing. This humility comes with an upside however. Since the active investor trying to beat the market assumes a much higher cost of doing business, the average returns of active investors must be lower than the returns of investors willing to sit patiently and accept what the market gives them. Investors cognizant of their own humilty have reaped the rewards.
Bogle on Understanding What the Stock Market Is
The second lesson about individual behavior is understanding what the stock market is and is not. The stock market is not the engine of wealth creation in the world, it is an expression of it. Real wealth is created by the tens of thousands of profitable businesses that provide goods and services that people need and want. Some of them make their stock available to anyone in the public with the cash to purchase it. The stock market serves to democratize capitalism and help make it available to everyone, but it is not the real economy.
Bogle and the Average Investor
Finally, I can’t recall encountering anyone in financial history who understood his “why” better than John Bogle. Everything he did was designed to put more money into the pockets of average investors. He understood that doing so came at a cost to him personally. He never cared. Bogle always knew he would do well financially if his plan worked. By his own standards he was not disappointed. His great personal fortune is estimated at $80 million at the time of his death. It seems trivial next to investing billionaires like the Johnson family (Fidelity) or Larry Fink (Black Rock). As the title of his 2008 book Enough suggested, Bogle was amply rewarded for his efforts through his life . History will indeed be kind to him.
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