Notes from Bogleheads® 16

IndependenceHall_J.Fusco_01-400VPThis is a guest post by forum member Moolala. The Bogleheads® 16 Conference took place in Philadelphia, Pennsylvania October 18 – 20, 2017.

Jack Bogle’s presentation

Slideshow link

JackBoglecartoon

Jack Bogle

Jack Bogle opened the event with highlights from the past year, including being featured in a Wall Street Journal cartoon and being called the father of passive investing.

He also spoke about getting a boost from “the second highest possible source ever”: Warren Buffett, a long-time index champion. When they met, they talked for about an hour. Mostly, they spoke about the letters they get saying they are such bad dressers.

Warren Buffett now recommends Vanguard. At Warren Buffett’s 2017 annual meeting, Buffett remarked that if there is ever a statue erected to honor the person who has done the most for American investors, that person should be Jack Bogle. In fact, Bogle said, there is a statue of him in the Vanguard courtyard. In the course of Warren Buffett’s annual meeting, he said, he thinks he took over 750 pictures with people (including about 190 selfies). Buffett also noted that in two years, Bogle will be eligible for an executive position at Berkshire! (“Hang in there, buddy,” he said.)

In terms of spreading the word, Bogle has also received lots of awards in 2017, and was named by Forbes as one of the world’s 100 greatest living business minds. He thinks that Forbes kind of let us down by leaving out as one of their criteria, “creating durable value for society.” As evidence, he pointed to the inclusion of casino moguls on the list. Bogle shared that when his photo was taken for the award, he told a woman in the room, “I feel like I’m a little boy in a room of giants.” She said “Oh Mr. Bogle, I’m sure everyone in the room feels that way.” He said, “I bet Jack Welch doesn’t.”

Bogle also received the 2017 CME Group Melamed-Arditti Innovation Award, and may be traveling to Florida to accept it.

Bogle shared articles in which he was featured (“I probably said a few things I shouldn’t have, which is what makes it decent” ) and said he has sold a total of 848,000 books since 1994. He stated that his book, The Little Book of Common Sense Investing, has succeeded because it is short, simple and persuasive. Bogle also shared a video of his speech to the Pennsylvania Society, complete with a rendition of his Princeton school song.

Bogle on mutual funds

Bogle highlighted the trajectory of the mutual fund industry throughout his career and noted big changes in mutual fund leadership. While Vanguard ranked no. 7 in 1980, it ranks No. 1 in 2017.

Vanguard’s assets have increased 2005x since 1980.

Changes in Mutual Fund Leadership: Then and Now

Rank
 1980 Total Assets Billions 2017 Total Assets Billions Growth in Assets
1 IDS 5.0 Vanguard 4211 2005x
2 American Funds 3.7 Fidelity 1942 588x
3 Fidelity 3.3 Blackrock 1682 New
4 Dreyfus 2.8 American Funds 1449 392x
5 T. Rowe Price 2.4 State Street Global 657 New
6 MFS 2.4 T. Rowe Price 582 243x
7 Vanguard 2.1 JP Morgan Funds 527 New
8 Putnam 2.0 Franklin-Templeton 412 New
9 Lord Abbett 1.8 Dimensional 356 New
10 Union Service Corp 1.7 PIMCO 348 New
Total 27.2 12166
Percentage of Industry 55% 62%
Total Industry Assets 49.3 19500

While conventional industry expense ratios have increased 72%, Vanguard’s has decreased 73% (now Vanguard is at 0.15 vs. a 1.06 industry average). Happily, lower costs mean stronger returns. He said that an industry that sells what it makes became an industry that makes what will sell. Bogle also noted that he would like TIF (Traditional Index Fund) to be an accepted acronym. We are currently in the ETF era. What’s next, according to Bogle? The return to a new normalcy: the triumph of TIF indexing.

“In 2017, Vanguard is shooting the lights out,” he said. Bogle remarked that he is a small company kind of guy and is amazed by Vanguard’s size. “What is enough? I don’t know the answer to that, but don’t say that I don’t think about it,” he said. “I’m glad to have the ideas been given such acceptance by the public, but I still worry about size and what it does to a company — and what it does to challenges such as regulatory authority and things of that nature.”

Vanguard has soared above all competition since 2006, when its assets first topped Fidelity’s.

“I loved the days of struggle,” Bogle said, when everyone’s trying to do their best and searching for good news. But when you get big… “uneasy lies the head that wears the crown.”

Vanguard’s peak market share (24.2% in Aug. 2017) is much higher than former industry leaders’ peak market shares (which topped out around 15%). That is because of Vanguard’s index funds.

Bogle said he wanted relative predictability from the funds, which dominates Vanguard’s asset base.

Wellington is 65% S&P, 35% Corporate Bond Index…. Those two indexes explain 98% of Wellington’s performance. Only 2% of its performance is tied to active management.

Why is Vanguard a leader? Bogle pointed to structure (low-cost), and strategy (indexing, virtual index funds). When you rank fund managers by number of high vs. low rated funds and the net distance between the two, Vanguard has topped the list.

On picking winning funds: what happens to winning funds after you buy them? Reversion to the mean!

Bogle on exchange-traded funds

ETfs have grown 35% since 1997, while TIFs have grown at a lesser rate.

At one point, Bogle said, he was looking at numbers. ETFs and TIFs have both grown very rapidly. ETF cash flow growth was about half of the net increase in assets. The numbers were very different for TIFs: 800 vs  ETF 500 billion for performance (asset appreciation) and TIF 242 vs. ETF 842 billion for net cash flow. Investor return for TIFs: 7.4% vs. 4.6% for ETFs.

Bogle took that further and looked through each year in the period. The returns for TIFs and ETFs correlate very highly with the investor returns you get from Morningstar, and seem to verify that that ETFs are not doing nearly as well for their investors.

Musings on life

When it comes to words to live by, Bogle quoted two passages:

Matthew, 21 AD — “No man can serve two masters, for either he will hate the one and love the other; or else hold to the one and despise the other.” That’s what Vanguard tried to solve by having only one master, the investor, Bogle said.

He also quoted Adam Smith from Wealth of Nations, when he talked about the interest of the producer – which ought to be attended to only so far as it may be necessary. Bogle said that the interests of fund shareholders (consumers) must finally triumph over the interest of fund managers (producers).

Bogle says he thinks a lot about his place in history and what he wants to accomplish. He thinks that curiously enough he summed all of this up in 1973, in the dedication that was in the Wellington management building. Here is a rough transcription:

Today America is again being tested, and it is hardly an exaggeration to say that every institution in our society, from the White House on down the line – is being challenged – challenged to reassess its goals, its values, its contributions to our society.

Despite the billions of dollars entrusted to us, our company is small and fragile, and perhaps even unimportant in the vast context of space and time. Nonetheless, by doing our work as best we can, we can be better and stronger as individuals, and make this ambitious and interesting organization better and stronger, too. Each of us can in a small way be a positive force in helping to make this land just a little better. In short, I believe that even one person can make a difference.

Deep space image

Deep space

“Here is our part in the universe,” Bogle said, before describing the size of the galaxy (“It has two hundred billion stars and a hundred billion planets.”) “How important are we in all that? Our galaxy is but one of two trillion galaxies out there,” he said. “That’s how important I feel at this very moment.”

Bogle ended his slideshow by reminding attendees to “STAY THE COURSE!”

 

 

The Fireside Chat

Fireside Chat video

Following Bogle’s introductory comments, Bogle and Bill Bernstein sat down for a fireside chat. Below are highlights from their conversation.

Vanguard’s business model

wbernstein

William Bernstein

One of Bernstein’s first questions was about the role of nonprofit organizations in the financial sphere. “There are certain things that are necessarily in purview of the state,” he said. “But there’s a third area of the economy — nonprofits — which dominate certain segments of the market, such as education and medicine. . . . .Vanguard is a nonprofit organization for all purposes and practices. Do you think that finance is one area that should be run by nonprofits?”

Bogle said that any legislation mandating that finance be run by nonprofits would be far too complicated, but advantaged the opportunity to share more about Vanguard’s business structure. He said that Vanguard started on a very small budget for a financial organization, with under two million dollars. “The funds had no money,” he said, but argued that building success is still possible on a low budget. “You can rent computers, you can rent land, you can rent buildings,” he shared. “The ongoing question is, why don’t more people do it?” Vanguard’s name means “leader of a new trend,” and yet, Bogle said, “We still don’t have any followers! So how can you be a leader when you don’t have any followers?”

Market composition

Bernstein transitioned to a question about FANG stocks (Facebook, Amazon, Netflix, and Google). Those stocks, he said, comprise about 15 percent of market cap. What makes them unusual is that they are all tech companies and selling for high valuations. Bernstein called them companies that could easily vaporize, and asked Bogle to share his thoughts.

“There is a certain risk of all this money coming into the index fund at very high prices,” Bogle said, and there is concern that the index funds could be hit more heavily by the actions of inexperienced investors. But, he said, that does not concern him. “Maybe it should, but it does not.”

Are mutual funds bad for competition?

Bernstein asked Bogle to comment on a recent paper by Jose Azar, Martin Schmalz, and Isabel Tecu, who proposed that mutual funds are bad for the competition because they do not care about how companies compete. The authors argue that this is bad for society because it distributes wealth away from consumers, who are paying for the higher profits.

Bogle said he disagreed with the argument, and shared examples to support his thinking. Suppose, he said, that Vanguard decided to bet on Google in a certain category, and Fidelity decided not to bet on Google in that category, but to bet on Apple instead. If Apple were to outperform Google, you would have people at Vanguard saying, “we’ve got to get out of this Google!” Bogle said. “And there you have a managed fund.”

“The essence of governance from an index point of view is to make sure the company is run in the interest of shareholders,” Bogle continued. “If that means bad things for the industry . . . that’s the way capitalism works. And it distributes those benefits very, very disproportionately, and that’s why we have that large gap between the wealthiest and least wealthy in America. There are a lot of repairs we need, but none have anything to do with changing the S&P 500 into the S&P 411 or 382.”

“When you get big and successful, there are going to be a lot of problems raised in the competitive markets and by governments all over the world,” Bogle said. “Those threats are going to be there when you get large and they will be tough threats. But that’s about it, and you can’t really see somebody else coming into the business to try to tackle all of that oligopoly. . . . Nobody wants to jump into the water because it would take so long to get the economies of scale that we deliver to investors. But if you deliver to investors, you’re not going to deliver to the managers.”

The future of index funds

chart(11)“If you aren’t familiar with Minsky, he produced the stability hypothesis,” Bernstein said. That theory says that stability produces instability and instability produces stability. The moment it all falls apart is called the Minsky Moment. Bernstein recalled that a graph Bogle showed during his opening remarks indicated that the percentage of the market that is indexed points clearly upward. “It is said that if too many people index, active managers will succeed,” Bernstein said. “We both know that they can’t possibly succeed, because even if 99 percent of funds are indexed, that one percent left is still ‘the market.’ But, some weird stuff would happen if we get to that point.” So, Bernstein asked, will that happen? If so, when? And, what would happen if it did?

“When you get to 99 percent or something like that… God knows what would happen,” Bogle said. Overall in the US, there’s still “a long ride to go,” before we could reach that point. “A bear market could slow down indexing. Would it slow down other people at the same amount? I don’t know. So I don’t worry about it. To go to 80 percent would require — I guess 100 years,” he said. “So indexing will continue to do okay. But there are other challenges.”

“The active managers say — or their representatives say — if all these people are indexing, it will be less efficient and easier for managers to systematically win,” Bogle said, adding “which managers, I don’t know.” But, he said, “it’s also easier by the same amount for active managers to lose. So it’ll be easier to lose and easier to win – what else is new?”

“Anything that gives the middleman strength costs money,” Bogle said. “Trading is the investors’ enemy, because all of these traders together get the market return.”

Credits

  • Cartoon image courtesy of Jack Bogle: The Undisputed Champion of the Long Run,
  • Table and chart derived from data supplied in the Slideshow presentation  accompanying John Bogle’s remarks at Bogleheads® 16 Conference.
About

Barry Barnitz, administrator of both the Bogleheads® wiki and of Financial Page, a Bogleheads® blog

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