How I Did It: John Bogle of the Vanguard Group
As a student at Princeton, John Bogle wrote his thesis about the mutual-fund business, at the time a Wall Street backwater. Upon graduation, he joined one of the oldest firms in the field--and proceeded to become the most creative disrupter the industry has ever known. In 1974, he founded the Vanguard Group, whose unique approach to fund management has saved shareholders hundreds of billions in fees; that and his righteous denunciations of his industry's sharper practices earned Bogle, 83, the grudging nickname "Saint Jack." Vanguard is now the largest fund group in the U.S., with 13,000 employees and $1.9 trillion under management. As told to Eric Schurenberg.
I'm not sure I really am an entrepreneur. I'm not much of a businessman. I know I'm not a marketing guy. I do have an entrepreneurial lineage, though. My grandfather was a wealthy and respected merchant in Montclair, New Jersey, where I was born. But his estate was wiped out in the Great Depression, and as a result, I had what I consider the ideal upbringing: We were a proud family, good citizens, and we didn't have a sou.
Vanguard never would have happened if I hadn't been fired as CEO of Wellington Management Company, the firm that did the investing for the Wellington fund and eight sister funds. In 1966, I had merged the company with a highflying group of whiz-kid traders from Boston. I cringe to say it today, but I thought their hot performance would be permanent. I was naive, overconfident, full of every kind of bad attitude. The whiz kids' streak whizzed out, as it inevitably had to, in the recession of 1973-74, and the fund fell by 50%. In January of '74, I was fired from the company I considered my own.
I looked into finding another job, but I concluded my best move was to fight back. I went to the fund's board and proposed that it and its eight sister funds split from WMC and start a new company to oversee the funds. The new company would be owned by the funds--it wouldn't have to make a profit and for that reason could serve the funds much more economically than a profit-seeking management company. Oh, and I would be chairman and CEO.
It took seven months of arguing to reach agreement. The deal left me unhappy and Wellington Management unhappy, but that's what happens in tough negotiations. The new company, which would become Vanguard, could administer the funds, but it couldn't invest the funds' money. So, basically, I was left with only one of the functions of a mutual fund and the least interesting one at that. I could see more fighting was ahead. Thank God I love to fight.
It quickly became obvious that if I wanted to build the company, I had to get into investment management. So I snuck in. I created a fund that arguably didn't require any investment management. All it would try to do is match the return of the S&P 500 index. It sounds like a recipe for mediocrity, but the index fund is actually the killer app of investing, a strategy that cannot empirically be improved on.
It is based on a simple fact. In the stock market, some investors do better and some worse, but their aggregate returns equal the market's returns, minus the costs of investing. After all, they are the market. So if a fund matches the market's gross return and does so at a cost much lower than the average fund, it will always beat the average fund over time. It has to. Borrowing a phrase from Justice Louis Brandeis, I call it the Relentless Rules of Humble Arithmetic. And of all the things I've said and done that people disagree with--and there's no shortage of those--no one has successfully taken that one on.
Academic research supported the wisdom of indexing, but at the time, everyone in the industry thought it was the stupidest idea. I hired four Wall Street brokerages to manage the underwriting. They hoped to raise $150 million; they delivered $11.4. I thought, Oh, my God, that's not enough even to buy the stocks in the index. The underwriters suggested we cancel the fund and give the money back. I said, "Wait a minute. This is the world's first index mutual fund." So we managed to approximate the index with the money we had and kept it going. The fund is now the largest in the world.
When I started Vanguard, we had 28 employees, counting me. At that stage of a company's existence, when values were so important and when you had to lay down the law, people considered me something of a dictator. I would say that's a fair criticism. When people ask me about teamwork, I say, "Teamwork is the most important thing. Unfortunately, I'm not very good at it."
You don't have to like Steve Jobs as a person much, bless his soul, but he and I are similar in a lot of ways. He said: Never do surveys; never ask anyone if your idea's any good. I never did. If I had, I never would have started the index fund.
The one thing I wouldn't tolerate on the Vanguard crew is arrogance. That's one of the reasons I decided that everyone who was remotely qualified had to be trained to answer phone calls from investors. We had a lot of executive types who thought they were too important to do that kind of thing. They had no idea what it's like to be a shareholder.
When we had the panic on Black Monday, in 1987, virtually everyone had to work the phones. I took 106 calls myself. I'd answer the phone: "This is Vanguard; John Bogle speaking. How may I help you?" And they'd say, "Is it really you?" I spent a lot of time on one call explaining bond funds to a woman who didn't know who I was, and at the end she said, "Can I have the name of your supervisor? I'd like to commend you."
The structure of Vanguard has meant that I couldn't get the financial rewards that might have accrued to any other CEO of a trillion-dollar financial services company. I made a decent amount of money before I stepped down in 1999, but every once in a while, because I'm human, I think maybe I should have done it a little differently. Maybe Vanguard should have gone to a profit model, and I should've kept a 1 percent interest. Vanguard would be worth, I don't know, $30 billion, and 1 percent of that is $300 million, which wouldn't be bad. When the hospital that did my heart transplant says they'd like me to give $25 million, I wouldn't have to say no.
But you reach a point in life where you say what is, is. The rewards of my life have been great. I built a company; I left things better than I found them. I have a good reputation. I put the Vanguard shareholders and crew first. That's a huge thing.
And I lived to see index investing, and low-cost fund management and fiduciary duty to fund shareholders, all vindicated. I never thought I'd live to see it. I had my first heart attack when I was 31. My heart stopped beating on seven different occasions before I got the transplant 16 years ago. But you see: I'm still in the fight. I'm like Antaeus, that guy from Greek mythology who took strength from the earth. They knock me to the ground, and I get back up stronger.
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