John “Jack” Bogle's Vanguard Group has accumulated a whopping $3.5 trillion since the inception of its first index fund back in 1976. Bogle wrote his senior thesis on market returns in 1951, where he asserted that actively-managed mutual funds “may make no claim to superiority over the market averages.” He has been defending his philosophy ever since.

Bogle launched the initial Vanguard 500 Index Fund (VFINX), which tracks the Standard & Poor's 500 Index, in 1976 as a way to offer investors a cheaper way to simply buy the market instead of trying to beat it through active management. This approach has generated tremendous opposition from many in the industry, as it has drawn in hundreds of billions of dollars from active fund managers over the years and has made a major impact on the markets over time. (For more, see: The Greatest Investors: John (Jack) Bogle.)

What Makes Bogle Tick

Bloomberg News recently interviewed Bogle to find out what still makes him tick. He told them that he celebrated the 40th anniversary of the Vanguard 500 Fund with a luncheon for all of the fund’s underwriters. Bogle said that the underwriters remembered thinking back to when the fund started that they would get $250 million in assets to start. That number shrank steadily until the actual amount received was only $11.3 million, perhaps the worst underwriting ever in Wall Street history. But the underlying idea turned out to be one of the most successful of its kind, one that has substantially impacted the industry.

Bloomberg asked Bogle where he thought the passive index fund trend would go from here, given that it’s only a small fraction of the assets under management in the industry. He replied that he feels strongly that the industry will only continue to grow and that the mutual fund industry is in the midst of a revolution, one that is shifting the returns that have been previously earned on Wall Street to Main Street. He said that we are no longer at the beginning, but that the end is still a long way off.

When asked whether he thought the pendulum towards indexing had swung too far, Bogle explained that he’s seen a lot of that in his 65 years in the business and that he doesn’t feel that the latest swing in favor of indexing is a passing fad. He believes that more people will be using index funds in 2025 than there are now, and that the use of index funds is an underlying, fundamental trend. (For more, see: Bogle Predicts 5% Annual Returns Over Next Decade.)

Bloomberg then asked what he thought of a recent paper by a Sanford C. Bernstein strategist that asserted that passive investing is worse than Marxism. The paper asserted that too much indexing could cause stocks to become over-correlated and impede the efficient allocation of capital. Bogle said the paper was absurd and that the markets had nothing to do with the allocation of capital. He stated that only 10% to 15% of the markets were indexed now, and this could go to 50%. But this would probably be good for investors, because it would reduce the amount of turnover in the markets.

Bogle acknowledges that when the markets become inefficient, then active management can win but for every winning active manager, there is also a loser. Indexing is the steady medium with the lowest cost. He views the market as the house in the casino of Wall Street, and the house always wins. He believes that the math behind the indexing strategy is inarguable. He also believes that corporations should be run in the best interests of their shareholders and not their management.

When asked about the possibility that Vanguard owes hundreds of billions of dollars in back taxes, he responded that he had not personally looked at the litigation, but feels that it’s absurd that his company could really owe that given their unchallenged business structure and initial approval by the Securities and Exchange Commission (SEC). (For more, see: Bogle Rejects Criticism of Index Investing.)

Bogle approves of the fiduciary rule, but feels that it is ultimately unnecessary because consumers are becoming more educated and have more options to choose from in the marketplace. Furthermore, he does not feel threatened by the advent of the exchange-traded fund (ETF) market, because he sees that as essentially a trading market that a lot of investors and managers use to generate higher returns, which is not what Vanguard focuses on.

Speaking on the future of the markets, Bogle feels that we are now in an era of lower returns and that the advent of robo-advisors is a good thing, although they can’t add much value. He strongly advocates social investing and hopes that Donald Trump will not do anything to restrict free trade. He will also be appalled if Trump repeals the inheritance tax. He feels that Social Security needs to be fixed, but that this problem is political and not economic.

The Bottom Line

Forty years after launching the first index fund Bogle still sticks to his investing philosophy. Assets in index funds continue to grow and they remain a popular choice among investors. (For more, see: The Vanguard Effect: Lower Expenses, Higher Returns.)

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