Sometimes, we are aware that something is very likely to happen, but we don’t fully digest the implications until we go through the motions. For many years now, John C. Bogle, the founder of Vanguard group has signalled about his declining health. Earlier today, news arrived that he passed away.
John Bogle was a selfless legend of the investment world. By creating one of the first index funds at very low fees, he provided the world with an elegant way to get market returns. Incidentally, this arose out of his undergraduate thesis at Princeton, where he studied the performance of mutual funds and concluded that the vast majority of them underperform the market.
Every mutual fund is owned by it’s shareholders. John Bogle’s second insight was to make the fund company (Vanguard) mutually owned by the funds it managed. This removed the need for any profit. All profits are distributed back to shareholders. In doing so, he chose the path not travelled. Many of his competitors such as Mr. Charles Schwab and the Johnsons (of Fidelity) are billionaires. They became rich by managing money for others and earning fees on the investments, even if the investors themselves didn’t do very well for themselves. As John Bogle has said:
The investors came for the high fees, and stayed for the underperformance.
Three decades ago, when Vanguard was a fledgling in the investment world, it was common for mutual funds to charge 1%+ yearly fees. In addition, they would also charge 12b-1 sales commissions of 5%+. In other words, if you invested $100, only $95 would end up in the fund (after sales commissions) and you would pay 1% annually! By giving investors low fee access to market return, Vanguard started the race to the bottom.
Today, average index fund fees are around 0.1% (and many times even lower). More than $3 trillion are invested in index funds today. Thanks to Vanguard, the world has saved over 0.9% per year in many trillions of assets. The amount that Mr. Bogle has saved the world is in the trillions of dollars on its own.
When he started the index fund, Mr. Bogle was ridiculed, and even called, “un-American”, for buying every stock in the market. Nevertheless, he stuck with it and launched the fund. It was undersubscribed and raised only $11M. The fund didn’t even have enough money to buy every stock in the S&P 500. To solve this, they sampled randomly from the S&P500. It worked just enough to allow the fund to live and continue. It really is due to his grit and perseverance that we have low-cost index funds today!
John C Bogle was a selfless legend, and an independent thinker. He is one of my investing and life heroes, and it is incredibly sad to see him pass away. His contributions will outlive all of us for many generations to come.