November 7, 2007
Building a Better Financial System
John Bogle
Founder, Vanguard Fund
Minutes of the Eighth Meeting of the 66th Year
President Giordmaine convened the eighth meeting of the 66th year at the Carl Field Center at 10:15 AM following a hospitality hour. George Folkers led the invocation. Nicholas Van Dyck read the minutes from the last meeting’s talk on the Princeton Historical Society.
There were numerous visitors. Ruth Miller introduced her husband, Bernie Miller, Harvey Rothberg introduced Klaus Florey, George Folkers introduced Paul Rutherford and Paul Lyness introduced his wife, Mary Lyness. There were several other visitors but alas their names were not recorded.
Joe Bolster introduced the speaker, John (Jack} Bogle from the great Princeton class of 1951. His topic is “Building a Better Financial System.” At Princeton, Bogle majored in economics. He founded the Vanguard Group in 1974 and is the author of six books on the mutual fund industry. The Vanguard Group is now comprised of 120 mutual funds and has over $120 trillion in assets. In February 1999, Bogle received the Woodrow Wilson medal, given to a Princeton University alumnus for distinguished achievement in the nation’s service.
Bogle began by saluting his Princeton classmates saying that his basic values about investing were formed at Princeton. In December 1949, he read an article in Fortune Magazine about mutual funds which he had never heard of previously. He subsequently wrote his senior thesis on this topic, The Economic Role of the Mutual Fund. He says now that his thesis was shamelessly idealistic, positing that the prime responsibility of an investment fund was to the shareholders, not to the interests of the fund’s managers. Although it was idealistic, he still holds those same views today.
What has gone wrong with our financial system? As Warren Buffet says, for investors as a whole, returns decrease as motion increases. There is a profound conflict of interest between those who manage the industry and those who invest. For a manager, the philosophy is: Don’t just stand there, do something. For an investor, the philosophy should be: Don’t do something, just stand there! Successful investing is all about investing in America’s business. Returns are your friends and costs are your enemies. Nowadays, mutual funds can make no claims of superiority over funds indexed to the market. Index funds keep costs low, leading to greater earnings. For example, Vanguard operates on an “at cost” basis for the benefit of the owners. They capture the returns of the stock market and deduct trivial amounts of cost (1 or 2%). Equity funds turn over almost 100% per year, index funds almost never turn over.
In September 2006 a dinner in New York City celebrated the 30th anniversary of the initial offering of the first index fund, Vanguard. If you had bought 1000 shares then at $15 each, that investment would today be worth $543,000. But the important thing to remember is that the more the financial system makes, the less investors make. The financial service industry costs $580 billion a year, making it the largest generator of corporate profits.
Bogle says that the stock market is a giant distraction. The only real thing to invest in is corporate business – real companies, real products, real services. The daily moves of the stock market, in Bogle’s words, are like “a tale told by an idiot, full of sound and fury, signifying nothing.” When you see strong managers, weak directors and passive investors, don’t be surprised when the looting begins! Managers look after their own financial interests, not the owners’ interests. The average mutual fund holds stocks these days for one year only. That’s another reason for the degradation of our financial system.
He cited many instances of financial leaders who agree with his point of view including Henry Kauffman, Paul Samuelson, Gary Becker and Warren Buffet. They concur that the invisible hand of capitalism has failed us. Individual investors should look after their own investments and move away from short-term speculating to long-term investing in businesses. We must create a new fiduciary society and to bring back traditional values and professional stewardship. Bottom line: Watch out for your own economic self-interest!!
Following the entertaining and informative lecture, a lively question and answer session followed and the meeting ended at 11:30 a.m.
Respectfully submitted,
Ruth Miller
There were numerous visitors. Ruth Miller introduced her husband, Bernie Miller, Harvey Rothberg introduced Klaus Florey, George Folkers introduced Paul Rutherford and Paul Lyness introduced his wife, Mary Lyness. There were several other visitors but alas their names were not recorded.
Joe Bolster introduced the speaker, John (Jack} Bogle from the great Princeton class of 1951. His topic is “Building a Better Financial System.” At Princeton, Bogle majored in economics. He founded the Vanguard Group in 1974 and is the author of six books on the mutual fund industry. The Vanguard Group is now comprised of 120 mutual funds and has over $120 trillion in assets. In February 1999, Bogle received the Woodrow Wilson medal, given to a Princeton University alumnus for distinguished achievement in the nation’s service.
Bogle began by saluting his Princeton classmates saying that his basic values about investing were formed at Princeton. In December 1949, he read an article in Fortune Magazine about mutual funds which he had never heard of previously. He subsequently wrote his senior thesis on this topic, The Economic Role of the Mutual Fund. He says now that his thesis was shamelessly idealistic, positing that the prime responsibility of an investment fund was to the shareholders, not to the interests of the fund’s managers. Although it was idealistic, he still holds those same views today.
What has gone wrong with our financial system? As Warren Buffet says, for investors as a whole, returns decrease as motion increases. There is a profound conflict of interest between those who manage the industry and those who invest. For a manager, the philosophy is: Don’t just stand there, do something. For an investor, the philosophy should be: Don’t do something, just stand there! Successful investing is all about investing in America’s business. Returns are your friends and costs are your enemies. Nowadays, mutual funds can make no claims of superiority over funds indexed to the market. Index funds keep costs low, leading to greater earnings. For example, Vanguard operates on an “at cost” basis for the benefit of the owners. They capture the returns of the stock market and deduct trivial amounts of cost (1 or 2%). Equity funds turn over almost 100% per year, index funds almost never turn over.
In September 2006 a dinner in New York City celebrated the 30th anniversary of the initial offering of the first index fund, Vanguard. If you had bought 1000 shares then at $15 each, that investment would today be worth $543,000. But the important thing to remember is that the more the financial system makes, the less investors make. The financial service industry costs $580 billion a year, making it the largest generator of corporate profits.
Bogle says that the stock market is a giant distraction. The only real thing to invest in is corporate business – real companies, real products, real services. The daily moves of the stock market, in Bogle’s words, are like “a tale told by an idiot, full of sound and fury, signifying nothing.” When you see strong managers, weak directors and passive investors, don’t be surprised when the looting begins! Managers look after their own financial interests, not the owners’ interests. The average mutual fund holds stocks these days for one year only. That’s another reason for the degradation of our financial system.
He cited many instances of financial leaders who agree with his point of view including Henry Kauffman, Paul Samuelson, Gary Becker and Warren Buffet. They concur that the invisible hand of capitalism has failed us. Individual investors should look after their own investments and move away from short-term speculating to long-term investing in businesses. We must create a new fiduciary society and to bring back traditional values and professional stewardship. Bottom line: Watch out for your own economic self-interest!!
Following the entertaining and informative lecture, a lively question and answer session followed and the meeting ended at 11:30 a.m.
Respectfully submitted,
Ruth Miller