John Bogle Interview - Index Funds, Industry Structure, Costs & Fiduciary Duty

Bogle identifies 'day that will live in infamy for mutual fund investors': 1958 Supreme Court decision allowing management companies to have public ownership - 'you could capitalize by selling your fiduciary office and that was a catastrophe.' Led to industry 'being taken over by conglomerates with just a few exceptions - Vanguard, Fidelity still private, American Funds still private.' Conglomerates 'want to earn a high return on the capital they put into it and guess what in this business you can earn any return on capital you want. Funds grow, it's a gold mine.' Example: 'Sun Life has taken $4 billion out of Mass Financial which I think they only paid about $300 million for in the last 15 years - $4 billion.' Contrasts with 'day that will live in infamy for mutual fund managers': December 31, 1975 when first index fund incorporated. 'Everybody had the knowledge, the ability to do it but nobody had the motivation to do it... Without Vanguard there wouldn't have been an index fund.'

Bogle's mathematical insight: '100% of Americans are indexers. How did that happen? Because 100% own the entire stock market.' Those who choose to own market by 'owning it share by share in market weight - about 25% of the market - don't play games with each other, don't have transaction costs, don't have management fees.' The other 75% 'obviously owns the stock market too but they trade with each other' incurring costs. Core truth: 'What's good for the manager is bad for the investor and what's bad for the manager is good for the investor because it all comes down to cost.' Industry structure creates inherent conflict between managers seeking profits and investors seeking returns.

Bogle's devastating Goldman Sachs analysis: 'They're going to sit there and tell you the secret of their success is putting the client first. The Muppets I'd say? Let's test that.' Created ranking of 50 largest mutual fund managers by fund performance - counts percentage with 4-5 star funds (good) minus percentage with 1-2 star funds (bad). 'Goldman Sachs is minus 40... they're third from last, fifth from last, there's quite a crowd down there at the bottom.' Vanguard ranks 2nd or 3rd at 'plus 50' vs Goldman's 'minus 50 - just symmetrical, maybe plus 45 and minus 45.' On costs: 'We come in at about 0.25 and they come in at about 1.35.' Hypothetical: 'If they wanted to put their clients first and reduce their expense ratios to industry average 0.90-1.00 they would all of a sudden go up to the average. To get to where Vanguard is... their fees would have to go down from 130-140 basis points to say 25. That's putting the clients first.'