Jack Bogle Bogleheads 17 Conference - Index Fund Parentage, Growth vs Value, Threats & Future Returns

Opening health update: 'I had a little problem yesterday, a little problem resolved yesterday with my heart which was out of rhythm and I wasn't sure I could be here at all. So I'm obviously happy to be here and in my 89 and a half year happy to be here - don't knock it.' Medical detail: 'All they were doing yesterday and they've done it to me before a number of times - when your heart gets out of rhythm shock it back into rhythm. This is a little machine happened to be designed by one of my first cardiologists Dr Bernard Lown up in Boston called the cardioverter. Well it's a shock and it's over and you're out. They give you a little very light anesthetic and so it's back, got back to normal yesterday.' iPhone monitoring: 'I've already sent it in on my iPhone to my cardiologist this morning and the first words I saw were normal and I've seen so few normals in the last couple of years that don't quite know what to say about that.' Team introduction: 'Here's my wonderful Mike Nolan who I couldn't get anything done without and there's my staunch Emily Snyder. We have a photo of the three of us and actually with Kathy Juncker our kind of part-time person in the new book.' Churchill quote: 'Never was so much owed by so many to so few - that's a Churchill expression about the Royal Air Force in World War II. So our three of us and Kathy are our little team and man do we crank it out. Without them my life would not be a hell of a lot of fun to be quite honest with you.' Bogleheads 17: 'Tim Dempsey who was here for his 17th time. I told him I thought cruel and unusual punishment was prohibited by the US Constitution but apparently not.'

Bogle's ignorance: 'There were a whole lot of roiling going around about indexing when I started the first index fund. I didn't happen to know about any of it - not anything. I didn't know about the efficient market hypothesis. I didn't know about these guys that won the Nobel Laureate I guess that would be Fama and French or French. And when I found out about them I didn't think they were right.' All others failed: 'But in all their fussing around indexing this is the important thing because they all brought out something - maybe seven or eight different enterprises. Not one of those fledgling efforts in indexing bore fruit. Not one of those early pilot lights ignited the flame of indexing. That's a pretty good sentence. All of those tentative forays failed to create a single index fund that was sustainable and successful. All except one: Vanguard First Index Investment Trust.' Defending parentage: 'So whatever the case I find myself defending my parentage for want of a better word of the index fund and I've had a good chance to make that clear.'

Book sales: 'Number 12 has come out, I'm heading for a million copies as you'll see at the top - 949,000 copies. It's just amazing how well these books sell and sometimes for odd reasons.' Swensen forward: 'Common Sense on Mutual Funds 10th Anniversary - 59,000 books. Almost sold almost as many copies as its original which was 1999 which sold 67,000 copies. But I think the reason the second edition did so well is the publisher asked David Swensen to write the forward and David Swensen is a word that elates investors, excites investors, impresses investors. He turned out to be a wonderful friend of mine.' Wine gift: 'Yale gave him 30 bottles of expensive wine - Chateau I think it was called - Chateau $5,000. I don't want to tell you the price but they put it right on the label. And he sent me one. That was about as thoughtful of a gesture as you can imagine.' Pre-signed books story: 'He wrote me a note saying he'd love to have some copies for the new edition for every member of my staff. If I send them down to you would you sign them? I wasn't born yesterday - I waited two days. And then I dropped an email: David, look at your office door, they're right there all signed. Because I just signed them and sent them up FedEx and waited two days to respond to his email. So he was duly impressed and I think should have been.' Philosophy: 'Little things mean so much in this life. I get letters from investors, letter from crew members, people are in deep trouble, someone that I worked with in Wellington Management Company three years ago dying and his daughter thought it would be nice if I would just send him a little letter. Of course I did. I mean what kind of person would not do that? Doesn't matter how busy you are - make the damn time. And that's my philosophy no matter how little.'

Major address setup: 'One of the more interesting speeches came shortly after Bogleheads 16. You'll see two things of note: a major address by John C Bogle and a special introduction by Chairman Jay Clayton of the SEC. As to the major I didn't know what I was going to write about until I got the program and I wasn't born yesterday - I thought I guess I'd better give him a major speech. I mean isn't that what you would do? So I did. It was actually good and later printed in essay form in the Financial Analyst Journal.' Clayton's initiative: 'But even more interesting was special introduction. I said to the people running the Public Company Accounting Oversight Board - how'd you ever talk Jay Clayton into coming over time? He said we didn't talk him in - he called us up when he heard you were speaking here and said he would like to do the introduction. And I'm thinking huh or was it duh?' Clayton's tribute: 'He gave this lovely speech, short sweet. One paragraph: In a lecture: One, I love markets and the study of markets and both amazing things they do and the failures and imperfectly - Mr Bogle is a student of markets and the best kind of student who can see the change before they arrive and plan for them. To make markets better, John is to make life better to the long-term individual retail investor. Mr Bogle's every effort reflects that goal. Well I must say I was basking in...'

90-year history: 'Value is worth a million $491,000 and growth is up a mere $269,000. That's the full period in the chart 1928 to 2017. We're talking about 90 years. But look what happens - the advantage of value is steady, moderate all the way up until 1972 and that's where the big advantage is and then it's pretty quickly going to come to an end.' Cycles: 'Since 1973 it's an all-time high that's the ratio of one to the other. 1988 to 1999 value 15.9% and growth 21%. So you can see there are cycles of growth. This is what got me into all that trouble with Larry Swedroe. He said I'd picked this chart from mutual funds value and growth and I didn't. But it doesn't - nobody knows whether value will do better than growth. All I was trying to do was illuminate the fact that if you think something will be better forever it's highly unlikely that it will be better forever.' Vanguard creation 1993: 'Another Vanguard first is we created the first two factor funds 1993. I had said in a speech a year or so before that the creation of growth and value index funds awaits only the creation of growth and value indexes. When Standard and Poor's created them in 1993 we quickly started our two funds. They happen to be the two oldest and the two largest so-called strategic beta funds, factor funds whatever. Don't be mad at me for that.' Rational strategy: 'What I did was I thought very rational and that is it was not a terrible strategy to accumulate money in growth funds where you had a lower income and therefore lower tax deduction until you retire and then you go into value index funds, have a higher yield which you want then, a little lower volatility and much higher income.' Warning not to trade: '1994 Annual Report: Resist the temptation to abandon one strategy and move to another inevitably after performance disappointments. 1995: Various market segments seem to enjoy cyclical superiority and their unpredictable returns but over longer periods their respective returns tend to converge. To be sure investors must stick to their objectives with consistency and firmness ignoring the siren songs that suggest that moving money back and forth from one segment to another will result in sustainable advantage. Such market timing is all too likely to be self-defeating. Whichever of the trust portfolios you have selected a long-term steady-as-she-goes approach is virtually certain to be the most productive strategy.' Result vindicated: 'My guess that the returns would be the same over that 25-year period certainly came true. Growth index fund 9.52% and value index fund 9.64%. You really can't get much closer than that. I don't know if I was really making a prediction but it certainly came out nicely.' Investor disaster: 'But look at the investor returns below those. The investors lagged the fund by 2.2% a year in growth and by 1.3% in value. So the net result when you accumulate them is the investors fell short of the fund return by 385% in growth and in value index they fell 264% short. What more information do you need to say it's just not a good idea to have funds that are traded because people go with the hot funds of the day.' Value losing streak: '2014 through 2018 - value lost in 2014, lost in 2015, lost big in 2016, lost in 2017 and lost in 2018. That is a lot of losses for people that think their future is in value which just began with all these factor funds back around 2014 when factor funds started to come into play. It's what you expect to happen when something gets popular. When something gets popular it's probably a good idea to avoid it. When mutual fund companies are advertising and hyping and promoting these funds and even giving them shaky records by buying new issues and stuff when they're small you want to avoid that as much as you can.'

The proposal: 'Now we'll talk about common ownership. One proposal is one stock per company per industry. Now that's in the abstract - I don't know what to call it - it's not ridiculous but it's not true. We have probably seven airline stocks by the way. The only example they ever use is the airlines and other businesses are very different.' Destruction: 'But it would do away with the index fund and the S&P 500 index fund would become the S&P 173. Let me say I've been after these writers for two years to tell me what that number is. Okay we're going to do what you say, how many stocks do we own so I can tell you the S&P 500. And in two years I have yet to get an answer. I know why it's so difficult.' Anti-competitive argument: 'They have their view that's anti-competitive, legal implications. The Clayton Act bans possible cooperation between among companies and they want to argue that owning all airline stocks using their example - you know we're telling the airlines keep prices high and keep wages low and we'll make sure your competitors do the same. As if we had that much of a voice with the airlines.' Complications: 'Who decides what an industry is? It's very complicated, ends up probably being a government bureaucrat. And it would destroy the equity, it would destroy the S&P 500 and it would be a terrible problem for people like American Funds which has lots of holdings in each industry. But the worst impact would be on the large index funds.' The critics: 'They're well-meaning perfectly decent people. Actually one of them was a friend of mine who was the valedictorian at Princeton in 2007. You know he's still a friend of mine and he'll have to think what he wants but they write pretty violently about where they tell us that the index fund is the cause of the golden age and the gilded age that we have today. Well that's a little pushy.'

The threat: 'The other threat is the hidden power of the Big Three. This is the concentration of ownership: the likelihood that in the near future roughly 12 individuals - I would use a smaller number - will have practical power over the majority of US public companies and that is a concerning issue, a real issue unlike the issue of common ownership. It's almost the other side.' Current state: 'Think about that - they say 12, I'd say six individuals might be more like it with a practical power to control the majority of US public companies. You know right now Vanguard's about 8%, BlackRock's about 8% and State Street's about 4% and that's 20% now.' Growth question: 'How long will it take that 20% to go to 30%? I don't know, it's going to have to slow down.' Guarantee: 'And I think I can guarantee to you - this might sound like a funny statement - that we will never get there. US public policy will never permit Vanguard or any other large giant institution from having practical power over the majority of US public companies. I can't tell you why it will happen, I can't tell you when it will happen but I can tell you it will happen. It's just not going to be allowed.' Personal perspective: 'For a few individuals really - chief executives of these management companies - these individuals to control American business. I mean it would be absurd. Who the hell are they? I mean I was one of them. I know I couldn't control American business. I wouldn't even want to think about trying.' Resolution: 'So that's two big issues but I'm sure the S&P 500 - as everybody knows the greatest invention for the individual investor in the history of finance - we're never going to get a Congress to approve this kind of divestiture leaving aside the tax impact and all that. So it's not going to happen that way but growth will slow down and there may be a whole lot of new ways to deal with the issue of governance.'

Stock forecast: 'Future returns you've probably read what I've had to say about this. We're looking for six percent - four percent for stocks and you can see 6% fundamental return minus 2% speculative return (lower valuations).' Bond forecast: 'For bonds way below since 1974 - 8% versus 3.5%. So I think combination returns of bonds and stocks could be more like 4% compared to 12%.' Historical context: 'These are equities only. 12% over Vanguard's history. You guys that have been investors that time most of it. Last - well I've got 60 years here, nobody's been that but 60 years it's kind of an investor's lifetime today.' Compounding impact: 'Look what happens when you compound at 12 versus 4 and the math is easy. You divide the number into 72 and see how often it will double. So 12% you double every six years and at 4% you double every 18 years.' Dramatic difference: 'So at 4% after 60 years your original dollar goes to $11 and at 12% your original dollar goes to $898. So small differences in return or even big differences in return - the differences in return more or less than I expect - suggests that we are basically our reasonable expectations are better save more money. Better save more money, get better, get more costs out of the equation.'