Right up until his death this week at age 89, Jack Bogle lost no opportunity to make his case. Every time the Vanguard Group founder came to visit my first-year students at Princeton University, as he did for the last several years no matter what physical shape he was in, he was quick to blast the asset management industry. “Too much costs, not enough value”—his deep voice and high energy would startle the students. He bemoaned the eroding sense of professionalism–managing money had become a “business.” He lamented the rise of “speculation” over “investment.” He extolled the value of hard work.
Those tenets could form a roadmap to Bogle’s career as one of the most important figures in American finance over the past century. I am writing a book on virtue in finance–a challenging aspiration given how the industry has evolved. The entire book could be about Bogle. He epitomizes how finance can be a force for good by genuinely focusing on the interest of customers rather than those of the intermediary.
When he came to meet with my students at Princeton, he talked about how he had stumbled upon a Fortune article on the nascent mutual fund industry in the Firestone Library reading room, almost 70 years ago. Up to that point, he had struggled to find his footing academically. A scholarship student at Princeton, he worked long hours in between classes. The article triggered his interest. He wrote his senior thesis on the ethical shortcomings of the mutual fund industry. His central argument: “Mutual funds can make no claim to superiority over the market averages.” Decades later, his ideas around indexing finally caught fire. Vanguard, the asset management firm he founded in 1975 to address the very issues he had highlighted in his undergraduate thesis, is draining assets away from traditional asset management firms at a record pace. The Fidelitys and Franklin Templetons have reluctantly brought down their fees over time.
Academic studies have proven Bogle’s point for over four decades. In 1974, Nobel Prize winner Paul Samuelson published “Challenge to Judgment,” arguing that there was no evidence that fund managers could systematically outperform the S&P 500 on a sustained basis. Around the same time, Charles Ellis published “The Loser’s Game,” which found similar evidence, while Princeton professor Burt Malkiel called for the creation of a mutual fund that simply replicated the market in his seminal book A Random Walk Down Wall Street, first published in 1973.
Retail investors are better off putting their savings into passive, indexed funds, which simply replicate the performance of a stock index, rather than “active” fund managers that pick stocks. Why pay for expensive fund managers when the index they are supposed to beat outperforms them? The more vexing question is why did it take so long for Bogle’s idea to become mainstream? “Too much salesmanship, not enough stewardship” according to Bogle: marketing, rather than investment management, has become the asset management industry’s core strength.
Empirical research suggests that a large proportion of the compensation differential between the finance sector and the rest of the economy comes from rent extraction, or the act of obtaining economic gain by extracting value from society rather than creating new wealth. Value extraction can appear in various forms, including excess fees. One of the most thoroughly documented examples comes from the asset management industry. Bogle stood out in his zeal to buck that trend. Not everyone was enamored. From the time he launched his first index funds and was denounced as “un-American” on posters sponsored by a competitor firm, he never had a particularly warm relationship with finance industry leaders. That’s not surprising, considering that his life’s mission has been to call the industry’s bluff on fees. A relentless champion of small investors against the system, he publicized the self-serving interests of active managers.
Some simply resented the “holier than thou” tone of his message. His energy and missionary zeal tended to translate into a tyrannical disposition at work, by his own admission. Perhaps this explains the frosty relationship he had with some of his successors at the helm of Vanguard. Clashes mounted when he came back to work after a heart transplant at age 67, implausibly re-invigorated after years of diminishing health. Boardroom drama forced him off the board, after which he was exiled in a corner of the executive building on Vanguard’s campus. From there, he proceeded to push his industry agenda.
Bogle gave away his equity to his customers when he created Vanguard as a mutual company. This means that all of Vanguard’s profits go back to its customers, the owners of Vanguard funds, thereby reducing their fees and ensuring that no traditional Wall Street firm could sustainably challenge Vanguard on a cost basis. By doing so, Bogle also effectively forewent vast wealth. He insisted that never in his wildest dreams could he have imagined Vanguard managing over $5 trillion as it does today. He was very wealthy by any absolute standard, but his wealth was very modest by the standards of the finance industry for someone who founded and managed one of the industry’s behemoth institutions. That fit his character. In discussing his lifestyle during lunch right before talking to my students, he pointed out how he had owned the blazer he was wearing for more than 30 years. “Why buy another one?” Bogle asked. He systematically gave away a large chunk of his compensation, funding scores of Blair Academy and Princeton students over the years.
Bogle cringed whenever he was asked whether setting up Vanguard as a mutual company owned by its customers, and focusing on low-cost index funds were meant as acts of public service. He typically retorted that they were tactical decisions, made purely to avoid triggering a non-compete clause with his former employer and to quickly gain market share. Yet Bogle’s pattern of decisions throughout his career and his lifelong crusade on behalf of individual investors point to broader motivation. At times, he described himself as an academic masquerading as a businessman. A better description might have been a public servant masquerading as a businessman.
A sub-theme of the course I teach on ethics in finance explores role models in the finance industry. They are few and far between. The challenge in discussing Bogle lies in the scale of his impact. By so effectively pressuring the asset management industry to lower its fees, he created more social good than perhaps any contemporary in the finance industry. He makes comparisons with other potential role models daunting.