Bogle hoists Vanguard's banner

Investment vs. Speculation

By John C. Bogle

John Wiley & Sons. 338 pp. $29.95

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Reviewed by Joseph N. DiStefano

Sixteen years after he stepped down as chief executive of Vanguard Group to fix his ailing heart, John C. Bogle remains the investment company's ardent cheerleader, a plainspoken advocate of the old virtues of thrift and probity, a blunt critic of financial-industry aggrandizement - and the most effective marketer in the business.

Bogle ran Vanguard, the firm he formed to market the old Wellington Fund and develop stock-index funds, for 22 years; he's been gone from day-to-day management for 16. He's spent his retirement years singing the praises of the Vanguard way from his office on the company's Malvern campus, writing common-sense books (perennial best-sellers on Amazon's investment list) and headlining magazine Q&As and public events. His consistent message includes a cheerful, relentless, almost Occupy-like criticism of personal greed and Wall Street amorality in general - and of rival fund brands and their fees.

Bogle notes Vanguard's onetime underdog status, even though the nominally investor-owned company's disciplined, hard-working, self-perpetuating Ivy League management team has made it the dominant company of its kind, drawing investors' dollars while Fidelity and other higher-fee stock-picking fund groups have faded.

The firm he founded, now under its third CEO since Bogle stepped down, has been entrusted with sums approaching $2 trillion in other people's money, much of it robotically tied to stock and bond indexes that Vanguard licensed from Wall Street firms.

As the market has moved sideways, deflating the growth-stock funds hyped by business magazines in the Reagan and Clinton bull markets, and as interest rates have collapsed, pulverizing bond yields, Bogle's gospel that even star mutual fund managers cannot beat the broad market indexes over time has earned him prophet status. The best that most investors can hope for, he tells us, is to buy low-cost funds, like Vanguard's, that don't trail the S&P or the broad world benchmarks they are tied to by too much, after fees.

Bogle doesn't praise everything Vanguard has done since he left. Vanguard has for example embraced exchange-traded funds (ETFs), stocks made up of other stocks that compete with traditional mutual funds. Bogle has long condemned ETFs for tempting investors to short-term trading and enriching traders at clients' expense. Bogle again trashes ETFs in this book - and declines to countenance Vanguard's contention that its research exonerates ETFs of association with high-turnover trading - but he also argues that, if you must have ETFs, Vanguard's are the best on the market.

Bogle's latest book tackles what looks like an artificial distinction. His Clash of the Cultures title conjures thoughts of world war and social strife. But he's talking about "investment vs. speculation," two words that to most Americans, who either own no stocks or bonds or have only very small shares in their employers' retirement plans, sound like the same thing.

As usual, Bogle admits the difficulty, and explains: He uses investment to mean long-term ownership - more than a year. Speculation means short-term trading - with positions held mere weeks, days, even seconds, using today's inter-blink trading technology.

In Bogle's approach, investment is sane, virtuous, and leads to reasonable, positive results from companies that make market-useful products. Speculation is cynical, wasteful, alienating, and feeds the rip-off artists who now manage most Wall Street machinery, ignoring its original but all-too-rare function of raising capital for productive (which, to Bogle, means nonfinancial) businesses.

As in his previous books, Bogle is a master of the clear point and the pithy quote - from the investment writings of John Maynard Keynes and Benjamin Graham, pension adviser Keith Ambachtsheer and Bogle's old mentor the late Walter L. Morgan, as well as the Gospels of Luke and John.

If you don't like the way the elaborations pile up, at least the summary chapter moves at a snappy pace. He cites Paul Volcker's putdown of self-serving Wall Street financial contraptions - that the only useful invention of the last generation of bankers is the automated teller machine. He builds convincing tables and point systems showing how much better Vanguard clients have fared than their peers who pay rivals Fidelity, Putnam, or American. He shows how returns collapsed at funds that grew too big or lost their focus - like Fidelity's Magellan, or even, for a time, Vanguard's venerable Wellington fund.

Bogle calls for private-equity manager fees to be taxed at the (higher) rates levied on ordinary income. He backs a "Tobin tax" on financial transactions that would presumably push American business away from wasteful money-chasing-money deals toward productive investments in factories, mines, tech centers, and other physical assets.

These are bold ideas that play well in middle America. But you won't hear them much from Democrats or Republicans, especially in this election year, when they're working Wall Street bosses, bankers, and traders to pay for advertising.

Bogle admits that he was wrong in a long-ago paper he wrote challenging Keynes' warning about short-term, market-driven corporate thinking. Bogle (like Alan Greenspan) tells us he used to trust that corporate bosses' long-term self-interest would push them to do the right thing - only to lose faith when he saw them helping themselves, and wrecking markets, at clients' expense. Bogle's awakening seems to have come a lot earlier and without any of the public disaster attendant on the ex-Fed chairman's feckless disdain for sensible barriers between investment finance-and-trading and commercial lending-and-savings.

Despite those radical touches, Bogle's message is conservative: As an amateur, you can't know enough to pick your own investments, and you can't trust any of those for-profit sharks to do it for you, so trust your money to Vanguard. Our record won't be better than average - no one's can be, except by temporary luck - and we will trim your gains with our fees, but not as much as the others would. And you'll still pay us, because you want to collect money without working, so you have to invest it somewhere.

There are gaps between Bogle's ideals and Vanguard reality. Bogle eschews short-term corporate profit-chasing, yet Vanguard's dominance makes it the investor that corporate managers most need to please every quarter if they are to remain on the S&P and other stock-index lists and continue to attract investors. He condemns millionaire executive pay packages, but Vanguard, with all the votes it controls at major public corporations, hasn't distinguished itself for interfering with compensation schemes. Bogle doesn't really want to overthrow the system; it's enough for him to be able to plausibly argue that Vanguard's version is simpler and more cost-efficient than its other practicioners. Praising the Vanguard way, he builds his monument alongside those of the investment pioneers he admires.