(Forbes) Jack Bogle was the entrepreneur-founder of Vanguard, now the largest mutual fund in the world boasting $4.5 trillion in assets. He died on January 16 at age 89. Bogle was iconic, fierce and just about the straightest shooter on Wall Street. He was called a Titan of Industry and is remembered not only for promoting basic values like service, candor and stewardship, but also for practicing them.
Bogle’s grandfather was wealthy, but the family lost everything in the Depression. Bogle worked his way through Princeton, washing dishes and taking other jobs. His senior thesis on “The Economic Role of the Investment Company” led to a career as a rising star at Wellington Investment Company. Then in 1974 he decided to start a new investment business based on his theories. He called it Vanguard, to signal his intent to lead an investing revolution.
The model was simple: First, Vanguard would be owned by its shareholders. Second, it would operate with the lowest costs, because this would support the highest returns. To keep costs low, Bogle would invest shareholder money in a fund that mirrored the S&P market returns. He called it index-based fund investing.
Bogle would instill an ethical corporate culture at Vanguard that put the interests of shareholders before those of management. Management would be entrusted with shareholder capital, not entitled to it.
I saw Bogle’s passionate commitment to these principles when we met in 2003 at my church in Manhattan. He had accepted an invitation to speak in a lecture series that also included former Secretary of State Henry Kissinger and 60 Minutes anchor Lesley Stahl.
When I showed him my model to measure the amount of candor and integrity in public companies, he paused and exclaimed, “Like Copernicus you have discovered the true position of the sun!” We laughed out loud and agreed that Capital Stewardship is the sun that shines on successful businesses.
Last year, CEO Warren Buffett honored the genius of Bogle’s investment thesis in his 2017 shareholder letter. He told the story about a bet he made with a prominent hedge fund manager at the 2007 Berkshire Hathaway meeting. He wagered a million dollar investment in a low cost S&P Index fund against a million dollar investment in a basket of hedge funds put together by the hedge fund manager.
Buffett wrote, "if things turned out as I expected, my pick – a virtually cost-free investment in an unmanaged S&P index fund – would, over time, deliver better results than those achieved by most investment (hedge fund) professionals, however well-regarded and incentivized.”
How were these hedge fund managers compensated? First, they shared “significantly” in the funds’ gains – “even those achieved simply because the market generally moves upward…” Furthermore, some managers grew “very rich” thanks to annual fixed management fees that could average “a staggering 2.5% of assets or so.” These fees were often paid even when the fund lost money.
Who won the bet? Buffett reported in his 2018 shareholder letter that the hedge fund investment returned 36.3% after ten years. What about Buffett’s investment? It was up a whopping 125.8%.
Buffett’s lesson from this experiment bears repeating: “Performance comes, performance goes. Fees never falter.” Bogle’s legacy in creating worthy investment opportunities for the middle class was affirmed.
Bogle shared strong views about corporate leadership. He disliked the word “product” and said, “I can’t stand the idea of mutual funds as products we peddle to whomever we can persuade to buy them. I call them trust accounts, or mutual funds... A product is Budweiser beer, Chanel No. 5 or Wonder Bread. I don’t believe our business is selling products. I think it is providing a fiduciary-focused financial service.”
Bogle believed that leaders needed vision, passion and clarity to persuade others and this required “character traits like virtue, candor and reflection.” In an interview with CNBC’s Elizabeth McBride, Bogle revealed how at a young age he focused on what matters most in life and in business.
He recalled a time when he was at Princeton and “his mother and two brothers were living in a rented apartment above the garage of a mansion in Pennsylvania. The apartment had a pool room where his brothers slept, a bedroom for his mom, a hot plate in the hallway, and a bathroom, where they also washed dishes.” When Bogle came home from Princeton for the winter holiday, there wasn’t room for him, so he made another bedroom in the dirt-floor garage.
He told McBride, “I remember walking down the street from this mansion garage in the dead of night. Streetlights on. Not a car in sight. Once in a while it would be snowing. And I thought, ‘Oh, my God, I’m in heaven. The snow is falling, and everything is quiet, and I’m going to work looking forward to the day.’” Then he whispered, “I never thought I was anything, but the luckiest person on the face of the earth.”
