Jack Bogle, founder of Vanguard Mutual Funds, died Thursday at age 89. I call him the “Mozart of Finance” because he transformed the stock market based on a theory from his senior thesis at Princeton University.
At an age when Mozart was scribbling operas, Bogle was thinking about disrupting how investments are done. With no political or ideological agenda, he turned millions of middle-class Americans into capitalists.
If you have a 401(k) and are invested in a stock index fund, you can thank Jack Bogle.
In 1974, when he started what would become the first Vanguard Fund, the financial community thought he was nuts. Back then, the way to make money in the market was to pick individual stocks (or pay someone to pick them for you) and hope that the stock’s value would increase faster than inflation and the average market growth.
Bogle, whose father had lost his family’s fortune in the October 1929 crash, saw this philosophy as akin to a crap shoot in Vegas, where not only were the odds in favor of the casino, but the casino charged the gambler a fee for the chips, win or lose.
There were mutual funds prior to 1974, and they charged and continue to charge a fee for investment services. Bogle believed if a fund was based on a simple index (e.g. Standard & Poor 500 stocks), the fund’s computer would do the buying on a programmed basis — resulting in tiny fees for investors.
This idea made investing in the stock market more affordable and accessible to Americans.
My late father was a believer in the stock picking theology. He was constantly on the phone to his broker to buy this or sell that. He made money (without an undergraduate degree), but it was a roller coaster ride at the kitchen table at home. My late mother was strident in criticizing his market moves.
What my father probably didn’t realize was how much his broker was charging him for every buy or sell order. Again, my father was good at picking stocks, but he wasn’t sophisticated about fees.
Enter Jack Bogle.
Bogle firmly believed that fees reduced an investor’s return, and, for the most part, weren’t worth the money the investor paid for them. He introduced his index fund at precisely the right time, considering the technical aspects of trading. As computing power grew, the amount of human activity into the actual purchase of buying or selling a stock shrunk. This decreased transaction costs dramatically as the markets moved forward to the 21st century.
Bogle believed if the cost of a stock transaction was pennies on the dollar, then the investor must not be charged a high fee for investing. Ergo, the individual’s return on investment was higher, putting more money into the investor’s account.
Jack Bogle helped millions of middle-class Americans become investors.
Whether it was via a 401(k) program, or putting idle cash into an index fund, investing became a “normal” thing. It didn’t require special knowledge or language. A potential investor could look at a fund’s share price and its fee, compare it to other funds and make a choice. Bogle believed people would choose low-cost or no-cost index funds.
He was proved right, as Vanguard now controls $5.3 trillion in investments.
While Mr. Bogle was turning middle-class Americans into capitalists, he never pushed an ideological or political view (inside-the-Beltway-conservatives take note). He did it by helping ordinary people make money.
Finally, Mr. Bogle left an important life lesson for all of us: failure can be an opportunity. When he graduated from Princeton, he eventually worked for an investment firm. Then he got fired.
Instead of getting angry, bitter, or drunk, he dusted off his senior thesis and founded Vanguard.
If instead, he had enjoyed a comfortable lifetime career at his former employer’s firm, we would have never have gotten a trading culture based on value to the investor. Granted, perhaps someone else may have figured this out eventually, but in reality, millions of American can be grateful that Jack Bogle got fired.
Because today, they’re wealthier for it.
Joanne Butler was an international trade specialist at the Office of the U.S. Trade Representative and at the Foreign Agricultural Service at USDA (GHW Bush administration). In the GWB administration, she was the senior adviser/speechwriter for an assistant secretary at the Department of Labor.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.