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ACM Journal - Investment Management
12 Apr

A True Investment Loss – Q1 2019 Newsletter

Perhaps the fiercest advocate for the individual investor and shareholder rights ever to walk the planet died during the first quarter: John C. Bogle, who preferred to be called Jack by his legion of friends, founder of the Vanguard Group. Jack was best known for launching the first index mutual fund in 1976. This new approach to investing would ultimately revolutionize the entire industry.

Investing used to be quite expensive. While many would argue it is still too expensive, historical trading commissions, bid/ask spreads, and professional investment management all cost far more than they do today. Jack’s index fund addressed many of those fees, even for very small investors. Merely buying all 500 stocks represented in the S&P 500 Index didn’t require fancy offices, cutting-edge technology, or high-priced investment staff. The cost savings accrued to the investor. Since the investor is the one taking the risk, it seems appropriate that he should reap the lion’s share of the returns. However, that was not the rule when Jack started his investment career.

Today, the Admiral class shares of the Vanguard S&P 500 Index fund incur an annual management fee of 0.04%. That compares with an industry average of over 1% for domestic stock funds. And, as Jack said frequently, in the investment world “you get what you don’t pay for.” The poor performance record of the actively-managed fund industry illustrates this point. Keeping costs low puts more money in the pockets of investors by improving net (after-fee) returns. The low trading activity within index funds also can result in significant tax savings, which is frequently the largest cost of investing.

The cost savings and increased returns to investors from index investing are due in large part to Jack’s advocacy efforts over several decades. In fact, Warren Buffet commented back in 2009 that “if all investors heeded [Jack’s] ideas, they would be hundreds of billions of dollars better off than they are now.”

Bogle’s many books, articles, and speeches have served to educate an entire population of individual investors. There’s even a loyal following, known as the Bogleheads, with an active online discussion forum dedicated to spreading the Gospel According to Jack.

Interestingly, Jack was not an overnight success. Vanguard was born as a result of Jack losing his job at Wellington Management. He launched his index fund two years later, hoping to start with over $100 million. Instead, he attracted only $11 million in initial investor dollars, earning the fund the derisive nickname “Bogle’s Folly”. Indexing has been much criticized over the years as “settling for average,” unAmerican, and even Marxist. Nevertheless, Jack’s tiny fund from 1976 was the seed that grew Vanguard into the world’s second largest asset manager with almost $5 trillion in managed assets today. (Fun fact: the GDP of Germany is $3.4 trillion.)

Jack came to Rochester a decade or so ago, and I was fortunate to be able to spend some time with him. He addressed a group of more than 100 people that included professional investors; many CFAs and CFPs; individual investors; and business school students. Jack spoke articulately without notes. In characteristic fashion, he offered provocative remarks and invited the audience to disagree with him. He loved a good debate. I still have a picture of the two of us at this event that hangs above my desk.

Later that evening, I had dinner with Jack. I asked him about a recent article saying he left $10 billion of personal wealth on the table when he set up Vanguard as a mutually-owned company. Fidelity, Vanguard’s biggest competitor at the time had an estimated value of around $10 billion, and was privately held by the Johnson family. The article speculated that Jack would have had a similar net worth if he had established Vanguard with a more typical corporate structure. Jack didn’t care about the money though. He told me that he had earned plenty throughout his career, and noted the pleasure he took when small investors thanked him for being their champion.

Jack earned the respect of small investors, billionaires, and even hedge fund managers. He was truly a man, a myth, and a legend, but also an extremely nice person. The investment world won’t be the same without him.

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