You may not have heard of Jack Bogle. He never attained the fame of Warren Buffett, say. He certainly never acquired the wealth. But he died this week leaving a far grander legacy: for millions of ordinary families he reinvented what it is to save up.
In 1951, Bogle wrote a thesis at Princeton which made a few points about funds where savers might park their money. To start, you cannot rely on clever stock-picking: “Funds can make no claim to superiority over the market averages.” Investors should think about tracking the market, rather than trying to beat it.
In 1975 this insight became a business proposition: he launched a fund that would just mechanically buy and hold a basket of stocks mirroring the S&P 500 index. It started as a flop, raising a paltry initial $11 million. Who only wants an average fund when so many promise so much more?
But, these days, the fund now known as Vanguard 500 is a $400 billion leviathan. It and other so-called index funds account for $10 trillion of investments.
Part of the reason why it worked so well is that Bogle had another trick: index funds can be run cheaply – and that dovetails with another principle from the young Bogle’s thesis: “Future growth can be maximised by reducing . . . fees” charged to savers.
This sounds banal but the magic of compounding makes it a searing critique of modern finance. A dollar taken from an investor’s savings is a dollar that is not being reinvested for that customer, so it creates a cascade of losses in future years. Invest at 6 per cent for 20 years, and you triple your money. But a 2 per cent investment fee would mean you only double it.
This pair of insights made an unassailable business case. But Bogle’s pursuit of the conclusions of that university thesis required a moral core. Fees on savings are one of the surest ways in the modern world to make obscene money. Bogle eschewed them.
As Buffett himself wrote: “He amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing.”
There are issues with index funds: they mechanically invest in companies that do well on the stock market – but express no moral compass. They are also disengaged shareholders in a world which already has too many of them.
But capitalism would not be under such attack if there were more modest, decent people like Jack Bogle leading it.