NEW HAVEN –The death on January 16 of Jack Bogle, the founder of the investment company Vanguard Group, was met with a slew of flattering obituaries. Of course, obituaries often praise their subjects. But Bogle’s seemed more laudatory than usual. And I think there is a reason: Bogle was an unusually morally directed man. Of course, we cannot judge his success by his personal wealth. When Bogle established Vanguard in 1975, he set it up as a nonprofit. The company has no outside shareholders; all profits are reflected in lower fees, not dividends. By metrics other than founder wealth, the Vanguard Group is a huge success. It invests for 20 million people in 170 countries. It has $4.9 trillion in assets under management. It may be the world’s most significant investment company. But this does not mean that we must agree with everything Bogle said, or malign others who are not nonprofit. His is not the only way to be moral. Bogle’s morality was rooted in his conviction that trying to beat the market is futile. This was reflected in his 2007 book The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. His investment strategy is “the only way,” and the opening paragraph of the tenth-anniversary edition sums it up: “Successful investing is all about common sense. As Warren Buffett, the Oracle of Omaha, has said, it is simple but it is not easy. Simple arithmetic suggests, and history confirms, that the winning strategy for investing in stocks is to own all of the nation’s publicly held businesses at very low cost.” This means that one should simply invest in an index fund that represents the whole market and then call it a day. But it is a little odd to be quoting Buffett in support of such a strategy, given that the Oracle of Omaha owes his fame (and his moniker) entirely to his ability to outperform the market. Bogle’s statement is best interpreted as applying to his audience of individual retail investors. Because the market portfolio is the average investment for all investors, the average investor can do no better than the average for the market. But the excitement of the market causes people to lose sight of that. As Bogle puts it in his book: “The stock market is a giant distraction from the business of investing.” He is right about the distraction. People look for excitement, and the stock market is one game they can play. People will gamble anyway, if not in the stock market, then in a casino. On the other hand, it is no doubt better overall if people learn lessons about business and real economic activity, rather than card-counting tricks. There may be rough rides for some, but the hurly burly of the stock market is also a sign of a vibrant economy. Advising people simply to hold the market is advising them to free-ride on the wisdom of others who do not follow such a strategy. If everyone followed Bogle’s advice, market prices would turn into nonsense and would provide no direction to economic activity. I remember exactly when I began to appreciate the complexity of the moral issues money management entails: October 8, 2009. I received a phone call from the eminent MIT economist Paul Samuelson, who had been my teacher when I was a graduate student in the early 1970s. He was 94 years old at the time, and two months later he died. I was so impressed by the call that I took notes on it in my diary. Samuelson was responding to my recent publications advocating expanded insurance, futures, and options markets to mitigate the financial risks – for example, those related to housing prices and occupational incomes – that ordinary people face. He said that these markets could, if pitched to the general population, turn into “casino markets,” with people using them to gamble, rather than to protect themselves. He then brought up the example of Bogle, who “gave up a billion dollars for a concept,” Samuelson said. “He could easily have cashed this in,” but he didn’t. “The miracle that was Vanguard came from Bogle’s principles.” I thought he was right. In the long run, markets reward principled people. But there is still need for an expanded set of risk markets, because these markets can – and do – carry out useful functions, including risk management, incentivisation, and orienting business. The problem is that attention to these markets requires intelligent and hard-working people to help others in their investing. Theirs is not a zero-sum game, for they help direct resources to better uses. And these people must be paid. Even Vanguard, which now has a number of different index funds, hires investment managers and charges a management fee, albeit a low one. Not every fund needs a low fee. We live in a world where constant and rapid change and innovation require more attention, and attention is costly. While many financial managers are at times unscrupulous, a higher management fee is not always a sign that something is wrong. But Bogle is still a hero of mine, because he provided an honest product and was motivated by a sincere desire to help people. And he should be a hero to all, because he showed that markets eventually recognise integrity. The author, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the third edition of which was published in January 2015, and, most recently, Phishing for Phools: The Economics of Manipulation and Deception, co-authored with George Akerlof. Copyright: Project Syndicate.
