John Bogle, the guy who could have been the world’s richest man.

John Bogle could easily have been the richest man in the world. He is the founder of Vanguard, the least glamorous company in finance. Vanguard is among the world’s largest money management companies, with over two trillion dollars under management. TWO TRILLION! A little bit of two trillion dollars is a whole lot! He could have all it all, but instead he had integrity.

Before John Bogle came around, the S&P 500 Index was just a concept. The index existed only as a reporting methodology for the grouped performance of the 500 largest publicly traded companies. There was no index fund, there was only the index. Standard and Poor’s started recording performance of their S&P 500 Index in 1923, and has done so ever since!

Money managers have long compared their own investment performance against the index. The index was the benchmark they measured themselves against. The S&P 500 index let them know if they were successful or not, and by how much. When Vanguard was just getting started in the 1970’s, Bogle said, “Why not just have a mutual fund of the index, and clients could get the index return?” (Not a direct quote, just my own conjecture of what he was thinking.) It was a completely radical idea. Why would anyone want just the index return? The point of money management was to try to beat the index, not match the index.

Allow me to digress for a moment. Any person who can consistently outperform the index on a regular basis will achieve worldwide fame and unimaginable wealth, such as Warren Buffett. Do you know any other investment guru? No. It’s because there hasn’t been anybody else who could beat the market year after year. There have been a couple of one hit wonders here and there. Pro tip: the next time some someone says that they have a great investment idea, just say you’ll wait it out. If they really are that good, they will really become that rich and famous, and they will be able to repeat their success. In the meanwhile, invest in the Vanguard S&P 500 Index because at least you know you’ll be getting the market return.

Back to Bogle. Bogle saw that managers were charging around 2% for a management fee. He calculated that the index fund would cost around 0.3% to manage. You could say the index fund was already outperforming the other funds by 1.7%. Analysis has shown time after time, the S&P 500 Index will outperform most large cap funds on an after-tax after-fee basis in a 3 year horse race, and ALL large cap funds after a seven year time period. So why not just invest in the simple index? Despite all of Wall Street’s obfuscation, sophisticated investors know that the lowest fee S&P 500 Index fund is the wisest place for large cap equity exposure. This is how Vanguard’s S&P 500 Index fund became the largest equity mutual fund in the world. All the smart money invested in the fund, and they stayed there. As Vanguard expanded its offerings into other index funds, the smart money went there too.

During the creation of Vanguard, John Bogle did something truly remarkable. He decided that the moral purpose of a money management company was to make money for the investor. And acting on this morality, Bogle organized Vanguard as a mutual company. Every shareholder of a Vanguard mutual fund is also a shareholder of Vanguard. John Bogle does not actually have any special equity ownership in the firm, and during his career at Vanguard he collected a salary like everybody else.

The fees that Vanguard charges on the mutual funds go into the management of the firm. The fees pay the salaries, the office supplies, the electricity, the technology, and etc. Vanguard is very well known for keeping firm expenses as low as possible. If there is any money left over after expenses are paid, money is returned to the fund investors not in the form of a check, but in the form of reduced mutual fund expenses. Remember, the lower the fees, the better the performance. Vanguard’s fees are the rock bottom lowest in the industry.

In a “regular” company, fees are set as high as possible, and excess earnings are put straight into the pockets of the owners of the firm. Fidelity Investments, a competitor of Vanguard, is privately owned by the Johnson family. The Johnson’s make regular appearances on the Forbes magazine list of wealthiest families in America. They have enriched themselves beyond belief on the backs of investors in Fidelity mutual funds. You’ll never see John Bogle on any of the “top wealthiest” lists.

There are plenty of publicly traded companies that also sell mutual funds. There are Goldman Sachs mutual funds, Citibank has a fund line, so does Morgan Stanley and so on. The fees of mutual funds produced by publicly traded companies are typically much higher than private companies. A publicly traded firm has to serve two masters: the clients of the firm and also the shareholders. Therefore, in addition to operating expenses, fund fees of publicly traded companies must also support shareholder dividends and retained earnings. Guess which mutual funds are among the poorest performing in the industry? That’s right, the high fee funds run by the publicly traded banks. Goldman Sachs has frequently been among the worst performing.

If not for John Bogle and Vanguard, fees on Wall Street would be a race to the top. You know how much those bankers just love charging the highest fees possible. But Bogle took a stand and decided that an investment firm should exist to serve the investor. Strangely, this seems to be an entirely unique and foreign concept on Wall Street.

John Bogle, American saint and founder of Vanguard. He is truly one of my heroes. Open a Vanguard account, and invest in the S&P 500 Index fund!

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2 Responses to John Bogle, the guy who could have been the world’s richest man.

  1. Alex says:

    Nice article about a man that gave the middle class a chance at real wealth. Good job!

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