Most legendary investors became famous for picking winners. John Bogle became famous for telling people to stop trying. His creation, the low-cost index fund for ordinary investors, has arguably helped more people build wealth than any stock picker in history. Warren Buffett has said that if a statue were ever built to honour the person who did the most for American investors, it should be of Bogle. In Part 7 of Legendary Investors, we look at his simple but radical idea.
Who was John Bogle?
Bogle was born in 1929 in New Jersey. His family lost much of its wealth in the Depression, and he worked from a young age. At Princeton he wrote his senior thesis on the mutual fund industry, arguing that funds should be run for the benefit of investors and that most could not beat the market.
He joined the Wellington fund company in Philadelphia, rose to lead it, and was then fired after a merger went wrong. Out of that setback, in 1975, he founded The Vanguard Group.
"Bogle's folly"
In 1976 Vanguard launched the First Index Investment Trust, designed simply to track the S&P 500 index of large US companies. It would not try to beat the market; it would just be the market, at very low cost.
Critics mocked it as "Bogle's folly" and "un-American", asking why anyone would settle for average. The launch raised only about $11 million, far below the target. But the fund, later renamed the Vanguard 500 Index Fund, became one of the largest funds in the world.
An unusual company structure
Bogle also made Vanguard mutually owned. The funds own the company, and the funds are owned by their investors. Profits that would otherwise go to outside owners are returned to investors through lower fees. This structure helped drive costs down across the entire industry.
The core idea: costs matter
Bogle's argument is arithmetic, not opinion. Before costs, all investors together earn the market's return, because together they are the market. After costs, the average investor must earn less than the market. So the investor who pays the least in fees, trading costs and taxes is likely to do better than most over time.
The difference seems small each year but compounds powerfully. A 1.5% annual fee can consume a large share of your final wealth over 30 or 40 years compared with a fee of 0.1%.
"Don't look for the needle, buy the haystack"
Bogle's most famous line captures his philosophy. Picking the few stocks or funds that will beat the market is like looking for a needle in a haystack. Instead, buy the whole haystack through an index fund and you are guaranteed to own the needles too.
Bogle's rules for investors
- Keep costs low. Fees are one of the few things you control.
- Diversify broadly. Own the whole market rather than a few names.
- Keep it simple. A small number of funds covering stocks and bonds is enough for most people.
- Match your mix to your age and risk. He suggested holding more bonds as you get older, though not as a rigid formula.
- Stay the course. Don't let market swings push you into buying high and selling low.
- Avoid chasing past performance. Last year's top fund is rarely next year's.
- Time is your friend; impulse is your enemy.
The evidence
Over long periods, studies such as the regular SPIVA reports from S&P Dow Jones Indices have found that a large majority of actively managed funds trail their benchmark index after fees. Buffett's famous 10-year bet, in which an S&P 500 index fund beat a group of hedge funds from 2008 to 2017, became a public showcase of Bogle's idea.
Criticisms
Index investing is not perfect. Critics worry that if almost everyone indexes, fewer investors will be setting prices carefully, and that a few giant fund firms now hold large voting power in many companies. Index funds also follow the market down in crashes; they do not protect you from losses. Bogle himself raised concerns about concentration of ownership late in his life.
His legacy
Bogle wrote several books, including Common Sense on Mutual Funds (1999) and The Little Book of Common Sense Investing (2007). His loyal followers call themselves "Bogleheads." He died in 2019, but index funds and ETFs are now a core building block of investing around the world.
The takeaway
If you do not have the time, skill or temperament to pick stocks, you do not need to. A low-cost, diversified index fund held for decades gives you the market's return minus a tiny fee, which beats what most people achieve by trying harder.
In Part 8, we meet an investor at the other end of the spectrum: George Soros, the macro trader famous for breaking the Bank of England.
Legendary Investors: the full series
- Part 1: Benjamin Graham
- Part 2: Philip Fisher
- Part 3: Warren Buffett
- Part 4: Charlie Munger
- Part 5: John Templeton
- Part 6: Peter Lynch
- Part 7: John Bogle (you are here)
- Part 8: George Soros
- Part 9: Ray Dalio
- Part 10: Jim Simons
This series is for education only and is not investment advice. Returns, dates and figures are commonly cited historical values and may vary slightly between sources. Past performance does not guarantee future results.
