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WORLD FOCUS: Don’t count on it

July 8, 2011
Last year, Forbes magazine called John C. Bogle, the founder of the Vanguard Group of Mutual funds, the world’s first and largest index mutual funds organization that manages approximately $1.8 trillion in assets, as the person who “has done more good for investors than any other financier of the last century.”

Bogle, apparently is not done, yet. In his new book, “Don’t Count on it!: Reflections on Investment Illusions, Capitalism, ‘Mutual’ Funds, Indexing, Entrepreneurship, Idealism, and Heroes,” a collection of 35 essays, he tells the story of his mission in life, namely helping investors to achieve their financial goals.

But Bogle’s book is much more than an inventory of achievements. It is also a cry in the wilderness in an effort to rescue capitalism, as we know it. Not just from the excesses of greedy managers who focus on short-term gains, but also from the illusions of investors who believe in their ability to capture high return, disregarding the fees they pay, taxes, etc.

In one of his essays, Bogle illustrates that a $1,000 investment made 50 years ago should have earned a theoretical return of $212,000. But the actual return, to the investor, was a mere $4,300.

“The most damaging illusion for investors is their belief that they capture the stock market’s return. For example, if the stock market provides an annual return of 7 percent, we know that the average investor’s return will fall short of that by amount of fees they pay, taxes, inflation, etc….. In other words, the investor’s cumulative return is less than 20 percent of the market return,” he was quoted in the editorial review of his book.

In 2009, during the deep economic crisis that rocked our country, Bogle, in an interview with the Lake Placid News and The Virginia Gazette, pointed out, one of the main reasons for the severity of the crisis is “the mutation of capitalism from ‘owner’ capitalism to ‘management’ capitalism.”

He explained that the core problem is that money managers of financial institutions, such as mutual funds and endowment funds, are now owners of corporation.

“Three-quarters of all stocks are owned by financial institutions. The institutional money managers are in the driver’s seat. They are running money for themselves,” he said. “They are not in it for doing public service. Their idea is marketing, and they have forgotten what stewardship means.”

In a recent interview, Bogle pointed out that speculation in our financial markets was a major force in creating the crisis. “Risk ignored, great rewards to speculators, even when they failed, money too cheep, regulation too unfocused. It’s still going on, and we had too much crime and not enough punishment. Powerful institutions spend tons of money on political contributions, aimed at diluting the opportunity for reform. And our deadlocked Congress seems uninterested, not recognizing that a sound financial system is essential to make capitalism work.”

In his book and in lectures, Bogle exhorts investors to demand that our corporate managers put their interest first. “Evaluating stocks used to be based on long-term investment. Now it is based on short-term speculation. The consequences are that you have management of money, instead of the management of a corporation. In pursuit of short-term profits, many money managers embrace a reckless and ultimately destructive approach to investing their client’s money. They trade 10 billion shares a day with each other. It’s lunacy,” he said.

According to Bogle, our financial institutions have a hands-off attitude toward governance. “This must change, we need to create a true fiduciary society,” he said.

John Bogle is the scheduled speaker at the Adirondack Roundtable, Saturday, July 9 at 8.30 a.m. at the Crowne Plaza Resort. For details, visit

Frank Shatz lives in Williamsburg, Va. and Lake Placid. His column was reprinted with permission from The Virginia Gazette.


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