Investing legend John “Jack” Bogle spoke about President Donald Trump, Warren Buffett and, of course, investing in a wide-ranging interview with CNNMoney.
Here is a full transcript of the 10-question interview with the founder and CEO of Vanguard:
1. Warren Buffett just called you a “hero” to investors in his latest annual letter. How did you react to that?
Jack Bogle: I had no idea it was coming. We have a nice relationship. He just agreed a month ago to endorse my new edition of the “Little Book of Common Sense Investing.” I am in touch with him periodically. I write something, and he gets back quickly in half an hour or less. We have a lot of mutual respect.
I’m still the same person I was before Buffett called me a hero. I still think of myself as a kid just trying to do the right thing. I started a company that was the essence of simplicity. I picked a business model never tried before and an unprecedented strategy focusing on index funds. I never had the slightest interest in building a colossus, and I was too stupid to realize if you gave investors the best deal they will ever see, to own the market and hold it forever, then you’ll build a colossus whether you like it or not.
I feel good about it all. I don’t consider myself a hero, but maybe, just maybe, it may take a hero [like Buffett] to know a hero. The remark has gotten a lot of attention. Nobody has written me to say I’m a jerk. I’m almost 88. I got a heart transplant 21 years ago. It’s a thrill to live this long and see all this happen.
2. You’ve said you don’t feel “super confident” about the market and economy right now. Why not?
Jack Bogle: I don’t feel super confident in the sock market. By any historical standards, it’s pretty fully valued. I use a price- earnings (PE) multiple — a good indicator of value, although it’s not perfect. I get it up to 26x earnings. That’s way on the high side. Long run, the norm is more like 16x earnings or 17x earnings.
I’m a stern taskmaster. I use last year’s actual earnings. And I use reported earnings. I’m using last year’s reported earnings. Wall Street, of course, is using this year’s projected earnings. So they come up with a PE of 16. So if you ask me, I’m not super confident at 26. If you ask anyone from Wall Street, they would say they are super confident at 16. The numbers are the numbers.
We don’t know what earnings will be this year. They could well be up. We will just see about that. I don’t know. But I can say the economy will have difficulty growing more than 2.5% this year. It’s hard to see corporate profits growing at a much faster rate. In the long run, take the last 100 years, the correlation between corporate profits (after tax) and GDP is 98%. So my judgments are based on the long-term.
I couldn’t care less about what the market did today. If you’re a long-term investor, your one big bet is that GDP will be significantly larger in 2027 than it is today. And that’s that. I am the apostle of simplicity. That comes from Vanguard’s index fund strategy: own American business and hold forever at the lowest cost you can possibly hold it at. It’s an extraordinarily simple strategy and the mathematics are enduring.
3. You’ve said that a number of President Trump’s policies are “bad for society.” What do you mean by that? What concerns you?
Jack Bogle: I don’t “bell the cat” with the president. But I talk about these things generally. Anything that increases the gap between rich and poor is bad for our society. It’s bad for our society and bad for our economy and stock market.
The second thing that concerns me is anything that makes racial divisions in our country worse. It’s bad for our society, but also bad for our economy and our markets.
And anything that reduces our bulwark against communism — NATO — is bad for our economy and bad for our markets.
And anything that puts impediments to free international trade is also bad for our society and bad for our economy.
At least wiser heads, to a certain extent, seem to be prevailing. It’s unknown to what extent he will push those positions on NATO, etc. Now he’s looking at NATO in a much more favorable light. I don’t know how any of these things will come out. But we can’t divorce the needs and interests of society from the needs and interests of economy and our stock market.
If you’re concerned about those things, you want to be a little cautious. I have not reduced my equity positions. I only do that in extreme conditions. I’m about 50% Vanguard bond index funds and 50% Vanguard stock index funds. I have never done non-U.S. stocks. I said back in my first book in 1993 that I saw special risks in international stocks: currency risk, institutional risk, sovereign risks. I didn’t see growth potential that equaled the U.S. I’m a great believer in the U.S. It’s the same reason Warren Buffetts buys the S&P 500 index fund and not the all world index.
Since 1993, the S&P 500has gone up about 800%. The MSCI EAFE inde of international stocks has gone up around 280%. I’m in no position to say whether the same thing will happen in the future or not. But I don’t mind betting on U.S. Half of revenues and profits of U.S. companies come from abroad anyway. I’m not some island of “American first” at all. So that was my position then and my position now. It gets me into trouble. I’ve never taken any position, so many people thought was stupid and wrong.
4. As a child of immigrants yourself, what’s your view on the President’s immigration policies?
Jack Bogle: My Bogle grandparents came over from Scotland in 1868. My Armstrong relatives were immigrants in 1705. They ran a farm in Indiana. We’re all children of immigrants. Open immigrant is good for the economy. I don’t mean just open the doors and let floodgates in. I do think discipline is required, but I don’t think it should be based on religion.
It’s amazing we don’t want to bring terrorists into this country, but I read somewhere that the possibility of being killed by terrorist is roughly equivalent to the possibly of slipping in the bathtub and being killed.
5. Do you believe the stock market is in a bubble?
Jack Bogle: I don’t think it’s a bubble. I think it’s a significant high valuation, but not a bubble. We got a bubble back in 2000 with the tech companies and the new economy. Stocks got up to 38x earnings. That’s a bubble.
A bubble, the way I define it, is when the market value of stocks substantially exceeds the intrinsic value of corporations. That’s not easy to measure. So you can have overvaluations and undervaluations. Generally speaking, unless they are extreme, I don’t think it’s good idea to act on them. Getting out of the market may be good idea, but who would really know? When you sell, somebody else is buying. That’s the reality. Then you have to figure out when the time to get back in. I can’t do it. I don’t know anybody who can do it. I don’t know anybody who knows anybody who’s done it successfully. It’s not a good strategy.
Of course there’s risk in the market. There’s the risk of a pandemic of disease, nuclear war, religious war. All those kinds of things are really worrisome. But I’m not sure how to protect myself against that. If there’s a nuclear war, it won’t matter whether you own stocks or bonds.
6. You’ve said that you see the U.S. entering a period of lower stock market returns. What should investors do?
Jack Bogle: When you look at market history, the average dividend yield has been 4.5%. It is now 2%, so that’s 2.5% dead weight loss on future returns. If you look at earnings growth, the average has been around 5%. I think it’s hard to see 5% regular earnings growth ahead. That’s where investment return comes from. Speculative return is the percentage in the market increase or decrease that comes from the re-valuation of stocks. It’s hard for me to see that’s going to be higher at the end of a decade, but I’m perfectly willing to disclaim my knowledge. It could happen or not happen. But the odds are tremendous against it. When the PE ratio is above 20x, 80% of time returns will be lower for the decade than before. It’s not 100% odds, but it makes common sense.
I tell people: Don’t peek [into your retirement statement]. Don’t open those statements until you retire. When you retire and open that statement, you are going to have so much money, you will probably go into dead faint.
The miracle of compounding returns, particularly if you can eliminate the tyranny of compounding costs, is a fabulous number. It’s hard to believe. One of the lawyers in the first Vanguard index fund — a lawyer for our company underwriters — decided he would buy 1,000 shares of the Vanguard S&P 500 index fundat $15 a share. So he put in $15,000. In October, we celebrated our 40th anniversary and he brought his statement with him. After paying his taxes, his $15,000 was worth $963,000. That’s just very good market returns and staying the course and compounding. It’s not a miracle.
Returns are not going to be that good in the future. It was an 11% annual return in that period. We’re not going to get 11% in the future. More like 4 or 5% from stocks. And bonds are not particularly attractive either. The correlation between today’s yield when you buy into bond market and the 10-year return is 92%. How could it be otherwise? So the bond market will be very lucky to return 2.5% or 3%.
7. You’ve advocated strongly for the Fiduciary Rule to protect average Joe investors. The Trump administration has already delayed implementation and may roll that rule back entirely. Why is that a mistake?
Jack Bogle: I have absolutely no idea what the administration is going to do. In truth, I’m not so sure the administration knows what it wants to do. You’re trying to regulate things that can’t be regulated. As much as the principle of the fiduciary rule is just remarkably sound — something that is self-evident — the implementation is always difficult. Whether they can put any lessening of the requirements for record keeping, for example, is up for debate. But I believe the rule will persist and can’t be watered down.
I did an op-ed for the New York Times on this subject. The Times put the headline: “Putting clients second.” It seems not a good foundation to put clients second. I wouldn’t want to say to a client, “I’m putting you second.” I think the rule will persist and investors will figure it out and go to a firm that has the fiduciary duty at the top of their agenda. It saves time and investors’ money.
8. A lot of people say America is facing a retirement crisis where people haven’t saved enough money. How do we improve our current system?
Jack Bogle: First, probably pretty close to half our population is simply in no position to save. If you’re making $20,000 a year and someone says you have to put 15% away, you will be laughed out of the room. It’s a nice idea, but you’re going to have to depend on Social Security. I’m convinced Social Security has been — and will continue to be — a good investment. It’s protected. It has a cost of living hedge. You can’t take the capital with you, but it’s a very good plan for all of us. Particularly for people who have nothing else to add. I’m not saying it will be easy to live on Social Security, but that’s the reality.
For the others, the main thing is we’ve turned a defined benefit-oriented retirement plan — the pension plan — into a defined contributed plan. The defined benefit is dying more every year. Now we have defined contribution plan, but it’s based on thrift plan — extra savings — not a pension plan. What we have to do is remodel the thrift plan so it looks like a defined contribution pension plan. So that means placing limits on taking money out. It means requiring an entry to the system only by investment firms that operate by low cost because cost is murder to the average investor.
We have to give investors a better option than the typical mutual funds. So there has to be more discipline to save and less cost in the system. The real return on a balanced portfolio is likely to be 2.5% or 3.5% [going forward]. If you’re expecting 10% return, the historical return, and markets give you 3% or 4%, you have terrible shortfall. The market is at a fairly high level today, fully valued, I think. It’s certainly hard for me to see it go up, although anything can happen! I’ve been in the market for 65 years. It’s hard to know the unknowable.
9. You’ve been a harsh critic of hedge funds. Is there any reason someone should ever buy one?
Jack Bogle: There’s no reason anyone would want to buy an average one. This is the dilemma. You could buy a hedge fund of funds, which just piles the fees on and makes you worse off. There will be always good hedge funds. But the ranking will change. The No. 1 hedge fund will be No. 50 hedge fund the next year. Hedge funds go out of business at an alarming rate. Just think about this: from 2009 to 2016, hedge funds earned 5% a year. Our balanced index fund of stocks and bonds earned 10.1% a year. You might get lucky with your hedge fund choice. But getting lucky is not the formula for investment success.
10. You ushered in an index investing revolution. There are two big concerns I hear a lot: 1) That index investors are passive and don’t police what CEOs and companies do anymore and 2) There’s a danger of too much correlation in the market. How do you respond to those critics?
Jack Bogle: Large institutional investors are going to start playing a much more significant role in corporate governance. That includes Vanguard, BlackRock and State Stree. They were all brought together by [JPMorgan CEO] Jamie Dimon. They have a statement of principles for long-term investors in stocks. It’s not the end, but it’s the good beginning.
There is a social responsibility and corporate responsibility to make sure companies are running in interests of shareholders. It’s not about telling companies how to run themselves, but I do think the hands-off approach we had a long time ago is over. We’re moving gradually toward much greater involvement in corporate governance, we institutional investors.
As to all these correlations, I don’t know what to say about that. I don’t think it makes much difference. All index funds do is neutralize a certain amount of stocks in the stock market. When I came into the business in the 1970s, stock market turnover was around 25% a year, not it’s around 250%. If half of the market is indexed, that would drop from 250% to 125%. That’s still 5 times what it was back then.
No, indexing is not Marxism again, as some claim. That was a silly paper [by researchers at investment firm Bernstein]. Highly inaccurate. Let them complain. I wish they would have some more serious complaints. If you’re on Wall Street, you don’t like the idea of indexing. But when grandma comes to you and says, “You’re a stock broker, what do I do with my money?: You say put it in an index fund. Believe me, that is happening to a remarkable extent.
Bonus: What is the next trend in the investment industry?
Jack Bogle: Simplicity has been the right way to do this since traders stood under the Buttonwood tree back in 1792 and did business at a New York curb. The math is the same. Business returns are created by corporations. All that’s left is how that investment return is allocated between Wall Street and Main Street. When Wall Street get less, Main Street get more.
The rise of indexing is part of a sea change in how people thinking about investing. Wall Street is all about allocating returns between insiders and outsiders. When outsiders wake up, they will take their money to firms that do the right things for them. They will hold diversified portfolio at low cost and hang onto the portfolio forever. It’s so simple and so boring. But you won’t be bored when you open up that statement on your retirement day.
