John Bogle, 76, is as pugnacious as ever in his new book, "The Battle for the Soul of Capitalism. " The Vanguard Group founder finds plenty...
PHILADELPHIA — John Bogle, 76, is as pugnacious as ever in his new book, “The Battle for the Soul of Capitalism.”
The Vanguard Group founder finds plenty to dislike about corporate chieftains, investment professionals and the mutual-fund industry.
He argues that individual investors have ceded control of the markets to financial intermediaries, such as pension funds and mutual funds, which are too caught up in trading to police problems in corporate America.
Meanwhile, Bogle criticizes mutual-fund managers as salespeople rather than as stewards of their clients’ wealth.
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Bogle retired from Vanguard six years ago and began a second career of flaying the industry he helped create. Still on Vanguard’s Malvern, Pa., campus, he holds forth in an office brimming with mementos, awards, photographs, clippings and nautical antiques.
“Battle,” his fifth book, attacks a system Bogle says is run for the benefit of managers rather than investors.
Business reporter Todd Mason asked Bogle to elaborate in an interview. The following is a condensed version of a 45-minute interview, edited for space and clarity. It also incorporates some follow-up responses from Bogle, given during a subsequent telephone interview.
Q: You say that capitalism is moving in the wrong direction. Can you explain what you mean by that?
A: It has undergone a pathological mutation into a new form of capitalism, where far too large a share of the rewards of investing is going to the managers.
Compensation of chief executives is a national scandal. The way they fudged earnings is a national scandal.
How do you build up earnings, even manufacture earnings, to get the price of the stock up so that executives can cash out their stock options?
The typical chief executive officer (CEO), who once was making, 25 years ago, 42 times as much as the average worker, this year is making 340 times.
Q: Stock prices remain high in historical terms. In that sense, aren’t CEOs delivering?
A: Wall Street obviously has always had a bullish bias. You’re not paid by a Wall Street brokerage firm to say the market is about to go to hell.
Q: Is the market going to hell?
A: I don’t think anyone can forecast whether the market is going way up or way down. People should recognize that the stock market and the bond market are paying a very small risk premium. That’s a time when risk is high, when you are paid very little to assume risk.
Q: So your advice to investors would be what?
A: If you are looking at a world of subdued returns, control the one thing you can control. Get costs the hell out of the equation.
Q: Was there ever a point where investors could trust Wall Street?
A: The problem with Wall Street is not a problem of bad apples. We have a barrel problem. The compensation system is based on investment activity. It is a closed system. Each buyer has a seller. Each seller has a buyer, and the man in the middle gets rich. The rule of doing business for Wall Street is, “Don’t just stand there, do something: buy or sell.” The best rule for the investor is, “Don’t do something. Just stand there.”
Q: Isn’t progress being made? Are you a fan of the Sarbanes-Oxley corporate-accounting changes and the Securities and Exchange Commission’s mutual-fund changes?
A: I’m a big fan of Sarbanes-Oxley: requiring the CEO and CFO [chief financial officer] to sign off on financial statements, requiring immediate reporting of stock sales, all of these are important improvements.
The mutual-fund changes are at least a beginning to put investors in the driver’s seat in mutual-fund governance.
The big improvement will come when we have an independent chairman of the board. Imagine the chairman of the [investment management company] negotiating with the chairman of the mutual-fund board when they are both the same person:
“I think we ought to charge 1 percent [management fee]. What do you think?”
“You think that’s enough?”
They are the same person!
Q: What remains to be done?
A: First, the mutual-fund industry needs to lay off and let these reforms go through. They are fighting it tooth and nail.
The parallel is going on in corporate America. The companies are resisting vigorously giving their owners access to the proxy [ballot] to nominate directors and make business proposals. Corporate managers don’t want anyone playing in their sandbox. It’s the shareholders’ sandbox, for God’s sake.
The next thing is, there needs to be a federal statute establishing a fiduciary duty of [mutual-fund] directors. It is a requirement that you behave as a prudent trustee, placing the interest of your beneficiaries above your own.
Q: To get back to your ownership society, do we need Joe Investor reading annual reports and proxies?
A: The ownership society is never coming back. Ninety-one percent of all the stock in America was owned directly by individuals in the 1950s. Now, direct individual owners hold 32 percent.
We have an agency society today, where 68 percent of stocks are owned by intermediaries. The problem with that is that they are not representing [investors]. The managers are putting their own interests first.
We have an ownership society that is gone forever. We have an agency society that is failing.
Q: Isn’t the market working in the sense that investors are favoring conservative mutual-fund families?
A: We do see money going to low-cost funds. But this industry has never found a strategy to deal with our Achilles’ heel. The better you do in the past in creating superior performance, the more money comes in, and the less superior you’ll be in the future.
Q: You have been called unflattering things by industry peers. How do you want to be remembered?
A: I’d like to be remembered as an idealist who did his best to give the average investor a fair shake, and not only at Vanguard. I want to make things so clear that the industry will respond.
Many years ago, maybe 20 years ago, 25 years ago, someone criticized me by saying the only thing I had going for me was an uncanny ability to recognize the obvious. I have always loved that.
Q: The emperor has no clothes?
Q: Do you see yourself as an outsider?
A: No. I go to [trade meetings] every year, in part to see how bad it is. I went to one seminar, how to succeed in a multiproduct — I hate the word “product” — multichannel marketplace.
When he got to the end, he said, “Now, if you’ve gotten my point, you know that to succeed in those markets you need to do only one thing: Pay the distributor the most money. The more you pay, the more distribution you get.”
But the more you pay, the less your investors get.