Uncommon Common Sense - An Interview with John C. Bogle

I recently interviewed John C. Bogle on his 10th Anniversary edition of "Common Sense on Mutual Funds." Never before had I seen a book that so openly and successfully juxtaposed that which was said against that which actually happened over the period of a decade. Jack noted to me, "What someone says usually lasts a few moments, but what they write in a book lasts forever."

The late economist and Nobel Laureate, Paul Samuelson, said, "The only thing better than Bogle's original book is its improved revision." I couldn't agree more. Here's a little bit of Bogle's wisdom, as well as how he sees his batting average over the past decade.

Advice for a volatile decade?
Bogle freely admits that he did not anticipate the wild ride investors would be taken on during the decade following the release of the original book. In the first edition, he predicted the return on stocks could be as low as five percent annually, over the next ten years. While he overshot by about five percent annually, his was one of the closest estimates, as most were predicting a continuation of double digit returns.

How did his principles of low costs, long-term investing, asset allocation, and diversification work? I'm with Bogle in observing that they worked brilliantly in a type of market that had never been seen before. The book shows data on performance versus costs and, surprise-surprise, costs destroyed returns. And what became of the twelve mutual funds that had outpaced the market in the past? Only three continued to do so over the next decade.

In baseball terms, I'd say he hit the ball out of the park on this one.

Hopes for the mutual fund industry
Bogle shared his strong hopes with me that his original common sense in the first edition would bring about change in the mutual fund industry. He wanted to drive costs down and turn marketing funds into investment funds. He freely admitted that he struck out on this one.

Casino capitalism has continued to ascend as stocks are traded far more frequently than a decade ago. Mutual fund directors are not acting in the best interests of their shareholders and "ten years later, the absurdity of the 12b-1 fee remains." In fact, these fees have increased from $15 billion in 1999 to $28 billion in 2009.

So, between his advice working and his hopes to change the industry failing, Bogle told me his batting average was 500. He did note, though, that even Ted Williams never batted 500.

Bogle's big change over the past decade
In the new edition, he clearly states his previous reluctance to recommend international investing. The book notes that 48 percent of the S&P 500 sales in 1998 came from foreign sources. Bogle recommends international investing with caution and limiting it to 20 percent of one's equity portfolio.

I asked Bogle if he agreed with my take that this was a softening of his position toward international investing and he stated it was. He also said that he personally had very little invested in international equities, and we both agreed that many investors will get into international after it has been hot, only to speculate and sell after poor performance.

On Human Beings
In the interview, Bogle noted that he had been asked many times why his last chapter was on humans. His response was that investors are humans and often let emotions overcome economics.

Bogle quickly pointed out that the best example of people helping people to invest wisely occurred during the last decade -- the rise of the Bogleheads. He stated the Bogleheads are "A community-minded, largely self-taught, integrity-laden investors." With no financial motive, Bogleheads are quick to help anyone who posts a question on the forum. Even their recent book, The Bogleheads' Guide to Retirement Planning, was done without financial motive, as proceeds went to charity. As a recent Boglehead member myself, I was very pleased to hear him say this.

Why you should read this book
As a long-time believer in low cost indexing, I didn't think I'd learn much from this book. I was wrong! Reading this book offers investors a glimpse of the perspective and lessons learned from recent years that were anything but normal. I have only touched on a few lessons from this book, but can tell you that it increased my understanding of markets in the context of the tumultuous last decade that caused so much pain.

This book, of course, is even more valuable to those that aren't a believer in indexing. It may be a hard read if you're among those who still believe that 90 percent of investors can all be above average. Consider the effort well worth it because the common sense in this book may save your retirement.

Reading this book might also help you realize, as I have, that common sense really is pretty uncommon.

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