In this Tuesday, May 20,2008, file photo, John Bogle, founder of The Vanguard Group, talksduring an interview with The Associated Press in New York. Boglepassed away this month. (Photo: AP)
Call it one of those old-fashioned moral dilemmas. Not the kindfirst-year philosophy students get preternaturally excited about.(You know what I mean: “A priest, a rabbi, and a minister are on asinking boat that can carry only two people. Which one do you throwoverboard?”) No, this dilemma is much more sinister. Mary Shellysinister. Like a doctor who saves the baby from certain death, onlythat baby turns out to be responsible for starting the zombieapocalypse.
|By now, you've read dozens of eulogies honoring John Bogle, all showering accolades that painthim as some sort of deity. I'm pretty sure “Jack” would have hadnone of this idolatry.
|This is what struck me when I had a chance to sit down with himfor an interview a little more than a year ago (see “Exclusive Interview with John Bogle: Industry'Crying Out for Change'; says Fiduciary Rule 'a TurningPoint',” FiduciaryNews.com, June 21, 2016).
|What would be the first words this iconic persona would speak tome? This man, purported to command legions of devotedBogle-heads –would he live up to this grandioseexpectation I had formed in my head?
|No. His first words were “Call me Jack.”
|Thus speaks a man of high character, a man certain of his placein the grand order of things (and that place isn't as high asBogle-heads infamously believe), a man who retained a philosophicalsimplicity – “purity” might be more appropriate – in hisdemeanor.
|Even Robert Shiller, who wasn't afraid to take issue withBogle's greatest accomplishment, still managed to emphasize hishigh moral standing.
|About Bogle's greatest accomplishment: Many don't understand howinvesting legend Warren Buffet can offer praise to Bogle and hisindex fund invention.
|Indeed, Bogle often told us, Buffet's will says his wife'sassets should be placed in an index fund when his passes.
|If that sounds ironic coming from perhaps the greateststock-picker in history, then you don't understandstock-pickers.
|Behavioral finance expert Vic Ricciardi explains this phenomenonas the “overconfidence” bias, (see, “Exclusive Interview: Vic Ricciardi Says 'StatusQuo' Bias Thwarts Broader Acceptance of Behavioral Finance,”FiduciaryNews.com, January 23, 2019).
|It's particularly prevalent among professionals. For example, nostock-picker thinks anyone else can pick stocks like he can; thus,he advises his family members to place their 401(k) assets (whichhe can't manage since they're captive in a retirement plan) into anindex fund.
|Buffet is no different than any other stock-picker.
|Shiller's point, however, reflects a broader concern with indexfunds in general. Economists understand that, taken to the extreme,index funds will destroy the capital markets (see, “3 Reasons to Outlaw Index Investing Right Now (andOne Selfish Reason Not To) in 5 Acts,” May 12, 2010).
|Obviously, this is something I was quite aware of at the time ofmy interview with Bogle. That academia treated this concern asaxiomatic (even if they considered it merely an academic question)meant Bogle was undoubtedly also aware of it.
|As I talked and talked with him about the DOL's (then new)fiduciary rule, I was chomping at the bit to see how he wouldrespond to this question.
|Finally, I had an opening. “Jack,” I began, “what happens tocapital markets if everyone invested only in index funds?” Iexpected an ardent defense of index funds.
|“Chris, I know what the economists say,” he began, exactly as Ithought he would.
|What he said next shocked me. “It's true but it'll never happen.I don't see index funds ever getting more than 50% of themarket.”
|How's that for honesty? He knew precisely the limits – and thedanger – of his creation.
|It soon became clear to me why you never saw quotes from Bogle(until very recently) about this. His extended answer to myquestion dealt with the competing mutual fund business structures.It had less to do with the investments and more to do with theperils of “too big to fail.”
|Bogle must have been thinking about this topic when he wrote hisfinal book (published last month). In it, he warns of the dangersof index funds capturing too much of the market.
|His article in the Wall Street Journal on this, however, doesn'tdiscuss how index funds will cause the capital markets to seizeup.
|Instead, he emphasizes another point. If there are only two orthree big index fund companies controlling, say, 30% of the sharesof major U.S. companies, well, that just has all the markings of astereotypical James Bond villain.
|And we won't have Jack Bogle around anymore to play the role ofJames Bond.
|READ MORE:
|Who will replace the super hero of mutualfunds?
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