The passing of investment legend John Bogle has brought forth many well-deserved tributes to his professional accomplishments. He was a tireless champion of passive investing and the founder of The Vanguard Group which, as more than a few investors don’t realize, also manages almost $1 trillion in active funds. However, we think Bogle’s most valuable contribution came in the role of investment philosopher. His books on thoughtful investing offer an abundance of sound advice that is too rare in our field.
One of the philosophical understandings that is vital to successful investing is the ability to distinguish between investment and speculation. Bogle notes that long-term investment results are driven by the economic success of the underlying asset. In his book Common Sense on Mutual Funds, he writes, “If there are favorable odds of making a reasonably accurate long-term prediction of investment returns, and if fundamental returns—earnings and dividends—are the dominant force in shaping the long-term returns that actually transpire, would not an investment strategy focused on those fundamental factors be more likely to be successful than the strategy of speculation for the investor with a long-term time horizon?” Focusing on the true sources of fundamental returns should be the first rule for every investor, active and passive alike. We heartily recommend Bogle’s books to every investor, training one’s eye on the philosophical nuggets he identifies as the cornerstones of good long-term investing.
That said, we take issue with some of the recent reporting on passive investing. As with any ideological movement, it is common to find exaggerations and extreme comments made in support of the idea at hand. We have seen Bogle remembrances that include comments (paraphrasing) such as “only 6% of active managers can beat the index.” The studies that generate such a low active manager hit-rate are, in our opinion, using research parameters that place passive investing in the best possible light and are overzealous in their effort to prove a point. In the spirit of Bogle’s own approach of straight talk and no-nonsense thinking, we felt compelled to offer a differing viewpoint.