JWA is proud to announce the January 2009 release of Jim Whiddon’s new book, The Investing Revolutionaries. An anthology of critical financial and investing topics, it will highlight the last five years of The Investing Revolution radio show.
The Revolution accepts listeners ideas and suggetions for topics, ideas and guests for inclusion on the show. As a radio show that aims to give you a new perspective on economic topics, we hope Volume 1 of this new series, published by McGraw Hill, will do the same.
Excerpts from the new book:
Everything that is really great and inspiring is created by the individual who can labor in freedom.
-Albert Einstein
Chapter 1
Investing Patriots
Every great cause has at its core, men and women whose hearts run in front of their heads. They are the patriots who are often maligned or cast off by the establishment as wannabes or zealots who have no real foundation. I begin by telling you about several individuals who have taken a stand with the greatness of free markets and used their brains, time and talents to better the cause of economic freedom, and champion the individual investor’s liberty. What an honor it was to have had them as guests on our program named aptly for them – The Investing Revolution.
John Bogle, a Founding Father
John C. Bogle is one of the most gracious gentleman I have ever had the honor of engaging. He is of the George Bush, Sr. ilk of gentlemen – the type that responds to inquiries with personal hand-written notes with a style that connotes the integrity of America’s Greatest Generation. Having been born in 1929 in Verona, New Jersey, just 21 miles from Wall Street, and 175 days before Black Tuesday (the worst day in stock market history), it seems that bringing an approach to investing defined by simplicity and common sense was not only his life’s mission – but his destiny as well. Having developed difficulty with a genetic heart condition as a young adult, he received a heart transplant in 1986. Given his enthusiasm, quick-witted responses and aire of optimism and idealism that surrounds him, I can only suspect that the heart he received must have come from a young person – perhaps even a teenager. Whether or not it did, I know this – the doctors attending him certainly put it in the right place.
John Bogle is a legend in the world of investing. He founded The Vanguard Group, Inc., in 1974 and under his leadership; it grew to be the second largest mutual fund company in the world. He was named as one of the “world’s most powerful and influential people” by Time magazine in 2004 and is currently president of the Bogle Financial Markets Research Center and the author of several books, including one of my favorites, The Battle for the Soul of Capitalism (Yale University Press, 2005). He joined our radio program, “The Investing Revolution,” in 2005 and again in September 2007.[i]
Mr. Bogle, started the first index fund back in 1974 and since then investors have experienced some incredible success in passive investing. Passive mutual fund investing is characterized by low costs and a buy-and-hold mentality. The funds actually track selected indexes such as the Standard & Poors 500.
Thirty years later, passive low-cost investing is still only a tiny part of the mutual fund business. Active fund managers who pick stocks for their mutual funds and try to time entries and exits from the stock market continue to have great success. Mr. Bogle responds to the relative non-use of his passive methods in this way, “The [mutual] fund business is based on selling something to somebody and it’s easier to sell an actively managed fund because you can always find an actively managed fund that is shooting the lights out. If people would only understand that the past is not a prologue to the future, they would be much more successful investors. It’s really quite as simple as that.”
The title of Bogle’s book is an intriguing one - The Battle for the Soul of Capitalism.[ii] On the cover there is a quote, “How the financial system undermined social ideals, damaged trust in the markets, robbed investors of trillions and what to do about it.” It is clearly not difficult to surmise how he feels about the matter at hand. I felt that a historical perspective for our listeners that were perhaps not quite as familiar with the passive-active debate would be beneficial. When asked what had gone wrong with the financial system since he started a passive approach 30 years ago, Mr. Bogle responded with a strong comparison between how the system is designed to work and what it has become – or as he says how it has “mutated.”
“We have taken a wonderful system of capitalism in which rewards went to the owners (those who put up the capital and took the risk) and moved to a system of managers’ capitalism, in which the rewards largely went to the corporate managers. I call it in the book a pathological mutation from owners’ to managers’ capitalism, where far too much of the reward is going to the managers and far too little, therefore, going to the owners.”
“You see this in CEO compensation. Where the CEO of 25 years ago was making maybe 40 times the salary of the average worker, it’s been as high as 500 times [as of late]. And people say, “They should get that kind of money if they do a good job.” Well, the fact of the matter is, these CEOs as a group have predicted over the last 25 years that their [company] earnings would grow at 11.5% per year. They’ve delivered 6% a year and the economy’s been growing at 6.5%. Does that sound like good performance, to fall halfway short of your expectations and half a point behind simply being in the economy? Not at all.”
On the program, we do a great deal of watch dogging the financial services industry. Consolidation is one trend we have noted often in recent years. I wanted to get a feel from John as to the degree the merging of various financial companies was exacerbating the problems of the management incentive. His perspective on this issue was frank and I believe one of the most important points to consider when evaluating the supposed worth of active management.
Bogle explained, ………………………..
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