2022 has proven to be a difficult year so far for investors, largely due to inflationary pressures and rising interest rates. Major stock indexes are down by double-digit percentages. And though they have not dropped as much as stocks, bonds, in aggregate, have fared poorly as well.
Particularly during challenging market environments, it is essential to stay grounded and not lose sight of sound investment principles. A guiding light whose advice we can always turn to is John Bogle, the highly regarded founder of Vanguard, whom Warren Buffett asserted “did more for American investors as a whole than any individual I’ve known.”1 Although Mr. Bogle passed away in 2019, the wisdom he imparted through his numerous books, articles, and speeches remains timeless. If he were alive today, I have no doubt that he would convey the same unwavering advice; indeed, the company he founded still operates on these overarching principles.
Accordingly, I thought I would share a piece I wrote in 2008 while working at my prior firm. It summarizes an especially well-timed encounter I had with Mr. Bogle during the onset of the global financial crisis. I find Mr. Bogle’s insight just as relevant and reassuring today as I did back then. I hope you find it helpful too.
September 29, 2008
As some of you know, I am a Deadhead—a passionate fan of the legendary band the Grateful Dead. Well, I just returned from a short road trip with another legion of diehard fans known as the “Bogleheads.” These are disciples of a legend in his own right, John Bogle (a.k.a. “Saint Jack”), the venerated 79-year-old founder of the Vanguard Group and a pioneer in index fund investing, whom we’ve always held in high admiration. (And yes, much to this Deadhead’s dismay, the 1960s are definitely over. Not only do a bunch of investment geeks now call themselves “heads,” but even Warren Buffett himself refers to his annual Berkshire Hathaway shareholders meeting as “Woodstock for Capitalists.” Yikes!)
The Bogleheads originated as an internet discussion group (www.bogleheads.org). And for the past seven years, they’ve held an annual “off-line” conference, with none other than Mr. Bogle himself as the keynote speaker. Fortunately, the event is maintained as a relatively intimate affair, with a limit of approximately 100 attendees. Given this year’s conference was in San Diego, only a short “hop, skip, and a jump” down the West Coast, I took the opportunity to commune with my fellow “heads.” It turned out be a particularly fortuitous time to hear from and interact with Mr. Bogle, as well as other respected investment professionals who share his philosophy (although I was not terribly surprised by what was conveyed and reinforced). Here are some key takeaways:
- Bogle’s own personal opinion is that we could be in for some tough times economically, and that it may take two to three years for overall conditions to improve. As he was quoted in the Wall Street Journal this past week, “It’s very unrealistic to expect some beautiful rainbow after this storm.” That said, he proclaimed, quoting the famous words of King Solomon: “This too shall pass.”
- This is the 11th bear market of his lifetime (bear markets are technically defined as a peak-to-trough drop of at least 20%).
- “Investors’ only recourse continues to be to ‘stay the course,’ assuming they are well-diversified and their investments are cost and tax efficient.” (Our clients’ portfolios have always fit the bill in this regard.)
- Bogle also iterated that even if the economy is weak for two to three years, this does not necessarily mean markets will follow the same path. As he was quick to point out, the stock market is ultimately a “discounting mechanism” that anticipates economic turns. In other words, the market usually turns before an actual inflection point in the economy occurs (in either direction).
- He ultimately believes the stock market is a “huge distraction to the business of investing.” Like Mr. Buffett, Bogle is an adamant long-term, “buy and hold” investor (he defines the alternative as simply short-term speculation). To paraphrase, “Expectations and near-term prices fluctuate like you’re in the eye of Hurricane Katrina. The value of the productive economy doesn’t fluctuate as much.” Bogle referred to an old cartoon of a news announcer who said, “There was no trading today on Wall Street. Everyone is satisfied with their positions.” Bogle then exclaimed (to much laughter and applause), “That’s the day I’m waiting for!”
- While it is practically impossible to predict short-term market returns, Bogle believes it is possible to fairly estimate longer-term returns. Returns are ultimately a function of three variables: (1) the current market’s dividend yield, (2) corporate earnings growth (which is “mean reverting” and is thus fairly stable over reasonably long periods of time), and (3) the change in the valuation multiple per dollar of corporate earnings (in industry parlance, the “price-to-earnings” ratio). His past projections have proven to be reasonably accurate. Over the next ten years, Bogle projects an average annualized return for the market (which he defines as the S&P 500) of approximately 7%. While this is modest relative to the historical long-term average of 10%, it is positive nonetheless, and still superior to what he expects for most fixed-income investments. (2022 update: We now have the benefit of hindsight to compare Bogle’s projection against the actual ten-year return that followed: From September 2008 to September 2018, the S&P 500 provided an annualized total return of 9.1%2—a bit higher than Bogle’s projection but still slightly lower than the long-term historical average. So is there a reasonable forecast for the next ten years? While Bogle’s projection was independent from Vanguard’s at the time, the company is currently projecting U.S equities to return between 3.4% and 5.4% over the next decade. Vanguard’s muted expectations are due largely to the U.S. market’s valuation, which still remains elevated relative to its historical average3).
- In addition to Bogle’s three-hour presentation and Q&A session, there was a panel of respected “Bogle-ian” investment advisors, one of whom stated that a person’s savings rate and/or “burn rate” (living expenses/overhead) will probably be just as, if not even more, important over time than what the market does. A well-heeded reminder that successful money/risk management means doing a good job of “controlling the controllables,” not only with regard to one’s investment assets, but also with regard to one’s overall finances.
I’ll end this note by sharing the personal inscription Mr. Bogle wrote in our own copy of his excellent book, Common Sense on Mutual Funds:
Press on, regardless.
You can rest assured we will continue to press on, employing many of the sound, investor/client-centric principles Mr. Bogle has tirelessly advocated over his long and illustrious career. Saint Jack has been a force for good in this world, for which we should all be grateful.
- Grace Dobush, “Warren Buffett Remembers Vanguard Founder John Bogle as a Wall Street Revolutionary,” Fortune, January 17, 2019.
- Data source: DQYDJ total return calculator.
- “Market Perspectives: Recession Risks Ahead,” Vanguard, July 13, 2022.
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