Enough – Bogle

Enough Author Blurb

John C. Bogle is founder of the Vanguard Mutual Fund Group and President of its Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as chairman and chief executive officer until 1996 and senior chairman until 2000. In 1999, Fortune magazine named Mr. Bogle as one of the four “Investment Giants” of the twentieth century; in 2004, Time named him one of the world’s 100 most powerful and influential people; and Institutional Investor presented him with its Lifetime Achievement Award. Enough., Bogle’s seventh book, follows his 2007 bestseller The Little Book of Common Sense Investing.

Enough: True Measures of Money, Business, and Life

Bogle, Enough Cover Illustration

Bogle, Enough Cover Illustration

I like Bogle. I like him for starting the index fund revolution in the 1970s. He created the first mutual fund that mirrored an index: the S&P500. It held whatever was in the S&P 500 and its holding were weighed by market capitalization. No active manager, no stock picking, no speculation. The result was rock bottom fees. Back then, they called it “Bogle’s Folly.” The big investment firms derided him. Bogle had to start up his own investment company in 1974 (the year I was born) to sell the product. Today, that company–The Vanguard Group–is one of the largest money managers in the world with 20 million + investors and 3 trillion of assets under management. Yes, I am proud to invest my money with them.

The original fund is still going strong today and trades under the ticker VOO. It’s expense ratio is a negligible 5 basis points. What’s 5 basis points? Well, 5 basis points is 5% of 1%. Expressed as a percentage, 5 basis points is 0.05%. For every $1000 invested in VOO, an investor would pay 50 cents each year for Vanguard to rebalance the holdings to track changes in the S&P500. Considering that the average mutual fund in Canada charges 2.35%, 0.05% is a steal. The difference is 4600% In dollar terms, on $1000, the average mutual fund would charge $23.50 and VOO would charge $0.50.

If, as they say, in the long run you can safely draw down 4% of an investment portfolio each year, if you’re paying 2.35% in fees, the investment firm is leaching over half of your returns from you each year. Think about it in those terms: 2.35% is over half of 4%! In effect, you’ve handed over over half of your money to the investment company. When Bogle says that the most important thing is to keep costs low, he’s right!

Think of assets not in terms of net worth, but in terms of the income stream that it generates. If you think of assets in terms of net worth, it’s easy to be careless with money: “2.35% of $1000? That’s only $23.50 a year, that’s not much at all,” someone might say. But if $1000 produces a $40 income stream each year and you have to pay $23.50 of that $40 in expenses, well, all of a sudden, whoa, that seems like a lot of money!

To think of money in terms of an income stream instead of net worth is to go back to an 19th century perspective. Back then, the question wasn’t: “How much is your farm worth?” but rather “How much income does your farm generate?” Think of Jane Eyre or Magic Mountain. To characters in those novels, net worth means nothing. Income is everything. You can’t buy bread or pay rent with net worth. You can, however, purchase shelter and food with income.

How can Vanguard keep fees so low? Most investment firms are there to make money from the people that buy its products. Not Vanguard. Vanguard is structured as a coop. Coops are structured so that profits are returned to its shareholders, who are also its customers. With a traditional company like Fidelity or State Street, they are there to make money for their shareholders. As much money as they can. With Vanguard, all the profits are returned to its customers. How does it return the profits to its customers?–by lowering the management expenses. So that’s how Vanguard works: it creates value for its customers, who are also its owners. Their interests are aligned.

Creating Value For Society

Bogle is all about creating value for society. By structuring Vanguard as a coop, he aligned shareholder and client interests and created value for investors by returning profits to the clients. To Bogle, 21st century America has lost its way: there is too much cost and not enough value, there is too much speculation and not enough investment, there is too much complexity and not enough simplicity, there is too much counting and not enough trust, there is too much managemen, and not enough leadership, there is too much salesmanship and not enough stewardship, there is too much focus on things and not enough focus on commitment, there is too many success and not enough character. In short, with Enough, Bogle thinks that America has lost its way because it has too many 21st century values and not enough 18th century values.

What Is Enough?

Bogle begins and ends Enough with this true story, printed in the 2005 New Yorker written by the writer Kurt Vonnegut:

True story, Word of Honor:

Joseph Heller, an important and funny writer

now dead,

and I were at a party given by a billionaire

on Shelter Island.

I said, “joe, how does it make you feel

to know that our host only yesterday

may have made more money

than your novel ‘Catch-22’

has earned in its entire history?”

And Joe said, “I’ve got something he can never have.”

And I said, “What on earth could that be, Joe?”

And Joe said, “The knowledge that I’ve got enough.”

Not bad! Rest in Peace!

What is enough? If you talk to the fellow on the street, enough might be a thousand dollars more than he earned last year. Enough is funny. Money is also funny. Its like productivity at work: whatever tasks workers are given, they will make it fit their 8hr shift. So too with money: if you make more, you will spend more. You will never have enough.

One of the statistics in the book stuck in my head. America has 4% of the world’s population. If you ask the average American, they’ll say they want more. They don’t have enough. Well, Americans already consume 25% of the world’s output. How much is enough?

America–and Canada–are probably the best place to be born in the world right now. There is universal medicare. Universal pensions. They are the lands with the greatest social and economic mobility. They have safety nets in EI and welfare. There is religious freedom. If you could be born as an average person in any other time or place, do you think you’d have a better chance somewhere else? How much is enough?

I’m Edwin Wong and enough for me is the opportunity to be Doing Melpomene’s Work.