Thanks John C. Bogle for Making Investing Simple
When I realised that in order to become an investor I didn’t have to learn how to pick stocks it was like the clouds had parted and the sun had finally come out. And I have American John C. Bogle to thank for that. Last week he passed away at the age of 89 but he leaves a huge legacy behind and I know that in years to come many will still be learning from him, just like I did.
I first learned of him probably only three or four years ago when I really started to realise I needed to learn where to put money where it could grow, something it certainly was not doing at the bank. My only options appeared to be to start to put a lot of time and research into companies so I could buy shares in them or to outsource this to a financial advisor. But gut instinct told me individual stocks was fraught with danger for a complete novice like me, I also knew I wanted to manage my own money because having recently met a financial advisor he really put me off due to the fact he was a complete idiot: How do I find a Financial Advisor?
So, I started to research my options and that was when I stumbled across John Bogle for the first time. He founded the company Vanguard and he created the first index fund back in 1976. He had read an article by economist Paul Samuelson who had worked out that professional investors could not perform any better than the average of the whole stock market. John Bogle took the time to test this theory by looking back over 35 years of individual company data and finding the average (it’s fair to say he really liked working with math). The economist was right! So John Bogle thought he would go ahead and start an index fund and put the theory into practice.
He created a fund that contained the biggest 500 companies in the US stock market. All of them were in this fund in proportion to their size. So when you are listening to the news, if the S&P 500 rises on that particular day, your index fund rises, if it falls, your fund falls. An index fund follows the direction of the market.
Professional investors thought it was a dumb idea, an index fund follows the average and who wants to be just average? These guys thought they always had the skills to pick the top companies (despite the research to the contrary) and they thrived on the excitement of it. They also liked to charge investors handsomely for their advice. Index funds were dirt cheap in comparison because there was no stock picking involved, so few people were required.
John Bogle wanted share investing to be boring, yet effective and he wanted people to invest, not speculate on stocks. And he succeeded. As an investor you don’t do anything, instead, the companies in the fund do all the work for you. He wanted people just like you and me to have a shot at creating wealth using the stock market in a simple way. His fund thinks long term, its low cost, extremely diversified and there is no need to buy and sell and continuously trade.
So, I learned all this but I still didn’t quite get how it related to me here in New Zealand.
Throughout the many American podcasts I listened to, where they quoted him or interviewed him there was often mention of The Bet. So after a bit of googling, I was next introduced to Warren Buffett, possibly/probably the worlds best investor and at variest times the richest man in the world as well. He proposed a bet were he invest $320,000 US in an index fund and a hedge fund manager invest the same by actively picking stocks. The winner would get $1,000,000. The Bet began Jan 1st 2008.
Buffett said he was doing this “to publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would, over time, deliver better results than those achieved by most investment professionals, however well-regarded and incentivized those “helpers” may be.”
Year one was terrible for the index fund and the hedge funds were way up but as the ten years ticked by the index fund repeatedly beat the hedge fund. The Bet ended Dec 31st 2017 with the results being that the hedge funds gained only 2.9% a year after fees (which were large) while the index fund gained an average of 8.5% a year. Buffett won The Bet.
Here is a link to the Berkshire Hathaway investors letter, where Warren Buffett explains The Bet in more detail, well worth a read from page 11: “The Bet” is Over and Has Delivered an Unforeseen Investment Lesson
And here is a link to a blog post where they explain it in more layman's terms: A Recap of Warren Buffett’s 10 Year Bet on the S&P 500
This all blew my mind!
This bet beautifully showed me how an index fund works if you just give it time and it showed me that for those who don’t have a room of fund managers working for them, it's better to just index. Heck for those who DO have a room of fund managers working for them, it is STILL better to just index! I had a healthy distrust of financial advisors, fund managers and big business touting for my business and making big promises (remember the finance companies of NZ and their subsequent collapse?) How on earth could I pick through the rocks to find the diamond? When I learned about index funds, thanks to John Bogle I realised I didn’t have to. When I learned that I didn’t have to try to learn how to pick a fund manager or stocks my relief was immense. Finally, a way to get in the game!
These are John Bogle’s eight basic rules for investors:
Select low-cost funds
Consider carefully the added costs of advice
Do not overrate past fund performance
Use past performance to determine consistency and risk
Beware of stars (as in, star mutual fund managers)
Beware of asset size
Don't own too many funds
Buy your fund portfolio – and hold it
Another well-worn comment from Warren Buffett, the best stock picker in the world was that when he dies his advice to his wife is to put everything into index funds. If it’s good enough for her, then its good enough for me.
I didn’t stop there, I kept on googling and before long I discovered JL Collins and his book The Simple Path To Wealth. I read it cover to cover and then listened to him on more podcasts than I could count explaining how index funds work as opposed to buying individual stocks. In his calm way he talked through every single objection I could think of and just provided a clear pathway to take. Buy a broad based index fund consistently over a long period of time. And never sell. And go and do something else more interesting with my life other than watch stock markets.
After learning all this I just HAD to know where could I find this simple, low fee index fund in New Zealand? I had a sinking feeling that it would be like when I visited Canada and discovered the wonder of IKEA for the first time and realising that it didn’t exist in New Zealand. But thankfully index funds were well and truly already here and I pretty quickly tracked them down.
Today I buy a set amount every single month of the US 500 Fund (USF) and the NZ Top 50 Fund (FNZ) using my platform of choice SmartShares. When cash allows I buy as a lump sum. More recently (so I could blog about it) I started buying the NZ Property Fund (NPF) using Sharesies (who buy SmartShares units anyway). And that is it for me. One day I may add a bond fund but not yet.
There is often fierce debate about who you could invest through:
Each is low cost, each track an index. At the end of the day, it's about the individual investor making the choice and just going for it while sticking to the eight rules above.
So, thanks John C. Bogle for driving down the cost of investing, for making it simple, teaching me to diversify and to buy and hold. You have changed my future and the future of millions of average investors around the world. People are going to keep discovering you as I did just a few short years ago, my regret being I didn’t find you sooner. Maybe someone reading this blog post is just learning about you for the very first time and is at the beginning of a new journey themselves, maybe they too will look back in years to come and want to say thank you as well.
Rest In Peace.
A few more resources to check out:
His Wikipedia page is worth a read: John C. Bogle
Forbes article: John Bogle’s Impact On Investors Lives On After His Death
Planet Money: Episode 688: Brilliant Vs. Boring
The story of The Bet between Buffett and a Hedge Fund
SPIVA compares fund performance with the S&P/ASX200 in Australia (they don’t have NZ sorry): SPIVA Statistics & Reports