Enough: A Vanguard Perspective - Mercedes-Benz Forum

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Enough: A Vanguard Perspective

This is a very good read from the founder of the Vanguard Group. Written just prior to the meltdown, it provides a very good perspective.

Sometime during the recent holiday season you might have found yourself sitting next to a sincere older relative reflecting on a long life and its lessons. That's the tone of "Enough," a distillation of some new and past arguments by one of the mutual fund industry's storied pioneers and, even before the recent market meltdown, one of its most consistent critics.

The result is a roundup of gripes, hopes, and principles. John C. Bogle reviews his own career, rattles off a pack of technical criticisms about funds, regulators, and chief executives, and argues that many businesses have lost their values by focusing on the dark arts of money-counting rather than on their core products.

"What we call business today is largely about finance," he writes, charging that too many business leaders care more about investment returns than about creating value for customers, shareholders, and employees. What's "enough," essentially, is that which enables you to do "your best to join the battle to build anew ourselves, our communities, our nation, and our world."

These universal truths were worth hearing even before the economy's plunge. But enough with the big ideas, let's talk about me. Vanguard Group Inc., the Pennsylvania firm that Bogle founded and ran for years, and where he still keeps an office, manages the 401(k) plan here at the Boston Globe. The last I checked, my holdings had lost more than 30 percent for the year ended Nov. 30, paralleling a steep bear market. Who is Bogle to preach such lofty principles?

It's a question many investors will be asking of companies managing retirement accounts. The conventional response is to be patient and to wait for the markets to recover.

The elderly Bogle provides something more like an answer: He's been after the industry and rival fund firms for years to change their ways, such as to become more actively involved in the governance of companies, to do away with certain fees, and to give the boards that oversee funds more independence.

Certainly Bogle's non-financial ideas are his least controversial. He stresses the value of family and community and praises the enlightened values of the 18th century, such as Benjamin Franklin's decision not to patent his invention, the lightning rod.

To some observers, Bogle's own story is as influential as Franklin's in the annals of American thrift. After working many part-time jobs in his youth, Bogle happened upon a Fortune magazine article in 1949 called "Big Money in Boston," about the rise of mutual funds, made up of money from individuals pooled to be managed by professionals. Inspired to write a thesis at Princeton on the young industry, he parlayed the document into a job with Philadelphia's Wellington Management Co. and by the mid-1960s was the firm's leader.

This set the stage for a period that Bogle doesn't detail here, his epic and lost battle for control of Wellington, following a merger that he engineered, and his reemergence at the helm of Vanguard in the 1970s, powered by the innovation of the "index fund," a mutual fund crafted to hold a mix of stocks so it wouldn't require a hands-on manager. (Also, the formula let him reduce ties to Wellington.)

Vanguard's resulting low costs gave Bogle a pulpit to beat up other fund industry players, which he does mercilessly here, though without naming names. His criticisms, familiar from past books, are narrowed down in "Enough." A central one is that while institutional investors controlled just 26 percent of company shares in 1950, today that figure has soared to 74 percent, with the growth of fund complexes and corporate pension plans. But these investors tend to hold stocks for much shorter periods and thus function as much less of a check on company management, thereby allowing executive pay to soar and oversight to lag.

Oversight from small shareholders probably wasn't so great back then either, or company pension obligations wouldn't have gotten so bloated. Still, these corporate governance questions are likely to grow as part of the post-mortem on the economy's crash this year, and Bogle's arguments will likely guide the discussion.

A work of such lofty principles is certain to provide ammunition to Bogle's detractors. In one section on the virtues of Vanguard, Bogle boasts that the firm was one of only two recognized in a Harvard study for creating value, the other being Wal-Mart Stores Inc. Bogle has some guts to note this comparison since few companies have been criticized as harshly as the Arkansas retailer over its treatment of workers and communities.

Still, at a time when plunging capital markets, mass corporate layoffs, and rapid policy shifts in Washington have many investors feeling whipsawed, it's a good time to hear out these sentiments - especially since many other fund-industry leaders are more reticent. Bogle isn't running Vanguard anymore, so it's easier for him to hold forth, but in the absence of other fund-industry voices, he has captured a lot of rhetorical ground.

In 'Enough,' John Bogle writes from a fund of experience - The Boston Globe


Being smart is knowing the difference, in a sticky situation between a well delivered anecdote and a well delivered antidote - bear.
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