John (“Jack”) C. Bogle – 10 Investing Principles

One name that keeps consistently coming up in my education as an investor is John C. Bogle, the person who gave us Vanguard and also the concept of index funds. I have been watching/listening to some of his interviews before his death in Jan. 2019. Even at an age of 87, the man was so sharp! And I must say, every single time I listen to him speak, I learn something new.

John’s statements are easy to co-relate with the historical stock market data i.e. passive index investing generally gives the investor better returns at lower costs compared to actively managed funds. It is for this reason that a large portion of my net worth is tied up in low-cost index funds from Vanguard.

Regardless of what your investing strategy is like, it would be wise to listen to experienced heads such as John and adopt those learnings into your overall mindset.

In this post, I wanted to highlight 10 such investing principles that I have heard from his various interviews/speeches/books.

1. Reversion to the mean

Don’t choose funds based on past winners. One way or the other, all mutual funds do badly in one period and do better in another period

This is true of all investments in general. Past performance alone cannot guarantee future results. With every investment, it would be wise to look towards the future and question is the investment makes a good long-term choice.

2. Time is your friend.

Think of the value of compounding. Get yourself a little compound interest table and see that at 7%, money doubles every 10 years and it doubles again and again and again. And by the time you are at your retirement age, it might 35 to 40 times your original investment…maybe more than that.

I demonstrated this very concept in my previous post where I discussed Yield-on-Cost. This is such a powerful concept that can achieved through a simple buy-and-hold strategy with dividend growth investing.

3. Buy Right and Hold Tight

Pick a good fund and hold it through thick and thin. Don’t get despondent when it does badly, because it comes and goes. So don’t let yourself get distracted by changes in the fund performance or changes in the market.

Again, some sound advice about any investment vehicle. During a market correction, it would be wise to disregard all the market headlines and look instead at the fundamentals of the businesses you have invested in. If nothing materially has changed, stay put.

4. Have realistic expectations

I think common stocks should return at a nominal rate, nominal meaning before inflation…at a nominal rate of 7%. The dividend yield is very important in all this. Reasonable rate of return would be 7%, don’t look for 11, don’t look for 15, don’t look for nothing, don’t keep waiting for the next bear market….those are all guesses! Some of these guesses will come good, some not so good.

Several pearls of wisdom in that statement alone. In general, when attempting to draw estimates about projected growth in your portfolio or also things like valuing a business, it is better to remain conservative. Other useful takeaway is to remain invested in the market and not wait on the sidelines.

5. Forget the needle, buy the haystack

You don’t need to take the risk of owning individual stocks, take the market risk, which is high as it is“.

I think I largely agree that for a common individual who is least interested in the stock market news and world of finance, this would be great advice. However, I prefer a slightly hybrid approach where I have a large portion of my net worth invested in low-cost index funds and a smaller portion invested in dividend growth stocks.

6. Minimize the Croupier’s take

Cost is an important factor

Ensure that if you are investing in a index fund, it is low-cost. The expense ratio can add up over time and take away a significant portion of your total return.

7. There is no escaping risk

Think about this for a second..I don’t like the risk of the stock market. I am putting my money in a savings account or certificate of deposit. There is no risk there. Wait a minute! The return there is probably going to be about 1.5% and we are going to have 2.5% inflation. The real return is -1%! So is there any risk in putting your money in a savings account? You better believe it!

Stay invested and stay the course. Obviously, set aside some cash for emergency expenses. But keep the remainder invested. Cash sitting in a bank account will slowly get devalued over time.

8. Don’t fight the last war

Your job is to get the biggest gross return…inflation is going to take whatever it takes out of that. If it is big return, it will take a little of it. But if the gross return is small, it will eliminate it!

Jack was referring to safeguarding against inflation through special funds like “inflation beaters” (his words, TIPS?). In general, my takeaway from this was staying focused on one primary strategy and not making decisions based on problems that existed several years back or that might possibly exist several years into the future.

9. The Hedgehog beats the fox

The fox knows many things. But the hedgehog knows one great thing. In our business, foxes are those harvard business graduates with their fancy computers…armies of them..who know many things. I know one great thing, which is if you own the market in a low-cost index fund, you are guaranteed to earn your fair-share of the market is kind enough to give us, and lets be clear on this, whatever returns a bad market is mean-spirited enough to take from us. So it is the hedgehog who wins ultimately“.

Simple boring strategies ultimately have the highest probability of success, as compared to complicated strategies that involve timing the market.

9. Stay the course

Let me start with this premise…Many investors lose because of their own behavior and not because of how stocks and bonds do. They are trailers…they buy something that has done well and expect it to perform the same in the future, and it doesn’t. A whole lot of bad behavioral patterns…the find a hot stock manager, they jump on the bandwagon and that does not work….that will not work. So figure out a sound program, set the right course and don’t let all these superficial emotional momentary things get in your way! Another way of putting that is, don’t do something, just stand there!

Again, so many pearls of wisdom from the legend. I have previously written about cognitive biases and how that impacts investment decisions. A good investor must be cognizant of these and try their best to avoid such biases creeping in. Another advice is to avoid frequent tinkering with the portfolio based on market news. In fact, I find it easier at times to “zone out” and stay away from the news and headlines and instead focus on big picture and long-term fundamentals.

So there you go! Words from the legendary John C. Bogle. Dear Sir, I thank you humbly for all your contributions to this world. I am a better investor thanks to you.

Making sound financial decisions

Over the course of investing in high-quality dividend stocks, I have realized that this strategy relies on two key facets:

  • Time
  • Capital Invested.

Let me elaborate on how each of these impact your portfolio’s performance.

Time

In general, the longer you stay invested in the stock market, the greater the odds of you generating a better return on your original invested capital. Hence, it is generally better if you start investing early in your lifetime and stay invested throughout.

Capital Invested

The other factor is simply how much amount your can contribute towards your investments and at what frequency. This is largely dependent on your personal lifestyle and the financial choices you make throughout the course of your lifetime.

I wanted to touch on this second aspect since it is often overlooked when it comes to investing.

A simple equation to look at your savings is as follows:

Savings = Income Generated – Expenses

Common sources of generating income are your regular day job and any side-hustles. One approach to maximize your savings is to excel regularly at your day-job, invest in yourself through improving your existing skillset such that you can command a higher salary. You can further supplement this by having one or more side hustles. But pretty soon, you will come to a point where you will simply be unable to maximize your income: either because of factors that are simply not in your control (eg. your employer cannot afford to pay you more), or because you simply do not have the time or the bandwidth to pick up more side-hustles.

This brings to the other piece of the equation: expenses. Compared to your income, on the face of it, this seems to be a little more under your control. Sure there are aspects such as groceries, gas or daily-use items that we cannot avoid paying. Because we all got to eat, take a shower, commute to work etc. 🙂 I get that.

But what about that fancy new car you are planning to buy (or just recently bought)? What about that fancy new smartphone you are planning to buy during Christmas this year? What about those frequent takeout meals you like spending on? These are lifestyle choices and they eat into your savings, thereby reducing the available capital that you could have otherwise deployed towards generating more wealth.

Even before you begin investing a single dime in the stock market, it is critical that you self-introspect and take note of your current financial situation. Monitor all of your expenses for any given month (or months), sit down with your family or loved ones who live with you and seek guidance on which expenses can be cut down. Work towards creating a reasonable monthly budget and stick to it.

Among the daily expenses that are common in each household, the ones related to paying off debt will impact your journey to financial independence the most. In this specific regard, I highly encourage the interested reader to look at Dave Ramsay’s baby steps. The first four steps, in particular, are critical. While I do not agree with Dave Ramsay’s thoughts on investing, I also cannot agree with him more about paying off debt sooner.

If you are currently in debt, please know that this is not the end of the world. We have all been there (including yours truly 🙂 ). It is actually pretty easy to turn this around and knock off this debt. You just need to turn that “Beast Mode” setting ON and aggressively eliminate this debt. If I have managed to open your eyes and forced you to think about this seriously, I have achieved my goal.

If you are not having any outstanding debt (other than your mortgage), pat yourself on the back! From this point on, you should first look at having an emergency fund. I typically recommend keeping a stash of cash to cover for expenses for atleast 3-6 months. What this amount would be is subjective to each family’s individual lifestyle.

You should then look at maxing out your retirement accounts such as 401(k) and IRAs. Note that these retirement accounts are applicable to US residents only. Your country’s tax laws might call them something else and treat them accordingly for tax purposes. Please check with your tax advisor.

If you have maxed out your retirement accounts, you are killing it! Congrats!! Now, it is really a question of how to choose to invest the remaining money into income generating assets. There are several options available to you depending on your preferences and risk tolerance. My personal preference is to use part of my capital and invest in high-quality businesses that will pay me back cash in the form of dividends. Your strategy might be something else. There is no one right/wrong answer here. It depends. The key here is you are making financially sound decisions to invest in yourself and securing your future.

I would love to hear your views on this subject. Please let me know by dropping a comment below.

Photo courtesy: Damir Spanic

Disclaimer: Please read my disclaimer here.