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.