Wednesday, February 29, 2012

Does John Bogle Like Anything?

John Bogle is the originator of index investing.  Scanning recent headlines leaves the casual reader with the impression that he's a crusty old dude who can't stand modern life.  He dislikes the current federal tax scheme that gives big breaks to private equity firms.  I totally agree with him on that one.  He doesn't like ETFs because they tempt investors to actively trade something that should be a passive allocation to an asset class.  I see his point but I disagree; ETFs are useful for an index-based strategy that seeks to enhance yield over the short term using options.  He doesn't even like the financial system as a whole for its weak governance.  I do agree and I would come down even harder on proprietary trading than the Volcker Rule.

I've read enough of Mr. Bogle's writing to figure out what he really does like.  He's fond of low-cost, passive indexed, long-term approaches to investing.  Nothing else matters much for the average investor.  The unique thing about him is that he recognizes the existence of outliers like Warren Buffett who somehow outperform average investors and market indexes.  I believe Mr. Buffett's success comes from taking passive investing to an extreme, with a disciplined focus on minimizing risk and cost.  That is deep value investing in a nutshell, and when combined with some simple insights into market anomalies (like merger arbitrage, monopolistic pricing power, and very limited use of options) it makes for an awesome approach to building wealth.

Long live John Bogle, Paul Volcker, and Warren Buffett.  They are in the twilight of life and there are very few investment professionals who can step up to replace them.  Except me, of course.  I've been ready for a while.