John Bogle: "I Can't Explain The Market"

On Dec. 31, John Bogle leaves the board of Vanguard Group, a $520 billion titan he founded in 1974. This was no smooth move. After turning 70 in May, Bogle learned Vanguard aimed to enforce a retire-at-70 policy. He squawked, forcing a face-saving pact with the board and his successor as chairman, John Brennan: Bogle quits the board but stays in his bully pulpit with a new research job at Vanguard. What's in Mr. Indexing's sights now? He told me when I met him recently in his office at Vanguard's suburban Philadelphia headquarters.

Q: Your final days were pretty rocky. Why?

A: It worked out in a way that's satisfactory to me. Life is complicated. People are complicated. I think we all do our best in some of these struggles. We all have egos, we all have pride. The time comes when you have to put that aside and make things work.

Q: So you and Jack Brennan have kissed and made up?

A: I don't know if I want to get into that too much.

Q: Do you hope fund directors will be better guardians of investors' money?

A: Hope springs eternal, even in Bogle! I've encouraged the Securities & Exchange Commission to do a study of mutual-fund costs--where the money goes. The best place to start looking into this is money-market funds, because there's no ability to add value. You can find a money-market fund that's spending $140 million on investment management. How could the directors of that fund set that as a reasonable payment for a couple of guys sitting on a money-market desk?

Q: What's Vanguard's biggest threat?

A: To keep the human touch. To go from 28 [employees] to 10,000 and then 12,000 and then 15,000--it's a very, very tough job. Our management is doing an excellent job trying, but it's a little bit like King Canute: We've all got to do our best to hold back the tide.

Q: What was your greatest mistake?

A: I've probably been a little too conservative in my expectations about the market and my preaching about the market. I never expected the market would sell at 29 times earnings, any more than it would fly to the moon.

Q: What do you make of it now, with Yahoo! soaring 24% in a day?

A: I can't explain the market. I think it's hard to see that it's anything but a speculative mania.

Q: What about bonds?

A: Don't buy a bond fund, other than a low-cost one, because there's no point in doing so. But bond funds will come into their own. You can get a 7.5% return on pretty good quality corporates. So the bond market today looks reasonably attractive.

Q: Have you bought into any actively managed funds lately?

A: No. I find it increasingly difficult to justify anything other than index funds in taxable accounts....Investors should know that when they go fishing for funds they should fish in the low-cost quartile. That's a really odds-on bet--and that's the best advice you can get.

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