Investments for the lazy. What are passive funds and how do they work?
As is well known, Thomas Paine's persuasive and well-articulated arguments won the day. The American Revolution gave birth to the US Constitution, which still defines the responsibilities of government, citizens, and society. Inspired by Payne's writings, I titled my 1999 book Common Sense on Mutual Funds and appealed to investors to free themselves from prejudice and magnanimously raise their minds far beyond the limits of the present day. In my new book, I again use the same approach.
If I "only could explain the true state of things to a sufficient number of people and do it thoroughly, deeply and comprehensively, then there can be no doubt that everyone would understand everything and everything would be settled."
In Common Sense on Mutual Funds, I quote one of today's journalists, Michael Kelly, as in tune with my idealistic nature: "The eternal dream (of an idealist) is that if he could only explain the true state of things to a sufficient number of people and do it thoroughly, deeply and comprehensively, then there is no doubt that everyone would understand everything and everything would be settled. This book is my attempt to explain the principles of working financial system for those of you who are willing to listen carefully enough, thoughtfully and meaningfully to understand everything and solve all your problems. Maybe not all, of course, but at least - to answer questions related to personal financial well-being.
Some people may be suggesting that, as the founder of Vanguard in 1974 and the world's first index mutual fund in 1975, I am pursuing my own interests in persuading you to share my views. Of course it is! Not because it will make me rich (I'm not making a penny out of it), but because the principles on which the Vanguard foundation was founded many years ago (its values, structure, and strategies) will make me rich. you.
In the early days of index funds, my voice was like a voice crying in the wilderness. But gradually authoritative and wise people began to appear around, in whose ideas I drew inspiration for the fulfillment of my mission. Today, many of the most successful investors ardently support the concept of index funds, and in academia this approach met with almost unanimous approval. However, you don't have to take my word for it. Listen to opinion independent experts who have no other purpose than to convey the truth about investing. You will find their statements at the end of each chapter.
For example, Paul Samuelson (a Nobel laureate and professor of economics at the Massachusetts Institute of Technology, to whom I dedicated this book) said: “Thanks to Bogle’s ideas, we, millions of savers, can become the envy of our neighbors in 20 years. Instead, we continue to sleep peacefully, not paying any attention to such impressive possibilities.
Another way to put it is to use the words of the Shakers' anthem: "It's a gift to be simple, it's a gift to be free, it's a gift to be where you need to be." Using this approach in relation to investing, we can formulate the rule: simple investing in an index fund liberates you from almost all unnecessary expenses associated with the functioning of the financial system, and as a result you get a kind of gift in the form of accumulated savings in the form in which it it should be, i.e. without loss.
The financial system, alas, cannot remain unchanged for a long time. However, all sorts of changes in the investment climate do not mean that you should give up pursuing your own interests when investing. You don't have to take part in costly madness. If you have chosen the winning game of buying stocks and refraining from doomed attempts to beat the market, you can start simple: use your common sense, understand the system, and invest only according to your own principles. This will avoid almost all unnecessary expenses. Finally, whatever earnings the company earns in the years to come (and this depends not least on their actions in the stock and bond markets), you are guaranteed to become the owner of a fair share. When you understand this, you will find that everything is determined solely by common sense.
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Greetings! We continue our acquaintance with legendary investors who have a lot to learn from. Meet John Bogle - a successful entrepreneur and investor, founder and former fund manager of The Vanguard Group and author of the world's best-selling investment books.
John Bogle is credited with the idea of the index fund. He is also famous for his sharp criticism of management companies. From his point of view, the private investment industry cares little about the interests of clients. The task of the management company and investment funds is to earn the maximum profit for themselves and only for themselves. Including by charging exorbitantly high management fees from customers.
Colleagues in the investment business gave him the sarcastic nickname "Saint Jack". And journalists dubbed Bogle "the conscience of the industry."
In 2004, Time included him in the top 100 most influential people in the world. In 2017, in his Annual Letter, Warren Buffett called John Bogle "a hero to investors."
Short biography
John Clifton Bogle was born in the crisis year of 1929 in New Jersey (USA). He graduated from college and entered Princeton University.
As a student, John read an article called Boston's Big Money (Fortune magazine) about the Wellington Fund, a large investment fund. From that moment on, Bogle knew for sure that in the future he wanted to deal only with mutual funds.
After graduating from university, he was taken to unit trust to work. Moreover, in the same Wellington Fund. At 35, he was already an executive vice president. In the mid-1970s, the fund experienced a strong decline, shareholders massively withdrawing funds. Bogle was fired from his position. But the next day, he returned to the company and proposed a "rescue plan" to management.
The plan was to reduce fees for clients and completely overhaul the structure of the Wellington Fund. Unfortunately, the fund could not be saved. But Bogle did not abandon the idea of "investor orientation".
On December 30, 1975, the first index fund called the Vanguard 500 Index Fund was born. John Bogle proposed a revolutionary idea at that time. The fund should not try to beat the market, but only copy its performance with the help of an index.
Books by John Bogle
"Mutual Funds from a Common Sense Perspective"
In my opinion, Mutual Funds is one of the best textbooks for investors (especially passive investors).
The author reveals in the book many "secrets" of investment funds (to which Russian mutual funds can be safely attributed). For example, Bogle "on the fingers" explains how to figure out an unscrupulous management company. The one that uses dubious methods in working with assets, earns money for itself, not for clients, and provides poor quality services.
I will give a few interesting thoughts from the book (each author “chews” in detail in the text). Note! It's about not about index funds, but about actively managed funds.
- "Always choose funds with low costs."
- "Don't buy too many funds." According to Bogle, the optimal number of funds for a private investor is one or two. If there are more than four of them in the portfolio, this ceases to somehow affect the level of risk.
- "Don't be fooled by the fund's past performance." What John Bogle means is that it's useless to choose a fund based on past performance information.
"The Smart Investor's Guide"
The book is a light version of the previous book Common Sense Mutual Funds. But it is no longer overloaded with information, unnecessary volume and emphasized orientation towards the American markets.
Here are a couple of reviews of the book from legendary investors.
Warren Buffett: “A low cost index fund is the best option for the vast majority of investors. Why? Read John Bogle's book and find out."
William Bernstein: “Wall Street is taking away your future. If you want to stop financial scammers, read this book."
"Don't trust the numbers!"
To begin with, the book has a surprisingly long title: “Don't believe the numbers! Reflections on Investor Fallacies, Capitalism, Mutual Funds, Index Investing, Entrepreneurship, Idealism, and Heroes.
Why is the title more like summary? Because the book is a collection of essays, lectures and articles by Bogle on completely different topics. Materials were written by him for ten years since 2000.
In general, the book "Do not believe the numbers!" about how to make adequate decisions in business and financial and investment sphere. And, of course, that this very adequacy is sorely lacking today. John Bogle writes about how we deceive ourselves and what the consequences are.
The book clearly shows how the financial "kitchen" is arranged from the inside. You can trust the author - he has been “cooked” in the field of investments for more than 50 years. John Bogle writes extensively about the operation of a management company. In particular, about how management companies take care not of clients, but of their own bonuses.
The work is written in a lively and accessible language, with a bunch of illustrative examples and figures. Of the minuses, I would note the following. Like other books by US authors, Don't Believe the Numbers! designed for American readers. Analysis of the financial sector of the United States, references to American books, films and episodes from history. If all the material of the book were transferred to Russian realities, there would be no price for it.
A few rules of entrepreneurship from John Bogle's book:
- "Don't underestimate the obvious."
- "You can catch luck by the tail many times."
- "Choose the least beaten path."
“Investors versus speculators. Who Really Runs the Stock Market?
John Bogle wrote this book relatively recently: in 2012. The main thesis: in our time, the culture of long-term investment is being replaced by short-term speculation. But you cannot be both a speculator and an investor at the same time. You have to choose: greed or fear, peaceful sleep or a beautiful life for a couple of years?
Have you read John Bogle's books?
This material talks about the principles of investing John Bogle, as well as books in which he gives advice on investing in the collective investment market. By pioneering index funds, John Bogle revolutionized collective investment. With the help of what investment methods he succeeded, you will learn in this material.
In the preface to one of his books, John Bogle describes himself this way: “I became known as a rebel in the mutual investment industry. Among the players in the industry, I am without a doubt its harshest critic. And not because I think this industry is bad; rather, because the industry can be much better than it is.”
Bogle's criticisms were mostly directed at his colleagues in the money management industry. He criticized them for their closeness and the desire to cash in on their clients. Bogle himself was said to have "his success in making Vanguard an industry giant, proving that he can do the right thing with his customers and still thrive."
Bogle's brainchild Vanguard Group is one of the largest fund families in the world, with millions of investors and billions of dollars of assets. When creating Vanguard, Bogle used the principles he formulated when writing his thesis in college at Princeton University. The most interesting and important are the following principles:
- minimizing the asset turnover ratio and operating costs;
- creation of new types of funds;
- honesty and openness in dealing with investors.
As part of Vanguard, Bogle offered to operate without stock brokers, selling shares directly to shareholders. For investors, this was a big advantage, since the US has a system where stock brokers can charge a fairly high commission (and determine it themselves) for the purchase of fund units.
In addition, Vanguard's low-cost strategy has minimized advertising and marketing costs for the company's mutual funds. Compared to other funds, Vanguard's expenses were several times lower.
However, Bogle's main merit is considered the study and implementation of index funds. He first proposed the idea of index funds in his thesis, and in 1976 Bogle introduced the first stock index fund, in fact, it was a revolutionary breakthrough in the field of collective investment. Bogle's idea was that in the long run, most investors, including collective investment funds, underperform the market, and commissions further reduce depositor returns. Based on this idea, Bogle created index funds that simply replicate the structure of the entire market or a specific segment of it. The management of such funds does not involve the presence of specialists in the selection of stocks and the implementation of a large number of transactions and, therefore, it is possible to significantly reduce the costs of investors.
Arsagera Management Company's opinion on index funds: Such an investment product as an index fund will be in demand only if developed infrastructure sales. We do not consider ourselves a company with such an advantage, therefore, our investment products will be in demand only if we can provide a better result than the index by our management over long time intervals. To achieve this result, we compare shares of the Russian stock market among themselves and choose the most interesting ones with the help of such an indicator as potential profitability, the calculation of which is based on the forecast of economic performance of companies.
John Bogle is the author of several books on investing and the collective investment industry. In one of them (" Common Sense Mutual Funds”), he gives 8 short rules for investing in the collective investment market:
- Choose funds with low costs;
- Approach carefully to additional costs related to receiving recommendations;
- Don't overestimate the fund's past performance;
- Use past performance to determine the fund's stability and risk;
- Beware of the stars (i.e. star fund managers);
- Avoid funds that are too large;
- Don't own too many funds;
- Buy a stock portfolio and keep it.
Also, here are excerpts from another book by Bogle (“ The Smart Investor's Guide”) that characterize Bogle’s approach to investment:
“All of us, investors, receive the profits of the stock market, which are distributed among all of us. If one made more profit, the other will receive less, and the second will have less than exactly as much as the first has more. Without taking into account the cost of investing, you will lose as much as the stock market will gain, and vice versa. However, the cost of the game reduces the winnings of the winners and increases the losses for the losers. Who wins? I think you know. Intermediaries win...
“Let's find out why investors in general fail to get the profit that corporations create by increasing their profits and incomes and which is ultimately reflected in the value of their shares. To understand the reasons for this, let's turn to the simplest arithmetic of investing: investors as a whole always receive the full profit generated by the market, but it is also necessary to subtract the investment costs from it.
“After deducting the cost of services financial intermediaries- all commissions for managing funds and conducting brokerage operations, all premiums investment companies, the cost of publishing ads and other costs - the profit of investors as a whole, of course, decreases compared to the total revenue by the total amount of these costs. If the market gives a 10% return, then we, the investors, collectively receive a gross income of this 10%. (Yeah, how!) But we have to pay for the services of our financial intermediaries, and we put in our pocket only what is left. (And we'll have to pay them, whether we've made a profit or lost!)
“Most investors in the stock market think they can avoid the cost of investing by carefully checking funds and their knowledge, and by buying and selling stocks quickly, always one step ahead of the rest of the players. However, in reality, everything is not so: if those investors who buy and sell last have at least a ghostly chance of a decent profit, then those who show efficiency and quickness are doomed to losses in advance. According to one study, the most active traders (constituting about a fifth of the market) renew their portfolio by more than 21% per month. When the stock market returns reached 17.9% per annum between 1990 and 1996, their cost of investing was about 6.5%, leaving them with a return of no more than 11.4% per annum. It turns out that they received only two-thirds of the profit that the market gave.
“Investors who, once invested, immediately exit the game and never pay in vain, dramatically increase their chances of making a solid profit. Why? Yes, because they buy a business, and the business as a whole brings significant profit, both through the growth in the value of shares and in the form of dividends. Yes, individual companies often go bust. Firms that build their activities on a deliberately unsuccessful idea, or have no strategic flexibility, or with weak management, inevitably become victims of creative destruction - that natural selection that characterizes competitive capitalism; but they disappear only to make room for new, more successful ones. But overall, our vibrant economy is showing business growth over the long term.”
Bogle's principles have made him one of the most controversial figures in the stock market. Fighting for the honesty and openness of stock market participants, he defended, first of all, the interests of private investors, who began to look up to him when making investments. The index funds created by Bogle are now extremely widespread, and Bogle's books are reprinted with enviable regularity, allowing everyone to get acquainted with his ideas.
With his book Common Sense Mutual Funds. New Imperatives for the Intelligent Investor” American financier John Bogle opened a new era in investing. Let's talk about what he came up with
Name: Common Sense Mutual Funds. New imperatives for a reasonable investor”
John Bogle
Edition: Moscow, Alpina Publisher, 2002
We first published this review in June 2018. Since then, the audience of RBC Quote has increased markedly, and in August 2019 . Especially for those who decided to take advantage of the VTB offer and for transactions in the first month of service, we decided to post this material again.
RBC Quote believes: good knowledge and understanding of the financial topic can help you make money more money. This means that in addition to news and articles, the investor will need books, plain language talking about investing. Here is a story about one of these books.
Gentleman of Fortune
John Bogle is undoubtedly a lucky man. He was born into a wealthy family, but five months before the start of the Great Depression of 1929, during which his parents went bankrupt. He studied with his twin brother in a free public school. For their outstanding performance, they were given a scholarship to study at a good private school.
After graduating from Princeton (already without a brother), Bogle joined one of the first American mutual funds (mutual funds, in the Russian version it is a mutual fund) - Wellington Management Company. Over the course of 20 years, he rose to executive vice president, was the favorite of the founder of Wellington and was supposed to replace him at the helm of the company. In 1973, Bogle made several acquisitions of other funds, failed, and was fired.
But again, lucky. Opened his own management company, The Vanguard Group. I opened it just in time - it was at this moment that the mutual fund boom began.
What exactly Bogle came up with and why it matters
If before this boom, mutual funds were a niche story for fairly wealthy Americans, then after the boom, mutual funds became participants in the consumer market. financial market, where, as before, the average Americans carried money to the bank.
There were many reasons for this - from the loss of competitiveness by banks (at the end of the Vietnam War, banks were limited to a rate on deposits at the level of 4-5% - and this is all on the eve of the era of the largest inflation in US history) to a real strengthening of the middle class (the era from the beginning of 1960- x until the mid-1980s was the era of the lowest level of economic inequality, when even workers could afford a separate house).
After another 25 years, The Vanguard Group became one of the largest property management companies in the United States. On his 70th birthday, John Bogle wrote this book, which brought his name into the "hall of fame" of the financial industry. There are few managers in America, albeit the most successful ones, but there are only a few people who have changed the entire industry.
The fact is that the first fund that Bogle launched was an index fund - that is, it consisted of stocks that were included in the S & P500 index. Bogle charged a lower percentage for managing index funds than managers who promised to achieve best result, using your professionalism - no mind is needed to buy additional shares from the index following the influx of clients' money.
The difference in tariffs was an order of magnitude: by the beginning of the 2000s, managing an active fund cost 2% of the shareholder's funds per year. The management of a passive fund (as they were called because of following the index) cost only 0.1-0.2% per year.
Earn without doing anything. Bogle method
As a result, John Bogle wrote a manifesto. Manifesto of the future final victory of passive control. Of course, it could have been thinner - at least like that of Marx and Engels with their 23-page "Communist Manifesto" - but Bogle wrote more than 500 pages. The man still summarized his 50 years of experience.
If anyone thinks that he does not have the patience to overcome half a thousand pages, then he can look at the Wikipedia chapter about Bogle, where there is summary his principles. It consists of only eight items.
John Bogle's most significant statement: The money you pay active fund managers doesn't get paid back. That is, sometimes someone can still earn an income that exceeds the manager's fee - the management fee, but there are no permanent winners and it is impossible to predict who will be lucky. Then why take money away from investments to pay helpless managers?
Immediately after the publication of the manifesto, fierce battles began between supporters of active and passive investments, in which the latter received the nickname Bogleheads, that is, "bogheads." These disputes, by the way, continue to this day.
The godheads' results are quite convincing. In 2002, S&P began to publish an annual SPIVA (S&P Indices Versus Active) study, which assessed how active funds played against passive ones (based on their indices, of course). The research results showed Bogle was right.
By the mid-2000s, it had become common for active funds to indicate the performance of the index they were competing with when evaluating performance. But the most obvious result is the money invested in these types of funds. If in 1999 investments in indices reached the level of $100 billion in the United States, and open-ended active funds raised $4.2 trillion, then in 2017 active funds, although they won, were much less convincing - $10 trillion against $7 trillion.
That $7 trillion includes both open-ended index funds (which Bogle managed) and exchange-traded funds. investment funds(). This is a further step in the development of investing in indices - index funds, the shares of which are freely traded on the stock exchange. That is, instead of the shares of one company, you can buy, for example, immediately the idea of \u200b\u200bgrowth in the shares of a certain industry - say, or.
Now Russia is “the land of unfeared active investors”. There are few index funds, ETFs are just emerging. The growth of investment in indices is hindered strong resistance managers and the tiny size of our market. In his first fund, John Bogle in 1973, even before the opening, raised $ 1 billion - and in Russia the entire volume of passively managed investments is unlikely to have grown to this level.
The meager amounts of remuneration of managers with small amounts of invested money are not able to satisfy the appetites of Russian investment managers. For example, in the mid-2000s Management Company Bank of Moscow took over the management of its index fund 5% per year.
In short, for those who seek to learn more about alternative options investment and does not want to overpay managers, it is worth reading a book by John Bogle. Well, at least up to page 370 - by this moment all the main arguments will be voiced.
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