The death on 16 January of Jack Bogle, the founder of the investment company Vanguard Group, was embellished with a series of flattering obituaries. Of course, obituaries often praise their subjects. But Bogle & # 39; s seemed more favorable than usual. And I think there is a reason: Bogle was an unusual morally-directed man.
Of course, we can not judge his success on the basis of his personal wealth. When Bogle founded Vanguard in 1975, he founded it as a non-profit organization. The company has no external shareholders; all profits are reflected in lower costs, no dividends.
Due to metrics other than the wealth of founders, the Vanguard Group is a huge success. It invests for 20 million people in 170 countries. It has $ 4.9tn (£ 3.8tn) of assets under management. It may be the world's foremost investment company.
But this does not mean that we have to agree with everything that Bogle said or do harm to others not non-profit. He is not the only way to be moral.
Bogle's morality was rooted in his belief that an attempt to defeat the market is useless. This was reflected in his book The Little Book of Common Sense Investing from 2007: the only way to guarantee your fair share returns on the stock market. His investment strategy is "the only way" and the opening paragraph of the 10th anniversary edition summarizes:
"Successful investing has everything to do with common sense, as Warren Buffett, the Oracle of Omaha, has said," It's simple, but it's not easy. "Simple arithmetic suggests, and history confirms that the winning strategy is to invest in stocks. is to own all public companies of the nation at very low cost. "
This means that you simply have to invest in an index fund that represents the entire market and can then call it a day. But it is a bit strange to quote Buffett as support for such a strategy, since the Oracle of Omaha owes its fame (and its name) entirely to its ability to outperform the market.
Bogle's statement can best be interpreted as applying to its public of individual retail investors. Because the market portfolio is the average investment for all investors, the average investor can not do better than the average for the market. But the excitement of the market causes people to lose sight of that. As Bogle says in his book: "The stock market is a huge diversion from doing business."
He is right about the distraction. People seek excitement and the stock market is a game that they can play. People will gamble anyway, if not on the stock market, then in a casino. On the other hand, it is undoubtedly better in general whether people learn lessons about business and real economic activity, rather than card counting tricks. There may be some rugged attractions for some, but the hurly burly of the stock market is also a sign of a vibrant economy.
Advising people to preserve the market, advises them to sail freely on the wisdom of others who do not follow such a strategy. If everybody followed by Bogle's advice, market prices would be nonsense and would not give direction to economic activity.
I remember exactly when I began to understand the complexity of the moral issues of money management: October 8, 2009. I received a call from the eminent MIT economist Paul Samuelson, who had been my teacher when I was in the early 70s was a student. . He was then 94 years old, and two months later he died. I was so impressed with the call that I made notes in my diary.
Samuelson responded to my recent publications calling for extensive insurance, term and option markets to mitigate the financial risks – for example those related to house prices and labor incomes – that ordinary people face. He said that these markets, when set up for the general population, & # 39; casino markets & # 39; can be, with people who use them to gamble, instead of protecting themselves.
He then presented Bogle's example, which "has given up $ 1 billion for a concept," Samuelson said. "He could have easily cashed in," but he did not. "The miracle that Vanguard was, came from the principles of Bogle."
I thought he was right. In the long run, markets reward people of principle. But there is still a need for a wide range of risk markets, because these markets can and will perform useful functions, such as risk management, stimulation and orientation of companies.
The problem is that the focus on these markets requires intelligent and hard-working people to help others with their investments. It is not a zero sum game because they help the resources lead to better use. And these people must be paid. Even Vanguard, which now has a number of different index funds, hires investment managers and charges a management fee, albeit a low fee.
Not every fund needs a low fee. We live in a world where constant and rapid change and innovation require more attention and attention is costly. Although many financial managers are sometimes unscrupulous, a higher management fee is not always a sign that something is wrong.
But Bogle is still a hero of mine, because he has delivered a fair product and was motivated by a sincere desire to help people. And he should be a hero for everyone because he showed that markets ultimately recognize integrity.
• Robert J Shiller is 2013 Nobel laureate in economics, professor of economics at Yale University and co-creator of the Case-Shiller index of house prices in the US. He is the author of Irrational Exuberance.