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Encore Presentation: John Bogle: Mutual Fund Revolutionary

Aired August 25, 2000 - 14:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
(BEGIN VIDEOTAPE)

JOHN BOGLE, FOUNDER, THE VANGUARD GROUP: Energy, energy, I have so much energy I almost don't know what to do with it. I mean it's kind of scary, honestly.

BEVERLY SCHUCH, HOST (voice-over): John Bogle has a 70-year-old body and a 26-year-old heart. He burns off his scary energy by playing a ferocious game of squash and by brilliantly investing the half trillion dollars Americans have entrusted to his various Vanguard mutual funds. Twenty-five years ago, Bogle single-handedly revolutionized the mutual fund industry by a simple and elegant invention, the index fund.

(on camera): What was the initial reaction?

BOGLE: This will amount to nothing. There's no point in even paying any attention to it. No one ever heard the name Vanguard.

SCHUCH: Bogle's folly.

BOGLE: The Index Fund was called Bogle's folly.

SCHUCH (voice-over): Bogle's folly, the Vanguard 500 Index Fund, is now the number one or number two mutual fund in the world, depending on which day you check. And his concept of indexing has spawned legions of imitators.

UNIDENTIFIED REPORTER: Indexing continues to grow.

UNIDENTIFIED REPORTER: Either way, index funds are popular.

UNIDENTIFIED REPORTER: The index funds have outperformed 80 percent...

BOGLE: I've taken all the mutual fund manuals going back over the years and calculated the returns of the average common stock fund. For 30 years before 1975, '45 to '75 and I could show that the average, the Standard & Poor's 500 Index had outperformed those mutual funds by about 1.3 percent a year.

SCHUCH (on camera): Oh, but it's so boring, I mean it's just an average thing.

BOGLE: Boring.

SCHUCH: There's growth companies out that. They're glamorous, they're exciting.

BOGLE: But the reality of all this is so easy and that is if there's a 10 percent market return out there and you own the market, you're going to get 10 percent and $10,000 over a period of time is going to turn into, say, $300,000. If you put $10,000 in an average fund and earn the same 10 percent, which is what they're going to do, and they're going to take two and a half percent out. So you're earning seven and a half percent. The manager's getting it. You're not going to have $300,000. You're going to have $150,000.

So if you think of it in this way, it's not very complicated. You the investor put up 100 percent of the money, take 100 percent of the risk and get 50 percent of the return and the manager puts up none of the capital, takes none of the risk and gets the other 50 percent of the return. That just isn't right. That just isn't right. So the index fund does that. And it is boring. It's terribly boring but you've got to decide when you want to retire do you want to retire interested or rich.

SCHUCH (voice-over): John Bogle has gotten tremendously rich from that boring, boring idea and he has no intention of retiring. He's had seven lives to live, a new one after each of his five heart attacks, one operation and finally the transplant that gave him the heart and energy of a 26-year-old. A larger than life legend of Wall Street, the founder of the Vanguard Group, John Bogle, is next on PINNACLE.

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(BEGIN VIDEOTAPE)

SCHUCH (on camera): Let me toss some adjectives out to you that have been attributed to you both inside and outside the industry -- self-righteous, maverick, iconoclast, bad boy of mutual fund industry, over zealous and irritatingly preachy.

BOGLE: I don't know, I'd just have to say true.

SCHUCH (voice-over): John Bogle revels in being a zealous maverick and his many admirers love it, as well. They even call him Saint Jack.

BOGLE: A brave new heart with steady gaze, you've sailed your flagship into waters uncharted.

SCHUCH: He's been canonized for his thriftiness. He wears belts that are older than some of his employees. And he's still faster and more accurate with a slide rule than a computer.

BOGLE: Well, how do I get it on my machine?

UNIDENTIFIED EMPLOYEE: Let me show you.

SCHUCH (on camera): You are a kind of a legendary penny pincher, you know?

BOGLE: I suppose.

SCHUCH: You have a well earned -- there's a story about you at the Plaza Hotel in New York. You know that story?

BOGLE: Sure. I was going up to a dinner and two of my associates at Vanguard were in front of me in line. We went in there and they got the room at the corporate rate and it was $200, I think. And so I got up there and I said to this room clerk who was kind of, you know, very kind of haughty, Frenchified guy like they have at The Plaza, I said, "Let me, I want a room please." And I said, "Let me tell you this, there is no way in god's world I'm going to pay $200 for a room here."

So he said -- I said, "I've always, whenever I've stayed here a few times in the past I've always stayed at the cheapest room at The Plaza." And he said, "Just how, when was the last time you were here?" I said, "Well maybe 10 years ago." He said, "How much was the cheapest room?" And I said, "$34." He said, "Well we can't do that for you, but I do have a sort of..." -- I think he said a converted broom closet, something like that up there, no windows, which is great in New York.

SCHUCH: Because you don't want the...

BOGLE: Yes, you don't want that garbage can banging around every morning. So I said, "That'd be great." And I think it was, I think he said, it was something still outrageous like $105. And I said, "Do I get the corporate rate on that?" No, I didn't get the corporate rate. And the funny part of the story is I turned around, of course, after all the squabbling up there, I said to the man behind me, I said I'm so sorry to hold everybody up. You know, I had this little thing about I don't want to spend too much money. And he says, "Aren't you John Bogle?" That's absolutely true.

And I laughed and I said, "How would you know that?" And he said, "Oh, I'm a Vanguard shareholder. I recognized you and now I believe. I believe everything they say about economy and cheapness."

SCHUCH: You see, the shareholders love you.

BOGLE: Yes.

SCHUCH (voice-over): That word shareholder is one of the secrets of Vanguard's success. Unlike other mutual fund companies, Vanguard is set up as a non-profit organization which manages money for its owners, the investors in its 124 mutual funds. Vanguard's other major secret is simple and powerful -- its costs are the lowest in the industry.

BOGLE: To save our business from ruin, we must at once undertake a vigorous risk lowering. To do this, the first step must be to reduce expenses, reduce expenses. That is the message I bring to you today.

SCHUCH (on camera): So what are you showing me?

BOGLE: Well, this is the original thesis, "The Economic Role of the Investment Company."

SCHUCH: Now, you wrote your senior thesis at Princeton, which it sounds very prescient, actually, for the rest of your life. What gave you the idea to write it about the mutual fund industry?

BOGLE: Well, that's a wonderful story. I went into Firestone Library in Princeton University and I opened "Fortune" magazine for December 1949. On page 116 there was an article and it was called...

SCHUCH: What memory.

BOGLE: Well, I had good occasion to look back at this. And it was called "Big Money In Boston," which is where the headquarters of the mutual fund industry was in those days. And it was a tiny little industry. It was described in the article as tiny but contentious, tiny but contentious.

SCHUCH: And that appealed to you?

BOGLE: That appealed to me and I was looking for a thesis. I also, what also appealed to me is I wanted to write a senior thesis on a subject on which nobody had ever written before. So it was uniqueness and tiny but contentious.

SCHUCH: But this really determined the course of your life, then. Did you know when you were writing this that this was going to be such a major part of your life?

BOGLE: I couldn't have dreamed it.

SCHUCH (voice-over): Bogle's college thesis was so good it got the attention of Wall Street big shots, especially Walter Morgan, one of Bogle's heroes. He was then president of Wellington Management, one of the nation's most successful investment funds.

BOGLE: Walter Morgan was a great, great man, certainly the great man of my life. He took kind of a shine to me when he met me. He wasn't sure he wanted to bring me into his company because he had gone to Princeton, too. It was a kind of playboy kind of thing. People didn't take life very seriously. People had a lot of money and he thought well, do I need anybody from Princeton around here?

SCHUCH (on camera): Didn't he read your thesis and say something like this guy knows more about mutual funds than we do?

BOGLE: Exactly right. And I've kept a copy of that, his little memo. He wrote a little two page memo to everybody and it was really very generous and very, very nice. And so I started there. "As a result of this thesis we have added Mr. Bogle to our Wellington Management Company organization," very, very nice words because remember, nobody came into this business in that era. The business was...

SCHUCH: It was in its infancy.

BOGLE: It was dead. The whole industry was $2.5 billion and now we take in $5 billion in some months, take in new money. It's twice the size -- in one month it's twice the size of an entire industry.

SCHUCH (voice-over): John Bogle became president of Wellington then got fired. Find out why when PINNACLE returns.

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(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

SCHUCH (voice-over): John Bogle named his great experiment Vanguard after the flagship of his hero, Lord Nelson. Nelson's ship, Vanguard, led the British fleet to victory over Napoleon at the Battle of the Nile in 1798.

BOGLE: There's the HMS Vanguard sitting there. And I read Lord Nelson's dispatch, so it's quite something. Without the naval achievements of Great Britain, there's no name Vanguard.

SCHUCH: The battle's symbolism is appropriate for Bogle. He's a great lover of military history and his life has been one battle after another. In spite of great efforts to destroy him both in business and in life, he's survived brilliantly.

BOGLE: I've got a brand new heart so I don't have the old heart disease. It's gone. It's in a jar of formaldehyde down at Hanneman Hospital (ph) and that's history.

No pickles, no chips, no onions. A little bit of sauerkraut.

SCHUCH: John Bogle's first life came to an end on a tennis court when he was just 31 years old.

(on camera): What happened that day?

BOGLE: I was playing tennis with my brother-in-law and I felt this kind of funny thing go wrong, like a big bright light. I was throwing the ball up to serve it and a bright light, and I couldn't do it. Nothing was there. So I, and I felt kind of funny in my chest and I sat under a tree for a minute and I said if I didn't know better, I'd swear I just had a heart attack. And we both roared with laughter.

And I got up and finished the match. This is not too smart.

SCHUCH: Was it over then?

BOGLE: And within about a half an hour I thought I was going to die. It just kind of crept up on me in that way and I could barely, I couldn't pick up a phone to call the hospital or anything. We finally got a doctor, took me to the hospital and they had a, I think a pretty close call with me. So I was kind of immobilized for a while, six weeks in the hospital. And then back to work.

SCHUCH: Did you think it was a one time event and that was going to be it then?

BOGLE: Well, they diagnosed it as a standard heart attack.

SCHUCH: Heart attack.

BOGLE: And it turns out to be this unusual disease that was only discovered in the mid-1980s and it's genetic and it involves the heart muscle gradually slowing. It's unable to pump and it gets a lot of fatty tissue on it and eventually you just die.

SCHUCH: When you're 31 years old, though, and you've got a young wife and a young family and you're, you feel like you're pretty immortal, you've been in good health your whole life. What affect did that have on how you fashioned your life?

BOGLE: I guess I'm embarrassed to say I don't think too much. I was just -- it drives my wife crazy but I say press on regardless is the family rule. And she says don't say that anymore. But you just kind of press on regardless.

SCHUCH: That was the beginning, though, of a succession of, what, five, six...

BOGLE: Yes, I think there were six.

SCHUCH: ... major heart attacks.

BOGLE: And biopsies and all that kind of thing going don. And then finally they put a pacemaker into me in 1967. It didn't do any good at all and it was kind of a terrible operation. They had to cut you wide open. It was a mess. And I almost died then.

SCHUCH: Does it make you very either religious or fatalistic or, you have to come to grips with this somehow that I, there's no reason on god's green earth why I should be here today. It has to do something to you.

BOGLE: Well, I kind of, I'm a day to day kind of person. I never, I don't recall, one is never sure, but I don't recall lying awake all night thinking I was going to die. I don't recall ever in my whole life, even waiting for the transplant when I -- you know, I used to say at night in the hospital not my will but thy will be done and at first I knew that was going to be the way it was whether I said it or not. But I thought it was a good idea to let him know.

SCHUCH: I'm with you.

BOGLE: Yes. And thanks again.

SCHUCH: Right. So, but even waiting, knowing that you were going to, what, how, whatever shape your heart was in it was going, that was it, this was your last chance?

BOGLE: Well, you kind of hope that the heart would last until a transplant came and 128 days in the hospital intravenous is not exactly fun, but it was not bad. It's not bad. And they took wonderful care of me at Hanneman Hospital here in Philadelphia and, you know, you kind of get through each day. My way of doing it was to stay very busy, working most all day just about every day just to keep my mind off, you know, difficult things. What's the point of dwelling on them?

SCHUCH: Do you know whose heart you have?

BOGLE: I found out down the road actually I ran into the guy, a young man who got his liver and the first thing they told me, the only thing they told me when I, the first words I heard was you've got a great heart, young and strong. Then right away when they put the heart in you it starts, just by itself. It doesn't usually even take a shock.

SCHUCH: Really?

BOGLE: Boom.

SCHUCH: It just knows?

BOGLE: It's kind of scary, I think of lying there in the hospital without either heart but there you go. But I didn't dwell on that either. But this, he told me it was a young man. This liver recipient told me it was a young man 26 years old and it's a fantastic -- I have a wonderful match. They match for blood. That's essential. That's the only thing they can really match for, blood type. And it just was a great match because my body -- and I'm one of the most, if not the most, I think, successful heart transplant recipients in America.

SCHUCH (voice-over): When PINNACLE returns, Bogle battles with the mutual fund industry. And how losing his job has made millions of Americans rich.

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(BEGIN VIDEOTAPE)

SCHUCH (on camera): Tell me why I should invest in an index fund.

BOGLE: Because in the long run we're all average less cost and the index fund is average less a teeny cost and a mutual fund is average less a large cost.

SCHUCH (voice-over): It sounds like a no brainer now, but when John Bogle first proposed an index fund, it was revolutionary and it not only made his clients rich, it saved his job. He had become CEO of Wellington, the precursor of Vanguard. But just as he reached the pinnacle, the foundations began to shake.

(on camera): The year that you became CEO of Wellington was a bad health year for you that year.

BOGLE: Yes. They didn't want to make me the CEO because of my health and I said well look, if I'm going to die, you know, it would be nice to do that before I went. That was '67 and I was really running the company long before that because around 1964 or 5 Mr. Morgan said make the decisions, whatever decisions you're going to make to get the company going again. We were having a little slow spell there. And so I did the, I did a merger. I was impulsive, brash and wrong.

SCHUCH: And it turned out to be your downfall.

BOGLE: Yes, but it was my own stupidity because I believed that there were such things as super investment managers. They had a super investment record, this Boston group that I merged with, and we got along well at the beginning and they were money managers. I've always been more of the businessman, the one that developed the company concept and strategy.

SCHUCH: When did things start to go wrong?

BOGLE: Well, it was a sort of constant struggle because they felt that we should have kind of a collegial participative management they called it. And I'm sort of a bull. I want to hear both sides, but I've already thought about both sides to the best of my ability.

SCHUCH: You've made your decision.

BOGLE: I've pretty much made the decision and they didn't like that. I fear I'm not the best compromiser in the world.

SCHUCH: You're not the best loser, either. You...

BOGLE: Well, there is that. So I finally got fired. I had a -- I've got a wonderful speech that I gave, and it was really a darned good speech, one of my better efforts.

This is quite necessary. I mean that's, ooh my goodness, I'm going to have to pare it down to get it into my 25 minutes.

And my own wonderful wife Eve, who came to hear the talk.

SCHUCH (voice-over): Bogle loves writing and making speeches and he's become legendary for his apt use of quotation and his lucid style. The speech he gave upon getting fired ultimately convinced his board to let him try a new kind of fund management, none at all. The index fund, which holds the stocks in the S&P 500 Index, allowed for a real no load fund, all profits returned to the shareholders. The shareholders returned the favor.

In 1999 when Bogle reached 70, the Vanguard board told him it was time to retire. He refused and with investor pressure, the board relented. He vows to stay until the final act. BOGLE: And this is a speech for the Woodrow Wilson house in Washington, D.C. tomorrow night. It's about economics and idealism and how they go together, how Woodrow Wilson's economics were dictated by his idealism and how Vanguard's economics were dictated by my idealism.

UNIDENTIFIED BUSINESSMAN: So economics is not a science apart from the person?

BOGLE: That's exactly right.

It comes to what kind of moral and ethical values you have, at least that's the way I feel about it. We've also got Ralph Waldo Emerson and Theodore Roosevelt here. The Emerson we're working on is an institution, in fact, the length and shadow of one man.

SCHUCH: Just as Vanguard is the length and shadow of John Bogle, so is he the living measure of William Yates Bogle, his father.

BOGLE: He was in the Royal Flying Corps in W.W.I. He was an American who went over and had to join the action.

SCHUCH: The Bogles lived a comfortable life in New Jersey until the great crash of 1929. The fortune made by Jack's grandfather, founder of the American Can Company, evaporated and the three Bogle boys went to work.

BOGLE: I used to worry about money all the time.

SCHUCH (on camera): You did?

BOGLE: Yes. Where was the next dollar going to come from?

SCHUCH: Oh, after the crash.

BOGLE: Yes, absolutely, I mean really have it on my mind. So I started, as my brothers did, too, to work at a very young age. And we were working summers certainly at the age of nine or 10 years old, and sometimes in the winters, too.

SCHUCH (voice-over): Bogle's hard work and determination got him into Blair Academy (ph), which was a turning point in his life.

BOGLE: I thrived and I think, I think, in retrospect, that the teachers saw something in me that said we are going to beat the devil out of this kid and make him work because he has something going for the world. I can still see our English teacher in our junior, in our senior year and I can see the papers that he sent back to me, the themes we did. And it looked like a chicken had walked through red ink and then walked over my paper.

SCHUCH: What Bogle has given the world is not only his vision, but his unique determination to make it happen, the grit that overcame a weak heart.

BOGLE: I asked my children once, if you could use one word to describe me, what would it be? Every one of them said exactly the same thing, determination. Determination. I use this quote, it's a quote of Churchill's when he was aging. He went back to Harrow School (ph) and frail, a year or so before he died, and the headmaster asked him if he'd like to speak at this black tie school dinner in England. And he stood up and he said, "Never give up. Never, never, never, never, never." And then he sat down to thunderous applause.

(END VIDEOTAPE)

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