John Bogle, the founder of The Vanguard Group who died earlier this month at age 89, got rich by giving his mutual fund customers a better deal.
The obituaries seem to have missed that point, dwelling instead on the theory that if only Bogle had chosen to rip off his customers, he could have been even richer. That claim is highly speculative, and based on a fundamental misperception: a view of capitalism as a racket rather than as a system in which the incentives of entrepreneurs and customers sometimes align with results that are spectacularly rewarding for both.
The tone was set with a New York Times obituary. “Vanguard managed its indexed mutual funds at cost, charging investors fees that were far lower than those of virtually all of its rivals,” the Times wrote. “Vanguard’s consistent growth produced riches for Mr. Bogle, but not to the extent that another ownership structure might have done. For example, Edward C. Johnson III, the chairman of Fidelity Investments, has a net worth of $7.4 billion, according to Forbes. Mr. Bogle’s net worth was generally estimated at $80 million last year.”
In case anyone missed the point, the lead headline in Friday’s Times business section read “Jack Bogle was no billionaire.” That ran over an article crediting Bogle with “giving up his chance at great wealth by eschewing ownership of the company,” and describing Bogle’s $80 million as “small change by the standards of money management.”
“Instead of making billions, helping millions,” was the Times inside headline. An accompanying Times article described Bogle as someone “who didn’t care about his own bottom line.”
A Bloomberg columnist, Nir Kaissar, echoed this theme, calling Bogle’s fortune “laughably small” compared with those of Blackstone Group founder Stephen Schwarzman or BlackRock CEO Larry Fink. “He should be a billionaire, but Jack Bogle chose to make others richer,” is the headline one newspaper put over the column.
Sorry, but that’s nonsense. Had Bogle pursued the conventional, high-fee approach to mutual fund management, it’s quite possible he would have ended up not as a billionaire but in obscurity, just another mediocre retired executive from some forgettable fund firm.
Insisting otherwise, as the press storyline does, is like writing a story about the world’s richest man, Jeff Bezos, and claiming that he could be even richer if he only charged everyone $15 for shipping and handling instead of offering free shipping to Prime customers. Or it’d be like claiming that Bezos could be even richer if he sold bestselling books at full price rather than discounting. It’d be like writing a story about Charles Schwab saying he could have been even richer if he only had charged full price retail commissions for stock trades rather than opening a discount online brokerage. It’d be like writing a story about McDonald’s genius Ray Kroc saying he could have been even richer if he had sold Big Macs for $10 rather than at lower prices.
Part of the confusion comes from conflating two aspects of Bogle’s approach with Vanguard. One was low fees, largely made possible by index funds rather than active management. Another was ownership structure, in which the fund company was owned by the shareholders rather than by Bogle himself or some publicly traded firm. The low fees aren’t totally unrelated to the ownership structure, but they aren’t entirely dependent on it, either.
Bogle himself has acknowledged publicly that the low-cost approach was not in tension with his firm’s commercial success but the reason for it. “Vanguard has proven to be both a commercial success and an artistic success,” he said in 2008 at George Washington University Law School. “How did we earn that commercial success? By our artistic success, which I define as providing superior investment returns to our shareholders.” He wrote that Vanguard was “the low-cost provider,” and that low cost “is the key to superior returns.”
Even Fidelity is now offering low-cost index funds, and Fink’s BlackRock is behind the iShares exchange traded funds, many of which also offer index-linked returns at low cost.
Perhaps if Bogle had realized he was giving up $10 billion by adopting a mutual structure when he set up Vanguard, he would have done it differently at the time. Once such a decision is made, it is hard to undo.
In an event, $80 million isn’t nothing, especially for someone with six children and lifelong health problems who didn’t start out rich and who gave a lot of money away to charity. It’s a reminder that in capitalism you can make a fortune by saving your customers money.
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