Low cost or low risk
Should we invest with dedicated, hard working managers that reduce volatility OR in a no work, unskilled speculative list of 500 stocks S&P likes, with no attention to valuation or risk? Which would a prudent man REALLY chose? 2 and 20 for smart alpha is a bargain compared to 0.02 for dumb beta.
Jack Bogle steals clients' precious time waiting years for volatile indices to rise. Bizarrely he risks the most money on the biggest names and outsources security selection to ACTIVE stock pickers at index construction firms! Would anyone with the rare ability to analyze stocks be at such firms? Bogle charges outrageous fees for zero work, tracking silly lists of securities without any due diligence.
Low cost? Nonsense. Even NEGATIVE expense ratios would still render his HIGH RISK speculative products unsuitable. He charges retail investors an absurd 18bp for inflicting 50% losses (twice!) and horrific volatility on their portfolios. Bogle's "invention" is uninvestable even if it was 318 basis points cheaper than what he claims is "cheap".
Low fee beta or high value alpha? It's safer to invest in skill. So-called "passive" are just ACTIVE trading models, badly designed with abysmal risk-adjusted returns but brilliantly marketed. Low fee? Index funds are VERY EXPENSIVE. Capital preservation is the priority. Deep drawdowns and vicious volatility are unacceptable. Better and safer ALTERNATIVES are the way to go.
The market is efficient, apparently so security analysis is pointless? According to Bogle, hedge fund managers like Warren Buffett and Jim Simons are lucky monkeys. Bogle claims to be able to predict the long term future and urges you to gamble on his clairvoyance. Embrace the average as there is no skill! Expense ratios must be judged against net risk-adjusted returns and index funds have poor performance compared to skill strategies. Name any industry where the "average" succeeds.
Bogle says security analysis is a waste of time! No-one can beat the market so Medallion's +35% per year after fee returns were just luck? He knows nothing about hedge funds but has strong opinions nonetheless. Bogle's dogmatic, uninformed preaching may cost millions their retirement if they listen to his bizarre faith in S&Ps ability to pick stocks. They don't know how to rate debt let alone equity. AAA does not mean "investment grade"; just means someone paid them enough to award AAA to some likely toxic waste.
Why endure the unstable returns and large losses of the unacceptably risky Bogle's folly when investment innovation has progressed far beyond the dinosaurs in the risky stone age world of buy and hold? Good hedge funds destroy index funds in terms of risk adjusted returns. Index funds obliterate peoples' savings in bear markets. Don't let Bogle blow your portfolio apart. Again.
The "average" is no place for YOUR money. Absurdly he says to ride out the massive losses he sometimes delivers. That suits his expensive high risk "advice". Yet another 50% loss and destroying even more peoples' savings? The FDA would never permit a "cure" that kills so many but Bogle's "cheap" garbage is still allowed to infect retail portfolios. Bogle is just a low quality Delta One trader. ENOUGH.
Bogle considers EVERY stock and bond to be worth investing YOUR money in as long as someone ACTIVELY decided to include it in a benchmark. He says the largest stocks should get the biggest allocation regardless of valuation or business prospects. He thinks you should lend money to the most heavily indebted borrowers no matter how low the yield or high the default risk! Such thinking causes devastating damage to peoples' retirement plans.
Bogle loves risky index funds despite the availability of safer strategies. His firm charges egregious fees for passively doing nothing. No risk management or exposure reduction even during market crashes or economic meltdowns. Index dependent funds have no place in YOUR portfolio. The TOTAL COST is far too high. Avoid "low cost" beta and replace with "high value" alpha.
Index idiocy has imploded too many portfolios. Unlike Bogle, I require absolute returns above inflation no matter what the markets do. I won't let the volatile stock and bond markets destroy my clients' wealth and liability funded status. They need performance in relevant time frames. On a value basis good hedge funds have the LOWEST fees and HIGHEST returns which is why cheapskates like me invest in them. I'm more conservative and cost sensitive than Bogle so invest in alpha instead.
Bogle says investors must always be 100% long only! Whatever the economic conditions, he thinks retirees, widows and orphans should speculate on markets. Trend following with no stop loss; Bogle is just a bad CTA. Is it sense to claim that security analysis is pointless or to criticize risk management and hedging? His speculative products' dire return on risk are unsuitable for conservative long term investors. Patience? Why wait when better ways to a secure financial future exist? Do you really want a manager's 500th "best" idea?
How can trillions in losses be "cheap"? After the S&P's many years below its high water mark and another -50% drawdown, I read Bogle's rant "The Little Book of Common Sense Investing". Who can afford to invest in such expensive, dangerous and WRONG ideas? People ought not to gamble their wealth away on the unskilled long only delta one products that Bogle pushes. No common sense in the book. Buy and hold everything in some arbitrary benchmark no matter what? It's a clear breach of fiduciary duty to buy securities with no analysis and ignorance of valuation.
There are safer and cheaper ways to invest than "passively" owning what some index construction firm ACTIVELY chose for capital-weighted "unmanaged" benchmarks. Why endure large losses and prolonged periods before a fund makes new profits? Index funds are higher risk and more expensive than real hedge funds. Passive "managers" rake in fat fees for poor performance, zero skill and disastrous drawdowns.
Index funds versus hedge funds is about PRICE versus VALUE and good hedge funds have proven their superior value proposition over many decades and after fees. It's time John Bogle looked at modern ways of managing money with an open mind rather than regurgitating misinformed views on absolute return strategies he knows nothing about. Skill-based funds whose consistently superior performance destroys his absurd philosophy.
Is it common sense to claim investment skill does not exist and investors should not try to identify better securities and talented fund managers? Not many people want to ride in a car driven by John Bogle. He would just place a brick on the accelerator, remove the steering wheel, gaze at the rear view mirror and await the nice destination he anticipates. No need to worry about ongoing risks and economic obstacles in the, according to Bogle, "certain" path to riches when huge capital gains loom in the so-called long term.
Anyone really using the "rules of humble arithmetic" doesn't put a cent in index funds. The empirical evidence overwhelmingly demonstrates the superior performance and safety of skill-based strategies over unskilled asset classes. And investors can diversify away systemic risk. That is why sophisticated institutions are moving to superior alternatives. It's the CHEAPEST liability solution.
Bogle says people should ride out drawdowns no matter how much client capital his preposterous products lose. Is it really "sensible" to suggest ignoring those 401(k) statements since they will supposedly be fine some day far into the future? John Maynard Keynes pointed out what happens in the long run so isn't it better to GROW and PRESERVE capital in the short run? Is it common sense to own every stock Standard and Poor's ACTIVELY manages in the "unmanaged" S&P 500 regardless of the underlying economic conditions and business prospects for each company?
The trouble with Jack Bogle is that he is too young and inexperienced. If he had been investing in the 1930s his love of long only would be gone. Keynes did well actively managing an absolute return fund in the depression. Is it prudent to passively hold value destroying corporations when you could be short selling or actively engaging them? Keynes said: "When somebody persuades me I am wrong, I change my mind. What do you do?" but Bogle says to buy and hold the constituents of an index no matter what. Dangerous "advice" that will cost investors dearly. The US market was lower in 1942 than it was in 1905. Could you wait that long? Huge opportunity cost. Some other indices went to zero as many will this century.
Successful investors like Warren Buffett "join" the pro-index brigade despite avoiding index funds themselves. This "Do as I say not as I do" is weird. Why does Warren have a quote on the book's cover supporting index funds when he manages a foreign exchange and commodities trading, arbitrage, event-driven, distressed securities, bid for Long-Term Capital Management, own a few stocks, multistrategy hedge fund called Berkshire Hathaway and has outperformed the S&P 500 since the 1950s? In actions, not words, Buffett's performance is an argument AGAINST indexing and FOR absolute return strategies.
Buffett's mentor Benjamin Graham was also a hedge fund manager. Graham wrote that "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative." Since index funds do NOT promise SAFETY OF PRINCIPAL, they are therefore speculative! "Don't take my word for it" as the Intelligent Investor himself would clearly have favored the hedging and limited drawdowns from quality hedge funds versus the lack of capital preservation of index funds. Long only performance is inadequate compensation for the RISK.
Bogle claims index funds are the "only way to guarantee stock market returns". Really? I think ABSOLUTE returns are what an investor needs, not guaranteeing their share of stock market crashes, damaging drawdowns, vicious volatility and sometimes decades of losses. There is no need to take outright market risk when there are so many inefficiencies and mispricings to exploit across global markets. Skill does exist and CAN be identified ahead of time and in my experience alpha is actually more reliable than beta. Strategy diversification, risk management and hedging against disaster are surely more sensible than the unhedged gambling that Bogle favors.
Risk tolerance? I have little tolerance for risk which is why I invest in good hedge funds. "Passive" products are simply too volatile and unreliable for conservative investors. Staying below their high water mark for so long is unacceptable especially when there are superior alternatives. John Bogle's followers were "lucky" to get back to breakeven TEMPORARILY after just 7 years compared to the 17 year drawdown from 1965-1982 or the devastation of 1929-1954. And check out 1905-1942 for a 37 year no growth nightmare. Should an investor have to endure even the possibility of waiting that long? 2005-2042?
I don't dispute that "passive" funds will likely outperform many, though not all, long only active managers over time. Skill is rare by definition. However that reflects the fact that UNHEDGED funds are too constrained and that talented fund managers are more likely to be at good hedge funds than long only funds. An AVERAGE hedge fund is not worth investing in but SKILLED hedge funds can be identified in advance IF you know what you are doing. Ben Graham and several Nebraska doctors backed Warren Buffett BEFORE his success as a hedge fund manager.
Hedge funds are not mentioned until "Funny Money" in a scathing, poorly researched, diatribe near the end of Bogle's book. "Too much hype"? Most hedge fund commentary is negative so what hype is Bogle referring to? Does he mean the REALITY of top hedge funds delivering absolute returns and preserving capital unlike the disastrous "cheap" products he pushes? Hedge funds don't just "invest in the very stocks and bonds that comprise the portfolio of the typical investor"; they use futures, options, derivatives, short selling, new kinds of assets and diverse holding periods to REDUCE risk.
According to Bogle, hedge funds offer "too many different strategies". That's a criticism? You need as many strategies as possible; it is a strength of the hedge fund industry not a weakness. Some hedge fund managers are successful and closed because their investors made far more. Index funds are the compensation strategy - you don't have to do much work but you still get paid that huge 18 bp for no work. And the extra layer of fees of a good fund of funds more than justifies itself in paying for evaluation, due diligence and monitoring of common sense investments like hedge funds.
The tyranny of fees fails to consider the product's value. Interesting how people get irate over hedge fund managers making a billion for doing a superb job while the firm Bogle founded levies exorbitant fees on $1.1 trillion and does NOTHING to hedge risk or avoid losses. For what you are getting in terms of risk-adjusted absolute returns the fees charged by proper hedge funds are CHEAPER than index funds.
The "low" fee charged for "managing" passive funds also obscures their enormous OPPORTUNITY COST for investors. While trillions have been languishing for almost a decade in index funds, vast money making opportunities have been missed. Such "common sense" is EXPENSIVE as investors await the assumed upward trend to reassert itself. Bogle also writes of the MIRACLE of compounding but fails to mention the MISERY of negative compounding that wrecked so many institutional and individual investors' portfolios.
Investing is NOT simple. Bogle cites Occam's Razor where the "easy" solution is supposedly optimal. William of Ockam has been misinterpreted and actually wrote "Entia non sunt multiplicanda praeter necessitatem". It is the simplest choice amongst VIABLE solutions that works. Index funds are too simple to be suitable for such ontological parsimony. The correct answer is multiple strategies within and across multiple asset classes and reducing risk as much as possible. William of Ockam would have seen quality hedge funds as the answer not the risky trap of just holding assets. Things are also more complex today; when Sir William entered Oxford University 700 years ago, long only real estate and commodities were the only investment choices available. Thank you for the simplicity of financial innovation.
Bogle argues for owning "all the nation's" publicly held companies. Which nation? All the companies? Just the biggest firms? Why just the public ones? Most companies are private. Good venture capital and focused (smaller!) private equity funds can offer excellent performance. By the time a company makes it to IPO a high percentage of its growth is usually over so why shouldn't investors access private companies. A stock that makes it to the rarified heights of the S&P 500 has already been a winner for many years and there have been many instances of index trackers forced into buying the top but they NEVER have the opportunity to buy the bottom.
Although considered "passive" the S&P 500 is quite actively managed as companies go bankrupt or get acquired. If you had bought the ORIGINAL 500 components in 1957 and held on with no adjustments whatsoever you would have OUTPERFORMED the "real" S&P 500 at slightly LOWER risk even though only 86 names survived over 50 years. That should be a very strong argument for TRUE buy and hold but John Bogle doesn't use it, instead pushing the frequently updated quasi-active index.
Innovation is always hated by salespeople with a vested interest in the status quo. Predictably Bogle is also not a fan of the equally weighted and fundamental indices that have appeared in recent years or ETFs. Bogle even thinks Exxon XOM and General Electric GE have the best stock price appreciation prospects; a sad consequence of cap-weighted indices is the biggest stocks get the largest percent of your money, regardless of business prospects or valuation. Surely common sense is for your cash to go to the BEST stocks not necessarily the BIGGEST stocks.
Why does the intellectual force behind passive capitalization-weighted indices urge a large active bet AGAINST global weightings? Bogle's "advice" to keep 80% of an equity portfolio in USA stocks is wrong, insufficiently diversified and logically inconsistent with his indexation argument. The world has moved on and such geographic constraints are not common sense. Investors need ALL of their equity portfolio allocated to the best opportunities wherever that may be. The USA is less than 45% of world market cap and the proportion drops each year. If an investor is a true Boglehead diehard then their portfolio should surely be in line with global market cap. 40% of equity in US stocks in the correct "passive" amount.
The Japanese Nikkei has, over the long haul, vastly outperformed the S&P 500 though of course not over the short or medium term. Even though still far below its high and having trodden water for so long, US investors would have done better holding Japan index funds for 50 years than US index funds. John Bogle does not mention this either and is generally quite negative on "foreign" equities.
Japan outperformed because decades ago it was an emerging market and offered similar VALUE to OTHER opportunity-rich countries today. Based on Bogle's relentless rules of humble arithmetic the dollar return on the Nikkei was MUCH higher than the dollar return on the S&P 500 so, according to his historical performance chasing logic, should not he be urging Japan as the common sense investment given his assumption that past is prologue?
Long term performance has little to do with long term investing. In fact some hedge fund managers with the best long term track records have the shortest holding periods. Steady capital growth does indeed the win the race but index funds are anything but steady. Good hedge funds are the reliable tortoise to the volatile and unpredictable index hare. Equity indices were designed to simply benchmark long only active managers; they are NOT a suitable product for conservative investors to actually put money in given the absence of risk management and high volatility.
You can read the John Bogle blog. Common sense is going with investment skill and the hedging of risk not Boglehead nonsense. Investors need ABSOLUTE RETURNS, not EXPENSIVE "passive" products that are guaranteed to lose money in a bear market. Staying the course makes sense if you know the destination AND the route. There are safer vehicles for anyone's money than index funds. I track total returns for total cost and passive is just too expensive.