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From Chapters 20, 21 and 22

 
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JWR1945
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PostPosted: Wed Jun 23, 2004 1:10 pm    Post subject: From Chapters 20, 21 and 22 Reply with quote

From Chapters 20, 21 and 22

In chapters 20, 21 and 22 of our featured book, Common Sense on Mutual Funds by John Bogle, writes about the more personal aspects of his career. In Chapter 20 he leads us through his creation of Vanguard. The chapter is about Entrepreneurship. He was surprised to learn in a 1997 senior paper by a Yale student that he himself was an entrepreneur. He agrees that he is a leader who has turned an idea into an enterprise. If you add a requirement that those ideas become the mainstream, then he does not qualify as an entrepreneur. In terms of his personality and outlook he has all of the qualities of a classic entrepreneur as defined by Schumpeter.

On attribute that caught my attention is that John Bogle is credited with having "an uncanny ability to recognize the obvious" and "the gift of making the obscure seem obvious and the opaque transparent". My experience is that simple, understandable explanations often reflect one's clarity of thought, not a lack of intellectual ability.

He discusses Leadership in Chapter 21 including not only expected qualities such as a sense of purpose but also the necessity of having experienced failure. Another is courage, which led him to say on page 421: "In the long run, when there is a gap between perception and reality, it is only a matter of time until reality carries the day."

In Chapter 22 John Bogle draws our attention to treating people right, treating people as Human Beings. He has challenged audiences to find the phrase human beings in any book on corporate strategy. He considers this as being a central element of Vanguard's culture, both within the company and in dealings with its shareholders.

Have fun.

John R.


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JWR1945
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Location: Crestview, Florida

PostPosted: Wed Jun 23, 2004 1:15 pm    Post subject: Reply with quote

Final Remarks

John Bogle has made a compelling argument that those who invest in mutual funds are best served by selecting low-cost index funds. It is not that active managers are lacking skill. It just those with skill cannot produce superior results. Whatever is gained by skill is held back by high fees and too much money within a fund. Fees place a high hurdle just to match the market. What is worse is that skill immediately draws in too much money. As a fund grows larger, it has fewer investment choices and those choices have less potential on the upside.

John Bogle mentioned that his son has closed funds under his management when they have grown to $100 million. It is hard to imagine finding a superior active fund manager with a long-term, proved track record and whose fund is still open and has less than $100 million in assets.

John Bogle is very loose about using the term Market Timing to reject anything that might vary regardless of cause. His evidence is based on very short-term trading activities of two years and less and on funds with annual turnovers close to 100%. I have seen too many people mindlessly reject the entire notion that prices matter. They call anything other than buy-and-hold-NOW! Market Timing and conclude that it must fail. I fault Bogle for that. He uses the term that way. Yet, there are times when prices are too high, when nothing is worth buying.

Hidden in the background, it seems, is John Bogle quietly screaming at the top of his lungs that the market is way overpriced and that future returns will be much lower than in recent memory (in 1999). No, he does not raise his voice. He is not insistent. He just presents compelling evidence from time to time. Today's market is overvalued. He acknowledges that his earlier prediction of falling returns failed. The reason that it failed is known as the bubble.

Have fun.

John R.


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Mike
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PostPosted: Thu Jun 24, 2004 3:16 am    Post subject: Reply with quote

Quote:
Hidden in the background, it seems, is John Bogle quietly screaming at the top of his lungs that the market is way overpriced and that future returns will be much lower than in recent memory...

He doesn't seem to have any solutions to this dilemma, since whenever I see an interview of him he only repeats, "Stay the course". Berstein's 4 Pillars book seems to pretty much counsel the same, with the sole concession being to recommend a maximum of 75-80% equities for the most risk prone. If this is how most people are thinking, I suspect that equities will continue to get even more over valued.

Commercial paper has been totally destroyed as an asset class by the fed's constant inflation policy. People have switched to investing in equities (and bigger homes) in an attempt to defeat inflation, but the equity market does not seem to be large enough to absorb all of the money that has fled commercial paper.

Since it is not a free market at the short end, interest rates have not risen to attract some of the money back out of equities. The fed simply prints more money, and gives it to the banks to loan out. Banks do not have to actually attract depositors any more. They fall over themselves to attract people who are willing to loan them money cheaper than the fed, but don't bother with anyone who is not willing to consistently lose ground to inflation after taxes. More and more people flock to equities in a desperate attempt to get out of this trap, making an eventual fall potentially much more traumatic. Unlike Britain et al, the United States has traditionally funded much more of its corporate growth through debt. This, along with the baby boom, may magnify the effect.

TIPS may attract some of this former commercial paper money in IRAs, but to date it has not made much of a dent in equity dividend yield. I suspect that the eventual taxation of the inflation adjust portion makes these seem less attractive than commercial paper used to be in a past era of very low to no inflation. The trauma of the high inflation 70s has sapped people's confidence in the dollar. Equity has been one of the places where they sought refuge, at least until a prolonged period of low returns makes them lose confidence here also. An interesting puzzle to ponder.


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unclemick
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Location: LA till Katrina, now MO

PostPosted: Thu Jun 24, 2004 4:02 am    Post subject: Reply with quote

Yep

I scratch my head with wonder when I read the occasional article on university and pension funds trying hedge funds, timberland, venture capital partnerships, etc.

For the individual investor - I'll dink with fairly conservative divdend stocks and suffer along as best I can. Royalty trusts, commodities, MLP's, hedge stuff are out of my circle of competance. International beyond index funds - might? be worth a look, but I intend to proceed very carefully and with 'petty cash'

Overall - stay the course - while grinning and bearing it - the best I can.


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