The Clash of the Cultures: Investment vs. Speculation

Praise for The Clash of the Cultures

"Jack Bogle is brilliant and persuasive, and his ability to get to the heart of complex issues is one of his greatest gifts. . . . I have come to appreciate his unique ability to speak to investors in a language that is accessible, lyrical and yet also bracing. He points out with clarity the inherent conflicts present throughout our financial markets, most notably between the investor′s interests and those of many financial professionals. . . . The entire financial services industry should be glad that Bogle is merely an expert witness, and not the judge and jury as well." From the Foreword by ARTHUR LEVITT

"A calm yet impassioned call to financial arms. A trading and speculation culture has taken over on Wall Street, pushing aside the traditions that underpin sensible investing. John Bogle speaks with great credibility and deep experience explaining in meticulous detail exactly how powerful insiders gain and you lose. Listen to him carefully and act to protect your family′s financial future." SIMON JOHNSON, Professor, MIT Sloan School of Management, coauthor, White House Burning

"The Clash of the Cultures argues convincingly the merits of investing over speculating. Bogle′s ′Stewardship Quotient′ methodology helps to identify fiduciaries that value stewardship over salesmanship, an all too often mutual fund industry failure. Finally, I like his ′10 Simple Rules for Investment Success,′ which are logical but seldom followed. Well done!" ROBERT L. RODRIGUEZ, CFA, Managing Partner and CEO, First Pacific Advisors

"This is vintage Bogle a hard–hitting, no–holds–barred jeremiad showing how the culture of speculation has too often superseded the culture of long–term investing. Jack′s fans will benefit particularly from his 10 simple rules comprising an optimal investment strategy for the years ahead." Professor BURTON MALKIEL, bestselling author of A Random Walk Down Wall Street, Tenth Edition

Foreword By Arthur Levitt ix

Acknowledgments xiii

About This Book xv

Chapter 1 The Clash of the Cultures 1

Chapter 2 The Double–Agency Society and the Happy Conspiracy 29

Chapter 3 The Silence of the Funds: Why Mutual Funds Must Speak Out on the Governance of Our Nation s Corporations 65

Chapter 4 The Mutual Fund Culture Stewardship Gives Way to Salesmanship 103

Chapter 5 Are Fund Managers True Fiduciaries?: The Stewardship Quotient 139

Chapter 6 The Index Fund: The Rise of the Fortress of Long–Term Investing and Its Challenge

from Short–Term Speculation 167

Chapter 7 America s Retirement System: Too Much Speculation, Too Little Investment 213

Chapter 8 The Rise, the Fall, and the Renaissance of Wellington Fund: A Case Study Investment

Wins, Speculation Loses 251

Chapter 9 Ten Simple Rules for Investors and a Warning for Speculators 297

Appendix I: Performance Ranking of Major Mutual Fund Managers March 2012 323

Appendix II: Annual Performance of Common Stock Funds versus S&P 500, 1945 1975 325

Appendix III: Growth in Index Funds Number and Assets, 1976 2012 327

Appendix IV: Wellington Fund Record, 1929 2012 329

Appendix V: Wellington Fund Equity Ratio and Risk Exposure (Beta), 1929 2012 333

Appendix VI: Wellington Fund Performance versus Average Balanced Fund, 1929 2012 335

Appendix VII: Wellington Fund Expense Ratios, 1966 2011 337

Index 339

John C. Bogle is the founder of the Vanguard Group of mutual funds and President of its Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as chairman and chief executive officer until 1996 and senior chairman until 2000. In 1999, Fortune magazine named Mr. Bogle as one of the four "Investment Giants" of the twentieth century. In 2004, Time magazine named him one of "the world′s 100 most powerful and influential people," and Institutional Investor presented him with its Lifetime Achievement Award. In 2010, Forbes magazine described him as the person who "has done more good for investors than any other financier of the past century." In January 2012, some of the nation′s most respected financial leaders celebrated his distinguished career at the John C. Bogle Legacy Forum, held at New York′s Museum of American Finance.

The Clash of the Cultures: Investment vs. Speculation    is a must read for investors who want to understand the forces that are working against them and what they can do about it to maximize their investment returns. It should come as no surprise to those who know Jack and his philosophy that the final words of his final book are:  Stay the course! Forbes

The Clash of the Cultures: Investment vs. Speculation is . . . an enjoyable read that ends with 10 lessons for investors that, while simple, are deeply valuable to the general public. . . Clash of the Cultures is a great summary of the breadth of Bogle′s 60–plus years in the investment field. He offers observations on the shocking change in the culture of finance that he has witnessed first–hand. Among the most important of the shifts is that short–term speculation has crowded out long–term investment. Though this has been great for the financial sector, it has come at the expense of the public. CBS MoneyWatch

Bogle, as the Godfather of index investing, has ideas that are timeless and based on simple math, and at the same time exhibit uncommon sense and a routinely overlooked view of how investors are consistently overcharged by the financial services industry. Fortunately, his wisdom is widely available to everyone. Much of that wisdom has been assembled in Bogle′s most recent book The Clash of the Cultures: Investment vs. Speculation (Wiley, 2012). While most of the insights are time–honored themes in the Bogle canon, they are very useful for individual investors. Reuters

Bogle′s latest book tackles what looks like an artificial distinction. His Clash of the Cultures title conjures thoughts of world war and social strife. But he′s talking about investment vs. speculation . . .  As in his previous books, Bogle is a master of the clear point and the pithy quote – from the investment writings of John Maynard Keynes and Benjamin Graham, pension adviser Keith Ambachtsheer and Bogle′s old mentor the late Walter L. Morgan, as well as the Gospels of Luke and John. Philadelphia Inquirer

You know what to expect when opening a book by John Bogle, founder of the Vanguard mutual fund group and inventor of index funds: a lament about the fall from grace of the US mutual fund industry, and a restatement of his strong conviction that COSTS MATTER!!!  Mr Bogle s new book, The Clash of the Cultures , Investment vs Speculation, does not disappoint on either count, but it is also very much in tune with the zeitgeist in its focus on stewardship and fiduciary duty.  It lambasts US mutual fund managers for neglecting to act as responsible owners of the companies they invest in on behalf of the savers whose money they look after, and for their own governance failures. The Financial Times

[The Clash of the Cultures] echoes many familiar . . . themes worth repeating, because they are too often ignored. Investors spend so much time chasing hot asset classes and hot fund managers that they end up buying high and selling low, all the while incurring transaction costs. In Mr Bogle s words, investors need to understand not only the magic of compounding long–term returns, but the tyranny of compounding costs. . . . The American pension–fund industry has been particularly bad at understanding these long–run fundamentals. Many schemes assume, on the basis of past performance, a return of 7.5–8%, a figure that is highly implausible given the current low yields. . . Meanwhile, many employees in the private sector have been switched into defined–contribution schemes. . .  But employees are not saving enough, are not allocating their portfolios efficiently and are incurring too many costs. It is hard to disagree with Mr Bogle that the system of retirement security is imperilled, heading for a serious train wreck. But will anybody listen to him, when they haven t in the past? The Economist

John Bogle s latest book, as much a piece of history as is it a playbook for how to repair financial markets scarred by two bear markets in 10 years and a loss of confidence, is one of those books on finance that ought not be left unread. The Clash of the Cultures is the latest and perhaps best book by the founder of Vanguard Group. . . Plus, for those not familiar with Bogle s prose, the man can turn a phrase, which makes the book all the more enjoyable. IndexUniverse

If the Occupy Wall Street movement is serious about helping people with real financial issues, then its leaders should read John Bogle s book and embrace his ideas for change. Rick Ferri, Forbes.com

John Bogle s story is an oft–told tale, yet even Bogle junkies will learn some fascinating new facts from The Clash of the Cultures. Bogle takes of the cudgels on behalf of investors, who he believes have been poorly served by most of the industry. Bogle brings invaluable historical perspective to current issues ranging from high–frequency trading to the looming crisis in the U.S. retirement system to the use of mutual fund investors money to promote the growth of assets under management. Every thoughtful investor can benefit from his wisdom, served up with refreshing modesty by a giant in a field notorious for outsized egos. Financial Analysts Journal

The book is a gem. Well–researched and carefully argued, there′s simply no way to argue with Bogle′s premises –– that the little guy always loses, that the more you churn the more you lose, that most people′s retirements are dramatically underfunded, that management looks out for itself and not the stockholders, and that greed is driving the bus. . . Read Bogle, not just to learn about how to protect your investments and understand what really happens on Wall Street. But more than that, read The Clash Of The Cultures and declare yourself into the three percent who have ideas and aren′t afraid to use them. The Huffington Post