John Bogle of Vanguard warns investors on stock broker fees

Every investor should read the books of John Bogle, founder of the Vanguard Group and tireless advocate of the ordinary retirement investor, the “little guy” faced with long odds and the hungry sharks of Wall Street.

One of the best is Enough: True Measures of Money, Business, and Life, a book he probably thought of as the capstone of his career, a legacy. It was published in late 2008, as Bogle turned the corner toward 80. He celebrated 88 in May this year.

For a guy who had a heart transplant back in 1996, every day must seem like an unexpected bonus. You can forgive the man for assuming that time was running out, as it is for all of us.

Yet here he is today, still arguing for the little guy, making the case for low-cost investing that dates back to his 1951 thesis at Princeton, the document that earned him a perfect grade but, more importantly, led to the creation of the first Vanguard index fund and what should be hundreds of billions in extra returns for investors over the years.

Bogle recently wrote about his investment thinking in the CFA Institute’s Financial Analysts Journal, offering a trenchant analysis of none other than Adam Smith, the intellectual father of capitalism, and Benjamin Graham, the father of stock analysis and mentor to the great Warren Buffett (the source of the “hundreds of billions” estimate.)

If you’re not going to plunge into any of Jack’s short and highly readable books (and you should, really), in the essay Bogle neatly distills his life’s work into seven timeless lessons, which I will provide here unedited:

Invest you must. The biggest risk facing investors is not short-term volatility but, rather, the risk of not earning a sufficient return on their capital as it accumulates.

Time is your friend. Investing is a virtuous habit best started as early as possible. Enjoy the magic of compounding returns. Even modest investments made in one’s early 20s are likely to grow to staggering amounts over the course of an investment lifetime.

Impulse is your enemy. Eliminate emotion from your investment program. Have rational expectations for future returns, and avoid changing those expectations in response to the ephemeral noise coming from Wall Street. Avoid acting on what may appear to be unique insights that are in fact shared by millions of others.

Basic arithmetic works. Net return is simply the gross return of your investment portfolio less the costs you incur. Keep your investment expenses low, for the tyranny of compounding costs can devastate the miracle of compounding returns.

Stick to simplicity. Basic investing is simple—a sensible allocation among stocks, bonds, and cash reserves; a diversified selection of middle-of-the-road, high-grade securities; a careful balancing of risk, return, and (once again) cost.

Never forget reversion to the mean. Strong performance by a mutual fund is highly likely to revert to the stock market norm—and often below it. Remember the Biblical injunction, “So the last shall be first, and the first last” (Matthew 20:16, King James Bible).

Stay the course. Regardless of what happens in the markets, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor. (Just ask investors who moved a significant portion of their portfolio to cash during the depths of the financial crisis, only to miss out on part or even all of the subsequent eight-year—and counting—bull market that we have enjoyed ever since.) “Stay the course” is the most important piece of advice I can give you.

It’s really all there, decades of investment experience and thought in seven simple ideas. If I may be so bold as to summarize even further, Jack is mostly talking about ego.

The “problem” of investing truly is a problem of the ego, of believing so strongly in one’s own investment convictions that you ignore math itself. That way lies peril. Some will be right, but most will be wrong. Ego is how investors lose money.

I hope Jack lives another decade and more. For one, his long campaign to enact the fiduciary standard is still in play, though growing more real by the hour at this point.

Yet he himself would just chuckle and wave off any such suggestion. Enough is enough. The trick in life is to recognize it.

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