Book Review: John C. Bogle's 'Don’t Count on It!'
Brenda Jubin submits: Don’t Count on It!: Reflections on Investment Illusions, Capitalism, “Mutual” Funds, Indexing, Entrepreneurship, Idealism, and Heroes (Wiley, 2011) is an anthology of recent writings and speeches by John C. Bogle, the venerable founder of Vanguard. It is a substantial book, over 600 pages long, and, as its subtitle indicates, covers a range of topics. Here I’m going to confine myself to two. I’ll begin by exploring three principles that underlie Bogle’s well-known case for low-cost passive index funds. Then I’ll jump to the lecture he gave to the Risk Management Association in October 2007: “Black Monday and Black Swans.”Why, according to Bogle, is it preferable to invest in broad index funds rather than actively manage a portfolio? First, “the past is not prologue” (p. xxiii) or, put another way, “historic stock market returns have absolutely nothing in common with actuarial tables.” Bogle continues, quoting Keynes: “’It is dangerous to apply to the future inductive arguments based on past experience [that’s the bad news] unless one can distinguish the broad reasons for what it was’ [that’s the good news]. For there are just two broad reasons that explain equity returns . . . (1) economics and (2) emotions.” (p. 7) The math here is blissfully elementary. Add earnings growth and dividend yield to get investment return. Calculate the percentage increase in the P/E ratio to get the speculative return. Add investment return and speculative return to get total return. “In the short run,” Bogle writes, “speculative return drives the market. In the long run, investment return is all that matters.” (p. 66)Complete Story »