Investing principles of the great: John Bogle

With the growing role of big business and institutional capital, it is difficult to succeed and make a fortune nowadays. That is why it is getting even more important to understand the principles of increasing personal wealth. Today, we start a series of articles about great investors and their approaches. Let’s begin with a man whose ideas have made more than a hundred thousand people millionaires.

John’s Index

John Bogle passed away on January 16, 2019. He was not the most famous and frequently cited investor. However, he helped many people become millionaires, more than anybody else. 43 years ago John created the first index fund in the world. He believed that even professional investors’ returns could very seldom exceed the average market values. So John’s first fund followed the stock index S&P 500 and simply repeated its structure in the investment portfolio.

Source: Institute for The Fiduciary Standard

Let’s look at the theory. A stock index is a composite index, computed from the aggregate prices of a selected group of securities. S&P 500 is a stock index, which includes 500 US companies with the largest market capitalization. The weight of each company in the index depends on its capitalization. If the index increases, the stock prices of these companies grow, if it falls — they decrease.

It is impossible to buy the index directly, and before John Bogle created the index fund, it was just used to show the market trend. According to the only investment paradigm in those days, a portfolio was supposed to include securities, which grew faster than the market, and eliminate the least promising ones. However, it was difficult to put it into practice even for professionals who managed multi-billion investment funds, let alone non-professional investors. In fact, these funds were not more effective than the market. John Bogle showed that the best strategy was broad diversification of funds between unrelated assets.

There was no need to analyze each asset individually, because then the investor’s returns would be close to the market’s. With the active investment management, it was almost impossible to exceed them.

The simplest and most profitable investment strategy was proved and proposed back in 1960, but the theoretic insights were not interesting to the general public. It was put into practice by John Bogle in 1976. The passive management did not require any effort and copied the structure of the chosen stock index. So, at first, nobody believed that it could bring higher returns than the active asset management by professionals and analysts. But 4 years after the fund was created, it overtook a half of competitors by profitability and some time later — ¾ of them.

John’s principles and our time

Today, the investment company The Vanguard Group founded by John Bogle in 1975 ranks 2nd in the world by assets under management with $ 5.2 trillion. The most interesting thing is that Bogle was rich but was not a billionaire. His wealth was estimated at about $100 million. He was never the sole owner of the fund he created, did not bring it to IPO or sell it. The reason for it was the unusual structure of the company. It consists of 190 funds located in the United States and 220 funds outside them. The owners of the company are shareholders of these funds are about 20 million people around the world. John Bogle was just one of them holding his “modest” share. So, his income included salary and passive investment.

Bogle’s main principles are: reduce the cost of making investments and don’t try to outcompete the market. Although John dealt with the securities market, his principles could be applied to any investment product, for example, P2P lending. Bogle’s logic suggests that one should diversify investments between a variety of unrelated assets to reach the average market profitability. Many P2P platforms allow to distribute funds between different borrowers, minimize the risk and receive good profitability. Assets can also be diversified between several P2P platforms (which is done by most P2P investors according to findings).

P2P lending market is young and grows rapidly. Its profitability is higher than in the stock market. According to John’s forecasts shortly before his death, in the next 10 years the returns on the stock market will not exceed 2% per year, since most companies are already overvalued. Due to the active growth, the P2P market can yield 10–12% a year. Using John’s principles, investors can take a right approach to benefit from this growing trend.