John C. Bogle

John C. Bogle

Founder, Vanguard Group

John C. Bogle — Jack to his millions of fans — revolutionized the investment world with the simple notion that every dollar investors pay in expenses to a mutual fund company is a dollar they can’t use for retirement, their children’s education or anything else.

“The wisdom of indexing is so simple that you would think people would pick it up quickly,” Mr. Bogle said.

In fact, it took a long time for people to realize that a low-cost fund will beat a high-cost fund most times.

But eventually they did, and the fund company Mr. Bogle founded, the Vanguard Group, is now a $3.5 trillion behemoth with more than 20 million investors in 170 countries.

Mr. Bogle’s fascination with numbers helped him from a difficult upbringing during the Great Depression. His excellent grades got him into Princeton, where his interest in math led him to study economics and investment. His thesis, “The Economic Role of the Investment Company,” led him to graduate magna cum laude in 1951. From there he went to Wellington Management, where energy and intelligence propelled him to CEO in 1970.

During his tenure at Wellington, Mr. Bogle engineered what he now calls an “extremely unwise” merger with an aggressive active fund manager. When the go-go market of the late 1960s and early 1970s collapsed, Wellington management fired him in 1974.

An article by Nobel Laureate Paul Samuelson in the first issue of The Journal of Portfolio Management in 1974 grabbed Mr. Bogle’s attention. In it, Mr. Samuelson pleaded for someone to start an index fund “if only for the purpose of setting up a naive model against which their in-house gunslingers can measure their prowess.”

The initial underwriting for Vanguard’s first index fund fell 93% below its goal of $150 million. But he had no intention of giving up, and even eliminated the fund’s sales charge in 1977 - a highly unusual step for a young fund trying to increase its assets. Money managers hated it. A widely circulated poster at the time said, “Help Stamp Out Index Funds! Index Funds Are UnAmerican.”

Mr. Bogle’s faith then, as now, was in the simple value proposition of an index fund.

“Over 50 years, 7% turns one dollar into $30, and 5% turns one dollar into $10. What investors have realized is that they’re putting up 100% of the capital, taking 100% of the risk and getting 30% of the return.”

Dan Wiener, editor of The Independent Advisor for Vanguard Investors, said it’s not indexing that has been so successful for investors, but low costs. “That’s his legacy. Everything else is ancillary.”

One advantage Vanguard has is its unique mutual structure. Because the fund company has no stockholders to pay, it can return profits to investors in the form of lower expenses.

“Most mutual fund companies are not mutual at all,” Mr. Bogle said. “Most people start mutual fund companies to make money for themselves - of course they do. They’re trying to earn a return on your capital.”

Under Mr. Bogle’s command, Vanguard created more than a dozen new index funds. “The bond index fund was the genius move, particularly in this day and age, when a low expense ratio makes all the difference,” Mr. Wiener said.

Vanguard also offered several low-cost actively managed funds under Mr. Bogle’s watch, many run by his old employer, Wellington. The company also launched several sector funds while Mr. Bogle was at the helm, an obvious reply to Fidelity’s pantheon of specialized Select funds.

In 1996, heart troubles prompted him to turn the reins over to John Brennan, who had worked for the company since 1982. Mr. Bogle returned to Vanguard after a heart transplant that year, but left the firm in 1999 when he ran up against the company’s mandatory retirement age of 70. At the time, there was speculation that the retirement age rule was used as a passive-aggressive way to push Mr. Bogle out because of clashes with Mr. Brennan.

"There is certainly an argument that the creator of a company deserves a tad of extra consideration," Mr. Bogle told TheStreet.com.

He now works at the Bogle Financial Markets Research Center, located on the Vanguard campus.

“The average Vanguard investor probably thinks Bogle is still running the company,” said James Lowell, editor of The Fidelity Investor, a newsletter.

His legion of followers, called Bogleheads, probably feel he should be. Mr. Bogle may be the only person in the financial services industry that has a horde of admirers. Mr. Bogle stokes their ardor by criticizing the mutual fund industry - notably on the role of exchange-traded funds, where Vanguard is one of the biggest players. While he doesn’t single out Vanguard, he bristles at funds you can trade by the minute.

“The more you trade, the more you lag the market,” he said.

And he has mixed feelings about the usefulness of advisers - again, because of costs.

“People need help, but 1% is large,” Mr. Bogle said. During his talks with Bogleheads, he sometimes asks how many use financial advisers. Not one hand goes up. “I’m not sure the handholding is always good.”

And Mr. Bogle knows that making the financial services industry better means making it less profitable.

“When someone says, ‘Bogle saved investors $1 trillion,’ it also means, ‘Bogle cost the financial system $1 trillion,’” he said.

Occasionally, a fan will remind him that some of that $1 trillion that went to investors instead of mutual fund companies could have gone to him.

“You’d be worth billions if it weren’t for that crazy mutual fund structure of yours, they tell me,” Mr. Bogle said. “But then we would have been just like anyone else. I’m doing fine.”

At 87, Mr. Bogle admits he’s slowing down.

“I carry a walking stick,” he said, “but I’m still swinging in there. I have six children, 12 grandchildren and a great wife. What the hell else can I say? I’m a lucky guy.”

– John Waggoner