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Sunday, August 26, 2012 - Page updated at 07:30 p.m.

Vanguard's John Bogle still preaching gospel of long-term, low-cost investing

By JEFF SOMMER
The New York Times

Vanguard, the penny-pinching mutual-fund company founded by John Bogle, has become a colossus. Its index funds -- once derided for not even trying to beat the market -- are now the industry standard.

And after at least six heart attacks and one heart transplant, Bogle has managed to witness this triumph. "It's all a kind of a miracle," he says in a booming baritone. "It's really nice that I'm able to see this happen in my own lifetime."

With this kind of medical history, any other man of 83 might simply enjoy his success. But not John Bogle. He is still on a mission, as outspoken as ever and nearly as vigorous -- thanks, he says, to the heart of a younger man. He's not done yet.

"It's urgent that people wake up," he says. Why? This is the worst time for investors that he has ever seen -- and after more than 60 years in the business, that's saying a lot.

Start with the economy, the ultimate source of long-term stock-market returns. "The economy has clouds hovering over it," Bogle said. "And the financial system has been damaged. The risk of a black-swan event -- of something unlikely but apocalyptic -- is small, but it's real."

Even so, he said, long-term investors must hold stocks, because risky as the market may be, it is still likely to produce better returns than the alternatives.

"Wise investors won't try to outsmart the market," he says. "They'll buy index funds for the long term, and they'll diversify.

"But diversify into what? They need alternatives, bonds, for the most part. What's so frightening right now is that the alternatives to equities are so poor."

In the financial crises of the last several years, he says, investors have flocked to seemingly safe government bonds, driving up prices and driving down yields. The Federal Reserve and other central banks have been pushing down interest rates, too.

But low yields today predict low returns later, he says, and "the outlook for bonds over the next decade is really terrible."

Dark as this outlook may be, he says, people need to "stay the course" if they are to have hope of buying homes or putting children through college or retiring in comfort.

He is still preaching the gospel of long-term, low-cost investing. "My ideas are very simple," he says: "In investing, you get what you don't pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won't be foolish enough to think that they can consistently outsmart the market."

Still, because the market and the economy are deeply troubled, it's time for action on many fronts, he says: "We've really got no choice. We've got to fix this system. All of us, as individuals, need to do it."

That's the message of his latest and 11th book, "The Clash of the Cultures: Investment vs. Speculation" (Wiley & Sons, $29.95). It offers a scathing critique of the financial-services industry and updated guidance for investors. "A culture of short-term speculation has run rampant," he writes, "superseding the culture of long-term investment that was dominant earlier in the post-World War II era."

Too much money is aimed at short-term speculation -- the seeking of quick profit with little concern for the future. The financial system has been wounded by so-called innovations that promote hyper-rapid trading, market timing and shortsighted corporate maneuvering. Individual investors are being shortchanged, he writes.

He advocates taxes to discourage short-term speculation. He wants limits on leverage, transparency for financial derivatives, stricter punishments for financial crimes and a unified fiduciary standard for all money managers: "A fiduciary standard means, basically, put the interests of the client first. No excuses. Period."

Bully pulpit

Despite Vanguard's size and success, Bogle is no billionaire.

While he has no operational role at Vanguard, he hasn't entirely left it. He works on its campus, heading the Bogle Financial Markets Research Center, a small research institute that provides him with a bully pulpit, which he tries to use in the energetic mode of his hero, Theodore Roosevelt.

"There aren't many of us Roosevelt Republicans left," he said.

The research institute is financed by Vanguard but is independent, allowing Bogle to write books and make fiery speeches that sometimes differ from Vanguard policies.

Bogle moved to the institute after leaving the company's board in 1999 amid a conflict with John Brennan, his hand-picked successor and second in command. Brennan, who declined to comment for this article, has since been succeeded by F. William McNabb III.

By 1996, when Bogle relinquished his role as CEO to Brennan, he had already had at least six heart attacks and was mortally ill, according to two people then at Vanguard.

"At that point Jack Bogle couldn't walk slowly across a room without getting out of breath," one of those officials said. "Jack's heart was failing. Either he'd get a transplant or basically have to say goodbye to the world."

The transplant in early 1996 was spectacularly successful. "Physically, Jack was born again," the official said.

Revered on campus

On the Vanguard campus, on a lawn near the cafeteria, stands a 7-foot-high bronze statue of Bogle.

He is sheepish about it. "I'm not sure we should've done it, but there it is," he said. "It's a good likeness, isn't it?"

Indeed, it is. Thomas Warren, the sculptor who created it in 1996, said the Vanguard board commissioned the statue when Bogle was ill, and that he became stronger as work proceeded.

"Mr. Bogle was very humble about it," Warren said. "I went out to his house to 'live cast' his face one day, and I was late. He was dressed for a board meeting, but he was very gracious and got down on the kitchen floor, and we made the mold." Bogle asked him not to prettify his image.

"Mr. Bogle has arthritis, but he told me to go ahead and show him the way he really is, so the fingers on the statue are gnarled."

One day earlier this year in the company cafeteria -- the "galley," as it's called at the nautically themed Vanguard -- Bogle ordered a grilled-cheese sandwich and chatted with an endless stream of young well-wishers.

On the walls were murals embellished with quotations from his speeches:

"Like a rock."

"Even one person can make a difference."

"Press on regardless."

"We lead."

"Success must not be bought but earned."

And, of course, there is another, which may be his favorite. "Stay the course," Bogle said.


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