Stay the Course

Notes on John C. Bogle's final book

This week I read Stay the Course: The Story of Vanguard and the Index Revolution by John C. Bogle. This was his final book before he passed and a really enjoyable one.

I've been using Vanguard since 2018. I had moved on from a "financial advisor." Vanguard had low expense ratios and glowing reviews. I did not know much about the company or its history besides anecdotes.

My summary

The book tells the history of Vanguard through many lenses. The beginning of the book tells the end to end story and later chapters cover certain aspects in more detail. Near the end of the book, Bogle makes some predictions about the industry's future. Lastly, he shares various personal notes, quotes, and advice as he knew this would be his last book.

The book's main points centered around explaining how Vanguard came to be, and then rallying for more Vanguards in the industry. Bogle attributes Vanguard's success to its mutual company structure: investors own funds and funds own Vanguard. From this structure, Bogle argues all else follows.

Vanguard was Bogle's rebound from a sour merger gone wrong. He had merged, as CEO of Wellington Management Company, with some more aggressive active investors who went on to shove him out. He made a new company to service Wellington in managing administrative duties.

Bogle described (1) administration, (2) investment decisions, and (3) distribution and sales as the three pillars of a mutual fund company. Vanguard creatively would come to be responsible for all these pillars.

Underpinning mutualization was creating the right incentives for, not the index fund in particular, but rather reducing costs for investors no matter the investment scheme. This reduction of costs was the bedrock obligation Vanguard had to their funds and those funds investors. The data bears this out, especially now many decades later, but someone not so burned by the active management industry may have not pursued it.

That line of reasoning was enough for Bogle to drive a wedge through with Vanguard. Reading about how Vanguard became the full mutual fund company it is today, it felt a little comical. Vanguard's first order of business was to weasel out of being an administrative-only branch of Wellington. It started with gaining the ability to create new non-Wellington funds:

  • Bogle: "We [Vanguard] are creating an index fund."
  • Wellington: "No no no. You do admin, you can't make investment decisions."
  • Bogle: "An index fund is an algorithm you see, we don't actually make any decisions. So this is all good, yeah?"
  • Wellington: "Uh, yeah...I guess so."

With the S&P 500 index, Vanguard had its foot in the door of its own investment future. We know the index fund as this radical new instrument in the finance world. To Vanguard, it was simply a sensible means to start breaking out on its own. A masterful plan and lucky opportunity as it would turn out.

Next was sales and distribution:

  • Bogle: "We [Vanguard] are going to start selling our funds directly."
  • Wellington: "No no no. We do the sales and distribution."
  • Bogle: "Ah but you see we're offering the funds directly. We won't market, if people want to buy they can."
  • Wellington: "Oh...I guess that's fine."

Both of these moves fit the narrative of reducing costs for investors (near-zero management fees, no sales fees). They just also happen to coincidentally severe Vanguard's dependency on Wellington. These moves would play out to allow Vanguard the freedom to operate autonomously in all aspects over the years.

Bogle later in the book asks often why there are not more companies like Vanguard. I think the high initial cost of investment limits newcomers and Vanguard sidestepped that leaning on to Wellington in its early days. Vanguard also held the innovator's advantage to pull these tricks in an industry so early and have Wellington so easily "tricked." This history put Vanguard in the unique position to reach the escape velocity necessary to put individual investors in the driver's seat with its mutual structure.

Bogle spent his whole life trying to steer others to the mutual approach. I personally don't see the stars aligning for another Vanguard without a similar series of events and new innovation to be created in the industry. Without volunteers, Bogle urged public policy makers to intervene and steer towards a mutual structure on the grounds of fiduciary responsibility to investors.

Vanguard was a hotbed for innovation. Having each fund in control of its own destiny made it fairly easy to experiment. Bogle was candid about errors made along the way:

  • Fee decreases were commonplace until investors unintentionally ceded their voting rights on fee changes, as Vanguard has had a history of only reducing fees. This would be a lesson to always keep a guard up for giving a central authority more power than intended.

  • Many a time where marketing and the newest hotness won out in the short term over the business fundamentals that were geared for the long term.

  • In active investing, it was often the case one fund manager carried a fund and upon retirement the fund died with them. Anything with the inability to have a long term track record beating the S&P was scrutinized, so that means most of them.

Overall, Vanguard has crushed it in the industry. "Haters gonna hate" could have easily been coined by Bogle if this all started in a more recent era.

Small notes

Why funds close to new investors

I never really knew why funds closed to new investments. When I had first seen Wellington and Windsor funds when I was beginning my investment journey, I naively thought, "Ah, this fund has a secret formula and are keeping it for themselves." Something gatekeeping and secretive like that.

I'm sure there are other reasons to close off new investment to funds, but in Vanguard's case these funds were (1) actively managed, and (2) had so much investment the active managers felt they could not scale their investing approach to match demand. The game they were playing did or would peak and investors would be hit by waning returns if they pressed on.

Much more reasonable and I don't feel like I'm missing out now.

The fun fact

Vanguard couldn't afford all 500 companies in the S&P 500 at first.

The initial investment in the fund was only 11 million dollars. The fund debuted with only the top 280 companies of the index.

The impartial observer

Bogle ends the book with a bunch of personal notes.

He quotes Adam Smith's impartial observer, which resonated with me. Beyond doing to your neighbor what you would want done to you, there's this third party watching yourself and others and putting pressure on your character in terms of moral consistency.

One of the things I wanted to learn in reading this book is how does someone become the revolutionary for the little guy like Bogle was. There are many remarks and thoughts on how duty to individual investors is paramount in an industry that doesn't want to hear it. He tried to convey and appeal to morality in these final chapters. I'm aboard the overarching ideas, but I did not fully grasp a secret sauce from this book like I'd hoped.

I keep in mind history is often written by the winners and Bogle definitely won. The data cannot deny the outcomes but I wasn't compelled on the initial motivations to pursue Vanguard.

Was Bogle always first and foremost an advocate for the individual investor? Or was he simply lucky his revenge story against his Wellington partners ended up so well and he spun into it? The connective tissue for the former is missing, and if it is what of it?

Morality can be awoken anywhere, and that is good. In Bogle's case, it was great.