Call it one of those old-fashioned moral dilemmas. Not the kind first-year philosophy students get preternaturally excited about. (You know what I mean: “A priest, a rabbi, and a minister are on a sinking boat that can carry only two people. Which one do you throw overboard?”) No, this dilemma is much more sinister. Mary Shelly sinister. Like a doctor who saves the baby from certain death, only that baby turns out to be responsible for starting the zombie apocalypse.
By now, you've read dozens of eulogies honoring John Bogle, all showering accolades that paint him as some sort of deity. I'm pretty sure “Jack” would have had none of this idolatry.
This is what struck me when I had a chance to sit down with him for an interview a little more than a year ago (see “Exclusive Interview with John Bogle: Industry 'Crying Out for Change'; says Fiduciary Rule 'a Turning Point',” FiduciaryNews.com, June 21, 2016).
What would be the first words this iconic persona would speak to me? This man, purported to command legions of devoted Bogle-heads –would he live up to this grandiose expectation I had formed in my head?
No. His first words were “Call me Jack.”
Thus speaks a man of high character, a man certain of his place in the grand order of things (and that place isn't as high as Bogle-heads infamously believe), a man who retained a philosophical simplicity – “purity” might be more appropriate – in his demeanor.
Even Robert Shiller, who wasn't afraid to take issue with Bogle's greatest accomplishment, still managed to emphasize his high moral standing.
About Bogle's greatest accomplishment: Many don't understand how investing legend Warren Buffet can offer praise to Bogle and his index fund invention.
Indeed, Bogle often told us, Buffet's will says his wife's assets should be placed in an index fund when his passes.
If that sounds ironic coming from perhaps the greatest stock-picker in history, then you don't understand stock-pickers.
Behavioral finance expert Vic Ricciardi explains this phenomenon as the “overconfidence” bias, (see, “Exclusive Interview: Vic Ricciardi Says 'Status Quo' Bias Thwarts Broader Acceptance of Behavioral Finance,” FiduciaryNews.com, January 23, 2019).
It's particularly prevalent among professionals. For example, no stock-picker thinks anyone else can pick stocks like he can; thus, he advises his family members to place their 401(k) assets (which he can't manage since they're captive in a retirement plan) into an index fund.
Buffet is no different than any other stock-picker.
Shiller's point, however, reflects a broader concern with index funds in general. Economists understand that, taken to the extreme, index funds will destroy the capital markets (see, “3 Reasons to Outlaw Index Investing Right Now (and One Selfish Reason Not To) in 5 Acts,” May 12, 2010).
Obviously, this is something I was quite aware of at the time of my interview with Bogle. That academia treated this concern as axiomatic (even if they considered it merely an academic question) meant Bogle was undoubtedly also aware of it.
As I talked and talked with him about the DOL's (then new) fiduciary rule, I was chomping at the bit to see how he would respond to this question.
Finally, I had an opening. “Jack,” I began, “what happens to capital markets if everyone invested only in index funds?” I expected an ardent defense of index funds.
“Chris, I know what the economists say,” he began, exactly as I thought he would.
What he said next shocked me. “It's true but it'll never happen. I don't see index funds ever getting more than 50% of the market.”
How's that for honesty? He knew precisely the limits – and the danger – of his creation.
It soon became clear to me why you never saw quotes from Bogle (until very recently) about this. His extended answer to my question dealt with the competing mutual fund business structures. It had less to do with the investments and more to do with the perils of “too big to fail.”
Bogle must have been thinking about this topic when he wrote his final book (published last month). In it, he warns of the dangers of index funds capturing too much of the market.
His article in the Wall Street Journal on this, however, doesn't discuss how index funds will cause the capital markets to seize up.
Instead, he emphasizes another point. If there are only two or three big index fund companies controlling, say, 30% of the shares of major U.S. companies, well, that just has all the markings of a stereotypical James Bond villain.
And we won't have Jack Bogle around anymore to play the role of James Bond.
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