

A Mutual Fund Master, Too Worried to Rest - Brajeshwar
http://www.nytimes.com/2012/08/12/business/john-bogle-vanguards-founder-is-too-worried-to-rest.html

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tptacek
_Burton Malkiel, the Princeton economist and author of “A Random Walk Down
Wall Street,” says: “Index funds are so popular now that it’s easy to forget
how courageous and tenacious Jack Bogle was in starting them._ They were
called Bogle’s Folly because all they did was replicate the returns of the
market. _But, of course, that’s a great deal. In the academic world many
people saw the wisdom of this — but Jack is the guy who actually made it
happen.”_

Vanguard is really an inspiring company, which is all the more remarkable
because of the industry they're in.

Apart from pioneering index funds, and from their strategy of observing a
Nader-esque duty of loyalty to their customers, Vanguard is also unique
because of its ownership structure, which is upside-down from what every other
big mutual fund company uses: the funds themselves own The Vanguard Group (the
company, which provides services to the funds), which mitigates an obvious
principal/agent problem at financial firms.

~~~
adestefan
It's important to note that they didn't open on Wall Street, instead they
started in Valley Forge, PA. At the time it was seen as another bullet point
which could be used against Vanguard ever becoming successful.

I mean who in their right mind started a company creating investment vehicles
that wasn't at least in New York City?!!?

~~~
T_S_
Maybe Fidelity? PIMCO? Humble Warren B. of Omaha. Lots of other examples.
Money is universal...like love. Kind of.

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lucisferre
There are some important ideas in here. The truth is that a number aspects of
finance are simply broken, and being heavily gamed for very short term gains
(the Facebook IPO is an excellent example of some of this).

The reality right now, is that for the vast majority of people (anyone sub
$500k in investable assets) getting the kind of quality advice needed to
navigate the complexities of investing is virtually impossible. This type of
high-touch service is almost exclusively reserved for the high net-worth
marketplace.

In a bear market like this one the likelihood that the returns of most mid-
level advisor's and fund managers will outperform the management fees is not
exceptionally high. This is why Vanguard's funds have received so much
attention recently, they are a relatively safe, and very, very low cost, which
addresses a big problem in this market.

That being said, they don't perform exceptionally well either, at least not by
themselves as a strategy. Investing in the value of the stock market is a
volatile strategy in the best of times, and completely fruitless in the worst.
Value investing has to be balanced by an income generation strategy, usually
one focused on equities that pay solid dividends and other income-generating
investments.

[http://www.theglobeandmail.com/globe-investor/investment-
ide...](http://www.theglobeandmail.com/globe-investor/investment-ideas/five-
reasons-to-love-dividend-growth-investing/article535865/)

Even armed with that information, the truth is that people should ideally not
be put in a position of managing their own finances. They regularly work
against themselves, have emotional attachments to their losses and gains and
often make out no better than a gambler. This is work for professionals in a
position of trust with their clients. Unfortunately, professionalism and
likewise trust seems to be in short supply in finance right now.

Furthermore, most people are not really even interested in being 100%
responsible for their own finances. They may want a enough of an understanding
of things to have some piece of mind, but most are no more interested in
managing their investments than they are in fixing their own car or filling
their own cavities.

~~~
cynicalkane
Most people feel the inevitable urge to gamble in the stock market. Some
advisers advocate a 10% allocation to "stock picks" for this reason.

Personally, I feel that a smart and tasteful person can outguess Wall Street
in areas he's an expert in. I don't think anyone could have predicted the
meteoric rise of Apple, but I think plenty of nerds could have looked at Mac
OS 10.1 back in the day and thought, "this is a good bet". The ideas is that
Wall Street can efficiently price financials (except in speculative bubbles,
but if can't judge if a stock is in a bubble then don't buy it!) but doesn't
have the computer nerd expertise to judge the long-term viability of a product
line or engineering culture. Along similar lines, I made a tidy profit in 2008
on banks because I knew a few people at these banks and knew which ones worked
and which ones were dysfunctional at a high level--a sort of perfectly legal
"insider" information. Of course when you do this stuff you're assuming risk.

~~~
losvedir
> _I don't think anyone could have predicted the meteoric rise of Apple, but I
> think plenty of nerds could have looked at Mac OS 10.1 back in the day and
> thought, "this is a good bet"._

Honestly, this is why I'm skeptical I can beat the market. This was exactly
me: I sat down at OS X Jaguar 10.2 and thought, "boy howdy this is great!" and
bought Apple stock at less than $40/share.

But you know what? I was wrong. I made money, of course, but for the wrong
reasons: the meteoric rise of Apple as a company was due almost entirely to
the iPod and then-unannounced iPhone.

Nowadays, of course, after the increase in stature of the company, they're
making money from their computers and laptops, but I'm not sure where Apple
would be if they didn't make it big with those other products.

~~~
cynicalkane
Investing in Apple back then would have been like investing in a startup--
investing in the engineering culture that made Mac OS X, not the product line
itself. They were a company that secured a future from oblivion by making
best-in-class stuff in a class with a huge upside for profit. I think a hacker
could have seen potential that Wall Street did not.

And, like a startup, they took a number of swings before hitting the iOS home
run, except they were also turning a modest profit during the swings.

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hncommenter13
For anyone interested, I highly recommend David Swensen's book "Unconventional
Success: A Fundamental Approach to Personal Investment." Swensen is the highly
successful manager of Yale's endowment. While no book on investing is without
flaws, I have found it to be some of the most understandable, well-argued and
supported advice around.

Short answer: he recommends a portfolio of low-cost index funds/ETFs covering
several asset classes and regular rebalancing to target allocation weights. I
have generally followed his advice to good effect using Vanguard index funds.

------
infinite8s
What do people think of the permarment portfolio
(<http://en.wikipedia.org/wiki/Fail-Safe_Investing>). The proposal is to
diversify your investments equally across stocks, bonds, gold and cash
equivalents. The idea is that for any particular market condition (inflation,
deflation, stagnation and growth), 3 of the asset classes won't do too well,
while the fourth will do spectacularly well and average out the losses in the
other 3. The other benefit (unlike simple stock/bond investing) is that the
portfolio seems to be pretty immune to variance from start date (ie, while
investing in the S&P has consistently yielded around 7-8% real returns, their
is pretty high variance in this number depending on when you start the
calculation). For example, here are some backtesting results showing that the
portfolio averages 9.7% - [http://crawlingroad.com/blog/2008/12/22/permanent-
portfolio-...](http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-
historical-returns/), which is pretty competitive with 100% stock allocation.

------
confluence
I'll quote one of Berkshire Hathaway's early Insurance CEOs

> _There are no such things as bad risks; just bad rates_

The problem I perceive with most people and finance is that they simply do not
think about it sensibly at all.

An example:

I love Coca Cola (the soft drink). But it costs $3 a can right now. I will
wait until it is $1 and buy up as much as I possibly can. I'll get more value
that way.

Now a stock market example:

Coca Cola (the stock) just fell 75% to $1 a share, I won't buy it because the
market is clearly telling me something (during a economic crisis). Oh wait it
just went up to $3 - I will now buy.

That's insane. But that's how it works. Think of stocks like computers,
tablets, food and clothes. Just buy good quality ones cheap and know that they
money you put in is never coming back out.

Index funds get one thing right - buy cheap, don't sell and know the money you
put in is untouchable. But they get another thing wrong - diversification
doesn't exist.

