My Jack Bogle Problem
Some of us can beat the dickens out of the market if we try. We should be encouraged.
Before I pounce on John "Jack" Bogle -- and I will -- let's give him his due. He is a legend. Fortune named him one of the investment industry's four "Giants of the 20th Century." Not only did Bogle start Vanguard Group, but he also created the first Standard Poor's 500-stock index fund. Moreover, he is one of the toughest critics of the fund industry's high fees and misbehavior. He fights for the rights of small investors.
Now I pounce
Only one thing bothers me about Bogle, and it bothers me a lot. It is his hectoring insistence that it's impossible for individuals to select fund managers who can beat the market. To me, Bogle is the living, breathing embodiment of the efficient-market hypothesis, which holds that the market cannot be beaten, and he continues to embody it long after it has been discredited. The mounting evidence that he is mistaken -- that investors are, in fact, so irrational that, at any given moment, some stocks are always mispriced -- has no effect on him. Even the inventor of the hypothesis, Eugene Fama, of the University of Chicago, now acknowledges that irrationality permeates the markets and results in mispricing of stocks.
Now I grant you, I'm biased. I regularly trounce the market. So does my brother, who co-manages Clipper and Selected American Shares funds. So do some friends and dozens of professional acquaintances. I find it very easy to select fund managers who will beat the market consistently. And you know many of their names: Whitman, Danoff, Dreman, Muhlenkamp, Rodriguez, Nygren, Miller, Calamos and, in the old days, Lynch and Neff. Interestingly, another fund manager who handily has beaten the market is John Bogle Jr., who currently runs Bogle Small Cap Growth fund. He is Jack Bogle's son.
I think Bogle won't bend because he's so appalled at the failures of most fund managers -- 80% to 85% of funds fail to beat the market over time -- and at the even more dangerous habits of individual investors who flit back and forth between hot and cold funds, invariably at the wrong time. Bogle wants to protect investors from themselves -- and index funds do serve that prophylactic function.
He also knows that if you look at funds in the aggregate, sterling past performance is not predictive of future market-beating results. But that fact doesn't mean what it seems to mean. If more than 80% of managers fail, it is axiomatic that most of those who are hot now will eventually cool down with a vengeance. That's how math works. But Bogle takes this concept much too far. In Common Sense on Mutual Funds he writes, "Intelligent investors must accept the fact that, over time, the fund (or funds) they select, irrespective of past performance, will inevitably revert toward the mean." Translation: There is no skill; there is only luck. What I say is that there are exceptions to any rule -- in this instance, the managers I named and scores of others.
Bogle may cling to his point of view because he doesn't like admitting that he has been wrong (in his case, for decades). But he's also a kind of zealot. In 2003, John Bogle Jr. told the Baltimore Sun that as a child, he could sometimes see his breath inside the house. "My mom wanted to save the environment and my dad wanted to save a nickel, and so I remember being constantly cold in the wintertime," he said. Good grief. And the elder Bogle believes no irrationality exists in the stock market?
Saint Jack's church tolerates no complexity. I agree that most of us should index. But some of us can beat the dickens out of the market if we try -- and we should be encouraged rather than told we are on a fool's errand.
Columnist Andrew Feinberg is a money manager and freelance writer. Read his blog, The Money Monster, five days a week at blog.kiplinger.com.