Friday, September 2, 2011

Investment Lessons from My Father and John Bogle

In the late 1970's, when I was first considering a career in investment management, I had a long talk with my Dad.

My father was a good investor - he bought a boatload of stocks in 1974, for example, when the Dow dipped below 600 - but was puzzled as to my career choice.

"I don't get it," he said, "Once you buy your stocks for clients, what would you do all day?"

My Dad's thoughts reflected the way that investors looked at stocks a generation ago: namely, you were investing in a company, and usually with a multi-year time horizon. Trading was done infrequently, and Wall Street was a fairly sleepy place.

Dividends were important, of course (why would you ever buy a risky asset like a stock without a high dividend yield?), but mostly you were betting on the long term prospects of a particular company.

I recalled my conversation with my Dad as I have been reading John Bogle's book Don't Count On It: Reflections on Investment Illusions, Capitalism, "Mutual" Funds, Indexing, Entrepreneurship, Idealism and Heroes.

At one point in the book, Bogle discusses on much the investment management industry has changed since he entered it in 1951. I won't try to go through all of the detail - I highly recommend you read the book - but here are a few points I wanted to highlight (quoting Bogle):

  • In 1950, mutual fund assets totaled $2 billion. Today, assets total more than $12 trillion, an astonishing 17 percent rate of growth. Then, equity funds held about 1 percent of all U.S. stocks; today, they hold a stunning 30 percent;
  • In 1950, almost 80 percent of stock funds (60 of 75) were broadly diversified among investment grade stocks...Today, such large-cap blend funds account for only 11 percent of all stock funds...;
  • In 1951, the average fund investor held shares for about 16 years. Today, the holding period averages a fourth of that...;
  • In 1951, management by investment committee was the rule; today it is the exception..A star system among mutual fund managers has evolved, with all the attendant hoopla, although most of these stars, alas, have turned out to be comets and hyperactive at that..;
  • In 1951, the typical mutual fund focused on the wisdom of long-term investing, holding the average stock in its portfolio for about six years. Today, the holding period for a stock in an actively managed equity fund is just one year..
Ultimately the point that Bogle makes is that the investment process today has become too focused on trading and trying to catch the next "winner" rather than the simple idea of investing to make money.

Numerous studies have shown that investors tend to be their own worst enemy. Rather than invest in a particular company or style and leave it alone, investors tend to react to news events or economic forecasts in allocating their hard-earned capital.

Bogle's advice is well-worth remembering in these turbulent markets.

And, oh by the way, my Mother still holds many of the stocks that my Dad bought back in the mid-1970's, and nearly all are worth multiples of what he paid.