2009 Morningstar Investment Conference – 5

In the final session of the day was a conversation with John Bogle, the founder of Vanguard.  Don Phillips, Managing Director of Morningstar, was the moderator of the conversation.  This was the highlight of the day.  Mr. Bogle is a very distiguished investor with lots of experience and extremely knowledgeable. 

First, though, Mr. Phillips asked Mr. Bogle about his health to clear up some rumors that have been out recently.  After having spent some time in the hospital recently for issues related to his heart, Mr. Bogle was happy to report that he has recovered and is doing very well now.  He has “as much energy as you can have at this age.”

Moving on, Mr. Bogle was asked about the credit crisis, to which he responded that he had no idea how much speculation was going on, that the speculative behavior of investors got way out of hand and the whole affair snowballed from there.  Overall, he said that capitalists themselves have failed more than capitalism itself.  He said that growing up he learned that there were just some things you didn’t do.  Now it seems as though the sentiment is that “if everyone else is doing it, I can too.”  Mr. Bogle blaimed CEOs for the crisis because they should have known better.  He does not blame the government in any way.  To finish his thought, he said, “character still counts and we have lost a lot of it.”

Mr. Phillips then asked Mr. Bogle to respond to recent allegations in the investing world that the buy and hold strategy has died.  Mr. Bogle responded directly with, “buy and hold is never dead.”  He explained that the S&P can be divided into two equal groups.  One group is made up of buy-and-holders, who buy and never sell.  The other group is made up of the rest of the investment community (day-traders, speculators, etc.), who trade freely.  When all is said and done, the buy-and-hold group will have 100% of their returns while the other half will have significantly less due to trading costs.  Therefore, in order to get the maximum return, a buy-and-hold strategy will always be beneficial.  He advised that investors “avoid trading like the plague.”

Later he was asked to specifically respond to something Bill Gross’s statement from lunch that “Policy Portfolio is Dead.”  Mr. Bogle explained that this is not true because the market as a whole is a policy portfolio.  Part of the market is in equities and another part of it is in bonds.  If an investor increases his or her share of one part, another investor is decreasing their share.  No matter what there will always be a policy portfolio.

One very interesting thing that he brought up was that he doesn’t believe that commodities should be a part of any investment portfolio.  He detailed that stocks and bonds are investments because they provide income.  For stocks, income comes in the form of dividends or capital appreciation.  For bonds it is more clear and is the interest on the bond.  But commodities have no income; therefore, they are not an investment.  He also mentioned that from the time of the Great Fire of London (1666) to World War I, the commodities index didn’t change – possible evidence that commodities should not be considered investments.

Finally, he said that he has never felt more confident in his beliefs and methods than he does today, a time when it has never been harder to determine valuation, and told a story from his youth.  One of the biggest and first lessons he learned about investing came when he was working as a runner for a broker-dealer in Philadelphia.  A man told him that the only thing he would ever have to know about the investment world is that “Nobody Knows Nothing.”  Seems particularly true today.

More of our coverage of the 2009 Morningstar Investment Conference:
Thursday opening session
Three Takes on Value breakout session
Two Sides of the Coin breakout session
Thursday Lunch general session


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