Vanguard Founder Bogle on Strategy, U.S. Tax Laws
I really respect Bogle, but he completely discounts tactical shifts during secular bear markets:
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Source: BLOOMBERG TELEVISION
Bogle on the private equity industry:
“I would confuse Steve Schwarzman with an indexer. He may own a diversified list of stocks but it’s not going to look anything like the index. And then of course, you deduct the monumental, outrageous fees, on which they pay very low taxes…Ridiculous.”
“Look, I would think most people in this room would say that there should be no tax rate that is lower than the earned income tax rate that people earn by the sweat of their brow or the burrows of their brain. That should be the regular tax rate. I think that there are a lot of good arguments out there for having a higher tax rate on capital gains, in particular short-term capital gains…What is the explanation for the tax break for gambling?”
“I am arguing for a capital gains rate taxed at ordinary income. I’m also arguing for a premium tax and maybe even a transaction tax that will slow down trading…Why would you give a lower tax rate to other than the people working every day than you to on people who are, to a large extent, gambling on Wall Street?”
On higher taxes for the wealthy
“There’s something that I don’t like about “soak the rich.” I say, equalize the sources of income, but given the income distribution, or maldistribution, in this country, you are doing the same thing. I think it’s a better platform to consider where the income comes from and how it’s earned and we’ll tax everybody at least equality…I would also put in because there are a lot of people, the lower 99%, who own investments in the hope of building a retirement plan. I would say, just for the fun of it, top of head, maybe give them the first $10,000 or $25,000 of capital gains and dividends tax free. Is that soaking the rich or helping the poor to accumulate retirement? They happen to be the opposite sites of the same coin.”
On which presidential candidate has the best tax policy:
“I’d say the Obama plan to the extent that I understand it. Everybody knows deep down that carried interest is a technical fraud…I am a lifelong Republican, but unfortunately to ruin the sentence, I am what I would call an Abraham Lincoln or Teddy Roosevelt Republican, and they are a vanishing breed. But I think that we will eventually have to come back…I don’t see anything from any of the other candidates, when you do the math, whether it’s Herman Cain–that just simply doesn’t work. The Romney plan, I have no idea what the Gingrich plan is, and Santorum, no comment.”
“As a general policy, equalize the taxes, raise the taxes on capital gains. He may not have to raise the taxes on people who earn more than $250,000 because he’s going to pick up so much on the capital gains change. Again, I want to emphasize that this has nothing to do with capital formation…I look at this position as just simply logic, with maybe a touch of concern for our fellow human beings who aren’t doing as well as we are all doing.”
On the hedge fund industry:
“First of all, they come and go at an astonishing rate. I have no reason to believe that the hedge fund averages from Credit Suisse or wherever, are fair representation of what happens…I think what it is is some ghastly combination of greed and hope and a belief that the past is prologue. If we haven’t had enough of that, if we don’t learn enough…even the very good managers over time in the mutual fund industry, Bill Miller is a great example and I have a lot of respect for him, but he had a lot of bad years after a lot of good years. That is always what happens in this business….Bill Miller, from beginning to end, 18 to 20 years, is average. That is not so bad. He almost beat the index.”
On hedge fund managers he admires:
“There are a number of hedge fund managers that I greatly admire. One is Steve Galbraith at Maverick, one is Cliff Asness at AQR…they’ve done well in the past…look at the character of the management and make sure you know what they’re doing. There’s not 1,000 managers that I’m madly in love with, mutual fund or hedge fund.”
On equities:
“In the case for equities, my view is a very simple one. That is, in the long run, the fundamental things apply as time goes by. And that is the case for equities is based on today’s dividend yield, your entry level dividend yield, and the earnings growth that follows that. I call that fundamental investing.”
On ETFs:
“I am skeptical of the way they are being used. ETFs are the greatest marketing innovation thus far in the 21st century. What we should be looking at is are ETFs the greatest investment innovation of the century? Are they the best thing for investors? And the evidence is overpowering that they are not.”
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February 17th, 2012 at 11:56 am
Rebalacing to your own target Asset Allocation is all you need to do in a down or up market.
Know one knows what will happen next, when it will happen or how long it will last. So the only logical approach is to rebalace to your target asset allocation at all times.
February 17th, 2012 at 1:14 pm
VennData sounds like he’s swallowed the Bogle kool-aid that it is impossible for anyone to outperform the market other than by luck. Shouldn’t it it then also be true that it is impossible to underperform the market other than by luck? In other words, shouldn’t market-timing have ZERO impact on returns, neither positive nor negative?
Fact is, small investors lose from market-timing, which means someone is winning. In today’s market, with very low transaction costs, there is nothing to stop the small investors from being one of the winners.
VennData is doomed to be one of the losers because at some point he will be forced to market time. In particular, when he makes the decision of when to change his asset allocation to prepare for retirement. Because he has put on his stupid hat, he will inevitably get the timing wrong.
February 17th, 2012 at 2:08 pm
Amen VennData. To bad that doesn’t sell “financial press/ads or pay for money managers’ lifestyles.
February 17th, 2012 at 2:40 pm
Whenever I give a speech to individual investors, I always preface it with: “This is the best advice you will never follow: Dollar cost average into 3 or 4 broad indexes; If you want to get fancy, sell when markets break below 10 month moving average, jump back in when its back above the 6 month MA.”
No one listens . . .
February 17th, 2012 at 2:57 pm
Barry,
No on listens….
I’m laughing my ass off right now remembering 2008 where I couldn’t even get people to understand:
1. “Just put aside as much cash as you can. The best investment you’ll ever make will something unexpected 2-5 years from now”
2. “but where should I should invest now.”
3. “How much cash do you have on hand?”
4. “2-3thousand (salary$100,000)”
Go to point one
February 17th, 2012 at 3:41 pm
How did “rebalancing quarterly” serve you over the past 10 years?
February 17th, 2012 at 5:06 pm
Hey Barry….OK, OK…..I give up……I’ll listen…..which Broad Indexes are you talking about????????
February 17th, 2012 at 7:06 pm
nj-prof,
How about these three: Vanguard Total Stock Market Index Fund (VTSMX), Vanguard Total International Stock Index Fund (VGTSX), and Vanguard Total Bond Market Fund (VBMFX). Put your allocation of bonds roughly at your age. Split your equity allocation between US and International. You could also add Vanguard REIT Index Fund (VGSIX ) and take that out of your equity allocation. Perhaps 10%. Rebalance once a year back to your target allocation. You will beat commentator bonzo 9 out of 10 times and you will spend 99% less energy. A win/win.
February 17th, 2012 at 7:12 pm
nj-prof,
How about these 3 or 4:
Vanguard Total Stock Market Index Fund (VTSMX)
Vanguard Total International Stock Index Fund (VGTSX)
Vanguard Total Bond Market Fund (VBMFX)
Vanguard REIT Index Fund (VGSIX)
Your target asset allocation is up to you but a good rule of thumb is use your age as your general bond percentage, split the rest 45/45 US stock and international stock. Allocate 10% for REITS. Rebalance to your target allocations once a year. You will beat 90% of the active investors out there and spend 99% less effort. Win/Win!!!!
February 17th, 2012 at 9:25 pm
I’ve been mostly a permabear since 2007. More’s the pity. Of the several financial sources I read faithfully every day, this one has been awe inspiring in the prescience of the market calls. Whenever I have overcome my pessimism and invested based on whatever I can glean of Barry’s current direction I have made money. (or avoided losing money, which is even more important)
I will never, ever forget the call I still think of as “100% cash”. Amazing.
February 18th, 2012 at 3:56 am
BR: Bogle is a jolly good fellow, the type Wall Streeters hate the most though. I see many similarities between the two of you, in terms of macro thinking, age/health notwithstanding. I hope you stay agile in the years to come enough to avoid Wall Street’s wrath. I say: you will have to consistently remain beyond ANY suspicion even more so than Caesar’s wife. Great advice to individual investors, and rest assured, some of us do listen.
@bonzo: your attack on VennData’s sensible comment is arrogant AND wrong. Ben Graham has a good explanation of investing basics for the likes of you. Read his book “The Intelligent Investor”. If you are a trader(with your own money I mean), you will lose over time. Then hopefully you’ll be chastised.
February 18th, 2012 at 7:54 am
Matt P……what no GLD????
thanks for your ideas….Thinking of simplifying entire portfolio and way of thinking…..Hedge, mutual and pension fund cash flow and fast computerized trading of huge blocks at any given time (think short squeeze) has changed the rules of the game….
My thinking is Ritholtz dollar cost average with a few broad etfs, set it and forget it…..leaving a small percentage of portfolio to try and find an unusual small cap situation……
thanks!
February 18th, 2012 at 8:45 am
Sorry nj-prof, no gold for me. I’m an investor not a speculator. Though I have been guilty of owning the PIMCO commodities fund in the past. In any case, you could tilt a bit toward small cap (Fama/French, etc.) with something like this:
50% VT – Total World Stock
20% VBR – Small Cap Value
20% BND – Total Bond Market
10% VNQ – REIT Index
The above is fairly aggressive and for someone 40 or younger generally. Ratchet up the bond percentage as you see fit.
February 18th, 2012 at 12:47 pm
I always find the discussion about “beating the market” a little of the mark. It is not like that it is the real motivation for most money managers. “Beating the market” for a period of time may be a means to the end…the real motivation of most money managers is actually to MAKE AS MUCH MONEY FOR THEMSELVES AS POSSIBLE.
In this pursuit, the manager then ramps up AUM well beyond the size of the market ineffeciencies they know how to exploit, After a certain size the manager gets rich and the investors get underperformance.
From my firms perspective I can out perform w/ 50 million in our shop confidently but 50 Billion is an entirely different matter. It make me have all the respect in the world for people like Bill Gross and Ray Dalio.
As Barry continues to grow his business and stature this AUM v. size of ineffecenies may become a trade off as well.
February 18th, 2012 at 12:50 pm
As more people shift toward pure indexing, one would think it would allow for more mispriced assets not in the indexes?
February 20th, 2012 at 8:21 pm
Would highly suggest a reading of Robert Shiller’s, Irrational Exuberance for anyone that just watched this video:
http://www.amazon.com/Irrational-Exuberance-Robert-J-Shiller/dp/0767907183