This book, written by John Bogle, founder of the Vanguard Mutual Fund Group, is an insightful and useful guide to leading a rewarding life, both professionally and personally. Bogle recounts his own experiences as an ambitious young man who suffered setbacks but persevered to become one of the financial industry’s greatest innovators. The credit Bogle gives to others for Vanguard’s success is an invaluable lesson for anyone who aspires to become an effective manager.
Over the past 20 years, Wall Street security analysts, on average, have forecasted five-year earnings growth of 11.5 percent for the companies they follow. Actual growth has been just 6 percent. John Bogle attributes the analysts’ overshooting to their reliance on the notoriously overoptimistic guidance of corporate managers, who, as he wryly comments, at least have the excuse of self-interest.
Corporate knavery, in turn, can be ascribed to faulty governance. Bogle, founder of the Vanguard Mutual Fund Group, turns on its head politicians’ cheerful assertion that the United States has become an ownership society. True, more Americans than ever have equity exposure, thanks to the proliferation of corporate pension plans. To Bogle, however, the more salient statistic is that the proportion of stock directly owned by individuals has plummeted to 26 percent from 92 percent in 1950.
Institutional shareholders turn over their shares too frenetically to exercise meaningful control over the managers who supposedly serve their interests. One result is the continuous ratcheting up of executive pay through compensation consultants’ insidious use of peer group rankings. As long as business appears to be going well, the typical board of directors bridles at the notion that its CEO ranks in the fourth quartile of compensation. The directors accordingly open the shareholders’ wallet to lift their CEO to the second or third quartile. That action automatically pushes the CEO of some other company down to the fourth quartile, which triggers a similar response by its board. The cycle repeats endlessly, and CEOs’ compensation climbs with little regard to their success in creating enduring value for shareholders.
Besides pointing out the shortcomings of security analysis, institutional money management, and corporate governance, Bogle criticizes the reporting of economic statistics, the mergers and acquisitions business, and the fees extracted by mutual fund companies that eschew Vanguard’s investor-friendly model. Indeed, as indicated by his book’s title— Enough. True Measures of Money, Business, and Life —Bogle ranges even more broadly, offering a full-blown moral vision. The book cites the Bible and assorted 18th-century philosophers, as well as Warren Buffett and the late Peter Bernstein. Few financial executives would attempt such an ambitious project, but unlike Bogle, most financial executives were not included in Time magazine’s first annual list of the world’s 100 most influential people.
In his current professional role as president of Vanguard’s Financial Markets Research Center, Bogle can generate extensive statistical support for his arguments. At the same time, he stresses the dangers of judging success exclusively by the numbers. Ethical considerations take precedence, he insists, and make genuine client service a priority rather than a mere slogan.
Consistent with his concerns about excessive reliance on numbers, Bogle steers clear of academic-style finance and its sometimes arcane quantitative techniques. This down-to-earth approach gets to the heart of several important issues. On one point, however, Bogle’s analysis falls short by failing to address a basic theoretical objection. He disparages a method of projecting future stock returns that consists of feeding historical monthly returns into a Monte Carlo simulation. The problem, he contends, is that in the historical period, dividend yields averaged 5 percent. With the dividend yield reduced to 2.3 percent (as of July 2008), Bogle argues that future returns should approximate 5 percent, rather than the historical norm of 7 percent. After all, the contribution of dividend yield to future returns depends on the present, rather than the past, dividend yield. “What could be more elementary than that?” he asks.
Making his case, however, depends on the answer to another question: What happens to the cash that corporations are not paying out in dividends (i.e., the difference of 2.7 percentage points between the historical and the present dividend yield)? One thing that corporations have increasingly done with the cash is return it to shareholders in a more tax-efficient manner than paying dividends—namely, through share repurchases. Another use of the undistributed cash is internal reinvestment in businesses. Neither share repurchases nor internal reinvestment would be expected to reduce stock returns from historical levels, with one proviso: The rate of return on internal reinvestment must match or exceed the corporations’ cost of capital.
Bogle’s forecast of lower-than-historical-average stock returns is valid if corporations are collectively reinvesting their retained earnings in uneconomic projects. A notable article in the Financial Analysts Journal suggested that corporations are doing just that, possibly as a result of “empire building” by corporate managers intent on running the largest, rather than the most profitable, companies.1 Bogle, as it happens, was one of the eminent financial experts whom the authors of that article thanked for their comments and suggestions. The bottom line is that Bogle might have solidified his argument for lower expected stock returns by dealing with a core principle of financial economics.
To judge Bogle’s opus primarily by the precision of its debating technique, however, would be a mistake. Plenty of other books are available to practitioners who want to deepen their knowledge of investment theory. Readers should peruse Enough to learn how to lead a rewarding life, both professionally and personally.
Teaching by example, Bogle recounts his own experiences as an ambitious young man who suffered setbacks but persevered to become one of the financial industry’s greatest innovators. He has extended his outstanding leadership to the civic and philanthropic spheres and thus reinforced his message that generating profits and accumulating wealth are not the only worthy goals for a businessperson. Not least of all, the credit Bogle gives to others for Vanguard’s success is an invaluable lesson for anyone who aspires to become an effective manager.
—M.S.F.