pretty thinker

I’ve been doing some research, and found John Bogle’s eBlog as he calls it. Great site with some very solid speeches and such for you to read. I was inspired to email Mr. Bogle in connection to a few of his speeches, but primarily his The Battle for the Soul of Capitalism speech. My email is rather long, though, I’m not holding my breath for a reply, but I think this may be interesting and possibly informative to those interested. John Bogle was the founder of Vanguard Group and is considered the mastermind behind index funds, which I’m a huge fan of.

Dear Mr. Bogle,

I’m a young man in my mid twenties, and I have an entrepreneurial dream of erasing financial complexity. I started a blog not long ago, Removing Complexity (, in the hopes of sharing various points on personal finance that I know and am learning as I continue my own education on the subject, and also because I found a lack of discourse in an industry that thrives on confusion and misinformation. I arrived at your blog because I share many of your views, and was hoping I missed, and might find through some connection to you, some forum of conceptual or directional conversation about where the industry should go. However, I’m still left with the question, “where is the public discourse?”

This is a question you yourself asked in one of your recent speeches that you posted on your blog, “The Battle for the Soul of Capitalism: Doing Your Part to Begin the World Anew.” I’m not so much looking for an answer as continuing some discourse on the subject, which you started by posting your speech on your blog, by offering some of my own thoughts. Additionally, I am publishing this email to you on my blog, along with a link to your site and the speech, where my readers and others might participate as well. I hope and would appreciate if you had the time to read this and respond as your schedule might allow, but in any event, thank you for putting your thoughts out there already.

I agree with most everything in your speech, however, I think a couple points were missed, and I’ll propose some changes that are required in turn. In your Battle for the Soul of Capitalism speech, you highlight the distinction between a past owners’ capitalism and today’s agency capitalism – the pathological mutation. I would agree that this agency model has produced companies that “came to be run to profit its managers” (p4, a quote by William Pfaff) and that this is bad for investors. However, I think this move away from a traditional owners’ capitalism to an agency model has produced much social value. Additionally in another speech, you connect this agency model of capitalism to a rise of the expectation market – a move away from the real intrinsic value market. Again, though, I would disagree that this is wholly bad, and there are some lessons we can learn from these situations.

We have the agency model today thanks to the continued expansion of investment options and the growing availability of those to the general public. Your own contribution of creating the index fund and providing it through Vanguard has greatly helped as it addresses a number of the cost and manager compensation problems in the mutual fund industry (although index funds are still vastly under appreciated and unknown as my own parents didn’t know what they were until I convinced them to move their investments into index funds from Vanguard). That openness and inclusion of a large portion of the population has been a wonderful benefit to capitalism. However, these people are starkly different from those who participated in the past ownership model.

While, in your speech, you hope for a return to the ownership model, you also acknowledge that it won’t happen. Additionally, you criticize the expectation market connected with the move to an agency model, but I think you misunderstand the inherent benefit in that for these new investors. These new investors, which include baby boomers like my parents, don’t care about actively tracking investments and understanding the real intrinsic market. They have an expectation of return from the market, but benefit little from taking the process much further then buying diversified mutual funds, especially broad market index funds. That expectation is derived from at least a basic understanding of the real market, though, and they put faith in the expectation of overall return. In that sense, the expectation market is good for these new investors who prefer minimum interaction with portfolio management.

The problem that you note, though, is that of “short-termism,” which I believe is a direct product of the expectation market. However, we’ve arrived there because these new investors preferred minimum interaction with their investments, and preferred the mutual fund managers as the established experts. These professionals then saw the value in fighting for more investors and larger funds, and have driven the mostly unaware public into a frenzy for greater than market returns (which Jonathan Berk and Richard Green [2002] have shown kill a fund’s returns). Mutual funds learned that they could prosper if they became more like salesmen and marketers, and less managers of investors’ money, and in doing so, they’re listening to these new investors and speaking to them in their own words (albeit confusing investors more than clarifying, but this only drives them deeper into managers’ pockets).

What needs to be done is not return to the old ownership model, but an education of future managers, beyond relearning “trust and being trusted,” and include an education on these new investors – what they care about, how they communicate, and how to build relationships with them. They must learn to speak not in investment terms, but the terms of those disinterested in investments beyond providing a better and more solid retirement or other goal, and the first step in doing so is throwing out the very term investor. Investors take care to understand the intrinsic value of the markets, and find ways to make money in that real business world. The new investor, the indexer, or casual investor, is tired of being confused by current fund salesmanship. They themselves must be spoken to in plain terms that help them understand the value of low cost, long term in the face of chasing higher returns. Academic studies and discussions at universities don’t help foster that any better than pundits discussing politics helps clear the air.

As people like Doc Searls, a coauthor of the Cluetrain Manifesto, and Hugh MacLeod, known for the Global Microbrand, have helped redefine the communication between media and companies in general for the benefit of both consumer and company, the personal finance and investment industries need to learn and draw lessons from that situation, and reconnect properly in open dialogue with old investors and new about their values. We cannot accept the current environment, but must push forward in improving our relationships with all parties.

Thank you for reading this. Any comments or thoughts would be much appreaciated.

Matt Blass