The House that Bogle Built: How John Bogle and Vanguard Reinvented the Mutual Fund Industry - Hardcover

Braham, Lewis

Hardcover

ISBN 10: 0071749063 ISBN 13: 9780071749060

Publisher: McGraw Hill, 2011

Synopsis

"One of the best financial books of 2011."
National Post

"I highly recommend the book for those interested in Bogle, who became the conscience of the industry and the great company he built."
Larry Swedroe, CBS MoneyWatch


John Bogle's journey from financial-industry pioneer to one of its toughest critics
Arguably the greatest shareholder advocate in the history of Wall Steet, John Bogle not only created the first index mutual fund but has become the primary voice for change in an industry plagued by excess and complacency. Bogle stumbled upon mutual funds by accident in 1949 as a college student at Princeton. In his junior year, he read a Fortune article about the burgeoning fund industry that sparked his interest, and he wrote his now famous senior thesis about it.
What began as an intellectual pursuit would turn into Bogle's life mission. The House That Bogle Built chronicles the years of Bogle's development from college whiz kid into a titan of the mutual fund industry and shareholder advocate--highlighting his creation of the Vanguard Group and the Vanguard 500 Index Fund and his frequent battles to shake up the status quo. It takes you through the two decades he spent running Vanguard, until his forced retirement in 1999, and discloses what he thinks about the fund industry today.
Bogle has always stood out for his extraordinary talents in math, analysis, management, and investing. But his most noteworthy trait is his most basic: his humanism in an industry not exactly famous for placing people over profit. It's Bogle's dedication to clients' interests above all else that has earned him the reputation as the "conscience" of the investing industry.
In his ninth decade of life, Bogle is remarkably candid about the role he plays at Vanguard today--and about his opinion of Jack Brennan, his successor. "How do you keep Vanguard a place where judgment has at least a fighting chance to triumph over process?" he asks. Skeptical but never defeatist, Bogle maintains a retired-but-active status at the company, keeping a close watch over those now at the helm of Vanguard.
The House That Bogle Built reveals one of the investing world's most fascinating and complex figures. A dogged advocate of shareholder democracy, he was a self-confessed "dictator" at Vanguard. A brilliant mathematician, he is more interested in people than numbers. Fiercely competitive, he bemoans the cut-throat approach that drives his industry of choice. Always, though, Bogle places the good of the client before anything else--a practice that has become steadily rarer in his business.
The House That Bogle Built provides an insightful look at the past, present, and future of one of today's largest industries, through the eyes of one of its most influential pioneer.

About this title

About the Author

Lewis Braham is a journalist whose work has appeared in a number of business publications, including BusinessWeek, SmartMoney, and Bloomberg Markets.

Excerpt. © Reprinted by permission. All rights reserved.

The HOUSE that BOGLE BUILT

How John Bogle and Vanguard Reinvented the Mutual Fund Industry

By LEWIS BRAHAM

The McGraw-Hill Companies, Inc.

Copyright © 2011 Lewis Braham
All rights reserved.

ISBN: 978-0-07-174906-0

Contents

PREFACE
CHAPTER 1 The Sopwith Camel
CHAPTER 2 The Mutual Fund Pioneer
CHAPTER 3 "He Knows More About the Fund Business than We Do"
CHAPTER 4 A Marriage Made in Heaven
CHAPTER 5 Irreconcilable Differences
CHAPTER 6 From the Deck of HMS Vanguard
CHAPTER 7 Cutting the Gordian Knot
CHAPTER 8 The Vanguard Manual
CHAPTER 9 Creating Loyalty and Respect
CHAPTER 10 The Great Bull Market
CHAPTER 11 "The Devil's Invention"
CHAPTER 12 The Two Jacks
CHAPTER 13 "Don't Call Me a Gadfly"
CHAPTER 14 St. Jack
CHAPTER 15 The Rise of the Speculator
CHAPTER 16 The Spirit of Mutuality
CHAPTER 17 The Heart of the Matter
CHAPTER 18 The Future of Indexing
CHAPTER 19 The Future of Vanguard
ACKNOWLEDGMENTS
NOTES
INDEX

Excerpt

CHAPTER 1

The Sopwith Camel

Tucked away on a bookshelf in Jack Bogle's office beside a copy of KahlilGibran's The Prophet and Michael Novak's Business as a Callingis a scale model of a Sopwith Camel. The World War I biplane seems out of placein a room full of nineteenth-century naval artifacts and Vanguard memorabilia.As it turns out, it was this specific make of plane that Bogle's father, WilliamYates Bogle, Jr., flew for the Royal Flying Corps and crashed in the Great War.

And yet this biographical fact does little to answer the mystery of the Camel'spresence. Reading the published history of Bogle's childhood in books likeEnough, one might think it has an almost storybook rags-to-richesquality, but there are parts of his youth that he often finds painful todiscuss. Truth be told, the Bogle family and its paterfamilias were on hostileterms during the final years of William's life because of his persistentalcoholism. And perhaps it is easier for Jack to focus on this bit of heroism onhis father's part than to dwell on more unpleasant aspects of his past. It wouldgo against his philosophy of press on regardless to do otherwise.

* * *

William Yates Bogle, Jr., was born in Montclair, New Jersey, in 1896. In 1920 hemarried Josephine Lorraine Hipkins, born in Brooklyn, also in 1896. Both camefrom wealthy, respected Scottish American families, in Josephine's case datingall the way back to the eighteenth century, when her mother's family, theArmstrongs, immigrated to the United States to farm here.

Bogle often cites his great grandfather Philander Banister Armstrong as his"spiritual progenitor." Armstrong was in the insurance industry and was a bit ofa firebrand. He made speeches urging the industry to lower its costs and alsopenned a 268-page screed called A License to Steal: How the Life InsuranceIndustry Robs Our Own People of Billions. In it, Armstrong asks readers tocontribute $2.50 each to join the "Policyholders' Alliance," which would striveto force insurance companies to "disgorge three billion six hundred milliondollars stolen from policyholders by dishonest laws and dishonest accountings,dishonest mortality, dishonest 'profits,' dishonest forfeitures and dishonestpremiums."

Interestingly enough, Armstrong also once got in trouble with the law. A 1907article in the New York Times titled "Says Insurance Co. Was Built onWind" describes how the New York State attorney general put the Excelsior FireInsurance Company, of which Armstrong was president, into receivership afteralleging that $137,500 of $300,000 invested in the company was never depositedin the bank and that instead fictitious credits were created. Armstrong laterwrote a letter to Governor Hughes asking for the removal of the statesuperintendent of insurance and accusing him of ruining Excelsior's reputation.But the damage to his credibility was enough that when his book came out in1917, The Insurance Monitor, an industry publication, wrote a scathingreview titled "A License to Bunk." No doubt this was partially an act ofretribution on the Monitor's part. Like Bogle, Armstrong's critique ofhis industry made him few friends.

In the early years of their marriage, the Bogles lived a well-to-do existence ina spacious home in Verona, New Jersey, a bedroom community not far from New YorkCity. Though their first two children, twins Josephine and Lorraine, died atbirth, they had a son, William Yates Bogle, III, in 1927. Then, on May 8, 1929,Josephine again gave birth to twins—John Clifton and David Caldwell, namedafter their maternal grandfather and great-grandfather. Despite the stuffinessof their namesakes, the three Bogle boys were informally nicknamed Bud, Jack,and Dave or more affectionately known as Bud-Ro, Jack-Ro, and Dave-Ro amongfriends. "My mother called me Jack," Bogle says. "My grandmother thought weshould've stuck with John, which basically is a better name, not slangy. ButJack it is."

The Bogles had a glamorous life their children never experienced. "They wereScott and Zelda [Fitzgerald] of the '20s," Jack says. "My father was a veryhandsome man. They used to call him the Prince of Wales who would later becomeking. And my mother was glamorous and charming, and everybody loved her." Thefact that his father was a war hero only added to his romantic allure. "Therewas a lot of patriotism back then," Bogle says. "In 1916 my father would havebeen 19 years old. And there was a great feeling in America that 'I want to getinto this fight.' As I understand this story, my father went to Canada, joinedthe Royal Canadian Air Force, got transferred to the Royal Flying Corps, now theRAF, and went over to England."

Jack's first model of a successful businessman, though, was his grandfather,William Yates Bogle, Sr., who had founded the American Brick Corporation andcofounded the Sanitary Can Company, which was eventually acquired by theAmerican Can Company in 1908 after getting into financial trouble during thecrash of 1907. William, Sr., was a heroic figure in the canning industry, havingbeen one of the first industrialists to develop and promote the sanitary double-seamedcan. Previously, soldered cans would often have black flakes inside ofthem, a residue of the soldering process that caused fruits and vegetables tocarbonize. (Ironically, American Can would eventually be run in the 1980s byGerald Tsai, a famous ex-manager of Vanguard's arch-nemesis Fidelity Funds, whowould somehow turn what was once America's premier canning concern intoPrimerica, a financial services company that would later be acquired by SandyWeill and the company that is now Citigroup—a sentence which perhapsencapsulates the sad history of American industry more than any other on earth.)

When Jack's father returned from the war, he worked in sales and marketing,first for American Brick, and then for American Can. In both these jobs heprospered, and the family enjoyed a genteel life. Then came the 1929 stockmarket crash, which had a nearly disastrous effect on the Bogles, wiping out thefamily's inheritance. "Their friends didn't desert them when it happened," Boglesays. "But it was a different kind of life. We never saw that first life. We sawphotographs of it. They would say, 'This is how we lived before.'"

Because of their financial problems, the Bogle boys all had to go to work at avery young age to help support the family, and it was this specific period intheir lives that instilled in them a powerful work ethic and belief infrugality. By age 10, Jack was delivering newspapers and magazines (TheLadies' Home Journal, Collier's, and The Saturday Evening Post)and working at an ice-cream parlor. Among his numerous other "pre-Vanguard"positions were waiter, pollster, brokerage securities runner, night reporter atthe Philadelphia Bulletin, and pins setter in a bowling alley. The lastposition Bogle always said was the hardest job he ever had, resetting the pinsafter each crash being a dull, Sisyphean task.

Yet Bogle says he relished the learning experience and actually found anenvironment of growing up surrounded by wealthy, educated people yet stillhaving to work hard to be ideal for building character. "I don't think there isanything healthier than learning that you have to earn what you want to spend,"he says. "It's a great blessing. When you are working at a young age,particularly when you are dealing with the public, you learn about humanrelations. You learn about dealing with people; you learn about getting to workon time; you learn that sometimes bosses are really tough; you learn thecustomer is always right." And that goes a long way to explain why, at ages 80and 82, respectively, Jack and his brother Bud are still working.

Though hard work didn't trouble the Bogle boys, their father's carousing did."It always fell upon me to be the leader and to protect my younger brothers andmyself against whatever kind of bad things my father got into, which was toomuch wine, women, and song," says Jack's older brother Bud. "I could see thedamage way before they realized what was going on. And I was the guy who had tofind the damn bottles of booze and break them in front of him and cry. It washorrible. It affected my mother, and it affected everybody. My father was awonderful sentimental man, and he would cry when I'd do that, but I didn'trealize that alcohol is a disease."

Eventually, their father's behavior cost him his job at American Can in theearly 1940s, and that caused the family additional financial hardship, forcingthem to move out of their house in Verona. For a while the Bogles house-hoppedaround the Jersey coast. "We went from a lovely house that my parents had builtto a house we rented [in Lakewood] from my grandparents on my mother's side,probably for nothing, and then we couldn't even afford that as my father losthis job, so we had to move down to the Jersey shore," says Bud.

And yet William, Jr., was always able to find a job somewhere, as he was a verycharming, talented salesman, and the boys would pitch in to make ends meet. Hisbehavior ultimately was probably more damaging emotionally to Bud than to Jack."I won a scholarship to Montclair Academy, which was a prestigious boys'school," he says. "My brothers weren't even aware that I'd won a fullscholarship because I was the smartest kid in my eighth-grade class. And that'swhen we had to leave town. I tried to live with my cousin, but there was no roomfor me. So I lost that scholarship, and as opposed to Jack, I never studiedseriously again. I was a sore loser."

Winning was always essential to Jack and Bud, and they were extremelycompetitive with each other. While Jack's fraternal twin, David, was morestudious, artistic, and gentle, the other two boys were sports fanatics whoplayed war games and generally spent a lot of time roughhousing. "You know wewould always fight, and it was for real," says Bud. "We were really serious. Iremember once we went up on a hill across from where we lived, and we starteddropping rocks on each other for some reason. I mean, thick stones. We came homebloody. Another time in our basement we even took hammers and started banging oneach other's heads. It was really weird, the violence."

Surely the turmoil at home must have sparked all sorts of animosity. When he was16, Bud was so upset by having to give up his scholarship and by his father'sbehavior that he moved out of the house for a year to live with his uncleClifton Armstrong Hipkins, a successful investment banker in Greenwich,Connecticut. While the twins stayed with their parents in Spring Lake, NewJersey, and attended Manasquan High School, Bud went to Greenwich High School."I was so unhappy at home," says Bud. "To see what was going on was too much forme. So my uncle said, 'He needs a better life for a while. Maybe I can get himstraightened out here.'"

Jack doesn't really like to discuss or remember the family's struggles, althoughhe seems to have handled them better by turning inward and remaining focused onhis goals. "I was a very introverted person, and I had a huge imagination," hesays. "The world could revolve around me. My brothers had more friends than Idid—no question about it. And I was in a lot of ways to myself. I hadthings I wanted to accomplish, and I accomplished them." About the problems athome he says: "I always thought that we had a wonderful, wonderful background,and having a challenged family life is a—you survive that or you don't.You survive that and you are stronger than a person who goes breezing throughlife thinking the world is their oyster."

* * *

By 1945, financial hardship had forced the family to move into a two-roomapartment on the third floor of a modest house in Ardmore, a Philadelphiasuburb. There was a master bedroom, a living room, and in between a flat expansewith a coffeemaker and a hot plate, and that was about it. Because the cookingfacilities were so crude, most nights the family ate its dinners at a Horn &Hardart around the corner. "That was a cheap dining place, most famous forhaving automats," Bogle says. "We didn't go to the automat part. They had arestaurant, and we sat down for dinner." Anyone who has seen Edward Hopper'sAutomat painting of a woman drinking coffee alone in an empty restaurantknows how dreary such a dining experience can be.

And yet Josephine Bogle was determined that her children have a better life.With her brother Clifton's assistance, she helped her sons win scholarships toBlair Academy, a prestigious boarding school in Blairs town, New Jersey. Thelovely 423-acre hilltop campus was just the right environment for the boys toescape their troubled home life. Bud went for one year and graduated in 1945,and then Jack and David followed him for two years, graduating in 1947. "Mymother came to my graduation, but she was crying, and I didn't realize that shehad my orders to report to the Marine Corps the very next week," says Bud. "Thewar was still going on." Meanwhile, when David graduated, he also enlisted andwas stationed in Japan. Neither son ever saw any action.

While both Bud and David enjoyed their stay at Blair, for Jack it was truly atransformative experience. He later would say about the school, "Virtuallyeverything I've achieved in life began with my few years there." Founded in1848, Blair Academy was an all-boys school with an enrollment of 300 duringJack's junior and senior years. Although Blair was no boot camp in Jack's day,it had some of the ambience of a military school. Students rose at 6 a.m.,attended classes, worked at part-time jobs on campus, and hurried to completetheir homework before lights out at 10 p.m.

Pampered students would have found Blair stifling, but Jack thrived in theatmosphere. He got his first chance to show what he could do—in academics,athletics, and the jobs he took to maintain his scholarship— and he wasdetermined to make the most of the experience. He was driven to make his mark atBlair, to attain good grades, to please his parents, and to attend college.

That's not to say that it was easy for him at first. "While Blair was a greatleap forward in our lives, the academic demands were large and the transitionpainful," he later remarked. "But the outcome was commensurately rewarding. Istarted with a miserable grade of 40 in Jesse Witherspoon Gage's algebra class,but my final grade of 100 was then thought to be the only perfect score he hadever awarded. And in Marvin Garfield Mason's English class, this demandingmaster drummed into me an inspirational sentence from Macaulay's essay on SamuelJohnson that I have never forgotten: 'The force of his mind overcame his everyimpediment.'"

Jack had a particular aptitude for math. Numbers fascinated him; he could lookat a stack of figures and point out an error in the computation before anyoneelse had started to work on the problem. He could analyze mathematical problemsin his head and arrive at answers long before other students, using pencil andpaper, could. His ability to use a slide rule became his trademark.

In 1947 Jack graduated from Blair cum laude. Although his senior classmatesvoted him most likely to succeed as well as best student, he failed by afraction of a percentage point to be named class valedictorian. Jack was sodetermined to succeed that he regarded being number two (he was named classsalutatorian) as a stinging defeat. He visited several of his teachers and urgedthem to reconsider his grades so that he could graduate number one. None would.(Even now, he does not think number two is good enough, often citing thecrossword puzzle definition of "came in second," which is "lost.")

Bogle came to believe that he owed his greatest debt to Blair Academy. Hissuccess there enabled him to attend a top-ranking college, without which he maynot have accomplished as much as he did in later life. As a result, repayingBlair became of great importance to him, and the bulk of his charitablecontributions would be directed to Blair, eventually making him the largestsingle contributor in Blair's 148-year history. In 1972 he joined the board oftrustees of Blair and served as its chairman from 1984 through 2001.

"Blair gave him a stable place to grow up at a time when his life wasn't sostable at home," says Chandler Hardwick, Blair's current headmaster. "It gavehim a scholarship to attend. And since Jack was the beneficiary of someoneelse's philanthropy, one part of our endowment he created is a scholarship fundthat pays for a lot of kids to come here." When Bogle became Blair's chairman in1984, its endowment was a mere $900,000, while now it is estimated to be inexcess of $61 million, thanks in no small part to his contributions and fundraisingefforts. His brothers have also donated to the school, and today thereis a Bogle Hall and an Armstrong-Hipkins Hall at Blair named in the family'shonor.

And yet despite all the benefits Blair provided, because of the family's limitedfinances, only one of the Bogle boys could attend college. The two otherbrothers would have to work to help support the family. With little discussion,it was understood that Jack would be the one to attend, while David and Budwould help the Bogle family stay afloat financially. Against this backdrop ofresponsibility and guilt, Jack became even more motivated, more determined thatnothing should interfere with his success.

Bogle ultimately decided on Princeton University for his college choice becauseit offered a generous scholarship and student jobs that together would cover allhis expenses. In his determined frame of mind, he sifted through the Princetoncurriculum, majoring in economics but discovering Shakespeare, English history,and, for the first time, art history. A few courses gave him trouble. Despitehis aptitude for mathematics, he found calculus a challenge, and a course ininternational trade was no snap. (In later years, he quipped that perhaps heowed his skepticism about investing in foreign markets to the troubles heencountered in that course.)

(Continues...)

(Continues...)

Excerpted from The HOUSE that BOGLE BUILT by LEWIS BRAHAM. Copyright © 2011 by Lewis Braham. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Edition details

• Publisher: McGraw Hill
• Publication date: 2011
• Language: English
• ISBN 10: 0071749063
• ISBN 13: 9780071749060
• Binding: Hardcover
• Edition number: 1
• Number of pages: 304