Ever the Foe of Market Guesswork

October 8, 2000


INVESTORS in index funds should circle Dec. 31 on their calendars.

That date will be the 25th anniversary of the incorporation of John C. Bogle's grand invention, the First Index Investment Trust, today known as the Vanguard 500 Index, the largest stock mutual fund in the United States. And the pioneering fund company that Mr. Bogle founded, the Vanguard Group, has grown apace, with some $575.5 billion in assets under management at quarter's end.

And Mr. Bogle himself? Nearly five years after a heart transplant, the wiry, irascible evangelist of common-sense investing keeps quite busy writing, researching and giving speeches. He gave up most of his day-to-day responsibilities at Vanguard last year and now, at 71, he presides over his own organization, the Bogle Financial Markets Research Center. In an interview, he spoke of some abiding concerns, especially indexing and the hyperventilating market, and shared thoughts about his latest projects.

Q. Though it has gained wide acceptance, indexing as a fund strategy still comes in for criticism - that indexes like the Standard & Poor's 500 are too narrowly focused on large caps, for example. Do the critics have a point?

A. I'm not bothered with the S.& P. 500. The S.& P. 500 represents 75 percent of the market, and in the long run I would be flabbergasted if it didn't have the same return as the Wilshire 5000 Total Market index, because of the reversion to the mean - large caps do better for a while and then small caps do better. Returns have been identical.

Q. What is the right question to be asking about indexing?

A. "Do we have the right indexes?" You don't need to structure an index so that it throws out a stock when it gets too big. So we're thinking about whether there are better ways to index.

Q. You don't see yourself as a market forecaster, but you do make forecasts. How do you approach the task?

A. I believe profoundly that earnings and dividends are the only long-term, long- term determinants of stock prices. P/E is a short-term, speculative determinant, although there may be a little upward bias as our economy has gotten more stable. What I do is challenge investors to say: "Don't tell me what the market return will be. Tell me what you think the fundamental return will be, and then we'll guess together at what the speculative return will be." That makes thinking about the market a rational exercise, rather than just a guessing exercise.

Q. Seen that way, where is the market headed?

A. Earnings are growing 8 percent, more or less, and the dividend yield is a little over 1 percent. That gives you a fundamental return of a little over 9 percent. The market P/E is 30, and if it reverts to the mean I'd say it's likely to be about 20, leaving an investment return of about 5 percent going forward.

Of course, the market never returns the same two years in a row, so it is more likely that you'll see a period of significant decline, and then higher growth rates from then on.

Q. You gave up your seats on the boards of Vanguard's funds nearly a year ago. Do you miss that part of the business?

A. No, I'm having the time of my life. I talk about the differences between relinquishing your intellectual and moral power, which I couldn't possibly relinquish such as they may be, and relinquishing your power over the person - your power to manipulate people and things of that nature. I don't miss those kinds of power at all. I'm doing what I want to do, and I'm hoping that with the five extra years of life that the Lord has given me, I'm still doing things for shareholders.


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