Advertisement

February 3, 2006

Excerpts: The Bogleheads' Guide to Investing by Larimore, Lindauer, and LeBoeuf

By: Dylan Schleicher @ 7:59 PM – Filed under: Management & Workplace Culture

Book Description

The Bogleheads’ Guide to Investing is a slightly irreverent, straightforward guide to investing for everyone. The book offers sound, practical advice, no matter what your age or net worth. Bottomline, become a Boglehead and prosper! Originally just the chat-line ruminations of Boglehead founder Taylor Larimore, and Morningstar forum leading cohorts Mel Lindauer and Michael LeBoeuf, their trusted advice has been brewed and distilled into an easy-to-use, need-to-know, no frills guide to building up your own financial well-being – so you can worry less and profit more from the investments you make. Invest like a Boglehead, and let their grassroots investment wisdom guide you down the path of long-term wealth creation and happiness, without all the worries and fuss of stock pickers and day traders. If you face a financial crisis or problem, or simply want to know what is prudent to do with the money you save, the Bogleheads will have the answers you need to help you gain your financial footing and keep it.

Here is the foreword to the book written by John Bogle:

Foreword

Nothing is more deserving of your attention than the intellectual and moral associations of Americans. Americans of all ages, all conditions, and all dispositions constantly form associations (of a) thousand kinds...religious, moral, serious, futile, general or restricted, enormous or diminutive. I have often admired the extreme skill with which the inhabitants of the United States succeed in proposing a common object for the exertions of a great many men and inducing them voluntarily to pursue it.

As soon as several of the inhabitants of the United States have taken up an opinion or a feeling which they wish to promote, they look out for mutual assistance, and as soon as they have found one another out, they combine. From that moment they are no longer isolated men, but a power seen from afar, whose actions serve for an example and whose language is listened to.

Only by the reciprocal influence of men upon one another are feelings and opinions recruited, is the heart enlarged, and is the human mind developed...This can only be accomplished by associations. What political power could ever carry on the vast multitude of lesser undertakings which the American citizens perform every day, with the assistance of the principle of association?

—Alexis de Tocqueville
Democracy in America, 1840



The Bogleheads of the Internet, it seems to me, are the paradigm of the American association described with such perceptive power by Alexis de Tocqueville in his seminal work. This association of intelligent, integrity-laden, and like-minded investors has provided not only a sound intellectual rationale for the successful accumulation of wealth but, just as de Tocqueville suggested, a sound moral rationale as well. No wonder Democracy in America—from a Frenchman who visited America for just nine months when he was but 25 years old!—has stood the test as the defining text of the American way for nearly 170 years.

During its decade-plus of existence, the Bogleheads have moved from a loose association of dedicated investors to a formal Web site offered by Morningstar, identified there as “Vanguard Diehards.” It quickly became the most popular Fund Forum at Morningstar.com, where each day it now attracts an incredible 25,000 visits and as many as several hundred individual posts and responses. (The site can also be reached through its sister site diehards.org.) The Bogleheads’ Guide to Investing marks a major milestone for this extraordinary association.

Two especially notable characteristics mark the Boglehead culture. One is rationality. These individual investors are awash in common sense, intolerant of illogic, and permeated with a preference for facts over hyperbole. Today’s popular investment misconceptions—short-term focus and fast-paced trading, the conviction that exceptional past fund performance will recur, the ignorance of the importance of fund operating expenses, sales commissions, hidden portfolio turnover costs, and state and federal taxes—are anathema to them. Bogleheads have come to accept as the core of successful investing what I have called “the majesty of simplicity in an empire of parsimony.”

The second characteristic is, of all things, caring. Bogleheads care about one another. They are eager to help all investors—regular visitors to the Web site and new ones, informed and naïve, experienced and novice alike—who have questions on almost any investment subject, and willing to discuss the investment issues of the day, sometimes even the national and global issues, with no holds barred (except for rudeness or coarseness). Fund selection, fund performance, types of investments, retirement planning, savings programs, tax management—none are beyond the scope of this remarkable association of investors who, without compensation or bias, strive to help their fellow investors. If there is a Web site that bespeaks the Golden Rule, surely the Boglehead site is its paradigm.

BOGLE AND THE BOGLEHEADS

The Bogleheads had been associating for at least three years before they came to my attention. I had heard them discussed by Vanguard’s public relations staff, and early on got the idea that they were not only firm advocates of my approach to investing—expressed in the investment strategies and human values that represented Vanguard’s rock foundation when I created this upstart firm in 1974—but were also a pretty special group of people.

However, it was not until February 3, 1999, that I met my first Boglehead. The occasion was “The Money Show” in Orlando, Florida, where I gave a contentious speech about investment principles (“The Clash of the Cultures in Investing: Complexity vs. Simplicity”) that at once seemed to confound the hosts who invited me to address the show, to infuriate the sponsor firms (all offering their own routes to easy riches), and to amaze and delight the audience of several thousand individual investors.

Shortly before my talk, Taylor Larimore (there with his wife Pat) introduced himself to me. Taylor, then and now considered the unofficial leader of the Bogleheads, proved to be as fine a human being as I’ve ever met—warm, thoughtful, intelligent, investment-savvy, and eager to help others. A combat veteran of World War II and an exceptional sailor are only a few aspects of Taylor’s background. I mention them because the first demands courage and discipline; the second, careful planning and staying the course one has set, all the while adjusting to the winds and tides. These traits, as it happens, are the principal traits of the successful investor.

In March 2000, when I spoke again in Florida, Taylor invited me to meet with the Bogleheads at his Miami condominium located at virtually the same location where Taylor was born—he honors me by calling it “the house that Jack built”—and I enthusiastically agreed. When I came down into the hotel lobby, there to meet me was Mel Lindauer, unofficial associate leader of the group, next to a sign that read “Bogleheads Meet Here.” We all went to Taylor’s lovely home, and Pat’s hospitality at dinner made what came to be known as Diehards I an evening of extraordinary warmth, energy, and delightful conversation, and some 20 investors who had never met one another before quickly became friends.

The following year, at Diehards II, the group met in Valley Forge, Pennsylvania. The festivities began on June 8, 2001 with a dinner addressed by MONEYjournalist Jason Zweig, now with 40 Bogleheads in attendance. He would later write an article extolling the group: “By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise.” The next day included an extended visit to Vanguard’s head office in Valley Forge, where I acted as host, tour guide, and keynote speaker. The questions and answer session that followed was broad-ranging, and ended with the Reverend Bob Stowe, a Massachusetts Boglehead, presenting me, on behalf of the association, with a handsome regimental bugle of World War II vintage, symbolizing my “clarion call to build an industry that protects and serves the average investor.” If the trumpet shall give an uncertain sound, who shall prepare himself to the battle?”)

Diehards III, kindly hosted by Web site provider Morningstar, took place in Chicago on June 26, 2002, as some 50 Bogleheads from all over the country participated in the firm’s annual investment conference, taking in my speech (“The Tell-Tale Chart”), and having an active series of gatherings. In Chicago, this association of good human beings who happen to be intelligent investors and who seek to spread the gospel grew ever more familiar and friendly.

The most recent gathering (Diehards IV) took place on May 10, 2004, when some 60 Bogleheads gathered in Denver, Colorado, guests of the annual conference of the Association for Investment Management and Research, the professional organization that represents securities analysts and money managers. (“AIMR” has now taken the name “The CFA Institute,” with the acronym standing for Chartered Financial Analyst.) The Bogleheads were given seats in a special section for my speech (“Creating Sound Governance: The Shareholder’s Perspective”), which was followed by an extensive question and answer session. The final question put to me by the moderator was “What is a Boglehead?” What a treat it was to have the opportunity to tell the 1000-person audience of investment professionals about the wonderful people who constitute this dedicated association of individual investors and the sound investment strategies that they both employ and propagate.

THE BOGLEHEADS MESSAGE

The Bogleheads’ Guide to Investing is a wonderful, witty, and wise book. As an investor for my entire adult lifetime, I found most rewarding the sage understanding of Messrs. Larimore, Lindauer, and LeBoeuf that the practice of investing is, as they put it, “so different from most of life.” Why? Largely because our financial markets are essentially closed systems in which an advantage garnered by a given investor comes at the disadvantage of the other investors in the same market. The authors recognize this eternal truth: As a group, we investors are inevitably average, so beating the market is a zero-sum game. (After our investment costs are deducted, of course, it becomes a loser’s game.) Importantly, they note that relying on the typical common sense approaches that apply to most of life’s challenges is “destined to leave you poorer.” On page 76, for example, they warn against following life principles like these:

  1. If you don’t know how to do something...hire an expert.
  2. You get what you pay for.
  3. If there’s a crisis, take action!
  4. The best predictor of future performance is past performance.

In short, the principles that work in most aspects of our daily lives simply lead to failure in investing. Understanding that contrarian wisdom is the first step toward investment success.

But if that warning is both precisely accurate and grandly counterintuitive, the basic thrust of The Bogleheads’ Guide to Investing is both precisely accurate and grandly intuitive. “Choose a sound financial lifestyle. Start early and invest regularly. Know what you’re buying. Preserve your buying power. Keep costs and taxes low. Diversify your stock portfolio [and diversify your stock risk with a bond portfolio].” Investors who follow these simple tenets will earn their fair share of whatever returns the financial markets are kind enough to deliver in the years ahead.

THE BOGLEHEADS AND BENJAMIN FRANKLIN

When I completed my perusal of The Bogleheads’ Guide to Investing, I had a certain sense of déjà vu. For I suddenly realized that I’d only recently seen a similar collection of sound, simple, and successful ways to save and invest that were written 250 years earlier, suggesting that these precepts may be not only effective, but eternal. They were expressed, as it happens, by Benjamin Franklin in 1757, in his widely-circulated pamphlet The Way to Wealth (also entitled The Art of Making Money Plenty, or Father Abra- ham Speaks), republished in 2002 by the American Philosophical Society:

  • If you would be wealthy, think of Saving as well as Getting.
  • He that lives upon Hope will die fasting.
  • There are no Gains, without Pains.
  • He that hath a Trade hath an Estate.
  • Taxes are indeed very heavy (but) we are taxed twice as much by our Idleness, three times as much by our Pride, and four times as much by our Folly.
  • Beware of little Expences; a small Leak will sink a great Ship.
  • Learning is to the Studious, and Riches to the Careful.
  • If you would have a faithful Servant, serve yourself.
  • Always taking out of the Meal-tub, and never putting in, soon comes to the bottom.
  • Great Estates may venture more, but little Boats should keep near shore.
  • For Age and Want, save while you may; no Morning Sun lasts a whole Day.

In all, Franklin’s legacy matches the legacy of the Bogleheads, “a doctrine, my friends, of Reason and Wisdom...and Frugality and Prudence, though excellent Things. Ask God’s blessing humbly and be not uncharitable to those who seem to want it, but comfort and help them...What is the noblest question in the world? ‘What good may I do in it?’” Again using the words Franklin chose, the members of this investment association have “dedicated themselves to assuming the obligations of virtue and of serving others.”

WHAT’S A BOGLE TO THINK ABOUT THE BOGLEHEADS?

Put yourself, for a moment, dear readers, in my position. How would you feel if an association of American citizens named themselves “(insert your last name here) -heads”? It would all depend—wouldn’t it?—on their character, their values, and the extent to which their intellectual and moral principles coincided with your own. Here, the Bogleheads gain high scores, espousing the investment strategies and human values to which I’ve dedicated my entire career. More than that, just as Alexis de Tocqueville suggested, they have “taken up an opinion...they wish to promote, they look for mutual assistance, and as soon as they have found one another out they combine...influencing one another with opinions recruited, the heart enlarged, the human mind developed.”

So, of course I’m honored and of course I’m pleased, not only with the endorsement and friendship of this stellar group of followers who have named themselves after me and adopted my principles. The final objective of my career—in investing, in management, in entrepreneurship, and in public service—is to depart this world with my reputation intact. (But not too soon!) And so I confess that, yes, I’m filled with pride at how my life’s mission has found burgeoning acceptance, not only among the Bogleheads but among millions of honest-to-God, down-to-earth human beings who deserve a fair shake in their efforts to achieve financial security for their families.

Pride, of course, is hardly an unmixed blessing, and I realize that it is a trait of character to be handled with care. Here is how Benjamin Franklin wisely expressed it:

In reality, there is, perhaps, no one of our natural passions so hard to subdue as pride. Disguise it, struggle with it, beat it down, stifle it, mortify it as much as one pleases, it is still alive, and will every now and then peep out and show itself; you will see it perhaps often in my history; for even if I could conceive that I had completely overcome it, I should probably be proud of my humility.

If, in the history I have recounted today, I have allowed my own pride to peep out and show itself, I assure you that it is with great humility that I accept the honor that this association of Bogleheads have paid to this particular Bogle by their choice of name, by their enthusiastic endorsement of my principles and values, and by their dedication in this wonderful book. Take heed of its guidance, and you will enjoy investment success.

John C. Bogle
Valley Forge, Pennsylvania
September 1, 2005


About Dylan Schleicher


Dylan Schleicher has been a part of the 800-CEO-READ claque since 2003. Even though he's stayed on at the company, he has not stayed put. After beginning in shipping & receiving, he joined customer service and accounting before moving into his current, highly elliptical orbit of duties overseeing the ChangeThis and In the Books websites, the company's annual review of books and in-house design. He lives with his wife and two children in the Washington Heights neighborhood on Milwaukee's West Side.