If you’ve never heard of John Clifton “Jack” Bogle (and if you’re new to investing, you probably haven’t), he’s the founder of the Vanguard group and pioneer of the index fund, a kind of mutual fund with very low costs that has gained the endorsement of invest guru Warren Buffett. This is a very interesting endorsement, because John Bogle and Warren Buffett have very different investment strategies that serve very different purposes, and the subtitle of Bogle’s new book, Clash of Cultures, says it all: investing vs. speculation.
I’ve heard ads on the radio that talk about the “Wall Street casino,” and I just finished watching Trading Places with my wife, and it’s easy to see how the public at large can see such things as “the stock market” as a risky place to put your money. The wild world of options trading in the “pit” with Dan Aykroyd and Eddie Murphy is a far, far cry from the boring investment world of John Bogle, but these are polar opposites of two cultures that too many novice investors confuse as the same thing.
Speculation is the process of picking and choosing one investment over another. You think a certain stock is going to rise, so you put your money into it as a bet. It might take off like a rocket, or it might fall to zero and wipe your investment out completely. Some investors remove themselves one step by investing in a mutual fund, letting a team of fund managers do the picking and choosing for them. Of course, you must still pick and choose which mutual fund you may think is going to take off like a rocket, and you may even separate yourself one step further by seeking an investment adviser to pick and choose funds for you.
All this picking and choosing costs money. Investors usually pay commissions when you buy, sell, or trade investments this way. Actively managed mutual funds have expense ratios that reflect this. A personal adviser will often have fees even on top of all of this for offering personal advice. The theory is that the expert advice from all these hands involved in your investment pot will pay for itself with higher returns.
But does that actually happen? Studies are starting to show: not really.
John Bogle’s investment approach is in many ways the opposite of speculation. Instead of picking and choosing good stocks among the bad, an index fund represents large clusters of stocks all grouped together by certain categories — large companies, small companies, foreign companies, companies of all kinds. The goal is not to pick winners an losers but instead simply invest in a large cross-section of capitalism and then hold it for as long as possible. It’s important to keep your portfolio balanced and diversified by investing in these different categories, but this kind of investing is like the joke about a man so gluttonous that he looks at a large restaurant menu and saying, “OK.”
This is the kind of investing I like: buy, hold, and forget about it. I’m not a full-time investor like Warren Buffett. I’m a graphic designer, and I know better than to trust my “gut” on picking one stock or another. Speculative investing requires knowledge and research that I don’t have, but the John Bogle style of investing only requires time and patience. Every pay day, I put a little more money into my Roth IRA, and then buy whichever funds I need to keep things balanced (it’s mostly been small-cap companies this time around).
Of course, if you like the heart-pounding risk involved in trading futures in frozen, concentrated orange juice, you can always give that a try as well. For me, I like boring investments that win rather than spinning a financial roulette wheel.
For further reading, check out Clash of Cultures by John Bogle.