Don't Count on It! : Reflections on Investment Illusions, Capitalism, ''Mutual'' Funds, Indexing, Entrepreneurship, Idealism, and Heroes

595 Pages·2010·4.73 MB·English

by  John C. Bogle

Table of Contents

Title Page
Copyright Page
Dedication
Foreword
Introduction
How to Lie with Statistics
Torturing the Mutual Fund Data
“A Lantern on the Stern”
The Wisdom of the Economists
An Increasingly Fragile World
A Note to the Reader

Part One - INVESTMENT ILLUSIONS

Chapter 1 - Don’t Count on It! The Perils of Numeracy

Peril #1: Attributing Certitude to History
Peril #2: The Bias toward Optimism
Peril #3: The Worship of Hard Numbers
Peril #4: The Adverse Real-World Consequences of Counting
An Individual Perspective

Chapter 2 - The Relentless Rules of Humble Arithmetic

“Trampling with Impunity on Laws Human and Divine”
The Mutual Fund Industry
Let’s Look at the Record
Fund Returns versus Investor Returns
Two Costly and Counterproductive Trends
Looking Ahead
The Wealth of the Nation
The Humble Arithmetic of Pension Plans
Comparative Advantage versus Community Advantage
Our Intermediation Society
“The Next Frontier”
Appendix

Chapter 3 - The Telltale Chart

Six Manifestations of RTM
RTM—Large-Cap Stocks versus Small-Cap Stocks
RTM—Value Stocks versus Growth Stocks
RTM in the Market Portfolio
RTM in Equity Mutual Funds
RTM and “Slice and Dice”
RTM and the Stock Market
This, Too, Shall Pass Away

Chapter 4 - A Question So Important That It Should Be Hard to Think about ...

An Industry Changes
Lower Equity Returns in Prospect?
A Matter of Indifference

Chapter 5 - The Uncanny Ability to Recognize the Obvious

Indexing as the Ultimate Reality
Reality and Illusion in the Stock Market
The Real Market versus the Expectations Market
“The Battle for the Soul of Capitalism”
Wrapping Up

Part Two - THE FAILURE OF CAPITALISM
Chapter 6 - What Went Wrong in Corporate America?

Capitalism—A Brief Review
The Broken Circle
Creating Wealth—for Management
The Failure of the Gatekeepers
The Role of the Board
Oh, No They Shouldn’t!
Actions and Reactions
Winners and Losers
Fixing the Governance System
Fixing the Investment System
Back to the Future
Man’s Better Nature
A Call for Virtue

Chapter 7 - Fixing a Broken Financial System

An Act of Faith
Fathers of the Crisis
How Can We Fix Our Broken System?
The Heart of the Matter
Speculation Sits in the Driver’s Seat
Alan Greenspan and the Bubble
Bernard Madoff and How We Fool Ourselves
President Obama, Leadership, and Confidence

Chapter 8 - Vanishing Treasures: Business Values and Investment Values

The Battle for the Soul of Capitalism
Profession versus Business
Business Values and Investment Values Gone Awry
The Mutual Fund Industry Loses Its Way
Grounds for Hope

Chapter 9 - A Crisis of Ethic Proportions
Chapter 10 - Black Monday and Black Swans

The Light Shined by Frank Knight
Mandelbrot on Risk, Ruin, and Reward
The Wisdom of John Maynard Keynes
Putting Numbers on Keynes’s Distinction
Hyman Minsky Adds the Crucial Ingredient
The Rise of the Financial Economy
The Soaring Costs of Our Financial System
The Dominance of Finance over Business
Risk and Ruin—A Reprise
Looking Ahead
Other Risks

Chapter 11 - The Go-Go Years

Part One: The Supermoney Era
Part Two: Retribution Comes
Part Three: Another Bubble

Part Three - WHAT’S WRONG WITH “MUTUAL” FUNDS
Chapter 12 - Re-Mutualizing the Mutual Fund Industry: The Alpha and the
Omega

The Development of MIT
The Wellington Group—From Omega to Alpha
Omega to Alpha
Enter Vanguard
Improved Returns in a Full-Fledged Alpha Complex
Alpha versus Omega: Lower Costs and Higher Market Share
Tested in the Crucible
An Elementary Principle, Too Often Ignored
It Is Time for Change
How to Get from Omega to Alpha
Structure, Strategy, and Spirit

Chapter 13 - A New Order of Things: Bringing Mutuality to the “Mutual” Fund

A Lone Exception to the Conventional Structure
Whence “Mutual”?
The Straw That Broke the Camel’s Back
The Floodgates Open
Vanguard Goes the Other Way
Let’s See How It All Worked Out
Performance Evaluations from a Higher Authority
Costs Rear Their (Ugly) Head
Price Competition?
Recap of the Issues
The Triumph of Conglomeration
It’s Time for a Change
What’s to Be Done?
Two Powerful Endorsements
Appendix

Chapter 14 - The Fiduciary Principle: No Man Can Serve Two Masters

Fiduciary Duty
Causes of the Recent Crisis
The Role of Institutional Managers
The Triumph of Speculation over Investment
The Mutual Fund Industry
A Piece of History
A Prescient SEC?
To Build the Financial World Anew
Building a Fiduciary Society

Chapter 15 - Mutual Funds at the Millennium: Fund Directors and Fund Myths

Protecting the Interests of Those Whose Funds They Command
Myth #1: Mutual Funds Are Long-Term Investments
Myth #2: Mutual Fund Managers Are Long-Term Investors
Myth #3: Mutual Fund Shareholders Are Long-Term Owners
Myth #4: Mutual Fund Costs Are Declining
Myth #5: Mutual Funds Are Meeting the Reasonable Expectations of
Investors
Where Do We Go from Here?
The Ten Commandments
The Golden Rule

Chapter 16 - “High Standards of Commercial Honor . . . Just and Equitable ...

Commercial Honor, Equitable Principles, Fair Dealing
The Importance of Investment Income
Bond Funds
Fund Returns versus Shareholder Returns
Measuring Shareholder Satisfaction—The Redemption Rate
What’s to Be Done?
The “Statement of Policy”
A Retrospective View, and a Look Ahead

Part Four - WHAT’S RIGHT WITH INDEXING
Chapter 17 - Success in Investment Management: What Can We Learn from
Indexing?

The Theory of Transaction Costs
Reality Bites Theory
The Merrill Lynch/BARRA Study
What Active Managers Can Learn from Indexing
The S&P 500 Index
Is the S&P Really “The Market”?
“Benchmarking”
Variations on Long-Term, All-Market Indexing
Indexing: Losing Its Way?
Chapter 18 - As the Index Fund Moves from Heresy to Dogma, What More Do
We Need ...

The Intellectual Basis for Indexing
Two Schools of Indexing—Quantitative and Pragmatic
How Vanguard Came to Start the First Index Mutual Fund
Brute Facts
More Brute Facts
A Case Study
What Is the Intellectual Foundation for Active Management?
Changing Times and Circumstances
A Great Idea Gone Awry
What More Do We Need to Know?
Conclusion

Chapter 19 - “The Chief Cornerstone”

The Birth of the Index Fund
A Slow Start
The Chief Cornerstone
The Classic Index Fund
The Triumph of Indexing
We Are All Indexers Now
A New Wave in Indexing
Spiders and Sectors
The Four E’s
How Do Investors Fare?
The Chief Cornerstone Remains

Chapter 20 - Convergence!

The Paradigm of the Original Index Fund
Answering the Prayers of a Nobel Laureate
The Growth of Indexing
Commercial Success, Artistic Success
Reverberations