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Friday, 30 September 2011

The Game Is Rigged: Jack Bogle

By Matt Nesto

Just as I was considering another attempt at hastening my journey to wealth via some form of speculation on stocks, a wise old sage came along and told me not to.

"The game is rigged," says Jack Bogle, the octogenarian founder of The Vanguard Group. "It is too convoluted. It is too complex. You shouldn't be playing the game. You don't need to play the game."

With his paternal loyalty intact, the man who created the first index fund 35 years ago is unbending in his belief that speculators lose, and owning the broader market for the long haul is the best path to wealth appreciation. Not surprisingly, the enormous popularity and diversity of offerings within the fast growing universe of exchange traded funds or ETFs, has failed to convert him.

"The index investor doesn't need to be touched by any of the lunacy that is going on in the ETF market,"says Bogle. "The ETF industry, which has got to be the greatest marketing idea of this age, is not the greatest investment idea of this age, I can assure you."

It's not so much products with triple leverage that irk him about ETFs, it's more the velocity that they represent. Bogle abhors the notion of trading and timing, and the long odds that go with it. He insists no one is smart enough to do that for the long haul.

"If you own the stock market for a lifetime, you get those returns. Playing games in the stock market, over every day of that time, is playing the stock market. The stock market game is rigged, the business of investing is not rigged," says Bogle.

His reasoning is simple. The use of capital by companies to "develop new products, efficiencies, innovations, productivity, the improvement of consumer goods and services at lower and lower prices" is all very real and ultimately validated through earnings. It's a proven process that delivers long-term growth that mirrors the pace of economic growth, plus a pinch of dividends to round up the results.

The problem is that investors want more than 6 or 7 percent gains and they want it fast. Unfortunately it's been a wild ride over the past 11 years. We've made great highs and painful lows, until to finally landing at the same place we started from, a.k.a. "the lost decade."

It's the eternal rift that marks the difference between investing and trading. The intended outcomes are the same, but the paths to prosperity are wildly different.

Do you agree with Bogle? Are investors better off than traders? Let us know in the comment section below.

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