John Bogle on Investing: The First 50 Years

11

ECONOMICS 101: FOR MUTUAL FUND INVESTORS … FOR MUTUAL FUND MANAGERS

The Economic Club of ArizonaPhoenix, ArizonaApril 20, 1999

IT'S A SPECIAL PRIVILEGE to be asked to speak to the Economic Club of Phoenix. For while this lovely city is a long way from the boundless seas that HMS Vanguard sailed centuries ago, it is the place we chose four years ago to develop Vanguard's first office space away from our home in Valley Forge, where I founded the firm. Given your Club's mission, I'm going to present some strong and perhaps controversial opinions about the nature of the economics of mutual funds—as they affect fund investors, and as they affect fund managers as well. As you will see, there is a difference. That difference has created serious flaws in the record of the mutual fund industry, flaws ignored during our era of incredible economic growth.

I've called the talk “Economics 101,” for what I intend to do is give a sort of basic college survey course explaining the nature of this industry, and its remarkable acceptance. For in the wink of an eye, mutual funds have at once become:

• The investment of choice among America's families, not only the dominant way in which we invest in stocks and bonds, but the dominant way we save our cash reserves.
• The largest institutional investor in common stocks, holding (when private accounts managed by fund advisers are included) fully one-third of all U.S. equities.
• The major force in the largest stock market in the world, accounting for almost ...