FOREWORD

FIDUCIARY RESPONSIBILITY, OBJECTIVITY OF ANALYSIS, AND WILLINGNESS TO TAKE A STAND

IF A MODERN DAY Rip van Winkle were to wake up after a sleep of 50 years, he'd have a lot of trouble understanding today's financial markets or recognizing the names of the major participants. But if Rip happened to be, say, a Princeton professor who had monitored or read John Bogle's senior thesis, he wouldn't be at all surprised about one of the most significant developments in the world of the stock market and money management.

John Bogle didn't invent the business of mutual investment funds. They had started before he went to college, but were barely visible. His curiosity about the business was piqued by an article in a magazine as he was ruminating about a thesis topic. That bit of serendipity led not only to an honors thesis but to a lifelong vocation.

Today, mutual funds are the dominant investment medium for American families. They directly own a large fraction of all traded stock and a sizable share of bonds and liquid assets as well.

The success of the industry is built on a solid base—the demonstrable value of diversifying risk and spreading costs by collective investment. Those were concepts intuitively recognized and emphasized by the Princeton senior.

John Bogle has not, of course, been alone in seeing the basic merit of mutual funds, now counted in the thousands. His great contribution—his single-minded mission—has been to insist that those funds should be managed, first and foremost, in a way truly to serve the interests of the investing public.

That has meant strong emphasis on minimizing conflicts of interest and operating at the lowest possible cost. To those ends, the family of funds which John Bogle established a quarter of a century ago—The Vanguard Group—has remained independent of ties to other businesses. It has long led the industry in operating without sales charges and with minimal operating costs.

Early in its life, Vanguard established the industry's first index fund. Over time, the stress on the value of index funds responded to the clear logic—a logic fully supported by the plain evidence—that most “active” money managers most of the time will not be able to “beat” the market. These days, after all, mutual funds largely are the market. On the average, they couldn't do better, even if they had no costs, operated with perfect efficiency, and incurred no taxes. With those hurdles to jump, very few funds can consistently outperform the averages.

That's not an easy conclusion for money managers to accept. John Bogle has not won many popularity contests among his professional colleagues. Moreover, he himself would readily confess that the unique form of governance and style of management that he instilled in Vanguard is not easy to replicate.

But from a distance, I along with many others have enormously admired the force and eloquence with which he has set forth his thinking. It is thinking that I find fully persuasive as an analytic matter and entirely consistent with the public interest. John Bogle's basic conviction that the mutual fund investor is entitled, in his words, to a “fair shake” should serve as the motto of every mutual fund.

This new volume happily makes that thinking easily available to a wider audience. John Bogle writes with unusual clarity and simplicity, clarity of the vision and simplicity of the written word. He has a rare ability to set out concisely and effectively the evidence to support his argument. A wry sense of humor can't quite disguise, and shouldn't disguise, his sense of frustration—even outrage—about some practices that permeate the industry that has been his life's work and personal passion.

All of us dependent on mutual funds or other collective investment institutions to manage our savings, and that is most of us, owe thanks to John Bogle for insisting that our interests be placed front and center.

Even more broadly, the strong sense of fiduciary responsibility, the objectivity of analysis, and the willingness to take a stand—qualities that permeate all his writings—set high standards for all those concerned with the growth and integrity of our open and competitive financial system.

Paul A. Volcker
May 1, 2000