Stories by Felix Salmon
Jack Bogle's misunderstood legacy
The best speech ever given to an audience of bankers was delivered by Paul Volcker in December 2009: "The most important financial innovation that I have seen in the past 20 years is the automatic teller machine."
The big picture: Volker was right in substance, but he did miss one financial innovation that has been unambiguously positive for the world. The low-cost index fund, as popularized by Jack Bogle (1929–2019), has given millions of investors billions of dollars in extra retirement income.
Bogle created a fund-management giant in Vanguard, which is owned by the investors in its funds and therefore has no need to maximize the profits it makes.
- For anybody trying to work out where to invest their retirement savings, it's hard to do better — and very easy to do a lot worse — than just putting the whole amount into a Vanguard index fund.
- Bogle's insight was that an individual investor will find it statistically impossible to beat the market over the long term, either by picking stocks or by picking fund managers. Index funds provide market returns at minimal cost, by excising stock-pickers entirely.
Millions of Americans have got the message and have moved their investments to index funds and other passive strategies. The biggest fund managers, including Vanguard and BlackRock (which owns iShares), are built on not picking stocks.
- Vanguard and BlackRock are two of the largest shareholders in just about any big company you care to mention; they have no choice in the matter. Yet as large shareholders, they are constantly subject to campaigns urging them to divest from certain companies.
- BlackRock, in contrast to Vanguard, is reluctant to admit that it has very little control over much of its asset base. BlackRock CEO Larry Fink enjoys the bully pulpit that comes with controlling trillions of dollars. (Bogle, by contrast, never tried to tell public-company CEOs how to run their companies.)
This week, BlackRock was embarrassed by a fake letter from Fink, designed to make him look like an ineffective blowhard. The point of the letter was to show what Fink could achieve if he really wanted to, including divesting from carbon-investing companies even in his "broad indexed funds."
- There's a case for divestment, but a fund manager doing any such thing is by definition an activist.
The bottom line: Passive investment is good for millions, but active investment is still necessary. It holds managers accountable for their actions and provides crucial price discovery. Bogle was proud to be a passive investor. Fink, by contrast, seems to want to have it both ways.
2019 earnings are off to a rocky start
Analysts were convinced that the last quarter of 2018 was going to be great for earnings — until, suddenly, at the end of the year, they weren't.
The bottom line: The stock market's volatility at the end of 2018 was to a certain degree based in genuinely unexpected fourth-quarter weakness. And 2019 is getting off to a very rocky start. With expected earnings still at or near all-time highs, there's definitely a lot of room for them to be re-rated downwards.
- JPMorgan is a good example. It had a record year in 2018, earning $32.5 billion in total. That shattered the previous record by some $8 billion. And yet its quarterly fixed-income trading revenue was its worst since the financial crisis.
- Apple's earnings warning at the beginning of January was particularly noteworthy, and wiped some $2.5 billion off expectations for its quarterly earnings.