• Bogle’s Enough draws from a lifetime of wisdom to reflect on the excesses of a financial system that led to the 2008 crisis and reminds readers of the benefits of a less greedy, long-term, client-first system (society) where success in life is defined by more than just money.

• “At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have…enough.”

• Net Return to Investors = Gross Return – Costs/Fees. The financial system siphons (or skims) the top of the returns earned by investors, businesses, etc.

• “On balance, the financial system subtracts value from our society.”

• “Most money-making activity contains profoundly antisocial effects… As high-cost modality become ever more popular…the activity exacerbates the current harmful trend in which ever more of the nation’s ethical young brain-power is attracted into lucrative money-management and its attendant modern frictions, as distinguished from work providing much more value to others.” — Charlie Munger

• Advice for those in finance:

  • “If you enter the financial field, do so with your eyes wide open, recognizing that any endeavor that extracts value from its clients may, in times more troubled than these, find that it has been hoist by its own petard. It is said on Wall Street, correctly, that “money has no conscience,” but don’t allow that truism to let you ignore your own conscience, nor to alter your own conduct and character.”
  • “When you begin to invest so that you have enough for your own retirement many decades hence, do so in a way that minimizes the extraction by the financial community of the returns generated by business.”
  • “No matter what career you choose, do your best to hold high its traditional professional values, no swiftly eroding, in which serving the client is always the highest priority. And don’t ignore the greater good of your community, your nation, and your world.”

• The magic of compounding works on costs, as well as returns. The higher the cost, the lower the return. Here’s an example: A $1,000 initial investment 50 years ago at 11% per year, would grow to $184,600. Of course, that’s before fees. A 2% fee per year, drops the net annual return down to 9% on that initial $1,000 investment and produces just $74,400. Now add 1.5% to cover income tax and capital gains every year — cutting the return down to 7.5% per year — and the final total is $37,000. 80% of the total return is eaten by costs!

• Expect costs to rise if your strategy is more speculation than investing.

• “It is my basic thesis — for the future as for the past — that an intelligent and well-trained financial analyst can do a useful job as portfolio adviser for many different kinds of people, and thus amply justify his existence. Also I claim he can do this by adhering to relatively simple principles of sound investment; e.g., a proper balance between stocks and bonds; proper diversification; selection of a representative list; discouragement of speculation operations not suited for the client’s financial position or temperament — and for this he does not need to be a wizard in picking winners from the stock list or in foretelling market improvements.” — Ben Graham

• The Financial System is not all bad. It does:

  • Facilitate optimal capital allocation for users.
  • Enable efficient introduction of buyers and sellers.
  • Provide ease of liquidity for assets.
  • Allow investors to capitalize or acquire future cash flows.
  • Allow investors to take additional risk or hedge risk through numerous financial instruments.
  • Bogle wonders if the cost of the benefits above exceeds the benefits themselves. Do investors get what they pay for?

• “Investing is all about the long-term ownership of businesses… Speculation is precisely the opposite. It is all about the short-term trading, not long-term holding, of financial instruments — pieces of paper, not businesses — largely focused on the belief that their prices, as distinct from intrinsic values will rise; indeed, an expectation that the prices of the stocks that are selected will rise more than other stocks, as the expectations of other investors rise to match one’s own.”

• “The most that owners in the aggregate can earn between now and Judgment Day is what their business in the aggregate earns.” — Warren Buffett

• Speculation driven by emotion produces short-term volatility and opportunities for the patient long-term investors.

• “The stock market is a giant distraction from the business of investing.”

• The average turnover rate for stocks was about 25% in 1951 and stayed there for the next two decades. Then it gradually rose to over 100% by 1998 and 215% by 2007. Turnover = number of shares traded as a percentage of shares outstanding.

• In 2008, the value of futures and options derivatives of the S&P 500 Index totaled $29 trillion. The value of the companies in the S&P 500 at the time was $13 trillion.

• “Whenever stock prices lose touch with corporate values and bubbles begin to form, too many market participants seem to anticipate that values will soon rise to justify prices, instead of the other way around.”

• Speculation encourages investors “to ignore the inevitable even as they discount the probability of the improbable.”

• Rising speculation increases the chance of anything happening.

• “In financial markets, the improbable is, in fact, highly probable.”

• “Placing large bets on an unknown future is worse than gambling because at least in gambling you know the odds. Most of the decisions in life motivated by greed have unhappy outcomes.” — Peter Bernstein

• Market timing is hard, if not impossible, to make money consistently. It requires being right twice: in getting out and getting back in.

• “For me, simplicity has always been the key to successful investing, and the time-honored wisdom of Occam’s razor…has stood me in good stead: When confronted with multiple solutions to a problem, choose the simplest one.”

• Except, financial institutions and investors tend to choose complex solutions.

  • Financial innovation revolves around complex products because it brings with it higher fees.
  • Fund companies consistently create new funds to take advantage of the fad of the day, then charge a high fee for it.
  • Investors favor complex products because they believe complex works better than simple.
  • Investors in new fad funds often underperform the fund itself and a simpler broad market index fund.
  • “Thanks to the innovation and creativity of fund sponsors — and surely the greed (or perceived need) of fund investors — the return that mutual fund investors received on their hard-earned capital was less than a third of the return offered by the stock market itself.”
  • Fad funds have a higher than average failure rate.
  • 3,165 of the 6,125 funds that existed in 2001, were gone by 2008. Of the 4,356 equity funds, 2,314 fund managers failed to invest in the fund they managed.

• “There are three i‘s in every cycle: first the innovator, then the imitator, and finally the idiot.” — Warren Buffett

• “First principles: Commodities have no internal rate of return. Their prices are based entirely on supply and demand. That is why they are considered speculations, and rank speculations at that.”

• “In economics and finance, we place too much trust in numbers. Numbers are not reality. At best, they are a pale reflection of reality. At worst, they’re a gross distortion of the truths we seek to measure… Not only do we rely too heavily on historic economic and market data; our optimistic bias also leads us to misinterpret the data and give them credence that they rarely merit.”

• “…the only valid prism through which to view the market’s future is the one that takes into account not history, but the sources of stock returns.”

• Relying on historical returns ignores the sources of those returns. Those sources being earnings growth, dividend yield, and a speculative element that moves price multiples.

• CEOs and analysts fail at forecasting business growth. It’s almost always too optimistic.

• Since 1929, average after-tax profits grew at a 5.6% rate. GDP grew at a 6.6% rate.

• M&A activity often creates fees for the finance system and costs shareholders.

• “When investors are focused, not on the intrinsic value of the corporation, but on the price of its stock, assuming some responsibility for corporate governance is the first casualty.”

• In 1980, average CEO pay was 42x the average worker’s pay. By 2004, it was 280x the average workers. Adjusted for inflation, the average worker’s income rose 0.3% per year. The average - CEOs income rose 8.5% per year. In fact, CEO pay outpaced corporate profit growth (corporate profits, in real terms, grew at 2.9%).

• Shareholders rarely hold management accountable. Ben Graham complained about it in the 1940s and it hasn’t changed must since.

• The average mutual fund investors held shares for 16 years in 1951. The average holding period was down to 4 years in 2008.

• The average stock in the average mutual fund in 1951 was held for six years. By 2008, that holding period was down to one year.

• The average expense ratio of the average mutual fund doubled from 1951 to 2007.

• Bogle’s “dreams” for the fund industry:

  • Give every investor a fair shake on costs.
  • Serve the investors for a lifetime.
  • Focus on long-term investment strategies.
  • Serve long-term investors (today’s clients are tomorrow’s clients too).
  • Push corporate governance that’s in the best interest of investors.

• Bogle’s Rules to Building a Great Organization:

  • Make caring the soul of the organization.
  • Forget about employees (he wanted “crew members,” committed people linked together as part of a greater whole)
  • Set high standards and values — stick to them.
  • Talk the talk — repeat the values endlessly.
  • Walk the walk — Actions speak louder…
  • Don’t overmanage.
  • Recognize individual achievement.
  • Loyalty is a two-way street.
  • Lead/manage for the long term.
  • Press on, regardless.

• Of the original Fortune 500 companies, first published in 1955, only 71 still exist. Of the 2000+ that have made the list at some point, most are gone. Few companies last.

• “I have had cause enough to know that the road to life is rarely smooth and that we need to be prepared for the inevitable reversals in our fortunes, whether constituted by wealth, or health, or family.”

• “Knowledge is not the personal property of its discoverer, but the common property of all. As we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours, and this we should do freely and generously.” — Benjamin Franklin

• Ben Franklin began each day with the question, “What good shall I do this day?” and ended each day with the question, “What good have I done today?”

• “In reality, there is, perhaps, no one of our natural passions so hard to subdue as pride. Disguise it, struggle with it, beat it down, stifle it, mortify it as much as one pleases, it is still alive, and will every now and then peep out and show itself; you will see it perhaps often in this history; for even if I could conceive that I had completely overcome it, I should probably be proud of my humility.” — Benjamin Franklin

• “I have come to recognize that wealth is ill measured by mere dollars, that fame is ill measured by public accolades, and that power is ill measured solely by control over others.”

• “Success, in short, can be measured not in what we attain for ourselves, but in what we contribute to our society.”

• “A man is incapable of comprehending any argument that interferes with his revenue.” — Rene Descartes

• “The world is moved along, not only by the mighty shoves of its heroes, but also by the aggregate of the tiny pushes of each honest worker.” — Helen Keller

• Bogle saved 15% of his salary, since 1951, toward retirement.

• Worried about excessive speculation in the market in 1999, Bogle reduced his equity holdings to 35%, raising bond holdings to 65%. Otherwise, he focused on a balanced allocation.

• “When you plan your financial future, don’t fool yourself by focusing on the nominal gross returns on stocks and bonds; subtract the costs you expect to be assessed, and work with net returns. Then assume that even those returns will be reduced by inflation. Set realistic goals that you can reasonably expect to achieve.”

Quotes

“I have come to recognize that wealth is ill measured by mere dollars, that fame is ill measured by public accolades, and that power is ill measured solely by control over others.” “Success, in short, can be measured not in what we attain for ourselves, but in what we contribute to our society.”

“A man is incapable of comprehending any argument that interferes with his revenue.” — Rene Descartes

“The world is moved along, not only by the mighty shoves of its heroes, but also by the aggregate of the tiny pushes of each honest worker.” — Helen Keller

“I have had cause enough to know that the road to life is rarely smooth and that we need to be prepared for the inevitable reversals in our fortunes, whether constituted by wealth, or health, or family.”

“Knowledge is not the personal property of its discoverer, but the common property of all. As we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours, and this we should do freely and generously.” — Benjamin Franklin

“When investors are focused, not on the intrinsic value of the corporation, but on the price of its stock, assuming some responsibility for corporate governance is the first casualty.”

“First principles: Commodities have no internal rate of return. Their prices are based entirely on supply and demand. That is why they are considered speculations, and rank speculations at that.”

“In economics and finance, we place too much trust in numbers. Numbers are not reality. At best, they are a pale reflection of reality. At worst, they’re a gross distortion of the truths we seek to measure… Not only do we rely too heavily on historic economic and market data; our optimistic bias also leads us to misinterpret the data and give them credence that they rarely merit.”

“…the only valid prism through which to view the market’s future is the one that takes into account not history, but the sources of stock returns.”

“There are three i‘s in every cycle: first the innovator, then the imitator, and finally the idiot.” — Warren Buffett

“Thanks to the innovation and creativity of fund sponsors — and surely the greed (or perceived need) of fund investors — the return that mutual fund investors received on their hard-earned capital was less than a third of the return offered by the stock market itself.”

“In financial markets, the improbable is, in fact, highly probable.”

“Placing large bets on an unknown future is worse than gambling because at least in gambling you know the odds. Most of the decisions in life motivated by greed have unhappy outcomes.” — Peter Bernstein

“Whenever stock prices lose touch with corporate values and bubbles begin to form, too many market participants seem to anticipate that values will soon rise to justify prices, instead of the other way around.”

“The stock market is a giant distraction from the business of investing.”

“The most that owners in the aggregate can earn between now and Judgment Day is what their business in the aggregate earns.” — Warren Buffett

“Investing is all about the long-term ownership of businesses… Speculation is precisely the opposite. It is all about the short-term trading, not long-term holding, of financial instruments — pieces of paper, not businesses — largely focused on the belief that their prices, as distinct from intrinsic values will rise; indeed, an expectation that the prices of the stocks that are selected will rise more than other stocks, as the expectations of other investors rise to match one’s own.”

“It is my basic thesis — for the future as for the past — that an intelligent and well-trained financial analyst can do a useful job as portfolio adviser for many different kinds of people, and thus amply justify his existence. Also I claim he can do this by adhering to relatively simple principles of sound investment; e.g., a proper balance between stocks and bonds; proper diversification; selection of a representative list; discouragement of speculation operations not suited for the client’s financial position or temperament — and for this he does not need to be a wizard in picking winners from the stock list or in foretelling market improvements.” — Ben Graham

“If you enter the financial field, do so with your eyes wide open, recognizing that any endeavor that extracts value from its clients may, in times more troubled than these, find that it has been hoist by its own petard. It is said on Wall Street, correctly, that “money has no conscience,” but don’t allow that truism to let you ignore your own conscience, nor to alter your own conduct and character.”

“When you begin to invest so that you have enough for your own retirement many decades hence, do so in a way that minimizes the extraction by the financial community of the returns generated by business.”

“No matter what career you choose, do your best to hold high its traditional professional values, no swiftly eroding, in which serving the client is always the highest priority. And don’t ignore the greater good of your community, your nation, and your world.”

“At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have…enough.”

“On balance, the financial system subtracts value from our society.”

“Most money-making activity contains profoundly antisocial effects… As high-cost modality become ever more popular…the activity exacerbates the current harmful trend in which ever more of the nation’s ethical young brain-power is attracted into lucrative money-management and its attendant modern frictions, as distinguished from work providing much more value to others.” — Charlie Munger

References

• novelinvestor summary