Interesting Quotes From John Bogle

Here’s a quote from John Bogle regarding the subprime mortgage crisis and the part that the rating agencies played:

I have always been skeptical about the rating services. I think there was tremendous reliance on rating services. It is irresponsible for a giant financial institution to let someone else tell them the quality of the investments in their portfolio. Asking the rating agencies, who get paid to rate each of these CDOs, was like asking the barber if you need a haircut!

Good point. However, I don’t think the financial institutions had any idea what their portfolios were worth!

The other interesting quote came when Bogle was asked where he thought the Dow Jones Industrial Average would be ten years from now:

Well, the Dow is a peculiar piece of work. The Dow yield is 2.2 percent now, vs. the S&P’s 2 percent. Since I’m expecting a 6 percent to 7 percent return on stocks, the Dow ought to grow at 4 percent to 5 percent a year. So over ten years, growing 4.5 percent a year, it would grow by 55 percent and so it would be slightly over 20,000, give or take. But anybody who is expecting that ought to be prepared for a lot of bumps along the way.

I’m not a betting man, but if I were, I would bet (justified or not) that the Dow would be higher than that in ten years. This is pure speculation on my part, but I just think there’s a lot of foreign money out there and that money is going to prop up our stock prices.

Finally, did Bogle change his rule of thumb that states that a person’s bond allocation should be equal to their age? For example, a 40-year old should have 60% in stocks and 40% in bonds. When asked how a person who was 20 years from retirement should invest, Bogle said (emphasis mine):

People are retiring later in life nowadays. I’m 13 years past 65, and I still have plenty of energy to work every day. I got up at 5:30 this morning in New York and was ready for an 8:30 meeting in Philadelphia. If I can do it, I don’t see why anyone else can’t.

Take someone who is 45. They should be 70 percent stocks and 30 percent bonds. People think I’m being too conservative, but I would remind them that corporate earnings grow at about the rate of our GDP. Corporate after-tax profits as a percent of GDP have gone above 10 percent for the first time in history. Normally they are 6 percent of GDP. I don’t look for that to go any higher.

Hmmm… Interesting stuff. Be sure and read the rest of Bogle’s interview in the 2008 Fortune Investor’s Guide.

9 thoughts on “Interesting Quotes From John Bogle”

  1. Nice article.

    People are standing around wondering why all these financial institutions were investing in mortgage backed securities a few years ago. Let’s hop the way back machine to 2002-2004 and think about it. The stock market was still shakey, the prime rate was pegged at 1-2% and money market investments were paying, well, next to nothing. Banks were considering charging people to maintain a savings account. Back in the day, mortgage backed securities looked pretty good. And as an added bonus, the rating companies said everything was peachey.

    Why continue to invest in US stocks? Considering all the options, it’s still the best choice. As long as you believe the US will continue to grow and thrive, which I do.

  2. Couple of questions I hope you can clear up for me…

    JLP, you said “However, I don’t think the financial institutions had any idea what their portfolios were worth!”

    Q1: If the financial institution owns the portfolio, how would they not know what it is worth?

    Q2: Don’t the rating services evaluate a companies’ portfolio so other lenders know how to evaluate said portfolio?

  3. The ratings services are very tough to control and regulate in today’s environment it seems. Bogle’s comment about the barber is a great one that is very true. Don’t count on them being totally truthful.

  4. Bobby,

    Nearly every article I have read about the subprime crisis states that the investors in these “investments” didn’t know what they were worth. That’s the reason for all these huge write offs that banks and brokerage firms have been taking lately.

  5. The rating agencies have an enormous conflict of interest since the investment bank selling the security is the party that pays the rating agencies to rate the instrument.

    The only one that is independent is Weiss Ratings. They aren’t paid by the issuing investment bank. So if you are looking to evaluate a bond or insurance company (when buying insurance such as life or disability), use Weiss if possible.

  6. I think people got complacent and stop doing their due diligence, now it’s coming back to haunt them and it’s their fault. It’s like when you invest in a company and then find out they were padding the books (*cough* enron *cough*), maybe you should’ve dug a little deeper. (not to say that it’s feasible for an individual to do it but certainly larger companies should’ve done their homework)

  7. I always thought that Bogle’s bonds-to-age rule of thumb didn’t seem right. Why should I, at 25, at the beginning of my investment lifetime, drop a quarter of my funds into bonds?

    It just doesn’t seem to make sense.

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