No such thing as a stock picker's market, says investor John Bogle

The 89-year-old legendary investor shares his investment philosophy

In the long run, it is corporate earnings and corporate dividends that drive stock prices, believes John Bogle, founder of Vanguard Group, an investment manager that manages over $5 trillion in assets worldwide.

Sharing his investment philosophy at the Morningstar investment conference in Mumbai through a recorded video, Bogle said that age is just a rule of thumb and one should consider it only as a starting point for deciding one’s asset allocation.

“I don’t do a simple age-based formula. If I did, I’d be 90 per cent in bonds, and 10 per cent in stocks. And that would be ridiculous,” said the 89-year-old legendary investor.

Bogle has about 50 per cent of his corpus invested in stocks at present and the remaining 50 per cent in bonds. “I spend half my time thinking why I have so much in stocks and half my time wondering why I have so little in stocks. So, it’s equal opportunity and regret,” he said.

His advice to ordinary investors: work out your asset allocation based on your own individual circumstances.

“Your financial ability to withstand risk and your emotional ability to withstand risk is important. These are two very different things. You want to be emotionally in tune with your financial ability when you set your asset allocation,” said Bogle.

Bogle also cautions that past performance may not guarantee future returns. “To the extent that your psyche can take it, ignore past performance. Or make that the last thing you look at and not the first," he said.

Bogle feels that dividends are an investors’ best friend and can really make a difference between investment success and failure. Investors are often their own enemies because of their tendency to trade, he said.

As the industry matures, Bogle said, you’ve got investors that are better informed, more knowledgeable, and more concerned about the future. This is true of the US and several other markets. He also calls into question the ability of active fund managers to consistently outperform the market.

“When people say that the market is much more efficient now, I don’t believe that. It has always been fairly efficient and it has always had times of great inefficiency. And there is nothing in the data that would indicate that mutual fund managers used to win by a lot and that they don’t do it anymore because of the efficiency in the market,” said Bogle, pointing out that unbundled advisory is the best model to follow.

Bogle further said that there’s no such thing as a stock picker’s market. "That’s because if someone is a good stock picker there has to be someone out there who’s an average or bad stock picker. If we assume that a good manager can outperform the S&P 500 by three per cent a year, there’s another manager who’s going to underperform the S&P 500 by three per cent a year. And now if you take the costs out, the three per cent manager wins by one per cent and the other manager loses by five (assuming a two per cent cost).”

Bogle also believes that the uptrend in the US markets could reverse if the earnings growth of US companies starts to fade. The US market returns in 2018 are still positive even as most other markets have seen deep corrections.