[A Sip of Books] Does Stock Market History Repeat?... Common Pitfalls Experts Often Fall Into

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John Bogle, founder of Vanguard Group and the pioneer of the first index fund, dedicated his life to restoring common sense in investing. He emphasized that obsession with monetary success inevitably leads to miserable outcomes. In fact, in 2008, Warren Buffett wagered with a hedge fund called Prot?g? Partners that Vanguard Group’s low-cost S&P 500 index fund would outperform most hedge funds over ten years?and he won. The Vanguard index fund Buffett chose recorded approximately 126% returns from January 1, 2008, to December 31, 2017, while the hedge funds selected by Prot?g? Partners averaged only 36%. Bogle explored the value of life beyond merely making money and criticized the excessive prioritization of money and success in capitalist society. He posed the question to our society: “How much more do you need to feel enough?”

My concern is that far too many people implicitly assume that the history of the stock market will repeat itself. However, the only valid perspective for forecasting the market’s future is not history but the sources of stock returns (dividends and earnings growth) discussed in Chapter 2. (...) It is obvious that experts are often wrong. We might wonder what foolish expert would predict future returns based on past returns. Yet, the world is full of investment advisors and analysts who do exactly that. Consider the popular Monte Carlo simulation. The problem with this technique is that it relies solely on past returns, ignoring the sources of those returns. (This method mixes monthly stock returns and uses probabilities to generate infinite sequences and combinations.) Of course, speculative returns (returns derived from fluctuations in price-earnings ratios) tend to converge to zero in the long run. And corporate earnings growth generally aligns with the nominal growth rate of our economy. (No surprise!) However, the dividend yield that matters is not the historical average but the actual dividend yield at the time of forecasting future stock returns.

My fifth dream is to empower investors with control over their funds. Only through this can we fulfill the explicit requirements of the 1940 Investment Company Act, the federal law regulating the fund industry. According to this law, mutual funds must be established, operated, and managed for the benefit of investors, not advisors or underwriters. Yet, despite the noble intent of the law, today’s fund industry does not operate according to these principles. To be frank, funds are established, operated, and managed for the benefit of advisors. So what should be done? Educating investors is painfully time-consuming, and time is money. The conglomerates dominating today’s market will not easily accept declining returns on equity nor willingly return profits to customers. Therefore, the only precise way is to demand control over mutual funds as prescribed by law?namely, to form an independent board of directors that is primarily accountable to the shareholders who elected them.

Where is the wealth that can evaluate your life? I am still searching for the ultimate answer to this question. But we must never allow such wealth to judge life. In a materially abundant country like the United States, it is easy to fall into this trap. The Greek philosopher Protagoras said 2,500 years ago that “Man is the measure of all things.” Today, I worry that our society is becoming one where “wealth is the measure of man.” In fact, there is a ridiculous saying that the person with the most toys at death is the winner. Such a measure is absurd, superficial, and self-destructive. Although the world’s resources are limited, people rush to spend them on trivial and fleeting things. Literally billions of people scattered across the globe cry out for aid, relief, safety, compassion, education, and opportunity.

Therefore, while I acknowledge that wealth, fame, and power are the three attributes of success, I still reject the traditional ways of defining these elements. I have come to believe that wealth should not be measured by money, fame not by public praise, and power not merely by control over others. In fact, monetary wealth is too shallow a measure of success. If we accept money as the measure of success, then “money becomes the measure of man”?what foolishness is that? So how should wealth be measured? How about by a life well lived? What about a family firmly bound by love? Who is wealthier than someone who fulfills their calling by benefiting humanity, fellow citizens, community, or neighbors? That is not to say money is unimportant. Who among us does not want enough money to fully enjoy our lives and freedom? We want safety from poverty, the ability to choose our careers, money to educate our children, and a comfortable retirement. But how much wealth is needed for these goals? We should question whether the enormous wealth held by society’s top tier is a blessing or a disaster.

John Bogle’s Wealth Mindset | Written by John Bogle | Translated by Lee Geon | Evening Moon | 360 pages | 20,000 KRW