| | | |  | Essentially, John Bogle's position in "The Battle for the Soul ofCapitalism" is that investors -- what he calls the true owners of majorcorporations and mutual funds -- are being robbed blind by corporationand mutual fund company managers. He refers to it as the shift fromowner's capitalism to manager's capitalism.
Most of us have heard about the investors (and true owners) of Enron,WorldCom, and other corporations being fleeced by the likes of Ken Lay,Jeff Skilling, and Bernie Ebbers. Bogle contends that the same type oftheft practiced by these men is going on in the mutual fund industry.He doesn't point to just a few bad apples, either -- he fingers theindustry as a whole.
To quote Bogle, "Simply put, fund managers have arrogated to themselvesan excessive share of the financial markets' returns, and left fundinvestors with too small a share." Elaborating on that point, Boglewrites, "With today's dividend yields on stocks at about 1.8 percent, atypical equity funds expense ratio consumes fully 80 percent of afund's income."
As I put it on the air that day, "Eighty percent is a bit greedy."
A Money Vacuum
To illustrate his point, Bogle writes that "while $10,000 invested inthe stock market [in 1985] earned a profit of $109,800 [over 20 years],the average mutual fund investor earned a profit of just $29,700.Together, the cost penalty, the timing penalty, and the selectionpenalty consumed an amazing 73 percent of the profit available simplyby buying and holding the stock market itself, leaving the average fundstockholder with a mere 27 percent of the total."
In other words, if investors had invested in the stock market back in1985, they would have made $109,800 dollars over 20 years. That'sincluding the ups and downs of the market. During the same period,investors who put the same $10,000 in mutual funds made only $29,700.
That's what prompted me to tell the radio interviewer, "That's whymutual funds suck. Not only do they suck 80 percent of the dividends,in come cases they suck another 73 percent of other gains frominvestors."
I believe my comment was bleeped.
Caveat Emptor
Reading "The Battle for the Soul of Capitalism," you begin tounderstand Bogle's motivation for writing it. As the radio hostaccurately told me, "John Bogle loves mutual funds." If that financialplanner had read the book, he'd understand that that's precisely whyBogle is so frustrated.
Mutual funds are a beautifully conceived investment vehicle designed toprovide long-term wealth for passive investors. Sadly, over the years,fund managers have been both legally and illegally ripping offinvestors who count on their investments to provide a college educationfor their kids or retirement security for themselves. It seems thatmutual fund managers, like the managers of our major corporations, havesold their souls for fast money, and have left the investors behind.
I agree with Bogle's call for more governance from fund managers. Ifthe rip-off continues, it'll be harder to raise money from investors tofund our entrepreneurs and businesses. Many U.S. investors are alreadyinvesting overseas rather than at home.
Yet regardless of whether or not our capital market leaders tighten therules and fund managers regain their capitalistic souls, I remind youof a timeless bit of investing wisdom: "Let the buyer beware."Ultimately, it's your money, so be very careful about what you investin and who you invest with. | | | | | |
