Bogle on Valuations, the Economy, and Where to Invest Now

In a recent interview with MarketWatch, John Bogle says he thinks the market “probably has it about right” in terms of current valuations, but adds that investors should expect slower growth than they’ve grown accustomed to when the economy does turn around.

“I would guess the market probably has it about right,” Bogle said. “I would guess that we have seen the low for the year and maybe the low for this cycle. … I’m no expert, but as far as I can tell the economy is leveling off right now and may have a little further to go down, but when it comes back, the old 3% real growth which is the rate the economy has grown at, well I think that is too aggressive. We’re looking at much slower economic times.”

Bogle also offered some candid comments on a number of other issues, including:

The “death” of buy and hold: “I am really concerned when I hear people say buy-and-hold is over. Investors, as a group, are buy-and-holders. We own the stock market, all of us together, we buy and hold it. As a group, we all have the same asset allocation. So when you hear someone say ‘It’s a stockpicker’s market,’ well if you picked well, then I picked ill, and as a group it’s the same.’

“Fund managers are speculating, not investing. Turning over 100% … it just makes no sense. … So if you have a billion-dollar fund, you are turning over $750 million, which means $1.5 billion in trades per year on a billion-dollar fund. It’s not going work out in the favor of the investor. We trade 10 billion shares a day, with each other. And we lose. It’s lunacy. The croupier wins. The day the market has no volume — when we can say ‘There were no trades on the New York Stock Exchange today as all investors were satisfied with their positions’ — that’s the day I want to see before I go.”

Which markets to invest in: “I just think you don’t need to go beyond U.S. stocks. You have the country with the greatest securities markets, the greatest protection of ownership rights, it’s your own currency, your assets are valued the same way you earn your income. We are a very technologically advanced society, probably the world’s technology leaders still.”

The fund industry and the financial crisis: “I’d say we did a bad job. Embarrassment is right. Annoyance, even anger, that the industry turned out not to be this wonderful stewardship business, but a great big salesmanship business of new products.We had absolute return funds — heaven help us all — and then a choice of funds that offer 1%, 3%, 5% or 7% above the Treasury bill, and all kinds of things that just can not work.

“We are confined as a group to whatever returns the stock and bonds market will give us. … a combined return of 5% for bonds and 8% for stocks, so about 6.5% for your portfolio. There are people saying ‘That’s not enough to reach my retirement goals, I have to do something to earn more.’ That’s like saying ‘I lost the first seven races, so I am betting everything I have on a longshot in the eighth.’ Feel free to do it, but know that there’s about one chance in 40 of it doing what you want and paying out. That leaves the 39 other chances to worry about.”

Market ups and downs: “You have to be prepared to take the bad times with the good. … If you are going to be with an active manager and have found someone who has the values you believe in and who is in the investment business and not the marketing business, then go with it but be prepared to lose one year out of three. I think most investors can’t handle that; they are their own worst enemies.

“But advisers don’t help this, I think. They hold a magnifying glass up to the worst of things. You say ‘God I have to get out of here,’ and they say ‘Go now’ instead of saying ‘Stay the course.'”

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