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JOHN C. BOGLE is the founder of the Vanguard Group of Mutual Funds and President of its Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as chairman and chief executive officer until 1996 and senior chairman until 2000. In 1999, Fortune magazine named Mr. Bogle as one of the four "Investment Giants" of the twentieth century; in 2004, Time magazine named him one of the world's 100 most powerful and influential people, and Institutional Investor presented him with its Lifetime Achievement Award. In 2010, Forbes magazine described him as the person who "has done more good for investors than any other financier of the past century." Mr. Bogle graduated from Blair Academy cum laude in 1947 and Princeton University in 1951, magna cum laude in economics. In 1999, he received the University's Woodrow Wilson Award for distinguished achievement in the nation's service.

Don't Count on It! is Mr. Bogle's ninth book. His earlier books include Common Sense on Mutual Funds, The Battle for the Soul of Capitalism, The Little Book of Common Sense Investing, and Enough.

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In his Foreword, former Federal Reserve vice-chairman Alan S. Blinder writes, "America's vaunted financial system let us down big-time during the raucous decade of the 2000s." In Don't Count on It!, John C. Bogle a man Dr. Blinder refers to as "the conscience of Wall Street" identifies modern capitalism's flaws, explains how we arrived at this economic crossroads, and examines how we can begin to repair the damage before it's too late.

Don't Count on It! presents an anthology of Bogle's latest thinking, focused on how numbers deceive us into seeing things as other than they really are. He also presents a cogent analysis of the chinks in the armor of a financial system that has failed to live up to the responsibility owed to its individual and institutional investors.

Read and learn from the wise counsel of Vanguard's founder about how we deceive ourselves into accepting illusory and evanescent numbers rather than focusing on fundamental and intrinsic reality. Bogle argues that we confuse the market of real investing with the market of expectations, disregarding the beauty of simplicity in favor of the wizardry that creates complex "products" that serve Wall Street at the expense of its clients. Specifically, Bogle discusses:

• The unconscionably high costs of financial intermediation
• The disgraceful failure of money managers and agents to abide by what should have been traditional fiduciary standards
• The unfortunate consequences of the dominance of short-term speculation over long-term investment

The subjects of Bogle's anthology go well beyond the investment markets, as indicated by the seven sections of Don't Count on It! Investment Illusions, The Failure of Capitalism, What's Wrong with "Mutual" Funds, What's Right with Indexing, Entrepreneurship and Innovation, Idealism and the New Generation, and Heroes and Mentors.

His book encourages readers to better understand our complex financial system, to examine it, to debate it, to challenge it, and to fulfill our duty to ask simple questions and demand answers that are understandable, intelligent, and, above all, wise.

Aus dem Klappentext

In his Foreword, former Federal Reserve vice-chairman Alan S. Blinder writes, "America's vaunted financial system let us down big-time during the raucous decade of the 2000s." In Don't Count on It!, John C. Bogle--a man Dr. Blinder refers to as "the conscience of Wall Street"--identifies modern capitalism's flaws, explains how we arrived at this economic crossroads, and examines how we can begin to repair the damage before it's too late.

Don't Count on It! presents an anthology of Bogle's latest thinking, focused on how numbers deceive us into seeing things as other than they really are. He also presents a cogent analysis of the chinks in the armor of a financial system that has failed to live up to the responsibility owed to its individual and institutional investors.

Read and learn from the wise counsel of Vanguard's founder about how we deceive ourselves into accepting illusory and evanescent numbers rather than focusing on fundamental and intrinsic reality. Bogle argues that we confuse the market of real investing with the market of expectations, disregarding the beauty of simplicity in favor of the wizardry that creates complex "products" that serve Wall Street at the expense of its clients. Specifically, Bogle discusses:

• The unconscionably high costs of financial intermediation

• The disgraceful failure of money managers and agents to abide by what should have been traditional fiduciary standards

• The unfortunate consequences of the dominance of short-term speculation over long-term investment

The subjects of Bogle's anthology go well beyond the investment markets, as indicated by the seven sections of Don't Count on It!--Investment Illusions, The Failure of Capitalism, What's Wrong with "Mutual" Funds, What's Right with Indexing, Entrepreneurship and Innovation, Idealism and the New Generation, and Heroes and Mentors.

His book encourages readers to better understand our complex financial system, to examine it, to debate it, to challenge it, and to fulfill our duty to ask simple questions and demand answers that are understandable, intelligent, and, above all, wise.

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Don't Count on It!

John Wiley & Sons

Chapter One

Mysterious, seemingly random, events shape our lives, and it is no exaggeration to say that without Princeton University, Vanguard never would have come into existence. And had it not, it seems altogether possible that no one else would have invented it. I'm not saying that our existence matters, for in the grand scheme of human events Vanguard would not even be a footnote. But our contributions to the world of finance—not only our unique mutual structure, but the index mutual fund, the three-tier bond fund, our simple investment philosophy, and our overweening focus on low costs—have in fact made a difference to investors. And it all began when I took my first nervous steps on the Princeton campus back in September 1947.

My introduction to economics came in my sophomore year when I opened the first edition of Paul Samuelson's Economics: An Introductory Analysis. A year later, as an Economics major, I was considering a topic for my senior thesis, and stumbled upon an article in Fortune magazine on the "tiny but contentious" mutual fund industry. Intrigued, I immediately decided it would be the topic of my thesis. The thesis in turn proved the key to my graduation with high honors, which in turn led to a job offer from Walter L. Morgan, Class of 1920, an industry pioneer and founder of Wellington Fund in 1928. Now one of 100-plus mutual funds under the Vanguard aegis, that classic balanced fund has continued to flourish to this day, the largest balanced fund in the world.

In that ancient era, Economics was heavily conceptual and traditional. Our study included both the elements of economic theory and the worldly philosophers from the 18th century on—Adam Smith, John Stuart Mill, John Maynard Keynes, and the like. Quantitative analysis was, by today's standards, conspicuous by its absence. (My recollection is that Calculus was not even a department prerequisite.) I don't know whether to credit—or blame—the electronic calculator for inaugurating the sea change in the study of how economies and markets work, but with the coming of the personal computer and the onset of the Information Age, today numeracy is in the saddle and rides economics. If you can't count it, it seems, it doesn't matter.

I disagree, and align myself with Albert Einstein's view: "Not everything that counts can be counted, and not everything that can be counted counts." Indeed, as you'll hear again in another quotation I'll cite at the conclusion, "to presume that what cannot be measured is not very important is blindness." But before I get to the pitfalls of measurement, to say nothing of trying to measure the immeasurable—things like human character, ethical values, and the heart and soul that play a profound role in all economic activity—I will address the fallacies of some of the measurements we use, and, in keeping with the theme of this forum, the pitfalls they create for economists, financiers, and investors.

My thesis is that today, in our society, in economics, and in finance, we place too much trust in numbers. Numbers are not reality. At best, they're a pale reflection of reality. At worst, they're a gross distortion of the truths we seek to measure. So first, I'll show that we rely too heavily on historic economic and market data. Second, I'll discuss how our optimistic bias leads us to misinterpret the data and give them credence that they rarely merit. Third, to make matters worse, we worship hard numbers and accept (or did accept!) the momentary precision of stock prices rather than the eternal vagueness of intrinsic corporate value as the talisman of investment reality. Fourth, by failing to avoid these pitfalls of the numeric economy, we have in fact undermined the real economy. Finally, I conclude that our best defenses against numerical illusions of certainty are the immeasurable, but nonetheless invaluable, qualities of perspective, experience, common sense, and judgment.

Peril #1: Attributing Certitude to History

The notion that common stocks were acceptable as investments—rather than merely speculative instruments—can be said to have begun in 1924 with Edgar Lawrence Smith's Common Stocks as Long-Term Investments. Its most recent incarnation came in 1994, in Jeremy Siegel's Stocks for the Long Run. Both books unabashedly state the case for equities and, arguably, both helped fuel the great bull markets that ensued. Both, of course, were then followed by great bear markets. Both books, too, were replete with data, but the seemingly infinite data presented in the Siegel tome, a product of this age of computer-driven numeracy, puts its predecessor to shame.

But it's not the panoply of information imparted in Stocks for the Long Run that troubles me. Who can be against knowledge? After all, "knowledge is power." My concern is too many of us make the implicit assumption that stock market history repeats itself when we know, deep down, that the only certainty about the equity returns that lie ahead is their very uncertainty. We simply do not know what the future holds, and we must accept the self-evident fact that historic stock market returns have absolutely nothing in common with actuarial tables.

John Maynard Keynes identified this pitfall in a way that makes it obvious:* "It is dangerous to apply to the future inductive arguments based on past experience [that's the bad news] unless one can distinguish the broad reasons for what it was" (that's the good news). For there are just two broad reasons that explain equity returns, and it takes only elementary addition and subtraction to see how they shape investment experience. The too-often ignored reality is that stock returns are shaped by (1) economics and (2) emotions.

Economics and Emotions

By economics, I mean investment return (what Keynes called enterprise), the initial dividend yield on stocks plus the subsequent earnings growth. By emotions, I mean speculative return (Keynes's speculation), the return generated by changes in the valuation or discount rate that investors place on that investment return. This valuation is simply measured by the earnings yield on stocks (or its reciprocal, the price-earnings ratio). For example, if stocks begin a decade with a dividend yield of 4 percent and experience earnings growth of 5 percent, the investment return would be 9 percent. If the price-earnings ratio rises from 15 times to 20 times, that 33 percent increase would translate into an additional speculative return of about 3 percent per year. Simply add the two returns together: Total return on stocks 12 percent.

So when we analyze the experience of the Great Bull Market of the 1980s and 1990s, we discern that in each of these remarkably similar decades for stock returns, dividend yields contributed about 4 percent to the return, the earnings growth about 6 percent (for a 10 percent investment return), and the average annual increase in the price-earnings ratio was a remarkable and unprecedented 7 percent. Result: Annual stock returns of 17 percent were at...