Why This Book Is Unique

Jack Bogle has written a book on investing unlike any investment book that I have ever encountered, because he discusses sensitive matters that other authors ignore. I hesitate to speculate on why these topics receive such short shrift elsewhere, but I suspect that other experts have horizons that are more limited than Bogle’s, or they have less concern for their readers’ best interests.

People often forget that Bogle is much more than an investment professional who is deadly serious about how individual investors should manage their hard-earned wealth. He is first and foremost a fabulously successful businessman who has built one of the great mutual fund empires with skill and determination, always driving it in the direction of the vision that inspired him when he launched forth on this adventure many years ago. Readers of this book are therefore treated to a unique and unvarnished exposure of the nature of the mutual fund world and how it affects their pocketbooks.

Despite all the high-minded talk we hear from the corporate spin-masters, conflict of interest between seller and buyer is inherent in our economic system. Jack Bogle’s goal was to build a business whose primary objective was to make money for his customers by minimizing the elements of that conflict of interest, but at the same time to be so successful that it would be able to continue to grow and sustain itself. That has been no easy task. The complexity of the job that Bogle set out for himself, however, has enabled him to look at the competition with a very special kind of eye. One of the loud and clear messages in this book is that he is less than pleased with what that eye sees.

We must look at the investment management industry (yes, it is an industry even more than it is a profession) as a business and within the framework of the economic system as a whole. The investment management business is extraordinarily profitable. As such, it responds to the iron law of capitalism that capital will flow to those areas where the expected return is the highest. Over the past 10 years, the number of mutual funds has increased from 2,710 to 6,870, and the number of investment managers has exploded from 1,260 to 5,810. On the other hand, investment management defies the rest of the iron law of capitalism, which is that the very process by which high returns attract new capital inevitably brings down the rate of return as new competitors strive to take market share away from the old. Joseph Schumpeter, in a famous aphorism, referred to this process as “creative destruction.” It is the essence of why our economic system has been so successful and why, despite its many glaring flaws, it continues to command such wide public acceptance.

Investment management firms never heard of such a thing. The growth in the number of managers far exceeds the rate of growth in the number of customers they serve. Willy-nilly, more and more people enter the field without in any way diminishing the profitability of those who have established themselves. Occasionally a startup will fail to make it or an established firm goofs up in some horrible fashion and disappears from the scene, but the great mass of investment managers go right on earning a return on their own capital that most other industries can only envy.

Bogle’s skill in dispensing uncommon wisdom about how to invest and how to understand the capital markets would be reason enough to read these pages. But the big message in this book is that what happens to the wealth of individual investors cannot be separated from the structure of the industry that manages those assets. Bogle’s insight into what that structure means to the fortunes of the individuals whose welfare concerns him so deeply is what makes this book most rewarding. It is not only fun to read: It has a big payoff as well.