Part V

ON SPIRIT

I have absolutely no doubt that the principles expressed in Part IV will serve the investment side of the mutual fund industry, and, in turn, serve mutual fund investors. However, given the way fund management companies currently operate, these principles are unlikely to serve the needs of the business side of this industry. Readers may have been surprised to see a discussion of that issue in a book about commonsense principles of investing, but it is of crucial importance for investors.

Part V takes an even more surprising turn. I discuss my own business philosophy as it is reflected in the entrepreneurship, leadership, and human values that I have tried to manifest in the creation of the Vanguard Group, under a structure that is antithetical to the mutual fund industry norm. But while our growth provides evidence that such a structure can function effectively, history tells us that a more enlightened governance structure may not be enough. Life insurance companies, for example, maintained their mutual structure for 100 years or more, but seem to have long since abandoned the principles of mutuality, and are now formally abandoning the structure itself.

Will structure carry the day in the mutual fund industry? No. More than structure will be needed. The business of managing other people’s money—no matter how an enterprise is structured—must be focused on the human beings it serves and the human beings who provide those services. A mutual structure may be necessary to provide both optimal services and maximum returns to shareholders, but it is not sufficient. Mutual funds must also be mutual in spirit. Organizational principles are involved, but so too are human principles.

My discussion of these almost universally overlooked aspects of providing financial services—services of stewardship and trust—requires that I mention Vanguard by name. Until now, I have emphasized the investment principles on which I based Vanguard—commonsense principles such as conservatism, indexing, and low cost, which I regard as the very essence of sound long-term investing. But I have mentioned our corporate name only when it was absolutely necessary to do so. The next three chapters ignore that constraint. Forewarned is forearmed.