Jack Bogle: Beware of This One Mistake 99% of Investors Make

At least start off. I mean, I'd say start off an index fund period. And for five years, don't do anything else and then look around and see what's happened in the five years. See how it felt when the market dropped fifty percent. See how it felt when it came back. Those five-year periods are going to be very different for one investor than another, but, uh, because they're all, you know, over time.

But then when you get there, five percent in the funny money account, is it appropriate, in your opinion, for an individual to buy stocks? Is there a level of expertise or interest, an amount of time you should have, or capital? Or should it be a side for volatility in a base portfolio of index funds? That last sentence captures it best, and that is, you should have a serious money account. I might even call it a boring money account where you put money in the stock market index fund and balance it out a little bit with some bonds, depending on age and so on.

And don't look at it. Don't look at it for 50 years. Don't peak. But when you retire, open the envelope. Be sure a doctor is nearby to revive you. You'll go into a dead family; you can't believe there's not much money in the world. And that's where we fool ourselves. That's a serious money, boring money account. We have a gambling culture here in this country. Maybe every country does. You see it in its finest manifestation, or maybe I say worst manifestation in the lottery. State lottery, Las Vegas contributes its share, the racing... the races contribute their share, the track, and always, just gambling where a whole lot of people bet their money and a whole lot of people take their money out, and the croupier wins the three, three to twenty percent, whatever you put a dollar in here.

So, I'd say have a funny one if you have a gambling instinct, and most people do. At least start off. I mean, I'd say start off with index fund, period, and for five years don't do anything else. And then look around and see what's happened in the five years. See how it felt when the market dropped fifty percent, see how it felt when it came back. And those five-year periods are going to be very different for one investor than another, but, uh, because they're all, you know, over time.

But, uh, then when you get there, five percent in the funny money account. What would have happened to Warren Buffett if he had done that? He would have a tremendous amount of value; would not have been created by his understanding and ability to evaluate a business for investment. Well, name two. Well, Longleaf, you mentioned Longleaf. Dodging—they don't have the sensational returns. They may probably have something about poor returns, but maybe a little bit below par from time to time.

So, um, and then don't forget, in Warren's case, he wasn't running a mutual fund. The mutual fund is a badly structured business for investment management. We say, and this is the way it has to be, really, you can take your money out whenever you want, and you gotta be ready to put it in whenever you want. So you ride on these waves of optimism and good performance, and the money comes in up here, and then reversion of the mean, which is a big part of my recent book—a big part of the final chapter of my recent book called Clash of the Cultures.

And it's happened everywhere. It's happened in Magellan Fund, it's happened in T. Rowe Price Growth Fund, it's happened in our old Ibest fund, it's happened in Fidelity Trend Fund that Johnson happened to have run. It happened in CGM, all the hot funds, they're all in there for the last 25 years, and they all look like this. If you put them over each other, it looks like the Himalaya mountains. The reversion of the mean is a constant pattern for the individual.

I'm just going to poke around here a little bit, just to get your full philosophy. For the individual, it's unlikely that you're going to hit the mountaintop of the Himalayas with your portfolio. So, you may not have to ever see the other side of the mountaintop unless you have so successfully invested that your personal account is moving up in a billion dollar... let's say you bought Magellan before you... before it was for sale, which is where that record begins, by the way. There's a lot of phoniness in this business, uh, and you're... but you're going to enjoy the mountain, and you're not going to know it's a mountain.

But when that mountain gets up there, anything; my God, I found the holy grail! Now, I'm really going to go all in, and now I'm going to go all out. So, there's a lot of behavioral kind of stuff—not to use too fancy a word—in the mutual fund industry. Interestingly enough, Tom, there is no behavioralism in the field of stocks generally. How could that be? That is because I'm a dumb behavior. The guy that buys my stock from me is a smart behavior.

We offset each other. I mean, it's not as if—I can make a behavioral mistake without somebody else making a successful behavioral thing on the other side of the trade. So, you know, I think we take a lot for granted. We listen to all these theories, and big, old boring indexing is the answer. Have you ever bought individual stocks and/or actively traded funds? And if so, what do you look for in those investments?

Well, I... when I came into the business, I had friends in the brokerage business. I bought this and that and the other thing, and then I had a broker and he would tell me this was good, get out of that and get into that. And it wasn't that they did badly, which was, of course, what they did, but it was... I just couldn't stand to have my phone ring when I was trying to do my work. So, I haven't owned individual stocks since, let me say, 1960. I don't know exactly... a long, long time.