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John Bogle
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John Bogle is an investor with an evangelistic twist. He sold over 800,000 copies of his various books about Mutual Funds, donating the royalties to charity. One theme running throughout his writing is that no unmargined investment manager can focus exclusively on equities in his portfolio and expect to have a higher return than the index itself, whether he is an index investor, or is more activist as a portfolio manager. About five or ten percent of managers do beat the index each year, but they are general managers of small funds, and generally cannot repeat the performance consistently. It's a very useful message since the conclusion seems to follow that if a manager simply imitates the index, he will surely reduce his research costs, and will therefore almost surely have consistent final results which beat the average competitor. Ultimately, the best results will be found in long-term index funds with the lowest costs. That's a conclusion both logical and borne out by results; no amount of denial can refute the logic of it.
However, it is also possible to take it as a challenge. What approaches might be tested, to see if they can beat it? Mr. Bogle himself admits success might defeat a front-runner, by attracting so many investors the portfolio is forced to limit itself to large-size when the supply of frisky small stocks gets used up. If the small newcomers out-perform the blue chips, average big-fund performance will suffer by comparison with small boutique funds. Indeed, small-fund indices often display a 2% outperformance, compared with large-cap indices. It would probably be useful to consider closing a large fund to new purchases when the average size of its investment is forced to contract downward. Since such a reaction benefits the investors but not the managers, the right to close or reopen funds should be transferred to the shareholder investors.
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Common Sense on Mutual Funds
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New Tools. It is common for mutual funds to limit or forbid short-selling, as well as buying on margin. That's obviously less risky than engaging in such activity, but most investors understand greater returns require greater risk. That seems to be the approach adopted by hedge funds, although the success of it is often shrouded in secrecy for good reason, and has nothing in common with other stockmarket talents like demanding high fees. The main limitation on hedge fund competition comes from the excessive fees (2% annually, regardless of profits, plus 20% of profits themselves, and a five-year lock-in.) In effect, such activities can be simulated by funds controlled by a single university or pension fund. A fund with a large float of incoming deposits can treat the float as a virtual loan, and an organization which needs to mortgage a large construction project can treat the construction loan on the building as a virtual mortgage on the stock portfolio. It might further be argued that other organizations without a stock portfolio are overweighted in fixed assets whenever they take out a mortgage. Closed-end investment trusts seldom leverage overtly, but they usually are sold at a 10-20% discount to net asset value, and thus are effectively leveraged. Warren Buffett, the greatest stock market manager in history, owes much of his success to buying an auto insurance company outright and then using its float from premium deposits as if they were part of his portfolio. He tends to buy entire companies; their dividends disappear. In special circumstances with 1% prevailing interest rates, it can be difficult to make the case that borrowing is too risky for long-term investments; the issue now is liquidity.
And one final warning. When too many people get overleveraged, by whatever method, they generally sense the approaching dangers but often are restrained from selling by the tax consequences they would experience. But when it looks as though everybody sees the same thing, there may be a rush for the door. It's called a crash. So don't you dare buy on margin? Let me do it, and together we'll blame the speculators.
REFERENCES
| Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition: John C. Bogle ISBN: 978-0470138137 | Amazon |
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New Jersey Constitution of 1947
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The wording of the 1844 State of New Jersey Constitution concerning its Senate, is short and simple:
Article IV. Legislative. Section I.
1. The legislative power shall be vested in a Senate and General Assembly.....
Section II.
1. The Senate shall be composed of one Senator from each County in the State, elected by the legal voters of the Counties, respectively, for three years.
A century later, the state held another Constitutional Convention, in which the relevant sections in the 1947 Constitution concerning the Senate were revised:
Section II
1. The Senate shall be composed of forty senators apportioned among Senate districts as nearly as may be according to the number of their inhabitants as reported in the last preceding decennial census of the United States and according to the method of equal proportions. Each Senate district shall be composed, wherever practicable, of one single county, and, if not so practicable, of two or more contiguous whole counties.
By amendment effective December 8, 1966, an electoral commission was appointed to respond to changes in the census; search engines are currently not explicit about the senatorial redistricting between 1947 and 1966:
Section III
1. After the next and every subsequent decennial census of the United States, the Senate districts and Assembly districts shall be established, and the senators and members of the General Assembly shall be apportioned among them, by an Apportionment Commission consisting of ten members, five to be appointed by the chairman of the State committee of each of the two political parties whose candidates for Governor receive the largest number of votes at the most recent gubernatorial election. Each State chairman, in making such appointments, shall give due consideration to the representation of the various geographical areas of the State. Appointments to the Commission shall be made on or before November 15 of the year in which such census is taken and shall be certified by the Secretary of State on or before December 1 of that year. The Commission, by a majority of the whole number of its members, shall certify the establishment of Senate and Assembly districts and the apportionment of senators and members of the General Assembly to the Secretary of State within one month of the receipt by the Governor of the official decennial census of the United States for New Jersey, or on or before February 1 of the year following the year in which the census is taken, whichever date is later.
2. If the Apportionment Commission fails so to certify such establishment and apportionment to the Secretary of State on or before the date fixed or if prior thereto it determines that it will be unable so to do, it shall so certify to the Chief Justice of the Supreme Court of New Jersey and he shall appoint an eleventh member of the Commission. The Commission so constituted, by a majority of the whole number of its members, shall, within one month after the appointment of such eleventh member, certify to the Secretary of State the establishment of Senate and Assembly districts and the apportionment of senators and members of the General Assembly.
3. Such establishment and apportionment shall be used thereafter for the election of members of the Legislature and shall remain unaltered until the following decennial census of the United States for New Jersey shall have been received by the Governor.
Article IV, Section III, paragraphs 1, 2, 3 amended effective December 8, 1966.(Emphasis added)
Two "new" revenue sources, which we need to discuss, are really quite old. But widespread use of third parties to pay medical bills diminished consumers' attention to their value. Patients become like Queen Victoria, indifferent to what it costs to run a household, even forgetting how to do it. We fit some details into the discussion of Health and Retirement Savings Accounts, but they are capsulized here for descriptive convenience, in an era when personal management has largely moved from junior high schools to the curriculum of graduate business schools. In the process, we have forgotten a timeless message: never let an agent manage your checkbook for you.
1. Compound Interest. Aristotle complained it gets more expensive to repay debts, the longer you take to pay them off. That's the debtor's viewpoint, of course. The creditor's view of it is, the longer the better. But restated as a neutral mathematical comment, an essential feature of compound interest is that both principal and effective interest, rise over time. To repeat: income rates (and/or borrowing costs) from a debt, increase with duration. About half the capital of every major corporation consists of debt, so even owning common stock has some of the quality of being a debtor. Furthermore, this effect is seen sooner, with quite small rises in nominal interest rates. A graph of sample interest rates demonstrates this simple truth with greater clarity:
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As a result of centuries of haggling and experimentation, most modern loans charge interest rates of 5-15%. That's an enormous swing, but only for long-term investing. It makes little difference whether this range of rates reflects the supply of money in the economy, or the vigor of the economy, or something else macroeconomic. So long as rates remain steady, or even if they are changing at a slow steady rate, borrowers and lenders can reach an agreement and negotiate a long-term loan. If there is uncertainty about rates in general, they may rise precipitously, so all borrowers know to keep loans as short as possible, and creditors quickly raise rates when they must cover longer time periods.
The moral is, as you become older you tend to become a creditor, so adjust your mentality from borrowing short to lending long. For centuries, nobody thought much about this invisible equilibrium, because life expectancy was stable at the Biblical threescore and ten -- and in fact only twoscore. But suddenly around 1900, life expectancy at birth began to rise, and starting in 1950 it entered a steep climb from forty-seven to eighty-four years. Thirty-year loans remained the extreme, however, because the proportion of those who would chisel you doesn't seem to change much. Stagecoach robberies went away, but inflation took their place. Underneath it all, governments prefer to expand the currency supply rather than raise interest rates, printing repayments rather than repaying them. Interest rates are, as they say, volatile. Within limits, they are also malleable.
Nevertheless, the expansion of longevity created a new opportunity. The long-term investment was more profitable for everybody. The upturn in interest rates was relatively negligible for the first forty years of compound interest, but progressively quite handsome after that. In practical terms, buy-and-hold became a better strategy. The difference of a tenth of a percent means little in a ten-year loan, but it can create a stupendous profit in a ninety-year loan. One suspects the interest rate on a bank loan has more to do with the debtor's working life (the period available for confident repayment) than his life on earth. In this book, we concentrate on the creditor, whose lifespan should not affect interest rates as much as it affects his opportunity to enjoy money, so long as he has some of it. But a long life without money at the end of it is a fearsome prospect, indeed.
2. Equity Index Investing. The stock of only one company (General Electric) was a member of the Dow-Jones Industrial Average a century ago. By definition, the DJII always contains thirty leading stocks; others have been replaced many times. It takes a long time to become a household name, and by the time an investor has heard the name, it is often ready to decline. Active investing, meaning sell one to buy another, was once quite necessary for success. Unless fading leaders are replaced by new leaders, however, the average would fall behind, But it is easy to see the average has moved steadily upward, so it must be actively managed by someone.
If you are careful to avoid the spongers and the fly-by-nights, the investment world is rapidly changing, mostly for the better. To some extent, this reflects a flight from the bond market which governments deal with, but most investors now think total market index funds are safer. When the Federal Reserve forces banks to buy its bonds through "Quantitative Easing", the supply of bonds goes up and so the price goes down. "Passive" investing is certainly easier for the small investor to deal with, and investors are responding.
Later we will try to take advantage of one obvious flaw in such investing. If a single investment represents thousands of companies, investor control is diluted to meaninglessness. The only effective control over management then resides in the shares which are not held by funds; and even there, more and more corporate control rests with insiders and managers. The effect of such a trend is not merely that manager salaries are inflated, but the corporation becomes less responsive to the consumer public. Its legitimate business plan is to make a profit, but to make a short-term profit at the expense of long-term profits is not so defensible. Because of the corporate shield, many corporations borrow too much, risk too much, and collapse too often, but their managers often walk away with riches. If Health and Retirement Savings Accounts really get popular (at last count, they only had thirty billion dollars invested), its counterweight of stock ownership should help restrain consumer prices. Nevertheless, experience seems to show that competition between companies has been a more effective guardian of public interest, than stockholder control of individual competitors.
HSAs collect money when it is not needed, spend it decades later when it is badly needed, and invest the money during the interval, tax-free. The longer the interval, the more it earns. And with careful application of the principles of compound interest and index investing, the earnings are considerably magnified. If your Christmas Savings Fund earns more money, it reduces the effective cost of what you buy. But if you are careless, investment fees and inflation will ruin everything. So that, in sum, is another message.
Originally the "lower counties" of Pennsylvania, and thus one of three Quaker colonies founded by William Penn, Delaware has developed its own set of traditions and history.
Start in Philadelphia, take two days to tour around Delaware Bay. Down the New Jersey side to Cape May, ferry over to Lewes, tour up to Dover and New Castle, visit Winterthur, Longwood Gardens, Brandywine Battlefield and art museum, then back to Philadelphia. Try it!
Millions of eye patients have been asked to read the passage from Franklin's autobiography, "I walked up Market Street, etc." which is commonly printed on eye-test cards. Here's your chance to do it.
In 1751, the Pennsylvania Hospital at 8th and Spruce was 'way out in the country. Now it is in the center of a city, but the area still remains dominated by medical institutions.
Grievances provoking the American Revolutionary War left many Philadelphians unprovoked. Loyalists often fled to Canada, especially Kingston, Ontario. Decades later the flow of dissidents reversed, Canadian anti-royalists taking refuge south of the border.
