November 11

Today’s Letter from Grandma Sylvia

Dear Reader,

Our topic today is about revolutions.  Revolutions of many different kinds happen throughout history.  One happened recently in the investment world.

Another revolution happened many years ago and gave us our voting rights.

Yes, I voted and now some new and some returning members will be in the US Congress.  It was good to see how many people came out to vote here on a rainy day.  Whatever your beliefs, aren’t we fortunate to be able to go to the polls to cast our votes?  Sometimes freedom to vote is something we take for granted.

What do you think?

Big Picture

It was the American Revolution between 1765 and 1783 that led to the freedoms we have today in the United States, including the right to vote.

The Revolution was about the vision of a new type of country and of a belief in a new model of government.

“You never change things by fighting the existing reality.
To change something, build a new model that makes the existing model obsolete.”
― Buckminster Fuller

A Story

When I started to invest, I didn’t know what to buy, so I bought stocks in companies I knew, like AT&T and McDonalds.  Every time I bought a stock, I had to find information about the company to tell if it was a good buy.  I didn’t want to buy stock in a company that was going bankrupt.  At one time, I bought some stock in GE because GE had always been a good company.  Now, the stock is not a good buy because the company seems to be going downhill.

Only later did I find out I could have invested without so much study and with a safer approach.  That’s the topic of today’s letter to you.

Today’s Topic: John C. Bogle and the Investment Revolution

In the investment world, there’s been a revolution.  It’s changed the way many people think about investing. Whether you are a beginning investor, invest with a financial advisor, or invest on your own, I believe you will want to know about this revolution.

To me, it’s like the revolution in understanding the motions of our sun and earth.  Before the work of a scientist named Copernicus, even the best thinkers thought the sun went around the earth.  That’s why people said words like sunrise and sunset.  They thought the sun rose, traveled around the side of the earth we see, and then it set to travel around the other side.

Today we all know the earth revolves around the sun.  That was an enormous change in the way we thought about the sun, earth, and the heavens.

In the investment world, many of us believed that professional financial managers could do better in investing our money than we could.  It’s true that some of these managers can do that, but now we are finding that it’s not an overwhelming number of managers, especially when all the fees that these managers and their companies charge are deducted.

What John C. Bogle realized is that if we don’t bother picking individual stocks but buy the whole stock market, we will get our fair share of market returns.  He developed index funds that do just that.  Then he founded Vanguard, the company that is owned by investors who buy Vanguard index funds, like you or me.  The costs of these funds are among the lowest, if not the lowest, in the investment field.  (See my Letter on Cash to find Vanguard’s web site and telephone number.)

It means ordinary investors like you and me can buy index funds with low expenses and follow along in the market without having to continually study what stocks or other things to buy.

You can imagine that Mr. Bogle was ridiculed by his colleagues and by the big financial investment firms because they had huge amounts of money to lose if his approach worked.  Now, it’s been proven that his ideas work and across the industry his ideas are being copied by others.

It is strange that only extraordinary men make the discoveries, which later appear so easy and simple. –

Georg C. Lichtenberg. physicist

Once you understand that this way to invest gives you your fair-share of the market, you can relax and just invest in index funds.

Then it becomes interesting to see how many people spend considerable time trying to beat the market and to impress you and their colleagues with how smart they are. A few are smart and a few have made great buys (although we usually don’t hear of their losses).  For some, it’s a hobby and they enjoy it.

Now in his 80s, Mr. Bogle must have great satisfaction in knowing he helped change the entire investment industry to help the ordinary investor like you and me.

Important Ideas

¬♦ John C. Bogle revolutionized the investing world with low-cost index funds.

¬♦ You and I can invest in inexpensive index funds without worrying about picking individual stocks.

¬♦ Index funds will give us our fair share of market returns.

*****

Today I’m going shopping for groceries.  I have a list that helps me remember what I need to buy and a budget that helps me stay focused.  Aren’t we fortunate to have grocery stores with food on the shelves?  Wish you were here.