Skeptical Bogle Weighs in on Whitney, the Markets and Our 'Slippery Slope'

Jack Bogle, the founder and former chairman of mutual-fund giant Vanguard, has seen his share of ups and downs during a long life and career. He was a child during the Great Depression. He survived a heart transplant. And, of course, he started one of the world’s great fund companies and became one of the foremost advocates for the average investor.

This is why the 81-year-old Bogle doesn’t take doomsday predictions and other fads too seriously, whether it’s Meredith Whitney’s meanderings about wide-spread municipal-bond defaults (which months after her statement still hasn’t happened), or the notion that just after the financial crisis in 2008 investors should stay out of the markets for good (which would have been one of the great investing mistakes in recent memory).

Bogle says he’s done so well by remaining “a skeptic,” “a contrarian” and at times, “kind of a loner.” And it’s a mindset he believes investors must adopt as well.

“You have to have confidence in the long-run and you have to know when the markets are idiotic,” Bogle said in an interview with FOXBusiness.com.

But that doesn’t mean Bogle is a raging bull, either. Over the years, Bogle has consistently warned about excesses on Wall Street and its culture of putting its interests above those of the average investors. He was an early critic of Wall Street's speculative behavior, which led to the financial crisis of 2007 and 2008.

The promotional excesses of Wall Street is the main reason he and the fund company he founded have been such tireless advocates of the index fund as a cheap, and efficient way for investors to play the market. Unlike managed funds sold through brokers, the index fund offers a fully-disclosed basket of stocks based on an index, like Vanguard’s popular Vanguard 500 Index Fund, which tracks the S&P 500 index.

As Bogle has been pointing out for years, investors don’t have to pay the salary of a fund manager who more often than not can’t beat the broad indexes in the first place. Marketing costs are low because managers don’t have to sell an investing gimmick, just a general belief on the direction of a basket of stocks.

In a wide-ranging interview with FOXBusiness.com, Bogle pulls no punches -- about Whitney, the excesses of Wall Street which may be creating yet another bubble, or his ideas on how improve the landscape for smaller investors.

One question our readers and viewers would love to have answered is where Jack Bogle thinks the market is going -- and where you have your own money?

Reasonable expectations are that we will have returns of 7-8% in this decade in equities, and that bonds will yield 3-4% in the same time period. The odds are very good that stocks will do twice as well as bonds. So why not commit everything to stocks? We don’t know what will happen. Also as you get older, you should put less in the stock market because you should be looking to preserve wealth rather than make it. As I aged, I went 65% into bonds, and in the last decade, with the bond market appreciating, that changed my allocation to closer to 80% in bonds. I am not some genius. I don’t trade specific stocks and I try not to get carried away with the emotions of the day.

What do you think of the state of Wall Street right now?

Wall Street is changing -- and not for the better -- because we’re in a culture of speculation. I would like investments to be the star show, and not in today’s cameo role. Furthermore, we’ve changed from a financial industry that was about stewardship for the small investor to it being all about marketing, selling and speculating. And that leads the average investor down the wrong path.What’s important to note is that the stock market doesn’t create value -- companies create value. If a stock is overvalued, it’s good for the seller, bad for the buyer, and we are trading at volume levels that cannot be sustained. Individual investors should stay out of the game.What is the solution then?

There are two solutions. First, a federal standard of fiduciary duty so mutual fund managers access the companies they invest in purely in the interest of their shareholders. Mutual funds are joining the speculation game. When you are a speculator, you own the stock for 15 minutes and don’t care about the governance of the companies in the portfolio. They’re just looking for short-term gain.Second, we need accounting reform; accountants should report to shareholders, not boards of the companies that hire them, which is a conflict of interest. Washington isn’t doing anything on this issue.What do you think about the Federal Reserve’s quantitative easing measures to inflate the economy by purchasing bonds, which is designed to drive down long-term interest rates and inject money into the banking system -- and hopefully the stock market and the economy?

Not sure it really helped the bond market, as interest rates did go up after that. I’m not happy with the Fed helping to raise asset prices. Stocks have a certain inherent value, and if you raise that value by printing money, they will eventually come down. The government has no business getting into stock valuations. It’s a very slippery slope.Are you concerned the U.S. will go into default with the increasing debt burden and the debate over the debt cap?

There is always a chance the U.S. could go into default. And there’s always hope that we are able to handle this before it gets that far out of hand. But right now we can’t seem to get any movement out of the Congress. It’s a question of political will. We’ll be fine if Washington has the guts to change the situation.

What do you think of the insider trading investigation launched by the Justice Department and the prosecution of hedge fund billionaire Raj Rajaratnam? Doesn’t it show the markets are rigged against the individual investor?

Are hedge funds really that much smarter or are they just getting their information another way? The lines are very clear and most of us know what they are. It’s pretty disgraceful. But investors don’t have to play this game of speculation. That’s why we have the index fund, which is an obvious idea, the idea of owning the entire stock market. Your investment is the intrinsic value of U.S. corporations -- that is where returns really get created. Not in short-term trading where having inside knowledge might matter.What is your opinion of exchange-traded funds, which offer investors an easy way to buy commodities like oil, gold and silver? As you know, silver ETFs have gotten crushed recently.

ETFs have been the greatest marketing idea of the last 10 years, but whether it’s a great investment idea remains to be seen. The evidence is not so good so far. Investors chase returns, and I don’t think it’s a good idea to invest in a small corner of the market, like silver. It’s not like buying a business and instead it’s a gamble in a casino.

Speaking of casinos, state and cities governments are facing massive budget deficits. That means less money to pay holders of their bonds. What do you think of the massive muni-bond default forecast by prominent analyst Meredith Whitney, who said there might be between 50 and 100 this year? So far her prediction isn’t holding up.

I think Meredith Whitney paints with too broad a brush and I think painting with that broad brush has tarnished that industry. And I think if you get out of munis it’s at your peril because states and cities are taking measures not to default and these bonds offer great tax advantages (munis are free of state, local and federal taxes). At Vanguard, we diversify to soften the impact of a possible default. Each of our portfolios owns 1,000 municipalities. No more than 1% investment in any single bond.What do you think of the role of the ratings agencies in the markets? It’s pretty clear that by slapping all those triple-A ratings on risky bonds, they abetted the financial crisis. But the rating agencies still exist, with the government still designating the one’s that can exist.

At Vanguard, we rely on our own internal ratings instead of S&P and Moody’s. In the market, the ratings agencies’ reputation, simply put, is mud. It’s obviously very difficult to predict the market but I think they should be forced to adopt a more demanding business model, a model where customers pay (the big ratings agencies are paid by bond issuers, thus they have an inherent conflict of interest to issue higher ratings). Also, they should not have the governmental franchise they seem to have. You still have to be approved by the SEC. Bottom line: Institutions should do it themselves. This is too important to outsource, but if you can’t do homework yourself, the rating agency Egan Jones is a good example of how a ratings agency operates independently. (Egan Jones isn’t paid by bond issuers; instead it charges investors for its research)You’ve been retired from Vanguard officially since 2000, and you are still involved in the company, though you haven’t always had a great relationship with the new management. You obviously don’t have a problem letting people know how you feel, which has ruffled feathers in the board room. How is your relationship with Vanguard management now?

William McNabbe has been CEO of Vanguard since 2008, he has a company to run, and I am the father of it. I created this company. He should not, and doesn’t need to, spend time with me. But if he needs something I am always around. The man who succeeded me, Jack Brennan, hasn’t talked to me in many years. But of course, if I ran into him, I would say hello.