16
I recently attended the annual Bogleheads Confer-
ence, where I had the opportunity to sit down with
Vanguard founder Jack Bogle. We discussed the
current market environment and trends in indexing,
among other topics.
Christine Benz:
Last night, Congress resolved the
debt-ceiling impasse, but just for a few months. Does
it seem to you that we will just lurch from crisis to
crisis? I’d like to talk about what the impact is, in your
mind, for investors.
Jack Bogle:
It’s pretty obvious that we are now just
setting ourselves up for the next crisis. On the other
hand, maybe, just maybe, our less-than-statesman-
like politicians will have gotten the message here,
which is, what is the point of what we’ve gone
through? What is the point in trying to hold the admin-
istration and the president hostage to a few people’s
ideas about what must be done—and in this case,
Obamacare. It’s just not a good way to run the country.
And they lost finally—the people who took that
position—finally lost.
Now you can learn from your losses; you should
learn more from your losses than your victories. This
is probably more optimistic than I ought to be, but
maybe you can bring some order out of the chaos, just
because we’ve gone through this experience.
I hope so.
Benz:
I know that you generally believe that most
investors should try to tune out this sort of noise
in relation to their portfolios, but we’re at a juncture
right now where stocks don’t appear especially
cheap, bonds don’t appear especially attractive.
Let’s start with stocks. I’d like to hear your thoughts
on how investors should be thinking about their
equity portfolios, given that we’ve had a tremendous
runup in stock prices.
Bogle:
Well, we have had a wonderful runup—no
question about that—but it’s been pretty much
because corporate earnings have been maintained
at such a good level.
There’s a lot of cheating going on, if I may say so,
Christine, in calculating price/earnings multiples. The
traditional way of looking at them was your reported
earnings in the last
12
months relative to the current
price. And those reported earnings, of course, all
those bad things have happened in them—so-called
nonrecurring things, write-offs, bad decisions that
were made in the past. And that’s obviously what
earnings really are. If you make a bad decision,
it’s got to come through the P
&
L somewhere along
the way.
So, past
12
months’ reported earnings [was tradition-
ally used in calculating P/E], and yet Wall Street
looks at the next
12
months of operating earnings—
operating earnings without all those bad things. So
is the P/E maybe
20
or
21
, or is it
14
or
15
, depending
on which you’re using? The truth is, and probably
a reasonable way of looking at it, it’s probably some-
where in the middle. That’s not usually the way I
feel about things. So I’d say there is not much sign
of excessive valuation.
Corporate profits are very high relative to
GDP
, actu-
ally higher than they have ever been in the recorded
history of [this] great nation. So, I don’t think we can
expect them to grow anymore. I’d look for some soft-
ness there. But not a lot of danger ...
Benz:
At current valuations you think ...
Bogle:
Put it this way: a
2%
dividend yield, which is
roughly where we are today, and possibly—maybe
a little optimistically—
5%
earnings growth from here,
that would be a
7%
what I’ll call investment return,
a fundamental return—the real return, not real in the
inflation sense, but the actual return earned by cor-
porate America. And that looks to be around
7%
; it
could be a point or two more.
Bogle on Bonds, Rebalancing,
and Washington
Portfolio Matters
|
Christine Benz
Welcome to our
new feature,
Portfolio Matters,
by Christine Benz,
Morningstar’s director of
personal finance. We’re
thrilled to have Christine
help you manage the port-
folio challenges that you
face each month.Christine
will address personal
finance issues with prac-
tical solutions through-
out the year.
