If you asked experts in the financial industry what single individual has done the most in the past 50 years to influence how Americans invest, you’d get a wide-ranging list of names—but one name you’d see over and over would be John Bogle. What follows are excerpts from his 1951 college thesis, submitted to Princeton University, including parts of Chapter 1, “Advantages to the Individual Investor,” and the conclusion. In it, you can see the original seeds of many of the ideas and concerns that would later drive him to build the Vanguard Group and become an outspoken advocate for the best interests of investors.
That the investment company has fulfilled its functions to the individual investor appears manifest. The very fact that the number of shareholders has trebled in the last ten years seems to indicate that they have found it a suitable means to accomplish their investment ends.1 It will be the place of this chapter to show what advantages the investment company gives the investor, using particular examples wherever practicable.
Several things must be made clear, however. First, investment companies have generally tried to encourage the purchase of their shares by investors, not savers. Many funds point to the need for adequate cash reserves, insurance, and perhaps additional savings or government bonds before placing the remainder in a mutual fund. This chapter, then, will be oriented toward those individual investors who can afford investment, which by its very nature entails a certain amount of risk.
Second, the funds can make no claim to superiority over the market averages, which are in a sense investment trusts with fixed portfolios; e.g., the stocks composing the particular “average.” They state, rather, that their performance must be judged against what the individual could have done at the same cost over the same period, with the same objectives as has a given fund.
Third, it is evident that the open-end investment company cannot attain perfect fulfillment of all the objectives stated below, but makes available the most adequate combination of facilities for the individual investor; that is, it offers the package with the greatest total amount of management, diversification, income, liquidity, and dollar appreciation. There will be no claim in this thesis that the management of the investor’s capital will produce better results than that of an investment counsel who handles large accounts individually; that the diversification will be sounder than that of insurance companies under legal list requirements; that the income will be as stable as that of government bonds or as high as that from a given common stock; that the liquidity will be as great as that given by a savings bank; nor that the share will appreciate in value with the cost-of-living as a closed-end leverage share does. The only claim will be that the investment company offers the best combination of these facilities to the individual investor.
In offering to the investor a greater degree of diversification and more expert management than he could otherwise obtain, investment companies present a wide variety of fund types with diversified objectives, from which the investor may choose. He may pick the balanced fund, which attempts to plan its portfolio with regard to current conditions, especially by shifting its ratio of “aggressive” common stocks and “defensive” bonds; or the common stock fund, which maintains a largely fully invested position with a view toward selecting seasoned issues; or the bond fund, which maintains a portfolio solely of bonds. If the investor prefers to exercise a greater degree of management, he may choose the specialty fund, of which there are two types: the industry type, in which a share is backed by a diversified list of issues in an industry of the investor’s choice; and the objective type, in which the investor picks his objective and participates in a diversified list of stocks most likely to fulfill it. Thus, the mutual fund offers the investor a wide variety of shares from which to choose, to suit his objectives of either capital appreciation, capital preservation, or reasonable income, or varying combinations of each.