Don't Count on It!: Reflections on Investment Illusions, Capitalism, "Mutual" Funds, Indexing, Entrepreneurship, Idealism, and Heroes [Hardcover]

This book covers a lot of ground, with 35 chapters addressing seven main themes over a total of 586 pages. If you are already very familiar with John Bogle (who has written many books and delivered countless speeches addressing investment topics over a very long career in investments), then there is precious little in this book that you don't already know. However, if you are an investor who isn't quite that familiar with Bogle, then you may find this anthology of his major essays and speeches over the last decade to be a very helpful introduction to important investment-related topics of today.

Without divulging too much detail about the book, here's a relatively short guide to Bogle's topics. The seven parts of the book address:

1. Investment illusions. For example, as Bogle makes clear mutual funds taken as a whole simply cannot earn the markets' returns--because mutual funds have their own expenses. Indeed, Bogle's simple formula--net returns to investors = gross returns on assets minus the costs of operating the financial system--is pretty obvious, but one that investors tend to forget. Another illusion cited by Bogle is that mutual fund investors actually earn the returns of their funds. That is, if the XYZ mutual fund earns an average annual return of 8% over a 10-year period, chances are that XYZ's shareholders didn't achieve that 8% annual return, due to the well-documented tendency of investors to add to their investments when they feel optimistic (and markets are high) and reduce their investments when they feel pessimistic (and markets are low). Simply put, buying high and selling low reduces one's return.

2. The failure of capitalism. Bogle is actually a champion of capitalism, not some anti-capitalist critic. However, Bogle maintains that self interest and free markets alone won't necessarily guide an economy effectively. Rather, he says, there is a need for a broad fiduciary standard applicable to market participants, so that corporate managers, brokers, etc. put the interests of their shareholders and clients before themselves. (Some would argue that sufficient fiduciary standards already exist, but Bogle doesn't buy that argument.)

3. What's wrong with "mutual" funds? For starters, Bogle observes that "mutual" typically refers to an entity that's owned by its participants. In that case, only the Vanguard Group of mutual funds, Bogle maintains, is truly "mutual." Surprise, surprise--Bogle helped found the Vanguard Group.

4. What's right with indexing? Traditional indexing has taken a lot of flack in recent years, so Bogle (who helped start the indexing movement) fights back. He says the intellectual theory of indexing is not dependent on the notion of "efficient" markets, but rather on the concepts of low cost, diversification and tax efficiency. I admire Bogle as an honest and passionate advocate for investors, but I should note that not everyone will agree about the importance of the efficiency argument to the concept of indexing.

5. Entrepreneurship and innovation. I am taking more of your time than I planned, so I'll become briefer. In this part of the book, expect yet more of Bogle's characteristic idealism concerning the determinants of innovation.

6. Idealism and the new generation. Here we go again. More of Bogle's passionate arguments.

7. Heroes and mentors. We all owe a lot to those who have inspired and guided us, and here Bogle describes four men who were influential to him: Walter Morgan, Paul Samuelson, Peter Bernstein and Bernard Lown.

In conclusion, if you are an investor who is concerned about the economic and investing environment in which you participant, and if you are not already familiar with John Bogle's thoughtful commentaries on a host of relevant topics, then this book would be well worth your careful consideration.

My recent journey to Bogleheads 9 was special for one and only one reason: the opportunity to see Jack Bogle enter the room to a standing ovation of Bogleheads and speak his mind, as he always does. His god-given sportscaster's voice is truly something special--and it is always worth the price of the trip to listen to him. (If Jack had ever decided to do play-by-play for the Phillies, there is no doubt that he would have ended up in a different sort of Hall of Fame).

The commute back from Philly to Chicago only made the latest Boglestock meeting even more memorable, since it gave me a few uninterrupted hours to read his new book, in the way he suggested, by moving directly to the chapter of interest, rather than reading the book as a continuum. I'll let you find your own personal gems, but let me share a few that I enjoyed.

No one speaks more eloquently to Americans--particularly young Americans--in my view than Bogle. I encourage everyone, whatever your age, to read Chapters 26-30, first to yourself and then to your children. His commencement speeches, packed with sage advice, are well crafted homilies for America's youth. I'm glad they are published in a book for all to read. Part VII, "Heroes and Mentors," is also deeply personal, an acknowledgement of 29 heroes and mentors who changed his own life for the better. The obit for Dr. Bernard Lown, who at one point served as Jack's doctor, also gave me a window into a part of Jack's personal journey that I did not know about. Dare I say that Bogle writes as well about all things non-investment as he does the investment world itself?

As poet Wallace Stevens once noted, "to get to the universal, you must go through the local." How else can I explain how poetic and moving it is to see a man of Bogle's success spend the time to thank Jim Harrington in the Princeton Athletic Association Ticket Office for giving him a break or two, or Taylor Larimore, a member of the Greatest Generation who served as a soldier in the Battle of the Bulge in World War II, for starting the Bogleheads? We all have heroes of this sort in our life, but how many of us take the time to give thanks? No man is an island, entire of itself, as John Donne wrote and Jack Bogle reminds us.

As a card-carrying member of Bogleheads, I was most intrigued by one central theme in the book, what Bogle calls "The Perils of Numeracy". I agree numbers and statistics can often lie. But I want more numbers as an investor from people I can trust, not less. I personally find some of the numbers and information on Vanguard's own website to be quite useful, for example, when I'm trying to get a handle on the risks I'm taking in my own 401(k) portfolio. I often go to other sources such as financialengines.com, which I find useful as do-it-myself investor. Some of these numbers are extremely helpful, even if, as Jack warns, there's an inherent risk to using them. I'd like to think the numbers coming from a reliable source, such as Vanguard or Financial Engines, are much more useful to me than numbers spoon fed by less trustworthy charlatans in the investment world.

* Full disclosure: For those who might question a review done by an editor at Wiley (publisher of this particular book), please note I did not personally work on this book. I simply share my thoughts as a Boglehead, who continues to enjoy virtually everything Jack writes or says -- speech, book or otherwise. Some day, my kids will inherent my personal library of Bogle books and be very happy they did.

When I write reviews I do not usually read the other reviews, but in this case there were a limited number of reviews and they were EXCELLENT. I therefore will not cover the same ground but come at John Bogle's work from a different angle if you will permit me.

By way of disclosure I am a market professional, with 40 years of experience working with billions of dollars and performing an advising function which includes not just wealthy individuals but heads of state and finance ministers. Having said that, it is my belief that this book is extraordinary. It is a breath of fresh air in an industry of incompetence. You will learn more from reading, and re-reading this book than any course you could probably take at Harvard or Wharton in portfolio analysis, and valuation - been there, done that.

Keep in mind that Wall Street is by definition the worse managed industry in America, and whose basic function is to judge the managements of other companies in other industries. For 200 years they haven't gotten it right, and my fellow Wall Streeter's are so CONFLICTED between their need to make money, and their fiduciary responsibilities that they fail in both. John Bogle is the only author I know that lays it out for you. Warren Buffett is always polite politically to Washington. He does not want to make waves just like the jovial uncle he wants to portray himself as. Bogle on the other hand has a desperate need to get the truth out there, and he writes as he speaks. This book is his voice, no question about it.

Only John Bogle will hit you in the face with the truth on every topic that he writes. There are no punches pulled here. You can start to read this book anywhere you like. Throw darts at the pages and start there, just be prepared to be enlightened. Come at with an open mind, and you will receive a financial education like no other. I do recommend that you read the first 20 pages or so to set the tone, before moving around in the book.

Here are just a few fabulous revelations you will learn:

* Bogle often speaks about the high cost of financial intermediation. This simply means, what are the commissions and fees you are paying on top of the actual investment you are making. As an example in private real estate transactions I look at, the sales charge can be 15%. This means if you put up $100,000, only $85,000 is actually being invested in the product. It's a lot of ground to make up.

* The master talks about 2007 in particular because the numbers are available for that year. The actual commissions and take-outs for all investments in the United States that year was $528 billion, which is equivalent to 3.8% of Gross Domestic Product. Now the question you have to ask yourself is whether or not Wall Street added $528 billion of value added advice to the investment process. The answer is no way.

* Again in 2007, companies reported $1.67 trillion in operating earnings whereas reported earnings were 1.17 trillion. Where did $500 billion in earnings go? It simply disappeared in accounting gimmicks sanctified by independent public accounting firms, and condoned by government regulators. Now if there is that much leeway in the how you can report your numbers, the whole deck of cards is stacked against the investor.

* The author speaks of the absence of normal fiduciary standards, and he could not be more right. The answer seems to be to make billions, and wind up paying fines of a hundred million or so for conflicts. Then change the name of the game and make billions again. Only in America my friends can this happen, and Bogle lays it all out with the unvarnished truth of how the game is rigged against the average investor.

CONCLUSION:

Is there hope, of course there is. You need to educate yourself, not by reading the popular press that will simply earn you the same returns as the masses get. Actually, you will lose principal with that approach. You must study the works of the masters, and I cannot think of a better place to start than with this new book by legendary investment professional John Bogle. Good luck in all your investments and thank you for reading this review.

Richard C. Stoyeck

SUPPLEMENT:

I'm sitting in a private club in Manhattan recently and a brilliant young lady I mentor tells me she just got her Masters from NYU about two years ago. She got all A's and one B. I ask her what did she get the B in, and the answer is banking. I inquired as to the problem. She tells me that she wrote a thesis on how the banks were taking on too much risk at the time. This is early 2008. The professor tells her that the basis of her paper isn't plausible because the banks have professional risk management teams that are averse to taking on too much risk.

As you know the financial markets blew up shortly thereafter. Here's what you need to take away from this. Economists know a thousand ways to make love, but they have never been with a woman. You as an investor have to learn your own truth yourself about what you are investing in. It will take time and effort but the rewards are substantial. Good luck.

› Go to Amazon.com to see all 15 reviews  4.4 out of 5 stars