Podcast Episode 14 – John Bogle Pulls NO Punches And I LOVE IT!

Robert Shiller’s CAPE ratio for projecting future returns is a great tool to be aware of. (Remember it’s a TOOL, though. Not a guarantee!)

CAPE stands for Cyclically Adjusted Price Earnings which ‘smooths’ out previous earnings and prices relative to inflation. The reason it’s important is that it doesn’t get too caught up in one specific year to gauge valuations.

For instance, in 2006 earnings were through the roof relative to prices. That would indicate that stocks were valued LOW and thus a great buying opportunity…right?

IN 2009 earnings dropped like a brick in water relative to prices and thus P/E ratios were through the roof, indicating stocks were WAY overvalued and should be sold, right?

WRONG! On both fronts.

And this is why the CAPE is such a good tool, but it takes away some of the year over year anomalies that transpire and instead levels things out over time.

The problem with CAPE though is that its been quite high, for going on a decade now, relative to historic norms. Thus, when Shiller revisits other times the CAPE has been this high, we get scary results.

.9% REAL returns for the next decade on average.

Will that come to frution? Anyone’s guess.

But what happens if we use one of the CAPE’s biggest crtic’s, Jeremy Siegal, numbers. Even then we get around a 3.5% Real return for the next decade.

Spit in the middle and we’re looking at 2%! YIKES!

Look, I’ve no clue what’s going to happen over the next 10 years. You don’t either. But I do know that you need to really be focused on things you can control.

1. EXPENSES -especially investment expenses. If we are going to get low returns, you simply can not afford 1% a year in investment fees. It’s simply not worth it.

2. Debt: Pay it off!

3. Social Security: DELAY, DELAY, DELAY!!! That’s 8% a year increase which you should not expect to get in the markets. Oh, Social Security also grows WITHOUT risk too!

4. Understand your cash flow. You need to know where your $ goes especially if you’re about to retire.



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John Bogle, founder of Vanguard, is one of the hero’s in all the investment world.

If it were not for him, investors would be losing well more than the billions they already are due to management fees and trading costs.

Here’s his book that changed the course of my investing life:

Bogle has claimed for many years that the investment business EXTRACTS wealth. And that it does nothing to add value.

That’s a very threatening statement, of course. But it’s no longer controversial.The facts are that the vast majority of actively managed accounts do not, and can not, outperform the market averages with any consistency.

When you think this through, it makes perfect sense. What is the average record of an NFL team?  The answer is 8-8.  Are there some teams that do better than 8-8? Yup. Are there some that do worse? Yup.  But the average will always be 8-8.

Now let’s say each team that spends over $100 million a year in expenses forfeits a game.  Thus, those teams start the season at 0-1.  What’s the likelihood those high expense teams are going to beat the averages?

Not very high, actually.  Some may on any given year. But it’s impossible to know that in advance.  In fact, after a few years of this new  numbers we’d find that average record for teams that spend over $100 million is  probably 7-9, a full game behind the league average.

Now this isn’t a precise anecdote.  It’s actually WORSE in the investment industry.  At least a high spending football team is theoretically spending that money on the best player salaries and may be rewarded with their open checkbook.

In the investment world it’s a sure bet that the MORE the cost of the fund, the WORSE the fund does relative to market averages!  This has been proven year over year and it’s because of John Bogle we all know this now. Wasn’t always like that, though. Bogle had many-an-arrow aimed at him. But he withstood and the world is a much better place for his persistence.

In this podcast I point out a few of the highlights from his interview:

  1. Considering Social Security and other sources of guaranteed income as a bond.
    1. Moshe Milevsky’s work discusses this a lot.
  2.  Current state of the markets.  High valuations???
  3. How much should financial advice cost?
  4. Taking on some of the largest titans in the industry…BY NAME!  And lots more!

Should be informative for you.

Here is link to the video: https://www.youtube.com/watch?v=VBdE0nV94Q8


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