To my knowledge, Bloomberg’s Michael Regan is the first reporter to get Jack Bogle’s reaction to this past August’s research note from Sanford C. Bernstein calling passive investing “worse than Marxism.”
MR: You’ve read the report?
JB: I glance at anything favorable to indexing; I pore over anything unfavorable. You don’t need people to tell you you’re right all the time. You need people to tell you that you’re wrong. But this was an absurd paper. First, take the simple part. The stock market has nothing—n-o-t-h-i-n-g—to do with the allocation of capital. All it means is that if you’re buying General Motors stock, say, someone else is selling it to you. Capital isn’t allocated—the ownership just changes. I may be an investor, you may be a speculator. But no capital goes anywhere. This is basically a closed system. You have new IPOs and whatnot, but they’re very small compared to this vast thing we call a market, which is now around $24 trillion. The allocation of capital? That’s just nonsense.
MR: And the correlation of stocks?
JB There is some evidence that the correlation of stocks, which has always been very high—something like 65 percent, maybe 70 percent now—could very well be caused by indexing. But so what? The efficient market theory ignores the fact that for every buyer there’s a seller. I don’t know why we can’t get this through people’s heads. Cliff Asness is the one who got everything right. He’s one of the smartest guys in the business. One of his headlines was, “Indexing Is Capitalism at Its Best.” I’ll let him be the defender of that, but this Bernstein note was just a sensational thing. It’s a bit like asking your barber if you need a haircut: He has a vested interest in this.
Go read the whole Q&A at some point today: