VALLEY FORGE, Pa. (TheStreet) -- Last year capped a decade that ended as tumultuously as it started. Stocks, as measured by the S&P 500 Index, made no progress. Bankers at Goldman Sachs (GS) - Get Report, JPMorgan (JPM) - Get Report and Bank of America (BAC) - Get Report are getting billions in bonuses even after Wall Street imploded. Low interest rates, which led to the real estate bubble and financial crisis, are at historic lows once again.
Bogle: 'It's highly likely that stocks will outpace bonds in the decade that just began.'
When things are at their craziest, you can always count on Jack Bogle for common sense.
A lot has happened in the decade since the
Common Sense on Mutual Funds
including two bubbles and the so-called Great Recession. Now the index-mutual-fund guru is back with an updated 10th anniversary edition of his investment classic. Bogle, 80, spoke with
about the highs and lows of the past 10 years, and what he expects in the coming decade.
Stock prices finished the decade below where they started, so it was a tough 10 years for investors. What happened?
What happened over the last 10 years were two things, and one of which we have never encountered before. The 17% returns we had over the two previous consecutive decades, the '80s and the '90s, were born largely on ascending price-earnings multiples. If the price-to-earnings ratio goes from 8 to 16 in one decade, and then to 32 in the next decade, that accounts for 7% per year of that 17% return. So the market was driven by the revaluation of corporate America and that just can't keep recurring at those rates. I projected in the original book that the price-earnings multiple might get down below 20, which is exactly what it's done, so that was fairly predictable.
But what made the decade quite so bad is that we then had a major recession or light depression at the end of 2008 to 2009 which is still with us. That coming with the market so highly valued meant that earnings growth was much less than what we might have expected. So looking out from here, I think we can look for better earnings growth. And dividend yields are back in decent territory but not great. We started this decade with a 1% dividend yield, and that's an important part of investment returns, and now the dividend yield is around 2.25%, so a higher dividend yield contributing to future growth. So I think it's highly likely that stocks will outpace bonds in the decade that just began.
A lot of people have been blamed for the problems of the past decade, including former Federal Reserve Chairman Alan Greenspan, Wall Street CEOs and the ratings agencies, just to name a few. Whom do you blame for the financial crisis?
There is an old saying that victory has a thousand fathers but defeat is an orphan. In this case, victory has no fathers. Victory is an orphan. And defeat has a thousand fathers.
Yes, Alan Greenspan's rollback of regulation. Yes, the abject failure of the ratings agencies. Yes, the opportunism of our investment managers. Yes, the creation of insanely complicated and risky financial products by Wall Street. Yes, the grossly excessive compensation to financial executives for building the earnings of their firms by creating house of cards. All of these are to blame. But it even goes beyond Wall Street's problems to that of our society. We have a "now" society. We have a crisis of "ethics." The ethics of our society have broken down. In sum, we all played a role in this.
Are we on the right path now? Has America learned its lesson?
No. Unequivocally not. The long overdue reforms being discussed in Washington do not go nearly far enough, in my opinion. We need protection for consumers. Canada has a financial structure similar to ours except it has a consumer-protection board, which would prevent banks from giving people mortgages if they have no ability to pay them back. To get that done has been very difficult. Also, Senators (John) McCain and (Maria) Cantwell have proposed a return of the Glass-Steagall Act, and that's gotten nowhere but it is long overdue. We should have banks behave as banks and not as investment banks or hedge-fund managers.
Do you agree with President Barack Obama's war on the banks?
War is a strong term, its politically charged. But I believe he is on the right track. We have to reform the financial business. I have written a lot about this. The financial-services industry just takes too much out of the financial return of investing. To me, investing is a pretty simple thing. Businesses create returns, not stocks. And stocks are the way we capture those business returns. And what goes on in the stock market day after day is like a casino where one investor tries to outsmart his fellow investors. What kind of way is that to run a railroad? It's a good way to run a casino or the state lottery. But it's the triumph of the folly of short-term speculation over the wisdom of long-term investing. That's why I favor a transaction tax of some kind to slow down speculation.
That's not going to be very popular on Wall Street.
They hate it. But let's suppose the stock market creates a 10% return. And the value of the stock market today is around $13 trillion so 10% is $1.3 trillion. By my numbers, Wall Street and the mutual fund industry take $600 billion a year out of that return. That's half of the return. So the only way investors are going to get their fair share of the $1.3 trillion is to reduce the costs and get the casinos out.
Who makes sense to you on Wall Street? Whom should people be listening to for the next decade?
The first two are obvious.
is the pillar of integrity. He does things right. And while he does not index, he believes passionately in indexing and talks about it all the time. And the other is Paul Volcker. Now these are older guys, but they are speaking from positions of total independence and integrity and with no vested interests.
I'm also a great admirer of Bill Gross. He may not always be right, and they tend to take some unusual risks out there. But they have paid off. My hat is off to Bill Gross for the job he's done on fixed-income management.
In the political scene, there is one giant that stands head and shoulders over everyone else and that's our president, Barack Obama. He is trying to rise above the chaotic fray in Washington. We have a stalemate in Washington and not much is going to be done that needs to be done. So can he summon his character, his articulation, his integrity to rise above the political fray in Washington? We will see. But I don't believe he has a rival anywhere who could be president besides him. And I'm a Republican, actually.
China was not our rival a decade ago when you wrote your book. How does China fit into the next 10 years?
China is going to be a dominant force in the next 10 years. They have a mysterious system, and they are walking a tight and perilous line in terms of government intervention and government control of lending, and government control of information. I don't think this Chinese system can be sustained in this information age without major changes. What that will do to the Chinese economy -- I don't know. It's clearly growing rapidly in the cities but in the country, which is the major part of their population, it is still quite impoverished. But at some point it's all too likely, maybe around 2020 or 2025, that China will have a greater GDP than the United States. I don't think it will have a greater stock-market capitalization, however.
But China is a big worry. They are buying a lot of U.S. stocks and when you think about the trillions of dollars in federal debt, the ownership of American enterprise is somewhat fragile.
Who really knows? It's a mysterious place. But I think, sooner or later, every nation puts its own interests first. That's the way the world works, and it's hard to say that's not the way it should work. And, at some point, they will realize that all that hacking and spying is counterproductive to their society and economy. Like the title of the book, I am arguing that common sense will lead them more in the direction of free markets and democracy than today. I think they will be a freer nation a decade from now.
-- Reported by Gregg Greenberg in New York.
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.