Why Jack Bogle Changed Investing Forever

Warren Buffett once proclaimed that Vanguard founder Jack Bogle “has probably done more for the American investor than any man in the country.” Buffett’s praise appeared to affirm his longstanding appreciation for the index-tracking funds that Bogle helped bring to the masses. But there was actually more to it than that. Just days earlier, one of Bogle’s funds had helped Buffett win a $1 million wager.

The Bet

At Berkshire Hathaway’s 2006 annual meeting, Buffett boldly claimed that an index fund tracking the U.S. stock market would deliver greater returns over one decade than any hedge fund manager. He invited attendees who disagreed to bet against him.

Buffett’s love for index funds was well known by this time. The Oracle of Omaha had been advising investors for decades to choose cheap passive index funds that blindly buy the whole market instead of expensive actively managed funds seeking to do better. Once fund managers get paid and trading costs are included, he said, the returns will inevitably be lower than the broader market.

Hedge fund manager Tom Sedies disagreed and with Protégé Partners LLC, a money management firm he founded that runs funds of hedge funds, accepted Buffett’s challenge. The bet was set at $1 million, with the proceeds going to charity.

Initially, it looked like Sedies and Protégé would succeed as the 2008 financial crisis decimated stock markets. However, by the end of the decade, Buffett won the wager by a huge margin. His pick, the Vanguard 500 Index Fund, which tracks the S&P 500, returned 126%, while the quintet of funds-of-hedge-funds chosen by Protégé delivered an average return of 36%. In the end, not even one of them beat Buffett’s index fund.

Praising Jack Bogle

Just days after Seides officially conceded defeat, Buffett was due to give his trademark speech at Berkshire Hathaway’s annual shareholder meeting. Bogle had been invited to the event for the first time, but wasn’t aware why. It wasn’t until later that the reason became clear.

After the usual jokes and presentation of Berkshire’s financial results, Buffett, in front of thousands of people, started giving his much less famous special guest his due, claiming he “has probably done more for the American investor than any man in the country.”

“I estimate that Jack, at a minimum, has saved and left . . . tens and tens and tens of billions into their pockets, and those numbers are going to be hundreds and hundreds of billions over time,” said Buffett, before thanking Bogle on behalf of American investors.

The Bottom Line

Warren Buffett spent much of his career criticizing the fees collected by active fund managers, urging most investors to buy passive index funds. After he won his $1 million bet, he publicly gave the godfather of index investing and founder of the fund that helped him win the wager his due.

In front of thousands of people, Buffett told Bogle he was an under-appreciated American hero who had made investing much more lucrative for the average person. Bogle not only had a hand in Buffett winning $1 million. He helped him vividly illustrate that most fees collected by active managers weren’t justifiable.