Dear Jack,

Standing against the establishment, having a voice and speaking up needs courage. This is what you did. You spoke up against the industry which started the first Mutual Fund in 1775. Bloomberg calls it a revolution, you call it a revolution, Wall Street Journal is calling it differently, but that does not matter. Mutual Funds are in a descent. Stock Pickers might still continue to follow Graham and Dodd approach, but the facts are overwhelming. If an institution can’t beat the index then it is wasting resources.

Active is Human

You are almost right on the death of stock selection. I am with you on that. The 8 years you mentioned in your interview, can be even extended to 10, 15 or 20 years. The active managers generally trail the market. They are humans, not systems. Active investing is a global profession. One can not make the market alone Jack, market needs the active managers as a counterparty, and Active as a business will evolve.


It would be interesting to relook at the 1974 Journal of Portfolio Management, which inspired you, where Paul Samuelson talked about beating the Index Challenge, but Jack that was 40 years ago. I don’t know whether you saw the Granger Challenge of 1992.

Granger (1992) mentioned, “To build a method that consistently produces positive profits after allowing for risk correction and transaction costs and if this method has been publicly announced for some time, then this would possibly be evidence against EMH…Only if a profitable rule is found to be widely known and remains profitable for an extended period can the efficient market hypothesis be rejected."

I am aware of your opinion about beating the market, but don't you think when you have a few trillion dollars based on a business model that assumes the Index can never be beaten, it is hard to reboot, to comprehend, to appreciate, undo and unlearn what has already been built? It’s also hard to explain the investors, that there is a probability that over the course of last 50 years, while you have been right about underperformance as the bane of the mutual fund industry, you could have misjudged Samuelson's challenge as he based his 1974 'Challenge to Judgement' on 'Random Walk Hypothesis'. Jack, we are in a different time now. Markets have been proved to be non-random. A few other things happened while you were building Vanguard. I am sorry if this disappoints you, but the revolution you started is over and we are in a new revolution now. Let me explain.

Distorted Maths

Jack, you know that the benchmark thinking is based on a flawed hypothesis. Just because markets revert can not be the only reason, we should think 'Benchmark'. The biggest disservice that could happen to your fund investors is if we have a 1929 like event and it takes 25 years for markets to get back to the 1929 peak. Investors might lose trust in the benchmark investing process. Things can get bad Jack, and to blindly believe in benchmark investing does not prepare the investor for an eventuality that is not just up, that is not just equity and that is irrational to the extent that it takes a generation to revert. How do you account for markets that fail to revert? This is irrationality. There is a chance that the 1% annual return logic that you cite could be -5% annual return for a decade. Especially, now that the mutual fund business is declining, you have a choice either to believe in the low fee Vanguard hypothesis as a comparison to mutual funds fees, or guide the investors to broaden their perspective. You need to tell them the risks of benchmark investing outside the scope of low fees.

Biases and Science

Jack in 1975, you were not the poster boy. You needed to shout to be heard. That’s not the case now. People listen to you, they follow you, and there is no reason for you to snub contesting ideas. You know we are in an idea's world, and the world is never the same, the truths get challenged and trashed. You can afford to be more objective and move away from the singleminded approach of promoting Vanguard.

The world where there is just a benchmark, there is no smart beta, no active, no mutual funds is not a perfect world. The more you teach people about benchmark investing, the less you are telling them about the inefficiency of market capitalization weighting and the more you are skewing the world to a risk preference, it does not understand. Yes, if the correlation of the stock increases, it impedes the allocation of capital, and benchmark Indexing could create an inefficient herding where the investors fall off the cliff.

That’s not Maths

Jack, you have argued that no value premium exists, claiming that Fama and French’s research is period dependent. You have been the top advocate against the value and size premium school.

You even said, “While gross performance reverts to the mean self-evident pattern of mean reversion. Yet as we observe these extended cycles of mean reversion, it must occur to you that investors ought to be able to capitalize on them, riding one horse until it tires, then leaping to the other.” In other words, you said that if things are anyway going to come back to the mean, why waste resources and time, jumping from one investing style horse to another. You are proposing against timing and going with accepting the swinging pendulum of mean reversion, suggesting a simple approach to investing.

You said that you don’t think benchmark investing industry is a swaying pendulum anymore. This is a double standard Jack. You can not rely on reversion to explain benchmark investing and then ignore reversion when it comes to industry growth.

Jack, why are you conveniently using statistical laws? Don’t you think laws of statistics are above financial theories? What if the markets indeed experience a backlash against benchmark indexing? There is always a probability of that happening. Jack, you can not give 100% probability to anything. That’s not maths.

Rich Get Richer, Poor Get Richer Logic

Jack, your Rich Get Richer (RGR), Poor Get Richer (PGR) logic is wrong. RGR is like Growth investing and PGR is like Value investing. You believe it is hard to identify RGR from PGR consistently and hence it is better to buy the market. What if RGR and PGR were both bought together? What if investing styles were not competing? In this case buying the market becomes disadvantageous compared to buying the combination of RGR and PGR. I explained the framework in my paper, "How did Physics Solved Your Wealth Problem!".

The inability of the society to explain the RGR and its failure was a statistical challenge, which went beyond finance to question the functioning of mean reversion, the mechanism that drives it and the failure of reversion. Actually, the 1886 paper of Francis Galton, "Regression towards Mediocrity in Hereditary Stature" had the answer to the question, but Francis was so excited about observing the phenomenon of reversion that he failed to articulate the mechanism of reversion and why the phenomenon fails sometimes. Jack, are you assuming perfect knowledge on the law of reversion before dismissing competition? You owe your investment hypothesis to Francis Galton, the man who coined the idea of regression.

Can you imagine Jack, the father of statistics had the answer to your mutual fund observation 65 years before you asked the question. The question you asked regarding the underperforming mutual funds was correct, but the question more important than undeperformance is the mechanism that drives the phenomenon of mean reversion and why is it harder to be different from the average.

Benchmark investing is telling the global investors that your mutual fund manager is doing a mediocre task of managing your pension, so it's better to ditch him and adopt a method which buys the market average at a low fee. The investor still gets average portfolio performance but is paying a lower fees. Jack, if your revolution was about saving the investors some fee, it was mission accomplished, but if you think you are doing them a favor by repackaging average performance, you may be misguiding them.

Architecture of Indexing

Your estimates of 80 or 90 percent of the business in Indexing will kill the market. Active investing space might get even further straitjacketed and with the robots coming, how do you forsee a market where everybody is buying a benchmark? Don’t you think your logic of symmetry of win and loss just for the active managers and the low fee satisfaction for benchmark investors needs more thinking?

Jack, I am sorry to say, but I don’t believe that "the stock market has nothing to do with allocation of capital". Stock markets have everything to do with allocation of capital. It is the allocation that makes the pendulum sway and just because the pendulum sways back does not mean that one should stay in the center and close his eyes and believe that market is dizzying itself. There are different perspectives to it.

You can, of course, look for confirmations from Asness who thinks factor timing is an illusion. You can also tell us that Cliff’s got everything right. But you are again doing the same mistake, you give Cliff 100% probability of knowing everything. When the society creates icons, it tends to give them 100% probability of knowing the truth. I heard about a Rob who got the top rank a few years back, and then we all saw what happened. His 'Value' has gone from everywhere to nowhere over the last 6 years.

The New Revolution

Jack, there are many revolutions happening at the same time but fortunately for the world, now there is more science than finance in these revolutions. The science which can explain markets as probabilistic systems, can explain where benchmark investing is flawed, where smart beta is dumb, and how one does not need timing to outperform markets. This Science can also explain why the pendulum sways. The Physics is here, and it’s just getting started. Now that you have written 10 books, sold nearly a million copies, came on multiple covers and I wish you come also on the Time cover, and then that film happens too, you will have done your best to pass on your ideas to the new generation. You have succeeded in your revolution. You brought the much needed accountability to the mutual fund industry and gave us an opportunity to build our revolution on the one you started. Thank you.


[1] Smart-Beta War Rages On as Cliff Asness Slams Arnott's Paper, Bloomberg, April 2016
[2] Q&A With Jack Bogle: ‘We’re in the Middle of a Revolution’, Bloomberg, November 2016
[3] Pal, M. “Arbitraging the Anomalies”, SSRN, 2015
[4] Pal, M. “How Physics Solved Your Wealth Problem!”, SSRN, 2016
[5] Pal, M. “What is Value?”, SSRN, 2015
[6] Pal, M. “Mean Reversion Indicator”, SSRN, 2012
[7] Pal, M. “Mean Reversion Framework”, SSRN, 2015
[8] Pal, M. “Momentum and Reversion”, SSRN, 2015
[9] Galton, F. “Regression towards Mediocrity in Hereditary Stature”. Anthropological Miscellanea, 1886.
[10] M. E. J. Newman, “Power laws, Pareto distributions and Zipf’s law,” 2006
[11] Montier, J. “CAPM is CRAP (or, the Dead Parrot Lives!), Behavioural Investing: A Practitioner's Guide to Applying Behavioural Finance, 2013
[12] Pal, M. “Why CAPM is not CRAP”, SSRN, 2014
[13] DeBondt and Thaler, “Does the Stock Market Overreact?” The Journal of Finance, Vol. 40, No. 3, 1985
[14] The Stock Market Universe—Stars, Comets, and the Sun, John Bogle, 2001
[15] Pal, M. “The End of Behavioural Finance”, SSRN, 2014