Who is John Galt? It’s John Bogle!

By Dr. Rikki Racela, WCI Columnist

In episode 322 of The White Coat Investor podcast, Dr. Jim Dahle mentioned the book Atlas Shrugged, written by Ayn Rand. Rand had a great quote about money, which was Jim’s quote of the day for that episode (“Money is just a tool. It will take you where you want to go, but it will not replace you as a driver.”). He also recommended reading his quintessential novel to understand what people mean when they ask, “Who is John Galt?”

For those who haven’t read the book, consider this a spoiler alert (but if you’ve already read the thick of the book, I might save you a lot of time!). In the book, people all over the world were asking this question out of desperation, commiserating with each discussion of the bad things happening in the world in the novel. It’s not until the middle of the book that we actually find out who John Galt was – the inventor of an ultra-efficient engine that would change the world.

But what did he do with this wonderful and mind-blowing innovation? John Galt abandoned it in the factory where he worked. It is only at the end of the novel that John Galt emerges with his invention that puts the world back on track. After reading the book, I could not help but compare John Galt and his fictional world to that of another John, the great John Bogle, and to our own real world of investors. By analyzing the comparison of these two Johns, we can better understand John Bogle as a man and the direction of our financial institutions.

They share a first name, and more

Let’s start with the obvious: they have the same first name. John Galt and John Bogle also came from humble beginnings. In the novel, John Galt did not come from a wealthy family and worked hard to get an education. He ended up working in a random factory when he invented his machine. John Bogle, in the same vein, was born into a poor family in New Jersey, attended public school in his early years, and was only able to attend a private high school on merit scholarships. He had to work throughout his undergraduate studies to pay his tuition at Princeton.

In several of his books, Bogle recalls working hard to earn money, recounting one particularly mindless job as a pinsetter at a random bowling alley in Sea Girt, New Jersey (I can’t even imagine!). Our two protagonists were not born into want, and out of necessity, they rose through hard work and grit. In the process, they both changed the world they lived in.

This reinforces a central tenet that Ayn Rand states about greatness: to become great, one must suffer and work hard (and perhaps be born into a less affluent background to bring out the greatness in oneself). Another protagonist in another of Rand’s novels, The Fountainhead, also comes from humble beginnings to become a great architect. Bogle himself wrote in his books that the financial tribulations he endured in his youth gave him a spirit that he quotes as saying: “Never give up, never, never, NEVER!” It was Bogle’s formative years that truly laid the foundation for his future greatness, something Rand sees as necessary to the development of Galt’s character.

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Both Johns shrugged.

I have already mentioned that John Galt did not give the world his marvelous invention until the world was ready. In a similarly strange way, John Bogle laid the foundation for the index fund years before its launch, while he was an undergraduate at Princeton. His senior thesis was about the fact that fees eat into an investor’s returns and that the only way to get the best returns for investors was to minimize them as much as possible, i.e. the idea of ​​a passive index fund. However, after completing his thesis, Bogle did not pursue these ideas to the final conclusion of an index fund. Like Galt, Bogle abandoned his revolutionary idea. The idea of ​​a lowest-cost investment vehicle lay in the depths of the Firestone Library (where all senior theses end up on the Princeton campus), and Bogle took a job as an active fund manager in Wellington after graduation.

In his book Trillions, Robin Wigglesworth mentions that Bogle went so far as to publicly support active management and the fees that go with it. After graduating from college, Bogle wrote an article in the Financial Analyst Journal under the pen name John B. Armstrong (which was his maternal grandfather’s last name) in support of active management. Wigglesworth argued that Bogle didn’t have the information to really make the case that passive indexing would be better than active management in terms of fees. But Bogle was incredibly smart, and I think he was doing what Galt was doing; Bogle shrugged. Just as Galt’s world wasn’t initially ready for his invention, Bogle recognized that the investment world of the 1950s, after he graduated, wasn’t ready for a low-cost investment product.

This is why, I think, Bogle used a pseudonym. He didn’t believe that active management was really the lowest-cost path for individual investors, and he didn’t want to put his real name on paper. At the time he graduated from college, it would have been career suicide to suggest moving away from active management and eventually pursuing a passive strategy. The world he graduated into was all about active management. The redundant idea was that individual investors had no chance of financial success without an active manager to guide them in picking stocks. They needed active managers to manage the mutual funds that were the primary diversification vehicle at the time. So instead of imposing a low-cost passive index fund on the financial industry, Bogle decided to leave that card alone. The index fund was the logical conclusion of his senior thesis at Princeton, but instead of trying to fight the headwinds that were coming his way, he shrugged.

Legends of the Fall

In Atlas Shrugged, the way the world works has broken down. Social services have broken down. Transportation, like flights and trains, has been abandoned. The world has descended into chaos. It was only when the world hit rock bottom that John Galt and other great world leaders came out of hiding.

Likewise, the world of investing for an individual investor in Bogle’s day was equally chaotic. Fees, including transaction costs and expense ratios, were exorbitant.

And then the 1970s hit. The early 1970s were not kind to the Nifty Fifty, and most of them were devastated in the bear market of 1973-74. Not only was the market down by as much as 30% in that period, but the economy was in the early stages of what is arguably the worst inflation our country has ever seen in terms of its magnitude and duration. Jack Bogle was fired as CEO of Wellington in 1974. It was during this desperate time that Bogle launched the index fund that could be sold to retail investors.

Wigglesworth wrote in his book that Bogle’s invention had reached its finest hour. Since he was no longer CEO of Wellington, Bogle was relegated to administrative duties at the Wellington Fund. He was not allowed to do active management. The index fund was an alternative to active management where Bogle could serve investors in a way that allowed them to avoid the exorbitant costs and fees associated with investing. As investors were hit hard by a terrible bear market, crushing inflation, and punitive industry fees, Bogle’s true nature emerged. Like Galt, Bogle had to bide his time.

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Galt and Bogle: A Giant Among Giants

What we find in Rand’s masterpiece is that most of the book doesn’t really focus on John Galt, but on the other giants of the world who moved the world and innovation forward. The same goes for Bogle, who doesn’t really believe that the index fund revolution was built by him. Rather, it was built by other giants of the financial industry. Index funds are often mistakenly thought to be Bogle’s idea. The index fund structure that Bogle used was actually developed by John “Mac” McQuown at Wells Fargo, where, while innovative, it failed to make Wells Fargo money.

In the excellent film Tune Out the Noise, which documents the growth of factor investing, McQuown recounts the response of Ransom Cook, then chairman of Wells Fargo, when Bogle asked him about the S&P index fund: “Give it to him. Give it to him.” Unfortunately for McQuown but fortunately for Bogle, Wells Fargo could not sell index funds outside of institutions under the Glass-Steagall Act.

(For a bit of history, this law was enacted in 1933 to separate commercial banking from investment banking. It was thought that one of the root causes of the Great Depression of 1929 was the mixing of traditional banking with speculative investing, i.e. if I deposited a few hundred dollars in my local bank, that local bank could take my money and legally invest in Bitcoin.)

Bogle has been a leader in countless other financial innovators and leaders who have helped investors maximize their returns. From Fama/French with their ideas on factor investing and Tversky and Kahneman with the development of behavioral economics to Ric Ferri, Paul Merriman, and the owner of this website for their engaging efforts on financial education, John Bogle is not alone in advancing a new and better world of investing. Like Galt, who joined other fictional innovators whose inventions and hard work were equally important in creating a better world, Bogle was a giant among giants, and he needed other financial giants to innovate and make the world of investing better for individual investors.

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The end is just the beginning

Atlas Shrugged ends with John Galt bringing the world’s innovators out of hiding, indicating that this was the beginning of a better world. And that was the case with the investing world when Bogle started Vanguard. We now live in a better investing world, and since Vanguard’s inception, we have continued to see ever-lower tuition, more tax-efficient vehicles like the invention of ETFs, and better education on how to invest optimally.

Fortunately, Bogle’s days of shrugging his shoulders are over, and we live in an era where great innovators in the financial industry are carrying the torch of optimal, low-cost investing. We should be eternally grateful to Bogle and everyone else in the investment industry for helping us, as Jim Dahle puts it, “get a fair shake” and no longer ignore this difficult task.

Is the world of Atlas Shrugged and John Galt similar to our world as investors and John Bogle? Are we now in a time where, as the ending of Atlas Shrugged suggests, investing is only getting better? Comment below!