The Class War Is Over (and you lost)

Is it any surprise to you that CEO pay has grown faster than that of workers? Are you shocked that money managers are making more off the stock market than average investors? As you troubled to hear that most mutual fund managers are not really very good?

How about this: would you be shocked to know that you've been played for a fool, that the entire modern stock market is little more than a con game designed to part you from your cash faster than a slot machine in Vegas, and that the "ownership society" was a complete illusion set up to give the vast bulk of your savings over to the people who were supposed to be taking care of it?


Who would make such communist, anti-market statements? How about John Bogle, the man who founded Vanguard Investments and a lifelong conservative Republican.

Bogle has been known as a "hyper-capitalist." He helped to invent the entire mutual funds industry, and introduced the first market index funds. For years, Bogle was a staple of the investment circuit, and a favorite speaker on all things financial. These days, Wall Street just wants him to shut up.

Mr. Bogle has long been known as someone offended by the huge sums money managers were collecting for not only failing to do any good for their clients, but for doing literal harm. In his latest book, The Battle for the Soul of Capitalism he returns to this theme and illustrates with brutal clarity how Americans have been conned into handing over much of their wealth for an illusion.


Twenty years ago, most companies paid out fixed pension benefits. No employee ever got rich on these pensions, but they did provide the security of a clear schedule of payments. A generation of Americans retired on these secure benefits. But starting in 1980's, companies began to phase out fixed benefits in favor of IRAs, 401K plans, and other such instruments. The promise to the employee was that, while these new funds lacked the clear promise of the pension funds, they would deliver much more money in the end, thanks to the magic of the market and compound growth. Take for example an employee who invests $1000 at age 20. If the market keeps to the oft-cited rate of 8% growth, then by retirement at age 64, that $1000 investment will have grown to over $140,000. Not bad, huh? The trouble is, most company plans don't leave the door open for their employees to invest any way they want. Instead, they have to invest in mutual funds. These funds then come with management fees. Take the same example above, and insert a 2 1/2% fee. That still leaves the employee with a 5 1/2% return, which after 45 years turns his $1,000 investment into... around $30,000. So where did the other $110,000 go? Into the pockets of the investment manager. The worker put up 100% of the money and took 100% of the risk, but the "money manager" took more than two thirds of the cash. Welcome to the magic of compound costs.

Bad as that all sounds, the truth is worse. Many mutual funds are managed so badly, that from the start they fall short of the market -- and that's even before the management fees are extracted. Those that do manage to eke out a short-term figure above market returns, are then flooded with additional funds which inevitably drive their returns down to no more than average. The odds that you will lose by investing in a mutual fund versus investing in an index of the entire market, are 92%.

Having shown that our savings plans have actually reduced the savings of the average employee and fatten the wallets of Wall Streets professional thieves, Bogle goes on to point out the real scale of the CEO swindle. While paychecks may have doubled over the last twenty years, when adjusted for inflation American workers have done no better than break even. At the same time, CEOs have pulled down over a 600% increase. Even better, by putting CEO compensation primarily in the form of stock options, CEOs have been given enormous incentive to manipulate the books, tweaking the stock price to their benefit.

Finally, Bogle goes on to show that Americans -- poorer and less prepared for the future than ever -- also have less control. Corporations are no longer beholden to individual investors. Instead, the control goes through the money men, who often have an incestuous relationship with the very companies they are investing other people's money in.

While Mr. Bogle may be a lifelong Republican, his books hasn't been missed by some prominent Democrats.

by Devilstower over at KOS