How in 1974 John Bogle Came to the Idea of The Index Fund

John C. Bogle, founder of The Vanguard Group, is the creator of the world’s first index mutual fund.

Economist Burton Malkiel (and author of “A Random Walk Down Wall Street“) wrote the following in the Foreword of Bogle’s book, “Stay the Course: The Story of Vanguard and the Index Revolution“.

In my judgment, the index fund is the most important financial innovation that has been created for the individual investor.

In “Stay the Course” Bogle tells the origin story of Vanguard, and the how the first index fund product was created in 1975.

Here are several passages from the book that describe how Bogle came to the idea of the index fund.

Indexing was an idea that had first crossed my mind back in 1951 at Princeton University. In my senior thesis I wrote that mutuals funds “may make no claims to superiority over the market averages.” In the years that followed, my deep involvement in Wellington Fund’s exclusive search for some semblance of investment excellence – to say nothing of my unrequited hope that my merger partners could earn sustained superior returns – only confirmed my worst fears about active fund managers.

These firsthand experience with active investment management taught me a lesson: The search for winning fund managers is a tough and ultimately unrewarding strategy for the vast majority of investors. That lesson returned to my mind when I read “Challenge to Judgment,” by Nobel laureate professor Paul A. Samuelson, in the inaugural issue of The Journal of Portfolio Management early in October 1974. What an amazing – and happy – coincidence that I read that profound article only moments after founding the new firm! The timing couldn’t have been more perfect.

Dr. Samuelson could find not “brute evidence” that fund managers could systematically outperform the returns of the S&P 500 Index “on a repeatable, sustained basis.” In essence, he demanded that someone, somewhere, start an index fund modeled on the S&P 500. “As yet,” he wrote, “there exists no convenient fund that apes the whole market, requires no load, and keeps commissions, turnover and management fees to the feasible minimum.”