A Random Walk Down Wall Street

John, or Jack, Bogle is the founder and former Chief Executive Officer of the Vanguard Group, and he was a close friend of Burton Malkiel. Bogle’s family lost a considerable sum in the Great Depression in the 1930s, and Bogle later studied economics at Princeton, becoming an investor for the Wellington Fund in 1951. Bogle’s focus was on mutual funds, which bolstered his reputation within the Wellington Fund, leading him, in 1970, to become the chairman of mutual funds at Wellington. Bogle then founded the Vanguard Group in 1974, and, in 1976, founded one of the first index mutual funds available for public investment.

Much like Malkiel, Bogle’s beliefs in investing are founded in simplicity and passive investing. His interest in index funds was rooted in the desire to mirror the stock market through long-term, stable investments, rather than trying to beat the market with short-term purchases and sales. His focus was on reducing fees and taxes on investments, which follows with his structuring of mutual and index funds through the Vanguard Group. Like Malkiel, Bogle favored index funds over actively managed mutual funds, and his general advice regarding investments mirrors those Malkiel includes in Random Walk. Bogle passed away in 2019.

The Vanguard Group is the largest mutual fund provider, and it is second only to BlackRock in providing ETFs, or exchange-traded funds. They have over $7 trillion in assets globally, and they are included as one of the “Big Three” index fund providers in the United States. The fund established by Jack Bogle, the First Index Investment Trust, is now known as the Vanguard 500 index fund, and it is just one of the numerous Vanguard products that Malkiel advocates in Random Walk. After Bogle left Vanguard in 1999, new management increased Vanguard’s provision of ETFs and actively managed funds, the latter against both Bogle and Malkiel’s advice.

The SEC, or the US Securities and Exchange Commission, was created after the stock market crash of 1929 to regulate and enforce regulations on the sales of securities within the United States. It replaced the so-called “blue sky” laws, which attempted to regulate such exchanges at the state level, but which could be circumvented by trading across state lines. The SEC was a part of Franklin Roosevelt’s New Deal by the Securities Act of 1933 and the Securities Exchange Act of 1934, which established the SEC as an independent agency to oversee and regulate securities exchanges. The SEC is split into multiple divisions, such as a corporate finance division to handle public companies and an enforcement department which investigates violations of SEC regulations. SEC regulations require companies to submit annual reports and narrative accounts of management practices, called management discussion and analysis, each of which can be used to monitor and evaluate a company’s performance.

In Random Walk, the SEC is always implicitly present, as all investing and securities trading is regulated by the SEC. Malkiel mentions the SEC in discussions of the tronics and dotcom booms in a disparaging light, noting how the SEC failed to act to contain those booms and subsequent crashes. In part, Malkiel’s discussion of fraud and deception, such as the case of Enron in the early 2000s, involves the ways in which companies circumvent SEC regulation, as in Enron’s use of speculative accounting. Importantly, investing, unlike traditional banking, is not protected by any government agency in the sense of insurance or protection against fraud. Although a company like the one Malkiel notes during the South Sea bubble, which offered a mysterious venture without details, would be rejected by the SEC, today, investors are not protected in the event that they invest in a company that subsequently fails. As such, the regulatory efforts of the SEC are limited in that they do not interfere with an essentially free market.