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Bob Pisani: Heeding the investment wisdom of Jack Bogle starts with keeping it simple

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(Below is an excerpt from Bob Pisani’s new book “Shut Up & Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Exchange.”)

In 1997, just as I was becoming on-air stocks editor for CNBC, I had a telephone conversation with Jack Bogle, the founder of Vanguard.

That conversation would end up changing my life.

Jack was by then already an investing legend. He had founded Vanguard more than 20 years before and had created the first indexed mutual fund in 1976.

CNBC had been in the regular habit of having investing “superstars” like Bill Miller from Legg Mason, Bill Gross from Pimco or Jim Rogers on the air. It made sense: let the people who had been successful share their tips with the rest of us.

Bogle, in our brief conversation, reminded me that these superstar investors were very rare creatures, and that most people never outperformed their benchmarks. He said we were spending too much time building up these superstars and not enough time emphasizing long-term buy-and-hold, and the power of owning index funds. He reiterated that most actively managed funds charged fees that were too high and that any outperformance they might generate was usually destroyed by the high fees.

His tone was cordial, but not overly warm. Regardless: I started paying much more attention to Bogle’s investment precepts.

The birth of Vanguard

From the day it opened on May 1, 1975, Vanguard Group was modeled differently from other fund families. It was organized as a mutual company owned by the funds it managed; in other words, the company was and is owned by its customers.

One of Vanguard’s earliest products proved to be the most historic: the earliest ever index mutual fund, the First Index Investment Trust, which began operation on Aug. 31, 1976.

By then, the academic community was aware stock pickers — both those that picked individual stocks and actively managed mutual funds — underperformed the stock market. The search was on to find some cheap way to own the broad market.

A tribute to Jack Bogle, founder and retired CEO of The Vanguard Group, is displayed on the bell balcony over the trading floor of the New York Stock Exchange in New York, January 17, 2019
In 1973, Princeton professor Burton Malkiel published “A Random Walk Down Wall Street,” drawing on earlier academic research that showed that stocks tend to follow a random path, that prior price movements were not indicative of future trends and that it was not possible to outperform the market unless more risk was taken.
But selling the public on just buying an index fund that mimicked the S&P 500 was a tough sell. Wall Street was aghast: not only was there no profit in selling an index fund, but why should the public be sold on just going along with the market?  The purpose was to try to beat the market, wasn’t it?
But Vanguard, under Bogle’s leadership, kept pushing forward. In 1994, Bogle published “Bogle on Mutual Funds: New Perspectives for the Intelligent Investor,” in which he argued the case for index funds over high-fee active management and showed that those high costs had an adverse impact on long-term returns.

Bogle’s second book, “Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor,” came out in 1999 and immediately became an investment classic. In it, Bogle made an extended case for low-cost investing.

Bogle’s four components to investing

Bogle’s main message was that there are four components to investing: return, risk, cost and time.

Return is how much you expect to earn.

Risk is how much you can afford to lose “without excessive damage to your pocketbook or your psyche.”

Cost is the expenses you are incurring that eat into your return, including fees, commissions and taxes.

Time is the length of your investment horizon; with a longer time horizon, you can afford to take more risk.

Stocks beat bonds over the long term

While there are some periods when bonds have done better, over the long term stocks provide superior returns, which makes sense because the risk of owning stocks is greater.

The longer the time period, the better chance stocks would outperform. For 10-year horizons, stocks beat bonds 80% of the time, for 20-year horizons, about 90% of the time and, over 30-year horizons, nearly 100% of the time.

Vanguard signage at a Morningstar Investment Conference.
M. Spencer Green | AP

Other key Bogle precepts:

Focus on the long term, because the short term is too volatile. Bogle noted that the S&P 500 had produced real (inflation-adjusted) returns of 7% annually since 1926 (when the S&P 500 was created), but two-thirds of the time the market will average returns of plus or minus 20 percentage points of that.

In other words, about two-thirds of the time the market will range between up 27% (7% plus 20) or down 13% (7% minus 20) from the prior year. The other one-third of the time, it can go outside those ranges. That is a very wide variation from year to year!

Focus on real (inflation-adjusted) returns, not nominal (non-inflation adjusted) returns. While inflation-adjusted returns for stocks (the S&P 500) have averaged about 7% annually since 1926, there were periods of high inflation that were very damaging. From 1961 to 1981, inflation hit an annual rate of 7%. Nominal (not adjusted for inflation) returns were 6.6% annually during this period, but inflation-adjusted returns were -0.4%.

The rate of return on stocks is determined by three variables: the dividend yield at the time of investment, the expected rate of growth in earnings and the change in the price-earnings ratio during the period of investment.

The first two are based on fundamentals. The third (the P/E ratio) has a “speculative” component. Bogle described that speculative component as “a barometer of investor sentiment. Investors pay more for earnings when their expectations are high, and less when they lose faith in the future.”

High costs destroy returns. Whether it is high fees, high trading costs or high sales loads, those costs eat into returns. Always choose low cost. If you need investment advice, pay close attention to the cost of that advice.

Keep costs low by owning index funds, or at least low-cost actively managed funds. Actively managed funds charge higher fees (sometimes including front-end charges) that erode outperformance, so index investors earn a higher rate of return.

As for the hopes of any consistent outperformance from active management, Bogle concluded, as Burton Malkiel had, that the skill of portfolio managers was largely a matter of luck. Bogle was never against active management, but believed it was rare to find management that outpaced the market without taking on too much risk.

Very small differences in returns make a big difference when compounded over decades. Bogle used the example of a fund that charged a 1.7% expense ratio versus a low-cost fund that charged 0.6%. Assuming an 11.1% rate of return, Bogle showed how a $10,000 investment in 25 years grew to $108,300 in the high cost fund but the low-cost fund grew to $166,200. The low-cost fund had nearly 60% more than the high-cost fund!

Bogle said this illustrated both the magic and the tyranny of compounding: “Small differences in compound interest lead to increasing, and finally staggering, differences in capital accumulation.”

Don’t try to time the markets. Investors who try to move money into and out of the stock market have to be right twice: once when they put money in, and again when they remove it.

Bogle said: “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”

Don’t churn your portfolio. Bogle bemoaned the fact that investors of all types traded too much, insisting that “impulse is your enemy.”

Don’t overrate past fund performance. Bogle said: “There is no way under the sun to forecast a fund’s future absolute returns based on its past records.” Funds that outperform eventually revert to the mean.

Beware of following investing stars. Bogle said: “These superstars are more like comets: they brighten the firmament for a moment in time, only to burn out and vanish into the dark universe.”

Owning fewer funds is better than owning a lot of funds. Even in 1999, Bogle bemoaned the nearly infinite variety of mutual fund investments. He made a case for owning a single balanced fund (65/35 stocks/bonds) and said it could capture 97% of total market returns.

Having too many funds (Bogle believed no more than four or five were necessary) would result in over-diversification. The total portfolio would come to resemble an index fund, but would likely incur higher costs.

Stay the course. Once you understand your risk tolerance and have selected a small number of indexed or low-cost actively managed funds, don’t do anything else.

Stay invested. Short term, the biggest risk in the market is price volatility, but long term the biggest risk is not being invested at all.

Bogle’s legacy

More than 20 years later, the basic precepts that Bogle laid down in “Common Sense on Mutual Funds” are still relevant.

Bogle never deviated from his central theme of indexing and low-cost investing, and there was no reason to do so. Time had proven him correct.

Just look at where investors are putting their money. This year, with the S&P 500 down 15%, and with bond funds down as well, more than $500 billion has flowed into exchange traded funds, the vast majority of which are low-cost index funds.

Where is that money coming from?

“Much of the outflows we have seen are coming from active [ETF] strategies,” Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, a major ETF provider, told Pension & Investments magazine recently.

Today, Vanguard has more than $8 trillion in assets under management, second only to Blackrock. While Vanguard has many actively managed funds, the majority of its assets are in low-cost index funds.

And that first Vanguard index fund? Now known as the Vanguard 500 Index Fund (VFIAX), it charges 4 basis points ($4 per $10,000 invested) to own the entire S&P 500. All major fund families have some variation of a low-cost S&P 500 index fund.

Jack Bogle would be pleased.

Bob Pisani is senior markets correspondent for CNBC. He has spent the nearly three decades reporting from the floor of the New York Stock Exchange. In Shut Up and Keep Talking, Pisani shares stories about what he has learned about life and investing.

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Investment regulator imposed $14M in enforcement penalties in latest fiscal year

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TORONTO — Canada’s investment product regulator says it imposed more than $14 million in fines and other financial enforcements in its last fiscal year.

The Canadian Investment Regulatory Organization (CIRO) says the total also includes imposed costs and the forced return of ill-gotten profits.

The regulator says it also ordered suspensions and permanent prohibitions in a significant proportion of proceedings against individuals.

Enforcement efforts included a $2 million fine against Fortrade Canada for recommending a high-risk product to unsophisticated retail clients, and a $1.7 million fine and permanent ban on securities-related business against Paul Walker for a range of misconduct including soliciting more than $1.5 million in investments for an outside business activity.

CIRO was created at the start of 2023 through a combination of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.

The new self-regulatory organization says it is focused on harmonizing its regulatory approach to create more consistency and timeliness with enforcement action.

This report by The Canadian Press was first published July 16, 2024.

The Canadian Press

 

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Conditions on Simandou investment now satisfied

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LONDON, July 15, 2024–(BUSINESS WIRE)–All conditions have now been satisfied for Rio Tinto’s investment to develop the Simandou high-grade iron ore deposit in Guinea, including the completion of necessary Guinean and Chinese regulatory approvals. The transaction is expected to complete during the week of 15 July 2024.

Along with the recent approval by the Board of Simfer1, this allows Simfer to invest in and fund its share of co-developed rail and port infrastructure being progressed in partnership with Winning Consortium Simandou2 (WCS), Baowu and the Republic of Guinea.

More than 600 kilometres of new multi-use trans-Guinean railway together with port facilities will allow the export of up to 120 million tonnes per year of mined iron ore by Simfer and WCS from their respective Simandou mining concessions in the southeast of the country3. Together, this will be the largest greenfield integrated mine and infrastructure investment in Africa.

Rio Tinto Executive Committee lead for Guinea and Copper Chief Executive Bold Baatar said: “We thank the Government of Guinea, Chinalco, Baowu and WCS for their partnership in reaching this milestone towards developing the world class Simandou project.

“Simandou will deliver a significant new source of high-grade iron ore that will strengthen Rio Tinto’s portfolio for the decarbonisation of the steel industry, along with trans-Guinean rail and port infrastructure that can make a significant contribution to the country’s economic development.”

Under the terms of the transaction, Simfer will acquire a participation in the WCS project companies constructing rail and port infrastructure, commit to perform a portion of the construction works itself and commit to funding its share of the overall co-developed infrastructure cost, in an aggregate amount of approximately $6.5 billion (Rio Tinto share approximately $3.5 billion)4.

Chalco Iron Ore Holdings Ltd (CIOH) has now paid its share of capital expenditures incurred or required by Simfer to progress critical works up to completion. A first payment of approximately $410 million, for expenditures until the end of 2023, was made on 28 June 2024, and a second payment of approximately $575 million, for 2024 expenditures, was made on 11 July 2024. These amounts settle all expenditures incurred up to date.

The co-developed infrastructure capacity and associated cost will be shared equally between Simfer, which will develop, own and operate a 60 million tonne per year5 mine in blocks 3 and 4 of the Simandou Project, and WCS, which is developing blocks 1 and 2.

Under the co-development arrangement, Simfer and WCS will deliver separate infrastructure scopes to leverage expertise. Simfer will construct the approximately 70 kilometre Simfer spur rail line and a 60 million tonne per year transhipment vessel (TSV) port, while WCS will construct the dual track approximately 536 kilometre main rail line, the approximately 16 kilometre WCS spur rail line and a 60 million tonne per year barge port.

Once complete, all co-developed infrastructure and rolling stock will be transferred to and operated by the Compagnie du Transguinéen (CTG) joint venture, in which Simfer and WCS each hold a 42.5% equity stake and the Guinean State a 15% equity stake6.

First production from the Simfer mine is expected in 2025, ramping up over 30 months to an annualised capacity of 60 million tonnes per year5 (27 million tonnes Rio Tinto share). The mine will initially deliver a single fines product before transitioning to a dual fines product of blast furnace and direct reduction ready ore.

Simfer’s capital funding requirement for the Simandou project as a whole is estimated to be approximately $11.6 billion, of which Rio Tinto’s share is approximately $6.2 billion, broken down as follows.

US dollars in billions (nominal terms) Simfer

capex

  Rio Tinto
share
Mine and TSVs, owned and operated by Simfer
Development of an initial 60Mt/a mine at Simandou South (blocks 3 & 4), to be constructed by Simfer $5.1 $2.7
Co-developed infrastructure, owned and operated by CTG once complete
Simfer scope (funded 100% by Simfer during construction)

Rail: a 70 km rail-spur from Simfer mine to the mainline, including rolling stock
Port: construction of a 60Mt/a TSV port

$3.5 $1.9
WCS scope (funded 34% by Simfer during construction)

Port and rail infrastructure including an approximately 552 km trans-Guinean heavy haul rail system, comprised of a 536 km mainline and a 16 km WCS rail spur

$3.0 $1.6
Total capital expenditure (nominal terms) $11.6 $6.27

Rio Tinto’s share of expected capital investment remaining to be spent from 1 January 2024 is to be $5.7 billion. Rio Tinto’s expected funding requirements for 2024 and 2025 are included in its share of capital investment guidance for this period, with project funding expected to extend beyond this timeframe.

Further details on the Simandou project can be found in the 2023 Investor Seminar presentation at https://www.riotinto.com/en/invest/investor-seminars.

As Chinalco, Baowu, China Rail Construction Corporation and China Harbour Engineering Company are Chinese state-owned entities, and given Chinalco indirectly holds 11.2% of shares in the Rio Tinto Group, they, and WCS, may be considered to be associates of a related party of Rio Tinto for the purpose of the UK Listing Rules. Rio Tinto’s funding commitment pursuant to the infrastructure co-development arrangement (Rio Tinto share $3.5bn) is a smaller related party transaction for the purposes of Listing Rule 11.1.10R and this announcement is, therefore, made in accordance with Listing Rule 11.1.10R(2)(c).

___________________________
1 Approval has been granted by the Board of Simfer Jersey Limited, a joint venture between the Rio Tinto Group (53%) and Chalco Iron Ore Holdings Ltd (CIOH) (47%), a Chinalco-led joint venture of leading Chinese SOEs (Chinalco (75%), Baowu (20%), China Rail Construction Corporation (2.5%) and China Harbour Engineering Company (2.5%)). Simfer Infraco Guinée S.A.U. will deliver Simfer Jersey’s scope of the co-developed rail and port infrastructure, and is, on the date of this notice, a wholly-owned indirect subsidiary of Simfer Jersey Limited, but will be co-owned by the Guinean State (15%) after closing of the co-development arrangements. Simfer S.A. is the holder of the mining concession covering Simandou Blocks 3 & 4, and is owned by the Guinean State (15%) and Simfer Jersey Limited (85%).
2 WCS is the holder of Simandou North Blocks 1 & 2 (with the Government of Guinea holding a 15% interest in the mining vehicle and WCS holding 85%) and associated infrastructure. WCS was originally held by WCS Holdings, a consortium of Singaporean company, Winning International Group (50%) and Weiqiao Aluminium (part of the China Hongqiao Group) (50%). On 19 June 2024, Baowu Resources completed the acquisition of a 49% share of WCS mine and infrastructure projects with WCS Holdings holding the remaining 51%. In the case of the mine, Baowu also has an option to increase to 51% during operations. After Closing, Simfer will hold 34% of the shares in the WCS infrastructure entities during construction with WCS holding the remaining 66%.
3 WCS holds the mining concession for Blocks 1 and 2, while Simfer S.A. holds the mining concession for blocks 3 and 4. Simfer and WCS will independently develop their mines.
4 A true-up mechanism will apply between Simfer and WCS to equalise most of their costs of constructing the co-developed rail and port infrastructure. The figures shown here are pre-equalisation.
5 The estimated annualised capacity of approximately 60 million dry tonnes per annum iron ore for the Simandou life of mine schedule was previously reported in a release to the Australian Securities Exchange dated 6 December 2023 titled “Simandou iron ore project update“. Rio Tinto confirms that all material assumptions underpinning that production target continue to apply and have not materially changed.
6 Ownership of the rail and port infrastructure will transfer from CTG to the Guinean State after a 35 year Operations Period, with Simfer retaining access rights on a non-discriminatory basis and at least equivalent to all Third Party Users.
7 By the end of 2023, Rio Tinto spent $0.5 billion (Rio Tinto share) to progress critical path works. Rio Tinto’s share of expected capital investment remaining to be spent from 1 January 2024 was $5.7 billion.

This announcement is authorised for release to the market by Andy Hodges, Rio Tinto’s Group Company Secretary.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240621382292/en/

Contacts

Please direct all enquiries to media.enquiries@riotinto.com

Media Relations,
United Kingdom
Matthew Klar
M +44 7796 630 637
David Outhwaite
M +44 7787 597 493

Media Relations,
Australia

Matt Chambers
M +61 433 525 739
Jesse Riseborough
M +61 436 653 412
Alyesha Anderson
M +61 434 868 118
Michelle Lee
M +61 458 609 322

Media Relations,
Americas

Simon Letendre
M +1 514 796 4973
Malika Cherry
M +1 418 592 7293
Vanessa Damha
M +1 514 715 2152

Investor Relations,
United Kingdom
David Ovington
M +44 7920 010 978
Laura Brooks
M +44 7826 942 797

Investor Relations,
Australia

Tom Gallop
M +61 439 353 948
Amar Jambaa
M +61 472 865 948

Rio Tinto plc
6 St James’s Square
London SW1Y 4AD
United Kingdom
T +44 20 7781 2000
Registered in England
No. 719885

Rio Tinto Limited
Level 43, 120 Collins Street
Melbourne 3000
Australia
T +61 3 9283 3333
Registered in Australia
ABN 96 004 458 404

riotinto.com

Category: Simandou

 

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BlackRock Pulls Ad Featuring Trump Rally Shooter Thomas Matthew Crooks

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A screengrab of Thomas Crooks from the BlackRock ad that aired in 2022.

Thomas Matthew Crooks, the 20-year-old who shot at former president Donald Trump at a rally in Pennsylvania, had briefly appeared in a 2022 advertisement for BlackRock Inc, the world’s largest money manager.

The ad, filmed at the Bethel Park High School in Pennsylvania, featured Crooks and several other unpaid students in the background, said the investment giant in a statement. Crooks graduated from the school in 2022.

BlackRock said it has pulled the ad but the video will be available to authorities. The ad, however, is being widely shared by social media users.

“The assassination attempt on former President Trump is abhorrent. We’re thankful former President Trump wasn’t seriously injured, and thinking about all the innocent bystanders and victims of this awful act, especially the person who was killed,” the company added in its statement.

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BlackRock, whose earnings figures are expected today, has faced scrutiny after shooting incidents since some of its index funds own shares in gunmakers.

Trump Assassination Attempt

Trump survived an assassination attempt on Saturday after a gunman opened fire at him at a rally in Pennsylvania ahead of the Presidential elections. The attack left him with a bloodied face as the former president said the bullet pierced his “upper part of right ear”.

Latest and Breaking News on NDTV

A bystander died in the attack while shielding his family and Crooks – a registered Republican – was shot dead by a Secret Service sniper.

Trump, whose Republican candidature will be finalised today, shared a message of unity after the attack and said Americans must not allow “evil to win”. “It was God alone who prevented the unthinkable from happening,” he said on social media.

Biden, too, appealed to the nation to “lower the political temperature” in a rare Oval Office address. “Politics must never be a literal battlefield, God forbid a killing field,” he said.

The US markets are expecting Trump trades to gain momentum after the attack. It has already been pinning hopes for the return of Republicans, especially after Biden’s poor performance in last month’s debate. Those trades are likely to take deeper hold as the attack sparks a wave of sympathy and support for Trump.

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