Vanguard

Transcript from https://podmenti.com/t/9db66098e4a17338

I was telling my wife, you know, I think I'll be able to do bedtime tonight, maybe maybe even dinner, and she was like, Whoa, whoa, whoa, don't get ahead of yourself. Let's not go crazy here. How complicated could it be? It's indexed funds. And active funds and
Money market and brokerage and advisory Yeah, yeah, yeah. But really it's mostly index funds. Alright. Let's do it.
Let's do it.
Who got the truth?
Is it you, is it you, is it you
No.
Is it you, is it you, is it you
Say it straight
Another story on the
Welcome to the spring twenty twenty six season of Acquire, the podcast about great companies and the stories and playbooks behind them.
I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts.
Today's episode is more relevant.
for you than any other company we have ever covered.
For most of you
You have most of your net worth tied up in this company.
Or the copycats who followed.
The company.
is Vanguard.
who effectively created the first index fund for individual investors in 1975, and today is the largest provider of index funds in the United States.
They manage over ten
trilli in passive index funds.
That means they own an average of almost ten percent of every company in the S P five hundred.
General Motors, Nike, Starbucks, Lockheed Martin, Visa Apple.
You name it.
Vanguard is the largest shareholder of most US corporations, and together with the other big index funds like BlackRock, State Street, and Fidelity, they own twenty four percent of the entire US stock market.
It's absolutely
Incredible. And none of those other firms would be in this market are doing it in the same way if it weren't.
For Vanguard. No. I mean the impact is just wild. I mean
millions and millions and millions of people.
Have sent their kids to college, bought homes, retired comfortably. Because of Vanguard.
And Jack Bogle.
So Vanguard has an incredibly unique corporate structure. If you are an investor in a Vanguard fund, you own a piece of the firm.
Vanguard is owned exclusively by its customers, and it's not publicly traded. It doesn't have outside shareholders of any other kind. Even the CEO doesn't have any equity, except, of course, then what he has from investing.
In the funds just like
Me and David and all of you.
In many ways it is a different kind of capitalism.
Dare we say.
Communist capitalism.
Ooh, I like it.
whose products exclusively serve the interests of its customers.
and no other shareholders. And David, as you've been alluding to, the man behind this idea
is a visionary.
An iconoclast.
And
A pedantic stick in the mud who was as disagreeable as he was right. Jack Bogle. Oh that's great. I couldn't have written it better myself, Ben.
And his story is wild since he didn't start Vanguard until he was forty six years old. And you might think it was started idealistically given this structure we're talking about.
And it was sort of.
But the story is equal parts idealistic as it is vindictive.
But what is clear, we all owe Jack a giant thank you.
Because of Vanguard's relentless cost cutting and low fees, Vanguard has saved investors over$500 billion in fees and trading costs since its founding in 1975. And as a recent book, The Bogle Effect argues.
Vanguard's actions also forced the hand of the rest of the industry to cut their fees, totaling another$500 billion over time.
So Jack Bogle and Vanguard are responsible for a trillion dollars of wealth transfer out of the pockets of Wall Street in the finance industry and into the pockets of individual investors in the form of
Fees that they didn't have to pay.
Absolutely incredible.
I was catching up with good friend of the show, Morgan Hausel, uh a couple of days ago. Oh, yeah, of course. And his comment to me was, I view Bogle as an undercover philanthropist.
And uh at a trillion or even half a trillion dollars, that would make him the greatest philanthropist of all time. Wow, wow. I love that framing. Yeah. I mean, a large portion of that trillion dollars could easily have flowed into Jack's own wealth and he made the choice.
But it didn't.
Yeah, maybe, maybe David. So listeners, you can join the email list at acquire.fm slash email. That's where we're gonna send out our big takeaways from each episode, past episode corrections, exclusive behind the scenes photos that we find in our research, and it's where you'll get to vote on future episode topics. Plus David writes a little hint.
each time about next episode's topics. So come play the guessing game with us at acquire.fm slash email.
Come talk about this episode with the whole community in the Slack after you listen. That's acquired.fm slash Slack. And before we dive in, we want to thank our presenting partner, JP Borgan.
Yes, and just like how we say every company has a story, every company's story is powered by payments, and JP Morgan is a part of so many of their journeys from seed to IPO and beyond.
So with that, this show is not investment advice. David and I may
And definitely do this time have investments in the companies that we discuss, and this show is for informational and entertainment purposes only.
David.
Where do we begin? Ooh. All right.
But we start.
In May of 1929.
On the eve of the Great Wall Street crash of October nineteen twenty nine,
that would throw America and the world into the Great Depression.
Wipe out millions of family savings, ruin countless lives.
forever scar an entire generation.
We we don't often talk about the Great Depression on Acquired. It was truly
horrible. I mean the financial crisis was quaint compared to this.
Nine thousand
Thanks.
failed after the Wall Street crash of nineteen twenty nine. Nine million
Individual family savings accounts were wiped out. Almost 100,000 businesses failed. Unemployment reached 25%.
And it truly did scar.
An entire generation.
I remember my grandparents still like into the nineteen nineties doing
Absolutely insane things.
because of their experience during the depression. My my dad's mom
never threw out a plastic bag in her entire life. When she died and we cleaned out her condo, it was like
Full of tens of thousands of plastic bags. My grandpa was magazines and Tums containers. We found just overflowing amounts in his basement. But the crazy thing about this, David, is
Back then, only one to two percent of Americans owned stocks. So all of these things were second order effects from the crash, from the banks being deeply intertwined, a lot of leverage on all these equities. It wasn't like, oh, I own a bunch of stocks and those stocks crash, so my life is over. It is the giant interrelated
ripples and no safeguards in the economy at that time. Yep, exactly. It was the bank failures, it was the businesses going under, it was unemployment. It was everything.
But
On the eve

Financial calamity.
Our hero
NA
financial hero to many.
Is born.
John.
Clifton.
Jack.
Bogle.
And he's born here in May of nineteen twenty nine as one of two twin boys.
Along with his twin David.
And together with their older brother Bud,
They form
The Bogle Boys.
As they would be known.
throughout the rest of their youth and indeed the rest of their lives. Now
Jack and David here at the time of their birth.
are born into a prominent New Jersey
Family.
Their great grandfather
had founded a mutual fire insurance company.
Nice.
Foreshadowing there with founding. Mutual mutually owned company, as Vanguard would go on to be. And
Their grandfather
had then founded
A company.
Which would go on to become part of the American can company.
Which manufactured tin cans and was one of the largest companies in America for a long time. So it's like a a
Prosperous, well to do
well respected family that they are born.
Into.
But
During their early childhood here in the depression.
The family loses.
Everything.
They're
Dad becomes an alcoholic.
divorces their mom, abandons the family, runs off

Dying alone on a street corner years later.
Their mother, as you can imagine
is equally scarred from all this, suffers from severe depression, mental health issues
isn't able to provide for
The boys.
And so the Bogle Boys basically from the time they're kids, like before they're teenagers
They're kind of left to fend for themselves in the world.
So all three of them work several concurrent jobs while they're growing up and going through school. I mean, we're talking like paper routes, food service jobs, restaurants, manual labor, like anything that they can do to support themselves.
and their mom. Jack would talk about how the best job that he ever had as a kid
was a three AM paper route that he had.
Because the world was quiet and peaceful.
in the middle of the night and he could escape the chaos and strife all around him, as he liked to say it was a contrast to the rest of my life growing up. And you got all this from talking with Jack's kids, right? Yeah, yeah. I spoke to several members of the Bogle family for research and I mean this story is
Just incredible.
Yeah, it's interesting because
kind of through his last name and his great grandfather and his grandfather, they had this sort of family network where they were
in high society and he knew other well to do kids, but
Personally.
Their family's wealth and relationships were kinda in shambles.
They're both insiders and
Outsiders at the same time.
So as
The boys get older.
And they enter high school.
Again, the family no longer has any money, but they do still have these connections and relatives and friends who have resources.
And so they managed to get all of the boys
Scholarships.
to go to Blair Academy, one of the sort of prestigious East Coast boarding schools for their junior and senior years of high school. And Jack especially just like
flourishes at Blair.
He becomes a fantastic student and
He graduates cum laude.
He gets voted both best student and most likely to succeed by his classmates at graduation. Obviously he's going places. Yep.
Now.
There's just
One.
Problem though, as Jack and David are approaching graduation,
the boys in the family still have no money, even though they've gone to this, you know, prestigious boarding school that they're gonna graduate from.
And they all need to keep working.
both to support themselves and, you know, their mother who's still alive. So
The three of them get together.
And decide that
Hey, because of our situation.
Only one of us should actually go to college and the other two
Need to keep working and providing for the family.
And because Jack has been so successful at Blair and is such a good student, he gets chosen
As the one.
Of the brothers that's going to get to go to college. And Jack would say that like the weight of that decision just rested on him for the whole rest of his life. Like he alone.

And he felt like it.
tremendous obligation to make good to his family on this opportunity. And the other two never go to college. I mean all three remain close, but
David and Bud never go to college.
And it's funny, listeners, David, you're referencing the things that Jack would say.
It is
incredibly easy to find Jack's words everywhere. There is no shortage of commentary that Jack would give on his own life, on his philosophies. The man gave
thousands of speeches. He wrote memoirs. He wrote twelve books, investment advice, reflections back on Vanguard. He would go on TV and talk to journalists and speak in classes anytime anyone would have him
So there is no gaps in historical record of uh Jack's life. Of Jack's memory, yeah. Jack loved nothing more than to give a speech.
So
After graduation from Blair.
Jack goes on to college at Princeton.
Once again, on a work scholarship, he's working in like the dining halls. He ends up working in the ticketing office for athletic events and football games. And while he's at Princeton
He becomes fascinated.
with економікс
after he takes a intro econ course in the fall of his sophomore year.
During which he gets a D plus on the midterm. An inauspicious beginning to his finance career. Yeah. But he loves it.
He works hard, he finishes with a C minus in the class. Incredible for like you know.
The guy who would go on to revolutionized
All of finance. Yep.
So the next year.
During Jack's junior year at Princeton.
He's
decided that he's gonna major in economics or concentrate in Princeton's, you know, fancy terms. We don't have majors, concentrations. Really? And
Yeah, yeah, really.
I know, I know, I'm sorry, I'm sorry. I of course went to Princeton, so went through all this. And specifically I also went through the rite of passage that Jack has to go through.
Which is he needs to write
A senior thesis. So one of the hallmarks of Princeton is that every single undergraduate
Must write.
A senior thesis, which must be a unique piece of scholarly research, is
in order to graduate. Uh it's it's like a mini version, a very, very mini version of what you would do as a PhD. Mine, of course, was on the marketing history of champagne.
being a French literature major. Which is so funny for acquired. Like it's actually very useful for us in the L VMH episode. Incredibly useful. There you go. David Rosenthal, Jack Bogle, you know, the connection's bound.
Okay, continue the story. Okay. So one afternoon Jack's casting about for
What would become his thesis topic. He's in Firestone, the main library on campus, and he's reading the current issue of Fortune magazine.
Where he comes across an article
deep in the back of the magazine on page one sixteen entitled
Big money in Boston. It's about
The growth of a relatively new industry.
Uh
Open ended
public.
Fun.
what today we would call mutual funds. That term wasn't even in use yet.
And the article centers on this new firm.
That's leading this innovation, this new sector.
on Wall Street, even though they're based in Boston, the Massachusetts Investors Trust Company.
Known and marketed as
M I T.
No actual connection.
To you know
The real MIT, Massachusetts Institute of Technology, but uh this gives you a sense of the marketing to the public of these uh open-ended public funds. We'll see it over and over again on this episode, appropriating
Prestige is a signature of the mutual fund industry. For really the the finance industry.
The interesting thing about this, you might say, Well what do you mean mutual funds were new at this point in time? Well
That comment that I made before the Great Depression in the twenties
Only one or two percent of Americans owned stocks.
By nineteen forty nine
That was still only up to four point two percent.
of Americans.
And what they were doing is they were
working with a stockbroker to buy individual stocks. There really hadn't been any academic research around finance of any kind yet, let alone sort of investment and diversification and funds. So
this notion of you are going to mutually pool your money with a bunch of other investors into a fund and buy a basket of stocks in that fund and hold it for an open ended period of time, these public equities.
That was brand new. Yes.
And this is what Jack decides to write his thesis about, this new phenomenon.
Now
They actually
Two important things to talk about here that you started to allude to, Ben.
One is this concept of a
Open and
Fund.
Versus.
Closed end funds.
So this is the real pioneering thing that
Yeah.
We're not gonna call it MIT here. Pioneered, which is there's no set fun size.
It's elastic. So it's not like they have to write a prospectus and go out and say, We are raising a one hundred million dollar fund and get everybody in it and then, you know, it gets to a hundred million and then they close it and they manage it. Nope. Could be one million, could be a hundred million, could be
Five trillion, as we will see approaching towards the end of the year. You keep dumping more dollars in and we'll keep buying more stuff in the basket. Yep. And
That also means that investors in the fund can
Come and go as they please.
There's no lock offs, it doesn't have to be a set number. You you buy into the fund, you hold it for a while, hopefully it appreciates, you can sell out of the fund.
It's everything we know today.
About
mutual funds, but until this concept of an open ended fund was pioneered you couldn't do this.
Now
You mentioned.
If
Americans held stocks at all at this point in time. They held individual stocks through brokers.
These funds
came to be distributed exactly the same way.
Through
Stock brokers. You would call up your Merrill Lynch broker and instead of saying, Hey, give me
five shares of General Electric, you'd say, Hey, give me a couple of units of the Massachusetts fund, et cetera, et cetera.
Yep. And so the marketing, the distribution, it relies on this broker dealer network to sort of
sell the funds on behalf of the the fund management company itself. Yep.
And the brokers.
We're getting paid by this. Oh yes. Oh, were they ever. So they would take what's called a sales load.
Usually like
Seven and a half to eight and a half percent of every dollar.
that a client was putting into the fund.
The fund manager would then kick back
to the broker as a spif for
Putting their clients in the fund.
And it's a kickback.
out of the money that was just invested. So if you're investing a hundred dollars into one of these funds,
Well actually only ninety one and a half dollars are going in.
as the investment and the rest is going right out as this effectively distribution fee. It's your friendly neighborhood stockbroker. Now the funny thing is if if we didn't have the context that we have today, which is I invest a hundred dollars and basically a hundred dollars goes into the thing that I'm investing in, or at least that's the way it kind of feels. This was normal.
Paying for distribution is a very normal thing across every business and every sector. You have to incentivize
people to push your product through marketing, through advertising, through sales commissions, through hiring a giant salesforce yourself, these are often very large costs.
I mean, for example, retailers
often double the price of something when they sell it to the public. But the revenue here is not$100. The revenue to the fund is like
$2 per year in fees. So paying$8 to the broker dealers is a giant egregious amount to sell the product. I mean it's like four times the amount that the fund itself actually makes.
Right.
Okay.
So that's number one to understand about these new open ended mutual funds. Number two
Also might be crazy or not crazy, depending on your perspective.
These new funds are
Like the Massachusetts fund.
weren't really set up for the benefit of their customer base, the
Fund holders.
Rather, they were created and organized by the investment managers.
Who started and ran them.
with the express purpose of generating profits
For themselves. Right. It's a business. And the way that that happened was the people who set up the fund created
A separate company called the Management Company.
That had a contractual relationship with the fund.

a percentage of assets that would, you know, be their revenue and
Ultimately, this is a very high margin business. Uh, their profits. This is effectively the way that all finance works today. There's a management company.
That
performs the act advising all of the investments in each of the individual funds that the principals own and run it like a business. Yep. And that management company would be responsible for three things.
Regarding the fund. One
making investment decisions, allocating the capital.
Two.
controlling marketing and distribution, which as we talked about, mostly was just turning around to whatever their favorite network of stockbrokers was and kicking it over to them for additional fees.
And three.
Managing the like back office and administration of the funds. So like the register of the fund holders, the investments, the allocations of shares, tax, et cetera, et cetera. Legal, compliance, bookkeeping, making sure to communicate
the prices of the assets with the newspapers so they can print it all the administrative stuff. Yep. And the way that the Massachusetts fund worked is the management company
Just got paid a fixed

of the assets under management that year.
For the fun. So you can see the immediate conflicts of interest all over the place here.
If
Management of the fund.
gets paid solely based on the size of the assets
In the fund.
With no penalties or rewards for
actual investment performance.
Well you're basically
Just incentivized to grow the fund as large as possible and market it as best as you can and
Skim a lot of fees off the top. Th there's a tiny bit of performance benefit built in because if the assets under management grow organically by the investments performing well, the fees grow, but it's very different than the way that a lot of funds would go on to be structured later with carried interest or a promote or some sort of performance.
incentive. Hurdle rate, you know, it to it gets to benchmark, et cetera, et cetera. None of that. Yes. Investment returns are but one sort of arrow in the quiver of management companies at this point in time, too.
grow their profits.
And these profits.
could be very, very, very large.
So
Let's say, for example, you have a hundred million dollar fund, which was reasonable even in that day.
Yeah.
And it would have a management fee of like
one and a half percent of assets.
Annually.
For a public equitif. Right, right. So as a management company group in this hypothetical hundred million dollar fund.
You'd be taking one and a half million dollars a year home.
Rain or shine.
In nineteen fifty. That's like twenty million dollars adjusted for inflation today. And sometimes up to
two million,'cause I'd I'd seen the number two percent too for mutual funds in this era. And this is again, listeners, for mutual funds, basket of publicly traded stocks that
are just listed publicly to buy on exchanges, and these funds in exchange for
picking them, putting'em in a basket, and administrating it are charging two percent to do that. Yeah. And
Oftentimes they're not even doing
the administration. They're not doing the distribution. They're outsourcing that to
Stock workers.
They're outsourcing the administration too. So all they're doing is picking stocks.
And getting a lot of money for it. So the things we've talked about so far are the one and a half, two percent management fee, there's the eight and a half percent sales load. So that bumps you down from whatever your current principal is to
Even that on day one when you enter the fund, you know
being down eight and a half percent. And so you have that sort of to overcome. And then there's a third thing too, which is transaction fees at this point in time are very, very high. If the fund needs to go and trade stocks to add things to the fund or take things out of the fund, there were very, very large transaction fees relative to today to make those trades.
So yeah.
Back to Jacking.
Fire Stone Library here reading Fortune magazine.
Big money in Boston.
Indeed. And you can imagine how this
might be attractive to
Young Jack who
comes from this destitute family. He needs to earn money to support his family. This sounds like a great new industry to get involved in. So in the spring of nineteen fifty one,
Jack turns in his senior thesis to the economics department entitled The Economic Role of the Investment Company. He gets an A on the thesis and graduates Magnicum Laude from the economics department.
And David, what was the thrust of the piece? I mean, he wrote it like on this
concept of big money in Boston, but what was his takeaway?
Well, it's interesting.
The thrust of the piece is that
This is gonna be a big important industry within finance. Yep.
But Jack does also have some
idealism in here, uh, as a young whipper snapper. And you know, he recognizes everything that we were just talking about, which is that
the fees charged to fund clients.
Or
Gonna be a
Big drag on performance for these funds. And
He doesn't go all the way to say uh hey, maybe we should eliminate them, but he does say that
Probably the best way to maximize returns to fund holders is to try and
minimize the fees.
And he does even in the thesis go one step further and say, Well
It's sort of a tautological conclusion that the aggregate
average of all these funds.
are going to perform in lockstep with the market. So if you really want to try and beat the market
Then reducing fees is the way to do it.
Because all of these investors who are trading against each other collectively are the market. If you take all the winners and all the losers and sum them up,
and don't take out any fees, you come up with zero. Every positive winner on the uh the side of a trade has a loser on the other side of the trade. And so in aggregate, all investors together are the market.
Now, that is true in theory.
And in practice
Today that is absolutely true.
Back in nineteen fifty one
Jack was a little ahead of his time.
Because professional fund managers were a small, small minority of the market back then.
There were a lot of other players, mostly unsophisticated players, mostly retail traders, and
And so it really is not
Inconceivable that
the pitch as a professional fund manager that's gonna dedicate their
Life.
and all their working days to researching and picking stocks and betting against the market.
probably does have a good chance of beating the market back in these days. Yep. The pitch of I can outperform all this dumb money in the market.
Probably right and probably justifies significant fees. Yep. Yep.
Now as graduation approaches
Jack has a goal.
He wants to go to work in this
New fund management.
industry. And he manages to get
His
A grade senior thesis in front of another
Prestigious Princeton alum.
In Philadelphia.
Named Walter Morgan.
who had founded and was running another early
open ended public investment company in Philadelphia called
Wellington.
Management.
Walter Morgan hires Jack as his assistant.
right out of school, really takes a shine to him. Jack becomes sort of like a surrogate son to him. You know, Jack
didn't really have a dad and Walter didn't have kids, they become really, really close.
Now
Wellington.
And it's
Wellington fund.
was a super conservative and very highly regarded
early mutual fund.
That pioneered
The style that came to be known as balanced investing.
i a balance between stocks and bonds.
All within a single fund. So the sort of marketing slogan that Walter Morgan had used for the firm and the fund was, quote, a complete investment program in one security. You can see how.
This would be.
Attractive. Sounds great. And the Wellington fun by this point here when Jack joins out of school.
has attracted a hundred and fifty million dollars in assets. So they are
smaller than the Massachusetts fund, which was the largest fund in the world at that point in time with
Just under five hundred million in assets. But Wellington is still like among the top ten funds in the industry and super well respected.
This is what, mid fifties?
Early fifties, nineteen fifty one.
Okay.
So again, we talked about the economics for the management company, like
I think
Morgan and everybody at Wellington and Jack absolutely did have
their customers and the fund holders in mind and wanted to do a great job for them.
But they are making a lot of money. It's market. It's industry standard. Yeah, based on the fees and that fund size. Call it like
two to three million dollars a year flowing into a
reasonably low headcount, high margin business here in
Yeah.
Nineteen fifty one. Everybody's doing great.
So Jack.
Takes to Wellington and to Mr. Morgan like a pig in mud. He loves it.
He rises through the ranks from Morgan's assistant.
Mm.
Basically doing like every job in the company.
And
After a
Pretty short number of years.
He emerges as the clear
Air apparent too.
Take over.
Wellington when Morgan retires. Morgan was thirty years older than Jack.
And then ultimately in nineteen sixty five
Morgan retires, steps back and
Name's Jack.
President of the firm.
Uh.
Thirty five years old.
He's made it. Yeah.
Jack, he's come up in the world. He's gone from family ruin
Essentially an orphan to
president of a highly profitable and respected
Enterprise at age thirty five.
He's got it made.
And importantly a successful and pretty conservative.
mutual fund organization here with Wellington at this point in time.
Yeah.
Yep, absolutely.
But unfortunately
That conservative uh mindset and pedigree.
was exactly the wrong thing.
for this moment here in the mid nineteen sixties for
Wellington and its young hotshot new president.
Because Wall Street
And the investing world.
is undergoing a sea change from the hyper conservative mode that emerged after the depression
To what would come to be known as the Go Go Years. Pioneered by a small investment firm in Boston called
Fidelity.
Yes. But before we tell that story.
Now is a great time to thank our presenting partner
JP Morgan.
Yes. And today, listeners.
We are gonna talk about something that we mentioned last season on the Trader Joe's episode, supply chain finance. Yes. Think about when a buyer gets an invoice from their supplier. They're expected to pay quickly, but often can't or don't want to tie up that cash.
Wouldn't it be great if you could have a financing partner come in and fund that gap so the supplier isn't waiting up to thirty, sixty, or even ninety days to get paid? Well
That's exactly what a bank can do to bridge that time gap. The buyer gets to hold onto their cash longer and suppliers get paid faster.
True win win.
Yep.
And JP Morgan specifically has been doing this kind of work for decades at the world's largest companies. So supply chain finance, receivables financing, dynamic discounting, all of this is built on top of the trillions in daily payment processing moving through the system.
But the tooling and the teams around it have historically been fragmented. You've got treasury teams trying to maximize liquidity, you've got procurement wanting everything in one place, and IT stuck integrating.
All of it.
Not to mention the different portals, static reports, and all the manual setup.
So this is where JP Morgan Payments working capital accelerator platform comes in.
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So listeners, if you want to learn more about this new working capital acceler platform, go to jpmorgan.com slash acquire or contact your JP Morgan rep and tell them that Ben and David sent you.
And if you want to join us for some live interviews, we will be on the main stage with JP Morgan at the We Are Developers World Congress in San Jose this September. Click the link in the show notes to learn more.
Alright, so David, the entrance of fidelity into our story. Yes, and the go go years.
Which really were this like
violent reaction to all the pen up conservatism and prudence and austerity.
that had dominated
Wall Street and
Finance for
America and the world through the depression and through World War Two.
The
Journalist John Brooks would write about it later.
in the New Yorker.
Yeah.
The go go era was quote.
a method of operating in the stock market.
A method that was to be sure.
free, fast, and lively and certainly in some cases attended by the joy, merriment, and hubbub implied by
The go go term.
The method was characterized by a rapid in and out trading of huge blocks of stock with an eye to large profits taken very quickly.
So in other words.
The exact opposite of
Wellington management and Walter Morgan's approach.
Which is tough because if you grew up as a leader in that previous era and you believed in that philosophy, but this is what all of your customers, the the investors, want, what do you do?
Yep.
And Fidelity was the one that pioneered.
All of this. So
Fidelity goes all the way back to the early
Boston mutual fund scene kind of like same era as the Massachusetts fund.
They were always, though, like a kind of small bit player.
Until
The legendary Edward Johnson, known as Mr. Johnson.
who had previously been Fidelity's legal counsel.
Takes over the firm.
Right before the end of World War Two.
At the time Fidelity is managing just three million
Yeah.
And the previous owners who I think are, you know, retiring
They literally give Fidelity the firm.
Two
Edward Johnson for free.
Wow.
'Cause they just don't think it has much value.
No, I mean it w it was part of that like we're here to serve the clients, that sort of ethos. But also it was a
three million dollar fund, even with the high economics of

You know, if the base that you're pulling a percentage fee off of is three million dollars, you're just kinda limited in how much money you're gonna make here.
Yeah. But yeah, this is why like
Spoiler alert, obviously Fidelity is one of the largest fund complexes and financial companies in the world today. It's still owned by the Johnson family. It's estimated that their net worth is forty or fifty billion dollars thanks to this. Uh incredible. On a basis of zero, because they'd got it for free. Right, right.
So when Ed Johnson takes over Fidelity, he starts
trying a whole bunch of stuff to grow it. You know, he comes from the legal industry. He's not from a
Wall Street background per se.
different styles. He's not sort of steeped in orthodoxy, shall we say.
And
In nineteen fifty eight
He creates
A new fund within the group. I mean, this in and of itself was not unprecedented, but
Quite rare.
Most of the time
There was just one fund within a group or a management company. So for a long time, Wellington Management Company just managed the Wellington Fund. And Fidelity had just had the Fidelity Fund.
So Johnson creates
This new fund called the Fidelity Capital Fund, which is gonna be a growth fund.
And he hires a young portfolio manager
Name Jerry Sigh.

And run it.
And
Psy basically ignores.
All the Wall Street conservative
Conventions.
And just starts.
shooting the lights out with this fund.
He's taking big
concentrated positions in blue chip companies trading in and out of the stock, making quick profits.
I mean really like we talked about earlier
He's kind of preying on the unsophisticated retail investors out there. Like he could move the market by taking a big position, pop a stock, and then
Get out of it and book profits. There was a lot less regulation at that time, and there was a lot less sophistication in your counterparties when you were trading. Yes. So pretty quickly
Sigh and fidelity start to become like
Like a player. Like a like a real player. All the CEOs of all the big companies want to get to know him because
Hey, he has the power to, you know, really move their
Stocks. He becomes kind of like a quasi celebrity. And move it or not, he kinda has the power to
Be a giant
shareholder in your company now that he's attracting all his capital because people want to get in on his funds. Exactly. So the Fidelity Capital Fund within just a short number of years goes from
Basically zero, like startup initiative within Fidelity itself already a small firm.
To a three hundred and forty million dollar fund.
Here by nineteen sixty five.
When Bogle is taking over.
Wellington.
From
Mr Morgan.
So this is actually the backdrop.
To why
Morgan decided to hand the firm to Jack.
Here in nineteen sixty five, even though Jack is still so young.
Morgan had a crisis of confidence.
He's not sure that he's gonna be able to operate and be successful.
In this new go-go era. This is uncharted territory to him. So he actually gives a quote
To institutional investor magazine.
when the handover is happening to Jack.
He says quote I have been too conservative. And when he hands
the firm to Jack, his direction to Bogle is
I want you
to do whatever it takes.
To fix.
This firm.
Hm. Like we need to do something different.
So he's got the mandate. He's got the clear path.
To do as he sees fit.
Yep. So this isn't just succession. This is
Hey.
You should completely change our strategy to compete in this new era. Yes. Yes. So Wellington and its kind of whole class of funds, the the balanced funds that we had talked about, I mean it's stocks and bonds together, complete investment program in one security.
Before the go go era.
That balanced style.
was forty percent
of the entire fund market.
In nineteen fifty five. That had declined by nineteen sixty five.
All the way down to seventeen percent.
And would just keep dropping.
By nineteen seventy five, ten years after that, it was down to less than one percent of the entire market. They were going the way of the dodo, basically.
So investors are looking to
transition away from this blended stocks and bonds to
Funds that are only stocks.
And stocks that are trading
often and trying to
hit the highest number possible this year in their returns and, you know, taken some risk to do so. Well yeah, and specifically I think they don't even care that much about the underlying stocks. They want trades that book quick profits. Yeah. They want what Fidelity and Jerry Sai are doing.
Like, I don't care if you trade in and out of the stocks. I don't care if you hold G for
A day or a week or a year
If you buy it at five and you sell it at ten, like hell yeah, let's go. It's funny. I associate this with the eighties. I don't think I realized that it was also happening in the kind of nineteen sixty five to nineteen seventy
one era. Yeah, the eighties were an echo of this that happens here in the sixties.
Okay.
Yep. So
All this is happening right at the same time here in nineteen sixty five as Jack is taking the reins at Wellington.
Jerry Psy.
the he'd a celebrity fund manager here at Fidelity.
He starts to think
All right, you know.
Mr. Johnson here.
You're getting older.
I think I should take over the firm. Of course he does. Course he does, right? Like he's got the star fund, all the clients, he's the man about town, et cetera. Tail is all his time. Yep.
Johnson of course has
Other opinions, uh
No, this is my firm. This is my family business and I'm planning to give it to my son.
Ned Johnson, Edward Johnson the third.
So
Should be.
Okay, fine.
Buy me out.
of the equity that I've accumulated here in
Fidelity in the management company through my performance and um I'll go start my own fund.
He does. He leaves. He starts a fund called the Manhattan Fund.
In a
Absolutely wild.
You cannot make this stuff up.
He would eventually take over
The American Can Company
You know, that had been like co founded by Jack's grandfather. Whoa. Yes.
Cy would become the CEO of that.
He would transform that
Into Primarica.
And then sell it to Sandy Weill and Jamie Diamond.
And that would be part of the building block of Citigroup.
What? Insane. Completely insane. I had no idea. It's funny, when you were giving the history of the can company earlier, I was like, is it really relevant for listeners ha uh the vehicle through which
Bogle's grandfather
built the family business. Yeah. And it turns out that becomes Citigroup. That's wild. Through fidelity and
Jamie Diamond and did all all this stuff. You can't make this up. Wow.
So
This is the stew that's happening as Jack is taking over.
And
Pretty quickly he decides that the best course of action
for him as the new leader of Wellington is to take the
Well
If you can't beat'em
join'em approach or
More specifically.
Have them.
Join you.
So he goes out and he starts looking for
Go go style fund managers to merge with
and absorb into Wellington and transform Wellington into what Fidelity has done.
And I think first he was trying to hire people like this, but he couldn't convince anyone to just join as an employee. He sort of realized, Oh, I'm gonna have to buy one of their firms. Yeah, I mean hey, if Jerry Side just left because he didn't get a
big equity piece and fidelity and take over the firm like anybody else who thinks they're
As good as him.
You know, they're gonna want an equity piece in the management company.
Yep.
He casts about.
And eventually.
Jack finds a small new firm in Boston.
Founded by four young partners.
Thorndyke, Dorrin, Payne, and Lewis.
And the lead partner there, Nick Thorndike.
had just come out of Fidelity.
Where he had worked.
With Jerry Sigh and N Johnson.
And so
They've raised a new fund.
Called I Vest.
Investing in the go go style.
The young hotshots.
They have seventeen million dollars.
under management.
in their nascent go go fund.
Wellington.
At this point.
has two billion dollars
Under management. Which is huge. There's giant market share. Yeah. Even though they're investing in the old style of investments.
Yes, but back to the business model of the management companies where you're getting paid fees based on the percentage of assets under management, like the revenue and fee streams flowing into Wellington, even though they're declining are super high. Way higher than the startup
IVest fund out of Boston.
None the less.
Wellington.
And Jack feel like they're in such dire straits.
And need
this merger need to bring this go go blood into the firm so much
Yeah.
He ends up offering forty percent
of the equity in the management company.
to the four partners coming in.
From IVest.
Ooh, that's almost a merger of equals. Yeah. Two billion dollars for Wellington.
Seventeen million dollars for my vest.
Sixty forty split on the equity. There's a quote.
In the New York Times in a lead story about this.
Merger.
Some observers feel that Wellington paid too high a price.
For management personnel.
Many persons are said to credit the Boston group with a major coup.
Mr. Bogle disagrees.
With generous offers he had been unable to hire the men he wanted, to your point, Ben.
And he did not want to wait.
For promising men to develop.
Their skills.
This is a big deal.
I mean, Wellington is still, even though its style is on the outs, one of the
We know top ten.
mutual funds in the entire industry.
Institutional investor magazine runs a cover story on the merger titled The Wiz Kids Take Over at Wellington. And they have an illustration on the cover. You can find this on the internet. We'll include it in the email. With Jack as a four armed quarterback handing off footballs to each of the four iVest partners as, you know, the running backs to
Take them across the line. Score touchdowns here.
What could go wrong? What could go wrong.
Yeah.
Well
As you can predict.
After a couple more go go years.
The bubble bursts.
In the nineteen seventies.
The oil crises hit.
Stagflation hits.
The stock market declines fifty percent.
It is
Not quite great depression levels, but you and I, Ben, have also never lived through anything like the nineteen seventies in the US. It was
Bad. It was a lost decade. Even two thousand and eight was not this severe. Certainly the uh short lived COVID crash was not this severe. Uh software going out of favor in twenty twenty-two was not this severe. The dot com bubble burst was not this severe. This is something that very few listeners
will sort of understand the magnitude of and and feel intrinsically how bad this was. Yeah. I mean interest rates went to twenty one percent.
By the end of this.

I mean, the world basically fell apart a couple of years ago when interest rates went to what, like five?
Can you imagine?
So what was the good years of the go go time and then when did it fall apart?
through the sixties and then probably like nineteen seventy, nineteen seventy one, it starts falling apart. And then once the oil crisis start hitting and
Seventy two, seventy three, seventy four.
Go go just completely falls apart. So the IVest fund, they ported over the IVest fund itself into Wellington. It had continued to perform during the GoGo years. It gets a drawdown of 65% in one year, and they ultimately shutter the fund, like they close it down.
They closed down the IVES fund entirely. Oh, wow.
Yeah. But hadn't they already shifted the Wellington funds style to look a lot more like IVest. Wellington was suffering too, right? The the fund. Wellington was suffering too. I mean, really like Wellington is just uh
A battered ship taking on water on all sides at this point because
It had been out of favor during the go go years'cause it was too conservative and too balanced. It was underperforming the market. Underperforming the market.
Then it transformed basically into a
Go go fund took on a lot more risk.
by Nintendo Seventy three
the assets of the Wellington Fund have fallen all the way from two billion dollars at the time of the merger down to four hundred and eighty.
million dollars. So over three quarters of the assets in the fund and thus
Three quarters of the revenue to the management company.
Poof.
Up in smoke.
Now, all of that wasn't because of the assets decreasing in value, a lot of that was redemptions where investors are taking their money and going elsewhere. But doesn't matter to the management company. For the for them, AUM is AUM. And this is somebody made this point to me in research.
Management companies of investment firms have phenomenal operating leverage.
as we talked about earlier. As you are growing
Your funds under management.
You don't have to scale your headcount or your operations or your costs in the same way. And so you can get this, you know, amazing operating leverage and profits. Much like a software business. Much like a software business.
Unfortunately, that works in both directions. So if your assets under management ever start to shrink
That goes away very quickly. You still have almost all the exact same operational responsibility
that you did when you had lots of assets when you have a smaller number of assets. Yep.
And thanks to
the merger, there are now four new partners around the table with mouths to feed who own forty percent.
Of
The management company.
So then in the midst of all this, to complicate things.
Even further.
Jack.
Starts
To develop a crisis of conscience.
As all these losses are piling up.
And
Wellington and clients are
withdrawing and they're shutting down the Ivest fund.
He starts wondering.
No, first to himself.
And then allowed to his partners.
Guys, what are we doing here? Like
We're still
Taking fees from our fund clients, yes, our assets under management are shrinking, so our fee stream is shrinking, but for the clients who are sticking with us,
We're not lowering our costs. We're still getting paid pretty well.
And we're just incinerating their capital.
Something feels
Wrong.
Here. I've heard this referred to as his Jerry Maguire moment in the book The Bogle Effect. Where uh you know that famous scene in in Jerry Maguire where he loses confidence in the entire industry of being a sports agent and writes a letter and says, Guys, we're gonna do this right. We should change everything and and blow up our whole business.
And uh as usual, you know how that is received. Well.
So Jack's Jerry McGuire moment here as he gives a speech.
To the whole firm.
Where he throws out this idea.
that hey, maybe we should m actually mutualize.
The firm's funds.
dissolve the management company or have the fund itself acquire the management company.
And eliminate.
All of the excess profits.
That we are making and just
Solely serve.
our fund holders operate at cost
And at least reduce
Or get as close to eliminate as possible the fees that they are paying for this
Frankly, not very good service that we are providing them.
A mutually owned group of mutual funds or uh mutual mutual, as Jack loved to say. Yes, indeed.
Now, buy it out, why would they have to do that if
Jack and
Potentially his partners out of the goodness of their hearts were were gonna give it.

Well,
Before Morgan retired,
he had taken the management company public.
Like floated it on the stock exchange. So there were public shareholders
They're in the management company, in Wellington Management Company, along with Jack and along with the four
I best partners. So you not only have to get, you know, your camp, the Philadelphia camp, to agree, but you need the Boston guys to get on board too, that are a big voting block at forty percent, and all these public shareholders. And
Why would anyone do this? Because it's not rational or economic. It's uh charity. Let's take this business that
generates a bunch of cash and has enterprise value, let's stop generating the cash and let's take its enterprise value and effectively call it zero now and give it to the funds itself. Commit suicide with the company, effectively. Yeah. And just to really highlight this again.
It's kinda easy in retrospect to look at this and be like, Oh, Jack, he was like so morally upstanding and he stood up against Wall Street and like all of the you know crooks and fees out there.
That's not the case.
This was how the industry operated. Nobody was asking for this. No other firm
changed how they operated. No other firm reduced their fees or mutualized
No clients.
got mad about it. The government was fine with it. There were not protest groups outside of headquarters. Yeah, there's no Occupy Wall Street in the nineteen seventies. Purely him saying
Nobody's asking, but I think we should do this. I think this is the right thing to do. Like it is really
lunatic friends to the extent there is a moral conflict
It exists solely in Jack's kind of head and in his heart. Yeah. So then as you said, as you can imagine, this goes over like a lead balloon within the partnership, which is already quite stressed with all of the
Problems going on.
So
Yeah.
On
January twenty third.
Nineteen seventy four.
at the Wellington Management Company board meeting.
The four IVs partners band together.
Rally enough votes from the public shareholders.
And they fire.
Jack.
As CEO of Wellington Management Company.
And this is a few years after his original proposal.
For
mutualization for making the the fun self-owning. There is this multi-year drawn out sort of struggle between them.
Where they just don't see eye to eye on anything. They have completely different philosophies and it gets so contentious. You know, they they ask Jack to quit. He says, I refuse. You know, he he even writes a many, many, many page m memo speech, gives it to the whole board of directors, uh, espousing how much he refuses, and then they formally actually do fire him. Yeah. Yeah.
This is an extreme event.
Yes. An extreme event. And from Jack's perspective, he partnered with these guys. They came in. It was a fox in the henhouse, and they forced him out of his own company. Yep. That is sort of how he is viewing it.
Yep. And from their perspective, this guy lost his marbles. We had public shareholders to look after. So January twenty third, nineteen seventy four.
Jack is fired.
As CEO.
Of Wellington.
Management company.
But
Now here's the thing. Wellington Management Company and the actual Wellington fund, and at this point in time funds, they had several funds.
Are technically separate.
Legal.
Entities. So Jack was CO of Wellington Management Company. He was also the chairman of each of the individual
Funds.
Which collectively together had their own
separate board of directors for the funds. There was one board of directors that represented all the funds, and Jack is chairman of that board of directors. Now up until this point in time in the history of American financial organizations
That's
A footnote?
But that doesn't matter. That's like a legal technicality. It's like yeah, yeah, the funds have their own directors, but like really the management company, the funds, it's all kind of one thing run by the same group of people. Yep. They were about to find out
just how powerful that technicality was. Or Jack was about to test it, shall we say? So he hatches a plan. He's like, all right.
Well.
You guys gonna kick me out of the management company and think I'm just gonna go quietly into the night?
You don't know Jack Bogle.
Mm.
And for anyone who is not in
finance, PE, venture, anywhere in in the financial ecosystem.
The funds
traditionally have the right
To select.
What investment manager
They want.
And the investors in the fund who elect a board of directors of the fund rely on that board of the fund or the management of the fund to
pick the investor. So the funds actually do have the power to pick whether or not they want to stay with Wellington management or go find a new company that could advise them on how to invest this pool of capital. Or do something different, et cetera.
Nobody had ever tested this idea before, though. Yes. Yes. So
The next day after Jack is fired as CEO of the management company, he calls a special meeting of the board of directors of the funds.
Which is his prerogative as chairman. And he proposes that they as the board of the funds vote to
One, do just what you said, Ben.
Sever the management company relationship with Wellington Management Company.
And two
Do Jack's uh, you know, fever dream idea.
Mutualize all the management and operations of the funds.
hire their own staff
And run it all directly within the fund with no separate external management company or fees. The phrase that comes to mind here, although it is
used completely differently in this context than its original context is
Your margin is my opportunity.
Jeff Bezos.
And in this case, it's not the Amazonian comment, which is hey, you're charging high margins, I'm gonna charge a lower margin, so I'm gonna get your customers. It's
Hey.
I'm gonna slash margins as close to zero as possible. I'm gonna mutualize the ownership of two zero, not as close to zero as possible. There are there's not gonna no longer gonna be any profits. There will still be costs. We will operate at cost, but
We will forego
All profits.
Right.
It's effectively like a
Poison pill.
Like they're not gonna get rich. I'm not gonna get rich. There's these high margins, and I'm gonna use the fact that you're making high margins as my opportunity to come in and say, Nobody's gonna make any money, we're gonna
shift it all to this new organization that I'm gonna create and
Nobody's making anything. Yep.
So
How do the funds?
board of directors react to this. Um
Perhaps not quite as negatively as the management company partners and board of directors, but they're still
Pretty shocked.
Wow.
Okay, Jack. Um, you know, we've heard you talk about this before. Um
Obviously we're in an acute situation here.
And you're kinda conflicted, buddy. Yeah. Yeah. Are are you being vindictive, maybe? Is there anything motivating you uh really pressing us to take all the profits and slash them to zero and go with your like brand new company that you're proposing here? Yep. But here's the thing.
Jack does have a very good point, especially to the director's
of the fund, whose fiduciary duty is to do what's in the best interests of the fund holders,
What he's proposing is
Pretty obviously in the best interest of
The fund holders.
Right, he's making the pitch to sort of a non conflicted group, the the board of the funds.
theoretically is only looking after
the investors in the funds and not the shareholders of the management company. Indeed.
So the fun board says like
Okay.
We need a pause. We need a recess. We need a little more time for the dust to settle and figure out what to do here. Let's take a month.
And Jack, we will direct you.
Since you want to do this.
To go prepare.
a study, a feasibility study of like what are the available options to us.
As the fund and the board of the funds.'Cause you're kinda just proposing the nuclear one here. Can we get the whole gradient? Give us the full gradient.'Cause it is kinda nice relying on Wellington. I mean, they've built out a lot of infrastructure here on the management company for us to do what we do. I
It'd be a little bit nuts to just say
sorry, we're starting something new from whole class. From scratch. So
Jack goes away.
Prepares a two hundred and fifty page report
Of course. It's like he's back in his carol at Firestone and you know uh library writing his senior thesis again.
And it's full of data. I mean, he has really, really done the research, done the math. He is making a extremely well formed pitch here.
Yep. So the
Thesis statement of this report that he presents to the board the next month in February reads Quote.
The present structure has been the accepted norm for the mutual fund industry for fifty years.
The issue we face is whether a structure so traditional, so long accepted, so satisfactory for an infant industry as it grew during a time of less stringent ethical and legal standards is
is really the optimum structure for these times and for the future and for the Wellington group of investment companies. Or rather.
Should the funds see greater control over their own
Destiny.
And obviously Jack's answer to the question is yes.
I mean fire and brimstone. He's got a preacher in him. He's he's motivated. He is motivated here.
U and he actually has a telling quote.
in his memoir that I think speaks to his mindset at the time. He says yes
Mutualization.
Of of the fund and funds activities.
Was totally my idea.
And
I realized that a mutual company would never provide me with the personal fortune that so many denizens of Wall Street would earn.
But it offered, I believe, my last best chance.
To resume.
My career.

Obviously it's both here. Jack is idealistic.
And this is his chance to save his career. This is his opportunity of last resort. Yes.
Ultimately.
The fun board comes back.
And does
Vote.
With Jack.
Barely.
Infinitesimally barely.
They they carve out a small job for him to do, but not the the whole thing that he had asked for. Yes. They say, okay.
You can remain chairman of
The funds.
And we will endorse some very, very small degree of separation from Wellington management company.
But not everything.
And not to start.
We will empower you to go form a new subsidiary company.
Of the funds.
collectively owned by the funds and thus the
Yeah.
And we will authorize that.
Company
To take over fund administration or
Only.
So not investment management.
Not
Marketing and distribution. Those will remain with Wellington Management Company.
But we will run a little experiment.
All the back office. Tax, accounting, legal
Fund holder registers, et cetera.
Which is
Jack's least favorite thing to do. Yeah. I mean which is everyone's least favorite thing to do. The the the fun stuff is picking what to invest in and seeing if you can then go out and, you know, sell clients and bring in new money. Traditionally, it's fun to be the stock picker or it's fun to be the salesperson. It's not fun to be
the person making sure the accounting checks out. Yep. I and indeed most management companies outsource this. They don't do it themselves. Yep.
And technically, he was explicitly precluded from all
Offering investment advisory services. To the funds. Yes. To the funds.
Yes. Stor that away, listeners. Keep that in mind.
And Jack logs the win.
He's like, Cool, I got something. Yep, yeah. So I mean, hey, look, it was either his career is over and he's you don't
out on the street proverbially. Although wealthy. I mean he's he's like medium wealthy by this point. He's had a
twenty year career during a great era running a finance company when the finance company had pretty fat profits. So he's made
I don't know, I'm gonna guess five million dollars and he wasn't a big spender, so
Doing pretty well.
Yeah.
Depends how much salary and draw he was taking from the management company. But
Of course he's gonna take this opportunity. Whatever I can get. So he's like, Great, let's do it.
He writes in his memoirs.
I knew a rough road lay ahead.
For my goal ultimately was

Firm.
In other words.
Take over everything. Fully cut Wellington out.
And I took on my new leadership role in the same way I had left my previous leadership role.
Fired with enthusiasm boy fired with
Great fire and brimstone would be a a better way to put it.
Yes.
So
Once the fund board votes for this, other
People in the industry hear about it, of course. And Wellington, even though they're much smaller now, is still a widely known, well respected, big firm in the industry.
The reaction is
Severe.
So Forbes magazine runs a piece.
About all of this infighting.
happening at Wellington.
with the headline borrowing from the famous curse from Romeo and Juliet of a plague on both houses.
They declare. Like these guys, they're ruining it for everybody.
Jack tells an anecdote.
at the beginning of of the book's Stay the Course, which is his memoirs, that
Around this time he travels out to Los Angeles.
When while he's there, he gets an urgent message.
from the head of Capital Group.
out there. It's big.
active fund manager in Los Angeles. John Lovelace Jr. is the head of Capital Group says he needs to meet with Jack privately. Jack's like, Well, my schedule's pretty booked. I got a lot going on here right now. Um
I'm flying out of LAX tomorrow. The only time I could do would be like a six A. breakfast at LAX tomorrow before my flight home.
To Philadelphia. Lovelace is like, Okay, fine, I'm there. Jack shows up, Lovelace is already sitting down, he's like
Stone cold.
He says, I hear
You're planning to mutualize the Wellington fund.
And
Texas. Yes, John, that's right. In fact, I got the votes. We're we're starting the process. Yeah, ish. And John turns to him and says, If you do that, you will destroy this entire industry.
Yeah.

Now of course what's fascinating
is that uh, you know, capital group and active management today has kinda never been better. Capital Group manages
Three trillion in assets. You can see why they had the fear, which is if you provide this existence proof.
That
you can run this business at cost and you don't need to pay huge sums of money to the people managing this, then
our customers will demand the same from us.
Which is
Sort of right.
Because you can buy an S P five hundred index fund from basically anyone today at basically no cost.
But also sort of wrong because
Capital Group.
BlackRock, Fidelity, these are all giant profitable companies. And so I think that the interesting thing to sort of tease out across the rest of this episode is
The competitors were probably right to be terrified of this sort of communist act.
where they took a crown jewel of capitalism and and
Communized it.
But at the same time Kinda like the NFL, it ended up being great for everybody. Right. Right. So
Yes. So
Jack's starting down the path.
The first thing that this new subsidiary company needs.
It's a name.
So right as this is happening.
Jack gets a visit.
from an antiques dealer. Again, you can't make this stuff up.
Who offers him some prints of British naval ships.
from the Duke of Wellington era. Uh the Duke of Wellington was the British prime minister and military leader for whom Walter Morgan had named the
Wellington firm.
Jack is looking through the prints and one of them is of a ship.
The HMS Vanguard, which was the flag ship.
in the naval battle of the Nile where the British forces defeated
Napoleon.
And ensured British independence and the state of Europe for centuries to come.
And so on the spot he decides Vanguard is the name.
Which is
Hilarious.
Because Vanguard is a great name.
It is steadfast, trustworthy, everything we think of it today. Short, memorable, unique exactly memorable. It also, you know, is the vanguard, it's the leader, it's a pioneer, it's leading a revolution.
But knowing all the history now, like
Obviously Jack chose the name because it represented total victory and like complete annihilation of the other side. Yes. Uh so funny. Not at all how people think of the brand today.
So in September of nineteen seventy four
The Vanguard Group.
Files.
For incorporation.
Commencing operations and taking over the back office.
of the Wellington fund and the other funds that
Wellington.
Managed.
Exciting.
Nobody cared. All of the great fear that, you know, John Lovelace at Capital Group and Forbes and everybody else in the industry had about this is gonna destroy everything.
This is gonna burn the industry to the ground. Well, because it didn't actually get mutualized. Yeah, nobody cares. If any venture capitalists are out there listening, or private equity guys, or if you're in the investment management business.
Okay, you switch back offices. This happens all the time. This happens every five years. This has no bearing on your peers in the industry. What would have a lot of bearing is if you said, Oh, all of my fees and all of my sort of performance compensation, that we're just gonna take down to at cost. That would be significant, but that is not what this is.
No it was not.
And it turned out that Jack would need to lead another
Second
And totally separate.
Revolution.
As well.
Before anyone would pay attention to what he was doing.
A revolution.
Not in the
legal structure of funds
But in the very nature of the investment product that they offered.
But David, I thought he was barred from doing that. Well
If you're not
offering any investment advice at all.
Perhaps you still could be in the business of deciding what to invest in.
If you're not actually doing any deciding. Yes.
And that second revolution
Would be
The index fund.
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So David.
The creation of the first commercially available index fund.
For
Retail investor consumers.
Mm.
Yes.
People really care, right? They're they're they're lining up a around the block for this thing. It's the most hotly anticipated financial product of all time.
Except that it's not at all.
It's so funny.
This would change the world.
And not just like a little bit. Like
A massive
Massive impact. Most of all of your net worth is in these funds. Yeah. People today are concerned.
That index and passive funds.
are too much of the market.
What will happen to corporate governance when seventy percent of the equity ownership of America's companies are all in passive index funds? Like this you know
Existential fear happening right now.
That could not be farther away from the reaction
in the industry to the launch of these things fifty years ago.
Okay, so David, take us to nineteen seventy four and the journal article that inspired it all.
Yes, the journal of portfolio management.
Where Nobel Prize winning American economist Paul Samuelson
had written that fall in nineteen seventy four.
That
He had been studying
Market returns.
and active fund manager returns in this new mutual fund industry.
And he had found no
Actual
Evidence.
That any fund managers
could systematically outperform
The market.
And
In the conclusion of the paper.
He argues that
Well
There's an obvious uh opportunity here.
Somebody should come along and offer a fund that quote
Apes the whole market.
requires no load and keeps commissions, turnover, and management fees to the feasible minimum.
Aka
An index fund.
And interestingly, I actually didn't realize he proposed the sort of commercial availability of it like that. The part of it that I read was some large foundation should set up an in-house portfolio that tracks the S P five hundred index, if only for the purposes of setting up a naive model against which their in-house gunslingers can measure their prowess.
Yeah, no, he was thinking about distribution to retail, like in that paper by talking about no load. But you are
Touching on something.
This idea of an index fund that would passively track
The stock market.
Was not.
Totally new.
A couple people in institutional circles
had had
the same or similar realization
in the years leading up to this, that this could be an interesting idea. And
In fact, the whole idea of having an index or indices in the first place
really is the precursor to this idea. Like people
wanted some way to measure the entire market. I mean that's what
the standard and poorest five hundred is that's what the Dow Jones industrial average is. These things go all the way back to the eighteen hundreds. Like newspapers wanted a way to report on the movement of the market.
The delicious thing is that it took
like a hundred years from the founding of those to think
Huh, maybe this isn't just a benchmark we should measure ourselves against, but maybe this is actually a great investment product. Yes. This could be an asset class in and of itself. And it makes sense because why would anyone want to buy the average?
I mean, why would you want to own
The fiftieth percentile.
of the market isn't the whole point to work with a great investment manager who can
beat the market. Why would you just want beta? You want alpha on top of beta?
It's not a
Immediately sailable.
Proposition.
To say, hey, don't you want to be average. Right, right. It's uniquely counter to this sort of whole American way of being an aspiration of America. American exceptionalism. It's funny. If this had all been in Europe or somewhere else, it might have emerged sooner. It's funny. Anyway.
So yeah, a couple people had
tried to make this idea work on the institutional side.
Before.
Most
Prominently.
The pension management
division of Wells Fargo. Uh so like the division of Wells Fargo that would manage and administer
pensions for large corporations. They had actually created
An index fund for
The pension fund of the Samsonite luggage corporation a few years earlier. Amazing. Incredible. But it had failed. They couldn't make it work because
Actually
This was a deceptively hard problem.
In order to
do this to create a fund that continuously
tract something like the S P five hundred index.
You needed a lot of software.
You had to have automation. Humans
Could not do this. Right. The point of the S P five hundred is to create a subset of the total market that has essentially the same returns, but with a smaller set of companies. So you don't need the thousands of companies. You just need this five hundred. But even
setting up the systems to track five hundred companies movements day to day
Sophisticated Yeah.
The other thing that makes it challenging is
It's kind of expensive.
to
buy especially in whole share denominated amounts.
a representative correctly weighted
set of the entire S P five hundred. Today the minimum quantity of dollars you would need to do it on your own without buying into a fund is about three and a half million dollars to the sort of minimum efficient or or minimum representative S P five hundred.
So
Couple years after this, along come
Jack and Vanguard in this unique moment where they they need something to make their model work.
And computing and software is like
Just now starting to be
Capable of
handling this. And Jack is reading the docs very carefully. He's having tight communication with his board of directors, and he realizes he's got
A little bit of daylight. Where he can say
I am not
Actively.
Taking Vanguard and having it.
offer investment advice in any way here.
But what we do wanna do is we wanna create this new fund that will require no investment advisory services, that will purely be this
Index of the S P five hundred.
And we can run it under Vanguard and it's within our mandate. Yeah. We don't need to involve Wellington.
His board agrees. Yeah. This is sort of the acid test. He goes in and says, What do you think? Is this what you've given me permission for? And they come back and say, Yes. Yes. As Jack puts it in his memoir, you know, kinda like uh you know uh rendering a guilty verdict in a legal trial. He and early Vanguard there

To commit the crime, or in this case, you know, create the first index fund. But also the motivation to do so because this was the way around.
This prohibition against active management.
And the thing that Jack was starting to realize, which is the culmination of his senior thesis and the Paul Samuelson article, is that
This could actually be very successful. Yep. He runs the numbers because he's Jack. The S P index without the fees beat half the active managers.
And over the full decade it would beat seventy eight percent of them.
So Jack realized, wait a minute, it's impossible to run an index at zero cost, but at scale, actually, you could approach zero cost.
If you just own the S P
then you could beat three quarters of the other mutual funds in the market.
So
There really could be something here. Yeah. This is a really important subtle point.
If you are able
To pull this off.
And just own the average of the market.
but do it at significantly lower fees than all of the other managers in the market.
You will actually have top tier performance.
Because if your fee that you are charging your clients is
is lower than the average fee of the other managers in the market.
Well now that Delta between
Fund returns minus fees is much lower for you. So if you say, Great, I'll just take the average.
But I'm gonna actually get the average. You will do much better than most other people in the market.
So here's the math to illustrate what a giant difference it is. You might hear, oh one percent fee. That's that's not so bad.
You know, and and at this point it was actually higher than one percent fee. It was one and a half to two, but let's just say one percent.
But that's one percent of the total assets. So if the stock market were to return 7%.
But you owe one percent in fees.
That's actually one seventh of your gains that you are giving up, or around 15% of the returns. And so when that happens year after year after year,
it really cuts out your returns at the knees. And I did a little spreadsheeting just to check the math on this. If you investe a hundred thousand dollars at age twenty five and you got seven percent market returns for 40 years, you'd end up with 1.5 million dollars.
But if you paid a one percent management fee along the way each year
that's a six percent annual return. Instead of one point five million dollars, you end up with one million dollars. Yeah. That's an extra fifty percent for your retirement that you could make by not paying
one percent in fees each year. I mean the the long term impact
Is that
People thought
Bogle was sort of this zealot for indexing and he hated active management, but that's not true.
He was a zealot for low fees. He always believed that
Hey.
Active managers might be able to outperform the market.
But like Samuelson observed,
The durability of that is
really, really hard to do and consistently outperform for decades. But what is really obvious is e even with just a one percent fee, that's a fifteen percent
outperforce that every year you're starting with a disadvantage and you got to beat the market by 15%.
Just to break even. Yeah.
Gosh, I'd I'd rather not have that structural disadvantage. That's the thing that is really Bogle's legacy and what he was obsessed with. Yeah, later in life, Jack would come to uh call this the cost matters hypothesis. And your example there of an extra half a million dollars in a retirement account or a college fund or even just a savings account.
That's why I said at the top of the show, millions and millions and millions of people
completely had their lives changed by this. An extra five hundred thousand dollars or you know whatever base you start with. That's the difference between
Meaning to rely on your kids to support you in retirement and being self sufficient. That's the difference in educational outcomes for your family. That's so important.
Just because of that one percent delta in fees.
That's right.
Another way to put it.
Active managers in aggregate.
mathematically cannot beat the market after fees.
And the in aggregate is doing a lot of lifting there, but that's the point is the market is made up of active managers. They can't all beat themselves. Some will outperform in any given year and justify fees, but the median active manager
will underperform by exactly the amount of their fees. Yes. And since you can't reliably identify the winners in advance, especially when your goal is to stay invested for decades.
the expected value of active management with fees as a whole is a negative expected value compared to an index fund without fees.
Yep.
So
Back to nineteen seventy five, nineteen seventy six, and
Jack and his merry crew.
And they do indeed call all employees at Vanguard crew members for many, many years'cause of the ship and the nautical theme, et cetera. That's perfect.
Jack assigns one of the first employees.
Guy named Jan Twardoski.
To go write the software.
To do this.
To create
The first retail index fund. He goes off, writes it in the APL programming language on a time sharing computer in Philadelphia.
Jack, meanwhile.
goes off to Standard and Poor's headquarters and negotiates a licensing fee with them.
for the rights to use the S P five hundred index as the basis for this first index fund. There's a great story that Jack tells on a podcast interview about this.
He was negotiating with whoever the head of the department that ran the five hundred was it S P.
And uh
Guy's like basically like uh I don't know. Gosh, should should you be paying us? Should we be paying you? This is gonna be great marketing for us. Uh They eventually land on Vanguard paying S P twenty five thousand dollars per year that they sort of
Pull out of thin air is the transaction value for this. Which is absolutely hilarious because
Now
Index fund.
Licensing is
Basically the entire business.
Of
Indices around the world. And it is extremely high margin. I've got the numbers on this.
People estimate that Vanguard pays S P Global something like three to four hundred million dollars per year and is their single largest licensing client.
And the licensing segment of their business as a whole does one point eight five
billions a year. And to your point, David.
That is
Essentially all profit. Right. I mean, the whole world has agreed the S P five hundred is the standard brand for the market.
And so they just get to
Take
A rent of a
1.85 billion dollars a year for anybody who wants to make an index fund. Great work if you can get it. Yep. Vanguard, BlackRock, Fidelity, State Street.
All paying them a lot of money.
And it's charged on a
basis points of assets under management or AUM. Ha ha it's a management fee. Or trading volume basis. And so it scales depending on how valuable it is to you as a client. I did not know that. That is so deeply ironic. And I started looking too like why doesn't
Vanguard push their total market.
one stronger, or why doesn't someone come up with a sort of synthetic
thing that looks a lot like the S P five hundred, but isn't the S P five hundred. Fidelity tried that.
Th there is a
five hundred stock fidelity fund that is not
quite the S P five hundred or at least doesn't license the name, but people just don't flock to it. People want the standard. They want the brand. It's a good business if you can get it. It's the Intel inside. The ingredient brand. Yep. Well, regardless.
In nineteen seventy six.
Vanguard.
Launches.
The first index investment trust.
Fun.
Titled.
Vanguard five hundred.
Index fund.
Ticker.
V F I A X
The first retail
index fund.
Available to the public.
Today, the second largest individual fund in the entire world.
with one and a half trillion dollars in assets.
And second only to its own sister fund that you mentioned, Ben.
The Vanguard Total Stock Market Index Fund.
Which has two point one
trillion dollars in assets.
Three point six trillion dollars between these two funds today. Which are effectively the same thing. Effectively the same thing. If you own the S P five hundred or you own the entire US stock market.
in the long run, they're g gonna be nearly identical returns. And they they both have, you know, their roots in this
Fund that Vanguard launches in nineteen seventy six.
With a broken IPO that raises eleven million dollars. Well, to the point we were talking about earlier. Why would anyone want to buy the average? Yeah. It's a terrible sales pitch. I want to outperform. Don't pitch me on this. And by the way, we talked about sort of the far future where Vanguard's fees have come down so dramatically. I own the ETF.
the V O O one. I looked this morning. It's a
three basis point management th fee, that is a point oh three percent management fee. It's near zero. You know, them and all their competitors are near zero.
When this thing debuts, it actually has a significant management fee. Yeah. It's not as bad as the rest of the industry with a percent or percent and a half or two percent, but it's still like point six something. So the pitch as a sub scale index fund is do you want
To be average.
But actually with a significant drag from fees. Yes. It's a bad pitch. Well, and and and worse than that. So remember we talked about the three things that a management company does and what the Vanguard fund board, the Wellington Fund Board allowed Jack to do. They said, Hey
We'll let you just do
administration but
Investment advice and distribution still have to live with Wellington.
Well
Distribution is still through the stockbroker network with sales loads.
So
The only way that
Jack and Vanguard can get around the distribution prohibition for this new fund.
they figure out is to do an IPO.
of it. So I said IPO. This is why there's an IPO. So they rustle up a group of Wall Street banks and I guess technically doing a one time event of an IPO of a fund did not count.
As distribution and marketing. So Vanguard was allowed to do it.
And they think
That they
can raise and that they're gonna need.
About a hundred and fifty million dollars of initial
Fund holder capital.


And they can't get the demand. They raise eleven point three million dollars. It is so bad.
Th they don't have enough. One fourteenth of their target. Right, right, right. They don't have enough
capital to go buy even one hundred share lots of the entire S P
So th don't they go buy like the S P two hundred and twenty or something? Well th this I don't know how they got away with this. They buy two hundred and eighty stocks.
But they had to choose which two hundred and eighty. So they are doing active management.
I think it's something like they picked the two hundred largest, and then with the remaining eighty, they tried to create a representative sample that was mathematically equivalent.
To owning the five hundred. But that was an academic hypothesis, not completely proven yet. I mean it's still requiring significant judgment in there. You might even say investment advisory. You might even say. You might even say. There's an amazing story on this. Did you find it? No.
So
Vanguard.
A didn't have a lot of resources, and B didn't want to go do
Anything that looked like hiring a professional investment advisor, investment manager to manage this program.
So they hire a young woman who
Part time.
to work nights and weekends
Really? And basically like
Choose these eighty extra stocks and then manage and track everything.
She worked full time during the day at her husband's furniture store in Wilmington, Delaware. Whoa. And by nights and weekends she was the portfolio manager for, you know, what today is
The second largest fund in the world and
Together with its sister fund by far the largest fund in the world.
How incredible is that.
Okay, so they've got this completely broken IPO.
They didn't raise enough capital.
The pitch is bad. Yes. Oh, uh Ned Johnson at Fidelity, remember Fidelity we talked about. Yeah. And Ned, he would famously comment to the press about the launch of this fund, quote, I can't believe that the great mass of investors are going to be satisfied with just receiving average returns. The name of the game is to be the best.
Deeply ironic because a giant amount of Fidelity's asset base today is composed of index funds.
Many of which are Vanguard index funds held within Fidelity. The funny thing about Fidelity is that I think they're primarily a brokerage. They they do have their own in house funds, but
I think a lot of people own Vanguard funds using Fidelity's website. Yes, they do. Yes, they do. We will get to that. Okay. So the pitch is quite bad.
But
The machinery they've constructed
As it
plays out in scales.
is actually pretty genius. So if you think about it, if the customers own the management company,
The business itself, there's really no incentive to generate any more margin than you actually need to run the business. There's no like
point in profits for shareholders you'd want to dividend it out to. So you could just dividend those excess profits out to customers.
who are the investors in the fund.
Or you could just say, Oh, we're we're
doing that in the form of lower fees. It's a much more tax efficient way to do it than
generating profit, recognizing taxes on that profit, dividending it out, and then those people having to pay taxes on it. They're they'll say, Hey, look, we'll just lower the fees in the future because we're now confident we don't need higher fees. Every time Vanguard lowers fees, you should view it as like
Hey, we have reported higher earnings, essentially. Exactly. Exactly.
And then as you get
economies of scale and you grow, you can further cut prices. And David, as you mentioned earlier, the business of asset management really lends itself well to the economies of scale game.
Th there are just not that many variable costs.
in managing money, almost everything is fixed. Except things like customer service, which we'll come back to later, and is kind of where Vanguard's vulnerabilities are. Yeah, is in these variable costs. So once you're managing
very large amounts of money for lots of customers, fees can be super low on a percentage basis.
This is the exact same thing.
From our Costco episode.
David, do you remember the phrase? Oh yeah. Scale economies shared.
I think uh didn't we make acquired T shirts and sweatshirts with that phrase? We did. We did.
Uh yeah, linked from the the email and our website. You can share the benefit
of your scale economies, Costco does this back with customers.
And Vanguard does this too.
Yeah, I I mean at the risk, Ben, of stealing what I
suspect might be your quintessence of this episode.
Vanguard is Costco of for finance.
Exactly. But even further. It's it's like Costco on steroids. Even Costco, who lowers prices as much as they can to reward customers and encourage customer loyalty and make everything about customer experience better.
Even Costco has outside shareholders who want the business to generate profits. Th there there is a reason you are investing
in Costco as a business, and that's because you expect it to yep generate cash flows today and in the far future. Costco itself, several hundred billion dollar market cap company today. Right. Vanguard doesn't have that at all. You are investing
In the
beautiful machine of capitalism.
As a communist. Yes.
Yes.
Even Salt Price and Jim Sinegal.
We're not this fanatical.
Yes. Yes.
So
It takes a few years.
For
this machinery to kick in for the scale economies to get to a point where it really can.
And for the investing public to wake up to this idea.
In the meantime, they start with eleven.
million dollars of fund capital.
And then they still experience
Customer
withdrawals and cash outflows. Like the stock market starts to rise. So that's sort of
keeps the fund alive, but they're not getting new cash in, and they they can't, because they can't do
Their own distribution.
It gets so bad.
That the next year, in late nineteen seventy seven.
They have to take
The extreme drastic mezur.
Of merging another
Small legacy Wellington
fund called the Exeter fund.
into the index fund.
just to keep it alive and get enough capital into the fund to keep operating it.
Which is crazy to me that they figured out how to sort of acquire this other fund and then just merge its assets into their index fund and all the investors were like, Cool, sounds good. I guess we're we're index fund holders now. Yeah, I I I didn't
see anything in Jack's memoirs about the uh governance issues associated with that.
Somehow.
They get it done though.
And
that fund when they do this merger
had fifty eight milli of assets.
You know, again compared to the eleven million dollars and bleeding out rapidly in the index fund.
I mean that's like
Six times.
The size of the index fund. So yeah, uh really
The seed.
capital that you should think about
In
The Vanguard five hundred index fund and again also its sister fund, the total stock market index, you know.
Biggest
collectively fund in the world today.
comes not from the IPO of clients into the index fund itself initially.
But the majority of the initial capital base comes from this other
Exeter Former Wellington actively managed fund that just gets folded in. Yep.
Totally, totally wild. So after this emergency transplant to save the index fund here.
Finally in nineteen eighty one into nineteen eighty two, Jack and Vanguard.
Do win the right.
Two
Take over distribution.
Of
the index funds. And the way they do it is through, you know, another loophole.
This one kinda even more tenuous, Jack argues.
Oh, we're not taking over distribution.
We're just eliminating distribution. We're gonna no longer go to stockbrokers and have them charge sales loads to go into our index funds. We're not gonna allow that at all. And thus we are eliminating distribution.
Again, conveniently ignoring the fact that
Now they gotta employ a lot of people within Vanguard that are gonna
market and sell and advertise the funds. Right. They they went no load. They they refused to pay eight and a half percent to
people outside the firm but
now they just have a fixed cost base that they picked up of people that work
inside of Vanguard that have to do the work of not only
Convincing people to buy these funds.
But then
On top of that
Actually handling
and facilitating the purchase.
The the way that this worked is you would communicate and send in an order via mail.
And then you would mail a check.
to invest in this fund. Right. Could you imagine? I mean, I remember my parents doing this. Yes. So you know, eliminating distribution, sure. But somehow someone has to do the marketing and distribution and now you just do it in house. Yep.
On the back of that, the five hundred index fund
Does it be
Finally reach the one hundred million dollar
Capital milestone.
In nineteen eighty two.
Six years after launch.
takes him six years to get to a hundred million dollars. Which again
That was not large at this point in time. The Wellington fund, many years earlier, had been two billion dollars. Yep.
And the initial IPO target had been a hundred and fifty million dollars. So they're still below that six years in. And they've got this headwind of they just switched away from paying people to do distribution. So there's now no incentive out there in the marketplace to try to sell Vanguard funds. Yep. Yep.
But the slow burn does start and towards the end of the decade in the nineteen eighties, by nineteen eighty eight the fund reaches
One billion dollars.
in assets. And it would obviously
Grow from there. So that's six years to reach a hundred million. Yep, and then and then another six years to get to a billion. Yep. That's right.
Now
You might be wondering.
That's not a lot of capital.
And
Vanguard's fees are super low.
How is the firm staying afloat during this period?
Well, it turns out
That
Jack's first revolution.
Of the low cost.
Lo fee proposition of Vanguard.
It works.
Pretty well.
Inequities.
There are other financial markets out there.
Where the low cost strategy works.
Even better.
Specifically.
Money markets.
And fixed income.
Aka
Bonds, the debt market.
In equities, you can have real outperformance. There is uncapped upside to investing in equities. This is the dream that active management sells. Jerry Sai or Peter Lynch or Warren Buffett are, you know, the greatest investors of all time. We can generate
Annual returns in the twenties, thirties, even higher percentages like Rentec in our episode there.
If you're investing in the debt markets or the money markets.
There is a ceiling to your performance.
It is the coupons of government bonds or Muni bonds or, you know, treasuries in the case of money markets. Yep.
The only thing that matters in terms of relative investment performance by
products offered in those spaces is costs. Yep. The lowest cost provider will win in those markets.
And Vanguard builds a juggernaut.
in the fixed income business.
During this era. And that's what keeps
the firm afloat while they are waiting and waiting and waiting.
For
Jack's indexing revolution, his second revolution, to come online.
Well there's that
And there's also the fact that John Neff, who managed the Windsor Fund
which was an actively managed fund and had the the fees of an active managed fund.
was absolutely shooting the lights out.
Uh on the equity side. Yes. I was wondering if you were gonna bring this up. That is the other deep irony here.
Vanguard never got out of the active business.
And they sort of inherited it by virtue of having some responsibilities for the Wellington funds that they shared with the Wellington management company. And so yeah, this Windsor fund
There were many years where it basically provided all the profits to pay all the overhead and keep the lights on while Vanguard's low cost indexing strategy was
Yep, absolutely. And Vanguard today
Still has very large
Fixed income businesses, money market businesses.
And active equities management businesses.
But
Today they're all dwarfed.
By the index fund business.
Yeah.
Which wasn't the case for a long time.
Yep.

You said something a couple of minutes ago that I'm stewing on here, this whole
inequities.
A low cost index fund.
in the long run will outperform
you know, eighty five percent or something of
other actively managed.
Funds.
Listeners are probably wondering.
Is that really just fees?
Is it just that
Having low fees.
It makes you better than that much of the market.
There are other components to it.
A giant one is behavioral.
If you are
In a mindset.
where you are actively trying to pick the best companies. Yep. You do a lot of trading.
And aside from the fact that
that has a lot of transaction costs, you tend to react to external stimuli.
The market being up. You don't stay in your winners long. The market being down. You having conversations with other people. Exactly, David. You selling out of your winners too early, whatever it is, and you can make the errors on either side.
There's a behavioral component where
passive index investors
Tend to not act.
And what you need to do is not act for long periods of time to be a great investor. Yes, it's the great Warren Buffett line. Don't just do something, stand there.
Yeah.
Whether you are trying to shoot the lights out like Warren Buffett and you are active
And trying to find the very best businesses you can, or whether you are passive and sort of throwing your hands up. Either way, you need to mostly not act.
Every day.
And
passive index investing that just lends itself better.
behaviorally.
If you if you're in one of those funds to just saying
I know the market's up, I know the market's down, but whatever. I own the index, I've I've made my piece. Whereas if you are
Either the active manager trying to
improve the outcome of the fund or an investor in an active manager, both of you have a higher predisposition
to do stuff. And for most investors in the long run, you shouldn't do stuff most of the time. Yep.
Yeah.
Absolutely.
So as we exit
The eighties here.
All the pieces are in place, finally.
For the rise.
Of indexing.
The
Vanguard five hundred fund.
Crosses a billion, as we said in nineteen eighty eight.
And then the model's working better and better, the scale economies are getting shared.
to in nineteen seventy nine, fifty nine basis points, then down to fifty basis points in nineteen eighty five, to thirty five basis points in nineteen eighty seven. We are really starting to be the true low cost index fund. They've already dropped by fifty percent here by the end of the eighties. Yeah.
Yeah, I mean the scale economies are getting shared. Yep. Everybody around the table is eating good.
So after assets crossed the billion dollar threshold in nineteen eighty eight,
Around nineteen ninety two ish, they hit ten billion dollars. So you know, 10x in four or five years, strong acceleration.
Also in nineteen ninety two, Vanguard launches the sister fund, the total stock market index fund. They now have more than enough.
capital base that they can own every single stock. Why stop at the S P five hundred? Own everything, all US stock.
And computers are sophisticated enough by this point in time where you
can track the entire stock market and own the entire stock market and handle the reporting on that. Not to mention you have the benefit of not having to pay S P Global a licensing fee. To uh index the entire market. Quite convenient. You know, look, they're not not business people at Vanguard. Right.
Oh, they're great business. It's just on your behalf instead of on shareholders' behalf. They're working for you.
And so by the mid to late nineties.
The two sister funds together.

Like a hundred billion dollars. Like
The Vanguard Colossus is
Rolling. Yep. Things are
Going great.
And then in nineteen ninety nine
You're not gonna believe this.
Jack.
Manages to get himself fired.
Again.
Yeah.
Unbelievably. Unbelievably.
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All right, so David, there is something that you have not been telling us about Jack's life over the years.
Yes.
Jack.
Unfortunately has a bad heart.
He was born with a rare genetic heart disease called arhythmogenic right ventricular dysplasia.
Or A R V D.
And that means that Jack suffers his first heart attack.
In N sixty at age thirty one.
So before he even becomes CEO of Wellington Management
That was his first heart attack.
He had
Like.
Ten.
twelve over his life. It was like a ticking time bomb. At any moment in time he knew he could just drop dead.
And
What Jack decided to do with this.
Was
Yook.
At the age of thirty six he got a pacemaker
and he consulted a doctor and that doctor said
You really shouldn't count on living past forty. Oof.
Then he went and talked to a second doctor and that doctor said, Why don't you get a place out in Cape Cod and stop working and enjoy the last few years you have left. Don't work anymore.
He uh wrote at one point.
If I had taken the second doctor's advice
the first doctor would have been right. Yeah.
Yeah.
Man. This is totally
Jack's unique personality, the way he approaches
this part of his life is
Not gonna change a thing.
I'm just gonna live every day the same way I would have lived it.
If I didn't have this disease. And the stories around this are amazing. I think one time
He collapsed and had a heart attack waiting for the commuter train out of Philadelphia and it was lying there.
on the ground and the ambulance and the paramedics come and he makes a bet with them that they won't get him to the hospital in time to save his life. He just had that kind of attitude and approach to it.
He would bring defibrillators to squash matches. Oh, this is the best. Yes. And it it happened at one point where he had a heart attack while playing and had to count on his opponent running over and reviving him.
Yeah, yeah. And he would use this to like intimidate his opponents while playing and be like Make sure I got my defibrillator here. I can drop dead at any moment.
All right, let's go, you know.
So
as Vanguard's really taking off and indexing is taking off.
Jack's heart is just getting
weaker and weaker and more and more worn down from all this. In nineteen ninety four, his twin brother David dies also from heart complications.
And by nineteen ninety five
Over half of Jack's heart has stopped working.
Oof.
And so in early nineteen ninety five his doctors say
Hey.
We know your approach to life, but we can't put this off.
Any longer.
Despite your relatively advanced age for this, he's sixty six at the time.
You need to have a heart transplant.
If you want to have
any hope of actually, you know, surviving for a meaningful period of time going forward.
Jack and the family.
are brought around, they agree to this. So this of course impacts Vanguard.
So in May of nineteen ninety five, the company holds a press conference
Where Jack announces that he's stepping down
as CEO to prepare for his heart transplant.
And the company announces that
John Brennan.
Jack's former assistant who had joined
The company in nineteen eighty two will be taking over as the next CEO, Brendan had been Vanguard CFO for
Many years.
Leading up to this.
And in late nineteen ninety five, Jack

Enters the hospital.
on a waiting list for a heart transplant. His heart has
continued to degenerate. He needs to be hooked up to an IV feeding him drugs to keep his heart beating.
Constantly.
He waits.
A hundred and twenty eight days.
In the hospital.
Waiting for a heart transplant.
And he keeps working the whole time. He hasn't officially transitioned.
out of the CEO role and giving it to Brennan yet.
Maybe a little bit of foreshadowing here.
On January thirty first, nineteen ninety six,
Jack officially steps down as CEO and Brennan takes over after more than three months of operating as CEO out of his
Hospital room. Unreal.
Really, Jack is one of a kind here.
And then
In February.
Finally
They get the call, there's a heart available for Jack and he has the heart transplant.
at the end of February.
So the day of the surgery arrives.
At this point.
Vanguard is essentially planning for this to be the end of his career.
Like heart transplants today are obviously a giant deal. This is even thirty years ago. Medical science is still working on this procedure.
The assumption is he's
He's
Done at this point, even if he survives.
And so the company
Moves on.
Brennan.
becomes CEO and starts working on a whole bunch of new initiatives.
And Jack.
Does make a miraculous full recovery. He would live for another twenty three years. He would live for another twenty three years on his transplanted heart.
And
Within a
couple weeks, weeks after his heart transplant, he's back on the squash court.
Amazing. Playing squash and intimidating
His opponents like gosh, if you thought it was scary to play against Jack when he might have a heart attack, how about playing against Jack with a new heart?
Seriously.
So of course all of this is like wonderful and joyous
And
Unexpectedly great.
But it is unexpected.
Jack didn't think he was coming back from the heart transplant. The company didn't think he was coming back from the heart transplant. And the company's in this sort of funny place where
even not thinking about leadership succession right now, but the core business, they made all these really long term trade-offs starting back in seventy five, seventy six.
Where
You know, when the fund is subscale, the fees are kinda high.
And the mutual ownership thing is like cute, but it doesn't
mean much when it's small.
cutting the load so you go to a no load thing that in the short term just slows your distribution down. And all these things are sacrifices for the long term, thinking, well, when it really starts working, it's gonna really start working. Yeah.
In the nineties, this is that like harvesting phase for the company where 20 years of doing things the right way that caused really slow growth are now causing this giant inflection. I mean, David, you you said something about the crossing a billion line in the eighties. By 1996, the AUM across all of Vanguard.
is up to a hundred and eighty billion dollars.
And the two index funds are like
Fifty of that.
Going pretty quickly to a hundred. Right. So it's just gotta be fun for all the company longtimers at this point, where they're sitting there thinking, We were right.
We made all these long term trade offs and it really sucked for a while and no one would distribute our product and no one would invest in our funds and it's really, really, really paying off. Yep.
And there's something else going on for the first time too.
Vanguard has competition. Competitors have woken up and realized maybe we should
Jump on too.
That's passive and
Indexing.
Thing.
Which is funny because
They're not structurally incentivized to do it.
Over at
Fidelity and BlackRock and State Street and you know all the others, they're starting to roll out these very low fee index funds, but they are doing it because they effectively have to. Yep. Consumers have woken up to the power of it and they need to have an offering in this area. So even though they don't have this investor shareholder alignment the way that Vanguard does.
They make money.
plenty of other ways of their business. And so they're happy to offer this as a near loss leader or or break even in order to retain and attract those clients for their other higher margin services. Indeed.
So, coming out of his recovery from the heart transplant.
Jack is still on the board.
But he's no longer CEO.
The transition has happened.
Um
The company is transitioning to this new phase.
Jack, I think gets super frustrated.
He wants to be back in the saddle.
And the way this manifests is
He at the board level starts kind of becoming a curmudgeon.
And
disagrees with all the new initiatives, all the new things that Brennan and the new management team
Wanna do
capture their opportunity and insulate against competitors.
So these are things like launching sector specific index funds or international funds and investing more there or investing more in marketing. You know, basically growing the firm and offering
the clients what they want.
In Jack's mind.
This is starting to be a perversion of the mission.
Meanwhile, management is like, Hey, our customers want this and our competitors are offering it, so we should do it.
This is
classically
the divide between the founder of a company
And the group of people that will take it.
not just from one to two, but from one to a hundred. I mean the clean simplicity and the mission and the focus and the narrowness of the product and this one cool trick that they have is the thing that got them there.
And classically
You need
People who are willing to be much more flexible, but with the same culture, the same values, the same mission.
uh than the founder was. And you see this in the numbers.
Ninety nine percent of Vanguard's AUM came after Jack stepped down.
Yep, yep.
And you hit on a
Really, really important point to stress there.
The same values, the same mission.
It's not like Brennan and the new management wanna all of a sudden
start generating tons of excess profits or
Take Vanguard public or you know do anything crazy like that. No no they they're true believers in the mission as well.
They just wanna
Serve clients and meet them where they're at now as the world is moving on.
And there are big things here like
employee retention.
If
As a company you're trying to run at cost.
And your competitors are in an industry where you can pay people obscene amounts of money if they are high performers. Right. I mean
You you need some kind of
way of dealing with this and Jack Brennan, this sort of falls in his lap.
One of the things he does early in his tenure is to create a employee partnership plan to try to incentivize the the workforce and kind of deal with the structural trade off of
How do you get high performers who could get paid way more somewhere else? Or
very similarly, if you aren't generating very much income, how do you make future investments in things like R D?
as people's expectations for customer service and technology start becoming higher and higher and higher. Right. So that's the sort of things that fall in Brennan's lap that he has to do to take the company forward. And they end up at loggerheads with Jack on the board.
So all of this
comes to an ultimate head and blow up.
In nineteen ninety nine.
Over exchange traded.
Funds.
Yep, the most important new thing.
in the industry.
I am a Vanguard customer and I think
A hundred percent of the way that I am a customer is through their ETFs, not through their mutual fund products. And the mutual funds are
Everything we've talked about up until this point. Yep.
Yeah.
So
Jack.
a real point of view on ETFs. And in fact
Hm.
Had the opportunity.
To launch
ETF. So back in nineteen ninety two.
A man named Nathan Most.
had come to see Jack at Vanguard.
Nathan was the VP of new products at the American Stock Exchange, and he had had the idea.
To create
Exchange traded funds as a new product, a new trading vehicle.
that would allow effectively shares, quote unquote.
Of mutual funds.
to trade on stock markets in the same way as individual stocks. A stock exchange traded
Mutual fund and ETF.
And
He
Thinks, of course, naturally the very best fund partner to launch this idea with would be
The
newly, you know, kinda
crowned jewel of the mutual fund industry, the Vanguard five hundred.
Index fund.
And you might think Bogle's gonna love this. Like w what is an ETF?
it's an even easier way to buy into something that looks basically like an index fund. And if you're
Trying to go direct to your customers the way that Vanguard does without
the sales loads and everything, then great. They should be able to buy it right on an exchange. Easier distribution available to more of the investing public. What's not to love. I mean that was
That was Nathan's view. He was a real
Idealist about this.
vastly expand the distribution reach
And the target audience for mutual funds and allow anybody who can place a trade on a brokerage to
buy into a mutual fund. And he was absolutely right. And there's some other structural benefits too. There's the idea that you're not affected by other people in the fund. So if someone else decides to
sell a bunch of their shares, I don't end up getting a a big tax hit from it. Yep. Then of course there's the you actually do know the price that you are getting because since it's traded on an exchange, when I decide to make an investment in that fund, I buy it.
right here, right now, at the market price. I'm not waiting till the end of the day to figure out what the mutual fund is going to be priced at. So
ETS have lots of great things about them.
Jack.
hates this idea. Absolutely hates it. And he basically tells Nathan Most to
Get lost. And why does he hate it? He hates it because it's exchange traded. He thinks, well, i that for that very reason that I love it, that you know the exact price that you're buying it, it means you could trade in and out of it all day. You could do the worst possible sin of investing, which is incur a bunch of trading costs, speculate on it.
not be a long term owner and just try to do intraday arbitrage. Yep. And
that particular
thing that he thinks that's gonna cause all of these behavioral issues, even though the intrinsic product has all these great characteristics, he thinks the temptation for people to do that is so bad that the product shouldn't exist.
Well, and I think there's two other related things that he's really worried about beyond just
that temptation in and of itself.
One is that the brokerage platforms are gonna incentivize
Trading because this is how they're gonna profit.
From
mutual funds. Because at this point in time, Robinhood didn't exist yet, fees hadn't dropped to zero on transactions, so you actually were paying very meaningful amounts. For in recent memory it was single dollar, but it used to be like fifty plus dollars to place a trade on an exchange. Yeah. So if you're a prospective competitor to
Vanguard and you wanna
offer competitive, you know, index funds at similarly low costs.
Well, all of a sudden if you can now make a bunch of profits on trading in and out of ETFs in those funds on your brokerage platform.
That's a way to make money here. Yep. So Jack hates that.
He also hates that
Because
These funds will now be traded on an exchange, it means that you can short sell them. And he thinks this will just be like a
Absolute disaster for the financial industry.
You know, and hey look, like I would definitely not recommend going and
short selling with the S P five hundred that has historically been a losing game in the long run.
But
Look, this is a product people want and
Shorting.
Indexes like the S P five hundred is like a core part of many hedge funds strategies today.
This is an idea whose time had come with all the good and all the bad and it needed to exist.
So
Jack turns it down.
And not just turns it down, but like he hates
The concept of ETFs.
Nathan.
Goes on to launch.
The world's first ETF.
with a new asset management division of a
Old Boston bank named State Street.
And uh you've probably heard the state stream name today. You might have heard of the spider.
SPDR. Well known. SPDR. Standard Empor's Depository Receipts Trust.
Which is the listing for state streets.
S P five hundred, ETF.
Which until recently.
Like a year or two ago.
was the largest ETF in the world.
Until it was surpassed by Vanguard and BlackRock. After Jack's time. Well after Jack's time.
So yeah.
This was a really bad decision by Jack to pass on ETFs. Today ETFs are a huge

of the mutual fund industry. They are still only about half the assets in aggregate of traditional mutual funds.
But ETFs are growing at like
thirty percent per year.
While mutual funds are flat. So
If that keeps up at some point here in the next small set of years.
ETF assets will pass traditional mutual funds to become the you know largest equity asset class in the world. Yeah.
So listeners, why does this matter? Why are we explaining the difference between ETFs and mutual funds here on Acquired?
I think the most interesting reason is
that it was the thing
where it was clear that th the founder really should hand over the reins. This should not have been a sticking point. This should not have been even a decision for the company. This was clearly the right thing to do long term.
And whether or not you understand the mechanics of a mutual fund versus an ETF, and and we dramatically oversimplified and skipped some things. It is just so
perfectly illustrative of this point of Vanguard had to get into ETFs. Yeah. And that purity of the founder is is the thing that is required to start the company, but typically not sufficient.
to scale and keep them globally relevant. Yep. Yep. And we see this in Ferrari with Enzo. You see this it with Apple, the Steve Jobs, Tim Cook, you see it in the NFL with Coca Cola, with Trader Joe's. I mean this phenomenon just shows up over and over again.
Yeah.
Yeah, and this is how it showed up in Veigard. Uh so
In August nineteen ninety nine
This finally comes to a head on the board. Brennan and the management team.
say we we gotta launch ETFs. We're so far behind. State Street is out to this huge lead. They're building all this market share in a S P five hundred index that we started this. This is our space to own and our our
Customers or clients are demanding it. Yeah.
Jack is staunchly against it. And so in August of nineteen ninety nine, Vanguard announces that it is
enforcing its mandatory board retirement age in the bylaws of
Seventy.
No board member can serve past the year in which they turned seventy.
Jack has turned seventy that year and that Mr. Bogle will be stepping down from the board.
at the end of the year in December. This is a big deal.
This causes a huge
Public outcry.
Also
There's someone older than him who is on the board that they don't enforce it for. So
It's not really about the age requirement. It's it's about the overstaying your welcome.
But
He is the face of a movement. Right. So
Unlike
The last time Jack got fired where
His former partners were probably hoping he would go quietly into the night.
That's not an option here.
Because
He's a giant asset to Vanguard.
Yes.
By this time, Jack has become like a saint to the investing public. People had actually started calling him Saint Jack. And when
He stepped down as CEO in nineteen ninety six, you know, head of the heart transplant. The company
had commissioned a statue of him to be erected. There is no option to just uh
part ways with
Jack Bogle.
You kinda want him to keep an office.
At headquarters.
If
You know.
He's alive and there's a statue of him there.
and the entire investing community and increasingly consumers are finding religion.
Follow his teachings.
The year before this in nineteen ninety eight.
Yeah.
Passionate.
Passionate.
Group.
Of users.
on Morningstar's online discussion forums on the Morningstar dot com website.
I love it. Had founded a dedicated sub forum.
Called Vanguard Die Hards.
that would eventually morph into its own website.
And like grassroots movement.
Called Bogleheads. By the way, I love this subreddit. I've been on this subreddit for a long time, long before we started researching this episode. It is a beautiful thing to watch these conversations. It is incredible. So
The standalone Bogleheads
Forum.
Bogleheads dot org.
Today it gets two million visitors per month.
And then Ben, you mentioned the subreddit that has four hundred thousand weekly active visitors. And if you are listening to this episode because it was posted on there, welcome to the show. Thanks for joining us.
So
As I said.
The compromise that they reach is
Jack will still be the founder of Vanguard. Jack will still be
The face and the spirit of Vanguard too.
all of the millions of fans and diehards around America and around the world.
But he will no longer be on the board. He will no longer be involved in active management of the company.
They set up the Bogle Financial Markets Research Center.
On campus.
Which Jack leads uh with a staff helping him for the next
Twenty years, so
researching, speaking, writing books, papers
Uh and
Generally just evangelizing the index investing.
Philosophy.
All of which of course is like
The very, very best marketing.
That
I would say buy. You you can't even possibly buy marketing like this for all of the
conflict and strife around this
Second firing.
It really works out about as
good as it possibly could for the company and for Jack. His legacy's preserved. His value to the company is preserved
And
Vanguard gets to move on and launch ETFs, which they
Do in two thousand one.
Finally.
He did soften on over time. Yes.
And he does eventually repair his relationships with
management of the company, especially after Brennan steps down in two thousand eight and the next CEO
Bill McNab succeeds him.
Yeah.
And there's a few things we sort of skipped over to this point that
happened in the seventies, eighties, and then happened in a big way here in the nineties. And that's
changes in the structure
of the investment management industry.
The first one to know is
Indexing.
was not actually that interesting
When
Bogle started it. I know we gave the stats around its outperformance, Snet of Fs
But
In seventy five
The market still had a lot.
Of
Fools.
Yeah. Yeah. People that were
acting individually
That word.
not institutions or advised by financial advisors.
they were clients of stockbrokers and the stockbroker would make a commission on a trade
And
So they would trade a lot and they would buy stuff that were bad decisions. And so if you were an active manager, it was just
Not actually that hard.

All the fools in the market. Yes.
By the eighties and nineties.
that started to go away. So much of the activity in the market was real professional management that
you could often assume, oh, my counterparty is smarter than I am. I I always assume this when I'm buying of individual stock. I'm like, why am I buying a stock that a really smart hedge fund is selling? And that is the thing that causes me mostly to buy index funds.
Or to transact in private markets where I'm buying shares directly from a company rather than in
public markets where I'm the least informed person on the trade.
But that was not at all the case back then. So there was this interesting trend where as more money became professionally managed,
Indexings
Advantage increased.
Hm. I I bet it actually worked both ways too, that
as indexing became more popular
A lot of the um
unsophisticated, shall we say, participants in the market.
moved into indexing and stopped
being easy prey available for the active managers. Right.
Right. Yeah. That's a great point. It's kinda like um online poker when it first started, there was a lot of fish at the tables and then eventually the fish go away and you're just playing other poker pros, which is no fun. It's sort of the same thing in in the stock market. And I I I didn't make the leap to realize that
indexing is a much better product.
when it's a sophisticated market of traders versus an unsophisticated market,'cause its relative advantage is higher. Yep.
Yeah.
Absolutely. Or I'd say its relative disadvantage is lower. Yep. Is the right way to put it. So that was a big tailwind for investing. The second big tailwind is in the sixties and seventies, you mostly bought stocks through a stockbroker who charged you a commission, but they didn't make money simply by managing your assets the way that people do today. The advisory business wasn't
Uh.
Right.
You just had a stockbroker and that guy wanted you to trade.
'Cause he got paid on the trades.
Over time, stockbrokers went out of favor and people started shifting David exactly what you're talking about to financial advisors. And so that meant that instead of being purely incentivized for you to buy and sell stocks, they were incentivized
for your net worth to grow.
which is is more aligned, still taking typically a large fee, but aligned incentives at least. So index funds were kind of this perfect product for them. Yeah. They didn't care whether you traded or not, they just wanted your assets to grow and they wanted you to be happy with the level of service that you were getting.
So it was this like amazing
Tailwind, this growth of the advisory business became this huge accelerant for index funds. You had an amazing channel from it.
Yep. And then the last tailwind is the dot com era. Yes, yes. I love this bringing this up. My favorite thing. V Trade, baby. Yeah, David, why do you think
the dot com era was a tailwind for index funds. I've always thought that
It's ETFs. It's the continuation of the story that we were just saying. Like as
People are coming online trading more
And seeing the option to just within your online brokerage account.
By the S P five hundred, people are doing it.
Yeah.
Yep, that is absolutely a big one of them. The technology itself, interest in buy stocks because the dot com run up was happening and people were getting more and more excited to buy stocks. So that was sort of people's introduction to it. But the third one is that they could actually
see how much they were getting ripped off by underperforming high fee active funds. Where before
You work with your stockbroker, you end up in a fund and you kind of get a statement every quarter or once a year, and you're like, Okay.
But every day you log into your
Whatever your favorite brokerage dot com is, and you see
Performance versus benchmark. You can dive into the research. It's sort of all at your fingertips. And that caused people to go,
Wait.
There's an S P five hundred button.
Yeah. Great.
That's gonna be much better than whatever this thing is that I'm currently in. Yep.
Yep. Amazing. What a revolution. So the ownership of equities in America went from that one to two percent pre-Great Depression to four point two percent in nineteen forty nine.
But even by the 80s, it was still just right around 20%.
It wasn't until the bull market of the eighties and nineties where the stock market really took off as a thing that that people owned.
In nineteen eighty nine.
It was at thirty two percent. So thirty two percent of Americans
Owned equities. Owned any stocks at all. By two thousand and one
It was at
Fifty-four percent. Wow.
And a huge part of that.
Is
Everything we just talked about with dot com.
Probably the bigger thing is the rise of the 401k, where suddenly people are responsible for their own retirement. And they have a a vehicle here, which I'm sure we'll talk about infidelity. Oh yeah. And then thirdly, the mutual fund and the index fund just being this very sort of perceived as safe good way to
to own equities. And today it's something around sixty percent of Americans have
stock market exposure, which it's funny that it's not just one thing. You need all of these different
uh accelerance to happen over time.
Yes, you say index funds being widely perceived as this good safe thing to own. One thing we skipped over earlier in the mid nineties was the oracle of Omaha himself.
That's right.
Warren Buffett implicitly
endorsed Jack and Vanguard in the nineteen ninety six Berkshire annual
shareholder letter where he wrote, The best way to own common stocks is through an index fund that charges minimal fees.
Those following this path are sure to beat the net results delivered by the great majority of investment professionals.
From the horse's mouth himself.
Now interestingly
If you had invested in Berkshire, it would have been a much, much better investment than just buy the index. I mean, we we've been sitting here talking about how the index beats eighty five percent of managers on a a long term basis, especially because you don't have to like
leave the bad manager when they become bad and then go find the good manager and incur all the costs involved in that.
Berkshire was the exception. I was prepping for this episode with a good friend of the show from Worldly Partners, Arvin Navarutnam. He showed me this chart.
From NT sixty five to twenty twenty five.
If you had invested in the S P five hundred
You would have
kinda unbelievably a ten percent compound annual growth rate. Wow.
Pretty good. Like the S P since sixty five has been amazing. Yep as at ten percent annual growth rate with dividends reinvested. That's a four hundred and five X return. All right.
Lay warren entirely on me here.
Berkshire.
was a nineteen percent compound annual growth rate for a
thirty nine thousand X return.
Four hundred and five versus thirty nine.
Thousand.
And that's over sixty years. That's over sixty years. So when you hear us saying like
Oh, well, it beats eighty percent or eighty-five percent of other managers over some time frame. Berkshire was the extreme exception. Extreme exception. And so to hear Warren saying actually what most people should do is
buy low cost index funds like Vanguard.
goes it goes a long way. Well, there's more Warren and Berkshire to come on this episode. But uh you know, to that point though, like I have always thought about Berkshire
as the vanguard of private equity funds.
Like it is essentially a no fee private equity fund.
You get to buy shares and you don't pay fees and carry on it. Yep.
It's concentrated though.
That's the that's the difference here. So is a private equity fund. Right, but I'm saying that's the difference versus a uh Vanguard SP. Oh yes, yes. But like the
Spiritual and cultural between Omaha and
Malvern, Pennsylvania, where Vanguard is located, you know, are are strong. That's true. We haven't told listeners yet this is in the middle of freaking nowhere. Yes. It's like
two hour train ride from New York City. It's the opposite of the capital of finance. And also just so happens to be
Right up the street from
Where I grew up, which is
Amazing. Yeah, work your
Grandparents?
Some of the first Vanguard investors because they lived nearby. I was gonna save this for the end of the episode, but um Yeah, my grandparents were among the like
Very, very first
Fund holders.
In Vanguard. I I couldn't find the exact date, but I believe my grandparents must have become
Vanguard clients.
Either in the late seventies or early eighties when like
Nobody was a Vanguard client. Before the hundred million mark on the fund. I think it was just, you know, hey local company, like great, we'll go with this local company.
Amazing. Southeast Pennsylvania showing up again. It was our Taylor Swift episode and this one. I mean, they set up Vanguard accounts for me like the day I was born.
Wow.
Okay, so y getting back to the story here.
We haven't yet.
talked about the financial crisis. You mentioned there's more Berkshire to come. Oh yeah. There's been like four other CEOs since since Jack. There's a big
Yeah.
Two thousand eight.
And the financial crisis.
Really is Vanguard.
And
All of indexing and passives.
Finest moment.
Yeah, I think that's uh I think that's probably right. But should we do our last sponsor first? Yep, let's do it.
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Felt in quotes correct.
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All right, David, bring us to two thousand and eight and the great financial crisis.
Yep.
Indexing and vanguards.
Big moment in the sun.
It's kind of funny.
During the financial crisis.
Passive index funds don't magically avoid getting whacked. Of course.
They move exactly the same as the market and have
Huge losses in
Two thousand eight, two thousand nine, et cetera. What's more important though is
What happens to
Everyone.
Else.
So you know like
Michael Burry and the big short aside.
Almost
The entire professional
active money management ecosystem gets crushed
Just as bad or worse.
Like.
Mutual funds, hedge funds, private equity, alternatives, you name it.
Carnage.
Devastation.
No one is safe.
Well, most money managers are not set up
to have a forty percent drawdown.
On
everything in their portfolio. Their comp structures and their redemptions and their contracts all sort of break.
And
And this is what
you not just creates like the spiraling problems that lead to all the losses, but what
Permanently
impairs or ruptures
Faith in the entire smart people on Wall Street ecosystem. The promise had always been
Especially as passive and indexing had been rising over the last two decades. Like
Yeah, yeah, yeah, yeah. That's great, but like we're smart.
When the bad times come, we're gonna outperform. We're gonna protect. You're saying this is active. This is the premise of active money management and all the smart people on Wall Street. Right. We know what we're doing. We're gonna get you the high returns in the good times and we'll figure out how to protect you in the bad times, and it's all
mechanistically built in to have safeguards. We have safeguards. We won't
get wiped out, we won't experience the same kind of, you know, piano falling on our head losses as
These naive index funds will.
That turned out to be
Absolutely not the case.
For the vast majority.
The vast, vast, vast majority of active management again, of all types, not just like equity management funds, like
everything out there in the financial ecosystem. So John Reckenthaler wrote on Morningstar in a retrospective on the financial crisis years later.
Active managers had long promised that when a bear market finally arrived, the
that they would outperform Vanguard's fully invested index funds.
It did.
And they did not.
Yeah.
Yeah.
And then related to what I was
Yeah.
Even more than the
underperformance, you know, some might say non performance of the active management industry during the crisis.
The crisis just completely bursts.
Whatever
halo or status or bubble.
had emerged around
Wall Street and Fund Managers for most of the
Investing public.
A lot of people's
Views.
Of Wall Street.
during the financial crisis changes from
Hey, these are smart people who I should probably invest my money with to
These people are charlatans at best and crooks at worst.
You've got
The bailouts, you've got the Occupy Wall Street movement, you've got Lehman Brothers, you've got all this
stuff like public sentiment turns against
Wall Street and active management in
Not just a major way, but
Arguably a

And who is there?
As the hero
Of Main Street.
The little guys.
But Malvern, Pennsylvania based.
Jack Bogle and Vanguard, which makes no profits.
has no fees above costs, has no corporate owners.
And has always been
The champion of the average American. I mean, you could not draw up a better marketing event for Vanguard than the financial crisis.
Yeah. And I think for a lot of people
They just decided to hang it up on
thinking too hard about their finances. They thought look, I thought I was clever
For trusting this person's cool strategy.
I thought
They were clever. Turns out none of us were clever enough.
And
the easy button where nobody's making any promises about how much better they're gonna do. I mean Vanguard makes you no promises. It's hey, you're gonna get the market. If you're interested in the market, it has historically performed well because it essentially captures the productivity growth and innovation of the world's most successful economy.
In fact, since they started existing nineteen in since nineteen seventy five,
It's done extraordinarily well. Something like eleven point six percent
compound annual growth rate if you reinvest dividends, that's a delightful average. If that's average, I'll take average. You know, your your life is gonna be in great shape if you just compound that for a long time. And so I think for a lot of people it was I'm fed up with clever, give me straightforward. Yep. Well and
The one explicit promise that Vanguard
does make to you is we will not profit from you. Right. And that goes especially in this moment during and after the financial crisis, like that goes so far with so many people. Yes.
Did you see, you know what's interesting is Vanguard actually raised their fees in two thousand and eight. Mm, I didn't see that.
I think structurally they they sort of need to raise them
when there's contractions in the market. First of all, you should know Vanguard did not lay anyone off during the financial crisis, which is kind of unbelievable. Yeah. Wow. So they have a fixed cost base that they have to cover and now their AUM is lower.
Assuming they didn't get net new inflows because the underlying stocks are worthless. They they actually have to effectively raise money from their customers.
In the worst times.
Two
meet their obligations to pay all of their headcount and fixed costs.
Now
when they raise it, it's from like
Point.
Ow seven percent to like
you know, something slightly higher than that. So it ends up kinda being fine and it's just noise. Still like very, very, very low. Right. Yeah, interesting. But it is sort of this interesting
impact of the mutual ownership model. Yeah, during market contractions they actually have to raise their fees. Or at least have historically done that. Yep. So what what what's the impact of this?
Well, just to put an even finer point on this
Saint Warren over in Omaha.
Yeah.
In two thousand seven, fortuitously, right before the crash
He had issued a public challenge Warren Buffett had
He said that he would bet
One million dollars of his own money.
Against any and all takers.
From the hedge fund industry.
That
Over a ten year period starting on january first, two thousand eight.
the Vanguard five hundred index fund
would outperform
After fees,
The same dollar amount invested in
Any portfolio of at least five
Hedge funds.
And then the winner of the bet would get to select
A charity that the funds would be.
Donated to the
It's kinda crazy, right? You get to pick any five hedge funds you want. Yep.
And you can go pick the five best. You can pick the five Tiger Cubs, you know, whatever you want And they just have to outperform the S P over a ten year period. Not just the S P specifically.
The Vanguard five hundred index fund.
I know, it's cool he named it. It's really cool that he named it.
This also just tells you kinda everything you need to know. Only one person.
Took him up on the bed.
You know I yeah, you do know who it was. Our friend, I'm sure you are listening. Host today of the Capital Allocators podcast.
The only
hedge fund industry manager that took Warren up on his bet and accepted the challenge. And as Ted will be the first to tell you
He got whooped. It didn't look that way at first. The the hedge funds were off to a good start, but in the fullness of of the decade, I don't know the numbers in front of me, but it was something like
the the S P performed like a hundred and thirty something percent and the hedge funds w in aggregate were like thirty to forty percent.
I've got the numbers right here. Yeah, it is not even close. So the Vanguard five hundred index fund over the ten year period.
blows away Ted's selected hedge fund portfolio. So much so that
Ted ends up conceding early to Warren. Yeah. Like a a year or two before it's over, he's
Ted's like a
War and you won. What charity am I making the checkout to. So when all is said and done, the Vanguard five hundred returns a total a hundred and twenty six percent.
net after fees for the ten year period.
Well the hedge fund portfolio returns just thirty
Six.
Percent. So yeah, what's that? For ten years. Over ten years.
Yeah.
And yes, Ben, the the charity that the check is made out to is Warren Selects Girls Inc. of Omaha as the
recipient of the money. I wonder we we gotta ask Ted if it was an option to pick the Ren Tech medallion fund. So Ted it'd be fun to ask him. He actually chose five
hedge fund of funds.
to get a total basket of about a hundred
different hedge funds in the portfolio. And Warren said like yeah sure, that's fine. And the extra fee layer on top of the fund of funds too. What? Yeah, I'm not sure why you made that choice.

But uh
Either way. But yeah, but but truly, like the more diversification you get, the more you're just buying the market. And the more you're buying the market, the less interested you should be in paying fees. You should pay fees
when it's more concentrated and thus uncorrelated with the market. Right.
Right.
Well
Either way.
Warren writes in Berkshire's
twenty sixteen.
Annual letter related to all this.
Quote If a statue is ever erected to honor the person who has done the most
For American investors, the hands down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra low cost index funds.
In his crusade, Jack was frequently mocked by

Today, however, he has the satisfaction of knowing that he helped millions of investors.
realize far better returns on their savings than they otherwise would have earned.
He is a hero to them.
And
To me.
It is hard to get a better endorsement. I mean
as a human being, than Warren Buffett using those words about you. That is unbelievable. Say that you
Are a hero to him.
Yeah.
Incredible.
I think the most interesting thing about two thousand and eight
Is
The fact that
The index fund conceptually was stress tested and it
performed with flying colors. I'm sure there were mechanical issues that didn't come up in my research, but
It owned a
giant percentage of American companies. And that did not further cause additional systemic issues to the already massive problems going on.
We have trillions at stake in
These passive funds. Yep.
Yeah.
But thinking about today now that
indexing is so much bigger. If there ever were to be a problem or a failure of one of the
big indexing players Vanguard or BlackRock or Fidelity or State Street, like
The systemic fallout from that would be huge. I mean if you think about the you know

All of the major index fund players are now.
much bigger than any individual player was back during the financial crisis. Yep.
Interesting to think about. Hopefully that never happens.
Anyway, after two thousand eight, as you would expect.
Vanguard's share of mutual fund flows just
skyrockets. It basically doubles overnight, so
Before the financial crisis Vanguard received
Roughly fifteen cents of every new dollar that came into the mutual fund industry as a whole.
After the crisis that doubles to thirty cents of every dollar, which is way, way more than
Any other firm, Vanguard just starts gobbling up the industry.
On the back of this in September twenty ten.
Vanguard passes Fidelity to become the world's largest
mutual fund manager.
And
That leads
continues to expand for the next several years. So
From
twenty fourteen to twenty nineteen.
Vanguard takes in one point two trillion in
cash inflows versus five hundred billion for the whole rest of the industry combined. So wow, over twice as much of all the dollars flowing into all of their competitors.
flow into Vanguard during that.
five year period. This is when they also add their advisory products. So we were talking about advisory earlier. Wealthfront.
had emerged during this time and was getting traction as a robo advisor.
Vanguard decides under Bill McNabb, the CEO after Brennan.
That
We need to offer an advisory product to our clients too, but
They want to actually
Talk to people.
And we have an advantage here because of our, you know, profitless strategy and approach to our business.
we can offer human wealth advisors to accounts with as little as fifty thousand dollars invested. So this is a huge win for Vanguard.
That pretty quickly zero to a hundred and fifty billion in
advised client assets overnight.
And again, isn't a profit driver for Vanguard because
It doesn't need to be. And it's
To your point, the lowest, I think they charge somewhere from five to thirty basis points for this service. They now have over a thousand CFPs on staff. Yep. This is a completely different business line.
that is sort of predicated on the same model of
what if we don't have any shareholders that we need to serve? What if the only stakeholder is our customer? And the customer doesn't just have to be people invested in the funds. It can also be people that are in a
related but different business, which is they need investment advice for structuring their personal finances. And and often it's the same customers. It's you know Vanguard clients who are using Vanguard funds to
In their retirement accounts or college saving funds and
Yeah, need advice about how best to structure that.
Yep.
So in January twenty nineteen
Jack.
Passes away.
And it's
eighty nine after
Just one of the most incredible lives, I think, of the
twentieth century into the twenty first century.
Uh yeah, American hero.
He enabled more Americans to participate in the fruits of capitalism.
In a way.
That
sort of dips only into the best parts of capitalism and leaves all the unsavory parts behind. Yep. I mean it's this beautiful
communal fair way.
to participate in the rising tide.
At the time of his death, Vanguard.
managed an aggregate of five trillion dollars.
Over twenty million clients. I mean, this from a firm that started as like a
Kakamimi revenge plot against his former partners. Using a s a system that he believed in prior to wanting revenge. Absolutely.
Vanguard in twenty nineteen is the number one mutual fund company with twenty-five percent market share.
of the entire mutual fund industry.
The previous high water mark being Fidelity when it was the leader had fifteen percent.
The compounding advantage of Vanguard is just
Humming.
Manage in twenty nineteen
Thirteen of the fifteen
largest individual funds.
In the entire world.
Wow.
And
It is widely reported in the press in Jack's obituaries at the time of his death, but
That his estate is worth roughly eighty
million.
Dollars.
For reference.
The Johnson family, as we said from Fidelity.

is worth about forty or fifty billion dollars.
Through the, you know, estimated forty percent that they still own of Vanguard or Larry Fink over at BlackRock.
Co-founder and CEO of BlackRock is worth about one and a half billion dollars, much smaller because he owns a much smaller percentage of the company.
But yeah, Ben, to your point, whether it's savory or unsavory, it's just
Truly incredible like that.
Call it you know.
forty, fifty billion dollar. I mean, Vanguard's bigger than Fidelity at this point, so maybe hundred billion dollar.
Delta that Jack leaves on the table just goes right back to the American. Did he leave it on the table? I mean the only way that Vanguard would exist is
Is
by not taking profit. Good point. Good point. That is a There's a real chicken in the egg problem. Path dependency thing. But you know, over time there there w there totally could have been ways for it to start being profit generating or have enterprise value. And he just wasn't interested in any of it. Yep. Absolutely.
So our story does not end there. I used a minute ago Fidelity and BlackRock and
Their founders and controlling families for reference.
That was not an
Accident.
in the years kind of leading up to Jack's death and and then especially really in the seven plus years since
Fidelity and BlackRock have just they've done exceptionally well. Really made a comeback. Yeah.
BlackRock is the largest
AUM asset manager in the world with uh more international and institutional client base than Vanguard's US individual approach. Yep, and Fidelity has had an incredible comeback too.
Each of them in different ways.
And they both come back to ETFs.
And really validate how important that was it.
Frankly, how wrong a decision it was of Vanguard not to get into it in the early days.
So I know more about Fidelity than I do about BlackRock. In my mind
Fidelity.
is sort of more of a brokerage.
They're like a brokerage that has funds
And Vanguard is like a set of funds that happens to have a brokerage. I think that's a fair characterization. Yeah. They like are primarily in different places in the value chain. And I'm revealing myself here, listeners, I
have a Fidelity brokerage where I own mostly Vanguard funds. Yep.
You and a lot of people. I think that's the common. Yep, yep. Yeah. Well, okay, so let's take each of them in terms. Ma maybe let's start with Fidelity and then we'll do Black Rock.
So
As we said throughout the story.
Fidelity has always been
Very happy to experiment and invest in.
Lots and lots of different things.
And they have
Hit on two like
Real home run.
platforms in recent years.
Both of which are weak spots for Vanguard. So one
is corporate 401k plans, as you foreshadowed earlier, Ben. Which is why I am a Fidelity customer. They got me when I started my first job at Microsoft and I got my 401k there and my employee stock plan.
also came through there. So then I
opened my first Fidelity brokerage account and that is how they've retained me as a customer for
Fifteen years. Well,
And that's the other platform that has been a big home run for them, which is retail brokerage accounts. And as you point out, there is a natural crossover between
Those two things.
It all I think stems from a strategy that they realized a number of years ago.
They don't necessarily have to compete with Vanguard anymore in the funds business.
So even though Fidelity
And Wellington slash Vanguard.
all started in the same business as fund managers.
Fidelity realized hey
We can and and they certainly do offer their own index funds. Some of which are actually even cheaper. Yep, some of which are even cheaper. They're loss leaders for them.
But like
We don't have to beat them there.
Fidelity is very happy.
to have their four oh one K and brokerage account holders do what you do of
Just hold the vanguard funds.
Through ETFs. And I think Jack
kind of foresaw this is this is why I didn't like the the the business.
Opened up.
the Vanguard funds to being on all the other platforms.
Yeah.
I mean this is a
I I don't know if it's an existential risk, I wouldn't say that, but this is a
vulnerability for Vanguard, which is so many of their
customers of their AUM
don't actually have a relationship with the company. They are invested in Vanguard ETFs
via their direct relationship with a different brokerage.
Primarily Fidelity.
And that different brokerage, at least in Fidelity's case and in many of their cases, is also a competitor in the funds business. So right now this is all fine, but if you play this out it's it's fine'cause no one makes any money on the funds. So Fidelity doesn't have a huge incentive to say you should come buy my
two basis point fund over here instead of your three basis point fund over at Vanguard.
Your point is probably what will ultimately be correct is like the cost basis for these funds is so low already, it doesn't matter. But you could play this out years into the future where
If this dynamic continues and fidelity
is able to make a lot of profits from all of their account holders in their other businesses, you know.
four oh one K management.
Profits from companies for management fees there and then
retail brokerage through all the ways that they monetize retail brokerage. They could even like
really undercut Vanguard on
fund costs and say like this is gonna be a total loss leader because we're just gonna profit in these other areas.
That vanguard won't do.
This is like
Vanguard is Microsoft and
Fidelity is Google, and they could launch Gmail and say that thing that's your primary business, we're gonna make that free now.
And you have no other businesses to compete with us on'cause you don't have cash coming in from anything else. So
Sorry. Yep. The pushback is I don't think there's a difference between three basis points and zero basis points. If we go back to my example earlier of you throw a hundred thousand dollars in and the market compounds at seven percent, and your fee is
Zero point zero three percent.
That is a difference at the end of the day of
1.48 million and 1.497 million. So not a huge difference, even 40 years later, of compounding.
I don't think
People are gonna switch over that. Yep. Yep.
There's another aspect to this too, though, which uh your Gmail
Versus
Outlook mail analogy is holds even more.
Paneldi's just a
better product and product experience than Vanguard. So
During the pandemic, especially
It exposed that Vanguard's customer service and technology is like
jank. It is not good. And there were a lot of horror stories of trades not going through, fund account transfers getting lost,
And like it makes sense, right? I mean Vanguard, the downside of its structure is that there are no excess
Profits.
that can be invested for the long term in things like technology and things like customer service.
Whereas Fidelity, as they started to realize that this strategy's gonna work for them, they said, Oh
This is gonna be a weak spot for Vanguard.
we're gonna double down on technology, we're gonna double down on customer service if we're gonna make our
brokerage platform and our four oh one K platform.
Vastly superior to
Vanguard offers.
Yep.
It is an inherent trade off in the model. You don't have as much money in the kitty to
build the best in class technology platform or the best in class customer service. You could, but you probably need to raise prices a little bit, and they just need to get comfortable with that.
Yep, yep. So that's the fidelity story.
The Black Rock story.
Is
Different.
But also rooted in ETFs.
And in BlackRock's case directly rooted in ETFs.
So in two thousand nine
During the depths of the financial crisis.
Blackrock made
A fantastic
Acquisition.
Of a business called iShares. Yeah.
From
Barclays.
And this is all directly related to the crisis. So Barclays had
acquired the pieces from a few different banks and financial firms, but really assembled
I shares earlier in the decade.
And iShares had become
The
leader in
ETF issuance.
Barclays took over
The field.
Lehman Brothers assets.
They needed to raise capital to shore up there.
capital base and they had to put iShares.
Up for sale as part of it.
Blackrock came in and acquired it and it has been just like
A slam dunk.
Huge, huge win.
For them.
Coming out of the financial crisis.
You know what?
retail investors decided they liked
even more than the Vanguard story and the simplicity and the folksiness of the Vanguard.
Index mutual funds.
They liked
a lot of ETFs that they could trade on their own and make all sorts of
Wall Street Bet style.
Fancy bats on the market.
Even Vanguard only has a few hundred
funds and ETFs today.
Whereas
BlackRock has
Tons of ETFs, right? Yes. 1400 total ETFs. Like really custom. In aggregate totaling three point three trillion.
in ETF assets under management, which is the largest player in the market by far.
Across a bunch of different
strategies and sectors and stuff that Vanguard has always been religiously against. Yes, reluctant to pursue. Yeah. Yep. So yeah, uh Vanguard is today the number two player in ETFs, but
smaller both number of funds and then assets under management. And BlackRock continues to kinda accelerate away from them.
Which again, right now the ETF market is smaller
than the traditional mutual fund market that Vanguard still dominates, but the ETF market is still growing thirty percent.
Every year.
And BlackRo is starting to run away with it here. And BlackRock is also very diversified. Vanguard is a competitor with a slice of their business, but they're just in so many different
sectors not to mention private assets. International. BlackRock is way more international than Vanguard is in terms of uh the client base that they work with.
Yeah.
Similar again though to the fidelity strategy.
Black rock's
profits elsewhere in the business allow them to subsidize the ETF business and just win.
Massive amounts of clients.
Yeah.
So
All of this raises an interesting question here at the end of the story.
Does
Vanguard's no profit
Mutualized model.
Actually hold it.
Back.
today relative to Fidelity and BlackRock. When we started
Yeah.
Ben and I originally thought that the question of the episode was gonna be
How do Fidelity and BlackRock continue to exist at all, despite Vanguard's obviously superior model? Right. And to put a finer point on obviously superior, it was
with Vanguard undercutting them on price and being structurally incentivized by their shareholders to do so.
Yeah.
Yeah.
And we kinda had to

went through the research of oh, actually Fidelity and BlackRock are doing so well
Is the question actually flipped?
That Vanguard's model is holding it back.
I don't exactly know the answer, but what I will tell you to bring us to today here
Is that twenty four months ago?
In May of twenty twenty four, Vanguard made another big CEO announcement.
That they were bringing on the first
outside CEO in the firm's
Entire fifty year history.
Salim Ramji.
From BlackRock.
Where he was
Until that point in time.
Head of the iShares division.
So that really says a lot.
Right there. And the question is, can he
Fix.
the challenges that Vanguard is facing right now.
And and to itemize those, it's
What, customer service technology?
And
this situation where they've found themselves that because of ETFs
their competitors, or quote unquote competitors.
Can access
their funds.
easily and in sort of a open garden on their own platforms where they will then profit from the customer relationships with those fund holders. Yeah, in in in in other ways. See, I don't view that as a problem.
I think like
If you're Vanguard, you're delighted to get the business to have people buying Vanguard funds on Fidelity.
But there is a vulnerability of you actually don't have a relationship with those customers, but and they have a relationship with with Fidelity. And they can easily trade in and out of your funds.
Whenever they want, and their advisors on those other platforms might one day advise them to.
Yeah.

Gee, wouldn't it be smart to have a giant advisory business of your own to build the direct relationship with those customers. Right.
So yeah.
What does Salim do when he comes in?
Well, I think it's some of these things we've been talking about. It's expand the advisory business. In addition to that, expand fixed income, which we haven't talked about in a while.
try and expand into retirement, where obviously Fidelity has really knocked it out of the park. He's talked on podcasts about making deeper technology investments and improving the client experience.
There is this interesting
question which is th they haven't
really had any new innovations in a while, call it a decade, that
have been really meaningful to the business and that they've continued to scale.
They did buy a direct indexing platform called Just Invest.
But the
afterwards haven't done that much with it.
Similarly, the personal advisor services grew really fast at launch and then the in the years afterwards. But since Covid, I don't think they have been mostly flat.
Yeah, or at least they haven't been putting out any press releases talking about how big it is getting.
One interesting one that I was surprised to see is an expansion into private equity. Yeah. Yeah.
That was surprising.
So kind of before talking about why they're doing it.
It is worth calling out this crazy thing, which is
Four.
Public
Equities.
And for bond funds.
Prices have seen.
massive compression thanks to Vanguard, where you're seeing they used to charge one and a half, two percent
fifty, sixty years ago, and now you are seeing
The Vanguard effect. You know, seven basis points at Vanguard and forty basis points for the rest of the industry. Venture and private equity is two and twenty, or often even higher. I've seen plenty of higher fee structures than that also. Right. Not only is it two percent.
Assets under management fee.
to the fund manager every year. There's also a performance fee on top of that. Right.
Form of carry.
So, David, you and I are in this world. We've been venture investors in the past. We do venture investing now. What what is your take on structurally?
why the Vanguard effect has not come to venture capital and private equity.
Yes. I used to think about this a lot and
No, I think the answer is just quite simple.
Venture capital and private equity is an access business. Yeah. And it's not like you can just call up your broker and say,
Hey, I want some shares of Anthropic today and execute an order like
You need to pay for access and that's what
Venture capital is doing and that's what private equity is doing. In private markets, the assets have to pick you back. Yes. But in the public markets they do not.
Yes. And in venture capital, there is this chance of extreme outperformance in a power law way for the very best funds, and investors actually are willing to tolerate fees for that chance at outperformance. Yep. The other thing is you really do need a crazy person like Jack Bogle that is
interested enough in capitalism to spend their life in the world of investing, but not capitalist enough
to want to benefit from it.
in any way, which is like this incredibly rare, rare person. And
Jack.
didn't exist in this world at all. I mean he only was in the world of mutual funds and basically had no contact with the sort of venture and and private equity world. Yeah, there hasn't been a Jack Bogle in the private asset world of VC and private equity.
And
There hasn't been another Jack Bogle in the public asset world either. He is one of one. There hasn't been another Jack Bogle in any industry. Right. I mean that's the interesting thing to call out here is to spoil one of my giant
End notes of this episode, my quintessence.
There's no reason why mutual ownership of a corporation
needs to be
Strictly in the
Asset management.
business.
I mean
Yeah. If this is a better form of capitalism, which I think like
I'm excited about this model. I'm I'm fascinated by it. It seems like this like really beautiful, elegant structure that provides a lot of durability.
Why aren't we seeing it in retail and grocery and technology and why aren't the customers always the owners of the company? Or at least why isn't there literally any other examples other than REI and outcor, but that's probably the biggest example, and then a handful of small grocery stores.
And the other scale players are probably just insurance companies or banks. Yeah, yeah. But like why why isn't the economy littered with this? Let's table this question for analysis, but to keep it on Saleem and Vanguard today. Yes. They're entering private assets for the first time. They are entering private assets. And the big thing
is these companies are staying private longer, and so so much more of
The
innovation engine
of the American economy is happening in private markets. And so if you're gonna best serve
investors, then you you do wanna find some way to get exposure to it. And the question is can they do it in a vanguardy way where they they do it at at cost or as close to at cost as possible.
And we've seen an announcement of an alliance with Blackstone, the huge private equity firm, which will be really interesting. And I think the question is what's the economics there and uh at what scale can they do it? Because at least historically the private markets were a lot smaller than the public markets now with multiple
trillion or near trillion dollar companies in the late stage private markets, they're pretty big now.
Yeah.
Yeah.
Yeah, this needs to get
figure it out one way or another.
Navigating the fee question is gonna be
A big one. Because again, like we said.
This is a fundamentally different market where the asset needs to pick the investor and access is limited and scarce. So like
the best investors in private markets think like Sequoia, Benchmark, et cetera, in the venture world at least, like
Why would they ever give up their fees?
Right.
Right.

The other thing that's happened is
The success of the index fund has sort of created
a barbell in a lot of people's portfolio where
you kinda own Vanguard as your like 80%, your your cheap beta for most of your net worth. And then you kind of like play with the other twenty percent and look for asymmetric bets to make. Does Vanguard want to play in that twenty percent at all? Are they satisfied kind of being the the core for most people? That'll be the interesting thing to watch.
Yeah. And it seems like Salim is moving them in the direction of like
Yes.
Private assets, full spectrum, et cetera.
Yeah.
My big question is
When you are owned by your current set of customers.
Why grow? You don't have any shareholders.
to appease. Like normally in a company, when I buy a share of Apple
It's because I think Apple is gonna
Compounds.
their profits, their cash flows in the future at a higher rate
than anything else that I could invest in.
And so it's their job to grow.
to benefit me as the shareholder.
Vanguard doesn't have that.
They their only charter
Is
appease the needs of their current customers.
Right.
That's a great point.
There actually is no built in incentive or obligation.
to grow with a structure like Vanguard. The only
Reason to do so is if you believe
The mission
of the company either
As set up by Jack or
As it should be today.
is to bring the service to as many people as possible.
But that's just a value judgment.
There's no uh incentive there.
Right.
The
answer I suspect Vanguard leadership would give you is
you do actually need to grow to stay competitive because you need to keep
Investing
in the platform.
And the current cash flows off our small management fees are not enough.
to make all the investments that we want to make. Yeah. So you do need to fund like a
a fixed cost build out with your future customers. So you sort of have to grow to to get them in.
The other thing I would suspect they would say is
is to best serve our current customers.
We need more products to offer them. And so we need to enter
wealth management and we need to enter private equity.
in order to better serve our owners slash customers. And I think that there's there's merits to that too.
Okay, so that's the last couple of years in the new management at Vanguard.
Take us to today by the numbers.
So
Total assets is now twelve trillion dollars.
Two trillion of that, interestingly, is active.
Yes. So just to underscore that
Jack Bogle was not a
Index.
passive zealot, he was a zealot for low fees. And I think this is the DNA of Vanguard is can they figure out how to using their mutual ownership structure continue to enter more and more sectors where they can squash fees to zero or as near zero as possible, especially in these scenarios where they can get
average returns at a dramatically below market cost. That is the like magic of the whole thing. Yep. Yep.
Again, very Costco like. Yes. You've seen Costco expand into vacations and auto. You know, yeah, why can't Vanguard do the same? Yep. So it's crazy. As much as we talked about the index fund as the central narrative of this story, Vanguard's AUM was
Mostly their active funds.
For the first twenty years.
By nineteen ninety four, indexing was still only fifteen percent, but
of their total assets under management.
And then as we talked about, they really took off in the nineties and two thousands. Today, eighty four percent of their assets are passive index funds, but you go back to nineteen seventy four, it was zero percent.
Right.
And it stayed sub fifteen percent for the first nearly two decades. Yeah, twenty years. Yeah.
Now onto expense ratios, Vanguard's average ETF and mutual fund expense ratio is now down to zero point zero seven percent, with some ETFs like the one that I'm in, the VOO is zero point zero three percent.
the industry average
across mutual funds and ETF is
Forty four basis points.
Mm. So that is
six and a half times Vanguard's average. So even after all these years and all the Vanguard affecting,
There is still quite a bit.
of difference between Vanguard and the industry average. The average mutual fund out there. Yep. Yes.
Notably not the average.
passive index fund because basically everyone has had to meet Vanguard there. But it's interesting how the Vanguard effect has even dragged down the active public managers too. Yes. Yes.
Eighty four percent of Vanguard's funds have outperformed their peers over the last ten years.
They have twenty thousand employees, they have fifty million investors worldwide, but notably, the last thing I'll say is a little over ninety percent.
of their investors and their investor capital is in the US. So they are not nearly as global as BlackRock or Invesco or Franklin Templeton. Yep. So

All right.
Should we do analysis?
Well
On this one I have
One more thing. Ooh before we go into analysis. Ooh, lay it on me.
Well.
Listeners might have noticed.
We never really said what
happened to Wellington.
Oh, in the divorce? After the divorce, yeah.
The crazy thing.
They went on.

Trillion.
Dollar.
Firm.
A hundred percent devoted to active management. It's the anti Bogle.
So if you know anything about
the active management space today. W Wellington Management Company is one of
The largest.
Players out there.
And yes it is the very same.
Wellington management company all the way back to Philadelphia and Walter Morgan. So they built this giant pure active firm in the
era that massively bent toward passive indexing.
Yes. So was it the same four guys that sort of stayed and rebuilt it? So after Jack left, the original four IVS partners
Took over.
the firm.
And
Slowly
rebuilt it into something new. Remember it had been a public company.
They
Retake it.
Private.
in a management buyout.
Hm.
And then they basically radically reconfigure what
Wellington.
They go out and they recruit.
A bunch of
young, talented, new partners to come in.
And then
They restructure the partnership.
Into a sort of progressive
Generational transfer.
where senior partners age out of their equity in the firm and then younger partners
Age in and it's worked incredibly
Well for them. So
The second half of the nineteen eighties as the
The stock market rebounds
Wellington management.
Gets
Totally rebuilt. At one point.
In time.
They take over management of
MIT's endowment, like the actual MIT? What? The Massachusetts Institute of Technology.
They obviously have always been in equities. They build a debt practice, a private capital practice, an alternatives practice. They go international.
But probably their closest sort of comp today is Capital Group, the
giant firm in Los Angeles that we talked about. Wellington manages about one point three trillion
in assets today. Capital Group manages three trillion, so larger, but like both
Mm. Very well respected.
And then the best part.
Wellington management.
still does
The investment management
For the Wellington Fund.
Within Vanguard.
Even to this day. Really? And that Wellington fund not only still exists
It has a hundred and ten billion dollars.
In assets.
Today. So it's technically a Vanguard administered fund, but the investment advisory is done by
Wellington Management Company, same as always. It's this incredible story. And Jack and the IVES partners eventually reconciled.
In the early nineties, Jack
Goes up to Boston.
They all sit down to dinner and they're like
Hey, you know, we have gone our separate ways. It's been a long time.
It's time to bury the hatchet.
And the relationship between Vanguard and Wellington has never been better.
Wellington manages several
Other.
Vanguard active equity funds and portfolios for them as well. Amazing. How crazy is that? It really like is kinda heartwarming. It is. And what a way to wrap the story. It's full circle. What a way. Yeah.
Yeah. All right. Let's move into analysis.
Okay, so my big question here in analysis, and I've got some playbook themes that I wanna hit, but
I've been cliffhanging from earlier.
Why do you think outside
Of
Some mutual insurance companies
Are you.
Some local grocery stores
Why isn't
It more popular to see this mutual ownership structure.
in our world. Yep. Well, and I I think you could argue that the NFL in its own way is this. Obviously not to the fans, but to the constituent teams. Uh
The NFL was
I actually don't I disagree with the NFL take. I think the NFL take is
It's a collective bargaining agreement.
Mm. It was, you know, the year is whenever it was, nineteen sixty, nineteen sixty one, by linking arms.
And bargain together we're gonna get more for our T V deal than we would independently. They observed that working and then they just decided
We're gonna be
taking that stance for everything and negotiate as one league going forward.
This is different.
Which is
Can we avoid
Having
Another

to our entity, the shareholder, and can we
get everything that we would need out of shareholders.
Primarily capital.
out of our customers. And maybe that's why it works uniquely.
for Vanguard and for sort of asset management is because the product is capital.
you can tap your customers for the thing you would normally tap investors for. Yep. You definitely need to have the ability to do that. I mean even Vanguard's real estate on their campus in Malvern
When they were constructing that they
Tapped.
The
shareholders, they tap the fund holders for essentially
construction loans. Oh, interesting. To construct the campus. Yes. You do need to have enough capital in the base and ability to do that in order to fund your fixed costs.
Whereas like I don't know if REI could raise a bond
from its members. I mean the fact that fifteen years ago I paid thirty dollars to become an REI co op member.
Am I really a member of the If they called you today and they're like, We need your money to finance to the next story bell down, you'd be like No. Right. The other thing, Vanguard was sort of in a unique place to
rely on
Wellington's active
stuff to provide profits during the dark wandering years. I mean, usually the way you end up with shareholders is
You need to raise money. And Vanguard figured out a way to bootstrap off of the old business.
Yeah.
Yep.
All that said.
I totally agree. I think you need to be operating in a
space such that you can access capital. Everything I just said is an argument for
Founder ownership, not customer ownership.
Like if you didn't need to raise capital, then the founders would just own the business forever. But this is very unique where the customers are actually the owners of the business.
Yep. And that's where I was gonna go. It really takes a very, very special group of people.
To
Do this because you are removing
a huge amount of wealth creation potential.
You have to make a non economic decision. You have to decide
that's something you would own as the founder you don't own and the community owns instead. Yes. And even if you get paid a good salary and Vanguard, you know, pays high salaries commensurate with the
industry.
Yeah. You're not getting equity ownership.
And
You're thus.
Not gonna
And you're gonna have to go through
Absolute hell.
to will this thing into existence more so than if you had regular shareholders because you're you you have to do crazy things to
get through in the lean years, especially early on.
usually there's some economic component to being willing to to go through all that. And this is you uh admitting I will never ever
Have
founder economics or economics of any kind in this entity, and you're still trying to will it into existence. So it's not only a very narrow circumstance
that could allow it to exist, but it takes
A very unique uh a Jack Bogle. Yep.
A type of person in the exact
Specific.
situation in life where he found himself. I mean, it's his quote from his memoir that I have right here.
I realized that a mutual company
Would never provide me
With the personal fortune that so many denizens of Wall Street would earn.
But it offered, I believe, my last best chance to resume.
My career. Even Jack wouldn't have done it if he hadn't
Right.
So I I think it kinda b mostly boils down to Jack. The other thing that makes this
Finance in particular uniquely well suited to this is
Lots of people managed to start co op grocery stores and small co-op things.
In order to expand those businesses, they all require capital. And so you end up with shareholders at some point, or you are small and stay subscale.
Finance isn't that.
Finance is like software where it can scale.
Basically infinitely once it overcomes its early fixed cost base.
Yep, huge operating leverage.
I did think of one other
Jack Bogle like character who built a vanguard like thing. And I'm curious if the thought your mind too.
I think Costco thus far has been the most correct
analogy that this is Costco on steroids, but it's also something else that was also an acquired episode.
Oh wow.
Uh it's even in financial services.
Uh I guess Berkshire?
Visa.
Oh, Visa. Yeah, D Hawk. Yeah, absolutely. Absolutely. I mean, I was gonna say Berkshire because
For sure.
as we talked about earlier, does not take fees or carry, but effectively as a private equity firm. But it's not the same because
Warren.
owns a huge chunk of Brookshires. Exactly. He doesn't take outsized economics, he takes
Commensurate economics. Yep. I forgot about Dee Hawk. You're totally right. Listeners, for anyone who isn't tuned into our Visa episode.
Yeah.
took a similarly
I I'm not sure if selfless is the right word.
But a person who was not motivated by getting to own the fruits of their labor.
where D just decided
This is the best structure.
If all these banks link arms and collectively
create this thing that if memory serves it might have even been a nonprofit.
S some sort of strange structure. It was. Yeah. Yeah. Strange structure. Now it's a corporation and it's gone public and all that, but for a while it was. But it had to get restructured in order to go public in two thousand eight, I think it was. Yeah. Right. But it was it was this realization that there exists a better structure that will uniquely enable this interbank experience and
I wanna will that into existence. It's gonna be my life's work and I'm not gonna own it. Yep. And I think that's the type of person that it takes to to do this. Yep.
And you're right, I think there are a lot of parallels between D and Jack.
But D if Memory Serves was an employee. Yes. When
He started this. So
Visa.
Yes, he f you know, sort of forwent founder economics, so to speak.
But it wouldn't have been on the table for him otherwise. This was his chance to be on the big stage. Yeah, he had to convince his employer not to be the owner. Yeah.
But he never could have been the owner.
Yeah.
Yeah. Unlike Jack.
Yeah. Good call, though. I love that.
Thank you. Thank you. I was proud of that one. You should be You should be.
Other playbook themes.
This is a case study in a aligning incentives.
If you want something to happen
And Jack really wanted investing to happen, since the math showed that it was superior in the majority of cases. You need to align incentives for it.
So I think most people coming into this episode
No
Vanguard has low cost index funds.
Some people know that Vanguard is owned by its funds.
Investors.
But I think few people realize
That is why.
It is low costs. Yep.
The investors
or the board of directors, or elect the board of directors and thus
Will always vote.
to lower fees when they can lower fees'cause it's in their own interest.
Jack's quote on this that he would say often is strategy follows structure. Yes. And
By setting our structure as such, this had to be our strategy. Yep.
Another playbook theme I had is uh people often talk about compounding returns. We've done it
hundreds of times on this show.
Bogle really understood the power of compounding costs.
His quote on this.
Where returns are concerned, time is your friend.
But where costs are concerned,
Time is your enemy.
And Vanguard strategy
was just that, to give you the power of compounding returns without uh what Jack calls the tyranny of compounding costs.
Yeah.
So Jack, yes.
I don't think corporate structure and corporate governance has ever played
such an important role as it did on this one.
Yeah. I was racking my brain on you know, we we always talk about
these founder led companies or where private family ownership lets you take a longer view.
But this is something else entirely where it was literally path dependent. The only reason that they had the market opportunity that they had was because of the corporate structure that they had. Yep.
Be fun to see if there's other ones of those that exist.
Yep.
Alright.
Should we get into the criticisms of
Passive investing as a movement. Yes.
The crisis we would be remiss if we don't know. The crisis, of course. The passive crisis. Yeah. And this is what we were alluding to earlier with like
Hey, if one of these companies were to go down, it would be systemically really bad.
Also the flip of that is these large index fund complexes, of which Vanguard is the largest
control a huge percentage of the voting shares of all American corporations and increasingly all corporations around the world.
Yeah. So first of all
There's this name, passive investing.
That's not true.
It's not like
An algorithm.
Determines
what is in the S P five hundred.
It's a committee of humans.
Mm-hmm.
So
This whole thing is predicated on
Just
you know, owning that basket of stocks.
But the S P five hundred, yeah, it's got some rules.
But it's not entirely rules based. Those just
Uh government
what companies are eligible to get voted in by a small group of people around the table. The investment advisors to
The majority of, you know, the American public here. Yes. The counter argument to this is that only matters in the short run. In the long run, the S P five hundred returns are almost exactly the same as the total market returns. So it doesn't keep me up at night, but I always think it is a little bit funny if like it's not totally passive.
Yeah.
Okay, so other criticisms here of
the indexing.
Unlike businesses that have some form of physical operations or like an addressable market being small that constrains it.
Asset management.
can scale infinitely.
Like it's market.
із
Investing literally any currency is
in literally any company.
Which is
Market size unconstrained. It is truly market size unconstrained. You know, think of the largest markets in the world, transportation, housing.
This is maybe bigger than any of that.
It's a little bit of a crazy thought exercise. So it's not constrained by addressable market and it's
It just scales so elegantly, other than customer service. Uh
It
It just doesn't require any additional
dollars of cost to serve additional customers and additional uh revenue. So in theory
A few
Index funds should
continue unabated to scale and own basically everything.
Yep, and we're well on our way to that happening.
Yeah. So here's the stats on it. Thirty five years ago, only one percent of the market was passive.
It's now more than twenty percent.
of the S P five hundred.
And a couple of years ago, passive assets in funds overtook active assets in funds for the first time.
That that
Just happened.
Where passive funds eclipsed active funds.
So the concern that people have is uh a fewfold based on this. One is
There's not enough active traders in the market to accurately discover price.
if we're all trusting that the index is gonna buy things at the correct price, you do need active managers
to buy and sell to set the price. Yeah, and the associated criticism of passive
Which I think Jack would readily acknowledge is
Hey, we're free riders here. Right.
We're getting all of that price discovery and price information that the active guys are doing just
For free. I don't buy this argument.
Like I'm I'm not concerned in any way about this.
I think even if you had ninety five percent passive.
The prices are set by the marginal trader.
You don't need very many people in there.
arguing with their dollars about what something is worth to figure out what it's worth.
Yep. A and the profit opportunity from arbitraging is so great. And that profit opportunity becomes greater as this
problem quote unquote gets worse. So like
the m right market balance will figure itself, yes here. There is an equilibrium.
long before we get to that problem, you'll have arbitragers that are interested in trading because it's profitable. That you're right, it'll hit an equilibrium. At least that's my my perspective on this. The other concern is
Well, all these companies now have the same shareholders.
Apple, Microsoft, Google, it's all twenty percent plus these big uh Vanguard, Fidelity, Black Street, et cetera. So why would they compete?
If let's say that twenty percent goes to fifty percent or eighty percent.
Shouldn't
the owners go tell the CEOs, Hey, you guys should just collude and keep prices high. Let's reap in the corporate profits. Let's
screw over the American public, the customers, and let's all just
make a lot of money together.
This also seems a bit far fetched. Right. It it sounds
provable in an academic thesis, and then you like get actually out in the real world and you talk to some CEOs. Do you think the CEO of any company is is gonna stop competing with their biggest competitor in a fierce battle because an index fund manager common ownership in index funds no. There's just no way.
Yeah.
more legitimate concern version of this.
is voting and and shareholding and like sort of being being active shareholders and holding management to account. And right now
It's actually pretty interesting. The way that each of these companies and each of these funds handles how to vote the shares.
of the index funds is all over the board. Some of them literally let individual index holders vote on individual issues. That's incredibly rare.
usually what they say is I wanna pick one of these five options and vote with management, with the majority, with a set of ESG guidelines. And you can kinda that that's the common thing.
most of the times it's suggestions of how should we vote the shares, but
I get where you're going that the fund manager of
Let's say one of these Vanguard or BlackRock grows to be, I don't know, sixty percent ownership of every company in America, suddenly they have voting control.
over those companies and it's a big responsibility to decide how they're gonna vote those. Right.
Or or in aggregate.
You know, a set of three or four of these large index funds and then
their fund holder base, which is the American public.
It's like
We've turned the
board of directors of every company into an election on the order of like a, you know, US political election. That's funny. It turns every corporate
governance issue into the court of public opinion.
Yeah. How does the American public feel about this?
I have no idea if that's a good or a bad thing, but it's certainly not how
Corporate boards have operated in the past.
I will say this twenty percent is a little misleadingly low because
Thanks to direct indexing and people constructing their own portfolios that look like indexes, but aren't actually in index funds.
The
passive ownership in companies could be more like thirty to forty percent. Mm-hmm.
But
the people that are direct indexing or creating the mirror portfolios, they're not in funds. So you don't really have to worry about how the the funds are voting. But
It does impact
those people aren't trading, those people aren't participating in in price discovery. That's just passive ownership of everything.
Yep.
Yep. So at the end of the day on all of this stuff.
I think these are some issues that
will get magnified and need to be worked out, but none of them feel like
A real existential threat to me to passive.
Yeah.
Totally agree.
Alright.
Should we do our seven powers analysis? Let's do it. Seven powers. This will be
fun because, you know, Hamilton Helmer's definition of
Seven powers is what enables a firm to earn sustainably more profits than their closest competitors and um
Well Vanguard by its very nature.
Earns no profits. Right. We're gonna have to sort of adapt the definition of seven powers.
to really align with more of its spiritual goal.
Why do fifty million people have twelve trillion dollars with this business? Yeah, maybe it can be expressed through market share instead of through the sum of profits.
Yeah, why is Vanguard the market share leader in mutual funds and index funds? Because you can't really talk about it in terms of theoretical profits.
Because the only thing that earned them the right to exist is not generating profits. So if they were to recognize their theoretical profits,
then they may not exist at all, at least historically. Yep. So you sort of have to do the analysis based on market share rather than on
trying to estimate what their theoretical profits would be.
Yep.
Little twist on this that we can keep in mind as we go.
is a question I was asking through the research of
What's to stop
Another
idealistic young person from
coming along and saying.
I also don't care about profits and I am also going to start
Yeah. Another vanguard and compete with them.
What protects Vanguard? That's the question.
So the seven are
Scale economies, network economies, counter positioning, switching costs.
Branding.
Cornered resource.
And process power.
Yep.
Well
To my question. Scale economies.
For sure. Absolutely.
Absolutely.
I mean we said earlier this business like Costco has scale economies shared.
the reason they exist in the first place is because
There were not
existing low fee index fund providers. If you were to try to start a new one today,
In order to
Break even you probably need
One or two percent.
fees starting from a zero asset base. And so you'd be inherently noncompetitive.
Big
Or you don't
Go raise a giant amount of money to subsidize it, then
U you kinda need Vanguard scale economies to compete.
Three basis points.
On twelve trillion dollars is still a lot of absolute money that can fund a lot of salaries in a lot of place. Sorry, oh sorry, sorry. Seven.
Seven feet. Even more money. Even more money.
So that scale economies that's that's a obvious one.
Counter positioning.
I think this may be the most extreme example of counter positioning ever.
Right. Bogle did something that was essentially non economic. There's no economic incentive to create this company in the first place. Their their ownership and fee structure was an advantage that
Cannot be replicated.
Not only by a a a competitor who it would be like concerning and destroy their
their business. But like anyone else who tried to do this
Would make no money.
Yes. Extreme counter positioning. Now interestingly, it still took like
the better part of two decades to get real adoption for this. But I think that's largely because it also took a while for all the mechanisms to really get put in place. I think that's right.
Yeah.
I don't think there's really network economies here.
Uh, there's certainly no switching costs, especially once ETFs.
are on board. In the traditional mutual fund industry, yes.
But ETFs I completely disagree. I think eliminate switching costs. Oh, you disagree?
There's no chance that I'm gonna sell by Vanguard index fund and realize the capital gains tax only to switch to a different index fund.
Uh sorry. I was thinking about switching costs in terms of a customer relationship.
But
But that's this kinda unbelievable thing about ha if you're a fund manager or having someone invested.
If they can let the compounding continue unabated.

Right, right, right.
And not realise the capital gains taxes. Okay. Yep.
Fair point. So I think this is inherent in
the fund business model. Mm-hmm. Mm-hmm. Especially the open ended public fund business model.
That's a great point.
Yeah.
I do think ETFs meaningfully
Change this equation for Vanguard, but in a sort of
Sideway.
Just simply that the
Customer relationships could now be ported out of Vanguard easily.
out of Vanguard the brokerage. Yes.
But not out of Vanguard the fund.
Yeah.
Branding. Branding, I mean God, the Bogleheads. The Warren Buffett endorsements, like the decades of
Building the brand.
I'd have to think back to when I first started
buying index funds, but I probably picked
Vanguard.
Over
a fidelity fund'cause they both looked
de minimisly low fees and I was like oh Vanguard's probably the the right thing I'm looking for.
Really hard to replicate.
Warren Buffett.
Saying that a statue should be erected to Jack Bogle and that he's a hero to the American public and to him. Now interestingly, there is some wholesale transfer pricing because
of the S P licensing.
Where the
Branding is a Vanguard SP five hundred index fund, and Vanguard probably has to pay a good amount of what it makes on that fund.
to S P global.
It's gotta be the biggest single component. Yeah, of course.
Yep.
Process power.
There's something unique.
In the culture at Vanguard.
I think people make non economic decisions.
to work there because they're motivated by the mission.
And it might also attract a set of people that are not interested in being in New York City finance.
Yeah.
I think that's totally true. Yep.
Cornered Resource.
I don't think it exists. I don't think so.
All right.
That's power. Should we do Quintessence? Alright.
Quintessence.
Here's mine.
So
We haven't talked about this yet, but I think it kinda comes down to this.
Jack had the insight.
that running a successful mutual fund
is actually not a differentiated product.
It is a commodity.
Yeah.
What you are seeking
is the highest possible long term return on your capital.
That is not like buying a unique piece of jewelry.
It is like buying a soybean.
I mean this industry that for
decades had sort of sold itself on
Uнікness
there isn't a unique thing you're seeking.
It is just a risk return profile over a long period of time.
And so in commodity markets
It is a different set of things that determine a winner.
versus differentiated product markets.
Scale really matters.
Brand really matters.
And most importantly, the lowest price
is the market clearing price.
If someone's selling undifferentiated coffee beans or soybeans or oil for a dollar lower than you are,
Your demand goes to zero.
and they get all of your demand.
And he realized that actually
the public equitiment business is that.
And so if you need the lowest price
then you need the lowest cost structure.
Mm.
I like that. I might suggest a modification.
Please. I'm open to it.
I would suggest
The
Jack.
bifurcated the public equities market.
into
Commodity
And non commodity.
Before Jack and before he invented a commodity sleeve of the It was all differentiated pro marketed as differentiated products. Selling the dream of outsize returns.
Jack took a huge chunk of that, broke it off, and said, Nope.
This is a commodity market. I still do think there is a successful and thriving industry selling the dream. I mean, clear, there's an existence proof of that. And some of them deliver on it. But yeah, Jack.
broke off a huge chunk of it and created a new market.
Yeah, I love the quote that he that he has the the grim irony of investing is that we investors as a group not only don't get what we pay for.
We get precisely what we don't pay for. Yes.
And then whole realization around
Investors as a whole
are the market. It is zero sum. So therefore, if you're gonna own the market, you have to do so with the lowest possible fees. And I think the thing that kind of makes it all work is holding for duration.
There's gonna be lots of funds that you can be in that will outperform
in fits and starts, but if you wanna be the i in the upper decile.
After forty years.
then it turns out owning the market with no fees is a almost surefire way to do it.
Yeah.
Yep.
Not investment advice.
Not investment advice, but you know, hey, Warren says it. So look to him. Which leads me right to my quintessence. My quintessence is that Warren Buffett.
Was right.
The world and America should erect a statue.
to Jack Bogle. And specifically my quintessence is that
More than almost any other episode I can think of.
The Vanguard story and Jack's story is proof that
one single human being really can.
Change the world.
This is not a

Time had come.
Uh not like this.
Not like this. Index funds probably
would have come, technology had gotten there. Ah, but a mutual ship. But a mutual via loss leaders. Yes. Yes. The Vanguard effect.
Would Fidelity, would BlackRock, would State Street be charging
The low low fees that they are.
Today on their index products.
Were it not for
Jack Bogle and Vanguard.
I don't think so.
It's interesting. I wonder where it would have settled.
'Cause there would have been
competition around pricing.
And
The way it usually works is you compete down to the minimum profit that firms are willing to make.
Yep. So I wonder what that
sort of floor would have been if not for Vanguard.
Right.
But
U usually that minimum profit that farms are willing to make is not
Zero Zero Especially not in this industry. Very true.
So yeah, I think uh I I agree with Warren and millions and millions and millions of people have had their financial lives change because of him.
And would not have happened without him.
Yep.
All right. All right, I've got two bits of trivia for you.
Oh, okay, great. Blame on me. Vanguard opened their doors.
On May first.
Nineteen seventy five.
Yep.
What other company started that same month? Oh
Uh Microsoft.
Microsoft. Yeah.
Nicely done.


At the same time
You know, time that
Bill Gates is toiling away in Albuquerque.
You've got
Bogle and crew.
Amidst that crazy board fight all the way across the country in Pennsylvania. And uh we didn't put this in the narrative, but the
initial founding headquarters location of
Vanguard. Valley Forge. Not Philadelphia. Not Malvern, but
Nearby Valley Forge, Pennsylvania, cradle of independence in the American Revolution. That's right.
right up the street from where I grew up. Spent many an afternoon as a child walking around that park.
Little did I know what was going on there.
Alright, so my second piece of trivia is something truly astonishing that is related to this episode, but didn't make the narrative.
Arvin from Worldly Partners.
sent over this crazy piece of research to David and I. David, I don't know if you looked at it about
the entire set of companies that have hundreds since going public.
'Cause he's on this quest to figure out was it knowable at time of IPO how well they would do.
And
This basket of companies
On average, delivered a five hundred and thirty three X cents going public.
Wow. So like really good companies.
On average, they saw drawdowns at some point in their life of sixty five percent and
And took
Eight years.

to get to their prior all time highs.
Wow.
So think NVIDIA, Amazon, Meta, TSM C, Nike.
And I bring this up because
Most investors just do not have the temperament or the research capacity.
to decide to continue to hold these assets.
So it just doesn't make sense.
For most people

material chunks of their net worth in them. I I I don't think I realized
that even for that whole basket of hundred Xers, the average drawdowns that they saw was 65%.
Like if if your goal is to invest in the world's greatest companies and hold for a long time,
you are required to go through massive, massive downturns that could take on average eight years to return to the all time highs.
Who does that?
Well, there's two groups of people who do that.
People with
Absolute iron stomachs.
And index fund holders. Right. So there you go.
And the people with iron stomachs, they might be right, they might be wrong.
Like there's high conviction wrong people much more often than high conviction right people. And so that's
you know, why there really is only one
Berkshire Hathaway.
Yep.
Yep.
That's incredible.
Yeah.
It's crazy stat.
Well, similar to that I have uh
really fun thing that I learned in the research. So Jack, as we
Talked about.
Was a
Prolific author.
I think he wrote twelve books, I wanna say, in his lifetime. Yeah.
And those books continue to sell really well.
All the proceeds from the book sales.
All go directly to the Bogle.
Family Foundation.
where they get distributed to a whole variety of charities, including prominently the American Indian College Fund, which I think Jack was on the board of and was a huge supporter of during his life. So
What another cool legacy that all of the proceeds just flow directly into charities. Pretty cool.
the world's largest philanthropist. Yes. But not from the book sales. Not from the book sales now, though.
All right, on to carve outs.
The first one is many of you will notice that we started writing in the Wall Street Journal. Yes.
We are very, very pumped about that.
If you want to read our article on Ferrari
You can do that by clicking the link in the show notes. Also on Vanguard. We just did one two days before this episode came out. They came out in the weekend edition of the Wall Street Journal. Yeah. This is
A super cool and
B.
What a fun.
Full circle.
moment for me earlier in my career I worked at the journal.
On the business side, not as a writer, like
The idea that some day
I and we would have a regular
column in the journal would have blown my twenty four year old mind. So listeners, if you are not subscribed to the journal and you would like to read our columns, you can go sign up at acquired.fm slash W Sj
And we will get you sent special links that are free for you to read because we want this to be accessible to every acquired listener. Yeah.
Super cool.
Even if you
already have a Wall Street Journal subscription, sign up at acquire.fm slash WSJ if you just want to be notified when we do have a new piece so you don't miss it.
That's acquired.fm slash W Sj.
Okay. My
Real carve out?
Is
I am recording this episode on a brand new MacBook Pro M5 Max.
You went all out. I clicked the biggest step possible.
I I did. And
I was definitely in the camp.
Uh
All Apple Silicon is amazing and it's remarkable how my M one
still feels
Snappy.
And I was wrong.
the well getting getting an M5 Max revealed to me just how slow my 2021 computer was. And God, this thing is just such a beast. So it is very fun to be using a computer again because I don't wait for anything anymore. Also, I upgraded my internet to get two and a half gigs up and two and a half gigs down. So
there is just no latency between me and uh anything I can imagine at the moment, which is a a delightful place to be in computing. Yes. Every time you come to visit, you haul that beast out of your backpack up like
My mobile battle station. I'm in awe of the computing power resting in the city.
Oh me. It's my La Ferrari in a backpack. Yeah.
All right. I've got three carve outs.
This time.
The first one is Michael McKelvey on YouTube.
is this awesome YouTuber who I've discovered recently. He makes these super in depth, usually sports analytics focused
YouTube videos and
They're amazing.
Very thoughtful, very intellectual, very highly produced.
And
Hilarious.
He just does a great job.
Huge fan. I think he's based in Seattle, too.
Oh sweet. Yeah, you just sent him to me a couple of days ago, I just couldn't subscribe. So that's one
Two.
is the new Super Mario Brothers movie, Super Mario Galaxy.
So my older daughter and I love
The first
Super Mario Brothers movie.
When she heard that the second one was coming out, she said
Oh, dad, I really want to go see it in theaters. And so I promise I was like, Okay, we'll go on a date.
You and me.
Daddy daughter date. We'll go to the movies.
It was the best date I've ever been on in my entire life. I mean to do
Don't tell Jenny, or actually do tell Jenny. We had the most amazing afternoon. We walked to the movie theater, we held hands the whole way. Wow. We ordered lunch. The movie theater had special Super Mario themed Shirley Temple's
Yeah.
popcorn candy, you know, she snuggled up during the scary moments. And I was just like
This is what you become a parent for. This is like the best afternoon of my entire life, you know.
Can't recommend it highly enough. Go on dates with your children.
I love it.
Congratulations on parenting heaven.
Yeah, and then it was back to the salt mines after that. But it was great. And then my third one
A surprise last minute carve out.
While I was doing research yesterday
Polishing up the show notes for the script.
I came across
Totally accidentally by Googling.
Brooks.
Vanguard shoes.
This is like the ultimate acquired crossover. Did you know that these things exist? No.
These are old school Brooks.
Running shoes.
That they still make.
We gotta order some of these and wear'em to our next event. Are they actually Vanguard?
something or is it just called the model is called Vanguard by Brooks.
I was thinking it was um like I bought the Nike Kirkland signature shoes because
I had to. Yeah, these are sweet. But they look pretty sweet. I feel like we gotta get a couple cruises. Oh, and they have'em in acquired teal.
Oh yeah.
All right.
Nice.
Order. Live ordering during carve outs. That's right. That's right. Well, a huge thank you to a bunch of the great folks that we chatted with to prep for this episode. First to our partners this season, JP Morgan, trusted reliable payments infrastructure for your business, no matter the scale.
JP Morgan.com slash acquired Vercell.
the developer tools and cloud infrastructure to build fast, secure applications on the web, Vercell.com slash acquired, ServiceNow, the platform that puts AI to work for people, serviceNow.com slash acquired, and StatSig, bringing experimentation, future flags product analytics into one unified
system for product teams. That's statsig.com slash acquired.
You can click the link in the show notes to learn more. And as always, all of our sources, the books that we used, et cetera, are all linked in the show notes as well.
So on to the folks that we talked with to prep for this episode. For me, Arvin Navarrotnam as always at Worldly Partners did a great, great write up on Vanguard. And since he is in the investment business, this one was very close to home. We'll also link to his write up on the the hundred Xers.
And we didn't get to it in this episode, but he has sort of a a framework on how you could create a valuation for Vanguard at the end of his write up, which is cool for anyone who wants to check that out.
To Morgan Housel, our good friend and financial author famously of Psychology of Money, and past ACQ two guest. Yeah.
to Bill McNabb.
the former CEO of Vanguard two thousand and eight to twenty seventeen and thirty year veteran of the firm. Thank you so much for hopping on the phone multiple times to kind of work through a few different
Things that we were thinking about.
As always to Mike Miller, the former Wall Street Journal editor who has been really helpful in crafting these episodes with us.
David, while we're on the topic of the Wall Street Journal, I know you have one.
Yes.
Jason's wag.
The legendary
author of the intelligent investor column in the journal and
One of the most
Prolific authors on
The entire
Fun space. And of course Vanguard in.
Jack Bogle throughout his life.
Thank you so much for
All of your help.
Man, the Wall Street Journal party continues to uh Justin Bear there, who has a book coming out soon called House of Fidelity, which I think is actually due out this week.
And then to Charles D. Ellis for the book Inside Vanguard and Eric Balchunis.
for the Bogle effect, both really great books with a lot of detail on the history.
And from me, thank you to all of the other folks who helped us who we won't say your names here, but you know who you are. We deeply appreciate it and really made the episode special. Thank you.
Well, if you like this episode, go check out our episode on Rent Tech or Berkshire Hathaway, which we have three of for a total of I think nine hours. Yep. Uh Costco and Visa. You can join the acquired email list at acquire.fm slash email. You'll get our big takeaways from each episode in writing.
Past episode corrections, behind the scenes photos found in the research, and it's where you can vote on future episode topics. Plus you'll get David's little hint at what our next episode will be. David, very curious to see what you come up with this time. That is acquired.fm slash email. I'm cooking. And come talk with us in the Slack.
at acquire.fm slash slack.
So with that, listeners.
We'll see you next time.
We'll see you next time.
Is it you, is it you, is it you Who got the truth now