Humble Giants – Vanguard’s Gerry O’Reilly and Jim Rowley - [Invest Like the Best, EP.06]

There is a good chance that this week’s guests manage your money. This episode is a rare and fascinating look into the world’s largest asset manager. My first guest is Gerry O’Reilly, who is the portfolio manager for the largest mutual fund in the world, and oversees more than $800 billion for Vanguard. My second guest is Jim Rowley, a Senior Investments Analyst with deep knowledge of indexing and ETF’s. The two provide incredible insight into some of the particulars that make Vanguard and its funds tick. Please enjoy! For comprehensive show notes on this episode go to investorfieldguide.com/vanguard/ For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:04Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 0:24Speaker 01

  Patrick O'Neal is a principal and portfolio manager at O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 0:46Patrick O'Shaughnessy?

  My guests today are Jerry O'Reilly and Jim Rowley. Jerry oversees roughly $800 billion in assets for Vanguard, including their flagship total market fund. He does so quietly with great humility. Jim is a senior investments analyst with Vanguard with deep knowledge of both indexing and ETFs. I've always been impressed with Vanguard as an institution, so it was a blast diving into some of the particulars that make the company and its funds tick. For show notes on this episode, visit investorfieldguide.com/vanguard. And now, please enjoy my conversation with Jerry O'Reilly and Jim Rowley.

• 1:25Patrick O'Shaughnessy?

  All right, well, Jim and Jerry, thank you very much for doing this with me today. This is going to be a really fun conversation. I think some of the interesting minutia that we'll get into around index investing and Vanguard's active strategies as well will be great fodder for the listening audience out there. I'd love to start with something fun, which is that I have recently gotten very into running, so let's see where this is going, and looked up with the last name O'Neal, all of the Irishmen who had broken the four-minute mile. I was reading Phil Knight's new book, Shoe Dog, which I really enjoyed, and saw, in connection with the interview, that you, Jerry, had, I think, the third fastest time, certainly at Villanova, but sub-four-minute mile.

• 2:07Speaker 02

  Yeah.

• 2:07Patrick O'Shaughnessy?

  So I'd love to hear, just tell me a little bit about the first time you did it.

• 2:12Speaker 02

  Okay, so I had been knocking on the door of four minute miles for my sophomore year in college and just for whatever reason at 4.001, 4 point, you know, two tenths of a second, just never quite got there. And so at the end of my sophomore year, a little disappointed, and then went into my junior year and kind of figured, okay, this year it's going to happen and trained like I'd never trained before. And when I got the opportunity, I actually went from, instead of running 359 or 358, I actually went from a four-minute miler to a 354 miler. So I took, you know, almost six seconds off my personal best in one race. And that was, I think, just, I think the fact that I didn't have success

• 2:56Speaker 02

  my sophomore year in terms of breaking it, I was, made me even more determined. So that's kind of was the fodder for, for breaking it.

• 3:04Patrick O'Shaughnessy?

  At what stage did you figure out, I'm assuming you started running relatively young, like at what stage was it, did it become apparent, like, okay, I've got, I've got something interesting going on here?

• 3:13Speaker 02

  I think I was probably, you know, you're right, I did start running at a very, very early age, probably eight or nine. The town that I grew up in Ireland didn't have a whole lot of options available. There was, there was Gaelic football, soccer and running, and that was kind of it. So a neighbor happened to be into running and invited me to, hey, you should come down and try it out. Tried it out, liked it. But I'd say it was probably 15 when I realized, you know, I actually have, I have something going on here where I can, I tend to be able to keep going when other kids start blowing up. And, you know, I just said, this is, this is maybe something I should stick with.

• 3:46Patrick O'Shaughnessy?

  So there's this thread there that I'm interested in, the quote that I pulled up here from Shoe Dog, which was Bill Boerman, I think they pronounce his name, the famous Oregon track coach, said that his philosophy for running the mile was to set a fast pace for the first two laps, run the third as hard as you can, and then triple your speed on the fourth, which sounds insane and like, uh, crazy, but, but a lot of people said that actually is kind of what you do.

• 4:09Speaker 02

  Yeah, I mean, when you're running four minutes, there's no, at no point are you kind of taking it easy.

• 4:14Patrick O'Shaughnessy?

  Right.

• 4:14Speaker 02

  It's 50 miles an hour on the treadmill.

• 4:16Patrick O'Shaughnessy?

  I mean.

• 4:16Speaker 02

  Yeah, it's, it's cranking it, it's keeping it honest. I was probably not gifted with the best closing speed in the world. So I, I had to ensure that the pace was reasonably respectable. And then hopefully off of that pace, then I could still come home hard, which was my best races were races like that. If it was a really slow first two laps where it was more of a race, probably set up for a half miler. I was probably in trouble.

• 4:41Patrick O'Shaughnessy?

  Yeah.

• 4:41Speaker 02

  But if it was an honest pace with a strong finish, I was, I was generally in there.

• 4:45Patrick O'Shaughnessy?

  I assume, especially since you had the six second, you know, gap down, that this is as much mental, if not more mental than, than physical at that point.

• 4:53Speaker 02

  Yeah, it is absolutely. I mean, and, and overcoming that, the mental aspect of it, once I, I think I, I, I realized that there's no question I'm going to break it. Um, it, it became a lot easier.

• 5:03Patrick O'Shaughnessy?

  So was your last major running experience, the, the Olympics in 88?

• 5:06Speaker 02

  Yeah. I mean, I ran for a few years later. I think it got to a point where, you know, if you're a professional athlete, which I was for a little while after college, you don't make a whole lot of money, at least not at the level that I was at. And at, at some point I, I started, I was dating my, my, my now wife back in the time. And I started trying to put it together. Well, let me see what I'm making here versus what it's going to cost to have a car and a mortgage. The math didn't really add up. And so I was fortunate enough to have a competitor I used to run against who was working at Vanguard. Jim Norris and, and Jim said, I'll, I'll drop your resume off. So, uh, that was almost 25 years ago. I thought I'd be here for a few years and, and here we are 25 years later.

• 5:43Patrick O'Shaughnessy?

  And how about you, Jim? How did you get started at Vanguard?

• 5:45Speaker 03

  Well, I'm a little bit of an, an oddity, I think, because I've been around the block where, you know, you have a lot of crew members here, as you know, everybody's referred to, who have been here for very long periods of time. And like you and I discussed before we went on air here was, I, I actually started as a English tutor in a boarding home in Germany. I made my way back to the U S and reconnected with, with some college friends. And I've been involved in investment sales at Merrill Lynch. Um, I went to graduate school and I got my investment banking job at Lehman Brothers in the early 2000s, well in advance of any issues. Cause my wife and I wanted to come back to the area, both being Villanova graduates. And I'll put the, in for Jerry as well, he is well, you know, it got us back to this area and she could start going back to work.

• 6:27Speaker 03

  And, you know, for a couple of years, I just started making my networking and, and connections and found my way. In Dork Vanguard and that was that was 10 years ago. So it's tough to believe, looking back that I've been here 10 years. I like to say that I've always been a Vanguard investor, but maybe I didn't know how to articulate it, which it actually is now my number one job responsibility to help articulate it. But I think it's been very good to me, having worked at other places in a sales capacity, in an investment banking capacity, worked in different cultures. When we say a real Wall Street culture coming here, I think it's informed my perspectives and my judgment to a very, very good degree that maybe others don't have.

• 7:04Patrick O'Shaughnessy?

  The length of tenures is something that's on the decline, right? The average time people spend with a firm is coming down kind of across industries and 25 years and 10 years. And I would say at other really great firms that we work with, where there's the same tenure, long tenure tends to be a characteristic, it always comes back to the culture. And I think Vanguard, rightly so, has a reputation for a great culture. Maybe the two things it's gotten most right is the kind of original setup where the funds own the firm and the culture. So I'd love to hear, maybe listeners will be asset managers themselves, who are either building businesses or part of one. I'd love to hear from each of you what you think the key cultural components are that drive this reputation that Vanguard has.

• 7:48Speaker 03

  I'll start only because I do my fair share of interviewing for HR department. They'll ask us to recruiting or when students coming off from outside on the campus and they'll say, hey Jim, you know, what might nobody explain to me that helps somebody's success at Vanguard? And I'll say, look, there are far more successful people than I am here. But two rules that are serve you really well is number one, it is a do the right thing type of place. You might hear that about Vanguard, you might think that's a little bit corny. I can't tell you how many times I've been in a meeting where you discuss a topic and somebody says, hey, wait, how does that affect our shareholders? So that really is the way things work around here. It's a do the right thing place and you are concerned with your shareholders and your fellow crew member. And I said, oddly

• 8:31Speaker 03

  enough, the other thing that gets noticed is you start every sentence with we. We accomplished a goal. We did this as a team. You know, we improved engagement, we improved success ratios, but your successes are determined as a team, as a we. And if you start a sentence with I, I did this, it gets noticed and not in the right way. So I feel very good about saying that we do look out for the interests of our shareholders and it is very much a team environment.

• 8:55Patrick O'Shaughnessy?

  Such a simple heuristic, but something easy to say, but probably hard to do, you know, year after year. What do you think, Jerry?

• 9:01Speaker 02

  Well, I mean, and this this may sound a little corny too, but I I have, you know, interns come in and they talk about what makes Vanguard different. And I was like, well, Sunday evening, I'm actually looking forward to coming to work on a Monday morning. Now, I think I'm in the minority. I work out, you know, I live out in a neighborhood where I talk to other people who are involved in other businesses. And I think that's not that's not normal. And I think the reason I look forward to come is the people I work with incredibly, you know, team oriented, as Jim mentioned, just great environment. I mean, they're not only colleagues, but they're also good friends away from work. So we we socialize together. We're, I think the fact that you are involved in in in an

• 9:42Speaker 02

  area that can be quite stressful at times, you do you do tend to bond together. And that I think just is great. If you can work at a place where you enjoy actually coming in here and spending time in here, it's fantastic. And Vanguard's actually managed to create that. And the the groups that I interact with, it's it's a lot of what Jim mentioned. It's it's not, you know, the I, it's it's the we and it's, you know, working together. I think I remember when I interviewed for the job on the desk, Gus Soder was that was in charge at the time. And Gus said, you know, I like to to use the analogy of a high school basketball team where you don't really have these these big egos. You've got five people clung together and you can achieve incredible things. And that type

• 10:23Speaker 02

  of environment is is alive and well here at Vanguard. So and when when people get in here, we tell them, hey, you can have a phenomenal career path. And it doesn't really matter where you went to school. It doesn't matter, you know, who your parents knew. It's what kind of a job are you going to do here? And you'll you'll have opportunities here, which is great.

• 10:39Patrick O'Shaughnessy?

  Yeah. So the idea of a mutual is pervasive.

• 10:42Speaker 02

  It is. It really is. Yeah.

• 10:43Patrick O'Shaughnessy?

  Well, let's dive into investing, which is what I think most people will be very interested to hear both your perspective on. Obviously, the the major debate or question we hear it in every single meeting with advisors, with clients, with institutions is this active passive debate. And what I'm most interested in is not so much who's right, because I think the answer is obviously, we need both. And the more interesting question is, what does equilibrium look like? What does the transition from now until that point look like? And how a firm like Vanguard who owns, which owns, I think today, 6.5% of Apple, there's going to be a 13D for every, conceivably every security in the universe in the not-too-distant

• 11:28Patrick O'Shaughnessy?

  future. I think for passive investors, it's not till 20% that you have to file it. But that sort of thing starts to be a real consideration, and there are all sorts of knock-on effects. So I'm curious, as this ramp-up has happened, and I guess it's really accelerated post-financial crisis, have you noticed, specifically in the passive side, but maybe the active side too, things changing in terms of the execution difficulty? Especially, let's say, in the bottom 1,500 stocks of the total market fund. Our firm trades some of those names, we know what they're like. Have things changed? Are we starting to get towards a point, a saturation point, past which we're either sniffing that equilibrium, or tracking errors start to rise in the total market fund versus the reference index?

• 12:12Patrick O'Shaughnessy?

  What do you think about this whole debate in transition period?

• 12:15Speaker 02

  I mean, I think if you step back a little bit, I've been on the trading desk for about 20 years, and there's no question, there's a lot has changed in the market structure in that 20-year period. You probably remember yourself back in the days when it was really, you had New York and NASDAQ. It's very different today. We have 13 exchanges, we have about 40, 45 different pools of liquidity. I would say with regard to, you know, small caps have always been difficult to trade. I would say what's different today is the fact that, even though we've had large assets coming into our funds, one of the great things about indexes is that there tends to be little turnover. So while the assets in the funds themselves are huge, the rebalances tend to be, 5% turnover in a year is kind of around the norm.

• 13:00Speaker 02

  So it tends to be little in the way of turnover. So even when we have rebalances, relative to the size of the fund, they're not huge. Now, having said that, there is still a lot of trading that needs to be done, and I would like to think that the traders on our desk are very much aware of the trade-off between tracking error versus impact. So obviously, there are certain names, and you mentioned You know, the bottom deciles of the total market where if you needed to get something done and you had to be done in a day, you're definitely going to have impact. So we tend to be somewhat opportunistic in those names and we will exhaust all different types of ATSs, dark pools, crossing venues, wherever we feel we can find liquidity.

• 13:41Speaker 02

  We will take advantage of that. Most of the cash flow that's coming into our funds tends to be benchmarked to the close. So when we're running lists that are going to be, you know, for that night's closing price, that tends to be traded more towards the close where you tend to get a pickup in liquidity in that last half hour of the day. So, you know, there's not the, the issue in there, but there's no question on the bottom decile names. It is a challenge and, you know, I'd like to think that over the years we've accumulated some expertise with regards to trading those names without signaling out to the market that I'm, I'm out here as a buyer, whether it's using, you know, algos, crossing networks or whatever the case may be.

• 14:20Patrick O'Shaughnessy?

  So if I said to you, you know, the next two years, you're going to quadruple in size in the total market fund, you're going to go to two trillion. What face would you make?

• 14:30Speaker 02

  Yeah, that, that, I mean, you're, we still, obviously there, there will be, I don't think small caps are going to be that much significantly easier to trade two years from now. But we're just going to have to adjust to it. I think that's maybe a tad optimistic that we're going to get to that size. But there's always going to be those issues.

• 14:45Patrick O'Shaughnessy?

  Not if you'd been at some of the meetings I've been in.

• 14:47Speaker 02

  Yeah, but I would say, you know, there's always going to be a challenge with trading those smaller micro cap type names. The good thing, I guess, from the fund point of view is that they, they represent a relatively small portion of the overall fund. And so they're to the extent that, you know, they're difficult, they do are relatively small in the overall context.

• 15:04Speaker 03

  Patrick, I was going to say, you, you brought up an interesting point at the outset, just that kind of looking at the definition of indexing, right? And the amount of the impact it's had on the marketplace. And, and the one thing I think is very interesting for investors to pause and think about, right, is you say there's X amount of cash flows going to indexing or Y percent of assets are in indexed funds. We think about the definition of index fund, right? That includes all these non-market cap weighted index products, right? Which are active strategies and I don't, I don't mean that as a four letter word. That's not, that's not a negative, but from the standpoint that they hold securities not in a market weighted capacity, those are active decisions. If you look at cash flows that go into products, notably ETFs, because they have the balance of index products.

• 15:47Speaker 03

  You may find the cash flows are proportionally more going into small-cap value funds or mid-cap growth funds. That is not the proportion of the total market. So in effect, these are all active decisions going on. They may be using index pieces to do it, but when you take it out at a higher industry or higher strategy level, that's not about indexing anymore. These are all about active management decisions.

• 16:12Patrick O'Shaughnessy?

  Yeah, it seems like the only true, probably the total market fund or something close to it, everything, right, is the only true passive approach. And you see this stat now that there's more large-cap indexes than large-cap stocks, which is, you know, some sorcery, I think, behind a lot of that. I believe that Vanguard uses Crisp now, Crisp's indexes, and used to use MSCI's. How do you think about that? And the underlying question would be, why don't you just do it yourself? Why do you need a third-party index provider against which to, say, benchmark yourself?

• 16:46Speaker 02

  I think we've probably, we have looked at that in the past, but I think there's a lot to be said. I mean, Crisp has been around, I think, 90-odd years studying indexes and providing that type of information. And there is something to be said for, you know, an arm's length between us, the manager and the index provider. But, you know, having said that, we're always in touch with index providers in terms of how to better improve their index methodology. So I think back to when I started, there was no such thing as float adjustment. So you potentially could have had a name that had 100 million shares outstanding, but insiders would have owned 70 million shares. So you have all these managers trying to track, you know, go after these 30 million shares. And it led to pretty severe, you know, price movement when, if a name like that got added

• 17:29Speaker 02

  to a benchmark or was deleted from a benchmark. Now, most of the index providers have adjusted for float. So it's really just what's available to us in the public. That's just one example, but I mean, we are always in terms of whether it's corporate actions, making sure that, hey, we might want to consider if there's something somewhat complicated, be aware of this, always giving feedback. And if there's, a lot of times, there is opportunity for us for input when an index provider is considering making a change, whatever the case might be. I know in our emerging markets, you know, there's been discussions about China, if it's in or out, we were very much involved in that. Along the way, we do have an opportunity to be involved, albeit, you know, at an arm's length.

• 18:11Patrick O'Shaughnessy?

  Very interesting. I think it's one of the next issues that comes to mind is proxy voting, where alongside this rise in market share for Vanguard specifically, let's even say, but other big index providers too, is that it's almost this passively active idea now where in general, a lot of managers have relied on services like ISS to vote proxies, and they have to follow a formula because they don't have scale to actually evaluate decisions. So famously, they said that Coca-Cola shareholders should withhold votes from Warren Buffett. And the joke was that apparently one of their checklist items was, is he the greatest capital allocator of all time? So how does Vanguard think about this big and growing issue where, to use that extreme example again, you're going to own 20% of

• 18:55Patrick O'Shaughnessy?

  or more of pretty much every stock, publicly traded stock? Is there a group behind it? How does that work? Any mechanics there would be really interesting to hear about.

• 19:04Speaker 03

  The simple way to think about that is, I mean, we do have a corporate governance group at Vanguard that is engaged in these matters. And I think depending upon what you see in the press, you have almost this litmus test that says, oh, percentage of times a firm votes with or not with management is the litmus test in terms of how active or how engaged they are. And I think the way we might look at it is, that's not necessarily the only way a firm or an asset manager can go about corporate governance. A lot of that can be at a more personal level, what others might deem to be behind the scenes, but more in a conversational type of approach to management, not necessarily this binary yes or no vote type of approach.

• 19:43Patrick O'Shaughnessy?

  Will it be a group that keeps growing, do you think? Will it kind of grow in linear fashion with Vanguard's own size?

• 19:50Speaker 03

  Never really thought about that. Both Jerry and I are investment management group people, so don't have too much insight in terms of other business units in the company.

• 19:57Patrick O'Shaughnessy?

  Yeah, yeah, fair enough.

• 19:58Speaker 02

  I would say, Patrick, though, we will get calls on the desk when a company, an issuer, is looking to speak to someone in our proxy area about something that may be coming up down the road. So certainly to that extent, we will put them in touch with that group. If they have an opinion that they would like to make sure that they were aware of, absolutely, that happens, not infrequently.

• 20:17Patrick O'Shaughnessy?

  What are the skill sets that, you know, let's say I was hiring someone to be an analyst at an active shop who might have skills in quantitative arena or as a fundamental analyst, you know, pretty specific set of skills I'm looking for, what would be that same skill set for say someone you're looking to hire in your group? If you're, if you're looking at, you know, minimizing the, the difference between, you know, after, to after cost

• 20:38Speaker 02

  Yeah.

• 20:38Patrick O'Shaughnessy?

  returns versus the index, what, what is the skill set that you're after?

• 20:41Speaker 02

  Well, yeah, I mean, there's a lot of different, I mean, we've, we've actually done that, uh, this year, in fact, we, we've hired some new traders on the desk. The first thing I would say is that the, the traders on the desk, we probably have the average tenure of about 13 years. We have some guys who've been on the desk close to 30. So we've got a good combination there. The things that we look for is a couple of things. We look for people who are passionate about the markets that absolutely, you know, they, they enjoy what they do. We obviously, there's, there's this, when you're tracking a benchmark, I mentioned a little earlier, there's understanding what, what the importance of tracking error versus impact is. I mean, as you talked about, our, our growth in assets over, over the years, that's become a challenge that everyone needs to be aware of. The ability to work with other groups, specifically, you know, I would say if you looked at our

• 21:25Speaker 02

  desk today and looked at it 20 years ago, transaction cost analysis was something we did very limited, I would say, back then. Now we have a transaction cost analysis group that works very closely with us. So in terms of analyzing our trades and taking that information then and baking it into our trading strategies. Also, I would say, uh, the ability to work with our risk areas. So we have an investment risk group that allows us to trade large rebalances in a very risk controlled fashion, which was something that probably we didn't have 20 years ago. And now today, so the ability to understand that. So, uh, obviously, you know, individuals would need to have pretty useful skills when it comes to, you know, just technology skills.

• 22:07Speaker 02

  We use a lot of different systems, understanding, uh, market structure. Uh, as I mentioned earlier, it's somewhat, uh, it's not exactly, I think if you had a blank sheet of paper, I'm not sure you'd design the current market structure that we have today, but just understanding that and how does that interact with all of the different tools that you have available to you. And so we, we also have the ability to work in teams and groups and understanding that, you know, you are a contributor, but ultimately it's, it's the desk is what's, it's, it's the desk and it's Vanguard what's, what's ultimately important.

• 22:35Patrick O'Shaughnessy?

  You mentioned two terms I want to flesh out a little bit there, risk and market structure. So when I think about risk, or I think what most people think about risk, it's risk relative to you, relative to the total market.

• 22:45Speaker 02

  Yeah.

• 22:45Patrick O'Shaughnessy?

  So what dimensions of risk are you mentioning?

• 22:48Speaker 02

  So we would be referring to risk. So if we have, for example, large trade coming up, what type of, we would be looking at that trade relative, you know, what type of tracking error would you be looking at relative to the benchmark? So as you have a rebalance coming up, say, you know, at the end of a month, you know, there's obviously names that are going to be added to the index, names that are going to be deleted to the index. So you look at basically, hey, how is this trade looking relative to the current index? And as you, you know, obviously you can't trade the entire rebalance in the last hour of the day. You could certainly match your benchmark, but you're probably going to have impact that you'd rather not have. So to the extent that you're going to start to trade some names early, you need to know what type of risk that is to the portfolio. So we have very, very, very good risk folks that are analyzing that every day, letting

• 23:33Speaker 02

  us know how we're doing, what the, you know, the tracking is looking at relative to the benchmark.

• 23:38Patrick O'Shaughnessy?

  And then the second being market structure. And you said that, you know, if you were, if you had a pen and paper, maybe you'd draw it up a little bit differently.

• 23:44Speaker 02

  Yeah.

• 23:45Patrick O'Shaughnessy?

  Flesh that out a little bit. What are some aspects that are subpar?

• 23:48Speaker 02

  Yeah, well, I mean, it's a very fragmented market. I mean, and anytime it's, you know, you have, as I said, 13 exchanges right now and understanding, you know, how your orders are getting routed, that whole venue analysis, that is something that is probably not optimal. Now, the benefits are if there is an issue at one of the exchanges, the other end, and it has happened in the past where you have the ability to trade and avoid that one index that's having a particular problem. But it does add a whole level of complexity to trading. And, you know, I would say that understanding how your orders are interacting in this maze of pools and exchanges, and being able to take that information and apply it to the way that you trade is really important. So we're fortunate that our TCA group, that's,

• 24:33Speaker 02

  they live and die by, by, by understanding that venue analysis. And so we can look at the end of a month, we have monthly meetings to determine. Here are different algos that you're using and here are the results that we're seeing. And if there's results that we're seeing that are not, well, we don't think are optimal, we're going to have a conversation with the broker and say, we're noticing on this particular, when we use this, we're seeing quite a bit of adverse selection going on in these names. And can you give us any color as to what's going on? And if we don't feel comfortable with it, we actually won't use it. But to the extent that you, you take that information and use it as a tool to help enhance your trading, I think it's a win-win for everybody.

• 25:08Patrick O'Shaughnessy?

  Yeah, makes sense. We've talked mostly about passive. Of course, Vanguard has a trillion dollars of active assets. It seems unassailable that Vanguard's, you know, low cost or cost matters hypothesis is true, just because costs compound and there's no denying that. Assuming that there is a set of principles or values are applied when deciding what active strategies to pursue, whether that's internally or through sub-advisors, could you walk through how Vanguard thinks about other key components other than just low cost on the active side of the equation?

• 25:42Speaker 03

  There's probably three things if you were an investor saying, how would I go about building my portfolio? And three quick things to think about, you know, cost is unavoidable, so I'm going to mention that. But, you know, we would say talent, cost, and patience. Granted, talent is a very qualitative, tough to sort of...

• 26:00Patrick O'Shaughnessy?

  Buzzzy term.

• 26:01Speaker 03

  Yeah, and it's very tough to get your arms on how do I judge talent? But you know what? There are a lot of people that have their own metrics or philosophies in terms of how they define who a talented manager is. So maybe that's a bit of the, the art component here that goes with the science. Because the science components are cost, right? And this is relevant to whether you're an index fund or an active fund, right? Every basis point of cost is a basis point in return you don't get. So those principles apply not only to active management, but index management, because having a high-cost index fund is doing you less of a good job in a relative scale, even on the indexing side. And the third thing I would say is patience, right? Most successful active managers are successful because they have longer track records.

• 26:44Speaker 03

  And maybe that success is achieved over longer periods of time. And they're most likely going to have... Speed bumps along the way. They're most likely going to have intermittent periods of, hey, that didn't really go well, or maybe we really underperformed. But to the extent they are successful, and it is over the long term, if you're an investor that doesn't have patience, and you jump ship, and you switch managers, or you don't have the patience anymore, you don't realize that longer term track record. So talent, cost, patience, maybe three quick guides that investors can think about when they go through the active manager search.

• 27:19Patrick O'Shaughnessy?

  The behavioral side of that, that you mentioned at the end of our just human tendency to do the wrong thing at the wrong time with our money, especially in markets, leads me to the next question, which is, I'd love to hear, guessing the answer is what I think it is, but would love to hear what you think about the market efficiency debate. Whether or not markets are efficient, to what degree? I mean, obviously Vanguard has active assets, and that assumes a belief in inefficiency. But I'd love to hear just you two in particular, what you think.

• 27:48Speaker 03

  I think I can start with sort of the more academic, how we talk to investors, maybe Jerry can talk about actually trading securities.

• 27:55Patrick O'Shaughnessy?

  Yeah, being in the market.

• 27:55Speaker 03

  Yeah, being in the market itself. I always sort of jump ahead of the argument a little bit and say, when we get to this, and it's an active passive debate, market efficiency is, dare I say, irrelevant for why indexing works. If we believe in Bill Sharp's zero sum game principles, whether or not a market is efficient or inefficient, only half the dollars can do better than average, no matter what. So indexing works because it's taking the average and having a cost advantage over the average active manager. Efficiency isn't the focal point of that discussion. And the natural next question is always, well, okay, Jim, what about in small cap emerging market stocks? And trying to make a little bit of a light hard discussion, I'll say, hey, for every

• 28:38Speaker 03

  genius who correctly identifies an undervalued stock, there's some not so genius person that sold them the undervalued stock, whether that's a corporate bond, an emerging market stock, a mid-cap growth stock, it doesn't matter. For every dollar that was a relatively winner trade, that same dollar is a relatively loser trade for somebody else. So when we put efficiency into that active passive context, it's the notion that no matter what the market is, or what the perceived efficiency or inefficiency, indexing works because of a zero sum game principle, not because of efficiency or inefficiency.

• 29:15Speaker 02

  And I would say, Patrick, on the trading side, I mean, price discovery, I think, has never I'm always amazed at just how quickly in today's market. You know, you know, I don't know if you've been back to the trading room, but there's there's no shortage of TVs there just to see what's going on. And it's amazing to me, a name will get halted. And for whatever reason, and that thing is, once they open that up, it's up and running in size. And it seems like it's not an issue to get to get these stocks back up and running again. So it's, I'm amazed at the speed of it. You know, there are, I think there are times when it's, you know, somewhat when you're dealing maybe in the when issued market, occasionally you've probably seen it yourself where there is issues about price discovery. But as it gets closer to when it's going to start trading regular way, that tends to beef up a lot.

• 30:01Speaker 02

  And, you know, to the extent even with with IPOs, it is amazing how quickly that whole process, you know, can get up and running once you have an IPO price as well.

• 30:11Patrick O'Shaughnessy?

  The word speed makes me think of high frequency trading. And if you think of HFT as, or the opinions on HFT as some sliding scale of pure villainy on one side and something that's actually very healthy and good for markets on the other side, where do you fall on the spectrum?

• 30:26Speaker 02

  I don't think it's, I agree with you. I don't think it's all or nothing. I think there are, there are aspects of high frequency trading that are absolutely beneficial to the market. I wouldn't say that, you know, everybody involved, but I think there are, you know, the high frequency trading firms that are arbing out between futures, ETFs and the cash and keeping markets kind of to some extent knit it together is not a bad thing. I think spreads have come in dramatically in the last 15 years. I don't think it's, it's a coincidence that that also is when HFTs have gotten involved. But I do think there are players in the HFT space that are not, that are looking to take advantage of, whether it's latency arb issues, if it looking to take advantage of potentially sniff out larger orders that may be out there so that they can can jump in front of that.

• 31:12Speaker 02

  So I'm not naive enough to think that all HFTs are great, but you know, to a great extent, I think they are a huge provider of liquidity in the market right now. And we would, you know, say that from a retail perspective. Spreads have never been tighter. It's been a net positive. Nonetheless, it's we feel as traders on the desk, it's our responsibility to protect our orders. So we have techniques that we've developed over the years to make sure that we are not signaling out there that, hey, I'm out here, I'm a big buyer and let people run in front of our order. We own that process and it's up to us to make sure that we do that in a way that's not going to be harmful to our shareholders.

• 31:47Patrick O'Shaughnessy?

  Anything to add on high frequency, Jim?

• 31:49Speaker 03

  I'll leave that to him. He's the one that deals with it every day.

• 31:51Patrick O'Shaughnessy?

  Sure, sure. Fair enough. The one of the things that I'm most interested in is the quarterly rebalance versus daily trading. And obviously, there's a lot that goes on in markets and there's corporate action, there's secondary issuances, there's buybacks.

• 32:07Speaker 02

  Yes.

• 32:08Patrick O'Shaughnessy?

  I know that a lot gets bundled into the quarterly rebalance. So maybe start by telling me what happens quarterly and then we can we can go from there.

• 32:15Speaker 02

  Yeah, so maybe just a two second overview of index methodology. So for most index providers, the line is 5%. If a company issues shares of over 5%, that tends to be done the following day. So company A is buying company B and is going to issue 6% of their shares outstanding. That change will generally hit the index the following day. If it's less than 5%, they kind of group them all up together. And as you pointed out, they wait until the end of the quarter to do that trade. So you're right in that, you know, as we own so many names, it's not unusual at 10 after 4:00 in the afternoon to get multiple calls from syndicate offerings that are going on. And, you know, they may be issuing stock to pay off debt. They may be acquiring another company, whatever the case may be. So to the extent that our index providers are going to be making a change the next day, we will participate to some extent in those, assuming that we feel that, you know, they're priced right and that the environment is good.

• 33:12Speaker 02

  So we have those going on all the time. And the quarterly rebalance is, you know, depending on the index provider, those are trades that are known to everybody out there in the market. And we put, you know, we basically will be notified ahead of time from the index provider, here are the changes that are going on. Usually, it's about a week to two weeks ahead of time that we're going to know. What the index, the new index constituents are, what changes are going to be. And then we will set about putting a plan in place. So we have a group within the desk. Actually, that is a rebalance group that basically looks at these. They would have history going back as far, you know, as we've been doing these about how certain names have worked.

• 33:54Speaker 02

  And we incorporate all of that into our how we handle rebalances. Now, as I mentioned earlier, it's a lot of dollars, but you know, we look at it. We work closely with the folks in our transaction cost group as well as in our risk group. To make sure that these rebalances are done in a kind of a risk controlled way.

• 34:12Patrick O'Shaughnessy?

  So the 5%, I didn't know that threshold specifically was a good rule of thumb. What about the buyback side of the equation? So it's a huge issue.

• 34:20Speaker 02

  Yeah.

• 34:20Patrick O'Shaughnessy?

  Interesting issue these days where there's a lot of these corporate cannibals, as they call them. And sometimes you'll see a firm buy back 10% of its shares in a month.

• 34:28Speaker 02

  Yeah.

• 34:29Patrick O'Shaughnessy?

  Or something really aggressive like that, but certainly buyback's happening all the time.

• 34:33Speaker 02

  Sure.

• 34:33Patrick O'Shaughnessy?

  So how's the flip side of the coin?

• 34:35Speaker 02

  The flip side of that basically is, so for example, if you know, if you have a company that's doing that. So I mentioned earlier, we have this float, this idea of a float adjustment. So obviously when a company is buying back, that's going to have an implication for the float on the fund that was available to shareholders. And generally we are, if a company is buying back shares, we are going to be selling. Yes, absolutely. And it's the same, you know, same type of rigorous controls are in place, whether it's on the sell side or on the buy side.

• 35:02Patrick O'Shaughnessy?

  Yeah, I think that's a really interesting dynamic here with such like a rise in these issuance and especially buybacks. Right. Where there's big debates about at the, at the market level, if they're good or bad for America. Or, or for the, or for the companies and the shareholders of the companies. And to have index providers behind them. And then the companies knowing that indexes will act a certain way, whether they're issuing or buying back. It's certainly an interesting kind of game.

• 35:30Speaker 02

  Yeah, I would hope that the companies that the fact that an index might need to sell because we're buying back our shares. I would hope that's not the primary reason for doing that. In fact, I would, I would be shocked if that was the case. I think they are obviously doing it for. For other much more meaningful reasons.

• 35:47Patrick O'Shaughnessy?

  Yeah, I think I think ninety whatever percent of the time that's true.

• 35:51Speaker 02

  Yeah.

• 35:51Patrick O'Shaughnessy?

  And when I talked to a guest on the show, Michael Mobison, one of the camps that that he has for buyback motivations is the impure motive camps, he calls it.

• 35:59Speaker 02

  Yeah.

• 36:00Patrick O'Shaughnessy?

  And hopefully that's a small minority.

• 36:03Speaker 02

  Yeah.

• 36:03Patrick O'Shaughnessy?

  But knowing what we know about markets, it's not a zero, it's not a zero percent minority.

• 36:07Speaker 02

  It is, you know, I will say this, that a lot of the, whether it's on the buy side or on the sell side during large rebalances. There are, one of the advantages, I think, of having it publicly available, that that information out there is that it tends to become a liquidity event. So whether it's a company that's in buyback mode and knows that indexes are going to be selling. I can't tell you the number of times that you've looked and if you just look at the, what your trade is relative to what trades on a normal day, you think, wow, we may have some impact on this name. But the buy side will actually show up to offset that because I think they will be prodded and given a heads up that, hey, indexers have have X number of shares that they're going to need to trade and they'll offset the other side of that. So a lot of times I'm surprised that there's actually little movement in these names.

• 36:51Patrick O'Shaughnessy?

  Jim, what do you make of the rise of factor investing as sort of the the theme of the day where we'll call pure indexing. Let's forget all the different definitions of indexing for a minute and we'll say that indexing is truly total market fund. All of the new, they're called indexes, but as we, as you pointed out earlier, are really active combinations of stocks. Based on value or momentum or quality or low vol or whatever, whatever the the factor might be. What's your take on on the rise of the popularity of these factors and and what, how investors out there should think about allocating or not allocating to a factor exposure within their portfolio?

• 37:27Speaker 03

  Number one thing about is it's it's sort of the next wave of active management. I mean, if we went back and maybe did a bit of a history review of active, there's always seemed to be themes, methods, ways to invest. So a little more attention on factor based investing just might be that next new thing. Now that being said, factors themselves aren't necessarily new, maybe the general broader awareness is new.

• 37:51Speaker 03

  But factor investing isn't. I mean, if we think about the CAPM as a 50 some odd year history and as small and value and momentum have been developed over time, the groundswell has now come to the place where it's a little more broadly known in the practitioner community. The other way to think about that is how it gets implemented. On one hand, it can be all the things that you just mentioned prior, but if we think about the rise of the ETF industry over the past 15 years or so, a lot of that has been predicated on factor-based investing. I mentioned earlier, it's this idea of being able to use market cap-weighted index pieces to build an active strategy. Well, if I start

• 38:35Speaker 03

  with Jerry running total market index fund, but I say, "Well, I like the idea of a value factor or a small factor. I can be a do-it-myself investor and I can say, 'Well, let's go get Vanguard Small Cap Value Index Fund and I can add a value tilt as defined by Crisp or as defined by Russell or whatever the case may be.'" Or maybe I choose to go get what we would call an actively managed value factor product. So there's this broad landscape of factors and then there's the how you implement it, where I have the pieces to do it myself based upon certain index provider's definition, or maybe I outsource it to somebody who's running a factor fund in an active sense.

• 39:17Patrick O'Shaughnessy?

  What I find interesting is that if you look at firms that offer a growth and a value offering, more often than not, the value of the assets and the value strategy dwarf the growth. I think on the back of pharma French research in the early 90s and this idea that value outperforms, and of course, markets are much harder than that. As soon as something like that is identified, if it persists at all, it's probably going to persist in a lumpier fashion or A smaller excess return into the future. I'm curious how you both are personally invested. If you don't mind my asking, we can cut this out if you're not comfortable. And maybe even as granular as total market fund versus ETF.

• 39:57Speaker 02

  I think when I started at Vanguard, I started off entry level position at Vanguard, and I have some legacy dollars in funds that I probably, if I was looking today, I was thinking, why did you ever do that? But I keep it relatively simple. I think all of my investments are maybe in five different funds. And some of them are the, well, most of them are broad mark, whether it's total stock, total international, total bond. They would be, I think, three of the funds that most, and all of my investments are at Vanguard. I actually do not have any ETF exposure. It's all in long-term mutual funds.

• 40:31Patrick O'Shaughnessy?

  Does Vanguard have a, not just total stock market, but total global market across asset classes passive portfolio? Meaning like just representing, you know, an equal weight of bonds, stocks, everything?

• 40:44Speaker 03

  On the equity side, we have a total market.

• 40:47Patrick O'Shaughnessy?

  Total everything global. It's interesting why, everyone talks about 60/40, right? As the perfect portfolio, but there's no such, I can't find one of these things anywhere. And I was curious to see that the derivation of that balance was that at the time, this was in a William Bernstein paper that someone sent me, at the time, that was the actual total market. The market was 60% stocks, 40% bonds. It's obviously a lot more bonds now with so much issuance from sovereign governments. But maybe an interesting product idea. I think the 60/40 portfolio that costs, you know, five basis points or whatever Vanguard would offer it for.

• 41:23Speaker 03

  It brings up a very interesting point when you think about how do you construct portfolios? And too many times, we end up with conversations where investors might think their biggest risk control metrics are in the sub-asset class space or, you know, stock selection. And when it comes to how do you control the risk return parameters of your portfolio? Far and away, your stock bond choice, assuming they are diversified positions, right? You're not picking one bond and one stock. But assuming you have reasonably diversified portfolios, that's the most. I don't want to talk in absolutes, but I'll say that's the most unique decision any investor can make. For me, how much in stock and how much in bond? So for anybody whose risk tolerance is 80, 20, 60, 40, whatever it is,

• 42:04Speaker 03

  that is the most powerful risk return decision you can make building the portfolio. Then we at Vanguard would say, look, given you've made a stock decision, right? We are, we have a reasonable belief set in how we split domestic and international. And given you have the fixed income allocation, the same thing applies. And maybe more so in the equity space because we recognize investors have home bias in their portfolios. And there are, there are real reasons for that. You know, you think about how much of a, of a domestic allocation I should have because I, I as investors, I have to save and pay my bills in US dollars. So, and that goes for investors around the world. They have to save and pay their bills in their, their domestic home currency. So there are reasons why investors will have levels of, of home bias.

• 42:49Speaker 03

  But again, the bigger picture to tie that back is the stock bond decision is, is arguably the biggest one an investor can make.

• 42:57Patrick O'Shaughnessy?

  Jerry, you said you have no money in the ETFs. From the perspective of an investor out there that says, okay, I want total market fund and I've got VTI or I don't know. I can't remember the symbol for the fund. I looked at the fund docs and there's something like 112 billion of unrealized gains in the, in the fund. And obviously ETFs, the ETFs have this amazing tax advantage. Do you think that that tax advantage is significant enough for prospective investors to choose VTI, the ETF over the fund?

• 43:27Speaker 02

  I would say that there are, certainly the ETF mechanism has, has advantages in, in that fund. But I would also say that in terms of just the fund itself, you know, every week we are fully aware of where we stand in the fund in terms of potential gains, what the losses are in the fund. So there is some, you know, there's, there's definitely a, an awareness on the, on the portfolio management side as to what we're looking at within the funds. Now for, for every stock that we've bought at 20 bucks that's gone to 100, unfortunately there's those stocks that we've bought at, you know, at 30 or 40 bucks that have gone to bankruptcy. So it's the extent, you know, there is an ability at the, at the fund level to, to look at tax harvesting

• 44:09Speaker 02

  when it, when it's prudent to do so in a, in a risk controlled manner. But you know, our ETF is another share class of the fund. So it's the extent that there is ETF activity in there, that, that can be beneficial to the fund as well.

• 44:22Patrick O'Shaughnessy?

  In a scenario where in the future, let's say, demographically driven, there's outflows because the flow chart has looked like this, so there really hasn't been that turn. But let's say there's a bear market and boomers are all retired and selling down equities. How in that scenario where there are, let's say, net outflows, very specifically, like, how would taxes be managed? Is it lot by lot? Is there some piece of technology that kind of tells you how to best produce after-tax returns in the fund?

• 44:53Speaker 02

  Yeah.

• 44:54Speaker 03

  I was gonna say, I'm gonna hit it first from the, many investors probably want to start with the active index thought around this, right? And they hear the glitz and the glamour around tax efficiency and ETFs, and I would argue the tax efficiency comes from the indexing strategy first and foremost, and that the overwhelming benefits are because of indexing, not because of ETFs. So just maybe to start at that place, I think, is really important for investors to understand.

• 45:20Speaker 02

  Sure. And I would say, to get back to your point, Patrick, is we work very closely with our fund accounting group to determine where we are in the funds, and then we have tools available to us on the desk that allow us to basically, if potentially we're looking at tax harvesting, what is the most efficient way to do that? What type of tax laws should we be signaling in order to get the biggest bang for the buck? So you could have potentially a relatively small notional value that you need to trade that could potentially generate large tax savings. So we're all the time tweaking that, but we're very much aware of it on the desk. And there are people that kind of specialize in that area, too.

• 46:02Patrick O'Shaughnessy?

  If you had to each pick a favorite component of each of your jobs, what would it be?

• 46:07Speaker 03

  I get to do lots of different things. I think it's what makes it most fun. In our investment strategy group, we like to say we're responsible for answering the question, what does Vanguard think about any number of investment topics? I get to do that in written form. It's been the thrill of a lifetime to be published in the spring 2015 edition of the Journal of Portfolio Management. Getting an acceptance letter from Frank Fubozzi was better than a college acceptance letter. But if you sit, you know, in one angle, that's, you know, a very formal, published piece in a journal.

• 46:38Speaker 02

  What was the paper?

• 46:38Speaker 03

  The ins and outs of index tracking.

• 46:40Speaker 02

  Okay.

• 46:40Speaker 03

  Sort of linking what characteristics help explain how well index funds track their indexes. You know, the other end of the spectrum is I get to write dopey witty sarcastic blogs where three paragraphs and a picture is a really challenging way to get a point across. I get to go out on the road and speak at conferences in front of 200 or 300 people at a time. So, you know, I have leadership positions where, you know, I work with others around here. So just the idea of I get to have a well-rounded athlete's way to do the job and not necessarily a particular position for me is what keeps me really engaged and motivated.

• 47:12Speaker 02

  I would say, Patrick, on my side, it's on the trading desk. You are, you see, you talked about the cash flows coming in earlier. So you kind of have a front row seat of what's going on in the business. And just knowing that you have some small part to play in helping people, whether it's for their retirement, getting their kids through college, there's incredible satisfaction out of that. It just, it makes you feel like if you're having a tough day and you're on the way home, you feel good about the fact that you're helping people, whatever it is, those life, you know, challenges that come along the way, that you're involved in that. And the people that I work with on the desk are just second to none. So that's the part that I enjoy.

• 47:49Patrick O'Shaughnessy?

  Tell me about your most memorable day, individual day, I think.

• 47:53Speaker 02

  My most memorable day is actually not a good day. My most memorable day was 9/11. That was, that was, that was very, very difficult because we lost some brokers that we actually traded with, the guys that we spoke with on a daily basis. And, you know, we just had the anniversary just a few weeks ago. And I think it's still raw. It's still raw when I think about, you know, those people that we lost. We had some very good friends, very good colleagues that we worked with at Kenner Fitzgerald that I would say there wasn't a day go by that we didn't speak to at least one of them.

• 48:33Speaker 02

  And so that, and just the whole way that that day played out was just, was something I will never forget. And it's, you know, I'm not sure I ever will forget it. I know there was, you know, just, I think for the next four or five days after that event, I'm not sure I slapped a wink. And I know the guys who've been on the desk a while, they'd probably say that that's a day they'll never forget either. Now... That, that obviously was a very tough day, but there, there are so many great days here at Vanguard that are, you know, they're good too. But if you're asking me, what's the day? I'll, I'll remember most. I mean, the, the, the look on, on Gus's face when, when he saw

• 49:15Speaker 02

  that the, the, the towers were, were coming down, that, that I will never forget. And just people just realizing the enormity of what was going on.

• 49:23Patrick O'Shaughnessy?

  Yeah, I remember, as everyone does, you know, exactly where, where I was sitting, how, how I heard.

• 49:28Speaker 02

  Yes.

• 49:29Patrick O'Shaughnessy?

  First picture, first, remember the TV looked like, right?

• 49:32Speaker 02

  Yes.

• 49:33Patrick O'Shaughnessy?

  And it, it, the answer, while, while of course it was a horrible day, reminds me of an earlier point, which was this idea of tenure and knowing some of these people for so long.

• 49:45Speaker 02

  Yep.

• 49:46Patrick O'Shaughnessy?

  And it's, it's a great example for me at least, and thanks for the, for the great answer, of how important it is to work with people that you care about, that you love, maybe?

• 49:57Speaker 02

  Yep.

• 49:58Patrick O'Shaughnessy?

  And who you share good and, and very, very bad experiences with. So certainly an unbelievably bad day and the 15 year anniversary was tough.

• 50:07Speaker 02

  Yeah.

• 50:08Patrick O'Shaughnessy?

  How about, how about you, Jim? Most memorable, most memorable day?

• 50:12Speaker 03

  I probably have a couple memorable days where I've helped some, you know, crew members get to places here in the company that, you know, have been their dream job, or they didn't think they had a shot at it, or, you know, you had to work your way around to, to get them in places where maybe they were too shy to speak up and say they wanted to get to. And, and I could drop names, but I'll leave that aside. And maybe say, it goes to what makes the job so fun is, you know, if I speak at conferences or I meet with our clients, there's nothing more satisfying or beneficial than when you have a conversation or you have a presentation, they say, Jim, that was great. Thank you so much. That was so beneficial. I didn't understand that before, but I, I get it now. And, and if that's myself representing Vanguard and that's the impression they get walking away from what

• 50:56Speaker 03

  Vanguard means, or how Vanguard is trying to help them succeed, you know, what Jerry alluded to, that's a great feeling every day to think that you made something click with somebody and they get to go back to their desk and help their clients, or they get to go back to their house and their portfolios. That's a pretty good feeling. And if you get that once a week, that's a pretty good week.

• 51:14Patrick O'Shaughnessy?

  So I've been asking this question, which is an interesting question, I think, because one day is so specific. And I'm amazed at how often, another version of the question is, and maybe I'd love to hear your answers, the kindest thing that anyone has ever done for you in your career. So you're talking about kindness for others, where very often the answer is one of integration, some sort of like out of the way to integrate someone into something else that you didn't need to. So what do you think about that question? If you had to think about the kindest thing that someone's done for you?

• 51:48Speaker 03

  Wow. Boy, that's the enormity of that. Honestly, I'm not even sure how I could handle.

• 51:57Patrick O'Shaughnessy?

  Too many?

• 51:58Speaker 03

  Yeah. If I said, I'm not where I am today without a help from a lot of different people, I'm not sure I could honestly even pick one.

• 52:06Speaker 02

  Fair enough. Yeah, I think the same. Like Patrick, I just think of the, you know, we will sometimes have interns that'll come through and ask for some career guidance. And, you know, I remember one time I was asked the question, like, what do I need to be, do to be in your seat in 10 years? And I thought about it. And it's like, there's so many people that did great things for me along the way that I, it's impossible for me to say, if you follow this roadmap, you're going to end up in this seat in 10 years' time. You just, whether it's coaches that instilled in me certain work ethics, whether it's, you know, getting, Gus probably taken a little bit of a leap in terms of a belief that I could do the job initially. People along the way, just, just great mentors,

• 52:51Speaker 02

  great, great, great people to work with. Mike Bucoy, I worked with on the desk. There's probably nobody more knowledgeable about market structure and trading. And I sit three feet away from him. And, you know, I don't need to call up anybody. I just say, Mike, look at this situation. What do you think? You know, phenomenal person mentor that I kind of have working with you. So I think Jim and I are both beneficiaries of a lot of people within Vanguard who've been like that. And, you know, one of the competencies that's really valued here, I think, at Vanguard is, you know, how are you when it comes to developing other people? And so it's something that people really kind of take seriously. And I know we have younger traders on the desk, and that's something that every one of the more senior traders is always trying to make sure that these, that these people know

• 53:36Speaker 02

  everything that you can possibly pass on to them to help them, you know, grow their career. And it's something that, it definitely is something that's taken seriously. And we've both been great beneficiaries of it.

• 53:47Patrick O'Shaughnessy?

  Yeah, that's great. It definitely seems like a component of the culture, which does a lot for a lot of people.

• 53:52Speaker 02

  I would agree, yeah.

• 53:53Patrick O'Shaughnessy?

  So my first love is reading, and I ask this question of everyone very selfishly in search of great new books. If you could pick one or two, we'll call them formative books, books that shape the way you think, or that you just, you know, enjoy and always think back on, with, I'll say, extra points for a book that's not obvious. So everyone keeps telling me, "Read Thinking Fast and Slow" by Danny Kahneman, which is a great, great book, but it's on every bestseller list. So any favorite or formative books?

• 54:24Speaker 03

  You know who I love to follow, and, you know, I've read a couple of books and follow his blogs, is Dan Ariely, the professor at Duke. So Predictably Irrational is a wonderful book because, obviously, as a behavioral economist by trade who delves into psychology, his writing is not, for the books, it's not above anybody's head. He writes in very simple terms, easy to understand, gives you follow-ups, and whether or not it's from an investing perspective, or I go out to dinner and think, "I'm about to order a meal. What do Dan's experiments tell me about what I'm about to do?"

• 54:59Speaker 02

  Menu placement and everything, yeah.

• 55:00Speaker 03

  You know, you get a real sense of, I could apply this to a work setting, I mean, maybe there is a takeaway, or I just think, "What am I doing on a daily basis that what I've read about is subliminally impacting my decisions and how I handle myself?" So I do appreciate any reading that gets me outside of investing, because I think it kind of spurs the creativity or the other side of your brain that maybe always isn't applied in sometimes an overly numeric fashion. But if I had to pick one, I'll go with Predictably Irrational.

• 55:30Speaker 02

  I've read quite a few of the Malcolm Gladwell books. I think initially someone had put me on to him because, hey, this guy used to be a runner. And that was

• 55:39Patrick O'Shaughnessy?

  He's a good runner.

• 55:40Speaker 02

  Yeah, he's a good runner. I think he's a Masters competitor now.

• 55:43Patrick O'Shaughnessy?

  Yeah, he is.

• 55:43Speaker 02

  And quite good at it. And he may have actually spoken, I think, at one or two Vanguard events back in the day. But I've also, you know, I like some of the lighthearted stuff you'll on the desk. If somebody has a good experience with a book, I remember back when Freakonomics came out, everyone was like, hey, guess what? You know, and then what do you think will happen here, whether it's realtors selling their own homes or whatever the case may be? You know, the, the, the, um, you know, obviously with the whole IEX coming along, we have known Brad and Ronan when they were brokers at RBC. And so when, when that book came out and 60 Minutes and Michael Lewis, that was one that we, we knew, we knew a lot about what they were, what they were talking about. So that was, that was a book that I think pretty much everybody on the desk has read.

• 56:26Patrick O'Shaughnessy?

  Last, last couple of questions. What is the area that you're most interested in and improving upon or exploring in markets in the future that maybe you haven't, maybe you've already gone, started to go down the path, but haven't, haven't mastered or felt that there is room for exploration and discovery or improvement, if you want to think about it in those terms?

• 56:46Speaker 02

  Well, I think in, in broad terms, I think, uh, you know, a lot of Vanguard's growth has been here in the US and on the ETF and the mutual fund side. But I think as we look the next 10, 15 years down the road, I think it's going to be on the global side. And whether that's, you know, Canada, Europe or Asia Pac, I think there's, I think there's a framework in place now that probably wasn't in place 15 years ago to, to really grow Vanguard, Vanguard's brand overseas. So I think you're going to see a lot on the global side.

• 57:14Patrick O'Shaughnessy?

  I've been amazed how different even the Canadian market, let's say, we do a lot of work up in Canada. How, how equities and corporate culture is different, how

• 57:24Patrick O'Shaughnessy?

  the level of indexation can be drastically different. For example, in Canada, it's very low. Closet indexing is very high.

• 57:32Patrick O'Shaughnessy?

  In Europe, you know, dividends are favored over buybacks, all these different things that affect, affect things. So it would be interesting to see a company that's focused so much on US markets really get its, its feet wet elsewhere.

• 57:42Speaker 02

  Yeah, I think that, would you agree, Jim, over the next decade or so?

• 57:46Speaker 03

  I think that's the, you know, if you said topically speaking and to whom you're reaching out to outside these borders.

• 57:54Patrick O'Shaughnessy?

  Is where that's headed. Go global. Is go global. Wonderful. This has been, this has been a blast. Really appreciate all the time and I think some insight into how, how things work around here. I think people think index fund and they think, okay, it just works, right? And obviously it's a lot more complicated than that. So really appreciate your time talking about Vanguard and about markets. Thank you, Patrick. Thank you, Patrick. Thank you. Pleasure.

• 58:18Patrick O'Shaughnessy?

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter @Patrick_OShag, O-S-H-A-G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.