#57 John Bogle: Stay the Course: The Story of Vanguard and the Index Revolution

What I learned from reading Stay the Course: The Story of Vanguard and the Index Revolution. ---- This is a story of a revolution [0:01] what Vanguard does and why? [7:00] the seed of the idea that eventually becomes Vanguard [10:00] switching from conservative investing to speculation / when humans are scared they copy the behavior of those around them [17:00] John gets fired. He decides to fight back. [31:00] if you know why you are doing what you are doing you are less likely to quit [41:00] staying the course gives you a massive advantage because most humans quit [53:00] We must never underrate the power of compounding investment returns, and always avoid the tyranny of compounding investment costs.– John Bogle [59:00] eliminating the 50-year tradition of sales commission [1:01:00] a failure caused by focusing on competition and not learning from the past [1:06:00] the Founders Mentality [1:07:30] personal reflections and a memoir of sorts [1:11:00] ---- Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work. Get access to Founders Notes here. ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast

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

• 0:00David Senra?

  This book tells the story of how my career began, how it was abruptly cut short, and what followed once I resumed that career. It is a story of creativity and innovation, of victory and defeat, of laughter and tears, of pure coincidence and sheer luck, of commitment to high values, of determination, of stubbornness, and of cussedness. All in the name of serving investors, small as well as large, simply by giving thrifty human beings their fair share of whatever returns the financial markets bestow to our investments. It is also the story of a revolution.

• 0:44David Senra?

  No, there are no Molotov cocktail-throwing radicals involved. Just one man with a truly financial world-changing idea called the Index Mutual Fund. That idea has spread like a meme, maybe even a religious sect. It is the Index Revolution, and Vanguard has been its clear leader. For as long as I can remember, I've used the phrase "Stay the Course" to urge investors to invest for the long term and not be diverted by the daily sound and fury of the stock market. In this book, as you'll see, "Stay the Course" also has been my motto in building Vanguard:

• 1:28David Senra?

  Holding fast to a long-term business strategy and overcoming both adversaries and adversities, none of which were able to halt our rise. Okay, so that is from the introduction of the book that I want to talk to you about. The book is titled "Stay the Course: The Story of Vanguard and the Index Revolution", by John Bogle. So I knew I was gonna eventually get around to covering John Bogle because I think he is the inventor and the founder of arguably one of the most important products and most important companies in history.

• 2:08David Senra?

  And I'll put into financial terms later on in the podcast that'll make, I think, that statement fairly obvious. But a few weeks ago, or about a week or two ago, if it was the time I'm recording this, he passed away, so I decided to push him to the front of the queue. And for us to study his ideas, because he was a truly remarkable person with some very simple ideas that, in retrospect, are extremely obvious. And as we've studied on the podcast, a simple idea coupled with determination usually can lead, over a long period of time, to great results. And before I jump into the book, just a reminder that this podcast is ad-free and independent,

• 2:53David Senra?

  so I rely on the people that actually get value from my work. The best way to do that is sign up for Founder's Notes. If you commit to supporting this podcast on a monthly or an annual basis, you'll get every single podcast note. So just like I take notes on books about entrepreneurs, I take notes on podcasts with entrepreneurs. And I just counted yesterday, the full archive of all my notes, I've taken notes on 132 different founders. So the same way I'm pulling out the main ideas of these books, I pull out their main ideas from the podcasts and email them to you every Sunday. And you can just do that by clicking the link below or going to founderspodcast.com. All right, so, let's go ahead and get into the book. Now, this book does not follow...

• 3:36David Senra?

  the timescale is not linear, so he'll be talking about something that happened in, say, 1974, and then he'll flash forward to the result of that, let's say, 30 years later. But I'm just gonna pull out these ideas. Don't worry about keeping the timeframes, because it'd be too confusing unless you literally read the book in order. So, we're gonna get to how he get... what he was referencing in the introduction about how his career was cut short, and then he had to basically start all over again. So he's going to explain a little bit about that in a minute. For now, though, all you have to know is that he got fired. And he decides, hey, this is an opportunity to kind of turn the industry, the active management industry on its head.

• 4:21David Senra?

  And it's based on a thesis that he wrote in 1951, which we'll also get to. But anyways, he's publicizing his plans to basically have an unmanaged index fund, which didn't exist at the time. And this guy named John finds out. And the note I left myself was, you want to put customers' needs first? How dare you? And so as we can imagine, and we've seen in other podcasts, whenever you have a new idea, you're going to get a lot of pushback, especially from the people that make money, that are making money doing it the current way. So he talks about the, hey, I want to meet with you. John's like, okay, well, you can just meet with me tomorrow at the airport. And we're going to pick right up to the point. He says, after a few pleasantries, he got right to his point.

• 5:06David Senra?

  I understand that you're planning to create a new mutual fund complex that will actually be mutual, owned by the fund shareholders. Yes, I responded. I hope to build such a firm. To put it mildly, John was not amused. I still remember his exact words. If you create a mutual structure, in other terms, if you put the customers' needs before our own, he said sternly, you will destroy this industry. More than four decades later, it is clear that John was on to something. If he had amended his dire prediction to say, you will destroy this industry as we know it, today, we could credit him with almost perfect foresight.

• 5:49David Senra?

  Then again, nobody in 1974 really could have predicted that an upstart firm founded at the bottom of a vicious bear market would overcome all odds and not merely survive, but ultimately dominate the mutual fund industry. So what I particularly loved about reading this book is he spends a lot of time in like his thoughts, going back from when he was at Princeton in the 1950s, all the way up to when he started Vanguard. He was in his mid to late 30s at the time. So that places it somewhere in the 1970s, mid 1970s. And so now today, I think it's widely known by a lot of people, you know, index. Index funds are massive. They're right at the time I'm recording this.

• 6:32David Senra?

  I think Vanguard has something like $6 trillion of assets under management. But this industry literally did not exist in the 1970s. So it's really interesting to see the creation of a fundamentally brand-new product and then, of course, the predictable responses from, you know, the entrenched interests. Okay, so let me just give you, in case you don't know, this is just a brief description of what Vanguard does and why it does it. The decades that followed, the name Vanguard, along with its unique structure and an unprecedented strategy built around the creation of the world's first index mutual fund, so the company started Vanguard, the product he created, the invention I would say, is the world's

• 7:14David Senra?

  first index mutual fund, would unquestionably change the nature of the mutual fund industry as we then knew it. Call it creative destruction. Call it disruptive innovation. Call it luck. For surely, the passage of time would have eventually awakened the investment world to this fundamental truth. And this is what he built his entire company on. Before costs are deducted, the returns earned by investors as a group precisely equal the returns of the market itself. After those costs, therefore, investors earn lower-than-market returns. He means actively manage. The irrefutable fact, this is the irrefutable fact, the only way for the 100 million families

• 7:59David Senra?

  whom the mutual fund industry serves to maximize their share of the financial market returns they earn as a group is by minimizing their costs. Vanguard took the leadership role in bringing down the costs of investing, ultimately becoming the world's lowest-cost provider of mutual funds. In other words, Vanguard was successful because they put their customers' needs before their own. And on the very next page, this is the explicit secret Vanguard was built on. The concept that fund managers could not add value to their clients' wealth, once considered nearly heretical, is now broadly accepted. Remember, the mutual fund industry was invented somewhere in the 1920s.

• 8:44David Senra?

  1924 is the year that I've seen. All the way from 1924, it took 50 years for them to basically, to realize this fundamental truth, that fund managers actually don't add value to their clients' wealth. Now, this was not, this was also, as we'll get into in a minute, this was not an idea hidden. There's many people writing about it. They just didn't take that actually idea and do something about it. That's what made John so unique. And I think the earliest I saw it, somewhere in the, I think, 1950s, it was realizing, hey, if you're actually analyzing the returns, compared to just, if you took the market returns and you compare that to the fund manager, the active managed, the active fund managers,

• 9:29David Senra?

  they're actually getting results worse than the market. Okay, so we're gonna get into, now we're gonna go back in time and we're gonna figure out, we're gonna learn here, where he gets the seed of the idea for Vanguard. So he's a junior in college at the time. And he's trying to figure out, like, what he should write his thesis about. He said, "Late in my junior year, in one of my many appearances of, and in one of the many appearances of good luck in my long life, I found myself in the library. I was leafing through an issue of Fortune magazine. I began to read an article describing a business I knew nothing about, one that I had never even imagined. The headline read, 'Big Money in Boston.'

• 10:13David Senra?

  I immediately realized that I had found the subject of my thesis." And so this is where he's first exposed to something. They're not even called mutual funds at the time. They're, in this article, they're calling them open, open-end fund. So now he's also gonna realize that,

• 10:35David Senra?

  Something I guess like we should know better by now, but well, let me just read this paragraph and then I'll tell you. "In those ancient days, the term mutual fund had not yet come into general use, perhaps because mutual funds, with one notable exception, are not mutual. In fact, in direct contradiction of the principles spelled out in the preamble to the Investment Company Act of 1940, they are organized, operated, and managed in the interest of the management companies that control them, rather than placing the interest of their shareholders first." He's even on the board of one of these kind of, you know, these tons of industries have these like groups where they set rules and ethics and basic decorum.

• 11:18David Senra?

  And what he realizes like you guys aren't even reading the, like the, your articles of organization, like why you are, why this organization exists in the first place. And when he started to introduce to say, "Hey, let's just cut our fees. Let's, if, if we have 50 years of evidence that it's like managed, we actually are not adding value, that the people that are choosing to pay us exorbitant fees to manage their money are actually getting a worse return, a much worse return than if they just bought a broad index of the entire market. Why don't we switch to that product because it's better for the consumers?" Well, what have we learned in 50 something episodes of, about human nature?

• 11:58David Senra?

  Like that's, they're going to guard what they're making money, what they're making money on, their own interests. And so he got a hell of a lot, like he got tons of flack. But this guy, like many of the other entrepreneurs that, that we've studied, is just extremely stubborn and bullheaded and just, just leaned into basically a giant fight. And I'll get to, you know, we're now, we're living the, like, we've benefited from the fact that this guy was completely stubborn about this one idea. And he spent, up until he died a few weeks ago, what is that, 50 years? Just focused on this one single idea.

• 12:42David Senra?

  Okay, so we're not there yet though. Let me go back into this moment in 1951. And it says, "That serendipitous moment would shape my entire career and my life. The Fortune article was the springboard for my decision, made on the spot to write my thesis on the history and future prospects of open-end investment companies." I threw myself into the task with intensity, spending a year and a half researching and writing the thesis, writing the thesis, meanwhile, falling madly in love with my subjects. I was convinced that this tiny $2 billion mutual fund industry would become huge. So he's correct about that. At the time he's involved, it's $2 billion.

• 13:24David Senra?

  Today, 21 trillion mutual fund colossus, the industry, is among the nation's largest and most dominant financial sectors. And so I'm not going to read all of the conclusions from his thesis, but these are two that I found most important, and you'll see that that shaped heavily the creation of the product he's going to make 23 years into the future. And so my thesis conclusions reached after an intense analysis of the industry follow. Number one, investment companies should be operated in the most efficient, honest, and economical way possible. So what is he talking about there? Cost for gality, something that runs throughout this book, something that runs throughout this entire thesis of Founder's Podcast.

• 14:09David Senra?

  You're not going to find very many of these entrepreneurs who are able to build successful companies that were, that wasted their resources. They were frugal. Doesn't mean they didn't spend money, like think about Walt Disney. He'd spend a lot of money, but he'd make sure that all the money he was spending was increasing the quality of the product, not spending on just silly things. And then future growth, this is number two, future growth can be maximized by reducing sales charges and management fees. And he's got a great way to put this later in the book. It's something like, "Performance comes and goes, but costs are forever." So what he's talking about, number two, like your performance over a long time, like the one of the wonders of the world is compound interest, right?

• 14:53David Senra?

  But just like your, just like your returns compound over time, so do your costs. And so if you focus on just letting your, your returns compound, but then you eliminate your costs, you're going to, that the delta, the difference between those two, over a long term is going to be substantial. We're going to get into those numbers in a little bit. Okay, so he writes this whole thesis, it's like 120 pages, it's published, and then he, somebody else, he gets a job, basically his thesis leads to a job offer. It's this guy named Walter Morgan, who's also, he was an alumni at Princeton about 20 or 30 years before John was.

• 15:34David Senra?

  So he reads, he says, "Following my 1951 graduation, Walter L. Morgan read my 130-page opus and offered me a job with his Philadelphia firm, Wellington Management Company." This is important because out of Wellington is where Vanguard is actually created. Okay, so I'm gonna skip over this. As you can imagine, John goes to work, he takes his job extremely serious. There's a bunch of numbers here, which I think is gonna be confusing if I pulled them out without context. So this is the summary. "By the time a decade had passed, I was viewed as the hair apparent to Mr. Morgan. I assumed that I would be at Wellington forever."

• 16:19David Senra?

  Another reoccurring theme, that the future is unpredictable, the world is much too complex. So he's like, "I'd just be happy." He wasn't even thinking he'd ever have to be a founder and entrepreneur. Okay, so here's the problem. "But the stability I had hoped for at Wellington would not last. By the time of my rocket-like ascent to the company's presidency in April 1965, the traditional mutual fund industry that I described in my Princeton thesis had changed." So it's really important to note, again, this is 1965. The index fund is not invented until 1974. So although they're conservative, they're what I guess you would call value investors at the time, they're still, most of their money is made on management fees, okay?

• 17:04David Senra?

  So, it says, "I described, the traditional mutual fund industry that I described in my Princeton thesis had changed, and not for the better. The Go-Go Era was in full swing." And that's not a name he created, you can Google "Go-Go Era." There's like, all these different boom and bust cycles are given different names throughout history. So this is the one that's happening around in the 1960s. "The Go-Go Era was in full swing, and investors were abandoning conservative balanced funds, such as Wellington and droves, drawn by the siren song of quick profits being earned by high-flying aggressive stock funds."

• 17:42David Senra?

  One way or another, I would deal with these challenges for the rest of my long career. So what is he saying? Human nature is constant. They're getting good returns, but they're, you know, they're playing it safe. They're very conservative because what's Warren Buffett's two rules of becoming wealthy? One, don't lose, uh, number, rule number one, don't lose money. Rule number two, follow rule number one. So they're trying to, instead of optimizing just for the highest returns, which they feel is more speculative in nature, they're keeping a balance. But what are humans? Humans will always forever love to make a lot of money, really quickly for doing nothing. So this is happening in 1960s.

• 18:26David Senra?

  I told you guys before, I read, I've read a lot of, I don't know, probably two dozen books on the history of, uh, like financial markets, something I was interested in, something I've done less in the last few years. Could it kind of, not that I figured it out, I shouldn't say that, but I just went through a period of my life, this was basically all I was reading. And this was probably 10 years ago, but I read this great book. It's called This Time Is Different: Eight Centuries of Financial Folly, which just basically outlines over 800 years, the, the behavior of humans, separated by, you know, centuries and, and geography remains the same. So once you look at that, um, and you start to get old enough, you, and you live through a couple of these boom, bust cycles, like, oh, okay, I've seen this before. So that's what he's saying. And he's dealing with this in 1965.

• 19:10David Senra?

  He's writing these words in 2016 to 2018. And he's saying, hey, one way or another, I'm going to deal with these challenges for the rest of my life. That's how you kind of know human nature is constant. And this is his, the way he, um, the way he deals with this. And I would argue this is his motto, since he, he repeats it in this book, probably a dozen times. "In the challenges they lay ahead, I would need a guiding star and a motto that encapsulates it." That, that motto was, and still is, "Stay the course." So before I read this book, or as I was reading it, I think. Let me grab it real quick.

• 19:55David Senra?

  Okay, so as, I don't know if it was before or during, but I was taking, I was listening to Jack. His name is John, but people call him Jack. I get really confused with that. I'm gonna call him John. So, I was listening to John on a podcast that he recorded in 2016, and even though I think he died in his late 80s, hearing his voice even two years before his death, he sounded extremely vibrant and young and was still a very clear thinker. But to echo the point that he's writing about in his book about this, "Hey, I need a motto in life", which he's calling in the book, "Stay the course", right? But he said something that I was found interesting, and for the people that have already subscribed to Founder's Notes, this is coming from Founder's Notes number 20.

• 20:38David Senra?

  And he said, "One of my basic rules, don't do something, just stand there", and he's talking about why you don't want to monitor your portfolio daily. And he goes, "The movements of the stock market are a tale told by an idiot full of sound and fury that signify nothing." And he's gonna harp on this point over and over again in this book, that you have to eliminate the noise and just focus on the signal. If he is mathematically certain that if he lowers the costs, and I think they decreased their costs by the time he retired as CEO, like 200 times and never increased them,

• 21:19David Senra?

  that that will give you the best returns, that'll give your customers the best returns than anything else. So that's what he means by just stay the course, don't do any, I mean, it's kind of, you are doing something if you're staying the course, but if you've already picked this, if you know what, your theory is true, don't keep changing it, don't listen to these machinations which never stop. He's talking about this, he realizes all the way back in 1965, but in this book he goes through constantly, they called about the nifty 50 era, the 1965, the go-go era, that goes through the dot-com busts in the late 90s, early 2000s. Just over and over again, he's like, "Nope, stay the course, stay the course, don't do anything. Don't interrupt your compounding and just focus on costs."

• 22:03David Senra?

  It's really solid advice, but for some reason really hard for us as a species to adhere to. Okay, so this is an example of the environment Vanguard grew out of. So they're talking about, he was just talking about, you know, these people that they, they, they're like flash in the pans, but they, he also references that the stock, the financial services industry is more of like a marketing industry than people would actually want to admit. So this is an example of who he has to fight with and why some of the capitals fling from Wellington into, you know, more speculative funds and what the end result of that is. So

• 22:45David Senra?

  this is one particularly egregious example was the enterprise fund. In 1967, this newcomer would report a dubious return of 117%. Built largely on the acquisition of previously privately owned stocks acquired by the fund at discounts as large as 50% from the market price and then later marked up to 100% of market price. So again, they're advertising, hey, we, we made 117, we made our customers 117% on their money in one year. Most people are not going to actually look into like, what's the underlying effect? Like, how did you do that? John does. So that's what he's describing to us here. He says, "In the following year, enterprise drew the largest

• 23:26David Senra?

  annual cash flow in the previous history of the fund industry." So again, that marketing is very, very persuasive for humanity because what, what we just talked about, humans will always try, usually to their detriment, to make large amounts of money really fast for doing nothing. Okay, so it says, "From this marketing, the annual, they got the largest annual cash flow in the previous history of the fund for the entire industry, an unheard of $600 million." And this is in 1967, guys. "The fund's assets grew to $950 million by the close of the next year, but reality finally returned to the marketplace and enterprise's funds assets fell to 84% to less than 150 million." And the fund, check this out, "And

• 24:11David Senra?

  the fund suffered negative net cash flows in 22 of the 25 years that followed. Soon thereafter, enterprise had ceased to exist."

• 24:23David Senra?

  And now something happens here that's going to change the trajectory of his career. And the note I just wrote to myself is, again, human nature is when you're scared, you're likely to copy. And we saw this in the last decade, a little, I guess, a little longer by now, with, you know, the great returns some people were getting in the real estate industry. Let's say the middle 2000s, it's like, oh my God, if my idiot neighbor can make $100,000 just by buying a house and selling it next year, then, then of course I should be able to do it too. And so you see these people rush to all these, and that's what, that's what exacerbates the bubble because they're like, oh my God, I'm going to miss out. I'm gonna, like, I'm doing something wrong. These people have something figured out that I don't. But we know that's just not true.

• 25:08David Senra?

  So this happens to his boss, Mr. Morgan. And Mr. Morgan, actually, he arrives at the wrong conclusion, that he was actually too conservative. So said, "Mr. Morgan had become concerned about the growing trend towards speculative funds, the funds we were just describing. He recognized a serious threat to his conservative philosophy and his business with its near total dependence on the balanced fund. 'I was too conservative,' he told Institutional Investor Magazine." And he's older, and I just feel bad about this. He says, "At age 66, he decided that it was time for new leadership and took a radical step. He called me into his office and told me that I would immediately take charge of Wellington Management as his successor.

• 25:52David Senra?

  I still remember his exact words. 'John, I want you to take charge and do whatever it takes to solve our problems.' I was but 35 years old, but after working with me for almost 15 years, Mr. Morgan had come to trust my judgment. Perhaps overly self-confident, I thought the solution was obvious." And this is the mistake that he's, that, that John talks about, that he made. And the mistake is basically copying. It's like, well, if we're getting our butts kicked by everybody else, like, clearly, we like, we gotta ditch this conservative, um, this conservative approach as well.

• 26:33David Senra?

  And so, um, John takes over, he becomes the CEO, he finds another, um, another firm that has...

• 26:45David Senra?

  It's run by a bunch of other partners and has more, let's say, you know, aggressive funds. And John, even though he's running the company, together, they're a bunch of young guys and they actually land on the cover of a magazine and they call them the whiz kids. And it says, "Together, we five whiz kids whizzed high for a few years." So they, they, they transition from the, from being conservative, they jump in with what everybody's doing, they're copying, say, "Yeah, we can do this too." The go-go era went, went. It was superseded by something distinctly different, but it turned out even worse. The nifty 50 craze, in which the stock prices of the nation's fastest growing companies

• 27:30David Senra?

  lost all touch with their intrinsic values. The simple principle, "Don't worry, high valuations don't matter, earnings growth will ultimately bail you out." Does that sound familiar? Stocks such as Xerox, Polaroid, IBM, Avon, and Digital Equipment Corporation soared. These stocks at their peaks were valued at 50 times earnings or more, but reality finally took over and the stock prices collapsed. Participants in that bubble included not only mutual fund managers, but the vast majority of institutional investors, insurance companies, and even college endowment funds.

• 28:15David Senra?

  From its high in early 1973 to its low in early October 1974, the US stock market fell by 50%. So he's saying, "Not only did it happen to us, it happened to other mutual fund managers, it happened to institutional investors who are supposed to be the, you know, the pros, insurance companies, and college endowment funds." I always talk about the fact that, you know, books can, can, one book can literally be life-changing. And one of the life-changing books for me, as far as how I view the world now... Was Michael Lewis's book The Big Short because it goes into detail and obviously like Michael Lewis can is one of the most entertaining writers that anybody can come across like he

• 28:55David Senra?

  wrote a book like he can make just paint drying a fascinating novel but I really like love his storytelling because he's able to teach you while you're being entertained but the same stuff that's happening now that John's going through in 1970s happened exactly in The Big Short decade decade and a half ago and it's same people got caught up fund managers institutional investors college endowment funds insurance companies this constantly happens over and over again and it made me doubt like before you know it was you're you're taught that oh there's there's such thing as experts and in their their decision making is almost invaluable and you're just it's just not true they're just human beings and human beings are fundamentally

• 29:39David Senra?

  flawed okay so the results but the difference between a lot of us and John is this failure actually leads to introspection so he's gonna he's this is when he's going to learn he's like oh well he's also gonna get fired too so that helps okay so at the same time Wellington's new business model began to fail three of our four new funds that are aggressive new managers brought into our fold collapsed I questioned I so then he started reading he's like what's going on he goes I questioned whether our public ownership structure was the best for our mutual fund shareholders so there's that that thing that he was writing about 20 years earlier in his

• 30:19David Senra?

  Princeton thesis is now coming back and it had to come back this failure had to happen to him for him to understand oh my god like I've been through this before like we we cannot the the future is fundamentally unpredictable you there no active manager is going to beat the market returns over a long period of time like our entire industry is a fraud So he says, "It was high time," I added, "that any conflicts between the profession of investing and the business of investing be reconciled in favor of the clients." And so I'm skipping over parts about this, but he's giving talks at this time to other, like to organizations of investment professionals. He's like, "Listen, this is objectively true.

• 31:05David Senra?

  And if we can figure it out, it's only a matter of time till our customers figure it out. So if we don't change, our industry will cease to exist." And for that, that fundamental truth, he is ostracized in general and made fun of. They call this, when he starts his company, and we're gonna get there in a minute, they call it "Bogle's folly." They think this guy's, you know, that he's crazy. He doesn't know what he's talking about. Okay, so this is before he gets there, though. Before he starts his company, he's gotta get fired, and this is gonna happen here. "My partners quickly found a scapegoat, not among themselves, despite their responsibility for their terrible performance of the mutual funds whose portfolios they actually managed."

• 31:48David Senra?

  So that he's actually gonna get fired here from, you know, those three of the four funds. Each of the funds had a manager, and three of the four failed. And again, they're like, "Oh, it's not us. It's you. You gotta go," which is just hilarious to me. "Not among themselves, despite their responsibility for their terrible performance of their mutual funds, whose portfolios they managed. They chose me as their scapegoat," because he was also the CEO. "The chief executive responsible for the merger that wrecked such havoc on the returns earned by investors who had trusted us. Yet, I had ceded substantial voting power to the new managers to accomplish the merger. That was his downfall. They banded together, and they fired me.

• 32:28David Senra?

  It was the most heartbreaking moment. Actually, until then, the only heartbreaking moment of my entire career. I decided to fight back."

• 32:40David Senra?

  So this is the beginning, when I referenced earlier, his doggedness, his stubbornness, his perseverance. And I think...

• 32:49David Senra?

  I think there has, there is, not there's an has to be, I think in some cases, it's helpful that the seed of your determination is anger. In his case, it's the anger of being, what he feels unfairly scapegoated. It's the anger of his idea not being listened to, even though he feels that it would objectively be true. I found that like, I'm going back over my notes for, for a bunch of the podcasts, but specifically, I think all the books that I've read so far for the podcast are extremely valuable, but if, if, I, I've told you this before, where in, in conversation, I really try to, to design within constraints. So if I'm talking to a friend, I'm like, hey, I like to put like, false constraints.

• 33:33David Senra?

  It's like, okay, if you're stuck on an abandoned, on a desert island, you can only bring one music album with you, that to listen to for the rest of your life, what is it? If you can only visit one city the rest of your life, where, where do you go? I like this because you're, you're forced, you force people to like, think hard about something and you can actually see how they analyze things and why. And I think it's a, it's very helpful in like, understanding that person even more on a fundamental nature. So if somebody forced me to say, hey, out of all these books that you've read so far for the podcast, you can only recommend one, what would it be? I think it would be the autobiography of, of James Dyson.

• 34:09David Senra?

  And something I was looking over the notes of his is like, he built 5,127 prototypes because he was angry that his vacuum cleaner didn't work. He was angry that every single product on that market, in his words, were shit. He was, he was offended at how ugly and bad they worked and how, and what, in his words, how stupid they were designed, from the bag and everything else. I mean, you can go back and listen to that podcast or read the book if you want more details. And I feel like we're seeing that here. First of all, we see that in a lot of places, in a lot of these entrepreneurs, you know, they're just mad at how bad things are. And they're like, I can do better and I'm going to.

• 34:52David Senra?

  And so, and that kind of, that seed of dissatisfaction and anger leads to them to pursue this almost like with missionary zeal, I would say.

• 35:03David Senra?

  So this is the beginning of that for John. Okay, so the New York Times is writing about all the stuff that's going on at the time. And I'm just going to read this quote. And it gives you a good idea of what's happening. It says, "John Bogle, who was forced out of his $100,000 a year job as president and CEO of Wellington Management in late January, is expected by his associates to try to fight his way back at the next board meeting. Mr. Bogle is understood to believe that this may be the appropriate time for the funds to mutualize or take over their investment advisors." So that's just another way of saying, out of this, I'm gonna, not only am I going to fight this, which they do, Vanguard has actually sprung out of Wellington because he's successful in this.

• 35:49David Senra?

  And it's funny because he has this prohibition in his contract where he's like, "Well, you can't do active management." And several times, he gets the board to agree to what he's doing because he's like, "I'm not actively managing it. Nobody is managing it. It's an unmanaged fund." So again, another way, out of these constraints, even though he had this idea prior, out of these constraints, you know, he's able to create this wonderful product.

• 36:17David Senra?

  Okay, and then he has something in a footnote that I just want to read. And let me read it to you, and then I'm going to tell you. Brought to my mind is this quote from Elon Musk. And he said, "Don't forget that at the outset, the odds against creating this new structure were long, and the odds in favor of building a $5 trillion colossus were essentially zero." And that made me think of this Elon Musk quote where it says, "When something is important enough, you do it, even if the odds aren't in your favor."

• 36:54David Senra?

  Okay, so...

• 36:56David Senra?

  This is just a sentence. It says, "It took no genius to realize that our destiny would be determined by the kinds of funds we created, whether they could attain superior investment returns, and how effectively the fund shares were marketed." And I felt, when I read that sentence, like he's talking about investment, like vehicles. And I really feel like if you change this to product, for a company, it remains true. "It took no genius to realize that our destiny would be determined by the kinds of products we created, whether they could attain superior returns," so instead of investment returns,

• 37:40David Senra?

  if the customer's experience with them are superior, "and how effectively," instead of "the fund shares were marketed," "and how effectively the product was marketed." So I think that those principles hold true in both domains. And so this was very interesting to me. "No one noticed an acorn. The formation of Vanguard largely went unnoticed by the press. Today, one searches in vain for any recognition in the financial media that a new company had been born, let alone a new company that had broken the traditional rules of mutual fund structure." And the reason I said, "No one noticed the acorn," that's a play on one of my favorite Jeff Bezos quotes that I always talk about on the podcast, that every oak tree starts from an acorn.

• 38:23David Senra?

  And if you give it enough time, and your idea is correct, like that, you can grow it into, you know, a business that grows large, whether that's large in revenue, profits, people, whatever you're trying to optimize for. Okay, so...

• 38:43David Senra?

  Okay, well, here's some of the people, the few people that were paying attention. It was negative. And my note is just ignore these. And this is also personally why I spend most of my time reading old books than current events. I think time is smarter than us, and it's a good way to filter what is actually important, because we're going to see here. "Later, when we did begin to attract attention, it was not kind. In a May 1975 article, Forbes magazine treated our new mutual structure with scorn."

• 39:18David Senra?

  So I'm gonna skip over, you know, they're just hating on him, basically. Decades later, and then this is the punchline. Decades later, then Forbes editors issued not one, but two apologies for the baneful article. In 1999, they said, "With the benefit of hindsight, we should not have published that snide article about the Vanguard Group." And in 2010, they wrote another one. "I'd like," this is crazy. "I'd like to officially retract a story Forbes published in May 1975. Bogle is as verisifus," and that's not how you pronounce that word. I think you know what I'm trying to say. "is as verisifus as ever, an evangelist for cost-cutting.

• 39:59David Senra?

  I think he has done more for investors than any other financier of the past century." The reason I say that relates to, you know, there's a lot of, I have a lot of friends that are news junkies, they're constantly reading the news. Problem is, like, you're just reading it as it comes out. You have no idea if it's even valuable. Go back, and one way to cure yourself of this, just go back and read, start reading the newspaper articles from a year ago. And you'll realize, oh, wow, I spent time worrying and thinking about that thing, and that thing doesn't even matter now. If somebody was reading this article in 1975, they might have actually believed that Forbes magazine knew what they were talking about. But humans don't know what they're talking about. The only way we know if humans know what they're talking about is to use time as a filter for that. So, read old books. All right.

• 40:44David Senra?

  Okay, it says, "Others in the mutual fund industry may have well felt the same way about the creation of Vanguard as did that article in Forbes in 1975, but they largely ignored its birth. Little did they suspect what would lie ahead." And this is him telling us that you, another, a piece of advice that I feel is echoed a lot in the entrepreneurs, is knowing why you're doing what you're doing. And if you don't know why you're doing what you're doing, you might, you're more likely to quit. So he says, "The guiding star of stay the course again proved to be an essential aspect of my ability to surmount challenges. Weathering the heartaches and disappointments

• 41:28David Senra?

  of the years from 1965 to 1974 depended on my dogged determination to stay the course of my career. The battle was long and hard, but the result would one day bring a revolution to the world of mutual funds. In retrospect, I don't see how I kept my cool. I don't see how I kept my cool under the pressures of battle. But paraphrasing Kipling, I treated triumph and disaster, those two imposters, just the same." I like that. That's almost like he had a stoic nature, realizing that you can't get too excited when things go well, and you can't get too bummed out when things are going bad, because they're, both of those are inevitable.

• 42:11David Senra?

  "I knew what I wanted to accomplish and Vanguard's novel mutual structure was the key to what would come next, the world's first index mutual fund."

• 42:29David Senra?

  I love this idea about motive and opportunity. So, again, he's saying, remember when he said back, he's like, "Listen, a lot of what happened to me was luck, because this idea was going to come one way or another, whether I did it or somebody else did it." So he finds the writings of this guy named Paul Samuelson, and he was writing about the issues with the, with fund managers, and he was doing this in the early 1970s. And he did an analysis of the returns. He's like, "Wait, this doesn't make sense." Similar conclusion that, that John has, but John takes this idea and runs with it. "Dr. Samuelson could find no brute evidence that fund managers could systematically outperform

• 43:12David Senra?

  the returns of the S and P 500 index on a repeatable and sustained basis." Now, this still holds true today. "In essence, he demanded that someone, somewhere, start an index fund modeled on the S and P 500. As yet, he wrote, 'There exists no convenient fund that apes the whole market, requires no load, and keeps commissions, turnover, and management fees to the feasible minimum.'" And that one sentence, he lays out the entire product structure for Vanguard. Dr. Samuelson's challenge struck me like a bolt of lightning, igniting my conviction that Upstart Vanguard had a remarkable, even unique opportunity to operate a passively managed,

• 43:53David Senra?

  low-cost index fund and have the market to ourselves for at least a few years. None of our competitors in the mutual fund industry wanted to start a low-cost, indeed at-cost mutual fund. All of our peers had the opportunity to start an index fund. Only Vanguard had both the opportunity and the motive.

• 44:17David Senra?

  So going back to my notes on the podcast that I took with John, he expounds on this. He was asked the question, he's like Vanguard's an enormous success, and I think right now, the index market's huge, there's like three main players now, but they're like, you were successful for a long time. Like, how come no one said, hey, we should come in and compete with them? And I loved John's answer. He goes, "The answer is simple. Index funds have a real problem. All the damn money goes to the investors. Managers can't take anything." In other, in other words, there's no economic incentive to do so, which makes the sacrifice

• 44:57David Senra?

  that John made in, in, in starting this product, which is basically, he foregoed a, let's see, I think the technical term is a metric shit-ton of profits, and gave it back to his customers. So we're actually going to learn more about that because I'm reading another one of his books. He wrote like 11 or 14 books, something like that, something crazy. And he talks more, this book is more about like the beginning of Vanguard, but I'm also going to do a podcast on like, why, like, why are you so unique in that you had, you know, the motive and the opportunity? Like, what was it about your life that made you realize this? And he just, he has a phrase, he's like, "I have enough." And he died with like a net worth

• 45:40David Senra?

  somewhere at like 80 to 100 million dollars, so he's obviously very wealthy, but he could have, you know, he's like, "I don't want to be a billionaire." At least not at the, not that, not that he wouldn't want to be a billionaire, he's not going to want to be a billionaire at the expense of his customers. And I just think that's why, you know, people are, Warren Buffett's going to be quoted later in the book, that if anybody ever built a statue for anybody in the finance industry, it should be John Vogel, because, you know, he, he did this.

• 46:10David Senra?

  Because he thought it was best for the customer, not just optimizing for short-term profits. Which again, should be, in my, like, shouldn't that be common sense? But it's so rare in, um, in, in life. And so I, I went through, I was talking to my wife about this, uh, a few days ago. Because I was telling her about the book I was reading and how this guy's just, you know, he's universally praised. And as far as I can tell, that praise is, um, like, he's worthy of that. And I started going through, I was like, hey, let's think about all the companies that we pay money to. Like, how many of them are fundamentally put the customer first? And we couldn't think of very many, except for small, local businesses that we support. And that says a lot.

• 46:56David Senra?

  We gotta fix that, because that, long-term, that's, that's not healthy.

• 47:01David Senra?

  Okay, um, yeah, there's a lot of things he talks about, uh, that are good, uh, ideas for, for investing, but I feel they're also true for company and personal finances as well. And this is one of them. "Great long-term rewards can result from small differences in cost." This was my simple thesis in creating that precedent-shattering investment strategy. And so, this is something that, you know, we know this in company finances, because a lot of these guys, a lot of these entrepreneurs, um, are obsessed with frugality. Um, they like industry, they like efficiency, they don't like waste. And I just saw, I, I usually find examples of the opposite, and I don't come across them unless they almost come exclusively from Twitter.

• 47:46David Senra?

  And somebody posted on Twitter that, uh, the company WeWork, which is still not profitable, which means if investors say they're gonna stop funding the product, the company, the company will go out of business. Um, even if at a high valuation, and this has happened multiple times. So they're in a very dangerous, precarious position if there's a downturn, or if investors are saying, hey, we're not gonna give you any more money. Uh, I think this guy was saying they lost like a billion, 1.23 billion in the last, uh, I don't know if it was a quarter last year. But, uh, they made the point, that WeWork, um, rented out Universal Studios, paid Red Hot Chili Peppers to come do a concert for them, a private concert for them, and, and then flew every single one of their, um, employees. Uh, to LA to go to Universal Studios together and, and basically shut down the entire company for a few days to do this.

• 48:32David Senra?

  And his response was like, just remember when the down rounds come. In other words, like remember like when their valuation stops like this is, this is this kind of financial stewardship that we work um is is applying here. And it's a private company, so there's really not no obvious way, at least no obvious way to me to short that company or else I would. Um, because I, I think that's highly irresponsible, but the reason I, I saw that is I was also taking notes on this other. His name is Josh Wolfe, who's a really counter intuitive and contrarian thinker, but he had this great mental model for making decisions. And he's like, listen, you should have a hall of heroes. In his case, he, he mentioned people like Warren Buffett, Charlie Munger, which

• 49:15David Senra?

  um, I'm going to be doing podcasts on both those guys soon because they're mentioned so many times with so many people I respect. But he's like, listen, I have a mental model. This is a mental model for making decisions. And uh, he's like, you can access their thinking by just by reading. Um, and this applies to people that are alive and by people that are dead. And you could analyze the way their decisions and then you could, you could start to understand how they make decisions. And then when you're approached with something like that, ask yourself, what would your hall of heroes do in this situation? What would Buffett do or what would Munger do in this situation? So for me, my hall of heroes, I don't know if I would use that um term because I don't like, I don't. I don't, I think idolizing individual people, like I don't think that's smart.

• 49:55David Senra?

  Every single human's flawed. I'm flawed, you're flawed, everybody's flawed. So heroes are like, probably not the term I would use, but people who I respect their decision making, I guess is where he's getting at. And I, I, I apply that mental model to that tweet. Would Jeff Bezos do that? No. Certainly not when his company wasn't making money. Uh, would Henry Ford do that? No. Would James Dyson do that? No. Would Jevon Shannard do that? No. Would Steve Jobs do that? Go through the list of all these people that we've studied here. None of them would do that. That is not smart. Another example of this was, I don't, this also came from Twitter, I don't know the name of the company,

• 50:36David Senra?

  but it's also an unprofitable company at the moment, and they just went through a down round. And they were talking about how they were spending their previous money that they raised. And they'd spent a total of $24,000, $12,000 each on, it was like some kind of like vintage arcade game. And I looked at that and it reminded me of the argument that Jeff Bezos was having when the vein in his head popped out. By, I think the executive came from MCI, it's in the book, The Everything Store. And the guy, you know, he just came over and he's like, hey, I think you should let executives like me fly first class. And this is at the very beginning of Amazon, they might do it now because, you know, it's almost a trillion dollar company or whatever the case.

• 51:20David Senra?

  But he slammed his hand on the desk and he got all mad because he's like, you're not thinking like an owner. Is that, and so what he meant by that is like, is you flying first class better for the customer? No, it's not better for the customer. If you thought like an owner, you would be focused exclusively on what's best for the customer. I also just read a headline, I didn't go into the, you know, headlines suck, right? A lot of these things, these studies, they're flawed when you actually go into like their interpretation of the actual study. When you, when you actually look into the statistics, it's usually inaccurate. But this is just something that kind of confirmation bias in this sense. But it said that if there was premature death by founders of multimillion dollar businesses,

• 52:04David Senra?

  the revenues or the profits dropped like 82% in like a given period after the death. Meaning, once the owner stops thinking like an owner and then you have just professional managers come over, you have a lot of these like silly, you know, management these theories that they have.

• 52:20David Senra?

  To quote Charlie Munger, because I'm gonna, I've been doing preliminary research, because I'm gonna probably do multiple podcasts on both Charlie Munger and Warren Buffett. But he was asked, him and Warren were asked at this, I was watching these videos to do this research. And they were asked about like, all kinds of like diversification, what's taught in business schools? They just have, they have very interesting responses. I want to understand how they think. And they were just basically saying like a lot of management theory taught in business school, he called chwaddle, which is just a nice way to say bullshit. I just found that interesting. Alright, so anyways, that was a tangent. Wasn't expecting to talk about that, but I think that's a useful mental model. When you come across

• 53:00David Senra?

  things, whether it's in your business or your building, or when you see the decision-making and the actions of other entrepreneurs, it is good. Like, filter through that, like, based on what you've learned. That doesn't mean it's always, it's gonna be 100% accurate, but it's a good way to like, to make higher quality decisions. And if we can improve the quality of our decisions making, even by 1% over a long period of time, that's a drastically different life over several decades. Something John also picked up is that most, human nature, most people quit. They, they wanna lose weight, they'll quit on their diet. They wanna work out, they stop working out. They want to build a business and they quit. They do all these things. This is why

• 53:43David Senra?

  I have friends that wanna start podcasts, and I unequivocally say, if there's something you're passionate about, you wanna talk about, do it. And do it now. And they're like, "Yeah, but how, but like, there's hundreds of thousands of podcasts out there." And I'm like, "That's not, that's, yeah, there's 5, 600, 700,000 in the, in the Apple Podcast directory right now." But do you know how many of them have stopped updating? They're like, "No, 75%." How do you know that? Cause you know humans quit. The vast majority of people give up. And that's why if you just stay the course, which is what John's telling us to do, you're gonna have greatly better results. If you can just survive, then you will have better results. It doesn't mean you, you're, you can predict outsized, you

• 54:23David Senra?

  know, power law, level, level of success, but moderate success is extremely achievable if you don't make bad, bad decisions and you just don't quit. And you see this in, in so many different domains. So, he's, the, the context of the discussion here is like, at around the time he started Index Fund, there's a couple people tried to try this idea before, but they never, like, they had the idea, they maybe started, couldn't raise money, or it just basically all failed. And he said, "None of those fledgling efforts in indexing bore fruit. Not one of those early pilot lights ignited the flame of indexing.

• 55:03David Senra?

  All of those tentative forays failed to create a single index fund that was sustainable and successful. All except one."

• 55:13David Senra?

  Being John. Four decades later, the accumulated assets of the index funds formed by those early pioneers who sought to lead the indexing revolution totaled zero. I also think something that helped John not give up is that that seed of anger I mentioned earlier and the fact that he believed in this. He was willing to dedicate his career and his life to this idea. And if you're completely intransigent, like you, that actually increases your chances of success. He's just not, he's not willing to budge and he's not going to give up because he feels he's right.

• 55:48David Senra?

  Okay, so this is something I don't quite understand. He doesn't elaborate in the book. But I guess when you're starting a fund, the way to start a fund back in those days, like you IPO. So he's going around and saying,

• 56:06David Senra?

  "Hey, I have this new fund. I want to raise $150 million in this IPO." And as we've been talking about his determination, initially he failed. He calls it a flop. So he says brokerage firms representatives did not seem particularly smitten with the idea. An index fund, after all, implied essentially that their profession, selecting well managed funds for their clients, was a loser's game. When the IPO closed on August 31, 1976, it was a complete flop. It produced but $11.3 million of investor capital. This is the funny part and another example of his stubbornness. "The apologetic underwriters suggested that we cancel the offering and return the money to the investors.

• 56:48David Senra?

  No, I recall them saying, saying to them, "We now have the world's first, the world's first index fund, and this is the beginning of something big." And he's gonna, this is something I think is helpful for all of us. "Anyone with a new idea must expect to be greeted with skepticism, followed by condemnation and attack when the idea becomes a reality. This was described as Bogle's folly." Broke, this is such a bizarre. Response from his competitors too. Brokerage firms flooded Wall Street with posters illustrated by an angry Uncle Sam using a large rubber stamp to cancel the index fund's stock certificates. Its headline screamed, "Index Funds Are Un-American.

• 57:32David Senra?

  Help Stamp Out Index Funds." What a bizarre marketing tactic. Saving you money is un-American. Okay. Okay, so now we're going to see the results of that. So he raises, what is that, 11 and a half million in 1970s? And this is just him talking, like projecting in the future about what the actual result was. So that was just the humble beginning. By the end of 1982, the assets of the first index investment trust topped $100 million. We reached, so it started with 11 million, 1982 was 100 million, 1988 they had a billion. And then by 2018, they had two funds.

• 58:17David Senra?

  One, 640 billion, and the second, 742 billion. So you just see the growth over time. And then he states this sentence, this perspective again. "Without Vanguard, the creation of the index fund would have occurred anyway, I'm sure." And he's quoting Victor Hugo here. He says, "Victor Hugo got it right. No army can resist the power of an idea whose time has come." And he definitely believes that the power, the idea of the index fund, it was that, it was their time. It was its time to happen. And very simple pragmatic advice.

• 59:00David Senra?

  I would say, "Simple but not easy, given our nature." Says, "We must never underrate the power of compounding investment returns and always avoid the tyranny of compounding investment costs." So stay the course and then monitor your expenses. And this is Warren Buffett on Bogle. 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 had urged investors to invest in ultra-low-cost index funds. And listen to the words that Buffett's using, because we always talk about missionary zeal.

• 59:39David Senra?

  "In his crusade," not in his business, "in his crusade," Jack was frequently mocked by the investment management industry. 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, than they otherwise would have earned. Says, "He is a hero to them and to me." A mutual, and then this is Samuelson, the guy that wrote that, basically that call to arms back in the 50s, excuse me, back in the 70s? I don't know, I just covered it, I don't even remember now. And he's, now he's talking 2005. And he says, you know, I mean, he's a little hyperbolic here, he's saying this, he ranks

• 1:00:24David Senra?

  this invention along with the invention of the wheel, other stuff like that, maybe not, but it's important, it's very important. I would not say it's up there with the wheel, but, and he said, this is Samuelson talking. "A mutual fund that never made Bogle rich, but elevated the long-term returns of mutual fund investors. This was something new under the sun." And I just want to make it clear, like this, he did, it's not like he came right out of the gate in 1970s with the lowest cost possible. I told you, I think he says over his career, they lowered the fees 200 times. They had to start out with like a lot of, like dealing with a lot of legacy stuff. So this is how he eliminates a 50-year tradition, which is sales commission.

• 1:01:09David Senra?

  So he said, "From the outset of the struggle of Vanguard's independence, I had realized the anomaly of striving to operate at rock bottom annual expense ratios. As we continue to be dependent on the broker dealer community," so it's kind of hard to do that if you're having to pay all these fat commissions. "Like nearly all of our peer fund managers, Vanguard's distribution strategy was linked to stockbrokers." So he's going to change this, this distribution strategy. "I decided that we must resolve this anonymously." Anonym, anonymously.

• 1:01:40David Senra?

  I can't even pronounce simple words, guys. I outlined my plan to abandon the distribution system that had supported Wellington for nearly a half century. We would sell shares of our funds on a no-load basis, meaning without sales commission, entirely eliminating the need for brokers. So instead of paying them less, we're just going to get rid of them completely. We would not rely on sellers to sell fund shares, but rather on buyers to buy them.

• 1:02:08David Senra?

  So this is just solid, old-school wisdom that applies to both good and bad times. The stock market environment that Vanguard Index Fund entered was, in a word, terrible. The mutual fund industry, including Vanguard's pre-history under Wellington, had jumped into the go-go era as if it would last forever. It didn't. Nothing does.

• 1:02:34David Senra?

  So in addition to applying this for his same, his logic to index funds for stocks, he's like, hey, wait, I can do this. This logic still holds true for bonds. So he says, "Even as I came to believe that precious few stock managers could outguess the market, the stock market over the long term, so I'd also come to believe that precious few bond managers could accurately forecast the direction and level of interest, level of interest rates and outguess the bond market. Yet our peers, offering quote-unquote managed, tax-exempt bond funds, were implicitly promising to do exactly that, a promise that could not be fulfilled. Vanguard's funds would certainly almost whip them over time

• 1:03:16David Senra?

  once costs were deducted," and now this is that great quote I mentioned earlier. "Performance comes and goes. Costs go on forever." It seemed obvious that Vanguard would come to dominate the fixed income field, and so we did.

• 1:03:37David Senra?

  And now I'm finally getting to the point about the impact this product had in dollars and why he gets so much adulation. I may have bored you with these data, but I wanted to establish a firm footing for our focus on low costs, always low costs for our investors. Now, let's have some fun and talk real dollars. The impact of Vanguard's at-cost structure translates to billions of dollars saved by investors every year. In 2017 alone, we estimate that Vanguard's low cost saved investors 29 billion in fees and expenses. So to compare that, remember, he's putting the benefit of his customers first, right?

• 1:04:21David Senra?

  And in one year alone, he saved 29 billion. Well, in that same year, banks, which no one ever talks about them putting the interests of their customers first, not in this country at least, made $30 billion just in overdraft fees.

• 1:04:38David Senra?

  If we carry this process back to Vanguard's founding in 1974, the aggregate savings to Vanguard's investors can be fairly estimated at $217 billion, so a quarter trillion. I take great pride in the fact that the company I founded has been able to give so much back to its investors. They deserve every penny of it. He knows fundamentally why he exists, and that's to serve the interests of his customers.

• 1:05:11David Senra?

  So the book is talking about, you know, the ideas he had. It's also, what I love, he's got a great humility where he goes into a lot of his failures. And this one failure could be described, a failure caused by focusing on the competition and not learning from the past. In listing our successes, I cannot in good conscience ignore one of the great failures of my long career. In 1984, I was anxious, too anxious to compete with our rival, Fidelity. So Fidelity gets into these things called sector funds, and he says, "I decided that we needed to meet the challenge. So we formed Vanguard's specialized portfolios," which is just another way of saying they're going to, they're basically copying what Fidelity's jumping to sector funds.

• 1:05:54David Senra?

  Even though he saw in back in the 60s, the problem with doing so. I should have known better. In 1951, studying the fund industry for my Princeton senior thesis, I observed the performance of five sector fund groups.

• 1:06:08David Senra?

  And now he's coming to his this like his conclusion about what he observed 20, now 30 years earlier. The manager's idea was to facilitate trading among the funds and then encourage investors to trade the 15 industries based on market trends. So it's kind of like a like a old idea, but but kind of dressed up as if it's something new, but it's not new. They soon began to founder and all 15 industry funds went out of business. With such a flawed investment premise, despite their brilliant for a time, marketing premise, these funds ill-served their investors and fell out of the mainstream.

• 1:06:48David Senra?

  So he basically is doing the same thing and they wind up not serving the the investors in Vanguard. He says, it occurs to me that that most of my mistakes I've made during my long career came on those occasions, happily rare, when I removed my investment hat and put on a marketing hat.

• 1:07:11David Senra?

  Okay, so I'm going to skip over a large chunk of the middle of the book because it goes into like detail of each fund they have. And that's just it's outside of the scope of what we were trying to learn here. But I want to jump to this part where he talks about the founder's mentality, which I think is so important.

• 1:07:29David Senra?

  It says, nothing could describe my legacy as Vanguard's founder better than these first few paragraphs from The Founder's Mentality. And The Founder's Mentality is a book that's been published in the last few years. So now I'm going to read the excerpt that he says sums up his his view of like his mentality, his mentality of founding and running Vanguard. Most companies that achieve sustainable growth share a common set of motivating attitudes and behaviors that can usually be traced back to a bold, ambitious founder who got it right the first time around. The companies that have grown profitably to scale often consider themselves insurgents,

• 1:08:14David Senra?

  waging war on their industry and its standards on behalf of an underserved customer, or creating an entirely new industry altogether. Such companies possess a clear sense of mission and focus that everyone in the company can understand and relate to, what the company stands for. Companies run in this way have the special ability to foster employees' deep feelings of personal responsibility. Founders abhor complexity, bureaucracy, and anything that gets in the way of the clean execution of strategy. They are obsessed with the details of the business and celebrate the employees at the

• 1:08:58David Senra?

  front line who deal directly with customers. Together, these attitudes and behaviors constitute a frame of mind that is one of the great and most undervalued secrets of business success. The founder's mentality consists of three main traits: an insurgent's mission, an owner's mindset, and an obsession with the front line, in other words, an obsession with the customer experience. In their purest expression, these traits can be found in companies where the clear influence of the founder still remains in the principles, norms, and values that guide employees' day-to-day decisions and behavior.

• 1:09:43David Senra?

  And now here's John's takeaways from those paragraphs. Wow, a bold, ambitious founder, insurgents, waging war on their industry, creating an entire new industry altogether, a clear sense of mission, employees' deep feelings of personal responsibility, abhorring complexity and bureaucracy, celebrate employees at the front line. I repeat these phrases so that readers will not quickly overlook their parallel to the vanguard story. Truth told, these phrases are a perfect thumbnail sketch of what I did my best to create.

• 1:10:25David Senra?

  Okay, so now I'm going to skip all the way to the end of the book, and this is where we'll close. His last chapters, he calls it a memoir of sorts.

• 1:10:35David Senra?

  And it's called What Really Matters? And well, let me read the introduction to this memoir. So this is much of, much of the investing public seems at least vaguely aware of my career, my indexing insurgency, and my investment philosophy. In this final chapter, I'd like to reveal a bit of who I am, and how I try to serve society, some of my joys and some of my sorrows, and even some of my fears. How much delight I've received from helping others, as many decades ago, others helped me along this road of life. So this is something that I found very common. A lot of these autobiographies of entrepreneurs that we've covered on the podcast are written when they're much older, like they're, they're much closer to the end of their life, whether

• 1:11:17David Senra?

  it be 70, 80, and in this case, in the mid 80s. And I like, I think this is extremely valuable. First of all, it seems to be common that people want, like when they're close to the end of their life, they want to pass on the lessons they've learned to benefit future generations, which I think is extremely helpful. And at this point in time, we're the beneficiaries of all their experience. Like they've distilled their ideas, they saved us, you know, making mistakes or having to live 70 years, and we could take their ideas and apply it to our lives. And that's what he's talking about here. He's like, listen, there's been tons of people that have helped me. I needed to go ahead and pass that along and repay that to future generations.

• 1:11:55David Senra?

  So he says, you know, I want to honor some of the people that have influenced my life. He says, I want to cite a few passages by others that I've found inspiring. So it says, "In this memoir source, I present a list of some things that are important to me. Institutions that have helped me develop my mind and gave me the opportunity to give back to the community. I also want to honor some of the individuals who've helped shape who I am and some traits that shaped my character and much more." And so he does this in like little, it's in alphabetical order. And I'm just going to pick out some of the ones that particularly resonate with me. It's just very quick and to the point. So this one is on advice. "This ancient Persian proverb offers the best advice that I know for dealing with the inevitable ups and downs of life. The best times and worst times alike."

• 1:12:39David Senra?

  And that proverb is, "This too shall pass." It's a pass. He wants to talk about what he learned at Blair Academy, which I think is a boarding school, it's a high school. What we call high school now. "This fine New Jersey boarding school was and remains among the principal cornerstones of my long life. My experienced masters at Blair seemed to see something worthwhile in me. They would not accept flawed work." So it talks about this guy named Jesse Gage, "crushed me with a forty on my first exposure to algebra, but I ended the year earning a hundred on my final exam.

• 1:13:19David Senra?

  His other teachers, Henry Adams and Marvin Mason, corrected my English papers with a fury and with red pens. The markups of my papers were not pretty sights, but my ability to write began under their tutelage. Determined to overcome that slow start, I worked hard and graduated at the top of my class and was named best student. That may have been the first hint that I had the grit to stay the course."

• 1:13:53David Senra?

  This is his opinion on books. "I love writing books and I have a lover's quarrel with the mutual fund industry. That combination has resulted in 12 books, 10 of which have helped to drive Vanguard's success as an industry rebel creating a new industry. One among those companies that consider themselves insurgents waging war on behalf of the underserved customer."

• 1:14:18David Senra?

  Why do I write? Because I love to do it. Because writing takes those incoherent, rambling thoughts we all have rattling around in our brains and demand that they be focused and articulate, even impassioned. Because books outlive one's short existence on this planet. This is him on Warren Buffett. "The Oracle of Omaha has been described as a better salesman than I for the Vanguard 500 Index Fund. He's boosted it in seven Berkshire Hathaway annual reports. He also put his money where his mouth is, including winning a winning bet that the S and P 500 would outpace a select group of hedge funds."

• 1:15:03David Senra?

  I think he won a couple of million dollars on that, by the way. "And directing the trustee of his wife's estate to invest 90% of its assets in the Vanguard 500 Index Fund." So when he gives, when people ask him for investment advice, he almost always says, "Just put it in the Vanguard 500 Index Fund." And he's also putting his money where his mouth is because after he dies, 90% of his wife's estate is going to go into that. This is on communication and this, this is somebody that worked with John, talking about how he communicates. "It helps to be compulsive about it, to be absolutely maniacal and disciplined about being a great communicator. Perhaps the secret to Jack's impact is his ability to bring drama into the equation.

• 1:15:48David Senra?

  A lot of that derives from his state of constant, agitated, moral indignation about the plight of the investor." See, 50 years later, that little seed of anger is still there. "There's no gray in Jack's thinking. It's moral absolutism." This is his opinion on determination. "Years ago, I asked some friends and most members of my family what they thought was my single most important trait. Each came up with the same word: determination. I'm also known for my contrarianism." Another way to put that is, there must be a better way. "I've also been cited for decisiveness, resilience, grit, and self-confidence, which

• 1:16:32David Senra?

  I pray does not cross the line and become arrogance." One of his favorite quotes is from Dylan Thomas and it says, "Do not go gentle into that good night. Rage, rage against the dying of the light."

• 1:16:48David Senra?

  And he actually says, "One of the best advice you can give somebody comes from the book, "The Little Engine That Could." "The Little Engine That Could offers the best brief advice for a successful career than I can imagine." "I think I can, I think I can, I think I can, I knew I could, I knew I could, I knew I could."

• 1:17:09David Senra?

  Oh, this is interesting. So, he goes into detail in this book about how, you know, there's a lot of people that wronged him and tried to basically destroy him, but that it's more powerful to forgive, even though he's kind of a fighter. He says, "I confess that I always kind of liked the simple message, 'an eye for an eye and a tooth for a tooth,' meaning these people screwed me over, I should do the same to them." "In 1974," but he's gonna change course here, "in 1974, my former Boston partners abruptly cut short my career. It was hardball politics, for it was their investment failures that almost sank the company. So I returned to my earlier philosophy, 'the heck with asking for repentance, get revenge.' I soon realized that heeding this maxim was eating away at me."

• 1:17:54David Senra?

  So, this is, I think, the battle, like, I don't know how to put the right words, it escapes me at this moment, but like, I think the default for a lot of people is like, "Okay, you're gonna screw me over, then that's fine, we're at war and I'm gonna go get revenge." But it's all, like, that's our instinct, the difference between our instinct and then once we calm down and think about it, it's like, this is, might not be the best path forward. So, he's like, "I soon realized that heeding this maxim was eating away at me." So, basically, his instinct was not serving him well. "Then I learned of the mutual inimity between former US Presidents John Adams and Thomas Jefferson. They were political enemies until 1801, when Jefferson's presidency ended. Then their rift healed,

• 1:18:34David Senra?

  they became friends. Their long years of correspondence ended only when both died on the same day." That was 26, 25 years after they became friends again. "I was inspired by that story. I decided to take the initiative to mend the rift and forgive my successors, even without their repentance." So, he reached out to them and he says, "My words were simple, 25 years is enough, let's be friends, and so it would be."

• 1:19:06David Senra?

  I am no hero, though. I confess that I can't quite get an eye for an eye out of my mind. So it's still in his mind, but he's not acting on it. So at least that's good.

• 1:19:19David Senra?

  Uh, he loves this. And again, remember earlier, I was like, you'd be really, I think people are really better served, like searching, like reading old books and seeing the knowledge that has existed to our human history. He's recommending the story of the hedgehog and the fox. So he says, "The quotation that follows was found circa 670 BCE in a fragment of writing of the Greek philosopher, oh, boy, Arkalakis. That's no way how to pronounce that. And this is what he says. "The fox knows many things, but the hedgehog knows one great thing. For me, this idea provides an insight into our nation's money managers.

• 1:20:01David Senra?

  We have an army of sly foxes who survive and prosper by knowing many things about complex markets and sophisticated marketing. The hedgehogs in the field know only one great thing. That investment success is based on simplicity, plain service, and honest stewardship."

• 1:20:21David Senra?

  So he talks a little bit about his religion in the book. I think he's, he says he's escapalian, but he studied the Quakers and he's like, he, he feels that, um, he was born with some of the like innate, the values that Quakers preach. And he says, "In retrospect, I see that my life and my design for Vanguard reflect many of the basic Quaker values. Simplicity, economy, thrift, efficiency, and service to others." And this is him on teaching and learning.

• 1:20:53David Senra?

  "When I'm asked, what is the secret of a, of a life well-lived? I often answer, first rule, get out of the bed in the morning. If you don't do that, not much will happen. Then, every day, teach something and learn something. Along the way, give an enthusiastic compliment to a deserving soul whom you may have never before met. Then you've earned a great night's sleep. You'll get it. When you awaken the next day, repeat these rules."

• 1:21:27David Senra?

  And this is his opinion on work. I've been working since I was nine years old, beginning as a newspaper deliverer, store clerk, postal worker, and waiter. I worked my way through school and college waiting on tables, and I also worked during summer vacations and holiday breaks. After college, I worked to build my career in the mutual fund business. In all my working career, however, I've only had a single job that I would call real work, when I was a pin setter at the bowling alley of the New Jersey Fire Department. Other than that, all of my work has been fun, productive, and deeply fulfilling, even with a spiritual element.

• 1:22:08David Senra?

  And he's gonna continue his thoughts on work, talks about how he admires Alexander Hamilton, and he's gonna quote Lin-Manuel Miranda, who was the inventor, the creator of that hit Broadway, Hamilton. So it says, "Lin-Manuel Miranda described Alexander Hamilton's standards for getting ahead in one's work in his hit Broadway musical, Hamilton. To paraphrase, the founding father with no father got farther by working harder, by being smarter, and by being a self-starter."

• 1:22:38David Senra?

  Unfortunately, I cannot rap as well as Lin can, although I secretly wish I could. And this is the last thing, we'll close the book here. I've usually used the phrase "stay the course" as one of the great rules of investment success. Ignore the day-to-day fluctuations in the stock market and focus on long-term growth of the US economy. But as I complete this memoir, "stay the course" is also a splendid rule for fighting our way through the inevitable ups and downs of the short spans of our existence on this earth, and for enjoying a productive and honorable life well-lived."

• 1:23:17David Senra?

  And as far as I can tell, he reached that goal. He lived a productive and honorable life, well-lived, that unfortunately ended a few weeks ago. So if you want the full story by the book, it's Stay the Course: The Story of Vanguard and the Index Revolution. There's just so much more in the book than I could ever put into into this podcast. So if you found the podcast interesting, you'll probably find the book interesting.

• 1:23:42David Senra?

  As a reminder, if you so if you leave a review, you know, every single podcast you probably listen to says, hey, leave a review. It's really important. It actually is really important. But I want to further, since we've this podcast is all about studying human nature and how humans respond to incentives, I want to take it a step further. I don't want to just ask you to leave a review because it's important to me. I want to actually do extra work so I can further incentivize for you. So I have a private podcast feed that's and it's free to access. All you have to do is leave a review on places like Apple Podcasts or Stitcher. It's easy. You leave a review, take a screenshot and email it to me. Places like Overcast or Breaker, they have different systems where like you could recommend. So on Overcast, it's a star. On Breaker, it's a heart. Press that, it changes color.

• 1:24:25David Senra?

  Take a screenshot, email it to me. I will personally respond. It's [email protected]. So founders with an S, just like the name of the podcast. Reviews, plural with an S. So [email protected]. I will personally email you back a private RSS feed, which is all a podcast is. And I have three on there. I have one about Steve Jobs from Ed Cap, the founder of Pixar. Him talking about what is like working with Steve Jobs for 20 something years. One on Max Levchin about the early days of PayPal. And I just completed one based on the book Creative Selection, which I would recommend to anybody that's building something, whether you're an individual, working within a company, you're running a company, whatever it is.

• 1:25:07David Senra?

  It's the way it's the it's a look inside the way Apple designed products when Steve Jobs was still at the helm. And it's a very fast book. Full of really useful information on ways to think about getting to your objective. So I did a podcast on that. Now, here's the cool thing. Not only do you have access to those three podcasts, but I'm going to, what I said at the end of the last last review or only podcast I did was, I'm going to make sure this one or two minutes that you spend leaving a review and emailing it to me is the best two minutes that you've ever spent in your life. What that means is like, I'm going to work extremely hard to make that feed as valuable as possible. And so you, you, by you sending it over real quick, you get access to the three past podcasts. But then, once the feeds in your podcast player, it'll automatically update.

• 1:25:52David Senra?

  So in the future, I'm going to keep adding, maybe one, two a month, whatever the frequency of the cadence is. So you keep reaping the benefits of just doing me a favor. Cause like I said before, this podcast is independent. I'm, I don't have a large social following. I'm not using ads to make money on it. I'm not part of a podcast network. And so just like the people we study in the books, I have to, to come up with creative ideas to gain an advantage. And I want to have, I may never have the most reviews, which is fine, but I want damn sure, make sure I have the most reviews in relation to, you know, how many people actually listen to the podcast, like on a per capita basis, basis is way, way I think about it. And I think I'm able to achieve that when I, when I'm doing something that's a little different.

• 1:26:37David Senra?

  I listen to a lot of podcasts, none of, I've never heard one say, hey, I also have this, this, I'm doing an extra podcast for people to leave reviews. So please do that. It helps out a lot. And again, John just was telling us, you know, one of the basis of his, of work is, is keeping it simple. And so I kept it simple in terms of, since I don't have ads, I rely on the support from people that value my work. So if you like what I'm doing and you want to see more of this in the world, you want me to continue indefinitely, please consider supporting it. And I made that really easy. There's one way to support you, sign up for Founder's Notes. I leave a link directly in the show notes.

• 1:27:20David Senra?

  It takes, if you're on an Apple device, less than a minute to sign up. You choose, you don't even have to choose, and I made, made it as simple as possible. You choose, you have one decision. Monthly or annually, it's up to you, what do you want to do? And while, in addition to supporting the podcast and me not having to rely on ads and continue, being able to continue to dedicate all the time I do to this podcast, you also get all of the, my podcast notes, which just like I take notes and pull out the best ideas from books on founders, I do the same thing for podcasts. And when an entrepreneur goes on a podcast, I take notes, I put right down their ideas in a very simple, almost tweet-length tweet, like it's tweet-sized bits of knowledge, and I email them to you every Sunday. And every Sunday, you'll get an email from me, if you're supporting on a financial basis,

• 1:28:04David Senra?

  that contains the best ideas from seven founders. I do one every day. And so on a monthly basis, not only do you have access to the 132 that I've done so far as of the time of recording this, but you'll get 30 extra every month. And my goal here is, I told you, like, just like I think I've learned a lot from books, podcasts is slowly creeping up there with, you know, the way I learn. And I think that there's this huge, there's an abundance of information that is helpful to people creating something, entrepreneurs or people that want to be entrepreneurs, that are coming directly from people that have done it. And my goal with Founders Notes is I want to build the largest repository of, of the

• 1:28:45David Senra?

  knowledge that, that entrepreneurs share on podcasts, and I want to be able to transfer that to you in an easy, simple way. So I really feel Founders Podcast is analyzing the history of entrepreneurship, and Founders Notes is analyzing what's going on in entrepreneurship right now. And I think using that, listening to this podcast every weekend and reading one email, and, you know, in a very short amount of time, you're going to get in a high level of information and knowledge that you can then use in your own life and apply it to, to whatever it is that you want to work on. And essentially, like, you're going to benefit from other people's experiences. Like, why wouldn't you want to do that? So, all right, so that's all, that's it. I'll be back next week. Please consider signing up and financially supporting this podcast. It means the world, it allows me to do this work, and I think the work is very important.

• 1:29:30David Senra?

  Thank you very much for listening. Please tell your friends, and I will be back very soon with another podcast.