Vanguard

Vanguard is the most effective vehicle ever created for participating in the fruits of American capitalism. Today it’s the single largest equity owner of the majority of corporations in the S&P 500, on behalf of 50 million clients (including, likely, many of you). And yet Vanguard itself is essentially a communist organization — it has no shareholders, makes no profits, and operates more like REI than Fidelity. If you own a Vanguard fund, you own a piece of the firm itself. Any excess margin instead gets returned to clients in the form of lower fees, which since 1975 have added up to roughly five hundred billion dollars transferred out of Wall Street managers’ pockets and into retail investors’ savings accounts. And oh yeah, it all started as a cockamamie revenge plot by a guy who’d just been fired by his partners. Today we tell the story of communist capitalism at its finest — Vanguard. Sponsors: Many thanks to our fantastic Spring '26 Season partners: J. P. Morgan https://bit.ly/acquiredJPMvanguardpodWeAreDevelopers event https://wearedevelopers.com/acquiredServiceNow https://bit.ly/acquiredservicenow26Vercel https://bit.ly/acquiredvercel26Statsig https://bit.ly/acquiredstatsig26Links: This episode's PDF companion https://www.acquired.fm/episodes/vanguard#companionSign up for email updates https://www.acquired.fm/email, get our takeaways and research photos from each episode, and vote on future topics! Our Vanguard "episode preview" in WSJ https://www.wsj.com/finance/vanguard-costco-acquired-podcast-hosts-bogle-96d97c7dStay the Course: The Story of Vanguard and the Index Revolution by John C. Bogle https://www.amazon.com/Stay-Course-Story-Vanguard-Revolution/dp/1119404304/ref=tmm_hrd_swatch_0The Bogle Effect by Eric Balchunas https://www.amazon.com/Bogle-Effect-Vanguard-Investors-Trillions/dp/1637740719Worldly Partners' Multi-Decade Vanguard Study https://worldlypartners.com/businesshistoryWorldly Partners' Article Generational Investing: The Discipline Behind 100+x Outcomes https://worldlypartners.com/wp-content/uploads/2026/04/Generational-Investing.pdfAll episode sources https://www.acquired.fm/episodes/vanguard#sourcesCarve Outs: Our WSJ pieces on Ferrari https://www.wsj.com/business/autos/ferrari-acquired-podcast-luca-di-montezemolo-6d2ee2cb?mod=hp_lead_pos10 and Vanguard https://www.wsj.com/finance/vanguard-costco-acquired-podcast-hosts-bogle-96d97c7dMacBook Pro M5 Max https://www.apple.com/macbook-pro/Michael MacKelvie on YouTube https://www.youtube.com/@michaelmackelvieThe Super Mario Galaxy Movie https://www.imdb.com/title/tt28650488/Brooks Vanguard sneakers https://bit.ly/acqbrooksvanguardMore Acquired: Get email updates https://www.acquired.fm/email and vote on future episodes! Join the Slack https://acquired.fm/slackCheck out the latest swag in the ACQ Merch Store https://www.acquired.fm/store!00:00:00 Start 00:00:41 Intro 00:05:30 Jack Bogle's Early Life & Family Ruin (1929) 00:12:34 Princeton Thesis & Mutual Funds Emerge (1949-1951) 00:27:20 Joining Wellington Management (1951) 00:30:38 The Go-Go Years & Fidelity's Ascent (1958-1965) 00:40:36 Jack Takes the Reins & The Ivest Merger (1965) 00:46:04 The Go-Go Bust & Jack's Crisis of Conscience (1970-1973) 00:53:28 Jack is Fired: The Genesis of Vanguard (1974) 01:13:03 The Journal Article That Inspired It All (1974-1976) 01:35:02 Building the Fund & Early Struggles (1976-1981) 01:44:32 The Rise of Indexing & Vanguard's Growth (1988-1992) 01:49:06 Jack's Health & The CEO Transition (1995-1996) 02:00:06 The ETF Debate & Jack's Second Firing (1999) 02:24:18 The 2008 Financial Crisis: Vanguard's Moment 02:30:46 The Warren Buffett Bet (2008-2019) 02:41:28 Fidelity & BlackRock's Resurgence (Post-2008) 02:52:04 Salim Ramji: Vanguard's First Outside CEO 03:04:43 Wellington's Comeback & Mutual Ownership 03:08:23 Analysis 03:30:58 Quintessence 03:39:35 Carve-Outs + Outro ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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

• 0:00Ben Gilbert?

  I was telling my wife, you know, I think I'll be able to do bedtime tonight, maybe, maybe even dinner. And she was like, whoa, whoa, whoa, don't get ahead of yourself.

• 0:07David Rosenthal?

  Let's not go crazy here.

• 0:10Ben Gilbert?

  How complicated could it be? It's index funds.

• 0:12David Rosenthal?

  And active funds and money market and brokerage and advisory.

• 0:18Ben Gilbert?

  Yeah, yeah, yeah.

• 0:19David Rosenthal?

  But really, it's mostly index funds.

• 0:21Ben Gilbert?

  All right.

• 0:22David Rosenthal?

  Let's do it.

• 0:23Ben Gilbert?

  Let's do it.

• 0:23David Rosenthal?

  Vanguard.

• 0:41Ben Gilbert?

  Welcome to the spring 2026 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 0:49David Rosenthal?

  I'm David Rosenthal.

• 0:51Ben Gilbert?

  And we are your hosts. Today's episode is more relevant for you than any other company we have ever covered. For most of you, you have most of your net worth tied up in this company, or the copycats who followed. The company is Vanguard, who effectively created the first index fund for individual investors in 1975, and today is the largest provider of index funds in the United States. They manage over $10 trillion in passive index funds. That means they own an average of almost 10% of every company in the S and P 500. General Motors, Nike, Starbucks, Lockheed Martin, Visa, Apple, you name it. Vanguard

• 1:35Ben Gilbert?

  is the largest shareholder of most US corporations, and together with the other big index funds like BlackRock, State Street, and Fidelity, they own 24% of the entire US stock market.

• 1:49David Rosenthal?

  It's absolutely. Incredible. And none of those other firms would be in this market or doing it in the same way if it weren't for Vanguard.

• 1:57Ben Gilbert?

  No.

• 1:57David Rosenthal?

  I mean, the impact is just wild. I mean, millions and millions and millions of people have sent their kids to college, bought homes, retired comfortably because of Vanguard and Jack Bogle.

• 2:10Ben Gilbert?

  So Vanguard has an incredibly unique corporate structure. If you are an investor in a Vanguard fund, you own a piece of the firm. Vanguard is owned exclusively by its customers, and it's not publicly traded. It doesn't have outside shareholders of any other kind. Even the CEO doesn't have any equity, except of course, than what he has from investing in the funds, just like me and David and all of you. In many ways, it is a different kind of capitalism, dare we say communist capitalism.

• 2:39David Rosenthal?

  Ooh, I like it.

• 2:41Ben Gilbert?

  A company whose products exclusively serve the interests of its customers and no other shareholders. And David, as you've been alluding to, the man behind this idea is a visionary, an iconoclast, and a pedantic stick in the mud who was as disagreeable as he was right, Jack Bogle.

• 3:02David Rosenthal?

  Oh, that's great. I couldn't have written it better myself than.

• 3:05Ben Gilbert?

  And his story is wild, since he didn't start Vanguard until he was 46 years old. And you might think it was started idealistically, given this structure we're talking about. And it was, sort of. But the story is equal parts idealistic as it is vindictive. But what is clear, we all owe Jack a giant thank you. Because of Vanguard's relentless cost cutting and low fees, Vanguard has saved investors over $500 billion in fees and trading costs since its founding in 1975. And as a recent book, The Bogle Effect argues, Vanguard's actions also forced the hand of the rest of the industry to cut their fees, totaling another $500 billion over time. So Jack Bogle and Vanguard are responsible

• 3:50Ben Gilbert?

  for a trillion dollars of wealth transfer out of the pockets of Wall Street and the finance industry and into the pockets of individual investors in the form of fees that they didn't have to pay.

• 4:01David Rosenthal?

  Absolutely incredible.

• 4:03Ben Gilbert?

  I was catching up with good friend of the show, Morgan Housel, a couple of days ago.

• 4:06David Rosenthal?

  Oh, yeah, of course.

• 4:07Ben Gilbert?

  And his comment to me was, "I view Bogle as an undercover philanthropist." And at a trillion or even half a trillion dollars, that would make him the greatest philanthropist of all time.

• 4:18David Rosenthal?

  Wow. Wow. I love that framing. Yeah. I mean, a large portion of that trillion dollars could easily have flowed into Jack's own wealth, and he made the choice that it didn't.

• 4:28Ben Gilbert?

  Yeah, maybe. Maybe, David.

• 4:30David Rosenthal?

  Who was it?

• 4:30Ben Gilbert?

  We'll get into it. So listeners, you can join the email list at acquired.fm/ email. That's where we're going to send out our big takeaways from each episode, past episode corrections, exclusive behind the scenes photos that we find in our research, and it's where you'll get to vote on future episode topics. Plus, David writes a little hint each time about next episode's topic. So come play the guessing game with us at acquired.fm/ email. Come talk about this episode with the whole community in the Slack after you listen. That's acquired.fm/ Slack. And before we dive in, we want to thank our presenting partner, JP Morgan.

• 5:05David Rosenthal?

  Yes. And just like how we say every company has a story, every company's story is powered by payments. And JP Morgan is a part of so many of their journeys from seed to IPO and beyond.

• 5:16Ben Gilbert?

  So with that, this show is not investment advice. David and I may and definitely do this time have investments in the companies that we discuss. And this show is for informational and entertainment purposes only. David, where do we begin?

• 5:29David Rosenthal?

  Oh, all right. Well, we start in May of 1929, on the eve of the great Wall Street crash of October 1929 that would throw America and the world into the Great Depression, wipe out millions of family savings, ruin countless lives, forever scar an entire generation. We don't often talk about the Great Depression on Acquired. It was truly horrible. I mean, the financial crisis was quaint compared to this. 9,000 banks failed after the Wall Street crash of 1929. 9 million individual family savings accounts were wiped out. Almost 100,000 businesses failed. Unemployment reached 25%.

• 6:14David Rosenthal?

  And it truly did scar an entire generation. I mean, I remember my grandparents still like into the 1990s doing absolutely insane things because of their experience during the Depression. My dad's mom never threw out a plastic bag in her entire life. When she died and we cleaned out her condo, it was like... Full of tens of thousands of plastic bags.

• 6:38Ben Gilbert?

  My grandpa was magazines and Tums containers. We found just overflowing amounts in his basement. But the crazy thing about this, David, is back then, only 1% to 2% of Americans owned stocks.

• 6:51David Rosenthal?

  Yes.

• 6:51Ben Gilbert?

  So all of these things were second order effects from the crash, from the banks being deeply intertwined. A lot of leverage on all these equities. It wasn't like, oh, I own a bunch of stocks and those stocks crashed, so my life is over. It is the giant interrelated ripples and no safeguards in the economy at that time.

• 7:10David Rosenthal?

  Yep, exactly. It was the bank failures, it was the businesses going under, it was unemployment, it was everything. But on the eve of this great financial calamity, our hero, and a financial hero to many, is born. John Clifton "Jack" Bogle. And he's born here in May of 1929 as one of two twin boys, along with his twin David. And together with their older brother Bud, they form the Bogle Boys, as they would be known throughout the rest of their youth and indeed the rest of their lives. Now, Jack and David, here at the time of their birth, are born into a prominent New Jersey family.

• 7:54David Rosenthal?

  Their great grandfather had founded a mutual fire insurance company. Nice foreshadowing there.

• 8:02Ben Gilbert?

  Yeah, mutual.

• 8:03David Rosenthal?

  Mutually owned company, as Vanguard would go on to be. And their grandfather had then founded a company, which would go on to become part of the American Can Company, which manufactured tin cans and was one of the largest companies in America for a long time. So it's like a prosperous, well-to-do, well-respected family that they are born into. But during their early childhood here in the Depression, the family loses everything. Their dad becomes an alcoholic, divorces their mom, abandons the family, runs off.

• 8:43David Rosenthal?

  Basically ends up dying alone on a street corner years later. Their mother, as you can imagine, is equally scarred from all this, suffers from severe depression, mental health issues, isn't able to provide for the boys. And so the Bogle boys, basically from the time they're kids, like before they're teenagers, they're kind of left to fend for themselves in the world. So all three of them work several concurrent jobs while they're growing up and going through school. I mean, we're talking like paper routes, food service jobs, restaurants, manual labor, like anything that they can do to support themselves and their mom. Jack would talk about how the best job that he ever had as a kid was a 3 a.m.

• 9:28David Rosenthal?

  paper route that he had because the world was quiet and peaceful in the middle of the night and he could escape the chaos and strife all around him. As he liked to say, it was a contrast to the rest of my life growing up.

• 9:41Ben Gilbert?

  And you got all this from talking with Jack's kids, right?

• 9:43David Rosenthal?

  Yeah, yeah, I spoke to several members of the Bogle family for research and I mean, this story is just incredible.

• 9:50Ben Gilbert?

  Yeah, it's interesting because kind of through his last name and his great grandfather and his grandfather, they had this sort of family network where they were in high society and he knew other well-to-do kids. But personally, their family's wealth and relationships were kind of in shambles.

• 10:10David Rosenthal?

  They're both insiders and outsiders at the same time. So as the boys get older and they enter high school, again, the family no longer has any money, but they do still have these connections and relatives and friends who have resources. And so they managed to get all of the boys scholarships to go to Blair Academy, one of the sort of prestigious East Coast boarding schools for their junior and senior years of high school. And Jack especially just like flourishes at Blair. He becomes a fantastic student. He graduates cum laude. He gets voted both best student and most likely to succeed by his classmates at graduation. Obviously, he's going places.

• 10:55Ben Gilbert?

  Yep.

• 10:56David Rosenthal?

  Now, there's just one problem, though, as Jack and David are approaching graduation. The boys in the family still have no money, even though they've gone to this prestigious boarding school that they're going to graduate from. And they all need to keep working, both to support themselves and their mother, who's still alive. So the three of them get together and decide that, hey, because of our situation, only one of us should actually go to college. And the other two need to keep working and providing for the family. And because Jack has been so successful at Blair and is such a good student, he gets chosen as the one of the brothers that's going to get to go to college. And Jack would say that the weight of that decision

• 11:41David Rosenthal?

  just rested on him for the whole rest of his life. Like, he alone was given this chance to do something bigger. And he felt like a tremendous obligation to make good to his family on this opportunity. And the other two never go to college. I mean, all three of them remain close, but David and Bud never go to college.

• 11:57Ben Gilbert?

  And it's funny, listeners, David, you're referencing the things that Jack would say. It is incredibly easy to find Jack's words everywhere. There is no shortage of commentary that Jack would give on his own life, on his philosophies. The man gave thousands of speeches. He wrote memoirs. He wrote 12 books, investment advice, reflections back on Vanguard. He would go on TV and talk to journalists and speaking classes anytime anyone would have him. So there is no gaps in the historical record of Jack's life.

• 12:30David Rosenthal?

  Of Jack's memory, yeah. Jack loved nothing more than to give a speech. So after graduation from Blair, Jack goes on to college at Princeton. Once again, on a work scholarship, he's working in the dining halls. He ends up working in the ticketing office for athletic events and football games. And while he's at Princeton, he becomes fascinated with economics after he takes an intro econ course in the fall of his sophomore year, during which he gets a D+ on the midterm, an inauspicious beginning to his finance career.

• 13:04Ben Gilbert?

  Yeah.

• 13:04David Rosenthal?

  But he loves it. He works hard. He finishes with a C- in the class. Incredible for the guy who would go on to revolutionize all of finance.

• 13:14Ben Gilbert?

  Yep.

• 13:14David Rosenthal?

  So the next year, during Jack's junior year at Princeton, he's decided that he's going to major in economics or concentrate in Princeton's fancy terms. You don't have majors, you have concentrations.

• 13:25Ben Gilbert?

  Really?

• 13:26David Rosenthal?

  Yeah, yeah, really.

• 13:28Ben Gilbert?

  Every day I learn one more quirky little Princeton thing.

• 13:31David Rosenthal?

  I know, I'm sorry, I'm sorry. I, of course, went to Princeton, so I went through all this. And specifically, I also went through the rite of passage that Jack has to go through, which is, he needs to write a senior thesis. So one of the hallmarks of Princeton is that every single undergraduate must write a senior thesis, which must be a unique piece of scholarly research in order to graduate. It's like a mini version, a very, very mini version of what you would do as a PhD. Mine, of course, was on the marketing history of champagne, being a French literature major.

• 14:08Ben Gilbert?

  Which is so funny for acquired, like, it's actually very useful for us in the LVMH episode.

• 14:13David Rosenthal?

  Incredibly useful. There you go. David Rosenthal, Jack Bogle, you know, the connections abound.

• 14:18Ben Gilbert?

  Okay, continue the story.

• 14:19David Rosenthal?

  Okay. So one afternoon, Jack's casting about for what would become his thesis topic. He's in Firestone, the main library on campus, and he's reading the current issue of Fortune magazine, where he comes across an article, deep in the back of the magazine, on page 116, entitled "Big Money in Boston." And it's about the growth of a relatively new industry of open-ended public funds, what today we would call mutual funds. That term wasn't even in use yet. And the article centers on this new firm that's leading this innovation, this new

• 15:02David Rosenthal?

  sector on Wall Street, even though they're based in Boston, the Massachusetts Investors Trust Company, known and marketed as MIT. No actual connection to, you know, the real MIT, Massachusetts Institute of Technology, but this gives you a sense of the marketing to the public of these open-ended public funds.

• 15:25Ben Gilbert?

  We'll see it over and over again on this episode, appropriating Prestige is a signature of the mutual fund industry, really the finance industry.

• 15:34David Rosenthal?

  A hallmark of this industry, absolutely.

• 15:37Ben Gilbert?

  The interesting thing about this, you might say, well, what do you mean mutual funds were new at this point in time? Well, that comment that I made before the Great Depression in the 20s, only 1% or 2% of Americans owned stocks. By 1949, that was still only up to 4.2% of Americans. And what they were doing is they were working with a stockbroker to buy individual stocks. There really hadn't been any academic research around finance of any kind yet, let alone sort of investment and diversification and funds. So this notion of you are going to mutually pool your money with a bunch of other investors into a fund

• 16:19Ben Gilbert?

  and buy a basket of stocks in that fund and hold it for an open-ended period of time, these public equities, that was brand new.

• 16:27David Rosenthal?

  Yes. And this is what Jack decides to write his thesis about this new phenomenon. Now, there are actually two important things to talk about here that you started to allude to, Ben. One is this concept of a open-end fund versus closed-end funds. So this is the real pioneering thing that the Massachusetts Fund, we're not going to call it MIT here, pioneered, which is there's no set fund size. It's elastic. So it's not like they have to write a prospectus and go out and say, we are raising a $100 million fund and get everybody in it and then, you know, it gets to 100 million and then they close it and

• 17:08David Rosenthal?

  they manage it. Nope. Could be 1 million, could be 100 million, could be 5 trillion, as we will see approaching towards the end of the episode.

• 17:17Ben Gilbert?

  You keep dumping more dollars in and we'll keep buying more stuff in the basket.

• 17:21David Rosenthal?

  Yep. And that also means that investors in the fund can come and go as they please. There's no lockups. It doesn't have to be a set number. You buy into the fund, you hold it for a while. Hopefully it appreciates. You can sell out of the fund. It's everything we know today about mutual funds, but until this concept of an open-ended fund was pioneered, you couldn't do this. Now, you mentioned if Americans held stocks at all at this point in time, they held individual stocks through brokers. These funds came to be distributed exactly the same way. Through stockbrokers, you would call up your Merrill Lynch broker and instead of saying, "Hey, give me five shares of General Electric," you'd say, "Hey, give me a couple of units of the Massachusetts Fund," et cetera, et cetera.

• 18:07Ben Gilbert?

  Yep. And so the marketing, the distribution, it relies on this broker-dealer network to sort of sell the funds on behalf of the the fund management company itself.

• 18:18David Rosenthal?

  Yep. And the brokers were getting paid by this.

• 18:22Ben Gilbert?

  Oh, yes.

• 18:23David Rosenthal?

  Oh, were they ever. So they would take what's called a sales load of usually like 7.5% to 8.5% of every dollar that a client was putting into the fund. The fund manager would then kick back to the broker as a spiff for putting their clients in the fund.

• 18:41Ben Gilbert?

  And it's a kickback out of the money that was just invested. So if you're investing $100 into one of these funds, well, actually only $91.5 are going in as the investment and the rest is going right out as this effectively distribution fee.

• 18:58David Rosenthal?

  Yeah, to your friendly neighborhood stockbroker.

• 19:00Ben Gilbert?

  Now, the funny thing is if we didn't have the context that we have today, which is I invest $100 and basically $100 goes into the thing that I'm investing in, or at least that's the way it kind of feels.

• 19:11David Rosenthal?

  This was normal.

• 19:12Ben Gilbert?

  Paying for distribution is a very normal thing across every business and every sector. You have to incentivize people to push your product through marketing, through advertising, through sales commissions, through hiring a giant sales force yourself. These are often very large costs. I mean, for example, retailers often double the price of something when they sell it to the public, but the revenue here is not $100. The revenue to the fund is like $2 per year in fees. So paying $8 to the broker-dealers is a giant egregious amount to sell the product. It's like four times the amount that the fund itself actually makes.

• 19:50David Rosenthal?

  Right. Okay. So that's number one to understand about these new open-ended mutual funds. Number two, also might be crazy or not crazy, depending on your perspective, these new funds, like the Massachusetts Fund, weren't really set up for the benefit of their customer base, the fund holders.

• 20:11David Rosenthal?

  Rather, they were created and organized by the investment managers who started and ran them with the express purpose of generating profits for themselves.

• 20:22Ben Gilbert?

  Right. It's a business.

• 20:23David Rosenthal?

  And the way that that happened was the people who set up the fund created a separate company called the management company that had a contractual relationship with the fund to get paid a percentage of assets that would be their revenue. And ultimately, this is a very high margin business. Their profits.

• 20:40Ben Gilbert?

  This is effectively the way that all finance works today. There's a management company that performs the act of advising all of the investments in each of the individual funds that the principals own and run it like a business.

• 20:53David Rosenthal?

  Yep. And that management company would be responsible for three things regarding the fund. One, making investment decisions, allocating the capital. Two, controlling marketing and distribution, which, as we talked about, mostly was just turning around to whatever their favorite network of stockbrokers was and kicking it over to them for additional fees. And three, managing the back office and administration of the fund. So like the register of the fund holders, the investments, the allocations of shares, tax, et cetera, et cetera.

• 21:24Ben Gilbert?

  Legal compliance, bookkeeping, making sure to communicate the prices of the assets with the newspapers so they can print it, all the administrative stuff.

• 21:34David Rosenthal?

  Yep. And the way that the Massachusetts Fund worked is the management company just got paid a fixed percentage of the assets under management that year for the fund. So you can see the immediate conflicts of interests all over the place here. If management of the fund gets paid solely based on the size of the assets in the fund with no penalties or rewards for actual investment performance, well, you're basically just incentivized to grow the fund as large as possible and market it as best as you can and skim a lot of fees off the top.

• 22:14Ben Gilbert?

  There's a tiny bit of performance benefit built in because if the assets under management grows organically by the investments performing well, the fees grow. But it's very different than the way that a lot of funds would go on to be structured later with carried interest or a promote or some sort of performance incentive.

• 22:31David Rosenthal?

  Right. Or hurdle rate, it gets to benchmark, et cetera, et cetera.

• 22:36David Rosenthal?

  None of that, yes. Investment returns are but one sort of arrow in the quiver of management companies at this point in time to grow their profits. And these profits could be very, very, very large. So let's say, for example, you have a $100 million fund, which was reasonable even in that day.

• 22:56Ben Gilbert?

  Yep.

• 22:56David Rosenthal?

  And it would have a management fee of like 1.5% of assets annually.

• 23:02Ben Gilbert?

  For a public equities fund.

• 23:05David Rosenthal?

  Right, right. So as a management company group in this hypothetical $100 million fund, you'd be taking $1.5 million a year home, rain or shine, in 1950. That's like $20 million adjusted for inflation today.

• 23:20Ben Gilbert?

  And sometimes up to 2 million, because I'd seen the number 2% too for mutual funds in this era. And this is, again, listeners, for mutual funds. Baskets of publicly traded stocks that are just listed publicly to buy on exchanges. And these funds, in exchange for picking them, putting them in a basket and administrating it, are charging 2% to do that.

• 23:43David Rosenthal?

  Yeah, and oftentimes, they're not even doing the administration. They're not doing the distribution. They're outsourcing that to stockbrokers. They're outsourcing the administration, too. So all they're doing is picking stocks and getting a lot of money for it.

• 23:55Ben Gilbert?

  So the things we've talked about so far are the 1.5%, 2% management fee. There's the 8.5% sales load. So that bumps you down from whatever your current principal is to even the, on day one, when you enter the fund, you know, being down 8.5%. So you have that sort of to overcome. And then there's a third thing, too, which is transaction fees at this point in time are very, very high. If the fund needs to go and trade stocks to add things to the fund or take things out of the fund, there were very, very large transaction fees relative to today to make those trades.

• 24:29David Rosenthal?

  So yeah, back to Jack in Firestone Library here reading Fortune magazine. Big money in Boston, indeed.

• 24:38David Rosenthal?

  And you can imagine how this might be attractive to young Jack, who comes from this destitute family. He needs to earn money to support his family. This sounds like a great new industry to get involved in. So in the spring of 1951, Jack turns in his senior thesis to the economics department, entitled "The Economic Role of the Investment Company." He gets an A on the thesis and graduates magna cum laude from the economics department.

• 25:05Ben Gilbert?

  And David, what was the thrust of the piece? I mean, he wrote it like on this concept of big money in Boston, but what was his takeaway?

• 25:14David Rosenthal?

  Well, it's interesting. The thrust of the piece is that this is going to be a big, important industry within finance.

• 25:21Ben Gilbert?

  Yep.

• 25:22David Rosenthal?

  But Jack does also have some idealism in here as a young whippersnapper. And he recognizes everything that we were just talking about, which is that the fees charged to fund clients are going to be a big drag on performance for these funds. And he doesn't go all the way to say, hey, maybe we should eliminate them. But he does say that probably the best way to maximize returns to fund holders is to try and minimize the fees. And he does, even in the thesis, go one step further and say, well, it's sort of a tautological conclusion that the aggregate average of all these funds are going to perform in lockstep with the market.

• 26:07David Rosenthal?

  So if you really want to try and beat the market, then reducing fees is the way to do it.

• 26:13Ben Gilbert?

  Because all of these investors who are trading against each other collectively are the market. If you take all the winners and all the losers and sum them up and don't take out any fees, you come up with zero. Every positive winner on the side of a trade has a loser on the other side of the trade. And so in aggregate, all investors together are the market.

• 26:33David Rosenthal?

  Now, that is true in theory. And in practice, today, that is absolutely true. Back in 1951, Jack was a little ahead of his time because professional fund managers were a small, small minority at the market back then. There were a lot of other players, mostly unsophisticated players, mostly retail traders. And so it really is not inconceivable that the pitch as a professional fund manager that's going to dedicate their life and all their working days to researching and picking stocks and betting against the market probably does have a good chance of beating the market back in these days.

• 27:11Ben Gilbert?

  Yep. The pitch of I can outperform all this dumb money in the market, probably right and probably justifies significant fees.

• 27:19David Rosenthal?

  Yep, yep. Now, as graduation approaches, Jack has a goal. He wants to go to work in this new fund management industry. And he manages to get his A-grade senior thesis in front of another prestigious Princeton alum in Philadelphia named Walter Morgan, who had founded and was running another early, open-ended, public investment company in Philadelphia called Wellington Management. Walter Morgan hires Jack as his assistant right out of school, really takes a shine to him. Jack becomes sort of like a surrogate son to him. You know, Jack didn't really have a dad and Walter didn't have kids. They become really,

• 28:03David Rosenthal?

  really close. Now, Wellington and its Wellington Fund was a super conservative and very highly regarded, early mutual fund that pioneered the style that's came to be known as balanced investing, i.e. a balance between stocks and bonds, all within a single fund. So the sort of marketing slogan that Walter Morgan had used for the firm and the fund was, quote, "A complete investment program in one security." You can see how this would be attractive.

• 28:40Ben Gilbert?

  Sounds great.

• 28:41David Rosenthal?

  And the Wellington Fund, by this point here, when Jack joins out of school, has attracted $150 million in assets. So they are smaller than the Massachusetts Fund, which was the largest fund in the world at that point in time with just under $500 million in assets. But Wellington is still like among the top 10 funds in the industry and super well-respected.

• 29:03Ben Gilbert?

  This is what, mid 50s?

• 29:04David Rosenthal?

  Early 50s, 1951.

• 29:06Ben Gilbert?

  Okay.

• 29:08David Rosenthal?

  Again, we talked about the economics for the management company. Like, I think Morgan and everybody at Wellington and Jack absolutely did have their customers and the fund holders in mind and wanted to do a great job for them. But they are making a lot of money.

• 29:23Ben Gilbert?

  It's market, it's industry standard.

• 29:25David Rosenthal?

  Yeah, based on the fees and that fund size, call it like $2 to $3 million a year flowing into a reasonably low headcount, high-margin business here in, you know, 1951. Everybody's doing great. So Jack takes to Wellington and to Mr. Morgan like a pig in mud. He loves it. He rises through the ranks from Morgan's assistant to basically doing like every job in the company. And after a pretty short number of years, he emerges as the clear heir apparent to take over Wellington when Morgan retires. Morgan was 30 years older than Jack.

• 30:04David Rosenthal?

  And then ultimately, in 1965, Morgan retires, steps back and names Jack president of the firm at 35 years old. He's made it.

• 30:16Ben Gilbert?

  Yeah.

• 30:17David Rosenthal?

  He's, Jack, he's come up in the world. He's gone from family ruin, essentially an orphan, to president of a highly profitable and respected enterprise at age 35. He's got it made.

• 30:29Ben Gilbert?

  And importantly, a successful and pretty conservative mutual fund organization here with Wellington at this point in time.

• 30:36David Rosenthal?

  Yep, yep, absolutely. But unfortunately, that conservative mindset and pedigree was exactly the wrong thing for this moment here in the mid 1960s for Wellington and its young hotshot new president, because Wall Street and the investing world is undergoing a sea change from the hyperconservative mode that emerged after the Depression to what would come to be known as the go-go years, pioneered by a small investment firm in Boston called Fidelity.

• 31:13Ben Gilbert?

  Yes.

• 31:14David Rosenthal?

  But before we tell that story, now is a great time to thank our presenting partner, J. P. Morgan.

• 31:21Ben Gilbert?

  Yes. And today, listeners, we are going to talk about something that we mentioned last season on the Trader Joe's episode, supply chain finance.

• 31:29David Rosenthal?

  Yes. Think about when a buyer gets an invoice from their supplier. They're expected to pay quickly, but often can't or don't want to tie up that cash. Wouldn't it be great if you could have a financing partner come in and fund that gap? So the supplier isn't waiting up to 30, 60, or even 90 days to get paid? Well, that's exactly what a bank can do to bridge that time gap. The buyer gets to hold on to their cash longer and suppliers get paid faster. True win-win.

• 31:55Ben Gilbert?

  Yep. And JP Morgan specifically has been doing this kind of work for decades at the world's largest companies. So supply chain finance, receivables financing, dynamic discounting. All of this is built on top of the trillions in daily payment processing moving through the system.

• 32:11David Rosenthal?

  But the tooling and the teams around it have historically been fragmented. You've got treasury teams trying to maximize liquidity. You've got procurement wanting everything in one place and IT stuck integrating all of it, not to mention the different portals, static reports, and all the manual setup.

• 32:27Ben Gilbert?

  So this is where JP Morgan Payments Working Capital Accelerator Platform comes in. You've got one login and one unified view across payables and receivables financing, near real time data, and it plugs into the ERPs that your team is already running.

• 32:42David Rosenthal?

  And when teams can see their full working capital position in real time, working capital stops being a cash management headache and starts becoming a lever that you can pull as a business. The best business is treated as part of their operating system, and this is the kind of platform that makes it easy.

• 32:56Ben Gilbert?

  So listeners, if you want to learn more about this new Working Capital Accelerator Platform, go to jpmorgan.com/acquired or contact your JP Morgan rep and tell them that Ben and David sent you. And if you want to join us for some live interviews, we will be on the main stage with JP Morgan at the We Are Developers World Congress in San Jose this September. Click the link in the show notes to learn more. All right. So David, the entrance of Fidelity into our story.

• 33:24David Rosenthal?

  Yes, and the Go-Go years, which really were this like violent reaction to all the pent-up conservatism and prudence and austerity that had dominated Wall Street and finance for America and the world through the Depression and through World War II. The journalist John Brooks would write about it later in The New Yorker that the Go-Go era was, quote, "a method of operating in the stock market, a method that was, to be sure, free, fast, and lively, and certainly in some cases, attended by the joy, merriment, and hubbub implied by the Go-Go term."

• 34:07David Rosenthal?

  The method was characterized by rapid in-and-out trading of huge blocks of stock with an eye to large profits taken very quickly. So in other words, the exact opposite of Wellington Management and Walter Morgan's approach.

• 34:23Ben Gilbert?

  Which is tough, because if you grew up as a leader in that previous era and you believed in that philosophy, but this is what all of your customers, the investors, want, what do you do?

• 34:34David Rosenthal?

  Yep. And Fidelity was the one that pioneered all of this. So Fidelity goes all the way back to the early Boston mutual fund scene, kind of like same era as the Massachusetts Fund. They were always, though, like a kind of small bit player until the legendary Edward Johnson, known as Mr. Johnson, who had previously been Fidelity's legal counsel, takes over the firm right before the end of World War II. At the time, Fidelity is managing just $3 million, and the previous owners, who I think are retiring, they literally give Fidelity, the firm, to Edward Johnson for free.

• 35:13Ben Gilbert?

  Wow, because they just don't think it has much value?

• 35:16David Rosenthal?

  No, I mean, it was part of that, like, we're here to serve the clients, that sort of ethos. But also, it was a $3 million fund, even with the high economics of how this fund industry works. You know, if the base that you're pulling a percentage fee off of is $3 million.

• 35:33Ben Gilbert?

  Right.

• 35:33David Rosenthal?

  You're just kind of limited in how much money you're going to make here.

• 35:36Ben Gilbert?

  Yep.

• 35:36David Rosenthal?

  But yeah, this is why, like, spoiler alert, obviously, Fidelity is one of the largest fund complexes in financial companies in the world today. It's still owned by the Johnson family. It's estimated that their net worth is 40 or 50 billion dollars, thanks to this.

• 35:52David Rosenthal?

  Incredible.

• 35:53Ben Gilbert?

  On a basis of zero, because they got it for free.

• 35:55David Rosenthal?

  Right, right. So when Ed Johnson takes over Fidelity, he starts trying a whole bunch of stuff to grow it. You know, he comes from the legal industry. He's not from a Wall Street background, per se. He's open to different styles. He's not sort of steeped in orthodoxy, shall we say. And in 1958, he creates a new fund within the group. I mean, this in and of itself was not unprecedented, but quite rare. Most of the time, there was just one fund within a group or a management company. So for a long time, Wellington Management Company just managed the Wellington Fund.

• 36:33Ben Gilbert?

  Yeah.

• 36:33David Rosenthal?

  And Fidelity had just had the Fidelity Fund. So Johnson creates this new fund called the Fidelity Capital Fund, which is going to be a growth fund. And he hires a young portfolio manager named Jerry Tsai to come in and run it. And Tsai basically ignores all the Wall Street conservative conventions and just starts shooting the lights out with this fund. He's taking big, concentrated positions in blue-chip companies, trading in and out of the stock, making quick profits. I mean, really, like we talked about earlier, he's kind of preying on the unsophisticated retail investors out there.

• 37:16David Rosenthal?

  Like, he could move the market by taking a big position, pop a stock, and then get out of it and book profits.

• 37:22Ben Gilbert?

  There was a lot less regulation at that time, and there was a lot less sophistication in your counterparties when you were trading.

• 37:28David Rosenthal?

  Yes, so pretty quickly, Tsai and Fidelity start to become like, like a player, like a, like a real player. All the CEOs of all the big companies want to get to know him because... Hey, he has the power to really move their stocks. He becomes kind of like a quasi-celebrity.

• 37:46Ben Gilbert?

  And move it or not, he kind of has the power to be a giant shareholder in your company now that he's attracting all this capital because people want to get in on his funds.

• 37:54David Rosenthal?

  Exactly. So the Fidelity Capital Fund, within just a short number of years, goes from basically zero, like startup initiative within Fidelity itself, already a small firm, to a $340 million fund here by 1965, when Bogle is taking over Wellington from Mr. Morgan. So this is actually the backdrop to why Morgan decided to hand the firm to Jack here in 1965, even though Jack is still so young. Morgan had a crisis of confidence. He's not sure that he's going to be able to operate and be successful in this new go-go era. This is uncharted territory to him.

• 38:37David Rosenthal?

  So he actually gives a quote to Institutional Investor Magazine when the handover is happening to Jack. He says, quote, "I have been too conservative." And when he hands the firm to Jack, his direction to Bogle is, "I want you to do whatever it takes to fix this firm." Like, "We need to do something different."

• 39:01Ben Gilbert?

  So he's got the mandate. He's got the clear path to do as he sees fit.

• 39:05David Rosenthal?

  Yep.

• 39:05Ben Gilbert?

  So this isn't just succession. This is, hey, you should completely change our strategy to compete in this new era.

• 39:11David Rosenthal?

  Yes, yes. So Wellington and its kind of whole class of funds, the balanced funds that we talked about, you know, it's stocks and bonds together, complete investment program in one security. Before the go-go era, that balanced style was 40% of the entire fund market in 1955. That had declined by 1965, all the way down to 17%, and would just keep dropping.

• 39:40David Rosenthal?

  By 1975, 10 years after that, it was down to less than 1% of the entire market. They were going the way of the dodo, basically.

• 39:47Ben Gilbert?

  So investors are looking to transition away from this blended stocks and bonds to funds that are only stocks and stocks that are trading often and trying to hit the highest number possible this year in their returns and, you know, taking some risk to do so.

• 40:03David Rosenthal?

  Well, yeah, and specifically, I think they don't even care that much about the underlying stocks. They want trades that book quick profits. They want what Fidelity and Jerry Tsai are doing. Like, I don't care if you trade in and out of the stocks. I don't care if you hold GE for a day or a week or a year. If you buy it at five and you sell it at 10, like, hell, yeah, let's go.

• 40:23Ben Gilbert?

  It's funny, I associate this with the 80s. I don't think I realized that it was also happening in the kind of 1965 to 1971 era.

• 40:32David Rosenthal?

  Yeah, the 80s were an echo of this that happens here in the 60s.

• 40:35Ben Gilbert?

  Okay.

• 40:36David Rosenthal?

  Yep. So all this is happening right at the same time here in 1965, as Jack is taking the reins at Wellington. Jerry Tsai, the celebrity fund manager here at Fidelity, he starts to think, all right, you know, Mr. Johnson here, you're getting older. I think I should take over the firm.

• 40:59Ben Gilbert?

  Of course he does.

• 41:00David Rosenthal?

  Of course he does, right? Like, he's got the Star Fund, all the clients, he's the man about town, et cetera.

• 41:06Ben Gilbert?

  Tale as old as time.

• 41:07David Rosenthal?

  Yep. Johnson, of course, has other opinions. No, this is my firm. This is my family business, and I'm planning to give it to my son, Ned Johnson, Edward Johnson III. So Tsai says, okay, fine. Buy me out of the equity that I've accumulated here in Fidelity and the management company through my performance, and I'll go start my own fund. He does. He leaves. He starts a fund called the Manhattan Fund. In a absolutely wild, you cannot make this stuff up, he would eventually take over the American Can Company, you know, that had been like co-founded by Jack's grandfather.

• 41:47Ben Gilbert?

  Whoa.

• 41:48David Rosenthal?

  Yes. Tsai would become the CEO of that. He would transform that into Primerica and then sell it to Sandy Weill and Jamie Dimon, and that would be part of the building block of Citigroup.

• 42:01Ben Gilbert?

  What?

• 42:02David Rosenthal?

  Insane. Completely insane.

• 42:06Ben Gilbert?

  I had no idea. It's funny, when you were giving the history of the can company earlier, I was like, is it really relevant for listeners? The vehicle through which Bogle's grandfather built the family business?

• 42:21David Rosenthal?

  Yeah.

• 42:22Ben Gilbert?

  And it turns out-

• 42:23David Rosenthal?

  That becomes Citigroup.

• 42:24Ben Gilbert?

  That's wild.

• 42:26David Rosenthal?

  Through Fidelity and Jamie Dimon and all of this stuff. You can't make this up.

• 42:31Ben Gilbert?

  Wow.

• 42:32David Rosenthal?

  So, this is the stew that's happening as Jack is taking over. And pretty quickly, he decides that the best course of action for him as the new leader of Wellington is to take the, well, if you can't beat them, join them approach, or more specifically, have them join you. So he goes out and he starts looking for GoGo-style fund managers to merge with and absorb into Wellington and transform Wellington into what Fidelity has done.

• 43:03Ben Gilbert?

  And I think first he was trying to hire people like this, but he couldn't convince anyone to just join as an employee. He sort of realized, oh, I'm gonna have to buy one of their firms.

• 43:11David Rosenthal?

  Yeah, I mean, hey, if Jerry Sei just left because he didn't get a big equity piece in Fidelity and take over the firm, like anybody else who thinks they're as good as him, you know, they're gonna want an equity piece in the management company.

• 43:24Ben Gilbert?

  Yep.

• 43:24David Rosenthal?

  So, he casts about, and eventually, Jack finds a small, new firm in Boston founded by four young partners: Thorndike, Doran, Payne, and Lewis. And the lead partner there, Nick Thorndike, had just come out of Fidelity, where he had worked with Jerry Sei and then Johnson. And so, they've raised a new fund called iVest, investing in the GoGo-style, they're young hotshots. They have $17 million under management in their nascent GoGo fund. Wellington, at this point, has $2 billion.

• 44:05David Rosenthal?

  Under management.

• 44:06Ben Gilbert?

  Which is huge. That's giant market share.

• 44:08David Rosenthal?

  Yes.

• 44:08Ben Gilbert?

  Even though they're

• 44:10David Rosenthal?

  Declining rapidly.

• 44:11Ben Gilbert?

  Investing in the old style of investments.

• 44:13David Rosenthal?

  Yes, but back to the business model of the management companies where you're getting paid fees based on a percentage of assets under management. Like, the revenue and fee streams flowing into Wellington, even though they're declining-

• 44:23Ben Gilbert?

  Super high.

• 44:23David Rosenthal?

  Way higher than the startup Ivest fund out of Boston. Nonetheless, Wellington and Jack feel like they're in such dire straits and need this merger, need to bring this go-go blood into the firm so much that he ends up offering 40% of the equity in the management company to the four partners coming in from Ivest.

• 44:49Ben Gilbert?

  Oof, that's almost a merger of equals.

• 44:51David Rosenthal?

  Yeah, $2 billion for Wellington, $17 million for Ivest, 60-40 split on the equity. There's a quote in the New York Times in a lead story about this merger. "Some observers feel that Wellington paid too high a price for management personnel. Many persons are said to credit the Boston group with a major coup. Mr. Bogle disagrees. With generous offers, he had been unable to hire the men he wanted," to your point, Ben, "and he did not want to wait for promising men to develop their skills." This is a big deal. I mean, Wellington is still, even though its style is on the outs,

• 45:32David Rosenthal?

  one of the top 10 mutual funds in the entire industry. Institutional Investor Magazine runs a cover story on the merger titled "The Whiz Kids Take Over at Wellington," and they have an illustration on the cover. You can find this on the internet. We'll include it in the email, with Jack as a four-armed quarterback, handing off footballs to each of the four Ivest partners as, you know, the running backs to take them across the line, score touchdowns here. Whew, what could go wrong?

• 46:02Ben Gilbert?

  What could go wrong?

• 46:03David Rosenthal?

  Yeah.

• 46:04Ben Gilbert?

  Well.

• 46:05David Rosenthal?

  As you can predict, after a couple more GoGo years, the bubble bursts. In the 1970s, the oil crises hit, stagflation hits, the stock market declines 50%. It is not quite Great Depression levels, but you and I, Ben, have also never lived through anything like the 1970s in the US. It was bad. It was a lost decade.

• 46:29Ben Gilbert?

  Even 2008 was not this severe. Certainly, the short-lived COVID crash was not this severe. Software going out of favor in 2022 was not this severe. The dot com bubble burst was not this severe. This is something that very few listeners will sort of understand the magnitude of and feel intrinsically how bad this was.

• 46:47David Rosenthal?

  Yeah, I mean, interest rates went to 21% by the end of this. I mean, the world basically fell apart a couple of years ago when interest rates went to, what, like, five? You know, can you imagine?

• 47:00Ben Gilbert?

  So what was the good years of the GoGo time? And then when did it fall apart?

• 47:04David Rosenthal?

  Through the 60s and then probably like 1970, 1971, it starts falling apart. And then, once the oil crises start hitting in 72, 73, 74, GoGo just completely falls apart. So the iVest fund, they ported over the iVest fund itself into Wellington. It had continued to perform during the GoGo years. It gets a drawdown of 65% in one year, and they ultimately shutter the fund, like, they close it down.

• 47:33Ben Gilbert?

  They closed down the iVest fund entirely?

• 47:34David Rosenthal?

  They closed down the iVest fund, yeah.

• 47:36Ben Gilbert?

  Oh, wow. But hadn't they already shifted the Wellington fund's style to look a lot more like iVest?

• 47:43David Rosenthal?

  Oh, yes.

• 47:44Ben Gilbert?

  Wellington was suffering too, right? The fund?

• 47:46David Rosenthal?

  Wellington was suffering too. I mean, really, like, Wellington is just a battered ship taking on water on all sides at this point because it had been out of favor during the GoGo years because it was too conservative and too balanced.

• 47:59Ben Gilbert?

  It was underperforming the market.

• 48:00David Rosenthal?

  Underperforming the market. Then it transformed, basically, into a GoGo fund.

• 48:07Ben Gilbert?

  Took on a lot more risk.

• 48:08David Rosenthal?

  Lot more risk. Then that falls off a cliff. By 1973, the assets of the Wellington fund have fallen all the way from $2 billion at the time of the merger down to $480 million. So over three quarters of the assets in the fund, and thus, three quarters of the revenue to the management company. Poof, up in smoke.

• 48:30Ben Gilbert?

  Now, all of that wasn't because of the assets decreasing in value. A lot of that was redemptions where investors are taking their money and going elsewhere. But it doesn't matter to the management company. For them, AUM is AUM.

• 48:41David Rosenthal?

  And this is, somebody made this point to me in research. Management companies of investment firms have phenomenal operating leverage, as we talked about earlier. As you are growing your funds under management, you don't have to scale your headcount or your operations or your costs in the same way. And so you can get this amazing operating leverage and profits.

• 49:02Ben Gilbert?

  Much like a software business.

• 49:04David Rosenthal?

  Much like a software business. Unfortunately, that works in both directions. So if your assets under management ever start to shrink, that goes away very quickly.

• 49:15Ben Gilbert?

  You still have almost all the exact same operational responsibility that you did when you had lots of assets, when you have a smaller number of assets.

• 49:22David Rosenthal?

  Yep. And thanks to the merger, there are now four new partners around the table with mouths to feed who own 40% of the management company. So then, in the midst of all this, to complicate things even further, Jack starts to develop a crisis of conscience. As all these losses are piling up at Wellington and clients are withdrawing and they're shutting down the iVest fund, he starts wondering, first to himself and then aloud to his partners, guys, what are we doing here? Like, we're still taking fees from our fund clients.

• 50:06David Rosenthal?

  Yes, our assets under management are shrinking, so our fee stream is shrinking. But for the clients who are sticking with us, we're not lowering our costs. We're still getting paid pretty well. And we're just incinerating their capital. Something feels wrong here.

• 50:21Ben Gilbert?

  I've heard this referred to as his Jerry Maguire moment in the book, The Bogle Effect, where that famous scene in Jerry Maguire, where he loses confidence in the entire industry of being a sports agent and writes a letter and says, guys, we're going to do this right. We should change everything and blow up our whole business. And as usual, you know how that is received.

• 50:43David Rosenthal?

  Well, so Jack's Jerry Maguire moment here is he gives a speech to the whole firm. Where he throws out this idea that, hey, maybe we should actually mutualize the firm's funds, dissolve the management company or have the fund itself acquire the management company and eliminate all of the excess profits that we are making and just solely serve our fund holders, operate at cost and at least reduce or get as close to eliminate as possible the fees that they are paying for this frankly, not very good service that we are providing them.

• 51:21Ben Gilbert?

  A mutually owned group of mutual funds or mutual mutual, as Jack loved to say.

• 51:28David Rosenthal?

  Yes, indeed. Now, buy it out. Why would they have to do that if Jack and potentially his partners out of the goodness of their hearts were were going to give it to the fund holders? Well, before Mr. Morgan retired, he had taken the management company public, like floated it on the stock exchange.

• 51:46Ben Gilbert?

  That's right.

• 51:46David Rosenthal?

  So there were public shareholders there in the management company, in Wellington Management Company, along with Jack and along with the four Ivest partners.

• 51:55Ben Gilbert?

  So you not only have to get, you know, your camp, the Philadelphia camp to agree, but you need the Boston guys to get on board too, that are a big voting bloc at 40% and all these public shareholders. And why would anyone do this?

• 52:08David Rosenthal?

  Right.

• 52:08Ben Gilbert?

  Because it's not rational or economic. It's a charity. Let's take this business that generates a bunch of cash and has enterprise value. Let's stop generating the cash and let's take its enterprise value and effectively call it zero now and

• 52:23David Rosenthal?

  Yes.

• 52:23Ben Gilbert?

  give it to the funds itself.

• 52:24David Rosenthal?

  Commit suicide with the company. Yes, effectively. Yeah. And just to really highlight this again, it's kind of easy in retrospect to look at this and be like, oh, Jack, he was like so morally upstanding and he stood up against Wall Street and like all of the, you know, crooks and fees out there. That's not the case. This was how the industry operated. Nobody was asking for this. No other firm changed how they operated. No other firm reduced their fees or mutualized. No clients got mad about it. The government was fine with it.

• 52:58Ben Gilbert?

  There were not protest groups outside of headquarters.

• 53:00David Rosenthal?

  Yeah, there's no Occupy Wall Street in the 1970s.

• 53:03Ben Gilbert?

  Purely him saying, "Nobody's asking, but I think we should do this."

• 53:07David Rosenthal?

  I think this is the right thing to do. Like, it is really lunatic fringe. To the extent there is a moral conflict, it exists solely in Jack's kind of head and in his heart.

• 53:18Ben Gilbert?

  Yep.

• 53:19David Rosenthal?

  So Ben, as you said, as you could imagine, this goes over like a lead balloon within the partnership, which is already quite stressed with all of the problems going on. So after Jack proposes this, on January 23rd, 1974, at the Wellington Management Company board meeting, the four Ives Partners band together, rally enough votes from the public shareholders, and they fire Jack as CEO of Wellington Management Company.

• 53:50Ben Gilbert?

  And this is a few years after his original proposal for mutualization, for making the funds self-owning. There is this multi-year, drawn-out sort of struggle between them where they just don't see eye to eye on anything. They have completely different philosophies, and it gets so contentious, you know, they ask Jack to quit. He says, "I refuse." You know, he even writes a many, many, many-page memo, speech, gives it to the whole board of directors, espousing how much he refuses, and then they formally actually do fire him.

• 54:20David Rosenthal?

  Yeah, yeah. This is an extreme event.

• 54:23Ben Gilbert?

  Yes.

• 54:23David Rosenthal?

  An extreme event.

• 54:25Ben Gilbert?

  And from Jack's perspective, he partnered with these guys. They came in. It was a fox in the hen house, and they forced him out of his own company.

• 54:31David Rosenthal?

  Yep.

• 54:31Ben Gilbert?

  That is sort of how he is viewing it.

• 54:33David Rosenthal?

  Yep. And from their perspective, this guy lost his marbles.

• 54:36Ben Gilbert?

  We had public shareholders to look after.

• 54:38David Rosenthal?

  So January 23rd, 1974, Jack is fired.

• 54:43David Rosenthal?

  As CEO of Wellington Management Company.

• 54:47Ben Gilbert?

  But.

• 54:48David Rosenthal?

  Now, here's the thing.

• 54:51David Rosenthal?

  Wellington Management Company and the actual Wellington Fund, and at this point in time, funds, they had several funds, are technically separate legal entities. So Jack was CEO of Wellington Management Company. He was also the chairman of each of the individual funds, which collectively together had their own separate board of directors for the funds. There was one board of directors that represented all the funds and Jack is chairman of that board of directors.

• 55:18Ben Gilbert?

  Now, up until this point in time, in the history of American financial organizations, that's a footnote.

• 55:26David Rosenthal?

  Right.

• 55:26Ben Gilbert?

  That doesn't matter.

• 55:27David Rosenthal?

  That's like a legal technicality.

• 55:28Ben Gilbert?

  It's like, yeah, yeah, the funds have their own directors, but like really the management company, the funds, it's all kind of one thing run by the same group of people.

• 55:35David Rosenthal?

  Yep.

• 55:35Ben Gilbert?

  They were about to find out just how powerful that technicality was.

• 55:41David Rosenthal?

  Or Jack was about to test it, shall we say.

• 55:43Ben Gilbert?

  Yes.

• 55:44David Rosenthal?

  So he hatches a plan. He's like, all right, well, you guys are going to kick me out of the management company and think I'm just going to go quietly into the night? You don't know Jack Bogle.

• 55:54Ben Gilbert?

  And for anyone who is not in finance, PE, venture, anywhere in the financial ecosystem, the funds traditionally have the right to select what investment manager they want. And the investors in the fund who elect a board of directors of the fund rely on that board of the fund or the management of the fund to pick the investor. So the funds actually do have the power to pick whether or not they want to stay with Wellington Management or go find a new company that could advise them on how to invest this pool of capital.

• 56:34David Rosenthal?

  Or do something different, et cetera. Nobody had ever tested this idea before, though.

• 56:39Ben Gilbert?

  Yes, yes.

• 56:41David Rosenthal?

  So the next day, after Jack is fired as CEO of the management company, he calls a special meeting of the board of directors of the funds, which is his prerogative as chairman. And he proposes that they, as the board of the funds, vote to, one, do just what you said, Ben, sever the management company relationship with Wellington Management Company.

• 57:04David Rosenthal?

  And two, do Jack's, you know, fever dream idea, mutualize all the management and operations of the funds, hire their own staff and run it all directly within the fund with no separate external management company or fees.

• 57:21Ben Gilbert?

  The phrase that comes to mind here, although it is used completely differently in this context than its original context, is your margin is my opportunity, Jeff Bezos. And in this case, it's not the Amazonian comment, which is, hey, you're charging high margins. I'm going to charge a lower margin. So I'm going to get your customers. It's, hey, I'm going to slash margins as close to zero as possible. I'm going to mutualize the ownership.

• 57:45David Rosenthal?

  Quite actually to zero, not as close to zero as possible. There are, there's not going to, no longer going to be any profits. There will still be costs. We will operate at cost, but we will forego all profits.

• 57:55Ben Gilbert?

  Right. It's effectively like a poison pill. Like they're not going to get rich. I'm not going to get rich. There's these high margins and I'm going to use the fact that you're making high margins as my opportunity to come in and say, nobody's going to make any money. We're going to shift it all to this new organization that I'm going to create. And nobody's making anything.

• 58:13David Rosenthal?

  Yep. So how do the fund board of directors react to this? Perhaps not quite as negatively as the management company partners and board of directors, but they're still pretty shocked. They're like, wow. Okay, Jack, you know, we've heard you talk about this before. Obviously we're in an acute situation here.

• 58:38Ben Gilbert?

  And you're kind of conflicted, buddy.

• 58:40David Rosenthal?

  Yeah, yeah.

• 58:41Ben Gilbert?

  Are you being vindictive? Maybe is there anything motivating? You really pressing us to take all the profits and slash it to zero and go with your like brand new company that you're proposing here?

• 58:53David Rosenthal?

  Yep. But here's the thing.

• 58:56David Rosenthal?

  Jack does have a very good point, especially to the directors of the fund, whose fiduciary duty is to do what's in the best interests of the fund holders. What he's proposing is, pretty obviously, in the best interests of the fund holders.

• 59:10Ben Gilbert?

  Right. He's making the pitch to sort of a non-conflicted group. The board of the funds theoretically is only looking after the investors in the funds and not the shareholders of the management company.

• 59:23David Rosenthal?

  Indeed. So the fund board says like, okay, we need a pause. We need a recess. We need a little more time for the dust to settle and figure out what to do here. Let's take a month and, Jack, we will direct you, since you want to do this, to go prepare a study, a feasibility study of like, what are the available options to us as the fund and the board of the funds?

• 59:48Ben Gilbert?

  Because you're kind of just proposing the nuclear one here. Can we get the whole gradient?

• 59:51David Rosenthal?

  Give us the full gradient.

• 59:52Ben Gilbert?

  Because it is kind of nice relying on Wellington. I mean, they've built out a lot of infrastructure here on the management company for us to do what we do. I'd be a little bit nuts to just say, sorry, we're starting something new from whole cloth.

• 1:00:05David Rosenthal?

  Yeah, from scratch. So Jack goes away, prepares a 250-page report.

• 1:00:10Ben Gilbert?

  Of course.

• 1:00:11David Rosenthal?

  It's like he's back in his carol at Firestone, you know, library, writing his senior thesis again.

• 1:00:17Ben Gilbert?

  And it's full of data. I mean, he has really, really done the research, done the math. He is making an extremely well-formed pitch here.

• 1:00:26David Rosenthal?

  Yep. So the thesis statement of this report that he presents to the board the next month in February reads, quote, "The present structure has been the accepted norm for the mutual fund industry for 50 years. The issue we face is whether a structure so traditional, so long-accepted, so satisfactory for an infant industry as it grew during a time of less stringent ethical and legal standards, is really the optimum structure for these times and for the future and for the Wellington group of investment companies." Or rather, should the funds seek greater control over their own destiny?

• 1:01:05David Rosenthal?

  And obviously, Jack's answer to the question is yes.

• 1:01:07Ben Gilbert?

  I mean, fire and brimstone. He's got a preacher in him.

• 1:01:10David Rosenthal?

  He's motivated. He is motivated here. And he actually has a telling quote in his memoir that I think speaks to his mindset at the time. He says, yes, mutualization of the fund and funds activities was totally my idea. And I realized that a mutual company would never provide me with the personal fortune that so many denizens of Wall Street would earn. But it offered, I believe, my last best chance to resume my career. Obviously, it's both here. Jack is idealistic, and this is his chance to save his career. This is his opportunity of last resort.

• 1:01:51Ben Gilbert?

  Yes.

• 1:01:52David Rosenthal?

  Ultimately, the fund board comes back and does vote with Jack, barely, infinitesimally barely.

• 1:02:04Ben Gilbert?

  They carve out a small job for him to do.

• 1:02:06David Rosenthal?

  Yes.

• 1:02:07Ben Gilbert?

  But not the whole thing that he had asked for.

• 1:02:10David Rosenthal?

  Yes. They say, okay, you can remain chairman of the funds, and we will endorse some very, very small degree of separation from Wellington Management Company, but not everything, and not to start. We will empower you to go form a new subsidiary company of the funds, collectively owned by the funds and thus the clients in the funds. And we will authorize that company to take over fund administration only. So not investment management, not marketing and distribution. Those will remain with Wellington Management Company.

• 1:02:52David Rosenthal?

  But we will run a little experiment, all the back office, tax, accounting, legal, fundholder registers, et cetera.

• 1:03:00Ben Gilbert?

  Which is Jack's least favorite thing to do.

• 1:03:03David Rosenthal?

  Yeah.

• 1:03:03Ben Gilbert?

  I mean, which is everyone's least favorite thing to do. The fun stuff is picking what to invest in and seeing if you can then go out and, you know, sell clients and bring in new money. Traditionally, it's fun to be the stock picker, or it's fun to be the salesperson. It's not fun to be the person making sure the accounting checks out.

• 1:03:22David Rosenthal?

  Yep. And indeed, most management companies outsource this. They don't do it themselves.

• 1:03:26Ben Gilbert?

  Yep. And technically, he was explicitly precluded from offering investment advisory services.

• 1:03:34David Rosenthal?

  To the funds, yes.

• 1:03:35Ben Gilbert?

  To the funds.

• 1:03:36David Rosenthal?

  Yes.

• 1:03:36Ben Gilbert?

  Store that away, listeners. Keep that in mind. And Jack logs the win. He's like, cool, I got something.

• 1:03:41David Rosenthal?

  Yep. Yeah. So, I mean, hey, look, it was either his career is over and he's out on the street proverbially.

• 1:03:48Ben Gilbert?

  Although wealthy. I mean, he's like medium wealthy by this point. He's had a 20-year career during a great era running a finance company when the finance company had pretty fat profits. So he's made, I don't know, I'm gonna guess $5 million and he wasn't a big spender, so doing pretty well.

• 1:04:05David Rosenthal?

  Yeah. Depends how much salary and draw he was taking from the management company. But of course, he's gonna take this opportunity, whatever I can get. So he's like, great, let's do it. He writes in his memoirs, "I knew a rough road lay ahead for my goal ultimately was to build a broad-based firm." In other words, take over everything. Fully cut Wellington out. "And I took on my new leadership role in the same way I had left my previous leadership role, fired with enthusiasm." Boy. Fired with great fire and brimstone would be a better way to put it.

• 1:04:45Ben Gilbert?

  Yes.

• 1:04:46David Rosenthal?

  So, once the fund board votes for this, other people in the industry hear about it, of course. And Wellington, even though they're much smaller now, is still a widely known, well-respected, big firm in the industry. The reaction is severe. So Forbes magazine runs a piece about all of this infighting happening at Wellington with the headline borrowing from the famous curse from Romeo and Juliet of "a plague on both houses," they declare. These guys, they're ruining it for everybody. Jack tells an anecdote at the beginning of the book's Stay the Course, which is his memoirs, that around this time, he travels out to Los Angeles. When, while he's there, he gets an urgent message

• 1:05:31David Rosenthal?

  from the head of Capital Group out there, a big, active fund manager in Los Angeles. John Lovelace Jr., the head of Capital Group, says he needs to meet with Jack privately. Jack's like, well, my schedule's pretty booked. I got a lot going on here right now. I'm flying out of LAX tomorrow. The only time I could do would be like a 6 a.m. breakfast at LAX tomorrow before my flight home to Philadelphia. Lovelace is like, okay, fine, I'm there. Jack shows up, Lovelace is already sitting down. He's like, stone cold. And he says, I hear you're planning to mutualize the Wellington Fund. And Jack says, yes, John, that's right. In fact, I got the votes. We're, we're starting the process.

• 1:06:09Ben Gilbert?

  Yeah, ish.

• 1:06:10David Rosenthal?

  Ish. Yeah, ish. And John turns to him and says, if you do that, you will destroy this entire industry.

• 1:06:20David Rosenthal?

  Now, of course, what's fascinating is that, you know, Capital Group and active management today has kind of never been better. Capital Group manages 3 trillion in assets.

• 1:06:29Ben Gilbert?

  You can see why they had the fear, which is if you provide this existence proof that you can run this business at cost and you don't need to pay huge sums of money to the people managing this, then our customers will demand the same from us, which is sort of right, because you can buy an S and P 500 index fund from basically anyone today at basically no cost, but also sort of wrong, because Capital Group, BlackRock, Fidelity, these are all giant profitable companies. And so I think that the interesting thing to sort of tease out across the rest of this episode is the competitors were probably right to be terrified of this sort of communist act where they took a crown jewel of capitalism and communized it. But at the same time-

• 1:07:14David Rosenthal?

  Kind of like the NFL. It ended up being great for everybody.

• 1:07:17Ben Gilbert?

  Right, right.

• 1:07:18David Rosenthal?

  So, yes. So, Jack's starting down the path. The first thing that this new subsidiary company needs is a name. So right as this is happening, Jack gets a visit from an antiques dealer. Again, you can't make this stuff up, who offers him some prints of British naval ships from the Duke of Wellington era. The Duke of Wellington was the British Prime Minister and military leader for whom Walter Morgan had named the Wellington Firm. Jack is looking through the prints and one of them is of a ship, the HMS Vanguard, which was the flagship in the naval Battle of the Nile, where the British forces defeated Napoleon and ensured British independence

• 1:08:02David Rosenthal?

  and the state of Europe for centuries to come. And so on the spot, he decides Vanguard is the name.

• 1:08:09David Rosenthal?

  Which is hilarious because Vanguard is a great name. It is steadfast, trustworthy, everything we think of it today.

• 1:08:18Ben Gilbert?

  Short, memorable, unique.

• 1:08:19David Rosenthal?

  Exactly, memorable. It's also, you know, it's the Vanguard, it's the leader, it's a pioneer, it's leading a revolution. But knowing all the history now, like, obviously, Jack chose the name because it represented total victory. And like, complete annihilation of the other side.

• 1:08:36Ben Gilbert?

  Yes.

• 1:08:37David Rosenthal?

  So funny. Not at all how people think of the brand today. So in September of 1974, the Vanguard Group files for incorporation, commencing operations and taking over the back office of the Wellington Fund and the other funds that Wellington managed.

• 1:08:58Ben Gilbert?

  Exciting.

• 1:09:00David Rosenthal?

  Nobody cared.

• 1:09:03David Rosenthal?

  All of the great fear that, you know, John Lovelace at Capital Group and Forbes and everybody else in the industry had about this is going to destroy everything. This is going to burn the industry to the ground.

• 1:09:14Ben Gilbert?

  Well, because it didn't actually get mutualized.

• 1:09:16David Rosenthal?

  Yeah, nobody cares.

• 1:09:17Ben Gilbert?

  If any venture capitalists are out there listening, or private equity guys, or if you're in the investment management business, okay, you switch back offices. This happens all the time. This happens every five years. This has no bearing on your peers in the industry. What would have a lot of bearing is if you said, oh, all of my fees and all of my sort of performance compensation, that we're just going to take down to at cost. That would be significant, but that is not what this is.

• 1:09:42David Rosenthal?

  No, it was not. And it turned out that Jack would need to lead another second and totally separate revolution as well, before anyone would pay attention to what he was doing. A revolution not in the legal structure of funds, but in the very nature of the investment product that they offered.

• 1:10:05Ben Gilbert?

  But David, I thought he was barred from doing that.

• 1:10:08David Rosenthal?

  Well, if you're not offering any investment advice at all.

• 1:10:14Ben Gilbert?

  Perhaps you still could be in the business of deciding what to invest in if you're not actually doing any deciding.

• 1:10:21David Rosenthal?

  Yes, and that second revolution would be the index fund.

• 1:10:28Ben Gilbert?

  Yep.

• 1:10:28David Rosenthal?

  But before we tell that story, now is a great time to thank our longtime friend of the show, ServiceNow.

• 1:10:34Ben Gilbert?

  Yes, it is. Listeners, if you are running a large enterprise, then AI agents are likely spread across every single team and deploying them is actually not the hard part anymore.

• 1:10:47David Rosenthal?

  Yep. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. The risks are real.

• 1:11:00Ben Gilbert?

  Yep. So if you think about the companies like the ones we cover, at that scale, you can't have a blind spot. Your systems, your employees, your permissions, they all need to be accounted for to maintain customer trust. That is the problem that many companies have with AI right now. A lot of intelligence, but not enough visibility.

• 1:11:19David Rosenthal?

  Yep. And that is what ServiceNow does. Building on top of their end-to-end enterprise workflows, every device on your network, every permission across every system, your AI agents, all visible and secure in one place.

• 1:11:32Ben Gilbert?

  They've been at this for over 20 years. Today, they run the workflows behind more than 85% of the Fortune 500, over $95 billion workflows a year. A big part of the world already works with ServiceNow.

• 1:11:44David Rosenthal?

  And now, as the AI control tower, they're giving companies a single place to manage all of it, turning AI chaos into AI control.

• 1:11:52Ben Gilbert?

  So listeners, if you are thinking about how to scale AI securely, go check out servicenow.com/acquired and just tell them that Ben and David sent you. So David, the creation of the first commercially available index fund for retail investor consumers.

• 1:12:12David Rosenthal?

  Yes.

• 1:12:14Ben Gilbert?

  People really care, right? They're lining up around the block for this thing. It's the most hotly anticipated financial product of all time, except that it's not at all.

• 1:12:22David Rosenthal?

  It's so funny. This would change the world and not just like a little bit, like a massive, massive impact.

• 1:12:30Ben Gilbert?

  Most of all of your net worth is in these funds.

• 1:12:34David Rosenthal?

  Yeah. People today are concerned that index and passive funds are too much of the market. What will happen to corporate governance when 70% of the equity ownership of America's companies are all in passive index funds? Like this existential fear happening right now, that could not be farther away from the reaction in the industry to the launch of these things 50 years ago.

• 1:13:03Ben Gilbert?

  Okay. So David, take us to 1974 and the journal article that inspired it all.

• 1:13:09David Rosenthal?

  Yes, the Journal of Portfolio Management, where Nobel Prize winning American economist Paul Samuelson had written that fall in 1974, that he had been studying market returns and active fund manager returns in this new mutual fund industry. And he had found no actual evidence that any fund managers could systematically outperform the market. And in the conclusion of the paper, he argues that, well, there's an obvious opportunity

• 1:13:49David Rosenthal?

  here. Somebody should come along and offer a fund that, quote, apes the whole market, requires no load and keeps commissions, turnover and management fees to the feasible minimum, AKA an index fund.

• 1:14:06Ben Gilbert?

  And interestingly, I actually didn't realize he proposed the sort of commercial availability of it like that. The part of it that I read was some large foundation should set up an in-house portfolio that tracks the S and P 500 index, if only for the purposes of setting up a naive model against which their in-house gunslingers can measure their prowess.

• 1:14:26David Rosenthal?

  Yeah, no, he was thinking about distribution to retail, like in that paper by talking about no load. But you are touching on something.

• 1:14:36David Rosenthal?

  This idea of an index fund that would passively track the stock market was not totally new. A couple of people in institutional circles had had the same or similar realization in the years leading up to this, that this could be an interesting idea. And in fact, the whole idea of having an index or indices in the first place really is the precursor to this idea. Like, people wanted some way to measure the entire market. I mean, that's what the Standard and Poor's 500 is. That's what the Dow Jones Industrial Average is. These things go all the way back to the 1800s. Like, newspapers wanted a way to report on the movement of the market.

• 1:15:21Ben Gilbert?

  The delicious thing is that it took like 100 years from the founding of those to think, huh, maybe this isn't just a benchmark we should measure ourselves against, but maybe this is actually a great investment product.

• 1:15:33David Rosenthal?

  Yes, this could be an asset class in and of itself.

• 1:15:36Ben Gilbert?

  And it makes sense because why would anyone want to buy the average? I mean, why would you want to own the 50th percentile of the market? Isn't the whole point to work with a great investment manager who can beat the market? Why would you just want beta? You want alpha on top of beta? It's not an immediately saleable proposition to say, hey, don't you want to be average?

• 1:16:01David Rosenthal?

  Right, right. It's uniquely counter to this sort of whole American way of being. An aspiration of America.

• 1:16:10Ben Gilbert?

  American exceptionalism.

• 1:16:11David Rosenthal?

  It's funny, if this had all been in Europe or somewhere else, it might have emerged sooner.

• 1:16:15Ben Gilbert?

  That's funny.

• 1:16:17David Rosenthal?

  Anyway, so yeah, a couple of people had tried to make this idea work on the institutional side before. Most prominently, the Pension Management Division of Wells Fargo. So like, the division of Wells Fargo that would manage and administer pensions for large corporations. They had actually created an index fund for the pension fund of the Samsonite Luggage Corporation a few years earlier.

• 1:16:47Ben Gilbert?

  Amazing.

• 1:16:48David Rosenthal?

  Incredible. But it had failed. They couldn't make it work because actually... This was a deceptively hard problem. In order to do this, to create a fund that continuously tracked something like the S and P 500 index, you needed a lot of software. You had to have automation. Humans could not do this.

• 1:17:10Ben Gilbert?

  Right. The point of the S and P 500 is to create a subset of the total market that has essentially the same returns, but with a smaller set of companies. So you don't need the thousands of companies. You just need this 500. But even setting up the systems to track 500 companies' movements day to day, sophisticated.

• 1:17:30David Rosenthal?

  Yeah.

• 1:17:31Ben Gilbert?

  The other thing that makes it challenging is it's kind of expensive to buy, especially in whole share denominated amounts, a representative correctly weighted set of the entire S and P 500. Today, the minimum quantity of dollars you would need to do it on your own without buying into a fund is about $3.5 million to the sort of minimum efficient or minimum representative S and P 500.

• 1:17:57David Rosenthal?

  So a couple of years after this, along come Jack and Vanguard in this unique moment where they, they need something to make their model work and computing and software is like just now starting to be capable of handling this.

• 1:18:14Ben Gilbert?

  And Jack is reading the docs very carefully. He's having tight communication with his board of directors and he realizes he's got a little bit of daylight.

• 1:18:25David Rosenthal?

  He's got a loophole.

• 1:18:26Ben Gilbert?

  Yep. Where he can say, I am not actively taking Vanguard and having it offer investment advice in any way here, but what we do want to do is we want to create this new fund that will require no investment advisory services, that will purely be this index of the S and P 500 and we can run it under Vanguard and it's within our mandate.

• 1:18:50David Rosenthal?

  Yeah, we don't need to involve Wellington.

• 1:18:52Ben Gilbert?

  His board agrees.

• 1:18:53David Rosenthal?

  Yeah.

• 1:18:54Ben Gilbert?

  This is sort of the asset test. He goes, and this is, what do you think? Is this what you're going to be permission for? And they come back and say, yes.

• 1:18:59David Rosenthal?

  Yes. As Jack puts it in his memoir, you know, kind of like, you know, rendering a guilty verdict in a legal trial, he and early Vanguard there had both the opportunity to commit the crime or in this case, you know, create the first index fund, but also the motivation to do so, because this was the way around this prohibition against active management.

• 1:19:22Ben Gilbert?

  And the thing that Jack was starting to realize, which is the culmination of his senior thesis and the Paul Samuelson article, is that this could actually be very successful. He runs the numbers because he's Jack. The S and P index without the fees beat half the active managers. And over the full decade, it would beat 78% of them. So Jack realized, wait a minute, it's impossible to run an index at zero cost. But at scale, actually, you could approach zero cost. If you just owned the S and P, then you could beat three quarters of the other mutual funds in the market. So there really could be something here.

• 1:20:01David Rosenthal?

  Yeah, this is a really important subtle point. If you are able to pull this off and just own the average of the market, but do it at significantly lower fees than all of the other managers in the market, you will actually have top tier performance. Because if your fee that you are charging your clients is lower than the average fee of the other managers in the market, well, now that delta between fund returns minus fees is much lower for you. So if you say, great, I'll just take the average, but I'm going to actually get the average, you will do much better than most other people in the market.

• 1:20:40Ben Gilbert?

  So here's the math to illustrate what a giant difference it is. You might hear, oh, 1% fee, that's not so bad. And at this point, it was actually higher than 1% fee. It was one and a half to two, but let's just say 1%. But that's 1% of the total assets. So if the stock market were to return 7%, but you owe 1% in fees, that's actually one seventh of your gains that you are giving up or around 15% of the returns. And so when that happens year after year after year, it really cuts out your returns at the knees. And I did a little spreadsheeting just to check the math on this. If you invested $100,000 at age 25 and you got 7% market returns for 40 years, you'd end up with $1.5 million.

• 1:21:24Ben Gilbert?

  But if you paid a 1% management fee along the way each year, that's a 6% annual return. Instead of $1.5 million, you end up with $1 million. That's an extra 50% for your retirement that you could make by not paying 1% in fees each year. I mean, the long term impact is that People thought Bogle was sort of this zealot for indexing and he hated active management, but that's not true. He was a zealot for low fees.

• 1:21:52David Rosenthal?

  Yep.

• 1:21:52Ben Gilbert?

  He always believed that, hey, active managers might be able to outperform the market, but like Samuelson observed, the durability of that is really, really hard to do and consistently outperform for decades. But what is really obvious is even with just a 1% fee, that's a 15% outperformance that every year you're starting with a disadvantage and you've got to beat the market by 15% just to break even.

• 1:22:21David Rosenthal?

  Yeah.

• 1:22:22Ben Gilbert?

  Gosh, I'd rather not have that structural disadvantage. That's the thing that is really Bogle's legacy and what he was obsessed with.

• 1:22:29David Rosenthal?

  Yeah. Later in life, Jack would come to call this the cost matters hypothesis. And to your example there of an extra half a million dollars in a retirement account or a college fund, or even just a savings account. That's why I said at the top of the show, millions and millions and millions of people completely had their lives changed by this. An extra $500,000 or whatever base you start with. That's the difference between needing to rely on your kids to support you in retirement and being self-sufficient. That's the difference in educational outcomes for your family. That's so important just because of that 1% delta in fees.

• 1:23:05Ben Gilbert?

  That's right. Another way to put it, active managers in aggregate mathematically cannot beat the market after fees. And the in aggregate is doing a lot of lifting there, but that's the point is the market is made up of active managers. They can't all beat themselves. Some will outperform in any given year and justify fees, but the median active manager will underperform by exactly the amount of their fees.

• 1:23:29David Rosenthal?

  Yes.

• 1:23:30Ben Gilbert?

  And since you can't reliably identify the winners in advance, especially when your goal is to stay invested for decades, the expected value of active management with fees as a whole is a negative expected value compared to an index fund without fees.

• 1:23:45David Rosenthal?

  Yep. So back to 1975, 1976, and Jack and his merry crew. And they do indeed call all employees at Vanguard crew members for many, many years because of the ship and the nautical theme, et cetera.

• 1:24:00Ben Gilbert?

  It's perfect.

• 1:24:01David Rosenthal?

  Jack assigns one of the first employees, a guy named Jan Twardowski. To go write the software to do this, to create the first retail index fund. He goes off, writes it in the APL programming language on a time sharing computer in Philadelphia. Jack, meanwhile, goes off to Standard Emporers headquarters and negotiates a licensing fee with them for the rights to use the S and P 500 index as the basis for this first index fund. There's a great story that Jack tells on a podcast interview about this. He was negotiating with whoever the head of the department that ran the 500 was at S and P. And the guy was like, basically like, ah, I don't know. Gosh, should you be paying us?

• 1:24:46David Rosenthal?

  Should we be paying you? This is going to be great marketing for us. They eventually land on Vanguard paying S and P $25,000 per year that they sort of pull out of thin air as the transaction value for this. Which is absolutely hilarious because now index fund licensing is basically the entire business of indices around the world, and it is extremely high margin.

• 1:25:13Ben Gilbert?

  I've got the numbers on this. People estimate that Vanguard pays S and P Global something like $300 million per year and is their single largest licensing client. And the licensing segment of their business as a whole does $1.85 billion a year. And to your point, David, that is essentially all profit.

• 1:25:33David Rosenthal?

  Right.

• 1:25:34Ben Gilbert?

  I mean, the whole world has agreed the S and P 500 is the standard brand for the market. And so they just get to take a rent of $1.85 billion a year for anybody who wants to make an index fund.

• 1:25:48David Rosenthal?

  Great work if you can get it. Yep. Vanguard, BlackRock, Fidelity, State Street, all paying them a lot of money.

• 1:25:55Ben Gilbert?

  And it's charged on a basis points of assets under management or AUM.

• 1:26:02David Rosenthal?

  It's a management fee.

• 1:26:03Ben Gilbert?

  Or a trading volume basis. And so it scales depending on how valuable it is to you as a client.

• 1:26:08David Rosenthal?

  I did not know that. That is so deeply ironic.

• 1:26:11Ben Gilbert?

  And I started looking too, like, why doesn't Vanguard push their total market one stronger? Or why doesn't someone come up with a sort of synthetic thing that looks a lot like the S and P 500, but isn't the S and P 500? Fidelity tried that. There is a 500-stock fidelity fund that is not quite the S and P 500, or at least doesn't license the name, but people just don't flock to it. People want the standard.

• 1:26:37David Rosenthal?

  They want the brand.

• 1:26:38Ben Gilbert?

  It's a good business if you can get it.

• 1:26:39David Rosenthal?

  It's the Intel Inside, the ingredient brand.

• 1:26:41Ben Gilbert?

  Yep.

• 1:26:42David Rosenthal?

  Well, regardless, in 1976, Vanguard launches the first index investment trust fund.

• 1:26:52Ben Gilbert?

  Terrible name.

• 1:26:53David Rosenthal?

  Which today has been renamed to the much better titled Vanguard 500 Index Fund. Ticker V F I A X, the first retail index fund available to the public. Today, the second largest individual fund in the entire world with one and a half trillion dollars in assets and second only to its own sister fund that you mentioned, Ben, the Vanguard Total Stock Market Index Fund, which has $2.1 trillion in assets. $3.6 trillion between these two funds today.

• 1:27:34Ben Gilbert?

  Which are effectively the same thing.

• 1:27:35David Rosenthal?

  Effectively the same thing.

• 1:27:36Ben Gilbert?

  If you own the S and P 500 or you own the entire US stock market, in the long run, they're going to be nearly identical returns.

• 1:27:43David Rosenthal?

  And they both have, you know, their roots in this fund that Vanguard launches in 1976 with a broken IPO that raises $11 million.

• 1:27:55Ben Gilbert?

  Well, to the point we were talking about earlier, why would anyone want to buy the average?

• 1:27:58David Rosenthal?

  Yeah.

• 1:27:58Ben Gilbert?

  It's a terrible sales pitch. I want to outperform. Don't pitch me on this. And by the way, we talked about sort of the far future where Vanguard's fees have come down so dramatically. I own the ETF, the VOO one. I looked this morning. It's a three basis point management fee. That is a 0.03% management fee. It's near zero. You know, them and all their competitors are near zero. When this thing debuts, it actually has a significant management fee.

• 1:28:24David Rosenthal?

  Yeah.

• 1:28:24Ben Gilbert?

  It's not as bad as the rest of the industry with a percent or percent and a half or 2%, but it's still like 0.6 something.

• 1:28:30David Rosenthal?

  0.65 or something like that.

• 1:28:32Ben Gilbert?

  So the pitch as a subscale index fund is, do you want to be average, but actually with a significant drag from fees?

• 1:28:41David Rosenthal?

  Yes.

• 1:28:41Ben Gilbert?

  It's a bad pitch.

• 1:28:42David Rosenthal?

  Well, and worse than that. So remember, we talked about the three things that a management company does and what the Vanguard Fund Board, the Wellington Fund Board, allowed Jack to do. They said, hey, We'll let you just do administration, but investment advice and distribution still have to live with Wellington. Well, distribution is still through the stockbroker network with

• 1:29:05Ben Gilbert?

  Right.

• 1:29:06David Rosenthal?

  Sales loads. So the only way that Jack and Vanguard can get around the distribution prohibition for this new fund, they figure out is to do an IPO of it. So I said IPO. This is why there's an IPO. So they rustle up a group of Wall Street banks. And I guess technically doing a one-time event of an IPO of the fund did not count as distribution and marketing.

• 1:29:30Ben Gilbert?

  Huh.

• 1:29:30David Rosenthal?

  So Vanguard was allowed to do it. And they think that they can raise and that they're gonna need about $150 million of initial fund holder capital in this fund to make it work. And they can't get the demand. They raise $11.3 million. It is so bad that they don't have enough

• 1:29:55Ben Gilbert?

  It's 1/14 of their target.

• 1:29:57David Rosenthal?

  Right, right, right. They don't have enough capital to go buy even 100 share lots of the entire S and P.

• 1:30:04Ben Gilbert?

  So don't they go buy like the S and P 220 or something?

• 1:30:09David Rosenthal?

  Well, this, I don't know how they got away with this. They buy 280 stocks, but they had to choose which 280. So they are doing active management in the

• 1:30:18Ben Gilbert?

  I think it's something like they picked the 200 largest and then with the remaining 80, they tried to create a representative sample that was mathematically equivalent to owning the 500. But that was an academic hypothesis, not completely proven yet.

• 1:30:32David Rosenthal?

  I mean, it's still requiring significant judgment in there. You might even say investment advisory.

• 1:30:37Ben Gilbert?

  You might even say.

• 1:30:38David Rosenthal?

  You might even say. There's an amazing story on this. Did you find it?

• 1:30:41Ben Gilbert?

  No.

• 1:30:42David Rosenthal?

  So Vanguard

• 1:30:45David Rosenthal?

  A, didn't have a lot of resources and B, didn't want to go do anything that looked like hiring a professional investment advisor, investment manager to manage this program. So they hire a young woman, part-time, to work nights and weekends.

• 1:31:02Ben Gilbert?

  Really?

• 1:31:03David Rosenthal?

  And basically like, choose these 80 extra stocks and then manage and track everything. She worked full-time during the day at her husband's furniture store in Wilmington, Delaware.

• 1:31:14Ben Gilbert?

  Whoa.

• 1:31:15David Rosenthal?

  And by nights and weekends, she was the portfolio manager for, you know, what today is the second-largest fund in the world, together with its sister fund, by far the largest fund in the world. How incredible is that?

• 1:31:27Ben Gilbert?

  Okay, so they've got this completely broken IPO. They didn't raise enough capital. The pitch is bad.

• 1:31:33David Rosenthal?

  Yes. Oh, Ned Johnson at Fidelity, remember Fidelity we talked about?

• 1:31:37Ben Gilbert?

  Yeah.

• 1:31:37David Rosenthal?

  And Ned, he would famously comment to the press about the launch of this fund. Quote, "I can't believe that the great mass of investors are going to be satisfied with just receiving average returns. The name of the game is to be the best." Deeply ironic because a giant amount of Fidelity's asset base today is composed of index funds, many of which are Vanguard index funds held within Fidelity.

• 1:32:00Ben Gilbert?

  The funny thing about Fidelity is that I think they're primarily a brokerage. They do have their own in-house funds.

• 1:32:05David Rosenthal?

  Oh, yes.

• 1:32:05Ben Gilbert?

  But I think a lot of people own Vanguard funds using Fidelity's website.

• 1:32:11David Rosenthal?

  Yes, they do. Yes, they do. We will get to that.

• 1:32:13Ben Gilbert?

  Okay, so the pitch is quite bad, but the machinery they've constructed, as it plays out and scales, is actually pretty genius. So if you think about it, if the customers own the management company, the business itself, there's really no incentive to generate any more margin than you actually need to run the business. There's no like, point in profits for shareholders you'd want to dividend it out to. So you could just dividend those excess profits out to customers. Who are the investors in the fund? Or you could just say, oh, we're doing that in the form of lower fees. It's a much more tax efficient way to do it than generating profit, recognizing taxes on that profit, divvying it out, and then those people having to pay taxes on it.

• 1:32:57Ben Gilbert?

  They'll say, hey, look, we'll just lower the fees in the future because we're now confident we don't need higher fees.

• 1:33:02David Rosenthal?

  Every time Vanguard lowers fees, you should view it as like, hey, we have reported higher earnings, essentially.

• 1:33:09Ben Gilbert?

  Exactly, exactly. And then, as you get economies of scale and you grow, you can further cut prices. And David, as you mentioned earlier, the business of asset management really lends itself well to the economies of scale game. There are just not that many variable costs in managing money. Almost everything is fixed, except things like customer service, which we'll come back to later and is kind of where Vanguard's

• 1:33:31David Rosenthal?

  Achilles' heel is.

• 1:33:33Ben Gilbert?

  Yeah, is in these variable costs. So, once you're managing very large amounts of money for lots of customers, fees can be super low on a percentage basis. This is the exact same thing from our Costco episode. David, do you remember the phrase?

• 1:33:46David Rosenthal?

  Oh, yeah. Scale economies shared. I think, didn't we make acquired T-shirts and sweatshirts with that phrase?

• 1:33:52Ben Gilbert?

  We did, we did. Yeah, linked from the email on our website. You can share the benefit of your scale economies, Costco does this, back with customers. And Vanguard does this, too.

• 1:34:05David Rosenthal?

  Yeah, I mean, at the risk, Ben, of stealing what I suspect might be your quintessence of this episode, Vanguard is Costco for finance.

• 1:34:13Ben Gilbert?

  Exactly. But even further, it's like Costco on steroids. Even Costco, who lowers prices as much as they can to reward customers and encourage customer loyalty and make everything about customer experience better. Even Costco has outside shareholders who want the business to generate profits. There is a reason you are investing in Costco as a business, and that's because you expect it to generate cash flows today and in the far future.

• 1:34:39David Rosenthal?

  Costco itself, several hundred billion dollar market cap company today.

• 1:34:42Ben Gilbert?

  Right. Vanguard doesn't have that at all. You are investing in the beautiful machine of capitalism as a communist.

• 1:34:52David Rosenthal?

  Yes, yes. Even Saul Price and Jim Sinagal were not this fanatical.

• 1:34:58Ben Gilbert?

  Yes, yes.

• 1:35:02David Rosenthal?

  So it takes a few years for this machinery to kick in for the scale economies to get to a point where it really can and for the investing public to wake up to this idea. In the meantime, they start with $11 million of fund capital. And then they still experience customer withdrawals and cash outflows. Like, the stock market starts to rise, so that sort of keeps the fund alive, but they're not getting new cash in and they can't because they can't do their own distribution. It gets so bad that the next year, in late 1977, they have to take the extreme drastic

• 1:35:44David Rosenthal?

  measure of merging another small legacy Wellington fund called the Exeter Fund into the index fund just to keep it alive and get enough capital into the fund to keep operating it.

• 1:35:59Ben Gilbert?

  Which is crazy to me that they figured out how to sort of acquire this other fund and then just merge its assets into their index fund and all the investors were like, "Cool, sounds good. I guess we're index fund holders now."

• 1:36:09David Rosenthal?

  Yeah, I didn't see anything in Jack's memoirs about the governance issues associated with that. Somehow, they get it done, though, and that fund, when they do this merger, had $58 million of assets, again, compared to the $11 million and bleeding out rapidly in the index fund. I mean, that's like six times the size of the index fund. So yeah, really, the seed capital that you should think about in the Vanguard 500 index fund, and again, also its sister fund, the Total Stock Market Index, you know, biggest

• 1:36:49David Rosenthal?

  collectively fund in the world today, comes not from the IPO of clients into the index fund itself initially, but the majority of the initial capital base comes from this other

• 1:37:00Ben Gilbert?

  Exeter.

• 1:37:01David Rosenthal?

  former Wellington actively managed fund that just gets folded in.

• 1:37:05Ben Gilbert?

  Yep.

• 1:37:06David Rosenthal?

  Totally, totally wild. So after this emergency transplant to save the index fund here, finally, in 1981 into 1982, Jack and Vanguard do win the right to

• 1:37:19David Rosenthal?

  Take over distribution of the index funds. And the way they do it is through, you know, another loophole. This one kind of even more tenuous. Jack argues, oh, we're not taking over distribution. We're just eliminating distribution. We're going to no longer go to stockbrokers and have them charge sales loads to go into our index funds. We're not going to allow that at all. And thus we are eliminating distribution. Again, conveniently ignoring the fact that now they got to employ a lot of people within Vanguard that are going to market and sell and advertise the funds.

• 1:37:53Ben Gilbert?

  Right. They went no load. They refused to pay eight and a half percent to people outside the firm. But now they just have a fixed cost base that they picked up of people that work inside of Vanguard that have to do the work of not only convincing people to buy these funds, but then on top of that, actually handling and facilitating the purchase.

• 1:38:16David Rosenthal?

  Right, right.

• 1:38:17Ben Gilbert?

  The way that this worked is you would communicate and send in an order via mail. And then you would mail a check to invest in this fund.

• 1:38:26David Rosenthal?

  Right. Could you imagine? I mean, I remember my parents doing this.

• 1:38:29Ben Gilbert?

  Yes. So, you know, eliminating distribution, sure. But somehow someone has to do the marketing and distribution and now you just do it in-house.

• 1:38:36David Rosenthal?

  Yep. On the back of that, the 500 index fund does finally reach the $100 million capital milestone in 1982, six years after launch. Takes them six years to get to $100 million, which again, that was not large at this point in time. The Wellington Fund many years earlier had been $2 billion.

• 1:38:58Ben Gilbert?

  Yep.

• 1:38:59David Rosenthal?

  And the initial IPO target had been $150 million. So they're still below that six years in.

• 1:39:04Ben Gilbert?

  And they've got this headwind of they just switched away from paying people to do distribution. So there's now no incentive out there in the marketplace to try to sell Vanguard funds.

• 1:39:13David Rosenthal?

  Yep, yep. But the slow burn does start. And towards the end of the decade in the 1980s, by 1988, the fund reaches $1 billion in assets and it would obviously grow from there.

• 1:39:25Ben Gilbert?

  So that's six years to reach 100 million.

• 1:39:28David Rosenthal?

  Yep.

• 1:39:28Ben Gilbert?

  And then another six years to get to a billion.

• 1:39:31David Rosenthal?

  Yep, that's right. Now, you might be wondering, that's not a lot of capital. And Vanguard's fees are super low.

• 1:39:40David Rosenthal?

  How is the firm staying afloat during this period? Well, it turns out that Jack's first revolution of the low-cost, low-fee proposition of Vanguard, it works pretty well in equities. There are other financial markets out there where the low-cost strategy works even better, specifically money markets and fixed income, AKA bonds, the debt market. In equities, you can have real outperformance. There is uncapped upside to investing in equities. This is the dream that active management sells.

• 1:40:23David Rosenthal?

  Jerry Sei or Peter Lynch or Warren Buffett or, you know, the greatest investors of all time, we can generate annual returns in the 20s, 30s, even higher percentages like Rentec in our episode there. If you're investing in the debt markets or the money markets, there is a ceiling to your performance. It is the coupons of government bonds or muni bonds or, you know, treasuries in the case of money markets.

• 1:40:46Ben Gilbert?

  Yep.

• 1:40:47David Rosenthal?

  The only thing that matters in terms of relative investment performance by products offered in those spaces is costs.

• 1:40:54Ben Gilbert?

  Yep. The lowest-cost provider will win in those markets.

• 1:40:57David Rosenthal?

  And Vanguard builds a juggernaut in the fixed income business during this era. And that's what keeps the firm afloat while they are waiting and waiting and waiting for Jack's indexing revolution, his second revolution, to come online.

• 1:41:15Ben Gilbert?

  Well, there's that, and there's also the fact that John Neff, who managed the Windsor Fund, which was an actively managed fund and had the fees of an active managed fund, was absolutely shooting the lights out.

• 1:41:31David Rosenthal?

  On the equities side, yes. I was wondering if you were going to bring this up. That is the other deep irony here. Vanguard never got out of the active business.

• 1:41:39Ben Gilbert?

  And they sort of inherited it by virtue of having some responsibilities for the Wellington Funds that they shared with the Wellington Management Company. And so, yeah, this Windsor Fund. There were many years where it basically provided all the profits to pay all the overhead and keep the lights on while Vanguard's low-cost indexing strategy was

• 1:42:01David Rosenthal?

  On a slow burn.

• 1:42:02Ben Gilbert?

  Not scaled enough to pay for itself.

• 1:42:03David Rosenthal?

  Yep, absolutely. And Vanguard today still has very large fixed income businesses, money market businesses, and active equities management businesses. But today, they're all dwarfed by the index fund business.

• 1:42:18Ben Gilbert?

  Yep. Which wasn't the case for a long time.

• 1:42:20David Rosenthal?

  Yep.

• 1:42:21Ben Gilbert?

  You know, it's funny, you said something a couple of minutes ago that I'm stewing on here. This whole inequities, a low-cost index fund in the long run will outperform, you know, 85% or something of other actively managed funds.

• 1:42:42Ben Gilbert?

  Listeners are probably wondering, is that really just fees? Is it just that having low fees makes you better than that much of the market? There are other components to it. A giant one is behavioral. If you are in a mindset where you are actively trying to pick the best companies.

• 1:43:05David Rosenthal?

  Yep.

• 1:43:05Ben Gilbert?

  You do a lot of trading. And aside from the fact that that has a lot of transaction costs, you tend to react to external stimuli, the market being up.

• 1:43:16David Rosenthal?

  You don't stay in your winners long enough.

• 1:43:17Ben Gilbert?

  The market being down, you having conversations with other people. Exactly, David, you selling out of your winners too early, whatever it is. And you can make the errors on either side. There's a behavioral component where passive index investors tend to not act. And what you need to do is not act for long periods of time to be a great investor.

• 1:43:38David Rosenthal?

  Yes, it's the great Warren Buffett line, "Don't just do something, stand there."

• 1:43:42Ben Gilbert?

  Yes, yes. Whether you are trying to shoot the lights out like Warren Buffett, and you are active and trying to find the very best businesses you can, or whether you are passive and sort of throwing your hands up. Either way, you need to mostly not act every day. And passive index investing just lends itself better.

• 1:44:03Ben Gilbert?

  Behaviorally, if you're in one of those funds to just saying, I know the market's up, I know the market's down, but whatever, I own the index, I've made my peace. Whereas if you are either the active manager trying to improve the outcome of the fund, or an investor in an active manager, both of you have a higher predisposition to do stuff. And for most investors, in the long run, you shouldn't do stuff most of the time.

• 1:44:30David Rosenthal?

  Yep, yep, absolutely.

• 1:44:34David Rosenthal?

  So as we exit the 80s here, all the pieces are in place, finally, for the rise of indexing. The Vanguard 500 Fund crosses a billion, as we said, in 1988. And then the model's working better and better, the scale economies are getting shared.

• 1:44:54Ben Gilbert?

  Fees are coming down from that initial launch price of 68 basis points to, in 1979, 59 basis points, then down to 50 basis points in 1985, to 35 basis points in 1987. We are really starting to be the true low-cost index fund. They've already dropped by 50% here by the end of the 80s.

• 1:45:16David Rosenthal?

  Yeah, yeah. I mean, the scale economies are getting shared.

• 1:45:19Ben Gilbert?

  Yep.

• 1:45:19David Rosenthal?

  Everybody around the table is eating good. So after assets crossed the billion-dollar threshold in 1988, around 1992-ish, they hit $10 billion, so 10x in four or five years, strong acceleration. Also, in 1992, Vanguard launches the sister fund, the Total Stock Market Index Fund. They now have more than enough capital base that they can own every single stock. Why stop at the S&P 500? Own everything, all US stocks.

• 1:45:49Ben Gilbert?

  And computers are sophisticated enough by this point in time where you can track the entire stock market and own the entire stock market and handle the reporting on that. Not to mention, you have the benefit of not having to pay S&P Global a licensing fee.

• 1:46:03David Rosenthal?

  Yes, yes.

• 1:46:03Ben Gilbert?

  To index the entire market.

• 1:46:07David Rosenthal?

  Quite convenient. You know, look, they're not not business people at Vanguard.

• 1:46:11Ben Gilbert?

  Right. Oh, they're great business.

• 1:46:13David Rosenthal?

  They're great business.

• 1:46:14Ben Gilbert?

  It's just on your behalf instead of on shareholders.

• 1:46:16David Rosenthal?

  They're working for you. And so by the mid to late 90s, the two sister funds together are approaching like $100 billion. Like the Vanguard Colossus is rolling.

• 1:46:31Ben Gilbert?

  Yep.

• 1:46:31David Rosenthal?

  Things are going great. And then in 1999, you're not going to believe this. Jack manages to get himself fired again.

• 1:46:44Ben Gilbert?

  Unbelievably.

• 1:46:45David Rosenthal?

  Unbelievably.

• 1:46:46Ben Gilbert?

  Yes. But listeners, before we tell you that story, now is a great time to thank one of our favorite partners, Vercel. So for 20 years, cloud infrastructure was built around a pretty simple mental model. Humans send requests, servers respond, and then they scale according to the traffic. But what happens in the era of AI agents when the software itself is sending the requests and making decisions, not just responding to them?

• 1:47:15David Rosenthal?

  That's the shift Vercel is building for. The cloud wasn't designed for agents, but Vercel is. They've purpose-built agentic infrastructure where agents are first-class users alongside human developers. It's not just an old deployment platform with AI features bolted on. It's a ground-up rethink. Tools, frameworks, infrastructure, all engineered to work together.

• 1:47:36Ben Gilbert?

  So one particularly noteworthy element of this is their AI gateway. Just like content delivery networks accelerated and secured the web, Vercel is doing that for agents. It's a single endpoint that routes across every major AI model with automatic failovers. So when a provider goes down, and as you know, they do.

• 1:47:55David Rosenthal?

  Oh, yes.

• 1:47:56Ben Gilbert?

  Your product keeps humming. So since launch, it serves 60 trillion tokens across 180,000 unique teams. Vercel is a new type of delivery network for tokens.

• 1:48:07David Rosenthal?

  A good example of what this unlocks is Poke, who are building personal superintelligence that hundreds of thousands of people use. Before switching to Vercel, they were maintaining their own AI infrastructure, everything from routing and retries to cost tracking by users. After switching, their retry rate dropped 20x. So virtually every message now succeeds on the first try.

• 1:48:29Ben Gilbert?

  AI Gateway is just one tool in a complete AI stack built with, for, and optimized by agents. And that's what Vercel is really about. Making sure that the most ambitious teams like OpenAI, Stripe, and Polymarket have the infrastructure to match. Because when code is increasingly autonomous, the question is no longer can you ship? It's what you choose to ship. Learn more at vercel.com/acquired. That's V E R C E L dot com slash acquired. And just tell them that Ben and David sent you. All right, so David, there is something that you have not been telling us about Jack's life over the years.

• 1:49:06David Rosenthal?

  Yes. Jack unfortunately has a bad heart. He was born with a rare genetic heart disease called arrhythmogenic right ventricular dysplasia, or ARVD. And that means that Jack suffers his first heart attack in 1960 at age 31. So before he even becomes CEO of Wellington Management, that was his first heart attack. He had like 10, 12 over his life. It was like a ticking time bomb. At any moment in time, he knew he could just drop dead.

• 1:49:42Ben Gilbert?

  And what Jack decided to do with this was work. At the age of 36, he got a pacemaker and he consulted a doctor. And that doctor said, you really shouldn't count on living past 40.

• 1:49:57David Rosenthal?

  Oof.

• 1:49:58Ben Gilbert?

  Then he went and talked to a second doctor. And that doctor said, why don't you get a place out in Cape Cod and stop working and enjoy the last few years you have left? Don't work anymore. He wrote at one point, if I had taken the second doctor's advice, the first doctor would have been right.

• 1:50:15David Rosenthal?

  Yeah, yeah, man. This is totally. Jack's unique personality, the way he approaches this part of his life is not going to change a thing. I'm just going to live every day the same way I would have lived it if I didn't have this disease.

• 1:50:32Ben Gilbert?

  Yep.

• 1:50:32David Rosenthal?

  And the stories around this are amazing. I think one time he collapsed and had a heart attack waiting for the commuter train out of Philadelphia. And it was lying there on the ground and the ambulance and the paramedics come and he makes a bet with them that they won't get him to the hospital in time to save his life. He just had that kind of attitude and approach to it.

• 1:50:53Ben Gilbert?

  He would bring defibrillators to squash matches.

• 1:50:56David Rosenthal?

  Oh, this is the best. Yeah.

• 1:50:58Ben Gilbert?

  And it happened at one point where he had a heart attack while playing and had to count on his opponent running over and reviving him.

• 1:51:05David Rosenthal?

  Yeah, yeah. And he would use this to like intimidate his opponents while playing. He'd be like, make sure I got my defibrillator here. I could drop dead at any moment. All right, let's go, you know?

• 1:51:16Ben Gilbert?

  It's amazing.

• 1:51:18David Rosenthal?

  So as Vanguard's really taking off and indexing is taking off, Jack's heart is just getting weaker and weaker and more and more worn down from all this. In 1994, his twin brother David dies also from heart complications. And by 1995, over half of Jack's heart has stopped working.

• 1:51:39Ben Gilbert?

  Oh.

• 1:51:40David Rosenthal?

  And so in early 1995, his doctors say, hey, we know your approach to life, but we can't put this off any longer. Despite your relatively advanced age for this, he's 66 at the time, you need to have a heart transplant if you want to have any hope of actually, you know, surviving for a meaningful period of time going forward. Jack and the family are brought around, they agree to this. So this of course impacts Vanguard. So in May of 1995, the company holds a press conference where Jack announces that he's stepping down as CEO to prepare for his heart transplant.

• 1:52:20David Rosenthal?

  And the company announces that John Brennan, Jack's former assistant, who had joined the company in 1982, will be taking over as the next CEO. Brennan had been Vanguard CFO for many years leading up to this. And in late 1995, Jack Bogle. Enters the hospital on a waiting list for a heart transplant. His heart has continued to degenerate. He needs to be hooked up to an IV, feeding him drugs to keep his heart beating constantly. He waits 128 days in the hospital, waiting for a heart transplant. And he keeps working the whole time.

• 1:53:01David Rosenthal?

  He hasn't officially transitioned out of the CEO role and given it to Brennan yet. Maybe a little bit of foreshadowing here. On January 31st, 1996, Jack officially steps down as CEO and Brennan takes over after more than three months of operating as CEO out of his hospital room.

• 1:53:21Ben Gilbert?

  Unreal.

• 1:53:22David Rosenthal?

  Really, Jack is one of a kind here. And then in February, finally, they get the call, there's a heart available for Jack and he has the heart transplant at the end of February. So the day of the surgery arrives.

• 1:53:37Ben Gilbert?

  And at this point, Vanguard is essentially planning for this to be the end of his career. Like, heart transplants today are obviously a giant deal. This is even 30 years ago. Medical science is still working on this procedure. The assumption is he's, he's done at this point, even if he survives.

• 1:53:57David Rosenthal?

  And so the company moves on. Brennan becomes CEO and starts working on a whole bunch of new initiatives. And Jack does make a miraculous full recovery.

• 1:54:08Ben Gilbert?

  He would live for another 23 years.

• 1:54:10David Rosenthal?

  He would live for another 23 years on his transplanted heart. And within a couple weeks, weeks after his heart transplant, he's back on the squash court.

• 1:54:21Ben Gilbert?

  Amazing.

• 1:54:22David Rosenthal?

  Playing squash and intimidating his opponents. Like, gosh, if you thought it was scary to play against Jack when he might have a heart attack, how about playing against Jack with a new heart?

• 1:54:31Ben Gilbert?

  Seriously.

• 1:54:32David Rosenthal?

  So of course, all of this is like wonderful and joyous and unexpectedly great.

• 1:54:39David Rosenthal?

  But it is unexpected. Jack didn't think he was coming back from the heart transplant. The company didn't think he was coming back from the heart transplant.

• 1:54:45Ben Gilbert?

  And the company's in this sort of funny place where even not thinking about leadership succession right now, but the core business, they made all these really long-term trade-offs, starting back in 75, 76, where, you know, when the fund is subscale, the fees are kind of high and the mutual ownership thing is like cute, but it doesn't mean much when it's small. Cutting the load, so you go to a no-load thing that in the short term just slows your distribution down. And all these things are sacrifices for the long-term, thinking, well, when it really starts working, it's going to really start working.

• 1:55:22David Rosenthal?

  Yeah.

• 1:55:23Ben Gilbert?

  In the 90s, this is that like harvesting phase for the company where 20 years of doing things the right way that caused really slow growth are now causing this giant inflection. I mean, David, you said something about the crossing a billion line in the 80s. By 1996, the AUM across all of Vanguard is up to $180 billion.

• 1:55:45David Rosenthal?

  And the two index funds are like 50 billion of that, going pretty quickly to 100.

• 1:55:50Ben Gilbert?

  Right. So it's just gotta be fun for all the company long-timers at this point where they're sitting there thinking, we were right, we made all these long-term trade-offs and it really sucked for a while and no one would distribute our product and no one would invest in our funds and it's really, really, really paying off.

• 1:56:06David Rosenthal?

  Yep. And there's something else going on for the first time, too. Vanguard has competition. Competitors have woken up and realized, maybe we should jump on to this passive indexing thing.

• 1:56:20Ben Gilbert?

  Which is funny because they're not structurally incentivized to do it over at Fidelity and BlackRock and State Street and, you know, all the others that are starting to roll out these very low-fee index funds, but they are doing it because they effectively have to.

• 1:56:36David Rosenthal?

  Yep.

• 1:56:36Ben Gilbert?

  Consumers have woken up to the power of it and they need to have an offering in this area. So even though they don't have this investor-shareholder alignment, the way that Vanguard does, they make money plenty of other ways in their business. And so they're happy to offer this as a near-loss leader or break even in order to retain and attract those clients for their other higher-margin services.

• 1:56:57David Rosenthal?

  Indeed. So, coming out of his recovery from the heart transplant.

• 1:57:02David Rosenthal?

  Jack is still on the board, but he's no longer CEO. The transition has happened and the company is transitioning to this new phase. Jack, I think, gets super frustrated. He wants to be back in the saddle. And the way this manifests is he, at the board level, starts kind of becoming a curmudgeon and disagrees with all the new initiatives, all the new things that Brennan and the new management team want to do to capture their opportunity and insulate against competitors. So these are things like launching sector-specific index funds or international funds and investing

• 1:57:42David Rosenthal?

  more there, or investing more in marketing, basically growing the firm and offering the clients what they want. In Jack's mind, this is starting to be a perversion of the mission. Meanwhile, management is like, hey, our customers want this and our competitors are offering it, so we should do it.

• 1:58:01Ben Gilbert?

  This is classically the divide between the founder of a company and the group of people that will take it not just from one to two, but from one to 100. I mean, the clean simplicity and the mission and the focus and the narrowness of the product and this one cool trick that they have is the thing that got them there. And classically, you need people who are willing to be much more flexible, but with the same culture, the same values, the same mission than the founder was. And you see this in the numbers. 99% of Vanguard's AUM came after Jack stepped down.

• 1:58:40David Rosenthal?

  Yep, yep. And you hit on a really, really important point to stress there. The same values, the same mission. It's not like Brennan and the new management want to all of a sudden start generating tons of excess profits or take Vanguard public or do anything crazy like that. No, no, they're true believers in the mission as well. They just want to serve clients and meet them where they're at now as the world is moving on.

• 1:59:06Ben Gilbert?

  And there are big things here, like employee retention. If, as a company, you're trying to run at cost... And your competitors are in an industry where you can pay people obscene amounts of money if they are high performers.

• 1:59:20David Rosenthal?

  Right, right.

• 1:59:20Ben Gilbert?

  I mean, you need some kind of way of dealing with this. And Jack Brennan, this sort of falls in his lap. One of the things he does early in his tenure is to create a employee partnership plan to try to incentivize the workforce and kind of deal with the structural trade off of how do you get high performers who could get paid way more somewhere else? Or very similarly, if you aren't generating very much income, how do you make future investments in things like R and D as people's expectations for customer service and technology start becoming higher and higher and higher?

• 1:59:54David Rosenthal?

  The internet is becoming a thing now.

• 1:59:56Ben Gilbert?

  Right, you need to start investing. So that's the sort of things that fall in Brennan's lap that he has to do to take the company forward.

• 2:00:02David Rosenthal?

  And they end up at loggerheads with Jack on the board. So all of this comes to an ultimate head and blow up in 1999 over exchange traded funds.

• 2:00:16Ben Gilbert?

  Yep.

• 2:00:17David Rosenthal?

  The most important new thing in the industry.

• 2:00:20Ben Gilbert?

  I am a Vanguard customer, and I think 100% of the way that I am a customer is through their ETFs, not through their mutual fund products. And the mutual funds are everything we've talked about up until this point.

• 2:00:32David Rosenthal?

  Yep, yep. So Jack had a real point of view on ETFs. And in fact, he had the opportunity to launch ETFs. So back in 1992, a man named Nathan Most had come to see Jack at Vanguard. Nathan was the VP of New Products at the American Stock Exchange, and he had had the idea to create exchange traded funds as a new product, a new trading vehicle that would allow effectively shares, quote unquote, of mutual funds to trade on stock markets in the same way as individual stocks. A stock exchange traded mutual fund, an ETF.

• 2:01:16David Rosenthal?

  And he thinks, of course, naturally, the very best fund partner to launch this idea with would be the

• 2:01:26David Rosenthal?

  Newly, you know, kind of crowned jewel of the mutual fund industry, the Vanguard 500 index fund.

• 2:01:34Ben Gilbert?

  And you might think Bogle is going to love this. Like, what is an ETF? It's an even easier way to buy into something that looks basically like an index fund. And if you're trying to go direct to your customers, the way that Vanguard does, without the sales loads and everything, then great. They should be able to buy it right on an exchange.

• 2:01:52David Rosenthal?

  Easier distribution available to more of the investing public. What's not to love? I mean, that was, that was Nathan's view. He was a real idealist about this. Hey, we're going to vastly expand the distribution reach and the target audience for mutual funds and allow anybody who can place a trade on a brokerage to buy into a mutual fund. And he was absolutely right.

• 2:02:16Ben Gilbert?

  And there's some other structural benefits, too. There's the idea that you're not affected by other people in the fund. So if someone else decides to sell a bunch of their shares, I don't end up getting a big tax hit from it. Then, of course, there's the, you actually do know the price that you are getting because since it's traded on an exchange, when I decide to make an investment in that fund, I buy it right here, right now, at the market price. I'm not waiting till the end of the day to figure out what the mutual fund is going to be priced at. So ETFs have lots of great things about them.

• 2:02:47David Rosenthal?

  Lots of great attributes. Jack hates this idea. Absolutely hates it. And he basically tells Nathan Most to get lost.

• 2:02:57Ben Gilbert?

  And why does he hate it? He hates it because it's exchange traded. He thinks, well, for that very reason that I love it, that you know the exact price that you're buying it, it means you could trade in and out of it all day. You could do the worst possible sin of investing, which is incur a bunch of trading costs, speculate on it, not be a long-term owner and just try to do intra-day arbitrage. And that particular

• 2:03:24Ben Gilbert?

  Thing that he thinks it's going to cause all of these behavioral issues, even though the intrinsic product has all these great characteristics. He thinks the temptation for people to do that is so bad that the product shouldn't exist.

• 2:03:37David Rosenthal?

  Well, and I think there's two other related things that he's really worried about beyond just that temptation of itself. One is that the brokerage platforms are going to incentivize trading because this is how they're going to profit from mutual funds.

• 2:03:52Ben Gilbert?

  Because at this point in time, Robinhood didn't exist yet. Fees hadn't dropped to zero on transactions. So you actually were paying very meaningful amounts. In recent memory, it was single dollar, but it used to be like 50 plus dollars to place a trade on an exchange.

• 2:04:08David Rosenthal?

  Yep. So if you're a prospective competitor to Vanguard and you want to offer competitive, index funds at similarly low costs, well, all of a sudden, if you can now make a bunch of profits on trading in and out of ETFs in those funds on your brokerage platform, that's a way to make money here.

• 2:04:26Ben Gilbert?

  Yep.

• 2:04:26David Rosenthal?

  So Jack hates that. He also hates that because these funds will now be traded on an exchange. It means that you can short sell them. And he thinks this will just be like a absolute disaster for the financial industry. You know, and hey, look, like I would definitely not recommend going and short selling at the S and P 500. That has historically been a losing game in the long run. But look, this is a product people want and shorting indexes like the S and P 500 is like a core part of many hedge fund strategies today. This is an idea whose time had come with all the good and all the bad, and it needed to exist.

• 2:05:06David Rosenthal?

  So Jack turns it down and not just turns it down, but like he hates the concept of ETFs. Nathan goes on to launch the world's first ETF with a new asset management division of a old Boston bank named State Street. And you've probably heard the State Street name today. You might've heard of the SPDR. Well-known SPDR, Standard and Poor's Depository Receipts Trust, which is the listing for State Street's S and P 500 ETF, which until recently, like a year or two ago, was the largest ETF in the world, until it was surpassed by Vanguard and BlackRock.

• 2:05:53David Rosenthal?

  After Jack's time, well after Jack's time. So yeah, this was a really bad decision by Jack to pass on ETFs. Today, ETFs are a huge part of the mutual fund industry. They're still only about half the assets in aggregate of traditional mutual funds, but ETFs are growing at like 30% per year while mutual funds are flat. So if that keeps up at some point here in the next small set of years, ETF assets will pass traditional mutual funds to become the largest equity asset class in the world.

• 2:06:30Ben Gilbert?

  Yep. So listeners, why does this matter? Why are we explaining the difference between ETFs and mutual funds here on Acquired? I think the most interesting reason is that it was the thing where it was clear that the founder really should hand over the reins. This should not have been a sticking point. This should not have been even a decision for the company. This was clearly the right thing to do long term. And whether or not you understand the mechanics of a mutual fund versus an ETF, and we dramatically oversimplified and skipped some things. It is just so perfectly illustrative of this point of-

• 2:07:04David Rosenthal?

  Vanguard had to get into ETFs.

• 2:07:07Ben Gilbert?

  Yeah. And that purity of the founder is the thing that is required to start the company, but typically not sufficient to scale and keep them globally relevant.

• 2:07:17David Rosenthal?

  Yep, yep.

• 2:07:18Ben Gilbert?

  And we see this in Ferrari with Enzo. You see this with Apple, the Steve Jobs, Tim Cook. You see it in the NFL with Coca-Cola, with Trader Joe's. I mean, this phenomenon just shows up over and over again.

• 2:07:29David Rosenthal?

  Yep, yep. And this is how it showed up in Vanguard. So in August 1999, this finally comes to a head on the board. Brennan and the management team say, we gotta launch ETFs. We're so far behind. State Street is out to this huge lead. They're building all this market share in a S and P 500 index that we started this. This is our space to own and our customers, our clients are demanding it.

• 2:07:58Ben Gilbert?

  Yep.

• 2:07:59David Rosenthal?

  Jack is staunchly against it. And so in August of 1999, Vanguard announces that it is enforcing its mandatory board retirement age in the bylaws of 70. No board member can serve past the year in which they turn 70. Jack has turned 70 that year and that Mr. Bogle will be stepping down from the board at the end of the year in December. This is a big deal. This causes a huge public outcry.

• 2:08:28Ben Gilbert?

  Also, there's someone older than him who is on the board that they don't enforce it for. So it's not really about the age requirement. It's about the overstaying your welcome. But he is the face of a movement.

• 2:08:44David Rosenthal?

  Right. So unlike the last time Jack got fired, where his former partners were probably hoping he would go quietly into the night, that's not an option here because

• 2:08:58Ben Gilbert?

  He's a giant asset to Vanguard.

• 2:09:00David Rosenthal?

  Yes. By this time, Jack has become like a saint to the investing public. People had actually started calling him Saint Jack. And when he stepped down as CEO in 1996, you know, head of the heart transplant, the company had commissioned a statue of him to be erected. There is no option to just part ways with Jack Bogle.

• 2:09:24Ben Gilbert?

  You kind of want him to keep an office at headquarters. If, you know, he's alive and there's a statue of him there and the entire investing community and increasingly consumers are finding religion following his teachings.

• 2:09:39David Rosenthal?

  So the year before this, in 1998, a passionate, passionate group of users on Morningstar's online discussion forums on the morningstar.com website.

• 2:09:53Ben Gilbert?

  I love it.

• 2:09:54David Rosenthal?

  Had founded a dedicated subforum called Vanguard Diehards that would eventually morph into its own website and like grassroots movement called Bogleheads.

• 2:10:09Ben Gilbert?

  By the way, I love this subreddit. I've been on this subreddit for a long time, long before we started researching this episode. It is a beautiful thing to watch these conversations.

• 2:10:17David Rosenthal?

  It is incredible. So. The standalone Bogleheads forum, bogleheads.org, today it gets 2 million visitors per month. And then, Ben, you mentioned the subreddit that has 400,000 weekly active visitors.

• 2:10:34Ben Gilbert?

  And if you are listening to this episode because it was posted on there, welcome to the show.

• 2:10:38David Rosenthal?

  Yeah, welcome to the show. So, as I said, the compromise that they reach is Jack will still be the founder of Vanguard. Jack will still be the face and the spirit of Vanguard to all of the millions of fans and diehards around America and around the world. But he will no longer be on the board. He will no longer be involved in active management of the company. They set up the Bogle Financial Markets Research Center on campus, which Jack leads with a staff helping him for the next 20 years, researching, speaking, writing books, papers,

• 2:11:17David Rosenthal?

  and generally just evangelizing the index investing philosophy, all of which, of course, is like the very, very best marketing that I would say buy. You can't even possibly buy marketing like this. For all of the conflict and strife around this second firing, it really works out about as good as it possibly could for the company and for Jack. His legacy is preserved, his value to the company is preserved, and Vanguard gets to move on and launch ETFs, which they do in 2001, finally.

• 2:11:55Ben Gilbert?

  Which he did soften on over time.

• 2:11:58David Rosenthal?

  Yes, and he does eventually repair his relationships with management of the company, especially after Brennan steps down in 2008 and the next CEO, Bill McNabb, succeeds him.

• 2:12:11Ben Gilbert?

  Yep, and there's a few things we sort of skipped over to this point that happened in the 70s, 80s, and then happened in a big way here in the 90s. And that's changes in the structure of the investment management industry. The first one to know is indexing was not actually that interesting when Bogle started it. I know we gave the stats around its outperformance, net of fees, but in 75, the market still had a lot of...

• 2:12:46Ben Gilbert?

  Fools in it.

• 2:12:47David Rosenthal?

  Yeah.

• 2:12:48Ben Gilbert?

  People that were acting individually that were not institutions or advised by financial advisors. They were clients of stockbrokers and the stockbroker would make a commission on a trade. And so they would trade a lot and they would buy stuff that were bad decisions. And so if you were an active manager, it was just not actually that hard to beat all the fools in the market.

• 2:13:13David Rosenthal?

  Yes.

• 2:13:14Ben Gilbert?

  By the eighties and nineties, that started to go away. So much of the activity in the market was real professional management that you could often assume, oh, my counterparty is smarter than I am. I always assume this when I'm buying individual stocks. I'm like, why am I buying a stock that a really smart hedge fund is selling? And that is the thing that causes me mostly to buy index funds. Or to transact in private markets where I'm buying shares directly from a company rather than in public markets where I'm the least informed person on the trade. But that was not at all the case back then. So there was this interesting trend where as more money became professionally managed, indexing's advantage increased.

• 2:13:58David Rosenthal?

  Hmm. I bet it actually worked both ways too, that as indexing became more popular, a lot of the unsophisticated, shall we say, participants in the market moved into indexing and stopped being easy prey available for the active managers.

• 2:14:15Ben Gilbert?

  Right, right. Yeah, that's a great point. It's kind of like online poker. When it first started, there was a lot of fish at the tables and then eventually the fish go away and you're just playing other poker pros, which is no fun. It's sort of the same thing in the stock market. And I didn't make the leap to realize that indexing is a much better product when it's a sophisticated market of traders versus an unsophisticated market because its relative advantage is higher.

• 2:14:39David Rosenthal?

  Yep, yep, absolutely.

• 2:14:41Ben Gilbert?

  Or I'd say its relative disadvantage is lower.

• 2:14:43David Rosenthal?

  Yep.

• 2:14:44Ben Gilbert?

  Is the right way to put it. So that was a big tailwind for investing. The second big tailwind is in the sixties and seventies, you mostly bought stocks through a stockbroker who charged you a commission, but they didn't make money simply by managing your assets the way that people do today.

• 2:14:58David Rosenthal?

  The advisory business wasn't a thing yet.

• 2:15:02Ben Gilbert?

  Right. You just had a stockbroker and that guy wanted you to trade because he got paid on the trades. Over time, stockbrokers went out of favor and people started shifting, David, exactly what you're talking about, to financial advisors. And so that meant that instead of being purely incentivized for you to buy and sell stocks, they were incentivized for your net worth to grow, which is more aligned, still taking typically a large fee, but aligned incentives at least. So index funds were kind of this perfect product for them.

• 2:15:29David Rosenthal?

  Hmm, yeah.

• 2:15:30Ben Gilbert?

  They didn't care whether you traded or not. They just wanted your assets to grow and they wanted you to be happy with the level of service that you were getting. So it was this like amazing tailwind, this growth of the advisory business became this huge accelerant for index funds. You had amazing channel from it.

• 2:15:47David Rosenthal?

  Yep.

• 2:15:48Ben Gilbert?

  And then the last tailwind is the dot com era.

• 2:15:50David Rosenthal?

  Yes, yes. I love that you're bringing this up.

• 2:15:52Ben Gilbert?

  This is like my favorite thing.

• 2:15:53David Rosenthal?

  E-Trade, baby.

• 2:15:54Ben Gilbert?

  Yeah, David, why do you think the dot com era was a tailwind for index funds?

• 2:16:00David Rosenthal?

  I've always thought that it's ETFs. It's the continuation of the story that we were just saying, like, as people are coming online, trading more and seeing the option to just within your online brokerage account, buy the S and P 500, people are doing it.

• 2:16:16Ben Gilbert?

  Yep, yep, that is absolutely a big one of them. The technology itself, interest in buying stocks because the dot com run-up was happening and people were getting more and more excited to buy stocks. So that was sort of people's introduction to it. But the third one is that they could actually see how much they were getting ripped off by underperforming high-fee active funds, where before you work with your stockbroker, you end up in a fund and you kind of get a statement every quarter or once a year and you're like, okay. But every day you log into your, whatever your favorite brokerage dot com is, and you see performance versus benchmark, you can dive into the research.

• 2:16:59Ben Gilbert?

  It's sort of all at your fingertips and that caused people to go, wait, there's an S and P 500 button?

• 2:17:04David Rosenthal?

  Yeah.

• 2:17:04Ben Gilbert?

  Great. That's going to be much better than whatever this thing is that I'm currently in.

• 2:17:08David Rosenthal?

  Yep, yep. Amazing. What a revelation.

• 2:17:11Ben Gilbert?

  So the ownership of equities in America went from that 1% to 2% pre-Great Depression to 4.2% in 1949. But even by the eighties, it was still just right around 20%. It wasn't until the bull market of the eighties and nineties, where the stock market really took off as a thing that that people owned. In 1989, it was at 32%.

• 2:17:36David Rosenthal?

  So 32% of Americans owned equities?

• 2:17:39Ben Gilbert?

  Owned any stocks at all.

• 2:17:40David Rosenthal?

  Yeah.

• 2:17:41Ben Gilbert?

  By 2001, it was at 54%.

• 2:17:46David Rosenthal?

  Wow.

• 2:17:47Ben Gilbert?

  And a huge part of that is everything we've talked about with dot com. Probably the bigger thing is the rise of the 401k, where suddenly people are responsible for their own retirement.

• 2:17:59David Rosenthal?

  Yep.

• 2:17:59Ben Gilbert?

  And they have a vehicle here, which I'm sure we'll talk about in fidelity.

• 2:18:02David Rosenthal?

  Oh, yeah.

• 2:18:03Ben Gilbert?

  And then, thirdly, the mutual fund and the index fund just being this very sort of perceived as safe, good way to own equities. And today, it's something around 60% of Americans have stock market exposure, which it's funny that it's not just one thing. You need all of these different accelerants to happen over time.

• 2:18:25David Rosenthal?

  Yes, you say index funds being widely perceived as this good, safe thing to own. One thing we skipped over earlier in the mid 90s was the Oracle of Omaha himself.

• 2:18:36Ben Gilbert?

  That's right.

• 2:18:36David Rosenthal?

  Warren Buffett implicitly endorsed Jack and Vanguard in the 1996 Berkshire Annual Shareholder Letter, where he wrote, "The best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results delivered by the great majority of investment professionals," from the horse's mouth himself.

• 2:18:59Ben Gilbert?

  Now, interestingly, if you had invested in Berkshire, it would have been a much, much better investment than just by the index. I mean, we've been sitting here talking about how the index beats 85% of managers on a long-term basis, especially because you don't have to like, leave the bad manager when they become bad and then go find the good manager and incur all the costs involved in that. Berkshire was the exception. I was prepping for this episode with a good friend of the show from Worldly Partners, Arvind Navarutnam. He showed me this chart from 1965 to 2025. If you had invested in the S and P 500, you would have kind of unbelievably a 10% compound annual growth rate.

• 2:19:41David Rosenthal?

  Wow, pretty good.

• 2:19:43Ben Gilbert?

  Like, the S and P since 65 has been amazing.

• 2:19:46David Rosenthal?

  Yep.

• 2:19:46Ben Gilbert?

  As a 10% annual growth rate with dividends reinvested. That's a 405x return.

• 2:19:53David Rosenthal?

  All right, lay Warren and Charlie on me here.

• 2:19:55Ben Gilbert?

  Berkshire was a 19% compound annual growth rate for a 39,000x return. 405 versus 39,000.

• 2:20:08David Rosenthal?

  And that's over 60 years.

• 2:20:11Ben Gilbert?

  That's over 60 years. So when you hear us saying like, oh, well, it beats 80% or 85% of other managers over some timeframe, Berkshire was the extreme exception. And so to hear Warren saying, actually, what most people should do is buy low-cost index funds like Vanguard.

• 2:20:31David Rosenthal?

  Goes, it goes a long way. Well, there's more Warren and Berkshire to come on this episode. But, uh, you know, to that point though, like I have always thought about Berkshire as the Vanguard of private equity funds. Like it is essentially a no-fee private equity fund. You get to buy shares and you don't pay fees and carry on it.

• 2:20:48Ben Gilbert?

  Yep. It's concentrated though. That's the, that's the difference.

• 2:20:51David Rosenthal?

  So is a private equity fund.

• 2:20:53Ben Gilbert?

  Right. But I'm saying that's the difference versus a Vanguard S and P.

• 2:20:56David Rosenthal?

  Oh, yes, yes. But like the spiritual and cultural resonance between Omaha and Malvern, Pennsylvania, where Vanguard is located are strong.

• 2:21:07Ben Gilbert?

  That's true. We haven't told listeners yet. This is in the middle of freaking nowhere.

• 2:21:09David Rosenthal?

  Yes.

• 2:21:10Ben Gilbert?

  It's like two hour train ride from New York City. It's the opposite of the capital of finance.

• 2:21:15David Rosenthal?

  And also just so happens to be right up the street from where I grew up, which is amazing.

• 2:21:20Ben Gilbert?

  Yeah. Weren't your grandparents some of the first Vanguard investors?

• 2:21:25David Rosenthal?

  Yeah, yeah, yeah. I was going to save this for the end of the episode, but, um, yeah, my grandparents were among the like very, very first fund holders in Vanguard. I couldn't find the exact date, but I believe my grandparents must have become Vanguard clients either in the late seventies or early eighties when like nobody was a Vanguard client.

• 2:21:48Ben Gilbert?

  Before the hundred million mark on the fund.

• 2:21:51David Rosenthal?

  I think it was just, you know, a local company. Like, great. We'll go with this local company.

• 2:21:56Ben Gilbert?

  Southeast Pennsylvania showing up again. It was our Taylor Swift episode and this one.

• 2:22:00David Rosenthal?

  I mean, they set up Vanguard accounts for me like the day I was born.

• 2:22:03Ben Gilbert?

  Wow. Okay. So getting back to the story here, we haven't yet talked about the financial crisis. You mentioned there's more Berkshire to come. There's been like four other CEOs since, since Jack. There's a big beat of the story here.

• 2:22:17David Rosenthal?

  Yeah. 2008 and the financial crisis really is Vanguard and all of indexing and passive's finest moment.

• 2:22:29Ben Gilbert?

  Yeah, I think that's, I think that's probably right, but should we do our last sponsor first?

• 2:22:33David Rosenthal?

  Yep, let's do it.

• 2:22:34Ben Gilbert?

  Well, listeners, one of the big takeaways from this whole story that we have been telling is that Jack Bogle had the data. He showed over and over again that active fund managers on average don't beat the market after fees. The data was right there. The industry ignored it for decades because conventional wisdom sort of felt, felt in quotes, correct.

• 2:22:56David Rosenthal?

  Yep. And you know, that same dynamic plays out in product development every single day. Teams ship features based on conviction, momentum, or just the highest paid person's opinion. And most of the time, nobody like goes back to check whether it actually made the product better or worse. The feature ships, everyone moves on, and you never really close the loop.

• 2:23:17Ben Gilbert?

  So listeners, if you haven't guessed by now, Statsig is one of our sponsors this episode. This problem that we are describing gets way harder when AI is involved. LLMs are non-deterministic, meaning that the same prompt doesn't always produce the same output. And small changes to a user flow or a prompt can have surprisingly large downstream effects. And the real feedback signal that you need ends up coming from real users in production.

• 2:23:43David Rosenthal?

  Yep. And that's exactly what Statsig does. Statsig gives product teams experimentation, feature flags, and product analytics all in a single platform. So you can ship fast, roll out changes safely, and actually see what's moving the needle in real time.

• 2:23:58Ben Gilbert?

  Yep. Bogle bet on data over intuition and built one of the largest financial institutions in history doing it. And if you want to apply that same rigor to how you build a great product, go to statsig.com/acquired. That's S T A T S I G dot com slash acquired and just tell them that Ben and David sent you. All right, David, bring us to 2008 and the great financial crisis.

• 2:24:22David Rosenthal?

  Yep. Indexing and Vanguard's big moment in the sun. It's kind of funny. During the financial crisis, passive index funds don't magically avoid getting whacked. Of course, they move exactly the same as the market and have huge losses in 2008, 2009, et cetera. What's more important, though, is what happens to everyone else. So, you know, like Michael Burry and The Big Short aside, almost the entire professional active money management ecosystem gets crushed just as bad or worse. Like mutual funds, hedge funds, private equity, alternatives, you name it.

• 2:25:06David Rosenthal?

  Carnage, devastation. No one is safe.

• 2:25:10Ben Gilbert?

  Well, most money managers are not set up to have a 40% drawdown on everything in their portfolio. Their comp structures and their redemptions and their contracts all sort of break and the business falls apart.

• 2:25:28David Rosenthal?

  And this is what, you know, not just creates like the spiraling problems that lead to all the losses, but what permanently impairs or ruptures faith in the entire smart people on Wall Street ecosystem. The promise had always been, especially as passive and indexing had been rising over the last two decades. Like, yeah, yeah, yeah, that's great, but like, we're smart. When the bad times come, we're going to outperform. We're going to protect.

• 2:25:58Ben Gilbert?

  You're saying this is active?

• 2:25:59David Rosenthal?

  This is the premise of active money management and all the smart people on Wall Street.

• 2:26:04Ben Gilbert?

  Right.

• 2:26:04David Rosenthal?

  We know what we're doing.

• 2:26:06Ben Gilbert?

  We're going to get you the high returns in the good times and we'll figure out how to protect you in the bad times. And it's all mechanistically built in to have safeguards.

• 2:26:14David Rosenthal?

  Yep. We have safeguards. We won't get wiped out. We won't experience the same kind of, you know, piano falling on our head losses as these naive index funds will. That turned out to be absolutely not the case.

• 2:26:29Ben Gilbert?

  For the vast majority.

• 2:26:30David Rosenthal?

  The vast, vast, vast majority of active management, again, of all types, not just like equity management funds, like everything out there in the financial ecosystem. So John Rechenthaler wrote on Morningstar in a retrospective on the financial crisis years later.

• 2:26:46David Rosenthal?

  Active managers had long promised that when a bear market finally arrived, that they would outperform Vanguard's fully invested index funds. It did, and they did not.

• 2:27:00Ben Gilbert?

  Yep.

• 2:27:00David Rosenthal?

  Yeah. And then related to what I was saying there, even more than the underperformance, you know, some might say non-performance of the active management industry during the crisis, the crisis just completely bursts whatever halo or status or bubble had emerged around Wall Street and fund managers for most of the investing public. A lot of people's views of Wall Street during the financial crisis changes from, hey, these are smart people who I should probably invest my money with, to these people are charlatans at best and crooks at worst.

• 2:27:44David Rosenthal?

  You've got the bailouts, you've got the Occupy Wall Street movement, you've got Lehman Brothers, you've got all this stuff. Like, public sentiment turns against Wall Street and active management in not just a major way, but arguably a permanent way. And who is there as the hero of Main Street? The little guys, but Malvern, Pennsylvania-based, Jack Bogle and Vanguard, which makes no profits, has no fees above costs, has no corporate owners, and has always been the champion of the average American. I mean, you could not draw up a better marketing event per Vanguard than the financial crisis.

• 2:28:29Ben Gilbert?

  Yeah. And I think for a lot of people, they just decided to hang it up on thinking too hard about their finances. They thought, look, I thought I was clever. For trusting this person's cool strategy. I thought they were clever. Turns out, none of us were clever enough. And the easy button where nobody's making any promises about how much better they're going to do. I mean, Vanguard makes you no promises. It's, hey, you're going to get the market. If you're interested in the market, it has historically performed well because it essentially captures the productivity growth and innovation of the world's most successful economy. In fact, since they started existing in 1975, it's done extraordinarily well.

• 2:29:10Ben Gilbert?

  Something like 11.6% compound annual growth rate if you reinvest dividends. That's a delightful average. If that's average, I'll take average.

• 2:29:20David Rosenthal?

  Right, right.

• 2:29:20Ben Gilbert?

  You know, your, your life is going to be in great shape if you just compound that for a long time. And so I think for a lot of people, it was, I'm fed up with clever. Give me straightforward.

• 2:29:29David Rosenthal?

  Yep. Well, and the one explicit promise that Vanguard does make to you is we will not profit from you.

• 2:29:37Ben Gilbert?

  Right.

• 2:29:37David Rosenthal?

  And that goes, especially in this moment during and after the financial crisis. Like, that goes so far with so many people.

• 2:29:44Ben Gilbert?

  Yes. Did you see, you know, what's interesting is Vanguard actually raised their fees in 2008.

• 2:29:49David Rosenthal?

  Hmm, I didn't see that.

• 2:29:51Ben Gilbert?

  I think structurally, they, they sort of need to raise them when there's contractions in the market.

• 2:29:57David Rosenthal?

  Hmm.

• 2:29:57Ben Gilbert?

  First of all, you should know Vanguard did not lay anyone off during the financial crisis, which is kind of unbelievable.

• 2:30:02David Rosenthal?

  Yeah, wow.

• 2:30:03Ben Gilbert?

  So they have a fixed cost base that they have to cover. And now their AUM is lower, assuming they didn't get net new inflows because the underlying stocks are worthless.

• 2:30:11David Rosenthal?

  Right, right.

• 2:30:11Ben Gilbert?

  They, they actually have to effectively raise money from their customers in the worst times to meet their obligations to pay all of their headcount and fixed costs. Now, when they raise it, it's from like 0.07% to like, you know, something slightly higher than that. So it ends up kind of being fine and it's just noise.

• 2:30:31David Rosenthal?

  Still like very, very, very low.

• 2:30:33Ben Gilbert?

  Right.

• 2:30:33David Rosenthal?

  Yeah, interesting.

• 2:30:34Ben Gilbert?

  But it is sort of this interesting impact of the mutual ownership model.

• 2:30:38David Rosenthal?

  Yeah, during market contractions, they actually have to raise their fees, huh?

• 2:30:41Ben Gilbert?

  Or at least have historically done that.

• 2:30:43David Rosenthal?

  Yeah.

• 2:30:43Ben Gilbert?

  So what, what's the impact of this?

• 2:30:46David Rosenthal?

  Well, just to put an even finer point on this, St. Warren over in Omaha comes back into the story here. In 2007, fortuitously, right before the crash.

• 2:30:58David Rosenthal?

  He had issued a public challenge, Warren Buffett had. He said that he would bet $1 million of his own money against any and all takers from the hedge fund industry that, over a 10-year period, starting on January 1st, 2008, the Vanguard 500 Index Fund would outperform, after fees, the same dollar amount invested in any portfolio of at least five hedge funds. And then the winner of the bet would get to select a charity that the funds would be donated to.

• 2:31:37Ben Gilbert?

  It's kind of crazy, right? You get to pick any five hedge funds you want.

• 2:31:41David Rosenthal?

  Yep.

• 2:31:41Ben Gilbert?

  And you can go pick the five best.

• 2:31:43David Rosenthal?

  You can pick the five tiger cubs, whatever you want.

• 2:31:45Ben Gilbert?

  And they just have to outperform the S and P over a 10-year period?

• 2:31:49David Rosenthal?

  Not just the S and P, specifically the Vanguard 500 Index Fund.

• 2:31:53Ben Gilbert?

  I know, it's cool he named it.

• 2:31:54David Rosenthal?

  It's really cool that he named it.

• 2:31:55Ben Gilbert?

  It's good for Vanguard.

• 2:31:56David Rosenthal?

  So this also just tells you kind of everything you need to know. Only one person took him up on the bet. Do you know, you do know.

• 2:32:05Ben Gilbert?

  Of course, I know who this is.

• 2:32:07David Rosenthal?

  Of course, you know who it was, our friend.

• 2:32:08Ben Gilbert?

  Ted, I'm sure you are listening.

• 2:32:10David Rosenthal?

  Friend of acquired Ted Sietes, host today of the Capital Allocators Podcast. The only hedge fund industry manager that took Warren up on his bet and accepted the challenge. And as Ted will be the first to tell you, he got whooped.

• 2:32:27Ben Gilbert?

  It didn't look that way at first. The hedge funds were off to a good start, but in the fullness of the decade, I don't have the numbers in front of me, but it was something like the S and P performed like 130 something percent and the hedge funds in aggregate were like 30 to 40%.

• 2:32:42David Rosenthal?

  I've got the numbers right here. Yeah, it is not even close. So the Vanguard 500 Index Fund over the 10-year period. Blows away Ted's selected hedge fund portfolio, so much so that Ted ends up conceding early to Warren.

• 2:32:57Ben Gilbert?

  Wow.

• 2:32:57David Rosenthal?

  Yeah, like a year or two before it's over, he's Ted's like, Warren, you won.

• 2:33:03Ben Gilbert?

  What charity am I making the checkout to?

• 2:33:05David Rosenthal?

  So when all is said and done, the Vanguard 500 returns a total of 126% net after fees for the 10-year period, while the hedge fund portfolio returns just 36%. So yeah, what's that for?

• 2:33:22Ben Gilbert?

  Over 10 years.

• 2:33:23David Rosenthal?

  Over 10 years. Yeah. And yes, Ben, the charity that the check is made out to is Warren Selects Girls, Inc. of Omaha as the recipient of the money.

• 2:33:32Ben Gilbert?

  I wonder, we got to ask Ted if it was an option to pick the RenTech Medallion Fund.

• 2:33:39David Rosenthal?

  That's a good question. So Ted, it'd be fun to ask him. He actually chose five hedge fund of funds to get a total basket of about 100 different hedge funds in the portfolio. And Warren said like, yeah, sure, that's fine.

• 2:33:53Ben Gilbert?

  Because then you're just buying the average.

• 2:33:55David Rosenthal?

  And the extra fee layer on top of the fund of funds, too.

• 2:33:58Ben Gilbert?

  Yeah, what?

• 2:33:58David Rosenthal?

  Yeah, I'm not sure why he made that choice.

• 2:34:02David Rosenthal?

  But either way.

• 2:34:03Ben Gilbert?

  But yeah, but truly, like, the more diversification you get, the more you're just buying the market. And the more you're buying the market, the less interested you should be in paying fees. You should pay fees when it's more concentrated and thus uncorrelated with the market.

• 2:34:17David Rosenthal?

  Right, right. Well, either way, Warren writes in Berkshire's 2016 annual letter related to all this. Quote, "If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, Jack was frequently mocked by 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 have earned.

• 2:34:59David Rosenthal?

  He is a hero to them and to me."

• 2:35:04Ben Gilbert?

  It is hard to get a better endorsement, I mean, as a human being, than Warren Buffett using those words about you. That is unbelievable.

• 2:35:10David Rosenthal?

  Saying that you are a hero to him.

• 2:35:14Ben Gilbert?

  Yep.

• 2:35:15David Rosenthal?

  Incredible.

• 2:35:15Ben Gilbert?

  I think the most interesting thing about 2008 is the fact that the index fund conceptually was stress tested and it performed with flying colors. I'm sure there were mechanical issues that didn't come up in my research, but it owned a giant percentage of American companies and that did not further cause additional systemic issues to the already massive problems going on. We have trillions at stake in these passive funds.

• 2:35:43David Rosenthal?

  Yep, yep. But thinking about today, now that indexing is so much bigger, if there ever were to be a problem or a failure of one of the big indexing players, Vanguard or BlackRock or Fidelity or State Street, like the systemic fallout from that would be huge. I mean, if you think about the, you know, too big to fail concept from the financial crisis, all of the major index fund players are now much bigger than any individual player was back during the financial crisis.

• 2:36:11Ben Gilbert?

  Yep.

• 2:36:12David Rosenthal?

  Interesting to think about. Hopefully that never happens. Anyway, after 2008, as you would expect, Vanguard's share of mutual fund flows just skyrockets. It basically doubles overnight. So before the financial crisis, Vanguard received roughly 15 cents of every new dollar that came into the mutual fund industry as a whole. After the crisis, that doubles to 30 cents of every dollar, which is way, way more than any other firm. Vanguard just starts gobbling up the industry. On the back of this, in September 2010, Vanguard passes Fidelity to become the world's largest mutual fund manager. And that lead continues to expand for the next

• 2:36:56David Rosenthal?

  several years. So from 2014 to 2019, Vanguard takes in 1.2 trillion in cash inflows versus 500 billion for the whole rest of the industry combined. So

• 2:37:11Ben Gilbert?

  Wow.

• 2:37:11David Rosenthal?

  Over twice as much of all the dollars flowing into all of their competitors flow into Vanguard during that five-year period. This is when they also add their advisory products. So we were talking about advisory earlier. Wealthfront had emerged during this time and was getting traction as a robo-advisor. Vanguard decides, under Bill McNabb, the CEO after Brennan, that We need to offer an advisory product to our clients, too, but they want to actually talk to people. And we have an advantage here because of our profitless strategy and approach to our business. We can offer human wealth advisors to accounts with as little

• 2:37:51David Rosenthal?

  as $50,000 invested. So this is a huge win for Vanguard. That pretty quickly grows from like zero to 150 billion in advised client assets overnight. And again, isn't a profit driver for Vanguard because it doesn't need to be.

• 2:38:08Ben Gilbert?

  And it's, to your point, the lowest, I think they charge somewhere from five to 30 basis points for this service. They now have over 1,000 CFPs on staff.

• 2:38:17David Rosenthal?

  Yep.

• 2:38:17Ben Gilbert?

  This is a completely different business line that is sort of predicated on the same model of what if we don't have any shareholders that we need to serve? What if the only stakeholder is our customer? And the customer doesn't just have to be people invested in the funds. It can also be people that are in a related but different business, which is they need investment advice for structuring their personal finances.

• 2:38:40David Rosenthal?

  And often it's the same customers. It's Vanguard clients who are using Vanguard funds to, in their retirement accounts or college saving funds and, yeah, need advice about how best to structure that.

• 2:38:50Ben Gilbert?

  Yep.

• 2:38:51David Rosenthal?

  So in January 2019, Jack passes away at age 89 after just one of the most incredible lives, I think, of the 20th century into the 21st century.

• 2:39:05Ben Gilbert?

  Uh, yeah, American hero. He enabled more Americans to participate in the fruits of capitalism in a way that sort of dips only into the best parts of capitalism and leaves all the unsavory parts behind.

• 2:39:20David Rosenthal?

  Yep.

• 2:39:20Ben Gilbert?

  I mean, it's this beautiful, communal, fair way to participate in the rising tide.

• 2:39:26David Rosenthal?

  At the time of his death, Vanguard managed an aggregate of $5 trillion, over 20 million clients. I mean, this from a firm that started as like a cockamamie revenge plot against his former partners.

• 2:39:41Ben Gilbert?

  Using a system that he believed in prior to wanting revenge.

• 2:39:45David Rosenthal?

  Yes, yes.

• 2:39:45Ben Gilbert?

  I think he had pitched this before.

• 2:39:47David Rosenthal?

  Absolutely. Vanguard in 2019 is the number one mutual fund company with 25% market share of the entire mutual fund industry. The previous high watermark being Fidelity when it was the leader had 15%. The compounding advantage of Vanguard is just humming. They manage in 2019 13 of the 15 largest individual funds in the entire world.

• 2:40:15Ben Gilbert?

  Wow.

• 2:40:15David Rosenthal?

  And it is widely reported in the press in Jack's obituaries at the time of his death, that his estate is worth roughly $80 million, eight zero. For reference, the Johnson family, as we said from Fidelity, is worth about $40 or $50 billion through the estimated 40% that they still own of Vanguard or Larry Fink over at BlackRock. Co-founder and CEO of BlackRock is worth about $1.5 billion. Much smaller because he owns a much smaller percentage of the company. But yeah, Ben, to your point, whether it's savory or unsavory, it's just truly incredible. Like that, call it, you know, $40, $50 billion. I mean, Vanguard's bigger than Fidelity at this point, so maybe $100

• 2:41:00David Rosenthal?

  billion delta that Jack leaves on the table just goes right back to the American investing public.

• 2:41:07Ben Gilbert?

  Did he leave it on the table? I mean, the only way that Vanguard would exist is by not taking profits.

• 2:41:14David Rosenthal?

  Good point, good point. There's a real chicken and the egg problem here.

• 2:41:17Ben Gilbert?

  There's a path dependency thing, but you know, over time, there totally could have been ways for it to start being profit generating or have enterprise value. And he just wasn't interested in any of it.

• 2:41:26David Rosenthal?

  Yep, absolutely. So our story does not end there. I used a minute ago, Fidelity and BlackRock and their founders and controlling families for reference. That was not an accident.

• 2:41:40David Rosenthal?

  In the years kind of leading up to Jack's death and then especially really in the seven plus years since his death, Fidelity and BlackRock have just-

• 2:41:49Ben Gilbert?

  They've done exceptionally well.

• 2:41:50David Rosenthal?

  Really made a comeback.

• 2:41:52Ben Gilbert?

  Yeah. BlackRock is the largest AUM asset manager in the world with more international and institutional client base than Vanguard's US individual approach.

• 2:42:02David Rosenthal?

  Yep. And Fidelity has had an incredible comeback, too. Each of them in different ways, and they both come back to ETFs and really validate how important that was and frankly, how wrong a decision it was of Vanguard not to get into it in the early days.

• 2:42:17Ben Gilbert?

  So I know more about Fidelity than I do about BlackRock. In my mind, Fidelity is sort of more of a brokerage. They're like a brokerage that has funds and Vanguard is like a set of funds that happens to have a brokerage.

• 2:42:32David Rosenthal?

  I think that's a fair characterization. Yeah.

• 2:42:34Ben Gilbert?

  They are primarily in different places in the value chain. And I'm revealing myself here, listeners. I have a Fidelity brokerage where I own mostly Vanguard funds.

• 2:42:43David Rosenthal?

  Yep. You and a lot of people.

• 2:42:45Ben Gilbert?

  I think that's the common.

• 2:42:46David Rosenthal?

  Yep. Yep. Yeah. Well, okay. So let's take each of them in turn. Maybe let's start with Fidelity and then we'll do BlackRock. So as we said throughout the story, Fidelity has always been very happy to experiment and invest in lots and lots of different things. And they have hit on two like real home run platforms in recent years, both of which are weak spots for Vanguard. So one is corporate 401k plans, as you foreshadowed earlier, Ben.

• 2:43:17Ben Gilbert?

  Which is why I am a Fidelity customer. They got me when I started my first job at Microsoft and I got my 401k there. And my employee stock plan also came through there. So then I opened my first Fidelity brokerage account and that is how they've retained me as a customer for- 15 years.

• 2:43:35David Rosenthal?

  Well, and that's the other platform that has been a big home run for them, which is retail brokerage accounts. And as you point out, there is a natural crossover between those two things. So it all, I think, stems from a strategy that they realized a number of years ago. They don't necessarily have to compete with Vanguard anymore in the funds business. So even though Fidelity and Wellington slash Vanguard all started in the same business as fund managers, Fidelity realized, hey, we can, and they certainly do offer their own index funds.

• 2:44:11Ben Gilbert?

  Some of which are actually even cheaper.

• 2:44:12David Rosenthal?

  Yep, some of which are even cheaper. They're loss leaders for them. But like, we don't have to beat them there. Fidelity is very happy to have their 401K and brokerage account holders do what you do of just hold the Vanguard funds through ETFs. And I think Jack kind of foresaw this, this is why I didn't like the business, opened up the Vanguard funds to being on all the other platforms.

• 2:44:39Ben Gilbert?

  Hmm. Yeah. I mean, this is a, I don't know if it's an existential risk. I wouldn't say that, but this is a vulnerability for Vanguard, which is so many of their customers, of their AUM, don't actually have a relationship with the company. They are invested in Vanguard ETFs via their direct relationship with a different brokerage, primarily Fidelity.

• 2:45:04David Rosenthal?

  And that different brokerage, at least in Fidelity's case, and in many of their cases, is also a competitor in the funds business. So right now, this is all fine, but if you play this out.

• 2:45:13Ben Gilbert?

  Well, it's, it's fine because no one makes any money on the funds. So Fidelity doesn't have a huge incentive to say, you should come buy my two basis point fund over here instead of your three basis point fund over at Vanguard.

• 2:45:25David Rosenthal?

  Yeah. Your point is probably what will ultimately be correct is like the cost basis for these funds is so low already. It doesn't matter, but you could play this out years into the future where if this dynamic continues and Fidelity is able to make a lot of profits from all of their account holders in their other businesses, you know, 401K management, profits from companies for management fees there. And then retail brokerage through all the ways that they monetize retail brokerage. They could even like really undercut Vanguard on fund costs and say like, this is going to be a total loss leader because we're just going to profit in these other areas that Vanguard won't do.

• 2:46:03Ben Gilbert?

  This is like Vanguard is Microsoft and Fidelity is Google and they could launch Gmail and say that thing that's your primary business, we're going to make that free now and you have no other businesses to compete with us on because you don't have cash coming in from anything else. So, sorry.

• 2:46:20David Rosenthal?

  Yep.

• 2:46:21Ben Gilbert?

  The pushback is I don't think there's a difference between three basis points and zero basis points. If we go back to my example earlier of you throw $100,000 in and the market compounds at 7% and your fee is 0.03%. That is a difference at the end of the day of 1.48 million and 1.497 million. So, not a huge difference even 40 years later of compounding. I don't think people are going to switch over that.

• 2:46:49David Rosenthal?

  Yep. Yep. There's another aspect to this too, though, which your Gmail versus Outlook Mail analogy is holds even more. Fidelity is just a better product and product experience than Vanguard. So during the pandemic especially, it exposed that Vanguard's customer service and technology is like jank. It is not good. And there were a lot of horror stories of trades not going through, fund account transfers getting lost. And like, it makes sense, right? I mean Vanguard, the downside of its structure is that there are no excess profits that can be invested for the long term in things like technology and things like customer service.

• 2:47:33David Rosenthal?

  Whereas Fidelity, as they started to realize that this strategy is going to work for them, they said, oh, this is going to be a weak spot for Vanguard. We're going to double down on technology. We're going to double down on customer service. And we're going to make our brokerage platform and our 401k platform vastly superior to what Vanguard offers.

• 2:47:51Ben Gilbert?

  Yep. It is an inherent trade off in the model. You don't have as much money in the kitty to build the best in class technology platform or the best in class customer service. You could, but you probably need to raise prices a little bit and they just need to get comfortable with that.

• 2:48:05David Rosenthal?

  Yep. Yep. So that's the Fidelity story. The BlackRock story is different, but also rooted in ETFs. And in BlackRock's case, directly rooted in ETFs. So in 2009, during the depths of the financial crisis, BlackRock made a fantastic acquisition of a business called iShares.

• 2:48:29Ben Gilbert?

  Yeah.

• 2:48:30David Rosenthal?

  From Barclays, and this is all directly related to the crisis. So Barclays had acquired the pieces from a few different banks and financial firms, but really assembled iShares earlier in the decade. And iShares had become the leader in ETF issuance. When Barclays took over the failed Lehman Brothers assets, they needed to raise capital to shore up their capital base, and they had to put iShares up for sale as part of it. BlackRock came in and acquired it, and it has been just like a slam dunk, huge, huge win for them.

• 2:49:12David Rosenthal?

  Coming out of the financial crisis, you know what retail investors decided they liked even more than the Vanguard story and the simplicity and the folksiness of the Vanguard index mutual funds? They liked a lot of ETFs that they could trade on their own and make all sorts of Wall Street Bets-style fancy bets on the market.

• 2:49:37Ben Gilbert?

  That's right, because even Vanguard only has a few hundred funds and ETFs today, whereas BlackRock has tons of ETFs, right?

• 2:49:48David Rosenthal?

  Yes, 1,400 total ETFs.

• 2:49:51Ben Gilbert?

  Like really custom.

• 2:49:52David Rosenthal?

  In aggregate totaling 3.3 trillion in ETF assets under management, which is the largest player in the market by far.

• 2:50:01Ben Gilbert?

  Across a bunch of different strategies and sectors and stuff that Vanguard has always been religiously against.

• 2:50:08David Rosenthal?

  Yes, reluctant to pursue.

• 2:50:10Ben Gilbert?

  Yeah.

• 2:50:10David Rosenthal?

  Yep. So yeah, Vanguard is today the number two player in ETFs, but smaller both number of funds and then assets under management. And BlackRock continues to kind of accelerate away from them. Which again, right now, the ETF market is smaller than the traditional mutual fund market that Vanguard still dominates, but the ETF market is still growing 30% every year, and BlackRock is starting to run away with it here.

• 2:50:37Ben Gilbert?

  And BlackRock is also very diversified. Vanguard is a competitor with a slice of their business, but they're just in so many different sectors.

• 2:50:44David Rosenthal?

  Not to mention private assets.

• 2:50:46Ben Gilbert?

  International. BlackRock is way more international than Vanguard is in terms of the client base that they work with.

• 2:50:53David Rosenthal?

  Yep. Similar again, though, to the Fidelity strategy, BlackRock's profits elsewhere in the business allow them to subsidize the ETF business and just win massive amounts of clients.

• 2:51:06Ben Gilbert?

  Yep.

• 2:51:07David Rosenthal?

  So all of this raises an interesting question here at the end of the story. Does Vanguard's no-profit, mutualized model actually hold it back today relative to Fidelity and BlackRock? When we started the process for this episode, Ben and I originally thought that the question of the episode was going to be, how do Fidelity and BlackRock continue to exist at all despite Vanguard's, you know, obviously superior model?

• 2:51:40Ben Gilbert?

  Right. And to put a finer point on obviously superior, it was with Vanguard undercutting them on price and being structurally incentivized by their shareholders to do so.

• 2:51:51David Rosenthal?

  Yep. Yep. And we kind of had to change it here as we went through the research of, oh, actually, Fidelity and BlackRock are doing so well. Is the question actually flipped? That Vanguard's model is holding it back? I don't exactly know the answer, but what I will tell you to bring us to today here is that 24 months ago, in May of 2024, Vanguard made another big CEO announcement, that they were bringing on the first outside CEO in the firm's entire 50-year history, Salim Ramji, from BlackRock, where he was, until that point in time, head of the iShares division.

• 2:52:36David Rosenthal?

  So that really says a lot right there. And the question is, can he fix the challenges that Vanguard is facing right now?

• 2:52:45Ben Gilbert?

  And to itemize those, it's what customer service, technology?

• 2:52:50David Rosenthal?

  And this situation where they've found themselves that because of ETFs, their competitors or quote unquote competitors can access their funds easily and in sort of an open garden on their own platforms where they will then profit from the customer relationships with those fund holders.

• 2:53:11Ben Gilbert?

  Yeah, in other ways. See, I don't view that as a problem. I think like if you're Vanguard, you're delighted to get the business, to have people buying Vanguard funds on Fidelity. But there is a vulnerability of you actually don't have a relationship with those customers, but and they have a relationship with with Fidelity.

• 2:53:28David Rosenthal?

  And they can easily trade in and out of your funds whenever they want. And their advisors on those other platforms might one day advise them to.

• 2:53:36Ben Gilbert?

  Yep. Gee, wouldn't it be smart to have a giant advisory business of your own? To build the direct relationship with those customers.

• 2:53:44David Rosenthal?

  Right. So yeah, what does Salim do when he comes in?

• 2:53:47Ben Gilbert?

  Well, I think it's some of these things we've been talking about. It's expand the advisory business. In addition to that, expand fixed income, which we haven't talked about in a while. Try and expand into retirement where obviously Fidelity has really knocked it out of the park. He's talked on podcasts about making deeper technology investments and improving the client experience. There is this interesting question, which is that they haven't really had any new innovations in a while, call it a decade, that have been really meaningful to the business and that they've continued to scale. They did buy a direct indexing platform called Just Invest, but afterwards haven't done that much with it. Similarly, the personal advisor services grew really fast at launch and then in the years afterwards.

• 2:54:31Ben Gilbert?

  But since COVID, I don't think.

• 2:54:33David Rosenthal?

  They have been mostly flat.

• 2:54:35Ben Gilbert?

  Yeah, or at least they haven't been putting out any press releases talking about how big it is getting. One interesting one that I was surprised to see is an expansion into private equity.

• 2:54:45David Rosenthal?

  Yeah, yeah, that was surprising.

• 2:54:47Ben Gilbert?

  So kind of before talking about why they're doing it, it is worth calling out this crazy thing, which is for public.

• 2:54:56Ben Gilbert?

  Equities and for bond funds, prices have seen massive compression thanks to Vanguard, where you're seeing they used to charge 1.5%, 2%, 50, 60 years ago, and now you are seeing the Vanguard effect. Seven basis points at Vanguard and 40 basis points for the rest of the industry. Venture and private equity is 2 and 20, or often even higher. I've seen plenty of higher fee structures than that also.

• 2:55:22David Rosenthal?

  Right. Not only is it 2% assets under management fee to the fund manager every year, there's also a performance fee on top of that in the form of carry.

• 2:55:33Ben Gilbert?

  So David, you and I are in this world. We've been venture investors in the past. We do venture investing now. What is your take on structurally why the Vanguard effect has not come to venture capital and private equity?

• 2:55:45David Rosenthal?

  Yes. I used to think about this a lot, and now I think the answer is just quite simple. Venture capital and private equity is an access business, and it's not like you can just call up your broker and say, hey, I want some shares of Anthropic today and execute an order. You need to pay for access, and that's what venture capital is doing, and that's what private equity is doing.

• 2:56:07Ben Gilbert?

  In private markets, the assets have to pick you back. But in the public markets, they do not.

• 2:56:12David Rosenthal?

  Yes.

• 2:56:13Ben Gilbert?

  And in venture capital, there is this chance of extreme outperformance in a power law way for the very best funds, and investors actually are willing to tolerate fees for that chance at outperformance.

• 2:56:24David Rosenthal?

  Yep.

• 2:56:25Ben Gilbert?

  The other thing is you really do need a crazy person like Jack Bogle that is interested enough in capitalism to spend their life in the world of investing, but not capitalist enough to want to benefit from it in any way, which is like this incredibly rare, rare person. And Jack didn't exist in this world at all. I mean, he only was in the world of mutual funds and basically had no contact with the venture and private equity world.

• 2:56:53David Rosenthal?

  Yeah, there hasn't been a Jack Bogle in the private asset world of VC and private equity. And there hasn't been another Jack Bogle in the public asset world either. He is one of one.

• 2:57:03Ben Gilbert?

  There hasn't been another Jack Bogle in any industry. I mean, that's the interesting thing to call out here is to spoil one of my giant end notes of this episode, my quintessence, there's no reason why mutual ownership of a corporation

• 2:57:17Ben Gilbert?

  Needs to be strictly in the asset management business. I mean, if this is a better form of capitalism, which I think like, I'm excited about this model. I'm fascinated by it. It seems like this like really beautiful elegant structure that provides a lot of durability. Why aren't we seeing it in retail and grocery and technology? And why aren't the customers always the owners of the company? Or at least, why isn't there literally any other examples other than REI?

• 2:57:49David Rosenthal?

  REI.

• 2:57:50Ben Gilbert?

  An outdoor, but that's probably the biggest example. And then a handful of small grocery stores. And the other scale players are probably just insurance companies or banks.

• 2:57:59David Rosenthal?

  Yeah, yeah.

• 2:58:00Ben Gilbert?

  But like, why, why isn't the economy littered with this?

• 2:58:03David Rosenthal?

  Let's table this question for analysis, but to keep it on Salim and Vanguard today.

• 2:58:07Ben Gilbert?

  Yes.

• 2:58:07David Rosenthal?

  They're entering private assets for the first time.

• 2:58:09Ben Gilbert?

  They are entering private assets. And the big thing is these companies are staying private longer. And so, so much more of the innovation engine of the American economy is happening in private markets. And so if you're going to best serve investors, then you do want to find some way to get exposure to it. And the question is, can they do it in a Vanguard-y way? Where they, they do it at, at cost or as close to at cost as possible. And we've seen an announcement of an alliance with Blackstone, the huge private equity firm, which will be really interesting. And I think the question is, what's the economics there? And at what scale can they do it? Because at least historically, the private markets were a lot smaller than the public markets.

• 2:58:54Ben Gilbert?

  Now with multiple trillion or near trillion dollar companies in the late stage private markets, they're pretty big now.

• 2:59:01David Rosenthal?

  Yep, yep. Yeah, this needs to get figured out one way or another. Navigating the fee question is going to be a big one. Because again, like we said, this is a fundamentally different market where the asset needs to pick the investor and access is limited and scarce. So like, the best investors in private markets think like Sequoia, Benchmark, et cetera, and the venture world at least, like, why would they ever give up their fees?

• 2:59:27Ben Gilbert?

  Right, right. The other thing that's happened is the success of the index fund has sort of created A barbell in a lot of people's portfolio where you kind of own Vanguard as your like 80%. You're cheap beta for most of your net worth. And then you kind of like play with the other 20% and look for asymmetric bets to make. Does Vanguard want to play in that 20% at all? Are they satisfied kind of being the core for most people? That'll be the interesting thing to watch.

• 2:59:58David Rosenthal?

  Yeah, and it seems like Saleem is moving them in the direction of like, yes, private assets, crypto, et cetera.

• 3:00:04Ben Gilbert?

  Yeah. My big question is, when you are owned by your current set of customers, why grow? You don't have any shareholders to appease. Like normally in a company, when I buy a share of Apple, it's because I think Apple is going to compound their profits, their cash flows in the future at a higher rate than anything else that I could invest in. And so it's their job to grow to benefit me as the shareholder. Vanguard doesn't have that. Their only charter is appease the needs of their current customers.

• 3:00:43David Rosenthal?

  Right. That's a great point. There actually is no built in incentive or obligation to grow.

• 3:00:51Ben Gilbert?

  That's right.

• 3:00:51David Rosenthal?

  With a structure like Vanguard. The only reason to do so is if you believe the mission of the company, either as set up by Jack or as it should be today, is to bring the service to as many people as possible. But that's just a value judgment. There's no incentive there.

• 3:01:12Ben Gilbert?

  Right. The answer I suspect Vanguard leadership would give you is you do actually need to grow to stay competitive because you need to keep investing in the platform. And the current cash flows off our small management fees are not enough. To make all the investments that we want to make.

• 3:01:33David Rosenthal?

  Yeah.

• 3:01:33Ben Gilbert?

  So you do need to fund like a fixed cost build out with your future customers. So you sort of have to grow to get them in. The other thing I would suspect they would say is to best serve our current customers, we need more products to offer them. And so we need to enter wealth management and we need to enter private equity in order to better serve our owners slash customers. And I think that there's merits to that, too.

• 3:01:59David Rosenthal?

  Okay, so that's the last couple of years in the new management at Vanguard. Take us to today by the numbers.

• 3:02:05Ben Gilbert?

  So total assets is now $12 trillion. $2 trillion of that, interestingly, is active.

• 3:02:12David Rosenthal?

  Yes.

• 3:02:13Ben Gilbert?

  So just to underscore that Jack Bogle was not a index passive zealot. He was a zealot for low fees. And I think this is the DNA of Vanguard is can they figure out how to, using their mutual ownership structure, continue to enter more and more sectors where they can squash fees to zero or as near zero as possible, especially in these scenarios where they can get average returns at a dramatically below market cost. That is the like magic of the whole thing.

• 3:02:42David Rosenthal?

  Yep, yep. Again, very Costco like.

• 3:02:45Ben Gilbert?

  Yes.

• 3:02:45David Rosenthal?

  You've seen Costco expand into vacations and autos. Yeah, why can't Vanguard do the same?

• 3:02:51Ben Gilbert?

  Yep. So it's crazy. As much as we've talked about the index fund as the central narrative of this story, Vanguard's AUM was mostly their active funds for the first 20 years. By 1994, indexing was still only 15% of their total assets under management. And then, as we talked about, they really took off in the 90s and 2000s. Today, 84% of their assets are passive index funds. But you go back to 1974, it was 0%.

• 3:03:22David Rosenthal?

  Right.

• 3:03:22Ben Gilbert?

  And it stayed sub 15% for the first nearly two decades.

• 3:03:26David Rosenthal?

  Yeah, 20 years, yep.

• 3:03:27Ben Gilbert?

  Now on to expense ratios. Vanguard's average ETF and mutual fund expense ratio is now down to 0.07% with some ETFs, like the one that I'm in, the VLO, is 0.03%. The industry average across mutual funds and ETF is 44 basis points. So that is six and a half times Vanguard's average. So even after all these years and all the Vanguard affecting. There is still quite a bit of difference between Vanguard and the industry average.

• 3:04:03David Rosenthal?

  The average mutual fund out there, yep.

• 3:04:05Ben Gilbert?

  Yes. Notably, not the average passive index fund because basically everyone has had to meet Vanguard there. But it's interesting how the Vanguard effect has even dragged down the active public managers, too.

• 3:04:16David Rosenthal?

  Yes, yes.

• 3:04:17Ben Gilbert?

  84% of Vanguard's funds have outperformed their peers over the last 10 years. They have 20,000 employees. They have 50 million investors worldwide. But notably, the last thing I'll say is a little over 90% of their investors and their investor capital is in the US. So they are not nearly as global as BlackRock or Invesco or Franklin Templeton.

• 3:04:39David Rosenthal?

  Yep.

• 3:04:40Ben Gilbert?

  So, all right, should we do analysis?

• 3:04:43David Rosenthal?

  Well, on this one, I have one more thing.

• 3:04:47Ben Gilbert?

  Ooh.

• 3:04:47David Rosenthal?

  Before we go into analysis.

• 3:04:49Ben Gilbert?

  Ooh, lay it on me.

• 3:04:50David Rosenthal?

  Ooh. Well, listeners might have noticed, we never really said what happened to Wellington.

• 3:04:58Ben Gilbert?

  Oh, and the divorce?

• 3:04:58David Rosenthal?

  After the divorce, yep. The crazy thing, they went on to build their own trillion-dollar firm, 100% devoted to active management.

• 3:05:13Ben Gilbert?

  It's the anti-Bogle.

• 3:05:14David Rosenthal?

  So if you know anything about the active management space today, Wellington Management Company is one of the largest players out there. And yes, it is the very same Wellington Management Company, all the way back to Philadelphia and Walter Morgan.

• 3:05:30Ben Gilbert?

  So they built this giant pure active firm in the era that massively bent toward passive indexing.

• 3:05:38David Rosenthal?

  Yes.

• 3:05:38Ben Gilbert?

  So was it the same four guys that sort of stayed and rebuilt it?

• 3:05:42David Rosenthal?

  So after Jack left, the original four Ives partners took over the firm and slowly...

• 3:05:50David Rosenthal?

  Rebuilt it into something new. Remember, it had been a public company. They retake it private in a management buyout. And then they basically radically reconfigure what Wellington is. They go out and they recruit a bunch of young, talented, new partners to come in. And then they restructure the partnership into a sort of progressive generational transfer, where senior partners age out of their equity in the firm and then younger partners age in. And it's worked incredibly well for them. So the second half of the 1980s, as the stock market rebounds,

• 3:06:36David Rosenthal?

  Wellington Management gets totally rebuilt. At one point in time, they take over management of MIT's endowment, like the actual MIT. The Massachusetts Institute of Technology. They obviously have always been in equities. They build a debt practice, a private capital practice, an alternatives practice. They go international. But probably their closest sort of comp today is Capital Group, the giant firm in Los Angeles that we talked about. Wellington manages about 1.3 trillion in assets today. Capital Group manages 3 trillion, so larger, but like both very well respected. And then the best part, Wellington Management still does

• 3:07:20David Rosenthal?

  the investment management for the Wellington Fund within Vanguard, even to this day.

• 3:07:27Ben Gilbert?

  Really?

• 3:07:28David Rosenthal?

  And that Wellington Fund not only still exists, it has $110 billion in assets today.

• 3:07:37Ben Gilbert?

  So it's technically a Vanguard administered fund, but the investment advisory is done by Wellington Management?

• 3:07:44David Rosenthal?

  Management company, same as always. It's this incredible story and Jack and the Ivest partners eventually reconciled. In the early 90s, Jack goes up to Boston. They all sit down to dinner and they're like, hey, you know, we have gone our separate ways. It's been a long time. It's time to bury the hatchet. And the relationship between Vanguard and Wellington has never been better. Wellington manages several other Vanguard active equity funds and portfolios for them as well.

• 3:08:16Ben Gilbert?

  Amazing.

• 3:08:17David Rosenthal?

  How crazy is that? That really like is kind of heartwarming.

• 3:08:20Ben Gilbert?

  It is, and what a way to wrap the story. It's full circle.

• 3:08:22David Rosenthal?

  What a way. Yeah, yeah. All right, let's move into analysis.

• 3:08:25Ben Gilbert?

  Okay, so my big question here in analysis, and I've got some playbook themes that I want to hit, but I've been cliffhanging from earlier. Why do you think outside of some mutual insurance companies, REI, some local grocery stores? Why isn't it more popular to see this mutual ownership structure in our world?

• 3:08:48David Rosenthal?

  Yep. Well, I think you could argue that the NFL in its own way is this. Obviously not to the fans, but to the constituent teams.

• 3:08:56Ben Gilbert?

  Eh, the NFL was, I actually don't, I disagree with the NFL take. I think the NFL take is it's a collective bargaining agreement. It was, you know, the year is whenever it was, 1960, 1961. By linking arms and bargaining together, we're going to get more for our TV deal than we would independently. They observed that working and then they just decided we're going to be taking that stance for everything and negotiate as one league going forward. This is different, which is can we avoid having another party to our entity, the shareholder? And can we get everything that we would need out of shareholders, primarily capital, out of our customers?

• 3:09:41Ben Gilbert?

  And maybe that's why it works uniquely for Vanguard and for sort of asset management is because the product is capital, you can tap your customers for the thing you would normally tap investors for.

• 3:09:55David Rosenthal?

  Yep, you definitely need to have the ability to do that. I mean, even Vanguard's real estate on their campus in Malvern, when they were constructing that, they tapped the. Shareholders, they tap the fund holders for essentially construction loans.

• 3:10:11Ben Gilbert?

  Oh, interesting.

• 3:10:12David Rosenthal?

  To construct the campus. Yes, you do need to have enough capital in the base and ability to do that in order to fund your fixed costs.

• 3:10:19Ben Gilbert?

  Whereas like, I don't know if REI could raise a bond from its members. I mean, the fact that 15 years ago, I paid $30 to become an REI co-op member.

• 3:10:29David Rosenthal?

  Right.

• 3:10:29Ben Gilbert?

  Am I really a member?

• 3:10:30David Rosenthal?

  If they called you today and they're like, we need your money to finance the next door build out, you'd be like, no.

• 3:10:36Ben Gilbert?

  Right. The other thing Vanguard was sort of in a unique place to rely on Wellington's active stuff to provide profits during the dark wandering years. I mean, usually the way you end up with shareholders is you need to raise money and Vanguard figured out a way to bootstrap off of the old business.

• 3:10:56David Rosenthal?

  Yep, yep. All that said, I totally agree. I think you need to be operating in a space such that you can access capital.

• 3:11:04Ben Gilbert?

  Everything I just said is an argument for founder ownership, not customer ownership. Like, if you didn't need to raise capital and the founders would just own the business forever. But this is very unique where the customers are actually the owners of the business.

• 3:11:16David Rosenthal?

  Yep. And that's where I was gonna go. It really takes a very, very special group of people to do this because you are removing a huge amount of wealth creation potential.

• 3:11:29Ben Gilbert?

  Right. You have to make a non-economic decision. You have to decide that something you would own as the founder, you don't own and the community owns instead.

• 3:11:37David Rosenthal?

  Yes. And even if you get paid a good salary and Vanguard, you know, pays high salaries commensurate with the industry.

• 3:11:44Ben Gilbert?

  Yep.

• 3:11:44David Rosenthal?

  You're not getting equity ownership and you're thus not gonna get, you know, incredible wealth generation.

• 3:11:52Ben Gilbert?

  And you're gonna have to go through absolute hell to will this thing into existence, more so than if you had regular shareholders, because you're, you have to do crazy things to get through in the lean years, especially early on. Usually, there's some economic component to being willing to go through all that. And this is admitting, I will never, ever have founder economics or economics of any kind in this entity, and you're still trying to will it into existence. So it's not only a very narrow circumstance that could allow it to exist, but it takes a very unique, a Jack Bogle.

• 3:12:30David Rosenthal?

  Yeah, a type of person in the exact, specific situation in life where he found himself. I mean, it's his quote from his memoir that I have right here. "I realized that a mutual company would never provide me with the personal fortune that so many denizens of Wall Street would earn, but it offered, I believe, my last, best chance to resume my career." Even Jack wouldn't have done it if he hadn't found himself in this situation.

• 3:12:58Ben Gilbert?

  Right. So I think it kind of mostly boils down to Jack. The other thing that makes this finance in particular uniquely well-suited to this is lots of people manage to start co-op grocery stores and small co-op things. In order to expand those businesses, they all require capital. And so you end up with shareholders at some point, or you are small and stay subscale. Finance isn't that. Finance is like software where it can scale basically infinitely once it overcomes its early fixed cost base.

• 3:13:28David Rosenthal?

  Yep, huge operating leverage.

• 3:13:30Ben Gilbert?

  I did think of one other Jack Bogle-like character who built a Vanguard-like thing. And I'm curious if the thought crossed your mind, too. I think Costco thus far has been the most correct analogy, that this is Costco on steroids, but it's also something else that was also an acquired episode.

• 3:13:48David Rosenthal?

  Oh, wow.

• 3:13:49Ben Gilbert?

  It's even in financial services.

• 3:13:52David Rosenthal?

  I guess Berkshire?

• 3:13:54Ben Gilbert?

  Visa.

• 3:13:55David Rosenthal?

  Oh, Visa, yeah, D. Hawk, yeah, absolutely, absolutely. I was gonna say Berkshire because Berkshire, as we talked about earlier, does not take fees or carry, but effectively is a private equity firm. But it's not the same because Warren owns a huge chunk of Berkshire.

• 3:14:10Ben Gilbert?

  Became worth $100 billion from the success of it.

• 3:14:12David Rosenthal?

  Exactly.

• 3:14:13Ben Gilbert?

  He doesn't take outsized economics, he takes commensurate economics.

• 3:14:16David Rosenthal?

  Yep, I forgot about D. Hawk. You're totally right.

• 3:14:19Ben Gilbert?

  Listeners, for anyone who hasn't tuned into our Visa episode, it took a similarly I'm not sure if selfless is the right word, but a person who was not motivated by getting to own the fruits of their labor, where Dee just decided this is the best structure if all these banks link arms and collectively create this thing that if memory serves, it might have even been a nonprofit or some sort of strange structure.

• 3:14:47David Rosenthal?

  It was. Yeah, yeah.

• 3:14:48Ben Gilbert?

  Strange structure. Now it's a corporation and it's gone public and all that. But for a while it was just like-

• 3:14:52David Rosenthal?

  But it had to get restructured in order to go public in 2008, I think it was. Yeah.

• 3:14:56Ben Gilbert?

  Right. But it was this realization that there exists a better structure that will uniquely enable this interbank experience. And I want to will that into existence. It's going to be my life's work and I'm not going to own it.

• 3:15:08David Rosenthal?

  Yep.

• 3:15:08Ben Gilbert?

  And I think that's the type of person that it takes to do this.

• 3:15:11David Rosenthal?

  Yep. And you're right. I think there are a lot of parallels between Dee and Jack. But Dee, if memory serves, was an employee.

• 3:15:19Ben Gilbert?

  Yes.

• 3:15:19David Rosenthal?

  When he started this. So Visa, yes, he sort of forewent founder economics, so to speak, but it wouldn't have been on the table for him otherwise. This was his chance to be on the big stage.

• 3:15:32Ben Gilbert?

  Yeah, he had to convince his employer not to be the owner.

• 3:15:35David Rosenthal?

  Yeah.

• 3:15:36Ben Gilbert?

  But he never could have been the owner.

• 3:15:37David Rosenthal?

  Yep. Yep.

• 3:15:38Ben Gilbert?

  Unlike Jack.

• 3:15:39David Rosenthal?

  Yep. Good call, though. I love that.

• 3:15:42Ben Gilbert?

  Thank you.

• 3:15:42David Rosenthal?

  Visa connection.

• 3:15:43Ben Gilbert?

  Thank you. I was proud of that one.

• 3:15:46David Rosenthal?

  You should be. You should be.

• 3:15:48Ben Gilbert?

  Other playbook themes. This is a case study in aligning incentives. If you want something to happen and Jack really wanted low cost investing to happen, since the math showed that it was superior in the majority of cases, you need to align incentives for it. So I think most people coming into this episode know Vanguard has low cost index funds. Some people know that Vanguard is owned by its funds investors, but I think few people realize that is why it is low cost.

• 3:16:20David Rosenthal?

  Yep.

• 3:16:21Ben Gilbert?

  The investors- Are the board of directors or elect the board of directors and thus will always vote to lower fees when they can lower fees because it's in their own interest.

• 3:16:32David Rosenthal?

  Jack's quote on this that he would say often is "strategy follows structure."

• 3:16:36Ben Gilbert?

  Yes.

• 3:16:37David Rosenthal?

  And by setting our structure as such, this had to be our strategy.

• 3:16:41Ben Gilbert?

  Yep. Another playbook theme I had is people often talk about compounding returns. We've done it hundreds of times on this show. Bogle really understood the power of compounding costs. His quote on this, "Where returns are concerned, time is your friend, but where costs are concerned, time is your enemy." And Vanguard's strategy was just that, to give you the power of compounding returns without what Jack calls "the tyranny of compounding costs."

• 3:17:10David Rosenthal?

  So, Jack, yes.

• 3:17:11Ben Gilbert?

  I don't think corporate structure and corporate governance has ever played such an important role as it did on this one.

• 3:17:19David Rosenthal?

  Yep.

• 3:17:19Ben Gilbert?

  I was racking my brain on, you know, we always talk about these founder-led companies or where private family ownership lets you take a longer view, but this is something else entirely where it was literally path-dependent. The only reason that they had the market opportunity that they had was because of the corporate structure that they had.

• 3:17:36David Rosenthal?

  Yep.

• 3:17:36Ben Gilbert?

  Be fun to see if there's other ones of those that exist.

• 3:17:39David Rosenthal?

  Yep.

• 3:17:40Ben Gilbert?

  All right. Should we get into the criticisms of passive investing as a movement?

• 3:17:45David Rosenthal?

  Yes. The crisis. We would be remiss if we don't.

• 3:17:49Ben Gilbert?

  The crisis, of course.

• 3:17:50David Rosenthal?

  The passive crisis.

• 3:17:51Ben Gilbert?

  What is, once a revolution becomes a crisis if you let it become successful enough.

• 3:17:56David Rosenthal?

  Yeah. And this is what we were alluding to earlier with like, hey, if one of these companies were to go down, it would be systemically really bad. Also, the flip of that is these large index fund complexes, of which Vanguard is the largest, control a huge percentage of the voting shares of all American corporations and increasingly all corporations around the world.

• 3:18:18Ben Gilbert?

  Yeah. So first of all, there's this name, passive investing.

• 3:18:24Ben Gilbert?

  That's not true. It's not like an algorithm determines what is in the S and P 500. It's a committee of humans.

• 3:18:33David Rosenthal?

  Mm hmm.

• 3:18:34Ben Gilbert?

  So this whole thing is predicated on just, you know, owning that basket of stocks. But the S and P 500, yeah, it's got some rules, but it's not entirely rules based. Those just are govern what companies are eligible to get voted in by a small group of people around the table.

• 3:18:51David Rosenthal?

  Who you might say are

• 3:18:52Ben Gilbert?

  actively

• 3:18:53David Rosenthal?

  the fund advisors, the investment advisors to the majority of, you know, the American public here.

• 3:18:58Ben Gilbert?

  Yes. The counter argument to this is that only matters in the short run. In the long run, the S and P 500 returns are almost exactly the same as the total market returns. So it doesn't keep me up at night, but I always think it is a little bit funny of like, it's not totally passive.

• 3:19:12David Rosenthal?

  Yep.

• 3:19:12Ben Gilbert?

  Okay. So other criticisms here of indexing. Unlike businesses that have some form of physical operations or like an addressable market being small that constrains it. Asset management can scale infinitely, like its market is investing literally any currency in literally any company. Which is the TAM for that is like all of humanity. It's all of humanity's wealth. So

• 3:19:40David Rosenthal?

  Market size unconstrained.

• 3:19:41Ben Gilbert?

  It is truly market size unconstrained. You know, think of the largest markets in the world, transportation, housing. This is maybe bigger than any of that. It's a little bit of a crazy thought exercise. So it's not constrained by addressable market. And it's, it just scales so elegantly, other than customer service. It just doesn't require any additional dollars of cost to serve additional customers and additional revenue. So in theory, a few index funds should continue unabated to scale and own basically everything.

• 3:20:17David Rosenthal?

  Yep. And we're well on our way to that happening.

• 3:20:19Ben Gilbert?

  Yeah. So here's the stats on it. 35 years ago, only 1% of the market was passive. It's now more than 20% of the S and P 500. And a couple of years ago, passive assets in funds overtook active assets in funds for the first time. That that just happened where passive funds eclipsed active funds. So the concern that people have is a few fold based on this. One is there's not enough active traders in the market to accurately discover price. If we're all trusting that the index is going to buy things at the correct price, you do need active managers to buy and sell to set the price.

• 3:20:58David Rosenthal?

  Yeah. And the associated criticism of passive, which I think Jack would readily acknowledge is, hey, we're free riders here.

• 3:21:05Ben Gilbert?

  Right.

• 3:21:06David Rosenthal?

  We're getting all of that price discovery and price information that the active guys are doing just for free.

• 3:21:11Ben Gilbert?

  I don't buy this argument. Like, I'm not concerned in any way about this. I think even if you had 95% passive, the prices are set by the marginal trader.

• 3:21:22David Rosenthal?

  Right.

• 3:21:22Ben Gilbert?

  You don't need very many people in there arguing with their dollars about what something is worth to figure out what it's worth.

• 3:21:29David Rosenthal?

  Yep. And the profit opportunity from arbitraging.

• 3:21:33Ben Gilbert?

  Right.

• 3:21:33David Rosenthal?

  Is so great. And that profit opportunity becomes greater as this problem, quote unquote, gets worse. So like, the right market balance will figure itself out here.

• 3:21:45Ben Gilbert?

  Yes, there is an equilibrium. Long before we get to that problem, you'll have arbitragers that are interested in trading because it's profitable, that you're right, it'll hit an equilibrium. At least that's my my perspective on this. The other concern is, well, all these companies now have the same shareholders. Apple, Microsoft, Google, it's all 20% plus, these big.

• 3:22:05David Rosenthal?

  Vanguard, Fidelity, BlackRock, State Street, et cetera.

• 3:22:07Ben Gilbert?

  So why would they compete if, let's say that 20% goes to 50% or 80%? Shouldn't the owners go tell the CEOs, hey, you guys should just collude and keep prices high? Let's reap in the corporate profits. Let's screw over the American public, the customers, and let's all just make a lot of money together.

• 3:22:28David Rosenthal?

  This also seems a bit farfetched.

• 3:22:29Ben Gilbert?

  Right. It it sounds provable in an academic thesis and then you like get actually out in the real world and you talk to some CEOs. Do you think the CEO of any company is is gonna stop competing with their biggest competitor in a fierce battle because an index fund manager?

• 3:22:46David Rosenthal?

  Share common ownership in index funds? No.

• 3:22:48Ben Gilbert?

  There's just no way.

• 3:22:49David Rosenthal?

  Yeah. I do think the more legitimate concern version of this is voting and

• 3:22:57Ben Gilbert?

  Yes.

• 3:22:57David Rosenthal?

  shareholder and like so being active shareholders and holding management to account.

• 3:23:02Ben Gilbert?

  And right now, it's actually pretty interesting. The way that each of these companies and each of these funds handles how to vote the shares of the index funds is all over the board. Some of them literally let individual index holders vote on individual issues. That's incredibly rare. Usually what they say is, I want to pick one of these five options and vote with management, with the majority, with a set of ESG guidelines. And you can kind of, that's the common thing. Most of the times, it's suggestions of how should we vote the shares? But I get where you're going, that the fund manager of, let's say, one of these Vanguard or BlackRock grows to be, I don't know, 60% ownership of every company in America, suddenly

• 3:23:45Ben Gilbert?

  they have voting control over those companies. And it's a big responsibility to decide how they're going to vote those.

• 3:23:50David Rosenthal?

  Right. Or in aggregate, you know, a set of three or four of these large index funds and then their fund holder base, which is the American public. It's like, we've turned the board of directors of every company into an election on the order of like a, you know, US political election.

• 3:24:09Ben Gilbert?

  That's funny. It turns every corporate governance issue into the court of public opinion.

• 3:24:15David Rosenthal?

  Yeah.

• 3:24:15Ben Gilbert?

  Like, how does the American public feel about this?

• 3:24:17David Rosenthal?

  Which? I have no idea if that's a good or a bad thing, but it's certainly not how corporate boards have operated in the past.

• 3:24:24Ben Gilbert?

  I will say this 20% is a little misleadingly low because thanks to direct indexing and people constructing their own portfolios that look like indexes but aren't actually in index funds, the passive ownership in companies could be more like 30 to 40%. But the people that are direct indexing or creating the mirror portfolios, they're not in funds. So you don't really have to worry about how the funds are voting. But it does impact, those people aren't trading, those people aren't participating in price discovery. That's just passive ownership of everything.

• 3:24:56David Rosenthal?

  Yep, yep.

• 3:24:57Ben Gilbert?

  So.

• 3:24:58David Rosenthal?

  At the end of the day, on all of this stuff, I think these are some issues that will get magnified and need to be worked out, but none of them feel like a real existential threat to me to passive.

• 3:25:11Ben Gilbert?

  Yeah, totally agree. All right. Should we do our seven powers analysis?

• 3:25:16David Rosenthal?

  Let's do it. Seven powers. This will be fun because, you know, Hamilton-Helmers definition of seven powers is what enables a firm to earn sustainably more profits than their closest competitors. And well, Vanguard by its very nature earns no profits.

• 3:25:35Ben Gilbert?

  Right. We're going to have to sort of adapt the definition of seven powers to really align with more of its spiritual goal.

• 3:25:41David Rosenthal?

  Why do 50 million people have $12 trillion with this business?

• 3:25:45Ben Gilbert?

  Yeah, maybe it can be expressed through market share instead of through the sum of profits.

• 3:25:50David Rosenthal?

  Yeah. Why is Vanguard the market share leader in mutual funds and index funds?

• 3:25:54Ben Gilbert?

  Because you can't really talk about it in terms of theoretical profits because the only thing that earned them the right to exist is not generating profits. So if they were to recognize their theoretical profits, then they may not exist at all, at least historically.

• 3:26:08David Rosenthal?

  Yep.

• 3:26:08Ben Gilbert?

  So you sort of have to do the analysis based on market share rather than on trying to estimate what their theoretical profits would be.

• 3:26:15David Rosenthal?

  Yep. And maybe one little twist on this that we can keep in mind as we go is a question I was asking through the research of what's to stop another idealistic young person from coming along and saying, I also don't care about profits and I am also going to start another Vanguard and compete with them.

• 3:26:36Ben Gilbert?

  What protects Vanguard? That's the question. So the seven are scale economies, network economies, counter positioning, switching costs, branding, cornered resource, and process power.

• 3:26:49David Rosenthal?

  Yep. Well, to my question, scale economies for sure.

• 3:26:53Ben Gilbert?

  Absolutely.

• 3:26:54David Rosenthal?

  Absolutely.

• 3:26:55Ben Gilbert?

  I mean, we said earlier, this business like Costco has scale economies shared. The reason they exist in the first place is because there were not existing low-fee index fund providers. If you were to try to start a new one today, in order to break even, you'd probably need 1% or 2% fees, starting from a zero asset base. And so you'd be inherently non-competitive. If you're not already big, or you don't go raise a giant amount of money to subsidize it, then you kind of need Vanguard's scale economies to compete.

• 3:27:28David Rosenthal?

  Put another way, three basis points on $12 trillion is still a lot of absolute money that can fund a lot of salaries and a lot of fixed places. Sorry, okay, oh, sorry, sorry. Seven, seven, even more money, even more money.

• 3:27:42Ben Gilbert?

  So that's scale economies. That's an obvious one. Counter positioning? I think this may be the most extreme example of counter positioning ever.

• 3:27:51David Rosenthal?

  Right.

• 3:27:52Ben Gilbert?

  Bogle did something that was essentially non-economic. There's no economic incentive to create this company in the first place. Their ownership and fee structure was an advantage that cannot be replicated, not only by a competitor who would be concerning and destroy their business, but like, anyone else who tried to do this would make no money.

• 3:28:15David Rosenthal?

  Yes, extreme counter positioning. Now, interestingly, it still took like, the better part of two decades to get real adoption for this, but I think that's largely because it also took a while for all the mechanisms to really get put in place.

• 3:28:29Ben Gilbert?

  I think that's right.

• 3:28:30David Rosenthal?

  Yep. I don't think there's really network economies here.

• 3:28:32Ben Gilbert?

  Nope.

• 3:28:33David Rosenthal?

  There's certainly no switching costs, especially once ETFs are on board. In the traditional mutual fund industry, yes, but ETFs.

• 3:28:41Ben Gilbert?

  I completely disagree.

• 3:28:41David Rosenthal?

  I think eliminate switching costs. Oh, you disagree?

• 3:28:44Ben Gilbert?

  There's no chance that I'm going to sell my Vanguard index fund and realize the capital gains tax only to switch to a different index fund.

• 3:28:52David Rosenthal?

  Ah, sorry. I was thinking about switching costs in terms of a customer relationship, but.

• 3:28:57Ben Gilbert?

  But that's this kind of unbelievable thing about if you're a fund manager, having someone invested. If they can let the compounding continue unabated,

• 3:29:04David Rosenthal?

  Right, right, right, right. And not realize the capital gains taxes. Okay, yep, fair point.

• 3:29:11Ben Gilbert?

  So I think this is inherent in the fund business model.

• 3:29:14David Rosenthal?

  Mm hmm, mm hmm.

• 3:29:15Ben Gilbert?

  Especially the open-ended and public fund business model.

• 3:29:18David Rosenthal?

  That's a great point. Yep. I do think ETFs meaningfully changed this equation for Vanguard, but in a sort of side way. Just simply that the customer relationships could now be ported out of Vanguard easily.

• 3:29:32Ben Gilbert?

  Out of Vanguard, the brokerage.

• 3:29:33David Rosenthal?

  Yes.

• 3:29:34Ben Gilbert?

  But not out of Vanguard, the fund.

• 3:29:35David Rosenthal?

  Yep.

• 3:29:36Ben Gilbert?

  Branding.

• 3:29:37David Rosenthal?

  Branding, I mean, God, the Bogle heads, the Warren Buffett endorsements, like the decades of building the brand.

• 3:29:44Ben Gilbert?

  I'd have to think back to when I first started buying index funds, but I probably picked Vanguard over a fidelity fund because they both looked de minimis low fees. And I was like, oh, Vanguard's probably the right thing I'm looking for.

• 3:29:59David Rosenthal?

  Really hard to replicate Warren Buffett saying that a statue should be erected to Jack Bogle and that he's a hero to the American public and to him.

• 3:30:09Ben Gilbert?

  Now, interestingly, there is some wholesale transfer pricing because of the S and P licensing, where the branding is a Vanguard S and P 500 index fund. And Vanguard probably has to pay a good amount of what it makes on that fund to S and P Global.

• 3:30:26David Rosenthal?

  It's got to be the biggest single component.

• 3:30:28Ben Gilbert?

  Yeah, of course. Yep. Process power. There's something unique in the culture at Vanguard. I think people make non-economic decisions to work there because they're motivated by the mission.

• 3:30:45Ben Gilbert?

  And it might also attract a set of people that are not interested in being in New York City finance.

• 3:30:50David Rosenthal?

  Yep. I think that's totally true.

• 3:30:52Ben Gilbert?

  Yep. Cornered resource. I don't think it exists.

• 3:30:56David Rosenthal?

  I don't think so.

• 3:30:57Ben Gilbert?

  All right, that's power. Should we do quintessence?

• 3:31:00David Rosenthal?

  All right. Quintessence.

• 3:31:02Ben Gilbert?

  Here's mine. So we haven't talked about this yet, but I think it kind of comes down to this. Jack had the insight that running a successful mutual fund is actually not a differentiated product. It is a commodity.

• 3:31:17David Rosenthal?

  Yep.

• 3:31:18Ben Gilbert?

  What you are seeking is the highest possible long-term return on your capital. That is not like buying a unique piece of jewelry. It is like buying a soybean. I mean, this industry that for decades had sort of sold itself on uniqueness, there isn't a unique thing you're seeking. It is just a risk return profile over a long period of time. And so in commodity markets, it is a different set of things that determine a winner versus differentiated product markets. Scale really matters, brand really matters, and most importantly,

• 3:31:56David Rosenthal?

  Low cost.

• 3:31:57Ben Gilbert?

  The lowest price is the market clearing price. If someone's selling undifferentiated coffee beans, or soybeans, or oil for a dollar lower than you are, your demand goes to zero and they get all of your demand. And he realized that actually, the public equities investment business is that. And so if you need the lowest price, then you need the lowest cost structure.

• 3:32:23David Rosenthal?

  I like that. I might suggest a modification.

• 3:32:25Ben Gilbert?

  Please, I'm open to it.

• 3:32:27David Rosenthal?

  I would suggest that Jack bifurcated the public equities market into commodity and non-commodity before Jack and before Vanguard.

• 3:32:42Ben Gilbert?

  That's interesting. He invented a commodity sleeve.

• 3:32:44David Rosenthal?

  It was all differentiated, all marketed as differentiated products. Selling the dream of outsized returns. Jack took a huge chunk of that, broke it off, and said, nope, this is a commodity market. I still do think there is a successful and thriving industry selling the dream.

• 3:33:02Ben Gilbert?

  I mean, clearly, there's an existence proof of that.

• 3:33:04David Rosenthal?

  And some of them deliver on it. But yeah, Jack broke off a huge chunk of it and created a new market.

• 3:33:10Ben Gilbert?

  Yeah, I love the quote that he has. The grim irony of investing is that we investors as a group not only don't get what we pay for, we get precisely what we don't pay for.

• 3:33:20David Rosenthal?

  Yes.

• 3:33:21Ben Gilbert?

  And that whole realization around investors as a whole are the market. It is zero sum. So therefore, if you're going to own the market, you have to do so with the lowest possible fees. And I think the thing that kind of makes it all work is holding for duration. There's going to be lots of funds that you can be in that will outperform in fits and starts. But if you want to be in the upper decile after 40 years, then it turns out owning the market with no fees is an almost surefire way to do it.

• 3:33:56David Rosenthal?

  Yep, yep.

• 3:33:57Ben Gilbert?

  Not investment advice.

• 3:34:00David Rosenthal?

  Not investment advice, but you know, hey, Warren says it. So

• 3:34:03Ben Gilbert?

  Yes.

• 3:34:04David Rosenthal?

  Look to him. Which leads me right to my quintessence. My quintessence is that Warren Buffett was right. The world and America should erect a statue to Jack Bogle. And specifically, my quintessence is that more than almost any other episode I can think of, the Vanguard story and Jack's story is proof that one single human being really can change the world. This is not a product or an idea whose time had come.

• 3:34:36Ben Gilbert?

  You don't think?

• 3:34:37David Rosenthal?

  Ah, not like this. Not like this. Index funds probably would have come. Technology had gotten there.

• 3:34:45Ben Gilbert?

  Ah, but a mutual ownership.

• 3:34:46David Rosenthal?

  But a mutualization.

• 3:34:47Ben Gilbert?

  Via loss leaders.

• 3:34:49David Rosenthal?

  Yes, yes. The Vanguard effect. Would Fidelity, would BlackRock, would State Street be charging the low, low fees that they are today on their index products? Were it not for Jack Bogle and Vanguard? I don't think so.

• 3:35:05Ben Gilbert?

  It's interesting. I wonder where it would have settled because there would have been competition around pricing. And the way it usually works is you compete down to the minimum profit that firms are willing to make.

• 3:35:19David Rosenthal?

  Yep.

• 3:35:20Ben Gilbert?

  So I wonder what that sort of floor would have been if not for Vanguard.

• 3:35:23David Rosenthal?

  Right. But usually that minimum profit that firms are willing to make is not zero.

• 3:35:28Ben Gilbert?

  Zero.

• 3:35:31David Rosenthal?

  Especially not in this industry.

• 3:35:33Ben Gilbert?

  Very true.

• 3:35:35David Rosenthal?

  So, yeah, I think I agree with Warren and millions and millions and millions of people have had their financial lives changed because of him and would not have happened without him.

• 3:35:46Ben Gilbert?

  Yep.

• 3:35:47David Rosenthal?

  All right.

• 3:35:47Ben Gilbert?

  All right. I've got two bits of trivia for you.

• 3:35:49David Rosenthal?

  Oh, okay. Great. Play mommy.

• 3:35:51Ben Gilbert?

  Vanguard opened their doors on May 1st, 1975.

• 3:35:56David Rosenthal?

  Yep.

• 3:35:56Ben Gilbert?

  What other company started that same month?

• 3:35:59David Rosenthal?

  Oh, uh, Microsoft.

• 3:36:02Ben Gilbert?

  Microsoft.

• 3:36:02David Rosenthal?

  Yeah.

• 3:36:03Ben Gilbert?

  Nicely done. Isn't that crazy to think at the same you know, time that Bill Gates is toiling away in Albuquerque, you've got Bogle and crew amidst that crazy board fight all the way across the country in Pennsylvania.

• 3:36:21David Rosenthal?

  And we didn't put this in the narrative, but the initial founding headquarters location of Vanguard.

• 3:36:29Ben Gilbert?

  Valley Forge.

• 3:36:30David Rosenthal?

  Not Philadelphia, not Malvern, but nearby Valley Forge, Pennsylvania, cradle of independence in the American Revolution.

• 3:36:38Ben Gilbert?

  That's right.

• 3:36:39David Rosenthal?

  Right up the street from where I grew up. Spent many an afternoon as a child walking around that park. Little did I know what was going on there.

• 3:36:48Ben Gilbert?

  All right. So my second piece of trivia is something truly astonishing that is related to this episode, but didn't make the narrative. Arvin from Worldly Partners sent over this crazy piece of research to David and I. David, I don't know if you looked at it about the entire set of companies that have 100x since going public because he's on this quest to figure out, was it knowable at a time of IPO, how well they would do. And this basket of companies, on average, delivered a 533x since going public.

• 3:37:20David Rosenthal?

  Wow.

• 3:37:20Ben Gilbert?

  So like really good companies. On average, they saw drawdowns at some point in their life of 65% and took eight years to recover to get to their prior all time highs.

• 3:37:34David Rosenthal?

  Wow.

• 3:37:35Ben Gilbert?

  So think Nvidia, Amazon, Meta, TSMC, Nike. And I bring this up because most investors just do not have the temperament or the research capacity to decide to continue to hold these assets. So it just doesn't make sense for most people to put material chunks of their net worth in them. I don't think I realized that even for that whole basket of 100xers, the average drawdowns that they saw was 65%. Like if, if your goal is to invest in the world's greatest companies and hold for a long time, you are required to go through massive, massive downturns that could take on average eight years to return to the all time highs. Who does that?

• 3:38:20David Rosenthal?

  Well, there's two groups of people who do that. People with absolute iron stomachs.

• 3:38:26David Rosenthal?

  And index fund holders.

• 3:38:29David Rosenthal?

  So there you go.

• 3:38:30Ben Gilbert?

  And the people with iron stomachs, they might be right, they might be wrong. Like, there's high conviction wrong people much more often than high conviction right people. And so that's, you know, why there really is only one Berkshire Hathaway.

• 3:38:42David Rosenthal?

  Yep, yep. Wow, that's incredible.

• 3:38:45Ben Gilbert?

  Yeah, it's a crazy stat.

• 3:38:46David Rosenthal?

  Well, similar to that, I have a really fun thing that I learned in the research. So Jack, as we talked about, was a prolific author. I think he wrote 12 books, I want to say, in his lifetime.

• 3:39:01Ben Gilbert?

  Yeah.

• 3:39:02David Rosenthal?

  And those books continue to sell really well. All the proceeds from the book sales all go directly to the Bogle Family Foundation, where they get distributed to a whole variety of charities, including prominently the American Indian College Fund, which I think Jack was on the board of and was a huge supporter of during his life. So what another cool legacy that all of the proceeds just flow directly into charities?

• 3:39:28Ben Gilbert?

  Pretty cool. The world's largest philanthropist.

• 3:39:30David Rosenthal?

  Yes.

• 3:39:31Ben Gilbert?

  But not from the book sales.

• 3:39:33David Rosenthal?

  Not from the book sales, no, no.

• 3:39:35Ben Gilbert?

  All right, on to carve outs. The first one is, many of you will notice that we started writing in the Wall Street Journal.

• 3:39:40David Rosenthal?

  Yes.

• 3:39:41Ben Gilbert?

  We are very, very pumped about that. If you want to read our article on Ferrari, you can do that by clicking the link in the show notes. Also, on Vanguard, we just did one two days before this episode came out, that came out in the weekend edition of the Wall Street Journal.

• 3:39:55David Rosenthal?

  Yeah, this is A, super cool, and B, what a fun full circle moment for me. Earlier in my career, I worked at the Journal on the business side, not as a writer. Like, the idea that someday I and we would have a regular column in the Journal would have blown my 24-year-old mind.

• 3:40:15Ben Gilbert?

  So listeners, if you are not subscribed to the Journal and you would like to read our columns, you can go sign up at acquired.fm/wsj, and we will get you sent special links that are free for you to read, because we want this to be accessible to every acquired listener.

• 3:40:30David Rosenthal?

  Yeah, super cool.

• 3:40:32Ben Gilbert?

  Even if you already have a Wall Street Journal subscription, sign up at acquired.fm/wsj if you just want to be notified when we do have a new piece, so you don't miss it. That's acquired.fm/wsj.

• 3:40:44Ben Gilbert?

  Okay, my real carve out is I am recording this episode on a brand new MacBook Pro M5 Max.

• 3:40:53David Rosenthal?

  Yeah, you went all out.

• 3:40:54Ben Gilbert?

  I clicked the biggest.

• 3:40:56David Rosenthal?

  You clicked the max button.

• 3:40:58Ben Gilbert?

  I did, and I was definitely in the camp of all Apple silicon is amazing and it's remarkable how my M1 still feels snappy. And I was wrong. The getting an M5 Max revealed to me just how slow my 2021 computer was. And god, this thing is just such a beast. So it's very fun to be using a computer again, because I don't wait for anything anymore. Also, I upgraded my internet to get 2.5 gigs up and 2.5 gigs down. So there is just no latency between me and anything I can imagine at the moment, which is a delightful place to be in computing. Yes.

• 3:41:39David Rosenthal?

  Every time you come to visit, you haul that beast out of your backpack. I'm like.

• 3:41:44Ben Gilbert?

  My mobile battle station.

• 3:41:45David Rosenthal?

  I'm in awe of the computing power resting.

• 3:41:48Ben Gilbert?

  16 inches of pure horsepower.

• 3:41:51David Rosenthal?

  Oh, amazing.

• 3:41:52Ben Gilbert?

  It's my LaFerrari in a backpack.

• 3:41:53David Rosenthal?

  Yeah. All right, I've got three carve outs this time. The first one is Michael McKelvey on YouTube is this awesome YouTuber who I've discovered recently. He makes these super in-depth, usually sports analytics focused YouTube videos, and they're amazing. Very thoughtful, very intellectual, very highly produced, and hilarious. He just does a great job. Huge fan. I think he's based in Seattle, too.

• 3:42:24Ben Gilbert?

  Oh, sweet. Yeah, you just sent him to me a couple of days ago. I just clicked subscribe.

• 3:42:27David Rosenthal?

  So that's one. Two is the new Super Mario Brothers movie, Super Mario Galaxy. So my older daughter and I love the first Super Mario Brothers movie. When she heard that the second one was coming out, she said, oh, Dad, I really want to go see it in theaters. And so I promised her, I was like, okay, we'll go on a date. You and me, daddy-daughter date. We'll go to the movies. It was the best date I've ever been on in my entire life. I mean, don't tell Jenny, or actually do tell Jenny. We had the most amazing afternoon. We walked to the movie theater. We held hands the whole way.

• 3:43:01Ben Gilbert?

  Wow.

• 3:43:02David Rosenthal?

  We ordered lunch. The movie theater had special Super Mario themed Shirley Temples. We had popcorn, candy, you know, she snuggled up during the scary moments. And I was just like, this is what you become a parent for. This is like the best afternoon of my entire life, you know? Can't recommend it highly enough. Go on dates with your children.

• 3:43:21Ben Gilbert?

  I love it. Congratulations on parenting heaven.

• 3:43:23David Rosenthal?

  Yeah. Yeah, and then it was back to the salt mines after that. But it was great. And then my third one, a surprise last minute carve out. While I was doing research yesterday, polishing up the show notes for the script, I came across, totally accidentally by Googling, Brooks Vanguard shoes. This is like the ultimate acquired crossover. Did you know that these things exist?

• 3:43:51Ben Gilbert?

  No.

• 3:43:52David Rosenthal?

  These are old school Brooks running shoes that they still make.

• 3:43:57Ben Gilbert?

  Googling now.

• 3:43:59David Rosenthal?

  I feel like we gotta order some of these and wear them to our next event.

• 3:44:03Ben Gilbert?

  Are they actually Vanguard something? Or is it just?

• 3:44:06David Rosenthal?

  No, no, no.

• 3:44:07Ben Gilbert?

  They're just called Vanguard?

• 3:44:07David Rosenthal?

  The model is called Vanguard.

• 3:44:09Ben Gilbert?

  Oh, I see.

• 3:44:09David Rosenthal?

  But by Brooks.

• 3:44:10Ben Gilbert?

  I was thinking it was, like, I bought the Nike Kirkland Signature shoes because I had to.

• 3:44:16David Rosenthal?

  No, it is not an official crossover. It's just the name of the model. But they look pretty sweet. I feel like we gotta get a couple pairs of these.

• 3:44:22Ben Gilbert?

  Oh, and they have them in acquired teal.

• 3:44:24David Rosenthal?

  Oh, yeah.

• 3:44:25Ben Gilbert?

  All right, ordered.

• 3:44:26David Rosenthal?

  Nice. Live ordering during carve outs.

• 3:44:29Ben Gilbert?

  That's right. That's right. Well, a huge thank you to a bunch of the great folks that we chatted with to prep for this episode. First, to our partners this season. JP Morgan, trusted, reliable payments infrastructure for your business, no matter the scale. JPMorgan.com/acquired. Versal, the developer tools and cloud infrastructure to build fast, secure applications on the web. Versal.com/acquired. ServiceNow, the platform that puts AI to work for people. Servicenow.com/acquired. And Statsig, bringing experimentation, future flags, product analytics into one unified system for product teams. That's statsig.com/acquired.

• 3:45:07Ben Gilbert?

  You can click the link in the show notes to learn more. And as always, all of our sources, the books that we used, et cetera, are all linked in the show notes as well. So on to the folks that we talked with to prep for this episode. For me, Arvind Navarathnam, as always, at Worldly Partners, did a great, great write-up on Vanguard. And since he is in the investment business, this one was very close to home. We'll also link to his write-up on the 100 Xers. And we didn't get to it in this episode, but he has sort of a framework on how you could create a valuation for Vanguard at the end of his write-up, which is cool for anyone who wants to check that out. To Morgan Housel, our good friend and financial author, famously of Psychology of Money and past ACQ2 guest.

• 3:45:48David Rosenthal?

  Yeah.

• 3:45:49Ben Gilbert?

  To Bill McNabb, the former CEO of Vanguard 2008 to 2017 and 30-year veteran of the firm. Thank you so much for hopping on the phone with us multiple times to kind of work through a few different things that we were thinking about. As always, to Mike Miller, the former Wall Street Journal editor, who has been really helpful in crafting these episodes with us. David, while we're on the topic of the Wall Street Journal, I know you have one.

• 3:46:14David Rosenthal?

  Yes. Jason Zweig, the legendary author of the Intelligent Investor column in the Journal and one of the most prolific authors on the entire fund space. And of course, Vanguard and Jack Bogle throughout his life. Thank you so much for all of your help.

• 3:46:31Ben Gilbert?

  Man, the Wall Street Journal party continues. To Justin Baer there, who has a book coming out soon called House of Fidelity, which I think is actually due out this week. And then to Charles D. Ellis for the book Inside Vanguard and Eric Balchunas for The Bogle Effect, both really great books with a lot of detail on the history.

• 3:46:51David Rosenthal?

  And from me, thank you to all of the other folks who helped us, who we won't say your names here, but you know who you are. We deeply appreciate it and really made the episode special. Thank you.

• 3:47:03Ben Gilbert?

  Well, if you liked this episode, go check out our episode on RenTech or Berkshire Hathaway, which we have three of for a total of, I think, nine hours.

• 3:47:11David Rosenthal?

  Yep.

• 3:47:12Ben Gilbert?

  Costco and Visa. You can join the Acquired email list at acquired.fm/ email. You'll get our big takeaways from each episode in writing, past episode corrections, behind the scenes photos, found in the research, and it's where you can vote on future episode topics. Plus, you'll get David's little hint at what our next episode will be. David, very curious to see what you come up with this time. That is acquired.fm/ email.

• 3:47:37David Rosenthal?

  I'm cooking.

• 3:47:37Ben Gilbert?

  And come talk with us in the Slack at acquired.fm/ Slack. So with that, listeners, we'll see you next time.

• 3:47:44David Rosenthal?

  We'll see you next time.