Acquired
02:08:58 · Ben Gilbert, David Rosenthal
[02:08:58] S0: He's a giant asset to Vanguard. [02:09:00] S1: Yes. By this time, Jack has become like a synced 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. [02:09:24] S0: You kinda want him to keep an office at headquarters if, you know, he's alive and there's a statue of him there and the entire investing community. And increasingly, consumers Yes. Are finding religion following his teachings. [02:09:39] S1: So the year before this in 1998, a passionate, passionate group of users on Morningstar's online discussion forums on the morningstar.com website I love it. Had founded a dedicated subforum called Vanguard DieHards that would eventually morph into its own website and, like, grassroots movement called Bogleheads. [02:10:09] S0: 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. [02:10:17] S1: It is incredible. So the standalone Bogleheads forum, bogleheads.org. Today, it gets 2,000,000 visitors per month. And then, Ben, you mentioned the subreddit that has 400,000 weekly active visitors. [02:10:34] S0: And if you are listening to this episode because it was posted on there, welcome to the show.
02:10:34 · Ben Gilbert, David Rosenthal
[02:10:34] S0: And if you are listening to this episode because it was posted on there, welcome to the show. [02:10:38] S1: Thanks for joining us. So as I said, the compromise that they reach is Jack will still be the founder of Vanguard. Jack will still be the face and the spirit of Vanguard 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 twenty years of researching, speaking, writing books, papers, and generally just evangelizing the index investing philosophy, all of which, of course, is, like, the very, very best marketing that I would say buy. You you can't even possibly buy marketing like this for all of the conflict and strife around this second firing, it really works out about as good as it possibly could for the company and for Jack. His legacy is preserved. His value to the company is preserved, and Vanguard gets to move on and launch ETFs, which they do in 2001, finally. Which [02:11:55] S0: he did soften on over time. [02:11:58] S1: 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.
02:11:58 · David Rosenthal, Ben Gilbert
[02:11:58] S1: 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. [02:12:11] S0: Yep. And there's a few things we sort of skipped over to this point that happened in the seventies, eighties, and then happened in a big way here in the nineties, and that's changes in the structure of the investment management industry. The first one to know is indexing was not actually that interesting when Bogle started it. I know we gave the stats around its outperformance net of fees, but in '75, the market still had a lot of fools in it. Yeah. People that were acting individually that were not institutions or advised by financial advisers. 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. [02:13:13] S1: Yes.
02:13:13 · David Rosenthal, Ben Gilbert
[02:13:13] S1: Yes. [02:13:14] S0: By the eighties and nineties, that started to go away. So much of the activity in the market was real professional management that you could often assume, oh, my counterparty is smarter than I am. I I always assume this when I'm buying 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. [02:13:58] S1: 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. Right.
02:13:58 · David Rosenthal, Ben Gilbert
[02:13:58] S1: 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. Right. [02:14:16] S0: Right. Yeah. That's a great point. It's kinda like, online poker. When it first started, there was a of fish at the tables, and then eventually the fish go away, you're just playing other poker pros, which is no fun. It's sort of the same thing in in the stock market. And I I 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. Yep. Yep. Absolutely. Say its relative disadvantage is lower. Yep. Is the right way to put it. So that was a big tailwind for investing. The second big tailwind is in the sixties and seventies, you mostly bought stocks through a stockbroker who charged you a commission, but they didn't make money simply by managing your assets the way that people do today. [02:14:59] S1: The advisory business wasn't a thing yet.
02:14:59 · David Rosenthal, Ben Gilbert
[02:14:59] S1: The advisory business wasn't a thing yet. [02:15:02] S0: 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 advisers. And so that meant that instead of being purely incentivized for you to buy and sell stocks, they were incentivized for your net worth to grow, which is is more aligned, still taking typically a large fee, but aligned incentives at least. So index funds were kind of this perfect product for them. Yeah. They didn't care whether you traded or not. They just wanted your assets to grow, and they wanted you to be happy with the level of service that you were getting. So it was this, like, amazing tailwind. This growth of the advisory business became this huge accelerant for index funds. You had amazing channel from it. Yep. And then the last tailwind is the .com era. [02:15:50] S1: Yes. Yes. I love that you're breaking this up. My favorite thing. E*TRADE, baby. [02:15:54] S0: Yeah. David, why do you think the .com era was a tailwind for index funds? [02:16:00] S1: 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.