Acquired
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.
02:16:00 · David Rosenthal, Ben Gilbert
[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. [02:16:16] S0: Yep. Yep. That is absolutely a big one of them. The technology itself, interest in buying stocks because the .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 kinda get a statement every quarter or once a year, and you're like, okay. But every day, you log in to your whatever your favorite brokerage.com is, and you see performance versus benchmark. You can dive into the research. It's sort of all at your fingertips, and that caused people to go, wait. There's an S and P 500 button? [02:17:04] S1: Yeah. [02:17:04] S0: Great. That's gonna be much better than whatever this thing is that I'm currently in. [02:17:08] S1: Yep. Yep. Amazing. What a revolution. [02:17:11] S0: So the ownership of equities in America went from that one 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%.
02:17:11 · Ben Gilbert, David Rosenthal
[02:17:11] S0: So the ownership of equities in America went from that one 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%. [02:17:35] S1: So 32% of Americans owned equities? [02:17:39] S0: Owned any stocks at all. Yeah. By 2001, it was at 54%. Wow. And a huge part of that is everything we've talked about with .com. Probably the bigger thing is the rise of the April where suddenly people are responsible for their own retirement. Yep. And they have a a vehicle here, which I'm sure we'll talk about infidelity. Oh, yeah. And then thirdly, the mutual fund and the index fund just being this very sort of perceived as safe, good way to 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. [02:18:25] S1: Yes. You say index funds being widely perceived as this good safe thing to own. One thing we skipped over earlier in the mid nineties was the Oracle of Omaha himself. [02:18:36] S0: That's right.