Acquired
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.
02:18:36 · Ben Gilbert, David Rosenthal
[02:18:36] S0: That's right. [02:18:36] S1: 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. [02:18:59] S0: 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 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 Navaratnam. He showed me this chart. From 1965 to 2025, if you had invested in the S and P five hundred, you would have kinda unbelievably a 10% compound annual growth rate. Wow. Pretty good. Like, the S and P since '65 has been amazing Yep. As a 10% annual growth rate with dividends reinvested. That's a 405 x return. [02:19:53] S1: Alright. Lay Warren and Charlie on me here. [02:19:55] S0: Berkshire was a 19% compound annual growth rate for a 39,000 x return. 04/2005 versus 39,000. [02:20:08] S1: And that's over sixty years.
02:20:08 · David Rosenthal, Ben Gilbert
[02:20:08] S1: And that's over sixty years. [02:20:11] S0: That's over sixty years. So when you hear us saying, like, oh, well, it beats 80% or 85% of other managers over some time frame, Berkshire was the extreme exception. [02:20:23] S1: Extreme exception. [02:20:23] S0: And so to hear Warren saying, actually, what most people should do is buy low cost index funds like Vanguard. [02:20:31] S1: Goes it goes a long way. Well, there's more Warren and Berkshire to come on this episode. But, 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. [02:20:48] S0: Yep. It's concentrated, though. That's the that's the difference. [02:20:51] S1: Yeah. So it's a private equity fund. [02:20:53] S0: Right. But I'm saying that's the difference versus a Vanguard S and P [02:20:56] S1: Oh, yes. Yes. But, like, the spiritual and cultural resonance between Omaha and Malvern, Pennsylvania, where Vanguard is located, you know, are are strong. [02:21:07] S0: That's true. We haven't told listeners yet. This is in the middle of freaking nowhere. [02:21:09] S1: Yes. [02:21:10] S0: It's like two hour train ride from New York City. It's the opposite of the capital of finance. [02:21:15] S1: And, also, just so happens to be right up the street from where I grew up, which is amazing. [02:21:21] S0: Yeah. Weren't your grandparents some of the first Vanguard investors because they age nearby?
02:21:21 · Ben Gilbert, David Rosenthal
[02:21:21] S0: Yeah. Weren't your grandparents some of the first Vanguard investors because they age nearby? [02:21:26] S1: I was gonna save this for the end of the episode. But Yeah. My grandparents were among the, like, very, very first fund holders in Vanguard. I 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. [02:21:48] S0: Before the 100,000,000 Yep. Mark on the fund. [02:21:51] S1: I think it was just, you know, hey. Local company. Like, great. We'll go with this local company. Amazing. [02:21:56] S0: Southeast Pennsylvania showing up again. It was our Taylor Swift episode and this one. [02:22:00] S1: I mean, they set up Vanguard accounts for me, like, the day I was born. Wow. [02:22:04] S0: 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. [02:22:12] S1: Oh, yes. [02:22:12] S0: There's been, like, four other CEOs since since Jack. There's a big beat of the story here. [02:22:17] S1: Yeah. 2008 and the financial crisis really is Vanguard and all of indexing and passive's finest moment.
02:22:17 · David Rosenthal, Ben Gilbert
[02:22:17] S1: Yeah. 2008 and the financial crisis really is Vanguard and all of indexing and passive's finest moment. [02:22:29] S0: Yeah. I think that's, I think that's probably right. But should we do our last sponsor first? Yep. Let's do it. 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. [02:22:56] S1: 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. [02:23:17] S0: 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 nondeterministic, 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.