Acquired
02:23:17 · Ben Gilbert, David Rosenthal
[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. [02:23:43] S1: 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. [02:23:58] S0: Yep. Bogle bet on data over intuition and built one of the largest financial institutions in history doing it. And if you wanna apply that same rigor to how you build a great product, go to statsig.com/acquired. That's statsig.com/acquired, and just tell them that Ben and David sent you. Alright, David. Bring us to 2008 and the great financial crisis.
02:23:58 · Ben Gilbert, David Rosenthal
[02:23:58] S0: Yep. Bogle bet on data over intuition and built one of the largest financial institutions in history doing it. And if you wanna apply that same rigor to how you build a great product, go to statsig.com/acquired. That's statsig.com/acquired, and just tell them that Ben and David sent you. Alright, David. Bring us to 2008 and the great financial crisis. [02:24:23] S1: 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, etcetera. 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, carnage, devastation. [02:25:09] S0: No one is safe. 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.
02:25:09 · Ben Gilbert, David Rosenthal
[02:25:09] S0: No one is safe. 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. [02:25:28] S1: 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. Yeah. That's great, but, like, we're smart. When the bad times come, we're gonna outperform. We're gonna protect. [02:25:58] S0: You're saying this is active. [02:25:59] S1: This is the premise of active money management and all the smart people on Wall Street. Right. We know what we're doing. [02:26:06] S0: We're gonna 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. [02:26:14] S1: 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 [02:26:26] S0: out to be absolutely not the case. For the vast majority.
02:26:30 · David Rosenthal
[02:26:30] S1: 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 Reckenthaler wrote on Morningstar in a retrospective on the financial crisis years later, 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. Yep. Yeah. And then related to what I was saying there, even more than the underperformance, you know, some might say nonperformance 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. 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 for Vanguard than the financial crisis.
02:28:29 · Ben Gilbert, David Rosenthal
[02:28:29] S0: Yeah. And I think for a lot of people, they just decided to hang it up on thinking too hard about their finances. They 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 gonna do. I mean, Vanguard makes you no promises. It's hey. You're gonna 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 nine since 1975, it's done extraordinarily well. 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. [02:29:20] S1: Right. Right. [02:29:20] S0: You know? Your your life is gonna 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. [02:29:30] S1: Yep. Well and the one explicit promise that Vanguard does make to you is we will not profit from you. Right. And that goes especially in this moment during and after the financial crisis, like, goes so far with so many people. [02:29:44] S0: Yes. Did you see you know what's interesting is Vanguard actually raised their fees in 2008. [02:29:49] S1: I didn't see that.
02:29:49 · David Rosenthal, Ben Gilbert
[02:29:49] S1: I didn't see that. [02:29:51] S0: I think structurally, they they sort of need to raise them when there's contractions in the market. First of all, you should know Vanguard did not lay anyone off during the financial crisis, which is kind of unbelievable. Yeah. [02:30:02] S1: Wow. [02:30:03] S0: 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. [02:30:11] S1: Right. [02:30:11] S0: Right. 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, point o 7% to, like, you know, something slightly higher than that. So it ends up kinda being fine, and it's just noise. [02:30:31] S1: Still, like, very, very, very low. Right. Yeah. Interesting. [02:30:34] S0: But it is sort of this interesting impact of the mutual ownership model. [02:30:38] S1: Yeah. During market contractions, they actually have to raise their fees. [02:30:41] S0: Or at least have historically Yeah. Done that. Yep. So what what what's the impact of this?