Acquired
02:30:41 · Ben Gilbert, David Rosenthal
[02:30:41] S0: Or at least have historically Yeah. Done that. Yep. So what what what's the impact of this? [02:30:46] S1: Well, just to put an even finer point on this, Saint Warren over in Omaha comes back into the story here. In 2007, fortuitously, right before the crash, he had issued a public challenge Warren Buffett had. He said that he would bet $1,000,000 of his own money against any and all takers from the hedge fund industry that over a ten year period starting on 01/01/2008, the Vanguard five hundred 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. [02:31:37] S0: It's kinda crazy. Right? You get to pick any five hedge funds you want. Yep. And you can go pick the five best. [02:31:43] S1: You can pick the five Tiger Cubs. You know? Whatever you want. [02:31:46] S0: And they just have to outperform the S and P over a 10 period. [02:31:49] S1: Not just the S and P, specifically, the Vanguard five hundred index fund. [02:31:53] S0: I know. It's cool he named [02:31:54] S1: it. It's really cool that he named it. [02:31:55] S0: It's good good for Vanguard. [02:31:56] S1: So this also just tells you kinda everything you need to know. Only one person took him up on the bet. Do you know I you do know who. [02:32:05] S0: Of course, know who this is. [02:32:07] S1: You know who it was. Our friend [02:32:08] S0: Ted, I'm sure you are listening. Acquired.
02:32:08 · Ben Gilbert, David Rosenthal
[02:32:08] S0: Ted, I'm sure you are listening. Acquired. [02:32:11] S1: Ted Siety's 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 would be the first to tell you, he got whooped. [02:32:27] S0: It didn't look that way at first. The the hedge funds were off to a good start, but in the fullness of of the decade I don't have the numbers in front of me, but it was something like the S and P performed, like, a 130 something percent, and the hedge funds in aggregate were, like, 30 to 40%. [02:32:42] S1: I've got the numbers right here. Yeah. It is not even close. So the Vanguard five hundred index fund over the ten year period blows away Ted's selected hedge fund portfolio so much so that Ted ends up conceding early to Warren. [02:32:57] S0: Wow. [02:32:57] S1: Yeah. Like, a a year or two before it's over, he's Ted's like, yeah. Warren, you won. [02:33:03] S0: What charity am I making the Yep. The check [02:33:05] S1: out to? When all is said and done, the Vanguard five hundred returns a total of a 126% net after fees for the ten year period, while the hedge fund portfolio returns just 36%. So, yeah, what's that? Four Over ten years. Over ten years. Yeah. And, yes, Ben, the the charity that the check is made out to is Warren Selects Girls Inc of Omaha as the recipient of the money. [02:33:32] S0: I wonder we we gotta ask Ted if it was an option to pick the RENTECH Medallion fund.
02:33:32 · Ben Gilbert, David Rosenthal
[02:33:32] S0: I wonder we we gotta ask Ted if it was an option to pick the RENTECH Medallion fund. [02:33:38] S1: That's a good question. So Ted, it'd be fun to ask him. He actually chose a five hedge fund of funds to get a total basket of about a 100 different hedge funds in the portfolio. And Warren said, like, yeah. Sure. That's fine. [02:33:53] S0: Because then you're just buying the average. And the extra fee [02:33:56] S1: layer on top of the fund of funds [02:33:57] S0: too. What? [02:33:59] S1: I'm not sure why you made that choice. But either way [02:34:03] S0: But yeah. But 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. [02:34:17] S1: 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. He is a hero to them and to me.
02:34:17 · David Rosenthal, Ben Gilbert
[02:34:17] S1: 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. He is a hero to them and to me. [02:35:03] S0: 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. [02:35:11] S1: Saying that you are a hero to him? [02:35:14] S0: Yep. Incredible. 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.
02:35:43 · David Rosenthal
[02:35:43] S1: 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. Yep. 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¢ of every new dollar that came into the mutual fund industry as a whole. After the crisis, that doubles to 30¢ 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 several years. So from 2014 to 2019, Vanguard takes in 1,200,000,000,000 in cash inflows versus 500,000,000,000 for the whole rest of the industry combined. So Wow. 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 wanna actually talk to people. And we have an advantage here because of our, you know, profitless strategy and approach to our business. We can offer human wealth advisors to accounts with as little as $50,000 invested. So this is a huge win for Vanguard that pretty quickly grows from, like, 0 to a 150,000,000,000 in advised client assets overnight. And, again, isn't a profit driver for Vanguard because it doesn't need
02:38:07 · Ben Gilbert, David Rosenthal
[02:38:07] S0: to be. 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 a thousand CFPs on staff. Yep. 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 Yeah. Personal finances. [02:38:40] S1: And and often it's the same customers. It's, you know, 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. Yep. So in January 2019, Jack passes away at age 89 after just one of the most incredible lives, I think, of the twentieth century into the twenty first century. [02:39:05] S0: 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. [02:39:20] S1: Yep. [02:39:20] S0: I mean, it's this beautiful communal fair way to participate in the rising tide. [02:39:26] S1: At the time of his death, Vanguard managed an aggregate of $5,000,000,000,000 over 20,000,000 clients. I mean, this from a firm that started as, like, a cockamamie revenge plot against his former partners.