Acquired
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.
02:39:26 · David Rosenthal, Ben Gilbert
[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. [02:39:41] S0: Using a a system that he believed in prior to to wanting revenge. Yes. I think he he had pitched this before. [02:39:47] S1: Absolutely. Vanguard in 2019 is the number one mutual fund company with 25% market share of the entire mutual fund industry. The previous high watermark being Fidelity when it was the leader had 15%. The compounding advantage of Vanguard is just humming. They managed in twenty nineteen thirteen of the 15 largest individual funds in the entire world. Wow. And it is widely reported in the press in Jack's obituaries at the time of his death that his estate is worth roughly $80,000,000.08 0. For reference, the Johnson family, as we said from Fidelity, is worth about 40 or $50,000,000,000 through the, you know, estimated 40% that they still own of Vanguard or Larry Fink over at BlackRock, founder and CEO of BlackRock, is worth about 1 and a half billion dollars, much smaller because he owns a much smaller percentage of the company. But, yeah, Ben, to your point, whether it's savory or unsavory, it's just truly incredible. Like, that call it, you know, $4,050,000,000,000 dollar I mean, Vanguard's bigger than Fidelity at this point, so maybe $100,000,000,000 delta that Jack leaves on the table just goes right back to the American investing public.
02:39:47 · David Rosenthal, Ben Gilbert
[02:39:47] S1: Absolutely. Vanguard in 2019 is the number one mutual fund company with 25% market share of the entire mutual fund industry. The previous high watermark being Fidelity when it was the leader had 15%. The compounding advantage of Vanguard is just humming. They managed in twenty nineteen thirteen of the 15 largest individual funds in the entire world. Wow. And it is widely reported in the press in Jack's obituaries at the time of his death that his estate is worth roughly $80,000,000.08 0. For reference, the Johnson family, as we said from Fidelity, is worth about 40 or $50,000,000,000 through the, you know, estimated 40% that they still own of Vanguard or Larry Fink over at BlackRock, founder and CEO of BlackRock, is worth about 1 and a half billion dollars, much smaller because he owns a much smaller percentage of the company. But, yeah, Ben, to your point, whether it's savory or unsavory, it's just truly incredible. Like, that call it, you know, $4,050,000,000,000 dollar I mean, Vanguard's bigger than Fidelity at this point, so maybe $100,000,000,000 delta that Jack leaves on the table just goes right back to the American investing public. [02:41:07] S0: Did he leave it on the table? I mean, the only way that Vanguard would exist is by not taking profits. [02:41:14] S1: Good point. Good point. That is a There's a real chicken and the egg problem here.