Acquired
03:07:28 · David Rosenthal, Ben Gilbert
[03:07:28] S1: And that Wellington fund not only still exists, it has a $110,000,000,000 in assets today. [03:07:37] S0: So it's technically a Vanguard administered fund, but the investment advisory is done by Wellington Management. [03:07:44] S1: Company. Same as always. It's this incredible story. And Jack and the IVAS partners eventually reconciled. In the early nineties, Jack goes up to Boston. They all sit down to dinner, and they're like, hey, you know, we have gone our separate ways. It's been a long time. It's time to bury the hatchet. And the relationship between Vanguard and Wellington has never been better. Wellington manages several other Vanguard active equity funds and portfolios for them as well. Amazing. How crazy is that? That really, like, is kinda heartwarming. [03:08:20] S0: It is. And what a way to wrap the story. It's full circle. [03:08:22] S1: What a way. Yeah. Yeah. Alright. Let's move into analysis. [03:08:25] S0: Okay. So my big question here in analysis, and I've got some playbook themes that I wanna hit, but I've been cliff hanging from earlier. Why do you think outside of some mutual insurance companies, REI, some local grocery stores, why isn't it more popular to see this mutual ownership structure in our world? [03:08:48] S1: Yep. Well, I I think you could argue that the NFL in its own way is this, obviously, not to the fans, but to the constituent teams.
03:08:48 · David Rosenthal, Ben Gilbert
[03:08:48] S1: Yep. Well, I I think you could argue that the NFL in its own way is this, obviously, not to the fans, but to the constituent teams. [03:08:57] S0: The NFL was I actually don't I disagree with the NFL take. I think the NFL take is it's a collective bargaining agreement. It was you know, the year is whenever it was, 1960, 1961. By linking arms and bargaining together, we're gonna get more for our TV deal than we would independently. They observed that working, and then they just decided we're gonna be taking that stance for everything and negotiate as one league going forward. This is different, which is can we avoid having another party to our entity, the shareholder? And can we get everything that we would need out of shareholders, primarily capital, out of our customers? And maybe that's why it works uniquely for Vanguard and for sort of asset management is because the product is capital, you can tap your customers for the thing you would normally tap investors for. [03:09:55] S1: Yep. You definitely need to have the ability to do that. I mean, even Vanguard's real estate on their campus in Malvern, when they were constructing that, they tapped the shareholders. They tapped the fund holders for essentially construction loans Oh, interesting. To construct the campus. Yes. You do need to have enough capital in the base and ability to do that in order to fund your fixed costs.
03:09:55 · David Rosenthal, Ben Gilbert
[03:09:55] S1: Yep. You definitely need to have the ability to do that. I mean, even Vanguard's real estate on their campus in Malvern, when they were constructing that, they tapped the shareholders. They tapped the fund holders for essentially construction loans Oh, interesting. To construct the campus. Yes. You do need to have enough capital in the base and ability to do that in order to fund your fixed costs. [03:10:19] S0: Whereas, like, I don't know if REI could raise a bond from its members. I mean, the fact that fifteen years ago, I paid $30 to become an REI co op member. Right. Am I really a member? [03:10:30] S1: If they called you today and they're like, we need your money to finance, you know, the next story build out, you'd be like, no. [03:10:36] S0: Right. The other thing, Vanguard was sort of in a unique place to rely on Wellington's active stuff to provide profits during the dark wandering years. I mean, usually, way you end up with shareholders is you need to raise money, and Vanguard figured out a way to bootstrap off of the old business. [03:10:56] S1: Yep. Yep. All that said, I totally agree. I think you need to be operating in a space such that you can access capital. [03:11:04] S0: Everything I just said is an argument for founder ownership, not customer ownership. Like, if you didn't need to raise capital, then the founders would just own the business forever. But this is very unique where the customers are actually the owners of the business.
03:11:04 · Ben Gilbert, David Rosenthal
[03:11:04] S0: Everything I just said is an argument for founder ownership, not customer ownership. Like, if you didn't need to raise capital, then the founders would just own the business forever. But this is very unique where the customers are actually the owners of the business. [03:11:16] S1: Yep. And that's where I was gonna go. It really takes a very, very special group of people to do this because you are removing a huge amount of wealth creation potential. [03:11:29] S0: You have to make a noneconomic decision. You have to decide that something you would own as the founder, you don't own, and the community owns instead. [03:11:37] S1: Yes. And even if you get paid a good salary, and Vanguard, you know, pays high salaries commensurate with the industry Yep. You're not getting equity ownership, and you're thus not gonna get, you know, incredible wealth generation. [03:11:52] S0: And you're gonna have to go through absolute hell to will this thing into existence more so than if you had regular shareholders because you're you you have to do crazy things to get through in the lean years, especially early on. Usually, there's some economic component to being willing to to go through all that. And this is admitting, I will never ever have founder economics or economics of any kind in this entity, and you're still trying to will it into existence. So So it's it's not not only only a a very very narrow narrow circumstance, circumstance that could allow it to exist, but it takes a very unique a Jack Bogle.
03:11:52 · Ben Gilbert, David Rosenthal
[03:11:52] S0: And you're gonna have to go through absolute hell to will this thing into existence more so than if you had regular shareholders because you're you you have to do crazy things to get through in the lean years, especially early on. Usually, there's some economic component to being willing to to go through all that. And this is admitting, I will never ever have founder economics or economics of any kind in this entity, and you're still trying to will it into existence. So So it's it's not not only only a a very very narrow narrow circumstance, circumstance that could allow it to exist, but it takes a very unique a Jack Bogle. [03:12:30] S1: Yep. A type of person in the exact specific situation in life where he found himself. I mean, it's his quote from his memoir that I have right here. I realized that a mutual company would never provide me with the personal fortune that so many denizens of Wall Street would earn, but it offered, I believe, my last best chance to resume my career. Even Jack wouldn't have done it if he hadn't found himself in this situation.
03:12:30 · David Rosenthal, Ben Gilbert
[03:12:30] S1: Yep. A type of person in the exact specific situation in life where he found himself. I mean, it's his quote from his memoir that I have right here. I realized that a mutual company would never provide me with the personal fortune that so many denizens of Wall Street would earn, but it offered, I believe, my last best chance to resume my career. Even Jack wouldn't have done it if he hadn't found himself in this situation. [03:12:58] S0: Right. So I I think it kinda mostly boils down to Jack. The other thing that makes this finance, in particular, uniquely well suited to this is lots of people manage to start co op grocery stores and small co op things. In order to expand those businesses, they all require capital, and so you end up with shareholders at some point, or you are small and stay subscale. Finance isn't that. Yep. Finance is like software where it can scale basically infinitely once it overcomes its early fixed cost base. [03:13:28] S1: Yep. Huge operating leverage. [03:13:30] S0: I did think of one other Jack Bogle like character who built a Vanguard like thing, and I'm curious if the thought crossed your mind too. I think Costco thus far has been the most correct analogy that this is Costco on steroids, but it's also something else that was also an acquired episode. [03:13:48] S1: Oh, wow. [03:13:50] S0: It's even in financial services. [03:13:52] S1: I guess Berkshire? [03:13:54] S0: Visa.