Acquired
00:32:56 · Ben Gilbert, David Rosenthal
[00:32:56] S0: So listeners, if you wanna learn more about this new working capital accelerator platform, go to jpmorgan.com/acquired or contact your JP Morgan rep and tell them that Ben and David sent you. And if you wanna join us for some live interviews, we will be on the main stage with JP Morgan at the We Are Developers World Congress in San Jose this September. Click the link in the show notes to learn more. Alright. So, David, the entrance of Fidelity into our story. [00:33:24] S1: Yes. And the go go years, which really were this, like, violent reaction to all the pent up conservatism and prudence and austerity that had dominated Wall Street and finance for America and the world through the depression and through World War two. The journalist John Brooks would write about it later in the New Yorker that the go go era was, quote, a method of operating in the stock market, a method that was, to be sure, free, fast, and lively. And certainly in some cases attended by the joy, merriment, and hubbub implied by the go go term. The method was characterized by a rapid in and out trading of huge blocks of stock with an eye to large profits taken very quickly. So in other words, the exact opposite of Wellington management and Walter Morgan's approach. [00:34:23] S0: Which is tough because if you grew up as a leader in that previous era and you believed in that philosophy, but this is what all of your customers, the the investors want, what do you do?
00:34:23 · Ben Gilbert, David Rosenthal
[00:34:23] S0: Which is tough because if you grew up as a leader in that previous era and you believed in that philosophy, but this is what all of your customers, the the investors want, what do you do? [00:34:34] S1: Yep. And Fidelity was the one that pioneered all of this. So Fidelity goes all the way back to the early Boston mutual fund scene, kinda like same era as the Massachusetts fund. They were always though like a kinda small bit player until the legendary Edward Johnson, known as mister Johnson, who had previously been Fidelity's legal counsel, takes over the firm right before the end of World War two. At the time, Fidelity is managing just $3,000,000, and the previous owners, who I think are, you know, retiring, they literally give Fidelity, the firm, to Edward Johnson for free. Wow. [00:35:14] S0: Because they just don't think it has much value? [00:35:16] S1: No. I mean, it it was part of that, like, we're here to serve the clients, that sort of ethos. But, also, it was a $3,000,000 fund even with the high economics of how this fund industry works. You know, if the base that you're pulling a percentage fee off of is $3,000,000 Right. You're just kinda limited in how much money you're gonna make here. Yep. But, yeah, this is what like, spoiler alert. Obviously, Fidelity is one of the largest fund complexes and financial companies in the world today. It's still owned by the Johnson family. It's estimated that their net worth is 40 or $50,000,000,000. Thanks to this. Incredible. [00:35:53] S0: On a basis of zero because they got it for free.
00:35:53 · Ben Gilbert, David Rosenthal
[00:35:53] S0: On a basis of zero because they got it for free. [00:35:55] S1: Right. Right. So when Ed Johnson takes over Fidelity, he starts trying a whole bunch of stuff to grow it. You know, he comes from the legal industry. He's not from a Wall Street background per se. He's open to different styles. He's not sort of steeped in orthodoxy, shall we say. And in 1958, he creates a new fund within the group. I mean, this in and of itself was not unprecedented, but quite rare. Most of the time, there was just one fund within a group or a management company. So for a long time, Wellington management company just managed the Wellington Fund. Yep. And Fidelity had just had the Fidelity fund. So Johnson creates this new fund called the Fidelity Capital Fund, which is gonna be a growth fund, and he hires a young portfolio manager named Jerry Tsai to come in and run it. And Sai basically ignores all the Wall Street conservative conventions and just starts shooting the lights out with this fund. He's taking big concentrated positions in blue chip companies, trading in and out of the stock, making quick profits. I mean, really, like we talked about earlier, he's kinda preying on the unsophisticated retail investors out there. Like, he could move the market by taking a big position, pop a stock, and then get out of it and book profits. [00:37:22] S0: There was a lot less regulation at that time, and there was a lot less sophistication in your counterparties when you were trading.
00:37:22 · Ben Gilbert, David Rosenthal
[00:37:22] S0: There was a lot less regulation at that time, and there was a lot less sophistication in your counterparties when you were trading. [00:37:28] S1: Yes. So pretty quickly, Psy and Fidelity start to become, like, like, a player, like, a, like, a real player. All the CEOs of all the big companies wanna get to know him because, hey. He has the power to, you know, really move their stocks. He becomes kinda like a quasi celebrity. [00:37:46] S0: And move it or not, he kinda has the power to be a giant shareholder in your company now that he's attracting all his capital because people wanna get in on his funds. [00:37:55] S1: Exactly. So the Fidelity Capital Fund within just a short number of years goes from, you know, basically zero, like, startup initiative within Fidelity itself, already a small firm, to a $340,000,000 fund here by 1965 when Bogle is taking over Wellington from mister Morgan. So this is actually the backdrop to why Morgan decided to hand the firm to Jack here in 1965, even though Jack is still so young. Morgan had a crisis of confidence. He's not sure that he's gonna be able to operate and be successful in this new go go era. This is uncharted territory to him. So he actually gives a quote to Institutional Investor magazine when the handover is happening to Jack. He says, quote, I have been too conservative. And when he hands the firm to Jack, his direction to Bogle is, I want you to do whatever it takes to fix this firm. Like, we need to do something different.
00:37:55 · David Rosenthal, Ben Gilbert
[00:37:55] S1: Exactly. So the Fidelity Capital Fund within just a short number of years goes from, you know, basically zero, like, startup initiative within Fidelity itself, already a small firm, to a $340,000,000 fund here by 1965 when Bogle is taking over Wellington from mister Morgan. So this is actually the backdrop to why Morgan decided to hand the firm to Jack here in 1965, even though Jack is still so young. Morgan had a crisis of confidence. He's not sure that he's gonna be able to operate and be successful in this new go go era. This is uncharted territory to him. So he actually gives a quote to Institutional Investor magazine when the handover is happening to Jack. He says, quote, I have been too conservative. And when he hands the firm to Jack, his direction to Bogle is, I want you to do whatever it takes to fix this firm. Like, we need to do something different. [00:39:01] S0: So he's got the mandate. He's got the clear path to do as he sees fit. Yep. So this isn't just succession. This is, hey. You should completely change our strategy to compete in this new era. [00:39:11] S1: Yes. Yes. So Wellington and its kinda whole class of funds, the the balanced funds that we talked about, stocks and bonds together, complete investment program in one security. Before the go go era, that balanced style was 40% of the entire fund market in 1955. That had declined by 1965 all the way down to 17% and would just keep dropping by 1975. Ten years after that, it was down to less than 1% of the entire market. They were going the way of the dodo, basically.
00:39:11 · David Rosenthal, Ben Gilbert
[00:39:11] S1: Yes. Yes. So Wellington and its kinda whole class of funds, the the balanced funds that we talked about, stocks and bonds together, complete investment program in one security. Before the go go era, that balanced style was 40% of the entire fund market in 1955. That had declined by 1965 all the way down to 17% and would just keep dropping by 1975. Ten years after that, it was down to less than 1% of the entire market. They were going the way of the dodo, basically. [00:39:47] S0: So investors are looking to transition away from this blended stocks and bonds to funds that are only stocks and stocks that are trading often and trying to hit the highest number possible this year in their returns and, you know, taking some risk to do so. [00:40:03] S1: Well, yeah. And, specifically, I think they don't even care that much about the underlying stocks. They want trades that book quick profits. [00:40:10] S0: You know? [00:40:10] S1: They want what Fidelity and Jerry Tsai are doing. Like, I don't care if you trade in and out of the stocks. I don't care if you hold GE for a day or a week or a year. If you buy it at five and you sell it at ten, like, hell yeah. Let's go. [00:40:23] S0: It's funny. I associate this with the eighties. I don't think I realized that it was also happening in the kinda 1965 to 1971 era. [00:40:32] S1: Yeah. The eighties were an echo of this that happens here in the sixties. [00:40:35] S0: Okay.