Acquired
01:53:37 · Ben Gilbert, David Rosenthal
[01:53:37] S0: And at this point, Vanguard is essentially planning for this to be the end of his career. Like, heart transplants today are obviously a giant deal. This is even thirty years ago. Medical science is still working on this procedure. The assumption is he's he's done at this point even if he survives. [01:53:57] S1: And so the company moves on. Brennan becomes CEO and starts working on a whole bunch of new initiatives. And Jack does make a miraculous full recovery. [01:54:08] S0: He would live for another twenty three years? [01:54:10] S1: He would live for another twenty three years on his transplanted heart. And within a couple weeks, weeks after his heart transplant, he's back on the squash court. Amazing. Playing squash and intimidating his opponents. Like, gosh. If you thought it was scary to play against Jack when he might have a heart attack, how about playing against Jack with a new heart? [01:54:31] S0: Seriously. [01:54:32] S1: So, of course, all of this is, like, wonderful and joyous and unexpectedly great, but it is unexpected. Jack didn't think he was coming back from the heart transplant. The company didn't think he was coming back from the heart transplant.
01:54:32 · David Rosenthal, Ben Gilbert
[01:54:32] S1: So, of course, all of this is, like, wonderful and joyous and unexpectedly great, but it is unexpected. Jack didn't think he was coming back from the heart transplant. The company didn't think he was coming back from the heart transplant. [01:54:45] S0: And the company's in this sort of funny place where even not thinking about leadership succession right now, but the core business, they made all these really long term trade offs starting back in '75, '76 where, you know, when the fund is subscale, the fees are kinda high, and the mutual ownership thing is, like, cute, but it doesn't mean much when it's small. Cutting the load so you go to a no load thing that, in the short term, just slows your distribution down. And all these things are sacrifices for the long term thinking, well, when it really starts working, it's gonna really start working. [01:55:22] S1: Yeah. [01:55:23] S0: In the nineties, this is that, like, harvesting phase for the company where twenty years of doing things the right way that caused really slow growth are now causing this giant inflection. I mean, David, you you said something about the crossing a billion line in the eighties. By 1996, the AUM across all of Vanguard is up to a $180,000,000,000. [01:55:45] S1: And the two index funds are, like, 50,000,000,000 of that going pretty quickly to a 100.
01:55:45 · David Rosenthal, Ben Gilbert
[01:55:45] S1: And the two index funds are, like, 50,000,000,000 of that going pretty quickly to a 100. [01:55:50] S0: Right. So it's just gotta be fun for all the company long timers at this point where they're sitting there thinking, we were right. We made all these long term trade offs, and it really sucked for a while. And no one would distribute our product, and no one would invest in our funds, and it's really, really, really paying off. [01:56:06] S1: Yep. And there's something else going on for the first time too. Vanguard has competition. Competitors have woken up and realized maybe we should jump on too in this passive indexing thing. [01:56:20] S0: Which is funny because they're not structurally incentivized to do it over at Fidelity and BlackRock and State Street and, you know, all the others that are starting to roll out these very low fee index funds, but they are doing it because they effectively have to. Yep. Consumers have woken up to the power of it, and they need to have an offering in this area. So even though they don't have this investor shareholder alignment the way that Vanguard does, they make money plenty of other ways in their business. And so they're happy to offer this as a near loss leader or or breakeven in order to retain and attract those clients for their other higher margin services. Indeed. So coming out of his recovery from the heart transplant, Jack is
01:57:02 · David Rosenthal, Ben Gilbert
[01:57:02] S1: still on the board, but he's no longer CEO. The transition has happened, and the company is transitioning to this new phase. Jack, I think, gets super frustrated. He wants to be back in the saddle. And the way this manifests is he, at the board level, starts kinda becoming a curmudgeon and disagrees with all the new initiatives, all the new things that Brennan and the new management team wanna do to capture their opportunity and insulate against competitors. So these are things like launching sector specific index funds or international funds and investing more there or investing more in marketing. You know, basically growing the firm and offering the clients what they want. In Jack's mind, this is starting to be a perversion of the mission. Meanwhile, management is like, hey. Our customers want this, and our competitors are offering it, so we should do it. [01:58:01] S0: This is classically the divide between the founder of a company and the group of people that will take it not just from one to two, but from one to a 100. I mean, the clean simplicity and the mission and the focus and the narrowness of the product and this one cool trick that they have is the thing that got them there. And classically, you need people who are willing to be much more flexible but with the same culture, the same values, the same mission than the founder was. And you see this in the numbers. 99% of Vanguard's AUM came after Jack stepped down.
01:58:01 · Ben Gilbert, David Rosenthal
[01:58:01] S0: This is classically the divide between the founder of a company and the group of people that will take it not just from one to two, but from one to a 100. I mean, the clean simplicity and the mission and the focus and the narrowness of the product and this one cool trick that they have is the thing that got them there. And classically, you need people who are willing to be much more flexible but with the same culture, the same values, the same mission than the founder was. And you see this in the numbers. 99% of Vanguard's AUM came after Jack stepped down. [01:58:40] S1: Yep. Yep. And you hit on a really, really important point to stress there. The same values, the same mission. It's not like Brennan and the new management wanna all of a sudden start generating tons of excess profits or take Vanguard public or, you know, do anything crazy like that. No. No. They they're true believers in the mission as well. They just wanna serve clients and meet them where they're at now as the world is moving on. [01:59:06] S0: And there are big things here like employee retention. If, as a company, you're trying to run at cost and your competitors are in an industry where you can pay people obscene amounts of money if they are high performers. [01:59:20] S1: And Right.
01:59:20 · David Rosenthal, Ben Gilbert
[01:59:20] S1: And Right. [01:59:20] S0: I mean, you you need some kind of way of dealing with this. And Jack Brennan, this sort of falls in his lap. One of the things he does early in his tenure is to create a employee partnership plan to try to incentivize the the workforce and kinda deal with the structural trade off of how do you get high performers who could get paid way more somewhere else. Or very similarly, if you aren't generating very much income, how do you make future investments in things like r and d as people's expectations for customer service and technology start becoming higher and higher and higher. [01:59:54] S1: Right. The Internet is becoming a thing now. [01:59:56] S0: Right. You you you you need to start investing. So that's the sort of things that fall in Brennan's lap [02:00:01] S1: Yeah. [02:00:01] S0: That he has to do to take the company forward. [02:00:03] S1: And they end up at loggerheads with Jack on the board. So all of this comes to an ultimate head and blow up in 1999 over exchange traded funds. Yep. The most important new thing in the industry. [02:00:20] S0: I am a Vanguard customer, and I think a 100% of the way that I am a customer is through their ETFs, not through their mutual fund products. And the mutual funds are everything we've talked about up until this point.