Vanguard：拯救投资者1万亿美元的共产主义资本家（音频）

I was telling my wife, “I think I’ll be able to do bedtime tonight, maybe even dinner.” And she was like, “Whoa, whoa, whoa, don’t get ahead of yourself.”

Let’s not go crazy here.

How complicated could it be? It’s index funds.

And active funds, money market, brokerage, and advisory.

Yeah.

But really, it’s mostly index funds.

All right, let’s do it.

Vanguard.

Welcome to the Spring 2026 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I’m Ben Gilbert.

I’m David Rosenthal.

And we are your hosts. Today’s episode is more relevant for you than any other company we have ever covered. For most of you, you have most of your net worth tied up in this company or the copycats who followed.

The company is Vanguard, which effectively created the first index fund for individual investors in 1975 and today is the largest provider of index funds in the United States. They manage over $10 trillion in passive index funds. That means they own an average of almost 10% of every company in the S&P 500: General Motors, Nike, Starbucks, Lockheed Martin, Visa, Apple—you name it.

Vanguard is the largest shareholder of most U.S. corporations, and together with the other big index funds like BlackRock, State Street, and Fidelity, they own 24% of the entire U.S. stock market.

It’s absolutely incredible. None of those other firms would be in this market or doing it in the same way if it weren’t for Vanguard.

No.

I mean, the impact is just wild. Millions and millions and millions of people have sent their kids to college, bought homes, and retired comfortably because of Vanguard and Jack Bogle.

So Vanguard has an incredibly unique corporate structure. If you are an investor in a Vanguard fund, you own a piece of the firm. Vanguard is owned exclusively by its customers, and it’s not publicly traded. It doesn’t have outside shareholders of any other kind.

Even the CEO doesn’t have any equity except, of course, what he has from investing in the funds, just like David, all of you, and me. In many ways, it is a different kind of capitalism. Dare we say communist capitalism?

Ooh, I like it.

A company whose products exclusively serve the interests of its customers and no other shareholders. And David, as you’ve been alluding to, the man behind this idea is a visionary, an iconoclast, and a pedantic stick-in-the-mud who was as disagreeable as he was right: Jack Bogle.

Oh, that’s great. I couldn’t have written it better myself, Ben.

And his story is wild, since he didn’t start Vanguard until he was 46 years old. You might think it was started idealistically, given this structure we’re talking about. And it was, sort of, but the story is equal parts idealistic and vindictive.

What is clear is that we all owe Jack a giant thank-you. Because of Vanguard’s relentless cost-cutting and low fees, Vanguard has saved investors over $500 billion in fees and trading costs since its founding in 1975. And as a recent book, The Bogle Effect, argues, Vanguard’s actions also forced the hand of the rest of the industry to cut their fees, totaling another $500 billion over time.

So Jack Bogle and Vanguard are responsible for a trillion dollars of wealth transfer out of the pockets of Wall Street and the finance industry and into the pockets of individual investors in the form of fees that they didn’t have to pay.

Absolutely incredible.

I was catching up with good friend of the show Morgan Housel a couple of days ago.

Oh yeah, of course.

And his comment to me was, “I view Bogle as an undercover philanthropist.” At a trillion or even half a trillion dollars, that would make him the greatest philanthropist of all time. Wow.

Wow. I love that framing. A large portion of that trillion dollars could easily have flowed into Jack’s own wealth, and he made the choice that it didn’t.

Yeah, maybe, David. We’ll get into it.

1. Jack Bogle's Hard Start

We start in May of 1929, on the eve of the Wall Street crash of October 1929 that would throw America and the world into the Great Depression. It would wipe out millions of families’ savings, ruin countless lives, and forever scar an entire generation.

We don’t often talk about the Great Depression on Acquired. It was truly horrible. The financial crisis was quaint compared to this. 9,000 banks failed after the Wall Street crash of 1929. 9 million individual family savings accounts were wiped out. Almost 100,000 businesses failed. Unemployment reached 25%.

It truly did scar an entire generation. I remember my grandparents still doing absolutely insane things because of their experience during the Depression, well into the 1990s. My dad’s mother never threw out a plastic bag in her entire life. When she died and we cleaned out her condo, it was full of tens of thousands of plastic bags.

My grandpa collected magazines and Tums containers. We found overflowing amounts of them in his basement. But the crazy thing about this, David, is that back then, only 1% to 2% of Americans owned stocks.

Yes.

All of these things were second-order effects from the crash, from the banks being deeply intertwined and carrying a lot of leverage on all these equities. It wasn’t like, “Oh, I own a bunch of stocks and those stocks crash, so my life is over.” It was the giant, interrelated ripples and the lack of safeguards in the economy at that time.

Yep, exactly. It was the bank failures. It was the businesses going under. It was unemployment. It was everything.

But on the eve of this great financial calamity, our hero—and a financial hero to many—is born: John Clifton “Jack” Bogle. He’s born here in May of 1929 as one of two twin boys, along with his twin, David, and together with their older brother, Bud. They form the Bogle Boys, as they would be known throughout the rest of their youth and, indeed, the rest of their lives.

At the time of their birth, Jack and David are born into a prominent New Jersey family. Their great-grandfather had founded a mutual fire insurance company—nice foreshadowing there with founding a mutually owned company, as Vanguard would go on to be. Their grandfather had founded a company that would go on to become part of the American Can Company, which manufactured tin cans and was one of the largest companies in America for a long time.

So it’s a prosperous, well-to-do, well-respected family that they are born into. But during their early childhood in the Depression, the family loses everything. Their dad becomes an alcoholic, divorces their mom, abandons the family, runs off, and eventually dies alone on a street corner years later.

Their mother, as you can imagine, is equally scarred from all this, suffers from severe depression and mental-health issues, and isn’t able to provide for the boys. And so the Bogle boys, basically from the time they’re kids, before they’re teenagers, are left to fend for themselves in the world.

All three of them work several concurrent jobs while they’re growing up and going through school. We’re talking paper routes, food-service jobs, restaurants, manual labor—anything that they can do to support themselves and their mom.

Jack would talk about how the best job that he ever had as a kid was a 3:00 a.m. paper route because the world was quiet and peaceful in the middle of the night and he could escape the chaos and strife all around him. As he liked to say, “It was a contrast to the rest of my life growing up.”

And you got all this from talking with Jack’s kids, right?

Yeah. I spoke to several members of the Bogle family for research. This story is just incredible.

It’s interesting because, through his last name and his great-grandfather and grandfather, they had this family network where they were connected to other well-to-do kids. But personally, their family’s wealth and relationships were in shambles.

They’re both insiders and outsiders at the same time. As the boys get older and enter high school, the family no longer has any money, but they do still have these connections, relatives, and friends—parents who have resources. So they manage to get all of the boys scholarships to go to Blair Academy, one of the prestigious East Coast boarding schools, for their junior and senior years of high school.

And Jack especially flourishes at Blair. He becomes a fantastic student. He graduates cum laude. He gets voted both best student and most likely to succeed by his classmates at graduation. Obviously, he’s going places.

There’s one problem, though. As Jack and David are approaching graduation, the boys in the family still have no money, even though they’ve gone to this prestigious boarding school and are about to graduate from it.

And they all need to keep working both to support themselves and their mother, who's still alive. So the 3 of them get together and decide that, because of their situation, only 1 of them should actually go to college, and the other 2 need to keep working and providing for the family. And because Jack has been so successful at Blair and is such a good student, he gets chosen as the 1 brother who's going to get to go to college.

Jack would say that the weight of that decision rested on him for the whole rest of his life. He alone was given this chance to do something bigger, and he felt a tremendous obligation to make good to his family on this opportunity. And the other 2 never go to college. I mean, all 3 of them remain close, but David and Bud never go to college.

And it's funny, listeners, David, you're referencing the things that Jack would say. It is incredibly easy to find Jack's words everywhere. There is no shortage of commentary that Jack would give on his own life and his philosophies. The man gave thousands of speeches. He wrote memoirs.

He wrote 12 books—investment advice, reflections back on Vanguard. He would go on TV and talk to journalists and speak in classes anytime anyone would have him. So there are no gaps in the historical record of Jack's life.

Of Jack's memory. Yeah. Jack loved nothing more than to give a speech. So after graduation from Blair, Jack goes on to college at Princeton, once again on a work scholarship. He's working in the dining halls, and he ends up working in the ticketing office for athletic events and football games.

While he's at Princeton, he becomes fascinated with economics after he takes an intro econ course in the fall of his sophomore year, during which he gets a D+ on the midterm. An inauspicious beginning to his finance career.

Yeah, but he loves it. He works hard. He finishes with a C− in the class. Incredible for the guy who would go on to revolutionize all of finance.

Yep. So the next year, during Jack's junior year at Princeton, he's decided that he's going to major in economics—or concentrate, in Princeton's fancy terms. You don't have majors; you have concentrations.

Really?

And yeah, yeah, really.

Every day I learn 1 more quirky little Princeton thing.

I know, I know. I'm sorry. I, of course, went to Princeton, so I went through all this. Specifically, I also went through the rite of passage that Jack has to go through, which is that he needs to write a senior thesis.

One of the hallmarks of Princeton is that every single undergraduate must write a senior thesis, which must be a unique piece of scholarly research in order to graduate. It's like a mini version—a very, very mini version—of what you would do as a PhD. Mine, of course, was on the marketing history of champagne, being a French literature major.

Which is so funny for Acquired. It's actually very useful for us in the LVMH episode.

Incredibly useful. There you go. David Rosenthal, Jack Bogle. You know, the connections abound.

Okay, continue the story.

2. Jack Discovers Mutual Funds

Okay. So one afternoon, Jack's casting about for what would become his thesis topic. He's in Firestone, the main library on campus, and he's reading the current issue of Fortune magazine, where he comes across an article deep in the back of the magazine, on page 116, entitled “Big Money in Boston.”

And it's about the growth of a relatively new industry of open-ended public funds, what today we would call mutual funds. That term wasn't even in use yet. And the article centers on this new firm that's leading this innovation, this new sector on Wall Street, even though they're based in Boston: the Massachusetts Investors Trust Company, known and marketed as MIT.

No actual connection to the real MIT, the Massachusetts Institute of Technology. But this gives you a sense of the marketing to the public of these open-ended public funds.

We'll see it over and over again on this episode: appropriating prestige is a signature of the mutual fund industry, really the finance industry.

A hallmark of this industry. Absolutely.

The interesting thing about this, you might say, is, “What do you mean mutual funds were new at this point in time?” Well, that comment that I made before the Great Depression—in the '20s, only 1% or 2% of Americans owned stocks. By 1949, that was still only up to 4.2% of Americans.

And what they were doing is they were working with a stockbroker to buy individual stocks. There really hadn't been any academic research around finance of any kind yet, let alone investment, diversification, and funds.

So this notion that you are going to mutually pool your money with a bunch of other investors into a fund, buy a basket of stocks in that fund, and hold it for an open-ended period of time—these public equities—that was brand new.

Yes. And this is what Jack decides to write his thesis about, this new phenomenon. Now, there are actually 2 important things to talk about here that you started to allude to, Ben.

One is this concept of an open-end fund versus closed-end funds. So this is the real pioneering thing that the Massachusetts Fund—we're not going to call it MIT here—pioneered: there's no set fund size. It's elastic.

It's not like they have to write a prospectus and go out and say, “We are raising a $100 million fund,” and get everybody in it. Then it gets to $100 million, they close it, and they manage it. Nope. It could be $1 million, it could be $100 million, it could be $5 trillion, as we will see approaching toward the end of the episode.

You keep dumping more dollars in, and we'll keep buying more stuff in the basket.

Yep. And that also means that investors in the fund can come and go as they please. There are no lockups. It doesn't have to be a set number. You buy into the fund, you hold it for a while, hopefully it appreciates, and you can sell out of the fund. It's everything we know today about mutual funds. But until this concept of an open-ended fund was pioneered, you couldn't do this.

Now, you mentioned that if Americans held stocks at all at this point in time, they held individual stocks through brokers. These funds came to be distributed exactly the same way through stockbrokers. You would call up your Merrill Lynch broker and instead of saying, “Hey, give me 5 shares of General Electric,” you'd say, “Hey, give me a couple of units of the Massachusetts Fund,” et cetera, et cetera.

Yep. And so the marketing and the distribution relies on this broker-dealer network to sell the funds on behalf of the fund management company itself.

Yep. And the brokers were getting paid for this.

Oh, yes.

Oh, were they ever. So they would take what's called a sales load of usually 7.5% to 8.5% of every dollar that a client was putting into the fund. The fund manager would then kick back to the broker as a spiff for putting their clients in the fund.

It's a kickback out of the money that was just invested. If you're investing $100 into 1 of these funds, well, actually only $91.50 is going in as the investment, and the rest is going right out as this, effectively, distribution fee.

Yeah, to your friendly neighborhood stockbroker.

Now, the funny thing is, if we didn't have the context that we have today, which is that I invest $100 and basically $100 goes into the thing that I'm investing in—or at least that's the way it kind of is—this was normal.

Paying for distribution is a very normal thing across every business and every sector. You have to incentivize people to push your product through marketing, through advertising, through sales commissions, or through hiring a giant sales force yourself. These are often very large costs.

I mean, for example, retailers often double the price of something when they sell it to the public. But the revenue here is not $100. The revenue to the fund is like $2 per year in fees. So paying $8 to the broker-dealers is a giant, egregious amount to sell the product. It's like 4 times the amount that the fund itself actually makes.

Right. Okay. So that's No. 1 to understand about these new open-ended mutual funds. No. 2 also might be crazy or not crazy, depending on your perspective.

These new funds, like the Massachusetts Fund, weren't really set up for the benefit of their customer base, the fund holders. Rather, they were created and organized by the investment managers who started and ran them with the express purpose of generating profits for themselves.

Right. It's a business.

And the way that that happened was that the people who set up the fund created a separate company called the management company. That had a contractual relationship with the fund to get paid a percentage of assets that would be their revenue. Ultimately, this is a very high-margin business: their profits.

This is effectively the way that all finance works today. There's a management company that performs the act of advising all of the investments in each of the individual funds that the principals own and run it like a business.

Yep. And that management company would be responsible for 3 things regarding the fund.

One, making investment decisions and allocating the capital. Two, controlling marketing and distribution, which, as we talked about, mostly was just turning around to whatever their favorite network of stockbrokers was and kicking it over to them for additional fees. And three, managing the back office and administration of the fund, including the register of the fund holders, the investments, the allocations of shares, taxes, et cetera, et cetera.

Legal compliance, bookkeeping, making sure to communicate the prices of the assets with the newspapers so they can print them—all the administrative stuff.

Yep. And the way that the Massachusetts Fund worked is that the management company just got paid a fixed percentage of the assets under management that year for the fund.

So you can see the immediate conflicts of interest all over the place here. If management of the fund gets paid solely based on the size of the assets in the fund, with no penalties or rewards for actual investment performance, you're basically just incentivized to grow the fund as large as possible, market it as best as you can, and skim a lot of fees off the top.

There's a tiny bit of performance benefit built in because if the assets under management grow organically as the investments perform well, the fees grow. But it's very different from the way that a lot of funds would go on to be structured later, with carried interest, a promote, or some sort of performance incentive.

Hurdle rate—it's against a benchmark, et cetera, et cetera. None of that. Yes, investment returns are but one sort of arrow in the quiver of management companies at this point in time to grow their profits. And these profits could be very, very large. So let's say, for example, you have a $100 million fund, which was reasonable even in that day. It would have a management fee of 1.5% of assets annually.

For a public equities fund.

Right. So as a management company, in this hypothetical $100 million fund, you'd be taking $1.5 million a year home, rain or shine. In 1950, that's like $20 million adjusted for inflation today.

And sometimes up to $2 million, because I'd seen the number 2% too for mutual funds in this era. And this is again, listeners, for mutual funds: baskets of publicly traded stocks that are just listed publicly to buy on exchanges. These funds, in exchange for picking them, putting them in a basket, and administering it, are charging 2% to do that.

Yeah, and oftentimes they're not even doing the administration. They're not doing the distribution. They're outsourcing that to stockbrokers. They're outsourcing the administration too. So all they're doing is picking stocks and getting a lot of money for it.

So the things we've talked about so far are the 1.5% to 2% management fee. There is the 8.5% sales load. So that bumps you down from whatever your current principal is to 91.5% of that on day one when you enter the fund. You're down 8.5% before you've even started. And then there's a third thing too, which is that transaction fees at this point in time are very high. If the fund needs to go and trade stocks to add things to the fund or take things out of the fund, there were very large transaction fees relative to today to make those trades.

So, back to Jack in Firestone Library here, reading Fortune magazine: big money in Boston indeed. And you can imagine how this might be attractive to young Jack, who comes from this destitute family. He needs to earn money to support his family. This sounds like a great new industry to get involved in.

So in the spring of 1951, Jack turns in his senior thesis to the economics department, entitled “The Economic Role of the Investment Company.” He gets an A on the thesis and graduates magna cum laude from the economics department.

And David, what was the thrust of the piece? I mean, he wrote it on this concept of big money in Boston, but what was his takeaway?

Well, it's interesting. The thrust of the piece is that this is going to be a big, important industry within finance. But Jack does also have some idealism in here as a young whippersnapper. He recognizes everything that we were just talking about, which is that the fees charged to fund clients are going to be a big drag on performance for these funds.

He doesn't go all the way to say, “Hey, maybe we should eliminate them.” But he does say that probably the best way to maximize returns to fund holders is to try and minimize the fees. And he does, even in the thesis, go one step further and say, well, it's sort of a tautological conclusion that the aggregate average of all these funds is going to perform in lockstep with the market. So if you really want to try and beat the market, then reducing fees is the way to do it.

Because all of these investors who are trading against each other collectively are the market. If you take all the winners and all the losers and sum them up and don't take out any fees, you come up with zero. Every positive winner on the side of a trade has a loser on the other side of the trade. And so, in aggregate, all investors together are the market.

Now, that is true in theory and in practice today. That is absolutely true. Back in 1951, Jack was a little ahead of his time because professional fund managers were a small minority of the market back then. There were a lot of other players, mostly unsophisticated players, mostly retail traders. And so it really is not inconceivable that the pitch as a professional fund manager that's going to dedicate their life and all their working days to researching and picking stocks and betting against the market probably does have a good chance of beating the market back in those days.

The pitch of “I can outperform all this dumb money in the market” was probably right, and probably justifies significant fees.

Yep. Now, as graduation approaches, Jack has a goal. He wants to go to work in this new fund management industry, and he manages to get his A-grade senior thesis in front of another prestigious Princeton alum in Philadelphia named Walter Morgan, who had founded and was running another early open-ended public investment company in Philadelphia called Wellington Management.

Walter Morgan hires Jack as his assistant right out of school and really takes a shine to him. Jack becomes a surrogate son to him. Jack didn't really have a dad, and Walter didn't have kids. They become really close.

Now, Wellington and its Wellington Fund were a super-conservative and highly regarded early mutual fund that pioneered the style that came to be known as balanced investing—i.e., a balance between stocks and bonds, all within a single fund. So the sort of marketing slogan that Walter Morgan had used for the firm and the fund was, quote, “A complete investment program in one security.” You can see how this would be attractive.

Sounds great.

And the Wellington Fund, by this point, when Jack joins out of school, has attracted $150 million in assets. So they are smaller than the Massachusetts Investors Trust, which was the largest fund in the world at that point in time, with just under $500 million in assets. But Wellington is still among the top 10 funds in the industry and super well-respected.

This is what, mid-'50s?

Early '50s, 1951. So again, we talked about the economics for the management company. I think Morgan and everybody at Wellington, and Jack absolutely, did have their customers and the fund holders in mind and wanted to do a great job for them. But they are making a lot of money.

It's market. It's industry standard.

Yeah. Based on the fees and that fund size, call it $2 million to $3 million a year flowing into a reasonably low-headcount, high-margin business here in 1951.

Yeah.

Everybody's doing great. So Jack takes to Wellington and to Mr. Morgan like a pig in mud. He loves it. He rises through the ranks from Morgan's assistant to basically doing every job in the company. And after a pretty short number of years, he emerges as the clear heir apparent to take over Wellington when Morgan retires.

Morgan was 30 years older than Jack. And then ultimately, in 1965, Morgan retires, steps back, and names Jack president of the firm at 35 years old. He's made it. Here's Jack. He's come up in the world. He's gone from family ruin, essentially an orphan, to president of a highly profitable and respected enterprise at age 35. He's got it made.

And importantly, a successful and pretty conservative mutual fund organization here with Wellington at this point in time.

Yep, absolutely. But unfortunately, that conservative mindset and pedigree was exactly the wrong thing for this moment in the mid-1960s for Wellington and its young, hotshot new president. Wall Street and the investing world are undergoing a sea change from the hyper-conservative mode that emerged after the Depression to what would come to be known as the go-go years, pioneered by a small investment firm in Boston called Fidelity.

Yes.

All right. So, David, the entrance of Fidelity into our story.

Yes. And the Go-Go Years, which really were this violent reaction to all the pent-up conservatism, prudence, and austerity that had dominated Wall Street and finance for America and the world through the Depression and through World War II.

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 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.

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 investors—want, what do you do?

Yep. And Fidelity was the one that pioneered all of this. Fidelity goes all the way back to the early Boston mutual fund scene, kind of like the same era as the Massachusetts Investors Trust. They were always a small bit player until the legendary Edward Johnson, known as Mr. Johnson, who had previously been Fidelity’s legal counsel, took over the firm right before the end of World War II.

At the time, Fidelity was managing just $3 million, and the previous owners, who I think were retiring, literally gave Fidelity, the firm, to Edward Johnson for free.

Because they just didn’t think it had much value?

No, I mean, it was part of that “we’re here to serve the clients” ethos. But also, it was a $3 million fund. Even with the high economics of how this fund industry works, if the base that you’re pulling a percentage fee off of is $3 million, you’re just limited in how much money you’re going to make here.

But, yeah, this is why—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 billion thanks to this.

Incredible.

On a basis of zero because they got it for free.

Right, right. So when Ed Johnson takes over Fidelity, he starts trying a whole bunch of stuff to grow it. 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 steeped in orthodoxy, shall we say.

In 1958, he creates a new fund within the group. This in and of itself was not unprecedented, but it was quite rare. Most of the time, there was just one fund within a group or a management company. For a long time, Wellington Management Company just managed the Wellington Fund, and Fidelity had just had the Fidelity Fund.

So Johnson creates this new fund called the Fidelity Capital Fund, which is going to be a growth fund. He hires a young portfolio manager named Jerry Tsai to come in and run it. Tsai 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. Really, like we talked about earlier, he’s preying on the unsophisticated retail investors out there. He could move the market by taking a big position, pop a stock, and then get out of it and book profits.

There was a lot less regulation at that time, and there was a lot less sophistication in your counterparties when you were trading.

Yes. So pretty quickly, Tsai and Fidelity start to become a real player. All the CEOs of all the big companies want to get to know him because he has the power to really move their stocks. He becomes a quasi-celebrity.

And move it or not, he kind of has the power to be a giant shareholder in your company now that he’s attracting all this capital because people want to get in on his funds.

Exactly. So the Fidelity Capital Fund, within just a short number of years, goes from basically zero—a startup initiative within Fidelity itself, already a small firm—to a $340 million fund by 1965, when Bogle is taking over Wellington from Mr. Morgan.

So this is actually the backdrop to why Morgan decided to hand the firm to Jack in 1965, even though Jack is still so young. Morgan had a crisis of confidence. He’s not sure that he’s going to be able to operate and be successful in this new Go-Go Era. This is uncharted territory to him.

So he 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.”

Hmm.

We need to do something different.

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.”

Yes. So Wellington and its whole class of funds—the balanced funds that we talked about, stocks and bonds together, a 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, 10 years after that, it was down to less than 1% of the entire market. They were going the way of the dodo, basically.

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, taking some risk to do so.

Well, yeah. And specifically, I think they don’t even care that much about the underlying stocks. They want trades that book quick profits. They want what Fidelity and Jerry Tsai are doing.

“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 5 and you sell it at 10, hell yeah, let’s go.”

It’s funny. I associate this with the ’80s. I don’t think I realized that it was also happening in the 1965 to 1971 era.

Yeah, the ’80s were an echo of this that happens here in the ’60s.

Okay.

Yep. So all this is happening right at the same time here in 1965 as Jack is taking the reins at Wellington. Jerry Tsai, the celebrity fund manager at Fidelity, starts to think, “All right, Mr. Johnson, you’re getting older. I think I should take over the firm.”

Of course he does.

Of course he does, right? He’s got the star fund, all the clients, and he’s the man about town.

Tale as old as time.

Yep. Johnson, of course, has other opinions. “No, this is my firm. This is my family business, and I’m planning to give it to my son”—Ned Johnson, Edward Johnson III.

So Tsai says, “Okay, fine. Buy me out of the equity that I’ve accumulated here in Fidelity and the management company through my performance, and I’ll go start my own fund.”

He does. He leaves and starts a fund called the Manhattan Fund. In an absolutely wild—you cannot make this stuff up—turn of events, he would eventually take over The American Can Company, which had been co-founded by Jack’s grandfather.

Whoa.

Yes. Tsai would become the CEO of that. He would transform it into Primerica and then sell it to Sandy Weill and Jamie Dimon. That would be part of the building block of Citigroup.

What? Insane. Completely insane.

I had no idea. It’s funny, when you were giving the history of the can company earlier, I was thinking, “Is it really relevant for listeners, the vehicle through which Bogle’s grandfather built the family business?”

Yeah. And it turns out that becomes Citigroup.

That’s wild.

Through Fidelity and Jamie Dimon and all of this stuff. You can’t make this up.

Wow.

So this is the stew that’s happening as Jack is taking over. Pretty quickly, he decides that the best course of action for him as the new leader of Wellington is to take the “if you can’t beat ’em, join ’em” approach—or, more specifically, have them join you.

So he goes out and starts looking for go-go-style fund managers to merge with and absorb into Wellington, transforming Wellington into what Fidelity has done.

And I think first he was trying to hire people like this, but he couldn’t convince anyone to just join as an employee. He realized, “Oh, I’m going to have to buy one of these firms.”

Yeah. I mean, hey, if Jerry Tsai just left because he didn’t get a big equity piece in Fidelity and take over the firm, anybody else who thinks they’re as good as him is going to want an equity piece in the management company.

So he casts about, and eventually Jack finds a small new firm in Boston founded by four young partners: Thorndike, Doran, Payne, and Lewis. The lead partner there, Nick Thorndike, had just come out of Fidelity, where he had worked with Jerry Tsai and Ned Johnson.

And so they’ve raised a new fund called Ivest, investing in the go-go style. They’re young hotshots. They have $17 million under management in their nascent go-go fund. Wellington at this point has $2 billion under management, which is huge.

That’s giant market share.

Yes.

Even though they’re declining rapidly in the old style of investments.

Yes. But back to the business model of the management companies, where you’re getting paid fees based on a percentage of assets under management: the revenue and fee streams flowing into Wellington, even though they’re declining, are super high—way higher than the startup Ivest fund out of Boston.

Nonetheless, Wellington and Jack feel like they’re in such dire straits and need this merger, need to bring this go-go blood into the firm so much, that he ends up offering 40% of the equity in the management company to the four partners coming in from Ivest.

Ooh, that’s almost a merger of equals.

Yeah. $2 billion for Wellington, $17 million from Ivest, 60/40 split on the equity. There’s a quote in The New York Times in a lead story about this merger:

“Some observers feel that Wellington paid too high a price for management personnel. Many persons are said to credit the Boston group with a major coup. Mr. Bogle disagrees. With generous offers, he had been unable to hire the men he wanted.”

To your point, Ben.

“And he did not want to wait for promising men to develop their skills.”

This is a big deal. Wellington is still, even though its style is on the outs, one of the top 10 mutual funds in the entire industry. Institutional Investor magazine runs a cover story on the merger titled “The Whiz Kids Take Over at Wellington.” They have an illustration on the cover. You can find this on the internet. We’ll include it in the email, with Jack as a four-armed quarterback handing off footballs to each of the four Ivest partners, the running backs, to take them across the line and score touchdowns here.

Whew. What could go wrong? What could go wrong?

What could go wrong?

Yeah. Well, as you can predict, after a couple more go-go years, the bubble bursts. In the 1970s, the oil crises hit, stagflation hits, and the stock market declines 50%. It is not quite Great Depression levels, but you and I, Ben, have also never lived through anything like the 1970s in the U.S. It was bad. It was a lost decade.

Even 2008 was not this severe. Certainly, the short-lived COVID crash was not this severe. Software going out of favor in 2022 was not this severe. The dot-com bubble burst was not this severe. This is something that very few listeners will understand the magnitude of and feel intrinsically how bad this was.

Yeah, I mean, interest rates went to 21% by the end of this. The world basically fell apart a couple of years ago when interest rates went to, what, like 5%? Can you imagine?

So what were the good years of the go-go time? And then when did it fall apart?

Through the ’60s, and then probably around 1970 or 1971, it starts falling apart. Once the oil crisis started hitting in ’72, ’73, and ’74, go-go just completely falls apart.

They ported the Ivest fund itself over into Wellington. It had continued to perform during the go-go years. It gets a drawdown of 65% in 1 year, and they ultimately shutter the fund. They close it down.

They closed down the Ivest Fund entirely?

They closed down the Ivest Fund.

Oh, wow.

Yeah.

But hadn’t they already shifted the Wellington Fund’s style to look a lot more like Ivest?

Oh, yes.

So Wellington was suffering too, right? The fund?

Wellington was suffering too. Really, Wellington is just a battered ship taking on water on all sides at this point because it had been out of favor during the go-go years because it was too conservative and too balanced.

It was underperforming the market, underperforming the market.

Then it transformed basically into a go-go fund—

Took on a lot more risk.

—then that falls off a cliff. By 1973, the assets of the Wellington Fund have fallen all the way from $2 billion at the time of the merger down to $483 million. So over three-quarters of the assets in the fund, and thus three-quarters of the revenue to the management company, poof, up in smoke.

Now, all of that wasn’t because of the assets decreasing in value. A lot of that was redemptions, where investors are taking their money and going elsewhere. But it doesn’t matter to the management company. For them, AUM is AUM.

And this is—somebody made this point to me in research—management companies of investment firms have phenomenal operating leverage, as we talked about earlier. As you are growing your funds under management, you don’t have to scale your headcount, your operations, or your costs in the same way. And so you can get this amazing operating leverage and profits.

Much like a software business.

Much like a software business. Unfortunately, that works in both directions. So if your assets under management ever start to shrink, that goes away very quickly.

You still have almost all the exact same operational responsibility that you did when you had lots of assets, when you have a smaller number of assets.

Yep. And thanks to the merger, there are now four new partners around the table with mouths to feed, who own 40% of the management company.

So then, in the midst of all this, to complicate things even further, Jack starts to develop a crisis of conscience as all these losses are piling up at Wellington. Clients are withdrawing, and they’re shutting down the Ivest Fund. He starts wondering, first to himself and then aloud to his partners, “Guys, what are we doing here? We’re still taking fees from our fund clients. Yes, our assets under management are shrinking, so our fee stream is shrinking. But for the clients who are sticking with us, we’re not lowering our costs. We’re still getting paid pretty well, and we’re just incinerating their capital. Something feels wrong here.”

I’ve heard this referred to as his Jerry Maguire moment in the book The Bogle Effect, where that famous scene in Jerry Maguire has him losing confidence in the entire industry of being a sports agent and writing a letter that says, “Guys, we’re going to do this right. We should change everything and blow up our whole business.” And, as usual, you know how that is received.

Well, Jack’s Jerry Maguire moment here is that he gives a speech to the whole firm where he throws out this idea: “Hey, maybe we should actually mutualize the firm’s funds, dissolve the management company, or have the fund itself acquire the management company and eliminate all of the excess profits that we are making. Just solely serve our fundholders, operate at cost, and at least reduce—or get as close to eliminating as possible—the fees that they are paying for this, frankly, not very good service that we are providing them.”

A mutually owned group of mutual funds—or “mutual mutual,” as Jack loved to say.

Yes, indeed. Now, why buy it out? Why would they have to do that if Jack and potentially his partners, out of the goodness of their hearts, were going to give it to the fundholders?

Well, before Mr. Morgan retired, he had taken the management company public, floated it on the stock exchange.

That’s right.

So there were public shareholders there in the management company, in Wellington Management Company, along with Jack and along with the four Ivest partners.

So you not only have to get your camp, the Philadelphia camp, to agree, but you need the Boston guys to get on board too. They are a big voting bloc at 40%, along with all these public shareholders.

And why would anyone do this? Because it’s not rational or economic. It’s charity. Let’s take this business that generates a bunch of cash and has enterprise value, stop generating the cash, take its enterprise value, effectively call it zero now, and give it to the funds themselves.

Commit suicide with the company, effectively. And just to really highlight this again, it’s kind of easy in retrospect to look at this and be like, “Oh, Jack, he was so morally upstanding and he stood up against Wall Street and all of the crooks and fees out there.” That’s not the case.

This was how the industry operated. Nobody was asking for this. No other firm changed how they operated. No other firm reduced their fees or mutualized. No clients got mad about it. The government was fine with it.

There were not protest groups outside of headquarters.

Yeah, there’s no Occupy Wall Street in the 1970s.

Purely him saying, “Nobody’s asking, but I think we should do this.”

I think this is the right thing to do. It is really lunatic fringe. To the extent there is a moral conflict, it exists solely in Jack’s head and in his heart.

Yep.

So, Ben, as you said, as you can imagine, this goes over like a lead balloon within the partnership, which is already quite stressed with all of the problems going on.

So after Jack proposes this on January 23, 1974, at the Wellington Management Company board meeting, the four Ivest partners band together, rally enough votes from the public shareholders, and they fire Jack as CEO of Wellington Management Company.

And this is a few years after his original proposal for mutualization, for making the fund self-owning. There is this multiyear, drawn-out struggle between them where they just don’t see eye to eye on anything. They have completely different philosophies, and it gets so contentious.

They ask Jack to quit. He says, “I refuse.” He even writes a many, many, many-page memo speech, gives it to the whole board of directors, espousing how much he refuses, and then they formally actually do fire him.

Yeah. This is an extreme event. An extreme event.

And from Jack’s perspective, he partnered with these guys.

They came in. It was a fox in the henhouse, and they forced him out of his own company.

Yep.

That is how he is viewing it.

Yep. And from their perspective, this guy lost his marbles.

We had public shareholders to look after.

So January 23, 1974, Jack is fired as CEO of Wellington Management Company.

But—

Now, here's the thing: Wellington Management Company and the actual Wellington Fund—and at this point in time, they had several funds—are technically separate legal entities. Jack was CEO of Wellington Management Company. He was also the chairman of each of the individual funds, which collectively had their own separate board of directors for the funds. There was one board of directors that represented all the funds, and Jack was chairman of that board of directors.

Now, up until this point in the history of American financial organizations, that's a footnote, right? That doesn't matter.

That's a legal technicality.

Yeah, the funds have their own directors, but really the management company and the funds—it's all kind of one thing, run by the same group of people.

Yep.

They were about to find out just how powerful that technicality was.

Or Jack was about to test it, shall we say.

Yes.

So he hatches a plan. He's like, "All right, well, you guys are going to kick me out of the management company and think I'm just going to go quietly into the night? You don't know Jack Bogle."

For anyone who is not in finance, private equity, venture, or anywhere in the financial ecosystem, the funds traditionally have the right to select what investment manager they want. The investors in the fund, who elect a board of directors of the fund, rely on that board—or the management of the fund—to pick the investment manager. So the funds actually do have the power to pick whether or not they want to stay with Wellington Management or go find a new company that could advise them on how to invest this pool of capital.

Right. Or do something different, et cetera. Nobody had ever tested this idea before, though.

Yes.

So the next day, after Jack is fired as CEO of the management company, he calls a special meeting of the board of directors of the funds, which is his prerogative as chairman. He proposes that they, as the board of the funds, vote to, one, do just what you said, Ben: sever the management company relationship with Wellington Management Company; and two, do Jack's fever-dream idea: mutualize all the management and operations of the funds, hire their own staff, and run it all directly within the fund, with no separate external management company or fees.

The phrase that comes to mind here, although it is used completely differently in this context than in its original context, is "Your margin is my opportunity"—Jeff Bezos. In this case, it's not the Amazonian comment, which is, "Hey, you're charging high margins; I'm going to charge a lower margin, so I'm going to get your customers." It's, "Hey, I'm going to slash margins as close to zero as possible. I'm going to mutualize the ownership."

Wait—"I'm going to make it zero," not as close to zero as possible. There are—there's no longer going to be any profits. There will still be costs. We will operate at cost, but we will forgo all profits.

Right. It's effectively like a poison pill. They're not going to get rich. I'm not going to get rich. There are these high margins, and I'm going to use the fact that you're making high margins as my opportunity to come in and say nobody's going to make any money. We're going to shift it all to this new organization that I'm going to create, and nobody's making anything.

Yep. So how do the fund board of directors react to this? Perhaps not quite as negatively as the management company partners and board of directors, but they're still pretty shocked. They're like, "Wow, okay, Jack, we've heard you talk about this before. Obviously, we're in an acute situation here."

And you're kind of conflicted, buddy. Are you being vindictive, maybe? Is there anything motivating you, really pressing us to take all the profits and slash them to zero and go with this brand-new company that you're proposing here?

Yep. But here's the thing: Jack does have a very good point, especially to the directors of the fund, whose fiduciary duty is to do what's in the best interests of the fundholders. What he's proposing is pretty obviously in the best interest of the fundholders, right?

He's making the pitch to a non-conflicted group. The board of the funds theoretically is only looking after the investors in the funds and not the shareholders of the management company.

Indeed. So the fund board says, "Okay, we need a pause. We need a recess. We need a little more time for the dust to settle and figure out what to do here. Let's take a month. Jack, since you want to do this, we will direct you to go prepare a feasibility study of the available options to us as the fund and the board of the funds."

Because you're proposing the nuclear option here. Can we get the whole gradient?

Give us the full gradient.

Because it is kind of nice relying on Wellington. They've built out a lot of infrastructure here in the management company. For us to do what we do, it would be a little bit nuts to just say, "Sorry, we're starting something new from whole cloth."

Yeah, from scratch. So Jack goes away and prepares a 250-page report.

Of course.

It's like he's back in his carrel at Firestone Library, writing his senior thesis again.

And it's full of data. He has really done the research and the math. He is making an extremely well-formed pitch here.

Yep. So the thesis statement of this report, which he presents to the board the next month in February, reads:

"The present structure has been the accepted norm for the mutual fund industry for 50 years. The issue we face is whether a structure so traditional, so long accepted, so satisfactory for an infant industry as it grew during a time of less stringent ethical and legal standards, is really the optimum structure for these times and for the future and for the Wellington Group of Investment Companies? Or rather, should the funds seek greater control over their own destiny?"

Obviously, Jack's answer to the question is yes.

I mean, fire and brimstone. He's got a preacher in him.

He's motivated. And he actually has a telling quote in his memoir that I think speaks to his mindset at the time. He says, "Yes, mutualization of the fund and funds' activities was totally my idea. And 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." Obviously, it's both here. Jack is idealistic, and this is his chance to save his career. This is his opportunity of last resort.

Yes.

Ultimately, the fund board comes back and does vote with Jack. Barely. Infinitesimally barely.

They carve out a small job for him to do, but not the whole thing that he had asked for.

Yes. They say, "Okay, you can remain chairman of the funds. We will endorse some very, very small degree of separation from Wellington Management Company, but not everything, and not to start. We will empower you to go form a new subsidiary company of the funds, collectively owned by the funds and thus the clients in the funds. We will authorize that company to take over fund administration only." So not investment management, not marketing and distribution. Those will remain with Wellington Management Company. But we will run a little experiment: all the back office, tax, accounting, legal, fundholder registers, et cetera.

Which is Jack's least favorite thing to do. I mean, which is everyone's least favorite thing to do. The fun stuff is picking what to invest in and seeing if you can then go out and sell clients and bring in new money. Traditionally, it's fun to be the stock picker, or it's fun to be the salesperson. It's not fun to be the person making sure the accounting checks out.

Yep. And indeed, most management companies outsource this. They don't do it themselves.

Yep. And technically, he was explicitly precluded from offering investment advisory services.

To the funds. Yes.

To the funds.

Yes.

Store that away, listeners. Keep that in mind. And Jack logs the win. He's like, "Cool, I got something."

Yep. I mean, look, it was either his career was over and he was out on the street, proverbially—

Although wealthy. I mean, he's medium wealthy by this point. He's had a 20-year career during a great era running a finance company when the finance company had pretty fat profits. So he's made, I'm going to guess, $5 million, and he wasn't a big spender. So he's doing pretty well.

Yeah, it depends how much salary and draw he was taking from the management company. But of course he's going to take this opportunity. Whatever I can get. So he's like, "Great, let's do it." He writes in his memoirs, "I knew a rough road lay ahead, for my goal ultimately was to build a broad-based firm." In other words, take over everything, fully cut Wellington out. "And I took on my new leadership role in the same way I had left my previous leadership role. Fired with enthusiasm." Boy, "fired with great fire and brimstone" would be a better way to put it.

Yes.

So once the fund board votes for this, other people in the industry hear about it, of course. And Wellington, even though they're much smaller now, is still a widely known, well-respected, big firm in the industry.

The reaction is severe. Forbes magazine runs a piece about all of this infighting happening at Wellington, with the headline borrowing from the famous curse in Romeo and Juliet, “A plague on both houses,” they declare. These guys, they’re ruining it for everybody.

Jack tells an anecdote at the beginning of the book Stay the Course, his memoir, that around this time he travels out to Los Angeles. While he’s there, he gets an urgent message from the head of Capital Group, a big active fund manager in Los Angeles. John Lovelace Jr., the head of Capital Group, says he needs to meet with Jack privately. Jack’s like, “Well, my schedule’s pretty booked. I’ve got a lot going on here right now. I’m flying out of LAX tomorrow. The only time I could do would be a 6:00 a.m. breakfast at LAX tomorrow before my flight home to Philadelphia.”

Lovelace is like, “Okay, fine. I’m there.” Jack shows up, and Lovelace is already sitting down. He’s stone-cold, and he says, “I hear you’re planning to mutualize the Wellington Fund.” Jack says, “Yes, John, that’s right. In fact, I got the votes. We’re starting the process.”

Eh, ish.

Ish. Yeah, ish. And John turns to him and says, “If you do that, you will destroy this entire industry.”

Now, of course, what’s fascinating is that Capital Group and active management today have never been better. Capital Group manages $3 trillion in assets.

You can see why they had the fear, which is: If you provide this existence proof that you can run this business at cost and you don’t need to pay huge sums of money to the people managing this, then our customers will demand the same from us. That is sort of right because you can buy an S&P 500 index fund from basically anyone today at basically no cost. But it’s also sort of wrong because Capital Group, BlackRock, and Fidelity are all giant, profitable companies.

I think the interesting thing to tease out across the rest of this episode is that the competitors were probably right to be terrified of this sort of communist act, where they took a crown jewel of capitalism and communized it. But at the same time—

—like the NFL, it ended up being great for everybody.

Right, right.

So, yes. Jack’s starting down the path. The first thing this new subsidiary company needs is a name. Right as this is happening, Jack gets a visit from an antiques dealer. Again, you can’t make this stuff up. The dealer offers him some prints of British naval ships from the Duke of Wellington era.

The Duke of Wellington was the British prime minister and military leader for whom Walter Morgan had named the Wellington firm. Jack is looking through the prints, and one of them is of a ship, the HMS Vanguard, which was the flagship in the naval Battle of the Nile, where the British forces defeated Napoleon and ensured British independence and the state of Europe for centuries to come. On the spot, he decides Vanguard is the name, which is hilarious because Vanguard is a great name: steadfast, trustworthy, everything we think of it today.

Short, memorable, unique.

Exactly. Memorable. It’s also the Vanguard. It’s the leader. It’s a pioneer. It’s leading a revolution. But knowing all the history now, obviously Jack chose the name because it represented total victory and complete annihilation of the other side.

Yes.

So funny. Not at all how people think of the brand today.

3. Vanguard Is Born

In September 1974, The Vanguard Group files for incorporation, commencing operations and taking over the back office of the Wellington Fund and the other funds that Wellington managed.

Exciting.

Nobody cared. All of the great fear that John Lovelace at Capital Group, Forbes, and everybody else in the industry had about this—“This is going to destroy everything. This is going to burn the industry to the ground.”

Well, because it didn’t actually get mutualized.

Yeah, nobody cares.

If any venture capitalists are out there listening, or private equity guys, or if you’re in the investment management business: Okay, you switch back offices. This happens all the time. This happens every 5 years. This has no bearing on your peers in the industry.

What would have a lot of bearing is if you said, “Oh, all of my fees and all of my performance compensation—we’re just going to take that down to cost.” That would be significant. But that is not what this is.

No, it was not. And it turned out that Jack would need to lead another, second, and totally separate revolution as well before anyone would pay attention to what he was doing—a revolution not in the legal structure of funds, but in the very nature of the investment product that they offered.

But David, I thought he was barred from doing that. Well, if you’re not offering any investment advice at all, perhaps you still could be in the business of deciding what to invest in if you’re not actually doing any deciding.

Yes. And that second revolution would be the index fund.

So, David, the creation of the first commercially available index fund for retail investor consumers. People really care, right? They’re lining up around the block for this thing. It’s the most hotly anticipated financial product of all time. Except that it’s not at all.

It’s so funny. This would change the world, and not just a little bit—a massive, massive impact.

Most of your net worth is in these funds.

Yeah. People today are concerned that index and passive funds are too much of the market. What will happen to corporate governance when 70% of the equity ownership of America’s companies is all in passive index funds? This existential fear happening right now could not be farther from the reaction in the industry to the launch of these things 50 years ago.

Okay, so David, take us to 1974 and the journal article that inspired it all.

Yes, in the Journal of Portfolio Management, Nobel Prize-winning American economist Paul Samuelson had written that fall in 1974 that he had been studying market returns and active fund manager returns in this new mutual fund industry, and he had found no actual evidence that any fund managers could systematically outperform the market.

In the conclusion of the paper, he argues that there’s an obvious opportunity here. Somebody should come along and offer a fund that, quote, “apes the whole market,” requires no-load, and keeps commissions, turnover, and management fees to the feasible minimum—an index fund.

And interestingly, I actually didn’t realize he proposed the commercial availability of it like that. The part of it that I read was that some large foundation should set up an in-house portfolio that tracks the S&P 500 Index, if only for the purposes of setting up a naive model against which their in-house gunslingers can measure their prowess.

Yeah, no, he was thinking about distribution to retail in that paper by talking about no-load. But you are touching on something. This idea of an index fund that would passively track the stock market was not totally new. A couple of people in institutional circles had had the same or a similar realization in the years leading up to this, that this could be an interesting idea.

In fact, the whole idea of having an index or indices in the first place really is the precursor to this idea. People wanted some way to measure the entire market. That’s what the S&P 500 is. That’s what the Dow Jones Industrial Average is. These things go all the way back to the 1800s. Newspapers wanted a way to report on the movement of the market.

The delicious thing is that it took 100 years from the founding of those to think, “Huh, maybe this isn’t just a benchmark we should measure ourselves against, but maybe this is actually a great investment product.”

Yes, this could be an asset class in and of itself.

And it makes sense because why would anyone want to buy the average? Why would you want to own the 50th percentile of the market? Isn’t the whole point to work with a great investment manager who can beat the market? Why would you just want beta? You want alpha on top of beta. It’s not an immediately saleable proposition to say, “Hey, don’t you want to be average?”

Right, right.

It’s uniquely counter to this sort of whole American way of being—an aspiration of America.

American exceptionalism.

It’s funny, if this had all been in Europe or somewhere else, it might have emerged sooner.

Anyway, a couple people had tried to make this idea work on the institutional side before, most prominently the Pension Management Division of Wells Fargo—the division of Wells Fargo that would manage and administer pensions for large corporations. They had actually created an index fund for the pension fund of the Samsonite Luggage Corporation a few years earlier.

Amazing.

Incredible. But it had failed. They couldn’t make it work because this was a deceptively hard problem. In order to do this—to create a fund that continuously tracked something like the S&P 500 index—you needed a lot of software. You had to have automation. Humans could not do this.

Right. The point of the S&P 500 is to create a subset of the total market that has essentially the same returns, but with a smaller set of companies. So you don’t need the thousands of companies; you just need these 500. But even setting up the systems to track 500 companies’ movements day to day is sophisticated.

Yeah.

The other thing that makes it challenging is that it’s kind of expensive to buy, especially in whole-share-denominated amounts, a representative, correctly weighted set of the entire S&P 500. Today, the minimum quantity of dollars you would need to do it on your own, without buying into a fund, is about $3.5 million to create a minimum representative S&P 500.

So a couple years after this, along come Jack and Vanguard in this unique moment where they need something to make their model work. Computing and software are just now starting to be capable of handling this.

And Jack is reading the docs very carefully. He’s having tight communication with his board of directors, and he realizes he’s got a little bit of daylight.

He’s got a loophole. Yep.

He can say, “I am not actively taking Vanguard and having it offer investment advice in any way here, but what we do want to do is create this new fund that will require no investment advisory services, that will purely be this index of the S&P 500, and we can run it under Vanguard. It’s within our mandate.”

Yeah. We don’t need to involve Wellington.

His board agrees. Yeah, this is sort of the acid test. He goes and says, “What do you think? Is this what you’ve given me permission for?” And they come back and say yes.

Yes. As Jack puts it in his memoir, it was kind of like rendering a guilty verdict in a legal trial. He and early Vanguard had both the opportunity to commit the crime—or, in this case, create the first index fund—but also the motivation to do so, because this was the way around this prohibition against active management.

And the thing that Jack was starting to realize, which was the culmination of his senior thesis and the Paul Samuelson article, is that this could actually be very successful.

Yep.

He runs the numbers because he’s Jack. The S&P index, without the fees, beat half the active managers, and over the full decade, it would beat 78% of them. So Jack realized, “Wait a minute. It’s impossible to run an index at zero cost, but at scale, you could actually approach zero cost. If you just own the S&P, then you could beat 75% of the other mutual funds in the market.” So there really could be something here.

Yeah, this is a really important subtle point. If you are able to pull this off and just own the average of the market, but do it at significantly lower fees than all of the other managers in the market, you will actually have top-tier performance. If the fee you are charging your clients is lower than the average fee of the other managers in the market, then the delta between fund returns minus fees is much lower for you. So if you say, “Great, I’ll just take the average, but I’m actually going to get the average,” you will do much better than most other people in the market.

So here’s the math to illustrate what a giant difference it is. You might hear, “Oh, 1% fee. That’s not so bad.” At this point, it was actually higher than a 1% fee. It was 1.5% to 2%, but let’s just say 1%. That’s 1% of the total assets. If the stock market were to return 7%, but you owe 1% in fees, that’s actually 1/7 of your gains that you are giving up, or around 15% of the returns.

When that happens year after year after year, it really cuts out your returns at the knees. And I did a little spreadsheeting just to check the math on this. If you invested $100,000 at age 25 and you got 7% market returns for 40 years, you’d end up with $1.5 million. But if you paid a 1% management fee along the way each year, that’s a 6% annual return. Instead of $1.5 million, you end up with $1 million.

Yeah, that’s an extra 50% for your retirement that you could make by not paying 1% in fees each year. I mean, the long-term impact is that people thought Bogle was sort of this zealot for indexing and that he hated active management, but that’s not true. He was a zealot for low fees.

He always believed that active managers might be able to outperform the market, but, as Samuelson observed, the durability of that is really, really hard to do, and consistently outperforming for decades of trades is even harder. But what is really obvious is that even with just a 1% fee, that’s a 15% outperformance that every year you’re starting with a disadvantage. You’ve got to beat the market by 15% just to break even. Gosh, I’d rather not have that structural disadvantage. That’s the thing that is really Bogle’s legacy and what he was obsessed with.

Yeah, later in life, Jack would come to call this the cost matters hypothesis. And your example there of an extra half a million dollars in a retirement account or a college fund, or even just a savings account—that’s why I said at the top of the show that millions and millions and millions of people completely had their lives changed by this. An extra $500,000, or whatever the amount is based on what you start with, is the difference between needing to rely on your kids to support you in retirement and being self-sufficient. That’s the difference in educational outcomes for your family. That’s so important just because of that 1% delta in fees.

That’s right. Another way to put it is that active managers, in aggregate, mathematically cannot beat the market after fees. And “in aggregate” is doing a lot of lifting there, but that’s the point: The market is made up of active managers. They can’t all beat themselves. Some will outperform in any given year and justify fees, but the median active manager will underperform by exactly the amount of their fees.

Since you can’t reliably identify the winners in advance, especially when your goal is to stay invested for decades, the expected value of active management with fees as a whole is a negative expected value compared to an index fund without fees.

Yep. So, back to 1975 and 1976, and Jack and his merry crew. They did indeed call all employees at Vanguard crew members for many, many years because of the ship and the nautical theme.

It’s perfect.

Jack assigns one of the first employees, a guy named Jan Twardowski, to go write the software to do this—to create the first retail index fund. He goes off and writes it in the APL programming language on a time-sharing computer in Philadelphia.

Jack, meanwhile, goes off to Standard & Poor’s headquarters and negotiates a licensing fee with them for the rights to use the S&P 500 index as the basis for this first index fund. There’s a great story that Jack tells on a podcast interview about this. He was negotiating with whoever the head of the department that ran the 500 was at S&P, and the guy was like, “Basically, I don’t know. Gosh, should you be paying us? Should we be paying you? This is going to be great marketing for us.”

They eventually landed on Vanguard paying S&P $25,000 per year, which they sort of pulled out of thin air as the transaction value for this. That is absolutely hilarious because now index-fund licensing is basically the entire business of indices around the world, and it is extremely high-margin.

I’ve got the numbers on this. People estimate that Vanguard pays S&P Global something like $300 million to $400 million per year and is its single largest licensing client, while the licensing segment of its business as a whole does $1.85 billion a year. And to your point, David, that is essentially all profit, right? I mean, the whole world has agreed that the S&P 500 is the standard brand for the market, so they just get to take a rent of $1.85 billion a year from anybody who wants to make an index fund.

Great work if you can get it. Yep. Vanguard, BlackRock, Fidelity, and State Street are all paying them a lot of money.

And it’s charged in basis points on assets under management, or AUM.

Ha-ha, it’s a management fee!

Or on a trading-volume basis. And so it scales depending on how valuable it is to you as a client.

I did not know that. That is so deeply ironic.

And I started looking too. Why doesn’t Vanguard push its total-market fund more strongly? Or why doesn’t someone come up with a sort of synthetic thing that looks a lot like the S&P 500 but isn’t the S&P 500? Fidelity tried that. There is a 500-stock Fidelity fund that is not quite the S&P 500, or at least doesn’t license the name, but people just don’t flock to it. People want the standard.

They want the brand.

It’s a good business if you can get it.

It’s the Intel Inside—an ingredient brand.

Yep.

Well, regardless, in 1976, Vanguard launched the First Index Investment Trust Fund.

Terrible name.

Which today has been renamed to the much better-titled Vanguard 500 Index Fund, ticker VFIAX—the first retail index fund available to the public.

Today, it is the second-largest individual fund in the entire world, with $1.5 trillion in assets, second only to its own sister fund that you mentioned, Ben: the Vanguard Total Stock Market Index Fund, which has $2.1 trillion in assets. That’s $3.6 trillion between these 2 funds today.

Which are effectively the same thing.

Effectively the same thing.

If you own the S&P 500 or you own the entire U.S. stock market, in the long run, the returns are going to be nearly identical.

They both have their roots in this fund that Vanguard launched in 1976 with a broken IPO that raised $11 million.

Well, to the point we were talking about earlier, why would anyone want to buy the average? It’s a terrible sales pitch. I want to outperform. Don’t pitch me on this.

And by the way, we talked about the far future, where Vanguard’s fees have come down so dramatically. I own the ETF, the VOO one. I looked this morning. It’s a 3-basis-point management fee. That is a 0.03% management fee. It’s near zero. They and all their competitors are near zero.

When this thing debuts, it actually has a significant management fee. It’s not as bad as the rest of the industry, with 1%, 1.5%, or 2%, but it’s still 0.6-something.

0.65, or something like that.

So the pitch as a subscale index fund is: Do you want to be average, but actually with a significant drag from fees?

Yes.

It’s a bad pitch.

Well, and worse than that. Remember we talked about the 3 things that a management company does and what the Vanguard fund board, the Wellington fund board, allowed Jack to do. They said, “Hey, we’ll let you just do administration, but investment advice and distribution still have to live with Wellington.”

Distribution is still through the stockbroker network, with sales loads. So the only way that Jack and Vanguard figure out they can get around the distribution prohibition for this new fund is to do an IPO of it. So I said IPO—this is why there’s an IPO.

They rustle up a group of Wall Street banks, and I guess technically, doing a one-time IPO of the fund did not count as distribution and marketing. So Vanguard was allowed to do it. They think they can raise it, and that they’re going to need about $150 million of initial fund-holder capital in this fund to make it work. And they can’t get the demand. They raise $11.3 million. It is so bad that they don’t have enough—

It’s 1/14 of their target.

Right. They don’t have enough capital to go buy even 100-share lots of the entire S&P.

So don’t they go buy, like, the S&P 220 or something?

Well, I don’t know how they got away with this. They buy 280 stocks, but they had to choose which 280. So they are doing active management.

I think it’s something like they picked the 200 largest and then, with the remaining 80, they tried to create a representative sample that was mathematically equivalent to owning the 500, but that was an academic hypothesis, not completely proven yet.

It still requires significant judgment in there. You might even say investment advisory.

You might even say.

You might even say. There’s an amazing story on this. Did you find it?

No.

Vanguard, A, didn’t have a lot of resources, and B, didn’t want to go do anything that looked like hiring a professional investment adviser or investment manager to manage this program. So they hire a young woman part-time to work nights and weekends to choose these 80 extra stocks and then manage and track everything.

She worked full-time during the day at her husband’s furniture store in Wilmington, Delaware.

Whoa.

At night and on weekends, she was the portfolio manager for what today is the second-largest fund in the world. Together with its sister fund, it is by far the largest fund in the world. How incredible is that?

Okay, so they’ve got this completely broken IPO. They didn’t raise enough capital. The pitch is bad.

Yes. Oh, Ned Johnson at Fidelity. Remember Fidelity we talked about?

Yeah.

Ned would famously comment to the press about the launch of this fund, quote, “I can’t believe that the great mass of investors are going to be satisfied with just receiving average returns. The name of the game is to be the best.”

Deeply ironic, because a giant amount of Fidelity’s asset base today is composed of index funds, many of which are Vanguard index funds held within Fidelity.

The funny thing about Fidelity is that I think they’re primarily a brokerage. They do have their own in-house funds, but I think a lot of people own Vanguard funds using Fidelity’s website.

Yes, they do. We will get to that.

Okay. So the pitch is quite bad, but the machinery they’ve constructed, as it plays out and scales, is actually pretty genius.

If you think about it, if the customers own the management company, the business itself, there’s really no incentive to generate any more margin than you actually need to run the business. There’s no point in profits for shareholders that you’d want to dividend out to. So you could just dividend those excess profits out to customers who are the investors in the fund.

Or you could just say, “Oh, we’re doing that in the form of lower fees.” It’s a much more tax-efficient way to do it than generating profit, recognizing taxes on that profit, dividending it out, and then those people having to pay taxes on it. They’ll say, “Hey, look, we’ll just lower the fees in the future because we’re now confident we don’t need higher fees.”

Every time Vanguard lowers fees, you should view it as, “Hey, we have reported higher earnings,” essentially.

Exactly. And then as you get economies of scale and you grow, you can further cut prices. David, as you mentioned earlier, the business of asset management really lends itself well to the economies-of-scale game.

There are just not that many variable costs in managing money. Almost everything is fixed, except things like customer service, which we’ll come back to later and is kind of where Vanguard’s vulnerabilities are. Their vulnerabilities are in these variable costs.

Once you’re managing very large amounts of money for lots of customers, fees can be super low on a percentage basis. This is the exact same thing from our Costco episode. David, do you remember the phrase?

Oh, yeah. “Scale economies shared.” Didn’t we make Acquired T-shirts and sweatshirts with that phrase?

We did. Yeah. You can share the benefit of your scale economies. Costco does this with customers, and Vanguard does this too.

At the risk, Ben, of stealing what I suspect might be your quintessence of this episode, Vanguard is Costco for finance.

Exactly. But even further, it’s like Costco on steroids. Even Costco, who lowers prices as much as they can to reward customers, encourage customer loyalty, and make everything about customer experience better, has outside shareholders who want the business to generate profits. There is a reason you are investing in Costco as a business, and that’s because you expect it to generate cash flows today and in the far future.

Costco itself is a several-hundred-billion-dollar market-cap company today.

Right. Vanguard doesn’t have that at all. You are investing in the beautiful machine of capitalism as a communist.

Yes. Even Sol Price and Jim Sinegal were not this fanatical.

Yes.

4. The Slow Burn Pays Off

So it takes a few years for this machinery to kick in, for the scale economies to get to a point where it really can work, and for the investing public to wake up to this idea.

In the meantime, they start with $11 million of fund capital, and then they still experience customer withdrawals and cash outflows. The stock market starts to rise, so that keeps the fund alive, but they’re not getting new cash in, and they can’t because they can’t do their own distribution.

It gets so bad that the next year, in late 1977, they have to take the extreme, drastic measure of merging another small legacy Wellington fund called the Exeter Fund into the index fund just to keep it alive and get enough capital into the fund to keep operating it.

It’s crazy to me that they figured out how to acquire this other fund and then just merge its assets into their index fund. And all the investors were like, “Cool, sounds good. I guess we’re index fund holders now.”

Yeah, I didn’t see anything in Jack’s memoirs about the governance issues associated with that. Somehow, they get it done, though.

That fund, when they do this merger, had $58 million of assets, again, compared with the $11 million in the index fund, which was bleeding out rapidly. I mean, that’s like 6 times the size of the index fund.

So, really, the seed capital that you should think about in the Vanguard 500 Index Fund, and again, also its sister fund, the Total Stock Market Index Fund—the biggest mutual fund in the world today—comes not from the IPO capital from clients into the index fund itself initially, but the majority of the initial capital base comes from this other—

Exeter—

Former Wellington actively managed fund that just gets folded in.

Yep.

Totally wild. So after this emergency transplant to save the index fund, finally, in 1981 and into 1982, Jack and Vanguard do win the right to take over distribution of the index funds.

The way they do it is through another loophole, this one even more tenuous. Jack argues, “Oh, we’re not taking over distribution; we’re just eliminating distribution. We’re no longer going to stockbrokers and having them charge sales loads to go into our index funds. We’re not going to allow that at all, and thus we are eliminating distribution.”

Again, conveniently ignoring the fact that they now have to employ a lot of people within Vanguard who are going to market, sell, and advertise the funds.

Right. They went no-load. They refused to pay 8.5% to people outside the firm, but now they just have a fixed-cost base of people they picked up inside Vanguard who have to do the work not only of convincing people to buy these funds, but also of handling and facilitating the purchase.

Right. Right!

The way that this worked is you would communicate and send in an order via mail, and then you would mail a check to invest in this fund.

Right? Could you imagine? I remember my parents doing this.

So, eliminating distribution, sure. But somehow someone has to do the marketing and distribution, and now you just do it in-house.

Yep. On the back of that, the Vanguard 500 Index Fund does finally reach the $100 million capital milestone in 1982, 6 years after launch. It takes them 6 years to get to $100 million, which, again, was not large at this point in time. The Wellington Fund many years earlier had been $2 billion.

The initial IPO target had been $150 million. So they’re still below that, 6 years in.

Yep.

And they’ve got this headwind of having just switched away from paying people to do distribution. So there’s now no incentive out there in the marketplace to try to sell Vanguard funds.

Yep. Yep.

But the slow burn does start. Toward the end of the decade, by 1988, the fund reaches $1 billion in assets, and it would obviously grow from there.

So that’s 6 years to reach $100 million.

Yep.

And then another 6 years to get to $1 billion.

Yep, that’s right. Now, you might be wondering: That’s not a lot of capital, and Vanguard’s fees are super low. How is the firm staying afloat during this period?

Well, it turns out that Jack’s first revolution—the low-cost, low-fee proposition of Vanguard—works pretty well in equities. There are other financial markets out there where the low-cost strategy works even better, specifically money markets and fixed income, aka bonds—the debt market.

In equities, you can have real outperformance. There is uncapped upside to investing in equities. This is the dream that active management sells: Jerry Tsai, Peter Lynch, Warren Buffett, or the greatest investors of all time. We can generate annual returns in the 20s, 30s, even higher percentages, like RenTech in our episode there.

If you’re investing in the debt markets or the money markets, there is a ceiling to your performance. It is the coupons of government bonds or muni bonds, or Treasuries in the case of money markets.

Yep.

The only thing that matters in terms of relative investment performance by products offered in those spaces is cost.

Yep. The lowest-cost provider will win in those markets.

And Vanguard builds a juggernaut in the fixed-income business during this era. That’s what keeps the firm afloat while they are waiting and waiting and waiting for Jack’s indexing revolution—his second revolution—to come online.

Well, there’s that, and there’s also the fact that John Neff, who managed the Windsor Fund, which was an actively managed fund and had the fees of an actively managed fund, was absolutely shooting the lights out.

On the equity side, yes. I was wondering if you were going to bring this up. That is the other deep irony here: Vanguard never got out of the active business.

And they inherited it by virtue of having some responsibilities for the Wellington funds that they shared with the Wellington Management Company. So, yeah, this Windsor Fund provided all the profits in many years to pay all the overhead and keep the lights on while Vanguard’s low-cost indexing strategy was

On a slow burn—

—not scaled enough to pay for itself.

Yep, absolutely. And Vanguard today still has very large fixed-income businesses, money-market businesses, and active-equities management businesses. But today, they’re all dwarfed by the index-fund business.

Yep, which wasn’t the case for a long time.

Yep.

You know, it’s funny. You said something a couple of minutes ago that I’m stewing on here. This idea that, in equities, a low-cost index fund in the long run will outperform 85% or something of other actively managed funds—listeners are probably wondering, is that really just fees? Is it just that having low fees makes you better than that much of the market?

There are other components to it. A giant one is behavioral. If you are in a mindset where you are actively trying to pick the best companies, you do a lot of trading. And aside from the fact that this has a lot of transaction costs, you tend to react to external stimuli: the market being up.

You don’t stay in your winners long enough.

The market being down, having conversations with other people. Exactly, David. You sell out of your winners too early, whatever it is. And you can make the errors on either side.

There’s a behavioral component where passive index investors tend not to act. What you need to do is not act for long periods of time to be a great investor.

Yes, it’s the great Warren Buffett line: “Don’t just do something, stand there.”

Yes, yes. Whether you are trying to shoot the lights out like Warren Buffett and you are active and trying to find the very best businesses you can, or whether you are passive and throwing your hands up, either way, you need to mostly not act every day.

Passive index investing just lends itself better, behaviorally, if you’re in one of those funds, to saying, “I know the market’s up, I know the market’s down, but whatever. I own the index. I’ve made my peace.”

Whereas if you are either the active manager trying to improve the outcome of the fund or an investor in an active manager, both of you have a higher predisposition to do stuff. And for most investors in the long run, you shouldn’t do stuff most of the time.

Yep. Yep. Absolutely. So, as we exit the ’80s here, all the pieces are finally in place for the rise of indexing. The Vanguard 500 Index Fund crosses $1 billion, as we said, in 1988. And then the model’s working better and better. The scale economies are getting shared.

Fees are coming down from that initial launch price of 68 basis points to 59 basis points in 1979, then down to 50 basis points in 1985 and 35 basis points in 1987. We are really starting to be the true low-cost index fund. They’ve already dropped by 50% here by the end of the ’80s.

Yeah, yeah. The scale economies are getting shared.

Yep.

Everybody around the table is eating good. So, after assets crossed the billion-dollar threshold in 1988, around 1992-ish, they hit $10 billion. So, 10x in 4 or 5 years—a strong acceleration.

Also in 1992, Vanguard launches the sister fund, the Vanguard Total Stock Market Index Fund. They now have more than enough capital base that they can own every single stock. Why stop at the S&P 500? Own everything—all U.S. stocks.

And computers are sophisticated enough by this point in time that you can track the entire stock market, own the entire stock market, and handle the reporting on that. Not to mention, you have the benefit of not having to pay S&P Global a licensing fee to index the entire market.

Yes. Yes! Quite convenient. Look, they’re not not businesspeople at Vanguard.

Right. Oh, they’re great businesspeople.

They’re great businesspeople.

It’s just on your behalf instead of on shareholders’ behalf.

They’re working for you.

Yep.

By the mid-to-late ’90s, the two sister funds together are approaching $100 billion. The Vanguard colossus is rolling.

Yep.

Things are going great. And then in 1999, you’re not going to believe this: Jack manages to get himself fired again.

Unbelievably.

Unbelievably.

Yes.

All right. So, David, there is something that you have not been telling us about Jack’s life over the years.

Yes. Jack, unfortunately, had a bad heart. He was born with a rare genetic heart disease called arrhythmogenic right ventricular dysplasia, or ARVD. That meant that Jack suffered his first heart attack in 1960, at age 31, before he even became CEO of Wellington Management. That was his first heart attack. He had 10 or 12 over his life. It was like a ticking time bomb. At any moment, he knew he could just drop dead.

And what Jack decided to do with this was work. At the age of 36, he got a pacemaker and consulted a doctor, who said, “You really shouldn’t count on living past 40.” Then he went and talked to a second doctor, who said, “Why don’t you get a place out in Cape Cod, stop working, and enjoy the last few years you have left? Don’t work anymore.” He wrote at one point, “If I had taken the second doctor’s advice, the first doctor would have been right.”

Yeah, man, this is totally Jack’s unique personality. The way he approaches this part of his life is not going to change a thing. He’s just going to live every day the same way he would have lived it if he didn’t have this disease.

Yep.

And the stories around this are amazing. I think one time he collapsed and had a heart attack waiting for the commuter train out of Philadelphia. He was lying there on the ground, and the ambulance and the paramedics came. He made a bet with them that they wouldn’t get him to the hospital in time to save his life. He just had that kind of attitude and approach to it.

He would bring defibrillators to squash matches.

Oh, this is the best.

And it happened at one point where he had a heart attack while playing and had to count on his opponent running over and reviving him.

Yeah. And he would use this to intimidate his opponents while playing, saying, “Make sure I’ve got my defibrillator here. I could drop dead at any moment. All right, let’s go.”

It’s amazing.

So, as Vanguard is really taking off and indexing is taking off, Jack’s heart is just getting weaker and more worn down from all this. In 1994, his twin brother, David, also died from heart complications. By 1995, over half of Jack’s heart had stopped working.

Ugh.

And so, in early 1995, his doctors said, “Hey, we know your approach to life, but we can’t put this off any longer. Despite your relatively advanced age for this—he’s 66 at the time—you need to have a heart transplant if you want to have any hope of actually surviving for a meaningful period of time going forward.”

Jack and the family were brought around, and they agreed to this. This, of course, impacted Vanguard. In May 1995, the company held a press conference where Jack announced that he was stepping down as CEO to prepare for his heart transplant. The company announced that John Brennan, Jack’s former assistant, who had joined the company in 1982, would be taking over as the next CEO. Brennan had been Vanguard’s CFO for many years leading up to this.

In late 1995, Jack Bogle entered the hospital on a waiting list for a heart transplant. His heart had continued to degenerate. He needed to be hooked up to an IV feeding him drugs to keep his heart beating constantly. He waited 128 days in the hospital—

Wow.

—waiting for a heart transplant. And he kept working the whole time. He hadn’t officially transitioned out of the CEO role and given it to Brennan yet. Maybe a little bit of foreshadowing here.

On January 31, 1996, Jack officially stepped down as CEO, and Brennan took over after more than 3 months of operating as CEO out of his hospital room.

Unreal.

Really, Jack is one of a kind here. Then, in February, finally, they got the call. There was a heart available for Jack, and he had the heart transplant at the end of February. So the day of the surgery arrived.

And at this point, Vanguard is essentially planning for this to be the end of his career. Heart transplants today are obviously a giant deal. This was even 30 years ago, when medical science was still working on the procedure. The assumption was that he was done at this point, even if he survived.

And so the company moved on. Brennan became CEO and started working on a whole bunch of new initiatives. And Jack made a miraculous full recovery.

He would live for another 23 years.

He would live for another 23 years on his transplanted heart. And within a couple of weeks after his heart transplant, he was back on the squash court.

Amazing.

Playing squash and intimidating his opponents. 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?

Seriously.

So, of course, all of this was wonderful and joyous and unexpectedly great, but it was 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.

And the company was in this sort of funny place where, even without thinking about leadership succession right now, the core business had made all these really long-term trade-offs starting back in 1975 and 1976. When the fund was subscale, the fees were kind of high, and the mutual ownership thing was cute, but it didn’t mean much when it was small. Cutting the load so you go to a no-load thing, which in the short term just slows your distribution down—all these things were sacrifices for the long term, thinking, “Well, when it really starts working, it’s going to really start working.”

In the 1990s, this was that harvesting phase for the company, where 20 years of doing things the right way, which caused really slow growth, were now causing this giant inflection. I mean, David, you said something about crossing the billion-dollar line in the 1980s. By 1996, the assets under management across all of Vanguard were up to $180 billion.

And the 2 index funds were like $50 billion of that, going pretty quickly to $100 billion.

Right. So it’s just got to 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. No one would distribute our product, and no one would invest in our funds. It’s really, really, really paying off.”

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 this passive-indexing thing, too.”

Which is funny, because they’re not structurally incentivized to do it over at Fidelity, BlackRock, State Street, and all the others that are starting to roll out these very low-fee index funds. But they’re 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 the investor-shareholder alignment the way that Vanguard does, they make money plenty of other ways in their business. They’re happy to offer this as a near-loss leader, or at break-even, 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 was still on the board, but he was no longer CEO. The transition had happened, and the company was transitioning to this new phase.

Jack, I think, got super frustrated. He wanted to be back in the saddle. The way this manifested was that he started becoming a curmudgeon at the board level and disagreeing with all the new initiatives—all the new things that Brennan and the new management team wanted to do to capture their opportunity and insulate against competitors.

These were things like launching sector-specific index funds or international funds and investing more there, or investing more in marketing—basically, growing the firm and offering clients what they wanted. In Jack’s mind, this was starting to be a perversion of the mission. Meanwhile, management was saying, “Hey, our customers want this and our competitors are offering it, so we should do it.”

This is classically the divide between the founder of a company and the group of people that will take it not just from 1 to 2, but from 1 to 100. The clean simplicity, the mission, the focus, the narrowness of the product, and this one cool trick that they had were the things that got them there.

Classically, you need people who are willing to be much more flexible, but with the same culture, the same values, and the same mission that the founder had. And you see this in the numbers: 99% of Vanguard’s AUM came after Jack stepped down.

Yep. And you hit on a really important point to stress there: the same values, the same mission. It’s not like Brennan and the new management wanted to all of a sudden start generating tons of excess profits, take Vanguard public, or do anything crazy like that. No, they were true believers in the mission as well. They just wanted to serve clients and meet them where they were as the world was moving on.

And there were 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’re high performers, you need some kind of way of dealing with this.

Jack Brennan sort of had this fall in his lap. One of the things he did early in his tenure was create an employee partnership plan to try to incentivize the workforce and deal with the structural trade-off of how 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&D as people’s expectations for customer service and technology start becoming higher and higher and higher?

The internet is becoming a thing now, right?

You need to start investing.

So those are the sorts of things that fall in Brennan's lap that he has to do to take the company forward. And they end up at loggerheads with Jack on the board. All of this comes to an ultimate head and blowup in 1999 over exchange-traded funds.

Yep.

The most important new thing in the industry.

I am a Vanguard customer, and I think 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.

Yep. Yep. So Jack had a real point of view on ETFs, and in fact, he had the opportunity to launch ETFs. Back in 1992, a man named Nathan Most had come to see Jack at Vanguard. Nathan was the vice president of new products at the American Stock Exchange, and he had the idea to create exchange-traded funds as a new product, a new trading vehicle that would allow, effectively, shares—quote-unquote—of mutual funds to trade on stock markets in the same way as individual stocks.

A stock exchange-traded, liquid mutual fund—an ETF. And he thinks, of course, naturally, the very best fund partner to launch this idea with would be the newly crowned jewel of the mutual fund industry, the Vanguard 500 Index Fund.

And you might think Bogle's going to love this. What is an ETF? It's an even easier way to buy into something that looks basically like an index fund. And if you're trying to go direct to your customers the way that Vanguard does, without the sales loads and everything, then great—they should be able to buy it right on an exchange.

Easier distribution available to more of the investing public. What's not to love? I mean, that was Nathan's view. He was a real idealist about this. “Hey, we're going to vastly expand the distribution reach and the target audience for mutual funds and allow anybody who can place a trade at a brokerage to buy into a mutual fund.” And he was absolutely right.

And there's some other structural benefits, too. There's the idea that you're not affected by other people in the fund. So if someone else decides to sell a bunch of their shares, I don't end up getting a big tax hit from it. Then, of course, you actually do know the price that you are getting, because since it's traded on an exchange, when I decide to make an investment in that fund, I buy it right here, right now, at the market price. I'm not waiting until the end of the day to figure out what the mutual fund is going to be priced at. So ETFs have lots of great things about them.

Lots of great attributes. Jack hates this idea. Absolutely hates it. And he basically tells Nathan Most to get lost.

And why does he hate it? He hates it because it's exchange-traded. He thinks that, for that very reason that I love it—that you know the exact price that you're buying it at—it means you could trade in and out of it all. You could do the worst possible sin of investing, which is incur a bunch of trading costs, speculate on it, not be a long-term owner, and just try to do intraday arbitrage.

That particular thing that he thinks is going to cause all of these behavioral issues—even though the intrinsic product has all these great characteristics—he thinks the temptation for people to do that is so bad that the product shouldn't exist.

Well, and I think there's two other related things that he's really worried about beyond just that temptation in and of itself. One is that the brokerage platforms are going to incentivize trading because this is how they're going to profit from mutual funds.

Because at this point in time, Robinhood didn't exist yet. Fees hadn't dropped to zero on transactions. So you actually were paying very meaningful amounts for trades. In recent memory, it was a single dollar, but it used to be like $50 or more to place a trade on an exchange.

Yeah. So if you're a prospective competitor to Vanguard and you want to offer competitive, low-cost index funds, all of a sudden, if you can now make a bunch of profits on trading in and out of ETFs in those funds on your brokerage platform, that's a way to make money here.

Yep.

So Jack hates that. He also hates that because these funds will now be traded on an exchange, it means that you can short-sell them. And he thinks this will just be an absolute disaster for the financial industry.

And hey, look, I would definitely not recommend going and short-selling the S&P 500. That has historically been a losing game in the long run. But look, this is a product people want, and shorting indexes like the S&P 500 is a core part of many hedge funds' strategies today.

This is an idea whose time had come, with all the good and all the bad, and it needed to exist. So Jack turns it down—not just turns it down, but hates the concept of ETFs. Nathan goes on to launch the world's first ETF with a new asset management division of an old Boston bank named State Street.

You've probably heard the State Street name today. You might have heard of the SPDR.

The SPDR.

The well-known SPDR, the Standard & Poor's Depository Receipts Trust, which is the listing for State Street's S&P 500 ETF. Until recently—like a year or two ago—it was the largest ETF in the world, until it was surpassed by Vanguard and BlackRock, after Jack's time. Well, after Jack's time.

So yeah, this was a really bad decision by Jack to pass on ETFs. Today, ETFs are a huge part of the mutual fund industry. They are still only about half the assets, in aggregate, of traditional mutual funds, but ETFs are growing at like 30% per year while mutual funds are flat. So if that keeps up, at some point here in the next few years, ETF assets will pass traditional mutual funds to become the largest equity asset class in the world.

Yep. So listeners, why does this matter? Why are we explaining the difference between ETFs and mutual funds here on Acquired? I think the most interesting reason is that it was the thing where it was clear that the founder really should hand over the reins.

This should not have been a sticking point. This should not have been even a decision for the company. This was clearly the right thing to do long-term. And whether or not you understand the mechanics of a mutual fund versus an ETF—and we dramatically oversimplified and skipped some things—it is just so perfectly illustrative of this point.

Vanguard had to get into ETFs. Yeah.

And that purity of the founder is the thing that is required to start the company, but typically not sufficient to scale and keep it globally relevant.

Yep, yep.

And we see this in Ferrari with Enzo. You see this with Apple, with the Steve Jobs–Tim Cook transition. You see it in the NFL, with Coca-Cola, with Trader Joe's. I mean, this phenomenon just shows up over and over again.

Yep, yep. And this is how it showed up in Vanguard. In August 1999, this finally comes to a head on the board. Brennan and the management team say, “We have to launch ETFs. We're so far behind. State Street is out to this huge lead. They're building all this market share in an S&P 500 index that we started. This is our space to own. And our customers, our clients, are demanding it.”

Yep.

Jack is staunchly against it. And so, in August of 1999, Vanguard announces that it is enforcing its mandatory board retirement age in the bylaws of 70. No board member can serve past the year in which they turn 70. Jack has turned 70 that year, and Mr. Bogle will be stepping down from the board at the end of the year, in December.

This is a big deal. This causes a huge public outcry.

Also, there's someone older than him who is on the board, and they don't enforce it for that person.

Right. Right.

So it's not really about the age requirement. It's about overstaying your welcome. But he is the face of a movement.

Right. So unlike the last time Jack got fired, when his former partners were probably hoping he would go quietly into the night, that's not an option here because—

He's a giant asset to Vanguard.

Yes. By this time, Jack has become like a saint to the investing public. People had actually started calling him Saint Jack. And when he stepped down as CEO in 1996, ahead of the heart transplant, the company had commissioned a statue of him to be erected.

There is no option to just part ways with Jack Bogle.

You kind of want him to keep an office at headquarters if he's alive and there's a statue of him there, and the entire investing community—and increasingly, consumers—are finding religion by following his teachings.

So the year before this, in 1998, a passionate group of users on Morningstar's online discussion forums on the Morningstar.com website had founded a dedicated subforum called Vanguard Diehards, which would eventually morph into its own website and grassroots movement called Bogleheads.

I love it.

It is incredible. The standalone Bogleheads forum, Bogleheads.org, today gets 2 million visitors per month. And then, Ben, you mentioned the subreddit that has 400,000 weekly active visitors.

And if you are listening to this episode because it was posted on there, welcome to the show!

Yeah, welcome to the show!

Thanks for joining us.

So as I said, the compromise that they reach is that Jack will still be the founder of Vanguard. Jack will still be the face and the spirit of Vanguard to all of the millions of fans and diehards around America and around the world. But he will no longer be on the board. He will no longer be involved in active management of the company.

They set up the Bogle Financial Markets Research Center on campus, which Jack leads, with a staff helping him spend the next 20 years researching, speaking, writing books and papers, and generally just evangelizing the index-investing philosophy.

All of which, of course, is the very, very best marketing that, I would say, you can't possibly buy. For all of the conflict and strife around this second firing, it really works out about as well as it possibly could for the company and for Jack. His legacy is preserved, his value to the company is preserved, and Vanguard gets to move on and launch ETFs, which they finally do in 2001.

Which he did soften on over time.

Yes, and he does eventually repair his relationships with the management of the company, especially after Brennan steps down in 2008 and the next CEO, Bill McNabb, succeeds him.

Yep. And there are a few things we skipped over to this point that happened in the '70s and '80s, and then happened in a big way here in the '90s. That's changes in the structure of the investment management industry. The first thing to know is that indexing was not actually that interesting when Bogle started it. I know we gave the stats around its outperformance net of fees, but in 1975, the market still had a lot of fools in it.

Yeah. Yeah.

People who were acting individually, who were not institutions or advised by financial advisors. They were clients of stockbrokers, and the stockbroker would make a commission on a trade, so they would trade a lot and buy things that were bad decisions. If you were an active manager, it was just not that hard to beat all the fools in the market.

Yes.

By the '80s and '90s, that started to go away. So much of the activity in the market was real professional management that you could often assume, "Oh, my counterparty is smarter than I am." I always assume this when I'm buying individual stocks. I'm like, why am I buying a stock that a really smart hedge fund is selling? That's what causes me mostly to buy index funds or to transact in private markets, where I'm buying shares directly from a company rather than in public markets, where I'm the least informed person on the trade. But that was not at all the case back then. So there was this interesting trend where, as more money became professionally managed, indexing's advantage increased.

Hmm. I bet it actually worked both ways, too: as indexing became more popular, a lot of the unsophisticated, shall we say, participants in the market moved into indexing and stopped being easy prey available for the active managers.

Right, right. Yeah, it's a great point. It's kind of like online poker. When it first started, there were a lot of fish at the tables, and then eventually the fish go away and you're just playing other poker pros, which is no fun. It's sort of the same thing in the stock market. I didn't make the leap to realize that indexing is a much better product when it's a sophisticated market of traders versus an unsophisticated market, because its relative advantage is higher.

Yep. Yep. Absolutely.

Or I'd say its relative disadvantage is lower. That's the right way to put it. So that was a big tailwind for indexing. The second big tailwind is that, in the '60s and '70s, you mostly bought stocks through a stockbroker who charged you a commission. But they didn't make money simply by managing your assets the way that people do today.

Right. The advisory business wasn't a thing yet.

Right. You just had a stockbroker, and that guy wanted you to trade because he got paid on the trades. Over time, stockbrokers went out of favor and people started shifting, David, exactly as you were talking, to financial advisors. That meant that instead of being purely incentivized for you to buy and sell stocks, they were incentivized for your net worth to grow, which is more aligned. They were still typically taking a large fee, but the incentives were at least aligned. So index funds were kind of this perfect product for them. They didn't care whether you traded or not. They just wanted your assets to grow, and they wanted you to be happy with the level of service that you were getting. It was this amazing tailwind. The growth of the advisory business became a huge accelerant for index funds. You had an amazing channel from it.

Yep.

And then the last tailwind is the dot-com era.

Yes, yes. I love that you're bringing this up.

This is my favorite thing.

E-Trade, baby.

Yeah. David, why do you think the dot-com era was a tailwind for index funds?

I've always thought that it's ETFs. It's the continuation of the story that we were just telling: as people are coming online, trading more, and seeing the option to just, within your online brokerage, buy the S&P 500, people are doing it.

Yep. Yep. That is absolutely a big one of them. The technology itself, interest in buying stocks because the dot-com run-up was happening, and people were getting more and more excited to buy stocks. So that was people's introduction to it. But the third one is that they could actually see how much they were getting ripped off by underperforming, high-fee active funds. Before, you worked with your stockbroker, ended up in a fund, and got a statement every quarter or once a year, and you were like, okay. But every day you log into whatever your favorite brokerage.com is, and you see performance versus benchmark. You can dive into the research. It's all at your fingertips. That caused people to go, "Wait, there's an S&P 500 button? Great. That's going to be much better than whatever this thing is that I'm currently in."

Yep, yep. Amazing. What a revolution.

So the ownership of equities in America went from 1% to 2% before the Great Depression to 4.2% in 1949. But even by the '80s, it was still just right around 20%. It wasn't until the bull market of the '80s and '90s, when the stock market really took off as a thing that people owned, that it grew substantially. In 1989, it was at 32%.

So 32% of Americans owned equities?

Owned any stocks at all.

Yeah.

By 2001, it was at 54%.

Wow.

A huge part of that is everything we talked about with the dot-com era. Probably the bigger thing is the rise of the 401(k), where suddenly people are responsible for their own retirement and they have a vehicle here, which I'm sure we'll talk about with Fidelity.

Oh, yeah.

And then, thirdly, the mutual fund and the index fund just being this very perceived-as-safe, good way to own equities. Today, it's something around 60% of Americans have stock market exposure. It's funny that it's not just one thing. You need all of these different accelerants to happen over time.

Yes. You say index funds were widely perceived as this good, safe thing to own. One thing we skipped over earlier, in the mid-'90s, was the Oracle of Omaha himself.

That's right.

Warren Buffett implicitly endorsed Jack Bogle and Vanguard in the 1996 Berkshire annual shareholder letter, where he wrote, "The best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results delivered by the great majority of investment professionals." From the horse's mouth himself.

Now, interestingly, if you had invested in Berkshire, it would have been a much, much better investment than just buying the index. We've been sitting here talking about how the index beats 85% of managers on a long-term basis, especially because you don't have to leave the bad manager when they become bad, then go find the good manager, and incur all the costs involved in that. Berkshire was the exception. I was prepping for this episode with a good friend of the show from Worldly Partners, Arvind Navaratnam. He showed me this chart from 1965 to 2025. If you had invested in the S&P 500, you would have had, kind of unbelievably, a 10% compound annual growth rate.

Wow. Pretty good.

The S&P since 1965 has been amazing, with a 10% annual growth rate and dividends reinvested. That's a 405x return.

All right, lay Warren and Charlie on me here.

Berkshire was a 19% compound annual growth rate, for a 39,000x return.

Wow! 405 versus 39,000.

That's over 60 years.

And that's over 60 years.

So when you hear us saying, "Oh, well, it beats 80% or 85% of other managers over some time frame," Berkshire was the extreme exception. To hear Warren saying, "Actually, what most people should do is buy low-cost index funds like Vanguard"—

—it goes a long way. Well, there's more Warren and Berkshire to come on this episode. But to that point, I have always thought about Berkshire as the Vanguard of private equity funds. It is essentially a no-fee private equity fund. You get to buy shares, and you don't pay fees or carry on it.

Yep. It's concentrated, though. That's the difference here.

Well, so is a private equity fund.

Right. But I'm saying that's the difference versus Vanguard's S&P 500 fund.

Oh, yes, yes. But the spiritual and cultural resonance between Omaha and Malvern, Pennsylvania, where Vanguard is located, is strong.

That's true. We haven't told listeners yet: this is in the middle of freaking nowhere.

Yes.

It's like a 2-hour train ride from New York City. It's the opposite of the capital of finance.

And it also just so happens to be right up the street from where I grew up, which is amazing.

Yeah. Weren't your grandparents some of the first Vanguard investors?

Yeah. Yeah. Nearby. I was going to save this for the end of the episode, but my grandparents were among the very, very first fund holders in Vanguard. I couldn't find the exact date, but I believe my grandparents must have become Vanguard clients either in the late '70s or early '80s, when nobody was a Vanguard client.

Before the $100 million mark on the fund.

I think it was just a local company: "Great, we'll go with this local company." Amazing.

Southeastern Pennsylvania showing up again.

It was our Taylor Swift episode, and this one.

I mean, they set up Vanguard accounts for me the day I was born.

Wow. Okay, so getting back to the story here, we haven't yet talked about the financial crisis. You mentioned there's more Berkshire to come.

Oh, yes.

There have been, like, 4 other CEOs since Jack. There's a big beat of the story here.

Yeah. The 2008 financial crisis really was Vanguard's—and all of indexing and passive investing's—finest moment.

Yeah, I think that's probably right. All right, David, bring us to 2008 and the Great Financial Crisis.

Yep. Indexing and Vanguard's big moment in the sun. It's kind of funny: during the financial crisis, passive index funds don't magically avoid getting whacked. Of course, they move exactly the same as the market and have huge losses in 2008, 2009, et cetera. What's more important, though, is what happens to everyone else?

So, Michael Burry and The Big Short aside, almost the entire professional active money-management ecosystem gets crushed just as badly or worse. Mutual funds, hedge funds, private equity, alternatives—you name it. Carnage, devastation. No one is safe.

Well, most money managers are not set up to have a 40% drawdown on everything in their portfolio. Their comp structures, their redemptions, and their contracts all sort of break, and the business falls apart.

This not only creates the spiraling problems that lead to all the losses, but also permanently impairs or ruptures faith in the entire smart-people-on-Wall-Street ecosystem. The promise had always been, especially as passive investing and indexing had been rising over the last 2 decades, "Yeah, yeah, yeah, that's great, but we're smart. When the bad times come, we're going to outperform. We're going to protect."

You're saying this is active?

This is the premise of active money management and all the smart people on Wall Street: We know what we're doing.

We're going to get you the high returns in the good times, and we'll figure out how to protect you in the bad times. And it's all mechanistically built in to have safeguards.

Yep. We have safeguards. We won't get wiped out. We won't experience the same kind of piano-falling-on-our-head losses as these naive index funds will. That turned out to be absolutely not the case.

For the vast majority.

The vast, vast, vast majority of active management, again, of all types—not just equity-management funds, but everything out there in the financial ecosystem. John Rekenthaler wrote in Morningstar, in a retrospective on the financial crisis years later, "Active managers had long promised that when a bear market finally arrived, they would outperform Vanguard's fully invested index funds. It did, and they did not."

Yep.

Yeah. And then, related to what I was saying there, even more than the underperformance—you know, some might say nonperformance—of the active-management industry during the crisis, the crisis just completely burst whatever halo or status or bubble had emerged around Wall Street and fund managers for most of the investing public.

A lot of people's views of Wall Street during the financial crisis changed from, "Hey, these are smart people who I should probably invest my money with," to, "These people are charlatans at best and crooks at worst." You've got the bailouts, you've got the Occupy Wall Street movement, you've got Lehman Brothers, you've got all this stuff. Public sentiment turns against Wall Street and active management in not just a major way, but arguably a permanent way.

And who is there as the hero of Main Street, the little guys, but Malvern, Pennsylvania-based Jack Bogle and Vanguard, which makes no profits, has no fees above costs, has no corporate owners, and has always been the champion of the average American? I mean, you could not draw up a better marketing event for Vanguard than the financial crisis.

Yeah. And I think for a lot of people, they just decided to hang it up on thinking too hard about their finances. They thought, "Look, I thought I was clever for trusting this person's cool strategy. I thought they were clever. Turns out none of us were clever enough."

And the easy button, where nobody's making any promises about how much better they're going to do—I mean, Vanguard makes you no promises—is, "Hey, you're going to get the market." If you're interested in the market, it has historically performed well because it essentially captures the productivity growth and innovation of the world's most successful economy.

In fact, since they started existing in 1975, it's done extraordinarily well—something like an 11.6% compound annual growth rate if you reinvest dividends. That's a delightful average. If that's average, I'll take average.

You know, your life is going to be in great shape if you just compound that for a long time. And so I think for a lot of people it was, "I'm fed up with clever. Give me straightforward."

Right, right.

And the one explicit promise that Vanguard does make to you is, "We will not profit from you."

Right.

And that goes especially far in this moment, during and after the financial crisis, with so many people.

Yes. What's interesting is Vanguard actually raised its fees in 2008.

I didn't see that.

I think structurally, they need to raise them when there are contractions in the market. First of all, you should know Vanguard did not lay anyone off during the financial crisis, which is kind of unbelievable.

Yeah. Wow.

So they have a fixed-cost base that they have to cover, and now their AUM is lower, assuming they didn't get net new inflows because the underlying stocks are worth less.

Right. Right.

They actually have to effectively raise money from their customers in the worst times to meet their obligations to pay all of their headcount and fixed costs. Now, when they raise it, it's from, like, 0.07% to something slightly higher than that. So it ends up being fine, and it's just noise.

Still very, very, very low. Yeah. Interesting.

But it is sort of this interesting impact of the mutual-ownership model.

Yeah. During market contractions, they actually have to raise their fees, huh?

Or at least have historically done that. So what's the impact of this?

Well, just to put an even finer point on this, St. Warren over in Omaha comes back into the story here. In 2007, fortuitously, right before the crash, he issued a public challenge. Warren Buffett said that he would bet $1 million of his own money against any and all takers from the hedge-fund industry that, over a 10-year period starting on January 1, 2008, the Vanguard 500 Index Fund would outperform, after fees, the same dollar amount invested in any portfolio of at least 5 hedge funds. And then the winner of the bet would get to select a charity that the funds would be donated to.

It's crazy, right? You get to pick any 5 hedge funds you want, and you can go pick the 5 best.

You can pick the 5 Tiger Cubs, whatever you want.

And they just have to outperform the S&P over a 10-year period.

Not just the S&P—specifically, the Vanguard 500 Index Fund.

I know. It's cool he named it.

It's really cool that he named it.

It's good for Vanguard.

So this also just tells you everything you need to know. Only 1 person took him up on the bet. Do you know?

You do know. Of course I know who this is.

Of course you know who it was. Our friend Ted—I'm sure you are listening—friend of Acquired, Ted Seides, host today of the Capital Allocators podcast. He was the only hedge-fund-industry manager to take Warren up on his bet and accept the challenge. As Ted would be the first to tell you, he got whooped.

It didn't look that way at first. The hedge funds were off to a good start, but in the fullness of the decade, I don't have the numbers in front of me, but it was something like the S&P performed like 130-something percent, and the hedge funds in aggregate were like 30% to 40%.

I've got the numbers right here.

Yeah, it is not even close. The Vanguard 500 Index Fund over the 10-year period blows away Ted's selected hedge fund portfolio so much that Ted ends up conceding early to Warren.

Wow.

Yeah, like a year or two before it's over, Ted's like, “Yeah, yeah, yeah, Warren, you won.”

“What charity am I making the check out to?”

So when all is said and done, the Vanguard 500 returns a total of 126% net after fees for the 10-year period, while the hedge fund portfolio returns just 36%. So yeah, what's that, 4x plus?

Over 10 years.

Over 10 years. Yeah. And yes, Ben, the charity that the check is made out to is Girls Inc. of Omaha, which Warren selected as the recipient of the money.

I wonder—we've gotta ask Ted—if it was an option to pick the Renaissance Technologies Medallion Fund.

Oh, that's a good question. So, Ted, it'd be fun to ask him. He actually chose 5 hedge funds of funds, to get a total basket of about 100 different hedge funds in the portfolio. And Warren said, like, “Yeah, sure, that's fine.”

Because then you're just buying the average.

And the extra fee layer on top of the fund of funds, too.

Yeah.

Yeah, I'm not sure why he made that choice.

But truly, the more diversification you have, 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, right?

Right. Well, either way, Warren writes in Berkshire Hathaway's 2016 annual letter related to all this:

“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.

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.

Saying that you are a hero to him. 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.

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, the systemic fallout from that would be huge. If you think about the 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. Interesting to think about. Hopefully that never happens.

Yep.

Anyway, after 2008, as you would expect, Vanguard's share of mutual-fund flows just skyrockets. It basically doubles overnight. Before the financial crisis, Vanguard received roughly 15 cents of every new dollar that came into the mutual-fund industry as a whole. After the crisis, that doubles to 30 cents 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 $1.2 trillion in cash inflows versus $500 billion for the whole rest of the industry combined.

Wow.

Over twice as much of all the dollars flowing into all of their competitors flow into Vanguard during that 5-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 they need to offer an advisory product to their clients too. They want to actually talk to people. And they have an advantage here because of their profitless strategy and approach to their business. They can offer human wealth advisors to accounts with as little as $50,000 invested. This is a huge win for Vanguard that pretty quickly grows from zero to $150 billion in advised client assets overnight. And again, it isn’t a profit driver for Vanguard because it doesn’t need to be.

And it’s, to your point, the lowest—I think they charge somewhere from 5 to 30 basis points for this service. They now have over 1,000 CFPs on staff. This is a completely different business line that is predicated on the same model: What if we don’t have any shareholders that we need to serve? What if the only stakeholder is our customer?

And often it’s the same customers. It’s Vanguard clients who are using Vanguard funds in their retirement accounts or college-saving funds and need advice about how best to structure that.

So in January 2019, Jack passes away at age 89 after one of the most incredible lives, I think, of the 20th century into the 21st century.

Yeah, American hero. He enabled more Americans to participate in the fruits of capitalism in a way that dips only into the best parts of capitalism and leaves all the unsavory parts behind. It’s this beautiful communal, fair way to participate in the rising tide.

At the time of his death, Vanguard managed an aggregate of $5 trillion over 20 million clients. I mean, this is from a firm that started as a cockamamie revenge plot against his former partners.

Did he leave it on the table? I mean, the only way that Vanguard would exist is by not taking profits.

Good point. That is a real chicken-and-egg problem here.

Path-dependency thing. But over time, there totally could have been ways for it to start being profit-generating or have enterprise value, and he just wasn’t interested in any of it.

Yep, absolutely.

So our story does not end there. I used a minute ago Fidelity and BlackRock and their founders and controlling families for reference. That was not an accident. In the years leading up to Jack’s death, and especially in the 7-plus years since his death, Fidelity and BlackRock have really made a comeback.

They’ve done exceptionally well.

Yeah. BlackRock is the largest AUM asset manager in the world, with a more international and institutional client base than Vanguard’s U.S. individual approach.

Yep. And Fidelity has had an incredible comeback too, each of them in different ways. And they both come back to ETFs and really validate how important that was, and frankly how wrong a decision it was for Vanguard not to get into them in the early days.

So I know more about Fidelity than I do about BlackRock. In my mind, Fidelity is sort of more of a brokerage. They’re a brokerage that has funds, and Vanguard is like a set of funds that happens to have a brokerage.

I think that’s a fair characterization.

They are primarily in different places in the value chain, and I’m revealing myself here, listeners. I have a Fidelity brokerage where I own mostly Vanguard funds.

Yep. You and a lot of people.

Well, okay, so let’s take each of them in turn and maybe let’s start with Fidelity and then we’ll do BlackRock. So as we said throughout the story, Fidelity has always been very happy to experiment and invest in lots and lots of different things, and they have hit on two real home-run platforms in recent years, both of which are weak spots for Vanguard. One is corporate 401(k) plans.

Which is why I am a Fidelity customer.

Well, and that’s the other platform that has been a big home run for them, which is retail brokerage accounts. And as you point out, there is a natural crossover between those two things. So it all, I think, stems from a strategy that they realized a number of years ago. They don't necessarily have to compete with Vanguard anymore in the funds business. So even though Fidelity and Wellington/Vanguard all started in the same business as fund managers, Fidelity realized, hey, we can—and they certainly do—offer their own index funds.

Some of which are actually even cheaper.

Yep. Some of which are even cheaper. They're loss leaders for them. But we don't have to beat them there. Fidelity is very happy to have their 401(k) and brokerage account holders do what you do: just hold the Vanguard funds through ETFs. And I think Jack kind of foresaw this. This is why he didn't like the business, but he opened up the Vanguard funds to be on all the other platforms.

Yeah. I mean, this is a—I don't know if it's an existential risk. I wouldn't say that, but this is a vulnerability for Vanguard, which is that so many of their customers, of their AUM, don't actually have a relationship with the company. They are invested in Vanguard ETFs via their direct relationship with a different brokerage, primarily Fidelity.

And that different brokerage, at least in Fidelity's case and in many of their cases, is also a competitor in the funds business. So right now this is all fine, but if you play this out—

Well, it's fine because no one makes any money on the funds. So Fidelity doesn't have a huge incentive to say, “You should come buy my 2-basis-point fund over here instead of your 3-basis-point fund over at Vanguard.”

Yeah, your point is probably what will ultimately be correct: The cost basis for these funds is so low already, it doesn't matter. But you could play this out years into the future where, if this dynamic continues and Fidelity is able to make a lot of profits from all of their account holders in their other businesses—you know, 401(k) management, profits from companies for management fees there, and then retail brokerage through all the ways that they monetize retail brokerage—they could even really undercut Vanguard on fund costs and say, “This is going to be a total loss leader because we're just going to profit in these other areas that Vanguard won't do.”

This is like Vanguard is Microsoft and Fidelity is Google, and they could launch Gmail and say, “That thing that's your primary business, we're going to make that free now, and you have no other businesses to compete with us on because you don't have cash coming in from anything else. So, sorry.”

Yep.

The pushback is I don't think there's a difference between 3 basis points and 0 basis points. If we go back to my example earlier of you throw $100,000 in and the market compounds at 7% and your fee is 0.03%, that is a difference at the end of the day of $1.48 million and $1.497 million. So, not a huge difference even 40 years later of compounding. I don't think people are going to switch over that.

Yep. Yep. There's another aspect to this, too, though, which your Gmail versus Outlook Mail analogy holds even more. Fidelity's just a better product and product experience than Vanguard. So during the pandemic especially, it exposed that Vanguard's customer service and technology are jank. They are not good. And there were a lot of horror stories of trades not going through and fund and account transfers getting lost.

It makes sense, right? I mean, the downside of Vanguard's structure is that there are no excess profits that can be invested for the long term in things like technology and customer service. Whereas Fidelity, as they started to realize that this strategy was going to work for them, said, “Oh, this is going to be a weak spot for Vanguard. We're going to double down on technology. We're going to double down on customer service. If we're going to make our brokerage platform and our 401(k) platform vastly superior to what Vanguard offers.”

Yep. It is an inherent trade-off in the model. You don't have as much money in the kitty to build the best-in-class technology platform or the best-in-class customer service. You could, but you probably need to raise prices a little bit, and they just need to get comfortable with that.

Yep. Yep. So that's the Fidelity story. The BlackRock story is different, but also rooted in ETFs and, in BlackRock's case, directly rooted in ETFs. So in 2009, during the depths of the financial crisis, BlackRock made a fantastic acquisition of a business called iShares from Barclays.

And this is all directly related to the crisis. Barclays had acquired the pieces from a few different banks and financial firms, but really assembled iShares earlier in the decade, and iShares had become the leader in ETF issuance. When Barclays took over the failed Lehman Brothers assets, they needed to raise capital to shore up their capital base, and they had to put iShares up for sale as part of it. BlackRock came in and acquired it, and it has been just a slam dunk, huge, huge win for them.

Coming out of the financial crisis, you know what retail investors decided they liked even more than the Vanguard story and the simplicity and folksiness of the Vanguard index mutual funds? They liked a lot of ETFs that they could trade on their own and make all sorts of WallStreetBets-style fancy bets on the market.

That's right, because even Vanguard only has a few hundred funds and ETFs today, whereas BlackRock has tons of ETFs, right?

Yes, 1,400 total ETFs—

—like really custom—

—in aggregate totaling $3.3 trillion in ETF assets under management, which is the largest player in the market by far.

Across a bunch of different strategies and sectors and stuff that Vanguard has always been religiously against.

Yes, reluctant to pursue. Yep. So, yeah, Vanguard is today the number 2 player in ETFs, but smaller both in number of funds and then assets under management. And BlackRock continues to kind of accelerate away from it.

Again, right now the ETF market is smaller than the traditional mutual fund market that Vanguard still dominates, but the ETF market is still growing 30% every year, and BlackRock is starting to run away with it here.

And BlackRock is also very diversified. Vanguard is a competitor with a slice of their business, but they're just in so many different sectors.

Not to mention private assets.

International. BlackRock is way more international than Vanguard is in terms of the client base that they work with.

Yep. Similar again to the Fidelity strategy, BlackRock's profits elsewhere in the business allow them to subsidize the ETF business and just win massive amounts of clients.

Yep.

5. Vanguard's Next Challenge

So all of this raises an interesting question here at the end of the story: Does Vanguard's no-profit mutualized model actually hold it back today relative to Fidelity and BlackRock? When we started the process for this episode, Ben and I originally thought that the question of the episode was going to be: How do Fidelity and BlackRock continue to exist at all despite Vanguard's obviously superior model?

Right. And to put a finer point on “obviously superior,” it was with Vanguard undercutting them on price and being structurally incentivized by their shareholders to do so.

Yep, yep. And we kind of had to change it here as we went through the research: Oh, actually Fidelity and BlackRock are doing so well. Is the question actually flipped, that Vanguard's model is holding it back? I don't exactly know the answer, but what I will tell you to bring us to today here is that, 24 months ago, in May of 2024, Vanguard made another big CEO announcement that they were bringing on the first outside CEO in the firm's entire 50-year history, Salim Ramji, from BlackRock, where he was, until that point in time, head of the iShares division.

So that really says a lot right there. And the question is, can he fix the challenges that Vanguard is facing right now?

And to itemize those, it's what, customer service, technology—

—and this situation where they've found themselves that, because of ETFs, their competitors, or “competitors,” can access their funds easily and in sort of an open garden on their own platforms, where they will then profit from the customer relationships with those fundholders.

Yeah, in other ways. See, I don't view that as a problem. I think if you're Vanguard, you're delighted to get the business, to have people buying Vanguard funds on Fidelity. But there is a vulnerability: You actually don't have a relationship with those customers, and they have a relationship with Fidelity.

Yeah. And they can easily trade in and out of your funds whenever they want. And their advisors on those other platforms might one day advise them to.

Yep. Gee, wouldn't it be smart to have a giant advisory business of your own to build the direct relationship with those customers?

Right. So, yeah, what does Salim do when he comes in?

Well, I think it's some of these things we've been talking about. It's expanding the advisory business. In addition to that, expanding fixed income, which we haven't talked about in a while. Try and expand into retirement, where obviously Fidelity has really knocked it out of the park.

He's talked on podcasts about making deeper technology investments and improving the client experience. There is this interesting question, which is that they haven't really had any new innovations in a while, call it a decade, that have been really meaningful to the business and that they've continued to scale.

They did buy a direct-indexing platform called JustInvest, but afterwards haven't done that much with it. Similarly, the Personal Advisor Services grew really fast at launch and in the years afterwards. But since COVID, I don't think—

—they have been mostly flat.

Yeah.

Or at least they haven't been putting out any press releases talking about how big it is getting. One interesting development that I was surprised to see is an expansion into private equity.

Yeah, that was surprising.

Before talking about why they're doing it, it is worth calling out this crazy thing: for public equities and bond funds, prices have seen massive compression thanks to Vanguard. They used to charge 1.5% or 2% 50 or 60 years ago, and now you're seeing the Vanguard effect: 7 basis points at Vanguard and 40 basis points for the rest of the industry. Venture capital and private equity are 2 and 20, or often even higher. I've seen plenty of higher fee structures than that, too.

Right. Not only is it a 2% assets-under-management fee to the fund manager every year, there's also a performance fee on top of that, in the form of carry.

Right. David, you and I are in this world. We've been venture investors in the past, and we do venture investing now. What is your take on why, structurally, the Vanguard effect has not come to venture capital and private equity?

Yes, I used to think about this a lot. Now I think the answer is quite simple: venture capital and private equity are an access business.

Yeah.

It's not like you can just call up your broker and say, “Hey, I want some shares of Anthropic today,” and execute an order. You need to pay for access. That's what venture capital is doing, and that's what private equity is doing.

In private markets, the assets have to pick you.

Yes.

But in the public markets, they do not.

Yes.

In venture capital, there is a chance of extreme outperformance in a power-law way for the very best funds, and investors are actually willing to tolerate fees for that chance at outperformance.

Yep.

The other thing is, you really do need a crazy person like Jack Bogle who is interested enough in capitalism to spend their life in the world of investing, but not capitalist enough to want to benefit from it in any way. That's an incredibly rare person. Jack didn't exist in this world at all. He was only in the world of mutual funds and basically had no contact with the venture and private equity world.

Yeah, there hasn't been a Jack Bogle in the private asset world of VC and private equity, and there hasn't been another Jack Bogle in the public asset world either. He is one of one.

There hasn't been another Jack Bogle in any industry. The interesting thing to call out here—and to spoil one of my giant endnotes of this episode, my quintessence—is that there's no reason why mutual ownership of a corporation needs to be strictly in the asset management business. If this is a better form of capitalism, which I think it is—I’m excited about this model, and I’m fascinated by it—it seems like this really beautiful, elegant structure that provides a lot of durability. Why aren't we seeing it in retail, grocery, and technology? Why aren't the customers always the owners of the company? Or at least, why isn't there literally any other example besides REI?

REI, yep. Co-op.

That's probably the biggest example, and then a handful of small grocery stores. The other scale players are probably just insurance companies or banks.

Yeah, yeah.

But why isn't the economy littered with this?

Let's table this question for analysis, but to keep it on Salim and Vanguard today, they're entering private assets for the first time.

They are entering private assets, and the big thing is that these companies are staying private longer, so much more of the innovation engine of the American economy is happening in private markets. If you're going to best serve investors, then you do want to find some way to get exposure to it. The question is, can they do it in a Vanguard-y way, where they do it at cost or as close to at cost as possible?

We've seen an announcement of an alliance with Blackstone, the huge private equity firm, which will be really interesting. I think the question is, what are the economics there, and at what scale can they do it? Historically, the private markets were a lot smaller than the public markets. Now, with multiple trillion- or near-trillion-dollar companies in the late-stage private markets, they're pretty big.

Yep, yep. This needs to get figured out one way or another. Navigating the fee question is going to be a big one because, again, like we said, this is a fundamentally different market where the asset needs to pick the investor, and access is limited and scarce. The best investors in private markets—think Sequoia, Benchmark, and so on, in the venture world at least—why would they ever give up their fees?

Right, right. The other thing that's happened is the success of the index fund has created a barbell in a lot of people's portfolios, where you own Vanguard as your 80%—your cheap beta for most of your net worth—and then you play with the other 20% and look for asymmetric bets to make. Does Vanguard want to play in that 20% at all? Are they satisfied being the core for most people? That'll be the interesting thing to watch.

Yeah. It seems like Salim is moving them in the direction of, yes: private assets, crypto, and so on.

Full spectrum.

Yeah. My big question is, when you are owned by your current set of customers, why grow? You don't have any shareholders to appease. Normally, when I buy a share of Apple, it's because I think Apple is going to compound its profits and cash flows in the future at a higher rate than anything else that I could invest in. It's Apple's job to grow to benefit me as the shareholder. Vanguard doesn't have that. Their only charter is to appease the needs of their current customers.

Right. The answer I suspect Vanguard leadership would give you is that you do actually need to grow to stay competitive because you need to keep investing in the platform, and the current cash flows from our small management fees are not enough to make all the investments that we want to make.

Yeah.

You do need to fund a fixed-cost build-out with your future customers, so you sort of have to grow to get them in. The other thing I would suspect they would say is, to best serve our current customers, we need more products to offer them. We need to enter wealth management and private equity in order to better serve our owners and customers. I think there's merit to that, too.

Okay, so that's the last couple of years under the new management at Vanguard. Take us to today by the numbers.

Total assets are now $12 trillion. $2 trillion of that, interestingly, is active.

Yes!

Just to underscore this, Jack Bogle was not an index-passive zealot. He was a zealot for low fees. I think this is the DNA of Vanguard: can they figure out how to use their mutual ownership structure to continue entering more and more sectors where they can squash fees to zero, or as near zero as possible, especially in scenarios where they can get average returns at a dramatically below-market cost? That is the magic of the whole thing.

Yeah, yep. Again, very Costco-like.

Yes.

You've seen Costco expand into vacations, autos, and tires. Why can't Vanguard do the same?

Yep. It's crazy. As much as we've talked about the index fund as the central narrative of this story, Vanguard's assets under management consisted mostly of its active funds for the first 20 years. By 1994, indexing was still only 15% of its total assets under management. Then, as we talked about, it really took off in the '90s and 2000s. Today, 84% of Vanguard's assets are passive index funds, but if you go back to 1974, it was 0%.

Right.

It stayed below 15% for the first nearly 2 decades.

Yeah, 20 years. Yep.

Now, on to expense ratios. Vanguard's average ETF and mutual fund expense ratio is down to 0.07%. Some ETFs, like the one that I'm in, VOO, are at 0.03%. The industry average across mutual funds and ETFs is 44 basis points. That's 6.5 times Vanguard's average. Even after all these years and all the Vanguard effect on the industry, there is still quite a bit of difference between Vanguard and the industry average.

The average mutual fund out there.

Yes. Notably, that's not the average passive index fund, because basically everyone has had to meet Vanguard there. But it's interesting how the Vanguard effect has even dragged down the active public managers, too.

Yes, yes.

84% of Vanguard's funds have outperformed their peers over the last 10 years. They have 20,000 employees and 50 million investors worldwide. But notably, a little over 90% of their investors and investor capital are in the US, so they're not nearly as global as BlackRock, Invesco, or Franklin Templeton.

Yep.

All right, should we do analysis?

Well, on this one, I have one more thing before we go into analysis.

Ooh.

Listeners might have noticed we never really said what happened to Wellington.

Oh, in the divorce?

After the divorce, yep. The crazy thing is, they went on to build their own trillion-dollar firm, 100% devoted to active management.

It's the anti-Bogle.

So if you know anything about the active-management space today, Wellington Management Company is one of the largest players out there.

And yes, it is the very same Wellington Management Company, all the way back to Philadelphia and Walter Morgan.

So they built this giant pure active firm in the era that massively bent toward passive indexing.

Yes.

So was it the same 4 guys that stayed and rebuilt it?

Same 4 guys.

After Jack left, the original 4 Ivest partners took over the firm and slowly rebuilt it into something new. Remember, it had been a public company. They retook it private in a management buyout. Then they radically reconfigured what Wellington was.

They went out and recruited a bunch of young, talented new partners to come in. Then they restructured the partnership into a progressive generational transfer, where senior partners age out of their equity in the firm and younger partners age in. It has worked incredibly well for them.

In the second half of the 1980s, as the stock market rebounded, Wellington Management was totally rebuilt. At one point, they took over management of MIT's endowment—the actual Massachusetts Institute of Technology.

What?

They obviously had always been in equities. They built a debt practice, a private capital practice, and an alternatives practice. They went international, but probably their closest comp today is Capital Group, the giant firm in Los Angeles that we talked about.

Wellington manages about $1.3 trillion in assets today. Capital Group manages $3 trillion, so it is larger, but both are very well respected. And the best part is that Wellington Management still does the investment management for the Wellington Fund within Vanguard, even to this day.

Really?

And that Wellington Fund not only still exists, it has $110 billion in assets today.

So it is technically a Vanguard-administered fund, but the investment advisory is done by Wellington Management Company.

Wellington Management Company. Same as always.

It is an incredible story. Jack and the Ivest partners eventually reconciled in the early ’90s. Jack went up to Boston, they all sat down to dinner, and they said, “Hey, we have gone our separate ways. It has been a long time. It is time to bury the hatchet.”

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? It really is kind of heartwarming.

It is. And what a way to wrap the story. It is full circle.

What a way. Yeah. All right, let’s move into analysis.

Okay. So my big question here in analysis—and I have some playbook themes that I want to hit—but I have been cliffhanging from earlier. Why do you think, outside of some mutual insurance companies, REI, and some local grocery stores, it is not more popular to see this mutual ownership structure in our world?

Yep. I think you could argue that the NFL, in its own way, is this—obviously not to the fans, but to the constituent teams.

I disagree with the NFL take. I think the NFL take is a collective bargaining agreement. It was, whenever it was, 1960 or 1961. By linking arms and bargaining together, they were going to get more for their TV deal than they would independently.

They observed that working, and then they decided, “We are going to take that stance for everything and negotiate as one league going forward.” This is different. It 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?

Maybe that is why it works uniquely for Vanguard and for asset management: the product is capital. You can tap your customers for the thing you would normally tap investors for.

Yeah, you definitely need to have the ability to do that. Even Vanguard’s real estate on their campus in Malvern, when they were constructing it, they tapped the fund holders for essentially construction loans to construct the campus. You do need to have enough capital in the base, and the ability to do that, in order to fund your fixed costs.

Whereas, I do not know if REI could raise a bond from its members. I mean, the fact that 15 years ago I paid $30 to become an REI co-op member—am I really a member?

If they called you today and said, “We need your money to finance the next store buildout,” you would say, “No.”

Right. The other thing is that Vanguard was in a unique place to rely on Wellington’s active stuff enough to provide profits during the dark wandering years. Usually, the way you end up with shareholders is that you need to raise money, and Vanguard figured out a way to bootstrap off the old business.

Yep. All that said, I totally agree. I think you need to be operating in a space such that you can access capital.

Everything I just said is an argument for founder ownership, not customer ownership. If you did not 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.

Yep. And that is where I was going to 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.

Right. You have to make a non-economic decision. You have to decide that something you would own as the founder, you do not own, and the community owns instead.

Yes. And even if you get paid a good salary—and Vanguard pays high salaries commensurate with the industry—you are not getting equity ownership, and you are thus not going to get incredible wealth generation.

And you are going to have to go through absolute hell to will this thing into existence, more so than if you had regular shareholders, because you have to do crazy things to get through the lean years, especially early on. Usually, there is some economic component to being willing to go through all that.

This is admitting, “I will never, ever have founder economics, or economics of any kind, in this entity,” and you are still trying to will it into existence. So it is not only a very narrow circumstance that could allow it to exist, but it takes a very unique—a Jack Bogle.

Yeah, a type of person in the exact, specific situation in life where he found himself. It is 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 would not have done it if he had not found himself in this situation.

Right. So I think it mostly boils down to Jack. The other thing that makes finance uniquely well suited to this is that lots of people manage to start co-op grocery stores and small co-op businesses. 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 is not that.

Yeah.

Finance is like software, where it can scale basically infinitely once it overcomes its early fixed-cost base. Huge operating leverage.

I did think of one other Jack Bogle-like character who built a Vanguard-like thing, and I am 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 is also something else that was also an Acquired episode.

Oh, wow. I guess Berkshire?

Visa.

Oh, Visa! Yeah, Dee Hock. Absolutely. I was going to say Berkshire because Berkshire, as we talked about earlier, does not take fees or carry, but effectively is a private equity firm. But it is not the same because Warren owns a huge chunk of Berkshire.

He became worth $100 billion.

Yeah, exactly.

He does not take outsized economics. He takes commensurate economics.

Yeah, I forgot about Dee Hock. You are totally right.

Listeners, for anyone who is not tuned into our Visa episode, it took a similarly—I am not sure if “selfless” is the right word—but a person who was not motivated by getting to own the fruits of their labor.

Dee just decided this is the best structure if all these banks link arms and collectively create this thing that, if memory serves, might have even been a nonprofit or some sort of strange structure.

It was a strange structure.

Now it is a corporation and it has gone public and all that.

But it had to be restructured in order to go public in 2008, I think.

Right, but it was this realization that there exists a better structure that will uniquely enable this interbank experience, and I want to will that into existence. It is going to be my life’s work, and I am not going to own it. I think that is the type of person that it takes to do this.

Yep, and you are right. I think there are a lot of parallels between Dee and Jack, but Dee, if memory serves, was an employee—

Yes.

—when he started this. So Visa, yes, he forwent founder economics, so to speak, but it would not have been on the table for him otherwise. This was his chance to be on the big stage.

Yeah. He had to convince his employer not to be the owner.

Yeah.

But he never could have been the owner.

Yep.

Unlike Jack.

Yeah. Good call, though. I love that Visa connection.

Thank you. I was proud of that one.

You should be.

All right. Other playbook themes. This is a case study in aligning incentives. If you want something to happen, and Jack really wanted low-cost investing to happen since the math showed that it was superior in the majority of cases, you need to align incentives for it.

So I think most people coming into this episode know Vanguard has low-cost index funds. Some people know that Vanguard is owned by its fund investors, but I think few people realize that is why it is low cost.

Yeah.

The investors are the board of directors, or elect the board of directors, and thus will always vote to lower fees when they can lower fees, because it’s in their own interest.

Jack’s quote on this, which he would often say, is, “Strategy follows structure.”

Yes.

And by setting our structure as such, this had to be our strategy.

Yep. Another playbook theme I had is that people often talk about compounding returns. We’ve done it hundreds of times on this show. Bogle really understood the power of compounding costs. His quote on this is, “Where returns are concerned, time is your friend, but where costs are concerned, time is your enemy.” And Vanguard’s strategy was just that: to give you the power of compounding returns without what Jack calls the tyranny of compounding costs.

So Jack, yes.

I don’t think corporate structure and corporate governance have ever played such an important role as they did on this one.

Yeah.

I was racking my brain. We always talk about these founder-led companies or where private family ownership lets you take a longer view, but this is something else entirely, where it was literally path-dependent. The only reason they had the market opportunity they had was because of the corporate structure they had.

Yep.

It’d be fun to see if there are other ones of those that exist.

Yep.

All right, should we get into the criticisms of passive investing as a movement?

Yes, the crisis. We would be remiss if we didn’t discuss—

The crisis, of course.

—the passive crisis.

What is a revolution? It becomes a crisis if you let it become successful enough.

Yeah. And this is what we were alluding to earlier: if one of these companies were to go down, it would be systemically really bad. The flip side of that is that these large index fund complexes—of which Vanguard is the largest—control a huge percentage of the voting shares of all American corporations, and increasingly all corporations around the world.

Yeah. So first of all, there’s this name “passive investing.” That’s not true. It’s not like an algorithm determines what is in the S&P 500. It’s a committee of humans. So this whole thing is predicated on just owning that basket of stocks, but the S&P 500, yeah, it’s got some rules, but it’s not entirely rules-based. Those just govern what companies are eligible to get voted in by a small group of people around the table.

Who, you might say—

—are actively picking.

—the fund advisers, the investment advisers—to the majority of the American public here.

Yes. The counterargument to this is that it only matters in the short run. In the long run, the S&P 500 returns are almost exactly the same as the total market returns. So it doesn’t keep me up at night, but I always think it is a little bit funny that it’s not totally passive.

Yep.

Okay. Other criticisms here of indexing: unlike businesses that have some form of physical operations, or an addressable market being small that constrains them, asset management can scale infinitely. Its market is investing literally any currency in literally any company. The TAM for that is all of humanity. It’s all of humanity’s wealth.

Market size unconstrained.

It is truly market-size unconstrained. Think of the largest markets in the world: transportation, housing. This is maybe bigger than any of that. That is a little bit of a crazy thought exercise. It’s not constrained by addressable market, and it just scales so elegantly. Other than customer service, it just doesn’t require any additional dollars of cost to serve additional customers and generate additional revenue. So, in theory, a few index funds should continue unabated to scale and own basically everything.

Yep, and we’re well on our way to that happening.

Yeah, so here are the stats on it. 35 years ago, only 1% of the market was passive. It’s now more than 20% of the S&P 500, and a couple of years ago, passive assets in funds overtook active assets in funds for the first time. That just happened, where passive funds eclipsed active funds. So the concern that people have is a fewfold, based on this. One is that there aren’t enough active traders in the market to accurately discover price. If we’re all trusting that the index is going to buy things at the correct price, you do need active managers to buy and sell to set the price.

Yeah, and the associated criticism of passive, which I think Jack would readily acknowledge, is, “Hey, we’re free riders here.”

Right.

We’re getting all of that price discovery and price information that the active guys are doing, just for free.

I don’t buy this argument. I’m not concerned in any way about this. I think even if you had 95% passive, the prices are set by the marginal trader. You don’t need very many people in there arguing with their dollars about what something is worth to figure out what it’s worth.

Yep. And the profit opportunity from arbitraging—

Right!

—is so great. And that profit opportunity becomes greater as this problem, quote-unquote, gets worse. So the right market balance will figure itself out here.

Yes, there is an equilibrium. Long before we get to that problem, you’ll have arbitrageurs that are interested in trading because it’s profitable. You’re right, it’ll hit an equilibrium. At least that’s my perspective on this.

The other concern is, well, all these companies now have the same shareholders. Apple, Microsoft, Google—it’s all 20% plus these big—

Vanguard, Fidelity, BlackRock, State Street, et cetera.

—exactly. So why would they compete? If, let’s say, that 20% goes to 50% or 80%, shouldn’t the owners go tell the CEOs, “Hey, you guys should just collude and keep prices high. Let’s reap the corporate profits. Let’s screw over the American public, the customers, and let’s all just make a lot of money together”?

This also seems a bit far-fetched to me.

Right. It sounds provable in an academic thesis, and then you get actually out in the real world and you talk to some CEOs. Do you think the CEO of any company is going to stop competing with their biggest competitor in a fierce battle because an index fund manager—

Common ownership in index funds?

No, there’s just no way.

Yeah. I do think the more legitimate concern is voting and being active shareholders, holding management to account.

Yes.

And right now, it’s actually pretty interesting. The way that each of these companies and each of these funds handles how to vote the shares of the index funds is all over the board. Some of them literally let individual index holders vote on individual issues. That’s incredibly rare. Usually what they say is, “I want to pick one of these 5 options and vote with management, with the majority, or with a set of ESG guidelines.” That’s the common thing. Most of the time, they’re suggestions of how we should vote the shares, but I get where you’re going: the fund manager of, let’s say, one of these—Vanguard or BlackRock—grows to, I don’t know, 60% ownership of every company in America. Suddenly, they have voting control over those companies, and it’s a big responsibility to decide how they’re going to vote those.

Right.

Or, in aggregate, a set of 3 or 4 of these large index funds and their fund-holder base, which is the American public, means it’s like we’ve turned the board of directors of every company into an election on the order of a U.S. political election.

Right. That’s funny. It turns every corporate governance issue into the court of public opinion.

Yeah.

How does the American public feel about this?

I have no idea if that’s a good or bad thing, but it’s certainly not how corporate boards have operated in the past.

Right. I will say this 20% is a little misleadingly low because, thanks to direct indexing and people constructing their own portfolios that look like indexes but aren’t actually in index funds, the passive ownership in companies could be more like 30% to 40%. But the people who are direct indexing or creating the mirror portfolios aren’t in funds, so you don’t really have to worry about how the funds are voting. But it does impact price discovery—those people aren’t trading, those people aren’t participating in price discovery. That’s just passive ownership of everything.

Yep, yep. At the end of the day, on all this stuff, I think these are some issues that will get magnified and need to be worked out, but none of them feel like real existential threats to me—to passive investing.

Yeah, totally agree. All right. Should we do our 7 Powers analysis?

Let’s do it. 7 Powers. This will be fun because Hamilton Helmer’s definition of 7 Powers is what enables a firm to earn sustainably more profits than its closest competitors. And, well, Vanguard by its very nature earns no profits.

Right. We’re going to have to adapt the definition of 7 Powers to really align with more of its spiritual goal.

Why do 50 million people have $12 trillion with this business?

Yeah, maybe it can be expressed through market share instead of through the sum of profits.

Yeah. Why is Vanguard the market-share leader in mutual funds and index funds?

Because you can’t really talk about it in terms of theoretical profits. The only thing that earned them the right to exist is not generating profits. So if they were to recognize their theoretical profits, then they may not exist at all, at least historically.

Yeah.

So you sort of have to do the analysis based on market share rather than on trying to estimate what their theoretical profits would be.

Yep.

And maybe one little twist on this that we can keep in mind as we go is a question I was asking through the research: What's to stop another idealistic young person from coming along and saying, “I also don't care about profits, and I am also going to start another Vanguard and compete with them?”

Yes. What protects Vanguard? That's the question. So the 7 are scale economies, network economies, counterpositioning, switching costs, branding, cornered resource, and process power.

Yep. Well, to my question, scale economies for sure.

Absolutely.

Absolutely.

This business, like Costco, has scale economies shared. The reason they exist in the first place is because there were no existing low-fee index fund providers. If you were to try to start a new one today, in order to break even, you'd probably need 1% or 2% fees, starting from a zero asset base. And so you'd be inherently noncompetitive. If you're not already big or you don't go raise a giant amount of money to subsidize it, then you need Vanguard scale economies to compete.

Put another way, 7 basis points on $12 trillion is still a lot of absolute money that can fund a lot of salaries.

7 basis points.

Sorry—7. Even more money.

So that's scale economies. That's an obvious one. Counterpositioning: I think this may be the most extreme example of counterpositioning ever. Bogle did something that was essentially noneconomic. There's no economic incentive to create this company in the first place. Their ownership and fee structure was an advantage that cannot be replicated—not only by a competitor who would be concerned and destroy their business, but by anyone else who tried to do this. They would make no money.

Yes. Extreme counterpositioning. Now, interestingly, it still took the better part of 2 decades to get real adoption for this. But I think that's largely because it also took a while for all the mechanisms to really get put in place.

Yes.

I think that's right.

Yep. I don't think there's really network economies here.

Nope.

There's certainly no switching costs, especially once ETFs are on board. In the traditional mutual fund industry, yes, but ETFs—

I completely disagree.

I think ETFs eliminate switching costs. Oh, you disagree?

There's no chance that I'm going to sell my Vanguard index fund and realize the capital gains tax only to switch to a different index fund.

Ah, sorry. I was thinking about switching costs in terms of a customer relationship, but—

But that's the unbelievable thing about how, if you're a fund manager and someone is invested, if they can let the compounding continue unabated, they should.

Right, right, right. And not realize the capital gains taxes. Okay. Fair point.

So I think this is inherent in the fund business model, especially the open-ended public fund business model.

That's a great point. Yep. I do think ETFs meaningfully changed this equation for Vanguard, but in a sort of side way, simply that the customer relationships could now be ported out of Vanguard easily.

Out of Vanguard the brokerage.

Yes.

But not out of Vanguard the fund.

Yep.

Branding?

Branding. The Bogleheads, the Warren Buffett endorsements, and decades of building the brand.

I'd have to think back to when I first started buying index funds, but I probably picked Vanguard over a Fidelity fund because they both looked de minimis in fees, and I was like, “Oh, Vanguard's probably the right thing I'm looking for.”

It's really hard to replicate Warren Buffett saying that a statue should be erected to Jack Bogle and that he's a hero to the American public and to him.

Yes. Now, interestingly, there is some wholesale transfer pricing because of the S&P licensing, where the branding is a Vanguard S&P 500 index fund, and Vanguard probably has to pay a good amount of what it makes on that fund to S&P Global.

It's got to be the biggest single component—

Of cost.

Yep.

Yep. Process power. There's something unique in the culture at Vanguard. I think people make noneconomic decisions to work there because they're motivated by the mission, and it might also attract a set of people who aren't interested in being in New York City finance.

Yep. I think that's totally true.

Yep. Cornered resource. I don't think it exists.

I don't think so.

All right. That's power. Should we do quintessence?

All right. Quintessence.

Here's mine. We haven't talked about this yet, but I think it comes down to this. Jack had the insight that running a successful mutual fund is actually not a differentiated product. It is a commodity.

Yep.

What you are seeking is the highest possible long-term return on your capital. That is not like buying a unique piece of jewelry. It is like buying a soybean. This is an industry that, for decades, had sold itself on uniqueness, but there isn't a unique thing you're seeking. It is just a risk-return profile over a long period of time. So in commodity markets, it is a different set of things that determine a winner versus differentiated product markets. Scale really matters. Brand really matters, and most importantly—

Low cost.

The lowest price is the market-clearing price. If someone's selling undifferentiated coffee beans or soybeans or oil for a dollar lower than you are, your demand goes to zero and they get all of your demand. And he realized that the public equities investment business is that. So if you need the lowest price, then you need the lowest cost structure.

I like that. I might suggest a modification.

Please. I'm open to it.

I would suggest that Jack bifurcated the public equities market into commodity and non-commodity before Jack and before Vanguard.

Oh, that's interesting. He invented a commodity sleeve of the stock market.

Yeah. It was all differentiated, all marketed as differentiated products, selling the dream of outsized returns. Jack took a huge chunk of that, broke it off, and said, “Nope, this is a commoditized market.” I still do think there is a successful and thriving industry selling the dream.

I mean, clearly there's an existence proof of that.

And some of them deliver on it. But yeah, Jack broke off a huge chunk of it and created a new market.

Yeah, I love the quote that he has: “The grim irony of investing is that we investors not only don't get what we pay for, we get precisely what we don't pay for.”

Yes! That's a great quote.

And the whole realization is that investors as a whole are the market. It is zero-sum. Therefore, if you're going to own the market, you have to do so with the lowest possible fees. And I think the thing that makes it all work is holding for duration. There are going to be lots of funds that you can be in that will outperform in fits and starts. But if you want to be in the upper decile after 40 years, then it turns out owning the market with no fees is an almost surefire way to do it.

Yep.

Not investment advice.

Not investment advice, but Warren Buffett says it, so look to him. Which leads me right to my quintessence. My quintessence is that Warren Buffett was right. The world and America should erect a statue to Jack Bogle. And specifically, my quintessence is that, more than almost any other episode I can think of, the Vanguard story and Jack's story are proof that one single human being really can change the world. This is not a product or an idea whose time had come.

You don't think?

Not like this. Not like this. Index funds probably would have come. Technology had gotten there.

Ah, but mutual ownership—

Right. Mutualization—

But people would have done it via loss leaders, not—

Yes. Yes. The Vanguard effect. Would Fidelity, BlackRock, and State Street be charging the low, low fees that they are today on their index products were it not for Jack Bogle and Vanguard? I don't think so.

It's interesting. I wonder where it would have settled, because there would have been competition around pricing. And the way it usually works is you compete down to the minimum profit that firms are willing to make. So I wonder what that floor would have been if not for Vanguard.

Right. But usually that minimum profit that firms are willing to make is not zero.

Zero!

Especially not in this industry.

Very true.

So yeah, I agree with Warren, and millions and millions and millions of people have had their financial lives changed because of him and would not have happened without him.

Yep.

All right.

All right. I've got 2 bits of trivia for you.

Oh, okay, great. Lay them on me.

Vanguard opened its doors on May 1, 1975. What other company started that same month?

Oh, Microsoft.

Microsoft. Nicely done. Isn't that crazy? At the same time that Bill Gates is toiling away in Albuquerque, you've got Bogle and crew amid that crazy board fight all the way across the country in Pennsylvania.

And we didn't put this in the narrative, but the initial founding headquarters location of Vanguard—

Valley Forge!

Not Philadelphia, not Malvern, but nearby Valley Forge, Pennsylvania, cradle of independence in the American Revolution. Right up the street from where I grew up. I spent many an afternoon as a child walking around that park. Little did I know what was going on there.

That's right.

All right.

All right, so my second piece of trivia is something truly astonishing that is related to this episode but didn't make the narrative.

Arvind Navaratnam from Worldly Partners sent over this crazy piece of research to David and me. David, I don't know if you looked at it, about the entire set of companies that have 100x'd since going public, because he's on this quest to figure out: was it knowable at the time of IPO how well they would do? This basket of companies, on average, delivered a 533x return since going public. So, really good companies, on average, saw drawdowns at some point in their life of 65% and took 8 years to recover to their prior all-time highs.

Wow.

So think Nvidia, Amazon, Meta, TSMC, Nike. And I bring this up because most investors just do not have the temperament or the research capacity to decide to continue to hold these assets. So it just doesn't make sense for most people to put material chunks of their net worth in them. I don't think I realized that even for that whole basket of 100xers, the average drawdown that they saw was 65%. If your goal is to invest in the world's greatest companies and hold for a long time, you are required to go through massive, massive downturns that could take, on average, 8 years to return to the all-time highs. Who does that?

Well, there's two groups of people who do that: people with absolute iron stomachs and index fund holders.

Right.

So there you go.

And the people with iron stomachs, they might be right, they might be wrong. There are high-conviction wrong people much more often than high-conviction right people. And so that's why there really is only one Berkshire Hathaway.

Yep, yep. Wow, that's incredible.

Yeah, it's a crazy stat.

Well, similar to that, I have a really fun thing that I learned in the research. So Jack, as we talked about, was a prolific author. I think he wrote 12 books, I want to say, in his lifetime. And those books continue to sell really well. All the proceeds from the book sales go directly to the Bogle Family Foundation, where they get distributed to a whole variety of charities, including, prominently, the American Indian College Fund, which I think Jack was on the board of and was a huge supporter of during his life. What a cool legacy—all of the proceeds just flow directly into charity.

Pretty cool. The world's largest philanthropist.

Yes.

But not from the book sales!

Not from the book sales, no.

All right, on to carve-outs. The first one is that many of you will notice that we started writing in The Wall Street Journal.

Yes!

So we are very, very pumped about that. We also did an article on Vanguard two days before this episode came out that was published in the weekend edition of The Wall Street Journal.

Yeah, this is, A, super cool, and B, what a fun full-circle moment for me. Earlier in my career, I worked at The Journal on the business side, not as a writer. The idea that someday I and we would have a regular column in The Journal would have blown my 24-year-old mind. Yeah, super cool.

Okay, my real carve-out is that I am recording this episode on a brand-new MacBook Pro M5 Max.

Yeah, you went all out!

I clicked the biggest spec possible.

You clicked the max button.

I did. And I was definitely in the camp that all Apple silicon is amazing, and it's remarkable how my M1 still feels snappy. And I was wrong. Getting an M5 Max revealed to me just how slow my 2021 computer was. God, this thing is just such a beast. So it's very fun to be using a computer again because I don't wait for anything anymore. Also, I upgraded my internet to get 2.5 gigs up and 2.5 gigs down. So there is just no latency between me and anything I can imagine at the moment, which is a delightful—

You're a junkie, Ben. You're a junkie!

—place to be in computing. Yes.

Every time you come to visit, you haul that beast out of your backpack. I'm like—

"My mobile battle station."

I'm in awe of the computing power resting in—

16 inches of pure horsepower.

Oh, amazing.

It's my LaFerrari in a backpack.

Yeah.

All right. I've got 3 carve-outs this time. The first one is Michael MacKelvie on YouTube. He's this awesome YouTuber who I've discovered recently. He makes these super-in-depth, usually sports-analytics-focused YouTube videos, and they're amazing. Very thoughtful, very intellectual, very highly produced, and hilarious. He just does a great job. Huge fan. I think he's based in Seattle too.

Oh, sweet. Yeah, you just sent him to me a couple of days ago. I just clicked subscribe.

So that's 1. 2 is the new Super Mario Galaxy movie. My older daughter and I love the first Super Mario Bros. Movie. When she heard that the second one was coming out, she said, "Oh, Dad, I really want to go see it in theaters." And so I promised her, I was like, "Okay, we'll go on a date, you and me—a daddy-daughter date. We'll go to the movies."

It was the best date I've ever been on in my entire life. Don't tell Jennie—or actually, do tell Jennie. We had the most amazing afternoon. We walked to the movie theater, we held hands the whole way, and ordered lunch. The movie theater had special Super Mario-themed Shirley Temples. We had popcorn and candy, she snuggled up during the scary moments, and I was just like, this is what you become a parent for. This is the best afternoon of my entire life. Can't recommend it highly enough. Go on dates with your children.

I love it. Congratulations on parenting heaven.

Yeah, and then it was back to the salt mines after that, but it was great. And then my third one, a surprise last-minute carve-out. While I was doing research yesterday, polishing up the show notes for the script, I came across Brooks Vanguard shoes, totally accidentally, by Googling.

What?

This is the ultimate Acquired crossover. Did you know these things exist?

No.

These are old-school Brooks running shoes that they still make—

Googling now.

—I feel like we gotta order some of these and wear them to our next event.

Are they actually Vanguard something, or is it just—

No, no, the model is called Vanguard.

Oh, I see.

By Brooks.

I was thinking it was like the Nike Kirkland Signature shoes I bought because I had to.

No, it's not an official crossover. It's just the name of the model.

Yeah, these are sweet, though.

But they look pretty sweet! I feel like we gotta get a couple pairs of these.

Oh, and they have them in Acquired teal.

Oh yeah.

All right. Ordered.

Nice. Live ordering during carve-outs.

Well, a huge thank you to a bunch of the great folks that we chatted with to prep for this episode. For me, Arvind Navaratnam, as always, at Worldly Partners, did a great, great write-up on Vanguard. And since he is in the investment business, this one was very close to home. He also had a framework for how you could create a valuation for Vanguard at the end of his write-up.

Thank you to Morgan Housel, our good friend and financial author, famously the author of The Psychology of Money and a past ACQ2 guest.

Yeah.

And to Bill McNabb, former CEO of Vanguard from 2008 to 2017 and a 30-year veteran of the firm. Thank you so much for hopping on the phone with us multiple times to work through a few different things that we were thinking about. As always, thank you to Mike Miller, the former Wall Street Journal editor who has been really helpful in crafting these episodes with us.

While we're on the topic of The Wall Street Journal, I know you have one.

Yes!

Jason Zweig, the legendary author of The Intelligent Investor column in The Journal and one of the most prolific authors covering the entire fund space, including Vanguard and Jack Bogle throughout his life. Thank you so much for all of your help.

Man, The Wall Street Journal party continues with Justin Baer there, who has a book coming out soon called House of Fidelity, which I think is actually due out this week. And then to Charles D. Ellis for the book Inside Vanguard and Eric Balchunas for The Bogle Effect, both really great books with a lot of detail on the history.

And from me, thank you to all of the other folks who helped us, who we won't name here, but you know who you are. We deeply appreciate it, and it really made the episode special. Thank you.