WEBVTT - Charlie Ellis on the Rules of Investing 0:00:00.080 --> 0:00:05.960 M. This is Mesters in Business with very Results on 0:00:06.200 --> 0:00:11.680 Bloombird Radio this week on the podcast What Can I Say? 0:00:11.840 --> 0:00:15.280 Charlie Alis is a legend in the world of finance, 0:00:15.720 --> 0:00:20.240 whether it was at Greenwich Associates or as chair of 0:00:20.280 --> 0:00:24.360 the Yell Endowment or a board member at Vanguard, he 0:00:24.480 --> 0:00:28.640 has seen pretty much everything in the world of investing. 0:00:29.800 --> 0:00:34.280 His career spans the entire modern era, dating back to 0:00:35.159 --> 0:00:38.360 um you know, the Paul Vulcar era, and what took 0:00:38.400 --> 0:00:41.880 place during the boom periods of the eighties and nineties, 0:00:42.200 --> 0:00:47.320 and how technology has changed the world of investing. He's 0:00:47.360 --> 0:00:50.199 just one of these people who is so thoughtful and 0:00:50.400 --> 0:00:55.680 insightful about everything. It's just always a pleasure, uh to 0:00:55.840 --> 0:00:59.760 chat with him. I found our discussion to be absolutely 0:01:00.040 --> 0:01:03.040 us in and I think you will also with no 0:01:03.120 --> 0:01:09.000 further ado my conversation with Grantwich Associates Charlie Alis. The 0:01:09.080 --> 0:01:11.399 last time we spoke, we really were talking about the 0:01:11.440 --> 0:01:15.920 retiming crisis, and we spent a little bit of time 0:01:16.120 --> 0:01:19.520 discussing Van Guard. But this new book is so interesting 0:01:19.520 --> 0:01:23.560 and so filled with details that only an inserter can have. 0:01:24.200 --> 0:01:26.960 Let's delve into it a little bit. Tell us. What 0:01:27.160 --> 0:01:29.640 first led you to Vanguard? How did you get involved 0:01:29.640 --> 0:01:35.959 with them? Well, it's started long time ago. Six. I 0:01:36.000 --> 0:01:39.000 was working with the securities firm in New York and 0:01:39.600 --> 0:01:43.360 Wellington was a client in Philadelphia, and I would go 0:01:43.400 --> 0:01:47.840 down to Philadelphia meet with John, Jack Bogel and the others, 0:01:48.680 --> 0:01:52.760 and I got convinced that these were very bright and 0:01:52.800 --> 0:01:58.840 interesting people doing interesting things. But Old Wellington was not 0:01:59.040 --> 0:02:03.480 really a great and instinct place. It was balanced portfolio. 0:02:04.360 --> 0:02:07.320 The assets were going down year by year by year, 0:02:07.360 --> 0:02:09.440 as people said, you know, it's just out of date. 0:02:09.960 --> 0:02:11.760 I want to get a performance fund. I want to 0:02:11.919 --> 0:02:14.880 beat the market. These guys will never get out of 0:02:14.919 --> 0:02:19.200 the slow that they're in. Uh. But still there was 0:02:19.240 --> 0:02:24.040 something special about Jack and John. So the irony of 0:02:24.080 --> 0:02:28.240 that is in ninety six, hey, we were about to start, 0:02:28.639 --> 0:02:32.400 you know, a long period of equity under performance. You 0:02:32.440 --> 0:02:36.120 would have guessed had you known that a balanced fund 0:02:36.160 --> 0:02:38.280 of stock and bond portfolio was going to do a 0:02:38.280 --> 0:02:41.280 lot better than just the pure stock funds over the 0:02:41.280 --> 0:02:44.040 next sixteen years. That's the way the world works. Just 0:02:44.120 --> 0:02:47.240 when you least expected, something goes in a different direction. 0:02:48.639 --> 0:02:53.280 I really liked the guys and and when jack said 0:02:53.639 --> 0:02:56.360 he was gonna be leaving after the merger Maide in 0:02:56.360 --> 0:03:01.600 Heaven with the Boston Group. Jackie, you really are stretching it. 0:03:02.400 --> 0:03:06.359 This is a very unlikely proposition. You've got less than 0:03:06.400 --> 0:03:09.240 thirty people working with you. You're in charge of the 0:03:09.320 --> 0:03:13.079 back office activities. That's an activity you never ever personally 0:03:13.160 --> 0:03:16.160 enjoyed at all. You always assigned that to somebody else. 0:03:16.400 --> 0:03:17.799 And he would say to me, don't worry about it, 0:03:17.840 --> 0:03:20.360 Jim Reep, he's going to take responsibility for that. I 0:03:20.400 --> 0:03:23.440 don't have to do it. You're not allowed to do 0:03:23.520 --> 0:03:26.520 anything in investment management, and then I allow it to 0:03:26.560 --> 0:03:29.960 do anything in sales. The mutual fund business is all 0:03:30.000 --> 0:03:35.560 about sales and investing. What are you gonna do? And 0:03:35.640 --> 0:03:37.360 the answer was I'm going to hang in there and 0:03:37.400 --> 0:03:39.880 find a way to make this thing work. And the 0:03:39.920 --> 0:03:47.800 fascinating story is the argument that he concocted around indexing. First, 0:03:48.160 --> 0:03:52.440 it's non investment management because hey, we're not making any decisions, 0:03:52.440 --> 0:03:55.440 we're just buying all the stocks in the index. And second, 0:03:55.480 --> 0:03:57.960 there's no sales. People are gonna come to us, so 0:03:58.080 --> 0:04:01.320 therefore this is out out of the deal he cut 0:04:01.400 --> 0:04:04.400 with the folks at Wellington right, And it was just 0:04:04.520 --> 0:04:07.760 barely enough over a period of several months to convince 0:04:07.800 --> 0:04:12.440 his board of directors it's okay to do that, and 0:04:12.520 --> 0:04:16.320 he just kind of skated through. They barely approved it. 0:04:17.120 --> 0:04:21.400 Very close run. But Zack was a very argumentative, persuasive 0:04:22.160 --> 0:04:25.880 always had the facts supporting whatever case. Like a really 0:04:25.920 --> 0:04:29.200 good litigating lawyer, he was always able to make his 0:04:29.279 --> 0:04:32.839 own case very very very well. So let's talk about 0:04:32.880 --> 0:04:36.080 that initial funds. The plan was to do an IPO 0:04:36.200 --> 0:04:40.680 to raise two million dollars in new client assets for 0:04:40.800 --> 0:04:43.359 the funds. How much did they end up? Actually, this 0:04:43.440 --> 0:04:49.279 is the first index funds. It's a very interesting story. 0:04:49.400 --> 0:04:52.880 I'm going to raise a pretty serious amount of money. 0:04:52.960 --> 0:04:55.200 It was very hard to get Wall Street to agree 0:04:55.279 --> 0:04:58.880 to do the underwriting, and then it was really hard 0:04:58.920 --> 0:05:01.720 to get salespeople the various cities to say, yeah, I'm 0:05:01.720 --> 0:05:04.000 going to pitch this to my clients. For a very 0:05:04.000 --> 0:05:07.159 good reason. Everybody knew in those days the purpose of 0:05:07.240 --> 0:05:11.880 investment management is to beat the market. Everybody understood that 0:05:12.000 --> 0:05:14.720 was the game. So you're looking for a manager is 0:05:14.760 --> 0:05:17.520 going to beat the market. Everybody talked that way, And 0:05:17.560 --> 0:05:19.560 here's the guy coming along and saying, I got a 0:05:19.600 --> 0:05:21.360 really good idea for you. I'm not going to beat 0:05:21.360 --> 0:05:26.640 the market. Jack would have argument, well, wait a minute. 0:05:27.720 --> 0:05:31.000 Of the active funds are underperforming what they said they 0:05:31.000 --> 0:05:34.000 were going to do. If I meet the market, match it, 0:05:34.279 --> 0:05:36.080 I'm gonna beat most of them. I'll be in the 0:05:36.080 --> 0:05:41.000 top quartile as a consequence. Yeah, yeah, yeah, But Jack, 0:05:41.520 --> 0:05:44.680 you're going to charge a sales load of eight percent 0:05:44.880 --> 0:05:48.479 on this index fund. So people's first day or eight 0:05:48.520 --> 0:05:51.880 percent behind the market, how are they ever going to 0:05:51.960 --> 0:05:54.600 catch up with the market. Don't let that bothery in. 0:05:54.800 --> 0:05:57.960 We're gonna we'll find a way to make it work out. 0:05:58.440 --> 0:06:01.440 But that was a killer, and people look at and say, 0:06:01.560 --> 0:06:03.719 straight faced, I'm not going to go to my clients 0:06:03.720 --> 0:06:07.599 and say go into this investment opportunity. You're guaranteed to 0:06:07.680 --> 0:06:09.680 be behind the market for the rest of the time 0:06:09.720 --> 0:06:12.839 that you hold onto it. Now, some of the data 0:06:12.880 --> 0:06:16.760 that Jack had showed that the active managers, all of 0:06:16.800 --> 0:06:21.719 whom were high fee, not even counting the fees. After 0:06:21.800 --> 0:06:26.560 a period of time, the vast majority, some nine lag 0:06:26.680 --> 0:06:28.400 the market, and then once you work the fees in 0:06:28.480 --> 0:06:31.920 after ten or fifteen years, they're way behind the market. 0:06:32.400 --> 0:06:35.479 Why did it take so long for that concept to 0:06:35.560 --> 0:06:39.360 be recognized by investors. We're all governed by our beliefs, 0:06:40.760 --> 0:06:44.360 and the beliefs are much more powerful than data. And 0:06:44.560 --> 0:06:47.520 as we've seen in politics, as we will see in 0:06:47.560 --> 0:06:52.039 all kinds of other subject areas, what people believe is 0:06:52.080 --> 0:06:56.039 what drives them to their behavior and decisions. Don't bother 0:06:56.120 --> 0:06:59.599 me with the facts is a reality of human beings. 0:07:00.120 --> 0:07:02.560 So if you're fact based, you've got to be prepared 0:07:02.600 --> 0:07:06.000 for people to say you're crazy. That doesn't make any sense. 0:07:06.080 --> 0:07:08.800 I know what's right. And when you look back in 0:07:08.839 --> 0:07:11.520 the nineties, seventies and eighties, you know, we take it 0:07:11.560 --> 0:07:15.720 for granted how much data is available today, how easy 0:07:15.840 --> 0:07:21.120 it is for us to access historical returns for various 0:07:21.160 --> 0:07:27.680 indices versus inflation, versus dividends versus everything. That technology and 0:07:27.720 --> 0:07:32.520 that information wasn't all that readily available for years ago. 0:07:32.600 --> 0:07:35.080 What do you mean it wasn't readily available. It wasn't 0:07:35.080 --> 0:07:38.360 available period. I mean we go back a little bit 0:07:38.400 --> 0:07:43.000 of personal history. I was privileged to have the responsibility 0:07:43.040 --> 0:07:49.320 for representing Greenwich Associates consulting with Wall Street firms. The 0:07:49.480 --> 0:07:52.560 smartest people on Wall Street in terms of picking up 0:07:52.600 --> 0:07:56.080 and understanding this is really good information. I can really 0:07:56.120 --> 0:08:00.240 put it to work. John Whitehead at Goldman Sachs, who 0:08:00.320 --> 0:08:04.720 was unbelievably demanding and rigorous as a client, But I 0:08:04.800 --> 0:08:07.720 loved working for him because he always took everything very, 0:08:07.800 --> 0:08:13.920 very seriously. There's one other person, Mike Bloomberg at Solomon Brothers, 0:08:14.240 --> 0:08:18.680 and Mike took the information and converted into decisions on 0:08:18.720 --> 0:08:22.640 a regular basis, and it put him in a very 0:08:22.680 --> 0:08:27.040 strong position competitively. But it also proved to him the 0:08:27.200 --> 0:08:31.720 value of having good heart information. And you can't deny 0:08:31.800 --> 0:08:35.079 anybody can have good heart information and not use it. 0:08:35.600 --> 0:08:39.440 He was really good at using it, and that's characteristic 0:08:39.480 --> 0:08:42.880 of why he's been so extraordinary in his successfulness years 0:08:42.920 --> 0:08:45.679 and years and years later. So all of this is 0:08:45.720 --> 0:08:51.720 really fascinating. What made you nineteen books in decide to say, hey, 0:08:51.800 --> 0:08:54.480 you know, it's time to tell the inside story of 0:08:54.600 --> 0:08:57.320 Van Guard. What led you to saying now is the 0:08:57.400 --> 0:09:02.000 time I was a direct to a Vanguard. I had 0:09:02.040 --> 0:09:06.400 worked with Vanguard as a strategy consultant before being a director, 0:09:07.240 --> 0:09:10.880 and I was deeply convinced that this was, for almost 0:09:10.920 --> 0:09:16.160 any American investor, the right way to do your investing. 0:09:17.679 --> 0:09:22.000 And then it was low cost YEP, high value YEP, 0:09:23.040 --> 0:09:28.400 reliably delivered in a systematic way, and that looking at 0:09:28.480 --> 0:09:31.520 as a director, it seemed to me very very clear 0:09:31.679 --> 0:09:36.720 that Vanguard was way underestimated by almost everybody. The clients 0:09:37.160 --> 0:09:40.640 of Vanguard underestimated how good a deal they were really getting. 0:09:41.240 --> 0:09:44.200 People who weren't clients of Vanguard were crazy not to 0:09:44.240 --> 0:09:46.400 know what the facts were. They can make their own decision, 0:09:46.600 --> 0:09:48.640 but they should know at least what the facts are. 0:09:48.960 --> 0:09:51.280 Here's a better way of being able to get good 0:09:51.280 --> 0:09:56.800 investment guidance and information. And as a director, I said, 0:09:56.840 --> 0:09:59.079 you know, I think we really are making a big 0:09:59.120 --> 0:10:02.000 mistake not to make it clear to our own people 0:10:02.559 --> 0:10:06.160 how good to deal where they're getting. Yeah. Yeah, but 0:10:06.440 --> 0:10:11.120 you know, everything about Vanguards an organization is modesty, and 0:10:11.920 --> 0:10:15.360 particularly with Jack Brennan, who was very much Mr Modesty, 0:10:15.520 --> 0:10:18.280 and it just didn't take off. And then after I 0:10:18.360 --> 0:10:20.760 left the board, Jack and I were both advisors to 0:10:20.880 --> 0:10:24.520 a very very large investment fund, and so it gave 0:10:24.520 --> 0:10:26.440 me an opportunity to make the pitch to him one 0:10:26.440 --> 0:10:30.800 more time, and he said, you know, I think you're right. 0:10:31.480 --> 0:10:35.200 I think this would be good for investors. I said, 0:10:35.200 --> 0:10:36.920 but Jack is going to be good for Vanguard to 0:10:37.000 --> 0:10:39.800 He said, yeah, but it's really good for investors, So 0:10:39.880 --> 0:10:43.480 let's go ahead. So I like the concept of Vanguard's 0:10:43.480 --> 0:10:47.360 culture as unique in the world of finance, low cost, 0:10:47.800 --> 0:10:52.040 high integrity. Tell us a little bit about the Vanguard culture. Well, 0:10:52.080 --> 0:10:55.679 it starts with one very simple proposition. Nobody is making 0:10:55.679 --> 0:10:59.200 a profit. Every other investment organization has got a problem 0:10:59.200 --> 0:11:02.840 that somebody is taking money out of the pot every day, 0:11:02.880 --> 0:11:06.839 every month, every year as a profit. Let's see American way. 0:11:06.880 --> 0:11:09.080 It's a good incentive. Yeah, yeah, yeah, But here's a 0:11:09.120 --> 0:11:13.480 group who's highly motivated, they're doing all kinds of leadership things, 0:11:13.960 --> 0:11:18.319 and nobody's taken a profit. Everybody who's an investor in 0:11:18.400 --> 0:11:21.719 Vanguard is an owner of Vanguard. The only owners of 0:11:21.800 --> 0:11:25.320 Vanguard are the investors in Vanguard. So it's a nice, 0:11:25.360 --> 0:11:30.160 tight little situation where you eat your own cooking and 0:11:30.440 --> 0:11:33.520 you're doing what's really right because it's what's really right 0:11:33.559 --> 0:11:38.720 for everybody. Really interesting. So, given how the world has 0:11:38.840 --> 0:11:42.240 changed over the past few decades, have you noticed any 0:11:42.360 --> 0:11:47.160 changes in the culture at Vanguard over that period. Honestly, no, 0:11:48.120 --> 0:11:52.120 it's astonishing. It's still boy Scotts and girls Scots gathered 0:11:52.160 --> 0:11:54.760 together every day to do, as they like to say, 0:11:54.840 --> 0:11:58.240 to do the right thing. And that's the only metric 0:11:58.320 --> 0:12:00.959 by which they make a judgment. What's the really right 0:12:01.000 --> 0:12:04.319 thing to do for our investor clients, because it's their 0:12:04.360 --> 0:12:08.880 shop and we're here to do the right thing for them. 0:12:08.960 --> 0:12:11.480 So when we look around at the world of low 0:12:11.559 --> 0:12:14.880 cost indexes, they're all pretty much the same. They're cheap, 0:12:15.360 --> 0:12:20.360 they tend to hold almost identical portfolios. What makes the 0:12:20.480 --> 0:12:25.480 Vanguard version of this so different? How does Vanguard brand 0:12:25.559 --> 0:12:31.120 itself in what is essentially a commodity product. It's really fascinating, 0:12:31.559 --> 0:12:35.679 essentially a commodity product. If you have a client, they 0:12:35.720 --> 0:12:39.320 will understand the and appreciate they get good service, not 0:12:39.440 --> 0:12:43.000 fabulous service, but good service at low cost on a 0:12:43.080 --> 0:12:46.480 very reliable basis. And there's a group of people who 0:12:46.520 --> 0:12:49.439 are working full time to protect them from anything dumb 0:12:50.000 --> 0:12:54.560 or getting conned. Not bad. So let's talk about the 0:12:54.679 --> 0:12:58.760 enigma that is Jack Vogel. He spent the first twenty 0:12:58.840 --> 0:13:02.280 five years of his We are on the active side 0:13:02.280 --> 0:13:05.200 of the street. Um, it seems like it's almost a 0:13:05.240 --> 0:13:08.719 coincidence that Vanguard was even launched tell us about that. 0:13:10.840 --> 0:13:12.280 There are a lot of different ways you've come at 0:13:12.320 --> 0:13:18.360 the answer to your question. First, Jack engineered what was 0:13:18.400 --> 0:13:23.480 supposed to be the great merger made in Heaven, combining 0:13:24.120 --> 0:13:27.320 old fashioned Wellington with all of the integrity that it 0:13:27.440 --> 0:13:31.439 might have had in days gone by, heavy sales load, 0:13:32.000 --> 0:13:37.199 heavy on sales activities, um not so good on investing, 0:13:38.160 --> 0:13:42.560 combined with the hot ticket group in Boston, and it 0:13:42.600 --> 0:13:46.800 looked like that would be a winning proposition for everybody. 0:13:47.720 --> 0:13:53.760 Only problem culture, personality, way of thinking, way of doing business. 0:13:54.800 --> 0:13:58.200 Jack always wanted to have complete control of everything. The 0:13:58.280 --> 0:14:01.960 guys that for indyke Door in Paynton and Lewis Partnership, 0:14:03.000 --> 0:14:07.800 which is now the core of modern Wellington's, believed deeply 0:14:07.800 --> 0:14:12.280 in a consensus development as friends talking things out, figuring 0:14:12.280 --> 0:14:14.880 out together what's the best thing to do take a 0:14:14.920 --> 0:14:19.600 long term point of view. The two cultures did not mix, 0:14:21.160 --> 0:14:24.000 and Jack insisted on his culture being dominant because that 0:14:24.120 --> 0:14:28.560 was key to his personality, and that made it worse, 0:14:28.680 --> 0:14:31.960 not better. And then he insisted more on having it 0:14:32.120 --> 0:14:36.040 his way, and that made it even worse. And so 0:14:36.200 --> 0:14:38.720 finally they got to the point of saying, you have 0:14:38.960 --> 0:14:44.360 to go and essentially they deposed him. They tossed out 0:14:44.400 --> 0:14:48.000 the king, eventually winning a vote at a board level 0:14:48.720 --> 0:14:53.720 where he was removed from Wellington the investment firm. But 0:14:54.040 --> 0:14:58.000 Jack had a clever back door way around it. He 0:14:58.200 --> 0:15:02.160 was still a participant and part of the board where 0:15:02.160 --> 0:15:06.800 there were numerous independent directors, and the way the mutual 0:15:06.800 --> 0:15:11.360 fund industry is set up, the administration of the funds 0:15:11.400 --> 0:15:14.320 and the management of the investments are two different creatures, 0:15:14.360 --> 0:15:16.840 so he was able to stay with the admin side. 0:15:17.000 --> 0:15:19.760 Tell us a little bit about that. You've sent such 0:15:19.760 --> 0:15:22.080 a nice job of summarizing it. There's almost nothing to 0:15:22.120 --> 0:15:24.320 say other than you've got it exactly right. Oh. I 0:15:24.360 --> 0:15:28.240 got a couple of chapters just on that. Jack Vogel 0:15:28.360 --> 0:15:31.280 understood that the directors had certain kinds of power that 0:15:31.440 --> 0:15:34.800 could not be taken away, and they were because of 0:15:34.880 --> 0:15:37.800 the sec and the whole concept of regulation the mutual 0:15:37.840 --> 0:15:42.560 fund industry representatives of the investors in the mutual funds. 0:15:43.280 --> 0:15:47.760 That was a very strong base. And so legally the 0:15:47.880 --> 0:15:50.480 directors were responsible for us figuring out what to do 0:15:50.520 --> 0:15:53.800 about investing, and the directors were responsible for figuring out 0:15:53.840 --> 0:15:56.800 what to do about sales. That's legally doesn't. It's not 0:15:56.840 --> 0:15:58.840 the way to actually work. The way it actually worked 0:15:59.240 --> 0:16:01.400 is the director's at exactly what they were told by 0:16:01.440 --> 0:16:04.400 the management company, because otherwise they wouldn't get the very 0:16:04.480 --> 0:16:06.760 nice fees that they were getting, and they wouldn't have 0:16:06.840 --> 0:16:08.960 the privilege of coming to the meetings and so on. 0:16:10.520 --> 0:16:13.960 All the directors were buddies of the folks running the investor. 0:16:14.040 --> 0:16:19.080 Why else would you choose one obedient directors friends of 0:16:19.120 --> 0:16:21.400 the firm, all that sort of stuff. It's really not 0:16:21.480 --> 0:16:26.440 a nice part of the history. It's very different today, 0:16:26.480 --> 0:16:31.760 but years ago, who's a different world. Uh So, Jack 0:16:31.800 --> 0:16:35.640 had worked out that the directors would have responsibility for 0:16:35.800 --> 0:16:41.160 making the final decision on things that were important enough 0:16:41.920 --> 0:16:45.800 so that that's some real gravitas and some real strength. 0:16:46.880 --> 0:16:50.000 And he had a very close relationship with several of 0:16:50.000 --> 0:16:53.840 the directors, and several of the directors had a high 0:16:53.880 --> 0:16:57.120 regard for Jack and some men of integrity, and so 0:16:57.280 --> 0:17:00.240 they were very strong in support for him. Is like 0:17:00.360 --> 0:17:03.120 Chuck Root for an example. He was the head of 0:17:03.280 --> 0:17:07.439 T F and C, the actuarial firm, had a really 0:17:07.480 --> 0:17:13.440 distinguished talent in the Philadelphia business community and basically thought 0:17:13.520 --> 0:17:17.879 that Jack was a good guy with strong intentions and 0:17:18.000 --> 0:17:22.640 maybe too strong a personality sometimes, but a good guy 0:17:22.680 --> 0:17:25.919 for the long run, and it was clear going to 0:17:26.000 --> 0:17:29.359 support him. And Jack had similar relationships with people who 0:17:29.359 --> 0:17:33.080 give him support just enough so that he could get 0:17:33.080 --> 0:17:35.560 the vote on his side for things that had to 0:17:35.600 --> 0:17:39.720 do with the administration. Interesting phenomenon. One of the guys 0:17:39.760 --> 0:17:42.600 said he was most focused on getting to be sure 0:17:43.600 --> 0:17:47.960 that he would get the right support. Management consultant named Warden, 0:17:47.960 --> 0:17:52.440 who was doing some terrific work for European companies trying 0:17:52.480 --> 0:17:56.240 to understand American business after the Second World War and 0:17:56.440 --> 0:18:01.080 built up a very nice franchise. Uh. He died, And 0:18:01.119 --> 0:18:04.480 if it hadn't died the night before the vote, if 0:18:04.520 --> 0:18:07.240 it hadn't happened that way, vote might have gone the 0:18:07.240 --> 0:18:11.800 other way. That that close any right, Jack, one but 0:18:12.920 --> 0:18:17.160 marginal vote, the right to be able to do the administration. 0:18:18.359 --> 0:18:22.080 What a win? You think about pyric victories? What a win? 0:18:22.760 --> 0:18:26.200 Let me just be sure I understand this. I'm Jack Bogel. 0:18:26.840 --> 0:18:29.040 The one thing I don't care about at all, have 0:18:29.160 --> 0:18:34.360 no interest in whatsoever is fund administration. That's my sole business. 0:18:34.600 --> 0:18:37.159 And I'm going to have less than thirty people working 0:18:37.200 --> 0:18:41.000 with me. And the crowd of funds that I'm managing 0:18:41.359 --> 0:18:45.960 are basically going downhill because redemptions are larger than new sales. 0:18:48.320 --> 0:18:51.160 That's not much to start with, but not at all. 0:18:51.359 --> 0:18:55.960 Got to understand at the start there's a magic missing ingredient. 0:18:57.640 --> 0:19:04.240 Jack's ability to be ferociously angry and beautifully articulate for 0:19:04.320 --> 0:19:07.960 any case he ever wanted to make was a major 0:19:08.440 --> 0:19:13.359 competitive factor. And then a couple of things were lucky breaks. 0:19:14.200 --> 0:19:19.680 Money market funds came out and you could charge one 0:19:19.760 --> 0:19:22.080 percent on a money market fund, which is a lot 0:19:22.119 --> 0:19:24.199 to charge for something to says plain Vanilla as a 0:19:24.200 --> 0:19:27.240 money market fund, but a money market fund was sure 0:19:28.840 --> 0:19:31.320 to be a winner compared to the bank CDs that 0:19:31.400 --> 0:19:36.359 were limited by regulation to five interest. Then Paul Volker 0:19:36.560 --> 0:19:40.920 was driving the interest rates up to eight, ten, twelve 0:19:41.400 --> 0:19:46.280 even on money market instruments. All you had to do 0:19:46.440 --> 0:19:49.800 is a money market fund manager is by the standard 0:19:49.880 --> 0:19:53.600 stuff treasury builds, commercial paper and the like, and you 0:19:53.600 --> 0:19:57.680 could put together a portfolio that's producing a very high income, 0:19:58.000 --> 0:20:00.760 and the banks that had all the money, we're limited 0:20:01.000 --> 0:20:03.240 to that five and a half percent. So then when 0:20:03.240 --> 0:20:06.160 he float out of the banks into the mutual funds, 0:20:06.320 --> 0:20:11.720 and Vanguard made itself obvious choice by having slightly lower fees, 0:20:11.840 --> 0:20:14.120 and then lower fees, and then lower fees as there 0:20:14.160 --> 0:20:17.520 as it's built up. So they had low fees for 0:20:17.600 --> 0:20:20.280 identical product. And you don't have to be that smart 0:20:20.320 --> 0:20:23.520 to figure out, hey, when these are identical products and 0:20:23.640 --> 0:20:27.000 one is low cost, why not? Why not? So let's 0:20:27.040 --> 0:20:30.159 also talk about what was then thought of as a 0:20:30.200 --> 0:20:36.320 fairly radical concept, mutualizing the mutual funds business. Tell us 0:20:36.320 --> 0:20:40.160 a little bit about that idea where instead of being 0:20:40.320 --> 0:20:45.000 profit driven, the profits would eventually flow back to the owners, 0:20:45.320 --> 0:20:49.480 the investors, and the funds through lower fees. You just 0:20:49.520 --> 0:20:53.920 said it beautifully. Well, you know, I I've been educated 0:20:54.000 --> 0:20:57.200 with this book, so it's deep in my thought process. Well, 0:20:57.240 --> 0:20:58.800 you know, once you get two and two is four, 0:20:58.920 --> 0:21:02.280 it's easy to remember. Put to work. But the secret here, 0:21:02.359 --> 0:21:05.960 over and over and over again is ferocious drive to 0:21:06.400 --> 0:21:12.240 not fail, which was jack ferocious drive to be recognized 0:21:12.280 --> 0:21:15.800 as Mr Wonderful, which was a very important part of 0:21:15.880 --> 0:21:19.679 Jack Bogel all through his career, but they more and 0:21:19.760 --> 0:21:22.280 more and more important as he got deeper into Van Kart. 0:21:22.280 --> 0:21:25.960 Those two phenomena show up over and over and over again. So, 0:21:26.080 --> 0:21:30.200 given how successful the mutualization was, why didn't any other 0:21:30.240 --> 0:21:34.960 asset managers copy the structure? It seems like, oh wait, wait, wait, wait, wait, 0:21:35.760 --> 0:21:39.440 what's the American way? I start a business to make 0:21:39.480 --> 0:21:42.200 a profit. If I do a good job, people will 0:21:42.280 --> 0:21:46.280 come to my business. I'll get bigger, I'll make more profits. 0:21:46.280 --> 0:21:48.240 So I do a good job, I'll keep getting more 0:21:48.320 --> 0:21:54.000 in it a positive cycle. Okay, what would attract anybody 0:21:54.119 --> 0:21:56.680 to get into a business where you do a really 0:21:56.680 --> 0:22:00.119 good job and you break even. You do a really 0:22:00.160 --> 0:22:03.320 good job for years and you break even. You do 0:22:03.400 --> 0:22:06.120 a really, really really good job for year after year 0:22:06.160 --> 0:22:09.760 after year, for all kinds of people, and you break even. 0:22:10.320 --> 0:22:12.920 You mean you never ever make a profit. That's right, 0:22:13.040 --> 0:22:16.199 you never ever make a profit. Well, what's in it 0:22:16.280 --> 0:22:19.440 for me? And that is a stopper for almost everybody 0:22:19.440 --> 0:22:21.800 who starts a business. If you can't make a profit, 0:22:22.160 --> 0:22:24.400 why in the world would you get going? Goes back 0:22:24.440 --> 0:22:26.640 to Adam Smith and all the way through since then 0:22:27.080 --> 0:22:30.520 you do end up achieving a certain size where there 0:22:30.520 --> 0:22:34.440 are economies of scale, and you pay yourself a very 0:22:34.560 --> 0:22:37.439 nice salary. Hey, maybe you don't go public, maybe you 0:22:37.440 --> 0:22:40.520 don't sell the firm. But you sleep at night and 0:22:40.560 --> 0:22:43.240 you know you're doing the right thing for your clients. 0:22:43.000 --> 0:22:45.160 There's got to be some appeal for that. Now you're 0:22:45.160 --> 0:22:48.360 getting to why is the culture at Vanguards so steadily 0:22:48.600 --> 0:22:52.440 the same? Then why do people in Vanguard enjoyed being 0:22:52.440 --> 0:22:57.120 where they are? First they really like doing a good 0:22:57.160 --> 0:22:59.480 job and doing the right thing in doing a good job. 0:23:00.080 --> 0:23:03.960 It's amazing that people really do like being in honest. 0:23:04.520 --> 0:23:08.120 People really do like delivering good value. People really do 0:23:08.280 --> 0:23:11.359 like doing a great job for other people as customers. 0:23:11.680 --> 0:23:14.720 And particularly if you make clear when you joined Vanguard 0:23:15.080 --> 0:23:18.040 you're never going to get rich, it is not going 0:23:18.119 --> 0:23:20.880 to happen. So if that's the main item on your agenda, 0:23:21.200 --> 0:23:23.680 go somewhere else. And there are plenty of places in 0:23:23.760 --> 0:23:25.880 Wall Street where they'll say you want to get rich, 0:23:25.960 --> 0:23:28.640 come here. So if you don't want to get rich, 0:23:29.240 --> 0:23:31.159 but you do want to do something you're proud of 0:23:31.920 --> 0:23:34.600 every day with a group of people who are just 0:23:34.800 --> 0:23:39.080 like you, proud of what they're doing. Boy Scott's, Girl Scott's. 0:23:39.359 --> 0:23:41.720 Pretty soon you start to say, you know there's something 0:23:41.760 --> 0:23:45.680 to this. Maybe being a jesuit's not all that bad. 0:23:45.720 --> 0:23:49.880 An idea and pretty soon you start finding hey, hey, wait, 0:23:50.359 --> 0:23:55.359 this works. Let's talk a little bit about not just 0:23:55.560 --> 0:23:59.240 Jack Bogel, but the era and the team he assembled 0:23:59.560 --> 0:24:03.159 that was so crucial to Vanguard's success. Tell us a 0:24:03.240 --> 0:24:11.399 little bit about how this Yankees came together. Great question. First, 0:24:11.920 --> 0:24:15.600 Jack was man with the mission, and if you spent 0:24:15.760 --> 0:24:19.120 time with him, you could be infected with that sense 0:24:19.160 --> 0:24:21.960 of mission and purpose, and if that rang the bell 0:24:22.040 --> 0:24:24.399 for what you wanted to do with your working career, 0:24:25.480 --> 0:24:29.680 it was almost magic because there wasn't very much competition 0:24:30.040 --> 0:24:35.000 from other people doing things in the investment world. Secondly, 0:24:35.560 --> 0:24:38.399 this was a man of tremendous conviction above what was 0:24:38.480 --> 0:24:40.760 going to be the right thing to do. Sometimes that 0:24:40.800 --> 0:24:44.680 worked very much the advantage of Vanguard. There were sometimes 0:24:44.720 --> 0:24:47.159 when it worked just the other way, and it was 0:24:47.200 --> 0:24:52.720 a real negative but decisive whichever way. It was characteristic 0:24:52.760 --> 0:24:56.119 of Jack as a personality. He could put on the 0:24:56.280 --> 0:24:59.240 charm in a way in which almost anybody would melt. 0:25:00.800 --> 0:25:04.440 And then, of course there were hard hitting times when 0:25:04.440 --> 0:25:07.840 he was absolutely determined that everybody was going to do this, 0:25:08.119 --> 0:25:11.480 or that you were already on board, and you sort 0:25:11.480 --> 0:25:13.600 of saying, well, you can take the good with the bad. 0:25:13.800 --> 0:25:17.840 We can work this one out really interesting. Tell us 0:25:17.840 --> 0:25:21.040 a little bit about Jack Brennan, the man who succeeded 0:25:21.440 --> 0:25:25.760 Bogel as as the second CEO of Vanguard. He's really 0:25:25.840 --> 0:25:29.120 quite a fascinating character. Well, he had a terrific impact. 0:25:29.240 --> 0:25:32.000 And if you look at the impact in terms of 0:25:32.119 --> 0:25:37.160 essence under management, what Bogel did in his time, Brennan 0:25:37.240 --> 0:25:42.080 did ten times as much in his time, ten times 0:25:42.160 --> 0:25:44.680