Speaker 1: M. This is Mesters in Business with very Results on
Speaker 1: Bloombird Radio this week on the podcast What Can I Say?
Speaker 1: Charlie Alis is a legend in the world of finance,
Speaker 1: whether it was at Greenwich Associates or as chair of
Speaker 1: the Yell Endowment or a board member at Vanguard, he
Speaker 1: has seen pretty much everything in the world of investing.
Speaker 1: His career spans the entire modern era, dating back to
Speaker 1: um you know, the Paul Vulcar era, and what took
Speaker 1: place during the boom periods of the eighties and nineties,
Speaker 1: and how technology has changed the world of investing. He's
Speaker 1: just one of these people who is so thoughtful and
Speaker 1: insightful about everything. It's just always a pleasure, uh to
Speaker 1: chat with him. I found our discussion to be absolutely
Speaker 1: us in and I think you will also with no
Speaker 1: further ado my conversation with Grantwich Associates Charlie Alis. The
Speaker 1: last time we spoke, we really were talking about the
Speaker 1: retiming crisis, and we spent a little bit of time
Speaker 1: discussing Van Guard. But this new book is so interesting
Speaker 1: and so filled with details that only an inserter can have.
Speaker 1: Let's delve into it a little bit. Tell us. What
Speaker 1: first led you to Vanguard? How did you get involved
Speaker 1: with them? Well, it's started long time ago. Six. I
Speaker 1: was working with the securities firm in New York and
Speaker 1: Wellington was a client in Philadelphia, and I would go
Speaker 1: down to Philadelphia meet with John, Jack Bogel and the others,
Speaker 1: and I got convinced that these were very bright and
Speaker 1: interesting people doing interesting things. But Old Wellington was not
Speaker 1: really a great and instinct place. It was balanced portfolio.
Speaker 1: The assets were going down year by year by year,
Speaker 1: as people said, you know, it's just out of date.
Speaker 1: I want to get a performance fund. I want to
Speaker 1: beat the market. These guys will never get out of
Speaker 1: the slow that they're in. Uh. But still there was
Speaker 1: something special about Jack and John. So the irony of
Speaker 1: that is in ninety six, hey, we were about to start,
Speaker 1: you know, a long period of equity under performance. You
Speaker 1: would have guessed had you known that a balanced fund
Speaker 1: of stock and bond portfolio was going to do a
Speaker 1: lot better than just the pure stock funds over the
Speaker 1: next sixteen years. That's the way the world works. Just
Speaker 1: when you least expected, something goes in a different direction.
Speaker 1: I really liked the guys and and when jack said
Speaker 1: he was gonna be leaving after the merger Maide in
Speaker 1: Heaven with the Boston Group. Jackie, you really are stretching it.
Speaker 1: This is a very unlikely proposition. You've got less than
Speaker 1: thirty people working with you. You're in charge of the
Speaker 1: back office activities. That's an activity you never ever personally
Speaker 1: enjoyed at all. You always assigned that to somebody else.
Speaker 1: And he would say to me, don't worry about it,
Speaker 1: Jim Reep, he's going to take responsibility for that. I
Speaker 1: don't have to do it. You're not allowed to do
Speaker 1: anything in investment management, and then I allow it to
Speaker 1: do anything in sales. The mutual fund business is all
Speaker 1: about sales and investing. What are you gonna do? And
Speaker 1: the answer was I'm going to hang in there and
Speaker 1: find a way to make this thing work. And the
Speaker 1: fascinating story is the argument that he concocted around indexing. First,
Speaker 1: it's non investment management because hey, we're not making any decisions,
Speaker 1: we're just buying all the stocks in the index. And second,
Speaker 1: there's no sales. People are gonna come to us, so
Speaker 1: therefore this is out out of the deal he cut
Speaker 1: with the folks at Wellington right, And it was just
Speaker 1: barely enough over a period of several months to convince
Speaker 1: his board of directors it's okay to do that, and
Speaker 1: he just kind of skated through. They barely approved it.
Speaker 1: Very close run. But Zack was a very argumentative, persuasive
Speaker 1: always had the facts supporting whatever case. Like a really
Speaker 1: good litigating lawyer, he was always able to make his
Speaker 1: own case very very very well. So let's talk about
Speaker 1: that initial funds. The plan was to do an IPO
Speaker 1: to raise two million dollars in new client assets for
Speaker 1: the funds. How much did they end up? Actually, this
Speaker 1: is the first index funds. It's a very interesting story.
Speaker 1: I'm going to raise a pretty serious amount of money.
Speaker 1: It was very hard to get Wall Street to agree
Speaker 1: to do the underwriting, and then it was really hard
Speaker 1: to get salespeople the various cities to say, yeah, I'm
Speaker 1: going to pitch this to my clients. For a very
Speaker 1: good reason. Everybody knew in those days the purpose of
Speaker 1: investment management is to beat the market. Everybody understood that
Speaker 1: was the game. So you're looking for a manager is
Speaker 1: going to beat the market. Everybody talked that way, And
Speaker 1: here's the guy coming along and saying, I got a
Speaker 1: really good idea for you. I'm not going to beat
Speaker 1: the market. Jack would have argument, well, wait a minute.
Speaker 1: Of the active funds are underperforming what they said they
Speaker 1: were going to do. If I meet the market, match it,
Speaker 1: I'm gonna beat most of them. I'll be in the
Speaker 1: top quartile as a consequence. Yeah, yeah, yeah, But Jack,
Speaker 1: you're going to charge a sales load of eight percent
Speaker 1: on this index fund. So people's first day or eight
Speaker 1: percent behind the market, how are they ever going to
Speaker 1: catch up with the market. Don't let that bothery in.
Speaker 1: We're gonna we'll find a way to make it work out.
Speaker 1: But that was a killer, and people look at and say,
Speaker 1: straight faced, I'm not going to go to my clients
Speaker 1: and say go into this investment opportunity. You're guaranteed to
Speaker 1: be behind the market for the rest of the time
Speaker 1: that you hold onto it. Now, some of the data
Speaker 1: that Jack had showed that the active managers, all of
Speaker 1: whom were high fee, not even counting the fees. After
Speaker 1: a period of time, the vast majority, some nine lag
Speaker 1: the market, and then once you work the fees in
Speaker 1: after ten or fifteen years, they're way behind the market.
Speaker 1: Why did it take so long for that concept to
Speaker 1: be recognized by investors. We're all governed by our beliefs,
Speaker 1: and the beliefs are much more powerful than data. And
Speaker 1: as we've seen in politics, as we will see in
Speaker 1: all kinds of other subject areas, what people believe is
Speaker 1: what drives them to their behavior and decisions. Don't bother
Speaker 1: me with the facts is a reality of human beings.
Speaker 1: So if you're fact based, you've got to be prepared
Speaker 1: for people to say you're crazy. That doesn't make any sense.
Speaker 1: I know what's right. And when you look back in
Speaker 1: the nineties, seventies and eighties, you know, we take it
Speaker 1: for granted how much data is available today, how easy
Speaker 1: it is for us to access historical returns for various
Speaker 1: indices versus inflation, versus dividends versus everything. That technology and
Speaker 1: that information wasn't all that readily available for years ago.
Speaker 1: What do you mean it wasn't readily available. It wasn't
Speaker 1: available period. I mean we go back a little bit
Speaker 1: of personal history. I was privileged to have the responsibility
Speaker 1: for representing Greenwich Associates consulting with Wall Street firms. The
Speaker 1: smartest people on Wall Street in terms of picking up
Speaker 1: and understanding this is really good information. I can really
Speaker 1: put it to work. John Whitehead at Goldman Sachs, who
Speaker 1: was unbelievably demanding and rigorous as a client, But I
Speaker 1: loved working for him because he always took everything very,
Speaker 1: very seriously. There's one other person, Mike Bloomberg at Solomon Brothers,
Speaker 1: and Mike took the information and converted into decisions on
Speaker 1: a regular basis, and it put him in a very
Speaker 1: strong position competitively. But it also proved to him the
Speaker 1: value of having good heart information. And you can't deny
Speaker 1: anybody can have good heart information and not use it.
Speaker 1: He was really good at using it, and that's characteristic
Speaker 1: of why he's been so extraordinary in his successfulness years
Speaker 1: and years and years later. So all of this is
Speaker 1: really fascinating. What made you nineteen books in decide to say, hey,
Speaker 1: you know, it's time to tell the inside story of
Speaker 1: Van Guard. What led you to saying now is the
Speaker 1: time I was a direct to a Vanguard. I had
Speaker 1: worked with Vanguard as a strategy consultant before being a director,
Speaker 1: and I was deeply convinced that this was, for almost
Speaker 1: any American investor, the right way to do your investing.
Speaker 1: And then it was low cost YEP, high value YEP,
Speaker 1: reliably delivered in a systematic way, and that looking at
Speaker 1: as a director, it seemed to me very very clear
Speaker 1: that Vanguard was way underestimated by almost everybody. The clients
Speaker 1: of Vanguard underestimated how good a deal they were really getting.
Speaker 1: People who weren't clients of Vanguard were crazy not to
Speaker 1: know what the facts were. They can make their own decision,
Speaker 1: but they should know at least what the facts are.
Speaker 1: Here's a better way of being able to get good
Speaker 1: investment guidance and information. And as a director, I said,
Speaker 1: you know, I think we really are making a big
Speaker 1: mistake not to make it clear to our own people
Speaker 1: how good to deal where they're getting. Yeah. Yeah, but
Speaker 1: you know, everything about Vanguards an organization is modesty, and
Speaker 1: particularly with Jack Brennan, who was very much Mr Modesty,
Speaker 1: and it just didn't take off. And then after I
Speaker 1: left the board, Jack and I were both advisors to
Speaker 1: a very very large investment fund, and so it gave
Speaker 1: me an opportunity to make the pitch to him one
Speaker 1: more time, and he said, you know, I think you're right.
Speaker 1: I think this would be good for investors. I said,
Speaker 1: but Jack is going to be good for Vanguard to
Speaker 1: He said, yeah, but it's really good for investors, So
Speaker 1: let's go ahead. So I like the concept of Vanguard's
Speaker 1: culture as unique in the world of finance, low cost,
Speaker 1: high integrity. Tell us a little bit about the Vanguard culture. Well,
Speaker 1: it starts with one very simple proposition. Nobody is making
Speaker 1: a profit. Every other investment organization has got a problem
Speaker 1: that somebody is taking money out of the pot every day,
Speaker 1: every month, every year as a profit. Let's see American way.
Speaker 1: It's a good incentive. Yeah, yeah, yeah, But here's a
Speaker 1: group who's highly motivated, they're doing all kinds of leadership things,
Speaker 1: and nobody's taken a profit. Everybody who's an investor in
Speaker 1: Vanguard is an owner of Vanguard. The only owners of
Speaker 1: Vanguard are the investors in Vanguard. So it's a nice,
Speaker 1: tight little situation where you eat your own cooking and
Speaker 1: you're doing what's really right because it's what's really right
Speaker 1: for everybody. Really interesting. So, given how the world has
Speaker 1: changed over the past few decades, have you noticed any
Speaker 1: changes in the culture at Vanguard over that period. Honestly, no,
Speaker 1: it's astonishing. It's still boy Scotts and girls Scots gathered
Speaker 1: together every day to do, as they like to say,
Speaker 1: to do the right thing. And that's the only metric
Speaker 1: by which they make a judgment. What's the really right
Speaker 1: thing to do for our investor clients, because it's their
Speaker 1: shop and we're here to do the right thing for them.
Speaker 1: So when we look around at the world of low
Speaker 1: cost indexes, they're all pretty much the same. They're cheap,
Speaker 1: they tend to hold almost identical portfolios. What makes the
Speaker 1: Vanguard version of this so different? How does Vanguard brand
Speaker 1: itself in what is essentially a commodity product. It's really fascinating,
Speaker 1: essentially a commodity product. If you have a client, they
Speaker 1: will understand the and appreciate they get good service, not
Speaker 1: fabulous service, but good service at low cost on a
Speaker 1: very reliable basis. And there's a group of people who
Speaker 1: are working full time to protect them from anything dumb
Speaker 1: or getting conned. Not bad. So let's talk about the
Speaker 1: enigma that is Jack Vogel. He spent the first twenty
Speaker 1: five years of his We are on the active side
Speaker 1: of the street. Um, it seems like it's almost a
Speaker 1: coincidence that Vanguard was even launched tell us about that.
Speaker 1: There are a lot of different ways you've come at
Speaker 1: the answer to your question. First, Jack engineered what was
Speaker 1: supposed to be the great merger made in Heaven, combining
Speaker 1: old fashioned Wellington with all of the integrity that it
Speaker 1: might have had in days gone by, heavy sales load,
Speaker 1: heavy on sales activities, um not so good on investing,
Speaker 1: combined with the hot ticket group in Boston, and it
Speaker 1: looked like that would be a winning proposition for everybody.
Speaker 1: Only problem culture, personality, way of thinking, way of doing business.
Speaker 1: Jack always wanted to have complete control of everything. The
Speaker 1: guys that for indyke Door in Paynton and Lewis Partnership,
Speaker 1: which is now the core of modern Wellington's, believed deeply
Speaker 1: in a consensus development as friends talking things out, figuring
Speaker 1: out together what's the best thing to do take a
Speaker 1: long term point of view. The two cultures did not mix,
Speaker 1: and Jack insisted on his culture being dominant because that
Speaker 1: was key to his personality, and that made it worse,
Speaker 1: not better. And then he insisted more on having it
Speaker 1: his way, and that made it even worse. And so
Speaker 1: finally they got to the point of saying, you have
Speaker 1: to go and essentially they deposed him. They tossed out
Speaker 1: the king, eventually winning a vote at a board level
Speaker 1: where he was removed from Wellington the investment firm. But
Speaker 1: Jack had a clever back door way around it. He
Speaker 1: was still a participant and part of the board where
Speaker 1: there were numerous independent directors, and the way the mutual
Speaker 1: fund industry is set up, the administration of the funds
Speaker 1: and the management of the investments are two different creatures,
Speaker 1: so he was able to stay with the admin side.
Speaker 1: Tell us a little bit about that. You've sent such
Speaker 1: a nice job of summarizing it. There's almost nothing to
Speaker 1: say other than you've got it exactly right. Oh. I
Speaker 1: got a couple of chapters just on that. Jack Vogel
Speaker 1: understood that the directors had certain kinds of power that
Speaker 1: could not be taken away, and they were because of
Speaker 1: the sec and the whole concept of regulation the mutual
Speaker 1: fund industry representatives of the investors in the mutual funds.
Speaker 1: That was a very strong base. And so legally the
Speaker 1: directors were responsible for us figuring out what to do
Speaker 1: about investing, and the directors were responsible for figuring out
Speaker 1: what to do about sales. That's legally doesn't. It's not
Speaker 1: the way to actually work. The way it actually worked
Speaker 1: is the director's at exactly what they were told by
Speaker 1: the management company, because otherwise they wouldn't get the very
Speaker 1: nice fees that they were getting, and they wouldn't have
Speaker 1: the privilege of coming to the meetings and so on.
Speaker 1: All the directors were buddies of the folks running the investor.
Speaker 1: Why else would you choose one obedient directors friends of
Speaker 1: the firm, all that sort of stuff. It's really not
Speaker 1: a nice part of the history. It's very different today,
Speaker 1: but years ago, who's a different world. Uh So, Jack
Speaker 1: had worked out that the directors would have responsibility for
Speaker 1: making the final decision on things that were important enough
Speaker 1: so that that's some real gravitas and some real strength.
Speaker 1: And he had a very close relationship with several of
Speaker 1: the directors, and several of the directors had a high
Speaker 1: regard for Jack and some men of integrity, and so
Speaker 1: they were very strong in support for him. Is like
Speaker 1: Chuck Root for an example. He was the head of
Speaker 1: T F and C, the actuarial firm, had a really
Speaker 1: distinguished talent in the Philadelphia business community and basically thought
Speaker 1: that Jack was a good guy with strong intentions and
Speaker 1: maybe too strong a personality sometimes, but a good guy
Speaker 1: for the long run, and it was clear going to
Speaker 1: support him. And Jack had similar relationships with people who
Speaker 1: give him support just enough so that he could get
Speaker 1: the vote on his side for things that had to
Speaker 1: do with the administration. Interesting phenomenon. One of the guys
Speaker 1: said he was most focused on getting to be sure
Speaker 1: that he would get the right support. Management consultant named Warden,
Speaker 1: who was doing some terrific work for European companies trying
Speaker 1: to understand American business after the Second World War and
Speaker 1: built up a very nice franchise. Uh. He died, And
Speaker 1: if it hadn't died the night before the vote, if
Speaker 1: it hadn't happened that way, vote might have gone the
Speaker 1: other way. That that close any right, Jack, one but
Speaker 1: marginal vote, the right to be able to do the administration.
Speaker 1: What a win? You think about pyric victories? What a win?
Speaker 1: Let me just be sure I understand this. I'm Jack Bogel.
Speaker 1: The one thing I don't care about at all, have
Speaker 1: no interest in whatsoever is fund administration. That's my sole business.
Speaker 1: And I'm going to have less than thirty people working
Speaker 1: with me. And the crowd of funds that I'm managing
Speaker 1: are basically going downhill because redemptions are larger than new sales.
Speaker 1: That's not much to start with, but not at all.
Speaker 1: Got to understand at the start there's a magic missing ingredient.
Speaker 1: Jack's ability to be ferociously angry and beautifully articulate for
Speaker 1: any case he ever wanted to make was a major
Speaker 1: competitive factor. And then a couple of things were lucky breaks.
Speaker 1: Money market funds came out and you could charge one
Speaker 1: percent on a money market fund, which is a lot
Speaker 1: to charge for something to says plain Vanilla as a
Speaker 1: money market fund, but a money market fund was sure
Speaker 1: to be a winner compared to the bank CDs that
Speaker 1: were limited by regulation to five interest. Then Paul Volker
Speaker 1: was driving the interest rates up to eight, ten, twelve
Speaker 1: even on money market instruments. All you had to do
Speaker 1: is a money market fund manager is by the standard
Speaker 1: stuff treasury builds, commercial paper and the like, and you
Speaker 1: could put together a portfolio that's producing a very high income,
Speaker 1: and the banks that had all the money, we're limited
Speaker 1: to that five and a half percent. So then when
Speaker 1: he float out of the banks into the mutual funds,
Speaker 1: and Vanguard made itself obvious choice by having slightly lower fees,
Speaker 1: and then lower fees, and then lower fees as there
Speaker 1: as it's built up. So they had low fees for
Speaker 1: identical product. And you don't have to be that smart
Speaker 1: to figure out, hey, when these are identical products and
Speaker 1: one is low cost, why not? Why not? So let's
Speaker 1: also talk about what was then thought of as a
Speaker 1: fairly radical concept, mutualizing the mutual funds business. Tell us
Speaker 1: a little bit about that idea where instead of being
Speaker 1: profit driven, the profits would eventually flow back to the owners,
Speaker 1: the investors, and the funds through lower fees. You just
Speaker 1: said it beautifully. Well, you know, I I've been educated
Speaker 1: with this book, so it's deep in my thought process. Well,
Speaker 1: you know, once you get two and two is four,
Speaker 1: it's easy to remember. Put to work. But the secret here,
Speaker 1: over and over and over again is ferocious drive to
Speaker 1: not fail, which was jack ferocious drive to be recognized
Speaker 1: as Mr Wonderful, which was a very important part of
Speaker 1: Jack Bogel all through his career, but they more and
Speaker 1: more and more important as he got deeper into Van Kart.
Speaker 1: Those two phenomena show up over and over and over again. So,
Speaker 1: given how successful the mutualization was, why didn't any other
Speaker 1: asset managers copy the structure? It seems like, oh wait, wait, wait, wait, wait,
Speaker 1: what's the American way? I start a business to make
Speaker 1: a profit. If I do a good job, people will
Speaker 1: come to my business. I'll get bigger, I'll make more profits.
Speaker 1: So I do a good job, I'll keep getting more
Speaker 1: in it a positive cycle. Okay, what would attract anybody
Speaker 1: to get into a business where you do a really
Speaker 1: good job and you break even. You do a really
Speaker 1: good job for years and you break even. You do
Speaker 1: a really, really really good job for year after year
Speaker 1: after year, for all kinds of people, and you break even.
Speaker 1: You mean you never ever make a profit. That's right,
Speaker 1: you never ever make a profit. Well, what's in it
Speaker 1: for me? And that is a stopper for almost everybody
Speaker 1: who starts a business. If you can't make a profit,
Speaker 1: why in the world would you get going? Goes back
Speaker 1: to Adam Smith and all the way through since then
Speaker 1: you do end up achieving a certain size where there
Speaker 1: are economies of scale, and you pay yourself a very
Speaker 1: nice salary. Hey, maybe you don't go public, maybe you
Speaker 1: don't sell the firm. But you sleep at night and
Speaker 1: you know you're doing the right thing for your clients.
Speaker 1: There's got to be some appeal for that. Now you're
Speaker 1: getting to why is the culture at Vanguards so steadily
Speaker 1: the same? Then why do people in Vanguard enjoyed being
Speaker 1: where they are? First they really like doing a good
Speaker 1: job and doing the right thing in doing a good job.
Speaker 1: It's amazing that people really do like being in honest.
Speaker 1: People really do like delivering good value. People really do
Speaker 1: like doing a great job for other people as customers.
Speaker 1: And particularly if you make clear when you joined Vanguard
Speaker 1: you're never going to get rich, it is not going
Speaker 1: to happen. So if that's the main item on your agenda,
Speaker 1: go somewhere else. And there are plenty of places in
Speaker 1: Wall Street where they'll say you want to get rich,
Speaker 1: come here. So if you don't want to get rich,
Speaker 1: but you do want to do something you're proud of
Speaker 1: every day with a group of people who are just
Speaker 1: like you, proud of what they're doing. Boy Scott's, Girl Scott's.
Speaker 1: Pretty soon you start to say, you know there's something
Speaker 1: to this. Maybe being a jesuit's not all that bad.
Speaker 1: An idea and pretty soon you start finding hey, hey, wait,
Speaker 1: this works. Let's talk a little bit about not just
Speaker 1: Jack Bogel, but the era and the team he assembled
Speaker 1: that was so crucial to Vanguard's success. Tell us a
Speaker 1: little bit about how this Yankees came together. Great question. First,
Speaker 1: Jack was man with the mission, and if you spent
Speaker 1: time with him, you could be infected with that sense
Speaker 1: of mission and purpose, and if that rang the bell
Speaker 1: for what you wanted to do with your working career,
Speaker 1: it was almost magic because there wasn't very much competition
Speaker 1: from other people doing things in the investment world. Secondly,
Speaker 1: this was a man of tremendous conviction above what was
Speaker 1: going to be the right thing to do. Sometimes that
Speaker 1: worked very much the advantage of Vanguard. There were sometimes
Speaker 1: when it worked just the other way, and it was
Speaker 1: a real negative but decisive whichever way. It was characteristic
Speaker 1: of Jack as a personality. He could put on the
Speaker 1: charm in a way in which almost anybody would melt.
Speaker 1: And then, of course there were hard hitting times when
Speaker 1: he was absolutely determined that everybody was going to do this,
Speaker 1: or that you were already on board, and you sort
Speaker 1: of saying, well, you can take the good with the bad.
Speaker 1: We can work this one out really interesting. Tell us
Speaker 1: a little bit about Jack Brennan, the man who succeeded
Speaker 1: Bogel as as the second CEO of Vanguard. He's really
Speaker 1: quite a fascinating character. Well, he had a terrific impact.
Speaker 1: And if you look at the impact in terms of
Speaker 1: essence under management, what Bogel did in his time, Brennan
Speaker 1: did ten times as much in his time, ten times
Speaker 1: as much. And he did it by putting the other
Speaker 1: the team of other people, empowering them to be strong
Speaker 1: and effective at what they were doing. Then it goes
Speaker 1: back to a couple of different route factors. Boston, Irish
Speaker 1: Catholic training. His dad was told by his guidance counselor
Speaker 1: in high school, no, kid, you're not going to become
Speaker 1: a mechanic. You're going to go to school because you're
Speaker 1: too good and too smart to stop your life. Right
Speaker 1: at this graduating from high school, you're going to college.
Speaker 1: And that was a breakthrough. And Jack's father became a
Speaker 1: consequential banker in the Boston area, but he always stayed
Speaker 1: clear to his basic roots. Jack Brennan grows up as
Speaker 1: a son of that kind of straightforward guy, and becomes
Speaker 1: a very very straightforward guy himself. The second characteristic is
Speaker 1: he was a very good athlete, and he was very
Speaker 1: good at lacrosse in particular. And one day his kids
Speaker 1: were asking, well, Dad, were you the highest scorer? And
Speaker 1: he said, that's not the right question. What do you mean, Dad?
Speaker 1: They gave him a copy of the Dartmouth Indian, the
Speaker 1: student newspaper. Brennan twenty eight assists, eight goals. He said,
Speaker 1: it's not whether youth score, it's whether your team scores.
Speaker 1: And that's Jack Brennan all the way through. He's all
Speaker 1: about bringing the team for it. As he said himself,
Speaker 1: being famous is not on my agenda. And it's very
Speaker 1: clear most people have never heard of Jack Brennan. Probably
Speaker 1: the most important person in the development of Vanguard is
Speaker 1: an organization. That's quite a statement. I don't disagree, but
Speaker 1: I don't think most people are aware how he professionalized Vanguard,
Speaker 1: how he brought in a huge team of people, but
Speaker 1: he also found all sorts of both cost savings and
Speaker 1: growth that as good as Bogel was, it was just
Speaker 1: outside of his expertise. Yeah, and look, Jack Bogel always said,
Speaker 1: I'm a small company guy, and Jack Brennan understood to
Speaker 1: be the really right Vanguard in the future is going
Speaker 1: to have to be a big organization. Second, you're gonna
Speaker 1: have to have a lot of computing power, because technology
Speaker 1: is a secret to keeping costs low, low, low, and
Speaker 1: long run. Jack Bogler would say over and over again,
Speaker 1: computers are too damn expensive, and he was right on
Speaker 1: the day that you buy them. But if you can
Speaker 1: only think of him as that moment, you're not going
Speaker 1: to be able to get a payoff. If you think
Speaker 1: of him as going to own him for five years
Speaker 1: or ten years, I'm going to use the tools to
Speaker 1: bring the cost of the operation down, it's a completely
Speaker 1: different answer. And so Jack Brennan was absolutely key to
Speaker 1: the whole idea of using technology, particularly computers, and moving
Speaker 1: in advancement that direction. Second thing is very good at
Speaker 1: distributing responsibility and hiring in outstanding individuals to do in
Speaker 1: a quiet way the things that needed to get done.
Speaker 1: So shift from one person to a team, and the
Speaker 1: team has got maybe a dozen key players on it.
Speaker 1: Then you get something that's got tremendous capacity to manage
Speaker 1: a larger and larger organization, which Vanguard had to be
Speaker 1: come in order to get the economic power that it
Speaker 1: has today to keep driving costs lower. So Brennan and
Speaker 1: Bogel were very close. Eventually, to Brennan's dismay, the relationship
Speaker 1: fell apart. Tell us a little bit about that eppisode.
Speaker 1: Easy analogy would be father and son, older guy, younger guy. Mr.
Speaker 1: Outside Jack Bogel, Mr. Inside Jack Brennan. So long as
Speaker 1: that was the working relationship, things were great. But Jack
Speaker 1: Bogel always thought of Vanguard as my company. And when
Speaker 1: you have a possessive view like that, you can talk
Speaker 1: yourself into making serious mistakes. He had agreed with Jim
Speaker 1: Ripe way back when that the longest that anybody ought
Speaker 1: to work at Vanguard would be maybe to seventy, So
Speaker 1: let's have seventy br retirement age. They got closer and
Speaker 1: closer and closer to it, and Jack Bogel said, well,
Speaker 1: you haven't, doesn't applied to the chairman, doesn't inclide to me,
Speaker 1: can't be the really right thing in the board of
Speaker 1: the actor said, now it really is the right thing.
Speaker 1: In fact, the company has already gone past your skill set,
Speaker 1: and Jack Brennan has got the skill set and he's
Speaker 1: proving it over and over and over again. We want
Speaker 1: to make that change in a very clear way, I
Speaker 1: don't want to make that change. Then Jack Bogel really
Speaker 1: really resisted it. Finally, it turned out he was deeply
Speaker 1: upset about not having made a fortune the way Ned
Speaker 1: Johnson had made a fortunate fidelity. So they gave him
Speaker 1: a substantial settlement to leave with good behavior and a
Speaker 1: great opportunity for him to start Bogel Research, which turned
Speaker 1: out to be marvelous success for Jack Bogel and for
Speaker 1: people who are paying attention in that direction. But take
Speaker 1: him out of the controls position on Van Guards so
Speaker 1: it could basically grow in its natural way as a
Speaker 1: major phenomenon. So let's talk a little bit about John Neff,
Speaker 1: another name that made a huge difference early on. Doesn't
Speaker 1: really get talked about all that much. Tell us what
Speaker 1: he did and why he was so pivotal to Vanguard's success.
Speaker 1: People don't talk about John Neff today, but in the
Speaker 1: sixties and the seventies and the eighties, people talked about
Speaker 1: John Neff because he had the best record of any
Speaker 1: mutual fund manager in the country. And you could argue
Speaker 1: that one of the great managers at Capital Group hadn't
Speaker 1: even better record, but Capital broke up the funds into
Speaker 1: multi different portfolio managers so it was not public. But
Speaker 1: among the public recorded John Neff had the best performance
Speaker 1: over the long term. Wow, does that make a difference
Speaker 1: when you're looking at year after year after year after year,
Speaker 1: with some exceptions sometimes for two or three years, but
Speaker 1: over any long term investment at the best record of
Speaker 1: anybody in the investment business. What about Gus Sauder He
Speaker 1: was the first chief investment officer at vant Guard Group,
Speaker 1: highly regarded. Tell us a little bit about his contributions.
Speaker 1: Terrific quant with the great deal of modesty and a
Speaker 1: wonderful ability to think things through. And Gus Souder was
Speaker 1: critical to development of the t F business and critical
Speaker 1: to the development of the indexing business and the capacity
Speaker 1: to manage with the quantitative group substantial fractions of the
Speaker 1: actively managed portfolios because he could replicate what an active
Speaker 1: manager might do and one of these quiet, soft spoken
Speaker 1: it's not about me, it's about the interesting work that
Speaker 1: my team is doing. The team builder and terrific technology
Speaker 1: understander who was able to put things together in a
Speaker 1: way that was really wonderful. You mentioned how important Jack
Speaker 1: Brennan was. Let's talk a little bit about Bill McNabb.
Speaker 1: He was running Vanguard right in the heart of the
Speaker 1: financial crisis. He's the one who basically told all the
Speaker 1: crew members, Hey, nobody's getting fired. Just get on the phones,
Speaker 1: speak to the clients, and don't worry about your jobs.
Speaker 1: We're all safe. Tell us a bit about his decision
Speaker 1: making and how important he was, not just during the
Speaker 1: financial crisis, but you know, I think Vinglo was about
Speaker 1: eight hundred billion pre crisis, and now it's ten x,
Speaker 1: it's eight trillion. Tell us a little bit about what
Speaker 1: Bill McNabb brought to the table. Secret to Bill McNabb
Speaker 1: is modesty, competence and discipline. And if you look at
Speaker 1: how would you understand that? Think of him as he
Speaker 1: was for many many years a rower in crew. There
Speaker 1: are no fabulous individual performers. It's all about how the
Speaker 1: whole group of eight people rose simultaneously to a level
Speaker 1: of perfection and if they get it really really right,
Speaker 1: perform in a way that you can't match. And that's
Speaker 1: what Bill McNabb was all about. Is disciplined, steady, reliable
Speaker 1: performance and USh ucks personality on the outside, but Mr
Speaker 1: Trustworthy on the inside, and everybody knew he was the
Speaker 1: kind of solid citizen that you would like to have
Speaker 1: your sister Mary, or you'd like to have your mother Mary,
Speaker 1: or you'd like to have your daughter married. And it's
Speaker 1: one of those things that just a Mr. Good guy.
Speaker 1: And while every other firm in the investment business was
Speaker 1: cutting costs because the market was down and looked like
Speaker 1: it was going to go down a lot, he said, no,
Speaker 1: we're not going to cut costs at all. Nobody's losing
Speaker 1: their job. We're all going to stay here together because
Speaker 1: the number of customers is not going down. It's just
Speaker 1: that the profitability of the business is going down. And
Speaker 1: we do not a profit minded organization. Were a service
Speaker 1: minded organization. We're all about the customers because there are
Speaker 1: owners that we're gonna stay right steady on through. And
Speaker 1: that made a terrific impact internally. But of course it
Speaker 1: also meant that they had a wonderfully strong organization coming
Speaker 1: out of the financial crisis, and that was a big
Speaker 1: help to ye perfectly positioned. Tell us about Charlie Root.
Speaker 1: What was his role as an advisor and a board member.
Speaker 1: He was the head of a major actuarial consulting firm
Speaker 1: in Philadelphia. Very disciplined thinker and an organizationally minded person
Speaker 1: and one of those people that you'd love to have
Speaker 1: as a director of your corporation. Unfortunately, shortly after some
Speaker 1: of the most important decisions, he was cleaning out the
Speaker 1: gutters in his home and the ladder he was thinking
Speaker 1: had climbed up to the gutters on started to slip
Speaker 1: a little bit to the side, and I'm afraid that
Speaker 1: that caused his death. And it was a real loss
Speaker 1: to Vanguard and a real loss to the Philadelphia community.
Speaker 1: There's one person I really have to ask about, and
Speaker 1: that's you. You were a director at Vanguard for over
Speaker 1: a decade. You're a strategy consultant. Tell us about how
Speaker 1: you felt your role was and what your contributions were
Speaker 1: during that that era. In all fairness, I have to
Speaker 1: feel you're blushing. I can't believe this. I really enjoyed
Speaker 1: being a director. We didn't get paid very much. I
Speaker 1: have to admit. The food that we were served at
Speaker 1: meals was really pretty crummy, but it was all part
Speaker 1: of the keep the cost down, keep the cost down. Attitude.
Speaker 1: Management was so candid and so open with us as directors.
Speaker 1: It was a privilege to be working with him. And
Speaker 1: it didn't hurt that I was sitting side by side
Speaker 1: with Bert Malkiel, who is one of those outstanding people
Speaker 1: in the investments world. And Bert is just turned ninety
Speaker 1: and his great book Random Walk Down Wall Street has
Speaker 1: just come out with a new, very considerably updated version,
Speaker 1: and to sit with him and to realize on item
Speaker 1: after item to item, Burt and I agreed. Burton and
Speaker 1: I agreed, Burt and I agreed. So it was a
Speaker 1: wonderful privilege, the opportunity to be able to be candid, direct,
Speaker 1: blunt spoken, and to have a really capable guy sitting
Speaker 1: right besides youch thing, You're You're on the right track,
Speaker 1: keep going, keep going, And to have a management team
Speaker 1: that was so glad to hear what we had to say,
Speaker 1: even when it made might be really in disagreement with him,
Speaker 1: or might be slightly in disagreement with him. They loved
Speaker 1: having the candor coming from the outside. Let's talk a
Speaker 1: little bit about the current state of Vanguard, but I
Speaker 1: have to preface it with Jack Bogel's c MH, not
Speaker 1: not e m H, not the uh not the efficient
Speaker 1: market hypothesis, but the cost matter hypothesis, which really dates
Speaker 1: back to his Princeton thesis. It wasn't so much about
Speaker 1: active versus passive, It was about expensive versus in a
Speaker 1: expensive tell us a little bit about how that impacted
Speaker 1: the development at Vanguard. First, you gotta understand that Jack
Speaker 1: Bogel was a master of the personality franchise development business.
Speaker 1: When nobody else gave a damn about becoming clearly identified
Speaker 1: in a very specific way, Jack cared greatly about that.
Speaker 1: And it goes back to when, as he likes to
Speaker 1: tell the story on himself, at least did tell his
Speaker 1: story on himself where he likes it or not. When
Speaker 1: he was in school, he came in second in his
Speaker 1: academic performance, and he went around to each one of
Speaker 1: his teachers pleading with them to read, examine, and modify
Speaker 1: his grade so he could come in first. He wanted
Speaker 1: to be the valedictorian, not the salutatorian. Why would he
Speaker 1: care so much about that? It is not the be
Speaker 1: all and end all of the world. It because of
Speaker 1: his personality. Something deep inside him drove him to always
Speaker 1: enhance things, make things look better, make things look better,
Speaker 1: make things look better, and so all the way through
Speaker 1: the story of Vanguard, you'll find Jack Bogel doing things
Speaker 1: or saying things to make the record look much more
Speaker 1: positive about what he contributed than the reality. And one
Speaker 1: of the awkwardnesses is the franchise building was done so beautifully,
Speaker 1: so consistently, so skillfully by a master of that craft
Speaker 1: that it's still twenty years later, thirty years later, carries on.
Speaker 1: And most people, if you ask him, when you think
Speaker 1: of Vanguard, who do you think of thing? They've got
Speaker 1: it well. Jack Bogel was terribly important to the starting.
Speaker 1: Nobody could have started the organization without being Jack Pokeel.
Speaker 1: Partly anger, partly talent, partly skills of various particular characteristics,
Speaker 1: one of which was building the personal franchise. Nobody could
Speaker 1: have started Vanguard. But if Jack Bogel had stayed in control,
Speaker 1: it would never have become the organization it is today.
Speaker 1: It would be substantially smaller, it would be deeply outclassed
Speaker 1: by people who would use automation to make their offering
Speaker 1: a better and more effective proposition, and we wouldn't see
Speaker 1: the Vanguard that's been developed since then. So let's talk
Speaker 1: a little bit about that Vanguard very huge in ETFs,
Speaker 1: big overseas investing, uh, lots of other things that Vanguard
Speaker 1: and Bogel didn't see eye to eye about. How often
Speaker 1: did the company disagree with its founder? Instant question And
Speaker 1: I'm not sure I could do it in terms of
Speaker 1: numerical quantitative But if you look back the concepts that
Speaker 1: Jack Bogel really eaved in computers he thought were terribly expensive,
Speaker 1: that would have been a stopper today you couldn't do it. Uh.
Speaker 1: It really believed in his making the decisions. It's too
Speaker 1: complicated a business. There's too many things going on, there
Speaker 1: are too many different responsibilities for one person to do
Speaker 1: all of the decision making. If you look at Vanguard today,
Speaker 1: you're looking at a substantial organization that's going through a
Speaker 1: substantial transformation towards becoming more of an effective organization at
Speaker 1: serving clients interests and doing a better and better job
Speaker 1: for the people who are already the investor owners of
Speaker 1: Van Gourd. So they are not making a major commitment internationally,
Speaker 1: they're not spending a lot of money to build a
Speaker 1: future business in other countries. They're looking for places where
Speaker 1: the resistance by the banking establishment or the financial establishment
Speaker 1: in those different countries is more open to non local competition,
Speaker 1: but it's hard to find, very hard to find. They've
Speaker 1: made some changes that we're keeping up with the times.
Speaker 1: They've got a substantial institutional business. If you're in the
Speaker 1: investment business as an institution, you really want to know
Speaker 1: something about private equity. If Vanguard doesn't have private equity,
Speaker 1: that's going to take them out of the running. So
Speaker 1: they've developed a really interesting joint venture where they're able
Speaker 1: to get access to a very competent private equity investment
Speaker 1: organization at a very controlled cost. They're not aiming to
Speaker 1: be in the very best but second quartile of performance
Speaker 1: on a reliable basis with broadly diversified capability. Okay, that'll
Speaker 1: work very nicely. They're doing the same sort of a
Speaker 1: change in going towards more and more advice. And anybody
Speaker 1: has been in the investment management business, you have been
Speaker 1: looking back on things, you can tell almost everybody would
Speaker 1: be well advised to have been more a long term investor,
Speaker 1: make fewer choices and decisions, figure out what's really right
Speaker 1: for you. At the same time, you'd recognize that every
Speaker 1: individual is unique. Nobody is exactly the same. If you
Speaker 1: look at personality, for an example, your eyeglasses, I wear eyeglasses,
Speaker 1: your shoe size, my shoe size, your shirt size, collar size,
Speaker 1: sleeve length. Pretty soon you realize barries clothes are different
Speaker 1: from mine because Barry is different from me, and he
Speaker 1: ought to wear the closer or right for him, and
Speaker 1: I ought to wear the closer or more right for him.
Speaker 1: I might get advice from my wife or something on
Speaker 1: what to wear, but we're actually dress similarly with our
Speaker 1: collar shirts and a blue sweater. But but isn't Doesn't
Speaker 1: that kind of raise the point of, well, everybody's different,
Speaker 1: but everybody needs to, say, for retirement, to pay for
Speaker 1: their kids college, to leave something to the next generation.
Speaker 1: It shouldn't vary radically. The broad strokes should all be
Speaker 1: fairly similar, shouldn't they in terms of the macro proposition?
Speaker 1: But you're exactly right, But everybody is different from everybody
Speaker 1: else in age, income, wealth, attitude towards life, how many
Speaker 1: years you want to keep working, things like risk tolerance,
Speaker 1: or everybody differs. So it turns out that almost everybody
Speaker 1: is specifically individually themselves different from somebody else specifically individually
Speaker 1: themselves and as a result, advice to individuals is increasingly
Speaker 1: obviously a useful part of the total investment proposition. Then
Speaker 1: Vanguard is moving in that direction and capable probably of
Speaker 1: more power in that direction that anybody would ever under
Speaker 1: understate or estimate. I read a crazy statistic somewhere I
Speaker 1: don't recall was in the book or elsewhere in the
Speaker 1: state of Pennsylvania, the certified financial Planners, something like n
Speaker 1: of them in the state work for Vanguard. That's that's
Speaker 1: just a crazy number. As they've pushed into uh the
Speaker 1: advisory business. In hiring all of these cfps made a
Speaker 1: major commitment to serving the investor with what they really need.
Speaker 1: And most people really ought to have a good investment plan,
Speaker 1: but they don't. Most people ought to have a clear
Speaker 1: definition of their long term purpose as investors other than
Speaker 1: I want to do better in the market, or I
Speaker 1: want to do at least as well as the market,
Speaker 1: or I want to do well, or something vague in
Speaker 1: general like that. Very hard to get people to be
Speaker 1: very specific about what do they really really want to
Speaker 1: do and why. And if you've got a good advisor,
Speaker 1: you can do a lot to improve on your results
Speaker 1: by figuring out together what makes sense to you that's
Speaker 1: available in the marketplace, and making the right decisions of
Speaker 1: what's available and realistic as opposed to dreams that may
Speaker 1: or may not come true. So so let's talk about
Speaker 1: two areas that are a little controversial. One is the
Speaker 1: thought that as indexing became more and more appealing and
Speaker 1: attracted more and more assets. Jack Bogel was a little
Speaker 1: concerned about on Oligopoly about potential anti trust issues. At
Speaker 1: what size is passive or indexing too large? I think
Speaker 1: it's a wonderful question, but if you don't mind, I'm
Speaker 1: going to say it's the wrong question. Okay. The right
Speaker 1: question is when will active investors say to themselves, the professionals,
Speaker 1: the people who are making their living as active investors,
Speaker 1: say to themselves, I think I'm going to get a
Speaker 1: different career. I think I'm going to leave this business
Speaker 1: and go in a different direction. At what age will
Speaker 1: they say to their children, Look, it was okay for
Speaker 1: me in my time, but it's not a good place
Speaker 1: for you. Don't do it. Don't do it. At what
Speaker 1: point are you going to see fewer people taking courses
Speaker 1: on investment management at business schools? Were nowhere near that
Speaker 1: we're putting more people through the learning process of how
Speaker 1: to be pretty damn good as an analyst through business
Speaker 1: school courses and then out into the industry. Then are
Speaker 1: coming out of the industry through retirement, and that's where
Speaker 1: the market is really controlled. For market efficiency or correct
Speaker 1: pricing is really smart people. If you go back fifty
Speaker 1: years ago, there were a small number of people who
Speaker 1: made their living as analysts and a small number of
Speaker 1: people made their living as portfolio managers, maybe as many
Speaker 1: a five people in the world, and today it's somewhere
Speaker 1: between one and a half and two million people. That's
Speaker 1: a big change, and there's been lots of other changes.
Speaker 1: The one that I think is the most powerful here
Speaker 1: we are that Bloomberg radio. Think about how many people
Speaker 1: own a terminal, a Bloomberg terminal that will give you
Speaker 1: any answer to any question you ever want to ask
Speaker 1: for the rest of your life within seconds. It's all
Speaker 1: it's all data and technology. It's all over the place.
Speaker 1: Everybody has computing power in their pocket. That's as much
Speaker 1: as a three sixty, which was IBM's magical power force
Speaker 1: fifty years ago. And everybody has access to the Internet,
Speaker 1: and it's entertaining its communication worldwide, and thank goodness we
Speaker 1: speak the English language because that's the language of investing worldwide.
Speaker 1: But it means that this is huge transformation that's taken place,
Speaker 1: and it has made the markets more and more skillful
Speaker 1: at finding the right price, but made it harder for
Speaker 1: active managers than as you and I've talked about before,
Speaker 1: active managers underperformed that the chosen segment of the market
Speaker 1: they went after, and now we're somewhere between and of
Speaker 1: active managers fall short of their intention, and when they
Speaker 1: fall short, they often get desperate and fall very short
Speaker 1: by hail Mary passes and other kinds of dramatic efforts.
Speaker 1: The paradox of skill is the better the professionals get,
Speaker 1: it becomes increasingly harder to even beat the market, so
Speaker 1: that that's quite fastening. One other um question that's a
Speaker 1: little controversial. H we've seen some pushback to e s g.
Speaker 1: Environmental social governance investing and the voting of proxies. How
Speaker 1: does an entity like Vanguard manage these issues on behalf
Speaker 1: of there huge thirty million clients and they're eight trillion
Speaker 1: dollars in assets and very simple they do what you
Speaker 1: would like to if you were a corporate executive, what
Speaker 1: would you like to have your shareholders do? Pay attention
Speaker 1: to the votes, be quite consistent about always voting, and
Speaker 1: as you know, most people don't vote at all. And
Speaker 1: then many institutional investments say, it's not our decision to
Speaker 1: make because we're on behalf of those. So your very
Speaker 1: best client, if you're a corporate executive, best shareholder, is
Speaker 1: to be somebody who is in it for the long run.
Speaker 1: And if you're a vanguard and indexing, you're in it
Speaker 1: permanently for the long, long, long run. Cares about certain
Speaker 1: basic principles, and they do, and they advertise what those
Speaker 1: principles are. For an example, they believe that a board
Speaker 1: of directors should have h an incentive in the company's style. Uh,
Speaker 1: they're very strong to have diversification of personality and background. Um, okay.
Speaker 1: Find those are pretty much straightforward things. Nobody would have
Speaker 1: any trouble with that. Yeah, And they are very much
Speaker 1: in favor of certain kinds of incentives but not others.
Speaker 1: And most people look at and say, yeah, those are
Speaker 1: the right things to be in favor of. So it's
Speaker 1: one after another after another. Items were Vanguard and State
Speaker 1: Street and black Rock are all three in agreement basically
Speaker 1: that good governance is an important characteristic of a board
Speaker 1: of directors, and they really want to see that going.
Speaker 1: What is it that you wouldn't like about the way
Speaker 1: in which the voting has done. It's a terrifically powerful answer.
Speaker 1: What wouldn't you like? And there is nothing that you
Speaker 1: wouldn't like? Now, is it possible that a group could quietly,
Speaker 1: somehow skillfully get together and agree, let's do something that's
Speaker 1: really not going to be right for our investors? Yeah,
Speaker 1: you could say mechanically it's possible. But there's Canada for
Speaker 1: an example of the country right next to one of
Speaker 1: the most powerful military organization nations in the world. Are
Speaker 1: the Canadians a fraid the Americans are going to attack again?
Speaker 1: Of course not. In fact, we cooperate in our activities. Okay,
Speaker 1: what would happen if somebody at any one of the
Speaker 1: indexing leaders were to do something that was not quite
Speaker 1: boy scout, girl scout right down the line? They'll get
Speaker 1: called out, I think got called out. Would it be
Speaker 1: in the newspapers, yes, would it be on Bloomberg Radio? Yes?
Speaker 1: Would you have an interview with somebody who had called
Speaker 1: him out. Yes, one of those perfectly marvelous situations where
Speaker 1: you're forced to do what you dame well want to do.
Speaker 1: That they all have State Street, Vanguard, Black Rock, they
Speaker 1: all have pretty good businesses. Why would you want to
Speaker 1: mess with that? Really really fascinating stuff, Charlie. Let's let's
Speaker 1: jump to some of our favorite questions that we ask
Speaker 1: all of our guests. And I want to start with
Speaker 1: the last time I saw you was before the pandemic.
Speaker 1: What have you been doing during the pandemic? And tell
Speaker 1: us what what's been keeping you entertained? Well. Part of
Speaker 1: the entertainment value is that are our children or daughter
Speaker 1: and her husband and their two kids under five have
Speaker 1: moved into our house, so we've had the privilege of
Speaker 1: watching little kids again. And I have to tell you
Speaker 1: that is a dream come true. It's a lot of fun.
Speaker 1: The second thing is we have an agreement in our
Speaker 1: family that we're worried about the children and COVID, so
Speaker 1: we don't do very much at all in the way
Speaker 1: of travel. And I used to be five days a
Speaker 1: week and on the train into Manhattan right as we're
Speaker 1: doing business. I haven't been in New York City three
Speaker 1: times in three years really something else. And so I'm
Speaker 1: delighted to be here today. But in our family, I
Speaker 1: have to drive in and then turn around and drive back,
Speaker 1: and as you know, the traffic has done all that
Speaker 1: convenience so on and song, But things like that have
Speaker 1: been distractions. I've enjoyed the privileged Zoom has made a
Speaker 1: wonderful difference to my life, and I'm sure to most
Speaker 1: other people. The freedom to be able to do repeat
Speaker 1: messages and communication in a serious way through Zoom has
Speaker 1: really been terrific. The third thing is I've got a
Speaker 1: real be in my bunnet that i want to be
Speaker 1: able to try to be helpful to people, and so
Speaker 1: doing investment advice is just as easy for me located
Speaker 1: where I am. Once you make the communication contact works,
Speaker 1: I've find and I've really enjoyed being able to provide
Speaker 1: some useful investment advice individuals as were going along. And
Speaker 1: then the the third thing is I've been quite active
Speaker 1: in writing. I've written for the Financial Times several different pieces,
Speaker 1: and I've written a couple of different books. I've got
Speaker 1: three books in the process of coming out. Some have
Speaker 1: I've been busy, Yeah, I've been busy. So so one
Speaker 1: of the things I won't always like to ask people
Speaker 1: is about their mentors who helped shape your career. Well,
Speaker 1: the most important person probably is Nellie Walsh, my sixth
Speaker 1: grade school teacher, who called me on their carpet one day,
Speaker 1: and I was terribly surprised because I thought I was
Speaker 1: doing just the right thing. And she said, you were
Speaker 1: wrestling with Peter Neely, weren't you. Well, I was, but
Speaker 1: that's because of I couldn't get him to stop throwing
Speaker 1: the snowballs with cinders in him at the little kids,
Speaker 1: and he was picking on the little kids, and I
Speaker 1: didn't think that was fair. And she said, Charles never
Speaker 1: called me Charlie always Charles, I think more of you.
Speaker 1: I expect more of you than you would lower yourself
Speaker 1: to the likes of Peter Neely. You may go. And
Speaker 1: ever since then I've been held to a higher account,
Speaker 1: higher standard, higher expectation in every way to be responsive
Speaker 1: to Nellie Walsh. But and more serious people in the
Speaker 1: investment world. Uh Joe Lasser, who was the director of
Speaker 1: research at Worth time, a traditional Wall Street firm. He
Speaker 1: believed deeply in security analysis and was a very strong
Speaker 1: advocate of the c f A program, and so he
Speaker 1: got me and a group of us in our training
Speaker 1: group to take the c f A exam as soon
Speaker 1: as we could. That was an important break breakaway time.
Speaker 1: H Another would be Collier Kroma, was a terrific professor
Speaker 1: of investment management at Harvard Business School, and enjoyed very
Speaker 1: much working with him. You could argue also Ben Graham
Speaker 1: and David Dodd because of their wonderful book Security Analysis,
Speaker 1: which was the first affirmation of professionalism in the financial
Speaker 1: analysis and securities pricing industry. UH and it really made
Speaker 1: a big difference to me. One of the great privilege
Speaker 1: bages of my life was to work when I was
Speaker 1: working in Wall Street and then working for Grunch Associates
Speaker 1: for thirty years, working all day, every day with some
Speaker 1: of the smartest, most capable people in the world. And
Speaker 1: they were all involved in investment management, and if any
Speaker 1: one of them competed, all the others competed, and they
Speaker 1: all wanted to try to find ways to be better.
Speaker 1: And they were all willing to tell you any insights
Speaker 1: that they had, and they're all willing to provide a
Speaker 1: chorus of teachers and guidance in terms of what's going
Speaker 1: on in investment management, and for me, that's really the
Speaker 1: most important single place for learning that I had, And
Speaker 1: what a privilege all day every day to be with
Speaker 1: the smartest people in the room who were trying to
Speaker 1: figure out investment management. And when you add it all together,
Speaker 1: you realize they're competing with themselves and they're not going
Speaker 1: to be able to beat each other on a systematic
Speaker 1: and regular basis, and boys, that make a big difference
Speaker 1: to your way of thinking. So you mentioned Graham and
Speaker 1: dot and their books on on security analysis. Tell us
Speaker 1: some of your over other favorites, and what else you've
Speaker 1: been reading more recently, Well more recently, I have to
Speaker 1: tell you I haven't found a book on investment management
Speaker 1: that I thought was really compelling. Could argue no, Come on,
Speaker 1: there is a very recent book that's the new edition
Speaker 1: of an established book. Bert Malkiel's Random Walk Down Wall
Speaker 1: Street has got to be one of the best books
Speaker 1: that's ever been written about investment management and about the
Speaker 1: markets and how to think about them. Uh. Wonderful guy
Speaker 1: and a wonderful book and has done so much for
Speaker 1: so many people. Then if you look at other books
Speaker 1: that I would like to read, then their tend towards
Speaker 1: history biography, and I'm always looking for suggestions of more
Speaker 1: books to read in that general field, because I think
Speaker 1: you learned so much about the way human beings do
Speaker 1: things if you study about them, study about them, and
Speaker 1: study about them. And so I'm a nut for trying
Speaker 1: to learn from others. I like the suggestions what sort
Speaker 1: of advice would you give to a recent college graduate
Speaker 1: who is thinking about a career in investment management? Here,
Speaker 1: I have a very strong opinion that you should think
Speaker 1: very candidly about why you're interested. We all know, for
Speaker 1: an example, that it's a very well paid line of work.
Speaker 1: Most people don't really appreciate how well paid it is,
Speaker 1: but it is wonderfully well paid. Secondly, you don't have
Speaker 1: to retire at six. In fact, many people work into
Speaker 1: their seventies. Many people even work into their eighties. At five,
Speaker 1: I'm still working in the visitors. I just very wonderful
Speaker 1: privilege of not having to stop work at some arbitrary
Speaker 1: date like sixty five or sixty. Now, that's a characteristic
Speaker 1: when you look at the lifetime compensation of being in
Speaker 1: the markets all the time and free to pick any
Speaker 1: time you want to to pick a stock individually. That
Speaker 1: can be for some people a very attractive characteristics. So
Speaker 1: if you'd like to make some substantial financial success, that's
Speaker 1: one reason. If that's your motivation, I think you're in
Speaker 1: trouble because yes, of course you will make a substantial
Speaker 1: amount of income, but it's not the most important part
Speaker 1: of your life. When you get to the end of
Speaker 1: life and you're off standing in front of St. Peter
Speaker 1: at the Pearly Gates and he said, well, you had
Speaker 1: your life. You were very lucky to be born at all.
Speaker 1: But there you were, and you chose the investment management world.
Speaker 1: What did you really do during that that you're proud of?
Speaker 1: I made a lot of money. That's not a good
Speaker 1: answer to a really great question. So be sure that
Speaker 1: if you're going into the investment management field that you know.
Speaker 1: Is it because you want to make a lot of
Speaker 1: money or is it because you like the idea of
Speaker 1: competing all the time with some of the smartest, most
Speaker 1: hard working people in the world, which could be a
Speaker 1: terrific motivator and you can understand. Or is it because
Speaker 1: you want to serve people and help them with what
Speaker 1: they're trying to figure out about what they want to accomplish.
Speaker 1: If you're the latter group, then you're going to be
Speaker 1: in a profession and you will also get paid well,
Speaker 1: but your compensation will come primarily from being good at
Speaker 1: the profession that lasts a lifetime. But you have to
Speaker 1: be clear about what is your motivation? Really really very
Speaker 1: interesting and our final question, what do you know about
Speaker 1: the world of finance and investing in Wall Street today
Speaker 1: that you wish you knew fifty or so years ago.
Speaker 1: You know, it's pretty obvious in a way. I wish
Speaker 1: I'd understood how much change was going to take place
Speaker 1: in the investment management activity and field computers, for an example,
Speaker 1: when I first got started, there were no computers being used,
Speaker 1: or maybe in the back office, but they were clunky
Speaker 1: kinds of operations. And the idea that there would be
Speaker 1: the transformation of information that worldwide is available to you
Speaker 1: instantaneously through Mike Bloomberg's wonderful invention the terminal, that the
Speaker 1: Bloomberg terminal has transformed the world of information gathering. The
Speaker 1: Internet has transformed the world of information gathering, and as
Speaker 1: a consequence, the world of investing is now worldwide and
Speaker 1: everybody in the world is competing with everybody else in
Speaker 1: the world in the investment management field. So UH, I
Speaker 1: wish I'd understood how dramatic a change there would be,
Speaker 1: because it would make a big difference to if you
Speaker 1: had understood that you have the forces of change working
Speaker 1: for you, and you could have made a completely different
Speaker 1: transformation of life. Quite fascinating. Charlie, thank you for being
Speaker 1: so generous with your time. We have been speaking with
Speaker 1: Charlie Ellis, author of the new book Inside Vanguard, Leadership
Speaker 1: Secrets from the company that continues to rewrite the rules
Speaker 1: of investing business. If you enjoy this conversation, be sure
Speaker 1: and check out any of the previous four hundred and
Speaker 1: seventy podcasts we've done over the past eight years. You
Speaker 1: can find those at iTunes, Spotify, YouTube, wherever you get
Speaker 1: your favorite podcast from. UH be sure and sign up
Speaker 1: for my daily reading list at rid Halts dot com.
Speaker 1: Follow me on Twitter at rit Halts. You can follow
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Speaker 1: would be remiss if I did not thank the crack
Speaker 1: team that helps with these conversations together each week. Justin
Speaker 1: Milner is my audio engineer. Atica val bron is my
Speaker 1: project manager. Paris Wald is my producer. Sean Russo is
Speaker 1: my head of research. I'm Barry rit Halts. You been
Speaker 1: listening to Masters in Business on Bloomberg Radio.