WEBVTT - Jack Bogle Remembered on Masters in Business (Podcast) 0:00:02.200 --> 0:00:06.399 This is Masters in Business with Barry Ridholts on Boomberg 0:00:06.480 --> 0:00:11.040 Radio SAD News. This week, as Vanguard founder Jack Vogel 0:00:11.440 --> 0:00:15.360 passed away at the age of eighty nine, I had 0:00:15.360 --> 0:00:18.239 the great privilege and honor of sitting down with him 0:00:18.400 --> 0:00:22.840 in March for a full ninety minutes, and I just 0:00:22.920 --> 0:00:27.600 have to share a little bit about that experience with you. Uh. 0:00:27.720 --> 0:00:31.880 The Vanguard campus is just immense. It's grown over the 0:00:31.920 --> 0:00:36.680 past forty five years. It's out in Malvern, Pennsylvania. I 0:00:36.760 --> 0:00:42.200 picked up my engineer, Charlie volmer Um locally and we drove. 0:00:42.720 --> 0:00:46.320 Took us about two hours before traffic. We left about 0:00:46.320 --> 0:00:50.360 five in the morning to get there, and the place 0:00:50.479 --> 0:00:52.559 is just quite amazing. We got a tour of it. 0:00:52.600 --> 0:00:55.600 We saw their trading room. It was it was really astonishing. 0:00:56.080 --> 0:00:58.280 And then you finally get to meet the man and 0:00:58.320 --> 0:01:02.000 the legend himself. Um. He comes into the conference room. 0:01:02.040 --> 0:01:05.080 He's kind of slight, he's a little hunched over. He 0:01:05.160 --> 0:01:09.880 moved slowly, and I'm thinking, gee, maybe, uh, this isn't 0:01:09.920 --> 0:01:13.480 gonna work out. And then he sits down and puts 0:01:13.520 --> 0:01:16.800 on his headphones. He has a headphone with a mic 0:01:16.920 --> 0:01:19.880 that comes around. He wears it as a set and 0:01:19.959 --> 0:01:23.160 as soon as he started speaking, it was clear this 0:01:23.200 --> 0:01:26.280 guy as sharp as attack, full of vim and vigor 0:01:26.319 --> 0:01:30.280 and energy, and still has something to teach us in, 0:01:30.400 --> 0:01:34.839 something to prove. It was a whirlwind ninety minutes. Essentially 0:01:34.880 --> 0:01:37.480 my job was to just give him a little nudge 0:01:37.480 --> 0:01:39.440 and get out of the way. Uh. And it was 0:01:39.560 --> 0:01:43.360 quite an experience. It's something that I will always be 0:01:43.520 --> 0:01:46.400 thrilled that I got to do. Uh. He was in 0:01:46.480 --> 0:01:49.600 fine form and great voice. As you'll hear. Everything he 0:01:49.720 --> 0:01:54.520 covered was really just classic Vogel. Uh. Not only was 0:01:54.560 --> 0:01:57.600 it a privilege, but it was also an amazing conversation, 0:01:58.200 --> 0:02:01.480 mostly because of Jack. I had very little to do 0:02:01.520 --> 0:02:05.320 with it. So, with no further ado, my Master's in 0:02:05.360 --> 0:02:14.000 Business Conversation with Vanguard founder Jack Bogel via is Masters 0:02:14.000 --> 0:02:18.000 in Business with Barry Ridholts on Bloomberg Radio. I know 0:02:18.080 --> 0:02:20.680 I say this every week that I have a special guest, 0:02:21.200 --> 0:02:24.760 but this week I have a super special guest, the 0:02:24.840 --> 0:02:29.960 one the only Jack Bogel, founder and Chairman emeritus of 0:02:30.000 --> 0:02:34.400 the Vanguard Group, essentially the creator of the world's first 0:02:34.600 --> 0:02:40.200 index mutual fund for individuals. In I could read your 0:02:40.240 --> 0:02:43.840 CV which will essentially take up the entire show. There's 0:02:43.880 --> 0:02:47.399 so much stuff to to talk about with you. You 0:02:47.440 --> 0:02:50.880 are a legend in the industry and maybe the person 0:02:50.880 --> 0:02:55.519 who has had the single biggest impact on investing of anyone. 0:02:55.680 --> 0:03:00.799 But let's just start from that beginning. Undergrad you with thesis. 0:03:01.160 --> 0:03:06.040 You're in college in Princeton in nineteen fifty nineteen fifty one, 0:03:06.240 --> 0:03:12.240 and you're thinking about why do actively managed funds, why 0:03:12.280 --> 0:03:15.560 do so many of them underperform the market? How did 0:03:15.600 --> 0:03:18.720 that come about for a college Well, came about by 0:03:18.720 --> 0:03:21.840 a great accident, and that is I was majoring in economics. 0:03:22.440 --> 0:03:24.760 I was looking for a subject for my senior thesis, 0:03:25.080 --> 0:03:29.720 just a requirement still at Princeton, sixtensive, extensive document. Mine 0:03:29.720 --> 0:03:31.440 turned out to be maybe a hundred and thirty five 0:03:31.520 --> 0:03:35.320 forty pages, and Uh, I didn't know what to write about, 0:03:35.440 --> 0:03:37.000 but I wanted to write about something that no one 0:03:37.000 --> 0:03:40.600 had never written about before, and they're In December nineteen 0:03:40.680 --> 0:03:43.360 forty nine, I was reading Fortune magazine, which I did 0:03:43.400 --> 0:03:48.000 as part of my economics background, just voluntarily, and there 0:03:48.040 --> 0:03:51.240 was an article called Big Money in Boston, and it 0:03:51.320 --> 0:03:56.280 was about the mutual fund industry. Described this tiny industry. Uh, 0:03:56.320 --> 0:03:59.200 maybe two and a half billion dollars for the industry 0:03:59.760 --> 0:04:03.240 as tiny but contentious, and I thought, well, you know, 0:04:03.320 --> 0:04:07.240 I'm kind of tiny and I'm kind of contentious, so 0:04:07.280 --> 0:04:10.240 I'll write about it, and I wrote the thesis enabled 0:04:10.240 --> 0:04:14.160 me to graduate with high honors from Princeton. Very pretty 0:04:14.160 --> 0:04:17.880 good job. Not a great thesis, but not bad for 0:04:17.920 --> 0:04:20.800 somebody a year out of his teens. Let me let 0:04:20.839 --> 0:04:23.200 me push back at you and say, that was an 0:04:23.400 --> 0:04:28.200 incredibly insightful thesis. The insight that you derived at a 0:04:28.320 --> 0:04:32.200 very young ages the cost of all this active management. 0:04:32.880 --> 0:04:37.280 They were unable to overcome that bogey even to today, 0:04:37.320 --> 0:04:40.599 what should really be so obvious to everybody. Lots of 0:04:40.600 --> 0:04:43.560 folks still haven't seemed to figure that out. So what 0:04:43.680 --> 0:04:46.400 makes me stop and pausing and ask you this question, 0:04:46.800 --> 0:04:50.520 how did you ever come to that conclusion at such 0:04:50.560 --> 0:04:55.039 a young age without the universe of information we have 0:04:55.120 --> 0:04:58.120 available to us today. Will to begin with the thesis 0:04:58.160 --> 0:05:01.760 title was the economic role of the investment company, And 0:05:01.880 --> 0:05:06.160 the overall of the overriding and focus of that thesis 0:05:06.760 --> 0:05:10.760 was mutual funds are there to serve investors. Put the 0:05:10.800 --> 0:05:14.560 investors first. And I talked about reducing sales loads, reducing 0:05:14.640 --> 0:05:20.039 management fees, focusing on investing and non marketing, things of 0:05:20.080 --> 0:05:23.359 that nature. And that's what the industry in my in 0:05:23.400 --> 0:05:25.520 my formula and would have to do to reach its 0:05:25.560 --> 0:05:29.279 great potential. And I did not, actually, to be very 0:05:29.279 --> 0:05:32.680 clear on this, I did not assemble any data. But 0:05:32.800 --> 0:05:36.200 I looked at about fifteen leading mutual funds and looked 0:05:36.240 --> 0:05:41.280 at their records, and without adding and dividing and getting averages, 0:05:41.680 --> 0:05:43.800 it was very clear that very few of them, if 0:05:43.800 --> 0:05:46.880 any at that time, could could outperform the S and 0:05:46.920 --> 0:05:51.479 P five undered indecks. So it was basically anecdotal. Although 0:05:51.480 --> 0:05:55.960 this industry in those days was very much a commodity 0:05:56.000 --> 0:05:59.120 in a way kind of commodity. The major funds of 0:05:59.160 --> 0:06:04.159 those days we're just basic basically buying long lists of 0:06:04.160 --> 0:06:07.800 blue chip stocks. You could call him Dow Jones Industrial 0:06:07.880 --> 0:06:11.160 average funds, or later because the SMP wasn't very enough 0:06:11.520 --> 0:06:13.560 well known, then you could call him standard and Poor's 0:06:13.600 --> 0:06:16.920 kind of funds. They were down the middle. They had fluctuations, 0:06:17.360 --> 0:06:21.400 very similar volatility, very similar to the index. So so 0:06:21.560 --> 0:06:24.919 even back in the late forties early fifties, mutual funds 0:06:24.920 --> 0:06:30.560 were closet indexers. Sure, absolutely Huh, that's quite that's quite fascinating. 0:06:30.640 --> 0:06:33.560 So let's fast forward a little bit. So now you're 0:06:33.640 --> 0:06:39.119 working as chairman of Wellington Management Company, and long story short, 0:06:39.240 --> 0:06:42.120 you said the most unwise decision of your career. You 0:06:42.200 --> 0:06:45.080 do a merger doesn't work out and they end up 0:06:45.640 --> 0:06:50.120 um breaking it down from from uh lieutenant to private 0:06:50.160 --> 0:06:53.159 so to speak, and not less than private, less than private. 0:06:53.720 --> 0:06:56.920 And you wanted to run a fund and they said, well, 0:06:57.320 --> 0:07:00.520 you know, because of this M and A, we don't 0:07:00.560 --> 0:07:02.520 want you running an active fund. If you want to 0:07:02.520 --> 0:07:05.440 put together how did how did the index come out 0:07:05.480 --> 0:07:09.240 of that? That job changed? Okay, well let me say 0:07:09.279 --> 0:07:12.440 my first job and I was thirty five years old 0:07:12.480 --> 0:07:15.200 and Mr Morgan, the founder of Walter L. Morgan, the 0:07:15.240 --> 0:07:18.640 founder of Wellington, called me into his office. Wellington was 0:07:18.680 --> 0:07:21.800 in trouble. Wellingcoln Fund was in trouble, its performance was slipping, 0:07:22.320 --> 0:07:24.920 and Wellington Management Company was in trouble because we were 0:07:24.920 --> 0:07:28.880 basically a one product if you will company up conservative 0:07:28.920 --> 0:07:31.920 balance fund. We were, for the want of a better metaphor, 0:07:32.440 --> 0:07:37.280 the bagel of the mutual fund industry, the the hard, 0:07:37.680 --> 0:07:44.720 not sweet, um nutritious safe choice and in the biggest 0:07:44.720 --> 0:07:49.880 balance fund in the industry, and people stopped buying bagels 0:07:50.320 --> 0:07:53.960 and started buying, if you will, donuts. We came into 0:07:53.960 --> 0:07:57.280 the go go era. So all these fancy growth funds, 0:07:57.360 --> 0:08:02.000 high powered buying stocks that had no investment, no intrinsic 0:08:02.040 --> 0:08:04.720 investment meri at all. This is the mid to late sixties, 0:08:04.760 --> 0:08:08.280 the nifty fifty and that sort of the go go era, 0:08:09.040 --> 0:08:11.160 and the go goes came and the go goes win. 0:08:12.000 --> 0:08:15.600 But if you're in the bagel business and nobody is 0:08:15.640 --> 0:08:18.960 buying bagels, and the balanced fund share of industry sales 0:08:19.000 --> 0:08:22.320 actually dropped to one percent, and so I had to 0:08:22.360 --> 0:08:24.280 do something, and Mr Morgan told me to do it, 0:08:24.840 --> 0:08:27.000 and I talked to a couple of firms about merging, 0:08:27.720 --> 0:08:30.680 and then I came across this firm in Boston and 0:08:30.760 --> 0:08:32.600 it had a fund called I Vest Fund, one of 0:08:32.600 --> 0:08:35.160 the go go funds of the day. They had some 0:08:35.280 --> 0:08:38.800 apparently bright young managers that I had kind of common 0:08:38.840 --> 0:08:41.959 cause with, and they had a pension business. So we 0:08:42.040 --> 0:08:44.319 got the new managers that would save welling and fund. 0:08:44.360 --> 0:08:47.199 We got the go go fund that we needed to 0:08:47.240 --> 0:08:49.560 stay in business, and we got into a new business 0:08:49.559 --> 0:08:51.640 that we thought we could be very successful. It was 0:08:51.960 --> 0:08:56.000 from words of one syllable, two syllables, brilliant. I'm Barry Ridholts. 0:08:56.120 --> 0:08:59.839 You're listening to Masters in Business on Bloomberg Radio. My 0:09:00.120 --> 0:09:03.840 extra special guest today is Jack Bogel. He is the 0:09:03.960 --> 0:09:08.880 founder of Vanguard Group and essentially the inventor of the 0:09:08.920 --> 0:09:14.760 index funds. Jack, we were speaking earlier about how a 0:09:14.800 --> 0:09:19.600 crisis at Wellington, which was the predecessor you worked at 0:09:19.920 --> 0:09:23.800 to the Vanguard Group, actually led to the creation of 0:09:23.840 --> 0:09:26.760 the Vanguard Group. Tell us how that came about. Okay, well, 0:09:26.800 --> 0:09:29.040 let's start with the fact that in doing this merger, 0:09:29.880 --> 0:09:33.040 which I was eager to do, I gave up too 0:09:33.040 --> 0:09:37.040 many votes in the company and so when everything fell apart, 0:09:37.120 --> 0:09:41.560 the market went down, uh, and so on. Right at 0:09:41.559 --> 0:09:44.040 the as the market was going down in seventy four, 0:09:44.040 --> 0:09:49.960 it would be to climb the happy partners um fragmented 0:09:50.360 --> 0:09:51.720 and there were four of them, and there was one 0:09:51.760 --> 0:09:54.400 of me, and they had packed the board of directors. 0:09:54.679 --> 0:09:57.600 I was I was never very political, and they fired me. 0:09:57.800 --> 0:10:01.000 The guys that had caused this catastrophe, fired the one 0:10:01.000 --> 0:10:05.160 that was trying to avoid it, and so I was 0:10:05.160 --> 0:10:08.600 out of a job. So what could I do, I 0:10:08.640 --> 0:10:10.760 could go try and find work for another firm. I 0:10:10.800 --> 0:10:13.120 had a young family living here. I didn't want to move. 0:10:14.000 --> 0:10:17.160 I was very angry about what happened, of course, but 0:10:17.360 --> 0:10:19.960 you know what is is, and so I decided my 0:10:20.000 --> 0:10:22.760 best chance was to talk to the directors of the 0:10:22.760 --> 0:10:27.439 Wellington Fund, this fund so badly heard the ash the 0:10:27.920 --> 0:10:32.440 diamond in our crown, and say, look, the management company 0:10:32.440 --> 0:10:35.400 has fired me, but you, you're a slightly different group, 0:10:36.960 --> 0:10:39.640 can keep me. And we'll tell the management company what 0:10:39.720 --> 0:10:42.160 to do. We will be in charge of the administration 0:10:42.200 --> 0:10:44.840 of the fund, ending necessary to make it work, and 0:10:44.880 --> 0:10:47.600 we'll be in charge of appraising the advisor and taking 0:10:47.640 --> 0:10:50.040 whatever steps we want. Will be independent of the advisor. 0:10:50.679 --> 0:10:53.720 And uh I wanted to take over distribution to but 0:10:53.760 --> 0:10:56.680 the directors wouldn't go along with that. So we became 0:10:57.720 --> 0:11:01.320 a little administrative company. And and uh I wanted to 0:11:01.640 --> 0:11:05.200 glamorous name. So I found the name Vanguard. When I 0:11:05.240 --> 0:11:10.000 first learned about that. We go from Wellington, the the 0:11:10.000 --> 0:11:14.280 the land battles of the Napoleonic Wars, the Duke of Wellington, 0:11:14.720 --> 0:11:17.760 the naval battles of the Napoleonic War, and there's Lord 0:11:17.800 --> 0:11:20.400 Nelson at the Battle of the Nile, one of the 0:11:20.400 --> 0:11:24.120 most complete, the most complete naval victory in history to 0:11:24.240 --> 0:11:28.320 this day. Uh and uh, He writes to this dispatch 0:11:28.400 --> 0:11:32.000 that I see from the deck of HMS Vanguard his flagship, 0:11:32.480 --> 0:11:34.520 and that sounds like a great name for a for 0:11:34.559 --> 0:11:39.360 a company, perfect, perfect from Wellington Funds. How did you 0:11:39.360 --> 0:11:42.920 actually form the Vanguard Group? Well, the idea was that 0:11:43.040 --> 0:11:45.760 the funds would create a new company that they owned, 0:11:46.280 --> 0:11:49.920 they would capitalize. Capitalization was very small. I'm gonna guess 0:11:49.960 --> 0:11:53.040 maybe two dollars. This is a very small company at 0:11:53.040 --> 0:11:56.319 that point. Actually, the total assets of the funds were 0:11:56.320 --> 0:12:00.200 down and around one point five billion, So we appen 0:12:00.320 --> 0:12:03.200 lots of the fund and and Welling and Management Company 0:12:03.200 --> 0:12:05.840 had to take it because the directors of the funds 0:12:05.840 --> 0:12:09.360 were in charge of the contracts with Welling and So 0:12:09.400 --> 0:12:12.120 you really backed George your way back into the company 0:12:12.200 --> 0:12:15.199 after they had fired you as chairman. Well, yes, I 0:12:15.240 --> 0:12:18.640 think that's a fair statement. But techno, from a tactical standpoint, 0:12:18.800 --> 0:12:20.560 I've been the chairman of the Welling and Fund all 0:12:20.600 --> 0:12:23.680 along gotch so I have the same old continuity that 0:12:23.720 --> 0:12:26.480 I had going back to nineteen just post merger, they 0:12:26.960 --> 0:12:28.920 this was a bactor. So how do you go from 0:12:28.960 --> 0:12:31.920 that to the Vanguard Group. Well, we put a name 0:12:31.920 --> 0:12:34.200 in the company because we had I think in those 0:12:34.280 --> 0:12:36.760 days maybe a dozen funds and we didn't want a 0:12:36.800 --> 0:12:39.640 dozen separate companies to match. So we had to have 0:12:39.800 --> 0:12:45.160 a core central company and UH that would pool resources 0:12:45.200 --> 0:12:48.040 of all the funds and provide all the services. And 0:12:48.080 --> 0:12:51.680 we had allocation methods between the funds. And it was 0:12:51.720 --> 0:12:57.240 all good until we decided to take over distribution, which 0:12:57.320 --> 0:12:59.840 was our Let me, I'm a little bit ahead of 0:12:59.880 --> 0:13:01.360 my help. Let me, let me go back and say 0:13:01.440 --> 0:13:04.120 to the first thing. We were not allowed to go 0:13:04.120 --> 0:13:07.360 into the business of investment management, that was theirs. We 0:13:07.360 --> 0:13:09.040 were not allowed to go into the business that was 0:13:09.080 --> 0:13:12.680 there as being willing, that was there. The active side 0:13:12.880 --> 0:13:16.840 you couldn't do and we couldn't. We couldn't go into management. 0:13:16.880 --> 0:13:20.319 We didn't distinguish between active and passive and those days 0:13:20.360 --> 0:13:23.079 not in those days, there weren't an index, right, So 0:13:23.080 --> 0:13:25.520 so if you couldn't go into management, how are you 0:13:25.559 --> 0:13:31.840 able to set up the Vanguard five hundred wouldn't be patient. So, UM, 0:13:32.480 --> 0:13:34.400 we were not allowed to go into distribution because that 0:13:34.480 --> 0:13:36.920 was welling coins function too, So we had this little 0:13:36.920 --> 0:13:41.480 administrative company looking over. However, had the legal responsibility and 0:13:41.559 --> 0:13:44.920 board responsibility to look over the advisor and distributor. So 0:13:44.960 --> 0:13:48.320 we were in charge. And so my first time I 0:13:48.400 --> 0:13:51.200 knew a company that was an administrative company was not 0:13:51.240 --> 0:13:53.440 going to be anything for me. I mean, I like 0:13:53.520 --> 0:13:56.320 the administration. I know how well it has to be done, 0:13:56.640 --> 0:14:00.040 shareholder record keeping and all that, but that's just not 0:14:00.160 --> 0:14:02.400 the kind of challenge I was looking for. And any 0:14:02.440 --> 0:14:05.000 company it's going to succeed, it's gonna have to control 0:14:05.080 --> 0:14:07.160 the kind of funds he wants to they want to run, 0:14:07.760 --> 0:14:10.240 the kind of distribution they want to have, who will 0:14:10.280 --> 0:14:12.960 buy the funds, who will sell them, things of that nature. 0:14:13.600 --> 0:14:15.520 So we have a company that's just in this little 0:14:15.720 --> 0:14:20.000 administrative box, and I'm thinking, let's do something. So at 0:14:20.040 --> 0:14:22.680 the very first board meeting of the new company, after 0:14:22.720 --> 0:14:25.440 we got an organized, I say we got to start 0:14:25.440 --> 0:14:29.320 an index fund. And the directors say you're not allowed 0:14:29.320 --> 0:14:33.280 to get new investment management. And I say, this fund 0:14:33.320 --> 0:14:37.760 isn't managed, and believe it or not, they bought it. 0:14:38.760 --> 0:14:41.840 So in other words, you describe the index fund as 0:14:41.920 --> 0:14:45.840 just hey, it's the five largest companies in America. There's 0:14:45.840 --> 0:14:49.720 no manager, nobody's in charge. It's just it's an unmanaged 0:14:50.320 --> 0:14:54.280 broad index. And they said, oh, go do that. They said, well, 0:14:54.560 --> 0:14:56.520 I won't say it was that easy, but that was 0:14:56.560 --> 0:14:59.320 the final decision. I get the sense from from what 0:14:59.400 --> 0:15:02.760 you've described right that they were kind of, let's let's 0:15:02.840 --> 0:15:04.720 let Jack go do that. He'll be out of our hair. 0:15:04.800 --> 0:15:08.360 It'll keep them busy and fine, won't cause anybody trouble. 0:15:08.520 --> 0:15:10.920 I think you're pretty much on the mark. This week 0:15:10.960 --> 0:15:14.040 on Masters in Business on Bloomberg Radio, I have an 0:15:14.080 --> 0:15:18.040 extra special guest. His name is Jack Bogel. He is 0:15:18.080 --> 0:15:22.000 the founder of the Vanguard Group, the inventor of the 0:15:22.040 --> 0:15:26.360 index funds, and author of far too many books to mention. 0:15:27.320 --> 0:15:30.480 I've been speaking with Jack here in the headquarters of 0:15:30.480 --> 0:15:34.120 of Vanguard, and just outside the conference room we were 0:15:34.160 --> 0:15:39.320 sitting on the wall is a framed print, and on 0:15:39.400 --> 0:15:44.440 that print it says, stamp out index funds. Jack, What 0:15:44.680 --> 0:15:48.000 on earth does that mean? That means Wall Street couldn't 0:15:48.040 --> 0:15:50.800 make any money out of index funds, and so Wall 0:15:50.880 --> 0:15:54.320 Street didn't like it. We had an initial initial public offering. 0:15:54.680 --> 0:15:56.760 I went all over New York so many times to 0:15:56.800 --> 0:15:59.920 try and find underwriters, and finally got the four large 0:16:00.080 --> 0:16:05.360 retail underwriters, bas Dan, Winter, Reynolds, uh I forget who 0:16:05.400 --> 0:16:08.320 the other one was. Reynolds. Okay, they were the biggest 0:16:08.320 --> 0:16:09.800 guys in the business. And they said, we can do 0:16:09.800 --> 0:16:12.120 a hundred and fifty million dollars with this great new idea. 0:16:12.960 --> 0:16:16.880 They did eleven million dollars, so so less than ten percent. 0:16:17.120 --> 0:16:19.560 And they came in to see me when the underwriting 0:16:19.600 --> 0:16:22.240 was over and said, you know, I said to them, look, 0:16:22.280 --> 0:16:25.920 we can't even buy around lots of bois And they said, well, 0:16:25.920 --> 0:16:27.640 why don't we just give everybody their bondy back and 0:16:27.640 --> 0:16:29.560 pull it? And I said, are you kidding me? We 0:16:29.640 --> 0:16:32.880 have the world's first index fund. And it's the world's 0:16:32.920 --> 0:16:35.400 first index fund. Period. You don't have to say retail, 0:16:35.840 --> 0:16:38.680 a lot of institutional holding at the beginning. It's the 0:16:38.720 --> 0:16:44.120 world's first index mutual fund, no question about that. And 0:16:44.120 --> 0:16:47.160 and so it got noere It went nowhere fast, eleven 0:16:47.160 --> 0:16:49.480 million dollar launched. What year was that? That was in 0:16:49.600 --> 0:16:55.480 nine seventy six, eleven million dollars and everybody laughed, and 0:16:55.520 --> 0:16:58.440 nobody thought there was any future to index funds. But 0:16:58.480 --> 0:17:01.760 that's exactly right, that that just astonishing well. You had 0:17:01.840 --> 0:17:05.240 incredible foresight to say. And it makes sense that the 0:17:05.359 --> 0:17:08.440 four largest retail shops would want to participate in this 0:17:08.800 --> 0:17:11.640 because this is a simple, easy way for their retail 0:17:11.720 --> 0:17:17.360 client to get exposure to the market, fast, easy, relatively inexpensive. 0:17:17.720 --> 0:17:20.639 It should have except that when the when the client 0:17:20.720 --> 0:17:23.800 buys this fund, it's to be held forever. They don't 0:17:23.840 --> 0:17:26.560 trade it, and the fund doesn't do any trading. There's 0:17:26.600 --> 0:17:29.520 no brokerage business generated by the fun So this was 0:17:29.600 --> 0:17:32.640 not a happy moment for Wall Street and they looked 0:17:32.640 --> 0:17:34.520 at it, I think as a some kind of the 0:17:34.560 --> 0:17:38.600 beginning of a of a communicable disease and it had 0:17:38.640 --> 0:17:41.320 to it had to be stamped out. The Center for 0:17:41.400 --> 0:17:44.639 Disease Control had to come in. And did they really 0:17:44.720 --> 0:17:46.959 perceive you as a threat or did they kind of 0:17:47.040 --> 0:17:50.960 laugh it off? And yeah, yeah, best of luck with that, Jack, Yeah, 0:17:50.960 --> 0:17:53.360 I'd say pretty much that way. Although we did in 0:17:53.400 --> 0:17:55.520 a couple of years ago for one of the fund's 0:17:55.520 --> 0:17:59.359 anniversaries we all got together, but the underwriters, all four underwriters, 0:17:59.359 --> 0:18:01.480 and also and the writers and their lawyers and our 0:18:01.560 --> 0:18:04.480 lawyer lawyer singular. We only add one on those days 0:18:05.240 --> 0:18:08.679 and they're all good people. You know, I don't. Uh. 0:18:09.000 --> 0:18:10.600 Then we all do our best in this life in 0:18:10.680 --> 0:18:13.120 very different ways of work. So it worked out. Well, 0:18:13.520 --> 0:18:16.919 it had to start, and it did start. So here's 0:18:16.960 --> 0:18:21.240 the question that I could ask you. Forty plus years later, 0:18:21.920 --> 0:18:26.720 Vanguard is now running three point something trillion dollars. Four 0:18:26.760 --> 0:18:29.960 trillion is not that far off in the distance, an 0:18:30.160 --> 0:18:34.480 enormous success, one of the single largest asset managers in 0:18:34.520 --> 0:18:38.840 the world. How come nobody ever said, hey, those guys 0:18:38.880 --> 0:18:42.280 are onto something, we should be a competitor to them. 0:18:42.320 --> 0:18:45.119 How did how did that never come up anywhere along 0:18:45.119 --> 0:18:49.000 the line. Well, the answer is so simple. Index funds 0:18:49.000 --> 0:18:52.639 have a real problem. All the damn money goes to 0:18:52.680 --> 0:18:58.120 the investors, right, Managers can't take anything they're not managing well. 0:18:58.119 --> 0:19:01.479 But you're taking ten or fifth team basis points and 0:19:01.560 --> 0:19:05.360 on trillions of dollars, that's not nothing. Well, nobody expected 0:19:05.400 --> 0:19:07.400 to get the trillions of dollars, believe me, not an 0:19:07.400 --> 0:19:11.200 eleven million. But but okay, in seventy four, seventy six, 0:19:11.240 --> 0:19:14.000 it's eleven million. But by the time you get to 0:19:14.160 --> 0:19:18.800 the mid nineteen nineties, you're hundreds of billions of dollars. 0:19:18.800 --> 0:19:21.879 And then I think you hit a trillion? Was it 0:19:22.000 --> 0:19:29.280 late nineties? So even didn't anybody say, hey, those guys 0:19:29.320 --> 0:19:32.439 in Pennsylvania, they have a trillion dollars, why don't we 0:19:32.520 --> 0:19:35.200 do what they're doing? Well, it's a prince of problem. 0:19:35.280 --> 0:19:38.480 And then eventually the big guys had to Fidelity had 0:19:38.520 --> 0:19:41.760 to have They were dragged kicking and screaming in indexing, 0:19:42.320 --> 0:19:45.280 and they have to be competitive on price. They can 0:19:45.280 --> 0:19:47.439 still make all the money they want, and it's an 0:19:47.440 --> 0:19:50.719 awful lot on the actively managed funds. So it's kind 0:19:50.720 --> 0:19:53.439 of a lost leader for Fidelity. But what about others 0:19:53.480 --> 0:19:57.000 Black Rock and American Century and all these other entities, 0:19:57.320 --> 0:20:01.040 Schwab offers and index It seems everybody off there's some 0:20:01.440 --> 0:20:05.200 version of the SMP index. Yeah. Well, t ro Price 0:20:05.280 --> 0:20:07.880 is a good example. They have a hidden index fund. 0:20:07.880 --> 0:20:11.400 They don't talk much about it. It's kind of expensive 0:20:11.400 --> 0:20:15.480 basis points relative or five, and it's a kind of 0:20:15.520 --> 0:20:18.439 a sideball thing so they can get into the retirement market. 0:20:19.119 --> 0:20:23.920 This has become a marketing business, and right now we're 0:20:23.920 --> 0:20:28.840 seeing this tremendous change in people who realizing the importance 0:20:28.880 --> 0:20:32.120 of low cost and a long term focus. And if 0:20:32.160 --> 0:20:34.640 you just keep those two things in mind, you will 0:20:34.760 --> 0:20:38.520 never do anything but own a broad market index and 0:20:38.600 --> 0:20:42.000 hold it forever. I'm Barry Ridholtz. You're listening to Masters 0:20:42.000 --> 0:20:45.719 in Business on Bloomberg Radio. My extra special guest this 0:20:45.760 --> 0:20:49.119 week is Jack Bogel. He is the founder of the 0:20:49.200 --> 0:20:54.840 Vanguard Group, inventor of the index funds, author of numerous books. 0:20:54.960 --> 0:20:58.119 Let's jump right back into the issue of costs and 0:20:58.200 --> 0:21:02.400 how they impact investors. You're known as the person who 0:21:02.440 --> 0:21:05.760 created the index fund but really, which do you think 0:21:05.840 --> 0:21:09.399 is more important, the passive indexing or the fact that 0:21:09.440 --> 0:21:12.879 it's so low cost. Well, it's pretty clear to me 0:21:12.920 --> 0:21:15.879 that passive indexing is the more important because I'm going 0:21:15.960 --> 0:21:17.920 to define cost in a couple of different ways here. 0:21:18.440 --> 0:21:22.720 One is the expense ratio. And our funds. Index funds 0:21:22.760 --> 0:21:25.800 probably average about ten basis points. Are managed funds probably 0:21:25.800 --> 0:21:29.480 average about thirty five, So there's not that big a difference. 0:21:29.480 --> 0:21:32.000 The industry is up around a hundred and twenty on 0:21:32.000 --> 0:21:35.040 an unweighted basis And when we talk about basis points, 0:21:35.040 --> 0:21:37.879 the basis point is just a percentage of So a 0:21:37.960 --> 0:21:41.520 hundred basis points is one percent, ten basis points is 0:21:41.600 --> 0:21:45.040 one tenth of one percent. If you're averaging ten basis points. 0:21:45.080 --> 0:21:50.280 That's a very very inexpensive. It's five five basis points five, 0:21:51.680 --> 0:21:56.479 that's very inexpensive. That is really inexpensive. But that's because 0:21:56.520 --> 0:22:00.040 we have a mutual company owned by its shareholders and 0:22:00.080 --> 0:22:02.480 don't have to deliver profits. And think about this for 0:22:02.560 --> 0:22:05.640 Eminent Parry, that the profit margins in this business can 0:22:05.640 --> 0:22:08.960 easily run to be So if you've got a one 0:22:09.000 --> 0:22:13.240 percent expense ratio, you're making fifty basis points on the top. 0:22:14.160 --> 0:22:17.760 So you're you're actually operating at fifty, which is probably 0:22:17.760 --> 0:22:20.960 not too bad because very few people have the scale 0:22:21.440 --> 0:22:24.760 that we have developed, have the technology that we've developed, 0:22:25.000 --> 0:22:29.200 have the efficiencies that we've developed. And also I don't 0:22:29.240 --> 0:22:32.919 think this is self serving. Have the bully pulpit that 0:22:33.000 --> 0:22:36.640 we have. You know, imagine Fidelity coming into this business. 0:22:37.240 --> 0:22:40.000 Describe I described that as drag, kicking and screaming to 0:22:40.080 --> 0:22:43.200 the business. So here we have kicking and screaming over here, 0:22:43.880 --> 0:22:48.480 and here we have missionary zeal, the bully pulpit. By 0:22:49.000 --> 0:22:51.520 this is the way, this is the new way. And 0:22:51.600 --> 0:22:56.119 you have an entire universe of evangelists amongst the advisor 0:22:56.200 --> 0:23:00.160 community who have drunk the kool aid and say, hey, 0:23:00.200 --> 0:23:03.520 low cost indexing is the way to go. Following the 0:23:03.520 --> 0:23:08.000 financial crisis, it seems like Vanguard was sucking up all 0:23:08.080 --> 0:23:10.879 the money in the room and everybody else wasn't also 0:23:11.040 --> 0:23:15.840 run it also ran are events like the Great Financial Crisis? 0:23:16.119 --> 0:23:19.560 Does that sort of shake people out of their false 0:23:19.600 --> 0:23:23.520 belief and send them in the direction of, hey, these missionaries. 0:23:23.680 --> 0:23:26.359 Turns out these guys are right. Well, you're certainly right 0:23:26.400 --> 0:23:28.800 in a sense. It's it's not easy to read. But 0:23:29.160 --> 0:23:31.399 what happens when the market goes way down and went 0:23:31.480 --> 0:23:37.280 down fifty rough nine, and all these managers it says, 0:23:37.440 --> 0:23:40.760 we'll manage your money for you. The shareholder has kind 0:23:40.760 --> 0:23:44.000 of led to expect that they will anticipate this and 0:23:44.080 --> 0:23:46.720 not let it happen to them. And they may not 0:23:47.040 --> 0:23:50.520 directly communicate that, but if someone says, well, i'm you know, 0:23:50.600 --> 0:23:53.320