WEBVTT - Interview With Jack Bogle: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.600 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.440 --> 0:00:10.200 I know I say this every week that I have 0:00:10.280 --> 0:00:14.480 a very special guest, but this week I really have 0:00:15.160 --> 0:00:20.160 an extra very special guest. His name is Jack Bogel 0:00:20.400 --> 0:00:24.160 and he is the founder of the Vanguard Group and 0:00:24.239 --> 0:00:29.320 the inventor of the Index Fund. Did I oversell that 0:00:29.360 --> 0:00:32.400 this is a special guest or not? Um, let me 0:00:32.479 --> 0:00:35.160 tell you a little bit about how this date came 0:00:35.200 --> 0:00:40.840 about and what made this so interesting and weird and unusual. First, 0:00:41.280 --> 0:00:45.839 I'm in chasing Jack Bogel for literally years, and he 0:00:45.920 --> 0:00:49.240 doesn't travel much. He's a home body. He lives near 0:00:49.880 --> 0:00:54.240 the Vanguard headquarters. He's not much for coming into Manhattan 0:00:54.600 --> 0:00:58.520 and and recording something like this. Uh. But we did 0:00:58.560 --> 0:01:02.080 the interview with Chairman of Vanguard, Jack Brennan about a 0:01:02.160 --> 0:01:05.039 year and until almost two years ago, and that went 0:01:05.120 --> 0:01:08.280 really well. And then last year we did just about 0:01:08.280 --> 0:01:10.800 a year ago, we did the interview with Bill McNabb, 0:01:10.920 --> 0:01:16.399 he's the current CEO of Vanguard Group. And I started 0:01:16.400 --> 0:01:19.600 poking and prodding and asking, Hey, when can I sit 0:01:19.640 --> 0:01:21.520 down with Jack? When can I sit down with Jack? 0:01:22.200 --> 0:01:27.679 And finally I just said we're willing to come to 0:01:27.840 --> 0:01:30.679 Pennsylvania and meet with you guys, And they said, oh, 0:01:30.720 --> 0:01:34.240 if that's the case, come on down. So you'll hear 0:01:34.280 --> 0:01:37.040 when we sit and talk with Jack. This was not 0:01:37.400 --> 0:01:41.959 the usual interview, partly because he's just a force of nature. 0:01:42.160 --> 0:01:48.480 And you know, I try and balance between guiding the 0:01:48.520 --> 0:01:53.760 conversation to the specific questions we have and and keeping 0:01:53.960 --> 0:01:57.960 us on track to cover a variety of topics and subjects. 0:01:57.960 --> 0:02:00.880 And you could pretty much tell when I give up 0:02:00.960 --> 0:02:04.160 about three or four questions in and just say, Jack 0:02:04.200 --> 0:02:07.120 Bogel is a force of nature. I'm just gonna have 0:02:07.160 --> 0:02:09.880 a conversation with him and let it go. A little 0:02:09.919 --> 0:02:12.760 background on on the day. This was a couple of 0:02:12.800 --> 0:02:17.919 thursdays ago, and we basically left the New York area 0:02:18.080 --> 0:02:20.760 ungodly early, I want to say about four thirty quarter 0:02:20.840 --> 0:02:25.240 to five, drove down to Pennsylvania. Actually we left so 0:02:25.280 --> 0:02:28.680 early we beat all the traffic, not only around New York, 0:02:28.760 --> 0:02:31.840 we got there before the pen the traffic from Philadelphia. 0:02:32.440 --> 0:02:36.120 Um so, I had my first cracker barrel experience, having 0:02:36.280 --> 0:02:39.120 having a breakfast at a cracker barrel, which apparently is 0:02:39.639 --> 0:02:43.959 very common outside of downstate New York. It was quite delicious. 0:02:44.040 --> 0:02:48.840 We get to the Vanguard campus about an hour early, 0:02:49.040 --> 0:02:51.839 spend some time in their galley. Get at Vanguard, it's 0:02:51.880 --> 0:02:56.240 it's the staff for crew. The cafeteria is a galley, 0:02:56.280 --> 0:02:59.760 it's got all these these nautical themes. And we're finally 0:03:00.000 --> 0:03:05.000 showed into a small conference room off of Jack's office. 0:03:05.760 --> 0:03:10.240 And he's you'll hear during the interview, he's eighty six 0:03:10.320 --> 0:03:13.680 years old. He is sharp as attack, smart as a whip. 0:03:13.760 --> 0:03:17.400 His voice is still very strong, very powerful. And any 0:03:17.480 --> 0:03:20.720 pretense I had of following a script and trying to 0:03:20.760 --> 0:03:25.240 ask specific questions pretty much went out the window. Uh 0:03:25.320 --> 0:03:27.640 So you'll hear me wrestling in the beginning some of 0:03:27.639 --> 0:03:31.200 the questions. You'll hear me trying to keep him on 0:03:31.240 --> 0:03:34.360 our original script. And and I, you know, ten minutes 0:03:34.400 --> 0:03:38.920 into this conversation, it's pretty clear, Hey, this is a 0:03:38.920 --> 0:03:42.240 bucking bronco, just just trying not to get kicked in 0:03:42.280 --> 0:03:47.120 the head. Keep feeding him questions based on wherever he goes, 0:03:47.320 --> 0:03:50.400 Just follow him and take it to where it goes. 0:03:50.520 --> 0:03:55.400 And all told, I thought this was really a fascinating conversation. 0:03:55.760 --> 0:03:58.800 He sat with us for ninety minutes. He was supposed 0:03:58.800 --> 0:04:01.680 to go to lunch with someone else. I'm pointing to 0:04:01.720 --> 0:04:04.040 my watch. He's waving me off like I'm telling him 0:04:04.080 --> 0:04:06.520 not to steal home, and he's coming in. He doesn't care, 0:04:06.840 --> 0:04:08.960 and so it ran a little long by the time 0:04:09.000 --> 0:04:12.080 we back out. Some of the other stuff you'll hear. 0:04:12.120 --> 0:04:16.520 This is a substantive, lengthy conversation. If you are at 0:04:16.520 --> 0:04:21.120 all a Vanguard fan, a Bogel head, an Index fan, 0:04:21.720 --> 0:04:24.040 you're going to have a field day with this. I 0:04:24.080 --> 0:04:26.479 had to set this up because really it was such 0:04:26.520 --> 0:04:29.760 an exciting experience for me to spend ninety minutes with 0:04:29.839 --> 0:04:33.680 the man, the legend. Here it is my conversation with 0:04:33.720 --> 0:04:40.320 the one the Only Jack Bogel. This is Masters in 0:04:40.360 --> 0:04:44.479 Business with Barry Ridholts on Bloomberg Radio. I know I 0:04:44.560 --> 0:04:47.000 say this every week that I have a special guest, 0:04:47.520 --> 0:04:51.080 but this week I have a super special guest, the 0:04:51.120 --> 0:04:56.280 one the Only Jack Bogel, founder and Chairman emeritus of 0:04:56.320 --> 0:05:00.360 the Vanguard Group, essentially the creator of the world world's 0:05:00.440 --> 0:05:04.960 first index mutual fund for individuals in nineteen seventy five. 0:05:05.480 --> 0:05:08.480 I could read your CV which will essentially take up 0:05:08.560 --> 0:05:11.919 the entire show. There's so much stuff to to talk 0:05:11.960 --> 0:05:15.640 about with you. You are a legend in the industry 0:05:15.680 --> 0:05:19.400 and maybe the person who has had the single biggest 0:05:19.440 --> 0:05:24.400 impact on investing of anyone. But let's just start from 0:05:24.400 --> 0:05:29.960 that beginning undergraduate thesis. You're in college in Princeton in 0:05:30.120 --> 0:05:34.960 nineteen fifty nineteen fifty one, and you're thinking about why 0:05:35.120 --> 0:05:39.400 do actively managed funds, why do so many of them 0:05:39.440 --> 0:05:42.760 underperform the market? How did that come about for a 0:05:42.839 --> 0:05:46.320 college to well? Came about by a great accident, and 0:05:46.400 --> 0:05:49.320 that is I was majoring in economics. I was looking 0:05:49.320 --> 0:05:51.560 for a subject for my senior thesis, which is a 0:05:51.640 --> 0:05:56.320 requirement still at Princeton, sixtensive, extensive document. Mine turned not 0:05:56.400 --> 0:05:58.520 to be maybe a hundred and thirty five forty pages, 0:05:59.160 --> 0:06:01.919 and I didn't know what to write about. But I 0:06:01.920 --> 0:06:03.520 wanted to write about something that no one had ever 0:06:03.560 --> 0:06:07.560 written about before. And they're in December ninety nine, I 0:06:07.600 --> 0:06:10.120 was reading Fortune magazine, which I did as part of 0:06:10.120 --> 0:06:14.880 my economics background, just voluntarily, and there was an article 0:06:14.920 --> 0:06:18.040 called Big Money in Boston and it was about the 0:06:18.120 --> 0:06:23.000 mutual fund industry. I described this tiny industry, uh maybe 0:06:23.240 --> 0:06:26.320 two and a half billion dollars for the industry as 0:06:26.360 --> 0:06:29.760 tiny but contentious, and I said, well, you know, I'm 0:06:29.839 --> 0:06:33.760 kind of tiny and I'm kind of contentious, so I'll 0:06:33.760 --> 0:06:36.600 write about it. And I wrote the thesis enabled me 0:06:36.640 --> 0:06:40.960 to graduate with high honors from Princeton. Very pretty good job. 0:06:41.920 --> 0:06:44.600 Not a great thesis, but not bad for somebody a 0:06:44.680 --> 0:06:47.760 year out of his teens. Let me let me push 0:06:47.800 --> 0:06:51.720 back at you and say, that was an incredibly insightful thesis. 0:06:52.400 --> 0:06:55.599 The insight that you derived at a very young ages 0:06:56.200 --> 0:07:00.000 the cost of all this active management. They were unable 0:07:00.080 --> 0:07:04.360 to overcome that bogey even to today. What should really 0:07:04.360 --> 0:07:07.720 be so obvious to everybody. Lots of folks still haven't 0:07:07.720 --> 0:07:10.720 seemed to figure that out. So what makes me stop 0:07:10.760 --> 0:07:13.480 and pause and and ask you this question, how did 0:07:13.560 --> 0:07:17.240 you ever come to that conclusion at such a young 0:07:17.320 --> 0:07:22.040 age without the universe of information we have available to 0:07:22.160 --> 0:07:24.920 us today. Well, to begin with, the thesis title was 0:07:25.080 --> 0:07:28.960 the economic role of the investment company, and the overall 0:07:29.080 --> 0:07:33.720 of the overriding and focus of that thesis was mutual 0:07:33.840 --> 0:07:38.120 funds are there to serve investors. Put the investors first. 0:07:38.160 --> 0:07:41.920 And I talked about reducing sales loads, reducing management fees, 0:07:42.400 --> 0:07:46.960 and focusing on investing and non marketing things of that nature, 0:07:47.440 --> 0:07:50.280 and that's what the industry in my in my formula 0:07:50.320 --> 0:07:52.520 and would have to do to reach its great potential. 0:07:53.240 --> 0:07:56.080 And I did not actually, to be very clear on this, 0:07:56.600 --> 0:07:59.520 I did not assemble any data. But I looked at 0:07:59.560 --> 0:08:03.720 about team leading mutual funds and look at their records, 0:08:03.880 --> 0:08:08.240 and without adding and dividing and getting averages, it was 0:08:08.320 --> 0:08:10.560 very clear that very few of them, if any at 0:08:10.560 --> 0:08:14.880 that time, could could outperform the SMP five index. So 0:08:14.920 --> 0:08:19.280 it was basically anecdotal. Although this industry in those days 0:08:19.840 --> 0:08:23.040 it was very much a commodity in a way kind 0:08:23.040 --> 0:08:27.120 of commodity. The major funds of those days we're just 0:08:27.240 --> 0:08:32.520 basic basically buying long lists of blue chip stocks. You 0:08:32.520 --> 0:08:35.760 could call them Dow Jones industrial average funds or later, 0:08:35.760 --> 0:08:38.520 because the SMP wasn't very enough well known then you 0:08:38.520 --> 0:08:40.800 could call them standard and poorst kind of funds. They 0:08:40.800 --> 0:08:44.960 were down the middle. They had fluctuations, very similar volatility, 0:08:45.080 --> 0:08:49.079 very similar to the index. So even back in the 0:08:49.160 --> 0:08:54.960 late forties early fifties, mutual funds were closet indexers. Sure, absolutely, huh, 0:08:55.320 --> 0:08:58.480 that's quite that's quite fascinating. So let's fast forward a 0:08:58.520 --> 0:09:02.319 little bit. So now you working as chairman of Wellington's 0:09:02.320 --> 0:09:06.480 management company. And long story short, you said the most 0:09:06.559 --> 0:09:09.880 unwise decision of your career. You do a merger doesn't 0:09:09.880 --> 0:09:13.679 work out and they end up um breaking it down 0:09:13.760 --> 0:09:17.480 from from uh lieutenant to private so to speak, and 0:09:17.760 --> 0:09:21.440 not less than private, less than private. And you wanted 0:09:21.480 --> 0:09:23.880 to run a fund and they said, well, you know, 0:09:23.960 --> 0:09:27.079 because of this M and A, we don't want you 0:09:27.200 --> 0:09:29.400 running an active fund. If you want to put together 0:09:29.679 --> 0:09:32.800 how did how did the index come out of that? 0:09:32.800 --> 0:09:36.000 That job change? Okay, well, let me say my first 0:09:36.080 --> 0:09:39.520 job and I was thirty five years old and Mr Morgan, 0:09:39.520 --> 0:09:42.520 the founder of Walter L. Morgan, the founder of Wellingcoln, 0:09:43.000 --> 0:09:45.960 called me into his office. Wellington was in trouble. Wellingcoln 0:09:46.000 --> 0:09:49.280 Fund was in trouble, its performance was slipping, and Wellington 0:09:49.360 --> 0:09:52.120 Management Company was in trouble because we were basically a 0:09:52.200 --> 0:09:55.920 one product if you will company up conservative balanced fund. 0:09:56.440 --> 0:09:58.800 We were, for the want of a better metaphor, the 0:09:58.960 --> 0:10:04.640 bagel of the mutual fund industry, the the hard, not sweet, 0:10:05.320 --> 0:10:11.679 um nutritious safe choice in the biggest balance fund in 0:10:11.720 --> 0:10:17.680 the industry, and people stopped buying bagels and started buying 0:10:18.160 --> 0:10:21.040 if you will donuts. We came into the go go era. 0:10:21.640 --> 0:10:25.959 So all these fancy growth funds I powered buying stocks 0:10:25.960 --> 0:10:29.280 that had no investment, no intrinsic investment merit at all. 0:10:29.440 --> 0:10:31.960 This is the mid to late sixties, the nifty fifty 0:10:32.040 --> 0:10:35.520 and that sort of just the go go era and 0:10:35.600 --> 0:10:38.400 the go goes came and the go goes win. But 0:10:38.520 --> 0:10:42.800 if you're in the bagel business and nobody is buying bagels, 0:10:42.800 --> 0:10:45.920 and the balance fund share of industry sales actually dropped 0:10:45.920 --> 0:10:49.160 to one percent, and so I had to do something, 0:10:49.200 --> 0:10:51.560 and Mr Morgan told me to do it, and I 0:10:51.600 --> 0:10:54.400 talked to a couple of firms about merging, and then 0:10:54.440 --> 0:10:57.320 I came across this firm in Boston and it had 0:10:57.320 --> 0:10:59.200 a fund called I Vest Fund, one of the go 0:10:59.200 --> 0:11:03.080 go funds that a They had some apparently bright young 0:11:03.120 --> 0:11:06.200 managers that I had kind of common cause with, and 0:11:06.240 --> 0:11:08.839 they had a pension business. So we got the new 0:11:08.880 --> 0:11:11.840 managers that would save Wellington Fund. We got the go 0:11:11.920 --> 0:11:14.720 go fund that we needed to stay in business, and 0:11:14.760 --> 0:11:16.319 we got into a new business that we thought we 0:11:16.360 --> 0:11:19.480 could be very successful. It was from words of one syllable, 0:11:19.559 --> 0:11:23.920 two syllables, brit I'm Barry Riholts, You're listening to Masters 0:11:23.920 --> 0:11:27.840 in Business on Bloomberg Radio. My extra special guest today 0:11:28.000 --> 0:11:32.080 is Jack Bogel. He is the founder of Vanguard Group 0:11:32.240 --> 0:11:37.440 and essentially the inventor of the index funds. Jack, we 0:11:37.440 --> 0:11:43.680 were speaking earlier about how a crisis at Wellington, which 0:11:43.840 --> 0:11:47.360 was the predecessor you worked at to the Vanguard Group, 0:11:47.600 --> 0:11:51.360 actually led to the creation of the Vanguard Group. Tell 0:11:51.440 --> 0:11:53.680 us how that came about. Okay, Well, let's start with 0:11:53.720 --> 0:11:56.600 the fact that in doing this merger, which I was 0:11:56.640 --> 0:12:00.040 eager to do, I gave up too many votes in 0:12:00.080 --> 0:12:03.840 the company and so when everything fell apart, the market 0:12:03.840 --> 0:12:08.840 went down. Uh, and so on. Right at the market 0:12:08.840 --> 0:12:11.400 was going down in seventy four, it would be to 0:12:11.480 --> 0:12:17.280 climb the happy partners um fragmented and there were four 0:12:17.280 --> 0:12:19.360 of them, and there was one of me, and they 0:12:19.360 --> 0:12:21.560 had packed the board of directors. I was I was 0:12:21.559 --> 0:12:24.600 never very political, and they fired me. The guys that 0:12:24.640 --> 0:12:27.880 had caused this catastrophe, fired the one that was trying 0:12:27.920 --> 0:12:32.080 to avoid it. And so I was out of a job. 0:12:33.000 --> 0:12:35.599 So what could I do. I could go try and 0:12:35.840 --> 0:12:37.880 find work for another firm. I had a young family 0:12:37.880 --> 0:12:40.920 living here. I didn't want to move. I was very 0:12:40.920 --> 0:12:44.000 angry about what happened, of course, but you know what 0:12:44.240 --> 0:12:47.720 is is. And so I decided my best chance was 0:12:47.760 --> 0:12:50.599 to talk to the directors of the Wellington Fund, this 0:12:50.760 --> 0:12:55.320 fund so badly heard the ash the diamond and arn't crown, 0:12:56.080 --> 0:13:00.600 and say, look, the management company has fired me, but you, 0:13:00.600 --> 0:13:04.800 you're a slightly different group, can keep me. And we'll 0:13:04.800 --> 0:13:07.200 tell the management company what to do. We will be 0:13:07.240 --> 0:13:09.880 in charge of the administration of the fund, ending necessary 0:13:09.880 --> 0:13:12.320 to make it work, and we'll be in charge of 0:13:12.559 --> 0:13:15.079 praising the advisor and taking whatever steps we want. Will 0:13:15.080 --> 0:13:18.640 be independent of the advisor. And uh I wanted to 0:13:18.679 --> 0:13:21.360 take over distribution too, but the directors wouldn't go along 0:13:21.400 --> 0:13:26.360 with that. So we became a little administrative company. And 0:13:26.559 --> 0:13:29.280 uh I wanted to glamorous name. So I found the 0:13:29.320 --> 0:13:34.360 name Vanguard. When I first learned about We go from Wellington, 0:13:35.200 --> 0:13:39.760 the the the land battles of the Napoleonic Wars, the 0:13:39.840 --> 0:13:42.960 Duke of Wellington, the naval battles of the Napoleonic War, 0:13:43.400 --> 0:13:46.160 and there's Lord Nelson at the Battle of the Nile, 0:13:46.360 --> 0:13:49.800 one of the most complete, the most complete naval victory 0:13:49.840 --> 0:13:53.839 in history to this day. Uh and Uh, he writes 0:13:53.880 --> 0:13:57.080 to this dispatch that I see from the deck of HMS. 0:13:57.160 --> 0:14:00.160 Vanguard his flagship, and that sounds like a great name 0:14:00.240 --> 0:14:05.199 for a for a company, perfect perfect from Wellington Funds. 0:14:05.240 --> 0:14:08.440 How did you actually form the Vanguard Group. Well, the 0:14:08.520 --> 0:14:11.280 idea was that the funds would create a new company 0:14:11.400 --> 0:14:15.200 that they owned, they would capitalize. Capitalization was very small 0:14:15.480 --> 0:14:17.920 and I'm gonna guess maybe two hundred and fifty thousand dollars. 0:14:17.960 --> 0:14:20.880 This is a very small company at that point. Actually, 0:14:21.200 --> 0:14:23.320 the total assets of the funds were down and around 0:14:23.640 --> 0:14:28.040 one point five billion. So we capitalized the fund and 0:14:28.040 --> 0:14:30.760 and Welling and Management Company had to take it because 0:14:30.800 --> 0:14:33.040 the directors of the funds were in charge of the 0:14:33.080 --> 0:14:36.960 contracts with Welling and So you really backed George your 0:14:36.960 --> 0:14:39.800 way back into the company after they had fired you 0:14:39.880 --> 0:14:42.680 as chairman. Well, yes, I think that's a fair statement. 0:14:42.720 --> 0:14:45.880 But techno, from a technical standpoint, I'd been the chairman 0:14:45.880 --> 0:14:48.400 of the Welling and Fund all along Gotch so I 0:14:48.400 --> 0:14:50.720 have the same old continuity that I had going back 0:14:50.760 --> 0:14:54.080 to nineteen just post merger. They this was a bactor. 0:14:54.200 --> 0:14:57.440 So how do you go from that to the Vanguard Group. Well, 0:14:57.640 --> 0:14:59.600 we put a name in the company because we had, 0:14:59.760 --> 0:15:01.920 I think get than those days, maybe a dozen funds, 0:15:02.160 --> 0:15:04.960 and we didn't want a dozen separate companies to manage. 0:15:05.360 --> 0:15:07.960 So we had to have a core or central company 0:15:08.040 --> 0:15:12.320 and UH that would pool resources of all the funds 0:15:12.480 --> 0:15:15.800 and provide all the services. And we had allocation methods 0:15:15.800 --> 0:15:20.760 between the funds. And it was all good until we 0:15:20.920 --> 0:15:25.280 decided to take over distribution, which was our Let me, 0:15:25.320 --> 0:15:26.920 I'm a little bit ahead of myself. Let me let 0:15:26.920 --> 0:15:29.720 me go back and say to the first thing. We 0:15:29.720 --> 0:15:32.240 were not allowed to go into the business of investment management, 0:15:32.560 --> 0:15:34.560 that was theirs. We were not allowed to go into 0:15:34.600 --> 0:15:37.240 the business that was there as being willing that was there. 0:15:38.000 --> 0:15:41.040 The active side you couldn't do and we couldn't. We 0:15:41.080 --> 0:15:44.760 couldn't go into management. We didn't distinguish between active and 0:15:44.800 --> 0:15:47.680 passive and those days not In those days, there weren't 0:15:47.720 --> 0:15:51.240 an index, right, So so if you couldn't go into management, 0:15:51.400 --> 0:15:53.920 how are you able to set up the Vanguard five hundred? 0:15:54.480 --> 0:15:59.440 Wouldn't be patient? Okay? So um, we were not allowed 0:15:59.480 --> 0:16:02.200 to go into this retribution because that was welling consfunction too. 0:16:02.480 --> 0:16:05.680 So we had this little administrative company looking over however, 0:16:05.960 --> 0:16:09.360 had the legal responsibility and the board responsibility to look 0:16:09.400 --> 0:16:12.240 over the advisor and distributor. So we were in charge. 0:16:12.960 --> 0:16:15.600 And so my first I knew a company that was 0:16:15.640 --> 0:16:18.560 an administrative company was not going to be anything for me. 0:16:19.200 --> 0:16:21.800 I mean, I like the administration. I know how well 0:16:21.800 --> 0:16:24.720 it has to be done, shareholder record keeping and all that, 0:16:25.600 --> 0:16:27.320 but that's just not the kind of challenge I was 0:16:27.360 --> 0:16:30.440 looking for. And any company that's going to succeed, it's 0:16:30.480 --> 0:16:32.120 going to have to control the kind of funds he 0:16:32.160 --> 0:16:35.040 wants to they want to run, the kind of distribution 0:16:35.120 --> 0:16:37.360 they want to have, who will buy the funds, who 0:16:37.440 --> 0:16:40.400 will sell them, things of that nature. So we have 0:16:40.440 --> 0:16:44.000 a company that's just in this little administrative box, and 0:16:44.040 --> 0:16:46.920 I'm thinking, let's do something. So at the very first 0:16:46.920 --> 0:16:49.440 board meeting of the new company, after we got an 0:16:49.520 --> 0:16:53.560 organized I say we gotta started index fund. And the 0:16:53.640 --> 0:16:56.960 directors say you're not allowed to get new investment management. 0:16:57.640 --> 0:17:02.040 And I say, this fund isn't man aged, and believe 0:17:02.040 --> 0:17:05.960 it or not, they bought it. So in other words, 0:17:06.400 --> 0:17:08.840 you describe the index fund as just, hey, it's the 0:17:08.880 --> 0:17:13.560 five largest companies in America. There's no manager, nobody's in charge. 0:17:13.640 --> 0:17:18.600 It's just it's an unmanaged broad index, and they said, oh, 0:17:18.720 --> 0:17:21.520 go do that. They said, well, I won't say was 0:17:21.600 --> 0:17:24.440 that easy, but that was the final decision. I get 0:17:24.520 --> 0:17:27.000 the sense from from what you've described that they would 0:17:27.080 --> 0:17:30.320 kind of let's let's let Jack go do that. He'll 0:17:30.359 --> 0:17:33.000 be out of our hair. It'll keep them busy and fine, 0:17:33.400 --> 0:17:35.960 won't cause anybody trouble. I think you're pretty much on 0:17:36.040 --> 0:17:39.480 the mark. This week on Masters in Business on Bloomberg Radio, 0:17:39.680 --> 0:17:43.440 I have an extra special guest. His name is Jack Bogel. 0:17:43.840 --> 0:17:47.560 He is the founder of the Vanguard Group, the inventor 0:17:47.960 --> 0:17:51.200 of the index funds, and author of far too many 0:17:51.280 --> 0:17:55.520 books to mention. I've been speaking with Jack here in 0:17:55.640 --> 0:17:59.840 the headquarters of of Vanguard and just outside the conference 0:18:00.000 --> 0:18:03.840 and we were sitting on the wall is a frames 0:18:04.040 --> 0:18:10.400 prints and on that print it says stamp out index funds. Jack, 0:18:10.680 --> 0:18:13.960 What on earth does that mean? That means Wall Street 0:18:13.960 --> 0:18:16.800 couldn't make any money out of index funds, and so 0:18:16.920 --> 0:18:19.800 Wall Street didn't like it. We had an initial initial 0:18:19.840 --> 0:18:22.560 public offering. I went all over New York so many 0:18:22.640 --> 0:18:25.600 times to try and find underwriters and finally got the 0:18:25.720 --> 0:18:31.240 four largest retail underwriters, pH Dan Winter Reynolds. Uh forget 0:18:31.480 --> 0:18:34.280 who the other one was Reynolds. Okay, they were the 0:18:34.280 --> 0:18:36.000 biggest guys in the business, and they said, we can 0:18:36.040 --> 0:18:37.880 do a hundred and fifty million dollars with this great 0:18:37.920 --> 0:18:42.360 new idea. They did eleven million dollars, so so less 0:18:42.400 --> 0:18:45.159 than ten. And they came in to see me when 0:18:45.200 --> 0:18:48.080 the underwriting was over and said, you know, I said 0:18:48.119 --> 0:18:49.879 to them, look, we can't even buy around lots of 0:18:49.920 --> 0:18:52.920 five And they said, well, why don't we just give 0:18:52.920 --> 0:18:54.520 everybody their money back and pull it? And I said, 0:18:54.520 --> 0:18:57.760 are you kidding me? We have the world's first index fund. 0:18:58.520 --> 0:19:00.920 And it's the world's first index fund. Period. You have 0:19:00.960 --> 0:19:04.479 to say, retail a lot of institutional hold at the beginning. 0:19:04.760 --> 0:19:07.960 It's the world's first index mutual fund, no question about that. 0:19:08.760 --> 0:19:12.920 And amazing and so it got nowhere, It went nowhere fast, 0:19:13.040 --> 0:19:17.920 eleven million dollar launched. What year was that that was in, right, 0:19:18.840 --> 0:19:22.639 eleven million dollars and everybody laughed and nobody thought there 0:19:22.720 --> 0:19:25.879 was any future to index funds. That's exactly right. That 0:19:26.119 --> 0:19:29.760 that's just astonishing. Well, you had incredible foresight to say, 0:19:30.400 --> 0:19:33.280 and it makes sense that the four largest retail shops 0:19:33.320 --> 0:19:36.240 would want to participate in this because this is a simple, 0:19:36.320 --> 0:19:40.359 easy way for their retail client to get exposure to 0:19:40.440 --> 0:19:45.320 the market, fast, easy, relatively inexpensive. It should have except 0:19:45.720 --> 0:19:48.200 that when the client buys this fund, it's to be 0:19:48.280 --> 0:19:51.920 held forever. They don't trade it, and the fund doesn't 0:19:51.960 --> 0:19:54.680 do any trading. There's no brokerage business generated by the 0:19:54.760 --> 0:19:57.560 fun So this was not a happy moment for Wall Street, 0:19:58.080 --> 0:20:00.359 and they looked at it, I think as a some 0:20:00.520 --> 0:20:03.800 kind of the beginning of a of a communicable disease, 0:20:04.520 --> 0:20:06.280 and it had to it had to be stamped out. 0:20:07.080 --> 0:20:09.240 The Center for Disease Control had to come in and 0:20:10.160 --> 0:20:12.679 did they really perceive you as a threat or did 0:20:12.720 --> 0:20:15.920 they kind of laugh it off? And yeah, yeah, best 0:20:15.960 --> 0:20:18.359 of luck with that, Jack. Yeah, I'd say pretty much 0:20:18.440 --> 0:20:20.600 that way. Although we did a couple of years ago 0:20:21.119 --> 0:20:23.160 for one of the funds anniversaries. We all got together, 0:20:23.240 --> 0:20:26.800 but the underwriters, all four underwriters, and all four underwriters 0:20:26.880 --> 0:20:29.760 and their lawyers and our lawyer lawyer singular. We only 0:20:29.800 --> 0:20:33.040 had one on those days. And they're all good people, 0:20:33.119 --> 0:20:36.040 you know, I don't uh. Then we all do our 0:20:36.080 --> 0:20:38.040 best in this life in very different ways of work. 0:20:38.359 --> 0:20:40.960 So it worked out well. It had to start, and 0:20:41.040 --> 0:20:44.720 it did start. So here's the question that I could 0:20:44.840 --> 0:20:49.359 ask you. Forty plus years later, Vanguard is now running 0:20:49.480 --> 0:20:53.960 three point something trillion dollars. Four trillion is not that 0:20:54.119 --> 0:20:57.840 far off in the distance, an enormous success, one of 0:20:57.920 --> 0:21:02.400 the single largest asset managers in the world. How come 0:21:02.720 --> 0:21:06.800 nobody ever said, hey, those guys are onto something, we 0:21:06.840 --> 0:21:09.439 should be a competitor to them. How did how did 0:21:09.520 --> 0:21:12.320 that never come up anywhere along the lines? Well, the 0:21:12.400 --> 0:21:16.080 answer is so simple. Index funds have a real problem. 0:21:17.119 --> 0:21:22.160 All the damn money goes to the investors, right, Managers 0:21:22.200 --> 0:21:25.119 can't take anything they're not managing well, but you're taking 0:21:25.359 --> 0:21:29.040 ten or fifteen basis points and on trillions of dollars, 0:21:29.440 --> 0:21:32.440 that's not nothing. Well, nobody expected to get the trillions 0:21:32.480 --> 0:21:35.760 of dollars, believe me, not an eleven million. But but okay, 0:21:35.840 --> 0:21:38.639 in seventy four or seventy six, it's eleven million. But 0:21:38.880 --> 0:21:42.080 by the time you get to the mid ninety nineties, 0:21:43.000 --> 0:21:45.800 you're hundreds of billions of dollars, and then I think 0:21:45.880 --> 0:21:50.200 you hit a trillion? Was it late nineties? So even 0:21:52.720 --> 0:21:56.920 didn't anybody say, hey, those guys in Pennsylvania they have 0:21:57.040 --> 0:22:00.240 a trillion dollars, Why don't we do what they're doing. Well, 0:22:00.359 --> 0:22:03.200 it's a p it's a problem. And then eventually the 0:22:03.240 --> 0:22:05.800 big guys had to Fidelity had to have They were 0:22:05.920 --> 0:22:09.399 dragged kicking and screaming in indexing and they have to 0:22:09.440 --> 0:22:12.320 be competitive on price. They can still make all the 0:22:12.400 --> 0:22:15.200 money they want, and it's an awful lot on the 0:22:15.280 --> 0:22:17.760 actively managed funds. So it's kind of a lost leader 0:22:17.800 --> 0:22:21.400 for Fidelity. And what about others Black Rock and American 0:22:21.480 --> 0:22:25.080 Century and all these other entities swab offers and index. 0:22:25.119 --> 0:22:30.840 It seems everybody offers some version of uh, the SMPI index. Yeah. Well, 0:22:30.880 --> 0:22:33.159 t ro Price is a good example. They have a 0:22:33.240 --> 0:22:35.959 hidden index fund. They don't talk much about it. It's 0:22:36.040 --> 0:22:41.440 kind of expensive. Basis points relatives are five and it's 0:22:41.480 --> 0:22:43.560 a kind of a sideball thing so they can get 0:22:43.560 --> 0:22:47.200 into the retirement market. This has become a marketing business, 0:22:47.800 --> 0:22:53.600 and right now we're seeing this tremendous change in people 0:22:53.680 --> 0:22:57.120 who realizing the importance of low cost and a long 0:22:57.240 --> 0:22:59.680 term focus. And if you just keep those two things 0:22:59.720 --> 0:23:03.280 in mind, you will never do anything but own a 0:23:03.400 --> 0:23:06.960 broad market index and hold it forever. I'm Barry Ridholtz. 0:23:07.040 --> 0:23:10.359 You're listening to masters in Business on Bloomberg Radio. My 0:23:10.680 --> 0:23:14.200 extra special guest this week is Jack Bogel. He is 0:23:14.280 --> 0:23:18.479 the founder of the Vanguard Group, inventor of the index funds, 0:23:19.080 --> 0:23:22.639 author of numerous books. Let's jump right back into the 0:23:22.760 --> 0:23:27.080 issue of costs and how they impact investors. You're known 0:23:27.400 --> 0:23:31.040 as the person who created the index fund but really, 0:23:31.240 --> 0:23:34.800 which do you think is more important, the passive indexing 0:23:35.080 --> 0:23:38.120 or the fact that it's so low cost Well, it's 0:23:38.280 --> 0:23:40.520 it's pretty clear to me that passive indexing is the 0:23:40.560 --> 0:23:43.159 more important because I'm going to define costs in a 0:23:43.240 --> 0:23:45.960 couple of different ways here. One is the expense ratio. 0:23:46.840 --> 0:23:50.840 And our funds index funds probably average about ten basis points. 0:23:50.920 --> 0:23:54.760 Are managed funds probably average about thirty five, So there's 0:23:54.800 --> 0:23:56.960 not that big a difference. The industry is up around 0:23:57.160 --> 0:23:59.920