Vanguard: The communist capitalist who saved investors a trillion dollars (Audio)

1. 0:00 – 0:41

   Start

   1. BGBen Gilbert0:00

      I was telling my wife, you know, "I think I'll be able to do bedtime tonight, maybe, maybe even dinner," and she was like, "Whoa, whoa, whoa. Don't get ahead of yourself." [laughs]

   2. DRDavid Rosenthal0:07

      Yeah. [laughs] "Let's not go crazy here." [laughs]

   3. BGBen Gilbert0:10

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

   4. DRDavid Rosenthal0:12

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

   5. BGBen Gilbert0:19

      Yeah, yeah, yeah.

   6. DRDavid Rosenthal0:20

      But really, it's mostly index funds.

   7. BGBen Gilbert0:21

      All right. [sighs]

   8. DRDavid Rosenthal0:22

      Let's do it.

   9. BGBen Gilbert0:23

      Let's do it.

   10. DRDavid Rosenthal0:24

       Vanguard.

   11. SPSpeaker0:24

       Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth?

2. 0:41 – 5:30

   Intro

   1. BGBen Gilbert0:41

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

   2. DRDavid Rosenthal0:50

      I'm David Rosenthal.

   3. BGBen Gilbert0:51

      And we are your hosts. Today's episode is more relevant for you than any other company we have ever covered. For most of you, you have most of your net worth tied up in this company, or the copycats who followed. The company is Vanguard, who effectively created the first index fund for individual investors in 1975, and today is the largest provider of index funds in the United States. They manage over $10 trillion in passive index funds. That means they own an average of almost 10% of every company in the S&P 500; General Motors, Nike, Starbucks, Lockheed Martin, Visa, Apple, you name it. Vanguard is the largest shareholder of most US corporations, and together with the other big index funds like BlackRock, State Street, and Fidelity, they own 24% of the entire US stock market.

   4. DRDavid Rosenthal1:49

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

   5. BGBen Gilbert1:57

      No.

   6. DRDavid Rosenthal1:58

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

   7. BGBen Gilbert2:10

      So Vanguard has an incredibly unique corporate structure. If you are an investor in a Vanguard fund, you own a piece of the firm. Vanguard is owned exclusively by its customers, and it's not publicly traded. It doesn't have outside shareholders of any other kind. Even the CEO doesn't have any equity, except, of course, than what he has from investing in the funds, just like me and David and all of you. In many ways, it is a different kind of capitalism, dare we say communist capitalism.

   8. DRDavid Rosenthal2:40

      Ooh, I like it.

   9. BGBen Gilbert2:42

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

   10. DRDavid Rosenthal3:00

       [laughs]

   11. BGBen Gilbert3:00

       ... Jack Bogle. [laughs]

   12. DRDavid Rosenthal3:03

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

   13. BGBen Gilbert3:05

       And his story is wild since he didn't start Vanguard until he was 46 years old, and you might think it was started idealistically given the structure we're talking about, and it was sort of, but the story is equal parts idealistic as it is vindictive. But what is clear, w- we all owe Jack a giant thank you. Because of Vanguard's relentless cost-cutting and low fees, Vanguard has saved investors over $500 billion in fees and trading costs since its founding in 1975, and as a recent book, The Bogle Effect, argues, Vanguard's actions also forced the hand of the rest of the industry to cut their fees, totaling another $500 billion over time. So Jack Bogle and Vanguard are responsible for a trillion dollars of wealth transfer out of the pockets of Wall Street and the finance industry and into the pockets of individual investors in the form of fees that they didn't have to pay.

   14. DRDavid Rosenthal4:02

       Absolutely incredible.

   15. BGBen Gilbert4:03

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

   16. DRDavid Rosenthal4:06

       Oh yeah, of course

   17. BGBen Gilbert4:07

       ... and his comment to me was, "I view Bogle as an undercover philanthropist," and, uh, at a trillion or even half a trillion dollars, that would make him the greatest philanthropist of all time.

   18. DRDavid Rosenthal4:18

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

   19. BGBen Gilbert4:28

       Yeah, m- maybe.

   20. DRDavid Rosenthal4:29

       Maybe.

   21. BGBen Gilbert4:30

       Maybe, David.

   22. DRDavid Rosenthal4:30

       We'll see.

   23. BGBen Gilbert4:30

       We'll get into it. So listeners, you can join the email list at acquired.fm/email. That's where we're gonna send out our big takeaways from each episode, past episode corrections, exclusive behind-the-scenes photos that we find in our research, and it's where you'll get to vote on future episode topics. Plus, David writes a little hint each time about next episode's topic, so come play the guessing game with us at acquired.fm/email. Come talk about this episode with the whole community in the Slack after you listen. That's acquired.fm/slack. And before we dive in, we wanna thank our presenting partner, J.P. Morgan.

   24. DRDavid Rosenthal5:05

       Yes, and just like how we say every company has a story, every company's story is powered by payments, and J.P. Morgan is a part of so many of their journeys from seed to IPO and beyond.

   25. BGBen Gilbert5:16

       So with that, this show is not investment advice. David and I may, and definitely do this time-

   26. DRDavid Rosenthal5:21

       Yes

   27. BGBen Gilbert5:21

       ... have investments in the companies that we discuss, and this show is for informational and entertainment purposes only. David, where do we begin?

   28. DRDavid Rosenthal5:29

       Ooh.

3. 5:30 – 12:34

   Jack Bogle's Early Life & Family Ruin (1929)

   1. DRDavid Rosenthal5:30

      All right. Well, we start in May of 1929 on the eve of the great Wall Street crash of October 1929 that would throw America and the world into the Great Depression, wipe out millions of families' savings, ruin countless lives, forever scar an entire generation. We, we don't often talk about the Great Depression on Acquired. It was truly horrible. I mean, the financial crisis was quaint compared to this. 9,000 banks failed after the Wall Street crash of 1929. 9 million individual family savings accounts were wiped out. Almost 100,000 businesses failed. Unemployment reached 25%, and it truly did scarAn entire generation. I mean, I remember my grandparents still like into the 1990s doing absolutely insane things because of their experience during-

   2. BGBen Gilbert6:26

      [laughs]

   3. DRDavid Rosenthal6:26

      ... the Depression. My, my dad's mom never threw out a plastic bag in her entire life. When she died and we cleaned out her condo, it was like full [laughs] of tens of thousands of plastic bags.

   4. BGBen Gilbert6:38

      My grandpa was magazines and Tums containers.

   5. DRDavid Rosenthal6:41

      Ugh.

   6. BGBen Gilbert6:41

      We found just overflowing amounts in his basement. But the crazy thing about this, David, is back then only 1 to 2% of Americans owned stocks.

   7. DRDavid Rosenthal6:51

      Yes.

   8. BGBen Gilbert6:51

      So all of these things were second order effects from the crash, from the banks being deeply intertwined, a lot of leverage on all these equities. It wasn't like, "Oh, I own a bunch of stocks and those stocks crashed, so my life is over." It is the giant interrelated ripples and no safeguards in the economy at that time.

   9. DRDavid Rosenthal7:10

      Yep, exactly. It was the bank failures, it was the businesses going under, it was unemployment, it was everything. But on the eve of this great financial calamity, our hero, and a financial hero to many, is born. John Clifton Jack Bogle. And he's born here in May of 1929 as one of two twin boys, along with his twin David, and together with their older brother Bud, they form the Bogle boys, as they would be known throughout the rest of their youth and indeed the rest of their lives. Now, Jack and David here at the time of their birth are born into a prominent New Jersey family. Their great-grandfather had founded a mutual fire insurance company. Nice foreshadowing there with founding-

   10. BGBen Gilbert8:03

       Yeah, mutual

   11. DRDavid Rosenthal8:03

       ... a mutually owned company as Vanguard would go on to be. And their grandfather had then founded a company which would go on to become part of the American Can Company, which manufactured tin cans and was one of the largest companies in America for a long time. So it's like a, a prosperous, well-to-do, well-respected family that they are born into. But during their early childhood here in the Depression, the family loses everything. Their dad becomes an alcoholic, divorces their mom, abandons the family, runs off, basically ends up dying alone on a street corner years later. Their mother, as you can imagine, is equally scarred from all this, suffers from severe depression, mental health issues, isn't able to provide for the boys. And so the Bogle boys basically from the time they're kids, like before they're teenagers, they're kind of left to fend for themselves in the world. So all three of them work several concurrent jobs while they're growing up and going through school. I mean, we're talking like paper routes, food service jobs, restaurants, manual labor, like anything-

   12. BGBen Gilbert9:19

       Mm

   13. DRDavid Rosenthal9:19

       ... that they can do to support themselves and their mom. Jack would talk about how the best job that he ever had as a kid was a 3:00 AM paper route that he had because the world was quiet and peaceful in the middle of the night and he could escape the chaos and strife all around him. As he liked to say, it was a contrast to the rest of my life growing up.

   14. BGBen Gilbert9:41

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

   15. DRDavid Rosenthal9:43

       Yeah, yeah. I spoke to several members of the Bogle family for research, and I mean, this story is just incredible.

   16. BGBen Gilbert9:50

       Yeah, it's interesting because kinda through his last name and his great-grandfather and his grandfather, they had this sort of family network where they were in high society and he knew other well-to-do kids. But personally, their family's wealth and relationships were kinda in shambles.

   17. DRDavid Rosenthal10:11

       They're both insiders and outsiders at the same time. So as the boys get older and they enter high school, again, the family no longer has any money, but they do still have these connections and relatives and friends who have resources. And so they manage to get all of the boys scholarships to go to Blair Academy, one of the sort of prestigious East Coast boarding schools, for their junior and senior years of high school. And Jack especially just like flourishes at Blair. He becomes a fantastic student. He graduates cum laude. He gets voted both best student and most likely to succeed by his classmates-

   18. BGBen Gilbert10:53

       [laughs]

   19. DRDavid Rosenthal10:53

       ... at graduation. Obviously he's going places.

   20. BGBen Gilbert10:55

       Yep.

   21. DRDavid Rosenthal10:56

       Now, there's just one problem though as Jack and David are approaching graduation. The boys and the family still have no money even though they've gone to this, you know, prestigious boarding school that they're gonna graduate from, and they all need to keep working both to support themselves and, you know, their mother who's still alive. So the three of them get together and decide that, "Hey, because of our situation, only one of us should actually go to college, and the other two need to keep working and providing for the family." And because Jack has been so successful at Blair and is such a good student, he gets chosen as the one of the brothers that's gonna get to go to college. And Jack would say that like the weight of that decision just rested on him for the whole rest of his life. Like he alone was given this chance to do something bigger, and he felt like a tremendous obligation to make good to his family on this opportunity. And the other two never go to college.

   22. BGBen Gilbert11:53

       Huh.

   23. DRDavid Rosenthal11:53

       I mean, all three of them remain close, but David and Bud never go to college.

   24. BGBen Gilbert11:57

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

   25. DRDavid Rosenthal12:11

       Yes.

   26. BGBen Gilbert12:11

       The man gave thousands of speeches. He wrote memoirs. He wrote 12 books, investment advice, reflections back on Vanguard. He would go on TV and talk to journalists and speak in classes anytime anyone would have him. So there is no gaps in the historical record-

   27. DRDavid Rosenthal12:28

       Yeah [laughs]

   28. BGBen Gilbert12:28

       ... of, uh, Jack's life.

   29. DRDavid Rosenthal12:30

       Of Jack's memory, yeah. Jack loved nothing more than to give a speech. So

4. 12:34 – 27:20

   Princeton Thesis & Mutual Funds Emerge (1949-1951)

   1. DRDavid Rosenthal12:34

      after graduation from Blair, Jack goes on to college at Princeton, once again on a work scholarship. He's working in, like, the dining halls. He ends up working in the ticketing office for athletic events and football games. And while he's at Princeton, he becomes fascinated with economics after he takes a intro econ course in the fall of his sophomore year, during which he gets a D+ on the midterm [laughs] an inauspicious beginning to his finance career.

   2. BGBen Gilbert13:04

      Yeah.

   3. DRDavid Rosenthal13:04

      But he loves it. He works hard, and he finishes with a C- [laughs] in the class. Incredible for the, like, you know, the guy who would go on to revolutionize all of finance.

   4. BGBen Gilbert13:14

      Yep.

   5. DRDavid Rosenthal13:15

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

   6. BGBen Gilbert13:25

      Really?

   7. DRDavid Rosenthal13:25

      And... Yeah, yeah, really [laughs]

   8. BGBen Gilbert13:28

      Just w- every, every day I learn one more quirky little Princeton thing.

   9. DRDavid Rosenthal13:32

      I know, I know. I'm sorry, I'm sorry [laughs] I, of course, went to Princeton, so went through all this. And specifically I also went through the rite of passage that Jack has to go through, which is he needs to write a senior thesis. So one of the hallmarks of Princeton is that every single undergraduate must write a senior thesis which must be a unique piece of scholarly research in order to graduate. Uh, it's, it's like a mini version, a very, very mini version of what you would do as a PhD. Mine of course was on the marketing history of champagne, being a French [laughs] literature major.

   10. BGBen Gilbert14:08

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

   11. DRDavid Rosenthal14:13

       In- incredibly useful. There you go. David Rosenthal, Jack Bogle, you know, the connections abound.

   12. BGBen Gilbert14:17

       [laughs]

   13. DRDavid Rosenthal14:17

       [laughs]

   14. BGBen Gilbert14:18

       Okay, continue the story.

   15. DRDavid Rosenthal14:19

       Okay. So one afternoon Jack's casting about for what would become his thesis topic. He's in Firestone, the main library on campus, and he's reading the current issue of Fortune magazine, where he comes across an article deep in the back of the magazine on page 116 entitled Big Money in Boston. And it's about the growth of a relatively new industry of open-ended public funds, what today we would call mutual funds. That term wasn't even in use yet. And the article centers on this new firm that's leading this innovation, this new sector on Wall Street even though they're based in Boston, the Massachusetts Investors Trust Company, known and marketed as MIT [laughs] No actual connection to, you know, the real MIT, Massachusetts Institute of Technology, but, uh, this gives you a sense of the marketing to the public of these, uh, open-ended public funds.

   16. BGBen Gilbert15:25

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

   17. DRDavid Rosenthal15:34

       A hallmark of this industry, absolutely.

   18. BGBen Gilbert15:38

       The interesting thing about this, you might say, "Well, what do you mean mutual funds were new at this point in time?" Well, that comment that I made before the Great Depression in the '20s, only 1 or 2% of Americans owned stocks. By 1949 that was still only up to 4.2% of Americans, and what they were doing is they were working with a stockbroker to buy individual stocks. There really hadn't been any academic research around finance o- of any kind yet, let alone sorta investment and diversification and funds. So th- this notion of you are going to mutually pool your money with a bunch of other investors into a fund and buy a basket of stocks in that fund and hold it for an open-ended period of time, these public equities, that was brand new.

   19. DRDavid Rosenthal16:27

       Yes, and this is what Jack decides to write his thesis about, this new phenomenon. Now, there are actually two important things to talk about here that you started to allude to, Ben. O- one is this concept of a open-end fund versus closed-end funds. So this is the real pioneering thing that the Massachusetts Fund, we're not gonna call it MIT here [laughs] pioneered, which is there's no set fund size. It's elastic. So it's not like they have to write a prospectus and go out and say, "We are raising a $100 million fund," and get everybody in it, and then, you know, it gets to 100 million, and then they close it, and they manage it. Nope. Could be 1 million, could be 100 million, could be 5 trillion, as we will see approaching towards the end of the episode here.

   20. BGBen Gilbert17:17

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

   21. DRDavid Rosenthal17:21

       Yep. And that also means that investors in the fund can come and go as they please. There's no lockups. It doesn't have to be a set number. You, you buy into the fund, you hold it for a while, hopefully it appreciates, you can sell out of the fund. It's everything we know today about mutual funds, but until this concept of an open-ended fund was pioneered, you couldn't do this. Now, y- you mentioned if Americans held stocks at all at this point in time, they held individual stocks through brokers. These funds came to be distributed exactly the same way, through stockbrokers. You would call up your Merrill Lynch broker and instead of saying, "Hey, give me five shares of General Electric," you'd say, "Hey, give me a couple units of the Massachusetts Fund," et cetera, et cetera.

   22. BGBen Gilbert18:07

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

   23. DRDavid Rosenthal18:18

       Yep. And the brokers were getting paid [laughs] by this.

   24. BGBen Gilbert18:22

       Oh, yes.

   25. DRDavid Rosenthal18:23

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

   26. BGBen Gilbert18:41

       And it's a kickback out of the money that was just invested. So if you're investing $100 into one of these funds, well, actually only 91 and a half dollars are going in as the investment, and the rest is going right out as this effectively distribution fee.

   27. DRDavid Rosenthal18:58

       Yeah, to your friendly neighborhood stockbroker.

   28. BGBen Gilbert19:01

       Now, the funny thing is if, if we didn't have the context that we have today, which is I invest $100 and basically $100 goes into the thing that I'm investing in, or at least that's the way it kinda feels-

   29. DRDavid Rosenthal19:11

       This was normal

   30. BGBen Gilbert19:12

       ... paying for distribution is a very normal thing across every business and every sector. You have to incentivize people to push your product through marketing, through advertising, through sales commissions, through hiring a giant sales force yourself. These are often very large costs. I mean, for example, retailers often double the price of something when they sell it to the public, but the revenue here is not $100. The revenue to the fund is, like, $2 per year in fees. So paying $8 to the broker-dealers is a giant, egregious amount to sell the product. I mean, it's, like, four times the amount that the fund itself actually makes.
5. 27:20 – 30:38

   Joining Wellington Management (1951)

   1. DRDavid Rosenthal27:20

      yep. Now, as graduation approaches, Jack has a goal. He wants to go to work in this, you know, new fund management industry, and he manages to get his A grade senior thesis in front of another prestigious Princeton alum in Philadelphia named Walter Morgan, who had founded and was running another early open-ended public investment company in Philadelphia called Wellington Management. Walter Morgan hires Jack as his assistant right out of school, really takes a shine to him. Jack becomes sort of like a surrogate son to him. You know, Jack didn't really have a dad, and Walter didn't have kids. They become really, really close. Now, Wellington and its Wellington Fund was a super conservative and very highly regarded early mutual fund that pioneered the style that came to be known as balanced investing, i.e. a balance between stocks and bonds all within a single fund. So the sort of marketing slogan that Walter Morgan had used for the firm and the fund was, quote, "A complete investment program in one security." You can see how this would be attractive.

   2. BGBen Gilbert28:40

      Sounds great.

   3. DRDavid Rosenthal28:41

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

   4. BGBen Gilbert29:03

      This is what? Mid-'50s?

   5. DRDavid Rosenthal29:05

      Early '50s, 1951.

   6. BGBen Gilbert29:06

      Okay.

   7. DRDavid Rosenthal29:07

      So again, we talked about the economics for the management company. Like, I think Morgan and everybody at Wellington and Jack absolutely did have their customers and the fund holders in mind and wanted to do a great job for them, but they are making a lot of money. [laughs]

   8. BGBen Gilbert29:23

      It's market. It's industry standard.

   9. DRDavid Rosenthal29:25

      Yeah, based on the fees and that fund size, call it, like, $2 to $3 million a year flowing into a reasonably low headcount, high margin business here in, you know, 1951. [laughs]

   10. BGBen Gilbert29:37

       Yeah.

   11. DRDavid Rosenthal29:37

       Everybody's doing great. So Jack takes to Wellington and to Mr. Morgan like a pig in mud. He loves it. He rises through the ranks from Morgan's assistant to basically doing, like, every job in the company, and after a pretty short number of years, he emerges as the clear heir apparent to take over Wellington when Morgan retires. Morgan was 30 years older than Jack. And then ultimately in 1965, Morgan retires, steps back, and names Jack president of the firm at 35 years old. He's made it. [laughs]

   12. BGBen Gilbert30:16

       Yeah.

   13. DRDavid Rosenthal30:17

       He's Jack. He's come up in the world. He's gone from family ruin, essentially an orphan, to president of a highly profitable and respected enterprise at age 35. He's got it made.

   14. BGBen Gilbert30:29

       And importantly, a successful and pretty conservative mutual fund organization-

   15. DRDavid Rosenthal30:34

       Yep

   16. BGBen Gilbert30:34

       ... here with Wellington at this point in time.

   17. DRDavid Rosenthal30:36

       Yep, yep. Absolutely.

6. 30:38 – 40:36

   The Go-Go Years & Fidelity's Ascent (1958-1965)

   1. DRDavid Rosenthal30:38

      But unfortunately-That conservative, uh, mindset and pedigree was exactly the wrong thing for this moment here in the mid-1960s for Wellington and its young hotshot new president because Wall Street and the investing world is undergoing a sea change from the hyper-conservative mode that emerged after the Depression to what would come to be known as the Go-Go Years.

   2. BGBen Gilbert31:07

      [laughs]

   3. DRDavid Rosenthal31:07

      Pioneered by a small investment firm in Boston called Fidelity.

   4. BGBen Gilbert31:14

      Yes.

   5. DRDavid Rosenthal31:14

      But before we tell that story, now is a great time to thank our presenting partner, J.P. Morgan.

   6. BGBen Gilbert31:21

      Yes. And today, listeners, we are gonna talk about something that we mentioned last season on the Trader Joe's episode, supply chain finance.

   7. DRDavid Rosenthal31:29

      Yes. Think about when a buyer gets an invoice from their supplier. They're expected to pay quickly, but often can't or don't wanna tie up that cash. Wouldn't it be great if you could have a financing partner come in and fund that gap so the supplier isn't waiting up to 30, 60, or even 90 days to get paid? Well, that's exactly what a bank can do to bridge that time gap. The buyer gets to hold onto their cash longer, and suppliers get paid faster. True win-win.

   8. BGBen Gilbert31:55

      Yep, and J.P. Morgan specifically has been doing this kind of work for decades at the world's largest companies. So supply chain finance, receivables financing, dynamic discounting, all of this is built on top of the trillions in daily payment processing moving through the system.

   9. DRDavid Rosenthal32:11

      But the tooling and the teams around it have historically been fragmented. You've got treasury teams trying to maximize liquidity. You've got procurement wanting everything in one place, and IT stuck integrating all of it, not to mention the different portals, static reports, and all the manual setup.

   10. BGBen Gilbert32:27

       So this is where J.P. Morgan Payment's Working Capital Accelerator platform comes in. You've got one login and one unified view across payables and receivables financing, near real-time data, and it plugs into the ERPs that your team is already running.

   11. DRDavid Rosenthal32:42

       And when teams can see their full working capital position in real time, working capital stops being a cash management headache and starts becoming a lever that you can pull as a business. The best businesses treat it as part of their operating system, and this is the kind of platform that makes it easy.

   12. BGBen Gilbert32:56

       So listeners, if you wanna learn more about this new Working Capital Accelerator platform, go to jpmorgan.com/acquired, or contact your J.P. Morgan rep and tell them that Ben and David sent you. And if you wanna join us for some live interviews, we will be on the main stage with J.P. Morgan at the WeAreDevelopers World Congress in San Jose this September. Click the link in the show notes to learn more. All right, so David, the entrance of Fidelity into our story.

   13. DRDavid Rosenthal33:25

       Yes, and the Go-Go Years, which really were this, like, violent reaction to all the pent-up conservatism and prudence and austerity that had dominated Wall Street and finance for America and the world through the Depression and through World War II. The journalist John Brooks would write about it later in The New Yorker that the Go-Go era was, quote, "A method of operating in the stock market, a method that was, to be sure, free, fast, and lively" [laughs] "And certainly in some cases attended by the joy, merriment, and hubbub implied by the Go-Go term. The method was characterized by rapid in-and-out trading of huge blocks of stock with an eye to large profits taken very quickly." So in other words, the exact opposite of Wellington Management-

   14. BGBen Gilbert34:21

       [laughs]

   15. DRDavid Rosenthal34:21

       ... and Walter Morgan's approach.

   16. BGBen Gilbert34:23

       Which is tough because if you grew up as a leader in that previous era and you believed in that philosophy, but this is what all of your customers, the, the investors want, what do you do?

   17. DRDavid Rosenthal34:34

       Yep, and Fidelity was the one that pioneered all of this. So Fidelity goes all the way back to the early Boston mutual fund scene, kinda like same era as the Massachusetts Fund. They were always, though, like, a kinda small bit player until the legendary Edward Johnson, known as Mr. Johnson, who had previously been Fidelity's legal counsel, takes over the firm right before the end of World War II. At the time, Fidelity is managing just $3 million, and the previous owners, who I think are, you know, retiring, they literally give Fidelity the firm to Edward Johnson for free. [laughs]

   18. BGBen Gilbert35:13

       Wow. 'Cause they just don't think it has much value?

   19. DRDavid Rosenthal35:16

       No. I mean, it, it was part of that, like, we're here to serve the clients, that sorta ethos.

   20. BGBen Gilbert35:21

       Hmm.

   21. DRDavid Rosenthal35:21

       But also, it was a $3 million fund. Even with the high economics of how this fund industry works, you know, if the base that you're pulling a percentage fee off of is $3 million-

   22. BGBen Gilbert35:33

       Right

   23. DRDavid Rosenthal35:33

       ... you're just kinda limited in how much money-

   24. BGBen Gilbert35:35

       Right

   25. DRDavid Rosenthal35:35

       ... you're gonna make here. [laughs]

   26. BGBen Gilbert35:36

       Yep.

   27. DRDavid Rosenthal35:36

       But yeah, this is why, like, spoiler alert, obviously Fidelity is one of the largest fund complexes and financial companies in the world today. It's still owned by the Johnson family. It's estimated that their net worth is $40 or $50 billion thanks to this. [laughs] Oh, incredible.

   28. BGBen Gilbert35:53

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

   29. DRDavid Rosenthal35:55

       Right, right. So when Ed Johnson takes over Fidelity, he starts trying a whole bunch of stuff to grow it. You know, he comes from the legal industry. He's not from a Wall Street background per se. He's open to different styles. He's not sorta steeped in orthodoxy, shall we say. And in 1958, he creates a new fund within the group. I mean, this in and of itself was not unprecedented but quite rare. Most of the time there was just one fund within a group or a management company. So for a long time, Wellington Management Company just managed the Wellington Fund.

   30. BGBen Gilbert36:33

       Yep.
7. 40:36 – 46:04

   Jack Takes the Reins & The Ivest Merger (1965)

   1. BGBen Gilbert40:36

      Okay.

   2. DRDavid Rosenthal40:36

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

   3. BGBen Gilbert40:59

      Of course he does.

   4. DRDavid Rosenthal41:00

      Of course he does, right? Like, he's got the star fund, all the clients. He's the man about town, et cetera.

   5. BGBen Gilbert41:06

      Tail is oldest time.

   6. DRDavid Rosenthal41:07

      Yep. Johnson, of course, has other opinions. Uh, "No, this is my firm. This is my family business, and I'm planning to give it to my son, Ned Johnson, Edward Johnson III." So Tsai says, "Okay, fine. Buy me out of the equity that I've accumulated here in Fidelity in the management company through my performance, and, um, I'll go start my own fund." He does. He leaves. He starts a fund called The Manhattan Fund. In a absolutely wild you cannot make this stuff up, he would eventually take over the American Can Company [laughs] you know, that had been, like, co-founded by Jack's grandfather.

   7. BGBen Gilbert41:47

      Whoa.

   8. DRDavid Rosenthal41:48

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

   9. BGBen Gilbert42:02

      What?

   10. DRDavid Rosenthal42:03

       Insane. [laughs] Completely insane. [laughs]

   11. BGBen Gilbert42:06

       I had no idea. It's funny, when you were giving the history of the Can Company earlier, I was like, is it really relevant for listeners h- uh, the vehicle through which Bogle's grandfather built the family business?

   12. DRDavid Rosenthal42:21

       Yeah.

   13. BGBen Gilbert42:22

       And it turns out-

   14. DRDavid Rosenthal42:23

       That becomes Citigroup. [laughs]

   15. BGBen Gilbert42:25

       That's wild.

   16. DRDavid Rosenthal42:26

       Through Fidelity and Jamie Dimon and it... All, all of this stuff. You can't make this up.

   17. BGBen Gilbert42:32

       Wow.

   18. DRDavid Rosenthal42:32

       So this is the stew that's happening as Jack is taking over, and pretty quickly he decides that the best course of action for him as the new leader of Wellington is to take the well, if you can't beat them, join them approach. Or more specifically, have them join you.So he goes out and he starts looking for Go-Go style fund managers to merge with and absorb into Wellington, and transform Wellington into what Fidelity has done.

   19. BGBen Gilbert43:03

       And I think first he was trying to hire people like this, but he couldn't convince anyone to just join as an employee. He, he sorta realized, "Oh, I'm gonna have to buy one of their firms."

   20. DRDavid Rosenthal43:12

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

   21. BGBen Gilbert43:24

       Yep.

   22. DRDavid Rosenthal43:24

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

   23. BGBen Gilbert43:44

       Mm

   24. DRDavid Rosenthal43:44

       ... and Ned Johnson. And so they've raised a new fund called Ivest, investing in the Go-Go style. They're young hotshots. They have $17 million under management in their nascent Go-Go fund. Wellington at this point has $2 billion [laughs] under management.

   25. BGBen Gilbert44:06

       Which is huge. That's giant market share-

   26. DRDavid Rosenthal44:08

       Yes

   27. BGBen Gilbert44:09

       ... even though they're-

   28. DRDavid Rosenthal44:10

       Declining rapidly [laughs]

   29. BGBen Gilbert44:11

       ... investing in the old style of investments.

   30. DRDavid Rosenthal44:13

       Yes. But back to the business model of the management companies where you're getting paid fees based on a percentage of assets under management, like the revenue and fee streams flowing into Wellington even though they're declining are-
8. 46:04 – 53:28

   The Go-Go Bust & Jack's Crisis of Conscience (1970-1973)

   1. DRDavid Rosenthal46:04

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

   2. BGBen Gilbert46:29

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

   3. DRDavid Rosenthal46:47

      Yeah, I mean, interest rates went to 21% by the end of this.

   4. BGBen Gilbert46:52

      Oof.

   5. DRDavid Rosenthal46:52

      [laughs] I mean, the world basically fell apart a couple years ago when interest rates went to what? Like five. You know-

   6. BGBen Gilbert46:58

      Yeah

   7. DRDavid Rosenthal46:58

      ... can you imagine?

   8. BGBen Gilbert47:00

      So what was the good years of the Go-Go time, and then when did it fall apart?

   9. DRDavid Rosenthal47:04

      Through the '60s and then probably like 1970, 1971 it starts falling apart, and then once the oil crises start hitting in '72, '73, '74, Go-Go just completely falls apart. So the Ivest Fund, they ported over the Ivest Fund itself into Wellington. It had continued to perform during the Go-Go years. It gets a drawdown of 65% in one year, and they ultimately shutter the fund, like they close it down.

   10. BGBen Gilbert47:33

       They closed down the Ivest Fund entirely?

   11. DRDavid Rosenthal47:34

       They closed down the Ivest Fund.

   12. BGBen Gilbert47:35

       Oh, wow.

   13. DRDavid Rosenthal47:36

       Yeah, yeah.

   14. BGBen Gilbert47:36

       But hadn't they already shifted the Wellington Fund's style-

   15. DRDavid Rosenthal47:41

       Yes

   16. BGBen Gilbert47:41

       ... to look a lot more like Ivest's?

   17. DRDavid Rosenthal47:43

       Oh, yes.

   18. BGBen Gilbert47:44

       So Wellington was suffering too, right? The, the fund.

   19. DRDavid Rosenthal47:46

       Wellington was suffering too. I mean, really, like Wellington is just a, a battered ship [laughs] taking on water on all sides at this point because it had been out of favor during the Go-Go years 'cause it was too conservative and too balanced.

   20. BGBen Gilbert47:59

       It was underperforming the market because of that.

   21. DRDavid Rosenthal48:01

       Underperforming the market. Then it transformed basically into a Go-Go fund.

   22. BGBen Gilbert48:07

       Took on a lot more risk.

   23. DRDavid Rosenthal48:08

       A lot more risk. Then that falls off a cliff. By 1973, the assets of the Wellington Fund have fallen all the way from $2 billion at the time of the merger down to $480 million. So over three quarters of the assets in the fund, and thus three quarters of the revenue to the management company, poof, up in smoke.

   24. BGBen Gilbert48:31

       Now, all of that wasn't because of the assets decreasing in value. A lot of that was redemptions-

   25. DRDavid Rosenthal48:36

       Yes

   26. BGBen Gilbert48:36

       ... where investors are taking their money-

   27. DRDavid Rosenthal48:37

       Client withdrawals, yeah

   28. BGBen Gilbert48:37

       ... and going elsewhere, but doesn't matter to the management company. For, for them, AUM is AUM.

   29. DRDavid Rosenthal48:41

       And this is... Somebody made this point to me in research. Management companies of investment firms have phenomenal operating leverage, as we talked about earlier.

   30. BGBen Gilbert48:51

       Hmm.
9. 53:28 – 1:13:03

   Jack is Fired: The Genesis of Vanguard (1974)

   1. DRDavid Rosenthal53:28

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

   2. BGBen Gilbert53:50

      And this is a few years after his original proposal for mutualization, for making the, the fund self-owning. There is this multi-year drawn out sort of struggle between them where they just don't see eye to eye on anything. They have completely different philosophies, and it gets so contentious, you know, they, they ask Jack to quit. He says, "I refuse."

   3. DRDavid Rosenthal54:11

      Yep.

   4. BGBen Gilbert54:11

      You know, he, he even writes a many, many, many page m- memo, speech, gives it to the whole board of directors, uh, espousing how much he refuses, and then they formally actually do fire him.

   5. DRDavid Rosenthal54:20

      Yeah, yeah. This is an extreme event. [laughs]

   6. BGBen Gilbert54:23

      Yes.

   7. DRDavid Rosenthal54:23

      An extreme event.

   8. BGBen Gilbert54:25

      And from Jack's perspective, he partnered with these guys. They came in. It was a fox in the henhouse, and they forced him out of his own company.

   9. DRDavid Rosenthal54:31

      Yep.

   10. BGBen Gilbert54:31

       And that is sort of how he is viewing it.

   11. DRDavid Rosenthal54:33

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

   12. BGBen Gilbert54:36

       We had public shareholders to look after.

   13. DRDavid Rosenthal54:38

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

   14. BGBen Gilbert54:47

       But-

   15. DRDavid Rosenthal54:48

       Now, here's the thing. [laughs]

   16. BGBen Gilbert54:51

       [laughs]

   17. DRDavid Rosenthal54:51

       Wellington Management Company and the actual Wellington Fund, and at this point in time funds, they had several funds-Are technically separate legal entities. So Jack was CEO of Wellington Management Company. He was also the chairman of each of the individual funds, which collectively together had their own separate board of directors for the funds. There was one board of directors that represented all the funds, and Jack is chairman of that board of directors.

   18. BGBen Gilbert55:18

       Now, up until this point in time in the history of American financial organizations, that's a footnote.

   19. DRDavid Rosenthal55:26

       Right.

   20. BGBen Gilbert55:26

       That doesn't matter.

   21. DRDavid Rosenthal55:27

       That's like a legal technicality.

   22. BGBen Gilbert55:28

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

   23. DRDavid Rosenthal55:35

       Yep.

   24. BGBen Gilbert55:35

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

   25. DRDavid Rosenthal55:40

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

   26. BGBen Gilbert55:43

       Yes. Yes.

   27. DRDavid Rosenthal55:44

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

   28. BGBen Gilbert55:54

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

   29. DRDavid Rosenthal56:34

       Right, or do something different, et cetera. Nobody had ever tested this idea before though. [laughs]

   30. BGBen Gilbert56:39

       Yes. Yes.
10. 1:13:03 – 1:35:02

    The Journal Article That Inspired It All (1974-1976)

    1. BGBen Gilbert1:13:03

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

    2. DRDavid Rosenthal1:13:10

       Yes, the Journal of Portfolio Management, where Nobel Prize-winning American economist Paul Samuelson had written that fall in 1974 that-He had been studying market returns and active fund manager returns in this new mutual fund industry, and he had found no actual evidence that any fund managers could systematically outperform the market. And in the conclusion of the paper, he argues that, well, there's an obvious, uh, opportunity here. Somebody should come along and offer a fund that, quote, "Apes the whole market, requires no load, and keeps commissions, turnover, and management fees to the feasible minimum," AKA an index fund.

    3. BGBen Gilbert1:14:06

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

    4. DRDavid Rosenthal1:14:26

       Yeah, no, he was thinking about distribution to retail, like, in that paper by talking about no load. But you are touching on something. This idea of an index fund that would passively track the stock market was not totally new. A couple people in institutional circles had had the same or similar realization in the years leading up to this, that this could be an interesting idea. And in fact, the whole idea of having an index or indices in the first place really is the precursor to this idea. Like, people wanted some way to measure the entire market. I mean, that's what the Standard & Poor's 500 is. That's what the Dow Jones Industrial Average is. These things go all the way back to the 1800s. Like, newspapers wanted a way to report on the movement of the market.

    5. BGBen Gilbert1:15:21

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

    6. DRDavid Rosenthal1:15:33

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

    7. BGBen Gilbert1:15:36

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

    8. DRDavid Rosenthal1:16:02

       Right. Right. It's uniquely counter to the sort of whole American way of being [laughs]

    9. BGBen Gilbert1:16:08

       [laughs] Right

    10. DRDavid Rosenthal1:16:08

        ... an aspiration of America.

    11. BGBen Gilbert1:16:10

        American exceptionalism.

    12. DRDavid Rosenthal1:16:12

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

    13. BGBen Gilbert1:16:15

        [laughs] That's funny.

    14. DRDavid Rosenthal1:16:16

        [laughs] Anyway, so yeah, a couple people had tried to make this idea work on the institutional side before. Most prominently, the pension management division of Wells Fargo, uh, so, like, the division of Wells Fargo that would manage and administer pensions for large corporations, they had actually created an index fund for the pension fund of the Samsonite Luggage Corporation a few years earlier.

    15. BGBen Gilbert1:16:47

        Amazing.

    16. DRDavid Rosenthal1:16:48

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

    17. BGBen Gilbert1:17:10

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

    18. DRDavid Rosenthal1:17:30

        Yeah.

    19. BGBen Gilbert1:17:31

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

    20. DRDavid Rosenthal1:17:52

        Right

    21. BGBen Gilbert1:17:52

        ... to sort of m- minimum efficient or, or minimum representative S&P 500.

    22. DRDavid Rosenthal1:17:57

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

    23. BGBen Gilbert1:18:14

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

    24. DRDavid Rosenthal1:18:25

        He's got a loophole, yep.

    25. BGBen Gilbert1:18:26

        Where he can say, "I am not actively taking Vanguard and having it offer investment advice in any way here. But what we do wanna do is we wanna create this new fund that will require no investment advisory services, that will purely be this index of the S&P 500, and we can run it under Vanguard, and it's within our mandate."

    26. DRDavid Rosenthal1:18:50

        Yeah, we don't need to involve Wellington.

    27. BGBen Gilbert1:18:52

        His board agrees.

    28. DRDavid Rosenthal1:18:53

        Yeah.

    29. BGBen Gilbert1:18:54

        This is sort of the acid test. He goes and he says, "What do you think? Is this what you've given me permission for?" And they come back and say, "Yes."

    30. DRDavid Rosenthal1:18:59

        Yes. As Jack puts it in his memoir, you know, kinda like, uh, you know, uh, rendering a guilty verdict in a legal trial, he and early Vanguard there had both the opportunity to commit the crime, or in this case, you know [laughs]
11. 1:35:02 – 1:44:32

    Building the Fund & Early Struggles (1976-1981)

    1. DRDavid Rosenthal1:35:02

       So it takes a few years for this machinery to kick in for the scale economies to get to a point where it really can and for the investing public to wake up to this idea. In the meantime, they start with $11 million of fund capital, and then they still experience customer withdrawals and cash outflows. Like, the stock market starts to rise, so that sorta keeps the fund alive, but they're not getting new cash in, and they, they can't 'cause they can't do their own distribution. It gets so bad that the next year in late 1977, they have to take the extreme drastic measure of merging another small legacy Wellington fund called the Exeter Fund into the index fund just to keep it alive and get enough capital into the fund to keep operating it.

    2. BGBen Gilbert1:35:59

       Which is crazy to me that they figured out how to sort of acquire this other fund and then just merge its assets into their index fund, and all the investors were like, "Cool, sounds good."

    3. DRDavid Rosenthal1:36:08

       Yeah.

    4. BGBen Gilbert1:36:08

       "I guess we're, we're index fund holders now."

    5. DRDavid Rosenthal1:36:09

       Yeah. I, I, I didn't see anything in Jack's memoirs about the, uh, governance issues [laughs] associated with that. Somehow they get it done though, and that fund when they do this merger had $58 million of assets. You know, again, compared to the $11 million and bleeding out rapidly in the index fund, I mean, that's like six times the size of the index fund. So yeah, r- really the seed capital that you should think about in the Vanguard 500 Index Fund, and again, also its sister fund, the Total Stock Market Index, you know, biggest collectively fund in the world today, comes not from the IPO of clients into the index fund itself initially, but the majority of the initial capital base comes from this other [laughs]

    6. BGBen Gilbert1:37:01

       Exeter

    7. DRDavid Rosenthal1:37:01

       ... former Wellington actively managed fund that just gets folded in.

    8. BGBen Gilbert1:37:05

       Yep.

    9. DRDavid Rosenthal1:37:06

       Totally, totally wild. So after this emergency transplant to save the index fund here, finally in 1981 into 1982, Jack and Vanguard do win the right to take over distribution of the index funds, and the way they do it is through, you know, another loophole, this one kinda even more tenuous. Jack argues, "Oh, we're not taking over distribution.We're just eliminating distribution [laughs]

    10. BGBen Gilbert1:37:36

        [laughs]

    11. DRDavid Rosenthal1:37:36

        We're gonna no longer go to stockbrokers and have them charge sales loads to go into our index funds. We're not gonna allow that at all, and thus we are eliminating distribution. Again, conveniently ignoring the fact that now they gotta employ a lot of people within Vanguard that are gonna market and sell and advertise [laughs] the funds.

    12. BGBen Gilbert1:37:54

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

    13. DRDavid Rosenthal1:38:17

        Right, right

    14. BGBen Gilbert1:38:17

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

    15. DRDavid Rosenthal1:38:26

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

    16. BGBen Gilbert1:38:29

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

    17. DRDavid Rosenthal1:38:36

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

    18. BGBen Gilbert1:38:58

        Yep.

    19. DRDavid Rosenthal1:38:59

        And the initial IPO target had been $150 million, so they're still below that six years in.

    20. BGBen Gilbert1:39:05

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

    21. DRDavid Rosenthal1:39:14

        Yep, yep. But the slow burn does start, and towards the end of the decade in the 1980s, by 1988, the fund reaches $1 billion in assets, and it would obviously grow from there.

    22. BGBen Gilbert1:39:26

        So that's six years to reach 100 million-

    23. DRDavid Rosenthal1:39:28

        Yep, and then another six

    24. BGBen Gilbert1:39:30

        ... and then another six years to get to a billion.

    25. DRDavid Rosenthal1:39:31

        Yep, that's right. Now, you might be wondering, that's not a lot of capital, and Vanguard's fees are super low. How is the firm staying afloat [laughs]

    26. BGBen Gilbert1:39:43

        [laughs]

    27. DRDavid Rosenthal1:39:44

        ... during this period? Well, it turns out that Jack's first revolution of the low-cost, low-fee proposition of Vanguard, it works pretty well in equities. There are other financial markets out there where the low-cost strategy works even better, specifically money markets and fixed income, AKA bonds, the debt market. In equities, you can have real outperformance. There is uncapped upside to investing in equities. This is the dream that active management sells. Jerry Seib or Peter Lynch or Warren Buffett or, you know, the greatest investors of all time, we can generate annual returns in the 20s, 30s, even higher percentages like Rentech in our episode there. If you're investing in the debt markets or the money markets, there is a ceiling to your performance. It is the coupons of government bonds or muni bonds or, you know, treasuries in the case of money markets.

    28. BGBen Gilbert1:40:46

        Yep.

    29. DRDavid Rosenthal1:40:47

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

    30. BGBen Gilbert1:40:54

        Yep. The lowest cost provider will win in those markets.
12. 1:44:32 – 1:49:06

    The Rise of Indexing & Vanguard's Growth (1988-1992)

    1. BGBen Gilbert1:44:32

       [laughs]

    2. DRDavid Rosenthal1:44:34

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

    3. BGBen Gilbert1:44:54

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

    4. DRDavid Rosenthal1:45:16

       Yeah, yeah. I mean, the scale economies are getting shared.

    5. BGBen Gilbert1:45:19

       Yep.

    6. DRDavid Rosenthal1:45:19

       Everybody around the table is eating good. So after assets crossed the billion-dollar threshold in 1988, around 1992-ish, they hit $10 billion. So you know, 10X in four or five years, strong acceleration. Also in 1992, Vanguard launches the sister fund, the Total Stock Market Index Fund. They now have more than enough capital base that they can own every single stock. Why stop at the S&P 500? Own everything, all US stocks.

    7. BGBen Gilbert1:45:49

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

    8. DRDavid Rosenthal1:46:03

       Yes, yes

    9. BGBen Gilbert1:46:03

       ... to, uh, index the entire market.

    10. DRDavid Rosenthal1:46:05

        [laughs] Quite convenient. You know, look, they're not not business people at Vanguard. [laughs]

    11. BGBen Gilbert1:46:12

        Right. Oh, they're great business people.

    12. DRDavid Rosenthal1:46:13

        They're great business people.

    13. BGBen Gilbert1:46:14

        It's just on your behalf-

    14. DRDavid Rosenthal1:46:15

        Yes

    15. BGBen Gilbert1:46:15

        ... instead of on shareholders' behalf.

    16. DRDavid Rosenthal1:46:17

        They're working for you. And so by the mid to late '90s, the two sister funds together are approaching like $100 billion. Like, the Vanguard colossus is rolling.

    17. BGBen Gilbert1:46:31

        Yep.

    18. DRDavid Rosenthal1:46:31

        Things are going great. And then in 1999, you're not gonna believe this, Jack manages to get himself fired again. [laughs]

    19. BGBen Gilbert1:46:44

        Unbelievably.

    20. DRDavid Rosenthal1:46:45

        Unbelievably.

    21. BGBen Gilbert1:46:46

        Yes. But listeners, before we tell you that story, now is a great time to thank one of our favorite partners, Vercel. So for 20 years, cloud infrastructure was built around a pretty simple mental model. Humans send requests, servers respond, and then they scale according to the traffic. But what happens in the era of AI agents when the software itself is sending the requests and making decisions, not just responding to them?

    22. DRDavid Rosenthal1:47:15

        That's the shift Vercel is building for. The cloud wasn't designed for agents, but Vercel is. They've purpose-built agentic infrastructure where agents are first-class users alongside human developers. It's not just an old deployment platform with AI features bolted on. It's a ground-up rethink, tools, frameworks, infrastructure all engineered to work together.

    23. BGBen Gilbert1:47:36

        So one particularly noteworthy element of this is their AI gateway. Just like content delivery networks accelerated and secured the web, Vercel is doing that for agents. It's a single endpoint that routes across every major AI model with automatic failovers. So when a provider goes down, and as you know, they do-

    24. DRDavid Rosenthal1:47:55

        Oh, yes

    25. BGBen Gilbert1:47:56

        ... your product keeps humming. So since launch, it's served 60 trillion tokens across 180,000 unique teams. Vercel is a new type of delivery network for tokens.

    26. DRDavid Rosenthal1:48:07

        A good example of what this unlocks is Poke, who are building personal super intelligence that hundreds of thousands of people use. Before switching to Vercel, they were maintaining their own AI infrastructure, everything from routing and retries to cost tracking by users. After switching, their retry rate dropped 20x, so virtually every message now succeeds on the first try.

    27. BGBen Gilbert1:48:29

        AI Gateway is just one tool in a complete AI stack built with, for, and optimized by agents, and that's what Vercel is really about, making sure that the most ambitious teams like OpenAI, Stripe, and Polymarket have the infrastructure to match. Because when code is increasingly autonomous, the question is no longer can you ship, it's what you choose to ship. Learn more at vercel.com/acquired. That's V-E-R-C-E-L.com/acquired, and just tell them that Ben and David sent you. All right, so David, there is something that you have not been telling us about Jack's life over the years.

13. 1:49:06 – 2:00:06

    Jack's Health & The CEO Transition (1995-1996)

    1. DRDavid Rosenthal1:49:06

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

    2. BGBen Gilbert1:49:42

       And what Jack decided to do with this was work.At the age of 36, he got a pacemaker, and he consulted a doctor, and that doctor said, "You really shouldn't count on living past 40."

    3. DRDavid Rosenthal1:49:57

       Oof.

    4. BGBen Gilbert1:49:59

       Then he's- went and talked to a second doctor, and that doctor said, "Why don't you get a place out in Cape Cod and stop working and enjoy the last few years you have left? Don't work anymore." He, uh, wrote at one point, "If I had taken the second doctor's advice, the first doctor would've been right."

    5. DRDavid Rosenthal1:50:15

       Yeah. Yeah. Man, this is totally Jack's unique personality. The way he approaches this part of his life is, "I'm not gonna change a thing. I'm just gonna live every day the same way I would've lived it if I didn't have this disease."

    6. BGBen Gilbert1:50:32

       Yep.

    7. DRDavid Rosenthal1:50:32

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

    8. BGBen Gilbert1:50:53

       He would bring defibrillators to squash matches.

    9. DRDavid Rosenthal1:50:57

       Oh, this is the best. Yeah. [laughs]

    10. BGBen Gilbert1:50:58

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

    11. DRDavid Rosenthal1:51:06

        Yeah, yeah. And he would use this to, like, intimidate his opponents while playing.

    12. BGBen Gilbert1:51:10

        [laughs] Yes.

    13. DRDavid Rosenthal1:51:10

        He'd be like, "Make sure I got my defibrillator here. I could drop dead at any moment."

    14. BGBen Gilbert1:51:15

        [laughs]

    15. DRDavid Rosenthal1:51:15

        "All right, let's go." You know? [laughs]

    16. BGBen Gilbert1:51:16

        That's amazing.

    17. DRDavid Rosenthal1:51:18

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

    18. BGBen Gilbert1:51:40

        Ugh.

    19. DRDavid Rosenthal1:51:40

        And so in early 1995, his doctors say, "Hey, we know your approach to life, but we can't put this off any longer. Despite your relatively advanced age for this" He's 66 at the time. "You need to have a heart transplant if you wanna have any hope of actually, you know, surviving for a meaningful period of time going forward." Jack and the family are brought around. They agree to this. So this, of course, impacts Vanguard. So in May of 1995, the company holds a press conference where Jack announces that he's stepping down as CEO to prepare for his heart transplant, and the company announces that John Brennan, Jack's former assistant who had joined the company in 1982, will be taking over as the next CEO. Brennan had been Vanguard's CFO for many years leading up to this. And in late 1995, Jack Bogle enters the hospital on a waiting list for a heart transplant. His heart has continued to degenerate. He needs to be hooked up to an IV feeding him drugs to keep his heart beating constantly. He waits 128 days in the hospital-

    20. BGBen Gilbert1:52:57

        Wow

    21. DRDavid Rosenthal1:52:57

        ... waiting for a heart transplant, and he keeps working the whole time. He hasn't officially transitioned [laughs] out of the CEO role and given it to Brennan yet. Maybe a little bit of foreshadowing here. [laughs] On January 31st, 1996, Jack officially steps down as CEO and Brennan takes over after more than three months of operating as CEO out of his hospital room.

    22. BGBen Gilbert1:53:21

        Unreal.

    23. DRDavid Rosenthal1:53:22

        Really, Jack is one of a kind here. And then in February, finally they get the call there's a heart available for Jack, and he has the heart transplant at the end of February. So the day of the surgery arrives-

    24. BGBen Gilbert1:53:38

        And at this point Vanguard is essentially planning for this to be the end of his career. Like, uh, heart transplants today are obviously a giant deal. This is even 30 years ago, medical science is still working on this procedure. The assumption is he's, he's done at this point, even if he survives.

    25. DRDavid Rosenthal1:53:57

        And so the company moves on. Brennan becomes CEO and starts working on a whole bunch of new initiatives, and Jack does make a miraculous full [laughs] recovery.

    26. BGBen Gilbert1:54:08

        He would live for another 23 years?

    27. DRDavid Rosenthal1:54:10

        He would live for another 23 years on his transplanted heart, and within a couple weeks, weeks after his heart transplant, he's back on the squash court [laughs]

    28. BGBen Gilbert1:54:21

        Amazing

    29. DRDavid Rosenthal1:54:22

        ... playing squash and intimidating his opponents. Like, gosh, if you thought it was scary to play against Jack when he might have a heart attack-

    30. BGBen Gilbert1:54:28

        [laughs]
14. 2:00:06 – 2:24:18

    The ETF Debate & Jack's Second Firing (1999)

    1. DRDavid Rosenthal2:00:06

       So all of this comes to an ultimate head and blowup in 1999 over exchange-traded funds.

    2. BGBen Gilbert2:00:17

       Yep.

    3. DRDavid Rosenthal2:00:17

       The most important new thing in the industry.

    4. BGBen Gilbert2:00:21

       I am a Vanguard customer, and I think 100% of the way that I am a customer is through their ETFs, not through their mutual fund products, and the mutual funds are everything we've talked about up until this point.

    5. DRDavid Rosenthal2:00:33

       Yep, yep. So Jack had a real point of view on ETFs, and in fact, he had the opportunity to launch ETFs. So back in 1992, a man named Nathan Most had come to see Jack at Vanguard. Nathan was the VP of new products at the American Stock Exchange, and he had had the idea to create exchange-traded funds as a new product, a new trading vehicle that would allow effectively shares, quote-unquote, of mutual funds to trade on stock markets in the same way as individual stocks, a stock exchange-traded mutual fund, an ETF. And he thinks, of course, naturally the very best fund partner to launch this idea with would be the newly, you know, kinda crowned jewel of the mutual fund industry, the Vanguard 500 Index Fund.

    6. BGBen Gilbert2:01:34

       And you might think Bogle's gonna love this. Like, w- what is an ETF? It's an even easier way to buy into something that looks basically like an index fund, and if you're trying to go direct to your customers the way that Vanguard does-

    7. DRDavid Rosenthal2:01:48

       Yeah

    8. BGBen Gilbert2:01:48

       ... without the sales loads and everything, then great, they should be able to buy it right on an exchange.

    9. DRDavid Rosenthal2:01:53

       Easier distribution available to more of the investing public. What's not to love? I mean, that was, that was Nathan's view. He was a real idealist about this.

    10. BGBen Gilbert2:02:02

        Yep.

    11. DRDavid Rosenthal2:02:02

        "Hey, we're gonna vastly expand the distribution reach-"And the target audience for mutual funds and allow anybody who can place a trade on a brokerage to buy into a mutual fund, and he was absolutely right.

    12. BGBen Gilbert2:02:16

        And there's some other structural benefits too. There's the idea that you're not affected by other people in the fund. So if someone else decides to sell a bunch of their shares, I don't end up getting a, a big tax hit from it.

    13. DRDavid Rosenthal2:02:28

        Yep.

    14. BGBen Gilbert2:02:29

        Then of course there's the you actually do know the price that you are getting because since it's traded on an exchange, when I decide to make an investment in that fund, I buy it right here, right now at the market price. I'm not waiting till the end of the day to figure out what the mutual fund is gonna be priced at. So ETFs have lots of great things about them.

    15. DRDavid Rosenthal2:02:47

        Lots of great attributes. Jack hates this idea. [laughs]

    16. BGBen Gilbert2:02:51

        [laughs]

    17. DRDavid Rosenthal2:02:52

        Absolutely hates it, and he basically tells Nathan Most to get lost.

    18. BGBen Gilbert2:02:57

        And why does he hate it? He hates it because it's exchange traded.

    19. DRDavid Rosenthal2:03:01

        Yeah.

    20. BGBen Gilbert2:03:01

        He thinks, well, uh, uh, that for that very reason that I love it, that you know the exact price that you're buying it, it means you could trade in and out of it all day. You could do the worst possible sin of investing, which is incur a bunch of trading costs, speculate on it, not be a longterm owner, and just try to do intraday arbitrage.

    21. DRDavid Rosenthal2:03:21

        Yeah.

    22. BGBen Gilbert2:03:21

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

    23. DRDavid Rosenthal2:03:37

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

    24. BGBen Gilbert2:03:53

        'Cause at this point in time, Robinhood didn't exist yet. Fees hadn't dropped to zero on-

    25. DRDavid Rosenthal2:03:57

        Yeah

    26. BGBen Gilbert2:03:57

        ... transactions, so you actually were paying very meaningful amounts. Uh, uh, for... In recent memory it was single dollar, but it used to be like 50 plus dollars to place a trade on a exchange.

    27. DRDavid Rosenthal2:04:08

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

    28. BGBen Gilbert2:04:26

        Yep.

    29. DRDavid Rosenthal2:04:27

        So Jack hates that. He also hates that because these funds will now be traded on an exchange, it means that you can short sell them, and he thinks this-

    30. BGBen Gilbert2:04:36

        Mm
15. 2:24:18 – 2:30:46

    The 2008 Financial Crisis: Vanguard's Moment

    1. BGBen Gilbert2:24:18

       All right, David, bring us to 2008 and the great financial crisis.

    2. DRDavid Rosenthal2:24:23

       Yep. Indexing and Vanguard's big moment in the sun. It's kind of funny. During the financial crisis, passive index funds don't magically avoid getting whacked. Of course, they move exactly the same as the market and have huge losses in 2008, 2009, et cetera. What's more important though is what happens to everyone else. So, you know, like Michael Burry and The Big Short aside, almost the entire professional active money management ecosystem gets crushed just as bad or worse. Like mutual funds, hedge funds, private equity, alternatives, you name it. Carnage, devastation. No one is safe.

    3. BGBen Gilbert2:25:10

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

    4. DRDavid Rosenthal2:25:28

       And this is what, you know, not just creates like the spiraling problems that lead to all the losses, but what permanently impairs or ruptures faith in the entire smart people on Wall Street ecosystem. The promise had always been, especially as passive and indexing had been rising over the last two decades, like, "Yeah, yeah, yeah. That's great, but like we're smart. When the bad times come, we're gonna outperform. We're gonna protect you."

    5. BGBen Gilbert2:25:58

       You're saying this is active.

    6. DRDavid Rosenthal2:25:59

       This is the premise of active money management and all-

    7. BGBen Gilbert2:26:02

       Right

    8. DRDavid Rosenthal2:26:02

       ... the smart people on Wall Street.

    9. BGBen Gilbert2:26:04

       Right.

    10. DRDavid Rosenthal2:26:04

        "We know what we're doing."

    11. BGBen Gilbert2:26:06

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

    12. DRDavid Rosenthal2:26:14

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

    13. BGBen Gilbert2:26:29

        For the vast majority.

    14. DRDavid Rosenthal2:26:30

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

    15. BGBen Gilbert2:27:00

        Yep.

    16. DRDavid Rosenthal2:27:01

        Yeah. And then related to what I was saying there, even more than the underperformance, you know, some might say non-performance of the active management industry during the crisis, the crisis just completely bursts whatever halo or status or bubble had emerged around Wall Street and fund managers for most of the investing public. A lot of people's views of Wall Street during the financial crisis changes from, "Hey, these are smart people who I should probably invest my money with," to, "These people are charlatans at best and crooks at worst." You've got the bailouts, you've got the Occupy Wall Street movement, you've got Lehman Brothers, you've got all this stuff. Like public sentiment turns against Wall Street and active management in not just a major way, but arguably a permanent way. And who is there as the hero of Main Street, the little guys, but Malvern, Pennsylvania-based Jack Bogle and Vanguard [laughs] which makes no profits, has no fees above costs, has no corporate owners, and has always been the champion of the average American. I mean, you could not draw up a better marketing event for Vanguard than the financial crisis.

    17. BGBen Gilbert2:28:29

        Yeah. And I think for a lot of people, th- they just decided to hang it up on thinking too hard about their finances. They, they thought, "Look, I thought I was clever for trusting this person's cool strategy. I thought they were clever." Turns out none of us were clever enough, and the easy button where nobody's making any promises about how much better they're gonna do... I mean, Vanguard makes you no promises. It's, "Hey, you're gonna get the market." If you're interested in the market, it has historically performed well because it essentially captures the productivity growth and innovation of the world's most successful economy. In fact, since they started existing nine- in c- 1975, it's done extraordinarily well, something like 11.6% compound annual growth rate if you reinvest dividends. That's a delightful average. [laughs] If that's average, I'll take average.

    18. DRDavid Rosenthal2:29:20

        Right, right, right.

    19. BGBen Gilbert2:29:20

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

    20. DRDavid Rosenthal2:29:30

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

    21. BGBen Gilbert2:29:37

        Right.

    22. DRDavid Rosenthal2:29:38

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

    23. BGBen Gilbert2:29:44

        Yes. Did you see... You know what's interesting is Vanguard actually raised their fees in 2008.

    24. DRDavid Rosenthal2:29:49

        Hmm, I didn't see that.

    25. BGBen Gilbert2:29:51

        I think structurally they, they sort of need to raise them when there's contractions in the market.

    26. DRDavid Rosenthal2:29:57

        Mm.

    27. BGBen Gilbert2:29:58

        First of all, you should know Vanguard did not lay anyone off during the financial crisis, which is kind of unbelievable.

    28. DRDavid Rosenthal2:30:02

        Yeah. Wow.

    29. BGBen Gilbert2:30:03

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

    30. DRDavid Rosenthal2:30:11

        Right, right.
16. 2:30:46 – 2:41:28

    The Warren Buffet Bet (2008-2019)

    1. DRDavid Rosenthal2:30:46

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

    2. BGBen Gilbert2:31:37

       It's kinda crazy, right? You get to pick any five hedge funds you want.

    3. DRDavid Rosenthal2:31:41

       Yep.

    4. BGBen Gilbert2:31:41

       And you can go pick the five best.

    5. DRDavid Rosenthal2:31:43

       You can pick the five tiger cubs, [laughs] you know, whatever you want.

    6. BGBen Gilbert2:31:46

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

    7. DRDavid Rosenthal2:31:49

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

    8. BGBen Gilbert2:31:53

       I know, it's cool he named it.

    9. DRDavid Rosenthal2:31:54

       It's really cool [laughs] that he named it.

    10. BGBen Gilbert2:31:55

        It's g- good for Vanguard. [laughs]

    11. DRDavid Rosenthal2:31:56

        So this also just tells you kinda everything you need to know. Only one person took him up on the bet. Do you know... Uh, y- you do know who it was.

    12. BGBen Gilbert2:32:06

        Of course I know who this is.

    13. DRDavid Rosenthal2:32:07

        Of course you know who it was, our friend-

    14. BGBen Gilbert2:32:08

        Ted, I'm sure you are listening [laughs]

    15. DRDavid Rosenthal2:32:10

        ... Friend of Acquired, Ted Seides, host today of the Capital Allocators podcast. The only hedge fund industry manager that took Warren up on his bet and accepted the challenge. And as Ted would be the first to tell you-He got whooped. [laughs]

    16. BGBen Gilbert2:32:27

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

    17. DRDavid Rosenthal2:32:39

        Yeah, yeah, yeah

    18. BGBen Gilbert2:32:39

        ... and the hedge funds w- in aggregate were, like, 30 to 40%.

    19. DRDavid Rosenthal2:32:43

        I've got the numbers right here. Yeah, it is not even close. So the Vanguard 500 Index Fund over the 10-year period blows away Ted's selected hedge fund portfolio, so much so that Ted ends up conceding early to Warren. [laughs]

    20. BGBen Gilbert2:32:57

        Wow.

    21. DRDavid Rosenthal2:32:57

        Yeah. Like, a, a year or two before it's over, he's, Ted's like, "I, I, I... Warren, you won."

    22. BGBen Gilbert2:33:03

        What charity am I making the-

    23. DRDavid Rosenthal2:33:04

        Yep

    24. BGBen Gilbert2:33:04

        ... the check out to?

    25. DRDavid Rosenthal2:33:05

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

    26. BGBen Gilbert2:33:23

        Over 10 years.

    27. DRDavid Rosenthal2:33:23

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

    28. BGBen Gilbert2:33:33

        I wonder... We, we gotta ask Ted if it was an option to pick the Rentech Medallion Fund.

    29. DRDavid Rosenthal2:33:38

        [laughs] Oh, that's a good question. So Ted, it'd be fun to ask him. He actually chose five hedge fund of funds to get a total basket of about 100 different hedge funds in the portfolio.

    30. BGBen Gilbert2:33:52

        Oh.
17. 2:41:28 – 2:52:04

    Fidelity & BlackRock's Resurgence (Post-2008)

    1. DRDavid Rosenthal2:41:28

       [laughs] So our story does not end there. I used a minute ago Fidelity and BlackRock and their founders and controlling families for reference. That was not an accident. In the years kinda leading up to Jack's death and, and then especially really in the seven plus years since his death, Fidelity and BlackRock have just-

    2. BGBen Gilbert2:41:49

       They've done exceptionally well

    3. DRDavid Rosenthal2:41:50

       ... really made a comeback.

    4. BGBen Gilbert2:41:52

       Yeah. BlackRock is the largest AUM asset manager in the world-

    5. DRDavid Rosenthal2:41:56

       Yep

    6. BGBen Gilbert2:41:56

       ... with a more international and institutional client base than Vanguard's US individual approach.

    7. DRDavid Rosenthal2:42:02

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

    8. BGBen Gilbert2:42:17

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

    9. DRDavid Rosenthal2:42:32

       [laughs] I think that's a fair characterization. Yeah. Yeah, yeah.

    10. BGBen Gilbert2:42:34

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

    11. DRDavid Rosenthal2:42:44

        Yep. You and a lot of people.

    12. BGBen Gilbert2:42:45

        Which I think that's the common.

    13. DRDavid Rosenthal2:42:46

        Yep, yep. Yeah. Well, okay, so let's take each of them in turn. And may- maybe let's start with Fidelity, and then we'll do BlackRock. So as we said throughout the story, Fidelity has always been very happy to experiment and invest in lots and lots of different things, and they have hit on two like real home run platforms in recent years, both of which are weak spots for Vanguard. So one is corporate 401 [k] plans, as you foreshadowed earlier, Ben.

    14. BGBen Gilbert2:43:17

        Which is why I am a Fidelity customer. They got me when I started my first job at Microsoft, and I got my 401 [k] there, and my employee stock plan also came through there. So then I opened my first Fidelity brokerage account, and that is how they've retained me as a customer for 15 years.

    15. DRDavid Rosenthal2:43:35

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

    16. BGBen Gilbert2:44:11

        Some of which are actually even cheaper.

    17. DRDavid Rosenthal2:44:12

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

    18. BGBen Gilbert2:44:39

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

    19. DRDavid Rosenthal2:45:02

        Yeah

    20. BGBen Gilbert2:45:02

        ... primarily Fidelity.

    21. DRDavid Rosenthal2:45:04

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

    22. BGBen Gilbert2:45:14

        Well, it's, it's fine 'cause no one makes any money on the funds, so Fidelity doesn't have a huge incentive to say, "You should come buy my two basis point fund over here instead of-"

    23. DRDavid Rosenthal2:45:23

        Right, right

    24. BGBen Gilbert2:45:23

        "... your three basis point fund over at Vanguard."

    25. DRDavid Rosenthal2:45:25

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

    26. BGBen Gilbert2:46:01

        Right

    27. DRDavid Rosenthal2:46:01

        "... that Vanguard won't do."

    28. BGBen Gilbert2:46:03

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

    29. DRDavid Rosenthal2:46:21

        Yep. [laughs]

    30. BGBen Gilbert2:46:21

        The pushback is I don't think there's a difference between three basis points and zero basis points. If we go back to my example earlier of you throw $100,000 in and the market compounds at 7% and your fee is 0.03%, that is a difference at the end of the day of 1.48 million and 1.497 million. So not a huge difference even 40 years later of compounding. I don't think people are gonna switch over that.
18. 2:52:04 – 3:04:43

    Salim Ramji: Vanguard's First Outside CEO

    1. DRDavid Rosenthal2:52:04

       it back. I don't exactly know the answer, but what I will tell you to bring us to today here is that 24 months ago, in May of 2024, Vanguard made another big CEO announcement that they were bringing on the first outside CEO in the firm's entire 50-year history, Salim Ramji, from BlackRock-

    2. BGBen Gilbert2:52:28

       [laughs]

    3. DRDavid Rosenthal2:52:28

       ... where he was, until that point in time, head of the iShares division.

    4. BGBen Gilbert2:52:35

       [laughs]

    5. DRDavid Rosenthal2:52:36

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

    6. BGBen Gilbert2:52:45

       And, and to itemize those, it's what? Customer service, technology.

    7. DRDavid Rosenthal2:52:50

       And this situation where they've found themselves that because of ETFs, their competitors, or quote-unquote competitors, can access their funds easily and in sort of a open garden on their own platforms where they will then profit from the customer relationships with those fund holders.

    8. BGBen Gilbert2:53:11

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

    9. DRDavid Rosenthal2:53:28

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

    10. BGBen Gilbert2:53:36

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

    11. DRDavid Rosenthal2:53:44

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

    12. BGBen Gilbert2:53:48

        Well, I think it's some of these things we've been talking about. It's expand the advisory business. In addition to that, expand fixed income, which we haven't talked about in a while. Try and expand into retirement, where obviously Fidelity has really knocked it out of the park. He's talked on podcasts about making deeper technology investments and improving the client experience. There is this interesting question, which is they, they haven't really had any new innovations in a while, call it a decade, that have been really meaningful to the business and that they've continued to scale. They did buy a direct indexing platform called Just Invest, but the afterwards haven't done that much with it. Similarly, the personal advisor services grew really fast at launch and in the, in the years afterwards. But since COVID, I don't think-

    13. DRDavid Rosenthal2:54:33

        They have been mostly flat.

    14. BGBen Gilbert2:54:35

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

    15. DRDavid Rosenthal2:54:45

        Yeah. Yeah. That was surprising.

    16. BGBen Gilbert2:54:48

        So kind of before talking about why they're doing it, it is worth calling out this crazy thing, which is for public equities and for bond funds, prices have seen massive compression thanks to Vanguard, where you're seeing they used to charge 1.5, 2% 50, 60 years ago, and now you are seeing the Vanguard effect. You know, seven basis points at Vanguard and 40 basis points for the rest of the industry. Venture and private equity is two and 20, or often even higher. I've seen-

    17. DRDavid Rosenthal2:55:20

        Right

    18. BGBen Gilbert2:55:20

        ... plenty of higher fee structures than that also.

    19. DRDavid Rosenthal2:55:23

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

    20. BGBen Gilbert2:55:32

        Right

    21. DRDavid Rosenthal2:55:32

        ... in the form of carry.

    22. BGBen Gilbert2:55:34

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

    23. DRDavid Rosenthal2:55:46

        Yes. [laughs] I used to think about this a lot, and now I think the answer is just quite simple. Venture capital and private equity is an access business.

    24. BGBen Gilbert2:55:55

        Yeah.

    25. DRDavid Rosenthal2:55:55

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

    26. BGBen Gilbert2:56:08

        In private markets, the assets have to pick you back.

    27. DRDavid Rosenthal2:56:11

        Yes.

    28. BGBen Gilbert2:56:11

        But in the public markets, they do not.

    29. DRDavid Rosenthal2:56:13

        Yes.

    30. BGBen Gilbert2:56:13

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

Episode duration: 3:48:05