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

Introduction to Vanguard and Jack Bogle

• Vanguard is the largest provider of index funds in the United States, managing over $10 trillion in passive index funds, and is the largest shareholder of most US corporations, owning an average of almost 10% of every company in the S&P 500 10s.
• The company has a unique corporate structure, being owned exclusively by its customers, with no outside shareholders, and its CEO doesn't have any equity except for what they have from investing in the funds, making it a different kind of capitalism 4m6s.
• Vanguard's products serve the interests of its customers and no other shareholders, and the man behind this idea is Jack Bogle, a visionary and iconoclast who started Vanguard at the age of 46 6m42s.
• Jack Bogle's story is a mix of idealism and vindictiveness, but he has had a significant impact, with Vanguard saving investors over $500 billion in fees and trading costs since its founding in 1975, and forcing the rest of the industry to cut their fees, totaling another $500 billion 8m24s.
• As a result, Jack Bogle and Vanguard are responsible for a trillion dollars of wealth transfer from Wall Street and the finance industry to individual investors, making him potentially the greatest philanthropist of all time 10m30s.

Vanguard's Unique Corporate Structure

• Vanguard's actions have allowed millions of people to send their kids to college, buy homes, and retire comfortably, and its impact is still being felt today, with the company continuing to be a major player in the finance industry 2m6s.
• The story of John Clifton "Jack" Bogle, a financial hero, begins in May 1929, on the eve of the Great Wall Street crash of 1929, which would lead to the Great Depression, a period that saw 9,000 banks fail, 9 million individual family savings accounts wiped out, and almost 100,000 businesses fail, with unemployment reaching 25% 2m6s.
• The Great Depression had a profound impact on the people who lived through it, with many developing habits that lasted a lifetime, such as hoarding items, due to the scarcity and uncertainty of the time, and only 1 to 2% of Americans owned stocks, so the effects of the crash were largely felt through the interconnectedness of the economy 4m21s.
• Jack Bogle was born in May 1929, along with his twin brother David, to a prominent New Jersey family, with a great-grandfather who had founded a mutual fire insurance company and a grandfather who had founded a company that would become part of the American Can Company 6m15s.
• Despite being born into a prosperous family, the Bogle boys' childhood was marked by hardship, as their father became an alcoholic, divorced their mother, and abandoned the family, leading to financial struggles and the boys having to work multiple jobs from a young age to support themselves and their mother 8m30s.

Jack Bogle's Early Life and Education

• The Bogle boys, including Jack, David, and their older brother Bud, formed a close-knit unit, working together to survive and thrive in the face of adversity, with their experiences during the Great Depression likely shaping their future perspectives on finance and economics 10m4s.
• Jack Bogle had a 3:00 a.m. paper route as a kid, which he considered the best job he ever had because it allowed him to escape the chaos and strife around him in a quiet and peaceful world 10s.
• The Bogle family had a complex social status, being both insiders and outsiders, with connections to high society through their last name and relatives, but personally struggling with wealth and relationships 1m42s.
• Jack and his brothers managed to get scholarships to attend Blair Academy, a prestigious East Coast boarding school, where Jack excelled as a student, graduating cum laude and being voted best student and most likely to succeed by his classmates 2m6s.
• Despite their improved education, the Bogle family still struggled financially, leading Jack and his brothers to decide that only one of them should attend college, with Jack being chosen due to his academic success, and his brothers, David and Bud, never attending college 3m30s.
• Jack felt a tremendous obligation to make the most of this opportunity and make his family proud, with his brothers remaining close but not pursuing higher education 4m20s.
• Jack went on to attend Princeton University on a work scholarship, where he worked various jobs, including in the dining halls and ticketing office, and became fascinated with economics after taking an introductory course, despite initially struggling with a D+ on the midterm 5m40s.
• Jack decided to concentrate in economics at Princeton and worked hard to improve his understanding of the subject, eventually deciding to write a senior thesis as part of his academic requirements 7m10s.
• At Princeton, every undergraduate must write a senior thesis, which is a unique piece of scholarly research, and Jack Bogle's thesis was on the marketing history of champagne, but he later found a topic that interested him more, which was the growth of open-ended public funds, now known as mutual funds, after reading an article in Fortune magazine 10s.

The Rise of Mutual Funds and Jack Bogle's Thesis

• The article that inspired Jack Bogle's thesis topic was about the Massachusetts Investors Trust Company, which was leading the innovation of open-ended public funds, and this company was marketed as MIT, although it had no connection to the Massachusetts Institute of Technology 2m6s.
• Mutual funds were a new concept at that time, and only 1 or 2% of Americans owned stocks before the Great Depression, and by 1949, that number had only increased to 4.2%, and people were buying individual stocks through stock brokers, with no academic research on finance or investment 4m2s.
• Jack Bogle decided to write his thesis about this new phenomenon of mutual funds, and one of the pioneering things about the Massachusetts fund was the concept of an open-end fund, which is elastic and has no set fund size, allowing investors to come and go as they please, with no lockups 6m15s.
• The open-ended fund concept allowed investors to buy into the fund, hold it for a while, and then sell out of the fund, and this concept was new at that time, and these funds were distributed through stock brokers, who were getting paid for selling the funds on behalf of the fund management company 8m30s.
• The marketing and distribution of these funds relied on the broker-dealer network, and the brokers were getting paid for selling the funds, which was a key aspect of the mutual fund industry, and this concept of open-ended funds paved the way for the modern mutual fund industry 10m40s.
• The fund managers would take a sales load of 7.5 to 8.5% of every dollar invested by clients, which would then be kicked back to the broker as a kickback, resulting in only $91.5 of a $100 investment actually going into the fund 10s.
• Paying for distribution is a normal practice across businesses, but in the case of these funds, paying $8 to the broker dealers is a significant amount compared to the $2 per year in fees that the fund itself makes 2m6s.
• The new open-ended mutual funds, such as the Massachusetts fund, were not set up for the benefit of their customers, but rather to generate profits for the investment managers who created and ran them 4m6s.
• The investment managers created a separate management company that had a contractual relationship with the fund, allowing them to get paid a percentage of assets as revenue, resulting in a high-margin business 4m6s.
• The management company was responsible for making investment decisions, controlling marketing and distribution, and managing the back office and administration of the funds, including tasks such as register of fund holders, investments, and tax compliance 6m6s.
• The management company got paid a fixed percentage of the assets under management, which created conflicts of interest, as they were incentivized to grow the fund as large as possible and skim fees off the top, rather than focusing on investment performance 8m6s.
• The structure of the funds at this point in time did not include performance incentives, such as carried interest or a promote, which would later become common in the industry 10m6s.

Jack Bogle's Career at Wellington Management

• In the 1950s, a $100 million fund would have a management fee of around 1.5% of assets annually, which translates to $1.5 million per year, or approximately $20 million adjusted for inflation today, for a public equities fund 10s.
• Some mutual funds in this era charged up to 2% in management fees, and in exchange for picking stocks, putting them in a basket, and administrating the fund, they would charge investors these high fees, even though they often outsourced administration and distribution to stock brokers 42s.
• In addition to management fees, investors also had to contend with an 8.5% sales load, which would reduce their principal by that amount on the first day of investment, as well as high transaction fees for buying and selling stocks within the fund 1m30s.
• Jack, a young man from a destitute family, was attracted to the investment industry due to its potential for high earnings, and he wrote his senior thesis on the economic role of the investment company, graduating Magna Cum Laude from the economics department in 1951 2m6s.
• Jack's thesis recognized that the fees charged to fund clients would be a significant drag on performance, and he suggested that minimizing fees would be the best way to maximize returns to fund holders, also noting that the aggregate average of all funds would likely perform in line with the market 3m20s.
• Jack's idea that reducing fees is key to beating the market was ahead of its time, as professional fund managers were a small minority of the market in 1951, and it was possible for skilled managers to outperform the market, which may have justified the high fees they charged 5m30s.
• Jack's goal is to work in the fund management industry after graduation, and he manages to get his senior thesis in front of Walter Morgan, the founder of Wellington Management, who hires him as his assistant, and they become very close, with Walter Morgan taking a shine to Jack like a surrogate son 10s.
• Wellington Management and its Wellington fund are a super conservative and highly regarded early mutual fund that pioneered the style of balanced investing, with a marketing slogan of "a complete investment program in one security", and the fund has attracted $150 million in assets by the time Jack joins 42s.
• The Wellington fund is smaller than the Massachusetts fund, which is the largest fund in the world at that point in time with just under $500 million in assets, but Wellington is still among the top 10 funds in the industry and is highly respected 2m6s.
• Jack rises through the ranks at Wellington, doing every job in the company, and after a short number of years, he emerges as the clear heir to take over Wellington when Walter Morgan retires, and in 1965, Morgan retires and names Jack president of the firm at 35 years old 4m30s.
• Jack has come up in the world, going from family ruin and essentially an orphan to president of a highly profitable and respected enterprise at a young age, but the conservative mindset and pedigree of Wellington may be the wrong thing for the company at that moment in time 6m15s.
• The investing world is undergoing a sea change from the hyperconservative mode that emerged after the depression to what would come to be known as the go-go years, pioneered by a small investment firm in Boston called Fidelity, which may pose a challenge for Wellington and its new president, Jack 8m30s.
• The working capital accelerator platform by JP Morgan Payments provides a unified view of payables and receivables financing, near real-time data, and integration with existing ERPs, making it easier for businesses to manage their working capital 10s.

The Go-Go Years and Fidelity's Rise

• The platform allows teams to see their full working capital position in real-time, turning working capital into a lever that can be used to drive business growth, rather than a cash management headache 42s.
• The go-go years on Wall Street were characterized by rapid in-and-out trading of huge blocks of stock with an eye to large profits taken quickly, which was the opposite of Wellington Management and Walter Morgan's approach 2m6s.
• Fidelity, a small player in the Boston mutual fund scene, was taken over by Edward Johnson, also known as Mr. Johnson, who had previously been the company's legal counsel, and he received the firm for free as the previous owners were retiring 2m6s.
• Under Edward Johnson's leadership, Fidelity started to grow, and in 1958, he created a new fund called the Fidelity Capital Fund, a growth fund that would be managed by a young portfolio manager named Jerry Tsai 4m6s.
• Edward Johnson's leadership and innovative approaches, such as creating new funds and hiring new portfolio managers, helped transform Fidelity into one of the largest fund complexes and financial companies in the world, with the Johnson family's net worth estimated to be around $40-50 billion 4m6s.
• Jerry Sai ignores Wall Street conventions and achieves significant success with his fund by taking big concentrated positions in blue chip companies, trading in and out of stocks, and making quick profits, which allows him to move the market and book profits 10s.
• Sai's success leads to him becoming a quasi-celebrity, with CEOs of big companies wanting to get to know him due to his power to move their stocks, and he becomes a giant shareholder in companies as he attracts capital to his funds 42s.
• The Fidelity Capital Fund grows rapidly, reaching $340 million by 1965, which is the backdrop for Walter Morgan's decision to hand over Wellington to Jack Bogle, as Morgan has a crisis of confidence and feels he cannot operate successfully in the new go-go era 2m6s.
• Morgan gives Bogle the mandate to do whatever it takes to fix the firm, which is seen as an opportunity for Bogle to completely change the firm's strategy and compete in the new era 2m6s.
• The balanced fund style, which combines stocks and bonds, declines in popularity from 40% of the entire fund market in 1955 to 17% by 1965 and less than 1% by 1975, as investors transition to funds that focus on stocks and aim for high returns 2m6s.
• Investors are looking for funds that can book quick profits, similar to what Fidelity and Jerry Sai are doing, and are willing to take risks to achieve high returns, which leads to a shift in the investment landscape 2m6s.
• Jerry Sai's success and celebrity status lead him to think he should take over Fidelity, but Edward Johnson III has other plans, intending to give the firm to his son, Ned Johnson, which sets the stage for a potential conflict 2m6s.

Jack Bogle's Merger and the Shift in Strategy

• Jack Bogle took over Wellington and decided to merge with go-go style fund managers to transform the company, after realizing he couldn't hire people like Jerry Sai, who had left Fidelity due to not receiving a significant equity piece, and instead decided to buy one of their firms 10s.
• Jack found a small firm in Boston, founded by four young partners, Thorndike, Doran, Payne, and Lewis, who had just raised a new fund called Ive Vest, investing in the go-go style, with $17 million under management, and offered them 40% of the equity in the management company 2m6s.
• The merger between Wellington, with $2 billion under management, and Ive Vest was seen as a major coup for the Boston group, with some observers feeling that Wellington paid too high a price for management personnel, but Jack believed it was necessary to bring in new talent and transform the company 4m10s.
• The merger was a big deal, with Institutional Investor magazine running a cover story titled "The Whiz Kids Take Over at Wellington", featuring an illustration of Jack handing off footballs to the four Ive Vest partners, but the go-go style eventually led to a bubble bursting in the 1970s 6m20s.
• Jerry Sai, who had left Fidelity, went on to start his own fund, the Manhattan Fund, and eventually took over the American Can Company, transforming it into Primamer and selling it to Sandy Weill and Jamie Diamond, which became part of the building block of Citigroup 42s.

The 1970s Economic Crisis and Its Impact on Vanguard

• The 1970s in the US was a bad time economically, with the oil crises and stagflation hitting, the stock market declining 50%, and interest rates going up to 21%, which was a severe situation that few people can understand the magnitude of 10s.
• The go-go years, which were good years for the market, started to fall apart in 1970-1971 and completely collapsed when the oil crisis hit in 1972-1974, affecting the Ivest fund, which had a 65% drawdown in one year and was ultimately shut down 2m6s.
• The Wellington fund, which had been underperforming the market during the go-go years due to its conservative and balanced style, suffered too after it transformed into a more aggressive fund, and by 1973, its assets had fallen from $2 billion to $480 million, resulting in a significant loss of revenue for the management company 2m6s.
• The decline in assets was not only due to the decrease in value but also due to redemptions, where investors withdrew their money, which affected the management company's revenue, as assets under management (AUM) is a key factor in determining their income 2m6s.
• Management companies of investment firms have high operating leverage, which means they can grow their profits quickly as their funds under management increase, but this also works in the opposite direction, and when assets under management shrink, their profits decrease rapidly, similar to a software business 2m6s.
• Jack, one of the partners, started to develop a crisis of conscience as the losses piled up and clients withdrew their money, wondering if it was right to continue taking fees from clients while their capital was being "incinerated", which has been referred to as his "Jerry Maguire moment" 2m6s.
• Jack Bogle had a moment of realization where he proposed the idea of mutualizing the firm's funds, dissolving the management company, and eliminating excess profits to solely serve the fund holders, operating at cost and reducing fees, which was a radical idea at the time 10s.
• The management company had public shareholders after Mr. Morgan retired and took the company public, which meant that Jack needed to get the approval of not only his partners but also the public shareholders to implement his idea 2m6s.

Jack Bogle's Crisis of Conscience and Mutualization

• Jack's proposal was not driven by external pressure, as no clients were complaining, the government was not intervening, and there were no protest groups, but rather by his own moral conviction that it was the right thing to do 2m6s.
• The proposal did not go over well with the partnership, and after Jack presented it at the Wellington Management Company board meeting on January 23rd, 1974, the four Ivest partners banded together, rallied public shareholders, and fired Jack as CEO of Wellington Management Company 4m6s.
• The firing was the culmination of a multi-year struggle between Jack and the Ivest partners, who had fundamentally different philosophies, and despite Jack's refusal to quit, he was eventually formally fired 4m6s.
• Jack viewed his firing as being forced out of his own company by his partners, while the Ivest partners saw him as having lost his direction and being a threat to the interests of the public shareholders 4m6s.
• Although Jack was fired as CEO of Wellington Management Company, he remained the chairman of the individual funds, which were separate legal entities with their own board of directors 6m6s.
• Jack Bogle is the chairman of the board of directors that represents all the funds, a position that holds significant power as the funds have the right to select their own investment manager, and this technicality is about to be tested 10s.
• The funds traditionally have the power to pick whether or not they want to stay with their current management company or find a new one, but nobody had ever tested this idea before, and Jack is about to change that 2m6s.
• After being fired as CEO of the management company, Jack calls a special meeting of the board of directors of the funds and proposes that they sever the management company relationship with Wellington Management Company and mutualize all the management and operations of the funds 2m6s.

The Formation of Vanguard and the Mutualization Process

• Jack's proposal involves hiring the funds' own staff and running the operations directly within the fund with no separate external management company or fees, effectively slashing margins to zero and forgoing all profits 2m6s.
• The fund board of directors reacts with shock to Jack's proposal, questioning his motivations and wondering if he is being vindictive, but they also acknowledge that his proposal is in the best interest of the fund holders 4m6s.
• The board decides to take a pause and recess to figure out what to do, as they are theoretically only looking after the investors in the funds and not the shareholders of the management company, allowing them to consider Jack's proposal without conflict of interest 6m6s.
• Jack was tasked with preparing a feasibility study to explore available options for the fund and its board, which led to him creating a 250-page report filled with data and research, presenting a well-formed pitch to the board the next month in February 10s.
• The report questioned the traditional structure of the mutual fund industry and proposed that the funds should seek greater control over their own destiny, with Jack's answer to this question being yes, driven by both idealism and a desire to save his career 2m6s.
• Jack's proposal was motivated by his belief that a mutual company would not provide him with a personal fortune, but it would offer him a chance to resume his career, and he had a telling quote in his memoir that spoke to his mindset at the time, stating that mutualization of the fund was his idea 4m30s.
• The fund board ultimately voted in favor of Jack's proposal, but only to a small extent, allowing him to remain chairman of the funds and endorsing a limited degree of separation from Wellington Management Company 6m20s.
• The board authorized Jack to form a new subsidiary company to take over fund administration, including tasks such as tax, accounting, and legal services, but not investment management or marketing and distribution, which would remain with Wellington Management Company 8m10s.
• Jack was explicitly prohibited from offering investment advisory services to the funds, and he logged this as a win, despite it being a limited victory, and he decided to take this opportunity to move forward with his career 10m40s.
• At the time, Jack was considered medium wealthy, having had a 20-year career in finance with pretty fat profits, and he was likely to have made around $5 million, but he was not a big spender, and he was motivated to take this opportunity to get back on track with his career 12m30s.
• Jack's goal was to build a broad-based firm, taking over everything and cutting Wellington out, and he took on his new leadership role with enthusiasm, which marked the beginning of a significant transformation 10s.

Industry Reactions and the Naming of Vanguard

• The reaction to the changes at Wellington was severe, with Forbes magazine running a piece about the infighting, and other industry players, such as John Love Lace Jr. of Capital Group, expressing concerns that mutualizing the Wellington fund would destroy the entire industry 2m6s.
• John Love Lace Jr. warned Jack that if he mutualized the Wellington fund, it would have a devastating impact on the industry, as it would provide proof that the business could be run at a lower cost, potentially disrupting the business models of other companies like Capital Group 4m42s.
• The competitors' fears were likely justified, as the creation of Vanguard would ultimately lead to a shift in the industry, making it more difficult for companies to charge high fees, but it also ended up being beneficial for everyone in the long run 6m15s.
• Jack's new subsidiary company needed a name, and he was inspired by an antiques dealer who offered him prints of British naval ships from the Duke of Wellington era, leading him to choose the name "Vanguard" on the spot, which represented total victory and annihilation of the other side 8m10s.
• The name "Vanguard" was chosen for its qualities of being steadfast, trustworthy, and memorable, but also because it represented a leader and pioneer, and in September 1974, the Vanguard Group filed for incorporation, commencing operations and taking over the back office of the Wellington fund 10m20s.
• The introduction of a new investment concept was initially met with great fear and skepticism by industry professionals, including John Love Lace at Capital Group and Forbes, who believed it would destroy the industry, but it ultimately did not have a significant impact because it did not mutualize 10s.
• The concept that would have a significant bearing on the industry is if investment management companies were to reduce their fees and performance compensation to at-cost, but that was not what happened, and instead, a second revolution was needed to bring attention to the new investment product 1m42s.

The Concept of Index Funds and Their Introduction

• The second revolution was the introduction of the index fund, which was a new type of investment product that would change the nature of the investment industry, and it was not barred because it did not involve offering investment advice 2m6s.
• Before the story of the index fund is told, it is noted that companies like Service Now are helping large enterprises manage their AI agents and maintain customer trust by providing visibility and security to their systems, employees, and permissions 3m30s.
• The creation of the first commercially available index fund for retail investor consumers was not highly anticipated, but it would ultimately have a massive impact on the world, and today, people are concerned that index and passive funds have too much of the market 5m30s.
• The concept of the index fund was inspired by a 1974 journal article by Nobel Prize-winning American economist Paul Samuelson, who found that there was no evidence that fund managers could systematically outperform the market, and he argued that there was an opportunity for a new type of investment product 8m30s.
• The concept of an index fund that passively tracks the stock market was not entirely new, as a couple of people in institutional circles had similar ideas in the years leading up to its proposal, and the idea of having an index or indices in the first place dates back to the 1800s with the creation of the Dow Jones Industrial Average and the S&P 500 10s.
• The idea of using an index as a benchmark to measure the market's performance eventually led to the realization that it could also be a great investment product, offering a way to own the average market performance, but this concept was not immediately appealing as it seemed counterintuitive to settle for average returns 2m6s.
• The pension management division of Wells Fargo had previously attempted to create an index fund for the Samsonite Luggage Corporation's pension fund, but it failed due to the complexity and high costs of tracking the S&P 500 index, which required significant software and automation 4m42s.
• Creating an index fund that continuously tracks the S&P 500 index is a deceptively hard problem, as it requires tracking the movements of 500 companies day-to-day, and buying a representative set of the entire S&P 500 can be expensive, with a minimum investment of around $3.5 million 6m15s.
• Jack and Vanguard emerged at a unique moment when computing and software were becoming capable of handling the complexities of creating an index fund, and Jack carefully read the documents and communicated with his board of directors to realize he had a loophole to make his model work 8m30s.
• Jack Bogle created a new fund that would require no investment advisory services, purely an index of the S&P 500, which could be run under Vanguard and was within their mandate, and his board agreed to this proposal 10s.
• The idea for this index fund was motivated by the opportunity to create a low-cost investment option that could beat many active managers, as Bogle realized that owning the S&P index without fees could beat half of the active managers and 78% of them over a full decade 2m6s.
• By owning the average of the market at significantly lower fees than other managers, the index fund could achieve top-tier performance, as the lower fees would result in a higher return for investors 2m6s.
• The difference in fees can have a significant impact on investment returns over time, with a 1% fee resulting in a 15% reduction in returns, and this can add up to a substantial amount of money over the course of several decades, such as an extra $500,000 in a retirement account 4m30s.
• Jack Bogle's focus on low fees, rather than a dislike of active management, was the driving force behind his advocacy for index funds, and he later referred to this concept as the "cost matters hypothesis" 8m40s.

The Launch and Growth of Vanguard's Index Fund

• The impact of Bogle's idea has been profound, with millions of people benefiting from the lower fees and higher returns of index funds, and his legacy continues to be felt in the investment industry 10m30s.
• The difference of 1% in fees can significantly impact an individual's financial situation, such as the ability to be self-sufficient in retirement and achieve better educational outcomes for their family 10s.
• Active managers, in aggregate, cannot beat the market after fees, and the median active manager will underperform by exactly the amount of their fees, making the expected value of active management with fees a negative one compared to an index fund without fees 42s.
• In 1975 and 1976, Jack Bogle and his team at Vanguard worked on creating the first retail index fund, with Jan Tardoski writing the software and Jack negotiating a licensing fee with Standard & Poor's for the rights to use the S&P 500 index 2m6s.
• The initial licensing fee was $25,000 per year, which was pulled out of thin air, and is now estimated to be around $300-400 million per year, with the licensing segment of S&P Global's business generating $1.85 billion per year 2m6s.
• The S&P 500 index has become a standard brand for the market, allowing S&P Global to charge a high-margin licensing fee to companies like Vanguard, BlackRock, and Fidelity, which is typically based on a percentage of assets under management 2m6s.
• Despite the high licensing fees, companies continue to use the S&P 500 index because it is a widely recognized and trusted brand, and attempts to create alternative indexes have not been as successful 2m6s.
• In 1976, Vanguard launched the first index investment trust fund, which was later renamed to the Vanguard 500 Index Fund, and has since grown to become the second-largest individual fund in the world with $1.5 trillion in assets 2m6s.
• The Vanguard 500 Index Fund and the Vanguard Total Stock Market Index Fund, which has $2.1 trillion in assets, are effectively the same thing and have a combined total of $3.6 trillion in assets 2m6s.
• The S&P 500 and the entire US stock market have nearly identical returns in the long run, and both have roots in the fund launched by Vanguard in 1976 with a broken IPO that raised $11 million 10s.
• The initial pitch for the fund was not appealing, as it promised average returns with a significant management fee of around 0.65%, which was still lower than the industry average at the time 42s.
• The Vanguard fund board allowed Jack to handle administration, but investment advice and distribution had to be done through Wellington, which led to the fund being distributed through a stock broker network with sales loads, and an IPO was done to get around this prohibition 2m6s.
• The IPO did not raise enough capital, with only $11.3 million raised, which was not enough to buy even 100 share lots of the entire S&P, so the fund had to buy 280 stocks, with 200 being the largest and the remaining 80 being a representative sample 2m6s.
• The selection of the 80 extra stocks required significant judgment and was done by a young woman hired part-time by Vanguard, who worked nights and weekends and also worked full-time at her husband's furniture store 2m6s.
• The launch of the fund was criticized by Ned Johnson at Fidelity, who commented that investors would not be satisfied with average returns, which is ironic given that Fidelity now has a large amount of its asset base composed of index funds, including Vanguard index funds 2m6s.
• Despite the initial difficulties, the fund went on to become one of the largest in the world, with its sister fund, and Vanguard's fees have decreased dramatically over time, with the ETF having a management fee of 0.03% 10s.
• Vanguard's business model is unique in that the customers own the management company, which means there is no incentive to generate excessive profits, and excess profits can be returned to customers in the form of lower fees, making it a tax-efficient way to operate 10s.

Vanguard's Business Model and Its Impact on the Industry

• The company's ability to lower fees is a result of its economies of scale, as the business of asset management has relatively few variable costs, allowing fees to be super low on a percentage basis as the company grows 2m6s.
• Vanguard's approach to sharing the benefits of scale economies with customers is similar to Costco's model, but Vanguard takes it a step further by not having outside shareholders who expect the business to generate profits, making it a "Costco for finance" but on a larger scale 4m42s.
• The company's history shows that it took a few years for its business model to kick in, and in the meantime, it faced challenges such as customer withdrawals and cash outflows, which led to the drastic measure of merging another small fund into the index fund to keep it alive 8m10s.
• The merger with the Wellington fund, also known as the exit fund, was a significant move that helped Vanguard's index fund to stay operational, with the merged fund having $58 million in assets, six times the size of the original index fund 10m40s.
• The initial capital base for the Vanguard 500 index fund and its sister fund, the total stock market index, came primarily from the former Wellington actively managed fund, which was folded into the index fund, rather than from the initial public offering of clients into the index fund itself 10s.
• After an emergency transplant to save the index fund, Jack and Vanguard finally won the right to take over distribution of the index funds in 1981-1982 by arguing that they were eliminating distribution and would no longer pay sales loads to stock brokers, instead employing people within Vanguard to market and sell the funds 42s.
• The index fund reached the $100 million capital milestone in 1982, six years after its launch, which was still below the initial IPO target of $150 million, and it wasn't until 1988 that the fund reached $1 billion in assets 2m6s.
• Vanguard's low-cost, low-fee proposition worked well in equities, but it worked even better in money markets and fixed income, where the only thing that mattered in terms of relative investment performance was costs, and the lowest cost provider would win in those markets 4m30s.
• Vanguard built a strong business in the fixed income market during this era, which helped keep the firm afloat while waiting for the indexing revolution to take off, and the firm was also supported by the strong performance of the Windsor fund, an actively managed fund run by John Nef 6m20s.
• The slow growth of the index fund was due in part to the fact that Vanguard had switched away from paying people to do distribution, which meant there was no incentive for others to sell Vanguard funds, but the firm's low-cost strategy and strong performance in other markets ultimately helped it to succeed 8m0s.
• Vanguard never fully exited the active management business and still has large fixed income, money market, and active equities management businesses, although they are now dwarfed by the index fund business 10s.
• The company's low-cost indexing strategy was not initially scaled enough to pay for itself, and it was the Windsor fund that provided most of the profits to cover overhead costs for many years 10s.
• A low-cost index fund in equities will outperform around 85% of actively managed funds in the long run, and this is not just due to lower fees, but also due to behavioral factors, such as the tendency of active managers to overtrade and react to market stimuli 42s.

Challenges and Growth of the Index Fund

• Passive index investors tend to avoid common behavioral errors, such as selling winners too early or reacting to market fluctuations, and this is reflected in the wisdom of Warren Buffett's phrase "don't just do something, stand there" 2m6s.
• The rise of indexing was facilitated by the launch of the Vanguard 500 fund, which crossed the $1 billion threshold in 1988, and the subsequent launch of the Total Stock Market Index Fund in 1992, which allowed Vanguard to own every single US stock 2m6s.
• The scale economies of the index fund business led to significant fee reductions, from 68 basis points at launch to 35 basis points in 1987, and the assets under management grew rapidly, reaching $10 billion by 1992 and approaching $100 billion by the mid-to-late 1990s 2m6s.
• Jack managed to get himself fired again in 1999, which is a surprising turn of events, and this story will be told after discussing other important information 10s.

Jack Bogle's Health and Leadership Transition

• Verscell is a cloud infrastructure company that has been building a new type of delivery network for tokens, purpose-built for AI agents, with a ground-up rethink of tools, frameworks, and infrastructure, and they have already served 60 trillion tokens across 180,000 unique teams 42s.
• Verscell's AI gateway is a notable element, which routes across every major AI model with automatic failovers, ensuring that products keep running even when a provider goes down, and it has been successfully used by companies like Poke, who saw their retry rate drop 20x after switching to Verscell 1m6s.
• Jack had a rare genetic heart disease called arythmogenic right ventricular dysplasia, or ARVD, which caused him to suffer his first heart attack at the age of 31, and he went on to have around 10-12 heart attacks throughout his life, despite being told by a doctor that he shouldn't count on living past 40 2m6s.
• Jack's approach to his heart condition was to not let it change his life, and he continued to work and live every day as he would have without the disease, even using his condition to intimidate his opponents in squash matches, where he would bring defibrillators and make bets with paramedics 3m6s.
• Jack's unique personality and approach to his life, including his heart condition, are notable aspects of his story, and he would often make light of his situation, even in serious moments, such as when he collapsed and had a heart attack while waiting for a train, and made a bet with the paramedics that they wouldn't get him to the hospital in time 4m6s.
• Jack Bogle's health was deteriorating due to heart complications, and by 1995, over half of his heart had stopped working, leading his doctors to recommend a heart transplant as his only hope for survival, despite his relatively advanced age of 66 at the time 10s.
• In May 1995, Vanguard held a press conference where Jack announced he was stepping down as CEO to prepare for his heart transplant, and John Brennan, his former assistant and the company's CFO, would take over as the next CEO 2m6s.
• Jack entered the hospital in late 1995 and waited 128 days for a heart transplant, during which time he continued to work, and on January 31st, 1996, he officially stepped down as CEO, allowing Brennan to take over 2m6s.
• Jack received a heart transplant in February 1996, and despite the company's assumption that his career was over, he made a miraculous full recovery, living for another 23 years on his transplanted heart 4m30s.
• After his recovery, Jack returned to his normal activities, including playing squash, and the company, which had already moved on with Brennan as CEO, found itself in a unique situation where Jack's unexpected return posed new challenges and opportunities 6m20s.
• Vanguard's long-term trade-offs, made since the 1970s, were finally paying off in the 1990s, with the company's assets under management (AUM) reaching $180 billion by 1996, and the two index funds growing rapidly to $50 billion and soon to be $100 billion 8m40s.
• The company's success was a validation of Jack's vision and strategy, which had faced significant challenges and skepticism in the early years, but ultimately led to Vanguard's remarkable growth and success 10m0s.

Vanguard's Expansion and the ETF Debate

• Vanguard is facing competition for the first time as other companies, such as Fidelity, BlackRock, and State Street, start to offer low-fee index funds, despite not having the same structural incentives as Vanguard, because consumers have become aware of the benefits of passive investing and indexing 10s.
• After recovering from a heart transplant, Jack Bogle is no longer the CEO of Vanguard but remains on the board, where he becomes frustrated and disagrees with the new management team's initiatives to launch sector-specific index funds, international funds, and invest in marketing, which he sees as a perversion of the company's mission 2m6s.
• The new management team, led by Jack Brennan, wants to grow the firm and offer clients what they want, while staying true to the company's mission and values, and not seeking to generate excess profits or take the company public 4m42s.
• Brennan introduces an employee partnership plan to incentivize the workforce and deal with the structural trade-off of attracting and retaining high performers in an industry where competitors can offer higher salaries 6m15s.
• The company faces challenges such as investing in research and development, customer service, and technology, while maintaining its low-cost structure and competing with other firms that can offer higher salaries to top performers 8m10s.
• The disagreements between Jack Bogle and the new management team ultimately come to a head in 1999 over the issue of exchange-traded funds (ETFs), which Jack Bogle had strong views on, and which have become a crucial part of the company's offerings 10m40s.
• Nathan Most, the VP of new products at the American Stock Exchange, approached Jack Bogle at Vanguard in 1992 with the idea to create exchange-traded funds (ETFs) that would allow shares of mutual funds to trade on stock markets like individual stocks, and he believed Vanguard's 500 index fund would be the ideal partner for this concept 10s.
• The idea of ETFs had several structural benefits, including easier distribution, the ability to buy and sell at a known market price, and not being affected by other investors' actions in the fund, but Jack Bogle hated the idea because it could lead to speculative trading and incur unnecessary costs 2m6s.
• Jack Bogle was concerned that the exchange-traded nature of ETFs would tempt investors to trade in and out of the funds frequently, incurring trading costs and engaging in speculative behavior, which he believed would be detrimental to long-term investing 2m6s.
• Additionally, Bogle was worried that brokerage platforms would incentivize trading in ETFs to profit from the transactions, and that the ability to short sell ETFs would be disastrous for the financial industry 4m30s.
• Despite the potential benefits of ETFs, Jack Bogle rejected the idea and told Nathan Most to abandon the concept, primarily due to his concerns about the potential for speculative trading and the negative impact on investors 6m40s.
• The concept of ETFs eventually became a reality, and while it has its drawbacks, it has also expanded the distribution reach and target audience for mutual funds, allowing more people to invest in them, and has become a core part of many investment strategies 8m0s.
• Nathan launched the world's first ETF with State Street, a well-known bank, and their S&P 500 ETF, known as SPDR, was the largest ETF in the world until it was surpassed by Vanguard and BlackRock, 10s.
• ETFs are a significant part of the mutual fund industry, growing at 30% per year, while mutual funds are flat, and at this rate, ETF assets will eventually surpass traditional mutual funds, 2m6s.
• The difference between ETFs and mutual funds is crucial, as it was clear that Vanguard should have gotten into ETFs, but the founder, Jack Bogle, was against it, illustrating the point that the purity of the founder is required to start a company but not sufficient to scale and keep it globally relevant, 2m6s.
• In August 1999, the management team, led by Brennan, pushed to launch ETFs, but Jack Bogle was staunchly against it, leading to the enforcement of the mandatory board retirement age of 70, which resulted in Jack's departure from the board, 4m38s.

The Rise of Index Investing and Its Cultural Impact

• Jack Bogle's departure caused a huge public outcry, and it was not just about the age requirement, but about him overstaying his welcome, as he had become a giant asset to Vanguard and a saint to the investing public, 4m38s.
• By the time Jack stepped down as CEO in 1996, he had become a highly respected figure, with a statue erected in his honor, and a passionate group of users on Morningstar's online discussion forums had founded a dedicated subforum called Vanguard Diehards, which would eventually morph into the Bogleheads movement, 6m34s.
• The Bogleheads forum, bogleheads.org, currently receives 2 million visitors per month, and the subreddit has 400,000 weekly active visitors, indicating a significant following for the index investing philosophy 10s.
• Jack Bogle, the founder of Vanguard, reached a compromise where he would no longer be on the board or involved in active management of the company, but would lead the Bogle Financial Markets Research Center, allowing him to continue researching, speaking, and writing about index investing 1m42s.
• This compromise worked out well for both the company and Jack, as his legacy and value to the company were preserved, and Vanguard was able to move on and launch ETFs in 2001, with Jack eventually repairing his relationships with management, especially after Bill McNab succeeded Brennan as CEO in 2008 2m6s.
• Indexing was not initially interesting when Bogle started it, but as the investment management industry changed, with more professional management and fewer individual investors making uninformed decisions, indexing's advantage increased, making it a more attractive option 4m30s.
• The shift towards professional management in the 80s and 90s meant that active managers had to compete with smarter counterparties, making it harder to beat the market, and increasing the relative advantage of indexing, which became a more popular and attractive option 6m10s.
• The investment management industry also changed with the advent of the advisory business, where people made money by managing assets, rather than just charging commissions for trades, and this change, along with the increased sophistication of the market, contributed to the growth and popularity of indexing 8m40s.
• The shift from stock brokers to financial advisers changed the incentives for investment professionals, as they were no longer solely focused on generating trades, but rather on growing their clients' net worth, which made index funds an attractive product for them 10s.
• The growth of the advisory business became a significant accelerant for index funds, as financial advisers were more aligned with their clients' interests and were less focused on generating trading fees 42s.
• The dot-com era was another tailwind for index funds, as it introduced more people to online trading and allowed them to see the benefits of buying index funds, such as the S&P 500, and to compare the performance of their investments to benchmarks 2m6s.
• The increased transparency and accessibility of investment information during the dot-com era also helped people realize that they were being overcharged by underperforming active funds, leading them to switch to index funds 2m6s.
• The ownership of equities in America increased significantly over the years, from around 1-2% pre-Great Depression to 32% in 1989, and then to 54% in 2001, with the rise of 401k plans and the perception of mutual funds and index funds as safe and good ways to own equities being major contributing factors 2m6s.
• Today, around 60% of Americans have stock market exposure, and the widespread perception of index funds as a good and safe investment option has been influenced by endorsements from prominent investors, such as Warren Buffett, who implicitly endorsed index funds in his 1996 Berkshire annual shareholder letter 2m6s.
• Warren Buffett's endorsement of index funds, where he stated that the best way to own common stocks is through an index fund that charges minimal fees, helped to further popularize index funds and reinforce their reputation as a reliable investment option 4m30s.
• The performance of index funds has been shown to beat the majority of investment professionals over the long term, with the exception of exceptional investors like Warren Buffett, who has achieved remarkable success with Berkshire Hathaway 4m30s.
• From 1965 to 2025, an investment in the S&P 500 would have yielded a 10% compound annual growth rate, resulting in a 405x return with dividends reinvested 10s.
• In comparison, Berkshire had a 19% compound annual growth rate for a 39,000x return over 60 years, making it an extreme exception to the general trend of investment returns 42s.

The 2008 Financial Crisis and Vanguard's Response

• Warren Buffett has suggested that most people should invest in low-cost index funds like Vanguard, which has been described as the spiritual and cultural counterpart to Berkshire in the private equity fund space 2m6s.
• Vanguard is located in Malvern, Pennsylvania, which is about a 2-hour train ride from New York City and is considered to be in the middle of nowhere, yet it has a strong cultural resonance with Omaha, where Berkshire is based 4m10s.
• The host's grandparents were among the first investors in Vanguard, having become clients in the late 1970s or early 1980s, before the fund reached the $100 million mark 5m30s.
• The 2008 financial crisis was a significant moment for Vanguard and the indexing and passive investment industry as a whole, and it will be discussed further in the story 8m40s.
• Jack Bogle's use of data to demonstrate the effectiveness of index funds and the limitations of active fund managers is highlighted as a key takeaway from the story, and it is compared to the importance of using data in product development 10m50s.
• The 2008 financial crisis had a significant impact on the investment industry, with passive index funds experiencing huge losses, but active money management suffering even more, as many professional managers were not set up to handle a 40% drawdown in their portfolios, leading to a loss of faith in the entire system 10s.
• The promise of active money management, which was to outperform and protect investors during bad times, was not fulfilled, and the vast majority of active managers failed to deliver, as noted by John Rekenthaler in a retrospective on the financial crisis 2m6s.
• The crisis led to a change in public sentiment towards Wall Street and fund managers, with many people losing trust in the industry and viewing them as charlatans or crooks, and instead turning to Vanguard, which was seen as a champion of the average American, with no profits, no fees above costs, and no corporate owners 4m30s.
• The financial crisis created a marketing opportunity for Vanguard, which offered a simple and transparent investment option, with no promises of outperforming the market, but instead providing a way for investors to capture the productivity growth and innovation of the world's most successful economy, with its index funds having historically performed well, with a compound annual growth rate of 11.6% since 1975 6m40s.
• Many investors decided to simplify their investment approach after the crisis, opting for the "easy button" offered by Vanguard, which made no promises about outperforming the market, but instead provided a straightforward way to invest in the market, with the goal of capturing its long-term growth and returns 8m10s.

Vanguard's Post-Crisis Growth and Competitive Landscape

• Vanguard's approach to investing is straightforward and uncomplicated, with the company making an explicit promise not to profit from its customers, which resonated with many people, especially during and after the financial crisis 10s.
• Despite the financial crisis, Vanguard did not lay off any employees, but due to the contraction in the market, they had to raise their fees to cover their fixed costs, which increased from 0.07% to a slightly higher percentage 2m6s.
• The impact of Vanguard's mutual ownership model is that during market contractions, they have to raise their fees to meet their obligations and pay their employees, which is an interesting aspect of their business structure 2m6s.
• Warren Buffett issued a public challenge in 2007, betting $1 million that the Vanguard 500 index fund would outperform a portfolio of at least five hedge funds over a 10-year period, with the winner donating the funds to a charity of their choice 4m38s.
• Only one person, Ted Seides, took Warren Buffett up on the bet, and at the end of the 10-year period, the Vanguard 500 index fund had returned 126% net after fees, while the hedge fund portfolio returned only 36% 8m30s.
• Ted Seides conceded early, about a year or two before the end of the 10-year period, and Warren Buffett won the bet, with the proceeds going to a charity 10m30s.
• Warren Selects Girls Inc. of Omaha as the recipient of the charity money, and it is mentioned that Ted chose five hedge fund of funds to get a total basket of about a hundred different hedge funds in the portfolio, with Warren agreeing to this choice 10s.
• The concept of diversification is discussed, with the idea that the more diversification you get, the more you're just buying the market, and the less interested you should be in paying fees, as fees are more justified when the investment is more concentrated and uncorrelated with the market 2m6s.
• Warren Buffett writes in Berkshire's 2016 annual letter that Jack Bogle, who urged investors to invest in ultra-low-cost index funds, is a hero to him and to millions of investors who have realized better returns on their savings, and this endorsement is considered to be a significant one 4m6s.
• The index fund concept was stress-tested in 2008 and performed well, owning a giant percentage of American companies without causing additional systemic issues, and today, there are trillions at stake in these passive funds 6m10s.
• The potential systemic fallout from a problem or failure of one of the big indexing players, such as Vanguard or BlackRock, is considered to be huge, and this is a concern given the size and importance of these players in the financial system 8m20s.
• After the 2008 financial crisis, Vanguard's share of mutual fund flows skyrocketed, doubling overnight, and the company became the world's largest mutual fund manager in 2010, with a significant lead that continued to expand in the following years 10m30s.

Vanguard's Expansion into New Markets and Services

• From 2014 to 2019, Vanguard took in $1.2 trillion in cash inflows, more than twice as much as the rest of the industry combined, and the company also added an advisory product during this time, offering human wealth advisors to accounts with as little as $50,000 invested 12m40s.
• Vanguard experienced significant growth, quickly accumulating $150 billion in advised client assets, and its services are offered at a low cost, ranging from 5 to 30 basis points, with over a thousand certified financial planners on staff 10s.
• The company's business model is based on the idea of having no shareholders to serve, with the only stakeholder being the customer, who can be individuals invested in the funds or those seeking investment advice for personal finances, often being the same clients using Vanguard funds in their retirement or college savings accounts 42s.
• Jack, the founder, passed away in January 2019 at the age of 89, leaving behind a legacy as an American hero who enabled more people to participate in the benefits of capitalism, with Vanguard managing $5 trillion in assets for over 20 million clients at the time of his death 2m6s.
• By 2019, Vanguard had become the number one mutual fund company, with a 25% market share, surpassing the previous high of 15% held by Fidelity, and managed 13 of the 15 largest individual funds in the world 2m6s.
• Jack's estate was worth approximately $80 million, a relatively modest amount compared to the wealth of other financial industry leaders, such as the Johnson family of Fidelity, worth around $40-50 billion, or Larry Fink of BlackRock, worth around $1.5 billion 2m6s.
• The decision not to prioritize profits allowed Vanguard to reinvest in its customers, potentially leaving a $100 billion delta that benefited the American investing public, rather than being taken as profit by the company or its founder 2m6s.
• In the years following Jack's death, competitors such as Fidelity and BlackRock experienced significant growth, with BlackRock becoming the largest asset manager in the world and Fidelity making a comeback, partly due to their adoption of ETFs, which Vanguard had initially chosen not to pursue 2m6s.
• Fidelity has been successful in experimenting and investing in various platforms, including corporate 401k plans and retail brokerage accounts, which are considered weak spots for Vanguard, and this strategy has allowed them to retain customers for many years 10s.
• Fidelity realized that they do not need to compete with Vanguard in the funds business and are happy to have their 401k and brokerage account holders invest in Vanguard funds through ETFs, which is a vulnerability for Vanguard as many of their customers do not have a direct relationship with the company 2m6s.
• Vanguard's customers often have a direct relationship with a different brokerage, such as Fidelity, which is also a competitor in the funds business, and this dynamic could potentially lead to Fidelity undercutting Vanguard on fund costs in the future 4m42s.
• The cost basis for funds is already very low, and it may not make a significant difference to investors if Fidelity were to offer even lower costs, as the difference between three basis points and zero basis points would only result in a relatively small difference in returns over a long period of time 6m15s.
• Fidelity is considered to have a better product and product experience than Vanguard, which could be a significant advantage in attracting and retaining customers, similar to how Google's Gmail was able to compete with Microsoft's Outlook mail 8m40s.

Vanguard's Mutual Ownership Model and Its Implications

• Vanguard's customer service and technology were exposed as inadequate during the pandemic, with issues such as trades not going through and fund account transfers getting lost, due to the company's structure which does not allow for excess profits to be invested in these areas 10s.
• Fidelity recognized Vanguard's weaknesses and decided to invest in technology and customer service to make their brokerage and 401k platforms superior, which is an inherent trade-off in Vanguard's model as they would need to raise prices to build best-in-class technology and customer service 42s.
• BlackRock's story is rooted in ETFs, and their acquisition of Barclays' iShares in 2009 was a significant win, giving them a large market share in the ETF industry with 1,400 total ETFs and $3.3 trillion in assets under management 2m6s.
• BlackRock's diverse range of ETFs and sectors, as well as their international client base, have allowed them to accelerate away from Vanguard in the ETF market, which is growing 30% every year 2m6s.
• BlackRock's profits from other areas of their business enable them to subsidize their ETF business and attract a large number of clients, similar to Fidelity's strategy, which raises questions about whether Vanguard's no-profit mutualized model holds them back compared to their competitors 2m6s.
• The initial question of how Fidelity and BlackRock could exist despite Vanguard's supposedly superior model has been turned on its head, with the realization that Vanguard's structure may actually be a limitation in certain areas, such as technology and customer service, despite their ability to undercut prices 2m6s.
• Vanguard, a well-established investment firm, has been facing challenges such as customer service and technology issues, as well as the vulnerability of not having a direct relationship with customers who buy Vanguard funds on other platforms like Fidelity, which can easily trade in and out of their funds 10s.
• To address these challenges, Vanguard appointed Salem Ramji, the former head of the iShares division at BlackRock, as their first outside CEO in the firm's 50-year history, 24 months ago, with the goal of fixing the company's current issues 2m6s.
• One of the potential solutions being considered is expanding Vanguard's advisory business to build a direct relationship with customers, as well as expanding into fixed income and retirement services, where Fidelity has been successful 4m30s.
• Vanguard has also made investments in technology, including the purchase of a direct indexing platform called Just Invest, and has explored new innovations, such as personal advisor services, although these have not seen significant growth in recent years 6m20s.
• The company is also considering an expansion into private equity, which is a surprising move given the high fees associated with this type of investment, with typical fee structures being 2% assets under management fee and a performance fee on top of that 10m30s.
• The reason why the "Vanguard effect" of compressing prices has not been seen in venture capital and private equity is that these are access businesses, where investors need to pay for access to certain assets, and the assets have to "pick" the investors, rather than being openly available like public equities 14m40s.
• Jack Bogle is described as a rare individual who was interested in capitalism but not motivated by personal gain, and his absence is felt in the private asset world of venture capital and private equity, as well as the public asset world 10s.
• The concept of mutual ownership of a corporation, as seen in Vanguard, is considered a better form of capitalism, but it is not commonly found in other industries such as retail, grocery, and technology, with few examples like REI and some small grocery stores 2m6s.
• Vanguard is entering the private assets market for the first time, and their approach will be closely watched, particularly in terms of their ability to keep costs low and navigate the fee structure of private markets, which is fundamentally different from public markets 4m30s.
• The success of index funds has created a barbell effect in many portfolios, where investors hold a large portion of their assets in low-cost index funds like Vanguard and then seek out higher-risk, higher-reward investments with the remaining portion, and it is unclear whether Vanguard will attempt to play a role in this higher-risk segment 6m40s.
• As a company owned by its customers, Vanguard does not have the same pressure to grow and expand as traditional publicly traded companies, which raises questions about its motivation and strategy for entering new markets like private assets 10m20s.

Vanguard's Relationship with Wellington Management

• Vanguard's structure does not have a built-in incentive or obligation to grow, but the company's mission is to bring its services to as many people as possible, and its leadership believes growth is necessary to stay competitive and invest in the platform, with the current cash flows from small management fees being insufficient to make desired investments 10s.
• The company's leadership also believes that growth is necessary to offer more products to its current customers, such as wealth management and private equity, in order to better serve them 10s.
• Vanguard's total assets have grown to $12 trillion, with $2 trillion of that being active, demonstrating that the company's founder, Jack Bogle, was not a zealot for index passive investing, but rather for low fees 2m6s.
• The company's mutual ownership structure allows it to continue to enter new sectors and reduce fees to near zero, with the goal of providing average returns at a dramatically below market cost 2m6s.
• Vanguard's assets under management were mostly active funds for the first 20 years, but today 84% of its assets are passive index funds, with the company's average ETF and mutual fund expense ratio being 0.07%, significantly lower than the industry average of 0.44% 2m6s.
• The company has 20,000 employees, 50 million investors worldwide, and 84% of its funds have outperformed their peers over the last 10 years, but notably, over 90% of its investors and investor capital are in the US 2m6s.
• After Vanguard's divorce from Wellington, Wellington went on to build its own trillion-dollar firm, 100% devoted to active management, which can be seen as the anti-Bogle 6m42s.
• Wellington Management Company is one of the largest players in the active management space and has been rebuilt into a new entity after the original founder, Walter Morgan, and later Jack, left the company, with the original four IV partners taking over and restructuring the firm into a progressive generational transfer 10s.
• The company was retaken private in a management buyout and has since recruited new partners, built a debt practice, a private capital practice, and an alternatives practice, and has gone international, managing about $1.3 trillion in assets today 42s.
• Wellington Management still does the investment management for the Wellington fund within Vanguard, which has $110 billion in assets, and the company manages several other Vanguard active equity funds and portfolios 2m6s.
• The relationship between Vanguard and Wellington has improved over time, with the two companies reconciling in the early 90s, and Wellington now managing several Vanguard funds, making it a unique and successful story 4m10s.

The Broader Implications of Vanguard's Model

• The mutual ownership structure of Vanguard is not commonly seen in other companies, but it has worked well for the firm, allowing it to tap its customers for capital and avoid having external shareholders 6m10s.
• The company's ability to tap its customers for capital has been crucial in funding its fixed costs, such as constructing its campus in Malvern, where it tapped the fund holders for construction loans 8m10s.
• The success of Vanguard's mutual ownership structure is attributed to its ability to provide the necessary capital and funding without relying on external shareholders, making it a unique and effective business model 10m0s.
• The concept of customer ownership, as seen in companies like REI, is unique and may not be effective in raising capital, as customers may not be willing to invest in the company, even if they are members, 10s.
• Vanguard's ability to rely on Wellington's active management to provide profits during difficult times was a key factor in its success, and the company's ability to bootstrap off its existing business allowed it to avoid taking on shareholders, 2m6s.
• The idea of customer ownership, as opposed to founder ownership, requires a non-economic decision, where the founder gives up potential wealth creation in favor of community ownership, 2m6s.
• This approach requires a unique individual, such as Jack Bogle, who is willing to forgo personal wealth and go through significant challenges to establish the company, 2m6s.
• The finance industry is particularly well-suited to this model, as it can scale infinitely once it overcomes its initial fixed costs, providing huge operating leverage, 2m6s.
• Other companies, such as Visa, have also adopted similar models, where the company is owned by its customers, and the founder or management team does not take outsized economics, 2m6s.
• Jack Bogle's situation, as described in his memoir, was a key factor in his decision to establish Vanguard as a mutual company, as he realized it would not provide him with a personal fortune, but offered him a chance to resume his career, 2m6s.
• The success of Vanguard and similar companies depends on a combination of unique circumstances, including the presence of a charismatic leader, a suitable industry, and a willingness to forgo personal wealth, 2m6s.
• The story of Visa is similar to that of Vanguard, where a person created a structure that was not motivated by personal gain, but rather by the desire to create something that would benefit others, and this structure was initially a strange one, possibly a nonprofit, but it eventually became a corporation and went public in 2008 10s.
• The person who created Visa, referred to as D, was an employee who had to convince his employer not to be the owner, and he never could have been the owner, unlike Jack, who is the founder of Vanguard 1m6s.
• Vanguard is a unique case study in aligning incentives, where the company is owned by its fund investors, who elect the board of directors and vote to lower fees when possible, because it is in their own interest, and this is why Vanguard has low-cost index funds 3m42s.
• Jack, the founder of Vanguard, believed that strategy follows structure, and by setting up the company's structure in a certain way, the strategy of low-cost investing had to follow, and he also understood the power of compounding costs, saying that where returns are concerned, time is your friend, but where costs are concerned, time is your enemy 5m6s.
• The corporate structure and governance of Vanguard played a crucial role in its success, and it is a rare example of a company where the structure was path-dependent, meaning that the company's market opportunity was dependent on its unique corporate structure 7m6s.
• The discussion also touches on the criticisms of passive investing as a movement, and how it has become a crisis, with large index fund complexes like Vanguard controlling a huge percentage of the voting shares of American corporations, and increasingly, corporations around the world 9m6s.

Criticisms and Concerns About Passive Investing

• The S&P 500 is not entirely rules-based, as it is governed by a small group of people who decide which companies are eligible to be included, and this has led to concerns about the passivity of index funds 10s.
• The counterargument to this concern is that in the long run, the S&P 500 returns are almost exactly the same as the total market returns, which suggests that the issue may not be significant in the long term 2m6s.
• Asset management can scale infinitely, as its market is investing in any currency in any company, which means that the total addressable market is essentially all of humanity's wealth, and this has led to concerns about the potential for a few index funds to own everything 2m6s.
• The percentage of the market that is passive has increased significantly over the past 35 years, from 1% to over 20% of the S&P 500, and passive assets in funds have overtaken active assets in funds for the first time 4m0s.
• There are concerns that if most of the market is passive, there may not be enough active traders to accurately discover prices, and that passive funds are essentially free-riding on the price discovery efforts of active managers 4m0s.
• However, some argue that even with a high percentage of passive funds, prices will still be set by the marginal trader, and that arbitrage opportunities will ensure that the market reaches an equilibrium 6m0s.
• Another concern is that as index funds such as Vanguard, Fidelity, Black Rock, and State Street own increasingly large stakes in companies, they may have an incentive to collude and keep prices high, rather than competing with each other 8m0s.
• The concern about voting and shareholding is a legitimate one, as index funds handle voting shares in various ways, with some allowing individual holders to vote on individual issues, while others provide suggestions on how to vote, and this can lead to a significant amount of voting control if a few large index funds own a substantial portion of companies 10s.
• If a fund manager, such as Vanguard or BlackRock, were to grow to own 60% of every company in America, they would have significant voting control and responsibility to decide how to vote those shares, effectively turning corporate governance into a matter of public opinion 42s.
• The actual percentage of passive ownership in companies may be higher than 20%, potentially around 30-40%, due to direct indexing and people constructing their own portfolios that mirror indexes, but this does not affect the voting process for those individuals 2m6s.
• The issues surrounding passive ownership and voting control are not seen as existential threats, but rather as problems that will need to be addressed and worked out over time 4m10s.

Vanguard's Competitive Advantages and Market Position

• To analyze Vanguard's success using Hamilton Helmer's seven powers, the definition needs to be adapted to focus on market share rather than profits, as Vanguard earns no profits by its very nature 5m30s.
• The seven powers include scale economies, network economies, counterpositioning, switching costs, branding, cornered resource, and process power, and scale economies are seen as a key factor in Vanguard's success 7m40s.
• The question of what protects Vanguard from competition, such as another idealistic individual starting a similar business, is an important one, and the seven powers analysis can help identify the factors that contribute to Vanguard's market share leadership 9m20s.
• To start a new investment company today, it would likely require 1-2% fees to break even, making it non-competitive without a large amount of money to subsidize it or scale economies like Vanguard, which can fund a lot of salaries and fixed costs with its $12 trillion assets and three basis points fee 10s.
• Vanguard's ownership and fee structure is an advantage that cannot be replicated by competitors, and its counterpositioning is an extreme example, as there was no economic incentive to create the company in the first place, but it still took nearly two decades to gain real adoption 2m6s.
• The company's business model, especially with open-ended public funds, eliminates switching costs for customers, who are unlikely to sell their Vanguard index funds and realize capital gains taxes just to switch to a different index fund 4m42s.
• The introduction of ETFs has changed the equation for Vanguard, allowing customer relationships to be ported out of Vanguard easily, but not out of the fund itself, and the company's strong branding, including endorsements from Warren Buffett, is difficult to replicate 6m15s.
• Vanguard's culture and mission attract people who make non-economic decisions to work there, and the company's unique approach to the investment industry, treating mutual funds as commodities rather than differentiated products, has been key to its success 10m45s.
• Jack Bogle's insight that running a successful mutual fund is not about creating a unique product, but rather about providing the highest possible long-term return on capital, has been essential to Vanguard's strategy and success 14m20s.
• The public equities investment business is similar to commodity markets, where scale, brand, and low cost are crucial, and the lowest price is the market clearing price, determining the winner in the market 10s.
• Jack Bogle realized that the public equities investment business is a commodity market, and to succeed, one needs the lowest cost structure, which led to the creation of a new market with a commodity sleeve 2m6s.
• The realization that investors as a whole are the market and it is zero sum, means that to own the market, one has to do so with the lowest possible fees, and holding for duration is key to achieving long-term success 2m6s.
• Warren Buffett's quote highlights the grim irony of investing, where investors as a group get precisely what they don't pay for, emphasizing the importance of low fees in investing 2m6s.
• Jack Bogle's story and the Vanguard effect are proof that one single human being can change the world, and it is unlikely that other companies like Fidelity, BlackRock, and State Street would be charging low fees on their index products without Vanguard's influence 2m6s.
• The competition around pricing in the industry would have likely led to a minimum profit floor, but it is unlikely that it would have been as low as what Vanguard achieved, and millions of people have had their financial lives changed because of Jack Bogle's work 2m6s.

Vanguard's Founding Date and Historical Context

• Vanguard opened its doors on May 1st, 1975, the same month Microsoft was founded, and the company's initial founding headquarters location was Valley Forge, Pennsylvania 2m6s.
• Research was conducted on companies that have increased 100 times in value since their initial public offering, and it was found that on average, these companies delivered a 533x return since going public, with an average drawdown of 65% at some point in their life, taking around 8 years to recover to their prior all-time highs 42s.
• This information highlights the challenges of investing in individual companies, as most investors lack the temperament or research capacity to hold onto these assets through significant downturns, making it more suitable for people with absolute iron stomachs or index fund holders 2m6s.
• Jack Bogle, a prolific author, wrote 12 books in his lifetime, with all proceeds from book sales going directly to the Bogle Family Foundation, which supports various charities, including the American Indian College Fund 4m30s.

Additional Notes and Personal Reflections

• The hosts have started writing for the Wall Street Journal, with their article on Ferrari available to read by clicking the link in the show notes, and they are offering free access to their columns for listeners who sign up at acquired.fm/wsj 6m40s.
• One of the hosts is recording the episode on a brand new MacBook Pro M5 Max, having previously been impressed by the performance of their M1 device, and they clicked the biggest spec possible when purchasing the new laptop 8m20s.
• The computer has been upgraded to an M5 Max, which has significantly improved performance and eliminated latency, making it a delightful experience, especially with the upgraded internet speed of 2 and 1/2 gigs up and 2 and 1/2 gigs down 10s.
• There are three carveouts mentioned, the first one being Michael McKelie, a YouTuber who creates in-depth sports analytics videos that are highly produced, intellectual, and hilarious, and is likely based in Seattle 42s.
• The second carveout is the new Super Mario Brothers movie, Super Mario Galaxy, which was watched on a daddy-daughter date, and the experience was thoroughly enjoyed, with recommendations to go on dates with children 2m6s.
• The third carveout is the discovery of Brooks Vanguard shoes, an old school running shoe model that still exists, and the idea of ordering them in acquired teal has been considered 2m6s.
• The episode is sponsored by several partners, including JP Morgan, Verscell, Service Now, and Statsig, which provide various services such as payments infrastructure, developer tools, and product analytics 2m6s.
• The preparation for the episode involved talking to several folks, including Arvvin Navaratnam from Worldly Partners, who wrote a great piece on Vanguard, and the sources used are linked in the show notes 2m6s.
• The episode features discussions and insights from various individuals, including Morgan Housel, a financial author, and Bill McNab, the former CEO of Vanguard, who shared his experiences and knowledge about the firm 10s.
• The episode also acknowledges the contributions of Mike Miller, a former Wall Street Journal editor, who helped craft the episode, and Jason Swag, a legendary author of the Intelligent Investor column, who provided valuable information about Vanguard and Jack Bogle 1m42s.
• Additionally, the episode recognizes the work of authors Charles D. Ellis, who wrote "Inside Vanguard", and Eric Balchunas, who wrote "The Bogle Effect", both of which offer detailed insights into the history of Vanguard 2m6s.
• The episode concludes by thanking various individuals who helped make the episode special and invites listeners to check out other episodes, including those on Berkshire Hathaway, Costco, and Visa, and to join the Acquired email list for exclusive content and updates 3m30s.
• Listeners are also encouraged to join the Acquired Slack community to discuss the episode and future topics, and to look out for the next episode, which will be announced by David 4m40s.