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Charlie Ellis on the Rules of Investing · Masters in Business

0:00
Speaker 1: M. This is Mesters in Business with very Results on
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Speaker 1: Bloombird Radio this week on the podcast What Can I Say?
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Speaker 1: Charlie Alis is a legend in the world of finance,
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Speaker 1: whether it was at Greenwich Associates or as chair of
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Speaker 1: the Yell Endowment or a board member at Vanguard, he
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Speaker 1: has seen pretty much everything in the world of investing.
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Speaker 1: His career spans the entire modern era, dating back to
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Speaker 1: um you know, the Paul Vulcar era, and what took
0:38
Speaker 1: place during the boom periods of the eighties and nineties,
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Speaker 1: and how technology has changed the world of investing. He's
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Speaker 1: just one of these people who is so thoughtful and
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Speaker 1: insightful about everything. It's just always a pleasure, uh to
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Speaker 1: chat with him. I found our discussion to be absolutely
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Speaker 1: us in and I think you will also with no
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Speaker 1: further ado my conversation with Grantwich Associates Charlie Alis. The
1:09
Speaker 1: last time we spoke, we really were talking about the
1:11
Speaker 1: retiming crisis, and we spent a little bit of time
1:16
Speaker 1: discussing Van Guard. But this new book is so interesting
1:19
Speaker 1: and so filled with details that only an inserter can have.
1:24
Speaker 1: Let's delve into it a little bit. Tell us. What
1:27
Speaker 1: first led you to Vanguard? How did you get involved
1:29
Speaker 1: with them? Well, it's started long time ago. Six. I
1:36
Speaker 1: was working with the securities firm in New York and
1:39
Speaker 1: Wellington was a client in Philadelphia, and I would go
1:43
Speaker 1: down to Philadelphia meet with John, Jack Bogel and the others,
1:48
Speaker 1: and I got convinced that these were very bright and
1:52
Speaker 1: interesting people doing interesting things. But Old Wellington was not
1:59
Speaker 1: really a great and instinct place. It was balanced portfolio.
2:04
Speaker 1: The assets were going down year by year by year,
2:07
Speaker 1: as people said, you know, it's just out of date.
2:09
Speaker 1: I want to get a performance fund. I want to
2:11
Speaker 1: beat the market. These guys will never get out of
2:14
Speaker 1: the slow that they're in. Uh. But still there was
2:19
Speaker 1: something special about Jack and John. So the irony of
2:24
Speaker 1: that is in ninety six, hey, we were about to start,
2:28
Speaker 1: you know, a long period of equity under performance. You
2:32
Speaker 1: would have guessed had you known that a balanced fund
2:36
Speaker 1: of stock and bond portfolio was going to do a
2:38
Speaker 1: lot better than just the pure stock funds over the
2:41
Speaker 1: next sixteen years. That's the way the world works. Just
2:44
Speaker 1: when you least expected, something goes in a different direction.
2:48
Speaker 1: I really liked the guys and and when jack said
2:53
Speaker 1: he was gonna be leaving after the merger Maide in
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Speaker 1: Heaven with the Boston Group. Jackie, you really are stretching it.
3:02
Speaker 1: This is a very unlikely proposition. You've got less than
3:06
Speaker 1: thirty people working with you. You're in charge of the
3:09
Speaker 1: back office activities. That's an activity you never ever personally
3:13
Speaker 1: enjoyed at all. You always assigned that to somebody else.
3:16
Speaker 1: And he would say to me, don't worry about it,
3:17
Speaker 1: Jim Reep, he's going to take responsibility for that. I
3:20
Speaker 1: don't have to do it. You're not allowed to do
3:23
Speaker 1: anything in investment management, and then I allow it to
3:26
Speaker 1: do anything in sales. The mutual fund business is all
3:30
Speaker 1: about sales and investing. What are you gonna do? And
3:35
Speaker 1: the answer was I'm going to hang in there and
3:37
Speaker 1: find a way to make this thing work. And the
3:39
Speaker 1: fascinating story is the argument that he concocted around indexing. First,
3:48
Speaker 1: it's non investment management because hey, we're not making any decisions,
3:52
Speaker 1: we're just buying all the stocks in the index. And second,
3:55
Speaker 1: there's no sales. People are gonna come to us, so
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Speaker 1: therefore this is out out of the deal he cut
4:01
Speaker 1: with the folks at Wellington right, And it was just
4:04
Speaker 1: barely enough over a period of several months to convince
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Speaker 1: his board of directors it's okay to do that, and
4:12
Speaker 1: he just kind of skated through. They barely approved it.
4:17
Speaker 1: Very close run. But Zack was a very argumentative, persuasive
4:22
Speaker 1: always had the facts supporting whatever case. Like a really
4:25
Speaker 1: good litigating lawyer, he was always able to make his
4:29
Speaker 1: own case very very very well. So let's talk about
4:32
Speaker 1: that initial funds. The plan was to do an IPO
4:36
Speaker 1: to raise two million dollars in new client assets for
4:40
Speaker 1: the funds. How much did they end up? Actually, this
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Speaker 1: is the first index funds. It's a very interesting story.
4:49
Speaker 1: I'm going to raise a pretty serious amount of money.
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Speaker 1: It was very hard to get Wall Street to agree
4:55
Speaker 1: to do the underwriting, and then it was really hard
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Speaker 1: to get salespeople the various cities to say, yeah, I'm
5:01
Speaker 1: going to pitch this to my clients. For a very
5:04
Speaker 1: good reason. Everybody knew in those days the purpose of
5:07
Speaker 1: investment management is to beat the market. Everybody understood that
5:12
Speaker 1: was the game. So you're looking for a manager is
5:14
Speaker 1: going to beat the market. Everybody talked that way, And
5:17
Speaker 1: here's the guy coming along and saying, I got a
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Speaker 1: really good idea for you. I'm not going to beat
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Speaker 1: the market. Jack would have argument, well, wait a minute.
5:27
Speaker 1: Of the active funds are underperforming what they said they
5:31
Speaker 1: were going to do. If I meet the market, match it,
5:34
Speaker 1: I'm gonna beat most of them. I'll be in the
5:36
Speaker 1: top quartile as a consequence. Yeah, yeah, yeah, But Jack,
5:41
Speaker 1: you're going to charge a sales load of eight percent
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Speaker 1: on this index fund. So people's first day or eight
5:48
Speaker 1: percent behind the market, how are they ever going to
5:51
Speaker 1: catch up with the market. Don't let that bothery in.
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Speaker 1: We're gonna we'll find a way to make it work out.
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Speaker 1: But that was a killer, and people look at and say,
6:01
Speaker 1: straight faced, I'm not going to go to my clients
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Speaker 1: and say go into this investment opportunity. You're guaranteed to
6:07
Speaker 1: be behind the market for the rest of the time
6:09
Speaker 1: that you hold onto it. Now, some of the data
6:12
Speaker 1: that Jack had showed that the active managers, all of
6:16
Speaker 1: whom were high fee, not even counting the fees. After
6:21
Speaker 1: a period of time, the vast majority, some nine lag
6:26
Speaker 1: the market, and then once you work the fees in
6:28
Speaker 1: after ten or fifteen years, they're way behind the market.
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Speaker 1: Why did it take so long for that concept to
6:35
Speaker 1: be recognized by investors. We're all governed by our beliefs,
6:40
Speaker 1: and the beliefs are much more powerful than data. And
6:44
Speaker 1: as we've seen in politics, as we will see in
6:47
Speaker 1: all kinds of other subject areas, what people believe is
6:52
Speaker 1: what drives them to their behavior and decisions. Don't bother
6:56
Speaker 1: me with the facts is a reality of human beings.
7:00
Speaker 1: So if you're fact based, you've got to be prepared
7:02
Speaker 1: for people to say you're crazy. That doesn't make any sense.
7:06
Speaker 1: I know what's right. And when you look back in
7:08
Speaker 1: the nineties, seventies and eighties, you know, we take it
7:11
Speaker 1: for granted how much data is available today, how easy
7:15
Speaker 1: it is for us to access historical returns for various
7:21
Speaker 1: indices versus inflation, versus dividends versus everything. That technology and
7:27
Speaker 1: that information wasn't all that readily available for years ago.
7:32
Speaker 1: What do you mean it wasn't readily available. It wasn't
7:35
Speaker 1: available period. I mean we go back a little bit
7:38
Speaker 1: of personal history. I was privileged to have the responsibility
7:43
Speaker 1: for representing Greenwich Associates consulting with Wall Street firms. The
7:49
Speaker 1: smartest people on Wall Street in terms of picking up
7:52
Speaker 1: and understanding this is really good information. I can really
7:56
Speaker 1: put it to work. John Whitehead at Goldman Sachs, who
8:00
Speaker 1: was unbelievably demanding and rigorous as a client, But I
8:04
Speaker 1: loved working for him because he always took everything very,
8:07
Speaker 1: very seriously. There's one other person, Mike Bloomberg at Solomon Brothers,
8:14
Speaker 1: and Mike took the information and converted into decisions on
8:18
Speaker 1: a regular basis, and it put him in a very
8:22
Speaker 1: strong position competitively. But it also proved to him the
8:27
Speaker 1: value of having good heart information. And you can't deny
8:31
Speaker 1: anybody can have good heart information and not use it.
8:35
Speaker 1: He was really good at using it, and that's characteristic
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Speaker 1: of why he's been so extraordinary in his successfulness years
8:42
Speaker 1: and years and years later. So all of this is
8:45
Speaker 1: really fascinating. What made you nineteen books in decide to say, hey,
8:51
Speaker 1: you know, it's time to tell the inside story of
8:54
Speaker 1: Van Guard. What led you to saying now is the
8:57
Speaker 1: time I was a direct to a Vanguard. I had
9:02
Speaker 1: worked with Vanguard as a strategy consultant before being a director,
9:07
Speaker 1: and I was deeply convinced that this was, for almost
9:10
Speaker 1: any American investor, the right way to do your investing.
9:17
Speaker 1: And then it was low cost YEP, high value YEP,
9:23
Speaker 1: reliably delivered in a systematic way, and that looking at
9:28
Speaker 1: as a director, it seemed to me very very clear
9:31
Speaker 1: that Vanguard was way underestimated by almost everybody. The clients
9:37
Speaker 1: of Vanguard underestimated how good a deal they were really getting.
9:41
Speaker 1: People who weren't clients of Vanguard were crazy not to
9:44
Speaker 1: know what the facts were. They can make their own decision,
9:46
Speaker 1: but they should know at least what the facts are.
9:48
Speaker 1: Here's a better way of being able to get good
9:51
Speaker 1: investment guidance and information. And as a director, I said,
9:56
Speaker 1: you know, I think we really are making a big
9:59
Speaker 1: mistake not to make it clear to our own people
10:02
Speaker 1: how good to deal where they're getting. Yeah. Yeah, but
10:06
Speaker 1: you know, everything about Vanguards an organization is modesty, and
10:11
Speaker 1: particularly with Jack Brennan, who was very much Mr Modesty,
10:15
Speaker 1: and it just didn't take off. And then after I
10:18
Speaker 1: left the board, Jack and I were both advisors to
10:20
Speaker 1: a very very large investment fund, and so it gave
10:24
Speaker 1: me an opportunity to make the pitch to him one
10:26
Speaker 1: more time, and he said, you know, I think you're right.
10:31
Speaker 1: I think this would be good for investors. I said,
10:35
Speaker 1: but Jack is going to be good for Vanguard to
10:37
Speaker 1: He said, yeah, but it's really good for investors, So
10:39
Speaker 1: let's go ahead. So I like the concept of Vanguard's
10:43
Speaker 1: culture as unique in the world of finance, low cost,
10:47
Speaker 1: high integrity. Tell us a little bit about the Vanguard culture. Well,
10:52
Speaker 1: it starts with one very simple proposition. Nobody is making
10:55
Speaker 1: a profit. Every other investment organization has got a problem
10:59
Speaker 1: that somebody is taking money out of the pot every day,
11:02
Speaker 1: every month, every year as a profit. Let's see American way.
11:06
Speaker 1: It's a good incentive. Yeah, yeah, yeah, But here's a
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Speaker 1: group who's highly motivated, they're doing all kinds of leadership things,
11:13
Speaker 1: and nobody's taken a profit. Everybody who's an investor in
11:18
Speaker 1: Vanguard is an owner of Vanguard. The only owners of
11:21
Speaker 1: Vanguard are the investors in Vanguard. So it's a nice,
11:25
Speaker 1: tight little situation where you eat your own cooking and
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Speaker 1: you're doing what's really right because it's what's really right
11:33
Speaker 1: for everybody. Really interesting. So, given how the world has
11:38
Speaker 1: changed over the past few decades, have you noticed any
11:42
Speaker 1: changes in the culture at Vanguard over that period. Honestly, no,
11:48
Speaker 1: it's astonishing. It's still boy Scotts and girls Scots gathered
11:52
Speaker 1: together every day to do, as they like to say,
11:54
Speaker 1: to do the right thing. And that's the only metric
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Speaker 1: by which they make a judgment. What's the really right
12:01
Speaker 1: thing to do for our investor clients, because it's their
12:04
Speaker 1: shop and we're here to do the right thing for them.
12:08
Speaker 1: So when we look around at the world of low
12:11
Speaker 1: cost indexes, they're all pretty much the same. They're cheap,
12:15
Speaker 1: they tend to hold almost identical portfolios. What makes the
12:20
Speaker 1: Vanguard version of this so different? How does Vanguard brand
12:25
Speaker 1: itself in what is essentially a commodity product. It's really fascinating,
12:31
Speaker 1: essentially a commodity product. If you have a client, they
12:35
Speaker 1: will understand the and appreciate they get good service, not
12:39
Speaker 1: fabulous service, but good service at low cost on a
12:43
Speaker 1: very reliable basis. And there's a group of people who
12:46
Speaker 1: are working full time to protect them from anything dumb
12:50
Speaker 1: or getting conned. Not bad. So let's talk about the
12:54
Speaker 1: enigma that is Jack Vogel. He spent the first twenty
12:58
Speaker 1: five years of his We are on the active side
13:02
Speaker 1: of the street. Um, it seems like it's almost a
13:05
Speaker 1: coincidence that Vanguard was even launched tell us about that.
13:10
Speaker 1: There are a lot of different ways you've come at
13:12
Speaker 1: the answer to your question. First, Jack engineered what was
13:18
Speaker 1: supposed to be the great merger made in Heaven, combining
13:24
Speaker 1: old fashioned Wellington with all of the integrity that it
13:27
Speaker 1: might have had in days gone by, heavy sales load,
13:32
Speaker 1: heavy on sales activities, um not so good on investing,
13:38
Speaker 1: combined with the hot ticket group in Boston, and it
13:42
Speaker 1: looked like that would be a winning proposition for everybody.
13:47
Speaker 1: Only problem culture, personality, way of thinking, way of doing business.
13:54
Speaker 1: Jack always wanted to have complete control of everything. The
13:58
Speaker 1: guys that for indyke Door in Paynton and Lewis Partnership,
14:03
Speaker 1: which is now the core of modern Wellington's, believed deeply
14:07
Speaker 1: in a consensus development as friends talking things out, figuring
14:12
Speaker 1: out together what's the best thing to do take a
14:14
Speaker 1: long term point of view. The two cultures did not mix,
14:21
Speaker 1: and Jack insisted on his culture being dominant because that
14:24
Speaker 1: was key to his personality, and that made it worse,
14:28
Speaker 1: not better. And then he insisted more on having it
14:32
Speaker 1: his way, and that made it even worse. And so
14:36
Speaker 1: finally they got to the point of saying, you have
14:38
Speaker 1: to go and essentially they deposed him. They tossed out
14:44
Speaker 1: the king, eventually winning a vote at a board level
14:48
Speaker 1: where he was removed from Wellington the investment firm. But
14:54
Speaker 1: Jack had a clever back door way around it. He
14:58
Speaker 1: was still a participant and part of the board where
15:02
Speaker 1: there were numerous independent directors, and the way the mutual
15:06
Speaker 1: fund industry is set up, the administration of the funds
15:11
Speaker 1: and the management of the investments are two different creatures,
15:14
Speaker 1: so he was able to stay with the admin side.
15:17
Speaker 1: Tell us a little bit about that. You've sent such
15:19
Speaker 1: a nice job of summarizing it. There's almost nothing to
15:22
Speaker 1: say other than you've got it exactly right. Oh. I
15:24
Speaker 1: got a couple of chapters just on that. Jack Vogel
15:28
Speaker 1: understood that the directors had certain kinds of power that
15:31
Speaker 1: could not be taken away, and they were because of
15:34
Speaker 1: the sec and the whole concept of regulation the mutual
15:37
Speaker 1: fund industry representatives of the investors in the mutual funds.
15:43
Speaker 1: That was a very strong base. And so legally the
15:47
Speaker 1: directors were responsible for us figuring out what to do
15:50
Speaker 1: about investing, and the directors were responsible for figuring out
15:53
Speaker 1: what to do about sales. That's legally doesn't. It's not
15:56
Speaker 1: the way to actually work. The way it actually worked
15:59
Speaker 1: is the director's at exactly what they were told by
16:01
Speaker 1: the management company, because otherwise they wouldn't get the very
16:04
Speaker 1: nice fees that they were getting, and they wouldn't have
16:06
Speaker 1: the privilege of coming to the meetings and so on.
16:10
Speaker 1: All the directors were buddies of the folks running the investor.
16:14
Speaker 1: Why else would you choose one obedient directors friends of
16:19
Speaker 1: the firm, all that sort of stuff. It's really not
16:21
Speaker 1: a nice part of the history. It's very different today,
16:26
Speaker 1: but years ago, who's a different world. Uh So, Jack
16:31
Speaker 1: had worked out that the directors would have responsibility for
16:35
Speaker 1: making the final decision on things that were important enough
16:41
Speaker 1: so that that's some real gravitas and some real strength.
16:46
Speaker 1: And he had a very close relationship with several of
16:50
Speaker 1: the directors, and several of the directors had a high
16:53
Speaker 1: regard for Jack and some men of integrity, and so
16:57
Speaker 1: they were very strong in support for him. Is like
17:00
Speaker 1: Chuck Root for an example. He was the head of
17:03
Speaker 1: T F and C, the actuarial firm, had a really
17:07
Speaker 1: distinguished talent in the Philadelphia business community and basically thought
17:13
Speaker 1: that Jack was a good guy with strong intentions and
17:18
Speaker 1: maybe too strong a personality sometimes, but a good guy
17:22
Speaker 1: for the long run, and it was clear going to
17:26
Speaker 1: support him. And Jack had similar relationships with people who
17:29
Speaker 1: give him support just enough so that he could get
17:33
Speaker 1: the vote on his side for things that had to
17:35
Speaker 1: do with the administration. Interesting phenomenon. One of the guys
17:39
Speaker 1: said he was most focused on getting to be sure
17:43
Speaker 1: that he would get the right support. Management consultant named Warden,
17:47
Speaker 1: who was doing some terrific work for European companies trying
17:52
Speaker 1: to understand American business after the Second World War and
17:56
Speaker 1: built up a very nice franchise. Uh. He died, And
18:01
Speaker 1: if it hadn't died the night before the vote, if
18:04
Speaker 1: it hadn't happened that way, vote might have gone the
18:07
Speaker 1: other way. That that close any right, Jack, one but
18:12
Speaker 1: marginal vote, the right to be able to do the administration.
18:18
Speaker 1: What a win? You think about pyric victories? What a win?
18:22
Speaker 1: Let me just be sure I understand this. I'm Jack Bogel.
18:26
Speaker 1: The one thing I don't care about at all, have
18:29
Speaker 1: no interest in whatsoever is fund administration. That's my sole business.
18:34
Speaker 1: And I'm going to have less than thirty people working
18:37
Speaker 1: with me. And the crowd of funds that I'm managing
18:41
Speaker 1: are basically going downhill because redemptions are larger than new sales.
18:48
Speaker 1: That's not much to start with, but not at all.
18:51
Speaker 1: Got to understand at the start there's a magic missing ingredient.
18:57
Speaker 1: Jack's ability to be ferociously angry and beautifully articulate for
19:04
Speaker 1: any case he ever wanted to make was a major
19:08
Speaker 1: competitive factor. And then a couple of things were lucky breaks.
19:14
Speaker 1: Money market funds came out and you could charge one
19:19
Speaker 1: percent on a money market fund, which is a lot
19:22
Speaker 1: to charge for something to says plain Vanilla as a
19:24
Speaker 1: money market fund, but a money market fund was sure
19:28
Speaker 1: to be a winner compared to the bank CDs that
19:31
Speaker 1: were limited by regulation to five interest. Then Paul Volker
19:36
Speaker 1: was driving the interest rates up to eight, ten, twelve
19:41
Speaker 1: even on money market instruments. All you had to do
19:46
Speaker 1: is a money market fund manager is by the standard
19:49
Speaker 1: stuff treasury builds, commercial paper and the like, and you
19:53
Speaker 1: could put together a portfolio that's producing a very high income,
19:58
Speaker 1: and the banks that had all the money, we're limited
20:01
Speaker 1: to that five and a half percent. So then when
20:03
Speaker 1: he float out of the banks into the mutual funds,
20:06
Speaker 1: and Vanguard made itself obvious choice by having slightly lower fees,
20:11
Speaker 1: and then lower fees, and then lower fees as there
20:14
Speaker 1: as it's built up. So they had low fees for
20:17
Speaker 1: identical product. And you don't have to be that smart
20:20
Speaker 1: to figure out, hey, when these are identical products and
20:23
Speaker 1: one is low cost, why not? Why not? So let's
20:27
Speaker 1: also talk about what was then thought of as a
20:30
Speaker 1: fairly radical concept, mutualizing the mutual funds business. Tell us
20:36
Speaker 1: a little bit about that idea where instead of being
20:40
Speaker 1: profit driven, the profits would eventually flow back to the owners,
20:45
Speaker 1: the investors, and the funds through lower fees. You just
20:49
Speaker 1: said it beautifully. Well, you know, I I've been educated
20:54
Speaker 1: with this book, so it's deep in my thought process. Well,
20:57
Speaker 1: you know, once you get two and two is four,
20:58
Speaker 1: it's easy to remember. Put to work. But the secret here,
21:02
Speaker 1: over and over and over again is ferocious drive to
21:06
Speaker 1: not fail, which was jack ferocious drive to be recognized
21:12
Speaker 1: as Mr Wonderful, which was a very important part of
21:15
Speaker 1: Jack Bogel all through his career, but they more and
21:19
Speaker 1: more and more important as he got deeper into Van Kart.
21:22
Speaker 1: Those two phenomena show up over and over and over again. So,
21:26
Speaker 1: given how successful the mutualization was, why didn't any other
21:30
Speaker 1: asset managers copy the structure? It seems like, oh wait, wait, wait, wait, wait,
21:35
Speaker 1: what's the American way? I start a business to make
21:39
Speaker 1: a profit. If I do a good job, people will
21:42
Speaker 1: come to my business. I'll get bigger, I'll make more profits.
21:46
Speaker 1: So I do a good job, I'll keep getting more
21:48
Speaker 1: in it a positive cycle. Okay, what would attract anybody
21:54
Speaker 1: to get into a business where you do a really
21:56
Speaker 1: good job and you break even. You do a really
22:00
Speaker 1: good job for years and you break even. You do
22:03
Speaker 1: a really, really really good job for year after year
22:06
Speaker 1: after year, for all kinds of people, and you break even.
22:10
Speaker 1: You mean you never ever make a profit. That's right,
22:13
Speaker 1: you never ever make a profit. Well, what's in it
22:16
Speaker 1: for me? And that is a stopper for almost everybody
22:19
Speaker 1: who starts a business. If you can't make a profit,
22:22
Speaker 1: why in the world would you get going? Goes back
22:24
Speaker 1: to Adam Smith and all the way through since then
22:27
Speaker 1: you do end up achieving a certain size where there
22:30
Speaker 1: are economies of scale, and you pay yourself a very
22:34
Speaker 1: nice salary. Hey, maybe you don't go public, maybe you
22:37
Speaker 1: don't sell the firm. But you sleep at night and
22:40
Speaker 1: you know you're doing the right thing for your clients.
22:43
Speaker 1: There's got to be some appeal for that. Now you're
22:45
Speaker 1: getting to why is the culture at Vanguards so steadily
22:48
Speaker 1: the same? Then why do people in Vanguard enjoyed being
22:52
Speaker 1: where they are? First they really like doing a good
22:57
Speaker 1: job and doing the right thing in doing a good job.
23:00
Speaker 1: It's amazing that people really do like being in honest.
23:04
Speaker 1: People really do like delivering good value. People really do
23:08
Speaker 1: like doing a great job for other people as customers.
23:11
Speaker 1: And particularly if you make clear when you joined Vanguard
23:15
Speaker 1: you're never going to get rich, it is not going
23:18
Speaker 1: to happen. So if that's the main item on your agenda,
23:21
Speaker 1: go somewhere else. And there are plenty of places in
23:23
Speaker 1: Wall Street where they'll say you want to get rich,
23:25
Speaker 1: come here. So if you don't want to get rich,
23:29
Speaker 1: but you do want to do something you're proud of
23:31
Speaker 1: every day with a group of people who are just
23:34
Speaker 1: like you, proud of what they're doing. Boy Scott's, Girl Scott's.
23:39
Speaker 1: Pretty soon you start to say, you know there's something
23:41
Speaker 1: to this. Maybe being a jesuit's not all that bad.
23:45
Speaker 1: An idea and pretty soon you start finding hey, hey, wait,
23:50
Speaker 1: this works. Let's talk a little bit about not just
23:55
Speaker 1: Jack Bogel, but the era and the team he assembled
23:59
Speaker 1: that was so crucial to Vanguard's success. Tell us a
24:03
Speaker 1: little bit about how this Yankees came together. Great question. First,
24:11
Speaker 1: Jack was man with the mission, and if you spent
24:15
Speaker 1: time with him, you could be infected with that sense
24:19
Speaker 1: of mission and purpose, and if that rang the bell
24:22
Speaker 1: for what you wanted to do with your working career,
24:25
Speaker 1: it was almost magic because there wasn't very much competition
24:30
Speaker 1: from other people doing things in the investment world. Secondly,
24:35
Speaker 1: this was a man of tremendous conviction above what was
24:38
Speaker 1: going to be the right thing to do. Sometimes that
24:40
Speaker 1: worked very much the advantage of Vanguard. There were sometimes
24:44
Speaker 1: when it worked just the other way, and it was
24:47
Speaker 1: a real negative but decisive whichever way. It was characteristic
24:52
Speaker 1: of Jack as a personality. He could put on the
24:56
Speaker 1: charm in a way in which almost anybody would melt.
25:00
Speaker 1: And then, of course there were hard hitting times when
25:04
Speaker 1: he was absolutely determined that everybody was going to do this,
25:08
Speaker 1: or that you were already on board, and you sort
25:11
Speaker 1: of saying, well, you can take the good with the bad.
25:13
Speaker 1: We can work this one out really interesting. Tell us
25:17
Speaker 1: a little bit about Jack Brennan, the man who succeeded
25:21
Speaker 1: Bogel as as the second CEO of Vanguard. He's really
25:25
Speaker 1: quite a fascinating character. Well, he had a terrific impact.
25:29
Speaker 1: And if you look at the impact in terms of
25:32
Speaker 1: essence under management, what Bogel did in his time, Brennan
25:37
Speaker 1: did ten times as much in his time, ten times
25:42
Speaker 1: as much. And he did it by putting the other
25:44
Speaker 1: the team of other people, empowering them to be strong
25:48
Speaker 1: and effective at what they were doing. Then it goes
25:50
Speaker 1: back to a couple of different route factors. Boston, Irish
25:55
Speaker 1: Catholic training. His dad was told by his guidance counselor
26:01
Speaker 1: in high school, no, kid, you're not going to become
26:04
Speaker 1: a mechanic. You're going to go to school because you're
26:08
Speaker 1: too good and too smart to stop your life. Right
26:11
Speaker 1: at this graduating from high school, you're going to college.
26:16
Speaker 1: And that was a breakthrough. And Jack's father became a
26:20
Speaker 1: consequential banker in the Boston area, but he always stayed
26:24
Speaker 1: clear to his basic roots. Jack Brennan grows up as
26:28
Speaker 1: a son of that kind of straightforward guy, and becomes
26:33
Speaker 1: a very very straightforward guy himself. The second characteristic is
26:38
Speaker 1: he was a very good athlete, and he was very
26:42
Speaker 1: good at lacrosse in particular. And one day his kids
26:46
Speaker 1: were asking, well, Dad, were you the highest scorer? And
26:49
Speaker 1: he said, that's not the right question. What do you mean, Dad?
26:53
Speaker 1: They gave him a copy of the Dartmouth Indian, the
26:57
Speaker 1: student newspaper. Brennan twenty eight assists, eight goals. He said,
27:04
Speaker 1: it's not whether youth score, it's whether your team scores.
27:09
Speaker 1: And that's Jack Brennan all the way through. He's all
27:11
Speaker 1: about bringing the team for it. As he said himself,
27:14
Speaker 1: being famous is not on my agenda. And it's very
27:18
Speaker 1: clear most people have never heard of Jack Brennan. Probably
27:21
Speaker 1: the most important person in the development of Vanguard is
27:24
Speaker 1: an organization. That's quite a statement. I don't disagree, but
27:28
Speaker 1: I don't think most people are aware how he professionalized Vanguard,
27:33
Speaker 1: how he brought in a huge team of people, but
27:36
Speaker 1: he also found all sorts of both cost savings and
27:41
Speaker 1: growth that as good as Bogel was, it was just
27:45
Speaker 1: outside of his expertise. Yeah, and look, Jack Bogel always said,
27:49
Speaker 1: I'm a small company guy, and Jack Brennan understood to
27:54
Speaker 1: be the really right Vanguard in the future is going
27:57
Speaker 1: to have to be a big organization. Second, you're gonna
28:00
Speaker 1: have to have a lot of computing power, because technology
28:03
Speaker 1: is a secret to keeping costs low, low, low, and
28:06
Speaker 1: long run. Jack Bogler would say over and over again,
28:09
Speaker 1: computers are too damn expensive, and he was right on
28:12
Speaker 1: the day that you buy them. But if you can
28:15
Speaker 1: only think of him as that moment, you're not going
28:18
Speaker 1: to be able to get a payoff. If you think
28:19
Speaker 1: of him as going to own him for five years
28:21
Speaker 1: or ten years, I'm going to use the tools to
28:23
Speaker 1: bring the cost of the operation down, it's a completely
28:26
Speaker 1: different answer. And so Jack Brennan was absolutely key to
28:30
Speaker 1: the whole idea of using technology, particularly computers, and moving
28:35
Speaker 1: in advancement that direction. Second thing is very good at
28:38
Speaker 1: distributing responsibility and hiring in outstanding individuals to do in
28:44
Speaker 1: a quiet way the things that needed to get done.
28:46
Speaker 1: So shift from one person to a team, and the
28:50
Speaker 1: team has got maybe a dozen key players on it.
28:53
Speaker 1: Then you get something that's got tremendous capacity to manage
28:56
Speaker 1: a larger and larger organization, which Vanguard had to be
29:00
Speaker 1: come in order to get the economic power that it
29:03
Speaker 1: has today to keep driving costs lower. So Brennan and
29:06
Speaker 1: Bogel were very close. Eventually, to Brennan's dismay, the relationship
29:12
Speaker 1: fell apart. Tell us a little bit about that eppisode.
29:16
Speaker 1: Easy analogy would be father and son, older guy, younger guy. Mr.
29:21
Speaker 1: Outside Jack Bogel, Mr. Inside Jack Brennan. So long as
29:25
Speaker 1: that was the working relationship, things were great. But Jack
29:28
Speaker 1: Bogel always thought of Vanguard as my company. And when
29:33
Speaker 1: you have a possessive view like that, you can talk
29:36
Speaker 1: yourself into making serious mistakes. He had agreed with Jim
29:40
Speaker 1: Ripe way back when that the longest that anybody ought
29:44
Speaker 1: to work at Vanguard would be maybe to seventy, So
29:47
Speaker 1: let's have seventy br retirement age. They got closer and
29:51
Speaker 1: closer and closer to it, and Jack Bogel said, well,
29:54
Speaker 1: you haven't, doesn't applied to the chairman, doesn't inclide to me,
29:58
Speaker 1: can't be the really right thing in the board of
29:59
Speaker 1: the actor said, now it really is the right thing.
30:03
Speaker 1: In fact, the company has already gone past your skill set,
30:06
Speaker 1: and Jack Brennan has got the skill set and he's
30:09
Speaker 1: proving it over and over and over again. We want
30:11
Speaker 1: to make that change in a very clear way, I
30:14
Speaker 1: don't want to make that change. Then Jack Bogel really
30:17
Speaker 1: really resisted it. Finally, it turned out he was deeply
30:22
Speaker 1: upset about not having made a fortune the way Ned
30:24
Speaker 1: Johnson had made a fortunate fidelity. So they gave him
30:28
Speaker 1: a substantial settlement to leave with good behavior and a
30:34
Speaker 1: great opportunity for him to start Bogel Research, which turned
30:37
Speaker 1: out to be marvelous success for Jack Bogel and for
30:41
Speaker 1: people who are paying attention in that direction. But take
30:44
Speaker 1: him out of the controls position on Van Guards so
30:47
Speaker 1: it could basically grow in its natural way as a
30:51
Speaker 1: major phenomenon. So let's talk a little bit about John Neff,
30:55
Speaker 1: another name that made a huge difference early on. Doesn't
30:59
Speaker 1: really get talked about all that much. Tell us what
31:01
Speaker 1: he did and why he was so pivotal to Vanguard's success.
31:05
Speaker 1: People don't talk about John Neff today, but in the
31:07
Speaker 1: sixties and the seventies and the eighties, people talked about
31:12
Speaker 1: John Neff because he had the best record of any
31:15
Speaker 1: mutual fund manager in the country. And you could argue
31:19
Speaker 1: that one of the great managers at Capital Group hadn't
31:22
Speaker 1: even better record, but Capital broke up the funds into
31:25
Speaker 1: multi different portfolio managers so it was not public. But
31:29
Speaker 1: among the public recorded John Neff had the best performance
31:33
Speaker 1: over the long term. Wow, does that make a difference
31:37
Speaker 1: when you're looking at year after year after year after year,
31:40
Speaker 1: with some exceptions sometimes for two or three years, but
31:44
Speaker 1: over any long term investment at the best record of
31:47
Speaker 1: anybody in the investment business. What about Gus Sauder He
31:50
Speaker 1: was the first chief investment officer at vant Guard Group,
31:54
Speaker 1: highly regarded. Tell us a little bit about his contributions.
31:57
Speaker 1: Terrific quant with the great deal of modesty and a
32:02
Speaker 1: wonderful ability to think things through. And Gus Souder was
32:07
Speaker 1: critical to development of the t F business and critical
32:11
Speaker 1: to the development of the indexing business and the capacity
32:16
Speaker 1: to manage with the quantitative group substantial fractions of the
32:21
Speaker 1: actively managed portfolios because he could replicate what an active
32:25
Speaker 1: manager might do and one of these quiet, soft spoken
32:31
Speaker 1: it's not about me, it's about the interesting work that
32:34
Speaker 1: my team is doing. The team builder and terrific technology
32:38
Speaker 1: understander who was able to put things together in a
32:41
Speaker 1: way that was really wonderful. You mentioned how important Jack
32:45
Speaker 1: Brennan was. Let's talk a little bit about Bill McNabb.
32:49
Speaker 1: He was running Vanguard right in the heart of the
32:52
Speaker 1: financial crisis. He's the one who basically told all the
32:56
Speaker 1: crew members, Hey, nobody's getting fired. Just get on the phones,
33:00
Speaker 1: speak to the clients, and don't worry about your jobs.
33:02
Speaker 1: We're all safe. Tell us a bit about his decision
33:05
Speaker 1: making and how important he was, not just during the
33:09
Speaker 1: financial crisis, but you know, I think Vinglo was about
33:13
Speaker 1: eight hundred billion pre crisis, and now it's ten x,
33:17
Speaker 1: it's eight trillion. Tell us a little bit about what
33:20
Speaker 1: Bill McNabb brought to the table. Secret to Bill McNabb
33:23
Speaker 1: is modesty, competence and discipline. And if you look at
33:28
Speaker 1: how would you understand that? Think of him as he
33:32
Speaker 1: was for many many years a rower in crew. There
33:36
Speaker 1: are no fabulous individual performers. It's all about how the
33:39
Speaker 1: whole group of eight people rose simultaneously to a level
33:44
Speaker 1: of perfection and if they get it really really right,
33:48
Speaker 1: perform in a way that you can't match. And that's
33:52
Speaker 1: what Bill McNabb was all about. Is disciplined, steady, reliable
33:57
Speaker 1: performance and USh ucks personality on the outside, but Mr
34:02
Speaker 1: Trustworthy on the inside, and everybody knew he was the
34:06
Speaker 1: kind of solid citizen that you would like to have
34:09
Speaker 1: your sister Mary, or you'd like to have your mother Mary,
34:12
Speaker 1: or you'd like to have your daughter married. And it's
34:14
Speaker 1: one of those things that just a Mr. Good guy.
34:17
Speaker 1: And while every other firm in the investment business was
34:21
Speaker 1: cutting costs because the market was down and looked like
34:25
Speaker 1: it was going to go down a lot, he said, no,
34:27
Speaker 1: we're not going to cut costs at all. Nobody's losing
34:30
Speaker 1: their job. We're all going to stay here together because
34:34
Speaker 1: the number of customers is not going down. It's just
34:36
Speaker 1: that the profitability of the business is going down. And
34:39
Speaker 1: we do not a profit minded organization. Were a service
34:43
Speaker 1: minded organization. We're all about the customers because there are
34:47
Speaker 1: owners that we're gonna stay right steady on through. And
34:50
Speaker 1: that made a terrific impact internally. But of course it
34:53
Speaker 1: also meant that they had a wonderfully strong organization coming
34:56
Speaker 1: out of the financial crisis, and that was a big
34:59
Speaker 1: help to ye perfectly positioned. Tell us about Charlie Root.
35:03
Speaker 1: What was his role as an advisor and a board member.
35:07
Speaker 1: He was the head of a major actuarial consulting firm
35:13
Speaker 1: in Philadelphia. Very disciplined thinker and an organizationally minded person
35:20
Speaker 1: and one of those people that you'd love to have
35:23
Speaker 1: as a director of your corporation. Unfortunately, shortly after some
35:29
Speaker 1: of the most important decisions, he was cleaning out the
35:32
Speaker 1: gutters in his home and the ladder he was thinking
35:37
Speaker 1: had climbed up to the gutters on started to slip
35:40
Speaker 1: a little bit to the side, and I'm afraid that
35:43
Speaker 1: that caused his death. And it was a real loss
35:47
Speaker 1: to Vanguard and a real loss to the Philadelphia community.
35:51
Speaker 1: There's one person I really have to ask about, and
35:54
Speaker 1: that's you. You were a director at Vanguard for over
35:57
Speaker 1: a decade. You're a strategy consultant. Tell us about how
36:01
Speaker 1: you felt your role was and what your contributions were
36:05
Speaker 1: during that that era. In all fairness, I have to
36:08
Speaker 1: feel you're blushing. I can't believe this. I really enjoyed
36:15
Speaker 1: being a director. We didn't get paid very much. I
36:19
Speaker 1: have to admit. The food that we were served at
36:21
Speaker 1: meals was really pretty crummy, but it was all part
36:24
Speaker 1: of the keep the cost down, keep the cost down. Attitude.
36:28
Speaker 1: Management was so candid and so open with us as directors.
36:32
Speaker 1: It was a privilege to be working with him. And
36:35
Speaker 1: it didn't hurt that I was sitting side by side
36:38
Speaker 1: with Bert Malkiel, who is one of those outstanding people
36:41
Speaker 1: in the investments world. And Bert is just turned ninety
36:46
Speaker 1: and his great book Random Walk Down Wall Street has
36:50
Speaker 1: just come out with a new, very considerably updated version,
36:55
Speaker 1: and to sit with him and to realize on item
36:59
Speaker 1: after item to item, Burt and I agreed. Burton and
37:02
Speaker 1: I agreed, Burt and I agreed. So it was a
37:05
Speaker 1: wonderful privilege, the opportunity to be able to be candid, direct,
37:11
Speaker 1: blunt spoken, and to have a really capable guy sitting
37:15
Speaker 1: right besides youch thing, You're You're on the right track,
37:17
Speaker 1: keep going, keep going, And to have a management team
37:21
Speaker 1: that was so glad to hear what we had to say,
37:24
Speaker 1: even when it made might be really in disagreement with him,
37:27
Speaker 1: or might be slightly in disagreement with him. They loved
37:30
Speaker 1: having the candor coming from the outside. Let's talk a
37:34
Speaker 1: little bit about the current state of Vanguard, but I
37:38
Speaker 1: have to preface it with Jack Bogel's c MH, not
37:43
Speaker 1: not e m H, not the uh not the efficient
37:46
Speaker 1: market hypothesis, but the cost matter hypothesis, which really dates
37:51
Speaker 1: back to his Princeton thesis. It wasn't so much about
37:56
Speaker 1: active versus passive, It was about expensive versus in a
38:00
Speaker 1: expensive tell us a little bit about how that impacted
38:03
Speaker 1: the development at Vanguard. First, you gotta understand that Jack
38:08
Speaker 1: Bogel was a master of the personality franchise development business.
38:17
Speaker 1: When nobody else gave a damn about becoming clearly identified
38:22
Speaker 1: in a very specific way, Jack cared greatly about that.
38:26
Speaker 1: And it goes back to when, as he likes to
38:28
Speaker 1: tell the story on himself, at least did tell his
38:32
Speaker 1: story on himself where he likes it or not. When
38:35
Speaker 1: he was in school, he came in second in his
38:38
Speaker 1: academic performance, and he went around to each one of
38:43
Speaker 1: his teachers pleading with them to read, examine, and modify
38:49
Speaker 1: his grade so he could come in first. He wanted
38:52
Speaker 1: to be the valedictorian, not the salutatorian. Why would he
38:58
Speaker 1: care so much about that? It is not the be
39:02
Speaker 1: all and end all of the world. It because of
39:05
Speaker 1: his personality. Something deep inside him drove him to always
39:11
Speaker 1: enhance things, make things look better, make things look better,
39:14
Speaker 1: make things look better, and so all the way through
39:16
Speaker 1: the story of Vanguard, you'll find Jack Bogel doing things
39:21
Speaker 1: or saying things to make the record look much more
39:24
Speaker 1: positive about what he contributed than the reality. And one
39:29
Speaker 1: of the awkwardnesses is the franchise building was done so beautifully,
39:35
Speaker 1: so consistently, so skillfully by a master of that craft
39:41
Speaker 1: that it's still twenty years later, thirty years later, carries on.
39:46
Speaker 1: And most people, if you ask him, when you think
39:48
Speaker 1: of Vanguard, who do you think of thing? They've got
39:51
Speaker 1: it well. Jack Bogel was terribly important to the starting.
39:56
Speaker 1: Nobody could have started the organization without being Jack Pokeel.
40:00
Speaker 1: Partly anger, partly talent, partly skills of various particular characteristics,
40:06
Speaker 1: one of which was building the personal franchise. Nobody could
40:10
Speaker 1: have started Vanguard. But if Jack Bogel had stayed in control,
40:13
Speaker 1: it would never have become the organization it is today.
40:17
Speaker 1: It would be substantially smaller, it would be deeply outclassed
40:21
Speaker 1: by people who would use automation to make their offering
40:24
Speaker 1: a better and more effective proposition, and we wouldn't see
40:28
Speaker 1: the Vanguard that's been developed since then. So let's talk
40:31
Speaker 1: a little bit about that Vanguard very huge in ETFs,
40:36
Speaker 1: big overseas investing, uh, lots of other things that Vanguard
40:42
Speaker 1: and Bogel didn't see eye to eye about. How often
40:46
Speaker 1: did the company disagree with its founder? Instant question And
40:51
Speaker 1: I'm not sure I could do it in terms of
40:53
Speaker 1: numerical quantitative But if you look back the concepts that
40:58
Speaker 1: Jack Bogel really eaved in computers he thought were terribly expensive,
41:05
Speaker 1: that would have been a stopper today you couldn't do it. Uh.
41:11
Speaker 1: It really believed in his making the decisions. It's too
41:17
Speaker 1: complicated a business. There's too many things going on, there
41:20
Speaker 1: are too many different responsibilities for one person to do
41:23
Speaker 1: all of the decision making. If you look at Vanguard today,
41:29
Speaker 1: you're looking at a substantial organization that's going through a
41:33
Speaker 1: substantial transformation towards becoming more of an effective organization at
41:40
Speaker 1: serving clients interests and doing a better and better job
41:45
Speaker 1: for the people who are already the investor owners of
41:48
Speaker 1: Van Gourd. So they are not making a major commitment internationally,
41:54
Speaker 1: they're not spending a lot of money to build a
41:56
Speaker 1: future business in other countries. They're looking for places where
42:01
Speaker 1: the resistance by the banking establishment or the financial establishment
42:06
Speaker 1: in those different countries is more open to non local competition,
42:12
Speaker 1: but it's hard to find, very hard to find. They've
42:14
Speaker 1: made some changes that we're keeping up with the times.
42:17
Speaker 1: They've got a substantial institutional business. If you're in the
42:21
Speaker 1: investment business as an institution, you really want to know
42:25
Speaker 1: something about private equity. If Vanguard doesn't have private equity,
42:29
Speaker 1: that's going to take them out of the running. So
42:30
Speaker 1: they've developed a really interesting joint venture where they're able
42:35
Speaker 1: to get access to a very competent private equity investment
42:38
Speaker 1: organization at a very controlled cost. They're not aiming to
42:43
Speaker 1: be in the very best but second quartile of performance
42:46
Speaker 1: on a reliable basis with broadly diversified capability. Okay, that'll
42:51
Speaker 1: work very nicely. They're doing the same sort of a
42:54
Speaker 1: change in going towards more and more advice. And anybody
42:58
Speaker 1: has been in the investment management business, you have been
43:00
Speaker 1: looking back on things, you can tell almost everybody would
43:05
Speaker 1: be well advised to have been more a long term investor,
43:10
Speaker 1: make fewer choices and decisions, figure out what's really right
43:15
Speaker 1: for you. At the same time, you'd recognize that every
43:18
Speaker 1: individual is unique. Nobody is exactly the same. If you
43:24
Speaker 1: look at personality, for an example, your eyeglasses, I wear eyeglasses,
43:29
Speaker 1: your shoe size, my shoe size, your shirt size, collar size,
43:34
Speaker 1: sleeve length. Pretty soon you realize barries clothes are different
43:39
Speaker 1: from mine because Barry is different from me, and he
43:43
Speaker 1: ought to wear the closer or right for him, and
43:45
Speaker 1: I ought to wear the closer or more right for him.
43:47
Speaker 1: I might get advice from my wife or something on
43:50
Speaker 1: what to wear, but we're actually dress similarly with our
43:54
Speaker 1: collar shirts and a blue sweater. But but isn't Doesn't
43:58
Speaker 1: that kind of raise the point of, well, everybody's different,
44:01
Speaker 1: but everybody needs to, say, for retirement, to pay for
44:04
Speaker 1: their kids college, to leave something to the next generation.
44:08
Speaker 1: It shouldn't vary radically. The broad strokes should all be
44:12
Speaker 1: fairly similar, shouldn't they in terms of the macro proposition?
44:17
Speaker 1: But you're exactly right, But everybody is different from everybody
44:21
Speaker 1: else in age, income, wealth, attitude towards life, how many
44:27
Speaker 1: years you want to keep working, things like risk tolerance,
44:31
Speaker 1: or everybody differs. So it turns out that almost everybody
44:35
Speaker 1: is specifically individually themselves different from somebody else specifically individually
44:43
Speaker 1: themselves and as a result, advice to individuals is increasingly
44:48
Speaker 1: obviously a useful part of the total investment proposition. Then
44:53
Speaker 1: Vanguard is moving in that direction and capable probably of
44:58
Speaker 1: more power in that direction that anybody would ever under
45:02
Speaker 1: understate or estimate. I read a crazy statistic somewhere I
45:07
Speaker 1: don't recall was in the book or elsewhere in the
45:10
Speaker 1: state of Pennsylvania, the certified financial Planners, something like n
45:16
Speaker 1: of them in the state work for Vanguard. That's that's
45:20
Speaker 1: just a crazy number. As they've pushed into uh the
45:24
Speaker 1: advisory business. In hiring all of these cfps made a
45:28
Speaker 1: major commitment to serving the investor with what they really need.
45:33
Speaker 1: And most people really ought to have a good investment plan,
45:38
Speaker 1: but they don't. Most people ought to have a clear
45:42
Speaker 1: definition of their long term purpose as investors other than
45:46
Speaker 1: I want to do better in the market, or I
45:47
Speaker 1: want to do at least as well as the market,
45:49
Speaker 1: or I want to do well, or something vague in
45:52
Speaker 1: general like that. Very hard to get people to be
45:55
Speaker 1: very specific about what do they really really want to
45:57
Speaker 1: do and why. And if you've got a good advisor,
46:02
Speaker 1: you can do a lot to improve on your results
46:05
Speaker 1: by figuring out together what makes sense to you that's
46:09
Speaker 1: available in the marketplace, and making the right decisions of
46:13
Speaker 1: what's available and realistic as opposed to dreams that may
46:18
Speaker 1: or may not come true. So so let's talk about
46:20
Speaker 1: two areas that are a little controversial. One is the
46:25
Speaker 1: thought that as indexing became more and more appealing and
46:31
Speaker 1: attracted more and more assets. Jack Bogel was a little
46:34
Speaker 1: concerned about on Oligopoly about potential anti trust issues. At
46:41
Speaker 1: what size is passive or indexing too large? I think
46:46
Speaker 1: it's a wonderful question, but if you don't mind, I'm
46:48
Speaker 1: going to say it's the wrong question. Okay. The right
46:51
Speaker 1: question is when will active investors say to themselves, the professionals,
46:57
Speaker 1: the people who are making their living as active investors,
47:00
Speaker 1: say to themselves, I think I'm going to get a
47:02
Speaker 1: different career. I think I'm going to leave this business
47:05
Speaker 1: and go in a different direction. At what age will
47:08
Speaker 1: they say to their children, Look, it was okay for
47:11
Speaker 1: me in my time, but it's not a good place
47:13
Speaker 1: for you. Don't do it. Don't do it. At what
47:17
Speaker 1: point are you going to see fewer people taking courses
47:20
Speaker 1: on investment management at business schools? Were nowhere near that
47:25
Speaker 1: we're putting more people through the learning process of how
47:28
Speaker 1: to be pretty damn good as an analyst through business
47:32
Speaker 1: school courses and then out into the industry. Then are
47:35
Speaker 1: coming out of the industry through retirement, and that's where
47:39
Speaker 1: the market is really controlled. For market efficiency or correct
47:43
Speaker 1: pricing is really smart people. If you go back fifty
47:48
Speaker 1: years ago, there were a small number of people who
47:51
Speaker 1: made their living as analysts and a small number of
47:55
Speaker 1: people made their living as portfolio managers, maybe as many
47:59
Speaker 1: a five people in the world, and today it's somewhere
48:05
Speaker 1: between one and a half and two million people. That's
48:10
Speaker 1: a big change, and there's been lots of other changes.
48:13
Speaker 1: The one that I think is the most powerful here
48:15
Speaker 1: we are that Bloomberg radio. Think about how many people
48:20
Speaker 1: own a terminal, a Bloomberg terminal that will give you
48:24
Speaker 1: any answer to any question you ever want to ask
48:27
Speaker 1: for the rest of your life within seconds. It's all
48:30
Speaker 1: it's all data and technology. It's all over the place.
48:33
Speaker 1: Everybody has computing power in their pocket. That's as much
48:37
Speaker 1: as a three sixty, which was IBM's magical power force
48:42
Speaker 1: fifty years ago. And everybody has access to the Internet,
48:46
Speaker 1: and it's entertaining its communication worldwide, and thank goodness we
48:51
Speaker 1: speak the English language because that's the language of investing worldwide.
48:54
Speaker 1: But it means that this is huge transformation that's taken place,
48:59
Speaker 1: and it has made the markets more and more skillful
49:02
Speaker 1: at finding the right price, but made it harder for
49:06
Speaker 1: active managers than as you and I've talked about before,
49:09
Speaker 1: active managers underperformed that the chosen segment of the market
49:13
Speaker 1: they went after, and now we're somewhere between and of
49:19
Speaker 1: active managers fall short of their intention, and when they
49:22
Speaker 1: fall short, they often get desperate and fall very short
49:26
Speaker 1: by hail Mary passes and other kinds of dramatic efforts.
49:30
Speaker 1: The paradox of skill is the better the professionals get,
49:35
Speaker 1: it becomes increasingly harder to even beat the market, so
49:39
Speaker 1: that that's quite fastening. One other um question that's a
49:44
Speaker 1: little controversial. H we've seen some pushback to e s g.
49:49
Speaker 1: Environmental social governance investing and the voting of proxies. How
49:54
Speaker 1: does an entity like Vanguard manage these issues on behalf
49:59
Speaker 1: of there huge thirty million clients and they're eight trillion
50:04
Speaker 1: dollars in assets and very simple they do what you
50:08
Speaker 1: would like to if you were a corporate executive, what
50:10
Speaker 1: would you like to have your shareholders do? Pay attention
50:14
Speaker 1: to the votes, be quite consistent about always voting, and
50:18
Speaker 1: as you know, most people don't vote at all. And
50:22
Speaker 1: then many institutional investments say, it's not our decision to
50:26
Speaker 1: make because we're on behalf of those. So your very
50:30
Speaker 1: best client, if you're a corporate executive, best shareholder, is
50:36
Speaker 1: to be somebody who is in it for the long run.
50:40
Speaker 1: And if you're a vanguard and indexing, you're in it
50:42
Speaker 1: permanently for the long, long, long run. Cares about certain
50:47
Speaker 1: basic principles, and they do, and they advertise what those
50:51
Speaker 1: principles are. For an example, they believe that a board
50:54
Speaker 1: of directors should have h an incentive in the company's style. Uh,
51:01
Speaker 1: they're very strong to have diversification of personality and background. Um, okay.
51:08
Speaker 1: Find those are pretty much straightforward things. Nobody would have
51:11
Speaker 1: any trouble with that. Yeah, And they are very much
51:13
Speaker 1: in favor of certain kinds of incentives but not others.
51:17
Speaker 1: And most people look at and say, yeah, those are
51:19
Speaker 1: the right things to be in favor of. So it's
51:21
Speaker 1: one after another after another. Items were Vanguard and State
51:25
Speaker 1: Street and black Rock are all three in agreement basically
51:30
Speaker 1: that good governance is an important characteristic of a board
51:32
Speaker 1: of directors, and they really want to see that going.
51:35
Speaker 1: What is it that you wouldn't like about the way
51:38
Speaker 1: in which the voting has done. It's a terrifically powerful answer.
51:41
Speaker 1: What wouldn't you like? And there is nothing that you
51:44
Speaker 1: wouldn't like? Now, is it possible that a group could quietly,
51:49
Speaker 1: somehow skillfully get together and agree, let's do something that's
51:54
Speaker 1: really not going to be right for our investors? Yeah,
51:57
Speaker 1: you could say mechanically it's possible. But there's Canada for
52:01
Speaker 1: an example of the country right next to one of
52:03
Speaker 1: the most powerful military organization nations in the world. Are
52:08
Speaker 1: the Canadians a fraid the Americans are going to attack again?
52:11
Speaker 1: Of course not. In fact, we cooperate in our activities. Okay,
52:16
Speaker 1: what would happen if somebody at any one of the
52:19
Speaker 1: indexing leaders were to do something that was not quite
52:23
Speaker 1: boy scout, girl scout right down the line? They'll get
52:26
Speaker 1: called out, I think got called out. Would it be
52:28
Speaker 1: in the newspapers, yes, would it be on Bloomberg Radio? Yes?
52:33
Speaker 1: Would you have an interview with somebody who had called
52:35
Speaker 1: him out. Yes, one of those perfectly marvelous situations where
52:40
Speaker 1: you're forced to do what you dame well want to do.
52:42
Speaker 1: That they all have State Street, Vanguard, Black Rock, they
52:45
Speaker 1: all have pretty good businesses. Why would you want to
52:47
Speaker 1: mess with that? Really really fascinating stuff, Charlie. Let's let's
52:52
Speaker 1: jump to some of our favorite questions that we ask
52:55
Speaker 1: all of our guests. And I want to start with
52:58
Speaker 1: the last time I saw you was before the pandemic.
53:02
Speaker 1: What have you been doing during the pandemic? And tell
53:05
Speaker 1: us what what's been keeping you entertained? Well. Part of
53:09
Speaker 1: the entertainment value is that are our children or daughter
53:15
Speaker 1: and her husband and their two kids under five have
53:18
Speaker 1: moved into our house, so we've had the privilege of
53:21
Speaker 1: watching little kids again. And I have to tell you
53:24
Speaker 1: that is a dream come true. It's a lot of fun.
53:27
Speaker 1: The second thing is we have an agreement in our
53:30
Speaker 1: family that we're worried about the children and COVID, so
53:34
Speaker 1: we don't do very much at all in the way
53:36
Speaker 1: of travel. And I used to be five days a
53:39
Speaker 1: week and on the train into Manhattan right as we're
53:42
Speaker 1: doing business. I haven't been in New York City three
53:45
Speaker 1: times in three years really something else. And so I'm
53:49
Speaker 1: delighted to be here today. But in our family, I
53:52
Speaker 1: have to drive in and then turn around and drive back,
53:55
Speaker 1: and as you know, the traffic has done all that
53:57
Speaker 1: convenience so on and song, But things like that have
54:00
Speaker 1: been distractions. I've enjoyed the privileged Zoom has made a
54:04
Speaker 1: wonderful difference to my life, and I'm sure to most
54:07
Speaker 1: other people. The freedom to be able to do repeat
54:11
Speaker 1: messages and communication in a serious way through Zoom has
54:16
Speaker 1: really been terrific. The third thing is I've got a
54:21
Speaker 1: real be in my bunnet that i want to be
54:23
Speaker 1: able to try to be helpful to people, and so
54:26
Speaker 1: doing investment advice is just as easy for me located
54:32
Speaker 1: where I am. Once you make the communication contact works,
54:36
Speaker 1: I've find and I've really enjoyed being able to provide
54:39
Speaker 1: some useful investment advice individuals as were going along. And
54:43
Speaker 1: then the the third thing is I've been quite active
54:48
Speaker 1: in writing. I've written for the Financial Times several different pieces,
54:52
Speaker 1: and I've written a couple of different books. I've got
54:56
Speaker 1: three books in the process of coming out. Some have
55:00
Speaker 1: I've been busy, Yeah, I've been busy. So so one
55:03
Speaker 1: of the things I won't always like to ask people
55:05
Speaker 1: is about their mentors who helped shape your career. Well,
55:09
Speaker 1: the most important person probably is Nellie Walsh, my sixth
55:12
Speaker 1: grade school teacher, who called me on their carpet one day,
55:18
Speaker 1: and I was terribly surprised because I thought I was
55:20
Speaker 1: doing just the right thing. And she said, you were
55:24
Speaker 1: wrestling with Peter Neely, weren't you. Well, I was, but
55:28
Speaker 1: that's because of I couldn't get him to stop throwing
55:31
Speaker 1: the snowballs with cinders in him at the little kids,
55:33
Speaker 1: and he was picking on the little kids, and I
55:35
Speaker 1: didn't think that was fair. And she said, Charles never
55:40
Speaker 1: called me Charlie always Charles, I think more of you.
55:44
Speaker 1: I expect more of you than you would lower yourself
55:47
Speaker 1: to the likes of Peter Neely. You may go. And
55:51
Speaker 1: ever since then I've been held to a higher account,
55:55
Speaker 1: higher standard, higher expectation in every way to be responsive
56:00
Speaker 1: to Nellie Walsh. But and more serious people in the
56:04
Speaker 1: investment world. Uh Joe Lasser, who was the director of
56:08
Speaker 1: research at Worth time, a traditional Wall Street firm. He
56:12
Speaker 1: believed deeply in security analysis and was a very strong
56:17
Speaker 1: advocate of the c f A program, and so he
56:20
Speaker 1: got me and a group of us in our training
56:23
Speaker 1: group to take the c f A exam as soon
56:25
Speaker 1: as we could. That was an important break breakaway time.
56:31
Speaker 1: H Another would be Collier Kroma, was a terrific professor
56:35
Speaker 1: of investment management at Harvard Business School, and enjoyed very
56:38
Speaker 1: much working with him. You could argue also Ben Graham
56:43
Speaker 1: and David Dodd because of their wonderful book Security Analysis,
56:47
Speaker 1: which was the first affirmation of professionalism in the financial
56:52
Speaker 1: analysis and securities pricing industry. UH and it really made
56:57
Speaker 1: a big difference to me. One of the great privilege
57:00
Speaker 1: bages of my life was to work when I was
57:03
Speaker 1: working in Wall Street and then working for Grunch Associates
57:07
Speaker 1: for thirty years, working all day, every day with some
57:11
Speaker 1: of the smartest, most capable people in the world. And
57:14
Speaker 1: they were all involved in investment management, and if any
57:18
Speaker 1: one of them competed, all the others competed, and they
57:22
Speaker 1: all wanted to try to find ways to be better.
57:25
Speaker 1: And they were all willing to tell you any insights
57:27
Speaker 1: that they had, and they're all willing to provide a
57:31
Speaker 1: chorus of teachers and guidance in terms of what's going
57:35
Speaker 1: on in investment management, and for me, that's really the
57:39
Speaker 1: most important single place for learning that I had, And
57:43
Speaker 1: what a privilege all day every day to be with
57:47
Speaker 1: the smartest people in the room who were trying to
57:50
Speaker 1: figure out investment management. And when you add it all together,
57:53
Speaker 1: you realize they're competing with themselves and they're not going
57:56
Speaker 1: to be able to beat each other on a systematic
58:00
Speaker 1: and regular basis, and boys, that make a big difference
58:03
Speaker 1: to your way of thinking. So you mentioned Graham and
58:06
Speaker 1: dot and their books on on security analysis. Tell us
58:10
Speaker 1: some of your over other favorites, and what else you've
58:13
Speaker 1: been reading more recently, Well more recently, I have to
58:15
Speaker 1: tell you I haven't found a book on investment management
58:18
Speaker 1: that I thought was really compelling. Could argue no, Come on,
58:21
Speaker 1: there is a very recent book that's the new edition
58:25
Speaker 1: of an established book. Bert Malkiel's Random Walk Down Wall
58:29
Speaker 1: Street has got to be one of the best books
58:31
Speaker 1: that's ever been written about investment management and about the
58:34
Speaker 1: markets and how to think about them. Uh. Wonderful guy
58:38
Speaker 1: and a wonderful book and has done so much for
58:42
Speaker 1: so many people. Then if you look at other books
58:45
Speaker 1: that I would like to read, then their tend towards
58:48
Speaker 1: history biography, and I'm always looking for suggestions of more
58:53
Speaker 1: books to read in that general field, because I think
58:56
Speaker 1: you learned so much about the way human beings do
58:59
Speaker 1: things if you study about them, study about them, and
59:02
Speaker 1: study about them. And so I'm a nut for trying
59:04
Speaker 1: to learn from others. I like the suggestions what sort
59:08
Speaker 1: of advice would you give to a recent college graduate
59:12
Speaker 1: who is thinking about a career in investment management? Here,
59:16
Speaker 1: I have a very strong opinion that you should think
59:19
Speaker 1: very candidly about why you're interested. We all know, for
59:23
Speaker 1: an example, that it's a very well paid line of work.
59:26
Speaker 1: Most people don't really appreciate how well paid it is,
59:29
Speaker 1: but it is wonderfully well paid. Secondly, you don't have
59:33
Speaker 1: to retire at six. In fact, many people work into
59:37
Speaker 1: their seventies. Many people even work into their eighties. At five,
59:42
Speaker 1: I'm still working in the visitors. I just very wonderful
59:47
Speaker 1: privilege of not having to stop work at some arbitrary
59:50
Speaker 1: date like sixty five or sixty. Now, that's a characteristic
59:55
Speaker 1: when you look at the lifetime compensation of being in
1:00:00
Speaker 1: the markets all the time and free to pick any
1:00:03
Speaker 1: time you want to to pick a stock individually. That
1:00:06
Speaker 1: can be for some people a very attractive characteristics. So
1:00:10
Speaker 1: if you'd like to make some substantial financial success, that's
1:00:15
Speaker 1: one reason. If that's your motivation, I think you're in
1:00:19
Speaker 1: trouble because yes, of course you will make a substantial
1:00:24
Speaker 1: amount of income, but it's not the most important part
1:00:29
Speaker 1: of your life. When you get to the end of
1:00:32
Speaker 1: life and you're off standing in front of St. Peter
1:00:34
Speaker 1: at the Pearly Gates and he said, well, you had
1:00:37
Speaker 1: your life. You were very lucky to be born at all.
1:00:40
Speaker 1: But there you were, and you chose the investment management world.
1:00:44
Speaker 1: What did you really do during that that you're proud of?
1:00:49
Speaker 1: I made a lot of money. That's not a good
1:00:51
Speaker 1: answer to a really great question. So be sure that
1:00:56
Speaker 1: if you're going into the investment management field that you know.
1:01:00
Speaker 1: Is it because you want to make a lot of
1:01:01
Speaker 1: money or is it because you like the idea of
1:01:04
Speaker 1: competing all the time with some of the smartest, most
1:01:06
Speaker 1: hard working people in the world, which could be a
1:01:09
Speaker 1: terrific motivator and you can understand. Or is it because
1:01:13
Speaker 1: you want to serve people and help them with what
1:01:15
Speaker 1: they're trying to figure out about what they want to accomplish.
1:01:19
Speaker 1: If you're the latter group, then you're going to be
1:01:22
Speaker 1: in a profession and you will also get paid well,
1:01:26
Speaker 1: but your compensation will come primarily from being good at
1:01:29
Speaker 1: the profession that lasts a lifetime. But you have to
1:01:33
Speaker 1: be clear about what is your motivation? Really really very
1:01:36
Speaker 1: interesting and our final question, what do you know about
1:01:39
Speaker 1: the world of finance and investing in Wall Street today
1:01:43
Speaker 1: that you wish you knew fifty or so years ago.
1:01:48
Speaker 1: You know, it's pretty obvious in a way. I wish
1:01:51
Speaker 1: I'd understood how much change was going to take place
1:01:55
Speaker 1: in the investment management activity and field computers, for an example,
1:02:02
Speaker 1: when I first got started, there were no computers being used,
1:02:06
Speaker 1: or maybe in the back office, but they were clunky
1:02:09
Speaker 1: kinds of operations. And the idea that there would be
1:02:12
Speaker 1: the transformation of information that worldwide is available to you
1:02:17
Speaker 1: instantaneously through Mike Bloomberg's wonderful invention the terminal, that the
1:02:22
Speaker 1: Bloomberg terminal has transformed the world of information gathering. The
1:02:27
Speaker 1: Internet has transformed the world of information gathering, and as
1:02:31
Speaker 1: a consequence, the world of investing is now worldwide and
1:02:37
Speaker 1: everybody in the world is competing with everybody else in
1:02:40
Speaker 1: the world in the investment management field. So UH, I
1:02:45
Speaker 1: wish I'd understood how dramatic a change there would be,
1:02:48
Speaker 1: because it would make a big difference to if you
1:02:50
Speaker 1: had understood that you have the forces of change working
1:02:53
Speaker 1: for you, and you could have made a completely different
1:02:56
Speaker 1: transformation of life. Quite fascinating. Charlie, thank you for being
1:03:01
Speaker 1: so generous with your time. We have been speaking with
1:03:04
Speaker 1: Charlie Ellis, author of the new book Inside Vanguard, Leadership
1:03:09
Speaker 1: Secrets from the company that continues to rewrite the rules
1:03:12
Speaker 1: of investing business. If you enjoy this conversation, be sure
1:03:16
Speaker 1: and check out any of the previous four hundred and
1:03:18
Speaker 1: seventy podcasts we've done over the past eight years. You
1:03:22
Speaker 1: can find those at iTunes, Spotify, YouTube, wherever you get
1:03:27
Speaker 1: your favorite podcast from. UH be sure and sign up
1:03:30
Speaker 1: for my daily reading list at rid Halts dot com.
1:03:33
Speaker 1: Follow me on Twitter at rit Halts. You can follow
1:03:37
Speaker 1: all of the Bloomberg podcasts at Podcasts on Twitter. I
1:03:42
Speaker 1: would be remiss if I did not thank the crack
1:03:44
Speaker 1: team that helps with these conversations together each week. Justin
1:03:48
Speaker 1: Milner is my audio engineer. Atica val bron is my
1:03:52
Speaker 1: project manager. Paris Wald is my producer. Sean Russo is
1:03:56
Speaker 1: my head of research. I'm Barry rit Halts. You been
1:04:00
Speaker 1: listening to Masters in Business on Bloomberg Radio.