 Hello everyone and welcome to Bogleheads On Investing, podcast episode number one. On this inaugural episode we have a very special guest, John C. Bogle, founder of the Vanguard Group and creator of the World's First Index Fund. Hi everyone, my name is Rick Ferry and I am the host of Bogleheads On Investing. This podcast is made available by the John C. Bogle Center for Financial Literacy, a 501 C3 organization. On each episode we'll dive deep into the principles of low-fee investing and other financial topics of interest with a special guest. All episodes can be found on Bogleheads.org and the Bogleheads Wiki site. They will also be available on commercial sites such as iTunes and SoundCloud. Ladies and gentlemen today I have with us none other than the man who started it all, Mr. John C. Bogle. Let me read to you what Mel Lindauer said when he introduced Mr. Bogle a few years ago at our investing conference. While some mutual fund managers choose to make billions, Jack Bogle chose to make a difference. And I think that exemplifies more than anything our guest today. Good morning Mr. Bogle, how are you today? Rick, good morning, please call me Jack. Thank you. I had the unique opportunity to review your upcoming book, Stay the Course, the story of Vanguard in the Index Revolution. And we're going to be talking a lot about that book today. It's a great history of not only Vanguard but of your life as well, highly recommend when it comes out in November that everyone read it because it's just extremely thorough and a great read for anyone who is interested in the history of Vanguard and in how you got to create this great company. Let me read one of the quotes from the book to get this started. And this is from Warren Buffett, the Oracle of Omaha, who at the 2017 annual shareholder meeting which you and some of your family members attended said this to the audience of 40,000. Jack Bogle has probably done more for the American investor than any man in the country. Jack, could you stand up? And then what happened, Mr. Bogle or Jack, what happened after that? Well, I'm a little embarrassed to say so. There was an explosion of applause, seemed like everybody in the audience knew about me, and Warren had prefaces and remarks by saying, there ought to be a statue for me, and there happens to be one here in Valley Forge, that's another point, but it was embarrassing and exciting and very uplifting. Was that the first annual meeting you had been to? Yes, it is, first annual meeting of Berkshire. But Mr. Buffett is not new to indexing. In fact, back in 1996 he wrote in his annual report for Berkshire Hathaway, this quote, most investors, both institutional and individual, will find it the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results after fees and expenses delivered by a great majority of investment professionals. So he was not new to indexing. He's been a fan of yours for a long, long time. Well, that's 22 years ago, Rick, and I think he was a great prophet, P-R-O-P-H-E-T, because the people that listened to him earned great profits, P-R-O-F-I-T. It was a lot going on, though, in 1996 in your life and also at Vanguard. The first time I ever heard you speak was in May of 1996. I was at the Atlanta CFA Institute annual conference, and at that time I was a newly minted CFA for about a year and a half, and I was really having a difficult time with active management because I had done a lot of work analyzing the performance of active managers, and it wasn't coming out the way, I guess, CFAs were expecting it to come out, which was if you're a CFA and you're picking stocks, you're supposed to outperform. That's sort of what the CFA Institute was all about. Anyway, I'm listening to all the different speakers talking about all the different ways we could outperform, and then you got up on stage, and I remember it quite clearly. You said that this was the first public appearance that you made after having your heart transplant. It was pretty exciting to be back on my feet again, Rick. My son, John Bogo Jr., was the moderator. There were two people, an active manager, I think, and me, and then the moderator was my son, John Bogo. Okay. That was pretty exciting, and if I can add a little family anecdote, my birthday took place, regular birthday, on May 8th, a little few weeks later, and he gave me a present down there. We had a nice little family dinner together. He gave me a squash racket, and my wife almost fainted. She didn't think I should ever get back on the squash court, but two weeks later I was back on the squash court. Wow, that's great. I don't do that anymore, but I had a couple of decades of playing squash, and it's been quite remarkable and fun and productive, I think, for me to be given an extra 21 years of life. Yeah, and hopefully many more. I hope so, but the old body is, the spirit is willing, Rick, but the flesh is weak. Well, I can tell you, but the mind is still there. There's no doubt about that. Okay, so what happened was, you got up there and you started talking to all of these CFA's who have all been trained to believe they can outperform the market if they work hard enough, and you got up there and you started giving us the fact, and it was pretty blunt, very straightforward, not any different than what you have been saying ever since, and basically straight out of your book, the first book that you wrote back in 1993 called Vogle on Mutual Funds, with probably a little bit more detail than even what was in that book, and I was sitting there listening to this saying, I just went through this long CFA educational process where I've been trained to believe that if I work hard, I can beat the market, and he's telling me that I can't. And that's exactly what I'm seeing in my data as well as I analyze money managers and mutual funds. I've got to pick up a copy of his book, and I've got to read this because there's probably something in it. And I did do that, by the way. I did it in October of 1996, so a few months later I bought the book, and I can remember very clearly when I had my epiphany, my big aha moment. It was at a House of Horrors event where my children were going through this House of Horrors right before Halloween, and there was this fake chainsaw in the background and lots of screaming and yelling, and I was sitting in the car waiting for them, and I had the light on, and I was reading your book, and I came to some passages in that book which just absolutely blew my mind because you were saying in that book, absolutely exactly what I was seeing in the data that I was analyzing on mutual funds. I mean, to the penny, and at that point I realized, I had an epiphany, I realized that I was not alone, that in fact there was a lot of other people out there like me who just didn't believe that that knew that something was wrong, and you were doing something about it. And that literally for me, it changed my life, and it changed the direction that I went in my career, and for that of course I greatly thank you, and I just wanted to tell you that story, that seeing you that first time after you had your change of heart, as you called it, caused me to take a path that actually changed my life. I appreciate that, Rick. I do my best, and that book was an interesting book. Up to that time, I think it's fair to say there was not a single book on mutual funds, or it's a single book that looked at them from those various directions. Certainly that's true, and I was recommended as the writer by the head of the CFA, and to a nice young woman named Amy Hollins who worked for Dow Jones Irwin Publishing, a big publishing house of the day, and she came to me a couple of years earlier, and then again, and then again, asking me to write the book. She said, everybody says I'm the only one that can do it. She was being flattering, and we men like that when women flatter us, but I said, look, I'm trying to run a business. My health is terrible. I just can't do it. I'd like to. But when she came in 1990, I think 1992, she'd come each autumn, and it came in 1992, and I said, I've decided I'm going to write the book. I'll have to work weekends, so I don't disturb my business stuff, and I'm afraid that I may not live long enough to put it off any longer, because I was having, I've had trouble with my heart since I was 30 years old when I had my first heart attack. So I did it. It was a tremendous success publication-wise, and it said what I wanted to say, and I look at it every once in a while, and I'm pretty happy with that book. Actually, Rick, to be candid, I'm not sure I've ever written another book that is that good. Well, I would say that that book had the biggest impact. You've written some other books that have had a big impact, but the shockwave that that book sent out through the industry and outside the industry was tremendous. Like I said, it changed life. But 1996 was also a difficult year for you as well, because starting to get into your book a little bit, that was a transition year for Vanguard. Yes, it was. That was the year that you actually had to step down as the CEO. And I have some question about that. You were 65 years old at the time, and you had heart issues. So you stepped down. There's a rumor out there, and I just want to clear it up, whether it's true or not. Did you actually have something in the bylaws at Vanguard that said that at 65 you had to retire? Absolutely not. Oh, okay. I did it for two reasons. First, I, my health was extremely uncertain. Many, many years before, one doctor told me I would probably not live till I was 40, and I've struggled with it all those years in and out of hospitals, and whether it's in Boston or Philadelphia or Rinmore, Pennsylvania, wherever it might be. And I thought I owed it to the shareholders to make sure that there was a continuity of management. So that was the first thing about dealing with heart. And second, you know, sometimes in this world we get older, and we aren't quite aware of it, and we overrate what we can do. And the aging process, although I didn't feel it personally, was something that was very much in my mind. I thought it was time for the old guys to make room for younger guys. But by that time Vanguard was the second largest mutual fund company behind Fidelity at the time. So you had really grown the company. And you had also, by that time, introduced all of the basic broad market index funds, everything from the total market to a bond fund. I think the REIT fund was introduced in 1996, the Total International Index Fund. So you had the portfolio of index funds were in place at the time. The framework was in place at Vanguard to bring that company forward. Isn't that correct? You're absolutely right. So you could say that another thing that was on my mind was the fact that I put together the basics, the index basics for the entire enterprise, and in terms of centrality and acceptance, they were all there. So the die was cast, if you will. And those funds that you identify, Total Stock Market, 500, Total Bond Market, Total International, all those funds that I started are our largest funds today, which is interesting, Rick, and that is we're talking over a decade ago and we have had no innovation in any of those funds. They're the same as they were then. Try and tell that to Steve Jobs, or the guys at Google, a company with no innovation in its basic product line for, it would now be 12 years or 14 years. No, and I'll have to tell you something else too, something I learned from you more recently than when I first had the epiphany and started converting all of my business and such to indexing was that those funds, those core funds that we talked about are all you need. As I get older, and I just turned 60 this year, my thinking has been shifting even more and more to the way you've been talking about, even though I've been a follower of yours for almost 22 years, 23 years, and I made the switch that long ago, I am only now beginning to see the true genius of what you've done as far as the simple, broad market index funds in the U.S., in the bond market, maybe international, maybe some real estate, just very simple index fund portfolio is all you really need. And everything else is just icing on the cake or the flavor of the icing on the cake that probably cost you more money and in the end probably doesn't do anything more for you. Well, you make a good point. Staying the course, the name of the book or stay the course is all about buying something that's solid, well diversified, and holding on to it forever, and to give the usual phrase that I do, Rick that follows that, to enjoy the miracle of the compounding returns without it being eaten away by the tyranny of compounding investment costs. If you want to think of anything, someone once said, all this poor guy Bogle has going for him, is an uncanny ability to recognize the obvious. And I think that's fair. They may have thought it was a criticism. I think it would may well be a compliment. Well, you call this the index revolution in your book. And I think that that's what it was. You also have trying to coin another phrase. And I want to bring that out so that we can all understand what that is. You've been working on calling a phrase called TIF or traditional index funds. And I want you to explain what you mean by that relative to all other index funds. Well, I'm delighted to do it because I tried it about 10 times, 10 speeches, maybe in public appearances, and it has yet to be adopted. I wanted to contrast ETFs with TIS, exchange traded funds with traditional index funds. And the basic difference, Rick, is traditional index funds are passive funds held by passive investors. And exchange traded funds are passive funds held by active investors. And therein lies a world of difference. Now, what the statistical services do is talk about ETFs and then mutual funds. So they mix in the other part of the equation. They mix index funds, traditional index funds with actively managed funds. I mean, it makes absolutely no sense. And I try to wrote to all the leaders of the statistical thing about a year ago and said, here's what you have to do. Here's what the data look like. And I didn't even get a single answer to my letter. They didn't answer you. But I haven't given up hope, you know me. Okay, well, I have a thought on this, okay, because I did read into this a little bit. When I first heard you say traditional index funds, my mind said the Vanguard, say total stock market or an S&P 500, that tracks a market index and only tries to achieve the return of the market index. I didn't differentiate in my mind, whether it was a mutual fund or whether that was done in an exchange traded fund, because to me, it was the strategy of the fund itself, where you have traditional index funds. And then you have all of these other factor funds and everything else that's trying to, active management, that's trying to make believe that it's an index for the purpose of confusing people. So that was what I thought when I first read and first heard you talking about TIF. I think that might be some of the confusion there. Well, I'm working on it. And I try to explain a little more fully, because it's not an oral black and white thing. Let me try this one. There are 1,000 ETS that are in concentrated in the Special of Errors, by short, long short, a single country and on, 1,000 out of 2,000. This date is a little bit old. And 63% in diversified US stocks. In the traditional index area, there are 69 diversified US stocks and only 140 trading funds. So the distinction is quite clear. And when you look at the data, you see that ETS over half of their assets is in either factor funds or concentrated or speculative funds, where only 10% of the assets, maybe 12% of such funds, the factors, the smart betas, the concentrated, the speculative, 10% of the assets are in those kinds of funds in traditional index fund form. So it's not a clean break, but it's an obvious break. And I'm going to keep after TIF until the day I die. So stand back, world. Okay, we have been warned. All right, well, let's go ahead and continue to get into your book. Stay the course, the story of Vanguard and the index revolution. There were four parts to it. Now the history of Vanguard, the Vanguard funds themselves, which I found very interesting, then looking ahead and a concluding memoir. Now here's something that you wrote, which I find interesting. And I think it might typify your association with Vanguard, with the company Vanguard. You wrote in here that when you were writing this book that you requested to review the corporate minutes of the Vanguard mutual funds during the long period which you served as a chairman, but that was denied by Vanguard. A lot of people think that you still run Vanguard in many ways. I get letters from them every day. From people who are asking you to fix things at Vanguard? Yeah, exactly. All right, so maybe I can rephrase this to, what is your current relationship with Vanguard? I mean, how does it work? Well, to be candid, I don't have much of a relationship with Vanguard because I'm out. I don't participate in the management at all. I think that's appropriate. I don't want to not complaining about it. I get no information. The shareholder writes me I have no access to their records, but that's fine because I don't run the place anymore. And I moved over to other people run it and they are running it. So they don't, I mean, I think if they ever want my advice, they know they can get it anytime, but they think they know more because they're in the business currently on a daily basis. I have no doubt they think they know more than I do and they certainly know more than I do about the current moments in the business, cash flows, things of that nature. Well, I must say there's so much public information that I'm still very well informed about those areas. But look, when you retire from the, I don't even want to use the retire word retire because I'm anything but retired, but when you leave position of chief executive, even if you're the founder of the firm and that's an important distinction, the new guys want to take over, should take over and the old guys should move out of the way. I didn't want to move out of the way because the founder I think is in a different position than a mere previous CEO. And it's certainly true, as you suggest, that I am still for better or worse the face of Van Gogh or to many, many people, many shareholders, the public, the media and so on. Well, that's a great answer. Thank you, Jack. I'm going to get back to your book and start talking about where it all began, which in your book you start talking about Princeton and your 1951 essay. And you referenced that as the beginning of your introduction and analysis and quite detailed analysis because I read the thesis a few years ago of the mutual fund industry as it was back then. And in your thesis, you talk about one mutual fund company, you talk about a lot of them, but one of them you talked about was Wellington. And at the time, Walter Morgan, Mr. Morgan was the president or the CEO of Founder of Wellington. CEO and Founder. Yes. And also something I didn't know until I read your book, he is also a Princeton graduate class of 2020. That's good to be 1920. Well, I'm 100 years ahead. I met Mr. Morgan when he was 50 and knew him for 50 years. He died about three weeks after his 100th birthday. Oh, wow. A great man. Did you meet him while you were writing your thesis? It's possible that I did because I met him on the Princeton campus, but we didn't have any discussion about the nature of the business running like that until I sent him a copy of the thesis afterwards. There was a lot of analysis in your thesis about the mutual fund industry at the time. And you must imagine that when you were writing that thesis, you went to these mutual fund companies, which at the time were different than they are now. Most of the mutual funds, as you wrote in your book, mutual fund companies just basically had one fund. They were started to manage one fund as opposed to the way the fund industry now is where fund companies have multiple, multiple funds. I didn't have an opportunity to visit people. I called them mostly on the phone. I did visit one fund manager having been for Calvin Bullock in New York because my uncle knew him and we had lunch together up there in the New York Bankers' Club. But I did not get a lot of input from the industry people themselves. I got what I could from the ICI, which was next to nothing. And then I got a lot from the limited, admittedly limited coverage in the media. But the whole history of the industry has told them the Investment Company Act of 1940 through the hearings that were held in 1939 and 1940. So I had a lot of input, a lot of facts, a lot of chances to make up my mind. Oh, and I also relied, I should add, I don't know if you'll remember this or not, but we used to have the Wiesenberger annual publication called Investment Companies. Yeah, I remember. I'm that old. Yes, I remember. And it had the performance records of every fund year by year. In those days, performance was not something that was kind of right out there for everybody to look at. It was not a big deal, if you will. At the time, 1951, what was the benchmark? But the average that people looked at was the Dow Jones industrial average right there. And that's a very imperfect index, as you know. In the long run, of course, it gives returns similar to the S&P 500. But in the short run, it's very tricky, sometimes better, sometimes worse. And on a daily basis, it can be absolutely crazy because it's only got 30 stocks and they're weighted by price. So a high price stock does some big jumping around. And it's changed a lot. It was a happy day when we picked the S&P 500 as the basis for our index fund. You know, I actually talked with people over at S&P when you negotiated that contract. And I think David Blitzer, who was the head of the S&P committee, I was speaking with him. I believe that he told me a story that you came in and said, you know, we'd like to license the S&P 500 and make a fund out of it. And they didn't know what to do because nobody had really come to them with that. And you had to try to negotiate how much they were going to charge you to do that. And I recall a number of about $25,000 a year they just threw out there and you said, okay, is that how it worked? Is that how it happened? That's pretty close. Although as a sideline, David, and I think I'm quoting me accurately, and David said in retrospect, what they were really thinking then was how much were we going to charge them for giving this new attention to the S&P 500? And you have. That's all changed now, but these are out of rages. Yeah, well, if they come a big business indexing now that index funds are licensing, you know, fund companies are licensing indexes, of course, that is their business now. So all the indexes that are created are created for the sole purpose of becoming a product as opposed to measuring something or something of economic value. So things have really changed in the indexing industry as well, which speaks to, by the way, the difference between, in my mind, a traditional index versus these other things. And that's what I was thinking getting back to your traditional index fund concept. Well, the traditional index funds, you're right. I may have not done a good job in articulating the difference, but basically the true traditional index funds, and this is we're trying to make a mix. It's not necessarily a mix to make, but there are funds that are designed to be bought and held forever. And that means very large broadly diversified funds, 500 total stock market, total international, maybe total or emerging markets, and total bond market. And now you can do reasonable variations on that. And one is one of the obvious ones is municipal bonds are not included in that bond market. And a lot of wealthy people, a lot of potential clients need municipal bonds funds. And so you have to have a long and an immediate and short, so that the concept we introduced here at Vanguard in 1974, I think, and making the investor choose between long, intermediate and short, the muni municipal bond industry doesn't really have a very good index. So it's an index fund without being a formal index fund. It has an extremely high correlation with the index as you see, but they're very hard to match because the municipal bond has so many different areas of so many little bonds and different coal provisions and all that. And it's worked very, very well. Our muni funds, long and intermediate and short and limited term, have a very high correlation, certainly in the mid 90s with the indexes as they exist. So they're quasi index funds or something like that. Well, I can tell you a story about those funds, those three funds. I used to manage several hundred million dollars of municipal bonds for clients of mine. And they were all basic bond ladders from one to 10 years, state specific and all of that. And I was looking for a benchmark to determine what, how I should rate my performance as a manager of municipal bonds to the general municipal bond market. I could not find a municipal bond index that worked. So I used a combination of the Vanguard limited term municipal bond fund and intermediate term municipal bond fund, which the duration, the average maturity, if you will, of those funds combined, equaled what my portfolio looked like. And so I was able to benchmark my portfolio of municipal bonds to something that was a better index of municipal bonds than the indexes themselves. And by the way, because of that, I stopped managing municipal bond and went to all Vanguard bond funds. Yeah. Well, it's hard to beat the deal. This trading cost in the municipal bond business is very, very high, as you know. But we had become through that idea of long intermediate and short, gave us an important role. We were late entrance into that, as you read in the book, late entrance into the municipal bond area. And all of a sudden, we changed the way the bond in the bond industry, bond fund industry worked. Everybody went to long intermediate, short. And it's so much smarter, so much better for the client, and so much greater clarity as to whether a fund is doing well or ill. I have to add, Rick, I was not unaware an index or whatever might be in the segments like long intermediate and short. The more important low cost becomes. Low cost is a very valuable differentiator in the total municipal bond market. But an invaluable, totally invaluable, extremely deterministic, really, when you break down the market by maturities, holding quality constant. Well, these things that we take for granted now, when we look back and see where they came from, a lot of the great innovations that are out there today that everyone is using have come from you and your work at Vanguard, which is amazing in itself. And as I read the book, all of this comes out in the first factor funds, the value and growth, so you were the first to come out. Not a funny story. We have in this day a factor fund, which by and large I do not approve of. I don't think there are factors that are permanently good. So why are we the starters, the creators of the first growth index fund and the first value index fund, both of which are the two largest factor funds in the field according to Morning Store, by far. And the reason I did it had nothing to do with one doing better than the other. And if you look at my annual reports written to the shareholders in those days, it said, look, it's really designed to accumulate money on the growth side in the growth index and have a very low taxable tax rate. And then when you retire, you can move over to the value side and have a little less volatility and more income was a financial planning kind of an idea. And I said, don't try and pick one over the other for performance, because I'm going to tell you that the most likely event is they will both have the same returns over the next 25 years, or I'm not sure I used 25 year period, same long run returns. Well, 25 years later, they both had returns of 9%. And the devil in the detail is that investors didn't do what I told them, traded them back and forth, and don't hold me to this exact number. But I think investors in the value fund had a return of about 5%, investors compared to the funds themselves, and investors in the growth fund had a return of about 7%. That would be 4 percentage points and 2 percentage points, less than the returns of the fund itself. And that's the problem with any fund that involves trading. So they were started for the right reasons, I think. And maybe I was just too dumb to realize that people wouldn't take my advice about how to use them. But I am proud of my forecast though, because I don't know how many people would have agreed with me that growth and value would do the same for 25 years, particularly 25 years ago, when everybody thought value was going to do well forever. Rick, nothing does well forever. As you wrote in your book, it works until it doesn't. Exactly. The reality is value, I mean, you see the data, you see the annual returns, value is unquestionably the leader. If you go back to the late 1920s is when these things began. But if you go back 25 years, they're the same. They come and go and their returns over the last roughly 25 years are identical. So the value advantage did not persist, persisted for a long time. And in my opinion, the reason it didn't persist was everybody started to recognize it and act on it, which in theory at least means you bid up the price of value stocks and bid down the price of growth stocks. And then they perform the same. This is the market of the great arbitrageure between the past and the future. Well, we are all susceptible to making mistakes and sort of getting on the bandwagon. And I'm going to go back to some earlier history. You were hired by Mr. Morgan after you graduated from Princeton. And you work there and you became his heir apparent pretty much by the mid-60s, if you will. And that was during... And actually, if I can correct you, Rick, in the mid-60s, that is to say in 1967, he called me into his office and said, I want you to run the company from now on. I don't want to do it anymore. It's a crazy business. And so that was a little more than his heir apparent. That was his heir. Okay. And you then said, well, this is the go-go era, if you will. And this is all in your book. And you've talked about it many times. How you made the decision that you needed to bring on a growth manager into the company. And that is what you did. You went out and you hunted down and looked for a growth manager who you ended up bringing on partners with... It was a publicly traded company at that time, but they ended up having majority control. And that, as you said, worked for a while until it didn't. And that ultimately caused you to get fired, which started... Correct. And you go into this in a lot of detail in the book, so I don't want to take too much time about it. But my point was that you learned the hard way that there's a cycle or a wave between growth and value. And it really cost you, at least at the time, it seemed like it was costing you. It almost cost you your entire career because you got on the bandwagon. Let me just correct you ever so slightly. We had a balance fund. The most conservative balance fund. And since there was a few of them, we were often the industry leader in cash flow. It's amazing. Wellingham fund was our only fund up until 1958. When the balance fund share of industry cash flow dropped from 40% to 1%, it doesn't make a genius to figure we better do something about that. And the original idea was to bring in or join forces with a firm that was strong in equities. So the firms I looked at were the firms you would recognize today. American funds and, well, American funds would be the most obvious out of Los Angeles, the capital group. They were not interested. I talked to a fund called Incorporated Investors, standalone, pioneer from Boston, SOC fund. And they were not interested. I talked to a little tiny group of funds, mostly equity funds, in New York City who had, I think it's $24 million worth of assets, tiny, tiny, in five funds, six funds. And they were interested. Well, that was Franklin. Charlie Johnson said, you know, I don't know if there's a government formatting, but it's a family thing. And I think I just assumed stay independent and see what happens. He was smart. So finally I came up. The only thing I could do was, which was okay in a way, was to bring in a company that had four professional managers, four professional investors, and turned out a go-go fund, which was called I-Vest Fund. So that was my best opportunity, but not my most desirable opportunity. I wanted to do something with a more middle of the road fund. And if you can't do what you do, the second best. Because we had to act. We were dying. We were going to an era where there were 83 consecutive months of redemption. Well, you brought them on and that worked for a while. It seemed like, you know, you caught the second half of the go-go era and things were going well for a while, although for Wellington it still didn't stop the hemorrhaging of money because people just weren't interested in those funds anymore. I mean, the whole world was going go-go, you know, in a way. Well, let me come back to that. They said, when the merger came along, my new partners, we can't wait to get, I think this is in the book, can't wait to get our hands on Wellington fund. And when they did, they ruined it. It had the worst 10-year record under their direction of any balanced fund in the industry. The worst. It's just hard to be last rick in this world is to be first. So they ruined it because they turned it in to go-go fund. And the portfolio manager wouldn't listen to me when I told him it was too aggressive. It's all in the book. You know, I made a mistake. There's no question about that. And maybe I should have looked for yet another merger partner. Well, we're all very glad you made that mistake, Jack, quite frankly. Because what happened as a result of that was nothing less than absolutely phenomenal. When you eventually got fired by the Wellington board, you still retained your position as the fund chairman of the funds. And I want you to explain to the people who are listening the difference between being the CEO, the chairman of a asset manager who is making the investment decisions in funds. And the fund itself, there's actually two different boards. You were fired from one, but you did not get fired from the other. Could you explain that? Yes, I can. First, the funds, the mutual funds, mutual funds, the group are pretty much no more than corporate shells. They hire a manager to do everything that they need to stay in existence. They hire an outside manager to buy them, manage the portfolio, an outside manager to do the financials and shareholder record keeping, an outside manager to do the marketing and distribution, all the same firm. So the fund and the firm are pretty much wrapped up and bound together in the industry. And nothing like this had ever happened before. Generally speaking, when the manager, which is the controlling firm, when the manager fired the its president, the fund fired its. They were in lockstep. Why didn't that happen here? Because we still had directors from the old Wellington management company that I had run on the board. And they were barely a majority. And I tell that story in there, how close they came to being a nonmajority. But they believed in me. And they didn't want me thrown out by these managers who had done, in fact, a terrible job. Why they kept them around to manage the money, I'll leave it to Wiser heads and mine. So the fund all of a sudden became something in a fact that had never become before. An operating firm with a chief executive who did something who had no conflicts of interest and a small staff, 28 for us to do mostly accounting, because we couldn't do marketing. We were not allowed to get into marketing. We were not allowed to get into investment management. All we could do was administration and shareholder record keeping, which is essentially a third leg of the mutual fund stool. I knew, as I explained in the book, that we would get nowhere if we're just running this old skeleton of an administrative company. So we had to take over investment management and we had to take over marketing, both of which we were pledged not to do. But we did anyway. Well, it took a while, but you were able to convince the board, the other board members in the funds itself. And the book is very detailed about how this happened to allow you to take over. And one of the ways in which that occurred was through your idea or your invention, if you will, of a index mutual fund. The very first one, by the way, there have been a few attempts, and you talk about in the book, of doing an index, S&P type index investment pool in various places like Wells Fargo. But no one had attempted to do it within a mutual fund that was going to be available to the general public. So you came up with the idea of doing that at Vanguard. And you said to the board, if I recall, we're not managing, we're not picking the stock. So it stopped being we're not the manager. So we're within the charter. And then you were able to convince them to allow you to start a S&P 500 fund. And if I might jump ahead one point, you originally tried to sell this fund through the broker-dealer industry with a commission. True? That is true. Well, you have to get some money in the fund. And in those days, you didn't just put out a shingle and say, please send your money in. We put together an underwriting group. And they thought we could do $250 million, and they did $11 million. It was a complete failure. It was the worst underwriting probably in the history of Wall Street. So how did they fail? I guess they failed because it was a really lousy idea. Well, no. If I recall, the commission that these, that was being charged, was lower than the commission of, say, selling an American fund. Is it, wasn't the commission maybe 5% or 4% versus? 5% in those days, the normal commission was 7.5 to 8%. So knowing the mentality of brokers, which I was one for 10 years, why on earth would I, as a broker, want to put my client's money in a fund that only pays me a 5% commission and an untested product, by the way, when I could put my client's money in something like an American funds or some other fund that paid me 8.5%. And the fact that the actively managed funds do this payola. They do their brokerage trading with the firms that sell their shares, sometimes directly, sometimes what was called a give up in those days. You do the business with a firm like maybe Goldman Sachs, and they give up half of the commission to the firm that's selling to you. Don't ask me how that's legitimate, and it proved not to be legitimate eventually. But in any event, here's a fund that's not going to do any trading at all. So, and it was not a broker's product, but we had to get some money in at the beginning. And we tried and tried and tried. I mean, how many pairs of shoe letters I wore out trying to find first an underwriter, and then trying to travel the country with these sales meetings and introduction meetings. And it all came to basically a failure. But we had the first index fund. And you also did manage to bring in, what was it, 11 million? I know you were trying to get about 150 million, but you did manage to get 11 million. And there's where the leap of faith occurred when you said to the board that you wanted to go ahead and launch the fund anyway, and they in their wisdom agreed to go ahead and do it. Yeah, there was no issue about that. The issue starting that we started we formed the fund in September of 1975, which was only a few months, five months after we began operations in May 75, four months. And so we did it almost immediately. It was the first strategic thing we did at Vanguard, and we did it fast. The underwriting took place less than a year later, August of 1976. It's amazing what a struggle we had. Yeah, it's also amazing when you look at there, there's a lot of funny stuff going on out there about starting the first income account and this and that. And you look at all the people that did it, and there are five or six or seven or eight claimed that he's first in indexing. None of them exist anymore. None of them exist anymore. And that one first index mutual fund is now one of the two largest funds in the world. So first or not, we're certainly first now. But when you took in the 11 million, there was a decision that needed to be made. So you did the underwriting, you wanted to bring in 150 million. It was a dismal failure. You only brought in about 11 or 11 and a half million. How do you launch a S&P 500 fund with 11 and a half million dollars? You can't even buy all 500 stocks. So what did you do? Well, you can't buy all 500 stocks in round lots. And you don't want to buy non-round lots because it's too expensive. So we did a sampling. And I think the original portfolio was around 275 stocks. And if you sample by, have a certain right amount in each industry, for example, you're going to come very close to the returns. I mean, first stocks had a lot of commonality in their performance. Stocks as a group. And when you get to industry, that's an even more greater commonality. In other words, if you have six airline stocks as six percent of the index and you own only one of them, or maybe two, you're going to track that just as well as if you own all of them. And we did. The tracking was not as precise as we do today. Couldn't be. It was actually run by a part-time young woman who had her full-time job within her husband's furniture store in Wilmington, Delaware. But she did fine. It wasn't sophisticated like it is today. That was your portfolio manager. It was a woman who worked for you who it was a part-time job. She was managing the first S&P 500 index fund portfolio part-time while she also worked in her husband's furniture shop full-time. Right. Yeah, it's amazing. It's just unbelievable. Well, I'm going to skip ahead a little bit. Yeah, because I'm often sad, but I'm often sad to say you can't make this stop. I'm going to move ahead a little bit because I know we've spent some time, considerable time so far, and this could go on for a long time because I started printing out all the things I wanted to talk about from your book and I ended up, I got 50 pages printed and I just stopped because there's so much stuff to talk about. But one thing I do want to talk about, when you turned the S&P 500 fund from a load fund where it was sold through brokers into a no-load, and that was a new concept, and you also merged one of the Wilmington funds into the S&P 500 and that gave you enough money to finally buy all 500 stocks and you were no-load and you at that time got permission to do your own marketing. So now you were a full-fledged Vanguard, became a full-fledged company with all three legs. I mean, you were able to do the administration, you were able to do the marketing and you were able to do the management. We were ready to compete in the full-volta line mutual fund field and stand back everybody, here comes Vanguard. And here you came, but very, very slowly because if I recall, it took you something like 10 or 11 or 12 years for the Vanguard S&P 500 fund to actually get its first billion dollars. It wasn't like it just, it didn't explode. Oh God, so slow, it was awful. And yet you had to keep running the company as if it would come sooner or later and it did. And we started in 1974 with a billion five. By 1990, we were at 55 billion, but less than 10% of our assets were in index funds, less than 5 billion. Then the boom comes. We're now 78% of our assets in index funds, even in the 2000s, 2010, we were 60%. So the momentum of indexing and the Vanguard way, the mutuality, and they go together by the way, Rick, if you're not mutual, you really don't want to be in the index business. As I often said, all the damn money goes to the clients and managers don't like that. They want all the money to go to them and they compromise and give half of the money to the clients. That's a little hyperbole. I wanted to talk about a story where you went to the SEC and you asked them, you submitted a filing to do the first bond index fund and you got a lot of pushback on that where they said, no, you can't call it an index fund because you're not buying all of the bonds in the index. So you had to call it something else originally. An interesting sideline is when we work with the SEC, I travel alone. No lawyers, no retinue, and nobody at my side to tell me what to do and nobody to consult with. I'm confident to do it myself and I think it looks better to the SEC. They always have a room full of people and they wonder who this funny non-lawyer is. So we get down to present this and they are hardly expert on the name. They wanted to talk about the name and they said, look, we're just not going to let you call it Vanguard Bond Index Fund. And I said, okay, we'll call it Vanguard Bond Market Fund. They said, that's fine. And then I said, but we'll refer to it as the Vanguard Bond Market Index Fund. They said, that's fine just so long as you don't put it in the name. So it was fun to do. And what I didn't realize when I was reading your book was that Vanguard manages something like 25% now of all fixed income assets in mutual funds. It's a phenomenal amount of money that Vanguard manages in bonds, most of which are in Bond Index Fund. So this has been an incredible growth area once you finally got it. Yeah, but we also manage about 25% of all the money in equity funds. Our total market share is 25%. And that's, bonds are actually a little below that and stocks are a little bit higher than that. I'm going to go back to active management though, because I found something in your book which I found very interesting. I hadn't read it before, but you put in your book what you call Vanguard's four P's in evaluating fund managers and you're talking about active managers because Vanguard traditionally, like you said it, until 1990, 95% of the assets into Vanguard were actively managed. So you had to have some sort of a create some sort of a system or methodology for choosing the active managers who you were going to hire to manage the funds that you had, like the prime cap and such. And what I read in your book, which is the first place I think I've read it before, was you actually had a laid out here a system that you used for determining which active managers that you were going to hire. Yeah, it was actually less of a system, maybe a series of checkpoints. I don't mean to belabor that, but it wasn't. And we did ratings all up and down those numbers and gave managers scores from one to 10. And we looked at the way they made the basic performance standard, which was performance being the last thing we looked at. But we looked at philosophy, we looked at people. Without those kind of things, we looked at the portfolio to make sure it carried them out. And then finally we looked at the performance. Performance is so deceptive because it doesn't repeat. And it's cost investors, I'm sure hundreds of billions of dollars, who just jumping back and forth on the fund because they think they buy it for the performance. And then they don't get the performance, so they sell it. And there's no better example, and I don't mean to be catty, than Magellan fund, who did very well for quite a number of years and got to be at $110 billion. And it never done well since. And it's now about $11 billion in assets. It's a loss of $100 billion. Investors have withdrawn, or the market has taken away. In 1996, when you turned over CEO, what percentage of the assets at Vanguard were index funds and what percentage was active? Do you recall? Sure. We were 31% index. Okay, so you had really jumped even over a five-year period of time, some say, in 1991 to- Oh yeah. I have a little bit in the book about momentum. And that index momentum, you know, we went from, let's say, 10% in 1990. So let's say 7% in 1989 to 50% in 1999. So the growth rate has really slowed down, believe it or not, to 75%, 78% in 2018. And that was one of five times, I guess that's right. And after that, it was going up about 50%. By 1996, all the pieces were in place for the huge growth of indexing and traditional index funds. And that has been the area that has really taken off at Vanguard. And most of the assets are going, have gone into those traditional index funds that you created in 1996 or prior, or they were on the board at least by 1996. And that really is what Vanguard indexing is about, is those core funds, the ones that you had created. But for the last 22 years, you've been very influential in the industry and very much a part of the industry and educating investors, and not only educating investors, but also trying to educate the industry and educate regulators on where the industry needs to go. And part three of your book is all about the future of investment management, where you look at where we are now and give your views, basically three ideas of where the company is going or should go in the future. And the very first one that you talk about is the mutualization of major firms. And what I read about this is that you believe that other major mutual fund companies eventually must mutualize, like Vanguard started out doing, if they're going to survive. Can you elaborate on that? Well, it's pretty easy to elaborate on and that is the difference between a mutual company and a traditional company outside external manager is that the mutual company basically gives all those huge management company profits that they would otherwise earn back to the shareholders. And the external manager does not. This is a particular problem when the external manager is a subsidiary of a big conglomerate because the big conglomerate buys the mutual company. This is the way corporations work. They buy the mutual company and they want a 15% return or 20% return in their capital. And if they don't get it, they will hire somebody who will get it. That's the business to make money by getting into on the ground floor of an industry. So in my book, I think I point out the 50 largest mutual fund companies, 40 of them, maybe 41, are externally managed by financial conglomerates. They're publicly held. I'm sorry to say I missed this data that they're publicly held about half by financial conglomerates and half by public investors. And those investors want money. They want growth. They want dividends. These are the shareholders of the management company. That's a direct conflict of interest. And that is the one major reason why mutual funds don't outperform the market indexes. There are a whole lot of other reasons, but that comes right in there. So how are you going to get your fees? I mean, if you got your fees so well that you made no money, and I don't know what your owner would say. So they can't compete on cost. And people have started to realize that cost is almost everything. Performance comes and goes. Costs go on forever. And if people accompany their interest in cost, we're seeing what a tremendous burden it is over the long term. And I think I have data in the book that shows that if the market yields 7%, you'll end up over 25 years, I guess, with $30 for each dollar invested initially. That may be 50 years. Let's say 50 years. Now $30 per dollar. And if you get 5%, a dollar grows to $10. That means two-thirds of your long-term return has been consumed by cost. It makes no sense. And if people get aware of that, they're going to have to get their cost down as their clients get aware of it. And when the clients wake up, the industry will wake up. I see somewhere in your book you wrote, you came up with the number of how much money Vanguard has saved investors. And it was somewhere in the order of $217 billion is what you estimated Vanguard has saved investors because of the continued pressure pushing down fees. So you have a lot of data in there about that. And there was one thing too I want to point out, but what you just said about the cost is that it's always been my belief that cost matter, that's been your mantra, cost matter. You're thinking my motto. No, that's your motto. That's what I'm saying. It's not mine. It's yours. Cost matter. The reason why index funds outperform most active management, the bottom line is cost. It's not because we have dumb managers out there. Because in aggregate, all the managers put together are the market. So we're just talking about cost, correct? Before cost, the average manager is average. I'm talking about if the market's total return is 7%, all the investors in the market earn gross 7%. Now, this is not nuclear science. This is not brain surgery. This is the relentless rules of humble arithmetic. As William Sharpe said, your last argument is about the antiquated laws, legislation that we have from the Investment Company Act of 1940. You say that there needs to be a complete rewrite of the Investment Company Act, which is the law that governs mutual fund companies and investment companies. And you talk about the Financial Institutions Act of 2030 to replace the Investment Company Act of 1940. You make the argument that that act of 1940 existed when there was only a few companies around and they all looked a lot like Wellington, if you will, with one fund. And it's been too many patches and the whole thing needs to be redone. Well, that's right. It was also, if you read the act with CARE, which I did a long, long, long time ago, the reality is it was written mainly to curb the abuses of closed-end companies, which sprang up in the late 1920s and vanished in the 1930s. So it was a closed-end company act by and large. It also regulates funds, each fund, no funds, for example, can own more than 10% of any of the voting stock at any security, where today we don't have a mutual fund industry as such. We have a mutual fund complex industry. So if each fund can only have 10%, does that mean if you have 20 funds, you're going to have 200%? I don't think so. One of the areas that to me has really helped propel your message and your vision has been social media. The Bogleheads, for example, which was originally established on the Morningstar Forum, and then we moved off to a separate independent website called Bogleheads.org, has done, I think, just a tremendous job of helping to spread your message and low fees, fees matter, and all of the good investment ideas that you have been putting out there for many, many, many years. I see social media as helping to really expand the knowledge of the individual investor out there, and really has helped people to understand and embrace the concept to have that epiphany or that aha moment about why index funds work. You've never really talked about getting the word out and I haven't read anywhere where you've really gotten to your comments about social media and how it might have helped you and helped Vanguard grow. Can you comment on that? Sure. I have not written a lot about social media generally, but I have written, including a couple of forwards, about a particular social media called the Bogleheads. They have been an enormous asset to Vanguard, a staggeringly large asset. Not only do they get heard when they have a complaint, and then a complaint from them is as good as gold. If we get a complaint from someone that we know, it turns out, we'll see how many people are affected by it, how many shareholders, and fix it. You want people to criticize you up to a point. The Bogleheads have not only helped one another as everybody knows. It's been a fantastic website with participation that's beyond belief. I think by far the most popular financial website that's out there, but it's independent. They have nothing to do with us. They have nothing to sell, but good grace and good advice. The Bogleheads stand alone in being a huge asset to Vanguard and a huge asset to indexing. I should add, without taking anything away from the Bogleheads at all, that another great source of our strength is academia. Few business school courses and investment. Do not talk the index as book, if you will. The Bogle message. It's academic community. Andy Lowe at MIT, Bill Scharp, Bert Malkio at Princeton. They're all there. He's not quite an academic, but David Swenson at Yale, the money managers of the colleges, which are very much indexing. It's not just the man on the street, if you will, or woman on the street, the Bogleheads, worthy of help and worthy of honor, but it's the man off the street in the ivory tower of education, financial education, and sophisticated concepts that have also been a great asset. Rest assured that the Bogleheads will ensure that you have a legacy. With that, we thank you very, very much for everything that you've done for the industry, everything you've done for millions of investors in the US and internationally, and your work will go on for many, many years after all of us are gone. Thank you for this interview. We greatly appreciate it. Thank you, Rich. Good to talk to you, and good luck to the Bogleheads. This concludes the first episode of Bogleheads on Investing. Join us each month as we have a new special guest. In the meantime, visit Bogleheads.org and Bogleheads Wiki. Participate in the forum and help others find the forum. Thank you for listening and have a great week.