Bogle on Building Vanguard and Changing an Industry
Jack Bogle describes the challenges and thrill of building Vanguard, and what kept his team centered through tumultuous change. The first in our four-part Q&A series between Jack Bogle and Betterment’s Jon Stein.
The article below offers an annotated, abbreviated part of a conversation between Jon Stein and Jack Bogle in 2016. The words are their own as individuals, and they don’t reflect the views of Betterment. If major sections have been removed, we’ve done so for readability or because a claim was made that’s out of date or unsubstantiated.
Jon Stein: So this may be a fun way to start…Go back and I’d love to hear the story of what Vanguard was like when it was about 100, 150 people? About the size of Betterment [in 2016]. I’m reading a great book…about some of the evolution of some of the modern financial services…and it’s just great to see how these ideas get started. I’d love to hear about what Vanguard was like.
Jack Bogle: Well, we were struggling for our existence.
Jack was harkening back to the mid-1970s, before Vanguard become a mutualized company, where its fundholders were owners in the company.
How Bogle Invented the Index Fund
We started with taking over the administration of the funds – that was all – from Wellington, who won this great debate about who was going to – they got the name Wellington, which I thought was wrong. So I had to pick a new name for the company.
Our assets had dropped from about $2.5 billion, to $1.4 billion. We started right at the bottom of the market. And we had five consecutive years of liquidations. So we were fighting to keep the business alive.
And everybody got burned in the go-go era. But we got burned more than most, because we had only a balanced fund. We got into the game late. We had to do it, to save the business. …If your business is selling bagels and everybody is buying donuts, you gotta get into the donut business. And aspects of this business, the mutual fund business, aren’t very attractive.
But I had to do something to keep this firm [afloat]—keeping it in a survival mode. So we had five years, and the next five years, ’74 through ’80, I guess, or ’79, we had withdrawals every year. And we were bailing.
We had to think of some way to win our case with the fund directors. And that was to have a mutual company—never tried before—where the shareholders were in the driver’s seat.
And that it was – it’s a little bit like what you all do. You’re the leader. You’re marching down a new road. I think you found success far more quickly than we did. For what that’s worth.
Because right now, our success has led to giant size, and there doesn’t seem to be any stopping. But it was really fun when we were struggling and small. We made decisions by impulse. We had, as far as I can recall, no data.
But that’s where the idea of the index fund reappeared.
And, man, was that slow. It went nowhere for five years, and really only started to get what one might call traction 20 years after it was started.
Index fund adoption was slow—but worth it.
It was eight years before the second index fund was started. Imagine that. And so it was a difficult concept to get across. But it was very important, and the future of the firm depended upon it. I’m not sure we realized it would depend on it so greatly. But the basis for that was the performance.
This is where the data comes in. Performance of the average equity fund, compared to the average S&P 500. And the average equity fund in those days was very much an S&P 500 replicate. A large cap, blue chip kind of industry that would constantly lose by the amount of their cost, if these data for the previous 35 years showed. So I proved the point. [Vanguard’s] directors, I think reluctantly went along with it. And it was fun to do something new. It was fun to take on the industry. It was fun to have somebody say, “Stamp out index funds. They’re un-American.”
That was really Wall Street speaking, because Wall Street couldn’t figure out how to make a living on an index fund.
And the answer is, there was—I want to emphasize the word “was”—no way. So we were a pariah.
The second data had to do with distribution. We were having heavy withdrawals. I thought the only solution was to abandon the broker-dealer system that supported us for 50 years all across the country, but mostly in the Northeast and the greater Philadelphia area, and just leave them and say, “We’re going no load, and there will be no more commission.” And I did some back data on what our redemptions might look like.
Would everybody had abandoned us? And I concluded that that was highly unlikely. And in fact, it never happened.
And all of a sudden, we’re basically where Vanguard is today. Administration, investment management, and distribution. Today, Wall Street loves Vanguard and loves index funds. And I think you can say that’s approximately 100 percent, because of exchange traded funds. Wall Street has found a way to make money on index funds.
So it’s a different business than it was back then.
“Working with the working stiffs”
Back then, it was personal. It was fun. If I didn’t know everybody, even at 1,000 people, Jon, I gave the impression I liked to be—I was [most] comfortable—working with the working stiffs. And actually, I’ve always been more comfortable working with the working stiffs that are doing all the hard work, than with the suits. Even though I guess I was a suit. I never thought of myself as a suit. I still don’t think about myself as suit.
I think of myself as a decent human being, loving my interaction with other decent human beings, who make our values here, maintain them, our crew members, many of whom have been here for 35 years or so, now. And what’s fun is when business is human and personal—not bureaucratic and impersonal.
Jon Stein: Well certainly I agree with that. I think I have the best job in the world. I feel very lucky. But I love the team. I love that I get to build this team; I love that I get to put it together.
And at some point, it starts to take on a life of its own. But it’s still this—it’s like a lot of my best friends in the world are here. And it’s amazing. It’s an amazing feeling to get to put together a group of people like that, and to get to work with them every day.
Jack Bogle: It’s people doing a project.
Jon Stein: Yep.
The conversation continues between Jack and Jon, moving on to the importance of index-based investing and what indexing will look like in the future. But for a few minutes, Jon and Jack just shared in their mutual entrepreneurial spirit—building teams and creating something new. As Jack liked to say, he was “The Man in the Ring.”
Bogle on the Importance of a Fiduciary Duty for Money Managers
Jack Bogle describes his strongly held views on fiduciary duty. In his words: “If you touch another person’s money, you [should be] a fiduciary.”
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