Getting Mutualized with Jack Bogle

I think it should be renamed the Day Kill. So we did that because at the other end of that journey is a living legend at Vanguard named Jack Bogel. That's right, and the reason we went at to see him.

Not only are we trying to interview, you know, experts in the industry now and then, but in this case, we were interviewing him for a special series we have coming out called Trillions Presents, which is sort of like a ken Burn style documentary on the story of the E t F, a six part series, and Bogel is part of that story. So we wanted to interview him for this special series. And while we were interviewing him, it lasted about an hour and ten minutes. He was

so over us. He was at the end, I could tell he just wanted us to leave. Yeah. Yeah, But amazing guy though, totally. And there were so many things that came out of his mouth that weren't exactly applicable to the story of the E t F. But we're just little nuggets that I thought we should not just let sit on this file. Absolutely every word that was coming out of his mouth, you're just hanging on it because he's so astute still, I mean, he's right there.

He is sharp, He's like the Ben Franklin of the financial world. He's got he's not only talking logic, and he's built, you know, second big assassinent enter. But he's just little nuggets of wisdom just sort of come out. And I mean basically almost every American can basically chock up the retirement to Jack Bogel. Yeah, even Buffett says, this guy is the one they should build statue. He will definitely make the history book. So it's literally a legend.

But beyond Bogel's place in history, he's also sitting there in the Bogel research Center. So what he does is similar to what I do, and he studies fund so he's got a lot of good opinions on what's going on right now and it's part of the founder of Van Garden. Now they kind of moved in it into this other capacity where he's more of an advisor. Yeah, he writes books and does research, so in a way, he and I have a very similar job and tracked

the same. That's generous. Yeah. On this episode of Trillions Getting Mutualized with Jack Bogel, Okay, why are we calling this getting mutualized Because when we sat down with him, he was in the middle of writing his latest book and he was going through a chapter he wrote over the weekend. We saw him on a Monday, and this latest book is an upcoming book, not even out yet, so he was sharing what he was writing. So we kind of gus the weekend writing like the whole weekend

he said, he wrote. Yeah, he said he naps a lot, which is understandable, but and I like to know right now, right now. And one of the things that stuck out to me about with this chapter he was writing about everybody thinks the indstages can consolidate because everybody wants low cost products, and you know there's favorite things to talk about, right, and so in the end, you know we're gonna see a lot of companies get together to get scale and

go cheaper. He's gone beyond that. He thinks they're going to actually mutualize, which means they're gonna what does that mean? That means that Vanguard is a mutual ownership structure there so different than anybody else. Absolutely means that that the fun investors are the shareholders. He thinks more and more companies will be forced to do this in order to compete. Radical. Radical. Yeah, it's like a Bernie Sanders moment totally. So let's play

the clip in my book. I am telling you the world in the coming era, there will be mass mutual relations of large firms in the business. And there are a whole lot of reasons. One is there's a competitor out there that's eating their lunch and then know perfectly well why is eating there less? And so far they have not wanted to get competitive again. They'd have to slash their phase, but they can never slash them or

not to get down to where mutual can do. So he's not talking about et f there right, he's talking, it's bigger than that, bigger than that. And this is obviously a little out of our normal purview here, but this is something that I've been focused on a lot. If everybody wants their funds for dirt cheap, and Vanguard's taking in about two thirds of all the money, and the reason Vanguard is is because they're so cheap and they've been lowering their fees for thirty or forty years,

what's going to happen to this industry? And he's basically saying, this is what's gonna happen, and this, by the way, is an industry level phenomenon. He answered this. The question that we first asked him that this was the answer of, was why does he think other firms haven't done Vanguard's mutual ownership structure as opposed to being sort of a for profit company? And that was his answer was that, well,

they haven't because they haven't had too. But now they they're probably gonna have to radical, very radical, because it's a completely different way of operating and that is going to mean a lot of lower revenues for these companies. But what's crazy about what he says is when you think of consolidation, you think, okay, if you consolidate with three or four companies, get your assets to a couple of trillion, you have so much an assets, you could

lower your fees to Van Guardian levels. He's basically saying that's not going to be enough. Jack Bogel has a way of delivering savagery, but in a folksy manner, and that was classic Bogel. Your jugg on the ground. But you're like, oh, it's it's sounded so grandfather like. He We also asked him about what the timeline would be like for this, which he said didn't he didn't really think about it that way. It's just gonna happen. It could be five years, it could be ten years, it

could be two decades, but it will happen. He thinks it's in eventuality. Okay, next one. We buried the lead on this one. Yeah, so we did. We're on an et F show here, so we had to ask about ETF. Now, Bogel has famously not exactly been a fan. Where he stands on this one. He is not a fan. His famous quote was that E t F are like handing an arsonist the match, except that he may have one up to it with his interview with us. All right,

let's play this clip. Well, t is just an only forum, index fun um, a sort of bastardized forum for the one of a better word for one of the better word. Yeah, I mean it's pretty blunt to the chase. That's how he feels. But why does he feel that one? Here's why the e t F was really designed and this goes back to our documentary to increase volume on the AMEX. It was created by people in exchange who wanted to see volume from the volume totally. And he hates volume.

He thinks you're holding period should be like a hundred years. So it's a trading This is a trading tool conceived of as a trading tool, and he is not a trader. He's a long term investor. And what I think hurts him is that he's he created the index fund or made it into the big success it is, and this is sort of a mutation of it. So it kind of gets credit for the rise of passive but in in no way is it passive investing. So he does think that it may have contaminated this. It can be

used for pastive investing and it can be. And we we we challenged them with the fact that yes, some some ETFs are trade a lot by a lot of big investors, and that those volume figures can overshadow the people who are buying and holding. And and he admitted that there's no way to separate out the volume. And when you press Fogel on E t F s as being a fine vehicle if you buy and hold, he will admit that he just thinks that many people are.

And let's play that clip. Absolutely And you know my statement about that may seem kind of senegal, But exchange traded funds, you're fine just so long as you don't trade them. And that that's quite a true statement because you should stay with the class hey ones, the broadly diversitified ones, the total stock mark at the SNP, total international um, total bond and more total balance is even easier.

I want to stay with one. So yes, so that's interesting. Yeah, actually does acknowledge that it's okay, you just have to ignore, you know, E t F. You just have to ignore the tea exactly. And I know from I've studied the flows all the time, like it's my job basically, and I can tell you they're the low cost products from Vanguard and Schwab and some I shares core. They definitely

have lower turnover. They're used more by advisors for long term building block purposes an institutional investors who will hold those blocks for a long time. Yeah, long term investors like the E t F for the low fees and their tax efficiency. So uh, they are if used correctly. That's why I compare E t F to Gremlins. Remember the magua that was handed to that boy in the movie Gremlins. Cute little thing. As long as you've been well, is he rules? Yeah, And one of the rules, in

my opinion, is don't overtrade. If you can just withstand the temptation of not trading, you can get so many, so much of the benefits of the t F upper case lowercase T, upper case F. I like that. And speaking of acronyms, Boglos trying to introduce his own acronym for index funds. I think you might think that it's just sort of blends. He's trying to coovid little catchy acronym. So he called the TIFFs TIFFs traditional index fund. So I've never heard of that before. Had you heard that before,

I haven't. He's trying to push it. You know, when you try to push a buzzword or not, it sometimes doesn't work. But anyway, he's trying his best. Then here's him on TIFFs. T I s are a phrase that will have to be used. And you see these comparison. It says E T s versus other mutual funds, and other mutual funds are probably six index funds. You know, we know overall, but it's exactly. Funds are index one. But if you take the ETFs out and look at the rest of it, it's gonna be six percent or

five index. Men, there's got to be a separation of those two things because they are as different as day and night. And you can argue that indeed that an e T F has far more characteristics of an actively manage fund than than a traditional than the next one does. Let me just think about that. So what he's getting at here is that again, if you look at the holding periods for TIFFs, they tend to be really long term discipline type investors because because it includes stuff like

mutual funds. Yeah, and look when we say when people talk about, like, oh, all the money is going from mutual funds to um e t f s, that's not true because index mutual funds are mutual funds. Or when people say that all the money is going from active to passive, that's also not quite true because a lot

of e t fs are being used very actively. So he's trying to say that a lot of the generalization of these trends is not really true because people tend to forget that index funds are mutual funds and truly passive. In other words, there's nuance yes. Um. Another thing that I think is somewhat of a scoop in our interview, which I have never heard Bogel say, and I study

a lot of his interviews. He talked about when Vanguard launched e t s, he was not running the company, so it was a little bit out of his control that they did it, and history says, or legend says, he wasn't very happy about it. So we asked him about it, and he kind of conceded he would have done the same thing if you were running the company.

And I thought that really was him moving a notch closer to sort of coming to peace with the Vanguard ETFs, which is maybe not surprising considering how much of a dominant player they've become. I also think he sees that, compared to some of the other e t s, vanguard ets are not traded as much, and I think he's come to more peace with that. So here he is. And I, even, to be quite blunt about it, said, you know, I'd probably have done it too, But for me,

compared to anybody else, it was a big stretch. But looking back on my career, I made some really stupid judgments, and I think more when I had a marketing hat on and this is a marketing product. This is a product and bring in money and the serve investor as well. We don't really know that. It's a bit of a backhanded compliment. I love to travel in his voice like he sees it, and then it's like it's tough. Look,

it's baby steps for him. I think, you know, Bogel to me reminds me of the father whose daughter has married a guy he does not like, and it's sort of the slow process of warming up to the son in law. And it looks like a really frustrating Thanksgiving dinner. There's some life lessons in there. So the marketing hat being a real one, which is if you're just selling, then probably it's not gonna work out in your favorite

in the long run. Well, the case that was made at the time Banguard Large CTS was that ETS will get us into broker's channels, and Vanguard had never really been in that business of trying to get it stuff into distribution channels. It just it was sort of build it and they will come. And I think that's part of also why he didn't necessarily love it, because it was part to market Vanguard, and he's never been about being overtly like into marketing, so that was another reason.

So that's what he's saying. In the movie of Jack Bogo's life. Are you saying Kevin Costner plays Jack Bogel? I would say, Henry Fonda. He reminds me of Henry Fonda from on Golden Pond. That's that's the kind of vibe I get from him. I can see that. Kevin Costinger one, right, come on, okay, Well I would be well, look, if we did a biopic, Kevin Costomer would be maybe like the Middle Years, the Bogol we met that was Henry Fonda, Maybe the young would be I don't know,

um Shia Lebou or something like. So another thing we asked about, and we've talked about this in the past episode, which is in two thousand eight, Vanguard never saw a month of outflows. Every month was in flows, even in October. And just to make that perfectly clear, that's insane. It is insane in the midst of the biggest financial crisis in the past, you know, twenty years, and money only

goes in. And remember by October everybody was already definitely afraid and the market went down another seventeen percent in that month. Vanguard took in money. They just think about that. So in these sell offs that we've seen in the first quarter in February and a couple of times of the past eight years, I've studied what happens in sell offs, Vanguard takes in money. And so they've taken money when

it rains and when it's sunny. And so we asked about this sort of Navy seals level discipline of the Vanguard investor and why they're different. And that is, if somebody brings you to a new phone, a salesman and so on, and he's gonna want move you when things go down and I don't know. They say people get itchy and say I gotta get out, but I think an awful lot of brokers and advisors say, to protect themselves,

you better get out now. So having that intermediary airy force is a is a force that is a disruptive force against long term holdings. So here again he's saying that a lot of the reason other fund investors are not behaving well is because the intermediary needs to turn stuff to make it seem like they're doing their job,

whereas the people who come directly to Vanguard are. They're attracting already discipline investors first of all, and there's no intermediary, many of whom you know have gotten into investing through through Bogle and his books. What's ironic about all this is that a lot of the r A s that the sort of new school fee based advisors that love ETFs, they're saying their actual value add is to be do

behavioral coaching, and they do use Vanguard. So I do think that Vanguard does also attract inter d areas that are well behaved and are into good behavior. Because again, if you don't behave well and you pull out at the bottom and come back in on the top and all that the cost savings of using an et F over a mutual phone will get blown away by your behavior. So what he's talking about here is a complicated, layered issue and just really fascinating. What was what was another

thing that you thought he said that was surprising? Basically how big some of these big companies can get, namely black Rock and Vanguard. A lot of people are worried they're getting too big. They're the top two shareholders of about sp F understocks through any any stock stock and they black Rock, Vanguard or Vice versa. And that's that. And so we asked them about like how big this is and there are legal limits to how big they can get. Yeah, but they're very liberal. He thinks they

should be more conservative, which is interesting. So let's hear him talk about that right now. For example, on the best example I can give you out of the act, no neutral may own more than ten percent the voting stock of anyone company. What what would happen if we said no mutual fun complex con on more than ten percent of the voting sum anyone company. Vanguards almost there were eight and a half. Black Rock is I think

just a little bit be honestly not quite clear. But let me let make call M seven right, and I don't think State Street will ever get there, but they are at probably four percent. So basically, if if things keep up, Vanguard could be say, owner of all the stocks in the country. And the rule now is ten percent of a fund. So let's say the Vanguard Total Market fund, which I think owns about three or four

percent of Apple. Maybe if that hits ten, they could just create a total market too, and then there is no limit effect. What he's saying is what if we make at the company which would put Vanguard close to that ten percent limit? There black Rock seven And what he was also talking about was something you pressed them on a lot, which was this. In his book, he's writing about the New forty Act, which he thinks should

be right like that. You know, this thing that's been the bedrock of mutual funds, and e t F was also introduced in and to his point, one of the things he said is that when you go back and look at it, most of it no longer applies at all, and a lot of it was for closes and fronds funds, and they're pretty much minimalized at this point, and I think a lot of people would agree with that. I think a lot of people in the industry would disagree with his what he's thinking of doing, which is one

creating these limits. The other thing I thought that he talked about was it was interesting is he don't he doesn't think that any company that is public list and has shareholders should also be fiduciary or vice versa, which, unless I'm reading this wrong, it basically means that all these asset managers that trade on the exchange and have to serve shareholders, uh, would have to just stop or delist or something, because I think what he's saying is

you're trying to serve two masters. You can make your shareholders happy with revenue, but that's sort of against making your investors happy with lower fees and whatnot and being fiduciary. He thinks those are two gods that are clashing, and I think he's calling for a new Fordi Act that would eliminate that, which is again radical, radical Bernie Sanders

type stuff. So we also threw a few grenades, you know, we've been throwing him at that the industry, and then he went to an industry group which is called the I see I or the Investment Company Institute, the biggest lobby and group of asset managers. And I guess he was uninvited or wasn't invited. And you know he was a president once, Yeah, and Vanguard's a huge member, and uh, I think he was a little had some hurt feelings

about that, and he talks about it here. That's why if you recently read, if you read the whole article at the i C. I doesn't want me to come down there and speak to him, which I thought was

really weird. You know, here I am the founder of the most successful company in the history of this industry, a former governor, a former attendant I mean former at the general membership meeting every year, and I understand why they don't like me, But I don't understand what Stay Street and black Rock and Vanguard, why it isn't much

more of a index fund oriented institute. I mean, those three firms are pretty close to the industries asset And by the way, that article that he was referring to in that clip was cover story in Barren's recently that

you can check out to the grenades man. Well, look, I explained to him after this second, I was basically trying to say, I think when you think about what's happening in the industry, people can get sensitive because while he's saying index fund should be a bigger part of it, the problem is what he's saying doesn't make people a lot of money, and people have families to support. It can get a little sensitive for people. I've experienced this

experiences myself on Twitter. I can step on toes when I go to pro passive because I think people are like scared, and I think he taps into that. He's the face of what of what they kind of know is happening and may not want to admit or fan the flames of They might go, Okay, it's happening, but let's not let's not quicken it, because if it goes, if this whole move to low or no fee funds speeds up, uh, we we could have problems in terms

of people's jobs. So this has come up a couple of times about how advice fits into all of this, but it's some really interesting things to say about the future advice. Yeah, so um we talked about ETFs are loved by advisors, especially fee based advisors, and they love the cheap ones and part of the reason they like it they get to keep their own fee, so the advisor makes one percent. He's around there. Robo advisors came at at basis points and sort of try to shock

the system, but hasn't made that much aheadway. Vanguard now has an advisory service and they'll basically have a human advice for robo fees. A lot of people I think this is going to disrupt the whole industry, So we asked them whether the advice business would needs disrupting or how that might change that. This industry will get more and more professional and less and less like a business. And I think what will come along with that is

more and more professional ways of paying fees. So you might be paying fees on a visit basis by the hour. I don't know what it would be, but for an advisor, it seems to me that the flat percentage fee, or even the tapered percentage fee is something that's not going to sustain itself. This is a big deal. This is basically saying that instead of your advisor getting a percent of your assets or a commission, they would get maybe an hourly rate or something more akin to a different

type of business. And I've seen flashes of this on Twitter and on blogs, which is where usually things start.

And so he's right in tune with that. In terms of talking about the changing payment structure for advisors, what are the what are the ramifications of that, it's again we're going back to possibly shrinking revenues for everybody, because when you make a percentage of the assets of a portfolio and the stock market goes up, you kind of get paid just based on the market returns, and it's and it's if you change to hourly and it's sort of indifferent on how the market does. Um, this would

definitely lower revenues, but some investors may want that. And again, advisors have roughly trillion under management in the US, so that's bigger than the mutual fund industry. So when you're talking about the advisory business, it's a potentially a whole new area that sort of uh might go through what the mutual fund industry is going through right now in terms of being disrupted. You know, it dawned on me while you're describing all this. There's an Internet name behind Badger.

I think Jack Bogel is the honey Badger. Honey Badger don't care totally, and that's why he's a great interview. Um. He Usually people who run their own company, especially once they're retired and don't you know, are kind of out of it in terms of not being in the game anymore, are the best interviews because they are just so blunt.

And he's also he reminds me of my grandfather a little bit, who is deceased now, but he was World War two generation, and they have a way of talking that's just it's it's folksy, but it's blunt, and I think there's a lot of that there. And he also it's interesting. There's some other parts of the interview that we're not going to get to now, but he's very I could tell he's very satisfied getting to watch all this playoff, you know, um, and see this industry change

at the speed it's changing right now. I think he feels like he kind of won the fight. So if you get time with Jack Bogo, you can ask him about all the expected stuff, but then you have to tell him a couple of curved balls too. So one of the ones we threw him was what about bitcoin? And we'll van guard ever get into that game. Here's what he said. This is a double entendre over my dead body. Not exactly a surprising answer that I was. That was exactly what I was expecting. He'd say something

like I don't think he has a bitcoin wallet? Yeah? He um. I said, you know, is it all just nonsense to you? And he said absolutely. So. Look, I personally think that bitcoin's resilience when it should have died many times, gives me some faith. And I think that it's bitcoins um really based on the financial crisis and all these banks getting bailed out, and there's real spirit there, and I do think it's got some interesting technological benefits.

So I'm not I'm not as bearish as he is, but I get where he's coming from, and I also kind of get the evangelists, so I'm more in the middle. But I wasn't shocked that that he was on that side of the fence. And then we asked one of our favorite closing questions, which is what's your favorite DTF ticker, which he sort of stopped and looked at me and was like who. Then he looked at me to interpret I can't believe it was because like, I can't believe

this this shmuck just asked me this question. What is he? What is he asking me? But we asked, and here's what he is. He had a great answer. C r z Y. It's too funny. There is no et F with that ticker. That's his way of saying. But you get how he feels about to all of this. And I want to just sort of explore this for a second because it's a funny answer. I mean it's real wit there and makes you think he's thought about this before. That he is sharp, yes, but I don't think he

has I'm just saying that just came out. And I believe he's eighty eight years old, and I mean he is sharpest. I hope I'm that sharp, right, And look, he's still fired up. I personally, what I sometimes get from him is that, uh, the key to longevity might being might be, you know, just being fired up about stuff, because he definitely still is fired up. And uh that that was a little bit of a dig on E. T F S. And I just think it's Yeah, it really I think embodies, uh what it's like the interview.

Thanks for listening to trillions. Until next time, you can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, and wherever else you listen to podcasts. We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show. He's at Eric Altunas Big. Thanks to Vanguard and Jack Vogel for this episode. Trillions is produced by Magnus Hendrickson. Francesco Leavie is the head of Bloomberg podcast, but