The Invention That Changed Finance Forever — Robin Wigglesworth
The Invention That Changed Finance Forever — Robin Wigglesworth
Investors saved billions of dollars … When index funds were developed, many on Wall Street were skeptical. But a group of visionaries persevered through public scorn and granted financial freedom to countless investors across America. This week, author Robin Wigglesworth joins host Charles Mizrahi to discuss this pivotal financial revolution.
- An Introduction to Robin Wigglesworth (00:00:00)
- Beating the Index (00:02:09)
- The Financial Champion (00:13:56)
- A Fateful Financial Decision (00:18:40)
- Underdogs and Visionaries (00:23:03)
- Bogle’s Fall From Grace (00:31:53)
- Bogle’s Big Break (00:35:54)
- Saint Jack (00:42:15)
- Money in Your Pocket (00:48:20)
- A Book for Future Pioneers (00:59:24)
Robin Wigglesworth is an author and global finance correspondent for the Financial Times. Based in Oslo, Norway, Wigglesworth’s regularly reports on topics such as changing markets, new and unshakeable trends, technological disruption and quantitative investing. His newest book (below) tells the incredible true story of the pioneers who started the index fund revolution.
Before You Leave:
ROBIN WIGGLESWORTH: If you’d invested in the S&P 500 index fund 15 years ago, you would have beaten over 95% of the thousands of mutual funds in America over that period.
CHARLES MIZRAHI: My guest today is Robin Wigglesworth. Robin is the Financial Times‘ global financial correspondent. His most recent book is Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. Trillions is the incredible true story of the iconoclastic geeks who defied conventional wisdom and endured Wall Street’s scorn to launch the index fund revolution.
CHARLES MIZRAHI: Index funds have democratized investing and saved investors hundreds of billions of dollars in fees that would have otherwise lined Wall Street’s pockets.
CHARLES MIZRAHI: I recently sat down with Robin, and we talked about the secret history of an invention that Wall Street wishes was never created.
CHARLES MIZRAHI: Robin, thanks so much for coming on the show. I greatly appreciate it. And I want to tell you: You did an outstanding job with this book. It’s phenomenal. Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. It’s a really great read. Thanks so much for being on the show.
ROBIN WIGGLESWORTH: Thanks for having me, and thanks for saying that. It was a slog to get it done during the pandemic, so I’m glad that it seems to be resonating.
CHARLES MIZRAHI: Oh, I like it. I remember watching this industry grow. I was in my teens at the time — with money markets and index funds around the same time. I didn’t know anything about the cast of characters. Just as an aside, I started trading on the New York Futures Exchange in 1983. And that was the whole move towards indexes. Because at the same time, they’re trading the S&P 500. I thought it was brilliant. When you have to pick anything, you just trade in a major index.
ROBIN WIGGLESWORTH: It must have been a fascinating time trading futures in the 1980s.
CHARLES MIZRAHI: Crazy. Absolutely crazy. All right. Let me ask you the first question. The S&P index funds — and all the other index funds — how much money is currently…
CHARLES MIZRAHI: I heard it’s around $3 trillion. Is that right?
ROBIN WIGGLESWORTH: That’s just in exchange-traded funds and in the U.S. So, this has gone from an industry that was invented in the states to being a global phenomenon. So, if you look at Morningstar at the Investment Company Institute data and tally up all the publicly-known index funds — classic mutual funds like Vanguard’s to ETFs like BlackRock — then you’re talking $17 trillion dollars.
ROBIN WIGGLESWORTH: And even that is only the tip of the iceberg. A lot of big investment funds — like sovereign wealth funds in the Gulf or China or big pension plans in the U.S. — do this in-house. They don’t need to pay somebody to do an index tracking strategy in a fund format.
ROBIN WIGGLESWORTH: So, you add that all together. And I reverse engineered some data I got from BlackRock. They’re not keen to talk about this because they think big numbers might scare people. But I calculate — conservatively — that we’re talking around $26 trillion globally in index strategies. That’s $17 trillion that we can see.
CHARLES MIZRAHI: Global GDP is $80 trillion or so? Just put those numbers there, it’s almost a third of global GDP in a passive strategy. So, before we even get into it, what is an index fund? What is passive management — as opposed to active management? What’s the difference, and why do I care?
ROBIN WIGGLESWORTH: Broadly speaking, throughout centuries, we’ve invested in pooled investment vehicles. Back in the day — in the 19th century — that might have been in investment trusts.
ROBIN WIGGLESWORTH: And then, in the 20th century, it was the era of the mutual fund. That’s when lots of people give their money to a pooled investment fund that was run by a professional who might have had a team of traders, analysts and lawyers. They tried to pick the best stocks and avoid the worst ones. Or, in some cases, they might have tried to short the worst ones — the ones that they thought were going down the drain.
ROBIN WIGGLESWORTH: That’s kind of how it was up until 1971. There was a dawning realization that — in practice — even the professionals do a pretty bad job at this.
CHARLES MIZRAHI: One second, Robin. They do a bad job at what? Beating the index?
ROBIN WIGGLESWORTH: Yes, beating the index. Frankly, indices have been around for a long time. But people didn’t benchmark their fund managers against them. If you went back to the 1930s, 1940s, 1950s and 1960s, people didn’t really know what the overall stock market was doing. You had some indices — like the Dow Jones Industrial Average. That’s been around for ages, but it’s not that good. It has all sorts of technical problems with it. The S&P 500 — which is a really good index and has a lot of history now — was born in the 1950s. So, people didn’t know what to measure their fund managers against until the 1960s and 1970s.
CHARLES MIZRAHI: Why that’s important is because if I’m putting my money with a manager and paying them a fee, I want them to beat some type of benchmark. And prior to the S&P 500 index — which is an average or index that’s weighted — let’s to talk about that. Let’s call it 500 stocks that are weighted a certain way and gives us a good number of the stock market. If I did 20%, and the S&P did 19%, I’m worth my weight in salt because I beat the benchmark. Is that right?
ROBIN WIGGLESWORTH: Exactly. And you want those fund managers to not beat their benchmarks every year. But in the long run, they should, right? That’s why you’re paying your professional to manage your money. For a long time, people thought that’s what they did. It makes intuitive sense that the professionals will do better than your average dentist or lawyer investing their own money.
ROBIN WIGGLESWORTH: But what people started to discover in the 1960s — and especially in the 1970s when there was the biggest bear market since the Great Depression — is that they do a bad job, on average. And that ended up helping birth the very first index fund — which is just a fancy way of saying it’s a fund that buys all the stocks in one of these indices. So, they’re trying to choose the hot ones or avoid the bad ones. So, buy everything. And they do it cheaply.
ROBIN WIGGLESWORTH: Even people who don’t think markets are efficient — actually, there all sorts of challenges for active managers. There are all sorts of opportunities that they can take advantage of. People can see that the costs of these fund managers are quite a headwind. It’s a bit like starting every football game a few goals down. They have to make their own fees back before any gains accrue to the investor.
ROBIN WIGGLESWORTH: So, a lot of people like index funds — and not because they were academic zealots. They just like that they’re cheap. They’re cheap, simple products in an industry that loves complexity and high costs.
CHARLES MIZRAHI: Let’s take a step back for a second. I’m giving my money. I made a lot of money. I want it to be managed. It’s 1960. I give it to you — The Wigglesworth Investment Management Team. Your pitch is: “I can find a handful of stocks that are going to outperform the market. So, if the market does 20%, we should do exceedingly better than the market. And for that, you pay me a 1% or 2% management fee.” And I say: “That makes a lot of sense because you’re going to bring me an above-average or above-benchmark return.”
CHARLES MIZRAHI: And you’re telling me that what happened over time is investors of pension plans — these are big money people — kept saying: “Paying Wigglesworth is a waste of time and money because not only are the fees eating into performance, but this guy isn’t even coming close to the benchmark.” Is that it?
ROBIN WIGGLESWORTH: Pretty much. Back in those days, there was a mutual fund industry that was growing quickly. But it was nothing like it is today. At the time, the big market was big pension plans of General Electric or IBM — some of the state pension plans. And they had invested in maybe 100 of these fund managers. They could see that what they were doing was essentially swapping bananas and apples.
ROBIN WIGGLESWORTH: So, not only did you have the cost of paying them 1% or 2%, but quite often, they pushed the cost of trading over to you, the investor. So, if you were AT&T’s pension plan manager, and you invested in fund manager A and B, you could see that fund manager A was selling IBM stock to fund manager B. And fund manager B was selling General Electric stock back to fund manager A.
ROBIN WIGGLESWORTH: That was going on all the time — incurring massive costs and [paying] salaries. So, that’s why they were starting in reality — not just a few goals down. It was difficult for them. That’s why I always say: “These people aren’t lazy. They’re not bad people. It’s just a really difficult job.” And the data has conclusively proved that it’s close to impossible to do it consistently.
CHARLES MIZRAHI: Why is that? Why is it so hard to beat the index?
ROBIN WIGGLESWORTH: Some of it is the theory that markets are relatively efficient. That doesn’t mean that they’re perfect. We see people do dumb things in markets all the time. We see individual companies blow up or go down the drain. And market bubbles burst all the time. But over time, they should be fairly efficient because it reflects the sum of millions of relatively informed people trying to do their best to make money.
ROBIN WIGGLESWORTH: And over time, the people are bothered by it. They lose all their money. So, over time, the market should be relatively efficient. But frankly, even if you don’t believe in that, one thing that we have recently discovered is that it’s a staggeringly narrow club of companies that account for the vast majority of stock market gains. So, in the United States, for almost for the past century, only 4% of companies — around 1,000 companies — accounted for all $36 trillion worth of gains.
CHARLES MIZRAHI: Right. And what are the odds of you picking any of those thousand out of that?
ROBIN WIGGLESWORTH: Exactly. This is it. Essentially, if you do pick one of those, it might be blind luck. You can sustain an entire career as a successful investor if you choose one of these massive compounders — or winners — over time.
ROBIN WIGGLESWORTH: If you’d invested in IBM when it was a cheap and cheerful startup — or General Electric a century ago — it would have been absolutely astonishing until very recently. So, the theory behind it is that there are some gold needles in this haystack. But buy the entire haystack cheaply rather than have somebody scratch through it and eventually not come up with something. Or, if you’re lucky, they might come up with a gold needle or two. But statistically, we know that over a 10-year period, only around 10% of professional fund managers manage to beat their benchmarks.
CHARLES MIZRAHI: When indexing — and don’t I want to get into it because your book does a fantastic job and goes into detail. I want to tell you what I took away from this at the end. But before we talk about that, these quantitative guys — these computer nerds who don’t care about the earnings or fundamentals of a company — try to create an index to make it tradable or investable. And at the time, the mutual fund managers were pissed. They didn’t want this to come out, right?
ROBIN WIGGLESWORTH: No. It’s natural, right? It’s human nature. I like using the internet, but I’m a financial journalist. It’s my day job, but I don’t quite like what it’s done to the economics of my business either. Even though it has made the world a better place, it has not been great for my industry. And that’s kind of how the finance industry saw this.
ROBIN WIGGLESWORTH: To be honest, at the beginning, most of them thought the idea was comical. The idea that you’d buy a fund that doesn’t even try to beat market wasn’t just seen as lazy, but it was seen as giving up. Why would you do that? So, one fund manager once told Jack Bogle — who founded one of the biggest indexing companies: “Who wants to be operated on by a mediocre surgeon? Who wants to have a mediocre lawyer?” The name of the game is to be the best — especially in a country like America. It was lambasted as un-American.
CHARLES MIZRAHI: Right. Why would you want to invest?
ROBIN WIGGLESWORTH: Later on, this tipped from derision to fear and hatred. That’s where we’re getting to today.
CHARLES MIZRAHI: OK. Hang onto that for one second. In 1960, this guy writes an article. His name is John B. Armstrong. He writes in the Financial Analysts Journal — which is still around today — to make a case for managed mutual funds — meaning active management — and not investing in an index. That’s silly. We definitely beat that.
CHARLES MIZRAHI: He writes this paper and concludes the case fund mutual management. He highlights four leading stock-focused mutual funds. And he says: “You can beat the market. Easy. It can definitely be done.” It’s turns out — as I learned from your book — that this guy’s name wasn’t John B. Armstrong. And people were trying to figure out who this guy was. So, they pieced together that it was…
ROBIN WIGGLESWORTH: Jack Bogle, the founder of Vanguard.
CHARLES MIZRAHI: So, Jack Bogle goes on to become one of greatest financial champions. According to Warren Buffett, they should have a statue of Jack Bogle because he has saved investors billions of dollars in fees. Here he is writing under an assumed name and talking against index funds. How does that happen?
ROBIN WIGGLESWORTH: He’s speaking about his own industry’s case. Before he became the Jack Bogle that we know today, he was the wonder boy of the investment industry. He was the hotshot senior vice president at Wellington — one of the oldest and best-established mutual fund groups in America. And in 1960 — this was before the index fund was invented — some professors dared to suggest that there’s so much choice in the mutual fund industry. Maybe somebody should do an unmanaged portfolio of the entire market so that people don’t have to suffer the agony of choice. It was a zany, academic idea.
ROBIN WIGGLESWORTH: And Jack Bogle — under a pseudonym — rubbished the idea. It goes to show that, when your industry is under threat, you ring the wagons. Jack Bogle could probably sense that this was a dangerous idea. He was relatively steeped in financial theory. But I think that Jack Bogle — the champion of passive investing that we know today — is a historical revisionism that he encouraged later on in his life. Even when he started Vanguard, it wasn’t because he was a big fan of passive investing. It was because it was the only thing that he could do.
CHARLES MIZRAHI: Corporate intrigue. Amazing stuff. [There was a] boardroom fight. But hold onto that for just one second. I just want our listeners put this in the proper context. In theory, what index funds pose — and Bogle is smart enough and intellectually honest. Well, he’s not intellectually honest because he comes out and says that it’s not going to work.
CHARLES MIZRAHI: But it is probably one of the greatest innovative disruptors in an industry — ever. It makes what Amazon did to retail and brick and mortar look like a walk in the park. I don’t know what the size of retail is, but it’s certainly not $28 trillion. They’re attacking an industry where, for the past 70 to 80 years, you found your father’s stock broker (or inherited money) and the money management firm or trust department of a bank took care of it. Every year, you paid them a fee, and they got richer. Where were the customers’ yachts? You didn’t make money. So, Bogle senses that something’s up. His first line is to defend. And what happens then?
ROBIN WIGGLESWORTH: Very soon afterwards, he was elevated to lead at Wellington. So, the founder of the company handed the reins over to his protégé — a young Jack Bogle. He was the youngest CEO in the investment industry. But Wellington is a really conservative organization. So, it has actively-managed funds. But it has balanced funds that invest in both stocks and bonds. And it started an equity fund that ended up having great success. But it wasn’t a great success to begin with.
ROBIN WIGGLESWORTH: In the 1960s, there was a dot-com bubble — the first dot-com bubble. But they weren’t dot-coms. There were Xerox, IBM and Kodak — hot technology stocks. It was known as the go-go era. And nobody wanted boring, balanced funds at the time.
ROBIN WIGGLESWORTH: So, Bogle inherits this company with a brief to resurrect its fortunes — because it was losing ground day after day. And he looks around for partners. He realizes that they either need to build a go-go mutual fund or acquire one.
ROBIN WIGGLESWORTH: So, he makes the fateful decision to basically merge Wellington with one of the hottest go-go funds of the 1960s that was based up in Boston. And initially, this works really well — up until the go-go era goes — like most of the other dot.com bubbles go. It collapses into the biggest bear market since the Great Depression.
CHARLES MIZRAHI: In 1973 and 1974, right. The Nifty 50. All you needed were these 50 stocks. Just sit back. It was like investing in the dot-com. Same story. Different era.
ROBIN WIGGLESWORTH: It was it was incredible. They were very different. The Boston partners — Thorndike, Doran and few others — were good people. They were very consensual, calm and gentle — even though they were hot, young gun-slingers investment-wise. Bogle is a Titanic character with an immense force of will.
ROBIN WIGGLESWORTH: Essentially, they’ve had all these tensions building up for years and years. But when their investment performance completely fizzles and drags Wellington down with it, it mixes in toxic ways. And they essentially have full-out warfare that ends with all the other partners ganging up — because they have more board seats — and firing Jack Bogle as CEO of Wellington.
CHARLES MIZRAHI: What I find striking about that is Bogle was clueless. I think the vote went nine to one — or something like that. He was shocked. Talk about not being able to read the room. He did not get this.
ROBIN WIGGLESWORTH: I talked to quite a few of his friends about this. And they said that was the flipside to his incredible drive — which was needed to get him to where he was. He was a young man. And the flipside is that you can be obtuse to some of these signs. They could all tell that he was heading towards a rupture and was on his way out of the company. But he still walked into that fateful board meeting hoping that he’d win. He couldn’t envisage — he was so convinced. He was obviously smarter than them. He was obviously better than them. How dare they sack him? That’s what I gathered on how he thought about this.
CHARLES MIZRAHI: It takes that kind of mindset to be the leader and innovator. You have to do things differently and have a different belief system than the average person. Because if you don’t, you will be average. You won’t be able to do something as crazy as this.
ROBIN WIGGLESWORTH: No. And that’s why he managed to stage what was probably the greatest turnaround in American corporate history.
CHARLES MIZRAHI: Hang on. Don’t jump there. I want to want to walk through this. I want to tell you that, besides being a financial history — which is really great. I knew some of this, but I didn’t know a lot of this. I think you did a great service on two counts. One is, while these players are still living, you get to get what Bogle was like. Myth is going to take over in a couple years as they all die out. I liked the way you chopped some of these myths to pieces because you used the evidence.
CHARLES MIZRAHI: OK, put that all aside for a second. This is a book — and these stories are for entrepreneurs and business leaders. No doesn’t mean no. No. 2: Insurmountable odds should never be seen as insurmountable. You can figure out a way. And No. 3: If you have a belief and passion, it’ll happen.
CHARLES MIZRAHI: These were pioneers and renegades. The average person — even an above average person — would have quit 58 times before they went ahead. But these guys were so pigheaded. Their belief that this made sense was so strong that it became a passion to bring this product out. Is that the way I’m reading it from your book?
ROBIN WIGGLESWORTH: That’s exactly what I wanted to try and get through. As much as I’m a financial journalist — and I love finance — I do think this is a broader business story. It’s almost a familiar story of technological innovation — like Ford and the first car, right? The index fund is the original fintech disruption. And these guys were people who were willing to take on a very powerful, well-established industry — that happened to be finance — and come out with a product that was cheaper and better.
CHARLES MIZRAHI: They were in an industry. Then were planting the seeds of its own demise.
ROBIN WIGGLESWORTH: Exactly.
CHARLES MIZRAHI: That’s like a fifth column.
ROBIN WIGGLESWORTH: Well, you can see it through several lines that run through the entire book. It was the industry’s unwillingness to disrupt itself. Many financial companies had the great opportunity to become Vanguard [before] Vanguard.
CHARLES MIZRAHI: But they said no.
ROBIN WIGGLESWORTH: The odds were stacked against Vanguard. We’ve seen it so many times. Industries hate disrupting themselves. They hate the idea of cannibalizing their own business. Even when they do it, they gobble up or stymie themselves. Kodak, famously, invented digital photography. But it couldn’t wrap its head around that that was where the future had to go. Blockbuster was the beginning of an online rental business. But again, it couldn’t pivot properly.
CHARLES MIZRAHI: A few weeks ago, I had Tim Higgins on the show. He wrote Power Play about Elon Musk and Tesla. He was talking about the innovation that Elon Musk put in and the way the car could be updated over airwaves — and all kinds of amazing innovations. If you haven’t to listen to it, definitely do so because it’s really a phenomenal interview.
CHARLES MIZRAHI: I asked him time and again: “General Motors had the capacity. Toyota had the capabilities. They had the resources. Why did Tesla win and not them?” And he said: “You can’t disrupt an industry from the inside. It takes an outsider to see all the fat and problems and be honest with it.” Inside, no one’s going to upset the apple cart.
ROBIN WIGGLESWORTH: Tesla is an interesting parallel. I think that sometimes we think brilliant ideas will always win anyway. And sometimes they do. It might just take time. But I think Bogle’s ultimate skill — and what Musk did for the electric car as well — is world-class salesmanship. And it’s sometimes seen as a grotty skill. It’s not as cool as being a technological disruptor.
ROBIN WIGGLESWORTH: This isn’t to undersell what Tesla and Musk have done for electric vehicles and batteries. But fundamentally, Musk was able to make electric cars sexy, fun and interesting. They were things that cool people drove. They looked great. Bogle’s didn’t invent index mutual funds. He copied and pasted the ideas of people who went before him. In the first few years, he didn’t sell it aggressively, either.
ROBIN WIGGLESWORTH: But once he decided to do it, he was a world-class storyteller. We humans love stories. And he was able to tell the story, so we’re now following in the footsteps of Jack Bogle. It helps when you’ve got phenomenal, rock-hard data — over decades and across many countries — to back it with.
CHARLES MIZRAHI: But he didn’t originally have that at the beginning. You had a line in here that one of his colleagues said that the convert becomes the most religious. What was that line?
ROBIN WIGGLESWORTH: Nobody is a bigger zealot than a late convert.
CHARLES MIZRAHI: He converts to this, and all roads lead to indexing. If you do anything else, you’re drinking poison. You can’t do that. And I think that you need that in any innovator — where it’s this way or no way — to be successful.
ROBIN WIGGLESWORTH: The marriage of people — sometimes, you see it in a group of people. Let’s say Steve Wozniak and Jobs at Apple. You needed the technologies and the salesman. Jobs was a brilliant engineer, but he was the salesman — the visionary. And in many ways, Bogle was the visionary that Vanguard needed.
ROBIN WIGGLESWORTH: We see this [happening] again. I like finance. I think it’s a fascinating industry that touches so many aspects of our lives. But for me, this is a great business story. Like you said, the entrepreneurs — and the challenges that they and incumbents face. Sometimes, an early pioneer falls behind and gets eaten up by its rival. It grows fat, lazy and complacent.
CHARLES MIZRAHI: The pioneers are the ones with the arrows in their backs. That’s really it.
CHARLES MIZRAHI: OK, so let’s go back to the story because this is where it gets exciting. How tall was Bogle? He was a tall man, right?
ROBIN WIGGLESWORTH: He was a tall guy, yeah.
CHARLES MIZRAHI: I remember seeing him at a conference when he was in his 80s. He walked with determination. This was after his fourth heart attack or something. And I think he might have just had his heart transplant. Someone said: “That’s Jack Bogle.” And I said: “Really? I pictured a frail, old guy.” But he was a tall guy. He was a little stooped at the time, but he walked with vigor. He was taking the steps instead of the escalator.
CHARLES MIZRAHI: So, Bogle is a brilliant guy — a Princeton grad. He’s full of himself and arrogant — in terms of his cockiness about knowing what’s right. I know the right play. His partners sideline him. They put him on a lifeboat in the middle of the Pacific Ocean, and they give him a small, little tiny piece called…
ROBIN WIGGLESWORTH: Vanguard.
CHARLES MIZRAHI: And Vanguard is what at the time?
ROBIN WIGGLESWORTH: It’s a clerical outfit. It was set up as a freebie to save his reputation. And it was only doing paperwork for the Wellington funds. Frankly, Wellington — the people who sacked him — didn’t even want to give him that. They felt they’d given him a chance to get out with some dignity — to resign. He refused, so they sacked him in the end. These were the independent boards of the Wellington funds. They decided: “Jack Bogle is a great guy. Let’s give him this.”
CHARLES MIZRAHI: Let’s throw him a bone.
ROBIN WIGGLESWORTH: He wanted more. He wanted to mutualize the company. He said that was something he’d always wanted at some point. But it’s telling that he only proposed it once he’d been sacked.
CHARLES MIZRAHI: By the way, to put this in perspective, here was a guy who was going to recreate the industry — a financial disruption that had — at that point — no equal. Or maybe, there is no equal. He basically made it ubiquitous. He made it sexy — if you will — to own a fund.
CHARLES MIZRAHI: A few years ago, Warren Buffett wrote that, when he dies, he wants 90% of his money put in the Vanguard Index Fund — 10% in cash. And he doesn’t want his wife to do anything else. So, this is the master of active management saying: “When I’m out of the picture, no one is going to be as good as me. It’s impossible to beat it. Put it into passive.”
CHARLES MIZRAHI: OK, so here’s a guy who’s not only defeated but really humiliated. He loses everything. He loses the thing that’s important to him — which is the recognition of being a whiz-kid financial executive. And he’s put on — where was Napoleon sent? Elba? He’s exiled. They give him this little thing. I think it’s in 1974. Is that right?
ROBIN WIGGLESWORTH: Yeah, it’s around then.
CHARLES MIZRAHI: OK. He stages the most amazing — I want to tell you that I kept saying: “I’m going to get tripped up in this detail.” But it’s exciting! This is like Rocky. He’s starting from nothing. You’re rooting for him. Oh my gosh. So, they give this little thing. I think there’s a handful of people who even go with him.
ROBIN WIGGLESWORTH: I think it was 12 people.
CHARLES MIZRAHI: A clerical thing. What’s Bogle’s next move?
ROBIN WIGGLESWORTH: I think that your point about him being humiliated is essential. I don’t want to get too much into his backstory, but he came from a wealthy family. He lost all their money in the Great Depression. His father became an alcoholic, and his mother had to raise him and his brothers. So, this was a fall from grace. And yes, he made it to Princeton. But he was the only person that they could afford to send to college. He had the best grades, so he got to go.
ROBIN WIGGLESWORTH: So, you have this sense of being on the outside. He has a fall from grace. He had a chip on his shoulder from a very early age. Many of his classmates didn’t have to work. He worked as a busboy. He worked as a reporter. And he worked way harder than everybody else. He had huge drive. And then, he made it into the investment industry and had an incredible career. He was genuinely the wonder boy.
CHARLES MIZRAHI: He became CEO at thirty-something, right? I didn’t calculate it. I don’t think you put his age in there.
ROBIN WIGGLESWORTH: Yeah, he was 36 or 37 years old — it was before he turned 40. He was the senior vice president in his late 20s.
CHARLES MIZRAHI: And this was a big thing back in the 1950s. You had to spend a career [getting there], and this guy did it in less than a decade.
ROBIN WIGGLESWORTH: Yeah. He was the handpicked successor by the founder of the company, Walter Morgan. It was a big deal.
CHARLES MIZRAHI: I think he became the guy’s assistant in a heartbeat. I think it was one or two years. So, he moved up the corporate ladder overnight.
ROBIN WIGGLESWORTH: But he’s a talent. Ruby told me that Jack Bogle was somebody who spent a little bit of time on every piece of the investment industry pile. He was learning everything. He’d always be the first person in and the last person to leave. He’d sit there with a slide rule calculator and do all the work. He wasn’t an actual writer. He taught himself to write.
CHARLES MIZRAHI: We talk about him being the first person there. He was getting there 6:30 a.m., and he would stay. Go ahead.
ROBIN WIGGLESWORTH: He had incredible drive. Imagine when somebody like that — who has a huge chip on their shoulder — has a career without a single misstep. Everything is going fine until it all collapses and he’s fired — very publicly. And then, you’re given Elba. But this isn’t even Elba. This is a crappy island off the coast. This isn’t somewhere nice. This isn’t Napoleonic retirement.
ROBIN WIGGLESWORTH: And so, he decides that he has to do something else with it. I think the first clue is that he was not going to go. Happily Retiring is the name he gave the company — Vanguard. That’s not a name you give to a clerical outfit. That’s something you clearly have more ambitious plans for. But he needs something. And the divorce agreement with Wellington precludes him from doing a lot of things. So, he can’t do investment management. He can’t do distribution. He can basically only do paperwork for their funds.
ROBIN WIGGLESWORTH: He fortuitously read a newspaper article about some index funds that were started on the West Coast — and elsewhere — and were only for pension plans. Paul Samuelson — the grandfather of American economics and the first American Nobel laureate in economics — says: “Why can’t somebody do this for ordinary investors?” And that’s the break that Bogle needed. That was the marriage of his constricted circumstances and this opportunity.
ROBIN WIGGLESWORTH: He then goes to the board. And frankly, this is complete sophistry. But he says: “Well, obviously we aren’t allowed to do investment management. But an index fund is unmanaged. So, that’s OK, right?” Outrageously, the board actually agrees with him.
CHARLES MIZRAHI: Did you put something in here? If I don’t know if I wrote it down, or maybe you wrote it. It was something about there being enough of a wedge to fit a truck through. Did you write that?
ROBIN WIGGLESWORTH: I think so. I think that’s one of his quotes.
CHARLES MIZRAHI: Yeah, that couldn’t have been mine. So, it’s something where there was enough daylight … Oh! That was it! There was enough daylight to drive a truck through. That’s what it was. It was something to that effect. So, it wasn’t management because they weren’t managing.
CHARLES MIZRAHI: And by the way, you can’t blame the board. Looking back, I was trying to think about how the board could be so stupid. They weren’t because this was nothing. This was an idea. Even if it did work, six people would do it.
ROBIN WIGGLESWORTH: Index funds had only been around for four or five years, and there were a few hundred million dollars in them. There was no money in it. Wellington might have decided to try and kibosh it when the board approved it. But it also didn’t care. Let Jack do his little thing, right? Go ahead. Have fun. Selling index funds to ordinary investors was a big ask. People thought it would be an abject failure.
CHARLES MIZRAHI: That’s what his brilliance is. He read the same thing that everybody could have read. It was in the newspaper or a research paper. I’m not really sure. Was it research by Samuelson?
ROBIN WIGGLESWORTH: Samuelson was in a paper. I think it was Newsweek. He wrote some columns in Newsweek. It was unclear which one Bogle read.
CHARLES MIZRAHI: He read it. It was out there. There was no secret. And this is where I think the entrepreneur in him shined — where he was like Bezos, Zuckerberg or Gates. He sees that and puts two and two together. He creates his own opportunity. And then, he goes really big and catches everyone sleeping.
ROBIN WIGGLESWORTH: It’s a fortuitous marriage of opportunity, structure and blind luck. Bogle would later say that strategy follows structure. So, the structure of Vanguard meant that this was the structure they had to pursue. But I talked to friends of his, and they said that it wasn’t a grand plan. It was just something. It was something where you could ideally stick two fingers up at the partners that fired him.
ROBIN WIGGLESWORTH: So, Samuelson endorsing it was a huge deal. And index funds were growing from a tiny base then. But nobody really thought this was a huge opportunity — including Jack Bogle. He talked a big game, and they had an internal pool in betting how much money they thought he could raise. And he said something outrageous — like $150 million.
ROBIN WIGGLESWORTH: Internally, people thought that was a bit too bolshie. That was too aggressive. But for him, it was an opportunity. He needed to do something. And this was that wedge — that first hole that he could start breaking down. Or, he was loosening the straitjacket that Vanguard was in because of the divorce agreement. So, it was just something. The problem was that it was the only thing he could do.
CHARLES MIZRAHI: It was a toehold. And he made the best of it.
ROBIN WIGGLESWORTH: Yeah, and he powered through. As you know, the Vanguard 500 — the first index investment trust — was an abject failure. It was a cataclysmic disaster. It raised $11 million.
CHARLES MIZRAHI: What were they supposed to do? I remember that. Bogle says $100 million. And they take a pool. The most conservative estimate was $14 million or so. And they raised $11 million?
ROBIN WIGGLESWORTH: Yeah.
CHARLES MIZRAHI: So, I think they were going to give up at that point.
ROBIN WIGGLESWORTH: The underwriters —
CHARLES MIZRAHI: Was that Komansky of Merrill Lynch?
ROBIN WIGGLESWORTH: No, it wasn’t him yet. This was Dean Witter. This was in the mid-1970s. Komansky had started his career at Merrill Lynch, but he wasn’t the CEO then. So, the underwriter — Dean Witter — and some of the others wanted to scrap it. They said: “This is such an embarrassment. Let’s just kill it and move on.”
ROBIN WIGGLESWORTH: But, like you said, Bogle realized that this was the start of something. So, he later called it a commercial failure but an artistic success. It’s a classic Bogle-ism on what was a disaster. $11 million wasn’t even enough to buy all the stocks in the S&P 500. They had to sample. They had to approximate the S&P 500 for the first few years. But it was that first opening — the first loosening of the Wellington straitjacket. For the first time, they were managing money independently. Of course, his argument was that it was unmanaged.
CHARLES MIZRAHI: Right. But he was in business. The shop was open. OK. How does he go from $11 million in 1974 to the trillion-dollar range in Vanguard today? Maybe it’s a little more.
ROBIN WIGGLESWORTH: Oh yes, it’s $8 trillion.
CHARLES MIZRAHI: That’s absolutely staggering. $8 trillion. Fill in that gap for me. What is Bogle’s magic?
ROBIN WIGGLESWORTH: It’s various things. I think Bogle was a visionary. Some things were informed by his own prejudices. But he was a really good person to capture the zeitgeist. And he could see that this was a high-cost industry.
ROBIN WIGGLESWORTH: So, if he could position himself to be the low-cost provider in a high-cost industry, that would be a good commercial opportunity. So, he did certain things like start a bond fund — when they started becoming popular. He started money market funds. And actually, the success of money market funds saved Vanguard. Wellington didn’t want to do that, so Vanguard did it.
ROBIN WIGGLESWORTH: That was another loosening of the straitjacket. And also, it was such a success. It did bail Vanguard out until the index fund started taking off. But then, he went and talked to every journalist who would ever talked to anybody. And he was the industry legend who was willing to tweak the noses of everybody there.
ROBIN WIGGLESWORTH: He was willing to say to any journalists that came calling — in person or on the phone — what they wanted to hear. The industry was full of fat cats ripping off ordinary people’s money. So, he became “Saint Jack.” And he was able to lift up Vanguard and profile it. Even though he was super cheap in marketing, they didn’t need to pay much for marketing because they had Saint Jack.
CHARLES MIZRAHI: It was free marketing — using journalists like you — to basically echo the message that they were writing about: Wall Street was out to screw the average folks.
ROBIN WIGGLESWORTH: Exactly.
CHARLES MIZRAHI: Now, you had an insider telling you: “That’s right.”
ROBIN WIGGLESWORTH: Yeah, exactly. You have somebody who’s saying exactly what you want — which is always a titillating thing for any financial journalist. He was adept at that. And then, they started new index funds at opportune times — when the U.S. also started embarking on the biggest twin bull run in history. After Paul Volcker managed to crush inflation and started lowering interest rates, the U.S. — with a few blips along the way — had a phenomenal bull run.
ROBIN WIGGLESWORTH: And you had the growth of corporate pension plans — 401K plans. A lot of people thought: “Let’s just choose the low-cost provider.” And who was that? Well, it was Vanguard. And for a long time, they had this clean run at index funds. Index funds didn’t take off until the very late 1980s and early 1990s. But because of the remnants of Glass-Steagall after the Great Depression, banks like Wells Fargo or State Street — which had successful index fund franchises for pension plans, private banks and big institutions — couldn’t sell to ordinary investors. And the people that could — like Fidelity — hated the idea. It was an anathema to them.
ROBIN WIGGLESWORTH: So, he had a clean run at index funds. And for a long time, he was able to build up a commanding lead. And obviously, the magic of Vanguard is that it is owned by its own funds. This quirk of fate — how Jack Bogle was able to engineer the divorce — was that Wellington funds set up Vanguard to be owned by themselves. And that’s why the more money Vanguard makes the more it lowers its costs. So, you have this perfect flywheel. The more money Vanguard takes in, the cheaper it can sell its funds and the more money that gets in again.
CHARLES MIZRAHI: What I found amazing — I started back in this industry in the 1980s. Load funds were 8.5% — which means you put $10,000 in, and you only started with $9,200. Eight hundred dollars went to pay a sales commission. So, you have to make 10% just to break even. Vanguard had a load in the beginning — if I’m recalling that right.
ROBIN WIGGLESWORTH: Pretty much all of them had it at the beginning. And it wasn’t the first no-load fund. But Bogle was good at seeing the direction things were going. It was part of his [desire] to position them as the low-cost provider. Jack Bogle always used to say that he was not a big fan of the efficient markets hypothesis that Gene Palmer postulated. That underpinned the first index funds. But he was a big believer in the cost-matters hypothesis. Like you said, with a big sales fee — a load fee — you’re starting every game behind the curve. You’re starting with $100 and getting $92.
CHARLES MIZRAHI: You’re starting far behind the curve. You’re starting 10% in the hole. And that doesn’t include the management fees. So, you have so many hurdles that you have to get over just to catch up to the index. Unless you pick the 5% of the people who can beat the market, you’re going to be exponentially behind. You won’t catch up. It’s impossible.
CHARLES MIZRAHI: What I found interesting was that Bogle not only read the industry and saw the disruption, but he becomes a zealot in trying to see how low he can go. He does away with the load — which is nothing more than the sales commission. And for those of you who are old enough to remember, they lowered that to 4.5% or so.
CHARLES MIZRAHI: Then, you had no load funds. But within these funds, you had 1% to 2% in management fees. Gosh, it was crazy. But now, I think Vanguard is down to three basis points or so.
ROBIN WIGGLESWORTH: I think it’s four for some of the cheapest funds. But it’s close to zero. It’s astonishing when you think about how expensive it was for ordinary people to invest 20, 30, 40 or 50 years ago — and how cheap it is today. It’s astonishing.
CHARLES MIZRAHI: So, each basis point is 0.01%. For example, it’s a penny. So, 100 basis points makes up 1%. When a $10,000 investment at 1% it’s $100. At one basis point, it’s $10. Is my math right?
ROBIN WIGGLESWORTH: Yeah.
CHARLES MIZRAHI: If you have $10,000, 10% is $1,000. One percent is $100. One basis point is $10. So, he’s charging around $40 dollars for what Wall Street was getting close to a $1,000 for.
ROBIN WIGGLESWORTH: Yeah.
CHARLES MIZRAHI: That’s a huge advantage! By the way, that extra difference — that $970 — goes in your pocket! You make that money.
ROBIN WIGGLESWORTH: And this compounds over time, right? It’s astonishing. It’s not just the annual cost. Over time, just as returns compound, you let the stock market work for you. The costs work against you. And it adds up to be an astonishing amount of money if you’re talking about somebody saving the market for 40 years.
ROBIN WIGGLESWORTH: I recently saw a study. Somebody looked at the past 25 years and the classic U.S. stock market equity funds and calculated the direct savings. This is ignoring the fact that index funds have beaten the vast majority of active managers over the past 25 years. They calculated over $350 billion in fees that have gone straight into people’s pockets.
ROBIN WIGGLESWORTH: And that’s just the direct savings. Just imagine all the pressure. Thanks to the competition from index funds, the average active mutual fund fee has fallen by a third over the past 20 to 30 years. So, even if you’re not invested in them — even if you’ve never even heard of a Vanguard fund — you, me and everybody have indirectly benefited from the competitive pressure that they’ve put on all investment fees.
CHARLES MIZRAHI: When I was in the business, during the mid-1980s, no one asked you what the mutual funds were investing in. Nobody asked us what the expense ratio or expense fees were. Zero. In the 1990s, they started to. But they pooh-poohed that away and said: “What’s the difference between 0.9% and 1%? What’s the difference if we’re going to outperform?” So, it wasn’t a big deal. But when you stopped outperforming — or never outperformed and had fees — the reason for your existence disappeared.
ROBIN WIGGLESWORTH: Yeah.
CHARLES MIZRAHI: You didn’t need to exist.
ROBIN WIGGLESWORTH: It’s something that we’ve seen in every big downturn, right? Critics will always say: “Come the next downturn, when the stock market drops 50%, you’ll drop 50% and wish you invested an active manager.”
CHARLES MIZRAHI: It hasn’t happened.
ROBIN WIGGLESWORTH: What we can see is that active funds tend to do better in boom times. Because, yes, when you’re making 20% to 30% a year during a great year, then your fund charging 2% doesn’t matter much. It’s still making lots of money. But it’s the downturn. When it proves that a lot these funds have gone over their skis and done lots of risky, reckless things, we see the shift into index funds. It has accelerated during every single major market downturn since the 1970s.
CHARLES MIZRAHI: Right.
ROBIN WIGGLESWORTH: And the active management community will always say: “No, the next downturn will prove the fundamental fragility of index funds.” And lo and behold, it never happens. Maybe it will at some point. But so far, I struggle to see why we shouldn’t continue seeing accelerating money into index funds. I sometimes fall into the pit of bashing it too hard. These are hard-working men and women. They’re smart, and they try to do their best job. I just think it’s a really hard job.
ROBIN WIGGLESWORTH: But this is an industry that still has profit margins beyond Big Tech’s. The average U.S. investment company has a profit margin that’s greater than Google’s. This is an industry that has a lot of profits that can come out of it. Because that is profit that they’re making on the backs of savers.
CHARLES MIZRAHI: Right, someone’s paying them.
ROBIN WIGGLESWORTH: It comes under pressure.
CHARLES MIZRAHI: There are great managers out there who beat the market over long periods of time. There’s no question. But the problem is: Are you — John Q. Public — able to isolate those four or five out of the 100? And if the assumption is that you can, you don’t need an index fund.
CHARLES MIZRAHI: But if you can’t — what did Warren Buffett say? “A know-nothing investor ceases to be a know-nothing investor when they invest in an S&P index fund.” You know what you can’t do. Therefore, get the fund.
CHARLES MIZRAHI: I tell people all the time: If you want to beat the S&P 500, all you need to do is invest in an index fund. That’s really it. Only do something different if you feel like you have some type of edge. You have some advantage — or way of selecting a manager or picking stocks on your own — so you’re able to outperform. If you don’t think you have a clear advantage, stop trying.
ROBIN WIGGLESWORTH: If you’d invested the S&P 500 index fund 15 years ago, you would have beaten over 95% of the thousands of mutual funds in America over that period. These are highly-paid, highly-trained and hard-working professionals who try to do a great job. And by making that single, lazy decision 15 years ago, you would have beaten 95% of them.
CHARLES MIZRAHI: It’s staggering. Every time you look at it, the advantages for the average investor to just buy Vanguard or Schwab … the fees are so ridiculously low that it’s kind of free. And to be paying such a low amount of money for them to put in an index fund — to them, it looks like we’re making a fortune. But it’s become a commoditized business — where scale is all that matters. It’s an engineering business, if you will. It’s the Model T Ford. It’s the assembly line. Just keep squeezing out costs. That’s all there is to it. There’s no magic there.
ROBIN WIGGLESWORTH: And it’s going to go free. We’re basically at free already. With Fidelity, you can actually get a broad-base U.S. equity index fund for free now. And I think we’re heading towards that for broader parts of the market because there are other ways that these investment funds can make money. There are all sorts of technical gimmicks they can do. They can lend out the shares and share the revenue a bit with you.
ROBIN WIGGLESWORTH: For example, some of the Vanguard funds are more expensive than the Charles Schwab funds, but they’ll share more of the securities lending revenues with you. So, they sometimes work out to be free. And they want to upsell you. It’s like if you go to a big supermarket chain. They’ll often sell you beer or diapers at cost because it gets you through the door. And then, they’ll try to upsell you on expensive chips and dips.
ROBIN WIGGLESWORTH: I think that’s how the investment industry is working. It realized that broad, boring and well-diversified index funds are table stakes. And they will sell it for nothing — or close to nothing. That’s where we’re heading over the next 10 years. And it’s a great time to be an American saver — which you couldn’t have said for much of the past century.
CHARLES MIZRAHI: Yeah. Prior to 1975 — before May Day — you had to spend a fortune on fixed commissions to buy and sell. Now, buying and selling is virtually free.
ROBIN WIGGLESWORTH: It’s incredible. When you think of it, it’s astonishing that active managers are actually doing worse over time than they used to — given that they don’t have the headwind of trading costs.
ROBIN WIGGLESWORTH: In their defense, salaries were a big chunk of why they underperformed back in Bogle’s day. But trading costs were astronomical. And there wasn’t the same realization that turnover hurt returns. So, this was a constant headwind. It was a bigger part of the problem than the costs of the mutual fund, sales loads and stuff like that.
ROBIN WIGGLESWORTH: Today, even though trading costs for big institutions are a pretty low — close to zero — we see that the average performance of active funds is declining — even as passive keeps growing. That’s probably because it’s like a poker game. If we think of the market as 10 friends playing poker, and people drop out all the time, you should expect the worst managers — the worst card players — to drop out of the market.
ROBIN WIGGLESWORTH: That doesn’t mean that the game gets easier. It gets harder. And that’s what we see with markets. I think markets might be getting more efficient or harder to beat because all the mediocre managers are the ones who are dropping out. And they’re getting replaced by people who are younger, smarter and using faster computers and more data than ever before. So, that’s why — despite the fall in trading costs and how much money is going into passive — we’re seeing active management performance get worse.
CHARLES MIZRAHI: Even Buffett and Munger said that if they started now, it’d be hard to replicate any of their performance. They were playing against a lot of dumb people. Today, you’re playing against the smartest of the smart.
CHARLES MIZRAHI: Recently, I saw that college degrees aren’t returning much — except MBAs. I think Wharton graduated the richest class — $155,000 for their first jobs. So, it definitely pays to get an MBA. And who’s hiring them? General Motors? Wall Street is hiring these people. So, you have a lot of shark poker players playing poker among themselves. And that doesn’t end well because you need the patsies.
ROBIN WIGGLESWORTH: Yeah. Buffett once said that active managers expect themselves to all over-perform. It’s a bit like everybody going into the poker game and saying: “Guys, if we all play well here, I think we can all end up winners.” It doesn’t work that way, does it?
CHARLES MIZRAHI: It doesn’t happen.
CHARLES MIZRAHI: The bottom line is that Bogle and all these index pioneers that you showcase in this book…
CHARLES MIZRAHI: And all the way forward, we didn’t have time to talk about Larry Fink and BlackRock — which is transforming the industry in a huge way. If you want to know anything about that, folks, get the book. There will be a whole story about that. But I think the key here is that the investing public has fared enormously well through capitalism. It was capitalism that allowed this type of innovation and competition and destroyed the fat and weak.
ROBIN WIGGLESWORTH: Essentially, yes. It was a great idea, and eventually they went through. And they win through the marketplace of ideas and actual capital. Right now, index funds are ascendant. We talked about some of the numbers early on. But the stat that I always hold up is that, put together, index funds are twice as big as the combined hedge fund, private equity and venture capital industries. They’re twice as big as them combined. And it’s based on the idea that cheap, simple and transparent investing works best for most people. That’s pretty astonishing.
CHARLES MIZRAHI: My grandma could beat you by picking a Vanguard fund. That’s really it.
CHARLES MIZRAHI: Robin, I wish you the best of luck with this book. The name of the book is Trillions: How Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever by Robin Wigglesworth. If you’re interested in financial history, mutual funds, index funds or active management, get it. But even if you’re not, just from an entrepreneurial sense, this book should give you inspiration on how to continue to persevere in the face of overwhelming odds and upset an industry from within. It must have been really tough when these guys went to conferences. I would have worn a bulletproof vest.
ROBIN WIGGLESWORTH: They were not popular.
CHARLES MIZRAHI: They were not popular, folks.
CHARLES MIZRAHI: Robin, thanks so much. And best of luck to you.
ROBIN WIGGLESWORTH: Thanks, Charles. Thanks for having me on. It’s been a real pleasure.
CHARLES MIZRAHI: Thanks for listening to this episode of The Charles Mizrahi Show. If you’re a new listener, welcome! If you’ve been listening for a while, we’re glad to have you back. Either way, we’d love to know what you think of the show. Please leave a review if you listen on Apple Podcasts. Reviews make it easier for others to find the show. You can also see the video of the interview on The Charles Mizrahi Show channel on YouTube.
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