Afford Anything - The Radical Invention of the Index Fund, with Robin Wigglesworth

Episode Date: November 5, 2021

#347: Back in the 1960’s, Jack Bogle thought that actively-managed mutual funds performed better than a passive indexing strategy. He pseudonymously published a paper saying so. But academic data from the University of Chicago challenged his preconceived notions. He attended seminars that showed how the drag on returns that come from management fees and trading costs, coupled with the reality that the bulk of gains come from a hard-to-predict handful of equities (a concept known as “skew”), lead to index funds holding long-term outperformance. At the time, index funds were only available to major institutional investors. Regular folks couldn’t access these winners. And that might have continued for a long time … … except history turned on a dime. In the early 1970’s, Jack Bogle got fired. Rather than accept defeat, he turned into a renegade. He launched Vanguard and began offering index funds to ordinary individual investors. And the rest, as they say, is history. In today’s episode, we learn about the revolutionary ideas that paved the path to passive investing. We learn about the radical invention of the index fund. We discover the drama, the tenacity, the betrayal and redemption behind it. And we discover the lessons that the history of the index fund holds. Enjoy! For more information, visit the show notes at https://affordanything.com/episode347 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything, but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to any limited resource that you need to manage, like your time, your energy, your attention, your focus. Saying yes to something implicitly means. Saying no to all other opportunities. And that opens up two questions.

First, what matters most? And that's a tough question. And second, perhaps the harder question, How do you align your decision-making around that which matters most? Now, answering these two questions is a lifetime practice, and that is what this podcast is here to explore and facilitate. My name is Paula Pan. I am the host of the Afford Anything podcast, and today we're going to have a history lesson. Now, today's episode is a first Friday bonus episode. Typically, we're a weekly podcast. We come out Monday, Tuesday, Wednesday, day-ish of every week. Once upon a time we used to come out consistently on Mondays, but for the

past two years we've been coming out, I've been trying to release these episodes towards the beginning half of the week. But at any rate, we are typically a weekly podcast, but once a month, on the first Friday of the month, we do a first Friday bonus episode. And so this is our November 2021, first Friday bonus episode. As a bonus episode, I thought it would be fun to do a history lesson, one that can inform us of some values, some principles that can take us through life. Now, today's history lesson is about Jack Bogle, the founder of Vanguard, and the guy who is credited as being the father of index funds. Now, if you've been part of the Afford Anything community for a while, you know that we are very pro-indexed.

fund around here. And for those of you who are new, an index fund is a fund that tracks a broad market indices, such as the S&P 500 or the total U.S. stock market. It is a fund that rather than trying to cherry pick individual stocks, it invests in the entire underlying index, which means that the performance of that fund is as good as the overall index that it tracks. No better, no worse. You know, there's minor variation, negligible variation in terms of tracking methodology, but for the most part, a passive index fund strategy is around these corners and within the afford anything community. It is a strategy that is preferred over active mutual fund investing. Yet it is a fairly new strategy, particularly in terms of the access to individual investors,

mom and pop investors, you and me, have had to these types of funds. Now, Jack Bogle, who recently passed away, is the creator of Vanguard, and he's widely credited as being the father of index funds. But as we are about to discover, there's actually more drama, more nuance, more intrigue to that story than would appear at first blush. And so to share that story with us, today we are talking to Robin, Wigglesworth. He is the global finance correspondent at the Financial Times. As a journalist, he focuses on the biggest trends that reshape the markets, investing, and finance. Before he joined the Financial Times, he was a journalist at Bloomberg News. He recently wrote a book called Trillions, all about how a band of Wall Street renegades invented the index fund and changed finance forever. And so to talk about the invention of index funds, and the popularization of passive investing.

Here is Robin Wigglesworth. Hi, Robin. Hi, Paula. How are you? I'm pretty good. It's getting dark and miserable here in Norway, but I can't complain. So you are, Robin, you're talking to a community that loves index funds, loves Vanguard, vanguard, Jack Bogle.

We want to learn more about him and the history of Jack Bogle and the history of Jack Bogle and index funds, but in order to learn that, we need to take a step backwards in time and start with an obscure French mathematician named Louis Bacillier. Can you tell us about him? Yeah, that's right. I love history and Jack is a giant, but I think it's important to recognize that the story of index funds goes back well over a century, started arguably before Jack Bogle was even born, and it started with Bacchellier. He was born into a... fairly well to do family of vintners in France in a trading port outside Paris. And he was very smart and bright and he was good at mathematics. He was going to study maths at the Sorbonne.

His life looked pretty hunky dory until suddenly, just as he was about to go to university, his parents both died very suddenly. And he had to abort plans to study to go take care of the family business, the vintnery, and support his sisters. When he finally got the business of its feet in his 20s and family was doing okay again. He got drafted in the French army. So he had to bought plans to study again. So he actually only made it the Sorbonne fairly late in his life, in his 30s, I think it was. And he didn't have the wealth of many other students that studied there at the time. This is like, this is the Harvard or France. At that time, it was pretty much only the children of vast, wealthy landowners that went there. So he had to get a part of the time. He had to get a

part-time job at the Parisian stock exchange, and he decided to write his PhD thesis in mathematics on how stocks seem to move randomly. Now, because finance was a pretty grubby field, certainly in France, and certainly at that time, his teachers thought it was an original subject, but not something serious mathematicians really should deal with. So he didn't get the best grade. So you never really ended up getting tenure, and he basically bounced around various professors, chips until he finally did got tenure shortly before he passed away in pretty much obscurity. But that PhD thesis, the theory of speculation, is the wellspring from where tons of financial economics, as it's called now, has sprung. He is the godfather of the entire

financial economics field. He inspired a lot of people that later on talk about how stocks, yes, do seem to take a random walk. And that became a lot of. the efficient markets theory under Gene Farmer, who learnt from some other French mathematicians about his theories. And that was sort of the intellectual underpinnings for the first generation of index funds. So this notion that Bikilié discovered in his PhD thesis of stocks taking a quote-unquote random walk made popularized by Burton Malkiel's book A Random Walk Down Wall Street, Can you explain the conceptual notion of the random walk? Why was it? Is it so revolutionary? Well, essentially, I see the intellectual and academic backdrop for the birth of index funds is two strands at interlink.

One is just the gradual realization that most fund managers do a bad job. The data that showed that fund managers, even professional investors, actually on average, do a pretty poor job. that started emerging in the 60s. That was first, you know, people had done some kind of simple studies on this, but essentially they weren't able to do something thorough and quantitative until the computer was more widely usable in the 60s. And the second strand is this random walk part that became efficient markets, because you need a theory also for why do active managers do poorly? And what is a superior way of investing?

And that's where Bacchle's work of. so influential because he pointed out, and he never used terms like random walk or efficient markets, but he said, for example, that for every buyer of a stock, there is a seller. And on average, you'd assume that they have equal information, but the buyer thinks he's getting a good deal, and the seller might think she gets a good deal. So on any given day, the price of a stock or any financial security is roughly where the market thinks is fair, because otherwise, somebody would be buying it and somebody else would be selling it, essentially. So the mathematical result of this is nil.

Essentially, for everybody who wins, somebody has to lose. Maybe the buyer was right. Maybe the seller was right. And people took that and built it into this more sort of vibrant, broader theory. Because MacKale was a mathematician. He didn't really care that much about finance about how markets seem to continually reflect all available information, which is sort of the sum of efficient markets. and also, you know, the other mathematicians and economists, most notably Harry Markowitz and Bill Sharp, show that also it helps not having all your eggs in one basket.

Diversification, as Harry Markowitz pointed out and mathematically showed, is the only free lunch you really get. It's better to spread your bets across a wide variety of securities. Bill Sharp built on that work because Harry Markowitz was his mentor and showed that actually the optimal trade-off between risk and return was the entire market. None of them ever used the word index fund or passive investing. That was pejorative to begin with. Bill Sharp used the word the market portfolio. And the phrase he used or the symbol he used to signify that in his equitivision.

was beta, which has now entered the lingua franca of finance as the symbol for the overall market returns, the beta. They were all some massive foundation stones for the very first of heretical Wall Street, renegades that were willing to take and put some of these ideas into practice in the late 60s and early 70s. And this idea was not taken very well because essentially it discounts the contributions that fund managers are making. I mean, the one point that keeps getting brought up over and over again, both back in the 60s and 70s and even today, is if we are to take as a given that in most professions,

the practitioners of that profession contribute to their field, you know, if you are a plumber, you can do a better job at plumbing than the average layperson. If you are an obstetrician, you can do a better job at delivering babies. than the average layperson. And yet the premise of what we're talking about, it is a very radical idea. It's the premise that most fund managers can't do better than the average layperson, which means it essentially discredits the bulk of the professionals in the field. Yes.

And these are smart people. And they're not for the most part lazy. They're incredibly smart, hardworking people that do want to do best for their clients. So obviously, when people essentially say, as Burton Malkiel famous, put it, blindfolded monkeys could do as good a job. Clearly, that's not just a little bit insulting. That's in the front to who they are as people, right? If somebody told me that blindfolded monkeys could do their job as well as me, either I'd laugh them off. I'd be a little bit insulted. I'd say, I'd say my puns and jokes don't write themselves. No monkey could do them.

The backlash was natural, but at the time, it wasn't even that much of a backlash. It was just considered preposterous, the idea of just buying the index. It wasn't just, I mean, it later on became called passive as almost a pejorative, like lazy investing, but it was almost considered giving up. Just the very idea was antithetical to the entire investment industry as it had been built up over the past century, the idea of just not even trying. It was crazy. Even if the mathematics were pretty sound in that for every buyer there has to be a seller of any stock and over time in the market over a year somebody has to win and somebody has to lose it's a zero-sum game and if you pay a lot of money to a professional manager who incurs a lot of trading costs in

the process that on average the average investor in active investing is going to lose out the mathematics were always solid but people always thought well i will be above average right it's a bit Like, you know, 80, 90% of men think they're above average drivers, right? It's ingrained in our human nature. So it took some pretty special people to start this, somebody who was willing to defy that consensus. So this research first came about in the early 20th century. Why is it, when we fast forward through history, why is it that Vanguard, Jack Bogle, gets so much of the credit? Basically, how did this go from being an obscure academic paper to an amateur enthusiast who is, a lot of the people listening to this podcast are amateur finance enthusiasts?

You know, we're very aware of passive investing, of efficient market hypothesis. How did this go from A to B? Well, slowly, really. I mean, that's the thing. I mean, it's sometimes hard for us to wrap our head around how slowly things could happen. back in the day. This is pre-internet, right? Pre-fax machines. It just took a long time for papers to be published, for people to read it, to exchange correspondence, and the links between academia and the practical world of high finance were almost non-existent. And people that worked in

those days, they didn't have engineering backgrounds. They weren't quantitative scientists. There were largely people that studied social sciences, had joined the right clubs, and had played lacrosse at Harvard and then ended up doing a fairly standard job at Solomon Smith Barney or or Capital Group or Fidelity. It was just slow. So you have the academic backdrop by the 60s. You had the data that showed that active managers on average did a poor job. You had a theory for why that was and a plausible basically description of an alternative, something, a market portfolio that invested in all the securities that would be probably the best. trade off in risk or return for the vast majority of investors.

But the industry hated it or they were ignorant of it. Ironically, one of the industry executives that was aware of the idea of indexing was Jack Bogle when he was a senior executive at Wellington. And he lambas said the idea. He ridiculed the idea in a paper that he published pseudonymously in a prominent financial journal at the time saying the idea of an unmanaged market portfolio Fund was idiotic because everybody knows that big active mutual funds are incredibly skilled and they always beat the market in the long run.

He literally wrote that paper in the early 60s. I think what was needed for him to change his mind and the industry slowly as a whole was essentially the data just slowly seeping out and hammering home again and again and again. And the universe of Chicago held a lot of seminars to advertise its findings and its papers and Bogle was a frequent visitor to these seminars where he'd hear these professors present these heretical ideas. And in the early 70s, where it started in the late 60s, but by 1971, one young financial industry type who loved computers had an engineering background and was stubborn and bloody-minded enough to try and do something different had launched the very first index fund at Wells Fargo at the time. and he'd hired a lot of these academics to consult for him. So he had some of the academic chops to back up this.

And he got the pension fund of Samsonite to invest in it. But crucially, this index fund and a few others primarily launched by the American National Bank of Chicago and Battery March in Boston, tiny second, third tier financial institutions at the time, they weren't for ordinary investors. Firstly, because nobody thought you could sell this to ordinary investors. They just thought, yeah, ordinary investors still always want to beat the market. It's not fun and sexy to talk about index funds, even, you know, when it was a new cutting edge kind of thing. It was just, they'd never thought it'd be able to work. And secondly, you know, for American National Bank or Wells Fargo, they weren't actually allowed by post-Great Depression regulation and laws to sell stuff to retail investors in the investment banking side of things.

There was a separation between commercial banks and some trust departments. So they couldn't do that. They could only sell to big institutional investors, primarily pension funds. So there were a few pension funds that took a flower on this in the early 70s, but it didn't get going for ordinary people until Jack Bogle got sacked by Wellington. And that was the big tipping point for him that basically helped turn him into the biggest zealot in favor of indexing that that industry has ever seen. Right, because when he got fired, it was in grandiose fashion.

It was, what, a 10 to 1 vote and he flouted it. He said he was fired with enthusiasm and sought out to then prove them wrong and won up them. Can you tell us that story? Yes. Well, so he had basically been elevated to be the chief executive Wellington, very pedigreed, old, conservative mutual fund group. He was the boy who wanted the industry. I think he was the youngest CEO in the industry at the time, one of the youngest, certainly. But Wellington's boring balance funds had both stocks and bonds, weren't that sexy in the 60s, which was then in the middle of what was kind of the first dot-com bubble. But it wasn't dot-com then, of course. But it was, Xerox and IBM and Kodak were the hot technology stocks of the day. And it was called the GoGo era. And nobody wanted bounce funds.

They wanted GoGo funds, growth funds, performance funds that tried to get 50, 60% returns. So he made, Jack Bogle made the ill-fated decision that to survive in this new era, Wellington had to merge with one of these Go-Go funds. So he merged it with a group in Boston that had one of the same. one of the best performing stock funds in America at the time. And in that process, he still owned the biggest chunk, but he was outnumbered by his new partners on the board. And initially, things went really well. But then the go-go era ended horrifically.

And the 1970s bear market was the biggest, just for inflation since the Great Depression. And Wellington basically collapsed. It did awfully money gushed out of its funds. It was a terrible time. And Bogel started fighting with his partners, and in the end, they ganged up and sacked him. But Bogel was a pretty stubborn guy, and even though this was devastating, the very next day he decided to try a Hail Mary. He took the train back to New York, where there was a board meeting of the funds of Wellington. Because in the US, each mutual fund has to have an independent board.

And in practice, these boards just doff their cap to the board of the management company, which, after all, has set up these funds. Those board members are just there to make sure that nothing funny happens. But Bogle argued that those funds should essentially buy either Wellington out or set up a company that would own the funds themselves, that they would own in turn, basically mutualize the funds. Now, the full mutualization proved a step too far, but what they agreed, almost as a favor to Bogle for his years of service after he'd been fired, was to set up a new administrative company that would just handle the paperwork for the Wellington funds. So Wellington, the management company, would do all the investment management, all the trading, all the research, all the sales and distribution, all the glamorous sexy stuff of the industry, whilst this unnamed company would do paperwork, sending out records and letters to people who invested about what the fund was doing. But of course, Bogle had no intention of basically resigning himself to be a well-paid clerk.

So he gave this company the very grandiose name of Vanguard, and so did he need an opening. And the opening for him was reading an article by Paul Samuelson, the grandfather of American economics, the first American win the Nobel Prize in economics. You had actually ironically written a textbook that Bogle had read when he was at Princeton many years earlier. Sam Wilson wrote an article called A Call to Judgment, where he asked for somebody to launch an index fund for ordinary Americans along the lines of what basically Wells Fargo,

Battery March, an American National Bank had done for institutional investors. And Bogle realized this was the opening he needed. This was a way to basically stick two fingers up the people had sacked him. So you went to the board and rather disingenuously argued that, well, we are banned from doing any investment management as part of the divorce agreement, essentially with Wellington, but an index fund. Now, that wouldn't be managed, right? So that's fine. Crazily enough, the board kind of nodded along and said, fine. And that was how the first, it was called the first index investment trust and later became the Vanguard 500, all the biggest

funds in the world started. It was a pure power grab by Jack Bogle because it was the only thing he could do. It wasn't because he was a big believer in index being for that. It was something that he could do at the time. And he only later became the true believer that we know him to be. I mean, it's a power grab and it also sounds a bit like a loophole. Yeah. I mean, in many ways it is, right? And it was a loophole that the board could have easily have said, no, that's a silly argument, just because this is an unmanaged fund, there's no, you're not trying to pick hot stocks. It is still an investment fund.

You can't do that. And just imagine how history would have turned out differently. We wouldn't have had a vanguard then. If the board had nixed him, he would have gone out to stew and he probably wouldn't have been able to gradually slice and seize back more and more of the investment management activities from Wellington

and is of ongoing jihad with them for several decades afterwards. But the index fund, ironically, despite given that huge success, it became, it was not started because it was a necessarily true believer. It was started because it was something that they could do. And it was a horrific colossal failure when it first launched, only raising $11 million. At the time, that wasn't even enough to buy all the stocks in the SP 500. So it's crazy how sometimes enormous oaks can grow from tiny acorns. and this is, you know, I think the best example of that in the financial world I've ever come across.

We'll come back to this episode in just a minute. But first, the holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving that's in the entryway, in the bathroom, very space-saving. I have a daybed from them that's multi-purpose. You can use it as a couch, but you can sleep on it as a bed.

It's got shelving. It's got drawers underneath for storage. But you can get whatever it is you want, no matter your style, no matter your budget. Wayfair has something for everyone. Plus, they have a loyalty program, 5% back on a. every item across Wayfair's family of brands. Free shipping, members-only sales, and more terms apply. Don't miss out on early Black Friday deals.

Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-F-A-I-R.com. Sale ends December 7th. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in-payments technology, built to evolve with your business Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the FinTech Hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth third better is all about.

It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments of Fifth Third Better. Over time, Jack Bogle and American society in general became much bigger believers in a passive investing strategy and in index funds as a mechanism for passive investing. How did that happen, that social shift, that cultural shift? It's a fascinating point. And it's something I tried to answer in my book.

And honestly, I just have a multitude of smaller examples. that I think might add up to part of it but doesn't explain the whole thing because like you say, there was a societal shift. And I do think Jack Bogle deserves a lot of the credit because the index trust, the Vanguard 500, as it later became known, initially was a complete dud,

and it grew really slowly, and indexing was not a hit with the ordinary American. But it did start ticking off in the 90s, the late 80s and 90s, and that's when Bogle realized actually, apparently, according to people, that knew him well at the time, they told me that's when he became what we now know, this massive zealot for index funds and passive investing. But as he said, you know, there was always a bit of a

nuance to his position that he wasn't necessarily entirely anti-active investing. One of his best friends was Neff, you know, this famous fund manager with a phenomenal track record that worked at Wellington. He always said he didn't believe in the efficient markets hypothesis. But he did believe in the cost matters hypothesis. And he pointed out and he had reams of data to show that whether you choose active or passive, the crucial thing is actually choosing the cheapest fees. Passive usually wins because it has the cheapest fees. But cheap fees overall is what you need to aim for.

And that's what Vanguard became at a time when a lot of 401K plans were started. A lot of people started saving themselves. Pension plans grew. there was more general cost orientation. There was more attention paid to this. Also, sometimes returns in beer markets, you become more cost-conscious. Because if your fund manager is making 10, 20, 30, 40, 50% a year,

that he charges 1, 2%, doesn't sound like much. But when Mark is a little bit rockier, that's when you really care. So that's where I've seen typically a shift into passive, and low-cost investing has been accelerated by every beer market since the 70s rather than arrested, as many active managers always claim. Active managers will always say that, oh, well, come the next downturn, we'll prove everybody wrong. We'll show our worth. We'll show why you do active. You won't lose all your money with an active strategy in the next downturn,

but lo and behold, that's exactly what happens. And that's why the shift accelerates. I think there are other reasons for it. The 401K, the rise of the 401K was important. Dimensional fund advisors was started off as an off-shot by some people that used to work at Wells Fargo and American National Bank. They started running boot camps for financial advisors, teaching them about efficient markets. And over the years, they've taught tens of thousands of people. And I think that also helped a lot of people because financial advisors are in many ways, is one of the main interfaces between Wall Street and Main Street in the U.S. So I think that was a factor as well.

It's been remarkable how quickly it's grown after, you know, a pretty stuttery start. You mentioned that many traditional fund managers have often held to the idea that when the, when the tide goes out, you see who's naked, right? When the bear market comes, you see what actually performs. One of the common arguments that you hear is, well, you know, if it's an actively managed fund, we're able to capture the downside. like we're able to place shorts. We're able to make money even when the market is dropping, which is not something that a passive strategy can necessarily do. Why is it then that throughout a passive strategy has still proven strong?

Well, this is still hotly debated, actually. So a big part of it is just costs. that actually the compounding of returns and costs a huge overtime. So the difference between paying four or five basis points for a cheap index fund and 1% for a mutual fund or 2% plus for hedge funds and a big slice of the profits is just enormous overtime. Also, index funds tend to trade less. And trading costs back in the day were huge.

That was a major headwind. That was a bigger problem than frankly the cost of the salaries of active managers. Nowadays, that is less of an issue. But clearly active managers do trade more than passive funds. And that does, you know, that is, you know, a slow ebb. There's a little bit of a drip and a waste there. I think more and more there's a realization that it isn't because active managers are, you know, bad or lazy or feckless. They're actually very smart and hardworking.

All the people I've met are incredibly impressive people, even for, frankly, the ones that don't do that well. It boils down to one thing is something that financially economists called skew, that actually if you look at the US stock market as a whole, only a very tiny handful of companies account for the vast majority of all wealth generated by the US stock market. I think the date is something like over the past 120 years or something, 95% or well over 90% of all companies that have ever listed in the United States have made less money or lost money than you would have been making in treasury bills. Basically, the vast majority of companies are complete duds.

Either you lose all your money in them or they basically break even. And there are a few companies that actually account for a massive amount of the overall wealth generated by the stock market. The reason why that is so hard for active managers is that inherently they're more concentrated, right? They don't invest in all the stocks of the S&P 500, for example. You know, that would be crazy. People would accuse them of being a closet index or in charging active fees. So they choose a few stocks. And if they get lucky and choose the right big stock, or they're hot, the next Apple or the next Amazon or whatever, then they'll do well. And they'll look like rock.

us because one great bet can propel a career. I mean, famously, even Warren Buffett has said and indicated that maybe if he hadn't bet on Geico early in his career, maybe nobody would know the name of Warren Buffett. Other people have sustained a career by one or two really massive bets. I mean, just look at Arc, Kathy Wood and Arc today. I mean, a large part of her gains are a handful of absolute giant stocks, Tesla, for example, that is now trading completely stratospheric comedy levels, right?

Maybe they'll be right at some point. But Tesla is a big reason why ARC has looked so dang good over the past few years. You know, if you're at active management, if you can get those right,

that's great, but you don't know whether that's luck or skills sometimes. And even if you do a great job with the remaining companies, you'll still underperform the market. So the skew, the skew of returns,

the distribution or where wealth is managed is just incredible in the stock market, way greater than we ever actually expected before. And these are some new studies have shown this. So essentially, imagine it's a haystack, right? And there are only a few golden needles in it. Index funds buy the entire haystack because you can do that really simply and cheaply. So you get the golden needles. You get all the crud as well. And if you think you have like a magic golden needle finding technique, then go for it. Find the next Amazon or Apple or IBM or General Electric or whatever they'll be. But we know

from the data that essentially that is impossible. And even if you have found one of those, chances are it's just luck that you did. So this took a long time for people to realize, but that's one of the reasons why it is hard. And frankly, it's getting harder. I mean, this is one of my favorite analogies as well. It's from Mike Mabousson, who's this great analyst on Wall Street. I read everything he writes. phenomenal, but he imagines the market's a poker game, right? Imagine you have a poker game with 10 friends have come over. Everybody chips in $100 to play for the night.

Typically, you expect the worst friends of yours, the worst card players to drop out first, right? Does that mean the card game is getting easier or harder? It's getting harder. Right, yeah, because you've weeded out the weakest people. Yeah, so the mediocre fund managers, maybe some of the lazy ones, maybe some of the some of the unlucky ones, but broadly speaking, you'd expect the worst fun managed to drop out every year. And the ones that get replaced them ultimately are typically hungrier, younger, sharper, better schools, better educated than ever before. Back in the day, having a CFA designation was

considered cutting edge of Wall Street. These days, there are tens of thousands of CFAs graduating every year. So it's just getting really hard. It's always been hard. It was harder in the 60s, and it's even harder today. You need to work like these giant hedge funds with mammoth resources, armies of PhDs in astrophysics and computer science, to frankly have a shot. And even they routinely don't get this right. Some of the biggest quench shops in the world, as they're called, had a terrible 2020. So what I'm hearing is the message that because the bar is, is higher, that means that competition today is also higher, which makes it at an individual level more difficult. A concept that you mentioned in your book is that confirmation bias today

is much harder to escape. Back in the day, pre-internet, you could dodge ideas that didn't jive with yours pretty easily because we weren't surrounded by a cacophony of ideas all day, every day. Does that have some offsetting impact on the landscape? Like perhaps competition is more fierce than ever, but the ideas that the people in that landscape are exposed to are broader than ever. Yes. I mean, there are advantages that a fund manager or even an individual investor today has that people 40 years ago would have been considered complete science fiction.

I mean, the example I always tell people is like, when I studied journalism, I had a class in Google. Like, people showed me how to use Google because Google was then only one or two years old. It was considered really cutting edge tool for journalists to research stuff. When I was in high school, I had a class on Ask Jeeves. Exactly, right? I mean, there are more stuff we can do now. The problem is that information is also getting spread more widely. one of my favorite things is Dean LeBaron, he ran Battery March, which ran started one of the very first pioneering index funds.

And he used to joke that nobody in finance at that time cared about academic research, ivory tower academics. So he said they didn't have a research department because they just got a subscription to the journal of a financial economics or the journal of portfolio management, where academics who were working away for basically peanuts were churning out incredibly cutting edge investment strategies for nothing that you could just copy and do for free. So a classic case is the index fund. He read about the index fund or basically the idea of a market portfolio and thought, well, that sounds pretty easy. Let's do that.

Other things, for example, back in the day, you know, just buying smaller stocks. smaller stocks in the long run do better than big stocks, or they have for the past 100 years, in the same way that value stocks or cheaper stocks, depending on what metric you want to use it, generally outperform expensive stocks in the long run. This is what Warren Buffett's original strategy was. We now know this, and you can buy this in an ETF. You can buy value in small caps in an ETF. Back in the day, you couldn't.

So if I, with my knowledge today, if I had a time machine, I can go back 40 years and I would have been royalty. I would have been vastly wealthy because I know a lot of these anomalies that academics have proven and people have harnessed sometimes without really knowing it. You might have been a fund manager 40, 50 years ago that instinctively liked small companies because you were a little bit contrarrying or value stocks. You did well and you were disciplined. And you did really well out of that, but you never articulated it as a small caps value strategy. But that's what we do today. And I think because this information is so widely known, it does mean it becomes commoditized. So in the finance industry, people often talk about what was once alpha as in market beating gains.

It's the fate of it to always become beta, as in just market gains. So what was once considered a cool cutting edge hedge fund strategy 20, 30 years ago is now something you can buy in an ETF from BlackRock. So yes, we are exposed to far more ideas and we have better tools and there's way more stuff we can do today. But we all have that. We all have Google. We all have, you know, if you're a big hedge fund, having credit card data, real-time credit car data for the entire economy is kind of basic stuff now. Satellite imagery of car parks to guess footfall in retail malls is just table stakes. Everybody has this stuff. So the chances of us

order investors beating some of these Titanic funds in that game is basically de minimis. It is zero. But we do know thanks to people like Bogle and his colleagues that as your listeners know, you can actually beat them in the long run by just being you know kind of both lazy and discipline buying a broad diversified bunch of index funds and holding them for a long time you will statistically beat the vast majority of hedge funds in the long run as you know Warren Buffett showed in a very famous bet against the hedge fund industry well we're coming to the end of our time are there any final takeaways that you'd like to leave us with no I mean I think

your listeners are you know probably even more paid up members of the indexing fan club than I am. So that's why I was so pleased to do this. I think the people involved, whether you buy my book or somebody else's, I think people just should appreciate like how tough it was to be those rebels that did this, right? I mean, they were really, first they were laughed at,

then they were hated. And now, you know, they've venerated as heroes by people like me, but what they did was really remarkable. It takes a lot of guts and stubbornness and bloody-mindedness to essentially stick two fingers up against your own industry and say all the stuff you're doing is useless. Like Rex Sinkfield, one of the other pioneers that worked at American National Bank, he very famously said he's a proper efficient market, Ayatollah, as he calls it.

He says, it's all bullshit. And that's not popular thing to say. So, yeah, I hope people also just realize the work that it was involved for the people that did this, that we reap the benefits. So I'm just really thankful. I both got to write a book about it, but also that, you know, me and my saving, I get to benefit from their hard work so many years ago. Right. And today, today we don't even question the, or at least those of us who were listening to this podcast, don't even question the importance of index funds in a retirement portfolio. No, it's standard, right? I mean, you'd wonder what was wrong if it wasn't there. So, I mean,

shows how quickly things can change. Exactly. Well, thank you so much, Robin. Where can people find you if they'd like to know more about you and your work? Well, like many journalists, I'm sadly way too active on Twitter. People can definitely email me. I mean, Wigglesworth is luckily not a very common name. It's quite Harry Potter-esque, so there aren't that many Robin Wigglesworths out there. So just Google me. You should find my FTA email. Ping me an email. Hit me up on Twitter or LinkedIn. and Facebook is the one social media I don't use too much. And yeah, let me know what you think about the book. Stuff you hated as well.

I love it all. Thank you, Robin. What are the key takeaways that we got from this history lesson about the life of Jack Bogle? Here are three. Number one. Jack Bogle was willing to change his mind in a major way at a time when it was easy to adhere to confirmation bias, easier than it is today. Jack Bogle pseudonymously wrote and published an argument that active management, active funds, are better than passively managed funds. He once believed that,

but he kept an open mind. And when data came out disproving his preconceived notion, he did not fall prey to confirmation bias or ego entrenchment into his ideas. He did not dismiss ideas that failed to jive with his pre-existing notions. And he did all of this prior to the internet, prior to email and social media, back when it was easier to avoid divergent ideas because they weren't in your face and on your screen all the time. Ironically, one of the industry executives that was aware of the idea of indexing was Jack Bogle, when he was a senior executive at Wellington. And he lambas said the idea.

He ridiculed the idea in a paper that he published pseudonymously in a prominent financial journal at the time saying the idea of an unmanaged market portfolio fund was idiotic because everybody knows that big active mutual funds are incredibly skilled and they always beat the market in the long run. He literally wrote that paper in the early 60s. I think what was needed for him to change his mind and the industry slowly as a whole was essentially the data just slowly seeping out and hammering home again and again and again. And the University of Chicago held a lot of seminars to advertise its findings and its papers.

And Bogle was a frequent visitor to these seminars where he'd hear these professors present these heretical ideas. Jack Bogle's willingness to not fall prey to his own confirmation bias and to listen to ideas, not just listen, but fairly consider and, over time, adopt ideas that he once considered heretical. His willingness to do that is one of the reasons why Vanguard exists today, one of the reasons why index funds are as popular as they are today. And so what we learn from the biography of Jack Bogle is the importance of having strong ideas held weekly, of not being too ego entrenched in what you think you know. That is key takeaway number one. Key takeaway number two. The story of how Jack Bogle founded Vanguard is a story of tenacity,

creativity, and outside of the box thinking of being pushed with your back against the wall when all the chips are down and you're fighting for your career, you're fighting for your life, and you figure out a new way of doing something. Jack Bogle was fired from Wellington. He was fired, rejected by all his friends and colleagues. And this happened at the start of a bare market. The economy was tanking. His friends and colleagues and workplace had all rejected him.

And he was on the verge of being relegated to being, at best, a well-paid clerk. And so what did he do? He found a loophole. He figured out how he could continue to manage investments, spite rules to the contrary, and he did so through creating an entity, Vanguard, that could offer passively managed funds to the masses. The 1970s bear market was the biggest adjusted for inflation since the Great Depression, and Wellington basically collapsed.

It did awfully, money gushed out of its funds. It was a terrible time. And Bogel started fighting with his partners, and in the end, they ganged up and sacked him. But Bogor was a pretty stubborn guy, and even though this was devastating, the very next day he decided to try a Hail Mary. He took the train back to New York, where there was a board meeting of the funds of Wellington. Because in the US, each mutual fund has to have an independent board. And I practiced these boards just doff their cap to the board of the management company, which, after all, has set up these funds. Those board members are just there to make sure that nothing funny happened.

But Bogle argued that those funds should essentially buy either Wellington out or set up a company that would own the funds themselves, that they would own in turn, basically mutualize the funds. Now, the full mutualization proved a step too far. But what they agreed, almost as a favor to Bogle for his years of service after being fired, was to set up a new administrative company that would just handle. the paperwork for the Wellington funds. So Wellington, the management company would do all the investment management, all the trading, all the research, all the sales and distribution, all the glamorous sexy stuff of the industry, whilst this unnamed company would do paperwork, sending out records and letters to people who invested about what the fund was doing. But of course, Bogle had no intention of basically resigning himself to be a well-paid,

clerk. So he gave this company the very grandiose name of Vanguard, and so did he need an opening. And the opening for him was reading a article by Paul Samuelson, the grandfather of American economics, the first American to win the Nobel Prize in economics. You had actually ironically written a textbook that Bogle read when he was at Princeton many years earlier. Samuelson wrote an article called A Call to Judgment, where he asked for somebody to launch an index fund for ordinary Americans along the lines of what basically Wells Fargo, Battery March, an American National Bank had done for institutional investors. And Bogle realized this was the opening he needed.

This was a way to basically stick two fingers up to the people had sacked him. The tenacity that Jack Bogle showed in coming up with that idea, advocating for its approval, and fighting every obstacle in his path to make sure that his idea could be executed, That is a perfect example of a person who refuses to say the words, I can't, and instead transforms I can't into how can I? Because any time that phrase is transformed, when I can't turns into how can I? That's when innovation happens. And so that is key takeaway number two.

Finally, key takeaway number three. And this is the lesson that you can impart to your friends. when they're asking why you believe in a passively managed strategy over an actively managed one. It is a lesson on skew. Skew is fundamentally the concept of concentrated bets, the 80-20. The majority of results are driven by a small minority of companies. The top few companies drive the bulk of the returns, but no one knows exactly which companies those are going to be.

And that's the reason passively managed funds perform so well over a long-term aggregate average because rather than trying to find the needle in the haystack, a passive strategy buys the entire haystack, meaning necessarily you will be holding that needle. By contrast, an actively managed strategy, sure, you might get lucky and you might find that needle in the haystack once, and sometimes once is all you need, and that one bet, makes your whole career, makes your reputation. But over a long-term aggregate average, when you're investing for 40 years, 50 years, and you want consistent performance rather than erratic bets, makes more sense to buy the haystack.

One thing is something that financially economists called skew, that actually if you look at the U.S. stock market as a whole, only a very tiny handful of companies account for the vast majority of all wealth generated by the US stock market. I think the date is something like over the past 120 years or something, 95% or well over 90% of all companies that have ever listed in the United States have made less money or lost money than you would have been making in treasury bills. basically the vast majority of companies are complete duds. Either you lose all your money in them or they basically break even. And there are a few companies that actually account for a massive amount of the overall wealth generated by the stock market.

The reason why that is so hard for active managers is that inherently they're more concentrated. They don't invest in all the stocks of the S&P 500, for example. That would be crazy. people would accuse them of being a closet index or in charging active fees. So they choose a few stocks. And if they get lucky and choose the right big stock or they're hot, the next Apple or the next Amazon or whatever, then they'll do well. And they'll look like rock stars because one great bet can propel a career.

I mean, famously, even Warren Buffett has said and indicated that maybe if he hadn't bet on Geico early in his career, maybe nobody would know the name of Warren Buffett. And so that is the third and final key takeaway that we get from this history lesson on the life of Jack Bogle and the subsequent popularization of index funds. I hope you enjoyed today's episode. I know it's a little different from what we typically do. Oftentimes, most of our episodes are either conceptual conversations about the philosophy and psychology of money. And really what that is is a conversation about thinking from first principles told through the lens of money. That's what the bulk of what we do here is. There's a lot we can learn from history. And so I hope that today's episode, this history lesson, offered some insight, offered some story, some narrative that could help round out the ways in which we think.

You're listening to the Afford Anything podcast. My name is Paula Pant. If you enjoyed today's episode, please do three things. Number one, share it with a friend or a family member. That is, or a co-worker, or someone you know, or someone you know. or someone you don't know, share it with someone. Share it with someone who you think would enjoy it. That's a single most important way that you can spread the message of index fund investing, passive investing, financial independence, wise money management. Number two, open up whatever

app you're using to listen to this show and hit the follow button. Whether you're an Apple podcast, Spotify, Pandora, whatever you're using, hit that follow button so that you don't miss any of our amazing upcoming episodes. And number three, while you're there, please leave us a review. These reviews are incredibly helpful in allowing us to book intriguing and award-winning guests who can share their knowledge with you. If you want to chat about today's episode with other members of our community, go to afford-anything.com slash community. That's where you can find like-minded people who want to talk about whatever it is that you want to talk about, whether it's retirement planning, getting out of debt, investing strategies, cryptocurrency, any topic about finance or life that you want to discuss, you will find a village of people there who share those same common ideas,

common goals, who share in your aspirations and can offer support and advice and encouragement. So that's afford anything.com slash community, totally free. Everyone is welcome. Thank you so much for tuning in. My name, as I mentioned is Paula Pant, and this is the Afford Anything podcast, and I'll catch you in the next episode.

Thank you.