Bogleheads® on Investing Podcast 094: Robin Wigglesworth, FT journalist and author of "Trillions"

Welcome everyone to the 94th edition of Bogleheads on Investing. Today, our special [music] guest is Robin Wigglesworth, a Financial Times award-winning journalist and the author of Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. [music] >> [music] >> Hi everyone, my name is Rick Ferry and I am the co-host of Bogleheads on Investing along with John Luskin. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a nonprofit organization that is building a world of well-informed, capable, and empowered investors. Visit the Bogle Center at bogalcenter.net net where you will find a treasure trove of information, including transcripts of these podcasts. So, I have one announcement before we get started. Tickets for the 2026 Boglehead Conference are now on sale at boglecenter.net. The conference will be held from noon time November 13th through noon time November 15th at the Green Valley Resort and Spa in Henderson, Nevada. Just a short ride from the Harry Reid International Airport in Las Vegas. And again this year, we have a fantastic lineup of guests. There'll be many new faces there as well as your Bogleheads personal favorites including Bill Bernstein, Christine Benz, Mike Piper, Alen Roth, Jim Dolly, John Luskin, and yours truly. I hope to see you there. My guest today is Robin Wigglesworth. Robin is the editor of the Financial Times finance blog, Alphavville. He's also the author of Trillions, the definitive book on the past, present, and future of passive investing. His new book coming out in the fall is a fabulous debt, an upcoming story of the bond market. Today, our focus will be on trillions: How a band of Wall Street renegades invented the index fund and changed finance forever. And Robin really digs into this topic. Now, I thought I knew a lot about the history of indexes, index funds, and ETFs, but I learned a tremendous amount by reading Robin's book. He did a fabulous job digging into some corners of this market that just surprised me and I'm sure will surprise you. So, with no further ado, let me introduce Robin Wigglesworth. Robin, thank you so much for being on Bogleheads on Investing. >> I'm thrilled to finally be here. Yes, we would have had you on earlier if I was more diligent about reading your trillions book. >> I know there are many books I'd probably read before my own as well. [laughter] >> It was on my list for a long time. So, I'm glad I finally got around to reading it because it really filled in a lot of holes for me. I'd been this industry for 40 years now and involved in the indexing part of it for 30 years and knew a lot of the people in your book, a lot of the stories, but not all of the story. And I think that what your book did was it really did a lot more in-depth research and interviews and captured the indexing revolution and the ETF revolution that took place and is still taking place. So, we have you as a guest to talk about trillions, but I'm also going to have you on as a guest in the fall because you have another book coming out, A Fabulous Debt. And that book is going to be about the history and power of the bond market. So, I'm going to give you a a couple of minutes just to talk about that book, which will be coming out in the fall. >> Yeah, I love history and I love finance and whenever I can merge the two, I'm a happy bunny. The bond market is often seen as bit of the dowdy sibling to the more glamorous, racier stock market. You know, there's so many books written about the stock market and stock market investing, but the bond market kind of gets a little bit forgotten. And even people that write about debt often just lumps, they just lump it all together, right, in one big blob essentially. But the reality is bonds are radically different. They're a form of debt, of course, but they are radically different and and it matters. And it's far bigger than the stock market. There's probably close to $200 trillion worth of bonds out there and only $130 trillion worth of stocks, which is frankly, it's pathetic, right? Why I think the bond market matters so much is that it's actually bigger than the banking system. Over half of all global debt today is in the form of bonds rather than normal bank loans. And that is is a huge shift in the fabric of the financial system that I don't think people have grappled enough with. And I think a great story is a good way of telling that. So I start in in Renaissance Venice in 1171 was the Grand Andy bond issued kind of by accident and its inventor actually got murdered on the streets of Venice and then all to the present day with basis trades and convexity and and frankly all the crazy stuff that happens. Well, that's great. I'm really looking forward to receiving that book and reading it and then having you back. Bonds are for gentlemen. Yes. >> Stocks are for speculators. >> Exactly. I always say, look, my first job as a financial journalist was actually covering bonds. And like Cat Stevens sang, the first cut is the deepest. So, bonds is my first love. So, it's a bit my love letter, an affectionate biography of the bond market. >> I'm looking forward to that. But today, we are discussing Trillions. How a band of Wall Street renegades invented the index fund and changed finance forever. >> As you well know, there's been several books written about index funds over the years. I don't think any of them are as concise as to the history and the evolution of it as yours is. But the first book about index funds was written by I'd say Jack Bogle in 1994, Bogle on Mutual Funds. And that was followed up by a book by a fellow who was a lawyer from California. His name was Scott Simon. And he wrote a book called The Index Fund Revolution in 1998. And in 1999, I put out my first book called Serious Money, which was a book about index funds. And I sent that to Jack Bogle. And he sent me back this card that said, "Oh, you wrote a great book." I couldn't believe Jack Bogle actually wrote a card. >> That's quite a thing to have. I have to admit, I'm very jealous. I'll even make you more jealous because one of the books that I wrote he actually wrote the forward on. So there ah >> that that I don't think I can talk [laughter] that unfortunately. >> The name of that book was the power of passive investing which has several chapters in here about the history not as in detailed as you get into but three chapters on the history of indexes indexing and ETFs. And Jack did write the forward on that. I was fortunate and funny I had asked Burton Malke to write the forward at first and he said no I really don't have time. time. So I said, "Okay, I'll ask Jack Bogle." [laughter] Now say, "Well, why don't you ask him to begin with? Why are you asking me?" Right. [laughter] And then there was been several other good books. One that came out after yours was by Eric Belchunis. The Bogle Effect was an excellent book. Uh I had him on the podcast. But yours is a really detailed history and it cast a wider net and you bring in a lot of people who normally don't get mentioned, especially people like Larry Frink. >> Yeah. David Butler from DFA. I was surprised to see his name in the book and the late Kathleen Morardi who was a wonderful person and a friend of mine. You also linked the companies who were involved in index funds and ETFs together. For example, DFA had a strong relationship with Jack Bogle and Vanguard. I didn't realize that until I read your book. And then another example a few years later uh when Eyessharism went up for sale I mean Vanguard was looking at it, Fidelity was looking at I mean so there's an awful lot of relationships that were going on in this industry that I didn't realize but it's all in the book. So if you're a history nut like I am about this stuff. It's an excellent book to read. You structure the book with two things going on in the beginning of your book. It is a history of performance monitoring starting with Alfred Cowell's that's one track that the book takes initially at the beginning but then the another track that it takes is the history of the indexes themselves and how they evolve the benchmarks in proof. So, let's go ahead and start then. You you have an introductory chapter talking about the bet between Warren Buffett and hedge fund manager Ted Sides, the million-dollar bet where Buffett says hedge funds can't outperform the S&P 500 over 10 years and they they bet a million dollars to go to charity and Buffett of course we know won that bet. So, that was the first chapter of the book which which was a good way to to start. But the second chapter now gets into the the history and let's talk about this fellow Alfred Cows. brilliant man back in the day. I mean, he he was around in the 1920s. Like, talk a little bit about him and and what he did to to kind of get the ball rolling. >> Well, he was wealthy. His family was wealthy, but that probably helped stoke the interest and ability to pursue lots of different fields. He was obsessed with measuring things. He loved measuring and ranking and counting. And he got interested in investing when he was recovering from tuberculosis. He was a voracious reader and a student of everything. He signed up to all sorts of investment letters and read lots of investment books, started reading all the columns, but especially newsletters. There was essentially newsletters that people sent out to investors. And there had all sorts of different systems essentially for how you could beat the market. And he discovered very quickly that they were all useless. Some were horrifically bad. And this made him curious. And like how do you measure this? and you realize nobody really knew what the market was doing. The Dow Jones Industrial Average had been around then for almost half a century, but it was a way of measuring a fairly narrow subset of industrial stocks when that was frankly all there was in the United States. By the time Alfred Cows was recovering from TB, you know, it was a lot broader than that. So he essentially started collecting lots of data and finding out how the stock market did and also how various investors did on his own initiative and with his own brain and basic understanding of statistics. He came up with what was probably at least the first comprehensive study I've seen of measuring how investors actually do. Uh, and lo and behold, they on average did abysmally badly. >> Yeah. I'd like to talk about these numbers because when I wrote the power of passive investing, I went back to cows and I looked at the performance that he came up with and he studied from 1928 to 1932. So, a 5year period of time and it was like four different studies that he did that he published uh in 1933. He consistently came up with the same ratio of the surviving letters. And of the surviving portfolios, meaning the ones that were around for the entire 5-year period, one out of three outperformed, two out of three did not outperform. They underperformed. And and the one out of three that outperformed didn't really outperform by much. And the two out of three that underperformed, one-third underperformed by some, and one third underperformed by a lot. I found that to be interesting because as I we go forward in this, that statistic keeps coming up over and over and over again. And then if you throw in survivorship bias on top of that, it actually is about one quarter go away, one quarter outperform, one quarter underperformed by a little, and one quarter underperformed by a lot. I mean that as we go forward over the next almost 100 years and looks at many many of the same types of studies over a 5year period of time these percentages that uh outperformed underperformed by a little underperformed by a lot and went out of business didn't change. >> Yes. >> Now in addition to this cows was working on an index and he was trying to get better data than the the Dow Jones. I want to go down that second track and talk about the creation of better indices to measure performance again. >> Well, so we had the Dow Jones Industrial Average. It has a lot of technical flaws in how it's constructed. At the time it was revolutionary, but the fact that it's weighted by the price of companies rather than their size means that obviously you have a big waiting, you just have to have a high share price and that doesn't necessarily translate into a big company. It was also by design narrow uh at a time when you know there were no computers there were no calculators you had to calculate everything by hand. So even simple indices with 30 members calculated daily was a a full-time job of or maybe even several people right uh so that's why indices were fairly rudimentary for a long time there was started mostly as a a service to readers so the financial times where I work also started something called the footsie other parts of the world also newspaper groups but this was a considered a fairly unglamorous fairly backbreaking work essentially it not lucrative at all and it was hard to do and you know in many ways you know economists like them because we didn't really have GDP measurements either. So some of the early stock market indices were kind of a way of measuring economic vim or economic health. Um and and that's sort of how they remain. But the real change came with the computer. The first rudimentary computers really in the 50s and 60s because that is you know a quantum leap in the ability to calculate large groups of numbers. And obviously the computers back then are, you know, compared to like an iPhone in my pocket is probably roughly a million times more powerful than the supercomputers of the 50s. But at the time it was insane what they could do. And there is this almost Cambrian explosion of financial innovation that comes along with uh the invention and the emergence of of of computers in the 50s and 60s. So a lot of the these seinal financial works of financial economics whether it's you know a Jean Farmer or Bill Sharp or Harry Marowitz there is no coincidence that they were also among the first people who learned how to code on these massive IBM mainframes. Uh you could argue that the index fund indices and index funds were kind of the first financial technology. The the first marriage of computers and finance their first child was indices and index funds. Back in 1951, uh Jack Bogle when he was at Princeton, he had to do a a thesis uh in order to graduate and he did his thesis on the mutual fund industry. the it was a very very tiny industry at the time. In his thesis, which he was kind enough to send to me years ago when I asked him for it, he had all of his data for all the performance of all of these funds that went back into the 40s and he crunched these numbers and was looking at how well these active funds performed uh because they were all active funds back then. um you know, Massachusetts, MFS and State Street and so forth, they were uh Wellington fund as well. And he he made a comment that you know, none of these funds can really claim to outperform the market. And he and Jack claimed that that was the beginning of his thinking of index funds. I'm not sure if it was or not, but that's what he claimed. The funny thing is when I went back and I looked at that data and I crunched that data using the indices that were available at the time, it came out to that exact same set of numbers that Cowles came up with. One quarter went out of business, one quarter outperformed, one quarter underperformed by a little, and one quarter underperformed by a lot. And as we go forward with these studies, uh, over the 60s and the 70s, those same percentages kept coming up over and over again because now more and more academics were starting to to to look at these numbers and the indices started to get better and better. Talk about the crisp indices. the uh Center for Research and Security Prices, an affiliation with the University of Chicago. Why was that important and and how did that get started? >> As crazy as it sounds to us today, at the time in the 60s, people didn't think of stocks as something that gentlemen did. And let's face it, it was mostly men doing the vesting at the time. It was something a little bit tordy. And it was probably, you know, to do with the the legacy of the great depression and the great crash afterwards. This is something that Meil Lynch decides to change. So in the 60s, Meil Lynch wants to market stocks to ordinary Americans again. They think like this is a great opportunity. We want to sell it and we want to educate people and say this is a great long-term investment. Incredibly, the SEC, the Securities and Exchange Commission, says no, you can't do that. you need to prove that stocks a good long-term investment. So, Meil Lynch essentially hands a grant to the University of Chicago to set up something called the Center for Research and Security Prices to basically research whether stocks were a good long-term investment. So, essentially they started doing what Alfred Cows had done almost as a hobby. Uh but this time they actually had some computers. They had several brilliant business professors. So Jim Lori, one of the great professors of University of Chicago and his assistants Lawrence Fischer, who was one of the first people who could really program, they painstakingly collected all stock market prices they could find in the United States going back as far as they could. And this sounds like a humrum task, but it was herculean at the time because in practice over the decades and centuries of American capitalism, lots of things that were called stocks weren't actually stocks at all. They were bonds. Lots of things that were called bonds were actually stocks were equity their ownership. So they had to painstakingly find out what was actually what, put together a time series, calculate dividends and so on and put it all together on a magnetic spool that spun out for miles. This took them four years. This was a huge project. I'm sure the Meil Lynch people must have gotten incredibly frustrated with them, right? you know, slow academics and, you know, they sucking up money. I think it cost $200,000, which was a fortune at the time. But Jim Lori and Fisher, they really came up with the goods. I mean, they struck gold because this data set is kind of where all indexes and index funds spring from. This is arguably maybe even the genesis moment of passive investing because it was so detailed. It was some o so unimpeachable. And to Merrill's delight, it did show that US stocks did massively outperform bonds in the long run. Outrageously, even if you'd invested at the peak of the market in 1929, just before the Great Depression, you still would have made out like a bandit by 64 when the the results finally were in. And for Meil Lynch, this was fantastic. So, they marketed the crap out of this. They they had advertisements in almost every major newspaper in the US. They published books showing all these numbers. What was kind of awkward though and Meil Lynch downplayed was the fact that the data also showed that the stock market outperformed the large majority of professional mutual funds, the mutual fund industry that was kind of cropping up at the time because some consultants had finally started collecting data on that. people hadn't really systematically collected the data on how mutual funds and professional investors did, but by the 60s that came out at the same time. So, this was both a hallelujah moment for the investment industry, but also maybe arguably the seeds of it eventual, if not demise, but its decline. Certainly, >> I have to tell you a story. It it was when I used to work in the brokerage industry in the late 1980s uh and early uh 1990s. You walk into any office and there were these mountain charts. There's a big poster on the wall that showed the return of US stocks going up exponentially at like 10% per year. The return of bonds going up by much less the return of T bills and then the return of inflation. And the idea of this chart was that when you have a client and they start to have some reservations about why you're recommending stocks, you're supposed to point to that chart and you're supposed to say, "Well, this is why. Look, look at the rate of return on stocks." And then the broker would go, "And this is why we need to have these actively managed funds in your portfolio that have 8% commissions and one and a half% in fees." You know, by the late 1990s, clients were asking, "Well, why don't I just buy an index fund?" Well, I mean, and ironically, Jack Bogle is a colossus and and deserves all the credit was very much pos. The reality is the first people that invented the first generation of index funds and not coincidentally at second and third tier institutions at the time, they weren't really thinking of an index fund. They were not efficient market zealots. They were just trying to give people a cheap and easy way of getting the market return. That was it. They didn't call it an index fund. They didn't call it passive investing. It was just a product, a cheap and easily assembled product that they thought there would be some sort of a market for essentially because some people did just want that line, that market line. And they weren't anti-active. Some of them were active managers, some of them were not. But that was essentially it was an engineering challenge, a very narrow modest engineering challenge that they solved. and the consequences would be far greater than frankly anybody ever envvisaged. >> As we look back on the lives of people like uh Bill Sharp and Jean FMA, two Nobel laureates, we find that their roots, I mean their first jobs when they were research assistants was to try to find ways to outperform the market. Bill Sharp, they learned computer programming as a way to try to figure out how to outperform the market. uh Gene FMA's first job was to try to figure out investment strategies to outperform the market and these people who were ended up being the pioneers of efficient market and beta capital asset pricing model so forth discovered it's really hard to outperform the market and that's how people like Jean FA came up with this efficient market hypothesis they were using computers back in the 1960s and early '7s as a means to get a leg up to outperform for everybody else and what they were finding is very difficult to get a leg up and that a market return is a good return. The problem was as Bert Malke wrote, you can't buy the market which he wrote in his random walk on Wall Street book which was first published in 1973. So now I want to go through the history of the huge effort that various people and companies went through to try to create an index product. Now as you say Jack didn't invent this idea. Uh he was the first to capitalize on it through Vanguard in an index fund for everybody but but he didn't invent it. what came before Jack, the history of it in the late 1960s, early 1970s that was trying to create a product that became known as an index fund. >> As the cliche goes, failure is an orphan, but success has many parents. And the index fund has many, many parents, some more intellectual and some more practitioners, the hands-on people that maybe put these ideas into practice. And I think in my view there are three of these fathers that stand above others. One Dean Learon at Battery March in Boston. Classic what we would today call the quant or just a mega nerd essentially. Again one of the people taught himself to code, taught himself computers because he was obsessed with it. And he for him an index fund was just essentially an engineering challenge. So he came up with an index product. Essentially a separately managed account. Unfortunately, no clients took him up on that when he first launched it in the early '7s. So I think it got its very first client in 73 or 74. So he argues that, you know, maybe he got there first, but it didn't actually manage any money in the strategy. So it was designed, but didn't take up any take up immediately. There's another one called Rex Sinkfield in Chicago. He was an acolyte. He did study under Gene Farmer when Gene Farmer was a young Wundakin finance professor at Chicago. So he's very much an efficient market zealot. Rex Singfield himself describes himself as the grand ayatoller of efficient markets and and he was working at the American National Bank of Chicago in the stock picking and analysis division. He thought this was city obviously was against you know an anathema of what he believed in. See, he managed to convince the bank to convert one of its smaller, frankly worse funds into a de facto index fund. What I think is the granddaddy, the the original gangster is the Wells Fargo in market portfolio. So Wells Fargo, this is obviously the days long before banks were deregulated. They operated state by state. Wells Fargo is not what we know it is today. It was, you know, a first rate bank in San Francisco and frankly not much more than that. But the the leadership there kind of saw computers as a good way of of maybe becoming a bit more uh asset management investment was deregulate. You could operate across state boundaries at least in the institutional space. So they hired a brilliant MBA student at at Sullman Smith Barney called John McQueen Mack as he's known. And Mac is one of the heroes of my book. This guy is incredibly driven, just wildly ambitious, and is exactly the kind of person you need who takes these grandiose ideas that had been percolating around in financial academia for almost a decade at that point and actually turn into reality. You needed somebody like that. and he did that at Wells Fargo against you know the ardent fighting of his own trust department. They eventually came along and became ardent index fans themselves but it took incredibly hard work to do. So in 1971 they launched the first passive fund. It did not track the S&P 500. In fact, it tracked the entire New York Stock Exchange, 1,500 stocks at the time, and the waiting strategy was, let's say, suboptimal. Essentially, it was a completely silly, badly designed product. So, they had to rebalance all the time. It costs a lot. This was, you know, manual trading days. So, it was, you know, difficult product >> and the cost to trade back then was significantly higher. Huge. Yeah. No, I mean huge. And and the only client they could get to join in to to test this new product was the pension fund of Samsonite, the luggage company. And that was only because one of the signs of the family who'd studied at the University of Chicago under Gene Farmer came back to the family of business saw how badly its own pension fund was doing. called up his professors at Chicago and asked, "Surely I learned all this efficient market stuff, random walk stuff. Surely somebody must be managing money in a sort of a a theoretically sound way and was pointed in the direction of of MAC and and Wells Fargo. And that was the genesis, the first index fund. It later became an S&P 500 index fund, but it was initially just a separately managed account uh with some Wells Fargo money and Samsonite money that tracked the New York Stock Exchange as a whole. But that I think is the tiny acorn from which this mighty oak grew. No, these people knew each other and they were all operating independently, all trying to get to the same spot, which is to get some sort of a commercial product out there for institutional investors, not not for retail investors at the time. >> And this is why Jack Bogle is rightly famous today, but he brought it to the the masses, but he did not invent the index fund. In fact, there were several billion dollars in index funds long before uh Vanguard was ever sort of imagined even. Uh and those were these three pioneers and they did know each other not fantastically well but also ironically through the ferment of the University of Chicago and the Crisp Center. So to make sure that this research that Crisp had come up with in the 60s kind of percolated into the investment industry in the pre-in era, Crisp would set up semianual conferences where they'd invite people to speak and listen to all this new research coming out. Mr was there almost every time. Dean Learon was there quite frequently. Rex Sinkfull definitely went a lot. Jack Bogle also attended these seminars essentially on efficient markets and things like he didn't necessarily believe in all that certainly not at the time but he was definitely drinking from that same intellectual well from Chicago uh that started the index fund so he would have been and he later on frankly pretended that he didn't know about all these other projects I know I know I never asked him but how could he not know it it's very Jack like [laughter] we we know for a fact he knew about it. Jack Bogle is as phenomenal a man as he was was very keen especially in the last 10 20 years of burnishing his legacy. I mean I I I'd argue his legacy is so immense it needs no burnishing but he would reappraise certain historical facts to better suit the legend of Jack [laughter] rather than the reality of John Clifton Bogle. Uh but he knew about all these things. He knew about all these people. In fact, his assistant at Vanguard when it was first set up was asked to call Mack, Rex Sinkfield, and Ed Baron asked him for help when Vanguard was researching its first index fund. >> I read that I said that's interesting. That's something that never came out. I spoke with Jack many times about the evolution of how you created this index and it was all well, you know, I did this analysis. I said, "We need an index fund." And I went to the Wellington board and you never hear about the fact that he reached out to these three people and especially Digfield who gave them a lot of information which ironically when Rex Zingfield co-founded DFA in the early 80s there was a little help from Jack to DFA probably in a way a little payback for helping Vanguard start their first index fund. again information in your book that wasn't something something Jack talked about. >> No, exactly. [laughter] And and look, for me, finding these little intellectual linkages was one of the real delights of researching this book because I mean, one of my strongly most strongly held beliefs is that we all stand on the shoulders of giants. We all pretend sometimes that all our triumphs are our own and our defeats is obviously somebody else's fault. But the world isn't like that. Even Sinkfield and Learon and and Mac, they stood on the shoulders of giants who went before them. They stood on the work of Gene Farmer and and Harry Marowitz and Bill Sharp and others and they in turn stood on the shoulders of other economists that went before them. I thought it was interesting that the intellectual linkages were far stronger than previously acknowledged. One of Rex Sinkfield's classmates at the University of Chicago was David Booth. David Booth went to work for John McQueen at Wells Fargo and then later on founded Dimensional Fund Advisers with his old classmate Rex Sinkfield. The first idea was to set up essentially an index fund for small companies because at the time all the index funds were S&P 500 products and at Vanguard when that was almost like a protein embionic organization. uh Jack Bogle, maybe this is the nuance in his defense, maybe he didn't call these organizations directly, but he at least told or instructed his young assistant, his young uh quant at the time called Yan Tuadowski, another quiet giant of the passive investing world, um the guy that frankly designed the first index fund at Vanguard. He got in touch with these three other men to ask for their device and they were quite happy to give it because frankly they weren't rivals. Battery March, American National Bank of Chicago and Wells Fargo all target the institutional space and we're managing a couple of billion dollars at the time. Vanguard was obviously targeting retail space, an area that a lot of people thought this couldn't necessarily work because ordinary people would always want the hot shot stock picker. But he did that and as you say later on Dimensional Fund Advisers and Rex Singfield and David Booth were able to get their favor repaid because when they were setting up Dimensional Fund Advisor they got Vanguard to help with lots of the back office stuff introduction to lawyers advice and so on. And I do think it is nice that it's the old philosophy of paying it forward right you you do you if you're kind and help people it will come back in some form or fashion at a later date. I think that went on for about three years or so. Uh DFA using Vanguard's back office, which by the way, that's what Vanguard was set up to do. Yes. These people all helped each other. They all knew each other to varying degrees, and they all helped together collectively in aggregate bring forth the greatest investing revolution we've ever seen in human history. And I think, you know, none of them could have done it alone. And that's at least for me as a humble journalist that's almost encouraging. It's nice to know that it's what we do together that can be really impactful. >> And the naysayers about the retail marketplace not accepting indexing were correct. >> Yes. But there's a little twist there too. When the first index investment trust, which was the name of the Vanguard 500, which it's now called, was first brought to the market in 1975. It was sold through retail brokers, the Maril Lynches and Payne Webbers. Back then, Vanguard was only willing to pay a 6% upfront commission, while all the active fund companies out there were paying 8%. So, as a broker selling this, you have to admit that everything you've been telling your clients for as long as you've been in this business, all the funds that you've been selling maybe don't work. you know, go buy this index fund. You have to get over that hurdle, but then you are going to make less money by doing it. Well, I was a broker for 10 years. What did you expect to happen? I mean, Jack thought they were going to raise 150 million. Yes. Not in this lifetime where you're going to raise 150 million. Not from brokers who have very big egos and like to get paid. Vanguard raised a little over 11 million, but they were still able to launch. They weren't able to buy all 500 stocks uh because they didn't have enough money. That didn't happen until I think 1977 when they merged another large gap fund into uh the first index investment trust and then they were able to go out and buy. But the whole history of that by the way I did a podcast number one I had Jack Bogle on it. It it was only a few months before passed and he had wrote a book called Stay the course uh went over a lot of the history of the actual launching of the fund and interesting story in there. He was talking about the person who was actually buying the stocks was I want to say a secretary who worked there part-time and she the rest of the time she worked for her husband at a furniture store. It it really is fascinating to to listen to but it wasn't successful. There was only like $110 million in the fund as late as 1981. Yes. With very little incentive to sell the Vanguard first index investment trust as it was called for a long time. You had no incentive to sell it. So it struggled and I think this is part of the sort of Jack Bogle's later year revisionism that he was always a big fan. The reality is that he launched an index fund because it was the one thing he was able to do. Yes. Under the very restrictive terms of of the his divorce from Wellington. >> I agree. >> He his grandio way of expressing this was that strategy follows structure. But it really structure didn't let him to do anything other than an unmanaged index fund. And that was only because the the board essentially kind of with a nod and a wink, sure, yes, this is unmanaged. You're not actually managing money. It's unmanaged. It's purely passive. Fine, go and have your little side project. And he didn't really care about the fund or throw himself into marketing it in the way we saw later on for a very long time. I've talked to people that worked at Vanguard in the 80s. Frankly, the saving grace for Vanguard, the the money market funds, but that's really what kept Vanguard afloat. They were able to start money market funds and bond funds and a few other things. Uh they also had, you know, some very illustrious stock pickers still, right? Like John Nef who kind of kept it afloat. The index fund was, you know, it's not even the ugly duckling at this point. It's not anything that anybody really cares that much about, including Jack Bogle. But it does start to gather assets almost organically because by the 80s this research is starting to percolate more. There's an entire new generation of people that have studied it in in grad school, at business school, in economics. It just takes a long time for these ideas, especially when they're almost heretical to get into the public liveream. So by the 80s we are talking probably hundreds of billions of dollars globally in passive funds in passive mandates in big Wells Fargo became Wells Fargo you know eventually became BGI Barclay's global investors uh bankers trust battery much all these funds actually managed a lot of money in passive strategies but it was only institutions because the pension funds could see this data and they realized this was clearly the optimal way for a lot of them to manage money on the public decided it was just really slow. Ned Johnson, the head of Fidelity, famously said, "Who wants to be operated on by a mediocre surgeon?" Like, you want the best? It's so ingrained in us as consumers that, you know, if you're going to trust somebody with your money, you want the best people, not somebody who's going to be lazy or perish the thought passive. Even the word passive sounds bad, right? So, it had a marketing problem. And yet, it still started generating money a little bit in the 80s, but really it's in the '9s. >> Yep. that things start going a little bit more nuts. The Vanguard 500 fund when that started to generate assets, that's when Bogle decided, "Oh, wow. We have something here, right? >> Let's turn our mind to this. Let's turn this into a thing." They had gotten rid of sales loads. They gone no load before quite early on. So, they suddenly had quite a compelling offering. Like, they were the cheap competitor in a very high cost, mediocre industry essentially. And it's no surprise that in 1994, Jack published his first book, Bogalon Mutual Funds, which reintroduced indexing to the general public. And then from there, that was the focus. They they started looking at international funds, a bond fund, which they couldn't even call it an index fund. The SEC wouldn't allow them to. And then, as you wrote in your book, Jack went in to see Gus Solder and said, "Gus, what are we doing screwing around? Let's let's launch a total market index fund." Now he's on to it. >> Yeah. >> Yeah. It took 15 years. >> And Gus Sortter, you're right. Gus Sorter is an underappreciated hero in in the passive investing story. I think like he was instrumental at Vanguard. He was one of those people that had studied the efficient markets. I mean, he also had an incredibly interesting career, but he was the guy that really ran that and drove that in the '9s and started what is now, as you pointed out, this titanic $2 trillion fund. And that's that's Gus sorted. Though Jack Bogle does get the credit and she gets some of the credit, but I do think G deserves a large chunk of it, too. >> Gus is just a really great person, a really nice guy, very humble. Okay, we need to get into the second part of the book because we're just burning up time here. And that is exchangeraded funds. After the market crash of 1987, uh the failure of portfolio insurance, there needed to be a different way of trading a basket of real live stocks and doing it as a stock. Thus, the evolution or the creation of they weren't called ETFs back then. It was a security that was a basket of stocks like a closed end fund but traded close to its NAV, its net asset value, because the fund manager could create new shares and redeem shares that were in the marketplace to keep the price close to its NAV, which was very different than closed end funds. Let's talk about very early on the players, the amount of work and education that had to take place at the SEC for them to wrap their hands around what is now called an exchange traded fund, an ETF. >> So after 87, the the massive crash, the SEC published and then the Treasury and everybody got together with a of a a big sort of blue ribbon reports laying out what they thought went wrong. And in there there was a section that talked about maybe if there had been some sort of a product that basically kind of buffered like an index product, a tradable index product that kind of buffered somehow between index futures and the cash market that maybe this would have helped and quite a few financial engineers and there were a lot of financial engineers on Wall Street by the late 80s realized this could be the the kernel of something. The SEC was almost surreptitiously asking somebody to come up with something like this. I mean, you have various indexed tradable products. Obviously, futures had been around for a while. People are trading like total return swaps and things like that, but you had essentially at the American Stock Exchange a a problem. They were getting squeezed by the New York Stock Exchange, the big brother, the big board, and the upset NASDAQ. So they needed to find a new product and they decided that maybe this is a way to do it. So the main people at the American Stock Exchange were were two people, two financial engineers called Nathan Moss and Steven Blue. There were other people involved, Ivis Riley, Kathine Mariotti, their lawyer, but essentially they decided to come up with a tradable index fund. So it' be a cash product, a bit like what the SEC wanted, but it would be tradable throughout the day. It trades just like a stock and they set about developing it. But as you pointed out, it was hugely complicated both because of practical financial realities and incredibly awkward regulatory ones. And many people in the industry thought this was a terrible idea. And Nate Mos actually did go to visit Jack Bogle and asked him for help. And Jack Bogle said, "Well, essentially here's where I think the technical problems are, but the biggest problem is I think this is a stupid idea that should never ever happen." >> He called it giving gasoline to an arsonist. >> Sounds very Jack. He wanted people to buy the S&P 500 and hold it until they retired. And they were proposing something you might buy and sell within 5 minutes. It was quite understandably anathema to Jack Bogle, rightly so. I think it was hard to go from what Nate Mos was sketching out to him and what they were talking about in the early days and what we see in the world today, but that's partially because of all the hard work they had to do to clear the the regulatory thicket as it were to allow this to be born. This product called standard and pores depository receipts or spiders was finally filed with the SEC in 1990. But there was so much regulatory burden to get through. It didn't launch until January of 1993. And it traded. It went over okay. Wasn't a huge splash, but it greased the skids for what would come in the future. It took three years before another one was launched and that was the S&P 400 midis, the midcap index. >> I was in the brokerage industry at the time. I started using spiders and midis for my clients as a long-term hold which was almost forbidden. >> Oh wow. >> Yeah. I had read Jack's book and I was enlightened and I was looking for a way to move my clients over to index funds but there was nothing available except extremely high fee high commission S&P 500 funds through Drifus and other broker sold products and this was a solution and so I started putting clients in spiders and midis to replace uh US actively managed products. And that did not go over well with my uh bosses. Okay, moving along. It took a while before other exchange traded funds came out and they came out in batches. The first group was called webs. So tell us about webs. In the same way that the first ETF, Spider SPDR, was born out of a sort of an alliance of necessity between State Street and the American Stock Exchange in the same way that essentially Webs was born. It was actually Morgan Stanley had set up a index joint venture with capital group in on the West Coast. It was called MSCI for Morgan Stanley Capital Investments. And MSCI had all these ind indices. They were creating lots of indices, but they realized, well, we kind of need some products to go along with them. So, Morgan Stanley tapped its relationship with Barclay's global investors, BGI, out on the West Coast. So, this was the old Wells Fargo. In fact, they had it pion pioneered the very first index fund and was by then a giant of indexing, although it only solely in the institutional space. They'd also done all sorts of cool and funky things with systematic equity strategies and so on. So they were big and had been first after a joint venture with with uh NIC in in Japan, they had been acquired by Barclays the UK bank and had become a giant, one of the biggest asset management firms in the world. But frankly, even BGI did not get enormously excited about this idea of a joint venture with MCI to start these new ETFs as people were starting to call them then. they just weren't that crazy about it. It was kind of a retail product. They thought it didn't really fit with what they do. They were complicated and frankly it wasn't as if uh the first ETFs were a roaring success either. But they did it almost as a favor to Morgan Stanley. And there's a reason why Morgan Stanley essentially offloaded its share in this Web's joint venture to BGI for a purely nominal sum. Nobody really believed in this. And the name webs uh it was a world equity benchmarks the idea where they were international ETFs was really just like a a a cheeky way of a nod to spider like spider and webs right that was like that's a far that's how far naming conventions go in the financial industry and nobody really cared about for a long time until you suddenly had a few executives at BGI that realized that you know Barclays was already a giant of the institutional investing space and ETFs and this webs could be the kernel of the becoming a giant in the retail space as well. >> I recall the day that eyesshares you know that they changed the name to to eyeshares. >> Exactly. launched I want to say 16 ETFs and they were all to these different indices small cap cap I think they were using Russell indices if if I'm if I'm not mistaken and it was huge all of a sudden it it was no longer just the S&P 500 the S&P 400 and country baskets it was now styles and they came on the market and to me This was the beginning of the uh revolution that took place with exchange traded funds when eyeshares launched these style indices. >> Well, so the two cru crucial people at BGI at the time I think were Patricia Dunn the CEO and and Lee Cranefuss who took over you know what became known as as Eyesshares. They were the ones that, you know, Cranefirst was of the slightly mad genius I've heard him described, uh, who had immense drive and ambition and Patricia Dunn was the one that could see this and frankly back him and got money from Barclays and from the board of BGI to essentially what was lost probably a ton of money to begin with because it's a you and I know how hard it is to just go into something adjacent. going from being a purely institutional relationship manager essentially selling to pension plans, sovereign wealth funds, private banks and then selling to the retail world is just it's a huge leap. It requires a whole change of mindset which is why Eyesshares was set up into be something different and Lee Cranefuss I think saw quicker than almost anybody else certainly at places like State Street that had pioneered the ETF that the future of the ETF wasn't just like a tradable index fund essentially like the S&P 500 but actually being able to carpet bond the entire investment landscape with tradable products. So styles, sectors, uh sizes, the whole paniply of potential investment products you could package up because in reality you and I know that like it isn't just the fact that active managers underperform in the long run in like the stock market. It's in every single sub sector as well. And a lot of the fund managers that do outperform really always have done so by having some sort of secret style tilt. It's either explicitly or implicitly embraced. >> So this is why style ETFs the the the eyesshares they started and Crane first basically signed up all the biggest indices. signed for exclusive use of their brand because the indices had become kind of the the shorthand for these styles for these markets and like the Russell 2000 was the small caps index is actually I'd argue actually a really bad small caps index. >> I agree >> but but it was the small caps index. It was the shortand so. So he signed an exclusive deal to basically have that. So you essentially squatted like in a kind of intellectual property toad over all these different parts of the investment world and systematically built this up and it must have cost a ton of money. Uh because you have to build the sales forces, you have to do all the marketing and people of our generation remember how aggressively eyesshares used to market itself and it had to do so because they had to catch up, right? They had no retail cache. Nobody knew who they were. Nobody knew who BGI was. They suddenly then people realize that ETFs can be just a tradable index fund but they can be also be an investing tool. They can be used strategically and tactically and that meant that actually a lot of people started embracing them that frankly would never have been considered potential use users just a few years earlier. >> So now enter Gus Solder. So Gus is looking at this and Jack unfortunately had to uh retire because he had a heart condition and had a heart transplant. So he steps down. Gus is watching this and saying okay first of all we can't use those indices. I mean we can't launch ETSs against those because they're locked up. So Gus creates his own methodology and I remember when the paper was published it was like 2000 or 2001 and he takes this methodology small cap large cap and how to migrate from small cap to large cap and how to migrate from value to growth. He takes this whole methodology and he goes to Crisp and he says create indexes out of this. The paper explained how to do it. They take it and they create the indexes and then Vanguard comes in with what they called Vipers. Wasn't a great name. They ended up dropping it. >> Yeah. [laughter] >> But they come in with style and size ETFs and they also get a patent on the funds that they currently had like their total market fund and their S&P 500 fund. They create a patent where they can create a share class of ETFs within that fund. in the patent was for like 20 years so that no one else can do this. And now because of Gus Solder in my belief, Vanguard is now in the ETF industry which allows Meil Lynch and Payne Weber and Wells Fargo advisers to use Vanguard funds which is a thing Jack never got. I remember talking to Burton Malill about this. I mean he was at the board of Vanguard for a very long time was a good friend of Jack Bogle and huge fan. Bert was very articulate in explaining why he was supported the ousting of Jack Bogle from Vanguard. The reality is that sometimes you need a founder, a certain person who's perfectly suited for that era and Jack Bogle was Vanguard. I mean his spirit is still very much in the walls there. But increasingly by then it was very clear that the organization had started and grown or needed to maybe have a different type of CEO. And that was obviously very awkward to do and very painful frankly for everybody involved. I mean I've talked to a few people. They're all frankly emotionally scarred from that era. But I think Jack Brennan changed the organization made it more professional and could see the benefits. But still like this as an organization formed in such Jack's image that I think even with Auss championing ETFs, they were very slow to appreciate its power. Yeah, >> but I think they needed to manage Jack fully out unfortunately to truly embrace their index fund 2.0. >> Couple of other companies who missed the boat. >> Yes. >> On ETFs. Fidelity. Boy, did they miss the boat. >> I mean, you talk about Vipers, but Spartans were even worse, right? That's just it really shows how little Fidelity didn't want it. So, to tarnishing their active brand, as it were. We can't even call them fidelity funds and it's very easy to make excuses for them. I think like the really the one that like I hard to say they missed the boat but state street should be >> Oh yeah massive they had they had it absolutely absolutely even after it was all already very very obviously a big thing. State Street kind of slept on it for a long time. You you know the funny thing was when uh Barkclays got into a little financial trouble after the financial crisis and they had bought uh Lehman Brothers back then and they and they needed to spin off Eyesshares. They needed to find a buyer for Eyesshares. That was Fidelity's opportunity right there. >> Yeah. And and Vanguard. Vanguard sniffed around as well because they knew their ETFs were underpowered and they realized they had to catch up and this was a potential way. for Vanguard given its ownership structure and and Barclay's need for cash upfront now it meant that the advantage was always going to be to almost a de facto cash buyer and buyer eventually not Fidelity and not any of the other people that came sniffing around or the private equity firms that actually had bids accepted for eyeshares was Black Rockck Black Rockck's trump card was that he was obviously listed so he could pay in shares and fairly liquid shares and they would buy all of BGI, all of Barclay's global investors. And I think that was the genius move. >> It was you you did a good job with Larry Frink and talking about how he was instrumental in bringing on eyeshares and and and growing that brand. He saw the the value there. He he put building an institution before building his own personal wealth. And we elevate the inventors, the Jack Bogles, the Macrons. These are people that I also love. But sometimes you do need people who's just going to get done. And and Larry think is somebody who's very commercially minded, is extremely brilliant. I've talked to lots of people that even don't like him and will say he has complete mastery of every part of his business. >> And we could go on for two hours here because we can get into all kinds of things you have in your book, but we've run out of time. Thank you so much, Robin, for being on Bogleheads on Investing. >> Thanks so much for having me on, Rick, and I'm really looking forward to digging into this through the bond market next. This concludes this episode of Bogleheads on Investing. Join us each month as we interview a new guest on a new topic. In the meantime, [music] visit Bogalcenter.net, Bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit. Join one of your local Bogleheads chapters, [music] and get others to join. Thanks for listening. >> [music]