Acquired
02:21:21 · Ben Gilbert, David Rosenthal
[02:21:21] S0: Yeah. Weren't your grandparents some of the first Vanguard investors because they age nearby? [02:21:26] S1: I was gonna save this for the end of the episode. But Yeah. My grandparents were among the, like, very, very first fund holders in Vanguard. I I couldn't find the exact date, but I believe my grandparents must have become Vanguard clients either in the late seventies or early eighties when, like, nobody was a Vanguard client. [02:21:48] S0: Before the 100,000,000 Yep. Mark on the fund. [02:21:51] S1: I think it was just, you know, hey. Local company. Like, great. We'll go with this local company. Amazing. [02:21:56] S0: Southeast Pennsylvania showing up again. It was our Taylor Swift episode and this one. [02:22:00] S1: I mean, they set up Vanguard accounts for me, like, the day I was born. Wow. [02:22:04] S0: Okay. So getting back to the story here, we haven't yet talked about the financial crisis. You mentioned there's more Berkshire to come. [02:22:12] S1: Oh, yes. [02:22:12] S0: There's been, like, four other CEOs since since Jack. There's a big beat of the story here. [02:22:17] S1: Yeah. 2008 and the financial crisis really is Vanguard and all of indexing and passive's finest moment.
02:22:17 · David Rosenthal, Ben Gilbert
[02:22:17] S1: Yeah. 2008 and the financial crisis really is Vanguard and all of indexing and passive's finest moment. [02:22:29] S0: Yeah. I think that's, I think that's probably right. But should we do our last sponsor first? Yep. Let's do it. Well, listeners, one of the big takeaways from this whole story that we have been telling is that Jack Bogle had the data. He showed over and over again that active fund managers on average don't beat the market after fees. The data was right there. The industry ignored it for decades because conventional wisdom sort of felt felt, in quotes, correct. [02:22:56] S1: Yep. And, you know, that same dynamic plays out in product development every single day. Teams ship features based on conviction, momentum, or just the highest paid person's opinion. And most of the time, nobody, like, goes back to check whether it actually made the product better or worse. The feature ships, everyone moves on, and you never really close the loop. [02:23:17] S0: So listeners, if you haven't guessed by now, Statsig is one of our sponsors this episode. This problem that we are describing gets way harder when AI is involved. LLMs are nondeterministic, meaning that the same prompt doesn't always produce the same output, and small changes to a user flow or a prompt can have surprisingly large downstream effects. And the real feedback signal that you need ends up coming from real users in production.
02:23:17 · Ben Gilbert, David Rosenthal
[02:23:17] S0: So listeners, if you haven't guessed by now, Statsig is one of our sponsors this episode. This problem that we are describing gets way harder when AI is involved. LLMs are nondeterministic, meaning that the same prompt doesn't always produce the same output, and small changes to a user flow or a prompt can have surprisingly large downstream effects. And the real feedback signal that you need ends up coming from real users in production. [02:23:43] S1: Yep. And that's exactly what Statsig does. Statsig gives product teams experimentation, feature flags, and product analytics all in a single platform. So you can ship fast, roll out changes safely, and actually see what's moving the needle in real time. [02:23:58] S0: Yep. Bogle bet on data over intuition and built one of the largest financial institutions in history doing it. And if you wanna apply that same rigor to how you build a great product, go to statsig.com/acquired. That's statsig.com/acquired, and just tell them that Ben and David sent you. Alright, David. Bring us to 2008 and the great financial crisis.
02:23:58 · Ben Gilbert, David Rosenthal
[02:23:58] S0: Yep. Bogle bet on data over intuition and built one of the largest financial institutions in history doing it. And if you wanna apply that same rigor to how you build a great product, go to statsig.com/acquired. That's statsig.com/acquired, and just tell them that Ben and David sent you. Alright, David. Bring us to 2008 and the great financial crisis. [02:24:23] S1: Yep. Indexing and Vanguard's big moment in the sun. It's kind of funny. During the financial crisis, passive index funds don't magically avoid getting whacked. Of course, they move exactly the same as the market and have huge losses in 2008, 2009, etcetera. What's more important though is what happens to everyone else. So, you know, like, Michael Burry and the big short aside, almost the entire professional active money management ecosystem gets crushed just as bad or worse. Like mutual funds, hedge funds, private equity, alternatives, you name it, carnage, devastation. [02:25:09] S0: No one is safe. Well, most money managers are not set up to have a 40% drawdown on everything in their portfolio. Their comp structures and their redemptions and their contracts all sort of break, and the business falls apart.
02:25:09 · Ben Gilbert, David Rosenthal
[02:25:09] S0: No one is safe. Well, most money managers are not set up to have a 40% drawdown on everything in their portfolio. Their comp structures and their redemptions and their contracts all sort of break, and the business falls apart. [02:25:28] S1: And this is what, you know, not just creates, like, the spiraling problems that lead to all the losses, but what permanently impairs or ruptures faith in the entire smart people on Wall Street ecosystem. The promise had always been, especially as passive and indexing had been rising over the last two decades, like, yeah. Yeah. Yeah. Yeah. That's great, but, like, we're smart. When the bad times come, we're gonna outperform. We're gonna protect. [02:25:58] S0: You're saying this is active. [02:25:59] S1: This is the premise of active money management and all the smart people on Wall Street. Right. We know what we're doing. [02:26:06] S0: We're gonna get you the high returns in the good times, and we'll figure out how to protect you in the bad times. And it's all mechanistically built in to have safeguards. [02:26:14] S1: Yep. We have safeguards. We won't get wiped out. We won't experience the same kind of, you know, piano falling on our head losses as these naive index funds will. That turned [02:26:26] S0: out to be absolutely not the case. For the vast majority.
02:26:30 · David Rosenthal
[02:26:30] S1: The vast, vast, vast majority of active management, again, of all types, not just like equity management funds, like everything out there in the financial ecosystem. So John Reckenthaler wrote on Morningstar in a retrospective on the financial crisis years later, active managers had long promised that when a bear market finally arrived, that they would outperform Vanguard's fully invested index funds. It did, and they did not. Yep. Yeah. And then related to what I was saying there, even more than the underperformance, you know, some might say nonperformance of the active management industry during the crisis. The crisis just completely bursts whatever halo or status or bubble had emerged around Wall Street and fund managers for most of the investing public. A lot of people's views of Wall Street during the financial crisis changes from, hey. These are smart people who I should probably invest my money with to these people are charlatans at best and crooks at worst. You've got the bailouts. You've got the Occupy Wall Street movement. You've got Lehman Brothers. You've got all this stuff, like public sentiment turns against Wall Street and active management in not just a major way, but arguably a permanent way. And who is there as the hero of Main Street, the little guys, but Malvern, Pennsylvania based, Jack Bogle and Vanguard, which makes no profits, has no fees above costs, has no corporate owners, and has always been the champion of the average American. I mean, you could not draw up a better marketing event for Vanguard than the financial crisis.