Acquired
03:11:52 · Ben Gilbert, David Rosenthal
[03:11:52] S0: And you're gonna have to go through absolute hell to will this thing into existence more so than if you had regular shareholders because you're you you have to do crazy things to get through in the lean years, especially early on. Usually, there's some economic component to being willing to to go through all that. And this is admitting, I will never ever have founder economics or economics of any kind in this entity, and you're still trying to will it into existence. So So it's it's not not only only a a very very narrow narrow circumstance, circumstance that could allow it to exist, but it takes a very unique a Jack Bogle. [03:12:30] S1: Yep. A type of person in the exact specific situation in life where he found himself. I mean, it's his quote from his memoir that I have right here. I realized that a mutual company would never provide me with the personal fortune that so many denizens of Wall Street would earn, but it offered, I believe, my last best chance to resume my career. Even Jack wouldn't have done it if he hadn't found himself in this situation.
03:12:30 · David Rosenthal, Ben Gilbert
[03:12:30] S1: Yep. A type of person in the exact specific situation in life where he found himself. I mean, it's his quote from his memoir that I have right here. I realized that a mutual company would never provide me with the personal fortune that so many denizens of Wall Street would earn, but it offered, I believe, my last best chance to resume my career. Even Jack wouldn't have done it if he hadn't found himself in this situation. [03:12:58] S0: Right. So I I think it kinda mostly boils down to Jack. The other thing that makes this finance, in particular, uniquely well suited to this is lots of people manage to start co op grocery stores and small co op things. In order to expand those businesses, they all require capital, and so you end up with shareholders at some point, or you are small and stay subscale. Finance isn't that. Yep. Finance is like software where it can scale basically infinitely once it overcomes its early fixed cost base. [03:13:28] S1: Yep. Huge operating leverage. [03:13:30] S0: I did think of one other Jack Bogle like character who built a Vanguard like thing, and I'm curious if the thought crossed your mind too. I think Costco thus far has been the most correct analogy that this is Costco on steroids, but it's also something else that was also an acquired episode. [03:13:48] S1: Oh, wow. [03:13:50] S0: It's even in financial services. [03:13:52] S1: I guess Berkshire? [03:13:54] S0: Visa.
03:13:54 · Ben Gilbert, David Rosenthal
[03:13:54] S0: Visa. [03:13:55] S1: Oh, Visa. Yeah. DHOC. Yeah. Absolutely. Absolutely. I mean, I was gonna say Berkshire because Berkshire, as we talked about earlier, does not take fees or carry, but effectively is a private equity firm. But it's not the same because Warren owns a huge chunk of Berkshire. [03:14:10] S0: So worth a $100,000,000,000 [03:14:12] S1: from the successor. Exactly. [03:14:13] S0: He doesn't take outsized economics. He takes commensurate economics. [03:14:16] S1: Yep. I forgot about DHock. You're totally right. [03:14:19] S0: Listeners, for anyone who isn't tuned into our Visa episode, it took a similarly I I'm not sure if selfless is the right word, but a person who was not motivated by getting to own the fruits of their labor, where Dee just decided this is the best structure if all these banks link arms and collectively create this thing that if memory serves, it might have even been a nonprofit or some sort of strange [03:14:46] S1: Mhmm. Structure. It was. Yeah. Yeah. [03:14:48] S0: Strange structure. Now it's a corporation, and it's gone public and all that. For a while, it was But it had [03:14:52] S1: to get restructured in order to go public in 2008, I think it was. Yeah. [03:14:56] S0: Right. But it was there was this realization that there exists a better structure that will uniquely enable this interbank experience, and I wanna will that into existence. It's gonna be my life's work, and I'm not gonna own it. Yep. And I think that's the type of person that it takes to to do this.
03:14:56 · Ben Gilbert, David Rosenthal
[03:14:56] S0: Right. But it was there was this realization that there exists a better structure that will uniquely enable this interbank experience, and I wanna will that into existence. It's gonna be my life's work, and I'm not gonna own it. Yep. And I think that's the type of person that it takes to to do this. [03:15:11] S1: Yep. And you're right. I think there are a lot of parallels between Dee and Jack. But Dee, if memory serves, was an employee Yes. When he started this. So Vizo, yes, he, you know, sort of forewent founder economics, so to speak, but it wouldn't have been on the table for him otherwise. This was his chance to be on the big stage. [03:15:32] S0: Yeah. He had to convince his employer not to be the owner Yeah. But he never could have been the owner Yep. Yep. Unlike Jack. [03:15:39] S1: Yep. Good call, though. I love that. Thank you. Visa connection.
03:15:39 · David Rosenthal, Ben Gilbert
[03:15:39] S1: Yep. Good call, though. I love that. Thank you. Visa connection. [03:15:43] S0: Thank you. I was proud of that one. You should Alright. You should be. Other playbook themes. This is a case study in aligning incentives. If you want something to happen, and Jack really wanted low cost investing to happen since the math showed that it was superior in the majority of cases, you need to align incentives for it. So I think most people coming into this episode know Vanguard has low cost index funds. Some people know that Vanguard is owned by its funds investors, but I think few people realize that is why it is low cost. Yep. The investors are the board of directors or elect the board of directors and thus will always vote to lower fees when they can lower fees because it's in their own interest. [03:16:32] S1: Jack's quote on this that he would say often is strategy follows structure. Yes. And by setting our structure as such, this had to be our strategy. [03:16:41] S0: Yep. Another playbook theme I had is, people often talk about compounding returns. We've done it hundreds of times on this show. Bogle really understood the power of compounding costs. His quote on this, where returns are concerned, time is your friend, but where costs are concerned, time is your enemy. And Vanguard strategy was just that, to give you the power of compounding returns without what Jack calls the tyranny of compounding costs. [03:17:10] S1: So, Jack, yes.
03:17:10 · David Rosenthal, Ben Gilbert
[03:17:10] S1: So, Jack, yes. [03:17:11] S0: I don't think corporate structure and corporate governance has ever played such an important role as it did on this one. Yep. I was racking my brain on you know, we we always talk about these founder led companies or or private family ownership lets you take a longer view, but this is something else entirely where it was literally path dependent. The only reason that they had the market opportunity that they had was because of the corporate structure that they had. Yep. Be fun to see if there's other ones of those that exist. [03:17:39] S1: Yep. [03:17:40] S0: Alright. Should we get into the criticisms of passive investing as a movement? [03:17:45] S1: Yes. The crisis. We would be remiss if we don't [03:17:49] S0: The crisis. Of course. [03:17:50] S1: The passive crisis. [03:17:51] S0: What is once a revolution becomes a crisis, if you, let it become successful enough. [03:17:56] S1: Yeah. And this is what we were alluding to earlier with, like, hey. If one of these companies were to go down, it would be systemically really bad. Also, flip of that is these large index fund complexes of which Vanguard is the largest control a huge percentage of the voting shares of all American corporations and increasingly all corporations around the world. [03:18:18] S0: Yeah. So first of all, there's this name, passive investing. That's not true. It's not like an algorithm determines what is in the S and P 500. It's a committee of humans. [03:18:33] S1: Mhmm.