Why Vanguard’s Bogle Was A ‘Punk Rock’ Disruptor
Eric Balchunas, principal ETF analyst at Bloomberg, has written a book about the man who drove the rise of index investing.
The Bogle Effect: How John Bogle and Vanguard Shook Wall Street and Saved Trillions of Investors hits bookstores today, and it seeks to capture the extent of Bogle’s impact from the financial sector to mainstream investors. The conclusions drawn by the author offer a unique perspective on a titan of the financial industry. This article is the first of a two-part interview; it has been edited for brevity and clarity.
ETF.com: John Bogle, the founder of Vanguard, passed away in 2019. Could you tell us how the idea for this book developed?
Eric Balchunas: I wondered about living on the planet Bogle and exploring all the crevasses and mountains. This guy is colorful; he is interesting. And Vanguard is so big and powerful right now, taking in $1 billion a day for a decade – that’s a great topic to explore. The only thing he lacked — and I can’t help it — was a fall.
A lot of the books that come out talk about a rise and a fall, and it’s just a slow rise. This is about a guy who just nibbles on a system to change it and ultimately win. He didn’t change the whole system, the whole ball game, but there’s no tragedy here. There is no loss.
I did my best to keep it entertaining, despite the lack of fault. It was a bit difficult, to be honest, and I hope it goes well. The name of the book is very specific. I’m doing my best to capture the Bogle effect and how great it was what this guy did, and the ripple effects across all areas of the ecosystem and into wallets.
I also had plenty of data at my fingertips on the power of Vanguard and the mutual ownership structure. I thought, “This will probably haunt me if I don’t.” That’s when you know you’re ready to write a book, if you almost feel like it’s going to bore you if you don’t write it.
ETF.com: What were you trying to capture in the story you were telling?
Balchuna: I tell people it’s probably the only book on Wall Street that has a happy ending. Think about it: this guy really changed the whole game, and my conclusion is that the story will be very kind to him. Most people who come and go through investing, they’re known for how they played the game, this guy changed the game – and for the better.
The numbers and the impact are astounding. We are in the second or third innings. I know we seem to have heard enough about Vanguard, but [the company] going to get bigger and bigger as it goes overseas, into the wealth management industry, maybe private equity.
And that’s really what I wanted to focus on in the book. Ironically, I thought index funds were getting way too much credit for the index fund revolution. Index funds needed Vanguard much more than Vanguard needed index funds. And the reason is because of the Vanguard [ownership] structure.
They could have done private equity, active mutual funds, quantitative investing. Whatever they were going to do, they were going to be successful, because they were going to consistently bring a gun to a knife fight at very cheap costs.
It turned out to be an index fund that fit that structure perfectly. But Vanguard was going to be a hit no matter what. That’s what I wanted to focus on — that structure is the real core and also that unique structure of global demand.
[Bogle’s] different, he’s weird, he almost got it wrong in this industry. He’s almost a kind of guy that you could say – with the kind of things that motivated and inspired him – that he would probably be led into the priesthood, or maybe a military leader, or maybe a writer. .
He was just a very different guy. For me, Vanguard’s different structure and Bogle’s different structure was the source [of the] explosion which is ultimately what continues to spread and will continue for decades to come.
ETF.com: What role do index funds have in this?
Balchuna: Index funds were the first big byproduct of that explosion, and I really wanted to make sure people understood that. The other thing with index funds is that they are different. Passivity does not exist – the S&P 500 has rules for entering and it is managed by a committee. Everything we see is really inexpensive. And there’s no way index funds would have been cheap without Vanguard.
It’s just not that they wouldn’t have been invented – they would have happened, but they would have charged 70-100 basis points. They would have been nice – they might have had people buying them on the sidelines.
But their “beats” wouldn’t have mattered as much because you still couldn’t buy the benchmark if it was the benchmark minus 70 basis points, and that wouldn’t matter. not really worth it for many people.
The low cost formed over 40 years, from 45 basis points to today, like 3 or 4 basis points and you get a whole wallet for next to nothing. That’s really where the power comes from, more than the idea of indexing, which I think again gets way too much credit for the changes we’ve seen.
ETF.com: Would you talk more about that Bogle “weirdness” you mentioned?
Balchuna: He was weird for several reasons. I asked the 50 people I interviewed [for the book]why no one copied the Vanguard structure, [since] they obviously had a lot of success with it? [They generally said] well, because there is no economic incentive to put such a structure in place, nobody wants to drive a Volvo. The people who go to Wall Street and work so hard don’t want to hand over all the profits to the customers. That’s just not the way the economy works.
I think what made him different was his fiery attitude. In Wellington, most people would have left and started a new business somewhere else, [but] he fought them. And in fighting them, that’s where Vanguard came out.
He was very fiery, very excited. And he had a kind of populist nature. He just had this “customer first” thing going on. He was also a bit punk rock – I think he was okay with the tension. He would go to conferences and kind of upset the public by saying, like at Inside ETFs, “ETFs suck.” At Morningstar, he said, “business sucks.” And it’s just different.
I have a whole section where [I say] he looked like a late-day Henry Fonda, but he was kind of a punk rocker – he was very much into challenging the status quo and thinking about the little guy.
I also found something he shared with punk rock, something [known as] addition by subtraction. The birth of punk really comes from the Ramones, who basically said, “All we did was take away everything we didn’t like about rock at the time and do what was left. They didn’t want guitar solos and a lot of self-indulgence, so they made 2 1/2 minute songs that were very lean and mean, which gave birth to the whole genre.
And that’s really it [Bogle] did. He spent 45 years stripping away all the things he didn’t like that hurt investors’ returns – management fees, turnover, trading fees, brokers, human emotion, market timing. Now, if you buy a total market index fund, you get frictionless exposure to the whole enchilada.
But it took 45 years. Who else would really get into it when most people are looking for ways to get more money from the client? And that’s what made it unique.
He just wasn’t motivated like the others. He gave a speech to staff in 1991, saying, “I will know that Vanguard’s mission to make the world a better place for investors begins to be realized when our market share begins to erode.” And it’s weird. Who wants their market share to drop?
But he knew that would mean everyone getting cheap and more [focused on stewardship and fiduciary duty], because then they would catch up with Vanguard. That’s how different it was from a trip.
Contact Heather Bell at firstname.lastname@example.org
[Homepage photo of Jack Bogle by Mark Lennihan | Credit: AP]
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