Transcript:
The transcript from this week’s, MiB: Eric Balchunas on the Vanguard Effect, is below.
You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, hey, guess what? I have an extra special guest. Eric Balchunas is someone I’ve known from both the ETF industry and Bloomberg for, I don’t know, a decade or two, and we hang out in a lot of the same circles.
There are a few people in the world who know as much about ETFs indexing, Vanguard, Jack Bogle. I mean, I could count them on one hand the number of people who have his depth of knowledge in this space. And that’s why he is really a — a fascinating character.
You could tell when you listen to this conversation that it’s two guys who know each other just BS-ing and schmoozing. But I find those to be some of the best conversations because there’s no pretense, there’s no marketing, it’s just people talking about things that genuinely interest them. And when I basically don’t get to have my questions because we’re just, what about this, tell me about that. Hey, isn’t this wrong, or it just leads to all sorts of fun and interesting places.
I thought this was a fascinating conversation, and I think you will also. So, if you are remotely interested in passive investing, ETFs, indexing, or Vanguard and Jack Bogle, you will find this to be an absolutely fascinating conversation.
With no further ado, my interview of Eric Balchunas of Bloomberg Intelligence. He is the Senior ETF Analyst for Bloomberg News. He is also co-host of ETF IQ on Bloomberg Television. And he hosts a podcast called Trillions with Joel Webber, Editor-in-Chief of Businessweek. He is the author of several books, most recently, “The Bogle Effect,” how John Bogle and Vanguard turned Wall Street inside out and saved investors trillions.
Eric Balchunas, welcome to Masters in Business.
ERIC BALCHUNAS, SENIOR ETF ANALYST AT BLOOMBERG INTELLIGENCE: It is a pleasure to be here, Barry.
RITHOLTZ: Always (inaudible) …
BALCHUNAS: Like a home game for me. (Inaudible) walk like 10 feet here.
RITHOLTZ: Right, I texted you and said, “Come down to five. Time to start.” So — so let’s talk a little bit about the home field advantage and your career.
You’ve — you’ve been reporting on finance pretty much your entire career. What — what led to an interest in money and markets?
BALCHUNAS: While I was in college at Rutgers, and I was — wrote for the school paper, and I decided to major in journalism and communications because I liked it. And — but I was at the Cook college, which is the ag school. And in order to graduate from Cook you had to have at least a minor that was related, and I thought — I took an econ class and I kind of liked it, so I minored in environmental economics.
RITHOLTZ: Interesting.
BALCHUNAS: That got me through Cook because I was with a bunch of biology people. And so I — my — I immediately applied at Bloomberg, right? But I — I got rejected.
RITHOLTZ: This was your first job …
BALCHUNAS: Yeah. No, no, it wasn’t. I got rejected. I only got in my third time. I — because obviously, I’m like journalism, economics, I’m in Rutgers. Bloomberg makes perfect sense, and they were hiring, but I just wasn’t qualified, I guess.
RITHOLTZ: Balchunas, hard pass.
BALCHUNAS: Yeah, hard pass.
RITHOLTZ: So where did you start?
BALCHUNAS: I went to the Institutional Investor Magazine Newsletter division.
RITHOLTZ: Oh, sure. Their — their website is a regular in my morning reading list.
BALCHUNAS: Yeah.
RITHOLTZ: It’s always solid.
BALCHUNAS: Yeah. I mean, the name turned me off at — coming out of college, I was like institutional investor just sounds so boring like who would ever read this, but money was pretty (inaudible).
RITHOLTZ: It’s …
BALCHUNAS: Yeah, institutions, which came in handy later in my — when I wrote my first book. But I covered derivatives at first, and then I cover mutual funds. I worked for a (inaudible) called Fund Action and did that for a little while, and then went — I met a guy named Duff Ferguson at AllianceBernstein. He was the P.R. guy.
And I just thought then that I want to go behind the keyhole. And so, I went and took a job in P.R. because I kind of like this guy’s whole deal. And so I got a job in P.R. at a crisis communication firm named Abernathy MacGregor and got to work with several clients and, you know, took them to Bloomberg, took them to Reuters, took them to there.
And (inaudible) Bloomberg, I was like, “Man, this place is different,” right?
RITHOLTZ: Yeah, yeah.
BALCHUNAS: And so, I always had an eye on Bloomberg for my early career. And then in ’99-ish — no, no. Yeah, ’99-ish, early 2000, I got headhunted. That’s how good the economy was. You could be 25 and you get headhunted for like all these jobs.
And she comes and she goes, I — I got two jobs that are really good. One is at Bear Stearns …
RITHOLTZ: A lot of money.
BALCHUNAS: … doing P.R.
RITHOLTZ: Right.
BALCHUNAS: And the other one is at Bloomberg. And I was, yeah, it’s easy choice. So I basically put all my chips on Bloomberg, apply them and interviewed here to have a job in P.R., went through many interviews. It took a while, but I finally got it.
RITHOLTZ: In P.R.
BALCHUNAS: Yeah.
RITHOLTZ: Really?
BALCHUNAS: Yeah, so I started here …
RITHOLTZ: So — wow.
BALCHUNAS: … in Public Relations.
RITHOLTZ: So — so first, the first question is, if you weren’t rejected by Bloomberg right out of the gate when you were right out of school, might you have ended up at Bear Stearns. Was — was Bloomberg …
BALCHUNAS: Yes.
RITHOLTZ: … the one …
BALCHUNAS: Yeah, it’s a great point because …
RITHOLTZ: We chase the things that recede from us …
BALCHUNAS: Yes.
RITHOLTZ: … to quote The Tao of Steve.
BALCHUNAS: But having had like — I had like three jobs, maybe four, I worked at — I worked with a third-party marketer for about six months …
RITHOLTZ: Yeah.
BALCHUNAS: … where you had to call pensions and tried to pitch them on hedge funds …
RITHOLTZ: Cold (inaudible).
BALCHUNAS: … oh, it was really tough.
Those jobs, when I finally got to Bloomberg, always helped me stay here because I know what is out there, at least to a degree. This is my first job, I may have had such a — I don’t know …
RITHOLTZ: Right.
BALCHUNAS: … curiosity. I — I probably would’ve left. So maybe it’s a blessing in disguise.
RITHOLTZ: So you were covering derivatives in the 90’s, but not the 2000’s leading up to the ’08-’09 crisis.
BALCHUNAS: No, I only covered them for a little while there.
RITHOLTZ: So you missed …
BALCHUNAS: I’m hardly an expert.
RITHOLTZ: … you missed the fun derivative era.
BALCHUNAS: Yeah, I know. That’s right, that’s right. I cover them with …
RITHOLTZ: You’re like I did that in the 90’s, who needs that?
BALCHUNAS: The — the — the idea was you just try to call these traders and just get them to give you information on why, what went up and down in the futures market. It was a really — I mean, honestly, very unglamorous manual labor-type job.
RITHOLTZ: Right.
BALCHUNAS: Journalists need a — journalists need to get a reason for everything. Can’t you see the market went up or the futures? I said what happened, and you need someone for that.
RITHOLTZ: Who, what, where, when, why.
BALCHUNAS: Yeah. So …
RITHOLTZ: It just what makes financial news coverage either really good or really bad because some people must impose a narrative when it’s sometimes it’s just random.
BALCHUNAS: That was my first thought two months in my first job. I was like, I don’t know if there — there’s a reason for this. Maybe it went up like, I don’t know, half a point today. Maybe that just — maybe there is no reason, there’s no clear reason. It’s OKAY. Can we just say that? And they’re like (inaudible) like no.
RITHOLTZ: They hate that, no.
BALCHUNAS: You cannot say we don’t know or who knows.
RITHOLTZ: We — I think we’ve talked about this. My favorite thing in the world to do on TV is they ask you a question and say, “I have no idea.” Well, what — what about — I don’t know, nobody does, but I’m telling you the truth. I don’t know the rest of them are lying to you when they answer and people hate that.
BALCHUNAS: I agree. “I don’t know” is a underrated phrase and mindset whether it’s religion, politics. Sometimes you don’t know. And I think …
RITHOLTZ: Was it?
BALCHUNAS: … I don’t know is a very (inaudible).
RITHOLTZ: Most of the time.
BALCHUNAS: Yeah. And most people can relate because a few of us are experts in anything or know anything absolutely. And so I’m a big fan of “I don’t know” in general, but it doesn’t really play well in the media.
RITHOLTZ: All right, so let’s get serious now. You’re the go-to reporter for ETFs and passive indexes.
BALCHUNAS: Well, hold on. Can I stop you?
RITHOLTZ: Sure.
BALCHUNAS: So some people do think of me as a reporter and I started my career that way, but I’m in research, so what I do is I write notes that aren’t — I don’t report on something. I’m more — our team gives takes on things, so …
RITHOLTZ: Your — your title is technically senior ETF analyst. But when I think of everybody in the media who covers ETFs, passive investing, Vanguard, et cetera — BlackRock, et cetera, you’re the first name that pops into — oh, you have a question or you want to speak to a journalist in the ETF space …
BALCHUNAS: Yeah.
RITHOLTZ: … get a hold of Eric.
BALCHUNAS: So — so — so well …
RITHOLTZ: Let’s …
BALCHUNAS: … I — I — I would say, you know some of these guys who work for ESPN who are like experts in the NBA or …
RITHOLTZ: Sure.
BALCHUNAS: … I kind of model myself (inaudible).
RITHOLTZ: Your colored commentary. You’re not (inaudible).
BALCHUNAS: Yeah. And — where they just get the latest news, like …
RITHOLTZ: Yeah.
BALCHUNAS: … Woj for the NBA or Adam Schefter for — I believe that’s his name — for NFL. I’m — I’m that for ETFs, and so there is an element of trying to get on top of the latest things. But more so, I just see research is having to get out there more.
I think if you’re in research, you sort of need to put on a pundit head (ph) sometimes and have a reaction on Twitter quickly because if you wait and wait, then you’re late to it.
RITHOLTZ: (Inaudible), right.
BALCHUNAS: And I think it’s good to just be — add a little punditry. So I would understand why you would think that. Plus, I was a journalist, so I have maybe some vibes that are (inaudible).
RITHOLTZ: So let’s call you the go-to guy. We will …
BALCHUNAS: Sure.
RITHOLTZ: … call you the go-to reporter. How did the expertise in ETFs and passive investing come about?
BALCHUNAS: Remember the Fund Action newsletter I wrote for? So when I was a Bloomberg P.R. around 911, I had a near miss and I moved back to South Jersey.
RITHOLTZ: Define near miss.
BALCHUNAS: Well, I was supposed to be in the top windows of the world that day.
RITHOLTZ: Really?
BALCHUNAS: Yeah. There was a …
RITHOLTZ: By the way, there are thousands of these stories.
BALCHUNAS: I know.
RITHOLTZ: I’ve had …
BALCHUNAS: I know, and I don’t — I do not look — I — sometimes people overindulge themselves in these stories and — but fate indeed intervened, but there is a badge. There was a conference up there. WatersTechnology had a …
RITHOLTZ: A badge with your name on it, sure.
BALCHUNAS: There’s a badge with my name on it that was at the top.
RITHOLTZ: Wow.
BALCHUNAS: Isn’t that crazy?
RITHOLTZ: What time did the event start?
BALCHUNAS: Oh, it started at like seven in the morning so …
RITHOLTZ: Oh, so you absolutely would’ve been there.
BALCHUNAS: Yeah, there were three people from this company who were there.
RITHOLTZ: No kidding.
BALCHUNAS: Yeah, sad. And one of them is actually my friend from South Jersey knows him, and they still have a — you know, I think a walk for him every year. You know, it — it — it really hit home, but I also was looking to take a step, like I was looking to change gears in life anyway. I was about 27. So I moved back to South Jersey and I transferred to the Princeton office of Bloomberg.
And when you do that — I still think I’m the first person ever in the history in this company to go from P.R. to data because …
RITHOLTZ: Right.
BALCHUNAS: … that’s all they do in Princeton is data and engineering. But I was like, well, I don’t want to commute to New York every day from South Jersey, so I’ll take a job here.
So they looked at my background and said, “Why don’t you go work for funds data?” So I got to work where they make the terminals, like the Keebler elves. So I — I’ve — I’ve seen how the terminal is made, where all the data comes from. And they …
RITHOLTZ: Right.
BALCHUNAS: … I basically had to work on getting fund information from the prospectuses. This is before technology was really that great.
RITHOLTZ: Right.
BALCHUNAS: Put them into fields and then that’s what …
RITHOLTZ: (Inaudible) 00a manual process.
BALCHUNAS: Yes. We — we automated it as we went.
RITHOLTZ: Sure.
BALCHUNAS: We always (inaudible) and automate. And so, when you pulled Bloomberg and you type in like the Fidelity Magellan Fund and then you type DES, all that information …
RITHOLTZ: (Inaudible), right.
BALCHUNAS: … is really what we — we did.
And so, I was doing that in 2000, 2002, 2003, 2004. And in 2006, I got a hand at ETFs. They’re like, “You work on ETFs now.” And I was like I had heard of them, but I — you know, I was still …
RITHOLTZ: And let me just jump in. So the SPDRs had been around at that point in time, the S&P 500 SPDRs by State Street. They had been around at …
BALCHUNAS: Since ’93.
RITHOLTZ: Yeah, a couple of decades.
BALCHUNAS: Oh, yeah.
RITHOLTZ: And other companies had moved into the space, and I — I just was having this conversation with someone the other day. They said, “Who are you — who are you interviewing.” Oh, Eric Balchunas. Oh.
And the — the question they asked was, was Bloomberg late to ETFs? I’m like, “I thought they were there pre-financial crisis. They were fairly — they weren’t the first one, but they certainly didn’t lag.
BALCHUNAS: It’s a great question. So Bloomberg covers everything …
RITHOLTZ: Right.
BALCHUNAS: … and the ticker is on the exchange, it’s on the terminal, so we had ETFs from day one.
RITHOLTZ: Right.
BALCHUNAS: But did we care about them? Did we put a lot of resources into them? Not really. They were still small back then. And I think that’s maybe part of my legacy if there is one here is to — I was — in 2005’-‘07, I was like, oh, my god, I was like kicking the tires on ETFs, and I’m like, “These things are going to take over.” They’re too good.
RITHOLTZ: Right.
BALCHUNAS: And to value is too strong, so I just was like became — I’m like dove head first into ETFs. And I went to index universe conferences, started to listen to their podcast with your friend Dave Nadig, Matt Hogan. And I looked at some of the stuff they — how they talked the day that they looked at, and it was very inspirational. I said, “We have to cover things like index weighting methodology,” the criteria, the rebalancing. There’s all these ETF-specific fields we have to get on.
So part of what I did was to make the DES page one for ETFs that had all of — fields that were prevalent for ETFs because, at the time, they are putting ETFs into mutual funds, and they’re …
RITHOLTZ: You were a driver. You …
BALCHUNAS: Yeah.
RITHOLTZ: … you help separate it …
BALCHUNAS: Yeah.
RITHOLTZ: … that’s why people think of you as the ETF guy.
By the way, the folks you mentioned, I group you in with them because when I befriended folks like David Nadig, I had no idea that this was the ETF mafia, and these were the people running — you know, really driving the — the mindshare and the perception of ETFs both in the industry and amongst the investment community. I’m like, oh, what do you guys do, kind of we’re hanging out and having some fun. And it’s like, we’ve messed around with ETFs. Oh, that — we own ETFs. We can hang with you not realizing, oh, no, no, you don’t understand who this got, Jim and go down the list of people.
These are the folks that really drove the entire expansion of the ETF industry quietly in the nineties. But as you mentioned, in the 2000’s, it was just starting to ramp up. So how did you drive this company into putting a greater emphasis on ETFs and treating them as distinct from mutual funds?
BALCHUNAS: Yeah, I tried all kinds of ways, which is sort of — I could relate to Bogle trying to sell index funds in the 70’s and 80’s when no one was really interested. I think everybody has these plates in their life where they’re trying to tell people about something, and it just takes a long time to break through.
So I would get — I would — I would basically use my communication skills. I would talk to people internally. I would go to sales meetings. I would present — the chart I really like to show was people think of ETFs, at the — at the time, of having, say, like two percent market share of all funds. But I’m like, but they make up 20 percent of all equity trading. So I would show them the volume and be like, “And we’re a — a service that does a lot with trading.” We should have 20 percent of the equity programmers, if you think about it …
RITHOLTZ: Sure.
BALCHUNAS: … that — people would nod other heads, but I would never get 20 percent of the equity programmers.
But over — over time we — we made some headway, we started doing events. And honestly, I — I just really was like a one-man army for a little while, but then the asset started come in. And then someone like it, at a higher level, would be told by somebody ETFs are big, and that would help a little. And ultimately, it was like a wave that just finally broke. And now, we have a lot of resources into ETFs.
But I also think that Bloomberg and what I would tell people back in the days, we might have been a little late to sort of ETFIs or DES pages and — and give you some functions, but …
RITHOLTZ: But it was always on the terminal.
BALCHUNAS: But once you do that, that’s just the frosting on the cake. You click on an ETF, then you got to look at the holdings. (Inaudible) you want to analyze one stock, you click on that. You could just keep clicking on a terminal.
RITHOLTZ: Right.
BALCHUNAS: Other services, you — your clicking had to stop somewhere. So I’m like all the stuff they did here in the 80’s and 90’s to connected exchanges, to get all the stocks and the bonds, we — when the ETF came out, all we had to do was put some like, you know, sort of frosting on the cake.
RITHOLTZ: I was right, yeah.
BALCHUNAS: But now, your analysis could go anywhere. And so, the terminal and the infrastructure there was really a huge tailwind for my efforts.
RITHOLTZ: So — so let me ask you a question that’ll tee up the rest of our conversation. You started in the ETF space in the mid 2000’s and, you know, following the financial crisis, they exploded. Imagine, you know, just banging away at this for 40 years with some limited success, but mostly being looked at as that Jack Bogle guy in Pennsylvania. What — what is this stuff? He’s — well, he’s just hitting his head against the wall. That is just going nowhere. Could you — could you picture decades of this with just moderate, at best, acceptance to the whole idea?
BALCHUNAS: Yeah. I mean, this is part of the story. I — I couldn’t believe the numbers. Here’s two — two examples of how long it took. It took Vanguard 25 years to get 10 percent market share and funds. Ninetry-seven, 98 percent of Vanguard’s assets came after Jack Bogle stepped down as CEO.
RITHOLTZ: Amazing.
BALCHUNAS: That’s even …
RITHOLTZ: Amazing.
BALCHUNAS: … that’s amazing, right? So he built a foundation largely in oblivion, right?
RITHOLTZ: Yeah.
BALCHUNAS: But once it got built, then it became that gradually then suddenly thing, but he toiled around a long time. Although he was a very loud prominent voice, but the assets really weren’t there until …
RITHOLTZ: Right.
BALCHUNAS: … I would say the financial crisis of 2008 is when they really kicked in. But up until then they had less than one trillion, I believe. And, you know, they were always out there.
I remember when I covered for Fund Action in the — in the 90’s — in the late 90’s, I would cover all the fund companies. I looked at Vanguard as maybe the fourth or fifth company. I was like Fidelity — I got it from Fidelity, T. Rowe …
RITHOLTZ: Sure.
BALCHUNAS: … Legg Mason. Vanguard was like fourth or fifth.
Now, when I think of the universe, it’s like Vanguard, BlackRock and then …
RITHOLTZ: Everybody else.
BALCHUNAS: … (inaudible) binoculars to see somebody else.
RITHOLTZ: Right. That — that’s amazing and — and appreciate the Hemingway reference. That’s always a — that’s always really interesting.
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BALCHUNAS: So the Vanguard effect is, you know, if Vanguard comes out, they’re a mutually-owned company, right? The investors — the funds on the company, the investors on the fund, that is really the heart of the matter here.
RITHOLTZ: Very different, more akin to an insurance company …
BALCHUNAS: Yes.
RITHOLTZ: … than a typically publicly-traded …
BALCHUNAS: Or a coop almost, yeah, or a nonprofit. It’s not — they’re not exactly those things, but it’s something like that. It’s unique.
And this is part of the story I was so fascinated with was why would someone set-up a company where they deliberately turn over all the future profits to the — to the people? It just — it makes no sense. And so …
RITHOLTZ: It’s Marxist.
BALCHUNAS: It — it’s crazy. And I asked everybody, (inaudible) people for this book. I asked them all that question. How come nobody’s copied Vanguard structure? And the answer was all the same. Well …
RITHOLTZ: No incentive.
BALCHUNAS: … there’s no incentive, too. No one — and as Jason Swikes (ph) said, “No one goes to Wall Street to drive a Volvo.” And so …
RITHOLTZ: Man, can I tell you that is the most one percent thing I’ve ever heard from you because, in normal middle class households, a Volvo is considered a higher-end car.
BALCHUNAS: Sure. But I guess …
RITHOLTZ: Well …
BALCHUNAS: … but it’s also very accurate. But it’s also Bogle worked hard.
If you are going to go to Wall Street and you were going to put in those hours, I think most people want a big payoff. So I’m really going to put this much of myself in there.
RITHOLTZ: And intensity. It’s more than just the hours.
BALCHUNAS: And they got that (inaudible) in the belly thing.
RITHOLTZ: Right.
BALCHUNAS: It’s just the way the story goes on Wall Street. You make a ton of money. Usually, there’s some fall, you know, where maybe you get into fight with people, like the — the Bill Gross story, I thought, was probably more traditional Wall Street story …
RITHOLTZ: Yes.
BALCHUNAS: … the rise and the fall, right? So it’s unusual though to have that much work ethic, that much drive and say, yeah, I want all the investors to have the money. I — I mean, they got paid well, but he was never going to get Jeff Bezos rich or, you know, the — the Johnson family rich if he turned over the profits.
RITHOLTZ: Right.
BALCHUNAS: That decision was their biggest — I think the single biggest decision in the — in the last 50 years.
Indexing is just a lucky byproduct of that decision. If indexing was expensive, it wouldn’t really catch hold. And I think it was Vanguard’s mutual ownership structure that is the key ingredient, as well as Bogle’s unique structure. So most of my book is exploring those two things. I think those two things were the — created the explosion.
And then when they were looking for something to apply this to, indexing was out there and they said, “Let’s do that.” And that, I think, in a — in a weird way, I think, indexing got lucky that Vanguard and Bogle existed.
RITHOLTZ: So — so let me push back a little bit on that.
BALCHUNAS: Sure.
RITHOLTZ: If Vanguard had this — see, I think they’re — they’re very complimentary, the mutual ownership structure …
BALCHUNAS: Of course.
RITHOLTZ: … and — and …
BALCHUNAS: Hand in glove.
RITHOLTZ: … because, hypothetically in the alternative universe, Vanguard never gets into passive and indexing and instead just does low-cost active …
BALCHUNAS: Which would destroy though. They’d get all the money.
RITHOLTZ: I don’t think so.
BALCHUNAS: Yes, they would, yeah …
RITHOLTZ: I don’t think so.
BALCHUNAS: … because if you look at any study, the lowest cost active funds beat their benchmarks way more. And Vanguard’s active funds …
RITHOLTZ: Relatively speaking, the — the …
BALCHUNAS: Yeah, Vanguard’s …
RITHOLTZ: … amongst — amongst the active funds …
BALCHUNAS: Yes, yes.
RITHOLTZ: … the lowest cost wins. But if your low-cost active versus someone else doing low-cost passive, you’re going to lose …
BALCHUNAS: Yeah, I …
RITHOLTZ: … over the fullness of time, maybe not (inaudible).
BALCHUNAS: … this is part of my theory on low-cost passive. I don’t think it would happen without Vanguard because it’s just that …
RITHOLTZ: That could be true, yeah.
BALCHUNAS: Because I — it’s possible, you know, because the Wells Fargo Index Fund, which was the second one to ever come out …
RITHOLTZ: In the early 70’s, right?
BALCHUNAS: Yes, still charges 44 basis points and with a load. And that’s with Vanguard at the picture.
RITHOLTZ: And — and how much has the Wells Fargo Index amassed in assets.
BALCHUNAS: Oh, nothing. It’s like — no, it’s very little.
RITHOLTZ: So that’s why these two were — so here’s successful low-cost …
BALCHUNAS: Yeah.
RITHOLTZ: … successful indexing, not attracting assets.
BALCHUNAS: But it’s — it’s the low-cost. This — this whole thing that we’re experiencing with — with what I call the Bogle effect, it’s — it’s low-cost. That’s the thing. I call it the “great cost migration.” It is much more powerful than indexing.
Indexing is really just taking a group of stocks and market cap weighted (ph) them, right, or — and each index company does it a different way, like there is no like (inaudible) …
RITHOLTZ: Right, DFA is different from Vanguard …
BALCHUNAS: Yeah …
RITHOLTZ: … is different from (inaudible).
BALCHUNAS: … or how about the Russell 1000 is different than the S&P 500.
RITHOLTZ: Right.
BALCHUNAS: The S&P 500 is literally active. I mean, it’s really because it’s cheap. And if you were to have — let’s say indexing wasn’t even a concept. We don’t even know what it is.
RITHOLTZ: Right.
BALCHUNAS: If you had made active mutual funds and got them down to those low fees that Vanguard’s active funds currently are at, they would utterly destroy. They’d be the biggest active mutual fund to shop times over. That’s my opinion.
RITHOLTZ: Yeah, I just feel like active is sold by performance. And if you’re low-cost, it’ll help your performance. But depending on your model, there — there are active funds that have great years and then have terrible years. And if they were low-cost, I think you would have inflows and outflows.
BALCHUNAS: Over time, Vanguard’s active funds would rise to the top in the 10 and 20-year timeframe.
RITHOLTZ: Right, but it would take decades to get there.
BALCHUNAS: All right. It still would’ve taken a while. It would have been the graduate, then suddenly it just would’ve all happened with active instead of passive. It would happen though because I think low-cost …
RITHOLTZ: I don’t know (inaudible) I think …
BALCHUNAS: … is really what he pushed forward and what is here to stay.
RITHOLTZ: So — so the …
BALCHUNAS: Indexing is such a — you know, there are active funds that are very, very passive-ish. They basically — they’re closet indexers.
RITHOLTZ: Well, let’s — there are closet indexers, we’ll come back …
BALCHUNAS: Yeah.
RITHOLTZ: … hold that thought because we’re going to come …
BALCHUNAS: And there’s index funds that are pretty active. So indexing is a very nuanced conversation. What isn’t nuanced and what is the mother of all trends is high-cost to low-cost.
RITHOLTZ: All right. So — so let’s put some flesh on those bones.
BALCHUNAS: Right.
RITHOLTZ: In 2016 …
BALCHUNAS: I — I think I totally didn’t even answer your question, but …
RITHOLTZ: Well, I’m — I’m going to pin you down.
BALCHUNAS: OK, OK.
RITHOLTZ: Don’t worry. We — we got lots of time to make you answer the questions.
Your — your honor …
BALCHUNAS: Oh.
RITHOLTZ: … would you please direct the witness to …
BALCHUNAS: Oh, wait, you asked what the Vanguard effect was.
RITHOLTZ: In dollars, let’s talk about dollars.
BALCHUNAS: Yeah. So that mutual ownership company that he created, and once it got really popular and they gradually then suddenly kicked in in 2008, and they started getting trillions, once the trillions start to kick in, a couple of things happened. A, you could start to calculate the savings that Vanguard saved investors if you take the money they would have had and say a 60, 70 basis point active fund versus a 10 basis point X fund.
And the turnover, the trading cost is like another one percent for active funds that you don’t even see. You add that up, you know, arguably, it’s $500 billion to $1 trillion. There’s ways it could be more. Bogle wanted to reinvest the savings and that grows it more, but let’s say it’s a lot of money.
Now, the Vanguard effect is everybody is saying, oh, they’re getting all these flows. We’re going to have to copy their low-cost index funds.
RITHOLTZ: To cut off fees, we have to cut off fees to compete.
BALCHUNAS: They — and so in my book, a lot of people were like nobody wanted to do this. Only Bogle wanted this.
RITHOLTZ: Right.
BALCHUNAS: Everybody else did it because they had to. And that mattered to some people, but ultimately, that’s how everybody saw it, and I agree. And that’s the Vanguard effect. And that’s why I was so attracted to this topic because as somebody who looks at the flows every day, I’m like, damn, man, every — every year we look at the flows and I’m like, if you pull the thread on, basically 90 percent of this money — you end up in 1974, and it is all traced back to this guy in this decision to set this company up like this. And that is interesting that nobody copied Vanguard’s mutual ownership structure, but it’s the governing force of the whole enchilada now.
Basically, people are — they have to copy it. Even if they don’t structurally copy it, they have to copy the products, which leads me to a — a statement that Bogle made that blew my mind. I — I didn’t know he said this. I had noted some of these quotes, but not all of them.
In one of his books, “Character Counts,” where he goes over his speeches that he’s given the crew, he talks about …
RITHOLTZ: Have fun with the crew is what they call …
BALCHUNAS: The employees.
RITHOLTZ: … Vanguard employees.
BALCHUNAS: Yeah. He talks about Vanguard’s mission will be — will start — Vanguard’s — we’ll know Vanguard’s mission is beginning to be successful when our market share our roads.
RITHOLTZ: Meaning, everybody else has. And that’s happened in specific spaces, but not overall.
BALCHUNAS: Not overall. So he — I — I wrote a note saying Bogle’s dream on hold still despite passive revolution.
RITHOLTZ: So — so they, at one point in time, were the number one fund in a lot of specific categories. And in many areas, that is no longer the case because other companies, as a loss leader and to be able to market, hey, we’re the number one, and this have either cut their fees below Vanguard. I run it at a loss.
BALCHUNAS: Yeah.
RITHOLTZ: And so they’re still two, three, four in everything and much more assets under management. But when you look at the fund tables and look at specific things, it used to be Vanguard, Vanguard, Vanguard, Vanguard. And that’s no longer the case. Is that the market share loss Jack was talking about?
BALCHUNAS: That’s exactly. He would — he would — like that’s what so interesting about this guy is that’s a completely different trip to actually root for your market share to erode to — to think that that’s — that’s like saying, I want to actually change the whole …
RITHOLTZ: The whole industry.
BALCHUNAS: … the whole industry, and it is happening. The problem is, overall, Vanguard still leads in flows every year …
RITHOLTZ: Right.
BALCHUNAS: … like clockwork.
BlackRock, typically in any given year, Vanguard, let’s say, takes in 10, BlackRock will take in seven and then, you know, (inaudible) maybe a three or two was the next one.
RITHOLTZ: And then after that, it’s a fraction.
BALCHUNAS: Yeah. And then there are a lot of people who see outflows. So net-wise, you know, Vanguard and BlackRock are really King Kong and Godzilla at this point, and then there’s just this huge gap. But if Vanguard still takes in more than BlackRock though, and we know how big they are, so ultimately, Vanguard will pass BlackRock in assets …
RITHOLTZ: Eventually, if this continues.
BALCHUNAS: … especially in a bear market.
Bear markets are where Vanguard’s market share really starts to grow because there’s no asset appreciation asset growth or market appreciation asset growth. The only thing that can actually grow your assets or stop the asset loss is flows. So once flows are the only variable, the market share percentage that Vanguard has start to go — it doubles the rate of growth.
So bear markets are — because I would always with over the years here, I’ll just weigh it to a bear market. That’s when the — all this Vanguard stuff (inaudible).
RITHOLTZ: We’ve heard that (inaudible) …
BALCHUNAS: I’m like, dude …
RITHOLTZ: … laughable (inaudible).
BALCHUNAS: … I’m like if you’re active, you should root for Fed liquidity forever …
RITHOLTZ: Right.
BALCHUNAS: … market appreciation forever …
RITHOLTZ: Q.E. forever, right.
BALCHUNAS: … and just live with your outflows because the market appreciation will totally overwhelm that. You’ll get — you’ll still stay rich.
RITHOLTZ: Right.
BALCHUNAS: A bear market is when you’re probably going to really find — you’re going to start to see real erosion because you’re going to have the assets come down from the market …
RITHOLTZ: Right.
BALCHUNAS: … the outflows, and they’re still arguably …
RITHOLTZ: And the inflows triple, right.
BALCHUNAS: … a couple trillion stuck in there because of taxes.
RITHOLTZ: Yeah.
BALCHUNAS: So it — I would say a bear market, in — in my opinion, I — oh — we have a phrase on the team is that bull markets are good for passive, bear markets are great.
RITHOLTZ: That — that makes a lot of sense. Bill McNabb, the previous Vanguard CEO, told a fascinating story on that topic. So what they do — what some of the senior management does is they call — they log into the call center to see what clients are saying, to see how people are dealing with it. And in ’08, McNabb logs in and he hears not just nervous clients, but nervous customer service reps.
No one knows middle of ’08, no one knows what the hell is going to happen. Am I going to lose my job? And he came to realize, hey, our folks have to sound like they’re comfortable, they’re confident. They can’t reflect the fear from clients, so he does an all-hands on deck.
It doesn’t matter how low the market goes. There will be no layoffs. Everybody’s job is secured, and we’re going to continue to pick up money in ’08-’09 where our inflows are strong. You guys just have to communicate that to — to our clients.
And at that point forward, the — there was a fire hose. Everybody was — all the things that were being sold was flowing straight to Vanguard.
BALCHUNAS: 2008 was the year that made Vanguard and ETFs. It was one of those years where a lot of active managers did worse in the market, and so it was one of those, oh, you couldn’t even save me from the 35 percent (inaudible).
RITHOLTZ: The whole reason for existing.
BALCHUNAS: Yeah, so that was one. The liquidity and ETF …
RITHOLTZ: Thirty-eight percent, 54 percent peak to trough.
BALCHUNAS: Yeah. And — and Vanguard astonishingly took inflows every month in 2008 which, even in October, where we were already weary of going down, in October 2008, the market was down 17 percent in a month, and they took in money. And that’s when I really — I look back at this. This is — I might have been starting to look at this in 2014-’15. That’s when I really got on this whole notion that bear markets are actually going to speed this thing up …
RITHOLTZ: Yeah.
BALCHUNAS: … and we’ve been banging that drum internally, and we’ve been proven right so far. And this year is no exception. Vanguard is leading flows.
I think I — I did a — I forget the exact flow. It’s something like Vanguard’s taken in, I don’t know, $80 billion, $90 billion. The rest of the industry combined is like negative 250.
RITHOLTZ: It’s — it’s almost as if people are selling under — other funds and sending the money to Vanguard. I mean, it’s just …
BALCHUNAS: Or …
RITHOLTZ: … coincidental.
BALCHUNAS: There’s also this — see the Vanguard flows are so good and persistent because — and I asked Bogle why are — why are Vanguard investors so disciplined. And he said because they had defied us. These are people who — who weren’t stuck in it because they got a kickback from a fund company through a broker.
RITHOLTZ: Right.
BALCHUNAS: They found us and they’re usually pretty with it. And I also think this is it — and I put this on the book — behavior of Vanguard investors is off the charts good.
RITHOLTZ: Yeah.
BALCHUNAS: But I — and I think advisors like you who are — are specialized in behavior, I think your job is made a little easier by just introducing a cheap index fund. I think it’s easier to behave when you have a cheap index fund as a tool because you’re like — I call it the — like a resignation. You’re like what am I going to do. Hop on to …
RITHOLTZ: Right.
BALCHUNAS: … some high flying …
RITHOLTZ: Right.
BALCHUNAS: … who has a good year (inaudible).
RITHOLTZ: At least they’re underperforming, but at least they’re expensive.
BALCHUNAS: Yeah.
RITHOLTZ: Right?
BALCHUNAS: Yeah. And I think that — that resignation is made behavior. There’s all this stuff on psychology and behavior that seems to be like written about.
But I’m like I try to imagine, try writing all that stuff if all you have is active mutual funds that charge one percent. It’s much harder. It’s easier to reflect on behavior and how important it is when you have a cheap index fund. So I think Bogle’s contribution to behavior was monumental just by introducing the index fund. And also think Bogle is interesting and that he wasn’t really into the efficient market hypothesis. He wasn’t really an academic.
A lot of what he did though impacted those worlds, I think, but — and people might see him as like thinking that way, but he — I think he was just a very practical guy who kind of just saw it makes no sense to charge all this money because when stuff — when you start to compound, much of that compound then goes to the intermediary not you.
RITHOLTZ: Right. So it’s interesting about the flows to Vanguard. My partner, Josh Brown, calls this the “relentless bid.” And what he means by that is everybody who has Vanguard in their 401(k), everybody who has Vanguard in their IRA, their accountant says, hey, it’s time to make your contribution. It goes to Vanguard twice a month or every other week, depending on when you get paid. In Wall Street, it seems to be twice a month, you know. That — there’s a percentage.
And — and in my firm, I watch these like $50,000 checks go out every month to — to the 401(k) company, and a huge percentage of that is captured by Vanguard. So even when the — the tide goes out in the market, like the first half of the year, you’re still sending money to Vanguard automagically. It just happens.
BALCHUNAS: The other thing is underrated word is trust. You look at Bogle and I — you had a quote in my book about this, which is …
RITHOLTZ: Must you have used only quotes with curses for me?
BALCHUNAS: But it was hard to avoid them, man. I got — but I — if — I think when you curse, you’re saying your best stuff. That’s why …
RITHOLTZ: OK.
BALCHUNAS: … you curse because you’re so into it, so it happens to be your best points. When I listen back to your audio …
RITHOLTZ: Right.
BALCHUNAS: … it happened to contain curses, and I — maybe there’s a correlation there. But …
RITHOLTZ: It’s — it’s — it’s good to know, but …
BALCHUNAS: … you need …
RITHOLTZ: … then take the ball and go home, that quote?
BALCHUNAS: Yeah. Basically, over time, it was really — other people shoot at themselves in the foot, active funds …
RITHOLTZ: Huge.
BALCHUNAS: … showing that they — you know, people’s experience, over time, that added up. And then you see Vanguard over here, and they just look boy scout …
RITHOLTZ: Right.
BALCHUNAS: … in comparison.
RITHOLTZ: That’s a great phrase.
BALCHUNAS: And so — so their …
RITHOLTZ: (Inaudible) in the …
BALCHUNAS: … that trust, it gets built over 30, 40 years because people ask me all the time, how can — how isn’t Vanguard’s market share eroding when everybody has cheap index funds now.
Even J.P. Morgan/Goldman who have armies of advisors, they could just move them all in. And I’m like, well, you have 44 — 45 years of trust built up, goodwill banked and the low-cost, so it doesn’t matter if somebody is zero on Vanguard’s three basis points. It’s not enough because the trust and the branding is so strong, and it will be for a while. It could erode eventually, but right now, that trust is so underrated. It’s not just the fees.
RITHOLTZ: Nobody’s ever accused Vanguard of being a vampire squid jamming its funnel into the vein of money flows as — as we heard about some large companies during the financial crisis. And there was no accounting scandal at Vanguard. There was no IPO spending. There was no go down the list of all the scandals, the analyst scandals, scandal after scandal after the derivative scandal with …
BALCHUNAS: Enron.
RITHOLTZ: … (inaudible) County. It was one after another after another, and they’re like that’s — we’re owned by our …
BALCHUNAS: How about the …
RITHOLTZ: … investors (inaudible).
BALCHUNAS: … the mutual fund overnight trading scandal …
RITHOLTZ: Yeah.
BALCHUNAS: … that Eliot Spitzer (ph) investigated.
Here’s the thing that I feel for the rest of the world is that the structure of a publicly-traded asset manager is such that you are — you — your …
RITHOLTZ: Oh.
BALCHUNAS: … you have to serve the — the shareholders who want more money. And where — where is the money going to come from? The investors or your clients. And that is a vicious tension to live in.
And — and people try their best and some companies, like you take BlackRock. Good people work there. They like to serve their clients. I think they like what Bogle pushed onto them, but they are still having to live with that in her intention. And there’s probably going to be times where they have to make a decision. Well, we should — we should try to get them into the higher cost one because we have to meet our revenue goals.
And this is the sort of thing that Bogle would talk about any time he had a chance, which is the two masters that — speaking of Masters in Business — the two masters. It’s hard to serve two masters. And his structure was such that there was only one master, which was the owner of the company was the investor. So — and I know the story gets told all the time. People kind of know of it, but it — again, when you dive into it and trace it, the amount of money this guy commandeered and the idea that no one’s copied it just makes this such a fascinating story.
I heard your interview with Spencer Jakab and the meme stocks. And you said you couldn’t make this fiction because you could never invent it. It has …
RITHOLTZ: No one would believe it, right.
BALCHUNAS: I would say the same thing about Bogle.
RITHOLTZ: Right.
BALCHUNAS: You could never dream this guy up in like the 60. You just couldn’t — you couldn’t dream this, maybe possibly, but — and I know the story isn’t that interesting. But if you — again, the more you think about it and pondering, you’re like wow.
RITHOLTZ: You know, that’s the — the old joke. I don’t know who I’m stealing the line from, but the difference between fiction and nonfiction is fiction has to be plausible. Nonfiction can be utterly insane because it’s real, but you tell some of these.
Listen, the — I — I have coming up Bill — Bill Browder and “Red Notice” would have — will have broadcast. And that has to be a work in non-fiction because if it was fiction, you would look in and say this is just too ridiculous to have ever occurred. It can’t be real. And — and so the story loses effect, but you find out that all this stuff happened. It’s — it’s insane.
I — I totally agree with you. We’ll talk a little bit more about Jack and how completely contradictory his background is and how — how interesting it is.
The thing with the other ETF companies, you — what you’re essentially saying is that there are fiduciaries and then there are really fiduciaries. Is that what I’m hearing from you?
BALCHUNAS: Yeah, Bogle wasn’t necessarily against high cost or active. With the word he focused in on was stewardship. He thought there are good stewards and bad stewards because he says, “If you were a small company asset manager, you probably need to charge one percent because you got to keep the lights on.” One percent of a million isn’t a lot of money.
RITHOLTZ: Right.
BALCHUNAS: One percent on $30 billion is a ton of money. And so what he thought was they broke their stewardship by not sharing any of those economies of scale, the dollar fees were enormous. So I think that’s ultimately where he was trying to separate what they did from others because again, I found in a lot of his books he was proud of some of the active funds.
So I thought stewardship was the main word, and you can be active and be a good steward. You could be even moderate cost and be a good steward. I think the idea is are you, you know, sort of totally abusing the relationship you have as the controller of somebody’s money. And I think that’s where he really had problems. And he wrote many books that are just all one big rant. Especially, he wrote a rant about the 2008 crisis, and he wrote a rant about 2001 in Enron. And these books are where he just is like (inaudible) …
RITHOLTZ: Unvarnished (ph).
BALCHUNAS: … he’s unvarnished (ph).
And other books he’s just a little softer, but he found that that was what pissed him off the most is when people broke their fiduciary and stewardship bonds, not necessarily active or even high cost. It was about is the high cost warranted.
And in the case of asset managers, I think I have a chapter called the “Fall and Rise of Active” because active is evolving in different ways. But the fall is a missed opportunity. I think these companies in the 80’s and 90’s, when they got enormous, they got into 401(k) plans, that 70, 80, 90 basis points they charge even more was once you got $10 billion, $30 billion, $50 billion in that fund, they — they never shared any of that. And I think it was a missed opportunity.
Had they shared a little bit of it, they still would’ve made tons of money and they would’ve been able to bank goodwill, lower the fees, and increase their beat rates against the benchmark because their fees are now lower. It was a missed opportunity.
And I find it interesting that they were so disrupted when their whole job is to analyze companies and stocks and try to figure out who’s going to get disrupted and why. And they’ve seen Amazon’s come along in these other industries, but they — it’s like they never applied it to themselves. And I find that kind of interesting that they were so disrupted. And they’re students of disruption.
RITHOLTZ: Well, first, very few people have an accurate self-perception, and that includes companies. But second more important, how often do companies cannibalize themselves, compete against themselves, cut fees if competition doesn’t force them?
And so I can think — you know, my favorite example is Apple. Remember the first Apple is like a deck of cards. It was 500 bucks, the first — the first iPod, 1,000 songs in your pocket, 1,000 songs, laughable. And it was, I think $399. It was big and heavy. So they come out next year with another one now, it’s 10,000 songs and it’s 100 bucks less. And the next one is 40,000 songs, and now it’s 199 until eventually you get the little iPod Touch.
And the reason the Apple story is so instructive is it’s an outlier. People don’t cut — cut costs unless they have to. People won’t cannibalize themselves and — and then they said, “Oh, we’re going to build that into a phone and give it away for free.” And you know someone had to say, “What are you crazy? This is a billion dollar business.” Well, if we don’t do it, someone else will, so we have to.
BALCHUNAS: Yeah.
RITHOLTZ: Wall Street isn’t that self-reflective.
BALCHUNAS: Yeah, they all love Steve Jobs and that mindset, but they didn’t apply it. And I have a section called “The Steve Jobs Rule,” which is if you don’t cannibalize yourself, somebody else will.
RITHOLTZ: Right.
BALCHUNAS: And I think you either have to cannibalize yourself or create enormous value and keep just throwing value and value and value to keep that price steady. But …
RITHOLTZ: Or do both and become the biggest company …
BALCHUNAS: Yeah.
RITHOLTZ: … in the world.
BALCHUNAS: Exactly. And so I — I do think there was — there are these outliers of people who are that hardcore. But you’re right, and again this is what made the Vanguard story interesting.
And I also think what — what made it interesting was lowering fees in the 70’s, 80’s, and even the 90’s, nobody really cared, like there wasn’t a demand.
RITHOLTZ: During the bull market, you don’t notice it.
BALCHUNAS: Nobody cared. So he was doing this at times when Wall Street was not — it was decades before the world figured out this actually makes sense. And that vision is — is pretty rare, and I have a — well, this sort of comparison in the book where I look at 1987 and the movie Wall Street comes out. Gordon Gekko is giving his greatest good speech. Bogle’s in Valley Forge giving the Christmas, you know, speech to all the employees. And they’re side by side …
RITHOLTZ: Right.
BALCHUNAS: … of all these young people watching Gordon Gekko wanting to go to Wall Street, make a ton of money. And then Vanguard, Bogle is sitting there talking about like, oh, we shaved one basis point off the fund this year if we keep doing good fiduciary.
And like, in ’87, and I say this in the book multiple times, A, if I — if I was an active manager I would’ve shared economies of scale. I would have bought this.
RITHOLTZ: Of course, they did.
BALCHUNAS: I know. And so I — they did what most of us would have done.
Same thing in the 80’s, I would have gone crazy in the 80’s culture. I would’ve just got carried away. So I …
RITHOLTZ: (Inaudible) and — and Ferraris (inaudible).
BALCHUNAS: It’s not — that’s the …
RITHOLTZ: You know …
BALCHUNAS: In — in the 90’s in the bull market, that was the …
RITHOLTZ: Yeah.
BALCHUNAS: … whole thing. It was — Bogle is just weird. So …
RITHOLTZ: He’s an outlier, there’s no doubt.
BALCHUNAS: Right. And that’s why the book is on him, but I — I make points to say that I would have done the same thing as them. I don’t — I don’t think I would’ve shared it. I would’ve thought, well, we earned this money, let’s spend it. Let’s buy — hire new people, give us ourselves raises.
RITHOLTZ: So — so let’s — let’s imagine that you’re — you’re working at Fidelity or you’re working at Templeton or you’re working wherever. And in 1994, you just had your best year in history. And you walk in and say, “I have a great idea. We should cut our fees 25 percent because think about how great that’ll be for investors, how it will improve fund performance, and how sticky clients will become.
And you wouldn’t have been laughed at. They would’ve thrown you out of the room …
BALCHUNAS: Yeah.
RITHOLTZ: … and fired you.
BALCHUNAS: Isn’t that crazy? And so you have a guy who did nothing but that for 45 years. But now, you — he changed the whole world. I mean, he changed the whole investing world with that concept, but you’re right.
Again, I — and, you know, the 12b-1 fee, which is to say — which is …
RITHOLTZ: The marketing fee for mutual funds.
BALCHUNAS: Yeah, it’s — it’s to say like, hey, look, we — we have — we’re going to take your money and we’re going to go spend it on marketing, that way we get bigger so we can share economies of scale with you and lower the fee.
Well, they — they forgot the second part. That’s right. And Bogle was all about the second part constantly. And so I try to tell people there is a great business case study in this story. And I also told my crypto friends, you guys should read this heavily. Bogle was more EFI (ph) …
RITHOLTZ: Oh, yeah, they’re — they’re all about saving fees.
BALCHUNAS: Yeah, that’s the thing, like crypto almost sells themselves as Vanguard …
RITHOLTZ: Right.
BALCHUNAS: … but they’re really old school Wall Street.
RITHOLTZ: Right.
BALCHUNAS: And I’m like you need to get more Vanguard in your life because all we see is these billionaires hiring movie stars to do commercials. And I’m like — and you sell yourselves though as populist and for the people. Read the story. This guy was the real deal. I call him the O.G. (ph) of DeFi.
RITHOLTZ: Absolutely. So — so let’s talk a little bit about Bogle, Bogle. Everybody gets his name wrong, Jack Bogle.
BALCHUNAS: I know — I’ve had people internally call it the Bogle effect, and that’s where I do …
RITHOLTZ: With two Gs.
BALCHUNAS: Yeah, that’s where I knew, man. Some people know about him, but some people don’t know about him …
RITHOLTZ: Clearly.
BALCHUNAS: … I mean, inside the bubble.
RITHOLTZ: So — so let’s start with Jack Bogle’s early career. He writes a senior thesis. He went to Princeton undergrad?
BALCHUNAS: He did.
RITHOLTZ: That — that thesis seemed to have sealed his fate.
BALCHUNAS: Yeah, it did. It was a thesis about, you know, how the asset management industry should be better stewards. It was just basically …
RITHOLTZ: These are dragging on returns and …
BALCHUNAS: Yeah, it was — it was very much — again, the seed was planted.
Quick side note, I interviewed Michael Lewis for this book. And when I told him that, he said he keeps a file of Princeton thesis that have changed the world, like the atom bomb was a Princeton thesis …
RITHOLTZ: Right, right.
BALCHUNAS: … (inaudible) for America. (Inaudible) have to add this to my file. (Inaudible) maybe (inaudible) hell of a book on it one day, but I thought it was kind of cool, but yeah.
Also, the Princeton thesis is interesting because when he was searching for an idea, he went to the library, didn’t know what he’s going to write about, and just found Fortune magazine …
RITHOLTZ: Randomly.
BALCHUNAS: … randomly.
RITHOLTZ: … stumbles across a magazine.
BALCHUNAS: And on the cover, it didn’t even say mutual funds. You had to like open it, and it was like big money in Boston or something. And it was about mutual funds. He said, “I’ll write about this.”
So I actually went and looked at magazines that were also from December 1940 that were probably laying around the library. Time Magazine, cover Conrad Hilton. So (inaudible) the hotel industry dodged a huge bullet there, man.
So anyway, that’s — there was a lot of serendipity in Bogle’s story that again reminded me of that meme stock interview you did. There was a lot of things that had to come together to prove that — that meme sort of moment. And there were a lot of things that came together that were serendipitous. I would say that thesis was the first one.
RITHOLTZ: So — so Bogle eventually gets a job at the Wellington Fund, which had been around. I don’t remember if they were the earliest mutual funds or one of the (inaudible).
BALCHUNAS: They’re like — yeah, there was like — it was like 10 funds that were — came out in the 20’s, but they went through the ‘29 crash.
RITHOLTZ: And survived.
BALCHUNAS: And then — yeah. And actually, there was a balance fund that — it buffered a lot of the downfall because it was a conservative (inaudible).
RITHOLTZ: Stocks and bonds. So — so what was he doing at Wellington, and how long did that last?
BALCHUNAS: He joined Wellington, I want to say, early — like early 60’s, maybe even the late 50’s. No, (inaudible) 60’s because he wrote the thesis.
Anyway, he isn’t at Wellington in the 60’s, I will say. And then the guy who ran Wellington was like, “I’m — I’m out of here. I want you to take over the company.” Bogle was, I think — I want to say 35, pretty young.
And they had a problem. They were losing money because the sixties were like a great — it was like the last decade where all the — all people taking their money were like Cathie Wood and stuff except of their day. And Wellington was like boring. It was like the value investors who would make fun of them.
And so they’re like you — Bogle was like I was selling bagels — nutritious bagels, everybody wanted donuts, so I figured I got to start selling donuts or we’re going to be out of business. So he teamed up with a high-flying growth manager, which is interesting because it was the fourth or fifth one in the list. This company wasn’t very well-known, but they had a — a fund called the Ivest Fund (ph). But the first choice he had was Franklin and Capital Group. And they didn’t say yeah. They said they declined.
Now, I theorize and the book had one of those (inaudible) …
RITHOLTZ: This — this is an acquisition. In other words, he — they’re a private company, he offered to buy them and fold them into Wellington, and they said thanks, but no thanks.
BALCHUNAS: Yes, they did not want any part of merging or any acquisitions with him or Wellington. He finally gets this growth manager down — you know, fourth or fifth on the list. And it goes well for a while. You know, they’ve got the boring stuff and the ARKK stuff. And — but then the — the — basically, the stock market goes into a bear market.
RITHOLTZ: Sixty-six is the peak (inaudible) the post-war rally.
BALCHUNAS: Yes, and ’71, ’72, and ’73 was bad.
RITHOLTZ: And then — and ’73, ’74 was the …
BALCHUNAS: ’74 (inaudible).
RITHOLTZ: … by the way, parallel to ’08-’09, about a 56 …
BALCHUNAS: Very similar.
RITHOLTZ: … 57percent crash.
BALCHUNAS: And right before that, the people who were at Wellington changed the Wellington — the — his new partners changed the Wellington fund to be much more equity-oriented …
RITHOLTZ: At the exact wrong moment.
BALCHUNAS: … at the exact wrong time. And even Bogle had a memo saying we — we can’t do this, and he’s like, “No, this is the right way. Trust me.”
Anyway, so their growth funds fall off a cliff. They go down worse in the market. But the Wellington Fund goes down the same as the market, the same 35 percent. It doesn’t buffer at all.
And I think this was probably had to be one of the most pivotal life moments of Bogle to feel he betrayed himself, he betrayed his mentor. He sold him — he sold it all out. And these guys had voting control of the board.
And they got into massive fights. The clashes were historically bad. They were, you know, basically pissed off at each other, you know, blaming each other, and they fired him even though he — later in life, he’s always like I was the victim. But the stories are he wasn’t a picnic to deal with.
RITHOLTZ: He’s a big pain in the butt, yeah.
BALCHUNAS: Yeah, he’s a pain in the butt. So anyway, long story short, he realized there’s a loophole. Instead of being fired and going away, he’s like, “I’m actually the owner or the chairman of the funds themselves.” And so that gave him some leverage to sort of dig in and fight them, and they had to come up with a resolution, and that the board would agree with.
And so one of the ways he was able to keep a job there was he’s like I’ll do the back office work and I’m — I’ll set this company up mutually owned. That way it doesn’t look like I’m doing some cash grab here, and all 11 people in the fund phone boards agreed with that. So the mutual ownership structure, I’m not sure it would have been born ever if it wasn’t for this necessity to sort of satisfy different groups of people at a time when everybody was pissed off and — and upset and figuring out how to do something.
So this really awful crazy situation that was just nasty, ironically, produced this amazing sort of unique structure. It was almost like a freak accident.
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RITHOLTZ: So that was the first half of the freak accident. His contract says he cannot manage your funds, and so he comes up with his very clever backdoor that’s the — according to the Bogle effect book that very cleverly says, “Hey, you guys said I can’t manage a fund, but there are these indexes that are unmanaged funds, and we want to put in an unmanaged fund in the separate entity. Tell us — so that’s the other freak accident.
BALCHUNAS: Yeah.
RITHOLTZ: Tell us what happened from there.
BALCHUNAS: Yeah, that — the — the idea that an index fund wouldn’t be, quote, “managed” and wouldn’t violate his agreement with his former partners or current partners that were not talking was also a lucky break. And indexing was starting to become a thing. People were writing about it in the academic journals. It — it was a …
RITHOLTZ: A thing in academia, but not on …
BALCHUNAS: Yeah.
RITHOLTZ: … Wall Street, not in mutual funds.
BALCHUNAS: Wells Fargo had tried one, but it was (inaudible).
RITHOLTZ: Didn’t work.
BALCHUNAS: And because of the Glass-Steagall, they couldn’t do mutual funds. There was a — a lot of things that made it — it was — you know, Steve Jobs isn’t the only one in a garage thinking about PCs, OK?
RITHOLTZ: Right.
BALCHUNAS: Something was in the air. So Bogle read a journal piece by Paul Samuelson that basically was like can someone please just put an index fund out so we can have something to benchmark these gunslingers against because he had — again, people were starting to come up with this notion that active maybe wasn’t that great back then. So Bogle …
RITHOLTZ: What — let me just — let me interrupt you a second because some of the audience is a little younger and they’re going to find this hard to believe.
In the 60’s, 70’s, even 80’s, if you wanted to know how your fund was doing day-to-day, week-to-week, month-to-month, quarter-to-quarter year-to-date, that information was not a click away. Most of the time it didn’t exist. You wait until the end of the year to get an annual update, and if you were a mutual fundholder, you would get some sort of quarterly update. But most of the time, you had no idea how well these funds were doing.
BALCHUNAS: This is a great point. And Michael Kitces, who is great writer about the advisor world, once wrote a blogpost called “The Internet killed the Active Fund Star.” And it was all about how once information started to spread quickly it was over because you could quickly compare. Back then you couldn’t do that …
RITHOLTZ: And no one did.
BALCHUNAS: … and if — it was sort of — it helped active, I think, back in the day. Well, and by the way …
RITHOLTZ: I’m not displaying their expensive …
BALCHUNAS: … and by the way …
RITHOLTZ: … underperforming funds. How — how could that hurt them?
BALCHUNAS: … I sent that article to Bogle in an email …
RITHOLTZ: Yeah.
BALCHUNAS: … and I was like, “Hey, what do you think of this Internet theory?” He writes back like two pages, and he’s like, “Well, it helped a little, but I’d like to think I had something to do with it.” And he proceeds to write like all the things that went into creating the passive revolution, and he did — and he said, you know, Internet helped at the end, but the foundation had to be there.
But anyway, back to your story, so Bogle says I will take this guy up on his offer and do the next one. And it’s not — it doesn’t have to be managed, so I can hopefully squeeze it by the board.
He even knew he was like sort of …
RITHOLTZ: Yeah.
BALCHUNAS: … right near the line because later in a (inaudible) …
RITHOLTZ: Oh, no, he was way over the line …
BALCHUNAS: Yeah.
RITHOLTZ: … but — but he knew it.
BALCHUNAS: He said they bought it.
RITHOLTZ: Yeah.
BALCHUNAS: Yeah. He might even say they actually bought it.
RITHOLTZ: Right.
BALCHUNAS: So his — his — Jan Twardowski, which he was his first P.M. of that fund had to call himself a portfolio administrator.
RITHOLTZ: Not a manager, that’s right.
BALCHUNAS: Yes, so they went through the whole thing of like we’re not managing money here.
RITHOLTZ: The whole charade (ph).
BALCHUNAS: Yeah. So that necessity was also a lucky break. There were many of these as we just went over that makes you think there were some universal force ushering this along somehow because if any of these things doesn’t happen, this probably doesn’t happen the way that we see it. So — but long story short, they come with the index fund. They launch it, nobody cares. It doesn’t sell it well because it’s — this is a underrated point of Bogle’s story.
The index fund ultimately would not pay brokers, so he had to — it was — it’s like making a movie outside of all the distribution systems.
RITHOLTZ: Right.
BALCHUNAS: The theaters, Netflix. And you — and you’re going to have — people have to come to your backyard to watch it. And so …
RITHOLTZ: Right.
BALCHUNAS: … he made something that you had to leave the entire system and go to them to buy. And that was really ballsy. I mean, this is a guy with like five kids at the time and trying to raise a family. I mean, a couple of times …
RITHOLTZ: Waiting for a heart transplant at the same time.
BALCHUNAS: Yeah. I’m like a couple of times in the book I’m like, you know, I have a bad heart, I’m raising a family. I — I might just go to the big company and take the payday, and just like not worry about this. But so to do these moves and to purposely delay the success, I give him a lot of credit. This is the — the long hard walk that a lot of people just don’t have the courage to take, but he did it over and over.
RITHOLTZ: So — so let’s talk about — I’m — I was only half joking about the heart transplant. However, in the book, you talk about it, gave him a certain life is short, live every day like it’s your last, and don’t go for the money grab impact the universe. How significant were his health issues, and eventually, he gets a lifesaving heart transplant.
He used to jokingly say, “Hey, I have the heart of this — of a 20-year-old.” Really, a 28-year-old, I think. How significant was the fact that his life expectancy for the — at least for the first — was at 50, 60 years — was he could drop dead tomorrow and almost did several times.
BALCHUNAS: Oh, yeah, his wife took him to the hospital all the time. It was a whole recurring thing. He — he brought a defibrillator. Did I said that right?
RITHOLTZ: Yeah, defibrillator.
BALCHUNAS: To play squash. And so he told the — whoever he’s playing with, if I fall over, just, you know …
RITHOLTZ: Just …
BALCHUNAS: … put this on my chest.
RITHOLTZ: Shock me back.
BALCHUNAS: So — so people — like people were hesitant to play squash with him, but …
RITHOLTZ: I — I would think that it would encourage him to let the few — if you’re winning too much, it’s like, oh, I couldn’t (inaudible) the package in time.
BALCHUNAS: Yeah. You’re right, I think his heart was one of 10 things that made Bogle. And I have a chapter called “Explaining Bogle,” because again, he’s so unique. I’m like what went into — produce this particular character, and his heart was one of the things I go into. And I think that idea that you’re going to die any minute, any day, we’re all — we can push that off as people normally.
RITHOLTZ: He couldn’t.
BALCHUNAS: He could not. It was all — it was right in his face constantly, and I think that gave him a jolt of life. You know, people who survive car crashes and airplane crashes …
RITHOLTZ: Or 9/11.
BALCHUNAS: … or 9/11 have similar experiences of — and he had that almost — probably like more daily than most people. So that was probably a big thing that helped him.
Your point about not wanting the money, I do think he was almost miscast in this industry. I think he wrote a book called “Enough” about how you …
RITHOLTZ: Right.
BALCHUNAS: … (inaudible) that much money, yada yada. And I think he almost would’ve made a better — he would’ve been better in a different industry. I think he was almost miscast.
I also think he was miscast in Time. I think he was meant for the 18th century. (Inaudible) …
RITHOLTZ: Well, wasn’t his grandfather …
BALCHUNAS: Yes.
RITHOLTZ: … did something very similar with insurance, if I remember your book correctly?
BALCHUNAS: Yeah, he had a great grandfather who was basically a gadfly or a — what would you call that, like the …
RITHOLTZ: The Jack Bogle of the annuity business.
BALCHUNAS: Yeah. It was like the fire insurance business. And you read this guy’s pamphlets, and he’s like the insurance companies are ripping off these firemen, lower your fees. And — and you realize, man, this — you can — you can read Bogle in there. So there is some …
RITHOLTZ: It is genetic.
BALCHUNAS: … there’s some genetics involved as well. And I — I included that because Bogle loved his great grandfather. He would read these speeches he gave and take a lot of inspiration from it. But yeah, I would — I would say that, you know, that is definitely one of them.
But I think the enough thing, even though he had enough money and he wasn’t — he was sort of immune to that greed for money. What he couldn’t ever get enough was adulation. That’s why I almost think like usually if you really (inaudible) adulation, you go into the media, entertainment. Maybe you’re a physician, you know, somebody who’s like care to get any thanks a lot.
So I think he — he was — we all have to fill some void like …
RITHOLTZ: Right.
BALCHUNAS: … we’re all, you know, holes in the middle. And I think his was he wanted, you know, people to tell him how great he was. He wanted people to say he was important.
And his son, you know, told me that when he would get stopped on the street, he never tired of hearing that. And the kids could never understand why he would sit there and talk to this X door manager …
RITHOLTZ: Stranger, right.
BALCHUNAS: … (inaudible), yeah. And …
RITHOLTZ: You made my retirement …
BALCHUNAS: Yeah.
RITHOLTZ: … possible. You help me pay for my kids in college.
BALCHUNAS: He could never get enough of that.
RITHOLTZ: Just endless, and he …
BALCHUNAS: So …
RITHOLTZ: … just soaked it up.
BALCHUNAS: Yes, so he could — so he got — enough was applied to the money, but maybe not the sort of adulation. That’s — that’s what drove him. And I tried to get at that because you — he wasn’t a — even though I’m very complimentary of him here, he was a human being. He had flaws and he had needs. They just weren’t exactly the — the prototype of somebody on Wall Street or Running Money. They were completely different in many ways.
And so I, you know, explore that in the book because again, when I said why hasn’t anybody copied Vanguard’s structure, so there’s no economic incentive. And then I said, “Well, why did this guy do it?” And everybody had the same answer. That’s a good question. And so you have to kind of look at the character of the person and, you know, try to figure out what — what drove them. And so I tried to do my best to sort of lay all that out.
RITHOLTZ: So — so here’s the — the key Jack Bogle question. With Vanguard today, following this rally off the lows in June 2022, making up more than half of the first half of the year’s crash, and — and that means that Vanguard is, what, $7.8 trillion, $8 trillion. I don’t even know where they are these days.
BALCHUNAS: But they were $8.3 trillion at the sort of top. I think they’re probably $7.5 trillion today, something like that.
RITHOLTZ: So — so between $7.5 trillion, $8 trillion …
BALCHUNAS: Yeah.
RITHOLTZ: … would that — could that have ever happened without Jack Bogle and — and his philosophy?
BALCHUNAS: No.
RITHOLTZ: Just — just flat out a no?
BALCHUNAS: No. I agree that people who ran Vanguard after — I wrote a chapter called “Bogle Versus Vanguard,” because he had — that’s just fascinating. He had problems with his own company and the …
RITHOLTZ: ETFs, overseas investing.
BALCHUNAS: … oh, smart beta international …
RITHOLTZ: Right, right.
BALCHUNAS: … he would take giant craps on all — like 80 percent of the funds that they serve because he kind of honed it on. You know, and I found that really interesting, and he’d be on campus doing it, especially ETFs. That really pissed him off.
Smart beta, all of that, he just thought it was needless distraction. Why are you doing this? And he thought why is Vanguard trying to get so big?
But the other people who manage Vanguard, I thought they did a good job. So in the book, I tried to thread the needle because there’s a growing gap between the Bogle heads and Vanguard because they see Vanguard going into wealth management, going into private equity …
RITHOLTZ: Right.
BALCHUNAS: … going into these places. And Bogle was more like enough, we don’t need to be that big.
When I met with him once he was like, I can’t believe we have $3 trillion like that is — that is almost absurd. It’s — it’s ridiculous. Now they have doubled.
RITHOLTZ: Bill McNabb says, “Hold my beer, Jack.”
BALCHUNAS: Yeah. All right, so …
RITHOLTZ: Watch this.
BALCHUNAS: … but then you have to ask yourself, you know, Bogle was sort of pushed out of Vanguard.
That’s what’s interesting about Bogle. He was pushed out of Wellington.
RITHOLTZ: But he — but — but not off the campus. He was pushed out of the executive suite …
BALCHUNAS: Yes.
RITHOLTZ: … into a, Jack …
BALCHUNAS: Research role.
RITHOLTZ: … you’re the chairman.
BALCHUNAS: Yeah.
RITHOLTZ: You’re the gray hair.
BALCHUNAS: Yeah.
RITHOLTZ: You’re the driving philosophy. Now, I have an ETF meaning and a private equity meaning for our 401(k)s, but please, tell everybody about our philosophy.
BALCHUNAS: Yeah. I mean, the core Vanguard is still very much Bogle’s DNA. But on the outskirts, they’re changing. They are pushing people in the ETFs. He would’ve hated that.
The wealth management, you know, I don’t think he would’ve done that. He wouldn’t done ETFs, we know that. He probably would’ve expanded that much overseas as they are now.
But you — one could make the argument, well, shouldn’t these other places — don’t they need a little Vanguarding?
RITHOLTZ: Yeah.
BALCHUNAS: Yeah.
RITHOLTZ: Absolutely.
BALCHUNAS: And so there’s — you can see both sides of the story. But Bogle also — the way he was pushed out, I believe, and then they went and launched ETFs like within 10 years of him saying no to ETFs, that was sort of a — I mean, he might have saw it as a slap in the face. That — that …
RITHOLTZ: In the book you — you described his gentle easing out as, well, he’s in the hospital dying, right? Didn’t — didn’t — what was it, Jack — who — who was it?
BALCHUNAS: Brennan.
RITHOLTZ: Jack Brennan before Bill McNabb. Jack was his protégé.
BALCHUNAS: Yeah.
RITHOLTZ: They were very tight. And the board says, “Hey, Jack Bogle was in the hospital waiting for a heart. He’s dying. I just went to see him yesterday. It doesn’t look like this guy is going to make it. Someone has to run the firm.”
BALCHUNAS: Yeah.
RITHOLTZ: And what happened?
BALCHUNAS: Well, Brennan was — I get it, I think he was a — a great CEO.
RITHOLTZ: A fabulous — fabulous steward.
BALCHUNAS: The — the big issue there was the ETFs. And Gus Sauter was the one who had the idea. I interviewed Gus for the book.
Gus Sauter told me that …
RITHOLTZ: Who was the Chief Investment Officer?
BALCHUNAS: The CIO. And he was also very close with Bogle. You know, I think they had a very good relationship.
Sauter looked at Vanguard and thought about a massive crisis. What’s going to happen? All these people are in index funds, and we’re going to get all these calls. How are we going to deal with redemptions? And he thought if we can make the ETF a — a share class, people who wanted to come in and out of the fund, we could — they could use that to trade, and that would buffer and protect the index fund investors.
Bogle kind of saw ETFs as they just want to get bigger. They want to distribute, and that’s why he was against it.
Sauter’s reason almost is more Bogle-like. Sauter told me he told Bogle that later in life and Bogle kind of — I think it softened him because during my interviews with Bogle over, say, the last six years before he passed away, he got more and more soft on ETFs. He would — he — the last interview, in particular, here’s what he’d say. He says something like, “Well, look, I’ve always said as long as you buy the broad market ones and you don’t trade them low cost like ours, they’re fine.” But then he couldn’t just let that stand. He couldn’t just let it go (inaudible) …
RITHOLTZ: Like he always said that. That was what he always said.
BALCHUNAS: He goes …
RITHOLTZ: But it wasn’t.
BALCHUNAS: You mean like dot dot dot, and then he just would be like, but these things are marketing tools. They are for trading. We don’t even know what people are doing. You know, I don’t like him. And so he was always wrestling with them.
I feel like — my metaphor I use is that the index fund was his beautiful firstborn daughter, and the ETF is like the (inaudible) bad boy that she married, right? And so ETFs did a lot to advance indexing, and they’re — and now they’re in the family, and he has to deal with them. And it was always a sort of like push-pull, and it was never an easy relationship with him. And it’s — I — the chapter in the book that goes over this is Bogle and ETFs, it’s complicated because it is complicated.
Rick Ferri, who I interviewed also, who’s a big Bogle head, he — he tried to tell Bogle many times ETFs have really helped advance your cause. And they — they …
RITHOLTZ: Super tax-efficient …
BALCHUNAS: … they made it very easy to get — they’re everywhere.
RITHOLTZ: … super easy to use, right?
BALCHUNAS: You never have to go to Vanguard to get index funds now, you can just buy them anywhere through the ETF.
So, you know, even the most die-hard Bogle heads and friends of Jack, Burton Malkiel, they’re e-fans of ETFs.
RITHOLTZ: Charley Ellis …
BALCHUNAS: Yeah.
RITHOLTZ: … go down the list.
BALCHUNAS: Yeah. Basically, three things everybody disagree with Bogle on pretty much — ETFs, international investing. Bogle says you don’t need it. Almost everybody I’ve talked to, even his friends said, “I — I like a little international.”
And the third thing was Bogle’s prediction for what will happen to the asset management history. I couldn’t find anybody to agree with this. In his last interview, six months before he passed away, he was the most prophetic I’ve seen. And he said, “There’s going to be a mass mutualization of this industry” because these companies — it’s not going to be enough to lower fees. It’s too late. They’re just going to give away all their margin. It makes no sense.
They’re just going to — what they’re going to have to do at some point is just convert to our structure. And so the big asset managers, there’ll be a mass mutualization and no — I couldn’t find nobody to agree with that. So those are — so, Bogle said a lot of things that even his closest friends and people who look up to him did not agree with.
RITHOLTZ: Quite, quite fascinating. So let’s start out with my — my favorite discussion on indexing. Indexing has been called un-American, anti-competitive, Marxist communist. It will ruin the economy. It will crash the market. It turns out to be none of those things. Why so much hate for something that has saved investors trillions in fees?
BALCHUNAS: Well, that’s why. The — the answer is in the question.
RITHOLTZ: I asked the question …
BALCHUNAS: Yeah.
RITHOLTZ: … that way on purpose because this has come primarily from the active community …
BALCHUNAS: Sure.
RITHOLTZ: … and the academics …
BALCHUNAS: Academic.
RITHOLTZ: … they’ve hired.
BALCHUNAS: Bogle really — he — heartbroken by the academics. He really thought he got the active people doing it, but he thought the academics were a little irresponsible in this front.
I am convinced, if you took all the people who’ve ever trashed indexing or fear mongering …
RITHOLTZ: And looked at their 401(k)s …
BALCHUNAS: It’s — it’s got to be low-cost index funds …
RITHOLTZ: Of course.
BALCHUNAS: … because they’re smart. They’re not dumb.
RITHOLTZ: Of course. And, by the way, the next time one of these things happens in a debate, I’m going to steal that and say, what’s in your 401(k)?
BALCHUNAS: Yeah. This is exactly how to debate somebody on this. If they start doing that …
RITHOLTZ: Right.
BALCHUNAS: … you just say, well, OK, well …
RITHOLTZ: How do you invest?
BALCHUNAS: Yeah. Because if you’re not willing to like …
RITHOLTZ: The fact that Warren Buffett is — is an advocate, I mean — and — and I think most …
BALCHUNAS: Yeah.
RITHOLTZ: … most of (inaudible) — Warren is an honest steward of active investing.
BALCHUNAS: Yeah. And Buffett recommends — I mean, Buffett is an active investor, but he recommends if — unless you’re going to do this all the day, all the time …
RITHOLTZ: Right.
BALCHUNAS: … just put an index fund, you’ll be — you’ll do better than almost all the pros anyway.
RITHOLTZ: Right.
BALCHUNAS: That was his advice to people. And I — he actually — I was able to interview him for this book, and I asked him if his advice was the same because index is getting bigger, and he said yes, it’s still by S&P.
But then I said, well, do you think indexing is too big or — he’s like, no, it’s possible it gets so big that it’s a regulatory matter, but that’s the issue for another day. So I do think that ultimately the — the reason — the problem here with indexing isn’t necessarily indexing because look, all you’re doing is taking a basket of stocks and you’re buying them.
RITHOLTZ: Right.
BALCHUNAS: That’s all funds are all across the board. Look at the failure of Magellan (ph), it’s Apple, it’s Amazon. It’s the same stuff, man, it’s just cheaper, right? This is all indexing. It’s not that different, it’s just the same group of stocks for a lower fee, right?
I think the problem that we’re going to run into is Vanguard and BlackRock are going to own too much of corporate America. Right now, Vanguard owns about eight, nine percent of most stocks. BlackRock, seven, so it’s 15 between them.
At this rate, they’re probably going to own 30, 35 percent of stocks collectively because the rule is a fund can own no more than 10 percent, not a company. And so the rule is old. It was made back when fund complex is …
RITHOLTZ: Right.
BALCHUNAS: … one fund, not 30, 50.
So I think there might — regulation is probably the only thing that can stop their growth at this point. And I think it’ll probably be an issue.
Bernie Sanders tweeted about it, although I — I don’t think he …
RITHOLTZ: I — I actually put Bernie in his place because he said the most — the most ignorant — I mean, on either side of the aisle, I don’t remember a politician misunderstanding. Hey, Bernie, not for nothing, but all your supporters are giant winners because of Vanguard.
BALCHUNAS: I have — I had a line in the book that I removed, which is that Bogle has done more for average people and to reform Wall Street than Bernie Sanders could ever dream of …
RITHOLTZ: Right, and …
BALCHUNAS: … all because he’s put bills that did fail. Yeah, I mean, he’s — he talks a big game, but doesn’t get much done.
I’m surprised Bernie isn’t more in touch with that. That’s a weird thing to make.
RITHOLTZ: I was very polite in the — I — the post began, Bernie, Bernie, Bernie. Oh, come on. You — if anybody should understand mutualization and communal ownership …
BALCHUNAS: Yeah.
RITHOLTZ: … it’s a socialist like you. Shouldn’t you get that? But …
BALCHUNAS: So all right, but — but real quick. I think what we’re going to find is passive is going to continue to grow, right? It’s going to be the core of most (inaudible) portfolios because it’s just too — too good of a deal.
RITHOLTZ: So let me push back on you …
BALCHUNAS: So what — what’s going to happen? So let me just — let me finish this (inaudible).
RITHOLTZ: Go ahead.
BALCHUNAS: And this is a chapter I have. What’s going to happen is active won’t die, it’s just going to get crazier. So what’s going to happen is the core of a portfolio be low-cost passive, vanilla, check that box.
RITHOLTZ: Right.
BALCHUNAS: Then people are going to decorate that …
RITHOLTZ: With ARKK.
BALCHUNAS: … ARKK.
RITHOLTZ: Right.
BALCHUNAS: Call options, they’re going to play that, you know, trade. They might use bitcoin or crypto, basically like hot sauce and otherwise dull meal to sort of distract them. And I think active is going to get, ironically, way more active because of passive. And I think that — maybe that’s OK, so I think that’s ultimately where we’ll stand. And those active funds will shine enough consistently to make it that it’s never fully passive. They’re always be somebody who’s going to figure it out for a little while, and they’ll be used probably to complement passive. But I do not see a reversal where …
RITHOLTZ: Right.
BALCHUNAS: … an 80 basis point growth manager from a legacy active shop replaces Vanguard.
RITHOLTZ: Right.
BALCHUNAS: So that’s why when people freak out about Cathie Wood and they’re like, how can she have money?
RITHOLTZ: Her $30 billion.
BALCHUNAS: I’m like, “Dude, you’re hitting her from a fundamental stock picker point of view.” Your competition isn’t ARKK, it’s Vanguard, dude.”
RITHOLTZ: Right.
BALCHUNAS: You’re fighting the wrong enemy. She is competing with like lottery tickets, and crypto …
RITHOLTZ: Right.
BALCHUNAS: … and stuff that would go on the outside of your portfolio. When I say if you have Vanguard in the core, you want a little wild and crazy. You want somebody who’s dreaming five years into the future just in case they’re right. You don’t want to miss out.
RITHOLTZ: She’s the ornament, not the Christmas tree.
BALCHUNAS: I — totally, exactly. And I think Cathie has been kind of negative on index funds, and I’ve — I’ve told her privately and in — in public like, “I really think you should team up. I think you should be explaining how your (inaudible) …
RITHOLTZ: You’re the frosting, no the cake. You could — she should — 100 percent.
BALCHUNAS: She’s like, well, people — index funds are misallocation of capital. They’re just putting money randomly. But I’m like, honestly, you can’t — you can’t — I would not bank my kid’s college education money on …
RITHOLTZ: In ARKK.
BALCHUNAS: … a high-growth manager. I just wouldn’t do it.
So — but I do — I can understand the idea of a little FOMO. I don’t want to miss out on something like a crypto, bitcoin, ARKK, you know, some of these high flying growth stocks because it’s like a call option on the future. And I think those are — why those funds not only sell, but would’ve withstand this bear market. They haven’t really seen the options that (inaudible) think.
RITHOLTZ: Well, by — by withstanding, they may be down 60 percent, but they’re still seeing inflows.
BALCHUNAS: Yeah, yeah, they’re still seeing inflows or no outflows. And I — so I tried to explain to them that the Vanguard effect is actually that. And so that’s why this book, again, it’s not just index funds. Bogle — the Bogle effect is — but the way it’s impacting active, it’s impacting the wealth management industry, it’s impacting trading, it’s impacting behavior.
That’s how powerful this is. It’s not just a mutual fund story. Now that was what also made the book exciting.
RITHOLTZ: So — so let’s come back to, you know, if — if Vanguard did an active low-cost, they would’ve been successful. Here’s the pushback to that.
First, you buy an index fund or you make your own index that cost you almost nothing to create the portfolio, meaning here’s what you’re going to own and you don’t need a staff of 40. You don’t need to research team. You don’t have to buy outside Wall Street research. You don’t have these massive trading costs inherently the fact that it’s an index, and whether it’s the Vanguard total (inaudible) …
BALCHUNAS: Wait, time out, time out.
RITHOLTZ: … or the S&P 500.
BALCHUNAS: You’re living in a world where Vanguard has low-cost active funds, but somebody has invented indexing.
RITHOLTZ: Some, but right.
BALCHUNAS: Oh, OK. My — my thing was indexing isn’t a concept.
RITHOLTZ: OK.
BALCHUNAS: Just pretend it — just pretend it doesn’t exist.
RITHOLTZ: Oh, so low-cost index — low-cost active versus expensive active, well …
BALCHUNAS: You would agree with that?
RITHOLTZ: Of course, you can’t disagree with that.
BALCHUNAS: But here’s the thing (inaudible) …
(CROSSTALK)
BALCHUNAS: Yes.
RITHOLTZ: But — but low-cost active versus low-cost passive …
BALCHUNAS: So — but …
RITHOLTZ: … there’s an inherent advantage to passive.
BALCHUNAS: Here’s the problem with your premise though. Indexing never would’ve gotten low-cost if Vanguard didn’t do it. I promise you …
RITHOLTZ: I — I think you’re right about that. No, I’m not disagreeing with that.
BALCHUNAS: Because I think they would’ve come out indexing but, you know, these firms are like, oh, we’ll charge 80. We’ll charge 75.
RITHOLTZ: Well, even if you did …
BALCHUNAS: What’s 150? I still think you’re not powerful enough to overwhelm, it’s because it’s under 10 that it become — that’s when …
RITHOLTZ: So what did the State Street SPDRs, SPY come out? What was the fees in ‘93?
BALCHUNAS: This is a great — thank you for asking this because this is one of the data points that drove me to write this book as well. SPY came out of 20 basis points.
RITHOLTZ: So that’s still cheap.
BALCHUNAS: Yeah, but this is in 1993. Why did it pick 20 basis points? I actually interviewed Steve Bloom who (inaudible) AmEx, who put out SPY with Nate Most because that’s what the Vanguard 500 Index Fund was.
RITHOLTZ: OK.
BALCHUNAS: So think about that, and Bogle hated ETFs, but the dude had a profound positive influence on the fund …
RITHOLTZ: On ETFs.
BALCHUNAS: … because it started dirt cheap. I think SPY would’ve been one percent if there’s no Vanguard. I think ETFs probably would’ve been invented, too, but they would’ve been one percent. It would’ve not been 20 and 10 basis points as they are now.
RITHOLTZ: So here’s the crazy market efficiency question. There are index ETFs and mutual funds that charge 150 and 200 basis points, and they still have tens of millions, not billions, but tens, maybe even hundreds of millions in assets. How do these things still exist?
BALCHUNAS: They probably had loads. They probably are bribing somebody to put somebody in there.
RITHOLTZ: Oh, there’s no doubt about that.
BALCHUNAS: Yeah, that’s it. I mean, that’s the answer …
RITHOLTZ: So — so much …
BALCHUNAS: … because there’s no natural reason for that.
I mean, look, we have a phrase we use in the team called the Cabernet Lane. There’s still a huge market out there for wining and dining advisors. Your friends and your golf buddies, people still will hook you up. I’ll buy your index fund. I know it’s 60 basis points, but it’s my friend. There is still a lot of that going on. I’m not — and that happens in every business, but there’s still is a decent cabernet lane in asset management. There …
RITHOLTZ: But that can only happen on the brokerage side. I — so we’re — let me get self — let me insert myself a little further into the conversation.
So in my shop, we’re an RIA, we’re a fiduciary, if I’m looking in an index fund and there’s a 60 basis point because somebody version (ph) because someone took me out to dinner, and there’s a Vanguard five basis point, I don’t believe I can legally, on behalf of my clients, buy the 60-bp fund. As — as an advisor, we have to buy the …
BALCHUNAS: Yeah.
RITHOLTZ: … five-bp fund.
Now, if you are a brokerage house …
BALCHUNAS: Yeah.
RITHOLTZ: … if you’re — and you follow what — what’s the …
BALCHUNAS: And there’s some dual people who do — who try to do both …
RITHOLTZ: But you can’t, it’s easier …
BALCHUNAS: I know.
RITHOLTZ: … we said earlier …
(CROSSTALK)
RITHOLTZ: … fiduciaries and a fiduciary …
BALCHUNAS: Yes.
RITHOLTZ: … if you’re a legitimate fiduciary where the best interests …
BALCHUNAS: Yeah.
RITHOLTZ: … the client dominates or you are a broker and really, it’s the old — it’s the old Louis B. Mayer joke, which I’ll — I’ll skip the dirty part and just say, hey, we’ve already decided that, now we’re just debating price.
BALCHUNAS: I think my point on the cabernet lane was even beyond that index fund example into ETFs where, you know, you just get to know somebody they sell you on the narrative of the story, and maybe they — they decide to put some money into your dividend fund that might be, you know, 30, 50 basis points more than Vanguard won.
RITHOLTZ: All right.
BALCHUNAS: But if you could say to yourself, well, the strategy is better. But in your case of the index fund, you’re right, there’d be no fiduciary reason to go to the 60. So like I said, it’s probably all loads or sort of captive asset somehow.
RITHOLTZ: That — that makes a whole lot of sense.
BALCHUNAS: But by the way, some people are like, no, I think somebody will come out and just put zero fee. You know how like Robinhood came out, we’ll do free trading, like somebody would’ve come out like just all like — but I think the problem with that premise of like somebody who isn’t Bogle in a for-profit asset manager to do this as a loss leader is ultimately they would have — that — that the curtain would’ve — would’ve come up at some point, and you would’ve figured out, oh, my God, here’s how they’re screwing me over here.
In other words, if you put something out there for that cheap, you’re — you’re — you’re almost going to always look to make money somewhere else.
RITHOLTZ: Right.
BALCHUNAS: That’s what make Vanguard unique. There is no curtain to pull. It’s just that cheap because it’s that cheap because …
RITHOLTZ: That — that’s their business model.
BALCHUNAS: That’s their business model. So I do think maybe somebody would’ve come out gimmicky style and done, oh, free index funds. But I think, ultimately, people would’ve been like, oh, you’re just trying to upsell me on this or your pay for order flow or you’re taking amount of money and getting more interest on it somewhere else. There would’ve been something that would have soured people, and it would have then gotten a bad name.
Low cost is a good — has a good reputation because it was done the hard way. And so, we go back to 1983 when SPY was 20 and Vanguard was 20. What people don’t realize is that Vanguard started at 45, 46 basis points. They came down like one or two a year, so it wasn’t until the 90’s they were even 20. And then in the last decade now, they’re three to four across the board pretty much.
RITHOLTZ: Which is just — just wild.
BALCHUNAS: That’s when people went gaga for them. They didn’t really sweep the nation until they got to 10.
RITHOLTZ: So, you and I, the quote you used, the — I think the other factor was the financial crisis was the last straw for a lot of Main Street investors. So we — we have the analyst scandal, we have the IPO scandal, we have the mutual fund scandal, on and on and on and on, not even talking about Bernie Madoff.
And the financial crisis was, you know what, I’m done with this game. I’m just going to give my money to Vanguard and — and let it run. And I’ll check my portfolio once a year. That was a sea change from — if you remember in the 90’s, you could walk into a bar or a restaurant without CNBC being on the TV. Everybody — every barbecue, every dinner party, every conversation was about stocks. For a while, investing in the market was America’s pastime, and the 2000’s kind of cured us of that at least until the pandemic.
BALCHUNAS: This is why I think books written on behavior and psychology need to give Vanguard’s index funds and Bogle way more credit than they do. They don’t even mention them really, but I’m like try — try behaving in 2008 without this as an option.
RITHOLTZ: Well, think about it. If you’re buying an active fund versus an index, you’re buying it, there’s a little bit of ego involved. I’m looking to outperform. There’s a little bit of FOMO and greed there.
Passive is just I want to own everything and let — let — I’m investing in the world. And as planet earth does better, economically anyway, I’ll — I’ll participate in stocks, bonds, real estate, whatever. It’s a very different head space, then I believe I have the ability to either pick the guy that’s going to outperform or pick the guy that picks the guys that outperform.
BALCHUNAS: Also, you know, there — I have a chapter on looking at all the ways Bogle had to sort of explain that indexing wasn’t, quote, “average” because he had a sort of solo concept that’s American. It is. Average is not — we’re America, right? We went number one, yeah, Top Gun, whatever like, you know, indexing seems like middle of the road and almost like Marxist, as you said. So I think one of the ways he did that was to look at the long-term compounding effect of indexing, but also just explain that, you know, what are we doing here?
We’re investing in companies that everybody goes to work every day creates value. There’s cash flow there. There’s dividends. That’s what you’re buying, right? And over the decades, that investment returns pretty stable.
It’s the speculative return that can be a smokescreen. But that’s just, you know, people making the P/E go up a lot, and then there’s a crash and then up, but investor returns have been pretty stable throughout the decades, and you just try to get people to understand that that’s all we’re doing here. And also, the idea of the zero-sum game.
I think some people think of the stock market like they don’t really view it as people in a circle trading. It’s not — once you view it …
RITHOLTZ: A poker table.
BALCHUNAS: Yes, once you view it as a table, you realize, oh, yeah, half the people will win, but after cost only like two winners, you know, you start to get really latch on this concept.
RITHOLTZ: (Inaudible) takes (inaudible) …
BALCHUNAS: Yes.
RITHOLTZ: … exactly.
BALCHUNAS: But this was part of the challenge of what Bogle — that’s why it took a long time I think also was that he had to really explain some of these concepts and also again, show compounding. Compounding is such a powerful concept. And if you compound at seven percent versus five, in 15 years …
RITHOLTZ: Years.
BALCHUNAS: … the gap is enormous. And I think some people don’t look at a percent or bps as a big deal …
RITHOLTZ: Right.
BALCHUNAS: … because they also write — they don’t write checks.
(CROSSTALK)
RITHOLTZ: Well, in a bull market …
BALCHUNAS: … it comes out of their assets.
RITHOLTZ: … in 2021, when the market is up 28 percent, who cares about 10 or 20 bps.
BALCHUNAS: Yeah.
RITHOLTZ: It’s irrelevant. All right, last question before we get to our favorites, which circles back to what — with Jack Bogle and ETFs and mutual funds. When we look at ETFs today, they’re super-efficient, they’re super cost-effective and — and perhaps most important of all, the tax advantages of an ETF vastly just destroy mutual funds. So the question is if — if the mutual fund was introduced as a new product today, would that pass SEC muster versus the dominant ETF with its tax efficiency?
BALCHUNAS: Good question. I assume if you just check the regulatory boxes that could come out, but I just …
RITHOLTZ: We have this product.
BALCHUNAS: … it doesn’t make sense.
RITHOLTZ: And by the way, if somebody sells …
BALCHUNAS: I — I would …
RITHOLTZ: … the tax problem goes to the other shareholders who didn’t sell.
BALCHUNAS: Yeah. That’s the thing. I almost feel like ETFs are the way it should be done.
RITHOLTZ: Yeah.
BALCHUNAS: You sell, you pay.
RITHOLTZ: Right.
BALCHUNAS: Mutual funds where you’re sitting there, as a good soldier, by the way, and you get a tax bill …
RITHOLTZ: Because somebody else sold.
BALCHUNAS: It’s — I almost feel bad for mutual funds. This is just a bad break because it’s not — it’s just not fair. It’s …
RITHOLTZ: It’s a legacy that they’re stuck with from the 30’s.
BALCHUNAS: The government almost should — like I’m surprised the ICI hasn’t lobbied the government to remove that and put them on a level playing field with ETFs because they might do a little better. But I also think mutual funds generally, you know, a lot of their costs are internalized. ETF externalize a lot of cost. You know, you trade on your own. You buy it on your own. Your tax bill is on your own.
And people like that. It’s much more of a fair deal, I think, people think. So I think mutual funds — there’s possible some spaces. It might make sense, maybe some less liquid spaces. And active mutual funds still has some value. Fixed income, they do pretty well.
But I think overall, if a mutual fund came out today, I think it would be something akin to like a compact disc coming out today. Like if you invented CDs right now and said, oh, take this disk, go stick it into your computer or your TV and watch this movie, I’ll be like why would I do that?
So I — I do think, look, every industry is involving. You know, I can pair the ETF and the index fund to the MP3. Just like music, the MP3 really changed that industry. Uber completely revolutionized the taxi industry. And some of these industries are caught a little flat footed.
There’s nothing — this is why the story I think, it’s not just a mutual fund, it’s a business story. It’s a story about disruption. And I think if you’re — and also it’s a story about patients.
One of the people I interviewed was Brad Katsuyama of IEX, the Flash Boys guy.
RITHOLTZ: Sure.
BALCHUNAS: It was like when I told him it took Vanguard 25 years to get a 10 percent market share, he’s like you just made my day because he is also sort of operating out of the …
RITHOLTZ: Sure.
BALCHUNAS: … system guy. So I …
RITHOLTZ: Same concept.
BALCHUNAS: … try to tell people this book whether your crypto or you’re building a business, I think a lot of people can learn from some of these guys — some of what this guy did, how he did it, and maybe find some comfort in how long it took. And then when it finally kicked in, how much change it actually forced.
(COMMERCIAL BREAK)
RITHOLTZ: … all of our guests starting with, hey, what’s been keeping you entertained during the pandemic. Give us your favorite Netflix, Amazon Prime podcast, whatever.
BALCHUNAS: I mean, my — I have a 11-year-old son, so we’ve really enjoyed Stranger Things. That’s probably an obvious answer.
Another thing we do is I — I’ll go to Google. He likes scary kind of stuff, right? So I’ll go PG-13 scary. And we’ll just go through these movies I never heard of, like right now we’re watching Escape Room and Escape Room 2. And he loves them, and they’re good enough for me that I can — like, you know, when he was young he would want to watch Pixar movies. (Inaudible) little dull for an adult, but now we’re getting that …
RITHOLTZ: Really? I — I love Pixar.
BALCHUNAS: So I don’t know, I’m not — I wasn’t — I mean, Cars is OK. But like now that he’s — you know, we both, I think, equally enjoy Stranger Things. Some of these movies that we — some are better than others, but that’s sort of where I’ve been.
I’m probably a bad person to ask. I did see the Thirteen Lives in — on Amazon Prime about the cave rescue in Thailand, Ron Howard movie.
RITHOLTZ: Oh, that came out fairly recently, right?
BALCHUNAS: Yeah, it’s pretty good. Colin Farrell is in it. I — he’s so underrated. Everything he’s in is pretty good. So sometimes I’ll do that. I’ll take an actor like Colin Farrell or Bill Pullman like somebody you don’t really think about and I’ll just put their name into Amazon Prime, and I’ll just start going through some of their work that I haven’t heard of because if you just go to Amazon Prime or Netflix now, you end up scrolling forever.
RITHOLTZ: Oh, forever.
BALCHUNAS: So you need a search term. And so a lot of times, go to Google and put in PG-13 scary or something specific.
What I really want them to have is in Netflix.
RITHOLTZ: Are funny.
BALCHUNAS: I want the Rotten Tomatoes people to team up with Netflix so I can go, OK, I want a …
RITHOLTZ: Thriller plus …
BALCHUNAS: … thriller that’s 90 plus critic, 70 audience or I want a comedy that’s 50 critic, 90 audience. And I want to set these parameters so I can …
RITHOLTZ: That’s great.
BALCHUNAS: … really pinpoint what I want. I cannot believe that hasn’t happened yet.
RITHOLTZ: Netflix go by — go by Rotten Tomatoes, so Eric and I can find better films.
Second question. Tell us about your mentors, who helped to shape your career.
BALCHUNAS: I mean, I never had one real mentor. I guess, you know, index — institutional investor Tom Lamont ran the show there, and he was sort of this gruff old editor guy. And he was really about fact-checking, checking everything 13 times and it hurt, but that was a good lesson.
RITHOLTZ: By the way, I have yet to interview a journalist who, on the mentor question, pretty much the exact. He was old school, he’s a gruff, no B.S. guy and, you know, now I realize how useful it was. I’ve heard that …
BALCHUNAS: He also …
RITHOLTZ: … over and over again/
BALCHUNAS: … the first meeting at that company, Tom Lamont is sitting there, and even for Al D’Amato was senator, at the time …
RITHOLTZ: Sure.
BALCHUNAS: Yeah. He’s like, listen, you got to get to work early. You got to get there before the gatekeepers and the secretary show up. That’s what they call them back then.
RITHOLTZ: Right, right.
BALCHUNAS: Assistant is the word now. He’s like you get there at 7 A.M. You call Al D’Amato, you’re going to hear, “D’Amato …
RITHOLTZ: Right.
BALCHUNAS: … at 8:30, you’re going to hear, “Al D’Amato’s office, how can I help you?” Oh, yeah, sure, whatever, click.
So he — he also had this like just, you know, use the phone, pick up the phone, call the people, go to the thing. And I thought that was — he was a good mentor.
My — I’ll say my dad is — well, my dad was a highway or is a — well, he retired, but he would go around and try to get contracts to pave highways. So he go to like the New Jersey transportation. And I saw him present a couple times, and it was — I — I liked his style. He would present on like hot mix. Boring topic, right, like — like mutual funds. But he would have them rolling, like he would — he would — he’d have a little — little dry jokes here and there. You could tell he — he curated this and took a week.
RITHOLTZ: Over time, yeah.
BALCHUNAS: This doesn’t have to suck, right? And that’s — and I tried to fill with Dave and Matt in my first inside ETF conference. This doesn’t have to suck. These guys had a lot of fun up there with their PowerPoint.
RITHOLTZ: Sure.
BALCHUNAS: And I find it with you guys. This stuff can actually be fun, interesting, and I really try to apply that to my world. It doesn’t have to be boring and stayed and just dull, let’s fall asleep. So I think I’d — I’d say those two people for now.
RITHOLTZ: The — the idea of coming out of COVID of doing a conference in a hotel room, conference center or heaven forbid the Javits Center, it’s why we teed our future proof on the beach in — in California, like I’ve been locked in the house for two years, I don’t want to sit in a hotel room, let me out in the sunshine. So, yeah, absolutely the idea that anything that might be a little dry, you got to punch it up and make it interesting.
BALCHUNAS: Yeah. And especially the — the younger generation …
RITHOLTZ: Zero tolerance but — but nonsense.
BALCHUNAS: … they have zero tolerance for bullet points on a — you got to …
RITHOLTZ: Right.
BALCHUNAS: … show me a picture that’s funny and then explain to me, you know, the data behind it, like that’s the — it’s — though it’s …
RITHOLTZ: You’re — you’re letting …
BALCHUNAS: … our team really pays attention to this. We think it’s very important. Otherwise, you’re going to just fade into oblivion.
RITHOLTZ: Right, you’re just going to torture people. Everybody’s favorite question, what are some of your favorite books and what are you reading right now?
BALCHUNAS: For some reason, the book that keeps going to mind, I’ve read it twice now is Bob Dylan’s “Chronicles.”
RITHOLTZ: Really?
BALCHUNAS: Yeah. He only wrote one book, but I got into Bob Dylan late, but I really got into him, and I find him just fascinating. He’s still alive. I took my mom to see him. I can’t — can’t understand a word he’s saying and seeing but I …
RITHOLTZ: (Inaudible).
BALCHUNAS: … but you realize this guy influenced the Beatles. The Beatles …
RITHOLTZ: The Beatles …
BALCHUNAS: … The Beatles …
RITHOLTZ: … The Rolling Stones.
BALCHUNAS: It would’ve been I want to hold your hand if it wasn’t for Bob Dylan. Jimi Hendrix worshipped, I mean, this dude is like a walking Smithsonian Institute, right? So I was like I got to read his book.
His book is fascinating because it’s — he writes about his childhood up until 1963, and ‘60 to ’63, he sort of just like sleeping on couches in Manhattan, but he’s starting to read books on people’s shelves. And he’s starting to go into to art exhibits. And he’s taking the books and the art, and then he’s taking his Woody Guthrie love, and he’s merging it all together. And — and the — you really get an idea for how creativity happens in his books.
And when ’63 happens, he has the big album, the book stops. And then it starts again in 1980 when he’s in a slump and he tries to figure out like he’s lost, and it goes in how we found his groove again and his inspiration. So I find that to be so Bob Dylan.
None of the book is about his popularity, the big albums he wrote, nothing. It’s all about finding the spark, finding the creativity, putting together different things together in a stew and how to do that. And for anybody who writes or does anything creative, it’s a — it’s just a fascinating read. And clearly, this guy was ahead of his time and a very interesting figure. So I would recommend that to anybody.
RITHOLTZ: Chronicles (inaudible).
BALCHUNAS: Yeah, and I’m a Gen X, I wasn’t — I didn’t grow up with Bob Dylan, but I — I can’t — sometimes I can’t believe how good his — like his albums are when he — he — when he wrote when he was 21-22. I’m like he’s way beyond his years. It’s really — it’s interesting as — Scorsese did a documentary called “No Direction Home.” That’s also very good.
RITHOLTZ: Give us one more book, so “Chronicles” by Bob Dylan.
BALCHUNAS: And let’s see. Oh, here’s another one. You want a music one or a different one?
RITHOLTZ: It doesn’t matter, whatever you’re reading.
BALCHUNAS: I — I just got this book that Hunter Horsley of Bitwise recommended to me. I got it because I sent it to my dad. I knew my dad would love this. It’s Winston Churchill. And it’s a book of all his takes on different figures. So it’s like all his notes and writings on all these different figures in history, FDR, Charlie Chaplin, Hitler. And I find Churchill kind of fascinating. My dad is really in love with him. So I sent my dad the book. I got the book, and so now I’m reading that.
Churchill is also interesting because he wrote like 40 books.
RITHOLTZ: What’s the name of the book?
BALCHUNAS: Winston — Great Contemporaries.
RITHOLTZ: Oh, what an interesting …
BALCHUNAS: My dad who’s read almost everything about him and by him never heard of it.
RITHOLTZ: Really?
BALCHUNAS: So it’s — if anybody is a fan of Churchill at all, I took (inaudible).
RITHOLTZ: Wait, this is a five-part Winston Churchill reflects on FDR, Hitler, Kipling, book three of five? How many of these books are there?
BALCHUNAS: I’m not sure. I just downloaded the one. There might be three sections. I mean, I think it’s all in the one book though.
RITHOLTZ: Oh, OK.
BALCHUNAS: I think it’s just in three sections. But, you know, he definitely — he wrote all the time, it seems like so …
RITHOLTZ: Yeah, he’s got a ton of books out.
BALCHUNAS: And I’m not — I can’t say I’m a — a huge expert on that area, so I kind of like …
RITHOLTZ: What’s that — let me see what that cover looks like. Winston Churchill — yeah, I’m looking at Great Contemporaries.
BALCHUNAS: Yeah. Notice …
RITHOLTZ: It says book three of five and other works so …
BALCHUNAS: How many stars does it have like — or how many — no, how many …
RITHOLTZ: Ninety-four ratings, 4.5 stars.
BALCHUNAS: Isn’t it interesting, 94 …
RITHOLTZ: Nobody …
BALCHUNAS: … it’s not that much.
RITHOLTZ: And it’s actually him not a …
BALCHUNAS: And it’s his words. That’s — I found that interesting. So anyway, (inaudible) Hunter — Hunter Horsley who recommended that to me. And — and then when I told my dad he’s like, “I never heard of it.” I’m like that seems weird to me given how much he loves that guy.
RITHOLTZ: Really interesting. And — and our last two questions that we ask all of our guests, the first is what sort of advice would you give to a college grad who is interested in a career in either investment in finance or journalism or research and analysis?
BALCHUNAS: You know, I would — I would get out there and do it, you know, right for the school paper, go in turn somewhere. I — I’d tell I — you know, I — I did not get a CFA, although I would recommend that, too. I — if I could go back, I might take at least CFA 1 because sometimes — sometimes I would be — I would find things that were logical and James will be like, oh, yeah, that’s in the CFA. I’m like OK.
So I — I definitely would recommend though getting out and doing it, and — and being as social as possible. I think, you know, being able to work with people, being likable, and also it can help with your longevity because you don’t burn bridges, you — you end up getting into an industry.
And like the ETF industry is great, I feel like it’s a scene. And I — I would encourage getting into a scene.
RITHOLTZ: Interesting. And our final question, what do you know about the world of ETFs, mutual funds, financial journalism today you wish you knew 25 years ago?
BALCHUNAS: I — I guess I would go with compounding. When I was in my 20’s, I withdrew a lot of my 401(k) because I just wanted money to hang out with — like spending money. So I actually took money out of my 401(k), get idiot.
RITHOLTZ: Right.
BALCHUNAS: And I — I just — I didn’t know that much about it, and I wish — compounding is probably the single most important word in investing, in my opinion. Compounding also, I think, sort of — it shows you the end, which helps you in the now, and helps just relax because just like, you know, let — let it grow. It’s like watching a tree grow. It’s not like running or do — you just — the action, it — it helps you take less action. I think compounding is something I would immediately learn about, whether it’s compound interest or the investing. I think that that term is really powerful.
I mean, I don’t — that’s not a great answer, but I can’t say I knew a lot about that.
RITHOLTZ: It’s — it’s a pretty good answer.
We have been speaking with Eric Balchunas. He is the Senior ETF Analyst at Bloomberg and author of “The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Save Investors Trillions.”
If you enjoy this conversation, well, be sure and check out any of our previous 400 or so episodes we’ve done over the past — is it eight years? Well, that’s kind of crazy. You can find that at iTunes, Spotify, wherever you feed your podcast fix.
We love your comments, feedback, and suggestions. Write to us at mibpodcast@bloomberg.net. Sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz.
I would be remiss if I did not thank the crack team that helps with these conversations together each week. Juan Torres is my Audio Engineer. Atika Valbrun is my Project Manager. Sean Russo is my Head of Research. Paris Wald is my Producer.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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