Episode #428: Eric Balchunas, Bloomberg – Bogle is One of the Investing GOATs – Meb Faber Research



Episode #428: Eric Balchunas, Bloomberg – Bogle is One of the Investing GOATs








Guest: Eric Balchunas is an analyst at Bloomberg Intelligence focused on exchange-traded funds.

Date Recorded: 8/1/2022     |     Run-Time: 1:08:35

Summary: In today’s episode, we’re talking about the legend John Bogle. Eric covers his early struggles to get Vanguard off the ground and the impact he’s had on the entire investment community. I even ask Eric what he thinks Mr. Bogle would say about my one major disagreement with him. We also touch on a number of big trends within the ETF industry, including direct indexing, possible consolidation, and Mutual Fund to ETF conversions.

As we wind down, Eric shares some of his favorite ETF ideas that haven’t been launched yet, including a Congressional replication ETF.

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Transcript of Episode 428:

Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

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Meb: Hey, my friends, we got a really fun show today. Our guest is my main man, Eric Balchunas, the analyst at Bloomberg Intelligence, host of the great podcast, “Trillions,” and the author of the new book, “The Bogle Effect: How John Bogle and Vanguard Turn Wall Street Inside Out and Saved Investors Trillions.”

Today’s episode, we’re talking about the legend, none other than John Bogle. Eric covers his early struggles to get Vanguard off the ground, the impact he’s had on the entire investment community. I even asked Eric what he thinks Mr. Bogle would say about one of my major disagreements with him. We touched on a number of big trends within the ETF industry, including direct indexing, possible consolidation, and mutual fund to ETF conversions. As we wind down, Eric shares some of his favorite ETF ideas that haven’t been launched yet. Please enjoy this episode with Bloomberg’s Eric Balchunas.

Meb: Eric, welcome the show.

Eric: Hey, Meb, great to be here.

Meb: Good to see you, my friend. We’re recording this during Fed day, which everyone gets all hot and bothered about. You and I, we can probably just skip it.

I have a theory, I just posted this to Twitter. There’s a Tom McClellan chart, but it basically goes back 40 years or something. And it shows, I say, “I think every time the Fed gets together, they get a six pack, maybe six pack each, watch ‘Seinfeld’ reruns, drinks some beers, and just should peg the Fed funds rate to the two-year yield.” And overtime, it like matches it almost nearly identically over time, sometimes higher, sometimes lower. So what are they doing?

Eric: That’s what Gundlach said. It was at Exchange, he gave a presentation there. And he said they should just… I forget what he said, he was harsher than you. He is basically like, “You don’t need the Fed. You could stop paying like 600 economists or whatever and just follow two year.”

Meb: There you go.

Eric: So yeah, you guys are on the same topic there or same concept. I don’t know, the Fed is… As I told you earlier, I’m not a hardcore Fed watcher. They’re important. You have to know what they’re doing. But they seem to be like a god in this market. Like, what they do is so pivotal. I mean, I guess, if you’re long term, it doesn’t matter. But for short term, man, it’s just like the power they have is just massive.

Meb: I love the tweets like, “T minus 30 minutes till I lose money no matter what happens. That’s just like the best outcome of this.” There are certain things that people obsess about. What a great lead into what we’re going to talk about today that just over the long scheme of things, the amount of mind space and brain damage spent thinking about something that probably has no impact on what you’re going to actually end up doing over time seems like a giant seesaw. But who knows?

For the three of you that watch this on YouTube, we got a new book out. Yeah, I’ll tell you what it’s not called first. It is not called Addition by Subtraction. It is not called The Art of Doing Nothing. And it is not called Reasons to Sell. It is, however, called “The Bogle Effect.” And it is an outstanding book. And I wanted to thank you before we get started. You know why I’m going to thank you?

Eric: Why?

Meb: Because this sucker was originally 600 pages.

Eric: It was.

Meb: How did you write a 600-page book? And thankfully, you must have had a good editor because now it’s down to a very crisp 300.

Eric: I did. I also gave it to 5 people when it was 600 pages. Poor souls. It’s worse than asking someone to help you move. Two guys on my team, James, and Tom, my mom, Graham Sinclair, and I’m missing somebody. But they all gave me feedback and I was able to trim a lot. And then the editor at BenBella was a development. I gave it to her when it was like maybe 400 pages. And we got 100 out of that.

I had all kinds of stuff. You realize, when you start writing about Vanguard, you’re writing about everything. I mean, there’s nothing they are involved in that’s not consequential. And I spent the last seven years doing nothing but writing notes and making charts. So I’ve got this arsenal.

And so every time I’d get on a topic like, say, I don’t know, even smart beta, how deep do you go into smart beta in a book about the Bogle effect? Well, I probably had three or four pages, at least, on it to begin with, and I chopped that in half. I had to weigh like brevity and like the readability with things where I could go. And so I had to make some tough choices. And there’s some stuff I cut that was tough.

But ultimately, I think, I did my best to just keep the best stuff. And I’m a fan of overwriting and then just trying to pick the best stuff, as opposed to just nailing it at 300 words. There’s probably going to be some fat and filler in there.

Meb: All those great stories of Bogle going to the strip club with a bunch of bankers just didn’t make it in the final edition. Maybe in the second edition.

Eric: Yeah. By the way, I will say there were no salacious Bogle with stripper stories or real nasty backstabbing. I had to really get creative because I got no help from…like there was no real true dirt or anything like that in the book.

Meb: Which is interesting because he could, as you mentioned in the book… And we’ll get to all this, and listeners pick it up. It’s an awesome book written by one of my favorite people about one of my true favorite people, one of the goats of all investing. And I actually learned a lot. I mean, I think I’ve read all of his books, or at least most of them. But he could be a prickly fellow. So I’m surprised you didn’t get at least somewhere they’re just like, “This bastard…”

But here’s the title you can use when you take this from 300 down to 20 pages and turn it into a kid’s book, then you can call it Addition by Subtraction, the kid’s version of how to get started at investing. That’d be the real…

Eric: Well, it’s funny…

Meb: …ten-million-copy seller.

Eric: …in his book, “The Little Book of Common Sense,” I actually read a couple of his books, but had to read all of them in preparation, he has the story called Helpers. And it’s about all the people who tried to help this guy with a farm. And next thing, you know, he’s like has no money. Because there’s all people helping him. That could be a kid’s book. The way I read that, it felt like it was a kid’s book.

And obviously, part of, addition by subtraction was a phrase I came to while writing the book. And I realized that’s probably the best way to sum up his life’s work, in my opinion, is just, you start with this thing, and you just start pulling things out that you don’t need and decreasing the friction. And that, to me, is the underrated part of him. I think index fund gets like way too much credit and indexing for the index fund revolution, ironically. I think what he did, the lower cost thing, is much more impactful. And again, it was that addition by subtraction.

And also, I give him credit to go from 45 basis points, when they launched the first fund in like 1976, to get down to 3. I mean, that took like 45 years. This was not an overnight thing. It wasn’t three basis points back in the day. It’s a slow, organic, long road. And that’s not easy for people to do that long of a road on purpose. I give him credit for doing that. I couldn’t do it.

Meb: We’re going to hit on a couple of these things you just mentioned throughout the chat, and I don’t want to spoil all of it. So, listeners, definitely pick up the book. It really is great. But he had a quote where he was like, “I love the years of struggle.”

And what’s fascinating, for the people today, I did a poll in preparation for this yesterday and I said, “Do you know who Bogle is?” And it’s like 95% of my respondents said yes, which was higher than I would expect because I did one about the trend followers and turtle traders like a week prior and it was like half. And it’s my audience, I understand that it’s finance audience, so it should be high. But that’s pretty amazing, 95%.

Anyway, but they know the Vanguard of today that rakes in, I think you said, a billion dollars a day, something just like they rake in a Cambria, like my firm, every single day in assets but…

Eric: For 10 years.

Meb: Yeah, but the crazy part is you go back to the beginning, and this is just totally not auspicious beginnings where…and you can tell the kind of the story, but I think you said it was 80 months of outflows once he eventually kind of started his new version of Vanguard or something just… Everyone would have given up after a year or two, I feel like. Anyway, tell the origin story because a lot of people that know Vanguard today don’t know how it began.

Eric: I’ll keep it real basic because in the book I get into a little more detail, but it’s a complex story. But just, you have to imagine, Bogle is running a balanced fund in the ’60s. And a balanced fund in the ’60s, the ’60s were like the last decade where all the ARKs of the world were getting all the money.

Value investors, you know, they suck wind for like the last decade. They’re doing okay now, but like, it was sort of a situation like that. And Wellington was the balanced fund and he had to figure out something to get more inflows because they were losing customers, because everybody was going to the shiny objects.

So he teamed up with a shiny object kind of growth manager in order to give the firm some edge. And that was fine for a while. They had the basic stuff, the conservative stuff, and then shiny object stuff. And they were a good firm for a while.

But when the ’60s market crashed, 1973-74, the market went down like 35%, just like 2008, everything went down, customers were leaving, and they had a fight. They had a falling out with his new partners.

And in order to solve the situation of like, “Hey, I’m not leaving. I’m not leaving.” The partners had voting control and they fired him. They were like, “Okay. We’re going to take over. You’re out.” But Bogle realized the loophole where he was the chairman of the funds themselves, which is different than chairman of the actual company, Wellington. Each fund, as you know, is like a general contractor in a way.

So he is, being chairman of the funds, sort of leveraged. And he said, “Okay. I have some leverage.” And then so, basically, the board of the funds said, “You guys have to come to some kind of agreement on how to live together.” Because Bogle wasn’t leaving.

Again, I would have left. I would have just licked my wounds and gotten a job somewhere else. And he has a young family at this point. But he’s like, “Yeah, screw you.” He’s just a fighting kind of guy. He’s just, like you said, he’s full of piss and vinegar.

And so he said, “Okay. In order for the board to approve, here’s what we’ll do. I’ll sort of back off his company. And I’ll do like all the administrative and accounting work that you guys don’t like to do anyway. You do the investing. I won’t do any investing. Let me run this company. And we’ll make it mutually owned, too, so it doesn’t look like I’m trying to like cash in or anything.”

So he had to get something 11 people, I think it was 11 or 12 people on the board, would approve, and some of them were his new enemies. So he had to really come up with something that they would all agree on. That really unique situation was the birth of Vanguard and the mutual ownership structure, in which there’s really no economic incentive to set up a company mutually owned. So it took that weird circumstance to do it.

And so when Vanguard started, the 80 months of outflows were from really the Wellington funds. But in that time, Vanguard did launch the first index fund, nobody cared. I mean, that was like nothing.

But the 80 months of outflows is really interesting because it just speaks to the mud and the dirt and the horrible situation that this amazing company was birthed in. It was just a really nasty environment, a nasty situation. And it took this sort of freak accident situation to create something that is just so unique.

And obviously, nobody’s really copied it since. But that’s sort of how the 80 months of outflow started. And that is an interesting story, because as we know, Vanguards flows today is almost unimaginable that you could do 80 months of outflows and for a company that we know today.

Meb: What’s their ballpark AUM, 8 trillion, something like that?

Eric: Yeah, 8 trillion.

Meb: Okay, with the T.

Eric: It’s a lot. It’s a lot.

Meb: It’s funny because I love reading your book because there’s a lot of like tiny nuggets in there that I didn’t know, talking about the origins of the index fund, and Paul Samuelson, and everything involved. But there’s this like very alternate reality, metaverse, where Amex was like thinking about launching an index fund, and all of a sudden Amex is like this giant, huge index fund provider or money manager today, instead of Vanguard, or maybe both of them, or who knows? It’s just funny…or Wells, or all these other, Batterymarch, that kind of were jostling at the time.

But I talked to so many money managers today who are, like want to start an ETF. And the dozens, if not hundreds, of ideas and pitches you get where everyone’s like, “I got this idea.” I say, “Okay, are you going to give these 10 years, at least 5? Do you have money to float this for 5 to 10 years?” And everyone’s like, “Yeah, you know, I got long-term horizon.” I said, “BS. You launch this and this sucker does poorly for two years, you’re going to be sucking your thumb and crying for mom because no one’s willing to endure that amount of pain.” And thinking about that, what he went through is crazy to me.

Eric: I found a business school case study in this story, especially the mutual ownership structure and Bogle himself. And to your point about the indexing, I think indexing and index funds would have happened without Bogle if the man and the company hadn’t happened. That said, in my book, I theorized that at 5% of the assets they have today, they are only a smash hit because they’re dirt cheap.

And it’s just not Wall Street’s MO to go cheap on purpose unless it’s a gimmick like Schwab. “We’ll give you free of this, but we’re going to take your money and do this over here.” And that gimmickry free would ultimately, I think, get washed out. I think Vanguard’s low cost was done the hard way, the long way, the organic way. And that’s why it’s so powerful.

I don’t think he’s the father of the index fund even. I think he’s the father of low cost more than that. And again, that just getting a lot of the things out of the way.

But to your point, the idea of staying around that long, I think part of what Bogle was powered by was a) some revenge. I think he really wanted to…he hated his partners that he felt screwed him over. He was just a fighting kind of guy.

I think if I was talking to an ETF issuer, I would say, “How fired up and passionate about this are you? Because it’s going to have to see you through the years where nobody cares.” But certainly in the ETF world, there’s stories of… I think the Copper Miner ETF had nothing for 10, 11 years, and then it had a big year. Obviously, the Jets ETF, that was the third iteration of an airline ETF, that finally took off. It can happen for anybody, I think, it’s that the good news. But to your point, it can take a while.

And in Bogle’s case, what made it even harder and what I give him credit for, is he operated outside of the system. Now ETFs are everywhere. It’s easy to put your ETF, at least you get distribution. Back then, you had to pay a broker or they were not going to do anything with your fund. So Bogle operated outside of the entire incentive system and forced you to come to him. And that was pretty ballsy, as well. So you’ve got ballsy move after ballsy move.

Meb: That’s still pretty ballsy because we still talk to all these legacy platforms. I’m not going to name names, but we’ll say one rhymes with Smerril Mynch. And a lot of these legacy platforms, they have all these antiquated conflicts, giant conflicts of interest, built into where they’re like, “No, you need to pay to be on the platform. We’re going to share on these fees because they’re built in.”

And then Vanguard said, “You know what? Pounce that.” And then it creates these huge ripple effects where this entire mutual fund industry. I mean, I think Schwab OneSource, does like a billion a year in these platform fees. And Vanguard is like, “Screw you. We don’t need you guys. Like, are you crazy?” And so it benefits everyone, eventually. Well, it doesn’t benefit the platforms because all these middlemen are slowly, eventually getting put out to pasture. But the ETFs also, because they’re freely traded, for the most part, get around that as well. So it’s the ripple effect.

Eric: One point on that, which I talked to Michael Kitces and some other advisor experts, and they were totally on board with my theory. Although I talked to Rick Ferri, and he gave me more confirmation of this. I also felt Vanguard and Bogle might have been underrated impact on creating the RIA movement, I believe. Because if you wanted to use Vanguard, you had to leave because nobody was going to do it where they were.

So I think there is some degree of it. At least he fanned the flames of it. I’m not sure how fast it would have happened without him. But once you got to be an RIA, then you could use Vanguard all day long. And the RIA movement, I think, is a pretty crucial one for being another alternative to what you just described, the company that you mentioned.

Meb: I was going to bring this up later, but we’re kind of on topic. You have a top 10 favorite Bogle quote list in the back. And my favorite didn’t make it. So I’m going to read it and let you talk about it. Your favorite, if they’re an order, I don’t know if they were an order, but I’ll read your number one anyway. “Don’t look for the needle in the haystack. Just buy the haystack.” I love that.

This talks to an important distinction, I think. The 1970s, to me, indexing meant one thing. It was buying market-cap-weighted exposure. We often say the giant nuclear bomb that went off in the ’70s that had a ripple effect for decades wasn’t the index fund. But to me, it was what the index fund enabled. Because you did nothing, it enabled you to deliver this strategy for very low cost.

And so the quote that I loved about Bogle’s was always, and I’m going to murder this probably, “The conflict of interest in the industry is not active versus passive. It’s high fee versus low fee.”

And so now we have a period here in 2020 where, and I feel like the Bogleheads always come for me with torches when I talk about this, but Vanguard, you mentioned in this book, is pretty soon going to be the largest active fund manager in the world. And they have, technically by number, last I checked, more active funds than passive. Dollar weighted, obviously, it’s a lot more. But this blurry line of all active and passive, to me, was never the point. It was always high cost versus low cost. Your thoughts?

Eric: Totally. He would agree. I called Bogle metrics. Bogle was very proud of the active funds at Vanguard, if you read his books, especially Wellington Fund. I mean, he’s almost more proud of that than the total market. I think they’re about tied in the PRIMECAP fund. But what he did in his books, if you’ve read them closely, he sort of gives himself credit. He’s like, “Yeah, we had decent managers, but I lowered the fees on these Mofo’s. And so we didn’t do any trading. We did very little turnover.”

And almost like Sabermetrics looks at baseball stats and values different things that you used to. Bogle didn’t value the pedigree of the manager. It was more about these boring things, like turnover and expense ratio, that he felt were the secret to the active fund success. And so he was not against active at all.

And I agree with you, high cost to low cost, which I have a chapter called The Great Cost Migration, which I say mutual fund to ETF is blurry. There are many nuances there. And from active to passive is also blurry. A lot of active is much more passive, and a lot of passive is very active. That’s also blurry and even advisor and broker can be blurry.

I think it’s a high cost to low cost. That’s the mother of all trends. That is the Bogle effect. It’s hard to really dispute that. No matter where you look, that’s happening. So I agree, to your point, that that is very important.

I also think the active fund, Morningstar has a great study, and I put the chart in there, I think Ben Johnson made it, where they looked at the cost. It’s like a SPIVA report, but it takes cost into account. And obviously, the lower fee active funds beat rates, go up dramatically.

So I think that’s a very fair statement. I tried in my book, to not only point that out, I didn’t want to be religious about active, passive or anything, but also to say, even if I was in active mutual fund in the ’80s, and ’90s, and I made all this money…because I think their big problem was they didn’t share any economies of scale. Had they just shared a little of that gravy, the dollar fees got so massive, and we’re talking so much money, billions and billions, they just could have shared a little, I think, it would have banked some goodwill. Their beat rates would have gone up because they would have been, had a lower bogey to get over because their expense ratio was lower. And I think it would have done them a lot of favors down the road and made them less disruptable.

But even in the book, I say, I would have done what they did. I would have sponsored a sports stadium. I would have hired new people. I would have given myself a raise. That’s why the books about this guy. I’m just trying to get it right. I’m an analyst covering this. I just wanted to like, “Here’s the truth how I see it. And I think that’s the problem is the high cost. High cost is ultimately what I think is the problem for active. It just gets in the way, makes it much harder to outperform.”

Meb: The Balchunas Eagle Stadium, that’s a mouthful, that stadium. So I like to say like thinking of the mutual share structure, but also just thinking in general, we’ve reached a point where it’s either by force or by just preservation that companies, a lot have migrated to either low-cost structures or dual costs, kind of like you mentioned with BlackRock and others, where they can kind of subsidize their low costs with their other shenanigans.

But I think, in my mindset, I was like, you want a fiduciary or a steward, I think maybe the word that you used is better, and when I think of the asset management world, it’s almost always two circles. And there’s some blurring in the middle, but not much of the Venn diagram. On one hand, it’s like, “Hey, how can we deliver a good product and charge as little as possible and still stay in business to make a good living?” And then, on the other hand, it’s like, “How can we deliver a product that we can sell and charge as much as possible and get away with it?”

And often, like you could put these two almost on two different lists, and like, to me, very little overlap in the middle, but they forced the hand of a lot of other big shops. One of my favorite charts in your book, though, we always rail on it and talk about, it’s like you’re just going to collect your dividends until you die. These guys are like, “Well, we know we’re getting disruptive, but so what? I’m 60 and we’re not going to be around for this, and we’re just going to cash the checks until they’re gone.”

But because you have the tailwind of markets going up over time, they continue to grow on an absolute level, which is frustrating. But the profit margin in this industry is still crazy high. Like Jason Zweig was talking about in your book, where it’s just like, “Yo, this is like SAS level multiples.”

Eric: You’re making more than tech companies. And I have a chart of T Rowe and Microsoft in there. T Rowe is a bit been higher, their operating margin. Like I said, it’s a good place to be, if you’re in that business. It is weird that you could underperform, so you’re bad at your job, you could lose customers, and you could still make more revenue than ever. That is a weird, it’s almost socialist or something not capitalist, about that concept.

And ultimately, that’s why you’re right. I think if you’re running one of these big places, even with this bear market that’s happening, let’s say, extends two or three years, it’ll definitely make it tougher, and I think there’ll be some consolidation in the industry. But even with that, the amount of the size of these companies has grown so much because of just the market going up that they’re fine.

As I said in the book, a lot of that is just was gravy coming in. The market that happened to go up a lot. If you could have taken a little of that, lowered the fee a little, it would have gone a long way. It’s too late though.

Obviously, Bogle asked about this, it’s, “What can active do?” And he’s like, “Nothing, just milk it till it’s over.” He’s so savage. And then even he says that ultimately some of these bigger shops… He said, the small guys are fine. They’re close to their customers. It’s different down there. But he said the bigger or medium-sized one is probably going to have to mutualize. So he called for a mass mutualization of the whole industry.

Now, no one I talked to agree with this prediction. But because he was so far ahead of his time in the ’70s and ’80s with what happened, I think you have to at least examine it. But that’s how far he went with it.

Meb: The mutualization, it seems to me like almost like you would have to do it from scratch. I don’t understand how a company that is currently operating with a bunch of equity owners would transition to that because who’s going to buy that equity? I don’t know how that would work.

Eric: Part of the reason I wrote the book was the amount of money going into other funds that are just like Vanguard, basically. Because it’s not just Vanguard. It’s the effect. And it’s almost all the money. It’s just a giant wad of money going into stuff that’s directly from Bogle’s brain in the ’70s. And the idea that nobody had copied Vanguard’s ownership structure was interesting to me, and I explored that.

But I realized a lot of the industry is governed by it. Like even though they don’t have a mutual, they really have to follow the lead of this mutual. So, in a way, that mutual ownership structure is a bit of a governing body in asset management now. You kind of have to have something like it to get flows.

Like Fidelity is a good example. Their active funds are largely seeing outflows. But their passive funds are doing great. They have a trillion dollars in index mutual funds now. And they’re cheaper than Vanguard. In their press release, they’re like, “Hey, we’re actually cheaper than Vanguard. They’re expensive.” How the world has turned.

So that, to me, is the effect and why I use the word effect in the book. So it’s possible, to your point, nobody has to mutualize. They already are kind of mutualized in an indirect way.

Meb: I would like to hear what you think. Is there a dam that’s going to…? I mean, maybe the dam is already broken, and the flows are always moving to the lower costs, but I’m always scratching my head when I look at all the assets that are stranded.

And I used to say, “Look, it’s just death and divorce. It’s going to take a while. Bear markets helped clean it out.” My new theory is you’re going to see not mass mutualization, but mass mutual fund ETF conversions. And you’re starting to see that. I mean, DFA did like what, 50 billion or something? It’s not everyone, but it seems to be happening. What do you think?

Eric: I see it like the airlines. I think there’ll be three mega companies. Vanguard will be one, BlackRock plus a couple others might be another, maybe State Street, Invesco, who our whole team thinks are like a match made in heaven, State Street, Invesco plus like five other companies. Those 3 control 75% of the assets. And then you’ve just got niche providers who are doing unique things, interesting things, just like the airline business. That’s how I see it.

I see the advisory business ending there, too. It’s just the natural way that it goes. I have a chart showing the banking industry, too. Looks like the March Madness, it goes from like 64 teams down to 4 in terms of merger. So I think that’s probably the end result is that kind of a consolidation. But what was your point earlier about…?

Meb: I rarely have a point. I just kind of ramble, some more of just elongated Meb mumbling.

Eric: Oh, the conversions? Yeah. So we wrote a note saying mutual fund ETF conversions probably hit a trillion dollars in 10 years. Right now, it’s 60 billion. I think we underrated it. I think it could be big.

The only thing is a conversion doesn’t solve the root problem. It puts you in the right dog food bowl, but you’re still selling dog food. And is that food something that dog wants to eat? And in the case of like a high-cost closet indexing-type active fund, I don’t think they’re going to get bites, whether they’re in the ETF or not.

What it does do is it takes away one problem they have, which is the tax efficiency of the ETF. So at least they eliminate that problem. But the bigger problem is being in the middle, being in between shiny and dirt cheap. It’s just a tough place. So I don’t know, they may also premise well. Let’s just ride it out.

And I think what you might also see is mutual fund company, that’s old school, actually build an ETF arm and make it almost like its own thing. Just be like, “Hey, look,” sort of like JP Morgan did, “You guys, I won’t bother you. Just do what you have to do. Make this a successful business.” And I think that actually makes more sense to me if you want flows than converting your mutual funds, which we’re seeing outflows, into ETFs, thinking that’s going to change anything.

That said, I do think we’ll see conversions, especially among funds that are not that popular. I don’t know if Fidelity would have ever converted the Magellan Fund or the Contrafund. But they actually launched a clone of the Magellan Fund. Although that, I think, it’s still under 100 million, which says a lot about my theory, which is that the dog has to want the food in the bowl, regardless of the bowl.

Meb: Yeah, I mean, so much of our world, the way that it operates, that I’ve learned is like it’s not necessarily product-investor fit. In many cases, its product-advisor fit.

Eric: That’s true.

Meb: Does it help an advisor to sell a story? A lot of people are very bullish on direct indexing. And I think it’s fine. On the Venn diagram, I think it’s in fine category, But I put it in this product advisor fit category where it’s something they can claim to be doing something that is already solved, but it’s not terrible, as long as you don’t charge much.

Eric: I go into it in the book. I have a chapter called The Fall and Rise of Active. And I looked at the way that your traditional large blend fund, mutual fund is falling. People just don’t really want that anymore. But what’s rising is different forms of active high cost, I mean, high active, share, active themes, ESG.

And I think direct indexing is active. It’s just under a really slick name, and it’s almost even slicker because it benefits the advisor. They can say, “We’re different.” And they can never get yelled at because, “Hey, it’s your picks, not mine.”

And so it’s there’s something a little, on the surface, fine, if you really want customized portfolio, I get it. But they charge more. Like Fidelity’s direct indexing is 10 times the cost of their index funds, 10 times. That’s a lot of times. And you’re going to now be an active manager. And we all know it’s very difficult to beat the markets. And over 50 years, that will add up to a lot of dollars. And so how many people are really going to be moved to do this?

So I agree with you, the advisor fit though for direct indexing is strong. Whether it’s a better solution for their customer, I don’t know. I think almost probably not. If I had to pick, if my mom was faced with an advisor who was trying to put her in DI versus three cheap beta ETFs, I would say, “Do not do this. Keep her in the low-cost ETFs.” I always have a mom test. Would you be okay with your mom in it?

So that said, I’m fine with it, too. I get it. And for really rich people who hate taxes, there’s a good case for the tax efficiency because you have more losses to use. I don’t want to be too much of a downer. I’m just more bearish on direct indexing versus the hype. I believe it’ll carve out a niche, but it won’t like destroy the ETF or even mutual funds.

Meb: One of the areas that we talked about with ETFs that’s overlooked, that direct indexing, to my knowledge doesn’t address nor do any of the robo advisors, anyone else, is short lending revenue. And most ETFs that do short lending revenue, return it. And for a lot of the allocation funds, it can be 10 to 20 basis points. So a non-trivial amount of money that the vast majority of these others don’t do currently. And if they did, I mean, that’s a big number. Maybe they keep it. I don’t know what the brokerages are doing. But it gets left out of discussion.

Eric: The securities lending revenue is interesting. This is why we really tried to push tracking difference as the true fee of an ETF. That’s the difference between the benchmark and the actual return you get. Because in that numbers, the expense ratio plus or minus, I should say any securities lending revenue, to your point, especially small caps, they’re basically free.

Like IWM, last time I looked, it is literally free to hold because the sec lending revenue is put back in there. VTI, famously, it’s either one basis point or free. It’s a three basis points, but they make up two or three with sec lending revenue. And I think the passive PMs even sometimes can pick up a little bit through their acumen.

And this is actually, you talked about the book being 500 pages. I had a chapter I cut, which was called The Game of Basis Points. And it was a whole chapter about how passive portfolio managers are just looking to eat up these tiny little bits of increment. But if you add it up, it’s millions of dollars back in investors pockets. And it’s just so underrated job because all the active managers get all the credit, “I beat the benchmark.”

These guys are basically doing a more consistent return of money to the investor. But it’s so boring. It was so boring, I had to cut the whole chapter because everybody who read it was like, “Ah, this just sucks. It’s boring.”

Meb: Well, it’s funny, because we spend so much time in our world debating, like, kind of these final basis points. And it’s material. It’s meaningful. But we had an old post where we looked at, we have a couple allocation funds, and all are cheaper in the category average. But if you look at, if you just segment it above, say 50 bips or above 100 bips, and this is a strategic allocation category, so by definition doesn’t really do anything, just buying and holding a bunch of assets. And the amount of assets still that are above 50 or above 1% is enormous. But even then, you look outside the U.S., and things are multiples worse.

Eric: It’s ridiculous.

Meb: It’s like 1%, 2% plus, and you’re like, “What in God’s name?” So question, I always look around and I’m like, “God, this is just garbage over here,” why hasn’t Vanguard made inroads, or do you think they plan to, why are they bigger internationally?

Eric: I think it’ll happen over time. But it’s the plumbing. It’s the incentive system. A lot of places in the rest of the world, the brokers still rely on commissions. In Europe, the advisors hanging on to their value add being picking managers.

And in the U.S., the advisors have shifted. They’re like, “I get it. Asset allocation is now commodity, I can buy a simple model portfolio, any dummy can do that.” So now they’re shifting to, “I can help you with taxes, behavioral coaching, planning.”

I think that’s smart. If I was an advisor, I would do that. I would admit that portfolio is generic. But, “Hey, if I’m on your side, it’s the best thing for you.” That’s why direct indexing kind of violates that. It’s almost like, “Let me actually use customization now as a selling point, even though I probably, deep down, know, it won’t work out better over 40 years.”

But I would just work on every other thing. I would just keep hammering the value. And I would be a relationship to my client, too, someone to call, a psychologist. They’re lucky because the advisors actually know the end investor and it gives them such an advantage over the fund people who have to sell to them because they don’t really have that personal relationship. Which is why on Twitter, you see funds get bashed way more. Advisors barely get it because everybody has to sell to them. They’re in a nice spot, in my opinion. They get to write whatever they want barely to take any criticism.

Rick Ferri is probably one of the rare examples of somebody who drops bombs on them. But they’re not used to it. You could tell. They react all defensively. But that market has to be honest with itself. Because if you charge 1%, it’s almost as if you’re making the same mistake as the fund managers did in the ’90s and ’80s.

If I were them, I would focus on the relationships, all the planning, and I would share economies of scale. I would give little kickbacks, reduce fees, little ways to bank goodwill to say, “I know I’ve doubled my revenue in the past five years. I’m going to share a little that with you because I appreciate you.” I think they might avoid the mistake. Because now you’ve got Vanguard robos are all way cheaper with actual human advice. It’s almost like they are where the fund industry was 30 years ago.

Meb: I think it applies to almost every nook and cranny of our financial system, what you just said. We joked on Twitter at one point, I said name a Fintech start-up in the past decade that’s not just Vanguard but with higher fees. Like a prettier Vanguard, prettier front end, but with higher fees. I’m like, you can’t. There’s none that fit that bill.

But the brokerage example, like a lot of people struggle with my nemesis Robinhood and others, where they talk about, listen, Schwab got fined almost $200 million because of their shady way of forcing you into cash and then not paying you on it. And FinTwit, by the way, was all over this from the get-go. This is like such an avoidable, stupid decision that they didn’t have to do. And it was just a total dick move. They did it, anyway, got fined $200 million.

I think there’s about five other of these I could list that are going to happen at some point in these big funds. But in my mind, and this goes back to kind of what Bogle, his whole concept.

Like if you come to it with a mindset of stewardship, and if you’re looking at Robinhood, how much they monetize their customers on options, on trading, on crypto, all these things, like the number is just massive, and say, “Okay, what if instead, Eric and Meb start a brokerage.” And we’re saying, “You know what? We’re going to charge you a fair fee. Let’s call it 30 basis points on your account per year. However, at every possible juncture, we’re going to do what’s best for you. So you know what? Payment for the flow, yeah, we’ll do it. We’re going to return it all to you. Short lending? We’ll do it. But we’re going to return it to you,” on and on.

And so will it be the same economics? Probably. But you feel like a different feeling of instead of like, is this person trying to screw me over as much as possible? Or do they have my back? And I think there are, I think Betterment does a good job. I think others do a good job. Others, and we criticize Wealthfront for this, but now UBS, it’s their problem. It’s the opposite. It’s like, how much can we extract and get away with it versus how can we do the thing that’s best for this client at every possible turn?

Eric: And even in your example, I think if you said, “We’ll share half of these things.” There are a lot of people who will respond to that, especially if you’re up front with it. In the book, I interviewed Dan Egan at Betterment, and I found it really interesting. He’s sort of like the complete inverse of Robinhood. His job is to get you not to trade.

It’s almost interesting. You’ve got these two images of like the people of Robin here like, “How can we get them to trade more? Oh, we’ll drop confetti, we’ll make the sound that apparently humans respond to.” Like, they’re literally in this lab trying to figure out how to do it. And Dan’s in a lab trying to figure out the opposite. And they’re almost like working in opposite directions. And there’s a lot in the middle.

But ultimately, I think this is where Bogle would probably come back to, well, even if a lot of these companies just are serving two masters. And it’s difficult. But I do believe there’s a nice middle ground there. You don’t have to be…because you do have owners who want money with their shareholders, and that’s a reality. And then you have investors. That tension is difficult to navigate. And I think some do it better than others.

But that’s what made him so unique in that he only had to serve one master. And that was something he definitely banged people over the head with. It was pretty brutal. I mean, but there’s a point there. It’s not like the person at the fund company is necessarily a bad person. Maybe some are. But it’s just this sort of inherent tension between those two forces.

Meb: Incentives. Once you get the incentives in play, it’s hard to change them. I mean, I would love for him to have been around for this cycle over the last few years because he would have just would not have held back on the shenanigans we had going on in our world. But we don’t have him here. You talked to him a number of times. I never got the chance to talk to him. And there are a couple questions I would have loved to have asked him.

So I’m going to pretend Eric has a Bogle AI chat bot. So I’m going to ask you some questions and say like, what do you think he might have said about this topic or idea? And we can kind of see what you think.

One of the things I struggle with and have long publicly struggled with is you can design the best products, Vanguard products, and they tend to be better behaving versus Robinhood, who by the way, I can’t help just not throw them under the bus. They claim publicly, multiple times, over the last couple of years, that the majority of their clients are buy-and-hold investors. And I said, “There is zero chance that that is true.” I’d be willing to bet as much as like they would want to bet on a wager on that.

Eric: Somewhere in the fine print, the word hold is probably defined by three months or something. I mean, like that’s crazy.

Meb: Even then, there’s no scenario.

Eric: Even then, right.

Meb: And I think, if I had to guess, if you were to say, “Meb, what do you think Vlad actually thinks buy and hold means?” Because he responded to my tweet, and he says, “Only 2% of our clients are pattern day traders.” What does that have to do with anything like so the other 98% are not… Like, what does have to do with anything? Anyway, SEC, if you’re listening, feel free to ding them for this. But there’s no scenario that’s true, by the way.

I think what they think buying hold means, if you had asked me actually, I think they mean keeping a consistent market beta. Meaning “I have 10 Holdings. I’m long only. And I may swap them out five times a day, but I’m not going to cash.? That’s what I actually think it means.

Eric: Yeah, it’s something like that.

Meb: It’s something insane.

Eric: It’s some really, incredibly liberal definition. That’s probably what it is.

Meb: Incorrect. Liberal is a nice way to think about that.

Eric: Liberal. Yeah.

Meb: Anyway, okay, here’s my question. Vanguard publishes a lot on how… And again, speaking to product advisor fit, a study where they say, “Advisors, we love you guys, you create 4% alpha on your behavioral coddling of these clients.” And advisors love to use this and say, “Look, client, four times our fee just by keeping you from doing dumb stuff.”

However, we all know, individuals as well as institutions get it wrong often when they’re thinking about the long term. And the mutual fund structure is fine. And he would probably say it’s better than ETFs, which are hyper-trading, but still you can ring them up and sell it anytime you want.

Is there a structure that you and I could brainstorm on or come up with at some point that really lines those goals? Like, we have this huge problem in the U.S. of the retirement wealth gap. But actually, like getting people… Actually, I asked this the other night to Bill Sharpe, Nobel laureate, listeners, and he’s basically, I don’t know. I take it back. He said, “We transition from defined benefit to defined contribution. Most of the public is still defined benefit, whereas privates defined contribution. It’s like, I think that was mistake.” What do you think? And you can channel Bogle 3000, if you want.

Eric: Just going from DB to DC a mistake?

Meb: What? No, no. Is there a structure? Because Vanguard currently doesn’t have one, I don’t think. I know they have some annuities. But do you think there is an evolution of these products that is in the best interest of investors? Like we have robo-advisors, we have advisors, we have annuities, we have mutual funds ETFs, 5, 10 years from now, do you think we can improve upon it? Is there are an idea?

Eric: I sincerely think. And I asked Bogle all about the future of the advisory business. And he thinks it’ll go to a more professional model, which is, by our word, by flat fee. And I think, although that advisor, whether it’s hourly or flat fee, it’s hard to beat like a cheap two or three fund portfolio, maybe five funds.

The portfolio is ready to go. I think it’s that how to best get people into it. And hourly strikes me as a good idea. I feel like you’ll still make a ton of money. And you can serve people who don’t have as much money. Because the percentage is, obviously, you’d be more after the bigger clients because it means more dollar fee for you. So I think the hourly model is interesting.

Also, the government probably has to get involved. Fifty percent of people don’t own any stocks. There has to be a way to get them involved. And that’s why I have a thing, in the end, about 10 people kind of carrying the Bogle torch.

And I put Tyrone Ross in there because of all the stuff he’s talked about. And his ideas are pretty good. And index funds will be really a great tool. I think he proposed something like everybody gets, instead of social security, they get this account. But you have to pass financial literacy tests when you’re 18 to get access to it. You blow it if you want, but at least you would have had a shot at it.

So there’s I think a lot of things that can be good. But I will say that DC plans, they’ve been cleaned up a lot lately. They’re better than they were. This guy, Jerry Schlichter, sued a bunch of them and it really helped. I would also say the DC plans are why I think the RIA movement was so strong and why it’s slow internationally.

DC plans made everybody in America, or a lot of people, have to understand, at least, like what funds were, what the expense ratios were. In Europe, you don’t have to do any of that. So you don’t even know that you’re paying like 3%. That’s why they’re so fee-insensitive in other countries is they never had to be forced into understanding this stuff at all.

So I think the DC plans had a couple of interesting by-products or side effects that were probably good. I know I like my DC plan. My company contributes, I can’t say I will complain about it. But I think that advisory model is something to look at.

Some people have talked about coming up with an ETF that has like everything. Although it’s tough, because if you have an ETF with like everything in one shot, what are the weightings? And are they really going to fit everybody’s, what they need in life? It’s almost something that you need a couple ETFs to use. You need the pieces. But the pieces are really good.

And in the book, I also think that in the advisory space, you referenced Vanguard’s Advisor Alpha study. And in that study, they give behavioral coaching a good amount of that 3%, or whatever it is. I actually talked about this study in the book, and I killed it. It was too controversial for me. I don’t know if I believe it.

I also found something while writing that I didn’t realize, which was that I have come to the conclusion that just putting a cheap index fund in the marketplace, getting that sucker down to three basis points, five basis points, whatever, that did more good for behavior than any study, than any scientist. Because once you have that tool, everything else is so easy. You can just be like, “Yeah, well, fine. The markets are tanking, what am I going to do? Jump to some other thing.”

I think people look at that low fee as their alpha. “You’ve just brought my fee down from 60 to 3, and I’m locking in market returns. I know what happens when I try to jump over here and then jump over here and then jump over here.” So a lot of people have this resignation that I think is actually, that word can mean like bad. But I think in this case, it might be good. Because if you look at passive fund flows and the selloffs, they’re just almost unmovable. If anything, they take in money.

And I think just putting that product out there. And so when advisors say behavioral coaching, they get a nice tailwind from the fact that they got this very good product. Imagine doing behavioral coaching if you only had 70 basis point active funds to choose from. That’s a whole different story.

So a lot of times, when all these books on behavior, this that and the other, I’m like, “Yeah, it’s easy to say now. Try talking about behavior if that’s your only choice. And oh, now this my active fund is done worse than the market.” And that’s your kid’s college, you get panicked.

I think once you get into that low-cost index fund, and that’s somebody that matters, it’s way easier to just do nothing. I don’t know if that’s exactly the answer you wanted. But those are some points I would make on what you’re asking.

Meb: I once suggested on Twitter, it’s not my hall of fame on unpopular tweets, but it’s up there. And the free market kind of took care of it. So it’s irrelevant, I think, at this point. But I was like, “Why wouldn’t the U.S. government just offer, I don’t know, 5 to 10 broad market cap weighted zero fee funds. And people lost their minds. “The government, you know, aargh.” And I was like, “Okay. Well, like it’s already at three basis points so like, who cares?”

Eric: Ten is fine. I remember when you did that. That’s a fine idea. You’re right. I mean, that’s sort of what I think Tyrone’s idea was, was if you got an account when you’re born, like Social Security that was being filled with money from the government. The government certainly would then need to put you in the government fund. But that fund probably should be at 10-basis point or below index fund. It wouldn’t be controversial if you did that. It would be like, okay, “Who can argue with that?” That’s a great idea.

Meb: Why does it even need to charge? So anyway, I like Tyrone’s idea. We caught, as opposed to Yang’s Universal Income, that’s like all marketing, like life insurance, the death. It trips a cord in people’s head.

My favorite marketing is the Freedom Dividend, America, f-yeah. You get a share of this country’s business and capitalism, and you get some at birth and it grows. Then you set all the incentives around…like you said, you put incentives around getting some personal finance education and that compounds for decades, on and on. I think that’s a pretty cool idea. I don’t know why people would be against it. Like, it seems to be pretty basic, but we’ll figure it out.

Eric: Somehow, you’d have to have somebody just to explain it in a way. It needs a good communication. Also, again, funds and investing get boring to people.

But I also think your point about the Freedom Dividend is interesting. Two points on that. One is that I found Bogle did such a good job in his book – I had read them all, again, as I was researching – of just explaining investment returns versus speculative returns. And he had a chart that I didn’t realize existed. But I love it. I basically re-explained it in my book, which is investment returns of stocks have been completely pretty stable for the last 10 decades.

When you add in the speculative returns, obviously, it’s up, it’s down, it’s this, it’s that. I feel like most people don’t understand that, especially like some people I argue with on crypto. I’m not even sure if they understand that a stock is different than a cryptocurrency. One has this investment return. It’s got dividends, earnings growth. You’re actually riding the capitalism’s coattails. All these people wake up every day, go to corporations to create value. You get to actually get a cut of that.

Versus, “Hey, I bought this thing. Well, you pay more for it.” And I think that’s why Bogle and Buffett were against commodities and such. But I think somehow that message of what you’re actually doing here needs to be put out there.

And the other thing I hear back is, “Well, why would you put people in the market now? It’s already had this nice run.” I’m like, “Well, that’s the thing speculative return could mean a bad couple of years because you got to take some of this valuation down.” But over time, you’re still locking into that thing, that Freedom Dividend that American innovation, which is also another piece of Bogle. I said a lot of countries and his thing on international, I’d love to get your take on that.

He was not into international. I could not find one person, except for Taylor Larimore, I think, he’s the king of the Bogleheads. I think he agreed on Bogle with international, I believe. But even like, sort of his closer, people who like really looked up to him, they did not agree with him on international. They wanted international exposure.

He says, “Well, 40% of New York stocks have international, get the revenue from overseas, yada, yada.” That was something I explored a little bit. But that comes up a lot in my interviews on the book. They’re like, “Well, was he right about international?” And curious, your take on that?

Meb: I could have convinced him. That was like my number one, we did a post called The Case for Global Investing. It’s always fun. Because after he kind of got put out to pasture, still would shoot fireballs. There were some areas that he and Vanguard were kind of at odds about. And it’s funny, because you would see, we talked a lot about his stock market equation. And there’s some papers, well, I’ll add to the show notes links, about his Occam’s Razor, the way he phrases it, expectations through the stock market. You wouldn’t call it forecasting, but kind of expectations.

And it’s funny, because Vanguard, I was just looking at a tweet from the beginning of the year, they were basically saying U.S. stocks 60/40, lol, was like their forecasts for like the next decade or whatever. And foreign was going to do better. And I was kind of laughing because I said, “That’s the expectation and what do you do about it?”

But the question that I always would have asked Bogle, if I could have asked him about it, other than the one we talked about, would have been, is there a valuation that you would sell?

And so, we did a poll on Twitter. So do you own your stocks? Everyone owned their stocks. And I said, “Would you sell them if they hit a 10-year P. E. ratio of 50?” And a half said no. So higher than they’ve ever been in history in the U.S. We got to 40, the cycle, so close. We’re down to like 29 now. This is a 10-year Shiller Cape. Half said no.

And then we said, “Would you sell if they got to 100?” So higher than any stock market’s ever been in history, including Japan in the ’80s, which has gone nowhere for three decades. And it was like a third said no. So there’s no price. Like it’s a disconnect between, in my mind, common sense and…

Eric: You’re right. There’s a religion to it.

Meb: But look, if we get 50% GDP like some people were projecting for a year growth in 5 to 10 years, then all bets are off. But that would have been my question to him has been, and I know what he would have said, but I would have said, “Is there a point where you would have said, ‘You know what? This is a little bananas.’”

Eric: Another reason I wrote the book, I met with him three times, and you would have had a debate on him on international that would probably would have lasted 30 minutes. Soon as I got into his office, every time, he hit the ground running with his ETF stuff. And we just ended up in this like collegial debate on ETFs.

And I would just throw up the skeets. I’d make an argument here. I’d make an argument there, and just shoot them down. “Yes, but boom. Yes, but boom. Yes, but boom.” I think he had locked into the total market index fund, wait 50 years, anything else is a distraction. And he had started all this stuff. He started the international fund. He started growth in value. I guess he slowly just saw it wasn’t worth it.

But back to Dan Egan, he had a great quote on this. He says, “Well, Rome fell. Basically, like, we don’t know for sure America will be the biggest leader forever.” He wants to own all the stocks. He’s like, “You know, if there’s a Brazil company that’s doing something, I want to own it.” I don’t know. Again, I think Bogle would have understood that, but he just would have disagreed.

But you’re right. There shouldn’t be a point. If it’s 100, you’re right, there’s a disconnect. And this is where I think people cling to things. And you have to have, I think, a little fluidity, a little flexibility. But too much flexibility, probably bad.

Meb: The obvious answer, I think, he would have said, would have been like, “Oh, that’s why you rebound consistently, you’re constantly trimming.” I think, who was it? It might have been Cliff Asness that was saying Buffett admitted, kind of coyly, that he trimmed some of his stocks in the late ’90s. But maybe it was one of your writes. I don’t know where I read that. But oh, by the way, Fed, raised 75 bips, listeners. Meaningless. As Bogle would have said, “Don’t do something. Just stand there.” That’s one of my favorite quotes.

Eric: That’s a good one.

Meb: I always try to repeat it. I can never get it right.

Eric: I know, it’s hard to quote.

Meb: I try to read the original.

Eric: It is so hard to repeat. It’s only six words. And it’s so hard to say.

Meb: “Don’t do something, just stand there.”

Eric: Yeah, that’s it. It was interesting, by the way, just going to his office the first time, especially, I thought, “Oh, this is this old guy. He’s going to be, like, just platitudes. And he’s going to be, like, half there. And he’s really old.”

And I got there, he’s just… First of all, he opens with like, “I’m in trouble. I wrote this article for the FT about how ETFs suck. And now the SEs are all up my ass.” And I’m like, “What have I walked into?” And so he’s already bickering about Vanguard, the company.

He has papers all over and he’s all pissed off about USO. He was like, “This oil ETF. Look at the money weight of returns on this thing. This is bullshit. ” And that’s it, man. I mean, we’ve got right into it. It was like I was on Twitter. I mean, honestly, I think he would have had a lot of fun on FinTwit just arguing.

Meb: Particularly, if we were to use the punk rock graphic of him, which is maybe like, I’m going to frame that and put it in my office. It’s maybe like my favorite.

Eric: I’m glad you liked it. I wasn’t sure if I went too far, it was too gimmicky. But Joel Weber of BusinessWeek. BusinessWeek audience is a little younger, he seized on that. And it was like, “We have to put Bogle in a mohawk in a leather jacket.” And it’s weird looking, but…

Meb: Given his kind of use of the word… I learned a lot in your book. By the way, listeners, you got to read it. There’s so much in here. But one of the things was when he talks about the growth versus value.

And I said, well, like if you believe this whole shtick about total market, like why are you launching growth and value funds? And he said, “One of the original ideas was because the tax efficiency,” he said, “I thought investors would have invested in the growth stocks and taxable accounts because they have traditionally lowered dividends and income, and then the value stocks that had high yield and tax exempt accounts.”

And I actually wrote a paper about this. And there’s like almost nothing in the academic literature about this, by the way, for some unknown reason. And we wrote a paper and it’s one of our least downloaded papers. But basically, it said, what if you could bucket these companies by avoiding income yielders and then bucketing it by value? And basically, it demonstrated, you can beat the S&P in a taxable account by avoiding the yielding companies and tilting towards value, on and on.

We’ve had a couple of funds filed for like, I don’t even know how long five, seven years at this point, haven’t launched them because I’m convinced there’s going to be zero adopters. It’s like a Buffet thing. I’m like, I’m going to have to marinate on this for 10 years before anyone cares whatsoever. But I was so excited to see someone talk about it because I hadn’t seen anyone else really discuss this much.

Eric: The other thing with growth and value, I think he thought that the growth would be used in your younger days and the value later. Either one of those scenarios, though, requires discipline. And what he found was people just performance chased between them and got less than the total market. And that soured him on the whole concept. “Although, again, if you have discipline, I can see that working. The problem is the human emotion got in the way there,” at least, that’s what he found.

Meb: One of my favorite charts of his – and we’ll start to wind down, otherwise I’m going to keep you all day – which was in one of his books, he did the study where he’s looking at the top performing funds per decade and how they did afterwards. And every single decade – and we talk about this all the time, and it’s not to diminish the hot managers, the people who do well. I always feel like I’m like, tossing cold water on some fund or manager that’s done great – but I’m like, “Look, the history of this is atrocious.” Like you don’t chase.

And here we are in 2022. And you’ve seen this across the board, all these hot managers that are just absolutely getting smoked this year that did really well in the years prior.

Eric: I have a section on ARK in the book and he would have been like, “Why would you invest in that?” Thematic ETFs, honestly, we know what he thought of themes. Themes were his like most savage language fruit cases, or no, fruitcakes…

Meb: Nut cases.

Eric: Nut cases and fruit cakes.

Meb Fruit cakes.

Eric: The lunatic fringe, I mean, he was, like, so colorful about it. But I legitimately think, ironically, a high active share thematic-type ETFs and even crypto, to a degree, although we’ll see, are ironically a by-product of Vanguard. Because the more people go boring in the core, the more they get to search for excitement on the outskirts, and they’ll be tolerant to the drawdowns, which is Mike/Cathie Wood theory on why the flows haven’t been as bad. Also, the volume on the ETF is really good, too, which is helpful.

But I think actives can be pushed to get more active, whether doing alts or high active share. People are going to be on the hunt for something exciting, different. And it is ironic because Bogle himself would have been against that. Although you could argue there might be a behavioral hack there because if you’re one of those people who looks at their account a lot and just into this stuff, if the mess around with that 20% hot sauce just keeps you from touching the 80%, you could argue there’s a service provided there.

Although if you said that to Bogle, he’d say, “What kind of idiot needs to mess around with hot sauce.” Not everybody’s built like him. But there is an interesting yin-yang between Vanguard and ARK and ARK-like ETFs.

And I think they’re going to be here for a while. I think the number of holdings in new launches are going to continue to come down. A lot of creativity will be in the ETF world in an effort to do things that Vanguard doesn’t, whether that’s crazy active or a package trade, like some of the stuff simplified as I think that’s really viable in ETFs.

Meb: We always are surprised when we look at all the fun launches. For me, the correlation between looking at something and be like, “Wow, that’s a brilliant idea,” and then it’ll raise no money. And this happens even more often where I say, “That is the stupidest idea I’ve ever heard in my life.” And it raises billions of dollars.

Eric: It is.

Meb: But we consistently think of ideas all the time and talk about them that I think are thoughtful and have a place that doesn’t exist yet. And so in a world of tens of thousands of funds, it’s surprising to me that there’s still areas that are fertile grounds for innovation. So who knows?

What’s your favorite non-launched ETF idea? You probably get that question all the time. What’s your white whale on, how is no one launched this yet?

Eric: Probably, it’s a toss-up between the congressional stock tracker or, if you want to specify, just Nancy Pelosi’s portfolio tracker.

Meb: It’s got to be Tuttle in that crew. They don’t seem to have any…or Access now, I should say.

Eric: Of the things they do throw out there, that seems like a much more, it’s an easy-to-understand narrative. And those Congress people do really well, her in particular.

The other one is just the inverse Cramer. I’m surprised no one has tried that. The brand is interesting. But I think there’s a backlash against him that would get money into that even if it didn’t like to perform right away out of the gate. I think there’s a lot of people who just like to own it, just to own it. And just for the whole, like, I want to support this cause.

But honestly, if you look at some of his calls are so good the wrong way. They’re like 10 backers. Like, and you only need a couple of those. You can have a lot of dogs. You could see a couple monster trades. And he’s good at that.

Meb: This kind of applies to not just personalities, but conferences and the like. I remember I’d stalk into RealMoney way back in the day. This is a fun story, listeners. They actually fired me, which is hard to say fired, because I never got paid for RealMoney. But it was a columnists’ conversation back in the day. And they booted me.

And the reason was because I’m a science background, so you cite sources. And I used to cite sources. And a lot of the sources ended up being my own work because no one else was doing it. Because like I cite something just because this is the only place that was talking about it. And they said, “You’re trying to drive too much traffic to your own properties and like you’re abusing this platform.” I said, I’m just doing a citation. This is common academic behavior.

Anyway, but I remember asking them back in the day, I said, “Cramer has a huge audience, why doesn’t he launch a mutual fund? You could raise billions of dollars. He talks about it all the time already.” And they say, “Well, you have a good business already, which is the newsletter business. The newsletter business is enormous in our world. All you can do is muck that up.”

So there are two scenarios. You launch the fund. It does well, maybe. Cool, you raise much money. But it does poorly, not only does the fund do poorly, it also destroys the newsletter research business. Because now, you have egg on your face.

This also used to apply to all these conferences, stock picking conferences. When I was a young quant, I offered a bunch of them. I said, “Hey, send me your historical picks, and we’ll run it and come up with some statistics and write a paper on it.” They said, “Why would we do that?” I’m like, “What do you mean? Why would you do that? It’s a great idea, IRA Zone and Value Congress’ and all these.” And they said, “There’s only downside for us, we already have a good business. Now you’re going to show that our picks are terrible. Like why would we do that?”

Eric: This is a fascinating situation you’re bringing up and it’s why I tend to defend Cathie a bit on Twitter is a lot of the attacks come from people who, we don’t know their performance. We don’t know what they hold. It’s like attacking from the shadows. And she’s very out there, you know her picks every day. I tend to give her some credit for the transparency, at least. It takes a lot of courage to launch a fund and be daily pricing.

Private equity newsletter guys, they get to avoid all this. And I will give a little edge and benefit to the doubt or love to the transparent people because it’s a harder place to operate and you get a lot more shit.

And that’s part of, mentally, where I kind of lean on some of these emotionally. But not to defend her stock picks, but you know what they are, they’re out there, and that takes guts. As you said, a lot of people don’t have that kind of guts. And they should admit it.

Meb: The old woman/man in the arena comment.

Eric: Exactly.

Meb: By the way, before I forget, there used to be – And you may remember this, I don’t know if it still exists. I was just trying to find it looking up while we were chatting – a mutual fund, when I entered the industry, it charged like 2% a year. And it was called something like the Singer or Singer Congressional Fund. But all it would do, it would invest when Congress was out of session and sit in cash when it was in session, which historically was a great way to invest.

I don’t know if it still exists. But all they would do is hire former beauty contest winners to be the booth, so like the real booth babe back in the day. And I remember going up and asking about this fun and ask questions. She’s like, “Well, I have no idea about the fund. But here’s the fact sheet.” Like, I don’t know if it still exists. If you ever heard of this fund?

Eric: The Singer Congressional?

Meb: It’s like something congressional mutual fund. Anyway, we’ll put in the show note links, listeners. I hope they still exist because it was a funny one.

Eric: I don’t see it. But I don’t know. I probably would have heard of it. Or it would have been brought up because I’ve tweeted a little bit about the congressional one. And there’s been a couple of tries on like, “Oh, we’ll do stocks that benefit from the GOP and power.” That’s a little less indirect. I think just writing the congressional people’s personal portfolios themselves is a more bankable trade.

Meb: I had a tweet once. I was like, “Should Congress people be able to actively trade stocks?” And the three choices were like: no, obviously not, Like, F no, like what are you talking about? Like, how is this even a thing?

Eric: I know.

Meb: You and I can just start going down a rabbit hole for the next two hours. So we’re going to have to have you back on in the coming months. Listeners, check out Eric’s book. It’s awesome. What’s the best place to find you? Posting on Twitter, on TV, podcast? I love your podcast. Where are the best places to go?

Eric: I’m guessing you probably have some listeners who have a Terminal, and if you do, BI ETF is where all our research is. And I’d say Twitter is the best place to get me. Our DMs are open, and I post charts and stuff. And then my podcast is called “Trillions.” And that’s free. So Twitter and the podcast are the free ways to get me. But if you have a Terminal, you can find me there, too.

Meb: Awesome, my man. Thanks so much for joining us today.

Eric: No, really my pleasure. This is great. Thanks, Meb.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening friends and good investing.