Why Vanguard’s Bogle Was A ‘Punk Rock’ Disruptor

​Bloomberg’s Senior ETF Analyst Eric Balchunas has written a book focused on the man who was the driving force behind the rise of index investing. The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions hits bookstore shelves today, and it looks to capture the scope of Bogle’s impact from the financial industry to ordinary investors. The conclusions drawn by the author offer a unique perspective on a financial industry titan. This article is the first of a two-part interview; it has been edited for brevity and clarity. 

ETF.com: John Bogle, Vanguard’s founder, passed away in 2019. Would you talk about how the idea for this book developed? 

Eric Balchunas: I asked myself to live on planet Bogle and explore all the crevices and mountains. This guy is colorful; he’s interesting. And Vanguard is so potent and powerful right now, taking in $1 billion a day for a decade—this is a great topic to explore. The only thing it was lacking—and there's nothing I can do about it—was a fall.  

A lot of books that come out are about a rise and fall, and this is just a slow rise. It's about a guy steadily just chipping away at a system to change it and eventually winning. He didn't change the whole system, the whole ballgame, but there is no tragedy here. There's no losing. 

I did my best to make it entertaining, despite that lack of a foul. That was kind of challenging, to be honest, and hopefully it comes off. The name of the book is very accurate. I do my best to capture the Bogle effect and how tremendous it was what this one guy did, and the ripple effects through all areas of the ecosystem and in portfolios. 

I also had a lot of data at my fingertips on how potent Vanguard and the mutual ownership structure was. I thought, “This will probably haunt me if I don't do it.” That's when you know you're ready to write a book—if you almost feel like it's going to annoy you if you don't write it. 

ETF.com: What were you trying to capture in the story you were telling? 

Balchunas: I tell people it's probably the only Wall Street book that has a happy ending. Think about it: This guy really changed the whole game, and my conclusion is, history will be very kind to him. Most of the people who come and go through investing, they're known for how they played the game, this guy changed the game—and for the better.  

The numbers and the impact are astonishing. We're in the second or third inning of this. I know it seems like we've heard enough about Vanguard, but [the company] is going to get bigger and bigger as it goes overseas, into the wealth management industry, maybe private equity.  

And that's really what I wanted to focus on in the book. I felt index funds got way too much credit for the index-fund revolution, ironically. Index funds needed Vanguard way more than Vanguard needed index funds. And the reason is because of the Vanguard [ownership] structure.  

They could have done private equity, active mutual funds, quantitative investing. Whatever they were going to do, they were going to succeed, because they were going to constantly bring a gun to a knife fight by having dirt cheap costs.  

It happened to be an index fund was the perfect match that made it happen for that structure. But Vanguard was going to be a success no matter what. That's what I wanted to home in on—that structure is the real nucleus and also this unique structure of global demand.  

[Bogle’s] different, he's weird, he almost was miscast in this industry. He almost is a kind of guy who you could argue—with the kind of things that motivated him and inspired him—probably would be led to the priesthood, or maybe a military leader, or perhaps a writer.  

He just was just a very different guy. To me, the different structure of Vanguard and the different structure of Bogle were the source [of the] explosion that ultimately is what keeps rippling out and will for the next several decades.  

ETF.com: What role do index funds have in that? 

Balchunas: Index funds were the first big byproduct of that explosion, and I really wanted to make sure people understood that. The other thing with index funds is they're different. There is no such thing as passive—the S&P 500 has rules to get in and it's run by a committee. The whole thing that we're seeing is really low cost. And there's no way index funds would have been cheap without Vanguard. 

It's just not they wouldn't have been invented—they would have happened, but they would have charged 70 to 100 basis points. They would have been nice—they would have maybe had some people who bought them on the fringes.  

But their “beat rates” wouldn't have mattered as much because you could still never buy the benchmark if it was the benchmark minus 70 basis points, and it would have not really been worth it for a lot of people.  

The low cost was formed over 40 years from 45 basis points to now—like 3 or 4 basis points and you get a whole portfolio for almost nothing. That's really where the power comes from, more than the idea of indexing, which I think, again, gets way too much credit for the changes we've been seeing.  

ETF.com: Would you talk more about this Bogle “weirdness” that you’ve mentioned? 

Balchunas: He was weird for a number of reasons. I asked the 50 people I interviewed [for the book], why hasn't anybody copied the Vanguard structure, [since] they obviously had a lot of success with it? [They generally said] well, because there's no economic incentive to set up a structure like that—nobody wants to drive a Volvo. People who go to Wall Street and work that hard don’t want to turn over all the profits to the customers. It's just not the way economics works.  

I think what made him different was his fiery attitude. At Wellington, most people would have left and started a new company somewhere else, [but] he fought them. And in fighting them, that's where Vanguard came out of.  

He was very feisty, very fired up. And he had sort of a populist nature. He just had that “customer first” thing going on. He was also a little punk rock—I think he was OK with tension. He would go to conferences and just sort of antagonize the audience by saying, like at Inside ETFs, “ETFs suck.” At Morningstar, he'd say, “active sucks.” And that's just different.  

I have a whole section where [I say] he looked like a latter-day Henry Fonda, but he was kind of a punk rocker—he was very much into challenging the status quo and thinking of the little guy.  

I also found something that he shared with punk rock, something [known as] addition by subtraction. The birth of punk was really from the Ramones, who basically said, “All we did was take out all the stuff we didn't like about rock at the time and just do what was left over.” They didn't want guitar solos and a lot of indulgence, so they made 2-1/2-minute, very lean and mean songs, which birthed the whole genre.  

And that's really what [Bogle] did. He spent 45 years removing all the things he didn't like that got in the way of investor returns—management fees, turnover, trading costs, brokers, human emotion, market timing. Now, if you buy a total market index fund, you get frictionless exposure to the whole enchilada.  

But that took 45 years. Who else would really go about doing that when most people are figuring out ways to get more money from the client? And that's what made him unique.  

He just wasn't motivated like other people. He gave a speech to the staff in 1991, saying, “I'll know that Vanguard's mission to make the world a better place for investors is beginning to be realized when our market share begins to erode.” And that's weird. Whoever wants their market share to go down?  

But he knew that would mean everybody else is getting cheap and more [focused on stewardship and fiduciary duty], because then they would be catching up to Vanguard. That's how different of a trip he was on.  

Contact Heather Bell at [email protected] 

[Homepage photo of Jack Bogle by Mark Lennihan | Credit: AP]