INDEX FUND POPULARIZER: FOUNDER, VANGUARD, WORLD’S LARGEST MUTUAL FUND COMPANY
In 1965, my mentor, Walter L. Morgan, the founder of Wellington Management Co., called me into his office. It was the go-go era, and we only had a conventional, balanced mutual fund. “I want you to do whatever it takes to fix the company. You’re in charge now.” I was 35. So I merged with a very aggressive equity fund out of Boston with managers younger than I was. It seemed like an act of genius, until it wasn’t. The go-go era fell apart, and they turned out to be terrible money managers. In January 1974, the board of Wellington Management, controlled by that Boston group, fired me.
Except that the mutual funds themselves had a separate board controlled by independent directors, and I persuaded that board not to fire me. So there was a big fight, and it was resolved with a terrible deal: I would continue as chairman and CEO of the funds, which would be responsible for their own legal, compliance, administration and record keeping. (And I had to come up with a new name—that was the start of Vanguard Group.) My rivals, the people who fired me, would continue to oversee distribution, marketing and investment management. The scheme was totally irrational.
I had to find a way for Vanguard to take on the investment management and distribution of our funds. I had done some work on index funds in my senior thesis at Princeton in 1951. I had experienced the failure of active management firsthand. And I had just read an article by Nobel Laureate Paul Samuelson, saying, in essence, “Somebody, somewhere, please start an index fund.” I took the idea to the board and they said “You can’t get into investment management,” and I said, “This fund has no investment management.” They bought it, and there’s where the index revolution began. Then I decided we couldn’t allow Wellington and its sales force to continue to distribute the funds—so we eliminated all sales commissions and went no-load overnight. The directors said “You’re not allowed to take over distribution,” and I said “We’re not taking it over; we’re eliminating it.” They bought it, again.
When a door closes, if you look long enough and hard enough, if you’re strong enough, you’ll find a window that opens.