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An Interview With Jeremy Siegel: Masters in Business (Audio) · Masters in Business

• 0:03
  Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
• 0:08
  Speaker 1: This week, I have a very special guest. And I
• 0:10
  Speaker 1: know I say that every week and everybody gives me
• 0:13
  Speaker 1: grief about it, but I really have a very special guest,
• 0:17
  Speaker 1: Jeremy Siegel, professor at Wharton School of Business at the
• 0:21
  Speaker 1: University of Pennsylvania. A quick funny story. Um, So I've
• 0:28
  Speaker 1: done television and I've been on the other side of
• 0:30
  Speaker 1: the debate from Professor Siegel over the years, and you know,
• 0:34
  Speaker 1: I always kind of scratched my head. Yeah, Yes, Stocks
• 0:36
  Speaker 1: for the Long Run is pretty good book. It's now
• 0:38
  Speaker 1: it's fifth printing, and there are millions of them out there,
• 0:41
  Speaker 1: and he's consistently the top ranked professor at Wharton. But
• 0:46
  Speaker 1: on TV he always seems to you know, he I'm
• 0:50
  Speaker 1: wholly unimpressed with his television appearances and what he says,
• 0:54
  Speaker 1: and and I've been pursuing him to do the show
• 0:57
  Speaker 1: for a while and we just couldn't get the schedules
• 1:00
  Speaker 1: when he's he's in Philadelphia most of the time. We
• 1:02
  Speaker 1: finally got him into New York this week, and it
• 1:06
  Speaker 1: was one of those situations with which, based on his
• 1:10
  Speaker 1: his appearances that I've seen him previously. I mean, I've
• 1:14
  Speaker 1: seen his writings and they're usually fantastic, but his television
• 1:18
  Speaker 1: appearances were always like, not the greatest thing going. And
• 1:25
  Speaker 1: this experience of having him here for the podcast was
• 1:29
  Speaker 1: really interesting because it made me think that the television
• 1:34
  Speaker 1: appearances he does are just completely the wrong format for him.
• 1:37
  Speaker 1: A guy like him who's that informed, that knowledgeable, that intelligent,
• 1:42
  Speaker 1: and that articulate, you can't give him twelve seconds for
• 1:46
  Speaker 1: a sound bite. He needs a little time to flesh
• 1:50
  Speaker 1: out an answer. And so I guess I look, I
• 1:53
  Speaker 1: know who Professor Siegel is. I know who the Wizard
• 1:56
  Speaker 1: of Warton is. I just came into the podcast expect think, oh,
• 2:00
  Speaker 1: this will be a decent podcast, and I have to
• 2:02
  Speaker 1: tell you, he blew my doors off. He just basically
• 2:07
  Speaker 1: so enthusiastic and so articulate, and we really had so
• 2:14
  Speaker 1: much fun talking about all this stuff. I had a
• 2:16
  Speaker 1: great time, and I think those of you who may
• 2:20
  Speaker 1: not know Professor Jeremy Siegel well will also have a
• 2:24
  Speaker 1: really good time. Um, listen to this. For those of
• 2:27
  Speaker 1: you who are fans of stocks for the long run
• 2:30
  Speaker 1: and or no Professor Siegel, you're gonna enjoy this. Also,
• 2:33
  Speaker 1: he says a few things that he I don't believe
• 2:36
  Speaker 1: has ever said before publicly, and and it was just
• 2:39
  Speaker 1: a fascinating conversation. So, without any further ado my conversation
• 2:45
  Speaker 1: with Professor Jeremy Siegel. You mentioned Chicago. So it was
• 2:49
  Speaker 1: born in Chicago, ended up in Columbia, m I t
• 2:53
  Speaker 1: then across the river to Cambridge for a year post doc,
• 2:58
  Speaker 1: and then back to Chicago. How it brought you to
• 3:01
  Speaker 1: Wharton from Chicago? It was very interesting. So I was
• 3:05
  Speaker 1: in my fourth year, I was assistant professor of of
• 3:10
  Speaker 1: Business Economics, and I got a call from a colleague
• 3:14
  Speaker 1: one person, uh Tony Santa Marro, who by the way,
• 3:18
  Speaker 1: was president of the Federal Reserve Bank of Philadelphia after
• 3:23
  Speaker 1: he left Wharton, but at that time he was in Warton.
• 3:25
  Speaker 1: He called me up and said, Jeremy, I need I
• 3:28
  Speaker 1: need another macro person here. Would you consider coming to Wharton?
• 3:33
  Speaker 1: And I went to Wharton and they offered me a
• 3:35
  Speaker 1: very very attractive job. Even though I like Chicago a lot,
• 3:39
  Speaker 1: I decided to uh to settle there at at the
• 3:43
  Speaker 1: Wharton School. And now you're known as the Wizard of Warton.
• 3:46
  Speaker 1: You've been there for how is my year? That's amazing?
• 3:51
  Speaker 1: It is. I'm amazed myself sometimes. And you're gonna stay
• 3:54
  Speaker 1: for how long are you gonna go for the full fifties? Well,
• 3:58
  Speaker 1: I don't know. Actually, um, they have a very good program.
• 4:02
  Speaker 1: If before seventy you can do a reduced load. I
• 4:05
  Speaker 1: have one under honors undergraduate class after teaching. I've counted, Barry,
• 4:12
  Speaker 1: I've taught over ten thousand students in the forty four
• 4:16
  Speaker 1: years teaching. That's amazing, over ten thousand soon. So I
• 4:20
  Speaker 1: decided gonna gonna take it a little easier, and uh,
• 4:24
  Speaker 1: I just have an honors undergraduate class, which I love.
• 4:27
  Speaker 1: They're very unbelievably smart at Wharton. And uh so I'll
• 4:31
  Speaker 1: be on reduced teaching for a few years, probably four
• 4:34
  Speaker 1: or five years, and then you know, settle back after that.
• 4:38
  Speaker 1: So so let's jump right into it. You mentioned you're
• 4:40
  Speaker 1: a macro guy. How significant is the macro economy to
• 4:45
  Speaker 1: people's portfolios? Oh? Yeah, well, very significant. Uh. I mean
• 4:50
  Speaker 1: I take a look, just take a look at the
• 4:52
  Speaker 1: financial crisis. Uh you know, produced the worst decline in
• 4:57
  Speaker 1: GDP since the Great Depression and not uh coincidentally accidentally
• 5:05
  Speaker 1: the worst bear market since the Great Depression. So you
• 5:09
  Speaker 1: know business cycles, economic health that you know, that's all inflation. Wow,
• 5:15
  Speaker 1: that's really all about bonds and stocks and markets. So
• 5:18
  Speaker 1: let me throw a curve ball at you. If people
• 5:20
  Speaker 1: are we we mentioned stocks for the long run, If
• 5:23
  Speaker 1: people are supposed to be invested for the long run,
• 5:26
  Speaker 1: why should they care about macroeconomic wobbles? Why should they
• 5:30
  Speaker 1: even care about a giant financial crisis? Here it is.
• 5:35
  Speaker 1: The crisis began sometime in oh eight. It bottomed in
• 5:38
  Speaker 1: March o nine. We're already above the pre crisis highs
• 5:42
  Speaker 1: of oh seven. If you just put it away until
• 5:45
  Speaker 1: you were talking about that, that is true. If you
• 5:48
  Speaker 1: can be patient and just put it in you know,
• 5:52
  Speaker 1: uh indexed fund and let it ride and don't pan
• 5:57
  Speaker 1: it when things go bad. Um, you know, I I
• 6:01
  Speaker 1: think you will do very very well. Uh. So that's
• 6:05
  Speaker 1: where you're that's where you're budding in a way. You know,
• 6:08
  Speaker 1: if you're if you're just a buy and hold person,
• 6:12
  Speaker 1: I guess that's all you have to do. All right, Well,
• 6:14
  Speaker 1: thank you some ups and we're gonna leave right So
• 6:18
  Speaker 1: so let me ask you, um, a number of people,
• 6:21
  Speaker 1: including your your buddy Professor Bob Schiller have been saying
• 6:25
  Speaker 1: stocks are expensive, and there are other people saying the
• 6:28
  Speaker 1: technology stocks and venture capital stocks and private equity are
• 6:32
  Speaker 1: in a bubble. What what's your perspective on that? First,
• 6:36
  Speaker 1: let's talk about a bubble. P M nastac is what
• 6:40
  Speaker 1: thirty now on the Yeah, maybe bass earning. I don't know,
• 6:44
  Speaker 1: p of P of the SMP five hundred is about sixteen. Yeah. No,
• 6:48
  Speaker 1: But I'm gonna I'm gonna tell you NASDAK and I'll
• 6:50
  Speaker 1: tell you why I do NASDACK at thirty because in
• 6:53
  Speaker 1: March of two thousand it was six hundred. So that
• 6:57
  Speaker 1: means that means no earnings, you know. And so if
• 7:01
  Speaker 1: you take a look at a graph um and by
• 7:04
  Speaker 1: the way, you know, I actually you know, I find
• 7:06
  Speaker 1: that on Bloomberg a graph of pe ratios on nazdac
• 7:09
  Speaker 1: and it just goes like this and then collapses like this,
• 7:12
  Speaker 1: And I tell people, now, that's a bubble. You're listening
• 7:16
  Speaker 1: to Masters in Business on Bloomberg Radio. My guest this
• 7:19
  Speaker 1: week Professor Jeremy Siegel, author of Stocks for the Long Run,
• 7:24
  Speaker 1: professor at Wharton at the University of Pennsylvania. Previously we
• 7:28
  Speaker 1: were talking about the impact of the macro economy on stocks,
• 7:34
  Speaker 1: but trying to time the two, trying to correlate the
• 7:36
  Speaker 1: two is very challenging. And in fact, um you mentioned
• 7:39
  Speaker 1: uh Indexers Vanguard, the big indexing shop, did a study
• 7:44
  Speaker 1: and they could not find a correlation between stock returns
• 7:48
  Speaker 1: and macroeconomic news releases. How do you reconcile the two,
• 7:52
  Speaker 1: at least from a timing perspective. Well, you know, there's
• 7:56
  Speaker 1: that famous sam Usen quote that the stock market has
• 8:00
  Speaker 1: predicted like eleven out of the last five recessions. Uh.
• 8:07
  Speaker 1: You know, one thing, we know, the market always goes
• 8:10
  Speaker 1: down in a recession, but it often goes down when
• 8:12
  Speaker 1: there isn't a recession. There's a lot of false alarms
• 8:16
  Speaker 1: with with the market. But um uh you know, I
• 8:21
  Speaker 1: I think the accumulation of events. I mean again, let's
• 8:25
  Speaker 1: let's go back to the crisis, Uh, the Lehman Brothers,
• 8:30
  Speaker 1: uh collapse, the stresses in those markets, I mean it,
• 8:36
  Speaker 1: it just kept on moving into the market and everyone
• 8:40
  Speaker 1: saw the economic fallout of that, and you fell sixty
• 8:44
  Speaker 1: five percent from October of two thousand seven until March
• 8:49
  Speaker 1: two thousand nine. Now, in my lifetime, I never had
• 8:53
  Speaker 1: seen that my parents lived through two where the decline
• 8:59
  Speaker 1: was eighty five, the worst in world history, and that
• 9:02
  Speaker 1: also was the worst economic contraction. So again, it's very
• 9:08
  Speaker 1: hard to predict these contractions. We can see them after
• 9:12
  Speaker 1: a fact, but there's no question that you know, the
• 9:16
  Speaker 1: market is behavior is is linked to those contracts. Clearly.
• 9:21
  Speaker 1: When the economy slows, profits slow, and when profits slow
• 9:24
  Speaker 1: and they investors are less willing to pay up for stocks,
• 9:29
  Speaker 1: they're paying them multiple Yeah, exactly. So so let's um,
• 9:33
  Speaker 1: let's ask the question how closely should investors follow the
• 9:39
  Speaker 1: macroeconomic background. Is it important to their day to day holdings,
• 9:44
  Speaker 1: is it important for their long term portfolios? What should
• 9:48
  Speaker 1: mom and pop do with this just fire hose of
• 9:52
  Speaker 1: economic news that comes out every week every month. Well,
• 9:56
  Speaker 1: you know, it's reflecting on what I said in in
• 9:58
  Speaker 1: the first section, like just buy and hold. Um, I've
• 10:03
  Speaker 1: gained a greater appreciation that it is important to look
• 10:08
  Speaker 1: at valuation. Uh, and we're gonna talk about pete ratios.
• 10:12
  Speaker 1: You know, the average around fifteen. But you know, in
• 10:15
  Speaker 1: March of two thousand, when you were at the peak
• 10:19
  Speaker 1: of that dot com bubble and the Nasdaq was selling
• 10:22
  Speaker 1: a five six times or anything, and and and and
• 10:25
  Speaker 1: and it was crazy. That's a time to be lighter
• 10:28
  Speaker 1: in stocks now. The interesting thing, Yeah, I mean a
• 10:32
  Speaker 1: lot of people said, well, Jeremy, you know you weren't.
• 10:34
  Speaker 1: Well what I said, it's very important when I said
• 10:37
  Speaker 1: I said tech stocks were crazy, I said the non
• 10:40
  Speaker 1: tech sector wasn't. I recall that people have given you grief.
• 10:45
  Speaker 1: Well he missed two thousand, But I remember you warning
• 10:49
  Speaker 1: very clearly. And you're known as a buy and hold,
• 10:51
  Speaker 1: long term guy. And I saw you on TV saying, hey,
• 10:55
  Speaker 1: the tech stocks has just gone off the rails. The
• 10:58
  Speaker 1: that sector of the market is just completely unhinged. And
• 11:03
  Speaker 1: I remember kind of saying, wow, if he thinks this
• 11:05
  Speaker 1: is pricey, he's a buy and hold guy, it's got
• 11:08
  Speaker 1: to really be price you know. Yeah, the the you know,
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  Speaker 1: the March tenth, which was the high March fourteenth, I
• 11:14
  Speaker 1: had an lead op ed piece in Wall Street Journal
• 11:17
  Speaker 1: big cap tech stocks are a sucker's bet. And I
• 11:21
  Speaker 1: looked at the biggest tech stocks, Yahoo, E, M, C, A, O,
• 11:27
  Speaker 1: l Uh, you know, Son Micro, none of those. Yeah,
• 11:33
  Speaker 1: they were all selling at you know, two hundred, three hundred,
• 11:35
  Speaker 1: five hundred six. I said, this is absolutely crazy. And
• 11:38
  Speaker 1: I said that, I mean, that was that what I said. Listen,
• 11:42
  Speaker 1: you know, I'm a bull on the market, and I
• 11:43
  Speaker 1: think the rest of the market isn't really all that overveil.
• 11:46
  Speaker 1: But you've got to get out of these And that's
• 11:48
  Speaker 1: an unusual statement from you, so very unusual. So you
• 11:51
  Speaker 1: said earlier that the market is slightly elevated and slight value.
• 11:57
  Speaker 1: But how do you how do you textualize that given
• 12:01
  Speaker 1: that rates are at zero and the ten years paying
• 12:04
  Speaker 1: two point Yeah, but that's that's also very important, and
• 12:10
  Speaker 1: that's one reason why even though we're slightly elevated. I mean,
• 12:14
  Speaker 1: if you take a look at what times earnings you are, yeah,
• 12:17
  Speaker 1: we're about eighteen um times earnings. This was a bad year.
• 12:23
  Speaker 1: I mean, the the oil coapps, the energy sector and
• 12:28
  Speaker 1: and the dollar going higher. Uh. You know, I have
• 12:31
  Speaker 1: people I talked to they said that that could have
• 12:33
  Speaker 1: clipped thirteen bucks off of the S ANDP earnings, So
• 12:36
  Speaker 1: that you know that that's a huge chunk, uh, you know,
• 12:40
  Speaker 1: and a lot of people are saying, you know, if
• 12:42
  Speaker 1: we don't get a repeat of that, and I do mean,
• 12:44
  Speaker 1: it goes back, but just don't repeat it. People are
• 12:46
  Speaker 1: talking about a hundred five next year, and by the way,
• 12:50
  Speaker 1: that puts US at sixteen sixteen and a half times
• 12:54
  Speaker 1: earnings UM not not terribly unreasoned not to you know,
• 12:57
  Speaker 1: in a low extraordinary, low interest rate world, that margin
• 13:03
  Speaker 1: between what's called the valuation of stocks and bonds is
• 13:07
  Speaker 1: still very much greater than the historical average. It's called
• 13:11
  Speaker 1: the equity risk premium, and economists have written about that
• 13:15
  Speaker 1: a long time. If you go through all of history,
• 13:18
  Speaker 1: it's about three to three and a half percent a
• 13:19
  Speaker 1: year that stocks are over bonds. Now when I look
• 13:22
  Speaker 1: ahead and I'm looking at around five UM, and that's
• 13:27
  Speaker 1: the premium you pay for stocks, that's what future returns
• 13:31
  Speaker 1: of stocks versus that is the expected. So basically after inflation,
• 13:37
  Speaker 1: I see around a six percent UH return on stocks
• 13:42
  Speaker 1: going forward, a little less than the six point seven
• 13:46
  Speaker 1: the historical average. But what you got on the tips
• 13:48
  Speaker 1: and then we're looking at rio after inflation, you got
• 13:52
  Speaker 1: fifty basis points on the ten year, a little over
• 13:55
  Speaker 1: one on on the thirty years, So you're looking that
• 13:58
  Speaker 1: margin six to one on is that five percent? And
• 14:01
  Speaker 1: that is a greater margin in favor of stocks than
• 14:06
  Speaker 1: the long run historic player. So, so let's talk a
• 14:08
  Speaker 1: little bit about your friend, Professor Bomb Shiller of Yale.
• 14:11
  Speaker 1: People may not realize this. You guys are lifelong friends
• 14:14
  Speaker 1: at m I T. Is that right, first year at
• 14:18
  Speaker 1: m I T. The first week of m I T
• 14:19
  Speaker 1: we won't with went to graduate school together in economics
• 14:23
  Speaker 1: and we hit off. The first year at m I T.
• 14:26
  Speaker 1: That was nineteen sixty seven. My god, I'm looking that's
• 14:29
  Speaker 1: forty eight years ago, almost getting to our fiftieth anniverse.
• 14:34
  Speaker 1: We've been very, very close friends. He was at Penn
• 14:37
  Speaker 1: when I was there. Uh, he stayed another ten years
• 14:41
  Speaker 1: before going to Yale, and so now of course he's
• 14:44
  Speaker 1: at Yale University. So in the last thirty seconds, um,
• 14:47
  Speaker 1: let's just briefly talk about you guys are actually long
• 14:51
  Speaker 1: term family friends. Your fit together when the Poconos at
• 14:56
  Speaker 1: the Jersey Shore, we visit each other. You know, we
• 15:00
  Speaker 1: both have two boys as sons, and uh, we've had
• 15:05
  Speaker 1: a wonderful relationship. This is Masters in Business on Bloomberg Radio.
• 15:09
  Speaker 1: I'm Barry Ridhults. My special guest this week is Professor
• 15:14
  Speaker 1: Jeremy Siegel. He teaches macroeconomics at Wharton at the University
• 15:18
  Speaker 1: of Pennsylvania we were discussing earlier. You're a long term
• 15:22
  Speaker 1: friend of Professor Bob Schiller, who is known for a
• 15:26
  Speaker 1: number of things, one of which is his cyclically adjusted
• 15:31
  Speaker 1: PE ratio, better known as the CAPE ratio, which has
• 15:35
  Speaker 1: shown that stocks are extremely overvalued. What what is your
• 15:40
  Speaker 1: take on CAPE? Well, you know, it's very interesting because
• 15:44
  Speaker 1: I've I've been looking and examining CAPE for a long
• 15:47
  Speaker 1: time and this is bary. This basic My conclusion um
• 15:52
  Speaker 1: CAPE has done a fantastic job at forecasting tenuere returns
• 15:58
  Speaker 1: until the last in years when I think it has
• 16:02
  Speaker 1: gone off the rails. It is not Bob's fault that
• 16:08
  Speaker 1: has gone off the rails. What has happened? Remember, he
• 16:11
  Speaker 1: goes all the way back to seventy one, where we
• 16:14
  Speaker 1: have or anything. Both Bob and I love to work
• 16:16
  Speaker 1: with long term series. He goes all the way back,
• 16:19
  Speaker 1: and you know, and and and looks at that. In
• 16:21
  Speaker 1: the nineteen nineties, fastby the Financial Counting Standing Board started
• 16:27
  Speaker 1: changing the way firms do their accounting stop options, but
• 16:35
  Speaker 1: particularly marked to market. That never used to be the case.
• 16:40
  Speaker 1: You never used to write down until you sold. Then
• 16:43
  Speaker 1: you would record either a gain or a loss. What
• 16:45
  Speaker 1: they did said is you gotta mark down whether you
• 16:48
  Speaker 1: sell or not. Now, what has happened as a result
• 16:53
  Speaker 1: is in the last two recessions. Now, the ninety the
• 16:56
  Speaker 1: two thousand one two was a relatively mildest recession of corps.
• 17:00
  Speaker 1: The next one was the deep crisis recession produced a
• 17:04
  Speaker 1: tremendous drop in earnings that were way exceeded what we
• 17:11
  Speaker 1: had seen in prior recessions. And that was an asset
• 17:16
  Speaker 1: balance sheet based drop. It was not the an operating drop,
• 17:21
  Speaker 1: which is what they used to record previously. So otherwards,
• 17:25
  Speaker 1: the holdings of companies, even though it was a temporary
• 17:28
  Speaker 1: drop in in sflue, they hadn't market and that shows
• 17:31
  Speaker 1: up as a giant drop in So what you got,
• 17:34
  Speaker 1: and and particularly that that jumped out at me because
• 17:37
  Speaker 1: actually the drop in earnings recorded in the two thousand
• 17:41
  Speaker 1: nine recession was many times worse than the nineteen thirties.
• 17:44
  Speaker 1: And again we have a hundred and forty years of history.
• 17:47
  Speaker 1: And I said, just a minute here, I mean, yeah,
• 17:49
  Speaker 1: this was bad, but you know it was two we
• 17:52
  Speaker 1: had drop in GDP. We only had about a six
• 17:56
  Speaker 1: percent drop in the last one, and yet the earnings
• 17:58
  Speaker 1: and then I discuss covered. Yes, it's the market to market.
• 18:02
  Speaker 1: All these firms started writing down all their UH assets
• 18:08
  Speaker 1: and taking it into earnings as they were mandated to do. Now,
• 18:10
  Speaker 1: the effect of that, very simply is that you have
• 18:14
  Speaker 1: in two thousand and two tho nine almost zero earnings
• 18:17
  Speaker 1: because it's that's right, that is that's in the denominator.
• 18:22
  Speaker 1: Don't forget, Bob takes the cyclically adjusted price earnings RACIO,
• 18:24
  Speaker 1: takes the simple average of the last ten years, no waiting,
• 18:29
  Speaker 1: no other adjustments are done. So for two years we've
• 18:32
  Speaker 1: got almost a zero in there, a very low number,
• 18:36
  Speaker 1: and when that's in the denominator, that pushes up the rats.
• 18:41
  Speaker 1: Everything look much more, very much more extensive. In fact,
• 18:44
  Speaker 1: so I followed month by month the cape ratio very closely, Bob.
• 18:50
  Speaker 1: It did, at the bottom of the bear market go
• 18:53
  Speaker 1: below the average UM, and then a few months later,
• 18:57
  Speaker 1: by May, and you know, the averages UH bottomed in March.
• 19:02
  Speaker 1: By May it already jumped above. And I said, Tom,
• 19:05
  Speaker 1: come on, I mean, we're we're we're not into UH,
• 19:09
  Speaker 1: you know, overvalued position on that, And of course it's
• 19:12
  Speaker 1: been going up ever since. But this is really the
• 19:14
  Speaker 1: first year we've had a correction of of any magnitude
• 19:18
  Speaker 1: uh that is affecting it. But he, in my opinion,
• 19:22
  Speaker 1: until we get that zero out of that average, which
• 19:26
  Speaker 1: will guess will be Bob is going to look and say,
• 19:31
  Speaker 1: oh wow, the Cape ratio is very, very over extend.
• 19:35
  Speaker 1: My My head of research is a gentleman named Mike
• 19:38
  Speaker 1: Batnick who's a big fan of yours and a fan
• 19:40
  Speaker 1: of stocks for the long run. And he gave me
• 19:42
  Speaker 1: this data point when we were doing some research into
• 19:46
  Speaker 1: this conversation. He said, stocks have been below their historical
• 19:51
  Speaker 1: CAPE average sixteen of the last three hundred and nine months.
• 19:56
  Speaker 1: Since that time, the total return on the SMP five
• 20:00
  Speaker 1: is nine. So clearly something in the cape some three
• 20:06
  Speaker 1: months the past let's call it twenty five years. It's
• 20:08
  Speaker 1: not working the way it's not. It is not working.
• 20:11
  Speaker 1: And again Bob is just using the received one in
• 20:14
  Speaker 1: Bobby's scene. I've written a paper on this. Actually it's
• 20:17
  Speaker 1: been considered one of the journals now and I hope
• 20:20
  Speaker 1: it will be published uh soon. It's called the Cape
• 20:23
  Speaker 1: Ratio a New Look, And I acknowledge how what a
• 20:27
  Speaker 1: great idea this is to average them, but then point
• 20:30
  Speaker 1: out what these the problem is And what I do, Barry,
• 20:34
  Speaker 1: is I use alternative definitions like operating earnings and National
• 20:39
  Speaker 1: income account earnings and I put those and develop a
• 20:43
  Speaker 1: cape ratio UH for that, and that shows much less
• 20:47
  Speaker 1: overvaluation in the market. So that that basically is where
• 20:51
  Speaker 1: I stand in terms of you know, why has the
• 20:54
  Speaker 1: cape ratio been not a good predictor over the last
• 20:58
  Speaker 1: four or five years? And it's been been because of
• 21:00
  Speaker 1: this change and accounting standards. This is Masters in Business
• 21:03
  Speaker 1: on Bloomberg Radio. I'm Barry rid Halts. My guest this
• 21:07
  Speaker 1: week on Masters in Business is Professor Jeremy Siegel of
• 21:11
  Speaker 1: the Wharton School of Economics at Is that the right title,
• 21:14
  Speaker 1: Wharton School of Economics. Actually, it's just the Wharton School
• 21:17
  Speaker 1: used to be the Wharton School of Finance, but now
• 21:20
  Speaker 1: they've just shortened the Wharton School of the University of
• 21:22
  Speaker 1: pennsylis at University of Pennsylvania. So, so you wrote a
• 21:26
  Speaker 1: book which was consistently in all sorts of lists of
• 21:30
  Speaker 1: best investment books of all time, called Stocks for the
• 21:34
  Speaker 1: Long Run. Let's talk a bit about the case for equities.
• 21:38
  Speaker 1: What is the case for equities? Yes, I started the
• 21:43
  Speaker 1: research actually seven good time Actually it was very interesting. Um.
• 21:51
  Speaker 1: One of my colleagues at Wharton got a phone call
• 21:53
  Speaker 1: from the New York Stock Exchange, uh, wanting to do
• 21:57
  Speaker 1: a history of the exchange on New York Stock ex
• 21:59
  Speaker 1: Change was found seventeen two. You co authored a book
• 22:02
  Speaker 1: on that revolution on Wall Street. Now that what's interesting
• 22:05
  Speaker 1: is when when Marshall Bloom, which is just retired as
• 22:09
  Speaker 1: a faculty member at Edwardon he knew everything about history
• 22:12
  Speaker 1: and in historical I went up he said, call me,
• 22:15
  Speaker 1: said Jeremy, you're interested in the markets. You want to
• 22:16
  Speaker 1: do this book? And I said yeah, So I said,
• 22:18
  Speaker 1: I'll tell you what I want to do. Marshall. I
• 22:19
  Speaker 1: want to look at the longest history of stocks in
• 22:22
  Speaker 1: the US as I can. And he said, go ahead
• 22:25
  Speaker 1: and do that. I got it. I got this stuff together.
• 22:28
  Speaker 1: We we we put it in the book and well
• 22:31
  Speaker 1: in the New York stockt en get back and said, Jeremy,
• 22:33
  Speaker 1: your stuff is fascinating, but it makes it too long.
• 22:37
  Speaker 1: And um and and and Marshall Bloom and one of
• 22:40
  Speaker 1: the most I think generous gestures he said to me, Jeremy,
• 22:44
  Speaker 1: this stuff you can make your own book and just
• 22:46
  Speaker 1: joined me as a co author on the institutional side
• 22:49
  Speaker 1: of what happened since uh seventeen ninety two, which is
• 22:53
  Speaker 1: when the New York Stock and James was founded. I
• 22:55
  Speaker 1: got stock market data from eighteen o two, so I
• 22:57
  Speaker 1: couldn't quite get the first ten years, but I got
• 23:00
  Speaker 1: it after that, and uh, that was actually the beginning
• 23:04
  Speaker 1: of the book. Uh, the stocks for the long run.
• 23:07
  Speaker 1: Now here's the major idea that I think that I
• 23:09
  Speaker 1: think really made it a powerful new book. Not just
• 23:13
  Speaker 1: a long term data and not just the fact that
• 23:16
  Speaker 1: stocks return six and after seven percent after inflation overall
• 23:20
  Speaker 1: long term periods. What I showed was when you stretch
• 23:24
  Speaker 1: out your holding period up to you know, fift twenty
• 23:30
  Speaker 1: thirty years, stocks actually we're safer than bonds, at a
• 23:36
  Speaker 1: lower variance and lower volatility than bonds. And I made
• 23:41
  Speaker 1: one of the biggest criticisms I have of standard portfolio
• 23:45
  Speaker 1: theory that we teach in in our business school. It's
• 23:48
  Speaker 1: all based on one year measures of risk. We all
• 23:51
  Speaker 1: do one year, we grind it out and all that
• 23:54
  Speaker 1: and assume that that's okay if we extended in the future.
• 23:57
  Speaker 1: But it isn't for stocks because stocks have a property
• 24:00
  Speaker 1: which is now almost uniform It wasn't at that time
• 24:03
  Speaker 1: when I first throwed it, but afterwards now among academics
• 24:06
  Speaker 1: is almost in informally agreed. It has a property called
• 24:09
  Speaker 1: mean reversion, reverting to the mean. So you know, we
• 24:13
  Speaker 1: can have a couple of good years of stocks and
• 24:15
  Speaker 1: if it gets way above it'll come back down. A
• 24:17
  Speaker 1: couple of bad years, it comes back up. Mean reversion
• 24:21
  Speaker 1: means that volatility and longer periods of time are relatively
• 24:26
  Speaker 1: less than in shorter periods of time because you're going
• 24:29
  Speaker 1: back to the mean. So let let me rephrase mean
• 24:33
  Speaker 1: reversion for people who don't have any sort of little
• 24:36
  Speaker 1: math phobio or don't have a math background. If we
• 24:39
  Speaker 1: know stocks are gonna return seven percent a year, anytime
• 24:43
  Speaker 1: we have a couple of years where they're returning considerably
• 24:46
  Speaker 1: less than that, we should expect the next few years
• 24:49
  Speaker 1: to be on the other side of the seven percent,
• 24:52
  Speaker 1: or the other way around. When you have a period
• 24:54
  Speaker 1: like where they're returning high double digits, hey, you have
• 25:00
  Speaker 1: to expect the next few years after that you're gonna
• 25:02
  Speaker 1: be way below seven percent. Exactly Now. I wish it
• 25:05
  Speaker 1: could be just a couple of years. Sometimes it's longer
• 25:07
  Speaker 1: and have a string. Yeah, you have a string of
• 25:09
  Speaker 1: good years. I mean actually from eighty two now we've
• 25:17
  Speaker 1: had we had some interruptions, but to two thousand, the
• 25:20
  Speaker 1: average real returns on the market were nearly fourteen percent
• 25:23
  Speaker 1: a year. That was more than twice the average. I
• 25:26
  Speaker 1: mean that that shows you. And then we got, you know,
• 25:29
  Speaker 1: we got to the most overvalued position ever. In March
• 25:32
  Speaker 1: of two thousand, we had a PE of thirty for
• 25:35
  Speaker 1: the S and P five hundred. We had a PE
• 25:38
  Speaker 1: for a hundred of the SNP tech stocks, and as
• 25:42
  Speaker 1: I mentioned in an early your segment, we had a
• 25:44
  Speaker 1: P of six hundred for Nastac. So you can really
• 25:47
  Speaker 1: get extended. If we all knew two years it would
• 25:49
  Speaker 1: turn around, it would make us feel a lot better.
• 25:52
  Speaker 1: But sometimes it can be three, four or five years.
• 25:55
  Speaker 1: But if you are thirty years and don't forget think
• 25:59
  Speaker 1: of retirement fun I mean, you know, we put in
• 26:02
  Speaker 1: I RA s we can stand four or five bad
• 26:05
  Speaker 1: years followed by four or five good years and then
• 26:07
  Speaker 1: even better years. And if we know that return over
• 26:11
  Speaker 1: that longer period of time is gonna be bonds by
• 26:13
  Speaker 1: three or four or five percent a year, Wow, that
• 26:16
  Speaker 1: becomes the asset of choice for the long run. So
• 26:18
  Speaker 1: so let's put that eighty two to two thousand, that
• 26:21
  Speaker 1: secular bile market that lasted eighteen years return fourteen percent
• 26:25
  Speaker 1: a year into context. The previous sixteen years from nineteen
• 26:29
  Speaker 1: sixty six flat essentially basically, but that's nominally. Once you
• 26:36
  Speaker 1: take inflation to adjust, it was virtually a zero, right,
• 26:40
  Speaker 1: And then you turn around you say two thousand to
• 26:43
  Speaker 1: two thousand thirteen essentially flat, also not founding dividends, and
• 26:48
  Speaker 1: you had another period of high inflation right in the
• 26:50
  Speaker 1: middle of that. So when you talk about mean reversion
• 26:53
  Speaker 1: over long periods of time, ten fifteen years, you can
• 26:56
  Speaker 1: have no returns, fabulous returns for ten in fifteen years,
• 27:01
  Speaker 1: and then more no returns from another ten fifteen years.
• 27:04
  Speaker 1: But also then and you have to be careful about
• 27:07
  Speaker 1: valuation again. The bad period that that we had since
• 27:11
  Speaker 1: two thousand was because we were at the most overvalued point. Uh.
• 27:14
  Speaker 1: The great period from a D two on started from
• 27:17
  Speaker 1: an extremely undervalued, went to fairly valued and then stretched
• 27:21
  Speaker 1: all the way upright, same thing nineteen sixty six. You
• 27:24
  Speaker 1: are a twenty year bullmarket from World War two and
• 27:26
  Speaker 1: overvalued in sixty six fifty fifty very pricey. Those are
• 27:30
  Speaker 1: the like you mentioned the concentrated stocks in two thousand,
• 27:34
  Speaker 1: very very similar concept. So so let's let me push
• 27:37
  Speaker 1: back a little bit and give you an opportunity. Response
• 27:40
  Speaker 1: to criticism, The Wall Street Journal had an article saying, well,
• 27:44
  Speaker 1: stocks for the long run has a lot of survivorship bias.
• 27:46
  Speaker 1: We really don't know. You know, there aren't a lot
• 27:49
  Speaker 1: of great records from the eighteen hundreds. Yeah, all we
• 27:52
  Speaker 1: know are a handful of stocks that survive. What about
• 27:54
  Speaker 1: the hundreds of other stocks that went out of business?
• 27:58
  Speaker 1: What's the what's the counterarcad So so it's interesting from
• 28:02
  Speaker 1: eighteen seventy one on very careful to remove uh any
• 28:08
  Speaker 1: survivorship bias in whereas every stock is there if it
• 28:12
  Speaker 1: went bankrupt in zero, we put it in a zero.
• 28:15
  Speaker 1: We don't just do the survivors. Was the journal. A
• 28:19
  Speaker 1: couple of people had questioned my earlier data eighteen o
• 28:23
  Speaker 1: two to eighteen seventy one, which was one of the
• 28:25
  Speaker 1: innovative things that I added, and they pointed out that
• 28:28
  Speaker 1: those series might have um some survivorship ballot bias. Now,
• 28:34
  Speaker 1: fortunately a number of academics getsman um uh and others
• 28:39
  Speaker 1: at will Getsman at at uh UM and ibits and
• 28:42
  Speaker 1: if its in at Yale Getsman at Columbia, you might
• 28:45
  Speaker 1: have even maybe talked to them on your program. Uh.
• 28:48
  Speaker 1: Everyone knows the Ibbotson series. And they went back to
• 28:52
  Speaker 1: the newspapers and they actually dug down into every stock
• 28:57
  Speaker 1: from around eighteen ten onward. And you know what the
• 29:02
  Speaker 1: biggest uncertainty is there is we It was they didn't
• 29:05
  Speaker 1: have good records of dividends. But if you apply a
• 29:09
  Speaker 1: dividend rate among the ones that we do know to
• 29:12
  Speaker 1: the ones we don't know, it was very very close
• 29:16
  Speaker 1: to the number that I actually got. So I think
• 29:21
  Speaker 1: we you know, again, there's no no bias from eighteen
• 29:23
  Speaker 1: seventy one onwards. We produced six and a half percent
• 29:26
  Speaker 1: from eighteen in real time with the zeros. Uh. Now
• 29:32
  Speaker 1: there's another interesting question about survivorship bias, and that is
• 29:34
  Speaker 1: relative to countries, because people say, well, look at you know,
• 29:38
  Speaker 1: the most successful country. What happens if you went into
• 29:41
  Speaker 1: Russia or Argentina and all this? And there are definitely
• 29:44
  Speaker 1: a few that don't. And three British economists UH Elroy Dimpson,
• 29:50
  Speaker 1: Mike Staunton, um uh and UH Terry marsh in two
• 29:56
  Speaker 1: thousand did an investigation of a hundred year is a
• 30:00
  Speaker 1: return in seventeen different countries and the interestingly enough from
• 30:06
  Speaker 1: and I'm updating it now to the first published in
• 30:09
  Speaker 1: two thousands, but I'm updating it. Do you know that
• 30:12
  Speaker 1: the United States was not the best from over the
• 30:17
  Speaker 1: last hundred and fifteen years? And one country just shocks
• 30:20
  Speaker 1: people out of their mind. South Africa had higher and
• 30:23
  Speaker 1: this is in the US hours. This is converting South
• 30:26
  Speaker 1: Africa and Australia. US was number three. That's fascinating. Let's
• 30:32
  Speaker 1: let's since you bring up emerging markets, what do you
• 30:35
  Speaker 1: think the role of emerging markets should be in infinitely?
• 30:41
  Speaker 1: I think they definitely have a role. So you're different
• 30:43
  Speaker 1: from people like John Bogel who says, add this currency
• 30:47
  Speaker 1: risk and the other problems just keep it at home.
• 30:49
  Speaker 1: You like a global asset allocation first of all, that
• 30:52
  Speaker 1: that's an interesting thing you for the developed world. You
• 30:57
  Speaker 1: can hedge currency risk today for zero price because the
• 31:02
  Speaker 1: interest rates are when their interest rates are the same
• 31:05
  Speaker 1: between the two countries, currency risk can be hitched completely
• 31:10
  Speaker 1: at no cost. It is expensive to heads currency risk
• 31:13
  Speaker 1: in the emerging markets. To be sure, there's no question.
• 31:17
  Speaker 1: I think it's like twelve in Brazil and India, probably
• 31:22
  Speaker 1: six or seven percent a year, and that can drag
• 31:24
  Speaker 1: your earnings down. That's why you have to make sure
• 31:27
  Speaker 1: that one you're not buying over priced currency and to
• 31:30
  Speaker 1: you're not buying over priced stocks. And believe it or not,
• 31:34
  Speaker 1: today when I look at emerging markets, wow, I see
• 31:38
  Speaker 1: both of those at being very low. Currencies are low
• 31:41
  Speaker 1: and there prices are low relatives of their earnings. I
• 31:45
  Speaker 1: think in the next three to five years, emerging markets
• 31:49
  Speaker 1: will be among the very best performing sectors. We've been
• 31:53
  Speaker 1: speaking with Professor Jeremy Siegel of the University of Pennsylvania
• 31:58
  Speaker 1: Wharton School. If you and ay this conversation, be sure
• 32:01
  Speaker 1: and check out our podcast extras, where we let the
• 32:04
  Speaker 1: digital tape keep rolling and continue chatting. Be sure and
• 32:07
  Speaker 1: check out my daily column on Bloomberg View dot com.
• 32:11
  Speaker 1: Follow me on Twitter at rid Halts. You can see
• 32:15
  Speaker 1: more of Professor Siegel's writings at Jeremy Siegel dot com,
• 32:20
  Speaker 1: or just pick up stocks for the long run. I'm
• 32:22
  Speaker 1: Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. Okay,
• 32:28
  Speaker 1: this is the podcast portion I don't know why I
• 32:30
  Speaker 1: do that every time I stretched my arms out. Okay,
• 32:34
  Speaker 1: this is a international symbol for podcasts. If I forget
• 32:37
  Speaker 1: to say this later, thank you so much for doing this,
• 32:40
  Speaker 1: Professor Siegel. We've been back and forth for a while
• 32:43
  Speaker 1: trying to arrange this year in Philadelphia, and you're only
• 32:46
  Speaker 1: in New York on on rare occasions. Um Man, there
• 32:50
  Speaker 1: are so many questions I did not get to. So
• 32:54
  Speaker 1: why don't Why don't we pick up where we left off?
• 32:57
  Speaker 1: So we have owned, I want to say, for about
• 33:01
  Speaker 1: four or five years a Wisdom Tree Japan yen hedged funds,
• 33:10
  Speaker 1: which when we first owned it it hardly traded, nobody
• 33:14
  Speaker 1: paid attention to it. And then outcomes at a bonomics
• 33:18
  Speaker 1: and this thing just goes straight upright, the yend collapses,
• 33:23
  Speaker 1: the Nike Dow skyrockets. There's no offsetting yeah currency yet
• 33:30
  Speaker 1: because I's almost a no brainer, doesn't and it and
• 33:32
  Speaker 1: it became a fifth ye or sixty billion dollar funds.
• 33:36
  Speaker 1: I don't want to say overnight, but very When we
• 33:39
  Speaker 1: first put money into it was five or six billion dollars.
• 33:42
  Speaker 1: I think I got the three we didn't. We didn't
• 33:44
  Speaker 1: get to sixty, but it exploded, just drive through the roof.
• 33:50
  Speaker 1: And then we did one for Europe that has been
• 33:53
  Speaker 1: enormous called hedge. Now Europe is tougher because you can
• 33:57
  Speaker 1: hedge everything, so the like Swiss, ser Land and Great Britain.
• 34:01
  Speaker 1: But yeah, countries that aren't in the euro but are
• 34:04
  Speaker 1: important parts of the European economy. So it's about what
• 34:07
  Speaker 1: is it about? Heage, Well, I mean we if if
• 34:11
  Speaker 1: you want to take just euro Zone and you know,
• 34:15
  Speaker 1: take the UK, is something different in Switzerland kind of hard? Yeah,
• 34:19
  Speaker 1: you know that. That's that's true. You don't get you
• 34:22
  Speaker 1: don't get those two segments. But clearly that also became
• 34:26
  Speaker 1: enormously popular with Mario. Draggy said, you know what, I
• 34:30
  Speaker 1: think we need to bring the euro downe And that's
• 34:35
  Speaker 1: so that that also went from a one or two
• 34:38
  Speaker 1: billion dollar fund all the way. So how did you
• 34:41
  Speaker 1: get involved with Wisdom Tree? How long have you been
• 34:44
  Speaker 1: a part of that? Because that's a Jonathan stun So.
• 34:49
  Speaker 1: His father, soul Science Steinberg, won a big insurance company
• 34:54
  Speaker 1: and he went to work. Oh really, he ran, I'm
• 34:57
  Speaker 1: doing this from memory reliance. That's right, buddy, was the
• 35:01
  Speaker 1: General council years ago, Yes, that's right. And that was
• 35:04
  Speaker 1: a big shot. That was a big shop. Um, and
• 35:08
  Speaker 1: he was he had been in the markets, uh, in
• 35:12
  Speaker 1: in many different ways. I think he was with Leasco
• 35:16
  Speaker 1: at one point. I mean he he arrivaled IBM. He
• 35:19
  Speaker 1: he went in and said, you know, IBM always leased
• 35:21
  Speaker 1: their computers and uh, they wouldn't let you buy their
• 35:25
  Speaker 1: computers in the nineteen fifties. That was part of their policy.
• 35:28
  Speaker 1: And the Supreme Court said you can't do that, but
• 35:30
  Speaker 1: no one else changed and he actually went in got
• 35:33
  Speaker 1: funding to buy them and then undercut IBM on the
• 35:39
  Speaker 1: exactly exactly. So I mean he's been in the market
• 35:43
  Speaker 1: one one way or the other. And uh again he
• 35:45
  Speaker 1: was at Warden way before I was at Warden. But
• 35:48
  Speaker 1: his son went to Warden. Um and Jonathan Steinberg and um,
• 35:54
  Speaker 1: we had met each other at occasion. Um. Uh you
• 35:59
  Speaker 1: know Jonathan in Steinberg's wife, I do not, Maria Bartoma.
• 36:03
  Speaker 1: Oh that's right. I didn't know that. Yes, And I
• 36:07
  Speaker 1: actually had Maria in a class that I did in
• 36:11
  Speaker 1: New York about learning financial markets for financial reporters, way
• 36:15
  Speaker 1: back before she became famous. So how did you meet Steinberg?
• 36:18
  Speaker 1: Was he a student of yours or just he was
• 36:20
  Speaker 1: not in my class, so he didn't I didn't. I
• 36:23
  Speaker 1: knew of him, but didn't know much of him. And basically,
• 36:27
  Speaker 1: um um. He called me up. He had a financial magazine.
• 36:33
  Speaker 1: He said, Jeremy, would you like to do some columns
• 36:35
  Speaker 1: on economics? And he vaguely remember that magazine about Yeah,
• 36:39
  Speaker 1: I'm trying to remember, zackly what the title was. Um uh,
• 36:43
  Speaker 1: not trader but something else, Yeah, something about investing. It
• 36:47
  Speaker 1: was mostly in small companies, and obviously when the when
• 36:50
  Speaker 1: the market went puff in two thousand, that had difficulty.
• 36:54
  Speaker 1: Um uh. And Kiplinger called me up that he had
• 36:57
  Speaker 1: told always rights Kipling and now I read a column
• 37:00
  Speaker 1: every other month and Kipling here um but which was
• 37:03
  Speaker 1: a continuation of that. But so I knew Jonathan a
• 37:05
  Speaker 1: little bit. And Jonathan called me up back in two
• 37:08
  Speaker 1: thousand two. Uh, he said, Jeremy. He said, listen, you
• 37:14
  Speaker 1: you've been having questions about cap weighted indsease. You know
• 37:17
  Speaker 1: after the bust. I said, yeah, I was all in
• 37:20
  Speaker 1: tech because it was so big, it was so much,
• 37:22
  Speaker 1: and I wanted to get out of tech. And he said, listen,
• 37:25
  Speaker 1: we're developing some indexes that instead of waiting by market cap,
• 37:32
  Speaker 1: you wait by earnings or dividends, also known as smart data,
• 37:36
  Speaker 1: well now known as smart data. Back then it was
• 37:39
  Speaker 1: fundamental indexing because it was based on a fundamental index
• 37:45
  Speaker 1: either earnings dividends. Now people have extended that the sales
• 37:48
  Speaker 1: and other concepts of that. We've had Rob or not
• 37:51
  Speaker 1: Rob Research Affiliates. Research Affiliates actually came out with the
• 37:56
  Speaker 1: first or one, the Raffie one thousand. We followed him
• 38:00
  Speaker 1: with with others. He has a more complicated formula. I
• 38:02
  Speaker 1: know Rob very very well smart, very smart guy. I
• 38:06
  Speaker 1: like I like him or not and as you you
• 38:08
  Speaker 1: mind him known, I mean it's public record. Um, there
• 38:11
  Speaker 1: was a little little intellectual property. Everybody was happy. And
• 38:18
  Speaker 1: now wisdom Tree is a big success, would you say
• 38:20
  Speaker 1: sixty billions? And back of the envelope their two point
• 38:26
  Speaker 1: two billion market cap and according to something I read
• 38:30
  Speaker 1: not too long ago, you're a two percent holder of
• 38:33
  Speaker 1: wisdom Tree, which makes you a forty five million dollar man.
• 38:36
  Speaker 1: Is do you feel like you know it's been really
• 38:40
  Speaker 1: good for me? I I'm I feel very fortunate. I
• 38:45
  Speaker 1: you know, it's nothing that you're selling anytime soon. It's
• 38:48
  Speaker 1: just even though I have I have, I've sold a
• 38:52
  Speaker 1: lot of it. I still hold hold it, hold it.
• 38:54
  Speaker 1: My heart beat still stocks for the long run, jour selling.
• 38:59
  Speaker 1: But you're you're, you're, you're diversifying. So Barrey, let me
• 39:01
  Speaker 1: tell you all right, so let me let's let's be
• 39:03
  Speaker 1: very frank. So let's let's go through the story, because
• 39:06
  Speaker 1: that tells you a little bit about where you know,
• 39:08
  Speaker 1: that's a concentrated position. That's what I mean. You have dollars,
• 39:15
  Speaker 1: you don't want your networking one stop. So uh, that's
• 39:20
  Speaker 1: so I'm diversified out. I still held a way overweight
• 39:22
  Speaker 1: in that stock. But so I'll go through this. Um
• 39:26
  Speaker 1: uh so I he said, Jeremy, would you check this.
• 39:30
  Speaker 1: We've got some preliminary data. Looks good. And I had
• 39:33
  Speaker 1: a real good research assistant that helped me do Future
• 39:36
  Speaker 1: for Investors one of my books. Also, his name is
• 39:38
  Speaker 1: Jeremy Schwartz, which now, by the way, director of research
• 39:42
  Speaker 1: at Wisdom Tree. And he looked at that data. We
• 39:45
  Speaker 1: looked at that Dad and said, wow, this beats cap
• 39:48
  Speaker 1: waiting on a risk return page. Reported back to them
• 39:52
  Speaker 1: and they said, you know, that's what we were finding.
• 39:54
  Speaker 1: But you obviously have all the statistical techniques on that. Uh.
• 39:58
  Speaker 1: He said, well, I'm gonna tell a little bit where
• 40:00
  Speaker 1: we're going. We got Michael Steinhardt to fund a company
• 40:05
  Speaker 1: called Index Development Partners. We're going thinking of launching a
• 40:10
  Speaker 1: set of ETFs based on fundamental indexing. Um, would you
• 40:16
  Speaker 1: like to be an advisor? Uh? And uh actually started
• 40:20
  Speaker 1: me out. I was also a board member on that,
• 40:23
  Speaker 1: and I said yes. I said, I really, I you know,
• 40:28
  Speaker 1: after the the dot com crash, I said, if cap
• 40:32
  Speaker 1: waited has flaws, the huge flaws, huge flaws, huge flaws.
• 40:36
  Speaker 1: I mean, you know here I had, you know, I mean,
• 40:39
  Speaker 1: let's face it. I was in the first two or
• 40:41
  Speaker 1: three editions. It's talks for a long one. I was
• 40:43
  Speaker 1: a huge Vanguard fan. Van Guard paid me commissions for
• 40:50
  Speaker 1: every dollar I probably of their index fund. I so
• 40:53
  Speaker 1: I would be rich from that. They're up to three
• 40:55
  Speaker 1: trillion dollars. I know they're there. I listen, Greedy just
• 41:00
  Speaker 1: gets one bogel and I I love him. I think
• 41:03
  Speaker 1: he's great. And you know, we've had a little difference.
• 41:05
  Speaker 1: He said, Jeremy, I'm not happy you went on too
• 41:07
  Speaker 1: the fundamental route. He didn't stay you know that. I
• 41:10
  Speaker 1: mean he's you've had him on, I have no, I've
• 41:13
  Speaker 1: had had him. I've had Jack Brennan, who's the chairman.
• 41:17
  Speaker 1: Why don't you get bog You gotta get Bogel. I
• 41:19
  Speaker 1: would love to get Bogel, except to have to slept
• 41:21
  Speaker 1: into that old creek. He doesn't really try travel that much?
• 41:25
  Speaker 1: Was he? Valley Forge Pence. Yeah, so I've actually spoken
• 41:29
  Speaker 1: to people here and said, let's do a field trip
• 41:32
  Speaker 1: to Pennsylvania. Will listen. There's only one Bogel he's not
• 41:35
  Speaker 1: getting I think, you know, I don't know. Mike Steinhardt
• 41:40
  Speaker 1: is another one i'd love to speak to. I find
• 41:42
  Speaker 1: him absolutely fast. Ask him, Um, Michael, all right, you'll
• 41:47
  Speaker 1: make an introduction, make an introduction. You know, I know
• 41:50
  Speaker 1: Michael personally. I actually now. Michael Steinhardt is another Warton grad.
• 41:56
  Speaker 1: Not surprising, not surprisingly, also someone I did I knew of,
• 42:00
  Speaker 1: but did not know. So you know, it was like
• 42:03
  Speaker 1: Jonathan I met in a few occasions because being wife
• 42:06
  Speaker 1: Maria my class and a few occasions. Michael, I I
• 42:10
  Speaker 1: don't I don't even remember meeting. Of course I knew
• 42:12
  Speaker 1: about him, um, and and another fascinating guy, really interested stories.
• 42:18
  Speaker 1: He's quite a fascinating guy. Um. And he's also written
• 42:22
  Speaker 1: a book, by the way, I think, basically a book
• 42:25
  Speaker 1: of his his life and investing, and it's also very fascinating.
• 42:30
  Speaker 1: I'm gonna have to pull that. Yeah, he is a
• 42:32
  Speaker 1: fascinating guy. We we become quite friendly with him. My
• 42:36
  Speaker 1: wife and I a uh through wisdom treating his position's
• 42:39
  Speaker 1: chairman of the board. So, so Jonathan Steinberg was CEO,
• 42:43
  Speaker 1: and you're on the board of advisors. He's the check. Yeah,
• 42:45
  Speaker 1: I'm on basically an advisor. I'm no longer on the
• 42:47
  Speaker 1: board of uh uh directors directors so for various reasons.
• 42:53
  Speaker 1: I I stayed there for about one year, but I'm
• 42:55
  Speaker 1: senior investment strategy advisor. And you know, he said come on,
• 43:00
  Speaker 1: and you know part of it was options, you know,
• 43:03
  Speaker 1: tech companies and all that, um um. So uh Index
• 43:09
  Speaker 1: Development Partners was trading as the stump company from his
• 43:13
  Speaker 1: original company, so it was trading at four cents of share.
• 43:17
  Speaker 1: Really yeah, so all that so let me just mention
• 43:23
  Speaker 1: to you because it's the member of public record, Sawing
• 43:26
  Speaker 1: had four cents of share when it was announced that
• 43:31
  Speaker 1: you know, Michael Steinhard had funded were changing Index Development
• 43:34
  Speaker 1: and I joined it. It closed the next day. At
• 43:40
  Speaker 1: there you go. That's a good return right there. It
• 43:43
  Speaker 1: subsequently went up to ten and then crashed to about
• 43:47
  Speaker 1: forty cents in the crisis. So and where is it now?
• 43:52
  Speaker 1: So now it's fifteen alright, so it actually was as
• 43:57
  Speaker 1: high as twenty seven since but this tremendous down draand
• 44:01
  Speaker 1: you were day trading this the whole time. I don't
• 44:04
  Speaker 1: never date traded this. I did that trade trade did no.
• 44:09
  Speaker 1: So I mean we all of us went through a
• 44:11
  Speaker 1: roller coaster. So as you started going up, you know,
• 44:15
  Speaker 1: I said, listen to my gut, Yeah, I said, And
• 44:18
  Speaker 1: as we said, I mean, I'm stocked to the long run.
• 44:20
  Speaker 1: But I I didn't have to. You have to the
• 44:25
  Speaker 1: volatility of stomach jarning. Now here's the maybe funny isn't
• 44:29
  Speaker 1: the right word, but here's the um interesting parallel. Think
• 44:33
  Speaker 1: about every tech company and every twenty eight year old
• 44:37
  Speaker 1: software engineer, project manage or whatever at E. Mc dell. Yeah,
• 44:44
  Speaker 1: who go through the whole Intel, Son, Oracle, Microsoft, These
• 44:48
  Speaker 1: got kids in their twenties and thirties suddenly are worth
• 44:52
  Speaker 1: tens of millions, hundreds of millions of dollars. Same thing happened.
• 44:55
  Speaker 1: And then watching a drop. Well, yeah, that's that's that's right. Uh.
• 45:01
  Speaker 1: And in fact, wisdom Tree and it's and it's and
• 45:05
  Speaker 1: I think at that time it was uh it was
• 45:07
  Speaker 1: paint Is wisdom Tree. We changed our name from Index
• 45:09
  Speaker 1: Development Partners to Wisdom Tree. But we're talking about a
• 45:12
  Speaker 1: ninety five cent drop from nearly ten nine five. That
• 45:21
  Speaker 1: was well, you know that was yeah you so yeah,
• 45:29
  Speaker 1: so you know, I it was quite a ride. But
• 45:33
  Speaker 1: you know, you know, truthfully, as I say, um uh
• 45:38
  Speaker 1: to me my teaching, I mean, I I never was
• 45:41
  Speaker 1: a guy. I mean, I owned one car. It's not
• 45:43
  Speaker 1: a fancy car. I'm not. I'm not a real expensive
• 45:47
  Speaker 1: guy that has real expensive taste. I mean. And the
• 45:50
  Speaker 1: fact that I've become better off than I had ever
• 45:52
  Speaker 1: imagined really gives me an opportunity to be charitable. And
• 45:55
  Speaker 1: that's what I'm doing. Uh, and I'm very thankful for that. So,
• 45:59
  Speaker 1: so let talk a little bit about um, that's really
• 46:02
  Speaker 1: a fascinating set of stories. Let's talk a little bit
• 46:05
  Speaker 1: about the concept of indexing. And we've been having this
• 46:10
  Speaker 1: debate back and forth in my office a right, So,
• 46:14
  Speaker 1: through a random twist of fate, the first major indexes
• 46:21
  Speaker 1: are set up cap weighted. Right, Well, yeah, I mean, well,
• 46:25
  Speaker 1: twist of fate. Uh, it's there's a random or what
• 46:29
  Speaker 1: was So there's two forces about there. One it's um,
• 46:34
  Speaker 1: it's almost a natural weighting in the sense of all right,
• 46:37
  Speaker 1: I'm gonna buy all the stocks, but you know we'll
• 46:39
  Speaker 1: go up and down. Well, obviously I gotta buy buy
• 46:42
  Speaker 1: more of a big stock than a widow. So let
• 46:46
  Speaker 1: me just look at the market capitalization and by relative
• 46:49
  Speaker 1: to that. The good thing about that waiting is that
• 46:52
  Speaker 1: if the stock goes up, you don't have to sell
• 46:54
  Speaker 1: or buy because it's automatically reweighted in your portfolio exactly
• 46:57
  Speaker 1: the same. That makes it extre really convenient. But secondly,
• 47:03
  Speaker 1: if the market is efficient, we economist had proved cap
• 47:08
  Speaker 1: weighted portfolios are the best optimal portfolios for risk return.
• 47:14
  Speaker 1: So let's repeat that. If the market is efficient, so
• 47:18
  Speaker 1: that all the information is impounded in the price. All right,
• 47:23
  Speaker 1: so is the most efficient. It is the most efficient.
• 47:27
  Speaker 1: Any other waiting will give you a worse risk return
• 47:30
  Speaker 1: tradeoff then to cap. So other words, on a risk
• 47:32
  Speaker 1: adjusted return, cap weighted is the most efficient if the
• 47:35
  Speaker 1: market is efficient. Now, what we see is there are
• 47:38
  Speaker 1: times when the market is mostly efficient, but during those
• 47:42
  Speaker 1: boom bus periods, that's where things get a little crazy.
• 47:46
  Speaker 1: So back to the two thousand year, as you discussed,
• 47:50
  Speaker 1: when the SMP five hundred is trading at thirty or forty,
• 47:54
  Speaker 1: the tech sector at a hundred and NASTAC at six.
• 47:57
  Speaker 1: So that means that that means that a handful of
• 48:00
  Speaker 1: ox are just out oversized within the and if you're
• 48:04
  Speaker 1: a cap weight weight, you can't sell those. You gotta
• 48:07
  Speaker 1: hold them, even though you know this is crazy. If
• 48:11
  Speaker 1: you're cap weighted, you gotta hold them. Meaning the index
• 48:14
  Speaker 1: portfolio construction is going to be wildly overweighted on the
• 48:18
  Speaker 1: most overpriced stocks by definitely. So now here's the argument
• 48:24
  Speaker 1: that we've been having in the office. So that efficiency,
• 48:28
  Speaker 1: that coincidence. Back when funds first index is first started
• 48:33
  Speaker 1: being created, we really didn't have the full on technology
• 48:37
  Speaker 1: to slicindise everything and look at things by book value
• 48:42
  Speaker 1: and look at least as easily as today book value, earnings, revenues,
• 48:46
  Speaker 1: whatever you want. And the argument is, the counter argument
• 48:51
  Speaker 1: is if you go with with a fundamental waiting, you're
• 48:55
  Speaker 1: basically owning a stock in a within the index in
• 48:59
  Speaker 1: a closer proportion to its impact to the total accoontom exactly.
• 49:05
  Speaker 1: So if that's the case, and here's where the debate is.
• 49:09
  Speaker 1: I've argued that, hey, you're making a decision to wait
• 49:13
  Speaker 1: an index by something, whether it's cap or earnings or
• 49:17
  Speaker 1: book value, you're choosing it. Some people claim that if
• 49:20
  Speaker 1: you wait an index by earnings or by book value
• 49:23
  Speaker 1: or by whatever, that's active management. I don't. I'm not
• 49:29
  Speaker 1: comfortable with that. Well we could let we could, uh,
• 49:33
  Speaker 1: let's talk a little bit about that. Um the way
• 49:36
  Speaker 1: that these uh fundamental weighted index and I think it's
• 49:41
  Speaker 1: exactly the same way with our not so wisdom tree rafite.
• 49:46
  Speaker 1: What you do is it's on the basis of just
• 49:50
  Speaker 1: objective data on the earnings. We don't make any judgment
• 49:55
  Speaker 1: whatso weather on whether the quantita it's a quantitative factor
• 50:00
  Speaker 1: and that's it. So that active management that you could
• 50:06
  Speaker 1: call that, But that's like active management at low level,
• 50:09
  Speaker 1: lowest level. I really look at that as a it's passive,
• 50:13
  Speaker 1: but it's constructed differently. That's exactly the way I would
• 50:17
  Speaker 1: prefer it. I think active is when you have judgments
• 50:20
  Speaker 1: and you're presented with prices going up or down. I
• 50:23
  Speaker 1: think this is now fulfilled my price target given the
• 50:26
  Speaker 1: potential of the company. Blah blah blah blah blah. Exactly.
• 50:30
  Speaker 1: That's what I think about as active managing. The other
• 50:33
  Speaker 1: is really what we call, you know what, what's now
• 50:36
  Speaker 1: called smart beta in the sense is construct a base
• 50:39
  Speaker 1: of your portfolio. But instead of using capway to use
• 50:42
  Speaker 1: a fundamental weight to get the way and ultimately that
• 50:45
  Speaker 1: index then runs itself based on the initial parameters. And
• 50:49
  Speaker 1: there's no have to rebalancewceance once a year. Others do
• 50:56
  Speaker 1: it more. We've we've been examining it. Um. You know,
• 51:00
  Speaker 1: there's there's no theory that tells you how many there
• 51:03
  Speaker 1: do it. We found that there's a lot of costs, taxes, expenses.
• 51:07
  Speaker 1: There are people who we find rebalance way too often
• 51:10
  Speaker 1: and it's just expense. So we we we at wisdom too.
• 51:14
  Speaker 1: We balanced once a year. Um. Again, once we look
• 51:19
  Speaker 1: at it, we look at the fundamentals and the price,
• 51:20
  Speaker 1: and we move. You know, if the fundamentals moved up
• 51:23
  Speaker 1: but the price didn't, we buy more of it. The
• 51:24
  Speaker 1: fundamentals moved down, we buy less of it. Relative it's
• 51:28
  Speaker 1: all relative to the price. Buy a formula. You know, again,
• 51:30
  Speaker 1: no judgment. It's a formula that anyone out there can
• 51:34
  Speaker 1: you know, I mean you can, you can do this,
• 51:37
  Speaker 1: anyone can do it. Yeah, but you know, we do
• 51:40
  Speaker 1: it at a very cheap cost. There's no reasons for
• 51:43
  Speaker 1: anyone to try and put together three hundred stocks one
• 51:47
  Speaker 1: by one when one E T F you got will
• 51:50
  Speaker 1: do it for you. And your internal expense ratios are
• 51:52
  Speaker 1: fairly compary low. Yeah, you're not a high priced fund.
• 51:56
  Speaker 1: You're pretty inexpensive. And we are very we are very
• 51:59
  Speaker 1: in fact that that was one thing I told John Oh,
• 52:01
  Speaker 1: I mean, go forget. I was again before the dot
• 52:05
  Speaker 1: com bubble. I was very much an Index fan. And
• 52:07
  Speaker 1: of course we know vanguards five, six, seven basis points crazy. Yeah,
• 52:12
  Speaker 1: I mean there, you know. And but I told John
• 52:14
  Speaker 1: Oh when he you know, that's what everyone called John Steinberg,
• 52:18
  Speaker 1: johnno is is that I said to johnno When he
• 52:21
  Speaker 1: wanted me on, I said, listen, John oh, um, I
• 52:23
  Speaker 1: will be on. But let's let's keep these management fees low.
• 52:29
  Speaker 1: I know this is a great thing, and I know
• 52:30
  Speaker 1: on the basis of where we see risk and return,
• 52:32
  Speaker 1: it could probably you know, charge a hundred and fifty.
• 52:34
  Speaker 1: And he said no, Jeremy, I want this to be low.
• 52:38
  Speaker 1: I want to get assets. I want to do a
• 52:40
  Speaker 1: job for people. I want to get him over from
• 52:43
  Speaker 1: from Vanguard and from Index. And I'm with you, so
• 52:47
  Speaker 1: I look at you guys, not as pulling money. By
• 52:49
  Speaker 1: the way, there's been a from what I understand, there's
• 52:52
  Speaker 1: been an internal debate at Vanguard about smart data. And
• 52:57
  Speaker 1: I don't think that's gonna change anytime soon. Although I
• 53:00
  Speaker 1: I don't make predictions very often, but I'm gonna predict
• 53:03
  Speaker 1: one day Vangard is gonna just see a lot of
• 53:05
  Speaker 1: money going to Fundamental Index thing. And I can say, alright,
• 53:10
  Speaker 1: why not if they could do what we could do
• 53:12
  Speaker 1: it better cheaper. So I think Vanguard is is going
• 53:15
  Speaker 1: to be I don't know whether again, I mean they
• 53:20
  Speaker 1: did ETFs and Bogo, as you know, objected furiously. Uh,
• 53:26
  Speaker 1: he would go bananas absolutely fund Metal. I don't know.
• 53:32
  Speaker 1: He's probably an honorary member now, I don't know if
• 53:34
  Speaker 1: he has an official Yeah, he's he's a sum emeritus title.
• 53:40
  Speaker 1: Oh no, listen, he's Mr Vanguard. I'm sure, let's face it. Uh.
• 53:44
  Speaker 1: And but but you know they had a big falling
• 53:46
  Speaker 1: out on E T F S you know, they to
• 53:49
  Speaker 1: to Vanguard's credit, they looked at Jeeves, this is the
• 53:54
  Speaker 1: fastest growing section of the But but as you know,
• 53:58
  Speaker 1: Bogo was really really ideologically opposed. He doesn't like the
• 54:03
  Speaker 1: t F because he says it encourages people exactly, although
• 54:06
  Speaker 1: he's a buy and hold guy and he did not
• 54:10
  Speaker 1: like that at all. So, but he also doesn't like
• 54:13
  Speaker 1: emerging markets and developed markets overseas going the currency risk.
• 54:17
  Speaker 1: Vanguard has a huge not hedges the way you guys are.
• 54:21
  Speaker 1: But they have that that that that's true, but that
• 54:25
  Speaker 1: isn't as big as when they did e t F
• 54:28
  Speaker 1: because they were they were potentially gutting his baby there
• 54:33
  Speaker 1: with the Vanguard Index. Mean, while the tf have worked
• 54:35
  Speaker 1: out pretty well for they're still very low cost. They
• 54:39
  Speaker 1: parallel the mutual funds. Of course, although um I forget
• 54:42
  Speaker 1: what it's called the Admiral shares. If you're buying institutional
• 54:46
  Speaker 1: quantity shares a Vanguard, it's amongst the cheapest things in
• 54:51
  Speaker 1: the world. It's cheaper than the e t F s
• 54:54
  Speaker 1: and it appeals to a very specific audience. It appeals
• 54:58
  Speaker 1: to to the r i A says, it appeals to
• 55:01
  Speaker 1: big endowments and trust it's the cheapest way they could
• 55:04
  Speaker 1: get instant exposure, and they're buying stuff for ten or
• 55:07
  Speaker 1: twenty years. They don't care about the e T so
• 55:09
  Speaker 1: for their perspective. Um, so that's interesting. I didn't know
• 55:13
  Speaker 1: you knew Bogel very well, very well. I I have
• 55:16
  Speaker 1: tremendous respect for him. And as getting we added, uh,
• 55:19
  Speaker 1: you know, we've had differences on this smart Beta fundamental indexing.
• 55:23
  Speaker 1: But uh, he is definitely man that will go down
• 55:28
  Speaker 1: in the history and he should. And uh yeah, Verry,
• 55:31
  Speaker 1: I think bring yourself down. It's worth you know, he's
• 55:35
  Speaker 1: had it's worth getting down there. Well, he's had some
• 55:37
  Speaker 1: unbelievable health challenges. As you know, he was born with
• 55:40
  Speaker 1: a defective heart and had to wait like fifteen years
• 55:43
  Speaker 1: for heart transplant. They didn't even know each he's twenty
• 55:48
  Speaker 1: years beyond that. And you know, but obviously none of
• 55:52
  Speaker 1: us are going to live forever. Um I. The Google
• 55:56
  Speaker 1: guys are working on that. They're trying to find a way.
• 56:00
  Speaker 1: I'm too old to get forever living. Maybe my children
• 56:03
  Speaker 1: will get forever living. I think that you'll end up
• 56:05
  Speaker 1: board after a while for eternally. So, so let's go
• 56:09
  Speaker 1: back to the stocks. For the long run. We talked
• 56:11
  Speaker 1: about the case for equities. We talked about why over
• 56:13
  Speaker 1: the long haul stocks are less risky than bonds, less
• 56:17
  Speaker 1: volad old um. We didn't talk about the significance of
• 56:21
  Speaker 1: dividends to long term stock returns. And I find people
• 56:25
  Speaker 1: are always surprised when I show them data from your
• 56:28
  Speaker 1: book as to the significance of dividends. Let's let's talk
• 56:32
  Speaker 1: about that a bit. Yeah, well and it and it's changed.
• 56:36
  Speaker 1: Let me kind of pretend a big picture here. Up
• 56:39
  Speaker 1: until around or eighty firms used to pay out two
• 56:45
  Speaker 1: thirds of their earnings as dividends, two thirds of their
• 56:48
  Speaker 1: earners of earnings in the earlier years and through the nights.
• 56:52
  Speaker 1: Are we talking about first half of the twentieth century, Yeah,
• 56:54
  Speaker 1: even the first half of the twins and started changing
• 56:57
  Speaker 1: post war. Began to accelerate around the late seven He's
• 57:00
  Speaker 1: in eighties and right now it's one third. And so
• 57:03
  Speaker 1: what's the SMB five dividen yeld now about two point
• 57:06
  Speaker 1: one okay, yeah, so so better about the same as
• 57:10
  Speaker 1: the ten year bonds. Yes, plus the upside on the equity,
• 57:13
  Speaker 1: and plus you got the buy backs, which is now
• 57:15
  Speaker 1: so what had happened. And this has to do with
• 57:19
  Speaker 1: a number of factors we could talk about if people
• 57:21
  Speaker 1: want to. But firms have substituted buy backs for dividends. Now,
• 57:25
  Speaker 1: I'm not a big fan of buy backs, and I'm
• 57:27
  Speaker 1: curious as to you. Okay, we have something, are you
• 57:29
  Speaker 1: are I am a fan? Well, I would rather see
• 57:32
  Speaker 1: them pay the money and dividends. Oh, I'm with you there, okay,
• 57:35
  Speaker 1: But I my everone else said oh, they should be
• 57:37
  Speaker 1: investing in in this and this and this and this
• 57:39
  Speaker 1: and buying this, And I said, hey, listen, I would
• 57:42
  Speaker 1: I'm with you Bury. I prefer the dividends. But if
• 57:46
  Speaker 1: it's not going to be dividends, the buy backs are
• 57:48
  Speaker 1: the second best thing to what long term R and
• 57:52
  Speaker 1: D you believe it or not? Or expanding planic government
• 57:55
  Speaker 1: or do you know what firms do? They have all
• 57:58
  Speaker 1: this money? Hey, I can buy this? Am I always
• 58:00
  Speaker 1: like that firm? You know, premium on crazy? You know,
• 58:06
  Speaker 1: I mean you have these c e O s. I
• 58:07
  Speaker 1: mean many are good, but some of our empire builders
• 58:10
  Speaker 1: got cash on hands, are gonna buy well. They spend
• 58:13
  Speaker 1: one decade building these conglomerates, in the next decade taking
• 58:16
  Speaker 1: him apart, right, So you know, as I say, I mean,
• 58:21
  Speaker 1: I prefer with you. I would love to see it
• 58:24
  Speaker 1: in dividends. Unfortunately, you know we've were now you know
• 58:27
  Speaker 1: under Obama we have you know, we used to have
• 58:29
  Speaker 1: fifteen percent tax and now it's first went to twenty
• 58:31
  Speaker 1: and then the three point six. Yeah, this is raised
• 58:35
  Speaker 1: the tax on dividends again. Pushed it. Yeah, I mean
• 58:39
  Speaker 1: we you know, we are one of the only countries
• 58:41
  Speaker 1: in the world that we double tax dividends. You know,
• 58:44
  Speaker 1: at one point in time was taxed as ordinary income.
• 58:47
  Speaker 1: I know, I mean back in the day dividends with
• 58:49
  Speaker 1: tax that single people got a hundred dollars exemption and
• 58:53
  Speaker 1: married couples two hundred dollars exemples. In the sixties you
• 58:57
  Speaker 1: had your first two and then it was absolutely or
• 59:00
  Speaker 1: mary income. Now you know, people complain about fifteen People
• 59:04
  Speaker 1: used to complain about fifteen percent, and my answer was always, hey,
• 59:07
  Speaker 1: you used to just be like like and it is
• 59:10
  Speaker 1: much better than thirties nine to have it today at
• 59:14
  Speaker 1: twenty three. Uh, but but you'd rather see it at
• 59:19
  Speaker 1: or or. I was actually advocating. I had um written
• 59:24
  Speaker 1: some papers on when I began to look at dividends
• 59:26
  Speaker 1: um And I was actually in congressional testimony when President
• 59:32
  Speaker 1: Bush first developed that break for dividen because he was
• 59:37
  Speaker 1: too Bush. We got the first dividend break in Bush
• 59:40
  Speaker 1: two and that was part of the Big Oh three
• 59:45
  Speaker 1: and that was a huge set of tax huge. Now
• 59:48
  Speaker 1: I was actually interesting. I actually advocated that they um exemptive,
• 59:57
  Speaker 1: well exempt dividends from the corporate tax, because that's weird
• 1:00:01
  Speaker 1: double taxing them. First exempt dividends from the corporate taxt?
• 1:00:05
  Speaker 1: How would that apply? You mean at the corporate level
• 1:00:08
  Speaker 1: or by whole right now? Is you know corporations can
• 1:00:11
  Speaker 1: subtract all the interest on their debt corporate I also
• 1:00:14
  Speaker 1: wanted them to be able to suppract all the dividends
• 1:00:16
  Speaker 1: on their stock. Why not? So in other words, it's
• 1:00:19
  Speaker 1: a cost like interests? And why again? Why one reason
• 1:00:25
  Speaker 1: they exempted it because I'm taxed on the interest, so
• 1:00:27
  Speaker 1: they don't do it on corporation. Why do they double
• 1:00:30
  Speaker 1: tax the dividend. I'm tax on dividends and they're not
• 1:00:33
  Speaker 1: get the break on the cost side. I think the
• 1:00:35
  Speaker 1: reason is interest is an operational expense and dividends is
• 1:00:39
  Speaker 1: a capital structure. Expect Well, you can but that's honestly,
• 1:00:44
  Speaker 1: firms have a choice debt or or equity or both
• 1:00:47
  Speaker 1: or what you know, I guess if you look at
• 1:00:49
  Speaker 1: it that way, it's the same thing. Yeah, I mean,
• 1:00:51
  Speaker 1: you're borrowing money or you're borrowing if you want to
• 1:00:54
  Speaker 1: prevent all the over leverage, which is you know, one
• 1:00:56
  Speaker 1: of the things that led to the financial crisis, you
• 1:00:59
  Speaker 1: don't want to it's encouraging debt. It's creating a bias
• 1:01:03
  Speaker 1: more towards borrowing and less towards equity issues. So so
• 1:01:08
  Speaker 1: let's go back to the buy backs a second. The
• 1:01:10
  Speaker 1: rub against that, the argument against it is when we
• 1:01:13
  Speaker 1: look through the history of buy backs, companies have a
• 1:01:17
  Speaker 1: tendency to beat to do it very poorly. We have
• 1:01:21
  Speaker 1: Dell in the news they just announced the purchase of
• 1:01:23
  Speaker 1: e m C. The data point on Dell, which I
• 1:01:26
  Speaker 1: find astonishing, is they spent more money on buy backs
• 1:01:30
  Speaker 1: over their history when they were a public company then
• 1:01:33
  Speaker 1: their total earnings over the course of that same period,
• 1:01:36
  Speaker 1: which means they had to be buying high in order
• 1:01:39
  Speaker 1: to to either reduce the float or issue more stock options.
• 1:01:43
  Speaker 1: So aren't corporate executives poor timers of when it shouldn't
• 1:01:48
  Speaker 1: be timers, though, I I think you just buy it
• 1:01:50
  Speaker 1: at the market price. Some yes, sometimes you'll be overpaying,
• 1:01:54
  Speaker 1: some price you're underpaying. You shouldn't try to time it now.
• 1:01:58
  Speaker 1: I know. Bren Buffett always says, yeah, I think it's cheap,
• 1:02:01
  Speaker 1: I'll start buying more mos on that, and he encourages others.
• 1:02:04
  Speaker 1: But my feeling is all right, if you're not going
• 1:02:07
  Speaker 1: to give it as dividends, that's suppose you buy three
• 1:02:09
  Speaker 1: percent back a year. Just do it every month, you know,
• 1:02:12
  Speaker 1: just as a stand you some some years will be
• 1:02:15
  Speaker 1: over paying, some years you'll be underpaying, but on average
• 1:02:18
  Speaker 1: you'll be paying the price and you'll be getting you know,
• 1:02:22
  Speaker 1: a fair market value. In fact, by the way, you
• 1:02:25
  Speaker 1: will be buying more when the price is low because
• 1:02:29
  Speaker 1: dour cost average, it's actually a dour cost averaging. So
• 1:02:32
  Speaker 1: so you do that. They're buying less when it's expensive
• 1:02:35
  Speaker 1: more on right, So in a way, it's not you know,
• 1:02:38
  Speaker 1: I obviously some of them, if they do it all
• 1:02:41
  Speaker 1: on one date, or they don't do it for a
• 1:02:42
  Speaker 1: few years, they suspended. So during the financial crisis, everybody
• 1:02:46
  Speaker 1: suspended the purchase program well, which of course was when
• 1:02:49
  Speaker 1: stocks were the cheapest they've been in a decade. Well
• 1:02:52
  Speaker 1: they didn't have earnings either, to say the least. So
• 1:02:55
  Speaker 1: I mean that was that was that was. But that's
• 1:02:58
  Speaker 1: that's how you end up with them over paying because
• 1:03:01
  Speaker 1: when things are cheapest, there in the least position to
• 1:03:05
  Speaker 1: buy to a certain extent. That's that's true. But we
• 1:03:08
  Speaker 1: know there's a lot of times the market goes down.
• 1:03:11
  Speaker 1: As I said, you know when we talked about earlier,
• 1:03:13
  Speaker 1: it over predicts recessions and rea, and that's where they
• 1:03:18
  Speaker 1: get a good alright. So so to sum that up,
• 1:03:23
  Speaker 1: prefer dividends of the buy backs. But but if if
• 1:03:26
  Speaker 1: you you don't have the dividend, then you're gonna do
• 1:03:28
  Speaker 1: the buy backs. All right. Um, that's really quite quite fascinating.
• 1:03:33
  Speaker 1: So we did that. Let's talk about I p o s.
• 1:03:36
  Speaker 1: You're another person who says I p o s take
• 1:03:41
  Speaker 1: it as a whole. They don't really impress you. Yeah,
• 1:03:43
  Speaker 1: discuss well, you know, and and and it's interesting, Uh,
• 1:03:50
  Speaker 1: it was I looked at all the I p o s.
• 1:03:55
  Speaker 1: Everyone not cherry picking the cherry picking the high one. Uh.
• 1:03:59
  Speaker 1: And I did this around two thousand and five and six. Um,
• 1:04:05
  Speaker 1: and when I looked all the way back, I compared
• 1:04:08
  Speaker 1: it to a small stock index, not just the S
• 1:04:11
  Speaker 1: and P. And my conclusion was, if you bought the
• 1:04:15
  Speaker 1: portfolios of that, there were a few of these huge winners,
• 1:04:19
  Speaker 1: but there were so many losers that you really, uh
• 1:04:23
  Speaker 1: didn't beat a small stock index UM. And I wasn't
• 1:04:27
  Speaker 1: excited about that. Now I didn't have the resources too,
• 1:04:32
  Speaker 1: because it takes an awful lot of time too. Went
• 1:04:35
  Speaker 1: in my fifth addition to update it. Some other people said, Jeremy,
• 1:04:38
  Speaker 1: you know, in the last five, six, seven years, things
• 1:04:41
  Speaker 1: have been better for the I p O s because
• 1:04:44
  Speaker 1: it's been harder to go public unless you really like.
• 1:04:47
  Speaker 1: The lesson of two thousand is, hey don't buy I
• 1:04:49
  Speaker 1: pos that don't have profits. And I think I think
• 1:04:52
  Speaker 1: one of you know, really very one of our biggest
• 1:04:54
  Speaker 1: problems is we have firms disappearing. I mean, you know,
• 1:05:00
  Speaker 1: it's it's really the anti I A P of the
• 1:05:02
  Speaker 1: go in private UM. And I think that that is
• 1:05:06
  Speaker 1: really deletarious to our whole capital markets. I love I
• 1:05:09
  Speaker 1: P O s now in intense you're willing to go public,
• 1:05:11
  Speaker 1: and my firm was willing to go public. I mean,
• 1:05:14
  Speaker 1: we we're publicly traded UM. And John o has has
• 1:05:19
  Speaker 1: said that that was very important to us. What traded
• 1:05:23
  Speaker 1: What is the Wilshire five thousand now something? Three things?
• 1:05:27
  Speaker 1: It's usually right, it's it's that's a So now some
• 1:05:31
  Speaker 1: people have blamed the regulatory environment. Some people have blamed
• 1:05:35
  Speaker 1: I have access to all this. The venture capital market
• 1:05:39
  Speaker 1: is now so broad and deep. It's almost as if
• 1:05:42
  Speaker 1: there isn't a need for a lot of these companies
• 1:05:44
  Speaker 1: to go public. You look at Uber, where they worth
• 1:05:47
  Speaker 1: fifty billion dollars with an exit for the vcs, you
• 1:05:53
  Speaker 1: would think, yeah, so at some particular point, by the way,
• 1:05:56
  Speaker 1: I do think I you know, there's been some studies
• 1:05:59
  Speaker 1: on this. I do think Sarbanes oxially in the regulation afterwards. Yeah,
• 1:06:05
  Speaker 1: and and and now, particularly on financials. I mean, I
• 1:06:09
  Speaker 1: just know how much more we've had to do with compliance.
• 1:06:13
  Speaker 1: I mean the financial firms, it's it's incredible. You have
• 1:06:16
  Speaker 1: to dot your eyes and crushing every single thing. I mean,
• 1:06:19
  Speaker 1: they're the burden of going public. Um, So let me
• 1:06:23
  Speaker 1: tell you. I think it's I and I think that's
• 1:06:25
  Speaker 1: bad because it doesn't give us, it doesn't give ordinary
• 1:06:29
  Speaker 1: people and access to exciting capital developments. It's a friction
• 1:06:33
  Speaker 1: on returns. It's a drag Listen. I run a relatively
• 1:06:37
  Speaker 1: small office. We have an outside lawyer, we have an
• 1:06:40
  Speaker 1: outside compliance firm. We have to do outside security updates
• 1:06:44
  Speaker 1: just to make sure everybody's data is is sense. Everything
• 1:06:48
  Speaker 1: we write is archived. We have multiple offsite. It's amazing.
• 1:06:55
  Speaker 1: Now Afternon eleven, a lot of people lost a lot
• 1:06:57
  Speaker 1: of data. It was really a problem, so they had
• 1:06:59
  Speaker 1: to make some changes. But it is practically a full
• 1:07:04
  Speaker 1: time job to keep a relatively small firm fully compliant,
• 1:07:09
  Speaker 1: fully legal, fully matching everything. Um a big firm that
• 1:07:15
  Speaker 1: that's got to be a staff of lawyers, a staff
• 1:07:17
  Speaker 1: of accounts. That's gotta be amazing. Yeah, it absolutely is.
• 1:07:20
  Speaker 1: And one wonders, you know we've had uh you know,
• 1:07:24
  Speaker 1: I'm a macroeconomists. I always look at the GDP and
• 1:07:26
  Speaker 1: on that. We've had a productivity collapse of enormous proportions
• 1:07:29
  Speaker 1: of the last four or five years. We don't as
• 1:07:32
  Speaker 1: economists know all the reasons why that, But we should
• 1:07:35
  Speaker 1: have been increasing GDP four to five percent. You're not
• 1:07:38
  Speaker 1: two to three given given what we've seen, and we
• 1:07:41
  Speaker 1: don't understand what's going on. But is it regulation? Is
• 1:07:45
  Speaker 1: it rules? Is its compliance. Is it administration goovers? I mean,
• 1:07:49
  Speaker 1: I'm just saying we you know, we we've we've been
• 1:07:54
  Speaker 1: having a productivity collapse. Let's talk about that, because that's
• 1:07:58
  Speaker 1: a fascinating subject. And I've seen some very smart economists
• 1:08:02
  Speaker 1: make the argument that we're measuring productivity wrong. All right,
• 1:08:06
  Speaker 1: there's no doubt that I've suggested. Actually I wrote an article,
• 1:08:10
  Speaker 1: as I mentioned, I must have been refering to. It
• 1:08:12
  Speaker 1: might have been I. I actually so I'd say I
• 1:08:15
  Speaker 1: write um kiplingers every other month. That was I write,
• 1:08:19
  Speaker 1: And I talked about the productivity collapse, and I said,
• 1:08:23
  Speaker 1: you know, no one buys cameras anymore because it's all
• 1:08:26
  Speaker 1: on their phone. The government doesn't count it anymore because
• 1:08:29
  Speaker 1: something that goes to zero and price doesn't get in
• 1:08:31
  Speaker 1: g d P. And yet your phone is it's a phone,
• 1:08:35
  Speaker 1: it's a computer, it's a camera, it's it's it's everything.
• 1:08:39
  Speaker 1: No one by standalone GPS is anymore. And they're building
• 1:08:41
  Speaker 1: in the car or you don't buy them. Everyone uses
• 1:08:44
  Speaker 1: their phone. I mean, all sorts of things now have
• 1:08:46
  Speaker 1: become free. Now. I've talked to others and he said, Jeremy,
• 1:08:51
  Speaker 1: there's something to that we don't know. I mean, I
• 1:08:54
  Speaker 1: donic adjustments and all that funds and Jake Destin's are
• 1:08:57
  Speaker 1: very very difficult to do. But the dad, it is
• 1:09:00
  Speaker 1: absolutely striking. The COLLAPSI productivity from two thousand eleven through today,
• 1:09:07
  Speaker 1: uh is of a magnitude we have not seen, especially
• 1:09:12
  Speaker 1: in an economic expansion, and this is very important in
• 1:09:16
  Speaker 1: lower energy prices. We've had a collapse before, but that
• 1:09:20
  Speaker 1: was in the seventies when energy was going way up
• 1:09:22
  Speaker 1: in price. You understand why collapse at that particular. So
• 1:09:27
  Speaker 1: so I wouldn't be surprised if regulations are part of it.
• 1:09:31
  Speaker 1: I wouldn't be surprised if US measuring technology is part
• 1:09:34
  Speaker 1: of it. I gotta imagine there's a whole bunch of difference.
• 1:09:37
  Speaker 1: Who knows. I mean, you know, everyone has their pet thing.
• 1:09:41
  Speaker 1: Now some people say it's the millennials work habits. They're
• 1:09:46
  Speaker 1: just not working hard. They're not working hard on their jobs.
• 1:09:48
  Speaker 1: So that's one reason. Do you believe that you deal
• 1:09:51
  Speaker 1: with millennials? Everybody? Okay, So are they lazy? Are they stupid?
• 1:09:56
  Speaker 1: Are they Well? I get wonderful students at work. I'm
• 1:09:58
  Speaker 1: so I was the last I was. Can I tell
• 1:10:00
  Speaker 1: you something I've heard this millennials or bums argument. I'm
• 1:10:04
  Speaker 1: the old man in the office and all the guys
• 1:10:06
  Speaker 1: who worked for me. I have an unbelievable staff of
• 1:10:10
  Speaker 1: of twenty somethings and thirty somethings who are really hard working,
• 1:10:13
  Speaker 1: who were really smart, who what we crank out as
• 1:10:17
  Speaker 1: I don't want to make this segment about me, but
• 1:10:19
  Speaker 1: my experience has been working with young people. Um, they
• 1:10:26
  Speaker 1: come dressed in flip flops and T shirts, but other
• 1:10:29
  Speaker 1: than that, they do their job. But I'm not say
• 1:10:31
  Speaker 1: I don't yet. They're very, very talented. Yeah, I know.
• 1:10:36
  Speaker 1: I mean it's a lot of but you know, there's
• 1:10:39
  Speaker 1: first of all, there's a lot of people now under
• 1:10:41
  Speaker 1: the burden of the student debt, which is, as you know,
• 1:10:43
  Speaker 1: one point to trillion debt. But but there's been huge
• 1:10:46
  Speaker 1: student debt for long long time. It's a record heights now,
• 1:10:50
  Speaker 1: but it's gone up and up and up. For I'm
• 1:10:52
  Speaker 1: fifty four, I'm almost done paying my student loans. So no,
• 1:10:55
  Speaker 1: but really very we we've had student debt over the
• 1:10:59
  Speaker 1: last ten years from maybe three billion triple to and
• 1:11:04
  Speaker 1: I actually think it was a lot of these on
• 1:11:08
  Speaker 1: miss information, a lot of these onlines you know what
• 1:11:11
  Speaker 1: it was was's what's happened is there was an idea,
• 1:11:15
  Speaker 1: let's take a look at the earnings of graduates college
• 1:11:21
  Speaker 1: graduates versus non college and oh, it's this much. That
• 1:11:25
  Speaker 1: means they can actually take on thousand dollars a death
• 1:11:30
  Speaker 1: because their earnings are gonna be so much more, they're
• 1:11:32
  Speaker 1: gonna pay it back. There's a little The problem is
• 1:11:36
  Speaker 1: not You're now getting a generation that before would go
• 1:11:40
  Speaker 1: into the workplace. They wouldn't get scholarships because they weren't
• 1:11:44
  Speaker 1: as good. Because don't forget, if you're really good, you
• 1:11:48
  Speaker 1: can go to Harvard and they'll pay everything for it.
• 1:11:50
  Speaker 1: So these were not and you know, I know some
• 1:11:54
  Speaker 1: not as good students. They didn't have it. But now
• 1:11:56
  Speaker 1: they were given, uh, you know, a ticket. You had
• 1:11:59
  Speaker 1: these lessers schools that could never charge, but not because
• 1:12:02
  Speaker 1: the government gave them alone. They could they overcharge for
• 1:12:06
  Speaker 1: the type of education they were giving. They weren't giving
• 1:12:08
  Speaker 1: them the skills that they weren't getting placed and as
• 1:12:11
  Speaker 1: a result, after they get out, they weren't getting the
• 1:12:14
  Speaker 1: jobs that we're paying that much more. So I think
• 1:12:17
  Speaker 1: that what I understand, the motive was good and I'm
• 1:12:21
  Speaker 1: in education. But I think unfortunately that that's been a
• 1:12:25
  Speaker 1: burden for a lot of students. Yeah, when when you
• 1:12:28
  Speaker 1: look at first of all, there's a correlation error there.
• 1:12:32
  Speaker 1: Graduate students get high paid. So therefore, every let's make
• 1:12:35
  Speaker 1: everyone to graduate. Yeah, we can make everybody graduate. It's
• 1:12:38
  Speaker 1: lake will be gone and it's not gonna work. But
• 1:12:43
  Speaker 1: the other thing is we've had over the past decade
• 1:12:45
  Speaker 1: all of these fly by night colleges coming to effect,
• 1:12:50
  Speaker 1: some of these online. And you're a graduate of of
• 1:12:54
  Speaker 1: the University of dot Com online, you're not going to
• 1:12:58
  Speaker 1: get the same sort of job as a do it.
• 1:13:00
  Speaker 1: And it's it's not only that. Actually they were just
• 1:13:02
  Speaker 1: lesser schools that we had a hard time getting students.
• 1:13:06
  Speaker 1: And all of a sudden, I said, just the government
• 1:13:07
  Speaker 1: now he is paying tuition. And I see some of
• 1:13:10
  Speaker 1: these lesser known I'm not gonna say which ones they are,
• 1:13:13
  Speaker 1: they're charging like Harvard prices. And they said, we filled
• 1:13:16
  Speaker 1: them through the loan program. And where was when were
• 1:13:19
  Speaker 1: the big changes made to the to the loan availability?
• 1:13:22
  Speaker 1: If ten years ago we were three hundred thousand, three hundred,
• 1:13:26
  Speaker 1: three hundred thousand, three hundred billion dollars, you know again,
• 1:13:30
  Speaker 1: I would have to check that that it might be
• 1:13:32
  Speaker 1: I just know what. But there's been a huge increase,
• 1:13:35
  Speaker 1: been a huge in piece in the in the last
• 1:13:37
  Speaker 1: decade now, you know. And that I saw, I mean
• 1:13:40
  Speaker 1: that was what was shocking from you know, like like
• 1:13:43
  Speaker 1: early two thousands till now. It was almost like a
• 1:13:46
  Speaker 1: straight light. So what changed that suddenly because the government
• 1:13:49
  Speaker 1: had to see this is another thing, you know what
• 1:13:54
  Speaker 1: the loan problem wasn't on the government budget because they
• 1:13:56
  Speaker 1: all was a loan and it was always paid, and
• 1:13:59
  Speaker 1: it was always paid. And and they put one thing,
• 1:14:03
  Speaker 1: you know, that one thing they put in the law
• 1:14:05
  Speaker 1: a student cannot go bankrupted to avoid They changed that
• 1:14:07
  Speaker 1: a while ago. I always but that was one reason
• 1:14:10
  Speaker 1: why none of that trillion dollars is in the budget.
• 1:14:13
  Speaker 1: It was so easy for them always just give a guarantee.
• 1:14:16
  Speaker 1: It's not on the budget. So banks and you know,
• 1:14:20
  Speaker 1: you can't discharge them in bankruptcy. So eventually the banks
• 1:14:23
  Speaker 1: will get the pan and the government does through the guarantees.
• 1:14:26
  Speaker 1: Oh they can't go back. We're gonna get our money.
• 1:14:28
  Speaker 1: In fact, someone told me that according to government accounting,
• 1:14:31
  Speaker 1: they were actually counting a profit because from it, because
• 1:14:35
  Speaker 1: they were actually getting more from the students than they
• 1:14:37
  Speaker 1: had to pay on the government debt. So I'm floating,
• 1:14:40
  Speaker 1: you know, treasury bills at three basis points and I'm
• 1:14:42
  Speaker 1: getting student loans at five percentage points. It shrinks the deficit.
• 1:14:48
  Speaker 1: It's crazy. Yeah, well, a lot of things, you know,
• 1:14:53
  Speaker 1: in the name of let's give everybody a college education,
• 1:14:57
  Speaker 1: it's gonna you know, it can't get pays for a self,
• 1:15:01
  Speaker 1: but it doesn't, and it's not for a lot of
• 1:15:02
  Speaker 1: students unfortunate, and they come out without the better jobs
• 1:15:06
  Speaker 1: than a boatload of debt. Exactly. That that's really fascinating.
• 1:15:09
  Speaker 1: Let me let me mix stuff up on you a
• 1:15:11
  Speaker 1: little bit, because I know I don't have you all nice,
• 1:15:14
  Speaker 1: and let me let me get to some of my
• 1:15:16
  Speaker 1: favorite questions that I ask all my guests. Um. So,
• 1:15:21
  Speaker 1: before the Philly Fed, you were essentially well, I only
• 1:15:25
  Speaker 1: now I was full time at Warton. I just did
• 1:15:27
  Speaker 1: one Uh, I took a one semester sabbatical where I
• 1:15:31
  Speaker 1: actually was at the Fed as a researcher. Um So
• 1:15:34
  Speaker 1: it wasn't you know I was it was. It wasn't
• 1:15:37
  Speaker 1: really a any sort of a permanent job at the
• 1:15:40
  Speaker 1: but you worked with somebody there. One of the questions
• 1:15:42
  Speaker 1: I wanted to ask, where who are your early mentors.
• 1:15:45
  Speaker 1: You've obviously mentored countless students over the years, over the decades.
• 1:15:50
  Speaker 1: Who were your mentor? I would say in graduate school
• 1:15:54
  Speaker 1: it was Paul Samuelson, one of the giants. One of
• 1:15:59
  Speaker 1: the giants, Paul Samuelson, Robert Solo, these a m I
• 1:16:03
  Speaker 1: T Frankoman Digiani. Um uh, but that's a that's murderous, right, yeah, listen,
• 1:16:11
  Speaker 1: I'm honored. You know. All those three were my three
• 1:16:12
  Speaker 1: thesis advices we phdu Nobel price, and they it was
• 1:16:17
  Speaker 1: before well Samerson had won the Nobel Prize. The other
• 1:16:20
  Speaker 1: two had not yet. They had got him after I
• 1:16:22
  Speaker 1: actually left. So all three of your PhD advice a
• 1:16:27
  Speaker 1: Nobel prize. That's right, that's astonished. That is that that
• 1:16:30
  Speaker 1: that is something. But I would say the person that
• 1:16:32
  Speaker 1: influenced me the most was Milton Freedman. I members in Chicago.
• 1:16:37
  Speaker 1: First of all, I read a lot about him, you know,
• 1:16:39
  Speaker 1: from Capitalism and Freedom, which I read in college, and
• 1:16:42
  Speaker 1: I was I was really kind of a libertarian, and
• 1:16:44
  Speaker 1: I still consider myself sort of a moderate libertarian in
• 1:16:47
  Speaker 1: many ways. Is there such a thing because the Libertarians
• 1:16:50
  Speaker 1: I know are really very black and white. Well that's
• 1:16:52
  Speaker 1: what I think is the problem. I mean, I you know,
• 1:16:55
  Speaker 1: Milton Freedman U should call himself a libertarian, but he
• 1:16:58
  Speaker 1: is not. I mean, you know, libertarians today, like you
• 1:17:00
  Speaker 1: know Rand Paul I want to get rid of the FAD,
• 1:17:03
  Speaker 1: go back to the gold standards, everything, everything, So I mean,
• 1:17:08
  Speaker 1: you know, and Milton was not for for all that.
• 1:17:11
  Speaker 1: I mean he was of course, he wanted to reform
• 1:17:13
  Speaker 1: the FAD to make it operate right, but he did
• 1:17:17
  Speaker 1: believe we can't go He did not support going back
• 1:17:20
  Speaker 1: onto the gold standard. Um And I read the monetary
• 1:17:23
  Speaker 1: history of the United States. When I was at at
• 1:17:26
  Speaker 1: at M, I t that was my specialty was monetary
• 1:17:30
  Speaker 1: theory and policy. My thesis was on monetary policy and inflation.
• 1:17:35
  Speaker 1: I was actually trained as an economist, not in finance.
• 1:17:38
  Speaker 1: Were you a pure I was a pure economist. So
• 1:17:41
  Speaker 1: let me tell you a little secret which not everyone knows.
• 1:17:44
  Speaker 1: But um so, I've never taken a finance course in
• 1:17:50
  Speaker 1: my life really at undergraduate MBA or PhD. Left that's unbelievable.
• 1:17:56
  Speaker 1: But you wrote the book that notty much has become
• 1:17:59
  Speaker 1: the standard. Have you ever disclosed this publicly? Are we gonna?
• 1:18:03
  Speaker 1: I've disclosed it a little bits, but not very much. Um.
• 1:18:08
  Speaker 1: I've been wondering when my students will say, just a minute,
• 1:18:11
  Speaker 1: you're so undergrad You're one of the most famous professors
• 1:18:14
  Speaker 1: of finance, the Russell we Palmer professor of finance at
• 1:18:17
  Speaker 1: the Wharton's good the universe of Pennsylvania. And you've never
• 1:18:19
  Speaker 1: taken a finance course. And the answer is not undergraduate,
• 1:18:22
  Speaker 1: not PhD. Never So wait, wait, do you have a
• 1:18:25
  Speaker 1: PhD and an NBA. No, I don't have an I
• 1:18:28
  Speaker 1: didn't have you ever taken anything? I've never taken into
• 1:18:31
  Speaker 1: so so uh so they said where do you learn?
• 1:18:34
  Speaker 1: I said I I well, first of all, let me
• 1:18:36
  Speaker 1: say who was in my class at M I t
• 1:18:39
  Speaker 1: it only a class with thirty people. Bob Schiller, Robert Murton,
• 1:18:45
  Speaker 1: you know of you know black shows. I mean, I
• 1:18:49
  Speaker 1: had an incredible reservoir of brains and talent that I
• 1:18:54
  Speaker 1: bounced ideas. I remember Bob Murton coming to me. You know,
• 1:18:58
  Speaker 1: I was in graduate in sixties when the cat last
• 1:19:00
  Speaker 1: surprising matter was being developed, right, uh you know, And
• 1:19:03
  Speaker 1: I remember Bob and saying he said Jeremy, you know
• 1:19:05
  Speaker 1: there's some stuff here. Let's talk about it, you know,
• 1:19:08
  Speaker 1: be all sharp and and and the beta idea and
• 1:19:12
  Speaker 1: all that, and said, let's let's talk about this. And
• 1:19:15
  Speaker 1: we were we it was happening right then. But I
• 1:19:18
  Speaker 1: my whole focus, uh, and I was in the economics department.
• 1:19:22
  Speaker 1: Was I love monetary theory and the policy fed money
• 1:19:24
  Speaker 1: all that, and I stayed there. But I always had
• 1:19:26
  Speaker 1: a love for markets, and it was a perfect mild
• 1:19:30
  Speaker 1: of and And I remember once my publisher when when
• 1:19:34
  Speaker 1: I wrote TX to the Wrong One, first edition, she said,
• 1:19:35
  Speaker 1: you know what's interesting, You really have a top down look.
• 1:19:39
  Speaker 1: It's kind of a macro look. And so many times
• 1:19:41
  Speaker 1: I see people bottom up. They're specialized, and I think, Uh,
• 1:19:47
  Speaker 1: there were little bits of holes that I had to
• 1:19:50
  Speaker 1: fill on my own, which was a struggle. But I'm
• 1:19:52
  Speaker 1: very thankful that I approached it from an expertise level.
• 1:19:57
  Speaker 1: In macro. It's a very differ look than somebody who
• 1:20:01
  Speaker 1: could easily get lost. And that's why I kind of
• 1:20:03
  Speaker 1: They always say, Cheeferemy, you always get to the big
• 1:20:06
  Speaker 1: picture looking down, And I said, yeah, because that's the
• 1:20:09
  Speaker 1: way I was trained as a macro economist, macro economist.
• 1:20:13
  Speaker 1: So in a way, uh, you know, I struggled. I
• 1:20:16
  Speaker 1: mean I would have learned he does let him on
• 1:20:17
  Speaker 1: much better if I'd taken some of the FiOS courses,
• 1:20:20
  Speaker 1: the pricing, the options and all that. And I struggled on.
• 1:20:22
  Speaker 1: But you still got to the right answer. You just
• 1:20:25
  Speaker 1: had a gun your own. So you mentioned monetary policy.
• 1:20:30
  Speaker 1: Ben Bernanke has his new book out and reading it.
• 1:20:33
  Speaker 1: I brought it. Actually it's in my briefcase. I'm on
• 1:20:36
  Speaker 1: page four. It just came out, Mondy. So you're about
• 1:20:38
  Speaker 1: a quarter of the way through. Um a little bit.
• 1:20:41
  Speaker 1: What did you think. Let's talk about the FED. What
• 1:20:44
  Speaker 1: did you think about the job that the Fed and
• 1:20:46
  Speaker 1: Ben Bernankey did during the financial crisis. I've lectured a
• 1:20:50
  Speaker 1: lot about that. I think he did extraordinary, extraordinary. Well, right,
• 1:20:55
  Speaker 1: we had, by the way, we had Paul McCulley, who
• 1:20:58
  Speaker 1: used to be the chief economist that PIMCO is now retired,
• 1:21:02
  Speaker 1: and he was one of the first people who came
• 1:21:04
  Speaker 1: on and just firing brimstone defense of the FED. All
• 1:21:09
  Speaker 1: you people criticized, he was one of the few defenders.
• 1:21:13
  Speaker 1: I am a big defender. I think what Bernanke, did
• 1:21:17
  Speaker 1: I mean and and by the way, do you know
• 1:21:20
  Speaker 1: why he did what he did? And he says so
• 1:21:22
  Speaker 1: in the he doesn't say directly he blames Congress for
• 1:21:25
  Speaker 1: not doing anything, but he blames him. But if you
• 1:21:28
  Speaker 1: there's one part of the FED on Milton Friedman's ninetieth
• 1:21:32
  Speaker 1: birthday party, he was, we won't do it again. We
• 1:21:35
  Speaker 1: won't make that mistakes. And look that Milton is said,
• 1:21:38
  Speaker 1: you showed us what we did war on wrong in
• 1:21:40
  Speaker 1: the Great Depression of the thirties, and thanks to you,
• 1:21:43
  Speaker 1: we will not make this mistake again. Now this was
• 1:21:46
  Speaker 1: in two thousand and two. There was no subprime mortgage,
• 1:21:50
  Speaker 1: there was no crisis coming, there was nothing. And he said,
• 1:21:55
  Speaker 1: we will not make that mistake again. Now, Milton's passed
• 1:21:59
  Speaker 1: away two years after, in two thousand and four, so
• 1:22:01
  Speaker 1: he never lived to see it. But don't you think
• 1:22:04
  Speaker 1: that when Lehman went under and all the financial markets
• 1:22:07
  Speaker 1: seized up in panic, that that pledge did not come
• 1:22:14
  Speaker 1: to mind? In Bernankee, I've got to act. I've had it.
• 1:22:18
  Speaker 1: I know I'm gonna get flak for bailing out a
• 1:22:20
  Speaker 1: I G and he did huge. I'm gonna take that.
• 1:22:26
  Speaker 1: I think I think the title of the book. He
• 1:22:27
  Speaker 1: had the courage to act. I said, I'm gonna get flak,
• 1:22:30
  Speaker 1: but I've got I've got to do it. He could
• 1:22:34
  Speaker 1: have called it a promise to keep it, promised to keep.
• 1:22:37
  Speaker 1: He looked at Milton Freeman said, We're not going to
• 1:22:39
  Speaker 1: make that mistake. I'm not gonna let this whole system go.
• 1:22:42
  Speaker 1: And that's that's the difference between the O eight oh
• 1:22:44
  Speaker 1: nine and we had a five we had five nine
• 1:22:49
  Speaker 1: drop and g d p from you know, uh, we
• 1:22:55
  Speaker 1: had a twenty six drop percent drop in. So you
• 1:22:59
  Speaker 1: think the Fed basically stepped in, did what had to
• 1:23:03
  Speaker 1: be do, dude, and prevented the next Great Depression? I
• 1:23:07
  Speaker 1: absolutely do, absolutely do. So let me let me ask
• 1:23:11
  Speaker 1: you the fiscal question, because bernanke Bernecki has made some
• 1:23:15
  Speaker 1: really surprising comments in his book, or at least the
• 1:23:17
  Speaker 1: excerpts I've read. He's a lifelong Republican who basically said
• 1:23:21
  Speaker 1: moderate Republican. Right now, he said, these guys, I don't
• 1:23:24
  Speaker 1: recognize this part anymore. More. People are saying that I'm
• 1:23:27
  Speaker 1: an independent, and I understand well and that he's And
• 1:23:30
  Speaker 1: he also thought that the Congress should have enacted a
• 1:23:35
  Speaker 1: much more robust fiscal response, but essentially kicked the can
• 1:23:40
  Speaker 1: down the road. Well don't you know, yeah, you had
• 1:23:46
  Speaker 1: you know that there he doesn't stress that to my
• 1:23:49
  Speaker 1: not again, I haven't finished everything in the book and
• 1:23:51
  Speaker 1: I'm reading or really careful. Um, I think what he
• 1:23:54
  Speaker 1: did was far more important, I mean than the fiscal side.
• 1:23:57
  Speaker 1: Than the fiscal side, basically saving backing up all the
• 1:24:00
  Speaker 1: money market funds, backing up all the bank accounts of
• 1:24:05
  Speaker 1: businesses and the demand deposits out there, and all the deposits,
• 1:24:09
  Speaker 1: not one deposit went under the way it did in
• 1:24:11
  Speaker 1: the Great Depression when banks. We now have FDIC insurance,
• 1:24:15
  Speaker 1: so that really but he wasn't even beyond that, don't
• 1:24:17
  Speaker 1: forget insurance and they raise it. But even then he said,
• 1:24:22
  Speaker 1: I'm not gonna because look at businesses have have to
• 1:24:25
  Speaker 1: have a payroll that's more than two big. So he
• 1:24:30
  Speaker 1: made sure of that. I mean, we could go on
• 1:24:32
  Speaker 1: and on and on this thing. I remember you might remember,
• 1:24:36
  Speaker 1: I remember I don't. People are saying, Jeremy, get a
• 1:24:39
  Speaker 1: safe deposit box, and some people say, don't even get
• 1:24:42
  Speaker 1: it in the bank, buy a safe, get your money out,
• 1:24:45
  Speaker 1: get the cash out. I mean, there was crazy talk
• 1:24:48
  Speaker 1: going on. People were full blown. That would have do
• 1:24:54
  Speaker 1: you know what that would have done to our financial system?
• 1:24:56
  Speaker 1: I don't even want to begin the thing. You know,
• 1:24:58
  Speaker 1: everything had froze. And what the FED managed to do
• 1:25:02
  Speaker 1: was slaw that and forced the banks to start giving
• 1:25:05
  Speaker 1: each other credit back and forth. Well, he enabled them.
• 1:25:09
  Speaker 1: He flooded them with enough reserves, saying I'm gonna give
• 1:25:12
  Speaker 1: you the facility to get all the credit you need
• 1:25:14
  Speaker 1: and the liquidity. They all wanted liquidity, and he said, okay,
• 1:25:17
  Speaker 1: you need a trillion dollars in liquidity. Bank there it is.
• 1:25:19
  Speaker 1: That's what quees was. Basically, I'm gonna give you all
• 1:25:22
  Speaker 1: the liquidity you want so that hopefully you'll make some
• 1:25:25
  Speaker 1: loans with this and we can keep our economy coming back.
• 1:25:28
  Speaker 1: And that's more or less what would happened. So, so
• 1:25:31
  Speaker 1: you are a terrible libertarian, say well, but you're you're
• 1:25:36
  Speaker 1: a and Paul, I'm a terrible libertarian, but you're a pride.
• 1:25:40
  Speaker 1: I think had Milton Friedman lived right, he would have said,
• 1:25:45
  Speaker 1: that's what you have to do. Bernanke. Now he wouldn't
• 1:25:47
  Speaker 1: agree with absolutely everything. He said, yes, the bulk of it. Well,
• 1:25:52
  Speaker 1: if you go back and look at what he wrote
• 1:25:54
  Speaker 1: about the Great Depression. What Milton Freedman wrote, it was
• 1:25:57
  Speaker 1: pretty clear. You can't sit around and just watch the
• 1:26:00
  Speaker 1: whole thing go down and say, that's a lot of
• 1:26:04
  Speaker 1: the Republicans, you know, when they voted against the type
• 1:26:06
  Speaker 1: and all that the first time, by the way, worst
• 1:26:08
  Speaker 1: week in the market on a point basis, I think, ever,
• 1:26:12
  Speaker 1: I don't know on a percentage basis. Still it's the
• 1:26:17
  Speaker 1: biggest not the biggest percentage, but the biggest point. And
• 1:26:20
  Speaker 1: then by that Friday, we've got to do something. Well,
• 1:26:24
  Speaker 1: that's it the Republicans. I've got phone calls from there.
• 1:26:26
  Speaker 1: Just a minute here, Uh, the people with therefore our
• 1:26:30
  Speaker 1: one case and all that, just a minute here. Did
• 1:26:32
  Speaker 1: you see what happened when you guys voted it down?
• 1:26:35
  Speaker 1: I don't think that's good. Two days later overwhelmingly voted
• 1:26:38
  Speaker 1: it for When when the president of General Electric and
• 1:26:41
  Speaker 1: Foward and McDonald's called the White House and say, hey,
• 1:26:45
  Speaker 1: we're not going to make payroll, Yeah, I think that
• 1:26:47
  Speaker 1: really focuses well. And the seven seventy point, so they
• 1:26:50
  Speaker 1: got the public in vow and the and everyone said,
• 1:26:53
  Speaker 1: and it was amazing. They made a tiny little change
• 1:26:57
  Speaker 1: the Republicans could save face and half of them voted no,
• 1:27:01
  Speaker 1: voted yes two days later. It's amazing. So you mentioned
• 1:27:05
  Speaker 1: some of your early mentors. What investors you mentioned Steinhart?
• 1:27:10
  Speaker 1: What other investors influenced your your philosophy, your approach to
• 1:27:15
  Speaker 1: thinking about equities. Well, I would have to say that
• 1:27:19
  Speaker 1: I was a huge straight indexo. Bogo got it. I
• 1:27:25
  Speaker 1: remember Samuelson. He wrote an article when I was at gradual, Gee,
• 1:27:28
  Speaker 1: all we want is an index fund, but we didn't
• 1:27:31
  Speaker 1: have one. Actually responded you go through the history. He said,
• 1:27:35
  Speaker 1: we need someone with an index fund, and you know
• 1:27:38
  Speaker 1: Bogeol answered that question. I was one of the first
• 1:27:41
  Speaker 1: people to put my money in there in Vanguard and
• 1:27:43
  Speaker 1: Vanguard Index. That's amazing. Who else influenced your thinking besides Bogel, Well,
• 1:27:49
  Speaker 1: I mean, I mean again, it was the theory and
• 1:27:52
  Speaker 1: I was pretty much saying I don't see active management
• 1:27:55
  Speaker 1: beating it after fees and so all the way until
• 1:27:59
  Speaker 1: the tech the tech bubble. Hey, on the work that
• 1:28:03
  Speaker 1: I did, when you know, Jonathan Steinberg and Michael stein
• 1:28:07
  Speaker 1: had called me up about, you know, we want to
• 1:28:10
  Speaker 1: have a better a fund. Can we do a better
• 1:28:12
  Speaker 1: index thing rather than get overweight. That became really that
• 1:28:19
  Speaker 1: really a big impact that hit me on a cap.
• 1:28:21
  Speaker 1: I mean, theoretically, I hear I had to hold this
• 1:28:24
  Speaker 1: capway with technology. That would be if two hundred I
• 1:28:27
  Speaker 1: said I don't want to hold it, But then I
• 1:28:29
  Speaker 1: break my philosophy. How can I redo it? So markets
• 1:28:34
  Speaker 1: are efficient until human behavior makes them crazy. Your buddy
• 1:28:38
  Speaker 1: Bob Schiller would say they're efficient until people get involved. Yeah, well,
• 1:28:42
  Speaker 1: you know it's if they're still not easy to beat.
• 1:28:45
  Speaker 1: Let's put it that when that's why obviously active managers
• 1:28:48
  Speaker 1: after fees don't really beat it all over long periods
• 1:28:52
  Speaker 1: of time. It's it's impossible, it's almost impossible. But there
• 1:28:55
  Speaker 1: is a tendency and it really goes back to what
• 1:28:58
  Speaker 1: you know, I mean in a way. You know, Buffett
• 1:29:02
  Speaker 1: says people tend to overdo the growth stocks and various
• 1:29:06
  Speaker 1: stocks are not interesting. They tend to That's why wouldn't
• 1:29:09
  Speaker 1: we do seventy eight years studies on risk return and
• 1:29:12
  Speaker 1: that was something to Farmer French found right and their
• 1:29:14
  Speaker 1: research that on that value stocks, which is what a
• 1:29:19
  Speaker 1: fundamental waiting system would tend to overweight, do better than
• 1:29:24
  Speaker 1: growth stocks on a risk return basis when you go
• 1:29:26
  Speaker 1: back over you know, so you mentioned from a French
• 1:29:29
  Speaker 1: I'd be remiss if I didn't point out they are
• 1:29:31
  Speaker 1: advisers to dimensional funds and dimensional funds big focus is
• 1:29:37
  Speaker 1: the small cap premium over long periods of time. Before
• 1:29:41
  Speaker 1: before I go on with the rest of my last
• 1:29:43
  Speaker 1: few questions, what what are your thoughts on small cap premium, value, premium,
• 1:29:47
  Speaker 1: momentum premium are are some of the big quality premium
• 1:29:51
  Speaker 1: and now there's quality and momentum which I have an
• 1:29:53
  Speaker 1: end of. These are like I canna last few years
• 1:29:54
  Speaker 1: compared and the value goes way back. I mean the
• 1:29:57
  Speaker 1: value premium you know from of French stuff in the
• 1:29:59
  Speaker 1: midden nineties or even earlier. Uh showed that value premium.
• 1:30:04
  Speaker 1: Uh that's back to Benjamin Graham. And yeah, that's really
• 1:30:07
  Speaker 1: and uh and and I remember Buffett said people are
• 1:30:10
  Speaker 1: hard wired. They rather they don't like boring stocks. They
• 1:30:13
  Speaker 1: tend to undervalue them. They like the gross story. They
• 1:30:15
  Speaker 1: want to write them up and they write them too high.
• 1:30:17
  Speaker 1: And you know it makes for a great cocktail party.
• 1:30:20
  Speaker 1: Cheat exactly. You want to you want to own the
• 1:30:21
  Speaker 1: Microsoft and all the big ones that have gone way
• 1:30:24
  Speaker 1: way now it's the apples and the teslas. It's high
• 1:30:27
  Speaker 1: wired into the people's brain. So I definitely you know,
• 1:30:30
  Speaker 1: I mean, I definitely understand that. Uh, the small stock
• 1:30:34
  Speaker 1: premium is a little bit about liquidity and transaction costs.
• 1:30:38
  Speaker 1: And one good thing df A did is that they
• 1:30:40
  Speaker 1: were able to actually it took them a while, by
• 1:30:41
  Speaker 1: the way, in their early years they weren't successful. They
• 1:30:44
  Speaker 1: learned how to become a trading Yes, they have an
• 1:30:47
  Speaker 1: unbelievable there. That's how they did it. They're able actually
• 1:30:50
  Speaker 1: to make the mark. They're incredibly efficient as what's enabled
• 1:30:57
  Speaker 1: them to make that slice. Uh, there is so there.
• 1:31:00
  Speaker 1: There's a liquidity premium and there's not a lot of
• 1:31:03
  Speaker 1: coverage on a lot of these look, liquidity is also there.
• 1:31:07
  Speaker 1: I think wick would we know that io liquid assets
• 1:31:10
  Speaker 1: of any sort get discounted in price. If you're a
• 1:31:13
  Speaker 1: long term holder, that becomes a favorable thing. You know,
• 1:31:16
  Speaker 1: this whole thing now on quality and momentum, there is evidence,
• 1:31:20
  Speaker 1: but you know, more and more people are I think
• 1:31:22
  Speaker 1: more and more people are riding. They ride the train,
• 1:31:25
  Speaker 1: and that's when you get the sharp movements. Oftentimes they
• 1:31:29
  Speaker 1: break through the they break through the two day moving
• 1:31:31
  Speaker 1: average and they break through the channel. Everyone just gangs up.
• 1:31:37
  Speaker 1: So let's talk about that. Because you have a chapter
• 1:31:39
  Speaker 1: in Stocks for the long Run on technical analysis. I
• 1:31:42
  Speaker 1: know you think that that long term trend and momentum
• 1:31:46
  Speaker 1: is valid, but you're not really a big fan of
• 1:31:48
  Speaker 1: the well, you know. I I said to myself, come on,
• 1:31:52
  Speaker 1: I'm gonna go complete stuff on stock. I gotta do
• 1:31:55
  Speaker 1: a chartists and I actually did an exhaustive test of
• 1:31:58
  Speaker 1: the Twitter day moving average there on the dal Jones
• 1:32:02
  Speaker 1: n N naz dat and my my fav My final
• 1:32:06
  Speaker 1: conclusion was um after transactions cost because you're gonna be
• 1:32:13
  Speaker 1: going in and out all that, and you need a
• 1:32:16
  Speaker 1: band to go in and out and et cetera, and
• 1:32:17
  Speaker 1: so on. It turns on on a risk return basis.
• 1:32:21
  Speaker 1: It's not much different than buy and hold. The difference is, though,
• 1:32:27
  Speaker 1: if you follow two inter day moving averages, it does
• 1:32:29
  Speaker 1: keep you out of the worst bear markets. Now you say,
• 1:32:33
  Speaker 1: why doesn't it do better? Because a lot you get
• 1:32:37
  Speaker 1: whip sort, you get whipsawed in. I can two thousand
• 1:32:42
  Speaker 1: and two urs. I forget which of them. There's a
• 1:32:44
  Speaker 1: few of them where you're going above the average. You
• 1:32:46
  Speaker 1: you know, you buy you go below, and you sell
• 1:32:49
  Speaker 1: and buy and sell, and you're at the end of
• 1:32:51
  Speaker 1: the year you're exhausted with transactions costs that are huge.
• 1:32:54
  Speaker 1: My my buddy MEB Faber, who was on the show, said,
• 1:32:57
  Speaker 1: and don't use the two day it's two it be
• 1:33:00
  Speaker 1: it's too noise. You used the ten months essentially the
• 1:33:03
  Speaker 1: same place, but not you get a signal once a
• 1:33:06
  Speaker 1: month inst there but as you got to have but
• 1:33:09
  Speaker 1: that also can whip it also need a band. Don't
• 1:33:12
  Speaker 1: forget that two other day. If if if I picked
• 1:33:15
  Speaker 1: a one percent band, when you're one percent above and
• 1:33:17
  Speaker 1: blow because if you take whenever you go above, you
• 1:33:20
  Speaker 1: may go above and below fifty times in one day
• 1:33:24
  Speaker 1: when if you really compute it, so you gotta have
• 1:33:26
  Speaker 1: a band otherwise you're gonna go crazy. And and we
• 1:33:28
  Speaker 1: found over time you gotta use closing prices in especially
• 1:33:32
  Speaker 1: these days with flash crashing. When I did closing, I
• 1:33:35
  Speaker 1: did on the basis of closing price. So you you
• 1:33:38
  Speaker 1: basically I get what I say is you know what
• 1:33:40
  Speaker 1: I mean. It's something you can do, but realize they're
• 1:33:43
  Speaker 1: gonna be some years you're gonna really be whips. And
• 1:33:45
  Speaker 1: by the way, it's not so much difference on buying
• 1:33:47
  Speaker 1: puts on the market when you do also how much
• 1:33:50
  Speaker 1: puts you I'm just saying when I looked at the
• 1:33:54
  Speaker 1: distribution of annual returns on a two inter day moving average,
• 1:33:57
  Speaker 1: it didn't differ so much. I I just kept on
• 1:34:00
  Speaker 1: buying puts protected me against downside. But I keep on
• 1:34:03
  Speaker 1: getting the drag. But a cost. You've got cost and rags.
• 1:34:07
  Speaker 1: That's almost like the whip sawing cost. Uh. It doesn't
• 1:34:11
  Speaker 1: come every year and then it comes in bunches. But
• 1:34:14
  Speaker 1: it gave when you looked at the distribution. So what
• 1:34:16
  Speaker 1: happens cut off the bottom, you know, so it avoided
• 1:34:20
  Speaker 1: the bad things drag the distribution all the way to
• 1:34:25
  Speaker 1: when do you buy the puts relative to well? I
• 1:34:27
  Speaker 1: you know, I just said it looked like a Stanton
• 1:34:29
  Speaker 1: centered one. You know. Basically, I just said, you know,
• 1:34:32
  Speaker 1: buy a point at ten percent under the market every
• 1:34:35
  Speaker 1: year for did you could play with that that like
• 1:34:41
  Speaker 1: the two day moving average without buying it? Oh, that's
• 1:34:44
  Speaker 1: that's quite interesting. Let's talk about books. You're the author
• 1:34:48
  Speaker 1: of three books. Um, what books have you read fiction
• 1:34:52
  Speaker 1: or nonfiction that you thought were interesting, influential, or that
• 1:34:57
  Speaker 1: you just enjoyed. You're reading Ben Bernanke's book right now.
• 1:35:00
  Speaker 1: What else? What else really stayed with you? Well, you
• 1:35:05
  Speaker 1: know it's interesting. Um, I'm reading Ben Bernanke's book right now.
• 1:35:12
  Speaker 1: I tend to read nonfiction. My wife is the fiction reader. Uh.
• 1:35:17
  Speaker 1: So I enjoyed books like Investment Biker, which yeah, I
• 1:35:21
  Speaker 1: mean I enjoyed Jim Rogers and I read his books,
• 1:35:25
  Speaker 1: and I've read others. And I read a lot of
• 1:35:27
  Speaker 1: the historical books. Um. That has to do generally in
• 1:35:31
  Speaker 1: the markets. Um, give me, give me one of your
• 1:35:35
  Speaker 1: favorite Oh god, um, don't see the one who wrote
• 1:35:38
  Speaker 1: on the short seller named uh famous short seller the
• 1:35:42
  Speaker 1: Reminiscence of the stuff. Yeah, things like that I read. Um. Uh.
• 1:35:50
  Speaker 1: I tend to go back and and sometimes read articles
• 1:35:54
  Speaker 1: as they were written back when. So I go back.
• 1:35:57
  Speaker 1: I look at the internet what were people saying that time?
• 1:36:01
  Speaker 1: And I have some quotes on my first chapter of
• 1:36:03
  Speaker 1: Stocks for the Long Run has a lot of quotes
• 1:36:05
  Speaker 1: of what people were saying. I just was thumbing through
• 1:36:08
  Speaker 1: it earlier and I saw the quote of somebody calling
• 1:36:12
  Speaker 1: you a bad name right in the right in two thousand,
• 1:36:16
  Speaker 1: just as the about the first chapter, I give three
• 1:36:19
  Speaker 1: quote to the one, the last quote. What someone told
• 1:36:24
  Speaker 1: me about this? They said, Dad, Jeremy, did you hear um?
• 1:36:27
  Speaker 1: You know uh CNBC today? I said no, Well, they
• 1:36:31
  Speaker 1: were talking about stocks for long Run and they had
• 1:36:34
  Speaker 1: a call in and call in said stocks for learning?
• 1:36:38
  Speaker 1: Are you crazy? All I have that book and all
• 1:36:40
  Speaker 1: it is good for now is a doorstop. Right. I
• 1:36:43
  Speaker 1: put that quote in there. I do not mind making
• 1:36:47
  Speaker 1: fun of myself. But here we are. It's fifteen years later,
• 1:36:52
  Speaker 1: and we're substantially above where we were in that period. Um.
• 1:36:57
  Speaker 1: So you've been a participant in markets. You've been in
• 1:37:01
  Speaker 1: participant in the philosophy, the thinking, the ideas that drive markets.
• 1:37:07
  Speaker 1: You mentioned almost fifty years almost. What do you think
• 1:37:10
  Speaker 1: of the most significant changes that you've seen over that
• 1:37:13
  Speaker 1: arc of time. Obviously the development of index funds, no
• 1:37:20
  Speaker 1: doubt about that. We definitely, I think it's important there.
• 1:37:25
  Speaker 1: I think, Um, obviously the big bang when when commissions
• 1:37:29
  Speaker 1: became deep competitive and a few young INDs commissions used
• 1:37:34
  Speaker 1: to be fixed. Yea, that was changed in the yearly seventies.
• 1:37:37
  Speaker 1: Schwab was actually the first to come out and slice
• 1:37:41
  Speaker 1: fees and suddenly you had a competitive marketplace for brokeren Service.
• 1:37:45
  Speaker 1: I think that that was extremely important. I also think
• 1:37:50
  Speaker 1: the development of index futures um, where people, you see,
• 1:37:55
  Speaker 1: could take a direction on the market. Now, people like
• 1:37:58
  Speaker 1: the spider Now that came much much later, and they
• 1:38:01
  Speaker 1: do the mini maybe if they want to do on that.
• 1:38:04
  Speaker 1: But there was you know that that development was the
• 1:38:08
  Speaker 1: first time that you could, you know, without going into
• 1:38:10
  Speaker 1: the index fund, which was you know then wanted to
• 1:38:13
  Speaker 1: trade it. You could move a big chunk of money
• 1:38:16
  Speaker 1: in and out and hedge yourself with the entire index.
• 1:38:21
  Speaker 1: I thought that index futures um, which was I think
• 1:38:23
  Speaker 1: in the very early eighties two, was also a very
• 1:38:27
  Speaker 1: significant development. And and and generally, I mean, obviously we've
• 1:38:32
  Speaker 1: got the globalization of the markets, uh, free capital movements,
• 1:38:36
  Speaker 1: free exchange rates that allow you know, very few firms
• 1:38:40
  Speaker 1: have capital restrictions if they certainly want to be part
• 1:38:43
  Speaker 1: of the global economy. Back then, even the United States
• 1:38:46
  Speaker 1: had restrictions uh back in the fifties and sixties. So
• 1:38:49
  Speaker 1: the freedom of the market to go globally I think
• 1:38:52
  Speaker 1: is critical. Um, yeah, I think that those were things
• 1:38:55
  Speaker 1: the index fund was obviously, I do think fundamental indexing
• 1:38:59
  Speaker 1: is an their huge breakthrough um, these are all positive change,
• 1:39:04
  Speaker 1: positive change. Anything that you see that that you think
• 1:39:08
  Speaker 1: is negative high frequency trading derivatives, anything along those lines,
• 1:39:11
  Speaker 1: or have they done well? You know what when they've
• 1:39:14
  Speaker 1: done away? Okay. So not that I like the specialists,
• 1:39:17
  Speaker 1: because there were complaints about them all the time. But
• 1:39:21
  Speaker 1: one thing they would not have let some of these
• 1:39:24
  Speaker 1: blue chips sell ten dollars less than the market or
• 1:39:28
  Speaker 1: fort or whatever it was with a flash crash in
• 1:39:31
  Speaker 1: two thousand and ten or this very recent one. We're
• 1:39:35
  Speaker 1: doing better. They what they screwed up was the open
• 1:39:38
  Speaker 1: that was actually the opening actually the flash crash of
• 1:39:40
  Speaker 1: two thousand times. They put safeguards in these mini stops
• 1:39:43
  Speaker 1: that were good. The trouble is that they weren't effective
• 1:39:46
  Speaker 1: at the open, and that's why we had a mini
• 1:39:48
  Speaker 1: crash at the crash. We've also had we had e
• 1:39:52
  Speaker 1: t F crash A little bit on those one. I
• 1:39:55
  Speaker 1: don't want to overstate that because people get all upset
• 1:39:59
  Speaker 1: and we look at the n umber of trades at
• 1:40:00
  Speaker 1: a crazy price. It's point o O O one percent,
• 1:40:04
  Speaker 1: but it's what everybody's price shows up. People say, how
• 1:40:08
  Speaker 1: why is Johnson and Johnson? So there was a hundred
• 1:40:11
  Speaker 1: shares of J and J. That's so at that, you know,
• 1:40:15
  Speaker 1: and don't forget they unwound the crazy, real crazy ones before,
• 1:40:18
  Speaker 1: but even you know, in this recent one, so there
• 1:40:20
  Speaker 1: were one or two hundred shares at crazy prices. They
• 1:40:23
  Speaker 1: still got to work on that at the open and
• 1:40:25
  Speaker 1: I think they will to prevent that. We have prevented
• 1:40:28
  Speaker 1: some of those big gaps since two thousand. Listen, we
• 1:40:31
  Speaker 1: are in an instantaneous communication world. It's going to Uh,
• 1:40:37
  Speaker 1: rumors are gonna start. I sometimes wonder whether there you know,
• 1:40:41
  Speaker 1: with all the Facebook and social media Twitter, of course,
• 1:40:44
  Speaker 1: you know, whether we're we're gonna get some rumor that's
• 1:40:49
  Speaker 1: gonna be false. That's gonna panic everyone. I mean, and
• 1:40:54
  Speaker 1: you know back at the time, the news people would
• 1:40:58
  Speaker 1: wait to verify it doesn't happen. Uh, that isn't happening.
• 1:41:02
  Speaker 1: We could get some sharp movements, but I guess honestly
• 1:41:07
  Speaker 1: that comes with the territory of communication is basically good.
• 1:41:11
  Speaker 1: I don't want to restota anyway, so you see things generally,
• 1:41:15
  Speaker 1: all these innovations have been improvements over time that worked
• 1:41:18
  Speaker 1: to the to the benefit of investors. Wow, that's quite fascinating.
• 1:41:22
  Speaker 1: Um any major shifts you see coming up? I know
• 1:41:25
  Speaker 1: you think fundamental indexing is one of them. What what
• 1:41:28
  Speaker 1: else do you see coming up? You know that's that
• 1:41:32
  Speaker 1: so much has happened. I don't know whether I'm looking
• 1:41:35
  Speaker 1: for anything. I mean, we've we've you know, we've got
• 1:41:38
  Speaker 1: E t F s and commodities right now. E t
• 1:41:42
  Speaker 1: F s in the foreign markets right now. And I
• 1:41:45
  Speaker 1: think E t F s are also I should say
• 1:41:47
  Speaker 1: E t F s are I'm gonna include that as
• 1:41:49
  Speaker 1: one of the break huge great shoes. So we're pretty
• 1:41:52
  Speaker 1: much we're pretty much doing that. You know, whether we
• 1:41:57
  Speaker 1: could actually get E t fs in real estate as
• 1:42:01
  Speaker 1: beyond reats you mean, like beyond reas. It's really hard
• 1:42:04
  Speaker 1: to do that though, because you can't arbitrage. If you
• 1:42:07
  Speaker 1: can't easily in and out to arbitrage to be a
• 1:42:10
  Speaker 1: creation unit another word, just you're buying enough of the
• 1:42:13
  Speaker 1: underlying stock to make one more et F shart. You
• 1:42:17
  Speaker 1: can't really do that because you're's not as liquid, it
• 1:42:19
  Speaker 1: doesn't trade. Um, the last two questions, these are these
• 1:42:23
  Speaker 1: are always interesting. Um, you work with kids, you work
• 1:42:27
  Speaker 1: with college students and grad students. What sort of advice
• 1:42:32
  Speaker 1: would you give or do you give to millennials who
• 1:42:35
  Speaker 1: were graduating at the beginning of their career if they
• 1:42:38
  Speaker 1: were interested in going into finance. Well, there's a lot
• 1:42:43
  Speaker 1: of different ways to go into financing. To do what
• 1:42:44
  Speaker 1: I do is academics. Um is I just say, read,
• 1:42:51
  Speaker 1: read widely, current events, try to understand, structure, take course,
• 1:42:57
  Speaker 1: try to fit things into a paragigm that you feel
• 1:43:00
  Speaker 1: comfortable in analyzing it. That's it building, building a structure
• 1:43:06
  Speaker 1: at which you can think about the markets, and then
• 1:43:09
  Speaker 1: when a new situation comes up, you'll have a structure
• 1:43:12
  Speaker 1: to analyze it in. But the wealth of experience start young.
• 1:43:15
  Speaker 1: I actually, as I said, I was fascinated with Stockbacker
• 1:43:18
  Speaker 1: when I was a kid, And not so much which
• 1:43:21
  Speaker 1: stocks to buy, but the whole movements of the market
• 1:43:24
  Speaker 1: up or down? Why did it move up or down?
• 1:43:26
  Speaker 1: Why did it? And I always try to say, can
• 1:43:29
  Speaker 1: I learn enough to get a structure of thinking about
• 1:43:34
  Speaker 1: the major factors that do it? So, you know, read
• 1:43:37
  Speaker 1: as much as you can current events. Take those courses
• 1:43:40
  Speaker 1: that you can um and and and and and and
• 1:43:44
  Speaker 1: and and definitely take a global view. The world is
• 1:43:49
  Speaker 1: is global now and uh, you know it's not just
• 1:43:52
  Speaker 1: the United States. Or England. It's global, it's the whole world.
• 1:43:57
  Speaker 1: And my last question, what do you know about investing
• 1:44:00
  Speaker 1: today that you wish you knew when you started out
• 1:44:04
  Speaker 1: forty four years ago. Oh, and I wish that I
• 1:44:09
  Speaker 1: knew when I started out forty four years ago. Um,
• 1:44:14
  Speaker 1: I wish um that I was again, I was wadded
• 1:44:22
  Speaker 1: to cap weighted. At the same time, I said tech
• 1:44:26
  Speaker 1: was crazy and I didn't know how to reconcile those two.
• 1:44:31
  Speaker 1: Now I can do a fundamental waiting. I can get
• 1:44:34
  Speaker 1: out of a sector that I think is overweighted, or
• 1:44:37
  Speaker 1: overweight in a sector that I think it's really cheap. Now,
• 1:44:41
  Speaker 1: not dramatically. I don't think I'm the greatest timer and
• 1:44:44
  Speaker 1: all that, but just looking at valuations once they get
• 1:44:48
  Speaker 1: to an extreme. You may not buy at the bottom,
• 1:44:51
  Speaker 1: you may not sell at the top. But I think
• 1:44:53
  Speaker 1: that you can really move better than buy and hold.
• 1:44:58
  Speaker 1: I think fundamental waiting is one way that does it
• 1:45:01
  Speaker 1: for you, by the rebalancing technique. So so in a
• 1:45:05
  Speaker 1: situation like two thousand, you don't want to be overweighted
• 1:45:09
  Speaker 1: the most expensive sector, the biggest stocks, and that'll be
• 1:45:12
  Speaker 1: the biggest part of my potfolio. Yeah, so you know
• 1:45:15
  Speaker 1: if I were in, you know, a fundamentally weighted my,
• 1:45:19
  Speaker 1: they would have been selling the technology because it's price
• 1:45:22
  Speaker 1: kept on going up relative it's fundamentals, and I would
• 1:45:25
  Speaker 1: have been much better off rather than suffer through the
• 1:45:28
  Speaker 1: two thousand and two even though I knew it was overrated,
• 1:45:30
  Speaker 1: I was kind of locked into the cap weighted Professor Siegel,
• 1:45:34
  Speaker 1: I can't begin to thank you enough. This has been
• 1:45:38
  Speaker 1: absolutely delightful. I I appreciate all your time and generosity,
• 1:45:43
  Speaker 1: and it's been a pleasure. Burry Well, maybe we'll do
• 1:45:46
  Speaker 1: it again sometimes, I would love to. We've been speaking
• 1:45:50
  Speaker 1: with Professor Jeremy Siegel of the Wharton School of the
• 1:45:53
  Speaker 1: University of Pennsylvania, author of Stocks for the Long Run.
• 1:45:57
  Speaker 1: If you enjoy this conversation, be sure and look up
• 1:46:01
  Speaker 1: or down an Inch on iTunes and you can see
• 1:46:04
  Speaker 1: all of the other chats we've had with various people
• 1:46:07
  Speaker 1: over the years. Uh, be sure and check out my
• 1:46:10
  Speaker 1: daily column on Bloomberg View dot com. Follow me on
• 1:46:12
  Speaker 1: Twitter at rid Halts. I wanna I would be remiss
• 1:46:16
  Speaker 1: if I did. In fact, if I did not think
• 1:46:19
  Speaker 1: my engineer, Reggie Charlie Vollmer, my producer, and my Head
• 1:46:23
  Speaker 1: of Research, Michael bat Nick. You've been listening to Masters
• 1:46:27
  Speaker 1: in Business on Bloomberg Radio.