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Interview With Charles D. Ellis: Masters in Business (Audio) · Masters in Business

• 0:02
  Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
• 0:07
  Speaker 1: This week on the podcast, we have an extra special guest.
• 0:11
  Speaker 1: His name is Charlie Ellis, and I spend some time
• 0:17
  Speaker 1: going over his CV when we actually do the show,
• 0:21
  Speaker 1: so I won't um repeated, but I'm going to tell
• 0:24
  Speaker 1: a quick story about the first time Charlie was a
• 0:28
  Speaker 1: guest here. I was just captivated by the combination of
• 0:35
  Speaker 1: his intellect and integrity and common sense. And the show
• 0:40
  Speaker 1: ended and I had to be somewhere, and he was
• 0:43
  Speaker 1: walking down to Grand Central station, and I said, sure,
• 0:47
  Speaker 1: I'm happy to walk with you, and and we continue
• 0:50
  Speaker 1: to conversation down twenty blocks or so from the Bloomberg
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  Speaker 1: Building to UM to Grand Central and I can't describe
• 1:00
  Speaker 1: it any of the way. It was just captivating. It's
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  Speaker 1: a delight and a privilege to be able to chat
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  Speaker 1: with someone of his experience, knowledge, wisdom. It was just delightful.
• 1:12
  Speaker 1: And I sat and chatted with him for this show
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  Speaker 1: for about an hour and a half. If you are
• 1:19
  Speaker 1: at all interested in anything having to do with investment management,
• 1:25
  Speaker 1: institutional investing, individual investing, indexing, retirement savings, the list goes
• 1:31
  Speaker 1: on and on, you will appreciate this conversation. There there
• 1:35
  Speaker 1: is no one else like Charlie Ellis. Um. He is
• 1:39
  Speaker 1: one of the legends of finance. And so, with no
• 1:44
  Speaker 1: further ado, here is my conversation with Charlie Ellis. This
• 1:51
  Speaker 1: is Masters in Business with Barry Ridholts on Bloomberg Radio. Today.
• 1:55
  Speaker 1: I have an extra special guest, a legend in the
• 1:58
  Speaker 1: world of finance. His name is Charlie Ellis. And if
• 2:02
  Speaker 1: you're unfamiliar with Mr Ellis, let me give you a
• 2:04
  Speaker 1: very short version of his curriculum. Vita graduated from Yale
• 2:09
  Speaker 1: with a BA in history, ends up getting an NBA
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  Speaker 1: from Harvard UH and UH PhD in Finance from n YU.
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  Speaker 1: Becomes a c f A charter holder in nineteen sixty
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  Speaker 1: nine on the faculty of the Harvest Business School, director
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  Speaker 1: of the Vanguard Group on the Yale School of Management UH,
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  Speaker 1: as well as the Yale Endowment, Chairman of the Board
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  Speaker 1: of the cf A Institute. One of a dozen people
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  Speaker 1: recognized for lifetime contributions to the investment profession by the
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  Speaker 1: cf A Institute. Author of sixteen books on investing, and
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  Speaker 1: we'll talk about a few of those shortly. Charlie Ellis,
• 2:52
  Speaker 1: Welcome back to Bloomberg. Glad to be here, Barry. Thank you.
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  Speaker 1: So that's the short version of your curriculum. VTA will
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  Speaker 1: spend some more time talking about your work in the
• 3:03
  Speaker 1: field in a little bit. But let's jump right in
• 3:06
  Speaker 1: to the new book that you just put out, the
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  Speaker 1: title The index Revolution, Why investors should join it. Now
• 3:14
  Speaker 1: you've already written sixteen books. What motivated you to write
• 3:18
  Speaker 1: yet another one. Well, I really believe in getting the
• 3:21
  Speaker 1: word out, and I've had an unbelievable privilege as an
• 3:24
  Speaker 1: insider in the investment management world. I had chanced to
• 3:27
  Speaker 1: meet with people all over the world and talk and
• 3:31
  Speaker 1: talk and talk and talk with them about what's going on.
• 3:33
  Speaker 1: And once you get a really good idea of what's
• 3:36
  Speaker 1: going on, you realize indexing makes so much sense for
• 3:39
  Speaker 1: so many people. Everybody should seriously consider it and most
• 3:42
  Speaker 1: people should do it. So how do you help write
• 3:45
  Speaker 1: a short book that's easy to read and see if
• 3:48
  Speaker 1: you're gonna attract attention? So, so let's talk about indexing.
• 3:53
  Speaker 1: You spoke at a conference recently, the Evidence Based Investing Conference.
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  Speaker 1: Bill McNabb, the CEO and chairman UH of the conference,
• 4:01
  Speaker 1: spoke and the two of you both said the same thing. Gee,
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  Speaker 1: it's a shame indexing attracted the word passive that that
• 4:10
  Speaker 1: seems to be a problem. What's the issue with passive? Well,
• 4:13
  Speaker 1: when I was growing up, we read The Little Engine
• 4:15
  Speaker 1: that Could and we were told if you study harder,
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  Speaker 1: you'll get better grides. And when I got a job,
• 4:20
  Speaker 1: I was told, if you work hard, you'll get a raise,
• 4:22
  Speaker 1: you might even get a bonus. Everything about our lives.
• 4:25
  Speaker 1: You want to learn the piano, spend time practicing, you
• 4:28
  Speaker 1: want to learn how to play tennis, Practice, practice, practice,
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  Speaker 1: Everything has to do with do more, work harder, and
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  Speaker 1: you'll do better. So we come to investing and say, fine,
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  Speaker 1: I'm ready to go. Where do I get a chance
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  Speaker 1: to do better? I'm gonna work hard? And somebody says, he,
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  Speaker 1: you know, I wouldn't bother doing that. Why don't you
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  Speaker 1: just settle for average? Nobody wants to be average, Nobody
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  Speaker 1: wants to settle. And the word passive is a horrible negative.
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  Speaker 1: Can you imagine your wife or husband introducing you as
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  Speaker 1: this is my spouse. Passive sounds terrible. So what is
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  Speaker 1: the better phrase to describe what people should think of
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  Speaker 1: when they think of indexing well to one is indexing
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  Speaker 1: and the second is winning. Winning, So explain that why
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  Speaker 1: is um? Why is winning? As Charlie Sheen would say,
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  Speaker 1: why does that leave us to lead us to indexing? Well,
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  Speaker 1: one thing that I would use to describe winning is
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  Speaker 1: doing better than most of the other people at whatever
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  Speaker 1: it is you're trying to do operationally, year after year
• 5:27
  Speaker 1: after year. Over the long term, indexing does better today
• 5:31
  Speaker 1: than active investing. That wasn't the case twenty five or
• 5:34
  Speaker 1: thirty years ago, but it is the case today. What
• 5:36
  Speaker 1: what accounts for that change? Massive change in virtually every variable.
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  Speaker 1: Just for an example, if you go back fifty years ago,
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  Speaker 1: there might have been five thousand people involved in active investing.
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  Speaker 1: Now they're at least a million people involved, and they're smart,
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  Speaker 1: well educated. They've all got exactly the same tools, computers,
• 5:55
  Speaker 1: access to the Internet, Bloomberg terminals, and they've all got
• 5:59
  Speaker 1: access to same information because the SEC requires public companies
• 6:03
  Speaker 1: to give everybody all the information they give to anybody.
• 6:06
  Speaker 1: So it's not like the old days where whoever got
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  Speaker 1: that first call, Hey, that was a money maker. If
• 6:11
  Speaker 1: you found it out before all your competitors did, it
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  Speaker 1: was wonderful The second thing that's big, big change is
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  Speaker 1: it used to be it was professionals who had access
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  Speaker 1: to really good research, a small fraction of the market
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  Speaker 1: competing against large numbers of amateurs who bought and sold
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  Speaker 1: once every year or two and didn't candidly, no one,
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  Speaker 1: awful lot. Now it's been reversed. Now or more of
• 6:34
  Speaker 1: trading on the New York Exchange is either machines or
• 6:38
  Speaker 1: professional people, and they're playing to win. Michael Mobisoft calls
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  Speaker 1: this the paradox of skill. It's not that the competitors
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  Speaker 1: are bad, it's that everybody else is so good. How
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  Speaker 1: is there any room to to beat them when you're
• 6:51
  Speaker 1: playing at such high levels, so very good, and so
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  Speaker 1: many of them, and they have the tools, they have
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  Speaker 1: the technology. It's fabulous. They are so much better than
• 6:59
  Speaker 1: managers or twenty years ago. It's night and day. So
• 7:03
  Speaker 1: the first index fund that comes out by Jack Bogel,
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  Speaker 1: they were hoping to sell you right in the book,
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  Speaker 1: a hundred and fifty million dollars worth and they could
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  Speaker 1: barely get it over ten million dollars when they first
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  Speaker 1: launched it. It was a flop. Why did the first
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  Speaker 1: index fund do so poorly? It wasn't a flop. It
• 7:21
  Speaker 1: was a big flop. A whole bunch of different things.
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  Speaker 1: Number One, nobody knew anything about indexing to speak of,
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  Speaker 1: and the idea wasn't out, and everybody was looking for
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  Speaker 1: beat the market rates of return. That was a big
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  Speaker 1: second is there was a sales load in order to
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  Speaker 1: attract the sales force at the retail brokery firms. What
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  Speaker 1: was that sales load? It was I think six and
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  Speaker 1: a half percent. That's a lot when you're offering I'm
• 7:49
  Speaker 1: going to give you average, and I'm going to charge
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  Speaker 1: you a big entry fee to get started. That wasn't
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  Speaker 1: an annual fee. It was a one time load for
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  Speaker 1: the purchase one time. But you dropped eight and a
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  Speaker 1: half off the top of your money. Your behind the
• 8:01
  Speaker 1: line of scrimmage pretty far. So. One of the other
• 8:04
  Speaker 1: things that you mentioned the book that I think is fascinating.
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  Speaker 1: Over the past fifty years, the trading volume on the
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  Speaker 1: New York Stock Exchange increased from three million shares a
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  Speaker 1: day to five billion a day. That's a fifteen hundred
• 8:19
  Speaker 1: not all on the New York Stock Exchange, some of
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  Speaker 1: us off the board trading in New York Stock Exchange listed,
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  Speaker 1: and honestly, five million is an average. It ferries up
• 8:27
  Speaker 1: and down depending on what the machines are doing. I'm
• 8:29
  Speaker 1: Barry Riults. You're listening to Masters in Business on Bloomberg
• 8:33
  Speaker 1: Radio today. My special guest is Charlie allis a legend
• 8:37
  Speaker 1: in Wall Street. He has written and I shouldn't just
• 8:39
  Speaker 1: say Wall Street, but a legend in all of finance.
• 8:42
  Speaker 1: He has written sixteen books, one of which I think
• 8:46
  Speaker 1: is quite fascinating. It's called Falling Short. The Coming Retirement Crisis.
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  Speaker 1: What is the looming retirement crisis that the United States faces.
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  Speaker 1: It's a complex of several different so let's just pick
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  Speaker 1: out the really big ones. Number One, people are living
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  Speaker 1: longer than they used to live. Longevity certainly is an
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  Speaker 1: ongoing shift from which means people are going to be
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  Speaker 1: in retirement for more years than they might have actually
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  Speaker 1: been planning on. Secondly, a fairly large fraction half of
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  Speaker 1: any couple who were in there late sixties, early seventies,
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  Speaker 1: half of them will need assisted living at Sometimes that's
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  Speaker 1: fairly expensive stuff you are, particularly if you're not prepared
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  Speaker 1: for it. About a third of American workers have no
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  Speaker 1: retirement plan whatsoever. Zero zero Social security or nothing. Social
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  Speaker 1: Security is not enough, it's sure. Uh. Then if you say, well,
• 9:41
  Speaker 1: let's look at the people who got coverage. It used
• 9:43
  Speaker 1: to be that we had to find benefit plans, that
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  Speaker 1: the company did everything. All you had to do was
• 9:48
  Speaker 1: tell them what your address was so they can mail
• 9:50
  Speaker 1: the checks. Now virtually every decision has to be made
• 9:54
  Speaker 1: by the individual. Many people are not well prepared for
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  Speaker 1: making those decisions. Then you look at all the different decisions.
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  Speaker 1: Are you going to be in the plan or not?
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  Speaker 1: Are you going to match the match? Are you going
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  Speaker 1: to escalate your contributions over time so that you're saving
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  Speaker 1: enough to actually cover your cost in retirement? How are
• 10:13
  Speaker 1: you going to do the investing? How are you going
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  Speaker 1: to do the distributions from your investments when you do retire,
• 10:19
  Speaker 1: and you start with just one of the most obvious
• 10:21
  Speaker 1: things that drives me crazy. If you ask people broadly,
• 10:26
  Speaker 1: ask people here at Bloomberg, ask people who really know
• 10:29
  Speaker 1: quite a lot about investing. What is the delta? What
• 10:32
  Speaker 1: is the difference between how much you get from Social
• 10:35
  Speaker 1: Security if you claim as soon as you can sixty
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  Speaker 1: two or you wait until you're seventy and a half
• 10:40
  Speaker 1: when you have to claim well, it must be a lot,
• 10:43
  Speaker 1: and I usually get somewhere between twenty and thirty percent
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  Speaker 1: as an increase. That is not true if you don't
• 10:49
  Speaker 1: claim at sixty two and do claim tofer until you
• 10:52
  Speaker 1: get to seventy and a half, the increase every year
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  Speaker 1: for the rest of your life, as long as you
• 10:58
  Speaker 1: live and it's inflation protected, is an increase of seventy
• 11:01
  Speaker 1: six percent. Really, that's giant. That's a giant payout. And
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  Speaker 1: all I would like is that everybody knew and would
• 11:08
  Speaker 1: tell everybody they know more every effing year. So there's
• 11:13
  Speaker 1: no reason to unless you have no choice. If you
• 11:16
  Speaker 1: could wait till seventy and a half, that's clearly the better,
• 11:19
  Speaker 1: unless you're planning to die in your late sixties or
• 11:21
  Speaker 1: early seventies, in which case you should take the money.
• 11:23
  Speaker 1: But most people are not planning to make a note
• 11:25
  Speaker 1: of that. So there's a data point in the book
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  Speaker 1: that that I find mind blowing as and and this
• 11:32
  Speaker 1: data is a few years old, but I looked it
• 11:34
  Speaker 1: up since and I know it hasn't changed dramatically. As
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  Speaker 1: of the median household approaching retirement only had a hundred
• 11:45
  Speaker 1: and eleven thousand dollars in four oh one k and
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  Speaker 1: IRA holdings, and if you do what financial advisors suggest
• 11:53
  Speaker 1: you withdrew a four percent a year, that put that
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  Speaker 1: creates less than five thousand dollars in annual income house
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  Speaker 1: less than four and a half thousands. Now the numbers
• 12:02
  Speaker 1: have gone up, but I think it's now a hundred
• 12:04
  Speaker 1: and thirteen thousand UM. I forgot the UM, not the
• 12:08
  Speaker 1: investment company Institute that the e B I R dot
• 12:13
  Speaker 1: org one of these so so e B R I right,
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  Speaker 1: So that's where I got the one thirteen number. But
• 12:19
  Speaker 1: still it's it's an insignificant amount of amount of money. Yeah,
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  Speaker 1: we could argue about the specific details. It doesn't matter.
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  Speaker 1: For people going into retirement with usually something like twenty
• 12:34
  Speaker 1: years to go a hundred hundred and ten hundred twenty
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  Speaker 1: even a hundred thirty thousand is no help at all
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  Speaker 1: to covering the costs that they're going to be living with,
• 12:44
  Speaker 1: no help at all. Well, it's not quite that bad.
• 12:47
  Speaker 1: So it's a sucker bet. You looks like you've got
• 12:49
  Speaker 1: a lot of money. You imagine what it's like if
• 12:51
  Speaker 1: you're a working guy Joe sixpack, and you have been
• 12:55
  Speaker 1: working along and you look at your account. You see, Verry,
• 13:00
  Speaker 1: I got more money every dreamed I would have that.
• 13:01
  Speaker 1: It's in my own name. I've got a hundred and
• 13:04
  Speaker 1: ten hundred and fifteen thousand smackers thirty years right, So
• 13:10
  Speaker 1: long run, even if you retire at seventy and you
• 13:13
  Speaker 1: live to fifteen years, is still a long time to
• 13:18
  Speaker 1: not be having any income. And it's not just individuals.
• 13:21
  Speaker 1: The other data point from the book, the public sector
• 13:24
  Speaker 1: is just as bad. The Congressional Budget Office stated by
• 13:27
  Speaker 1: any measure, just about every single state and local pension
• 13:32
  Speaker 1: plan is underfunded. How how did that come about? Well,
• 13:36
  Speaker 1: that's the defined benefit plans in almost every case. So
• 13:39
  Speaker 1: these are public employees, teachers, what I like to say,
• 13:46
  Speaker 1: real Americans. These are a crowd of people who've put
• 13:50
  Speaker 1: in a good, long term serving the public, okay, And
• 13:54
  Speaker 1: where are they now? Their retirement depends on two things.
• 13:58
  Speaker 1: How much money has already been set aside, and how
• 14:00
  Speaker 1: much money is going to be earned by the investment
• 14:03
  Speaker 1: on that money that was set aside. And you look
• 14:07
  Speaker 1: through the eighties and nineties, people would have said, boy,
• 14:10
  Speaker 1: you know, we can earn a lot, ten percent, twelve percent,
• 14:13
  Speaker 1: fourteen percent. Years came ruaring through. We all had a
• 14:16
  Speaker 1: great time. If you assume that's what you could earn,
• 14:19
  Speaker 1: and you say, well, I want to be conservative, so
• 14:21
  Speaker 1: I'm only going to assume eight percent. Track it out
• 14:24
  Speaker 1: over time. That's your pension. Now, what if somebody comes
• 14:27
  Speaker 1: along and says, Barry, that was an unusual time period.
• 14:30
  Speaker 1: Interest rates went from thirteen percent to two percent. That
• 14:34
  Speaker 1: changed everything, made everything look like a hire rate to return.
• 14:37
  Speaker 1: You're not going to see that again. What are you
• 14:39
  Speaker 1: going to see? Well, we've got two percent three percent
• 14:42
  Speaker 1: in fixed income and it looks like six seven percent
• 14:46
  Speaker 1: in equity investments. What's the mix and you end up
• 14:51
  Speaker 1: with ten percent. So we've got what's called an unfunded
• 14:54
  Speaker 1: obligation that's on paper, we've signed up for it, but
• 14:58
  Speaker 1: it hasn't been paid in yet. Because we assume we're
• 15:01
  Speaker 1: going to get a great rate of return. Now we're
• 15:03
  Speaker 1: assuming we're going to get a much lower rate of return.
• 15:05
  Speaker 1: How much do we have to put up a lot
• 15:07
  Speaker 1: so that blended rate to return. I'm joking about adding
• 15:10
  Speaker 1: three and seven, But you take the sixty forty portfolio
• 15:13
  Speaker 1: seven equity, three bonds, you're really looking at a five
• 15:17
  Speaker 1: and a half six percent, a five and a half
• 15:19
  Speaker 1: six percent return at three in bonds would be a
• 15:22
  Speaker 1: little optimistic. Well, I'm taking the average over the next
• 15:25
  Speaker 1: thirty years. But if you look at the path and
• 15:27
  Speaker 1: you look at the long term average and bonds that
• 15:30
  Speaker 1: that said, you're so if we're looking at a much
• 15:34
  Speaker 1: lower rate of return, who's going to have to make
• 15:37
  Speaker 1: up that shortfall? Because these are contractually guaranteed payouts as
• 15:42
  Speaker 1: part of public employees employment contract. Who's on the hook
• 15:47
  Speaker 1: for that balance? Drop back to your really serious negotiations.
• 15:51
  Speaker 1: They're three parties at interest, the government, the mayor, the Senate,
• 15:55
  Speaker 1: the governor, mayor whoever it was, the public m hm,
• 16:01
  Speaker 1: and the workers. The workers are represented by a union.
• 16:04
  Speaker 1: The union guys are pretty smart. They've studied this stuff
• 16:06
  Speaker 1: for years. They pay a lot of attention. The political
• 16:09
  Speaker 1: people are focused on their next election and they're pretty
• 16:12
  Speaker 1: good at that sort of thing. The party that's going
• 16:14
  Speaker 1: to have to pay up any difference doesn't get to
• 16:16
  Speaker 1: come to the meetings. I'm Barry Ridholtz. You're listening to
• 16:20
  Speaker 1: Masters in Business on Bloomberg Radio. My special guest today
• 16:23
  Speaker 1: is Charlie Ellis. He has been on the faculty of
• 16:26
  Speaker 1: the Harvard Business School. He has served on the Yale
• 16:29
  Speaker 1: Endowment Board of Directors of Vanguard. Uh, the list goes
• 16:33
  Speaker 1: on and on. Author of sixteen books on finance. I
• 16:37
  Speaker 1: want to start discussing your history in financial services with
• 16:42
  Speaker 1: a quote of yours that that I really should have
• 16:45
  Speaker 1: frames and it's this The investment management business should not
• 16:51
  Speaker 1: should be a profession, but is not explain that well.
• 16:55
  Speaker 1: A profession is defined by the service by the experts
• 17:00
  Speaker 1: on behalf of individuals who don't happen to know very
• 17:03
  Speaker 1: much about what the experts are experts in. That's why
• 17:06
  Speaker 1: law is a profession. That's why medicine is a profession.
• 17:10
  Speaker 1: An investment management used to be entirely a profession. It
• 17:15
  Speaker 1: didn't pay very well, but you could do some really
• 17:17
  Speaker 1: nice work for individual people and help them through the
• 17:20
  Speaker 1: solution to the various problems they might face. Wait that
• 17:22
  Speaker 1: this profession didn't pay very well in the old days,
• 17:25
  Speaker 1: my assumption is it was a big money maker on
• 17:28
  Speaker 1: the nineteen fifties. It wasn't nineteen forties. It certainly wasn't.
• 17:32
  Speaker 1: Nineteen thirties. Was terrible. Nobody went into investment management in
• 17:36
  Speaker 1: those days. Huh. That's quite that's quite fascinating. Out of
• 17:39
  Speaker 1: my class at Harvard Business School in nineteen sixty three,
• 17:43
  Speaker 1: only three of us went into investment management, and I
• 17:45
  Speaker 1: got into it accidentally. So let's tell that story. That's
• 17:48
  Speaker 1: a fascinating story. How did you stumble into investment matter?
• 17:52
  Speaker 1: I was looking for a job and a friend of
• 17:54
  Speaker 1: mine father was looking for somebody to come and work
• 17:57
  Speaker 1: in a junior position, and so I thought it would
• 17:59
  Speaker 1: be a really interesting conversation. I thought that he was
• 18:02
  Speaker 1: talking for the Rockefeller Foundation. It turned out he was
• 18:04
  Speaker 1: talking about the Rockefeller Family Office, a tiny little investment
• 18:09
  Speaker 1: team that managed investments for the family and also for
• 18:12
  Speaker 1: some of their great philanthropic institutions like Rockefeller University, Rockefeller
• 18:17
  Speaker 1: Brothers Fund, and stuff like that. When you say a
• 18:19
  Speaker 1: tiny little team the Rockefeller Family Office, that was not
• 18:23
  Speaker 1: an insignificant sum of money, a lot of money, but
• 18:27
  Speaker 1: the number of people was small, only six of us. Okay,
• 18:31
  Speaker 1: So you thought you were going into some philanthropic already
• 18:35
  Speaker 1: sort of job. And I gotta start an interview with
• 18:38
  Speaker 1: a guy, and I realized, this man is really smart.
• 18:40
  Speaker 1: He knows a lot, uh, and I need to learn
• 18:42
  Speaker 1: a lot. I could learn a lot with him. I
• 18:44
  Speaker 1: better go there. Because I don't know enough. So there's
• 18:48
  Speaker 1: there's a legend that Goldman Sachs offered you a job
• 18:51
  Speaker 1: and you said, no, thanks. What is that any truth
• 18:54
  Speaker 1: to that? It's totally true, but they didn't actually offer
• 18:57
  Speaker 1: the job. They had it printed on a piece of
• 18:58
  Speaker 1: paper and looking at it realizing, you know, Dad always
• 19:02
  Speaker 1: thought Goldman Sax was a great firm. I'd love to
• 19:04
  Speaker 1: go with a great firm, but I need to earn
• 19:07
  Speaker 1: at least six thousand dollars so I can pay off
• 19:09
  Speaker 1: my wife's loans for going to college. She'd going to
• 19:13
  Speaker 1: college on a scholarship and a loan package, and I
• 19:17
  Speaker 1: needed to pay that off. So I had figured I
• 19:18
  Speaker 1: could stave a thousand dollars out of six thousand. I
• 19:21
  Speaker 1: can't take a job. Ford never occurred to me. You
• 19:24
  Speaker 1: might get a raised. Never occurred to me. You might
• 19:26
  Speaker 1: earn a bonus. So it ended up working out anyway
• 19:30
  Speaker 1: with with the Rockefellers and and eventually granteds associates. Uh
• 19:35
  Speaker 1: the firm you did? You you you co founded founded
• 19:38
  Speaker 1: I was the only one, the other one who founded it.
• 19:41
  Speaker 1: So how did you What did you learn from working
• 19:45
  Speaker 1: with the Rockefellers. I would think a family office sitting
• 19:49
  Speaker 1: on a giant pool of business, but giant pool of capital,
• 19:53
  Speaker 1: would really teach you the business from the inside out.
• 19:56
  Speaker 1: What what did you learn from that experience? I learned
• 19:59
  Speaker 1: a lot. Number one is that most people have not
• 20:01
  Speaker 1: thought through what they ought to be doing with their
• 20:03
  Speaker 1: investments over the long term, and they have not settled
• 20:05
  Speaker 1: on a policy that really makes sense to them individually. Second,
• 20:09
  Speaker 1: there's a lot of information, and if you don't have
• 20:11
  Speaker 1: that information, you're in trouble. And third that investment management
• 20:17
  Speaker 1: is a wonderful, interesting, fascinating, exciting and filled with all
• 20:22
  Speaker 1: kinds of experiences, wonderful place to work. So so, all told,
• 20:27
  Speaker 1: that was a positive experience, lucky, lucky and very positive.
• 20:30
  Speaker 1: But by the way, that's a theme that comes up
• 20:32
  Speaker 1: on the people I sit with and have these conversations
• 20:35
  Speaker 1: with over and over again, the role of just being
• 20:39
  Speaker 1: in the right place at the right time and getting
• 20:41
  Speaker 1: a little hey, smartest good. But sometimes lucky is better,
• 20:44
  Speaker 1: much much better. And you'll find that those who've been
• 20:47
  Speaker 1: around for a long time, it's all luck. Those that
• 20:50
  Speaker 1: are around only recently, they're paying attention how much you
• 20:53
  Speaker 1: can get paid, because it is the best paid line
• 20:55
  Speaker 1: of work in the world today. By the way, back
• 20:58
  Speaker 1: to back to some quotes in the book, the most
• 21:01
  Speaker 1: obvious success factor for us was luck, luck, and luck.
• 21:05
  Speaker 1: So how is that an exaggeration or is do you
• 21:10
  Speaker 1: think luck really serendipity a roll of the dice really
• 21:13
  Speaker 1: has a big impact on the lives we lead. I
• 21:17
  Speaker 1: know it had a huge impact on my life. I
• 21:20
  Speaker 1: doubt it head anywhere near that big an impact on
• 21:22
  Speaker 1: most of the other people who have been around. But
• 21:24
  Speaker 1: anybody who has been in the investment management area for
• 21:27
  Speaker 1: the last fifty years, it doesn't think that was really lucky,
• 21:31
  Speaker 1: either kidding himself or kidding you. So we're gonna talk
• 21:35
  Speaker 1: later about um winning the losers game. But how often
• 21:40
  Speaker 1: do investors confuse luck for skill? All the time? All
• 21:44
  Speaker 1: the time. But there are normal human beings. That's when
• 21:47
  Speaker 1: human beings do. If it works out well, I was smart.
• 21:50
  Speaker 1: If it doesn't work out well, I was unlucky. I'm
• 21:54
  Speaker 1: Barry rid Helts. You're listening to Masters in Business on
• 21:57
  Speaker 1: Bloomberg Radio. Our special yes today is Charlie Ellis. He
• 22:02
  Speaker 1: is a legend in the world of finance, having served
• 22:05
  Speaker 1: on the board of directors of Vanguard as well as
• 22:08
  Speaker 1: the Yale Endowmond Funds. Let's talk a little bit about
• 22:12
  Speaker 1: a paper you wrote in that I think has a
• 22:17
  Speaker 1: fascinating history, um both where it came from and where
• 22:22
  Speaker 1: it went. You authored The Losers Game in nineteen seventy
• 22:26
  Speaker 1: five as an article for the Financial Analyst Journal after
• 22:32
  Speaker 1: reading a book about tennis. Tell us about that. Well,
• 22:36
  Speaker 1: the hero of the story is really a brilliant guy
• 22:38
  Speaker 1: named Simon Ramo, who was the founder of what was
• 22:42
  Speaker 1: called Thompson Ramo Woldridge and then what's called t r
• 22:44
  Speaker 1: W and is in fact the organization that helped America
• 22:48
  Speaker 1: with its entire space program. He was a gifted amateur athlete,
• 22:53
  Speaker 1: and he also was a gifted musician. He used to
• 22:55
  Speaker 1: play in a quartet with three members of the Los
• 22:57
  Speaker 1: Angeles Professional Symphony Orchestra. Real Renaissance man, he sure was,
• 23:02
  Speaker 1: and he must have had a wonderful life. And along
• 23:05
  Speaker 1: the way he decided to write this little bitty book
• 23:07
  Speaker 1: which is the best guide to how you could do
• 23:09
  Speaker 1: better in tennis I've ever heard of. But it also
• 23:12
  Speaker 1: included a definition that was very very helpful to me. Said,
• 23:16
  Speaker 1: there's a whole lot of people that play tennis too.
• 23:20
  Speaker 1: Three of them play a kind of tennis that's completely
• 23:22
  Speaker 1: different from everybody else. They play winners tennis. They are
• 23:26
  Speaker 1: absolutely fabulous. The shots are always right near the line.
• 23:30
  Speaker 1: They never hit it in that, they never hit it
• 23:32
  Speaker 1: out to speak of. The placements are terrific, their strategies
• 23:35
  Speaker 1: are brilliant. They are wonderful. Most most of the rest
• 23:39
  Speaker 1: of us play a different game. Yeah, I know, same rules,
• 23:42
  Speaker 1: same scoring, same clothes, same court, same facilities, maybe even
• 23:47
  Speaker 1: at the same club. But we play a completely different game.
• 23:49
  Speaker 1: The game we play is the game not to lose,
• 23:53
  Speaker 1: where the control of the game is in the hands
• 23:56
  Speaker 1: not of the winner but of the loser. So the
• 24:00
  Speaker 1: words it's it's people lose by making unforced errors and
• 24:04
  Speaker 1: other such foibles, as opposed to winning by scoring points.
• 24:07
  Speaker 1: If you lose less, you'll be the winner. Lose less
• 24:11
  Speaker 1: will be And by the way, the name of that
• 24:12
  Speaker 1: book by Simon Ramo is extraordinary Tennis for the ordinary
• 24:16
  Speaker 1: tennis player. So how does that manifest itself as the
• 24:22
  Speaker 1: loser's game? About invest them? There two kinds of problems
• 24:26
  Speaker 1: in investing. One is the long term policy problem. The
• 24:28
  Speaker 1: other is the operational problem. People at all of us
• 24:32
  Speaker 1: are guilty almost all the time of doing things that
• 24:36
  Speaker 1: aren't really brilliant decisions. So we make mistakes that we
• 24:41
  Speaker 1: really shouldn't have made. If we had it to do
• 24:43
  Speaker 1: over again, a lot of us wouldn't make those mistakes.
• 24:47
  Speaker 1: And reality is, we do because we're human beings. The
• 24:51
  Speaker 1: other kind of mistakes were aiming in the wrong direction.
• 24:54
  Speaker 1: I'll come back to that later if you want to.
• 24:56
  Speaker 1: But day in day out, people buying and selling stocks
• 24:59
  Speaker 1: are prone to getting caught having made an error in
• 25:04
  Speaker 1: their judgment on the price. So in other words, if
• 25:07
  Speaker 1: you can avoid those self inflicted errors, you win by
• 25:10
  Speaker 1: not losing. Yes, and the parallels are are obvious as
• 25:15
  Speaker 1: investors and tennis and very powerful on the long, long,
• 25:18
  Speaker 1: long term. If you aim in the right direction, you've
• 25:21
  Speaker 1: got a good chance of getting there. You want to
• 25:23
  Speaker 1: go to Chicago, don't head south towards Florida, So to Chicago.
• 25:26
  Speaker 1: As an investor, how do you aim in the right direction?
• 25:29
  Speaker 1: What what does that exactly mean? Well, I can't give
• 25:32
  Speaker 1: you a straight answer except in generalities, because each of
• 25:35
  Speaker 1: us is unique. But start with how much money do
• 25:38
  Speaker 1: you have? Are you saving money or spending money? How
• 25:42
  Speaker 1: many years do you have before you need to cover
• 25:44
  Speaker 1: your retirement or pay for your kids going to college
• 25:47
  Speaker 1: or whatever is your objective? How much wealth do you have,
• 25:50
  Speaker 1: how much income are you creating? Take all those things,
• 25:54
  Speaker 1: you can work out an investment strategy that makes good sense.
• 25:57
  Speaker 1: Let me give you an example. I'm seventy nine. Most
• 25:59
  Speaker 1: people would say in that age, you must have a
• 26:01
  Speaker 1: lot of bonds. I have no bonds. Why Why? Well,
• 26:04
  Speaker 1: I still enjoy working and I'm able to keep earning
• 26:07
  Speaker 1: enough to cover my operating costs. And secondly, I look
• 26:11
  Speaker 1: at my investments. I say, who are you investing for?
• 26:13
  Speaker 1: I'm actually investing for my grandchildren, right right, So your
• 26:18
  Speaker 1: portfolio is not the average seventy nine year old man's portfolio.
• 26:22
  Speaker 1: It's for someone who has an investing horizon of And
• 26:25
  Speaker 1: it's not to brag about it. It's just the reality.
• 26:28
  Speaker 1: I ought to address that reality. If I did the
• 26:30
  Speaker 1: normal thing and saying, hey, you're about eighty, you probably
• 26:32
  Speaker 1: would have at least six maybe seventy and fixed income.
• 26:36
  Speaker 1: I look at I say, that's crazy. I'm investing on
• 26:38
  Speaker 1: behalf of my grandchildren. Okay, and and someone else who
• 26:43
  Speaker 1: isn't investing on on BF of their grandchildren. They have
• 26:46
  Speaker 1: to aim in the right direction. That means a mix
• 26:48
  Speaker 1: of stocks and bonds and something appropriate for their where
• 26:52
  Speaker 1: they are, whether they're working or retired. Every magician knows
• 26:55
  Speaker 1: if you want to be able to pull off a
• 26:56
  Speaker 1: good trick, distract your audience so they don't notice what
• 26:59
  Speaker 1: you're actually doing the same thing. It's true of everybody's
• 27:02
  Speaker 1: having an illicit affair. Abstract your audience and they won't
• 27:06
  Speaker 1: find out what you're doing. The same thing. Is all
• 27:08
  Speaker 1: kinds of different problems. You get people to focus on
• 27:11
  Speaker 1: the wrong thing in investing. Most people get focused on
• 27:14
  Speaker 1: day in, day out, stock prices and how to do
• 27:16
  Speaker 1: this quarter, this year, maybe the two years, week, this day, absolutely,
• 27:21
  Speaker 1: and the real questions are all about long, long, long term.
• 27:24
  Speaker 1: It's to me it's the father in law question. The
• 27:27
  Speaker 1: man has got a beautiful daughter, she's bright, she's interesting,
• 27:31
  Speaker 1: she's got a wonderful future ahead of her. She's introducing
• 27:33
  Speaker 1: a guy. Does he care whether he's got blue eyes
• 27:36
  Speaker 1: or brown eyes? Does he care whether he's got a
• 27:38
  Speaker 1: wonderful sense of humor? Does he care whether the guy
• 27:41
  Speaker 1: is tall or a good None of those things. What
• 27:43
  Speaker 1: he wants to do is one single thing. Is this
• 27:46
  Speaker 1: going to be a good friend from my daughter? Ten
• 27:49
  Speaker 1: years from now, twenty years from now, thirty years from now,
• 27:52
  Speaker 1: forty years from now, will she be in a good,
• 27:55
  Speaker 1: happy position? I gotta think long time. So so let's
• 28:00
  Speaker 1: talk a little more about the article. It goes on
• 28:02
  Speaker 1: to when the Graham and Dot Award in ninety seven,
• 28:06
  Speaker 1: and that ultimately leads to you writing the book. Well.
• 28:10
  Speaker 1: Also Dad's advice Dad when we were growing upset, don't
• 28:14
  Speaker 1: find a problem unless you find a solution to that problem.
• 28:18
  Speaker 1: I've I've heard similar advice given to young employees. Don't
• 28:22
  Speaker 1: bring problems to your boss. Identify problems and bring a
• 28:25
  Speaker 1: solution to it. Years ago. I didn't think it was
• 28:28
  Speaker 1: fair for Dad to say that, because it's hard to
• 28:29
  Speaker 1: come up with solutions sometimes, but he was right. And
• 28:32
  Speaker 1: so if you put out the loser's game, this is
• 28:35
  Speaker 1: a tough place to play and be successful, then the
• 28:37
  Speaker 1: question obviously is okay, what would you do? And the
• 28:40
  Speaker 1: answer is, don't play the detailed transactions game. Play the
• 28:44
  Speaker 1: long term policy game of getting in the right direction,
• 28:48
  Speaker 1: and I don't get back to driving. I don't care
• 28:50
  Speaker 1: how fast you drive. Going to Chicago just be sure
• 28:54
  Speaker 1: you're not headed towards Miami. So it's funny because the
• 28:58
  Speaker 1: the article from five really presages the indexing argument to
• 29:04
  Speaker 1: be made forty plus years later. Well back in the seventies,
• 29:08
  Speaker 1: it was an accurate description of the situation for individuals
• 29:12
  Speaker 1: if they're competing with professionals. Now it's an accurate description
• 29:15
  Speaker 1: for professionals competing with professionals, And individuals should not be
• 29:20
  Speaker 1: investing in mutual funds without being aware of how tough
• 29:23
  Speaker 1: it is to be a successful mutual fund manager. If
• 29:26
  Speaker 1: you're an active investors. It's so hard. So that there's
• 29:29
  Speaker 1: a theme that comes up in index Revolution, in um
• 29:35
  Speaker 1: the retirement Crisis, and in Winning the Losers Game, as
• 29:40
  Speaker 1: well as Extraordinary Tennis for ordinary tennis players, which is
• 29:45
  Speaker 1: the importance of understanding your own skill set and limitations
• 29:50
  Speaker 1: and not trying to do more than you're capable of doing.
• 29:52
  Speaker 1: Its discussed that all true is the same thing in
• 29:56
  Speaker 1: driving an automobile on the highway. It's the same thing
• 30:00
  Speaker 1: in virtually every dimension of our lives. Try to figure
• 30:03
  Speaker 1: out who you are and what you want to accomplish,
• 30:05
  Speaker 1: and focus on that. That remind me later I'm gonna
• 30:09
  Speaker 1: tell you a funny driving story related to that exact thing.
• 30:13
  Speaker 1: So we talk. Um. We have some quotes of yours
• 30:17
  Speaker 1: that I really love and I want to throw your way,
• 30:21
  Speaker 1: um quote. The investment management business is built upon a
• 30:25
  Speaker 1: simple and basic belief professional money managers can beat the market.
• 30:30
  Speaker 1: That premise appears to be false. Explain that the market
• 30:37
  Speaker 1: is priced by investors. Fifty years ago, those investors were
• 30:42
  Speaker 1: individuals who bought and sold once every year or two.
• 30:45
  Speaker 1: They honestly didn't know an awful lot and so they
• 30:48
  Speaker 1: made a lot of errors. Today, the market is entirely
• 30:51
  Speaker 1: priced by professionals. They are very much on top of
• 30:54
  Speaker 1: what's going on, and while they're never always dead right,
• 30:58
  Speaker 1: they're so close to being right compared to anybody else.
• 31:02
  Speaker 1: It's the old joke about the two guys and the bear,
• 31:06
  Speaker 1: and one guy is putting on his sneakers, and the
• 31:07
  Speaker 1: other guy says, God, you can't stop to put on
• 31:10
  Speaker 1: your sneakers. The bear will catch you. No, he won't.
• 31:13
  Speaker 1: Who catch you down on the bear? I just have
• 31:16
  Speaker 1: to outrun you. So so I find it fascinating that
• 31:22
  Speaker 1: you identified this in you and a handful of the
• 31:28
  Speaker 1: people Jack Bogel and maybe Burton Malkill, who else in
• 31:33
  Speaker 1: v was thinking along the lines that, hey, it's nearly
• 31:38
  Speaker 1: impossible to beat the market, and once you factor in
• 31:41
  Speaker 1: turnover in taxes and costs on a consistent basis over time,
• 31:46
  Speaker 1: it's all but impossible. How were so few people recognizing
• 31:51
  Speaker 1: this way back when Bary let's be realistic investment management,
• 31:55
  Speaker 1: active investment management, competing with everybody else. It's great fun,
• 31:59
  Speaker 1: It is fun, and it's too much requires concentrated attention.
• 32:03
  Speaker 1: So people are really really working at that. How are
• 32:05
  Speaker 1: they going to pay any attention to something that's completely
• 32:08
  Speaker 1: foreign to everything they've ever heard of. It just doesn't
• 32:10
  Speaker 1: make sense, which is step back and look at the
• 32:13
  Speaker 1: big picture, and say, is my efforts feudal or at
• 32:16
  Speaker 1: my You know, how many times can you roll the
• 32:18
  Speaker 1: stone up the hill and have it rolled back down
• 32:20
  Speaker 1: on you before you realize, hey, maybe this is a waste,
• 32:23
  Speaker 1: that there's one other thing that's really important. The data
• 32:26
  Speaker 1: that was available to people was inaccurate. It was precise,
• 32:31
  Speaker 1: but it was inaccurate. The reports on who is performing
• 32:34
  Speaker 1: compared to the market looked terribly encouraging. Looked like seventy
• 32:39
  Speaker 1: or eight percent of the professional managers were beating the market. Yeah,
• 32:42
  Speaker 1: but you've left out somebody. Who'd you leave out? The
• 32:45
  Speaker 1: guys that got killed. We've been speaking with Charlie Ellis.
• 32:48
  Speaker 1: He is formally on the board of directors of Vanguard
• 32:52
  Speaker 1: and on the Yale Endowment Funds. We love your comments
• 32:56
  Speaker 1: and feedback. Be sure to write to us at m
• 32:59
  Speaker 1: IB podcast us at Bloomberg dot net, check out my
• 33:02
  Speaker 1: daily column on Bloomberg View dot com, or follow me
• 33:06
  Speaker 1: on Twitter at rid Halts. I'm Barry rid Halts. You've
• 33:10
  Speaker 1: been listening to Masters in Business on Bloomberg Radio. Welcome
• 33:14
  Speaker 1: to the podcast. Charlie. Thank you so much for for
• 33:17
  Speaker 1: doing this. You know, when we first interviewed you, we've
• 33:20
  Speaker 1: now done a hundred and something plus interviews. You were
• 33:24
  Speaker 1: you were in the early portion, and I think I
• 33:27
  Speaker 1: was a little rough around the edges when we first started.
• 33:30
  Speaker 1: I'd like to think that just through sheer repetition, I've
• 33:34
  Speaker 1: gotten somewhat better. Your smooth as So trust me, if
• 33:39
  Speaker 1: it sounds smooth, it's only because I have really good
• 33:42
  Speaker 1: engineers who edit out many, but not all, of my mistakes.
• 33:46
  Speaker 1: We sometimes leave them in um for fun um. There's
• 33:49
  Speaker 1: so many questions that we blew through. I want to
• 33:52
  Speaker 1: come back to before we get to our standard questions,
• 33:57
  Speaker 1: and let's start with a quote that I love of
• 34:00
  Speaker 1: and this is in um the book Index Revolution in
• 34:04
  Speaker 1: ninety seven the director of research at Chase Manhattan Bank
• 34:09
  Speaker 1: which is now Chase JP Morrigan. But this is obviously
• 34:13
  Speaker 1: thirty acquisitions ago quote. The proliferation of index funds would
• 34:20
  Speaker 1: lead to massively inefficient markets, and a stocks price would
• 34:24
  Speaker 1: become more a function of money's flowing into index funds
• 34:28
  Speaker 1: than reflection or its investment merits. The entire capital allocation
• 34:34
  Speaker 1: process of the securities market would be distorted, and only
• 34:38
  Speaker 1: companies represented in indexes would be able to read raise
• 34:42
  Speaker 1: any equity capital capital True or false? What are your
• 34:47
  Speaker 1: thoughts on that? Well, first of all, it is false,
• 34:49
  Speaker 1: But secondly, nobody's saying that today. Occasionally people say, oh,
• 34:55
  Speaker 1: what's going to happen? When aren't we getting rid of
• 34:58
  Speaker 1: the the capital allocation function with all this money flowing
• 35:01
  Speaker 1: index But there that's hyperbole and it's future stuff. If
• 35:05
  Speaker 1: you had everybody indexing, wouldn't that mean that we've got
• 35:09
  Speaker 1: a real problem? Yes, of course it would. And when
• 35:11
  Speaker 1: everybody stops smoking, please let me know, because that would
• 35:15
  Speaker 1: be a really important reality. A lot less people are
• 35:18
  Speaker 1: smoking than used to, and a lot more people are
• 35:20
  Speaker 1: in at the United States worldwide, more people are smoking
• 35:23
  Speaker 1: now than ever. It's very very unlikely that we will
• 35:28
  Speaker 1: get so much indexing going on that smart people won't
• 35:31
  Speaker 1: be smart enough to figure out that they should now
• 35:34
  Speaker 1: think about doing a little bit of active investing. So
• 35:38
  Speaker 1: what do we no of percent of assets? But the
• 35:42
  Speaker 1: game is in the trading markets and in the trading
• 35:44
  Speaker 1: markets because index funds are very low turnover of total
• 35:49
  Speaker 1: volumes or less or less, and it's not aggressive. It's
• 35:53
  Speaker 1: kind of go with the flow activity most of the time.
• 35:56
  Speaker 1: It's highly skilled in the transactions, very skilled, but actually
• 36:01
  Speaker 1: it's just kind of going with the normal flow. So
• 36:03
  Speaker 1: the impact on pricing is to minimus. So index investing
• 36:08
  Speaker 1: doesn't affect prices very much, certainly doesn't. So, and you
• 36:13
  Speaker 1: talk to the people who know the most about it
• 36:14
  Speaker 1: because they're trading for index funds, they've figured out how
• 36:17
  Speaker 1: to handle almost every one of the questions that's people
• 36:20
  Speaker 1: have raised and handle them without any trouble. Some of
• 36:24
  Speaker 1: the questions are really interesting still and they still have
• 36:27
  Speaker 1: some minor difficulty but in the total picture, it's just
• 36:30
  Speaker 1: no problem at all. So if we were to look
• 36:34
  Speaker 1: at thet of investing that currently flows into as of
• 36:40
  Speaker 1: the assets, if that were ever to become fifty, would
• 36:45
  Speaker 1: that create opportunities for the stock pickers? Would there be
• 36:48
  Speaker 1: more inefficiencies at that point? Not in those levels. If
• 36:51
  Speaker 1: you get to nine, maybe, But look at what you
• 36:54
  Speaker 1: have to do. You've got a million people are active
• 36:56
  Speaker 1: involved in active investing. How are many of those will
• 37:00
  Speaker 1: have to retire from the field and say I'm gonna quit.
• 37:03
  Speaker 1: I'm going to go back and be a lawyer instead
• 37:06
  Speaker 1: of being an investor. I'm going to go into a
• 37:08
  Speaker 1: normal business instead of investment management. I don't want to
• 37:10
  Speaker 1: do this stuff anymore. It's going to be a long
• 37:14
  Speaker 1: long time before what do you have to do? You
• 37:16
  Speaker 1: have to cut their pay by that wouldn't be enough
• 37:19
  Speaker 1: to cause most people to quit. You really got a
• 37:23
  Speaker 1: major change on your hands before you're going to see
• 37:25
  Speaker 1: anything like that. It won't happen in my lifetime. I
• 37:28
  Speaker 1: doubt it will happen my son's lifetime, and I doubt
• 37:30
  Speaker 1: doubt doubt that will happen in my granddaughter's lifetime. So
• 37:33
  Speaker 1: you think that This is going to go on continuously
• 37:37
  Speaker 1: because of human beings being human beings, and there's no
• 37:40
  Speaker 1: other way to know, other way to deal with that.
• 37:42
  Speaker 1: Let's let's talk about some of the issues on the
• 37:46
  Speaker 1: retirement side. UM Richard Taylor had written a book called
• 37:51
  Speaker 1: Nudge where he talks about a lot of things that
• 37:55
  Speaker 1: now require affirmative steps by the employee should be replaced,
• 38:01
  Speaker 1: not opt in, but opt out. So, in other words,
• 38:04
  Speaker 1: you join a firm, you're automatically enrolled in the four
• 38:07
  Speaker 1: oh one K and you're automatically enrolled and increases as
• 38:11
  Speaker 1: your salary goes up unless you opt out of that.
• 38:14
  Speaker 1: What do you think of that? I think it's a
• 38:16
  Speaker 1: terrific idea for two different reasons. There's a strong political
• 38:20
  Speaker 1: view social view that we should not have government setting
• 38:23
  Speaker 1: the rules or telling us what to do. That'd be better.
• 38:31
  Speaker 1: This does not tell you what to do, right, You
• 38:33
  Speaker 1: have a choice, and you have a choice at all times,
• 38:35
  Speaker 1: and you would have the choice to say Nope, that's
• 38:38
  Speaker 1: not for me, Nope, that's not for me. No, that's
• 38:40
  Speaker 1: not for me. It's called opt out. You say I
• 38:43
  Speaker 1: don't want to be in the plan. Okay, if you'd
• 38:45
  Speaker 1: make that as your choice. Fine and say no, I
• 38:48
  Speaker 1: want to be in the plan, but I don't want
• 38:50
  Speaker 1: to match the match. I don't want free money by
• 38:52
  Speaker 1: putting up my four percent of match the employers four percent.
• 38:56
  Speaker 1: If you really don't want to do it, that's your
• 38:58
  Speaker 1: freedom of choice. If you well, I do want to
• 39:01
  Speaker 1: do the four percent match, but I don't want to
• 39:02
  Speaker 1: increase the savings rate as I get raises from time
• 39:05
  Speaker 1: to time. Okay, you can do that. I don't want
• 39:08
  Speaker 1: to be in an target date fund fun. If you
• 39:11
  Speaker 1: don't want to do that, you could do something else,
• 39:13
  Speaker 1: but we make it available to you. So, in other words,
• 39:16
  Speaker 1: the choice architecture, which is the phrase of this is
• 39:20
  Speaker 1: the default setting is significant. And I know they've done
• 39:23
  Speaker 1: experiments in different countries with organ donation. Hey, you don't
• 39:27
  Speaker 1: have to be an organ donor, but the default setting
• 39:30
  Speaker 1: on the driver's licenses you are an organ donor. And
• 39:33
  Speaker 1: it goes from an eight or ten percent participation rate
• 39:36
  Speaker 1: to rate and there's no shortage of organs, and and
• 39:40
  Speaker 1: all it is is you don't have to do it.
• 39:42
  Speaker 1: You just have to check a box that says you're
• 39:43
  Speaker 1: opting out. That's it, and you get a huge increase
• 39:46
  Speaker 1: in the percentage of workers who become part of the plan,
• 39:50
  Speaker 1: huge increase in the percentage of people who take the match,
• 39:53
  Speaker 1: huge increase in the percentage of people who escalate over
• 39:56
  Speaker 1: time their savings rate, huge increase in the number of
• 39:58
  Speaker 1: people get into an automatic the investment program. Those are
• 40:01
  Speaker 1: really positive moves. Opt out should be you're automatically enrolled,
• 40:07
  Speaker 1: you automatically do the match, you automatically do the increase.
• 40:11
  Speaker 1: And if you don't set a fund, if you don't
• 40:13
  Speaker 1: choose funds, you automatically go into a target date fund.
• 40:16
  Speaker 1: That's the default setting. If you want to change it,
• 40:19
  Speaker 1: you're free to change it. But at least let's start
• 40:21
  Speaker 1: you out on on something as opposed to nothing. So
• 40:25
  Speaker 1: if you if you don't respond there's something happening as
• 40:30
  Speaker 1: opposed to nothing, you lose no freedom of choice and
• 40:33
  Speaker 1: you have the benefit if you really don't know what
• 40:35
  Speaker 1: to do, go with the flow. So I got a
• 40:37
  Speaker 1: lot of pushback the other day I did a column
• 40:40
  Speaker 1: about the i r A minimums. I'm sorry the ira
• 40:44
  Speaker 1: A ceilings. They're at dollars that seems like an awfully
• 40:49
  Speaker 1: small number of of If people don't have a four
• 40:54
  Speaker 1: one K and they want to max out their tax
• 40:56
  Speaker 1: deferred um retirement savings from when the Aristus laws were passed.
• 41:02
  Speaker 1: Just adjusting for inflation, you should be closer to seventy
• 41:06
  Speaker 1: And unfortunately the way inflation has proven itself to exist.
• 41:11
  Speaker 1: The things we want, the technology, the phones, the computers,
• 41:15
  Speaker 1: they're going down in price. But the things we need,
• 41:17
  Speaker 1: housing and healthcare and and that sort of stuff, they're
• 41:20
  Speaker 1: all going up in price. So really that's seventy dred
• 41:23
  Speaker 1: If anything, it should be closer to ten thousand. Do
• 41:27
  Speaker 1: you see the ceiling for IRA contributions as an issue
• 41:32
  Speaker 1: for for a lot of middle class families? All right? Now,
• 41:36
  Speaker 1: the pushback I got was on and if you're raising
• 41:38
  Speaker 1: the IRA ceiling, you have to raise the four oh
• 41:41
  Speaker 1: one k, And people said, well, it's already eighteen thousand,
• 41:44
  Speaker 1: and imagine two people. I think you have to raise
• 41:47
  Speaker 1: them both. But so many people failed to meet the
• 41:50
  Speaker 1: ceiling on the four one k, it's probably not as present.
• 41:55
  Speaker 1: It would be great to raise the ceiling. It would
• 41:57
  Speaker 1: be really really great to help people understand and how
• 42:00
  Speaker 1: good that could be for them and why they should
• 42:03
  Speaker 1: take action and take advantage of the higher ceiling. I
• 42:06
  Speaker 1: don't I don't doubt that at all. Let's talk about
• 42:10
  Speaker 1: the savings rate um three percent. Three percent is too
• 42:15
  Speaker 1: low of a savings rate to replace se of employment
• 42:20
  Speaker 1: income during retirement. How do we get people to save
• 42:25
  Speaker 1: more than three percent of their income? Help people understand
• 42:28
  Speaker 1: what the impact is when they are retired, of how
• 42:31
  Speaker 1: badly hurt they will be if they don't save more.
• 42:35
  Speaker 1: And we ought to be teaching that day after day
• 42:38
  Speaker 1: after day. Teach it in high school, Teach it when
• 42:40
  Speaker 1: people first joined a retirement plan, Teach it in the
• 42:44
  Speaker 1: public domain all the time in high school. Do we
• 42:48
  Speaker 1: have any sort of financial literacy courses offered at the
• 42:51
  Speaker 1: high school level. Some of the problem we have, all
• 42:55
  Speaker 1: of us have, is we're all too busy. We've got
• 42:57
  Speaker 1: too many things in our mind. So we Yeah, you know,
• 42:59
  Speaker 1: I should lose ten pounds, but you know, I just
• 43:01
  Speaker 1: don't want to do it today. Yeah I know I
• 43:04
  Speaker 1: should do more exercise, but I just don't want to
• 43:06
  Speaker 1: get started today. Yeah I know. And so many things
• 43:09
  Speaker 1: that are crowd in on. You gotta get a job,
• 43:11
  Speaker 1: you gotta pay your taxes, you gotta do this, you
• 43:13
  Speaker 1: gotta do that. It's hard for people set aside the
• 43:16
  Speaker 1: time to say, now, I'm going to learn enough about investing.
• 43:19
  Speaker 1: And the shame is that investing is basically the stuff
• 43:22
  Speaker 1: that's really important, is really pretty simple, and if people
• 43:25
  Speaker 1: didn't get confused with only smart people know that sort
• 43:29
  Speaker 1: of stuff, or the language always bothers me. I don't
• 43:31
  Speaker 1: know what a pe ratio is, and they talk about
• 43:34
  Speaker 1: earnings yield and I don't know what that is either,
• 43:36
  Speaker 1: And pretty soon people say, ah, hell, I'll come back
• 43:39
  Speaker 1: to it later, but I can't do it today. If
• 43:41
  Speaker 1: they knew what the problem really is and boil it
• 43:44
  Speaker 1: down to the simplest kinds of decisions. This is how
• 43:47
  Speaker 1: much money you need to have when you're retired, Okay,
• 43:50
  Speaker 1: to have that money to spend every year. This is
• 43:52
  Speaker 1: how much you have to have in your nest egg
• 43:54
  Speaker 1: Okay to get there. You have to save this kind
• 43:56
  Speaker 1: of money every year and invested in this kind of
• 43:59
  Speaker 1: sensible way. If we could teach people those four or
• 44:02
  Speaker 1: five things, they'd be all set. You should write a
• 44:04
  Speaker 1: book about that. Did oh wait, oh wait, you already did. So.
• 44:09
  Speaker 1: There's a there's a thesis out there that says that
• 44:13
  Speaker 1: financial literacy education is great, but people rapidly forget about it.
• 44:19
  Speaker 1: You could teach people stuff and it stays with them
• 44:21
  Speaker 1: for three months, for six months, but not for a lifetime.
• 44:25
  Speaker 1: How do we get past the sort of short term
• 44:28
  Speaker 1: is um of of people being so easily distracted by
• 44:33
  Speaker 1: by life as you described. One that you obviously identified
• 44:36
  Speaker 1: earlier is opt out versus opt in. If every retirement
• 44:40
  Speaker 1: plan you automatically did the sensible thing, unless you said, no,
• 44:44
  Speaker 1: I'm different from most other people, so I've got a
• 44:46
  Speaker 1: real reason for wanting to do something different on this
• 44:49
  Speaker 1: item or that item or that item. Fine, you could
• 44:52
  Speaker 1: have the freedom to make a I'm different decision. Otherwise
• 44:55
  Speaker 1: you can have the super freedom to say somebody else
• 44:58
  Speaker 1: has thought about this pretty damn well. They've done a
• 45:00
  Speaker 1: good job of figuring out what most people need. I'm
• 45:02
  Speaker 1: going to take what's the blue plate special and and
• 45:05
  Speaker 1: the problem is that people when folks don't do that,
• 45:08
  Speaker 1: what you're left with thirty forty years hands. The fear
• 45:12
  Speaker 1: is that's going to fall on the taxpayer shoulders, because
• 45:14
  Speaker 1: it's just gonna really put stress on things like Medicare, Medicaid,
• 45:19
  Speaker 1: and Social Security. It's all going to end up back
• 45:22
  Speaker 1: on the taxpayers. Last wanna be really alarmist. Think how
• 45:25
  Speaker 1: badly this country would feel if there were a large
• 45:29
  Speaker 1: number of people in their seventies, eighties, and nineties who
• 45:33
  Speaker 1: are highly focused on the fact that they really were
• 45:36
  Speaker 1: hurting financially, and they turned to you and other people
• 45:39
  Speaker 1: who are experts and said, you did us real harm.
• 45:43
  Speaker 1: It's all your fault, and we're really angry, and we're
• 45:47
  Speaker 1: going to express our views at the polling place and
• 45:49
  Speaker 1: we're gonna do whatever we can because we got hurt.
• 45:53
  Speaker 1: And you knew we were going to get hurt. You
• 45:55
  Speaker 1: knew it all along. Why did you do that to us?
• 45:58
  Speaker 1: They won't say, cause you know, I made him stake
• 46:00
  Speaker 1: years ago. I should have done something. I've created this
• 46:02
  Speaker 1: problem for myself. That's not gonna happen. Didn't that just
• 46:05
  Speaker 1: happen already, didn't we see the first round? That's so
• 46:08
  Speaker 1: let's let's without talking about politics, because nobody cares about
• 46:12
  Speaker 1: my views on politics. How much of what took place
• 46:19
  Speaker 1: in the polls and the angst and other factors like that,
• 46:25
  Speaker 1: the populist uprising. Is that a one off event in
• 46:30
  Speaker 1: or is that a warning shot? Hey, this is what
• 46:32
  Speaker 1: the future is gonna look like if we don't develop
• 46:34
  Speaker 1: some economic security for for the population at large. It's
• 46:39
  Speaker 1: a first round only really could get worse pretty damn fast.
• 46:43
  Speaker 1: There's going to be more more of this sort of
• 46:45
  Speaker 1: populist uprising um in the future. If we don't as
• 46:50
  Speaker 1: a nation take care of our problems, we will have
• 46:53
  Speaker 1: those problems faster and get worse and worse, and they
• 46:56
  Speaker 1: can show up in politics very rapidly. So if you're
• 47:00
  Speaker 1: gonna be rational and reasonable about this, I don't know
• 47:03
  Speaker 1: what I can I can say to you about that. Um.
• 47:06
  Speaker 1: There's a data point in the book that I found
• 47:08
  Speaker 1: to be astonishing and I wanted to get to it
• 47:11
  Speaker 1: before UM we move on to some of our our
• 47:14
  Speaker 1: standard questions. If you start saving at five and retire
• 47:19
  Speaker 1: at seventy versus starting to save at forty five and
• 47:23
  Speaker 1: retire at sixty two, you reduce the required savings rate
• 47:29
  Speaker 1: by a factor of ten. Is that is that right?
• 47:32
  Speaker 1: That's an astonishing number. It is an astonishing number, and
• 47:35
  Speaker 1: it's a shame we don't all know it. It really
• 47:38
  Speaker 1: helps to have started early and have the accumulated power.
• 47:42
  Speaker 1: Einstein said that he thought the most powerful thing he
• 47:44
  Speaker 1: knew of was compound interest. Compound rates of return. If
• 47:48
  Speaker 1: you're in it for the long term, and we all are,
• 47:50
  Speaker 1: whether we like it or not, in it for the
• 47:51
  Speaker 1: long term. If you're in it for the long term,
• 47:54
  Speaker 1: that's a wonderful thing to have going for you. All
• 47:56
  Speaker 1: you need is time t I m e. Time. Most
• 48:00
  Speaker 1: of those gains come in the last ten years. That's
• 48:03
  Speaker 1: that's the biggest. So if you're starting at twenty five,
• 48:06
  Speaker 1: the bulk of your gains are coming um in the
• 48:10
  Speaker 1: last let's let's call it last fifth of of your
• 48:14
  Speaker 1: investment horizon. You started forty five and you go to
• 48:17
  Speaker 1: sixty two, you're not giving yourself enough time for compounding
• 48:20
  Speaker 1: to work. Correct. So let's see what else. There's one
• 48:24
  Speaker 1: or two other things. We've covered some stuff. You know
• 48:27
  Speaker 1: what I didn't talk to you about. So you were
• 48:30
  Speaker 1: working in the midst of the bear market of sixty
• 48:34
  Speaker 1: six to eighty two when you you talked about, Hey,
• 48:36
  Speaker 1: nobody really wants to work in finance in the thirties
• 48:40
  Speaker 1: and there wasn't a lot of money in the fifties.
• 48:41
  Speaker 1: What was it like from nineteen sixty two six to
• 48:45
  Speaker 1: two when we had ten twelve percent inflation rate and
• 48:49
  Speaker 1: stocks went nowhere for sixteen years. Who, Yeah, stocks didn't
• 48:53
  Speaker 1: go nowhere. Stocks went down. The drop in the value
• 48:57
  Speaker 1: of the down Jones average, just to take a measure,
• 49:01
  Speaker 1: the drop in the seventies was greater than the drop
• 49:05
  Speaker 1: in the from nine to the bottom of the thirties.
• 49:09
  Speaker 1: So what do we inflation adjusted the real real return,
• 49:12
  Speaker 1: so you had it was a nine loss once you
• 49:15
  Speaker 1: factored in inflation. It was held on wheels. So what
• 49:20
  Speaker 1: did you do during that period of time? How do
• 49:22
  Speaker 1: you how do you deal with institutions? How do you
• 49:24
  Speaker 1: deal with individuals when there's no not a lot of
• 49:28
  Speaker 1: upside inequities and whatever gains you have in bonds are
• 49:32
  Speaker 1: going to be offset by inflation. Well, it was worse
• 49:34
  Speaker 1: in bonds than it wasn't stocks, because you do a
• 49:37
  Speaker 1: lot of damage to a bond portfolio if you take
• 49:39
  Speaker 1: infuriates from percent to two percent. So there was terrible
• 49:44
  Speaker 1: everywhere all the way around from two percent right when
• 49:49
  Speaker 1: you're you're from If the Federal Reserve says interest rates
• 49:53
  Speaker 1: want to be high to break inflation, country a lot
• 49:57
  Speaker 1: of good doing that you really really ash the markets
• 50:01
  Speaker 1: from inflation or rate of return on a treasury bond
• 50:07
  Speaker 1: all the way down to two. That's a long sweep
• 50:12
  Speaker 1: of real pain and anguish for people on the fixed income.
• 50:16
  Speaker 1: We we just finished a thirty year or maybe even
• 50:19
  Speaker 1: a thirty five year bull market in bonds, when when
• 50:23
  Speaker 1: you're looking at portfolio is going forward? What should people
• 50:28
  Speaker 1: be thinking about now? I know you don't have a
• 50:30
  Speaker 1: lot of bonds, but the average institution, the average investor,
• 50:35
  Speaker 1: what do you think about when you see rates at
• 50:38
  Speaker 1: two two and a half percent going who knows where?
• 50:41
  Speaker 1: How do you put together um a plan over for
• 50:45
  Speaker 1: the next couple of decades starting from such low rates
• 50:48
  Speaker 1: of interest. First of all, we all ought to know
• 50:52
  Speaker 1: it's not easy now because prices of bonds and prices
• 50:55
  Speaker 1: of stocks are high, and the Federal Reserve has done
• 50:59
  Speaker 1: all of us as a nation real good by getting
• 51:02
  Speaker 1: the interest rates down enough so that the employment has
• 51:06
  Speaker 1: gone up enough so that we're really starting to see
• 51:08
  Speaker 1: the economy come back to its full capabilities and potential.
• 51:12
  Speaker 1: It has been terribly painful for the people who depend
• 51:14
  Speaker 1: on interest income because they've seen interest income go from
• 51:19
  Speaker 1: down to three. That hurts, So be realistic about that.
• 51:25
  Speaker 1: But if you're looking at what should you do as
• 51:27
  Speaker 1: an investor today? First of all, think long term. Secondly,
• 51:32
  Speaker 1: take a look at the total picture. Don't look just
• 51:35
  Speaker 1: at your stock and bond portfolio. Look at your home,
• 51:39
  Speaker 1: social security and other and your income as an earning
• 51:43
  Speaker 1: person so called intellectual property. Those are all really important assets.
• 51:48
  Speaker 1: What are they worth? And then try with that total
• 51:51
  Speaker 1: portfolio to make a sensible decision as to what would
• 51:54
  Speaker 1: be right for you as an individual, knowing we're all different.
• 51:58
  Speaker 1: And the one question I know I didn't get to
• 52:00
  Speaker 1: before that I that I really wanted to was about benchmarking.
• 52:04
  Speaker 1: So in the index revolution you allude to this, um
• 52:11
  Speaker 1: what was benchmarking like in the early days? How do
• 52:14
  Speaker 1: you benchmark and index when there really isn't a frame
• 52:17
  Speaker 1: of reference? What what was done in the seventies when
• 52:20
  Speaker 1: it came to that, well, in the fifties and sixties,
• 52:23
  Speaker 1: what would have been done as you look at the
• 52:25
  Speaker 1: Dow Jones average and say that's probably about it. Where
• 52:28
  Speaker 1: you look at what you hoped to be able to
• 52:30
  Speaker 1: earn your return assumption and think that was about it.
• 52:35
  Speaker 1: That the data was not available on how well pension
• 52:38
  Speaker 1: funds were performing compared to other pension funds, how well
• 52:41
  Speaker 1: insurance companies were managing compared to banks compared to investment
• 52:45
  Speaker 1: council firms. And when that data came out through a
• 52:48
  Speaker 1: firm called A. G. Becker and Mary Lynch in those days,
• 52:51
  Speaker 1: the performance measurement, all of a sudden, the data, My god, Barrett,
• 52:54
  Speaker 1: look at the data. This is really important. And people
• 52:58
  Speaker 1: started saying, let's go find managers and do a really
• 53:00
  Speaker 1: good job for us. And that's where active investment management
• 53:03
  Speaker 1: started to take off. Because if you were an active
• 53:05
  Speaker 1: investment manager and you had access to really good research,
• 53:08
  Speaker 1: which was just being created in those days, and you're
• 53:11
  Speaker 1: willing to act fairly quickly instead of waiting for the
• 53:14
  Speaker 1: monthly investment committee meeting where you're trying to if you
• 53:18
  Speaker 1: were willing, if you're willing to be assertive and do
• 53:22
  Speaker 1: your very best, you could really do a lot better
• 53:24
  Speaker 1: than the market. Those were glorious days for active investing.
• 53:27
  Speaker 1: But they're gone. That's that. That that's history. It's amazing
• 53:31
  Speaker 1: to think that that the Dow Jones, which is not
• 53:35
  Speaker 1: just Lodge captives, are the biggest companies amongst the biggest
• 53:39
  Speaker 1: companies in the world. It just seems like such an
• 53:42
  Speaker 1: odd um benchmark for so many, so many you've probably left.
• 53:46
  Speaker 1: We use slide rules in those days have calculators. When
• 53:50
  Speaker 1: we wanted to do research, we went to the New
• 53:52
  Speaker 1: York Stock Exchange. They had a small set aside library
• 53:56
  Speaker 1: of all the filings with the SEC and page after
• 53:59
  Speaker 1: page after pay age you could do trying to figure
• 54:01
  Speaker 1: out what's going on in this company or that company.
• 54:04
  Speaker 1: You go out and meet with management and they would
• 54:05
  Speaker 1: talk with you for hours trying to help you understand
• 54:08
  Speaker 1: their company, which a very different world in the world
• 54:10
  Speaker 1: we live in today. So that's that's quite fascinating. And um,
• 54:17
  Speaker 1: I've seen a lot of those changes, um firsthand, but
• 54:21
  Speaker 1: the fifties and sixties are before my time. It sounds
• 54:24
  Speaker 1: it sounds like it was pretty interesting and amazing place
• 54:27
  Speaker 1: to work. Let's go to my standard questions. These are
• 54:31
  Speaker 1: the questions that I ask all of my guests, and
• 54:34
  Speaker 1: and some of these are going to require a little
• 54:36
  Speaker 1: recall on your part. Let's let's jump right into these.
• 54:40
  Speaker 1: So the quite thing that I find fascinating about you
• 54:44
  Speaker 1: is you graduate Yale with a major in art history.
• 54:48
  Speaker 1: Did you ever imagine art history would somehow lead to
• 54:51
  Speaker 1: finance and and how did that art history background, Because
• 54:57
  Speaker 1: you're obviously an accomplished successful part in the world of finance.
• 55:01
  Speaker 1: How did the art history training help you within the field?
• 55:07
  Speaker 1: Not very much, honestly, But it helped me in the
• 55:09
  Speaker 1: sense of when I had I traveled a great deal
• 55:12
  Speaker 1: in the work I did as a consultant on investment management,
• 55:15
  Speaker 1: so I was in London a lot and other major cities.
• 55:18
  Speaker 1: So if I had a meeting canceled, I knew what
• 55:21
  Speaker 1: to do. I got unto the art museum in that
• 55:23
  Speaker 1: particular city and have plenty of time to look at
• 55:25
  Speaker 1: the beautiful pictures and stuff like that. So it was
• 55:28
  Speaker 1: life enhancing. Yeah, it was great fun. Uh. It also
• 55:31
  Speaker 1: taught me a little bit about how to look more carefully,
• 55:35
  Speaker 1: because the difference between a really great painting and a
• 55:38
  Speaker 1: pretty good painting is not obvious. It's in some of
• 55:42
  Speaker 1: the details, in the specifics, and the difference between the
• 55:45
  Speaker 1: forgery and an original is of course really important. And
• 55:50
  Speaker 1: being able to look carefully was helpful, but I wouldn't
• 55:53
  Speaker 1: give too much. It was more in the recreation. Why
• 55:55
  Speaker 1: do I love to put When I was growing up,
• 55:58
  Speaker 1: I love to play golf, and then I played tennis.
• 55:59
  Speaker 1: Why I play tennis because my wife likes to play tennis?
• 56:03
  Speaker 1: Easy so I wouldn't try to draw too much out
• 56:07
  Speaker 1: of So you're an art history major and then you
• 56:08
  Speaker 1: got into investment management that there's no real linkage at all.
• 56:12
  Speaker 1: So so okay, so let's put art history aside. Who
• 56:15
  Speaker 1: were some of your early mentors, who who guided your
• 56:19
  Speaker 1: career when you moved into finance. Well, I was very
• 56:22
  Speaker 1: lucky to work for a guy who was a brilliant person. Uh.
• 56:27
  Speaker 1: And he happened to be in an investment management and
• 56:30
  Speaker 1: he happened to be working on investment problems. So I
• 56:33
  Speaker 1: was there to learn from him what I could learn. Honestly,
• 56:36
  Speaker 1: it didn't make very much difference. If he'd been in
• 56:38
  Speaker 1: real estate, that would have been fine. If you'd been
• 56:39
  Speaker 1: in retailing, that would have been fine. This is a
• 56:41
  Speaker 1: guy that could teach me a lot. So you want
• 56:44
  Speaker 1: to share a name with us? Name was well, there
• 56:46
  Speaker 1: two guys actually, j Richards and Dilworth. Dick Dilworth was
• 56:51
  Speaker 1: a factlessly talented guy. Uh. Many people confuse him with
• 56:56
  Speaker 1: the once time mayor of Philadelphia, completely different French guy.
• 57:01
  Speaker 1: But Dick Dilworth was a as good an illustration of
• 57:06
  Speaker 1: the finest in America as you would find anywhere. Really,
• 57:08
  Speaker 1: and the other guy was a phone named Robert Strange,
• 57:11
  Speaker 1: as in Robert Strange Mcnamerica. They were cousins, and Bob
• 57:15
  Speaker 1: Strange was also brilliant. Then he was my direct supervisor,
• 57:19
  Speaker 1: and a wonderful experience to work with two really brainy
• 57:22
  Speaker 1: guys who were very very well connected because people thought
• 57:25
  Speaker 1: the world of them as individuals. So so let's talk
• 57:28
  Speaker 1: a little bit about the investors that who influenced your
• 57:33
  Speaker 1: approach to investing. Who are the thinkers and investors that
• 57:37
  Speaker 1: actually affected how you looked the world of of putting
• 57:41
  Speaker 1: capital at risk. Well, there a whole bunch of them,
• 57:42
  Speaker 1: but I'll tell you the one that I think is
• 57:44
  Speaker 1: obviously the best. Uh Sandy Goddessman, who for many years
• 57:49
  Speaker 1: was on the board at Berkshire Hathaway as Chairman of
• 57:53
  Speaker 1: the board. And Sandy ran a firm called First Manhattan,
• 57:57
  Speaker 1: Fine New York firm, and he was a client of
• 58:01
  Speaker 1: mine when I was at Greenwich Associates, and one year
• 58:05
  Speaker 1: I recommended they not stay in the institutional brokerage business
• 58:09
  Speaker 1: and concentrated on the investment management business. The next year
• 58:12
  Speaker 1: I went to see him and he said, you're right,
• 58:14
  Speaker 1: we shouldn't be in the institutional brokerage business. We're just
• 58:17
  Speaker 1: going to do investment management. I said, well, uh, sorry
• 58:21
  Speaker 1: to hear that one sense, but I'm also glad you
• 58:23
  Speaker 1: took the message. He said, well, that completes our business conversation. Now,
• 58:26
  Speaker 1: what would you like to talk about? And lucky, lucky
• 58:30
  Speaker 1: lucky me. I said, Sandy, you're one of the best
• 58:32
  Speaker 1: investment managers in this city. I'd love to have you
• 58:35
  Speaker 1: tell me how you think about investing yourself. He said,
• 58:40
  Speaker 1: that's easy. I said, thank you tell me all. He said,
• 58:44
  Speaker 1: I'm invested in Berkshire Hathaway because I think Warren Buffett
• 58:47
  Speaker 1: has figured out how to do investing in a way
• 58:49
  Speaker 1: that is different from anybody else can do. I think
• 58:51
  Speaker 1: he's brilliant and very very disciplined. He's a long term investor. Then,
• 58:55
  Speaker 1: so that's my major investment. And he spent about half
• 58:58
  Speaker 1: an hour teaching me to understand Berkshire Hathway. What what
• 59:01
  Speaker 1: year was this? This has been in the early nineteen seventies.
• 59:05
  Speaker 1: I think it was so Berkshire Hathaway is not what
• 59:08
  Speaker 1: it is today. It was barely on anybody's radar. And
• 59:12
  Speaker 1: did you follow his advice? I certainly did. So you're
• 59:15
  Speaker 1: you're an investor with with Berkshire since the seventies, and
• 59:20
  Speaker 1: I've learned a lot by reading Warren Buffett's reports. I've
• 59:24
  Speaker 1: learned a lot from Warren himself, and I have had
• 59:29
  Speaker 1: an unbelievably positive experience I can imagine, to say the least.
• 59:34
  Speaker 1: So Um, it's ironic that you're talking about index investing
• 59:39
  Speaker 1: when in the early seventies, when the opportunity existed, you
• 59:43
  Speaker 1: found your way to Berkshire Hathaway. Those opportunities don't exist anymore,
• 59:47
  Speaker 1: do they. Uh, there may exist, but they'd be hard
• 59:51
  Speaker 1: for me to find. Well, I think they'd be hard
• 59:54
  Speaker 1: for And I think when when Warren Buffett says that
• 59:57
  Speaker 1: for his wife and her retirement right he's going to
• 1:00:02
  Speaker 1: use primarily index funds makes a lot of sense. When
• 1:00:05
  Speaker 1: he says for most individuals, that's what they should do,
• 1:00:08
  Speaker 1: makes a lot of sense. And then when David Swinson,
• 1:00:10
  Speaker 1: who is the chief investment officer for Yale has done
• 1:00:13
  Speaker 1: a wonderful job of investing as an active client in investing,
• 1:00:18
  Speaker 1: says most everybody should be using index funds. I'm smart
• 1:00:22
  Speaker 1: enough to realize that there are some guys are really
• 1:00:24
  Speaker 1: really good at this and they say, that's what we
• 1:00:27
  Speaker 1: ought to do. Probably ought to pay attention. So let's
• 1:00:29
  Speaker 1: let's talk about Swenson for a minute. He created what
• 1:00:33
  Speaker 1: everyone now calls the Yale model. It spawns a million imitators.
• 1:00:38
  Speaker 1: None of them have been able to do what he's
• 1:00:41
  Speaker 1: capable of doing, and Yale consistently outperforms most of the
• 1:00:47
  Speaker 1: other large endowments Harvard, m I T, Stanford, etcetera. Why
• 1:00:51
  Speaker 1: has he been so singularly successful at the Yale model
• 1:00:56
  Speaker 1: that he invented, and halp some other people have been
• 1:00:58
  Speaker 1: unable to find success just doing what he does. It's
• 1:01:03
  Speaker 1: a little too strong a statement. There's some other people
• 1:01:05
  Speaker 1: who've done a very good job. But David is really unique. Now.
• 1:01:09
  Speaker 1: First of all, he's brilliant, really smart. Secondly, he's really
• 1:01:14
  Speaker 1: well educated. Did his economics PhD at Yale and was
• 1:01:17
  Speaker 1: the top of the deck. Jim Tobin was his dissertation advisor,
• 1:01:20
  Speaker 1: and Tim thought so highly of David that they had
• 1:01:23
  Speaker 1: a great personal father to son kind of relationship. David's
• 1:01:28
  Speaker 1: got Midwest values, so he's all about integrity and doing
• 1:01:31
  Speaker 1: the right thing for the right reasons, deep deep rooted,
• 1:01:34
  Speaker 1: and he's devoted to the idea of doing a great
• 1:01:37
  Speaker 1: job for Yale because thousands of people benefit from that.
• 1:01:40
  Speaker 1: All the kids are on scholarship get better scholarships because
• 1:01:43
  Speaker 1: David Swinson has done such a great job for that university.
• 1:01:46
  Speaker 1: All the faculty members who are teaching courses have more
• 1:01:49
  Speaker 1: financial support for what they're trying to do. The head
• 1:01:52
  Speaker 1: of the university has more financial resources to build back
• 1:01:55
  Speaker 1: the facilities of the university. It's one after another after
• 1:01:58
  Speaker 1: everybody's benefiting. And why is he so darned good at it? Well,
• 1:02:03
  Speaker 1: yes he's brilliant. Yes he's well educated, and he's been
• 1:02:06
  Speaker 1: doing it for a long time, and he's very very disciplined.
• 1:02:09
  Speaker 1: But watch the part that's really important. He's completely objective
• 1:02:13
  Speaker 1: and rational, and he's very good with people, and he's
• 1:02:18
  Speaker 1: probably the best client anybody ever had. Tough, really tough
• 1:02:23
  Speaker 1: as a client, but so honest, so straight and so
• 1:02:27
  Speaker 1: helpful that everybody wants to have David Swinson as a client.
• 1:02:31
  Speaker 1: So he gets pick and shoes from all the very best,
• 1:02:33
  Speaker 1: and he's very very careful at his selectivity largely on
• 1:02:37
  Speaker 1: integrity of the discipline of your investing and the integrity
• 1:02:41
  Speaker 1: of the people who are working in the organization. When
• 1:02:43
  Speaker 1: you get checked out by Swenson and his team, you
• 1:02:45
  Speaker 1: get checked out more carefully than the CIA would check
• 1:02:49
  Speaker 1: you out if you were going to be Secretary of
• 1:02:50
  Speaker 1: State for the United States. It's an unbelievable process trying
• 1:02:54
  Speaker 1: to be sure they don't make any mistakes. Last part,
• 1:02:57
  Speaker 1: David Swinson and his team have a sc little button
• 1:03:00
  Speaker 1: network that goes throughout the investment management world. There's no
• 1:03:04
  Speaker 1: one who has more people who say, if I could
• 1:03:06
  Speaker 1: ever be helpful to David Swinson just a little bit
• 1:03:10
  Speaker 1: sometime once, I would love to. So he gets all
• 1:03:13
  Speaker 1: kinds of people feeding him ideas, insights, possibilities, things might
• 1:03:17
  Speaker 1: be useful because he's such a good user and one
• 1:03:20
  Speaker 1: of the best users. Ways he uses it is not
• 1:03:23
  Speaker 1: just for the Yale Endowment, which gets undivided first attention,
• 1:03:27
  Speaker 1: but then he also has been very very helpful in
• 1:03:30
  Speaker 1: teaching people how to do that kind of investing. And
• 1:03:33
  Speaker 1: if you look at the top fifty universities, about a
• 1:03:36
  Speaker 1: third of them have got a David Swinson educated, developed
• 1:03:41
  Speaker 1: and certified individual doing the investment management at that university.
• 1:03:45
  Speaker 1: He's done a lot of people a lot of good
• 1:03:47
  Speaker 1: for a long time. So that raises the the other
• 1:03:53
  Speaker 1: university not too far in in the next state, in Massachusetts.
• 1:04:00
  Speaker 1: Why has the Harvard Endowment stumbled the way it has.
• 1:04:04
  Speaker 1: There's been all sorts of crazy turnover. If you remember
• 1:04:08
  Speaker 1: about ten or fifteen years ago, there was some sort
• 1:04:11
  Speaker 1: of um general offense at how much the managers of
• 1:04:16
  Speaker 1: the endowment were making, and they were putting up really
• 1:04:18
  Speaker 1: good numbers. A lot of that team left. Now there's
• 1:04:21
  Speaker 1: been two or three c I O s since then.
• 1:04:25
  Speaker 1: Let's compare and contrast. What does Harvard need to do
• 1:04:28
  Speaker 1: to and the Harvard Endowment needs to do to look
• 1:04:33
  Speaker 1: more like or at least be as successful as the
• 1:04:36
  Speaker 1: Yale Endowment. Well, if you go back to the really
• 1:04:39
  Speaker 1: great days of the Harvard Endowment, Jack Meyer, who was
• 1:04:42
  Speaker 1: your Harvard manager, David Swinson, the Yale manager. They became
• 1:04:46
  Speaker 1: very close friends because they realized they were both motivated
• 1:04:50
  Speaker 1: by the same values. Do the right thing for the client,
• 1:04:53
  Speaker 1: do it with intellectual rigor, do it with objectivity or
• 1:04:56
  Speaker 1: old times, and do it for the long term. Once
• 1:05:00
  Speaker 1: you get those things down, pat as this is the
• 1:05:02
  Speaker 1: way we're gonna do it, it leads you in a
• 1:05:04
  Speaker 1: particular direction. I think that's been really important. The second
• 1:05:07
  Speaker 1: thing is the governance. The oversight of the Yale Endowment
• 1:05:12
  Speaker 1: has been very, very consistent and contributing in a very
• 1:05:15
  Speaker 1: nice way. One reason it's been so consistent is that
• 1:05:19
  Speaker 1: David Swenson has been carefully picking and choosing the people
• 1:05:22
  Speaker 1: that ought to be candidates, and the candidates have been
• 1:05:25
  Speaker 1: then selected by the president University and David Swenson jointly,
• 1:05:30
  Speaker 1: so that they've had a very nice capability in governance.
• 1:05:34
  Speaker 1: And that's been a stability that's been enormously helpful. That's
• 1:05:38
  Speaker 1: the key artist stability. You haven't had that in Cambridge.
• 1:05:41
  Speaker 1: That's been missing from from the Harvard endownmentt UM. So
• 1:05:47
  Speaker 1: it is what it is. I like the joke that, uh,
• 1:05:49
  Speaker 1: it's a hedge fund with a unit small university attached
• 1:05:52
  Speaker 1: to it. Is is how some people have described Harvard UM.
• 1:05:56
  Speaker 1: I don't know if that's true's not, but but it
• 1:05:58
  Speaker 1: certainly is. It certainly interesting. Let's let's get back to
• 1:06:02
  Speaker 1: my list of standard questions. So you mentioned Swanson, you
• 1:06:05
  Speaker 1: mentioned Buffett, any other investors or thinkers that you want
• 1:06:09
  Speaker 1: to reference in the people who have influenced your approach
• 1:06:13
  Speaker 1: to investments. Well, I've been very privileged because I've been
• 1:06:15
  Speaker 1: all over the world working with a lot of different people.
• 1:06:18
  Speaker 1: And if you started going through the list, you know
• 1:06:21
  Speaker 1: you'd have to pick up Ncox Song, who for many
• 1:06:24
  Speaker 1: years was chief investor for the g I C in Singapore,
• 1:06:29
  Speaker 1: a very large sovereign wealth fund. You go to London
• 1:06:32
  Speaker 1: and Peter Storm with Darling would be another top of
• 1:06:36
  Speaker 1: the deck. He was the guy that was in charge
• 1:06:37
  Speaker 1: of Warburg Investment Management in its glorious and great days
• 1:06:42
  Speaker 1: across the United States. All kinds of different people have
• 1:06:46
  Speaker 1: been terrific. Jim Rothenberg at Capital Group would have been
• 1:06:49
  Speaker 1: one of those individuals. Now David Testa Tiro Price would
• 1:06:55
  Speaker 1: be another. Uh. The large number of really really gifted people.
• 1:07:01
  Speaker 1: All right, So let's shift subjects a little bit. People
• 1:07:03
  Speaker 1: always ask about books. We we talked about some of
• 1:07:06
  Speaker 1: your books as well as UM as well as Extraordinary Tennis.
• 1:07:12
  Speaker 1: What other sorts of books have you enjoyed or would
• 1:07:15
  Speaker 1: you recommend? What sort of finance related fiction, nonfiction? What
• 1:07:20
  Speaker 1: what books do you fill your line your bookshelves at home. Well,
• 1:07:24
  Speaker 1: I'd love to read biography and history. I have to
• 1:07:28
  Speaker 1: be responsible for reading investment books, and I like to
• 1:07:31
  Speaker 1: be responsible for reading business books. But what I really
• 1:07:34
  Speaker 1: like doing is biography and history because I can learn
• 1:07:38
  Speaker 1: forever lessons by doing that. Give us a few examples
• 1:07:42
  Speaker 1: of so start with an author like Ron chernow, but
• 1:07:44
  Speaker 1: most people think he did Hamilton's, but he got some wonderful,
• 1:07:47
  Speaker 1: wonderful books on business organizations that are bar none. His
• 1:07:52
  Speaker 1: book on Morgan, his book on John D. Rockefeller, terrific
• 1:07:55
  Speaker 1: books and full of insight and understanding. It's funny you
• 1:07:59
  Speaker 1: mentioned those two the part, and I had you sign
• 1:08:01
  Speaker 1: uh your book to Mike, who's the head of my
• 1:08:04
  Speaker 1: research and my firm. He's read both of those. He's
• 1:08:07
  Speaker 1: read the Morrigan and he's read the Rockefell bio, and
• 1:08:10
  Speaker 1: he said they're both astonishing. They're really terrific, just unbelievably
• 1:08:14
  Speaker 1: researched and deep, and these guys lead amazing, amazing lives.
• 1:08:18
  Speaker 1: And we all ought to read Robert Carroll's wonderful books
• 1:08:20
  Speaker 1: about Lyndon Johnson because they are insightful in the details
• 1:08:26
  Speaker 1: as well as conceptually useful, fabulous lessons all the time.
• 1:08:31
  Speaker 1: But this is why it really really is how many
• 1:08:33
  Speaker 1: books now are in that Johnson sequence for so far?
• 1:08:38
  Speaker 1: All right? Because I remember Carol from The Power Broker
• 1:08:41
  Speaker 1: about Robert Moses. Terrific book, thick a thousand pages, still
• 1:08:46
  Speaker 1: a terrific book, worth absolutely worth reading. It's five really
• 1:08:50
  Speaker 1: great books in one package. It's a wonderful book. Um,
• 1:08:53
  Speaker 1: so you mentioned, uh investment and finance books. What what
• 1:08:57
  Speaker 1: stands out as some of your favorites. Oh, Arthur Stone
• 1:09:02
  Speaker 1: doings wonderful to volume corporate finance, mostly for the footnotes
• 1:09:07
  Speaker 1: which are about half of every page. Unbelievably rich body
• 1:09:11
  Speaker 1: of insight and understanding as things went along through the
• 1:09:15
  Speaker 1: late eighteen hundreds through the nineteen hundreds. It was just
• 1:09:18
  Speaker 1: a terrific source of learning. Ben Graham and David Dodds
• 1:09:24
  Speaker 1: Graham and Dott is a terrific book, particularly the four edition,
• 1:09:29
  Speaker 1: which just is a dream come true. Uh. Jason's Wags
• 1:09:35
  Speaker 1: books are all really worth reading. Uh. Jonathan Clements writes
• 1:09:40
  Speaker 1: a very nice, continuous book that I think it's really
• 1:09:43
  Speaker 1: worth anybody paying attention. Andy Tobias wrote a wonderful book
• 1:09:47
  Speaker 1: on individual investing. Uh. We're very lucky people put years
• 1:09:52
  Speaker 1: and years and years into learning and then a couple
• 1:09:55
  Speaker 1: of years into condensing into a relatively short package, and
• 1:09:58
  Speaker 1: you can buy the damn thing in your own local store,
• 1:10:01
  Speaker 1: or you can buy it over the internet for less
• 1:10:03
  Speaker 1: than fifty bucks, and there's all that knowledge and carry
• 1:10:06
  Speaker 1: with you wherever you want to go. I mean, books
• 1:10:08
  Speaker 1: are an unbelievable bargain. It's funny, he mentions Wage and
• 1:10:12
  Speaker 1: Graham and Dodd we were just in the office a
• 1:10:16
  Speaker 1: day or two ago talking about this Wage annotated version
• 1:10:20
  Speaker 1: of The Intelligent Investor, and the consensus was this is
• 1:10:25
  Speaker 1: the version you have to get because he describes each chapter.
• 1:10:30
  Speaker 1: So there's the chapter, and then there's Jason's Wagge's detailed
• 1:10:34
  Speaker 1: explanation and series of examples of why each chapter is
• 1:10:38
  Speaker 1: so insightful. And if you asked Ben Graham, he would say,
• 1:10:41
  Speaker 1: get this wag version because of the annotation, high praise. Indeed.
• 1:10:46
  Speaker 1: So so let's talk we we've we've referenced or or
• 1:10:50
  Speaker 1: just hinted about things that have changed since you've joined
• 1:10:53
  Speaker 1: the industry. What do you think is what do you
• 1:10:56
  Speaker 1: think is the most significant change for the positive and
• 1:10:59
  Speaker 1: what do you think is the most significant change for
• 1:11:01
  Speaker 1: the negative over the past couple of decades. One way
• 1:11:05
  Speaker 1: of saying that most positive is that things have gotten
• 1:11:07
  Speaker 1: better and better and better. The markets have been going up,
• 1:11:10
  Speaker 1: so that's got to be a big, big positive. How
• 1:11:16
  Speaker 1: about structurally, what do you think structurally has been the
• 1:11:20
  Speaker 1: positive change when when you look at that's that's obvious,
• 1:11:23
  Speaker 1: and that's the easy access to the expertise of large
• 1:11:27
  Speaker 1: numbers of brilliantly talented people working hard is held to
• 1:11:30
  Speaker 1: figure out what prices ought to be. Called an index fund,
• 1:11:34
  Speaker 1: you get all the best people working on their tails
• 1:11:36
  Speaker 1: off every single day, every single night for nearly nothing.
• 1:11:41
  Speaker 1: So that brings us full circle back back to why
• 1:11:45
  Speaker 1: most people should be buying indexes. Let's talk about the
• 1:11:49
  Speaker 1: shifts going forward. So we've seen this trend develop, especially
• 1:11:53
  Speaker 1: since the last financial crisis where Vanguard went from under
• 1:11:57
  Speaker 1: a trillion they're now coming up on for trill in.
• 1:12:00
  Speaker 1: What do you think is the next shifts or is
• 1:12:04
  Speaker 1: it just a continuation of what we've seen algorithm in
• 1:12:09
  Speaker 1: software and the so called robo advisors low cost indexing.
• 1:12:15
  Speaker 1: Is it just going to extrapolate forward or is something
• 1:12:17
  Speaker 1: else out out there that is going to change investing
• 1:12:22
  Speaker 1: in the future. Well, the change force you just picked
• 1:12:24
  Speaker 1: up on are going to continue. So called robo advisor
• 1:12:27
  Speaker 1: very very helpful for the lower wealth individual part of
• 1:12:30
  Speaker 1: the market. Uh. Indexing being more and more accepted, going
• 1:12:33
  Speaker 1: to be continued. We're going to take the cost out
• 1:12:35
  Speaker 1: of investing so that the returns that were available will
• 1:12:39
  Speaker 1: go mostly to the owners of the capital, so that
• 1:12:42
  Speaker 1: people have more money in their retirement years or more
• 1:12:44
  Speaker 1: money to spend in the meantime. Those would be positive.
• 1:12:49
  Speaker 1: The changes that we see now are going to continue,
• 1:12:52
  Speaker 1: but the changes we don't yet know because we haven't
• 1:12:54
  Speaker 1: seen them. Artificial intelligence being an obvious illustration of that,
• 1:12:58
  Speaker 1: are gonna compiling in top of it's going to get
• 1:13:01
  Speaker 1: to be a finer and finer, faster and faster market,
• 1:13:03
  Speaker 1: harder and harder to keep up with little and beat
• 1:13:07
  Speaker 1: that can be converted to your benefit if you just
• 1:13:08
  Speaker 1: say that's the way it is. So I'm gonna go
• 1:13:11
  Speaker 1: with the flow, and I'm going to use indexing, and
• 1:13:13
  Speaker 1: that's why people are to join the index revolution. And um,
• 1:13:20
  Speaker 1: so here's a question I didn't get to ask you
• 1:13:23
  Speaker 1: that that I've wanted to. This came from an emailer.
• 1:13:26
  Speaker 1: What do you do to relax? What do you do
• 1:13:27
  Speaker 1: for enjoyment outside of the office. Well, first of all,
• 1:13:31
  Speaker 1: I'm married, the most wonderful woman I've met, so I
• 1:13:33
  Speaker 1: really have a nice time with her, and that doesn't
• 1:13:36
  Speaker 1: take long hours at just a few minutes with her
• 1:13:38
  Speaker 1: is always a treat. Now, the second thing is I
• 1:13:41
  Speaker 1: happen to love the work I do. I don't do
• 1:13:43
  Speaker 1: anything I don't like. I often say to my friends,
• 1:13:46
  Speaker 1: I quit working at thirty. I've not quite eighty, but
• 1:13:51
  Speaker 1: I have not done anything that I didn't feel like doing,
• 1:13:53
  Speaker 1: want to do and enjoy doing. So it's been a marvelous,
• 1:13:57
  Speaker 1: privileged experience. And I know I'm lucky, but I play
• 1:14:00
  Speaker 1: to stay there if I possitively can. Uh. I think
• 1:14:04
  Speaker 1: learning is always a treat. And I don't know as
• 1:14:07
  Speaker 1: much as I should know about music, and so listening
• 1:14:10
  Speaker 1: to music is a wonderful opportunity to learn something that's
• 1:14:13
  Speaker 1: new to me. And then books that come out year
• 1:14:17
  Speaker 1: after year after year, these wonderful books that are available
• 1:14:20
  Speaker 1: and a chance to learn that. So my last two questions,
• 1:14:24
  Speaker 1: these are are my favorite two that we ask of
• 1:14:28
  Speaker 1: all our guests. Um, if a millennial or a recent
• 1:14:31
  Speaker 1: college grad would come to you and said I'm interested
• 1:14:34
  Speaker 1: in a career in finance, what sort of advice would
• 1:14:37
  Speaker 1: you give them? Finance is a pretty broad field. Be
• 1:14:42
  Speaker 1: sure that you've gone to business school. I think seriously
• 1:14:45
  Speaker 1: about doing more than business schools, So you might do
• 1:14:47
  Speaker 1: a joint law school business school combination, or do business
• 1:14:50
  Speaker 1: school and then study economics for an advanced degree afterwards.
• 1:14:54
  Speaker 1: But be sure you understand knowledge is a very important resource.
• 1:14:59
  Speaker 1: The second thing is look to be with people you
• 1:15:02
  Speaker 1: admire greatly for their basic values, how they live year
• 1:15:06
  Speaker 1: in year out, in an organization that really wants to
• 1:15:09
  Speaker 1: teach and train young people how to be the best
• 1:15:11
  Speaker 1: they could be. Because if you've got talent, you want
• 1:15:14
  Speaker 1: to maximize that talent. Key to that is fast learning curve,
• 1:15:17
  Speaker 1: particularly in the early years. Third thing is do not
• 1:15:20
  Speaker 1: do anything because it pays well. Choose what you want
• 1:15:24
  Speaker 1: to do because you love it. If you're doing what
• 1:15:25
  Speaker 1: you love doing, you get better and better and better
• 1:15:28
  Speaker 1: at it. As you get better and better and better,
• 1:15:29
  Speaker 1: you'll be paid well. Anybody in finance who's really good
• 1:15:32
  Speaker 1: is going to be paid so well that their biggest
• 1:15:35
  Speaker 1: financial problem over their lifetime. They may be poor when
• 1:15:38
  Speaker 1: they get started, but over their lifetime, their biggest financial
• 1:15:41
  Speaker 1: problem is how to protect their children from too much
• 1:15:43
  Speaker 1: money when they die. That that is a very good
• 1:15:47
  Speaker 1: advice across the board. And it's interesting that people like
• 1:15:51
  Speaker 1: Marren Buffett have learned the lesson and they says to
• 1:15:54
  Speaker 1: their kids, Hey, I made this money, now you go
• 1:15:57
  Speaker 1: make your money. Don't don't count on my health in
• 1:16:01
  Speaker 1: order to disincentivize you from going out. And Buffett's going
• 1:16:05
  Speaker 1: farther that he said, I give my children enough so
• 1:16:07
  Speaker 1: they can choose to do what they really want to do.
• 1:16:11
  Speaker 1: And then but not so much that they don't have
• 1:16:13
  Speaker 1: to choose something. Not so much that makes sense, So
• 1:16:17
  Speaker 1: they're going to have to find a career. Just he's
• 1:16:21
  Speaker 1: giving them enough of a head start so it allows
• 1:16:23
  Speaker 1: them a little selected open the doors so you can
• 1:16:25
  Speaker 1: be your first choice and go for what you want
• 1:16:28
  Speaker 1: to do for a great life. And you're a tough
• 1:16:31
  Speaker 1: person to ask this question of because most people have
• 1:16:37
  Speaker 1: to play with the answer. But I'm afraid you've answered
• 1:16:41
  Speaker 1: this question in the body of your career. But I'm
• 1:16:45
  Speaker 1: gonna ask in anyway, and it's what do you know
• 1:16:48
  Speaker 1: about investing today that you wish you knew forty years
• 1:16:52
  Speaker 1: ago when you began. Wow, there's so many different things
• 1:16:57
  Speaker 1: that I didn't know that I wish i'd known, But
• 1:16:59
  Speaker 1: the main item for me is how sensible it is
• 1:17:04
  Speaker 1: after everything comes in to change the nature of investment management.
• 1:17:08
  Speaker 1: All those people, all those tools, all that information, simplify
• 1:17:12
  Speaker 1: your life, concentrate on the really important questions and index
• 1:17:17
  Speaker 1: your operations. That you knew that back in seventy five.
• 1:17:21
  Speaker 1: That's why I said, it's a tough question when I
• 1:17:24
  Speaker 1: first came in. I came in in the early sixties.
• 1:17:26
  Speaker 1: Oh really, so you wish you but really for someone
• 1:17:31
  Speaker 1: over the course of your career. So usually when I
• 1:17:35
  Speaker 1: when I ask that question to people, the answer that
• 1:17:38
  Speaker 1: comes up is, well, here's what I know today that
• 1:17:42
  Speaker 1: I wish I knew way early in my career. But
• 1:17:45
  Speaker 1: I kind of feel like you've figured a lot of
• 1:17:47
  Speaker 1: this out pretty early in your career. That's very generous
• 1:17:52
  Speaker 1: on your part. I think it's more lucky than brilliant
• 1:17:55
  Speaker 1: figuring it out. But do what you really really want
• 1:17:58
  Speaker 1: to do is something that I was getting close to
• 1:18:01
  Speaker 1: understanding then now I know it's absolutely and and it
• 1:18:05
  Speaker 1: seems like you've managed to do that over over the
• 1:18:08
  Speaker 1: whole course of your career. I promised to get you
• 1:18:11
  Speaker 1: out in time for your lunch date and so we
• 1:18:14
  Speaker 1: still have a buffers to make sure you're gonna do that.
• 1:18:17
  Speaker 1: I I have to thank you for Charlie, for being
• 1:18:20
  Speaker 1: so generous, uh with your time. We have been speaking
• 1:18:25
  Speaker 1: with Charlie Ellis of the formerly of the Yale Endowment,
• 1:18:29
  Speaker 1: Greenwich Associates, the Vanguard Board of Directors, Harvard Faculty. The
• 1:18:34
  Speaker 1: list goes on and on. His latest book is Index Revolution.
• 1:18:38
  Speaker 1: And for those of you who are thinking about putting
• 1:18:41
  Speaker 1: money in the stock market, this is as good as
• 1:18:43
  Speaker 1: any place uh to start. I would be remiss if
• 1:18:48
  Speaker 1: I did not thank Taylor Riggs, my booker, Charlie Vollmer,
• 1:18:52
  Speaker 1: our producer, Michael bat Nick, our director of research. And
• 1:18:58
  Speaker 1: I can't see who's still in the booth. Oh you're here, okay,
• 1:19:04
  Speaker 1: because I heard a male voice five minutes ago at
• 1:19:09
  Speaker 1: Medina who is our recording engineer. We love your comments
• 1:19:14
  Speaker 1: and feedback. Be sure to write to us at m
• 1:19:17
  Speaker 1: IB podcast at Bloomberg dot net. I'm Barry rit Halts.
• 1:19:22
  Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.