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

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