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Interview With Jack Bogle: Masters in Business (Audio) · Masters in Business

• 0:03
  Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
• 0:08
  Speaker 1: I know I say this every week that I have
• 0:10
  Speaker 1: a very special guest, but this week I really have
• 0:15
  Speaker 1: an extra very special guest. His name is Jack Bogel
• 0:20
  Speaker 1: and he is the founder of the Vanguard Group and
• 0:24
  Speaker 1: the inventor of the Index Fund. Did I oversell that
• 0:29
  Speaker 1: this is a special guest or not? Um, let me
• 0:32
  Speaker 1: tell you a little bit about how this date came
• 0:35
  Speaker 1: about and what made this so interesting and weird and unusual. First,
• 0:41
  Speaker 1: I'm in chasing Jack Bogel for literally years, and he
• 0:45
  Speaker 1: doesn't travel much. He's a home body. He lives near
• 0:49
  Speaker 1: the Vanguard headquarters. He's not much for coming into Manhattan
• 0:54
  Speaker 1: and and recording something like this. Uh. But we did
• 0:58
  Speaker 1: the interview with Chairman of Vanguard, Jack Brennan about a
• 1:02
  Speaker 1: year and until almost two years ago, and that went
• 1:05
  Speaker 1: really well. And then last year we did just about
• 1:08
  Speaker 1: a year ago, we did the interview with Bill McNabb,
• 1:10
  Speaker 1: he's the current CEO of Vanguard Group. And I started
• 1:16
  Speaker 1: poking and prodding and asking, Hey, when can I sit
• 1:19
  Speaker 1: down with Jack? When can I sit down with Jack?
• 1:22
  Speaker 1: And finally I just said we're willing to come to
• 1:27
  Speaker 1: Pennsylvania and meet with you guys, And they said, oh,
• 1:30
  Speaker 1: if that's the case, come on down. So you'll hear
• 1:34
  Speaker 1: when we sit and talk with Jack. This was not
• 1:37
  Speaker 1: the usual interview, partly because he's just a force of nature.
• 1:42
  Speaker 1: And you know, I try and balance between guiding the
• 1:48
  Speaker 1: conversation to the specific questions we have and and keeping
• 1:53
  Speaker 1: us on track to cover a variety of topics and subjects.
• 1:57
  Speaker 1: And you could pretty much tell when I give up
• 2:00
  Speaker 1: about three or four questions in and just say, Jack
• 2:04
  Speaker 1: Bogel is a force of nature. I'm just gonna have
• 2:07
  Speaker 1: a conversation with him and let it go. A little
• 2:09
  Speaker 1: background on on the day. This was a couple of
• 2:12
  Speaker 1: thursdays ago, and we basically left the New York area
• 2:18
  Speaker 1: ungodly early, I want to say about four thirty quarter
• 2:20
  Speaker 1: to five, drove down to Pennsylvania. Actually we left so
• 2:25
  Speaker 1: early we beat all the traffic, not only around New York,
• 2:28
  Speaker 1: we got there before the pen the traffic from Philadelphia.
• 2:32
  Speaker 1: Um so, I had my first cracker barrel experience, having
• 2:36
  Speaker 1: having a breakfast at a cracker barrel, which apparently is
• 2:39
  Speaker 1: very common outside of downstate New York. It was quite delicious.
• 2:44
  Speaker 1: We get to the Vanguard campus about an hour early,
• 2:49
  Speaker 1: spend some time in their galley. Get at Vanguard, it's
• 2:51
  Speaker 1: it's the staff for crew. The cafeteria is a galley,
• 2:56
  Speaker 1: it's got all these these nautical themes. And we're finally
• 3:00
  Speaker 1: showed into a small conference room off of Jack's office.
• 3:05
  Speaker 1: And he's you'll hear during the interview, he's eighty six
• 3:10
  Speaker 1: years old. He is sharp as attack, smart as a whip.
• 3:13
  Speaker 1: His voice is still very strong, very powerful. And any
• 3:17
  Speaker 1: pretense I had of following a script and trying to
• 3:20
  Speaker 1: ask specific questions pretty much went out the window. Uh
• 3:25
  Speaker 1: So you'll hear me wrestling in the beginning some of
• 3:27
  Speaker 1: the questions. You'll hear me trying to keep him on
• 3:31
  Speaker 1: our original script. And and I, you know, ten minutes
• 3:34
  Speaker 1: into this conversation, it's pretty clear, Hey, this is a
• 3:38
  Speaker 1: bucking bronco, just just trying not to get kicked in
• 3:42
  Speaker 1: the head. Keep feeding him questions based on wherever he goes,
• 3:47
  Speaker 1: Just follow him and take it to where it goes.
• 3:50
  Speaker 1: And all told, I thought this was really a fascinating conversation.
• 3:55
  Speaker 1: He sat with us for ninety minutes. He was supposed
• 3:58
  Speaker 1: to go to lunch with someone else. I'm pointing to
• 4:01
  Speaker 1: my watch. He's waving me off like I'm telling him
• 4:04
  Speaker 1: not to steal home, and he's coming in. He doesn't care,
• 4:06
  Speaker 1: and so it ran a little long by the time
• 4:09
  Speaker 1: we back out. Some of the other stuff you'll hear.
• 4:12
  Speaker 1: This is a substantive, lengthy conversation. If you are at
• 4:16
  Speaker 1: all a Vanguard fan, a Bogel head, an Index fan,
• 4:21
  Speaker 1: you're going to have a field day with this. I
• 4:24
  Speaker 1: had to set this up because really it was such
• 4:26
  Speaker 1: an exciting experience for me to spend ninety minutes with
• 4:29
  Speaker 1: the man, the legend. Here it is my conversation with
• 4:33
  Speaker 1: the one the Only Jack Bogel. This is Masters in
• 4:40
  Speaker 1: Business with Barry Ridholts on Bloomberg Radio. I know I
• 4:44
  Speaker 1: say this every week that I have a special guest,
• 4:47
  Speaker 1: but this week I have a super special guest, the
• 4:51
  Speaker 1: one the Only Jack Bogel, founder and Chairman emeritus of
• 4:56
  Speaker 1: the Vanguard Group, essentially the creator of the world world's
• 5:00
  Speaker 1: first index mutual fund for individuals in nineteen seventy five.
• 5:05
  Speaker 1: I could read your CV which will essentially take up
• 5:08
  Speaker 1: the entire show. There's so much stuff to to talk
• 5:11
  Speaker 1: about with you. You are a legend in the industry
• 5:15
  Speaker 1: and maybe the person who has had the single biggest
• 5:19
  Speaker 1: impact on investing of anyone. But let's just start from
• 5:24
  Speaker 1: that beginning undergraduate thesis. You're in college in Princeton in
• 5:30
  Speaker 1: nineteen fifty nineteen fifty one, and you're thinking about why
• 5:35
  Speaker 1: do actively managed funds, why do so many of them
• 5:39
  Speaker 1: underperform the market? How did that come about for a
• 5:42
  Speaker 1: college to well? Came about by a great accident, and
• 5:46
  Speaker 1: that is I was majoring in economics. I was looking
• 5:49
  Speaker 1: for a subject for my senior thesis, which is a
• 5:51
  Speaker 1: requirement still at Princeton, sixtensive, extensive document. Mine turned not
• 5:56
  Speaker 1: to be maybe a hundred and thirty five forty pages,
• 5:59
  Speaker 1: and I didn't know what to write about. But I
• 6:01
  Speaker 1: wanted to write about something that no one had ever
• 6:03
  Speaker 1: written about before. And they're in December ninety nine, I
• 6:07
  Speaker 1: was reading Fortune magazine, which I did as part of
• 6:10
  Speaker 1: my economics background, just voluntarily, and there was an article
• 6:14
  Speaker 1: called Big Money in Boston and it was about the
• 6:18
  Speaker 1: mutual fund industry. I described this tiny industry, uh maybe
• 6:23
  Speaker 1: two and a half billion dollars for the industry as
• 6:26
  Speaker 1: tiny but contentious, and I said, well, you know, I'm
• 6:29
  Speaker 1: kind of tiny and I'm kind of contentious, so I'll
• 6:33
  Speaker 1: write about it. And I wrote the thesis enabled me
• 6:36
  Speaker 1: to graduate with high honors from Princeton. Very pretty good job.
• 6:41
  Speaker 1: Not a great thesis, but not bad for somebody a
• 6:44
  Speaker 1: year out of his teens. Let me let me push
• 6:47
  Speaker 1: back at you and say, that was an incredibly insightful thesis.
• 6:52
  Speaker 1: The insight that you derived at a very young ages
• 6:56
  Speaker 1: the cost of all this active management. They were unable
• 7:00
  Speaker 1: to overcome that bogey even to today. What should really
• 7:04
  Speaker 1: be so obvious to everybody. Lots of folks still haven't
• 7:07
  Speaker 1: seemed to figure that out. So what makes me stop
• 7:10
  Speaker 1: and pause and and ask you this question, how did
• 7:13
  Speaker 1: you ever come to that conclusion at such a young
• 7:17
  Speaker 1: age without the universe of information we have available to
• 7:22
  Speaker 1: us today. Well, to begin with, the thesis title was
• 7:25
  Speaker 1: the economic role of the investment company, and the overall
• 7:29
  Speaker 1: of the overriding and focus of that thesis was mutual
• 7:33
  Speaker 1: funds are there to serve investors. Put the investors first.
• 7:38
  Speaker 1: And I talked about reducing sales loads, reducing management fees,
• 7:42
  Speaker 1: and focusing on investing and non marketing things of that nature,
• 7:47
  Speaker 1: and that's what the industry in my in my formula
• 7:50
  Speaker 1: and would have to do to reach its great potential.
• 7:53
  Speaker 1: And I did not actually, to be very clear on this,
• 7:56
  Speaker 1: I did not assemble any data. But I looked at
• 7:59
  Speaker 1: about team leading mutual funds and look at their records,
• 8:03
  Speaker 1: and without adding and dividing and getting averages, it was
• 8:08
  Speaker 1: very clear that very few of them, if any at
• 8:10
  Speaker 1: that time, could could outperform the SMP five index. So
• 8:14
  Speaker 1: it was basically anecdotal. Although this industry in those days
• 8:19
  Speaker 1: it was very much a commodity in a way kind
• 8:23
  Speaker 1: of commodity. The major funds of those days we're just
• 8:27
  Speaker 1: basic basically buying long lists of blue chip stocks. You
• 8:32
  Speaker 1: could call them Dow Jones industrial average funds or later,
• 8:35
  Speaker 1: because the SMP wasn't very enough well known then you
• 8:38
  Speaker 1: could call them standard and poorst kind of funds. They
• 8:40
  Speaker 1: were down the middle. They had fluctuations, very similar volatility,
• 8:45
  Speaker 1: very similar to the index. So even back in the
• 8:49
  Speaker 1: late forties early fifties, mutual funds were closet indexers. Sure, absolutely, huh,
• 8:55
  Speaker 1: that's quite that's quite fascinating. So let's fast forward a
• 8:58
  Speaker 1: little bit. So now you working as chairman of Wellington's
• 9:02
  Speaker 1: management company. And long story short, you said the most
• 9:06
  Speaker 1: unwise decision of your career. You do a merger doesn't
• 9:09
  Speaker 1: work out and they end up um breaking it down
• 9:13
  Speaker 1: from from uh lieutenant to private so to speak, and
• 9:17
  Speaker 1: not less than private, less than private. And you wanted
• 9:21
  Speaker 1: to run a fund and they said, well, you know,
• 9:23
  Speaker 1: because of this M and A, we don't want you
• 9:27
  Speaker 1: running an active fund. If you want to put together
• 9:29
  Speaker 1: how did how did the index come out of that?
• 9:32
  Speaker 1: That job change? Okay, well, let me say my first
• 9:36
  Speaker 1: job and I was thirty five years old and Mr Morgan,
• 9:39
  Speaker 1: the founder of Walter L. Morgan, the founder of Wellingcoln,
• 9:43
  Speaker 1: called me into his office. Wellington was in trouble. Wellingcoln
• 9:46
  Speaker 1: Fund was in trouble, its performance was slipping, and Wellington
• 9:49
  Speaker 1: Management Company was in trouble because we were basically a
• 9:52
  Speaker 1: one product if you will company up conservative balanced fund.
• 9:56
  Speaker 1: We were, for the want of a better metaphor, the
• 9:58
  Speaker 1: bagel of the mutual fund industry, the the hard, not sweet,
• 10:05
  Speaker 1: um nutritious safe choice in the biggest balance fund in
• 10:11
  Speaker 1: the industry, and people stopped buying bagels and started buying
• 10:18
  Speaker 1: if you will donuts. We came into the go go era.
• 10:21
  Speaker 1: So all these fancy growth funds I powered buying stocks
• 10:25
  Speaker 1: that had no investment, no intrinsic investment merit at all.
• 10:29
  Speaker 1: This is the mid to late sixties, the nifty fifty
• 10:32
  Speaker 1: and that sort of just the go go era and
• 10:35
  Speaker 1: the go goes came and the go goes win. But
• 10:38
  Speaker 1: if you're in the bagel business and nobody is buying bagels,
• 10:42
  Speaker 1: and the balance fund share of industry sales actually dropped
• 10:45
  Speaker 1: to one percent, and so I had to do something,
• 10:49
  Speaker 1: and Mr Morgan told me to do it, and I
• 10:51
  Speaker 1: talked to a couple of firms about merging, and then
• 10:54
  Speaker 1: I came across this firm in Boston and it had
• 10:57
  Speaker 1: a fund called I Vest Fund, one of the go
• 10:59
  Speaker 1: go funds that a They had some apparently bright young
• 11:03
  Speaker 1: managers that I had kind of common cause with, and
• 11:06
  Speaker 1: they had a pension business. So we got the new
• 11:08
  Speaker 1: managers that would save Wellington Fund. We got the go
• 11:11
  Speaker 1: go fund that we needed to stay in business, and
• 11:14
  Speaker 1: we got into a new business that we thought we
• 11:16
  Speaker 1: could be very successful. It was from words of one syllable,
• 11:19
  Speaker 1: two syllables, brit I'm Barry Riholts, You're listening to Masters
• 11:23
  Speaker 1: in Business on Bloomberg Radio. My extra special guest today
• 11:28
  Speaker 1: is Jack Bogel. He is the founder of Vanguard Group
• 11:32
  Speaker 1: and essentially the inventor of the index funds. Jack, we
• 11:37
  Speaker 1: were speaking earlier about how a crisis at Wellington, which
• 11:43
  Speaker 1: was the predecessor you worked at to the Vanguard Group,
• 11:47
  Speaker 1: actually led to the creation of the Vanguard Group. Tell
• 11:51
  Speaker 1: us how that came about. Okay, Well, let's start with
• 11:53
  Speaker 1: the fact that in doing this merger, which I was
• 11:56
  Speaker 1: eager to do, I gave up too many votes in
• 12:00
  Speaker 1: the company and so when everything fell apart, the market
• 12:03
  Speaker 1: went down. Uh, and so on. Right at the market
• 12:08
  Speaker 1: was going down in seventy four, it would be to
• 12:11
  Speaker 1: climb the happy partners um fragmented and there were four
• 12:17
  Speaker 1: of them, and there was one of me, and they
• 12:19
  Speaker 1: had packed the board of directors. I was I was
• 12:21
  Speaker 1: never very political, and they fired me. The guys that
• 12:24
  Speaker 1: had caused this catastrophe, fired the one that was trying
• 12:27
  Speaker 1: to avoid it. And so I was out of a job.
• 12:33
  Speaker 1: So what could I do. I could go try and
• 12:35
  Speaker 1: find work for another firm. I had a young family
• 12:37
  Speaker 1: living here. I didn't want to move. I was very
• 12:40
  Speaker 1: angry about what happened, of course, but you know what
• 12:44
  Speaker 1: is is. And so I decided my best chance was
• 12:47
  Speaker 1: to talk to the directors of the Wellington Fund, this
• 12:50
  Speaker 1: fund so badly heard the ash the diamond and arn't crown,
• 12:56
  Speaker 1: and say, look, the management company has fired me, but you,
• 13:00
  Speaker 1: you're a slightly different group, can keep me. And we'll
• 13:04
  Speaker 1: tell the management company what to do. We will be
• 13:07
  Speaker 1: in charge of the administration of the fund, ending necessary
• 13:09
  Speaker 1: to make it work, and we'll be in charge of
• 13:12
  Speaker 1: praising the advisor and taking whatever steps we want. Will
• 13:15
  Speaker 1: be independent of the advisor. And uh I wanted to
• 13:18
  Speaker 1: take over distribution too, but the directors wouldn't go along
• 13:21
  Speaker 1: with that. So we became a little administrative company. And
• 13:26
  Speaker 1: uh I wanted to glamorous name. So I found the
• 13:29
  Speaker 1: name Vanguard. When I first learned about We go from Wellington,
• 13:35
  Speaker 1: the the the land battles of the Napoleonic Wars, the
• 13:39
  Speaker 1: Duke of Wellington, the naval battles of the Napoleonic War,
• 13:43
  Speaker 1: and there's Lord Nelson at the Battle of the Nile,
• 13:46
  Speaker 1: one of the most complete, the most complete naval victory
• 13:49
  Speaker 1: in history to this day. Uh and Uh, he writes
• 13:53
  Speaker 1: to this dispatch that I see from the deck of HMS.
• 13:57
  Speaker 1: Vanguard his flagship, and that sounds like a great name
• 14:00
  Speaker 1: for a for a company, perfect perfect from Wellington Funds.
• 14:05
  Speaker 1: How did you actually form the Vanguard Group. Well, the
• 14:08
  Speaker 1: idea was that the funds would create a new company
• 14:11
  Speaker 1: that they owned, they would capitalize. Capitalization was very small
• 14:15
  Speaker 1: and I'm gonna guess maybe two hundred and fifty thousand dollars.
• 14:17
  Speaker 1: This is a very small company at that point. Actually,
• 14:21
  Speaker 1: the total assets of the funds were down and around
• 14:23
  Speaker 1: one point five billion. So we capitalized the fund and
• 14:28
  Speaker 1: and Welling and Management Company had to take it because
• 14:30
  Speaker 1: the directors of the funds were in charge of the
• 14:33
  Speaker 1: contracts with Welling and So you really backed George your
• 14:36
  Speaker 1: way back into the company after they had fired you
• 14:39
  Speaker 1: as chairman. Well, yes, I think that's a fair statement.
• 14:42
  Speaker 1: But techno, from a technical standpoint, I'd been the chairman
• 14:45
  Speaker 1: of the Welling and Fund all along Gotch so I
• 14:48
  Speaker 1: have the same old continuity that I had going back
• 14:50
  Speaker 1: to nineteen just post merger. They this was a bactor.
• 14:54
  Speaker 1: So how do you go from that to the Vanguard Group. Well,
• 14:57
  Speaker 1: we put a name in the company because we had,
• 14:59
  Speaker 1: I think get than those days, maybe a dozen funds,
• 15:02
  Speaker 1: and we didn't want a dozen separate companies to manage.
• 15:05
  Speaker 1: So we had to have a core or central company
• 15:08
  Speaker 1: and UH that would pool resources of all the funds
• 15:12
  Speaker 1: and provide all the services. And we had allocation methods
• 15:15
  Speaker 1: between the funds. And it was all good until we
• 15:20
  Speaker 1: decided to take over distribution, which was our Let me,
• 15:25
  Speaker 1: I'm a little bit ahead of myself. Let me let
• 15:26
  Speaker 1: me go back and say to the first thing. We
• 15:29
  Speaker 1: were not allowed to go into the business of investment management,
• 15:32
  Speaker 1: that was theirs. We were not allowed to go into
• 15:34
  Speaker 1: the business that was there as being willing that was there.
• 15:38
  Speaker 1: The active side you couldn't do and we couldn't. We
• 15:41
  Speaker 1: couldn't go into management. We didn't distinguish between active and
• 15:44
  Speaker 1: passive and those days not In those days, there weren't
• 15:47
  Speaker 1: an index, right, So so if you couldn't go into management,
• 15:51
  Speaker 1: how are you able to set up the Vanguard five hundred?
• 15:54
  Speaker 1: Wouldn't be patient? Okay? So um, we were not allowed
• 15:59
  Speaker 1: to go into this retribution because that was welling consfunction too.
• 16:02
  Speaker 1: So we had this little administrative company looking over however,
• 16:05
  Speaker 1: had the legal responsibility and the board responsibility to look
• 16:09
  Speaker 1: over the advisor and distributor. So we were in charge.
• 16:12
  Speaker 1: And so my first I knew a company that was
• 16:15
  Speaker 1: an administrative company was not going to be anything for me.
• 16:19
  Speaker 1: I mean, I like the administration. I know how well
• 16:21
  Speaker 1: it has to be done, shareholder record keeping and all that,
• 16:25
  Speaker 1: but that's just not the kind of challenge I was
• 16:27
  Speaker 1: looking for. And any company that's going to succeed, it's
• 16:30
  Speaker 1: going to have to control the kind of funds he
• 16:32
  Speaker 1: wants to they want to run, the kind of distribution
• 16:35
  Speaker 1: they want to have, who will buy the funds, who
• 16:37
  Speaker 1: will sell them, things of that nature. So we have
• 16:40
  Speaker 1: a company that's just in this little administrative box, and
• 16:44
  Speaker 1: I'm thinking, let's do something. So at the very first
• 16:46
  Speaker 1: board meeting of the new company, after we got an
• 16:49
  Speaker 1: organized I say we gotta started index fund. And the
• 16:53
  Speaker 1: directors say you're not allowed to get new investment management.
• 16:57
  Speaker 1: And I say, this fund isn't man aged, and believe
• 17:02
  Speaker 1: it or not, they bought it. So in other words,
• 17:06
  Speaker 1: you describe the index fund as just, hey, it's the
• 17:08
  Speaker 1: five largest companies in America. There's no manager, nobody's in charge.
• 17:13
  Speaker 1: It's just it's an unmanaged broad index, and they said, oh,
• 17:18
  Speaker 1: go do that. They said, well, I won't say was
• 17:21
  Speaker 1: that easy, but that was the final decision. I get
• 17:24
  Speaker 1: the sense from from what you've described that they would
• 17:27
  Speaker 1: kind of let's let's let Jack go do that. He'll
• 17:30
  Speaker 1: be out of our hair. It'll keep them busy and fine,
• 17:33
  Speaker 1: won't cause anybody trouble. I think you're pretty much on
• 17:36
  Speaker 1: the mark. This week on Masters in Business on Bloomberg Radio,
• 17:39
  Speaker 1: I have an extra special guest. His name is Jack Bogel.
• 17:43
  Speaker 1: He is the founder of the Vanguard Group, the inventor
• 17:47
  Speaker 1: of the index funds, and author of far too many
• 17:51
  Speaker 1: books to mention. I've been speaking with Jack here in
• 17:55
  Speaker 1: the headquarters of of Vanguard and just outside the conference
• 18:00
  Speaker 1: and we were sitting on the wall is a frames
• 18:04
  Speaker 1: prints and on that print it says stamp out index funds. Jack,
• 18:10
  Speaker 1: What on earth does that mean? That means Wall Street
• 18:13
  Speaker 1: couldn't make any money out of index funds, and so
• 18:16
  Speaker 1: Wall Street didn't like it. We had an initial initial
• 18:19
  Speaker 1: public offering. I went all over New York so many
• 18:22
  Speaker 1: times to try and find underwriters and finally got the
• 18:25
  Speaker 1: four largest retail underwriters, pH Dan Winter Reynolds. Uh forget
• 18:31
  Speaker 1: who the other one was Reynolds. Okay, they were the
• 18:34
  Speaker 1: biggest guys in the business, and they said, we can
• 18:36
  Speaker 1: do a hundred and fifty million dollars with this great
• 18:37
  Speaker 1: new idea. They did eleven million dollars, so so less
• 18:42
  Speaker 1: than ten. And they came in to see me when
• 18:45
  Speaker 1: the underwriting was over and said, you know, I said
• 18:48
  Speaker 1: to them, look, we can't even buy around lots of
• 18:49
  Speaker 1: five And they said, well, why don't we just give
• 18:52
  Speaker 1: everybody their money back and pull it? And I said,
• 18:54
  Speaker 1: are you kidding me? We have the world's first index fund.
• 18:58
  Speaker 1: And it's the world's first index fund. Period. You have
• 19:00
  Speaker 1: to say, retail a lot of institutional hold at the beginning.
• 19:04
  Speaker 1: It's the world's first index mutual fund, no question about that.
• 19:08
  Speaker 1: And amazing and so it got nowhere, It went nowhere fast,
• 19:13
  Speaker 1: eleven million dollar launched. What year was that that was in, right,
• 19:18
  Speaker 1: eleven million dollars and everybody laughed and nobody thought there
• 19:22
  Speaker 1: was any future to index funds. That's exactly right. That
• 19:26
  Speaker 1: that's just astonishing. Well, you had incredible foresight to say,
• 19:30
  Speaker 1: and it makes sense that the four largest retail shops
• 19:33
  Speaker 1: would want to participate in this because this is a simple,
• 19:36
  Speaker 1: easy way for their retail client to get exposure to
• 19:40
  Speaker 1: the market, fast, easy, relatively inexpensive. It should have except
• 19:45
  Speaker 1: that when the client buys this fund, it's to be
• 19:48
  Speaker 1: held forever. They don't trade it, and the fund doesn't
• 19:51
  Speaker 1: do any trading. There's no brokerage business generated by the
• 19:54
  Speaker 1: fun So this was not a happy moment for Wall Street,
• 19:58
  Speaker 1: and they looked at it, I think as a some
• 20:00
  Speaker 1: kind of the beginning of a of a communicable disease,
• 20:04
  Speaker 1: and it had to it had to be stamped out.
• 20:07
  Speaker 1: The Center for Disease Control had to come in and
• 20:10
  Speaker 1: did they really perceive you as a threat or did
• 20:12
  Speaker 1: they kind of laugh it off? And yeah, yeah, best
• 20:15
  Speaker 1: of luck with that, Jack. Yeah, I'd say pretty much
• 20:18
  Speaker 1: that way. Although we did a couple of years ago
• 20:21
  Speaker 1: for one of the funds anniversaries. We all got together,
• 20:23
  Speaker 1: but the underwriters, all four underwriters, and all four underwriters
• 20:26
  Speaker 1: and their lawyers and our lawyer lawyer singular. We only
• 20:29
  Speaker 1: had one on those days. And they're all good people,
• 20:33
  Speaker 1: you know, I don't uh. Then we all do our
• 20:36
  Speaker 1: best in this life in very different ways of work.
• 20:38
  Speaker 1: So it worked out well. It had to start, and
• 20:41
  Speaker 1: it did start. So here's the question that I could
• 20:44
  Speaker 1: ask you. Forty plus years later, Vanguard is now running
• 20:49
  Speaker 1: three point something trillion dollars. Four trillion is not that
• 20:54
  Speaker 1: far off in the distance, an enormous success, one of
• 20:57
  Speaker 1: the single largest asset managers in the world. How come
• 21:02
  Speaker 1: nobody ever said, hey, those guys are onto something, we
• 21:06
  Speaker 1: should be a competitor to them. How did how did
• 21:09
  Speaker 1: that never come up anywhere along the lines? Well, the
• 21:12
  Speaker 1: answer is so simple. Index funds have a real problem.
• 21:17
  Speaker 1: All the damn money goes to the investors, right, Managers
• 21:22
  Speaker 1: can't take anything they're not managing well, but you're taking
• 21:25
  Speaker 1: ten or fifteen basis points and on trillions of dollars,
• 21:29
  Speaker 1: that's not nothing. Well, nobody expected to get the trillions
• 21:32
  Speaker 1: of dollars, believe me, not an eleven million. But but okay,
• 21:35
  Speaker 1: in seventy four or seventy six, it's eleven million. But
• 21:38
  Speaker 1: by the time you get to the mid ninety nineties,
• 21:43
  Speaker 1: you're hundreds of billions of dollars, and then I think
• 21:45
  Speaker 1: you hit a trillion? Was it late nineties? So even
• 21:52
  Speaker 1: didn't anybody say, hey, those guys in Pennsylvania they have
• 21:57
  Speaker 1: a trillion dollars, Why don't we do what they're doing. Well,
• 22:00
  Speaker 1: it's a p it's a problem. And then eventually the
• 22:03
  Speaker 1: big guys had to Fidelity had to have They were
• 22:05
  Speaker 1: dragged kicking and screaming in indexing and they have to
• 22:09
  Speaker 1: be competitive on price. They can still make all the
• 22:12
  Speaker 1: money they want, and it's an awful lot on the
• 22:15
  Speaker 1: actively managed funds. So it's kind of a lost leader
• 22:17
  Speaker 1: for Fidelity. And what about others Black Rock and American
• 22:21
  Speaker 1: Century and all these other entities swab offers and index.
• 22:25
  Speaker 1: It seems everybody offers some version of uh, the SMPI index. Yeah. Well,
• 22:30
  Speaker 1: t ro Price is a good example. They have a
• 22:33
  Speaker 1: hidden index fund. They don't talk much about it. It's
• 22:36
  Speaker 1: kind of expensive. Basis points relatives are five and it's
• 22:41
  Speaker 1: a kind of a sideball thing so they can get
• 22:43
  Speaker 1: into the retirement market. This has become a marketing business,
• 22:47
  Speaker 1: and right now we're seeing this tremendous change in people
• 22:53
  Speaker 1: who realizing the importance of low cost and a long
• 22:57
  Speaker 1: term focus. And if you just keep those two things
• 22:59
  Speaker 1: in mind, you will never do anything but own a
• 23:03
  Speaker 1: broad market index and hold it forever. I'm Barry Ridholtz.
• 23:07
  Speaker 1: You're listening to masters in Business on Bloomberg Radio. My
• 23:10
  Speaker 1: extra special guest this week is Jack Bogel. He is
• 23:14
  Speaker 1: the founder of the Vanguard Group, inventor of the index funds,
• 23:19
  Speaker 1: author of numerous books. Let's jump right back into the
• 23:22
  Speaker 1: issue of costs and how they impact investors. You're known
• 23:27
  Speaker 1: as the person who created the index fund but really,
• 23:31
  Speaker 1: which do you think is more important, the passive indexing
• 23:35
  Speaker 1: or the fact that it's so low cost Well, it's
• 23:38
  Speaker 1: it's pretty clear to me that passive indexing is the
• 23:40
  Speaker 1: more important because I'm going to define costs in a
• 23:43
  Speaker 1: couple of different ways here. One is the expense ratio.
• 23:46
  Speaker 1: And our funds index funds probably average about ten basis points.
• 23:50
  Speaker 1: Are managed funds probably average about thirty five, So there's
• 23:54
  Speaker 1: not that big a difference. The industry is up around
• 23:57
  Speaker 1: a hundred and twenty on an unweighted basis And when
• 24:00
  Speaker 1: you talk about basis points, the basis point is just
• 24:02
  Speaker 1: a percentage of So a hundred basis points is one percent.
• 24:06
  Speaker 1: Ten basis points is one tenth of one percent. If
• 24:09
  Speaker 1: you're averaging ten basis points, that's a very very inexpensive.
• 24:13
  Speaker 1: It's five five basis points, that's very inexpensive. That is
• 24:20
  Speaker 1: really inexpensive. But that's because we have a mutual company
• 24:24
  Speaker 1: owned by its shareholders and don't have to deliver profits.
• 24:27
  Speaker 1: And think about this for Eminent Parry, that the profit
• 24:30
  Speaker 1: margins in this business can easily run to be So
• 24:34
  Speaker 1: if you've got a one percent expense ratio, you're making
• 24:37
  Speaker 1: fifty basis points on the top. So you're you're actually
• 24:41
  Speaker 1: operating at fifty which is probably not too bad because
• 24:45
  Speaker 1: very few people have the scale that we have developed,
• 24:49
  Speaker 1: have the technology that we've developed, have the efficiency that
• 24:52
  Speaker 1: we've developed. And also I don't think this is self serving,
• 24:57
  Speaker 1: have the blie pulpit that we have. You know, imagine
• 25:01
  Speaker 1: Fidelity coming into this business. Describe I described that as
• 25:05
  Speaker 1: drag kicking and screaming to the business. So here we
• 25:07
  Speaker 1: have kicking and screaming over here, and here we have
• 25:11
  Speaker 1: missionary zeal, the bullied pulpit, bind this is the way,
• 25:16
  Speaker 1: this is the new way. And you have an entire
• 25:19
  Speaker 1: universe of evangelists amongst the advisor community who have drunk
• 25:24
  Speaker 1: the kool aid and say, hey, low cost indexing is
• 25:27
  Speaker 1: the way to go. Following the financial crisis, it seems
• 25:32
  Speaker 1: like Vanguard was sucking up all the money in the
• 25:35
  Speaker 1: room and everybody else wasn't also run it also ran
• 25:39
  Speaker 1: are events like the Great Financial Crisis? Does that sort
• 25:43
  Speaker 1: of shake people out of their false belief and send
• 25:46
  Speaker 1: them in the direction of hey, these missionaries. Turns out
• 25:50
  Speaker 1: these guys are right. Well, you're certainly right in a sense.
• 25:53
  Speaker 1: It's it's not easy to read. But what happens when
• 25:56
  Speaker 1: the market goes way down and went down fifty rough
• 25:59
  Speaker 1: into on he seven nine, and all these managers that says,
• 26:03
  Speaker 1: we'll manage your money for you. The shareholder has kind
• 26:07
  Speaker 1: of led to expect that they will anticipate this and
• 26:10
  Speaker 1: not let it happen to them. And they may not
• 26:13
  Speaker 1: directly communicate that, but if someone says, well, i'm you know,
• 26:16
  Speaker 1: I'm pretty smart, I'm a smart manager, you would expect
• 26:19
  Speaker 1: the down market they would do a good bit better
• 26:22
  Speaker 1: than the market. Well, of course to begin when they can't,
• 26:25
  Speaker 1: because some do, when some don't. They're all average together,
• 26:28
  Speaker 1: and how you're picking one over the other you never
• 26:30
  Speaker 1: know in advance. You can only guess. And what good
• 26:32
  Speaker 1: is that? Yeah, exactly, so the down markets do help that,
• 26:36
  Speaker 1: But it's also this wave of you know, there's not
• 26:39
  Speaker 1: an economics course there's not an MBA course, and in
• 26:44
  Speaker 1: investing or finance that doesn't say basically, indexing is the way.
• 26:50
  Speaker 1: It's the data that matters. It's the data and it's
• 26:55
  Speaker 1: gonna so instead of I mean, usually if you look
• 26:58
  Speaker 1: back and see a fund that's done well, you can
• 27:00
  Speaker 1: pretty much conclude it will not do well in the future.
• 27:03
  Speaker 1: Everything reverts to the mean. The index does not. It
• 27:06
  Speaker 1: continues to give you your share of the market return.
• 27:10
  Speaker 1: And when you look at the numbers, I mean. One
• 27:13
  Speaker 1: of my favorite constructions is, uh, the index fund gives
• 27:18
  Speaker 1: you the advantage of long term compounding of returns while
• 27:24
  Speaker 1: eliminating the tyranny of long term compounding. Of course, So
• 27:31
  Speaker 1: think about it this way. Let's assume the stock market
• 27:34
  Speaker 1: gives a seven percent return over your life over thirty
• 27:37
  Speaker 1: years or over fifty years um. If you get to
• 27:41
  Speaker 1: seven percent, each dollar goes up three times. If you
• 27:46
  Speaker 1: get five percent, that would be the seven percent less
• 27:49
  Speaker 1: the industry's typical two percent all in cost, you get
• 27:53
  Speaker 1: ten dollars, So ten dollars versus thirty dollars difference. So
• 27:58
  Speaker 1: you put up the capital, you took of the risk,
• 28:03
  Speaker 1: and you got thirty three of the return. As I
• 28:06
  Speaker 1: say to people, if that strikes she was a good
• 28:08
  Speaker 1: deal by all means, do it. So. Morning Star once
• 28:11
  Speaker 1: famously did a study which I'm sure to this day
• 28:15
  Speaker 1: they regret, and the study they became, you know, famous
• 28:20
  Speaker 1: for their Star rankings of mutual funds. And I've written
• 28:24
  Speaker 1: about this. You could google this, people can find this.
• 28:27
  Speaker 1: Someone internally did a study and said, if you don't
• 28:31
  Speaker 1: have access to morning Star data, but you just looked
• 28:35
  Speaker 1: at a single data point across the universe of mutual funds,
• 28:39
  Speaker 1: what would be the most helpful. Would it be the
• 28:41
  Speaker 1: track record, would it be the manager would it And
• 28:43
  Speaker 1: it turned out that if you forgot about everything else
• 28:47
  Speaker 1: and only picked the lowest cost funds, that generated the
• 28:51
  Speaker 1: highest returns going forward. So how that makes me ask
• 28:56
  Speaker 1: the question how important are keeping slow two investors? Well,
• 29:03
  Speaker 1: when you give the statement that it's only cost that matters,
• 29:06
  Speaker 1: I'm inclined to say, as the kids would say, Barry, duh,
• 29:12
  Speaker 1: it's it seems obvious after the fact, But for the
• 29:15
  Speaker 1: longest periods of time people, So let's let me digress
• 29:20
  Speaker 1: and talk a little bit about hedge funds. While all
• 29:23
  Speaker 1: this money is flowing a vanguard over the past decade
• 29:26
  Speaker 1: since the financial crisis, you guys went from a trillion
• 29:29
  Speaker 1: to over three trillion. The other segment of the market
• 29:33
  Speaker 1: that attracted a ton of money was the hedge fund industry,
• 29:37
  Speaker 1: which charges two percents forget five basis points two percent
• 29:42
  Speaker 1: of the assets under management, plus of the profits. And
• 29:46
  Speaker 1: they also scaled up across ten thousand funds to three
• 29:50
  Speaker 1: trillion dollars. How do you explain, despite the obvious duh,
• 29:55
  Speaker 1: how do you explain so much money flowing to a
• 29:58
  Speaker 1: group with such high expand well, greed, the buyer's greed
• 30:03
  Speaker 1: and perhaps even the manager's greed because those are very
• 30:06
  Speaker 1: high costs. But people are looking for a better way.
• 30:10
  Speaker 1: You know, it's pretty easy. I've done a lot of
• 30:12
  Speaker 1: work on this. You may have read some of it
• 30:14
  Speaker 1: to forecast what the stock market return is going to
• 30:16
  Speaker 1: be within reasonable magnitudes over time, not not in a
• 30:20
  Speaker 1: year by year, but over decades. And uh so you
• 30:25
  Speaker 1: know where you're gonna be roughly in the stock market.
• 30:27
  Speaker 1: And you say a pension pan, and pension plans are
• 30:30
  Speaker 1: very heavy part of the of the hedge fund business
• 30:33
  Speaker 1: because they don't have to worry about the high taxes
• 30:36
  Speaker 1: generated by by hedge funds. And uh so they say
• 30:39
  Speaker 1: we've got to have more, and someone coast comes and
• 30:42
  Speaker 1: shows them their past record and guess what they put
• 30:46
  Speaker 1: the S and P five shame. Of course they wouldn't
• 30:49
  Speaker 1: show you the record if they didn't. So a little
• 30:52
  Speaker 1: survivorship bias built into that, You sure that, well, the
• 30:55
  Speaker 1: survivorship bias build into it. But most of all, there's
• 31:00
  Speaker 1: it ignores the fact of life in this business. It's
• 31:03
  Speaker 1: everywhere reversion to the mean. Biblically put Barry, the last
• 31:08
  Speaker 1: shall be first, on the first shall be last. And
• 31:11
  Speaker 1: it happens to hedge funds, it happens to mutual funds.
• 31:14
  Speaker 1: It is basically a fundamental law. Seven fat years, seven
• 31:18
  Speaker 1: lean years, and there's no way around it. Yeah, the
• 31:21
  Speaker 1: number of years may differ, but you've got it all right. Well,
• 31:23
  Speaker 1: you reference the Bible and and that that phrase that
• 31:26
  Speaker 1: always stayed with me. Um. So let's let's stick with
• 31:30
  Speaker 1: the issue of um of indexing for now. And I
• 31:36
  Speaker 1: want to quote something that Charlie Ellis had wrote. Charlie
• 31:40
  Speaker 1: was not only on the board of the Vanguard Group,
• 31:44
  Speaker 1: a board of directors, but he was also an advisor
• 31:47
  Speaker 1: to the Yale Endowment Fund, and he wrote a wonderful
• 31:50
  Speaker 1: book called Winning the Loser's Game, and he he also
• 31:55
  Speaker 1: advocates that individuals should stick with simple indexing, which leads
• 31:59
  Speaker 1: me to a question, how many indices should the average
• 32:04
  Speaker 1: invest your own? Well, very very few is as symboled
• 32:10
  Speaker 1: to that answer to that question. You need a broad
• 32:12
  Speaker 1: stock index, and you need a broad out bond index,
• 32:15
  Speaker 1: because I'm convinced that everybody should have a little anchor
• 32:18
  Speaker 1: to winward when these bad times come, if for no
• 32:21
  Speaker 1: other reason, to protect themselves and getting emotional and behaving
• 32:26
  Speaker 1: badly and selling out their portfolios at market bottoms. So
• 32:30
  Speaker 1: leaving aside the allocation between stocks and bonds, you can
• 32:33
  Speaker 1: buy a bond index fund, and you're gonna buy a
• 32:35
  Speaker 1: total stock market index fund, and you're gonna buy the
• 32:38
  Speaker 1: Standard and Poors five index fund, and that's basically of
• 32:42
  Speaker 1: the market. The You would think that the that the
• 32:47
  Speaker 1: total stock market would be a better bet because it's
• 32:50
  Speaker 1: more diversified in the S and P five. But we're
• 32:53
  Speaker 1: in a time right now and I don't know if
• 32:55
  Speaker 1: this is durable or not. Nobody does. Where the large
• 32:58
  Speaker 1: companies are doing better than the small, So the great,
• 33:01
  Speaker 1: Mr Buffett, and does his he's leaving his wife the
• 33:06
  Speaker 1: state in the s and Vanguard SNP fix fund. He
• 33:11
  Speaker 1: has a bet with some hedge fund managers. He's winning,
• 33:14
  Speaker 1: he's winning the bet. He's not winning it, he's killing.
• 33:17
  Speaker 1: He's absolutely way way ahead. They actually had to create
• 33:21
  Speaker 1: derivatives for this bet. This is a real bet with
• 33:23
  Speaker 1: millions of dollars at risk on it, and he looks
• 33:26
  Speaker 1: it's a runaway. Nobody's else is even in second. Well,
• 33:29
  Speaker 1: he's got a year ago. This is that's right. It
• 33:32
  Speaker 1: will be a decade after the financial crisis, the hedge fund.
• 33:35
  Speaker 1: For those of you who may not be familiar with
• 33:37
  Speaker 1: the infamous bet, a bunch of hedge fund managers were
• 33:41
  Speaker 1: um arrogant enough to bet Warren Buffett that they could
• 33:44
  Speaker 1: outperform the SNP five. He took that bet and it's
• 33:48
  Speaker 1: not even close. It's it's really an amazing story. I
• 33:51
  Speaker 1: didn't realize we're only a year away from the final
• 33:55
  Speaker 1: outcome of that uh bet. And it's it's theoretically possible
• 33:59
  Speaker 1: they can win, but really mathematically it's it's highly improbable
• 34:03
  Speaker 1: that anything can happen. However, I can see that Jack Bogel.
• 34:09
  Speaker 1: Thank you so much for being so generous with your time.
• 34:11
  Speaker 1: This has been absolutely fascinating. For those of you who
• 34:15
  Speaker 1: are interested in hearing the conversation, continue be sure and
• 34:18
  Speaker 1: check out our podcast extras, where we keep the tape
• 34:21
  Speaker 1: rolling and continue chatting. You can check out my daily
• 34:24
  Speaker 1: column on Bloomberg View dot com or follow me on
• 34:27
  Speaker 1: Twitter at Ritolts. I'm Barry Ritolts. You're listening to Masters
• 34:31
  Speaker 1: in Business on Bloomberg Radio. Welcome back to the podcast. Jack.
• 34:35
  Speaker 1: Thank you so much for doing this. This has really
• 34:37
  Speaker 1: been tremendously fascinating. It was worth the drive to Pennsylvania
• 34:42
  Speaker 1: to come come see you. Um, I'm I'm absolutely fascinated
• 34:48
  Speaker 1: by everything you've accomplished. So we've talked a little bit
• 34:52
  Speaker 1: of the advantages of indexing for equities, and you mentioned
• 34:56
  Speaker 1: bond funds. There have been some pretty reasonable academic arguments
• 35:02
  Speaker 1: that you could do okay with active management with bond
• 35:06
  Speaker 1: funds because there's such a universe of choices. It's not
• 35:09
  Speaker 1: just treasuries, but it's treasuries and its corporates and its municipalities.
• 35:14
  Speaker 1: How do you feel about about bond funds? Do you
• 35:16
  Speaker 1: just own abroad? Um? Index of bond funds, or do
• 35:20
  Speaker 1: you look at active management and bonds and say, well,
• 35:23
  Speaker 1: maybe there's some value added there. Well, as a group,
• 35:27
  Speaker 1: bond managers cannot win because they are the market and
• 35:30
  Speaker 1: so they will as a group capture the market return.
• 35:33
  Speaker 1: There's just no question about this. And charging as they
• 35:36
  Speaker 1: do probably in the mutual fund business, probably sixty basis points,
• 35:40
  Speaker 1: seventy basis points. They just don't have a fighting chance
• 35:43
  Speaker 1: over the bond fund index. Now that index has some issues,
• 35:48
  Speaker 1: as they say, And I started the first bond in
• 35:51
  Speaker 1: next fund, by the way, years ago, yeah, thirty years ago,
• 36:00
  Speaker 1: and it's done just fine, met the test of competition.
• 36:03
  Speaker 1: But I'm not I think we can do better in
• 36:06
  Speaker 1: bond in next thing than the bond than the bond
• 36:09
  Speaker 1: in next the way it's constructed, because it's about sevent
• 36:12
  Speaker 1: treasuries and mortgage backed good mortgage backed government backed instruments,
• 36:19
  Speaker 1: and I think most investors should not have seventy in
• 36:22
  Speaker 1: the super safe category. I think something like thirty is
• 36:26
  Speaker 1: pretty good. So it should be a better assortment of
• 36:28
  Speaker 1: risk that potentially is generating more returns and as long
• 36:31
  Speaker 1: as you're holding it for decades, the short term volatility
• 36:35
  Speaker 1: is irrelevant. Yeah, Well, the the one that I have
• 36:38
  Speaker 1: to use myself is our intermediate intermediate term bond index fund.
• 36:43
  Speaker 1: It has it's just as volatile or as non volatile,
• 36:46
  Speaker 1: because that has the same duration or average maturity. And
• 36:49
  Speaker 1: but it's about thirty governments and it is the same
• 36:53
  Speaker 1: in every other respect. So if it has a higher yield,
• 36:57
  Speaker 1: the yield and a bond as today yield correlation with
• 37:03
  Speaker 1: the RETURNI you're gonna get in the next ten years,
• 37:05
  Speaker 1: so you might as well take advantage of it. And
• 37:07
  Speaker 1: I'd say particularly, I mean, yes, it's a little riskier,
• 37:10
  Speaker 1: but today people are dying for income, dying for income,
• 37:15
  Speaker 1: and to reach a little bit, you know, I don't
• 37:17
  Speaker 1: believe in big reaching for yield at all. Well, that
• 37:20
  Speaker 1: certainly was was a cluse of problems in the last
• 37:22
  Speaker 1: financial crisis. Everybody who reached for yields and said, I
• 37:27
  Speaker 1: understand this is subprime, but the rating agencies tell me
• 37:30
  Speaker 1: it's triple A, so I'm gonna hold my nose. And
• 37:32
  Speaker 1: by this didn't work out that way. It did not
• 37:34
  Speaker 1: work out well, to say the least. So so I
• 37:38
  Speaker 1: didn't realize you had created the first bond in next funds,
• 37:41
  Speaker 1: so we have we have bond indexes, which you would
• 37:45
  Speaker 1: like to see have a little more risk and uh
• 37:48
  Speaker 1: a little less of the super safe size we've already discussed,
• 37:52
  Speaker 1: uh the equity side. Let's let's talk a little bit
• 37:56
  Speaker 1: about some of the hot buzzwords that are going around today.
• 38:00
  Speaker 1: And I'm curious, as I already know what you ranch
• 38:02
  Speaker 1: is gonna be, but I feel obligated to ask before
• 38:05
  Speaker 1: we get to that, Can I just say one thing? Sure?
• 38:07
  Speaker 1: We also started in about nineteen, well in seven, to
• 38:14
  Speaker 1: broaden our index base from the S and P five hundred,
• 38:17
  Speaker 1: we started the bond in next fun. We then started
• 38:21
  Speaker 1: I realized that there was a certain attractiveness to owning
• 38:23
  Speaker 1: the whole market, so we started something called the extended
• 38:25
  Speaker 1: market in the next fun. How many holdings were in
• 38:27
  Speaker 1: that well probably um right in. It varies amazingly, but
• 38:33
  Speaker 1: probably right now because the Wilshire five thousand is something
• 38:37
  Speaker 1: like thirty stocks. It's it's even less than then it
• 38:40
  Speaker 1: got up to seventh, believe it or not. Late nineties, yeah, well,
• 38:44
  Speaker 1: we were cranking out a lot of new companies before
• 38:46
  Speaker 1: we realized that pets dot com wasn't a sustainable thing. Exactly.
• 38:50
  Speaker 1: So I also had an idea that growth might do
• 38:55
  Speaker 1: better than value for the for for young people investing
• 38:58
  Speaker 1: on a dollar averaging basis wouldn't be that much riskier,
• 39:01
  Speaker 1: and when they retired they might want an income fund.
• 39:04
  Speaker 1: So I I divided the SMP into two. As soon
• 39:07
  Speaker 1: as the SMP did that, I started a growth index
• 39:11
  Speaker 1: fund half of the SMP and a value index fund
• 39:14
  Speaker 1: the other half. It didn't work out very well. I mean,
• 39:16
  Speaker 1: it worked out fine from performance standpoint. Where we found
• 39:19
  Speaker 1: is the money poured into growth when growth was doing
• 39:21
  Speaker 1: well at the wrong time, out of growth and into value.
• 39:24
  Speaker 1: So you know, sometimes we may I think we've got
• 39:27
  Speaker 1: to be very aware of creating things that we know
• 39:30
  Speaker 1: investors are going to use badly. So we don't know,
• 39:33
  Speaker 1: we don't tell them what to use and how to
• 39:34
  Speaker 1: use it, but it happens, and it's a responsibility of us,
• 39:38
  Speaker 1: the sponsor, to do that. So that raises a really
• 39:41
  Speaker 1: significant question, which is how important is investor behavior to
• 39:47
  Speaker 1: long term returns and what can the average investor do
• 39:52
  Speaker 1: to make sure that they don't shoot themselves in the foot. Well,
• 39:56
  Speaker 1: the first thing to do is don't chase performance and
• 40:01
  Speaker 1: don't I have some salesman or you reading the paper
• 40:03
  Speaker 1: for that man, or I need to blame the salesman
• 40:05
  Speaker 1: for this says, here's a new manager on a new
• 40:07
  Speaker 1: fund and it's really doing great, or an old manager
• 40:09
  Speaker 1: and the fund is doing great, and this fund is
• 40:11
  Speaker 1: a great twenty year record. Turn away from that, because
• 40:15
  Speaker 1: it's next twenty years aren't going to be anywhere near
• 40:18
  Speaker 1: as good as its past. There are plenty of examples that,
• 40:20
  Speaker 1: with all due respect them on friends up in Boston.
• 40:23
  Speaker 1: Fideliti's Magellan Fund was a star fund for roughly twenty years.
• 40:27
  Speaker 1: Fantastic Peter Lynch and then his one of his successors
• 40:31
  Speaker 1: did really well. Peter Lynch was a superstar performer. And
• 40:34
  Speaker 1: then what happened well with a tiny little fund too,
• 40:37
  Speaker 1: don't forget that. And the fund that wasn't even offered
• 40:39
  Speaker 1: to the public for five or six years. Oh yeah,
• 40:43
  Speaker 1: we all have our little secrets, and uh so I
• 40:46
  Speaker 1: think overrated. But Peter Lynch was certainly a good manager.
• 40:48
  Speaker 1: But you know, his principle of you know, if you
• 40:50
  Speaker 1: see a product you liked by the stock, you know,
• 40:53
  Speaker 1: makes no rational sense, I'm sorry to say. And Peter
• 40:56
  Speaker 1: Lynch also at Madelon Magellan Funds. Hey Day said, in
• 41:01
  Speaker 1: words of one syllable in Barns, most investors would be
• 41:05
  Speaker 1: better off in an index fund. Was that barrens? I
• 41:09
  Speaker 1: know I read that from him, and that's not a concession,
• 41:12
  Speaker 1: that's the truth. Well, you have him saying that, you
• 41:15
  Speaker 1: have Warren Buffett saying that. We have a number of
• 41:17
  Speaker 1: people David Swinson, Swinson at the Yel Endowment, he's another one. Um,
• 41:23
  Speaker 1: it's amazing that people push against this because it's long
• 41:30
  Speaker 1: term in boring and there's nothing to talk about. And
• 41:33
  Speaker 1: but I guess shouldn't. That leads to the next question,
• 41:36
  Speaker 1: should investing be long term and boring? If you want
• 41:39
  Speaker 1: to have a comfortable retirement, Believe me, you'll be less
• 41:42
  Speaker 1: bored in your retirement. If you've got plenty of money,
• 41:45
  Speaker 1: You'll you'll be you'll be so on board. If you
• 41:47
  Speaker 1: don't do it that you'll have to go back to work.
• 41:50
  Speaker 1: So let me ask you about some of the hot
• 41:52
  Speaker 1: buzzwords that are out there and investing these days. And again,
• 41:56
  Speaker 1: this is a cheap because I'm pretty sure I know
• 41:57
  Speaker 1: what your answers are, but I feel obligated to ask this.
• 42:01
  Speaker 1: So your index funds are basically put together by market
• 42:06
  Speaker 1: cap waiting. But now there's something called smart beta, which
• 42:10
  Speaker 1: is different ways of assembling an index that don't rely
• 42:14
  Speaker 1: on cap waiting. What do you think of the idea
• 42:17
  Speaker 1: of smart beta? Smart beta is stupid? Okay, that's why, Well,
• 42:23
  Speaker 1: I mean I didn't say that's that's what Nobel laureate
• 42:26
  Speaker 1: Bill Sharp says. I just quoted him. And the reason
• 42:31
  Speaker 1: it is just think about this for a minute. It's
• 42:34
  Speaker 1: it's another form of active management to begin with. But
• 42:37
  Speaker 1: if smart beta is good, and that that means it
• 42:41
  Speaker 1: beats the index, then dumb beta this does even worse
• 42:47
  Speaker 1: than the index. Right, so smart and dumb are different.
• 42:50
  Speaker 1: But why are people going to be dumb if it's
• 42:52
  Speaker 1: so easy to be smart? It's just another claim that
• 42:55
  Speaker 1: I can do this better now. Happily, after Isdom Tree
• 43:00
  Speaker 1: and and Rob Arns fund came out a decade ago,
• 43:05
  Speaker 1: his fund is now more than ten years old. What
• 43:08
  Speaker 1: happened and the answer is essentially nothing. His fund beat
• 43:13
  Speaker 1: the S and P five hundred, but I think thirty
• 43:16
  Speaker 1: basis points, but it was more Votel and therefore it's
• 43:20
  Speaker 1: sharp ratio. The relationship relationship between risk and reward. I
• 43:24
  Speaker 1: don't hold me to the numbers. But the sharp ratio
• 43:27
  Speaker 1: of I mean, I mean his guests here, I won't
• 43:29
  Speaker 1: be too far off the sharp ratio of the five
• 43:32
  Speaker 1: of us like forty one. On the sharp ratio of
• 43:35
  Speaker 1: Arns fund was thirty six. So he lost. He had
• 43:40
  Speaker 1: ten years to prove it. Now maybe he'll prove it
• 43:42
  Speaker 1: the next ten years. Who can say, But why would
• 43:45
  Speaker 1: that be, I mean, where's all the brain power. He's
• 43:48
  Speaker 1: a very smart guy, by the way, one of the
• 43:49
  Speaker 1: smartest guys in this business. He was a four guest
• 43:52
  Speaker 1: on the show, one of our earliest guests. He's a
• 43:54
  Speaker 1: delightful gentleman. I always enjoy his company. UM And it
• 43:58
  Speaker 1: was really an in nightful thought to say, let's think
• 44:03
  Speaker 1: of different ways to put together UM, to put together indexes.
• 44:08
  Speaker 1: But your position is this isn't after fees, after everything else.
• 44:13
  Speaker 1: Once you now you risk adjusted, you look at all
• 44:16
  Speaker 1: this volatility, your your conclusion is this just isn't worth it. Well, then,
• 44:20
  Speaker 1: even if you look at absolute returns, it's like a
• 44:22
  Speaker 1: thirty basis points better over ten years. Now, that's not trivial.
• 44:26
  Speaker 1: But when he has essentially the same portfolio as the
• 44:29
  Speaker 1: index fund with different waitings, you can't expect anything to
• 44:33
  Speaker 1: be too different. So I think it's it's over sold.
• 44:36
  Speaker 1: Jeremy Siegell of Wisdom Trade described this as a new
• 44:40
  Speaker 1: Copernican view of the world. Everybody had it wrong, and
• 44:43
  Speaker 1: Copernica said, oh, by god, that son is in the
• 44:45
  Speaker 1: middle and the new sun is smart Beta can't be
• 44:50
  Speaker 1: because we're all as a group average. And if they
• 44:53
  Speaker 1: are these smart guys over there, there are dumb guys
• 44:55
  Speaker 1: over there. Smart and dumb both also net net. When
• 44:59
  Speaker 1: you're buying smart day, you're really buying a distribution of
• 45:02
  Speaker 1: really smart guys, really average guys, really dumb guys, and
• 45:04
  Speaker 1: you don't know who's who across all the smart beta funds.
• 45:08
  Speaker 1: You know, and then think about this one step further.
• 45:11
  Speaker 1: The index essentially guarantee the dollar value index essentially guarantees
• 45:16
  Speaker 1: you the return that will investors share. So that's written
• 45:20
  Speaker 1: stone etched in stone. Uh, smart Beta may do a
• 45:25
  Speaker 1: little better, may do a little worse. What's the point
• 45:29
  Speaker 1: of taking the risk when the guarantee of getting the
• 45:32
  Speaker 1: market return is right at your hand? Why would you speculate?
• 45:36
  Speaker 1: Why would you speculate on maybe this guy can do
• 45:39
  Speaker 1: it better. And believe me, some of these smart beta
• 45:41
  Speaker 1: funds will for a short period of times will do it,
• 45:44
  Speaker 1: and some of them won't. I mean, that's the nature
• 45:46
  Speaker 1: of the beast. I've described it as why do you
• 45:49
  Speaker 1: want to romance alpha and forsake beta when beta is
• 45:53
  Speaker 1: a short thing. So that's smart beta. Let me ask
• 45:57
  Speaker 1: you about something else that I suspect they know to
• 45:59
  Speaker 1: your know your answers. This year commodities have gold especially
• 46:04
  Speaker 1: has had a huge bounce back. We sort of tremendous
• 46:07
  Speaker 1: commodity run from the early two thousands until two thousand eleven.
• 46:12
  Speaker 1: What are your thoughts on things like commodity funds, gold,
• 46:16
  Speaker 1: and uh energy for for investors? No, no, and no no.
• 46:22
  Speaker 1: Let's repeat this in case those of you missed Gold. No,
• 46:26
  Speaker 1: commodity funds, no oil funds. No tell us why? Okay,
• 46:30
  Speaker 1: well oil is it commins I'm pick of oil as
• 46:32
  Speaker 1: a commodity now and then is think about what a
• 46:35
  Speaker 1: stock is? Okay. Stock has an internal rate of return
• 46:39
  Speaker 1: and it's composed of the earnings growth in the divin
• 46:41
  Speaker 1: end yield. When you buy it, it's there. If the
• 46:44
  Speaker 1: stock goes up and down, that return is there. It
• 46:47
  Speaker 1: has an underlying internal rate of return. You have a
• 46:50
  Speaker 1: discounted cash flow from the future. You're buying an existing
• 46:54
  Speaker 1: business that's gonna generate revenue and profits and you get
• 46:56
  Speaker 1: to participate in that. Now, take a bond, It has
• 46:59
  Speaker 1: an intern return equal to the interest coupon that you're
• 47:03
  Speaker 1: going to get over the next ten years or twenty
• 47:06
  Speaker 1: five years, whatever the case may be. Commodities have no
• 47:10
  Speaker 1: internal rate of return, and there's a cost of storage
• 47:13
  Speaker 1: and security for things like gold or royal. So when
• 47:16
  Speaker 1: you buy a unit of gold, why do you buy
• 47:19
  Speaker 1: it because you think you can sell it to somebody
• 47:22
  Speaker 1: for a higher price. That is the definition of speculation.
• 47:26
  Speaker 1: That's the classic greater full theory. You may have paid
• 47:29
  Speaker 1: a lot, but someone will pay more. And well, I mean,
• 47:31
  Speaker 1: you may be right, by the way, and there's no
• 47:33
  Speaker 1: reason you can't be right, but that just means the
• 47:35
  Speaker 1: other guy is wrong. And you don't know, as you
• 47:37
  Speaker 1: as the investor, you don't know which of those two
• 47:39
  Speaker 1: parties you're gonna be five years from that. And another
• 47:42
  Speaker 1: thing when you mentioned gold, is it brings to mind
• 47:45
  Speaker 1: is everybody used to talk about gold. Forbes magazine highlighted
• 47:49
  Speaker 1: in all their reviews for years and years when they
• 47:51
  Speaker 1: picked the best funds, gold funds, gold funds. And then
• 47:54
  Speaker 1: we we had the boom and gold and then we
• 47:57
  Speaker 1: had the collapse and nobody started talking about No, you
• 48:00
  Speaker 1: talked about gold. Now we have another boom and everybody's
• 48:03
  Speaker 1: talking about gold. Then gold collapses last year, nobody's talking
• 48:07
  Speaker 1: about gold. Now gold is up this year. Everybody. This
• 48:10
  Speaker 1: is metaphorically speaking, everybody's talking about gold. You know, don't
• 48:14
  Speaker 1: pay any attention to gold. I mean, it would not
• 48:17
  Speaker 1: be stupid. I wouldn't do it, but it would not
• 48:20
  Speaker 1: be stupid to have a very small position in gold
• 48:24
  Speaker 1: as a hedge against worldwide hyper inflation. Maybe five I
• 48:29
  Speaker 1: wouldn't do any more than that, But I don't think
• 48:32
  Speaker 1: you should do that. But it's at least defensible because
• 48:36
  Speaker 1: you're you have a specific goal in mind, and it's insurance.
• 48:40
  Speaker 1: You're paying a five percent insurance on the remote possibility
• 48:43
  Speaker 1: of global hyper inflation. But if you're wrong, it's a
• 48:46
  Speaker 1: giant five percent drag on your portfolio for the next
• 48:49
  Speaker 1: few decades. And that's huge. That is well, you guys
• 48:52
  Speaker 1: are talking about five basis points. This is five hundred
• 48:55
  Speaker 1: basis points. That's a tremendous, tremendous drag. Let's talk a
• 48:59
  Speaker 1: little bit it and by the way, I'm pretty much
• 49:02
  Speaker 1: what I expected you to say about commodities. Let's let
• 49:05
  Speaker 1: me find two things to talk to you about that
• 49:07
  Speaker 1: I'm gonna have to push back a little bit. One
• 49:11
  Speaker 1: is e t fs exchange traded funds. I know you're
• 49:15
  Speaker 1: not a big fan of them, but lots of investors
• 49:18
  Speaker 1: fund it's a very inexpensive, simple way to get exposure
• 49:22
  Speaker 1: to the S and P five hundred or whatever asset
• 49:25
  Speaker 1: class they want. Why are you not a big fan
• 49:29
  Speaker 1: of ETFs? Well, I'll start with little anecdote. A wonderful
• 49:34
  Speaker 1: guy named Nathan Most came to visit me right in
• 49:37
  Speaker 1: my office upstairs here at Vanguard, and he said, I
• 49:40
  Speaker 1: have a great idea for you. We I want to
• 49:42
  Speaker 1: start the first exchange traded mutual fund and have Vanguards
• 49:45
  Speaker 1: my partner there. I was I could have not only
• 49:48
  Speaker 1: created the first index mutual fund, but the first e
• 49:50
  Speaker 1: t F. And I said, Nate, no way, because the
• 49:56
  Speaker 1: description that you got from from Nathan, or at least
• 49:59
  Speaker 1: their first day later on. Now you can trade the
• 50:02
  Speaker 1: S and P five hundred all day long in real time.
• 50:06
  Speaker 1: And I would say, that's what kind of a nut
• 50:09
  Speaker 1: would want to do that. I mean, there must be
• 50:11
  Speaker 1: better things to do than that in this life. But
• 50:13
  Speaker 1: in any event, it's the trading idea. When my idea
• 50:17
  Speaker 1: of indexing broad market indexing by the SNP five and
• 50:21
  Speaker 1: hold it forever, what war is said to be warned?
• 50:24
  Speaker 1: Warren Buffett's favorite holding period is forever. So so the
• 50:28
  Speaker 1: idea of an SMP five hundred funds that if you're gonna,
• 50:32
  Speaker 1: if you're gonna do that exposure, you're better doing it
• 50:34
  Speaker 1: with the low cost mutual funds than an index funds. UH.
• 50:38
  Speaker 1: Then in UH E t F so there is no
• 50:41
  Speaker 1: temptation to trade intra day or to play around that.
• 50:46
  Speaker 1: That's not what you think people should be doing with
• 50:48
  Speaker 1: their time or not. But let's let's examine the E
• 50:50
  Speaker 1: t F business for just a minute. And that is
• 50:52
  Speaker 1: if you look at E t F s all the
• 50:55
  Speaker 1: big ones. Man, I can't look at all of them,
• 50:56
  Speaker 1: but the big ones, particularly in the normal ones uh
• 51:00
  Speaker 1: or about seventy by financial institutions, they're trading them in
• 51:03
  Speaker 1: the marketplace. The spider, the S and P five UM
• 51:08
  Speaker 1: E t F spider is the most widely traded stock
• 51:14
  Speaker 1: in the world every day, And if you look further
• 51:19
  Speaker 1: this year, which is a little more bottle than most
• 51:21
  Speaker 1: years so far, the dollar volume of trading in e
• 51:25
  Speaker 1: t f s is the same size as the dollar
• 51:28
  Speaker 1: volume of trading and common stocks. Unbelievable because common stocks
• 51:33
  Speaker 1: are worth about twenty three trillion dollars and the spiders
• 51:37
  Speaker 1: are worth about two. So spiders are turning over it
• 51:40
  Speaker 1: three thousand percent a year and stocks are turning over
• 51:43
  Speaker 1: it two a year or something like that. So they're
• 51:46
  Speaker 1: trading instruments owned by large institutions. I mean, look at
• 51:49
  Speaker 1: the spider head and it says institutions, here's what you
• 51:52
  Speaker 1: need to trade. I mean, it's practically verbatim from the
• 51:55
  Speaker 1: It's just it may be irrelevant, but I don't think
• 51:59
  Speaker 1: in the long run that has anything to do with
• 52:01
  Speaker 1: the mutual fund business or individual And it certainly shouldn't
• 52:03
  Speaker 1: have anything to do with individuals, because why would you
• 52:07
  Speaker 1: as an individual want to trade against these giant institutions
• 52:11
  Speaker 1: who do nothing but use this as a either trading
• 52:14
  Speaker 1: tool or a hedging tool or whatever it is you're saying.
• 52:17
  Speaker 1: This is not a playground for individuals to step into
• 52:21
  Speaker 1: and that looks like it's roughly seventy percent of the business.
• 52:24
  Speaker 1: And you know, I don't need even to criticize it.
• 52:27
  Speaker 1: It's kind of irrelevant when you get to the other
• 52:31
  Speaker 1: of the business. And I may be a little often
• 52:32
  Speaker 1: my percentages here, but they're individuals, and you know, something
• 52:38
  Speaker 1: like two thirds of them are using e t F
• 52:41
  Speaker 1: to trade, and one third of them that would be
• 52:44
  Speaker 1: ten pc of the total. All the e t F
• 52:46
  Speaker 1: market are using them, buying and holding them and maybe
• 52:49
  Speaker 1: using them. You know, we have it's a funny technical
• 52:52
  Speaker 1: thing in this business. But you know, if you want
• 52:54
  Speaker 1: to put it in a thousand dollars a month into
• 52:56
  Speaker 1: a van guard fund and then you want to take
• 52:58
  Speaker 1: out five thousand dollars at the end of the year
• 53:01
  Speaker 1: and buy Christmas presents whatever you might want. Um, it's
• 53:05
  Speaker 1: very difficult to do that here because we don't like
• 53:08
  Speaker 1: buying and selling at the same time. You can do
• 53:10
  Speaker 1: it with our e t s very easily. It's a
• 53:13
  Speaker 1: certain market place there of people who aren't traders, but
• 53:17
  Speaker 1: like the flexibility ETFs had, and I have no problem
• 53:19
  Speaker 1: with that. The other the other part of the problem, however,
• 53:23
  Speaker 1: the e t F problem, is there is this huge
• 53:26
  Speaker 1: amount in number, not so much in assets, of funds
• 53:29
  Speaker 1: that are doing things that no intelligent investor would ever do.
• 53:33
  Speaker 1: Triple leverage and you can bet every day whether the
• 53:35
  Speaker 1: markets going up or down. Isn't that grand? Not only
• 53:38
  Speaker 1: triple leveraged up, but inverse triple averaged. As long as
• 53:42
  Speaker 1: you know whether the market's going up or down during
• 53:44
  Speaker 1: the day, you're gonna make a fortune. Who who knows
• 53:46
  Speaker 1: what the market's going to go up any or down
• 53:48
  Speaker 1: any given day? Well, I guess these smart people that
• 53:50
  Speaker 1: have these funds, but they all have both of them,
• 53:53
  Speaker 1: that's right. They don't compete with each other. And there
• 53:56
  Speaker 1: are a whole lot of other wacky things. I mean,
• 53:58
  Speaker 1: I don't think US and invest there's you. I'm sure
• 54:00
  Speaker 1: you're gonna come to this, should be buying individual foreign
• 54:04
  Speaker 1: non US. So let's let's ask that question. A lot
• 54:08
  Speaker 1: of the academic data says that if you're diversified internationally,
• 54:14
  Speaker 1: parts of the world are sometimes doing better than the US,
• 54:17
  Speaker 1: and sometimes the US is doing part of the world.
• 54:19
  Speaker 1: If we want to really be diversified, you need US
• 54:23
  Speaker 1: and not just have an overwhelming home country bias UH
• 54:27
  Speaker 1: developed world X US and then emerging markets. What's wrong
• 54:32
  Speaker 1: with having a smattering of those in your portfolio so
• 54:36
  Speaker 1: that you get to take advantage of the growth of
• 54:41
  Speaker 1: the Pacific RIM in China and South America and etcetera. Well,
• 54:45
  Speaker 1: the question is is an advantage? I mean, tell someone
• 54:48
  Speaker 1: to put all their money in Brazil two years ago
• 54:50
  Speaker 1: because somebody who put in all their money in China
• 54:52
  Speaker 1: year ago. Isn't an advantage or is it just you know,
• 54:56
  Speaker 1: kind of a little bubble going on in those Well,
• 54:58
  Speaker 1: but you're not picking individual countries. You're gonna have a
• 55:00
  Speaker 1: broad index of international companies, and therefore it should theoretically
• 55:07
  Speaker 1: the gain should offset the losses and then some and
• 55:10
  Speaker 1: so you have exposure elsewhere. You're not a big fan
• 55:13
  Speaker 1: of that, Well, I'm not. And and the reason goes
• 55:16
  Speaker 1: back to when I started to think about it seriously
• 55:19
  Speaker 1: writing my book bogelon Mutual Funds. Back in Bogel on
• 55:25
  Speaker 1: Mutual Funds, let's see what I have here. I have
• 55:28
  Speaker 1: common sense on mutual funds that probably says something very
• 55:31
  Speaker 1: similar to this. But this is a little more recent,
• 55:33
  Speaker 1: so I said, tenth edition forward by David Swinson. So
• 55:36
  Speaker 1: when you say recent, this came originally came out almost
• 55:40
  Speaker 1: fifteen years ago. Right, the original was in nineteen seventeen
• 55:44
  Speaker 1: years ago. Interestingly enough, I'll get back to the other
• 55:47
  Speaker 1: subject in a second, But interestingly enough, the first book
• 55:51
  Speaker 1: came out at a market high and the second and
• 55:56
  Speaker 1: the second book came out of the market low. And
• 55:58
  Speaker 1: I would hardly change one word in the whole second edition.
• 56:02
  Speaker 1: I reprinted it verbatim and then Mark put red Nantucket
• 56:06
  Speaker 1: read for any changes that took place in the book.
• 56:08
  Speaker 1: Now in the tenth edition, that's that's used. After the
• 56:11
  Speaker 1: financial crisis, you could see some of the changes that
• 56:14
  Speaker 1: were made, but they're really very modest. You really didn't
• 56:18
  Speaker 1: change any of the themes in this. You just kind
• 56:21
  Speaker 1: of fleshed it out post crisis. It worked. Indexing worked
• 56:24
  Speaker 1: in the good market, indexing worked in the not so
• 56:26
  Speaker 1: good market, and and court low cost worked in the
• 56:30
  Speaker 1: good market and not so good and also in they're
• 56:32
  Speaker 1: not so good market. It has to So getting back
• 56:35
  Speaker 1: to I said in my first book, Uh, look, US
• 56:40
  Speaker 1: companies got half of their revenues. This is true now
• 56:43
  Speaker 1: at least a little bit less than half of the revenues,
• 56:45
  Speaker 1: and alter their earnings from outside the U S we
• 56:48
  Speaker 1: you have an international portfolio, why do you want a
• 56:51
  Speaker 1: larger one? And then I say, take a look at
• 56:55
  Speaker 1: what comprises that international portfolio. Your largest invest is Japan,
• 57:01
  Speaker 1: Your second largest investment is the UK, Your third largest
• 57:04
  Speaker 1: investment is France. Now, if returns are developed out of
• 57:08
  Speaker 1: national economic strength, does anybody think that the UK and
• 57:12
  Speaker 1: Japan and France were gonna do better than the US
• 57:15
  Speaker 1: in the next ten fift twenty years. I can't imagine it.
• 57:19
  Speaker 1: And now I may be wrong. I'm not saying this
• 57:22
  Speaker 1: is written in stone, but that's for that'st of the money.
• 57:27
  Speaker 1: So if people knew they were putting forty of their
• 57:29
  Speaker 1: international money, so called international non us is a better
• 57:33
  Speaker 1: formulation in Great Britain, France and and the Japan. I
• 57:39
  Speaker 1: mean when every one of those economies has real problems.
• 57:42
  Speaker 1: The French don't work very hard, the Japanese have a
• 57:46
  Speaker 1: structured and deeply aging economy, overburdened by future retirement claims,
• 57:51
  Speaker 1: terrible demographics, and they're a great exporter. But then they
• 57:55
  Speaker 1: have issues. And Britain doesn't know what's going to happen
• 57:58
  Speaker 1: if they do the the exit from the European Community,
• 58:01
  Speaker 1: and or do they know what's going to happen if
• 58:02
  Speaker 1: they stay in So what would happen if a sharp
• 58:06
  Speaker 1: upstart company let's call them Vanguard, says, here's a broad
• 58:11
  Speaker 1: international index that's fairly evenly weighted. It's not just these
• 58:14
  Speaker 1: three countries. Might that change your perspective or do you
• 58:19
  Speaker 1: still think, Hey, you get plenty of the SNP five hundred.
• 58:22
  Speaker 1: Half the revenue comes from overseas. That's all the overseas
• 58:25
  Speaker 1: exposure anyone really needs. I don't like the idea because
• 58:30
  Speaker 1: you would have as much and I don't know Honduras
• 58:34
  Speaker 1: as you do in in Great Britain. It wouldn't make
• 58:36
  Speaker 1: any sense. Uh So, But to make matters worse, when
• 58:40
  Speaker 1: I made this statement in we now have twenty two
• 58:44
  Speaker 1: years of history, right, how was the prediction? And the
• 58:48
  Speaker 1: answer is that don't hold me to the exact numbers,
• 58:52
  Speaker 1: but that the U S portfolio is up about say seven,
• 58:57
  Speaker 1: and the non use portfolios up about two. So the
• 59:01
  Speaker 1: US is still winning versus the international. So I committed
• 59:05
  Speaker 1: the elements in very I was right now, I want
• 59:10
  Speaker 1: to be very clear in this. Does that mean I
• 59:11
  Speaker 1: will be equally right in the future. I can't imagine it.
• 59:15
  Speaker 1: You think eventually, I mean reversion comes in. Yeah, and
• 59:17
  Speaker 1: eventually those two positions will reverse. The US Well, I
• 59:20
  Speaker 1: don't think they will reverse, but I don't think that
• 59:23
  Speaker 1: spread is is a durable spread. And then the reason
• 59:26
  Speaker 1: I don't think that reverse is we have this fabulous
• 59:29
  Speaker 1: economy here. I mean, yes, it has problems, but probably
• 59:32
  Speaker 1: less problems than any country in the world, no doubt
• 59:34
  Speaker 1: about that. And my favorite quote is this is the
• 59:38
  Speaker 1: cleanest shirt in a dirty hamper. Sure, exactly right. And well,
• 59:42
  Speaker 1: I mean I'd say was even cleaner than that. We're
• 59:44
  Speaker 1: number one in innovation and technology. Uh, We're not number
• 59:49
  Speaker 1: one an entrepreneurship. We're still a great manufacturing company, all
• 59:53
  Speaker 1: not as great as we are, and we still have
• 59:56
  Speaker 1: you know, all these new companies being started, existing companies
• 1:00:00
  Speaker 1: being run more and more efficiently and more than anything else,
• 1:00:04
  Speaker 1: or at least as much as all that. We have
• 1:00:06
  Speaker 1: great institutional structure in this country. We have legal protections,
• 1:00:10
  Speaker 1: we have courts, we have laws, and no one's going
• 1:00:13
  Speaker 1: to take your stock away from you confiscated overnight, and
• 1:00:17
  Speaker 1: shareholder rights are as good as any country in the world,
• 1:00:20
  Speaker 1: maybe with the exception of I don't think they do
• 1:00:22
  Speaker 1: any better but they don't do any worse. Probably Switzerland
• 1:00:25
  Speaker 1: and Great Britain would be the two big competitors. Now
• 1:00:28
  Speaker 1: you see, you see what happens in China, your stocks
• 1:00:30
  Speaker 1: may not be your stocks. It's very hard to be
• 1:00:33
  Speaker 1: forget as a as a local, as an international investor.
• 1:00:37
  Speaker 1: It's very hard to be an investor in China if
• 1:00:40
  Speaker 1: you don't know, am I gonna be able to ever
• 1:00:42
  Speaker 1: cast this out? Or maybe there's going to be a
• 1:00:45
  Speaker 1: vacation period where no sales for the next month, as
• 1:00:48
  Speaker 1: we saw last year. Yeah, and let me add to
• 1:00:51
  Speaker 1: this that these and just about everybody says I'm wrong,
• 1:00:54
  Speaker 1: by the way, but everybody said I was wrong with
• 1:00:57
  Speaker 1: an index. I was gonna say. That's only gonna make you.
• 1:00:59
  Speaker 1: That's only gonna make you double down and think you're right,
• 1:01:01
  Speaker 1: because there's a track record of people predicting you're gonna
• 1:01:04
  Speaker 1: be wrong, and they've all they've all proven themselves false.
• 1:01:08
  Speaker 1: So but let me just say one more thing. In
• 1:01:10
  Speaker 1: international just think what would you would have done if
• 1:01:13
  Speaker 1: you had an internationally waited or a non use waited
• 1:01:18
  Speaker 1: in when you had fifty percent, that is to say,
• 1:01:23
  Speaker 1: five percent of your money in Japan, right when the
• 1:01:26
  Speaker 1: NIK was forty six thousand or something like that. No
• 1:01:30
  Speaker 1: one was talking this way then, but that could happen again.
• 1:01:35
  Speaker 1: And I don't think he should be subject to these
• 1:01:38
  Speaker 1: funny speculative booms that can take place in other countries.
• 1:01:41
  Speaker 1: I just can't imagine that there will be a significant
• 1:01:44
  Speaker 1: advantage in international companies over US companies. I'm not talking
• 1:01:49
  Speaker 1: about stocks now, I'm talking about companies and economies over
• 1:01:53
  Speaker 1: the US. Now, look, I could be wrong on this,
• 1:01:55
  Speaker 1: and if you think I'm wrong, go buy all the
• 1:01:57
  Speaker 1: international and non US stocks you want, and non US
• 1:02:00
  Speaker 1: stock index by individual countries. I wouldn't do any of that.
• 1:02:05
  Speaker 1: And what we didn't even mention the currency side of things.
• 1:02:09
  Speaker 1: How significant is currency fluctuations to UH to this sort
• 1:02:14
  Speaker 1: of international exposure if you're domicile t here in the US,
• 1:02:18
  Speaker 1: what what kind of currency currencies here? Well, that that
• 1:02:24
  Speaker 1: is an issue because the dollar has been very strong,
• 1:02:26
  Speaker 1: and it won't be strong forever because international trade has
• 1:02:30
  Speaker 1: a way of balancing out. When the dollar is strong,
• 1:02:33
  Speaker 1: the trade balances change and all that. So I don't
• 1:02:36
  Speaker 1: think you should count on a good strong dollar forever.
• 1:02:39
  Speaker 1: So won't won't won't impact it. Let's let's talk UM,
• 1:02:42
  Speaker 1: but I want to talk a little more about Vanguard.
• 1:02:45
  Speaker 1: But before we get to that, to two last questions
• 1:02:49
  Speaker 1: about indexing. The first is is there any sort of
• 1:02:52
  Speaker 1: active management you would favor, you know, Vanguard about of
• 1:02:56
  Speaker 1: the assets here or an active managed funds. What do
• 1:02:59
  Speaker 1: you think about having a small slug of someone's portfolio
• 1:03:04
  Speaker 1: in something that might not be a passive index. Well,
• 1:03:08
  Speaker 1: let me give you this very important background about our
• 1:03:11
  Speaker 1: actively managed funds, and this is what I've been saying
• 1:03:13
  Speaker 1: since we started Vanguard in nineteen seventy four. I want
• 1:03:19
  Speaker 1: our active management, actively managed funds to have returns that
• 1:03:24
  Speaker 1: are relatively predictable, relative predictability relative to their group. There
• 1:03:28
  Speaker 1: they're group like large cap value funds, a long term
• 1:03:31
  Speaker 1: municipal mound funds, whatever it might be. UM, and the
• 1:03:36
  Speaker 1: idea would be look at those funds and not don't
• 1:03:40
  Speaker 1: get too far out of line so you'll have an
• 1:03:43
  Speaker 1: average perform if you if you have six managers, there's
• 1:03:45
  Speaker 1: where the multi manager thing comes from. If you have
• 1:03:48
  Speaker 1: six managers, the idea that they will do about the
• 1:03:51
  Speaker 1: same as another as your competitive group with sixty managers
• 1:03:54
  Speaker 1: is almost guaranteed to do the same So what's so
• 1:03:57
  Speaker 1: good about that? What's so good about that is we
• 1:04:00
  Speaker 1: think we have a one and a half percent to
• 1:04:02
  Speaker 1: two cost advantage through lower expenses, lower turnover, no sales loads,
• 1:04:07
  Speaker 1: and we should win by a point and a half
• 1:04:09
  Speaker 1: a year, not on brilliance, but on cost. So let's guarantee. Now,
• 1:04:13
  Speaker 1: let me just give you the punch line here. If
• 1:04:16
  Speaker 1: you win, what's so good about one over ten years,
• 1:04:19
  Speaker 1: you have a higher return that that's tremendous. So I
• 1:04:24
  Speaker 1: previously interviewed your CEO and chairman, Bill McNabb and one
• 1:04:28
  Speaker 1: of the comments he had made is that he still
• 1:04:32
  Speaker 1: felt there was room to squeeze costs lower. You guys
• 1:04:37
  Speaker 1: are three and a half trillion dollars. Is there a
• 1:04:40
  Speaker 1: floor on how low costs can go or are you
• 1:04:42
  Speaker 1: eventually gonna run out of efficiencies? Well, we have yet
• 1:04:48
  Speaker 1: to squeeze cost lower because our costs go up and
• 1:04:52
  Speaker 1: up and up. But as a percentage, you can squeeze
• 1:04:55
  Speaker 1: a little lower on a per well dollar invested basis
• 1:05:00
  Speaker 1: certainly wane to disagree with our CEO, but it's not
• 1:05:04
  Speaker 1: we're squeezing, but we're the captive of the market. If
• 1:05:07
  Speaker 1: the market goes way down, our expense ratio is going
• 1:05:10
  Speaker 1: to go up. There's no way we could squeeze enough
• 1:05:13
  Speaker 1: out of our expenses if we had less assets. So
• 1:05:18
  Speaker 1: we should be very careful about expenses, and we are.
• 1:05:21
  Speaker 1: I think we're managed in a very strong way, but
• 1:05:25
  Speaker 1: we're The expense ratio is a combination of something we
• 1:05:29
  Speaker 1: can control more or less how much we spend, and
• 1:05:32
  Speaker 1: something we can't control at all, the level of the
• 1:05:34
  Speaker 1: stock market. So the expense ratio is a mystery. And
• 1:05:40
  Speaker 1: whether Gupp or Dad, now, if it goes way down,
• 1:05:43
  Speaker 1: it's gonna mean we have very good markets. That sounds great.
• 1:05:46
  Speaker 1: Can indexing ever get too big or can indexing ever
• 1:05:52
  Speaker 1: take over the market as some people have alluded, or
• 1:05:55
  Speaker 1: is there a place for a combination of indexing and
• 1:05:58
  Speaker 1: active managers in the actual marketplace? Well, it's not in
• 1:06:03
  Speaker 1: the nature of things that in indexing could be of
• 1:06:06
  Speaker 1: the market. If it were, we would have chaos. There
• 1:06:10
  Speaker 1: will be no evaluations, there'll be no liquidity, there'll be
• 1:06:12
  Speaker 1: no enny. So what are the chances that indexting get
• 1:06:16
  Speaker 1: to zero? Right now? It's I think I had of
• 1:06:21
  Speaker 1: the total market of the mutual fund industry, of the
• 1:06:24
  Speaker 1: equity mutual fund industry, and so it means that that
• 1:06:30
  Speaker 1: hunk of business is in broadly stated, just removed from
• 1:06:34
  Speaker 1: the turnover level. So it's a turnover we're in the
• 1:06:38
  Speaker 1: end market were indexed, the turnover would go to I
• 1:06:43
  Speaker 1: came into this business when turnover was and everything was fine.
• 1:06:47
  Speaker 1: It's gonna take a long time to get the fifty percent,
• 1:06:50
  Speaker 1: a long long time and maybe never gets there. So
• 1:06:53
  Speaker 1: when you put reality in the face of the theory
• 1:06:55
  Speaker 1: that if everybody indexes uh, then then it's going to
• 1:06:59
  Speaker 1: be it's just it's just not gonna happen. But the
• 1:07:02
  Speaker 1: other thing is people follow this statement by saying, if
• 1:07:06
  Speaker 1: the market gets more and more indexed, then it will
• 1:07:08
  Speaker 1: be less efficient and we'll be able to beat it
• 1:07:11
  Speaker 1: more easily. No, unequivocally, no, some will beat it, some
• 1:07:17
  Speaker 1: will lose to it if they If the market is
• 1:07:21
  Speaker 1: is less efficient and the and the winners and the
• 1:07:24
  Speaker 1: losers will average the market returned, there's no way around that.
• 1:07:29
  Speaker 1: So that leads me to a quote of yours, and
• 1:07:32
  Speaker 1: I have to ask you about it because I find
• 1:07:34
  Speaker 1: it's fascinating. You once wrote the stock market is a
• 1:07:39
  Speaker 1: giant distraction to the business of investing. Explain well, investing
• 1:07:46
  Speaker 1: is about the long term, and investing is about earning
• 1:07:49
  Speaker 1: what I call the investment return, which is the divin
• 1:07:53
  Speaker 1: end yield when you go into the stock market and
• 1:07:55
  Speaker 1: the earnings wrote that follows. That's investment return. The market
• 1:07:59
  Speaker 1: return is also as a speculative return, and that is
• 1:08:02
  Speaker 1: is the price earnings multiple of the evaluations high or
• 1:08:05
  Speaker 1: low when you come in, and if they're high, they're
• 1:08:07
  Speaker 1: going to detract from that return, and evaluations are low
• 1:08:11
  Speaker 1: and they're going to add to that return because the
• 1:08:13
  Speaker 1: low will the in in the valuations. The price earnings
• 1:08:16
  Speaker 1: multiple reverts to the mean perfectly. It's about what today.
• 1:08:22
  Speaker 1: Although it's a little bit higher than this today because
• 1:08:24
  Speaker 1: the market's a little bit isn't hardly inexpensive, but the
• 1:08:28
  Speaker 1: reality is it's just about the same level it was.
• 1:08:32
  Speaker 1: So we had ups and downs, booms bust. In the
• 1:08:35
  Speaker 1: long run, speculative return is zero. So concentrate on the
• 1:08:38
  Speaker 1: investment return. Forget the speculative return, which is very difficult
• 1:08:43
  Speaker 1: to predict, and just get with business can give you
• 1:08:47
  Speaker 1: now if you look every day, you're apt to do something.
• 1:08:51
  Speaker 1: And one of my basic rules is don't do something,
• 1:08:55
  Speaker 1: just stand there and if you've been doing that this year,
• 1:08:58
  Speaker 1: I think you're a lot better off. This is a
• 1:08:59
  Speaker 1: tough years, so far, not that bad. I mean, you
• 1:09:02
  Speaker 1: think the SMP is off about three and a half percent,
• 1:09:05
  Speaker 1: it's really nothing. And although you think it was the
• 1:09:08
  Speaker 1: end of the world, uh so, it's Don't let the
• 1:09:12
  Speaker 1: stock market moves distract you. They are a tale told
• 1:09:17
  Speaker 1: by an idiot. These moves, daily moves, hourly been minute
• 1:09:21
  Speaker 1: by minute moves, a tale told by an idiot, full
• 1:09:24
  Speaker 1: of sound and furious, signifying nothing. I have a bunch
• 1:09:28
  Speaker 1: of questions that I ask all of my guests, but
• 1:09:32
  Speaker 1: they're all specific to each individual because they're so um
• 1:09:38
  Speaker 1: so so detailed. So who are your early mentors? I
• 1:09:42
  Speaker 1: know in one of your books you mentioned somebody, Uh
• 1:09:45
  Speaker 1: you thank somebody who you had mentioned in uh the
• 1:09:49
  Speaker 1: earlier part of of the conversation, Who do you think
• 1:09:53
  Speaker 1: of as as mentors? Well outside of my teachers. By
• 1:09:58
  Speaker 1: my first real grown up meant tour was a guy
• 1:10:01
  Speaker 1: named Jim Harrington who was a graduate student and engineer
• 1:10:04
  Speaker 1: at Princeton University, and he was running the Athletic Ticket
• 1:10:07
  Speaker 1: Association ticket office. And when he stopped doing that, he
• 1:10:12
  Speaker 1: pulled me out of the crowd and asked me to
• 1:10:13
  Speaker 1: run in for him. So I learned how to do
• 1:10:15
  Speaker 1: a job, and I learned how to do it with integrity,
• 1:10:18
  Speaker 1: and I learned how to do it with on time.
• 1:10:20
  Speaker 1: I learned how to do it with keeping my emotions
• 1:10:23
  Speaker 1: out of it. This is just selling tickets to Princeton
• 1:10:27
  Speaker 1: students forts basketball, baseball, whatever it might be, particularly football,
• 1:10:32
  Speaker 1: And that was a seminal experience to you and helped
• 1:10:35
  Speaker 1: form your your own character. He had just a great
• 1:10:38
  Speaker 1: sense of business values and like all engineers he was
• 1:10:41
  Speaker 1: you know, they kind of go step by step right.
• 1:10:43
  Speaker 1: Sometimes it's not a lot of exciting, but it's always
• 1:10:45
  Speaker 1: right structured, organized, and and you're dealing with a lot
• 1:10:49
  Speaker 1: of money. And sure, what Princeton Stadium is how many people?
• 1:10:53
  Speaker 1: That's ah, that was the old Palmer Stadium that held
• 1:10:56
  Speaker 1: fifty people, right, and now it's I almost double that size.
• 1:11:00
  Speaker 1: It's it's huge. No, we went way down. We're about
• 1:11:04
  Speaker 1: the other direction, okay, and we can't fill it now.
• 1:11:06
  Speaker 1: We used to. Every every game I worked was a sellout, right,
• 1:11:09
  Speaker 1: that was back in the day. So that was really
• 1:11:11
  Speaker 1: quite an education. Um, you dedicated common sense on mutual
• 1:11:15
  Speaker 1: funds to Walter Morgan, who was he in your in
• 1:11:19
  Speaker 1: your pantheon, Well, he was the greatest of my mentors.
• 1:11:22
  Speaker 1: He hired me. Uh he read my thesis out of Princeton.
• 1:11:26
  Speaker 1: He wrote, I think a little bit over the top
• 1:11:29
  Speaker 1: that Mr bogel knew more than he did about them
• 1:11:32
  Speaker 1: than we did about the mutual fund industry. And so
• 1:11:35
  Speaker 1: he liked it. And he was a Princetonian himself, class
• 1:11:38
  Speaker 1: of nineteen twenty, and I was the class of nineteen
• 1:11:42
  Speaker 1: fifty one, and I watched him work. He was very
• 1:11:45
  Speaker 1: much a renaissance man, interested in investing, interested in marketing,
• 1:11:49
  Speaker 1: probably less interested in the detail of the business share
• 1:11:51
  Speaker 1: older record keeping it stuff which was so much simpler
• 1:11:54
  Speaker 1: those days, but also a renaissance man in terms of
• 1:11:57
  Speaker 1: his interest. He was um outdoorsman, hunter, a fisherman, things
• 1:12:03
  Speaker 1: that I that I don't do at all. And but
• 1:12:05
  Speaker 1: he had a high sense of standards, and he they
• 1:12:09
  Speaker 1: said at the beginning, and uh turned the company over
• 1:12:13
  Speaker 1: to me when I was thirty five years old. So
• 1:12:15
  Speaker 1: I must have had an awful lot of confidence in me,
• 1:12:17
  Speaker 1: and I saved Welling and fund finally for him after
• 1:12:20
  Speaker 1: the catastrophe, I described earlier. We told Wellington Management Company
• 1:12:24
  Speaker 1: how we wanted to run and they've been running it
• 1:12:26
  Speaker 1: that way ever since. I've been much more focus on
• 1:12:29
  Speaker 1: income and income stocks and less focus on growth stocks,
• 1:12:33
  Speaker 1: and it's worked out. We had a whole renaissance of
• 1:12:36
  Speaker 1: the Welling and Fund, and he saw a lot of that,
• 1:12:39
  Speaker 1: and he was he he died, but the year that
• 1:12:42
  Speaker 1: book came out, and a little bit before, but I
• 1:12:45
  Speaker 1: had shown him the title page with his name on.
• 1:12:47
  Speaker 1: He was very pleased and very pleased with the revival
• 1:12:50
  Speaker 1: and renaissance of his wonderful Welling and Fund. I felt
• 1:12:54
  Speaker 1: I had a moral obligation save it. So what about
• 1:12:57
  Speaker 1: other investors who hasn't influence your thought process, your philosophy,
• 1:13:03
  Speaker 1: perhaps not your approach to investing, but what other investors
• 1:13:07
  Speaker 1: have colored your worldview? Well, you certainly start with Benjamin Graham.
• 1:13:14
  Speaker 1: He's the basically ground zero and the intelligent investor. His
• 1:13:18
  Speaker 1: book I happened to like the fourth edition, which is
• 1:13:21
  Speaker 1: much more into into the I think it was nine
• 1:13:24
  Speaker 1: seventy four, has much more about mutual funds and things
• 1:13:28
  Speaker 1: of that nature. And he's very clear on that, and
• 1:13:31
  Speaker 1: so he would certainly be one um Mr Morgan Um
• 1:13:37
  Speaker 1: Mr Brin had a couple of associates, Joe Welsh, the
• 1:13:39
  Speaker 1: president of the company, and Andy Young, his lawyer, very quick,
• 1:13:43
  Speaker 1: quick witted, smart guy, and they all saw something in me.
• 1:13:47
  Speaker 1: I don't know what it was that gave them confidence
• 1:13:51
  Speaker 1: that I had the judgment to do the job. And another,
• 1:13:54
  Speaker 1: interestingly enough, another one of my great mentors was the
• 1:13:57
  Speaker 1: man who when I came on the investment company is
• 1:13:58
  Speaker 1: two board of governors. He was the chairman. His name
• 1:14:01
  Speaker 1: was d. George Sullivan and he was executive vice president
• 1:14:05
  Speaker 1: of Fidelity. Oh really, and we had a great relationship.
• 1:14:10
  Speaker 1: That's fascinated And so he would have been you know,
• 1:14:14
  Speaker 1: if people have confidence in you, they bring out your
• 1:14:16
  Speaker 1: best and he really did, and Mr Morgan did, and
• 1:14:20
  Speaker 1: Mr Welsh did, Andy Young did, and so that those
• 1:14:24
  Speaker 1: would be the big names I think, both as mentors
• 1:14:28
  Speaker 1: and investors. Let's let's talk about books. You've written your
• 1:14:32
  Speaker 1: fair share of books. Who's what other authors books being
• 1:14:37
  Speaker 1: on investing or what have you have you enjoyed? What
• 1:14:40
  Speaker 1: what books would you recommend to people? Well, I've already
• 1:14:43
  Speaker 1: mentioned The Intelligent Investor by Graham. Intelligent Investor by Graham.
• 1:14:48
  Speaker 1: I think Bert Malkiale, who's a friend of ours and
• 1:14:50
  Speaker 1: friend of mine and former foreign director here for many
• 1:14:53
  Speaker 1: many years, I know, really the best director we've ever
• 1:14:56
  Speaker 1: had outside director. His random walked down Wall Street was
• 1:15:00
  Speaker 1: aided every couple of years is another. UM. David Swinson's
• 1:15:05
  Speaker 1: book On for the Individual Investor is really superb. Peter
• 1:15:11
  Speaker 1: Bernstein's Against the Gods just I just read that over
• 1:15:15
  Speaker 1: the holidays, fantastic book. Well, he was a very gifted man.
• 1:15:19
  Speaker 1: We were very close Peter and I, and we had
• 1:15:21
  Speaker 1: our little disagreements here and there, but overall we were
• 1:15:24
  Speaker 1: on the same team. And then Bill Bernstein Four Pillars
• 1:15:28
  Speaker 1: of Investment Wisdom is A is A is a wonderful book,
• 1:15:32
  Speaker 1: and there aren't. It's hard me to go a lot,
• 1:15:35
  Speaker 1: a lot beyond that, to be honest with you. Well,
• 1:15:37
  Speaker 1: that's that's a great starting list right there. You can
• 1:15:40
  Speaker 1: certainly do worse than any of those half dozen books. UM,
• 1:15:44
  Speaker 1: we've talked a lot about how you've changed the industry
• 1:15:48
  Speaker 1: since you began way back in in the sixties and seventies.
• 1:15:53
  Speaker 1: How else has the industry changed that you think is
• 1:15:56
  Speaker 1: either for the better or for the worst. What what
• 1:15:59
  Speaker 1: stands out as to how finance has evolved over those
• 1:16:04
  Speaker 1: those years. I think when I came into this industry,
• 1:16:10
  Speaker 1: it was a much better industry than it was thereafter,
• 1:16:13
  Speaker 1: the big part of that change was in the go
• 1:16:16
  Speaker 1: go era, when we had this idea. We went from
• 1:16:18
  Speaker 1: investment committees prudent investment committees buying blue chip stocks. Two
• 1:16:23
  Speaker 1: portfolio managers comments uh and not stars, comments that burn
• 1:16:30
  Speaker 1: out and their ashes drift gently down to earth. And
• 1:16:33
  Speaker 1: that's happened to so many, so many comment managers. I mean,
• 1:16:37
  Speaker 1: you could hardly lose count, you wonder. I mean, the
• 1:16:40
  Speaker 1: real the real superstars just don't stay there, you know.
• 1:16:44
  Speaker 1: I always just to wish Bill Miller, well, he beat
• 1:16:47
  Speaker 1: He's a leg mason. He beat the market, I think
• 1:16:49
  Speaker 1: sixteen years in a row, and every time I saw him,
• 1:16:52
  Speaker 1: I'd say good luck, good luck in the future. I
• 1:16:55
  Speaker 1: liked them. My wishes of good luck didn't do any
• 1:16:59
  Speaker 1: good at all. He very famously imploded and went from
• 1:17:03
  Speaker 1: the literally the top performing fund to the bottom one
• 1:17:07
  Speaker 1: percent following the financial crisis. What had worked for him
• 1:17:11
  Speaker 1: previously just eventually stopped working, and he got caught in
• 1:17:14
  Speaker 1: a lot of paper that turned out to be not
• 1:17:17
  Speaker 1: worth what he thought it was well in an earlier area.
• 1:17:19
  Speaker 1: Remember Gerald CSI ran Fideliti Capital Fund and he had
• 1:17:25
  Speaker 1: the best record in the business. He goes out and
• 1:17:27
  Speaker 1: starts his own fund and Manhattan Fund gets a huge underwriting.
• 1:17:31
  Speaker 1: It was four a million dollars. Nobody ever seen anything
• 1:17:33
  Speaker 1: like that in this business, that to the old days.
• 1:17:36
  Speaker 1: And it had after ten years of operation, the worst
• 1:17:40
  Speaker 1: record in the mutual fund industry. And you know, I
• 1:17:44
  Speaker 1: tell people, when you think about the nature of securities markets,
• 1:17:47
  Speaker 1: its gifts as difficult to be last as it is
• 1:17:50
  Speaker 1: to be first. What was his name about that? That's amazing?
• 1:17:54
  Speaker 1: What was his name again? Gerald Side t s A
• 1:17:57
  Speaker 1: I T S A great um. So some of my
• 1:18:01
  Speaker 1: my last few questions. You've mentioned a lot of things
• 1:18:06
  Speaker 1: have changed since nineteen fifty one. What do you see
• 1:18:09
  Speaker 1: as changing in the future. I guess I'd say, not
• 1:18:13
  Speaker 1: to beat the phrase to death, reversion to the mean.
• 1:18:16
  Speaker 1: I see the industry going back to its roots. Uh,
• 1:18:20
  Speaker 1: much more of a fiduciary focus, I hope. So I'm
• 1:18:22
  Speaker 1: very much in favor of the fiduciary rule. Although someone
• 1:18:25
  Speaker 1: else is gonna have to work out the details. It
• 1:18:27
  Speaker 1: seemed to make it difficult to operate and uh, but
• 1:18:31
  Speaker 1: it shouldn't make it difficult to operate because all you
• 1:18:34
  Speaker 1: have to do is ask yourself as an advisor, one question, Hey,
• 1:18:37
  Speaker 1: is this in the client's best interest? And if the
• 1:18:39
  Speaker 1: answer is no, you can't do it. It's much simpler
• 1:18:43
  Speaker 1: than the complicated suitability rules which have all sorts of
• 1:18:48
  Speaker 1: ifs and thens and clauses best interests of the client.
• 1:18:51
  Speaker 1: Yes you can do it, No you can't. What could
• 1:18:54
  Speaker 1: be What could be easier? When you unfortunately need kind
• 1:18:56
  Speaker 1: of documentation how you're doing things and all that. It
• 1:18:59
  Speaker 1: is a little borious because we have to have you know,
• 1:19:02
  Speaker 1: a lot of lawyers work on this, and you and
• 1:19:05
  Speaker 1: I have the spirit of fiduciary duty and they've got
• 1:19:08
  Speaker 1: to get to the letter of it. And it's it's
• 1:19:10
  Speaker 1: more complex than it ought to be, but it's coming.
• 1:19:13
  Speaker 1: And you know, with so many funds being flashes in
• 1:19:15
  Speaker 1: the pan, investors are going to learn by their own experience.
• 1:19:21
  Speaker 1: You know, I was told this was a great fund,
• 1:19:23
  Speaker 1: and it was a great fund for two days and
• 1:19:26
  Speaker 1: that was the end of it. Uh. And we overestimate
• 1:19:29
  Speaker 1: our own ability to pick funds and stocks. We over
• 1:19:32
  Speaker 1: overestimate the ability of our managers to do better consistently,
• 1:19:36
  Speaker 1: and if people just got the idea of reversion of
• 1:19:39
  Speaker 1: the mean again and again and again. You know the
• 1:19:42
  Speaker 1: we were looking at some data the other day, Barry,
• 1:19:44
  Speaker 1: and if you're in the top quartile for a given
• 1:19:48
  Speaker 1: five year period, only fifteen percent of you are going
• 1:19:51
  Speaker 1: to be in the top quartile in the next five
• 1:19:54
  Speaker 1: year period. And if you're in the bottom quartile of
• 1:19:58
  Speaker 1: you will be in the top quartile the next period.
• 1:20:01
  Speaker 1: And over time, that sort of returns don't help help anybody.
• 1:20:04
  Speaker 1: I think was Howard Marks who said, if you're consistently
• 1:20:07
  Speaker 1: in the top over time, that puts you in the
• 1:20:10
  Speaker 1: top ten percent. But you have to be consistent. You
• 1:20:12
  Speaker 1: can't be a shooting star, outperforming, under performing, out performing
• 1:20:17
  Speaker 1: under performing. You have to be uh top forty. But
• 1:20:20
  Speaker 1: he runs a distress bond funds not not necessarily a stick.
• 1:20:25
  Speaker 1: Let me let me add this, if my name, what
• 1:20:26
  Speaker 1: is the objective of the individual investor. It's to have
• 1:20:30
  Speaker 1: a lifetime of investing. Investing for a lifetime. And for
• 1:20:34
  Speaker 1: a young investor, believe it or not, twenty five year
• 1:20:37
  Speaker 1: old investor has a seventy year life expectancy, seventy years,
• 1:20:41
  Speaker 1: they're gonna be nine, probably be a hundred. So what's
• 1:20:44
  Speaker 1: the best way to invest for seventy years. If a
• 1:20:46
  Speaker 1: mutual fund manager lasts for seven years, that's the average,
• 1:20:50
  Speaker 1: You're gonna have ten of them. The average fund goes
• 1:20:53
  Speaker 1: out of business every um, every decade, every decade. Excuse me, really,
• 1:21:00
  Speaker 1: it's that high. That's amazing. And then the new the
• 1:21:02
  Speaker 1: new guy comes in and sweeps clean. Managers get fired.
• 1:21:06
  Speaker 1: There is no way, none, zero, that if you own
• 1:21:10
  Speaker 1: three or four mutual funds, which is typical, there is
• 1:21:13
  Speaker 1: no way that over seventy years you have even a
• 1:21:16
  Speaker 1: fighting chance to beat the market. And if you do
• 1:21:19
  Speaker 1: the index fund, I guarantee you that you will have
• 1:21:22
  Speaker 1: the same non manager seventy years from now as the
• 1:21:26
  Speaker 1: non manager you have today. So that raises a really
• 1:21:29
  Speaker 1: interesting question, which happens to be coincidentally one of my
• 1:21:33
  Speaker 1: last two questions. What advice would you give to a
• 1:21:37
  Speaker 1: millennial or a kid just graduating college today beginning their career.
• 1:21:42
  Speaker 1: What would you tell them about what they should do
• 1:21:44
  Speaker 1: with their career and what would you tell them about investing? Well,
• 1:21:49
  Speaker 1: people have to find their own way in this life,
• 1:21:51
  Speaker 1: and I've I've talked to a number of groups at Princeton,
• 1:21:54
  Speaker 1: one on religion and business and one on ethics and business,
• 1:21:58
  Speaker 1: two separate groups. And one is a small seminar and
• 1:22:01
  Speaker 1: one of a large lecture course. And I get that
• 1:22:03
  Speaker 1: kind of lecture. Should I not go into the financial business?
• 1:22:06
  Speaker 1: And I say no, go into the financial business and
• 1:22:09
  Speaker 1: make it better than it is today. You know, I don't.
• 1:22:12
  Speaker 1: People have to find their own way in this life.
• 1:22:14
  Speaker 1: I had to find my own way, Barry, you have
• 1:22:17
  Speaker 1: defined your own way, a lot of bumps along the way.
• 1:22:20
  Speaker 1: You gotta have a little resilience. You've got to be
• 1:22:23
  Speaker 1: able to take defeat and turn into victory. I think
• 1:22:25
  Speaker 1: that's what I've done, maybe a little bit. And and
• 1:22:31
  Speaker 1: so it's this, This field is going to shrink hugely.
• 1:22:35
  Speaker 1: There's no question about that. It already has just since
• 1:22:38
  Speaker 1: oh nine, no doubt about it. The combination of technology
• 1:22:41
  Speaker 1: and the knowledge and the spread of this disease called
• 1:22:46
  Speaker 1: indexing is not going to go away. It's habit forming,
• 1:22:50
  Speaker 1: it's catching, it's contagious, it's spreading. And and my final question,
• 1:22:55
  Speaker 1: and I'm I'm I feel awful that it's a ninety
• 1:22:58
  Speaker 1: minutes is already up I'd like to continue you going
• 1:23:00
  Speaker 1: for another ninety minutes. What is it that you know
• 1:23:03
  Speaker 1: about investing today that you wish you knew when you
• 1:23:07
  Speaker 1: started in nineteen fifty one. Well, I'd say quite a bit.
• 1:23:12
  Speaker 1: I mean, I I was on the Welling and Fund
• 1:23:13
  Speaker 1: Investment Committee, and I saw how what hard it was
• 1:23:16
  Speaker 1: to beat the market. I wouldn't have told you that
• 1:23:18
  Speaker 1: back in n and I worked for a long time
• 1:23:22
  Speaker 1: with John Neff, who had many, many years of success
• 1:23:25
  Speaker 1: in beating the market. But he's an exception, and even
• 1:23:28
  Speaker 1: his record and in later years deteriorated. But then he mean,
• 1:23:31
  Speaker 1: he hadn't gonna. He's not running wins. Your funny ran
• 1:23:34
  Speaker 1: it for thirty years, I think, But he's not gonna.
• 1:23:36
  Speaker 1: He's not running it anymore. So managers come and go.
• 1:23:40
  Speaker 1: So I'd say things like the power of compounding, the
• 1:23:44
  Speaker 1: beauty of keeping costs low, uh, the need to ignore
• 1:23:50
  Speaker 1: the market, they need to do something. Are all things
• 1:23:54
  Speaker 1: that have and and the difficulty. This is a very
• 1:23:58
  Speaker 1: very hard business, this business investment management. And then in
• 1:24:02
  Speaker 1: the long run, we're all average, we're below our averages
• 1:24:05
  Speaker 1: my thesis suggested, below the market averages. And so I
• 1:24:09
  Speaker 1: don't think it's easy, don't think you're smarter than anybody else.
• 1:24:13
  Speaker 1: Just get in the middle, get costs out, and don't
• 1:24:17
  Speaker 1: peek John Boggle, this has been a fascinating conversation. I
• 1:24:23
  Speaker 1: again thank you so much for being so generous with
• 1:24:26
  Speaker 1: your time. If you enjoy this conversation, you could look
• 1:24:30
  Speaker 1: up an Inch or down an Inch on Apple iTunes
• 1:24:33
  Speaker 1: and see the other eighty or so of these that
• 1:24:36
  Speaker 1: we've had. UH. Be sure and check out uh all
• 1:24:40
  Speaker 1: the rest of our our chats. They are really quite fascinating.
• 1:24:43
  Speaker 1: I have to thank Mike bat Nick, my head of research,
• 1:24:47
  Speaker 1: for helping to put together all these questions, my producer
• 1:24:51
  Speaker 1: and engineer Charlie Vollmer for dragging himself out of bed
• 1:24:54
  Speaker 1: at an undoddly hour in the morning to drive here
• 1:24:58
  Speaker 1: to Malvern, Pennsylvania to in guard UH mother ship. Jack.
• 1:25:02
  Speaker 1: Thank you again so much. This has been absolutely fascinating.
• 1:25:05
  Speaker 1: Great to be wayy to marry. Good luck. M