WEBVTT - Charles D. Ellis Interview (Replay):Masters in Business (Audio) 0:00:00.160 --> 0:00:02.440 The future may not be clear, but our commitment is 0:00:02.600 --> 0:00:04.440 so when you sit with an advisor at Mery Lynch, 0:00:04.519 --> 0:00:07.160 we'll put your interests first. Visit mL dot com and 0:00:07.240 --> 0:00:09.640 learn more about Mery Lynch. An affiliated Bank of America. 0:00:09.760 --> 0:00:12.039 Mery Lynch makes available products and services offered by Merrill 0:00:12.080 --> 0:00:14.440 Lynch Pierce Veteran Smith Incorporated or Register Broker Dealer remember 0:00:14.560 --> 0:00:19.920 s I PC. This is Masters in Business with Barry 0:00:20.000 --> 0:00:24.239 Ridholts on Bloomberg Radio. This week on the podcast, we 0:00:24.400 --> 0:00:28.840 have an extra special guest. His name is Charlie Ellis, 0:00:28.880 --> 0:00:35.360 and I spend some time going over his CV when 0:00:35.360 --> 0:00:38.520 we actually do the show, so I won't um repeated, 0:00:38.840 --> 0:00:42.120 but I'm going to tell a quick story about the 0:00:42.159 --> 0:00:46.239 first time Charlie was a guest here. I was just 0:00:46.400 --> 0:00:53.520 captivated by the combination of his intellect and integrity and 0:00:53.560 --> 0:00:56.920 common sense. And the show ended and I had to 0:00:56.960 --> 0:01:00.800 be somewhere, and he was walking down to Grand Central 0:01:00.880 --> 0:01:03.760 station and I said, sure, I'm happy to walk with you, 0:01:03.840 --> 0:01:09.080 and and we continue to conversation down twenty blocks or 0:01:09.080 --> 0:01:13.200 so from the Bloomberg Building to UM to Grand Central 0:01:13.720 --> 0:01:16.280 and I can't describe it any of the way. It 0:01:16.360 --> 0:01:19.920 was just captivating it. It's a delight and a privilege 0:01:20.280 --> 0:01:25.520 to be able to chat with someone of his experience, knowledge, wisdom. 0:01:25.959 --> 0:01:30.360 It was just delightful and I sat and chatted with 0:01:30.440 --> 0:01:33.560 him for this show for about an hour and a half. 0:01:34.120 --> 0:01:37.600 If you are at all interested in anything having to 0:01:37.680 --> 0:01:45.640 do with investment management, institutional investing, individual investing, indexing, retirement savings, 0:01:45.959 --> 0:01:49.840 the list goes on and on, you will appreciate this conversation. 0:01:49.920 --> 0:01:54.080 There there is no one else like Charlie Ellis. Um 0:01:54.160 --> 0:01:58.560 he is one of the legends of finance. And so, 0:01:59.240 --> 0:02:03.240 with no further ado, here is my conversation with Charlie Ellis. 0:02:05.640 --> 0:02:10.880 This is Masters in Business with Barry Ridholts on Bloomberg Radio. Today. 0:02:11.040 --> 0:02:13.639 I have an extra special guest, a legend in the 0:02:13.680 --> 0:02:17.280 world of finance. His name is Charlie Ellis. And if 0:02:17.280 --> 0:02:19.679 you're unfamiliar with Mr Ellis, let me give you a 0:02:19.840 --> 0:02:24.160 very short version of his curriculum. Vitae graduated from Yale 0:02:24.200 --> 0:02:26.880 with a BA in history, ends up getting an NBA 0:02:27.120 --> 0:02:32.000 from Harvard UH and UH PhD in finance from n YU. 0:02:32.240 --> 0:02:35.679 Becomes a c F A charter holder in nineteen nine 0:02:36.560 --> 0:02:40.360 on the faculty of the Harvest Business School, director of 0:02:40.400 --> 0:02:46.800 the Vanguard Group on the Yale School of Management UH 0:02:46.960 --> 0:02:50.240 as well as the Yale Endowment, Chairman of the board 0:02:50.320 --> 0:02:52.960 of the c f A Institute, one of a dozen 0:02:53.000 --> 0:02:58.919 people recognized for lifetime contributions to the investment profession by 0:02:58.960 --> 0:03:04.000 the CFA Institute. Author of sixteen books on investing, and 0:03:04.040 --> 0:03:07.400 we'll talk about a few of those shortly. Charlie Ellis, 0:03:07.440 --> 0:03:10.280 welcome back to Bloomberg, glad to be here, and Barry, 0:03:10.360 --> 0:03:14.480 thank you. So that's the short version of your curriculum, Vita. 0:03:14.560 --> 0:03:17.839 We will spend some more time talking about your work 0:03:17.880 --> 0:03:20.240 in the field in a little bit, but let's jump 0:03:20.480 --> 0:03:23.480 right in to the new book that you just put out, 0:03:23.600 --> 0:03:28.360 the title The Index Revolution, Why investors should join it. 0:03:28.480 --> 0:03:32.640 Now you've already written sixteen books. What motivated you to 0:03:32.680 --> 0:03:36.040 write yet another one. Well, I really believe in getting 0:03:36.040 --> 0:03:39.600 the word out and I've had an unbelievable privilege as 0:03:39.640 --> 0:03:42.840 an insider in the investment management world. Have had changed 0:03:42.880 --> 0:03:45.720 to meet with people all over the world and talk 0:03:45.760 --> 0:03:47.920 and talk and talk and talk with them about what's 0:03:47.920 --> 0:03:50.840 going on. And once you get a really good idea 0:03:51.200 --> 0:03:53.760 of what's going on, you realize Indexing makes so much 0:03:53.760 --> 0:03:56.800 sense for so many people. Everybody should seriously consider it, 0:03:57.040 --> 0:03:59.880 and most people should do it. So how do you 0:04:00.000 --> 0:04:03.120 help write a short book that's easy to read and 0:04:03.160 --> 0:04:06.800 see if you're gonna attract attention? So, so let's talk 0:04:06.840 --> 0:04:10.400 about indexing. You spoke at a conference recently, the Evidence 0:04:10.440 --> 0:04:15.400 Based Investing Conference. Bill McNabb, the CEO and chairman uh 0:04:15.800 --> 0:04:19.000 of the conference, spoke and the two of you both 0:04:19.040 --> 0:04:23.000 said the same thing. Gee, it's a shame indexing attracted 0:04:23.000 --> 0:04:26.600 the word passive that that seems to be a problem. 0:04:26.640 --> 0:04:29.320 What's the issue with passive? Well, when I was growing up, 0:04:29.360 --> 0:04:31.760 we read The Little Engine that Could, and we were 0:04:31.800 --> 0:04:34.520 told if you study harder, you'll get better grades. And 0:04:34.600 --> 0:04:36.680 when I got a job, I was told, if you 0:04:36.720 --> 0:04:38.440 work hard, you'll get a raise, you might even get 0:04:38.480 --> 0:04:41.080 a bonus. Everything about our lives. You want to learn 0:04:41.080 --> 0:04:43.720 the piano, spend time practicing, You want to learn how 0:04:43.760 --> 0:04:47.240 to play tennis, practice, practice, practice, Everything has to do 0:04:47.320 --> 0:04:51.200 with do more, work harder, and you'll do better. So 0:04:51.279 --> 0:04:53.320 we come to investing and say, fine, I'm ready to go. 0:04:53.440 --> 0:04:56.000 Where do I get a chance to do better? I'm 0:04:56.000 --> 0:04:57.840 gonna work hard and somebody says he. You know, I 0:04:57.839 --> 0:04:59.960 wouldn't bother doing that. Why don't you just settle for aver? 0:05:00.600 --> 0:05:04.880 Nobody wants to be average. Nobody wants to settle. And 0:05:04.920 --> 0:05:08.000 the word passive is a horrible negative. Can you imagine 0:05:08.040 --> 0:05:11.320 your wife or husband introducing you as this is my spouse. 0:05:11.839 --> 0:05:16.240 Passive sounds terrible. So what is the better phrase to 0:05:16.360 --> 0:05:20.480 describe what people should think of when they think of indexing. Well, 0:05:20.560 --> 0:05:24.240 to one is indexing and the second is winning winning, 0:05:24.920 --> 0:05:28.360 So explain that. Why is um? Why is winning? As 0:05:28.440 --> 0:05:31.159 Charlie Sheen would say, why does that leave us to 0:05:31.360 --> 0:05:33.960 lead us to indexing? Well, one thing that I would 0:05:34.000 --> 0:05:36.520 use to describe winning is doing better than most of 0:05:36.520 --> 0:05:38.640 the other people at whatever it is you're trying to 0:05:38.680 --> 0:05:44.320 do operationally, year after year after year. Over the long term, 0:05:44.680 --> 0:05:48.400 indexing does better today than active investing. That wasn't the 0:05:48.440 --> 0:05:50.640 case twenty five or thirty years ago, but it is 0:05:50.680 --> 0:05:54.360 the case today. What what accounts for that change? Massive 0:05:54.480 --> 0:05:58.200 change in virtually every variable. Just for an example, if 0:05:58.200 --> 0:06:00.200 you go back fifty years ago, there might have been 0:06:00.240 --> 0:06:03.160 five thousand people involved in active investing. Now they're at 0:06:03.240 --> 0:06:06.799 least a million people involved, and they're smart. Well, educated. 0:06:07.120 --> 0:06:11.400 They've all got exactly the same tools, computers, access to 0:06:11.400 --> 0:06:15.000 the Internet, Bloomberg terminals, and they've all got access to 0:06:15.040 --> 0:06:18.279 the same information because the SEC requires public companies to 0:06:18.279 --> 0:06:21.920 give everybody all the information they give to anybody. So 0:06:21.960 --> 0:06:23.880 it's not like the old days where whoever got that 0:06:23.960 --> 0:06:26.760 first call, Hey, that was a money maker. If you 0:06:26.839 --> 0:06:30.440 found it out before all your competitors did, it was wonderful. 0:06:30.440 --> 0:06:33.080 And the second thing that's big, big change is it 0:06:33.200 --> 0:06:36.120 used to be it was professionals who had access to 0:06:36.160 --> 0:06:39.560 really good research, a small fraction of the market, competing 0:06:39.600 --> 0:06:42.920 against large numbers of amateurs who bought and sold once 0:06:42.960 --> 0:06:45.760 every year or two and didn't candidly no one awful lot. 0:06:46.360 --> 0:06:50.440 Now it's been reversed. Now or more of trading on 0:06:50.480 --> 0:06:54.120 the New York Exchange is either machines or professional people, 0:06:54.400 --> 0:06:57.400 and they're playing to win. Michael Mobisock calls this the 0:06:57.400 --> 0:07:00.960 paradox of skill. It's not that the compet editors are bad, 0:07:01.200 --> 0:07:04.200 it's that everybody else is so good. How is there 0:07:04.279 --> 0:07:06.840 any room to to beat them when you're playing at 0:07:06.839 --> 0:07:10.240 such high levels, so very good, and so many of them, 0:07:10.240 --> 0:07:13.320 and they have the tools, they have the technology, it's fabulous. 0:07:13.360 --> 0:07:15.720 They are so much better than managers where twenty years 0:07:15.760 --> 0:07:19.520 ago it's night and day. So the first index fund 0:07:19.560 --> 0:07:23.400 that comes out by Jack Bogel, they were hoping to sell, 0:07:23.520 --> 0:07:25.560 you write in the book a hundred and fifty million 0:07:26.000 --> 0:07:29.560 dollars worth and they could barely get it over ten 0:07:29.640 --> 0:07:32.760 million dollars when they first launched it. It was a flop. 0:07:33.200 --> 0:07:35.440 Why did the first index fund do so poorly? It 0:07:35.560 --> 0:07:39.080 wasn't a flop. It was a big flop. A whole 0:07:39.080 --> 0:07:42.240 bunch of different things. Number One, nobody knew anything about 0:07:42.280 --> 0:07:45.360 indexing to speak of, and the idea wasn't out, and 0:07:45.400 --> 0:07:48.520 everybody was looking for beat the market rates of return. 0:07:48.720 --> 0:07:51.600 That was big. Second is there was a sales load 0:07:51.840 --> 0:07:54.800 in order to attract the sales force at the retail 0:07:54.880 --> 0:07:57.520 brokerage firms. What was that sales load? It was I 0:07:57.560 --> 0:08:03.080 think six and a half percent. Could bet that's a lot. 0:08:03.160 --> 0:08:05.760 When you're offering I'm gonna give you average and I'm 0:08:05.760 --> 0:08:08.800 going to charge you a big entry fee to get started. 0:08:09.000 --> 0:08:10.840 That wasn't an annual fee. It was a one time 0:08:11.040 --> 0:08:13.280 load for the purchase one time, but you drop eight 0:08:13.320 --> 0:08:14.760 and a half off the top of your money. And 0:08:14.800 --> 0:08:19.120 your start behind the line of scrimmage pretty far so. 0:08:19.440 --> 0:08:21.280 One of the other things that you mentioned the book 0:08:21.280 --> 0:08:24.720 that I think is fascinating. Over the past fifty years, 0:08:24.840 --> 0:08:28.800 the trading volume on the New York Stock Exchange increased 0:08:28.840 --> 0:08:32.840 from three million shares a day to five billion a day. 0:08:33.000 --> 0:08:35.160 That's a fifteen hundred not all on the New York 0:08:35.200 --> 0:08:37.760 Stock Exchange, some of us off the board trading in 0:08:37.800 --> 0:08:40.959 New York Stock Exchange listed, And honestly, five million is 0:08:41.000 --> 0:08:43.080 an average. It ferries up and down depending on what 0:08:43.080 --> 0:08:46.199 the machines are doing. I'm Barry Ridolts. You're listening to 0:08:46.440 --> 0:08:50.079 Masters in Business on Bloomberg Radio today. My special guest 0:08:50.280 --> 0:08:53.720 is Charlie allis a legend in Wall Street. He has 0:08:53.800 --> 0:08:55.680 written and I shouldn't just say Wall Street, but a 0:08:55.760 --> 0:08:59.240 legend in all of finance. He has written sixteen books, 0:09:00.000 --> 0:09:02.920 out of which I think is quite fascinating. It's called 0:09:03.400 --> 0:09:08.840 Falling Short The Coming Retirement Crisis. What is the looming 0:09:09.080 --> 0:09:14.200 retirement crisis that the United States faces. It's a complex 0:09:14.240 --> 0:09:16.440 of several different items. Let's just pick out the really 0:09:16.440 --> 0:09:19.360 big ones. Number One, people are living longer than they 0:09:19.440 --> 0:09:22.559 used to live. Longevity certainly is an ongoing shift, from 0:09:22.559 --> 0:09:24.400 which means people are going to be in retirement for 0:09:24.400 --> 0:09:27.800 more years than they might have actually been planning on. Secondly, 0:09:27.960 --> 0:09:31.679 a fairly large fraction half of any couple who are 0:09:31.720 --> 0:09:36.720 in there late sixties, early seventies, half of them will 0:09:36.800 --> 0:09:40.040 need assisted living at Sometimes that's fairly expensive stuff you are, 0:09:40.200 --> 0:09:43.080 particularly if you're not prepared for it. About a third 0:09:43.080 --> 0:09:48.080 of American workers have no retirement plan whatsoever. Zero zero 0:09:48.960 --> 0:09:55.800 social Security or nothing. Social Security is not enough, it's sure. Uh. 0:09:55.920 --> 0:09:57.520 Then if you say, well, let's look at the people 0:09:57.520 --> 0:09:59.520 who got coverage. It used to be that we had 0:09:59.559 --> 0:10:03.160 to find benefit plans that the company did everything. All 0:10:03.200 --> 0:10:05.080 you had to do was tell them what your address 0:10:05.160 --> 0:10:08.680 was so they can mail the checks. Now virtually every 0:10:08.679 --> 0:10:11.760 decision has to be made by the individual. Many people 0:10:11.840 --> 0:10:15.720 are not well prepared for making those decisions. Then you 0:10:15.760 --> 0:10:18.199 look at all the different decisions. Are you going to 0:10:18.240 --> 0:10:20.120 be in the plan or not? Are you going to 0:10:20.320 --> 0:10:23.680 match the match? Are you going to escalate your contributions 0:10:23.720 --> 0:10:26.000 over time so that you're saving enough to actually cover 0:10:26.080 --> 0:10:28.720 your cost in retirement? How are you going to do 0:10:28.760 --> 0:10:32.120 the investing? How are you going to do the distributions 0:10:32.160 --> 0:10:35.720 from your investments when you do retire, and you start 0:10:35.760 --> 0:10:37.600 with just one of the most obvious things that drives 0:10:37.640 --> 0:10:42.079 me crazy. If you ask people broadly, ask people here 0:10:42.120 --> 0:10:45.280 at Bloomberg, ask people who really know quite a lot 0:10:45.320 --> 0:10:48.760 about investing. What is the delta? What is the difference 0:10:49.120 --> 0:10:51.360 between how much you get from Social Security if you 0:10:51.400 --> 0:10:53.959 claim as soon as you can sixty two or you 0:10:54.040 --> 0:10:55.880 wait until you're seventy and a half when you have 0:10:55.960 --> 0:10:58.720 to claim, Well, it must be a lot, and I 0:10:58.840 --> 0:11:02.120 usually get somewhere between twenty is an increase That is 0:11:02.160 --> 0:11:06.200 not true if you don't claim at sixty two and 0:11:06.320 --> 0:11:08.439 do claim to defer until you get to seventy and 0:11:08.480 --> 0:11:12.000 a half, the increase every year for the rest of 0:11:12.040 --> 0:11:15.000 your life, as long as you live and it's inflation protected, 0:11:15.320 --> 0:11:19.600 is an increase of seventy six. Really, that's giant. That's 0:11:19.640 --> 0:11:22.080 a giant payout. And all I would like is that 0:11:22.160 --> 0:11:27.480 everybody knew and would tell everybody they know more every 0:11:27.559 --> 0:11:30.240 effing year. So there's no reason to unless you have 0:11:30.320 --> 0:11:32.960 no choice. If you could wait till seventy and a half, 0:11:32.960 --> 0:11:35.320 that's clearly the better. Unless you're planning to die in 0:11:35.360 --> 0:11:37.520 your late sixties or early seventies, in which case you 0:11:37.520 --> 0:11:39.800 should take the money. But most people are not planning 0:11:39.800 --> 0:11:42.319 to make a note of that. So there's a data 0:11:42.400 --> 0:11:45.760 point in the book that that I find mind blowing 0:11:46.440 --> 0:11:49.000 as and and this data is a few years old, 0:11:49.080 --> 0:11:50.880 but I looked it up since and I know it 0:11:50.920 --> 0:11:58.359 hasn't changed dramatically. As of the median household approaching retirement 0:11:58.960 --> 0:12:02.560 only had a undred and eleven thousand dollars in four 0:12:02.559 --> 0:12:05.640 oh one k and IRA holdings. And if you do 0:12:05.760 --> 0:12:09.720 what financial advisors suggest you withdrew a four percent a year, 0:12:10.280 --> 0:12:13.480 that put that creates less than five thousand dollars in 0:12:13.600 --> 0:12:17.240 annual income house less than four and a half thousand. 0:12:16.600 --> 0:12:18.880 That's now the numbers have gone up, but I think 0:12:18.920 --> 0:12:22.360 it's now a hundred and thirteen thousand UM. I forgot 0:12:22.400 --> 0:12:25.720 the UM not the investment company Institute. That the e 0:12:25.920 --> 0:12:30.079 B I R dot org one of those, so so 0:12:30.200 --> 0:12:33.160 e B R I right, So that's where I got 0:12:33.200 --> 0:12:38.080 the one thirteen number. But still it's it's an insignificant 0:12:38.440 --> 0:12:41.199 amount of amount of money. Yeah, we could argue about 0:12:41.200 --> 0:12:45.760 the specific details. It doesn't matter. For people going into 0:12:45.920 --> 0:12:51.559 retirement with usually something like twenty years to go a 0:12:51.679 --> 0:12:54.680 hundred hundred and ten hundred twenty even a hundred thirty 0:12:54.760 --> 0:12:57.959 thousand is no help at all to covering the costs 0:12:57.960 --> 0:13:00.520 that they're going to be living with, no no help 0:13:00.520 --> 0:13:03.000 at all. Well, it's not quite that bad. So it's 0:13:02.880 --> 0:13:05.280 a you looks like you've got a lot of money. 0:13:05.360 --> 0:13:07.400 You imagine what it's like if you're a working guy, 0:13:08.240 --> 0:13:11.320 Joe six pack, and you have been working along and 0:13:11.360 --> 0:13:15.280 you look at your account. You see, Berry, I got 0:13:15.280 --> 0:13:17.200 more money every dreamed I would have that. It's in 0:13:17.240 --> 0:13:20.000 my own name. I've got a hundred and ten hundred 0:13:20.000 --> 0:13:27.280 and fifteen thousand smackers. That's thirty years right, run. Even 0:13:27.280 --> 0:13:31.280 if you retire at seventy and you live to fifteen years, 0:13:31.360 --> 0:13:34.600 is still a long time to not be having any income. 0:13:34.640 --> 0:13:37.120 And it's not just individuals. The other data point from 0:13:37.160 --> 0:13:40.360 the book, the public sector is just as bad. The 0:13:40.360 --> 0:13:45.400 Congressional Budget Office stated by any measure, just about every 0:13:45.440 --> 0:13:50.319 single state and local pension plan is underfunded. How how 0:13:50.320 --> 0:13:53.360 did that come about? Well, that's the defined benefit plans 0:13:53.360 --> 0:13:58.679 in almost every case. So these are public employees, teachers, 0:14:00.280 --> 0:14:04.480 what I like to say, real Americans. These are the 0:14:04.520 --> 0:14:06.640 crowd of people who have put in a good long 0:14:06.760 --> 0:14:10.400 term serving the public, okay, and where are they now? 0:14:11.480 --> 0:14:14.120 Their retirement depends on two things. How much money has 0:14:14.120 --> 0:14:16.720 already been set aside, and how much money is going 0:14:16.760 --> 0:14:19.000 to be earned by the investment on that money that 0:14:19.080 --> 0:14:23.960 was set aside. And you look through the eighties and nineties, 0:14:24.000 --> 0:14:26.000 people would have said, boy, you know, we can earn 0:14:26.000 --> 0:14:29.920 a lot, ten percent, twelve percent, fourteen percent. Years came 0:14:30.080 --> 0:14:33.080 ruing through. We all had a great time. If you 0:14:33.120 --> 0:14:35.160 assume that's what you could earn, and you say, well, 0:14:35.200 --> 0:14:36.760 I want to be conservative, so I'm only going to 0:14:36.800 --> 0:14:41.680 assume eight percent. Track it out over time. That's your pension. Now, 0:14:41.720 --> 0:14:44.000 what if somebody comes along and says, Barry, that was 0:14:44.080 --> 0:14:47.800 an unusual time period. Interest rates went from thirteen percent 0:14:47.920 --> 0:14:51.560 to two percent. That changed everything, made everything look like 0:14:51.600 --> 0:14:53.320 a hire rate to return. You're not going to see 0:14:53.320 --> 0:14:55.320 that again. What are you going to see? Well, we've 0:14:55.320 --> 0:14:59.040 got two percent three percent in fixed income and it 0:14:59.080 --> 0:15:03.280 looks like six seven percent in equity investments. What's the 0:15:03.360 --> 0:15:07.080 mixed seven and you end up with ten percent. So 0:15:07.120 --> 0:15:12.120 we've got what's called an unfunded obligation that's on paper, 0:15:12.160 --> 0:15:14.600 we've signed up for it, but it hasn't been paid 0:15:14.680 --> 0:15:16.760 in yet because we assume we're going to get a 0:15:16.760 --> 0:15:18.880 great rate of return. Now we're assuming we're going to 0:15:18.960 --> 0:15:21.480 get a much lower rate of return. How much do 0:15:21.520 --> 0:15:23.720 we have to put up a lot so that blended 0:15:23.840 --> 0:15:26.160 rate to return. I'm joking about adding three and seven, 0:15:26.200 --> 0:15:30.880 But you take the sixty forty portfolio seven equity three bonds, 0:15:30.920 --> 0:15:33.360 you're really looking at a five and a half six percent. 0:15:34.040 --> 0:15:36.360 A five and a half six percent return a three 0:15:36.720 --> 0:15:39.680 in bonds would be a little optimistic. Well, I'm taking 0:15:39.720 --> 0:15:41.800 the average over the next thirty years. But if you 0:15:41.800 --> 0:15:43.560 look at the path and you look at the long 0:15:43.640 --> 0:15:48.680 term average and bonds that that said, you're so, if 0:15:48.720 --> 0:15:51.960 we're looking at a much lower rate of return, who's 0:15:51.960 --> 0:15:54.080 going to have to make up that shortfall? Because these 0:15:54.120 --> 0:15:59.840 are contractually guaranteed payouts as part of public employees in 0:16:00.000 --> 0:16:03.080 ployment contract, who's on the hook for that balance? Drop 0:16:03.120 --> 0:16:07.760 back to your really serious negotiations. Their three parties of interest, 0:16:08.520 --> 0:16:13.200 the government, the mayor, the Senate, the governor, mayor whoever 0:16:13.200 --> 0:16:18.280 it was, the public MHM, and the workers. The workers 0:16:18.280 --> 0:16:20.920 are represented by a union. The union guys are pretty smart. 0:16:20.920 --> 0:16:22.720 They've studied this stuff. For years. They pay a lot 0:16:22.760 --> 0:16:26.440 of attention. The political people are focused on their next election, 0:16:26.880 --> 0:16:28.880 and they're pretty good at that sort of thing. The 0:16:28.960 --> 0:16:31.000 party that's going to have to pay up any difference 0:16:31.200 --> 0:16:33.960 doesn't get to come to the meetings. I'm Barry rid Holtz. 0:16:34.200 --> 0:16:37.440 You're listening to Masters in Business on Bloomberg Radio. My 0:16:37.520 --> 0:16:40.400 special guest today is Charlie Ellis. He has been on 0:16:40.440 --> 0:16:43.920 the faculty of the Harvard Business School. He has served 0:16:43.920 --> 0:16:47.520 on the Yale Endowment Board of directors of Vanguard. UH 0:16:47.880 --> 0:16:50.640 the list goes on and on. Author of sixteen books 0:16:50.680 --> 0:16:55.480 on finance. I want to start discussing your history in 0:16:55.840 --> 0:16:59.480 financial services with a quote of yours that that I 0:16:59.520 --> 0:17:04.679 really should have frames and it's this the investment management 0:17:04.680 --> 0:17:08.320 business should not should be a profession, but is not 0:17:08.960 --> 0:17:13.760 explain that well. Profession is defined by the service by 0:17:13.800 --> 0:17:17.840 the experts on behalf of individuals who don't happen to 0:17:17.840 --> 0:17:20.680 know very much about what the experts are experts in. 0:17:21.320 --> 0:17:24.359 That's why law is a profession, that's why medicine is 0:17:24.400 --> 0:17:30.000 a profession, and investment management used to be entirely a profession. 0:17:30.119 --> 0:17:32.199 It didn't pay very well, but you could do some 0:17:32.280 --> 0:17:34.920 really nice work for individual people and help them through 0:17:35.000 --> 0:17:37.280 the solution to the various problems they might face. Wait 0:17:37.359 --> 0:17:40.320 that this profession didn't pay very well in the old days. 0:17:40.320 --> 0:17:43.080 My assumption is it was a big money maker on 0:17:43.200 --> 0:17:47.120 the nineteen fifties. It wasn't nineteen forties. It certainly wasn't 0:17:47.200 --> 0:17:51.119 nineteen thirties. Was terrible. Nobody went into investment management in 0:17:51.160 --> 0:17:54.879 those days. Huh, that's quite that's quite fascinating. Out of 0:17:54.920 --> 0:17:57.920 my class at Harvard Business School in nineteen sixty three, 0:17:58.320 --> 0:18:00.560 only three of us went into investment management. And I 0:18:00.600 --> 0:18:03.640 got into it accidentally. So let's tell that story. That's 0:18:03.640 --> 0:18:07.040 a fascinating story. How did you stumble into investment matter? 0:18:07.040 --> 0:18:09.159 I was looking for a job and a friend of 0:18:09.200 --> 0:18:12.240 mine father, was looking for somebody to come and work 0:18:12.280 --> 0:18:14.720 in a junior position, and so I thought it would 0:18:14.720 --> 0:18:17.639 be a really interesting conversation. I thought that he was 0:18:17.680 --> 0:18:20.000 talking for the Rockefeller Foundation. It turned out he was 0:18:20.000 --> 0:18:24.040 talking about the Rockefeller family office, a tiny little investment 0:18:24.119 --> 0:18:27.280 team that managed investments for the family and also for 0:18:27.359 --> 0:18:32.320 some of their great philanthropic institutions like Rockefeller University, Rockefeller 0:18:32.359 --> 0:18:34.800 Brothers Fund. Stuff like that. When you say a tiny 0:18:34.960 --> 0:18:39.080 little team the Rockefeller Family office. That was not an 0:18:39.080 --> 0:18:42.760 insignificant sum of money, a lot of money, but the 0:18:42.840 --> 0:18:46.360 number of people was small, only six of us. Okay, 0:18:46.400 --> 0:18:50.360 so you thought you were going into some philanthropic already 0:18:50.359 --> 0:18:53.040 sort of job. And I gotta start an interview with 0:18:53.080 --> 0:18:55.240 a guy, and I realized, this man is really smart. 0:18:55.640 --> 0:18:58.240 He knows a lot, and I need to learn a lot. 0:18:58.560 --> 0:19:00.359 I could learn a lot with him. I better go 0:19:00.480 --> 0:19:03.439 there because I don't know enough. So there's there's a 0:19:03.520 --> 0:19:08.159 legend that Goldman Sachs offered you a job and you said, no, thanks. 0:19:08.200 --> 0:19:10.920 What is that any truth to that? It's totally true, 0:19:11.000 --> 0:19:12.760 but they didn't actually offer the job. They had it 0:19:12.800 --> 0:19:15.520 printed on a piece of paper, and I'm looking at 0:19:15.560 --> 0:19:18.560 it realizing, you know, Dad always thought Goldman Sacks was 0:19:18.600 --> 0:19:21.400 a great firm. I'd love to go with a great firm, 0:19:21.440 --> 0:19:23.919 but I need to earn at least six thousand dollars 0:19:23.920 --> 0:19:27.520 so I can pay off my wife's loans for going 0:19:27.560 --> 0:19:30.359 to college. She'd going to college on a scholarship and 0:19:30.400 --> 0:19:33.080 a loan package, and I needed to pay that off. 0:19:33.119 --> 0:19:35.399 So I had figured I could stave a thousand dollars 0:19:35.400 --> 0:19:38.920 out of six thousand, I can't take a job ford 0:19:38.960 --> 0:19:40.920 never occurred to me. You might get a raised. Never 0:19:40.920 --> 0:19:43.480 occurred to me, you might earn a bonus. So it 0:19:44.000 --> 0:19:47.240 ended up working out anyway with with the Rockefellers and 0:19:47.240 --> 0:19:51.160 and eventually granteds associates. Uh the farm you did? You 0:19:51.160 --> 0:19:54.400 you you co founded founded. I was the only one, 0:19:54.760 --> 0:19:58.960 the other one who founded it. So how did you 0:19:59.240 --> 0:20:02.000 What did you learn from working with the Rockefellers. I 0:20:02.000 --> 0:20:05.800 would think a family office sitting on a giant pool 0:20:05.800 --> 0:20:09.679 of business, but giant pool of capital would really teach 0:20:09.680 --> 0:20:12.359 you the business from the inside out. What what did 0:20:12.359 --> 0:20:15.080 you learn from that experience? I learned a lot. Number 0:20:15.080 --> 0:20:17.239 one is that most people have not thought through what 0:20:17.280 --> 0:20:19.199 they ought to be doing with their investments over the 0:20:19.240 --> 0:20:21.360 long term, and they have not settled on a policy 0:20:21.359 --> 0:20:24.960 that really makes sense to them individually. Second, there's a 0:20:25.000 --> 0:20:27.639 lot of information and if you don't have that information, 0:20:27.720 --> 0:20:35.320 you're in trouble. And third that investment management is a wonderful, interesting, fascinating, 0:20:35.400 --> 0:20:39.400 exciting and filled with all kinds of experiences, wonderful place 0:20:39.440 --> 0:20:43.640 to work. So so all told, that was a positive experience, lucky, 0:20:44.080 --> 0:20:46.560 lucky and very positive. But by the way, that's a 0:20:46.640 --> 0:20:49.000 theme that comes up on the people I sit with 0:20:49.040 --> 0:20:53.080 and have these conversations with over and over again, the 0:20:53.200 --> 0:20:55.359 role of just being in the right place at the 0:20:55.440 --> 0:20:58.199 right time and getting a little hey, smartest good, But 0:20:58.320 --> 0:21:01.560 sometimes lucky is better, much much better. And you'll find 0:21:01.600 --> 0:21:03.840 that those who've been around for a long time, it's 0:21:03.880 --> 0:21:08.000 all luck. Those that are around only recently, they're paying 0:21:08.040 --> 0:21:10.040 attention how much you can get paid, because it is 0:21:10.080 --> 0:21:12.119 the best paid line of work in the world today. 0:21:12.720 --> 0:21:15.160 By the way, back to back to some quotes from 0:21:15.200 --> 0:21:19.480 the book, the most obvious success factor for us was luck, luck, 0:21:19.560 --> 0:21:24.560 and luck. So how is that an exaggeration or is 0:21:25.040 --> 0:21:28.080 do you think luck really serendipity a roll of the 0:21:28.119 --> 0:21:31.640 dice really has a big impact on the lives we lead. 0:21:32.480 --> 0:21:34.399 I know it had a huge impact on my life. 0:21:34.920 --> 0:21:37.000 I doubt it head anywhere near that big an impact 0:21:37.000 --> 0:21:38.919 on most of the other people who have been around. 0:21:38.960 --> 0:21:42.160 But anybody who has been in the investment management area 0:21:42.400 --> 0:21:44.760 for the last fifty years, it doesn't think that was 0:21:44.880 --> 0:21:50.240 really lucky, either kidding himself or kidding you. So we're 0:21:50.280 --> 0:21:54.119 gonna talk later about um winning the losers game. But 0:21:54.359 --> 0:21:59.520 how often do investors confuse luck for skill all the time, 0:21:59.680 --> 0:22:03.639 all the time normal human beings. That's when human beings do. 0:22:04.200 --> 0:22:06.280 If it works out well, I was smart. If it 0:22:06.320 --> 0:22:10.600 doesn't work out well, I was unlucky. I'm Barry rid Hilts. 0:22:10.800 --> 0:22:14.520 You're listening to Masters in Business on Bloomberg Radio. Our 0:22:14.600 --> 0:22:18.119 special guest today is Charlie Ellis. He is a legend 0:22:18.200 --> 0:22:21.200 in the world of finance, having served on the board 0:22:21.200 --> 0:22:26.280 of directors of Vanguard as well as the Yale Endowmond Funds. 0:22:26.760 --> 0:22:29.240 Let's talk a little bit about a paper you wrote 0:22:29.359 --> 0:22:35.639 in that I think has a fascinating history um both 0:22:35.800 --> 0:22:39.320 where it came from and where it went. You authored 0:22:39.640 --> 0:22:43.679 The Losers Game in ninety five as an article for 0:22:43.800 --> 0:22:49.200 the Financial Analysts Journal after reading a book about tennis. 0:22:49.960 --> 0:22:52.639 Tell us about that. Well, the hero of the story 0:22:52.720 --> 0:22:55.919