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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Masters in

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Speaker 1: Business with Barry Ritholts on Bloomberg Radio.

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Speaker 2: This week on the podcast, I have an extra extra

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Speaker 2: special guest. Charlie Ellis is just a legend in the

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Speaker 2: world of investing. He started for the Rockefeller Family Office

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Speaker 2: before going to DLJ and eventually ended up launching Greenwich Associates.

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Speaker 2: He's published twenty one books. He's won every award you

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Speaker 2: can win in the world of finance. He was a

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Speaker 2: member of Vanguard's Board of Director, he was chairman of

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Speaker 2: the Yales Endowment Investment Committee. And his not only did

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Speaker 2: he write twenty one books, his new book, Rethinking Investing

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Speaker 2: is just a delightful snack. It's only one hundred pages

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Speaker 2: and it distills sixty years of investing women wisdom into

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Speaker 2: a very very short read. I found the book excellent

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Speaker 2: and Charlie as delightful as always. I really enjoyed our

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Speaker 2: conversation and I think you will also with no further ado,

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Speaker 2: my discussion with Charlie. Alie, thank you Berry, Well, thank

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Speaker 2: you for being here. First of all, we're going to

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Speaker 2: talk a lot about the book in a bit which

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Speaker 2: I really just devoured over a cup of tea. It

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Speaker 2: was that short and very delightful. But before we do that,

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Speaker 2: I want people to fully understand what a fascinating background

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Speaker 2: you've had and how really interesting your career is. Where

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Speaker 2: you began and where you ended up. You get a

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Speaker 2: master's in business from Harvard Business School, a PhD from

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Speaker 2: New York University, and then you sort of happen onto

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Speaker 2: Rockefeller Foundation. How did you get that first job? How

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Speaker 2: did you discover your calling?

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Speaker 3: Friend of mine and schools said if you got a

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Speaker 3: job yet? I said, no, not yet, got a couple

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Speaker 3: of things, and I'm working towards He said, well, I've

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Speaker 3: got a friend, and I thought he meant the Rockefeller Foundation.

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Speaker 3: Actually he meant the Rockefeller family in their investment office.

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Speaker 3: And very very bright guy came up from New York

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Speaker 3: to Cambridge, Massachusetts, climbed to the third floor of my

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Speaker 3: apartment building, and we did an interview in what I

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Speaker 3: would have to describe as shabby graduate student facility. And

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Speaker 3: at the end of half an hour, I realized it

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Speaker 3: isn't the Foundation that he's talking about. He's doing about

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Speaker 3: something else, and I got to figure out what that is.

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Speaker 3: The end of the second half an hour, I knew

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Speaker 3: he was trying about investing where there were no courses

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Speaker 3: at that time at the Harvard Business School on investment management.

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Speaker 2: And he's really describing the Rockefeller family office. Yes, not

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Speaker 2: necessarily the foundation. So what were they doing at that time?

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Speaker 2: What were their investments like, Well.

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Speaker 3: They invested the family's fortune, and at that time, relative

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Speaker 3: to other family fortunes, it was the large major, so

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Speaker 3: on and so on. They were also because they'd been

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Speaker 3: generous philanthropically for years, managing several charitable organizations endowments. So

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Speaker 3: the combination made us a consequential investment client for Wall

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Speaker 3: Street as Wall Street was just coming into doing serious

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Speaker 3: research on individual companies and industries. So it was takeoff

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Speaker 3: time for what became institutional investing.

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Speaker 2: So give us some context as to that era. This

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Speaker 2: is the nineteen seventies and eighties essentially.

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Speaker 3: Went when I was in the nineteen sixties.

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Speaker 2: So late sixties, not a lot of data available on

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Speaker 2: a regular basis, and modern portfolio theory was kind of

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Speaker 2: just coming around.

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Speaker 3: Oh, it was just an academic curiosity. Nobody's right mind

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Speaker 3: thought it had a chance to be proven. But you know,

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Speaker 3: if you go back to those days. If we came

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Speaker 3: back to it, we would all of us agree with

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Speaker 3: the people who said, no, it's nothing, it's not going

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Speaker 3: to happen. The transformation of the whole investment management world,

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Speaker 3: information availability, legislation, who's participating in, what's the trading volume,

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Speaker 3: what kind of information is available? How fast can you

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Speaker 3: get it? Wow, every one of those dimensions has changed

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Speaker 3: and changed and changed. The world is completely different today.

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Speaker 2: You detail that in the book. We'll talk about that

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Speaker 2: a little bit. That if you just go back fifty years,

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Speaker 2: completely different world, as you mentioned the volume, but who

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Speaker 2: the players are, how technology allows us to do things

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Speaker 2: that we couldn't do before, and that we've also learned

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Speaker 2: a lot since then.

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Speaker 3: We sure have. It's hard to remember, but I do

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Speaker 3: because I was new and fresh and submitting impression. Trading

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Speaker 3: volume three million shares in New York Stock Exchange listed

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Speaker 3: Now it's six seven eight billion. That's a huge change

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Speaker 3: order of magnitude. The amount of research that was available

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Speaker 3: was virtually zero.

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Speaker 2: That's amazing.

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Speaker 3: Now.

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Speaker 2: I recall, well, the CCH binders used to get updates

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Speaker 2: on a regular basis, the clearing house binders, and then

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Speaker 2: it was essentially Zax and a whole bunch of different companies.

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Speaker 2: But that's really late eighties, right, Like when did the

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Speaker 2: research explosion will really happen?

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Speaker 3: Research explosion happened in the seventies and then into the eighties.

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Speaker 3: But the documents that you were looking at are thinking

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Speaker 3: about we're all looking.

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Speaker 2: Backwards, right, that's right.

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Speaker 3: Give you the plane vanilla facts of what's happened in

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Speaker 3: the last five years in a standardized format with no

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Speaker 3: analytical or insight available. Now everything research is a future

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Speaker 3: and it's full of factual information and careful interpretation. It's

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Speaker 3: really different.

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Speaker 2: That's really interesting. So how long are you at Rockefeller

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Speaker 2: before you launched Greenwich Associates in nineteen seventy two.

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Speaker 3: Well, I was there for two and a half years.

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Speaker 3: Then I went to Wall Street with Donaldson, Lufkin and

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Speaker 3: General at for six and then I started Greenwich Associates.

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Speaker 2: So what led you after less than a decade to

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Speaker 2: say I'm going to hang my own shingle. It seems

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Speaker 2: kind of bold at that point you're barely thirty years old.

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Speaker 3: It was a little nervy, I have to graduate. There

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Speaker 3: are a couple of different parts. One is that I

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Speaker 3: knew from my own personal experience, I had no ability

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Speaker 3: to get my clients to tell me what I was

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Speaker 3: doing right or wrong. They'd always say, oh, you're doing fine,

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Speaker 3: just keep it up, You're doing fine. Then no idea

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Speaker 3: what my competition was doing. You know, if we could

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Speaker 3: give factual information on exactly how well each firm is

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Speaker 3: doing and how every one of their competitors are doing,

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Speaker 3: we could interpret that in ways that clients would find

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Speaker 3: really useful, and then we could advise them on specific

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Speaker 3: recommendations based on the facts, really undeniable facts, based on

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Speaker 3: three hundred, five hundred, six hundred interviews with people who

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Speaker 3: made the decisions, and it worked well.

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Speaker 2: I can't imagine they're happy with the outcome, because what

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Speaker 2: you eventually end up learning is that a lot of

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Speaker 2: people who charge high fees for supposedly expert stockpicking, expert

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Speaker 2: market timing, expert allocation, they're not doing so well, And

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Speaker 2: it turns out, at least on the academic side, it

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Speaker 2: appears that the overall market is beating them.

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Speaker 3: I wouldn't quite say it that way, So I wouldn't

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Speaker 3: deny what you're saying, but I would say it differently. Now,

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Speaker 3: when the purpose of any market a grocery store, a

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Speaker 3: drug store, filling station. The purpose of any market is

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Speaker 3: really to find what's the right price that people will

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Speaker 3: buy and trade at, and the securities industry is a

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Speaker 3: very strong illustration of that. Lots of buyers, lots of sellers,

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Speaker 3: what do they think is the right price to do

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Speaker 3: a transaction, and they put real money behind it. So

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Speaker 3: that purpose of a market gets better and better and

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Speaker 3: better when the participants are more skillful, when the participants

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Speaker 3: have more information, when the information is really accessible, and

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Speaker 3: that's what's happened to the securities markets. The ability to

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Speaker 3: get information from a Bloomberg terminal. You don't mind using mitame,

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Speaker 3: but seriously, Bloomberg terminal will spew out so much in

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Speaker 3: the way of factual information. And there are hundreds of

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Speaker 3: thousands of these terminals all over the world, so everybody

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Speaker 3: in his right mind has them and uses them. Everybody's

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Speaker 3: right mind has computing power that would knock the socks

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Speaker 3: off Anybody who came from nineteen seventy got dropped into

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Speaker 3: the current period that would just be amazed at the

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Speaker 3: computing power. And they don't use slide rules anymore. You know,

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Speaker 3: back in the early seventies, everybody used a slide rule. Wow,

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Speaker 3: and we were proud of it, and we're pretty skilled

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Speaker 3: at it. But it's nothing like having computing power behind you.

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Speaker 3: In those days, there were very few in the way

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Speaker 3: of federal regulations. Now it's against the law for a

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Speaker 3: company to have a private luncheon with someone who's in

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Speaker 3: the investment world.

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Speaker 2: Right reg FD said it has to be disclosed to

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Speaker 2: everybody at once, so it is just whisper it to.

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Speaker 3: And everybody gets the same information at the same time.

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Speaker 3: So basically what you've got is everybody in the game

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Speaker 3: is competing with everybody knowing everything that everybody else knows

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Speaker 3: at exactly this right same time. You can be terribly

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Speaker 3: creative and wonderfully bright and very original, but if everybody

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Speaker 3: knows exactly what you know, then they've got computing power,

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Speaker 3: so they can do all kinds of analytics. Then they've

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Speaker 3: got Bloomberg terminals, so they can do any backgrounding that

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Speaker 3: they want to find. It's really hard to see how

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Speaker 3: you're going to be able to beat them by much,

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Speaker 3: if anything. And the truth is that people who are

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Speaker 3: actively investing are usually making They don't mean to, but

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Speaker 3: they are making mistakes. Then those mistakes put them a

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Speaker 3: little bit behind, a little bit behind, a little bit

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Speaker 3: behind the market. And then of course they charge fees

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Speaker 3: that are high enough, so trying to recover those fees

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Speaker 3: while trading. And you can only trade successfully by beating

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Speaker 3: the other guy when he's just as good as you are.

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Speaker 3: He's got just as big a computer as you have,

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Speaker 3: got just the same factual information you have. Then all

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Speaker 3: those other different dimensions, there's no way that you could think, oh, yeah,

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Speaker 3: this is a good opportunity to do well. That's why

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Speaker 3: people increasingly, in my view, sensibly turned index funds to

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Speaker 3: cut down on the cost.

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Speaker 2: So it's interesting how well you express that, because sometime

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Speaker 2: in the nineteen seventies you start writing your thoughts down

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Speaker 2: and publishing them. Not long after, in nineteen seventy seven,

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Speaker 2: you win a Gram and DoD Award. Tell us what

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Speaker 2: you were writing about back in the nineteen seventies and

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Speaker 2: what were you using for a data series when there

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Speaker 2: really wasn't a lot of data.

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Speaker 3: Well, the data did come, but it came later, and

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Speaker 3: fortunately it proved out to be very strong confirmation for

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Speaker 3: what I've been thinking. But I was in institutional sales

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Speaker 3: and I would go around from one investor to another,

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Speaker 3: to another, to another to another, and I knew pretty

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Speaker 3: quickly they're all really bright guys. They're all very competitive,

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Speaker 3: they're all very well informed. They're all very serious students

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Speaker 3: trying to get better and better and better. Their job

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Speaker 3: is to beat the other guys. But the other guys

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Speaker 3: are getting better and better and better all the time,

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Speaker 3: striving to be best informed. They get up early, they

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Speaker 3: study on through the night, they take work home on weekends.

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Speaker 3: Competition competition, competition, competition. How are you going to do

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Speaker 3: better than those other guys when there's so much in

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Speaker 3: the way of raw input is the same and the

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Speaker 3: answer is no, you can't.

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Speaker 2: Michael Mobison calls that the paradox of skill. As all

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Speaker 2: the players in a specific area get more and more skillful,

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Speaker 2: outcomes tend to be determined more by random luck because

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Speaker 2: everybody playing is so good at the game.

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Speaker 3: Absolutely true.

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Speaker 2: So I'm fascinated by this quote. We've been talking about

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Speaker 2: errors and making mistakes. One of the things from your

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Speaker 2: book that really resonated is quote, we are surrounded by

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Speaker 2: temptations to be wrong in both investing and in life.

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Speaker 3: Explain well, we all know about life that were tempted

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Speaker 3: by beautiful men beautiful women who are tempted by whiskey,

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Speaker 3: gin other drinks, where some of us get tempted by

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Speaker 3: drugs and other things like that. So there are lots

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Speaker 3: of temptations out and around. You think about all of

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Speaker 3: us in the investment world are striving to be rational,

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Speaker 3: which is a terribly difficult thing to do. Warren Buffett

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Speaker 3: is rational and is brilliantly rational. He also does an

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Speaker 3: enormous amount of homework. He also has terrific ability to

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Speaker 3: remember things that he studied, and he spends most of

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Speaker 3: his time reading, studying, memorizing, and reusing. Very few people

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Speaker 3: have that kind of ability natural ability that he has.

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Speaker 3: But most of us now have equipment that will damn

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Speaker 3: near do the same thing, and you could call up

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Speaker 3: things from the historical record anytime you want to. It

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Speaker 3: puts everybody in a position of being able to compete

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Speaker 3: more and more skillfully all the time. And therefore, candidly

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Speaker 3: I think the fees are a big problem. And then

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Speaker 3: the second problem is, yes, we've got opportunities to be

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Speaker 3: born more skillful and more and more effective, but actually

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Speaker 3: what we also have, which really drives anybody who seares

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Speaker 3: about examining the data drives some nuts. And anybody who

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Speaker 3: is an investor wants to deny it. And that is

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Speaker 3: that we make mistakes. We get scared by the market

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Speaker 3: after it's gone down, we get excited about the market

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Speaker 3: positively after it's gone up, and we interpret and make

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Speaker 3: mistakes in our judgment. Now, it's a wonderful section in

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Speaker 3: this little bitty book that I've just finished, wonderful section

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Speaker 3: on behavioral economics. Terrific book by Daniel Konnaman Thinking Fast,

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Speaker 3: Thinking Slow, several hundred pages, and anybody in the investment

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Speaker 3: world or to read it because it tells you all

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Speaker 3: about what we need to know about ourselves. And I've

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Speaker 3: got one chapter that just ticks off a whole bunch

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Speaker 3: of things, Like eighty percent of people think they're above

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Speaker 3: average dancers, eighty percent of people think they're above average drivers.

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Speaker 3: If you ask men a question, are you really above

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Speaker 3: average various kinds of skills, they get up to pretty

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Speaker 3: ninety ninety five percent saying they're very, very very good. Now,

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Speaker 3: if you look at a college group, are you going

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Speaker 3: to have happier life than your classmates? Yes, by far

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Speaker 3: are you going to get divorced as much as your classmates?

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Speaker 3: Oh no, that won't happen to me. Then all kinds

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Speaker 3: of other things that anybody looking at it objectively would say,

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Speaker 3: you know, Barry, that just isn't the way it's going

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Speaker 3: to happen. These guys aren't that much better drivers than

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Speaker 3: the normal crowd. In fact, they are part of the

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Speaker 3: normal crowd.

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Speaker 2: You know, we all that we're separate from the crowd.

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Speaker 2: I love the expression I'm stuck in traffic, when the

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Speaker 2: reality is, if you're near a major urban center during

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Speaker 2: rush hour on workday, you're not stuck in traffic. You

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Speaker 2: are traffic. And we all tend to think of ourselves

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Speaker 2: as separate. Really really fascinating stuff. I'm fascinated by the

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Speaker 2: evolution of your investing philosophy. You start with Rockefeller Family Office.

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Speaker 2: I assume back in the nineteen sixties that was a

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Speaker 2: fairly active form of investing. Tell us a little bit

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Speaker 2: about how you began, what sort of strategies you were using,

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Speaker 2: and then how you evolved.

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Speaker 3: Whoa boy. That's a complicated question. First of all, In

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Speaker 3: the early sixties, when I was working for the Rockeviller family,

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Speaker 3: that was the old world. All kinds of changes have

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Speaker 3: taken place since then and virtually turned every single dimension

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Speaker 3: of what was the right description of the investment world

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Speaker 3: into a very different, opposite version. And it changed like

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Speaker 3: that makes it almost a waste of time to talk

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Speaker 3: about what was it like. But just for instance, I

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Speaker 3: did some analysis of a company called DuPont, which was

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Speaker 3: one of the blue blue trips of all time. And

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Speaker 3: I had also been studying IBM, which was a wonderful company,

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Speaker 3: and I've realized, you know, IBM has got an ability

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Speaker 3: to generate its own growth because it is creating one

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Speaker 3: after another advancement in computing power, and they've got a

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Speaker 3: terrific organization behind it, and they are able to create

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Speaker 3: their own growth. IBM is a true growth company. DuPont

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Speaker 3: needs to invent something that other people will really want,

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Speaker 3: and it has to be something that's really new, and

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Speaker 3: then they get patent protection for a certain period of time,

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Speaker 3: and then they lose the patent protection because it's completed.

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Speaker 3: They've got a different situation. Both companies were selling at

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Speaker 3: thirty thirty two times earnings. One company I thought was

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Speaker 3: sure to continue growing and the other I wasn't so sure.

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Speaker 3: So I got permission to go down to Wilmington, Delaware,

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Speaker 3: and for three days I had nothing but one interview

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Speaker 3: after another after another, where the senior executive of the

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Speaker 3: DuPont organization, and they were very candid, and they told

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Speaker 3: me about their problems. They told me about their opportunities.

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Speaker 3: They told me about their financial policies. Their first level

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Speaker 3: financial policies were that they would always pay out half

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Speaker 3: their earnings and dividends the long established and that was

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Speaker 3: the way they did things. The second thing is they

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Speaker 3: had a major commitment to nylon, but nylon was no

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Speaker 3: longer patent protected, and so the profit margins of nylon

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Speaker 3: were going to come down, for sure, and come down

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Speaker 3: rather rapidly because competition was building up pretty quickly. They

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Speaker 3: hoped to build one terrific business in a leather substitute

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Speaker 3: called Corefam. But as I talked to the executives, they

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Speaker 3: talk to me about we're having difficulty getting people to

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Speaker 3: use core fam. We're getting people who make shoes to

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Speaker 3: think about using core Fam. We can't get sales outside

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Speaker 3: the United States to really get going, and we're having

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Speaker 3: a difficult time getting sales inside the United States. And

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Speaker 3: candidly it doesn't look like this is going to turn

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Speaker 3: out to be the bonanza we had all thought it

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Speaker 3: was going to be just a year or so ago. Well,

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Speaker 3: it doesn't take a genius, then it doesn't take a

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Speaker 3: very experienced person. And I was not a genius, and

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Speaker 3: I was not an experienced person, but I could see

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Speaker 3: the handwriting. Wait a minute. If you only reinvest half

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Speaker 3: your earnings each year and your major business is going

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Speaker 3: to be more and more commoditized, and your major new

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Speaker 3: business is not taking off, you got a real problem here,

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Speaker 3: and you're gonna have a tough time keeping up the

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Speaker 3: kind of growth that would justify selling for thirty plus

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Speaker 3: times earnings, whereas IBM was guaranteed to be virtually guaranteed

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Speaker 3: to be able to do that because they didn't have

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Speaker 3: very much the way of competition, and they really knew

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Speaker 3: what they were doing, and they kept cranking it out.

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Speaker 3: So what do you do? I came back and said,

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Speaker 3: I know that the family, the Rockefeller family, has many

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Speaker 3: friends in the DuPont organization, but they also have many

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Speaker 3: friends in the Watson family of IBM. I think it

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Speaker 3: would be a great thing if we would sell off

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Speaker 3: the holdings in DuPont and use the money to buy

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Speaker 3: into IBM, go out of one family friends into another

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Speaker 3: family friends. They would all understand it, and that was

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Speaker 3: what was done, and of course it involved a substantial

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Speaker 3: amount of ownership being shifted. And I've always thought to myself, Wow,

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Speaker 3: in that one specific recommendation, I earned my cape for

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Speaker 3: several years.

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Speaker 2: Huh. Really interesting, And it's fascinating because that's what was

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Speaker 2: being done in every institutional investor and every endowment. People

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Speaker 2: were making active choices.

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Speaker 3: But they also were making lots of mistakes. Right if

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Speaker 3: you looked at what happened in the two years after

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Speaker 3: my recommendation, IBM doubled and DuPont almost got cut in half.

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Speaker 2: Wow, So that worked out really well. So it's kind

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Speaker 2: of fascinating that you've evolved into really thinking about indexing

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Speaker 2: because when you were chairman of the Yale Endowment Investment Committee,

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Speaker 2: David Swinson was famously the creator of the Yale model,

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Speaker 2: and he had a lot of focus on private investment,

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Speaker 2: on alternatives, on venture capital, hedge funds, as well as commodities.

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Speaker 2: What made that era so different where those investments were

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Speaker 2: so attractive then and apparently less attractive to you today.

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Speaker 3: First, you have to understand that David Swinson was a

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Speaker 3: remarkably talented guy. He was the best PhD student that

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Speaker 3: Jim Tobin Nobel Prize winner ever had. He was the

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Speaker 3: first person to do an interest rate swamp, which is

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Speaker 3: the first derivative transaction that took place in this country

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Speaker 3: between IBM and the World Bank, which just show you

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Speaker 3: everybody had told him you'll never be able to do that, David.

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Speaker 3: So we're talking about a very unusual guy, and he

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Speaker 3: was creative and disciplined in a remarkable combination. And he

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Speaker 3: was the first person of size to get involved in

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Speaker 3: a series of different types of investing, and then he

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Speaker 3: very carefully chose the very best people in each of

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Speaker 3: those different types. One day I was thinking, you know,

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Speaker 3: he's really done some very creative work. I wonder what's

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Speaker 3: his average length of relationship because the average length of

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Speaker 3: relationship with most institutions was somewhere between two and a

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Speaker 3: half and three and a half years. High turnover of

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Speaker 3: managers the calculation was fourteen years on average, and they

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Speaker 3: were still running, so it'd probably be something like twenty

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Speaker 3: years of typical relationship duration. Many of these managers when

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Speaker 3: they were just getting started. So it's the most dicey

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Speaker 3: period in any investment organization. Very very unusual and creative.

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Speaker 3: Guy said to me after he'd been doing this for

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Speaker 3: quite a long time. You know the nature of creativity

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Speaker 3: payoff is getting less and less and less because of

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Speaker 3: everybody else is doing what I've been doing. It's not

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Speaker 3: as rewarding as it used to be. And because I've

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Speaker 3: been choosing managers and other people are trying to get

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Speaker 3: into those same managers, they're not as differentiated as they

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Speaker 3: used to be. The rate of return magnitude that I

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Speaker 3: have been able to accomplish ten years ago, fifteen years ago,

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Speaker 3: I'm not going to be able to do in ten

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Speaker 3: or fifteen years into the future. And I think he

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Speaker 3: was right.

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Speaker 2: Huh really interesting. So how do you end up from

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Speaker 2: going from the Yell Endowment to the Vanguard Board of Directors?

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Speaker 2: Tell us where that relationship.

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Speaker 3: Came completely different. Each one was doing what they were

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Speaker 3: capable of doing really well. Vanguard was focused on minimizing

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Speaker 3: cost and they really systematic at it. Different orientation. The

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Speaker 3: orientation of the Yale Endowment was to find managers and

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Speaker 3: investment opportunities that were so different that you might get

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Speaker 3: a higher rate of return. So attacking to the reaching

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Speaker 3: for higher and higher rate of return, Vanguard was reaching

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Speaker 3: for lower and lower cost of executing a plain vanilla

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Speaker 3: proposition index funds Canes once had somebody say, you seem

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Speaker 3: to have changed your mind. He said, yes, when the

404
00:25:03,640 --> 00:25:07,000
Speaker 3: facts changed, I do change my judgment. What do you

405
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Speaker 3: do when the facts changed? And the reality is we've

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Speaker 3: been looking at a market that has changed and changed

407
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Speaker 3: and changed and changed, and the right way to deal

408
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Speaker 3: with that market has therefore changed and changed and changed

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Speaker 3: and changed. Then what you could have done in the

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Speaker 3: early nineteen sixties you can't do today. And what you

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Speaker 3: should have done in the early sixties was go find

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Speaker 3: an active manager who could knock the socks off at

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Speaker 3: the competition. But it just the competition is so damned

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Speaker 3: good today that there isn't a manager that can knock

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Speaker 3: the sox off.

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Speaker 2: And a quote from your book is the grim reality

417
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Speaker 2: is clear active investing is not able to keep up with,

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Speaker 2: let alone outperform the market index. That's the biggest change

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Speaker 2: in the past fifty years is that it's become pretty

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Speaker 2: obvious that the deck is to be in favor of

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Speaker 2: active managers. Now it seems to be very much stacked against.

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Speaker 3: Them because they're so very good. It's ironic, ironic, ironic.

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Speaker 2: The paradox of skill. Yep, huh, really fascinating. You reference

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Speaker 2: some really interesting research in the book. One of the

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Speaker 2: things I found fascinating is that research from morning Star

426
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Speaker 2: and Dalbar show that not only do investors tend to

427
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Speaker 2: underperform the market, they underperform their own investments.

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Speaker 3: Tell us about that, because we're human beings, as any

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Speaker 3: behavioral economists would point out to you, we have certain beliefs,

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Speaker 3: and those beliefs tend to be very very optimistic about

431
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Speaker 3: our skills, and we think we can help ourselves get

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Speaker 3: better results, or at least to minimize the negative experiences.

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Speaker 3: And the reality is that over time just doesn't work

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Speaker 3: out to be true. The average investor in an average

435
00:27:07,880 --> 00:27:15,040
Speaker 3: year loses two full percent by making mistakes. With the

436
00:27:15,040 --> 00:27:19,399
Speaker 3: best of intentions, trying to do something really good for themselves,

437
00:27:19,680 --> 00:27:22,560
Speaker 3: they make mistakes that are costly and that cost you.

438
00:27:22,680 --> 00:27:25,679
Speaker 3: Think about it, if you think the market's going to

439
00:27:25,720 --> 00:27:30,359
Speaker 3: return something like six or seven percent, you lose two percent,

440
00:27:30,480 --> 00:27:33,320
Speaker 3: maybe two and a half, maybe three for inflation, call

441
00:27:33,359 --> 00:27:36,560
Speaker 3: it two and a half. Whoop, that's something down. Then

442
00:27:36,640 --> 00:27:40,399
Speaker 3: you've got fees and costs. Jeez, who is add on

443
00:27:40,520 --> 00:27:44,000
Speaker 3: to that? If you did add on another two percent

444
00:27:44,080 --> 00:27:49,800
Speaker 3: that you've made mistakes, you're talking about a major transformation

445
00:27:49,960 --> 00:27:53,120
Speaker 3: to the negative of what could have been your rate

446
00:27:53,119 --> 00:27:53,600
Speaker 3: of return.

447
00:27:54,200 --> 00:27:57,960
Speaker 2: Let's put some numbers, some meat on that bone. You

448
00:27:58,040 --> 00:28:01,480
Speaker 2: cite a UC Davis study that looked at sixty six

449
00:28:01,560 --> 00:28:06,560
Speaker 2: thousand investor accounts from nineteen ninety one to nineteen ninety six.

450
00:28:07,119 --> 00:28:11,320
Speaker 2: Over the that period, the market gained just under eighteen

451
00:28:11,440 --> 00:28:15,760
Speaker 2: percent a year, seventeen point nine percent a year. Investors

452
00:28:15,800 --> 00:28:20,000
Speaker 2: had underperformed by six point five percent a year. They

453
00:28:20,040 --> 00:28:25,000
Speaker 2: gave up a third of gains through mistakes, taxes, and costs.

454
00:28:25,680 --> 00:28:27,840
Speaker 2: And then Dalbar does the same thing. That's where the

455
00:28:27,880 --> 00:28:31,080
Speaker 2: two to three percent in a low return environment is.

456
00:28:31,440 --> 00:28:35,600
Speaker 2: So how should investors think about this tendency to do

457
00:28:35,680 --> 00:28:37,720
Speaker 2: worse than what the market does well?

458
00:28:38,200 --> 00:28:43,240
Speaker 3: In my view, and it's part of the rethinking investing

459
00:28:44,240 --> 00:28:48,280
Speaker 3: concept of the book is if you find a problem,

460
00:28:48,640 --> 00:28:54,000
Speaker 3: it's a repetitive problem. In this sure is attack the

461
00:28:54,040 --> 00:28:57,560
Speaker 3: problem and try to reduce it. So what could you

462
00:28:57,640 --> 00:29:01,760
Speaker 3: do to reduce the cost of behavioral economics, and the

463
00:29:01,800 --> 00:29:08,200
Speaker 3: answer is index or ETF. And the reason why you

464
00:29:08,280 --> 00:29:11,959
Speaker 3: would index where ETF would help is because it's boring.

465
00:29:12,840 --> 00:29:14,880
Speaker 3: You know, if you own an index fund, you don't

466
00:29:14,880 --> 00:29:18,760
Speaker 3: get excited about what happened in the market is anything

467
00:29:18,960 --> 00:29:20,840
Speaker 3: like you would get excited about it if you had

468
00:29:20,920 --> 00:29:24,120
Speaker 3: just had five stocks, or if you had two or

469
00:29:24,160 --> 00:29:26,680
Speaker 3: three mutual funds and you were tracking those mutual funds

470
00:29:26,880 --> 00:29:30,080
Speaker 3: because they change more. The market as a whole, it

471
00:29:30,200 --> 00:29:33,320
Speaker 3: kind of goes along in its own lumbering way, a slow,

472
00:29:33,480 --> 00:29:38,280
Speaker 3: wide river of flow over time, and you, yeah, there's

473
00:29:38,320 --> 00:29:41,400
Speaker 3: nothing to get excited about, so you leave it alone.

474
00:29:42,280 --> 00:29:45,040
Speaker 3: You leave it alone, and you leave it alone. And

475
00:29:45,120 --> 00:29:47,480
Speaker 3: it's a little bit like when your mother said, don't

476
00:29:47,480 --> 00:29:50,720
Speaker 3: pick it that scab, let it heal by itself. Well,

477
00:29:50,760 --> 00:29:53,520
Speaker 3: but mom, it itches. You'd just be a little bit

478
00:29:54,240 --> 00:29:58,080
Speaker 3: tolerant and don't itch it or don't scratch it. Then

479
00:29:58,280 --> 00:30:01,719
Speaker 3: it'll heal faster. And sure enough, mother was right. In

480
00:30:01,760 --> 00:30:06,280
Speaker 3: the same way, if you index, you won't be excited

481
00:30:06,320 --> 00:30:09,040
Speaker 3: by the same things that other people get excited by,

482
00:30:09,360 --> 00:30:12,080
Speaker 3: and you just sort of steadily flow through and have

483
00:30:12,160 --> 00:30:14,560
Speaker 3: all the good results come your way. That's it.

484
00:30:14,840 --> 00:30:18,640
Speaker 2: Huh. Really interesting. So, first of all, I have to

485
00:30:18,680 --> 00:30:23,560
Speaker 2: tell you I love this book. It's totally digestible. It's

486
00:30:23,600 --> 00:30:27,040
Speaker 2: barely one hundred pages. I literally read it over a

487
00:30:27,080 --> 00:30:32,400
Speaker 2: cup of tea. And you've published twenty books before this. What,

488
00:30:32,600 --> 00:30:35,960
Speaker 2: first of all, what led to this very short format?

489
00:30:35,520 --> 00:30:38,280
Speaker 2: Why go so brief? I'm curious.

490
00:30:39,680 --> 00:30:44,160
Speaker 3: It's really an interesting experience for me. I love helping

491
00:30:44,200 --> 00:30:46,719
Speaker 3: people with investing, and I keep trying to think of

492
00:30:46,760 --> 00:30:49,200
Speaker 3: how can I be helpful and what are the lessons

493
00:30:49,200 --> 00:30:52,960
Speaker 3: that my children, grandchildren ought to learn, What are the

494
00:30:53,000 --> 00:30:57,880
Speaker 3: lessons that my favorite institutions ought to learn, my local church,

495
00:30:58,080 --> 00:31:01,440
Speaker 3: whatever it is now, what could I offer that would

496
00:31:01,480 --> 00:31:04,200
Speaker 3: be helpful? And I thought to myself, you know, the

497
00:31:04,240 --> 00:31:08,280
Speaker 3: world has changed a lot, and some rethinking of what's

498
00:31:08,320 --> 00:31:10,800
Speaker 3: the right way to invest might turn out to be

499
00:31:10,840 --> 00:31:15,840
Speaker 3: a good idea. I should try penciling that out. And

500
00:31:17,000 --> 00:31:20,240
Speaker 3: the more I've tried to scratch it out for the

501
00:31:20,440 --> 00:31:24,080
Speaker 3: Church Investment Committee, I realized this is something that could

502
00:31:24,200 --> 00:31:27,160
Speaker 3: easily be used by virtually everybody else. There are some

503
00:31:27,360 --> 00:31:30,360
Speaker 3: major changes that have taken place, and the world of

504
00:31:30,400 --> 00:31:33,760
Speaker 3: investing is very different than it used to be, and

505
00:31:33,800 --> 00:31:36,800
Speaker 3: the right way to deal with the world is really

506
00:31:36,840 --> 00:31:40,400
Speaker 3: different than it used to be. And I owe it

507
00:31:40,440 --> 00:31:44,080
Speaker 3: to other people because I've been blessed with this wonderful

508
00:31:44,120 --> 00:31:47,160
Speaker 3: privilege of being able to learn from all kinds of

509
00:31:47,200 --> 00:31:50,480
Speaker 3: people what's going on in the investment world and how

510
00:31:50,560 --> 00:31:53,240
Speaker 3: to deal with it and add it all together. I

511
00:31:53,280 --> 00:31:58,960
Speaker 3: should put this together in one last short book. And

512
00:31:59,000 --> 00:32:02,200
Speaker 3: my wife laughed, you never get this down to only

513
00:32:02,200 --> 00:32:04,720
Speaker 3: one hundred pages. I think that's all it takes.

514
00:32:04,760 --> 00:32:07,400
Speaker 2: Yeah, pretty close. I think it's like one hundred and something,

515
00:32:07,440 --> 00:32:09,240
Speaker 2: one hundred and two, one hundred and four.

516
00:32:10,120 --> 00:32:12,080
Speaker 3: And one of those pages is blank, and that there

517
00:32:12,080 --> 00:32:13,920
Speaker 3: are several pages that are half blanks of.

518
00:32:14,400 --> 00:32:17,920
Speaker 2: Well, it's barely one hundred pages. So I love this

519
00:32:18,040 --> 00:32:21,840
Speaker 2: quote from the book. Over the twenty years ending in

520
00:32:22,000 --> 00:32:26,760
Speaker 2: mid twenty twenty three, investing in a broad based US

521
00:32:26,880 --> 00:32:31,560
Speaker 2: total market equity fund produced net returns better than more

522
00:32:31,600 --> 00:32:35,560
Speaker 2: than ninety percent of professionally managed stock funds that promise

523
00:32:35,640 --> 00:32:39,719
Speaker 2: to beat the market. Really, that's the heart of the

524
00:32:39,720 --> 00:32:43,680
Speaker 2: book is that if you invest for twenty plus years,

525
00:32:44,920 --> 00:32:47,880
Speaker 2: passive indexing and we'll talk about passive the phrase in

526
00:32:47,920 --> 00:32:52,440
Speaker 2: a minute, but basic indexing ends up in the top decile.

527
00:32:52,840 --> 00:32:56,040
Speaker 3: Yeah, And you're talking about twenty years, and many people say,

528
00:32:56,080 --> 00:32:58,640
Speaker 3: oh gee, that's a long time. Wait a minute, Wait

529
00:32:58,640 --> 00:33:02,200
Speaker 3: a minute, wait a minute. You start investing in your twenties,

530
00:33:02,880 --> 00:33:06,640
Speaker 3: you'll still be investing in your eighties. That's a sixty

531
00:33:06,760 --> 00:33:10,720
Speaker 3: year horizon. And if you're lucky enough to do well enough,

532
00:33:11,040 --> 00:33:14,040
Speaker 3: you might leave some to your children and grandchildren. So

533
00:33:14,080 --> 00:33:15,960
Speaker 3: it might not be sixty years, it might be eighty

534
00:33:15,960 --> 00:33:19,440
Speaker 3: one hundred hundred and twenty years. Try to think about

535
00:33:20,160 --> 00:33:23,840
Speaker 3: that long term, because that is a marvelous privilege to

536
00:33:23,880 --> 00:33:26,160
Speaker 3: have that long a time to be able to be

537
00:33:26,200 --> 00:33:26,840
Speaker 3: an investor.

538
00:33:27,280 --> 00:33:30,080
Speaker 2: And you cite the S and P Research Group SPIVA,

539
00:33:30,720 --> 00:33:34,560
Speaker 2: the average annual return of broad indexes was one point

540
00:33:34,640 --> 00:33:39,240
Speaker 2: eight percentage points better than the average actively managed funds.

541
00:33:39,800 --> 00:33:43,479
Speaker 2: That's nearly two percent compounding over time. That really adds up,

542
00:33:43,520 --> 00:33:44,040
Speaker 2: doesn't it.

543
00:33:44,040 --> 00:33:47,600
Speaker 3: It sure does, And compounding is really important for all

544
00:33:47,680 --> 00:33:52,080
Speaker 3: of us to recognize. Some people call it snowball, and

545
00:33:52,160 --> 00:33:55,880
Speaker 3: I think that's perfectly fine, because as you roll a snowball,

546
00:33:55,960 --> 00:33:59,080
Speaker 3: every time you roll it over, it gets much thicker,

547
00:33:59,560 --> 00:34:02,000
Speaker 3: not just a little bit, much thicker, and you do

548
00:34:02,120 --> 00:34:07,400
Speaker 3: compounding it one two four eight, sixteen thirty two sixty four,

549
00:34:07,560 --> 00:34:10,920
Speaker 3: one hundred and twenty eight. Those last rounds of compounding

550
00:34:11,200 --> 00:34:15,719
Speaker 3: are really important. So for goodness sake, think about how

551
00:34:15,760 --> 00:34:18,839
Speaker 3: can you get there so you'll have those compoundings work

552
00:34:18,920 --> 00:34:19,239
Speaker 3: for you.

553
00:34:20,840 --> 00:34:24,240
Speaker 2: So we mentioned the phrase passive, which has.

554
00:34:24,239 --> 00:34:26,480
Speaker 3: Come oh please don't do that, which comes.

555
00:34:26,280 --> 00:34:30,919
Speaker 2: With some baggage. But you describe what a historical anomaly

556
00:34:31,600 --> 00:34:34,719
Speaker 2: the phrase passive? Is it? Really? Why don't I let

557
00:34:34,760 --> 00:34:38,320
Speaker 2: you explain? It really just comes from an odd legal usage.

558
00:34:38,160 --> 00:34:40,439
Speaker 2: To tell us a little bit about where the word

559
00:34:40,560 --> 00:34:43,520
Speaker 2: passive came to be when it came glad.

560
00:34:43,280 --> 00:34:47,120
Speaker 3: To indexing is to me the right word to use.

561
00:34:48,160 --> 00:34:51,760
Speaker 3: Passive has such a negative connotation. I don't know about you, Berry,

562
00:34:51,800 --> 00:34:54,800
Speaker 3: but I wouldn't want anybody to describe me as passive.

563
00:34:55,400 --> 00:34:58,279
Speaker 3: Now I'm going to vote for so and so as

564
00:34:58,320 --> 00:35:00,480
Speaker 3: president of the United States, It's not going to be because

565
00:35:00,520 --> 00:35:05,640
Speaker 3: he's passive. Passive is a negative term. However, if you're

566
00:35:05,880 --> 00:35:13,240
Speaker 3: an electrical engineer, it's not a pejorative. There's two parts,

567
00:35:13,280 --> 00:35:16,440
Speaker 3: two prongs or three prongs on the end of a wire,

568
00:35:17,239 --> 00:35:21,120
Speaker 3: and there's a wall socket that's got either two holes

569
00:35:21,200 --> 00:35:24,560
Speaker 3: or three holes, depending on which electric system is. The

570
00:35:24,600 --> 00:35:28,200
Speaker 3: one that has the prongs is called the active part.

571
00:35:28,480 --> 00:35:31,080
Speaker 3: The one that has the holes is called the passive part.

572
00:35:31,520 --> 00:35:35,640
Speaker 3: And because indexing was created by a group of electrical

573
00:35:35,680 --> 00:35:39,560
Speaker 3: engineers and mechanical engineers, they just used what they thought

574
00:35:39,719 --> 00:35:43,239
Speaker 3: was the sensible terminology, and then other people who had

575
00:35:43,239 --> 00:35:46,600
Speaker 3: not realized where it came from, saw it as being

576
00:35:46,640 --> 00:35:48,919
Speaker 3: a negative. I don't want to be passive. I want

577
00:35:48,920 --> 00:35:51,120
Speaker 3: to have an active manager who go out there and

578
00:35:51,160 --> 00:35:55,600
Speaker 3: really do something for me. That is a complete misunderstanding,

579
00:35:55,880 --> 00:35:59,879
Speaker 3: and it really did a terrible harm for indexing vest

580
00:36:00,280 --> 00:36:01,440
Speaker 3: to be called passive.

581
00:36:01,760 --> 00:36:04,160
Speaker 2: Let's talk about some of the other things that index

582
00:36:04,200 --> 00:36:07,400
Speaker 2: investing has been called. And I put together a short

583
00:36:07,440 --> 00:36:11,919
Speaker 2: list because there's been so much pushback to indexing. It's

584
00:36:11,960 --> 00:36:19,000
Speaker 2: been called Marxist, communist, socialist. It's devouring capitalism, it's a mania,

585
00:36:19,600 --> 00:36:24,960
Speaker 2: it's creating frightening risk for markets. It's lobottomized investing, a

586
00:36:25,080 --> 00:36:29,520
Speaker 2: danger to the economy, a systemic risk, a bubble waiting

587
00:36:29,560 --> 00:36:34,120
Speaker 2: to burst. It's terrible for our economy. Why so much

588
00:36:34,120 --> 00:36:35,719
Speaker 2: hate for indexing.

589
00:36:35,200 --> 00:36:37,239
Speaker 3: Well, if you were an active manager and you were

590
00:36:37,320 --> 00:36:40,160
Speaker 3: life threatened by something that was a better product to

591
00:36:40,239 --> 00:36:43,479
Speaker 3: the lower cost, you might have some negative commentary too.

592
00:36:44,440 --> 00:36:47,360
Speaker 2: It's just as simple as their livelihood is dependent on

593
00:36:48,280 --> 00:36:50,880
Speaker 2: flows into active and that's where all the animals.

594
00:36:50,880 --> 00:36:54,760
Speaker 3: And it's partly livelihood, it's partly religious faith, it's partly

595
00:36:54,880 --> 00:36:58,840
Speaker 3: cultural conviction, it's partly what I've done for most of

596
00:36:58,880 --> 00:37:00,880
Speaker 3: these people would say, have been doing it for twenty

597
00:37:00,920 --> 00:37:02,840
Speaker 3: five years, and I want to keep doing it for

598
00:37:02,880 --> 00:37:05,360
Speaker 3: twenty five years. Oh, by the way, I get paid

599
00:37:05,400 --> 00:37:06,200
Speaker 3: really well to do.

600
00:37:06,160 --> 00:37:11,040
Speaker 2: It, and I liked that job to continue. Sure you

601
00:37:11,160 --> 00:37:17,160
Speaker 2: mentioned we talked earlier about the temptation that we're surrounded

602
00:37:17,200 --> 00:37:20,640
Speaker 2: by temptations to be wrong. I want to talk about

603
00:37:20,680 --> 00:37:24,600
Speaker 2: some data in the book about what happens if you're

604
00:37:24,680 --> 00:37:28,000
Speaker 2: wrong and out of the market during some of the

605
00:37:28,040 --> 00:37:33,000
Speaker 2: best days. And the data point you use was ten

606
00:37:33,120 --> 00:37:39,080
Speaker 2: thousand trading days over twenty six years on average, that's

607
00:37:39,120 --> 00:37:43,040
Speaker 2: about eleven point two percent returns. So if you have

608
00:37:43,320 --> 00:37:47,319
Speaker 2: money in broad market indices over twenty six years, ten

609
00:37:47,400 --> 00:37:51,440
Speaker 2: thousand trading sections, you're averaging eleven point two percent annually.

610
00:37:51,880 --> 00:37:55,480
Speaker 2: If you miss only the ten best days, not a year,

611
00:37:55,880 --> 00:37:59,359
Speaker 2: but over those ten thousand trading days, that eleven point

612
00:37:59,400 --> 00:38:04,280
Speaker 2: two percent drops to nine point two percent twenty days

613
00:38:05,360 --> 00:38:07,919
Speaker 2: down seven point to seven point seven percent a year,

614
00:38:08,120 --> 00:38:12,319
Speaker 2: and if you miss the thirty best days out of

615
00:38:12,400 --> 00:38:16,160
Speaker 2: ten thousand, the return goes from eleven point two to

616
00:38:16,239 --> 00:38:19,640
Speaker 2: six point four, almost a five hundred bases point drop.

617
00:38:20,280 --> 00:38:21,919
Speaker 2: That's amazing. Tell us about that.

618
00:38:22,800 --> 00:38:26,600
Speaker 3: Oh, First of all, you have to recognize when you

619
00:38:26,680 --> 00:38:30,160
Speaker 3: select out the most extreme days, it does have a

620
00:38:30,200 --> 00:38:33,440
Speaker 3: really big impact. The second thing is when do those

621
00:38:33,520 --> 00:38:38,760
Speaker 3: days come? And the best days usually come shortly after

622
00:38:38,840 --> 00:38:43,040
Speaker 3: the worst days, the bounce, the hey, wait a minute,

623
00:38:43,080 --> 00:38:45,839
Speaker 3: this market is not as bad as everybody's saying. It

624
00:38:45,920 --> 00:38:49,359
Speaker 3: really does have a terrific opportunity, and that's when the

625
00:38:49,400 --> 00:38:55,080
Speaker 3: best days typically come. So the time that we all

626
00:38:55,120 --> 00:38:59,719
Speaker 3: get frightened and all of us get unnervou is the

627
00:39:00,360 --> 00:39:02,800
Speaker 3: is the most wrong time to be taking action.

628
00:39:03,880 --> 00:39:08,920
Speaker 2: And the statistical basis is those ten days are only

629
00:39:09,200 --> 00:39:13,040
Speaker 2: zero point one percent of total training sessions, but you're

630
00:39:13,080 --> 00:39:18,440
Speaker 2: giving up one fifth of the games. That's an amazing asymmetry.

631
00:39:18,320 --> 00:39:20,320
Speaker 3: And it's a hell of a great lesson to learn.

632
00:39:20,960 --> 00:39:24,080
Speaker 3: Hang in there, steady aety does pay off.

633
00:39:25,160 --> 00:39:28,440
Speaker 2: Another quote from the book, why should investors care about

634
00:39:28,440 --> 00:39:32,240
Speaker 2: the day to day or even month to month fluctuations

635
00:39:32,360 --> 00:39:35,319
Speaker 2: in prices if they have no plans to sell any

636
00:39:35,360 --> 00:39:39,239
Speaker 2: time sooned. That sounds so perfectly obvious when you hear it.

637
00:39:39,960 --> 00:39:42,040
Speaker 2: Why are people so drawn into the noise?

638
00:39:42,200 --> 00:39:44,880
Speaker 3: Well, when I advise people on investing, I always start

639
00:39:44,920 --> 00:39:48,680
Speaker 3: with what do you most want to accomplish? And then

640
00:39:48,719 --> 00:39:51,680
Speaker 3: the second question is when do you plan to sell

641
00:39:53,200 --> 00:39:57,680
Speaker 3: your securities? And most people say, well, what do you

642
00:39:57,719 --> 00:40:01,200
Speaker 3: mean when do I plan to sell? Well, when are

643
00:40:01,200 --> 00:40:03,880
Speaker 3: you most likely to say? I need money out of

644
00:40:03,920 --> 00:40:11,360
Speaker 3: my securities? Investment for life spending, probably in retirement. Oh yeah,

645
00:40:11,600 --> 00:40:14,120
Speaker 3: And then they'll give you a date, and then you say,

646
00:40:14,160 --> 00:40:17,080
Speaker 3: and how far out into the future is that? And

647
00:40:17,120 --> 00:40:20,600
Speaker 3: then really want to be difficult for somebody to say, Okay,

648
00:40:21,200 --> 00:40:24,239
Speaker 3: it's forty three years out into the future. Let's go

649
00:40:24,400 --> 00:40:28,520
Speaker 3: back forty three years. Tell me what you think was

650
00:40:28,560 --> 00:40:33,440
Speaker 3: happening forty three years ago. Today's date, forty three years ago.

651
00:40:33,600 --> 00:40:34,320
Speaker 2: I have no idea.

652
00:40:34,360 --> 00:40:37,960
Speaker 3: Why do you ask? Well? Asking because you have no idea,

653
00:40:38,239 --> 00:40:40,719
Speaker 3: and you have no idea forty three years out into

654
00:40:40,719 --> 00:40:43,440
Speaker 3: the future. And the reason for that is because you

655
00:40:43,440 --> 00:40:47,360
Speaker 3: don't care. It's the long term trend that you care about,

656
00:40:47,520 --> 00:40:50,359
Speaker 3: and you care greatly about that, but you don't care

657
00:40:50,360 --> 00:40:52,600
Speaker 3: about the day to day to day fluctuations.

658
00:40:53,160 --> 00:40:56,680
Speaker 2: So you sum up the book by pointing out every

659
00:40:56,719 --> 00:41:03,799
Speaker 2: investor today has three great gifts time compounding and ETF

660
00:41:03,920 --> 00:41:04,719
Speaker 2: and indexing.

661
00:41:05,120 --> 00:41:11,959
Speaker 3: Discuss time to be able to have the experience of compounding,

662
00:41:12,480 --> 00:41:20,040
Speaker 3: where you each compounding round you double what you had. Boy,

663
00:41:20,080 --> 00:41:22,040
Speaker 3: does it really pay off to be in it for

664
00:41:22,080 --> 00:41:26,200
Speaker 3: the long term and have saved early enough so that

665
00:41:26,280 --> 00:41:32,040
Speaker 3: you compound a larger amount. But that leap from one

666
00:41:32,120 --> 00:41:34,279
Speaker 3: to two it's not very exciting. Two to four is

667
00:41:34,320 --> 00:41:37,399
Speaker 3: not much, Four to eight is not really all that much,

668
00:41:37,800 --> 00:41:41,040
Speaker 3: Eight to sixteen starts to attract your attention. Sixteen to

669
00:41:41,080 --> 00:41:44,319
Speaker 3: thirty two that's really something. Thirty two to sixty four

670
00:41:44,600 --> 00:41:47,319
Speaker 3: and to one hundred and twenty eight, Holy smokes, I

671
00:41:47,400 --> 00:41:50,759
Speaker 3: want that last doubling. That's really a payoff. Only way

672
00:41:50,800 --> 00:41:54,480
Speaker 3: you get there is start early and stay on course

673
00:41:54,880 --> 00:41:57,040
Speaker 3: compounding away as best you can.

674
00:41:58,040 --> 00:42:00,879
Speaker 2: You know, people have points it out, and I think

675
00:42:00,920 --> 00:42:04,560
Speaker 2: you reference this in the book that as successful as

676
00:42:04,600 --> 00:42:09,080
Speaker 2: Warren Buffett has been over his whole career because of

677
00:42:09,320 --> 00:42:12,359
Speaker 2: the doubling. It depends on the rule of seventy two.

678
00:42:12,480 --> 00:42:16,000
Speaker 2: But let's say every seven or eight years. Half of

679
00:42:16,080 --> 00:42:19,160
Speaker 2: your gains have come in the most recent seven and

680
00:42:19,200 --> 00:42:23,160
Speaker 2: a half eight year era, and Warren's now in his nineties,

681
00:42:23,360 --> 00:42:26,880
Speaker 2: and the vast majority of his wealth have only happened

682
00:42:26,920 --> 00:42:29,600
Speaker 2: in the past ten fifteen years. It's kind of fascinating.

683
00:42:30,680 --> 00:42:36,200
Speaker 3: Well, he's a brilliant and wonderful human being, and all

684
00:42:36,280 --> 00:42:40,200
Speaker 3: of us can learn great lessons from paying attention to

685
00:42:40,239 --> 00:42:44,080
Speaker 3: what Warren says or has said in his annual meetings

686
00:42:44,120 --> 00:42:48,439
Speaker 3: are a treasure chest of opportunities to learn. He did

687
00:42:48,480 --> 00:42:52,160
Speaker 3: start as a teenager, not in his mid twenties, but

688
00:42:52,200 --> 00:42:56,240
Speaker 3: in his early teens, and then he is not stopping

689
00:42:56,280 --> 00:42:59,719
Speaker 3: at sixty five. He's roaring right past that. And when

690
00:42:59,760 --> 00:43:02,759
Speaker 3: you bolt on those extra years, it gives him a

691
00:43:02,880 --> 00:43:05,920
Speaker 3: much larger playing field in which to double and double

692
00:43:05,960 --> 00:43:08,920
Speaker 3: and redouble and redouble. And all of us ought to

693
00:43:08,960 --> 00:43:12,640
Speaker 3: pay attention to that one most powerful lesson. If you've

694
00:43:12,680 --> 00:43:17,880
Speaker 3: got the time, the impact of compounding really is terrific.

695
00:43:18,080 --> 00:43:20,440
Speaker 3: And the only way you get to be have the

696
00:43:20,560 --> 00:43:24,320
Speaker 3: time is to do it yourself, save enough, early enough,

697
00:43:24,600 --> 00:43:27,400
Speaker 3: and stay with it long enough to let the compounding

698
00:43:27,440 --> 00:43:31,319
Speaker 3: take place. But it's inevitable power of compounding is just

699
00:43:31,480 --> 00:43:33,920
Speaker 3: wonderful to have on your side.

700
00:43:34,080 --> 00:43:36,520
Speaker 2: So three of the things I want to talk about

701
00:43:36,800 --> 00:43:42,480
Speaker 2: from the book. First, as alpha became harder and harder

702
00:43:42,480 --> 00:43:46,279
Speaker 2: to achieve, as it became more difficult to be very

703
00:43:46,320 --> 00:43:52,760
Speaker 2: good competition, the aspect of reducing costs, reducing fees, reducing

704
00:43:52,840 --> 00:43:59,000
Speaker 2: taxes became another way of generating better returns. Tell us

705
00:43:59,000 --> 00:44:02,799
Speaker 2: a little bit about what led you to that conclusion

706
00:44:03,000 --> 00:44:06,360
Speaker 2: and what firms like black Rock and Vanguard have done

707
00:44:06,920 --> 00:44:09,799
Speaker 2: to further that belief system.

708
00:44:10,000 --> 00:44:14,080
Speaker 3: Parents really candidly just been pay attention to what the

709
00:44:14,160 --> 00:44:18,160
Speaker 3: numbers say, and pay attention to the data, and the

710
00:44:18,239 --> 00:44:24,799
Speaker 3: data is so powerfully, consistently strong that active investing is

711
00:44:25,000 --> 00:44:29,120
Speaker 3: an exciting idea. And in the right time and circumstance

712
00:44:29,480 --> 00:44:33,759
Speaker 3: the nineteen sixties, it worked beautifully. But the circumstances now

713
00:44:33,880 --> 00:44:37,640
Speaker 3: are so different that it doesn't work beautifully. It works

714
00:44:37,719 --> 00:44:39,080
Speaker 3: candidly negatively.

715
00:44:40,840 --> 00:44:43,759
Speaker 2: Two other things I want to go over, what is

716
00:44:43,800 --> 00:44:49,200
Speaker 2: the concept of total financial portfolio, Meaning, when you're looking

717
00:44:49,239 --> 00:44:53,359
Speaker 2: at your allocation, you should include the present value of

718
00:44:53,400 --> 00:44:57,680
Speaker 2: your future social security payments and the equity value of

719
00:44:57,760 --> 00:45:01,719
Speaker 2: your home has sort of unlike and that should help

720
00:45:01,760 --> 00:45:05,960
Speaker 2: you shift your allocation a little away from bonds, a

721
00:45:05,960 --> 00:45:08,960
Speaker 2: little more into equities. Tell us about that now.

722
00:45:09,080 --> 00:45:11,520
Speaker 3: I think it's one of those ideas that once it

723
00:45:11,600 --> 00:45:14,680
Speaker 3: pops into your mind, you'll never walk away from it.

724
00:45:15,400 --> 00:45:18,040
Speaker 3: Most of us have no idea what the total value

725
00:45:18,160 --> 00:45:22,399
Speaker 3: of our future stream of payouts from Social Security are,

726
00:45:22,680 --> 00:45:26,319
Speaker 3: but you can do the calculation fairly simply. Most of

727
00:45:26,400 --> 00:45:30,720
Speaker 3: us would be really impressed if we've realized how much

728
00:45:30,920 --> 00:45:34,560
Speaker 3: is the real value of that future stream of payments

729
00:45:34,600 --> 00:45:37,560
Speaker 3: that are coming from the best credit in the world,

730
00:45:37,800 --> 00:45:42,720
Speaker 3: federal government, and that's inflation protected, so it's even better

731
00:45:42,800 --> 00:45:47,719
Speaker 3: than most people would imagine. That's the single most valuable

732
00:45:47,760 --> 00:45:51,279
Speaker 3: asset for most people. The second most valuable asset for

733
00:45:51,360 --> 00:45:53,839
Speaker 3: most people is the value of their home. And I

734
00:45:53,920 --> 00:45:56,279
Speaker 3: know people would say that first reactions, but I'm not

735
00:45:56,320 --> 00:45:57,960
Speaker 3: going to sell my home. I'm going to continue to

736
00:45:57,960 --> 00:46:02,800
Speaker 3: live there. Fine. True, But someday either your children or

737
00:46:02,840 --> 00:46:05,520
Speaker 3: your grandchildren will say, we don't really want to live

738
00:46:05,760 --> 00:46:08,359
Speaker 3: in that same house, so we're going to sell it.

739
00:46:08,520 --> 00:46:11,600
Speaker 3: So it does have an economic value, and it will

740
00:46:11,640 --> 00:46:14,799
Speaker 3: be realized at some point down the line. Take those

741
00:46:14,840 --> 00:46:19,040
Speaker 3: two and put them side by side with your securities

742
00:46:19,440 --> 00:46:22,560
Speaker 3: and most people would say, my god, I've got more

743
00:46:22,560 --> 00:46:25,320
Speaker 3: in the way of fixed income and fixed in bond

744
00:46:25,400 --> 00:46:29,799
Speaker 3: equivalents than I had ever imagined. I think I ought

745
00:46:29,840 --> 00:46:32,680
Speaker 3: to be careful in my securities part of the portfolio,

746
00:46:33,000 --> 00:46:37,520
Speaker 3: to rethink things and probably be substantially more committed to

747
00:46:37,600 --> 00:46:41,279
Speaker 3: equities in my securities portfolio because I've got these other

748
00:46:41,360 --> 00:46:44,440
Speaker 3: things that I was never counting on before, but now

749
00:46:44,480 --> 00:46:47,000
Speaker 3: that I've been told about it, I really want to

750
00:46:47,239 --> 00:46:50,280
Speaker 3: include that as my understanding to the total picture.

751
00:46:51,200 --> 00:46:54,759
Speaker 2: And I like the concept of outside the market decisions

752
00:46:54,880 --> 00:47:00,399
Speaker 2: versus inside the market decisions. Explain the difference between the two, well.

753
00:47:00,960 --> 00:47:05,279
Speaker 3: Outside market decisions have to do with what's changed in

754
00:47:05,320 --> 00:47:10,600
Speaker 3: your life, most obvious being when you retire, but sometimes

755
00:47:10,600 --> 00:47:14,200
Speaker 3: it's when you get a better job, higher pay, or

756
00:47:14,480 --> 00:47:18,760
Speaker 3: even you get a significant bonus because of the wonderful

757
00:47:18,760 --> 00:47:22,239
Speaker 3: achievement that you've had during the particular year, when your

758
00:47:22,360 --> 00:47:27,520
Speaker 3: circumstances get changed. Oh and getting married is another real change.

759
00:47:27,960 --> 00:47:31,799
Speaker 3: When the circumstances changed, you really ought to rethink your

760
00:47:31,960 --> 00:47:35,520
Speaker 3: investment program just to be sure that it's really right

761
00:47:35,600 --> 00:47:38,200
Speaker 3: for your present total picture.

762
00:47:38,760 --> 00:47:40,960
Speaker 2: Makes a lot of sense. I know I only have

763
00:47:41,040 --> 00:47:42,759
Speaker 2: you for a few more minutes, let me jump to

764
00:47:43,320 --> 00:47:46,200
Speaker 2: three of my favorite questions that I ask all my guests,

765
00:47:46,960 --> 00:47:50,360
Speaker 2: starting with what are some of your favorite books? What

766
00:47:50,400 --> 00:47:53,560
Speaker 2: are you reading right now?

767
00:47:54,400 --> 00:47:58,759
Speaker 3: My favorite books tend to be history, and the one

768
00:47:58,800 --> 00:48:02,319
Speaker 3: that I have most recently he read is a wonderful

769
00:48:02,800 --> 00:48:08,040
Speaker 3: biography of Jack Kennedy as president and the things that

770
00:48:08,120 --> 00:48:12,200
Speaker 3: he did that made America the most popular country in

771
00:48:12,239 --> 00:48:12,680
Speaker 3: the world.

772
00:48:13,080 --> 00:48:16,480
Speaker 2: And our last two questions, what advice would you give

773
00:48:16,520 --> 00:48:21,200
Speaker 2: to a recent college grad interested in a career in investing.

774
00:48:22,000 --> 00:48:25,560
Speaker 3: Think about what really motivates you to be interested in investing.

775
00:48:26,280 --> 00:48:30,280
Speaker 3: If it's because it's a high income field, that's okay,

776
00:48:31,400 --> 00:48:36,480
Speaker 3: But candidly, it's not an inspiration. And you only have

777
00:48:36,560 --> 00:48:40,719
Speaker 3: one life to lead. Is it your desire to lead

778
00:48:40,800 --> 00:48:44,439
Speaker 3: your life making money or doing something that you would

779
00:48:44,520 --> 00:48:46,920
Speaker 3: say was at the end of your life, I'm so

780
00:48:47,160 --> 00:48:49,920
Speaker 3: proud of what I did, or I'm so glad I

781
00:48:49,960 --> 00:48:54,800
Speaker 3: did what I did. If you're thinking about investing because

782
00:48:54,840 --> 00:48:58,640
Speaker 3: it's a profession where you help people be more successful

783
00:48:58,640 --> 00:49:02,359
Speaker 3: in achieving their objectives, then candidly you could have a

784
00:49:02,400 --> 00:49:06,080
Speaker 3: fabulous time. It won't come because you beat the market,

785
00:49:06,760 --> 00:49:09,760
Speaker 3: but that's not the problem. For most people. For most people,

786
00:49:10,600 --> 00:49:14,160
Speaker 3: beating the market is very clearly secondary to what's their

787
00:49:14,200 --> 00:49:17,920
Speaker 3: real need, which is to think through what are their objectives,

788
00:49:18,080 --> 00:49:20,879
Speaker 3: what are their financial resources, and how can they put

789
00:49:20,920 --> 00:49:25,000
Speaker 3: those together into the best for them investment program. And

790
00:49:25,040 --> 00:49:27,799
Speaker 3: the same thing is true for every college, every hospital,

791
00:49:28,040 --> 00:49:33,799
Speaker 3: every church, every organization has an endowment needs to think

792
00:49:33,880 --> 00:49:36,800
Speaker 3: carefully about what is the real purpose of the money

793
00:49:36,840 --> 00:49:39,760
Speaker 3: and how can we do the best for our long

794
00:49:39,880 --> 00:49:43,600
Speaker 3: term success by the structure of the portfolio that we have.

795
00:49:44,239 --> 00:49:47,319
Speaker 2: And our final question, what do you know about the

796
00:49:47,320 --> 00:49:51,160
Speaker 2: world of investing today that would have been really useful

797
00:49:51,680 --> 00:49:54,000
Speaker 2: back in the nineteen sixties when you were working for

798
00:49:54,040 --> 00:49:55,160
Speaker 2: the Rockefellers.

799
00:49:55,440 --> 00:49:59,560
Speaker 3: Oh boy, First that the whole world is going to

800
00:49:59,560 --> 00:50:02,719
Speaker 3: be changed. So don't stay with what you think is

801
00:50:02,840 --> 00:50:06,560
Speaker 3: really great about the early nineteen sixties, because all of

802
00:50:06,560 --> 00:50:09,600
Speaker 3: that is going to be upended, and all the lessons

803
00:50:09,640 --> 00:50:12,239
Speaker 3: that you would think were just great about how to

804
00:50:12,280 --> 00:50:15,319
Speaker 3: do things in the early nineteen sixties will work against you.

805
00:50:15,520 --> 00:50:18,399
Speaker 3: And by the time you get to the this time

806
00:50:18,440 --> 00:50:22,919
Speaker 3: of the year, you will be making mistakes one after

807
00:50:22,920 --> 00:50:25,319
Speaker 3: another after another after another by doing things that are

808
00:50:25,360 --> 00:50:29,760
Speaker 3: just completely out of date. And the world of investing

809
00:50:29,760 --> 00:50:35,400
Speaker 3: will change more than most fields will change. Computer technology

810
00:50:35,440 --> 00:50:41,520
Speaker 3: will change more, airplane travel will change more. But candidly,

811
00:50:42,280 --> 00:50:44,319
Speaker 3: investing is going to change so much that if you

812
00:50:44,600 --> 00:50:46,560
Speaker 3: take the lessons that you're learning for how to do

813
00:50:46,600 --> 00:50:50,320
Speaker 3: it in the sixties and try to transport those into

814
00:50:50,360 --> 00:50:53,560
Speaker 3: the twenty twenties, you're going to pay a terrible price.

815
00:50:53,640 --> 00:50:55,000
Speaker 3: Don't do it. Don't do it.

816
00:50:55,600 --> 00:50:59,240
Speaker 2: Thank you Charlie for sharing all of your wisdom and insights.

817
00:50:59,280 --> 00:51:04,160
Speaker 2: I really appreciate it. We have been speaking with Charlie

818
00:51:04,160 --> 00:51:08,439
Speaker 2: Ellis talking about his new book, Rethinking Investing, a very

819
00:51:08,480 --> 00:51:12,640
Speaker 2: short guide to very long term investing. If you enjoyed

820
00:51:12,640 --> 00:51:15,840
Speaker 2: this conversation, check out any of the five hundred or

821
00:51:15,840 --> 00:51:18,560
Speaker 2: so we've done over the past ten years. You can

822
00:51:18,600 --> 00:51:24,000
Speaker 2: find those at Bloomberg, iTunes, Spotify, YouTube, wherever you find

823
00:51:24,040 --> 00:51:26,920
Speaker 2: your favorite podcast, and be sure and check out my

824
00:51:27,000 --> 00:51:31,480
Speaker 2: new book, How Not to Invest The bad ideas, numbers,

825
00:51:31,520 --> 00:51:35,600
Speaker 2: and behavior that destroys wealth. I would be remiss if

826
00:51:35,600 --> 00:51:37,520
Speaker 2: I did not thank the Crack team that helps put

827
00:51:37,560 --> 00:51:42,200
Speaker 2: these conversations together each week. Andrew Davin is my audio engineer.

828
00:51:42,520 --> 00:51:46,200
Speaker 2: Anna Luke is my producer. Sean Russo is my researcher.

829
00:51:46,920 --> 00:51:50,640
Speaker 2: Sage Bauman is the head of Podcasts at Bloomberg. I'm

830
00:51:50,719 --> 00:51:55,040
Speaker 2: Barry Ritults. You've been listening to Masters in Business on

831
00:51:55,160 --> 00:51:56,160
Speaker 2: Bloomberg Radio.