1 00:00:02,200 --> 00:00:06,399 Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg 2 00:00:06,480 --> 00:00:11,040 Speaker 1: Radio SAD News. This week, as Vanguard founder Jack Vogel 3 00:00:11,440 --> 00:00:15,360 Speaker 1: passed away at the age of eighty nine, I had 4 00:00:15,360 --> 00:00:18,239 Speaker 1: the great privilege and honor of sitting down with him 5 00:00:18,400 --> 00:00:22,840 Speaker 1: in March for a full ninety minutes, and I just 6 00:00:22,920 --> 00:00:27,600 Speaker 1: have to share a little bit about that experience with you. Uh. 7 00:00:27,720 --> 00:00:31,880 Speaker 1: The Vanguard campus is just immense. It's grown over the 8 00:00:31,920 --> 00:00:36,680 Speaker 1: past forty five years. It's out in Malvern, Pennsylvania. I 9 00:00:36,760 --> 00:00:42,200 Speaker 1: picked up my engineer, Charlie volmer Um locally and we drove. 10 00:00:42,720 --> 00:00:46,320 Speaker 1: Took us about two hours before traffic. We left about 11 00:00:46,320 --> 00:00:50,360 Speaker 1: five in the morning to get there, and the place 12 00:00:50,479 --> 00:00:52,559 Speaker 1: is just quite amazing. We got a tour of it. 13 00:00:52,600 --> 00:00:55,600 Speaker 1: We saw their trading room. It was it was really astonishing. 14 00:00:56,080 --> 00:00:58,280 Speaker 1: And then you finally get to meet the man and 15 00:00:58,320 --> 00:01:02,000 Speaker 1: the legend himself. Um. He comes into the conference room. 16 00:01:02,040 --> 00:01:05,080 Speaker 1: He's kind of slight, he's a little hunched over. He 17 00:01:05,160 --> 00:01:09,880 Speaker 1: moved slowly, and I'm thinking, gee, maybe, uh, this isn't 18 00:01:09,920 --> 00:01:13,480 Speaker 1: gonna work out. And then he sits down and puts 19 00:01:13,520 --> 00:01:16,800 Speaker 1: on his headphones. He has a headphone with a mic 20 00:01:16,920 --> 00:01:19,880 Speaker 1: that comes around. He wears it as a set and 21 00:01:19,959 --> 00:01:23,160 Speaker 1: as soon as he started speaking, it was clear this 22 00:01:23,200 --> 00:01:26,280 Speaker 1: guy as sharp as attack, full of vim and vigor 23 00:01:26,319 --> 00:01:30,280 Speaker 1: and energy, and still has something to teach us in, 24 00:01:30,400 --> 00:01:34,839 Speaker 1: something to prove. It was a whirlwind ninety minutes. Essentially 25 00:01:34,880 --> 00:01:37,480 Speaker 1: my job was to just give him a little nudge 26 00:01:37,480 --> 00:01:39,440 Speaker 1: and get out of the way. Uh. And it was 27 00:01:39,560 --> 00:01:43,360 Speaker 1: quite an experience. It's something that I will always be 28 00:01:43,520 --> 00:01:46,400 Speaker 1: thrilled that I got to do. Uh. He was in 29 00:01:46,480 --> 00:01:49,600 Speaker 1: fine form and great voice. As you'll hear. Everything he 30 00:01:49,720 --> 00:01:54,520 Speaker 1: covered was really just classic Vogel. Uh. Not only was 31 00:01:54,560 --> 00:01:57,600 Speaker 1: it a privilege, but it was also an amazing conversation, 32 00:01:58,200 --> 00:02:01,480 Speaker 1: mostly because of Jack. I had very little to do 33 00:02:01,520 --> 00:02:05,320 Speaker 1: with it. So, with no further ado, my Master's in 34 00:02:05,360 --> 00:02:14,000 Speaker 1: Business Conversation with Vanguard founder Jack Bogel via is Masters 35 00:02:14,000 --> 00:02:18,000 Speaker 1: in Business with Barry Ridholts on Bloomberg Radio. I know 36 00:02:18,080 --> 00:02:20,680 Speaker 1: I say this every week that I have a special guest, 37 00:02:21,200 --> 00:02:24,760 Speaker 1: but this week I have a super special guest, the 38 00:02:24,840 --> 00:02:29,960 Speaker 1: one the only Jack Bogel, founder and Chairman emeritus of 39 00:02:30,000 --> 00:02:34,400 Speaker 1: the Vanguard Group, essentially the creator of the world's first 40 00:02:34,600 --> 00:02:40,200 Speaker 1: index mutual fund for individuals. In I could read your 41 00:02:40,240 --> 00:02:43,840 Speaker 1: CV which will essentially take up the entire show. There's 42 00:02:43,880 --> 00:02:47,399 Speaker 1: so much stuff to to talk about with you. You 43 00:02:47,440 --> 00:02:50,880 Speaker 1: are a legend in the industry and maybe the person 44 00:02:50,880 --> 00:02:55,519 Speaker 1: who has had the single biggest impact on investing of anyone. 45 00:02:55,680 --> 00:03:00,799 Speaker 1: But let's just start from that beginning. Undergrad you with thesis. 46 00:03:01,160 --> 00:03:06,040 Speaker 1: You're in college in Princeton in nineteen fifty nineteen fifty one, 47 00:03:06,240 --> 00:03:12,240 Speaker 1: and you're thinking about why do actively managed funds, why 48 00:03:12,280 --> 00:03:15,560 Speaker 1: do so many of them underperform the market? How did 49 00:03:15,600 --> 00:03:18,720 Speaker 1: that come about for a college Well, came about by 50 00:03:18,720 --> 00:03:21,840 Speaker 1: a great accident, and that is I was majoring in economics. 51 00:03:22,440 --> 00:03:24,760 Speaker 1: I was looking for a subject for my senior thesis, 52 00:03:25,080 --> 00:03:29,720 Speaker 1: just a requirement still at Princeton, sixtensive, extensive document. Mine 53 00:03:29,720 --> 00:03:31,440 Speaker 1: turned out to be maybe a hundred and thirty five 54 00:03:31,520 --> 00:03:35,320 Speaker 1: forty pages, and Uh, I didn't know what to write about, 55 00:03:35,440 --> 00:03:37,000 Speaker 1: but I wanted to write about something that no one 56 00:03:37,000 --> 00:03:40,600 Speaker 1: had never written about before, and they're In December nineteen 57 00:03:40,680 --> 00:03:43,360 Speaker 1: forty nine, I was reading Fortune magazine, which I did 58 00:03:43,400 --> 00:03:48,000 Speaker 1: as part of my economics background, just voluntarily, and there 59 00:03:48,040 --> 00:03:51,240 Speaker 1: was an article called Big Money in Boston, and it 60 00:03:51,320 --> 00:03:56,280 Speaker 1: was about the mutual fund industry. Described this tiny industry. Uh, 61 00:03:56,320 --> 00:03:59,200 Speaker 1: maybe two and a half billion dollars for the industry 62 00:03:59,760 --> 00:04:03,240 Speaker 1: as tiny but contentious, and I thought, well, you know, 63 00:04:03,320 --> 00:04:07,240 Speaker 1: I'm kind of tiny and I'm kind of contentious, so 64 00:04:07,280 --> 00:04:10,240 Speaker 1: I'll write about it, and I wrote the thesis enabled 65 00:04:10,240 --> 00:04:14,160 Speaker 1: me to graduate with high honors from Princeton. Very pretty 66 00:04:14,160 --> 00:04:17,880 Speaker 1: good job. Not a great thesis, but not bad for 67 00:04:17,920 --> 00:04:20,800 Speaker 1: somebody a year out of his teens. Let me let 68 00:04:20,839 --> 00:04:23,200 Speaker 1: me push back at you and say, that was an 69 00:04:23,400 --> 00:04:28,200 Speaker 1: incredibly insightful thesis. The insight that you derived at a 70 00:04:28,320 --> 00:04:32,200 Speaker 1: very young ages the cost of all this active management. 71 00:04:32,880 --> 00:04:37,280 Speaker 1: They were unable to overcome that bogey even to today, 72 00:04:37,320 --> 00:04:40,599 Speaker 1: what should really be so obvious to everybody. Lots of 73 00:04:40,600 --> 00:04:43,560 Speaker 1: folks still haven't seemed to figure that out. So what 74 00:04:43,680 --> 00:04:46,400 Speaker 1: makes me stop and pausing and ask you this question, 75 00:04:46,800 --> 00:04:50,520 Speaker 1: how did you ever come to that conclusion at such 76 00:04:50,560 --> 00:04:55,039 Speaker 1: a young age without the universe of information we have 77 00:04:55,120 --> 00:04:58,120 Speaker 1: available to us today. Will to begin with the thesis 78 00:04:58,160 --> 00:05:01,760 Speaker 1: title was the economic role of the investment company, And 79 00:05:01,880 --> 00:05:06,160 Speaker 1: the overall of the overriding and focus of that thesis 80 00:05:06,760 --> 00:05:10,760 Speaker 1: was mutual funds are there to serve investors. Put the 81 00:05:10,800 --> 00:05:14,560 Speaker 1: investors first. And I talked about reducing sales loads, reducing 82 00:05:14,640 --> 00:05:20,039 Speaker 1: management fees, focusing on investing and non marketing, things of 83 00:05:20,080 --> 00:05:23,359 Speaker 1: that nature. And that's what the industry in my in 84 00:05:23,400 --> 00:05:25,520 Speaker 1: my formula and would have to do to reach its 85 00:05:25,560 --> 00:05:29,279 Speaker 1: great potential. And I did not, actually, to be very 86 00:05:29,279 --> 00:05:32,680 Speaker 1: clear on this, I did not assemble any data. But 87 00:05:32,800 --> 00:05:36,200 Speaker 1: I looked at about fifteen leading mutual funds and looked 88 00:05:36,240 --> 00:05:41,280 Speaker 1: at their records, and without adding and dividing and getting averages, 89 00:05:41,680 --> 00:05:43,800 Speaker 1: it was very clear that very few of them, if 90 00:05:43,800 --> 00:05:46,880 Speaker 1: any at that time, could could outperform the S and 91 00:05:46,920 --> 00:05:51,479 Speaker 1: P five undered indecks. So it was basically anecdotal. Although 92 00:05:51,480 --> 00:05:55,960 Speaker 1: this industry in those days was very much a commodity 93 00:05:56,000 --> 00:05:59,120 Speaker 1: in a way kind of commodity. The major funds of 94 00:05:59,160 --> 00:06:04,159 Speaker 1: those days we're just basic basically buying long lists of 95 00:06:04,160 --> 00:06:07,800 Speaker 1: blue chip stocks. You could call him Dow Jones Industrial 96 00:06:07,880 --> 00:06:11,160 Speaker 1: average funds, or later because the SMP wasn't very enough 97 00:06:11,520 --> 00:06:13,560 Speaker 1: well known, then you could call him standard and Poor's 98 00:06:13,600 --> 00:06:16,920 Speaker 1: kind of funds. They were down the middle. They had fluctuations, 99 00:06:17,360 --> 00:06:21,400 Speaker 1: very similar volatility, very similar to the index. So so 100 00:06:21,560 --> 00:06:24,919 Speaker 1: even back in the late forties early fifties, mutual funds 101 00:06:24,920 --> 00:06:30,560 Speaker 1: were closet indexers. Sure, absolutely Huh, that's quite that's quite fascinating. 102 00:06:30,640 --> 00:06:33,560 Speaker 1: So let's fast forward a little bit. So now you're 103 00:06:33,640 --> 00:06:39,119 Speaker 1: working as chairman of Wellington Management Company, and long story short, 104 00:06:39,240 --> 00:06:42,120 Speaker 1: you said the most unwise decision of your career. You 105 00:06:42,200 --> 00:06:45,080 Speaker 1: do a merger doesn't work out and they end up 106 00:06:45,640 --> 00:06:50,120 Speaker 1: um breaking it down from from uh lieutenant to private 107 00:06:50,160 --> 00:06:53,159 Speaker 1: so to speak, and not less than private, less than private. 108 00:06:53,720 --> 00:06:56,920 Speaker 1: And you wanted to run a fund and they said, well, 109 00:06:57,320 --> 00:07:00,520 Speaker 1: you know, because of this M and A, we don't 110 00:07:00,560 --> 00:07:02,520 Speaker 1: want you running an active fund. If you want to 111 00:07:02,520 --> 00:07:05,440 Speaker 1: put together how did how did the index come out 112 00:07:05,480 --> 00:07:09,240 Speaker 1: of that? That job changed? Okay, well let me say 113 00:07:09,279 --> 00:07:12,440 Speaker 1: my first job and I was thirty five years old 114 00:07:12,480 --> 00:07:15,200 Speaker 1: and Mr Morgan, the founder of Walter L. Morgan, the 115 00:07:15,240 --> 00:07:18,640 Speaker 1: founder of Wellington, called me into his office. Wellington was 116 00:07:18,680 --> 00:07:21,800 Speaker 1: in trouble. Wellingcoln Fund was in trouble, its performance was slipping, 117 00:07:22,320 --> 00:07:24,920 Speaker 1: and Wellington Management Company was in trouble because we were 118 00:07:24,920 --> 00:07:28,880 Speaker 1: basically a one product if you will company up conservative 119 00:07:28,920 --> 00:07:31,920 Speaker 1: balance fund. We were, for the want of a better metaphor, 120 00:07:32,440 --> 00:07:37,280 Speaker 1: the bagel of the mutual fund industry, the the hard, 121 00:07:37,680 --> 00:07:44,720 Speaker 1: not sweet, um nutritious safe choice and in the biggest 122 00:07:44,720 --> 00:07:49,880 Speaker 1: balance fund in the industry, and people stopped buying bagels 123 00:07:50,320 --> 00:07:53,960 Speaker 1: and started buying, if you will, donuts. We came into 124 00:07:53,960 --> 00:07:57,280 Speaker 1: the go go era. So all these fancy growth funds, 125 00:07:57,360 --> 00:08:02,000 Speaker 1: high powered buying stocks that had no investment, no intrinsic 126 00:08:02,040 --> 00:08:04,720 Speaker 1: investment meri at all. This is the mid to late sixties, 127 00:08:04,760 --> 00:08:08,280 Speaker 1: the nifty fifty and that sort of the go go era, 128 00:08:09,040 --> 00:08:11,160 Speaker 1: and the go goes came and the go goes win. 129 00:08:12,000 --> 00:08:15,600 Speaker 1: But if you're in the bagel business and nobody is 130 00:08:15,640 --> 00:08:18,960 Speaker 1: buying bagels, and the balanced fund share of industry sales 131 00:08:19,000 --> 00:08:22,320 Speaker 1: actually dropped to one percent, and so I had to 132 00:08:22,360 --> 00:08:24,280 Speaker 1: do something, and Mr Morgan told me to do it, 133 00:08:24,840 --> 00:08:27,000 Speaker 1: and I talked to a couple of firms about merging, 134 00:08:27,720 --> 00:08:30,680 Speaker 1: and then I came across this firm in Boston and 135 00:08:30,760 --> 00:08:32,600 Speaker 1: it had a fund called I Vest Fund, one of 136 00:08:32,600 --> 00:08:35,160 Speaker 1: the go go funds of the day. They had some 137 00:08:35,280 --> 00:08:38,800 Speaker 1: apparently bright young managers that I had kind of common 138 00:08:38,840 --> 00:08:41,959 Speaker 1: cause with, and they had a pension business. So we 139 00:08:42,040 --> 00:08:44,319 Speaker 1: got the new managers that would save welling and fund. 140 00:08:44,360 --> 00:08:47,199 Speaker 1: We got the go go fund that we needed to 141 00:08:47,240 --> 00:08:49,560 Speaker 1: stay in business, and we got into a new business 142 00:08:49,559 --> 00:08:51,640 Speaker 1: that we thought we could be very successful. It was 143 00:08:51,960 --> 00:08:56,000 Speaker 1: from words of one syllable, two syllables, brilliant. I'm Barry Ridholts. 144 00:08:56,120 --> 00:08:59,839 Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My 145 00:09:00,120 --> 00:09:03,840 Speaker 1: extra special guest today is Jack Bogel. He is the 146 00:09:03,960 --> 00:09:08,880 Speaker 1: founder of Vanguard Group and essentially the inventor of the 147 00:09:08,920 --> 00:09:14,760 Speaker 1: index funds. Jack, we were speaking earlier about how a 148 00:09:14,800 --> 00:09:19,600 Speaker 1: crisis at Wellington, which was the predecessor you worked at 149 00:09:19,920 --> 00:09:23,800 Speaker 1: to the Vanguard Group, actually led to the creation of 150 00:09:23,840 --> 00:09:26,760 Speaker 1: the Vanguard Group. Tell us how that came about. Okay, well, 151 00:09:26,800 --> 00:09:29,040 Speaker 1: let's start with the fact that in doing this merger, 152 00:09:29,880 --> 00:09:33,040 Speaker 1: which I was eager to do, I gave up too 153 00:09:33,040 --> 00:09:37,040 Speaker 1: many votes in the company and so when everything fell apart, 154 00:09:37,120 --> 00:09:41,560 Speaker 1: the market went down, uh, and so on. Right at 155 00:09:41,559 --> 00:09:44,040 Speaker 1: the as the market was going down in seventy four, 156 00:09:44,040 --> 00:09:49,960 Speaker 1: it would be to climb the happy partners um fragmented 157 00:09:50,360 --> 00:09:51,720 Speaker 1: and there were four of them, and there was one 158 00:09:51,760 --> 00:09:54,400 Speaker 1: of me, and they had packed the board of directors. 159 00:09:54,679 --> 00:09:57,600 Speaker 1: I was I was never very political, and they fired me. 160 00:09:57,800 --> 00:10:01,000 Speaker 1: The guys that had caused this catastrophe, fired the one 161 00:10:01,000 --> 00:10:05,160 Speaker 1: that was trying to avoid it, and so I was 162 00:10:05,160 --> 00:10:08,600 Speaker 1: out of a job. So what could I do, I 163 00:10:08,640 --> 00:10:10,760 Speaker 1: could go try and find work for another firm. I 164 00:10:10,800 --> 00:10:13,120 Speaker 1: had a young family living here. I didn't want to move. 165 00:10:14,000 --> 00:10:17,160 Speaker 1: I was very angry about what happened, of course, but 166 00:10:17,360 --> 00:10:19,960 Speaker 1: you know what is is, and so I decided my 167 00:10:20,000 --> 00:10:22,760 Speaker 1: best chance was to talk to the directors of the 168 00:10:22,760 --> 00:10:27,439 Speaker 1: Wellington Fund, this fund so badly heard the ash the 169 00:10:27,920 --> 00:10:32,440 Speaker 1: diamond in our crown, and say, look, the management company 170 00:10:32,440 --> 00:10:35,400 Speaker 1: has fired me, but you, you're a slightly different group, 171 00:10:36,960 --> 00:10:39,640 Speaker 1: can keep me. And we'll tell the management company what 172 00:10:39,720 --> 00:10:42,160 Speaker 1: to do. We will be in charge of the administration 173 00:10:42,200 --> 00:10:44,840 Speaker 1: of the fund, ending necessary to make it work, and 174 00:10:44,880 --> 00:10:47,600 Speaker 1: we'll be in charge of appraising the advisor and taking 175 00:10:47,640 --> 00:10:50,040 Speaker 1: whatever steps we want. Will be independent of the advisor. 176 00:10:50,679 --> 00:10:53,720 Speaker 1: And uh I wanted to take over distribution to but 177 00:10:53,760 --> 00:10:56,680 Speaker 1: the directors wouldn't go along with that. So we became 178 00:10:57,720 --> 00:11:01,320 Speaker 1: a little administrative company. And and uh I wanted to 179 00:11:01,640 --> 00:11:05,200 Speaker 1: glamorous name. So I found the name Vanguard. When I 180 00:11:05,240 --> 00:11:10,000 Speaker 1: first learned about that. We go from Wellington, the the 181 00:11:10,000 --> 00:11:14,280 Speaker 1: the land battles of the Napoleonic Wars, the Duke of Wellington, 182 00:11:14,720 --> 00:11:17,760 Speaker 1: the naval battles of the Napoleonic War, and there's Lord 183 00:11:17,800 --> 00:11:20,400 Speaker 1: Nelson at the Battle of the Nile, one of the 184 00:11:20,400 --> 00:11:24,120 Speaker 1: most complete, the most complete naval victory in history to 185 00:11:24,240 --> 00:11:28,320 Speaker 1: this day. Uh and uh, He writes to this dispatch 186 00:11:28,400 --> 00:11:32,000 Speaker 1: that I see from the deck of HMS Vanguard his flagship, 187 00:11:32,480 --> 00:11:34,520 Speaker 1: and that sounds like a great name for a for 188 00:11:34,559 --> 00:11:39,360 Speaker 1: a company, perfect, perfect from Wellington Funds. How did you 189 00:11:39,360 --> 00:11:42,920 Speaker 1: actually form the Vanguard Group? Well, the idea was that 190 00:11:43,040 --> 00:11:45,760 Speaker 1: the funds would create a new company that they owned, 191 00:11:46,280 --> 00:11:49,920 Speaker 1: they would capitalize. Capitalization was very small. I'm gonna guess 192 00:11:49,960 --> 00:11:53,040 Speaker 1: maybe two dollars. This is a very small company at 193 00:11:53,040 --> 00:11:56,319 Speaker 1: that point. Actually, the total assets of the funds were 194 00:11:56,320 --> 00:12:00,200 Speaker 1: down and around one point five billion, So we appen 195 00:12:00,320 --> 00:12:03,200 Speaker 1: lots of the fund and and Welling and Management Company 196 00:12:03,200 --> 00:12:05,840 Speaker 1: had to take it because the directors of the funds 197 00:12:05,840 --> 00:12:09,360 Speaker 1: were in charge of the contracts with Welling and So 198 00:12:09,400 --> 00:12:12,120 Speaker 1: you really backed George your way back into the company 199 00:12:12,200 --> 00:12:15,199 Speaker 1: after they had fired you as chairman. Well, yes, I 200 00:12:15,240 --> 00:12:18,640 Speaker 1: think that's a fair statement. But techno, from a tactical standpoint, 201 00:12:18,800 --> 00:12:20,560 Speaker 1: I've been the chairman of the Welling and Fund all 202 00:12:20,600 --> 00:12:23,680 Speaker 1: along gotch so I have the same old continuity that 203 00:12:23,720 --> 00:12:26,480 Speaker 1: I had going back to nineteen just post merger, they 204 00:12:26,960 --> 00:12:28,920 Speaker 1: this was a bactor. So how do you go from 205 00:12:28,960 --> 00:12:31,920 Speaker 1: that to the Vanguard Group. Well, we put a name 206 00:12:31,920 --> 00:12:34,200 Speaker 1: in the company because we had I think in those 207 00:12:34,280 --> 00:12:36,760 Speaker 1: days maybe a dozen funds and we didn't want a 208 00:12:36,800 --> 00:12:39,640 Speaker 1: dozen separate companies to match. So we had to have 209 00:12:39,800 --> 00:12:45,160 Speaker 1: a core central company and UH that would pool resources 210 00:12:45,200 --> 00:12:48,040 Speaker 1: of all the funds and provide all the services. And 211 00:12:48,080 --> 00:12:51,680 Speaker 1: we had allocation methods between the funds. And it was 212 00:12:51,720 --> 00:12:57,240 Speaker 1: all good until we decided to take over distribution, which 213 00:12:57,320 --> 00:12:59,840 Speaker 1: was our Let me, I'm a little bit ahead of 214 00:12:59,880 --> 00:13:01,360 Speaker 1: my help. Let me, let me go back and say 215 00:13:01,440 --> 00:13:04,120 Speaker 1: to the first thing. We were not allowed to go 216 00:13:04,120 --> 00:13:07,360 Speaker 1: into the business of investment management, that was theirs. We 217 00:13:07,360 --> 00:13:09,040 Speaker 1: were not allowed to go into the business that was 218 00:13:09,080 --> 00:13:12,680 Speaker 1: there as being willing, that was there. The active side 219 00:13:12,880 --> 00:13:16,840 Speaker 1: you couldn't do and we couldn't. We couldn't go into management. 220 00:13:16,880 --> 00:13:20,319 Speaker 1: We didn't distinguish between active and passive and those days 221 00:13:20,360 --> 00:13:23,079 Speaker 1: not in those days, there weren't an index, right, So 222 00:13:23,080 --> 00:13:25,520 Speaker 1: so if you couldn't go into management, how are you 223 00:13:25,559 --> 00:13:31,840 Speaker 1: able to set up the Vanguard five hundred wouldn't be patient. So, UM, 224 00:13:32,480 --> 00:13:34,400 Speaker 1: we were not allowed to go into distribution because that 225 00:13:34,480 --> 00:13:36,920 Speaker 1: was welling coins function too, So we had this little 226 00:13:36,920 --> 00:13:41,480 Speaker 1: administrative company looking over. However, had the legal responsibility and 227 00:13:41,559 --> 00:13:44,920 Speaker 1: board responsibility to look over the advisor and distributor. So 228 00:13:44,960 --> 00:13:48,320 Speaker 1: we were in charge. And so my first time I 229 00:13:48,400 --> 00:13:51,200 Speaker 1: knew a company that was an administrative company was not 230 00:13:51,240 --> 00:13:53,440 Speaker 1: going to be anything for me. I mean, I like 231 00:13:53,520 --> 00:13:56,320 Speaker 1: the administration. I know how well it has to be done, 232 00:13:56,640 --> 00:14:00,040 Speaker 1: shareholder record keeping and all that, but that's just not 233 00:14:00,160 --> 00:14:02,400 Speaker 1: the kind of challenge I was looking for. And any 234 00:14:02,440 --> 00:14:05,000 Speaker 1: company it's going to succeed, it's gonna have to control 235 00:14:05,080 --> 00:14:07,160 Speaker 1: the kind of funds he wants to they want to run, 236 00:14:07,760 --> 00:14:10,240 Speaker 1: the kind of distribution they want to have, who will 237 00:14:10,280 --> 00:14:12,960 Speaker 1: buy the funds, who will sell them, things of that nature. 238 00:14:13,600 --> 00:14:15,520 Speaker 1: So we have a company that's just in this little 239 00:14:15,720 --> 00:14:20,000 Speaker 1: administrative box, and I'm thinking, let's do something. So at 240 00:14:20,040 --> 00:14:22,680 Speaker 1: the very first board meeting of the new company, after 241 00:14:22,720 --> 00:14:25,440 Speaker 1: we got an organized, I say we got to start 242 00:14:25,440 --> 00:14:29,320 Speaker 1: an index fund. And the directors say you're not allowed 243 00:14:29,320 --> 00:14:33,280 Speaker 1: to get new investment management. And I say, this fund 244 00:14:33,320 --> 00:14:37,760 Speaker 1: isn't managed, and believe it or not, they bought it. 245 00:14:38,760 --> 00:14:41,840 Speaker 1: So in other words, you describe the index fund as 246 00:14:41,920 --> 00:14:45,840 Speaker 1: just hey, it's the five largest companies in America. There's 247 00:14:45,840 --> 00:14:49,720 Speaker 1: no manager, nobody's in charge. It's just it's an unmanaged 248 00:14:50,320 --> 00:14:54,280 Speaker 1: broad index. And they said, oh, go do that. They said, well, 249 00:14:54,560 --> 00:14:56,520 Speaker 1: I won't say it was that easy, but that was 250 00:14:56,560 --> 00:14:59,320 Speaker 1: the final decision. I get the sense from from what 251 00:14:59,400 --> 00:15:02,760 Speaker 1: you've described right that they were kind of, let's let's 252 00:15:02,840 --> 00:15:04,720 Speaker 1: let Jack go do that. He'll be out of our hair. 253 00:15:04,800 --> 00:15:08,360 Speaker 1: It'll keep them busy and fine, won't cause anybody trouble. 254 00:15:08,520 --> 00:15:10,920 Speaker 1: I think you're pretty much on the mark. This week 255 00:15:10,960 --> 00:15:14,040 Speaker 1: on Masters in Business on Bloomberg Radio, I have an 256 00:15:14,080 --> 00:15:18,040 Speaker 1: extra special guest. His name is Jack Bogel. He is 257 00:15:18,080 --> 00:15:22,000 Speaker 1: the founder of the Vanguard Group, the inventor of the 258 00:15:22,040 --> 00:15:26,360 Speaker 1: index funds, and author of far too many books to mention. 259 00:15:27,320 --> 00:15:30,480 Speaker 1: I've been speaking with Jack here in the headquarters of 260 00:15:30,480 --> 00:15:34,120 Speaker 1: of Vanguard, and just outside the conference room we were 261 00:15:34,160 --> 00:15:39,320 Speaker 1: sitting on the wall is a framed print, and on 262 00:15:39,400 --> 00:15:44,440 Speaker 1: that print it says, stamp out index funds. Jack, What 263 00:15:44,680 --> 00:15:48,000 Speaker 1: on earth does that mean? That means Wall Street couldn't 264 00:15:48,040 --> 00:15:50,800 Speaker 1: make any money out of index funds, and so Wall 265 00:15:50,880 --> 00:15:54,320 Speaker 1: Street didn't like it. We had an initial initial public offering. 266 00:15:54,680 --> 00:15:56,760 Speaker 1: I went all over New York so many times to 267 00:15:56,800 --> 00:15:59,920 Speaker 1: try and find underwriters, and finally got the four large 268 00:16:00,080 --> 00:16:05,360 Speaker 1: retail underwriters, bas Dan, Winter, Reynolds, uh I forget who 269 00:16:05,400 --> 00:16:08,320 Speaker 1: the other one was. Reynolds. Okay, they were the biggest 270 00:16:08,320 --> 00:16:09,800 Speaker 1: guys in the business. And they said, we can do 271 00:16:09,800 --> 00:16:12,120 Speaker 1: a hundred and fifty million dollars with this great new idea. 272 00:16:12,960 --> 00:16:16,880 Speaker 1: They did eleven million dollars, so so less than ten percent. 273 00:16:17,120 --> 00:16:19,560 Speaker 1: And they came in to see me when the underwriting 274 00:16:19,600 --> 00:16:22,240 Speaker 1: was over and said, you know, I said to them, look, 275 00:16:22,280 --> 00:16:25,920 Speaker 1: we can't even buy around lots of bois And they said, well, 276 00:16:25,920 --> 00:16:27,640 Speaker 1: why don't we just give everybody their bondy back and 277 00:16:27,640 --> 00:16:29,560 Speaker 1: pull it? And I said, are you kidding me? We 278 00:16:29,640 --> 00:16:32,880 Speaker 1: have the world's first index fund. And it's the world's 279 00:16:32,920 --> 00:16:35,400 Speaker 1: first index fund. Period. You don't have to say retail, 280 00:16:35,840 --> 00:16:38,680 Speaker 1: a lot of institutional holding at the beginning. It's the 281 00:16:38,720 --> 00:16:44,120 Speaker 1: world's first index mutual fund, no question about that. And 282 00:16:44,120 --> 00:16:47,160 Speaker 1: and so it got noere It went nowhere fast, eleven 283 00:16:47,160 --> 00:16:49,480 Speaker 1: million dollar launched. What year was that? That was in 284 00:16:49,600 --> 00:16:55,480 Speaker 1: nine seventy six, eleven million dollars and everybody laughed, and 285 00:16:55,520 --> 00:16:58,440 Speaker 1: nobody thought there was any future to index funds. But 286 00:16:58,480 --> 00:17:01,760 Speaker 1: that's exactly right, that that just astonishing well. You had 287 00:17:01,840 --> 00:17:05,240 Speaker 1: incredible foresight to say. And it makes sense that the 288 00:17:05,359 --> 00:17:08,440 Speaker 1: four largest retail shops would want to participate in this 289 00:17:08,800 --> 00:17:11,640 Speaker 1: because this is a simple, easy way for their retail 290 00:17:11,720 --> 00:17:17,360 Speaker 1: client to get exposure to the market, fast, easy, relatively inexpensive. 291 00:17:17,720 --> 00:17:20,639 Speaker 1: It should have except that when the when the client 292 00:17:20,720 --> 00:17:23,800 Speaker 1: buys this fund, it's to be held forever. They don't 293 00:17:23,840 --> 00:17:26,560 Speaker 1: trade it, and the fund doesn't do any trading. There's 294 00:17:26,600 --> 00:17:29,520 Speaker 1: no brokerage business generated by the fun So this was 295 00:17:29,600 --> 00:17:32,640 Speaker 1: not a happy moment for Wall Street and they looked 296 00:17:32,640 --> 00:17:34,520 Speaker 1: at it, I think as a some kind of the 297 00:17:34,560 --> 00:17:38,600 Speaker 1: beginning of a of a communicable disease and it had 298 00:17:38,640 --> 00:17:41,320 Speaker 1: to it had to be stamped out. The Center for 299 00:17:41,400 --> 00:17:44,639 Speaker 1: Disease Control had to come in. And did they really 300 00:17:44,720 --> 00:17:46,959 Speaker 1: perceive you as a threat or did they kind of 301 00:17:47,040 --> 00:17:50,960 Speaker 1: laugh it off? And yeah, yeah, best of luck with that, Jack, Yeah, 302 00:17:50,960 --> 00:17:53,360 Speaker 1: I'd say pretty much that way. Although we did in 303 00:17:53,400 --> 00:17:55,520 Speaker 1: a couple of years ago for one of the fund's 304 00:17:55,520 --> 00:17:59,359 Speaker 1: anniversaries we all got together, but the underwriters, all four underwriters, 305 00:17:59,359 --> 00:18:01,480 Speaker 1: and also and the writers and their lawyers and our 306 00:18:01,560 --> 00:18:04,480 Speaker 1: lawyer lawyer singular. We only add one on those days 307 00:18:05,240 --> 00:18:08,679 Speaker 1: and they're all good people. You know, I don't. Uh. 308 00:18:09,000 --> 00:18:10,600 Speaker 1: Then we all do our best in this life in 309 00:18:10,680 --> 00:18:13,120 Speaker 1: very different ways of work. So it worked out. Well, 310 00:18:13,520 --> 00:18:16,919 Speaker 1: it had to start, and it did start. So here's 311 00:18:16,960 --> 00:18:21,240 Speaker 1: the question that I could ask you. Forty plus years later, 312 00:18:21,920 --> 00:18:26,720 Speaker 1: Vanguard is now running three point something trillion dollars. Four 313 00:18:26,760 --> 00:18:29,960 Speaker 1: trillion is not that far off in the distance, an 314 00:18:30,160 --> 00:18:34,480 Speaker 1: enormous success, one of the single largest asset managers in 315 00:18:34,520 --> 00:18:38,840 Speaker 1: the world. How come nobody ever said, hey, those guys 316 00:18:38,880 --> 00:18:42,280 Speaker 1: are onto something, we should be a competitor to them. 317 00:18:42,320 --> 00:18:45,119 Speaker 1: How did how did that never come up anywhere along 318 00:18:45,119 --> 00:18:49,000 Speaker 1: the line. Well, the answer is so simple. Index funds 319 00:18:49,000 --> 00:18:52,639 Speaker 1: have a real problem. All the damn money goes to 320 00:18:52,680 --> 00:18:58,120 Speaker 1: the investors, right, Managers can't take anything they're not managing well. 321 00:18:58,119 --> 00:19:01,479 Speaker 1: But you're taking ten or fifth team basis points and 322 00:19:01,560 --> 00:19:05,360 Speaker 1: on trillions of dollars, that's not nothing. Well, nobody expected 323 00:19:05,400 --> 00:19:07,400 Speaker 1: to get the trillions of dollars, believe me, not an 324 00:19:07,400 --> 00:19:11,200 Speaker 1: eleven million. But but okay, in seventy four, seventy six, 325 00:19:11,240 --> 00:19:14,000 Speaker 1: it's eleven million. But by the time you get to 326 00:19:14,160 --> 00:19:18,800 Speaker 1: the mid nineteen nineties, you're hundreds of billions of dollars. 327 00:19:18,800 --> 00:19:21,879 Speaker 1: And then I think you hit a trillion? Was it 328 00:19:22,000 --> 00:19:29,280 Speaker 1: late nineties? So even didn't anybody say, hey, those guys 329 00:19:29,320 --> 00:19:32,439 Speaker 1: in Pennsylvania, they have a trillion dollars, why don't we 330 00:19:32,520 --> 00:19:35,200 Speaker 1: do what they're doing? Well, it's a prince of problem. 331 00:19:35,280 --> 00:19:38,480 Speaker 1: And then eventually the big guys had to Fidelity had 332 00:19:38,520 --> 00:19:41,760 Speaker 1: to have They were dragged kicking and screaming in indexing, 333 00:19:42,320 --> 00:19:45,280 Speaker 1: and they have to be competitive on price. They can 334 00:19:45,280 --> 00:19:47,439 Speaker 1: still make all the money they want, and it's an 335 00:19:47,440 --> 00:19:50,719 Speaker 1: awful lot on the actively managed funds. So it's kind 336 00:19:50,720 --> 00:19:53,439 Speaker 1: of a lost leader for Fidelity. But what about others 337 00:19:53,480 --> 00:19:57,000 Speaker 1: Black Rock and American Century and all these other entities, 338 00:19:57,320 --> 00:20:01,040 Speaker 1: Schwab offers and index It seems everybody off there's some 339 00:20:01,440 --> 00:20:05,200 Speaker 1: version of the SMP index. Yeah. Well, t ro Price 340 00:20:05,280 --> 00:20:07,880 Speaker 1: is a good example. They have a hidden index fund. 341 00:20:07,880 --> 00:20:11,400 Speaker 1: They don't talk much about it. It's kind of expensive 342 00:20:11,400 --> 00:20:15,480 Speaker 1: basis points relative or five, and it's a kind of 343 00:20:15,520 --> 00:20:18,439 Speaker 1: a sideball thing so they can get into the retirement market. 344 00:20:19,119 --> 00:20:23,920 Speaker 1: This has become a marketing business, and right now we're 345 00:20:23,920 --> 00:20:28,840 Speaker 1: seeing this tremendous change in people who realizing the importance 346 00:20:28,880 --> 00:20:32,120 Speaker 1: of low cost and a long term focus. And if 347 00:20:32,160 --> 00:20:34,640 Speaker 1: you just keep those two things in mind, you will 348 00:20:34,760 --> 00:20:38,520 Speaker 1: never do anything but own a broad market index and 349 00:20:38,600 --> 00:20:42,000 Speaker 1: hold it forever. I'm Barry Ridholtz. You're listening to Masters 350 00:20:42,000 --> 00:20:45,719 Speaker 1: in Business on Bloomberg Radio. My extra special guest this 351 00:20:45,760 --> 00:20:49,119 Speaker 1: week is Jack Bogel. He is the founder of the 352 00:20:49,200 --> 00:20:54,840 Speaker 1: Vanguard Group, inventor of the index funds, author of numerous books. 353 00:20:54,960 --> 00:20:58,119 Speaker 1: Let's jump right back into the issue of costs and 354 00:20:58,200 --> 00:21:02,400 Speaker 1: how they impact investors. You're known as the person who 355 00:21:02,440 --> 00:21:05,760 Speaker 1: created the index fund but really, which do you think 356 00:21:05,840 --> 00:21:09,399 Speaker 1: is more important, the passive indexing or the fact that 357 00:21:09,440 --> 00:21:12,879 Speaker 1: it's so low cost. Well, it's pretty clear to me 358 00:21:12,920 --> 00:21:15,879 Speaker 1: that passive indexing is the more important because I'm going 359 00:21:15,960 --> 00:21:17,920 Speaker 1: to define cost in a couple of different ways here. 360 00:21:18,440 --> 00:21:22,720 Speaker 1: One is the expense ratio. And our funds. Index funds 361 00:21:22,760 --> 00:21:25,800 Speaker 1: probably average about ten basis points. Are managed funds probably 362 00:21:25,800 --> 00:21:29,480 Speaker 1: average about thirty five, So there's not that big a difference. 363 00:21:29,480 --> 00:21:32,000 Speaker 1: The industry is up around a hundred and twenty on 364 00:21:32,000 --> 00:21:35,040 Speaker 1: an unweighted basis And when we talk about basis points, 365 00:21:35,040 --> 00:21:37,879 Speaker 1: the basis point is just a percentage of So a 366 00:21:37,960 --> 00:21:41,520 Speaker 1: hundred basis points is one percent, ten basis points is 367 00:21:41,600 --> 00:21:45,040 Speaker 1: one tenth of one percent. If you're averaging ten basis points. 368 00:21:45,080 --> 00:21:50,280 Speaker 1: That's a very very inexpensive. It's five five basis points five, 369 00:21:51,680 --> 00:21:56,479 Speaker 1: that's very inexpensive. That is really inexpensive. But that's because 370 00:21:56,520 --> 00:22:00,040 Speaker 1: we have a mutual company owned by its shareholders and 371 00:22:00,080 --> 00:22:02,480 Speaker 1: don't have to deliver profits. And think about this for 372 00:22:02,560 --> 00:22:05,640 Speaker 1: Eminent Parry, that the profit margins in this business can 373 00:22:05,640 --> 00:22:08,960 Speaker 1: easily run to be So if you've got a one 374 00:22:09,000 --> 00:22:13,240 Speaker 1: percent expense ratio, you're making fifty basis points on the top. 375 00:22:14,160 --> 00:22:17,760 Speaker 1: So you're you're actually operating at fifty, which is probably 376 00:22:17,760 --> 00:22:20,960 Speaker 1: not too bad because very few people have the scale 377 00:22:21,440 --> 00:22:24,760 Speaker 1: that we have developed, have the technology that we've developed, 378 00:22:25,000 --> 00:22:29,200 Speaker 1: have the efficiencies that we've developed. And also I don't 379 00:22:29,240 --> 00:22:32,919 Speaker 1: think this is self serving. Have the bully pulpit that 380 00:22:33,000 --> 00:22:36,640 Speaker 1: we have. You know, imagine Fidelity coming into this business. 381 00:22:37,240 --> 00:22:40,000 Speaker 1: Describe I described that as drag, kicking and screaming to 382 00:22:40,080 --> 00:22:43,200 Speaker 1: the business. So here we have kicking and screaming over here, 383 00:22:43,880 --> 00:22:48,480 Speaker 1: and here we have missionary zeal, the bully pulpit. By 384 00:22:49,000 --> 00:22:51,520 Speaker 1: this is the way, this is the new way. And 385 00:22:51,600 --> 00:22:56,119 Speaker 1: you have an entire universe of evangelists amongst the advisor 386 00:22:56,200 --> 00:23:00,160 Speaker 1: community who have drunk the kool aid and say, hey, 387 00:23:00,200 --> 00:23:03,520 Speaker 1: low cost indexing is the way to go. Following the 388 00:23:03,520 --> 00:23:08,000 Speaker 1: financial crisis, it seems like Vanguard was sucking up all 389 00:23:08,080 --> 00:23:10,879 Speaker 1: the money in the room and everybody else wasn't also 390 00:23:11,040 --> 00:23:15,840 Speaker 1: run it also ran are events like the Great Financial Crisis? 391 00:23:16,119 --> 00:23:19,560 Speaker 1: Does that sort of shake people out of their false 392 00:23:19,600 --> 00:23:23,520 Speaker 1: belief and send them in the direction of, hey, these missionaries. 393 00:23:23,680 --> 00:23:26,359 Speaker 1: Turns out these guys are right. Well, you're certainly right 394 00:23:26,400 --> 00:23:28,800 Speaker 1: in a sense. It's it's not easy to read. But 395 00:23:29,160 --> 00:23:31,399 Speaker 1: what happens when the market goes way down and went 396 00:23:31,480 --> 00:23:37,280 Speaker 1: down fifty rough nine, and all these managers it says, 397 00:23:37,440 --> 00:23:40,760 Speaker 1: we'll manage your money for you. The shareholder has kind 398 00:23:40,760 --> 00:23:44,000 Speaker 1: of led to expect that they will anticipate this and 399 00:23:44,080 --> 00:23:46,720 Speaker 1: not let it happen to them. And they may not 400 00:23:47,040 --> 00:23:50,520 Speaker 1: directly communicate that, but if someone says, well, i'm you know, 401 00:23:50,600 --> 00:23:53,320 Speaker 1: I'm pretty smart, I'm a smart manager, you would expect 402 00:23:53,400 --> 00:23:55,560 Speaker 1: that the down market they would do a good bit 403 00:23:55,560 --> 00:23:58,239 Speaker 1: better than the market. Well, of course, to begin when 404 00:23:58,320 --> 00:24:01,879 Speaker 1: they can't, because some when some don't. They're all average together, 405 00:24:02,040 --> 00:24:04,000 Speaker 1: and how you're picking one over the other you never 406 00:24:04,000 --> 00:24:06,320 Speaker 1: know in advance. You can only guess, and what good. 407 00:24:06,400 --> 00:24:09,800 Speaker 1: Is that? Yeah, exactly, So the down markets do help that. 408 00:24:10,280 --> 00:24:13,000 Speaker 1: But it's also this wave of you know, there's not 409 00:24:13,040 --> 00:24:17,720 Speaker 1: an economics course, there's not an MBA course, and in 410 00:24:17,720 --> 00:24:23,640 Speaker 1: investing or finance that doesn't say basically, indexing is the way. 411 00:24:24,400 --> 00:24:29,480 Speaker 1: It's the data that matters. It's the data and it's 412 00:24:29,480 --> 00:24:32,080 Speaker 1: gonna so instead of I mean, usually if you look 413 00:24:32,119 --> 00:24:34,520 Speaker 1: back and see a fund that's done well, you can 414 00:24:34,560 --> 00:24:36,600 Speaker 1: pretty much conclude it will not do well in the future. 415 00:24:36,880 --> 00:24:40,199 Speaker 1: Everything reverts to the mean. The index does not. It 416 00:24:40,320 --> 00:24:43,359 Speaker 1: continues to give you your share of the market return. 417 00:24:44,240 --> 00:24:47,040 Speaker 1: And when you look at the numbers, I mean, one 418 00:24:47,080 --> 00:24:51,800 Speaker 1: of my favorite constructions is, uh, the index fund gives 419 00:24:51,800 --> 00:24:57,359 Speaker 1: you the advantage of long term compounding of returns while 420 00:24:58,080 --> 00:25:03,320 Speaker 1: eliminating h the tyranny of long term compounding. Of course, 421 00:25:04,160 --> 00:25:07,600 Speaker 1: so think about it this way. Let's assume the stock 422 00:25:07,640 --> 00:25:10,680 Speaker 1: market gives a seven percent return over your life over 423 00:25:10,760 --> 00:25:14,920 Speaker 1: thirty years or over fifty years um. If you get 424 00:25:14,920 --> 00:25:19,560 Speaker 1: to seven percent, each dollar goes up three times. If 425 00:25:19,560 --> 00:25:22,920 Speaker 1: you get five percent, that would be seven percent less 426 00:25:22,960 --> 00:25:26,920 Speaker 1: the industry's typical two percent all in cost, you get 427 00:25:26,960 --> 00:25:30,879 Speaker 1: ten dollars. Wow, So ten dollars versus thirty dollars a 428 00:25:30,960 --> 00:25:34,560 Speaker 1: huge difference. So you put up of the capital, you 429 00:25:34,600 --> 00:25:37,560 Speaker 1: took the pent of the risk, and you've got thirty 430 00:25:37,600 --> 00:25:40,399 Speaker 1: three percent of the return. As I say to people, 431 00:25:40,560 --> 00:25:42,920 Speaker 1: if that strikes she was a good deal by all means, 432 00:25:43,040 --> 00:25:47,160 Speaker 1: do it. So. Morning Star once famously did a study 433 00:25:47,359 --> 00:25:50,479 Speaker 1: which I'm sure to this day they regret, and the 434 00:25:50,560 --> 00:25:55,760 Speaker 1: study they became, you know, famous for their Star rankings 435 00:25:55,800 --> 00:25:59,080 Speaker 1: of mutual funds. And I've written about this. You could 436 00:25:59,119 --> 00:26:02,720 Speaker 1: google this people and find this. Someone internally did a 437 00:26:02,760 --> 00:26:06,600 Speaker 1: study and said, if you don't have access to morning 438 00:26:06,640 --> 00:26:09,760 Speaker 1: Start data, but you just looked at a single data 439 00:26:09,840 --> 00:26:13,320 Speaker 1: point across the universe of mutual funds, what would be 440 00:26:13,400 --> 00:26:15,720 Speaker 1: the most helpful Would it be the track record, would 441 00:26:15,720 --> 00:26:18,200 Speaker 1: it be the manager? Would it And it turned out 442 00:26:18,280 --> 00:26:22,119 Speaker 1: that if you forgot about everything else and only picked 443 00:26:22,240 --> 00:26:27,600 Speaker 1: the lowest cost funds, that generated the highest returns going forward. 444 00:26:28,280 --> 00:26:32,520 Speaker 1: So how that makes me ask the question how important 445 00:26:32,680 --> 00:26:37,480 Speaker 1: are keeping costs low? Two investors? Well, when you give 446 00:26:37,520 --> 00:26:41,280 Speaker 1: the statement that it's only cost that matters, I'm inclined 447 00:26:41,280 --> 00:26:46,280 Speaker 1: to say, as the kids would say, Mary, duh, it's 448 00:26:46,320 --> 00:26:49,840 Speaker 1: it seems obvious after the fact. But for the longest 449 00:26:49,960 --> 00:26:54,080 Speaker 1: periods of time people. So let's let me digress and 450 00:26:54,080 --> 00:26:57,080 Speaker 1: talk a little bit about hedge funds. While all this 451 00:26:57,200 --> 00:27:00,360 Speaker 1: money is flowing a vanguard over the past decade since 452 00:27:00,400 --> 00:27:03,440 Speaker 1: the financial crisis, you guys went from a trillion to 453 00:27:03,560 --> 00:27:07,280 Speaker 1: over three trillion. The other segment of the market that 454 00:27:07,359 --> 00:27:11,040 Speaker 1: attracted a ton of money was the hedge fund industry, 455 00:27:11,040 --> 00:27:15,679 Speaker 1: which charges two percents forget five basis points two percent 456 00:27:15,880 --> 00:27:20,080 Speaker 1: of the assets under management, plus of the profits. And 457 00:27:20,119 --> 00:27:24,440 Speaker 1: they also scaled up across ten thousand funds to three 458 00:27:24,480 --> 00:27:29,040 Speaker 1: trillion dollars. How do you explain, despite the obvious duh, 459 00:27:29,080 --> 00:27:32,000 Speaker 1: how do you explain so much money flowing to a 460 00:27:32,040 --> 00:27:37,080 Speaker 1: group with such high expenses, well, greed, the buyer's greed 461 00:27:37,119 --> 00:27:39,679 Speaker 1: and perhaps even the manager's greed because those are very 462 00:27:39,760 --> 00:27:43,639 Speaker 1: high costs. But people are looking for a better way. 463 00:27:44,359 --> 00:27:46,040 Speaker 1: You know, it's pretty easy. I've done a lot of 464 00:27:46,040 --> 00:27:47,480 Speaker 1: work on this. You may have read some of it 465 00:27:47,800 --> 00:27:49,960 Speaker 1: to forecast what the stock market return is going to 466 00:27:50,040 --> 00:27:54,360 Speaker 1: be within reasonable magnitudes over time, not not in year 467 00:27:54,359 --> 00:27:59,480 Speaker 1: by year, over decades, and uh so you know where 468 00:27:59,480 --> 00:28:01,560 Speaker 1: you're gonna be roughly in the stock market. And you 469 00:28:01,600 --> 00:28:04,960 Speaker 1: say a pension pan, and pension plans are very heavy 470 00:28:05,000 --> 00:28:07,760 Speaker 1: part of the of the hedge fund business because they 471 00:28:07,760 --> 00:28:10,359 Speaker 1: don't have to worry about the high taxes generated by 472 00:28:10,600 --> 00:28:13,720 Speaker 1: by hedge funds. And so they say, we've got to 473 00:28:13,720 --> 00:28:16,960 Speaker 1: have more. And someone coast comes and shows them their 474 00:28:17,000 --> 00:28:20,200 Speaker 1: past record and guess what they put the S and 475 00:28:20,280 --> 00:28:23,440 Speaker 1: P five to shame. Of course they wouldn't show you 476 00:28:23,480 --> 00:28:27,119 Speaker 1: the record if they didn't, So a little survivorship bias 477 00:28:27,160 --> 00:28:30,119 Speaker 1: built into that. You sure that, well, the survivorship bias 478 00:28:30,160 --> 00:28:34,359 Speaker 1: build into it. But most of all, there's it ignores 479 00:28:34,400 --> 00:28:38,440 Speaker 1: the fact of life in this business. It's everywhere reversion 480 00:28:38,480 --> 00:28:43,200 Speaker 1: to the mean. Biblically, put Barry, the last shall be first, 481 00:28:43,240 --> 00:28:45,920 Speaker 1: on the first shall be last. And it happens to 482 00:28:46,040 --> 00:28:49,760 Speaker 1: hedge funds, it happens to mutual funds. It is basically 483 00:28:49,760 --> 00:28:53,160 Speaker 1: a fundamental law. Seven fat years, seven lean years, and 484 00:28:53,200 --> 00:28:55,440 Speaker 1: there's no way around it. Yeah, the number of years 485 00:28:55,440 --> 00:28:57,760 Speaker 1: may differ, but you've got it all right. Well, you 486 00:28:57,760 --> 00:29:01,120 Speaker 1: you reference the Bible and that phrase that always stayed 487 00:29:01,160 --> 00:29:04,560 Speaker 1: with me. Um. So let's let's stick with the issue 488 00:29:04,880 --> 00:29:10,840 Speaker 1: of um of indexing for now. And I want to 489 00:29:10,960 --> 00:29:15,040 Speaker 1: quote something that Charlie Ellis had wrote. Charlie was not 490 00:29:15,160 --> 00:29:18,760 Speaker 1: only on the board of the Vanguard Group, a board 491 00:29:18,760 --> 00:29:21,479 Speaker 1: of directors, but he was also an advisor to the 492 00:29:21,560 --> 00:29:25,160 Speaker 1: Yale Endowment Fund, and he wrote a wonderful book called 493 00:29:25,640 --> 00:29:29,640 Speaker 1: Winning the Losers Game. And he he also advocates that 494 00:29:29,800 --> 00:29:33,880 Speaker 1: individuals should stick with simple indexing, which leads me to 495 00:29:33,920 --> 00:29:40,560 Speaker 1: a question, how many indices should the average invest your own? Well, 496 00:29:41,880 --> 00:29:44,280 Speaker 1: very very few is the symbol to that answer to 497 00:29:44,320 --> 00:29:48,000 Speaker 1: that question. You need a broad stock index, and you 498 00:29:48,040 --> 00:29:50,520 Speaker 1: need a broad out bond index, because I'm convinced that 499 00:29:50,560 --> 00:29:53,800 Speaker 1: everybody should have a little anchor to winward when these 500 00:29:53,840 --> 00:29:56,760 Speaker 1: bad times come, if for no other reason, to protect 501 00:29:56,840 --> 00:30:01,240 Speaker 1: themselves and getting emotional and behaving aileen selling out their 502 00:30:01,280 --> 00:30:05,719 Speaker 1: portfolios at market bottoms. So leaving aside the allocation between 503 00:30:05,760 --> 00:30:08,400 Speaker 1: stocks and bonds, you can buy a bond index fund, 504 00:30:08,840 --> 00:30:11,120 Speaker 1: and you're gonna buy a total stock market index fund, 505 00:30:11,520 --> 00:30:13,600 Speaker 1: and you're gonna buy the Standard and Poors five hundred 506 00:30:13,640 --> 00:30:18,000 Speaker 1: index fund, and that's basically eight of the market. The 507 00:30:18,920 --> 00:30:22,200 Speaker 1: You would think that the that the total stock market 508 00:30:22,240 --> 00:30:25,000 Speaker 1: would be a better bet because it's more diversified in 509 00:30:25,040 --> 00:30:28,120 Speaker 1: the SNP five but We're in a time right now 510 00:30:28,200 --> 00:30:29,840 Speaker 1: and I don't know if this is durable or not. 511 00:30:29,920 --> 00:30:33,120 Speaker 1: Nobody does. Where the large companies are doing better than 512 00:30:33,120 --> 00:30:37,720 Speaker 1: the small companies. So the great Mr Buffett and does 513 00:30:37,840 --> 00:30:42,200 Speaker 1: his He's leaving his wife the state in the s 514 00:30:42,240 --> 00:30:46,040 Speaker 1: and Vanguard SNP five index fund. He has a bet 515 00:30:46,040 --> 00:30:49,040 Speaker 1: with some hedge fund managers. He's winning. He's winning the bet. 516 00:30:49,120 --> 00:30:52,600 Speaker 1: He's not winning, it's he's killing him. He's absolutely way 517 00:30:52,640 --> 00:30:56,400 Speaker 1: way ahead. They actually had to create derivatives for this bet. 518 00:30:56,480 --> 00:30:59,000 Speaker 1: This is a real bet with millions of dollars on it, 519 00:30:59,320 --> 00:31:01,880 Speaker 1: and he looks it's a runaway. Nobody is else is 520 00:31:01,920 --> 00:31:05,200 Speaker 1: even in second. Well, he's got a year ago. This 521 00:31:05,280 --> 00:31:07,160 Speaker 1: is that's right. It will be a decade after the 522 00:31:07,200 --> 00:31:10,040 Speaker 1: financial crisis. The hedge fund. For those of you who 523 00:31:10,040 --> 00:31:12,440 Speaker 1: may not be familiar with the infamous bet, a bunch 524 00:31:12,480 --> 00:31:16,440 Speaker 1: of hedge fund managers were um arrogant enough to bet 525 00:31:16,440 --> 00:31:20,840 Speaker 1: Warren Buffett that they could outperform the SMP. He took 526 00:31:20,920 --> 00:31:24,280 Speaker 1: that bet and it's not even close. It's it's really 527 00:31:24,320 --> 00:31:26,720 Speaker 1: an amazing story. I didn't realize we're only a year 528 00:31:26,760 --> 00:31:31,200 Speaker 1: away from the final outcome of that uh bet. And 529 00:31:31,240 --> 00:31:35,600 Speaker 1: it's it's theoretically possible they can win, but really mathematically 530 00:31:35,640 --> 00:31:41,120 Speaker 1: it's it's highly improbable, but very anything can happen. However, 531 00:31:41,160 --> 00:31:43,600 Speaker 1: I can see that. Jack Bogle, thank you so much 532 00:31:43,640 --> 00:31:45,760 Speaker 1: for being so generous with your time. This has been 533 00:31:45,840 --> 00:31:49,640 Speaker 1: absolutely fascinating. For those of you who are interested in 534 00:31:49,760 --> 00:31:53,080 Speaker 1: hearing the conversation continue, be sure and check out our 535 00:31:53,120 --> 00:31:56,320 Speaker 1: podcast extras, where we keep the tape rolling and continue chatting. 536 00:31:56,920 --> 00:31:59,560 Speaker 1: You can check out my daily column on Bloomberg View 537 00:31:59,600 --> 00:32:03,400 Speaker 1: dot com or follow me on Twitter at Ritults. I'm 538 00:32:03,440 --> 00:32:07,480 Speaker 1: Barry Hults. You're listening to Masters in Business on Bloomberg Radio. 539 00:32:07,840 --> 00:32:10,280 Speaker 1: Welcome back to the podcast. Jack, Thank you so much 540 00:32:10,280 --> 00:32:14,160 Speaker 1: for doing this. This has really been tremendously fascinating. It 541 00:32:14,200 --> 00:32:17,280 Speaker 1: was worth the drive to Pennsylvania to come come see you. 542 00:32:17,960 --> 00:32:24,920 Speaker 1: Um I'm I'm absolutely fascinated by everything you've accomplished. So 543 00:32:25,240 --> 00:32:28,640 Speaker 1: we've talked a little bit of the advantages of indexing 544 00:32:28,800 --> 00:32:32,120 Speaker 1: for equities, and you mentioned bond funds. There have been 545 00:32:32,240 --> 00:32:37,760 Speaker 1: some pretty reasonable academic arguments that you could do okay 546 00:32:37,800 --> 00:32:41,560 Speaker 1: with active management with bond funds because there's such a 547 00:32:41,680 --> 00:32:45,600 Speaker 1: universe of choices. It's not just treasuries, but it's treasuries 548 00:32:45,640 --> 00:32:48,600 Speaker 1: and its corporates and its municipalities. How do you feel 549 00:32:48,640 --> 00:32:52,240 Speaker 1: about about bond funds? Do you just own abroad um 550 00:32:52,360 --> 00:32:55,560 Speaker 1: index of bond funds or do you look at active 551 00:32:55,560 --> 00:32:58,760 Speaker 1: management and bonds and say, well, maybe there's some value 552 00:32:58,760 --> 00:33:02,360 Speaker 1: added there. Well. As a group, bond managers cannot win 553 00:33:02,680 --> 00:33:05,280 Speaker 1: because they are the market and so they will as 554 00:33:05,280 --> 00:33:07,800 Speaker 1: a group capture the market return. There's just no question 555 00:33:07,840 --> 00:33:11,560 Speaker 1: about this. And charging as they do probably in the 556 00:33:11,640 --> 00:33:15,000 Speaker 1: mutual fund business, probably sixty basis points, seventy basis points, 557 00:33:15,400 --> 00:33:17,800 Speaker 1: they just don't have a fighting chance over the bond 558 00:33:17,840 --> 00:33:22,720 Speaker 1: fund index. Now that index has some issues, as they say. 559 00:33:23,440 --> 00:33:26,239 Speaker 1: And I started the first bond in next fund, by 560 00:33:26,240 --> 00:33:34,240 Speaker 1: the way, thirty years ago, Yeah, thirty years ago, and 561 00:33:34,280 --> 00:33:37,800 Speaker 1: it's done just fine, met the test of competition. But 562 00:33:38,160 --> 00:33:40,680 Speaker 1: I'm not I think we can do better in bond 563 00:33:40,760 --> 00:33:42,840 Speaker 1: and next thing than the bond, than the bond and 564 00:33:42,880 --> 00:33:46,959 Speaker 1: next the way it's constructed, because it's about se treasuries 565 00:33:47,320 --> 00:33:52,840 Speaker 1: and mortgage backed good mortgage backed government backed instruments, and 566 00:33:52,960 --> 00:33:56,520 Speaker 1: I think most investors should not have se in the 567 00:33:56,560 --> 00:34:00,720 Speaker 1: super safe category. I think something like is pretty good. 568 00:34:00,960 --> 00:34:02,800 Speaker 1: So it should be a better assortment of risk that 569 00:34:02,920 --> 00:34:05,920 Speaker 1: potentially is generating more returns. And as long as you're 570 00:34:05,960 --> 00:34:10,120 Speaker 1: holding it for decades, the short term volatility is irrelevant. Yeah. Well, 571 00:34:10,320 --> 00:34:14,000 Speaker 1: the the one that I have to use myself is 572 00:34:14,000 --> 00:34:17,799 Speaker 1: our intermediate intermediate term bond index fund. It has it's 573 00:34:17,840 --> 00:34:20,440 Speaker 1: just as volatile or as non volatile, because that has 574 00:34:20,520 --> 00:34:24,160 Speaker 1: the same duration or average maturity, and but it's about 575 00:34:24,160 --> 00:34:28,280 Speaker 1: thirty governments and it is the same in every other respect. 576 00:34:28,560 --> 00:34:31,279 Speaker 1: So if it has a higher yield, the yield and 577 00:34:31,320 --> 00:34:37,600 Speaker 1: a bond has today's yield correlation with the return you're 578 00:34:37,640 --> 00:34:39,719 Speaker 1: gonna get in the next ten years, so you might 579 00:34:39,760 --> 00:34:42,759 Speaker 1: as well take advantage of it. And I'd say particularly, 580 00:34:42,760 --> 00:34:45,360 Speaker 1: I mean, yes, it's a little riskier, but today people 581 00:34:45,360 --> 00:34:50,120 Speaker 1: are dying for income, dying for income, and to reach 582 00:34:50,160 --> 00:34:52,080 Speaker 1: a little bit, you know, I don't believe in big 583 00:34:52,080 --> 00:34:54,920 Speaker 1: reaching for yield at all. Well, that certainly was was 584 00:34:54,960 --> 00:34:58,480 Speaker 1: the close of problems in the last financial crisis. Everybody 585 00:34:58,480 --> 00:35:02,000 Speaker 1: who reached for yields and said, I understand this is subprime, 586 00:35:02,040 --> 00:35:04,880 Speaker 1: but the rating agencies tell me it's triple A, so 587 00:35:04,920 --> 00:35:07,239 Speaker 1: I'm gonna hold my nose and buy this didn't work 588 00:35:07,239 --> 00:35:09,480 Speaker 1: out that way. It did not work out well, to 589 00:35:09,560 --> 00:35:13,319 Speaker 1: say the least, So so I didn't realize you had 590 00:35:13,320 --> 00:35:16,520 Speaker 1: created the first bond index fund. So we have we 591 00:35:16,600 --> 00:35:19,560 Speaker 1: have bond indexes, which you would like to see have 592 00:35:19,640 --> 00:35:23,319 Speaker 1: a little more risk and uh, a little less of 593 00:35:23,360 --> 00:35:28,000 Speaker 1: the super safe size we've already discussed, uh the equity side. 594 00:35:28,320 --> 00:35:31,040 Speaker 1: Let's let's talk a little bit about some of the 595 00:35:31,080 --> 00:35:34,920 Speaker 1: hot buzzwords that are going around today. And I'm curious 596 00:35:34,960 --> 00:35:36,840 Speaker 1: as I already know what your ranches I'm gonna be, 597 00:35:36,880 --> 00:35:39,200 Speaker 1: but I feel obligated to ask before we get to that. 598 00:35:39,239 --> 00:35:42,040 Speaker 1: Can I just say one thing? Sure? We also started 599 00:35:42,840 --> 00:35:49,480 Speaker 1: in about nineteen, well in seven, to broaden our index 600 00:35:49,560 --> 00:35:52,200 Speaker 1: base from the SNP five, we started the bond in 601 00:35:52,280 --> 00:35:55,680 Speaker 1: next fund. We then started. I realized that there was 602 00:35:55,719 --> 00:35:57,799 Speaker 1: a certain attractiveness to owning the whole market, so we 603 00:35:57,840 --> 00:36:00,080 Speaker 1: started something called the extended market in the next on. 604 00:36:00,440 --> 00:36:04,480 Speaker 1: How many holdings were in that well probably um righting. 605 00:36:04,520 --> 00:36:10,200 Speaker 1: It varies amazingly, but probably right now because the Wilshire 606 00:36:10,239 --> 00:36:13,719 Speaker 1: five thousand is something like stocks, it's it's even less 607 00:36:13,760 --> 00:36:15,720 Speaker 1: than then it got up to seventh pass and believe 608 00:36:15,719 --> 00:36:18,320 Speaker 1: it or not, late nineties, Yeah, well, we were cranking 609 00:36:18,320 --> 00:36:20,680 Speaker 1: out a lot of new companies before we realized that 610 00:36:20,719 --> 00:36:24,719 Speaker 1: pets dot com wasn't a sustainable thing exactly. So I 611 00:36:24,800 --> 00:36:29,279 Speaker 1: also had an idea that growth might do better than 612 00:36:29,360 --> 00:36:32,520 Speaker 1: value for the for for young people investing on a 613 00:36:32,600 --> 00:36:35,879 Speaker 1: dollar averaging basis wouldn't be that much riskier, and when 614 00:36:35,920 --> 00:36:38,880 Speaker 1: they retired they might want an income fund. So I 615 00:36:39,200 --> 00:36:41,840 Speaker 1: I divided the SMP into two. As soon as the 616 00:36:41,920 --> 00:36:45,439 Speaker 1: SMP did that, I started a growth index fund half 617 00:36:45,440 --> 00:36:48,360 Speaker 1: of the SMP and a value index fund the other half. 618 00:36:48,800 --> 00:36:50,399 Speaker 1: It didn't work out very well. I mean, it worked 619 00:36:50,440 --> 00:36:53,640 Speaker 1: out fine from performance standpoint. Where we found is the 620 00:36:53,680 --> 00:36:56,000 Speaker 1: money poured into growth when growth was doing well at 621 00:36:56,000 --> 00:36:58,880 Speaker 1: the wrong time, out of growth and into value. So 622 00:36:59,160 --> 00:37:01,400 Speaker 1: you know, sometimes I think we've got to be very 623 00:37:01,440 --> 00:37:04,600 Speaker 1: aware of creating things that we know investors are going 624 00:37:04,640 --> 00:37:07,160 Speaker 1: to use badly. So we don't know, we don't tell 625 00:37:07,200 --> 00:37:09,040 Speaker 1: them what to use and how to use it, but 626 00:37:09,239 --> 00:37:12,520 Speaker 1: it happens, and it's a responsibility of us, the sponsor 627 00:37:12,920 --> 00:37:16,440 Speaker 1: to do that. So that raises a really significant question, 628 00:37:16,560 --> 00:37:22,080 Speaker 1: which is how important is investor behavior to long term 629 00:37:22,160 --> 00:37:26,640 Speaker 1: returns and what can the average investor do to make 630 00:37:26,680 --> 00:37:30,480 Speaker 1: sure that they don't shoot themselves in the foot. Well, 631 00:37:30,520 --> 00:37:34,560 Speaker 1: the first thing to do is don't chase performance, and 632 00:37:34,920 --> 00:37:37,400 Speaker 1: don't if some salesman or you reading the paper for 633 00:37:37,440 --> 00:37:39,960 Speaker 1: that man, or to blame the salesman for this, says, 634 00:37:40,040 --> 00:37:42,080 Speaker 1: here's a new manager on a new fund and it's 635 00:37:42,080 --> 00:37:43,919 Speaker 1: really doing great, or an old manager and the fund 636 00:37:44,000 --> 00:37:46,160 Speaker 1: is doing great, and this fund is a great twenty 637 00:37:46,200 --> 00:37:50,000 Speaker 1: year record. Turn away from that, because it's next twenty 638 00:37:50,080 --> 00:37:52,200 Speaker 1: years aren't going to be anywhere near as good as 639 00:37:52,200 --> 00:37:54,799 Speaker 1: its past twenty. There are plenty of examples that, with 640 00:37:54,840 --> 00:37:57,560 Speaker 1: all due respect and when friends up in Boston Fidelities, 641 00:37:57,600 --> 00:38:01,520 Speaker 1: Magellan Fund was a star fund for roughly twenty years. 642 00:38:01,560 --> 00:38:05,000 Speaker 1: Fantastic Peter Lynch and then his one of his successors 643 00:38:05,000 --> 00:38:08,600 Speaker 1: did really well. Peter Lynch was a superstar performer. And 644 00:38:08,600 --> 00:38:10,719 Speaker 1: then what happened well with a tiny little fun too, 645 00:38:10,800 --> 00:38:13,279 Speaker 1: don't forget that. And the fund that wasn't even offered 646 00:38:13,280 --> 00:38:15,799 Speaker 1: to the public for five or six years. Oh yeah, 647 00:38:16,080 --> 00:38:19,200 Speaker 1: very interesting. We all have our little secrets, and uh 648 00:38:19,680 --> 00:38:21,880 Speaker 1: so I think overrated. But Peter Lynch was certainly a 649 00:38:21,880 --> 00:38:24,480 Speaker 1: good manager. But you know his principle of being, if 650 00:38:24,480 --> 00:38:26,920 Speaker 1: you see a product, you liked by the stock you know, 651 00:38:27,000 --> 00:38:30,799 Speaker 1: makes no rational sense, I'm sorry to say. And Peter Lynch, 652 00:38:30,920 --> 00:38:35,840 Speaker 1: also at Madelon Magellan Funds hey Day said, in words 653 00:38:35,840 --> 00:38:39,719 Speaker 1: of one syllable in Barns, most investors would be better 654 00:38:39,800 --> 00:38:42,920 Speaker 1: off in an index fund. Was that barrens I know, 655 00:38:43,000 --> 00:38:45,239 Speaker 1: I read that from him, and that's not a concession, 656 00:38:45,719 --> 00:38:48,839 Speaker 1: that's the truth. Well, you have him saying that, you 657 00:38:48,840 --> 00:38:51,080 Speaker 1: have Warren Buffett saying that we have a number of 658 00:38:51,120 --> 00:38:56,560 Speaker 1: people David Swinson. Swinson at the yell Endownment, he's another one. Um. 659 00:38:57,280 --> 00:39:04,040 Speaker 1: It's amazing that people push against this because it's long 660 00:39:04,160 --> 00:39:07,160 Speaker 1: term and boring and there's nothing to talk about. And 661 00:39:07,200 --> 00:39:09,560 Speaker 1: but I guess shouldn't. That leads to the next question, 662 00:39:09,800 --> 00:39:13,319 Speaker 1: should investing be long term and boring? If you want 663 00:39:13,320 --> 00:39:16,480 Speaker 1: to have a comfortable retirement, Believe me, you'll be less 664 00:39:16,480 --> 00:39:18,840 Speaker 1: bored in your retirement. If you've got plenty of money, 665 00:39:19,480 --> 00:39:21,440 Speaker 1: You'll you'll be you'll be so on board. If you 666 00:39:21,440 --> 00:39:23,440 Speaker 1: don't do it that you'll have to go back to work. 667 00:39:23,800 --> 00:39:26,520 Speaker 1: So let me ask you about some of the hot 668 00:39:26,560 --> 00:39:29,720 Speaker 1: buzzwords that are out there and investing these days. And again, 669 00:39:29,760 --> 00:39:31,560 Speaker 1: this is a cheat because I'm pretty sure. I know 670 00:39:31,600 --> 00:39:34,879 Speaker 1: what your answers are, but I feel obligated to ask this. 671 00:39:35,480 --> 00:39:40,000 Speaker 1: So you're index funds are basically put together by market 672 00:39:40,040 --> 00:39:43,920 Speaker 1: cap waiting. But now there's something called smart beta, which 673 00:39:44,160 --> 00:39:47,879 Speaker 1: is different ways of assembling an index that don't rely 674 00:39:48,040 --> 00:39:51,480 Speaker 1: on cap waiting. What do you think of the idea 675 00:39:51,480 --> 00:39:57,200 Speaker 1: of smart beta? Smart beta is stupid? Okay, that's why. Well, 676 00:39:57,239 --> 00:39:59,920 Speaker 1: I mean I didn't say that's that's what Nobel Laurea, 677 00:40:00,160 --> 00:40:05,120 Speaker 1: Bill Sharp says. I just quoted him. And the reason 678 00:40:05,280 --> 00:40:08,319 Speaker 1: is just think about this for a minute. It's it's 679 00:40:08,360 --> 00:40:11,359 Speaker 1: another form of active management to begin with. But if 680 00:40:11,360 --> 00:40:15,600 Speaker 1: smart beta is good, and that that means it beats 681 00:40:15,640 --> 00:40:20,960 Speaker 1: the index, then dumb beta this does even worse than 682 00:40:21,000 --> 00:40:24,719 Speaker 1: the index. Right, so smart and dumb are different. But 683 00:40:24,760 --> 00:40:26,279 Speaker 1: why are people going to be dumb if it's so 684 00:40:26,320 --> 00:40:29,160 Speaker 1: easy to be smart? It's just another claim that I 685 00:40:29,160 --> 00:40:35,040 Speaker 1: can do this better now. Happily, after Wisdom Tree and 686 00:40:35,040 --> 00:40:39,120 Speaker 1: and Rob Arns fund came out a decade ago, his 687 00:40:39,200 --> 00:40:42,280 Speaker 1: fund is now more than ten years old. What happened 688 00:40:42,840 --> 00:40:47,080 Speaker 1: and the answer is essentially nothing. His fund beat the 689 00:40:47,239 --> 00:40:51,279 Speaker 1: SMP five d B I think thirty basis points, but 690 00:40:51,360 --> 00:40:55,200 Speaker 1: it was more vowel and therefore it's sharp ratio the 691 00:40:55,239 --> 00:40:58,600 Speaker 1: relationship relationship between risk and reward. I don't hold me 692 00:40:58,640 --> 00:41:01,880 Speaker 1: to the numbers, but the sharp ratio of I mean, 693 00:41:01,960 --> 00:41:03,520 Speaker 1: I mean his guests here, I won't be too far 694 00:41:03,600 --> 00:41:06,239 Speaker 1: off the sharp ratio of the five of us like 695 00:41:06,760 --> 00:41:10,320 Speaker 1: forty one. On the sharp ratio of Arno's fund was 696 00:41:10,400 --> 00:41:14,759 Speaker 1: thirty six. So he lost. He had ten years to 697 00:41:14,800 --> 00:41:17,439 Speaker 1: prove it. Now maybe he'll prove it the next ten years. 698 00:41:17,480 --> 00:41:20,560 Speaker 1: Who can say, But why would that be? I mean, 699 00:41:20,640 --> 00:41:22,919 Speaker 1: where's all the brain power. He's a very smart guy, 700 00:41:22,960 --> 00:41:24,840 Speaker 1: by the way, one of the smartest guys in this business. 701 00:41:24,920 --> 00:41:26,640 Speaker 1: He was a four guest on the show, one of 702 00:41:26,640 --> 00:41:30,120 Speaker 1: our earliest guests. He's a delightful gentleman. I always enjoy 703 00:41:30,200 --> 00:41:35,480 Speaker 1: his company. UM, And it was really an insightful thought 704 00:41:35,600 --> 00:41:40,040 Speaker 1: to say, let's think of different ways to put together UM, 705 00:41:40,239 --> 00:41:44,720 Speaker 1: to put together indexes. But your position is this isn't 706 00:41:44,840 --> 00:41:49,200 Speaker 1: after fees, after everything else. Once you now you risk adjusted, 707 00:41:49,239 --> 00:41:52,759 Speaker 1: you look at all this volatility. Your your conclusion is 708 00:41:52,880 --> 00:41:54,759 Speaker 1: this just isn't worth it well. And even if you 709 00:41:54,760 --> 00:41:57,399 Speaker 1: look at absolute returns, it's like thirty basis points better 710 00:41:57,480 --> 00:42:00,719 Speaker 1: over ten years now, that's not trivial. When he has 711 00:42:00,880 --> 00:42:04,640 Speaker 1: essentially the same portfolio as the index fund with different waitings, 712 00:42:05,640 --> 00:42:08,319 Speaker 1: you can't expect anything to be too different. So I 713 00:42:08,360 --> 00:42:12,480 Speaker 1: think it's it's over sold. Jeremy Siegell of Wisdom Tree 714 00:42:13,000 --> 00:42:15,680 Speaker 1: described this as a new Copernican view of the world. 715 00:42:15,719 --> 00:42:18,759 Speaker 1: Everybody had it wrong, and Copernica said, oh, by god, 716 00:42:18,800 --> 00:42:20,719 Speaker 1: that son is in the middle, and the new sun 717 00:42:20,920 --> 00:42:24,880 Speaker 1: is smart Beta can't be because we're all as a 718 00:42:25,000 --> 00:42:28,040 Speaker 1: group average. And if they are these smart guys over there, 719 00:42:28,480 --> 00:42:31,319 Speaker 1: they are dumb guys over there. Smart and dumb both 720 00:42:31,520 --> 00:42:34,160 Speaker 1: also net net. When you're buying smart data, you're really 721 00:42:34,200 --> 00:42:37,520 Speaker 1: buying a distribution of really smart guys, really average guys, 722 00:42:37,560 --> 00:42:40,160 Speaker 1: really dumb guys, and you don't know who's who across 723 00:42:40,200 --> 00:42:42,640 Speaker 1: all the smart beta funds. You know, and then think 724 00:42:42,680 --> 00:42:47,719 Speaker 1: about this one step further. The index essentially guarantee the 725 00:42:47,719 --> 00:42:51,399 Speaker 1: dollar value index essentially guarantees you the return that all 726 00:42:51,480 --> 00:42:57,680 Speaker 1: investors share. So that's written stone etched in stone. Uh, 727 00:42:58,160 --> 00:43:00,920 Speaker 1: smart beta may do a little better, may do a 728 00:43:00,920 --> 00:43:03,839 Speaker 1: little worse. What is the point of taking the risk 729 00:43:04,320 --> 00:43:07,520 Speaker 1: when the guarantee of getting the market return is right 730 00:43:07,560 --> 00:43:10,960 Speaker 1: at your hand, Why would you speculate, Why would you 731 00:43:10,960 --> 00:43:13,839 Speaker 1: speculate on maybe this guy can do it better? And 732 00:43:13,960 --> 00:43:16,160 Speaker 1: believe me, some of these smart beta funds was for 733 00:43:16,160 --> 00:43:18,480 Speaker 1: a short period of times will do it and some 734 00:43:18,560 --> 00:43:21,040 Speaker 1: of them won't. I mean that's the nature of the beast. 735 00:43:21,440 --> 00:43:23,720 Speaker 1: I've described it as why do you want to romance 736 00:43:23,760 --> 00:43:28,040 Speaker 1: alpha and forsake beta when beta is a sure thing? Yeah, 737 00:43:28,520 --> 00:43:31,880 Speaker 1: so that's smart beta. Let me ask you about something 738 00:43:31,920 --> 00:43:34,480 Speaker 1: else that I suspect they know to your know your answers. 739 00:43:34,960 --> 00:43:38,680 Speaker 1: This year commodities have gold especially has had a huge 740 00:43:38,719 --> 00:43:43,040 Speaker 1: bounce back. We sort of tremendous commodity run from the 741 00:43:43,080 --> 00:43:46,399 Speaker 1: early two thousand's till two thousand eleven. What are your 742 00:43:46,440 --> 00:43:52,080 Speaker 1: thoughts on things like commodity funds, gold, and uh energy 743 00:43:52,200 --> 00:43:57,240 Speaker 1: for for investors? No, no, and no no. Let's repeat 744 00:43:57,239 --> 00:44:01,040 Speaker 1: this in case those of you missed gold. No commodity funds, 745 00:44:01,040 --> 00:44:04,640 Speaker 1: no oil funds. No tell us why? Okay, well oil 746 00:44:04,719 --> 00:44:06,880 Speaker 1: is it commins I'm peak of oil as a commodity 747 00:44:06,960 --> 00:44:10,160 Speaker 1: now and then is think about what a stock is. 748 00:44:11,000 --> 00:44:14,160 Speaker 1: Stock has an internal rate of return and it's composed 749 00:44:14,200 --> 00:44:16,400 Speaker 1: of the earnings growth in the divin end yield. When 750 00:44:16,440 --> 00:44:19,400 Speaker 1: you buy it, it's there. If the stock goes up 751 00:44:19,440 --> 00:44:22,440 Speaker 1: and down, that return is there. It has an underlying 752 00:44:22,719 --> 00:44:25,319 Speaker 1: internal rate of return. You have a discounted cash flow 753 00:44:25,400 --> 00:44:28,640 Speaker 1: from the future. You're buying an existing business that's gonna 754 00:44:28,680 --> 00:44:31,600 Speaker 1: generate revenue and profits and you get to participate in that. Now, 755 00:44:31,680 --> 00:44:36,279 Speaker 1: take a bond. It has an internal return equal to 756 00:44:36,320 --> 00:44:38,520 Speaker 1: the interest coupon that you're gonna get over the next 757 00:44:38,800 --> 00:44:41,160 Speaker 1: ten years or twenty five years, whatever the case may be. 758 00:44:41,920 --> 00:44:46,440 Speaker 1: Commodities have no internal rate of return, and there's a 759 00:44:46,520 --> 00:44:49,279 Speaker 1: cost of storage and security for things like gold or oil. 760 00:44:49,520 --> 00:44:52,840 Speaker 1: So when you buy a unit of gold, why do 761 00:44:52,880 --> 00:44:55,080 Speaker 1: you buy it because you think you can sell it 762 00:44:55,200 --> 00:44:58,640 Speaker 1: to somebody for a higher price. That is the definition 763 00:44:58,719 --> 00:45:02,880 Speaker 1: of speculation. That's the classic greater fool theory. You may 764 00:45:02,920 --> 00:45:05,279 Speaker 1: have paid a lot, but someone will pay more. And well, 765 00:45:05,280 --> 00:45:06,640 Speaker 1: I mean, you may be right, by the way, and 766 00:45:06,680 --> 00:45:08,279 Speaker 1: there's no reason you can't be right, but that just 767 00:45:08,400 --> 00:45:10,920 Speaker 1: means the other guy is wrong. And you don't know 768 00:45:11,120 --> 00:45:12,920 Speaker 1: as you as the investor, you don't know which of 769 00:45:13,000 --> 00:45:15,279 Speaker 1: those two parties you're gonna be five years from that. 770 00:45:15,560 --> 00:45:18,320 Speaker 1: And another thing when you mentioned gold is it brings 771 00:45:18,360 --> 00:45:21,720 Speaker 1: to mind is everybody used to talk about gold. Forbes 772 00:45:21,800 --> 00:45:25,160 Speaker 1: magazine highlighted in all their reviews for years and years 773 00:45:25,200 --> 00:45:27,840 Speaker 1: when they picked the best funds gold funds, gold funds. 774 00:45:28,200 --> 00:45:30,440 Speaker 1: And then we we had the boom and gold, and 775 00:45:30,520 --> 00:45:33,439 Speaker 1: then we had the collapse and nobody started talking about 776 00:45:33,480 --> 00:45:36,840 Speaker 1: Nobody talking about gold. Now we have another boom and 777 00:45:36,960 --> 00:45:40,880 Speaker 1: everybody's talking about gold. Then gold collapses last year, nobody's 778 00:45:40,920 --> 00:45:44,280 Speaker 1: talking about gold. Now gold is up this year. Everybody. 779 00:45:44,360 --> 00:45:47,440 Speaker 1: This is metaphorically speaking, everybody's talking about gold. You know, 780 00:45:47,560 --> 00:45:50,919 Speaker 1: don't pay any attention to gold. I mean, it would 781 00:45:51,000 --> 00:45:54,359 Speaker 1: not be stupid. I wouldn't do it, but it would 782 00:45:54,400 --> 00:45:56,840 Speaker 1: not be stupid to have a very small position in 783 00:45:56,960 --> 00:46:03,480 Speaker 1: gold as a hedge against worldwide hyperinflation. Maybe five I 784 00:46:03,480 --> 00:46:06,080 Speaker 1: wouldn't do any more than that, But I don't think 785 00:46:06,080 --> 00:46:09,960 Speaker 1: you should do that. But it's at least defensible because 786 00:46:10,000 --> 00:46:13,800 Speaker 1: you're you have a specific goal in mind, and it's insurance. 787 00:46:13,840 --> 00:46:17,080 Speaker 1: You're paying a five percent insurance on the remote possibility 788 00:46:17,120 --> 00:46:20,080 Speaker 1: of global hyper inflation. But if you're wrong, it's a 789 00:46:20,200 --> 00:46:23,080 Speaker 1: giant five percent drag on your portfolio for the next 790 00:46:23,160 --> 00:46:26,239 Speaker 1: few decades. Yeah, and that's huge. That is well, you 791 00:46:26,280 --> 00:46:28,759 Speaker 1: guys are talking about five basis points. This is five 792 00:46:28,840 --> 00:46:33,160 Speaker 1: hundred basis points. That's a tremendous, tremendous drag. Let's talk 793 00:46:33,200 --> 00:46:36,080 Speaker 1: a little bit. And by the way, I'm pretty much 794 00:46:36,080 --> 00:46:39,520 Speaker 1: what I expected you to say about commodities. Let's let 795 00:46:39,560 --> 00:46:41,600 Speaker 1: me find two things to talk to you about that 796 00:46:41,640 --> 00:46:44,719 Speaker 1: I'm gonna have to push back a little bit. One 797 00:46:45,440 --> 00:46:48,920 Speaker 1: is e t fs exchange traded funds. I know you're 798 00:46:49,000 --> 00:46:52,040 Speaker 1: not a big fan of them, but lots of investors 799 00:46:52,120 --> 00:46:55,840 Speaker 1: find it's a very inexpensive, simple way to get exposure 800 00:46:55,920 --> 00:46:59,360 Speaker 1: to the S and P five hundred or whatever asset 801 00:46:59,440 --> 00:47:02,640 Speaker 1: class they want. Why are you not a big fan 802 00:47:02,719 --> 00:47:07,640 Speaker 1: of ETFs? Well, I'll start with little anecdote. A wonderful 803 00:47:07,680 --> 00:47:10,759 Speaker 1: guy named Nathan mose came to visit me right in 804 00:47:10,800 --> 00:47:13,680 Speaker 1: my office upstairs here at Vanguard, and he said, I 805 00:47:13,760 --> 00:47:16,160 Speaker 1: have a great idea for you. We I want to 806 00:47:16,200 --> 00:47:19,280 Speaker 1: start the first exchange traded mutual fund and have Vanguards 807 00:47:19,320 --> 00:47:21,799 Speaker 1: my partner there. I was I could have not only 808 00:47:21,880 --> 00:47:24,880 Speaker 1: created the first index mutual fund, but the first et F. 809 00:47:25,600 --> 00:47:30,880 Speaker 1: And I said, Nate, no way, because the description that 810 00:47:31,000 --> 00:47:33,319 Speaker 1: you got from from Nathan, or at least their first 811 00:47:33,440 --> 00:47:36,200 Speaker 1: adds later on, was now you can trade the S 812 00:47:36,280 --> 00:47:39,200 Speaker 1: and P five hundred all day long in real time. 813 00:47:40,040 --> 00:47:43,040 Speaker 1: And I would say, that's what kind of a nut 814 00:47:43,160 --> 00:47:45,200 Speaker 1: would want to do that. I mean, there must be 815 00:47:45,280 --> 00:47:47,400 Speaker 1: better things to do than that in this life. But 816 00:47:47,480 --> 00:47:50,720 Speaker 1: in any event, it's the trading idea. When my idea 817 00:47:50,719 --> 00:47:54,719 Speaker 1: of indexing broad market indexing by the SNP five and 818 00:47:54,880 --> 00:47:58,600 Speaker 1: hold it forever, what is said to be worn Warren 819 00:47:58,600 --> 00:48:02,080 Speaker 1: Buffett's favorite holding period is forever. So so the idea 820 00:48:02,200 --> 00:48:06,120 Speaker 1: of an SMP five hundred funds that if you're gonna, 821 00:48:06,120 --> 00:48:08,480 Speaker 1: if you're gonna do that exposure, you're better doing it 822 00:48:08,560 --> 00:48:12,480 Speaker 1: with the low cost mutual funds than an index funds. Uh. 823 00:48:12,560 --> 00:48:14,759 Speaker 1: Then in uh E t F so there is no 824 00:48:14,920 --> 00:48:19,560 Speaker 1: temptation to trade intra day or to play around that. 825 00:48:19,800 --> 00:48:21,600 Speaker 1: That's not what you think people should be doing with 826 00:48:21,680 --> 00:48:23,920 Speaker 1: their time or not. But let's let's examine the E 827 00:48:24,000 --> 00:48:26,440 Speaker 1: t F business for just a minute. And that is 828 00:48:26,520 --> 00:48:28,719 Speaker 1: if you look at E t F s, all the 829 00:48:28,760 --> 00:48:30,200 Speaker 1: big ones. Man, I can't look at all of them, 830 00:48:30,280 --> 00:48:34,480 Speaker 1: but the big ones, particularly in the normal ones, are 831 00:48:34,520 --> 00:48:37,680 Speaker 1: about seventy by financial institutions. They're trading them in the 832 00:48:37,719 --> 00:48:42,640 Speaker 1: marketplace every day. The spider, the SMP five UM e 833 00:48:42,800 --> 00:48:46,520 Speaker 1: T F or the NASA one spider is the most 834 00:48:46,600 --> 00:48:51,960 Speaker 1: widely traded stock in the world every day. And if 835 00:48:52,000 --> 00:48:54,360 Speaker 1: you look further this year, which is a little more 836 00:48:54,440 --> 00:48:58,040 Speaker 1: bottle than most years so far, the dollar volume of 837 00:48:58,120 --> 00:49:01,960 Speaker 1: trading in e T s is the same size as 838 00:49:02,000 --> 00:49:06,200 Speaker 1: the dollar volume of trading and common stocks. Unbelievable because 839 00:49:06,239 --> 00:49:09,759 Speaker 1: common stocks are worth about twenty three trillion dollars and 840 00:49:09,960 --> 00:49:13,600 Speaker 1: the spiders are worth about two. So spiders are turning 841 00:49:13,640 --> 00:49:16,120 Speaker 1: over it three thousand percent a year and stocks are 842 00:49:16,160 --> 00:49:18,800 Speaker 1: turning over it two a year or something like that. 843 00:49:19,400 --> 00:49:23,040 Speaker 1: So they're trading instruments owned by large institutions. I mean, 844 00:49:23,080 --> 00:49:26,239 Speaker 1: look at the spider head. It says institutions, here's what 845 00:49:26,360 --> 00:49:29,080 Speaker 1: you need to trade. I mean, it's practically verbatim from 846 00:49:29,080 --> 00:49:32,239 Speaker 1: the ad. It's just it may be irrelevant, but I 847 00:49:32,560 --> 00:49:34,680 Speaker 1: don't think in the long run and that has anything 848 00:49:34,719 --> 00:49:36,640 Speaker 1: to do with the mutual fund business or individual And 849 00:49:36,719 --> 00:49:39,680 Speaker 1: it certainly shouldn't have anything to do with individuals, because 850 00:49:40,160 --> 00:49:43,040 Speaker 1: why would you as an individual want to trade against 851 00:49:43,520 --> 00:49:47,319 Speaker 1: these giant institutions who do nothing but use this as 852 00:49:47,560 --> 00:49:49,640 Speaker 1: a either a trading tool or a hedging tool or 853 00:49:49,680 --> 00:49:52,799 Speaker 1: whatever it is. You're saying, this is not a playground 854 00:49:52,880 --> 00:49:56,279 Speaker 1: for individuals to step into. And that looks like it's 855 00:49:56,400 --> 00:49:59,480 Speaker 1: roughly seventy percent of the business. And you know, I 856 00:49:59,480 --> 00:50:01,680 Speaker 1: don't you mean even to criticize it. It's kind of 857 00:50:01,680 --> 00:50:05,280 Speaker 1: irrelevant when you get to the other of the business. 858 00:50:05,360 --> 00:50:07,359 Speaker 1: And I may be a little often my percentages here, 859 00:50:07,960 --> 00:50:12,800 Speaker 1: but they're individuals and you know, something like two thirds 860 00:50:12,880 --> 00:50:15,240 Speaker 1: of them are using e t f s to trade, 861 00:50:15,920 --> 00:50:18,720 Speaker 1: and one third of them that would be the total 862 00:50:18,920 --> 00:50:21,640 Speaker 1: all the e t F market are using them, buying 863 00:50:21,680 --> 00:50:24,560 Speaker 1: and holding them and maybe using them. You know, we 864 00:50:24,680 --> 00:50:27,040 Speaker 1: have it's a funny technical thing in this business. But 865 00:50:27,800 --> 00:50:28,920 Speaker 1: you know, if you want to put it in a 866 00:50:29,000 --> 00:50:31,400 Speaker 1: thousand dollars a month into a van guard fund and 867 00:50:31,480 --> 00:50:33,400 Speaker 1: then you want to take out five thousand dollars at 868 00:50:33,400 --> 00:50:36,719 Speaker 1: the end of the year and buy Christmas presents whatever 869 00:50:36,760 --> 00:50:40,440 Speaker 1: you might want, um, it's very difficult to do that 870 00:50:40,560 --> 00:50:42,600 Speaker 1: here because we don't like buying and selling at the 871 00:50:42,640 --> 00:50:45,360 Speaker 1: same time. You can do it with our e t 872 00:50:45,520 --> 00:50:48,160 Speaker 1: f s very easily. So a certain market place there 873 00:50:48,640 --> 00:50:52,440 Speaker 1: of people who aren't traders but like the flexibility ETFs had, 874 00:50:52,640 --> 00:50:55,120 Speaker 1: and I have no problem with that. The other the 875 00:50:55,200 --> 00:50:57,800 Speaker 1: other part of the problem, however, the E t F problem, 876 00:50:58,719 --> 00:51:01,120 Speaker 1: is there is this huge amount in number, not so 877 00:51:01,239 --> 00:51:04,200 Speaker 1: much an asset of funds that are doing things that 878 00:51:04,360 --> 00:51:07,759 Speaker 1: no intelligent investor would ever do. Triple leverage and you 879 00:51:07,800 --> 00:51:10,319 Speaker 1: can bet every day whether the market's going up or down. 880 00:51:10,680 --> 00:51:14,280 Speaker 1: Isn't that grand? Not only triple leveraged up, but inverse 881 00:51:14,320 --> 00:51:16,760 Speaker 1: triple leveraged. As long as you know whether the market's 882 00:51:16,800 --> 00:51:18,759 Speaker 1: going up or down during the day, you're gonna make 883 00:51:18,800 --> 00:51:21,080 Speaker 1: a fortune. Who who knows if the market's going to 884 00:51:21,160 --> 00:51:23,000 Speaker 1: go up any or down any given day. Well, I 885 00:51:23,040 --> 00:51:25,759 Speaker 1: guess these smart people that have these funds, but they 886 00:51:25,840 --> 00:51:28,840 Speaker 1: all have both of them, that's right. They don't compete 887 00:51:28,880 --> 00:51:30,680 Speaker 1: with each other. And there are a whole lot of 888 00:51:30,719 --> 00:51:34,080 Speaker 1: other wacky things. I mean, I don't think US investors, you'll, 889 00:51:34,200 --> 00:51:36,399 Speaker 1: I'm sure you're gonna come to this, should be buying 890 00:51:36,480 --> 00:51:41,360 Speaker 1: individual foreign non US So let's let's ask that question. 891 00:51:41,840 --> 00:51:45,600 Speaker 1: A lot of the academic data says that if you're 892 00:51:45,640 --> 00:51:50,279 Speaker 1: diversified internationally, parts of the world are sometimes doing better 893 00:51:50,360 --> 00:51:53,080 Speaker 1: than the US, and sometimes the US is doing part 894 00:51:53,120 --> 00:51:55,360 Speaker 1: of the world. If we want to really be diversified, 895 00:51:55,920 --> 00:51:59,000 Speaker 1: you need US and not just have an overwhelming home 896 00:51:59,120 --> 00:52:05,640 Speaker 1: country bias UH Developed World x US and then emerging markets. 897 00:52:05,680 --> 00:52:08,640 Speaker 1: What's wrong with having a smattering of those in your 898 00:52:08,719 --> 00:52:12,920 Speaker 1: portfolios so that you get to take advantage of the 899 00:52:13,000 --> 00:52:17,280 Speaker 1: growth of the Pacific RIM in China and South America 900 00:52:17,800 --> 00:52:21,279 Speaker 1: and etcetera. Well, the question is is an advantage I mean, 901 00:52:21,320 --> 00:52:23,200 Speaker 1: tell someone to put all their money in Brazil two 902 00:52:23,280 --> 00:52:25,919 Speaker 1: years ago because somebody who put in all their money 903 00:52:25,960 --> 00:52:28,800 Speaker 1: in China year ago. Isn't an advantage or is it 904 00:52:28,920 --> 00:52:31,000 Speaker 1: just you know, kind of a little bubble going on 905 00:52:31,120 --> 00:52:33,960 Speaker 1: in those Well, but you're not picking individual countries. You're 906 00:52:33,960 --> 00:52:38,400 Speaker 1: gonna have a broad index of international companies, and therefore 907 00:52:39,520 --> 00:52:43,440 Speaker 1: it should theoretically the gain should offset the losses and 908 00:52:43,520 --> 00:52:46,759 Speaker 1: then some and so you have exposure elsewhere. You're not 909 00:52:46,880 --> 00:52:49,480 Speaker 1: a big fan of that, Well, I'm not. And and 910 00:52:49,680 --> 00:52:52,080 Speaker 1: the reason goes back to when I started to think 911 00:52:52,080 --> 00:52:55,879 Speaker 1: about it seriously writing my book bogelon Mutual Funds. Back 912 00:52:55,880 --> 00:53:01,239 Speaker 1: in Bogel on Mutual Funds, let's see what I have here. 913 00:53:01,280 --> 00:53:04,239 Speaker 1: I have common sense on mutual funds that probably says 914 00:53:04,280 --> 00:53:06,120 Speaker 1: something very similar to this, But this is a little 915 00:53:06,160 --> 00:53:10,360 Speaker 1: more recent, so I said, tenth edition forward by David Swinson. 916 00:53:10,440 --> 00:53:13,000 Speaker 1: So when you say recent, this came originally came out 917 00:53:13,600 --> 00:53:18,440 Speaker 1: almost fifteen years ago, right, and the original was seventeen 918 00:53:18,480 --> 00:53:21,560 Speaker 1: years ago. Interestingly enough, I'll get back to the other 919 00:53:21,640 --> 00:53:24,919 Speaker 1: subject in a second, but interesting enough, the first book 920 00:53:25,000 --> 00:53:29,759 Speaker 1: came out at a market high and the second and 921 00:53:29,840 --> 00:53:32,160 Speaker 1: the second book came out on the market low. And 922 00:53:32,320 --> 00:53:35,479 Speaker 1: I would hardly change one word in the whole second edition. 923 00:53:36,160 --> 00:53:40,240 Speaker 1: I reprinted it verbatim and then Mark put red Nantucket 924 00:53:40,320 --> 00:53:42,319 Speaker 1: read for any changes that took place in the book. 925 00:53:42,480 --> 00:53:45,520 Speaker 1: Now on the tenth edition, that's that's used after the 926 00:53:45,640 --> 00:53:48,520 Speaker 1: financial crisis, you could see some of the changes that 927 00:53:48,600 --> 00:53:52,120 Speaker 1: were made, but they're really very modest. You really didn't 928 00:53:52,239 --> 00:53:54,640 Speaker 1: change any of the themes in this. You just kind 929 00:53:54,680 --> 00:53:58,399 Speaker 1: of fleshed it out post crisis. It worked. Indexing worked 930 00:53:58,440 --> 00:54:00,680 Speaker 1: in the good market. Indexing worked, they're not so good 931 00:54:00,760 --> 00:54:03,960 Speaker 1: market as and course low cost worked in the good 932 00:54:04,000 --> 00:54:05,960 Speaker 1: market and not so good also, and they're not so 933 00:54:06,080 --> 00:54:09,040 Speaker 1: good market It has to So getting back to I 934 00:54:09,160 --> 00:54:14,279 Speaker 1: said in my first book, Uh, look us companies got 935 00:54:14,320 --> 00:54:17,040 Speaker 1: half of their revenues. This is true now at least 936 00:54:17,040 --> 00:54:18,960 Speaker 1: a little bit less than half of the revenues and 937 00:54:19,000 --> 00:54:21,800 Speaker 1: a half of their earnings from outside the US. We 938 00:54:22,080 --> 00:54:24,560 Speaker 1: you have an international portfolio, why do you want a 939 00:54:24,680 --> 00:54:28,880 Speaker 1: larger one? And then I say, take a look at 940 00:54:28,920 --> 00:54:34,600 Speaker 1: what comprises that international portfolio. Your largest investment is Japan, 941 00:54:34,880 --> 00:54:38,080 Speaker 1: Your second largest investment is the UK, Your third largest 942 00:54:38,120 --> 00:54:41,600 Speaker 1: investment is France. Now, if returns are developed out of 943 00:54:41,719 --> 00:54:45,840 Speaker 1: national economic strength, does anybody think that the UK and 944 00:54:45,960 --> 00:54:48,720 Speaker 1: Japan and France are gonna do better than the US 945 00:54:49,120 --> 00:54:52,640 Speaker 1: in the next ten, fift twenty years. I can't imagine it. 946 00:54:53,360 --> 00:54:55,560 Speaker 1: And now I may be wrong. I'm not saying this 947 00:54:55,719 --> 00:54:59,799 Speaker 1: is written in stone, but that's four that's forty five 948 00:54:59,840 --> 00:55:02,120 Speaker 1: p end of the money. So if people knew they 949 00:55:02,160 --> 00:55:05,120 Speaker 1: were putting forty percent of their international money, so called 950 00:55:05,160 --> 00:55:10,000 Speaker 1: international non US is a better formulation. In Great Britain, France, 951 00:55:10,080 --> 00:55:13,880 Speaker 1: and and the Japan, I mean with every one of 952 00:55:13,920 --> 00:55:17,799 Speaker 1: those economies has real problems. The French don't work very hard, 953 00:55:18,960 --> 00:55:22,120 Speaker 1: the Japanese have a structured and deeply aging economy, over 954 00:55:22,239 --> 00:55:27,800 Speaker 1: burdened by future retirement claims, terrible demographics, and they're a 955 00:55:27,840 --> 00:55:30,839 Speaker 1: great exporter. But then they have issues and Britain doesn't 956 00:55:30,880 --> 00:55:32,920 Speaker 1: know what's going to happen if they do the the 957 00:55:33,040 --> 00:55:35,719 Speaker 1: exit from the European Community, and or do they know 958 00:55:35,760 --> 00:55:37,520 Speaker 1: what's going to happen if they stay in? So what 959 00:55:37,640 --> 00:55:43,040 Speaker 1: would happen if a sharp upstart company, let's call them Vanguard, says, 960 00:55:43,640 --> 00:55:47,799 Speaker 1: here's a broad international index that's fairly evenly weighted. It's 961 00:55:47,840 --> 00:55:52,200 Speaker 1: not just these three countries. Might that change your perspective 962 00:55:52,320 --> 00:55:54,600 Speaker 1: or do you still think, Hey, you get plenty of 963 00:55:55,040 --> 00:55:57,800 Speaker 1: the SMP five hundred. Half the revenue comes from overseas. 964 00:55:58,160 --> 00:56:02,479 Speaker 1: That's all the overseas exposure anyone really needs. I don't 965 00:56:02,520 --> 00:56:04,960 Speaker 1: like the idea because you would have as much and 966 00:56:05,800 --> 00:56:09,560 Speaker 1: I don't know Honduras as you do in in Great Britain. 967 00:56:09,600 --> 00:56:13,160 Speaker 1: It wouldn't make any sense. Uh so, But to make 968 00:56:13,239 --> 00:56:17,279 Speaker 1: matters worse, when I made this statement in we now 969 00:56:17,400 --> 00:56:21,360 Speaker 1: have twenty two years of history, right, how was the prediction? 970 00:56:22,280 --> 00:56:24,640 Speaker 1: And the answer is that don't hold me to the 971 00:56:24,760 --> 00:56:29,520 Speaker 1: exact numbers. But the US portfolio is up about say seven, 972 00:56:31,360 --> 00:56:35,360 Speaker 1: and the non US portfolios up about two. So the 973 00:56:35,480 --> 00:56:38,880 Speaker 1: US is still winning versus the international. So I committed 974 00:56:38,920 --> 00:56:43,799 Speaker 1: the elements in very I was right. Now I want 975 00:56:43,840 --> 00:56:45,440 Speaker 1: to be very clear in this. Does that mean I 976 00:56:45,480 --> 00:56:48,160 Speaker 1: will be equally right in the future. I can't imagine it. 977 00:56:48,680 --> 00:56:51,440 Speaker 1: You think eventually, I mean reversion comes in. Yeah, and 978 00:56:51,520 --> 00:56:54,200 Speaker 1: eventually those two positions will reverse. The US Well, I 979 00:56:54,280 --> 00:56:56,960 Speaker 1: don't think they will reverse. But I don't think that 980 00:56:57,080 --> 00:57:00,200 Speaker 1: spread is a durable spread. And the reason I don't 981 00:57:00,200 --> 00:57:03,560 Speaker 1: think that reverse is we have this fabulous economy here. 982 00:57:03,880 --> 00:57:06,640 Speaker 1: I mean, yes, it has problems, but probably less problems 983 00:57:06,680 --> 00:57:08,840 Speaker 1: than any country in the world, no doubt about that. 984 00:57:09,040 --> 00:57:12,520 Speaker 1: And the my favorite quote is this is the cleanest 985 00:57:12,800 --> 00:57:16,400 Speaker 1: shirt in a dirty hamper. Sure, exactly right. And well, 986 00:57:16,440 --> 00:57:18,560 Speaker 1: I mean I'd say was even cleaner than that. We're 987 00:57:18,640 --> 00:57:22,919 Speaker 1: number one in innovation and technology. Uh, we're not number 988 00:57:22,960 --> 00:57:27,040 Speaker 1: one an entrepreneurship. We're still a great manufacturing company, all 989 00:57:27,160 --> 00:57:29,680 Speaker 1: not as great as we are, and we still have, 990 00:57:30,360 --> 00:57:34,040 Speaker 1: you know, all these new companies being started, existing companies 991 00:57:34,080 --> 00:57:37,919 Speaker 1: being run more and more efficiently and more than anything else, 992 00:57:38,040 --> 00:57:40,040 Speaker 1: or at least as much as all that. We have 993 00:57:40,200 --> 00:57:43,920 Speaker 1: great institutional structure in this country. We have legal protections, 994 00:57:43,960 --> 00:57:46,960 Speaker 1: we have courts, we have laws, and no one's going 995 00:57:47,000 --> 00:57:50,320 Speaker 1: to take your stock away from you confiscated overnight and 996 00:57:51,200 --> 00:57:54,400 Speaker 1: shareholder rights are as good as any country in the world, 997 00:57:54,440 --> 00:57:56,520 Speaker 1: maybe with the exception of I don't think they do 998 00:57:56,600 --> 00:57:59,200 Speaker 1: any better, but they don't do any worse. Probably Switzerland 999 00:57:59,280 --> 00:58:02,280 Speaker 1: and Great Britain be the two big competitors. Now you see, 1000 00:58:02,400 --> 00:58:04,840 Speaker 1: you see what happens in China, your stocks may not 1001 00:58:05,000 --> 00:58:07,920 Speaker 1: be your stocks. It's very hard to be forget as 1002 00:58:08,000 --> 00:58:11,400 Speaker 1: a as a local, as an international investor. It's very 1003 00:58:11,480 --> 00:58:14,240 Speaker 1: hard to be an investor in China if you don't 1004 00:58:14,360 --> 00:58:17,680 Speaker 1: know am I gonna be able to ever cash this out? 1005 00:58:18,280 --> 00:58:21,040 Speaker 1: Or maybe there's gonna be a vacation period where no 1006 00:58:21,240 --> 00:58:24,480 Speaker 1: sales for the next month, as we saw last year. Yeah, 1007 00:58:24,480 --> 00:58:27,720 Speaker 1: and let me add to this that just about everybody 1008 00:58:27,760 --> 00:58:30,240 Speaker 1: says I'm wrong, by the way, but everybody said I 1009 00:58:30,320 --> 00:58:31,960 Speaker 1: was wrong with an index. I was gonna say. That's 1010 00:58:31,960 --> 00:58:34,080 Speaker 1: only gonna make you, that's only gonna make you double 1011 00:58:34,120 --> 00:58:36,400 Speaker 1: down and think you're right, because there's a track record 1012 00:58:36,440 --> 00:58:39,440 Speaker 1: of people predicting you're gonna be wrong, and they've all 1013 00:58:39,960 --> 00:58:42,800 Speaker 1: they've all proven themselves false. So but let me just 1014 00:58:42,880 --> 00:58:46,120 Speaker 1: say one more thing. In international just think what would 1015 00:58:46,160 --> 00:58:48,600 Speaker 1: you would have done if you had an internationally waited 1016 00:58:48,920 --> 00:58:54,720 Speaker 1: or a non you wise waited in when you had 1017 00:58:55,040 --> 00:58:58,680 Speaker 1: fifty percent, that is to say, five percent of your 1018 00:58:58,720 --> 00:59:02,160 Speaker 1: money in Japan, right when the nick was forty six 1019 00:59:02,280 --> 00:59:05,480 Speaker 1: thousand or something like that. No one was talking this 1020 00:59:05,640 --> 00:59:09,880 Speaker 1: way then, But that could happen again, and I don't 1021 00:59:09,920 --> 00:59:13,400 Speaker 1: think he should be subject to these funny speculative booms 1022 00:59:13,440 --> 00:59:16,080 Speaker 1: that can take place in other countries. I just can't 1023 00:59:16,160 --> 00:59:20,520 Speaker 1: imagine that there will be a significant advantage in international 1024 00:59:20,680 --> 00:59:23,560 Speaker 1: companies over US companies. I'm not talking about stocks now, 1025 00:59:23,960 --> 00:59:28,000 Speaker 1: I'm talking about companies and economies over the US. Now, look, 1026 00:59:28,080 --> 00:59:29,440 Speaker 1: I could be wrong on this, and if you think 1027 00:59:29,480 --> 00:59:32,480 Speaker 1: I'm wrong, go buy all the international and non US 1028 00:59:32,520 --> 00:59:35,600 Speaker 1: stocks you want by a non US stock index by 1029 00:59:35,680 --> 00:59:39,520 Speaker 1: individual countries. I wouldn't do any of that. And what 1030 00:59:39,720 --> 00:59:43,240 Speaker 1: we didn't even mention the currency side of things. How 1031 00:59:43,640 --> 00:59:47,960 Speaker 1: significant is currency fluctuations to UH to this sort of 1032 00:59:48,040 --> 00:59:52,280 Speaker 1: international exposure if you're domicile team in the US, what 1033 00:59:52,760 --> 00:59:58,040 Speaker 1: kind of currency currencies here? Well, that that is an 1034 00:59:58,080 --> 01:00:01,400 Speaker 1: issue because the dollar has been very strong, and it 1035 01:00:01,480 --> 01:00:04,840 Speaker 1: won't be strong forever, because international trade has a way 1036 01:00:04,880 --> 01:00:07,680 Speaker 1: of balancing out. When the dollar is strong, the trade 1037 01:00:07,720 --> 01:00:10,040 Speaker 1: balance has changed and all that. So I don't think 1038 01:00:10,040 --> 01:00:12,800 Speaker 1: you should count on a good strong dollar forever. So 1039 01:00:12,960 --> 01:00:16,280 Speaker 1: won't won't, won't impact it. Let's let's talk UM. But 1040 01:00:16,440 --> 01:00:18,880 Speaker 1: I want to talk a little more about Vanguard. But 1041 01:00:19,040 --> 01:00:23,720 Speaker 1: before we get to that, to two last questions about indexing. 1042 01:00:23,840 --> 01:00:27,040 Speaker 1: The first is is there any sort of active management 1043 01:00:27,200 --> 01:00:31,320 Speaker 1: you would favor Vanguard about of the sets here or 1044 01:00:31,360 --> 01:00:34,840 Speaker 1: in active managed funds. What do you think about having 1045 01:00:34,880 --> 01:00:39,400 Speaker 1: a small slug of someone's portfolio in something that might 1046 01:00:39,480 --> 01:00:43,120 Speaker 1: not be a passive index. Well, let me give you 1047 01:00:43,200 --> 01:00:46,200 Speaker 1: this very important background about our actively managed funds, and 1048 01:00:46,360 --> 01:00:49,040 Speaker 1: this is what I've been saying since we started Vanguard 1049 01:00:49,600 --> 01:00:55,360 Speaker 1: in nineteen seventy four. I want our active management, actively 1050 01:00:55,440 --> 01:00:59,680 Speaker 1: managed funds to have returns that are relatively predictable, relative 1051 01:00:59,720 --> 01:01:03,240 Speaker 1: predict ability relative to their group. There they're group like 1052 01:01:03,400 --> 01:01:06,240 Speaker 1: large cap value funds, a long term municipal mound, phones, 1053 01:01:06,280 --> 01:01:10,920 Speaker 1: whatever it might be. UM, and the idea would be 1054 01:01:12,760 --> 01:01:15,040 Speaker 1: look at those funds and not don't get too far 1055 01:01:15,080 --> 01:01:17,920 Speaker 1: out of line so you'll have an average perform if 1056 01:01:17,920 --> 01:01:20,080 Speaker 1: you If you have six managers, there's where the multi 1057 01:01:20,160 --> 01:01:23,760 Speaker 1: manager thing comes from. If you have six managers, the 1058 01:01:23,920 --> 01:01:25,880 Speaker 1: idea that they will do about the same as another, 1059 01:01:26,000 --> 01:01:29,560 Speaker 1: as your competitive group with sixty managers is almost guaranteed 1060 01:01:29,640 --> 01:01:31,920 Speaker 1: to do the same. So what's so good about that? 1061 01:01:32,320 --> 01:01:34,160 Speaker 1: What's so good about that is we think we have 1062 01:01:34,320 --> 01:01:37,240 Speaker 1: a one and a half percent to two cost advantage 1063 01:01:37,680 --> 01:01:41,480 Speaker 1: through lower expenses, lower turnover, no sales loads, and we 1064 01:01:41,520 --> 01:01:43,320 Speaker 1: should win by a point and a half a year, 1065 01:01:43,920 --> 01:01:47,400 Speaker 1: not on brilliance, but on cost. So let's guarantee. Now, 1066 01:01:47,560 --> 01:01:49,840 Speaker 1: let me just give you the punch line here. If 1067 01:01:49,880 --> 01:01:53,200 Speaker 1: you win, what's so good about one over ten years? 1068 01:01:53,480 --> 01:01:57,520 Speaker 1: You have a higher return. That that's tremendous. So I 1069 01:01:57,720 --> 01:02:02,200 Speaker 1: previously interviewed your CEO and Airman Bill McNabb, and one 1070 01:02:02,240 --> 01:02:05,520 Speaker 1: of the comments he had made is that he still 1071 01:02:05,720 --> 01:02:10,880 Speaker 1: felt there was room to squeeze costs lower. You guys 1072 01:02:10,960 --> 01:02:13,840 Speaker 1: are three and a half trillion dollars. Is there a 1073 01:02:14,000 --> 01:02:16,480 Speaker 1: floor on how low costs can go or are you 1074 01:02:16,600 --> 01:02:22,360 Speaker 1: eventually gonna run out of efficiencies? Well, we have yet 1075 01:02:22,400 --> 01:02:26,280 Speaker 1: to squeeze cost lower because our costs go up and 1076 01:02:26,480 --> 01:02:29,400 Speaker 1: up and up. But as a percentage you can squeeze 1077 01:02:29,400 --> 01:02:33,560 Speaker 1: a little lower on a per well dollar invested basis. 1078 01:02:34,160 --> 01:02:36,600 Speaker 1: Is there no one to disagree with our CEO. But 1079 01:02:37,360 --> 01:02:40,560 Speaker 1: it's not we're squeezing, but we're the captive of the market. 1080 01:02:41,240 --> 01:02:43,800 Speaker 1: If the market goes way down, our expense ratio is 1081 01:02:43,880 --> 01:02:46,840 Speaker 1: going to go up. There's no way we could squeeze 1082 01:02:46,960 --> 01:02:50,880 Speaker 1: enough out of our expenses if we had less assets. 1083 01:02:51,640 --> 01:02:54,960 Speaker 1: So we should be very careful about expenses, and we are. 1084 01:02:55,400 --> 01:02:58,560 Speaker 1: I think we're managed in a very strong way, but 1085 01:02:59,520 --> 01:03:03,320 Speaker 1: we're The expense ratio is a combination of something we 1086 01:03:03,400 --> 01:03:06,240 Speaker 1: can control more or less how much we spend, and 1087 01:03:06,360 --> 01:03:08,360 Speaker 1: something we can't control at all, the level of the 1088 01:03:08,400 --> 01:03:13,360 Speaker 1: stock market. So the expense ratio is a mystery in 1089 01:03:13,520 --> 01:03:16,919 Speaker 1: the whether gupper Dad. Now, if it goes way down, 1090 01:03:17,160 --> 01:03:20,400 Speaker 1: it's gonna mean we have very good markets. That sounds great. 1091 01:03:20,680 --> 01:03:25,920 Speaker 1: Can indexing ever get too big or can indexing ever 1092 01:03:26,160 --> 01:03:29,040 Speaker 1: take over the market as some people have alluded, or 1093 01:03:29,280 --> 01:03:32,440 Speaker 1: is there a place for a combination of indexing and 1094 01:03:32,560 --> 01:03:36,960 Speaker 1: active managers in the actual marketplace? Well, it's not in 1095 01:03:37,040 --> 01:03:40,200 Speaker 1: the nature of things that in indexing could be of 1096 01:03:40,240 --> 01:03:43,680 Speaker 1: the market. If it were, we would have chaos. There 1097 01:03:43,720 --> 01:03:46,320 Speaker 1: will be no evaluations, there'll be no liquidity, there'll be 1098 01:03:46,360 --> 01:03:49,680 Speaker 1: no enny. So what are the chances that indexing get 1099 01:03:49,760 --> 01:03:54,920 Speaker 1: to zero? Right now? It's I think I had of 1100 01:03:54,960 --> 01:03:57,760 Speaker 1: the total market of the mutual fund industry, of the 1101 01:03:57,800 --> 01:04:03,080 Speaker 1: equity mutual fund industry, and so it means that that 1102 01:04:04,000 --> 01:04:08,280 Speaker 1: hunk of business is in broadly stated, just removed from 1103 01:04:08,320 --> 01:04:12,440 Speaker 1: the turnover level. So if a turnover, we're in the 1104 01:04:12,520 --> 01:04:17,600 Speaker 1: end market indexed the turnover. I came into this business 1105 01:04:17,640 --> 01:04:22,160 Speaker 1: when turnover was and everything was fine. It's gonna take 1106 01:04:22,200 --> 01:04:25,040 Speaker 1: a long time to get the pent a long long 1107 01:04:25,160 --> 01:04:27,840 Speaker 1: time and maybe never gets there. So when you put 1108 01:04:27,920 --> 01:04:30,440 Speaker 1: reality in the face of the theory that if everybody 1109 01:04:30,480 --> 01:04:34,800 Speaker 1: indexes uh, then then it's going to be just it's 1110 01:04:34,800 --> 01:04:37,400 Speaker 1: just not gonna happen. But the other thing is people 1111 01:04:37,520 --> 01:04:40,480 Speaker 1: follow this statement by saying, if the market gets more 1112 01:04:40,520 --> 01:04:43,480 Speaker 1: and more indexed, then it will be less efficient and 1113 01:04:43,600 --> 01:04:48,400 Speaker 1: we'll be able to beat it more easily. No, unequivocally, no, 1114 01:04:49,280 --> 01:04:52,240 Speaker 1: some will beat it, some will lose to it if 1115 01:04:52,320 --> 01:04:56,440 Speaker 1: they If the market is is less efficient and the 1116 01:04:56,840 --> 01:04:59,920 Speaker 1: and the winners and the losers will average, the more 1117 01:05:00,040 --> 01:05:04,160 Speaker 1: can return. There's no way around that. So that leads 1118 01:05:04,200 --> 01:05:06,720 Speaker 1: me to a quote of yours, and I have to 1119 01:05:06,760 --> 01:05:09,760 Speaker 1: ask you about it because I find it's fascinating. You 1120 01:05:09,960 --> 01:05:14,840 Speaker 1: once wrote, the stock market is a giant distraction to 1121 01:05:15,040 --> 01:05:20,160 Speaker 1: the business of investing. Explain well, investing is about the 1122 01:05:20,200 --> 01:05:24,000 Speaker 1: long term, and investing is about earning what I call 1123 01:05:24,080 --> 01:05:27,240 Speaker 1: the investment return, which is the dimon end yield when 1124 01:05:27,240 --> 01:05:29,760 Speaker 1: you go into the stock market and the earnings growth 1125 01:05:29,840 --> 01:05:33,560 Speaker 1: that follows. That's investment return. The market return is also 1126 01:05:33,640 --> 01:05:36,800 Speaker 1: has a speculative return, and that is is the price 1127 01:05:36,880 --> 01:05:39,200 Speaker 1: earnings multiple of the evaluation is high or low when 1128 01:05:39,240 --> 01:05:41,400 Speaker 1: you come in, and if they're high, they're going to 1129 01:05:41,480 --> 01:05:45,240 Speaker 1: detract from that return, and evaluations are low and they're 1130 01:05:45,280 --> 01:05:47,040 Speaker 1: going to add to that return because the low will 1131 01:05:48,160 --> 01:05:52,120 Speaker 1: in in the valuations. The price earnings multiple reverts to 1132 01:05:52,200 --> 01:05:56,800 Speaker 1: the mean perfectly. It's about what today. Although it's a 1133 01:05:56,800 --> 01:05:58,600 Speaker 1: little bit higher than this today because the market is 1134 01:05:58,600 --> 01:06:02,840 Speaker 1: a little bit isn't hardly inexpensive, But the reality is 1135 01:06:02,840 --> 01:06:06,120 Speaker 1: it's just about the same level it was. So we 1136 01:06:06,240 --> 01:06:09,680 Speaker 1: had ups and downs, booms bust in the long run, 1137 01:06:09,760 --> 01:06:13,280 Speaker 1: speculative return at zero. So concentrate on the investment return. 1138 01:06:13,800 --> 01:06:17,200 Speaker 1: Forget the speculative return, which is very difficult to predict, 1139 01:06:17,880 --> 01:06:21,240 Speaker 1: and just get with business can give you now if 1140 01:06:21,280 --> 01:06:24,920 Speaker 1: you look every day, you're apt to do something. And 1141 01:06:25,040 --> 01:06:29,000 Speaker 1: one of my basic rules is don't do something, just 1142 01:06:29,160 --> 01:06:31,800 Speaker 1: stand there. And if you've been doing that this year, 1143 01:06:31,880 --> 01:06:33,360 Speaker 1: I think you're a lot better off. This is a 1144 01:06:33,440 --> 01:06:36,000 Speaker 1: tough year so far, not that bad. I mean, you 1145 01:06:36,320 --> 01:06:39,080 Speaker 1: think the SMP is off about three and a half percent, 1146 01:06:39,120 --> 01:06:42,240 Speaker 1: it's really nothing. And although you think it was the 1147 01:06:42,320 --> 01:06:46,440 Speaker 1: end of the world, uh so, it's Don't let the 1148 01:06:46,520 --> 01:06:51,240 Speaker 1: stock market moves distract you. They are a tale told 1149 01:06:51,280 --> 01:06:54,720 Speaker 1: by an idiot. These moves, daily moves, hourly been minute 1150 01:06:54,760 --> 01:06:58,440 Speaker 1: by minute moves, a tale told by an idiot, full 1151 01:06:58,520 --> 01:07:02,080 Speaker 1: of sound and furious, signifying nothing. I have a bunch 1152 01:07:02,160 --> 01:07:05,840 Speaker 1: of questions that I ask all of my guests, but 1153 01:07:06,000 --> 01:07:10,560 Speaker 1: they're all specific to each individual because they're so um 1154 01:07:12,040 --> 01:07:15,840 Speaker 1: so so detailed. So who are your early mentors? I 1155 01:07:15,960 --> 01:07:19,280 Speaker 1: know in one of your books you mentioned somebody, Uh 1156 01:07:19,440 --> 01:07:23,400 Speaker 1: you thank somebody who you had mentioned in uh the 1157 01:07:23,520 --> 01:07:27,120 Speaker 1: earlier part of of the conversation, who do you think 1158 01:07:27,200 --> 01:07:31,760 Speaker 1: of as as mentors? Well outside of my teachers, by 1159 01:07:32,120 --> 01:07:35,120 Speaker 1: my first real grown up mentor was a guy named 1160 01:07:35,200 --> 01:07:38,040 Speaker 1: Jim Harrington who was a graduate student and engineer at 1161 01:07:38,040 --> 01:07:41,800 Speaker 1: Princeton University, and he was running the Athletic Ticket Association 1162 01:07:41,840 --> 01:07:46,280 Speaker 1: ticket office and when he stopped doing that. He pulled 1163 01:07:46,280 --> 01:07:47,640 Speaker 1: me out of the crowd and asked me to run 1164 01:07:47,680 --> 01:07:50,000 Speaker 1: in for him. So I learned how to do a job, 1165 01:07:50,280 --> 01:07:52,080 Speaker 1: and I learned how to do it with integrity, and 1166 01:07:52,160 --> 01:07:54,120 Speaker 1: I learned how to do it with on time. I 1167 01:07:54,240 --> 01:07:57,240 Speaker 1: learned how to do it with keeping my emotions out 1168 01:07:57,280 --> 01:08:01,280 Speaker 1: of it. This is just selling tickets to Princeton students 1169 01:08:01,360 --> 01:08:06,160 Speaker 1: forts basketball, baseball, whatever it might be, particularly football, And 1170 01:08:06,280 --> 01:08:09,040 Speaker 1: that was a seminal experience to you, uh and helped 1171 01:08:09,120 --> 01:08:11,919 Speaker 1: form your your own character. He had just a great 1172 01:08:12,040 --> 01:08:14,800 Speaker 1: sense of business values and like all engineers he was 1173 01:08:15,200 --> 01:08:17,160 Speaker 1: you know, they kind of go step by step right. 1174 01:08:17,320 --> 01:08:19,400 Speaker 1: Sometimes it's not a lot of exciting, but it's always 1175 01:08:19,520 --> 01:08:23,080 Speaker 1: right structured, organized, and and you're dealing with a lot 1176 01:08:23,160 --> 01:08:27,320 Speaker 1: of money. And sure, what Princeton Stadium is how many people? 1177 01:08:27,479 --> 01:08:30,120 Speaker 1: That's ah? And that was the old Palmer Stadium that 1178 01:08:30,240 --> 01:08:33,960 Speaker 1: held people, right, and now it's almost double that size. 1179 01:08:34,000 --> 01:08:36,719 Speaker 1: It's it's huge. Isn't we want way down? We're about 1180 01:08:37,520 --> 01:08:39,639 Speaker 1: you want the other direction, okay, And we can't fill 1181 01:08:39,680 --> 01:08:41,920 Speaker 1: it now. We used to every every game I worked 1182 01:08:41,960 --> 01:08:44,160 Speaker 1: with the sellout right, that was back in the day, 1183 01:08:44,240 --> 01:08:47,920 Speaker 1: So that was really quite an education. Um, you dedicated 1184 01:08:48,040 --> 01:08:51,760 Speaker 1: common Sense on mutual funds to Walter Morgan? Who is 1185 01:08:51,840 --> 01:08:54,360 Speaker 1: he in your in your pantheon? Well, he was the 1186 01:08:54,400 --> 01:08:57,639 Speaker 1: greatest of my mentor is he hired me? He read 1187 01:08:57,720 --> 01:09:00,840 Speaker 1: my thesis out of Princeton. He wrote, I think a 1188 01:09:00,920 --> 01:09:04,760 Speaker 1: little bit over the top that Mr bogel knew more 1189 01:09:04,800 --> 01:09:06,560 Speaker 1: than he did about them than we did about the 1190 01:09:06,640 --> 01:09:10,400 Speaker 1: mutual fund industry. And so he liked it. And he 1191 01:09:10,520 --> 01:09:14,640 Speaker 1: was a Princetonian himself, class of nineteen twenty, and I 1192 01:09:14,720 --> 01:09:18,200 Speaker 1: was the class of nineteen fifty one, and I watched 1193 01:09:18,240 --> 01:09:20,920 Speaker 1: him work. He was very much a renaissance man, interested 1194 01:09:20,920 --> 01:09:24,040 Speaker 1: in investing, interested in marketing, probably less interested in the 1195 01:09:24,280 --> 01:09:27,040 Speaker 1: detail of the business share old of record keeping and stuff, 1196 01:09:27,080 --> 01:09:29,720 Speaker 1: which was so much simpler those days, but also a 1197 01:09:29,800 --> 01:09:33,560 Speaker 1: renaissance man in terms of his interest. He was um outdoorsman, 1198 01:09:33,600 --> 01:09:37,519 Speaker 1: a hunter, a fisherman, things that I that I don't 1199 01:09:37,560 --> 01:09:40,160 Speaker 1: do at all. And but he had a high sense 1200 01:09:40,240 --> 01:09:44,200 Speaker 1: of standards. And he they said at the beginning, and 1201 01:09:45,320 --> 01:09:47,160 Speaker 1: UH turned the company over to me when I was 1202 01:09:47,200 --> 01:09:49,479 Speaker 1: thirty five years old, So I must have had an 1203 01:09:49,520 --> 01:09:52,360 Speaker 1: awful lot of confidence in me, and I saved Wellington 1204 01:09:52,439 --> 01:09:55,439 Speaker 1: Fund finally for him, after the catastrophe I described earlier, 1205 01:09:56,000 --> 01:09:58,680 Speaker 1: we told Wellington Management Company how we wanted to run 1206 01:09:59,400 --> 01:10:01,680 Speaker 1: and they've been running it that way ever since. We've met. 1207 01:10:02,000 --> 01:10:05,880 Speaker 1: Much more focus on income and income stocks and less 1208 01:10:05,880 --> 01:10:08,680 Speaker 1: focus on growth stocks, and it's worked out. We had 1209 01:10:08,720 --> 01:10:11,640 Speaker 1: a whole renaissance of the Welling and Fund and he 1210 01:10:11,760 --> 01:10:14,280 Speaker 1: saw a lot of that, and he was he he 1211 01:10:14,920 --> 01:10:17,920 Speaker 1: died but the year that book came out, and a 1212 01:10:18,000 --> 01:10:19,840 Speaker 1: little bit before, but I had shown him the title 1213 01:10:19,920 --> 01:10:22,439 Speaker 1: page with his name on it. He was very pleased 1214 01:10:22,640 --> 01:10:25,519 Speaker 1: and very pleased with the revival and renaissance of his 1215 01:10:26,000 --> 01:10:28,839 Speaker 1: wonderful Welling and fun I barely had a moral obligation 1216 01:10:29,520 --> 01:10:33,960 Speaker 1: say it. So what about other investors who hasn't influenced 1217 01:10:34,479 --> 01:10:39,679 Speaker 1: your thought process, your philosophy, Perhaps not your approach to investing, 1218 01:10:39,840 --> 01:10:45,280 Speaker 1: but what other investors have colored your worldview? Well, you 1219 01:10:45,360 --> 01:10:49,960 Speaker 1: certainly start with Benjamin Graham. He's the basically ground zero 1220 01:10:50,760 --> 01:10:53,720 Speaker 1: and the intelligent investor. His book, I hadn't like, the 1221 01:10:53,760 --> 01:10:57,200 Speaker 1: fourth edition, which is much more into into the I 1222 01:10:57,240 --> 01:11:00,719 Speaker 1: think it was nineteen seventy four, has much more about 1223 01:11:00,840 --> 01:11:03,639 Speaker 1: mutual funds and things of that nature. And he's very 1224 01:11:03,680 --> 01:11:06,720 Speaker 1: clear on that, and so he would certainly be one. 1225 01:11:07,560 --> 01:11:12,760 Speaker 1: Um Mr Morgan, um Mr Brin had a couple of associates, 1226 01:11:12,840 --> 01:11:15,240 Speaker 1: Joe Welsh, the president of the company, and Andy Young, 1227 01:11:15,360 --> 01:11:19,320 Speaker 1: his lawyer, very quick, quick witted, smart guy, and they 1228 01:11:19,439 --> 01:11:21,960 Speaker 1: all saw something in me. I don't know what it 1229 01:11:22,160 --> 01:11:25,719 Speaker 1: was that gave them confidence that I had the judgment 1230 01:11:25,800 --> 01:11:28,840 Speaker 1: to do the job. And another, interestingly enough, another one 1231 01:11:28,840 --> 01:11:31,360 Speaker 1: of my great mentors was the man who when I 1232 01:11:31,400 --> 01:11:33,840 Speaker 1: came on the investment company's two board of governors, he 1233 01:11:33,960 --> 01:11:37,160 Speaker 1: was the chairman. His name was d. George Sullivan and 1234 01:11:37,240 --> 01:11:41,840 Speaker 1: he was executive vice president of Fidelity. Oh really, and 1235 01:11:41,960 --> 01:11:46,400 Speaker 1: we had a great relationship. That's fascinated and so he 1236 01:11:46,439 --> 01:11:49,560 Speaker 1: would have been you know, if people have confidence in you, 1237 01:11:49,640 --> 01:11:52,320 Speaker 1: they bring out your best and he really did, and 1238 01:11:52,479 --> 01:11:55,960 Speaker 1: Mr Morgan did, and Mr Welsh did, Andy Young did, 1239 01:11:56,720 --> 01:11:59,800 Speaker 1: and so that those would be the big names I think, 1240 01:12:01,040 --> 01:12:04,160 Speaker 1: both as mentors and investors. Let's let's talk about books. 1241 01:12:04,640 --> 01:12:08,960 Speaker 1: You've written your fair share of books. Who's what other 1242 01:12:09,120 --> 01:12:13,240 Speaker 1: authors books being on investing or what have you have 1243 01:12:13,400 --> 01:12:16,599 Speaker 1: you enjoyed? What what books would you recommend to people? Well, 1244 01:12:16,600 --> 01:12:20,679 Speaker 1: I've already mentioned The Intelligent Investor by Graham Intelligent Investor 1245 01:12:20,760 --> 01:12:23,360 Speaker 1: by Graham. I think Bert Malkil, who's a friend of 1246 01:12:23,400 --> 01:12:26,400 Speaker 1: ours and friend of mine and former foremer director here 1247 01:12:26,520 --> 01:12:29,320 Speaker 1: for many, many years and are really the best director 1248 01:12:29,360 --> 01:12:32,599 Speaker 1: we've ever had outside director at his random Walked down 1249 01:12:32,680 --> 01:12:36,760 Speaker 1: Wall Street, which updated every couple of years is another UM. 1250 01:12:38,400 --> 01:12:43,759 Speaker 1: David Swinson's book On for the Individual Investor is really superb. 1251 01:12:45,000 --> 01:12:49,200 Speaker 1: Peter Bernstein's Against the Gods Just I just read that 1252 01:12:49,320 --> 01:12:52,360 Speaker 1: over the holidays, fantastic book. Well, he was a very 1253 01:12:52,400 --> 01:12:54,920 Speaker 1: gifted man. We were very close Peter and I, and 1254 01:12:55,040 --> 01:12:58,120 Speaker 1: we had our little disagreements here and there, but overall 1255 01:12:58,200 --> 01:13:00,839 Speaker 1: we were on the same team. And then Bill Bernstein 1256 01:13:01,600 --> 01:13:04,519 Speaker 1: Four Pillars of Investment Wisdom is A is A is 1257 01:13:04,560 --> 01:13:08,920 Speaker 1: a wonderful book, and there aren't. It's hard me to 1258 01:13:08,960 --> 01:13:10,840 Speaker 1: go a lot, a lot beyond that, to be honest 1259 01:13:10,880 --> 01:13:13,360 Speaker 1: with you. Well, that that's a great starting list right there. 1260 01:13:13,400 --> 01:13:16,280 Speaker 1: You can certainly do worse than any of those half 1261 01:13:16,360 --> 01:13:20,719 Speaker 1: dozen books. UM. We've talked a lot about how you've 1262 01:13:20,960 --> 01:13:25,040 Speaker 1: changed the industry since you began way back in the 1263 01:13:25,160 --> 01:13:28,880 Speaker 1: sixties and seventies. How else has the industry changed that 1264 01:13:29,080 --> 01:13:32,679 Speaker 1: you think is either for the better or for the worst. 1265 01:13:32,760 --> 01:13:37,840 Speaker 1: What what stands out as to how finance has evolved 1266 01:13:37,920 --> 01:13:41,200 Speaker 1: over those those years. I think when I came into 1267 01:13:41,240 --> 01:13:45,519 Speaker 1: this industry in it was a much better industry than 1268 01:13:45,560 --> 01:13:49,599 Speaker 1: it was thereafter. The big part of that change within 1269 01:13:49,680 --> 01:13:52,040 Speaker 1: the Go go era, when we had this idea, we 1270 01:13:52,120 --> 01:13:56,479 Speaker 1: went from investment committees, prudent investment committees buying blue chip stocks, 1271 01:13:57,080 --> 01:14:03,320 Speaker 1: to portfolio managers comments uh and not stars, comments that 1272 01:14:04,320 --> 01:14:06,920 Speaker 1: burn out and their ashes drift gently down to earth. 1273 01:14:07,479 --> 01:14:11,120 Speaker 1: And that's happened to so many, so many comment managers. 1274 01:14:11,200 --> 01:14:13,840 Speaker 1: I mean, you can hardly lose count. You wonder the 1275 01:14:13,920 --> 01:14:18,320 Speaker 1: real the real superstars just don't stay there, you know. 1276 01:14:18,360 --> 01:14:20,439 Speaker 1: I always just to wish Bill Miller, well, he beat 1277 01:14:20,760 --> 01:14:23,120 Speaker 1: He's at leg Mason. He beat the market, I think 1278 01:14:23,200 --> 01:14:25,840 Speaker 1: sixteen years in a row, and every time I saw him, 1279 01:14:26,200 --> 01:14:28,880 Speaker 1: I'd say good luck, good luck in the future. I 1280 01:14:29,000 --> 01:14:32,800 Speaker 1: liked them. My wishes of good luck didn't do any 1281 01:14:32,880 --> 01:14:37,040 Speaker 1: good at all. He very famously imploded and went from 1282 01:14:37,120 --> 01:14:40,800 Speaker 1: the literally the top performing fund to the bottom one 1283 01:14:40,880 --> 01:14:44,720 Speaker 1: percent following the financial crisis. What had worked for him 1284 01:14:44,800 --> 01:14:48,280 Speaker 1: previously just eventually stopped working, and he got caught in 1285 01:14:48,360 --> 01:14:51,160 Speaker 1: a lot of paper that turned out to be not 1286 01:14:51,360 --> 01:14:53,559 Speaker 1: worth what he thought it was well in an earlier area. 1287 01:14:53,640 --> 01:14:59,040 Speaker 1: Remember Gerald Say ran Fideliti Capital Fund, and he had 1288 01:14:59,080 --> 01:15:00,920 Speaker 1: the best record in the business. He goes out and 1289 01:15:01,000 --> 01:15:05,040 Speaker 1: starts his own fund, Manhattan Fund gets a huge underwriting. 1290 01:15:05,080 --> 01:15:06,880 Speaker 1: It was four a million dollars. Nobody ever sent anything 1291 01:15:06,960 --> 01:15:10,240 Speaker 1: like that in this business. That's the old days. And 1292 01:15:10,400 --> 01:15:14,080 Speaker 1: it had after ten years of operation, the worst record 1293 01:15:14,160 --> 01:15:18,280 Speaker 1: in the mutual fund industry. And you know, I tell people, 1294 01:15:18,720 --> 01:15:21,200 Speaker 1: when you think about the nature of the securities markets, 1295 01:15:21,600 --> 01:15:24,400 Speaker 1: it's gifts as difficult to be last as it is 1296 01:15:24,479 --> 01:15:28,559 Speaker 1: to be first. What was his name about that? That's amazing? 1297 01:15:28,640 --> 01:15:30,800 Speaker 1: What was his name again? Gerald Side t s A 1298 01:15:30,920 --> 01:15:34,320 Speaker 1: I T s A great um. So some of my 1299 01:15:34,920 --> 01:15:40,519 Speaker 1: my last few questions. You've mentioned a lot of things 1300 01:15:40,600 --> 01:15:43,320 Speaker 1: have changed since nineteen fifty one. What do you see 1301 01:15:43,360 --> 01:15:47,160 Speaker 1: as changing in the future. I guess I'd say, not 1302 01:15:47,320 --> 01:15:50,479 Speaker 1: to beat the phrase to death, reversion to the mean. 1303 01:15:50,600 --> 01:15:53,720 Speaker 1: I see the industry going back to its roots. Uh, 1304 01:15:54,080 --> 01:15:56,519 Speaker 1: much more of a fiduciary focus, I hope. So I'm 1305 01:15:56,640 --> 01:15:59,519 Speaker 1: very much in favor of the fiduciary rule, although someone 1306 01:15:59,560 --> 01:16:01,880 Speaker 1: else's have to work out the details that seemed to 1307 01:16:01,920 --> 01:16:05,519 Speaker 1: make it difficult to operate, and uh, but it shouldn't 1308 01:16:05,520 --> 01:16:08,000 Speaker 1: make it difficult to operate because all you have to 1309 01:16:08,040 --> 01:16:11,080 Speaker 1: do is ask yourself as an advisor, one question, Hey, 1310 01:16:11,200 --> 01:16:13,080 Speaker 1: is this in the client's best interest? And if the 1311 01:16:13,120 --> 01:16:16,639 Speaker 1: answer is no, you can't do it. It's much simpler 1312 01:16:17,160 --> 01:16:21,280 Speaker 1: than the complicated suitability rules, which have all sorts of 1313 01:16:22,120 --> 01:16:25,320 Speaker 1: ifs and thens and clauses best interests of the client. 1314 01:16:25,479 --> 01:16:28,040 Speaker 1: Yes you can do it, No you can't. What could 1315 01:16:28,080 --> 01:16:30,320 Speaker 1: be what could be easier when you unfortunately kind of 1316 01:16:30,400 --> 01:16:33,000 Speaker 1: documentation how you're doing things. In all that, it is 1317 01:16:33,160 --> 01:16:36,080 Speaker 1: a little laborious because we have to have you know, 1318 01:16:36,160 --> 01:16:38,960 Speaker 1: a lot of lawyers work on this, and you and 1319 01:16:39,080 --> 01:16:41,720 Speaker 1: I have the spirit of fiduciary duty and they've got 1320 01:16:41,800 --> 01:16:43,639 Speaker 1: to get to the letter of it. And it's it's 1321 01:16:43,720 --> 01:16:46,240 Speaker 1: more complex than it ought to be, but it's coming. 1322 01:16:46,960 --> 01:16:49,439 Speaker 1: And you know, with so many funds being flashes in 1323 01:16:49,520 --> 01:16:54,600 Speaker 1: the pan, investors are going to learn by their own experience. 1324 01:16:55,240 --> 01:16:56,880 Speaker 1: You know, I was told this was a great fund, 1325 01:16:57,320 --> 01:16:59,560 Speaker 1: and it was a great fund for two days and 1326 01:16:59,680 --> 01:17:02,920 Speaker 1: that was the end of it. Uh. And we overestimate 1327 01:17:02,960 --> 01:17:06,160 Speaker 1: our own ability to pick funds in stocks. We over 1328 01:17:06,320 --> 01:17:10,160 Speaker 1: overestimate the ability of our managers to do better consistently, 1329 01:17:10,560 --> 01:17:12,960 Speaker 1: and if people just got the idea of reversion of 1330 01:17:13,000 --> 01:17:15,400 Speaker 1: the mean again and again and again. You know the 1331 01:17:15,840 --> 01:17:17,719 Speaker 1: we were looking at some data the other day, Barry, 1332 01:17:18,360 --> 01:17:21,760 Speaker 1: and if you're in the top quartile for a given 1333 01:17:21,800 --> 01:17:25,280 Speaker 1: five year period, only fifteen percent of you are going 1334 01:17:25,320 --> 01:17:27,720 Speaker 1: to be in the top quartile in the next five 1335 01:17:27,840 --> 01:17:32,000 Speaker 1: year period. And if you're in the bottom quartile of 1336 01:17:32,120 --> 01:17:34,400 Speaker 1: you will be in the top quartile in the next period. 1337 01:17:35,080 --> 01:17:38,040 Speaker 1: And over time, that sort of returns don't help help anybody. 1338 01:17:38,080 --> 01:17:40,880 Speaker 1: I think was Howard Marx who said, if you're consistently 1339 01:17:40,920 --> 01:17:43,840 Speaker 1: in the top forty over time, that puts you in 1340 01:17:43,920 --> 01:17:46,400 Speaker 1: the top ten percent. But you have to be consistent. 1341 01:17:46,520 --> 01:17:50,439 Speaker 1: You can't be a shooting star, outperforming, under performing, out 1342 01:17:50,479 --> 01:17:53,720 Speaker 1: performing under performing. You have to be top forty. But 1343 01:17:53,800 --> 01:17:58,040 Speaker 1: he runs a distress bond funds, not not necessarily a 1344 01:17:58,120 --> 01:18:00,280 Speaker 1: stock pick. Let me, let me add us if mame, 1345 01:18:00,360 --> 01:18:03,519 Speaker 1: what is the objective of the individual investor. It's to 1346 01:18:03,600 --> 01:18:08,200 Speaker 1: have a lifetime of investing. Investing for a lifetime. And 1347 01:18:08,320 --> 01:18:10,880 Speaker 1: for a young investor, believe it or not, twenty five 1348 01:18:10,920 --> 01:18:14,960 Speaker 1: year old investor has a seventy year life expectancy seventy years, 1349 01:18:15,000 --> 01:18:17,840 Speaker 1: they're gonna be probably be a hundred. So what's the 1350 01:18:17,920 --> 01:18:20,920 Speaker 1: best way to invest for seventy years. If a mutual 1351 01:18:20,960 --> 01:18:24,720 Speaker 1: fund manager lasts for seven years, that's the average, you're 1352 01:18:24,760 --> 01:18:27,639 Speaker 1: gonna have ten of them. The average fund goes out 1353 01:18:27,680 --> 01:18:33,880 Speaker 1: of business every every decade, every decade, excuse me, really, 1354 01:18:33,920 --> 01:18:36,559 Speaker 1: it's that high. That's and then the news the new 1355 01:18:36,640 --> 01:18:40,479 Speaker 1: guy comes in and sweeps clean. Managers get fired. There 1356 01:18:40,640 --> 01:18:44,599 Speaker 1: is no way, none, zero, that if you own three 1357 01:18:44,720 --> 01:18:47,400 Speaker 1: or four mutual funds, which is typical, there is no 1358 01:18:47,560 --> 01:18:50,439 Speaker 1: way that over seventy years, you have even a fighting 1359 01:18:50,560 --> 01:18:53,479 Speaker 1: chance to beat the market. And if you do the 1360 01:18:53,560 --> 01:18:56,479 Speaker 1: index fund, I guarantee you that you will have the 1361 01:18:56,560 --> 01:19:00,559 Speaker 1: same non manager seventy years from now as the manager 1362 01:19:00,640 --> 01:19:04,000 Speaker 1: you have today. So that raises a really interesting question, 1363 01:19:04,120 --> 01:19:08,680 Speaker 1: which happens to be coincidentally one of my last two questions. 1364 01:19:09,479 --> 01:19:12,160 Speaker 1: What advice would you give to a millennial or a 1365 01:19:12,280 --> 01:19:16,800 Speaker 1: kid just graduating college today beginning their career. What would 1366 01:19:16,840 --> 01:19:18,840 Speaker 1: you tell them about what they should do with their 1367 01:19:18,920 --> 01:19:22,800 Speaker 1: career and what would you tell them about investment? Well, 1368 01:19:22,920 --> 01:19:24,760 Speaker 1: people have to find their own way in this life. 1369 01:19:24,880 --> 01:19:27,519 Speaker 1: And I've I've talked to a number of groups at Princeton, 1370 01:19:28,479 --> 01:19:32,240 Speaker 1: one on religion and business and one on ethics and business, 1371 01:19:32,280 --> 01:19:34,840 Speaker 1: two separate groups. And one is a small seminar and 1372 01:19:34,880 --> 01:19:37,080 Speaker 1: one of a large lecture course. And I get that 1373 01:19:37,200 --> 01:19:39,960 Speaker 1: kind of lecture. Should I not go into the financial business? 1374 01:19:40,360 --> 01:19:43,160 Speaker 1: And I say, no, go into the financial business and 1375 01:19:43,240 --> 01:19:45,719 Speaker 1: make it better than it is today. You know, I don't. 1376 01:19:45,960 --> 01:19:48,040 Speaker 1: People have to find their own way in this life. 1377 01:19:48,160 --> 01:19:50,640 Speaker 1: I had to find my own way, Barry, you have 1378 01:19:50,760 --> 01:19:53,760 Speaker 1: defined your own way, a lot of bumps along the way. 1379 01:19:54,400 --> 01:19:56,680 Speaker 1: You gotta have a little residience. You've got to be 1380 01:19:56,720 --> 01:19:59,360 Speaker 1: able to take defeat and turn into victory. I think 1381 01:19:59,400 --> 01:20:04,800 Speaker 1: that's what i'd maybe a little bit. And and so 1382 01:20:06,240 --> 01:20:09,639 Speaker 1: it's this, This deal is going to shrink hugely. There's 1383 01:20:09,640 --> 01:20:12,439 Speaker 1: no question about that. It already has just since oh nine, 1384 01:20:12,600 --> 01:20:15,800 Speaker 1: no doubt about it. The combination of technology and the 1385 01:20:16,040 --> 01:20:21,320 Speaker 1: knowledge and the spread of this disease called indexing is 1386 01:20:21,360 --> 01:20:24,799 Speaker 1: not going to go away. It's habit forming, it's catching, 1387 01:20:25,640 --> 01:20:29,120 Speaker 1: it's contagious, it's spreading. And and my final question, and 1388 01:20:29,200 --> 01:20:32,120 Speaker 1: I'm I'm I feel awful that it's a ninety minutes 1389 01:20:32,160 --> 01:20:34,920 Speaker 1: is already up. I'd like to continue going for another 1390 01:20:35,040 --> 01:20:38,439 Speaker 1: ninety minutes. What is it that you know about investing 1391 01:20:38,640 --> 01:20:41,920 Speaker 1: today that you wish you knew when you started in 1392 01:20:42,080 --> 01:20:45,920 Speaker 1: nineteen fifty one. Well, I'd say quite a bit. I mean, 1393 01:20:46,000 --> 01:20:48,439 Speaker 1: I I was on the Welling and Fund Investment Committee, 1394 01:20:48,600 --> 01:20:50,479 Speaker 1: and I saw how what hard it was to beat 1395 01:20:50,520 --> 01:20:52,519 Speaker 1: the market. I wouldn't have told you that back in 1396 01:20:54,240 --> 01:20:56,360 Speaker 1: and I worked for a long time with John Neff, 1397 01:20:56,479 --> 01:20:59,880 Speaker 1: who had many, many years of success in beating the market. 1398 01:21:00,160 --> 01:21:02,800 Speaker 1: But he's an exception, and even his record and in 1399 01:21:03,040 --> 01:21:06,040 Speaker 1: later years deteriorated. But then he mean, he hadn't gonna, 1400 01:21:06,520 --> 01:21:08,920 Speaker 1: He's not running winds are funny, ran it for thirty years, 1401 01:21:08,960 --> 01:21:11,240 Speaker 1: I think, But he's not gonna. He's not running it anymore. 1402 01:21:11,840 --> 01:21:15,080 Speaker 1: So managers come and go. So I'd say things like 1403 01:21:15,840 --> 01:21:20,800 Speaker 1: the power of compounding, the beauty of keeping costs low, uh, 1404 01:21:21,320 --> 01:21:27,120 Speaker 1: the need to ignore the market, they need to do something. 1405 01:21:27,840 --> 01:21:30,960 Speaker 1: Are all things that have and and the difficulty. This 1406 01:21:31,120 --> 01:21:34,679 Speaker 1: is a very very hard business, this business of investment management. 1407 01:21:35,280 --> 01:21:38,160 Speaker 1: And in the long run, we're all average, we're below 1408 01:21:38,240 --> 01:21:42,439 Speaker 1: averages my thesis suggested, below the market averages. And so 1409 01:21:43,120 --> 01:21:45,840 Speaker 1: I don't think it's easy, don't think you're smarter than 1410 01:21:45,880 --> 01:21:49,479 Speaker 1: anybody else. Just get in the middle, get costs out, 1411 01:21:50,640 --> 01:21:56,760 Speaker 1: and don't peak. John Boggle, this has been a fascinating conversation. 1412 01:21:57,320 --> 01:21:59,879 Speaker 1: I again, thank you so much for being so generous 1413 01:22:00,360 --> 01:22:03,960 Speaker 1: with your time. If you enjoy this conversation, you could 1414 01:22:04,000 --> 01:22:06,479 Speaker 1: look up an Inch or down an Inch on Apple 1415 01:22:06,560 --> 01:22:09,800 Speaker 1: iTunes and see the other eighty or so of these 1416 01:22:09,880 --> 01:22:13,519 Speaker 1: that we've had. UH. Be sure and check out uh 1417 01:22:13,880 --> 01:22:17,200 Speaker 1: all the rest of our our chats. They're really quite fascinating. 1418 01:22:17,600 --> 01:22:20,679 Speaker 1: I have to thank Mike bat Nick, my head of research, 1419 01:22:21,040 --> 01:22:24,519 Speaker 1: for helping to put together all these questions. My producer 1420 01:22:24,720 --> 01:22:28,479 Speaker 1: and engineer Charlie Vollmer for dragging himself out of bed 1421 01:22:28,560 --> 01:22:31,200 Speaker 1: at an undoddly hour in the morning to drive here 1422 01:22:31,840 --> 01:22:36,439 Speaker 1: to Malvern, Pennsylvania to Vanguard UH mother ship. Jack, thank 1423 01:22:36,479 --> 01:22:39,559 Speaker 1: you again so much. This has been absolutely fascinating. Great 1424 01:22:39,640 --> 01:22:40,400 Speaker 1: to be way. You're married.