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