1
00:00:00,440 --> 00:00:04,440
Speaker 1: Look ahead, imagine more. Gain insight for your industry with

2
00:00:04,480 --> 00:00:08,480
Speaker 1: forward thinking advice from the professionals at Cone Resnick. Is

3
00:00:08,520 --> 00:00:11,559
Speaker 1: your business ready to break through? Find out more at

4
00:00:11,640 --> 00:00:19,279
Speaker 1: Cone Resnick dot com Slash Breakthrough. This is Master's in

5
00:00:19,360 --> 00:00:23,799
Speaker 1: Business with Barry Ridholds on Bloomberg Radio. This week on

6
00:00:23,920 --> 00:00:26,960
Speaker 1: Masters in Business, I have a very special guest. His

7
00:00:27,080 --> 00:00:29,920
Speaker 1: name is Professor Burton Malkiel. And when I say I

8
00:00:29,960 --> 00:00:33,440
Speaker 1: have a special guest, man, I am not kidding this week.

9
00:00:34,000 --> 00:00:38,280
Speaker 1: Professor Malkiel is perhaps best known for writing one of

10
00:00:38,320 --> 00:00:43,440
Speaker 1: the most seminal books on investing, A Random Walk Down

11
00:00:43,440 --> 00:00:47,960
Speaker 1: Wall Street. It's now in it's eleventh edition, having sold

12
00:00:48,360 --> 00:00:52,200
Speaker 1: more than a million and a half copies. UH Professor

13
00:00:52,240 --> 00:00:55,680
Speaker 1: of Economics at Princeton, twice chairman of the department there.

14
00:00:56,200 --> 00:01:00,880
Speaker 1: He ran the hell School of Management for out eight years,

15
00:01:00,960 --> 00:01:03,680
Speaker 1: and over the course of that period he was for

16
00:01:03,800 --> 00:01:08,240
Speaker 1: twenty eight years on the board UH Vanguard. He is

17
00:01:08,280 --> 00:01:14,479
Speaker 1: currently the Chief investment Officer of Wealth Front. Friends with

18
00:01:14,680 --> 00:01:20,319
Speaker 1: other guests of the show like Jack Bogel and Charlie Ellis. Really,

19
00:01:21,920 --> 00:01:28,160
Speaker 1: Professor Malkiel is unique UM in the annals of of investing.

20
00:01:28,240 --> 00:01:31,840
Speaker 1: He's a rock Star. And I don't know if there

21
00:01:31,840 --> 00:01:36,240
Speaker 1: are many people who are more knowledgeable and more influential

22
00:01:37,000 --> 00:01:40,759
Speaker 1: uh than he is. So the man who pretty much

23
00:01:40,880 --> 00:01:46,520
Speaker 1: invented the blindfolded monkey throwing darts, the person who suggested

24
00:01:47,440 --> 00:01:51,160
Speaker 1: that Wall Street created an index fund so that investors

25
00:01:51,200 --> 00:01:57,040
Speaker 1: could make low cost indexed investments. What else can I say?

26
00:01:57,400 --> 00:02:00,560
Speaker 1: Why don't I say nothing else? And without any further

27
00:02:00,600 --> 00:02:08,600
Speaker 1: ado my conversation with Bert Malkiel. This is Masters in

28
00:02:08,680 --> 00:02:13,639
Speaker 1: Business with Barry Ridholds on Bloomberg Radio. My special guest today.

29
00:02:13,800 --> 00:02:15,400
Speaker 1: And I know you make fun of me when I

30
00:02:15,440 --> 00:02:19,160
Speaker 1: say that, but my special guest today is truly a

31
00:02:19,440 --> 00:02:22,519
Speaker 1: special guest and a legend in the world of finance.

32
00:02:22,919 --> 00:02:26,440
Speaker 1: Let me read just a short version of his curriculum vitae.

33
00:02:27,320 --> 00:02:31,840
Speaker 1: His name is Professor Burton Malkiel. He used to be

34
00:02:32,000 --> 00:02:37,560
Speaker 1: the Chemical Bank Professor of Economics at the Princeton uh

35
00:02:37,560 --> 00:02:40,040
Speaker 1: A Princeton University. He is a two time chairman of

36
00:02:40,040 --> 00:02:44,040
Speaker 1: the Economics Department, served as a member of the Council

37
00:02:44,080 --> 00:02:49,480
Speaker 1: of Economic Advisors from to nineteen seventy seven, became president

38
00:02:49,720 --> 00:02:53,600
Speaker 1: of the American Finance Association. After that, he was dean

39
00:02:53,760 --> 00:02:56,960
Speaker 1: of the Yale School of Management in the eighties and

40
00:02:57,080 --> 00:03:02,400
Speaker 1: spent twenty eight years as a director of the Vanguard Group.

41
00:03:03,000 --> 00:03:08,320
Speaker 1: He's probably best known for authoring the book A Random

42
00:03:08,400 --> 00:03:12,079
Speaker 1: Walk Down Wall Street. It's now and it's eleventh edition.

43
00:03:12,160 --> 00:03:16,360
Speaker 1: The paperback just came out again last year, updated and

44
00:03:16,360 --> 00:03:22,440
Speaker 1: revised for It's sold one point five million copies, and

45
00:03:22,520 --> 00:03:25,360
Speaker 1: a number of people have said, if you read only

46
00:03:25,480 --> 00:03:29,280
Speaker 1: one book about investing, Random Walk Down Wall Street is

47
00:03:29,320 --> 00:03:32,760
Speaker 1: the one to read. Professor Malkiel, Welcome to Bloomberg. Thank

48
00:03:32,800 --> 00:03:37,440
Speaker 1: you very enjoy being here, and I am am thrilled

49
00:03:37,920 --> 00:03:39,800
Speaker 1: to have you. By the way, I left out so

50
00:03:39,880 --> 00:03:43,320
Speaker 1: much from your c v UM bachelor's and NBA from

51
00:03:43,360 --> 00:03:46,240
Speaker 1: Harvard and fifty three and fifty five doctorate from Princeton

52
00:03:46,280 --> 00:03:50,680
Speaker 1: in sixty four. You're currently Chief investment Officer for wealth Front,

53
00:03:51,360 --> 00:03:56,360
Speaker 1: which is a software based financial advisor. UM. The list

54
00:03:56,440 --> 00:03:59,240
Speaker 1: goes on and on. I'm gonna stop that because if

55
00:03:59,280 --> 00:04:02,080
Speaker 1: I keep discussing your CV will run out of time

56
00:04:02,120 --> 00:04:07,640
Speaker 1: for questions. You're probably best known as someone who who

57
00:04:07,680 --> 00:04:13,040
Speaker 1: was early in the history of recognizing that quote markets

58
00:04:13,080 --> 00:04:17,520
Speaker 1: are efficient? Why are markets efficient? First of all, sometimes

59
00:04:17,640 --> 00:04:23,040
Speaker 1: people get wrong what efficient markets mean. So giving a definition.

60
00:04:23,200 --> 00:04:25,159
Speaker 1: So let me let me tell you the way I

61
00:04:25,320 --> 00:04:30,159
Speaker 1: define it. There are two parts to uh the idea

62
00:04:30,160 --> 00:04:34,800
Speaker 1: of efficient markets, and one part that many people associate

63
00:04:34,920 --> 00:04:37,839
Speaker 1: with it that's wrong. The parts that are right are

64
00:04:38,040 --> 00:04:44,160
Speaker 1: one that information gets reflected very quickly into stock prices.

65
00:04:44,680 --> 00:04:48,279
Speaker 1: If there's some favorable news about a company UH that's

66
00:04:48,279 --> 00:04:51,719
Speaker 1: going to increase at stock price ten percent, the stock

67
00:04:51,800 --> 00:04:55,320
Speaker 1: price tends to go up ten percent right away because

68
00:04:55,400 --> 00:05:02,840
Speaker 1: anybody who uh waits uh to uh get take advantage

69
00:05:02,839 --> 00:05:06,640
Speaker 1: of it will find that quicker people have come in beforehand.

70
00:05:06,960 --> 00:05:12,479
Speaker 1: So one information gets reflected right away. Now, what efficient

71
00:05:12,520 --> 00:05:17,359
Speaker 1: markets is often associated with, which is wrong, is that

72
00:05:17,600 --> 00:05:22,080
Speaker 1: efficient markets mean the price is always right. The price

73
00:05:22,360 --> 00:05:26,760
Speaker 1: is exactly the present value of all of the dividends

74
00:05:26,800 --> 00:05:29,440
Speaker 1: and earnings that are going to come in the future,

75
00:05:29,800 --> 00:05:33,880
Speaker 1: and the price is perfectly right. That's wrong. The price

76
00:05:34,040 --> 00:05:37,839
Speaker 1: is never right. In fact, prices are always wrong. What's

77
00:05:37,960 --> 00:05:42,240
Speaker 1: right is that nobody knows for sure whether they're too

78
00:05:42,320 --> 00:05:46,600
Speaker 1: high or too low. And that leads to the second

79
00:05:46,680 --> 00:05:50,520
Speaker 1: point about efficient markets. It's not that the prices are

80
00:05:50,560 --> 00:05:57,279
Speaker 1: always right, it's that it's never clear that they are wrong.

81
00:05:57,400 --> 00:06:01,920
Speaker 1: There's nothing systematically wrong about out them. Therefore there are

82
00:06:02,000 --> 00:06:09,080
Speaker 1: no arbitrage opportunities, and therefore the market is really very

83
00:06:09,200 --> 00:06:15,240
Speaker 1: very difficult to beat, and so information gets reflected. The

84
00:06:15,360 --> 00:06:19,040
Speaker 1: market's tough to beat. But prices are not always right.

85
00:06:19,440 --> 00:06:23,080
Speaker 1: We know perfectly well they're always wrong, but nobody knows

86
00:06:23,200 --> 00:06:26,040
Speaker 1: for sure whether they're too high or too low. We

87
00:06:26,040 --> 00:06:29,479
Speaker 1: were recently having a discussion about fair value when people

88
00:06:29,520 --> 00:06:32,679
Speaker 1: were complaining, well, the market is not at fair value,

89
00:06:32,880 --> 00:06:36,839
Speaker 1: and my my response was, well, you just briefly pass

90
00:06:36,880 --> 00:06:39,800
Speaker 1: fair value as you crean too much to the upside

91
00:06:39,839 --> 00:06:42,760
Speaker 1: of too much to the downside. You're saying, even when

92
00:06:42,839 --> 00:06:45,560
Speaker 1: you go by fair value, we don't really know exactly

93
00:06:45,640 --> 00:06:48,840
Speaker 1: what we don't know. We don't know for sure. Look,

94
00:06:49,279 --> 00:06:54,839
Speaker 1: we know perfectly well that in March of two thousand

95
00:06:55,360 --> 00:06:58,360
Speaker 1: there was a bubble in the stock market. Uh. We

96
00:06:58,600 --> 00:07:04,280
Speaker 1: had internet companies selling a triple digit multiples. We had

97
00:07:04,320 --> 00:07:08,680
Speaker 1: companies changing their name uh to put dot com at

98
00:07:08,680 --> 00:07:10,880
Speaker 1: the end of it, and the price would double. We

99
00:07:11,040 --> 00:07:14,760
Speaker 1: know that there were crazy things going on. But the

100
00:07:14,880 --> 00:07:19,720
Speaker 1: problem is the people who are associated with the view

101
00:07:20,160 --> 00:07:24,520
Speaker 1: I told you so, I knew that. The problem is

102
00:07:24,840 --> 00:07:31,400
Speaker 1: they knew it in and that's the problem. After the fact.

103
00:07:31,520 --> 00:07:34,880
Speaker 1: We know perfectly well the prices were wrong. But the

104
00:07:34,960 --> 00:07:38,760
Speaker 1: difficulty was the people who said we knew it, knew

105
00:07:38,800 --> 00:07:41,840
Speaker 1: it early in the nineteen nineties and missed one of

106
00:07:41,880 --> 00:07:46,280
Speaker 1: the best bull markets we've ever had. I very famously

107
00:07:46,360 --> 00:07:51,800
Speaker 1: remember Lewis Rukaiser's his elves saying these things in nine six.

108
00:07:51,880 --> 00:07:54,760
Speaker 1: He ended up demoting a few of them because they

109
00:07:54,760 --> 00:07:57,600
Speaker 1: were right. Stocks were of valued. But so you missed

110
00:07:57,640 --> 00:08:03,480
Speaker 1: four years of double digit gain this last collapse. I recall,

111
00:08:03,560 --> 00:08:08,480
Speaker 1: in real time, very very few people were warning about credit,

112
00:08:08,480 --> 00:08:12,880
Speaker 1: about derivatives, about housing. These days, I have meant more

113
00:08:12,960 --> 00:08:16,680
Speaker 1: people who claim to have seen that collapse coming, and

114
00:08:16,720 --> 00:08:19,800
Speaker 1: that would be a little bit of hindsight bias. Now exactly,

115
00:08:19,840 --> 00:08:24,840
Speaker 1: and that's precisely the thing that happens uh before the fact.

116
00:08:25,480 --> 00:08:29,680
Speaker 1: We really don't know and we don't know today. Are

117
00:08:29,720 --> 00:08:32,640
Speaker 1: the is the stock market too high or too low?

118
00:08:32,960 --> 00:08:36,640
Speaker 1: It's high now, there's no question valuations are stretched. But

119
00:08:36,720 --> 00:08:41,280
Speaker 1: it's also the case that the short term government interest

120
00:08:41,360 --> 00:08:46,240
Speaker 1: rate is zero and the long term interest rate after

121
00:08:46,440 --> 00:08:51,880
Speaker 1: inflation is probably zero or below zero. So in that environment,

122
00:08:52,040 --> 00:08:56,120
Speaker 1: everything is going to be more highly priced. I'm Barry

123
00:08:56,320 --> 00:08:59,720
Speaker 1: Hults you're listening to Masters in Business on Bloomberg Radio.

124
00:09:00,320 --> 00:09:05,200
Speaker 1: My special guest is Professor Burton Malkiel of Princeton and

125
00:09:05,880 --> 00:09:10,040
Speaker 1: Vanguard and the author of A Random Walk Down Wall Street.

126
00:09:10,080 --> 00:09:13,560
Speaker 1: The paperback is now and it's eleventh edition and it's

127
00:09:13,559 --> 00:09:16,680
Speaker 1: sold a million and a half copies. Um, let's talk

128
00:09:16,720 --> 00:09:22,560
Speaker 1: a little bit about indexing versus active management. Uh, there

129
00:09:22,640 --> 00:09:25,840
Speaker 1: was a quote from the book that I've always enjoyed

130
00:09:25,880 --> 00:09:28,920
Speaker 1: this number of quotes from the book, But you had

131
00:09:28,960 --> 00:09:34,400
Speaker 1: said back in nineteen seventy three. Fund spokesman are quick

132
00:09:34,440 --> 00:09:37,359
Speaker 1: to point out that you can't buy the market averages.

133
00:09:38,000 --> 00:09:42,440
Speaker 1: It's time the public could so explain your role in

134
00:09:42,480 --> 00:09:46,280
Speaker 1: the development of the index fund. Well, basically, I said

135
00:09:46,320 --> 00:09:50,760
Speaker 1: that in nineteen seventy three, and the first index fund

136
00:09:51,400 --> 00:09:56,960
Speaker 1: was not started until seventy six. Now, Uh, you know,

137
00:09:57,520 --> 00:10:00,600
Speaker 1: I want to give Jack Bogle all the credit in

138
00:10:00,640 --> 00:10:06,160
Speaker 1: the world, because it's one thing for an academic to say, hey,

139
00:10:06,200 --> 00:10:09,960
Speaker 1: there ought to be index funds. It's another thing for

140
00:10:10,000 --> 00:10:14,640
Speaker 1: somebody to bet his company on starting an index fund.

141
00:10:14,960 --> 00:10:19,120
Speaker 1: And let me tell you it wasn't easy. At the beginning,

142
00:10:19,679 --> 00:10:23,079
Speaker 1: they had an underwriting where they were hoping to do

143
00:10:23,160 --> 00:10:26,640
Speaker 1: a hundred million or more in the index fund, and

144
00:10:26,720 --> 00:10:31,480
Speaker 1: in fact the book wasn't oversubscribed. They sold eleven million.

145
00:10:31,960 --> 00:10:35,600
Speaker 1: And sometimes I used to joke, because uh I then

146
00:10:35,720 --> 00:10:38,840
Speaker 1: was on the Vanguard board that Jack Bogle and I

147
00:10:38,920 --> 00:10:41,480
Speaker 1: were about the only people I knew who actually owned

148
00:10:41,520 --> 00:10:45,920
Speaker 1: shares in the index fund. It was very, very slow

149
00:10:46,160 --> 00:10:50,280
Speaker 1: to catch on, but it did catch on, UH, And

150
00:10:50,559 --> 00:10:56,120
Speaker 1: in fact, last year, hundreds of millions of dollars moved

151
00:10:56,440 --> 00:11:01,960
Speaker 1: from actively managed funds into index funds, and index funds

152
00:11:02,040 --> 00:11:06,480
Speaker 1: now have maybe somewhere between thirty and thirty five percent

153
00:11:07,600 --> 00:11:14,680
Speaker 1: of people's money of individuals or institutions, more institutional than individual. Uh.

154
00:11:14,720 --> 00:11:20,120
Speaker 1: Individuals are slower to catch onto this, so with the

155
00:11:20,200 --> 00:11:25,560
Speaker 1: institutions it's maybe thirty five or more. With individuals it's

156
00:11:25,600 --> 00:11:28,440
Speaker 1: probably a bit less than thirty. But the point is

157
00:11:28,840 --> 00:11:33,120
Speaker 1: the market is catching up to the idea, and UH,

158
00:11:33,160 --> 00:11:39,000
Speaker 1: I am obviously simply delighted, since I've basically been an

159
00:11:39,040 --> 00:11:43,640
Speaker 1: evangelist for index funds all my life. So Vanguard, you

160
00:11:43,640 --> 00:11:47,000
Speaker 1: you mentioned your you you served with Jack Bogel, you

161
00:11:47,040 --> 00:11:49,680
Speaker 1: were on the board for twenty eight years. They're now

162
00:11:49,800 --> 00:11:54,960
Speaker 1: over three trillion, that's trillion, with of which two thirds

163
00:11:55,000 --> 00:11:58,800
Speaker 1: are actively are actually passive indexes are Actually they still

164
00:11:58,840 --> 00:12:02,760
Speaker 1: have about a third that our active management um. But

165
00:12:03,360 --> 00:12:07,800
Speaker 1: that leads to a really interesting question. What's more significant

166
00:12:08,080 --> 00:12:12,040
Speaker 1: the low cost aspect of it or the passive aspect

167
00:12:12,120 --> 00:12:15,240
Speaker 1: of it of index Well, I think they're both both

168
00:12:15,240 --> 00:12:20,959
Speaker 1: are important. Clearly, the low cost is important in that. Uh.

169
00:12:21,000 --> 00:12:23,120
Speaker 1: You know, let me tell you, any of us who

170
00:12:23,440 --> 00:12:29,320
Speaker 1: talk about financial markets need to be very modest about

171
00:12:29,360 --> 00:12:31,839
Speaker 1: what we know and don't know. But let me tell

172
00:12:31,880 --> 00:12:35,360
Speaker 1: you the one thing I'm absolutely sure about with respect

173
00:12:35,360 --> 00:12:39,800
Speaker 1: to financial markets, and that is the lower the fee

174
00:12:40,000 --> 00:12:43,640
Speaker 1: I pay to the purveyor of the investment service, the

175
00:12:43,720 --> 00:12:46,640
Speaker 1: more that's going to be for me. And the problem

176
00:12:46,800 --> 00:12:52,000
Speaker 1: is for active managers, it is still the case that

177
00:12:52,200 --> 00:12:55,840
Speaker 1: probably a hundred basis points one percentage point a year

178
00:12:56,440 --> 00:13:00,719
Speaker 1: is what they are charging, and the index or e

179
00:13:00,880 --> 00:13:05,960
Speaker 1: t F, the exchange traded index fund charges five or

180
00:13:06,040 --> 00:13:12,040
Speaker 1: four basis points uh. And that difference is basically a

181
00:13:12,280 --> 00:13:18,040
Speaker 1: difference that comes to the investor. It's also the case

182
00:13:18,760 --> 00:13:23,200
Speaker 1: that trading is not free. There are bitass spreads, there

183
00:13:23,200 --> 00:13:27,600
Speaker 1: are market impact costs. Uh, It's not free. So there's

184
00:13:27,640 --> 00:13:32,360
Speaker 1: an extract cost, uh, including what I think people do

185
00:13:32,440 --> 00:13:38,280
Speaker 1: not appreciate, and that's the tax cost of the active trading.

186
00:13:38,600 --> 00:13:41,480
Speaker 1: When you have an actively managed fund, you've got a

187
00:13:41,559 --> 00:13:43,640
Speaker 1: ten ninety nine at the end of the year. Very

188
00:13:43,679 --> 00:13:46,760
Speaker 1: often and they will say, Hey, we realize some short

189
00:13:46,880 --> 00:13:49,800
Speaker 1: term and long term capital gains on your behalf, and

190
00:13:49,840 --> 00:13:52,360
Speaker 1: you've got to report those on your income tax. You

191
00:13:52,440 --> 00:13:54,480
Speaker 1: have a partner named Uncle Sam, and he's going to

192
00:13:54,559 --> 00:14:01,680
Speaker 1: take exactly that. That's that's quite astonished. So how did

193
00:14:01,760 --> 00:14:05,440
Speaker 1: I'm curious, how did you find your way to Vanguard

194
00:14:05,920 --> 00:14:09,600
Speaker 1: from Princeton? Well, I think Vanguard found its way to

195
00:14:09,679 --> 00:14:15,000
Speaker 1: me in that people knew UH that I had been

196
00:14:15,240 --> 00:14:23,760
Speaker 1: a proselytizer for index funds. I believed in low cost UH,

197
00:14:23,800 --> 00:14:27,400
Speaker 1: and so it was such a very natural fit. And

198
00:14:27,760 --> 00:14:30,760
Speaker 1: Vanguard came to me. I didn't come to them. So

199
00:14:30,840 --> 00:14:33,320
Speaker 1: let me throw another of your quotes from the book

200
00:14:33,320 --> 00:14:36,320
Speaker 1: out that that I adore. And I'm curious as to

201
00:14:36,360 --> 00:14:39,360
Speaker 1: the sort of pushback this generates. But by the way,

202
00:14:39,360 --> 00:14:42,480
Speaker 1: we take this quote for granted, and I have found

203
00:14:42,480 --> 00:14:46,560
Speaker 1: a number of quotes that are yours that a number

204
00:14:46,640 --> 00:14:50,240
Speaker 1: of other people have have taken credit for. But in

205
00:14:50,680 --> 00:14:55,080
Speaker 1: a random walkdown Wall Street, you wrote, a blindfolded monkey

206
00:14:55,120 --> 00:14:59,200
Speaker 1: throwing darts at a newspaper's financial pages could select a

207
00:14:59,240 --> 00:15:03,200
Speaker 1: portfolio that would do just as well as one selected

208
00:15:03,240 --> 00:15:07,240
Speaker 1: carefully by the experts. What was the response to that. Oh,

209
00:15:07,400 --> 00:15:17,360
Speaker 1: the response was really uh, definitely bad. Uh. The former

210
00:15:18,600 --> 00:15:23,360
Speaker 1: Bloomberg business Week was just Business Week. And my book

211
00:15:23,760 --> 00:15:26,880
Speaker 1: when it first came out, was reviewed by an investment

212
00:15:26,960 --> 00:15:31,120
Speaker 1: professional in Business Week, and it was probably the worst

213
00:15:31,200 --> 00:15:34,760
Speaker 1: review I've ever had in my life. The reviewers said,

214
00:15:34,840 --> 00:15:37,200
Speaker 1: this is the biggest piece of garbage that you could

215
00:15:37,200 --> 00:15:44,680
Speaker 1: possibly imagine, because professional uh, investment people really don't like

216
00:15:44,920 --> 00:15:52,080
Speaker 1: to be compared to a blindfolded to blindfolded chimpanzee. So

217
00:15:52,200 --> 00:15:55,480
Speaker 1: I remember for a long time the Wall Street maybe

218
00:15:55,480 --> 00:15:57,760
Speaker 1: it was fifteen years they were doing this. The Wall

219
00:15:57,800 --> 00:16:01,880
Speaker 1: Street Journal was literally throwing dar at stock pages and

220
00:16:01,960 --> 00:16:05,400
Speaker 1: comparing that to any absolutely and in fact, they had

221
00:16:05,440 --> 00:16:09,440
Speaker 1: invited me to throw out the first darts when they

222
00:16:09,480 --> 00:16:16,920
Speaker 1: did this. And basically what they found was there was

223
00:16:17,120 --> 00:16:20,000
Speaker 1: a little bit of an effect because when the Wall

224
00:16:20,040 --> 00:16:23,720
Speaker 1: Street Journal put the column out, the column had five

225
00:16:23,840 --> 00:16:28,240
Speaker 1: picks of the experts, and the expert picks, uh maybe

226
00:16:28,240 --> 00:16:31,400
Speaker 1: got a little bit for a day. The price went

227
00:16:31,480 --> 00:16:35,080
Speaker 1: up a bit, but generally, after the fifteen years of

228
00:16:35,120 --> 00:16:39,400
Speaker 1: doing this, it came out basically pretty even. And you know,

229
00:16:39,480 --> 00:16:44,480
Speaker 1: that really leads to a very very important point about indexing.

230
00:16:44,960 --> 00:16:47,800
Speaker 1: You know, we talked about the markets being reasonably efficient.

231
00:16:48,120 --> 00:16:52,640
Speaker 1: Suppose they weren't efficient. It doesn't matter when you think

232
00:16:52,680 --> 00:16:56,200
Speaker 1: of it. All the stocks in the United States have

233
00:16:56,360 --> 00:17:00,400
Speaker 1: to be held by somebody. Every share of General Motors

234
00:17:00,640 --> 00:17:05,280
Speaker 1: is held by somebody. Every share of Facebook is held

235
00:17:05,320 --> 00:17:10,760
Speaker 1: by somebody. Any every share of Salesforce is held by somebody.

236
00:17:10,800 --> 00:17:16,960
Speaker 1: So what that means is if you, as a professional investor,

237
00:17:18,080 --> 00:17:24,960
Speaker 1: hold just a few of the stocks, what that means

238
00:17:25,240 --> 00:17:28,080
Speaker 1: is and say that they're the good ones, the ones

239
00:17:28,119 --> 00:17:31,600
Speaker 1: that went up more than the market. What that has

240
00:17:31,640 --> 00:17:35,920
Speaker 1: to mean is that somebody else is holding the stocks

241
00:17:36,359 --> 00:17:39,280
Speaker 1: that went up less than the market. It it must

242
00:17:39,400 --> 00:17:44,119
Speaker 1: follow that investing has to be a zero sum game.

243
00:17:44,640 --> 00:17:49,200
Speaker 1: If somebody is outperforming, then somebody else has got to

244
00:17:49,280 --> 00:17:54,320
Speaker 1: be underperforming because the index holds everything. And the reason

245
00:17:54,440 --> 00:17:59,159
Speaker 1: the index fund wins is the index fund is holding

246
00:17:59,200 --> 00:18:04,240
Speaker 1: everything and essentially charging a zero fee, and the active

247
00:18:04,280 --> 00:18:08,439
Speaker 1: manager is holding some of the stocks and charging a

248
00:18:08,520 --> 00:18:14,480
Speaker 1: one percent fee. So even if before fees, the active

249
00:18:14,520 --> 00:18:21,440
Speaker 1: managers balanced each other out. After fees, they're going to underperform.

250
00:18:21,480 --> 00:18:26,600
Speaker 1: And what we know, we know so clearly is year

251
00:18:26,960 --> 00:18:34,000
Speaker 1: after year after year, the active funds are underperforming. Every year.

252
00:18:34,200 --> 00:18:36,439
Speaker 1: I always read columns, this is going to be a

253
00:18:36,520 --> 00:18:40,040
Speaker 1: stock pickers market year. You know, every year people are

254
00:18:40,080 --> 00:18:42,400
Speaker 1: going to say that, or beginning of this year, there's

255
00:18:42,400 --> 00:18:44,920
Speaker 1: going to be more of volatility. This year, the unactive

256
00:18:44,960 --> 00:18:49,280
Speaker 1: managers will be able to outperform. And Standard in Pores

257
00:18:49,400 --> 00:18:53,200
Speaker 1: does a so called SPIVA report each year Standard and

258
00:18:53,240 --> 00:18:56,840
Speaker 1: Poor's indices versus active, and every year we get the

259
00:18:56,880 --> 00:19:03,359
Speaker 1: same thing. Two thirds of the actively managed mutual funds

260
00:19:03,440 --> 00:19:08,200
Speaker 1: underperformed the index, and the third that outperform in one

261
00:19:08,280 --> 00:19:11,520
Speaker 1: year aren't the same as the third that outperformed in

262
00:19:11,520 --> 00:19:15,760
Speaker 1: the next year. So that uh uh, you know, it's

263
00:19:15,840 --> 00:19:20,320
Speaker 1: not that it's impossible to outperform, and in fact, there

264
00:19:20,359 --> 00:19:25,960
Speaker 1: are a few outperformers, but when you go active, you're

265
00:19:26,160 --> 00:19:28,520
Speaker 1: much more likely to be in the bottom end of

266
00:19:28,560 --> 00:19:33,840
Speaker 1: the distribution. And index investing isn't mediocre investing, it isn't

267
00:19:33,880 --> 00:19:39,680
Speaker 1: average investing. It's actually above average investing. I'm Barry rich Helts,

268
00:19:39,840 --> 00:19:43,640
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My

269
00:19:43,720 --> 00:19:49,000
Speaker 1: special guest today is Princeton Emeritus Professor Burton Malkiol. He

270
00:19:49,200 --> 00:19:52,680
Speaker 1: is probably best known for his book A Random Walk

271
00:19:52,720 --> 00:19:57,000
Speaker 1: Down Wall Street. The paperback is now in its eleventh edition.

272
00:19:57,040 --> 00:19:59,800
Speaker 1: It's already sold over a million and a half co

273
00:20:00,080 --> 00:20:03,520
Speaker 1: pies and is widely regarded as the one book to

274
00:20:03,520 --> 00:20:06,680
Speaker 1: read on investing if you're only going to read one. Uh.

275
00:20:06,720 --> 00:20:11,960
Speaker 1: He is also, in addition to a long and glorious

276
00:20:12,080 --> 00:20:16,360
Speaker 1: uh academic career, he is also the chief investment officer

277
00:20:16,600 --> 00:20:20,080
Speaker 1: of wealth Front, which is one of the larger new

278
00:20:20,760 --> 00:20:25,160
Speaker 1: software driven asset management firms, which is running about three

279
00:20:25,200 --> 00:20:28,399
Speaker 1: billion dollars. Is that about right? So how did you

280
00:20:28,440 --> 00:20:32,520
Speaker 1: get involved with something like a robo advis or something

281
00:20:32,520 --> 00:20:36,760
Speaker 1: like wealth Front? Well, again, they just as with Vanguard,

282
00:20:37,000 --> 00:20:43,320
Speaker 1: they found they came to me rather than vice versa. Uh.

283
00:20:43,359 --> 00:20:48,320
Speaker 1: And again it was just such a natural fit because

284
00:20:48,400 --> 00:20:54,080
Speaker 1: a they use only index funds, and as you know, UH,

285
00:20:54,119 --> 00:20:57,040
Speaker 1: that's what I have believed in all of my life.

286
00:20:57,560 --> 00:21:06,560
Speaker 1: And secondly, uh, they are charging very low fees. They

287
00:21:06,640 --> 00:21:11,520
Speaker 1: charge nothing for the first fifteen thousand dollars under management,

288
00:21:12,000 --> 00:21:16,440
Speaker 1: and then they charge twenty five basis points a quarter

289
00:21:16,520 --> 00:21:22,080
Speaker 1: of one percent on anything over there versus a traditional

290
00:21:22,200 --> 00:21:26,600
Speaker 1: investment advisor that will put together a portfolio for you

291
00:21:27,080 --> 00:21:33,040
Speaker 1: and charge probably at least one percent uh and sometimes

292
00:21:33,520 --> 00:21:38,560
Speaker 1: even more. And the problem I think with many professional

293
00:21:38,600 --> 00:21:44,000
Speaker 1: investment advisors is that we ought to recognize that they

294
00:21:44,040 --> 00:21:48,600
Speaker 1: often have a conflict of interest. What I think is

295
00:21:48,640 --> 00:21:52,399
Speaker 1: not as well known as it should be is that

296
00:21:52,560 --> 00:21:55,840
Speaker 1: if you go to an investment advisor who sits down

297
00:21:55,880 --> 00:22:00,680
Speaker 1: with you and says, okay, we'll put together a portfolio

298
00:22:00,880 --> 00:22:06,960
Speaker 1: for you, that that advisor gets paid for selling you

299
00:22:07,160 --> 00:22:11,399
Speaker 1: an actively managed fund. It's not only that the fund

300
00:22:11,440 --> 00:22:15,879
Speaker 1: itself is charging you maybe one but there's a conflict

301
00:22:15,920 --> 00:22:20,119
Speaker 1: of interests the advisor. UH. In fact, that's one of

302
00:22:20,160 --> 00:22:23,000
Speaker 1: the reasons why there's such a battle now about the

303
00:22:23,080 --> 00:22:28,840
Speaker 1: so called fiduciary standard. And again what this advisor UH,

304
00:22:29,000 --> 00:22:33,240
Speaker 1: this automated advisor, we have no conflict of interests. We

305
00:22:33,400 --> 00:22:36,240
Speaker 1: just use In fact, UH, we use a lot of

306
00:22:36,320 --> 00:22:40,200
Speaker 1: Vanguard ETFs. But if Charles Schwab has a cheaper et

307
00:22:40,400 --> 00:22:44,159
Speaker 1: f H, we will use that and we are able

308
00:22:44,359 --> 00:22:49,760
Speaker 1: to automatically rebalance the portfolio to keep it within the

309
00:22:50,000 --> 00:22:57,120
Speaker 1: risk level that the client wants. If it's a taxable account, Uh,

310
00:22:57,359 --> 00:23:02,560
Speaker 1: we do uh tax loss harvesting. I mean, for example, Uh,

311
00:23:02,680 --> 00:23:06,879
Speaker 1: last year, we had a bit of the portfolio in

312
00:23:07,119 --> 00:23:12,200
Speaker 1: emerging markets. Emerging markets were terrible last year, so that

313
00:23:12,280 --> 00:23:15,000
Speaker 1: if you bought an emerging market e t F you

314
00:23:15,119 --> 00:23:19,800
Speaker 1: had a loss. What we will then do is we

315
00:23:19,920 --> 00:23:26,560
Speaker 1: will then sell that e t F keep your position

316
00:23:26,720 --> 00:23:31,080
Speaker 1: in emerging markets by buying another one that's similar but

317
00:23:31,280 --> 00:23:34,840
Speaker 1: not identical. And the reason you can do that and

318
00:23:34,920 --> 00:23:38,560
Speaker 1: have it not be a wash sale is say you

319
00:23:38,720 --> 00:23:41,840
Speaker 1: sell an M S c I Emerging market e t

320
00:23:42,119 --> 00:23:46,640
Speaker 1: F and you buy a Vanguard one. They are index

321
00:23:46,760 --> 00:23:50,520
Speaker 1: to two different indices, so it's not a wash sale.

322
00:23:50,920 --> 00:23:54,480
Speaker 1: And so we're able to do all the things that

323
00:23:54,680 --> 00:24:00,480
Speaker 1: a sophisticated investment advisor will do for you and do

324
00:24:00,600 --> 00:24:04,160
Speaker 1: it at a fraction of the cost. And again, as

325
00:24:04,200 --> 00:24:07,919
Speaker 1: I said before, the thing I'm sure about is the

326
00:24:08,119 --> 00:24:11,280
Speaker 1: lower the costs that I pay, the more that's gonna

327
00:24:11,320 --> 00:24:15,920
Speaker 1: be for me. And Uh, I think it's been very

328
00:24:15,960 --> 00:24:21,480
Speaker 1: effective and in fact, in a lousy year like last year,

329
00:24:22,400 --> 00:24:28,400
Speaker 1: we were able to realize for various accounts between two

330
00:24:28,480 --> 00:24:33,919
Speaker 1: and three percentage points of tax losses, so that even

331
00:24:34,000 --> 00:24:37,280
Speaker 1: in a year when markets were pretty darn flat and

332
00:24:37,440 --> 00:24:41,400
Speaker 1: did very little, we were able to, uh, I think

333
00:24:41,400 --> 00:24:45,720
Speaker 1: benefit the people who are our clients. So so within

334
00:24:45,840 --> 00:24:49,320
Speaker 1: this and I find the term robo adviser to be

335
00:24:49,440 --> 00:24:52,240
Speaker 1: a little misleading. But well, I don't like it because

336
00:24:52,240 --> 00:24:57,639
Speaker 1: it suggests that, in fact, you know, there's some senseless

337
00:24:57,800 --> 00:25:02,240
Speaker 1: robot who's doing it, and so time the chief investment officer,

338
00:25:02,800 --> 00:25:05,600
Speaker 1: I can tell you that, in fact, there are a

339
00:25:05,600 --> 00:25:10,040
Speaker 1: lot of smart people behind what we are doing. I'm

340
00:25:10,080 --> 00:25:12,720
Speaker 1: Barry rich Hults. You're listening to Masters in Business on

341
00:25:12,760 --> 00:25:17,560
Speaker 1: Bloomberg Radio. My special guest today is Professor Burton Malkiel,

342
00:25:17,840 --> 00:25:23,520
Speaker 1: formerly of Princeton where he is still UH professor emeritus,

343
00:25:24,240 --> 00:25:27,679
Speaker 1: a former board member of Vanguard for twenty eight years,

344
00:25:28,160 --> 00:25:32,440
Speaker 1: and author, now in its eleventh edition, A Random Walk

345
00:25:32,480 --> 00:25:35,359
Speaker 1: Down Wall Street. Uh. The book has sold over a

346
00:25:35,400 --> 00:25:38,240
Speaker 1: million and a half copies. UH. Let's talk a little

347
00:25:38,240 --> 00:25:41,760
Speaker 1: bit about um some other guests I've had on the

348
00:25:41,800 --> 00:25:45,680
Speaker 1: show that that you know, so you worked with Jack

349
00:25:45,760 --> 00:25:48,320
Speaker 1: Bogel for a number of years. He was a guest

350
00:25:48,320 --> 00:25:51,080
Speaker 1: on the show a few months ago. What can you

351
00:25:51,119 --> 00:25:54,960
Speaker 1: tell us about Jack that that we probably don't know. Well,

352
00:25:55,040 --> 00:25:58,080
Speaker 1: I don't know whether you know. Jack is very well known,

353
00:25:58,160 --> 00:26:04,399
Speaker 1: and I think the some of his habits are uh

354
00:26:04,440 --> 00:26:07,760
Speaker 1: probably better known than the habits of some of your

355
00:26:07,800 --> 00:26:11,480
Speaker 1: other guests. But one of the things about Jack is

356
00:26:11,640 --> 00:26:16,800
Speaker 1: that maybe people don't know, is this idea of low

357
00:26:16,920 --> 00:26:21,879
Speaker 1: cost uh is really into his DNA. This is a

358
00:26:21,960 --> 00:26:27,240
Speaker 1: guy who will go to a hotel uh and when

359
00:26:27,280 --> 00:26:29,879
Speaker 1: they say, well, we've got a very good room and

360
00:26:29,920 --> 00:26:32,800
Speaker 1: we've got a bargain, uh it's a hundred and fifty

361
00:26:32,840 --> 00:26:36,320
Speaker 1: dollars a night. Jack will go and say, well, do

362
00:26:36,359 --> 00:26:39,040
Speaker 1: you have anything at a hundred dollars a night? Jack

363
00:26:39,560 --> 00:26:44,479
Speaker 1: has this sort of calvinist streak uh that uh uh

364
00:26:44,720 --> 00:26:49,840
Speaker 1: he uh as much money as he has, and he's

365
00:26:49,840 --> 00:26:55,560
Speaker 1: certainly been very successful financially, just lives his life as

366
00:26:55,760 --> 00:27:01,440
Speaker 1: frugally as you can imagine. And of course I think

367
00:27:01,560 --> 00:27:06,600
Speaker 1: that's really what has gotten into his company. A vanguard

368
00:27:06,760 --> 00:27:12,320
Speaker 1: that uh, that's really into Jack's uh d n A.

369
00:27:13,119 --> 00:27:15,760
Speaker 1: And you know the interesting thing, I'll tell you one

370
00:27:15,800 --> 00:27:22,480
Speaker 1: other little funny story about Jack Vogel. So many Wall

371
00:27:22,520 --> 00:27:27,520
Speaker 1: Street people, uh have you know the eight thousand dollar

372
00:27:28,320 --> 00:27:33,560
Speaker 1: watch on and uh the Italian Uh the Italian suits

373
00:27:33,640 --> 00:27:37,520
Speaker 1: and so forth. Uh, Jack is always sort of in

374
00:27:37,600 --> 00:27:43,040
Speaker 1: a rumpled suit. And interestingly enough, when he first met

375
00:27:43,160 --> 00:27:47,600
Speaker 1: Warren Buffett, Uh, they were actually at a hotel together

376
00:27:47,880 --> 00:27:53,520
Speaker 1: and Jack recognized Warren went up and introduced himself, and

377
00:27:53,640 --> 00:27:56,160
Speaker 1: he said to Warren, you know, the thing I really

378
00:27:56,200 --> 00:28:00,080
Speaker 1: like about you is you have rumpled suits just the

379
00:28:00,080 --> 00:28:04,439
Speaker 1: same as as I do. And Jack and Warren have

380
00:28:04,600 --> 00:28:07,840
Speaker 1: become very very good friends. And as you probably know,

381
00:28:08,040 --> 00:28:12,040
Speaker 1: because Warren is the sort of exception to indexing that

382
00:28:12,119 --> 00:28:16,320
Speaker 1: everybody mentions that. Warren has said, I've got told my

383
00:28:16,400 --> 00:28:21,119
Speaker 1: widow when I'm gone, I just want you to own

384
00:28:21,520 --> 00:28:25,960
Speaker 1: index funds. So there's a couple of things about Jack.

385
00:28:26,000 --> 00:28:30,680
Speaker 1: He's been a lifelong friend and uh, just a wonderful guy.

386
00:28:30,880 --> 00:28:35,560
Speaker 1: But Buffett has said publicly most people should be in indexes.

387
00:28:35,640 --> 00:28:39,640
Speaker 1: That absolutely what what the average person should be doing.

388
00:28:40,160 --> 00:28:44,280
Speaker 1: But so let's talk a second about Buffett, because when

389
00:28:44,280 --> 00:28:48,280
Speaker 1: we talk about the efficient the concept about the efficient

390
00:28:48,320 --> 00:28:54,080
Speaker 1: market hypothesis, the name that always comes up is Warren Buffett.

391
00:28:54,640 --> 00:28:57,920
Speaker 1: Is is he an outlier? Is he lucky? Or is

392
00:28:57,960 --> 00:29:03,120
Speaker 1: he uniquely skilled? Look? I think he is enormously skilled.

393
00:29:03,160 --> 00:29:07,120
Speaker 1: I wouldn't take anything away from him, but he's also

394
00:29:08,000 --> 00:29:11,400
Speaker 1: a very good businessman. Let me tell you a little story.

395
00:29:12,240 --> 00:29:14,920
Speaker 1: At one point, when I was the dean of the

396
00:29:15,000 --> 00:29:21,240
Speaker 1: Yale Management School, we had Katherine Graham come to speak

397
00:29:21,400 --> 00:29:27,600
Speaker 1: to our class, and uh, she fortunately got the time wrong,

398
00:29:27,960 --> 00:29:31,120
Speaker 1: but not to come an hour later an hour earlier.

399
00:29:31,480 --> 00:29:33,560
Speaker 1: So I was able to sit down with her for

400
00:29:33,640 --> 00:29:35,760
Speaker 1: about an hour. And of course, the first thing I

401
00:29:35,800 --> 00:29:39,120
Speaker 1: wanted to ask her was, look, I know that one

402
00:29:39,200 --> 00:29:43,960
Speaker 1: of Warren Buffett's first great investments was the Washington Post.

403
00:29:44,520 --> 00:29:50,880
Speaker 1: And tell me about Buffett, because Buffett generally buys companies,

404
00:29:50,920 --> 00:29:56,280
Speaker 1: are huge stakes in companies. And she said, uh. I said,

405
00:29:56,280 --> 00:29:58,560
Speaker 1: what was it like working with him? She said, you know,

406
00:29:58,760 --> 00:30:02,440
Speaker 1: when I had learned that he had bought a big

407
00:30:02,560 --> 00:30:06,160
Speaker 1: steak in our company, I was just scared to death.

408
00:30:06,440 --> 00:30:09,840
Speaker 1: I thought he clearly wanted to take over the company. Uh,

409
00:30:09,880 --> 00:30:12,360
Speaker 1: and I would be out in my ear. So I

410
00:30:12,440 --> 00:30:15,440
Speaker 1: called him and he said, no, really, I just did

411
00:30:15,480 --> 00:30:18,400
Speaker 1: this as an investment. And she said, I really sort

412
00:30:18,440 --> 00:30:22,200
Speaker 1: of liked him. He seemed very honest and straightforward. And

413
00:30:22,240 --> 00:30:26,480
Speaker 1: I then confided at him, we're going bankrupt. We're really

414
00:30:26,640 --> 00:30:31,479
Speaker 1: in terrible shape. Would you please come join my board

415
00:30:31,680 --> 00:30:36,360
Speaker 1: and help me right this company. Buffett joined the board.

416
00:30:36,920 --> 00:30:42,880
Speaker 1: Buffett actually was to Catherine Graham enormously helpful as a

417
00:30:42,960 --> 00:30:48,240
Speaker 1: business person, moving the thing around and making it finally successful.

418
00:30:49,000 --> 00:30:52,800
Speaker 1: And so when you think of Warren Buffett, I don't

419
00:30:52,880 --> 00:30:56,360
Speaker 1: think it's just that he read Graham and Dodd bought

420
00:30:56,360 --> 00:30:59,640
Speaker 1: a value stock uh and uh and it was good.

421
00:31:00,400 --> 00:31:04,720
Speaker 1: He's also made sure not himself, but he's put good

422
00:31:04,760 --> 00:31:09,520
Speaker 1: management in and has helped managements. And I think that's

423
00:31:09,600 --> 00:31:15,280
Speaker 1: been the genius of Warren Buffett as opposed to Uh. No,

424
00:31:15,480 --> 00:31:18,600
Speaker 1: it's very easy. You just read Graham and Dodd and

425
00:31:18,760 --> 00:31:22,000
Speaker 1: run a good portfolio. Let me also say about Buffett

426
00:31:22,040 --> 00:31:26,200
Speaker 1: that given the size that Berkshire Hathaway is now, it's

427
00:31:26,320 --> 00:31:30,959
Speaker 1: virtually impossible for him to do the kinds of things

428
00:31:31,400 --> 00:31:36,960
Speaker 1: that he has done in the past. He does um

429
00:31:37,160 --> 00:31:41,640
Speaker 1: bring a certain good housekeeping stamp of approval. And he

430
00:31:41,760 --> 00:31:44,840
Speaker 1: is also and I recall the most recent edition you

431
00:31:44,960 --> 00:31:51,000
Speaker 1: referenced him, he gets access and creates deals that the

432
00:31:51,160 --> 00:31:55,160
Speaker 1: average stock picker is just never going to have access to. Oh. Absolutely,

433
00:31:55,320 --> 00:32:00,200
Speaker 1: and he's got the capital that during the financial crisis, Uh,

434
00:32:00,240 --> 00:32:05,080
Speaker 1: he was able to go to financial institutions, get a

435
00:32:05,120 --> 00:32:10,280
Speaker 1: ten percent coupon, get an equity participation, and do what

436
00:32:10,320 --> 00:32:13,640
Speaker 1: other people were not able to do. So let's last

437
00:32:13,640 --> 00:32:17,760
Speaker 1: word about Buffett. He made a tremendous investment in Goldman Sachs,

438
00:32:18,160 --> 00:32:22,360
Speaker 1: which turns out to be hugely usually successful. Most people

439
00:32:23,280 --> 00:32:26,960
Speaker 1: probably don't realize that he had offered Dick Fold of

440
00:32:27,040 --> 00:32:31,480
Speaker 1: Lehman Brothers an investment and Fold turned them down, which

441
00:32:31,560 --> 00:32:34,560
Speaker 1: is stop and think about how how brilliant and insight

442
00:32:35,120 --> 00:32:38,720
Speaker 1: that was. So so let me go back to UM

443
00:32:38,840 --> 00:32:41,480
Speaker 1: some of some of my favorite quotes from the book.

444
00:32:42,560 --> 00:32:45,800
Speaker 1: I recall hearing this way back when, and then when

445
00:32:45,880 --> 00:32:51,720
Speaker 1: I started researching UM things for this conversation, I was

446
00:32:51,800 --> 00:32:55,360
Speaker 1: shocked to see that this was a quote of yours

447
00:32:56,000 --> 00:32:59,720
Speaker 1: you had written in or said in some interview. Tip

448
00:32:59,760 --> 00:33:02,440
Speaker 1: of the week. If you bought a thousand dollars worth

449
00:33:02,480 --> 00:33:05,040
Speaker 1: of Nortel stock one year ago. By the way, this

450
00:33:05,120 --> 00:33:08,680
Speaker 1: was in the late nineties when Nortel uh symbol NT

451
00:33:09,080 --> 00:33:12,320
Speaker 1: was a house of fire. Um, if you had board

452
00:33:12,360 --> 00:33:15,560
Speaker 1: a thousand dollars worth of Nortel a year ago, today

453
00:33:15,600 --> 00:33:18,960
Speaker 1: it's worth forty nine dollars. But if instead you went

454
00:33:19,000 --> 00:33:22,440
Speaker 1: out and bought a thousand dollars worth of Budweiser, the

455
00:33:22,520 --> 00:33:27,320
Speaker 1: beer not Anheuser bush stock a year ago. If you

456
00:33:27,440 --> 00:33:30,480
Speaker 1: drank all the beer and traded in all the cans

457
00:33:30,840 --> 00:33:34,360
Speaker 1: for the nickel deposit, it'd be worth seventy nine dollars

458
00:33:34,360 --> 00:33:38,360
Speaker 1: more than Nortel. My advice to you start drinking heavily.

459
00:33:39,040 --> 00:33:42,120
Speaker 1: I remember seeing that in the late nineties, and it

460
00:33:42,200 --> 00:33:45,479
Speaker 1: was never attributed to you. Is that really a quote

461
00:33:45,480 --> 00:33:48,560
Speaker 1: from Burton Mauthiel? Oh, yes, it definitely is. But you know,

462
00:33:48,680 --> 00:33:52,520
Speaker 1: my feeling is imitation is the best form of flattery.

463
00:33:53,200 --> 00:33:58,000
Speaker 1: I'm you know, I'd obviously prefer uh that someone gave

464
00:33:58,000 --> 00:34:02,240
Speaker 1: me credit for it, but uh, the imitation is fine.

465
00:34:02,440 --> 00:34:04,720
Speaker 1: And the point about the book, and I think one

466
00:34:04,720 --> 00:34:07,600
Speaker 1: of the reasons that the book has done well is

467
00:34:07,640 --> 00:34:12,240
Speaker 1: that it is written in a rather lighthearted fashion because

468
00:34:12,280 --> 00:34:15,760
Speaker 1: a lot of people's eyes glaze over when they're talking

469
00:34:15,800 --> 00:34:20,480
Speaker 1: about facts and figures and numbers. So I've really tried

470
00:34:20,719 --> 00:34:23,760
Speaker 1: as hard as I could to make it as interesting

471
00:34:23,800 --> 00:34:28,560
Speaker 1: as possible. Well, you certainly you're certainly succeeded. There. Another

472
00:34:28,640 --> 00:34:31,759
Speaker 1: book that that I've been a fan of, uh, is

473
00:34:31,800 --> 00:34:35,319
Speaker 1: The Winning the Loser's Game by Charlie Ellis. He was

474
00:34:35,400 --> 00:34:38,960
Speaker 1: also on the board of Vanguard for a long time

475
00:34:39,480 --> 00:34:44,560
Speaker 1: and uh on the Yale Advisement, Yale Endowment Advisory Board,

476
00:34:44,640 --> 00:34:48,320
Speaker 1: where where you were um chairman of the School of Management.

477
00:34:48,360 --> 00:34:50,839
Speaker 1: I assume you and Charlie know each other fairly well.

478
00:34:51,160 --> 00:34:55,000
Speaker 1: We do know each other fairly well. And uh, Charlie

479
00:34:55,000 --> 00:35:00,760
Speaker 1: and I have actually written things together. And and again

480
00:35:00,920 --> 00:35:03,120
Speaker 1: I think one of the things that Charlie and I

481
00:35:03,120 --> 00:35:06,760
Speaker 1: want to give him credit, this is his Charlie has

482
00:35:06,800 --> 00:35:13,960
Speaker 1: I think uh uh just uh, this wonderful analogy about

483
00:35:14,000 --> 00:35:18,319
Speaker 1: investing that is just so true. Uh. And it's one

484
00:35:18,320 --> 00:35:22,120
Speaker 1: of the things he's best known for. He says, Listen,

485
00:35:22,560 --> 00:35:26,920
Speaker 1: suppose you're a tennis player, but you're not a professional. Now.

486
00:35:27,000 --> 00:35:35,400
Speaker 1: Professionals win points by some uh you know, huge fast serve, uh,

487
00:35:35,520 --> 00:35:41,520
Speaker 1: some drop shot, some superb shot uh that the other

488
00:35:41,560 --> 00:35:46,200
Speaker 1: player can't get. But when you think of ordinary people

489
00:35:46,320 --> 00:35:50,640
Speaker 1: playing tennis, the people who win are the people who

490
00:35:50,640 --> 00:35:54,520
Speaker 1: have just made the fewer errors. That trying to do

491
00:35:54,760 --> 00:36:00,400
Speaker 1: something extra is a loser's game, and that, a course,

492
00:36:00,600 --> 00:36:04,400
Speaker 1: is what Charlie is best known for. Obviously, Charlie and

493
00:36:04,440 --> 00:36:10,840
Speaker 1: I are Kendred Spirits in that we both believe in indexing. Charlie,

494
00:36:10,920 --> 00:36:17,239
Speaker 1: for example, started his career and started a company, Granite Associates,

495
00:36:17,280 --> 00:36:21,960
Speaker 1: where they were helping to choose the best investment advisors.

496
00:36:22,360 --> 00:36:27,719
Speaker 1: Charlie believed in active management, and only after experience with

497
00:36:27,800 --> 00:36:33,520
Speaker 1: it he now realizes that he is a convert. And Uh,

498
00:36:33,560 --> 00:36:39,240
Speaker 1: there is no better person uh to sing the praises

499
00:36:39,280 --> 00:36:42,680
Speaker 1: of indexing than Charlie Ellis. Uh. He's a great guy

500
00:36:42,920 --> 00:36:46,680
Speaker 1: and a very good writer. So if people want to

501
00:36:46,719 --> 00:36:50,000
Speaker 1: find more of your writings other than the book, and

502
00:36:50,040 --> 00:36:52,359
Speaker 1: this isn't the only book you've written, a number of them.

503
00:36:52,640 --> 00:36:55,520
Speaker 1: Where else would they go to to learn more about

504
00:36:55,640 --> 00:37:03,080
Speaker 1: the works of Burton Malkiel. Well, I've done other things, uh,

505
00:37:03,520 --> 00:37:06,200
Speaker 1: such as and maybe this, you know, gets into a

506
00:37:06,280 --> 00:37:10,759
Speaker 1: different subject. I've written about emerging markets in a book

507
00:37:10,800 --> 00:37:14,680
Speaker 1: called Global Bargain Hunting. I've written about China in a

508
00:37:14,719 --> 00:37:19,000
Speaker 1: book called From Wall Street to the Great Wall. Uh.

509
00:37:19,040 --> 00:37:24,879
Speaker 1: And I think in general today, uh, probably if I

510
00:37:25,000 --> 00:37:33,000
Speaker 1: have any investment advice for a long run portfolio, I

511
00:37:33,200 --> 00:37:39,360
Speaker 1: suspect that people are smitten with what we call the

512
00:37:39,480 --> 00:37:45,600
Speaker 1: home country bias, that they just have US stocks, uh,

513
00:37:45,640 --> 00:37:51,480
Speaker 1: to the detriment to their own detriment, and they are

514
00:37:51,680 --> 00:37:55,960
Speaker 1: ignoring some of the fastest growing parts of the world.

515
00:37:56,440 --> 00:37:59,360
Speaker 1: Emerging markets now have about half of the world's GDP.

516
00:38:00,040 --> 00:38:03,200
Speaker 1: Emerging markets have eighty five percent of the world's population.

517
00:38:03,640 --> 00:38:10,960
Speaker 1: Emerging markets have about of the world's capitalization. And today

518
00:38:11,000 --> 00:38:17,600
Speaker 1: emerging markets are very unpopular, which means attractively priced, which

519
00:38:17,680 --> 00:38:22,279
Speaker 1: means that they are probably the most attractively priced markets

520
00:38:22,320 --> 00:38:25,680
Speaker 1: in the world. Now that doesn't mean the next month

521
00:38:25,800 --> 00:38:28,960
Speaker 1: or the next year they're going to do well, but

522
00:38:29,200 --> 00:38:36,760
Speaker 1: we can look at very long run rates of return

523
00:38:37,120 --> 00:38:41,680
Speaker 1: and get some idea as to whether they're going to

524
00:38:41,800 --> 00:38:46,400
Speaker 1: be high or low by looking at valuations and look,

525
00:38:46,520 --> 00:38:50,719
Speaker 1: valuations in the United States are high. They're higher than average.

526
00:38:51,480 --> 00:38:57,200
Speaker 1: Because emerging markets have been so unpopular, valuations are well

527
00:38:57,320 --> 00:39:03,960
Speaker 1: below normal. Emerging markets are still growing. China's slowing down. Yeah,

528
00:39:04,120 --> 00:39:07,080
Speaker 1: China's probably only growing at six six and a half

529
00:39:07,120 --> 00:39:11,480
Speaker 1: percent now rather than ten. And everybody says China's crashing

530
00:39:11,520 --> 00:39:14,640
Speaker 1: and burning. I wish we were growing at six for sure,

531
00:39:15,560 --> 00:39:19,359
Speaker 1: So I think there's a lot of growth there. Valuations

532
00:39:19,400 --> 00:39:23,600
Speaker 1: are better, and I just think that if somebody has

533
00:39:23,719 --> 00:39:29,600
Speaker 1: a portfolio and has nothing in emerging markets, you ought

534
00:39:29,600 --> 00:39:32,400
Speaker 1: to take a look. And of course I would say

535
00:39:32,719 --> 00:39:36,680
Speaker 1: you take a look by indexing, because a lot of

536
00:39:36,680 --> 00:39:39,759
Speaker 1: people say, oh, emerging markets are very inefficient, you don't

537
00:39:39,760 --> 00:39:44,840
Speaker 1: want to index there. In fact, of emerging market active

538
00:39:44,880 --> 00:39:49,799
Speaker 1: managers are outperformed by the index in part because of

539
00:39:49,840 --> 00:39:53,600
Speaker 1: the inefficiency of emerging markets, so that asks spreads are

540
00:39:53,719 --> 00:39:57,120
Speaker 1: high market impact costs. When you buy and sell, there

541
00:39:57,120 --> 00:40:00,439
Speaker 1: are stamp taxes and emerging markets, you really you want

542
00:40:00,440 --> 00:40:04,520
Speaker 1: to be more passive there. And my advice for investors

543
00:40:04,640 --> 00:40:07,960
Speaker 1: is take a look, and at least a small piece

544
00:40:08,000 --> 00:40:11,239
Speaker 1: of the portfolio should be put there, and I think

545
00:40:11,280 --> 00:40:15,400
Speaker 1: over the next decade people will be well served. This

546
00:40:15,520 --> 00:40:17,720
Speaker 1: puts you a little bit at odds with Jack Bogel,

547
00:40:17,800 --> 00:40:21,280
Speaker 1: who is not a fan of investing overseas. He's concerned

548
00:40:21,280 --> 00:40:24,400
Speaker 1: about the currency risk, and he says, hey, half of

549
00:40:24,440 --> 00:40:29,440
Speaker 1: the S and P five hundred uh revenue comes from overseas.

550
00:40:29,440 --> 00:40:32,359
Speaker 1: How do you respond to jile? Absolutely, Uh, there's no

551
00:40:32,440 --> 00:40:36,440
Speaker 1: question you get some of it with US multinationals. But

552
00:40:36,840 --> 00:40:42,400
Speaker 1: my feeling is, uh, you will also get some good

553
00:40:42,480 --> 00:40:47,880
Speaker 1: portfolio effects because emerging markets are not totally correlated with

554
00:40:47,960 --> 00:40:52,480
Speaker 1: the US market. I think that you're missing something. And

555
00:40:52,600 --> 00:40:57,880
Speaker 1: even though Jack is one of my absolutely best friends

556
00:40:57,880 --> 00:41:01,080
Speaker 1: and we agree one of the Jack also it doesn't

557
00:41:01,120 --> 00:41:04,120
Speaker 1: like a t F S. And I think are a

558
00:41:04,200 --> 00:41:09,760
Speaker 1: great uh, are a great invention and uh great for people.

559
00:41:09,960 --> 00:41:14,439
Speaker 1: So a little Burton Malkiel, Jack Bogel, Trivia, my head

560
00:41:14,440 --> 00:41:17,640
Speaker 1: of research, and I were putting these questions together and

561
00:41:17,680 --> 00:41:22,400
Speaker 1: we noticed that Jack Bogel was born at the peak

562
00:41:22,680 --> 00:41:26,480
Speaker 1: of the market and you were born at the depth

563
00:41:26,840 --> 00:41:30,880
Speaker 1: of the crash. Uh huh. That's very interesting. That's fascinating,

564
00:41:30,920 --> 00:41:35,840
Speaker 1: little bit of fascinating a bit of information. And uh

565
00:41:36,280 --> 00:41:41,960
Speaker 1: uh uh. I was a depression baby and so is

566
00:41:42,000 --> 00:41:44,839
Speaker 1: so is Jack Um Professor Malkiel, you can hang around

567
00:41:44,880 --> 00:41:47,200
Speaker 1: a little bit. We'll we'll continue chatting for a while.

568
00:41:48,000 --> 00:41:50,520
Speaker 1: So h and if I forget to say this later,

569
00:41:50,560 --> 00:41:52,520
Speaker 1: thank you so much for doing this and being so

570
00:41:53,120 --> 00:41:56,520
Speaker 1: generous with your time. We have been speaking with Professor

571
00:41:56,560 --> 00:42:01,200
Speaker 1: Burton Malkiel of Princeton University, author of A Random Walk

572
00:42:01,239 --> 00:42:05,279
Speaker 1: Down Wall Street now and it's eleventh edition. If you

573
00:42:05,480 --> 00:42:08,279
Speaker 1: enjoy this conversation, be sure and stick around for our

574
00:42:08,320 --> 00:42:11,520
Speaker 1: podcast extras, where we keep the digital tape rolling and

575
00:42:11,560 --> 00:42:15,759
Speaker 1: continue chatting about all things investing. Be sure and check

576
00:42:15,800 --> 00:42:19,759
Speaker 1: out my daily column on Bloomberg View dot com. You

577
00:42:19,800 --> 00:42:23,120
Speaker 1: can sign up for my Daily Reads also at Bloomberg

578
00:42:23,200 --> 00:42:26,480
Speaker 1: dot com, or follow me on Twitter at rit Halts.

579
00:42:26,680 --> 00:42:30,360
Speaker 1: I'm Barry rit Halts. You're listening to Masters in Business

580
00:42:30,360 --> 00:42:34,080
Speaker 1: on Bloomberg Radio. Are you looking to take your business

581
00:42:34,080 --> 00:42:37,600
Speaker 1: to the next level? The accounting, tax and advisory professionals

582
00:42:37,600 --> 00:42:41,400
Speaker 1: from cone Resnick can guide you. Cone Resnick delivers industry

583
00:42:41,400 --> 00:42:45,520
Speaker 1: expertise and forward thinking perspective that can help turn business

584
00:42:45,520 --> 00:42:51,759
Speaker 1: possibilities into business opportunities. Look ahead, gain insight, imagine more.

585
00:42:52,360 --> 00:42:55,040
Speaker 1: Is your business ready to break through? Learn more at

586
00:42:55,080 --> 00:43:01,840
Speaker 1: cone Resnick dot com Slash Breakthrough, cone Resnick Accounting ex Advisory.

587
00:43:02,120 --> 00:43:05,520
Speaker 1: Welcome to the podcast extras. Bert, thank you so much

588
00:43:05,600 --> 00:43:08,439
Speaker 1: for doing this. This is really fascinating. I'm a fan

589
00:43:08,480 --> 00:43:11,480
Speaker 1: of yours for forever. You could tell by the other

590
00:43:11,480 --> 00:43:15,520
Speaker 1: folks I've had on the show. Jack Bogel, Charlie Ellis,

591
00:43:15,560 --> 00:43:21,200
Speaker 1: Bill McNabb, Jack Brennan, you are You are right in

592
00:43:21,239 --> 00:43:26,960
Speaker 1: the same circle of of excellence as these folks. There

593
00:43:26,960 --> 00:43:28,799
Speaker 1: are so many questions I want to get to you

594
00:43:29,160 --> 00:43:31,840
Speaker 1: get through. Let's let's see how many of these we

595
00:43:31,920 --> 00:43:34,319
Speaker 1: can we can click through. Let let me start with

596
00:43:34,360 --> 00:43:42,400
Speaker 1: a softball. Why is stock picking so difficult? Basically, it's

597
00:43:43,239 --> 00:43:48,640
Speaker 1: partly difficult. Is that partly the reason is that there

598
00:43:48,680 --> 00:43:53,120
Speaker 1: are so many people doing it and that they are

599
00:43:53,280 --> 00:43:58,680
Speaker 1: so professional in doing it. You know, if you have

600
00:43:58,880 --> 00:44:05,319
Speaker 1: a market where say ten percent of the people in

601
00:44:05,440 --> 00:44:12,120
Speaker 1: the market or professional and are individuals who don't know anything,

602
00:44:14,640 --> 00:44:17,439
Speaker 1: and they will pick a stock because they like the name,

603
00:44:18,280 --> 00:44:25,080
Speaker 1: or they will pick a stock because uh uh, they

604
00:44:25,200 --> 00:44:28,719
Speaker 1: drive a Fiat, so they'll buy Fiat Chrysler. They'll do

605
00:44:28,800 --> 00:44:36,960
Speaker 1: it that way. That gives the professionals a possibility of

606
00:44:37,160 --> 00:44:42,719
Speaker 1: finding things that may be improperly priced. But when you

607
00:44:42,800 --> 00:44:49,480
Speaker 1: have a market now that is ninety percent professional and

608
00:44:49,760 --> 00:44:56,440
Speaker 1: probably of the trading is done professionally, that competition means

609
00:44:56,560 --> 00:44:58,960
Speaker 1: that if somebody has got a good idea, they act

610
00:44:59,040 --> 00:45:02,520
Speaker 1: on it and the price reflects that good idea. And

611
00:45:02,680 --> 00:45:05,520
Speaker 1: that's I think the problem. When you've got a market

612
00:45:06,080 --> 00:45:11,480
Speaker 1: that you have individuals who are buying stocks for different

613
00:45:11,960 --> 00:45:17,520
Speaker 1: reasons other than do they represent good value. Maybe there's

614
00:45:17,560 --> 00:45:20,680
Speaker 1: a chance of doing it, and maybe this worked fifty

615
00:45:20,760 --> 00:45:24,440
Speaker 1: years ago, but the problem is as the market gets

616
00:45:24,520 --> 00:45:29,239
Speaker 1: more and more professional. When people are better trained, when

617
00:45:29,280 --> 00:45:33,000
Speaker 1: people have better sources of information, when people can go

618
00:45:33,040 --> 00:45:39,800
Speaker 1: to their Bloomberg terminals and the information gets disseminated immediately

619
00:45:40,360 --> 00:45:45,920
Speaker 1: to all the professionals, it's then harder and harder to

620
00:45:46,080 --> 00:45:50,000
Speaker 1: actually beat the market. So that raises another question. There

621
00:45:50,040 --> 00:45:54,640
Speaker 1: raises a number of other questions. Uh, why are so

622
00:45:54,760 --> 00:46:00,200
Speaker 1: many people still so involved in chasing alpha? Why is

623
00:46:00,239 --> 00:46:05,960
Speaker 1: it that the majority of market participants seem to be

624
00:46:06,040 --> 00:46:11,600
Speaker 1: spending so much time chasing uh that the dream about performance.

625
00:46:12,960 --> 00:46:16,600
Speaker 1: Let me give you two reasons. One is, uh, that

626
00:46:17,239 --> 00:46:20,399
Speaker 1: they get paid for doing it. This is and well

627
00:46:20,440 --> 00:46:27,080
Speaker 1: paid at that. This is a very well paid profession. Uh, so, uh,

628
00:46:27,680 --> 00:46:30,640
Speaker 1: they do get paid for it. The second is, and

629
00:46:30,680 --> 00:46:37,360
Speaker 1: this goes to the work of Danny Kahneman, who is

630
00:46:37,400 --> 00:46:41,720
Speaker 1: one of my colleagues at Princeton, that there does seem

631
00:46:41,800 --> 00:46:45,880
Speaker 1: to be in our d n A a feeling of

632
00:46:45,960 --> 00:46:51,120
Speaker 1: over optimism. These people who are chasing alpha. Yeah, they

633
00:46:51,160 --> 00:46:53,000
Speaker 1: do it because they get paid to do it. But

634
00:46:53,080 --> 00:46:55,799
Speaker 1: I think they honestly, you know, it's it's not that

635
00:46:55,840 --> 00:46:59,520
Speaker 1: they're bad people and that they're lying. They really believe

636
00:47:00,120 --> 00:47:03,839
Speaker 1: drinking something. Yeah, they're drink and the and and this

637
00:47:03,960 --> 00:47:10,560
Speaker 1: is I think the problem that this over optimism is

638
00:47:10,680 --> 00:47:15,120
Speaker 1: just a part of our human nature. Uh and uh

639
00:47:16,120 --> 00:47:19,839
Speaker 1: even though they think it's difficult, uh, they think I

640
00:47:19,880 --> 00:47:24,160
Speaker 1: can do it. You know we uh we and uh

641
00:47:24,200 --> 00:47:27,640
Speaker 1: we now is myself and Danny Kahneman. Because I've done

642
00:47:27,680 --> 00:47:31,239
Speaker 1: these experiments. You ask a group of students. I've got

643
00:47:31,239 --> 00:47:35,120
Speaker 1: two hundred students in the room, and I give them

644
00:47:35,200 --> 00:47:40,319
Speaker 1: some questionnaires and one of them is are you a

645
00:47:41,000 --> 00:47:45,640
Speaker 1: better driver or the worst driver than all the other

646
00:47:45,760 --> 00:47:49,239
Speaker 1: students in the room. And of them say that they're

647
00:47:49,280 --> 00:47:52,480
Speaker 1: better than averages, like like will be gone. Yes, you know,

648
00:47:52,760 --> 00:47:56,279
Speaker 1: we're all better, We're all better than average. And I

649
00:47:56,320 --> 00:48:00,160
Speaker 1: think that there's a lot of that in uh in

650
00:48:00,239 --> 00:48:05,800
Speaker 1: this that you know, you just uh you you you

651
00:48:05,800 --> 00:48:09,919
Speaker 1: you hope uh and you think that, yeah, it's hard

652
00:48:09,960 --> 00:48:11,719
Speaker 1: to do, but I can do it. You know. The

653
00:48:12,880 --> 00:48:16,759
Speaker 1: joke story about this being in our DNA is a

654
00:48:16,760 --> 00:48:20,480
Speaker 1: few hundred thousand years ago there were two groups of

655
00:48:20,520 --> 00:48:23,880
Speaker 1: cave men, and one group of cavemen saw some mammoth

656
00:48:24,000 --> 00:48:26,720
Speaker 1: down on the plains and said, I have an idea.

657
00:48:26,880 --> 00:48:29,560
Speaker 1: Let's take sharpened sticks and see if we could go

658
00:48:29,760 --> 00:48:32,640
Speaker 1: bring down this three ton mammoth, and the other group

659
00:48:32,719 --> 00:48:35,960
Speaker 1: of people weren't optimistic and they stayed in the cave. Well,

660
00:48:36,280 --> 00:48:39,600
Speaker 1: the first cave might have lost a few participants, but

661
00:48:39,719 --> 00:48:41,759
Speaker 1: they had mammoth meat all winter and they made it

662
00:48:41,760 --> 00:48:44,279
Speaker 1: through to the spring. The risk of ours group, they

663
00:48:44,280 --> 00:48:47,759
Speaker 1: didn't have anything to eat. And therefore we we have

664
00:48:47,880 --> 00:48:50,480
Speaker 1: tend to be over optimistic. We may lose a few

665
00:48:50,520 --> 00:48:53,800
Speaker 1: people along the way, but as a group, the tribal

666
00:48:53,960 --> 00:48:56,080
Speaker 1: will survive. And I always thought that was an amusing

667
00:48:57,440 --> 00:48:59,960
Speaker 1: I think that's right, because I really do think it's

668
00:49:00,080 --> 00:49:05,840
Speaker 1: in our DNA. So this raises another question. I mentioned.

669
00:49:05,960 --> 00:49:08,480
Speaker 1: Vanguard is now up to three trillion with a t

670
00:49:09,520 --> 00:49:12,680
Speaker 1: H charging an average of something like eleven basis points

671
00:49:12,680 --> 00:49:15,880
Speaker 1: across all their funds. But at the same time, the

672
00:49:15,920 --> 00:49:20,080
Speaker 1: hedge fund community is also up to three trillion, and

673
00:49:20,120 --> 00:49:26,200
Speaker 1: they charged two hundred basis points plus another of the profits.

674
00:49:26,239 --> 00:49:31,719
Speaker 1: Some people have described hedge funds as a fee transfer mechanism,

675
00:49:32,440 --> 00:49:37,000
Speaker 1: UH disguised as a asset class. How do we explain

676
00:49:37,080 --> 00:49:43,880
Speaker 1: the simultaneous success of really low cost indexing and really

677
00:49:44,080 --> 00:49:50,120
Speaker 1: expensive active private management. Well, I don't think the hedge

678
00:49:50,120 --> 00:49:54,320
Speaker 1: fund fees are going to continue. I think there's already

679
00:49:55,040 --> 00:49:58,120
Speaker 1: uh some pressure on the fees, and there are some

680
00:49:58,200 --> 00:50:04,239
Speaker 1: institutional investors, such as cowpers who have in fact realized

681
00:50:04,360 --> 00:50:08,040
Speaker 1: that this may not be as good a deal as

682
00:50:08,120 --> 00:50:11,640
Speaker 1: they had hoped. Hedge funds worked for a while, and

683
00:50:11,680 --> 00:50:15,680
Speaker 1: you know, again this goes back to the paradox of

684
00:50:16,239 --> 00:50:22,719
Speaker 1: professional advice. At the beginning, there were hedge funds who

685
00:50:22,880 --> 00:50:26,720
Speaker 1: made a lot of money and who actually did find

686
00:50:27,040 --> 00:50:31,520
Speaker 1: arbitrage opportunities. Let me give you an example. Uh, we

687
00:50:31,560 --> 00:50:36,120
Speaker 1: have standard and Poor's futures, we have standard and Poor's

688
00:50:36,480 --> 00:50:41,920
Speaker 1: e t fs. Sometimes those futures and the e t

689
00:50:42,160 --> 00:50:46,400
Speaker 1: F sold at prices that were different from the prices

690
00:50:46,520 --> 00:50:50,640
Speaker 1: of the underlying and when you were able to do

691
00:50:51,080 --> 00:50:55,960
Speaker 1: efficiently a program trade, you might be able to get

692
00:50:56,000 --> 00:51:00,600
Speaker 1: an arbitrage where the futures too high, are you short

693
00:51:00,680 --> 00:51:03,759
Speaker 1: the future and by the underlying or vice versa, a

694
00:51:03,880 --> 00:51:09,919
Speaker 1: relatively low risk transaction. There were some arbitrages, and some

695
00:51:10,200 --> 00:51:13,440
Speaker 1: hedge funds, like Citadel was one example of a hedge

696
00:51:13,440 --> 00:51:16,960
Speaker 1: fund that got built up that way, did very very well.

697
00:51:17,840 --> 00:51:23,040
Speaker 1: Those opportunities now have basically been arbitraged away. That's the

698
00:51:23,239 --> 00:51:26,960
Speaker 1: idea of efficiency that has more and more good people

699
00:51:27,040 --> 00:51:32,359
Speaker 1: get into something, the opportunity goes away. It's like, you know,

700
00:51:32,600 --> 00:51:36,520
Speaker 1: suppose there was a Christmas rally that the market goes

701
00:51:36,640 --> 00:51:40,160
Speaker 1: up between Christmas and New Year's. Well, then if you

702
00:51:40,239 --> 00:51:42,919
Speaker 1: know about it, then what you do is you buy

703
00:51:42,960 --> 00:51:45,960
Speaker 1: the day before the Christmas holiday and you sell the

704
00:51:46,040 --> 00:51:49,560
Speaker 1: day before New Year's uh, in order to take advantage

705
00:51:49,600 --> 00:51:51,640
Speaker 1: of it. But then you realize you've got to go

706
00:51:51,719 --> 00:51:55,480
Speaker 1: two days before and sell two days before the end.

707
00:51:55,560 --> 00:51:58,399
Speaker 1: And then of course it disappears. And so I think

708
00:51:58,480 --> 00:52:03,040
Speaker 1: what's happened is that worked for a while, it does

709
00:52:03,160 --> 00:52:06,600
Speaker 1: not work now. And the hedge fund returns have been

710
00:52:07,440 --> 00:52:11,959
Speaker 1: just terrible over the last five years. And I think

711
00:52:12,000 --> 00:52:15,960
Speaker 1: what you are seeing slowly these things don't happen overnight,

712
00:52:16,360 --> 00:52:20,200
Speaker 1: but slowly you are seeing pressure on fees and more

713
00:52:20,400 --> 00:52:26,560
Speaker 1: and more institutions questioning, uh, the idea of hedge funds.

714
00:52:26,640 --> 00:52:29,400
Speaker 1: And and again let me talk about another person. I

715
00:52:29,400 --> 00:52:32,040
Speaker 1: don't know if you've ever had him on your show, UH,

716
00:52:32,160 --> 00:52:37,640
Speaker 1: David Swenson, who wrote the book on institutional management of

717
00:52:37,840 --> 00:52:40,919
Speaker 1: using hedge funds. And David was then going to write

718
00:52:40,960 --> 00:52:44,439
Speaker 1: a book for individuals. He then looked at the situation

719
00:52:44,520 --> 00:52:47,120
Speaker 1: today and said, oh my god, you can't do it

720
00:52:47,160 --> 00:52:52,120
Speaker 1: anymore by index funds. I haven't had Swinson on, but

721
00:52:52,200 --> 00:52:56,520
Speaker 1: I'd absolutely love to. You know, you mentioned, uh, some

722
00:52:56,640 --> 00:52:59,800
Speaker 1: years ago the hedge funds were making money. Jim Chainos

723
00:53:00,160 --> 00:53:04,200
Speaker 1: runs Kind Coast Associates said, twenty five years ago when

724
00:53:04,200 --> 00:53:06,720
Speaker 1: he or thirty years ago, when he launched his hedge funds,

725
00:53:06,960 --> 00:53:10,040
Speaker 1: they were about a hundred hundred hedge funds and they

726
00:53:10,040 --> 00:53:13,560
Speaker 1: were all making alpha. They were all actually making money.

727
00:53:14,040 --> 00:53:17,080
Speaker 1: Now there's ten thousand hedge funds, and the same hundred

728
00:53:17,120 --> 00:53:21,439
Speaker 1: hedge funds are still uh making creating alpha, and none

729
00:53:21,440 --> 00:53:24,560
Speaker 1: of the rest are. So You're right, is a handful

730
00:53:24,640 --> 00:53:28,120
Speaker 1: of them that did, and some of whom still are. Uh.

731
00:53:28,239 --> 00:53:32,239
Speaker 1: Look at look at Renaissance Technologies and Jim Simons um

732
00:53:33,120 --> 00:53:38,280
Speaker 1: hand Uh, David Tepper and Napalous Associates. There's a small

733
00:53:38,400 --> 00:53:41,319
Speaker 1: run of folks that seem to be making money. I

734
00:53:41,360 --> 00:53:45,239
Speaker 1: don't want to quite say consistently, although when you look

735
00:53:45,239 --> 00:53:47,680
Speaker 1: at Bridgewater and you look at Renaissance, some of them

736
00:53:47,680 --> 00:53:51,400
Speaker 1: have been fairly consistent over the years. But it sounds

737
00:53:51,480 --> 00:53:54,799
Speaker 1: like the you're You're of the opinion the bulk of

738
00:53:54,840 --> 00:53:57,239
Speaker 1: them just don't get it. I think the bulk of

739
00:53:57,280 --> 00:53:59,600
Speaker 1: them don't. And I think it's getting harder and harder

740
00:53:59,719 --> 00:54:05,000
Speaker 1: and the paradox of professional advice. Uh, if it works,

741
00:54:05,520 --> 00:54:11,000
Speaker 1: it's going to destroy the alpha's. And I'm very suspicious.

742
00:54:11,440 --> 00:54:17,839
Speaker 1: I don't think that suppose there even is some alpha around. Uh,

743
00:54:17,960 --> 00:54:21,520
Speaker 1: the two and twenty means the alpha's all gonna go

744
00:54:21,840 --> 00:54:25,000
Speaker 1: to the purveyor of the service. I think they'll be

745
00:54:25,200 --> 00:54:28,359
Speaker 1: less and less of it. And again, when we talk

746
00:54:28,600 --> 00:54:33,919
Speaker 1: about the things that Yale University did that my own

747
00:54:34,040 --> 00:54:39,200
Speaker 1: university did, remember also that a lot of these things,

748
00:54:39,280 --> 00:54:42,719
Speaker 1: it's less well known, would cut their own deals with

749
00:54:42,760 --> 00:54:46,920
Speaker 1: these people, and they wouldn't necessarily pay two and twenty.

750
00:54:47,000 --> 00:54:50,640
Speaker 1: The alpha's that are around, if there are any, are

751
00:54:50,760 --> 00:54:54,880
Speaker 1: not going to justify two and twenty for the buyer

752
00:54:55,120 --> 00:54:58,080
Speaker 1: of the fund. So let me throw another quote at

753
00:54:58,120 --> 00:55:02,320
Speaker 1: yours that of you. Let me know, throw another quote

754
00:55:02,360 --> 00:55:05,879
Speaker 1: at you of yours that that I really like. It's

755
00:55:05,920 --> 00:55:09,720
Speaker 1: not that stock prices are capricious, it's that the news

756
00:55:09,800 --> 00:55:13,799
Speaker 1: is capricious. Explain what you meant by that? Well, look,

757
00:55:14,120 --> 00:55:25,480
Speaker 1: if there is uh a headline uh that comes out tomorrow, Uh,

758
00:55:25,520 --> 00:55:33,320
Speaker 1: and it says, uh, men's stores are gearing up for

759
00:55:33,560 --> 00:55:39,239
Speaker 1: a Father's Day buying season. That's not news. I could

760
00:55:39,239 --> 00:55:44,680
Speaker 1: have written that six months ago the calendar, you know, Christmas,

761
00:55:42,600 --> 00:55:52,160
Speaker 1: and exactly. Uh. What's news is something that you can't

762
00:55:52,239 --> 00:55:58,640
Speaker 1: predict from the past. What's news is, uh, for example,

763
00:55:58,800 --> 00:56:03,680
Speaker 1: today it looks like an Egyptian airliner was taken down

764
00:56:03,760 --> 00:56:08,759
Speaker 1: by terrorists. That's news. You couldn't predict that yesterday. You

765
00:56:08,760 --> 00:56:13,560
Speaker 1: couldn't predict that the day before. And so news is

766
00:56:13,600 --> 00:56:18,480
Speaker 1: in some sense random, and by random I mean unpredictable.

767
00:56:19,080 --> 00:56:24,520
Speaker 1: And it's the unpredictable things that move prices. And what

768
00:56:24,680 --> 00:56:29,080
Speaker 1: I am suggesting is that to the extent that they

769
00:56:29,239 --> 00:56:33,000
Speaker 1: mean that prices should be higher or lower, the prices

770
00:56:33,080 --> 00:56:38,520
Speaker 1: changed right away. So I like the way you describe that.

771
00:56:39,160 --> 00:56:41,600
Speaker 1: Let's talk a little bit about what's become one of

772
00:56:41,600 --> 00:56:46,000
Speaker 1: the hottest but buzzwords and investing, smart beta, which you

773
00:56:46,080 --> 00:56:50,040
Speaker 1: actually added a whole section in the in the whole

774
00:56:50,360 --> 00:56:55,600
Speaker 1: champion on So. So is smart beta just smart marketing

775
00:56:55,719 --> 00:56:58,600
Speaker 1: or does it have some real I believe that smart

776
00:56:58,680 --> 00:57:03,759
Speaker 1: beta is mainly smart marketing and it's not smart investing. Now,

777
00:57:03,760 --> 00:57:08,239
Speaker 1: what smart beta is is the following. What we know

778
00:57:08,800 --> 00:57:15,560
Speaker 1: from history is that there are certain factors that have

779
00:57:15,640 --> 00:57:23,480
Speaker 1: been associated with somewhat higher stock returns. Example, we know

780
00:57:23,840 --> 00:57:30,840
Speaker 1: over time the returns from smaller companies have been generally

781
00:57:30,920 --> 00:57:36,200
Speaker 1: a little bit higher than the return from larger companies. Now,

782
00:57:36,240 --> 00:57:40,920
Speaker 1: my sense is that's probably right, it probably will continue.

783
00:57:41,960 --> 00:57:46,040
Speaker 1: But in fact, smaller companies are riskier than larger companies,

784
00:57:46,760 --> 00:57:49,760
Speaker 1: so that if you get a somewhat higher rate of

785
00:57:49,840 --> 00:57:55,320
Speaker 1: return for taking on more risks, that doesn't mean the

786
00:57:55,360 --> 00:57:58,480
Speaker 1: market is inefficient, that doesn't mean it's a real alpha.

787
00:57:58,640 --> 00:58:03,160
Speaker 1: That just means you took on more risk. Uh. Junk

788
00:58:03,200 --> 00:58:08,200
Speaker 1: bonds yield more than triple A bonds of the of

789
00:58:08,240 --> 00:58:12,120
Speaker 1: which there are only a few now. But the point is, yes,

790
00:58:12,160 --> 00:58:14,520
Speaker 1: you can get a higher rate of return for taking

791
00:58:14,560 --> 00:58:19,280
Speaker 1: on more risk. UH. So what smart beta says is,

792
00:58:20,040 --> 00:58:24,320
Speaker 1: let's put the portfolio together with some of these factors

793
00:58:24,360 --> 00:58:29,160
Speaker 1: that have been associated with higher returns, and my sense

794
00:58:29,400 --> 00:58:33,400
Speaker 1: is that either you get the higher rate of return

795
00:58:33,520 --> 00:58:37,640
Speaker 1: because you've taken on more risk, or that the factor

796
00:58:37,920 --> 00:58:42,520
Speaker 1: isn't nearly as dependable as it's been in the past.

797
00:58:42,680 --> 00:58:49,160
Speaker 1: For example, value has generally done a little better than

798
00:58:49,320 --> 00:58:55,720
Speaker 1: growth over the years. I think largely because of the

799
00:58:55,880 --> 00:59:00,840
Speaker 1: situation uh in the year two thousand when growth stocks

800
00:59:00,880 --> 00:59:05,000
Speaker 1: sold a triple digit multiples, and uh, I remember my

801
00:59:05,080 --> 00:59:09,080
Speaker 1: own public service of New Jersey sold at a multiple

802
00:59:09,200 --> 00:59:13,480
Speaker 1: not too much over ten. So obviously the growth stocks

803
00:59:13,520 --> 00:59:17,440
Speaker 1: went way down. The value stocks did well. Not dependable

804
00:59:17,520 --> 00:59:20,560
Speaker 1: though year to year. In fact, the last few years

805
00:59:20,680 --> 00:59:23,959
Speaker 1: value stocks have been a trap. They haven't been good.

806
00:59:24,040 --> 00:59:29,480
Speaker 1: So my sense is it's really an excuse to charge

807
00:59:29,600 --> 00:59:33,560
Speaker 1: instead of five basis points, seventy five or a hundred

808
00:59:33,600 --> 00:59:36,680
Speaker 1: basis points, And if you do get a higher rate

809
00:59:36,720 --> 00:59:39,680
Speaker 1: of return, it's only because you've taken on more risk.

810
00:59:40,280 --> 00:59:45,240
Speaker 1: And these other factors are really not nearly as dependable

811
00:59:45,760 --> 00:59:50,320
Speaker 1: as the proselytizers for smart beta suggests. So let's hold

812
00:59:50,360 --> 00:59:53,680
Speaker 1: smart beta side for a second and talk about the

813
00:59:53,720 --> 00:59:58,280
Speaker 1: French Fama three factor model, which since has been expanded.

814
00:59:58,320 --> 01:00:02,200
Speaker 1: So I think five factors. So small cap is one

815
01:00:02,680 --> 01:00:06,720
Speaker 1: value is the three factor, and the regular beta the

816
01:00:06,800 --> 01:00:10,440
Speaker 1: regular volatility is the third one of the Fama French

817
01:00:10,480 --> 01:00:14,400
Speaker 1: three factor model. Now, now there's also two additional factors.

818
01:00:14,480 --> 01:00:19,200
Speaker 1: One is quality where you're avoiding heavily indebted or some

819
01:00:19,320 --> 01:00:24,920
Speaker 1: other quantitatively way to to eliminate names and momentum on

820
01:00:25,040 --> 01:00:31,520
Speaker 1: top of it. How do we adjust those sort of

821
01:00:31,600 --> 01:00:36,000
Speaker 1: models that seem to do somewhat better than the actual

822
01:00:36,560 --> 01:00:42,600
Speaker 1: um benchmark? Is it that there are inefficiencies and it's

823
01:00:42,640 --> 01:00:45,760
Speaker 1: too challenging to to sift through. When you look at

824
01:00:45,800 --> 01:00:48,320
Speaker 1: the Wall Street coverage, for example, the analyst coverage of

825
01:00:48,360 --> 01:00:53,960
Speaker 1: big cap stocks Apple, wal Mart, Google, there's a hundred

826
01:00:53,960 --> 01:00:56,400
Speaker 1: analysts covering them. You look at any of the mid

827
01:00:56,480 --> 01:01:00,360
Speaker 1: size or even small cap stocks, there's a dearth of average,

828
01:01:00,400 --> 01:01:03,640
Speaker 1: there's a dearth of banking services. It seems like there's

829
01:01:03,720 --> 01:01:07,640
Speaker 1: not a lot of information about that. Is that potentially

830
01:01:07,720 --> 01:01:12,400
Speaker 1: an inefficiency that that could contribute to small cap so

831
01:01:12,480 --> 01:01:16,920
Speaker 1: called premium Uh? It's possible, But I would also say,

832
01:01:18,000 --> 01:01:22,320
Speaker 1: since there are a lot of small caps UH that

833
01:01:24,000 --> 01:01:28,720
Speaker 1: really can lose half or three quarters of their value, UH,

834
01:01:28,760 --> 01:01:32,520
Speaker 1: they're also, I think, in my view, intrinsically risk ear

835
01:01:33,000 --> 01:01:35,919
Speaker 1: And I think that's the other point about this. Let's

836
01:01:35,920 --> 01:01:38,439
Speaker 1: take momentum, which is one of the ones that there's

837
01:01:38,480 --> 01:01:41,920
Speaker 1: been a lot of recent work on. There is a

838
01:01:41,960 --> 01:01:46,880
Speaker 1: little bit of past evidence that there is some momentum

839
01:01:47,040 --> 01:01:52,240
Speaker 1: in the market. There are also what is called momentum crashes.

840
01:01:52,880 --> 01:01:57,280
Speaker 1: That sometimes you get a momentum stock and uh it

841
01:01:57,320 --> 01:02:04,080
Speaker 1: works fine, uh until uh uh until it doesn't. I

842
01:02:04,160 --> 01:02:08,520
Speaker 1: mean again, you know that uh this uh fellow on

843
01:02:08,640 --> 01:02:14,280
Speaker 1: a different network who will be nameless, would talk about

844
01:02:14,320 --> 01:02:18,680
Speaker 1: the fang stocks Facebook. You know, all of these were

845
01:02:18,840 --> 01:02:21,040
Speaker 1: just doing well. There was a lot of momentum and

846
01:02:21,040 --> 01:02:25,000
Speaker 1: then all of a sudden, uh, it crashed. And so

847
01:02:25,720 --> 01:02:30,400
Speaker 1: while there might be something there, I think there's also

848
01:02:30,640 --> 01:02:36,600
Speaker 1: an inherent risk in following some of those factors. So

849
01:02:36,680 --> 01:02:42,560
Speaker 1: again my view is that they're not nearly as dependable

850
01:02:42,720 --> 01:02:47,160
Speaker 1: as people argue they are. They probably are associated with

851
01:02:47,320 --> 01:02:51,680
Speaker 1: larger risk. And as I've looked at all the smart

852
01:02:51,880 --> 01:02:57,800
Speaker 1: beta ETFs over the last five years, I do not

853
01:02:58,040 --> 01:03:03,600
Speaker 1: find that as a group, after expenses, that they have

854
01:03:03,760 --> 01:03:07,760
Speaker 1: in fact been a good deal for investors. So my

855
01:03:07,880 --> 01:03:14,680
Speaker 1: view is plane vanilla capitalization waited indexing is still, in

856
01:03:14,760 --> 01:03:17,960
Speaker 1: my view, the way to go. So given the success

857
01:03:18,040 --> 01:03:22,440
Speaker 1: of indexing, and the success of Vanguard and a host

858
01:03:22,520 --> 01:03:28,880
Speaker 1: of other advisory firms that advocate indexing, that leads to

859
01:03:29,120 --> 01:03:34,400
Speaker 1: an obvious question, when does indexing get to be too big?

860
01:03:34,440 --> 01:03:37,400
Speaker 1: Can we ever reach a point where too many people

861
01:03:37,440 --> 01:03:41,120
Speaker 1: are in are in indexes, and that creates opportunities for

862
01:03:41,200 --> 01:03:46,960
Speaker 1: the active managers. Well, you know, when indexing is of

863
01:03:47,000 --> 01:03:50,280
Speaker 1: the total, I might start to worry about that, but

864
01:03:50,440 --> 01:03:53,880
Speaker 1: I think with the indexing thirty to thirty five percent

865
01:03:53,960 --> 01:03:57,560
Speaker 1: of the total, there are still plenty of active managers

866
01:03:57,560 --> 01:04:01,760
Speaker 1: out there to make sure that nation gets reflected quickly.

867
01:04:02,240 --> 01:04:06,400
Speaker 1: And in fact, I think it will always be the case.

868
01:04:06,880 --> 01:04:12,720
Speaker 1: Suppose indexing was so great that, in fact, the market

869
01:04:13,000 --> 01:04:17,480
Speaker 1: wasn't reflecting the news, then it will pay somebody to

870
01:04:17,640 --> 01:04:20,920
Speaker 1: jump into the market. And you know that's the wonderful

871
01:04:20,960 --> 01:04:25,040
Speaker 1: thing about capitalism. Uh, if you have free markets and

872
01:04:25,200 --> 01:04:28,800
Speaker 1: somebody can jump into a market, if there is an opportunity,

873
01:04:29,360 --> 01:04:32,840
Speaker 1: you can count on the fact that somebody will. So

874
01:04:33,000 --> 01:04:36,760
Speaker 1: I'm not worried about it. Uh. If in fact it

875
01:04:36,880 --> 01:04:40,040
Speaker 1: was the case that markets were getting less and less

876
01:04:40,080 --> 01:04:44,440
Speaker 1: efficient in reflecting information, believe me, that'd be a profit

877
01:04:44,520 --> 01:04:48,400
Speaker 1: motive for somebody to jump in. Because if there's a

878
01:04:48,520 --> 01:04:52,720
Speaker 1: chance to make money in this world. Uh, that's the

879
01:04:52,800 --> 01:04:56,160
Speaker 1: beauty of capitalism, somebody will find a way to do it.

880
01:04:56,800 --> 01:05:00,000
Speaker 1: So I mentioned to a friend that I was speaking

881
01:05:00,400 --> 01:05:04,800
Speaker 1: with you today and uh, this person is an active

882
01:05:04,840 --> 01:05:09,880
Speaker 1: manager and he said, ask him what his problem is

883
01:05:09,960 --> 01:05:13,680
Speaker 1: with market timing. If I see a train coming down

884
01:05:13,720 --> 01:05:17,000
Speaker 1: the tracks, don't I want to jump out of the way.

885
01:05:17,120 --> 01:05:20,320
Speaker 1: So I know what the answer is, but let's hear

886
01:05:20,360 --> 01:05:23,760
Speaker 1: it directly from Well, look, absolutely, you want to jump

887
01:05:23,800 --> 01:05:26,760
Speaker 1: out of the way. The problem is, UH, it just

888
01:05:27,160 --> 01:05:31,600
Speaker 1: isn't that obvious that there's the train uh coming. You know,

889
01:05:31,760 --> 01:05:33,920
Speaker 1: maybe maybe it's a light at the end of the

890
01:05:33,960 --> 01:05:37,400
Speaker 1: tunnel rather than the train coming in the opposite direction.

891
01:05:37,960 --> 01:05:40,600
Speaker 1: And I think the people who have tried to do

892
01:05:41,160 --> 01:05:46,880
Speaker 1: market timing, UH have I think, UH, really not been successful.

893
01:05:47,440 --> 01:05:54,080
Speaker 1: I have never known. Look, I remember I've been uh

894
01:05:54,160 --> 01:05:59,320
Speaker 1: on boards like Vanguard where we had some people trying

895
01:05:59,360 --> 01:06:03,000
Speaker 1: to do more market timing because Vanguard, as you pointed

896
01:06:03,040 --> 01:06:07,200
Speaker 1: out earlier, has some actively managed funds. I've been a

897
01:06:07,240 --> 01:06:11,560
Speaker 1: long term director of Prudential Financial. We had people trying

898
01:06:11,600 --> 01:06:16,040
Speaker 1: to I have never known anyone who could consistently time

899
01:06:16,120 --> 01:06:19,840
Speaker 1: the market. And in fact, I've never known anyone who

900
01:06:19,840 --> 01:06:24,280
Speaker 1: knows anyone who was able to consistently time the market. Sure,

901
01:06:24,840 --> 01:06:27,680
Speaker 1: jump out of the tracks of a train is coming,

902
01:06:27,720 --> 01:06:32,200
Speaker 1: but it isn't that obvious. So let's talk a little

903
01:06:32,200 --> 01:06:36,040
Speaker 1: bit about the behavioral side. We've alluded to it throughout

904
01:06:36,120 --> 01:06:41,880
Speaker 1: the conversation. Behavioral economics today is widely understood, widely followed

905
01:06:42,400 --> 01:06:45,560
Speaker 1: back a few a decade or two ago, it really

906
01:06:45,840 --> 01:06:51,080
Speaker 1: wasn't understood. Here's a quote from you, and this is

907
01:06:51,120 --> 01:06:55,120
Speaker 1: directly from the book. There are four factors that create

908
01:06:55,280 --> 01:07:03,040
Speaker 1: a rational market behavior over confidence, biased judgments, herd mentality,

909
01:07:03,080 --> 01:07:06,280
Speaker 1: and loss aversion. What does that mean to the to

910
01:07:06,360 --> 01:07:10,000
Speaker 1: the average investor, Well, I think when you actually look

911
01:07:10,760 --> 01:07:14,480
Speaker 1: at how this works with what people do, let me

912
01:07:14,520 --> 01:07:17,960
Speaker 1: tell you what I think. The main lesson is one

913
01:07:18,000 --> 01:07:23,640
Speaker 1: of the things that we know is that people tend

914
01:07:25,080 --> 01:07:30,480
Speaker 1: to sell out when things are looking grim and to

915
01:07:30,640 --> 01:07:35,520
Speaker 1: buy when everybody is optimistic. We we have very good

916
01:07:35,640 --> 01:07:41,000
Speaker 1: data on the flow of money from individuals into equity

917
01:07:41,080 --> 01:07:46,360
Speaker 1: mutual funds, and what we know from those data is

918
01:07:46,400 --> 01:07:51,120
Speaker 1: the following fact that money flows into the market when

919
01:07:51,120 --> 01:07:56,880
Speaker 1: everyone's optimistic. In the first quarter of two thousand, at

920
01:07:56,920 --> 01:08:00,680
Speaker 1: the top of what it clearly in retrospect was a bubble,

921
01:08:01,520 --> 01:08:07,280
Speaker 1: more money came into equity mutual funds than ever before

922
01:08:07,760 --> 01:08:11,440
Speaker 1: that that Courter Q one two thousand, Q one two thousand,

923
01:08:11,560 --> 01:08:13,800
Speaker 1: That's when the money came in right at the top,

924
01:08:14,200 --> 01:08:18,800
Speaker 1: and in fact it went into the growth funds, went

925
01:08:18,840 --> 01:08:22,880
Speaker 1: into probably the most overpriced part of the market. We

926
01:08:23,040 --> 01:08:28,280
Speaker 1: used to have a sick joke at Vanguard at that

927
01:08:28,400 --> 01:08:37,040
Speaker 1: period because value funds, which were actually cheap m had outflows.

928
01:08:37,640 --> 01:08:42,840
Speaker 1: We uh we at Vanguard. The flagship value fund that

929
01:08:42,880 --> 01:08:45,599
Speaker 1: we had was called the Windsor Funds, was run by

930
01:08:45,600 --> 01:08:48,280
Speaker 1: a mamby the name of John Nef, a great money manager.

931
01:08:48,800 --> 01:08:53,000
Speaker 1: He was losing money all the time. Now you don't

932
01:08:53,200 --> 01:08:59,240
Speaker 1: know in a mutual fund complex exactly where those flows

933
01:08:59,320 --> 01:09:05,040
Speaker 1: were going, because when you redeem in a complex like Vanguard,

934
01:09:05,280 --> 01:09:08,000
Speaker 1: you just redeem the fund and it goes into the

935
01:09:08,000 --> 01:09:11,439
Speaker 1: money market fund. So you have to look at where

936
01:09:11,479 --> 01:09:14,920
Speaker 1: the checks were written. So we looked at where the

937
01:09:15,000 --> 01:09:18,519
Speaker 1: checks were written, and in fact, the checks were being

938
01:09:18,560 --> 01:09:22,920
Speaker 1: written to this company in Denver called Jens Janice. Oh sure,

939
01:09:23,040 --> 01:09:26,520
Speaker 1: and the Janie Fund had something called the Janie twenty

940
01:09:26,560 --> 01:09:29,559
Speaker 1: the twenty best ideas that they had. They were all

941
01:09:29,640 --> 01:09:32,880
Speaker 1: internet companies. And the sick joke that we had is,

942
01:09:33,320 --> 01:09:36,200
Speaker 1: you know what, why do we have to go and

943
01:09:36,240 --> 01:09:39,519
Speaker 1: do the accounting of having the money go from Windsor

944
01:09:39,680 --> 01:09:42,880
Speaker 1: into the money fund and then to Janie, Why don't

945
01:09:42,880 --> 01:09:45,080
Speaker 1: we just package up the money and send it to

946
01:09:45,120 --> 01:09:50,200
Speaker 1: Denver right away. Well, you know what happened. The Janie

947
01:09:50,200 --> 01:09:54,320
Speaker 1: fund lost eight percent of its value. Uh. In fact,

948
01:09:54,439 --> 01:09:58,760
Speaker 1: value funds did very well after the market crashed. So

949
01:09:59,240 --> 01:10:01,920
Speaker 1: here's the problem them. People are putting their money in

950
01:10:02,040 --> 01:10:05,760
Speaker 1: when they're optimistic, they're going into this moment, these momentum

951
01:10:05,840 --> 01:10:09,559
Speaker 1: types of things. The money then came out when the

952
01:10:09,640 --> 01:10:12,920
Speaker 1: market was low in two thousand and two, and when

953
01:10:12,920 --> 01:10:16,320
Speaker 1: did most of the money come out of the stock market,

954
01:10:17,120 --> 01:10:22,240
Speaker 1: out of equity mutual funds, individuals took out scores and

955
01:10:22,400 --> 01:10:28,160
Speaker 1: scores of dollars in the third quarter of two thousand

956
01:10:28,240 --> 01:10:30,600
Speaker 1: and eight, which turned out that was one of the

957
01:10:30,600 --> 01:10:33,040
Speaker 1: market when the world was collapsed. And when we we

958
01:10:33,080 --> 01:10:36,439
Speaker 1: saw the first quarter of two thousand nine, the flows

959
01:10:36,560 --> 01:10:40,920
Speaker 1: actually accelerated and there was just a huge get me

960
01:10:40,960 --> 01:10:43,840
Speaker 1: out at any price exactly. And of course what we

961
01:10:43,960 --> 01:10:47,559
Speaker 1: know is that was precisely the time to get in

962
01:10:47,960 --> 01:10:53,000
Speaker 1: rather than going out. And in fact, this is where

963
01:10:53,000 --> 01:10:57,599
Speaker 1: our emotions get ahold of us. And in fact, if

964
01:10:57,640 --> 01:11:01,280
Speaker 1: it's the best thing that an invest an advisor can do,

965
01:11:02,360 --> 01:11:05,640
Speaker 1: whether it's a regular investment advisor, or one of the

966
01:11:05,680 --> 01:11:09,679
Speaker 1: automated advisors that I work with, is to keep people

967
01:11:09,840 --> 01:11:14,280
Speaker 1: on an even keel. That's the best lesson that we

968
01:11:14,320 --> 01:11:20,360
Speaker 1: can have is for heaven's sakes, uh, don't let your

969
01:11:20,439 --> 01:11:26,320
Speaker 1: emotions get ahold of you. Be a regular investor for retirement.

970
01:11:27,280 --> 01:11:32,720
Speaker 1: Put money in every pay period every quarter. You'll get

971
01:11:32,800 --> 01:11:36,519
Speaker 1: take the advantage of dollar cost averaging, which in a

972
01:11:36,680 --> 01:11:40,120
Speaker 1: volatile market will actually help you because you buy more

973
01:11:40,240 --> 01:11:43,120
Speaker 1: shares when the price is down that when the price

974
01:11:43,240 --> 01:11:47,479
Speaker 1: is up. Don't try to time the market, because it's

975
01:11:47,520 --> 01:11:49,920
Speaker 1: not that you don't it's even worse than that you

976
01:11:49,960 --> 01:11:51,920
Speaker 1: don't know how to do it. It's that when you

977
01:11:52,040 --> 01:11:55,800
Speaker 1: do it, you're much more likely to be wrong rather

978
01:11:55,880 --> 01:11:59,200
Speaker 1: than right. One of the things I noticed in the

979
01:11:59,360 --> 01:12:03,120
Speaker 1: O eight on nine collapse was even the people who

980
01:12:03,160 --> 01:12:06,880
Speaker 1: saw the train coming and got off the tracks when

981
01:12:06,880 --> 01:12:10,640
Speaker 1: the market bottomed in March O nine, they refused to

982
01:12:10,720 --> 01:12:14,360
Speaker 1: believe it. They stayed in cash. And we watched people

983
01:12:14,439 --> 01:12:18,320
Speaker 1: sit in cash oh nine, in two thousand ten and

984
01:12:18,360 --> 01:12:21,840
Speaker 1: two thousand eleven, and all we heard about for a

985
01:12:21,880 --> 01:12:24,960
Speaker 1: couple of years was this is just a head fake.

986
01:12:25,120 --> 01:12:28,200
Speaker 1: This is a temporary rally. It's gonna go even lower

987
01:12:28,680 --> 01:12:31,760
Speaker 1: and what are we two hundred and six percent higher from? Then?

988
01:12:32,080 --> 01:12:36,280
Speaker 1: It's amazing lesson about timing is uh? Not only do

989
01:12:36,360 --> 01:12:39,840
Speaker 1: you not know when to get in, you don't know

990
01:12:39,880 --> 01:12:42,080
Speaker 1: when to get out and when you market time. You

991
01:12:42,160 --> 01:12:44,479
Speaker 1: gotta be right twice. You gotta know when to get

992
01:12:44,479 --> 01:12:49,360
Speaker 1: out and when to get in. And nobody and I

993
01:12:49,560 --> 01:12:53,680
Speaker 1: really believe this, nobody, but nobody can do that. So

994
01:12:53,880 --> 01:12:58,040
Speaker 1: you mentioned the behavioral counseling for financial advisors as well

995
01:12:58,080 --> 01:13:02,840
Speaker 1: as the software um advisors. Let me let me ask

996
01:13:02,880 --> 01:13:06,120
Speaker 1: a question a little differently. What is it that the

997
01:13:06,240 --> 01:13:13,680
Speaker 1: financial services industry actually gets right for their customers to

998
01:13:13,960 --> 01:13:20,800
Speaker 1: the extent that they get their customers to diversify, to

999
01:13:21,080 --> 01:13:26,920
Speaker 1: have some safe parts of the portfolio, to keep an

1000
01:13:27,120 --> 01:13:33,600
Speaker 1: on an even keel uh two tax uh manage that is,

1001
01:13:33,640 --> 01:13:38,080
Speaker 1: to the extent that you have an I R A

1002
01:13:38,320 --> 01:13:42,000
Speaker 1: or a four oh one K. To the extent that

1003
01:13:42,080 --> 01:13:47,040
Speaker 1: you have that and have some fixed rate instruments. Uh,

1004
01:13:47,080 --> 01:13:52,320
Speaker 1: they ought to go into that part of the portfolio. Uh.

1005
01:13:52,360 --> 01:13:56,400
Speaker 1: And to the extent that you're in the taxable portfolio,

1006
01:13:56,600 --> 01:13:59,760
Speaker 1: maybe that's when you put some municipal bonds in. If

1007
01:13:59,800 --> 01:14:02,599
Speaker 1: you want some bonds and you know, this may seem

1008
01:14:02,680 --> 01:14:07,799
Speaker 1: very obvious, but that's something that individuals don't obviously think about.

1009
01:14:08,240 --> 01:14:13,599
Speaker 1: So there's a lot that financial advisors can do. Uh.

1010
01:14:13,640 --> 01:14:20,160
Speaker 1: And what I think is particularly useful in terms of

1011
01:14:20,200 --> 01:14:24,760
Speaker 1: what I'm doing with this automated advisor is if we

1012
01:14:24,840 --> 01:14:29,320
Speaker 1: can do it more efficiently, if we can do it

1013
01:14:29,360 --> 01:14:33,720
Speaker 1: at lower cost, it's going to be much better for

1014
01:14:33,760 --> 01:14:38,519
Speaker 1: the individual. So we have about thirty minutes left before

1015
01:14:38,520 --> 01:14:40,960
Speaker 1: I have to send you off to chat with Arthur Levitt.

1016
01:14:41,479 --> 01:14:45,120
Speaker 1: Before I I do that, let me run through some

1017
01:14:45,280 --> 01:14:50,479
Speaker 1: of my favorite questions I asked all of my guests. Um,

1018
01:14:51,240 --> 01:14:54,920
Speaker 1: it didn't look like you were gonna go into finance

1019
01:14:55,000 --> 01:14:58,720
Speaker 1: when you came out of school with an NBA. From

1020
01:14:58,760 --> 01:15:01,920
Speaker 1: what I read, you were thinking about going into business

1021
01:15:02,080 --> 01:15:06,080
Speaker 1: rather than finance. How did you make that transition? What

1022
01:15:06,080 --> 01:15:12,280
Speaker 1: what shifted your focus more towards investing, asset management and

1023
01:15:12,320 --> 01:15:17,519
Speaker 1: finance rather than working with a corporate entity. Well, I

1024
01:15:17,600 --> 01:15:21,439
Speaker 1: was always interested in finance. I mean I grew up

1025
01:15:21,479 --> 01:15:27,080
Speaker 1: a poor kid in Roxbury, Massachusetts, which is part of Boston,

1026
01:15:27,880 --> 01:15:31,680
Speaker 1: and I, uh, we lived in a tenement house, we

1027
01:15:31,680 --> 01:15:34,920
Speaker 1: had no money, but I was just sort of fascinated

1028
01:15:34,960 --> 01:15:37,439
Speaker 1: with numbers. I was fascinated with the stock market. I

1029
01:15:37,479 --> 01:15:40,920
Speaker 1: had no UH money in the stock market, but I

1030
01:15:41,000 --> 01:15:44,800
Speaker 1: knew the price of General Motors stock as well as

1031
01:15:44,800 --> 01:15:48,400
Speaker 1: I knew Ted Williams batting average. UH. And when I

1032
01:15:48,439 --> 01:15:51,679
Speaker 1: was in college, I was a good economic student. And

1033
01:15:52,120 --> 01:15:54,400
Speaker 1: my professors in college said you ought to go to

1034
01:15:54,439 --> 01:15:58,200
Speaker 1: graduate school and be an economist. And I said, no, no, look,

1035
01:15:58,240 --> 01:16:00,160
Speaker 1: and I grew up poor. I want to go and

1036
01:16:00,240 --> 01:16:03,519
Speaker 1: make some money. So I did go into UH. I

1037
01:16:03,560 --> 01:16:07,040
Speaker 1: did go to business school. I did then go into

1038
01:16:07,040 --> 01:16:10,559
Speaker 1: Wall Street. I worked for Smith Barney for almost three years.

1039
01:16:11,160 --> 01:16:16,000
Speaker 1: I was an investment banker. But what I found was

1040
01:16:16,800 --> 01:16:21,479
Speaker 1: I was thinking I really did like economics. I was

1041
01:16:21,600 --> 01:16:25,479
Speaker 1: trying to go to n y U UH and get

1042
01:16:25,479 --> 01:16:28,160
Speaker 1: a PhD. At the same time that I worked for

1043
01:16:28,160 --> 01:16:33,160
Speaker 1: Smith Barney. But I was an investment banker, I was traveling,

1044
01:16:33,240 --> 01:16:37,160
Speaker 1: I was missing more of my classes. And what finally

1045
01:16:37,240 --> 01:16:41,400
Speaker 1: happened was I finally did make enough money so that

1046
01:16:41,520 --> 01:16:44,800
Speaker 1: I didn't feel poor anymore, and I took a leave

1047
01:16:44,840 --> 01:16:52,640
Speaker 1: of absence to go to Princeton UH get a PhD.

1048
01:16:53,479 --> 01:16:55,880
Speaker 1: I expected to go back into Wall Street. I still

1049
01:16:56,040 --> 01:17:01,920
Speaker 1: liking finance, but an interesting thing happened. Uh. They said

1050
01:17:01,960 --> 01:17:05,040
Speaker 1: to me, hey, you've been a pretty good student, come

1051
01:17:05,080 --> 01:17:09,360
Speaker 1: and stay and teach. Really and so two things happened.

1052
01:17:11,120 --> 01:17:12,760
Speaker 1: I said, all right, I'll try it for a year

1053
01:17:12,800 --> 01:17:19,440
Speaker 1: and see if I like it. And secondly, Prudential Financial

1054
01:17:21,320 --> 01:17:26,320
Speaker 1: had had a scandal at one point where the chairman

1055
01:17:26,520 --> 01:17:30,080
Speaker 1: was having Prudential lend to some of the entities that

1056
01:17:30,120 --> 01:17:35,960
Speaker 1: the chairman UH controlled, and the legislature decided that there

1057
01:17:36,000 --> 01:17:42,760
Speaker 1: had to be six public directors of Prudential, chosen by

1058
01:17:43,000 --> 01:17:48,559
Speaker 1: the UH Supreme the Chief Justice of the New Jersey

1059
01:17:48,720 --> 01:17:52,880
Speaker 1: Supreme Court. The Chief Justice interviewed a number of people

1060
01:17:52,960 --> 01:17:56,799
Speaker 1: for this, including me, put me on the Prudential board

1061
01:17:57,479 --> 01:17:59,840
Speaker 1: and again came to the point and said, you know,

1062
01:18:00,640 --> 01:18:04,000
Speaker 1: I could be a professor and still be a business.

1063
01:18:04,040 --> 01:18:06,160
Speaker 1: You know, I sort have never decided when I what

1064
01:18:06,240 --> 01:18:09,600
Speaker 1: I wanted to be. He gave me both options. I

1065
01:18:09,680 --> 01:18:14,280
Speaker 1: then was on the Prudential board uh for uh longer

1066
01:18:14,360 --> 01:18:18,200
Speaker 1: actually than even on the Vanguard board, so that I

1067
01:18:18,640 --> 01:18:22,880
Speaker 1: uh then being on the Prudential board and knowing other

1068
01:18:22,960 --> 01:18:30,799
Speaker 1: people got on other boards and basically became uh someone

1069
01:18:30,880 --> 01:18:33,240
Speaker 1: who could live in both worlds and who could make

1070
01:18:33,280 --> 01:18:37,200
Speaker 1: a good living from being in the business world. Uh

1071
01:18:37,240 --> 01:18:42,679
Speaker 1: and UH did the writing uh and teaching that I enjoyed.

1072
01:18:42,800 --> 01:18:45,240
Speaker 1: I enjoyed teaching. It's one of the reasons why I

1073
01:18:45,280 --> 01:18:50,479
Speaker 1: wrote random Walk. Really, that's interesting. So basically that was

1074
01:18:50,640 --> 01:18:54,320
Speaker 1: kind of my career of not deciding what I wanted

1075
01:18:54,360 --> 01:18:57,000
Speaker 1: to be when I grew up, uh, and in fact

1076
01:18:57,120 --> 01:18:59,280
Speaker 1: thinking well, maybe I can do both things. And I

1077
01:18:59,360 --> 01:19:02,519
Speaker 1: have you taught it at Princeton? Am I right in

1078
01:19:02,600 --> 01:19:06,040
Speaker 1: saying almost forty years? Is that right? Well? I I

1079
01:19:06,080 --> 01:19:10,360
Speaker 1: was at Princeton, as you pointed out in your introduction.

1080
01:19:10,840 --> 01:19:13,000
Speaker 1: I worked for the government for a couple of years

1081
01:19:13,000 --> 01:19:16,280
Speaker 1: on the President's Council of Economic Advisors. I was a

1082
01:19:16,360 --> 01:19:20,280
Speaker 1: management school dean at Yale for seven years. So I've

1083
01:19:20,280 --> 01:19:23,280
Speaker 1: done a lot of different things, and I've enjoyed that

1084
01:19:23,439 --> 01:19:26,920
Speaker 1: because I think life is richer to the extent that

1085
01:19:27,040 --> 01:19:31,160
Speaker 1: you get more and more experiences, always always keep it fresh,

1086
01:19:31,240 --> 01:19:34,160
Speaker 1: always always mix it up. So let me ask you

1087
01:19:34,800 --> 01:19:39,840
Speaker 1: this fascinating question. Who were your early mentors? Who who

1088
01:19:39,920 --> 01:19:42,880
Speaker 1: was giving you advice and insight as to what to

1089
01:19:42,920 --> 01:19:46,479
Speaker 1: do with your career? Well, as I said, I think

1090
01:19:46,600 --> 01:19:51,920
Speaker 1: I had a couple of professors who were very influential

1091
01:19:51,960 --> 01:19:57,479
Speaker 1: who really did want me to be uh an academic who,

1092
01:19:57,600 --> 01:20:07,120
Speaker 1: in fact, UH were very disappointed uh when I first

1093
01:20:07,160 --> 01:20:16,519
Speaker 1: went into business. Within the UH business community, I guess

1094
01:20:16,800 --> 01:20:23,840
Speaker 1: uh uh people uh like Jack Bogel, who we've talked

1095
01:20:23,880 --> 01:20:31,360
Speaker 1: about before, who I liked particularly both because he and

1096
01:20:31,439 --> 01:20:35,880
Speaker 1: I did see eye to eye on of the things

1097
01:20:36,320 --> 01:20:42,519
Speaker 1: about investing, and who also had a social conscience. Uh.

1098
01:20:42,560 --> 01:20:48,400
Speaker 1: This was a business person who showed you that you

1099
01:20:48,439 --> 01:20:52,200
Speaker 1: could actually do well financially by doing well for your client.

1100
01:20:52,400 --> 01:20:55,559
Speaker 1: And I guess that was a particular influence for me

1101
01:20:56,320 --> 01:21:01,320
Speaker 1: in the things that I had done. Uh. And look,

1102
01:21:01,400 --> 01:21:05,880
Speaker 1: finances is fascinating, uh, you know, as I said, it

1103
01:21:06,200 --> 01:21:08,400
Speaker 1: interested me before I had any money and could do

1104
01:21:08,400 --> 01:21:14,320
Speaker 1: anything uh with it. So finance is fascinating and I

1105
01:21:14,400 --> 01:21:19,120
Speaker 1: do think that Uh. While a lot of people are

1106
01:21:19,320 --> 01:21:25,519
Speaker 1: very angry about finance because finance did practically bring the

1107
01:21:25,520 --> 01:21:30,360
Speaker 1: world down in the financial crisis, UH, finance is also

1108
01:21:30,720 --> 01:21:36,400
Speaker 1: absolutely essential. UH and UH can help people uh more

1109
01:21:36,439 --> 01:21:39,200
Speaker 1: than it can hurt them. What what's a financial crisis

1110
01:21:39,320 --> 01:21:43,559
Speaker 1: or two amongst friends? Right? It's um so so you

1111
01:21:43,680 --> 01:21:47,160
Speaker 1: mentioned and I'm only kidding before you people start sending

1112
01:21:47,160 --> 01:21:51,879
Speaker 1: the emails Um, you mentioned the mentors you previously mentioned

1113
01:21:51,960 --> 01:21:56,000
Speaker 1: David Swenson of Yale and Warren Buffett, any other investors

1114
01:21:56,040 --> 01:22:00,520
Speaker 1: stand out as influencing your thought process or a affecting

1115
01:22:00,520 --> 01:22:06,440
Speaker 1: the way you looked at markets? Now, I think that, uh,

1116
01:22:06,640 --> 01:22:11,479
Speaker 1: clearly those are the main names in terms of my

1117
01:22:11,600 --> 01:22:18,320
Speaker 1: own career, in my own life of people who have

1118
01:22:18,360 --> 01:22:22,760
Speaker 1: been influential. So let's talk about some books, uh, in

1119
01:22:22,800 --> 01:22:26,200
Speaker 1: addition to the eleventh edition of A Random Walk Down

1120
01:22:26,200 --> 01:22:29,240
Speaker 1: Wall Street. Uh, tell us about some books that you

1121
01:22:29,400 --> 01:22:34,760
Speaker 1: found influential. They could be fiction, non fiction, they don't

1122
01:22:34,760 --> 01:22:37,400
Speaker 1: have to have anything to do with finance. What are

1123
01:22:37,439 --> 01:22:40,639
Speaker 1: some of the books that that very much influenced your

1124
01:22:40,680 --> 01:22:45,520
Speaker 1: thought process? Well, let me give you one in the finance,

1125
01:22:45,880 --> 01:22:55,879
Speaker 1: uh academic area and umh one uh part of uh,

1126
01:22:55,960 --> 01:22:59,479
Speaker 1: you know, my own career. You know, sometimes I think

1127
01:23:00,240 --> 01:23:03,520
Speaker 1: it would be nice to have eight or nine lives

1128
01:23:03,560 --> 01:23:09,040
Speaker 1: because there are a lot of different things, uh that

1129
01:23:09,080 --> 01:23:11,320
Speaker 1: would be fun to do. I mean, we haven't talked

1130
01:23:11,360 --> 01:23:13,280
Speaker 1: about this, but I was in the Army for three

1131
01:23:13,360 --> 01:23:17,080
Speaker 1: years in the Army Finance Corps. I actually liked the army.

1132
01:23:17,439 --> 01:23:20,000
Speaker 1: What did you do for for the in the army? Actually,

1133
01:23:20,080 --> 01:23:25,800
Speaker 1: what I did was we Uh? I did this right

1134
01:23:25,840 --> 01:23:29,800
Speaker 1: after business school. Uh. There was a colonel in the

1135
01:23:29,920 --> 01:23:32,959
Speaker 1: Army who was the commandant of the Army Finance Corps

1136
01:23:33,520 --> 01:23:38,599
Speaker 1: and we were putting in a computerized pay an accounting system.

1137
01:23:38,720 --> 01:23:43,799
Speaker 1: And this colonel decided, what we need are well trained

1138
01:23:43,840 --> 01:23:47,599
Speaker 1: people to go into various posts to do it. And

1139
01:23:48,000 --> 01:23:51,160
Speaker 1: so I was a direct commissioned into the U. S.

1140
01:23:51,280 --> 01:24:00,080
Speaker 1: Army Finance Corps. Did uh uh did the conversion of

1141
01:24:00,080 --> 01:24:04,640
Speaker 1: our pay and accounting system into a computerized one. And

1142
01:24:04,800 --> 01:24:07,840
Speaker 1: at the age of twenty two, I had more responsibility

1143
01:24:07,920 --> 01:24:13,640
Speaker 1: than anybody could possibly have had at that in the

1144
01:24:13,680 --> 01:24:16,960
Speaker 1: private sector. For sure, uh, certainly more than you'd ever

1145
01:24:17,000 --> 01:24:20,920
Speaker 1: get in the private sector. And I loved my experience.

1146
01:24:21,000 --> 01:24:24,680
Speaker 1: In fact, uh you know, while as I told you,

1147
01:24:24,760 --> 01:24:26,920
Speaker 1: I grew up poor and I did want to get

1148
01:24:26,960 --> 01:24:29,800
Speaker 1: out and earn some money. The army is not a

1149
01:24:29,840 --> 01:24:33,360
Speaker 1: place to earn a lot of money. But I actually thought, gee,

1150
01:24:33,400 --> 01:24:35,960
Speaker 1: you know, this wouldn't have been a bad career. The

1151
01:24:36,000 --> 01:24:40,120
Speaker 1: other possible career that I would have loved is I

1152
01:24:40,160 --> 01:24:47,360
Speaker 1: am a frustrated Shakespearean actor. In that uh, I uh

1153
01:24:47,880 --> 01:24:50,559
Speaker 1: as a with a lean and hungry look. I was

1154
01:24:50,640 --> 01:24:54,320
Speaker 1: a wonderful Cassius and a high school play. I would

1155
01:24:54,320 --> 01:24:57,040
Speaker 1: have loved to have done that. And I love reading Shakespeare.

1156
01:24:57,120 --> 01:25:00,800
Speaker 1: I love theater. Uh. And actually a out of the things,

1157
01:25:00,920 --> 01:25:06,520
Speaker 1: the so called fiction things that I read are plays,

1158
01:25:06,600 --> 01:25:10,400
Speaker 1: because it would have been a wonderful career to have

1159
01:25:10,640 --> 01:25:15,720
Speaker 1: had uh. And other than thinking that it meant a

1160
01:25:15,840 --> 01:25:18,960
Speaker 1: life of being poor, I might have actually done that.

1161
01:25:19,479 --> 01:25:22,479
Speaker 1: With respect to other books that I think are very

1162
01:25:22,600 --> 01:25:27,080
Speaker 1: very influential, I would point out Danny Kahneman's book Thinking

1163
01:25:27,200 --> 01:25:32,600
Speaker 1: Fast and Slow Again. I think that the insights of

1164
01:25:33,080 --> 01:25:35,519
Speaker 1: you know, it's like the old Pogo line, We've met

1165
01:25:35,520 --> 01:25:38,800
Speaker 1: the enemy and it's us. Uh. This is I think

1166
01:25:38,920 --> 01:25:44,120
Speaker 1: the biggest problem that we have in investing, and the

1167
01:25:44,240 --> 01:25:49,879
Speaker 1: insights uh in that book, which is a wonderful summary

1168
01:25:49,960 --> 01:25:55,040
Speaker 1: of what we know about behavioralism. Uh. This is uh.

1169
01:25:55,920 --> 01:26:00,240
Speaker 1: I think you you ought to read my book, But boy,

1170
01:26:00,400 --> 01:26:04,320
Speaker 1: I would definitely read that book. It's a terrific book. Um.

1171
01:26:04,640 --> 01:26:06,800
Speaker 1: I've read it, and I'm gonna tell you most of

1172
01:26:06,840 --> 01:26:09,640
Speaker 1: our listeners, or or at least many of our listeners.

1173
01:26:10,200 --> 01:26:12,040
Speaker 1: Most of our listeners are familiar with the book, and

1174
01:26:12,080 --> 01:26:16,160
Speaker 1: I would bet many of them have read Danny Kahneman's work.

1175
01:26:16,360 --> 01:26:20,400
Speaker 1: It's it's just seminal um in the space. And so

1176
01:26:20,479 --> 01:26:25,680
Speaker 1: that's the the non fiction non finance book. What what

1177
01:26:25,800 --> 01:26:28,240
Speaker 1: else do you do you want to mention in terms

1178
01:26:28,240 --> 01:26:32,400
Speaker 1: of books, Well, I think those are you know as

1179
01:26:32,520 --> 01:26:37,360
Speaker 1: um again we've talked about it and it's very well written.

1180
01:26:38,600 --> 01:26:45,400
Speaker 1: Charlie Ellis's books and Winning the Loser's Game uh is

1181
01:26:45,800 --> 01:26:50,679
Speaker 1: I think very uh important. And uh you know, Jack

1182
01:26:50,720 --> 01:26:56,000
Speaker 1: Boggle has um written some great books. In fact, I

1183
01:26:56,040 --> 01:27:04,960
Speaker 1: think uh probably one of his uh best books uh

1184
01:27:05,320 --> 01:27:10,439
Speaker 1: is not directly about finance, and as uh says a

1185
01:27:10,479 --> 01:27:13,519
Speaker 1: lot about Jack Bogel. The book is called enough and

1186
01:27:13,600 --> 01:27:22,800
Speaker 1: it comes from uh this uh idea uh that there

1187
01:27:22,960 --> 01:27:31,679
Speaker 1: was a discussion with a writer and who had sold

1188
01:27:31,720 --> 01:27:35,519
Speaker 1: a lot of books, and Vellow pointed out to a

1189
01:27:35,600 --> 01:27:39,040
Speaker 1: hedge fund guy who had made billions of dollars and

1190
01:27:40,760 --> 01:27:46,839
Speaker 1: said to the writer, H, gee, you know you've sold

1191
01:27:46,880 --> 01:27:51,240
Speaker 1: a lot of copies of books, but you have got

1192
01:27:51,240 --> 01:27:56,760
Speaker 1: a pittance relative to this hedge fund guy. And the

1193
01:27:56,800 --> 01:28:01,360
Speaker 1: writer said, yeah, but I have got something uh that

1194
01:28:01,360 --> 01:28:06,439
Speaker 1: that fellow will never have. And that's enough. Uh. And

1195
01:28:06,520 --> 01:28:10,080
Speaker 1: again this is an idea that's uh, it's it's actually

1196
01:28:10,120 --> 01:28:15,360
Speaker 1: a wonderful book of Jack Bugles UH that I recommend

1197
01:28:15,760 --> 01:28:20,120
Speaker 1: warmly to people, a philosophical perspective on what you need

1198
01:28:20,160 --> 01:28:24,040
Speaker 1: to be happy as opposed to never never achieving that.

1199
01:28:24,560 --> 01:28:29,479
Speaker 1: So you've been watching the finance industry for a good

1200
01:28:29,520 --> 01:28:33,120
Speaker 1: long time, UM, what do you think on the most

1201
01:28:33,160 --> 01:28:38,080
Speaker 1: significant changes that we've witnessed? And we could probably talk

1202
01:28:38,120 --> 01:28:41,400
Speaker 1: for hours just about what's changed, But what is it

1203
01:28:41,479 --> 01:28:44,920
Speaker 1: that stands out as this is really something that's going

1204
01:28:44,960 --> 01:28:48,679
Speaker 1: to have a lasting effect, uh decades into the future.

1205
01:28:48,840 --> 01:28:54,200
Speaker 1: Well for me, because as you know, I wrote there

1206
01:28:54,240 --> 01:28:57,559
Speaker 1: ought to be index funds three years before the first

1207
01:28:57,600 --> 01:29:02,720
Speaker 1: index fund was it into effect. What I am so

1208
01:29:02,800 --> 01:29:09,080
Speaker 1: pleased about is that indexing finally has taken off, UH,

1209
01:29:09,120 --> 01:29:13,320
Speaker 1: that money is flowing in. I think the E t

1210
01:29:13,560 --> 01:29:18,200
Speaker 1: F revolution UH is a terrific thing. While there are

1211
01:29:18,320 --> 01:29:21,920
Speaker 1: some ETFs, and here I would agree with Jack Bogel,

1212
01:29:22,240 --> 01:29:24,559
Speaker 1: there are some E t F that I think are terrible.

1213
01:29:24,640 --> 01:29:27,920
Speaker 1: I don't think people should buy the E t F

1214
01:29:28,320 --> 01:29:33,160
Speaker 1: gives you three times the of the S and P.

1215
01:29:33,520 --> 01:29:35,760
Speaker 1: There are some of them that are terrible. But the

1216
01:29:35,880 --> 01:29:42,799
Speaker 1: plane vanilla ones allow people to basically buy the market

1217
01:29:43,000 --> 01:29:47,280
Speaker 1: at close to a zero cost. I think this is

1218
01:29:47,320 --> 01:29:52,800
Speaker 1: a revolution, and I think it's uh just extremely important.

1219
01:29:53,800 --> 01:29:59,320
Speaker 1: I think that one of the big mistakes also that

1220
01:29:59,479 --> 01:30:05,200
Speaker 1: people make is that they don't save enough. I think

1221
01:30:05,280 --> 01:30:10,360
Speaker 1: that we do have a crisis in this country that

1222
01:30:10,560 --> 01:30:16,880
Speaker 1: as we are aging, many people are woefully unprepared for retirement.

1223
01:30:17,760 --> 01:30:21,080
Speaker 1: One of the things that I wish we had done

1224
01:30:21,200 --> 01:30:26,680
Speaker 1: as a nation. When George Bush was hoping to privatize

1225
01:30:26,720 --> 01:30:32,360
Speaker 1: Social Security, what I would have preferred that he do

1226
01:30:33,479 --> 01:30:38,599
Speaker 1: is do a private add on to the regular Social

1227
01:30:38,680 --> 01:30:43,360
Speaker 1: Security where you would have another percentage or so that

1228
01:30:43,439 --> 01:30:46,360
Speaker 1: would come out of your salary, and this would be

1229
01:30:46,520 --> 01:30:52,800
Speaker 1: yours that could have been invested in index funds. I

1230
01:30:52,840 --> 01:30:55,960
Speaker 1: think if he had proposed that, it would have passed

1231
01:30:56,439 --> 01:31:00,800
Speaker 1: as opposed to trying to redo the whole such them.

1232
01:31:00,840 --> 01:31:05,200
Speaker 1: I still would like to see something like that because

1233
01:31:05,240 --> 01:31:08,840
Speaker 1: I think as a nation we are not saving enough,

1234
01:31:09,640 --> 01:31:14,679
Speaker 1: uh and many people are unprepared for retirement. That that's

1235
01:31:14,760 --> 01:31:19,400
Speaker 1: Charlie Ellis's most recent Charlie Ellis's most recent book exactly

1236
01:31:19,640 --> 01:31:22,639
Speaker 1: the coming coming retirement Crisis. Let me before I forget,

1237
01:31:22,720 --> 01:31:27,200
Speaker 1: let me just make a note, don't buy triple leveraged

1238
01:31:27,320 --> 01:31:30,800
Speaker 1: inverse funds, got it. I don't think anyone's going to

1239
01:31:30,880 --> 01:31:33,879
Speaker 1: take that as a news flash from you know, but

1240
01:31:33,880 --> 01:31:37,720
Speaker 1: but it's always good hearing it, uh, straight from the

1241
01:31:37,720 --> 01:31:41,200
Speaker 1: horse's mouth. All right, So you mentioned indexing as the

1242
01:31:41,240 --> 01:31:44,760
Speaker 1: most index funds as the most significant shifts since you

1243
01:31:44,920 --> 01:31:48,840
Speaker 1: joined the industry. Looking forward, what do you think are

1244
01:31:48,880 --> 01:31:52,200
Speaker 1: the next changes that are going to take place? Well,

1245
01:31:52,720 --> 01:32:00,280
Speaker 1: being UH in the vanguard of automated UH in spend

1246
01:32:00,320 --> 01:32:06,920
Speaker 1: advisories and trying to build that business up. I do

1247
01:32:07,200 --> 01:32:16,360
Speaker 1: believe that this will become increasingly important, and we will

1248
01:32:16,400 --> 01:32:22,639
Speaker 1: be able to automate investment advice because by doing so,

1249
01:32:23,360 --> 01:32:28,080
Speaker 1: we can charge less. And as I've said many times,

1250
01:32:29,080 --> 01:32:31,559
Speaker 1: I am very modest about what I know or don't

1251
01:32:31,680 --> 01:32:35,400
Speaker 1: know about finance. But what I'm just absolutely sure about

1252
01:32:35,680 --> 01:32:42,479
Speaker 1: is if we can provide services at lower cost. UH,

1253
01:32:42,720 --> 01:32:47,400
Speaker 1: that's a win win for people, because the lower the

1254
01:32:47,520 --> 01:32:51,360
Speaker 1: price I pay to the purveyor of any service, the

1255
01:32:51,439 --> 01:32:54,040
Speaker 1: more that's going to be for me, especially if you're

1256
01:32:54,040 --> 01:32:57,559
Speaker 1: going to compound that over decades, you bet you, because

1257
01:32:57,760 --> 01:33:02,720
Speaker 1: costs again, UH, my friend Jack Bogle would call it,

1258
01:33:03,479 --> 01:33:08,920
Speaker 1: just as Einstein said at one point, that compound interest

1259
01:33:09,040 --> 01:33:11,760
Speaker 1: is one of the greatest forces in the world. Well,

1260
01:33:12,280 --> 01:33:17,200
Speaker 1: the costs compound two, which Jack calls the tyranny of

1261
01:33:17,240 --> 01:33:22,519
Speaker 1: the compounding of costs. So we're down to our last

1262
01:33:22,560 --> 01:33:25,200
Speaker 1: two questions. These are two of my favorite questions. I

1263
01:33:25,240 --> 01:33:29,680
Speaker 1: asked all of my guests. If somebody who is just

1264
01:33:29,880 --> 01:33:36,439
Speaker 1: graduating college, um as a millennial as they're referred to

1265
01:33:36,479 --> 01:33:40,320
Speaker 1: these days, came to you when asked, said they're interested

1266
01:33:40,360 --> 01:33:43,559
Speaker 1: in a career in finance, what sort of advice would

1267
01:33:43,560 --> 01:33:47,040
Speaker 1: you give them. I would tell them that while finance

1268
01:33:47,479 --> 01:33:51,760
Speaker 1: sometimes has a very bad name, I mean, after all,

1269
01:33:51,880 --> 01:33:57,840
Speaker 1: we've had uh people uh, and they're really very very

1270
01:33:57,880 --> 01:34:03,840
Speaker 1: similar Bernie. In this campaign, Bernie Sanders says all the

1271
01:34:03,920 --> 01:34:06,840
Speaker 1: problems in the world are because of Wall Street, and

1272
01:34:07,080 --> 01:34:10,400
Speaker 1: uh uh and break up the banks and everything's gonna

1273
01:34:10,439 --> 01:34:13,559
Speaker 1: be fine. And Donald Trump has not been very different

1274
01:34:13,640 --> 01:34:18,840
Speaker 1: from Bernie Sanders uh in saying that Wall Street is

1275
01:34:18,880 --> 01:34:25,280
Speaker 1: all Dad, don't believe it. Uh, it's a fascinating career.

1276
01:34:26,240 --> 01:34:37,440
Speaker 1: Uh and uh uh. Finance has in fact been extremely

1277
01:34:37,680 --> 01:34:42,280
Speaker 1: important in improving welfare. And we were talking about books.

1278
01:34:42,760 --> 01:34:47,200
Speaker 1: There's a book by Getsman which has just come out

1279
01:34:47,840 --> 01:34:56,120
Speaker 1: about how money has in fact been absolutely essential in

1280
01:34:56,240 --> 01:34:59,400
Speaker 1: improving people's standard of living. What what's the name of

1281
01:34:59,400 --> 01:35:05,000
Speaker 1: the Getsman book? Uh, it's money and uh uh you

1282
01:35:05,120 --> 01:35:07,960
Speaker 1: might be able to find it. I don't think I've

1283
01:35:08,000 --> 01:35:11,519
Speaker 1: got the other part of it. Exact money changes every

1284
01:35:11,560 --> 01:35:15,360
Speaker 1: money changes everything. Fine, Yeah, I give credit to Google

1285
01:35:15,400 --> 01:35:20,400
Speaker 1: for that money changes everything. How finance made civilization possible?

1286
01:35:20,439 --> 01:35:26,040
Speaker 1: By William oh And I recognize this pyramid on the

1287
01:35:26,160 --> 01:35:31,000
Speaker 1: on the cover of the book. Um. And our final question, God,

1288
01:35:31,000 --> 01:35:32,760
Speaker 1: I have like a million other things to talk to

1289
01:35:32,800 --> 01:35:35,600
Speaker 1: you about, but I can't keep you here forever. What

1290
01:35:35,800 --> 01:35:37,840
Speaker 1: is it that you know about? And I know the

1291
01:35:37,880 --> 01:35:40,640
Speaker 1: answer to this, but I have to ask it. What

1292
01:35:40,840 --> 01:35:44,599
Speaker 1: is it that you know about investing today that you

1293
01:35:44,720 --> 01:35:49,280
Speaker 1: wish you knew forty years ago when you started your career. Well,

1294
01:35:49,360 --> 01:35:56,200
Speaker 1: I didn't know about indexing. Uh. In fact, when I

1295
01:35:56,200 --> 01:35:59,200
Speaker 1: worked at Smith Barney, I spent a lot of time

1296
01:35:59,240 --> 01:36:04,160
Speaker 1: with the research people. I Uh, I had drunk that

1297
01:36:04,240 --> 01:36:09,240
Speaker 1: cool that at that point I believed it could be done.

1298
01:36:09,479 --> 01:36:15,639
Speaker 1: And actually one of the things that I just found

1299
01:36:15,760 --> 01:36:22,679
Speaker 1: absolutely fascinating was it wasn't necessarily because people weren't good

1300
01:36:22,720 --> 01:36:27,719
Speaker 1: at it. Uh. My mentors at that time where people

1301
01:36:27,880 --> 01:36:33,679
Speaker 1: by the name of Bill Grant, Nelson, Shannon Uh. They

1302
01:36:33,720 --> 01:36:37,760
Speaker 1: were very good at it. But I began to realize,

1303
01:36:38,400 --> 01:36:42,160
Speaker 1: which I didn't know at the beginning, was the paradox

1304
01:36:42,720 --> 01:36:48,320
Speaker 1: that the more the talented people are in this game,

1305
01:36:51,120 --> 01:36:54,360
Speaker 1: the less they can profit from it. Because the more

1306
01:36:54,800 --> 01:37:03,320
Speaker 1: the talented people work and invest and make market prices change,

1307
01:37:05,000 --> 01:37:10,280
Speaker 1: the better the market becomes, and the better off people

1308
01:37:10,400 --> 01:37:14,360
Speaker 1: are just accepting the tableau of market prices that are

1309
01:37:14,400 --> 01:37:17,599
Speaker 1: out there and buying an index fund. And it was

1310
01:37:17,760 --> 01:37:23,280
Speaker 1: that kind of experience that finally led to this view

1311
01:37:24,280 --> 01:37:28,400
Speaker 1: that indexing was the way to go. Professor Malkiel, thank

1312
01:37:28,439 --> 01:37:32,479
Speaker 1: you so much for being so generous with your time.

1313
01:37:32,680 --> 01:37:36,920
Speaker 1: This has been an utterly fascinating UH tour to force

1314
01:37:37,000 --> 01:37:42,240
Speaker 1: conversation about the everything you've learned and the proper way

1315
01:37:42,720 --> 01:37:46,120
Speaker 1: for most people UH to invest. I hope all the

1316
01:37:46,200 --> 01:37:50,040
Speaker 1: listeners have have enjoyed this conversation. If you have to

1317
01:37:50,160 --> 01:37:52,120
Speaker 1: be sure and look up an inch or down an

1318
01:37:52,120 --> 01:37:55,719
Speaker 1: inch on Apple iTunes, you can see the other ninety

1319
01:37:55,800 --> 01:38:00,120
Speaker 1: two or so such conversations we've had. I would you

1320
01:38:00,160 --> 01:38:04,679
Speaker 1: remiss if I did not thank Taylor Riggs, our booker,

1321
01:38:04,840 --> 01:38:09,120
Speaker 1: for for scheduling these UH conversations and staying on top

1322
01:38:09,200 --> 01:38:13,840
Speaker 1: of all of our very various guests. My engineer is

1323
01:38:13,920 --> 01:38:18,000
Speaker 1: Charlie Vollmer and my head of research is Mike bat Nick. UH.

1324
01:38:18,240 --> 01:38:22,080
Speaker 1: You've been listening to Masters in business on Bloomberg Radio

1325
01:38:28,280 --> 01:38:32,280
Speaker 1: look Ahead, Imagine more, Gain insight for your industry with

1326
01:38:32,320 --> 01:38:36,320
Speaker 1: forward thinking advice from the professionals at Cone Resnick. Is

1327
01:38:36,360 --> 01:38:39,439
Speaker 1: your business ready to break through? Find out more at

1328
01:38:39,479 --> 01:38:42,040
Speaker 1: Cone Resnick dot com Slash Breakthrough