WEBVTT - Interview With Burt Malkiel: Masters in Business (Audio) 0:00:00.440 --> 0:00:04.440 Look ahead, imagine more. Gain insight for your industry with 0:00:04.480 --> 0:00:08.480 forward thinking advice from the professionals at Cone Resnick. Is 0:00:08.520 --> 0:00:11.559 your business ready to break through? Find out more at 0:00:11.640 --> 0:00:19.279 Cone Resnick dot com Slash Breakthrough. This is Master's in 0:00:19.360 --> 0:00:23.799 Business with Barry Ridholds on Bloomberg Radio. This week on 0:00:23.920 --> 0:00:26.960 Masters in Business, I have a very special guest. His 0:00:27.080 --> 0:00:29.920 name is Professor Burton Malkiel. And when I say I 0:00:29.960 --> 0:00:33.440 have a special guest, man, I am not kidding this week. 0:00:34.000 --> 0:00:38.280 Professor Malkiel is perhaps best known for writing one of 0:00:38.320 --> 0:00:43.440 the most seminal books on investing, A Random Walk Down 0:00:43.440 --> 0:00:47.960 Wall Street. It's now in it's eleventh edition, having sold 0:00:48.360 --> 0:00:52.200 more than a million and a half copies. UH Professor 0:00:52.240 --> 0:00:55.680 of Economics at Princeton, twice chairman of the department there. 0:00:56.200 --> 0:01:00.880 He ran the hell School of Management for out eight years, 0:01:00.960 --> 0:01:03.680 and over the course of that period he was for 0:01:03.800 --> 0:01:08.240 twenty eight years on the board UH Vanguard. He is 0:01:08.280 --> 0:01:14.479 currently the Chief investment Officer of Wealth Front. Friends with 0:01:14.680 --> 0:01:20.319 other guests of the show like Jack Bogel and Charlie Ellis. Really, 0:01:21.920 --> 0:01:28.160 Professor Malkiel is unique UM in the annals of of investing. 0:01:28.240 --> 0:01:31.840 He's a rock Star. And I don't know if there 0:01:31.840 --> 0:01:36.240 are many people who are more knowledgeable and more influential 0:01:37.000 --> 0:01:40.759 uh than he is. So the man who pretty much 0:01:40.880 --> 0:01:46.520 invented the blindfolded monkey throwing darts, the person who suggested 0:01:47.440 --> 0:01:51.160 that Wall Street created an index fund so that investors 0:01:51.200 --> 0:01:57.040 could make low cost indexed investments. What else can I say? 0:01:57.400 --> 0:02:00.560 Why don't I say nothing else? And without any further 0:02:00.600 --> 0:02:08.600 ado my conversation with Bert Malkiel. This is Masters in 0:02:08.680 --> 0:02:13.639 Business with Barry Ridholds on Bloomberg Radio. My special guest today. 0:02:13.800 --> 0:02:15.400 And I know you make fun of me when I 0:02:15.440 --> 0:02:19.160 say that, but my special guest today is truly a 0:02:19.440 --> 0:02:22.519 special guest and a legend in the world of finance. 0:02:22.919 --> 0:02:26.440 Let me read just a short version of his curriculum vitae. 0:02:27.320 --> 0:02:31.840 His name is Professor Burton Malkiel. He used to be 0:02:32.000 --> 0:02:37.560 the Chemical Bank Professor of Economics at the Princeton uh 0:02:37.560 --> 0:02:40.040 A Princeton University. He is a two time chairman of 0:02:40.040 --> 0:02:44.040 the Economics Department, served as a member of the Council 0:02:44.080 --> 0:02:49.480 of Economic Advisors from to nineteen seventy seven, became president 0:02:49.720 --> 0:02:53.600 of the American Finance Association. After that, he was dean 0:02:53.760 --> 0:02:56.960 of the Yale School of Management in the eighties and 0:02:57.080 --> 0:03:02.400 spent twenty eight years as a director of the Vanguard Group. 0:03:03.000 --> 0:03:08.320 He's probably best known for authoring the book A Random 0:03:08.400 --> 0:03:12.079 Walk Down Wall Street. It's now and it's eleventh edition. 0:03:12.160 --> 0:03:16.360 The paperback just came out again last year, updated and 0:03:16.360 --> 0:03:22.440 revised for It's sold one point five million copies, and 0:03:22.520 --> 0:03:25.360 a number of people have said, if you read only 0:03:25.480 --> 0:03:29.280 one book about investing, Random Walk Down Wall Street is 0:03:29.320 --> 0:03:32.760 the one to read. Professor Malkiel, Welcome to Bloomberg. Thank 0:03:32.800 --> 0:03:37.440 you very enjoy being here, and I am am thrilled 0:03:37.920 --> 0:03:39.800 to have you. By the way, I left out so 0:03:39.880 --> 0:03:43.320 much from your c v UM bachelor's and NBA from 0:03:43.360 --> 0:03:46.240 Harvard and fifty three and fifty five doctorate from Princeton 0:03:46.280 --> 0:03:50.680 in sixty four. You're currently Chief investment Officer for wealth Front, 0:03:51.360 --> 0:03:56.360 which is a software based financial advisor. UM. The list 0:03:56.440 --> 0:03:59.240 goes on and on. I'm gonna stop that because if 0:03:59.280 --> 0:04:02.080 I keep discussing your CV will run out of time 0:04:02.120 --> 0:04:07.640 for questions. You're probably best known as someone who who 0:04:07.680 --> 0:04:13.040 was early in the history of recognizing that quote markets 0:04:13.080 --> 0:04:17.520 are efficient? Why are markets efficient? First of all, sometimes 0:04:17.640 --> 0:04:23.040 people get wrong what efficient markets mean. So giving a definition. 0:04:23.200 --> 0:04:25.159 So let me let me tell you the way I 0:04:25.320 --> 0:04:30.159 define it. There are two parts to uh the idea 0:04:30.160 --> 0:04:34.800 of efficient markets, and one part that many people associate 0:04:34.920 --> 0:04:37.839 with it that's wrong. The parts that are right are 0:04:38.040 --> 0:04:44.160 one that information gets reflected very quickly into stock prices. 0:04:44.680 --> 0:04:48.279 If there's some favorable news about a company UH that's 0:04:48.279 --> 0:04:51.719 going to increase at stock price ten percent, the stock 0:04:51.800 --> 0:04:55.320 price tends to go up ten percent right away because 0:04:55.400 --> 0:05:02.840 anybody who uh waits uh to uh get take advantage 0:05:02.839 --> 0:05:06.640 of it will find that quicker people have come in beforehand. 0:05:06.960 --> 0:05:12.479 So one information gets reflected right away. Now, what efficient 0:05:12.520 --> 0:05:17.359 markets is often associated with, which is wrong, is that 0:05:17.600 --> 0:05:22.080 efficient markets mean the price is always right. The price 0:05:22.360 --> 0:05:26.760 is exactly the present value of all of the dividends 0:05:26.800 --> 0:05:29.440 and earnings that are going to come in the future, 0:05:29.800 --> 0:05:33.880 and the price is perfectly right. That's wrong. The price 0:05:34.040 --> 0:05:37.839 is never right. In fact, prices are always wrong. What's 0:05:37.960 --> 0:05:42.240 right is that nobody knows for sure whether they're too 0:05:42.320 --> 0:05:46.600 high or too low. And that leads to the second 0:05:46.680 --> 0:05:50.520 point about efficient markets. It's not that the prices are 0:05:50.560 --> 0:05:57.279 always right, it's that it's never clear that they are wrong. 0:05:57.400 --> 0:06:01.920 There's nothing systematically wrong about out them. Therefore there are 0:06:02.000 --> 0:06:09.080 no arbitrage opportunities, and therefore the market is really very 0:06:09.200 --> 0:06:15.240 very difficult to beat, and so information gets reflected. The 0:06:15.360 --> 0:06:19.040 market's tough to beat. But prices are not always right. 0:06:19.440 --> 0:06:23.080 We know perfectly well they're always wrong, but nobody knows 0:06:23.200 --> 0:06:26.040 for sure whether they're too high or too low. We 0:06:26.040 --> 0:06:29.479 were recently having a discussion about fair value when people 0:06:29.520 --> 0:06:32.679 were complaining, well, the market is not at fair value, 0:06:32.880 --> 0:06:36.839 and my my response was, well, you just briefly pass 0:06:36.880 --> 0:06:39.800 fair value as you crean too much to the upside 0:06:39.839 --> 0:06:42.760 of too much to the downside. You're saying, even when 0:06:42.839 --> 0:06:45.560 you go by fair value, we don't really know exactly 0:06:45.640 --> 0:06:48.840 what we don't know. We don't know for sure. Look, 0:06:49.279 --> 0:06:54.839 we know perfectly well that in March of two thousand 0:06:55.360 --> 0:06:58.360 there was a bubble in the stock market. Uh. We 0:06:58.600 --> 0:07:04.280 had internet companies selling a triple digit multiples. We had 0:07:04.320 --> 0:07:08.680 companies changing their name uh to put dot com at 0:07:08.680 --> 0:07:10.880 the end of it, and the price would double. We 0:07:11.040 --> 0:07:14.760 know that there were crazy things going on. But the 0:07:14.880 --> 0:07:19.720 problem is the people who are associated with the view 0:07:20.160 --> 0:07:24.520 I told you so, I knew that. The problem is 0:07:24.840 --> 0:07:31.400 they knew it in and that's the problem. After the fact. 0:07:31.520 --> 0:07:34.880 We know perfectly well the prices were wrong. But the 0:07:34.960 --> 0:07:38.760 difficulty was the people who said we knew it, knew 0:07:38.800 --> 0:07:41.840 it early in the nineteen nineties and missed one of 0:07:41.880 --> 0:07:46.280 the best bull markets we've ever had. I very famously 0:07:46.360 --> 0:07:51.800 remember Lewis Rukaiser's his elves saying these things in nine six. 0:07:51.880 --> 0:07:54.760 He ended up demoting a few of them because they 0:07:54.760 --> 0:07:57.600 were right. Stocks were of valued. But so you missed 0:07:57.640 --> 0:08:03.480 four years of double digit gain this last collapse. I recall, 0:08:03.560 --> 0:08:08.480 in real time, very very few people were warning about credit, 0:08:08.480 --> 0:08:12.880 about derivatives, about housing. These days, I have meant more 0:08:12.960 --> 0:08:16.680 people who claim to have seen that collapse coming, and 0:08:16.720 --> 0:08:19.800 that would be a little bit of hindsight bias. Now exactly, 0:08:19.840 --> 0:08:24.840 and that's precisely the thing that happens uh before the fact. 0:08:25.480 --> 0:08:29.680 We really don't know and we don't know today. Are 0:08:29.720 --> 0:08:32.640 the is the stock market too high or too low? 0:08:32.960 --> 0:08:36.640 It's high now, there's no question valuations are stretched. But 0:08:36.720 --> 0:08:41.280 it's also the case that the short term government interest 0:08:41.360 --> 0:08:46.240 rate is zero and the long term interest rate after 0:08:46.440 --> 0:08:51.880 inflation is probably zero or below zero. So in that environment, 0:08:52.040 --> 0:08:56.120 everything is going to be more highly priced. I'm Barry 0:08:56.320 --> 0:08:59.720 Hults you're listening to Masters in Business on Bloomberg Radio. 0:09:00.320 --> 0:09:05.200 My special guest is Professor Burton Malkiel of Princeton and 0:09:05.880 --> 0:09:10.040 Vanguard and the author of A Random Walk Down Wall Street. 0:09:10.080 --> 0:09:13.560 The paperback is now and it's eleventh edition and it's 0:09:13.559 --> 0:09:16.680 sold a million and a half copies. Um, let's talk 0:09:16.720 --> 0:09:22.560 a little bit about indexing versus active management. Uh, there 0:09:22.640 --> 0:09:25.840 was a quote from the book that I've always enjoyed 0:09:25.880 --> 0:09:28.920 this number of quotes from the book, But you had 0:09:28.960 --> 0:09:34.400 said back in nineteen seventy three. Fund spokesman are quick 0:09:34.440 --> 0:09:37.359 to point out that you can't buy the market averages. 0:09:38.000 --> 0:09:42.440 It's time the public could so explain your role in 0:09:42.480 --> 0:09:46.280 the development of the index fund. Well, basically, I said 0:09:46.320 --> 0:09:50.760 that in nineteen seventy three, and the first index fund 0:09:51.400 --> 0:09:56.960 was not started until seventy six. Now, Uh, you know, 0:09:57.520 --> 0:10:00.600 I want to give Jack Bogle all the credit in 0:10:00.640 --> 0:10:06.160 the world, because it's one thing for an academic to say, hey, 0:10:06.200 --> 0:10:09.960 there ought to be index funds. It's another thing for 0:10:10.000 --> 0:10:14.640 somebody to bet his company on starting an index fund. 0:10:14.960 --> 0:10:19.120 And let me tell you it wasn't easy. At the beginning, 0:10:19.679 --> 0:10:23.079 they had an underwriting where they were hoping to do 0:10:23.160 --> 0:10:26.640 a hundred million or more in the index fund, and 0:10:26.720 --> 0:10:31.480 in fact the book wasn't oversubscribed. They sold eleven million. 0:10:31.960 --> 0:10:35.600 And sometimes I used to joke, because uh I then 0:10:35.720 --> 0:10:38.840 was on the Vanguard board that Jack Bogle and I 0:10:38.920 --> 0:10:41.480 were about the only people I knew who actually owned 0:10:41.520 --> 0:10:45.920 shares in the index fund. It was very, very slow 0:10:46.160 --> 0:10:50.280 to catch on, but it did catch on, UH, And 0:10:50.559 --> 0:10:56.120 in fact, last year, hundreds of millions of dollars moved 0:10:56.440 --> 0:11:01.960 from actively managed funds into index funds, and index funds 0:11:02.040 --> 0:11:06.480 now have maybe somewhere between thirty and thirty five percent 0:11:07.600 --> 0:11:14.680 of people's money of individuals or institutions, more institutional than individual. Uh. 0:11:14.720 --> 0:11:20.120 Individuals are slower to catch onto this, so with the 0:11:20.200 --> 0:11:25.560 institutions it's maybe thirty five or more. With individuals it's 0:11:25.600 --> 0:11:28.440 probably a bit less than thirty. But the point is 0:11:28.840 --> 0:11:33.120 the market is catching up to the idea, and UH, 0:11:33.160 --> 0:11:39.000 I am obviously simply delighted, since I've basically been an 0:11:39.040 --> 0:11:43.640 evangelist for index funds all my life. So Vanguard, you 0:11:43.640 --> 0:11:47.000 you mentioned your you you served with Jack Bogel, you 0:11:47.040 --> 0:11:49.680 were on the board for twenty eight years. They're now 0:11:49.800 --> 0:11:54.960 over three trillion, that's trillion, with of which two thirds 0:11:55.000 --> 0:11:58.800 are actively are actually passive indexes are Actually they still 0:11:58.840 --> 0:12:02.760 have about a third that our active management um. But 0:12:03.360 --> 0:12:07.800 that leads to a really interesting question. What's more significant 0:12:08.080 --> 0:12:12.040 the low cost aspect of it or the passive aspect 0:12:12.120 --> 0:12:15.240 of it of index Well, I think they're both both 0:12:15.240 --> 0:12:20.959 are important. Clearly, the low cost is important in that. Uh. 0:12:21.000 --> 0:12:23.120 You know, let me tell you, any of us who 0:12:23.440 --> 0:12:29.320 talk about financial markets need to be very modest about 0:12:29.360 --> 0:12:31.839 what we know and don't know. But let me tell 0:12:31.880 --> 0:12:35.360 you the one thing I'm absolutely sure about with respect 0:12:35.360 --> 0:12:39.800 to financial markets, and that is the lower the fee 0:12:40.000 --> 0:12:43.640 I pay to the purveyor of the investment service, the 0:12:43.720 --> 0:12:46.640 more that's going to be for me. And the problem 0:12:46.800 --> 0:12:52.000 is for active managers, it is still the case that 0:12:52.200 --> 0:12:55.840 probably a hundred basis points one percentage point a year 0:12:56.440 --> 0:13:00.719 is what they are charging, and the index or e 0:13:00.880 --> 0:13:05.960 t F, the exchange traded index fund charges five or 0:13:06.040 --> 0:13:12.040 four basis points uh. And that difference is basically a 0:13:12.280 --> 0:13:18.040 difference that comes to the investor. It's also the case 0:13:18.760 --> 0:13:23.200 that trading is not free. There are bitass spreads, there 0:13:23.200 --> 0:13:27.600 are market impact costs. Uh, It's not free. So there's 0:13:27.640 --> 0:13:32.360 an extract cost, uh, including what I think people do 0:13:32.440 --> 0:13:38.280 not appreciate, and that's the tax cost of the active trading. 0:13:38.600 --> 0:13:41.480 When you have an actively managed fund, you've got a 0:13:41.559 --> 0:13:43.640 ten ninety nine at the end of the year. Very 0:13:43.679 --> 0:13:46.760 often and they will say, Hey, we realize some short 0:13:46.880 --> 0:13:49.800 term and long term capital gains on your behalf, and 0:13:49.840 --> 0:13:52.360 you've got to report those on your income tax. You 0:13:52.440 --> 0:13:54.480 have a partner named Uncle Sam, and he's going to 0:13:54.559 --> 0:14:01.680 take exactly that. That's that's quite astonished. So how did 0:14:01.760 --> 0:14:05.440 I'm curious, how did you find your way to Vanguard 0:14:05.920 --> 0:14:09.600 from Princeton? Well, I think Vanguard found its way to 0:14:09.679 --> 0:14:15.000 me in that people knew UH that I had been 0:14:15.240 --> 0:14:23.760 a proselytizer for index funds. I believed in low cost UH, 0:14:23.800 --> 0:14:27.400 and so it was such a very natural fit. And 0:14:27.760 --> 0:14:30.760 Vanguard came to me. I didn't come to them. So 0:14:30.840 --> 0:14:33.320 let me throw another of your quotes from the book 0:14:33.320 --> 0:14:36.320 out that that I adore. And I'm curious as to 0:14:36.360 --> 0:14:39.360 the sort of pushback this generates. But by the way, 0:14:39.360 --> 0:14:42.480 we take this quote for granted, and I have found 0:14:42.480 --> 0:14:46.560 a number of quotes that are yours that a number 0:14:46.640 --> 0:14:50.240 of other people have have taken credit for. But in 0:14:50.680 --> 0:14:55.080 a random walkdown Wall Street, you wrote, a blindfolded monkey 0:14:55.120 --> 0:14:59.200 throwing darts at a newspaper's financial pages could select a 0:14:59.240 --> 0:15:03.200 portfolio that would do just as well as one selected 0:15:03.240 --> 0:15:07.240 carefully by the experts. What was the response to that. Oh, 0:15:07.400 --> 0:15:17.360 the response was really uh, definitely bad. Uh. The former 0:15:18.600 --> 0:15:23.360 Bloomberg business Week was just Business Week. And my book 0:15:23.760 --> 0:15:26.880 when it first came out, was reviewed by an investment 0:15:26.960 --> 0:15:31.120 professional in Business Week, and it was probably the worst 0:15:31.200 --> 0:15:34.760 review I've ever had in my life. The reviewers said, 0:15:34.840 --> 0:15:37.200 this is the biggest piece of garbage that you could 0:15:37.200 --> 0:15:44.680 possibly imagine, because professional uh, investment people really don't like 0:15:44.920 --> 0:15:52.080 to be compared to a blindfolded to blindfolded chimpanzee. So 0:15:52.200 --> 0:15:55.480 I remember for a long time the Wall Street maybe 0:15:55.480 --> 0:15:57.760 it was fifteen years they were doing this. The Wall 0:15:57.800 --> 0:16:01.880 Street Journal was literally throwing dar at stock pages and 0:16:01.960 --> 0:16:05.400 comparing that to any absolutely and in fact, they had 0:16:05.440 --> 0:16:09.440 invited me to throw out the first darts when they 0:16:09.480 --> 0:16:16.920 did this. And basically what they found was there was 0:16:17.120 --> 0:16:20.000 a little bit of an effect because when the Wall 0:16:20.040 --> 0:16:23.720 Street Journal put the column out, the column had five 0:16:23.840 --> 0:16:28.240 picks of the experts, and the expert picks, uh maybe 0:16:28.240 --> 0:16:31.400 got a little bit for a day. The price went 0:16:31.480 --> 0:16:35.080 up a bit, but generally, after the fifteen years of 0:16:35.120 --> 0:16:39.400 doing this, it came out basically pretty even. And you know, 0:16:39.480 --> 0:16:44.480 that really leads to a very very important point about indexing. 0:16:44.960 --> 0:16:47.800 You know, we talked about the markets being reasonably efficient. 0:16:48.120 --> 0:16:52.640 Suppose they weren't efficient. It doesn't matter when you think 0:16:52.680 --> 0:16:56.200 of it. All the stocks in the United States have 0:16:56.360 --> 0:17:00.400 to be held by somebody. Every share of General Motors 0:17:00.640 --> 0:17:05.280 is held by somebody. Every share of Facebook is held 0:17:05.320 --> 0:17:10.760 by somebody. Any every share of Salesforce is held by somebody. 0:17:10.800 --> 0:17:16.960 So what that means is if you, as a professional investor, 0:17:18.080 --> 0:17:24.960 hold just a few of the stocks, what that means 0:17:25.240 --> 0:17:28.080 is and say that they're the good ones, the ones 0:17:28.119 --> 0:17:31.600 that went up more than the market. What that has 0:17:31.640 --> 0:17:35.920 to mean is that somebody else is holding the stocks 0:17:36.359 --> 0:17:39.280 that went up less than the market. It it must 0:17:39.400 --> 0:17:44.119 follow that investing has to be a zero sum game. 0:17:44.640 --> 0:17:49.200 If somebody is outperforming, then somebody else has got to 0:17:49.280 --> 0:17:54.320 be underperforming because the index holds everything. And the reason 0:17:54.440 --> 0:17:59.159 the index fund wins is the index fund is holding 0:17:59.200 --> 0:18:04.240 everything and essentially charging a zero fee, and the active 0:18:04.280 --> 0:18:08.439 manager is holding some of the stocks and charging a 0:18:08.520 --> 0:18:14.480 one percent fee. So even if before fees, the active 0:18:14.520 --> 0:18:21.440 managers balanced each other out. After fees, they're going to underperform. 0:18:21.480 --> 0:18:26.600 And what we know, we know so clearly is year 0:18:26.960 --> 0:18:34.000 after year after year, the active funds are underperforming. Every year. 0:18:34.200 --> 0:18:36.439 I always read columns, this is going to be a 0:18:36.520 --> 0:18:40.040 stock pickers market year. You know, every year people are 0:18:40.080 --> 0:18:42.400 going to say that, or beginning of this year, there's 0:18:42.400 --> 0:18:44.920 going to be more of volatility. This year, the unactive 0:18:44.960 --> 0:18:49.280 managers will be able to outperform. And Standard in Pores 0:18:49.400 --> 0:18:53.200 does a so called SPIVA report each year Standard and 0:18:53.240 --> 0:18:56.840 Poor's indices versus active, and every year we get the 0:18:56.880 --> 0:19:03.359 same thing. Two thirds of the actively managed mutual funds 0:19:03.440 --> 0:19:08.200 underperformed the index, and the third that outperform in one 0:19:08.280 --> 0:19:11.520 year aren't the same as the third that outperformed in 0:19:11.520 --> 0:19:15.760 the next year. So that uh uh, you know, it's 0:19:15.840 --> 0:19:20.320 not that it's impossible to outperform, and in fact, there 0:19:20.359 --> 0:19:25.960 are a few outperformers, but when you go active, you're 0:19:26.160 --> 0:19:28.520 much more likely to be in the bottom end of 0:19:28.560 --> 0:19:33.840 the distribution. And index investing isn't mediocre investing, it isn't 0:19:33.880 --> 0:19:39.680 average investing. It's actually above average investing. I'm Barry rich Helts, 0:19:39.840 --> 0:19:43.640 You're listening to Masters in Business on Bloomberg Radio. My 0:19:43.720 --> 0:19:49.000 special guest today is Princeton Emeritus Professor Burton Malkiol. He 0:19:49.200 --> 0:19:52.680 is probably best known for his book A Random Walk 0:19:52.720 --> 0:19:57.000 Down Wall Street. The paperback is now in its eleventh edition. 0:19:57.040 --> 0:19:59.800 It's already sold over a million and a half co 0:20:00.080 --> 0:20:03.520 pies and is widely regarded as the one book to 0:20:03.520 --> 0:20:06.680 read on investing if you're only going to read one. Uh. 0:20:06.720 --> 0:20:11.960 He is also, in addition to a long and glorious 0:20:12.080 --> 0:20:16.360 uh academic career, he is also the chief investment officer 0:20:16.600 --> 0:20:20.080 of wealth Front, which is one of the larger new 0:20:20.760 --> 0:20:25.160 software driven asset management firms, which is running about three 0:20:25.200 --> 0:20:28.399 billion dollars. Is that about right? So how did you 0:20:28.440 --> 0:20:32.520 get involved with something like a robo advis or something 0:20:32.520 --> 0:20:36.760 like wealth Front? Well, again, they just as with Vanguard, 0:20:37.000 --> 0:20:43.320 they found they came to me rather than vice versa. Uh. 0:20:43.359 --> 0:20:48.320 And again it was just such a natural fit because 0:20:48.400 --> 0:20:54.080 a they use only index funds, and as you know, UH, 0:20:54.119 --> 0:20:57.040 that's what I have believed in all of my life. 0:20:57.560 --> 0:21:06.560 And secondly, uh, they are charging very low fees. They 0:21:06.640 --> 0:21:11.520 charge nothing for the first fifteen thousand dollars under management, 0:21:12.000 --> 0:21:16.440 and then they charge twenty five basis points a quarter 0:21:16.520 --> 0:21:22.080 of one percent on anything over there versus a traditional 0:21:22.200 --> 0:21:26.600 investment advisor that will put together a portfolio for you 0:21:27.080 --> 0:21:33.040 and charge probably at least one percent uh and sometimes 0:21:33.520 --> 0:21:38.560 even more. And the problem I think with many professional 0:21:38.600 --> 0:21:44.000 investment advisors is that we ought to recognize that they 0:21:44.040 --> 0:21:48.600 often have a conflict of interest. What I think is 0:21:48.640 --> 0:21:52.399 not as well known as it should be is that 0:21:52.560 --> 0:21:55.840 if you go to an investment advisor who sits down 0:21:55.880 --> 0:22:00.680 with you and says, okay, we'll put together a portfolio 0:22:00.880 --> 0:22:06.960 for you, that that advisor gets paid for selling you 0:22:07.160 --> 0:22:11.399 an actively managed fund. It's not only that the fund 0:22:11.440 --> 0:22:15.879 itself is charging you maybe one but there's a conflict 0:22:15.920 --> 0:22:20.119 of interests the advisor. UH. In fact, that's one of 0:22:20.160 --> 0:22:23.000 the reasons why there's such a battle now about the 0:22:23.080 --> 0:22:28.840 so called fiduciary standard. And again what this advisor UH, 0:22:29.000 --> 0:22:33.240 this automated advisor, we have no conflict of interests. We 0:22:33.400 --> 0:22:36.240 just use In fact, UH, we use a lot of 0:22:36.320 --> 0:22:40.200 Vanguard ETFs. But if Charles Schwab has a cheaper et 0:22:40.400 --> 0:22:44.159 f H, we will use that and we are able 0:22:44.359 --> 0:22:49.760 to automatically rebalance the portfolio to keep it within the 0:22:50.000 --> 0:22:57.120 risk level that the client wants. If it's a taxable account, Uh, 0:22:57.359 --> 0:23:02.560 we do uh tax loss harvesting. I mean, for example, Uh, 0:23:02.680 --> 0:23:06.879 last year, we had a bit of the portfolio in 0:23:07.119 --> 0:23:12.200 emerging markets. Emerging markets were terrible last year, so that 0:23:12.280 --> 0:23:15.000 if you bought an emerging market e t F you 0:23:15.119 --> 0:23:19.800 had a loss. What we will then do is we 0:23:19.920 --> 0:23:26.560 will then sell that e t F keep your position 0:23:26.720 --> 0:23:31.080 in emerging markets by buying another one that's similar but 0:23:31.280 --> 0:23:34.840 not identical. And the reason you can do that and 0:23:34.920 --> 0:23:38.560 have it not be a wash sale is say you 0:23:38.720 --> 0:23:41.840 sell an M S c I Emerging market e t 0:23:42.119 --> 0:23:46.640 F and you buy a Vanguard one. They are index 0:23:46.760 --> 0:23:50.520 to two different indices, so it's not a wash sale. 0:23:50.920 --> 0:23:54.480 And so we're able to do all the things that 0:23:54.680 --> 0:24:00.480 a sophisticated investment advisor will do for you and do 0:24:00.600 --> 0:24:04.160 it at a fraction of the cost. And again, as 0:24:04.200 --> 0:24:07.919 I said before, the thing I'm sure about is the 0:24:08.119 --> 0:24:11.280 lower the costs that I pay, the more that's gonna 0:24:11.320 --> 0:24:15.920 be for me. And Uh, I think it's been very 0:24:15.960 --> 0:24:21.480 effective and in fact, in a lousy year like last year, 0:24:22.400 --> 0:24:28.400 we were able to realize for various accounts between two 0:24:28.480 --> 0:24:33.919 and three percentage points of tax losses, so that even 0:24:34.000 --> 0:24:37.280 in a year when markets were pretty darn flat and 0:24:37.440 --> 0:24:41.400 did very little, we were able to, uh, I think 0:24:41.400 --> 0:24:45.720 benefit the people who are our clients. So so within 0:24:45.840 --> 0:24:49.320 this and I find the term robo adviser to be 0:24:49.440 --> 0:24:52.240 a little misleading. But well, I don't like it because 0:24:52.240 --> 0:24:57.639 it suggests that, in fact, you know, there's some senseless 0:24:57.800 --> 0:25:02.240 robot who's doing it, and so time the chief investment officer, 0:25:02.800 --> 0:25:05.600 I can tell you that, in fact, there are a 0:25:05.600 --> 0:25:10.040 lot of smart people behind what we are doing. I'm 0:25:10.080 --> 0:25:12.720 Barry rich Hults. You're listening to Masters in Business on 0:25:12.760 --> 0:25:17.560 Bloomberg Radio. My special guest today is Professor Burton Malkiel, 0:25:17.840 --> 0:25:23.520 formerly of Princeton where he is still UH professor emeritus, 0:25:24.240 --> 0:25:27.679 a former board member of Vanguard for twenty eight years, 0:25:28.160 --> 0:25:32.440 and author, now in its eleventh edition, A Random Walk 0:25:32.480 --> 0:25:35.359 Down Wall Street. Uh. The book has sold over a 0:25:35.400 --> 0:25:38.240 million and a half copies. UH. Let's talk a little 0:25:38.240 --> 0:25:41.760 bit about um some other guests I've had on the 0:25:41.800 --> 0:25:45.680 show that that you know, so you worked with Jack 0:25:45.760 --> 0:25:48.320 Bogel for a number of years. He was a guest 0:25:48.320 --> 0:25:51.080 on the show a few months ago. What can you 0:25:51.119 --> 0:25:54.960 tell us about Jack that that we probably don't know. Well, 0:25:55.040 --> 0:25:58.080 I don't know whether you know. Jack is very well known, 0:25:58.160 --> 0:26:04.399 and I think the some of his habits are uh 0:26:04.440 --> 0:26:07.760 probably better known than the habits of some of your 0:26:07.800 --> 0:26:11.480 other guests. But one of the things about Jack is 0:26:11.640 --> 0:26:16.800 that maybe people don't know, is this idea of low 0:26:16.920 --> 0:26:21.879 cost uh is really into his DNA. This is a 0:26:21.960 --> 0:26:27.240 guy who will go to a hotel uh and when 0:26:27.280 --> 0:26:29.879 they say, well, we've got a very good room and 0:26:29.920 --> 0:26:32.800 we've got a bargain, uh it's a hundred and fifty 0:26:32.840 --> 0:26:36.320 dollars a night. Jack will go and say, well, do 0:26:36.359 --> 0:26:39.040 you have anything at a hundred dollars a night? Jack 0:26:39.560 --> 0:26:44.479 has this sort of calvinist streak uh that uh uh 0:26:44.720 --> 0:26:49.840 he uh as much money as he has, and he's 0:26:49.840 --> 0:26:55.560 certainly been very successful financially, just lives his life as 0:26:55.760 --> 0:27:01.440 frugally as you can imagine. And of course I think 0:27:01.560 --> 0:27:06.600 that's really what has gotten into his company. A vanguard 0:27:06.760 --> 0:27:12.320 that uh, that's really into Jack's uh d n A. 0:27:13.119 --> 0:27:15.760 And you know the interesting thing, I'll tell you one 0:27:15.800 --> 0:27:22.480 other little funny story about Jack Vogel. So many Wall 0:27:22.520 --> 0:27:27.520 Street people, uh have you know the eight thousand dollar 0:27:28.320 --> 0:27:33.560 watch on and uh the Italian Uh the Italian suits 0:27:33.640 --> 0:27:37.520 and so forth. Uh, Jack is always sort of in 0:27:37.600 --> 0:27:43.040 a rumpled suit. And interestingly enough, when he first met 0:27:43.160 --> 0:27:47.600 Warren Buffett, Uh, they were actually at a hotel together 0:27:47.880 --> 0:27:53.520 and Jack recognized Warren went up and introduced himself, and 0:27:53.640 --> 0:27:56.160 he said to Warren, you know, the thing I really 0:27:56.200 --> 0:28:00.080 like about you is you have rumpled suits just the 0:28:00.080 --> 0:28:04.439 same as as I do. And Jack and Warren have 0:28:04.600 --> 0:28:07.840 become very very good friends. And as you probably know, 0:28:08.040 --> 0:28:12.040 because Warren is the sort of exception to indexing that 0:28:12.119 --> 0:28:16.320 everybody mentions that. Warren has said, I've got told my 0:28:16.400 --> 0:28:21.119 widow when I'm gone, I just want you to own 0:28:21.520 --> 0:28:25.960 index funds. So there's a couple of things about Jack. 0:28:26.000 --> 0:28:30.680 He's been a lifelong friend and uh, just a wonderful guy. 0:28:30.880 --> 0:28:35.560 But Buffett has said publicly most people should be in indexes. 0:28:35.640 --> 0:28:39.640 That absolutely what what the average person should be doing. 0:28:40.160 --> 0:28:44.280 But so let's talk a second about Buffett, because when 0:28:44.280 --> 0:28:48.280 we talk about the efficient the concept about the efficient 0:28:48.320 --> 0:28:54.080 market hypothesis, the name that always comes up is Warren Buffett. 0:28:54.640 --> 0:28:57.920 Is is he an outlier? Is he lucky? Or is 0:28:57.960 --> 0:29:03.120 he uniquely skilled? Look? I think he is enormously skilled. 0:29:03.160 --> 0:29:07.120 I wouldn't take anything away from him, but he's also 0:29:08.000 --> 0:29:11.400 a very good businessman. Let me tell you a little story. 0:29:12.240 --> 0:29:14.920 At one point, when I was the dean of the 0:29:15.000 --> 0:29:21.240 Yale Management School, we had Katherine Graham come to speak 0:29:21.400 --> 0:29:27.600 to our class, and uh, she fortunately got the time wrong, 0:29:27.960 --> 0:29:31.120 but not to come an hour later an hour earlier. 0:29:31.480 --> 0:29:33.560 So I was able to sit down with her for 0:29:33.640 --> 0:29:35.760 about an hour. And of course, the first thing I 0:29:35.800 --> 0:29:39.120