1
00:00:03,240 --> 00:00:07,560
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.

2
00:00:08,119 --> 00:00:10,400
Speaker 1: My guest today, and I know I say this every

3
00:00:10,440 --> 00:00:14,840
Speaker 1: week my special guest is, but really my guest this

4
00:00:14,920 --> 00:00:20,200
Speaker 1: week is Finance Royalty. Charlie Ellis. Where do I begin

5
00:00:20,680 --> 00:00:25,919
Speaker 1: describing this gentleman? And he is truly a gentleman. He

6
00:00:26,079 --> 00:00:30,600
Speaker 1: is old school, he comes from a different world. Um

7
00:00:31,360 --> 00:00:34,080
Speaker 1: I I we were jokingly saying, I don't know if

8
00:00:34,080 --> 00:00:37,000
Speaker 1: I've ever met a finer human being other than him

9
00:00:37,080 --> 00:00:40,520
Speaker 1: or Arthur Levitt. It's a race to see which gentleman

10
00:00:40,640 --> 00:00:44,120
Speaker 1: is is more um of of a fantastic human being.

11
00:00:44,600 --> 00:00:48,800
Speaker 1: A little background about Charlie. Undergraduate, he goes to Yale

12
00:00:49,000 --> 00:00:51,879
Speaker 1: Majors in Art History, comes out, doesn't know what to

13
00:00:51,920 --> 00:00:56,040
Speaker 1: do with himself, sort of wanders into Harvard Business School

14
00:00:56,640 --> 00:00:59,080
Speaker 1: and discovers that he really enjoys that. He called it

15
00:00:59,320 --> 00:01:04,200
Speaker 1: the most transformative two years of his life. Comes out

16
00:01:04,200 --> 00:01:07,520
Speaker 1: of Harvard and and eventually just kind of wanders into

17
00:01:07,560 --> 00:01:12,119
Speaker 1: the Rockefeller family office and tells a delightful story about

18
00:01:12,160 --> 00:01:16,520
Speaker 1: how they discovered he essentially knew nothing about investing. Charlie,

19
00:01:16,600 --> 00:01:19,319
Speaker 1: didn't they teach anything in the Harvard Business School? Not

20
00:01:19,440 --> 00:01:22,000
Speaker 1: about investing. It was about business. And so he ends

21
00:01:22,040 --> 00:01:25,520
Speaker 1: up going to n y U and, as he describes it,

22
00:01:25,800 --> 00:01:28,280
Speaker 1: getting a doctorate. And I won't spoil the story, I'll

23
00:01:28,319 --> 00:01:30,880
Speaker 1: let I'll let him tell you. But then his resume,

24
00:01:31,040 --> 00:01:36,800
Speaker 1: as if that wasn't enough, just continues to accumulate accolades

25
00:01:36,840 --> 00:01:39,959
Speaker 1: and awards and everything else. Uh. He he works at

26
00:01:40,040 --> 00:01:42,640
Speaker 1: d l J and then he sets up Greenwich Associates,

27
00:01:42,920 --> 00:01:46,679
Speaker 1: where he is essentially a consultant to the financial services industry.

28
00:01:47,440 --> 00:01:53,120
Speaker 1: He is on the Yale Endowment Board of Managers where

29
00:01:53,120 --> 00:01:56,360
Speaker 1: he's a chairman with David Swinson, who's the c i O.

30
00:01:56,920 --> 00:02:00,240
Speaker 1: He's won all manner of awards from all sorts of people. Well,

31
00:02:00,720 --> 00:02:05,320
Speaker 1: how I know Charlie Ellis was from a short essay

32
00:02:05,440 --> 00:02:10,440
Speaker 1: that he wrote in and I read it decades afterwards,

33
00:02:10,480 --> 00:02:13,760
Speaker 1: called the Loser's Game. And and why this is so

34
00:02:13,840 --> 00:02:20,480
Speaker 1: important for investors. Charlie reads a book about tennis, Extraordinary

35
00:02:20,520 --> 00:02:24,760
Speaker 1: Tennis for Ordinary Players, and the book describes how tennis

36
00:02:24,840 --> 00:02:28,919
Speaker 1: is really two games in one. There is the professional

37
00:02:29,040 --> 00:02:31,560
Speaker 1: game and the amateur game. And why do we say

38
00:02:31,560 --> 00:02:35,240
Speaker 1: there are two games in one? Well, the way professionals

39
00:02:35,320 --> 00:02:39,720
Speaker 1: win is they outscore their opponent. They place the ball

40
00:02:39,880 --> 00:02:44,760
Speaker 1: with great force and accuracy just outside of their opponent's reach.

41
00:02:45,360 --> 00:02:50,440
Speaker 1: So professionals win tennis games, on the other hand, And

42
00:02:50,480 --> 00:02:54,000
Speaker 1: by the way, that's professionals playing other professionals. So even

43
00:02:54,040 --> 00:02:57,200
Speaker 1: when a professional, when the score is such that one

44
00:02:57,240 --> 00:03:00,920
Speaker 1: professional has lost to another professional, it's because he was

45
00:03:01,120 --> 00:03:05,360
Speaker 1: beaten by the winning player. Compare that with amateurs. The

46
00:03:05,400 --> 00:03:11,680
Speaker 1: way amateurs play tennis, they lose games. Amateurs try too hard,

47
00:03:12,080 --> 00:03:14,840
Speaker 1: they hit the ball too far, they double fault when

48
00:03:14,919 --> 00:03:18,720
Speaker 1: they serve, they hit the ball into the net. Amateurs

49
00:03:18,720 --> 00:03:22,320
Speaker 1: have lots and lots of unforced errors. And so when

50
00:03:22,400 --> 00:03:25,600
Speaker 1: you have two amateurs playing each other, it's not that

51
00:03:25,680 --> 00:03:27,840
Speaker 1: one of them has beaten to the other, It's that

52
00:03:27,919 --> 00:03:31,680
Speaker 1: one of them has lost more points than the other

53
00:03:31,880 --> 00:03:36,400
Speaker 1: and therefore loses. Professionals score more points and win. Two

54
00:03:36,400 --> 00:03:42,600
Speaker 1: professionals playing each other, amateurs essentially defeat themselves. And to

55
00:03:42,840 --> 00:03:46,400
Speaker 1: Charlie's great credit, and here it is in it's the

56
00:03:46,400 --> 00:03:49,160
Speaker 1: middle of a bear market, who is even thinking in

57
00:03:49,200 --> 00:03:53,240
Speaker 1: these terms? He looks at this book about tennis and

58
00:03:53,320 --> 00:03:59,640
Speaker 1: draws the analogy to investors. Investors lose all the time,

59
00:04:00,320 --> 00:04:05,120
Speaker 1: even professionals who in theory, should be hitting harder, more accurately,

60
00:04:05,200 --> 00:04:08,520
Speaker 1: and just outside of their opponent's reach. As he describes it,

61
00:04:08,640 --> 00:04:12,720
Speaker 1: the competition is so intense. There are so many bright,

62
00:04:13,440 --> 00:04:20,400
Speaker 1: well learned, knowledgeable, intense competitive players in the marketplace that

63
00:04:20,480 --> 00:04:23,120
Speaker 1: they all sort of cancel each other out. And the

64
00:04:23,160 --> 00:04:26,760
Speaker 1: advantage of indexing and Charlie Ellis's view is that when

65
00:04:26,760 --> 00:04:28,599
Speaker 1: you have all these smart people and they all cancel

66
00:04:28,680 --> 00:04:31,760
Speaker 1: each other out, a you can compete with them as

67
00:04:31,760 --> 00:04:34,320
Speaker 1: an amateur. You certainly would never step on to the

68
00:04:34,360 --> 00:04:36,720
Speaker 1: field of a football game on a Sunday and play

69
00:04:36,760 --> 00:04:39,960
Speaker 1: with the pros. They need three gurneys to carry you

70
00:04:39,960 --> 00:04:42,640
Speaker 1: off the field to play. It's the same thing you

71
00:04:42,680 --> 00:04:45,799
Speaker 1: step onto the gridiron, you step into the professional trading

72
00:04:46,520 --> 00:04:49,719
Speaker 1: as an amateur, and you're up against the biggest, smartest, strongest,

73
00:04:49,760 --> 00:04:52,640
Speaker 1: fastest firms who have all the tools and everything they

74
00:04:52,640 --> 00:04:55,640
Speaker 1: need to beat you. But they're all competing against each other.

75
00:04:55,680 --> 00:04:59,560
Speaker 1: And what ends up happening is low cost, low activity

76
00:04:59,640 --> 00:05:02,479
Speaker 1: INDE funds over the long hole tend to be the

77
00:05:02,520 --> 00:05:07,040
Speaker 1: best opportunity for most individuals. Uh. This is a tremendous

78
00:05:07,040 --> 00:05:11,599
Speaker 1: insight that he developed. Not just why indexing works. But

79
00:05:11,839 --> 00:05:16,600
Speaker 1: the way that amateur investors managed to hurt themselves, and

80
00:05:16,680 --> 00:05:19,480
Speaker 1: no matter how good the pros are, how they all

81
00:05:19,560 --> 00:05:23,240
Speaker 1: essentially cross, you know, cancel each other out, is really

82
00:05:23,320 --> 00:05:27,200
Speaker 1: a fascinating insight. Uh. And and from that he's built

83
00:05:27,279 --> 00:05:31,440
Speaker 1: a just a tremendous body of work and a tremendous

84
00:05:31,440 --> 00:05:35,800
Speaker 1: reputation as an investor, as an advisor, as a consultant

85
00:05:36,440 --> 00:05:40,680
Speaker 1: um to a number of very very large financial institutions.

86
00:05:40,720 --> 00:05:44,320
Speaker 1: If if you can name a firm off the top

87
00:05:44,360 --> 00:05:48,240
Speaker 1: of your head, there's a fair probability that Charlie Ellis

88
00:05:48,279 --> 00:05:50,919
Speaker 1: has consulted with them and giving them advice as to

89
00:05:50,960 --> 00:05:54,160
Speaker 1: how they should be running their business as well as

90
00:05:54,160 --> 00:05:57,640
Speaker 1: how they should be managing their money. So I just

91
00:05:57,960 --> 00:06:00,280
Speaker 1: found it. I was tickled pink to to sit with

92
00:06:00,360 --> 00:06:03,040
Speaker 1: him for a couple of hours after the show. I

93
00:06:03,120 --> 00:06:05,839
Speaker 1: walked him over to the Yale Club where he had

94
00:06:05,880 --> 00:06:08,240
Speaker 1: an event that that night, and he was just a

95
00:06:08,320 --> 00:06:11,760
Speaker 1: delight to walk down the streets of New York on St.

96
00:06:11,800 --> 00:06:15,120
Speaker 1: Patty's Day and just talk about everything that was going

97
00:06:15,160 --> 00:06:17,280
Speaker 1: around in the city around us. I found him to

98
00:06:17,320 --> 00:06:20,680
Speaker 1: be utterly charming. It was my pleasure to spend a

99
00:06:20,760 --> 00:06:25,120
Speaker 1: day with him without further ado. My conversation with Charlie Ellis.

100
00:06:28,440 --> 00:06:32,760
Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.

101
00:06:33,240 --> 00:06:37,240
Speaker 1: I am actually extremely privileged this week to have really

102
00:06:37,279 --> 00:06:41,320
Speaker 1: financial royalty in the room. My guest is Charlie Ellis.

103
00:06:41,760 --> 00:06:45,359
Speaker 1: Say hello, Charlie, How can I say anything after that introduction?

104
00:06:45,360 --> 00:06:48,920
Speaker 1: It's it's gonna get worse. So a little background about

105
00:06:48,960 --> 00:06:51,960
Speaker 1: who Mr Ellis is. Dr Ellis. You don't really go

106
00:06:52,040 --> 00:06:54,839
Speaker 1: by doctor, do you know? It doesn't work very well,

107
00:06:54,839 --> 00:06:58,760
Speaker 1: but it's very good for making reservations at restaurants. So

108
00:06:59,200 --> 00:07:03,000
Speaker 1: Charlie began his academic career. He received at Yale. He

109
00:07:03,000 --> 00:07:06,760
Speaker 1: received a b a in art history, subsequently went to

110
00:07:07,080 --> 00:07:11,600
Speaker 1: the Harvard Business School, and almost on a lark, ended

111
00:07:11,680 --> 00:07:14,920
Speaker 1: up getting a pH d in finance and economics at

112
00:07:15,040 --> 00:07:18,680
Speaker 1: n y U and then became a Charter c f

113
00:07:18,800 --> 00:07:22,720
Speaker 1: a UH Certified Financial Analyst in nineteen sixty nine. Now

114
00:07:22,760 --> 00:07:25,840
Speaker 1: that's a pretty good background for most people, but that

115
00:07:26,000 --> 00:07:29,400
Speaker 1: wasn't where we stopped. Charlie eventually gets appointed to the

116
00:07:29,440 --> 00:07:33,280
Speaker 1: faculty of the Harvest Business School. He becomes a director

117
00:07:33,880 --> 00:07:37,160
Speaker 1: of the Vanguard Group, joins them Yale School of Management

118
00:07:37,960 --> 00:07:40,520
Speaker 1: six and then becomes the Chairman of the board of

119
00:07:40,560 --> 00:07:43,840
Speaker 1: the cf A Institute, and then the awards start to come.

120
00:07:43,880 --> 00:07:46,880
Speaker 1: He's one of a dozen people in the world who

121
00:07:46,960 --> 00:07:51,200
Speaker 1: was recognized for their lifetime contributions to the investment profession

122
00:07:51,280 --> 00:07:54,280
Speaker 1: by the cf A, the Yale Medal of Honor for

123
00:07:54,320 --> 00:07:57,400
Speaker 1: a service to the University, the Harvard Business School Alumni

124
00:07:57,480 --> 00:08:01,640
Speaker 1: Award for Lifelong Service. He is the author of sixteen

125
00:08:01,880 --> 00:08:06,120
Speaker 1: books on investing and really there is there are a

126
00:08:06,160 --> 00:08:08,920
Speaker 1: few people in the world who have his depth and

127
00:08:09,080 --> 00:08:11,720
Speaker 1: breath of knowledge. I've been a fan of yours. I've

128
00:08:11,720 --> 00:08:14,080
Speaker 1: been reading your work for a long time. I'm an

129
00:08:14,200 --> 00:08:19,000
Speaker 1: enormous fan of Winning the Loser's Game, which was started

130
00:08:19,000 --> 00:08:23,559
Speaker 1: out as a paper back in and then became book.

131
00:08:24,000 --> 00:08:26,720
Speaker 1: But reading that background, the first question I have to

132
00:08:26,760 --> 00:08:31,120
Speaker 1: ask you, how do you go from art history to finance? Well,

133
00:08:31,160 --> 00:08:33,600
Speaker 1: first off all, unless you're really good at our history,

134
00:08:33,600 --> 00:08:36,680
Speaker 1: there's no destination. There no money. No money in art history,

135
00:08:36,800 --> 00:08:39,200
Speaker 1: no money. You really have to be very good to

136
00:08:39,200 --> 00:08:41,640
Speaker 1: get to the top of the group. And at the

137
00:08:41,640 --> 00:08:44,160
Speaker 1: top of the group it's quiet and lonely, and I

138
00:08:44,200 --> 00:08:47,000
Speaker 1: realized I'm a social guy. I didn't want to do that. Okay,

139
00:08:47,080 --> 00:08:51,160
Speaker 1: So you come out of business school and totally unprepared

140
00:08:51,200 --> 00:08:55,280
Speaker 1: for anything, unprepared for anything, yet Goldman Sachs offers you

141
00:08:55,320 --> 00:08:58,240
Speaker 1: a job. And the story is they offered you a

142
00:08:58,320 --> 00:09:01,520
Speaker 1: job at forty dollars a year and you were looking

143
00:09:01,559 --> 00:09:04,480
Speaker 1: for five thousand, and you said thanks, but no thanks.

144
00:09:05,559 --> 00:09:07,960
Speaker 1: That's roughly right. They didn't actually offer me the job.

145
00:09:08,000 --> 00:09:10,880
Speaker 1: They posted a job people who would like to apply

146
00:09:11,120 --> 00:09:13,839
Speaker 1: for the job. And I was very interested in Goldman

147
00:09:13,920 --> 00:09:15,720
Speaker 1: Sash because my father was a lawyer and he said

148
00:09:15,720 --> 00:09:17,880
Speaker 1: it's the best firm on Wall Street. It's not the

149
00:09:17,960 --> 00:09:20,520
Speaker 1: leading firm yet, but it will be, and that was

150
00:09:20,559 --> 00:09:22,480
Speaker 1: a kind of outfit I wanted to join. But when

151
00:09:22,559 --> 00:09:24,880
Speaker 1: I looked at the ticket as to what you're gonna

152
00:09:24,920 --> 00:09:28,680
Speaker 1: get paid, I realized it's not gonna work. Because I

153
00:09:28,720 --> 00:09:31,319
Speaker 1: was getting married to a wonderful woman who had gone

154
00:09:31,360 --> 00:09:34,760
Speaker 1: through Wellesley College on scholarship and loans, and the commitment

155
00:09:34,800 --> 00:09:37,400
Speaker 1: to Wellesley was you'd pay off the loans, and I

156
00:09:37,440 --> 00:09:39,160
Speaker 1: knew I was going to have to do it. So

157
00:09:39,240 --> 00:09:42,280
Speaker 1: you needed five thousand. I needed a full five thousand.

158
00:09:43,000 --> 00:09:45,199
Speaker 1: Your dad actually turned out to be quite pressing, and

159
00:09:45,320 --> 00:09:47,480
Speaker 1: I think you were in If I read your bio right,

160
00:09:47,559 --> 00:09:50,240
Speaker 1: you were in the seventh grade. Your father was an attorney,

161
00:09:50,320 --> 00:09:52,760
Speaker 1: said Charlie, I don't think law school is going to

162
00:09:52,840 --> 00:09:55,800
Speaker 1: be for you. It wasn't all love and affection. It

163
00:09:55,880 --> 00:09:58,839
Speaker 1: was being very, very realistic. We got along wonderfully well.

164
00:09:59,080 --> 00:10:00,920
Speaker 1: I had a great father, the great mother too, and

165
00:10:00,920 --> 00:10:03,480
Speaker 1: it was one of the lucky blessings of a lifetime.

166
00:10:03,840 --> 00:10:06,760
Speaker 1: But Dad had gone into the law knowing that they

167
00:10:06,800 --> 00:10:10,000
Speaker 1: were wonderful people practicing law, and he had two or

168
00:10:10,080 --> 00:10:13,120
Speaker 1: three really powerful arguments. Number One, I wasn't cut out

169
00:10:13,160 --> 00:10:16,080
Speaker 1: for the law because I'm not fundamentally a scholar. I

170
00:10:16,080 --> 00:10:18,240
Speaker 1: can learn things, but I'm not what you'd call a

171
00:10:18,320 --> 00:10:21,040
Speaker 1: real scholar, so I'm not gonna have the private satisfaction.

172
00:10:21,200 --> 00:10:24,120
Speaker 1: Second thing is an enormous number of people went through

173
00:10:24,200 --> 00:10:26,240
Speaker 1: law school and the g I Bill after the Second

174
00:10:26,240 --> 00:10:28,280
Speaker 1: World War, and they were coming into practice, and they

175
00:10:28,280 --> 00:10:30,920
Speaker 1: were filling up the law firms with very talented people

176
00:10:31,280 --> 00:10:33,720
Speaker 1: who were ten years older than I was, and that

177
00:10:33,840 --> 00:10:35,760
Speaker 1: was going to make a really big difference. I wasn't

178
00:10:35,800 --> 00:10:38,000
Speaker 1: going to get the chance to advance and promote myself

179
00:10:38,040 --> 00:10:40,560
Speaker 1: along the way. And the third thing is Dad said,

180
00:10:40,600 --> 00:10:44,400
Speaker 1: you know, the law, which I have loved, is shifting

181
00:10:44,440 --> 00:10:47,200
Speaker 1: from being a profession to being a business. And if

182
00:10:47,200 --> 00:10:49,360
Speaker 1: you're going to go into a business, the least you

183
00:10:49,360 --> 00:10:52,520
Speaker 1: can do is going to a real business instead of

184
00:10:52,559 --> 00:10:55,360
Speaker 1: struggling with a shift from profession to law. Where don't

185
00:10:55,360 --> 00:10:57,959
Speaker 1: you go into business? You've got a an appetite for

186
00:10:58,120 --> 00:10:59,920
Speaker 1: working with other people, and you'd like to be a

187
00:11:00,120 --> 00:11:03,960
Speaker 1: leader in organizations and I think you'd be happier that that.

188
00:11:04,120 --> 00:11:07,600
Speaker 1: That leads to something you said about the financial profession,

189
00:11:07,720 --> 00:11:10,600
Speaker 1: which is it should be a profession, but it's not.

190
00:11:10,640 --> 00:11:13,280
Speaker 1: It's actually a business. Well, parts of it should be

191
00:11:13,320 --> 00:11:17,559
Speaker 1: a profession. For example, investment banking should be a profession. Uh,

192
00:11:17,800 --> 00:11:22,079
Speaker 1: Investment management most definitely should be a profession. Investment analysis

193
00:11:22,480 --> 00:11:25,240
Speaker 1: is a profession if it's played well, and it should

194
00:11:25,240 --> 00:11:28,959
Speaker 1: be run as a profession. But trading is not really

195
00:11:29,000 --> 00:11:31,400
Speaker 1: a profession. And you want to recognize that trading is

196
00:11:31,400 --> 00:11:33,960
Speaker 1: a business. And what's happened in Wall Street over the

197
00:11:34,040 --> 00:11:37,200
Speaker 1: last twenty years is trading has become the dominant business

198
00:11:37,600 --> 00:11:40,800
Speaker 1: for everybody, and so everybody is whether they like it

199
00:11:40,920 --> 00:11:43,040
Speaker 1: or not, in business, it's sort of like winter weather,

200
00:11:43,280 --> 00:11:45,400
Speaker 1: whether you like it or not. It's coming, it's there.

201
00:11:45,679 --> 00:11:48,400
Speaker 1: You better button up, brace yourself for it. So so

202
00:11:48,480 --> 00:11:51,360
Speaker 1: you started out not too long after that, you were

203
00:11:51,520 --> 00:11:54,120
Speaker 1: briefly at w G b H in Boston, and then

204
00:11:54,160 --> 00:11:58,120
Speaker 1: you ended up in the Rockefeller family office. How did

205
00:11:58,160 --> 00:12:01,080
Speaker 1: that come about? Just lucky and it's a string of

206
00:12:01,080 --> 00:12:03,040
Speaker 1: good luck. While I was at w G b H,

207
00:12:03,520 --> 00:12:07,680
Speaker 1: wonderful woman who was my age and was a volunteer,

208
00:12:08,280 --> 00:12:10,480
Speaker 1: cut my eye and I said, she's I'd really like

209
00:12:10,600 --> 00:12:12,760
Speaker 1: to get to know her. So I asked her for lunch,

210
00:12:12,760 --> 00:12:15,160
Speaker 1: and then we talked more and more. We started really

211
00:12:15,480 --> 00:12:18,360
Speaker 1: pretty serious dating, and we're still friends today. And she

212
00:12:18,440 --> 00:12:20,240
Speaker 1: said to me one day, you know, Charlie, you should

213
00:12:20,240 --> 00:12:22,400
Speaker 1: go to the B School. And I said, what is

214
00:12:22,559 --> 00:12:25,760
Speaker 1: a B school? She said, a business school? For goodness sake.

215
00:12:25,760 --> 00:12:28,240
Speaker 1: I said, when you say, the B school is the

216
00:12:28,360 --> 00:12:29,680
Speaker 1: only one, she said, no, they're a bunch of them,

217
00:12:29,679 --> 00:12:31,600
Speaker 1: but there's only one that you really ought to take seriously,

218
00:12:31,600 --> 00:12:35,000
Speaker 1: and that's the Harvard Business School. So I applied and

219
00:12:35,040 --> 00:12:36,920
Speaker 1: I got in. And while I was there, of course,

220
00:12:36,960 --> 00:12:38,959
Speaker 1: you're supposed to get a job, and I didn't have

221
00:12:39,000 --> 00:12:40,360
Speaker 1: a job. So I said to one of my friends,

222
00:12:40,400 --> 00:12:41,800
Speaker 1: now I don't have a job yet. He said, I

223
00:12:41,880 --> 00:12:43,920
Speaker 1: got something you might want to consider. My dad's got

224
00:12:43,920 --> 00:12:45,720
Speaker 1: a friend who's looking for somebody. I'm not sure what

225
00:12:45,760 --> 00:12:48,480
Speaker 1: it is. I think it's the Rockefeller Foundation, and I

226
00:12:48,559 --> 00:12:51,240
Speaker 1: was interested in philanthropic work. I thought that might be interesting.

227
00:12:51,840 --> 00:12:53,880
Speaker 1: I wasn't the Foundation. Took half an hour of the

228
00:12:53,920 --> 00:12:56,320
Speaker 1: interview for me to figure out that talking about something else.

229
00:12:56,840 --> 00:12:59,040
Speaker 1: This guy's interviewing me is such a good guy. I

230
00:12:59,040 --> 00:13:01,240
Speaker 1: want to work for him for sure. I gotta figure

231
00:13:01,280 --> 00:13:03,600
Speaker 1: out what he's doing. I'm Barry Ridhults. You're listening to

232
00:13:03,720 --> 00:13:06,840
Speaker 1: Masters in Business on Bloomberg Radio, and my special guest

233
00:13:06,880 --> 00:13:10,920
Speaker 1: this week is Charlie Ellis Um, well known for his

234
00:13:11,000 --> 00:13:15,520
Speaker 1: work with the Yale Endowment as a professor at both

235
00:13:15,559 --> 00:13:20,760
Speaker 1: Harvard and Yale and number of other places. Um, Charlie,

236
00:13:21,360 --> 00:13:24,760
Speaker 1: before the break, we talked about you ended up as

237
00:13:24,920 --> 00:13:28,280
Speaker 1: one of your earliest jobs working for the Rockefeller the

238
00:13:28,480 --> 00:13:32,400
Speaker 1: Rockefeller Family Office. What was that experience? Like? It was

239
00:13:32,520 --> 00:13:34,240
Speaker 1: terrific in a couple of ways. It might take you

240
00:13:34,280 --> 00:13:37,000
Speaker 1: by surprise. First of all, I was working for an

241
00:13:37,040 --> 00:13:39,840
Speaker 1: absolute wonderful human being, and he's set a role model

242
00:13:40,080 --> 00:13:42,360
Speaker 1: as to how high is up, and I realized, what

243
00:13:42,600 --> 00:13:45,320
Speaker 1: we it's really high. If you really want to be

244
00:13:45,800 --> 00:13:48,280
Speaker 1: at the high end of the spectrum, that's how good

245
00:13:48,320 --> 00:13:49,920
Speaker 1: you've got to be at whatever you're doing. What was

246
00:13:49,920 --> 00:13:52,920
Speaker 1: that gentleman's name, Jay Richardson Dilworth and was not the

247
00:13:52,960 --> 00:13:56,559
Speaker 1: mayor of Philadelphia, same name, but an absolutely wonderful man.

248
00:13:57,280 --> 00:14:00,480
Speaker 1: So that was one particularly part of it. The second

249
00:14:00,520 --> 00:14:03,839
Speaker 1: part is I turned in my first research report and

250
00:14:04,000 --> 00:14:08,360
Speaker 1: my immediate supervisor came over to my office. Is at Cholly, Cholly,

251
00:14:09,360 --> 00:14:12,200
Speaker 1: didn't you just go to the Havard Business School? I said, yes, Phil,

252
00:14:12,240 --> 00:14:14,920
Speaker 1: I did. Why Why are you asking? He said, because Charlie,

253
00:14:15,040 --> 00:14:18,120
Speaker 1: didn't they teach you nothing about investing? And I said, no, Phil,

254
00:14:18,160 --> 00:14:20,400
Speaker 1: actually there's only one course on investing and it's so

255
00:14:20,520 --> 00:14:23,680
Speaker 1: boring and dull and terrible. While it's taught between eleven

256
00:14:23,760 --> 00:14:26,920
Speaker 1: thirty and one, it's called Darkness at Noon. And I

257
00:14:26,960 --> 00:14:29,040
Speaker 1: didn't take it. Nobody else with his head screwed on

258
00:14:29,120 --> 00:14:31,640
Speaker 1: would have taken it. Was terrible course. So actually, Phil,

259
00:14:31,680 --> 00:14:34,840
Speaker 1: I don't know anything. Well, Charlie said, this is a

260
00:14:34,960 --> 00:14:37,760
Speaker 1: very wealthy family, but they ain't that rich. I can't

261
00:14:37,760 --> 00:14:40,440
Speaker 1: afford you, so you better go to night school and

262
00:14:40,520 --> 00:14:42,880
Speaker 1: learn something, and that's how you ended up getting a

263
00:14:42,920 --> 00:14:45,160
Speaker 1: doctor at an n y U. Well, it was an accident.

264
00:14:45,240 --> 00:14:47,400
Speaker 1: I got in. I've been in the army, so I

265
00:14:47,480 --> 00:14:48,880
Speaker 1: know how what you do when you see a line,

266
00:14:48,920 --> 00:14:50,880
Speaker 1: getting the line, and when I got to the front,

267
00:14:50,880 --> 00:14:53,240
Speaker 1: it's really attractive. Young woman looked up from a card

268
00:14:53,240 --> 00:14:56,200
Speaker 1: table and said, you're next. Are you a regular student

269
00:14:56,280 --> 00:14:58,240
Speaker 1: or a special student? Sorry, I'm sorry, I don't know

270
00:14:58,320 --> 00:14:59,760
Speaker 1: which is. I just wanted to sign up for some

271
00:15:00,320 --> 00:15:03,520
Speaker 1: She said, where'd you last go to school? I said,

272
00:15:03,800 --> 00:15:07,440
Speaker 1: just finished Harvard Business School. Oh, Harvard Business School. That's exciting.

273
00:15:07,480 --> 00:15:10,200
Speaker 1: You should be in our doctoral program. My sister and

274
00:15:10,200 --> 00:15:12,360
Speaker 1: brother are always getting higher grades than I was, so

275
00:15:12,960 --> 00:15:14,880
Speaker 1: I figured I'll sign up for a doctoral program. They

276
00:15:14,960 --> 00:15:17,200
Speaker 1: never signed up for a doctoral program. That didn't take

277
00:15:17,200 --> 00:15:19,800
Speaker 1: it seriously and was there any difference in price. No,

278
00:15:19,880 --> 00:15:22,040
Speaker 1: at the same price. So I signed up for a

279
00:15:22,040 --> 00:15:25,880
Speaker 1: doctoral program. In fourteen years, drifted through, finally finishing up

280
00:15:27,160 --> 00:15:29,240
Speaker 1: great experience. You were doing it at night part time.

281
00:15:29,240 --> 00:15:31,360
Speaker 1: While you were working on doing it at night. There

282
00:15:31,440 --> 00:15:33,280
Speaker 1: was nothing to it. You would go to the first

283
00:15:33,280 --> 00:15:36,600
Speaker 1: class and you had fifteen minutes between classes run across

284
00:15:36,600 --> 00:15:38,960
Speaker 1: the street to the Hamburger place where they had Hamburg's

285
00:15:38,960 --> 00:15:41,440
Speaker 1: on the grill, and you'd get a cold milkshake and

286
00:15:41,480 --> 00:15:44,520
Speaker 1: a hot hamburger and mix them together as you too quickly,

287
00:15:44,520 --> 00:15:48,080
Speaker 1: and then run back to class again. And ultimately, fourteen

288
00:15:48,160 --> 00:15:52,160
Speaker 1: years later sooner or later PhD from from n YU.

289
00:15:52,320 --> 00:15:56,480
Speaker 1: Not not too shabby. So let's get start talking about

290
00:15:56,480 --> 00:15:59,640
Speaker 1: the Losers Game. And and I love the analogy here.

291
00:15:59,640 --> 00:16:03,080
Speaker 1: There was so many really fascinating lessons from this. So

292
00:16:03,160 --> 00:16:07,760
Speaker 1: in you authored a paper called the Losers Game. And

293
00:16:07,800 --> 00:16:12,400
Speaker 1: it was after reading a book called Extraordinary Tennis for

294
00:16:12,520 --> 00:16:15,800
Speaker 1: the Ordinary Tennis Player. And I'm gonna I'm gonna pull

295
00:16:15,840 --> 00:16:19,120
Speaker 1: a quote out from something you had written. The book

296
00:16:19,200 --> 00:16:24,880
Speaker 1: was by Simon Ramos, and Ramos describes professional Simon Ramo

297
00:16:24,960 --> 00:16:29,600
Speaker 1: of Thompson Ramo Wooldridge. He was the brilliant industrial scientist

298
00:16:29,680 --> 00:16:32,680
Speaker 1: combination that really was the leader of the U. S

299
00:16:32,680 --> 00:16:36,000
Speaker 1: Space program. This is some guy, so he's looking at

300
00:16:36,040 --> 00:16:39,520
Speaker 1: tennis from a very quantitative scientific Plus he was a

301
00:16:39,600 --> 00:16:43,040
Speaker 1: very good athlete everything. Plus he played violin with the

302
00:16:43,120 --> 00:16:46,520
Speaker 1: quartet from the Los Angeles Philharmonic. So this guy hit

303
00:16:46,600 --> 00:16:50,880
Speaker 1: the genetic lottery straight across the board, right, so he writes,

304
00:16:51,080 --> 00:16:55,120
Speaker 1: you write about ramo. He described professional tennis as a

305
00:16:55,160 --> 00:16:58,960
Speaker 1: winners game where points are won through skill. It's played

306
00:16:58,960 --> 00:17:01,640
Speaker 1: by those who stroked the ball with strong, well aimed

307
00:17:01,640 --> 00:17:06,280
Speaker 1: shots and win points through long, often exciting rallies until

308
00:17:06,359 --> 00:17:09,919
Speaker 1: one point player is able to drive the ball just

309
00:17:10,080 --> 00:17:12,360
Speaker 1: beyond the reach of his opponent. That's the winners game.

310
00:17:13,000 --> 00:17:15,040
Speaker 1: On the other hand, and he says, tennis is two

311
00:17:15,080 --> 00:17:17,720
Speaker 1: games in one. It's a winners game and a loser's game.

312
00:17:18,080 --> 00:17:21,840
Speaker 1: The loser's game is the way amateurs play, where points

313
00:17:21,880 --> 00:17:26,400
Speaker 1: are lost due to simple mistakes. In other words, winners

314
00:17:26,840 --> 00:17:30,960
Speaker 1: and uh professionals end up scoring points through winning, and

315
00:17:31,720 --> 00:17:36,560
Speaker 1: amateurs end up making all these unforced errors. So how

316
00:17:36,600 --> 00:17:40,400
Speaker 1: did that impact you're thinking about investing? Well, I thought

317
00:17:40,400 --> 00:17:43,480
Speaker 1: about I'm realized that's the way I played tennis. When

318
00:17:43,560 --> 00:17:45,640
Speaker 1: Lynda and I go off and play, we come off

319
00:17:45,680 --> 00:17:47,840
Speaker 1: the court, it maybe some people waiting because we've gone

320
00:17:47,840 --> 00:17:49,919
Speaker 1: a little bit over our time on the court. They

321
00:17:49,920 --> 00:17:52,200
Speaker 1: ask who won, and it drives me nuts because that's

322
00:17:52,240 --> 00:17:55,639
Speaker 1: not fair. I was in control of that game, completely

323
00:17:55,640 --> 00:17:57,680
Speaker 1: in control of it, because I hit more double faults

324
00:17:58,359 --> 00:18:00,200
Speaker 1: I hit in the net more often, and I gave

325
00:18:00,240 --> 00:18:03,040
Speaker 1: more layups to Linda. She's a very good athlete. So

326
00:18:03,080 --> 00:18:05,600
Speaker 1: I'm not embarrassed to have lost. But I was not

327
00:18:05,680 --> 00:18:07,720
Speaker 1: only the loser. I was in control of the game

328
00:18:07,880 --> 00:18:09,920
Speaker 1: all the way along. You could have told after three

329
00:18:10,000 --> 00:18:12,719
Speaker 1: or four points I was going to lose. So in

330
00:18:12,760 --> 00:18:15,359
Speaker 1: other words, it wasn't so much that Linda beat you,

331
00:18:15,880 --> 00:18:19,159
Speaker 1: it was that you basically beat myself. That's right, And

332
00:18:19,200 --> 00:18:24,680
Speaker 1: so this raises a really interesting question relative to investors.

333
00:18:25,359 --> 00:18:30,080
Speaker 1: How important is it to understand your own skill set,

334
00:18:30,240 --> 00:18:32,720
Speaker 1: whether it's tennis or investing. Well, there are two things

335
00:18:32,720 --> 00:18:35,000
Speaker 1: that are really important. One is understand your own skill set,

336
00:18:35,320 --> 00:18:38,800
Speaker 1: and the second is understand how good the competition really is.

337
00:18:39,520 --> 00:18:42,119
Speaker 1: Most of us have sort of a mindset of, you know,

338
00:18:42,240 --> 00:18:45,600
Speaker 1: the friendly neighborhood doctor goes down to the brokerage office

339
00:18:45,680 --> 00:18:47,840
Speaker 1: and buys hundred shares of a T and T, and

340
00:18:47,920 --> 00:18:50,880
Speaker 1: that's basically what he does as an investor. That may

341
00:18:50,880 --> 00:18:53,160
Speaker 1: have been true when we were all kids, and fifty

342
00:18:53,200 --> 00:18:56,959
Speaker 1: years ago it was true, but today most of the trading.

343
00:18:58,359 --> 00:19:00,719
Speaker 1: The trading is done by professionals, and half of that

344
00:19:02,280 --> 00:19:06,320
Speaker 1: is done by the fifty largest, most aggressive professionals. They

345
00:19:06,320 --> 00:19:10,000
Speaker 1: are tough. So you may be a pretty good amateur

346
00:19:10,440 --> 00:19:12,600
Speaker 1: touch football player, but that doesn't mean you want to

347
00:19:12,680 --> 00:19:15,119
Speaker 1: join the line for the NFL. You just you just

348
00:19:15,200 --> 00:19:17,680
Speaker 1: reminded me of something I had quoted you in a

349
00:19:17,760 --> 00:19:20,639
Speaker 1: column I want to say about ten years ago, and

350
00:19:20,640 --> 00:19:22,560
Speaker 1: it had to do with look at the football play.

351
00:19:22,600 --> 00:19:25,560
Speaker 1: You may be a fun amateur football player, toss a

352
00:19:25,600 --> 00:19:28,359
Speaker 1: ball around weekends in your neighborhood, but but look at

353
00:19:28,400 --> 00:19:31,080
Speaker 1: these guys who played. They're much bigger than you, they're

354
00:19:31,160 --> 00:19:33,840
Speaker 1: much faster than you, they're more skilled than you. You

355
00:19:33,880 --> 00:19:36,639
Speaker 1: would never think of stepping out onto the field with

356
00:19:36,720 --> 00:19:39,760
Speaker 1: the Giants on any given Sunday and betting real money

357
00:19:39,800 --> 00:19:42,040
Speaker 1: on the outcome. But that's what a lot of people

358
00:19:42,160 --> 00:19:45,960
Speaker 1: end up doing in investing. They they compete against people

359
00:19:46,000 --> 00:19:48,920
Speaker 1: who were much more qualified for them, and the same

360
00:19:49,119 --> 00:19:51,639
Speaker 1: result happens as if they were playing football with the

361
00:19:51,680 --> 00:19:54,280
Speaker 1: New York Giants. Yes, but we don't notice that. We

362
00:19:54,320 --> 00:19:57,160
Speaker 1: don't keep a tight score, and we don't embarrass ourselves

363
00:19:57,240 --> 00:20:00,240
Speaker 1: by seeing reality, so it's a little bit easier. The

364
00:20:00,440 --> 00:20:02,919
Speaker 1: broken bones aren't as visible when you're an investor than

365
00:20:02,920 --> 00:20:05,119
Speaker 1: when you're playing for but the pain in anguish that

366
00:20:05,160 --> 00:20:08,120
Speaker 1: people are providing for themselves as their years go by

367
00:20:08,520 --> 00:20:13,399
Speaker 1: is just awful. So in the last minute we have

368
00:20:13,480 --> 00:20:15,840
Speaker 1: in this segment, I want to ask you just a

369
00:20:15,880 --> 00:20:19,399
Speaker 1: really quick question. So you identified this was back in

370
00:20:21,359 --> 00:20:25,200
Speaker 1: that active managers were not beating the market, that amateurs

371
00:20:25,480 --> 00:20:28,359
Speaker 1: were just shooting themselves in the foot. What gave you

372
00:20:28,400 --> 00:20:32,840
Speaker 1: the insight to recognize that that was forty years ago? Well,

373
00:20:32,880 --> 00:20:34,920
Speaker 1: first of all, it was a lucky break. And secondly,

374
00:20:34,960 --> 00:20:36,639
Speaker 1: I was working with a lot of people in the

375
00:20:36,680 --> 00:20:39,280
Speaker 1: investment management business and talking with them all the time,

376
00:20:39,560 --> 00:20:41,400
Speaker 1: and they were starting to tell me this is tough,

377
00:20:41,600 --> 00:20:44,720
Speaker 1: really tough, and it's getting harder, and it's getting harder.

378
00:20:45,240 --> 00:20:47,840
Speaker 1: I'm Barry Ridhults. You're listening to Masters in Business on

379
00:20:47,920 --> 00:20:52,399
Speaker 1: Bloomberg Radio. My extra special guest this week is Charlie

380
00:20:52,440 --> 00:20:56,040
Speaker 1: allis the author of a number of books, most recently

381
00:20:56,640 --> 00:20:58,600
Speaker 1: the book that I that I have that came out

382
00:20:58,840 --> 00:21:01,200
Speaker 1: not too long ago is What It Takes, which we'll

383
00:21:01,240 --> 00:21:03,280
Speaker 1: get to talk to talk about in a little bit.

384
00:21:03,600 --> 00:21:07,239
Speaker 1: I'm a big fan of your earlier book, Winning the

385
00:21:07,280 --> 00:21:11,880
Speaker 1: Losers Game, which is all about how people really mishandle

386
00:21:11,960 --> 00:21:15,720
Speaker 1: their own money and make very very poor decisions when

387
00:21:15,760 --> 00:21:18,560
Speaker 1: it comes to investing their own money. UM, don't feel

388
00:21:18,560 --> 00:21:21,119
Speaker 1: bad if you're an amateur. Of the professionals very often

389
00:21:21,160 --> 00:21:23,880
Speaker 1: do the same thing. But let's talk a little bit

390
00:21:23,880 --> 00:21:27,080
Speaker 1: about your time at Yale, both as a UM, a

391
00:21:27,119 --> 00:21:33,040
Speaker 1: member of UM, the investment committee for the endowment, and

392
00:21:33,200 --> 00:21:36,359
Speaker 1: as well as the faculty. One of the lines you

393
00:21:36,359 --> 00:21:40,600
Speaker 1: you had written reminded me of something that Daniel Boston

394
00:21:41,040 --> 00:21:45,640
Speaker 1: had said. Daniel Boston, famously the Librarian of Congress, used

395
00:21:45,680 --> 00:21:48,160
Speaker 1: to used to say, I write in order to figure

396
00:21:48,160 --> 00:21:50,760
Speaker 1: out what I think. Besides, at that hour all the

397
00:21:50,760 --> 00:21:54,080
Speaker 1: bars are closed anyway, so that that's his famous quote.

398
00:21:54,480 --> 00:21:58,920
Speaker 1: How does the process of teaching, speaking, and writing help

399
00:21:58,960 --> 00:22:02,119
Speaker 1: you form your thought? What's in your ideas? That's easy

400
00:22:03,160 --> 00:22:05,679
Speaker 1: if you're going to teach. For every hour you're in

401
00:22:05,720 --> 00:22:09,200
Speaker 1: the classroom teaching. My experience, it takes at least ten,

402
00:22:09,640 --> 00:22:14,320
Speaker 1: often fifteen hours of preparation for every single hour. I'm

403
00:22:14,359 --> 00:22:16,480
Speaker 1: developing a course now on how to be a successful

404
00:22:16,520 --> 00:22:18,639
Speaker 1: client to be taught at the Yale School of Management.

405
00:22:19,080 --> 00:22:21,560
Speaker 1: And it is exciting and all that sort of stuff.

406
00:22:21,800 --> 00:22:24,240
Speaker 1: But on the other hand, every weekend I sit down

407
00:22:24,320 --> 00:22:26,920
Speaker 1: and start working again. And getting those classes figured out

408
00:22:26,920 --> 00:22:29,119
Speaker 1: what am I gonna do? And I still don't know

409
00:22:29,200 --> 00:22:30,879
Speaker 1: for sure what I'm gonna do because you have to

410
00:22:30,920 --> 00:22:33,399
Speaker 1: watch the way the class moves, and you have to

411
00:22:33,440 --> 00:22:35,720
Speaker 1: go with the flow and be sure that it covers

412
00:22:35,720 --> 00:22:38,159
Speaker 1: the things you really want and that it's really useful

413
00:22:38,200 --> 00:22:40,720
Speaker 1: to the students. So a lot of preparation for every

414
00:22:40,760 --> 00:22:44,000
Speaker 1: hour in the classroom. What about writing a book. It

415
00:22:44,119 --> 00:22:46,040
Speaker 1: takes three or four hours to read a good book,

416
00:22:46,280 --> 00:22:49,160
Speaker 1: six or seven hours. How much prep time you're doing

417
00:22:49,200 --> 00:22:51,040
Speaker 1: before you even sit down at two or three hours

418
00:22:51,040 --> 00:22:52,520
Speaker 1: to read a book, two or three years to write

419
00:22:52,560 --> 00:22:55,000
Speaker 1: a book about even so it's a one to one

420
00:22:55,080 --> 00:22:58,040
Speaker 1: ratio a year for for hour. I got it, um

421
00:22:58,119 --> 00:23:00,879
Speaker 1: And you worked with David Swanson as co chairs of

422
00:23:00,960 --> 00:23:02,800
Speaker 1: the I believe he was the c I O and

423
00:23:02,960 --> 00:23:06,600
Speaker 1: you were the I was the chair of the Investment Committee.

424
00:23:06,640 --> 00:23:09,480
Speaker 1: But let's be careful in terms. I didn't work with David.

425
00:23:09,600 --> 00:23:13,600
Speaker 1: I worked for David uh and I had the thrill

426
00:23:13,720 --> 00:23:17,440
Speaker 1: of sitting in the front row of the bleachers watching

427
00:23:17,640 --> 00:23:21,880
Speaker 1: the best professional investment manager I know. Really. Yeah, Now

428
00:23:21,880 --> 00:23:25,679
Speaker 1: his remputation is obviously sterling. So one of the questions

429
00:23:25,680 --> 00:23:29,080
Speaker 1: I have to ask is what made Swanson so unique?

430
00:23:29,880 --> 00:23:33,480
Speaker 1: So many different things combined. Number one is brilliant. He's

431
00:23:33,520 --> 00:23:37,320
Speaker 1: the first guy to think of even considering doing a derivative.

432
00:23:37,920 --> 00:23:40,760
Speaker 1: Did a swap on interest rates between IBM and the

433
00:23:40,800 --> 00:23:45,399
Speaker 1: World Bank None. He's very competitive guy. Watch him on

434
00:23:45,440 --> 00:23:48,560
Speaker 1: a softball field, you think the world was absolutely determined.

435
00:23:48,600 --> 00:23:50,520
Speaker 1: His whole future in the vision, whether people are going

436
00:23:50,560 --> 00:23:52,840
Speaker 1: to get hits or not, watching playing squasher tennis, the

437
00:23:52,920 --> 00:23:55,080
Speaker 1: same thing all over again. Thirty is one of the

438
00:23:55,160 --> 00:23:57,160
Speaker 1: nicest people in the face of the earth. There're more

439
00:23:57,200 --> 00:23:59,840
Speaker 1: people that would like to do something to say thank

440
00:23:59,840 --> 00:24:03,800
Speaker 1: you David than any other person I know, except perhaps

441
00:24:04,040 --> 00:24:07,480
Speaker 1: Warren Buffett, who got an even larger following, and for

442
00:24:07,600 --> 00:24:12,840
Speaker 1: good reason, very good reason. David is creative. He's tightly disciplined.

443
00:24:13,320 --> 00:24:15,240
Speaker 1: He is a team player and one of the best

444
00:24:15,280 --> 00:24:17,679
Speaker 1: team captains. There's ever been a number of people who

445
00:24:17,760 --> 00:24:20,879
Speaker 1: have trained under David and going on to manage other endowments,

446
00:24:21,359 --> 00:24:24,479
Speaker 1: really understanding what the secrets are. It's been just terrific.

447
00:24:24,560 --> 00:24:27,280
Speaker 1: And he's also written the best book ever written on

448
00:24:27,400 --> 00:24:33,480
Speaker 1: institutional investing, which is called I can never remember David's book.

449
00:24:33,600 --> 00:24:37,320
Speaker 1: I always thinking it was David's book, Unconventional Success. That's right,

450
00:24:37,440 --> 00:24:39,840
Speaker 1: unconve very good. You have a much better memory than

451
00:24:39,880 --> 00:24:41,960
Speaker 1: I do, because mine was buried back there. I couldn't

452
00:24:41,960 --> 00:24:45,359
Speaker 1: get it. So let's talk about the Yale model, which

453
00:24:45,480 --> 00:24:49,480
Speaker 1: essentially is what Swanson created. What is the Yale model?

454
00:24:49,880 --> 00:24:52,359
Speaker 1: First of all, the Yale model is not for anybody

455
00:24:52,400 --> 00:24:56,080
Speaker 1: else to use except for Yale. Actually that's quite true.

456
00:24:56,080 --> 00:24:59,560
Speaker 1: Although Harvard's close, Princeton's close, Stanford is close, m I

457
00:24:59,600 --> 00:25:02,719
Speaker 1: t is close. There's several other places that are pretty

458
00:25:02,720 --> 00:25:05,360
Speaker 1: close in what they're doing. But but if you look

459
00:25:05,400 --> 00:25:07,960
Speaker 1: at some of them, Harvard is a good example. They

460
00:25:08,040 --> 00:25:11,200
Speaker 1: hit a rough patch during the financial crisis. They were

461
00:25:11,240 --> 00:25:13,639
Speaker 1: a little behind Yale and never quite caught up with

462
00:25:13,680 --> 00:25:16,159
Speaker 1: them in terms of because they never quite had a

463
00:25:16,240 --> 00:25:19,399
Speaker 1: David Swinson. The secret to success in life is be

464
00:25:19,480 --> 00:25:22,520
Speaker 1: sure you picked the competition that you can be, not

465
00:25:22,640 --> 00:25:26,119
Speaker 1: be brilliant yourself. But the Harvard story is more complicated

466
00:25:26,119 --> 00:25:27,680
Speaker 1: in that I think all of us in the world

467
00:25:27,680 --> 00:25:30,640
Speaker 1: of investing know that Jane Mandilo did a fabulous job

468
00:25:30,920 --> 00:25:34,160
Speaker 1: with an unbelievably bad hand delta her. Then she did

469
00:25:34,160 --> 00:25:37,080
Speaker 1: it with grace, nice combination. Then you had the whole

470
00:25:37,080 --> 00:25:40,280
Speaker 1: issue with the faculty complaining about the fees that were

471
00:25:40,280 --> 00:25:43,960
Speaker 1: being paid to people. Were they they engage in a

472
00:25:43,960 --> 00:25:46,359
Speaker 1: little bit of losers game themselves? They shot themselves in

473
00:25:46,359 --> 00:25:49,000
Speaker 1: the foot. Well, if you're entirely rational, that is in

474
00:25:49,040 --> 00:25:51,800
Speaker 1: fact irrational, because the world is made up of human

475
00:25:51,800 --> 00:25:54,560
Speaker 1: beings and they make judgments as human beings do, so

476
00:25:54,800 --> 00:25:57,159
Speaker 1: don't be too smart. It is probably a good idea.

477
00:25:57,440 --> 00:26:00,000
Speaker 1: But that was a different group than the more recent manage.

478
00:26:00,640 --> 00:26:03,640
Speaker 1: So in the last thirty seconds, we have the experience

479
00:26:03,640 --> 00:26:06,280
Speaker 1: at Yale and working with Swinson. How does that compare

480
00:26:06,960 --> 00:26:09,800
Speaker 1: to other experiences you've had in the world of finance.

481
00:26:10,000 --> 00:26:12,240
Speaker 1: It's like going to see Ringling Brothers in Barnum and

482
00:26:12,240 --> 00:26:15,000
Speaker 1: Bailey Circus. The guys who do the acrobatics, the guys

483
00:26:15,000 --> 00:26:17,720
Speaker 1: who do the high wire, they are unbelievably good and

484
00:26:17,720 --> 00:26:21,320
Speaker 1: it's thrilling to watch. Don't do that at home. Don't

485
00:26:21,320 --> 00:26:24,520
Speaker 1: try this at home. This is Masters in Business on

486
00:26:24,560 --> 00:26:29,160
Speaker 1: Bloomberg Radio. I'm Barry Ridholtz my guest today. Charlie ellis

487
00:26:29,160 --> 00:26:32,560
Speaker 1: perhaps best known for his book Winning the Losers Game.

488
00:26:33,040 --> 00:26:34,960
Speaker 1: You know, in the last segment we were talking about

489
00:26:34,960 --> 00:26:39,480
Speaker 1: how investing is very similar to tennis, that most people

490
00:26:39,800 --> 00:26:43,280
Speaker 1: end up engaging in these unforced eras. That's how they

491
00:26:43,320 --> 00:26:46,919
Speaker 1: lose in tennis. That's also how they hurt themselves in investing.

492
00:26:47,520 --> 00:26:50,800
Speaker 1: I know you're a big fan of indexing, and here

493
00:26:50,840 --> 00:26:56,000
Speaker 1: we are in and earlier this year, the Vanguard Group

494
00:26:56,400 --> 00:27:00,439
Speaker 1: just crossed three trillion, that's trillion with a T in

495
00:27:00,520 --> 00:27:05,200
Speaker 1: assets under management. They're the best known, biggest indexers. Can

496
00:27:05,280 --> 00:27:08,159
Speaker 1: you declare victory? Can you say, okay, people have figured

497
00:27:08,200 --> 00:27:14,200
Speaker 1: out that simple indexing beats complicated active management. The answer

498
00:27:14,280 --> 00:27:16,879
Speaker 1: is both yes and no. I can declare victory, but

499
00:27:16,960 --> 00:27:20,440
Speaker 1: each individual has to make that decision for themselves. So

500
00:27:20,880 --> 00:27:24,520
Speaker 1: let's talk a little bit about your observation that active

501
00:27:24,560 --> 00:27:28,800
Speaker 1: managers have a very very hard time beating the market.

502
00:27:29,240 --> 00:27:33,040
Speaker 1: Why is that, Well, it's the same reason. Really smart

503
00:27:33,119 --> 00:27:36,359
Speaker 1: lawyers have a tough time winning all their cases. My

504
00:27:36,440 --> 00:27:38,919
Speaker 1: brother is as good a litigator as you will find

505
00:27:39,040 --> 00:27:42,679
Speaker 1: in the field of law. He wins about half and

506
00:27:42,720 --> 00:27:44,600
Speaker 1: he asked me once, why do you suppose I went

507
00:27:44,640 --> 00:27:47,199
Speaker 1: about half? I said, it's easy. The other guys know

508
00:27:47,240 --> 00:27:49,360
Speaker 1: you're terrific, so they get as many lawyers as they

509
00:27:49,400 --> 00:27:52,360
Speaker 1: need to come in and tie you. It's also if

510
00:27:52,359 --> 00:27:56,159
Speaker 1: the case is overwhelmingly one side or another, they end

511
00:27:56,240 --> 00:27:58,760
Speaker 1: up settling. And if by the time the cases that

512
00:27:58,840 --> 00:28:01,919
Speaker 1: go to trial are usually the ones that, gee, this

513
00:28:01,960 --> 00:28:04,159
Speaker 1: could go either way and both sides they are going

514
00:28:04,200 --> 00:28:06,320
Speaker 1: to win. Right, So someone's gonna win and you're not.

515
00:28:06,359 --> 00:28:08,520
Speaker 1: You're never going to bat a thousand on the really

516
00:28:08,520 --> 00:28:11,480
Speaker 1: close cases, but a bunch of you know, the typical

517
00:28:11,520 --> 00:28:14,639
Speaker 1: case settles because it's usually clear one side or the

518
00:28:14,680 --> 00:28:17,000
Speaker 1: other is in the right or wrong. Let's go back

519
00:28:17,000 --> 00:28:20,080
Speaker 1: to investing them, because I think it's really interesting. The

520
00:28:20,119 --> 00:28:24,200
Speaker 1: smartest people I've ever known have, one way or another

521
00:28:24,240 --> 00:28:30,480
Speaker 1: figured out that investment management is interesting, fascinating, fun, exciting

522
00:28:30,520 --> 00:28:34,360
Speaker 1: even and it pays really really well. And you get

523
00:28:34,400 --> 00:28:36,679
Speaker 1: to hang out with people who are really smart, and

524
00:28:36,720 --> 00:28:39,120
Speaker 1: you get to compete, and all people who are really

525
00:28:39,160 --> 00:28:43,040
Speaker 1: smart like to be winners in competitions. So you get

526
00:28:43,040 --> 00:28:45,520
Speaker 1: this terrific crowd of people coming out to compete with

527
00:28:45,560 --> 00:28:48,120
Speaker 1: each other. And the more they compete, the better they get,

528
00:28:48,160 --> 00:28:51,640
Speaker 1: the more skillful, the more tools, the more information, the

529
00:28:51,680 --> 00:28:54,400
Speaker 1: more access that they all get. The better and better

530
00:28:54,440 --> 00:28:58,200
Speaker 1: and better they get. Only one problem, so is everybody

531
00:28:58,200 --> 00:29:01,479
Speaker 1: else getting better and better and better and better, And

532
00:29:01,520 --> 00:29:04,640
Speaker 1: if you look at the realities of life, the secret

533
00:29:04,680 --> 00:29:09,120
Speaker 1: to success and investment management starts with good information. Everybody

534
00:29:09,160 --> 00:29:12,960
Speaker 1: gets all the same information today. The SEC requires any

535
00:29:13,000 --> 00:29:15,760
Speaker 1: companies any information to anybody, has to give it to

536
00:29:15,800 --> 00:29:18,400
Speaker 1: everybody at the same time. You can use Twitter if

537
00:29:18,400 --> 00:29:20,960
Speaker 1: you want to, but you've got to get it to everybody.

538
00:29:21,200 --> 00:29:24,400
Speaker 1: That levels the playing field. Then everybody's got a Bloomberg

539
00:29:24,480 --> 00:29:28,080
Speaker 1: machine that levels the playing field in a big, big way.

540
00:29:28,720 --> 00:29:31,240
Speaker 1: And third, everybody's got access to all the same people

541
00:29:31,400 --> 00:29:36,160
Speaker 1: using the internet instantaneous equal So pretty soon you've realized

542
00:29:36,200 --> 00:29:38,880
Speaker 1: and wait, wait, waitmen, everybody's going to the same schools.

543
00:29:38,880 --> 00:29:42,800
Speaker 1: Everybody's smart, everybody's got the same tools. Everybody's going out

544
00:29:42,840 --> 00:29:45,720
Speaker 1: to compete with everybody else. Isn't it going to be

545
00:29:45,760 --> 00:29:49,920
Speaker 1: awfully hard to be noticeably, clearly, decisively better than the

546
00:29:49,960 --> 00:29:53,520
Speaker 1: other guys in order to do better than the market.

547
00:29:53,760 --> 00:29:56,080
Speaker 1: And the answer is, yeah, you've gotta be awfully damn good.

548
00:29:56,240 --> 00:29:58,680
Speaker 1: Will anybody be able to do it? Sure, in every

549
00:29:58,720 --> 00:30:03,680
Speaker 1: single year, every single decade, every single whatever, small number

550
00:30:03,680 --> 00:30:08,360
Speaker 1: of people will glue clearly better, but huge numbers of

551
00:30:08,360 --> 00:30:13,920
Speaker 1: people will do clearly worse, and on average, everybody will

552
00:30:13,960 --> 00:30:17,000
Speaker 1: be doing worse. And here's the hard part. There is

553
00:30:17,120 --> 00:30:20,000
Speaker 1: no way to identify who is going to do better

554
00:30:20,200 --> 00:30:22,920
Speaker 1: before the game begins in advance that you know. This

555
00:30:23,000 --> 00:30:25,600
Speaker 1: is the discussion we've had with some of the fund

556
00:30:25,600 --> 00:30:29,960
Speaker 1: of funds. With hedge funds. It's impossible to pick the

557
00:30:30,640 --> 00:30:33,560
Speaker 1: one hedge funds that's going to do especially well. Why

558
00:30:33,600 --> 00:30:36,680
Speaker 1: does picking five hedge funds make you think that you're

559
00:30:36,800 --> 00:30:40,480
Speaker 1: raising your odds. You're just increasing your odds for mediocrity

560
00:30:40,480 --> 00:30:43,000
Speaker 1: by doing that, and then you add all the fees

561
00:30:43,080 --> 00:30:45,760
Speaker 1: on top of that. How do those guys continue to

562
00:30:46,000 --> 00:30:49,160
Speaker 1: uh to do what they're doing. Isn't the odds really

563
00:30:49,240 --> 00:30:52,760
Speaker 1: insurmountable for them? Well that's for the rantial observer, yes,

564
00:30:52,880 --> 00:30:55,240
Speaker 1: but all of us believe there's some one way or

565
00:30:55,240 --> 00:30:57,360
Speaker 1: another we're gonna get out in front. We're gonna do better.

566
00:30:57,400 --> 00:31:00,120
Speaker 1: We've all grown up learning from our parents, from our

567
00:31:00,120 --> 00:31:03,480
Speaker 1: school teachers, from our friends. Try harder you'll do better.

568
00:31:03,720 --> 00:31:07,080
Speaker 1: Try harder, you'll do better. Try harder, you'll do better.

569
00:31:07,520 --> 00:31:10,120
Speaker 1: So we've sort of programmed in ourselves to try harder.

570
00:31:10,160 --> 00:31:12,400
Speaker 1: And most of the time that's right. It works, We

571
00:31:12,520 --> 00:31:15,880
Speaker 1: do better. It's interesting, just not better than the market.

572
00:31:15,920 --> 00:31:18,120
Speaker 1: So it's a it's a market, fol No, it's not.

573
00:31:18,280 --> 00:31:20,480
Speaker 1: It's not doing better than the market. It's doing better

574
00:31:20,480 --> 00:31:24,680
Speaker 1: than all those other smart guys who create the market go. So,

575
00:31:24,680 --> 00:31:27,160
Speaker 1: so it's not like Lake Will be Gone where all

576
00:31:27,200 --> 00:31:30,840
Speaker 1: the children are above average. When you're competing with that,

577
00:31:30,960 --> 00:31:35,160
Speaker 1: against that group of folks, you're destined to really really

578
00:31:35,520 --> 00:31:40,040
Speaker 1: have a very very high odds of not not outperforming

579
00:31:40,400 --> 00:31:45,720
Speaker 1: that huge group of really smart, really prepared, really serious

580
00:31:45,760 --> 00:31:49,120
Speaker 1: people who are trying to beat the market. And that

581
00:31:49,120 --> 00:31:51,120
Speaker 1: that's what makes it so. It's like being in Lake

582
00:31:51,160 --> 00:31:56,280
Speaker 1: Paradise with the kids are not allowed to play because

583
00:31:56,360 --> 00:31:59,040
Speaker 1: only the top one percent are allowed to play, and

584
00:31:59,080 --> 00:32:03,440
Speaker 1: they're terrific. That that's really quite fascinating. So let's talk

585
00:32:03,480 --> 00:32:07,800
Speaker 1: a little bit about some of your earlier career. Um.

586
00:32:08,120 --> 00:32:11,920
Speaker 1: You really began in what some people have called the

587
00:32:12,000 --> 00:32:17,320
Speaker 1: golden age of market timers and newsletter writers. I remember

588
00:32:17,360 --> 00:32:21,440
Speaker 1: reading about Joe Granville in two and here's a guy

589
00:32:21,440 --> 00:32:23,600
Speaker 1: who had been dead right about everything for a few

590
00:32:23,680 --> 00:32:28,000
Speaker 1: years and missed the start of the biggest bullmarket in history.

591
00:32:28,040 --> 00:32:32,280
Speaker 1: What was that era like when you were UM fairly

592
00:32:32,320 --> 00:32:35,160
Speaker 1: early in your career well. The right answer for reading

593
00:32:35,200 --> 00:32:38,600
Speaker 1: and understanding it is read Jerry Goodman's or Adam Smith,

594
00:32:38,600 --> 00:32:42,200
Speaker 1: as he called himself, wonderful book The Money Game. That

595
00:32:42,320 --> 00:32:46,640
Speaker 1: a book about trading on Wall Street and investment management

596
00:32:46,720 --> 00:32:51,560
Speaker 1: contemporaries could be a bestseller nationwide for a couple of

597
00:32:51,640 --> 00:32:54,600
Speaker 1: years tells you a lot. It was an exciting game

598
00:32:54,640 --> 00:32:58,600
Speaker 1: and everybody was interested. And in those days, active management

599
00:32:58,640 --> 00:33:02,280
Speaker 1: was a damn good idea because the competition was individuals

600
00:33:02,280 --> 00:33:06,920
Speaker 1: who were not experienced and institutions that were sluggish, slow,

601
00:33:07,640 --> 00:33:10,640
Speaker 1: and move like Bohemuth. So it wasn't all that hard

602
00:33:10,720 --> 00:33:15,440
Speaker 1: to dance around them and be faster, quicker, better informed,

603
00:33:15,840 --> 00:33:17,840
Speaker 1: and therefore able to get a better rate of return.

604
00:33:17,960 --> 00:33:21,320
Speaker 1: The market has changed that much so that back in

605
00:33:21,360 --> 00:33:24,840
Speaker 1: the seventies and eighties, the amateurs were beating the professionals.

606
00:33:25,920 --> 00:33:27,920
Speaker 1: I wouldn't go quite that far, but I would say

607
00:33:27,920 --> 00:33:30,840
Speaker 1: that the few professionals who are out there, and we're

608
00:33:30,920 --> 00:33:34,520
Speaker 1: young and ambitious and worked hard, could find a way

609
00:33:34,560 --> 00:33:37,080
Speaker 1: that they could do better than most other institutions and

610
00:33:37,160 --> 00:33:39,920
Speaker 1: do better than most individuals, and you could see who

611
00:33:39,920 --> 00:33:42,640
Speaker 1: they were. It was advertised in the newspapers, it was

612
00:33:43,080 --> 00:33:47,320
Speaker 1: storied written up in articles. It was not all that tricky,

613
00:33:47,360 --> 00:33:51,480
Speaker 1: but that has clearly changed dramatically over the intervening decades,

614
00:33:51,720 --> 00:33:56,160
Speaker 1: overwhelming change, and it will never go back. So let

615
00:33:56,200 --> 00:33:59,479
Speaker 1: me ask you a couple of related questions. You've been

616
00:33:59,560 --> 00:34:03,520
Speaker 1: observed of the financial industry for a long time, and

617
00:34:03,640 --> 00:34:06,520
Speaker 1: I've been critical of some of the things the financial

618
00:34:06,520 --> 00:34:10,359
Speaker 1: industry does wrong. Let me reverse that question, what does

619
00:34:10,360 --> 00:34:13,520
Speaker 1: the financial industry get right? Well, first of all, the

620
00:34:13,640 --> 00:34:16,400
Speaker 1: financial industry is such a big aggregation. It's sort of

621
00:34:16,440 --> 00:34:20,840
Speaker 1: like talking about men or women. So let's focus on

622
00:34:20,840 --> 00:34:25,480
Speaker 1: on investment management. What does the investment management business do right?

623
00:34:25,520 --> 00:34:27,799
Speaker 1: And what do they get wrong? Well, there's two things

624
00:34:27,840 --> 00:34:31,080
Speaker 1: that are part and parcel of the investment management Number

625
00:34:31,080 --> 00:34:34,640
Speaker 1: one is what i'd call price discovery, figuring out what

626
00:34:34,719 --> 00:34:37,920
Speaker 1: price should each individual stock be, and what price it

627
00:34:37,960 --> 00:34:42,040
Speaker 1: should be compares to every other stock, so comparative pricing.

628
00:34:42,080 --> 00:34:45,239
Speaker 1: Getting that really figured out, that's really complicated, difficult work.

629
00:34:45,800 --> 00:34:49,480
Speaker 1: The second is value discovery, finding out for each client

630
00:34:49,560 --> 00:34:52,960
Speaker 1: what are they really trying to accomplish, what's important to them?

631
00:34:53,000 --> 00:34:55,120
Speaker 1: And that's not terribly difficult to figure out, but you

632
00:34:55,120 --> 00:34:56,840
Speaker 1: have to do it one at a time. For a

633
00:34:56,920 --> 00:35:00,719
Speaker 1: very simple reason. Every investor is different, and if you

634
00:35:00,760 --> 00:35:03,680
Speaker 1: get it really right for any investor, that isn't quite

635
00:35:03,719 --> 00:35:08,400
Speaker 1: exactly right for any other investors. So discovery of values aspirations,

636
00:35:08,400 --> 00:35:11,359
Speaker 1: what are you trying to accomplish is unique for each

637
00:35:11,360 --> 00:35:14,319
Speaker 1: individual client. Now, take the two parts used to be

638
00:35:14,400 --> 00:35:17,400
Speaker 1: years ago that they were blended together at a moderate fee,

639
00:35:17,480 --> 00:35:20,600
Speaker 1: and it worked out quite well. Then we got excited

640
00:35:20,640 --> 00:35:24,840
Speaker 1: about price discovery, and the skills and ambitions and drive

641
00:35:25,040 --> 00:35:28,680
Speaker 1: and skill of price discovery took off like a skyrocket.

642
00:35:29,160 --> 00:35:31,600
Speaker 1: Gradually it got to the point where it's so damn

643
00:35:31,640 --> 00:35:33,840
Speaker 1: good that there's almost no point in anybody trying to

644
00:35:33,880 --> 00:35:37,840
Speaker 1: do better than the crowd is already doing. Value discovery, however,

645
00:35:37,880 --> 00:35:41,200
Speaker 1: got ignored, and there's always a terrific opportunity to get

646
00:35:41,200 --> 00:35:43,320
Speaker 1: it really right for the long term for any investor

647
00:35:43,680 --> 00:35:46,520
Speaker 1: by thinking through and working through value discovery, what are

648
00:35:46,520 --> 00:35:50,120
Speaker 1: you trying to accomplish? So more than just buying a

649
00:35:50,160 --> 00:35:53,520
Speaker 1: stock that's going higher, what's the ultimate goal that is?

650
00:35:53,520 --> 00:35:57,760
Speaker 1: Isn't that really more financial planning than investing? Well, financial

651
00:35:57,800 --> 00:36:02,719
Speaker 1: plan there's nothing wrong with that. Aggressive trading might be

652
00:36:02,800 --> 00:36:06,239
Speaker 1: what you'd call the price discovery investing is sort of

653
00:36:06,280 --> 00:36:10,239
Speaker 1: an in between could be used by both groups. Got it?

654
00:36:10,640 --> 00:36:12,960
Speaker 1: So let me ask you this question, because this is

655
00:36:13,080 --> 00:36:17,560
Speaker 1: very much this is very much related for the average investor,

656
00:36:18,200 --> 00:36:22,600
Speaker 1: What then, is more important understanding yourself or understanding markets?

657
00:36:23,239 --> 00:36:26,520
Speaker 1: Understanding markets doesn't make very much difference at all, except

658
00:36:26,560 --> 00:36:29,840
Speaker 1: in general. You should know that markets fluctuate, and the

659
00:36:29,840 --> 00:36:34,120
Speaker 1: fluctuations can be huge, and they can cause very real

660
00:36:34,200 --> 00:36:37,080
Speaker 1: excitement on the upside and they can cause terrible fear

661
00:36:37,160 --> 00:36:40,000
Speaker 1: on the down side. So you're gonna get used to

662
00:36:40,040 --> 00:36:42,399
Speaker 1: that sort of thing and be prepared for it because

663
00:36:42,400 --> 00:36:45,560
Speaker 1: it will happen over and over and over again. That's

664
00:36:45,840 --> 00:36:48,000
Speaker 1: you're sort of stuck with that. But you better learn

665
00:36:48,200 --> 00:36:51,480
Speaker 1: what that's all about. That's the old joke. Wall Street

666
00:36:51,520 --> 00:36:54,919
Speaker 1: is an expensive place to learn who you are. Yes,

667
00:36:55,920 --> 00:36:59,120
Speaker 1: I've been speaking with Charlie Ellis of Yale School of

668
00:36:59,160 --> 00:37:02,960
Speaker 1: Management and the yell Endowment fame and author of Winning

669
00:37:03,000 --> 00:37:06,319
Speaker 1: the Losers Game and most recently What It Takes. If

670
00:37:06,360 --> 00:37:09,520
Speaker 1: you enjoyed these conversations, be sure and check out our

671
00:37:09,600 --> 00:37:13,640
Speaker 1: full podcast, where the tape keeps running and we discuss

672
00:37:13,800 --> 00:37:16,719
Speaker 1: many more things in great detail. Be sure and check

673
00:37:16,760 --> 00:37:20,919
Speaker 1: out my daily column on Bloomberg View dot com. Uh

674
00:37:20,920 --> 00:37:24,840
Speaker 1: follow me on Twitter at Rid Halts. I'm Barry Ridhults.

675
00:37:24,840 --> 00:37:29,040
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Welcome back.

676
00:37:29,080 --> 00:37:34,160
Speaker 1: This is the podcast portion of our show, and Charlie really,

677
00:37:34,200 --> 00:37:37,160
Speaker 1: thank you so much for doing this. I greatly appreciate this.

678
00:37:37,480 --> 00:37:39,040
Speaker 1: I've been a fan of yours for a long time

679
00:37:39,080 --> 00:37:41,279
Speaker 1: and it's just a pleasure meeting you. Well, you're terribly nice,

680
00:37:41,320 --> 00:37:43,000
Speaker 1: but I must tell you I'm having a great time.

681
00:37:43,120 --> 00:37:46,400
Speaker 1: Well good, that's fantastic. I have so many questions we

682
00:37:46,520 --> 00:37:49,200
Speaker 1: skipped during the radio portion. I'm just gonna work my

683
00:37:49,280 --> 00:37:53,160
Speaker 1: way through this. But but before I forget, you've written

684
00:37:53,160 --> 00:37:55,879
Speaker 1: a lot of books. So in between the Losers Game,

685
00:37:56,239 --> 00:37:59,319
Speaker 1: the most recent book was What It Takes. Actually most

686
00:37:59,360 --> 00:38:02,719
Speaker 1: recent book is Falling Short, Falling Short, so I I

687
00:38:03,200 --> 00:38:05,240
Speaker 1: have the wrong book here. And then there was also

688
00:38:05,280 --> 00:38:08,440
Speaker 1: the book The Partnership about Goldman Sachs that was so

689
00:38:08,520 --> 00:38:11,759
Speaker 1: much fun to do. It just wouldn't believe it really. Well,

690
00:38:11,800 --> 00:38:15,800
Speaker 1: first of all, there's smart, smart people. Well that's their reputation. Second,

691
00:38:15,800 --> 00:38:18,480
Speaker 1: they've got a terrific interest in their own firm. They

692
00:38:18,600 --> 00:38:21,840
Speaker 1: really really enjoyed the history and Third, the history is

693
00:38:21,880 --> 00:38:26,120
Speaker 1: so enjoyable. So I had the privilege of interviewing three

694
00:38:26,160 --> 00:38:30,239
Speaker 1: hund different people for that book, and I would be

695
00:38:30,320 --> 00:38:32,239
Speaker 1: glad to go back into it all over again. It

696
00:38:32,280 --> 00:38:34,960
Speaker 1: was so much fun, very storied firm. You know, what

697
00:38:35,040 --> 00:38:37,719
Speaker 1: do you think of of of more recently when they

698
00:38:37,719 --> 00:38:42,920
Speaker 1: were called the Vampire Squid? And Yeah, wasn't that fun? Aul?

699
00:38:43,160 --> 00:38:46,239
Speaker 1: So just awful. First of all, they deserved some of it,

700
00:38:47,239 --> 00:38:49,440
Speaker 1: but it was way too clever, And if I had

701
00:38:49,440 --> 00:38:51,759
Speaker 1: been an editor, I said, absolutely not, that's not going

702
00:38:51,800 --> 00:38:57,160
Speaker 1: to go in print. But they did deserve part of it.

703
00:38:57,600 --> 00:39:01,880
Speaker 1: And this second thing is they've reacted in a way

704
00:39:01,920 --> 00:39:05,640
Speaker 1: that makes me so very appreciative of what they're really

705
00:39:05,680 --> 00:39:09,440
Speaker 1: all about. Very proactive, not sitting around. They really have

706
00:39:09,600 --> 00:39:13,160
Speaker 1: made an effort to not just only change the culture

707
00:39:13,160 --> 00:39:16,160
Speaker 1: of the firm, but they've been pretty aggressive in public,

708
00:39:16,200 --> 00:39:18,800
Speaker 1: haven't they. Yeah, when you say change the culture, I

709
00:39:18,840 --> 00:39:21,080
Speaker 1: agree with you, but I'd say it a little differently.

710
00:39:21,680 --> 00:39:25,120
Speaker 1: Bring the culture back towards where it was, even though

711
00:39:25,160 --> 00:39:28,160
Speaker 1: the business environment and the business to be done has

712
00:39:28,200 --> 00:39:31,560
Speaker 1: been changed hugely. Give you a simple example, if you

713
00:39:31,600 --> 00:39:35,560
Speaker 1: go back years ago of all the business that was

714
00:39:35,600 --> 00:39:39,239
Speaker 1: done at Goldman Sachs was a relationship based business where

715
00:39:39,280 --> 00:39:42,640
Speaker 1: you as a portfolio manager and I, as an institutional salesman,

716
00:39:42,680 --> 00:39:47,719
Speaker 1: would work together every day for twenty years. Or you're

717
00:39:47,719 --> 00:39:50,480
Speaker 1: a chief financial officer of major corporation and I'm an

718
00:39:50,480 --> 00:39:54,239
Speaker 1: investment banker. We'd work together. I'd have people working with me,

719
00:39:54,320 --> 00:39:56,520
Speaker 1: you'd have people working with you, but we were team

720
00:39:56,560 --> 00:39:59,319
Speaker 1: captains back and forth. Then we would work together for

721
00:39:59,560 --> 00:40:03,680
Speaker 1: ten fifteen years, and everybody knew what we were doing.

722
00:40:03,719 --> 00:40:08,520
Speaker 1: It was all visible m hm trading. I am in

723
00:40:08,600 --> 00:40:11,880
Speaker 1: the market, I'm secret. Nobody knows I'm there. I decided

724
00:40:11,920 --> 00:40:14,040
Speaker 1: to do something. Nobody knows it was me that did it.

725
00:40:14,800 --> 00:40:17,319
Speaker 1: My transaction time might be two or three minutes, it

726
00:40:17,400 --> 00:40:20,800
Speaker 1: might be twenty or thirty minutes. It is never twenty years,

727
00:40:21,239 --> 00:40:24,399
Speaker 1: it's never a year. It's never even a week. It's

728
00:40:24,400 --> 00:40:28,160
Speaker 1: all very very fast and invisible, and nobody knows when

729
00:40:28,160 --> 00:40:31,200
Speaker 1: I've left. Nobody knows whether it worked or didn't work.

730
00:40:31,719 --> 00:40:34,799
Speaker 1: There's no record except in my office and yours, and

731
00:40:34,880 --> 00:40:40,080
Speaker 1: clearly no no relationship involved. There may be a transactual relationship,

732
00:40:40,160 --> 00:40:44,000
Speaker 1: but it's not an important factor in who's going to

733
00:40:44,080 --> 00:40:46,440
Speaker 1: do the business next time, And if I beat the

734
00:40:46,680 --> 00:40:50,000
Speaker 1: dickens out of you and really exploit you, that's my win.

735
00:40:50,280 --> 00:40:53,000
Speaker 1: You don't even know what has happened. So have has

736
00:40:53,080 --> 00:40:56,160
Speaker 1: Goldman Sacks moved away from that model because that seemed

737
00:40:56,200 --> 00:40:58,600
Speaker 1: to be the model in the late two thousand. Well,

738
00:40:58,640 --> 00:41:01,840
Speaker 1: trading is trading is trading, and if your business is dominated,

739
00:41:02,880 --> 00:41:08,160
Speaker 1: the firm's profitability comes from trading in currencies, trading in commodities,

740
00:41:08,280 --> 00:41:13,240
Speaker 1: trading in bonds, trading in stocks. It's all trading, trading, trading,

741
00:41:13,360 --> 00:41:17,680
Speaker 1: usually at risk. And that makes for a very different

742
00:41:17,719 --> 00:41:20,280
Speaker 1: kind of a business than when it's a relationship based

743
00:41:20,280 --> 00:41:24,479
Speaker 1: business and it's you as a client that determines whether

744
00:41:24,480 --> 00:41:26,759
Speaker 1: I get to do business or not, and I have

745
00:41:26,880 --> 00:41:29,440
Speaker 1: to serve your needs in order to serve my needs.

746
00:41:29,680 --> 00:41:32,520
Speaker 1: That's a very different business. So are they moving more

747
00:41:33,000 --> 00:41:36,239
Speaker 1: towards that older business model or is that just the

748
00:41:36,360 --> 00:41:38,160
Speaker 1: thing of the past. What they've done, which I think

749
00:41:38,239 --> 00:41:42,480
Speaker 1: is terrific, is they've kept the cultural commitments and even

750
00:41:42,520 --> 00:41:47,920
Speaker 1: though it's in trading and transactional businesses, they're working them way,

751
00:41:47,920 --> 00:41:50,680
Speaker 1: have been working their way back towards the values that

752
00:41:50,719 --> 00:41:54,040
Speaker 1: have to do with client relationships. They will never be

753
00:41:54,080 --> 00:41:56,680
Speaker 1: able to be clients, because the counterparty in a trade

754
00:41:56,880 --> 00:41:59,560
Speaker 1: can't be a client, but can be a customer, and

755
00:41:59,640 --> 00:42:01,480
Speaker 1: you can watch out to be sure that you treat

756
00:42:01,520 --> 00:42:05,880
Speaker 1: them with respect and consideration and that they would welcome

757
00:42:05,880 --> 00:42:08,400
Speaker 1: you back. And they have done a terrific job at that.

758
00:42:08,520 --> 00:42:11,600
Speaker 1: They've also done some terrific things in terms of public perception.

759
00:42:12,680 --> 00:42:17,160
Speaker 1: So we mentioned the Rockefell or family office. After that,

760
00:42:17,239 --> 00:42:20,759
Speaker 1: you ended up at Donaldson, Lufkin and Jenrette better known

761
00:42:20,800 --> 00:42:24,120
Speaker 1: as d l J. What was that experience like? It

762
00:42:24,160 --> 00:42:29,520
Speaker 1: was fabulous fun, A bunch of very bright guys pulled together. Honestly,

763
00:42:29,560 --> 00:42:32,200
Speaker 1: we didn't know an awful lot about the securities business,

764
00:42:32,239 --> 00:42:35,120
Speaker 1: but we were learning, and we were involved in the

765
00:42:35,120 --> 00:42:38,520
Speaker 1: front edge of research being important, and we were involved

766
00:42:38,520 --> 00:42:41,800
Speaker 1: in the front edge of active investment management being important,

767
00:42:42,120 --> 00:42:44,279
Speaker 1: and all of those things were working very much to

768
00:42:44,320 --> 00:42:47,640
Speaker 1: our benefit and interest because we were there first, because

769
00:42:47,640 --> 00:42:50,480
Speaker 1: we brought some very bright and capable people together, and

770
00:42:50,520 --> 00:42:52,759
Speaker 1: we had a wonderful time because we enjoyed each other

771
00:42:52,840 --> 00:42:57,239
Speaker 1: so very much. And then not too long after that, you,

772
00:42:57,400 --> 00:42:59,920
Speaker 1: I want to say, seventy two seventy three, you launched

773
00:43:00,360 --> 00:43:04,759
Speaker 1: Grants Associates, which was a consulting firm, but not your

774
00:43:04,840 --> 00:43:08,560
Speaker 1: usual consulting firm. What what made you say I think

775
00:43:08,560 --> 00:43:11,279
Speaker 1: I'm gonna try launching a consulting business. Well, are a

776
00:43:11,320 --> 00:43:12,840
Speaker 1: couple of things that made us different. One of we

777
00:43:12,920 --> 00:43:15,919
Speaker 1: only did things in the financial services world and only

778
00:43:15,960 --> 00:43:18,799
Speaker 1: at the institutional level, no retail work of any kind.

779
00:43:19,560 --> 00:43:22,160
Speaker 1: The second is, as consultants, we did all of our

780
00:43:22,200 --> 00:43:25,760
Speaker 1: own homework ourselves as principles, and then when and offered

781
00:43:25,760 --> 00:43:29,680
Speaker 1: our service, which is here is some extraordinary, undeniably accurate

782
00:43:29,800 --> 00:43:32,480
Speaker 1: data because we have just interviewed a thousand of your

783
00:43:32,480 --> 00:43:36,200
Speaker 1: most important customers, and they really know what they're talking about,

784
00:43:36,239 --> 00:43:39,360
Speaker 1: and they're talking about you and your competition on thirty

785
00:43:39,760 --> 00:43:42,200
Speaker 1: fifty different specific variables. So if you really want to

786
00:43:42,200 --> 00:43:43,960
Speaker 1: know how you're doing, this is the best source of

787
00:43:44,000 --> 00:43:48,200
Speaker 1: information you've ever had, and it's undeniable data. And then secondly,

788
00:43:48,239 --> 00:43:51,320
Speaker 1: we had bankers who worked with the banking clients, investment

789
00:43:51,360 --> 00:43:54,160
Speaker 1: managers who worked with the investment management clients. People out

790
00:43:54,160 --> 00:43:56,439
Speaker 1: of the brokerage business worked with the broker's clients, people

791
00:43:56,440 --> 00:43:58,320
Speaker 1: out of the bond business work with the bond clients.

792
00:43:58,360 --> 00:44:00,279
Speaker 1: So all around the world we had to come nation

793
00:44:00,280 --> 00:44:04,759
Speaker 1: of undeniable data and very skilled, competent consultants who bringly

794
00:44:04,760 --> 00:44:06,719
Speaker 1: into the business. And then we worked with the same

795
00:44:06,719 --> 00:44:08,839
Speaker 1: clients year after year after year after year after year.

796
00:44:09,080 --> 00:44:11,400
Speaker 1: Then people get used to saying, this is really very hopeful.

797
00:44:11,880 --> 00:44:14,160
Speaker 1: And when you say you work with the same clients,

798
00:44:14,280 --> 00:44:17,400
Speaker 1: let's let's explore that a little bit. Your client roster

799
00:44:18,440 --> 00:44:23,200
Speaker 1: is essentially you who's who of financial services companies as

800
00:44:23,239 --> 00:44:25,880
Speaker 1: well as am I correct in saying you work with

801
00:44:26,080 --> 00:44:29,440
Speaker 1: various treasury departments of different countries around the world. You're

802
00:44:29,480 --> 00:44:32,520
Speaker 1: in a lot of different nations now, um, from that

803
00:44:32,560 --> 00:44:35,680
Speaker 1: little shop that began back in nine most most all

804
00:44:35,760 --> 00:44:39,840
Speaker 1: of our clients were the sellers or offerers of financial services.

805
00:44:40,200 --> 00:44:42,360
Speaker 1: We did a little bit of work once in a

806
00:44:42,360 --> 00:44:45,480
Speaker 1: while for the Federal Reserve Bank or for central banks,

807
00:44:45,480 --> 00:44:48,239
Speaker 1: but not very much at all. So it's it's primarily

808
00:44:48,400 --> 00:44:52,640
Speaker 1: large institutional client base. And this has become you have

809
00:44:52,800 --> 00:44:54,960
Speaker 1: there are a few hundred am I correct and saying

810
00:44:54,960 --> 00:44:58,000
Speaker 1: a few hundred employees, now about four hundred people. So

811
00:44:58,040 --> 00:45:00,799
Speaker 1: this is what this is a substanti full firm that

812
00:45:00,920 --> 00:45:03,520
Speaker 1: there you know, a lot of people have never heard

813
00:45:03,560 --> 00:45:07,040
Speaker 1: of Granwich Associates, but you guys are very very influential

814
00:45:07,560 --> 00:45:10,319
Speaker 1: in the world of finance. In the little world that

815
00:45:10,360 --> 00:45:14,719
Speaker 1: we were focused on big fish small. I don't know

816
00:45:14,760 --> 00:45:17,680
Speaker 1: if I'm going to tell say that that's accurate, but

817
00:45:18,000 --> 00:45:20,480
Speaker 1: I'll let you slip away with that. Well, we really

818
00:45:20,520 --> 00:45:22,920
Speaker 1: cared about our clients and we really worked with our clients.

819
00:45:23,120 --> 00:45:26,919
Speaker 1: And so people can tell when you're the real thing,

820
00:45:27,200 --> 00:45:29,239
Speaker 1: and people can tell when you're doing better than you

821
00:45:29,280 --> 00:45:31,560
Speaker 1: claim you were doing, and people can tell when you've

822
00:45:31,560 --> 00:45:36,960
Speaker 1: got a really good value to deliver. People in the

823
00:45:36,960 --> 00:45:39,080
Speaker 1: financial world are smart, and they can catch on pretty

824
00:45:39,120 --> 00:45:41,480
Speaker 1: quickly for people who are not all that good, but

825
00:45:41,520 --> 00:45:43,640
Speaker 1: they can also catch on pretty quickly for people who

826
00:45:43,640 --> 00:45:46,800
Speaker 1: are really good. One of the things that that struck

827
00:45:46,840 --> 00:45:49,520
Speaker 1: me when I was sifting through your some of your

828
00:45:49,560 --> 00:45:55,160
Speaker 1: biographies plural, was that when you describe the cultural values

829
00:45:55,320 --> 00:45:59,560
Speaker 1: of Grandwich Associates, that's pretty much how you described it.

830
00:46:00,120 --> 00:46:04,719
Speaker 1: The client more than they bargain for ever more value output,

831
00:46:04,880 --> 00:46:09,080
Speaker 1: over promise, you thunder promise and over deliver. And that

832
00:46:09,160 --> 00:46:11,680
Speaker 1: really is what drove that the development of that business,

833
00:46:11,800 --> 00:46:14,560
Speaker 1: and it makes it very comfortable position to be in

834
00:46:14,640 --> 00:46:17,160
Speaker 1: for the people inside the firm to know that they're

835
00:46:17,160 --> 00:46:20,359
Speaker 1: really delivering great value and that clients like it. So

836
00:46:20,440 --> 00:46:24,040
Speaker 1: it's a hard work, low stress sort of approach. It

837
00:46:24,160 --> 00:46:26,080
Speaker 1: was plenty of stress just because of the hard work,

838
00:46:26,120 --> 00:46:28,840
Speaker 1: but it was such a fun time. So let me

839
00:46:28,840 --> 00:46:30,600
Speaker 1: give you a couple of quotes of yours that I

840
00:46:30,640 --> 00:46:35,759
Speaker 1: really like, and let's see how you um, I think

841
00:46:35,920 --> 00:46:39,520
Speaker 1: I think it is. The investment management business is built

842
00:46:39,600 --> 00:46:43,799
Speaker 1: upon a simple and basic belief professional money managers can

843
00:46:43,840 --> 00:46:47,799
Speaker 1: beat the market. That premise appears to be false. This

844
00:46:47,880 --> 00:46:52,120
Speaker 1: is right from uh the original Losers game. Explain not

845
00:46:52,239 --> 00:46:54,840
Speaker 1: that that needs a whole lot of explaining, but explain

846
00:46:54,920 --> 00:46:57,360
Speaker 1: how you came upon that. Well, first of all, I

847
00:46:57,440 --> 00:47:00,480
Speaker 1: had the privilege of working directly with quite a number

848
00:47:00,520 --> 00:47:05,000
Speaker 1: of very good investment managers, and therefore I came to

849
00:47:05,040 --> 00:47:07,440
Speaker 1: a realization faster than most people would be able to

850
00:47:07,719 --> 00:47:10,360
Speaker 1: that there are really a lot of really smart people

851
00:47:10,360 --> 00:47:12,399
Speaker 1: out there, and they're all competing trying to beat each other,

852
00:47:12,440 --> 00:47:15,440
Speaker 1: and they all underestimate the competition because they don't realize

853
00:47:15,640 --> 00:47:18,160
Speaker 1: how many other really smart people are out there. So

854
00:47:18,200 --> 00:47:21,120
Speaker 1: that's one. The second is, year after year after year,

855
00:47:21,160 --> 00:47:24,480
Speaker 1: I would watch perfectly wonderful people trying the hardest they

856
00:47:24,480 --> 00:47:29,879
Speaker 1: could disappointed in themselves because their particular organization or their

857
00:47:29,920 --> 00:47:33,839
Speaker 1: particular portfolio came in short. The third is that I

858
00:47:33,880 --> 00:47:37,920
Speaker 1: was working with research data that gave access to very

859
00:47:37,960 --> 00:47:41,239
Speaker 1: strong judgments right across the marketplace, and that helps a

860
00:47:41,239 --> 00:47:45,120
Speaker 1: lot for learning at a fast clip. The last is

861
00:47:46,239 --> 00:47:48,680
Speaker 1: I did have the privilege of knowing a lot of

862
00:47:48,800 --> 00:47:52,600
Speaker 1: very very bright people in the academic community, and I

863
00:47:52,719 --> 00:47:55,160
Speaker 1: knew what they were doing, and they were doing research

864
00:47:55,239 --> 00:47:57,799
Speaker 1: that kept coming up with this stuff that people are

865
00:47:57,840 --> 00:48:01,880
Speaker 1: doing actually cancels itself out. These people are really brilliant,

866
00:48:01,880 --> 00:48:04,399
Speaker 1: they're really hard working, but they're not actually beating each

867
00:48:04,440 --> 00:48:07,320
Speaker 1: other because they're so damn talented. So then I started

868
00:48:07,360 --> 00:48:09,640
Speaker 1: paying attention to that, and then I could see, my god,

869
00:48:09,640 --> 00:48:12,960
Speaker 1: it's coming true. So it wasn't a stroke of genius.

870
00:48:13,000 --> 00:48:14,400
Speaker 1: It was just a matter of being there at the

871
00:48:14,480 --> 00:48:16,440
Speaker 1: right place at the right time to see it. Well, well,

872
00:48:16,480 --> 00:48:19,720
Speaker 1: you were one of the first that really really saw

873
00:48:19,760 --> 00:48:24,600
Speaker 1: that very early. Um, here's an interesting observation from you,

874
00:48:24,680 --> 00:48:28,399
Speaker 1: and I'm actually going to turn it into a question. So,

875
00:48:29,600 --> 00:48:32,640
Speaker 1: given that everything you've said is is true and accurate,

876
00:48:32,640 --> 00:48:36,040
Speaker 1: and we all intellectually understand that, why is it that

877
00:48:36,200 --> 00:48:41,880
Speaker 1: active management is still the dominant form of investing. UH.

878
00:48:41,960 --> 00:48:48,560
Speaker 1: In finance, well, we all laugh about the second marriages

879
00:48:48,719 --> 00:48:53,200
Speaker 1: is the triumph of hope over experience. We all know

880
00:48:53,280 --> 00:48:57,040
Speaker 1: about too soon, old, too late smart say that again,

881
00:48:57,280 --> 00:49:03,560
Speaker 1: too soon, old, too late, late smart. Uh. It's hard

882
00:49:03,640 --> 00:49:06,360
Speaker 1: to give up on something that we've all learned as kids.

883
00:49:06,760 --> 00:49:09,320
Speaker 1: Try harder, you'll do better. Try harder and you'll do better.

884
00:49:10,160 --> 00:49:14,040
Speaker 1: And we also have kind of an instinct for giving

885
00:49:14,040 --> 00:49:20,359
Speaker 1: it a try ourselves. So I don't ever gamble and casinos.

886
00:49:21,200 --> 00:49:23,960
Speaker 1: It's just I know enough about the take from the

887
00:49:23,960 --> 00:49:26,560
Speaker 1: owners of the casino, and they're very good at it,

888
00:49:26,560 --> 00:49:29,480
Speaker 1: and they can mathematically change the take on the slot

889
00:49:29,480 --> 00:49:33,919
Speaker 1: machine from eight percent to seven to six percent. If

890
00:49:33,960 --> 00:49:36,640
Speaker 1: the traffic isn't high enough at eight percent, they'll bring

891
00:49:36,680 --> 00:49:38,759
Speaker 1: it down until people start saying, hey, look at all

892
00:49:38,800 --> 00:49:43,120
Speaker 1: the winning. Uh. And I understand that it's fun for

893
00:49:43,160 --> 00:49:46,120
Speaker 1: people to do gambling. Why I don't understand, but I

894
00:49:46,160 --> 00:49:50,319
Speaker 1: do understand that people do enjoy it. If you kind

895
00:49:50,320 --> 00:49:52,399
Speaker 1: of like gambling, and if you kind of like your

896
00:49:53,600 --> 00:49:56,840
Speaker 1: school teachers taught you, try harder, you'll do better. And

897
00:49:56,840 --> 00:49:58,640
Speaker 1: you think, I think I'll take a turn at it.

898
00:49:58,680 --> 00:50:01,960
Speaker 1: I think I'll give it a try. Uh. We're sort

899
00:50:01,960 --> 00:50:04,520
Speaker 1: of programmed to give one more try, one more try,

900
00:50:04,640 --> 00:50:07,359
Speaker 1: one more try, and then we're also very good at

901
00:50:07,400 --> 00:50:10,759
Speaker 1: not remembering the things that hurt. If you take back,

902
00:50:11,760 --> 00:50:13,600
Speaker 1: if you sat down a piece of paper and a

903
00:50:13,600 --> 00:50:15,719
Speaker 1: pencil and said I'm going to have to fill up

904
00:50:15,760 --> 00:50:18,160
Speaker 1: one side of one sheet of paper with memories, I

905
00:50:18,160 --> 00:50:20,080
Speaker 1: can promise you that most of your memories will be

906
00:50:20,120 --> 00:50:24,560
Speaker 1: positive memories. Why, because we're good at obliterating from memory

907
00:50:24,960 --> 00:50:28,319
Speaker 1: those things that were painful. We don't remember what the

908
00:50:28,320 --> 00:50:31,480
Speaker 1: appendicitis felt like. We don't remember what it was like

909
00:50:31,560 --> 00:50:33,200
Speaker 1: to get hit in the draw by that big kid

910
00:50:33,239 --> 00:50:35,759
Speaker 1: down the block. We don't remember what it was like

911
00:50:35,840 --> 00:50:37,640
Speaker 1: when that girl that we just thought it was absolutely

912
00:50:37,640 --> 00:50:40,359
Speaker 1: wonderful says dear John, I do not want to see

913
00:50:40,360 --> 00:50:43,440
Speaker 1: you anymore. All that sort of stuff fades away, and

914
00:50:43,480 --> 00:50:46,879
Speaker 1: we do remember the positive things down the history. It's

915
00:50:46,880 --> 00:50:50,759
Speaker 1: not just selective perception. It's selective retention in terms of

916
00:50:50,880 --> 00:50:54,120
Speaker 1: we remember the good as investors, and we forget about

917
00:50:54,480 --> 00:50:57,040
Speaker 1: oh yeah, I sold Apple at thirty two. And we

918
00:50:57,120 --> 00:50:59,799
Speaker 1: also think we're smarter than we are, which is why

919
00:50:59,840 --> 00:51:02,239
Speaker 1: we all laugh about Lake woebegon and of the kids

920
00:51:02,280 --> 00:51:04,640
Speaker 1: are above average, because that's the way we feel about ourselves.

921
00:51:04,680 --> 00:51:09,680
Speaker 1: If you ask people candidly, compared to your peers, would

922
00:51:09,680 --> 00:51:12,560
Speaker 1: you rate yourself above averager below average? As a driver,

923
00:51:14,000 --> 00:51:17,239
Speaker 1: people rate themselves above. I asked that question every time

924
00:51:17,239 --> 00:51:21,280
Speaker 1: I give a presentation to a room full of investors.

925
00:51:21,320 --> 00:51:23,800
Speaker 1: How many people in the room are above average drivers?

926
00:51:24,080 --> 00:51:26,400
Speaker 1: Eight out of ten hands go on. It's human nature.

927
00:51:26,520 --> 00:51:30,840
Speaker 1: Same thing dancers, how about conversationalists, how about sense of humor?

928
00:51:31,400 --> 00:51:35,120
Speaker 1: How about kissing and hugging? Everybody gives themselves a little

929
00:51:35,120 --> 00:51:39,880
Speaker 1: bit above average rating, and that's been true of all

930
00:51:39,960 --> 00:51:41,480
Speaker 1: kinds of things. So why can't we do that in

931
00:51:41,480 --> 00:51:45,360
Speaker 1: an investment management So let's let's let me give you

932
00:51:45,400 --> 00:51:47,759
Speaker 1: one other quote, and I want you to go into this.

933
00:51:47,920 --> 00:51:51,839
Speaker 1: You said the investment management business should be a profession,

934
00:51:52,040 --> 00:51:55,640
Speaker 1: but it's not. That was within the concept of the

935
00:51:55,680 --> 00:52:00,120
Speaker 1: earlier quote. Why isn't it a profession? The big is

936
00:52:00,120 --> 00:52:05,360
Speaker 1: on his side gradually becomes dominant, almost for sure. Let's

937
00:52:05,400 --> 00:52:08,200
Speaker 1: go back a little bit. When individuals decide they want

938
00:52:08,200 --> 00:52:11,839
Speaker 1: to go into investment management. In my age group back

939
00:52:11,880 --> 00:52:15,120
Speaker 1: in the sixties, it was because it was interesting because

940
00:52:15,160 --> 00:52:18,400
Speaker 1: it was fun. That's what it looked like. Something absolutely

941
00:52:19,040 --> 00:52:23,319
Speaker 1: because candidly, the pay wasn't all that good. Pay wasn't

942
00:52:23,320 --> 00:52:27,440
Speaker 1: all that good fun. But the pay has been increasing

943
00:52:27,440 --> 00:52:30,200
Speaker 1: and increasing and increasing, so now it's a wonderfully paid

944
00:52:30,239 --> 00:52:33,840
Speaker 1: line of work. So people go into the business or

945
00:52:33,880 --> 00:52:37,200
Speaker 1: into the field tend to be attracted because the compensation

946
00:52:37,280 --> 00:52:41,280
Speaker 1: is terrific and they'll say right away and it's really interesting,

947
00:52:41,320 --> 00:52:43,920
Speaker 1: and they're wonderful people in it. Then you get suspend

948
00:52:44,040 --> 00:52:47,879
Speaker 1: your time doing one of the most interesting, almost without doubt,

949
00:52:47,960 --> 00:52:51,319
Speaker 1: the most interesting competitive game to play, and you do

950
00:52:51,360 --> 00:52:54,160
Speaker 1: it all day, every day, no heavy lifting, no outdoor work,

951
00:52:54,719 --> 00:52:59,319
Speaker 1: no pain and anguish. Everything about it is absolutely marvelous.

952
00:52:59,520 --> 00:53:01,840
Speaker 1: So you were act an extraordinary group. But the dominant

953
00:53:01,840 --> 00:53:05,000
Speaker 1: reason people going to investment management today is because it

954
00:53:05,040 --> 00:53:07,799
Speaker 1: pays very well. One of the things I'm fond of

955
00:53:07,880 --> 00:53:11,240
Speaker 1: pointing out is this is the only profession where even

956
00:53:11,239 --> 00:53:14,799
Speaker 1: if you're not especially bright or especially talented, if you

957
00:53:14,840 --> 00:53:17,200
Speaker 1: put your head down and work hard, you can make

958
00:53:17,239 --> 00:53:19,879
Speaker 1: lots and lots of money. You can't say that you could.

959
00:53:19,920 --> 00:53:22,360
Speaker 1: You could work your tail off as a teacher. You

960
00:53:22,360 --> 00:53:24,640
Speaker 1: could be the greatest fireman in the world. You're not

961
00:53:24,840 --> 00:53:27,799
Speaker 1: necessarily going to make tens of millions of dollars. And

962
00:53:27,840 --> 00:53:32,240
Speaker 1: it always surprises me when people go off the rails

963
00:53:32,239 --> 00:53:37,680
Speaker 1: and do something unlawful or unethical or even illegal. When

964
00:53:37,719 --> 00:53:39,640
Speaker 1: it's all you have to do is be patient and

965
00:53:39,680 --> 00:53:42,680
Speaker 1: you'll make tons of money. Why can't you wait another

966
00:53:42,760 --> 00:53:46,600
Speaker 1: decade to do that? I find it astonishing too. So

967
00:53:46,760 --> 00:53:49,879
Speaker 1: let me let me keep going through some of these questions. UM,

968
00:53:49,920 --> 00:53:53,920
Speaker 1: because there's a bunch of stuff I wanted to get to. Um,

969
00:53:54,400 --> 00:53:56,400
Speaker 1: Let's let's talk about Harvard, because I don't want to

970
00:53:56,440 --> 00:53:59,800
Speaker 1: forget that question. I hand wrote this in because in

971
00:54:00,000 --> 00:54:03,240
Speaker 1: one of your bios you said you found the Harvard

972
00:54:03,280 --> 00:54:07,040
Speaker 1: School of Business to be the most transformative experience of

973
00:54:07,080 --> 00:54:11,799
Speaker 1: your life. That would be true. So what was it

974
00:54:11,880 --> 00:54:13,719
Speaker 1: about the be School that there A whole bunch of

975
00:54:13,760 --> 00:54:16,120
Speaker 1: different things. Number one is you're about the right age

976
00:54:16,160 --> 00:54:19,040
Speaker 1: for this sort of an experience, early twenties. All of

977
00:54:19,080 --> 00:54:21,320
Speaker 1: us are going through lots of changes, So we ascribe

978
00:54:21,719 --> 00:54:25,839
Speaker 1: the positives to the institutions we were at, probably more

979
00:54:25,880 --> 00:54:28,880
Speaker 1: than we should, but that's right. The second thing is

980
00:54:28,920 --> 00:54:33,320
Speaker 1: the school brings together some very bright people and challenges

981
00:54:33,360 --> 00:54:35,440
Speaker 1: each and every one of them to think for themselves

982
00:54:35,920 --> 00:54:38,120
Speaker 1: and to think about what the other person is saying.

983
00:54:38,200 --> 00:54:40,920
Speaker 1: So you learn to listen, and you learn to speak

984
00:54:41,000 --> 00:54:44,279
Speaker 1: up and articulate your own views. And they require you

985
00:54:44,719 --> 00:54:48,000
Speaker 1: three times today, three different problems every day, to work

986
00:54:48,040 --> 00:54:51,040
Speaker 1: your way through a problem that does not have an answer. Really,

987
00:54:51,719 --> 00:54:53,720
Speaker 1: there are no if a good case. At the Harvard

988
00:54:53,719 --> 00:54:56,520
Speaker 1: Business School, there is no clear cut answer, no yes

989
00:54:56,640 --> 00:55:00,000
Speaker 1: or no. Everything is about different ways you could approach.

990
00:55:00,280 --> 00:55:02,480
Speaker 1: So you could make a yes out of going to

991
00:55:02,520 --> 00:55:04,000
Speaker 1: the left. You could make a yes out of going

992
00:55:04,040 --> 00:55:06,040
Speaker 1: to the right. You could make a yes out of

993
00:55:06,080 --> 00:55:08,759
Speaker 1: going a little higher, going a little lower. You could

994
00:55:08,760 --> 00:55:10,920
Speaker 1: also make nose out of each of those things. And

995
00:55:10,960 --> 00:55:14,480
Speaker 1: you realize how complicated the world is, and how important

996
00:55:14,560 --> 00:55:18,440
Speaker 1: making good judgments can be, and how important having the

997
00:55:18,520 --> 00:55:21,920
Speaker 1: right facts can be, and whenever you come to a conclusion,

998
00:55:22,200 --> 00:55:25,440
Speaker 1: how terribly important it is to lead other people towards

999
00:55:25,520 --> 00:55:27,839
Speaker 1: the same analysis, so they can see why you've come

1000
00:55:27,880 --> 00:55:30,160
Speaker 1: out the way you have, and they can either agree

1001
00:55:30,200 --> 00:55:31,920
Speaker 1: with you or saying, no, I'm sorry, Charlie, that's not

1002
00:55:32,000 --> 00:55:33,640
Speaker 1: quite right. This is what you want to do instead,

1003
00:55:33,719 --> 00:55:35,400
Speaker 1: And you're listening to them, and you come out with

1004
00:55:35,600 --> 00:55:38,719
Speaker 1: better answers. So it's really learning how to think more

1005
00:55:38,719 --> 00:55:41,759
Speaker 1: than I think creatively positively with the discipline of getting

1006
00:55:41,800 --> 00:55:46,000
Speaker 1: it right. They're very fascinating. You know. We briefly mentioned

1007
00:55:46,080 --> 00:55:48,960
Speaker 1: one of the people you worked for um at d

1008
00:55:49,120 --> 00:55:51,480
Speaker 1: l J. But who are some of your early mentors

1009
00:55:52,239 --> 00:55:55,200
Speaker 1: at the Rockefeller Group or elsewhere. Oh, I've had so

1010
00:55:55,239 --> 00:55:57,799
Speaker 1: many different people who have taught me a lot. You'd

1011
00:55:57,800 --> 00:56:01,520
Speaker 1: have to go back to without a doubt. The most

1012
00:56:01,520 --> 00:56:04,600
Speaker 1: powerful teacher I have ever had was Miss Nellie Walsh,

1013
00:56:05,040 --> 00:56:07,720
Speaker 1: who was the sixth grade teacher in the Elbridge Gary

1014
00:56:07,760 --> 00:56:12,279
Speaker 1: School in Marblehead, Massachusetts. And she stood in front of

1015
00:56:12,280 --> 00:56:16,640
Speaker 1: the class one day and said, class, you were supposed

1016
00:56:16,640 --> 00:56:19,600
Speaker 1: to be twenty six or twenty seven or twenty eight

1017
00:56:19,680 --> 00:56:25,680
Speaker 1: in number, you are forty two. I am Miss Walsh.

1018
00:56:26,440 --> 00:56:29,440
Speaker 1: You as forty two, and I, as a single teacher,

1019
00:56:30,120 --> 00:56:33,160
Speaker 1: are going to do some very instant things because we

1020
00:56:33,239 --> 00:56:35,760
Speaker 1: are going to cover all of the sixth grade work

1021
00:56:36,440 --> 00:56:42,200
Speaker 1: this year together. She was a wonderful teacher. We all

1022
00:56:42,239 --> 00:56:45,759
Speaker 1: loved her. One day I was called to go to

1023
00:56:45,840 --> 00:56:47,799
Speaker 1: her office because she was also on the side the

1024
00:56:47,840 --> 00:56:51,440
Speaker 1: principal of the school. I was surprised I had no

1025
00:56:51,520 --> 00:56:54,680
Speaker 1: idea what could possibly have gone wrong. But I went

1026
00:56:54,719 --> 00:56:59,080
Speaker 1: down and she said, Charles, I'm very disappointed in you.

1027
00:56:59,640 --> 00:57:02,719
Speaker 1: I said why, Miss Walsh? And she said, am I

1028
00:57:02,880 --> 00:57:06,160
Speaker 1: right that you were found fighting with Peter Neely on

1029
00:57:06,239 --> 00:57:11,200
Speaker 1: the school playground during recess? And I said, yes, Miss Walsh.

1030
00:57:11,320 --> 00:57:16,680
Speaker 1: But I could explain, Charles, I said, Miss Walsh, he

1031
00:57:16,760 --> 00:57:18,680
Speaker 1: was picking on the little kids, and he was throwing

1032
00:57:18,720 --> 00:57:21,800
Speaker 1: snowballs at him, and he was putting cinders in the snowballs,

1033
00:57:21,840 --> 00:57:24,480
Speaker 1: and he was putting rocks in the snowballs, and he

1034
00:57:24,520 --> 00:57:29,600
Speaker 1: wouldn't stop. So I was trying to make him stop. Charles. Ever,

1035
00:57:29,640 --> 00:57:32,520
Speaker 1: unless she had something else in her mind, Charles, I

1036
00:57:32,640 --> 00:57:36,080
Speaker 1: expect more of you than you would bring yourself to

1037
00:57:36,120 --> 00:57:42,360
Speaker 1: the likes of Peter Neely. That will be all. That's

1038
00:57:42,400 --> 00:57:48,000
Speaker 1: the best lesson I ever had from anybody. Powerful. Miss

1039
00:57:48,040 --> 00:57:52,240
Speaker 1: Walsh was some wonderful teacher. So she basically said you,

1040
00:57:52,440 --> 00:57:55,480
Speaker 1: I expect more from you than you expect from yourself

1041
00:57:55,560 --> 00:57:58,320
Speaker 1: by a long shot. So what did that? What did

1042
00:57:58,320 --> 00:58:01,080
Speaker 1: that do to you? As look as a sixth grader,

1043
00:58:01,120 --> 00:58:05,520
Speaker 1: I remember Mrs Welsh's class, and you were a kid

1044
00:58:05,640 --> 00:58:08,960
Speaker 1: at sixth grade, or you're you're essentially a child. How

1045
00:58:09,000 --> 00:58:12,080
Speaker 1: did that resonate with you? Oh? Miss Walsh was a

1046
00:58:12,240 --> 00:58:16,720
Speaker 1: hero for me and she was magic, and it's not

1047
00:58:16,840 --> 00:58:19,200
Speaker 1: something you could walk away from because miss Walsh had

1048
00:58:19,200 --> 00:58:21,120
Speaker 1: said it. It's a little bit like Al Gross was

1049
00:58:21,200 --> 00:58:24,800
Speaker 1: our scout leader and he was a very thoughtful man

1050
00:58:24,880 --> 00:58:27,760
Speaker 1: who didn't happen to have any children, so he had

1051
00:58:27,760 --> 00:58:30,000
Speaker 1: decided he would get into boy scouting and he would

1052
00:58:30,000 --> 00:58:33,720
Speaker 1: take his side and say, here's some suggestions I think

1053
00:58:33,800 --> 00:58:35,400
Speaker 1: might be a good idea where you could go over

1054
00:58:35,400 --> 00:58:37,000
Speaker 1: at his home and he would give you a little

1055
00:58:37,000 --> 00:58:39,600
Speaker 1: bit of extra help on learning how to pass a

1056
00:58:39,680 --> 00:58:45,480
Speaker 1: merit badge. Never ever made it soft. Always the standard

1057
00:58:45,520 --> 00:58:47,560
Speaker 1: was high. But he would help you learn how to

1058
00:58:47,600 --> 00:58:49,800
Speaker 1: do it and would see show you the pathway to

1059
00:58:49,840 --> 00:58:51,680
Speaker 1: being able to do it, so you would be able

1060
00:58:51,720 --> 00:58:55,240
Speaker 1: to be successful. And because he would help you understand

1061
00:58:55,240 --> 00:58:57,760
Speaker 1: what the challenge was, you could pass it was it

1062
00:58:57,880 --> 00:59:01,040
Speaker 1: was a terrific lesson in leadership. So it was it

1063
00:59:01,160 --> 00:59:04,520
Speaker 1: was always about aiming much higher than you think, not

1064
00:59:04,640 --> 00:59:08,280
Speaker 1: just coasting by, but really doing as well as you

1065
00:59:08,280 --> 00:59:11,000
Speaker 1: can possibly do. W then some and at that age

1066
00:59:11,000 --> 00:59:13,720
Speaker 1: it's pretty easy to internalize when you've with people that

1067
00:59:13,840 --> 00:59:18,680
Speaker 1: have got that wonderful quality of genuine caring. So that

1068
00:59:18,760 --> 00:59:22,840
Speaker 1: was really a formative experience to you as what is

1069
00:59:22,920 --> 00:59:25,360
Speaker 1: sixth grades? I want to say about eleven or twelve

1070
00:59:25,440 --> 00:59:28,920
Speaker 1: years old? Is that about right? Ten? Eleven? All right?

1071
00:59:29,000 --> 00:59:33,080
Speaker 1: So now let's let's take this to another place. So,

1072
00:59:33,080 --> 00:59:35,600
Speaker 1: so that's who was formative to you as a person.

1073
00:59:36,320 --> 00:59:39,440
Speaker 1: Who were your big influences when it comes to investing,

1074
00:59:39,480 --> 00:59:43,160
Speaker 1: Who really were your investing heroes for lack of a

1075
00:59:43,160 --> 00:59:47,360
Speaker 1: better word, Boy, there's an awful lot of them. Because

1076
00:59:47,560 --> 00:59:49,720
Speaker 1: I've been privileged to know in a large number of

1077
00:59:49,720 --> 00:59:52,120
Speaker 1: people in the investment management world. I got you for

1078
00:59:52,120 --> 00:59:54,200
Speaker 1: another four hours. So let's let's work our way through

1079
00:59:54,200 --> 00:59:56,840
Speaker 1: the list. Well, Warren Buffett goes right to the top,

1080
00:59:56,920 --> 00:59:59,040
Speaker 1: and David Swinston goes right to the top, and those

1081
00:59:59,080 --> 01:00:03,400
Speaker 1: two are equal. Jack Meyer, who managed the Harvard and

1082
01:00:03,480 --> 01:00:05,520
Speaker 1: Dowment for many years, would be another at the top.

1083
01:00:06,440 --> 01:00:09,240
Speaker 1: This tremendous track. Andre Perrald, who for years taught the

1084
01:00:09,240 --> 01:00:11,760
Speaker 1: investment management course at Harvard Business School and is now

1085
01:00:11,960 --> 01:00:18,640
Speaker 1: an active practitioner. Uh you know, Bill Sharp, absolutely wonderful

1086
01:00:18,720 --> 01:00:22,280
Speaker 1: human being and a very very thoughtful guy. Man named

1087
01:00:22,320 --> 01:00:25,640
Speaker 1: Claude Rosenberg has started a firm called Rosenberg Capital Management

1088
01:00:25,640 --> 01:00:29,800
Speaker 1: in San Francisco would be another. Uh, there are probably

1089
01:00:29,840 --> 01:00:32,840
Speaker 1: a dozen people at Capital Group or the American Funds

1090
01:00:32,920 --> 01:00:36,160
Speaker 1: that would fit into that category. Start with Mike Shanahan

1091
01:00:36,240 --> 01:00:38,439
Speaker 1: and Jim Rothenberg, but then just keep right on going

1092
01:00:38,440 --> 01:00:42,280
Speaker 1: with one after another after another. Just terrific people. Yeah,

1093
01:00:43,520 --> 01:00:45,760
Speaker 1: I'd need a pencil and piece of paper to make

1094
01:00:45,760 --> 01:00:47,800
Speaker 1: a list that I thought was anywhere near fear because

1095
01:00:47,800 --> 01:00:50,920
Speaker 1: it's just all over the place. And I've known people

1096
01:00:51,000 --> 01:00:56,120
Speaker 1: in the United Kingdom that were just terrific. People. In Canada,

1097
01:00:56,160 --> 01:00:59,040
Speaker 1: they're terrific. People in Japan are terrific people. In Australia,

1098
01:00:59,720 --> 01:01:02,680
Speaker 1: I've had a very privileged life. You sound like you can.

1099
01:01:03,040 --> 01:01:05,760
Speaker 1: I'm gonna switch gears on you because something else you

1100
01:01:05,800 --> 01:01:10,240
Speaker 1: wrote really stood out to me. Um you said, you've

1101
01:01:10,280 --> 01:01:13,040
Speaker 1: repeatedly said you you've had a privileged life. How lucky

1102
01:01:13,040 --> 01:01:17,200
Speaker 1: you were with this. Here's something you said that was

1103
01:01:17,280 --> 01:01:20,160
Speaker 1: just stunning. It was a background Wich associates, but really

1104
01:01:20,400 --> 01:01:24,160
Speaker 1: you could ascribe it to anything. The most obvious success

1105
01:01:24,200 --> 01:01:28,200
Speaker 1: factor for us was luck, luck and luck and luck.

1106
01:01:28,280 --> 01:01:30,920
Speaker 1: So what what is the role of luck in business

1107
01:01:30,960 --> 01:01:34,160
Speaker 1: and investing, and in even just in a career. Well,

1108
01:01:34,200 --> 01:01:36,200
Speaker 1: there are two kinds of people, those who know that

1109
01:01:36,240 --> 01:01:38,360
Speaker 1: they were lucky and those who haven't figured it out

1110
01:01:38,440 --> 01:01:42,040
Speaker 1: yet among those who have had a wonderful life. And

1111
01:01:42,560 --> 01:01:44,880
Speaker 1: the truth is, most of the people that have really

1112
01:01:44,920 --> 01:01:47,520
Speaker 1: been hurt badly in life and have come out at

1113
01:01:47,560 --> 01:01:50,480
Speaker 1: the low end of the spectrum that's been luck, too

1114
01:01:50,880 --> 01:01:56,640
Speaker 1: bad luck, but it's really been luck. Life itself is unfair,

1115
01:01:56,760 --> 01:01:59,600
Speaker 1: is what Jack Kennedy said one day when he says,

1116
01:02:00,240 --> 01:02:02,960
Speaker 1: Mr President, how do you feel about those boys who

1117
01:02:03,000 --> 01:02:07,720
Speaker 1: are called up for the Berlin crisis? He said, life

1118
01:02:07,760 --> 01:02:10,880
Speaker 1: itself is unfair? And then going through the Catechism, and

1119
01:02:11,200 --> 01:02:13,200
Speaker 1: some people live at a time when there's no war.

1120
01:02:13,400 --> 01:02:16,720
Speaker 1: Some have wars but never served. Some serve but never

1121
01:02:16,800 --> 01:02:20,880
Speaker 1: leave the country. Some go overseas and never see combat.

1122
01:02:20,960 --> 01:02:23,960
Speaker 1: Some see combat but nothing actually happens. And other people

1123
01:02:24,040 --> 01:02:28,000
Speaker 1: get killed or wounded, and they have that forever. And

1124
01:02:28,040 --> 01:02:31,400
Speaker 1: it was a very good reminder that the experiences that

1125
01:02:31,520 --> 01:02:34,920
Speaker 1: we all have aren't really ones that we chose and

1126
01:02:35,000 --> 01:02:40,040
Speaker 1: to sign for ourselves. It's the fit happens, you know,

1127
01:02:40,120 --> 01:02:43,640
Speaker 1: you I'm I'm pulling something from my memories that you

1128
01:02:43,720 --> 01:02:46,959
Speaker 1: had written. I think it was about Kennedy, who someone

1129
01:02:47,000 --> 01:02:50,600
Speaker 1: had asked him, um, how did you become a war hero?

1130
01:02:50,760 --> 01:02:53,360
Speaker 1: And his answer was along the same lines, they sank

1131
01:02:53,440 --> 01:02:57,680
Speaker 1: my boat. It was involuntary, right, It's exactly that. That's

1132
01:02:57,680 --> 01:02:59,520
Speaker 1: how he became a hero. They sank my boat. I

1133
01:02:59,760 --> 01:03:03,080
Speaker 1: thought that was was fascinating and along the same lines

1134
01:03:03,120 --> 01:03:06,240
Speaker 1: of Hey, you know, it's fairly random what happens in

1135
01:03:06,280 --> 01:03:09,280
Speaker 1: the world, and sometimes you get lucky and it's good,

1136
01:03:09,320 --> 01:03:11,640
Speaker 1: and sometimes you get lucky and it's bad. But then

1137
01:03:11,680 --> 01:03:13,919
Speaker 1: it's Kennedy and what you did with it. I mean,

1138
01:03:13,960 --> 01:03:16,240
Speaker 1: he really was heroic in the way in which he

1139
01:03:16,680 --> 01:03:20,720
Speaker 1: took care of every one of those sailors, and really

1140
01:03:20,760 --> 01:03:25,160
Speaker 1: hard if the physical strain of swimming swimming, swimming, swimming,

1141
01:03:25,200 --> 01:03:30,400
Speaker 1: pulling people along with him. It's a stand up proposition.

1142
01:03:30,760 --> 01:03:34,560
Speaker 1: So you know, luck creates opportunities, and then how you

1143
01:03:34,600 --> 01:03:39,360
Speaker 1: respond to those opportunities really determines to some large degree

1144
01:03:40,280 --> 01:03:43,080
Speaker 1: what you do with that random shuffle of the cards. Boy,

1145
01:03:43,240 --> 01:03:46,400
Speaker 1: is that true? The secret to there's be optimistic, because

1146
01:03:46,440 --> 01:03:49,240
Speaker 1: if you're optimistic, you think something might work out. And

1147
01:03:49,280 --> 01:03:51,600
Speaker 1: if you think something might work out, you'd be surprised

1148
01:03:51,640 --> 01:03:54,000
Speaker 1: how often you can find something that sort of works out.

1149
01:03:54,200 --> 01:03:56,160
Speaker 1: If you're pessimistic and think it will never work out,

1150
01:03:56,200 --> 01:03:58,840
Speaker 1: you're probably right about that too. That's the old story

1151
01:03:58,880 --> 01:04:02,080
Speaker 1: about the little kid who's an optimist who wakes up

1152
01:04:02,080 --> 01:04:04,400
Speaker 1: on Christmas morning and there's a room full of manure

1153
01:04:04,800 --> 01:04:06,760
Speaker 1: and he's all excited and look at all this manure.

1154
01:04:06,760 --> 01:04:09,360
Speaker 1: There's got to be a pony in here somewhere. So

1155
01:04:09,360 --> 01:04:11,680
Speaker 1: so let me go over the four rules of the

1156
01:04:11,720 --> 01:04:14,040
Speaker 1: losers game that and I want to I want to

1157
01:04:14,080 --> 01:04:16,640
Speaker 1: get you to expound on this a little bit. So

1158
01:04:16,800 --> 01:04:19,520
Speaker 1: the four rules I pulled out from from your writings

1159
01:04:19,520 --> 01:04:25,560
Speaker 1: were play your own game, keep it simple, concentrate on defense,

1160
01:04:26,000 --> 01:04:30,080
Speaker 1: and don't take it personally. That's a perfectly marvelous fair.

1161
01:04:31,600 --> 01:04:34,320
Speaker 1: So so let's let's go through that. Play your own game.

1162
01:04:35,200 --> 01:04:38,200
Speaker 1: What does that mean again to the average investor who's

1163
01:04:38,560 --> 01:04:42,520
Speaker 1: looking at this really complicated market. Oh well, that's another

1164
01:04:42,800 --> 01:04:46,520
Speaker 1: another question. If what should an individual do is first

1165
01:04:46,600 --> 01:04:49,240
Speaker 1: recognize that the people who are really out there all

1166
01:04:49,280 --> 01:04:51,840
Speaker 1: the time and dominate the market, or people who are

1167
01:04:51,920 --> 01:04:54,640
Speaker 1: really skilled at their particular game and they're playing it

1168
01:04:54,720 --> 01:04:59,120
Speaker 1: all the time so the time, don't play their game.

1169
01:04:59,200 --> 01:05:02,919
Speaker 1: Play your own game. No, don't play, just don't play

1170
01:05:02,920 --> 01:05:05,920
Speaker 1: at all. Play your own game. I give an example.

1171
01:05:05,960 --> 01:05:08,600
Speaker 1: You could say, Okay, you're going to play against the

1172
01:05:08,600 --> 01:05:11,240
Speaker 1: Olympic team, and some of the people are gonna be

1173
01:05:11,240 --> 01:05:14,760
Speaker 1: downhill skiers, some of the people are gonna swimmers. Some

1174
01:05:14,880 --> 01:05:17,880
Speaker 1: of the people are weightlifters, some of them are balancing

1175
01:05:17,920 --> 01:05:21,480
Speaker 1: beam gymnasts. There are a whole bunch of different skills

1176
01:05:21,560 --> 01:05:23,200
Speaker 1: and they're all going to be out there. Which one

1177
01:05:23,200 --> 01:05:25,240
Speaker 1: do you want to play against? The answers, you don't

1178
01:05:25,240 --> 01:05:27,600
Speaker 1: want to play against any of them, and you certainly

1179
01:05:27,600 --> 01:05:29,600
Speaker 1: don't want to play one after another after another after

1180
01:05:29,600 --> 01:05:32,720
Speaker 1: another another one. They've been specialized in their particular capability.

1181
01:05:33,440 --> 01:05:37,360
Speaker 1: But the people who are swimmers should concentrate on being

1182
01:05:37,400 --> 01:05:40,600
Speaker 1: really gifted capable swimmers and take that discipline over and

1183
01:05:40,640 --> 01:05:43,280
Speaker 1: over and over and over and over again, hour after

1184
01:05:43,360 --> 01:05:46,600
Speaker 1: hour after hour, perfecting their conditioning so that they can

1185
01:05:46,640 --> 01:05:50,440
Speaker 1: be champion athletes. Makes a lot of sense. My colleague

1186
01:05:50,520 --> 01:05:54,200
Speaker 1: Josh always says, the way to defeat high frequency trading

1187
01:05:54,360 --> 01:05:57,520
Speaker 1: is to become a low frequency trader. It's still along

1188
01:05:57,560 --> 01:06:00,320
Speaker 1: the same it's along the same lines, So keep it simple,

1189
01:06:00,920 --> 01:06:04,560
Speaker 1: pretty self obvious, right, you know, but we should rephrase

1190
01:06:04,600 --> 01:06:08,280
Speaker 1: that sounds not keep it simple, stupid, but keep it simple, sweetheart,

1191
01:06:08,880 --> 01:06:11,720
Speaker 1: because people who do keep it simple or happier, and

1192
01:06:11,800 --> 01:06:14,160
Speaker 1: therefore they're nicer to be with, but they also have

1193
01:06:14,240 --> 01:06:18,360
Speaker 1: more success as opposed to getting involved in more complicated

1194
01:06:18,560 --> 01:06:21,520
Speaker 1: more is just slightly beyond your capacity to play him

1195
01:06:21,560 --> 01:06:25,440
Speaker 1: really well, all right? And the third one concentrate on defense.

1196
01:06:25,520 --> 01:06:27,960
Speaker 1: Most people don't really, I don't hear that that often.

1197
01:06:28,360 --> 01:06:31,160
Speaker 1: What do you mean when you say concentrate on your defenses.

1198
01:06:32,200 --> 01:06:34,840
Speaker 1: First of all, in any game you could play offense

1199
01:06:34,920 --> 01:06:39,680
Speaker 1: or defense. Everybody else is playing offense. So your chances

1200
01:06:39,680 --> 01:06:43,000
Speaker 1: of being better at whatever you're competing in by playing

1201
01:06:43,000 --> 01:06:45,880
Speaker 1: a really good defense will show up. And you'll see

1202
01:06:45,880 --> 01:06:48,960
Speaker 1: that when you watch a pro football team playing against

1203
01:06:49,000 --> 01:06:51,640
Speaker 1: another pro football team. Some are really strong on defense

1204
01:06:51,680 --> 01:06:53,960
Speaker 1: and are really strong on offense. But that's a game

1205
01:06:54,000 --> 01:06:56,120
Speaker 1: where everybody knows you've got to play the best you

1206
01:06:56,160 --> 01:07:00,280
Speaker 1: can do at whatever skill sets you've got. Amateurs don't

1207
01:07:00,400 --> 01:07:03,600
Speaker 1: usually pay very much attention to that. We all tend

1208
01:07:03,640 --> 01:07:05,840
Speaker 1: to think in terms of let's try harder to do better,

1209
01:07:06,040 --> 01:07:09,760
Speaker 1: and therefore offense, but the defense can be a wonderful

1210
01:07:09,840 --> 01:07:13,640
Speaker 1: way of coming out as a success. Back to the

1211
01:07:13,640 --> 01:07:16,400
Speaker 1: loser's game and tennis again. If you can get the

1212
01:07:16,400 --> 01:07:19,840
Speaker 1: ball back three times on every point, you will win

1213
01:07:20,240 --> 01:07:24,560
Speaker 1: every set for the rest of your life. That's extraordinary

1214
01:07:24,600 --> 01:07:29,240
Speaker 1: tennis for ordinary players. So in the fourth one, don't

1215
01:07:29,280 --> 01:07:33,080
Speaker 1: take it personally. What does that mean? All of us

1216
01:07:33,080 --> 01:07:35,400
Speaker 1: tend to think, if we got it right, that it

1217
01:07:35,520 --> 01:07:38,760
Speaker 1: was because we were brilliantly successful. If we get it wrong,

1218
01:07:38,840 --> 01:07:43,120
Speaker 1: we get angry and irritated and think somebody shouldn't have

1219
01:07:43,160 --> 01:07:47,040
Speaker 1: done something or something like that. If you're not close

1220
01:07:47,120 --> 01:07:50,000
Speaker 1: to rational, you don't belong in the investment management field.

1221
01:07:50,320 --> 01:07:53,480
Speaker 1: I think the best illustration of that is a beautiful

1222
01:07:53,520 --> 01:07:55,920
Speaker 1: woman at a dinner party which happened to be sitting

1223
01:07:55,920 --> 01:07:59,320
Speaker 1: next to Warren Buffett. Mr Buffett. She said, I am

1224
01:07:59,400 --> 01:08:01,520
Speaker 1: so glad to meet you. I've heard all about you.

1225
01:08:01,840 --> 01:08:04,960
Speaker 1: Now you're a brilliant investment manager. How how did you

1226
01:08:05,000 --> 01:08:07,800
Speaker 1: get to be so good as an investment manager? He said,

1227
01:08:07,840 --> 01:08:10,479
Speaker 1: I'm rational and she said, I'm sorry, but I didn't

1228
01:08:10,520 --> 01:08:12,600
Speaker 1: quite hear what you just said. Would you repeat that?

1229
01:08:12,680 --> 01:08:15,880
Speaker 1: He said, I am rational? And she's looked at it.

1230
01:08:16,280 --> 01:08:19,400
Speaker 1: Is that all oh, and turn talk to the other person.

1231
01:08:21,200 --> 01:08:23,280
Speaker 1: She's looking for a stock tip. But you know, the

1232
01:08:23,360 --> 01:08:28,200
Speaker 1: secret of success in any line of work is being rational, disciplined,

1233
01:08:28,439 --> 01:08:30,920
Speaker 1: and knowing what the dickens you're doing, and what the

1234
01:08:30,920 --> 01:08:34,400
Speaker 1: world of wherever you're competing, what that world is really

1235
01:08:34,479 --> 01:08:37,240
Speaker 1: all about. And there's no doubt that a lot of

1236
01:08:37,280 --> 01:08:41,280
Speaker 1: individual investors are not rational. They don't know what they're doing,

1237
01:08:41,439 --> 01:08:44,479
Speaker 1: and they're not prepared for the competition that they meet.

1238
01:08:44,840 --> 01:08:47,320
Speaker 1: We all make mistakes, and the biggest thing we can

1239
01:08:47,360 --> 01:08:50,360
Speaker 1: do to make our successes more frequent is to make

1240
01:08:50,400 --> 01:08:53,920
Speaker 1: fewer mistakes. And the answer to that is don't do

1241
01:08:54,040 --> 01:08:57,320
Speaker 1: the things that lead to making mistakes. For an example,

1242
01:08:57,840 --> 01:09:01,720
Speaker 1: I don't gamble. You've heard that, under stand. Uh. I'm

1243
01:09:01,760 --> 01:09:04,920
Speaker 1: an indexery I believe in indexing. Why because the other

1244
01:09:04,920 --> 01:09:07,000
Speaker 1: guys are so damn good. They're so smart, they're so

1245
01:09:07,040 --> 01:09:09,840
Speaker 1: hard working, they're so skillful, they're so informed, they've got

1246
01:09:09,880 --> 01:09:12,040
Speaker 1: to access to all kinds of information, and they're really

1247
01:09:12,040 --> 01:09:15,280
Speaker 1: willing to commit any time to making a decision. So

1248
01:09:15,320 --> 01:09:17,120
Speaker 1: I can sit back and say, but they figured it out,

1249
01:09:17,320 --> 01:09:19,720
Speaker 1: but they've got it right. Maybe not perfect, of course,

1250
01:09:19,760 --> 01:09:22,680
Speaker 1: not perfect, but pretty good. Yeah, pretty good, better than

1251
01:09:22,720 --> 01:09:25,360
Speaker 1: I could do, I think. So I'm sad to say

1252
01:09:25,400 --> 01:09:26,800
Speaker 1: that I'd like to be better than they are, but

1253
01:09:26,840 --> 01:09:30,439
Speaker 1: I'm not. And the other thing I avoid the fees,

1254
01:09:31,200 --> 01:09:35,640
Speaker 1: and those fees well very Let me put it. One day,

1255
01:09:35,680 --> 01:09:38,800
Speaker 1: ten years ago, I had this amazing discovery that I

1256
01:09:38,800 --> 01:09:41,280
Speaker 1: had missed the most important point for a long, long

1257
01:09:41,320 --> 01:09:44,400
Speaker 1: time investment manager. I was an investment committee listening to

1258
01:09:44,439 --> 01:09:47,080
Speaker 1: an investment manager explained how things just hadn't worked out,

1259
01:09:47,240 --> 01:09:49,320
Speaker 1: but it was going to be better soon and on

1260
01:09:49,400 --> 01:09:51,600
Speaker 1: average they were really terrific and so on and so on,

1261
01:09:51,680 --> 01:09:53,320
Speaker 1: And I'm looking at the numbers, and I said, you know,

1262
01:09:53,720 --> 01:09:58,120
Speaker 1: it's interesting. It's interesting. I have thought for years that

1263
01:09:58,240 --> 01:10:03,840
Speaker 1: fees were inconsequent I just realized they're the big number.

1264
01:10:04,479 --> 01:10:06,280
Speaker 1: How did I get there? Let me go through the drill.

1265
01:10:06,439 --> 01:10:10,120
Speaker 1: It's really interesting. Number one. We all said four letter words,

1266
01:10:10,120 --> 01:10:14,160
Speaker 1: single number. Only one percent. Fees are small. Only is

1267
01:10:14,200 --> 01:10:16,360
Speaker 1: the right word if it's one percent? But what if

1268
01:10:16,400 --> 01:10:19,200
Speaker 1: it's not one percent? What do you mean? Well? What

1269
01:10:19,240 --> 01:10:22,760
Speaker 1: do I mean by that? Is one percent of my assets?

1270
01:10:22,760 --> 01:10:27,760
Speaker 1: But wait, wait, wait, I already have the assets, so

1271
01:10:27,800 --> 01:10:30,479
Speaker 1: I'm not buying from you the assets I want from

1272
01:10:30,479 --> 01:10:33,519
Speaker 1: you the returns, right, Yeah, yeah, the charlie, you get

1273
01:10:33,520 --> 01:10:36,720
Speaker 1: the returns right? So one percent of assets is how

1274
01:10:36,800 --> 01:10:40,559
Speaker 1: much of a percent of returns? You know it varies

1275
01:10:40,600 --> 01:10:42,559
Speaker 1: a lot? Yeah, but how much on average is it? Well,

1276
01:10:43,280 --> 01:10:46,240
Speaker 1: let's call it fifteen percent of returns? Is a one

1277
01:10:46,280 --> 01:10:50,160
Speaker 1: percent fee of assets? Okay, but I studied economics more

1278
01:10:50,200 --> 01:10:52,920
Speaker 1: than one semester, and in the second semesters at all

1279
01:10:52,960 --> 01:10:58,080
Speaker 1: prices are relative to values. Yeah, what does that mean? Well,

1280
01:10:58,439 --> 01:11:01,320
Speaker 1: what is the value of active management? And what is

1281
01:11:01,320 --> 01:11:05,800
Speaker 1: the fee for active management? What do you mean by value? Well,

1282
01:11:05,960 --> 01:11:08,240
Speaker 1: I can get a commodity product in the X one

1283
01:11:08,360 --> 01:11:11,519
Speaker 1: for ten basis points one tenth of one percent. So

1284
01:11:11,600 --> 01:11:14,720
Speaker 1: if I want to get a custom tailored active management

1285
01:11:15,120 --> 01:11:18,200
Speaker 1: from a really brilliant, hard working guy who's just marvelous

1286
01:11:18,240 --> 01:11:22,080
Speaker 1: to talk to and terribly well informed, what is he

1287
01:11:22,520 --> 01:11:29,439
Speaker 1: charging incrementally over that commodity product? Um nighty basis points

1288
01:11:29,800 --> 01:11:33,720
Speaker 1: nine tenths of one percent, maybe a little bit more, Okay,

1289
01:11:33,720 --> 01:11:37,360
Speaker 1: And what is the return? Well, let's assume that he's

1290
01:11:37,400 --> 01:11:40,639
Speaker 1: a very good manager and he's getting a better than

1291
01:11:40,720 --> 01:11:45,839
Speaker 1: market rate of return. Maybe he's on average getting fifteen

1292
01:11:45,880 --> 01:11:48,680
Speaker 1: basis points over the market that would be a worldwide

1293
01:11:48,720 --> 01:11:56,000
Speaker 1: hero um ninety. Uh, the fee is actually running pretty

1294
01:11:56,000 --> 01:12:02,439
Speaker 1: close of the returns. Oh my goodness. You mean he's

1295
01:12:02,439 --> 01:12:07,200
Speaker 1: getting and I'm only getting. That's right. And what about

1296
01:12:07,200 --> 01:12:09,479
Speaker 1: an average manager. Well, I'm sorry, but the average manager

1297
01:12:09,560 --> 01:12:12,960
Speaker 1: actually gets beaten by the market over the long term.

1298
01:12:13,000 --> 01:12:15,760
Speaker 1: So the fee is actually infinite as a fraction of

1299
01:12:15,760 --> 01:12:18,880
Speaker 1: the incremental value. That's right, Charlie. It's the only service

1300
01:12:18,880 --> 01:12:20,880
Speaker 1: in the history of the world that has a fee

1301
01:12:20,880 --> 01:12:26,080
Speaker 1: that is infinite infinite. Jeff Summer, who Summers, who I

1302
01:12:26,120 --> 01:12:28,599
Speaker 1: believe is still a Yale Is that right? Had an

1303
01:12:28,680 --> 01:12:31,800
Speaker 1: article in the Sunday Times not too long ago that

1304
01:12:31,880 --> 01:12:36,320
Speaker 1: talked about how many mutual funds are trouncing the market

1305
01:12:36,920 --> 01:12:40,439
Speaker 1: and the answer was exactly zero percent. Well, that's a

1306
01:12:40,520 --> 01:12:43,719
Speaker 1: little bit of a tough article because he said, year

1307
01:12:43,760 --> 01:12:48,120
Speaker 1: after year after year after year, and it is very

1308
01:12:48,160 --> 01:12:51,519
Speaker 1: hard for anybody to beat the market. Significant had top

1309
01:12:51,600 --> 01:12:55,439
Speaker 1: quartile of investment results as his target. To be in

1310
01:12:55,439 --> 01:12:57,920
Speaker 1: the top quartil year after year after year after year

1311
01:12:58,479 --> 01:13:02,759
Speaker 1: is really hard. So I thought that was and wanted unfair,

1312
01:13:02,880 --> 01:13:06,360
Speaker 1: and and he threw in costs and fees, and that's

1313
01:13:06,400 --> 01:13:09,040
Speaker 1: how he came up with zero percent that he I

1314
01:13:09,080 --> 01:13:12,320
Speaker 1: believe it was. I don't want to misquote him. The

1315
01:13:12,360 --> 01:13:17,320
Speaker 1: phrase was either pernicious or compounded impact of fees. This

1316
01:13:17,720 --> 01:13:20,600
Speaker 1: handful of guys who managed to do it ended up

1317
01:13:20,640 --> 01:13:24,400
Speaker 1: getting bumped out of that market beating percentile because of

1318
01:13:24,439 --> 01:13:26,160
Speaker 1: the fees. The two different things that I think he

1319
01:13:26,240 --> 01:13:28,599
Speaker 1: really is right on. Number one, fees are high, much

1320
01:13:28,680 --> 01:13:33,880
Speaker 1: higher than people realize. And secondly, that return success it's

1321
01:13:33,920 --> 01:13:36,360
Speaker 1: not a regular repeating thing. So if somebody has had

1322
01:13:36,400 --> 01:13:38,479
Speaker 1: a very good run for three or four years, the

1323
01:13:38,520 --> 01:13:41,639
Speaker 1: odds are stacked against him for the next year. Somebody's

1324
01:13:41,680 --> 01:13:44,840
Speaker 1: had a bad run, but it's pretty damn capable, pretty

1325
01:13:44,880 --> 01:13:46,720
Speaker 1: good chance he will do better next year. A little

1326
01:13:46,760 --> 01:13:48,840
Speaker 1: bit of mean reversion. So let's talk a little bit.

1327
01:13:49,240 --> 01:13:51,800
Speaker 1: You know, we set something else up ourselves, and I

1328
01:13:51,800 --> 01:13:57,440
Speaker 1: know you're involved in this, uh perniciously called robo advisors,

1329
01:13:57,439 --> 01:14:01,400
Speaker 1: but you're on the board of advisors for health Fronts, right.

1330
01:14:01,479 --> 01:14:04,559
Speaker 1: We have a company called Liftoff that we we've set

1331
01:14:04,600 --> 01:14:07,800
Speaker 1: out in order to give people the opportunity to make

1332
01:14:08,040 --> 01:14:13,080
Speaker 1: very low cost investments that are essentially removing that active

1333
01:14:13,080 --> 01:14:18,000
Speaker 1: management and around allowing software to essentially run Uh the

1334
01:14:18,040 --> 01:14:24,960
Speaker 1: investment portfolios. How did you get involved with wealth Ront friendship? Uh,

1335
01:14:25,400 --> 01:14:28,040
Speaker 1: it's complicated, but I have a very bright friend who

1336
01:14:28,120 --> 01:14:31,599
Speaker 1: was on the governing board at Yale. Got to know

1337
01:14:31,680 --> 01:14:35,120
Speaker 1: her that way. She introduced me to the idea and

1338
01:14:35,240 --> 01:14:37,680
Speaker 1: they and I had conversations and it just seemed to

1339
01:14:37,680 --> 01:14:39,840
Speaker 1: make sense to see if there is a way to

1340
01:14:39,960 --> 01:14:44,639
Speaker 1: reduce the cost of delivering investment management services to people

1341
01:14:44,640 --> 01:14:47,280
Speaker 1: who just don't have the time to waste paying attention

1342
01:14:47,280 --> 01:14:49,960
Speaker 1: to it, but want somebody to be paying attention and

1343
01:14:50,120 --> 01:14:53,240
Speaker 1: using pretty simple metrics. And it's not complicated work, but

1344
01:14:53,760 --> 01:14:56,200
Speaker 1: it does help if you're paying, if you're alert and

1345
01:14:56,200 --> 01:14:59,120
Speaker 1: paying attention. So there's a handful of companies like that,

1346
01:14:59,600 --> 01:15:03,040
Speaker 1: Adam Ash at Wealth Front. Uh, there's another company betterment

1347
01:15:03,120 --> 01:15:07,080
Speaker 1: our farm is called Liftoff. There is also Schwab is

1348
01:15:07,120 --> 01:15:11,480
Speaker 1: now running its own robo advisor, and as is Vanguard.

1349
01:15:11,880 --> 01:15:15,240
Speaker 1: Vanguard launched a little late in the in the cycle,

1350
01:15:15,360 --> 01:15:18,719
Speaker 1: launched a robo advisor and suddenly they have five billion

1351
01:15:18,840 --> 01:15:23,439
Speaker 1: in assets under automated management. They just leap frogged everybody else.

1352
01:15:23,840 --> 01:15:25,719
Speaker 1: Is this going to be the way of the future.

1353
01:15:26,080 --> 01:15:29,520
Speaker 1: I don't know, but I think it's a very interesting opportunity,

1354
01:15:30,040 --> 01:15:32,040
Speaker 1: and I would bet that it will work for a

1355
01:15:32,120 --> 01:15:35,400
Speaker 1: large number of people quite well. You know for sure

1356
01:15:35,439 --> 01:15:37,479
Speaker 1: that there will be a lot of competition. There is now,

1357
01:15:37,880 --> 01:15:40,919
Speaker 1: and they'll be more competition, and so the best quality

1358
01:15:40,960 --> 01:15:44,120
Speaker 1: of service will be the ones that work out over time.

1359
01:15:44,560 --> 01:15:48,280
Speaker 1: And I think that's a very attractive thing for individuals.

1360
01:15:48,920 --> 01:15:50,519
Speaker 1: And one of the big problems is if you go

1361
01:15:50,600 --> 01:15:52,600
Speaker 1: to an investment management firm and say I'd like to

1362
01:15:52,600 --> 01:15:54,639
Speaker 1: be a clan, the first thing they have to ask

1363
01:15:54,680 --> 01:15:57,840
Speaker 1: you is, well, what are your assets which you don't have?

1364
01:15:57,840 --> 01:16:00,160
Speaker 1: Need our minimum? Can you? And a lot of are

1365
01:16:00,240 --> 01:16:03,280
Speaker 1: one in three and ten million dollar minimums we've seen,

1366
01:16:04,080 --> 01:16:06,720
Speaker 1: which is exciting and wonderful for those who are clients.

1367
01:16:06,760 --> 01:16:09,040
Speaker 1: On the other hand, most people don't have that kind

1368
01:16:09,040 --> 01:16:11,720
Speaker 1: of money and they would like to have somebody who

1369
01:16:11,720 --> 01:16:14,800
Speaker 1: pay some attention and avoid the big mistakes. So if

1370
01:16:14,800 --> 01:16:18,960
Speaker 1: your attitude mind would be when you're looking for an advisor,

1371
01:16:19,040 --> 01:16:20,840
Speaker 1: what are you trying to do? You're trying to avoid

1372
01:16:20,880 --> 01:16:25,439
Speaker 1: a serious mistake, and the robot advisors can do that

1373
01:16:26,120 --> 01:16:28,800
Speaker 1: at a low cost, and therefore you don't have to

1374
01:16:28,840 --> 01:16:32,640
Speaker 1: pay a high fee. Right the people who have complicated

1375
01:16:32,800 --> 01:16:38,599
Speaker 1: intergenerational wealth transfer issues or complex tax situations. Probably isn't

1376
01:16:38,600 --> 01:16:42,320
Speaker 1: the ideal fit for them. But as opposed to trying

1377
01:16:42,320 --> 01:16:44,479
Speaker 1: to do it on your own or or being left

1378
01:16:44,520 --> 01:16:49,800
Speaker 1: to um costli or alternatives, it really seems to make

1379
01:16:49,840 --> 01:16:53,759
Speaker 1: a lot of sense. So we're down to our last

1380
01:16:53,760 --> 01:16:57,559
Speaker 1: couple of questions. UM, let me ask you you this,

1381
01:16:57,680 --> 01:17:01,080
Speaker 1: since we were just talking about software. Uh, what has

1382
01:17:01,120 --> 01:17:04,280
Speaker 1: really changed since you joined the industry? What do you

1383
01:17:04,320 --> 01:17:09,840
Speaker 1: see as this everything? Well, it seems to me that's

1384
01:17:09,840 --> 01:17:13,360
Speaker 1: a pretty good fair summary. The first day I walked

1385
01:17:13,360 --> 01:17:17,720
Speaker 1: into the Rockefeller family office, I was introduced to a

1386
01:17:17,840 --> 01:17:24,080
Speaker 1: Scantlin machine. Interesting product. Jack Scantlin was a technical genius

1387
01:17:24,600 --> 01:17:28,000
Speaker 1: and Lawrence Rockefeller was a venture capitalist, and they had

1388
01:17:28,240 --> 01:17:31,520
Speaker 1: come together to create a company called Scantle and Electronics.

1389
01:17:32,600 --> 01:17:35,840
Speaker 1: And Jack had figured out that everybody who's in the

1390
01:17:35,880 --> 01:17:38,160
Speaker 1: investment business would like to be able to find out

1391
01:17:38,320 --> 01:17:41,120
Speaker 1: what the price of the stock is without calling a broker.

1392
01:17:41,160 --> 01:17:42,720
Speaker 1: The only way you could find out in those days

1393
01:17:42,760 --> 01:17:45,599
Speaker 1: we call it broker who might or might not remember

1394
01:17:45,640 --> 01:17:48,200
Speaker 1: what was the last price or be able to look

1395
01:17:48,280 --> 01:17:50,439
Speaker 1: up on a chalkboard where a bunch of teenage kids

1396
01:17:50,439 --> 01:17:53,519
Speaker 1: were rapidly trying to keep up with a two million

1397
01:17:53,560 --> 01:17:57,200
Speaker 1: share of day trade volume. Stock market is what was

1398
01:17:57,240 --> 01:17:59,479
Speaker 1: the last price of General Motors IBM and so on?

1399
01:18:00,280 --> 01:18:06,000
Speaker 1: And Jack Scantlon's idea was punched my keypad with the

1400
01:18:06,040 --> 01:18:08,840
Speaker 1: stock exchange symbol, and I'll print out for you on

1401
01:18:08,920 --> 01:18:12,559
Speaker 1: heat sensitive tape what the price is most recent trade,

1402
01:18:13,000 --> 01:18:15,080
Speaker 1: what the highest price of the day, the lowest price

1403
01:18:15,080 --> 01:18:18,880
Speaker 1: of the day, and even the volume, and you could

1404
01:18:18,880 --> 01:18:22,760
Speaker 1: do that and it was just magical. Well, there were

1405
01:18:22,800 --> 01:18:24,960
Speaker 1: only ten of those machines out in the whole world

1406
01:18:25,000 --> 01:18:28,000
Speaker 1: at that point, and I was able to access one

1407
01:18:28,120 --> 01:18:30,479
Speaker 1: just by walking out of my office and turning left,

1408
01:18:30,840 --> 01:18:35,479
Speaker 1: and was terrific. It's a long way from there to

1409
01:18:35,479 --> 01:18:39,200
Speaker 1: today with the kind of factual information that's accessible in

1410
01:18:39,680 --> 01:18:43,360
Speaker 1: every minute to everybody who's actively involved in business. The

1411
01:18:43,479 --> 01:18:47,360
Speaker 1: second thing is very few people were involved in research

1412
01:18:48,200 --> 01:18:51,720
Speaker 1: as analysts. Now there are thousands, hundreds of thousands of

1413
01:18:51,800 --> 01:18:54,840
Speaker 1: people all over the world who are really serious about

1414
01:18:54,880 --> 01:19:01,160
Speaker 1: being experts on industries, companies, demography, economics, politics, all kinds

1415
01:19:01,160 --> 01:19:03,479
Speaker 1: of different facts. So any kind of factual information you'd

1416
01:19:03,479 --> 01:19:05,880
Speaker 1: like to have access to, you can get access by

1417
01:19:06,040 --> 01:19:07,960
Speaker 1: pick up your phone. But you can also get it

1418
01:19:08,040 --> 01:19:11,320
Speaker 1: just by letting the inquiring through the Internet to the

1419
01:19:11,320 --> 01:19:14,759
Speaker 1: people who most recently made contact with you, so terrific

1420
01:19:14,800 --> 01:19:18,200
Speaker 1: factual information. The third thing is regulation has been a

1421
01:19:18,320 --> 01:19:21,320
Speaker 1: huge change in regulation. Used to be that you couldn't

1422
01:19:21,320 --> 01:19:25,200
Speaker 1: do insider trading, fine, but today the SEC requires that

1423
01:19:25,240 --> 01:19:29,200
Speaker 1: you make all information available to all investors. That really

1424
01:19:29,320 --> 01:19:32,920
Speaker 1: levels the play field. All those different things in there

1425
01:19:32,920 --> 01:19:35,000
Speaker 1: a lot were that you can add on top of that.

1426
01:19:35,520 --> 01:19:38,280
Speaker 1: It's very hard to see the business today as being

1427
01:19:38,439 --> 01:19:42,360
Speaker 1: anything like the business was fifty years ago, except we

1428
01:19:42,439 --> 01:19:44,960
Speaker 1: use some of the same terms. We didn't have digital

1429
01:19:45,920 --> 01:19:51,679
Speaker 1: digitized pricing, We had eighths and quarters and halves, open

1430
01:19:51,760 --> 01:19:54,439
Speaker 1: call out on the floor of the stock change was

1431
01:19:54,960 --> 01:19:57,479
Speaker 1: so different from what the volume is today. We do

1432
01:19:57,520 --> 01:19:59,880
Speaker 1: a thousand times more trading today than we did a

1433
01:20:00,040 --> 01:20:02,439
Speaker 1: day then, and that's in the cash market or at

1434
01:20:02,520 --> 01:20:06,320
Speaker 1: least as large. And you think, holy smokes, two thousand

1435
01:20:06,400 --> 01:20:09,280
Speaker 1: times as much volume going through that's really something that that, yeah,

1436
01:20:09,400 --> 01:20:11,400
Speaker 1: sure is. And there are all those other changes and

1437
01:20:11,520 --> 01:20:15,799
Speaker 1: not changes that you can add together. They multiply across

1438
01:20:15,840 --> 01:20:19,320
Speaker 1: each other, so the compounding is simply astonishing. We really

1439
01:20:19,360 --> 01:20:22,559
Speaker 1: take a lot of things. For granted, I'm astonished to

1440
01:20:22,640 --> 01:20:29,680
Speaker 1: think that the price action was essentially invisible to even professionals,

1441
01:20:29,720 --> 01:20:32,160
Speaker 1: and that was a big innovation. Hey, we could tell

1442
01:20:32,200 --> 01:20:35,000
Speaker 1: you what the actual price of the stock is. Yep,

1443
01:20:35,280 --> 01:20:38,599
Speaker 1: that's amazing. My My final question before we let you

1444
01:20:38,680 --> 01:20:41,719
Speaker 1: let you go, and this is a question I asked

1445
01:20:41,720 --> 01:20:45,800
Speaker 1: all my guests, what have you learned about investing that

1446
01:20:45,840 --> 01:20:49,400
Speaker 1: you wish you knew at the start of your career? Oh? Boy,

1447
01:20:49,680 --> 01:20:56,559
Speaker 1: quite a lot. Uh. First of all, investing is a

1448
01:20:56,680 --> 01:21:01,080
Speaker 1: long wavelength activity, and the fact that the stock exchanges

1449
01:21:01,160 --> 01:21:04,479
Speaker 1: a short wavelength activity, and most of the chatter about

1450
01:21:04,560 --> 01:21:08,679
Speaker 1: investing a short wavelength activity should not distract you from

1451
01:21:08,720 --> 01:21:13,599
Speaker 1: the serious work of long wavelength and real investing is

1452
01:21:13,640 --> 01:21:17,559
Speaker 1: so different from stock trading that you really ought to know.

1453
01:21:17,640 --> 01:21:19,240
Speaker 1: Which is it that you're gonna do. I have nothing

1454
01:21:19,280 --> 01:21:21,160
Speaker 1: against people want to do stock trading for the rest

1455
01:21:21,200 --> 01:21:23,200
Speaker 1: of their lives. I don't have any interest in that.

1456
01:21:23,280 --> 01:21:28,600
Speaker 1: I'm interested in investing, just a very different discipline. Uh.

1457
01:21:29,080 --> 01:21:31,840
Speaker 1: The second thing is I wish I had known how

1458
01:21:31,960 --> 01:21:34,400
Speaker 1: much fun it would be, because then I would have

1459
01:21:34,479 --> 01:21:36,880
Speaker 1: settled in with even more confidence to it. Because I've

1460
01:21:36,880 --> 01:21:39,400
Speaker 1: really enjoyed it, and it's partly the activity of the game,

1461
01:21:39,840 --> 01:21:43,360
Speaker 1: but mostly the privilege of working with extraordinarily bright people

1462
01:21:43,400 --> 01:21:46,760
Speaker 1: who are very articulate and very competitive and striving all

1463
01:21:46,800 --> 01:21:49,080
Speaker 1: the time to learn about new things and talking about

1464
01:21:49,120 --> 01:21:52,280
Speaker 1: new things, and the information flow is simply terrific. And

1465
01:21:52,320 --> 01:21:54,840
Speaker 1: the last it's candidly, I wished I'd realized what a

1466
01:21:54,960 --> 01:21:58,840
Speaker 1: terrific business it is, because if I had understood that,

1467
01:21:58,920 --> 01:22:01,240
Speaker 1: I would not have started Ranitis Associates, where I had

1468
01:22:01,240 --> 01:22:05,120
Speaker 1: a wonderful time. I would have started an investment management firm,

1469
01:22:05,200 --> 01:22:09,240
Speaker 1: and I would have made a larger financial success. And

1470
01:22:09,280 --> 01:22:11,439
Speaker 1: you know what's really sad about it, I would have

1471
01:22:11,479 --> 01:22:15,839
Speaker 1: been wrong. Because I would have made a larger financial success,

1472
01:22:15,880 --> 01:22:18,960
Speaker 1: I would have had a greater amount of excitement and

1473
01:22:19,000 --> 01:22:22,080
Speaker 1: fun in many ways, but I wouldn't be nearly as

1474
01:22:22,080 --> 01:22:24,639
Speaker 1: proud of what I had been doing as I'm able

1475
01:22:24,680 --> 01:22:26,640
Speaker 1: to be now looking back on the work that we

1476
01:22:26,680 --> 01:22:29,439
Speaker 1: did as a firm for the clients that we served.

1477
01:22:29,960 --> 01:22:32,240
Speaker 1: And that to me is the ultimate expression, because I

1478
01:22:32,280 --> 01:22:35,519
Speaker 1: am ultimately, whether I like it or not, I'm much

1479
01:22:35,560 --> 01:22:38,760
Speaker 1: more inclined towards the professional disciplines and whatever I'm doing

1480
01:22:38,760 --> 01:22:42,080
Speaker 1: than the business disciplines. I love smart people. I think

1481
01:22:42,120 --> 01:22:44,240
Speaker 1: that's just terrific, but I'd rather work with them on

1482
01:22:44,360 --> 01:22:48,240
Speaker 1: the drive for competition for best ideas than the drive

1483
01:22:48,280 --> 01:22:51,519
Speaker 1: for competition of making the most money. Charlie, thank you

1484
01:22:51,600 --> 01:22:54,439
Speaker 1: so much for being so generous with your time. This

1485
01:22:54,520 --> 01:22:59,479
Speaker 1: has just been absolutely a joy and a privilege. I'm

1486
01:22:59,479 --> 01:23:02,120
Speaker 1: gonna have to ask you to sign some of your

1487
01:23:02,120 --> 01:23:05,559
Speaker 1: books for me. We've been speaking with Charlie Ellis. He

1488
01:23:05,800 --> 01:23:12,599
Speaker 1: is the author of sixteen books, including most recently Falling Short,

1489
01:23:12,720 --> 01:23:16,880
Speaker 1: Falling Short. I highly recommend reading any of his books.

1490
01:23:17,200 --> 01:23:20,960
Speaker 1: My favorite is Winning the Losers Game. Um. If you

1491
01:23:21,240 --> 01:23:24,160
Speaker 1: enjoyed this podcast, look up an Inch Short, Down an

1492
01:23:24,160 --> 01:23:27,200
Speaker 1: Inch on Apple iTunes and you can see the rest

1493
01:23:27,240 --> 01:23:30,720
Speaker 1: of our our various conversations. Feel free to check out

1494
01:23:30,760 --> 01:23:33,559
Speaker 1: my daily column on Bloomberg View dot com or follow

1495
01:23:33,600 --> 01:23:36,599
Speaker 1: me on Twitter at rid Halts. I have to thank

1496
01:23:37,400 --> 01:23:42,400
Speaker 1: my engineer Matt Ryan, my assistant producer Charlie Valmer, and

1497
01:23:42,479 --> 01:23:45,200
Speaker 1: my head of research Mike bat Nick for helping put

1498
01:23:45,240 --> 01:23:47,720
Speaker 1: this all together. And most of all, thank you so much,

1499
01:23:47,760 --> 01:23:50,280
Speaker 1: Charlie Ellis. This has been absolutely a delight. Thanks Pare.

1500
01:23:50,360 --> 01:23:54,760
Speaker 1: I've had the most fun you're listening to Masters in

1501
01:23:54,840 --> 01:23:57,960
Speaker 1: Business with Barry rid Holts on Bloomberg Radio.