Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: My guest today, and I know I say this every
Speaker 1: week my special guest is, but really my guest this
Speaker 1: week is Finance Royalty. Charlie Ellis. Where do I begin
Speaker 1: describing this gentleman? And he is truly a gentleman. He
Speaker 1: is old school, he comes from a different world. Um
Speaker 1: I I we were jokingly saying, I don't know if
Speaker 1: I've ever met a finer human being other than him
Speaker 1: or Arthur Levitt. It's a race to see which gentleman
Speaker 1: is is more um of of a fantastic human being.
Speaker 1: A little background about Charlie. Undergraduate, he goes to Yale
Speaker 1: Majors in Art History, comes out, doesn't know what to
Speaker 1: do with himself, sort of wanders into Harvard Business School
Speaker 1: and discovers that he really enjoys that. He called it
Speaker 1: the most transformative two years of his life. Comes out
Speaker 1: of Harvard and and eventually just kind of wanders into
Speaker 1: the Rockefeller family office and tells a delightful story about
Speaker 1: how they discovered he essentially knew nothing about investing. Charlie,
Speaker 1: didn't they teach anything in the Harvard Business School? Not
Speaker 1: about investing. It was about business. And so he ends
Speaker 1: up going to n y U and, as he describes it,
Speaker 1: getting a doctorate. And I won't spoil the story, I'll
Speaker 1: let I'll let him tell you. But then his resume,
Speaker 1: as if that wasn't enough, just continues to accumulate accolades
Speaker 1: and awards and everything else. Uh. He he works at
Speaker 1: d l J and then he sets up Greenwich Associates,
Speaker 1: where he is essentially a consultant to the financial services industry.
Speaker 1: He is on the Yale Endowment Board of Managers where
Speaker 1: he's a chairman with David Swinson, who's the c i O.
Speaker 1: He's won all manner of awards from all sorts of people. Well,
Speaker 1: how I know Charlie Ellis was from a short essay
Speaker 1: that he wrote in and I read it decades afterwards,
Speaker 1: called the Loser's Game. And and why this is so
Speaker 1: important for investors. Charlie reads a book about tennis, Extraordinary
Speaker 1: Tennis for Ordinary Players, and the book describes how tennis
Speaker 1: is really two games in one. There is the professional
Speaker 1: game and the amateur game. And why do we say
Speaker 1: there are two games in one? Well, the way professionals
Speaker 1: win is they outscore their opponent. They place the ball
Speaker 1: with great force and accuracy just outside of their opponent's reach.
Speaker 1: So professionals win tennis games, on the other hand, And
Speaker 1: by the way, that's professionals playing other professionals. So even
Speaker 1: when a professional, when the score is such that one
Speaker 1: professional has lost to another professional, it's because he was
Speaker 1: beaten by the winning player. Compare that with amateurs. The
Speaker 1: way amateurs play tennis, they lose games. Amateurs try too hard,
Speaker 1: they hit the ball too far, they double fault when
Speaker 1: they serve, they hit the ball into the net. Amateurs
Speaker 1: have lots and lots of unforced errors. And so when
Speaker 1: you have two amateurs playing each other, it's not that
Speaker 1: one of them has beaten to the other, It's that
Speaker 1: one of them has lost more points than the other
Speaker 1: and therefore loses. Professionals score more points and win. Two
Speaker 1: professionals playing each other, amateurs essentially defeat themselves. And to
Speaker 1: Charlie's great credit, and here it is in it's the
Speaker 1: middle of a bear market, who is even thinking in
Speaker 1: these terms? He looks at this book about tennis and
Speaker 1: draws the analogy to investors. Investors lose all the time,
Speaker 1: even professionals who in theory, should be hitting harder, more accurately,
Speaker 1: and just outside of their opponent's reach. As he describes it,
Speaker 1: the competition is so intense. There are so many bright,
Speaker 1: well learned, knowledgeable, intense competitive players in the marketplace that
Speaker 1: they all sort of cancel each other out. And the
Speaker 1: advantage of indexing and Charlie Ellis's view is that when
Speaker 1: you have all these smart people and they all cancel
Speaker 1: each other out, a you can compete with them as
Speaker 1: an amateur. You certainly would never step on to the
Speaker 1: field of a football game on a Sunday and play
Speaker 1: with the pros. They need three gurneys to carry you
Speaker 1: off the field to play. It's the same thing you
Speaker 1: step onto the gridiron, you step into the professional trading
Speaker 1: as an amateur, and you're up against the biggest, smartest, strongest,
Speaker 1: fastest firms who have all the tools and everything they
Speaker 1: need to beat you. But they're all competing against each other.
Speaker 1: And what ends up happening is low cost, low activity
Speaker 1: INDE funds over the long hole tend to be the
Speaker 1: best opportunity for most individuals. Uh. This is a tremendous
Speaker 1: insight that he developed. Not just why indexing works. But
Speaker 1: the way that amateur investors managed to hurt themselves, and
Speaker 1: no matter how good the pros are, how they all
Speaker 1: essentially cross, you know, cancel each other out, is really
Speaker 1: a fascinating insight. Uh. And and from that he's built
Speaker 1: a just a tremendous body of work and a tremendous
Speaker 1: reputation as an investor, as an advisor, as a consultant
Speaker 1: um to a number of very very large financial institutions.
Speaker 1: If if you can name a firm off the top
Speaker 1: of your head, there's a fair probability that Charlie Ellis
Speaker 1: has consulted with them and giving them advice as to
Speaker 1: how they should be running their business as well as
Speaker 1: how they should be managing their money. So I just
Speaker 1: found it. I was tickled pink to to sit with
Speaker 1: him for a couple of hours after the show. I
Speaker 1: walked him over to the Yale Club where he had
Speaker 1: an event that that night, and he was just a
Speaker 1: delight to walk down the streets of New York on St.
Speaker 1: Patty's Day and just talk about everything that was going
Speaker 1: around in the city around us. I found him to
Speaker 1: be utterly charming. It was my pleasure to spend a
Speaker 1: day with him without further ado. My conversation with Charlie Ellis.
Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: I am actually extremely privileged this week to have really
Speaker 1: financial royalty in the room. My guest is Charlie Ellis.
Speaker 1: Say hello, Charlie, How can I say anything after that introduction?
Speaker 1: It's it's gonna get worse. So a little background about
Speaker 1: who Mr Ellis is. Dr Ellis. You don't really go
Speaker 1: by doctor, do you know? It doesn't work very well,
Speaker 1: but it's very good for making reservations at restaurants. So
Speaker 1: Charlie began his academic career. He received at Yale. He
Speaker 1: received a b a in art history, subsequently went to
Speaker 1: the Harvard Business School, and almost on a lark, ended
Speaker 1: up getting a pH d in finance and economics at
Speaker 1: n y U and then became a Charter c f
Speaker 1: a UH Certified Financial Analyst in nineteen sixty nine. Now
Speaker 1: that's a pretty good background for most people, but that
Speaker 1: wasn't where we stopped. Charlie eventually gets appointed to the
Speaker 1: faculty of the Harvest Business School. He becomes a director
Speaker 1: of the Vanguard Group, joins them Yale School of Management
Speaker 1: six and then becomes the Chairman of the board of
Speaker 1: the cf A Institute, and then the awards start to come.
Speaker 1: He's one of a dozen people in the world who
Speaker 1: was recognized for their lifetime contributions to the investment profession
Speaker 1: by the cf A, the Yale Medal of Honor for
Speaker 1: a service to the University, the Harvard Business School Alumni
Speaker 1: Award for Lifelong Service. He is the author of sixteen
Speaker 1: books on investing and really there is there are a
Speaker 1: few people in the world who have his depth and
Speaker 1: breath of knowledge. I've been a fan of yours. I've
Speaker 1: been reading your work for a long time. I'm an
Speaker 1: enormous fan of Winning the Loser's Game, which was started
Speaker 1: out as a paper back in and then became book.
Speaker 1: But reading that background, the first question I have to
Speaker 1: ask you, how do you go from art history to finance? Well,
Speaker 1: first off all, unless you're really good at our history,
Speaker 1: there's no destination. There no money. No money in art history,
Speaker 1: no money. You really have to be very good to
Speaker 1: get to the top of the group. And at the
Speaker 1: top of the group it's quiet and lonely, and I
Speaker 1: realized I'm a social guy. I didn't want to do that. Okay,
Speaker 1: So you come out of business school and totally unprepared
Speaker 1: for anything, unprepared for anything, yet Goldman Sachs offers you
Speaker 1: a job. And the story is they offered you a
Speaker 1: job at forty dollars a year and you were looking
Speaker 1: for five thousand, and you said thanks, but no thanks.
Speaker 1: That's roughly right. They didn't actually offer me the job.
Speaker 1: They posted a job people who would like to apply
Speaker 1: for the job. And I was very interested in Goldman
Speaker 1: Sash because my father was a lawyer and he said
Speaker 1: it's the best firm on Wall Street. It's not the
Speaker 1: leading firm yet, but it will be, and that was
Speaker 1: a kind of outfit I wanted to join. But when
Speaker 1: I looked at the ticket as to what you're gonna
Speaker 1: get paid, I realized it's not gonna work. Because I
Speaker 1: was getting married to a wonderful woman who had gone
Speaker 1: through Wellesley College on scholarship and loans, and the commitment
Speaker 1: to Wellesley was you'd pay off the loans, and I
Speaker 1: knew I was going to have to do it. So
Speaker 1: you needed five thousand. I needed a full five thousand.
Speaker 1: Your dad actually turned out to be quite pressing, and
Speaker 1: I think you were in If I read your bio right,
Speaker 1: you were in the seventh grade. Your father was an attorney,
Speaker 1: said Charlie, I don't think law school is going to
Speaker 1: be for you. It wasn't all love and affection. It
Speaker 1: was being very, very realistic. We got along wonderfully well.
Speaker 1: I had a great father, the great mother too, and
Speaker 1: it was one of the lucky blessings of a lifetime.
Speaker 1: But Dad had gone into the law knowing that they
Speaker 1: were wonderful people practicing law, and he had two or
Speaker 1: three really powerful arguments. Number One, I wasn't cut out
Speaker 1: for the law because I'm not fundamentally a scholar. I
Speaker 1: can learn things, but I'm not what you'd call a
Speaker 1: real scholar, so I'm not gonna have the private satisfaction.
Speaker 1: Second thing is an enormous number of people went through
Speaker 1: law school and the g I Bill after the Second
Speaker 1: World War, and they were coming into practice, and they
Speaker 1: were filling up the law firms with very talented people
Speaker 1: who were ten years older than I was, and that
Speaker 1: was going to make a really big difference. I wasn't
Speaker 1: going to get the chance to advance and promote myself
Speaker 1: along the way. And the third thing is Dad said,
Speaker 1: you know, the law, which I have loved, is shifting
Speaker 1: from being a profession to being a business. And if
Speaker 1: you're going to go into a business, the least you
Speaker 1: can do is going to a real business instead of
Speaker 1: struggling with a shift from profession to law. Where don't
Speaker 1: you go into business? You've got a an appetite for
Speaker 1: working with other people, and you'd like to be a
Speaker 1: leader in organizations and I think you'd be happier that that.
Speaker 1: That leads to something you said about the financial profession,
Speaker 1: which is it should be a profession, but it's not.
Speaker 1: It's actually a business. Well, parts of it should be
Speaker 1: a profession. For example, investment banking should be a profession. Uh,
Speaker 1: Investment management most definitely should be a profession. Investment analysis
Speaker 1: is a profession if it's played well, and it should
Speaker 1: be run as a profession. But trading is not really
Speaker 1: a profession. And you want to recognize that trading is
Speaker 1: a business. And what's happened in Wall Street over the
Speaker 1: last twenty years is trading has become the dominant business
Speaker 1: for everybody, and so everybody is whether they like it
Speaker 1: or not, in business, it's sort of like winter weather,
Speaker 1: whether you like it or not. It's coming, it's there.
Speaker 1: You better button up, brace yourself for it. So so
Speaker 1: you started out not too long after that, you were
Speaker 1: briefly at w G b H in Boston, and then
Speaker 1: you ended up in the Rockefeller family office. How did
Speaker 1: that come about? Just lucky and it's a string of
Speaker 1: good luck. While I was at w G b H,
Speaker 1: wonderful woman who was my age and was a volunteer,
Speaker 1: cut my eye and I said, she's I'd really like
Speaker 1: to get to know her. So I asked her for lunch,
Speaker 1: and then we talked more and more. We started really
Speaker 1: pretty serious dating, and we're still friends today. And she
Speaker 1: said to me one day, you know, Charlie, you should
Speaker 1: go to the B School. And I said, what is
Speaker 1: a B school? She said, a business school? For goodness sake.
Speaker 1: I said, when you say, the B school is the
Speaker 1: only one, she said, no, they're a bunch of them,
Speaker 1: but there's only one that you really ought to take seriously,
Speaker 1: and that's the Harvard Business School. So I applied and
Speaker 1: I got in. And while I was there, of course,
Speaker 1: you're supposed to get a job, and I didn't have
Speaker 1: a job. So I said to one of my friends,
Speaker 1: now I don't have a job yet. He said, I
Speaker 1: got something you might want to consider. My dad's got
Speaker 1: a friend who's looking for somebody. I'm not sure what
Speaker 1: it is. I think it's the Rockefeller Foundation, and I
Speaker 1: was interested in philanthropic work. I thought that might be interesting.
Speaker 1: I wasn't the Foundation. Took half an hour of the
Speaker 1: interview for me to figure out that talking about something else.
Speaker 1: This guy's interviewing me is such a good guy. I
Speaker 1: want to work for him for sure. I gotta figure
Speaker 1: out what he's doing. I'm Barry Ridhults. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio, and my special guest
Speaker 1: this week is Charlie Ellis Um, well known for his
Speaker 1: work with the Yale Endowment as a professor at both
Speaker 1: Harvard and Yale and number of other places. Um, Charlie,
Speaker 1: before the break, we talked about you ended up as
Speaker 1: one of your earliest jobs working for the Rockefeller the
Speaker 1: Rockefeller Family Office. What was that experience? Like? It was
Speaker 1: terrific in a couple of ways. It might take you
Speaker 1: by surprise. First of all, I was working for an
Speaker 1: absolute wonderful human being, and he's set a role model
Speaker 1: as to how high is up, and I realized, what
Speaker 1: we it's really high. If you really want to be
Speaker 1: at the high end of the spectrum, that's how good
Speaker 1: you've got to be at whatever you're doing. What was
Speaker 1: that gentleman's name, Jay Richardson Dilworth and was not the
Speaker 1: mayor of Philadelphia, same name, but an absolutely wonderful man.
Speaker 1: So that was one particularly part of it. The second
Speaker 1: part is I turned in my first research report and
Speaker 1: my immediate supervisor came over to my office. Is at Cholly, Cholly,
Speaker 1: didn't you just go to the Havard Business School? I said, yes, Phil,
Speaker 1: I did. Why Why are you asking? He said, because Charlie,
Speaker 1: didn't they teach you nothing about investing? And I said, no, Phil,
Speaker 1: actually there's only one course on investing and it's so
Speaker 1: boring and dull and terrible. While it's taught between eleven
Speaker 1: thirty and one, it's called Darkness at Noon. And I
Speaker 1: didn't take it. Nobody else with his head screwed on
Speaker 1: would have taken it. Was terrible course. So actually, Phil,
Speaker 1: I don't know anything. Well, Charlie said, this is a
Speaker 1: very wealthy family, but they ain't that rich. I can't
Speaker 1: afford you, so you better go to night school and
Speaker 1: learn something, and that's how you ended up getting a
Speaker 1: doctor at an n y U. Well, it was an accident.
Speaker 1: I got in. I've been in the army, so I
Speaker 1: know how what you do when you see a line,
Speaker 1: getting the line, and when I got to the front,
Speaker 1: it's really attractive. Young woman looked up from a card
Speaker 1: table and said, you're next. Are you a regular student
Speaker 1: or a special student? Sorry, I'm sorry, I don't know
Speaker 1: which is. I just wanted to sign up for some
Speaker 1: She said, where'd you last go to school? I said,
Speaker 1: just finished Harvard Business School. Oh, Harvard Business School. That's exciting.
Speaker 1: You should be in our doctoral program. My sister and
Speaker 1: brother are always getting higher grades than I was, so
Speaker 1: I figured I'll sign up for a doctoral program. They
Speaker 1: never signed up for a doctoral program. That didn't take
Speaker 1: it seriously and was there any difference in price. No,
Speaker 1: at the same price. So I signed up for a
Speaker 1: doctoral program. In fourteen years, drifted through, finally finishing up
Speaker 1: great experience. You were doing it at night part time.
Speaker 1: While you were working on doing it at night. There
Speaker 1: was nothing to it. You would go to the first
Speaker 1: class and you had fifteen minutes between classes run across
Speaker 1: the street to the Hamburger place where they had Hamburg's
Speaker 1: on the grill, and you'd get a cold milkshake and
Speaker 1: a hot hamburger and mix them together as you too quickly,
Speaker 1: and then run back to class again. And ultimately, fourteen
Speaker 1: years later sooner or later PhD from from n YU.
Speaker 1: Not not too shabby. So let's get start talking about
Speaker 1: the Losers Game. And and I love the analogy here.
Speaker 1: There was so many really fascinating lessons from this. So
Speaker 1: in you authored a paper called the Losers Game. And
Speaker 1: it was after reading a book called Extraordinary Tennis for
Speaker 1: the Ordinary Tennis Player. And I'm gonna I'm gonna pull
Speaker 1: a quote out from something you had written. The book
Speaker 1: was by Simon Ramos, and Ramos describes professional Simon Ramo
Speaker 1: of Thompson Ramo Wooldridge. He was the brilliant industrial scientist
Speaker 1: combination that really was the leader of the U. S
Speaker 1: Space program. This is some guy, so he's looking at
Speaker 1: tennis from a very quantitative scientific Plus he was a
Speaker 1: very good athlete everything. Plus he played violin with the
Speaker 1: quartet from the Los Angeles Philharmonic. So this guy hit
Speaker 1: the genetic lottery straight across the board, right, so he writes,
Speaker 1: you write about ramo. He described professional tennis as a
Speaker 1: winners game where points are won through skill. It's played
Speaker 1: by those who stroked the ball with strong, well aimed
Speaker 1: shots and win points through long, often exciting rallies until
Speaker 1: one point player is able to drive the ball just
Speaker 1: beyond the reach of his opponent. That's the winners game.
Speaker 1: On the other hand, and he says, tennis is two
Speaker 1: games in one. It's a winners game and a loser's game.
Speaker 1: The loser's game is the way amateurs play, where points
Speaker 1: are lost due to simple mistakes. In other words, winners
Speaker 1: and uh professionals end up scoring points through winning, and
Speaker 1: amateurs end up making all these unforced errors. So how
Speaker 1: did that impact you're thinking about investing? Well, I thought
Speaker 1: about I'm realized that's the way I played tennis. When
Speaker 1: Lynda and I go off and play, we come off
Speaker 1: the court, it maybe some people waiting because we've gone
Speaker 1: a little bit over our time on the court. They
Speaker 1: ask who won, and it drives me nuts because that's
Speaker 1: not fair. I was in control of that game, completely
Speaker 1: in control of it, because I hit more double faults
Speaker 1: I hit in the net more often, and I gave
Speaker 1: more layups to Linda. She's a very good athlete. So
Speaker 1: I'm not embarrassed to have lost. But I was not
Speaker 1: only the loser. I was in control of the game
Speaker 1: all the way along. You could have told after three
Speaker 1: or four points I was going to lose. So in
Speaker 1: other words, it wasn't so much that Linda beat you,
Speaker 1: it was that you basically beat myself. That's right, And
Speaker 1: so this raises a really interesting question relative to investors.
Speaker 1: How important is it to understand your own skill set,
Speaker 1: whether it's tennis or investing. Well, there are two things
Speaker 1: that are really important. One is understand your own skill set,
Speaker 1: and the second is understand how good the competition really is.
Speaker 1: Most of us have sort of a mindset of, you know,
Speaker 1: the friendly neighborhood doctor goes down to the brokerage office
Speaker 1: and buys hundred shares of a T and T, and
Speaker 1: that's basically what he does as an investor. That may
Speaker 1: have been true when we were all kids, and fifty
Speaker 1: years ago it was true, but today most of the trading.
Speaker 1: The trading is done by professionals, and half of that
Speaker 1: is done by the fifty largest, most aggressive professionals. They
Speaker 1: are tough. So you may be a pretty good amateur
Speaker 1: touch football player, but that doesn't mean you want to
Speaker 1: join the line for the NFL. You just you just
Speaker 1: reminded me of something I had quoted you in a
Speaker 1: column I want to say about ten years ago, and
Speaker 1: it had to do with look at the football play.
Speaker 1: You may be a fun amateur football player, toss a
Speaker 1: ball around weekends in your neighborhood, but but look at
Speaker 1: these guys who played. They're much bigger than you, they're
Speaker 1: much faster than you, they're more skilled than you. You
Speaker 1: would never think of stepping out onto the field with
Speaker 1: the Giants on any given Sunday and betting real money
Speaker 1: on the outcome. But that's what a lot of people
Speaker 1: end up doing in investing. They they compete against people
Speaker 1: who were much more qualified for them, and the same
Speaker 1: result happens as if they were playing football with the
Speaker 1: New York Giants. Yes, but we don't notice that. We
Speaker 1: don't keep a tight score, and we don't embarrass ourselves
Speaker 1: by seeing reality, so it's a little bit easier. The
Speaker 1: broken bones aren't as visible when you're an investor than
Speaker 1: when you're playing for but the pain in anguish that
Speaker 1: people are providing for themselves as their years go by
Speaker 1: is just awful. So in the last minute we have
Speaker 1: in this segment, I want to ask you just a
Speaker 1: really quick question. So you identified this was back in
Speaker 1: that active managers were not beating the market, that amateurs
Speaker 1: were just shooting themselves in the foot. What gave you
Speaker 1: the insight to recognize that that was forty years ago? Well,
Speaker 1: first of all, it was a lucky break. And secondly,
Speaker 1: I was working with a lot of people in the
Speaker 1: investment management business and talking with them all the time,
Speaker 1: and they were starting to tell me this is tough,
Speaker 1: really tough, and it's getting harder, and it's getting harder.
Speaker 1: I'm Barry Ridhults. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. My extra special guest this week is Charlie
Speaker 1: allis the author of a number of books, most recently
Speaker 1: the book that I that I have that came out
Speaker 1: not too long ago is What It Takes, which we'll
Speaker 1: get to talk to talk about in a little bit.
Speaker 1: I'm a big fan of your earlier book, Winning the
Speaker 1: Losers Game, which is all about how people really mishandle
Speaker 1: their own money and make very very poor decisions when
Speaker 1: it comes to investing their own money. UM, don't feel
Speaker 1: bad if you're an amateur. Of the professionals very often
Speaker 1: do the same thing. But let's talk a little bit
Speaker 1: about your time at Yale, both as a UM, a
Speaker 1: member of UM, the investment committee for the endowment, and
Speaker 1: as well as the faculty. One of the lines you
Speaker 1: you had written reminded me of something that Daniel Boston
Speaker 1: had said. Daniel Boston, famously the Librarian of Congress, used
Speaker 1: to used to say, I write in order to figure
Speaker 1: out what I think. Besides, at that hour all the
Speaker 1: bars are closed anyway, so that that's his famous quote.
Speaker 1: How does the process of teaching, speaking, and writing help
Speaker 1: you form your thought? What's in your ideas? That's easy
Speaker 1: if you're going to teach. For every hour you're in
Speaker 1: the classroom teaching. My experience, it takes at least ten,
Speaker 1: often fifteen hours of preparation for every single hour. I'm
Speaker 1: developing a course now on how to be a successful
Speaker 1: client to be taught at the Yale School of Management.
Speaker 1: And it is exciting and all that sort of stuff.
Speaker 1: But on the other hand, every weekend I sit down
Speaker 1: and start working again. And getting those classes figured out
Speaker 1: what am I gonna do? And I still don't know
Speaker 1: for sure what I'm gonna do because you have to
Speaker 1: watch the way the class moves, and you have to
Speaker 1: go with the flow and be sure that it covers
Speaker 1: the things you really want and that it's really useful
Speaker 1: to the students. So a lot of preparation for every
Speaker 1: hour in the classroom. What about writing a book. It
Speaker 1: takes three or four hours to read a good book,
Speaker 1: six or seven hours. How much prep time you're doing
Speaker 1: before you even sit down at two or three hours
Speaker 1: to read a book, two or three years to write
Speaker 1: a book about even so it's a one to one
Speaker 1: ratio a year for for hour. I got it, um
Speaker 1: And you worked with David Swanson as co chairs of
Speaker 1: the I believe he was the c I O and
Speaker 1: you were the I was the chair of the Investment Committee.
Speaker 1: But let's be careful in terms. I didn't work with David.
Speaker 1: I worked for David uh and I had the thrill
Speaker 1: of sitting in the front row of the bleachers watching
Speaker 1: the best professional investment manager I know. Really. Yeah, Now
Speaker 1: his remputation is obviously sterling. So one of the questions
Speaker 1: I have to ask is what made Swanson so unique?
Speaker 1: So many different things combined. Number one is brilliant. He's
Speaker 1: the first guy to think of even considering doing a derivative.
Speaker 1: Did a swap on interest rates between IBM and the
Speaker 1: World Bank None. He's very competitive guy. Watch him on
Speaker 1: a softball field, you think the world was absolutely determined.
Speaker 1: His whole future in the vision, whether people are going
Speaker 1: to get hits or not, watching playing squasher tennis, the
Speaker 1: same thing all over again. Thirty is one of the
Speaker 1: nicest people in the face of the earth. There're more
Speaker 1: people that would like to do something to say thank
Speaker 1: you David than any other person I know, except perhaps
Speaker 1: Warren Buffett, who got an even larger following, and for
Speaker 1: good reason, very good reason. David is creative. He's tightly disciplined.
Speaker 1: He is a team player and one of the best
Speaker 1: team captains. There's ever been a number of people who
Speaker 1: have trained under David and going on to manage other endowments,
Speaker 1: really understanding what the secrets are. It's been just terrific.
Speaker 1: And he's also written the best book ever written on
Speaker 1: institutional investing, which is called I can never remember David's book.
Speaker 1: I always thinking it was David's book, Unconventional Success. That's right,
Speaker 1: unconve very good. You have a much better memory than
Speaker 1: I do, because mine was buried back there. I couldn't
Speaker 1: get it. So let's talk about the Yale model, which
Speaker 1: essentially is what Swanson created. What is the Yale model?
Speaker 1: First of all, the Yale model is not for anybody
Speaker 1: else to use except for Yale. Actually that's quite true.
Speaker 1: Although Harvard's close, Princeton's close, Stanford is close, m I
Speaker 1: t is close. There's several other places that are pretty
Speaker 1: close in what they're doing. But but if you look
Speaker 1: at some of them, Harvard is a good example. They
Speaker 1: hit a rough patch during the financial crisis. They were
Speaker 1: a little behind Yale and never quite caught up with
Speaker 1: them in terms of because they never quite had a
Speaker 1: David Swinson. The secret to success in life is be
Speaker 1: sure you picked the competition that you can be, not
Speaker 1: be brilliant yourself. But the Harvard story is more complicated
Speaker 1: in that I think all of us in the world
Speaker 1: of investing know that Jane Mandilo did a fabulous job
Speaker 1: with an unbelievably bad hand delta her. Then she did
Speaker 1: it with grace, nice combination. Then you had the whole
Speaker 1: issue with the faculty complaining about the fees that were
Speaker 1: being paid to people. Were they they engage in a
Speaker 1: little bit of losers game themselves? They shot themselves in
Speaker 1: the foot. Well, if you're entirely rational, that is in
Speaker 1: fact irrational, because the world is made up of human
Speaker 1: beings and they make judgments as human beings do, so
Speaker 1: don't be too smart. It is probably a good idea.
Speaker 1: But that was a different group than the more recent manage.
Speaker 1: So in the last thirty seconds, we have the experience
Speaker 1: at Yale and working with Swinson. How does that compare
Speaker 1: to other experiences you've had in the world of finance.
Speaker 1: It's like going to see Ringling Brothers in Barnum and
Speaker 1: Bailey Circus. The guys who do the acrobatics, the guys
Speaker 1: who do the high wire, they are unbelievably good and
Speaker 1: it's thrilling to watch. Don't do that at home. Don't
Speaker 1: try this at home. This is Masters in Business on
Speaker 1: Bloomberg Radio. I'm Barry Ridholtz my guest today. Charlie ellis
Speaker 1: perhaps best known for his book Winning the Losers Game.
Speaker 1: You know, in the last segment we were talking about
Speaker 1: how investing is very similar to tennis, that most people
Speaker 1: end up engaging in these unforced eras. That's how they
Speaker 1: lose in tennis. That's also how they hurt themselves in investing.
Speaker 1: I know you're a big fan of indexing, and here
Speaker 1: we are in and earlier this year, the Vanguard Group
Speaker 1: just crossed three trillion, that's trillion with a T in
Speaker 1: assets under management. They're the best known, biggest indexers. Can
Speaker 1: you declare victory? Can you say, okay, people have figured
Speaker 1: out that simple indexing beats complicated active management. The answer
Speaker 1: is both yes and no. I can declare victory, but
Speaker 1: each individual has to make that decision for themselves. So
Speaker 1: let's talk a little bit about your observation that active
Speaker 1: managers have a very very hard time beating the market.
Speaker 1: Why is that, Well, it's the same reason. Really smart
Speaker 1: lawyers have a tough time winning all their cases. My
Speaker 1: brother is as good a litigator as you will find
Speaker 1: in the field of law. He wins about half and
Speaker 1: he asked me once, why do you suppose I went
Speaker 1: about half? I said, it's easy. The other guys know
Speaker 1: you're terrific, so they get as many lawyers as they
Speaker 1: need to come in and tie you. It's also if
Speaker 1: the case is overwhelmingly one side or another, they end
Speaker 1: up settling. And if by the time the cases that
Speaker 1: go to trial are usually the ones that, gee, this
Speaker 1: could go either way and both sides they are going
Speaker 1: to win. Right, So someone's gonna win and you're not.
Speaker 1: You're never going to bat a thousand on the really
Speaker 1: close cases, but a bunch of you know, the typical
Speaker 1: case settles because it's usually clear one side or the
Speaker 1: other is in the right or wrong. Let's go back
Speaker 1: to investing them, because I think it's really interesting. The
Speaker 1: smartest people I've ever known have, one way or another
Speaker 1: figured out that investment management is interesting, fascinating, fun, exciting
Speaker 1: even and it pays really really well. And you get
Speaker 1: to hang out with people who are really smart, and
Speaker 1: you get to compete, and all people who are really
Speaker 1: smart like to be winners in competitions. So you get
Speaker 1: this terrific crowd of people coming out to compete with
Speaker 1: each other. And the more they compete, the better they get,
Speaker 1: the more skillful, the more tools, the more information, the
Speaker 1: more access that they all get. The better and better
Speaker 1: and better they get. Only one problem, so is everybody
Speaker 1: else getting better and better and better and better, And
Speaker 1: if you look at the realities of life, the secret
Speaker 1: to success and investment management starts with good information. Everybody
Speaker 1: gets all the same information today. The SEC requires any
Speaker 1: companies any information to anybody, has to give it to
Speaker 1: everybody at the same time. You can use Twitter if
Speaker 1: you want to, but you've got to get it to everybody.
Speaker 1: That levels the playing field. Then everybody's got a Bloomberg
Speaker 1: machine that levels the playing field in a big, big way.
Speaker 1: And third, everybody's got access to all the same people
Speaker 1: using the internet instantaneous equal So pretty soon you've realized
Speaker 1: and wait, wait, waitmen, everybody's going to the same schools.
Speaker 1: Everybody's smart, everybody's got the same tools. Everybody's going out
Speaker 1: to compete with everybody else. Isn't it going to be
Speaker 1: awfully hard to be noticeably, clearly, decisively better than the
Speaker 1: other guys in order to do better than the market.
Speaker 1: And the answer is, yeah, you've gotta be awfully damn good.
Speaker 1: Will anybody be able to do it? Sure, in every
Speaker 1: single year, every single decade, every single whatever, small number
Speaker 1: of people will glue clearly better, but huge numbers of
Speaker 1: people will do clearly worse, and on average, everybody will
Speaker 1: be doing worse. And here's the hard part. There is
Speaker 1: no way to identify who is going to do better
Speaker 1: before the game begins in advance that you know. This
Speaker 1: is the discussion we've had with some of the fund
Speaker 1: of funds. With hedge funds. It's impossible to pick the
Speaker 1: one hedge funds that's going to do especially well. Why
Speaker 1: does picking five hedge funds make you think that you're
Speaker 1: raising your odds. You're just increasing your odds for mediocrity
Speaker 1: by doing that, and then you add all the fees
Speaker 1: on top of that. How do those guys continue to
Speaker 1: uh to do what they're doing. Isn't the odds really
Speaker 1: insurmountable for them? Well that's for the rantial observer, yes,
Speaker 1: but all of us believe there's some one way or
Speaker 1: another we're gonna get out in front. We're gonna do better.
Speaker 1: We've all grown up learning from our parents, from our
Speaker 1: school teachers, from our friends. Try harder you'll do better.
Speaker 1: Try harder, you'll do better. Try harder, you'll do better.
Speaker 1: So we've sort of programmed in ourselves to try harder.
Speaker 1: And most of the time that's right. It works, We
Speaker 1: do better. It's interesting, just not better than the market.
Speaker 1: So it's a it's a market, fol No, it's not.
Speaker 1: It's not doing better than the market. It's doing better
Speaker 1: than all those other smart guys who create the market go. So,
Speaker 1: so it's not like Lake Will be Gone where all
Speaker 1: the children are above average. When you're competing with that,
Speaker 1: against that group of folks, you're destined to really really
Speaker 1: have a very very high odds of not not outperforming
Speaker 1: that huge group of really smart, really prepared, really serious
Speaker 1: people who are trying to beat the market. And that
Speaker 1: that's what makes it so. It's like being in Lake
Speaker 1: Paradise with the kids are not allowed to play because
Speaker 1: only the top one percent are allowed to play, and
Speaker 1: they're terrific. That that's really quite fascinating. So let's talk
Speaker 1: a little bit about some of your earlier career. Um.
Speaker 1: You really began in what some people have called the
Speaker 1: golden age of market timers and newsletter writers. I remember
Speaker 1: reading about Joe Granville in two and here's a guy
Speaker 1: who had been dead right about everything for a few
Speaker 1: years and missed the start of the biggest bullmarket in history.
Speaker 1: What was that era like when you were UM fairly
Speaker 1: early in your career well. The right answer for reading
Speaker 1: and understanding it is read Jerry Goodman's or Adam Smith,
Speaker 1: as he called himself, wonderful book The Money Game. That
Speaker 1: a book about trading on Wall Street and investment management
Speaker 1: contemporaries could be a bestseller nationwide for a couple of
Speaker 1: years tells you a lot. It was an exciting game
Speaker 1: and everybody was interested. And in those days, active management
Speaker 1: was a damn good idea because the competition was individuals
Speaker 1: who were not experienced and institutions that were sluggish, slow,
Speaker 1: and move like Bohemuth. So it wasn't all that hard
Speaker 1: to dance around them and be faster, quicker, better informed,
Speaker 1: and therefore able to get a better rate of return.
Speaker 1: The market has changed that much so that back in
Speaker 1: the seventies and eighties, the amateurs were beating the professionals.
Speaker 1: I wouldn't go quite that far, but I would say
Speaker 1: that the few professionals who are out there, and we're
Speaker 1: young and ambitious and worked hard, could find a way
Speaker 1: that they could do better than most other institutions and
Speaker 1: do better than most individuals, and you could see who
Speaker 1: they were. It was advertised in the newspapers, it was
Speaker 1: storied written up in articles. It was not all that tricky,
Speaker 1: but that has clearly changed dramatically over the intervening decades,
Speaker 1: overwhelming change, and it will never go back. So let
Speaker 1: me ask you a couple of related questions. You've been
Speaker 1: observed of the financial industry for a long time, and
Speaker 1: I've been critical of some of the things the financial
Speaker 1: industry does wrong. Let me reverse that question, what does
Speaker 1: the financial industry get right? Well, first of all, the
Speaker 1: financial industry is such a big aggregation. It's sort of
Speaker 1: like talking about men or women. So let's focus on
Speaker 1: on investment management. What does the investment management business do right?
Speaker 1: And what do they get wrong? Well, there's two things
Speaker 1: that are part and parcel of the investment management Number
Speaker 1: one is what i'd call price discovery, figuring out what
Speaker 1: price should each individual stock be, and what price it
Speaker 1: should be compares to every other stock, so comparative pricing.
Speaker 1: Getting that really figured out, that's really complicated, difficult work.
Speaker 1: The second is value discovery, finding out for each client
Speaker 1: what are they really trying to accomplish, what's important to them?
Speaker 1: And that's not terribly difficult to figure out, but you
Speaker 1: have to do it one at a time. For a
Speaker 1: very simple reason. Every investor is different, and if you
Speaker 1: get it really right for any investor, that isn't quite
Speaker 1: exactly right for any other investors. So discovery of values aspirations,
Speaker 1: what are you trying to accomplish is unique for each
Speaker 1: individual client. Now, take the two parts used to be
Speaker 1: years ago that they were blended together at a moderate fee,
Speaker 1: and it worked out quite well. Then we got excited
Speaker 1: about price discovery, and the skills and ambitions and drive
Speaker 1: and skill of price discovery took off like a skyrocket.
Speaker 1: Gradually it got to the point where it's so damn
Speaker 1: good that there's almost no point in anybody trying to
Speaker 1: do better than the crowd is already doing. Value discovery, however,
Speaker 1: got ignored, and there's always a terrific opportunity to get
Speaker 1: it really right for the long term for any investor
Speaker 1: by thinking through and working through value discovery, what are
Speaker 1: you trying to accomplish? So more than just buying a
Speaker 1: stock that's going higher, what's the ultimate goal that is?
Speaker 1: Isn't that really more financial planning than investing? Well, financial
Speaker 1: plan there's nothing wrong with that. Aggressive trading might be
Speaker 1: what you'd call the price discovery investing is sort of
Speaker 1: an in between could be used by both groups. Got it?
Speaker 1: So let me ask you this question, because this is
Speaker 1: very much this is very much related for the average investor,
Speaker 1: What then, is more important understanding yourself or understanding markets?
Speaker 1: Understanding markets doesn't make very much difference at all, except
Speaker 1: in general. You should know that markets fluctuate, and the
Speaker 1: fluctuations can be huge, and they can cause very real
Speaker 1: excitement on the upside and they can cause terrible fear
Speaker 1: on the down side. So you're gonna get used to
Speaker 1: that sort of thing and be prepared for it because
Speaker 1: it will happen over and over and over again. That's
Speaker 1: you're sort of stuck with that. But you better learn
Speaker 1: what that's all about. That's the old joke. Wall Street
Speaker 1: is an expensive place to learn who you are. Yes,
Speaker 1: I've been speaking with Charlie Ellis of Yale School of
Speaker 1: Management and the yell Endowment fame and author of Winning
Speaker 1: the Losers Game and most recently What It Takes. If
Speaker 1: you enjoyed these conversations, be sure and check out our
Speaker 1: full podcast, where the tape keeps running and we discuss
Speaker 1: many more things in great detail. Be sure and check
Speaker 1: out my daily column on Bloomberg View dot com. Uh
Speaker 1: follow me on Twitter at Rid Halts. I'm Barry Ridhults.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Welcome back.
Speaker 1: This is the podcast portion of our show, and Charlie really,
Speaker 1: thank you so much for doing this. I greatly appreciate this.
Speaker 1: I've been a fan of yours for a long time
Speaker 1: and it's just a pleasure meeting you. Well, you're terribly nice,
Speaker 1: but I must tell you I'm having a great time.
Speaker 1: Well good, that's fantastic. I have so many questions we
Speaker 1: skipped during the radio portion. I'm just gonna work my
Speaker 1: way through this. But but before I forget, you've written
Speaker 1: a lot of books. So in between the Losers Game,
Speaker 1: the most recent book was What It Takes. Actually most
Speaker 1: recent book is Falling Short, Falling Short, so I I
Speaker 1: have the wrong book here. And then there was also
Speaker 1: the book The Partnership about Goldman Sachs that was so
Speaker 1: much fun to do. It just wouldn't believe it really. Well,
Speaker 1: first of all, there's smart, smart people. Well that's their reputation. Second,
Speaker 1: they've got a terrific interest in their own firm. They
Speaker 1: really really enjoyed the history and Third, the history is
Speaker 1: so enjoyable. So I had the privilege of interviewing three
Speaker 1: hund different people for that book, and I would be
Speaker 1: glad to go back into it all over again. It
Speaker 1: was so much fun, very storied firm. You know, what
Speaker 1: do you think of of of more recently when they
Speaker 1: were called the Vampire Squid? And Yeah, wasn't that fun? Aul?
Speaker 1: So just awful. First of all, they deserved some of it,
Speaker 1: but it was way too clever, And if I had
Speaker 1: been an editor, I said, absolutely not, that's not going
Speaker 1: to go in print. But they did deserve part of it.
Speaker 1: And this second thing is they've reacted in a way
Speaker 1: that makes me so very appreciative of what they're really
Speaker 1: all about. Very proactive, not sitting around. They really have
Speaker 1: made an effort to not just only change the culture
Speaker 1: of the firm, but they've been pretty aggressive in public,
Speaker 1: haven't they. Yeah, when you say change the culture, I
Speaker 1: agree with you, but I'd say it a little differently.
Speaker 1: Bring the culture back towards where it was, even though
Speaker 1: the business environment and the business to be done has
Speaker 1: been changed hugely. Give you a simple example, if you
Speaker 1: go back years ago of all the business that was
Speaker 1: done at Goldman Sachs was a relationship based business where
Speaker 1: you as a portfolio manager and I, as an institutional salesman,
Speaker 1: would work together every day for twenty years. Or you're
Speaker 1: a chief financial officer of major corporation and I'm an
Speaker 1: investment banker. We'd work together. I'd have people working with me,
Speaker 1: you'd have people working with you, but we were team
Speaker 1: captains back and forth. Then we would work together for
Speaker 1: ten fifteen years, and everybody knew what we were doing.
Speaker 1: It was all visible m hm trading. I am in
Speaker 1: the market, I'm secret. Nobody knows I'm there. I decided
Speaker 1: to do something. Nobody knows it was me that did it.
Speaker 1: My transaction time might be two or three minutes, it
Speaker 1: might be twenty or thirty minutes. It is never twenty years,
Speaker 1: it's never a year. It's never even a week. It's
Speaker 1: all very very fast and invisible, and nobody knows when
Speaker 1: I've left. Nobody knows whether it worked or didn't work.
Speaker 1: There's no record except in my office and yours, and
Speaker 1: clearly no no relationship involved. There may be a transactual relationship,
Speaker 1: but it's not an important factor in who's going to
Speaker 1: do the business next time, And if I beat the
Speaker 1: dickens out of you and really exploit you, that's my win.
Speaker 1: You don't even know what has happened. So have has
Speaker 1: Goldman Sacks moved away from that model because that seemed
Speaker 1: to be the model in the late two thousand. Well,
Speaker 1: trading is trading is trading, and if your business is dominated,
Speaker 1: the firm's profitability comes from trading in currencies, trading in commodities,
Speaker 1: trading in bonds, trading in stocks. It's all trading, trading, trading,
Speaker 1: usually at risk. And that makes for a very different
Speaker 1: kind of a business than when it's a relationship based
Speaker 1: business and it's you as a client that determines whether
Speaker 1: I get to do business or not, and I have
Speaker 1: to serve your needs in order to serve my needs.
Speaker 1: That's a very different business. So are they moving more
Speaker 1: towards that older business model or is that just the
Speaker 1: thing of the past. What they've done, which I think
Speaker 1: is terrific, is they've kept the cultural commitments and even
Speaker 1: though it's in trading and transactional businesses, they're working them way,
Speaker 1: have been working their way back towards the values that
Speaker 1: have to do with client relationships. They will never be
Speaker 1: able to be clients, because the counterparty in a trade
Speaker 1: can't be a client, but can be a customer, and
Speaker 1: you can watch out to be sure that you treat
Speaker 1: them with respect and consideration and that they would welcome
Speaker 1: you back. And they have done a terrific job at that.
Speaker 1: They've also done some terrific things in terms of public perception.
Speaker 1: So we mentioned the Rockefell or family office. After that,
Speaker 1: you ended up at Donaldson, Lufkin and Jenrette better known
Speaker 1: as d l J. What was that experience like? It
Speaker 1: was fabulous fun, A bunch of very bright guys pulled together. Honestly,
Speaker 1: we didn't know an awful lot about the securities business,
Speaker 1: but we were learning, and we were involved in the
Speaker 1: front edge of research being important, and we were involved
Speaker 1: in the front edge of active investment management being important,
Speaker 1: and all of those things were working very much to
Speaker 1: our benefit and interest because we were there first, because
Speaker 1: we brought some very bright and capable people together, and
Speaker 1: we had a wonderful time because we enjoyed each other
Speaker 1: so very much. And then not too long after that, you,
Speaker 1: I want to say, seventy two seventy three, you launched
Speaker 1: Grants Associates, which was a consulting firm, but not your
Speaker 1: usual consulting firm. What what made you say I think
Speaker 1: I'm gonna try launching a consulting business. Well, are a
Speaker 1: couple of things that made us different. One of we
Speaker 1: only did things in the financial services world and only
Speaker 1: at the institutional level, no retail work of any kind.
Speaker 1: The second is, as consultants, we did all of our
Speaker 1: own homework ourselves as principles, and then when and offered
Speaker 1: our service, which is here is some extraordinary, undeniably accurate
Speaker 1: data because we have just interviewed a thousand of your
Speaker 1: most important customers, and they really know what they're talking about,
Speaker 1: and they're talking about you and your competition on thirty
Speaker 1: fifty different specific variables. So if you really want to
Speaker 1: know how you're doing, this is the best source of
Speaker 1: information you've ever had, and it's undeniable data. And then secondly,
Speaker 1: we had bankers who worked with the banking clients, investment
Speaker 1: managers who worked with the investment management clients. People out
Speaker 1: of the brokerage business worked with the broker's clients, people
Speaker 1: out of the bond business work with the bond clients.
Speaker 1: So all around the world we had to come nation
Speaker 1: of undeniable data and very skilled, competent consultants who bringly
Speaker 1: into the business. And then we worked with the same
Speaker 1: clients year after year after year after year after year.
Speaker 1: Then people get used to saying, this is really very hopeful.
Speaker 1: And when you say you work with the same clients,
Speaker 1: let's let's explore that a little bit. Your client roster
Speaker 1: is essentially you who's who of financial services companies as
Speaker 1: well as am I correct in saying you work with
Speaker 1: various treasury departments of different countries around the world. You're
Speaker 1: in a lot of different nations now, um, from that
Speaker 1: little shop that began back in nine most most all
Speaker 1: of our clients were the sellers or offerers of financial services.
Speaker 1: We did a little bit of work once in a
Speaker 1: while for the Federal Reserve Bank or for central banks,
Speaker 1: but not very much at all. So it's it's primarily
Speaker 1: large institutional client base. And this has become you have
Speaker 1: there are a few hundred am I correct and saying
Speaker 1: a few hundred employees, now about four hundred people. So
Speaker 1: this is what this is a substanti full firm that
Speaker 1: there you know, a lot of people have never heard
Speaker 1: of Granwich Associates, but you guys are very very influential
Speaker 1: in the world of finance. In the little world that
Speaker 1: we were focused on big fish small. I don't know
Speaker 1: if I'm going to tell say that that's accurate, but
Speaker 1: I'll let you slip away with that. Well, we really
Speaker 1: cared about our clients and we really worked with our clients.
Speaker 1: And so people can tell when you're the real thing,
Speaker 1: and people can tell when you're doing better than you
Speaker 1: claim you were doing, and people can tell when you've
Speaker 1: got a really good value to deliver. People in the
Speaker 1: financial world are smart, and they can catch on pretty
Speaker 1: quickly for people who are not all that good, but
Speaker 1: they can also catch on pretty quickly for people who
Speaker 1: are really good. One of the things that that struck
Speaker 1: me when I was sifting through your some of your
Speaker 1: biographies plural, was that when you describe the cultural values
Speaker 1: of Grandwich Associates, that's pretty much how you described it.
Speaker 1: The client more than they bargain for ever more value output,
Speaker 1: over promise, you thunder promise and over deliver. And that
Speaker 1: really is what drove that the development of that business,
Speaker 1: and it makes it very comfortable position to be in
Speaker 1: for the people inside the firm to know that they're
Speaker 1: really delivering great value and that clients like it. So
Speaker 1: it's a hard work, low stress sort of approach. It
Speaker 1: was plenty of stress just because of the hard work,
Speaker 1: but it was such a fun time. So let me
Speaker 1: give you a couple of quotes of yours that I
Speaker 1: really like, and let's see how you um, I think
Speaker 1: I think it is. The investment management business is built
Speaker 1: upon a simple and basic belief professional money managers can
Speaker 1: beat the market. That premise appears to be false. This
Speaker 1: is right from uh the original Losers game. Explain not
Speaker 1: that that needs a whole lot of explaining, but explain
Speaker 1: how you came upon that. Well, first of all, I
Speaker 1: had the privilege of working directly with quite a number
Speaker 1: of very good investment managers, and therefore I came to
Speaker 1: a realization faster than most people would be able to
Speaker 1: that there are really a lot of really smart people
Speaker 1: out there, and they're all competing trying to beat each other,
Speaker 1: and they all underestimate the competition because they don't realize
Speaker 1: how many other really smart people are out there. So
Speaker 1: that's one. The second is, year after year after year,
Speaker 1: I would watch perfectly wonderful people trying the hardest they
Speaker 1: could disappointed in themselves because their particular organization or their
Speaker 1: particular portfolio came in short. The third is that I
Speaker 1: was working with research data that gave access to very
Speaker 1: strong judgments right across the marketplace, and that helps a
Speaker 1: lot for learning at a fast clip. The last is
Speaker 1: I did have the privilege of knowing a lot of
Speaker 1: very very bright people in the academic community, and I
Speaker 1: knew what they were doing, and they were doing research
Speaker 1: that kept coming up with this stuff that people are
Speaker 1: doing actually cancels itself out. These people are really brilliant,
Speaker 1: they're really hard working, but they're not actually beating each
Speaker 1: other because they're so damn talented. So then I started
Speaker 1: paying attention to that, and then I could see, my god,
Speaker 1: it's coming true. So it wasn't a stroke of genius.
Speaker 1: It was just a matter of being there at the
Speaker 1: right place at the right time to see it. Well, well,
Speaker 1: you were one of the first that really really saw
Speaker 1: that very early. Um, here's an interesting observation from you,
Speaker 1: and I'm actually going to turn it into a question. So,
Speaker 1: given that everything you've said is is true and accurate,
Speaker 1: and we all intellectually understand that, why is it that
Speaker 1: active management is still the dominant form of investing. UH.
Speaker 1: In finance, well, we all laugh about the second marriages
Speaker 1: is the triumph of hope over experience. We all know
Speaker 1: about too soon, old, too late smart say that again,
Speaker 1: too soon, old, too late, late smart. Uh. It's hard
Speaker 1: to give up on something that we've all learned as kids.
Speaker 1: Try harder, you'll do better. Try harder and you'll do better.
Speaker 1: And we also have kind of an instinct for giving
Speaker 1: it a try ourselves. So I don't ever gamble and casinos.
Speaker 1: It's just I know enough about the take from the
Speaker 1: owners of the casino, and they're very good at it,
Speaker 1: and they can mathematically change the take on the slot
Speaker 1: machine from eight percent to seven to six percent. If
Speaker 1: the traffic isn't high enough at eight percent, they'll bring
Speaker 1: it down until people start saying, hey, look at all
Speaker 1: the winning. Uh. And I understand that it's fun for
Speaker 1: people to do gambling. Why I don't understand, but I
Speaker 1: do understand that people do enjoy it. If you kind
Speaker 1: of like gambling, and if you kind of like your
Speaker 1: school teachers taught you, try harder, you'll do better. And
Speaker 1: you think, I think I'll take a turn at it.
Speaker 1: I think I'll give it a try. Uh. We're sort
Speaker 1: of programmed to give one more try, one more try,
Speaker 1: one more try, and then we're also very good at
Speaker 1: not remembering the things that hurt. If you take back,
Speaker 1: if you sat down a piece of paper and a
Speaker 1: pencil and said I'm going to have to fill up
Speaker 1: one side of one sheet of paper with memories, I
Speaker 1: can promise you that most of your memories will be
Speaker 1: positive memories. Why, because we're good at obliterating from memory
Speaker 1: those things that were painful. We don't remember what the
Speaker 1: appendicitis felt like. We don't remember what it was like
Speaker 1: to get hit in the draw by that big kid
Speaker 1: down the block. We don't remember what it was like
Speaker 1: when that girl that we just thought it was absolutely
Speaker 1: wonderful says dear John, I do not want to see
Speaker 1: you anymore. All that sort of stuff fades away, and
Speaker 1: we do remember the positive things down the history. It's
Speaker 1: not just selective perception. It's selective retention in terms of
Speaker 1: we remember the good as investors, and we forget about
Speaker 1: oh yeah, I sold Apple at thirty two. And we
Speaker 1: also think we're smarter than we are, which is why
Speaker 1: we all laugh about Lake woebegon and of the kids
Speaker 1: are above average, because that's the way we feel about ourselves.
Speaker 1: If you ask people candidly, compared to your peers, would
Speaker 1: you rate yourself above averager below average? As a driver,
Speaker 1: people rate themselves above. I asked that question every time
Speaker 1: I give a presentation to a room full of investors.
Speaker 1: How many people in the room are above average drivers?
Speaker 1: Eight out of ten hands go on. It's human nature.
Speaker 1: Same thing dancers, how about conversationalists, how about sense of humor?
Speaker 1: How about kissing and hugging? Everybody gives themselves a little
Speaker 1: bit above average rating, and that's been true of all
Speaker 1: kinds of things. So why can't we do that in
Speaker 1: an investment management So let's let's let me give you
Speaker 1: one other quote, and I want you to go into this.
Speaker 1: You said the investment management business should be a profession,
Speaker 1: but it's not. That was within the concept of the
Speaker 1: earlier quote. Why isn't it a profession? The big is
Speaker 1: on his side gradually becomes dominant, almost for sure. Let's
Speaker 1: go back a little bit. When individuals decide they want
Speaker 1: to go into investment management. In my age group back
Speaker 1: in the sixties, it was because it was interesting because
Speaker 1: it was fun. That's what it looked like. Something absolutely
Speaker 1: because candidly, the pay wasn't all that good. Pay wasn't
Speaker 1: all that good fun. But the pay has been increasing
Speaker 1: and increasing and increasing, so now it's a wonderfully paid
Speaker 1: line of work. So people go into the business or
Speaker 1: into the field tend to be attracted because the compensation
Speaker 1: is terrific and they'll say right away and it's really interesting,
Speaker 1: and they're wonderful people in it. Then you get suspend
Speaker 1: your time doing one of the most interesting, almost without doubt,
Speaker 1: the most interesting competitive game to play, and you do
Speaker 1: it all day, every day, no heavy lifting, no outdoor work,
Speaker 1: no pain and anguish. Everything about it is absolutely marvelous.
Speaker 1: So you were act an extraordinary group. But the dominant
Speaker 1: reason people going to investment management today is because it
Speaker 1: pays very well. One of the things I'm fond of
Speaker 1: pointing out is this is the only profession where even
Speaker 1: if you're not especially bright or especially talented, if you
Speaker 1: put your head down and work hard, you can make
Speaker 1: lots and lots of money. You can't say that you could.
Speaker 1: You could work your tail off as a teacher. You
Speaker 1: could be the greatest fireman in the world. You're not
Speaker 1: necessarily going to make tens of millions of dollars. And
Speaker 1: it always surprises me when people go off the rails
Speaker 1: and do something unlawful or unethical or even illegal. When
Speaker 1: it's all you have to do is be patient and
Speaker 1: you'll make tons of money. Why can't you wait another
Speaker 1: decade to do that? I find it astonishing too. So
Speaker 1: let me let me keep going through some of these questions. UM,
Speaker 1: because there's a bunch of stuff I wanted to get to. Um,
Speaker 1: Let's let's talk about Harvard, because I don't want to
Speaker 1: forget that question. I hand wrote this in because in
Speaker 1: one of your bios you said you found the Harvard
Speaker 1: School of Business to be the most transformative experience of
Speaker 1: your life. That would be true. So what was it
Speaker 1: about the be School that there A whole bunch of
Speaker 1: different things. Number one is you're about the right age
Speaker 1: for this sort of an experience, early twenties. All of
Speaker 1: us are going through lots of changes, So we ascribe
Speaker 1: the positives to the institutions we were at, probably more
Speaker 1: than we should, but that's right. The second thing is
Speaker 1: the school brings together some very bright people and challenges
Speaker 1: each and every one of them to think for themselves
Speaker 1: and to think about what the other person is saying.
Speaker 1: So you learn to listen, and you learn to speak
Speaker 1: up and articulate your own views. And they require you
Speaker 1: three times today, three different problems every day, to work
Speaker 1: your way through a problem that does not have an answer. Really,
Speaker 1: there are no if a good case. At the Harvard
Speaker 1: Business School, there is no clear cut answer, no yes
Speaker 1: or no. Everything is about different ways you could approach.
Speaker 1: So you could make a yes out of going to
Speaker 1: the left. You could make a yes out of going
Speaker 1: to the right. You could make a yes out of
Speaker 1: going a little higher, going a little lower. You could
Speaker 1: also make nose out of each of those things. And
Speaker 1: you realize how complicated the world is, and how important
Speaker 1: making good judgments can be, and how important having the
Speaker 1: right facts can be, and whenever you come to a conclusion,
Speaker 1: how terribly important it is to lead other people towards
Speaker 1: the same analysis, so they can see why you've come
Speaker 1: out the way you have, and they can either agree
Speaker 1: with you or saying, no, I'm sorry, Charlie, that's not
Speaker 1: quite right. This is what you want to do instead,
Speaker 1: And you're listening to them, and you come out with
Speaker 1: better answers. So it's really learning how to think more
Speaker 1: than I think creatively positively with the discipline of getting
Speaker 1: it right. They're very fascinating. You know. We briefly mentioned
Speaker 1: one of the people you worked for um at d
Speaker 1: l J. But who are some of your early mentors
Speaker 1: at the Rockefeller Group or elsewhere. Oh, I've had so
Speaker 1: many different people who have taught me a lot. You'd
Speaker 1: have to go back to without a doubt. The most
Speaker 1: powerful teacher I have ever had was Miss Nellie Walsh,
Speaker 1: who was the sixth grade teacher in the Elbridge Gary
Speaker 1: School in Marblehead, Massachusetts. And she stood in front of
Speaker 1: the class one day and said, class, you were supposed
Speaker 1: to be twenty six or twenty seven or twenty eight
Speaker 1: in number, you are forty two. I am Miss Walsh.
Speaker 1: You as forty two, and I, as a single teacher,
Speaker 1: are going to do some very instant things because we
Speaker 1: are going to cover all of the sixth grade work
Speaker 1: this year together. She was a wonderful teacher. We all
Speaker 1: loved her. One day I was called to go to
Speaker 1: her office because she was also on the side the
Speaker 1: principal of the school. I was surprised I had no
Speaker 1: idea what could possibly have gone wrong. But I went
Speaker 1: down and she said, Charles, I'm very disappointed in you.
Speaker 1: I said why, Miss Walsh? And she said, am I
Speaker 1: right that you were found fighting with Peter Neely on
Speaker 1: the school playground during recess? And I said, yes, Miss Walsh.
Speaker 1: But I could explain, Charles, I said, Miss Walsh, he
Speaker 1: was picking on the little kids, and he was throwing
Speaker 1: snowballs at him, and he was putting cinders in the snowballs,
Speaker 1: and he was putting rocks in the snowballs, and he
Speaker 1: wouldn't stop. So I was trying to make him stop. Charles. Ever,
Speaker 1: unless she had something else in her mind, Charles, I
Speaker 1: expect more of you than you would bring yourself to
Speaker 1: the likes of Peter Neely. That will be all. That's
Speaker 1: the best lesson I ever had from anybody. Powerful. Miss
Speaker 1: Walsh was some wonderful teacher. So she basically said you,
Speaker 1: I expect more from you than you expect from yourself
Speaker 1: by a long shot. So what did that? What did
Speaker 1: that do to you? As look as a sixth grader,
Speaker 1: I remember Mrs Welsh's class, and you were a kid
Speaker 1: at sixth grade, or you're you're essentially a child. How
Speaker 1: did that resonate with you? Oh? Miss Walsh was a
Speaker 1: hero for me and she was magic, and it's not
Speaker 1: something you could walk away from because miss Walsh had
Speaker 1: said it. It's a little bit like Al Gross was
Speaker 1: our scout leader and he was a very thoughtful man
Speaker 1: who didn't happen to have any children, so he had
Speaker 1: decided he would get into boy scouting and he would
Speaker 1: take his side and say, here's some suggestions I think
Speaker 1: might be a good idea where you could go over
Speaker 1: at his home and he would give you a little
Speaker 1: bit of extra help on learning how to pass a
Speaker 1: merit badge. Never ever made it soft. Always the standard
Speaker 1: was high. But he would help you learn how to
Speaker 1: do it and would see show you the pathway to
Speaker 1: being able to do it, so you would be able
Speaker 1: to be successful. And because he would help you understand
Speaker 1: what the challenge was, you could pass it was it
Speaker 1: was a terrific lesson in leadership. So it was it
Speaker 1: was always about aiming much higher than you think, not
Speaker 1: just coasting by, but really doing as well as you
Speaker 1: can possibly do. W then some and at that age
Speaker 1: it's pretty easy to internalize when you've with people that
Speaker 1: have got that wonderful quality of genuine caring. So that
Speaker 1: was really a formative experience to you as what is
Speaker 1: sixth grades? I want to say about eleven or twelve
Speaker 1: years old? Is that about right? Ten? Eleven? All right?
Speaker 1: So now let's let's take this to another place. So,
Speaker 1: so that's who was formative to you as a person.
Speaker 1: Who were your big influences when it comes to investing,
Speaker 1: Who really were your investing heroes for lack of a
Speaker 1: better word, Boy, there's an awful lot of them. Because
Speaker 1: I've been privileged to know in a large number of
Speaker 1: people in the investment management world. I got you for
Speaker 1: another four hours. So let's let's work our way through
Speaker 1: the list. Well, Warren Buffett goes right to the top,
Speaker 1: and David Swinston goes right to the top, and those
Speaker 1: two are equal. Jack Meyer, who managed the Harvard and
Speaker 1: Dowment for many years, would be another at the top.
Speaker 1: This tremendous track. Andre Perrald, who for years taught the
Speaker 1: investment management course at Harvard Business School and is now
Speaker 1: an active practitioner. Uh you know, Bill Sharp, absolutely wonderful
Speaker 1: human being and a very very thoughtful guy. Man named
Speaker 1: Claude Rosenberg has started a firm called Rosenberg Capital Management
Speaker 1: in San Francisco would be another. Uh, there are probably
Speaker 1: a dozen people at Capital Group or the American Funds
Speaker 1: that would fit into that category. Start with Mike Shanahan
Speaker 1: and Jim Rothenberg, but then just keep right on going
Speaker 1: with one after another after another. Just terrific people. Yeah,
Speaker 1: I'd need a pencil and piece of paper to make
Speaker 1: a list that I thought was anywhere near fear because
Speaker 1: it's just all over the place. And I've known people
Speaker 1: in the United Kingdom that were just terrific. People. In Canada,
Speaker 1: they're terrific. People in Japan are terrific people. In Australia,
Speaker 1: I've had a very privileged life. You sound like you can.
Speaker 1: I'm gonna switch gears on you because something else you
Speaker 1: wrote really stood out to me. Um you said, you've
Speaker 1: repeatedly said you you've had a privileged life. How lucky
Speaker 1: you were with this. Here's something you said that was
Speaker 1: just stunning. It was a background Wich associates, but really
Speaker 1: you could ascribe it to anything. The most obvious success
Speaker 1: factor for us was luck, luck and luck and luck.
Speaker 1: So what what is the role of luck in business
Speaker 1: and investing, and in even just in a career. Well,
Speaker 1: there are two kinds of people, those who know that
Speaker 1: they were lucky and those who haven't figured it out
Speaker 1: yet among those who have had a wonderful life. And
Speaker 1: the truth is, most of the people that have really
Speaker 1: been hurt badly in life and have come out at
Speaker 1: the low end of the spectrum that's been luck, too
Speaker 1: bad luck, but it's really been luck. Life itself is unfair,
Speaker 1: is what Jack Kennedy said one day when he says,
Speaker 1: Mr President, how do you feel about those boys who
Speaker 1: are called up for the Berlin crisis? He said, life
Speaker 1: itself is unfair? And then going through the Catechism, and
Speaker 1: some people live at a time when there's no war.
Speaker 1: Some have wars but never served. Some serve but never
Speaker 1: leave the country. Some go overseas and never see combat.
Speaker 1: Some see combat but nothing actually happens. And other people
Speaker 1: get killed or wounded, and they have that forever. And
Speaker 1: it was a very good reminder that the experiences that
Speaker 1: we all have aren't really ones that we chose and
Speaker 1: to sign for ourselves. It's the fit happens, you know,
Speaker 1: you I'm I'm pulling something from my memories that you
Speaker 1: had written. I think it was about Kennedy, who someone
Speaker 1: had asked him, um, how did you become a war hero?
Speaker 1: And his answer was along the same lines, they sank
Speaker 1: my boat. It was involuntary, right, It's exactly that. That's
Speaker 1: how he became a hero. They sank my boat. I
Speaker 1: thought that was was fascinating and along the same lines
Speaker 1: of Hey, you know, it's fairly random what happens in
Speaker 1: the world, and sometimes you get lucky and it's good,
Speaker 1: and sometimes you get lucky and it's bad. But then
Speaker 1: it's Kennedy and what you did with it. I mean,
Speaker 1: he really was heroic in the way in which he
Speaker 1: took care of every one of those sailors, and really
Speaker 1: hard if the physical strain of swimming swimming, swimming, swimming,
Speaker 1: pulling people along with him. It's a stand up proposition.
Speaker 1: So you know, luck creates opportunities, and then how you
Speaker 1: respond to those opportunities really determines to some large degree
Speaker 1: what you do with that random shuffle of the cards. Boy,
Speaker 1: is that true? The secret to there's be optimistic, because
Speaker 1: if you're optimistic, you think something might work out. And
Speaker 1: if you think something might work out, you'd be surprised
Speaker 1: how often you can find something that sort of works out.
Speaker 1: If you're pessimistic and think it will never work out,
Speaker 1: you're probably right about that too. That's the old story
Speaker 1: about the little kid who's an optimist who wakes up
Speaker 1: on Christmas morning and there's a room full of manure
Speaker 1: and he's all excited and look at all this manure.
Speaker 1: There's got to be a pony in here somewhere. So
Speaker 1: so let me go over the four rules of the
Speaker 1: losers game that and I want to I want to
Speaker 1: get you to expound on this a little bit. So
Speaker 1: the four rules I pulled out from from your writings
Speaker 1: were play your own game, keep it simple, concentrate on defense,
Speaker 1: and don't take it personally. That's a perfectly marvelous fair.
Speaker 1: So so let's let's go through that. Play your own game.
Speaker 1: What does that mean again to the average investor who's
Speaker 1: looking at this really complicated market. Oh well, that's another
Speaker 1: another question. If what should an individual do is first
Speaker 1: recognize that the people who are really out there all
Speaker 1: the time and dominate the market, or people who are
Speaker 1: really skilled at their particular game and they're playing it
Speaker 1: all the time so the time, don't play their game.
Speaker 1: Play your own game. No, don't play, just don't play
Speaker 1: at all. Play your own game. I give an example.
Speaker 1: You could say, Okay, you're going to play against the
Speaker 1: Olympic team, and some of the people are gonna be
Speaker 1: downhill skiers, some of the people are gonna swimmers. Some
Speaker 1: of the people are weightlifters, some of them are balancing
Speaker 1: beam gymnasts. There are a whole bunch of different skills
Speaker 1: and they're all going to be out there. Which one
Speaker 1: do you want to play against? The answers, you don't
Speaker 1: want to play against any of them, and you certainly
Speaker 1: don't want to play one after another after another after
Speaker 1: another another one. They've been specialized in their particular capability.
Speaker 1: But the people who are swimmers should concentrate on being
Speaker 1: really gifted capable swimmers and take that discipline over and
Speaker 1: over and over and over and over again, hour after
Speaker 1: hour after hour, perfecting their conditioning so that they can
Speaker 1: be champion athletes. Makes a lot of sense. My colleague
Speaker 1: Josh always says, the way to defeat high frequency trading
Speaker 1: is to become a low frequency trader. It's still along
Speaker 1: the same it's along the same lines, So keep it simple,
Speaker 1: pretty self obvious, right, you know, but we should rephrase
Speaker 1: that sounds not keep it simple, stupid, but keep it simple, sweetheart,
Speaker 1: because people who do keep it simple or happier, and
Speaker 1: therefore they're nicer to be with, but they also have
Speaker 1: more success as opposed to getting involved in more complicated
Speaker 1: more is just slightly beyond your capacity to play him
Speaker 1: really well, all right? And the third one concentrate on defense.
Speaker 1: Most people don't really, I don't hear that that often.
Speaker 1: What do you mean when you say concentrate on your defenses.
Speaker 1: First of all, in any game you could play offense
Speaker 1: or defense. Everybody else is playing offense. So your chances
Speaker 1: of being better at whatever you're competing in by playing
Speaker 1: a really good defense will show up. And you'll see
Speaker 1: that when you watch a pro football team playing against
Speaker 1: another pro football team. Some are really strong on defense
Speaker 1: and are really strong on offense. But that's a game
Speaker 1: where everybody knows you've got to play the best you
Speaker 1: can do at whatever skill sets you've got. Amateurs don't
Speaker 1: usually pay very much attention to that. We all tend
Speaker 1: to think in terms of let's try harder to do better,
Speaker 1: and therefore offense, but the defense can be a wonderful
Speaker 1: way of coming out as a success. Back to the
Speaker 1: loser's game and tennis again. If you can get the
Speaker 1: ball back three times on every point, you will win
Speaker 1: every set for the rest of your life. That's extraordinary
Speaker 1: tennis for ordinary players. So in the fourth one, don't
Speaker 1: take it personally. What does that mean? All of us
Speaker 1: tend to think, if we got it right, that it
Speaker 1: was because we were brilliantly successful. If we get it wrong,
Speaker 1: we get angry and irritated and think somebody shouldn't have
Speaker 1: done something or something like that. If you're not close
Speaker 1: to rational, you don't belong in the investment management field.
Speaker 1: I think the best illustration of that is a beautiful
Speaker 1: woman at a dinner party which happened to be sitting
Speaker 1: next to Warren Buffett. Mr Buffett. She said, I am
Speaker 1: so glad to meet you. I've heard all about you.
Speaker 1: Now you're a brilliant investment manager. How how did you
Speaker 1: get to be so good as an investment manager? He said,
Speaker 1: I'm rational and she said, I'm sorry, but I didn't
Speaker 1: quite hear what you just said. Would you repeat that?
Speaker 1: He said, I am rational? And she's looked at it.
Speaker 1: Is that all oh, and turn talk to the other person.
Speaker 1: She's looking for a stock tip. But you know, the
Speaker 1: secret of success in any line of work is being rational, disciplined,
Speaker 1: and knowing what the dickens you're doing, and what the
Speaker 1: world of wherever you're competing, what that world is really
Speaker 1: all about. And there's no doubt that a lot of
Speaker 1: individual investors are not rational. They don't know what they're doing,
Speaker 1: and they're not prepared for the competition that they meet.
Speaker 1: We all make mistakes, and the biggest thing we can
Speaker 1: do to make our successes more frequent is to make
Speaker 1: fewer mistakes. And the answer to that is don't do
Speaker 1: the things that lead to making mistakes. For an example,
Speaker 1: I don't gamble. You've heard that, under stand. Uh. I'm
Speaker 1: an indexery I believe in indexing. Why because the other
Speaker 1: guys are so damn good. They're so smart, they're so
Speaker 1: hard working, they're so skillful, they're so informed, they've got
Speaker 1: to access to all kinds of information, and they're really
Speaker 1: willing to commit any time to making a decision. So
Speaker 1: I can sit back and say, but they figured it out,
Speaker 1: but they've got it right. Maybe not perfect, of course,
Speaker 1: not perfect, but pretty good. Yeah, pretty good, better than
Speaker 1: I could do, I think. So I'm sad to say
Speaker 1: that I'd like to be better than they are, but
Speaker 1: I'm not. And the other thing I avoid the fees,
Speaker 1: and those fees well very Let me put it. One day,
Speaker 1: ten years ago, I had this amazing discovery that I
Speaker 1: had missed the most important point for a long, long
Speaker 1: time investment manager. I was an investment committee listening to
Speaker 1: an investment manager explained how things just hadn't worked out,
Speaker 1: but it was going to be better soon and on
Speaker 1: average they were really terrific and so on and so on,
Speaker 1: And I'm looking at the numbers, and I said, you know,
Speaker 1: it's interesting. It's interesting. I have thought for years that
Speaker 1: fees were inconsequent I just realized they're the big number.
Speaker 1: How did I get there? Let me go through the drill.
Speaker 1: It's really interesting. Number one. We all said four letter words,
Speaker 1: single number. Only one percent. Fees are small. Only is
Speaker 1: the right word if it's one percent? But what if
Speaker 1: it's not one percent? What do you mean? Well? What
Speaker 1: do I mean by that? Is one percent of my assets?
Speaker 1: But wait, wait, wait, I already have the assets, so
Speaker 1: I'm not buying from you the assets I want from
Speaker 1: you the returns, right, Yeah, yeah, the charlie, you get
Speaker 1: the returns right? So one percent of assets is how
Speaker 1: much of a percent of returns? You know it varies
Speaker 1: a lot? Yeah, but how much on average is it? Well,
Speaker 1: let's call it fifteen percent of returns? Is a one
Speaker 1: percent fee of assets? Okay, but I studied economics more
Speaker 1: than one semester, and in the second semesters at all
Speaker 1: prices are relative to values. Yeah, what does that mean? Well,
Speaker 1: what is the value of active management? And what is
Speaker 1: the fee for active management? What do you mean by value? Well,
Speaker 1: I can get a commodity product in the X one
Speaker 1: for ten basis points one tenth of one percent. So
Speaker 1: if I want to get a custom tailored active management
Speaker 1: from a really brilliant, hard working guy who's just marvelous
Speaker 1: to talk to and terribly well informed, what is he
Speaker 1: charging incrementally over that commodity product? Um nighty basis points
Speaker 1: nine tenths of one percent, maybe a little bit more, Okay,
Speaker 1: And what is the return? Well, let's assume that he's
Speaker 1: a very good manager and he's getting a better than
Speaker 1: market rate of return. Maybe he's on average getting fifteen
Speaker 1: basis points over the market that would be a worldwide
Speaker 1: hero um ninety. Uh, the fee is actually running pretty
Speaker 1: close of the returns. Oh my goodness. You mean he's
Speaker 1: getting and I'm only getting. That's right. And what about
Speaker 1: an average manager. Well, I'm sorry, but the average manager
Speaker 1: actually gets beaten by the market over the long term.
Speaker 1: So the fee is actually infinite as a fraction of
Speaker 1: the incremental value. That's right, Charlie. It's the only service
Speaker 1: in the history of the world that has a fee
Speaker 1: that is infinite infinite. Jeff Summer, who Summers, who I
Speaker 1: believe is still a Yale Is that right? Had an
Speaker 1: article in the Sunday Times not too long ago that
Speaker 1: talked about how many mutual funds are trouncing the market
Speaker 1: and the answer was exactly zero percent. Well, that's a
Speaker 1: little bit of a tough article because he said, year
Speaker 1: after year after year after year, and it is very
Speaker 1: hard for anybody to beat the market. Significant had top
Speaker 1: quartile of investment results as his target. To be in
Speaker 1: the top quartil year after year after year after year
Speaker 1: is really hard. So I thought that was and wanted unfair,
Speaker 1: and and he threw in costs and fees, and that's
Speaker 1: how he came up with zero percent that he I
Speaker 1: believe it was. I don't want to misquote him. The
Speaker 1: phrase was either pernicious or compounded impact of fees. This
Speaker 1: handful of guys who managed to do it ended up
Speaker 1: getting bumped out of that market beating percentile because of
Speaker 1: the fees. The two different things that I think he
Speaker 1: really is right on. Number one, fees are high, much
Speaker 1: higher than people realize. And secondly, that return success it's
Speaker 1: not a regular repeating thing. So if somebody has had
Speaker 1: a very good run for three or four years, the
Speaker 1: odds are stacked against him for the next year. Somebody's
Speaker 1: had a bad run, but it's pretty damn capable, pretty
Speaker 1: good chance he will do better next year. A little
Speaker 1: bit of mean reversion. So let's talk a little bit.
Speaker 1: You know, we set something else up ourselves, and I
Speaker 1: know you're involved in this, uh perniciously called robo advisors,
Speaker 1: but you're on the board of advisors for health Fronts, right.
Speaker 1: We have a company called Liftoff that we we've set
Speaker 1: out in order to give people the opportunity to make
Speaker 1: very low cost investments that are essentially removing that active
Speaker 1: management and around allowing software to essentially run Uh the
Speaker 1: investment portfolios. How did you get involved with wealth Ront friendship? Uh,
Speaker 1: it's complicated, but I have a very bright friend who
Speaker 1: was on the governing board at Yale. Got to know
Speaker 1: her that way. She introduced me to the idea and
Speaker 1: they and I had conversations and it just seemed to
Speaker 1: make sense to see if there is a way to
Speaker 1: reduce the cost of delivering investment management services to people
Speaker 1: who just don't have the time to waste paying attention
Speaker 1: to it, but want somebody to be paying attention and
Speaker 1: using pretty simple metrics. And it's not complicated work, but
Speaker 1: it does help if you're paying, if you're alert and
Speaker 1: paying attention. So there's a handful of companies like that,
Speaker 1: Adam Ash at Wealth Front. Uh, there's another company betterment
Speaker 1: our farm is called Liftoff. There is also Schwab is
Speaker 1: now running its own robo advisor, and as is Vanguard.
Speaker 1: Vanguard launched a little late in the in the cycle,
Speaker 1: launched a robo advisor and suddenly they have five billion
Speaker 1: in assets under automated management. They just leap frogged everybody else.
Speaker 1: Is this going to be the way of the future.
Speaker 1: I don't know, but I think it's a very interesting opportunity,
Speaker 1: and I would bet that it will work for a
Speaker 1: large number of people quite well. You know for sure
Speaker 1: that there will be a lot of competition. There is now,
Speaker 1: and they'll be more competition, and so the best quality
Speaker 1: of service will be the ones that work out over time.
Speaker 1: And I think that's a very attractive thing for individuals.
Speaker 1: And one of the big problems is if you go
Speaker 1: to an investment management firm and say I'd like to
Speaker 1: be a clan, the first thing they have to ask
Speaker 1: you is, well, what are your assets which you don't have?
Speaker 1: Need our minimum? Can you? And a lot of are
Speaker 1: one in three and ten million dollar minimums we've seen,
Speaker 1: which is exciting and wonderful for those who are clients.
Speaker 1: On the other hand, most people don't have that kind
Speaker 1: of money and they would like to have somebody who
Speaker 1: pay some attention and avoid the big mistakes. So if
Speaker 1: your attitude mind would be when you're looking for an advisor,
Speaker 1: what are you trying to do? You're trying to avoid
Speaker 1: a serious mistake, and the robot advisors can do that
Speaker 1: at a low cost, and therefore you don't have to
Speaker 1: pay a high fee. Right the people who have complicated
Speaker 1: intergenerational wealth transfer issues or complex tax situations. Probably isn't
Speaker 1: the ideal fit for them. But as opposed to trying
Speaker 1: to do it on your own or or being left
Speaker 1: to um costli or alternatives, it really seems to make
Speaker 1: a lot of sense. So we're down to our last
Speaker 1: couple of questions. UM, let me ask you you this,
Speaker 1: since we were just talking about software. Uh, what has
Speaker 1: really changed since you joined the industry? What do you
Speaker 1: see as this everything? Well, it seems to me that's
Speaker 1: a pretty good fair summary. The first day I walked
Speaker 1: into the Rockefeller family office, I was introduced to a
Speaker 1: Scantlin machine. Interesting product. Jack Scantlin was a technical genius
Speaker 1: and Lawrence Rockefeller was a venture capitalist, and they had
Speaker 1: come together to create a company called Scantle and Electronics.
Speaker 1: And Jack had figured out that everybody who's in the
Speaker 1: investment business would like to be able to find out
Speaker 1: what the price of the stock is without calling a broker.
Speaker 1: The only way you could find out in those days
Speaker 1: we call it broker who might or might not remember
Speaker 1: what was the last price or be able to look
Speaker 1: up on a chalkboard where a bunch of teenage kids
Speaker 1: were rapidly trying to keep up with a two million
Speaker 1: share of day trade volume. Stock market is what was
Speaker 1: the last price of General Motors IBM and so on?
Speaker 1: And Jack Scantlon's idea was punched my keypad with the
Speaker 1: stock exchange symbol, and I'll print out for you on
Speaker 1: heat sensitive tape what the price is most recent trade,
Speaker 1: what the highest price of the day, the lowest price
Speaker 1: of the day, and even the volume, and you could
Speaker 1: do that and it was just magical. Well, there were
Speaker 1: only ten of those machines out in the whole world
Speaker 1: at that point, and I was able to access one
Speaker 1: just by walking out of my office and turning left,
Speaker 1: and was terrific. It's a long way from there to
Speaker 1: today with the kind of factual information that's accessible in
Speaker 1: every minute to everybody who's actively involved in business. The
Speaker 1: second thing is very few people were involved in research
Speaker 1: as analysts. Now there are thousands, hundreds of thousands of
Speaker 1: people all over the world who are really serious about
Speaker 1: being experts on industries, companies, demography, economics, politics, all kinds
Speaker 1: of different facts. So any kind of factual information you'd
Speaker 1: like to have access to, you can get access by
Speaker 1: pick up your phone. But you can also get it
Speaker 1: just by letting the inquiring through the Internet to the
Speaker 1: people who most recently made contact with you, so terrific
Speaker 1: factual information. The third thing is regulation has been a
Speaker 1: huge change in regulation. Used to be that you couldn't
Speaker 1: do insider trading, fine, but today the SEC requires that
Speaker 1: you make all information available to all investors. That really
Speaker 1: levels the play field. All those different things in there
Speaker 1: a lot were that you can add on top of that.
Speaker 1: It's very hard to see the business today as being
Speaker 1: anything like the business was fifty years ago, except we
Speaker 1: use some of the same terms. We didn't have digital
Speaker 1: digitized pricing, We had eighths and quarters and halves, open
Speaker 1: call out on the floor of the stock change was
Speaker 1: so different from what the volume is today. We do
Speaker 1: a thousand times more trading today than we did a
Speaker 1: day then, and that's in the cash market or at
Speaker 1: least as large. And you think, holy smokes, two thousand
Speaker 1: times as much volume going through that's really something that that, yeah,
Speaker 1: sure is. And there are all those other changes and
Speaker 1: not changes that you can add together. They multiply across
Speaker 1: each other, so the compounding is simply astonishing. We really
Speaker 1: take a lot of things. For granted, I'm astonished to
Speaker 1: think that the price action was essentially invisible to even professionals,
Speaker 1: and that was a big innovation. Hey, we could tell
Speaker 1: you what the actual price of the stock is. Yep,
Speaker 1: that's amazing. My My final question before we let you
Speaker 1: let you go, and this is a question I asked
Speaker 1: all my guests, what have you learned about investing that
Speaker 1: you wish you knew at the start of your career? Oh? Boy,
Speaker 1: quite a lot. Uh. First of all, investing is a
Speaker 1: long wavelength activity, and the fact that the stock exchanges
Speaker 1: a short wavelength activity, and most of the chatter about
Speaker 1: investing a short wavelength activity should not distract you from
Speaker 1: the serious work of long wavelength and real investing is
Speaker 1: so different from stock trading that you really ought to know.
Speaker 1: Which is it that you're gonna do. I have nothing
Speaker 1: against people want to do stock trading for the rest
Speaker 1: of their lives. I don't have any interest in that.
Speaker 1: I'm interested in investing, just a very different discipline. Uh.
Speaker 1: The second thing is I wish I had known how
Speaker 1: much fun it would be, because then I would have
Speaker 1: settled in with even more confidence to it. Because I've
Speaker 1: really enjoyed it, and it's partly the activity of the game,
Speaker 1: but mostly the privilege of working with extraordinarily bright people
Speaker 1: who are very articulate and very competitive and striving all
Speaker 1: the time to learn about new things and talking about
Speaker 1: new things, and the information flow is simply terrific. And
Speaker 1: the last it's candidly, I wished I'd realized what a
Speaker 1: terrific business it is, because if I had understood that,
Speaker 1: I would not have started Ranitis Associates, where I had
Speaker 1: a wonderful time. I would have started an investment management firm,
Speaker 1: and I would have made a larger financial success. And
Speaker 1: you know what's really sad about it, I would have
Speaker 1: been wrong. Because I would have made a larger financial success,
Speaker 1: I would have had a greater amount of excitement and
Speaker 1: fun in many ways, but I wouldn't be nearly as
Speaker 1: proud of what I had been doing as I'm able
Speaker 1: to be now looking back on the work that we
Speaker 1: did as a firm for the clients that we served.
Speaker 1: And that to me is the ultimate expression, because I
Speaker 1: am ultimately, whether I like it or not, I'm much
Speaker 1: more inclined towards the professional disciplines and whatever I'm doing
Speaker 1: than the business disciplines. I love smart people. I think
Speaker 1: that's just terrific, but I'd rather work with them on
Speaker 1: the drive for competition for best ideas than the drive
Speaker 1: for competition of making the most money. Charlie, thank you
Speaker 1: so much for being so generous with your time. This
Speaker 1: has just been absolutely a joy and a privilege. I'm
Speaker 1: gonna have to ask you to sign some of your
Speaker 1: books for me. We've been speaking with Charlie Ellis. He
Speaker 1: is the author of sixteen books, including most recently Falling Short,
Speaker 1: Falling Short. I highly recommend reading any of his books.
Speaker 1: My favorite is Winning the Losers Game. Um. If you
Speaker 1: enjoyed this podcast, look up an Inch Short, Down an
Speaker 1: Inch on Apple iTunes and you can see the rest
Speaker 1: of our our various conversations. Feel free to check out
Speaker 1: my daily column on Bloomberg View dot com or follow
Speaker 1: me on Twitter at rid Halts. I have to thank
Speaker 1: my engineer Matt Ryan, my assistant producer Charlie Valmer, and
Speaker 1: my head of research Mike bat Nick for helping put
Speaker 1: this all together. And most of all, thank you so much,
Speaker 1: Charlie Ellis. This has been absolutely a delight. Thanks Pare.
Speaker 1: I've had the most fun you're listening to Masters in
Speaker 1: Business with Barry rid Holts on Bloomberg Radio.