WEBVTT - Interview With Charles D. Ellis: Masters in Business (Audio) 0:00:02.200 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.440 --> 0:00:11.280 This week on the podcast, we have an extra special guest. 0:00:11.560 --> 0:00:17.160 His name is Charlie Ellis, and I spend some time 0:00:17.360 --> 0:00:21.280 going over his CV when we actually do the show, 0:00:21.320 --> 0:00:24.640 so I won't um repeated, but I'm going to tell 0:00:24.680 --> 0:00:28.880 a quick story about the first time Charlie was a 0:00:28.880 --> 0:00:35.360 guest here. I was just captivated by the combination of 0:00:35.440 --> 0:00:40.720 his intellect and integrity and common sense. And the show 0:00:40.880 --> 0:00:43.559 ended and I had to be somewhere, and he was 0:00:43.600 --> 0:00:47.640 walking down to Grand Central station, and I said, sure, 0:00:47.680 --> 0:00:50.280 I'm happy to walk with you, and and we continue 0:00:50.360 --> 0:00:55.120 to conversation down twenty blocks or so from the Bloomberg 0:00:55.160 --> 0:01:00.440 Building to UM to Grand Central and I can't describe 0:01:00.440 --> 0:01:03.320 it any of the way. It was just captivating. It's 0:01:03.360 --> 0:01:06.400 a delight and a privilege to be able to chat 0:01:06.480 --> 0:01:12.240 with someone of his experience, knowledge, wisdom. It was just delightful. 0:01:12.840 --> 0:01:16.520 And I sat and chatted with him for this show 0:01:17.000 --> 0:01:19.720 for about an hour and a half. If you are 0:01:19.959 --> 0:01:24.960 at all interested in anything having to do with investment management, 0:01:25.000 --> 0:01:31.479 institutional investing, individual investing, indexing, retirement savings, the list goes 0:01:31.520 --> 0:01:35.240 on and on, you will appreciate this conversation. There there 0:01:35.319 --> 0:01:39.679 is no one else like Charlie Ellis. Um. He is 0:01:39.880 --> 0:01:44.560 one of the legends of finance. And so, with no 0:01:44.640 --> 0:01:50.600 further ado, here is my conversation with Charlie Ellis. This 0:01:51.080 --> 0:01:55.800 is Masters in Business with Barry Ridholts on Bloomberg Radio. Today. 0:01:55.960 --> 0:01:58.600 I have an extra special guest, a legend in the 0:01:58.600 --> 0:02:02.200 world of finance. His name is Charlie Ellis. And if 0:02:02.240 --> 0:02:04.560 you're unfamiliar with Mr Ellis, let me give you a 0:02:04.760 --> 0:02:09.120 very short version of his curriculum. Vita graduated from Yale 0:02:09.120 --> 0:02:11.799 with a BA in history, ends up getting an NBA 0:02:12.040 --> 0:02:16.919 from Harvard UH and UH PhD in Finance from n YU. 0:02:17.160 --> 0:02:20.280 Becomes a c f A charter holder in nineteen sixty 0:02:20.400 --> 0:02:25.000 nine on the faculty of the Harvest Business School, director 0:02:25.160 --> 0:02:31.560 of the Vanguard Group on the Yale School of Management UH, 0:02:31.880 --> 0:02:35.160 as well as the Yale Endowment, Chairman of the Board 0:02:35.240 --> 0:02:38.280 of the cf A Institute. One of a dozen people 0:02:38.360 --> 0:02:44.000 recognized for lifetime contributions to the investment profession by the 0:02:44.000 --> 0:02:48.920 cf A Institute. Author of sixteen books on investing, and 0:02:48.960 --> 0:02:52.320 we'll talk about a few of those shortly. Charlie Ellis, 0:02:52.360 --> 0:02:55.680 Welcome back to Bloomberg. Glad to be here, Barry. Thank you. 0:02:56.080 --> 0:02:59.639 So that's the short version of your curriculum. VTA will 0:02:59.680 --> 0:03:03.000 spend some more time talking about your work in the 0:03:03.000 --> 0:03:06.320 field in a little bit. But let's jump right in 0:03:06.360 --> 0:03:08.640 to the new book that you just put out, the 0:03:08.680 --> 0:03:13.760 title The index Revolution, Why investors should join it. Now 0:03:14.440 --> 0:03:17.919 you've already written sixteen books. What motivated you to write 0:03:18.120 --> 0:03:21.040 yet another one. Well, I really believe in getting the 0:03:21.080 --> 0:03:24.680 word out, and I've had an unbelievable privilege as an 0:03:24.720 --> 0:03:27.880 insider in the investment management world. I had chanced to 0:03:27.919 --> 0:03:30.720 meet with people all over the world and talk and 0:03:31.000 --> 0:03:33.160 talk and talk and talk with them about what's going on. 0:03:33.600 --> 0:03:36.560 And once you get a really good idea of what's 0:03:36.600 --> 0:03:39.080 going on, you realize indexing makes so much sense for 0:03:39.120 --> 0:03:42.360 so many people. Everybody should seriously consider it and most 0:03:42.360 --> 0:03:45.920 people should do it. So how do you help write 0:03:45.920 --> 0:03:48.400 a short book that's easy to read and see if 0:03:48.440 --> 0:03:52.760 you're gonna attract attention? So, so let's talk about indexing. 0:03:53.200 --> 0:03:57.000 You spoke at a conference recently, the Evidence Based Investing Conference. 0:03:57.400 --> 0:04:01.560 Bill McNabb, the CEO and chairman UH of the conference, 0:04:01.600 --> 0:04:05.760 spoke and the two of you both said the same thing. Gee, 0:04:05.800 --> 0:04:10.160 it's a shame indexing attracted the word passive that that 0:04:10.200 --> 0:04:13.280 seems to be a problem. What's the issue with passive? Well, 0:04:13.280 --> 0:04:15.400 when I was growing up, we read The Little Engine 0:04:15.480 --> 0:04:17.920 that Could and we were told if you study harder, 0:04:17.960 --> 0:04:20.720 you'll get better grides. And when I got a job, 0:04:20.800 --> 0:04:22.720 I was told, if you work hard, you'll get a raise, 0:04:22.800 --> 0:04:25.160 you might even get a bonus. Everything about our lives. 0:04:25.440 --> 0:04:28.040 You want to learn the piano, spend time practicing, you 0:04:28.040 --> 0:04:30.839 want to learn how to play tennis, Practice, practice, practice, 0:04:31.120 --> 0:04:34.480 Everything has to do with do more, work harder, and 0:04:34.520 --> 0:04:37.560 you'll do better. So we come to investing and say, fine, 0:04:37.560 --> 0:04:39.799 I'm ready to go. Where do I get a chance 0:04:39.880 --> 0:04:42.320 to do better? I'm gonna work hard? And somebody says, he, 0:04:42.560 --> 0:04:44.159 you know, I wouldn't bother doing that. Why don't you 0:04:44.160 --> 0:04:48.360 just settle for average? Nobody wants to be average, Nobody 0:04:48.400 --> 0:04:52.239 wants to settle. And the word passive is a horrible negative. 0:04:52.279 --> 0:04:55.080 Can you imagine your wife or husband introducing you as 0:04:55.320 --> 0:04:59.680 this is my spouse. Passive sounds terrible. So what is 0:04:59.720 --> 0:05:04.000 the better phrase to describe what people should think of 0:05:04.040 --> 0:05:06.799 when they think of indexing well to one is indexing 0:05:06.920 --> 0:05:11.080 and the second is winning. Winning, So explain that why 0:05:11.240 --> 0:05:14.719 is um? Why is winning? As Charlie Sheen would say, 0:05:14.800 --> 0:05:17.680 why does that leave us to lead us to indexing? Well, 0:05:17.760 --> 0:05:20.280 one thing that I would use to describe winning is 0:05:20.320 --> 0:05:22.760 doing better than most of the other people at whatever 0:05:22.800 --> 0:05:27.280 it is you're trying to do operationally, year after year 0:05:27.320 --> 0:05:31.239 after year. Over the long term, indexing does better today 0:05:31.520 --> 0:05:34.320 than active investing. That wasn't the case twenty five or 0:05:34.360 --> 0:05:36.720 thirty years ago, but it is the case today. What 0:05:36.720 --> 0:05:41.320 what accounts for that change? Massive change in virtually every variable. 0:05:41.800 --> 0:05:44.320 Just for an example, if you go back fifty years ago, 0:05:44.360 --> 0:05:47.520 there might have been five thousand people involved in active investing. 0:05:47.600 --> 0:05:50.640 Now they're at least a million people involved, and they're smart, 0:05:50.880 --> 0:05:55.320 well educated. They've all got exactly the same tools, computers, 0:05:55.880 --> 0:05:59.320 access to the Internet, Bloomberg terminals, and they've all got 0:05:59.400 --> 0:06:03.080 access to same information because the SEC requires public companies 0:06:03.120 --> 0:06:06.680 to give everybody all the information they give to anybody. 0:06:06.760 --> 0:06:08.680 So it's not like the old days where whoever got 0:06:08.720 --> 0:06:11.600 that first call, Hey, that was a money maker. If 0:06:11.640 --> 0:06:14.840 you found it out before all your competitors did, it 0:06:14.880 --> 0:06:17.880 was wonderful The second thing that's big, big change is 0:06:17.920 --> 0:06:20.960 it used to be it was professionals who had access 0:06:21.000 --> 0:06:24.040 to really good research, a small fraction of the market 0:06:24.080 --> 0:06:27.559 competing against large numbers of amateurs who bought and sold 0:06:27.640 --> 0:06:30.200 once every year or two and didn't candidly, no one, 0:06:30.240 --> 0:06:34.760 awful lot. Now it's been reversed. Now or more of 0:06:34.839 --> 0:06:37.800 trading on the New York Exchange is either machines or 0:06:38.080 --> 0:06:41.919 professional people, and they're playing to win. Michael Mobisoft calls 0:06:41.960 --> 0:06:45.320 this the paradox of skill. It's not that the competitors 0:06:45.320 --> 0:06:48.880 are bad, it's that everybody else is so good. How 0:06:48.960 --> 0:06:51.360 is there any room to to beat them when you're 0:06:51.360 --> 0:06:53.560 playing at such high levels, so very good, and so 0:06:53.600 --> 0:06:56.320 many of them, and they have the tools, they have 0:06:56.360 --> 0:06:59.360 the technology. It's fabulous. They are so much better than 0:06:59.400 --> 0:07:02.719 managers or twenty years ago. It's night and day. So 0:07:03.279 --> 0:07:06.560 the first index fund that comes out by Jack Bogel, 0:07:07.040 --> 0:07:09.120 they were hoping to sell you right in the book, 0:07:09.160 --> 0:07:12.840 a hundred and fifty million dollars worth and they could 0:07:12.840 --> 0:07:15.720 barely get it over ten million dollars when they first 0:07:15.800 --> 0:07:18.840 launched it. It was a flop. Why did the first 0:07:18.880 --> 0:07:21.200 index fund do so poorly? It wasn't a flop. It 0:07:21.280 --> 0:07:24.720 was a big flop. A whole bunch of different things. 0:07:24.840 --> 0:07:28.280 Number One, nobody knew anything about indexing to speak of, 0:07:29.000 --> 0:07:31.720 and the idea wasn't out, and everybody was looking for 0:07:32.000 --> 0:07:34.200 beat the market rates of return. That was a big 0:07:34.560 --> 0:07:37.280 second is there was a sales load in order to 0:07:37.320 --> 0:07:40.760 attract the sales force at the retail brokery firms. What 0:07:40.880 --> 0:07:43.080 was that sales load? It was I think six and 0:07:43.080 --> 0:07:49.000 a half percent. That's a lot when you're offering I'm 0:07:49.000 --> 0:07:51.320 going to give you average, and I'm going to charge 0:07:51.320 --> 0:07:54.280 you a big entry fee to get started. That wasn't 0:07:54.280 --> 0:07:56.360 an annual fee. It was a one time load for 0:07:56.360 --> 0:07:58.320 the purchase one time. But you dropped eight and a 0:07:58.360 --> 0:08:01.040 half off the top of your money. Your behind the 0:08:01.080 --> 0:08:04.920 line of scrimmage pretty far. So. One of the other 0:08:04.960 --> 0:08:07.440 things that you mentioned the book that I think is fascinating. 0:08:07.880 --> 0:08:11.320 Over the past fifty years, the trading volume on the 0:08:11.360 --> 0:08:15.200 New York Stock Exchange increased from three million shares a 0:08:15.280 --> 0:08:19.280 day to five billion a day. That's a fifteen hundred 0:08:19.320 --> 0:08:21.000 not all on the New York Stock Exchange, some of 0:08:21.080 --> 0:08:24.280 us off the board trading in New York Stock Exchange listed, 0:08:24.520 --> 0:08:27.080 and honestly, five million is an average. It ferries up 0:08:27.080 --> 0:08:29.320 and down depending on what the machines are doing. I'm 0:08:29.320 --> 0:08:33.160 Barry Riults. You're listening to Masters in Business on Bloomberg 0:08:33.240 --> 0:08:37.040 Radio today. My special guest is Charlie allis a legend 0:08:37.080 --> 0:08:39.760 in Wall Street. He has written and I shouldn't just 0:08:39.760 --> 0:08:42.040 say Wall Street, but a legend in all of finance. 0:08:42.440 --> 0:08:45.920 He has written sixteen books, one of which I think 0:08:46.000 --> 0:08:51.360 is quite fascinating. It's called Falling Short. The Coming Retirement Crisis. 0:08:52.360 --> 0:08:56.840 What is the looming retirement crisis that the United States faces. 0:08:57.920 --> 0:09:00.760 It's a complex of several different so let's just pick 0:09:00.800 --> 0:09:03.720 out the really big ones. Number One, people are living 0:09:03.760 --> 0:09:06.480 longer than they used to live. Longevity certainly is an 0:09:06.520 --> 0:09:08.520 ongoing shift from which means people are going to be 0:09:08.559 --> 0:09:10.920 in retirement for more years than they might have actually 0:09:11.000 --> 0:09:15.360 been planning on. Secondly, a fairly large fraction half of 0:09:15.480 --> 0:09:20.679 any couple who were in there late sixties, early seventies, 0:09:20.800 --> 0:09:23.400 half of them will need assisted living at Sometimes that's 0:09:23.440 --> 0:09:26.360 fairly expensive stuff you are, particularly if you're not prepared 0:09:26.400 --> 0:09:29.520 for it. About a third of American workers have no 0:09:29.640 --> 0:09:37.160 retirement plan whatsoever. Zero zero Social security or nothing. Social 0:09:37.160 --> 0:09:41.600 Security is not enough, it's sure. Uh. Then if you say, well, 0:09:41.679 --> 0:09:43.680 let's look at the people who got coverage. It used 0:09:43.679 --> 0:09:45.760 to be that we had to find benefit plans, that 0:09:46.160 --> 0:09:48.920 the company did everything. All you had to do was 0:09:48.920 --> 0:09:50.800 tell them what your address was so they can mail 0:09:50.880 --> 0:09:54.720 the checks. Now virtually every decision has to be made 0:09:54.720 --> 0:09:58.200 by the individual. Many people are not well prepared for 0:09:58.240 --> 0:10:02.280 making those decisions. Then you look at all the different decisions. 0:10:02.679 --> 0:10:04.000 Are you going to be in the plan or not? 0:10:04.559 --> 0:10:07.000 Are you going to match the match? Are you going 0:10:07.040 --> 0:10:09.839 to escalate your contributions over time so that you're saving 0:10:09.920 --> 0:10:13.120 enough to actually cover your cost in retirement? How are 0:10:13.160 --> 0:10:15.360 you going to do the investing? How are you going 0:10:15.400 --> 0:10:19.080 to do the distributions from your investments when you do retire, 0:10:19.640 --> 0:10:21.880 and you start with just one of the most obvious 0:10:21.880 --> 0:10:25.600 things that drives me crazy. If you ask people broadly, 0:10:26.040 --> 0:10:29.680 ask people here at Bloomberg, ask people who really know 0:10:29.800 --> 0:10:32.760 quite a lot about investing. What is the delta? What 0:10:32.920 --> 0:10:35.520 is the difference between how much you get from Social 0:10:35.559 --> 0:10:37.880 Security if you claim as soon as you can sixty 0:10:37.960 --> 0:10:40.440 two or you wait until you're seventy and a half 0:10:40.440 --> 0:10:43.360 when you have to claim well, it must be a lot, 0:10:43.480 --> 0:10:46.000 and I usually get somewhere between twenty and thirty percent 0:10:46.040 --> 0:10:49.800 as an increase. That is not true if you don't 0:10:49.800 --> 0:10:52.680 claim at sixty two and do claim tofer until you 0:10:52.720 --> 0:10:56.160 get to seventy and a half, the increase every year 0:10:56.240 --> 0:10:58.080 for the rest of your life, as long as you 0:10:58.120 --> 0:11:01.680 live and it's inflation protected, is an increase of seventy 0:11:01.920 --> 0:11:05.640 six percent. Really, that's giant. That's a giant payout. And 0:11:05.840 --> 0:11:08.840 all I would like is that everybody knew and would 0:11:08.840 --> 0:11:13.720 tell everybody they know more every effing year. So there's 0:11:13.720 --> 0:11:16.400 no reason to unless you have no choice. If you 0:11:16.400 --> 0:11:18.960 could wait till seventy and a half, that's clearly the better, 0:11:19.080 --> 0:11:21.199 unless you're planning to die in your late sixties or 0:11:21.200 --> 0:11:23.240 early seventies, in which case you should take the money. 0:11:23.280 --> 0:11:25.480 But most people are not planning to make a note 0:11:25.480 --> 0:11:28.120 of that. So there's a data point in the book 0:11:28.200 --> 0:11:32.559 that that I find mind blowing as and and this 0:11:32.640 --> 0:11:34.840 data is a few years old, but I looked it 0:11:34.920 --> 0:11:38.120 up since and I know it hasn't changed dramatically. As 0:11:38.240 --> 0:11:45.120 of the median household approaching retirement only had a hundred 0:11:45.120 --> 0:11:48.920 and eleven thousand dollars in four oh one k and 0:11:49.120 --> 0:11:52.680 IRA holdings, and if you do what financial advisors suggest 0:11:53.120 --> 0:11:55.920 you withdrew a four percent a year, that put that 0:11:56.040 --> 0:11:59.560 creates less than five thousand dollars in annual income house 0:11:59.640 --> 0:12:02.880 less than four and a half thousands. Now the numbers 0:12:02.880 --> 0:12:04.720 have gone up, but I think it's now a hundred 0:12:04.720 --> 0:12:08.640 and thirteen thousand UM. I forgot the UM, not the 0:12:08.640 --> 0:12:13.200 investment company Institute that the e B I R dot 0:12:13.280 --> 0:12:16.400 org one of these so so e B R I right, 0:12:16.480 --> 0:12:19.679 So that's where I got the one thirteen number. But 0:12:19.840 --> 0:12:25.040 still it's it's an insignificant amount of amount of money. Yeah, 0:12:25.240 --> 0:12:27.920 we could argue about the specific details. It doesn't matter. 0:12:29.440 --> 0:12:34.640 For people going into retirement with usually something like twenty 0:12:34.720 --> 0:12:38.520 years to go a hundred hundred and ten hundred twenty 0:12:38.679 --> 0:12:41.600 even a hundred thirty thousand is no help at all 0:12:41.920 --> 0:12:44.000 to covering the costs that they're going to be living with, 0:12:44.720 --> 0:12:47.040 no help at all. Well, it's not quite that bad. 0:12:47.200 --> 0:12:49.679 So it's a sucker bet. You looks like you've got 0:12:49.679 --> 0:12:51.360 a lot of money. You imagine what it's like if 0:12:51.360 --> 0:12:55.240 you're a working guy Joe sixpack, and you have been 0:12:55.240 --> 0:12:59.800 working along and you look at your account. You see, Verry, 0:13:00.000 --> 0:13:01.800 I got more money every dreamed I would have that. 0:13:01.880 --> 0:13:03.880 It's in my own name. I've got a hundred and 0:13:04.080 --> 0:13:09.800 ten hundred and fifteen thousand smackers thirty years right, So 0:13:10.880 --> 0:13:13.720 long run, even if you retire at seventy and you 0:13:13.840 --> 0:13:17.960 live to fifteen years, is still a long time to 0:13:18.080 --> 0:13:20.960 not be having any income. And it's not just individuals. 0:13:21.000 --> 0:13:24.199 The other data point from the book, the public sector 0:13:24.360 --> 0:13:27.840 is just as bad. The Congressional Budget Office stated by 0:13:27.920 --> 0:13:32.600 any measure, just about every single state and local pension 0:13:32.640 --> 0:13:36.800 plan is underfunded. How how did that come about? Well, 0:13:36.840 --> 0:13:39.880 that's the defined benefit plans in almost every case. So 0:13:39.920 --> 0:13:46.160 these are public employees, teachers, what I like to say, 0:13:46.480 --> 0:13:50.440 real Americans. These are a crowd of people who've put 0:13:50.440 --> 0:13:54.480 in a good, long term serving the public, okay, And 0:13:54.520 --> 0:13:58.280 where are they now? Their retirement depends on two things. 0:13:58.280 --> 0:14:00.880 How much money has already been set aside, and how 0:14:00.920 --> 0:14:03.200 much money is going to be earned by the investment 0:14:03.280 --> 0:14:07.040 on that money that was set aside. And you look 0:14:07.120 --> 0:14:10.000 through the eighties and nineties, people would have said, boy, 0:14:10.120 --> 0:14:12.960 you know, we can earn a lot, ten percent, twelve percent, 0:14:13.040 --> 0:14:16.520 fourteen percent. Years came ruaring through. We all had a 0:14:16.520 --> 0:14:19.360 great time. If you assume that's what you could earn, 0:14:19.560 --> 0:14:21.120 and you say, well, I want to be conservative, so 0:14:21.120 --> 0:14:24.720 I'm only going to assume eight percent. Track it out 0:14:24.760 --> 0:14:27.440 over time. That's your pension. Now, what if somebody comes 0:14:27.440 --> 0:14:30.640 along and says, Barry, that was an unusual time period. 0:14:30.960 --> 0:14:34.200 Interest rates went from thirteen percent to two percent. That 0:14:34.280 --> 0:14:37.440 changed everything, made everything look like a hire rate to return. 0:14:37.520 --> 0:14:39.360 You're not going to see that again. What are you 0:14:39.360 --> 0:14:42.280 going to see? Well, we've got two percent three percent 0:14:42.440 --> 0:14:45.920 in fixed income and it looks like six seven percent 0:14:46.080 --> 0:14:51.120 in equity investments. What's the mix and you end up 0:14:51.120 --> 0:14:54.480 with ten percent. So we've got what's called an unfunded 0:14:54.840 --> 0:14:58.240 obligation that's on paper, we've signed up for it, but 0:14:58.320 --> 0:15:01.240 it hasn't been paid in yet. Because we assume we're 0:15:01.240 --> 0:15:03.120 going to get a great rate of return. Now we're 0:15:03.120 --> 0:15:05.760 assuming we're going to get a much lower rate of return. 0:15:05.920 --> 0:15:07.760 How much do we have to put up a lot 0:15:07.880 --> 0:15:10.400 so that blended rate to return. I'm joking about adding 0:15:10.400 --> 0:15:13.360 three and seven, But you take the sixty forty portfolio 0:15:13.800 --> 0:15:17.200 seven equity, three bonds, you're really looking at a five 0:15:17.240 --> 0:15:19.680 and a half six percent, a five and a half 0:15:19.720 --> 0:15:22.320 six percent return at three in bonds would be a 0:15:22.360 --> 0:15:25.800 little optimistic. Well, I'm taking the average over the next 0:15:25.840 --> 0:15:27.800 thirty years. But if you look at the path and 0:15:27.840 --> 0:15:30.560 you look at the long term average and bonds that 0:15:30.560 --> 0:15:34.720 that said, you're so if we're looking at a much 0:15:34.840 --> 0:15:37.640 lower rate of return, who's going to have to make 0:15:37.720 --> 0:15:42.560 up that shortfall? Because these are contractually guaranteed payouts as 0:15:42.640 --> 0:15:47.080 part of public employees employment contract. Who's on the hook 0:15:47.120 --> 0:15:51.000 for that balance? Drop back to your really serious negotiations. 0:15:51.360 --> 0:15:55.760 They're three parties at interest, the government, the mayor, the Senate, 0:15:55.840 --> 0:16:00.720 the governor, mayor whoever it was, the public m hm, 0:16:01.200 --> 0:16:04.440 and the workers. The workers are represented by a union. 0:16:04.560 --> 0:16:06.760 The union guys are pretty smart. They've studied this stuff 0:16:06.760 --> 0:16:09.240 for years. They pay a lot of attention. The political 0:16:09.280 --> 0:16:12.360 people are focused on their next election and they're pretty 0:16:12.360 --> 0:16:14.600 good at that sort of thing. The party that's going 0:16:14.640 --> 0:16:16.760 to have to pay up any difference doesn't get to 0:16:16.800 --> 0:16:19.960 come to the meetings. I'm Barry Ridholtz. You're listening to 0:16:20.160 --> 0:16:23.440 Masters in Business on Bloomberg Radio. My special guest today 0:16:23.520 --> 0:16:26.240 is Charlie Ellis. He has been on the faculty of 0:16:26.280 --> 0:16:29.320 the Harvard Business School. He has served on the Yale 0:16:29.440 --> 0:16:33.480 Endowment Board of Directors of Vanguard. Uh, the list goes 0:16:33.560 --> 0:16:37.120 on and on. Author of sixteen books on finance. I 0:16:37.480 --> 0:16:42.640 want to start discussing your history in financial services with 0:16:42.680 --> 0:16:45.600 a quote of yours that that I really should have 0:16:45.720 --> 0:16:50.720 frames and it's this The investment management business should not 0:16:51.040 --> 0:16:55.600 should be a profession, but is not explain that well. 0:16:55.640 --> 0:16:59.520 A profession is defined by the service by the experts 0:17:00.080 --> 0:17:03.400 on behalf of individuals who don't happen to know very 0:17:03.440 --> 0:17:06.640 much about what the experts are experts in. That's why 0:17:06.760 --> 0:17:10.040 law is a profession. That's why medicine is a profession. 0:17:10.480 --> 0:17:15.080 An investment management used to be entirely a profession. It 0:17:15.160 --> 0:17:17.440 didn't pay very well, but you could do some really 0:17:17.520 --> 0:17:20.000 nice work for individual people and help them through the 0:17:20.040 --> 0:17:22.399 solution to the various problems they might face. Wait that 0:17:22.560 --> 0:17:25.240 this profession didn't pay very well in the old days, 0:17:25.240 --> 0:17:28.040 my assumption is it was a big money maker on 0:17:28.119 --> 0:17:32.040 the nineteen fifties. It wasn't nineteen forties. It certainly wasn't. 0:17:32.119 --> 0:17:36.080 Nineteen thirties. Was terrible. Nobody went into investment management in 0:17:36.080 --> 0:17:39.760 those days. Huh. That's quite that's quite fascinating. Out of 0:17:39.840 --> 0:17:42.840 my class at Harvard Business School in nineteen sixty three, 0:17:43.280 --> 0:17:45.480 only three of us went into investment management, and I 0:17:45.480 --> 0:17:48.560 got into it accidentally. So let's tell that story. That's 0:17:48.560 --> 0:17:51.960 a fascinating story. How did you stumble into investment matter? 0:17:52.000 --> 0:17:54.080 I was looking for a job and a friend of 0:17:54.119 --> 0:17:57.160 mine father was looking for somebody to come and work 0:17:57.200 --> 0:17:59.640 in a junior position, and so I thought it would 0:17:59.640 --> 0:18:02.560 be a really interesting conversation. I thought that he was 0:18:02.600 --> 0:18:04.920 talking for the Rockefeller Foundation. It turned out he was 0:18:04.960 --> 0:18:08.960 talking about the Rockefeller Family Office, a tiny little investment 0:18:09.040 --> 0:18:12.199 team that managed investments for the family and also for 0:18:12.280 --> 0:18:17.240 some of their great philanthropic institutions like Rockefeller University, Rockefeller 0:18:17.320 --> 0:18:19.199 Brothers Fund, and stuff like that. When you say a 0:18:19.320 --> 0:18:23.639 tiny little team the Rockefeller Family Office, that was not 0:18:23.800 --> 0:18:27.520 an insignificant sum of money, a lot of money, but 0:18:27.600 --> 0:18:30.760 the number of people was small, only six of us. Okay, 0:18:31.320 --> 0:18:35.280 So you thought you were going into some philanthropic already 0:18:35.320 --> 0:18:38.000 sort of job. And I gotta start an interview with 0:18:38.000 --> 0:18:40.159 a guy, and I realized, this man is really smart. 0:18:40.560 --> 0:18:42.760 He knows a lot, uh, and I need to learn 0:18:42.800 --> 0:18:44.800 a lot. I could learn a lot with him. I 0:18:44.880 --> 0:18:47.920 better go there. Because I don't know enough. So there's 0:18:48.040 --> 0:18:51.240 there's a legend that Goldman Sachs offered you a job 0:18:51.280 --> 0:18:54.240 and you said, no, thanks. What is that any truth 0:18:54.240 --> 0:18:57.040 to that? It's totally true, but they didn't actually offer 0:18:57.080 --> 0:18:58.560 the job. They had it printed on a piece of 0:18:58.560 --> 0:19:02.320 paper and looking at it realizing, you know, Dad always 0:19:02.359 --> 0:19:04.800 thought Goldman Sax was a great firm. I'd love to 0:19:04.840 --> 0:19:07.320 go with a great firm, but I need to earn 0:19:07.359 --> 0:19:09.720 at least six thousand dollars so I can pay off 0:19:09.880 --> 0:19:13.879 my wife's loans for going to college. She'd going to 0:19:13.960 --> 0:19:17.040 college on a scholarship and a loan package, and I 0:19:17.080 --> 0:19:18.879 needed to pay that off. So I had figured I 0:19:18.880 --> 0:19:21.760 could stave a thousand dollars out of six thousand. I 0:19:21.800 --> 0:19:24.840 can't take a job. Ford never occurred to me. You 0:19:24.880 --> 0:19:26.639 might get a raised. Never occurred to me. You might 0:19:26.680 --> 0:19:30.520 earn a bonus. So it ended up working out anyway 0:19:30.600 --> 0:19:34.840 with with the Rockefellers and and eventually granteds associates. Uh 0:19:35.000 --> 0:19:38.080 the firm you did? You you you co founded founded 0:19:38.480 --> 0:19:41.520 I was the only one, the other one who founded it. 0:19:41.880 --> 0:19:45.520 So how did you What did you learn from working 0:19:45.680 --> 0:19:49.359 with the Rockefellers. I would think a family office sitting 0:19:49.400 --> 0:19:52.800 on a giant pool of business, but giant pool of capital, 0:19:53.320 --> 0:19:56.520 would really teach you the business from the inside out. 0:19:56.800 --> 0:19:59.240 What what did you learn from that experience? I learned 0:19:59.240 --> 0:20:01.359 a lot. Number one is that most people have not 0:20:01.480 --> 0:20:03.200 thought through what they ought to be doing with their 0:20:03.240 --> 0:20:05.640 investments over the long term, and they have not settled 0:20:05.640 --> 0:20:09.439 on a policy that really makes sense to them individually. Second, 0:20:09.520 --> 0:20:11.679 there's a lot of information, and if you don't have 0:20:11.760 --> 0:20:17.440 that information, you're in trouble. And third that investment management 0:20:17.560 --> 0:20:22.320 is a wonderful, interesting, fascinating, exciting and filled with all 0:20:22.400 --> 0:20:27.000 kinds of experiences, wonderful place to work. So so, all told, 0:20:27.040 --> 0:20:30.400 that was a positive experience, lucky, lucky and very positive. 0:20:30.480 --> 0:20:32.560 But by the way, that's a theme that comes up 0:20:32.800 --> 0:20:35.240 on the people I sit with and have these conversations 0:20:35.280 --> 0:20:39.280 with over and over again, the role of just being 0:20:39.280 --> 0:20:41.320 in the right place at the right time and getting 0:20:41.320 --> 0:20:44.520 a little hey, smartest good. But sometimes lucky is better, 0:20:44.760 --> 0:20:47.359 much much better. And you'll find that those who've been 0:20:47.400 --> 0:20:50.159 around for a long time, it's all luck. Those that 0:20:50.240 --> 0:20:53.720 are around only recently, they're paying attention how much you 0:20:53.760 --> 0:20:55.800 can get paid, because it is the best paid line 0:20:55.800 --> 0:20:58.359 of work in the world today. By the way, back 0:20:58.359 --> 0:21:01.320 to back to some quotes in the book, the most 0:21:01.400 --> 0:21:04.920 obvious success factor for us was luck, luck, and luck. 0:21:05.440 --> 0:21:10.199 So how is that an exaggeration or is do you 0:21:10.280 --> 0:21:13.840 think luck really serendipity a roll of the dice really 0:21:13.920 --> 0:21:17.520 has a big impact on the lives we lead. I 0:21:17.560 --> 0:21:19.919 know it had a huge impact on my life. I 0:21:20.000 --> 0:21:22.000 doubt it head anywhere near that big an impact on 0:21:22.080 --> 0:21:23.960 most of the other people who have been around. But 0:21:24.040 --> 0:21:27.439 anybody who has been in the investment management area for 0:21:27.480 --> 0:21:30.679 the last fifty years, it doesn't think that was really lucky, 0:21:31.680 --> 0:21:35.640 either kidding himself or kidding you. So we're gonna talk 0:21:35.760 --> 0:21:39.919 later about um winning the losers game. But how often 0:21:40.000 --> 0:21:44.800 do investors confuse luck for skill? All the time? All 0:21:44.840 --> 0:21:47.840 the time. But there are normal human beings. That's when 0:21:47.920 --> 0:21:50.840 human beings do. If it works out well, I was smart. 0:21:50.960 --> 0:21:54.640 If it doesn't work out well, I was unlucky. I'm 0:21:54.680 --> 0:21:57.800 Barry rid Helts. You're listening to Masters in Business on 0:21:57.880 --> 0:22:02.280 Bloomberg Radio. Our special yes today is Charlie Ellis. He 0:22:02.440 --> 0:22:05.000 is a legend in the world of finance, having served 0:22:05.400 --> 0:22:08.760 on the board of directors of Vanguard as well as 0:22:08.840 --> 0:22:12.840 the Yale Endowmond Funds. Let's talk a little bit about 0:22:12.880 --> 0:22:17.720 a paper you wrote in that I think has a 0:22:17.800 --> 0:22:22.400 fascinating history, um both where it came from and where 0:22:22.400 --> 0:22:26.639 it went. You authored The Losers Game in nineteen seventy 0:22:26.680 --> 0:22:32.560 five as an article for the Financial Analyst Journal after 0:22:32.600 --> 0:22:36.600 reading a book about tennis. Tell us about that. Well, 0:22:36.640 --> 0:22:38.880 the hero of the story is really a brilliant guy 0:22:38.960 --> 0:22:42.080 named Simon Ramo, who was the founder of what was 0:22:42.119 --> 0:22:44.520 called Thompson Ramo Woldridge and then what's called t r 0:22:44.760 --> 0:22:48.040 W and is in fact the organization that helped America 0:22:48.200 --> 0:22:53.120 with its entire space program. He was a gifted amateur athlete, 0:22:53.160 --> 0:22:55.240