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Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.

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Speaker 1: I know I say this every week that I have

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Speaker 1: a very special guest, but this week I really have

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Speaker 1: an extra very special guest. His name is Jack Bogel

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Speaker 1: and he is the founder of the Vanguard Group and

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Speaker 1: the inventor of the Index Fund. Did I oversell that

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Speaker 1: this is a special guest or not? Um, let me

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Speaker 1: tell you a little bit about how this date came

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Speaker 1: about and what made this so interesting and weird and unusual. First,

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Speaker 1: I'm in chasing Jack Bogel for literally years, and he

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Speaker 1: doesn't travel much. He's a home body. He lives near

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Speaker 1: the Vanguard headquarters. He's not much for coming into Manhattan

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Speaker 1: and and recording something like this. Uh. But we did

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Speaker 1: the interview with Chairman of Vanguard, Jack Brennan about a

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Speaker 1: year and until almost two years ago, and that went

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Speaker 1: really well. And then last year we did just about

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Speaker 1: a year ago, we did the interview with Bill McNabb,

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Speaker 1: he's the current CEO of Vanguard Group. And I started

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Speaker 1: poking and prodding and asking, Hey, when can I sit

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Speaker 1: down with Jack? When can I sit down with Jack?

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Speaker 1: And finally I just said we're willing to come to

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Speaker 1: Pennsylvania and meet with you guys, And they said, oh,

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Speaker 1: if that's the case, come on down. So you'll hear

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Speaker 1: when we sit and talk with Jack. This was not

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Speaker 1: the usual interview, partly because he's just a force of nature.

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Speaker 1: And you know, I try and balance between guiding the

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Speaker 1: conversation to the specific questions we have and and keeping

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Speaker 1: us on track to cover a variety of topics and subjects.

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Speaker 1: And you could pretty much tell when I give up

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Speaker 1: about three or four questions in and just say, Jack

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Speaker 1: Bogel is a force of nature. I'm just gonna have

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Speaker 1: a conversation with him and let it go. A little

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Speaker 1: background on on the day. This was a couple of

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Speaker 1: thursdays ago, and we basically left the New York area

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Speaker 1: ungodly early, I want to say about four thirty quarter

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Speaker 1: to five, drove down to Pennsylvania. Actually we left so

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Speaker 1: early we beat all the traffic, not only around New York,

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Speaker 1: we got there before the pen the traffic from Philadelphia.

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Speaker 1: Um so, I had my first cracker barrel experience, having

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Speaker 1: having a breakfast at a cracker barrel, which apparently is

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Speaker 1: very common outside of downstate New York. It was quite delicious.

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Speaker 1: We get to the Vanguard campus about an hour early,

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Speaker 1: spend some time in their galley. Get at Vanguard, it's

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Speaker 1: it's the staff for crew. The cafeteria is a galley,

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Speaker 1: it's got all these these nautical themes. And we're finally

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Speaker 1: showed into a small conference room off of Jack's office.

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Speaker 1: And he's you'll hear during the interview, he's eighty six

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Speaker 1: years old. He is sharp as attack, smart as a whip.

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Speaker 1: His voice is still very strong, very powerful. And any

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Speaker 1: pretense I had of following a script and trying to

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Speaker 1: ask specific questions pretty much went out the window. Uh

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Speaker 1: So you'll hear me wrestling in the beginning some of

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Speaker 1: the questions. You'll hear me trying to keep him on

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Speaker 1: our original script. And and I, you know, ten minutes

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Speaker 1: into this conversation, it's pretty clear, Hey, this is a

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Speaker 1: bucking bronco, just just trying not to get kicked in

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Speaker 1: the head. Keep feeding him questions based on wherever he goes,

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Speaker 1: Just follow him and take it to where it goes.

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Speaker 1: And all told, I thought this was really a fascinating conversation.

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Speaker 1: He sat with us for ninety minutes. He was supposed

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Speaker 1: to go to lunch with someone else. I'm pointing to

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Speaker 1: my watch. He's waving me off like I'm telling him

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Speaker 1: not to steal home, and he's coming in. He doesn't care,

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Speaker 1: and so it ran a little long by the time

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Speaker 1: we back out. Some of the other stuff you'll hear.

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Speaker 1: This is a substantive, lengthy conversation. If you are at

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Speaker 1: all a Vanguard fan, a Bogel head, an Index fan,

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Speaker 1: you're going to have a field day with this. I

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Speaker 1: had to set this up because really it was such

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Speaker 1: an exciting experience for me to spend ninety minutes with

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Speaker 1: the man, the legend. Here it is my conversation with

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Speaker 1: the one the Only Jack Bogel. This is Masters in

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Speaker 1: Business with Barry Ridholts on Bloomberg Radio. I know I

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Speaker 1: say this every week that I have a special guest,

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Speaker 1: but this week I have a super special guest, the

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Speaker 1: one the Only Jack Bogel, founder and Chairman emeritus of

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Speaker 1: the Vanguard Group, essentially the creator of the world world's

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Speaker 1: first index mutual fund for individuals in nineteen seventy five.

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Speaker 1: I could read your CV which will essentially take up

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Speaker 1: the entire show. There's so much stuff to to talk

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Speaker 1: about with you. You are a legend in the industry

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Speaker 1: and maybe the person who has had the single biggest

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Speaker 1: impact on investing of anyone. But let's just start from

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Speaker 1: that beginning undergraduate thesis. You're in college in Princeton in

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Speaker 1: nineteen fifty nineteen fifty one, and you're thinking about why

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Speaker 1: do actively managed funds, why do so many of them

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Speaker 1: underperform the market? How did that come about for a

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Speaker 1: college to well? Came about by a great accident, and

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Speaker 1: that is I was majoring in economics. I was looking

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Speaker 1: for a subject for my senior thesis, which is a

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Speaker 1: requirement still at Princeton, sixtensive, extensive document. Mine turned not

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Speaker 1: to be maybe a hundred and thirty five forty pages,

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Speaker 1: and I didn't know what to write about. But I

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Speaker 1: wanted to write about something that no one had ever

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Speaker 1: written about before. And they're in December ninety nine, I

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Speaker 1: was reading Fortune magazine, which I did as part of

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Speaker 1: my economics background, just voluntarily, and there was an article

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Speaker 1: called Big Money in Boston and it was about the

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Speaker 1: mutual fund industry. I described this tiny industry, uh maybe

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Speaker 1: two and a half billion dollars for the industry as

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Speaker 1: tiny but contentious, and I said, well, you know, I'm

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Speaker 1: kind of tiny and I'm kind of contentious, so I'll

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Speaker 1: write about it. And I wrote the thesis enabled me

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Speaker 1: to graduate with high honors from Princeton. Very pretty good job.

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Speaker 1: Not a great thesis, but not bad for somebody a

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Speaker 1: year out of his teens. Let me let me push

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Speaker 1: back at you and say, that was an incredibly insightful thesis.

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Speaker 1: The insight that you derived at a very young ages

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Speaker 1: the cost of all this active management. They were unable

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Speaker 1: to overcome that bogey even to today. What should really

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Speaker 1: be so obvious to everybody. Lots of folks still haven't

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Speaker 1: seemed to figure that out. So what makes me stop

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Speaker 1: and pause and and ask you this question, how did

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Speaker 1: you ever come to that conclusion at such a young

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Speaker 1: age without the universe of information we have available to

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Speaker 1: us today. Well, to begin with, the thesis title was

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Speaker 1: the economic role of the investment company, and the overall

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Speaker 1: of the overriding and focus of that thesis was mutual

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Speaker 1: funds are there to serve investors. Put the investors first.

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Speaker 1: And I talked about reducing sales loads, reducing management fees,

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Speaker 1: and focusing on investing and non marketing things of that nature,

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Speaker 1: and that's what the industry in my in my formula

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Speaker 1: and would have to do to reach its great potential.

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Speaker 1: And I did not actually, to be very clear on this,

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Speaker 1: I did not assemble any data. But I looked at

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Speaker 1: about team leading mutual funds and look at their records,

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Speaker 1: and without adding and dividing and getting averages, it was

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Speaker 1: very clear that very few of them, if any at

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Speaker 1: that time, could could outperform the SMP five index. So

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Speaker 1: it was basically anecdotal. Although this industry in those days

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Speaker 1: it was very much a commodity in a way kind

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Speaker 1: of commodity. The major funds of those days we're just

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Speaker 1: basic basically buying long lists of blue chip stocks. You

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Speaker 1: could call them Dow Jones industrial average funds or later,

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Speaker 1: because the SMP wasn't very enough well known then you

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Speaker 1: could call them standard and poorst kind of funds. They

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Speaker 1: were down the middle. They had fluctuations, very similar volatility,

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Speaker 1: very similar to the index. So even back in the

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Speaker 1: late forties early fifties, mutual funds were closet indexers. Sure, absolutely, huh,

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Speaker 1: that's quite that's quite fascinating. So let's fast forward a

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Speaker 1: little bit. So now you working as chairman of Wellington's

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Speaker 1: management company. And long story short, you said the most

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Speaker 1: unwise decision of your career. You do a merger doesn't

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Speaker 1: work out and they end up um breaking it down

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Speaker 1: from from uh lieutenant to private so to speak, and

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Speaker 1: not less than private, less than private. And you wanted

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Speaker 1: to run a fund and they said, well, you know,

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Speaker 1: because of this M and A, we don't want you

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Speaker 1: running an active fund. If you want to put together

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Speaker 1: how did how did the index come out of that?

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Speaker 1: That job change? Okay, well, let me say my first

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Speaker 1: job and I was thirty five years old and Mr Morgan,

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Speaker 1: the founder of Walter L. Morgan, the founder of Wellingcoln,

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Speaker 1: called me into his office. Wellington was in trouble. Wellingcoln

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Speaker 1: Fund was in trouble, its performance was slipping, and Wellington

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Speaker 1: Management Company was in trouble because we were basically a

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Speaker 1: one product if you will company up conservative balanced fund.

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Speaker 1: We were, for the want of a better metaphor, the

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Speaker 1: bagel of the mutual fund industry, the the hard, not sweet,

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Speaker 1: um nutritious safe choice in the biggest balance fund in

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Speaker 1: the industry, and people stopped buying bagels and started buying

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Speaker 1: if you will donuts. We came into the go go era.

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Speaker 1: So all these fancy growth funds I powered buying stocks

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Speaker 1: that had no investment, no intrinsic investment merit at all.

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Speaker 1: This is the mid to late sixties, the nifty fifty

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Speaker 1: and that sort of just the go go era and

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Speaker 1: the go goes came and the go goes win. But

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Speaker 1: if you're in the bagel business and nobody is buying bagels,

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Speaker 1: and the balance fund share of industry sales actually dropped

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Speaker 1: to one percent, and so I had to do something,

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Speaker 1: and Mr Morgan told me to do it, and I

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Speaker 1: talked to a couple of firms about merging, and then

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Speaker 1: I came across this firm in Boston and it had

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Speaker 1: a fund called I Vest Fund, one of the go

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Speaker 1: go funds that a They had some apparently bright young

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Speaker 1: managers that I had kind of common cause with, and

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Speaker 1: they had a pension business. So we got the new

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Speaker 1: managers that would save Wellington Fund. We got the go

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Speaker 1: go fund that we needed to stay in business, and

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Speaker 1: we got into a new business that we thought we

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Speaker 1: could be very successful. It was from words of one syllable,

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Speaker 1: two syllables, brit I'm Barry Riholts, You're listening to Masters

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Speaker 1: in Business on Bloomberg Radio. My extra special guest today

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Speaker 1: is Jack Bogel. He is the founder of Vanguard Group

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Speaker 1: and essentially the inventor of the index funds. Jack, we

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Speaker 1: were speaking earlier about how a crisis at Wellington, which

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Speaker 1: was the predecessor you worked at to the Vanguard Group,

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Speaker 1: actually led to the creation of the Vanguard Group. Tell

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Speaker 1: us how that came about. Okay, Well, let's start with

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Speaker 1: the fact that in doing this merger, which I was

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Speaker 1: eager to do, I gave up too many votes in

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Speaker 1: the company and so when everything fell apart, the market

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Speaker 1: went down. Uh, and so on. Right at the market

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Speaker 1: was going down in seventy four, it would be to

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Speaker 1: climb the happy partners um fragmented and there were four

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Speaker 1: of them, and there was one of me, and they

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Speaker 1: had packed the board of directors. I was I was

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Speaker 1: never very political, and they fired me. The guys that

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Speaker 1: had caused this catastrophe, fired the one that was trying

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Speaker 1: to avoid it. And so I was out of a job.

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Speaker 1: So what could I do. I could go try and

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Speaker 1: find work for another firm. I had a young family

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Speaker 1: living here. I didn't want to move. I was very

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Speaker 1: angry about what happened, of course, but you know what

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Speaker 1: is is. And so I decided my best chance was

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Speaker 1: to talk to the directors of the Wellington Fund, this

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Speaker 1: fund so badly heard the ash the diamond and arn't crown,

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Speaker 1: and say, look, the management company has fired me, but you,

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Speaker 1: you're a slightly different group, can keep me. And we'll

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Speaker 1: tell the management company what to do. We will be

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Speaker 1: in charge of the administration of the fund, ending necessary

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Speaker 1: to make it work, and we'll be in charge of

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Speaker 1: praising the advisor and taking whatever steps we want. Will

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Speaker 1: be independent of the advisor. And uh I wanted to

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Speaker 1: take over distribution too, but the directors wouldn't go along

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Speaker 1: with that. So we became a little administrative company. And

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Speaker 1: uh I wanted to glamorous name. So I found the

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Speaker 1: name Vanguard. When I first learned about We go from Wellington,

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Speaker 1: the the the land battles of the Napoleonic Wars, the

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Speaker 1: Duke of Wellington, the naval battles of the Napoleonic War,

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Speaker 1: and there's Lord Nelson at the Battle of the Nile,

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Speaker 1: one of the most complete, the most complete naval victory

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Speaker 1: in history to this day. Uh and Uh, he writes

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Speaker 1: to this dispatch that I see from the deck of HMS.

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Speaker 1: Vanguard his flagship, and that sounds like a great name

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Speaker 1: for a for a company, perfect perfect from Wellington Funds.

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Speaker 1: How did you actually form the Vanguard Group. Well, the

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Speaker 1: idea was that the funds would create a new company

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Speaker 1: that they owned, they would capitalize. Capitalization was very small

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Speaker 1: and I'm gonna guess maybe two hundred and fifty thousand dollars.

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Speaker 1: This is a very small company at that point. Actually,

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Speaker 1: the total assets of the funds were down and around

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Speaker 1: one point five billion. So we capitalized the fund and

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Speaker 1: and Welling and Management Company had to take it because

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Speaker 1: the directors of the funds were in charge of the

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Speaker 1: contracts with Welling and So you really backed George your

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Speaker 1: way back into the company after they had fired you

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Speaker 1: as chairman. Well, yes, I think that's a fair statement.

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Speaker 1: But techno, from a technical standpoint, I'd been the chairman

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Speaker 1: of the Welling and Fund all along Gotch so I

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Speaker 1: have the same old continuity that I had going back

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Speaker 1: to nineteen just post merger. They this was a bactor.

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Speaker 1: So how do you go from that to the Vanguard Group. Well,

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Speaker 1: we put a name in the company because we had,

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Speaker 1: I think get than those days, maybe a dozen funds,

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Speaker 1: and we didn't want a dozen separate companies to manage.

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Speaker 1: So we had to have a core or central company

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Speaker 1: and UH that would pool resources of all the funds

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Speaker 1: and provide all the services. And we had allocation methods

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Speaker 1: between the funds. And it was all good until we

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Speaker 1: decided to take over distribution, which was our Let me,

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Speaker 1: I'm a little bit ahead of myself. Let me let

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Speaker 1: me go back and say to the first thing. We

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Speaker 1: were not allowed to go into the business of investment management,

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Speaker 1: that was theirs. We were not allowed to go into

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Speaker 1: the business that was there as being willing that was there.

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Speaker 1: The active side you couldn't do and we couldn't. We

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Speaker 1: couldn't go into management. We didn't distinguish between active and

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Speaker 1: passive and those days not In those days, there weren't

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Speaker 1: an index, right, So so if you couldn't go into management,

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Speaker 1: how are you able to set up the Vanguard five hundred?

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Speaker 1: Wouldn't be patient? Okay? So um, we were not allowed

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Speaker 1: to go into this retribution because that was welling consfunction too.

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Speaker 1: So we had this little administrative company looking over however,

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Speaker 1: had the legal responsibility and the board responsibility to look

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Speaker 1: over the advisor and distributor. So we were in charge.

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Speaker 1: And so my first I knew a company that was

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Speaker 1: an administrative company was not going to be anything for me.

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Speaker 1: I mean, I like the administration. I know how well

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Speaker 1: it has to be done, shareholder record keeping and all that,

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Speaker 1: but that's just not the kind of challenge I was

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Speaker 1: looking for. And any company that's going to succeed, it's

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Speaker 1: going to have to control the kind of funds he

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Speaker 1: wants to they want to run, the kind of distribution

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Speaker 1: they want to have, who will buy the funds, who

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Speaker 1: will sell them, things of that nature. So we have

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Speaker 1: a company that's just in this little administrative box, and

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Speaker 1: I'm thinking, let's do something. So at the very first

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Speaker 1: board meeting of the new company, after we got an

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Speaker 1: organized I say we gotta started index fund. And the

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Speaker 1: directors say you're not allowed to get new investment management.

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Speaker 1: And I say, this fund isn't man aged, and believe

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Speaker 1: it or not, they bought it. So in other words,

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Speaker 1: you describe the index fund as just, hey, it's the

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Speaker 1: five largest companies in America. There's no manager, nobody's in charge.

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Speaker 1: It's just it's an unmanaged broad index, and they said, oh,

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Speaker 1: go do that. They said, well, I won't say was

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Speaker 1: that easy, but that was the final decision. I get

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Speaker 1: the sense from from what you've described that they would

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Speaker 1: kind of let's let's let Jack go do that. He'll

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Speaker 1: be out of our hair. It'll keep them busy and fine,

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Speaker 1: won't cause anybody trouble. I think you're pretty much on

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Speaker 1: the mark. This week on Masters in Business on Bloomberg Radio,

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Speaker 1: I have an extra special guest. His name is Jack Bogel.

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Speaker 1: He is the founder of the Vanguard Group, the inventor

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Speaker 1: of the index funds, and author of far too many

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Speaker 1: books to mention. I've been speaking with Jack here in

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Speaker 1: the headquarters of of Vanguard and just outside the conference

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Speaker 1: and we were sitting on the wall is a frames

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Speaker 1: prints and on that print it says stamp out index funds. Jack,

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Speaker 1: What on earth does that mean? That means Wall Street

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Speaker 1: couldn't make any money out of index funds, and so

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Speaker 1: Wall Street didn't like it. We had an initial initial

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Speaker 1: public offering. I went all over New York so many

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Speaker 1: times to try and find underwriters and finally got the

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Speaker 1: four largest retail underwriters, pH Dan Winter Reynolds. Uh forget

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Speaker 1: who the other one was Reynolds. Okay, they were the

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Speaker 1: biggest guys in the business, and they said, we can

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Speaker 1: do a hundred and fifty million dollars with this great

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Speaker 1: new idea. They did eleven million dollars, so so less

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Speaker 1: than ten. And they came in to see me when

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Speaker 1: the underwriting was over and said, you know, I said

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Speaker 1: to them, look, we can't even buy around lots of

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Speaker 1: five And they said, well, why don't we just give

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Speaker 1: everybody their money back and pull it? And I said,

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Speaker 1: are you kidding me? We have the world's first index fund.

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Speaker 1: And it's the world's first index fund. Period. You have

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Speaker 1: to say, retail a lot of institutional hold at the beginning.

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Speaker 1: It's the world's first index mutual fund, no question about that.

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Speaker 1: And amazing and so it got nowhere, It went nowhere fast,

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Speaker 1: eleven million dollar launched. What year was that that was in, right,

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Speaker 1: eleven million dollars and everybody laughed and nobody thought there

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Speaker 1: was any future to index funds. That's exactly right. That

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Speaker 1: that's just astonishing. Well, you had incredible foresight to say,

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Speaker 1: and it makes sense that the four largest retail shops

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Speaker 1: would want to participate in this because this is a simple,

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Speaker 1: easy way for their retail client to get exposure to

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Speaker 1: the market, fast, easy, relatively inexpensive. It should have except

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Speaker 1: that when the client buys this fund, it's to be

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Speaker 1: held forever. They don't trade it, and the fund doesn't

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Speaker 1: do any trading. There's no brokerage business generated by the

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Speaker 1: fun So this was not a happy moment for Wall Street,

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Speaker 1: and they looked at it, I think as a some

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Speaker 1: kind of the beginning of a of a communicable disease,

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Speaker 1: and it had to it had to be stamped out.

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Speaker 1: The Center for Disease Control had to come in and

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Speaker 1: did they really perceive you as a threat or did

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Speaker 1: they kind of laugh it off? And yeah, yeah, best

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Speaker 1: of luck with that, Jack. Yeah, I'd say pretty much

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Speaker 1: that way. Although we did a couple of years ago

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Speaker 1: for one of the funds anniversaries. We all got together,

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Speaker 1: but the underwriters, all four underwriters, and all four underwriters

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Speaker 1: and their lawyers and our lawyer lawyer singular. We only

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Speaker 1: had one on those days. And they're all good people,

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Speaker 1: you know, I don't uh. Then we all do our

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Speaker 1: best in this life in very different ways of work.

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Speaker 1: So it worked out well. It had to start, and

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Speaker 1: it did start. So here's the question that I could

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Speaker 1: ask you. Forty plus years later, Vanguard is now running

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Speaker 1: three point something trillion dollars. Four trillion is not that

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Speaker 1: far off in the distance, an enormous success, one of

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Speaker 1: the single largest asset managers in the world. How come

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Speaker 1: nobody ever said, hey, those guys are onto something, we

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Speaker 1: should be a competitor to them. How did how did

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Speaker 1: that never come up anywhere along the lines? Well, the

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Speaker 1: answer is so simple. Index funds have a real problem.

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Speaker 1: All the damn money goes to the investors, right, Managers

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Speaker 1: can't take anything they're not managing well, but you're taking

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Speaker 1: ten or fifteen basis points and on trillions of dollars,

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Speaker 1: that's not nothing. Well, nobody expected to get the trillions

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Speaker 1: of dollars, believe me, not an eleven million. But but okay,

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Speaker 1: in seventy four or seventy six, it's eleven million. But

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Speaker 1: by the time you get to the mid ninety nineties,

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Speaker 1: you're hundreds of billions of dollars, and then I think

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Speaker 1: you hit a trillion? Was it late nineties? So even

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Speaker 1: didn't anybody say, hey, those guys in Pennsylvania they have

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Speaker 1: a trillion dollars, Why don't we do what they're doing. Well,

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Speaker 1: it's a p it's a problem. And then eventually the

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Speaker 1: big guys had to Fidelity had to have They were

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Speaker 1: dragged kicking and screaming in indexing and they have to

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Speaker 1: be competitive on price. They can still make all the

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Speaker 1: money they want, and it's an awful lot on the

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Speaker 1: actively managed funds. So it's kind of a lost leader

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Speaker 1: for Fidelity. And what about others Black Rock and American

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Speaker 1: Century and all these other entities swab offers and index.

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Speaker 1: It seems everybody offers some version of uh, the SMPI index. Yeah. Well,

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Speaker 1: t ro Price is a good example. They have a

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Speaker 1: hidden index fund. They don't talk much about it. It's

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Speaker 1: kind of expensive. Basis points relatives are five and it's

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Speaker 1: a kind of a sideball thing so they can get

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Speaker 1: into the retirement market. This has become a marketing business,

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Speaker 1: and right now we're seeing this tremendous change in people

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Speaker 1: who realizing the importance of low cost and a long

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Speaker 1: term focus. And if you just keep those two things

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Speaker 1: in mind, you will never do anything but own a

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Speaker 1: broad market index and hold it forever. I'm Barry Ridholtz.

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Speaker 1: You're listening to masters in Business on Bloomberg Radio. My

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Speaker 1: extra special guest this week is Jack Bogel. He is

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Speaker 1: the founder of the Vanguard Group, inventor of the index funds,

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Speaker 1: author of numerous books. Let's jump right back into the

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Speaker 1: issue of costs and how they impact investors. You're known

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Speaker 1: as the person who created the index fund but really,

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Speaker 1: which do you think is more important, the passive indexing

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Speaker 1: or the fact that it's so low cost Well, it's

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Speaker 1: it's pretty clear to me that passive indexing is the

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Speaker 1: more important because I'm going to define costs in a

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Speaker 1: couple of different ways here. One is the expense ratio.

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Speaker 1: And our funds index funds probably average about ten basis points.

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Speaker 1: Are managed funds probably average about thirty five, So there's

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Speaker 1: not that big a difference. The industry is up around

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Speaker 1: a hundred and twenty on an unweighted basis And when

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Speaker 1: you talk about basis points, the basis point is just

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Speaker 1: a percentage of So a hundred basis points is one percent.

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Speaker 1: Ten basis points is one tenth of one percent. If

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Speaker 1: you're averaging ten basis points, that's a very very inexpensive.

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Speaker 1: It's five five basis points, that's very inexpensive. That is

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Speaker 1: really inexpensive. But that's because we have a mutual company

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Speaker 1: owned by its shareholders and don't have to deliver profits.

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Speaker 1: And think about this for Eminent Parry, that the profit

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Speaker 1: margins in this business can easily run to be So

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Speaker 1: if you've got a one percent expense ratio, you're making

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Speaker 1: fifty basis points on the top. So you're you're actually

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Speaker 1: operating at fifty which is probably not too bad because

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Speaker 1: very few people have the scale that we have developed,

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Speaker 1: have the technology that we've developed, have the efficiency that

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Speaker 1: we've developed. And also I don't think this is self serving,

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Speaker 1: have the blie pulpit that we have. You know, imagine

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Speaker 1: Fidelity coming into this business. Describe I described that as

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Speaker 1: drag kicking and screaming to the business. So here we

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Speaker 1: have kicking and screaming over here, and here we have

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Speaker 1: missionary zeal, the bullied pulpit, bind this is the way,

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Speaker 1: this is the new way. And you have an entire

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Speaker 1: universe of evangelists amongst the advisor community who have drunk

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Speaker 1: the kool aid and say, hey, low cost indexing is

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Speaker 1: the way to go. Following the financial crisis, it seems

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Speaker 1: like Vanguard was sucking up all the money in the

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Speaker 1: room and everybody else wasn't also run it also ran

428
00:25:39,600 --> 00:25:43,040
Speaker 1: are events like the Great Financial Crisis? Does that sort

429
00:25:43,080 --> 00:25:46,760
Speaker 1: of shake people out of their false belief and send

430
00:25:46,800 --> 00:25:50,399
Speaker 1: them in the direction of hey, these missionaries. Turns out

431
00:25:50,480 --> 00:25:53,160
Speaker 1: these guys are right. Well, you're certainly right in a sense.

432
00:25:53,240 --> 00:25:56,160
Speaker 1: It's it's not easy to read. But what happens when

433
00:25:56,200 --> 00:25:58,479
Speaker 1: the market goes way down and went down fifty rough

434
00:25:59,680 --> 00:26:03,560
Speaker 1: into on he seven nine, and all these managers that says,

435
00:26:03,760 --> 00:26:07,040
Speaker 1: we'll manage your money for you. The shareholder has kind

436
00:26:07,080 --> 00:26:10,240
Speaker 1: of led to expect that they will anticipate this and

437
00:26:10,359 --> 00:26:12,920
Speaker 1: not let it happen to them. And they may not

438
00:26:13,359 --> 00:26:16,800
Speaker 1: directly communicate that, but if someone says, well, i'm you know,

439
00:26:16,880 --> 00:26:19,639
Speaker 1: I'm pretty smart, I'm a smart manager, you would expect

440
00:26:19,880 --> 00:26:22,080
Speaker 1: the down market they would do a good bit better

441
00:26:22,160 --> 00:26:25,080
Speaker 1: than the market. Well, of course to begin when they can't,

442
00:26:25,640 --> 00:26:28,160
Speaker 1: because some do, when some don't. They're all average together,

443
00:26:28,320 --> 00:26:30,239
Speaker 1: and how you're picking one over the other you never

444
00:26:30,320 --> 00:26:32,600
Speaker 1: know in advance. You can only guess. And what good

445
00:26:32,680 --> 00:26:36,040
Speaker 1: is that? Yeah, exactly, so the down markets do help that,

446
00:26:36,600 --> 00:26:39,280
Speaker 1: But it's also this wave of you know, there's not

447
00:26:39,320 --> 00:26:43,639
Speaker 1: an economics course there's not an MBA course, and in

448
00:26:44,040 --> 00:26:49,920
Speaker 1: investing or finance that doesn't say basically, indexing is the way.

449
00:26:50,720 --> 00:26:55,760
Speaker 1: It's the data that matters. It's the data and it's

450
00:26:55,800 --> 00:26:58,400
Speaker 1: gonna so instead of I mean, usually if you look

451
00:26:58,440 --> 00:27:00,840
Speaker 1: back and see a fund that's done well, you can

452
00:27:00,880 --> 00:27:02,879
Speaker 1: pretty much conclude it will not do well in the future.

453
00:27:03,200 --> 00:27:06,480
Speaker 1: Everything reverts to the mean. The index does not. It

454
00:27:06,600 --> 00:27:09,680
Speaker 1: continues to give you your share of the market return.

455
00:27:10,560 --> 00:27:13,320
Speaker 1: And when you look at the numbers, I mean. One

456
00:27:13,400 --> 00:27:18,080
Speaker 1: of my favorite constructions is, uh, the index fund gives

457
00:27:18,119 --> 00:27:23,639
Speaker 1: you the advantage of long term compounding of returns while

458
00:27:24,400 --> 00:27:30,520
Speaker 1: eliminating the tyranny of long term compounding. Of course, So

459
00:27:31,320 --> 00:27:34,240
Speaker 1: think about it this way. Let's assume the stock market

460
00:27:34,280 --> 00:27:37,320
Speaker 1: gives a seven percent return over your life over thirty

461
00:27:37,400 --> 00:27:41,280
Speaker 1: years or over fifty years um. If you get to

462
00:27:41,320 --> 00:27:45,920
Speaker 1: seven percent, each dollar goes up three times. If you

463
00:27:46,040 --> 00:27:49,240
Speaker 1: get five percent, that would be the seven percent less

464
00:27:49,240 --> 00:27:53,200
Speaker 1: the industry's typical two percent all in cost, you get

465
00:27:53,240 --> 00:27:58,040
Speaker 1: ten dollars, So ten dollars versus thirty dollars difference. So

466
00:27:58,160 --> 00:28:02,240
Speaker 1: you put up the capital, you took of the risk,

467
00:28:03,080 --> 00:28:05,960
Speaker 1: and you got thirty three of the return. As I

468
00:28:06,040 --> 00:28:08,120
Speaker 1: say to people, if that strikes she was a good

469
00:28:08,160 --> 00:28:11,800
Speaker 1: deal by all means, do it. So. Morning Star once

470
00:28:11,960 --> 00:28:14,920
Speaker 1: famously did a study which I'm sure to this day

471
00:28:15,280 --> 00:28:20,040
Speaker 1: they regret, and the study they became, you know, famous

472
00:28:20,160 --> 00:28:24,480
Speaker 1: for their Star rankings of mutual funds. And I've written

473
00:28:24,480 --> 00:28:26,800
Speaker 1: about this. You could google this, people can find this.

474
00:28:27,440 --> 00:28:31,640
Speaker 1: Someone internally did a study and said, if you don't

475
00:28:31,720 --> 00:28:35,000
Speaker 1: have access to morning Star data, but you just looked

476
00:28:35,040 --> 00:28:38,600
Speaker 1: at a single data point across the universe of mutual funds,

477
00:28:39,120 --> 00:28:40,920
Speaker 1: what would be the most helpful. Would it be the

478
00:28:41,040 --> 00:28:43,840
Speaker 1: track record, would it be the manager would it And

479
00:28:43,920 --> 00:28:46,400
Speaker 1: it turned out that if you forgot about everything else

480
00:28:47,320 --> 00:28:51,160
Speaker 1: and only picked the lowest cost funds, that generated the

481
00:28:51,320 --> 00:28:56,760
Speaker 1: highest returns going forward. So how that makes me ask

482
00:28:56,840 --> 00:29:03,239
Speaker 1: the question how important are keeping slow two investors? Well,

483
00:29:03,280 --> 00:29:06,520
Speaker 1: when you give the statement that it's only cost that matters,

484
00:29:06,960 --> 00:29:09,880
Speaker 1: I'm inclined to say, as the kids would say, Barry, duh,

485
00:29:12,160 --> 00:29:15,280
Speaker 1: it's it seems obvious after the fact, But for the

486
00:29:15,480 --> 00:29:20,240
Speaker 1: longest periods of time people, So let's let me digress

487
00:29:20,280 --> 00:29:23,239
Speaker 1: and talk a little bit about hedge funds. While all

488
00:29:23,320 --> 00:29:26,360
Speaker 1: this money is flowing a vanguard over the past decade

489
00:29:26,400 --> 00:29:29,640
Speaker 1: since the financial crisis, you guys went from a trillion

490
00:29:29,720 --> 00:29:33,200
Speaker 1: to over three trillion. The other segment of the market

491
00:29:33,400 --> 00:29:37,280
Speaker 1: that attracted a ton of money was the hedge fund industry,

492
00:29:37,360 --> 00:29:42,000
Speaker 1: which charges two percents forget five basis points two percent

493
00:29:42,160 --> 00:29:46,320
Speaker 1: of the assets under management, plus of the profits. And

494
00:29:46,440 --> 00:29:50,680
Speaker 1: they also scaled up across ten thousand funds to three

495
00:29:50,800 --> 00:29:55,000
Speaker 1: trillion dollars. How do you explain, despite the obvious duh,

496
00:29:55,400 --> 00:29:58,280
Speaker 1: how do you explain so much money flowing to a

497
00:29:58,360 --> 00:30:03,360
Speaker 1: group with such high expand well, greed, the buyer's greed

498
00:30:03,400 --> 00:30:06,000
Speaker 1: and perhaps even the manager's greed because those are very

499
00:30:06,080 --> 00:30:09,920
Speaker 1: high costs. But people are looking for a better way.

500
00:30:10,680 --> 00:30:12,320
Speaker 1: You know, it's pretty easy. I've done a lot of

501
00:30:12,360 --> 00:30:13,800
Speaker 1: work on this. You may have read some of it

502
00:30:14,120 --> 00:30:16,280
Speaker 1: to forecast what the stock market return is going to

503
00:30:16,360 --> 00:30:20,440
Speaker 1: be within reasonable magnitudes over time, not not in a

504
00:30:20,520 --> 00:30:25,280
Speaker 1: year by year, but over decades. And uh so you

505
00:30:25,400 --> 00:30:27,680
Speaker 1: know where you're gonna be roughly in the stock market.

506
00:30:27,680 --> 00:30:30,760
Speaker 1: And you say a pension pan, and pension plans are

507
00:30:30,840 --> 00:30:33,520
Speaker 1: very heavy part of the of the hedge fund business

508
00:30:33,720 --> 00:30:35,960
Speaker 1: because they don't have to worry about the high taxes

509
00:30:36,000 --> 00:30:39,560
Speaker 1: generated by by hedge funds. And uh so they say

510
00:30:39,600 --> 00:30:42,600
Speaker 1: we've got to have more, and someone coast comes and

511
00:30:42,680 --> 00:30:46,080
Speaker 1: shows them their past record and guess what they put

512
00:30:46,160 --> 00:30:49,560
Speaker 1: the S and P five shame. Of course they wouldn't

513
00:30:49,560 --> 00:30:52,440
Speaker 1: show you the record if they didn't. So a little

514
00:30:52,440 --> 00:30:55,320
Speaker 1: survivorship bias built into that, You sure that, well, the

515
00:30:55,400 --> 00:30:59,640
Speaker 1: survivorship bias build into it. But most of all, there's

516
00:31:00,040 --> 00:31:03,000
Speaker 1: it ignores the fact of life in this business. It's

517
00:31:03,080 --> 00:31:08,760
Speaker 1: everywhere reversion to the mean. Biblically put Barry, the last

518
00:31:08,800 --> 00:31:11,480
Speaker 1: shall be first, on the first shall be last. And

519
00:31:11,600 --> 00:31:14,360
Speaker 1: it happens to hedge funds, it happens to mutual funds.

520
00:31:14,920 --> 00:31:18,720
Speaker 1: It is basically a fundamental law. Seven fat years, seven

521
00:31:18,800 --> 00:31:21,000
Speaker 1: lean years, and there's no way around it. Yeah, the

522
00:31:21,120 --> 00:31:23,680
Speaker 1: number of years may differ, but you've got it all right. Well,

523
00:31:23,800 --> 00:31:26,760
Speaker 1: you reference the Bible and and that that phrase that

524
00:31:26,840 --> 00:31:30,080
Speaker 1: always stayed with me. Um. So let's let's stick with

525
00:31:30,200 --> 00:31:36,800
Speaker 1: the issue of um of indexing for now. And I

526
00:31:36,920 --> 00:31:40,320
Speaker 1: want to quote something that Charlie Ellis had wrote. Charlie

527
00:31:40,680 --> 00:31:44,200
Speaker 1: was not only on the board of the Vanguard Group,

528
00:31:44,240 --> 00:31:47,440
Speaker 1: a board of directors, but he was also an advisor

529
00:31:47,520 --> 00:31:50,840
Speaker 1: to the Yale Endowment Fund, and he wrote a wonderful

530
00:31:50,880 --> 00:31:55,000
Speaker 1: book called Winning the Loser's Game, and he he also

531
00:31:55,080 --> 00:31:59,840
Speaker 1: advocates that individuals should stick with simple indexing, which leads

532
00:31:59,880 --> 00:32:03,959
Speaker 1: me to a question, how many indices should the average

533
00:32:04,000 --> 00:32:09,960
Speaker 1: invest your own? Well, very very few is as symboled

534
00:32:10,000 --> 00:32:12,200
Speaker 1: to that answer to that question. You need a broad

535
00:32:12,280 --> 00:32:15,680
Speaker 1: stock index, and you need a broad out bond index,

536
00:32:15,800 --> 00:32:18,760
Speaker 1: because I'm convinced that everybody should have a little anchor

537
00:32:18,840 --> 00:32:21,480
Speaker 1: to winward when these bad times come, if for no

538
00:32:21,600 --> 00:32:26,120
Speaker 1: other reason, to protect themselves and getting emotional and behaving

539
00:32:26,200 --> 00:32:29,880
Speaker 1: badly and selling out their portfolios at market bottoms. So

540
00:32:30,240 --> 00:32:33,320
Speaker 1: leaving aside the allocation between stocks and bonds, you can

541
00:32:33,400 --> 00:32:35,800
Speaker 1: buy a bond index fund, and you're gonna buy a

542
00:32:35,840 --> 00:32:38,560
Speaker 1: total stock market index fund, and you're gonna buy the

543
00:32:38,560 --> 00:32:42,760
Speaker 1: Standard and Poors five index fund, and that's basically of

544
00:32:42,840 --> 00:32:47,280
Speaker 1: the market. The You would think that the that the

545
00:32:47,640 --> 00:32:50,440
Speaker 1: total stock market would be a better bet because it's

546
00:32:50,480 --> 00:32:53,440
Speaker 1: more diversified in the S and P five. But we're

547
00:32:53,440 --> 00:32:55,160
Speaker 1: in a time right now and I don't know if

548
00:32:55,200 --> 00:32:58,280
Speaker 1: this is durable or not. Nobody does. Where the large

549
00:32:58,320 --> 00:33:01,440
Speaker 1: companies are doing better than the small, So the great,

550
00:33:01,560 --> 00:33:06,560
Speaker 1: Mr Buffett, and does his he's leaving his wife the

551
00:33:06,680 --> 00:33:11,760
Speaker 1: state in the s and Vanguard SNP fix fund. He

552
00:33:11,880 --> 00:33:14,440
Speaker 1: has a bet with some hedge fund managers. He's winning,

553
00:33:14,560 --> 00:33:17,400
Speaker 1: he's winning the bet. He's not winning it, he's killing.

554
00:33:17,600 --> 00:33:21,280
Speaker 1: He's absolutely way way ahead. They actually had to create

555
00:33:21,360 --> 00:33:23,720
Speaker 1: derivatives for this bet. This is a real bet with

556
00:33:23,840 --> 00:33:26,160
Speaker 1: millions of dollars at risk on it, and he looks

557
00:33:26,680 --> 00:33:29,120
Speaker 1: it's a runaway. Nobody's else is even in second. Well,

558
00:33:29,160 --> 00:33:32,240
Speaker 1: he's got a year ago. This is that's right. It

559
00:33:32,240 --> 00:33:35,600
Speaker 1: will be a decade after the financial crisis, the hedge fund.

560
00:33:35,680 --> 00:33:37,120
Speaker 1: For those of you who may not be familiar with

561
00:33:37,200 --> 00:33:40,640
Speaker 1: the infamous bet, a bunch of hedge fund managers were

562
00:33:41,000 --> 00:33:44,520
Speaker 1: um arrogant enough to bet Warren Buffett that they could

563
00:33:44,520 --> 00:33:48,200
Speaker 1: outperform the SNP five. He took that bet and it's

564
00:33:48,400 --> 00:33:51,480
Speaker 1: not even close. It's it's really an amazing story. I

565
00:33:51,520 --> 00:33:55,320
Speaker 1: didn't realize we're only a year away from the final

566
00:33:55,480 --> 00:33:59,360
Speaker 1: outcome of that uh bet. And it's it's theoretically possible

567
00:33:59,400 --> 00:34:03,719
Speaker 1: they can win, but really mathematically it's it's highly improbable

568
00:34:03,760 --> 00:34:09,080
Speaker 1: that anything can happen. However, I can see that Jack Bogel.

569
00:34:09,160 --> 00:34:11,439
Speaker 1: Thank you so much for being so generous with your time.

570
00:34:11,560 --> 00:34:15,120
Speaker 1: This has been absolutely fascinating. For those of you who

571
00:34:15,160 --> 00:34:18,800
Speaker 1: are interested in hearing the conversation, continue be sure and

572
00:34:18,920 --> 00:34:21,200
Speaker 1: check out our podcast extras, where we keep the tape

573
00:34:21,320 --> 00:34:24,560
Speaker 1: rolling and continue chatting. You can check out my daily

574
00:34:24,640 --> 00:34:27,120
Speaker 1: column on Bloomberg View dot com or follow me on

575
00:34:27,239 --> 00:34:31,760
Speaker 1: Twitter at Ritolts. I'm Barry Ritolts. You're listening to Masters

576
00:34:31,800 --> 00:34:35,799
Speaker 1: in Business on Bloomberg Radio. Welcome back to the podcast. Jack.

577
00:34:35,880 --> 00:34:37,640
Speaker 1: Thank you so much for doing this. This has really

578
00:34:37,719 --> 00:34:42,279
Speaker 1: been tremendously fascinating. It was worth the drive to Pennsylvania

579
00:34:42,440 --> 00:34:47,759
Speaker 1: to come come see you. Um, I'm I'm absolutely fascinated

580
00:34:48,280 --> 00:34:52,520
Speaker 1: by everything you've accomplished. So we've talked a little bit

581
00:34:52,560 --> 00:34:56,480
Speaker 1: of the advantages of indexing for equities, and you mentioned

582
00:34:56,560 --> 00:35:01,640
Speaker 1: bond funds. There have been some pretty reasonable academic arguments

583
00:35:02,200 --> 00:35:06,240
Speaker 1: that you could do okay with active management with bond

584
00:35:06,320 --> 00:35:09,360
Speaker 1: funds because there's such a universe of choices. It's not

585
00:35:09,640 --> 00:35:13,840
Speaker 1: just treasuries, but it's treasuries and its corporates and its municipalities.

586
00:35:14,160 --> 00:35:16,440
Speaker 1: How do you feel about about bond funds? Do you

587
00:35:16,560 --> 00:35:20,000
Speaker 1: just own abroad? Um? Index of bond funds, or do

588
00:35:20,120 --> 00:35:23,759
Speaker 1: you look at active management and bonds and say, well,

589
00:35:23,840 --> 00:35:27,280
Speaker 1: maybe there's some value added there. Well, as a group,

590
00:35:27,360 --> 00:35:30,759
Speaker 1: bond managers cannot win because they are the market and

591
00:35:30,880 --> 00:35:33,160
Speaker 1: so they will as a group capture the market return.

592
00:35:33,239 --> 00:35:35,960
Speaker 1: There's just no question about this. And charging as they

593
00:35:36,040 --> 00:35:40,200
Speaker 1: do probably in the mutual fund business, probably sixty basis points,

594
00:35:40,200 --> 00:35:43,160
Speaker 1: seventy basis points. They just don't have a fighting chance

595
00:35:43,480 --> 00:35:48,240
Speaker 1: over the bond fund index. Now that index has some issues,

596
00:35:48,360 --> 00:35:51,840
Speaker 1: as they say, And I started the first bond in

597
00:35:51,920 --> 00:35:59,920
Speaker 1: next fund, by the way, years ago, yeah, thirty years ago,

598
00:36:00,440 --> 00:36:03,160
Speaker 1: and it's done just fine, met the test of competition.

599
00:36:03,960 --> 00:36:06,600
Speaker 1: But I'm not I think we can do better in

600
00:36:06,719 --> 00:36:09,040
Speaker 1: bond in next thing than the bond than the bond

601
00:36:09,080 --> 00:36:11,720
Speaker 1: in next the way it's constructed, because it's about sevent

602
00:36:12,640 --> 00:36:18,400
Speaker 1: treasuries and mortgage backed good mortgage backed government backed instruments,

603
00:36:19,000 --> 00:36:22,640
Speaker 1: and I think most investors should not have seventy in

604
00:36:22,719 --> 00:36:26,440
Speaker 1: the super safe category. I think something like thirty is

605
00:36:26,480 --> 00:36:28,640
Speaker 1: pretty good. So it should be a better assortment of

606
00:36:28,760 --> 00:36:31,920
Speaker 1: risk that potentially is generating more returns and as long

607
00:36:31,920 --> 00:36:35,360
Speaker 1: as you're holding it for decades, the short term volatility

608
00:36:35,440 --> 00:36:38,759
Speaker 1: is irrelevant. Yeah, Well, the the one that I have

609
00:36:38,960 --> 00:36:43,120
Speaker 1: to use myself is our intermediate intermediate term bond index fund.

610
00:36:43,520 --> 00:36:46,160
Speaker 1: It has it's just as volatile or as non volatile,

611
00:36:46,239 --> 00:36:49,360
Speaker 1: because that has the same duration or average maturity. And

612
00:36:49,840 --> 00:36:53,640
Speaker 1: but it's about thirty governments and it is the same

613
00:36:53,680 --> 00:36:56,160
Speaker 1: in every other respect. So if it has a higher yield,

614
00:36:57,000 --> 00:37:02,920
Speaker 1: the yield and a bond as today yield correlation with

615
00:37:03,280 --> 00:37:05,080
Speaker 1: the RETURNI you're gonna get in the next ten years,

616
00:37:05,560 --> 00:37:07,880
Speaker 1: so you might as well take advantage of it. And

617
00:37:07,960 --> 00:37:10,440
Speaker 1: I'd say particularly, I mean, yes, it's a little riskier,

618
00:37:10,920 --> 00:37:14,640
Speaker 1: but today people are dying for income, dying for income,

619
00:37:15,280 --> 00:37:17,799
Speaker 1: and to reach a little bit, you know, I don't

620
00:37:17,800 --> 00:37:20,160
Speaker 1: believe in big reaching for yield at all. Well, that

621
00:37:20,280 --> 00:37:22,879
Speaker 1: certainly was was a cluse of problems in the last

622
00:37:22,920 --> 00:37:26,840
Speaker 1: financial crisis. Everybody who reached for yields and said, I

623
00:37:27,000 --> 00:37:29,840
Speaker 1: understand this is subprime, but the rating agencies tell me

624
00:37:30,320 --> 00:37:32,320
Speaker 1: it's triple A, so I'm gonna hold my nose. And

625
00:37:32,400 --> 00:37:34,360
Speaker 1: by this didn't work out that way. It did not

626
00:37:34,480 --> 00:37:38,719
Speaker 1: work out well, to say the least. So so I

627
00:37:38,800 --> 00:37:41,360
Speaker 1: didn't realize you had created the first bond in next funds,

628
00:37:41,440 --> 00:37:45,160
Speaker 1: so we have we have bond indexes, which you would

629
00:37:45,200 --> 00:37:47,640
Speaker 1: like to see have a little more risk and uh

630
00:37:48,680 --> 00:37:51,800
Speaker 1: a little less of the super safe size we've already discussed,

631
00:37:52,600 --> 00:37:56,040
Speaker 1: uh the equity side. Let's let's talk a little bit

632
00:37:56,440 --> 00:37:59,800
Speaker 1: about some of the hot buzzwords that are going around today.

633
00:38:00,280 --> 00:38:02,600
Speaker 1: And I'm curious, as I already know what you ranch

634
00:38:02,680 --> 00:38:05,040
Speaker 1: is gonna be, but I feel obligated to ask before

635
00:38:05,080 --> 00:38:06,759
Speaker 1: we get to that, Can I just say one thing? Sure?

636
00:38:07,080 --> 00:38:14,640
Speaker 1: We also started in about nineteen, well in seven, to

637
00:38:14,800 --> 00:38:17,480
Speaker 1: broaden our index base from the S and P five hundred,

638
00:38:17,520 --> 00:38:20,560
Speaker 1: we started the bond in next fun. We then started

639
00:38:21,120 --> 00:38:23,239
Speaker 1: I realized that there was a certain attractiveness to owning

640
00:38:23,280 --> 00:38:25,480
Speaker 1: the whole market, so we started something called the extended

641
00:38:25,520 --> 00:38:27,759
Speaker 1: market in the next fun. How many holdings were in

642
00:38:27,840 --> 00:38:33,160
Speaker 1: that well probably um right in. It varies amazingly, but

643
00:38:33,280 --> 00:38:37,560
Speaker 1: probably right now because the Wilshire five thousand is something

644
00:38:37,640 --> 00:38:40,360
Speaker 1: like thirty stocks. It's it's even less than then it

645
00:38:40,440 --> 00:38:44,000
Speaker 1: got up to seventh, believe it or not. Late nineties, yeah, well,

646
00:38:44,040 --> 00:38:46,200
Speaker 1: we were cranking out a lot of new companies before

647
00:38:46,320 --> 00:38:49,759
Speaker 1: we realized that pets dot com wasn't a sustainable thing. Exactly.

648
00:38:50,400 --> 00:38:55,040
Speaker 1: So I also had an idea that growth might do

649
00:38:55,200 --> 00:38:58,200
Speaker 1: better than value for the for for young people investing

650
00:38:58,600 --> 00:39:01,240
Speaker 1: on a dollar averaging basis wouldn't be that much riskier,

651
00:39:01,840 --> 00:39:04,480
Speaker 1: and when they retired they might want an income fund.

652
00:39:04,920 --> 00:39:07,879
Speaker 1: So I I divided the SMP into two. As soon

653
00:39:07,920 --> 00:39:11,200
Speaker 1: as the SMP did that, I started a growth index

654
00:39:11,239 --> 00:39:14,000
Speaker 1: fund half of the SMP and a value index fund

655
00:39:14,040 --> 00:39:16,440
Speaker 1: the other half. It didn't work out very well. I mean,

656
00:39:16,440 --> 00:39:19,040
Speaker 1: it worked out fine from performance standpoint. Where we found

657
00:39:19,800 --> 00:39:21,839
Speaker 1: is the money poured into growth when growth was doing

658
00:39:21,920 --> 00:39:24,280
Speaker 1: well at the wrong time, out of growth and into value.

659
00:39:24,840 --> 00:39:27,239
Speaker 1: So you know, sometimes we may I think we've got

660
00:39:27,320 --> 00:39:29,880
Speaker 1: to be very aware of creating things that we know

661
00:39:30,120 --> 00:39:32,920
Speaker 1: investors are going to use badly. So we don't know,

662
00:39:33,040 --> 00:39:34,400
Speaker 1: we don't tell them what to use and how to

663
00:39:34,520 --> 00:39:38,160
Speaker 1: use it, but it happens, and it's a responsibility of us,

664
00:39:38,239 --> 00:39:41,399
Speaker 1: the sponsor, to do that. So that raises a really

665
00:39:41,520 --> 00:39:47,719
Speaker 1: significant question, which is how important is investor behavior to

666
00:39:47,880 --> 00:39:51,719
Speaker 1: long term returns and what can the average investor do

667
00:39:52,520 --> 00:39:56,640
Speaker 1: to make sure that they don't shoot themselves in the foot. Well,

668
00:39:56,840 --> 00:40:00,759
Speaker 1: the first thing to do is don't chase performance and

669
00:40:01,239 --> 00:40:03,520
Speaker 1: don't I have some salesman or you reading the paper

670
00:40:03,640 --> 00:40:05,400
Speaker 1: for that man, or I need to blame the salesman

671
00:40:05,480 --> 00:40:07,799
Speaker 1: for this says, here's a new manager on a new

672
00:40:07,880 --> 00:40:09,720
Speaker 1: fund and it's really doing great, or an old manager

673
00:40:09,800 --> 00:40:11,840
Speaker 1: and the fund is doing great, and this fund is

674
00:40:11,840 --> 00:40:15,560
Speaker 1: a great twenty year record. Turn away from that, because

675
00:40:15,600 --> 00:40:18,040
Speaker 1: it's next twenty years aren't going to be anywhere near

676
00:40:18,080 --> 00:40:20,880
Speaker 1: as good as its past. There are plenty of examples that,

677
00:40:20,960 --> 00:40:23,080
Speaker 1: with all due respect them on friends up in Boston.

678
00:40:23,360 --> 00:40:27,759
Speaker 1: Fideliti's Magellan Fund was a star fund for roughly twenty years.

679
00:40:27,840 --> 00:40:31,239
Speaker 1: Fantastic Peter Lynch and then his one of his successors

680
00:40:31,320 --> 00:40:34,840
Speaker 1: did really well. Peter Lynch was a superstar performer. And

681
00:40:34,920 --> 00:40:37,000
Speaker 1: then what happened well with a tiny little fund too,

682
00:40:37,120 --> 00:40:39,560
Speaker 1: don't forget that. And the fund that wasn't even offered

683
00:40:39,600 --> 00:40:42,120
Speaker 1: to the public for five or six years. Oh yeah,

684
00:40:43,160 --> 00:40:46,200
Speaker 1: we all have our little secrets, and uh so I

685
00:40:46,280 --> 00:40:48,800
Speaker 1: think overrated. But Peter Lynch was certainly a good manager.

686
00:40:48,920 --> 00:40:50,800
Speaker 1: But you know, his principle of you know, if you

687
00:40:50,880 --> 00:40:53,200
Speaker 1: see a product you liked by the stock, you know,

688
00:40:53,280 --> 00:40:56,640
Speaker 1: makes no rational sense, I'm sorry to say. And Peter

689
00:40:56,880 --> 00:41:01,759
Speaker 1: Lynch also at Madelon Magellan Funds. Hey Day said, in

690
00:41:01,880 --> 00:41:05,759
Speaker 1: words of one syllable in Barns, most investors would be

691
00:41:05,800 --> 00:41:09,120
Speaker 1: better off in an index fund. Was that barrens? I

692
00:41:09,160 --> 00:41:11,520
Speaker 1: know I read that from him, and that's not a concession,

693
00:41:12,000 --> 00:41:15,080
Speaker 1: that's the truth. Well, you have him saying that, you

694
00:41:15,160 --> 00:41:17,320
Speaker 1: have Warren Buffett saying that. We have a number of

695
00:41:17,400 --> 00:41:22,279
Speaker 1: people David Swinson, Swinson at the Yel Endowment, he's another one. Um,

696
00:41:23,600 --> 00:41:30,319
Speaker 1: it's amazing that people push against this because it's long

697
00:41:30,480 --> 00:41:33,320
Speaker 1: term in boring and there's nothing to talk about. And

698
00:41:33,520 --> 00:41:35,800
Speaker 1: but I guess shouldn't. That leads to the next question,

699
00:41:36,120 --> 00:41:39,600
Speaker 1: should investing be long term and boring? If you want

700
00:41:39,640 --> 00:41:42,759
Speaker 1: to have a comfortable retirement, Believe me, you'll be less

701
00:41:42,800 --> 00:41:44,600
Speaker 1: bored in your retirement. If you've got plenty of money,

702
00:41:45,760 --> 00:41:47,719
Speaker 1: You'll you'll be you'll be so on board. If you

703
00:41:47,760 --> 00:41:49,680
Speaker 1: don't do it that you'll have to go back to work.

704
00:41:50,120 --> 00:41:52,799
Speaker 1: So let me ask you about some of the hot

705
00:41:52,840 --> 00:41:55,960
Speaker 1: buzzwords that are out there and investing these days. And again,

706
00:41:56,080 --> 00:41:57,800
Speaker 1: this is a cheap because I'm pretty sure I know

707
00:41:57,920 --> 00:42:01,040
Speaker 1: what your answers are, but I feel obligated to ask this.

708
00:42:01,800 --> 00:42:06,280
Speaker 1: So your index funds are basically put together by market

709
00:42:06,360 --> 00:42:10,160
Speaker 1: cap waiting. But now there's something called smart beta, which

710
00:42:10,480 --> 00:42:14,160
Speaker 1: is different ways of assembling an index that don't rely

711
00:42:14,360 --> 00:42:17,760
Speaker 1: on cap waiting. What do you think of the idea

712
00:42:17,800 --> 00:42:23,520
Speaker 1: of smart beta? Smart beta is stupid? Okay, that's why, Well,

713
00:42:23,560 --> 00:42:26,280
Speaker 1: I mean I didn't say that's that's what Nobel laureate

714
00:42:26,480 --> 00:42:31,359
Speaker 1: Bill Sharp says. I just quoted him. And the reason

715
00:42:31,440 --> 00:42:34,399
Speaker 1: it is just think about this for a minute. It's

716
00:42:34,480 --> 00:42:37,200
Speaker 1: it's another form of active management to begin with. But

717
00:42:37,480 --> 00:42:41,480
Speaker 1: if smart beta is good, and that that means it

718
00:42:41,600 --> 00:42:47,120
Speaker 1: beats the index, then dumb beta this does even worse

719
00:42:47,160 --> 00:42:50,680
Speaker 1: than the index. Right, so smart and dumb are different.

720
00:42:50,960 --> 00:42:52,480
Speaker 1: But why are people going to be dumb if it's

721
00:42:52,520 --> 00:42:55,160
Speaker 1: so easy to be smart? It's just another claim that

722
00:42:55,360 --> 00:43:00,560
Speaker 1: I can do this better now. Happily, after Isdom Tree

723
00:43:00,600 --> 00:43:05,239
Speaker 1: and and Rob Arns fund came out a decade ago,

724
00:43:05,360 --> 00:43:07,920
Speaker 1: his fund is now more than ten years old. What

725
00:43:08,160 --> 00:43:13,120
Speaker 1: happened and the answer is essentially nothing. His fund beat

726
00:43:13,320 --> 00:43:16,000
Speaker 1: the S and P five hundred, but I think thirty

727
00:43:16,040 --> 00:43:20,640
Speaker 1: basis points, but it was more Votel and therefore it's

728
00:43:20,640 --> 00:43:24,360
Speaker 1: sharp ratio. The relationship relationship between risk and reward. I

729
00:43:24,440 --> 00:43:27,280
Speaker 1: don't hold me to the numbers. But the sharp ratio

730
00:43:27,440 --> 00:43:29,359
Speaker 1: of I mean, I mean his guests here, I won't

731
00:43:29,400 --> 00:43:31,799
Speaker 1: be too far off the sharp ratio of the five

732
00:43:32,160 --> 00:43:34,759
Speaker 1: of us like forty one. On the sharp ratio of

733
00:43:35,680 --> 00:43:40,359
Speaker 1: Arns fund was thirty six. So he lost. He had

734
00:43:40,440 --> 00:43:42,920
Speaker 1: ten years to prove it. Now maybe he'll prove it

735
00:43:42,960 --> 00:43:45,600
Speaker 1: the next ten years. Who can say, But why would

736
00:43:45,640 --> 00:43:48,399
Speaker 1: that be, I mean, where's all the brain power. He's

737
00:43:48,400 --> 00:43:49,840
Speaker 1: a very smart guy, by the way, one of the

738
00:43:49,880 --> 00:43:52,200
Speaker 1: smartest guys in this business. He was a four guest

739
00:43:52,239 --> 00:43:54,120
Speaker 1: on the show, one of our earliest guests. He's a

740
00:43:54,239 --> 00:43:58,160
Speaker 1: delightful gentleman. I always enjoy his company. UM And it

741
00:43:58,320 --> 00:44:03,319
Speaker 1: was really an in nightful thought to say, let's think

742
00:44:03,360 --> 00:44:08,279
Speaker 1: of different ways to put together UM, to put together indexes.

743
00:44:08,480 --> 00:44:13,000
Speaker 1: But your position is this isn't after fees, after everything else.

744
00:44:13,600 --> 00:44:16,120
Speaker 1: Once you now you risk adjusted, you look at all

745
00:44:16,160 --> 00:44:20,640
Speaker 1: this volatility, your your conclusion is this just isn't worth it. Well, then,

746
00:44:20,680 --> 00:44:22,480
Speaker 1: even if you look at absolute returns, it's like a

747
00:44:22,520 --> 00:44:25,600
Speaker 1: thirty basis points better over ten years. Now, that's not trivial.

748
00:44:26,200 --> 00:44:29,320
Speaker 1: But when he has essentially the same portfolio as the

749
00:44:29,400 --> 00:44:32,960
Speaker 1: index fund with different waitings, you can't expect anything to

750
00:44:33,040 --> 00:44:36,040
Speaker 1: be too different. So I think it's it's over sold.

751
00:44:36,800 --> 00:44:40,640
Speaker 1: Jeremy Siegell of Wisdom Trade described this as a new

752
00:44:40,719 --> 00:44:43,440
Speaker 1: Copernican view of the world. Everybody had it wrong, and

753
00:44:43,520 --> 00:44:45,759
Speaker 1: Copernica said, oh, by god, that son is in the

754
00:44:45,840 --> 00:44:49,200
Speaker 1: middle and the new sun is smart Beta can't be

755
00:44:50,080 --> 00:44:52,960
Speaker 1: because we're all as a group average. And if they

756
00:44:53,000 --> 00:44:55,640
Speaker 1: are these smart guys over there, there are dumb guys

757
00:44:55,680 --> 00:44:59,000
Speaker 1: over there. Smart and dumb both also net net. When

758
00:44:59,040 --> 00:45:01,920
Speaker 1: you're buying smart day, you're really buying a distribution of

759
00:45:02,120 --> 00:45:04,840
Speaker 1: really smart guys, really average guys, really dumb guys, and

760
00:45:04,960 --> 00:45:08,160
Speaker 1: you don't know who's who across all the smart beta funds.

761
00:45:08,239 --> 00:45:10,200
Speaker 1: You know, and then think about this one step further.

762
00:45:11,160 --> 00:45:16,440
Speaker 1: The index essentially guarantee the dollar value index essentially guarantees

763
00:45:16,480 --> 00:45:20,840
Speaker 1: you the return that will investors share. So that's written

764
00:45:20,960 --> 00:45:25,719
Speaker 1: stone etched in stone. Uh, smart Beta may do a

765
00:45:25,760 --> 00:45:29,200
Speaker 1: little better, may do a little worse. What's the point

766
00:45:29,239 --> 00:45:32,440
Speaker 1: of taking the risk when the guarantee of getting the

767
00:45:32,520 --> 00:45:36,360
Speaker 1: market return is right at your hand? Why would you speculate?

768
00:45:36,800 --> 00:45:39,080
Speaker 1: Why would you speculate on maybe this guy can do

769
00:45:39,160 --> 00:45:41,640
Speaker 1: it better. And believe me, some of these smart beta

770
00:45:41,719 --> 00:45:44,120
Speaker 1: funds will for a short period of times will do it,

771
00:45:44,520 --> 00:45:46,800
Speaker 1: and some of them won't. I mean, that's the nature

772
00:45:46,840 --> 00:45:49,200
Speaker 1: of the beast. I've described it as why do you

773
00:45:49,239 --> 00:45:53,040
Speaker 1: want to romance alpha and forsake beta when beta is

774
00:45:53,080 --> 00:45:57,279
Speaker 1: a short thing. So that's smart beta. Let me ask

775
00:45:57,360 --> 00:45:59,520
Speaker 1: you about something else that I suspect they know to

776
00:45:59,640 --> 00:46:04,160
Speaker 1: your know your answers. This year commodities have gold especially

777
00:46:04,239 --> 00:46:07,200
Speaker 1: has had a huge bounce back. We sort of tremendous

778
00:46:07,280 --> 00:46:11,760
Speaker 1: commodity run from the early two thousands until two thousand eleven.

779
00:46:12,239 --> 00:46:16,520
Speaker 1: What are your thoughts on things like commodity funds, gold,

780
00:46:16,960 --> 00:46:22,640
Speaker 1: and uh energy for for investors? No, no, and no no.

781
00:46:22,960 --> 00:46:25,920
Speaker 1: Let's repeat this in case those of you missed Gold. No,

782
00:46:26,360 --> 00:46:30,480
Speaker 1: commodity funds, no oil funds. No tell us why? Okay,

783
00:46:30,520 --> 00:46:32,560
Speaker 1: well oil is it commins I'm pick of oil as

784
00:46:32,600 --> 00:46:35,880
Speaker 1: a commodity now and then is think about what a

785
00:46:35,920 --> 00:46:39,160
Speaker 1: stock is? Okay. Stock has an internal rate of return

786
00:46:39,640 --> 00:46:41,799
Speaker 1: and it's composed of the earnings growth in the divin

787
00:46:41,880 --> 00:46:44,560
Speaker 1: end yield. When you buy it, it's there. If the

788
00:46:44,600 --> 00:46:47,440
Speaker 1: stock goes up and down, that return is there. It

789
00:46:47,480 --> 00:46:50,440
Speaker 1: has an underlying internal rate of return. You have a

790
00:46:50,600 --> 00:46:53,520
Speaker 1: discounted cash flow from the future. You're buying an existing

791
00:46:54,080 --> 00:46:56,640
Speaker 1: business that's gonna generate revenue and profits and you get

792
00:46:56,680 --> 00:46:59,520
Speaker 1: to participate in that. Now, take a bond, It has

793
00:46:59,560 --> 00:47:03,839
Speaker 1: an intern return equal to the interest coupon that you're

794
00:47:03,840 --> 00:47:06,000
Speaker 1: going to get over the next ten years or twenty

795
00:47:06,080 --> 00:47:10,080
Speaker 1: five years, whatever the case may be. Commodities have no

796
00:47:10,600 --> 00:47:13,640
Speaker 1: internal rate of return, and there's a cost of storage

797
00:47:13,680 --> 00:47:16,120
Speaker 1: and security for things like gold or royal. So when

798
00:47:16,160 --> 00:47:19,520
Speaker 1: you buy a unit of gold, why do you buy

799
00:47:19,560 --> 00:47:22,000
Speaker 1: it because you think you can sell it to somebody

800
00:47:22,320 --> 00:47:25,879
Speaker 1: for a higher price. That is the definition of speculation.

801
00:47:26,719 --> 00:47:29,560
Speaker 1: That's the classic greater full theory. You may have paid

802
00:47:29,600 --> 00:47:31,799
Speaker 1: a lot, but someone will pay more. And well, I mean,

803
00:47:31,840 --> 00:47:33,239
Speaker 1: you may be right, by the way, and there's no

804
00:47:33,320 --> 00:47:34,960
Speaker 1: reason you can't be right, but that just means the

805
00:47:35,000 --> 00:47:37,680
Speaker 1: other guy is wrong. And you don't know, as you

806
00:47:37,760 --> 00:47:39,719
Speaker 1: as the investor, you don't know which of those two

807
00:47:39,800 --> 00:47:42,480
Speaker 1: parties you're gonna be five years from that. And another

808
00:47:42,600 --> 00:47:45,080
Speaker 1: thing when you mentioned gold, is it brings to mind

809
00:47:45,200 --> 00:47:49,320
Speaker 1: is everybody used to talk about gold. Forbes magazine highlighted

810
00:47:49,360 --> 00:47:51,799
Speaker 1: in all their reviews for years and years when they

811
00:47:51,880 --> 00:47:54,799
Speaker 1: picked the best funds, gold funds, gold funds. And then

812
00:47:54,880 --> 00:47:57,040
Speaker 1: we we had the boom and gold and then we

813
00:47:57,120 --> 00:48:00,080
Speaker 1: had the collapse and nobody started talking about No, you

814
00:48:00,120 --> 00:48:03,800
Speaker 1: talked about gold. Now we have another boom and everybody's

815
00:48:03,840 --> 00:48:07,439
Speaker 1: talking about gold. Then gold collapses last year, nobody's talking

816
00:48:07,480 --> 00:48:10,719
Speaker 1: about gold. Now gold is up this year. Everybody. This

817
00:48:10,840 --> 00:48:14,120
Speaker 1: is metaphorically speaking, everybody's talking about gold. You know, don't

818
00:48:14,160 --> 00:48:17,360
Speaker 1: pay any attention to gold. I mean, it would not

819
00:48:17,560 --> 00:48:20,759
Speaker 1: be stupid. I wouldn't do it, but it would not

820
00:48:20,840 --> 00:48:23,560
Speaker 1: be stupid to have a very small position in gold

821
00:48:24,120 --> 00:48:29,759
Speaker 1: as a hedge against worldwide hyper inflation. Maybe five I

822
00:48:29,800 --> 00:48:32,359
Speaker 1: wouldn't do any more than that, But I don't think

823
00:48:32,400 --> 00:48:36,280
Speaker 1: you should do that. But it's at least defensible because

824
00:48:36,320 --> 00:48:40,120
Speaker 1: you're you have a specific goal in mind, and it's insurance.

825
00:48:40,160 --> 00:48:43,400
Speaker 1: You're paying a five percent insurance on the remote possibility

826
00:48:43,440 --> 00:48:46,360
Speaker 1: of global hyper inflation. But if you're wrong, it's a

827
00:48:46,480 --> 00:48:49,399
Speaker 1: giant five percent drag on your portfolio for the next

828
00:48:49,480 --> 00:48:52,799
Speaker 1: few decades. And that's huge. That is well, you guys

829
00:48:52,840 --> 00:48:55,480
Speaker 1: are talking about five basis points. This is five hundred

830
00:48:55,520 --> 00:48:59,560
Speaker 1: basis points. That's a tremendous, tremendous drag. Let's talk a

831
00:48:59,600 --> 00:49:02,359
Speaker 1: little bit it and by the way, I'm pretty much

832
00:49:02,400 --> 00:49:05,839
Speaker 1: what I expected you to say about commodities. Let's let

833
00:49:05,880 --> 00:49:07,920
Speaker 1: me find two things to talk to you about that

834
00:49:07,960 --> 00:49:11,000
Speaker 1: I'm gonna have to push back a little bit. One

835
00:49:11,719 --> 00:49:15,239
Speaker 1: is e t fs exchange traded funds. I know you're

836
00:49:15,320 --> 00:49:18,360
Speaker 1: not a big fan of them, but lots of investors

837
00:49:18,440 --> 00:49:22,160
Speaker 1: fund it's a very inexpensive, simple way to get exposure

838
00:49:22,239 --> 00:49:25,680
Speaker 1: to the S and P five hundred or whatever asset

839
00:49:25,760 --> 00:49:28,960
Speaker 1: class they want. Why are you not a big fan

840
00:49:29,040 --> 00:49:33,960
Speaker 1: of ETFs? Well, I'll start with little anecdote. A wonderful

841
00:49:34,000 --> 00:49:37,040
Speaker 1: guy named Nathan Most came to visit me right in

842
00:49:37,120 --> 00:49:40,000
Speaker 1: my office upstairs here at Vanguard, and he said, I

843
00:49:40,080 --> 00:49:42,480
Speaker 1: have a great idea for you. We I want to

844
00:49:42,520 --> 00:49:45,560
Speaker 1: start the first exchange traded mutual fund and have Vanguards

845
00:49:45,640 --> 00:49:48,120
Speaker 1: my partner there. I was I could have not only

846
00:49:48,200 --> 00:49:50,759
Speaker 1: created the first index mutual fund, but the first e

847
00:49:50,880 --> 00:49:56,480
Speaker 1: t F. And I said, Nate, no way, because the

848
00:49:56,600 --> 00:49:59,279
Speaker 1: description that you got from from Nathan, or at least

849
00:49:59,280 --> 00:50:02,279
Speaker 1: their first day later on. Now you can trade the

850
00:50:02,480 --> 00:50:05,520
Speaker 1: S and P five hundred all day long in real time.

851
00:50:06,360 --> 00:50:09,359
Speaker 1: And I would say, that's what kind of a nut

852
00:50:09,480 --> 00:50:11,520
Speaker 1: would want to do that. I mean, there must be

853
00:50:11,600 --> 00:50:13,719
Speaker 1: better things to do than that in this life. But

854
00:50:13,800 --> 00:50:17,000
Speaker 1: in any event, it's the trading idea. When my idea

855
00:50:17,040 --> 00:50:21,000
Speaker 1: of indexing broad market indexing by the SNP five and

856
00:50:21,200 --> 00:50:24,280
Speaker 1: hold it forever, what war is said to be warned?

857
00:50:24,640 --> 00:50:27,920
Speaker 1: Warren Buffett's favorite holding period is forever. So so the

858
00:50:28,040 --> 00:50:32,439
Speaker 1: idea of an SMP five hundred funds that if you're gonna,

859
00:50:32,440 --> 00:50:34,800
Speaker 1: if you're gonna do that exposure, you're better doing it

860
00:50:34,880 --> 00:50:38,799
Speaker 1: with the low cost mutual funds than an index funds. UH.

861
00:50:38,880 --> 00:50:41,080
Speaker 1: Then in UH E t F so there is no

862
00:50:41,239 --> 00:50:45,880
Speaker 1: temptation to trade intra day or to play around that.

863
00:50:46,120 --> 00:50:47,920
Speaker 1: That's not what you think people should be doing with

864
00:50:48,000 --> 00:50:50,239
Speaker 1: their time or not. But let's let's examine the E

865
00:50:50,320 --> 00:50:52,759
Speaker 1: t F business for just a minute. And that is

866
00:50:52,840 --> 00:50:55,040
Speaker 1: if you look at E t F s all the

867
00:50:55,080 --> 00:50:56,520
Speaker 1: big ones. Man, I can't look at all of them,

868
00:50:56,600 --> 00:51:00,200
Speaker 1: but the big ones, particularly in the normal ones uh

869
00:51:00,719 --> 00:51:03,920
Speaker 1: or about seventy by financial institutions, they're trading them in

870
00:51:03,920 --> 00:51:07,960
Speaker 1: the marketplace. The spider, the S and P five UM

871
00:51:08,920 --> 00:51:14,280
Speaker 1: E t F spider is the most widely traded stock

872
00:51:14,440 --> 00:51:18,879
Speaker 1: in the world every day, And if you look further

873
00:51:19,600 --> 00:51:21,359
Speaker 1: this year, which is a little more bottle than most

874
00:51:21,480 --> 00:51:25,600
Speaker 1: years so far, the dollar volume of trading in e

875
00:51:25,760 --> 00:51:28,720
Speaker 1: t f s is the same size as the dollar

876
00:51:28,840 --> 00:51:33,160
Speaker 1: volume of trading and common stocks. Unbelievable because common stocks

877
00:51:33,200 --> 00:51:37,280
Speaker 1: are worth about twenty three trillion dollars and the spiders

878
00:51:37,280 --> 00:51:40,239
Speaker 1: are worth about two. So spiders are turning over it

879
00:51:40,719 --> 00:51:42,920
Speaker 1: three thousand percent a year and stocks are turning over

880
00:51:43,040 --> 00:51:46,040
Speaker 1: it two a year or something like that. So they're

881
00:51:46,080 --> 00:51:49,680
Speaker 1: trading instruments owned by large institutions. I mean, look at

882
00:51:49,680 --> 00:51:52,719
Speaker 1: the spider head and it says institutions, here's what you

883
00:51:52,840 --> 00:51:55,440
Speaker 1: need to trade. I mean, it's practically verbatim from the

884
00:51:55,960 --> 00:51:59,279
Speaker 1: It's just it may be irrelevant, but I don't think

885
00:51:59,320 --> 00:52:01,279
Speaker 1: in the long run that has anything to do with

886
00:52:01,320 --> 00:52:03,880
Speaker 1: the mutual fund business or individual And it certainly shouldn't

887
00:52:03,920 --> 00:52:06,960
Speaker 1: have anything to do with individuals, because why would you

888
00:52:07,160 --> 00:52:11,040
Speaker 1: as an individual want to trade against these giant institutions

889
00:52:11,080 --> 00:52:14,840
Speaker 1: who do nothing but use this as a either trading

890
00:52:14,880 --> 00:52:17,839
Speaker 1: tool or a hedging tool or whatever it is you're saying.

891
00:52:17,880 --> 00:52:21,279
Speaker 1: This is not a playground for individuals to step into

892
00:52:21,520 --> 00:52:24,440
Speaker 1: and that looks like it's roughly seventy percent of the business.

893
00:52:24,920 --> 00:52:27,560
Speaker 1: And you know, I don't need even to criticize it.

894
00:52:27,600 --> 00:52:29,799
Speaker 1: It's kind of irrelevant when you get to the other

895
00:52:31,080 --> 00:52:32,640
Speaker 1: of the business. And I may be a little often

896
00:52:32,719 --> 00:52:38,240
Speaker 1: my percentages here, but they're individuals, and you know, something

897
00:52:38,360 --> 00:52:40,920
Speaker 1: like two thirds of them are using e t F

898
00:52:41,080 --> 00:52:43,960
Speaker 1: to trade, and one third of them that would be

899
00:52:44,000 --> 00:52:45,960
Speaker 1: ten pc of the total. All the e t F

900
00:52:46,080 --> 00:52:49,399
Speaker 1: market are using them, buying and holding them and maybe

901
00:52:49,520 --> 00:52:52,280
Speaker 1: using them. You know, we have it's a funny technical

902
00:52:52,360 --> 00:52:54,719
Speaker 1: thing in this business. But you know, if you want

903
00:52:54,760 --> 00:52:56,520
Speaker 1: to put it in a thousand dollars a month into

904
00:52:56,560 --> 00:52:58,480
Speaker 1: a van guard fund and then you want to take

905
00:52:58,520 --> 00:53:00,319
Speaker 1: out five thousand dollars at the end of the year

906
00:53:01,160 --> 00:53:05,839
Speaker 1: and buy Christmas presents whatever you might want. Um, it's

907
00:53:05,920 --> 00:53:07,880
Speaker 1: very difficult to do that here because we don't like

908
00:53:08,040 --> 00:53:10,400
Speaker 1: buying and selling at the same time. You can do

909
00:53:10,520 --> 00:53:13,080
Speaker 1: it with our e t s very easily. It's a

910
00:53:13,160 --> 00:53:16,840
Speaker 1: certain market place there of people who aren't traders, but

911
00:53:17,000 --> 00:53:19,760
Speaker 1: like the flexibility ETFs had, and I have no problem

912
00:53:19,800 --> 00:53:23,040
Speaker 1: with that. The other the other part of the problem, however,

913
00:53:23,200 --> 00:53:25,959
Speaker 1: the e t F problem, is there is this huge

914
00:53:26,000 --> 00:53:29,160
Speaker 1: amount in number, not so much in assets, of funds

915
00:53:29,200 --> 00:53:32,239
Speaker 1: that are doing things that no intelligent investor would ever do.

916
00:53:33,120 --> 00:53:35,480
Speaker 1: Triple leverage and you can bet every day whether the

917
00:53:35,560 --> 00:53:38,640
Speaker 1: markets going up or down. Isn't that grand? Not only

918
00:53:38,719 --> 00:53:42,239
Speaker 1: triple leveraged up, but inverse triple averaged. As long as

919
00:53:42,280 --> 00:53:44,000
Speaker 1: you know whether the market's going up or down during

920
00:53:44,040 --> 00:53:46,480
Speaker 1: the day, you're gonna make a fortune. Who who knows

921
00:53:46,600 --> 00:53:48,359
Speaker 1: what the market's going to go up any or down

922
00:53:48,400 --> 00:53:50,480
Speaker 1: any given day? Well, I guess these smart people that

923
00:53:50,680 --> 00:53:53,120
Speaker 1: have these funds, but they all have both of them,

924
00:53:53,760 --> 00:53:56,400
Speaker 1: that's right. They don't compete with each other. And there

925
00:53:56,400 --> 00:53:58,520
Speaker 1: are a whole lot of other wacky things. I mean,

926
00:53:58,640 --> 00:54:00,839
Speaker 1: I don't think US and invest there's you. I'm sure

927
00:54:00,840 --> 00:54:03,720
Speaker 1: you're gonna come to this, should be buying individual foreign

928
00:54:04,200 --> 00:54:08,440
Speaker 1: non US. So let's let's ask that question. A lot

929
00:54:08,520 --> 00:54:13,720
Speaker 1: of the academic data says that if you're diversified internationally,

930
00:54:14,440 --> 00:54:17,400
Speaker 1: parts of the world are sometimes doing better than the US,

931
00:54:17,440 --> 00:54:19,839
Speaker 1: and sometimes the US is doing part of the world.

932
00:54:19,960 --> 00:54:23,240
Speaker 1: If we want to really be diversified, you need US

933
00:54:23,400 --> 00:54:27,080
Speaker 1: and not just have an overwhelming home country bias UH

934
00:54:27,360 --> 00:54:32,439
Speaker 1: developed world X US and then emerging markets. What's wrong

935
00:54:32,480 --> 00:54:36,000
Speaker 1: with having a smattering of those in your portfolio so

936
00:54:36,200 --> 00:54:40,040
Speaker 1: that you get to take advantage of the growth of

937
00:54:41,200 --> 00:54:45,600
Speaker 1: the Pacific RIM in China and South America and etcetera. Well,

938
00:54:45,640 --> 00:54:48,040
Speaker 1: the question is is an advantage? I mean, tell someone

939
00:54:48,120 --> 00:54:49,960
Speaker 1: to put all their money in Brazil two years ago

940
00:54:50,400 --> 00:54:52,680
Speaker 1: because somebody who put in all their money in China

941
00:54:52,840 --> 00:54:56,080
Speaker 1: year ago. Isn't an advantage or is it just you know,

942
00:54:56,200 --> 00:54:58,000
Speaker 1: kind of a little bubble going on in those Well,

943
00:54:58,040 --> 00:55:00,759
Speaker 1: but you're not picking individual countries. You're gonna have a

944
00:55:00,840 --> 00:55:07,080
Speaker 1: broad index of international companies, and therefore it should theoretically

945
00:55:07,480 --> 00:55:10,680
Speaker 1: the gain should offset the losses and then some and

946
00:55:10,760 --> 00:55:13,640
Speaker 1: so you have exposure elsewhere. You're not a big fan

947
00:55:13,719 --> 00:55:16,680
Speaker 1: of that, Well, I'm not. And and the reason goes

948
00:55:16,760 --> 00:55:19,320
Speaker 1: back to when I started to think about it seriously

949
00:55:19,680 --> 00:55:25,040
Speaker 1: writing my book bogelon Mutual Funds. Back in Bogel on

950
00:55:25,480 --> 00:55:27,800
Speaker 1: Mutual Funds, let's see what I have here. I have

951
00:55:28,400 --> 00:55:31,000
Speaker 1: common sense on mutual funds that probably says something very

952
00:55:31,040 --> 00:55:32,960
Speaker 1: similar to this. But this is a little more recent,

953
00:55:33,640 --> 00:55:36,800
Speaker 1: so I said, tenth edition forward by David Swinson. So

954
00:55:36,920 --> 00:55:40,280
Speaker 1: when you say recent, this came originally came out almost

955
00:55:40,320 --> 00:55:44,760
Speaker 1: fifteen years ago. Right, the original was in nineteen seventeen

956
00:55:44,800 --> 00:55:47,880
Speaker 1: years ago. Interestingly enough, I'll get back to the other

957
00:55:47,920 --> 00:55:51,239
Speaker 1: subject in a second, But interestingly enough, the first book

958
00:55:51,280 --> 00:55:56,080
Speaker 1: came out at a market high and the second and

959
00:55:56,160 --> 00:55:58,480
Speaker 1: the second book came out of the market low. And

960
00:55:58,640 --> 00:56:01,799
Speaker 1: I would hardly change one word in the whole second edition.

961
00:56:02,440 --> 00:56:06,560
Speaker 1: I reprinted it verbatim and then Mark put red Nantucket

962
00:56:06,640 --> 00:56:08,640
Speaker 1: read for any changes that took place in the book.

963
00:56:08,800 --> 00:56:11,840
Speaker 1: Now in the tenth edition, that's that's used. After the

964
00:56:11,960 --> 00:56:14,840
Speaker 1: financial crisis, you could see some of the changes that

965
00:56:14,880 --> 00:56:18,440
Speaker 1: were made, but they're really very modest. You really didn't

966
00:56:18,520 --> 00:56:20,960
Speaker 1: change any of the themes in this. You just kind

967
00:56:21,000 --> 00:56:24,719
Speaker 1: of fleshed it out post crisis. It worked. Indexing worked

968
00:56:24,760 --> 00:56:26,680
Speaker 1: in the good market, indexing worked in the not so

969
00:56:26,840 --> 00:56:30,040
Speaker 1: good market, and and court low cost worked in the

970
00:56:30,080 --> 00:56:32,080
Speaker 1: good market and not so good and also in they're

971
00:56:32,120 --> 00:56:35,000
Speaker 1: not so good market. It has to So getting back

972
00:56:35,040 --> 00:56:39,919
Speaker 1: to I said in my first book, Uh, look, US

973
00:56:40,000 --> 00:56:42,960
Speaker 1: companies got half of their revenues. This is true now

974
00:56:43,000 --> 00:56:45,240
Speaker 1: at least a little bit less than half of the revenues,

975
00:56:45,239 --> 00:56:48,120
Speaker 1: and alter their earnings from outside the U S we

976
00:56:48,400 --> 00:56:50,880
Speaker 1: you have an international portfolio, why do you want a

977
00:56:51,000 --> 00:56:55,160
Speaker 1: larger one? And then I say, take a look at

978
00:56:55,239 --> 00:57:00,920
Speaker 1: what comprises that international portfolio. Your largest invest is Japan,

979
00:57:01,200 --> 00:57:04,400
Speaker 1: Your second largest investment is the UK, Your third largest

980
00:57:04,440 --> 00:57:07,920
Speaker 1: investment is France. Now, if returns are developed out of

981
00:57:08,040 --> 00:57:12,160
Speaker 1: national economic strength, does anybody think that the UK and

982
00:57:12,280 --> 00:57:15,040
Speaker 1: Japan and France were gonna do better than the US

983
00:57:15,400 --> 00:57:18,920
Speaker 1: in the next ten fift twenty years. I can't imagine it.

984
00:57:19,680 --> 00:57:21,880
Speaker 1: And now I may be wrong. I'm not saying this

985
00:57:22,040 --> 00:57:26,880
Speaker 1: is written in stone, but that's for that'st of the money.

986
00:57:27,400 --> 00:57:29,840
Speaker 1: So if people knew they were putting forty of their

987
00:57:29,880 --> 00:57:33,400
Speaker 1: international money, so called international non us is a better

988
00:57:33,480 --> 00:57:38,960
Speaker 1: formulation in Great Britain, France and and the Japan. I

989
00:57:39,040 --> 00:57:42,000
Speaker 1: mean when every one of those economies has real problems.

990
00:57:42,720 --> 00:57:46,120
Speaker 1: The French don't work very hard, the Japanese have a

991
00:57:46,120 --> 00:57:51,360
Speaker 1: structured and deeply aging economy, overburdened by future retirement claims,

992
00:57:51,880 --> 00:57:55,800
Speaker 1: terrible demographics, and they're a great exporter. But then they

993
00:57:55,880 --> 00:57:57,959
Speaker 1: have issues. And Britain doesn't know what's going to happen

994
00:57:58,240 --> 00:58:01,480
Speaker 1: if they do the the exit from the European Community,

995
00:58:01,520 --> 00:58:02,840
Speaker 1: and or do they know what's going to happen if

996
00:58:02,840 --> 00:58:05,480
Speaker 1: they stay in So what would happen if a sharp

997
00:58:06,480 --> 00:58:10,720
Speaker 1: upstart company let's call them Vanguard, says, here's a broad

998
00:58:11,200 --> 00:58:14,880
Speaker 1: international index that's fairly evenly weighted. It's not just these

999
00:58:14,960 --> 00:58:18,880
Speaker 1: three countries. Might that change your perspective or do you

1000
00:58:19,000 --> 00:58:22,440
Speaker 1: still think, Hey, you get plenty of the SNP five hundred.

1001
00:58:22,520 --> 00:58:25,520
Speaker 1: Half the revenue comes from overseas. That's all the overseas

1002
00:58:25,800 --> 00:58:30,320
Speaker 1: exposure anyone really needs. I don't like the idea because

1003
00:58:30,360 --> 00:58:33,200
Speaker 1: you would have as much and I don't know Honduras

1004
00:58:34,120 --> 00:58:36,440
Speaker 1: as you do in in Great Britain. It wouldn't make

1005
00:58:36,480 --> 00:58:40,280
Speaker 1: any sense. Uh So, But to make matters worse, when

1006
00:58:40,280 --> 00:58:44,880
Speaker 1: I made this statement in we now have twenty two

1007
00:58:44,960 --> 00:58:48,800
Speaker 1: years of history, right, how was the prediction? And the

1008
00:58:48,880 --> 00:58:51,840
Speaker 1: answer is that don't hold me to the exact numbers,

1009
00:58:52,520 --> 00:58:55,800
Speaker 1: but that the U S portfolio is up about say seven,

1010
00:58:57,680 --> 00:59:01,640
Speaker 1: and the non use portfolios up about two. So the

1011
00:59:01,800 --> 00:59:05,200
Speaker 1: US is still winning versus the international. So I committed

1012
00:59:05,240 --> 00:59:10,120
Speaker 1: the elements in very I was right now, I want

1013
00:59:10,120 --> 00:59:11,760
Speaker 1: to be very clear in this. Does that mean I

1014
00:59:11,800 --> 00:59:14,480
Speaker 1: will be equally right in the future. I can't imagine it.

1015
00:59:15,000 --> 00:59:17,760
Speaker 1: You think eventually, I mean reversion comes in. Yeah, and

1016
00:59:17,840 --> 00:59:20,520
Speaker 1: eventually those two positions will reverse. The US Well, I

1017
00:59:20,600 --> 00:59:23,280
Speaker 1: don't think they will reverse, but I don't think that

1018
00:59:23,400 --> 00:59:26,200
Speaker 1: spread is is a durable spread. And then the reason

1019
00:59:26,240 --> 00:59:29,040
Speaker 1: I don't think that reverse is we have this fabulous

1020
00:59:29,080 --> 00:59:32,280
Speaker 1: economy here. I mean, yes, it has problems, but probably

1021
00:59:32,360 --> 00:59:34,800
Speaker 1: less problems than any country in the world, no doubt

1022
00:59:34,800 --> 00:59:38,160
Speaker 1: about that. And my favorite quote is this is the

1023
00:59:38,360 --> 00:59:42,720
Speaker 1: cleanest shirt in a dirty hamper. Sure, exactly right. And well,

1024
00:59:42,760 --> 00:59:44,840
Speaker 1: I mean I'd say was even cleaner than that. We're

1025
00:59:44,960 --> 00:59:49,240
Speaker 1: number one in innovation and technology. Uh, We're not number

1026
00:59:49,280 --> 00:59:53,360
Speaker 1: one an entrepreneurship. We're still a great manufacturing company, all

1027
00:59:53,440 --> 00:59:56,000
Speaker 1: not as great as we are, and we still have

1028
00:59:56,680 --> 01:00:00,360
Speaker 1: you know, all these new companies being started, existing companies

1029
01:00:00,400 --> 01:00:04,200
Speaker 1: being run more and more efficiently and more than anything else,

1030
01:00:04,360 --> 01:00:06,360
Speaker 1: or at least as much as all that. We have

1031
01:00:06,520 --> 01:00:10,200
Speaker 1: great institutional structure in this country. We have legal protections,

1032
01:00:10,280 --> 01:00:13,280
Speaker 1: we have courts, we have laws, and no one's going

1033
01:00:13,320 --> 01:00:16,640
Speaker 1: to take your stock away from you confiscated overnight, and

1034
01:00:17,520 --> 01:00:20,720
Speaker 1: shareholder rights are as good as any country in the world,

1035
01:00:20,760 --> 01:00:22,840
Speaker 1: maybe with the exception of I don't think they do

1036
01:00:22,880 --> 01:00:25,520
Speaker 1: any better but they don't do any worse. Probably Switzerland

1037
01:00:25,560 --> 01:00:28,200
Speaker 1: and Great Britain would be the two big competitors. Now

1038
01:00:28,280 --> 01:00:30,840
Speaker 1: you see, you see what happens in China, your stocks

1039
01:00:30,920 --> 01:00:32,960
Speaker 1: may not be your stocks. It's very hard to be

1040
01:00:33,560 --> 01:00:36,800
Speaker 1: forget as a as a local, as an international investor.

1041
01:00:37,200 --> 01:00:40,000
Speaker 1: It's very hard to be an investor in China if

1042
01:00:40,080 --> 01:00:42,640
Speaker 1: you don't know, am I gonna be able to ever

1043
01:00:42,800 --> 01:00:45,680
Speaker 1: cast this out? Or maybe there's going to be a

1044
01:00:45,760 --> 01:00:48,840
Speaker 1: vacation period where no sales for the next month, as

1045
01:00:48,880 --> 01:00:51,640
Speaker 1: we saw last year. Yeah, and let me add to

1046
01:00:51,720 --> 01:00:54,680
Speaker 1: this that these and just about everybody says I'm wrong,

1047
01:00:54,800 --> 01:00:56,960
Speaker 1: by the way, but everybody said I was wrong with

1048
01:00:57,040 --> 01:00:58,960
Speaker 1: an index. I was gonna say. That's only gonna make you.

1049
01:00:59,160 --> 01:01:01,360
Speaker 1: That's only gonna make you double down and think you're right,

1050
01:01:01,400 --> 01:01:04,120
Speaker 1: because there's a track record of people predicting you're gonna

1051
01:01:04,120 --> 01:01:07,760
Speaker 1: be wrong, and they've all they've all proven themselves false.

1052
01:01:08,160 --> 01:01:09,960
Speaker 1: So but let me just say one more thing. In

1053
01:01:10,000 --> 01:01:13,480
Speaker 1: international just think what would you would have done if

1054
01:01:13,520 --> 01:01:16,360
Speaker 1: you had an internationally waited or a non use waited

1055
01:01:18,200 --> 01:01:22,919
Speaker 1: in when you had fifty percent, that is to say,

1056
01:01:23,040 --> 01:01:26,800
Speaker 1: five percent of your money in Japan, right when the

1057
01:01:26,920 --> 01:01:30,800
Speaker 1: NIK was forty six thousand or something like that. No

1058
01:01:30,880 --> 01:01:34,760
Speaker 1: one was talking this way then, but that could happen again.

1059
01:01:35,480 --> 01:01:38,160
Speaker 1: And I don't think he should be subject to these

1060
01:01:38,320 --> 01:01:41,240
Speaker 1: funny speculative booms that can take place in other countries.

1061
01:01:41,800 --> 01:01:44,880
Speaker 1: I just can't imagine that there will be a significant

1062
01:01:44,920 --> 01:01:49,000
Speaker 1: advantage in international companies over US companies. I'm not talking

1063
01:01:49,000 --> 01:01:53,000
Speaker 1: about stocks now, I'm talking about companies and economies over

1064
01:01:53,040 --> 01:01:55,240
Speaker 1: the US. Now, look, I could be wrong on this,

1065
01:01:55,320 --> 01:01:57,480
Speaker 1: and if you think I'm wrong, go buy all the

1066
01:01:57,520 --> 01:02:00,680
Speaker 1: international and non US stocks you want, and non US

1067
01:02:00,720 --> 01:02:04,320
Speaker 1: stock index by individual countries. I wouldn't do any of that.

1068
01:02:05,400 --> 01:02:09,360
Speaker 1: And what we didn't even mention the currency side of things.

1069
01:02:09,440 --> 01:02:14,200
Speaker 1: How significant is currency fluctuations to UH to this sort

1070
01:02:14,240 --> 01:02:17,920
Speaker 1: of international exposure if you're domicile t here in the US,

1071
01:02:18,560 --> 01:02:24,000
Speaker 1: what what kind of currency currencies here? Well, that that

1072
01:02:24,160 --> 01:02:26,160
Speaker 1: is an issue because the dollar has been very strong,

1073
01:02:26,960 --> 01:02:30,920
Speaker 1: and it won't be strong forever because international trade has

1074
01:02:30,920 --> 01:02:33,560
Speaker 1: a way of balancing out. When the dollar is strong,

1075
01:02:33,680 --> 01:02:36,200
Speaker 1: the trade balances change and all that. So I don't

1076
01:02:36,200 --> 01:02:38,840
Speaker 1: think you should count on a good strong dollar forever.

1077
01:02:39,080 --> 01:02:42,400
Speaker 1: So won't won't won't impact it. Let's let's talk UM,

1078
01:02:42,560 --> 01:02:44,680
Speaker 1: but I want to talk a little more about Vanguard.

1079
01:02:45,160 --> 01:02:49,120
Speaker 1: But before we get to that, to two last questions

1080
01:02:49,160 --> 01:02:52,280
Speaker 1: about indexing. The first is is there any sort of

1081
01:02:52,400 --> 01:02:56,680
Speaker 1: active management you would favor, you know, Vanguard about of

1082
01:02:56,800 --> 01:02:59,560
Speaker 1: the assets here or an active managed funds. What do

1083
01:02:59,680 --> 01:03:03,840
Speaker 1: you think about having a small slug of someone's portfolio

1084
01:03:04,160 --> 01:03:07,880
Speaker 1: in something that might not be a passive index. Well,

1085
01:03:08,400 --> 01:03:11,080
Speaker 1: let me give you this very important background about our

1086
01:03:11,080 --> 01:03:13,760
Speaker 1: actively managed funds, and this is what I've been saying

1087
01:03:13,800 --> 01:03:19,320
Speaker 1: since we started Vanguard in nineteen seventy four. I want

1088
01:03:19,400 --> 01:03:24,000
Speaker 1: our active management, actively managed funds to have returns that

1089
01:03:24,120 --> 01:03:28,320
Speaker 1: are relatively predictable, relative predictability relative to their group. There

1090
01:03:28,640 --> 01:03:31,680
Speaker 1: they're group like large cap value funds, a long term

1091
01:03:31,720 --> 01:03:36,360
Speaker 1: municipal mound funds, whatever it might be. UM, and the

1092
01:03:36,560 --> 01:03:40,760
Speaker 1: idea would be look at those funds and not don't

1093
01:03:40,840 --> 01:03:43,320
Speaker 1: get too far out of line so you'll have an

1094
01:03:43,360 --> 01:03:45,840
Speaker 1: average perform if you if you have six managers, there's

1095
01:03:45,840 --> 01:03:48,520
Speaker 1: where the multi manager thing comes from. If you have

1096
01:03:48,640 --> 01:03:51,520
Speaker 1: six managers, the idea that they will do about the

1097
01:03:51,560 --> 01:03:54,240
Speaker 1: same as another as your competitive group with sixty managers

1098
01:03:54,880 --> 01:03:57,520
Speaker 1: is almost guaranteed to do the same So what's so

1099
01:03:57,640 --> 01:03:59,920
Speaker 1: good about that? What's so good about that is we

1100
01:04:00,080 --> 01:04:02,000
Speaker 1: think we have a one and a half percent to

1101
01:04:02,120 --> 01:04:07,160
Speaker 1: two cost advantage through lower expenses, lower turnover, no sales loads,

1102
01:04:07,600 --> 01:04:09,240
Speaker 1: and we should win by a point and a half

1103
01:04:09,280 --> 01:04:13,720
Speaker 1: a year, not on brilliance, but on cost. So let's guarantee. Now,

1104
01:04:13,880 --> 01:04:16,160
Speaker 1: let me just give you the punch line here. If

1105
01:04:16,200 --> 01:04:19,520
Speaker 1: you win, what's so good about one over ten years,

1106
01:04:19,800 --> 01:04:23,840
Speaker 1: you have a higher return that that's tremendous. So I

1107
01:04:24,040 --> 01:04:28,520
Speaker 1: previously interviewed your CEO and chairman, Bill McNabb and one

1108
01:04:28,560 --> 01:04:31,840
Speaker 1: of the comments he had made is that he still

1109
01:04:32,000 --> 01:04:37,200
Speaker 1: felt there was room to squeeze costs lower. You guys

1110
01:04:37,240 --> 01:04:40,080
Speaker 1: are three and a half trillion dollars. Is there a

1111
01:04:40,280 --> 01:04:42,800
Speaker 1: floor on how low costs can go or are you

1112
01:04:42,920 --> 01:04:48,680
Speaker 1: eventually gonna run out of efficiencies? Well, we have yet

1113
01:04:48,720 --> 01:04:52,600
Speaker 1: to squeeze cost lower because our costs go up and

1114
01:04:52,760 --> 01:04:55,720
Speaker 1: up and up. But as a percentage, you can squeeze

1115
01:04:55,720 --> 01:04:59,880
Speaker 1: a little lower on a per well dollar invested basis

1116
01:05:00,520 --> 01:05:03,960
Speaker 1: certainly wane to disagree with our CEO, but it's not

1117
01:05:04,120 --> 01:05:07,680
Speaker 1: we're squeezing, but we're the captive of the market. If

1118
01:05:07,720 --> 01:05:10,320
Speaker 1: the market goes way down, our expense ratio is going

1119
01:05:10,440 --> 01:05:13,400
Speaker 1: to go up. There's no way we could squeeze enough

1120
01:05:13,440 --> 01:05:17,960
Speaker 1: out of our expenses if we had less assets. So

1121
01:05:18,200 --> 01:05:21,280
Speaker 1: we should be very careful about expenses, and we are.

1122
01:05:21,680 --> 01:05:24,840
Speaker 1: I think we're managed in a very strong way, but

1123
01:05:25,840 --> 01:05:29,640
Speaker 1: we're The expense ratio is a combination of something we

1124
01:05:29,680 --> 01:05:32,560
Speaker 1: can control more or less how much we spend, and

1125
01:05:32,680 --> 01:05:34,680
Speaker 1: something we can't control at all, the level of the

1126
01:05:34,720 --> 01:05:39,680
Speaker 1: stock market. So the expense ratio is a mystery. And

1127
01:05:40,120 --> 01:05:43,240
Speaker 1: whether Gupp or Dad, now, if it goes way down,

1128
01:05:43,480 --> 01:05:46,720
Speaker 1: it's gonna mean we have very good markets. That sounds great.

1129
01:05:46,960 --> 01:05:52,240
Speaker 1: Can indexing ever get too big or can indexing ever

1130
01:05:52,440 --> 01:05:55,360
Speaker 1: take over the market as some people have alluded, or

1131
01:05:55,600 --> 01:05:58,720
Speaker 1: is there a place for a combination of indexing and

1132
01:05:58,880 --> 01:06:03,280
Speaker 1: active managers in the actual marketplace? Well, it's not in

1133
01:06:03,320 --> 01:06:06,520
Speaker 1: the nature of things that in indexing could be of

1134
01:06:06,560 --> 01:06:10,000
Speaker 1: the market. If it were, we would have chaos. There

1135
01:06:10,000 --> 01:06:12,600
Speaker 1: will be no evaluations, there'll be no liquidity, there'll be

1136
01:06:12,680 --> 01:06:15,960
Speaker 1: no enny. So what are the chances that indexting get

1137
01:06:16,080 --> 01:06:21,240
Speaker 1: to zero? Right now? It's I think I had of

1138
01:06:21,280 --> 01:06:24,080
Speaker 1: the total market of the mutual fund industry, of the

1139
01:06:24,120 --> 01:06:29,360
Speaker 1: equity mutual fund industry, and so it means that that

1140
01:06:30,280 --> 01:06:34,600
Speaker 1: hunk of business is in broadly stated, just removed from

1141
01:06:34,640 --> 01:06:38,720
Speaker 1: the turnover level. So it's a turnover we're in the

1142
01:06:38,800 --> 01:06:42,960
Speaker 1: end market were indexed, the turnover would go to I

1143
01:06:43,080 --> 01:06:46,920
Speaker 1: came into this business when turnover was and everything was fine.

1144
01:06:47,880 --> 01:06:50,680
Speaker 1: It's gonna take a long time to get the fifty percent,

1145
01:06:50,760 --> 01:06:53,560
Speaker 1: a long long time and maybe never gets there. So

1146
01:06:53,720 --> 01:06:55,720
Speaker 1: when you put reality in the face of the theory

1147
01:06:55,880 --> 01:06:59,600
Speaker 1: that if everybody indexes uh, then then it's going to

1148
01:06:59,680 --> 01:07:02,720
Speaker 1: be it's just it's just not gonna happen. But the

1149
01:07:02,800 --> 01:07:05,920
Speaker 1: other thing is people follow this statement by saying, if

1150
01:07:06,000 --> 01:07:08,400
Speaker 1: the market gets more and more indexed, then it will

1151
01:07:08,400 --> 01:07:11,120
Speaker 1: be less efficient and we'll be able to beat it

1152
01:07:11,200 --> 01:07:17,080
Speaker 1: more easily. No, unequivocally, no, some will beat it, some

1153
01:07:17,280 --> 01:07:20,480
Speaker 1: will lose to it if they If the market is

1154
01:07:21,200 --> 01:07:23,960
Speaker 1: is less efficient and the and the winners and the

1155
01:07:24,040 --> 01:07:29,360
Speaker 1: losers will average the market returned, there's no way around that.

1156
01:07:29,800 --> 01:07:32,280
Speaker 1: So that leads me to a quote of yours, and

1157
01:07:32,600 --> 01:07:34,400
Speaker 1: I have to ask you about it because I find

1158
01:07:34,480 --> 01:07:38,960
Speaker 1: it's fascinating. You once wrote the stock market is a

1159
01:07:39,160 --> 01:07:45,480
Speaker 1: giant distraction to the business of investing. Explain well, investing

1160
01:07:46,080 --> 01:07:49,680
Speaker 1: is about the long term, and investing is about earning

1161
01:07:49,800 --> 01:07:52,959
Speaker 1: what I call the investment return, which is the divin

1162
01:07:53,040 --> 01:07:55,320
Speaker 1: end yield when you go into the stock market and

1163
01:07:55,400 --> 01:07:59,080
Speaker 1: the earnings wrote that follows. That's investment return. The market

1164
01:07:59,160 --> 01:08:02,160
Speaker 1: return is also as a speculative return, and that is

1165
01:08:02,680 --> 01:08:05,160
Speaker 1: is the price earnings multiple of the evaluations high or

1166
01:08:05,200 --> 01:08:07,520
Speaker 1: low when you come in, and if they're high, they're

1167
01:08:07,560 --> 01:08:10,800
Speaker 1: going to detract from that return, and evaluations are low

1168
01:08:11,280 --> 01:08:12,920
Speaker 1: and they're going to add to that return because the

1169
01:08:13,000 --> 01:08:16,719
Speaker 1: low will the in in the valuations. The price earnings

1170
01:08:16,840 --> 01:08:21,479
Speaker 1: multiple reverts to the mean perfectly. It's about what today.

1171
01:08:22,400 --> 01:08:24,439
Speaker 1: Although it's a little bit higher than this today because

1172
01:08:24,479 --> 01:08:28,479
Speaker 1: the market's a little bit isn't hardly inexpensive, but the

1173
01:08:28,600 --> 01:08:30,600
Speaker 1: reality is it's just about the same level it was.

1174
01:08:32,200 --> 01:08:35,519
Speaker 1: So we had ups and downs, booms bust. In the

1175
01:08:35,600 --> 01:08:38,640
Speaker 1: long run, speculative return is zero. So concentrate on the

1176
01:08:38,760 --> 01:08:43,080
Speaker 1: investment return. Forget the speculative return, which is very difficult

1177
01:08:43,120 --> 01:08:46,560
Speaker 1: to predict, and just get with business can give you

1178
01:08:47,160 --> 01:08:50,400
Speaker 1: now if you look every day, you're apt to do something.

1179
01:08:51,160 --> 01:08:55,160
Speaker 1: And one of my basic rules is don't do something,

1180
01:08:55,280 --> 01:08:58,120
Speaker 1: just stand there and if you've been doing that this year,

1181
01:08:58,200 --> 01:08:59,640
Speaker 1: I think you're a lot better off. This is a

1182
01:08:59,720 --> 01:09:02,320
Speaker 1: tough years, so far, not that bad. I mean, you

1183
01:09:02,640 --> 01:09:05,360
Speaker 1: think the SMP is off about three and a half percent,

1184
01:09:05,439 --> 01:09:08,560
Speaker 1: it's really nothing. And although you think it was the

1185
01:09:08,640 --> 01:09:12,760
Speaker 1: end of the world, uh so, it's Don't let the

1186
01:09:12,840 --> 01:09:17,559
Speaker 1: stock market moves distract you. They are a tale told

1187
01:09:17,600 --> 01:09:21,040
Speaker 1: by an idiot. These moves, daily moves, hourly been minute

1188
01:09:21,040 --> 01:09:24,760
Speaker 1: by minute moves, a tale told by an idiot, full

1189
01:09:24,800 --> 01:09:28,400
Speaker 1: of sound and furious, signifying nothing. I have a bunch

1190
01:09:28,479 --> 01:09:32,160
Speaker 1: of questions that I ask all of my guests, but

1191
01:09:32,320 --> 01:09:36,840
Speaker 1: they're all specific to each individual because they're so um

1192
01:09:38,320 --> 01:09:42,160
Speaker 1: so so detailed. So who are your early mentors? I

1193
01:09:42,240 --> 01:09:45,599
Speaker 1: know in one of your books you mentioned somebody, Uh

1194
01:09:45,720 --> 01:09:49,720
Speaker 1: you thank somebody who you had mentioned in uh the

1195
01:09:49,800 --> 01:09:53,439
Speaker 1: earlier part of of the conversation, Who do you think

1196
01:09:53,520 --> 01:09:58,040
Speaker 1: of as as mentors? Well outside of my teachers. By

1197
01:09:58,400 --> 01:10:01,160
Speaker 1: my first real grown up meant tour was a guy

1198
01:10:01,240 --> 01:10:04,200
Speaker 1: named Jim Harrington who was a graduate student and engineer

1199
01:10:04,240 --> 01:10:07,479
Speaker 1: at Princeton University, and he was running the Athletic Ticket

1200
01:10:07,520 --> 01:10:11,400
Speaker 1: Association ticket office. And when he stopped doing that, he

1201
01:10:12,320 --> 01:10:13,720
Speaker 1: pulled me out of the crowd and asked me to

1202
01:10:13,800 --> 01:10:15,800
Speaker 1: run in for him. So I learned how to do

1203
01:10:15,920 --> 01:10:18,200
Speaker 1: a job, and I learned how to do it with integrity,

1204
01:10:18,360 --> 01:10:19,920
Speaker 1: and I learned how to do it with on time.

1205
01:10:20,400 --> 01:10:23,360
Speaker 1: I learned how to do it with keeping my emotions

1206
01:10:23,400 --> 01:10:27,120
Speaker 1: out of it. This is just selling tickets to Princeton

1207
01:10:27,200 --> 01:10:32,160
Speaker 1: students forts basketball, baseball, whatever it might be, particularly football,

1208
01:10:32,439 --> 01:10:35,360
Speaker 1: And that was a seminal experience to you and helped

1209
01:10:35,400 --> 01:10:38,240
Speaker 1: form your your own character. He had just a great

1210
01:10:38,320 --> 01:10:41,120
Speaker 1: sense of business values and like all engineers he was

1211
01:10:41,479 --> 01:10:43,439
Speaker 1: you know, they kind of go step by step right.

1212
01:10:43,600 --> 01:10:45,679
Speaker 1: Sometimes it's not a lot of exciting, but it's always

1213
01:10:45,800 --> 01:10:49,400
Speaker 1: right structured, organized, and and you're dealing with a lot

1214
01:10:49,479 --> 01:10:53,599
Speaker 1: of money. And sure, what Princeton Stadium is how many people?

1215
01:10:53,760 --> 01:10:56,760
Speaker 1: That's ah, that was the old Palmer Stadium that held

1216
01:10:56,840 --> 01:11:00,280
Speaker 1: fifty people, right, and now it's I almost double that size.

1217
01:11:00,320 --> 01:11:03,040
Speaker 1: It's it's huge. No, we went way down. We're about

1218
01:11:04,120 --> 01:11:06,280
Speaker 1: the other direction, okay, and we can't fill it now.

1219
01:11:06,360 --> 01:11:09,400
Speaker 1: We used to. Every every game I worked was a sellout, right,

1220
01:11:09,600 --> 01:11:11,200
Speaker 1: that was back in the day. So that was really

1221
01:11:11,439 --> 01:11:15,400
Speaker 1: quite an education. Um, you dedicated common sense on mutual

1222
01:11:15,479 --> 01:11:19,040
Speaker 1: funds to Walter Morgan, who was he in your in

1223
01:11:19,160 --> 01:11:21,919
Speaker 1: your pantheon, Well, he was the greatest of my mentors.

1224
01:11:22,000 --> 01:11:25,559
Speaker 1: He hired me. Uh he read my thesis out of Princeton.

1225
01:11:26,160 --> 01:11:28,200
Speaker 1: He wrote, I think a little bit over the top

1226
01:11:29,000 --> 01:11:31,920
Speaker 1: that Mr bogel knew more than he did about them

1227
01:11:32,000 --> 01:11:35,120
Speaker 1: than we did about the mutual fund industry. And so

1228
01:11:35,280 --> 01:11:38,479
Speaker 1: he liked it. And he was a Princetonian himself, class

1229
01:11:38,520 --> 01:11:41,960
Speaker 1: of nineteen twenty, and I was the class of nineteen

1230
01:11:42,000 --> 01:11:45,280
Speaker 1: fifty one, and I watched him work. He was very

1231
01:11:45,360 --> 01:11:48,799
Speaker 1: much a renaissance man, interested in investing, interested in marketing,

1232
01:11:49,080 --> 01:11:51,760
Speaker 1: probably less interested in the detail of the business share

1233
01:11:51,760 --> 01:11:54,360
Speaker 1: older record keeping it stuff which was so much simpler

1234
01:11:54,439 --> 01:11:57,360
Speaker 1: those days, but also a renaissance man in terms of

1235
01:11:57,479 --> 01:12:03,000
Speaker 1: his interest. He was um outdoorsman, hunter, a fisherman, things

1236
01:12:03,040 --> 01:12:05,600
Speaker 1: that I that I don't do at all. And but

1237
01:12:05,720 --> 01:12:09,280
Speaker 1: he had a high sense of standards, and he they

1238
01:12:09,280 --> 01:12:12,960
Speaker 1: said at the beginning, and uh turned the company over

1239
01:12:13,000 --> 01:12:15,120
Speaker 1: to me when I was thirty five years old. So

1240
01:12:15,200 --> 01:12:17,000
Speaker 1: I must have had an awful lot of confidence in me,

1241
01:12:17,560 --> 01:12:19,920
Speaker 1: and I saved Welling and fund finally for him after

1242
01:12:20,000 --> 01:12:23,960
Speaker 1: the catastrophe, I described earlier. We told Wellington Management Company

1243
01:12:24,120 --> 01:12:26,880
Speaker 1: how we wanted to run and they've been running it

1244
01:12:26,960 --> 01:12:29,160
Speaker 1: that way ever since. I've been much more focus on

1245
01:12:29,280 --> 01:12:33,320
Speaker 1: income and income stocks and less focus on growth stocks,

1246
01:12:33,800 --> 01:12:36,479
Speaker 1: and it's worked out. We had a whole renaissance of

1247
01:12:36,520 --> 01:12:38,760
Speaker 1: the Welling and Fund, and he saw a lot of that,

1248
01:12:39,400 --> 01:12:42,479
Speaker 1: and he was he he died, but the year that

1249
01:12:42,560 --> 01:12:45,160
Speaker 1: book came out, and a little bit before, but I

1250
01:12:45,200 --> 01:12:47,760
Speaker 1: had shown him the title page with his name on.

1251
01:12:47,920 --> 01:12:50,360
Speaker 1: He was very pleased and very pleased with the revival

1252
01:12:50,439 --> 01:12:54,080
Speaker 1: and renaissance of his wonderful Welling and Fund. I felt

1253
01:12:54,080 --> 01:12:57,360
Speaker 1: I had a moral obligation save it. So what about

1254
01:12:57,479 --> 01:13:03,040
Speaker 1: other investors who hasn't influence your thought process, your philosophy,

1255
01:13:03,920 --> 01:13:07,840
Speaker 1: perhaps not your approach to investing, but what other investors

1256
01:13:07,920 --> 01:13:13,120
Speaker 1: have colored your worldview? Well, you certainly start with Benjamin Graham.

1257
01:13:14,360 --> 01:13:18,800
Speaker 1: He's the basically ground zero and the intelligent investor. His

1258
01:13:18,880 --> 01:13:20,960
Speaker 1: book I happened to like the fourth edition, which is

1259
01:13:21,040 --> 01:13:24,120
Speaker 1: much more into into the I think it was nine

1260
01:13:24,400 --> 01:13:28,200
Speaker 1: seventy four, has much more about mutual funds and things

1261
01:13:28,240 --> 01:13:31,320
Speaker 1: of that nature. And he's very clear on that, and

1262
01:13:31,840 --> 01:13:36,720
Speaker 1: so he would certainly be one um Mr Morgan Um

1263
01:13:37,640 --> 01:13:39,720
Speaker 1: Mr Brin had a couple of associates, Joe Welsh, the

1264
01:13:39,760 --> 01:13:42,760
Speaker 1: president of the company, and Andy Young, his lawyer, very quick,

1265
01:13:43,360 --> 01:13:47,000
Speaker 1: quick witted, smart guy, and they all saw something in me.

1266
01:13:47,640 --> 01:13:50,800
Speaker 1: I don't know what it was that gave them confidence

1267
01:13:51,120 --> 01:13:54,000
Speaker 1: that I had the judgment to do the job. And another,

1268
01:13:54,080 --> 01:13:57,040
Speaker 1: interestingly enough, another one of my great mentors was the

1269
01:13:57,080 --> 01:13:58,880
Speaker 1: man who when I came on the investment company is

1270
01:13:58,920 --> 01:14:01,160
Speaker 1: two board of governors. He was the chairman. His name

1271
01:14:01,240 --> 01:14:05,040
Speaker 1: was d. George Sullivan and he was executive vice president

1272
01:14:05,120 --> 01:14:09,840
Speaker 1: of Fidelity. Oh really, and we had a great relationship.

1273
01:14:10,439 --> 01:14:13,760
Speaker 1: That's fascinated And so he would have been you know,

1274
01:14:14,560 --> 01:14:16,599
Speaker 1: if people have confidence in you, they bring out your

1275
01:14:16,640 --> 01:14:20,040
Speaker 1: best and he really did, and Mr Morgan did, and

1276
01:14:20,200 --> 01:14:24,040
Speaker 1: Mr Welsh did, Andy Young did, and so that those

1277
01:14:24,080 --> 01:14:28,200
Speaker 1: would be the big names I think, both as mentors

1278
01:14:28,240 --> 01:14:32,080
Speaker 1: and investors. Let's let's talk about books. You've written your

1279
01:14:32,160 --> 01:14:37,040
Speaker 1: fair share of books. Who's what other authors books being

1280
01:14:37,160 --> 01:14:40,479
Speaker 1: on investing or what have you have you enjoyed? What

1281
01:14:40,640 --> 01:14:43,400
Speaker 1: what books would you recommend to people? Well, I've already

1282
01:14:43,439 --> 01:14:47,519
Speaker 1: mentioned The Intelligent Investor by Graham. Intelligent Investor by Graham.

1283
01:14:48,040 --> 01:14:50,000
Speaker 1: I think Bert Malkiale, who's a friend of ours and

1284
01:14:50,240 --> 01:14:53,160
Speaker 1: friend of mine and former foreign director here for many

1285
01:14:53,360 --> 01:14:56,000
Speaker 1: many years, I know, really the best director we've ever

1286
01:14:56,120 --> 01:14:59,519
Speaker 1: had outside director. His random walked down Wall Street was

1287
01:15:00,000 --> 01:15:05,560
Speaker 1: aided every couple of years is another. UM. David Swinson's

1288
01:15:05,600 --> 01:15:11,559
Speaker 1: book On for the Individual Investor is really superb. Peter

1289
01:15:11,640 --> 01:15:15,760
Speaker 1: Bernstein's Against the Gods just I just read that over

1290
01:15:15,800 --> 01:15:19,160
Speaker 1: the holidays, fantastic book. Well, he was a very gifted man.

1291
01:15:19,200 --> 01:15:21,680
Speaker 1: We were very close Peter and I, and we had

1292
01:15:21,720 --> 01:15:24,760
Speaker 1: our little disagreements here and there, but overall we were

1293
01:15:24,800 --> 01:15:28,479
Speaker 1: on the same team. And then Bill Bernstein Four Pillars

1294
01:15:28,520 --> 01:15:31,639
Speaker 1: of Investment Wisdom is A is A is a wonderful book,

1295
01:15:32,479 --> 01:15:35,599
Speaker 1: and there aren't. It's hard me to go a lot,

1296
01:15:35,720 --> 01:15:37,720
Speaker 1: a lot beyond that, to be honest with you. Well,

1297
01:15:37,760 --> 01:15:40,200
Speaker 1: that's that's a great starting list right there. You can

1298
01:15:40,280 --> 01:15:44,240
Speaker 1: certainly do worse than any of those half dozen books. UM,

1299
01:15:44,640 --> 01:15:48,800
Speaker 1: we've talked a lot about how you've changed the industry

1300
01:15:48,920 --> 01:15:52,560
Speaker 1: since you began way back in in the sixties and seventies.

1301
01:15:53,200 --> 01:15:56,800
Speaker 1: How else has the industry changed that you think is

1302
01:15:56,840 --> 01:15:59,360
Speaker 1: either for the better or for the worst. What what

1303
01:15:59,560 --> 01:16:04,639
Speaker 1: stands out as to how finance has evolved over those

1304
01:16:04,800 --> 01:16:08,000
Speaker 1: those years. I think when I came into this industry,

1305
01:16:10,240 --> 01:16:12,639
Speaker 1: it was a much better industry than it was thereafter,

1306
01:16:13,280 --> 01:16:16,120
Speaker 1: the big part of that change was in the go

1307
01:16:16,280 --> 01:16:18,720
Speaker 1: go era, when we had this idea. We went from

1308
01:16:18,800 --> 01:16:23,559
Speaker 1: investment committees prudent investment committees buying blue chip stocks. Two

1309
01:16:23,640 --> 01:16:30,880
Speaker 1: portfolio managers comments uh and not stars, comments that burn

1310
01:16:30,960 --> 01:16:33,840
Speaker 1: out and their ashes drift gently down to earth. And

1311
01:16:33,960 --> 01:16:37,680
Speaker 1: that's happened to so many, so many comment managers. I mean,

1312
01:16:37,760 --> 01:16:40,160
Speaker 1: you could hardly lose count, you wonder. I mean, the

1313
01:16:40,240 --> 01:16:44,640
Speaker 1: real the real superstars just don't stay there, you know.

1314
01:16:44,680 --> 01:16:46,760
Speaker 1: I always just to wish Bill Miller, well, he beat

1315
01:16:47,080 --> 01:16:49,439
Speaker 1: He's a leg mason. He beat the market, I think

1316
01:16:49,479 --> 01:16:52,160
Speaker 1: sixteen years in a row, and every time I saw him,

1317
01:16:52,520 --> 01:16:55,200
Speaker 1: I'd say good luck, good luck in the future. I

1318
01:16:55,320 --> 01:16:59,080
Speaker 1: liked them. My wishes of good luck didn't do any

1319
01:16:59,200 --> 01:17:03,320
Speaker 1: good at all. He very famously imploded and went from

1320
01:17:03,439 --> 01:17:07,120
Speaker 1: the literally the top performing fund to the bottom one

1321
01:17:07,200 --> 01:17:11,040
Speaker 1: percent following the financial crisis. What had worked for him

1322
01:17:11,120 --> 01:17:14,600
Speaker 1: previously just eventually stopped working, and he got caught in

1323
01:17:14,680 --> 01:17:17,479
Speaker 1: a lot of paper that turned out to be not

1324
01:17:17,640 --> 01:17:19,880
Speaker 1: worth what he thought it was well in an earlier area.

1325
01:17:19,960 --> 01:17:25,320
Speaker 1: Remember Gerald CSI ran Fideliti Capital Fund and he had

1326
01:17:25,400 --> 01:17:27,240
Speaker 1: the best record in the business. He goes out and

1327
01:17:27,280 --> 01:17:31,360
Speaker 1: starts his own fund and Manhattan Fund gets a huge underwriting.

1328
01:17:31,400 --> 01:17:33,200
Speaker 1: It was four a million dollars. Nobody ever seen anything

1329
01:17:33,280 --> 01:17:35,880
Speaker 1: like that in this business, that to the old days.

1330
01:17:36,520 --> 01:17:39,599
Speaker 1: And it had after ten years of operation, the worst

1331
01:17:40,080 --> 01:17:43,920
Speaker 1: record in the mutual fund industry. And you know, I

1332
01:17:44,080 --> 01:17:47,519
Speaker 1: tell people, when you think about the nature of securities markets,

1333
01:17:47,920 --> 01:17:50,720
Speaker 1: its gifts as difficult to be last as it is

1334
01:17:50,800 --> 01:17:54,879
Speaker 1: to be first. What was his name about that? That's amazing?

1335
01:17:54,960 --> 01:17:57,120
Speaker 1: What was his name again? Gerald Side t s A

1336
01:17:57,240 --> 01:18:00,640
Speaker 1: I T S A great um. So some of my

1337
01:18:01,240 --> 01:18:06,840
Speaker 1: my last few questions. You've mentioned a lot of things

1338
01:18:06,920 --> 01:18:09,639
Speaker 1: have changed since nineteen fifty one. What do you see

1339
01:18:09,680 --> 01:18:13,439
Speaker 1: as changing in the future. I guess I'd say, not

1340
01:18:13,640 --> 01:18:16,760
Speaker 1: to beat the phrase to death, reversion to the mean.

1341
01:18:16,880 --> 01:18:20,040
Speaker 1: I see the industry going back to its roots. Uh,

1342
01:18:20,400 --> 01:18:22,840
Speaker 1: much more of a fiduciary focus, I hope. So I'm

1343
01:18:22,960 --> 01:18:25,880
Speaker 1: very much in favor of the fiduciary rule. Although someone

1344
01:18:25,880 --> 01:18:27,840
Speaker 1: else is gonna have to work out the details. It

1345
01:18:27,840 --> 01:18:30,920
Speaker 1: seemed to make it difficult to operate and uh, but

1346
01:18:31,320 --> 01:18:34,000
Speaker 1: it shouldn't make it difficult to operate because all you

1347
01:18:34,120 --> 01:18:37,400
Speaker 1: have to do is ask yourself as an advisor, one question, Hey,

1348
01:18:37,520 --> 01:18:39,400
Speaker 1: is this in the client's best interest? And if the

1349
01:18:39,439 --> 01:18:42,960
Speaker 1: answer is no, you can't do it. It's much simpler

1350
01:18:43,439 --> 01:18:47,600
Speaker 1: than the complicated suitability rules which have all sorts of

1351
01:18:48,439 --> 01:18:51,639
Speaker 1: ifs and thens and clauses best interests of the client.

1352
01:18:51,800 --> 01:18:54,360
Speaker 1: Yes you can do it, No you can't. What could

1353
01:18:54,400 --> 01:18:56,559
Speaker 1: be What could be easier? When you unfortunately need kind

1354
01:18:56,600 --> 01:18:59,080
Speaker 1: of documentation how you're doing things and all that. It

1355
01:18:59,240 --> 01:19:02,400
Speaker 1: is a little borious because we have to have you know,

1356
01:19:02,479 --> 01:19:05,280
Speaker 1: a lot of lawyers work on this, and you and

1357
01:19:05,400 --> 01:19:08,040
Speaker 1: I have the spirit of fiduciary duty and they've got

1358
01:19:08,120 --> 01:19:09,960
Speaker 1: to get to the letter of it. And it's it's

1359
01:19:10,000 --> 01:19:12,559
Speaker 1: more complex than it ought to be, but it's coming.

1360
01:19:13,240 --> 01:19:15,760
Speaker 1: And you know, with so many funds being flashes in

1361
01:19:15,840 --> 01:19:20,920
Speaker 1: the pan, investors are going to learn by their own experience.

1362
01:19:21,560 --> 01:19:23,200
Speaker 1: You know, I was told this was a great fund,

1363
01:19:23,640 --> 01:19:25,880
Speaker 1: and it was a great fund for two days and

1364
01:19:26,000 --> 01:19:29,200
Speaker 1: that was the end of it. Uh. And we overestimate

1365
01:19:29,240 --> 01:19:32,479
Speaker 1: our own ability to pick funds and stocks. We over

1366
01:19:32,600 --> 01:19:36,440
Speaker 1: overestimate the ability of our managers to do better consistently,

1367
01:19:36,880 --> 01:19:39,280
Speaker 1: and if people just got the idea of reversion of

1368
01:19:39,280 --> 01:19:41,680
Speaker 1: the mean again and again and again. You know the

1369
01:19:42,160 --> 01:19:44,040
Speaker 1: we were looking at some data the other day, Barry,

1370
01:19:44,680 --> 01:19:48,040
Speaker 1: and if you're in the top quartile for a given

1371
01:19:48,120 --> 01:19:51,599
Speaker 1: five year period, only fifteen percent of you are going

1372
01:19:51,640 --> 01:19:54,040
Speaker 1: to be in the top quartile in the next five

1373
01:19:54,120 --> 01:19:58,320
Speaker 1: year period. And if you're in the bottom quartile of

1374
01:19:58,400 --> 01:20:00,679
Speaker 1: you will be in the top quartile the next period.

1375
01:20:01,360 --> 01:20:04,360
Speaker 1: And over time, that sort of returns don't help help anybody.

1376
01:20:04,360 --> 01:20:07,160
Speaker 1: I think was Howard Marks who said, if you're consistently

1377
01:20:07,240 --> 01:20:10,240
Speaker 1: in the top over time, that puts you in the

1378
01:20:10,320 --> 01:20:12,840
Speaker 1: top ten percent. But you have to be consistent. You

1379
01:20:12,960 --> 01:20:17,160
Speaker 1: can't be a shooting star, outperforming, under performing, out performing

1380
01:20:17,240 --> 01:20:20,040
Speaker 1: under performing. You have to be uh top forty. But

1381
01:20:20,120 --> 01:20:24,879
Speaker 1: he runs a distress bond funds not not necessarily a stick.

1382
01:20:25,160 --> 01:20:26,720
Speaker 1: Let me let me add this, if my name, what

1383
01:20:26,880 --> 01:20:29,960
Speaker 1: is the objective of the individual investor. It's to have

1384
01:20:30,080 --> 01:20:34,680
Speaker 1: a lifetime of investing. Investing for a lifetime. And for

1385
01:20:34,800 --> 01:20:37,360
Speaker 1: a young investor, believe it or not, twenty five year

1386
01:20:37,400 --> 01:20:41,280
Speaker 1: old investor has a seventy year life expectancy, seventy years,

1387
01:20:41,280 --> 01:20:44,120
Speaker 1: they're gonna be nine, probably be a hundred. So what's

1388
01:20:44,120 --> 01:20:46,840
Speaker 1: the best way to invest for seventy years. If a

1389
01:20:46,920 --> 01:20:50,479
Speaker 1: mutual fund manager lasts for seven years, that's the average,

1390
01:20:50,880 --> 01:20:53,800
Speaker 1: You're gonna have ten of them. The average fund goes

1391
01:20:53,800 --> 01:21:00,240
Speaker 1: out of business every um, every decade, every decade. Excuse me, really,

1392
01:21:00,280 --> 01:21:02,720
Speaker 1: it's that high. That's amazing. And then the new the

1393
01:21:02,760 --> 01:21:06,120
Speaker 1: new guy comes in and sweeps clean. Managers get fired.

1394
01:21:06,640 --> 01:21:10,679
Speaker 1: There is no way, none, zero, that if you own

1395
01:21:10,800 --> 01:21:13,560
Speaker 1: three or four mutual funds, which is typical, there is

1396
01:21:13,680 --> 01:21:16,360
Speaker 1: no way that over seventy years you have even a

1397
01:21:16,479 --> 01:21:19,640
Speaker 1: fighting chance to beat the market. And if you do

1398
01:21:19,760 --> 01:21:22,680
Speaker 1: the index fund, I guarantee you that you will have

1399
01:21:22,760 --> 01:21:26,120
Speaker 1: the same non manager seventy years from now as the

1400
01:21:26,200 --> 01:21:29,320
Speaker 1: non manager you have today. So that raises a really

1401
01:21:29,400 --> 01:21:33,800
Speaker 1: interesting question, which happens to be coincidentally one of my

1402
01:21:33,960 --> 01:21:37,320
Speaker 1: last two questions. What advice would you give to a

1403
01:21:37,439 --> 01:21:42,679
Speaker 1: millennial or a kid just graduating college today beginning their career.

1404
01:21:42,800 --> 01:21:44,800
Speaker 1: What would you tell them about what they should do

1405
01:21:44,880 --> 01:21:49,120
Speaker 1: with their career and what would you tell them about investing? Well,

1406
01:21:49,200 --> 01:21:51,080
Speaker 1: people have to find their own way in this life,

1407
01:21:51,200 --> 01:21:53,839
Speaker 1: and I've I've talked to a number of groups at Princeton,

1408
01:21:54,760 --> 01:21:58,559
Speaker 1: one on religion and business and one on ethics and business,

1409
01:21:58,600 --> 01:22:01,160
Speaker 1: two separate groups. And one is a small seminar and

1410
01:22:01,200 --> 01:22:03,400
Speaker 1: one of a large lecture course. And I get that

1411
01:22:03,520 --> 01:22:06,280
Speaker 1: kind of lecture. Should I not go into the financial business?

1412
01:22:06,640 --> 01:22:09,479
Speaker 1: And I say no, go into the financial business and

1413
01:22:09,560 --> 01:22:12,040
Speaker 1: make it better than it is today. You know, I don't.

1414
01:22:12,280 --> 01:22:14,360
Speaker 1: People have to find their own way in this life.

1415
01:22:14,479 --> 01:22:16,960
Speaker 1: I had to find my own way, Barry, you have

1416
01:22:17,080 --> 01:22:20,040
Speaker 1: defined your own way, a lot of bumps along the way.

1417
01:22:20,720 --> 01:22:23,000
Speaker 1: You gotta have a little resilience. You've got to be

1418
01:22:23,040 --> 01:22:25,680
Speaker 1: able to take defeat and turn into victory. I think

1419
01:22:25,720 --> 01:22:29,680
Speaker 1: that's what I've done, maybe a little bit. And and

1420
01:22:31,080 --> 01:22:35,160
Speaker 1: so it's this, This field is going to shrink hugely.

1421
01:22:35,680 --> 01:22:38,160
Speaker 1: There's no question about that. It already has just since

1422
01:22:38,280 --> 01:22:41,240
Speaker 1: oh nine, no doubt about it. The combination of technology

1423
01:22:41,920 --> 01:22:46,040
Speaker 1: and the knowledge and the spread of this disease called

1424
01:22:46,080 --> 01:22:50,439
Speaker 1: indexing is not going to go away. It's habit forming,

1425
01:22:50,520 --> 01:22:55,280
Speaker 1: it's catching, it's contagious, it's spreading. And and my final question,

1426
01:22:55,360 --> 01:22:58,080
Speaker 1: and I'm I'm I feel awful that it's a ninety

1427
01:22:58,120 --> 01:23:00,720
Speaker 1: minutes is already up I'd like to continue you going

1428
01:23:00,800 --> 01:23:03,720
Speaker 1: for another ninety minutes. What is it that you know

1429
01:23:03,840 --> 01:23:07,439
Speaker 1: about investing today that you wish you knew when you

1430
01:23:07,600 --> 01:23:11,880
Speaker 1: started in nineteen fifty one. Well, I'd say quite a bit.

1431
01:23:12,000 --> 01:23:13,800
Speaker 1: I mean, I I was on the Welling and Fund

1432
01:23:13,840 --> 01:23:16,439
Speaker 1: Investment Committee, and I saw how what hard it was

1433
01:23:16,520 --> 01:23:18,400
Speaker 1: to beat the market. I wouldn't have told you that

1434
01:23:18,560 --> 01:23:21,960
Speaker 1: back in n and I worked for a long time

1435
01:23:22,000 --> 01:23:24,639
Speaker 1: with John Neff, who had many, many years of success

1436
01:23:25,240 --> 01:23:28,200
Speaker 1: in beating the market. But he's an exception, and even

1437
01:23:28,360 --> 01:23:31,760
Speaker 1: his record and in later years deteriorated. But then he mean,

1438
01:23:31,800 --> 01:23:34,280
Speaker 1: he hadn't gonna. He's not running wins. Your funny ran

1439
01:23:34,360 --> 01:23:36,439
Speaker 1: it for thirty years, I think, But he's not gonna.

1440
01:23:36,439 --> 01:23:39,320
Speaker 1: He's not running it anymore. So managers come and go.

1441
01:23:40,160 --> 01:23:44,439
Speaker 1: So I'd say things like the power of compounding, the

1442
01:23:44,520 --> 01:23:50,240
Speaker 1: beauty of keeping costs low, uh, the need to ignore

1443
01:23:50,320 --> 01:23:54,920
Speaker 1: the market, they need to do something. Are all things

1444
01:23:54,960 --> 01:23:58,160
Speaker 1: that have and and the difficulty. This is a very

1445
01:23:58,439 --> 01:24:02,080
Speaker 1: very hard business, this business investment management. And then in

1446
01:24:02,160 --> 01:24:04,960
Speaker 1: the long run, we're all average, we're below our averages

1447
01:24:05,040 --> 01:24:09,479
Speaker 1: my thesis suggested, below the market averages. And so I

1448
01:24:09,560 --> 01:24:12,880
Speaker 1: don't think it's easy, don't think you're smarter than anybody else.

1449
01:24:13,560 --> 01:24:17,320
Speaker 1: Just get in the middle, get costs out, and don't

1450
01:24:17,400 --> 01:24:23,640
Speaker 1: peek John Boggle, this has been a fascinating conversation. I

1451
01:24:23,840 --> 01:24:26,720
Speaker 1: again thank you so much for being so generous with

1452
01:24:26,920 --> 01:24:30,479
Speaker 1: your time. If you enjoy this conversation, you could look

1453
01:24:30,560 --> 01:24:33,320
Speaker 1: up an Inch or down an Inch on Apple iTunes

1454
01:24:33,360 --> 01:24:36,200
Speaker 1: and see the other eighty or so of these that

1455
01:24:36,320 --> 01:24:40,360
Speaker 1: we've had. UH. Be sure and check out uh all

1456
01:24:40,400 --> 01:24:43,520
Speaker 1: the rest of our our chats. They are really quite fascinating.

1457
01:24:43,920 --> 01:24:46,960
Speaker 1: I have to thank Mike bat Nick, my head of research,

1458
01:24:47,360 --> 01:24:50,839
Speaker 1: for helping to put together all these questions, my producer

1459
01:24:51,000 --> 01:24:54,800
Speaker 1: and engineer Charlie Vollmer for dragging himself out of bed

1460
01:24:54,880 --> 01:24:57,519
Speaker 1: at an undoddly hour in the morning to drive here

1461
01:24:58,120 --> 01:25:02,479
Speaker 1: to Malvern, Pennsylvania to in guard UH mother ship. Jack.

1462
01:25:02,560 --> 01:25:05,280
Speaker 1: Thank you again so much. This has been absolutely fascinating.

1463
01:25:05,640 --> 01:25:08,960
Speaker 1: Great to be wayy to marry. Good luck. M