Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: I know I say this every week that I have
Speaker 1: a very special guest, but this week I really have
Speaker 1: an extra very special guest. His name is Jack Bogel
Speaker 1: and he is the founder of the Vanguard Group and
Speaker 1: the inventor of the Index Fund. Did I oversell that
Speaker 1: this is a special guest or not? Um, let me
Speaker 1: tell you a little bit about how this date came
Speaker 1: about and what made this so interesting and weird and unusual. First,
Speaker 1: I'm in chasing Jack Bogel for literally years, and he
Speaker 1: doesn't travel much. He's a home body. He lives near
Speaker 1: the Vanguard headquarters. He's not much for coming into Manhattan
Speaker 1: and and recording something like this. Uh. But we did
Speaker 1: the interview with Chairman of Vanguard, Jack Brennan about a
Speaker 1: year and until almost two years ago, and that went
Speaker 1: really well. And then last year we did just about
Speaker 1: a year ago, we did the interview with Bill McNabb,
Speaker 1: he's the current CEO of Vanguard Group. And I started
Speaker 1: poking and prodding and asking, Hey, when can I sit
Speaker 1: down with Jack? When can I sit down with Jack?
Speaker 1: And finally I just said we're willing to come to
Speaker 1: Pennsylvania and meet with you guys, And they said, oh,
Speaker 1: if that's the case, come on down. So you'll hear
Speaker 1: when we sit and talk with Jack. This was not
Speaker 1: the usual interview, partly because he's just a force of nature.
Speaker 1: And you know, I try and balance between guiding the
Speaker 1: conversation to the specific questions we have and and keeping
Speaker 1: us on track to cover a variety of topics and subjects.
Speaker 1: And you could pretty much tell when I give up
Speaker 1: about three or four questions in and just say, Jack
Speaker 1: Bogel is a force of nature. I'm just gonna have
Speaker 1: a conversation with him and let it go. A little
Speaker 1: background on on the day. This was a couple of
Speaker 1: thursdays ago, and we basically left the New York area
Speaker 1: ungodly early, I want to say about four thirty quarter
Speaker 1: to five, drove down to Pennsylvania. Actually we left so
Speaker 1: early we beat all the traffic, not only around New York,
Speaker 1: we got there before the pen the traffic from Philadelphia.
Speaker 1: Um so, I had my first cracker barrel experience, having
Speaker 1: having a breakfast at a cracker barrel, which apparently is
Speaker 1: very common outside of downstate New York. It was quite delicious.
Speaker 1: We get to the Vanguard campus about an hour early,
Speaker 1: spend some time in their galley. Get at Vanguard, it's
Speaker 1: it's the staff for crew. The cafeteria is a galley,
Speaker 1: it's got all these these nautical themes. And we're finally
Speaker 1: showed into a small conference room off of Jack's office.
Speaker 1: And he's you'll hear during the interview, he's eighty six
Speaker 1: years old. He is sharp as attack, smart as a whip.
Speaker 1: His voice is still very strong, very powerful. And any
Speaker 1: pretense I had of following a script and trying to
Speaker 1: ask specific questions pretty much went out the window. Uh
Speaker 1: So you'll hear me wrestling in the beginning some of
Speaker 1: the questions. You'll hear me trying to keep him on
Speaker 1: our original script. And and I, you know, ten minutes
Speaker 1: into this conversation, it's pretty clear, Hey, this is a
Speaker 1: bucking bronco, just just trying not to get kicked in
Speaker 1: the head. Keep feeding him questions based on wherever he goes,
Speaker 1: Just follow him and take it to where it goes.
Speaker 1: And all told, I thought this was really a fascinating conversation.
Speaker 1: He sat with us for ninety minutes. He was supposed
Speaker 1: to go to lunch with someone else. I'm pointing to
Speaker 1: my watch. He's waving me off like I'm telling him
Speaker 1: not to steal home, and he's coming in. He doesn't care,
Speaker 1: and so it ran a little long by the time
Speaker 1: we back out. Some of the other stuff you'll hear.
Speaker 1: This is a substantive, lengthy conversation. If you are at
Speaker 1: all a Vanguard fan, a Bogel head, an Index fan,
Speaker 1: you're going to have a field day with this. I
Speaker 1: had to set this up because really it was such
Speaker 1: an exciting experience for me to spend ninety minutes with
Speaker 1: the man, the legend. Here it is my conversation with
Speaker 1: the one the Only Jack Bogel. This is Masters in
Speaker 1: Business with Barry Ridholts on Bloomberg Radio. I know I
Speaker 1: say this every week that I have a special guest,
Speaker 1: but this week I have a super special guest, the
Speaker 1: one the Only Jack Bogel, founder and Chairman emeritus of
Speaker 1: the Vanguard Group, essentially the creator of the world world's
Speaker 1: first index mutual fund for individuals in nineteen seventy five.
Speaker 1: I could read your CV which will essentially take up
Speaker 1: the entire show. There's so much stuff to to talk
Speaker 1: about with you. You are a legend in the industry
Speaker 1: and maybe the person who has had the single biggest
Speaker 1: impact on investing of anyone. But let's just start from
Speaker 1: that beginning undergraduate thesis. You're in college in Princeton in
Speaker 1: nineteen fifty nineteen fifty one, and you're thinking about why
Speaker 1: do actively managed funds, why do so many of them
Speaker 1: underperform the market? How did that come about for a
Speaker 1: college to well? Came about by a great accident, and
Speaker 1: that is I was majoring in economics. I was looking
Speaker 1: for a subject for my senior thesis, which is a
Speaker 1: requirement still at Princeton, sixtensive, extensive document. Mine turned not
Speaker 1: to be maybe a hundred and thirty five forty pages,
Speaker 1: and I didn't know what to write about. But I
Speaker 1: wanted to write about something that no one had ever
Speaker 1: written about before. And they're in December ninety nine, I
Speaker 1: was reading Fortune magazine, which I did as part of
Speaker 1: my economics background, just voluntarily, and there was an article
Speaker 1: called Big Money in Boston and it was about the
Speaker 1: mutual fund industry. I described this tiny industry, uh maybe
Speaker 1: two and a half billion dollars for the industry as
Speaker 1: tiny but contentious, and I said, well, you know, I'm
Speaker 1: kind of tiny and I'm kind of contentious, so I'll
Speaker 1: write about it. And I wrote the thesis enabled me
Speaker 1: to graduate with high honors from Princeton. Very pretty good job.
Speaker 1: Not a great thesis, but not bad for somebody a
Speaker 1: year out of his teens. Let me let me push
Speaker 1: back at you and say, that was an incredibly insightful thesis.
Speaker 1: The insight that you derived at a very young ages
Speaker 1: the cost of all this active management. They were unable
Speaker 1: to overcome that bogey even to today. What should really
Speaker 1: be so obvious to everybody. Lots of folks still haven't
Speaker 1: seemed to figure that out. So what makes me stop
Speaker 1: and pause and and ask you this question, how did
Speaker 1: you ever come to that conclusion at such a young
Speaker 1: age without the universe of information we have available to
Speaker 1: us today. Well, to begin with, the thesis title was
Speaker 1: the economic role of the investment company, and the overall
Speaker 1: of the overriding and focus of that thesis was mutual
Speaker 1: funds are there to serve investors. Put the investors first.
Speaker 1: And I talked about reducing sales loads, reducing management fees,
Speaker 1: and focusing on investing and non marketing things of that nature,
Speaker 1: and that's what the industry in my in my formula
Speaker 1: and would have to do to reach its great potential.
Speaker 1: And I did not actually, to be very clear on this,
Speaker 1: I did not assemble any data. But I looked at
Speaker 1: about team leading mutual funds and look at their records,
Speaker 1: and without adding and dividing and getting averages, it was
Speaker 1: very clear that very few of them, if any at
Speaker 1: that time, could could outperform the SMP five index. So
Speaker 1: it was basically anecdotal. Although this industry in those days
Speaker 1: it was very much a commodity in a way kind
Speaker 1: of commodity. The major funds of those days we're just
Speaker 1: basic basically buying long lists of blue chip stocks. You
Speaker 1: could call them Dow Jones industrial average funds or later,
Speaker 1: because the SMP wasn't very enough well known then you
Speaker 1: could call them standard and poorst kind of funds. They
Speaker 1: were down the middle. They had fluctuations, very similar volatility,
Speaker 1: very similar to the index. So even back in the
Speaker 1: late forties early fifties, mutual funds were closet indexers. Sure, absolutely, huh,
Speaker 1: that's quite that's quite fascinating. So let's fast forward a
Speaker 1: little bit. So now you working as chairman of Wellington's
Speaker 1: management company. And long story short, you said the most
Speaker 1: unwise decision of your career. You do a merger doesn't
Speaker 1: work out and they end up um breaking it down
Speaker 1: from from uh lieutenant to private so to speak, and
Speaker 1: not less than private, less than private. And you wanted
Speaker 1: to run a fund and they said, well, you know,
Speaker 1: because of this M and A, we don't want you
Speaker 1: running an active fund. If you want to put together
Speaker 1: how did how did the index come out of that?
Speaker 1: That job change? Okay, well, let me say my first
Speaker 1: job and I was thirty five years old and Mr Morgan,
Speaker 1: the founder of Walter L. Morgan, the founder of Wellingcoln,
Speaker 1: called me into his office. Wellington was in trouble. Wellingcoln
Speaker 1: Fund was in trouble, its performance was slipping, and Wellington
Speaker 1: Management Company was in trouble because we were basically a
Speaker 1: one product if you will company up conservative balanced fund.
Speaker 1: We were, for the want of a better metaphor, the
Speaker 1: bagel of the mutual fund industry, the the hard, not sweet,
Speaker 1: um nutritious safe choice in the biggest balance fund in
Speaker 1: the industry, and people stopped buying bagels and started buying
Speaker 1: if you will donuts. We came into the go go era.
Speaker 1: So all these fancy growth funds I powered buying stocks
Speaker 1: that had no investment, no intrinsic investment merit at all.
Speaker 1: This is the mid to late sixties, the nifty fifty
Speaker 1: and that sort of just the go go era and
Speaker 1: the go goes came and the go goes win. But
Speaker 1: if you're in the bagel business and nobody is buying bagels,
Speaker 1: and the balance fund share of industry sales actually dropped
Speaker 1: to one percent, and so I had to do something,
Speaker 1: and Mr Morgan told me to do it, and I
Speaker 1: talked to a couple of firms about merging, and then
Speaker 1: I came across this firm in Boston and it had
Speaker 1: a fund called I Vest Fund, one of the go
Speaker 1: go funds that a They had some apparently bright young
Speaker 1: managers that I had kind of common cause with, and
Speaker 1: they had a pension business. So we got the new
Speaker 1: managers that would save Wellington Fund. We got the go
Speaker 1: go fund that we needed to stay in business, and
Speaker 1: we got into a new business that we thought we
Speaker 1: could be very successful. It was from words of one syllable,
Speaker 1: two syllables, brit I'm Barry Riholts, You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My extra special guest today
Speaker 1: is Jack Bogel. He is the founder of Vanguard Group
Speaker 1: and essentially the inventor of the index funds. Jack, we
Speaker 1: were speaking earlier about how a crisis at Wellington, which
Speaker 1: was the predecessor you worked at to the Vanguard Group,
Speaker 1: actually led to the creation of the Vanguard Group. Tell
Speaker 1: us how that came about. Okay, Well, let's start with
Speaker 1: the fact that in doing this merger, which I was
Speaker 1: eager to do, I gave up too many votes in
Speaker 1: the company and so when everything fell apart, the market
Speaker 1: went down. Uh, and so on. Right at the market
Speaker 1: was going down in seventy four, it would be to
Speaker 1: climb the happy partners um fragmented and there were four
Speaker 1: of them, and there was one of me, and they
Speaker 1: had packed the board of directors. I was I was
Speaker 1: never very political, and they fired me. The guys that
Speaker 1: had caused this catastrophe, fired the one that was trying
Speaker 1: to avoid it. And so I was out of a job.
Speaker 1: So what could I do. I could go try and
Speaker 1: find work for another firm. I had a young family
Speaker 1: living here. I didn't want to move. I was very
Speaker 1: angry about what happened, of course, but you know what
Speaker 1: is is. And so I decided my best chance was
Speaker 1: to talk to the directors of the Wellington Fund, this
Speaker 1: fund so badly heard the ash the diamond and arn't crown,
Speaker 1: and say, look, the management company has fired me, but you,
Speaker 1: you're a slightly different group, can keep me. And we'll
Speaker 1: tell the management company what to do. We will be
Speaker 1: in charge of the administration of the fund, ending necessary
Speaker 1: to make it work, and we'll be in charge of
Speaker 1: praising the advisor and taking whatever steps we want. Will
Speaker 1: be independent of the advisor. And uh I wanted to
Speaker 1: take over distribution too, but the directors wouldn't go along
Speaker 1: with that. So we became a little administrative company. And
Speaker 1: uh I wanted to glamorous name. So I found the
Speaker 1: name Vanguard. When I first learned about We go from Wellington,
Speaker 1: the the the land battles of the Napoleonic Wars, the
Speaker 1: Duke of Wellington, the naval battles of the Napoleonic War,
Speaker 1: and there's Lord Nelson at the Battle of the Nile,
Speaker 1: one of the most complete, the most complete naval victory
Speaker 1: in history to this day. Uh and Uh, he writes
Speaker 1: to this dispatch that I see from the deck of HMS.
Speaker 1: Vanguard his flagship, and that sounds like a great name
Speaker 1: for a for a company, perfect perfect from Wellington Funds.
Speaker 1: How did you actually form the Vanguard Group. Well, the
Speaker 1: idea was that the funds would create a new company
Speaker 1: that they owned, they would capitalize. Capitalization was very small
Speaker 1: and I'm gonna guess maybe two hundred and fifty thousand dollars.
Speaker 1: This is a very small company at that point. Actually,
Speaker 1: the total assets of the funds were down and around
Speaker 1: one point five billion. So we capitalized the fund and
Speaker 1: and Welling and Management Company had to take it because
Speaker 1: the directors of the funds were in charge of the
Speaker 1: contracts with Welling and So you really backed George your
Speaker 1: way back into the company after they had fired you
Speaker 1: as chairman. Well, yes, I think that's a fair statement.
Speaker 1: But techno, from a technical standpoint, I'd been the chairman
Speaker 1: of the Welling and Fund all along Gotch so I
Speaker 1: have the same old continuity that I had going back
Speaker 1: to nineteen just post merger. They this was a bactor.
Speaker 1: So how do you go from that to the Vanguard Group. Well,
Speaker 1: we put a name in the company because we had,
Speaker 1: I think get than those days, maybe a dozen funds,
Speaker 1: and we didn't want a dozen separate companies to manage.
Speaker 1: So we had to have a core or central company
Speaker 1: and UH that would pool resources of all the funds
Speaker 1: and provide all the services. And we had allocation methods
Speaker 1: between the funds. And it was all good until we
Speaker 1: decided to take over distribution, which was our Let me,
Speaker 1: I'm a little bit ahead of myself. Let me let
Speaker 1: me go back and say to the first thing. We
Speaker 1: were not allowed to go into the business of investment management,
Speaker 1: that was theirs. We were not allowed to go into
Speaker 1: the business that was there as being willing that was there.
Speaker 1: The active side you couldn't do and we couldn't. We
Speaker 1: couldn't go into management. We didn't distinguish between active and
Speaker 1: passive and those days not In those days, there weren't
Speaker 1: an index, right, So so if you couldn't go into management,
Speaker 1: how are you able to set up the Vanguard five hundred?
Speaker 1: Wouldn't be patient? Okay? So um, we were not allowed
Speaker 1: to go into this retribution because that was welling consfunction too.
Speaker 1: So we had this little administrative company looking over however,
Speaker 1: had the legal responsibility and the board responsibility to look
Speaker 1: over the advisor and distributor. So we were in charge.
Speaker 1: And so my first I knew a company that was
Speaker 1: an administrative company was not going to be anything for me.
Speaker 1: I mean, I like the administration. I know how well
Speaker 1: it has to be done, shareholder record keeping and all that,
Speaker 1: but that's just not the kind of challenge I was
Speaker 1: looking for. And any company that's going to succeed, it's
Speaker 1: going to have to control the kind of funds he
Speaker 1: wants to they want to run, the kind of distribution
Speaker 1: they want to have, who will buy the funds, who
Speaker 1: will sell them, things of that nature. So we have
Speaker 1: a company that's just in this little administrative box, and
Speaker 1: I'm thinking, let's do something. So at the very first
Speaker 1: board meeting of the new company, after we got an
Speaker 1: organized I say we gotta started index fund. And the
Speaker 1: directors say you're not allowed to get new investment management.
Speaker 1: And I say, this fund isn't man aged, and believe
Speaker 1: it or not, they bought it. So in other words,
Speaker 1: you describe the index fund as just, hey, it's the
Speaker 1: five largest companies in America. There's no manager, nobody's in charge.
Speaker 1: It's just it's an unmanaged broad index, and they said, oh,
Speaker 1: go do that. They said, well, I won't say was
Speaker 1: that easy, but that was the final decision. I get
Speaker 1: the sense from from what you've described that they would
Speaker 1: kind of let's let's let Jack go do that. He'll
Speaker 1: be out of our hair. It'll keep them busy and fine,
Speaker 1: won't cause anybody trouble. I think you're pretty much on
Speaker 1: the mark. This week on Masters in Business on Bloomberg Radio,
Speaker 1: I have an extra special guest. His name is Jack Bogel.
Speaker 1: He is the founder of the Vanguard Group, the inventor
Speaker 1: of the index funds, and author of far too many
Speaker 1: books to mention. I've been speaking with Jack here in
Speaker 1: the headquarters of of Vanguard and just outside the conference
Speaker 1: and we were sitting on the wall is a frames
Speaker 1: prints and on that print it says stamp out index funds. Jack,
Speaker 1: What on earth does that mean? That means Wall Street
Speaker 1: couldn't make any money out of index funds, and so
Speaker 1: Wall Street didn't like it. We had an initial initial
Speaker 1: public offering. I went all over New York so many
Speaker 1: times to try and find underwriters and finally got the
Speaker 1: four largest retail underwriters, pH Dan Winter Reynolds. Uh forget
Speaker 1: who the other one was Reynolds. Okay, they were the
Speaker 1: biggest guys in the business, and they said, we can
Speaker 1: do a hundred and fifty million dollars with this great
Speaker 1: new idea. They did eleven million dollars, so so less
Speaker 1: than ten. And they came in to see me when
Speaker 1: the underwriting was over and said, you know, I said
Speaker 1: to them, look, we can't even buy around lots of
Speaker 1: five And they said, well, why don't we just give
Speaker 1: everybody their money back and pull it? And I said,
Speaker 1: are you kidding me? We have the world's first index fund.
Speaker 1: And it's the world's first index fund. Period. You have
Speaker 1: to say, retail a lot of institutional hold at the beginning.
Speaker 1: It's the world's first index mutual fund, no question about that.
Speaker 1: And amazing and so it got nowhere, It went nowhere fast,
Speaker 1: eleven million dollar launched. What year was that that was in, right,
Speaker 1: eleven million dollars and everybody laughed and nobody thought there
Speaker 1: was any future to index funds. That's exactly right. That
Speaker 1: that's just astonishing. Well, you had incredible foresight to say,
Speaker 1: and it makes sense that the four largest retail shops
Speaker 1: would want to participate in this because this is a simple,
Speaker 1: easy way for their retail client to get exposure to
Speaker 1: the market, fast, easy, relatively inexpensive. It should have except
Speaker 1: that when the client buys this fund, it's to be
Speaker 1: held forever. They don't trade it, and the fund doesn't
Speaker 1: do any trading. There's no brokerage business generated by the
Speaker 1: fun So this was not a happy moment for Wall Street,
Speaker 1: and they looked at it, I think as a some
Speaker 1: kind of the beginning of a of a communicable disease,
Speaker 1: and it had to it had to be stamped out.
Speaker 1: The Center for Disease Control had to come in and
Speaker 1: did they really perceive you as a threat or did
Speaker 1: they kind of laugh it off? And yeah, yeah, best
Speaker 1: of luck with that, Jack. Yeah, I'd say pretty much
Speaker 1: that way. Although we did a couple of years ago
Speaker 1: for one of the funds anniversaries. We all got together,
Speaker 1: but the underwriters, all four underwriters, and all four underwriters
Speaker 1: and their lawyers and our lawyer lawyer singular. We only
Speaker 1: had one on those days. And they're all good people,
Speaker 1: you know, I don't uh. Then we all do our
Speaker 1: best in this life in very different ways of work.
Speaker 1: So it worked out well. It had to start, and
Speaker 1: it did start. So here's the question that I could
Speaker 1: ask you. Forty plus years later, Vanguard is now running
Speaker 1: three point something trillion dollars. Four trillion is not that
Speaker 1: far off in the distance, an enormous success, one of
Speaker 1: the single largest asset managers in the world. How come
Speaker 1: nobody ever said, hey, those guys are onto something, we
Speaker 1: should be a competitor to them. How did how did
Speaker 1: that never come up anywhere along the lines? Well, the
Speaker 1: answer is so simple. Index funds have a real problem.
Speaker 1: All the damn money goes to the investors, right, Managers
Speaker 1: can't take anything they're not managing well, but you're taking
Speaker 1: ten or fifteen basis points and on trillions of dollars,
Speaker 1: that's not nothing. Well, nobody expected to get the trillions
Speaker 1: of dollars, believe me, not an eleven million. But but okay,
Speaker 1: in seventy four or seventy six, it's eleven million. But
Speaker 1: by the time you get to the mid ninety nineties,
Speaker 1: you're hundreds of billions of dollars, and then I think
Speaker 1: you hit a trillion? Was it late nineties? So even
Speaker 1: didn't anybody say, hey, those guys in Pennsylvania they have
Speaker 1: a trillion dollars, Why don't we do what they're doing. Well,
Speaker 1: it's a p it's a problem. And then eventually the
Speaker 1: big guys had to Fidelity had to have They were
Speaker 1: dragged kicking and screaming in indexing and they have to
Speaker 1: be competitive on price. They can still make all the
Speaker 1: money they want, and it's an awful lot on the
Speaker 1: actively managed funds. So it's kind of a lost leader
Speaker 1: for Fidelity. And what about others Black Rock and American
Speaker 1: Century and all these other entities swab offers and index.
Speaker 1: It seems everybody offers some version of uh, the SMPI index. Yeah. Well,
Speaker 1: t ro Price is a good example. They have a
Speaker 1: hidden index fund. They don't talk much about it. It's
Speaker 1: kind of expensive. Basis points relatives are five and it's
Speaker 1: a kind of a sideball thing so they can get
Speaker 1: into the retirement market. This has become a marketing business,
Speaker 1: and right now we're seeing this tremendous change in people
Speaker 1: who realizing the importance of low cost and a long
Speaker 1: term focus. And if you just keep those two things
Speaker 1: in mind, you will never do anything but own a
Speaker 1: broad market index and hold it forever. I'm Barry Ridholtz.
Speaker 1: You're listening to masters in Business on Bloomberg Radio. My
Speaker 1: extra special guest this week is Jack Bogel. He is
Speaker 1: the founder of the Vanguard Group, inventor of the index funds,
Speaker 1: author of numerous books. Let's jump right back into the
Speaker 1: issue of costs and how they impact investors. You're known
Speaker 1: as the person who created the index fund but really,
Speaker 1: which do you think is more important, the passive indexing
Speaker 1: or the fact that it's so low cost Well, it's
Speaker 1: it's pretty clear to me that passive indexing is the
Speaker 1: more important because I'm going to define costs in a
Speaker 1: couple of different ways here. One is the expense ratio.
Speaker 1: And our funds index funds probably average about ten basis points.
Speaker 1: Are managed funds probably average about thirty five, So there's
Speaker 1: not that big a difference. The industry is up around
Speaker 1: a hundred and twenty on an unweighted basis And when
Speaker 1: you talk about basis points, the basis point is just
Speaker 1: a percentage of So a hundred basis points is one percent.
Speaker 1: Ten basis points is one tenth of one percent. If
Speaker 1: you're averaging ten basis points, that's a very very inexpensive.
Speaker 1: It's five five basis points, that's very inexpensive. That is
Speaker 1: really inexpensive. But that's because we have a mutual company
Speaker 1: owned by its shareholders and don't have to deliver profits.
Speaker 1: And think about this for Eminent Parry, that the profit
Speaker 1: margins in this business can easily run to be So
Speaker 1: if you've got a one percent expense ratio, you're making
Speaker 1: fifty basis points on the top. So you're you're actually
Speaker 1: operating at fifty which is probably not too bad because
Speaker 1: very few people have the scale that we have developed,
Speaker 1: have the technology that we've developed, have the efficiency that
Speaker 1: we've developed. And also I don't think this is self serving,
Speaker 1: have the blie pulpit that we have. You know, imagine
Speaker 1: Fidelity coming into this business. Describe I described that as
Speaker 1: drag kicking and screaming to the business. So here we
Speaker 1: have kicking and screaming over here, and here we have
Speaker 1: missionary zeal, the bullied pulpit, bind this is the way,
Speaker 1: this is the new way. And you have an entire
Speaker 1: universe of evangelists amongst the advisor community who have drunk
Speaker 1: the kool aid and say, hey, low cost indexing is
Speaker 1: the way to go. Following the financial crisis, it seems
Speaker 1: like Vanguard was sucking up all the money in the
Speaker 1: room and everybody else wasn't also run it also ran
Speaker 1: are events like the Great Financial Crisis? Does that sort
Speaker 1: of shake people out of their false belief and send
Speaker 1: them in the direction of hey, these missionaries. Turns out
Speaker 1: these guys are right. Well, you're certainly right in a sense.
Speaker 1: It's it's not easy to read. But what happens when
Speaker 1: the market goes way down and went down fifty rough
Speaker 1: into on he seven nine, and all these managers that says,
Speaker 1: we'll manage your money for you. The shareholder has kind
Speaker 1: of led to expect that they will anticipate this and
Speaker 1: not let it happen to them. And they may not
Speaker 1: directly communicate that, but if someone says, well, i'm you know,
Speaker 1: I'm pretty smart, I'm a smart manager, you would expect
Speaker 1: the down market they would do a good bit better
Speaker 1: than the market. Well, of course to begin when they can't,
Speaker 1: because some do, when some don't. They're all average together,
Speaker 1: and how you're picking one over the other you never
Speaker 1: know in advance. You can only guess. And what good
Speaker 1: is that? Yeah, exactly, so the down markets do help that,
Speaker 1: But it's also this wave of you know, there's not
Speaker 1: an economics course there's not an MBA course, and in
Speaker 1: investing or finance that doesn't say basically, indexing is the way.
Speaker 1: It's the data that matters. It's the data and it's
Speaker 1: gonna so instead of I mean, usually if you look
Speaker 1: back and see a fund that's done well, you can
Speaker 1: pretty much conclude it will not do well in the future.
Speaker 1: Everything reverts to the mean. The index does not. It
Speaker 1: continues to give you your share of the market return.
Speaker 1: And when you look at the numbers, I mean. One
Speaker 1: of my favorite constructions is, uh, the index fund gives
Speaker 1: you the advantage of long term compounding of returns while
Speaker 1: eliminating the tyranny of long term compounding. Of course, So
Speaker 1: think about it this way. Let's assume the stock market
Speaker 1: gives a seven percent return over your life over thirty
Speaker 1: years or over fifty years um. If you get to
Speaker 1: seven percent, each dollar goes up three times. If you
Speaker 1: get five percent, that would be the seven percent less
Speaker 1: the industry's typical two percent all in cost, you get
Speaker 1: ten dollars, So ten dollars versus thirty dollars difference. So
Speaker 1: you put up the capital, you took of the risk,
Speaker 1: and you got thirty three of the return. As I
Speaker 1: say to people, if that strikes she was a good
Speaker 1: deal by all means, do it. So. Morning Star once
Speaker 1: famously did a study which I'm sure to this day
Speaker 1: they regret, and the study they became, you know, famous
Speaker 1: for their Star rankings of mutual funds. And I've written
Speaker 1: about this. You could google this, people can find this.
Speaker 1: Someone internally did a study and said, if you don't
Speaker 1: have access to morning Star data, but you just looked
Speaker 1: at a single data point across the universe of mutual funds,
Speaker 1: what would be the most helpful. Would it be the
Speaker 1: track record, would it be the manager would it And
Speaker 1: it turned out that if you forgot about everything else
Speaker 1: and only picked the lowest cost funds, that generated the
Speaker 1: highest returns going forward. So how that makes me ask
Speaker 1: the question how important are keeping slow two investors? Well,
Speaker 1: when you give the statement that it's only cost that matters,
Speaker 1: I'm inclined to say, as the kids would say, Barry, duh,
Speaker 1: it's it seems obvious after the fact, But for the
Speaker 1: longest periods of time people, So let's let me digress
Speaker 1: and talk a little bit about hedge funds. While all
Speaker 1: this money is flowing a vanguard over the past decade
Speaker 1: since the financial crisis, you guys went from a trillion
Speaker 1: to over three trillion. The other segment of the market
Speaker 1: that attracted a ton of money was the hedge fund industry,
Speaker 1: which charges two percents forget five basis points two percent
Speaker 1: of the assets under management, plus of the profits. And
Speaker 1: they also scaled up across ten thousand funds to three
Speaker 1: trillion dollars. How do you explain, despite the obvious duh,
Speaker 1: how do you explain so much money flowing to a
Speaker 1: group with such high expand well, greed, the buyer's greed
Speaker 1: and perhaps even the manager's greed because those are very
Speaker 1: high costs. But people are looking for a better way.
Speaker 1: You know, it's pretty easy. I've done a lot of
Speaker 1: work on this. You may have read some of it
Speaker 1: to forecast what the stock market return is going to
Speaker 1: be within reasonable magnitudes over time, not not in a
Speaker 1: year by year, but over decades. And uh so you
Speaker 1: know where you're gonna be roughly in the stock market.
Speaker 1: And you say a pension pan, and pension plans are
Speaker 1: very heavy part of the of the hedge fund business
Speaker 1: because they don't have to worry about the high taxes
Speaker 1: generated by by hedge funds. And uh so they say
Speaker 1: we've got to have more, and someone coast comes and
Speaker 1: shows them their past record and guess what they put
Speaker 1: the S and P five shame. Of course they wouldn't
Speaker 1: show you the record if they didn't. So a little
Speaker 1: survivorship bias built into that, You sure that, well, the
Speaker 1: survivorship bias build into it. But most of all, there's
Speaker 1: it ignores the fact of life in this business. It's
Speaker 1: everywhere reversion to the mean. Biblically put Barry, the last
Speaker 1: shall be first, on the first shall be last. And
Speaker 1: it happens to hedge funds, it happens to mutual funds.
Speaker 1: It is basically a fundamental law. Seven fat years, seven
Speaker 1: lean years, and there's no way around it. Yeah, the
Speaker 1: number of years may differ, but you've got it all right. Well,
Speaker 1: you reference the Bible and and that that phrase that
Speaker 1: always stayed with me. Um. So let's let's stick with
Speaker 1: the issue of um of indexing for now. And I
Speaker 1: want to quote something that Charlie Ellis had wrote. Charlie
Speaker 1: was not only on the board of the Vanguard Group,
Speaker 1: a board of directors, but he was also an advisor
Speaker 1: to the Yale Endowment Fund, and he wrote a wonderful
Speaker 1: book called Winning the Loser's Game, and he he also
Speaker 1: advocates that individuals should stick with simple indexing, which leads
Speaker 1: me to a question, how many indices should the average
Speaker 1: invest your own? Well, very very few is as symboled
Speaker 1: to that answer to that question. You need a broad
Speaker 1: stock index, and you need a broad out bond index,
Speaker 1: because I'm convinced that everybody should have a little anchor
Speaker 1: to winward when these bad times come, if for no
Speaker 1: other reason, to protect themselves and getting emotional and behaving
Speaker 1: badly and selling out their portfolios at market bottoms. So
Speaker 1: leaving aside the allocation between stocks and bonds, you can
Speaker 1: buy a bond index fund, and you're gonna buy a
Speaker 1: total stock market index fund, and you're gonna buy the
Speaker 1: Standard and Poors five index fund, and that's basically of
Speaker 1: the market. The You would think that the that the
Speaker 1: total stock market would be a better bet because it's
Speaker 1: more diversified in the S and P five. But we're
Speaker 1: in a time right now and I don't know if
Speaker 1: this is durable or not. Nobody does. Where the large
Speaker 1: companies are doing better than the small, So the great,
Speaker 1: Mr Buffett, and does his he's leaving his wife the
Speaker 1: state in the s and Vanguard SNP fix fund. He
Speaker 1: has a bet with some hedge fund managers. He's winning,
Speaker 1: he's winning the bet. He's not winning it, he's killing.
Speaker 1: He's absolutely way way ahead. They actually had to create
Speaker 1: derivatives for this bet. This is a real bet with
Speaker 1: millions of dollars at risk on it, and he looks
Speaker 1: it's a runaway. Nobody's else is even in second. Well,
Speaker 1: he's got a year ago. This is that's right. It
Speaker 1: will be a decade after the financial crisis, the hedge fund.
Speaker 1: For those of you who may not be familiar with
Speaker 1: the infamous bet, a bunch of hedge fund managers were
Speaker 1: um arrogant enough to bet Warren Buffett that they could
Speaker 1: outperform the SNP five. He took that bet and it's
Speaker 1: not even close. It's it's really an amazing story. I
Speaker 1: didn't realize we're only a year away from the final
Speaker 1: outcome of that uh bet. And it's it's theoretically possible
Speaker 1: they can win, but really mathematically it's it's highly improbable
Speaker 1: that anything can happen. However, I can see that Jack Bogel.
Speaker 1: Thank you so much for being so generous with your time.
Speaker 1: This has been absolutely fascinating. For those of you who
Speaker 1: are interested in hearing the conversation, continue be sure and
Speaker 1: check out our podcast extras, where we keep the tape
Speaker 1: rolling and continue chatting. You can check out my daily
Speaker 1: column on Bloomberg View dot com or follow me on
Speaker 1: Twitter at Ritolts. I'm Barry Ritolts. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. Welcome back to the podcast. Jack.
Speaker 1: Thank you so much for doing this. This has really
Speaker 1: been tremendously fascinating. It was worth the drive to Pennsylvania
Speaker 1: to come come see you. Um, I'm I'm absolutely fascinated
Speaker 1: by everything you've accomplished. So we've talked a little bit
Speaker 1: of the advantages of indexing for equities, and you mentioned
Speaker 1: bond funds. There have been some pretty reasonable academic arguments
Speaker 1: that you could do okay with active management with bond
Speaker 1: funds because there's such a universe of choices. It's not
Speaker 1: just treasuries, but it's treasuries and its corporates and its municipalities.
Speaker 1: How do you feel about about bond funds? Do you
Speaker 1: just own abroad? Um? Index of bond funds, or do
Speaker 1: you look at active management and bonds and say, well,
Speaker 1: maybe there's some value added there. Well, as a group,
Speaker 1: bond managers cannot win because they are the market and
Speaker 1: so they will as a group capture the market return.
Speaker 1: There's just no question about this. And charging as they
Speaker 1: do probably in the mutual fund business, probably sixty basis points,
Speaker 1: seventy basis points. They just don't have a fighting chance
Speaker 1: over the bond fund index. Now that index has some issues,
Speaker 1: as they say, And I started the first bond in
Speaker 1: next fund, by the way, years ago, yeah, thirty years ago,
Speaker 1: and it's done just fine, met the test of competition.
Speaker 1: But I'm not I think we can do better in
Speaker 1: bond in next thing than the bond than the bond
Speaker 1: in next the way it's constructed, because it's about sevent
Speaker 1: treasuries and mortgage backed good mortgage backed government backed instruments,
Speaker 1: and I think most investors should not have seventy in
Speaker 1: the super safe category. I think something like thirty is
Speaker 1: pretty good. So it should be a better assortment of
Speaker 1: risk that potentially is generating more returns and as long
Speaker 1: as you're holding it for decades, the short term volatility
Speaker 1: is irrelevant. Yeah, Well, the the one that I have
Speaker 1: to use myself is our intermediate intermediate term bond index fund.
Speaker 1: It has it's just as volatile or as non volatile,
Speaker 1: because that has the same duration or average maturity. And
Speaker 1: but it's about thirty governments and it is the same
Speaker 1: in every other respect. So if it has a higher yield,
Speaker 1: the yield and a bond as today yield correlation with
Speaker 1: the RETURNI you're gonna get in the next ten years,
Speaker 1: so you might as well take advantage of it. And
Speaker 1: I'd say particularly, I mean, yes, it's a little riskier,
Speaker 1: but today people are dying for income, dying for income,
Speaker 1: and to reach a little bit, you know, I don't
Speaker 1: believe in big reaching for yield at all. Well, that
Speaker 1: certainly was was a cluse of problems in the last
Speaker 1: financial crisis. Everybody who reached for yields and said, I
Speaker 1: understand this is subprime, but the rating agencies tell me
Speaker 1: it's triple A, so I'm gonna hold my nose. And
Speaker 1: by this didn't work out that way. It did not
Speaker 1: work out well, to say the least. So so I
Speaker 1: didn't realize you had created the first bond in next funds,
Speaker 1: so we have we have bond indexes, which you would
Speaker 1: like to see have a little more risk and uh
Speaker 1: a little less of the super safe size we've already discussed,
Speaker 1: uh the equity side. Let's let's talk a little bit
Speaker 1: about some of the hot buzzwords that are going around today.
Speaker 1: And I'm curious, as I already know what you ranch
Speaker 1: is gonna be, but I feel obligated to ask before
Speaker 1: we get to that, Can I just say one thing? Sure?
Speaker 1: We also started in about nineteen, well in seven, to
Speaker 1: broaden our index base from the S and P five hundred,
Speaker 1: we started the bond in next fun. We then started
Speaker 1: I realized that there was a certain attractiveness to owning
Speaker 1: the whole market, so we started something called the extended
Speaker 1: market in the next fun. How many holdings were in
Speaker 1: that well probably um right in. It varies amazingly, but
Speaker 1: probably right now because the Wilshire five thousand is something
Speaker 1: like thirty stocks. It's it's even less than then it
Speaker 1: got up to seventh, believe it or not. Late nineties, yeah, well,
Speaker 1: we were cranking out a lot of new companies before
Speaker 1: we realized that pets dot com wasn't a sustainable thing. Exactly.
Speaker 1: So I also had an idea that growth might do
Speaker 1: better than value for the for for young people investing
Speaker 1: on a dollar averaging basis wouldn't be that much riskier,
Speaker 1: and when they retired they might want an income fund.
Speaker 1: So I I divided the SMP into two. As soon
Speaker 1: as the SMP did that, I started a growth index
Speaker 1: fund half of the SMP and a value index fund
Speaker 1: the other half. It didn't work out very well. I mean,
Speaker 1: it worked out fine from performance standpoint. Where we found
Speaker 1: is the money poured into growth when growth was doing
Speaker 1: well at the wrong time, out of growth and into value.
Speaker 1: So you know, sometimes we may I think we've got
Speaker 1: to be very aware of creating things that we know
Speaker 1: investors are going to use badly. So we don't know,
Speaker 1: we don't tell them what to use and how to
Speaker 1: use it, but it happens, and it's a responsibility of us,
Speaker 1: the sponsor, to do that. So that raises a really
Speaker 1: significant question, which is how important is investor behavior to
Speaker 1: long term returns and what can the average investor do
Speaker 1: to make sure that they don't shoot themselves in the foot. Well,
Speaker 1: the first thing to do is don't chase performance and
Speaker 1: don't I have some salesman or you reading the paper
Speaker 1: for that man, or I need to blame the salesman
Speaker 1: for this says, here's a new manager on a new
Speaker 1: fund and it's really doing great, or an old manager
Speaker 1: and the fund is doing great, and this fund is
Speaker 1: a great twenty year record. Turn away from that, because
Speaker 1: it's next twenty years aren't going to be anywhere near
Speaker 1: as good as its past. There are plenty of examples that,
Speaker 1: with all due respect them on friends up in Boston.
Speaker 1: Fideliti's Magellan Fund was a star fund for roughly twenty years.
Speaker 1: Fantastic Peter Lynch and then his one of his successors
Speaker 1: did really well. Peter Lynch was a superstar performer. And
Speaker 1: then what happened well with a tiny little fund too,
Speaker 1: don't forget that. And the fund that wasn't even offered
Speaker 1: to the public for five or six years. Oh yeah,
Speaker 1: we all have our little secrets, and uh so I
Speaker 1: think overrated. But Peter Lynch was certainly a good manager.
Speaker 1: But you know, his principle of you know, if you
Speaker 1: see a product you liked by the stock, you know,
Speaker 1: makes no rational sense, I'm sorry to say. And Peter
Speaker 1: Lynch also at Madelon Magellan Funds. Hey Day said, in
Speaker 1: words of one syllable in Barns, most investors would be
Speaker 1: better off in an index fund. Was that barrens? I
Speaker 1: know I read that from him, and that's not a concession,
Speaker 1: that's the truth. Well, you have him saying that, you
Speaker 1: have Warren Buffett saying that. We have a number of
Speaker 1: people David Swinson, Swinson at the Yel Endowment, he's another one. Um,
Speaker 1: it's amazing that people push against this because it's long
Speaker 1: term in boring and there's nothing to talk about. And
Speaker 1: but I guess shouldn't. That leads to the next question,
Speaker 1: should investing be long term and boring? If you want
Speaker 1: to have a comfortable retirement, Believe me, you'll be less
Speaker 1: bored in your retirement. If you've got plenty of money,
Speaker 1: You'll you'll be you'll be so on board. If you
Speaker 1: don't do it that you'll have to go back to work.
Speaker 1: So let me ask you about some of the hot
Speaker 1: buzzwords that are out there and investing these days. And again,
Speaker 1: this is a cheap because I'm pretty sure I know
Speaker 1: what your answers are, but I feel obligated to ask this.
Speaker 1: So your index funds are basically put together by market
Speaker 1: cap waiting. But now there's something called smart beta, which
Speaker 1: is different ways of assembling an index that don't rely
Speaker 1: on cap waiting. What do you think of the idea
Speaker 1: of smart beta? Smart beta is stupid? Okay, that's why, Well,
Speaker 1: I mean I didn't say that's that's what Nobel laureate
Speaker 1: Bill Sharp says. I just quoted him. And the reason
Speaker 1: it is just think about this for a minute. It's
Speaker 1: it's another form of active management to begin with. But
Speaker 1: if smart beta is good, and that that means it
Speaker 1: beats the index, then dumb beta this does even worse
Speaker 1: than the index. Right, so smart and dumb are different.
Speaker 1: But why are people going to be dumb if it's
Speaker 1: so easy to be smart? It's just another claim that
Speaker 1: I can do this better now. Happily, after Isdom Tree
Speaker 1: and and Rob Arns fund came out a decade ago,
Speaker 1: his fund is now more than ten years old. What
Speaker 1: happened and the answer is essentially nothing. His fund beat
Speaker 1: the S and P five hundred, but I think thirty
Speaker 1: basis points, but it was more Votel and therefore it's
Speaker 1: sharp ratio. The relationship relationship between risk and reward. I
Speaker 1: don't hold me to the numbers. But the sharp ratio
Speaker 1: of I mean, I mean his guests here, I won't
Speaker 1: be too far off the sharp ratio of the five
Speaker 1: of us like forty one. On the sharp ratio of
Speaker 1: Arns fund was thirty six. So he lost. He had
Speaker 1: ten years to prove it. Now maybe he'll prove it
Speaker 1: the next ten years. Who can say, But why would
Speaker 1: that be, I mean, where's all the brain power. He's
Speaker 1: a very smart guy, by the way, one of the
Speaker 1: smartest guys in this business. He was a four guest
Speaker 1: on the show, one of our earliest guests. He's a
Speaker 1: delightful gentleman. I always enjoy his company. UM And it
Speaker 1: was really an in nightful thought to say, let's think
Speaker 1: of different ways to put together UM, to put together indexes.
Speaker 1: But your position is this isn't after fees, after everything else.
Speaker 1: Once you now you risk adjusted, you look at all
Speaker 1: this volatility, your your conclusion is this just isn't worth it. Well, then,
Speaker 1: even if you look at absolute returns, it's like a
Speaker 1: thirty basis points better over ten years. Now, that's not trivial.
Speaker 1: But when he has essentially the same portfolio as the
Speaker 1: index fund with different waitings, you can't expect anything to
Speaker 1: be too different. So I think it's it's over sold.
Speaker 1: Jeremy Siegell of Wisdom Trade described this as a new
Speaker 1: Copernican view of the world. Everybody had it wrong, and
Speaker 1: Copernica said, oh, by god, that son is in the
Speaker 1: middle and the new sun is smart Beta can't be
Speaker 1: because we're all as a group average. And if they
Speaker 1: are these smart guys over there, there are dumb guys
Speaker 1: over there. Smart and dumb both also net net. When
Speaker 1: you're buying smart day, you're really buying a distribution of
Speaker 1: really smart guys, really average guys, really dumb guys, and
Speaker 1: you don't know who's who across all the smart beta funds.
Speaker 1: You know, and then think about this one step further.
Speaker 1: The index essentially guarantee the dollar value index essentially guarantees
Speaker 1: you the return that will investors share. So that's written
Speaker 1: stone etched in stone. Uh, smart Beta may do a
Speaker 1: little better, may do a little worse. What's the point
Speaker 1: of taking the risk when the guarantee of getting the
Speaker 1: market return is right at your hand? Why would you speculate?
Speaker 1: Why would you speculate on maybe this guy can do
Speaker 1: it better. And believe me, some of these smart beta
Speaker 1: funds will for a short period of times will do it,
Speaker 1: and some of them won't. I mean, that's the nature
Speaker 1: of the beast. I've described it as why do you
Speaker 1: want to romance alpha and forsake beta when beta is
Speaker 1: a short thing. So that's smart beta. Let me ask
Speaker 1: you about something else that I suspect they know to
Speaker 1: your know your answers. This year commodities have gold especially
Speaker 1: has had a huge bounce back. We sort of tremendous
Speaker 1: commodity run from the early two thousands until two thousand eleven.
Speaker 1: What are your thoughts on things like commodity funds, gold,
Speaker 1: and uh energy for for investors? No, no, and no no.
Speaker 1: Let's repeat this in case those of you missed Gold. No,
Speaker 1: commodity funds, no oil funds. No tell us why? Okay,
Speaker 1: well oil is it commins I'm pick of oil as
Speaker 1: a commodity now and then is think about what a
Speaker 1: stock is? Okay. Stock has an internal rate of return
Speaker 1: and it's composed of the earnings growth in the divin
Speaker 1: end yield. When you buy it, it's there. If the
Speaker 1: stock goes up and down, that return is there. It
Speaker 1: has an underlying internal rate of return. You have a
Speaker 1: discounted cash flow from the future. You're buying an existing
Speaker 1: business that's gonna generate revenue and profits and you get
Speaker 1: to participate in that. Now, take a bond, It has
Speaker 1: an intern return equal to the interest coupon that you're
Speaker 1: going to get over the next ten years or twenty
Speaker 1: five years, whatever the case may be. Commodities have no
Speaker 1: internal rate of return, and there's a cost of storage
Speaker 1: and security for things like gold or royal. So when
Speaker 1: you buy a unit of gold, why do you buy
Speaker 1: it because you think you can sell it to somebody
Speaker 1: for a higher price. That is the definition of speculation.
Speaker 1: That's the classic greater full theory. You may have paid
Speaker 1: a lot, but someone will pay more. And well, I mean,
Speaker 1: you may be right, by the way, and there's no
Speaker 1: reason you can't be right, but that just means the
Speaker 1: other guy is wrong. And you don't know, as you
Speaker 1: as the investor, you don't know which of those two
Speaker 1: parties you're gonna be five years from that. And another
Speaker 1: thing when you mentioned gold, is it brings to mind
Speaker 1: is everybody used to talk about gold. Forbes magazine highlighted
Speaker 1: in all their reviews for years and years when they
Speaker 1: picked the best funds, gold funds, gold funds. And then
Speaker 1: we we had the boom and gold and then we
Speaker 1: had the collapse and nobody started talking about No, you
Speaker 1: talked about gold. Now we have another boom and everybody's
Speaker 1: talking about gold. Then gold collapses last year, nobody's talking
Speaker 1: about gold. Now gold is up this year. Everybody. This
Speaker 1: is metaphorically speaking, everybody's talking about gold. You know, don't
Speaker 1: pay any attention to gold. I mean, it would not
Speaker 1: be stupid. I wouldn't do it, but it would not
Speaker 1: be stupid to have a very small position in gold
Speaker 1: as a hedge against worldwide hyper inflation. Maybe five I
Speaker 1: wouldn't do any more than that, But I don't think
Speaker 1: you should do that. But it's at least defensible because
Speaker 1: you're you have a specific goal in mind, and it's insurance.
Speaker 1: You're paying a five percent insurance on the remote possibility
Speaker 1: of global hyper inflation. But if you're wrong, it's a
Speaker 1: giant five percent drag on your portfolio for the next
Speaker 1: few decades. And that's huge. That is well, you guys
Speaker 1: are talking about five basis points. This is five hundred
Speaker 1: basis points. That's a tremendous, tremendous drag. Let's talk a
Speaker 1: little bit it and by the way, I'm pretty much
Speaker 1: what I expected you to say about commodities. Let's let
Speaker 1: me find two things to talk to you about that
Speaker 1: I'm gonna have to push back a little bit. One
Speaker 1: is e t fs exchange traded funds. I know you're
Speaker 1: not a big fan of them, but lots of investors
Speaker 1: fund it's a very inexpensive, simple way to get exposure
Speaker 1: to the S and P five hundred or whatever asset
Speaker 1: class they want. Why are you not a big fan
Speaker 1: of ETFs? Well, I'll start with little anecdote. A wonderful
Speaker 1: guy named Nathan Most came to visit me right in
Speaker 1: my office upstairs here at Vanguard, and he said, I
Speaker 1: have a great idea for you. We I want to
Speaker 1: start the first exchange traded mutual fund and have Vanguards
Speaker 1: my partner there. I was I could have not only
Speaker 1: created the first index mutual fund, but the first e
Speaker 1: t F. And I said, Nate, no way, because the
Speaker 1: description that you got from from Nathan, or at least
Speaker 1: their first day later on. Now you can trade the
Speaker 1: S and P five hundred all day long in real time.
Speaker 1: And I would say, that's what kind of a nut
Speaker 1: would want to do that. I mean, there must be
Speaker 1: better things to do than that in this life. But
Speaker 1: in any event, it's the trading idea. When my idea
Speaker 1: of indexing broad market indexing by the SNP five and
Speaker 1: hold it forever, what war is said to be warned?
Speaker 1: Warren Buffett's favorite holding period is forever. So so the
Speaker 1: idea of an SMP five hundred funds that if you're gonna,
Speaker 1: if you're gonna do that exposure, you're better doing it
Speaker 1: with the low cost mutual funds than an index funds. UH.
Speaker 1: Then in UH E t F so there is no
Speaker 1: temptation to trade intra day or to play around that.
Speaker 1: That's not what you think people should be doing with
Speaker 1: their time or not. But let's let's examine the E
Speaker 1: t F business for just a minute. And that is
Speaker 1: if you look at E t F s all the
Speaker 1: big ones. Man, I can't look at all of them,
Speaker 1: but the big ones, particularly in the normal ones uh
Speaker 1: or about seventy by financial institutions, they're trading them in
Speaker 1: the marketplace. The spider, the S and P five UM
Speaker 1: E t F spider is the most widely traded stock
Speaker 1: in the world every day, And if you look further
Speaker 1: this year, which is a little more bottle than most
Speaker 1: years so far, the dollar volume of trading in e
Speaker 1: t f s is the same size as the dollar
Speaker 1: volume of trading and common stocks. Unbelievable because common stocks
Speaker 1: are worth about twenty three trillion dollars and the spiders
Speaker 1: are worth about two. So spiders are turning over it
Speaker 1: three thousand percent a year and stocks are turning over
Speaker 1: it two a year or something like that. So they're
Speaker 1: trading instruments owned by large institutions. I mean, look at
Speaker 1: the spider head and it says institutions, here's what you
Speaker 1: need to trade. I mean, it's practically verbatim from the
Speaker 1: It's just it may be irrelevant, but I don't think
Speaker 1: in the long run that has anything to do with
Speaker 1: the mutual fund business or individual And it certainly shouldn't
Speaker 1: have anything to do with individuals, because why would you
Speaker 1: as an individual want to trade against these giant institutions
Speaker 1: who do nothing but use this as a either trading
Speaker 1: tool or a hedging tool or whatever it is you're saying.
Speaker 1: This is not a playground for individuals to step into
Speaker 1: and that looks like it's roughly seventy percent of the business.
Speaker 1: And you know, I don't need even to criticize it.
Speaker 1: It's kind of irrelevant when you get to the other
Speaker 1: of the business. And I may be a little often
Speaker 1: my percentages here, but they're individuals, and you know, something
Speaker 1: like two thirds of them are using e t F
Speaker 1: to trade, and one third of them that would be
Speaker 1: ten pc of the total. All the e t F
Speaker 1: market are using them, buying and holding them and maybe
Speaker 1: using them. You know, we have it's a funny technical
Speaker 1: thing in this business. But you know, if you want
Speaker 1: to put it in a thousand dollars a month into
Speaker 1: a van guard fund and then you want to take
Speaker 1: out five thousand dollars at the end of the year
Speaker 1: and buy Christmas presents whatever you might want. Um, it's
Speaker 1: very difficult to do that here because we don't like
Speaker 1: buying and selling at the same time. You can do
Speaker 1: it with our e t s very easily. It's a
Speaker 1: certain market place there of people who aren't traders, but
Speaker 1: like the flexibility ETFs had, and I have no problem
Speaker 1: with that. The other the other part of the problem, however,
Speaker 1: the e t F problem, is there is this huge
Speaker 1: amount in number, not so much in assets, of funds
Speaker 1: that are doing things that no intelligent investor would ever do.
Speaker 1: Triple leverage and you can bet every day whether the
Speaker 1: markets going up or down. Isn't that grand? Not only
Speaker 1: triple leveraged up, but inverse triple averaged. As long as
Speaker 1: you know whether the market's going up or down during
Speaker 1: the day, you're gonna make a fortune. Who who knows
Speaker 1: what the market's going to go up any or down
Speaker 1: any given day? Well, I guess these smart people that
Speaker 1: have these funds, but they all have both of them,
Speaker 1: that's right. They don't compete with each other. And there
Speaker 1: are a whole lot of other wacky things. I mean,
Speaker 1: I don't think US and invest there's you. I'm sure
Speaker 1: you're gonna come to this, should be buying individual foreign
Speaker 1: non US. So let's let's ask that question. A lot
Speaker 1: of the academic data says that if you're diversified internationally,
Speaker 1: parts of the world are sometimes doing better than the US,
Speaker 1: and sometimes the US is doing part of the world.
Speaker 1: If we want to really be diversified, you need US
Speaker 1: and not just have an overwhelming home country bias UH
Speaker 1: developed world X US and then emerging markets. What's wrong
Speaker 1: with having a smattering of those in your portfolio so
Speaker 1: that you get to take advantage of the growth of
Speaker 1: the Pacific RIM in China and South America and etcetera. Well,
Speaker 1: the question is is an advantage? I mean, tell someone
Speaker 1: to put all their money in Brazil two years ago
Speaker 1: because somebody who put in all their money in China
Speaker 1: year ago. Isn't an advantage or is it just you know,
Speaker 1: kind of a little bubble going on in those Well,
Speaker 1: but you're not picking individual countries. You're gonna have a
Speaker 1: broad index of international companies, and therefore it should theoretically
Speaker 1: the gain should offset the losses and then some and
Speaker 1: so you have exposure elsewhere. You're not a big fan
Speaker 1: of that, Well, I'm not. And and the reason goes
Speaker 1: back to when I started to think about it seriously
Speaker 1: writing my book bogelon Mutual Funds. Back in Bogel on
Speaker 1: Mutual Funds, let's see what I have here. I have
Speaker 1: common sense on mutual funds that probably says something very
Speaker 1: similar to this. But this is a little more recent,
Speaker 1: so I said, tenth edition forward by David Swinson. So
Speaker 1: when you say recent, this came originally came out almost
Speaker 1: fifteen years ago. Right, the original was in nineteen seventeen
Speaker 1: years ago. Interestingly enough, I'll get back to the other
Speaker 1: subject in a second, But interestingly enough, the first book
Speaker 1: came out at a market high and the second and
Speaker 1: the second book came out of the market low. And
Speaker 1: I would hardly change one word in the whole second edition.
Speaker 1: I reprinted it verbatim and then Mark put red Nantucket
Speaker 1: read for any changes that took place in the book.
Speaker 1: Now in the tenth edition, that's that's used. After the
Speaker 1: financial crisis, you could see some of the changes that
Speaker 1: were made, but they're really very modest. You really didn't
Speaker 1: change any of the themes in this. You just kind
Speaker 1: of fleshed it out post crisis. It worked. Indexing worked
Speaker 1: in the good market, indexing worked in the not so
Speaker 1: good market, and and court low cost worked in the
Speaker 1: good market and not so good and also in they're
Speaker 1: not so good market. It has to So getting back
Speaker 1: to I said in my first book, Uh, look, US
Speaker 1: companies got half of their revenues. This is true now
Speaker 1: at least a little bit less than half of the revenues,
Speaker 1: and alter their earnings from outside the U S we
Speaker 1: you have an international portfolio, why do you want a
Speaker 1: larger one? And then I say, take a look at
Speaker 1: what comprises that international portfolio. Your largest invest is Japan,
Speaker 1: Your second largest investment is the UK, Your third largest
Speaker 1: investment is France. Now, if returns are developed out of
Speaker 1: national economic strength, does anybody think that the UK and
Speaker 1: Japan and France were gonna do better than the US
Speaker 1: in the next ten fift twenty years. I can't imagine it.
Speaker 1: And now I may be wrong. I'm not saying this
Speaker 1: is written in stone, but that's for that'st of the money.
Speaker 1: So if people knew they were putting forty of their
Speaker 1: international money, so called international non us is a better
Speaker 1: formulation in Great Britain, France and and the Japan. I
Speaker 1: mean when every one of those economies has real problems.
Speaker 1: The French don't work very hard, the Japanese have a
Speaker 1: structured and deeply aging economy, overburdened by future retirement claims,
Speaker 1: terrible demographics, and they're a great exporter. But then they
Speaker 1: have issues. And Britain doesn't know what's going to happen
Speaker 1: if they do the the exit from the European Community,
Speaker 1: and or do they know what's going to happen if
Speaker 1: they stay in So what would happen if a sharp
Speaker 1: upstart company let's call them Vanguard, says, here's a broad
Speaker 1: international index that's fairly evenly weighted. It's not just these
Speaker 1: three countries. Might that change your perspective or do you
Speaker 1: still think, Hey, you get plenty of the SNP five hundred.
Speaker 1: Half the revenue comes from overseas. That's all the overseas
Speaker 1: exposure anyone really needs. I don't like the idea because
Speaker 1: you would have as much and I don't know Honduras
Speaker 1: as you do in in Great Britain. It wouldn't make
Speaker 1: any sense. Uh So, But to make matters worse, when
Speaker 1: I made this statement in we now have twenty two
Speaker 1: years of history, right, how was the prediction? And the
Speaker 1: answer is that don't hold me to the exact numbers,
Speaker 1: but that the U S portfolio is up about say seven,
Speaker 1: and the non use portfolios up about two. So the
Speaker 1: US is still winning versus the international. So I committed
Speaker 1: the elements in very I was right now, I want
Speaker 1: to be very clear in this. Does that mean I
Speaker 1: will be equally right in the future. I can't imagine it.
Speaker 1: You think eventually, I mean reversion comes in. Yeah, and
Speaker 1: eventually those two positions will reverse. The US Well, I
Speaker 1: don't think they will reverse, but I don't think that
Speaker 1: spread is is a durable spread. And then the reason
Speaker 1: I don't think that reverse is we have this fabulous
Speaker 1: economy here. I mean, yes, it has problems, but probably
Speaker 1: less problems than any country in the world, no doubt
Speaker 1: about that. And my favorite quote is this is the
Speaker 1: cleanest shirt in a dirty hamper. Sure, exactly right. And well,
Speaker 1: I mean I'd say was even cleaner than that. We're
Speaker 1: number one in innovation and technology. Uh, We're not number
Speaker 1: one an entrepreneurship. We're still a great manufacturing company, all
Speaker 1: not as great as we are, and we still have
Speaker 1: you know, all these new companies being started, existing companies
Speaker 1: being run more and more efficiently and more than anything else,
Speaker 1: or at least as much as all that. We have
Speaker 1: great institutional structure in this country. We have legal protections,
Speaker 1: we have courts, we have laws, and no one's going
Speaker 1: to take your stock away from you confiscated overnight, and
Speaker 1: shareholder rights are as good as any country in the world,
Speaker 1: maybe with the exception of I don't think they do
Speaker 1: any better but they don't do any worse. Probably Switzerland
Speaker 1: and Great Britain would be the two big competitors. Now
Speaker 1: you see, you see what happens in China, your stocks
Speaker 1: may not be your stocks. It's very hard to be
Speaker 1: forget as a as a local, as an international investor.
Speaker 1: It's very hard to be an investor in China if
Speaker 1: you don't know, am I gonna be able to ever
Speaker 1: cast this out? Or maybe there's going to be a
Speaker 1: vacation period where no sales for the next month, as
Speaker 1: we saw last year. Yeah, and let me add to
Speaker 1: this that these and just about everybody says I'm wrong,
Speaker 1: by the way, but everybody said I was wrong with
Speaker 1: an index. I was gonna say. That's only gonna make you.
Speaker 1: That's only gonna make you double down and think you're right,
Speaker 1: because there's a track record of people predicting you're gonna
Speaker 1: be wrong, and they've all they've all proven themselves false.
Speaker 1: So but let me just say one more thing. In
Speaker 1: international just think what would you would have done if
Speaker 1: you had an internationally waited or a non use waited
Speaker 1: in when you had fifty percent, that is to say,
Speaker 1: five percent of your money in Japan, right when the
Speaker 1: NIK was forty six thousand or something like that. No
Speaker 1: one was talking this way then, but that could happen again.
Speaker 1: And I don't think he should be subject to these
Speaker 1: funny speculative booms that can take place in other countries.
Speaker 1: I just can't imagine that there will be a significant
Speaker 1: advantage in international companies over US companies. I'm not talking
Speaker 1: about stocks now, I'm talking about companies and economies over
Speaker 1: the US. Now, look, I could be wrong on this,
Speaker 1: and if you think I'm wrong, go buy all the
Speaker 1: international and non US stocks you want, and non US
Speaker 1: stock index by individual countries. I wouldn't do any of that.
Speaker 1: And what we didn't even mention the currency side of things.
Speaker 1: How significant is currency fluctuations to UH to this sort
Speaker 1: of international exposure if you're domicile t here in the US,
Speaker 1: what what kind of currency currencies here? Well, that that
Speaker 1: is an issue because the dollar has been very strong,
Speaker 1: and it won't be strong forever because international trade has
Speaker 1: a way of balancing out. When the dollar is strong,
Speaker 1: the trade balances change and all that. So I don't
Speaker 1: think you should count on a good strong dollar forever.
Speaker 1: So won't won't won't impact it. Let's let's talk UM,
Speaker 1: but I want to talk a little more about Vanguard.
Speaker 1: But before we get to that, to two last questions
Speaker 1: about indexing. The first is is there any sort of
Speaker 1: active management you would favor, you know, Vanguard about of
Speaker 1: the assets here or an active managed funds. What do
Speaker 1: you think about having a small slug of someone's portfolio
Speaker 1: in something that might not be a passive index. Well,
Speaker 1: let me give you this very important background about our
Speaker 1: actively managed funds, and this is what I've been saying
Speaker 1: since we started Vanguard in nineteen seventy four. I want
Speaker 1: our active management, actively managed funds to have returns that
Speaker 1: are relatively predictable, relative predictability relative to their group. There
Speaker 1: they're group like large cap value funds, a long term
Speaker 1: municipal mound funds, whatever it might be. UM, and the
Speaker 1: idea would be look at those funds and not don't
Speaker 1: get too far out of line so you'll have an
Speaker 1: average perform if you if you have six managers, there's
Speaker 1: where the multi manager thing comes from. If you have
Speaker 1: six managers, the idea that they will do about the
Speaker 1: same as another as your competitive group with sixty managers
Speaker 1: is almost guaranteed to do the same So what's so
Speaker 1: good about that? What's so good about that is we
Speaker 1: think we have a one and a half percent to
Speaker 1: two cost advantage through lower expenses, lower turnover, no sales loads,
Speaker 1: and we should win by a point and a half
Speaker 1: a year, not on brilliance, but on cost. So let's guarantee. Now,
Speaker 1: let me just give you the punch line here. If
Speaker 1: you win, what's so good about one over ten years,
Speaker 1: you have a higher return that that's tremendous. So I
Speaker 1: previously interviewed your CEO and chairman, Bill McNabb and one
Speaker 1: of the comments he had made is that he still
Speaker 1: felt there was room to squeeze costs lower. You guys
Speaker 1: are three and a half trillion dollars. Is there a
Speaker 1: floor on how low costs can go or are you
Speaker 1: eventually gonna run out of efficiencies? Well, we have yet
Speaker 1: to squeeze cost lower because our costs go up and
Speaker 1: up and up. But as a percentage, you can squeeze
Speaker 1: a little lower on a per well dollar invested basis
Speaker 1: certainly wane to disagree with our CEO, but it's not
Speaker 1: we're squeezing, but we're the captive of the market. If
Speaker 1: the market goes way down, our expense ratio is going
Speaker 1: to go up. There's no way we could squeeze enough
Speaker 1: out of our expenses if we had less assets. So
Speaker 1: we should be very careful about expenses, and we are.
Speaker 1: I think we're managed in a very strong way, but
Speaker 1: we're The expense ratio is a combination of something we
Speaker 1: can control more or less how much we spend, and
Speaker 1: something we can't control at all, the level of the
Speaker 1: stock market. So the expense ratio is a mystery. And
Speaker 1: whether Gupp or Dad, now, if it goes way down,
Speaker 1: it's gonna mean we have very good markets. That sounds great.
Speaker 1: Can indexing ever get too big or can indexing ever
Speaker 1: take over the market as some people have alluded, or
Speaker 1: is there a place for a combination of indexing and
Speaker 1: active managers in the actual marketplace? Well, it's not in
Speaker 1: the nature of things that in indexing could be of
Speaker 1: the market. If it were, we would have chaos. There
Speaker 1: will be no evaluations, there'll be no liquidity, there'll be
Speaker 1: no enny. So what are the chances that indexting get
Speaker 1: to zero? Right now? It's I think I had of
Speaker 1: the total market of the mutual fund industry, of the
Speaker 1: equity mutual fund industry, and so it means that that
Speaker 1: hunk of business is in broadly stated, just removed from
Speaker 1: the turnover level. So it's a turnover we're in the
Speaker 1: end market were indexed, the turnover would go to I
Speaker 1: came into this business when turnover was and everything was fine.
Speaker 1: It's gonna take a long time to get the fifty percent,
Speaker 1: a long long time and maybe never gets there. So
Speaker 1: when you put reality in the face of the theory
Speaker 1: that if everybody indexes uh, then then it's going to
Speaker 1: be it's just it's just not gonna happen. But the
Speaker 1: other thing is people follow this statement by saying, if
Speaker 1: the market gets more and more indexed, then it will
Speaker 1: be less efficient and we'll be able to beat it
Speaker 1: more easily. No, unequivocally, no, some will beat it, some
Speaker 1: will lose to it if they If the market is
Speaker 1: is less efficient and the and the winners and the
Speaker 1: losers will average the market returned, there's no way around that.
Speaker 1: So that leads me to a quote of yours, and
Speaker 1: I have to ask you about it because I find
Speaker 1: it's fascinating. You once wrote the stock market is a
Speaker 1: giant distraction to the business of investing. Explain well, investing
Speaker 1: is about the long term, and investing is about earning
Speaker 1: what I call the investment return, which is the divin
Speaker 1: end yield when you go into the stock market and
Speaker 1: the earnings wrote that follows. That's investment return. The market
Speaker 1: return is also as a speculative return, and that is
Speaker 1: is the price earnings multiple of the evaluations high or
Speaker 1: low when you come in, and if they're high, they're
Speaker 1: going to detract from that return, and evaluations are low
Speaker 1: and they're going to add to that return because the
Speaker 1: low will the in in the valuations. The price earnings
Speaker 1: multiple reverts to the mean perfectly. It's about what today.
Speaker 1: Although it's a little bit higher than this today because
Speaker 1: the market's a little bit isn't hardly inexpensive, but the
Speaker 1: reality is it's just about the same level it was.
Speaker 1: So we had ups and downs, booms bust. In the
Speaker 1: long run, speculative return is zero. So concentrate on the
Speaker 1: investment return. Forget the speculative return, which is very difficult
Speaker 1: to predict, and just get with business can give you
Speaker 1: now if you look every day, you're apt to do something.
Speaker 1: And one of my basic rules is don't do something,
Speaker 1: just stand there and if you've been doing that this year,
Speaker 1: I think you're a lot better off. This is a
Speaker 1: tough years, so far, not that bad. I mean, you
Speaker 1: think the SMP is off about three and a half percent,
Speaker 1: it's really nothing. And although you think it was the
Speaker 1: end of the world, uh so, it's Don't let the
Speaker 1: stock market moves distract you. They are a tale told
Speaker 1: by an idiot. These moves, daily moves, hourly been minute
Speaker 1: by minute moves, a tale told by an idiot, full
Speaker 1: of sound and furious, signifying nothing. I have a bunch
Speaker 1: of questions that I ask all of my guests, but
Speaker 1: they're all specific to each individual because they're so um
Speaker 1: so so detailed. So who are your early mentors? I
Speaker 1: know in one of your books you mentioned somebody, Uh
Speaker 1: you thank somebody who you had mentioned in uh the
Speaker 1: earlier part of of the conversation, Who do you think
Speaker 1: of as as mentors? Well outside of my teachers. By
Speaker 1: my first real grown up meant tour was a guy
Speaker 1: named Jim Harrington who was a graduate student and engineer
Speaker 1: at Princeton University, and he was running the Athletic Ticket
Speaker 1: Association ticket office. And when he stopped doing that, he
Speaker 1: pulled me out of the crowd and asked me to
Speaker 1: run in for him. So I learned how to do
Speaker 1: a job, and I learned how to do it with integrity,
Speaker 1: and I learned how to do it with on time.
Speaker 1: I learned how to do it with keeping my emotions
Speaker 1: out of it. This is just selling tickets to Princeton
Speaker 1: students forts basketball, baseball, whatever it might be, particularly football,
Speaker 1: And that was a seminal experience to you and helped
Speaker 1: form your your own character. He had just a great
Speaker 1: sense of business values and like all engineers he was
Speaker 1: you know, they kind of go step by step right.
Speaker 1: Sometimes it's not a lot of exciting, but it's always
Speaker 1: right structured, organized, and and you're dealing with a lot
Speaker 1: of money. And sure, what Princeton Stadium is how many people?
Speaker 1: That's ah, that was the old Palmer Stadium that held
Speaker 1: fifty people, right, and now it's I almost double that size.
Speaker 1: It's it's huge. No, we went way down. We're about
Speaker 1: the other direction, okay, and we can't fill it now.
Speaker 1: We used to. Every every game I worked was a sellout, right,
Speaker 1: that was back in the day. So that was really
Speaker 1: quite an education. Um, you dedicated common sense on mutual
Speaker 1: funds to Walter Morgan, who was he in your in
Speaker 1: your pantheon, Well, he was the greatest of my mentors.
Speaker 1: He hired me. Uh he read my thesis out of Princeton.
Speaker 1: He wrote, I think a little bit over the top
Speaker 1: that Mr bogel knew more than he did about them
Speaker 1: than we did about the mutual fund industry. And so
Speaker 1: he liked it. And he was a Princetonian himself, class
Speaker 1: of nineteen twenty, and I was the class of nineteen
Speaker 1: fifty one, and I watched him work. He was very
Speaker 1: much a renaissance man, interested in investing, interested in marketing,
Speaker 1: probably less interested in the detail of the business share
Speaker 1: older record keeping it stuff which was so much simpler
Speaker 1: those days, but also a renaissance man in terms of
Speaker 1: his interest. He was um outdoorsman, hunter, a fisherman, things
Speaker 1: that I that I don't do at all. And but
Speaker 1: he had a high sense of standards, and he they
Speaker 1: said at the beginning, and uh turned the company over
Speaker 1: to me when I was thirty five years old. So
Speaker 1: I must have had an awful lot of confidence in me,
Speaker 1: and I saved Welling and fund finally for him after
Speaker 1: the catastrophe, I described earlier. We told Wellington Management Company
Speaker 1: how we wanted to run and they've been running it
Speaker 1: that way ever since. I've been much more focus on
Speaker 1: income and income stocks and less focus on growth stocks,
Speaker 1: and it's worked out. We had a whole renaissance of
Speaker 1: the Welling and Fund, and he saw a lot of that,
Speaker 1: and he was he he died, but the year that
Speaker 1: book came out, and a little bit before, but I
Speaker 1: had shown him the title page with his name on.
Speaker 1: He was very pleased and very pleased with the revival
Speaker 1: and renaissance of his wonderful Welling and Fund. I felt
Speaker 1: I had a moral obligation save it. So what about
Speaker 1: other investors who hasn't influence your thought process, your philosophy,
Speaker 1: perhaps not your approach to investing, but what other investors
Speaker 1: have colored your worldview? Well, you certainly start with Benjamin Graham.
Speaker 1: He's the basically ground zero and the intelligent investor. His
Speaker 1: book I happened to like the fourth edition, which is
Speaker 1: much more into into the I think it was nine
Speaker 1: seventy four, has much more about mutual funds and things
Speaker 1: of that nature. And he's very clear on that, and
Speaker 1: so he would certainly be one um Mr Morgan Um
Speaker 1: Mr Brin had a couple of associates, Joe Welsh, the
Speaker 1: president of the company, and Andy Young, his lawyer, very quick,
Speaker 1: quick witted, smart guy, and they all saw something in me.
Speaker 1: I don't know what it was that gave them confidence
Speaker 1: that I had the judgment to do the job. And another,
Speaker 1: interestingly enough, another one of my great mentors was the
Speaker 1: man who when I came on the investment company is
Speaker 1: two board of governors. He was the chairman. His name
Speaker 1: was d. George Sullivan and he was executive vice president
Speaker 1: of Fidelity. Oh really, and we had a great relationship.
Speaker 1: That's fascinated And so he would have been you know,
Speaker 1: if people have confidence in you, they bring out your
Speaker 1: best and he really did, and Mr Morgan did, and
Speaker 1: Mr Welsh did, Andy Young did, and so that those
Speaker 1: would be the big names I think, both as mentors
Speaker 1: and investors. Let's let's talk about books. You've written your
Speaker 1: fair share of books. Who's what other authors books being
Speaker 1: on investing or what have you have you enjoyed? What
Speaker 1: what books would you recommend to people? Well, I've already
Speaker 1: mentioned The Intelligent Investor by Graham. Intelligent Investor by Graham.
Speaker 1: I think Bert Malkiale, who's a friend of ours and
Speaker 1: friend of mine and former foreign director here for many
Speaker 1: many years, I know, really the best director we've ever
Speaker 1: had outside director. His random walked down Wall Street was
Speaker 1: aided every couple of years is another. UM. David Swinson's
Speaker 1: book On for the Individual Investor is really superb. Peter
Speaker 1: Bernstein's Against the Gods just I just read that over
Speaker 1: the holidays, fantastic book. Well, he was a very gifted man.
Speaker 1: We were very close Peter and I, and we had
Speaker 1: our little disagreements here and there, but overall we were
Speaker 1: on the same team. And then Bill Bernstein Four Pillars
Speaker 1: of Investment Wisdom is A is A is a wonderful book,
Speaker 1: and there aren't. It's hard me to go a lot,
Speaker 1: a lot beyond that, to be honest with you. Well,
Speaker 1: that's that's a great starting list right there. You can
Speaker 1: certainly do worse than any of those half dozen books. UM,
Speaker 1: we've talked a lot about how you've changed the industry
Speaker 1: since you began way back in in the sixties and seventies.
Speaker 1: How else has the industry changed that you think is
Speaker 1: either for the better or for the worst. What what
Speaker 1: stands out as to how finance has evolved over those
Speaker 1: those years. I think when I came into this industry,
Speaker 1: it was a much better industry than it was thereafter,
Speaker 1: the big part of that change was in the go
Speaker 1: go era, when we had this idea. We went from
Speaker 1: investment committees prudent investment committees buying blue chip stocks. Two
Speaker 1: portfolio managers comments uh and not stars, comments that burn
Speaker 1: out and their ashes drift gently down to earth. And
Speaker 1: that's happened to so many, so many comment managers. I mean,
Speaker 1: you could hardly lose count, you wonder. I mean, the
Speaker 1: real the real superstars just don't stay there, you know.
Speaker 1: I always just to wish Bill Miller, well, he beat
Speaker 1: He's a leg mason. He beat the market, I think
Speaker 1: sixteen years in a row, and every time I saw him,
Speaker 1: I'd say good luck, good luck in the future. I
Speaker 1: liked them. My wishes of good luck didn't do any
Speaker 1: good at all. He very famously imploded and went from
Speaker 1: the literally the top performing fund to the bottom one
Speaker 1: percent following the financial crisis. What had worked for him
Speaker 1: previously just eventually stopped working, and he got caught in
Speaker 1: a lot of paper that turned out to be not
Speaker 1: worth what he thought it was well in an earlier area.
Speaker 1: Remember Gerald CSI ran Fideliti Capital Fund and he had
Speaker 1: the best record in the business. He goes out and
Speaker 1: starts his own fund and Manhattan Fund gets a huge underwriting.
Speaker 1: It was four a million dollars. Nobody ever seen anything
Speaker 1: like that in this business, that to the old days.
Speaker 1: And it had after ten years of operation, the worst
Speaker 1: record in the mutual fund industry. And you know, I
Speaker 1: tell people, when you think about the nature of securities markets,
Speaker 1: its gifts as difficult to be last as it is
Speaker 1: to be first. What was his name about that? That's amazing?
Speaker 1: What was his name again? Gerald Side t s A
Speaker 1: I T S A great um. So some of my
Speaker 1: my last few questions. You've mentioned a lot of things
Speaker 1: have changed since nineteen fifty one. What do you see
Speaker 1: as changing in the future. I guess I'd say, not
Speaker 1: to beat the phrase to death, reversion to the mean.
Speaker 1: I see the industry going back to its roots. Uh,
Speaker 1: much more of a fiduciary focus, I hope. So I'm
Speaker 1: very much in favor of the fiduciary rule. Although someone
Speaker 1: else is gonna have to work out the details. It
Speaker 1: seemed to make it difficult to operate and uh, but
Speaker 1: it shouldn't make it difficult to operate because all you
Speaker 1: have to do is ask yourself as an advisor, one question, Hey,
Speaker 1: is this in the client's best interest? And if the
Speaker 1: answer is no, you can't do it. It's much simpler
Speaker 1: than the complicated suitability rules which have all sorts of
Speaker 1: ifs and thens and clauses best interests of the client.
Speaker 1: Yes you can do it, No you can't. What could
Speaker 1: be What could be easier? When you unfortunately need kind
Speaker 1: of documentation how you're doing things and all that. It
Speaker 1: is a little borious because we have to have you know,
Speaker 1: a lot of lawyers work on this, and you and
Speaker 1: I have the spirit of fiduciary duty and they've got
Speaker 1: to get to the letter of it. And it's it's
Speaker 1: more complex than it ought to be, but it's coming.
Speaker 1: And you know, with so many funds being flashes in
Speaker 1: the pan, investors are going to learn by their own experience.
Speaker 1: You know, I was told this was a great fund,
Speaker 1: and it was a great fund for two days and
Speaker 1: that was the end of it. Uh. And we overestimate
Speaker 1: our own ability to pick funds and stocks. We over
Speaker 1: overestimate the ability of our managers to do better consistently,
Speaker 1: and if people just got the idea of reversion of
Speaker 1: the mean again and again and again. You know the
Speaker 1: we were looking at some data the other day, Barry,
Speaker 1: and if you're in the top quartile for a given
Speaker 1: five year period, only fifteen percent of you are going
Speaker 1: to be in the top quartile in the next five
Speaker 1: year period. And if you're in the bottom quartile of
Speaker 1: you will be in the top quartile the next period.
Speaker 1: And over time, that sort of returns don't help help anybody.
Speaker 1: I think was Howard Marks who said, if you're consistently
Speaker 1: in the top over time, that puts you in the
Speaker 1: top ten percent. But you have to be consistent. You
Speaker 1: can't be a shooting star, outperforming, under performing, out performing
Speaker 1: under performing. You have to be uh top forty. But
Speaker 1: he runs a distress bond funds not not necessarily a stick.
Speaker 1: Let me let me add this, if my name, what
Speaker 1: is the objective of the individual investor. It's to have
Speaker 1: a lifetime of investing. Investing for a lifetime. And for
Speaker 1: a young investor, believe it or not, twenty five year
Speaker 1: old investor has a seventy year life expectancy, seventy years,
Speaker 1: they're gonna be nine, probably be a hundred. So what's
Speaker 1: the best way to invest for seventy years. If a
Speaker 1: mutual fund manager lasts for seven years, that's the average,
Speaker 1: You're gonna have ten of them. The average fund goes
Speaker 1: out of business every um, every decade, every decade. Excuse me, really,
Speaker 1: it's that high. That's amazing. And then the new the
Speaker 1: new guy comes in and sweeps clean. Managers get fired.
Speaker 1: There is no way, none, zero, that if you own
Speaker 1: three or four mutual funds, which is typical, there is
Speaker 1: no way that over seventy years you have even a
Speaker 1: fighting chance to beat the market. And if you do
Speaker 1: the index fund, I guarantee you that you will have
Speaker 1: the same non manager seventy years from now as the
Speaker 1: non manager you have today. So that raises a really
Speaker 1: interesting question, which happens to be coincidentally one of my
Speaker 1: last two questions. What advice would you give to a
Speaker 1: millennial or a kid just graduating college today beginning their career.
Speaker 1: What would you tell them about what they should do
Speaker 1: with their career and what would you tell them about investing? Well,
Speaker 1: people have to find their own way in this life,
Speaker 1: and I've I've talked to a number of groups at Princeton,
Speaker 1: one on religion and business and one on ethics and business,
Speaker 1: two separate groups. And one is a small seminar and
Speaker 1: one of a large lecture course. And I get that
Speaker 1: kind of lecture. Should I not go into the financial business?
Speaker 1: And I say no, go into the financial business and
Speaker 1: make it better than it is today. You know, I don't.
Speaker 1: People have to find their own way in this life.
Speaker 1: I had to find my own way, Barry, you have
Speaker 1: defined your own way, a lot of bumps along the way.
Speaker 1: You gotta have a little resilience. You've got to be
Speaker 1: able to take defeat and turn into victory. I think
Speaker 1: that's what I've done, maybe a little bit. And and
Speaker 1: so it's this, This field is going to shrink hugely.
Speaker 1: There's no question about that. It already has just since
Speaker 1: oh nine, no doubt about it. The combination of technology
Speaker 1: and the knowledge and the spread of this disease called
Speaker 1: indexing is not going to go away. It's habit forming,
Speaker 1: it's catching, it's contagious, it's spreading. And and my final question,
Speaker 1: and I'm I'm I feel awful that it's a ninety
Speaker 1: minutes is already up I'd like to continue you going
Speaker 1: for another ninety minutes. What is it that you know
Speaker 1: about investing today that you wish you knew when you
Speaker 1: started in nineteen fifty one. Well, I'd say quite a bit.
Speaker 1: I mean, I I was on the Welling and Fund
Speaker 1: Investment Committee, and I saw how what hard it was
Speaker 1: to beat the market. I wouldn't have told you that
Speaker 1: back in n and I worked for a long time
Speaker 1: with John Neff, who had many, many years of success
Speaker 1: in beating the market. But he's an exception, and even
Speaker 1: his record and in later years deteriorated. But then he mean,
Speaker 1: he hadn't gonna. He's not running wins. Your funny ran
Speaker 1: it for thirty years, I think, But he's not gonna.
Speaker 1: He's not running it anymore. So managers come and go.
Speaker 1: So I'd say things like the power of compounding, the
Speaker 1: beauty of keeping costs low, uh, the need to ignore
Speaker 1: the market, they need to do something. Are all things
Speaker 1: that have and and the difficulty. This is a very
Speaker 1: very hard business, this business investment management. And then in
Speaker 1: the long run, we're all average, we're below our averages
Speaker 1: my thesis suggested, below the market averages. And so I
Speaker 1: don't think it's easy, don't think you're smarter than anybody else.
Speaker 1: Just get in the middle, get costs out, and don't
Speaker 1: peek John Boggle, this has been a fascinating conversation. I
Speaker 1: again thank you so much for being so generous with
Speaker 1: your time. If you enjoy this conversation, you could look
Speaker 1: up an Inch or down an Inch on Apple iTunes
Speaker 1: and see the other eighty or so of these that
Speaker 1: we've had. UH. Be sure and check out uh all
Speaker 1: the rest of our our chats. They are really quite fascinating.
Speaker 1: I have to thank Mike bat Nick, my head of research,
Speaker 1: for helping to put together all these questions, my producer
Speaker 1: and engineer Charlie Vollmer for dragging himself out of bed
Speaker 1: at an undoddly hour in the morning to drive here
Speaker 1: to Malvern, Pennsylvania to in guard UH mother ship. Jack.
Speaker 1: Thank you again so much. This has been absolutely fascinating.
Speaker 1: Great to be wayy to marry. Good luck. M