1 00:00:00,120 --> 00:00:02,440 Speaker 1: The future may not be clear, but our commitment is 2 00:00:02,560 --> 00:00:04,440 Speaker 1: so when you sit with an advisor at Merrill Lynch, 3 00:00:04,519 --> 00:00:07,160 Speaker 1: we'll put your interests first. Visit mL dot com and 4 00:00:07,240 --> 00:00:09,600 Speaker 1: learn more about Merrill Lynch. An affiliated Bank of America, 5 00:00:09,760 --> 00:00:12,239 Speaker 1: Mary Lynch makes available products and services offered by Merrill Lynch. 6 00:00:12,240 --> 00:00:14,600 Speaker 1: Pierce Veteran Smith Incorporated or Register Broker Dealer. Remember s 7 00:00:14,640 --> 00:00:21,200 Speaker 1: I PC. This is Master's in Business with Barry Ridholds 8 00:00:21,360 --> 00:00:25,200 Speaker 1: on Bloomberg Radio this week on Masters in Business. I 9 00:00:25,239 --> 00:00:29,280 Speaker 1: have a very special guest. His name is Professor Burton Malkiel. 10 00:00:29,360 --> 00:00:31,840 Speaker 1: And when I say I have a special guest man, 11 00:00:32,000 --> 00:00:36,160 Speaker 1: I am not kidding this week. Professor Malkiel is perhaps 12 00:00:36,240 --> 00:00:41,240 Speaker 1: best known for writing one of the most seminal books 13 00:00:41,280 --> 00:00:45,280 Speaker 1: on investing, A Random Walk down Wall Street. It's now 14 00:00:45,320 --> 00:00:49,440 Speaker 1: and it's eleventh edition, having sold more than a million 15 00:00:49,479 --> 00:00:53,760 Speaker 1: and a half copies. UH Professor of Economics at Princeton, 16 00:00:53,960 --> 00:00:57,680 Speaker 1: twice Chairman of the department there. He ran the Hell 17 00:00:57,800 --> 00:01:01,600 Speaker 1: School of Management for about eight years, and over the 18 00:01:01,600 --> 00:01:05,039 Speaker 1: course of that period he was for twenty eight years 19 00:01:05,120 --> 00:01:09,480 Speaker 1: on the board UH Vanguard. He is currently the chief 20 00:01:09,720 --> 00:01:15,679 Speaker 1: investment officer of Wealth Front Friends with other guests of 21 00:01:15,760 --> 00:01:22,520 Speaker 1: the show like Jack Bogel and Charlie ellis really Professor 22 00:01:22,640 --> 00:01:28,320 Speaker 1: Malkiel is unique um in the annals of of investing. 23 00:01:28,400 --> 00:01:32,000 Speaker 1: He's a rock star. And I don't know if there 24 00:01:32,040 --> 00:01:36,440 Speaker 1: are many people who are more knowledgeable and more influential 25 00:01:37,160 --> 00:01:40,960 Speaker 1: uh than he is. So the man who pretty much 26 00:01:41,080 --> 00:01:46,720 Speaker 1: invented the blindfolded monkey throwing darts, the person who suggested 27 00:01:47,600 --> 00:01:51,360 Speaker 1: that Wall Street created an index fund so that investors 28 00:01:51,400 --> 00:01:57,559 Speaker 1: could make low cost indexed investments. What else can I say? 29 00:01:57,560 --> 00:02:00,440 Speaker 1: Why don't I say nothing else? And with out any 30 00:02:00,440 --> 00:02:08,799 Speaker 1: further ado my conversation with Bert Malkiel. This is Masters 31 00:02:08,840 --> 00:02:13,280 Speaker 1: in Business with Barry Ridholts on Bloomberg Radio. My special 32 00:02:13,320 --> 00:02:15,400 Speaker 1: guest today. And I know you make fun of me 33 00:02:15,440 --> 00:02:18,120 Speaker 1: when I say that, but my special guest today is 34 00:02:18,240 --> 00:02:21,920 Speaker 1: truly a special guest and a legend in the world 35 00:02:22,040 --> 00:02:25,640 Speaker 1: of finance. Let me read just a short version of 36 00:02:25,720 --> 00:02:31,200 Speaker 1: his curriculum vitae. His name is Professor Burton Malkiel. He 37 00:02:31,639 --> 00:02:35,880 Speaker 1: used to be the Chemical Bank Professor of Economics at 38 00:02:35,919 --> 00:02:39,560 Speaker 1: the Princeton UH At Princeton University. He is a two 39 00:02:39,560 --> 00:02:43,600 Speaker 1: time chairman of the Economics Department, served as a member 40 00:02:43,639 --> 00:02:48,720 Speaker 1: of the Council of Economic Advisors from to nineteen seventy seven, 41 00:02:48,760 --> 00:02:53,200 Speaker 1: became president of the American Finance Association. After that, he 42 00:02:53,360 --> 00:02:56,400 Speaker 1: was dean of the Yale School of Management in the 43 00:02:56,480 --> 00:03:01,520 Speaker 1: eighties and spent twenty eight years as a director of 44 00:03:01,560 --> 00:03:07,280 Speaker 1: the Vanguard Group. He's probably best known for authoring the 45 00:03:07,360 --> 00:03:11,160 Speaker 1: book A Random Walk Down Wall Street. It's now and 46 00:03:11,200 --> 00:03:16,279 Speaker 1: it's eleventh edition. The paperback came out again, updated and revised. 47 00:03:16,760 --> 00:03:20,720 Speaker 1: It's sold one point five million copies, and a number 48 00:03:20,720 --> 00:03:23,880 Speaker 1: of people have said, if you read only one book 49 00:03:24,240 --> 00:03:27,280 Speaker 1: about investing, Random Walk Down Wall Street is the one 50 00:03:27,360 --> 00:03:31,440 Speaker 1: to read. Professor Malkiel, Welcome to Bloomberg. Thank you very 51 00:03:32,200 --> 00:03:36,120 Speaker 1: enjoy being here, and I am am thrilled to have you. 52 00:03:36,160 --> 00:03:38,440 Speaker 1: By the way, I left out so much from your CV. 53 00:03:39,280 --> 00:03:42,240 Speaker 1: UM bachelor's and NBA from Harvard and fifty three and 54 00:03:42,280 --> 00:03:46,000 Speaker 1: fifty five doctorate from Princeton in sixty four. You're currently 55 00:03:46,120 --> 00:03:50,920 Speaker 1: Chief investment Officer for wealth Front, which is a software 56 00:03:50,920 --> 00:03:54,840 Speaker 1: based financial advisor. UM. The list goes on and on. 57 00:03:55,160 --> 00:03:58,480 Speaker 1: I'm gonna stop that because if I keep discussing your 58 00:03:58,480 --> 00:04:01,920 Speaker 1: CV will run out of time for questions. You're probably 59 00:04:02,080 --> 00:04:07,200 Speaker 1: best known as someone who who was early in the 60 00:04:07,280 --> 00:04:12,280 Speaker 1: history of recognizing that quote markets are efficient. Why are 61 00:04:12,360 --> 00:04:17,400 Speaker 1: markets efficient? First of all, sometimes people get wrong what 62 00:04:17,720 --> 00:04:21,520 Speaker 1: efficient markets mean, so giving a definition, so let me 63 00:04:21,680 --> 00:04:23,960 Speaker 1: let me tell you the way I define it. There 64 00:04:24,000 --> 00:04:29,479 Speaker 1: are two parts to uh, the idea of efficient markets, 65 00:04:29,560 --> 00:04:33,640 Speaker 1: and one part that many people associate with it that's wrong. 66 00:04:33,920 --> 00:04:38,599 Speaker 1: The parts that are right are one that information gets 67 00:04:38,640 --> 00:04:43,680 Speaker 1: reflected very quickly into stock prices. If there's some favorable 68 00:04:43,760 --> 00:04:46,920 Speaker 1: news about a company, uh that's going to increase at 69 00:04:46,960 --> 00:04:50,440 Speaker 1: stock price ten percent, the stock price tends to go 70 00:04:50,520 --> 00:04:56,360 Speaker 1: up ten percent right away because anybody who uh waits 71 00:04:56,640 --> 00:05:01,560 Speaker 1: uh to uh get take advantage of it will find 72 00:05:01,640 --> 00:05:06,640 Speaker 1: that quicker people have come in beforehand. So one information 73 00:05:07,040 --> 00:05:11,560 Speaker 1: gets reflected right away. Now, what efficient markets is often 74 00:05:11,640 --> 00:05:16,720 Speaker 1: associated with, which is wrong, is that efficient markets mean 75 00:05:16,880 --> 00:05:22,039 Speaker 1: the price is always right. The price is exactly the 76 00:05:22,080 --> 00:05:25,800 Speaker 1: present value of all of the dividends and earnings that 77 00:05:25,839 --> 00:05:28,240 Speaker 1: are going to come in the future, and the price 78 00:05:28,480 --> 00:05:32,440 Speaker 1: is perfectly right. That's wrong. The price is never right. 79 00:05:32,520 --> 00:05:36,680 Speaker 1: In fact, prices are always wrong. What's right is that 80 00:05:36,760 --> 00:05:41,640 Speaker 1: nobody knows for sure whether they're too high or too low, 81 00:05:42,440 --> 00:05:46,480 Speaker 1: and that leads to the second point about efficient markets. 82 00:05:46,839 --> 00:05:50,200 Speaker 1: It's not that the prices are always right. It's that 83 00:05:50,720 --> 00:05:57,000 Speaker 1: it's never clear that they are wrong. There's nothing systematically 84 00:05:57,080 --> 00:06:02,640 Speaker 1: wrong about them. Therefore there are no arbitrage opportunities, and 85 00:06:02,760 --> 00:06:09,080 Speaker 1: therefore the market is really very very difficult to beat, 86 00:06:09,680 --> 00:06:14,359 Speaker 1: and so information gets reflected. The market's tough to beat. 87 00:06:14,800 --> 00:06:18,320 Speaker 1: But prices are not always right. We know perfectly well 88 00:06:18,360 --> 00:06:22,440 Speaker 1: they're always wrong, but nobody knows for sure whether they're 89 00:06:22,480 --> 00:06:24,839 Speaker 1: too high or too low. We were recently having a 90 00:06:24,880 --> 00:06:28,720 Speaker 1: discussion about fair value when people were complaining, well, the 91 00:06:28,800 --> 00:06:33,320 Speaker 1: market is not at fair value, and my my response was, well, 92 00:06:33,400 --> 00:06:36,680 Speaker 1: you just briefly pass fair value as you crean too 93 00:06:36,760 --> 00:06:38,800 Speaker 1: much to the upside of too much to the downside. 94 00:06:39,160 --> 00:06:42,200 Speaker 1: You're saying, even when you go by fair value, we 95 00:06:42,279 --> 00:06:44,480 Speaker 1: don't really know exactly what it is. We don't know, 96 00:06:45,080 --> 00:06:49,040 Speaker 1: we don't know for sure. Look, we know perfectly well 97 00:06:49,800 --> 00:06:53,880 Speaker 1: that in March of two thousand there was a bubble 98 00:06:53,920 --> 00:06:59,240 Speaker 1: in the stock market. UH. We had internet companies selling 99 00:06:59,279 --> 00:07:05,119 Speaker 1: a triple multiples. We had companies changing their name UH 100 00:07:05,320 --> 00:07:07,360 Speaker 1: to put dot com at the end of it, and 101 00:07:07,400 --> 00:07:10,360 Speaker 1: the price would double. We know that there were crazy 102 00:07:10,520 --> 00:07:15,080 Speaker 1: things going on but the problem is the people who 103 00:07:15,120 --> 00:07:19,640 Speaker 1: are associated with the view I told you so I 104 00:07:19,880 --> 00:07:24,720 Speaker 1: knew that. The problem is they knew it in and 105 00:07:26,680 --> 00:07:30,680 Speaker 1: that's the problem. After the fact, we know perfectly well 106 00:07:30,760 --> 00:07:34,640 Speaker 1: the prices were wrong, But the difficulty was the people 107 00:07:34,680 --> 00:07:37,320 Speaker 1: who said we knew it, knew it early in the 108 00:07:37,440 --> 00:07:40,840 Speaker 1: nineteen nineties and missed one of the best bull markets 109 00:07:40,880 --> 00:07:46,400 Speaker 1: we've ever had. I very famously remember Lewis Rukaiser's his 110 00:07:46,600 --> 00:07:50,080 Speaker 1: elves saying these things in nine six. He ended up 111 00:07:50,120 --> 00:07:53,440 Speaker 1: demoting a few of them because they were right. Stocks 112 00:07:53,440 --> 00:07:56,160 Speaker 1: were of valued. But so you missed four years of 113 00:07:56,680 --> 00:08:02,160 Speaker 1: double digit gains this last collapse. I recall, in real time, 114 00:08:03,040 --> 00:08:07,000 Speaker 1: very very few people were warning about credit, about derivatives, 115 00:08:07,040 --> 00:08:11,720 Speaker 1: about housing. These days, I have meant more people who 116 00:08:11,800 --> 00:08:14,800 Speaker 1: claim to have seen that collapse coming, and that would 117 00:08:14,800 --> 00:08:17,680 Speaker 1: be a little bit of hindsight bias. Now exactly, and 118 00:08:17,720 --> 00:08:22,600 Speaker 1: that's precisely the thing that happens uh before the fact, 119 00:08:23,200 --> 00:08:27,400 Speaker 1: we really don't know, and we don't know today. Are 120 00:08:27,440 --> 00:08:30,360 Speaker 1: the is the stock market too high or too low? 121 00:08:30,680 --> 00:08:34,400 Speaker 1: It's high now, there's no question valuations are stretched. But 122 00:08:34,480 --> 00:08:39,000 Speaker 1: it's also the case that the short term government interest 123 00:08:39,120 --> 00:08:43,960 Speaker 1: rate is zero, and the long term interest rate after 124 00:08:44,160 --> 00:08:49,600 Speaker 1: inflation is probably zero or below zero. So in that environment, 125 00:08:49,760 --> 00:08:54,319 Speaker 1: everything is going to be more highly priced. I'm Barry Hults. 126 00:08:54,520 --> 00:08:58,199 Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My 127 00:08:58,320 --> 00:09:04,280 Speaker 1: special guest is Professor Burton Malkiel of Princeton and Vanguard 128 00:09:04,400 --> 00:09:07,760 Speaker 1: and the author of A Random Walk Down Wall Street. 129 00:09:07,840 --> 00:09:11,280 Speaker 1: The paperback is now and it's eleventh edition and it's 130 00:09:11,280 --> 00:09:14,400 Speaker 1: sold a million and a half copies. Um, let's talk 131 00:09:14,440 --> 00:09:20,320 Speaker 1: a little bit about indexing versus active management. Uh. There 132 00:09:20,400 --> 00:09:23,600 Speaker 1: was a quote from the book that I've always enjoyed 133 00:09:23,600 --> 00:09:26,640 Speaker 1: this number of quotes from the book, but you had 134 00:09:26,720 --> 00:09:32,120 Speaker 1: said back in nine seventy three. Fund spokesman are quick 135 00:09:32,160 --> 00:09:35,079 Speaker 1: to point out that you can't buy the market averages. 136 00:09:35,720 --> 00:09:40,200 Speaker 1: It's time the public could so explain your role in 137 00:09:40,240 --> 00:09:44,000 Speaker 1: the development of the index funds. Well, basically I said 138 00:09:44,040 --> 00:09:48,480 Speaker 1: that in nineteen seventy three, and the first index fund 139 00:09:49,120 --> 00:09:54,679 Speaker 1: was not started until seventy six. Now. Uh, you know, 140 00:09:55,280 --> 00:09:58,320 Speaker 1: I want to give Jack Bogel all the credit in 141 00:09:58,400 --> 00:10:03,880 Speaker 1: the world, because it's one thing for an academic to say, hey, 142 00:10:03,960 --> 00:10:07,680 Speaker 1: there ought to be index funds. It's another thing for 143 00:10:07,720 --> 00:10:12,360 Speaker 1: somebody to bet his company on starting an index fund, 144 00:10:12,679 --> 00:10:16,840 Speaker 1: and let me tell you, it wasn't easy. At the beginning. 145 00:10:17,400 --> 00:10:20,800 Speaker 1: They had an underwriting where they were hoping to do 146 00:10:20,880 --> 00:10:24,360 Speaker 1: a hundred million or more in the index fund, and 147 00:10:24,440 --> 00:10:29,200 Speaker 1: in fact the book wasn't oversubscribed. They sold eleven million. 148 00:10:29,679 --> 00:10:33,319 Speaker 1: And sometimes I used to joke, because uh I then 149 00:10:33,480 --> 00:10:36,560 Speaker 1: was on the Vanguard board that Jack Bogle and I 150 00:10:36,640 --> 00:10:39,240 Speaker 1: were about the only people I knew who actually owned 151 00:10:39,240 --> 00:10:43,680 Speaker 1: shares in the index fund. It was very, very slow 152 00:10:43,880 --> 00:10:48,000 Speaker 1: to catch on, but it did catch on, UH And 153 00:10:48,280 --> 00:10:53,840 Speaker 1: in fact, last year, hundreds of millions of dollars moved 154 00:10:54,160 --> 00:10:59,640 Speaker 1: from actively managed funds into index funds, and index funds 155 00:10:59,720 --> 00:11:03,720 Speaker 1: now now have maybe somewhere between thirty and thirty five 156 00:11:03,840 --> 00:11:10,440 Speaker 1: percent of people's money of individuals or institutions, more institutional 157 00:11:10,600 --> 00:11:16,080 Speaker 1: than individual. Uh. Individuals are slower to catch onto this, 158 00:11:16,559 --> 00:11:20,960 Speaker 1: so with the institutions it's maybe thirty five or more. 159 00:11:21,520 --> 00:11:25,320 Speaker 1: With individuals it's probably a bit less than thirty. But 160 00:11:25,400 --> 00:11:29,480 Speaker 1: the point is the market is catching up to the idea, 161 00:11:30,040 --> 00:11:36,319 Speaker 1: and UH I am obviously simply delighted since I've basically 162 00:11:36,360 --> 00:11:40,199 Speaker 1: been an evangelist for index funds all my life. So 163 00:11:40,440 --> 00:11:44,680 Speaker 1: Vanguard you. You mentioned your you you served with Jack Bogel. 164 00:11:44,679 --> 00:11:47,160 Speaker 1: You were on the board for twenty eight years. They're 165 00:11:47,200 --> 00:11:52,280 Speaker 1: now over three trillion, that's trillion, with of which two 166 00:11:52,320 --> 00:11:56,160 Speaker 1: thirds are actively are actually passive indexes are actually they 167 00:11:56,240 --> 00:12:00,480 Speaker 1: still have about a third that are active management. But 168 00:12:01,080 --> 00:12:05,520 Speaker 1: that leads to a really interesting question. What's more significant 169 00:12:05,800 --> 00:12:09,760 Speaker 1: the low cost aspect of it or the passive aspect 170 00:12:09,840 --> 00:12:12,960 Speaker 1: of it of index Well, I think they're both both 171 00:12:12,960 --> 00:12:18,679 Speaker 1: are important. Clearly, the low cost is important in that Uh, 172 00:12:18,720 --> 00:12:20,840 Speaker 1: you know, let me tell you, any of us who 173 00:12:21,160 --> 00:12:27,040 Speaker 1: talk about financial markets need to be very modest about 174 00:12:27,080 --> 00:12:29,559 Speaker 1: what we know and don't know. But let me tell 175 00:12:29,600 --> 00:12:33,040 Speaker 1: you the one thing I'm absolutely sure about with respect 176 00:12:33,080 --> 00:12:37,520 Speaker 1: to financial markets, and that is the lower the fee 177 00:12:37,720 --> 00:12:41,360 Speaker 1: I pay to the purveyor of the investment service, the 178 00:12:41,440 --> 00:12:44,360 Speaker 1: more that's going to be for me. And the problem 179 00:12:44,520 --> 00:12:49,720 Speaker 1: is for active managers, it is still the case that 180 00:12:49,920 --> 00:12:53,560 Speaker 1: probably a hundred basis points one percentage point a year 181 00:12:54,160 --> 00:12:58,199 Speaker 1: is what they are charging, and the index fund or 182 00:12:58,400 --> 00:13:03,400 Speaker 1: e t F, the exchange traded index fund, charges five 183 00:13:03,600 --> 00:13:09,400 Speaker 1: or four basis points. Uh. And that difference is basically 184 00:13:09,600 --> 00:13:15,360 Speaker 1: a difference that comes to the investor. It's also the 185 00:13:15,440 --> 00:13:20,680 Speaker 1: case that trading is not free. There are bitass spreads, 186 00:13:20,720 --> 00:13:24,880 Speaker 1: there are market impact costs. Uh, it's not free. So 187 00:13:25,000 --> 00:13:29,840 Speaker 1: there's an extract cost uh, including what I think people 188 00:13:29,920 --> 00:13:35,000 Speaker 1: do not appreciate, and that's the tax cost of the 189 00:13:35,080 --> 00:13:38,960 Speaker 1: active trading. When you have an actively managed fund, you've 190 00:13:39,000 --> 00:13:40,960 Speaker 1: got a ten ninety nine at the end of the year. 191 00:13:41,160 --> 00:13:44,120 Speaker 1: Very often and they will say, hey, we realize some 192 00:13:44,200 --> 00:13:47,240 Speaker 1: short term and long term capital gains on your behalf 193 00:13:47,440 --> 00:13:49,640 Speaker 1: and you've got to report those on your income tax. 194 00:13:49,960 --> 00:13:52,120 Speaker 1: You have a partner named Uncle Sam, and he's going 195 00:13:52,160 --> 00:13:59,280 Speaker 1: to take exactly that. That's that's quite astonishing. So how 196 00:13:59,320 --> 00:14:01,800 Speaker 1: do I'm curio is, how did you find your way 197 00:14:01,840 --> 00:14:06,920 Speaker 1: to Vanguard from Princeton. Well, I think Vanguard found its 198 00:14:06,960 --> 00:14:12,000 Speaker 1: way to me in that people knew uh that I 199 00:14:12,080 --> 00:14:19,200 Speaker 1: had been a proselytizer for index funds. I believed in 200 00:14:19,920 --> 00:14:23,360 Speaker 1: low cost uh, and so it was such a very 201 00:14:23,520 --> 00:14:27,480 Speaker 1: natural fit. And Vanguard came to me. I didn't come 202 00:14:27,520 --> 00:14:30,520 Speaker 1: to them. So let me throw another of your quotes 203 00:14:30,560 --> 00:14:33,240 Speaker 1: from the book out that that I adore. And I'm 204 00:14:33,280 --> 00:14:36,560 Speaker 1: curious as to the sort of pushback this generates. But 205 00:14:36,640 --> 00:14:39,640 Speaker 1: by the way we take this quote for granted, and 206 00:14:39,680 --> 00:14:43,480 Speaker 1: I have found a number of quotes that are yours 207 00:14:43,520 --> 00:14:46,880 Speaker 1: that a number of other people have have taken credit for. 208 00:14:47,440 --> 00:14:51,480 Speaker 1: But in a random walkdown Wall Street, you wrote, a 209 00:14:51,560 --> 00:14:56,360 Speaker 1: blindfolded monkey throwing darts at a newspaper's financial pages could 210 00:14:56,400 --> 00:15:00,280 Speaker 1: select a portfolio that would do just as well, one 211 00:15:00,360 --> 00:15:04,960 Speaker 1: selected carefully by the experts. What was the response to that. Oh, 212 00:15:05,120 --> 00:15:15,080 Speaker 1: the response was really uh, definitely bad. Uh. The former 213 00:15:16,320 --> 00:15:21,080 Speaker 1: Bloomberg business Week was just Business Week, And my book 214 00:15:21,480 --> 00:15:24,600 Speaker 1: when it first came out, was reviewed by an investment 215 00:15:24,680 --> 00:15:28,880 Speaker 1: professional in Business Week, and it was probably the worst 216 00:15:28,920 --> 00:15:32,480 Speaker 1: review I've ever had in my life. The reviewers said, 217 00:15:32,560 --> 00:15:34,920 Speaker 1: this is the biggest piece of garbage that you could 218 00:15:34,920 --> 00:15:42,440 Speaker 1: possibly imagine, because professional, uh, investment people really don't like 219 00:15:42,680 --> 00:15:49,800 Speaker 1: to be compared to a blind to blindfolded chimpanzee. So 220 00:15:49,960 --> 00:15:53,200 Speaker 1: I remember, for a long time the Wall Street maybe 221 00:15:53,200 --> 00:15:55,440 Speaker 1: it was fifteen years they were doing this, The Wall 222 00:15:55,520 --> 00:15:59,560 Speaker 1: Street Journal was literally throwing darts at stock pages and 223 00:15:59,640 --> 00:16:03,640 Speaker 1: compared to an absolutely and in fact, they had invited 224 00:16:03,680 --> 00:16:07,680 Speaker 1: me to throw out the first darts when they did this. 225 00:16:08,280 --> 00:16:15,560 Speaker 1: And basically what they found was there was a little 226 00:16:15,600 --> 00:16:18,400 Speaker 1: bit of an effect because when the Wall Street Journal 227 00:16:18,440 --> 00:16:22,040 Speaker 1: put the column out. The column had five picks of 228 00:16:22,120 --> 00:16:26,360 Speaker 1: the experts, and the expert picks, Uh, maybe got a 229 00:16:26,400 --> 00:16:29,680 Speaker 1: little bit for a day, the price went up a bit, 230 00:16:29,960 --> 00:16:34,000 Speaker 1: but generally, after the fifteen years of doing this, it 231 00:16:34,080 --> 00:16:37,760 Speaker 1: came out basically pretty even. And you know, that really 232 00:16:37,880 --> 00:16:42,880 Speaker 1: leads to a very very important point about indexing. You know, 233 00:16:43,000 --> 00:16:46,480 Speaker 1: we talked about the markets being reasonably efficient. Suppose they 234 00:16:46,520 --> 00:16:50,760 Speaker 1: weren't efficient. It doesn't matter when you think of it. 235 00:16:51,280 --> 00:16:54,320 Speaker 1: All the stocks in the United States have to be 236 00:16:54,400 --> 00:16:58,800 Speaker 1: held by somebody. Every share of General Motors is held 237 00:16:58,800 --> 00:17:03,760 Speaker 1: by somebody. Every share of Facebook is held by somebody. 238 00:17:03,800 --> 00:17:08,679 Speaker 1: Any every share of Salesforce is held by somebody. So 239 00:17:08,800 --> 00:17:14,679 Speaker 1: what that means is if you, as a professional investor, 240 00:17:15,800 --> 00:17:22,679 Speaker 1: hold just a few of the stocks, what that means 241 00:17:22,960 --> 00:17:25,800 Speaker 1: is and say that they're the good ones, the ones 242 00:17:25,880 --> 00:17:29,320 Speaker 1: that went up more than the market. What that has 243 00:17:29,359 --> 00:17:33,640 Speaker 1: to mean is that somebody else is holding the stocks 244 00:17:34,119 --> 00:17:37,000 Speaker 1: that went up less than the market. It it must 245 00:17:37,160 --> 00:17:41,840 Speaker 1: follow that investing has to be a zero sum game. 246 00:17:42,400 --> 00:17:46,960 Speaker 1: If somebody is outperforming, then somebody else has got to 247 00:17:47,000 --> 00:17:52,080 Speaker 1: be underperforming because the index holds everything. And the reason 248 00:17:52,160 --> 00:17:56,879 Speaker 1: the index fund wins is the index fund is holding 249 00:17:56,920 --> 00:18:01,960 Speaker 1: everything and essentially charging a zero the and the active 250 00:18:02,000 --> 00:18:06,159 Speaker 1: manager is holding some of the stocks and charging a 251 00:18:06,240 --> 00:18:12,200 Speaker 1: one percent fee. So even if before fees, the active 252 00:18:12,240 --> 00:18:19,160 Speaker 1: managers balance each other out, after fees, they're going to underperform. 253 00:18:19,200 --> 00:18:24,480 Speaker 1: And what we know, we know so clearly is year 254 00:18:24,680 --> 00:18:31,840 Speaker 1: after year after year, the active funds are underperforming. Every year. 255 00:18:31,920 --> 00:18:34,199 Speaker 1: I always read columns, this is going to be a 256 00:18:34,240 --> 00:18:37,760 Speaker 1: stock pickers market year, you know, every year people are 257 00:18:37,800 --> 00:18:40,120 Speaker 1: going to say that, or beginning of this year, there's 258 00:18:40,119 --> 00:18:42,639 Speaker 1: going to be more of volatility. This year, the unactive 259 00:18:42,680 --> 00:18:47,000 Speaker 1: managers will be able to outperform. And Standard in Pores 260 00:18:47,119 --> 00:18:50,920 Speaker 1: does a so called SPIVA report each year Standard and 261 00:18:50,960 --> 00:18:54,560 Speaker 1: Poor's indices versus active, and every year we get the 262 00:18:54,600 --> 00:19:01,080 Speaker 1: same thing. Two thirds of the actively managed mutual funds 263 00:19:01,200 --> 00:19:05,920 Speaker 1: underperformed the index, and the third that outperform in one 264 00:19:06,000 --> 00:19:09,240 Speaker 1: year aren't the same as the third that outperformed in 265 00:19:09,280 --> 00:19:13,520 Speaker 1: the next year. So that uh uh, you know, it's 266 00:19:13,560 --> 00:19:18,080 Speaker 1: not that it's impossible to outperform, and in fact, there 267 00:19:18,080 --> 00:19:23,680 Speaker 1: are a few outperformers, but when you go active, you're 268 00:19:23,880 --> 00:19:26,240 Speaker 1: much more likely to be in the bottom end of 269 00:19:26,280 --> 00:19:31,560 Speaker 1: the distribution and index investing isn't mediocre investing, it isn't 270 00:19:31,640 --> 00:19:37,400 Speaker 1: average investing. It's actually above average investing. I'm Barry Riults. 271 00:19:37,600 --> 00:19:41,359 Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My 272 00:19:41,440 --> 00:19:46,800 Speaker 1: special guest today is Princeton Emeritus Professor Burton Malkiol. He 273 00:19:46,920 --> 00:19:50,400 Speaker 1: is probably best known for his book A Random Walk 274 00:19:50,440 --> 00:19:54,760 Speaker 1: Down Wall Street. The paperback is now in its eleventh edition. 275 00:19:54,760 --> 00:19:58,080 Speaker 1: It's already sold over a million and a half copies 276 00:19:58,160 --> 00:20:01,480 Speaker 1: and is widely regarded as the one book to read 277 00:20:01,520 --> 00:20:04,400 Speaker 1: on investing if you're only going to read one. Uh. 278 00:20:04,440 --> 00:20:09,720 Speaker 1: He is also, in addition to a long and glorious 279 00:20:09,800 --> 00:20:14,080 Speaker 1: uh academic career, he is also the chief investment officer 280 00:20:14,320 --> 00:20:17,800 Speaker 1: of wealth Front, which is one of the larger new 281 00:20:18,480 --> 00:20:22,880 Speaker 1: software driven asset management firms, which is running about three 282 00:20:22,920 --> 00:20:26,119 Speaker 1: billion dollars. Is that about right? So how did you 283 00:20:26,160 --> 00:20:30,240 Speaker 1: get involved with something like a robo advised or something 284 00:20:30,280 --> 00:20:34,879 Speaker 1: like Wealthfront? Well, again, they just as with Vanguard, they 285 00:20:34,920 --> 00:20:41,040 Speaker 1: found they came to me rather than vice versa. Uh. 286 00:20:41,080 --> 00:20:46,040 Speaker 1: And again it was just such a natural fit because 287 00:20:46,119 --> 00:20:51,800 Speaker 1: a they use only index funds, and as you know, UH, 288 00:20:51,840 --> 00:20:54,760 Speaker 1: that's what I have believed in all of my life. 289 00:20:55,280 --> 00:21:04,280 Speaker 1: And secondly, uh, they are charging very low fees. They 290 00:21:04,400 --> 00:21:09,240 Speaker 1: charge nothing for the first fifteen thousand dollars under management, 291 00:21:09,720 --> 00:21:14,200 Speaker 1: and then they charge twenty five basis points a quarter 292 00:21:14,280 --> 00:21:19,840 Speaker 1: of one percent on anything over there versus a traditional 293 00:21:19,960 --> 00:21:24,320 Speaker 1: investment advisor that will put together a portfolio for you 294 00:21:24,800 --> 00:21:30,760 Speaker 1: and charge probably at least one percent uh and sometimes 295 00:21:31,240 --> 00:21:36,280 Speaker 1: even more. And the problem I think with many professional 296 00:21:36,320 --> 00:21:41,720 Speaker 1: investment advisors is that we ought to recognize that they 297 00:21:41,800 --> 00:21:46,320 Speaker 1: often have a conflict of interest. What I think is 298 00:21:46,400 --> 00:21:50,119 Speaker 1: not as well known as it should be, is that 299 00:21:50,280 --> 00:21:53,560 Speaker 1: if you go to an investment advisor who sits down 300 00:21:53,640 --> 00:21:57,639 Speaker 1: with you and says, okay, uh, we'll put together a 301 00:21:57,720 --> 00:22:04,440 Speaker 1: portfolio for you, that that advisor gets paid for selling 302 00:22:04,480 --> 00:22:08,800 Speaker 1: you an actively managed fund. It's not only that the 303 00:22:08,840 --> 00:22:13,000 Speaker 1: fund itself is charging you maybe one but there's a 304 00:22:13,080 --> 00:22:17,719 Speaker 1: conflict of interests the advisor. Uh. In fact, that's one 305 00:22:17,800 --> 00:22:20,520 Speaker 1: of the reasons why there's such a battle now about 306 00:22:20,640 --> 00:22:26,560 Speaker 1: the so called fiduciary standard. And again, what this advisor, uh, 307 00:22:26,720 --> 00:22:30,960 Speaker 1: this automated advisor, we have no conflict of interests. We 308 00:22:31,119 --> 00:22:33,960 Speaker 1: just use In fact, uh, we use a lot of 309 00:22:34,040 --> 00:22:37,720 Speaker 1: Vanguard ETFs. But if Charles Schwab has a cheaper e 310 00:22:37,840 --> 00:22:41,440 Speaker 1: t F. H we will use that and we are 311 00:22:41,520 --> 00:22:47,119 Speaker 1: able to automatically rebalance the portfolio to keep it within 312 00:22:47,320 --> 00:22:52,880 Speaker 1: the risk level that the client wants. If it's a 313 00:22:52,960 --> 00:22:58,680 Speaker 1: taxable account, uh, we do uh tax loss harvesting. I mean, 314 00:22:58,760 --> 00:23:03,080 Speaker 1: for example, last year, we had a bit of the 315 00:23:03,200 --> 00:23:08,880 Speaker 1: portfolio in emerging markets. Emerging markets were terrible last year, 316 00:23:09,400 --> 00:23:12,159 Speaker 1: so that if you bought an emerging market e t 317 00:23:12,400 --> 00:23:15,840 Speaker 1: F you had a loss. What we will then do 318 00:23:16,359 --> 00:23:22,240 Speaker 1: is we will then sell that e t F keep 319 00:23:22,760 --> 00:23:27,920 Speaker 1: your position in emerging markets by buying another one that's 320 00:23:28,040 --> 00:23:31,680 Speaker 1: similar but not identical. And the reason you can do 321 00:23:31,760 --> 00:23:34,800 Speaker 1: that and have it not be a wash sale is 322 00:23:35,880 --> 00:23:39,360 Speaker 1: say you sell an M S c I Emerging market 323 00:23:39,359 --> 00:23:43,520 Speaker 1: e t F and you buy a Vanguard one. They 324 00:23:43,560 --> 00:23:47,399 Speaker 1: are index to two different indices, so it's not a 325 00:23:47,480 --> 00:23:51,439 Speaker 1: wash sale. And so we're able to do all the 326 00:23:51,600 --> 00:23:57,000 Speaker 1: things that a sophisticated investment advisor will do for you 327 00:23:57,920 --> 00:24:00,480 Speaker 1: and do it at a fraction of the cost. And again, 328 00:24:01,640 --> 00:24:05,080 Speaker 1: as I said before, the thing I'm sure about is 329 00:24:05,600 --> 00:24:08,720 Speaker 1: the lower the costs that I pay, the more that's 330 00:24:08,720 --> 00:24:12,040 Speaker 1: gonna be for me. And UH, I think it's been 331 00:24:13,400 --> 00:24:18,160 Speaker 1: very effective and in fact, in a lousy year like 332 00:24:18,440 --> 00:24:24,760 Speaker 1: last year, we were able to realize for various accounts 333 00:24:25,240 --> 00:24:30,960 Speaker 1: between two and three percentage points of tax losses, so 334 00:24:31,040 --> 00:24:34,280 Speaker 1: that even in a year when markets were pretty darn 335 00:24:34,400 --> 00:24:38,720 Speaker 1: flat and did very little, we were able to, UH, 336 00:24:38,720 --> 00:24:42,960 Speaker 1: I think benefit the people who are our clients. So 337 00:24:42,960 --> 00:24:46,439 Speaker 1: so within this and I find the term robo adviser 338 00:24:46,680 --> 00:24:49,399 Speaker 1: to be a little misleading. But well, I don't like 339 00:24:49,480 --> 00:24:53,560 Speaker 1: it because it suggests that, in fact, you know, there's 340 00:24:53,600 --> 00:24:58,199 Speaker 1: some senseless robot who's doing it. And since I'm the 341 00:24:58,280 --> 00:25:02,439 Speaker 1: chief Investment Office, I can tell you that, in fact, 342 00:25:03,040 --> 00:25:06,480 Speaker 1: there are a lot of smart people behind what we 343 00:25:06,640 --> 00:25:09,840 Speaker 1: are doing. I'm Barry Rich Hults. You're listening to Masters 344 00:25:09,840 --> 00:25:13,280 Speaker 1: in Business on Bloomberg Radio. My special guest today is 345 00:25:13,359 --> 00:25:18,320 Speaker 1: Professor Burton Malkiel, formerly of Princeton where he is still 346 00:25:19,040 --> 00:25:24,479 Speaker 1: UH professor emeritus, a former board member of Vanguard for 347 00:25:24,520 --> 00:25:29,159 Speaker 1: twenty eight years, and author, now in its eleventh edition, 348 00:25:29,320 --> 00:25:32,240 Speaker 1: A Random Walk Down Wall Street. UH. The book has 349 00:25:32,280 --> 00:25:35,440 Speaker 1: sold over a million and a half copies. UH. Let's 350 00:25:35,440 --> 00:25:38,400 Speaker 1: talk a little bit about UM. Some other guests I've 351 00:25:38,400 --> 00:25:42,560 Speaker 1: had on the show that that you know, so you 352 00:25:42,640 --> 00:25:45,560 Speaker 1: worked with Jack Bogel for a number of years. He 353 00:25:45,600 --> 00:25:47,760 Speaker 1: was a guest on the show a few months ago. 354 00:25:48,320 --> 00:25:50,679 Speaker 1: What can you tell us about Jack that that we 355 00:25:50,800 --> 00:25:54,320 Speaker 1: probably don't know? Well, I don't know whether you know. 356 00:25:54,440 --> 00:25:57,840 Speaker 1: Jack is very well known, and I think the some 357 00:25:57,960 --> 00:26:04,480 Speaker 1: of his habits are uh probably better known than the 358 00:26:04,520 --> 00:26:07,000 Speaker 1: habits of some of your other guests. But one of 359 00:26:07,000 --> 00:26:11,120 Speaker 1: the things about Jack is that maybe people don't know, 360 00:26:11,880 --> 00:26:17,280 Speaker 1: is this idea of low cost uh is really into 361 00:26:17,480 --> 00:26:21,359 Speaker 1: his DNA. This is a guy who will go to 362 00:26:21,760 --> 00:26:26,360 Speaker 1: a hotel uh and when they say, well, we've got 363 00:26:26,400 --> 00:26:29,560 Speaker 1: a very good room, and we've got a bargain, uh 364 00:26:29,560 --> 00:26:32,240 Speaker 1: it's a hundred and fifty dollars a night, Jack will 365 00:26:32,280 --> 00:26:34,919 Speaker 1: go and say, well, do you have anything at a 366 00:26:34,960 --> 00:26:38,960 Speaker 1: hundred dollars a night? Jack has this sort of calvinist 367 00:26:39,040 --> 00:26:46,520 Speaker 1: streak uh that uh uh he uh as much money 368 00:26:46,600 --> 00:26:50,040 Speaker 1: as he has, and he's certainly been very successful financially, 369 00:26:50,720 --> 00:26:57,640 Speaker 1: just lives his life as frugally as you can imagine. 370 00:26:58,040 --> 00:27:01,160 Speaker 1: And of course I think that's really what has gotten 371 00:27:01,280 --> 00:27:07,200 Speaker 1: into his company. A vanguard that uh that's really into 372 00:27:07,840 --> 00:27:12,800 Speaker 1: Jack's uh d n A. And you know the interesting thing, 373 00:27:12,840 --> 00:27:18,400 Speaker 1: I'll tell you one other little funny story about Jack Vogel. 374 00:27:19,400 --> 00:27:24,080 Speaker 1: So many Wall Street people, uh have you know the 375 00:27:24,200 --> 00:27:30,000 Speaker 1: eight thousand dollar watch on and uh the Italian Uh, 376 00:27:30,080 --> 00:27:34,600 Speaker 1: the Italian suits and so forth. Uh. Jack is always 377 00:27:34,640 --> 00:27:39,840 Speaker 1: sort of in a rumpled suit. And interestingly enough, when 378 00:27:39,840 --> 00:27:44,040 Speaker 1: he first met Warren Buffett, uh, they were actually at 379 00:27:44,040 --> 00:27:48,920 Speaker 1: a hotel together, and Jack recognized Warren went up and 380 00:27:49,720 --> 00:27:53,159 Speaker 1: introduced himself, and he said to Warren, you know the 381 00:27:53,240 --> 00:27:56,400 Speaker 1: thing I really like about you is you have rumpled 382 00:27:56,440 --> 00:28:01,480 Speaker 1: suits just the same as uh I do. And Jack 383 00:28:01,520 --> 00:28:04,480 Speaker 1: and Warren have become very very good friends. And as 384 00:28:04,520 --> 00:28:08,679 Speaker 1: you probably know, because Warren is the sort of exception 385 00:28:08,760 --> 00:28:12,840 Speaker 1: to indexing that everybody mentions that, Warren has said, I've 386 00:28:12,920 --> 00:28:18,160 Speaker 1: got told my widow when I'm gone, I just want 387 00:28:18,240 --> 00:28:21,720 Speaker 1: you to own index funds. So there's a couple of 388 00:28:21,800 --> 00:28:27,320 Speaker 1: things about Jack. He's been a lifelong friend and uh, 389 00:28:27,359 --> 00:28:31,560 Speaker 1: just a wonderful guy. But Buffett has said publicly most 390 00:28:31,600 --> 00:28:35,800 Speaker 1: people should be in indexes. That absolutely what what the 391 00:28:35,920 --> 00:28:39,320 Speaker 1: average person should be doing. But so let's talk a 392 00:28:39,400 --> 00:28:43,440 Speaker 1: second about Buffett, because when we talk about the efficient 393 00:28:44,480 --> 00:28:49,040 Speaker 1: the concept about the efficient market hypothesis, the name that 394 00:28:49,080 --> 00:28:54,200 Speaker 1: always comes up is Warren Buffett? Is is he an outlier? 395 00:28:54,440 --> 00:28:57,760 Speaker 1: Is he lucky? Or is he uniquely skilled? Look? I 396 00:28:57,800 --> 00:29:01,840 Speaker 1: think he is enormously is skilled. I wouldn't take anything 397 00:29:01,920 --> 00:29:07,160 Speaker 1: away from him. But he's also a very good businessman. 398 00:29:07,600 --> 00:29:10,680 Speaker 1: Let me tell you a little story. At one point, 399 00:29:10,760 --> 00:29:13,920 Speaker 1: when I was the dean of the Yale Management School, 400 00:29:14,920 --> 00:29:20,920 Speaker 1: we had Katherine Graham come to speak to our class, 401 00:29:21,760 --> 00:29:26,080 Speaker 1: and uh, she fortunately got the time wrong, but not 402 00:29:26,200 --> 00:29:29,640 Speaker 1: to come an hour later an hour earlier. So I 403 00:29:29,680 --> 00:29:32,000 Speaker 1: was able to sit down with her for about an hour. 404 00:29:32,160 --> 00:29:34,200 Speaker 1: And of course, the first thing I wanted to ask 405 00:29:34,240 --> 00:29:38,200 Speaker 1: her was, look, I know that one of Warren Buffett's 406 00:29:38,280 --> 00:29:42,920 Speaker 1: first great investments was the Washington Post. And tell me 407 00:29:43,000 --> 00:29:49,800 Speaker 1: about Buffett, because Buffett generally buys companies, are huge stakes 408 00:29:50,400 --> 00:29:54,280 Speaker 1: in companies. And she said, uh. I said, what was 409 00:29:54,280 --> 00:29:56,760 Speaker 1: it like working with him? She said, you know, when 410 00:29:57,280 --> 00:30:01,520 Speaker 1: I had learned that he had bought a steak in 411 00:30:01,600 --> 00:30:04,600 Speaker 1: our company, I was just scared to death. I thought 412 00:30:04,680 --> 00:30:07,680 Speaker 1: he clearly wanted to take over the company. Uh, and 413 00:30:07,760 --> 00:30:10,480 Speaker 1: I would be out in my ear. So I called 414 00:30:10,520 --> 00:30:13,400 Speaker 1: him and he said, no, really, I just did this 415 00:30:13,560 --> 00:30:16,280 Speaker 1: as an investment. And she said, I really sort of 416 00:30:16,320 --> 00:30:20,040 Speaker 1: liked him. He seemed very honest and straightforward. And I 417 00:30:20,120 --> 00:30:24,440 Speaker 1: then confided at him, we're going bankrupt. We're really in 418 00:30:24,720 --> 00:30:29,600 Speaker 1: terrible shape. Would you please come join my board and 419 00:30:29,720 --> 00:30:35,160 Speaker 1: help me right this company? Buffett joined the board. Buffett 420 00:30:35,200 --> 00:30:41,560 Speaker 1: actually was to Catherine Graham enormously helpful as a business person, 421 00:30:42,360 --> 00:30:46,880 Speaker 1: moving the thing around and making it finally successful. And 422 00:30:46,960 --> 00:30:50,880 Speaker 1: so when you think of Warren Buffett, I don't think 423 00:30:50,960 --> 00:30:54,120 Speaker 1: it's just that he read Graham and Dodd bought a 424 00:30:54,240 --> 00:30:58,400 Speaker 1: value stock uh and uh and it was good. He's 425 00:30:58,480 --> 00:31:03,080 Speaker 1: also made sure not himself, but he's put good management 426 00:31:03,120 --> 00:31:07,680 Speaker 1: in and has helped managements. And I think that's been 427 00:31:07,720 --> 00:31:13,000 Speaker 1: the genius of Warren Buffett as opposed to Uh No, 428 00:31:13,200 --> 00:31:16,320 Speaker 1: it's very easy. You just read Graham and Dodd and 429 00:31:16,480 --> 00:31:19,720 Speaker 1: run a good portfolio. Let me also say about Buffett 430 00:31:19,760 --> 00:31:23,920 Speaker 1: that given the size that Berkshire Hathaway is now, it's 431 00:31:24,040 --> 00:31:28,680 Speaker 1: virtually impossible for him to do the kinds of things 432 00:31:29,120 --> 00:31:34,680 Speaker 1: that he has done in the past. He does um 433 00:31:34,880 --> 00:31:39,360 Speaker 1: bring a certain good housekeeping stamp of approval. And he 434 00:31:39,480 --> 00:31:42,560 Speaker 1: is also and I recall the most recent addition you 435 00:31:42,680 --> 00:31:48,760 Speaker 1: referenced him, he gets access and creates deals that the 436 00:31:48,880 --> 00:31:52,880 Speaker 1: average stock picker is just never going to have access to. Oh, absolutely, 437 00:31:53,040 --> 00:31:57,880 Speaker 1: and he's got the capital that during the financial crisis, UH, 438 00:31:57,920 --> 00:32:02,800 Speaker 1: he was able to go to financial institutions, get a 439 00:32:02,840 --> 00:32:08,000 Speaker 1: ten percent coupon, get an equity participation, and do what 440 00:32:08,080 --> 00:32:11,360 Speaker 1: other people were not able to do. So let's last 441 00:32:11,360 --> 00:32:15,480 Speaker 1: word about Buffett. He made a tremendous investment in Goldman Sachs, 442 00:32:15,880 --> 00:32:20,120 Speaker 1: which turns out to be hugely usually successful. Most people 443 00:32:21,000 --> 00:32:24,680 Speaker 1: probably don't realize that he had offered Dick Fold of 444 00:32:24,760 --> 00:32:29,200 Speaker 1: Lehman Brothers an investment and Fold turned them down, which 445 00:32:29,280 --> 00:32:32,320 Speaker 1: is stop and think about how how brilliant and insight 446 00:32:32,840 --> 00:32:36,480 Speaker 1: that was. So, so let me go back to UM 447 00:32:36,560 --> 00:32:39,200 Speaker 1: some of some of my favorite quotes from the book. 448 00:32:40,280 --> 00:32:43,560 Speaker 1: I recall hearing this way back when, and then when 449 00:32:43,600 --> 00:32:49,440 Speaker 1: I started researching UM things for this conversation, I was 450 00:32:49,520 --> 00:32:53,120 Speaker 1: shocked to see that this was a quote of yours 451 00:32:53,720 --> 00:32:57,480 Speaker 1: you had written in or said in some interview. Tip 452 00:32:57,520 --> 00:33:00,160 Speaker 1: of the week if you bought a thousand dollars worth 453 00:33:00,200 --> 00:33:02,800 Speaker 1: of Nortel stock one year ago. By the way, this 454 00:33:02,880 --> 00:33:06,400 Speaker 1: was in the late nineties when Nortel UH symbol NT 455 00:33:06,800 --> 00:33:10,040 Speaker 1: was a house of fire. UM if you had board 456 00:33:10,080 --> 00:33:13,280 Speaker 1: a thousand dollars worth of Nortel a year ago, today, 457 00:33:13,320 --> 00:33:16,680 Speaker 1: it's worth forty nine dollars. But if instead you went 458 00:33:16,720 --> 00:33:20,160 Speaker 1: out and bought a thousand dollars worth of Budweiser, the 459 00:33:20,240 --> 00:33:25,040 Speaker 1: beer not Anheuser bush stock a year ago, if you 460 00:33:25,160 --> 00:33:28,200 Speaker 1: drank all the beer and traded in all the cans 461 00:33:28,560 --> 00:33:32,080 Speaker 1: for the nickel deposit, it'd be worth seventy nine dollars 462 00:33:32,120 --> 00:33:36,120 Speaker 1: more than Nortel. My advice to you start drinking heavily. 463 00:33:36,800 --> 00:33:39,840 Speaker 1: I remember seeing that in the late nineties, and it 464 00:33:39,920 --> 00:33:43,200 Speaker 1: was never attributed to you. Is that really a quote 465 00:33:43,200 --> 00:33:45,920 Speaker 1: from burton Mouth? Hiel, Oh, yes, it definitely is. But 466 00:33:46,080 --> 00:33:48,880 Speaker 1: you know, my feeling is imitation is the best form 467 00:33:49,000 --> 00:33:54,680 Speaker 1: of flattery. I'm you know, I'd obviously prefer uh that 468 00:33:55,120 --> 00:33:59,360 Speaker 1: someone gave me credit for it, but uh, the imitation 469 00:33:59,520 --> 00:34:02,040 Speaker 1: is fine. And the point about the book, and I 470 00:34:02,080 --> 00:34:04,200 Speaker 1: think one of the reasons that the book has done 471 00:34:04,240 --> 00:34:09,000 Speaker 1: well is that it is written in a rather lighthearted fashion, 472 00:34:09,520 --> 00:34:13,120 Speaker 1: because a lot of people's eyes glaze over when they're 473 00:34:13,160 --> 00:34:17,880 Speaker 1: talking about facts and figures and numbers. So I've really 474 00:34:17,920 --> 00:34:20,960 Speaker 1: tried as hard as I could to make it as 475 00:34:21,040 --> 00:34:24,959 Speaker 1: interesting as possible. Well, you certainly you're certainly succeeded. There 476 00:34:25,880 --> 00:34:29,240 Speaker 1: Another book that that I've been a fan of, uh 477 00:34:29,360 --> 00:34:32,759 Speaker 1: is The Winning the Loser's Game by Charlie Ellis. He 478 00:34:32,960 --> 00:34:36,279 Speaker 1: was also on the board of Vanguard for a long 479 00:34:36,400 --> 00:34:42,280 Speaker 1: time and uh on the Yale Advisement, Yale Endowment Advisory Board, 480 00:34:42,360 --> 00:34:46,040 Speaker 1: where where you were um chairman of the School of Management. 481 00:34:46,080 --> 00:34:48,560 Speaker 1: I assume you and Charlie know each other fairly well. 482 00:34:48,880 --> 00:34:52,720 Speaker 1: We do know each other fairly well. And uh, Charlie 483 00:34:52,719 --> 00:34:58,480 Speaker 1: and I have actually written things together. And and again 484 00:34:58,680 --> 00:35:01,040 Speaker 1: I think one of the things Charlie and I want 485 00:35:01,040 --> 00:35:04,680 Speaker 1: to give him credit, this is his Charlie has I 486 00:35:04,719 --> 00:35:12,320 Speaker 1: think uh uh just uh this wonderful analogy about investing 487 00:35:12,760 --> 00:35:16,160 Speaker 1: that is just so true. Uh. And it's one of 488 00:35:16,160 --> 00:35:20,760 Speaker 1: the things he's best known for. He says, Listen, suppose 489 00:35:20,840 --> 00:35:24,640 Speaker 1: you're a tennis player, but you're not a professional. Now. 490 00:35:24,719 --> 00:35:33,120 Speaker 1: Professionals win points by some uh you know, huge fast serve, uh, 491 00:35:33,239 --> 00:35:39,239 Speaker 1: some drop shot, some superb shot uh that the other 492 00:35:39,280 --> 00:35:43,920 Speaker 1: player can't get. But when you think of ordinary people 493 00:35:44,080 --> 00:35:48,359 Speaker 1: playing tennis, the people who win are the people who 494 00:35:48,400 --> 00:35:52,240 Speaker 1: have just made the fewer errors that trying to do 495 00:35:52,520 --> 00:35:57,719 Speaker 1: something extra is a loser's game, and uh, that of 496 00:35:57,800 --> 00:36:01,960 Speaker 1: course is what Charlie is best known for. Obviously, Charlie 497 00:36:02,000 --> 00:36:06,800 Speaker 1: and I are Kendred Spirits in that we both believe 498 00:36:06,880 --> 00:36:12,000 Speaker 1: in indexing. Charlie, for example, started his career and started 499 00:36:12,040 --> 00:36:17,320 Speaker 1: a company, Granite Associates, where they were helping to choose 500 00:36:17,480 --> 00:36:23,160 Speaker 1: the best investment advisors. Charlie believed in active management, and 501 00:36:23,239 --> 00:36:28,320 Speaker 1: only after experience with it he now realizes that he 502 00:36:28,440 --> 00:36:33,960 Speaker 1: is a convert. And Uh, there is no better person 503 00:36:34,800 --> 00:36:39,480 Speaker 1: uh to sing the praises of indexing than Charlie Ellis. Uh. 504 00:36:39,520 --> 00:36:43,239 Speaker 1: He's a great guy and a very good writer. So 505 00:36:43,360 --> 00:36:46,479 Speaker 1: if people want to find more of your writings other 506 00:36:46,560 --> 00:36:49,040 Speaker 1: than the book, and this isn't the only book you've 507 00:36:49,040 --> 00:36:51,239 Speaker 1: written a number of them, where else would they go 508 00:36:51,360 --> 00:36:55,839 Speaker 1: to to learn more about the works of Burton Malkiel. Well, 509 00:36:56,040 --> 00:37:02,640 Speaker 1: I've done other things, uh, such as and maybe this, 510 00:37:02,920 --> 00:37:07,040 Speaker 1: you know, gets into a different subject. I've written about 511 00:37:07,040 --> 00:37:10,839 Speaker 1: emerging markets and a book called Global Bargain Hunting. I've 512 00:37:10,840 --> 00:37:14,080 Speaker 1: written about China in a book called From Wall Street 513 00:37:14,200 --> 00:37:20,840 Speaker 1: to the Great Wall. Uh. And I think in general today, uh, 514 00:37:21,200 --> 00:37:28,120 Speaker 1: probably if I have any investment advice for a long 515 00:37:28,239 --> 00:37:36,440 Speaker 1: run portfolio. I suspect that people are smitten with what 516 00:37:36,480 --> 00:37:40,759 Speaker 1: we call the home country bias, that they just have 517 00:37:41,080 --> 00:37:48,280 Speaker 1: US stocks uh to the detriment to their own detriment, 518 00:37:48,480 --> 00:37:52,880 Speaker 1: and they are ignoring some of the fastest growing parts 519 00:37:52,920 --> 00:37:56,200 Speaker 1: of the world. Emerging markets now have about half of 520 00:37:56,200 --> 00:37:59,759 Speaker 1: the world's GDP. Emerging markets have eighty five percent of 521 00:37:59,760 --> 00:38:04,000 Speaker 1: the world else population. Emerging markets have about of the 522 00:38:04,000 --> 00:38:13,439 Speaker 1: world's capitalization. And today emerging markets are very unpopular, which 523 00:38:13,480 --> 00:38:17,400 Speaker 1: means attractively priced, which means that they are probably the 524 00:38:17,440 --> 00:38:21,280 Speaker 1: most attractively priced markets in the world. Now that doesn't 525 00:38:21,400 --> 00:38:24,759 Speaker 1: mean the next month or the next year they're going 526 00:38:24,800 --> 00:38:32,920 Speaker 1: to do well, but we can look at very long 527 00:38:33,040 --> 00:38:37,400 Speaker 1: run rates of return and get some idea as to 528 00:38:38,440 --> 00:38:41,760 Speaker 1: whether they're going to be high or low by looking 529 00:38:41,800 --> 00:38:47,000 Speaker 1: at valuations and look, valuations in the United States are high. 530 00:38:47,120 --> 00:38:52,600 Speaker 1: They're higher than average. Because emerging markets have been so unpopular, 531 00:38:53,440 --> 00:38:58,720 Speaker 1: valuations are well below normal. Emerging markets are still growing. 532 00:38:59,719 --> 00:39:03,560 Speaker 1: China is slowing down. Yeah, China is probably only growing 533 00:39:03,600 --> 00:39:06,479 Speaker 1: at six six and a half percent now rather than ten. 534 00:39:07,360 --> 00:39:10,240 Speaker 1: And everybody says China is crashing and burning. I wish 535 00:39:10,239 --> 00:39:14,120 Speaker 1: we were growing at six for sure, So I think 536 00:39:14,160 --> 00:39:17,759 Speaker 1: there's a lot of growth there. Valuations are better, and 537 00:39:17,840 --> 00:39:23,520 Speaker 1: I just think that if somebody has a portfolio and 538 00:39:23,680 --> 00:39:27,959 Speaker 1: has nothing in emerging markets, you ought to take a look. 539 00:39:28,040 --> 00:39:31,320 Speaker 1: And of course I would say you take a look 540 00:39:31,440 --> 00:39:35,719 Speaker 1: by indexing, because a lot of people say, oh, emerging 541 00:39:35,760 --> 00:39:38,479 Speaker 1: markets are very inefficient, you don't want to index there. 542 00:39:39,040 --> 00:39:44,960 Speaker 1: In fact, of emerging market active managers are outperformed by 543 00:39:44,960 --> 00:39:49,680 Speaker 1: the index in part because of the inefficiency of emerging markets. 544 00:39:49,840 --> 00:39:53,640 Speaker 1: So that asks spreads are high market impact costs when 545 00:39:53,680 --> 00:39:56,600 Speaker 1: you buy and sell, there are stamp taxes and emerging 546 00:39:56,680 --> 00:40:00,479 Speaker 1: markets you really want to be more passive there. And 547 00:40:00,840 --> 00:40:04,200 Speaker 1: my advice for investors is take a look and at 548 00:40:04,280 --> 00:40:08,480 Speaker 1: least a small piece of the portfolio should be put there, 549 00:40:08,520 --> 00:40:11,600 Speaker 1: and I think over the next decade people will be 550 00:40:11,680 --> 00:40:14,480 Speaker 1: well served. This puts you a little bit at odds 551 00:40:14,480 --> 00:40:18,200 Speaker 1: with Jack Bogel, who is not a fan of investing overseas. 552 00:40:18,200 --> 00:40:21,759 Speaker 1: He's concerned about the currency risk, and he says, hey, 553 00:40:21,800 --> 00:40:25,480 Speaker 1: half of the S and P five hundred uh revenue 554 00:40:25,600 --> 00:40:29,640 Speaker 1: comes from overseas. How do you respond to jile? Absolutely, Uh, 555 00:40:29,680 --> 00:40:34,120 Speaker 1: there's no question you get some of it with us multinationals. 556 00:40:34,160 --> 00:40:39,759 Speaker 1: But my feeling is, uh, you will also get some 557 00:40:39,840 --> 00:40:45,399 Speaker 1: good portfolio effects because emerging markets are not totally correlated 558 00:40:45,480 --> 00:40:50,000 Speaker 1: with the US market. I think that you're missing something. 559 00:40:50,080 --> 00:40:55,200 Speaker 1: And even though Jack is one of my absolutely best 560 00:40:55,239 --> 00:40:58,440 Speaker 1: friends and we agree on ent of things, Jack also 561 00:40:58,520 --> 00:41:01,680 Speaker 1: doesn't like a t f S and I think are 562 00:41:01,760 --> 00:41:06,960 Speaker 1: a great uh, are a great invention and uh great 563 00:41:07,000 --> 00:41:10,720 Speaker 1: for people. So a little Burton Malkiel, Jack Bogel Trivia, 564 00:41:11,520 --> 00:41:14,560 Speaker 1: my head of research and I were putting these questions 565 00:41:14,560 --> 00:41:19,560 Speaker 1: together and we noticed that Jack Bogel was born at 566 00:41:19,600 --> 00:41:23,680 Speaker 1: the peak of the market and you were born at 567 00:41:23,680 --> 00:41:27,640 Speaker 1: the depth of the crash. Uh huh. That's very interesting. 568 00:41:27,640 --> 00:41:30,719 Speaker 1: That's fascinating, a little bit of fascinating, a bit of 569 00:41:31,280 --> 00:41:37,880 Speaker 1: information and uh uh uh. I was a depression baby 570 00:41:38,040 --> 00:41:42,000 Speaker 1: and so is so is Jack. Um. Professor Malkiel, you 571 00:41:42,000 --> 00:41:44,480 Speaker 1: can hang around a little bit. We'll we'll continue chatting 572 00:41:44,520 --> 00:41:47,480 Speaker 1: for a while. So h and if I forget to 573 00:41:47,560 --> 00:41:49,560 Speaker 1: say this later, thank you so much for doing this 574 00:41:49,600 --> 00:41:53,120 Speaker 1: and being so generous with your time. We have been 575 00:41:53,160 --> 00:41:58,080 Speaker 1: speaking with Professor Burton Malkiel of Princeton University, author of 576 00:41:58,120 --> 00:42:01,960 Speaker 1: A Random Walk down Wall Street Now and it's eleventh edition. 577 00:42:02,640 --> 00:42:05,720 Speaker 1: If you enjoy this conversation, be sure and stick around 578 00:42:05,760 --> 00:42:08,719 Speaker 1: for our podcast extras, where we keep the digital tape 579 00:42:08,800 --> 00:42:13,080 Speaker 1: rolling and continue chatting about all things investing. Be sure 580 00:42:13,120 --> 00:42:17,360 Speaker 1: and check out my daily column on Bloomberg View dot com. 581 00:42:17,400 --> 00:42:20,279 Speaker 1: You can sign up for my Daily Reads also at 582 00:42:20,320 --> 00:42:24,200 Speaker 1: Bloomberg dot com, or follow me on Twitter at Rit Halts. 583 00:42:24,440 --> 00:42:28,080 Speaker 1: I'm Barry Rit Halts. You're listening to Masters in Business 584 00:42:28,080 --> 00:42:31,400 Speaker 1: on Bloomberg Radio. What could your future hold more than 585 00:42:31,440 --> 00:42:33,440 Speaker 1: you think? Because at Merrill Lynch we work with you 586 00:42:33,440 --> 00:42:36,319 Speaker 1: to create a strategy built around your priorities. Visit mL 587 00:42:36,360 --> 00:42:38,719 Speaker 1: dot com and learn more about Merrill Lynch. An affiliated 588 00:42:38,719 --> 00:42:41,160 Speaker 1: Bank of America. Mery Lynch makes available products and services 589 00:42:41,160 --> 00:42:43,720 Speaker 1: offered by Merrill Lynch Pierce feder Smith incorporatedor Register Broker 590 00:42:43,719 --> 00:42:47,680 Speaker 1: Dealer remember s I PC. Welcome to the podcast extras. Bert, 591 00:42:47,760 --> 00:42:50,439 Speaker 1: Thank you so much for doing this. This is really fascinating. 592 00:42:50,840 --> 00:42:53,719 Speaker 1: I'm a fan of yours for forever. You could tell 593 00:42:53,800 --> 00:42:57,320 Speaker 1: by the other folks I've had on the show, Jack Bogel, 594 00:42:57,520 --> 00:43:03,000 Speaker 1: Charlie Ellis, Bill McNab, Jack and in you are you 595 00:43:03,080 --> 00:43:08,120 Speaker 1: are right in the same circle of of excellence as 596 00:43:08,160 --> 00:43:11,480 Speaker 1: these folks. There's so many questions I want to get 597 00:43:11,520 --> 00:43:14,440 Speaker 1: to you get through. Let's let's see how many of 598 00:43:14,440 --> 00:43:16,799 Speaker 1: these we can we can click through. Let let me 599 00:43:16,880 --> 00:43:24,640 Speaker 1: start with a softball. Why is stock picking so difficult? Basically, 600 00:43:25,080 --> 00:43:31,279 Speaker 1: it's partly difficult. Is that partly the reason is that 601 00:43:31,320 --> 00:43:35,680 Speaker 1: there are so many people doing it and that they 602 00:43:35,800 --> 00:43:41,359 Speaker 1: are so professional in doing it. You know, if you 603 00:43:41,520 --> 00:43:46,240 Speaker 1: have a market where say ten percent of the people 604 00:43:48,200 --> 00:43:54,200 Speaker 1: in the market or professional and n are individuals who 605 00:43:54,280 --> 00:43:59,360 Speaker 1: don't know anything, and they will pick a stock because 606 00:43:59,400 --> 00:44:02,960 Speaker 1: they like the name, or they will pick a stock 607 00:44:04,800 --> 00:44:10,120 Speaker 1: because uh uh, they drive a Fiat so they'll buy 608 00:44:10,200 --> 00:44:15,600 Speaker 1: Fiat Chrysler. They'll do it that way. That gives the 609 00:44:15,680 --> 00:44:23,760 Speaker 1: professionals a possibility of finding things that may be improperly priced. 610 00:44:25,040 --> 00:44:28,680 Speaker 1: But when you have a market now that is ninety 611 00:44:28,880 --> 00:44:36,560 Speaker 1: percent professional and probably of the trading is done professionally, 612 00:44:37,680 --> 00:44:41,320 Speaker 1: that competition means that if somebody has got a good idea, 613 00:44:41,440 --> 00:44:44,960 Speaker 1: they act on it and the price reflects that good idea. 614 00:44:45,360 --> 00:44:47,880 Speaker 1: And that's I think the problem. When you've got a 615 00:44:48,040 --> 00:44:53,640 Speaker 1: market that you have individuals who are buying stocks for 616 00:44:53,920 --> 00:45:00,239 Speaker 1: different reasons other than do they represent good value. Maybe 617 00:45:00,280 --> 00:45:03,240 Speaker 1: there's a chance of doing it, and maybe this worked 618 00:45:03,280 --> 00:45:07,000 Speaker 1: fifty years ago. But the problem is as the market 619 00:45:07,080 --> 00:45:11,880 Speaker 1: gets more and more professional, when people are better trained, 620 00:45:11,960 --> 00:45:15,759 Speaker 1: when people have better sources of information, when people can 621 00:45:15,800 --> 00:45:21,600 Speaker 1: go to their Bloomberg terminals and the information gets disseminated 622 00:45:21,800 --> 00:45:27,720 Speaker 1: immediately to all the professionals, it's then harder and harder 623 00:45:28,800 --> 00:45:32,680 Speaker 1: to actually beat the market. So that raises another question 624 00:45:32,800 --> 00:45:37,440 Speaker 1: that raises a number of other questions. Uh, why are 625 00:45:37,520 --> 00:45:42,760 Speaker 1: so many people still so involved in chasing alpha? Why 626 00:45:43,000 --> 00:45:48,759 Speaker 1: is it that the majority of market participants seem to 627 00:45:48,800 --> 00:45:53,560 Speaker 1: be spending so much time chasing uh that the dream 628 00:45:53,600 --> 00:45:58,880 Speaker 1: about performance. Let me give you two reasons. One is, uh, 629 00:45:59,160 --> 00:46:03,040 Speaker 1: that they get paid for doing it. This is and 630 00:46:03,120 --> 00:46:07,960 Speaker 1: well paid at that this is a very well paid profession. 631 00:46:08,920 --> 00:46:12,560 Speaker 1: Uh so, uh, they do get paid for it. The 632 00:46:12,640 --> 00:46:19,240 Speaker 1: second is, and this goes to the work of Danny Kahneman, 633 00:46:19,920 --> 00:46:23,760 Speaker 1: who was one of my colleagues at Princeton, that there 634 00:46:23,920 --> 00:46:28,160 Speaker 1: does seem to be in our d n a a 635 00:46:28,280 --> 00:46:33,880 Speaker 1: feeling of over optimism. These people who are chasing alpha. Yeah, 636 00:46:33,920 --> 00:46:35,799 Speaker 1: they do it because they get paid to do it. 637 00:46:35,840 --> 00:46:38,600 Speaker 1: But I think they honestly, you know, it's it's not 638 00:46:38,640 --> 00:46:41,840 Speaker 1: that they're bad people and that they're lying. They really 639 00:46:42,000 --> 00:46:46,759 Speaker 1: believe something. Yeah, they're direct and the and and this 640 00:46:46,880 --> 00:46:53,520 Speaker 1: is I think the problem that this over optimism is 641 00:46:53,600 --> 00:46:58,080 Speaker 1: just a part of our human nature. Uh and uh 642 00:46:59,080 --> 00:47:02,759 Speaker 1: even though they think it's difficult, uh, they think I 643 00:47:02,800 --> 00:47:07,080 Speaker 1: can do it. You know we uh we and uh 644 00:47:07,120 --> 00:47:10,560 Speaker 1: we now is myself and Danny Kahneman, because I've done 645 00:47:10,600 --> 00:47:14,120 Speaker 1: these experiments. You ask a group of students. I've got 646 00:47:14,160 --> 00:47:18,040 Speaker 1: two hundred students in the room, and I give them 647 00:47:18,120 --> 00:47:23,239 Speaker 1: some questionnaires and one of them is are you a 648 00:47:23,960 --> 00:47:28,600 Speaker 1: better driver or the worst driver than all the other 649 00:47:28,719 --> 00:47:32,200 Speaker 1: students in the room. And of them say that they're 650 00:47:32,200 --> 00:47:35,400 Speaker 1: better than averages like like will be gone. Yes, you know, 651 00:47:35,680 --> 00:47:39,200 Speaker 1: we're all better, we're all better than average. And I 652 00:47:39,239 --> 00:47:42,759 Speaker 1: think that there's a lot of that in uh uh 653 00:47:42,920 --> 00:47:48,400 Speaker 1: in this that you know, you just uh you you 654 00:47:48,400 --> 00:47:52,600 Speaker 1: you you hope uh and you think that yeah, it's 655 00:47:52,640 --> 00:47:54,560 Speaker 1: hard to do, but I can do it. You know. 656 00:47:54,600 --> 00:47:59,319 Speaker 1: The joke story about this being in our DNA is 657 00:47:59,560 --> 00:48:03,320 Speaker 1: a few hundred thousand years ago there were two groups 658 00:48:03,320 --> 00:48:06,360 Speaker 1: of cave men, and one group of cavemen saw some 659 00:48:06,480 --> 00:48:09,680 Speaker 1: mammoth down on the plains and said, I have an idea. 660 00:48:09,800 --> 00:48:12,480 Speaker 1: Let's take sharpened sticks and see if we could go 661 00:48:12,719 --> 00:48:15,640 Speaker 1: bring down this three ton mammoth. And the other group 662 00:48:15,640 --> 00:48:18,880 Speaker 1: of people weren't optimistic, and they stayed in the cave. Well, 663 00:48:19,239 --> 00:48:22,520 Speaker 1: the first cave might have lost a few participants, but 664 00:48:22,640 --> 00:48:24,680 Speaker 1: they had mammoth meat all winter and they made it 665 00:48:24,719 --> 00:48:27,200 Speaker 1: through to the spring. The risk of us group, they 666 00:48:27,200 --> 00:48:30,680 Speaker 1: didn't have anything to eat, and therefore we we have 667 00:48:30,800 --> 00:48:33,439 Speaker 1: tend to be over optimistic. We may lose a few 668 00:48:33,440 --> 00:48:36,760 Speaker 1: people along the way, but as a group, the tribal 669 00:48:36,920 --> 00:48:39,000 Speaker 1: will survive. And I always thought that was an amusing 670 00:48:39,560 --> 00:48:42,360 Speaker 1: I think I think that's right, because I really do 671 00:48:42,520 --> 00:48:46,600 Speaker 1: think it's in our d n A. So this raises 672 00:48:46,640 --> 00:48:50,360 Speaker 1: another question. I mentioned. Vanguard is now up to three 673 00:48:50,440 --> 00:48:54,480 Speaker 1: trillion with a TU charging an average of something like 674 00:48:54,520 --> 00:48:57,719 Speaker 1: eleven basis points across all their funds. But at the 675 00:48:57,800 --> 00:49:01,480 Speaker 1: same time, the hedge fund community is also up to 676 00:49:01,560 --> 00:49:06,080 Speaker 1: three trillion, and they charged two hundred basis points plus 677 00:49:06,120 --> 00:49:11,480 Speaker 1: another of the profits. Some people have described hedge funds 678 00:49:12,000 --> 00:49:18,120 Speaker 1: as a fee transfer mechanism UH disguised as a asset class. 679 00:49:18,800 --> 00:49:24,000 Speaker 1: How do we explain the simultaneous success of really low 680 00:49:24,080 --> 00:49:31,560 Speaker 1: cost indexing and really expensive active private management. Well, I 681 00:49:31,600 --> 00:49:36,120 Speaker 1: don't think the hedge fund fees are going to continue. 682 00:49:36,160 --> 00:49:39,640 Speaker 1: I think there's already uh some pressure on the fees, 683 00:49:40,160 --> 00:49:44,120 Speaker 1: and there are some institutional investors, such as CalPERS, who 684 00:49:44,160 --> 00:49:49,719 Speaker 1: have in fact realized that this may not be as 685 00:49:49,800 --> 00:49:53,760 Speaker 1: good a deal as they had hoped. Hedge funds worked 686 00:49:53,800 --> 00:49:56,000 Speaker 1: for a while, and you know, again this goes back 687 00:49:56,000 --> 00:50:03,280 Speaker 1: to the paradox of professional advice. At the beginning, there 688 00:50:03,360 --> 00:50:07,440 Speaker 1: were hedge funds who made a lot of money and 689 00:50:07,520 --> 00:50:12,239 Speaker 1: who actually did find arbitrage opportunities. Let me give you 690 00:50:12,239 --> 00:50:17,279 Speaker 1: an example. Uh, we have standard and Poor's futures. We 691 00:50:17,520 --> 00:50:24,000 Speaker 1: have standard and Poor's e t fs. Sometimes those futures 692 00:50:24,080 --> 00:50:27,799 Speaker 1: and the e t F sold at prices that were 693 00:50:27,880 --> 00:50:32,360 Speaker 1: different from the prices of the underlying and when you 694 00:50:32,440 --> 00:50:37,600 Speaker 1: were able to do efficiently a program trade, you might 695 00:50:37,640 --> 00:50:42,120 Speaker 1: be able to get an arbitrage where the future is 696 00:50:42,200 --> 00:50:44,640 Speaker 1: too high, so you short the future and by the 697 00:50:44,760 --> 00:50:49,439 Speaker 1: underlying or vice versa, a relatively low risk transaction. There 698 00:50:49,480 --> 00:50:54,880 Speaker 1: were some arbitrages, and some hedge funds, like Citadel was 699 00:50:54,920 --> 00:50:58,160 Speaker 1: one example of a hedge fund that got built up 700 00:50:58,200 --> 00:51:02,680 Speaker 1: that way. Did very very well. Those opportunities now have 701 00:51:02,920 --> 00:51:08,160 Speaker 1: basically been arbitraged away. That's the idea of efficiency that 702 00:51:08,280 --> 00:51:11,680 Speaker 1: has more and more good people get into something, the 703 00:51:11,760 --> 00:51:16,719 Speaker 1: opportunity goes away. It's like, you know, suppose there was 704 00:51:16,760 --> 00:51:20,640 Speaker 1: a Christmas rally that the market goes up between Christmas 705 00:51:20,719 --> 00:51:23,879 Speaker 1: and New Year's. Well, then if you know about it, 706 00:51:24,200 --> 00:51:26,760 Speaker 1: then what you do is you buy the day before 707 00:51:27,040 --> 00:51:29,879 Speaker 1: the Christmas holiday and you sell the day before New 708 00:51:29,960 --> 00:51:33,239 Speaker 1: Year's UH, in order to take advantage of it. But 709 00:51:33,320 --> 00:51:35,560 Speaker 1: then you realize you've got to go two days before 710 00:51:35,719 --> 00:51:38,920 Speaker 1: and sell two days before the end. And then of 711 00:51:38,920 --> 00:51:42,400 Speaker 1: course it disappears. And so I think what's happened is 712 00:51:43,120 --> 00:51:47,200 Speaker 1: that worked for a while, it does not work now. 713 00:51:47,320 --> 00:51:52,399 Speaker 1: And the hedge fund returns have been just terrible over 714 00:51:52,440 --> 00:51:55,600 Speaker 1: the last five years. And I think what you are 715 00:51:55,760 --> 00:52:00,239 Speaker 1: seeing slowly, these things don't happen overnight, but slow you 716 00:52:00,280 --> 00:52:07,600 Speaker 1: were seeing pressure on fees and more and more institutions questioning, UH, 717 00:52:07,800 --> 00:52:10,960 Speaker 1: the idea of hedge funds. And and again let me 718 00:52:11,000 --> 00:52:13,080 Speaker 1: talk about another person. I don't know if you've ever 719 00:52:13,080 --> 00:52:17,320 Speaker 1: had him on your show, UH, David Swenson, who wrote 720 00:52:17,360 --> 00:52:22,400 Speaker 1: the book on institutional management of using hedge funds, and 721 00:52:22,520 --> 00:52:25,320 Speaker 1: David was then going to write a book for individuals. 722 00:52:25,560 --> 00:52:28,799 Speaker 1: He then looked at the situation today and said, oh 723 00:52:28,840 --> 00:52:32,480 Speaker 1: my god, you can't do it anymore by index funds. 724 00:52:33,320 --> 00:52:36,640 Speaker 1: I haven't had Swenson on, but i'd absolutely love to. 725 00:52:37,560 --> 00:52:40,359 Speaker 1: You know, you mentioned uh some years ago the hedge 726 00:52:40,360 --> 00:52:43,759 Speaker 1: funds were making money. Jim Chenos, who runs kind of 727 00:52:43,800 --> 00:52:47,360 Speaker 1: Coast Associates, said, twenty five years ago when he or 728 00:52:47,440 --> 00:52:50,040 Speaker 1: thirty years ago when he launched his hedge funds, they 729 00:52:50,040 --> 00:52:53,160 Speaker 1: were about a hundred hundred hedge funds and they were 730 00:52:53,239 --> 00:52:57,200 Speaker 1: all making alpha. They were all actually making money. Now 731 00:52:57,239 --> 00:53:00,279 Speaker 1: there's ten thousand hedge funds, and the same hundred hedge 732 00:53:00,320 --> 00:53:04,440 Speaker 1: funds are still uh making creating alpha, and none of 733 00:53:04,480 --> 00:53:07,680 Speaker 1: the rest are. So you're right, is a handful of 734 00:53:07,719 --> 00:53:11,040 Speaker 1: them that did, and some of whom still are. Uh. 735 00:53:11,200 --> 00:53:15,200 Speaker 1: Look at look at Renaissance Technologies and Jim Simons um 736 00:53:16,040 --> 00:53:21,200 Speaker 1: hand uh, David Tepper and Appalouse Associates. There's a small 737 00:53:21,320 --> 00:53:24,279 Speaker 1: run of folks that seem to be making money. I 738 00:53:24,280 --> 00:53:28,160 Speaker 1: don't want to quite say consistently, although when you look 739 00:53:28,200 --> 00:53:30,600 Speaker 1: at Bridgewater and you look at Renaissance, some of them 740 00:53:30,640 --> 00:53:34,360 Speaker 1: have been fairly consistent over the years, but it sounds 741 00:53:34,400 --> 00:53:37,759 Speaker 1: like the you're you're of the opinion the bulk of 742 00:53:37,800 --> 00:53:40,200 Speaker 1: them just don't get it. I think the bulk of 743 00:53:40,239 --> 00:53:42,560 Speaker 1: them don't, and I think it's getting harder and harder 744 00:53:42,680 --> 00:53:47,960 Speaker 1: and the paradox of professional advice. Uh, if it works, 745 00:53:48,440 --> 00:53:53,920 Speaker 1: it's going to destroy the alpha's. And I'm very suspicious. 746 00:53:54,360 --> 00:54:00,759 Speaker 1: I don't think that supposed there even is some alpha around. Uh, 747 00:54:00,880 --> 00:54:04,480 Speaker 1: the two and twenty means the alpha's all gonna go 748 00:54:04,800 --> 00:54:07,960 Speaker 1: to the purveyor of the service. I think they'll be 749 00:54:08,160 --> 00:54:11,319 Speaker 1: less and less of it. And again, when we talk 750 00:54:11,520 --> 00:54:16,879 Speaker 1: about the things that Yale University did that my own 751 00:54:17,000 --> 00:54:22,160 Speaker 1: university did, remember also that a lot of these things, 752 00:54:22,200 --> 00:54:25,680 Speaker 1: it's less well known, would cut their own deals with 753 00:54:25,719 --> 00:54:29,880 Speaker 1: these people, and they wouldn't necessarily pay two and twenty. 754 00:54:29,960 --> 00:54:33,560 Speaker 1: The alpha's that are around, if there are any, are 755 00:54:33,719 --> 00:54:37,840 Speaker 1: not going to justify two and twenty for the buyer 756 00:54:38,040 --> 00:54:41,400 Speaker 1: of the fund. So let me throw another quote at yours, 757 00:54:41,440 --> 00:54:45,440 Speaker 1: the of you. Let me know, throw another quote at 758 00:54:45,480 --> 00:54:49,000 Speaker 1: you of yours that that I really like. It's not 759 00:54:49,120 --> 00:54:53,680 Speaker 1: that stock prices are capricious, it's that the news is capricious. 760 00:54:54,080 --> 00:54:58,520 Speaker 1: Explain what you meant by that, Well, look, if there 761 00:54:58,960 --> 00:55:08,560 Speaker 1: is a headline UH that comes out tomorrow, UH, and 762 00:55:08,840 --> 00:55:16,719 Speaker 1: it says, uh, men's stores are gearing up for a 763 00:55:16,880 --> 00:55:22,239 Speaker 1: Father's Day buying season, that's not news. I could have 764 00:55:22,320 --> 00:55:30,080 Speaker 1: written that six months ago the calendar, you know, Christmas exactly. Uh. 765 00:55:30,120 --> 00:55:36,960 Speaker 1: What's news is something that you can't predict from the past. 766 00:55:37,760 --> 00:55:43,520 Speaker 1: What's news is uh, for example, today it looks like 767 00:55:43,600 --> 00:55:49,239 Speaker 1: an Egyptian airliner was taken down by terrorists. That's news. 768 00:55:49,719 --> 00:55:52,680 Speaker 1: You couldn't predict that yesterday. You couldn't predict that the 769 00:55:52,800 --> 00:55:58,040 Speaker 1: day before. And so news is in some sense random, 770 00:55:58,200 --> 00:56:04,040 Speaker 1: and by random I mean unpredictable. And it's the unpredictable 771 00:56:04,080 --> 00:56:09,000 Speaker 1: things that move prices. And what I am suggesting is 772 00:56:09,040 --> 00:56:13,720 Speaker 1: that to the extent that they mean that prices should 773 00:56:13,760 --> 00:56:18,239 Speaker 1: be higher or lower, the prices changed right away. So 774 00:56:19,000 --> 00:56:22,719 Speaker 1: I like the way you describe that. Let's talk a 775 00:56:22,719 --> 00:56:25,279 Speaker 1: little bit about what's become one of the hottest bud 776 00:56:25,560 --> 00:56:30,839 Speaker 1: buzzwords and investing, smart Beta, which you actually added a 777 00:56:30,880 --> 00:56:35,439 Speaker 1: whole section in the in the whole Champion. So, so 778 00:56:36,080 --> 00:56:39,520 Speaker 1: is smart beta just smart marketing or does it have 779 00:56:39,600 --> 00:56:44,320 Speaker 1: some real I believe that smart beta is mainly smart marketing, 780 00:56:44,480 --> 00:56:48,480 Speaker 1: and it's not smart investing. Now, what smart beta is 781 00:56:48,480 --> 00:56:54,680 Speaker 1: is the following. What we know from history is that 782 00:56:54,760 --> 00:57:01,120 Speaker 1: there are certain factors that have been associated did with 783 00:57:01,920 --> 00:57:08,799 Speaker 1: somewhat higher stock returns. Example, we know over time the 784 00:57:09,000 --> 00:57:14,480 Speaker 1: returns from smaller companies have been generally a little bit 785 00:57:14,560 --> 00:57:19,760 Speaker 1: higher than the return from larger companies. Now, my sense 786 00:57:19,960 --> 00:57:25,520 Speaker 1: is that's probably right, it probably will continue. But in fact, 787 00:57:25,640 --> 00:57:30,520 Speaker 1: smaller companies are riskier than larger companies, so that if 788 00:57:30,640 --> 00:57:35,000 Speaker 1: you get a somewhat higher rate of return for taking 789 00:57:35,040 --> 00:57:39,480 Speaker 1: on more risk, that doesn't mean the market is inefficient, 790 00:57:39,560 --> 00:57:43,240 Speaker 1: that doesn't mean it's a real alpha. That just means 791 00:57:43,240 --> 00:57:47,840 Speaker 1: you took on more risk. Uh. Junk bonds yield more 792 00:57:48,440 --> 00:57:51,720 Speaker 1: than triple A bonds, of the of which there are 793 00:57:51,760 --> 00:57:55,200 Speaker 1: only a few now. But the point is, yes, you 794 00:57:55,240 --> 00:57:57,600 Speaker 1: can get a higher rate of return for taking on 795 00:57:57,760 --> 00:58:03,240 Speaker 1: more risk. UH. So what smart beta says is, let's 796 00:58:03,280 --> 00:58:07,400 Speaker 1: put the portfolio together with some of these factors that 797 00:58:07,480 --> 00:58:12,480 Speaker 1: have been associated with higher returns. And my sense is 798 00:58:13,680 --> 00:58:16,800 Speaker 1: that either you get the higher rate of return because 799 00:58:16,800 --> 00:58:21,160 Speaker 1: you've taken on more risk, or that the factor isn't 800 00:58:21,320 --> 00:58:26,600 Speaker 1: nearly as dependable as it's been in the past. For example, 801 00:58:28,240 --> 00:58:33,880 Speaker 1: value has generally done a little better than growth over 802 00:58:33,960 --> 00:58:40,400 Speaker 1: the years. I think largely because of the situation UH 803 00:58:40,560 --> 00:58:44,160 Speaker 1: in the year two thousand when growth stocks sold a 804 00:58:44,240 --> 00:58:49,280 Speaker 1: triple digit multiples, and I remember my own public service 805 00:58:49,680 --> 00:58:52,760 Speaker 1: of New Jersey sold at a multiple not too much 806 00:58:52,840 --> 00:58:57,160 Speaker 1: over ten. So obviously the growth stocks went way down, 807 00:58:57,200 --> 00:59:01,040 Speaker 1: the value stocks did well. Not depend endable though year 808 00:59:01,120 --> 00:59:04,440 Speaker 1: to year. In fact, the last few years value stocks 809 00:59:04,440 --> 00:59:07,280 Speaker 1: have been a trap. They haven't been good. So my 810 00:59:07,480 --> 00:59:13,120 Speaker 1: sense is it's really an excuse to charge instead of 811 00:59:13,200 --> 00:59:17,440 Speaker 1: five basis points, seventy five or a hundred basis points, 812 00:59:17,960 --> 00:59:20,160 Speaker 1: And if you do get a higher rate of return, 813 00:59:20,240 --> 00:59:23,840 Speaker 1: it's only because you've taken on more risk. And these 814 00:59:23,840 --> 00:59:29,560 Speaker 1: other factors are really not nearly as dependable as the 815 00:59:29,640 --> 00:59:33,920 Speaker 1: proselytizers for smart beta suggests. So let's hold smart beta 816 00:59:34,040 --> 00:59:38,000 Speaker 1: side for second and talk about the French Fama three 817 00:59:38,040 --> 00:59:41,680 Speaker 1: factor model, which since has been expanded. So I think 818 00:59:41,720 --> 00:59:46,280 Speaker 1: five factors. So small cap is one, value is the 819 00:59:47,160 --> 00:59:51,600 Speaker 1: three factor, and the regular beta. The regular volatility is 820 00:59:51,680 --> 00:59:54,360 Speaker 1: the third one of the Fama French three factor model. 821 00:59:54,480 --> 00:59:58,600 Speaker 1: Now now there's also two additional factors. One is quality 822 00:59:58,760 --> 01:00:04,280 Speaker 1: where you're avoiding heavily indebted or some other quantitatively way 823 01:00:04,320 --> 01:00:08,640 Speaker 1: to to eliminate names and momentum on top of it. 824 01:00:11,080 --> 01:00:15,600 Speaker 1: How do we adjust those sort of models that seem 825 01:00:15,680 --> 01:00:21,760 Speaker 1: to do somewhat better than the actual um benchmark? Is 826 01:00:21,800 --> 01:00:26,880 Speaker 1: it that there are inefficiencies and it's too challenging to 827 01:00:26,880 --> 01:00:29,760 Speaker 1: to sift through. When you look at the Wall Street coverage, 828 01:00:29,760 --> 01:00:35,800 Speaker 1: for example, the analysts coverage of big cap stocks Apple, Walmart, Google, 829 01:00:35,920 --> 01:00:38,880 Speaker 1: there's a hundred analysts covering them. You look at any 830 01:00:38,920 --> 01:00:42,200 Speaker 1: of the mid size or even small cap stocks, there's 831 01:00:42,200 --> 01:00:45,000 Speaker 1: a dearth of coverage. There's a dearth of banking services. 832 01:00:45,440 --> 01:00:48,440 Speaker 1: It seems like there's not a lot of information about that. 833 01:00:49,400 --> 01:00:53,760 Speaker 1: Is that potentially an inefficiency that that could contribute to 834 01:00:54,040 --> 01:00:58,920 Speaker 1: small cap so called premium It's possible, But I would 835 01:00:58,960 --> 01:01:03,160 Speaker 1: also say, uh, since there are a lot of small 836 01:01:03,280 --> 01:01:09,200 Speaker 1: camps uh that really can lose half or three quarters 837 01:01:09,240 --> 01:01:13,840 Speaker 1: of their value. Uh, they're also I think, in my view, 838 01:01:14,000 --> 01:01:17,720 Speaker 1: intrinsically risk ear And I think that's the other point 839 01:01:17,760 --> 01:01:20,520 Speaker 1: about this. Let's take momentum, which is one of the 840 01:01:20,520 --> 01:01:23,200 Speaker 1: ones that there's been a lot of recent work on. 841 01:01:23,880 --> 01:01:27,600 Speaker 1: There is a little bit of past evidence that there 842 01:01:27,840 --> 01:01:32,880 Speaker 1: is some momentum in the market. There are also what 843 01:01:33,160 --> 01:01:38,040 Speaker 1: is called momentum crashes. But sometimes you get a momentum 844 01:01:38,120 --> 01:01:45,600 Speaker 1: stock and uh it works fine, uh until uh uh 845 01:01:45,720 --> 01:01:49,800 Speaker 1: until it doesn't. I mean again, you know that uh 846 01:01:49,840 --> 01:01:55,640 Speaker 1: this uh fellow on a different network who will be nameless, 847 01:01:56,240 --> 01:02:00,840 Speaker 1: would talk about the fang stocks Facebook. You know, all 848 01:02:00,880 --> 01:02:03,160 Speaker 1: of these were just doing well. There was a lot 849 01:02:03,240 --> 01:02:06,760 Speaker 1: of momentum, and then all of a sudden, uh, it crashed. 850 01:02:07,480 --> 01:02:12,640 Speaker 1: And so while there might be something there, I think 851 01:02:12,680 --> 01:02:19,400 Speaker 1: there's also an inherent risk in following some of those factors. 852 01:02:19,440 --> 01:02:24,760 Speaker 1: So again my view is that they're not nearly as 853 01:02:24,800 --> 01:02:30,000 Speaker 1: dependable as people argue they are. They probably are associated 854 01:02:30,000 --> 01:02:34,080 Speaker 1: with larger risk. And as I've looked at all the 855 01:02:34,240 --> 01:02:40,320 Speaker 1: smart beta ETFs over the last five years, I do 856 01:02:40,520 --> 01:02:46,439 Speaker 1: not find that as a group, after expenses, that they 857 01:02:46,480 --> 01:02:50,360 Speaker 1: have in fact been a good deal for investors. So 858 01:02:50,560 --> 01:02:57,400 Speaker 1: my view is plain vanilla capitalization waited indexing is still, 859 01:02:57,480 --> 01:03:00,360 Speaker 1: in my view, the way to go. So given the 860 01:03:00,400 --> 01:03:04,880 Speaker 1: success of indexing and the success of Vanguard and a 861 01:03:05,040 --> 01:03:11,680 Speaker 1: host of other advisory firms that advocate indexing, that leads 862 01:03:11,720 --> 01:03:16,200 Speaker 1: to an obvious question, when does indexing get to be 863 01:03:16,760 --> 01:03:19,800 Speaker 1: too big? Can we ever reach a point where too 864 01:03:19,800 --> 01:03:22,720 Speaker 1: many people are in are in indexes and that creates 865 01:03:22,760 --> 01:03:28,200 Speaker 1: opportunities for the active managers. Well, you know, when indexing 866 01:03:28,400 --> 01:03:32,600 Speaker 1: is of the total, I might start to worry about that, 867 01:03:33,160 --> 01:03:37,440 Speaker 1: But I think with the indexingt pent of the total, 868 01:03:37,960 --> 01:03:41,880 Speaker 1: there are still plenty of active managers out there to 869 01:03:42,000 --> 01:03:46,040 Speaker 1: make sure that information gets reflected quickly. And in fact, 870 01:03:46,480 --> 01:03:51,720 Speaker 1: I think it'll always be the case. Suppose indexing was 871 01:03:51,840 --> 01:03:57,640 Speaker 1: so great that, in fact, the market wasn't reflecting the news, 872 01:03:58,440 --> 01:04:01,720 Speaker 1: then it will pay somebody to jump into the market. 873 01:04:02,360 --> 01:04:05,960 Speaker 1: And you know, that's the wonderful thing about capitalism. Uh, 874 01:04:06,120 --> 01:04:09,520 Speaker 1: if you have free markets and somebody can jump into 875 01:04:09,520 --> 01:04:13,320 Speaker 1: a market, if there is an opportunity, you can count 876 01:04:13,400 --> 01:04:16,840 Speaker 1: on the fact that somebody will. So I'm not worried 877 01:04:16,880 --> 01:04:20,480 Speaker 1: about it. Uh. If in fact it was the case 878 01:04:20,880 --> 01:04:25,080 Speaker 1: that markets were getting less and less efficient in reflecting information, 879 01:04:25,680 --> 01:04:28,560 Speaker 1: believe me, that'd be a profit motive for somebody to 880 01:04:28,680 --> 01:04:33,160 Speaker 1: jump in. Because if there's a chance to make money 881 01:04:33,200 --> 01:04:37,960 Speaker 1: in this world. Uh, that's the beauty of capitalism. Somebody 882 01:04:37,960 --> 01:04:41,120 Speaker 1: will find a way to do it. So I mentioned 883 01:04:41,160 --> 01:04:44,200 Speaker 1: to a friend that I was speaking with you today 884 01:04:44,520 --> 01:04:50,040 Speaker 1: and Uh. This person is an active manager, and he said, 885 01:04:50,920 --> 01:04:54,600 Speaker 1: ask him what his problem is with market timing. If 886 01:04:54,680 --> 01:04:58,080 Speaker 1: I see a train coming down the tracks, don't I 887 01:04:58,120 --> 01:05:01,240 Speaker 1: want to jump out of the way. So I know 888 01:05:01,280 --> 01:05:06,040 Speaker 1: what the answer is, but let's hear it directly from Well, look, absolutely, 889 01:05:06,080 --> 01:05:09,160 Speaker 1: you want to jump out of the way. The problem is, UH, 890 01:05:09,200 --> 01:05:14,320 Speaker 1: it just isn't that obvious that there's the train uh coming? 891 01:05:14,320 --> 01:05:16,680 Speaker 1: You know, maybe maybe it's a light at the end 892 01:05:16,680 --> 01:05:19,280 Speaker 1: of the tunnel rather than the train coming in the 893 01:05:19,320 --> 01:05:23,000 Speaker 1: opposite direction. And I think the people who have tried 894 01:05:23,200 --> 01:05:28,560 Speaker 1: to do market timing, uh have I think, uh really 895 01:05:28,600 --> 01:05:33,680 Speaker 1: not been successful. I have never known. Look, I remember 896 01:05:33,720 --> 01:05:41,040 Speaker 1: I've been uh on boards like Vanguard where we had 897 01:05:41,120 --> 01:05:45,400 Speaker 1: some people trying to do market timing, because Vanguard, as 898 01:05:45,440 --> 01:05:49,880 Speaker 1: you pointed out earlier, has some actively managed funds. I've 899 01:05:49,920 --> 01:05:53,880 Speaker 1: been a long term director of Prudential Financial. We had 900 01:05:53,920 --> 01:05:57,760 Speaker 1: people trying to I have never known anyone who could 901 01:05:57,840 --> 01:06:02,160 Speaker 1: consistently time the market. And in fact, I've never known 902 01:06:02,200 --> 01:06:05,919 Speaker 1: anyone who knows anyone who was able to consistently time 903 01:06:05,960 --> 01:06:09,600 Speaker 1: the market. Sure, jump out of the tracks of a 904 01:06:09,680 --> 01:06:14,600 Speaker 1: train is coming. But it isn't that obvious. So let's 905 01:06:14,600 --> 01:06:18,240 Speaker 1: talk a little bit about the behavioral side. We've alluded 906 01:06:18,280 --> 01:06:23,760 Speaker 1: to it throughout the conversation. Behavioral economics today is widely understood, 907 01:06:23,800 --> 01:06:27,880 Speaker 1: widely followed back a few a decade or two ago, 908 01:06:27,960 --> 01:06:33,600 Speaker 1: it really wasn't understood. Here's a quote from you, and 909 01:06:33,680 --> 01:06:37,400 Speaker 1: this is directly from the book. There are four factors 910 01:06:37,440 --> 01:06:43,680 Speaker 1: that create a rational market behavior over confidence, biased judgments, 911 01:06:44,280 --> 01:06:48,800 Speaker 1: herd mentality, and loss aversion. What does that mean to 912 01:06:48,840 --> 01:06:51,840 Speaker 1: the to the average investor, Well, I think when you 913 01:06:51,920 --> 01:06:56,360 Speaker 1: actually look at how this works with what people do, 914 01:06:57,160 --> 01:06:59,320 Speaker 1: let me tell you what I think. The main lesson 915 01:06:59,520 --> 01:07:05,000 Speaker 1: is one of the things that we know is that 916 01:07:05,200 --> 01:07:13,080 Speaker 1: people tend to sell out when things are looking grim 917 01:07:13,120 --> 01:07:17,600 Speaker 1: and to buy when everybody is optimistic. We we have 918 01:07:17,840 --> 01:07:23,080 Speaker 1: very good data on the flow of money from individuals 919 01:07:23,200 --> 01:07:28,440 Speaker 1: into equity mutual funds, and what we know from those data, 920 01:07:28,720 --> 01:07:33,240 Speaker 1: uh is the following fact that money flows into the 921 01:07:33,360 --> 01:07:38,840 Speaker 1: market when everyone's optimistic. In the first quarter of two thousand, 922 01:07:39,600 --> 01:07:43,080 Speaker 1: at the top of what it clearly in retrospect was 923 01:07:43,120 --> 01:07:49,240 Speaker 1: a bubble, more money came into equity mutual funds than 924 01:07:49,360 --> 01:07:53,320 Speaker 1: ever before that that quarter Q one two thousand, Q 925 01:07:53,520 --> 01:07:56,120 Speaker 1: one two thousand. That's when the money came in right 926 01:07:56,200 --> 01:08:01,400 Speaker 1: at the top and in fact went into the growth funds, 927 01:08:01,560 --> 01:08:04,920 Speaker 1: went into probably the most overpriced part of the market. 928 01:08:05,720 --> 01:08:10,960 Speaker 1: We used to have a sick joke at Vanguard at 929 01:08:11,000 --> 01:08:19,960 Speaker 1: that period because value funds, which were actually cheap had outflows. 930 01:08:20,560 --> 01:08:25,760 Speaker 1: We uh we at Vanguard. The flagship value fund that 931 01:08:25,800 --> 01:08:28,519 Speaker 1: we had was called the Windsor Funds, was run by 932 01:08:28,560 --> 01:08:30,439 Speaker 1: a man by the name of John f a great 933 01:08:30,439 --> 01:08:35,120 Speaker 1: money manager. He was losing money all the time. Now, 934 01:08:35,520 --> 01:08:41,200 Speaker 1: you don't know in a mutual fund complex exactly where 935 01:08:41,320 --> 01:08:45,840 Speaker 1: those flows were going, because when you redeem in a 936 01:08:45,960 --> 01:08:50,200 Speaker 1: complex like Vanguard, you just redeem the fund and it 937 01:08:50,280 --> 01:08:53,400 Speaker 1: goes into the money market fund. So you have to 938 01:08:53,560 --> 01:08:57,280 Speaker 1: look at where the checks were written. So we looked 939 01:08:57,320 --> 01:09:00,519 Speaker 1: at where the checks were written, and in fact, the 940 01:09:00,600 --> 01:09:03,920 Speaker 1: checks were being written to this company in Denver called 941 01:09:04,000 --> 01:09:07,719 Speaker 1: Jens Janice. Oh sure, and the Janie Fund had something 942 01:09:07,800 --> 01:09:11,599 Speaker 1: called the Janie twenty the twenty best ideas that they had. 943 01:09:11,920 --> 01:09:15,160 Speaker 1: They were all internet companies. And the sick joke that 944 01:09:15,200 --> 01:09:18,200 Speaker 1: we had is, you know what, why do we have 945 01:09:18,320 --> 01:09:21,240 Speaker 1: to go and do the accounting of having the money 946 01:09:21,320 --> 01:09:25,120 Speaker 1: go from Windsor into the money fund and then to Janice. 947 01:09:25,439 --> 01:09:27,760 Speaker 1: Why don't we just package up the money and send 948 01:09:27,800 --> 01:09:31,559 Speaker 1: it to Denver right away. Well, you know what happened. 949 01:09:32,000 --> 01:09:36,799 Speaker 1: The Janie fund lost eight percent of its value. Uh. 950 01:09:36,840 --> 01:09:41,240 Speaker 1: In fact, value funds did very well after the market crashed. 951 01:09:41,520 --> 01:09:44,719 Speaker 1: So here is the problem. People are putting their money 952 01:09:44,800 --> 01:09:48,640 Speaker 1: in when they're optimistic, they're going into this these momentum 953 01:09:48,760 --> 01:09:52,519 Speaker 1: types of things. The money then came out when the 954 01:09:52,560 --> 01:09:55,840 Speaker 1: market was low in two thousand and two, and when 955 01:09:55,880 --> 01:09:59,240 Speaker 1: did most of the money come out of the stock market, 956 01:10:00,080 --> 01:10:05,160 Speaker 1: out of equity mutual funds? Individuals took out scores and 957 01:10:05,320 --> 01:10:11,160 Speaker 1: scores of dollars in the third quarter of two thousand 958 01:10:11,200 --> 01:10:13,519 Speaker 1: and eight, which turned out that was one of the 959 01:10:13,560 --> 01:10:15,840 Speaker 1: mark that when the world was collapsed, and when we 960 01:10:15,840 --> 01:10:18,880 Speaker 1: we saw the first quarter of two thousand nine, the 961 01:10:18,960 --> 01:10:23,719 Speaker 1: flows actually accelerated and there was just a huge get 962 01:10:23,760 --> 01:10:26,639 Speaker 1: me out at any price exactly. And of course what 963 01:10:26,680 --> 01:10:30,280 Speaker 1: we know is that was precisely the time to get 964 01:10:30,360 --> 01:10:35,519 Speaker 1: in rather than going out. And in fact, this is 965 01:10:35,560 --> 01:10:40,280 Speaker 1: where our emotions get ahold of us. And in fact, 966 01:10:40,360 --> 01:10:44,240 Speaker 1: if it's the best thing that an investment advisor can do, 967 01:10:45,280 --> 01:10:48,600 Speaker 1: whether it's a regular investment advisor or one of the 968 01:10:48,600 --> 01:10:52,639 Speaker 1: automated advisors that I work with, is to keep people 969 01:10:52,760 --> 01:10:57,200 Speaker 1: on an even keel. That's the best lesson that we 970 01:10:57,280 --> 01:11:03,280 Speaker 1: can have is, for heaven's sakes, uh, don't let your 971 01:11:03,400 --> 01:11:09,280 Speaker 1: emotions get ahold of you. Be a regular investor for retirement. 972 01:11:10,240 --> 01:11:15,639 Speaker 1: Put money in every pay period every quarter you'll get 973 01:11:15,760 --> 01:11:19,479 Speaker 1: take the advantage of dollar cost averaging, which in a 974 01:11:19,600 --> 01:11:23,040 Speaker 1: volatile market will actually help you because you buy more 975 01:11:23,160 --> 01:11:26,040 Speaker 1: shares when the price is down that when the price 976 01:11:26,160 --> 01:11:30,400 Speaker 1: is up. Don't try to time the market, because it's 977 01:11:30,439 --> 01:11:32,840 Speaker 1: not that you don't it's even worse than that you 978 01:11:32,880 --> 01:11:34,880 Speaker 1: don't know how to do it. It's that when you 979 01:11:35,000 --> 01:11:38,760 Speaker 1: do it, you're much more likely to be wrong rather 980 01:11:38,840 --> 01:11:42,160 Speaker 1: than right. One of the things I noticed in the 981 01:11:42,280 --> 01:11:46,080 Speaker 1: O eight oh nine collapse was even the people who 982 01:11:46,120 --> 01:11:49,800 Speaker 1: saw the train coming and got off the tracks when 983 01:11:49,840 --> 01:11:53,559 Speaker 1: the market bottomed in March O nine, they refuse to 984 01:11:53,680 --> 01:11:57,280 Speaker 1: believe it. They stayed in cash. And we watched people 985 01:11:57,400 --> 01:12:01,280 Speaker 1: sit in cash oh nine in two thousand ten and 986 01:12:01,280 --> 01:12:04,800 Speaker 1: two thousand eleven, and all we heard about for a 987 01:12:04,800 --> 01:12:07,920 Speaker 1: couple of years was this is just a head fake. 988 01:12:08,040 --> 01:12:11,160 Speaker 1: This is a temporary rally. It's gonna go even lower. 989 01:12:11,600 --> 01:12:14,280 Speaker 1: And what are we two hundred and six percent higher 990 01:12:14,320 --> 01:12:18,640 Speaker 1: from then? It's amazing. Lesson about timing is uh, not 991 01:12:18,800 --> 01:12:22,280 Speaker 1: only do you not know when to get in, you 992 01:12:22,360 --> 01:12:24,920 Speaker 1: don't know when to get out and when you market time. 993 01:12:24,960 --> 01:12:27,240 Speaker 1: You gotta be right twice. You gotta know when to 994 01:12:27,280 --> 01:12:32,120 Speaker 1: get out and when to get in. And nobody and 995 01:12:32,200 --> 01:12:35,720 Speaker 1: I really believe this, nobody, but nobody can do that. 996 01:12:36,479 --> 01:12:40,760 Speaker 1: So you mentioned the behavioral counseling for financial advisors as 997 01:12:40,800 --> 01:12:45,439 Speaker 1: well as the software um advisors. Let me let me 998 01:12:45,520 --> 01:12:48,960 Speaker 1: ask a question a little differently. What is it that 999 01:12:49,000 --> 01:12:54,320 Speaker 1: the financial services industry actually gets right for their customers 1000 01:12:56,520 --> 01:13:02,640 Speaker 1: to the extent that they get their customers to diversify, 1001 01:13:03,680 --> 01:13:09,559 Speaker 1: to have some safe parts of the portfolio, to keep 1002 01:13:09,600 --> 01:13:15,560 Speaker 1: an on an even keel uh two tax uh manage 1003 01:13:16,160 --> 01:13:20,120 Speaker 1: that is, to the extent that you have H an 1004 01:13:20,120 --> 01:13:23,479 Speaker 1: I R A or a four oh one K. To 1005 01:13:23,720 --> 01:13:27,839 Speaker 1: the extent that you have that and have some fixed 1006 01:13:27,920 --> 01:13:32,920 Speaker 1: rate instruments, Uh, they ought to go into that part 1007 01:13:32,920 --> 01:13:36,880 Speaker 1: of the portfolio. Uh. And to the extent that you're 1008 01:13:37,000 --> 01:13:41,160 Speaker 1: in the taxable portfolio, maybe that's when you put some 1009 01:13:41,240 --> 01:13:44,720 Speaker 1: municipal bonds in if you want some bonds. And you know, 1010 01:13:44,840 --> 01:13:48,960 Speaker 1: this may seem very obvious, but that's something that individuals 1011 01:13:49,040 --> 01:13:53,240 Speaker 1: don't obviously think about. So there's a lot that financial 1012 01:13:53,280 --> 01:14:00,840 Speaker 1: advisors can do UH. And what I think is particularly 1013 01:14:01,040 --> 01:14:05,640 Speaker 1: useful in terms of what I'm doing with this automated 1014 01:14:05,680 --> 01:14:11,599 Speaker 1: advisor is if we can do it more efficiently, if 1015 01:14:11,600 --> 01:14:15,600 Speaker 1: we can do it at lower cost, it's going to 1016 01:14:15,680 --> 01:14:20,200 Speaker 1: be much better for the individual. So we have about 1017 01:14:20,240 --> 01:14:22,479 Speaker 1: thirty minutes left before I have to send you off 1018 01:14:22,520 --> 01:14:26,639 Speaker 1: to chat with Arthur Levitt. Before I do that, let 1019 01:14:26,680 --> 01:14:30,799 Speaker 1: me run through some of my favorite questions I asked 1020 01:14:31,360 --> 01:14:35,680 Speaker 1: all of my guests. UM, it didn't look like you 1021 01:14:35,800 --> 01:14:38,800 Speaker 1: were gonna go into finance when you came out of 1022 01:14:38,800 --> 01:14:42,160 Speaker 1: school with an m b a. I from what I read, 1023 01:14:42,200 --> 01:14:46,000 Speaker 1: you were thinking about going into business rather than finance. 1024 01:14:46,400 --> 01:14:50,320 Speaker 1: How did you make that transition? What what shifted your 1025 01:14:51,040 --> 01:14:56,800 Speaker 1: focus more towards investing asset management and finance rather than 1026 01:14:56,840 --> 01:15:02,280 Speaker 1: working with UH corporate entity. Well, I was always interested 1027 01:15:02,479 --> 01:15:05,160 Speaker 1: in finance. I mean I grew up a poor kid 1028 01:15:06,080 --> 01:15:12,120 Speaker 1: in Roxbury, Massachusetts, which is part of Boston, and I UH, 1029 01:15:12,479 --> 01:15:15,360 Speaker 1: we lived in a tenement house. We had no money, 1030 01:15:16,240 --> 01:15:18,559 Speaker 1: but I was just sort of fascinated with numbers. I 1031 01:15:18,600 --> 01:15:21,280 Speaker 1: was fascinated with the stock market. I had no UH 1032 01:15:21,680 --> 01:15:25,400 Speaker 1: money in the stock market, but I knew the price 1033 01:15:25,439 --> 01:15:28,280 Speaker 1: of General Motors stock as well as I knew Ted 1034 01:15:28,320 --> 01:15:32,120 Speaker 1: Williams batting average. UH. And when I was in college, 1035 01:15:32,160 --> 01:15:36,120 Speaker 1: I was a good economic student. And my professors in 1036 01:15:36,200 --> 01:15:38,200 Speaker 1: college said you ought to go to graduate school and 1037 01:15:38,200 --> 01:15:41,240 Speaker 1: be an economist. And I said, no, no, look, and 1038 01:15:41,320 --> 01:15:43,360 Speaker 1: I grew up poor. I want to go and make 1039 01:15:43,400 --> 01:15:46,599 Speaker 1: some money. So I did go into UH. I did 1040 01:15:46,680 --> 01:15:49,960 Speaker 1: go to business school. I did UH then go into 1041 01:15:49,960 --> 01:15:53,519 Speaker 1: Wall Street. I worked for Smith Barney for almost three years. 1042 01:15:54,080 --> 01:15:58,920 Speaker 1: I was an investment banker. But what I found was 1043 01:15:59,720 --> 01:16:04,439 Speaker 1: I was thinking I really did like economics. I was 1044 01:16:04,520 --> 01:16:08,439 Speaker 1: trying to go to n y U UH and get 1045 01:16:08,439 --> 01:16:11,080 Speaker 1: a PhD. At the same time that I worked for 1046 01:16:11,120 --> 01:16:16,080 Speaker 1: Smith Barney. But I was an investment banker, I was traveling, 1047 01:16:16,160 --> 01:16:20,080 Speaker 1: I was missing more of my classes. And what finally 1048 01:16:20,160 --> 01:16:24,360 Speaker 1: happened was I finally did make enough money so that 1049 01:16:24,439 --> 01:16:27,720 Speaker 1: I didn't feel poor anymore, and I took a leave 1050 01:16:27,800 --> 01:16:35,560 Speaker 1: of absence to go to Princeton UH get a PhD. 1051 01:16:36,400 --> 01:16:38,800 Speaker 1: I expected to go back into Wall Street. I still 1052 01:16:39,000 --> 01:16:44,880 Speaker 1: liking finance, but an interesting thing happened. Uh. They said 1053 01:16:44,920 --> 01:16:47,960 Speaker 1: to me, hey, you've been a pretty good student, come 1054 01:16:48,000 --> 01:16:52,320 Speaker 1: and stay and teach. Really and so two things happened. 1055 01:16:54,040 --> 01:16:55,720 Speaker 1: I said, all right, I'll try it for a year 1056 01:16:55,760 --> 01:17:02,360 Speaker 1: and see if I like it. And secondly, Prudential Financial 1057 01:17:04,280 --> 01:17:09,280 Speaker 1: had had a scandal at one point where the chairman 1058 01:17:09,439 --> 01:17:13,000 Speaker 1: was having Prudential lend to some of the entities that 1059 01:17:13,080 --> 01:17:18,920 Speaker 1: the chairman UH controlled, and the legislature decided that there 1060 01:17:18,920 --> 01:17:25,520 Speaker 1: had to be six public directors of Prudential, chosen by 1061 01:17:25,920 --> 01:17:31,519 Speaker 1: the UH Supreme the Chief Justice of the New Jersey 1062 01:17:31,640 --> 01:17:35,800 Speaker 1: Supreme Court. The Chief Justice interviewed a number of people 1063 01:17:35,880 --> 01:17:39,759 Speaker 1: for this, including me, put me on the Prudential board, 1064 01:17:40,400 --> 01:17:42,840 Speaker 1: and again came to the point and said, you know, 1065 01:17:43,560 --> 01:17:46,960 Speaker 1: I could be a professor and still be a business. 1066 01:17:46,960 --> 01:17:51,080 Speaker 1: You know, I sort of never decided when I he 1067 01:17:51,160 --> 01:17:53,920 Speaker 1: gave me both options. I then was on the Prudential 1068 01:17:53,960 --> 01:17:58,439 Speaker 1: board uh for uh longer actually than even on the 1069 01:17:58,520 --> 01:18:03,360 Speaker 1: Vanguard board, so that I uh then being on the 1070 01:18:03,400 --> 01:18:07,880 Speaker 1: Prudential board and knowing other people got on other boards 1071 01:18:08,920 --> 01:18:14,840 Speaker 1: and basically became uh someone who could live in both 1072 01:18:14,880 --> 01:18:18,200 Speaker 1: worlds and who could make a good living from being 1073 01:18:18,240 --> 01:18:22,679 Speaker 1: in the business world. Uh, and UH did the writing 1074 01:18:23,320 --> 01:18:27,160 Speaker 1: Uh and teaching that I enjoyed. I enjoyed teaching. It's 1075 01:18:27,160 --> 01:18:30,200 Speaker 1: one of the reasons why I wrote random Walk. Oh really, 1076 01:18:30,240 --> 01:18:34,920 Speaker 1: that's interesting. So basically that was kind of my career 1077 01:18:35,320 --> 01:18:37,920 Speaker 1: of not deciding what I wanted to be when I 1078 01:18:37,960 --> 01:18:41,080 Speaker 1: grew up, Uh, and in fact thinking well, maybe I 1079 01:18:41,120 --> 01:18:43,479 Speaker 1: can do both things. And I have you told it 1080 01:18:43,880 --> 01:18:48,160 Speaker 1: at Princeton? Am I right? And saying almost forty years 1081 01:18:46,880 --> 01:18:51,600 Speaker 1: is right? Well, I I was at Princeton, as you 1082 01:18:51,760 --> 01:18:54,919 Speaker 1: pointed out in your introduction. I worked for the government 1083 01:18:54,960 --> 01:18:57,200 Speaker 1: for a couple of years on the President's Council of 1084 01:18:57,240 --> 01:19:00,640 Speaker 1: Economic Advisors. I was a management school old dean at 1085 01:19:00,720 --> 01:19:03,800 Speaker 1: Yale for seven years. So I've done a lot of 1086 01:19:03,840 --> 01:19:07,439 Speaker 1: different things, and I've enjoyed that because I think life 1087 01:19:07,479 --> 01:19:10,960 Speaker 1: is richer to the extent that you get more and 1088 01:19:11,080 --> 01:19:15,160 Speaker 1: more experiences, always always keep it fresh, always always mix 1089 01:19:15,240 --> 01:19:19,120 Speaker 1: it up. So let me ask you, uh this fascinating question. 1090 01:19:19,920 --> 01:19:23,479 Speaker 1: Who were your early mentors? Who who was giving you 1091 01:19:23,960 --> 01:19:28,240 Speaker 1: advice and insight as to what to do with your career? Well, 1092 01:19:28,360 --> 01:19:30,680 Speaker 1: as I said, I think I had a couple of 1093 01:19:32,040 --> 01:19:36,400 Speaker 1: professors who were very influential who really did want me 1094 01:19:36,479 --> 01:19:43,800 Speaker 1: to be uh an academic, who in fact, UH were 1095 01:19:44,520 --> 01:19:52,240 Speaker 1: very disappointed uh when uh I first went into business. 1096 01:19:53,080 --> 01:20:03,040 Speaker 1: Within the UH business community, I guess UH people UH 1097 01:20:03,400 --> 01:20:10,960 Speaker 1: like Jack Bogel, who we've talked about before, who I 1098 01:20:11,000 --> 01:20:16,040 Speaker 1: liked particularly both because he and I did see eye 1099 01:20:16,040 --> 01:20:21,519 Speaker 1: to eye on of the things about investing, and who 1100 01:20:21,640 --> 01:20:27,160 Speaker 1: also had a social conscience. Uh. This was a business 1101 01:20:27,280 --> 01:20:32,639 Speaker 1: person who showed you that you could actually do well 1102 01:20:32,720 --> 01:20:35,880 Speaker 1: financially by doing well for your client. And I guess 1103 01:20:36,000 --> 01:20:40,000 Speaker 1: that was a particular influence for me in the things 1104 01:20:40,080 --> 01:20:47,240 Speaker 1: that I had done. UH. And look, finance is fascinating uh. 1105 01:20:47,280 --> 01:20:50,200 Speaker 1: You know, as I said, it interested me before I 1106 01:20:50,240 --> 01:20:54,080 Speaker 1: had any money and could do anything with it. So 1107 01:20:55,320 --> 01:21:00,280 Speaker 1: finance is fascinating and I do think that UH. While 1108 01:21:00,960 --> 01:21:04,960 Speaker 1: a lot of people are very angry about finance because 1109 01:21:06,240 --> 01:21:11,519 Speaker 1: finance did practically bring the world down in the financial crisis, UH, 1110 01:21:11,600 --> 01:21:17,760 Speaker 1: finance is also absolutely essential UH and UH can help 1111 01:21:17,800 --> 01:21:20,960 Speaker 1: people uh more than it can hurt them. What what's 1112 01:21:21,000 --> 01:21:24,360 Speaker 1: a financial crisis or two amongst friends? Right? It's um 1113 01:21:24,960 --> 01:21:29,200 Speaker 1: so so you mentioned and I'm only kidding before you 1114 01:21:29,280 --> 01:21:33,240 Speaker 1: people start sending the emails. Um, you mentioned the mentors 1115 01:21:33,600 --> 01:21:37,200 Speaker 1: you previously mentioned David Swenson of Yale and Warren Buffett, 1116 01:21:37,760 --> 01:21:42,640 Speaker 1: any other investors stand out as influencing your thought process 1117 01:21:42,720 --> 01:21:47,479 Speaker 1: or affecting the way you looked at markets? Now, I 1118 01:21:47,520 --> 01:21:53,479 Speaker 1: think that, uh, clearly those are the main names in 1119 01:21:53,600 --> 01:21:58,439 Speaker 1: terms of my own career, in my own life of 1120 01:21:58,560 --> 01:22:05,519 Speaker 1: people who have been influential. So let's talk about some books, uh, 1121 01:22:05,600 --> 01:22:08,840 Speaker 1: in addition to the eleventh edition of a random of 1122 01:22:08,960 --> 01:22:12,080 Speaker 1: Down Wall Street. UH, tell us about some books that 1123 01:22:12,120 --> 01:22:17,439 Speaker 1: you found influential. They could be fiction, non fiction, they 1124 01:22:17,479 --> 01:22:20,120 Speaker 1: don't have to have anything to do with finance. What 1125 01:22:20,200 --> 01:22:23,000 Speaker 1: are some of the books that that very much influenced 1126 01:22:23,400 --> 01:22:27,439 Speaker 1: your thought process? Well, let me give you one in 1127 01:22:27,560 --> 01:22:36,200 Speaker 1: the finance, uh academic area, and umh one uh part 1128 01:22:36,560 --> 01:22:41,879 Speaker 1: of uh, you know, my own career. You know, sometimes 1129 01:22:42,000 --> 01:22:45,080 Speaker 1: I think it would be nice to have eight or 1130 01:22:45,200 --> 01:22:50,920 Speaker 1: nine lives because there are a lot of different things, 1131 01:22:51,280 --> 01:22:53,720 Speaker 1: uh that would be fun to do. I mean, we 1132 01:22:53,760 --> 01:22:55,800 Speaker 1: haven't talked about this, but I was in the Army 1133 01:22:55,840 --> 01:22:59,200 Speaker 1: for three years and the Army Finance Corps. I actually 1134 01:22:59,240 --> 01:23:01,559 Speaker 1: liked the Army. What did you do for for the 1135 01:23:01,680 --> 01:23:07,360 Speaker 1: in the Army. Actually, what I did was we uh 1136 01:23:07,760 --> 01:23:11,320 Speaker 1: can I did this right after business school. Uh. There 1137 01:23:11,479 --> 01:23:14,240 Speaker 1: was a colonel in the Army who was the commandant 1138 01:23:14,280 --> 01:23:17,880 Speaker 1: of the Army Finance Corps and we were putting in 1139 01:23:18,040 --> 01:23:24,680 Speaker 1: a computerized pay an accounting system. And this colonel decided, 1140 01:23:24,800 --> 01:23:27,719 Speaker 1: what we need are well trained people to go into 1141 01:23:27,840 --> 01:23:31,680 Speaker 1: various posts to do it. And so I was a 1142 01:23:31,800 --> 01:23:36,519 Speaker 1: direct commissioned into the U. S. Army Finance Corps did 1143 01:23:36,960 --> 01:23:44,240 Speaker 1: uh uh did the conversion of our pay and accounting 1144 01:23:44,280 --> 01:23:48,400 Speaker 1: system into a computerized one. And at the age of 1145 01:23:48,439 --> 01:23:52,440 Speaker 1: twenty two, I had more responsibility than anybody could possibly 1146 01:23:52,479 --> 01:23:57,880 Speaker 1: have had at that in the private sector. For sure, 1147 01:23:58,720 --> 01:24:01,559 Speaker 1: certainly more than you'd ever out in the private sector. 1148 01:24:01,760 --> 01:24:06,479 Speaker 1: And I loved my experience. In fact. Uh you know, 1149 01:24:06,600 --> 01:24:08,920 Speaker 1: while as I told you, I grew up poor and 1150 01:24:09,000 --> 01:24:11,719 Speaker 1: I did want to get out and earn some money. 1151 01:24:11,800 --> 01:24:14,040 Speaker 1: The army is not a place to earn a lot 1152 01:24:14,080 --> 01:24:16,800 Speaker 1: of money. But I actually thought, gee, you know, this 1153 01:24:16,840 --> 01:24:21,200 Speaker 1: wouldn't have been a bad career. The other possible career 1154 01:24:21,400 --> 01:24:24,240 Speaker 1: that I would have loved is I am a frustrated 1155 01:24:24,280 --> 01:24:31,160 Speaker 1: Shakespearean actor. Uh. In that uh, I uh as a 1156 01:24:31,479 --> 01:24:34,360 Speaker 1: with a lean and hungry. Look, I was a wonderful 1157 01:24:34,520 --> 01:24:37,639 Speaker 1: Cassius and a high school play. I would have loved 1158 01:24:37,680 --> 01:24:40,120 Speaker 1: to have done that. And I love reading Shakespeare. I 1159 01:24:40,200 --> 01:24:43,759 Speaker 1: love theater. Uh. And actually a lot of the things, 1160 01:24:43,880 --> 01:24:49,480 Speaker 1: the so called fiction things that I read, are plays, 1161 01:24:49,520 --> 01:24:53,360 Speaker 1: because it would have been a wonderful career to have 1162 01:24:53,560 --> 01:24:58,680 Speaker 1: had uh. And other than thinking that it meant a 1163 01:24:58,760 --> 01:25:01,920 Speaker 1: life of being poor, I might have actually done that. 1164 01:25:02,439 --> 01:25:05,400 Speaker 1: With respect to other books that I think are very 1165 01:25:05,560 --> 01:25:10,000 Speaker 1: very influential, I would point out Danny Kahneman's book Thinking 1166 01:25:10,120 --> 01:25:15,519 Speaker 1: Fast and Slow Again. I think that the insights of 1167 01:25:16,000 --> 01:25:18,439 Speaker 1: you know, it's like the old Pogo line, We've met 1168 01:25:18,479 --> 01:25:21,759 Speaker 1: the enemy and it's us. Uh. This is I think 1169 01:25:21,880 --> 01:25:27,040 Speaker 1: the biggest problem that we have and investing and the 1170 01:25:27,200 --> 01:25:32,840 Speaker 1: insights uh in that book, which is a wonderful summary 1171 01:25:32,880 --> 01:25:38,680 Speaker 1: of what we know about behavioralism. Uh. This is uh. 1172 01:25:38,880 --> 01:25:43,160 Speaker 1: I think you you ought to read my book, But boy, 1173 01:25:43,320 --> 01:25:46,760 Speaker 1: I would definitely read that book. It's a terrific book. 1174 01:25:47,120 --> 01:25:49,760 Speaker 1: I've read it. And I'm gonna tell you most of 1175 01:25:49,760 --> 01:25:52,600 Speaker 1: our listeners, or or at least many of our listeners, 1176 01:25:53,120 --> 01:25:55,000 Speaker 1: most of our listeners are familiar with the book, and 1177 01:25:55,040 --> 01:25:59,120 Speaker 1: I would bet many of them have read Danny Khneman's work. 1178 01:25:59,320 --> 01:26:03,360 Speaker 1: It's it's just seminal um in the space. And so 1179 01:26:03,400 --> 01:26:08,600 Speaker 1: that's the the non fiction non finance book. What what 1180 01:26:08,720 --> 01:26:10,840 Speaker 1: else do you, uh do you want to mention in 1181 01:26:10,920 --> 01:26:14,320 Speaker 1: terms of books? Well, I think those are you know 1182 01:26:14,920 --> 01:26:19,639 Speaker 1: as um again we've talked about it and it's very 1183 01:26:19,680 --> 01:26:26,800 Speaker 1: well written. Charlie Ellis's book Show on Winning the Losers Game, 1184 01:26:27,680 --> 01:26:33,240 Speaker 1: uh is I think very uh important. And uh you know, 1185 01:26:33,360 --> 01:26:38,759 Speaker 1: Jack Boggle has um written some great books. In fact, 1186 01:26:38,800 --> 01:26:45,880 Speaker 1: I think uh probably uh one of his uh best 1187 01:26:45,920 --> 01:26:51,920 Speaker 1: books uh is not directly about finance, and as uh 1188 01:26:52,920 --> 01:26:55,439 Speaker 1: says a lot about Jack Bogel. The book is called 1189 01:26:55,560 --> 01:27:01,479 Speaker 1: Enough and it comes from uh this uh h idea 1190 01:27:02,640 --> 01:27:11,040 Speaker 1: uh that there was a discussion with a writer and 1191 01:27:13,479 --> 01:27:17,160 Speaker 1: who had sold a lot of books, and the vellow 1192 01:27:17,520 --> 01:27:20,280 Speaker 1: pointed out to a hedge fund guy who had made 1193 01:27:20,320 --> 01:27:27,360 Speaker 1: billions of dollars and said to the writer, ah, gee, 1194 01:27:27,479 --> 01:27:31,400 Speaker 1: you know you've sold a lot of copies of books, 1195 01:27:31,439 --> 01:27:37,439 Speaker 1: but you have got a pittance relative to this hedge 1196 01:27:37,439 --> 01:27:41,280 Speaker 1: fund guy. And the writer said, yeah, but I have 1197 01:27:41,520 --> 01:27:46,960 Speaker 1: got something uh that that fellow will never have, and 1198 01:27:47,080 --> 01:27:51,720 Speaker 1: that's enough. Uh. And again this is an idea that's uh, 1199 01:27:51,960 --> 01:27:56,160 Speaker 1: it's it's actually a wonderful book of Jack Buggles UH 1200 01:27:56,200 --> 01:28:02,320 Speaker 1: that I recommend warmly to people, a philosophical perspective on 1201 01:28:02,520 --> 01:28:05,759 Speaker 1: what you need to be happy as opposed to never 1202 01:28:05,920 --> 01:28:11,680 Speaker 1: never achieving that. So you've been watching the finance industry 1203 01:28:11,880 --> 01:28:15,479 Speaker 1: for a good long time. UM, what do you think 1204 01:28:15,520 --> 01:28:20,160 Speaker 1: are the most significant changes that we've witnessed? And we 1205 01:28:20,200 --> 01:28:23,800 Speaker 1: could probably talk for hours just about what's changed, But 1206 01:28:23,920 --> 01:28:27,120 Speaker 1: what is it that stands out as this is really 1207 01:28:27,160 --> 01:28:30,759 Speaker 1: something that's going to have a lasting effect, uh, decades 1208 01:28:30,800 --> 01:28:34,640 Speaker 1: into the future. Well for me, because as you know, 1209 01:28:35,160 --> 01:28:40,040 Speaker 1: I wrote there auto be index funds three years before 1210 01:28:40,120 --> 01:28:45,080 Speaker 1: the first index fund was put into effect. What I 1211 01:28:45,120 --> 01:28:52,000 Speaker 1: am so pleased about is that indexing finally has taken off, uh, 1212 01:28:52,040 --> 01:28:56,280 Speaker 1: that money is flowing in. I think the E t 1213 01:28:56,520 --> 01:29:00,960 Speaker 1: F revolution uh is a terrific big thing. While there 1214 01:29:01,000 --> 01:29:04,839 Speaker 1: are some ETFs, and here I would agree with Jack Bogel, 1215 01:29:05,200 --> 01:29:07,519 Speaker 1: there are some E t F that I think are terrible. 1216 01:29:07,560 --> 01:29:10,840 Speaker 1: I don't think people should buy the E t F 1217 01:29:11,280 --> 01:29:16,120 Speaker 1: gives you three times the of the S and P. 1218 01:29:16,439 --> 01:29:18,679 Speaker 1: There are some of them that are terrible. But the 1219 01:29:18,840 --> 01:29:25,719 Speaker 1: plane Vanilla ones allow people to basically buy the market 1220 01:29:25,920 --> 01:29:30,240 Speaker 1: at close to a zero cost. I think this is 1221 01:29:30,280 --> 01:29:35,720 Speaker 1: a revolution, and I think it's uh just extremely important. 1222 01:29:36,720 --> 01:29:42,240 Speaker 1: I think that one of the big mistakes also that 1223 01:29:42,439 --> 01:29:48,160 Speaker 1: people make is that they don't save enough. I think 1224 01:29:48,200 --> 01:29:53,320 Speaker 1: that we do have a crisis in this country that 1225 01:29:53,479 --> 01:29:59,800 Speaker 1: as we are aging, many people are woefully unprepared for retirement. 1226 01:30:00,720 --> 01:30:03,960 Speaker 1: One of the things that I wish we had done 1227 01:30:04,160 --> 01:30:09,640 Speaker 1: as a nation. When George Bush was hoping to privatize 1228 01:30:09,680 --> 01:30:15,040 Speaker 1: social Security, what I would have preferred that he do 1229 01:30:16,400 --> 01:30:21,559 Speaker 1: is do a private add on to the regular Social 1230 01:30:21,600 --> 01:30:26,240 Speaker 1: Security where you would have another percentage or so that 1231 01:30:26,360 --> 01:30:29,280 Speaker 1: would come out of your salary, and this would be 1232 01:30:29,439 --> 01:30:35,720 Speaker 1: yours that could have been invested in index funds. I 1233 01:30:35,760 --> 01:30:38,879 Speaker 1: think if he had proposed that, it would have passed 1234 01:30:39,400 --> 01:30:43,840 Speaker 1: as opposed to trying to redo the whole system. I 1235 01:30:44,000 --> 01:30:48,320 Speaker 1: still would like to see something like that because I 1236 01:30:48,360 --> 01:30:53,000 Speaker 1: think as a nation, we are not saving enough, uh 1237 01:30:53,040 --> 01:30:58,080 Speaker 1: and many people are unprepared for retirement. That that's Charlie 1238 01:30:58,080 --> 01:31:01,679 Speaker 1: Ellis's most recent That's arl A Ellis's most recent book, 1239 01:31:01,760 --> 01:31:05,559 Speaker 1: exactly the coming coming retirement Crisis. Let me before I forget, 1240 01:31:05,640 --> 01:31:10,120 Speaker 1: let me just make a note, don't buy triple leveraged 1241 01:31:10,240 --> 01:31:13,720 Speaker 1: inverse funds. Got it. I don't think anyone's going to 1242 01:31:13,800 --> 01:31:16,839 Speaker 1: take that as a news flash from you know, but 1243 01:31:16,840 --> 01:31:20,640 Speaker 1: but it's always good hearing it, uh, straight from the 1244 01:31:20,680 --> 01:31:24,479 Speaker 1: horse's mouth. Alright, So you mentioned indexing as the most 1245 01:31:24,520 --> 01:31:28,080 Speaker 1: index funds as the most significant shifts since you joined 1246 01:31:28,160 --> 01:31:31,960 Speaker 1: the industry. Looking forward, what do you think are the 1247 01:31:32,040 --> 01:31:36,040 Speaker 1: next changes that are going to take place? Well, being 1248 01:31:36,720 --> 01:31:44,519 Speaker 1: UH in the vanguard of automated UH investment advisories and 1249 01:31:44,640 --> 01:31:52,000 Speaker 1: trying to build that business up. I do believe that 1250 01:31:53,760 --> 01:31:59,880 Speaker 1: this will become increasingly important, and we will be able 1251 01:32:00,080 --> 01:32:06,880 Speaker 1: to automate investment advice because by doing so, we can 1252 01:32:07,000 --> 01:32:12,599 Speaker 1: charge less. And as I've said many times, I'm very 1253 01:32:12,680 --> 01:32:15,800 Speaker 1: modest about what I know or don't know about finance. 1254 01:32:15,880 --> 01:32:19,720 Speaker 1: But what I'm just absolutely sure about is if we 1255 01:32:19,920 --> 01:32:26,439 Speaker 1: can provide services at lower cost. UH, that's a win 1256 01:32:26,600 --> 01:32:31,360 Speaker 1: win for people, because the lower the price I pay 1257 01:32:31,479 --> 01:32:34,960 Speaker 1: to the purveyor of any service, the more that's going 1258 01:32:35,000 --> 01:32:37,719 Speaker 1: to be for me, especially if you're going to compound 1259 01:32:37,720 --> 01:32:43,559 Speaker 1: that over decades, you bet you, because costs again, UH, 1260 01:32:43,840 --> 01:32:48,200 Speaker 1: my friend Jack Boggle would call it just as Einstein 1261 01:32:48,320 --> 01:32:52,320 Speaker 1: said at one point that compound interest is one of 1262 01:32:52,360 --> 01:32:57,040 Speaker 1: the greatest forces in the world. Well, the costs compound two, 1263 01:32:57,240 --> 01:33:01,759 Speaker 1: which Jack calls the tyranny of the compounding of costs. 1264 01:33:02,880 --> 01:33:06,760 Speaker 1: So we're down to our last two questions. These are 1265 01:33:06,760 --> 01:33:09,719 Speaker 1: two of my favorite questions. I ask all of my guests. 1266 01:33:11,080 --> 01:33:16,519 Speaker 1: If somebody who is just graduating college um as a 1267 01:33:16,560 --> 01:33:21,200 Speaker 1: millennial as they're referred to these days, came to you 1268 01:33:21,200 --> 01:33:24,680 Speaker 1: when asked, said they're interested in a career in finance, 1269 01:33:25,360 --> 01:33:28,080 Speaker 1: what sort of advice would you give them. I would 1270 01:33:28,080 --> 01:33:32,960 Speaker 1: tell them that while finance sometimes has a a very 1271 01:33:33,000 --> 01:33:38,519 Speaker 1: bad name, I mean, after all, we've had uh people uh, 1272 01:33:38,760 --> 01:33:43,760 Speaker 1: and they're really very very similar Bernie in this campaign, 1273 01:33:44,640 --> 01:33:48,120 Speaker 1: Bernie Sanders says all the problems in the world are 1274 01:33:48,200 --> 01:33:52,040 Speaker 1: because of Wall Street and uh uh and break up 1275 01:33:52,080 --> 01:33:54,960 Speaker 1: the banks and everything's gonna be fine. And Donald Trump 1276 01:33:55,000 --> 01:33:58,720 Speaker 1: has not been very different from Bernie sand really uh 1277 01:33:59,000 --> 01:34:03,320 Speaker 1: in say sing that Wall Street is all bad, don't 1278 01:34:03,360 --> 01:34:12,240 Speaker 1: believe it. Uh, it's a fascinating career. Uh and uh uh. 1279 01:34:12,280 --> 01:34:23,360 Speaker 1: Finance has in fact been extremely important in improving welfare. 1280 01:34:23,479 --> 01:34:26,559 Speaker 1: And we were talking about books. There's a book by 1281 01:34:26,680 --> 01:34:33,639 Speaker 1: Getsman which has just come out about how money has 1282 01:34:33,800 --> 01:34:41,000 Speaker 1: in fact been absolutely essential in improving people's standard of living. 1283 01:34:41,360 --> 01:34:44,200 Speaker 1: What what's the name of the Getsman book? Uh, it's 1284 01:34:44,720 --> 01:34:50,160 Speaker 1: money and uh uh you might be able to find it. 1285 01:34:50,200 --> 01:34:51,960 Speaker 1: I don't think I've got the other part of it. 1286 01:34:52,080 --> 01:34:57,000 Speaker 1: Exact money changes every Money changes everything. Fine, Yeah, I 1287 01:34:57,080 --> 01:35:00,599 Speaker 1: give credit to Google for that money changes everything. How 1288 01:35:00,640 --> 01:35:06,520 Speaker 1: finance made civilization possible? By William oh And I recognized 1289 01:35:06,560 --> 01:35:11,760 Speaker 1: this pyramid on the on the cover of the book. Um. 1290 01:35:11,800 --> 01:35:14,799 Speaker 1: And our final question, God, I have like a million 1291 01:35:14,840 --> 01:35:16,920 Speaker 1: other things to talk to you about, but I can't 1292 01:35:17,000 --> 01:35:20,040 Speaker 1: keep you here forever. What is it that you know about? 1293 01:35:20,120 --> 01:35:21,840 Speaker 1: And I know the answer to this, but I have 1294 01:35:21,920 --> 01:35:25,240 Speaker 1: to ask it. What is it that you know about 1295 01:35:25,280 --> 01:35:29,439 Speaker 1: investing today that you wish you knew forty years ago 1296 01:35:29,720 --> 01:35:36,719 Speaker 1: when you started your career. Well, I didn't know about indexing. Uh. 1297 01:35:36,760 --> 01:35:41,400 Speaker 1: In fact, when I worked at Smith Barney, I spent 1298 01:35:41,439 --> 01:35:46,280 Speaker 1: a lot of time with the research people. I Uh, 1299 01:35:46,320 --> 01:35:48,839 Speaker 1: I had drunk that kool ai that at that point 1300 01:35:49,360 --> 01:35:54,600 Speaker 1: I believed it could be done. And actually one of 1301 01:35:54,640 --> 01:36:01,840 Speaker 1: the things that I just found absolutely fascinating was it 1302 01:36:01,920 --> 01:36:08,280 Speaker 1: wasn't necessarily because people weren't good at it. UH. My 1303 01:36:08,560 --> 01:36:16,400 Speaker 1: mentors at that time where people by the name of Bill, Grant, Nelson, Shannon, Uh. 1304 01:36:16,439 --> 01:36:20,720 Speaker 1: They were very good at it. But I began to realize, 1305 01:36:21,320 --> 01:36:25,120 Speaker 1: which I didn't know at the beginning, was the paradox 1306 01:36:25,680 --> 01:36:31,280 Speaker 1: that the more the talented people are in this game, 1307 01:36:34,040 --> 01:36:37,680 Speaker 1: the less they can profit from it. Because the more 1308 01:36:37,720 --> 01:36:46,200 Speaker 1: the talented people work and invest and make market prices change, 1309 01:36:47,920 --> 01:36:53,240 Speaker 1: the better the market becomes, and the better off people 1310 01:36:53,360 --> 01:36:57,280 Speaker 1: are just accepting the tableau of market prices that are 1311 01:36:57,320 --> 01:37:00,559 Speaker 1: out there and buying an index fund. And it was 1312 01:37:00,720 --> 01:37:06,200 Speaker 1: that kind of experience that finally led to this view 1313 01:37:07,240 --> 01:37:11,320 Speaker 1: that indexing was the way to go. Professor Malkiel, thank 1314 01:37:11,360 --> 01:37:15,400 Speaker 1: you so much for being so generous with your time. 1315 01:37:15,640 --> 01:37:19,840 Speaker 1: This has been an utterly fascinating UH tour to force 1316 01:37:19,960 --> 01:37:25,520 Speaker 1: conversation about the everything you've learned and the proper way 1317 01:37:25,640 --> 01:37:29,080 Speaker 1: for most people UH to invest. I hope all the 1318 01:37:29,120 --> 01:37:33,000 Speaker 1: listeners have have enjoyed this conversation. If you have to 1319 01:37:33,080 --> 01:37:35,040 Speaker 1: be sure and look up an inch or down an 1320 01:37:35,040 --> 01:37:38,679 Speaker 1: inch on Apple iTunes, you can see the other ninety 1321 01:37:38,720 --> 01:37:43,000 Speaker 1: two or so such conversations we've had. I would be 1322 01:37:43,080 --> 01:37:47,639 Speaker 1: remiss if I did not thank Taylor Riggs, our booker 1323 01:37:47,760 --> 01:37:52,080 Speaker 1: for for scheduling these UH conversations and staying on top 1324 01:37:52,160 --> 01:37:56,800 Speaker 1: of all of our very various guests. My engineer is 1325 01:37:56,880 --> 01:38:00,400 Speaker 1: Charlie Volmer and my head of research is Mike at Nick. 1326 01:38:01,200 --> 01:38:05,000 Speaker 1: You've been listening to Masters in Business on Bloomberg Radio. 1327 01:38:07,600 --> 01:38:09,880 Speaker 1: Our world is always moving, so with Merrill Lynch you 1328 01:38:09,880 --> 01:38:12,920 Speaker 1: can get access to financial guidance online, in person or 1329 01:38:12,960 --> 01:38:15,160 Speaker 1: through the app. Visit mL dot com and learn more 1330 01:38:15,160 --> 01:38:17,720 Speaker 1: about Merrill Lynch. An affiliated Bank of America. Mery Lynch 1331 01:38:17,760 --> 01:38:20,040 Speaker 1: makes available products and services offered by Merrill Lynch. Pierce 1332 01:38:20,080 --> 01:38:22,240 Speaker 1: Veneran Smith Incorporated or Registered Broker Dealer remember s I 1333 01:38:22,280 --> 01:38:22,479 Speaker 1: PC