WEBVTT - Replay Interview With Burt Malkiel: Masters in Business (Audio) 0:00:00.120 --> 0:00:02.440 The future may not be clear, but our commitment is 0:00:02.560 --> 0:00:04.440 so when you sit with an advisor at Merrill Lynch, 0:00:04.519 --> 0:00:07.160 we'll put your interests first. Visit mL dot com and 0:00:07.240 --> 0:00:09.600 learn more about Merrill Lynch. An affiliated Bank of America, 0:00:09.760 --> 0:00:12.239 Mary Lynch makes available products and services offered by Merrill Lynch. 0:00:12.240 --> 0:00:14.600 Pierce Veteran Smith Incorporated or Register Broker Dealer. Remember s 0:00:14.640 --> 0:00:21.200 I PC. This is Master's in Business with Barry Ridholds 0:00:21.360 --> 0:00:25.200 on Bloomberg Radio this week on Masters in Business. I 0:00:25.239 --> 0:00:29.280 have a very special guest. His name is Professor Burton Malkiel. 0:00:29.360 --> 0:00:31.840 And when I say I have a special guest man, 0:00:32.000 --> 0:00:36.160 I am not kidding this week. Professor Malkiel is perhaps 0:00:36.240 --> 0:00:41.240 best known for writing one of the most seminal books 0:00:41.280 --> 0:00:45.280 on investing, A Random Walk down Wall Street. It's now 0:00:45.320 --> 0:00:49.440 and it's eleventh edition, having sold more than a million 0:00:49.479 --> 0:00:53.760 and a half copies. UH Professor of Economics at Princeton, 0:00:53.960 --> 0:00:57.680 twice Chairman of the department there. He ran the Hell 0:00:57.800 --> 0:01:01.600 School of Management for about eight years, and over the 0:01:01.600 --> 0:01:05.039 course of that period he was for twenty eight years 0:01:05.120 --> 0:01:09.480 on the board UH Vanguard. He is currently the chief 0:01:09.720 --> 0:01:15.679 investment officer of Wealth Front Friends with other guests of 0:01:15.760 --> 0:01:22.520 the show like Jack Bogel and Charlie ellis really Professor 0:01:22.640 --> 0:01:28.320 Malkiel is unique um in the annals of of investing. 0:01:28.400 --> 0:01:32.000 He's a rock star. And I don't know if there 0:01:32.040 --> 0:01:36.440 are many people who are more knowledgeable and more influential 0:01:37.160 --> 0:01:40.960 uh than he is. So the man who pretty much 0:01:41.080 --> 0:01:46.720 invented the blindfolded monkey throwing darts, the person who suggested 0:01:47.600 --> 0:01:51.360 that Wall Street created an index fund so that investors 0:01:51.400 --> 0:01:57.559 could make low cost indexed investments. What else can I say? 0:01:57.560 --> 0:02:00.440 Why don't I say nothing else? And with out any 0:02:00.440 --> 0:02:08.799 further ado my conversation with Bert Malkiel. This is Masters 0:02:08.840 --> 0:02:13.280 in Business with Barry Ridholts on Bloomberg Radio. My special 0:02:13.320 --> 0:02:15.400 guest today. And I know you make fun of me 0:02:15.440 --> 0:02:18.120 when I say that, but my special guest today is 0:02:18.240 --> 0:02:21.920 truly a special guest and a legend in the world 0:02:22.040 --> 0:02:25.640 of finance. Let me read just a short version of 0:02:25.720 --> 0:02:31.200 his curriculum vitae. His name is Professor Burton Malkiel. He 0:02:31.639 --> 0:02:35.880 used to be the Chemical Bank Professor of Economics at 0:02:35.919 --> 0:02:39.560 the Princeton UH At Princeton University. He is a two 0:02:39.560 --> 0:02:43.600 time chairman of the Economics Department, served as a member 0:02:43.639 --> 0:02:48.720 of the Council of Economic Advisors from to nineteen seventy seven, 0:02:48.760 --> 0:02:53.200 became president of the American Finance Association. After that, he 0:02:53.360 --> 0:02:56.400 was dean of the Yale School of Management in the 0:02:56.480 --> 0:03:01.520 eighties and spent twenty eight years as a director of 0:03:01.560 --> 0:03:07.280 the Vanguard Group. He's probably best known for authoring the 0:03:07.360 --> 0:03:11.160 book A Random Walk Down Wall Street. It's now and 0:03:11.200 --> 0:03:16.279 it's eleventh edition. The paperback came out again, updated and revised. 0:03:16.760 --> 0:03:20.720 It's sold one point five million copies, and a number 0:03:20.720 --> 0:03:23.880 of people have said, if you read only one book 0:03:24.240 --> 0:03:27.280 about investing, Random Walk Down Wall Street is the one 0:03:27.360 --> 0:03:31.440 to read. Professor Malkiel, Welcome to Bloomberg. Thank you very 0:03:32.200 --> 0:03:36.120 enjoy being here, and I am am thrilled to have you. 0:03:36.160 --> 0:03:38.440 By the way, I left out so much from your CV. 0:03:39.280 --> 0:03:42.240 UM bachelor's and NBA from Harvard and fifty three and 0:03:42.280 --> 0:03:46.000 fifty five doctorate from Princeton in sixty four. You're currently 0:03:46.120 --> 0:03:50.920 Chief investment Officer for wealth Front, which is a software 0:03:50.920 --> 0:03:54.840 based financial advisor. UM. The list goes on and on. 0:03:55.160 --> 0:03:58.480 I'm gonna stop that because if I keep discussing your 0:03:58.480 --> 0:04:01.920 CV will run out of time for questions. You're probably 0:04:02.080 --> 0:04:07.200 best known as someone who who was early in the 0:04:07.280 --> 0:04:12.280 history of recognizing that quote markets are efficient. Why are 0:04:12.360 --> 0:04:17.400 markets efficient? First of all, sometimes people get wrong what 0:04:17.720 --> 0:04:21.520 efficient markets mean, so giving a definition, so let me 0:04:21.680 --> 0:04:23.960 let me tell you the way I define it. There 0:04:24.000 --> 0:04:29.479 are two parts to uh, the idea of efficient markets, 0:04:29.560 --> 0:04:33.640 and one part that many people associate with it that's wrong. 0:04:33.920 --> 0:04:38.599 The parts that are right are one that information gets 0:04:38.640 --> 0:04:43.680 reflected very quickly into stock prices. If there's some favorable 0:04:43.760 --> 0:04:46.920 news about a company, uh that's going to increase at 0:04:46.960 --> 0:04:50.440 stock price ten percent, the stock price tends to go 0:04:50.520 --> 0:04:56.360 up ten percent right away because anybody who uh waits 0:04:56.640 --> 0:05:01.560 uh to uh get take advantage of it will find 0:05:01.640 --> 0:05:06.640 that quicker people have come in beforehand. So one information 0:05:07.040 --> 0:05:11.560 gets reflected right away. Now, what efficient markets is often 0:05:11.640 --> 0:05:16.720 associated with, which is wrong, is that efficient markets mean 0:05:16.880 --> 0:05:22.039 the price is always right. The price is exactly the 0:05:22.080 --> 0:05:25.800 present value of all of the dividends and earnings that 0:05:25.839 --> 0:05:28.240 are going to come in the future, and the price 0:05:28.480 --> 0:05:32.440 is perfectly right. That's wrong. The price is never right. 0:05:32.520 --> 0:05:36.680 In fact, prices are always wrong. What's right is that 0:05:36.760 --> 0:05:41.640 nobody knows for sure whether they're too high or too low, 0:05:42.440 --> 0:05:46.480 and that leads to the second point about efficient markets. 0:05:46.839 --> 0:05:50.200 It's not that the prices are always right. It's that 0:05:50.720 --> 0:05:57.000 it's never clear that they are wrong. There's nothing systematically 0:05:57.080 --> 0:06:02.640 wrong about them. Therefore there are no arbitrage opportunities, and 0:06:02.760 --> 0:06:09.080 therefore the market is really very very difficult to beat, 0:06:09.680 --> 0:06:14.359 and so information gets reflected. The market's tough to beat. 0:06:14.800 --> 0:06:18.320 But prices are not always right. We know perfectly well 0:06:18.360 --> 0:06:22.440 they're always wrong, but nobody knows for sure whether they're 0:06:22.480 --> 0:06:24.839 too high or too low. We were recently having a 0:06:24.880 --> 0:06:28.720 discussion about fair value when people were complaining, well, the 0:06:28.800 --> 0:06:33.320 market is not at fair value, and my my response was, well, 0:06:33.400 --> 0:06:36.680 you just briefly pass fair value as you crean too 0:06:36.760 --> 0:06:38.800 much to the upside of too much to the downside. 0:06:39.160 --> 0:06:42.200 You're saying, even when you go by fair value, we 0:06:42.279 --> 0:06:44.480 don't really know exactly what it is. We don't know, 0:06:45.080 --> 0:06:49.040 we don't know for sure. Look, we know perfectly well 0:06:49.800 --> 0:06:53.880 that in March of two thousand there was a bubble 0:06:53.920 --> 0:06:59.240 in the stock market. UH. We had internet companies selling 0:06:59.279 --> 0:07:05.119 a triple multiples. We had companies changing their name UH 0:07:05.320 --> 0:07:07.360 to put dot com at the end of it, and 0:07:07.400 --> 0:07:10.360 the price would double. We know that there were crazy 0:07:10.520 --> 0:07:15.080 things going on but the problem is the people who 0:07:15.120 --> 0:07:19.640 are associated with the view I told you so I 0:07:19.880 --> 0:07:24.720 knew that. The problem is they knew it in and 0:07:26.680 --> 0:07:30.680 that's the problem. After the fact, we know perfectly well 0:07:30.760 --> 0:07:34.640 the prices were wrong, But the difficulty was the people 0:07:34.680 --> 0:07:37.320 who said we knew it, knew it early in the 0:07:37.440 --> 0:07:40.840 nineteen nineties and missed one of the best bull markets 0:07:40.880 --> 0:07:46.400 we've ever had. I very famously remember Lewis Rukaiser's his 0:07:46.600 --> 0:07:50.080 elves saying these things in nine six. He ended up 0:07:50.120 --> 0:07:53.440 demoting a few of them because they were right. Stocks 0:07:53.440 --> 0:07:56.160 were of valued. But so you missed four years of 0:07:56.680 --> 0:08:02.160 double digit gains this last collapse. I recall, in real time, 0:08:03.040 --> 0:08:07.000 very very few people were warning about credit, about derivatives, 0:08:07.040 --> 0:08:11.720 about housing. These days, I have meant more people who 0:08:11.800 --> 0:08:14.800 claim to have seen that collapse coming, and that would 0:08:14.800 --> 0:08:17.680 be a little bit of hindsight bias. Now exactly, and 0:08:17.720 --> 0:08:22.600 that's precisely the thing that happens uh before the fact, 0:08:23.200 --> 0:08:27.400 we really don't know, and we don't know today. Are 0:08:27.440 --> 0:08:30.360 the is the stock market too high or too low? 0:08:30.680 --> 0:08:34.400 It's high now, there's no question valuations are stretched. But 0:08:34.480 --> 0:08:39.000 it's also the case that the short term government interest 0:08:39.120 --> 0:08:43.960 rate is zero, and the long term interest rate after 0:08:44.160 --> 0:08:49.600 inflation is probably zero or below zero. So in that environment, 0:08:49.760 --> 0:08:54.319 everything is going to be more highly priced. I'm Barry Hults. 0:08:54.520 --> 0:08:58.199 You're listening to Masters in Business on Bloomberg Radio. My 0:08:58.320 --> 0:09:04.280 special guest is Professor Burton Malkiel of Princeton and Vanguard 0:09:04.400 --> 0:09:07.760 and the author of A Random Walk Down Wall Street. 0:09:07.840 --> 0:09:11.280 The paperback is now and it's eleventh edition and it's 0:09:11.280 --> 0:09:14.400 sold a million and a half copies. Um, let's talk 0:09:14.440 --> 0:09:20.320 a little bit about indexing versus active management. Uh. There 0:09:20.400 --> 0:09:23.600 was a quote from the book that I've always enjoyed 0:09:23.600 --> 0:09:26.640 this number of quotes from the book, but you had 0:09:26.720 --> 0:09:32.120 said back in nine seventy three. Fund spokesman are quick 0:09:32.160 --> 0:09:35.079 to point out that you can't buy the market averages. 0:09:35.720 --> 0:09:40.200 It's time the public could so explain your role in 0:09:40.240 --> 0:09:44.000 the development of the index funds. Well, basically I said 0:09:44.040 --> 0:09:48.480 that in nineteen seventy three, and the first index fund 0:09:49.120 --> 0:09:54.679 was not started until seventy six. Now. Uh, you know, 0:09:55.280 --> 0:09:58.320 I want to give Jack Bogel all the credit in 0:09:58.400 --> 0:10:03.880 the world, because it's one thing for an academic to say, hey, 0:10:03.960 --> 0:10:07.680 there ought to be index funds. It's another thing for 0:10:07.720 --> 0:10:12.360 somebody to bet his company on starting an index fund, 0:10:12.679 --> 0:10:16.840 and let me tell you, it wasn't easy. At the beginning. 0:10:17.400 --> 0:10:20.800 They had an underwriting where they were hoping to do 0:10:20.880 --> 0:10:24.360 a hundred million or more in the index fund, and 0:10:24.440 --> 0:10:29.200 in fact the book wasn't oversubscribed. They sold eleven million. 0:10:29.679 --> 0:10:33.319 And sometimes I used to joke, because uh I then 0:10:33.480 --> 0:10:36.560 was on the Vanguard board that Jack Bogle and I 0:10:36.640 --> 0:10:39.240 were about the only people I knew who actually owned 0:10:39.240 --> 0:10:43.680 shares in the index fund. It was very, very slow 0:10:43.880 --> 0:10:48.000 to catch on, but it did catch on, UH And 0:10:48.280 --> 0:10:53.840 in fact, last year, hundreds of millions of dollars moved 0:10:54.160 --> 0:10:59.640 from actively managed funds into index funds, and index funds 0:10:59.720 --> 0:11:03.720 now now have maybe somewhere between thirty and thirty five 0:11:03.840 --> 0:11:10.440 percent of people's money of individuals or institutions, more institutional 0:11:10.600 --> 0:11:16.080 than individual. Uh. Individuals are slower to catch onto this, 0:11:16.559 --> 0:11:20.960 so with the institutions it's maybe thirty five or more. 0:11:21.520 --> 0:11:25.320 With individuals it's probably a bit less than thirty. But 0:11:25.400 --> 0:11:29.480 the point is the market is catching up to the idea, 0:11:30.040 --> 0:11:36.319 and UH I am obviously simply delighted since I've basically 0:11:36.360 --> 0:11:40.199 been an evangelist for index funds all my life. So 0:11:40.440 --> 0:11:44.680 Vanguard you. You mentioned your you you served with Jack Bogel. 0:11:44.679 --> 0:11:47.160 You were on the board for twenty eight years. They're 0:11:47.200 --> 0:11:52.280 now over three trillion, that's trillion, with of which two 0:11:52.320 --> 0:11:56.160 thirds are actively are actually passive indexes are actually they 0:11:56.240 --> 0:12:00.480 still have about a third that are active management. But 0:12:01.080 --> 0:12:05.520 that leads to a really interesting question. What's more significant 0:12:05.800 --> 0:12:09.760 the low cost aspect of it or the passive aspect 0:12:09.840 --> 0:12:12.960 of it of index Well, I think they're both both 0:12:12.960 --> 0:12:18.679 are important. Clearly, the low cost is important in that Uh, 0:12:18.720 --> 0:12:20.840 you know, let me tell you, any of us who 0:12:21.160 --> 0:12:27.040 talk about financial markets need to be very modest about 0:12:27.080 --> 0:12:29.559 what we know and don't know. But let me tell 0:12:29.600 --> 0:12:33.040 you the one thing I'm absolutely sure about with respect 0:12:33.080 --> 0:12:37.520 to financial markets, and that is the lower the fee 0:12:37.720 --> 0:12:41.360 I pay to the purveyor of the investment service, the 0:12:41.440 --> 0:12:44.360 more that's going to be for me. And the problem 0:12:44.520 --> 0:12:49.720 is for active managers, it is still the case that 0:12:49.920 --> 0:12:53.560 probably a hundred basis points one percentage point a year 0:12:54.160 --> 0:12:58.199 is what they are charging, and the index fund or 0:12:58.400 --> 0:13:03.400 e t F, the exchange traded index fund, charges five 0:13:03.600 --> 0:13:09.400 or four basis points. Uh. And that difference is basically 0:13:09.600 --> 0:13:15.360 a difference that comes to the investor. It's also the 0:13:15.440 --> 0:13:20.680 case that trading is not free. There are bitass spreads, 0:13:20.720 --> 0:13:24.880 there are market impact costs. Uh, it's not free. So 0:13:25.000 --> 0:13:29.840 there's an extract cost uh, including what I think people 0:13:29.920 --> 0:13:35.000 do not appreciate, and that's the tax cost of the 0:13:35.080 --> 0:13:38.960 active trading. When you have an actively managed fund, you've 0:13:39.000 --> 0:13:40.960 got a ten ninety nine at the end of the year. 0:13:41.160 --> 0:13:44.120 Very often and they will say, hey, we realize some 0:13:44.200 --> 0:13:47.240 short term and long term capital gains on your behalf 0:13:47.440 --> 0:13:49.640 and you've got to report those on your income tax. 0:13:49.960 --> 0:13:52.120 You have a partner named Uncle Sam, and he's going 0:13:52.160 --> 0:13:59.280 to take exactly that. That's that's quite astonishing. So how 0:13:59.320 --> 0:14:01.800 do I'm curio is, how did you find your way 0:14:01.840 --> 0:14:06.920 to Vanguard from Princeton. Well, I think Vanguard found its 0:14:06.960 --> 0:14:12.000 way to me in that people knew uh that I 0:14:12.080 --> 0:14:19.200 had been a proselytizer for index funds. I believed in 0:14:19.920 --> 0:14:23.360 low cost uh, and so it was such a very 0:14:23.520 --> 0:14:27.480 natural fit. And Vanguard came to me. I didn't come 0:14:27.520 --> 0:14:30.520 to them. So let me throw another of your quotes 0:14:30.560 --> 0:14:33.240 from the book out that that I adore. And I'm 0:14:33.280 --> 0:14:36.560 curious as to the sort of pushback this generates. But 0:14:36.640 --> 0:14:39.640 by the way we take this quote for granted, and 0:14:39.680 --> 0:14:43.480 I have found a number of quotes that are yours 0:14:43.520 --> 0:14:46.880 that a number of other people have have taken credit for. 0:14:47.440 --> 0:14:51.480 But in a random walkdown Wall Street, you wrote, a 0:14:51.560 --> 0:14:56.360 blindfolded monkey throwing darts at a newspaper's financial pages could 0:14:56.400 --> 0:15:00.280 select a portfolio that would do just as well, one 0:15:00.360 --> 0:15:04.960 selected carefully by the experts. What was the response to that. Oh, 0:15:05.120 --> 0:15:15.080 the response was really uh, definitely bad. Uh. The former 0:15:16.320 --> 0:15:21.080 Bloomberg business Week was just Business Week, And my book 0:15:21.480 --> 0:15:24.600 when it first came out, was reviewed by an investment 0:15:24.680 --> 0:15:28.880 professional in Business Week, and it was probably the worst 0:15:28.920 --> 0:15:32.480 review I've ever had in my life. The reviewers said, 0:15:32.560 --> 0:15:34.920 this is the biggest piece of garbage that you could 0:15:34.920 --> 0:15:42.440 possibly imagine, because professional, uh, investment people really don't like 0:15:42.680 --> 0:15:49.800 to be compared to a blind to blindfolded chimpanzee. So 0:15:49.960 --> 0:15:53.200 I remember, for a long time the Wall Street maybe 0:15:53.200 --> 0:15:55.440 it was fifteen years they were doing this, The Wall 0:15:55.520 --> 0:15:59.560 Street Journal was literally throwing darts at stock pages and 0:15:59.640 --> 0:16:03.640 compared to an absolutely and in fact, they had invited 0:16:03.680 --> 0:16:07.680 me to throw out the first darts when they did this. 0:16:08.280 --> 0:16:15.560 And basically what they found was there was a little 0:16:15.600 --> 0:16:18.400 bit of an effect because when the Wall Street Journal 0:16:18.440 --> 0:16:22.040 put the column out. The column had five picks of 0:16:22.120 --> 0:16:26.360 the experts, and the expert picks, Uh, maybe got a 0:16:26.400 --> 0:16:29.680 little bit for a day, the price went up a bit, 0:16:29.960 --> 0:16:34.000 but generally, after the fifteen years of doing this, it 0:16:34.080 --> 0:16:37.760 came out basically pretty even. And you know, that really 0:16:37.880 --> 0:16:42.880 leads to a very very important point about indexing. You know, 0:16:43.000 --> 0:16:46.480 we talked about the markets being reasonably efficient. Suppose they 0:16:46.520 --> 0:16:50.760 weren't efficient. It doesn't matter when you think of it. 0:16:51.280 --> 0:16:54.320 All the stocks in the United States have to be 0:16:54.400 --> 0:16:58.800 held by somebody. Every share of General Motors is held 0:16:58.800 --> 0:17:03.760 by somebody. Every share of Facebook is held by somebody. 0:17:03.800 --> 0:17:08.679 Any every share of Salesforce is held by somebody. So 0:17:08.800 --> 0:17:14.679 what that means is if you, as a professional investor, 0:17:15.800 --> 0:17:22.679 hold just a few of the stocks, what that means 0:17:22.960 --> 0:17:25.800 is and say that they're the good ones, the ones 0:17:25.880 --> 0:17:29.320 that went up more than the market. What that has 0:17:29.359 --> 0:17:33.640 to mean is that somebody else is holding the stocks 0:17:34.119 --> 0:17:37.000 that went up less than the market. It it must 0:17:37.160 --> 0:17:41.840 follow that investing has to be a zero sum game. 0:17:42.400 --> 0:17:46.960 If somebody is outperforming, then somebody else has got to 0:17:47.000 --> 0:17:52.080 be underperforming because the index holds everything. And the reason 0:17:52.160 --> 0:17:56.879 the index fund wins is the index fund is holding 0:17:56.920 --> 0:18:01.960 everything and essentially charging a zero the and the active 0:18:02.000 --> 0:18:06.159 manager is holding some of the stocks and charging a 0:18:06.240 --> 0:18:12.200 one percent fee. So even if before fees, the active 0:18:12.240 --> 0:18:19.160 managers balance each other out, after fees, they're going to underperform. 0:18:19.200 --> 0:18:24.480 And what we know, we know so clearly is year 0:18:24.680 --> 0:18:31.840 after year after year, the active funds are underperforming. Every year. 0:18:31.920 --> 0:18:34.199 I always read columns, this is going to be a 0:18:34.240 --> 0:18:37.760 stock pickers market year, you know, every year people are 0:18:37.800 --> 0:18:40.120 going to say that, or beginning of this year, there's 0:18:40.119 --> 0:18:42.639 going to be more of volatility. This year, the unactive 0:18:42.680 --> 0:18:47.000 managers will be able to outperform. And Standard in Pores 0:18:47.119 --> 0:18:50.920 does a so called SPIVA report each year Standard and 0:18:50.960 --> 0:18:54.560 Poor's indices versus active, and every year we get the 0:18:54.600 --> 0:19:01.080 same thing. Two thirds of the actively managed mutual funds 0:19:01.200 --> 0:19:05.920 underperformed the index, and the third that outperform in one 0:19:06.000 --> 0:19:09.240 year aren't the same as the third that outperformed in 0:19:09.280 --> 0:19:13.520 the next year. So that uh uh, you know, it's 0:19:13.560 --> 0:19:18.080 not that it's impossible to outperform, and in fact, there 0:19:18.080 --> 0:19:23.680 are a few outperformers, but when you go active, you're 0:19:23.880 --> 0:19:26.240 much more likely to be in the bottom end of 0:19:26.280 --> 0:19:31.560 the distribution and index investing isn't mediocre investing, it isn't 0:19:31.640 --> 0:19:37.400 average investing. It's actually above average investing. I'm Barry Riults. 0:19:37.600 --> 0:19:41.359 You're listening to Masters in Business on Bloomberg Radio. My 0:19:41.440 --> 0:19:46.800 special guest today is Princeton Emeritus Professor Burton Malkiol. He 0:19:46.920 --> 0:19:50.400 is probably best known for his book A Random Walk 0:19:50.440 --> 0:19:54.760 Down Wall Street. The paperback is now in its eleventh edition. 0:19:54.760 --> 0:19:58.080 It's already sold over a million and a half copies 0:19:58.160 --> 0:20:01.480 and is widely regarded as the one book to read 0:20:01.520 --> 0:20:04.400 on investing if you're only going to read one. Uh. 0:20:04.440 --> 0:20:09.720 He is also, in addition to a long and glorious 0:20:09.800 --> 0:20:14.080 uh academic career, he is also the chief investment officer 0:20:14.320 --> 0:20:17.800 of wealth Front, which is one of the larger new 0:20:18.480 --> 0:20:22.880 software driven asset management firms, which is running about three 0:20:22.920 --> 0:20:26.119 billion dollars. Is that about right? So how did you 0:20:26.160 --> 0:20:30.240 get involved with something like a robo advised or something 0:20:30.280 --> 0:20:34.879 like Wealthfront? Well, again, they just as with Vanguard, they 0:20:34.920 --> 0:20:41.040 found they came to me rather than vice versa. Uh. 0:20:41.080 --> 0:20:46.040 And again it was just such a natural fit because 0:20:46.119 --> 0:20:51.800 a they use only index funds, and as you know, UH, 0:20:51.840 --> 0:20:54.760 that's what I have believed in all of my life. 0:20:55.280 --> 0:21:04.280 And secondly, uh, they are charging very low fees. They 0:21:04.400 --> 0:21:09.240 charge nothing for the first fifteen thousand dollars under management, 0:21:09.720 --> 0:21:14.200 and then they charge twenty five basis points a quarter 0:21:14.280 --> 0:21:19.840 of one percent on anything over there versus a traditional 0:21:19.960 --> 0:21:24.320 investment advisor that will put together a portfolio for you 0:21:24.800 --> 0:21:30.760 and charge probably at least one percent uh and sometimes 0:21:31.240 --> 0:21:36.280 even more. And the problem I think with many professional 0:21:36.320 --> 0:21:41.720 investment advisors is that we ought to recognize that they 0:21:41.800 --> 0:21:46.320 often have a conflict of interest. What I think is 0:21:46.400 --> 0:21:50.119 not as well known as it should be, is that 0:21:50.280 --> 0:21:53.560 if you go to an investment advisor who sits down 0:21:53.640 --> 0:21:57.639 with you and says, okay, uh, we'll put together a 0:21:57.720 --> 0:22:04.440 portfolio for you, that that advisor gets paid for selling 0:22:04.480 --> 0:22:08.800 you an actively managed fund. It's not only that the 0:22:08.840 --> 0:22:13.000 fund itself is charging you maybe one but there's a 0:22:13.080 --> 0:22:17.719 conflict of interests the advisor. Uh. In fact, that's one 0:22:17.800 --> 0:22:20.520 of the reasons why there's such a battle now about 0:22:20.640 --> 0:22:26.560 the so called fiduciary standard. And again, what this advisor, uh, 0:22:26.720 --> 0:22:30.960 this automated advisor, we have no conflict of interests. We 0:22:31.119 --> 0:22:33.960 just use In fact, uh, we use a lot of 0:22:34.040 --> 0:22:37.720 Vanguard ETFs. But if Charles Schwab has a cheaper e 0:22:37.840 --> 0:22:41.440 t F. H we will use that and we are 0:22:41.520 --> 0:22:47.119 able to automatically rebalance the portfolio to keep it within 0:22:47.320 --> 0:22:52.880 the risk level that the client wants. If it's a 0:22:52.960 --> 0:22:58.680 taxable account, uh, we do uh tax loss harvesting. I mean, 0:22:58.760 --> 0:23:03.080 for example, last year, we had a bit of the 0:23:03.200 --> 0:23:08.880 portfolio in emerging markets. Emerging markets were terrible last year, 0:23:09.400 --> 0:23:12.159 so that if you bought an emerging market e t 0:23:12.400 --> 0:23:15.840 F you had a loss. What we will then do 0:23:16.359 --> 0:23:22.240 is we will then sell that e t F keep 0:23:22.760 --> 0:23:27.920 your position in emerging markets by buying another one that's 0:23:28.040 --> 0:23:31.680 similar but not identical. And the reason you can do 0:23:31.760 --> 0:23:34.800 that and have it not be a wash sale is 0:23:35.880 --> 0:23:39.360 say you sell an M S c I Emerging market 0:23:39.359 --> 0:23:43.520 e t F and you buy a Vanguard one. They 0:23:43.560 --> 0:23:47.399 are index to two different indices, so it's not a 0:23:47.480 --> 0:23:51.439 wash sale. And so we're able to do all the 0:23:51.600 --> 0:23:57.000 things that a sophisticated investment advisor will do for you 0:23:57.920 --> 0:24:00.480 and do it at a fraction of the cost. And again, 0:24:01.640 --> 0:24:05.080 as I said before, the thing I'm sure about is 0:24:05.600 --> 0:24:08.720 the lower the costs that I pay, the more that's 0:24:08.720 --> 0:24:12.040 gonna be for me. And UH, I think it's been 0:24:13.400 --> 0:24:18.160 very effective and in fact, in a lousy year like 0:24:18.440 --> 0:24:24.760 last year, we were able to realize for various accounts 0:24:25.240 --> 0:24:30.960 between two and three percentage points of tax losses, so 0:24:31.040 --> 0:24:34.280 that even in a year when markets were pretty darn 0:24:34.400 --> 0:24:38.720 flat and did very little, we were able to, UH, 0:24:38.720 --> 0:24:42.960 I think benefit the people who are our clients. So 0:24:42.960 --> 0:24:46.439 so within this and I find the term robo adviser 0:24:46.680 --> 0:24:49.399 to be a little misleading. But well, I don't like 0:24:49.480 --> 0:24:53.560 it because it suggests that, in fact, you know, there's 0:24:53.600 --> 0:24:58.199 some senseless robot who's doing it. And since I'm the 0:24:58.280 --> 0:25:02.439 chief Investment Office, I can tell you that, in fact, 0:25:03.040 --> 0:25:06.480 there are a lot of smart people behind what we 0:25:06.640 --> 0:25:09.840 are doing. I'm Barry Rich Hults. You're listening to Masters 0:25:09.840 --> 0:25:13.280 in Business on Bloomberg Radio. My special guest today is 0:25:13.359 --> 0:25:18.320 Professor Burton Malkiel, formerly of Princeton where he is still 0:25:19.040 --> 0:25:24.479 UH professor emeritus, a former board member of Vanguard for 0:25:24.520 --> 0:25:29.159 twenty eight years, and author, now in its eleventh edition, 0:25:29.320 --> 0:25:32.240 A Random Walk Down Wall Street. UH. The book has 0:25:32.280 --> 0:25:35.440 sold over a million and a half copies. UH. Let's 0:25:35.440 --> 0:25:38.400 talk a little bit about UM. Some other guests I've 0:25:38.400 --> 0:25:42.560 had on the show that that you know, so you 0:25:42.640 --> 0:25:45.560 worked with Jack Bogel for a number of years. He 0:25:45.600 --> 0:25:47.760 was a guest on the show a few months ago. 0:25:48.320 --> 0:25:50.679 What can you tell us about Jack that that we 0:25:50.800 --> 0:25:54.320 probably don't know? Well, I don't know whether you know. 0:25:54.440 --> 0:25:57.840 Jack is very well known, and I think the some 0:25:57.960 --> 0:26:04.480 of his habits are uh probably better known than the 0:26:04.520 --> 0:26:07.000 habits of some of your other guests. But one of 0:26:07.000 --> 0:26:11.120 the things about Jack is that maybe people don't know, 0:26:11.880 --> 0:26:17.280 is this idea of low cost uh is really into 0:26:17.480 --> 0:26:21.359 his DNA. This is a guy who will go to 0:26:21.760 --> 0:26:26.360 a hotel uh and when they say, well, we've got 0:26:26.400 --> 0:26:29.560 a very good room, and we've got a bargain, uh 0:26:29.560 --> 0:26:32.240 it's a hundred and fifty dollars a night, Jack will 0:26:32.280 --> 0:26:34.919 go and say, well, do you have anything at a 0:26:34.960 --> 0:26:38.960 hundred dollars a night? Jack has this sort of calvinist 0:26:39.040 --> 0:26:46.520 streak uh that uh uh he uh as much money 0:26:46.600 --> 0:26:50.040 as he has, and he's certainly been very successful financially, 0:26:50.720 --> 0:26:57.640 just lives his life as frugally as you can imagine. 0:26:58.040 --> 0:27:01.160 And of course I think that's really what has gotten 0:27:01.280 --> 0:27:07.200 into his company. A vanguard that uh that's really into 0:27:07.840 --> 0:27:12.800 Jack's uh d n A. And you know the interesting thing, 0:27:12.840 --> 0:27:18.400 I'll tell you one other little funny story about Jack Vogel. 0:27:19.400 --> 0:27:24.080 So many Wall Street people, uh have you know the 0:27:24.200 --> 0:27:30.000 eight thousand dollar watch on and uh the Italian Uh, 0:27:30.080 --> 0:27:34.600 the Italian suits and so forth. Uh. Jack is always 0:27:34.640 --> 0:27:39.840 sort of in a rumpled suit. And interestingly enough, when 0:27:39.840 --> 0:27:44.040 he first met Warren Buffett, uh, they were actually at 0:27:44.040 --> 0:27:48.920 a hotel together, and Jack recognized Warren went up and 0:27:49.720 --> 0:27:53.159 introduced himself, and he said to Warren, you know the 0:27:53.240 --> 0:27:56.400 thing I really like about you is you have rumpled 0:27:56.440 --> 0:28:01.480 suits just the same as uh I do. And Jack 0:28:01.520 --> 0:28:04.480 and Warren have become very very good friends. And as 0:28:04.520 --> 0:28:08.679 you probably know, because Warren is the sort of exception 0:28:08.760 --> 0:28:12.840 to indexing that everybody mentions that, Warren has said, I've 0:28:12.920 --> 0:28:18.160 got told my widow when I'm gone, I just want 0:28:18.240 --> 0:28:21.720 you to own index funds. So there's a couple of 0:28:21.800 --> 0:28:27.320 things about Jack. He's been a lifelong friend and uh, 0:28:27.359 --> 0:28:31.560 just a wonderful guy. But Buffett has said publicly most 0:28:31.600 --> 0:28:35.800 people should be in indexes. That absolutely what what the 0:28:35.920 --> 0:28:39.320 average person should be doing. But so let's talk a 0:28:39.400 --> 0:28:43.440 second about Buffett, because when we talk about the efficient 0:28:44.480 --> 0:28:49.040 the concept about the efficient market hypothesis, the name that 0:28:49.080 --> 0:28:54.200 always comes up is Warren Buffett? Is is he an outlier? 0:28:54.440 --> 0:28:57.760 Is he lucky? Or is he uniquely skilled? Look? I 0:28:57.800 --> 0:29:01.840 think he is enormously is skilled. I wouldn't take anything 0:29:01.920 --> 0:29:07.160 away from him. But he's also a very good businessman. 0:29:07.600 --> 0:29:10.680 Let me tell you a little story. At one point, 0:29:10.760 --> 0:29:13.920 when I was the dean of the Yale Management School, 0:29:14.920 --> 0:29:20.920 we had Katherine Graham come to speak to our class, 0:29:21.760 --> 0:29:26.080