An Interview With Jeremy Siegel: Masters in Business (Audio)

I always kind of scratched my head. Yeah, Yes, Stocks for the Long Run is pretty good book. It's now it's fifth printing, and there are millions of them out there, and he's consistently the top ranked professor at Wharton. But on TV he always seems to you know, he I'm wholly unimpressed with his television appearances and what he says, and and I've been pursuing him to do the show for a while and we just couldn't get the schedules

when he's he's in Philadelphia most of the time. We finally got him into New York this week, and it was one of those situations with which, based on his his appearances that I've seen him previously. I mean, I've seen his writings and they're usually fantastic, but his television

appearances were always like, not the greatest thing going. And this experience of having him here for the podcast was really interesting because it made me think that the television appearances he does are just completely the wrong format for him. A guy like him who's that informed, that knowledgeable, that intelligent, and that articulate, you can't give him twelve seconds for a sound bite. He needs a little time to flesh out an answer. And so I guess I look, I

know who Professor Siegel is. I know who the Wizard of Warton is. I just came into the podcast expect think, oh, this will be a decent podcast, and I have to tell you, he blew my doors off. He just basically so enthusiastic and so articulate, and we really had so much fun talking about all this stuff. I had a great time, and I think those of you who may not know Professor Jeremy Siegel well will also have a

really good time. Um, listen to this. For those of you who are fans of stocks for the long run and or no Professor Siegel, you're gonna enjoy this. Also, he says a few things that he I don't believe has ever said before publicly, and and it was just a fascinating conversation. So, without any further ado my conversation with Professor Jeremy Siegel. You mentioned Chicago. So it was born in Chicago, ended up in Columbia, m I t then across the river to Cambridge for a year post doc,

and then back to Chicago. How it brought you to Wharton from Chicago? It was very interesting. So I was in my fourth year, I was assistant professor of of Business Economics, and I got a call from a colleague one person, uh Tony Santa Marro, who by the way, was president of the Federal Reserve Bank of Philadelphia after he left Wharton, but at that time he was in Warton. He called me up and said, Jeremy, I need I need another macro person here. Would you consider coming to Wharton?

And I went to Wharton and they offered me a very very attractive job. Even though I like Chicago a lot, I decided to uh to settle there at at the Wharton School. And now you're known as the Wizard of Warton. You've been there for how is my year? That's amazing? It is. I'm amazed myself sometimes. And you're gonna stay for how long are you gonna go for the full fifties? Well, I don't know. Actually, um, they have a very good program. If before seventy you can do a reduced load. I

have one under honors undergraduate class after teaching. I've counted, Barry, I've taught over ten thousand students in the forty four years teaching. That's amazing, over ten thousand soon. So I decided gonna gonna take it a little easier, and uh, I just have an honors undergraduate class, which I love. They're very unbelievably smart at Wharton. And uh so I'll be on reduced teaching for a few years, probably four or five years, and then you know, settle back after that.

So so let's jump right into it. You mentioned you're a macro guy. How significant is the macro economy to people's portfolios? Oh? Yeah, well, very significant. Uh. I mean I take a look, just take a look at the financial crisis. Uh you know, produced the worst decline in GDP since the Great Depression and not uh coincidentally accidentally the worst bear market since the Great Depression. So you know business cycles, economic health that you know, that's all inflation. Wow,

that's really all about bonds and stocks and markets. So let me throw a curve ball at you. If people are we we mentioned stocks for the long run, If people are supposed to be invested for the long run, why should they care about macroeconomic wobbles? Why should they even care about a giant financial crisis? Here it is. The crisis began sometime in oh eight. It bottomed in March o nine. We're already above the pre crisis highs of oh seven. If you just put it away until

you were talking about that, that is true. If you can be patient and just put it in you know, uh indexed fund and let it ride and don't pan it when things go bad. Um, you know, I I think you will do very very well. Uh. So that's where you're that's where you're budding in a way. You know, if you're if you're just a buy and hold person,

I guess that's all you have to do. All right, Well, thank you some ups and we're gonna leave right So so let me ask you, um, a number of people, including your your buddy Professor Bob Schiller have been saying stocks are expensive, and there are other people saying the technology stocks and venture capital stocks and private equity are in a bubble. What what's your perspective on that? First, let's talk about a bubble. P M nastac is what thirty now on the Yeah, maybe bass earning. I don't know,

p of P of the SMP five hundred is about sixteen. Yeah. No, But I'm gonna I'm gonna tell you NASDAK and I'll tell you why I do NASDACK at thirty because in March of two thousand it was six hundred. So that means that means no earnings, you know. And so if you take a look at a graph um and by the way, you know, I actually you know, I find that on Bloomberg a graph of pe ratios on nazdac and it just goes like this and then collapses like this,

And I tell people, now, that's a bubble. You're listening to Masters in Business on Bloomberg Radio. My guest this week Professor Jeremy Siegel, author of Stocks for the Long Run, professor at Wharton at the University of Pennsylvania. Previously we were talking about the impact of the macro economy on stocks, but trying to time the two, trying to correlate the

two is very challenging. And in fact, um you mentioned uh Indexers Vanguard, the big indexing shop, did a study and they could not find a correlation between stock returns and macroeconomic news releases. How do you reconcile the two, at least from a timing perspective. Well, you know, there's that famous sam Usen quote that the stock market has

predicted like eleven out of the last five recessions. Uh. You know, one thing, we know, the market always goes down in a recession, but it often goes down when there isn't a recession. There's a lot of false alarms with with the market. But um uh you know, I

I think the accumulation of events. I mean again, let's let's go back to the crisis, Uh, the Lehman Brothers, uh collapse, the stresses in those markets, I mean it, it just kept on moving into the market and everyone saw the economic fallout of that, and you fell sixty five percent from October of two thousand seven until March two thousand nine. Now, in my lifetime, I never had seen that my parents lived through two where the decline was eighty five, the worst in world history, and that

also was the worst economic contraction. So again, it's very hard to predict these contractions. We can see them after a fact, but there's no question that you know, the market is behavior is is linked to those contracts. Clearly. When the economy slows, profits slow, and when profits slow and they investors are less willing to pay up for stocks, they're paying them multiple Yeah, exactly. So so let's um, let's ask the question how closely should investors follow the

macroeconomic background. Is it important to their day to day holdings, is it important for their long term portfolios? What should mom and pop do with this just fire hose of economic news that comes out every week every month. Well, you know, it's reflecting on what I said in in the first section, like just buy and hold. Um, I've gained a greater appreciation that it is important to look at valuation. Uh, and we're gonna talk about pete ratios.

You know, the average around fifteen. But you know, in March of two thousand, when you were at the peak of that dot com bubble and the Nasdaq was selling a five six times or anything, and and and and and it was crazy. That's a time to be lighter in stocks now. The interesting thing, Yeah, I mean a lot of people said, well, Jeremy, you know you weren't. Well what I said, it's very important when I said I said tech stocks were crazy, I said the non

tech sector wasn't. I recall that people have given you grief. Well he missed two thousand, But I remember you warning very clearly. And you're known as a buy and hold, long term guy. And I saw you on TV saying, hey, the tech stocks has just gone off the rails. The that sector of the market is just completely unhinged. And I remember kind of saying, wow, if he thinks this is pricey, he's a buy and hold guy, it's got

to really be price you know. Yeah, the the you know, the March tenth, which was the high March fourteenth, I had an lead op ed piece in Wall Street Journal big cap tech stocks are a sucker's bet. And I looked at the biggest tech stocks, Yahoo, E, M, C, A, O, l Uh, you know, Son Micro, none of those. Yeah, they were all selling at you know, two hundred, three hundred, five hundred six. I said, this is absolutely crazy. And

I said that, I mean, that was that what I said. Listen, you know, I'm a bull on the market, and I think the rest of the market isn't really all that overveil. But you've got to get out of these And that's an unusual statement from you, so very unusual. So you said earlier that the market is slightly elevated and slight value. But how do you how do you textualize that given that rates are at zero and the ten years paying two point Yeah, but that's that's also very important, and

that's one reason why even though we're slightly elevated. I mean, if you take a look at what times earnings you are, yeah, we're about eighteen um times earnings. This was a bad year. I mean, the the oil coapps, the energy sector and

and the dollar going higher. Uh. You know, I have people I talked to they said that that could have clipped thirteen bucks off of the S ANDP earnings, So that you know that that's a huge chunk, uh, you know, and a lot of people are saying, you know, if we don't get a repeat of that, and I do mean,

it goes back, but just don't repeat it. People are talking about a hundred five next year, and by the way, that puts US at sixteen sixteen and a half times earnings UM not not terribly unreasoned not to you know, in a low extraordinary, low interest rate world, that margin between what's called the valuation of stocks and bonds is still very much greater than the historical average. It's called the equity risk premium, and economists have written about that

a long time. If you go through all of history, it's about three to three and a half percent a year that stocks are over bonds. Now when I look ahead and I'm looking at around five UM, and that's the premium you pay for stocks, that's what future returns of stocks versus that is the expected. So basically after inflation, I see around a six percent UH return on stocks going forward, a little less than the six point seven

the historical average. But what you got on the tips and then we're looking at rio after inflation, you got fifty basis points on the ten year, a little over one on on the thirty years, So you're looking that margin six to one on is that five percent? And that is a greater margin in favor of stocks than the long run historic player. So, so let's talk a little bit about your friend, Professor Bomb Shiller of Yale.

People may not realize this. You guys are lifelong friends at m I T. Is that right, first year at m I T. The first week of m I T we won't with went to graduate school together in economics and we hit off. The first year at m I T. That was nineteen sixty seven. My god, I'm looking that's forty eight years ago, almost getting to our fiftieth anniverse. We've been very, very close friends. He was at Penn

when I was there. Uh, he stayed another ten years before going to Yale, and so now of course he's at Yale University. So in the last thirty seconds, um, let's just briefly talk about you guys are actually long term family friends. Your fit together when the Poconos at the Jersey Shore, we visit each other. You know, we both have two boys as sons, and uh, we've had a wonderful relationship. This is Masters in Business on Bloomberg Radio. I'm Barry Ridhults. My special guest this week is Professor

Jeremy Siegel. He teaches macroeconomics at Wharton at the University of Pennsylvania we were discussing earlier. You're a long term friend of Professor Bob Schiller, who is known for a number of things, one of which is his cyclically adjusted PE ratio, better known as the CAPE ratio, which has shown that stocks are extremely overvalued. What what is your take on CAPE? Well, you know, it's very interesting because I've I've been looking and examining CAPE for a long

time and this is bary. This basic My conclusion um CAPE has done a fantastic job at forecasting tenuere returns until the last in years when I think it has gone off the rails. It is not Bob's fault that has gone off the rails. What has happened? Remember, he goes all the way back to seventy one, where we have or anything. Both Bob and I love to work with long term series. He goes all the way back,

and you know, and and and looks at that. In the nineteen nineties, fastby the Financial Counting Standing Board started changing the way firms do their accounting stop options, but particularly marked to market. That never used to be the case. You never used to write down until you sold. Then you would record either a gain or a loss. What they did said is you gotta mark down whether you sell or not. Now, what has happened as a result

is in the last two recessions. Now, the ninety the two thousand one two was a relatively mildest recession of corps. The next one was the deep crisis recession produced a tremendous drop in earnings that were way exceeded what we had seen in prior recessions. And that was an asset balance sheet based drop. It was not the an operating drop,

which is what they used to record previously. So otherwards, the holdings of companies, even though it was a temporary drop in in sflue, they hadn't market and that shows up as a giant drop in So what you got, and and particularly that that jumped out at me because actually the drop in earnings recorded in the two thousand nine recession was many times worse than the nineteen thirties. And again we have a hundred and forty years of history.

And I said, just a minute here, I mean, yeah, this was bad, but you know it was two we had drop in GDP. We only had about a six percent drop in the last one, and yet the earnings and then I discuss covered. Yes, it's the market to market. All these firms started writing down all their UH assets

and taking it into earnings as they were mandated to do. Now, the effect of that, very simply is that you have in two thousand and two tho nine almost zero earnings because it's that's right, that is that's in the denominator. Don't forget, Bob takes the cyclically adjusted price earnings RACIO, takes the simple average of the last ten years, no waiting,

no other adjustments are done. So for two years we've got almost a zero in there, a very low number, and when that's in the denominator, that pushes up the rats. Everything look much more, very much more extensive. In fact, so I followed month by month the cape ratio very closely, Bob. It did, at the bottom of the bear market go below the average UM, and then a few months later, by May, and you know, the averages UH bottomed in March.

By May it already jumped above. And I said, Tom, come on, I mean, we're we're we're not into UH, you know, overvalued position on that, And of course it's been going up ever since. But this is really the first year we've had a correction of of any magnitude uh that is affecting it. But he, in my opinion, until we get that zero out of that average, which will guess will be Bob is going to look and say, oh wow, the Cape ratio is very, very over extend.

My My head of research is a gentleman named Mike Batnick who's a big fan of yours and a fan of stocks for the long run. And he gave me this data point when we were doing some research into this conversation. He said, stocks have been below their historical CAPE average sixteen of the last three hundred and nine months. Since that time, the total return on the SMP five is nine. So clearly something in the cape some three months the past let's call it twenty five years. It's

not working the way it's not. It is not working. And again Bob is just using the received one in Bobby's scene. I've written a paper on this. Actually it's been considered one of the journals now and I hope

it will be published uh soon. It's called the Cape Ratio a New Look, And I acknowledge how what a great idea this is to average them, but then point out what these the problem is And what I do, Barry, is I use alternative definitions like operating earnings and National income account earnings and I put those and develop a cape ratio UH for that, and that shows much less

overvaluation in the market. So that that basically is where I stand in terms of you know, why has the cape ratio been not a good predictor over the last four or five years? And it's been been because of this change and accounting standards. This is Masters in Business on Bloomberg Radio. I'm Barry rid Halts. My guest this week on Masters in Business is Professor Jeremy Siegel of the Wharton School of Economics at Is that the right title,

Wharton School of Economics. Actually, it's just the Wharton School used to be the Wharton School of Finance, but now they've just shortened the Wharton School of the University of pennsylis at University of Pennsylvania. So, so you wrote a book which was consistently in all sorts of lists of best investment books of all time, called Stocks for the Long Run. Let's talk a bit about the case for equities. What is the case for equities? Yes, I started the

research actually seven good time Actually it was very interesting. Um. One of my colleagues at Wharton got a phone call from the New York Stock Exchange, uh, wanting to do a history of the exchange on New York Stock ex Change was found seventeen two. You co authored a book on that revolution on Wall Street. Now that what's interesting is when when Marshall Bloom, which is just retired as a faculty member at Edwardon he knew everything about history and in historical I went up he said, call me,

said Jeremy, you're interested in the markets. You want to do this book? And I said yeah, So I said, I'll tell you what I want to do. Marshall. I want to look at the longest history of stocks in the US as I can. And he said, go ahead and do that. I got it. I got this stuff together. We we we put it in the book and well in the New York stockt en get back and said, Jeremy, your stuff is fascinating, but it makes it too long.

And um and and and Marshall Bloom and one of the most I think generous gestures he said to me, Jeremy, this stuff you can make your own book and just joined me as a co author on the institutional side of what happened since uh seventeen ninety two, which is when the New York Stock and James was founded. I got stock market data from eighteen o two, so I couldn't quite get the first ten years, but I got it after that, and uh, that was actually the beginning

of the book. Uh, the stocks for the long run. Now here's the major idea that I think that I think really made it a powerful new book. Not just a long term data and not just the fact that stocks return six and after seven percent after inflation overall long term periods. What I showed was when you stretch out your holding period up to you know, fift twenty thirty years, stocks actually we're safer than bonds, at a

lower variance and lower volatility than bonds. And I made one of the biggest criticisms I have of standard portfolio theory that we teach in in our business school. It's all based on one year measures of risk. We all do one year, we grind it out and all that and assume that that's okay if we extended in the future. But it isn't for stocks because stocks have a property which is now almost uniform It wasn't at that time when I first throwed it, but afterwards now among academics

is almost in informally agreed. It has a property called mean reversion, reverting to the mean. So you know, we can have a couple of good years of stocks and if it gets way above it'll come back down. A couple of bad years, it comes back up. Mean reversion means that volatility and longer periods of time are relatively less than in shorter periods of time because you're going back to the mean. So let let me rephrase mean reversion for people who don't have any sort of little

math phobio or don't have a math background. If we know stocks are gonna return seven percent a year, anytime we have a couple of years where they're returning considerably less than that, we should expect the next few years to be on the other side of the seven percent, or the other way around. When you have a period like where they're returning high double digits, hey, you have to expect the next few years after that you're gonna be way below seven percent. Exactly Now. I wish it

could be just a couple of years. Sometimes it's longer and have a string. Yeah, you have a string of good years. I mean actually from eighty two now we've had we had some interruptions, but to two thousand, the average real returns on the market were nearly fourteen percent a year. That was more than twice the average. I mean that that shows you. And then we got, you know, we got to the most overvalued position ever. In March of two thousand, we had a PE of thirty for

the S and P five hundred. We had a PE for a hundred of the SNP tech stocks, and as I mentioned in an early your segment, we had a P of six hundred for Nastac. So you can really get extended. If we all knew two years it would turn around, it would make us feel a lot better. But sometimes it can be three, four or five years.

But if you are thirty years and don't forget think of retirement fun I mean, you know, we put in I RA s we can stand four or five bad years followed by four or five good years and then even better years. And if we know that return over that longer period of time is gonna be bonds by three or four or five percent a year, Wow, that

becomes the asset of choice for the long run. So so let's put that eighty two to two thousand, that secular bile market that lasted eighteen years return fourteen percent a year into context. The previous sixteen years from nineteen

sixty six flat essentially basically, but that's nominally. Once you take inflation to adjust, it was virtually a zero, right, And then you turn around you say two thousand to two thousand thirteen essentially flat, also not founding dividends, and you had another period of high inflation right in the

middle of that. So when you talk about mean reversion over long periods of time, ten fifteen years, you can have no returns, fabulous returns for ten in fifteen years, and then more no returns from another ten fifteen years. But also then and you have to be careful about valuation again. The bad period that that we had since

two thousand was because we were at the most overvalued point. Uh. The great period from a D two on started from an extremely undervalued, went to fairly valued and then stretched all the way upright, same thing nineteen sixty six. You are a twenty year bullmarket from World War two and overvalued in sixty six fifty fifty very pricey. Those are the like you mentioned the concentrated stocks in two thousand, very very similar concept. So so let's let me push

back a little bit and give you an opportunity. Response to criticism, The Wall Street Journal had an article saying, well, stocks for the long run has a lot of survivorship bias. We really don't know. You know, there aren't a lot of great records from the eighteen hundreds. Yeah, all we know are a handful of stocks that survive. What about the hundreds of other stocks that went out of business?

What's the what's the counterarcad So so it's interesting from eighteen seventy one on very careful to remove uh any survivorship bias in whereas every stock is there if it went bankrupt in zero, we put it in a zero. We don't just do the survivors. Was the journal. A couple of people had questioned my earlier data eighteen o two to eighteen seventy one, which was one of the innovative things that I added, and they pointed out that

those series might have um some survivorship ballot bias. Now, fortunately a number of academics getsman um uh and others at will Getsman at at uh UM and ibits and if its in at Yale Getsman at Columbia, you might have even maybe talked to them on your program. Uh. Everyone knows the Ibbotson series. And they went back to the newspapers and they actually dug down into every stock from around eighteen ten onward. And you know what the biggest uncertainty is there is we It was they didn't

have good records of dividends. But if you apply a dividend rate among the ones that we do know to the ones we don't know, it was very very close to the number that I actually got. So I think we you know, again, there's no no bias from eighteen seventy one onwards. We produced six and a half percent from eighteen in real time with the zeros. Uh. Now there's another interesting question about survivorship bias, and that is relative to countries, because people say, well, look at you know,

the most successful country. What happens if you went into Russia or Argentina and all this? And there are definitely a few that don't. And three British economists UH Elroy Dimpson, Mike Staunton, um uh and UH Terry marsh in two thousand did an investigation of a hundred year is a return in seventeen different countries and the interestingly enough from and I'm updating it now to the first published in

two thousands, but I'm updating it. Do you know that the United States was not the best from over the last hundred and fifteen years? And one country just shocks people out of their mind. South Africa had higher and this is in the US hours. This is converting South Africa and Australia. US was number three. That's fascinating. Let's let's since you bring up emerging markets, what do you think the role of emerging markets should be in infinitely?

I think they definitely have a role. So you're different from people like John Bogel who says, add this currency risk and the other problems just keep it at home. You like a global asset allocation first of all, that that's an interesting thing you for the developed world. You can hedge currency risk today for zero price because the interest rates are when their interest rates are the same between the two countries, currency risk can be hitched completely

at no cost. It is expensive to heads currency risk in the emerging markets. To be sure, there's no question. I think it's like twelve in Brazil and India, probably six or seven percent a year, and that can drag your earnings down. That's why you have to make sure that one you're not buying over priced currency and to you're not buying over priced stocks. And believe it or not, today when I look at emerging markets, wow, I see both of those at being very low. Currencies are low

and there prices are low relatives of their earnings. I think in the next three to five years, emerging markets will be among the very best performing sectors. We've been speaking with Professor Jeremy Siegel of the University of Pennsylvania Wharton School. If you and ay this conversation, be sure and check out our podcast extras, where we let the digital tape keep rolling and continue chatting. Be sure and check out my daily column on Bloomberg View dot com.

Follow me on Twitter at rid Halts. You can see more of Professor Siegel's writings at Jeremy Siegel dot com, or just pick up stocks for the long run. I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. Okay, this is the podcast portion I don't know why I do that every time I stretched my arms out. Okay, this is a international symbol for podcasts. If I forget to say this later, thank you so much for doing this,

Professor Siegel. We've been back and forth for a while trying to arrange this year in Philadelphia, and you're only in New York on on rare occasions. Um Man, there are so many questions I did not get to. So why don't Why don't we pick up where we left off? So we have owned, I want to say, for about four or five years a Wisdom Tree Japan yen hedged funds, which when we first owned it it hardly traded, nobody

paid attention to it. And then outcomes at a bonomics and this thing just goes straight upright, the yend collapses, the Nike Dow skyrockets. There's no offsetting yeah currency yet because I's almost a no brainer, doesn't and it and it became a fifth ye or sixty billion dollar funds. I don't want to say overnight, but very When we first put money into it was five or six billion dollars. I think I got the three we didn't. We didn't get to sixty, but it exploded, just drive through the roof.

And then we did one for Europe that has been enormous called hedge. Now Europe is tougher because you can hedge everything, so the like Swiss, ser Land and Great Britain. But yeah, countries that aren't in the euro but are important parts of the European economy. So it's about what is it about? Heage, Well, I mean we if if you want to take just euro Zone and you know, take the UK, is something different in Switzerland kind of hard? Yeah, you know that. That's that's true. You don't get you

don't get those two segments. But clearly that also became enormously popular with Mario. Draggy said, you know what, I think we need to bring the euro downe And that's so that that also went from a one or two billion dollar fund all the way. So how did you get involved with Wisdom Tree? How long have you been a part of that? Because that's a Jonathan stun So. His father, soul Science Steinberg, won a big insurance company and he went to work. Oh really, he ran, I'm

doing this from memory reliance. That's right, buddy, was the General council years ago, Yes, that's right. And that was a big shot. That was a big shop. Um, and he was he had been in the markets, uh, in in many different ways. I think he was with Leasco at one point. I mean he he arrivaled IBM. He he went in and said, you know, IBM always leased their computers and uh, they wouldn't let you buy their computers in the nineteen fifties. That was part of their policy.

And the Supreme Court said you can't do that, but no one else changed and he actually went in got funding to buy them and then undercut IBM on the exactly exactly. So I mean he's been in the market one one way or the other. And uh again he was at Warden way before I was at Warden. But his son went to Warden. Um and Jonathan Steinberg and um, we had met each other at occasion. Um. Uh you know Jonathan in Steinberg's wife, I do not, Maria Bartoma.

Oh that's right. I didn't know that. Yes, And I actually had Maria in a class that I did in New York about learning financial markets for financial reporters, way back before she became famous. So how did you meet Steinberg? Was he a student of yours or just he was not in my class, so he didn't I didn't. I knew of him, but didn't know much of him. And basically, um um. He called me up. He had a financial magazine. He said, Jeremy, would you like to do some columns

on economics? And he vaguely remember that magazine about Yeah, I'm trying to remember, zackly what the title was. Um uh, not trader but something else, Yeah, something about investing. It was mostly in small companies, and obviously when the when the market went puff in two thousand, that had difficulty. Um uh. And Kiplinger called me up that he had told always rights Kipling and now I read a column every other month and Kipling here um but which was

a continuation of that. But so I knew Jonathan a little bit. And Jonathan called me up back in two thousand two. Uh, he said, Jeremy. He said, listen, you you've been having questions about cap weighted indsease. You know after the bust. I said, yeah, I was all in tech because it was so big, it was so much, and I wanted to get out of tech. And he said, listen, we're developing some indexes that instead of waiting by market cap, you wait by earnings or dividends, also known as smart data,

well now known as smart data. Back then it was fundamental indexing because it was based on a fundamental index either earnings dividends. Now people have extended that the sales and other concepts of that. We've had Rob or not Rob Research Affiliates. Research Affiliates actually came out with the first or one, the Raffie one thousand. We followed him with with others. He has a more complicated formula. I know Rob very very well smart, very smart guy. I like I like him or not and as you you

mind him known, I mean it's public record. Um, there was a little little intellectual property. Everybody was happy. And now wisdom Tree is a big success, would you say sixty billions? And back of the envelope their two point two billion market cap and according to something I read not too long ago, you're a two percent holder of wisdom Tree, which makes you a forty five million dollar man. Is do you feel like you know it's been really good for me? I I'm I feel very fortunate. I

you know, it's nothing that you're selling anytime soon. It's just even though I have I have, I've sold a lot of it. I still hold hold it, hold it. My heart beat still stocks for the long run, jour selling. But you're you're, you're, you're diversifying. So Barrey, let me tell you all right, so let me let's let's be very frank. So let's let's go through the story, because that tells you a little bit about where you know, that's a concentrated position. That's what I mean. You have dollars,

you don't want your networking one stop. So uh, that's so I'm diversified out. I still held a way overweight in that stock. But so I'll go through this. Um uh so I he said, Jeremy, would you check this. We've got some preliminary data. Looks good. And I had a real good research assistant that helped me do Future for Investors one of my books. Also, his name is Jeremy Schwartz, which now, by the way, director of research

at Wisdom Tree. And he looked at that data. We looked at that Dad and said, wow, this beats cap waiting on a risk return page. Reported back to them and they said, you know, that's what we were finding. But you obviously have all the statistical techniques on that. Uh. He said, well, I'm gonna tell a little bit where we're going. We got Michael Steinhardt to fund a company called Index Development Partners. We're going thinking of launching a

set of ETFs based on fundamental indexing. Um, would you like to be an advisor? Uh? And uh actually started me out. I was also a board member on that, and I said yes. I said, I really, I you know, after the the dot com crash, I said, if cap waited has flaws, the huge flaws, huge flaws, huge flaws. I mean, you know here I had, you know, I mean, let's face it. I was in the first two or three editions. It's talks for a long one. I was a huge Vanguard fan. Van Guard paid me commissions for

every dollar I probably of their index fund. I so I would be rich from that. They're up to three trillion dollars. I know they're there. I listen, Greedy just gets one bogel and I I love him. I think he's great. And you know, we've had a little difference. He said, Jeremy, I'm not happy you went on too the fundamental route. He didn't stay you know that. I mean he's you've had him on, I have no, I've had had him. I've had Jack Brennan, who's the chairman.

Why don't you get bog You gotta get Bogel. I would love to get Bogel, except to have to slept into that old creek. He doesn't really try travel that much? Was he? Valley Forge Pence. Yeah, so I've actually spoken to people here and said, let's do a field trip to Pennsylvania. Will listen. There's only one Bogel he's not getting I think, you know, I don't know. Mike Steinhardt is another one i'd love to speak to. I find him absolutely fast. Ask him, Um, Michael, all right, you'll

make an introduction, make an introduction. You know, I know Michael personally. I actually now. Michael Steinhardt is another Warton grad. Not surprising, not surprisingly, also someone I did I knew of, but did not know. So you know, it was like Jonathan I met in a few occasions because being wife Maria my class and a few occasions. Michael, I I don't I don't even remember meeting. Of course I knew about him, um, and and another fascinating guy, really interested stories.

He's quite a fascinating guy. Um. And he's also written a book, by the way, I think, basically a book of his his life and investing, and it's also very fascinating. I'm gonna have to pull that. Yeah, he is a fascinating guy. We we become quite friendly with him. My wife and I a uh through wisdom treating his position's chairman of the board. So, so Jonathan Steinberg was CEO, and you're on the board of advisors. He's the check. Yeah,

I'm on basically an advisor. I'm no longer on the board of uh uh directors directors so for various reasons. I I stayed there for about one year, but I'm senior investment strategy advisor. And you know, he said come on, and you know part of it was options, you know, tech companies and all that, um um. So uh Index Development Partners was trading as the stump company from his original company, so it was trading at four cents of share.

Really yeah, so all that so let me just mention to you because it's the member of public record, Sawing had four cents of share when it was announced that you know, Michael Steinhard had funded were changing Index Development and I joined it. It closed the next day. At there you go. That's a good return right there. It subsequently went up to ten and then crashed to about forty cents in the crisis. So and where is it now?

So now it's fifteen alright, so it actually was as high as twenty seven since but this tremendous down draand you were day trading this the whole time. I don't never date traded this. I did that trade trade did no. So I mean we all of us went through a roller coaster. So as you started going up, you know, I said, listen to my gut, Yeah, I said, And as we said, I mean, I'm stocked to the long run. But I I didn't have to. You have to the

volatility of stomach jarning. Now here's the maybe funny isn't the right word, but here's the um interesting parallel. Think about every tech company and every twenty eight year old software engineer, project manage or whatever at E. Mc dell. Yeah, who go through the whole Intel, Son, Oracle, Microsoft, These got kids in their twenties and thirties suddenly are worth tens of millions, hundreds of millions of dollars. Same thing happened.

And then watching a drop. Well, yeah, that's that's that's right. Uh. And in fact, wisdom Tree and it's and it's and I think at that time it was uh it was paint Is wisdom Tree. We changed our name from Index Development Partners to Wisdom Tree. But we're talking about a ninety five cent drop from nearly ten nine five. That was well, you know that was yeah you so yeah, so you know, I it was quite a ride. But you know, you know, truthfully, as I say, um uh to me my teaching, I mean, I I never was

a guy. I mean, I owned one car. It's not a fancy car. I'm not. I'm not a real expensive guy that has real expensive taste. I mean. And the fact that I've become better off than I had ever imagined really gives me an opportunity to be charitable. And that's what I'm doing. Uh, and I'm very thankful for that. So, so let talk a little bit about um, that's really a fascinating set of stories. Let's talk a little bit

about the concept of indexing. And we've been having this debate back and forth in my office a right, So, through a random twist of fate, the first major indexes are set up cap weighted. Right, Well, yeah, I mean, well, twist of fate. Uh, it's there's a random or what was So there's two forces about there. One it's um, it's almost a natural weighting in the sense of all right, I'm gonna buy all the stocks, but you know we'll go up and down. Well, obviously I gotta buy buy

more of a big stock than a widow. So let me just look at the market capitalization and by relative to that. The good thing about that waiting is that if the stock goes up, you don't have to sell or buy because it's automatically reweighted in your portfolio exactly the same. That makes it extre really convenient. But secondly, if the market is efficient, we economist had proved cap weighted portfolios are the best optimal portfolios for risk return.

So let's repeat that. If the market is efficient, so that all the information is impounded in the price. All right, so is the most efficient. It is the most efficient. Any other waiting will give you a worse risk return tradeoff then to cap. So other words, on a risk adjusted return, cap weighted is the most efficient if the market is efficient. Now, what we see is there are times when the market is mostly efficient, but during those boom bus periods, that's where things get a little crazy.

So back to the two thousand year, as you discussed, when the SMP five hundred is trading at thirty or forty, the tech sector at a hundred and NASTAC at six. So that means that that means that a handful of ox are just out oversized within the and if you're a cap weight weight, you can't sell those. You gotta hold them, even though you know this is crazy. If you're cap weighted, you gotta hold them. Meaning the index portfolio construction is going to be wildly overweighted on the

most overpriced stocks by definitely. So now here's the argument that we've been having in the office. So that efficiency, that coincidence. Back when funds first index is first started being created, we really didn't have the full on technology to slicindise everything and look at things by book value and look at least as easily as today book value, earnings, revenues,

whatever you want. And the argument is, the counter argument is if you go with with a fundamental waiting, you're basically owning a stock in a within the index in a closer proportion to its impact to the total accoontom exactly. So if that's the case, and here's where the debate is. I've argued that, hey, you're making a decision to wait an index by something, whether it's cap or earnings or book value, you're choosing it. Some people claim that if you wait an index by earnings or by book value

or by whatever, that's active management. I don't. I'm not comfortable with that. Well we could let we could, uh, let's talk a little bit about that. Um the way that these uh fundamental weighted index and I think it's exactly the same way with our not so wisdom tree rafite. What you do is it's on the basis of just objective data on the earnings. We don't make any judgment whatso weather on whether the quantita it's a quantitative factor

and that's it. So that active management that you could call that, But that's like active management at low level, lowest level. I really look at that as a it's passive, but it's constructed differently. That's exactly the way I would prefer it. I think active is when you have judgments and you're presented with prices going up or down. I think this is now fulfilled my price target given the potential of the company. Blah blah blah blah blah. Exactly.

That's what I think about as active managing. The other is really what we call, you know what, what's now called smart beta in the sense is construct a base of your portfolio. But instead of using capway to use a fundamental weight to get the way and ultimately that index then runs itself based on the initial parameters. And there's no have to rebalancewceance once a year. Others do it more. We've we've been examining it. Um. You know, there's there's no theory that tells you how many there

do it. We found that there's a lot of costs, taxes, expenses. There are people who we find rebalance way too often and it's just expense. So we we we at wisdom too. We balanced once a year. Um. Again, once we look at it, we look at the fundamentals and the price, and we move. You know, if the fundamentals moved up but the price didn't, we buy more of it. The fundamentals moved down, we buy less of it. Relative it's all relative to the price. Buy a formula. You know, again,

no judgment. It's a formula that anyone out there can you know, I mean you can, you can do this, anyone can do it. Yeah, but you know, we do it at a very cheap cost. There's no reasons for anyone to try and put together three hundred stocks one by one when one E T F you got will do it for you. And your internal expense ratios are fairly compary low. Yeah, you're not a high priced fund. You're pretty inexpensive. And we are very we are very in fact that that was one thing I told John Oh,

I mean, go forget. I was again before the dot com bubble. I was very much an Index fan. And of course we know vanguards five, six, seven basis points crazy. Yeah, I mean there, you know. And but I told John Oh when he you know, that's what everyone called John Steinberg, johnno is is that I said to johnno When he wanted me on, I said, listen, John oh, um, I will be on. But let's let's keep these management fees low.

I know this is a great thing, and I know on the basis of where we see risk and return, it could probably you know, charge a hundred and fifty. And he said no, Jeremy, I want this to be low. I want to get assets. I want to do a job for people. I want to get him over from from Vanguard and from Index. And I'm with you, so I look at you guys, not as pulling money. By the way, there's been a from what I understand, there's been an internal debate at Vanguard about smart data. And

I don't think that's gonna change anytime soon. Although I I don't make predictions very often, but I'm gonna predict one day Vangard is gonna just see a lot of money going to Fundamental Index thing. And I can say, alright, why not if they could do what we could do it better cheaper. So I think Vanguard is is going to be I don't know whether again, I mean they did ETFs and Bogo, as you know, objected furiously. Uh, he would go bananas absolutely fund Metal. I don't know.

He's probably an honorary member now, I don't know if he has an official Yeah, he's he's a sum emeritus title. Oh no, listen, he's Mr Vanguard. I'm sure, let's face it. Uh. And but but you know they had a big falling out on E T F S you know, they to to Vanguard's credit, they looked at Jeeves, this is the fastest growing section of the But but as you know,

Bogo was really really ideologically opposed. He doesn't like the t F because he says it encourages people exactly, although he's a buy and hold guy and he did not like that at all. So, but he also doesn't like emerging markets and developed markets overseas going the currency risk. Vanguard has a huge not hedges the way you guys are. But they have that that that that's true, but that isn't as big as when they did e t F because they were they were potentially gutting his baby there

with the Vanguard Index. Mean, while the tf have worked out pretty well for they're still very low cost. They parallel the mutual funds. Of course, although um I forget what it's called the Admiral shares. If you're buying institutional quantity shares a Vanguard, it's amongst the cheapest things in the world. It's cheaper than the e t F s

and it appeals to a very specific audience. It appeals to to the r i A says, it appeals to big endowments and trust it's the cheapest way they could get instant exposure, and they're buying stuff for ten or twenty years. They don't care about the e T so for their perspective. Um, so that's interesting. I didn't know you knew Bogel very well, very well. I I have tremendous respect for him. And as getting we added, uh, you know, we've had differences on this smart Beta fundamental indexing.

But uh, he is definitely man that will go down in the history and he should. And uh yeah, Verry, I think bring yourself down. It's worth you know, he's had it's worth getting down there. Well, he's had some unbelievable health challenges. As you know, he was born with a defective heart and had to wait like fifteen years for heart transplant. They didn't even know each he's twenty years beyond that. And you know, but obviously none of us are going to live forever. Um I. The Google

guys are working on that. They're trying to find a way. I'm too old to get forever living. Maybe my children will get forever living. I think that you'll end up board after a while for eternally. So, so let's go back to the stocks. For the long run. We talked about the case for equities. We talked about why over the long haul stocks are less risky than bonds, less volad old um. We didn't talk about the significance of

dividends to long term stock returns. And I find people are always surprised when I show them data from your book as to the significance of dividends. Let's let's talk about that a bit. Yeah, well and it and it's changed. Let me kind of pretend a big picture here. Up until around or eighty firms used to pay out two thirds of their earnings as dividends, two thirds of their earners of earnings in the earlier years and through the nights.

Are we talking about first half of the twentieth century, Yeah, even the first half of the twins and started changing post war. Began to accelerate around the late seven He's in eighties and right now it's one third. And so what's the SMB five dividen yeld now about two point one okay, yeah, so so better about the same as the ten year bonds. Yes, plus the upside on the equity, and plus you got the buy backs, which is now

so what had happened. And this has to do with a number of factors we could talk about if people want to. But firms have substituted buy backs for dividends. Now, I'm not a big fan of buy backs, and I'm curious as to you. Okay, we have something, are you are I am a fan? Well, I would rather see

them pay the money and dividends. Oh, I'm with you there, okay, But I my everone else said oh, they should be investing in in this and this and this and this and buying this, And I said, hey, listen, I would I'm with you Bury. I prefer the dividends. But if it's not going to be dividends, the buy backs are the second best thing to what long term R and D you believe it or not? Or expanding planic government or do you know what firms do? They have all this money? Hey, I can buy this? Am I always

like that firm? You know, premium on crazy? You know, I mean you have these c e O s. I mean many are good, but some of our empire builders got cash on hands, are gonna buy well. They spend one decade building these conglomerates, in the next decade taking him apart, right, So you know, as I say, I mean, I prefer with you. I would love to see it

in dividends. Unfortunately, you know we've were now you know under Obama we have you know, we used to have fifteen percent tax and now it's first went to twenty and then the three point six. Yeah, this is raised the tax on dividends again. Pushed it. Yeah, I mean we you know, we are one of the only countries in the world that we double tax dividends. You know, at one point in time was taxed as ordinary income.

I know, I mean back in the day dividends with tax that single people got a hundred dollars exemption and married couples two hundred dollars exemples. In the sixties you had your first two and then it was absolutely or mary income. Now you know, people complain about fifteen People used to complain about fifteen percent, and my answer was always, hey, you used to just be like like and it is much better than thirties nine to have it today at twenty three. Uh, but but you'd rather see it at

or or. I was actually advocating. I had um written some papers on when I began to look at dividends um And I was actually in congressional testimony when President Bush first developed that break for dividen because he was too Bush. We got the first dividend break in Bush two and that was part of the Big Oh three and that was a huge set of tax huge. Now I was actually interesting. I actually advocated that they um exemptive, well exempt dividends from the corporate tax, because that's weird

double taxing them. First exempt dividends from the corporate taxt? How would that apply? You mean at the corporate level or by whole right now? Is you know corporations can subtract all the interest on their debt corporate I also wanted them to be able to suppract all the dividends on their stock. Why not? So in other words, it's a cost like interests? And why again? Why one reason they exempted it because I'm taxed on the interest, so they don't do it on corporation. Why do they double

tax the dividend. I'm tax on dividends and they're not get the break on the cost side. I think the reason is interest is an operational expense and dividends is a capital structure. Expect Well, you can but that's honestly, firms have a choice debt or or equity or both or what you know, I guess if you look at

it that way, it's the same thing. Yeah, I mean, you're borrowing money or you're borrowing if you want to prevent all the over leverage, which is you know, one of the things that led to the financial crisis, you don't want to it's encouraging debt. It's creating a bias more towards borrowing and less towards equity issues. So so let's go back to the buy backs a second. The rub against that, the argument against it is when we look through the history of buy backs, companies have a

tendency to beat to do it very poorly. We have Dell in the news they just announced the purchase of e m C. The data point on Dell, which I find astonishing, is they spent more money on buy backs over their history when they were a public company then their total earnings over the course of that same period, which means they had to be buying high in order to to either reduce the float or issue more stock options.

So aren't corporate executives poor timers of when it shouldn't be timers, though, I I think you just buy it at the market price. Some yes, sometimes you'll be overpaying, some price you're underpaying. You shouldn't try to time it now. I know. Bren Buffett always says, yeah, I think it's cheap, I'll start buying more mos on that, and he encourages others. But my feeling is all right, if you're not going to give it as dividends, that's suppose you buy three

percent back a year. Just do it every month, you know, just as a stand you some some years will be over paying, some years you'll be underpaying, but on average you'll be paying the price and you'll be getting you know, a fair market value. In fact, by the way, you will be buying more when the price is low because dour cost average, it's actually a dour cost averaging. So

so you do that. They're buying less when it's expensive more on right, So in a way, it's not you know, I obviously some of them, if they do it all on one date, or they don't do it for a few years, they suspended. So during the financial crisis, everybody suspended the purchase program well, which of course was when stocks were the cheapest they've been in a decade. Well they didn't have earnings either, to say the least. So

I mean that was that was that was. But that's that's how you end up with them over paying because when things are cheapest, there in the least position to buy to a certain extent. That's that's true. But we know there's a lot of times the market goes down. As I said, you know when we talked about earlier, it over predicts recessions and rea, and that's where they get a good alright. So so to sum that up,

prefer dividends of the buy backs. But but if if you you don't have the dividend, then you're gonna do the buy backs. All right. Um, that's really quite quite fascinating. So we did that. Let's talk about I p o s. You're another person who says I p o s take it as a whole. They don't really impress you. Yeah, discuss well, you know, and and and it's interesting, Uh, it was I looked at all the I p o s. Everyone not cherry picking the cherry picking the high one. Uh.

And I did this around two thousand and five and six. Um, and when I looked all the way back, I compared it to a small stock index, not just the S and P. And my conclusion was, if you bought the portfolios of that, there were a few of these huge winners, but there were so many losers that you really, uh didn't beat a small stock index UM. And I wasn't excited about that. Now I didn't have the resources too, because it takes an awful lot of time too. Went

in my fifth addition to update it. Some other people said, Jeremy, you know, in the last five, six, seven years, things have been better for the I p O s because it's been harder to go public unless you really like. The lesson of two thousand is, hey don't buy I pos that don't have profits. And I think I think one of you know, really very one of our biggest problems is we have firms disappearing. I mean, you know, it's it's really the anti I A P of the go in private UM. And I think that that is

really deletarious to our whole capital markets. I love I P O s now in intense you're willing to go public, and my firm was willing to go public. I mean, we we're publicly traded UM. And John o has has said that that was very important to us. What traded What is the Wilshire five thousand now something? Three things? It's usually right, it's it's that's a So now some people have blamed the regulatory environment. Some people have blamed I have access to all this. The venture capital market

is now so broad and deep. It's almost as if there isn't a need for a lot of these companies to go public. You look at Uber, where they worth fifty billion dollars with an exit for the vcs, you would think, yeah, so at some particular point, by the way, I do think I you know, there's been some studies on this. I do think Sarbanes oxially in the regulation afterwards. Yeah, and and and now, particularly on financials. I mean, I just know how much more we've had to do with compliance.

I mean the financial firms, it's it's incredible. You have to dot your eyes and crushing every single thing. I mean, they're the burden of going public. Um, So let me tell you. I think it's I and I think that's bad because it doesn't give us, it doesn't give ordinary people and access to exciting capital developments. It's a friction on returns. It's a drag Listen. I run a relatively small office. We have an outside lawyer, we have an

outside compliance firm. We have to do outside security updates just to make sure everybody's data is is sense. Everything we write is archived. We have multiple offsite. It's amazing. Now Afternon eleven, a lot of people lost a lot of data. It was really a problem, so they had to make some changes. But it is practically a full time job to keep a relatively small firm fully compliant, fully legal, fully matching everything. Um a big firm that that's got to be a staff of lawyers, a staff

of accounts. That's gotta be amazing. Yeah, it absolutely is. And one wonders, you know we've had uh you know, I'm a macroeconomists. I always look at the GDP and on that. We've had a productivity collapse of enormous proportions of the last four or five years. We don't as economists know all the reasons why that, But we should have been increasing GDP four to five percent. You're not two to three given given what we've seen, and we don't understand what's going on. But is it regulation? Is

it rules? Is its compliance. Is it administration goovers? I mean, I'm just saying we you know, we we've we've been having a productivity collapse. Let's talk about that, because that's a fascinating subject. And I've seen some very smart economists make the argument that we're measuring productivity wrong. All right, there's no doubt that I've suggested. Actually I wrote an article, as I mentioned, I must have been refering to. It might have been I. I actually so I'd say I

write um kiplingers every other month. That was I write, And I talked about the productivity collapse, and I said, you know, no one buys cameras anymore because it's all on their phone. The government doesn't count it anymore because something that goes to zero and price doesn't get in g d P. And yet your phone is it's a phone, it's a computer, it's a camera, it's it's it's everything. No one by standalone GPS is anymore. And they're building in the car or you don't buy them. Everyone uses

their phone. I mean, all sorts of things now have become free. Now. I've talked to others and he said, Jeremy, there's something to that we don't know. I mean, I donic adjustments and all that funds and Jake Destin's are very very difficult to do. But the dad, it is absolutely striking. The COLLAPSI productivity from two thousand eleven through today, uh is of a magnitude we have not seen, especially in an economic expansion, and this is very important in

lower energy prices. We've had a collapse before, but that was in the seventies when energy was going way up in price. You understand why collapse at that particular. So so I wouldn't be surprised if regulations are part of it. I wouldn't be surprised if US measuring technology is part of it. I gotta imagine there's a whole bunch of difference. Who knows. I mean, you know, everyone has their pet thing. Now some people say it's the millennials work habits. They're

just not working hard. They're not working hard on their jobs. So that's one reason. Do you believe that you deal with millennials? Everybody? Okay, So are they lazy? Are they stupid? Are they Well? I get wonderful students at work. I'm so I was the last I was. Can I tell you something I've heard this millennials or bums argument. I'm the old man in the office and all the guys

who worked for me. I have an unbelievable staff of of twenty somethings and thirty somethings who are really hard working, who were really smart, who what we crank out as I don't want to make this segment about me, but my experience has been working with young people. Um, they come dressed in flip flops and T shirts, but other than that, they do their job. But I'm not say I don't yet. They're very, very talented. Yeah, I know.

I mean it's a lot of but you know, there's first of all, there's a lot of people now under the burden of the student debt, which is, as you know, one point to trillion debt. But but there's been huge student debt for long long time. It's a record heights now, but it's gone up and up and up. For I'm

fifty four, I'm almost done paying my student loans. So no, but really very we we've had student debt over the last ten years from maybe three billion triple to and I actually think it was a lot of these on miss information, a lot of these onlines you know what it was was's what's happened is there was an idea, let's take a look at the earnings of graduates college

graduates versus non college and oh, it's this much. That means they can actually take on thousand dollars a death because their earnings are gonna be so much more, they're gonna pay it back. There's a little The problem is not You're now getting a generation that before would go into the workplace. They wouldn't get scholarships because they weren't as good. Because don't forget, if you're really good, you can go to Harvard and they'll pay everything for it.

So these were not and you know, I know some not as good students. They didn't have it. But now they were given, uh, you know, a ticket. You had these lessers schools that could never charge, but not because the government gave them alone. They could they overcharge for the type of education they were giving. They weren't giving them the skills that they weren't getting placed and as a result, after they get out, they weren't getting the

jobs that we're paying that much more. So I think that what I understand, the motive was good and I'm in education. But I think unfortunately that that's been a burden for a lot of students. Yeah, when when you look at first of all, there's a correlation error there. Graduate students get high paid. So therefore, every let's make everyone to graduate. Yeah, we can make everybody graduate. It's

lake will be gone and it's not gonna work. But the other thing is we've had over the past decade all of these fly by night colleges coming to effect, some of these online. And you're a graduate of of the University of dot Com online, you're not going to get the same sort of job as a do it. And it's it's not only that. Actually they were just lesser schools that we had a hard time getting students. And all of a sudden, I said, just the government

now he is paying tuition. And I see some of these lesser known I'm not gonna say which ones they are, they're charging like Harvard prices. And they said, we filled them through the loan program. And where was when were the big changes made to the to the loan availability? If ten years ago we were three hundred thousand, three hundred, three hundred thousand, three hundred billion dollars, you know again, I would have to check that that it might be

I just know what. But there's been a huge increase, been a huge in piece in the in the last decade now, you know. And that I saw, I mean that was what was shocking from you know, like like early two thousands till now. It was almost like a straight light. So what changed that suddenly because the government had to see this is another thing, you know what the loan problem wasn't on the government budget because they all was a loan and it was always paid, and

it was always paid. And and they put one thing, you know, that one thing they put in the law a student cannot go bankrupted to avoid They changed that a while ago. I always but that was one reason why none of that trillion dollars is in the budget. It was so easy for them always just give a guarantee. It's not on the budget. So banks and you know, you can't discharge them in bankruptcy. So eventually the banks will get the pan and the government does through the guarantees.

Oh they can't go back. We're gonna get our money. In fact, someone told me that according to government accounting, they were actually counting a profit because from it, because they were actually getting more from the students than they had to pay on the government debt. So I'm floating, you know, treasury bills at three basis points and I'm getting student loans at five percentage points. It shrinks the deficit.

It's crazy. Yeah, well, a lot of things, you know, in the name of let's give everybody a college education, it's gonna you know, it can't get pays for a self, but it doesn't, and it's not for a lot of students unfortunate, and they come out without the better jobs than a boatload of debt. Exactly. That that's really fascinating. Let me let me mix stuff up on you a little bit, because I know I don't have you all nice, and let me let me get to some of my

favorite questions that I ask all my guests. Um. So, before the Philly Fed, you were essentially well, I only now I was full time at Warton. I just did one Uh, I took a one semester sabbatical where I actually was at the Fed as a researcher. Um So it wasn't you know I was it was. It wasn't really a any sort of a permanent job at the but you worked with somebody there. One of the questions I wanted to ask, where who are your early mentors.

You've obviously mentored countless students over the years, over the decades. Who were your mentor? I would say in graduate school it was Paul Samuelson, one of the giants. One of the giants, Paul Samuelson, Robert Solo, these a m I T Frankoman Digiani. Um uh, but that's a that's murderous, right, yeah, listen, I'm honored. You know. All those three were my three thesis advices we phdu Nobel price, and they it was before well Samerson had won the Nobel Prize. The other

two had not yet. They had got him after I actually left. So all three of your PhD advice a Nobel prize. That's right, that's astonished. That is that that that is something. But I would say the person that influenced me the most was Milton Freedman. I members in Chicago. First of all, I read a lot about him, you know, from Capitalism and Freedom, which I read in college, and I was I was really kind of a libertarian, and I still consider myself sort of a moderate libertarian in

many ways. Is there such a thing because the Libertarians I know are really very black and white. Well that's what I think is the problem. I mean, I you know, Milton Freedman U should call himself a libertarian, but he is not. I mean, you know, libertarians today, like you know Rand Paul I want to get rid of the FAD, go back to the gold standards, everything, everything, So I mean, you know, and Milton was not for for all that.

I mean he was of course, he wanted to reform the FAD to make it operate right, but he did believe we can't go He did not support going back onto the gold standard. Um And I read the monetary history of the United States. When I was at at at M, I t that was my specialty was monetary theory and policy. My thesis was on monetary policy and inflation. I was actually trained as an economist, not in finance.

Were you a pure I was a pure economist. So let me tell you a little secret which not everyone knows. But um so, I've never taken a finance course in my life really at undergraduate MBA or PhD. Left that's unbelievable. But you wrote the book that notty much has become the standard. Have you ever disclosed this publicly? Are we gonna?

I've disclosed it a little bits, but not very much. Um. I've been wondering when my students will say, just a minute, you're so undergrad You're one of the most famous professors of finance, the Russell we Palmer professor of finance at the Wharton's good the universe of Pennsylvania. And you've never taken a finance course. And the answer is not undergraduate, not PhD. Never So wait, wait, do you have a PhD and an NBA. No, I don't have an I

didn't have you ever taken anything? I've never taken into so so uh so they said where do you learn? I said I I well, first of all, let me say who was in my class at M I t it only a class with thirty people. Bob Schiller, Robert Murton, you know of you know black shows. I mean, I had an incredible reservoir of brains and talent that I

bounced ideas. I remember Bob Murton coming to me. You know, I was in graduate in sixties when the cat last surprising matter was being developed, right, uh you know, And I remember Bob and saying he said Jeremy, you know there's some stuff here. Let's talk about it, you know, be all sharp and and and the beta idea and all that, and said, let's let's talk about this. And we were we it was happening right then. But I my whole focus, uh, and I was in the economics department.

Was I love monetary theory and the policy fed money all that, and I stayed there. But I always had a love for markets, and it was a perfect mild of and And I remember once my publisher when when I wrote TX to the Wrong One, first edition, she said, you know what's interesting, You really have a top down look. It's kind of a macro look. And so many times I see people bottom up. They're specialized, and I think, Uh, there were little bits of holes that I had to

fill on my own, which was a struggle. But I'm very thankful that I approached it from an expertise level. In macro. It's a very differ look than somebody who could easily get lost. And that's why I kind of They always say, Cheeferemy, you always get to the big picture looking down, And I said, yeah, because that's the way I was trained as a macro economist, macro economist.

So in a way, uh, you know, I struggled. I mean I would have learned he does let him on much better if I'd taken some of the FiOS courses, the pricing, the options and all that. And I struggled on. But you still got to the right answer. You just had a gun your own. So you mentioned monetary policy. Ben Bernanke has his new book out and reading it. I brought it. Actually it's in my briefcase. I'm on page four. It just came out, Mondy. So you're about a quarter of the way through. Um a little bit.

What did you think. Let's talk about the FED. What did you think about the job that the Fed and Ben Bernankey did during the financial crisis. I've lectured a lot about that. I think he did extraordinary, extraordinary. Well, right, we had, by the way, we had Paul McCulley, who used to be the chief economist that PIMCO is now retired, and he was one of the first people who came on and just firing brimstone defense of the FED. All you people criticized, he was one of the few defenders.

I am a big defender. I think what Bernanke, did I mean and and by the way, do you know why he did what he did? And he says so in the he doesn't say directly he blames Congress for not doing anything, but he blames him. But if you there's one part of the FED on Milton Friedman's ninetieth birthday party, he was, we won't do it again. We won't make that mistakes. And look that Milton is said, you showed us what we did war on wrong in the Great Depression of the thirties, and thanks to you,

we will not make this mistake again. Now this was in two thousand and two. There was no subprime mortgage, there was no crisis coming, there was nothing. And he said, we will not make that mistake again. Now, Milton's passed away two years after, in two thousand and four, so he never lived to see it. But don't you think that when Lehman went under and all the financial markets seized up in panic, that that pledge did not come to mind? In Bernankee, I've got to act. I've had it.

I know I'm gonna get flak for bailing out a I G and he did huge. I'm gonna take that. I think I think the title of the book. He had the courage to act. I said, I'm gonna get flak, but I've got I've got to do it. He could have called it a promise to keep it, promised to keep. He looked at Milton Freeman said, We're not going to make that mistake. I'm not gonna let this whole system go.

And that's that's the difference between the O eight oh nine and we had a five we had five nine drop and g d p from you know, uh, we had a twenty six drop percent drop in. So you think the Fed basically stepped in, did what had to be do, dude, and prevented the next Great Depression? I absolutely do, absolutely do. So let me let me ask you the fiscal question, because bernanke Bernecki has made some really surprising comments in his book, or at least the

excerpts I've read. He's a lifelong Republican who basically said moderate Republican. Right now, he said, these guys, I don't recognize this part anymore. More. People are saying that I'm an independent, and I understand well and that he's And he also thought that the Congress should have enacted a much more robust fiscal response, but essentially kicked the can

down the road. Well don't you know, yeah, you had you know that there he doesn't stress that to my not again, I haven't finished everything in the book and I'm reading or really careful. Um, I think what he did was far more important, I mean than the fiscal side. Than the fiscal side, basically saving backing up all the money market funds, backing up all the bank accounts of businesses and the demand deposits out there, and all the deposits, not one deposit went under the way it did in

the Great Depression when banks. We now have FDIC insurance, so that really but he wasn't even beyond that, don't forget insurance and they raise it. But even then he said, I'm not gonna because look at businesses have have to have a payroll that's more than two big. So he made sure of that. I mean, we could go on and on and on this thing. I remember you might remember,

I remember I don't. People are saying, Jeremy, get a safe deposit box, and some people say, don't even get it in the bank, buy a safe, get your money out, get the cash out. I mean, there was crazy talk going on. People were full blown. That would have do you know what that would have done to our financial system? I don't even want to begin the thing. You know, everything had froze. And what the FED managed to do was slaw that and forced the banks to start giving

each other credit back and forth. Well, he enabled them. He flooded them with enough reserves, saying I'm gonna give you the facility to get all the credit you need and the liquidity. They all wanted liquidity, and he said, okay, you need a trillion dollars in liquidity. Bank there it is. That's what quees was. Basically, I'm gonna give you all the liquidity you want so that hopefully you'll make some loans with this and we can keep our economy coming back.

And that's more or less what would happened. So, so you are a terrible libertarian, say well, but you're you're a and Paul, I'm a terrible libertarian, but you're a pride. I think had Milton Friedman lived right, he would have said, that's what you have to do. Bernanke. Now he wouldn't agree with absolutely everything. He said, yes, the bulk of it. Well, if you go back and look at what he wrote about the Great Depression. What Milton Freedman wrote, it was

pretty clear. You can't sit around and just watch the whole thing go down and say, that's a lot of the Republicans, you know, when they voted against the type and all that the first time, by the way, worst week in the market on a point basis, I think, ever, I don't know on a percentage basis. Still it's the biggest not the biggest percentage, but the biggest point. And then by that Friday, we've got to do something. Well, that's it the Republicans. I've got phone calls from there.

Just a minute here, Uh, the people with therefore our one case and all that, just a minute here. Did you see what happened when you guys voted it down? I don't think that's good. Two days later overwhelmingly voted it for When when the president of General Electric and Foward and McDonald's called the White House and say, hey, we're not going to make payroll, Yeah, I think that really focuses well. And the seven seventy point, so they got the public in vow and the and everyone said,

and it was amazing. They made a tiny little change the Republicans could save face and half of them voted no, voted yes two days later. It's amazing. So you mentioned some of your early mentors. What investors you mentioned Steinhart? What other investors influenced your your philosophy, your approach to thinking about equities. Well, I would have to say that I was a huge straight indexo. Bogo got it. I

remember Samuelson. He wrote an article when I was at gradual, Gee, all we want is an index fund, but we didn't have one. Actually responded you go through the history. He said, we need someone with an index fund, and you know Bogeol answered that question. I was one of the first people to put my money in there in Vanguard and

Vanguard Index. That's amazing. Who else influenced your thinking besides Bogel, Well, I mean, I mean again, it was the theory and I was pretty much saying I don't see active management beating it after fees and so all the way until the tech the tech bubble. Hey, on the work that I did, when you know, Jonathan Steinberg and Michael stein had called me up about, you know, we want to have a better a fund. Can we do a better

index thing rather than get overweight. That became really that really a big impact that hit me on a cap. I mean, theoretically, I hear I had to hold this capway with technology. That would be if two hundred I said I don't want to hold it, But then I break my philosophy. How can I redo it? So markets are efficient until human behavior makes them crazy. Your buddy Bob Schiller would say they're efficient until people get involved. Yeah, well, you know it's if they're still not easy to beat.

Let's put it that when that's why obviously active managers after fees don't really beat it all over long periods of time. It's it's impossible, it's almost impossible. But there is a tendency and it really goes back to what you know, I mean in a way. You know, Buffett says people tend to overdo the growth stocks and various

stocks are not interesting. They tend to That's why wouldn't we do seventy eight years studies on risk return and that was something to Farmer French found right and their research that on that value stocks, which is what a fundamental waiting system would tend to overweight, do better than growth stocks on a risk return basis when you go back over you know, so you mentioned from a French I'd be remiss if I didn't point out they are

advisers to dimensional funds and dimensional funds big focus is the small cap premium over long periods of time. Before before I go on with the rest of my last few questions, what what are your thoughts on small cap premium, value, premium, momentum premium are are some of the big quality premium and now there's quality and momentum which I have an end of. These are like I canna last few years compared and the value goes way back. I mean the value premium you know from of French stuff in the

midden nineties or even earlier. Uh showed that value premium. Uh that's back to Benjamin Graham. And yeah, that's really and uh and and I remember Buffett said people are hard wired. They rather they don't like boring stocks. They tend to undervalue them. They like the gross story. They want to write them up and they write them too high. And you know it makes for a great cocktail party. Cheat exactly. You want to you want to own the Microsoft and all the big ones that have gone way

way now it's the apples and the teslas. It's high wired into the people's brain. So I definitely you know, I mean, I definitely understand that. Uh, the small stock premium is a little bit about liquidity and transaction costs. And one good thing df A did is that they were able to actually it took them a while, by the way, in their early years they weren't successful. They learned how to become a trading Yes, they have an unbelievable there. That's how they did it. They're able actually

to make the mark. They're incredibly efficient as what's enabled them to make that slice. Uh, there is so there. There's a liquidity premium and there's not a lot of coverage on a lot of these look, liquidity is also there. I think wick would we know that io liquid assets of any sort get discounted in price. If you're a long term holder, that becomes a favorable thing. You know, this whole thing now on quality and momentum, there is evidence, but you know, more and more people are I think

more and more people are riding. They ride the train, and that's when you get the sharp movements. Oftentimes they break through the they break through the two day moving average and they break through the channel. Everyone just gangs up. So let's talk about that. Because you have a chapter in Stocks for the long Run on technical analysis. I know you think that that long term trend and momentum is valid, but you're not really a big fan of the well, you know. I I said to myself, come on,

I'm gonna go complete stuff on stock. I gotta do a chartists and I actually did an exhaustive test of the Twitter day moving average there on the dal Jones n N naz dat and my my fav My final conclusion was um after transactions cost because you're gonna be going in and out all that, and you need a band to go in and out and et cetera, and so on. It turns on on a risk return basis.

It's not much different than buy and hold. The difference is, though, if you follow two inter day moving averages, it does keep you out of the worst bear markets. Now you say, why doesn't it do better? Because a lot you get whip sort, you get whipsawed in. I can two thousand and two urs. I forget which of them. There's a

few of them where you're going above the average. You you know, you buy you go below, and you sell and buy and sell, and you're at the end of the year you're exhausted with transactions costs that are huge. My my buddy MEB Faber, who was on the show, said, and don't use the two day it's two it be it's too noise. You used the ten months essentially the same place, but not you get a signal once a month inst there but as you got to have but that also can whip it also need a band. Don't

forget that two other day. If if if I picked a one percent band, when you're one percent above and blow because if you take whenever you go above, you may go above and below fifty times in one day when if you really compute it, so you gotta have a band otherwise you're gonna go crazy. And and we found over time you gotta use closing prices in especially these days with flash crashing. When I did closing, I did on the basis of closing price. So you you basically I get what I say is you know what

I mean. It's something you can do, but realize they're gonna be some years you're gonna really be whips. And by the way, it's not so much difference on buying puts on the market when you do also how much puts you I'm just saying when I looked at the distribution of annual returns on a two inter day moving average, it didn't differ so much. I I just kept on buying puts protected me against downside. But I keep on getting the drag. But a cost. You've got cost and rags.

That's almost like the whip sawing cost. Uh. It doesn't come every year and then it comes in bunches. But it gave when you looked at the distribution. So what happens cut off the bottom, you know, so it avoided the bad things drag the distribution all the way to when do you buy the puts relative to well? I you know, I just said it looked like a Stanton

centered one. You know. Basically, I just said, you know, buy a point at ten percent under the market every year for did you could play with that that like the two day moving average without buying it? Oh, that's that's quite interesting. Let's talk about books. You're the author of three books. Um, what books have you read fiction or nonfiction that you thought were interesting, influential, or that you just enjoyed. You're reading Ben Bernanke's book right now.

What else? What else really stayed with you? Well, you know it's interesting. Um, I'm reading Ben Bernanke's book right now. I tend to read nonfiction. My wife is the fiction reader. Uh. So I enjoyed books like Investment Biker, which yeah, I mean I enjoyed Jim Rogers and I read his books, and I've read others. And I read a lot of the historical books. Um. That has to do generally in

the markets. Um, give me, give me one of your favorite Oh god, um, don't see the one who wrote on the short seller named uh famous short seller the Reminiscence of the stuff. Yeah, things like that I read. Um. Uh. I tend to go back and and sometimes read articles as they were written back when. So I go back. I look at the internet what were people saying that time? And I have some quotes on my first chapter of Stocks for the Long Run has a lot of quotes

of what people were saying. I just was thumbing through it earlier and I saw the quote of somebody calling you a bad name right in the right in two thousand, just as the about the first chapter, I give three quote to the one, the last quote. What someone told me about this? They said, Dad, Jeremy, did you hear um? You know uh CNBC today? I said no, Well, they were talking about stocks for long Run and they had a call in and call in said stocks for learning?

Are you crazy? All I have that book and all it is good for now is a doorstop. Right. I put that quote in there. I do not mind making fun of myself. But here we are. It's fifteen years later, and we're substantially above where we were in that period. Um. So you've been a participant in markets. You've been in participant in the philosophy, the thinking, the ideas that drive markets.

You mentioned almost fifty years almost. What do you think of the most significant changes that you've seen over that arc of time. Obviously the development of index funds, no doubt about that. We definitely, I think it's important there. I think, Um, obviously the big bang when when commissions became deep competitive and a few young INDs commissions used to be fixed. Yea, that was changed in the yearly seventies.

Schwab was actually the first to come out and slice fees and suddenly you had a competitive marketplace for brokeren Service. I think that that was extremely important. I also think the development of index futures um, where people, you see, could take a direction on the market. Now, people like the spider Now that came much much later, and they do the mini maybe if they want to do on that.

But there was you know that that development was the first time that you could, you know, without going into the index fund, which was you know then wanted to trade it. You could move a big chunk of money in and out and hedge yourself with the entire index. I thought that index futures um, which was I think in the very early eighties two, was also a very

significant development. And and and generally, I mean, obviously we've got the globalization of the markets, uh, free capital movements, free exchange rates that allow you know, very few firms have capital restrictions if they certainly want to be part of the global economy. Back then, even the United States had restrictions uh back in the fifties and sixties. So the freedom of the market to go globally I think

is critical. Um, yeah, I think that those were things the index fund was obviously, I do think fundamental indexing is an their huge breakthrough um, these are all positive change, positive change. Anything that you see that that you think is negative high frequency trading derivatives, anything along those lines, or have they done well? You know what when they've done away? Okay. So not that I like the specialists,

because there were complaints about them all the time. But one thing they would not have let some of these blue chips sell ten dollars less than the market or fort or whatever it was with a flash crash in two thousand and ten or this very recent one. We're doing better. They what they screwed up was the open that was actually the opening actually the flash crash of two thousand times. They put safeguards in these mini stops

that were good. The trouble is that they weren't effective at the open, and that's why we had a mini crash at the crash. We've also had we had e t F crash A little bit on those one. I don't want to overstate that because people get all upset and we look at the n umber of trades at a crazy price. It's point o O O one percent, but it's what everybody's price shows up. People say, how

why is Johnson and Johnson? So there was a hundred shares of J and J. That's so at that, you know, and don't forget they unwound the crazy, real crazy ones before, but even you know, in this recent one, so there were one or two hundred shares at crazy prices. They still got to work on that at the open and I think they will to prevent that. We have prevented some of those big gaps since two thousand. Listen, we are in an instantaneous communication world. It's going to Uh,

rumors are gonna start. I sometimes wonder whether there you know, with all the Facebook and social media Twitter, of course, you know, whether we're we're gonna get some rumor that's gonna be false. That's gonna panic everyone. I mean, and you know back at the time, the news people would wait to verify it doesn't happen. Uh, that isn't happening. We could get some sharp movements, but I guess honestly that comes with the territory of communication is basically good.

I don't want to restota anyway, so you see things generally, all these innovations have been improvements over time that worked to the to the benefit of investors. Wow, that's quite fascinating. Um any major shifts you see coming up? I know you think fundamental indexing is one of them. What what else do you see coming up? You know that's that so much has happened. I don't know whether I'm looking for anything. I mean, we've we've you know, we've got E t F s and commodities right now. E t

F s in the foreign markets right now. And I think E t F s are also I should say E t F s are I'm gonna include that as one of the break huge great shoes. So we're pretty much we're pretty much doing that. You know, whether we could actually get E t fs in real estate as beyond reats you mean, like beyond reas. It's really hard to do that though, because you can't arbitrage. If you can't easily in and out to arbitrage to be a creation unit another word, just you're buying enough of the

underlying stock to make one more et F shart. You can't really do that because you're's not as liquid, it doesn't trade. Um, the last two questions, these are these are always interesting. Um, you work with kids, you work with college students and grad students. What sort of advice would you give or do you give to millennials who were graduating at the beginning of their career if they were interested in going into finance. Well, there's a lot of different ways to go into financing. To do what

I do is academics. Um is I just say, read, read widely, current events, try to understand, structure, take course, try to fit things into a paragigm that you feel comfortable in analyzing it. That's it building, building a structure at which you can think about the markets, and then when a new situation comes up, you'll have a structure to analyze it in. But the wealth of experience start young.

I actually, as I said, I was fascinated with Stockbacker when I was a kid, And not so much which stocks to buy, but the whole movements of the market up or down? Why did it move up or down? Why did it? And I always try to say, can I learn enough to get a structure of thinking about the major factors that do it? So, you know, read as much as you can current events. Take those courses that you can um and and and and and and

and and definitely take a global view. The world is is global now and uh, you know it's not just the United States. Or England. It's global, it's the whole world. And my last question, what do you know about investing today that you wish you knew when you started out forty four years ago. Oh, and I wish that I knew when I started out forty four years ago. Um, I wish um that I was again, I was wadded

to cap weighted. At the same time, I said tech was crazy and I didn't know how to reconcile those two. Now I can do a fundamental waiting. I can get out of a sector that I think is overweighted, or overweight in a sector that I think it's really cheap. Now, not dramatically. I don't think I'm the greatest timer and all that, but just looking at valuations once they get to an extreme. You may not buy at the bottom,

you may not sell at the top. But I think that you can really move better than buy and hold. I think fundamental waiting is one way that does it for you, by the rebalancing technique. So so in a situation like two thousand, you don't want to be overweighted the most expensive sector, the biggest stocks, and that'll be

the biggest part of my potfolio. Yeah, so you know if I were in, you know, a fundamentally weighted my, they would have been selling the technology because it's price kept on going up relative it's fundamentals, and I would have been much better off rather than suffer through the two thousand and two even though I knew it was overrated, I was kind of locked into the cap weighted Professor Siegel, I can't begin to thank you enough. This has been

absolutely delightful. I I appreciate all your time and generosity, and it's been a pleasure. Burry Well, maybe we'll do it again sometimes, I would love to. We've been speaking with Professor Jeremy Siegel of the Wharton School of the University of Pennsylvania, author of Stocks for the Long Run. If you enjoy this conversation, be sure and look up or down an Inch on iTunes and you can see all of the other chats we've had with various people over the years. Uh, be sure and check out my

daily column on Bloomberg View dot com. Follow me on Twitter at rid Halts. I wanna I would be remiss if I did. In fact, if I did not think my engineer, Reggie Charlie Vollmer, my producer, and my Head of Research, Michael bat Nick. You've been listening to Masters in Business on Bloomberg Radio.