Interview With Charles D. Ellis: Masters in Business (Audio)

his intellect and integrity and common sense. And the show ended and I had to be somewhere, and he was walking down to Grand Central station, and I said, sure, I'm happy to walk with you, and and we continue to conversation down twenty blocks or so from the Bloomberg Building to UM to Grand Central and I can't describe it any of the way. It was just captivating. It's a delight and a privilege to be able to chat with someone of his experience, knowledge, wisdom. It was just delightful.

And I sat and chatted with him for this show for about an hour and a half. If you are at all interested in anything having to do with investment management, institutional investing, individual investing, indexing, retirement savings, the list goes on and on, you will appreciate this conversation. There there is no one else like Charlie Ellis. Um. He is one of the legends of finance. And so, with no further ado, here is my conversation with Charlie Ellis. This

is Masters in Business with Barry Ridholts on Bloomberg Radio. Today. I have an extra special guest, a legend in the world of finance. His name is Charlie Ellis. And if you're unfamiliar with Mr Ellis, let me give you a very short version of his curriculum. Vita graduated from Yale with a BA in history, ends up getting an NBA from Harvard UH and UH PhD in Finance from n YU.

Becomes a c f A charter holder in nineteen sixty nine on the faculty of the Harvest Business School, director of the Vanguard Group on the Yale School of Management UH, as well as the Yale Endowment, Chairman of the Board of the cf A Institute. One of a dozen people recognized for lifetime contributions to the investment profession by the cf A Institute. Author of sixteen books on investing, and we'll talk about a few of those shortly. Charlie Ellis,

Welcome back to Bloomberg. Glad to be here, Barry. Thank you. So that's the short version of your curriculum. VTA will spend some more time talking about your work in the field in a little bit. But let's jump right in to the new book that you just put out, the title The index Revolution, Why investors should join it. Now you've already written sixteen books. What motivated you to write yet another one. Well, I really believe in getting the word out, and I've had an unbelievable privilege as an

insider in the investment management world. I had chanced to meet with people all over the world and talk and talk and talk and talk with them about what's going on. And once you get a really good idea of what's going on, you realize indexing makes so much sense for so many people. Everybody should seriously consider it and most people should do it. So how do you help write a short book that's easy to read and see if you're gonna attract attention? So, so let's talk about indexing.

You spoke at a conference recently, the Evidence Based Investing Conference. Bill McNabb, the CEO and chairman UH of the conference, spoke and the two of you both said the same thing. Gee, it's a shame indexing attracted the word passive that that seems to be a problem. What's the issue with passive? Well, when I was growing up, we read The Little Engine that Could and we were told if you study harder,

you'll get better grides. And when I got a job, I was told, if you work hard, you'll get a raise, you might even get a bonus. Everything about our lives. You want to learn the piano, spend time practicing, you want to learn how to play tennis, Practice, practice, practice, Everything has to do with do more, work harder, and you'll do better. So we come to investing and say, fine, I'm ready to go. Where do I get a chance to do better? I'm gonna work hard? And somebody says, he,

you know, I wouldn't bother doing that. Why don't you just settle for average? Nobody wants to be average, Nobody wants to settle. And the word passive is a horrible negative. Can you imagine your wife or husband introducing you as this is my spouse. Passive sounds terrible. So what is the better phrase to describe what people should think of when they think of indexing well to one is indexing and the second is winning. Winning, So explain that why

is um? Why is winning? As Charlie Sheen would say, why does that leave us to lead us to indexing? Well, one thing that I would use to describe winning is doing better than most of the other people at whatever it is you're trying to do operationally, year after year after year. Over the long term, indexing does better today than active investing. That wasn't the case twenty five or thirty years ago, but it is the case today. What

what accounts for that change? Massive change in virtually every variable. Just for an example, if you go back fifty years ago, there might have been five thousand people involved in active investing. Now they're at least a million people involved, and they're smart,

well educated. They've all got exactly the same tools, computers, access to the Internet, Bloomberg terminals, and they've all got access to same information because the SEC requires public companies to give everybody all the information they give to anybody. So it's not like the old days where whoever got

that first call, Hey, that was a money maker. If you found it out before all your competitors did, it was wonderful The second thing that's big, big change is it used to be it was professionals who had access to really good research, a small fraction of the market competing against large numbers of amateurs who bought and sold once every year or two and didn't candidly, no one, awful lot. Now it's been reversed. Now or more of trading on the New York Exchange is either machines or

professional people, and they're playing to win. Michael Mobisoft calls this the paradox of skill. It's not that the competitors are bad, it's that everybody else is so good. How is there any room to to beat them when you're playing at such high levels, so very good, and so many of them, and they have the tools, they have the technology. It's fabulous. They are so much better than

managers or twenty years ago. It's night and day. So the first index fund that comes out by Jack Bogel, they were hoping to sell you right in the book, a hundred and fifty million dollars worth and they could barely get it over ten million dollars when they first launched it. It was a flop. Why did the first index fund do so poorly? It wasn't a flop. It was a big flop. A whole bunch of different things.

Number One, nobody knew anything about indexing to speak of, and the idea wasn't out, and everybody was looking for beat the market rates of return. That was a big second is there was a sales load in order to attract the sales force at the retail brokery firms. What was that sales load? It was I think six and a half percent. That's a lot when you're offering I'm going to give you average, and I'm going to charge you a big entry fee to get started. That wasn't

an annual fee. It was a one time load for the purchase one time. But you dropped eight and a half off the top of your money. Your behind the line of scrimmage pretty far. So. One of the other things that you mentioned the book that I think is fascinating. Over the past fifty years, the trading volume on the New York Stock Exchange increased from three million shares a

day to five billion a day. That's a fifteen hundred not all on the New York Stock Exchange, some of us off the board trading in New York Stock Exchange listed, and honestly, five million is an average. It ferries up and down depending on what the machines are doing. I'm Barry Riults. You're listening to Masters in Business on Bloomberg Radio today. My special guest is Charlie allis a legend in Wall Street. He has written and I shouldn't just say Wall Street, but a legend in all of finance.

He has written sixteen books, one of which I think is quite fascinating. It's called Falling Short. The Coming Retirement Crisis. What is the looming retirement crisis that the United States faces. It's a complex of several different so let's just pick out the really big ones. Number One, people are living longer than they used to live. Longevity certainly is an ongoing shift from which means people are going to be in retirement for more years than they might have actually

been planning on. Secondly, a fairly large fraction half of any couple who were in there late sixties, early seventies, half of them will need assisted living at Sometimes that's fairly expensive stuff you are, particularly if you're not prepared for it. About a third of American workers have no retirement plan whatsoever. Zero zero Social security or nothing. Social Security is not enough, it's sure. Uh. Then if you say, well,

let's look at the people who got coverage. It used to be that we had to find benefit plans, that the company did everything. All you had to do was tell them what your address was so they can mail the checks. Now virtually every decision has to be made by the individual. Many people are not well prepared for making those decisions. Then you look at all the different decisions. Are you going to be in the plan or not?

Are you going to match the match? Are you going to escalate your contributions over time so that you're saving enough to actually cover your cost in retirement? How are you going to do the investing? How are you going to do the distributions from your investments when you do retire, and you start with just one of the most obvious things that drives me crazy. If you ask people broadly, ask people here at Bloomberg, ask people who really know

quite a lot about investing. What is the delta? What is the difference between how much you get from Social Security if you claim as soon as you can sixty two or you wait until you're seventy and a half when you have to claim well, it must be a lot, and I usually get somewhere between twenty and thirty percent

as an increase. That is not true if you don't claim at sixty two and do claim tofer until you get to seventy and a half, the increase every year for the rest of your life, as long as you live and it's inflation protected, is an increase of seventy six percent. Really, that's giant. That's a giant payout. And all I would like is that everybody knew and would tell everybody they know more every effing year. So there's

no reason to unless you have no choice. If you could wait till seventy and a half, that's clearly the better, unless you're planning to die in your late sixties or early seventies, in which case you should take the money. But most people are not planning to make a note of that. So there's a data point in the book that that I find mind blowing as and and this data is a few years old, but I looked it

up since and I know it hasn't changed dramatically. As of the median household approaching retirement only had a hundred and eleven thousand dollars in four oh one k and IRA holdings, and if you do what financial advisors suggest you withdrew a four percent a year, that put that creates less than five thousand dollars in annual income house less than four and a half thousands. Now the numbers have gone up, but I think it's now a hundred

and thirteen thousand UM. I forgot the UM, not the investment company Institute that the e B I R dot org one of these so so e B R I right, So that's where I got the one thirteen number. But still it's it's an insignificant amount of amount of money. Yeah, we could argue about the specific details. It doesn't matter.

For people going into retirement with usually something like twenty years to go a hundred hundred and ten hundred twenty even a hundred thirty thousand is no help at all to covering the costs that they're going to be living with, no help at all. Well, it's not quite that bad. So it's a sucker bet. You looks like you've got a lot of money. You imagine what it's like if you're a working guy Joe sixpack, and you have been

working along and you look at your account. You see, Verry, I got more money every dreamed I would have that. It's in my own name. I've got a hundred and ten hundred and fifteen thousand smackers thirty years right, So long run, even if you retire at seventy and you live to fifteen years, is still a long time to not be having any income. And it's not just individuals. The other data point from the book, the public sector

is just as bad. The Congressional Budget Office stated by any measure, just about every single state and local pension plan is underfunded. How how did that come about? Well, that's the defined benefit plans in almost every case. So these are public employees, teachers, what I like to say, real Americans. These are a crowd of people who've put in a good, long term serving the public, okay, And where are they now? Their retirement depends on two things.

How much money has already been set aside, and how much money is going to be earned by the investment on that money that was set aside. And you look through the eighties and nineties, people would have said, boy, you know, we can earn a lot, ten percent, twelve percent, fourteen percent. Years came ruaring through. We all had a great time. If you assume that's what you could earn, and you say, well, I want to be conservative, so I'm only going to assume eight percent. Track it out

over time. That's your pension. Now, what if somebody comes along and says, Barry, that was an unusual time period. Interest rates went from thirteen percent to two percent. That changed everything, made everything look like a hire rate to return. You're not going to see that again. What are you going to see? Well, we've got two percent three percent in fixed income and it looks like six seven percent in equity investments. What's the mix and you end up

with ten percent. So we've got what's called an unfunded obligation that's on paper, we've signed up for it, but it hasn't been paid in yet. Because we assume we're going to get a great rate of return. Now we're assuming we're going to get a much lower rate of return. How much do we have to put up a lot

so that blended rate to return. I'm joking about adding three and seven, But you take the sixty forty portfolio seven equity, three bonds, you're really looking at a five and a half six percent, a five and a half six percent return at three in bonds would be a little optimistic. Well, I'm taking the average over the next

thirty years. But if you look at the path and you look at the long term average and bonds that that said, you're so if we're looking at a much lower rate of return, who's going to have to make up that shortfall? Because these are contractually guaranteed payouts as part of public employees employment contract. Who's on the hook for that balance? Drop back to your really serious negotiations.

They're three parties at interest, the government, the mayor, the Senate, the governor, mayor whoever it was, the public m hm, and the workers. The workers are represented by a union. The union guys are pretty smart. They've studied this stuff for years. They pay a lot of attention. The political people are focused on their next election and they're pretty good at that sort of thing. The party that's going to have to pay up any difference doesn't get to

come to the meetings. I'm Barry Ridholtz. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Charlie Ellis. He has been on the faculty of the Harvard Business School. He has served on the Yale Endowment Board of Directors of Vanguard. Uh, the list goes

on and on. Author of sixteen books on finance. I want to start discussing your history in financial services with a quote of yours that that I really should have frames and it's this The investment management business should not should be a profession, but is not explain that well. A profession is defined by the service by the experts on behalf of individuals who don't happen to know very much about what the experts are experts in. That's why

law is a profession. That's why medicine is a profession. An investment management used to be entirely a profession. It didn't pay very well, but you could do some really nice work for individual people and help them through the solution to the various problems they might face. Wait that this profession didn't pay very well in the old days, my assumption is it was a big money maker on the nineteen fifties. It wasn't nineteen forties. It certainly wasn't.

Nineteen thirties. Was terrible. Nobody went into investment management in those days. Huh. That's quite that's quite fascinating. Out of my class at Harvard Business School in nineteen sixty three, only three of us went into investment management, and I got into it accidentally. So let's tell that story. That's a fascinating story. How did you stumble into investment matter?

I was looking for a job and a friend of mine father was looking for somebody to come and work in a junior position, and so I thought it would be a really interesting conversation. I thought that he was talking for the Rockefeller Foundation. It turned out he was talking about the Rockefeller Family Office, a tiny little investment team that managed investments for the family and also for some of their great philanthropic institutions like Rockefeller University, Rockefeller

Brothers Fund, and stuff like that. When you say a tiny little team the Rockefeller Family Office, that was not an insignificant sum of money, a lot of money, but the number of people was small, only six of us. Okay, So you thought you were going into some philanthropic already sort of job. And I gotta start an interview with a guy, and I realized, this man is really smart. He knows a lot, uh, and I need to learn a lot. I could learn a lot with him. I

better go there. Because I don't know enough. So there's there's a legend that Goldman Sachs offered you a job and you said, no, thanks. What is that any truth to that? It's totally true, but they didn't actually offer the job. They had it printed on a piece of paper and looking at it realizing, you know, Dad always thought Goldman Sax was a great firm. I'd love to go with a great firm, but I need to earn at least six thousand dollars so I can pay off

my wife's loans for going to college. She'd going to college on a scholarship and a loan package, and I needed to pay that off. So I had figured I could stave a thousand dollars out of six thousand. I can't take a job. Ford never occurred to me. You might get a raised. Never occurred to me. You might earn a bonus. So it ended up working out anyway with with the Rockefellers and and eventually granteds associates. Uh

the firm you did? You you you co founded founded I was the only one, the other one who founded it. So how did you What did you learn from working with the Rockefellers. I would think a family office sitting on a giant pool of business, but giant pool of capital, would really teach you the business from the inside out. What what did you learn from that experience? I learned

a lot. Number one is that most people have not thought through what they ought to be doing with their investments over the long term, and they have not settled on a policy that really makes sense to them individually. Second, there's a lot of information, and if you don't have that information, you're in trouble. And third that investment management is a wonderful, interesting, fascinating, exciting and filled with all

kinds of experiences, wonderful place to work. So so, all told, that was a positive experience, lucky, lucky and very positive. But by the way, that's a theme that comes up on the people I sit with and have these conversations with over and over again, the role of just being in the right place at the right time and getting a little hey, smartest good. But sometimes lucky is better, much much better. And you'll find that those who've been

around for a long time, it's all luck. Those that are around only recently, they're paying attention how much you can get paid, because it is the best paid line of work in the world today. By the way, back to back to some quotes in the book, the most obvious success factor for us was luck, luck, and luck. So how is that an exaggeration or is do you think luck really serendipity a roll of the dice really has a big impact on the lives we lead. I

know it had a huge impact on my life. I doubt it head anywhere near that big an impact on most of the other people who have been around. But anybody who has been in the investment management area for the last fifty years, it doesn't think that was really lucky, either kidding himself or kidding you. So we're gonna talk later about um winning the losers game. But how often do investors confuse luck for skill? All the time? All the time. But there are normal human beings. That's when

human beings do. If it works out well, I was smart. If it doesn't work out well, I was unlucky. I'm Barry rid Helts. You're listening to Masters in Business on Bloomberg Radio. Our special yes today is Charlie Ellis. He is a legend in the world of finance, having served on the board of directors of Vanguard as well as the Yale Endowmond Funds. Let's talk a little bit about a paper you wrote in that I think has a fascinating history, um both where it came from and where

it went. You authored The Losers Game in nineteen seventy five as an article for the Financial Analyst Journal after reading a book about tennis. Tell us about that. Well, the hero of the story is really a brilliant guy named Simon Ramo, who was the founder of what was called Thompson Ramo Woldridge and then what's called t r W and is in fact the organization that helped America with its entire space program. He was a gifted amateur athlete,

and he also was a gifted musician. He used to play in a quartet with three members of the Los Angeles Professional Symphony Orchestra. Real Renaissance man, he sure was, and he must have had a wonderful life. And along the way he decided to write this little bitty book which is the best guide to how you could do better in tennis I've ever heard of. But it also included a definition that was very very helpful to me. Said, there's a whole lot of people that play tennis too.

Three of them play a kind of tennis that's completely different from everybody else. They play winners tennis. They are absolutely fabulous. The shots are always right near the line. They never hit it in that, they never hit it out to speak of. The placements are terrific, their strategies are brilliant. They are wonderful. Most most of the rest of us play a different game. Yeah, I know, same rules, same scoring, same clothes, same court, same facilities, maybe even

at the same club. But we play a completely different game. The game we play is the game not to lose, where the control of the game is in the hands not of the winner but of the loser. So the words it's it's people lose by making unforced errors and other such foibles, as opposed to winning by scoring points. If you lose less, you'll be the winner. Lose less will be And by the way, the name of that book by Simon Ramo is extraordinary Tennis for the ordinary

tennis player. So how does that manifest itself as the loser's game? About invest them? There two kinds of problems in investing. One is the long term policy problem. The other is the operational problem. People at all of us are guilty almost all the time of doing things that aren't really brilliant decisions. So we make mistakes that we really shouldn't have made. If we had it to do over again, a lot of us wouldn't make those mistakes.

And reality is, we do because we're human beings. The other kind of mistakes were aiming in the wrong direction. I'll come back to that later if you want to. But day in day out, people buying and selling stocks are prone to getting caught having made an error in their judgment on the price. So in other words, if you can avoid those self inflicted errors, you win by not losing. Yes, and the parallels are are obvious as investors and tennis and very powerful on the long, long,

long term. If you aim in the right direction, you've got a good chance of getting there. You want to go to Chicago, don't head south towards Florida, So to Chicago. As an investor, how do you aim in the right direction? What what does that exactly mean? Well, I can't give you a straight answer except in generalities, because each of us is unique. But start with how much money do

you have? Are you saving money or spending money? How many years do you have before you need to cover your retirement or pay for your kids going to college or whatever is your objective? How much wealth do you have, how much income are you creating? Take all those things, you can work out an investment strategy that makes good sense. Let me give you an example. I'm seventy nine. Most people would say in that age, you must have a

lot of bonds. I have no bonds. Why Why? Well, I still enjoy working and I'm able to keep earning enough to cover my operating costs. And secondly, I look at my investments. I say, who are you investing for? I'm actually investing for my grandchildren, right right, So your portfolio is not the average seventy nine year old man's portfolio. It's for someone who has an investing horizon of And it's not to brag about it. It's just the reality.

I ought to address that reality. If I did the normal thing and saying, hey, you're about eighty, you probably would have at least six maybe seventy and fixed income. I look at I say, that's crazy. I'm investing on behalf of my grandchildren. Okay, and and someone else who isn't investing on on BF of their grandchildren. They have to aim in the right direction. That means a mix of stocks and bonds and something appropriate for their where

they are, whether they're working or retired. Every magician knows if you want to be able to pull off a good trick, distract your audience so they don't notice what you're actually doing the same thing. It's true of everybody's having an illicit affair. Abstract your audience and they won't find out what you're doing. The same thing. Is all kinds of different problems. You get people to focus on

the wrong thing in investing. Most people get focused on day in, day out, stock prices and how to do this quarter, this year, maybe the two years, week, this day, absolutely, and the real questions are all about long, long, long term. It's to me it's the father in law question. The man has got a beautiful daughter, she's bright, she's interesting, she's got a wonderful future ahead of her. She's introducing a guy. Does he care whether he's got blue eyes

or brown eyes? Does he care whether he's got a wonderful sense of humor? Does he care whether the guy is tall or a good None of those things. What he wants to do is one single thing. Is this going to be a good friend from my daughter? Ten years from now, twenty years from now, thirty years from now, forty years from now, will she be in a good, happy position? I gotta think long time. So so let's talk a little more about the article. It goes on to when the Graham and Dot Award in ninety seven,

and that ultimately leads to you writing the book. Well. Also Dad's advice Dad when we were growing upset, don't find a problem unless you find a solution to that problem. I've I've heard similar advice given to young employees. Don't bring problems to your boss. Identify problems and bring a solution to it. Years ago. I didn't think it was fair for Dad to say that, because it's hard to

come up with solutions sometimes, but he was right. And so if you put out the loser's game, this is a tough place to play and be successful, then the question obviously is okay, what would you do? And the answer is, don't play the detailed transactions game. Play the long term policy game of getting in the right direction, and I don't get back to driving. I don't care how fast you drive. Going to Chicago just be sure

you're not headed towards Miami. So it's funny because the the article from five really presages the indexing argument to be made forty plus years later. Well back in the seventies, it was an accurate description of the situation for individuals if they're competing with professionals. Now it's an accurate description for professionals competing with professionals, And individuals should not be investing in mutual funds without being aware of how tough

it is to be a successful mutual fund manager. If you're an active investors. It's so hard. So that there's a theme that comes up in index Revolution, in um the retirement Crisis, and in Winning the Losers Game, as well as Extraordinary Tennis for ordinary tennis players, which is the importance of understanding your own skill set and limitations and not trying to do more than you're capable of doing. Its discussed that all true is the same thing in

driving an automobile on the highway. It's the same thing in virtually every dimension of our lives. Try to figure out who you are and what you want to accomplish, and focus on that. That remind me later I'm gonna tell you a funny driving story related to that exact thing. So we talk. Um. We have some quotes of yours that I really love and I want to throw your way,

um quote. The investment management business is built upon a simple and basic belief professional money managers can beat the market. That premise appears to be false. Explain that the market is priced by investors. Fifty years ago, those investors were individuals who bought and sold once every year or two. They honestly didn't know an awful lot and so they made a lot of errors. Today, the market is entirely

priced by professionals. They are very much on top of what's going on, and while they're never always dead right, they're so close to being right compared to anybody else. It's the old joke about the two guys and the bear, and one guy is putting on his sneakers, and the other guy says, God, you can't stop to put on your sneakers. The bear will catch you. No, he won't. Who catch you down on the bear? I just have

to outrun you. So so I find it fascinating that you identified this in you and a handful of the people Jack Bogel and maybe Burton Malkill, who else in v was thinking along the lines that, hey, it's nearly impossible to beat the market, and once you factor in turnover in taxes and costs on a consistent basis over time, it's all but impossible. How were so few people recognizing this way back when Bary let's be realistic investment management,

active investment management, competing with everybody else. It's great fun, It is fun, and it's too much requires concentrated attention. So people are really really working at that. How are they going to pay any attention to something that's completely

foreign to everything they've ever heard of. It just doesn't make sense, which is step back and look at the big picture, and say, is my efforts feudal or at my You know, how many times can you roll the stone up the hill and have it rolled back down on you before you realize, hey, maybe this is a waste, that there's one other thing that's really important. The data that was available to people was inaccurate. It was precise, but it was inaccurate. The reports on who is performing

compared to the market looked terribly encouraging. Looked like seventy or eight percent of the professional managers were beating the market. Yeah, but you've left out somebody. Who'd you leave out? The guys that got killed. We've been speaking with Charlie Ellis. He is formally on the board of directors of Vanguard and on the Yale Endowment Funds. We love your comments

and feedback. Be sure to write to us at m IB podcast us at Bloomberg dot net, check out my daily column on Bloomberg View dot com, or follow me on Twitter at rid Halts. I'm Barry rid Halts. You've been listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. Charlie. Thank you so much for for doing this. You know, when we first interviewed you, we've

now done a hundred and something plus interviews. You were you were in the early portion, and I think I was a little rough around the edges when we first started. I'd like to think that just through sheer repetition, I've gotten somewhat better. Your smooth as So trust me, if it sounds smooth, it's only because I have really good engineers who edit out many, but not all, of my mistakes. We sometimes leave them in um for fun um. There's

so many questions that we blew through. I want to come back to before we get to our standard questions, and let's start with a quote that I love of and this is in um the book Index Revolution in ninety seven the director of research at Chase Manhattan Bank which is now Chase JP Morrigan. But this is obviously

thirty acquisitions ago quote. The proliferation of index funds would lead to massively inefficient markets, and a stocks price would become more a function of money's flowing into index funds than reflection or its investment merits. The entire capital allocation process of the securities market would be distorted, and only companies represented in indexes would be able to read raise any equity capital capital True or false? What are your thoughts on that? Well, first of all, it is false,

But secondly, nobody's saying that today. Occasionally people say, oh, what's going to happen? When aren't we getting rid of the the capital allocation function with all this money flowing index But there that's hyperbole and it's future stuff. If you had everybody indexing, wouldn't that mean that we've got a real problem? Yes, of course it would. And when everybody stops smoking, please let me know, because that would

be a really important reality. A lot less people are smoking than used to, and a lot more people are in at the United States worldwide, more people are smoking now than ever. It's very very unlikely that we will get so much indexing going on that smart people won't be smart enough to figure out that they should now think about doing a little bit of active investing. So

what do we no of percent of assets? But the game is in the trading markets and in the trading markets because index funds are very low turnover of total volumes or less or less, and it's not aggressive. It's kind of go with the flow activity most of the time. It's highly skilled in the transactions, very skilled, but actually it's just kind of going with the normal flow. So the impact on pricing is to minimus. So index investing

doesn't affect prices very much, certainly doesn't. So, and you talk to the people who know the most about it because they're trading for index funds, they've figured out how to handle almost every one of the questions that's people have raised and handle them without any trouble. Some of the questions are really interesting still and they still have some minor difficulty but in the total picture, it's just

no problem at all. So if we were to look at thet of investing that currently flows into as of the assets, if that were ever to become fifty, would that create opportunities for the stock pickers? Would there be more inefficiencies at that point? Not in those levels. If you get to nine, maybe, But look at what you have to do. You've got a million people are active involved in active investing. How are many of those will have to retire from the field and say I'm gonna quit.

I'm going to go back and be a lawyer instead of being an investor. I'm going to go into a normal business instead of investment management. I don't want to do this stuff anymore. It's going to be a long long time before what do you have to do? You have to cut their pay by that wouldn't be enough to cause most people to quit. You really got a major change on your hands before you're going to see

anything like that. It won't happen in my lifetime. I doubt it will happen my son's lifetime, and I doubt doubt doubt that will happen in my granddaughter's lifetime. So you think that This is going to go on continuously because of human beings being human beings, and there's no other way to know, other way to deal with that. Let's let's talk about some of the issues on the

retirement side. UM Richard Taylor had written a book called Nudge where he talks about a lot of things that now require affirmative steps by the employee should be replaced, not opt in, but opt out. So, in other words, you join a firm, you're automatically enrolled in the four oh one K and you're automatically enrolled and increases as your salary goes up unless you opt out of that. What do you think of that? I think it's a

terrific idea for two different reasons. There's a strong political view social view that we should not have government setting the rules or telling us what to do. That'd be better. This does not tell you what to do, right, You have a choice, and you have a choice at all times, and you would have the choice to say Nope, that's not for me, Nope, that's not for me. No, that's not for me. It's called opt out. You say I don't want to be in the plan. Okay, if you'd

make that as your choice. Fine and say no, I want to be in the plan, but I don't want to match the match. I don't want free money by putting up my four percent of match the employers four percent. If you really don't want to do it, that's your freedom of choice. If you well, I do want to do the four percent match, but I don't want to increase the savings rate as I get raises from time to time. Okay, you can do that. I don't want

to be in an target date fund fun. If you don't want to do that, you could do something else, but we make it available to you. So, in other words, the choice architecture, which is the phrase of this is the default setting is significant. And I know they've done experiments in different countries with organ donation. Hey, you don't have to be an organ donor, but the default setting

on the driver's licenses you are an organ donor. And it goes from an eight or ten percent participation rate to rate and there's no shortage of organs, and and all it is is you don't have to do it. You just have to check a box that says you're

opting out. That's it, and you get a huge increase in the percentage of workers who become part of the plan, huge increase in the percentage of people who take the match, huge increase in the percentage of people who escalate over time their savings rate, huge increase in the number of people get into an automatic the investment program. Those are really positive moves. Opt out should be you're automatically enrolled, you automatically do the match, you automatically do the increase.

And if you don't set a fund, if you don't choose funds, you automatically go into a target date fund. That's the default setting. If you want to change it, you're free to change it. But at least let's start you out on on something as opposed to nothing. So if you if you don't respond there's something happening as opposed to nothing, you lose no freedom of choice and you have the benefit if you really don't know what

to do, go with the flow. So I got a lot of pushback the other day I did a column about the i r A minimums. I'm sorry the ira A ceilings. They're at dollars that seems like an awfully small number of of If people don't have a four one K and they want to max out their tax deferred um retirement savings from when the Aristus laws were passed. Just adjusting for inflation, you should be closer to seventy And unfortunately the way inflation has proven itself to exist.

The things we want, the technology, the phones, the computers, they're going down in price. But the things we need, housing and healthcare and and that sort of stuff, they're all going up in price. So really that's seventy dred If anything, it should be closer to ten thousand. Do you see the ceiling for IRA contributions as an issue

for for a lot of middle class families? All right? Now, the pushback I got was on and if you're raising the IRA ceiling, you have to raise the four oh one k, And people said, well, it's already eighteen thousand, and imagine two people. I think you have to raise them both. But so many people failed to meet the ceiling on the four one k, it's probably not as present.

It would be great to raise the ceiling. It would be really really great to help people understand and how good that could be for them and why they should take action and take advantage of the higher ceiling. I don't I don't doubt that at all. Let's talk about the savings rate um three percent. Three percent is too low of a savings rate to replace se of employment income during retirement. How do we get people to save

more than three percent of their income? Help people understand what the impact is when they are retired, of how badly hurt they will be if they don't save more. And we ought to be teaching that day after day after day. Teach it in high school, Teach it when people first joined a retirement plan, Teach it in the public domain all the time in high school. Do we have any sort of financial literacy courses offered at the high school level. Some of the problem we have, all

of us have, is we're all too busy. We've got too many things in our mind. So we Yeah, you know, I should lose ten pounds, but you know, I just don't want to do it today. Yeah I know I should do more exercise, but I just don't want to get started today. Yeah I know. And so many things that are crowd in on. You gotta get a job, you gotta pay your taxes, you gotta do this, you gotta do that. It's hard for people set aside the time to say, now, I'm going to learn enough about investing.

And the shame is that investing is basically the stuff that's really important, is really pretty simple, and if people didn't get confused with only smart people know that sort of stuff, or the language always bothers me. I don't know what a pe ratio is, and they talk about earnings yield and I don't know what that is either, And pretty soon people say, ah, hell, I'll come back to it later, but I can't do it today. If they knew what the problem really is and boil it

down to the simplest kinds of decisions. This is how much money you need to have when you're retired, Okay, to have that money to spend every year. This is how much you have to have in your nest egg Okay to get there. You have to save this kind of money every year and invested in this kind of sensible way. If we could teach people those four or five things, they'd be all set. You should write a

book about that. Did oh wait, oh wait, you already did. So. There's a there's a thesis out there that says that financial literacy education is great, but people rapidly forget about it. You could teach people stuff and it stays with them for three months, for six months, but not for a lifetime. How do we get past the sort of short term is um of of people being so easily distracted by by life as you described. One that you obviously identified

earlier is opt out versus opt in. If every retirement plan you automatically did the sensible thing, unless you said, no, I'm different from most other people, so I've got a real reason for wanting to do something different on this item or that item or that item. Fine, you could have the freedom to make a I'm different decision. Otherwise you can have the super freedom to say somebody else has thought about this pretty damn well. They've done a

good job of figuring out what most people need. I'm going to take what's the blue plate special and and the problem is that people when folks don't do that, what you're left with thirty forty years hands. The fear is that's going to fall on the taxpayer shoulders, because it's just gonna really put stress on things like Medicare, Medicaid, and Social Security. It's all going to end up back

on the taxpayers. Last wanna be really alarmist. Think how badly this country would feel if there were a large number of people in their seventies, eighties, and nineties who are highly focused on the fact that they really were hurting financially, and they turned to you and other people who are experts and said, you did us real harm. It's all your fault, and we're really angry, and we're going to express our views at the polling place and we're gonna do whatever we can because we got hurt.

And you knew we were going to get hurt. You knew it all along. Why did you do that to us? They won't say, cause you know, I made him stake years ago. I should have done something. I've created this problem for myself. That's not gonna happen. Didn't that just happen already, didn't we see the first round? That's so let's let's without talking about politics, because nobody cares about my views on politics. How much of what took place in the polls and the angst and other factors like that,

the populist uprising. Is that a one off event in or is that a warning shot? Hey, this is what the future is gonna look like if we don't develop some economic security for for the population at large. It's a first round only really could get worse pretty damn fast. There's going to be more more of this sort of populist uprising um in the future. If we don't as a nation take care of our problems, we will have those problems faster and get worse and worse, and they

can show up in politics very rapidly. So if you're gonna be rational and reasonable about this, I don't know what I can I can say to you about that. Um. There's a data point in the book that I found to be astonishing and I wanted to get to it before UM we move on to some of our our standard questions. If you start saving at five and retire at seventy versus starting to save at forty five and retire at sixty two, you reduce the required savings rate by a factor of ten. Is that is that right?

That's an astonishing number. It is an astonishing number, and it's a shame we don't all know it. It really helps to have started early and have the accumulated power. Einstein said that he thought the most powerful thing he knew of was compound interest. Compound rates of return. If you're in it for the long term, and we all are, whether we like it or not, in it for the long term. If you're in it for the long term, that's a wonderful thing to have going for you. All

you need is time t I m e. Time. Most of those gains come in the last ten years. That's that's the biggest. So if you're starting at twenty five, the bulk of your gains are coming um in the last let's let's call it last fifth of of your investment horizon. You started forty five and you go to sixty two, you're not giving yourself enough time for compounding to work. Correct. So let's see what else. There's one or two other things. We've covered some stuff. You know

what I didn't talk to you about. So you were working in the midst of the bear market of sixty six to eighty two when you you talked about, Hey, nobody really wants to work in finance in the thirties and there wasn't a lot of money in the fifties. What was it like from nineteen sixty two six to two when we had ten twelve percent inflation rate and stocks went nowhere for sixteen years. Who, Yeah, stocks didn't

go nowhere. Stocks went down. The drop in the value of the down Jones average, just to take a measure, the drop in the seventies was greater than the drop in the from nine to the bottom of the thirties. So what do we inflation adjusted the real real return, so you had it was a nine loss once you factored in inflation. It was held on wheels. So what did you do during that period of time? How do

you how do you deal with institutions? How do you deal with individuals when there's no not a lot of upside inequities and whatever gains you have in bonds are going to be offset by inflation. Well, it was worse in bonds than it wasn't stocks, because you do a lot of damage to a bond portfolio if you take

infuriates from percent to two percent. So there was terrible everywhere all the way around from two percent right when you're you're from If the Federal Reserve says interest rates want to be high to break inflation, country a lot of good doing that you really really ash the markets from inflation or rate of return on a treasury bond all the way down to two. That's a long sweep of real pain and anguish for people on the fixed income.

We we just finished a thirty year or maybe even a thirty five year bull market in bonds, when when you're looking at portfolio is going forward? What should people be thinking about now? I know you don't have a lot of bonds, but the average institution, the average investor, what do you think about when you see rates at two two and a half percent going who knows where? How do you put together um a plan over for the next couple of decades starting from such low rates

of interest. First of all, we all ought to know it's not easy now because prices of bonds and prices of stocks are high, and the Federal Reserve has done all of us as a nation real good by getting the interest rates down enough so that the employment has gone up enough so that we're really starting to see the economy come back to its full capabilities and potential. It has been terribly painful for the people who depend on interest income because they've seen interest income go from

down to three. That hurts, So be realistic about that. But if you're looking at what should you do as an investor today? First of all, think long term. Secondly, take a look at the total picture. Don't look just at your stock and bond portfolio. Look at your home, social security and other and your income as an earning person so called intellectual property. Those are all really important assets.

What are they worth? And then try with that total portfolio to make a sensible decision as to what would be right for you as an individual, knowing we're all different. And the one question I know I didn't get to before that I that I really wanted to was about benchmarking. So in the index revolution you allude to this, um what was benchmarking like in the early days? How do you benchmark and index when there really isn't a frame

of reference? What what was done in the seventies when it came to that, well, in the fifties and sixties, what would have been done as you look at the Dow Jones average and say that's probably about it. Where you look at what you hoped to be able to earn your return assumption and think that was about it. That the data was not available on how well pension funds were performing compared to other pension funds, how well insurance companies were managing compared to banks compared to investment

council firms. And when that data came out through a firm called A. G. Becker and Mary Lynch in those days, the performance measurement, all of a sudden, the data, My god, Barrett, look at the data. This is really important. And people started saying, let's go find managers and do a really good job for us. And that's where active investment management

started to take off. Because if you were an active investment manager and you had access to really good research, which was just being created in those days, and you're willing to act fairly quickly instead of waiting for the monthly investment committee meeting where you're trying to if you were willing, if you're willing to be assertive and do your very best, you could really do a lot better than the market. Those were glorious days for active investing.

But they're gone. That's that. That that's history. It's amazing to think that that the Dow Jones, which is not just Lodge captives, are the biggest companies amongst the biggest companies in the world. It just seems like such an odd um benchmark for so many, so many you've probably left. We use slide rules in those days have calculators. When we wanted to do research, we went to the New

York Stock Exchange. They had a small set aside library of all the filings with the SEC and page after page after pay age you could do trying to figure out what's going on in this company or that company. You go out and meet with management and they would talk with you for hours trying to help you understand their company, which a very different world in the world we live in today. So that's that's quite fascinating. And um, I've seen a lot of those changes, um firsthand, but

the fifties and sixties are before my time. It sounds it sounds like it was pretty interesting and amazing place to work. Let's go to my standard questions. These are the questions that I ask all of my guests, and and some of these are going to require a little recall on your part. Let's let's jump right into these. So the quite thing that I find fascinating about you is you graduate Yale with a major in art history.

Did you ever imagine art history would somehow lead to finance and and how did that art history background, Because you're obviously an accomplished successful part in the world of finance. How did the art history training help you within the field? Not very much, honestly, But it helped me in the sense of when I had I traveled a great deal in the work I did as a consultant on investment management, so I was in London a lot and other major cities. So if I had a meeting canceled, I knew what

to do. I got unto the art museum in that particular city and have plenty of time to look at the beautiful pictures and stuff like that. So it was life enhancing. Yeah, it was great fun. Uh. It also taught me a little bit about how to look more carefully, because the difference between a really great painting and a pretty good painting is not obvious. It's in some of the details, in the specifics, and the difference between the

forgery and an original is of course really important. And being able to look carefully was helpful, but I wouldn't give too much. It was more in the recreation. Why do I love to put When I was growing up, I love to play golf, and then I played tennis. Why I play tennis because my wife likes to play tennis? Easy so I wouldn't try to draw too much out of So you're an art history major and then you got into investment management that there's no real linkage at all.

So so okay, so let's put art history aside. Who were some of your early mentors, who who guided your career when you moved into finance. Well, I was very lucky to work for a guy who was a brilliant person. Uh. And he happened to be in an investment management and he happened to be working on investment problems. So I was there to learn from him what I could learn. Honestly, it didn't make very much difference. If he'd been in real estate, that would have been fine. If you'd been

in retailing, that would have been fine. This is a guy that could teach me a lot. So you want to share a name with us? Name was well, there two guys actually, j Richards and Dilworth. Dick Dilworth was a factlessly talented guy. Uh. Many people confuse him with the once time mayor of Philadelphia, completely different French guy. But Dick Dilworth was a as good an illustration of the finest in America as you would find anywhere. Really, and the other guy was a phone named Robert Strange,

as in Robert Strange Mcnamerica. They were cousins, and Bob Strange was also brilliant. Then he was my direct supervisor, and a wonderful experience to work with two really brainy guys who were very very well connected because people thought the world of them as individuals. So so let's talk a little bit about the investors that who influenced your approach to investing. Who are the thinkers and investors that actually affected how you looked the world of of putting

capital at risk. Well, there a whole bunch of them, but I'll tell you the one that I think is obviously the best. Uh Sandy Goddessman, who for many years was on the board at Berkshire Hathaway as Chairman of the board. And Sandy ran a firm called First Manhattan, Fine New York firm, and he was a client of mine when I was at Greenwich Associates, and one year I recommended they not stay in the institutional brokerage business

and concentrated on the investment management business. The next year I went to see him and he said, you're right, we shouldn't be in the institutional brokerage business. We're just going to do investment management. I said, well, uh, sorry to hear that one sense, but I'm also glad you took the message. He said, well, that completes our business conversation. Now, what would you like to talk about? And lucky, lucky lucky me. I said, Sandy, you're one of the best

investment managers in this city. I'd love to have you tell me how you think about investing yourself. He said, that's easy. I said, thank you tell me all. He said, I'm invested in Berkshire Hathaway because I think Warren Buffett has figured out how to do investing in a way that is different from anybody else can do. I think he's brilliant and very very disciplined. He's a long term investor. Then, so that's my major investment. And he spent about half

an hour teaching me to understand Berkshire Hathway. What what year was this? This has been in the early nineteen seventies. I think it was so Berkshire Hathaway is not what it is today. It was barely on anybody's radar. And did you follow his advice? I certainly did. So you're you're an investor with with Berkshire since the seventies, and

I've learned a lot by reading Warren Buffett's reports. I've learned a lot from Warren himself, and I have had an unbelievably positive experience I can imagine, to say the least. So Um, it's ironic that you're talking about index investing when in the early seventies, when the opportunity existed, you found your way to Berkshire Hathaway. Those opportunities don't exist anymore, do they. Uh, there may exist, but they'd be hard

for me to find. Well, I think they'd be hard for And I think when when Warren Buffett says that for his wife and her retirement right he's going to use primarily index funds makes a lot of sense. When he says for most individuals, that's what they should do, makes a lot of sense. And then when David Swinson, who is the chief investment officer for Yale has done a wonderful job of investing as an active client in investing,

says most everybody should be using index funds. I'm smart enough to realize that there are some guys are really really good at this and they say, that's what we ought to do. Probably ought to pay attention. So let's let's talk about Swenson for a minute. He created what everyone now calls the Yale model. It spawns a million imitators. None of them have been able to do what he's capable of doing, and Yale consistently outperforms most of the

other large endowments Harvard, m I T, Stanford, etcetera. Why has he been so singularly successful at the Yale model that he invented, and halp some other people have been unable to find success just doing what he does. It's a little too strong a statement. There's some other people who've done a very good job. But David is really unique. Now. First of all, he's brilliant, really smart. Secondly, he's really well educated. Did his economics PhD at Yale and was

the top of the deck. Jim Tobin was his dissertation advisor, and Tim thought so highly of David that they had a great personal father to son kind of relationship. David's got Midwest values, so he's all about integrity and doing the right thing for the right reasons, deep deep rooted, and he's devoted to the idea of doing a great job for Yale because thousands of people benefit from that.

All the kids are on scholarship get better scholarships because David Swinson has done such a great job for that university. All the faculty members who are teaching courses have more financial support for what they're trying to do. The head of the university has more financial resources to build back the facilities of the university. It's one after another after everybody's benefiting. And why is he so darned good at it? Well,

yes he's brilliant. Yes he's well educated, and he's been doing it for a long time, and he's very very disciplined. But watch the part that's really important. He's completely objective and rational, and he's very good with people, and he's probably the best client anybody ever had. Tough, really tough as a client, but so honest, so straight and so helpful that everybody wants to have David Swinson as a client.

So he gets pick and shoes from all the very best, and he's very very careful at his selectivity largely on integrity of the discipline of your investing and the integrity of the people who are working in the organization. When you get checked out by Swenson and his team, you get checked out more carefully than the CIA would check you out if you were going to be Secretary of State for the United States. It's an unbelievable process trying

to be sure they don't make any mistakes. Last part, David Swinson and his team have a sc little button network that goes throughout the investment management world. There's no one who has more people who say, if I could ever be helpful to David Swinson just a little bit sometime once, I would love to. So he gets all kinds of people feeding him ideas, insights, possibilities, things might be useful because he's such a good user and one

of the best users. Ways he uses it is not just for the Yale Endowment, which gets undivided first attention, but then he also has been very very helpful in teaching people how to do that kind of investing. And if you look at the top fifty universities, about a third of them have got a David Swinson educated, developed and certified individual doing the investment management at that university. He's done a lot of people a lot of good

for a long time. So that raises the the other university not too far in in the next state, in Massachusetts. Why has the Harvard Endowment stumbled the way it has. There's been all sorts of crazy turnover. If you remember about ten or fifteen years ago, there was some sort of um general offense at how much the managers of the endowment were making, and they were putting up really good numbers. A lot of that team left. Now there's been two or three c I O s since then.

Let's compare and contrast. What does Harvard need to do to and the Harvard Endowment needs to do to look more like or at least be as successful as the Yale Endowment. Well, if you go back to the really great days of the Harvard Endowment, Jack Meyer, who was your Harvard manager, David Swinson, the Yale manager. They became very close friends because they realized they were both motivated

by the same values. Do the right thing for the client, do it with intellectual rigor, do it with objectivity or old times, and do it for the long term. Once you get those things down, pat as this is the way we're gonna do it, it leads you in a particular direction. I think that's been really important. The second thing is the governance. The oversight of the Yale Endowment has been very, very consistent and contributing in a very

nice way. One reason it's been so consistent is that David Swenson has been carefully picking and choosing the people that ought to be candidates, and the candidates have been then selected by the president University and David Swenson jointly, so that they've had a very nice capability in governance. And that's been a stability that's been enormously helpful. That's the key artist stability. You haven't had that in Cambridge. That's been missing from from the Harvard endownmentt UM. So

it is what it is. I like the joke that, uh, it's a hedge fund with a unit small university attached to it. Is is how some people have described Harvard UM. I don't know if that's true's not, but but it certainly is. It certainly interesting. Let's let's get back to my list of standard questions. So you mentioned Swanson, you mentioned Buffett, any other investors or thinkers that you want to reference in the people who have influenced your approach

to investments. Well, I've been very privileged because I've been all over the world working with a lot of different people. And if you started going through the list, you know you'd have to pick up Ncox Song, who for many years was chief investor for the g I C in Singapore, a very large sovereign wealth fund. You go to London and Peter Storm with Darling would be another top of the deck. He was the guy that was in charge of Warburg Investment Management in its glorious and great days

across the United States. All kinds of different people have been terrific. Jim Rothenberg at Capital Group would have been one of those individuals. Now David Testa Tiro Price would be another. Uh. The large number of really really gifted people. All right, So let's shift subjects a little bit. People always ask about books. We we talked about some of your books as well as UM as well as Extraordinary Tennis. What other sorts of books have you enjoyed or would

you recommend? What sort of finance related fiction, nonfiction? What what books do you fill your line your bookshelves at home. Well, I'd love to read biography and history. I have to be responsible for reading investment books, and I like to be responsible for reading business books. But what I really like doing is biography and history because I can learn

forever lessons by doing that. Give us a few examples of so start with an author like Ron chernow, but most people think he did Hamilton's, but he got some wonderful, wonderful books on business organizations that are bar none. His book on Morgan, his book on John D. Rockefeller, terrific books and full of insight and understanding. It's funny you mentioned those two the part, and I had you sign uh your book to Mike, who's the head of my

research and my firm. He's read both of those. He's read the Morrigan and he's read the Rockefell bio, and he said they're both astonishing. They're really terrific, just unbelievably researched and deep, and these guys lead amazing, amazing lives. And we all ought to read Robert Carroll's wonderful books about Lyndon Johnson because they are insightful in the details as well as conceptually useful, fabulous lessons all the time.

But this is why it really really is how many books now are in that Johnson sequence for so far? All right? Because I remember Carol from The Power Broker about Robert Moses. Terrific book, thick a thousand pages, still a terrific book, worth absolutely worth reading. It's five really great books in one package. It's a wonderful book. Um, so you mentioned, uh investment and finance books. What what

stands out as some of your favorites. Oh, Arthur Stone doings wonderful to volume corporate finance, mostly for the footnotes which are about half of every page. Unbelievably rich body of insight and understanding as things went along through the late eighteen hundreds through the nineteen hundreds. It was just a terrific source of learning. Ben Graham and David Dodds Graham and Dott is a terrific book, particularly the four edition, which just is a dream come true. Uh. Jason's Wags

books are all really worth reading. Uh. Jonathan Clements writes a very nice, continuous book that I think it's really worth anybody paying attention. Andy Tobias wrote a wonderful book

on individual investing. Uh. We're very lucky people put years and years and years into learning and then a couple of years into condensing into a relatively short package, and you can buy the damn thing in your own local store, or you can buy it over the internet for less than fifty bucks, and there's all that knowledge and carry with you wherever you want to go. I mean, books

are an unbelievable bargain. It's funny, he mentions Wage and Graham and Dodd we were just in the office a day or two ago talking about this Wage annotated version of The Intelligent Investor, and the consensus was this is the version you have to get because he describes each chapter. So there's the chapter, and then there's Jason's Wagge's detailed explanation and series of examples of why each chapter is so insightful. And if you asked Ben Graham, he would say,

get this wag version because of the annotation, high praise. Indeed. So so let's talk we we've we've referenced or or just hinted about things that have changed since you've joined the industry. What do you think is what do you think is the most significant change for the positive and what do you think is the most significant change for the negative over the past couple of decades. One way of saying that most positive is that things have gotten

better and better and better. The markets have been going up, so that's got to be a big, big positive. How about structurally, what do you think structurally has been the positive change when when you look at that's that's obvious, and that's the easy access to the expertise of large numbers of brilliantly talented people working hard is held to

figure out what prices ought to be. Called an index fund, you get all the best people working on their tails off every single day, every single night for nearly nothing. So that brings us full circle back back to why most people should be buying indexes. Let's talk about the shifts going forward. So we've seen this trend develop, especially since the last financial crisis where Vanguard went from under a trillion they're now coming up on for trill in.

What do you think is the next shifts or is it just a continuation of what we've seen algorithm in software and the so called robo advisors low cost indexing. Is it just going to extrapolate forward or is something else out out there that is going to change investing in the future. Well, the change force you just picked up on are going to continue. So called robo advisor very very helpful for the lower wealth individual part of the market. Uh. Indexing being more and more accepted, going

to be continued. We're going to take the cost out of investing so that the returns that were available will go mostly to the owners of the capital, so that people have more money in their retirement years or more money to spend in the meantime. Those would be positive. The changes that we see now are going to continue, but the changes we don't yet know because we haven't

seen them. Artificial intelligence being an obvious illustration of that, are gonna compiling in top of it's going to get to be a finer and finer, faster and faster market, harder and harder to keep up with little and beat that can be converted to your benefit if you just say that's the way it is. So I'm gonna go with the flow, and I'm going to use indexing, and that's why people are to join the index revolution. And um, so here's a question I didn't get to ask you

that that I've wanted to. This came from an emailer. What do you do to relax? What do you do for enjoyment outside of the office. Well, first of all, I'm married, the most wonderful woman I've met, so I really have a nice time with her, and that doesn't take long hours at just a few minutes with her is always a treat. Now, the second thing is I happen to love the work I do. I don't do anything I don't like. I often say to my friends,

I quit working at thirty. I've not quite eighty, but I have not done anything that I didn't feel like doing, want to do and enjoy doing. So it's been a marvelous, privileged experience. And I know I'm lucky, but I play to stay there if I possitively can. Uh. I think learning is always a treat. And I don't know as much as I should know about music, and so listening to music is a wonderful opportunity to learn something that's

new to me. And then books that come out year after year after year, these wonderful books that are available and a chance to learn that. So my last two questions, these are are my favorite two that we ask of all our guests. Um, if a millennial or a recent college grad would come to you and said I'm interested in a career in finance, what sort of advice would you give them? Finance is a pretty broad field. Be

sure that you've gone to business school. I think seriously about doing more than business schools, So you might do a joint law school business school combination, or do business school and then study economics for an advanced degree afterwards. But be sure you understand knowledge is a very important resource.

The second thing is look to be with people you admire greatly for their basic values, how they live year in year out, in an organization that really wants to teach and train young people how to be the best they could be. Because if you've got talent, you want to maximize that talent. Key to that is fast learning curve, particularly in the early years. Third thing is do not do anything because it pays well. Choose what you want

to do because you love it. If you're doing what you love doing, you get better and better and better at it. As you get better and better and better, you'll be paid well. Anybody in finance who's really good is going to be paid so well that their biggest financial problem over their lifetime. They may be poor when they get started, but over their lifetime, their biggest financial problem is how to protect their children from too much money when they die. That that is a very good

advice across the board. And it's interesting that people like Marren Buffett have learned the lesson and they says to their kids, Hey, I made this money, now you go make your money. Don't don't count on my health in order to disincentivize you from going out. And Buffett's going farther that he said, I give my children enough so they can choose to do what they really want to do. And then but not so much that they don't have to choose something. Not so much that makes sense, So

they're going to have to find a career. Just he's giving them enough of a head start so it allows them a little selected open the doors so you can be your first choice and go for what you want to do for a great life. And you're a tough person to ask this question of because most people have to play with the answer. But I'm afraid you've answered

this question in the body of your career. But I'm gonna ask in anyway, and it's what do you know about investing today that you wish you knew forty years ago when you began. Wow, there's so many different things that I didn't know that I wish i'd known, But the main item for me is how sensible it is after everything comes in to change the nature of investment management.

All those people, all those tools, all that information, simplify your life, concentrate on the really important questions and index your operations. That you knew that back in seventy five. That's why I said, it's a tough question when I first came in. I came in in the early sixties. Oh really, so you wish you but really for someone over the course of your career. So usually when I when I ask that question to people, the answer that comes up is, well, here's what I know today that

I wish I knew way early in my career. But I kind of feel like you've figured a lot of this out pretty early in your career. That's very generous on your part. I think it's more lucky than brilliant figuring it out. But do what you really really want to do is something that I was getting close to understanding then now I know it's absolutely and and it seems like you've managed to do that over over the

whole course of your career. I promised to get you out in time for your lunch date and so we still have a buffers to make sure you're gonna do that. I I have to thank you for Charlie, for being so generous, uh with your time. We have been speaking with Charlie Ellis of the formerly of the Yale Endowment, Greenwich Associates, the Vanguard Board of Directors, Harvard Faculty. The list goes on and on. His latest book is Index Revolution.

And for those of you who are thinking about putting money in the stock market, this is as good as any place uh to start. I would be remiss if I did not thank Taylor Riggs, my booker, Charlie Vollmer, our producer, Michael bat Nick, our director of research. And I can't see who's still in the booth. Oh you're here, okay, because I heard a male voice five minutes ago at Medina who is our recording engineer. We love your comments and feedback. Be sure to write to us at m

IB podcast at Bloomberg dot net. I'm Barry rit Halts. You've been listening to Masters in Business on Bloomberg Radio.