Jack Bogle Remembered on Masters in Business (Podcast)

past forty five years. It's out in Malvern, Pennsylvania. I picked up my engineer, Charlie volmer Um locally and we drove. Took us about two hours before traffic. We left about five in the morning to get there, and the place is just quite amazing. We got a tour of it. We saw their trading room. It was it was really astonishing. And then you finally get to meet the man and the legend himself. Um. He comes into the conference room.

He's kind of slight, he's a little hunched over. He moved slowly, and I'm thinking, gee, maybe, uh, this isn't gonna work out. And then he sits down and puts on his headphones. He has a headphone with a mic that comes around. He wears it as a set and as soon as he started speaking, it was clear this guy as sharp as attack, full of vim and vigor and energy, and still has something to teach us in,

something to prove. It was a whirlwind ninety minutes. Essentially my job was to just give him a little nudge and get out of the way. Uh. And it was quite an experience. It's something that I will always be thrilled that I got to do. Uh. He was in fine form and great voice. As you'll hear. Everything he covered was really just classic Vogel. Uh. Not only was it a privilege, but it was also an amazing conversation, mostly because of Jack. I had very little to do

with it. So, with no further ado, my Master's in Business Conversation with Vanguard founder Jack Bogel via is Masters in Business with Barry Ridholts on Bloomberg Radio. I know I say this every week that I have a special guest, but this week I have a super special guest, the one the only Jack Bogel, founder and Chairman emeritus of the Vanguard Group, essentially the creator of the world's first index mutual fund for individuals. In I could read your

CV which will essentially take up the entire show. There's so much stuff to to talk about with you. You are a legend in the industry and maybe the person who has had the single biggest impact on investing of anyone. But let's just start from that beginning. Undergrad you with thesis. You're in college in Princeton in nineteen fifty nineteen fifty one, and you're thinking about why do actively managed funds, why

do so many of them underperform the market? How did that come about for a college Well, came about by a great accident, and that is I was majoring in economics. I was looking for a subject for my senior thesis,

just a requirement still at Princeton, sixtensive, extensive document. Mine turned out to be maybe a hundred and thirty five forty pages, and Uh, I didn't know what to write about, but I wanted to write about something that no one had never written about before, and they're In December nineteen forty nine, I was reading Fortune magazine, which I did as part of my economics background, just voluntarily, and there was an article called Big Money in Boston, and it

was about the mutual fund industry. Described this tiny industry. Uh, maybe two and a half billion dollars for the industry as tiny but contentious, and I thought, well, you know, I'm kind of tiny and I'm kind of contentious, so I'll write about it, and I wrote the thesis enabled me to graduate with high honors from Princeton. Very pretty good job. Not a great thesis, but not bad for somebody a year out of his teens. Let me let me push back at you and say, that was an

incredibly insightful thesis. The insight that you derived at a very young ages the cost of all this active management. They were unable to overcome that bogey even to today, what should really be so obvious to everybody. Lots of folks still haven't seemed to figure that out. So what makes me stop and pausing and ask you this question, how did you ever come to that conclusion at such a young age without the universe of information we have

available to us today. Will to begin with the thesis title was the economic role of the investment company, And the overall of the overriding and focus of that thesis was mutual funds are there to serve investors. Put the investors first. And I talked about reducing sales loads, reducing management fees, focusing on investing and non marketing, things of that nature. And that's what the industry in my in my formula and would have to do to reach its

great potential. And I did not, actually, to be very clear on this, I did not assemble any data. But I looked at about fifteen leading mutual funds and looked at their records, and without adding and dividing and getting averages, it was very clear that very few of them, if any at that time, could could outperform the S and P five undered indecks. So it was basically anecdotal. Although this industry in those days was very much a commodity

in a way kind of commodity. The major funds of those days we're just basic basically buying long lists of blue chip stocks. You could call him Dow Jones Industrial average funds, or later because the SMP wasn't very enough well known, then you could call him standard and Poor's kind of funds. They were down the middle. They had fluctuations, very similar volatility, very similar to the index. So so even back in the late forties early fifties, mutual funds

were closet indexers. Sure, absolutely Huh, that's quite that's quite fascinating. So let's fast forward a little bit. So now you're working as chairman of Wellington Management Company, and long story short, you said the most unwise decision of your career. You do a merger doesn't work out and they end up um breaking it down from from uh lieutenant to private so to speak, and not less than private, less than private.

And you wanted to run a fund and they said, well, you know, because of this M and A, we don't want you running an active fund. If you want to put together how did how did the index come out of that? That job changed? Okay, well let me say my first job and I was thirty five years old and Mr Morgan, the founder of Walter L. Morgan, the founder of Wellington, called me into his office. Wellington was

in trouble. Wellingcoln Fund was in trouble, its performance was slipping, and Wellington Management Company was in trouble because we were basically a one product if you will company up conservative balance fund. We were, for the want of a better metaphor, the bagel of the mutual fund industry, the the hard, not sweet, um nutritious safe choice and in the biggest balance fund in the industry, and people stopped buying bagels and started buying, if you will, donuts. We came into

the go go era. So all these fancy growth funds, high powered buying stocks that had no investment, no intrinsic investment meri at all. This is the mid to late sixties, the nifty fifty and that sort of the go go era, and the go goes came and the go goes win.

But if you're in the bagel business and nobody is buying bagels, and the balanced fund share of industry sales actually dropped to one percent, and so I had to do something, and Mr Morgan told me to do it, and I talked to a couple of firms about merging, and then I came across this firm in Boston and it had a fund called I Vest Fund, one of the go go funds of the day. They had some apparently bright young managers that I had kind of common

cause with, and they had a pension business. So we got the new managers that would save welling and fund. We got the go go fund that we needed to stay in business, and we got into a new business that we thought we could be very successful. It was from words of one syllable, two syllables, brilliant. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Jack Bogel. He is the founder of Vanguard Group and essentially the inventor of the

index funds. Jack, we were speaking earlier about how a crisis at Wellington, which was the predecessor you worked at to the Vanguard Group, actually led to the creation of the Vanguard Group. Tell us how that came about. Okay, well, let's start with the fact that in doing this merger, which I was eager to do, I gave up too many votes in the company and so when everything fell apart,

the market went down, uh, and so on. Right at the as the market was going down in seventy four, it would be to climb the happy partners um fragmented and there were four of them, and there was one of me, and they had packed the board of directors. I was I was never very political, and they fired me. The guys that had caused this catastrophe, fired the one that was trying to avoid it, and so I was out of a job. So what could I do, I could go try and find work for another firm. I

had a young family living here. I didn't want to move. I was very angry about what happened, of course, but you know what is is, and so I decided my best chance was to talk to the directors of the Wellington Fund, this fund so badly heard the ash the diamond in our crown, and say, look, the management company has fired me, but you, you're a slightly different group, can keep me. And we'll tell the management company what

to do. We will be in charge of the administration of the fund, ending necessary to make it work, and we'll be in charge of appraising the advisor and taking whatever steps we want. Will be independent of the advisor. And uh I wanted to take over distribution to but the directors wouldn't go along with that. So we became a little administrative company. And and uh I wanted to glamorous name. So I found the name Vanguard. When I

first learned about that. We go from Wellington, the the the land battles of the Napoleonic Wars, the Duke of Wellington, the naval battles of the Napoleonic War, and there's Lord Nelson at the Battle of the Nile, one of the most complete, the most complete naval victory in history to this day. Uh and uh, He writes to this dispatch that I see from the deck of HMS Vanguard his flagship, and that sounds like a great name for a for a company, perfect, perfect from Wellington Funds. How did you

actually form the Vanguard Group? Well, the idea was that the funds would create a new company that they owned, they would capitalize. Capitalization was very small. I'm gonna guess maybe two dollars. This is a very small company at

that point. Actually, the total assets of the funds were down and around one point five billion, So we appen lots of the fund and and Welling and Management Company had to take it because the directors of the funds were in charge of the contracts with Welling and So you really backed George your way back into the company after they had fired you as chairman. Well, yes, I

think that's a fair statement. But techno, from a tactical standpoint, I've been the chairman of the Welling and Fund all along gotch so I have the same old continuity that I had going back to nineteen just post merger, they this was a bactor. So how do you go from that to the Vanguard Group. Well, we put a name in the company because we had I think in those days maybe a dozen funds and we didn't want a

dozen separate companies to match. So we had to have a core central company and UH that would pool resources of all the funds and provide all the services. And we had allocation methods between the funds. And it was all good until we decided to take over distribution, which was our Let me, I'm a little bit ahead of my help. Let me, let me go back and say to the first thing. We were not allowed to go

into the business of investment management, that was theirs. We were not allowed to go into the business that was there as being willing, that was there. The active side you couldn't do and we couldn't. We couldn't go into management. We didn't distinguish between active and passive and those days not in those days, there weren't an index, right, So so if you couldn't go into management, how are you

able to set up the Vanguard five hundred wouldn't be patient. So, UM, we were not allowed to go into distribution because that was welling coins function too, So we had this little administrative company looking over. However, had the legal responsibility and board responsibility to look over the advisor and distributor. So we were in charge. And so my first time I knew a company that was an administrative company was not going to be anything for me. I mean, I like

the administration. I know how well it has to be done, shareholder record keeping and all that, but that's just not the kind of challenge I was looking for. And any company it's going to succeed, it's gonna have to control the kind of funds he wants to they want to run, the kind of distribution they want to have, who will buy the funds, who will sell them, things of that nature. So we have a company that's just in this little

administrative box, and I'm thinking, let's do something. So at the very first board meeting of the new company, after we got an organized, I say we got to start an index fund. And the directors say you're not allowed to get new investment management. And I say, this fund isn't managed, and believe it or not, they bought it. So in other words, you describe the index fund as just hey, it's the five largest companies in America. There's no manager, nobody's in charge. It's just it's an unmanaged

broad index. And they said, oh, go do that. They said, well, I won't say it was that easy, but that was the final decision. I get the sense from from what you've described right that they were kind of, let's let's let Jack go do that. He'll be out of our hair. It'll keep them busy and fine, won't cause anybody trouble. I think you're pretty much on the mark. This week on Masters in Business on Bloomberg Radio, I have an

extra special guest. His name is Jack Bogel. He is the founder of the Vanguard Group, the inventor of the index funds, and author of far too many books to mention. I've been speaking with Jack here in the headquarters of of Vanguard, and just outside the conference room we were sitting on the wall is a framed print, and on that print it says, stamp out index funds. Jack, What on earth does that mean? That means Wall Street couldn't make any money out of index funds, and so Wall

Street didn't like it. We had an initial initial public offering. I went all over New York so many times to try and find underwriters, and finally got the four large retail underwriters, bas Dan, Winter, Reynolds, uh I forget who the other one was. Reynolds. Okay, they were the biggest guys in the business. And they said, we can do a hundred and fifty million dollars with this great new idea. They did eleven million dollars, so so less than ten percent.

And they came in to see me when the underwriting was over and said, you know, I said to them, look, we can't even buy around lots of bois And they said, well, why don't we just give everybody their bondy back and pull it? And I said, are you kidding me? We have the world's first index fund. And it's the world's first index fund. Period. You don't have to say retail, a lot of institutional holding at the beginning. It's the

world's first index mutual fund, no question about that. And and so it got noere It went nowhere fast, eleven million dollar launched. What year was that? That was in nine seventy six, eleven million dollars and everybody laughed, and nobody thought there was any future to index funds. But that's exactly right, that that just astonishing well. You had

incredible foresight to say. And it makes sense that the four largest retail shops would want to participate in this because this is a simple, easy way for their retail client to get exposure to the market, fast, easy, relatively inexpensive. It should have except that when the when the client buys this fund, it's to be held forever. They don't

trade it, and the fund doesn't do any trading. There's no brokerage business generated by the fun So this was not a happy moment for Wall Street and they looked at it, I think as a some kind of the beginning of a of a communicable disease and it had to it had to be stamped out. The Center for Disease Control had to come in. And did they really perceive you as a threat or did they kind of laugh it off? And yeah, yeah, best of luck with that, Jack, Yeah,

I'd say pretty much that way. Although we did in a couple of years ago for one of the fund's anniversaries we all got together, but the underwriters, all four underwriters, and also and the writers and their lawyers and our lawyer lawyer singular. We only add one on those days and they're all good people. You know, I don't. Uh. Then we all do our best in this life in very different ways of work. So it worked out. Well, it had to start, and it did start. So here's

the question that I could ask you. Forty plus years later, Vanguard is now running three point something trillion dollars. Four trillion is not that far off in the distance, an enormous success, one of the single largest asset managers in the world. How come nobody ever said, hey, those guys are onto something, we should be a competitor to them. How did how did that never come up anywhere along the line. Well, the answer is so simple. Index funds

have a real problem. All the damn money goes to the investors, right, Managers can't take anything they're not managing well. But you're taking ten or fifth team basis points and on trillions of dollars, that's not nothing. Well, nobody expected to get the trillions of dollars, believe me, not an eleven million. But but okay, in seventy four, seventy six, it's eleven million. But by the time you get to the mid nineteen nineties, you're hundreds of billions of dollars.

And then I think you hit a trillion? Was it late nineties? So even didn't anybody say, hey, those guys in Pennsylvania, they have a trillion dollars, why don't we do what they're doing? Well, it's a prince of problem. And then eventually the big guys had to Fidelity had to have They were dragged kicking and screaming in indexing, and they have to be competitive on price. They can still make all the money they want, and it's an awful lot on the actively managed funds. So it's kind

of a lost leader for Fidelity. But what about others Black Rock and American Century and all these other entities, Schwab offers and index It seems everybody off there's some version of the SMP index. Yeah. Well, t ro Price is a good example. They have a hidden index fund. They don't talk much about it. It's kind of expensive basis points relative or five, and it's a kind of a sideball thing so they can get into the retirement market.

This has become a marketing business, and right now we're seeing this tremendous change in people who realizing the importance of low cost and a long term focus. And if you just keep those two things in mind, you will never do anything but own a broad market index and hold it forever. I'm Barry Ridholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this

week is Jack Bogel. He is the founder of the Vanguard Group, inventor of the index funds, author of numerous books. Let's jump right back into the issue of costs and how they impact investors. You're known as the person who created the index fund but really, which do you think is more important, the passive indexing or the fact that it's so low cost. Well, it's pretty clear to me that passive indexing is the more important because I'm going to define cost in a couple of different ways here.

One is the expense ratio. And our funds. Index funds probably average about ten basis points. Are managed funds probably average about thirty five, So there's not that big a difference. The industry is up around a hundred and twenty on an unweighted basis And when we talk about basis points, the basis point is just a percentage of So a hundred basis points is one percent, ten basis points is one tenth of one percent. If you're averaging ten basis points.

That's a very very inexpensive. It's five five basis points five, that's very inexpensive. That is really inexpensive. But that's because we have a mutual company owned by its shareholders and don't have to deliver profits. And think about this for Eminent Parry, that the profit margins in this business can easily run to be So if you've got a one percent expense ratio, you're making fifty basis points on the top.

So you're you're actually operating at fifty, which is probably not too bad because very few people have the scale that we have developed, have the technology that we've developed, have the efficiencies that we've developed. And also I don't think this is self serving. Have the bully pulpit that we have. You know, imagine Fidelity coming into this business. Describe I described that as drag, kicking and screaming to the business. So here we have kicking and screaming over here,

and here we have missionary zeal, the bully pulpit. By this is the way, this is the new way. And you have an entire universe of evangelists amongst the advisor community who have drunk the kool aid and say, hey, low cost indexing is the way to go. Following the financial crisis, it seems like Vanguard was sucking up all the money in the room and everybody else wasn't also run it also ran are events like the Great Financial Crisis?

Does that sort of shake people out of their false belief and send them in the direction of, hey, these missionaries. Turns out these guys are right. Well, you're certainly right in a sense. It's it's not easy to read. But what happens when the market goes way down and went down fifty rough nine, and all these managers it says, we'll manage your money for you. The shareholder has kind of led to expect that they will anticipate this and

not let it happen to them. And they may not directly communicate that, but if someone says, well, i'm you know, I'm pretty smart, I'm a smart manager, you would expect that the down market they would do a good bit better than the market. Well, of course, to begin when they can't, because some when some don't. They're all average together, and how you're picking one over the other you never know in advance. You can only guess, and what good.

Is that? Yeah, exactly, So the down markets do help that. But it's also this wave of you know, there's not an economics course, there's not an MBA course, and in investing or finance that doesn't say basically, indexing is the way. It's the data that matters. It's the data and it's gonna so instead of I mean, usually if you look back and see a fund that's done well, you can pretty much conclude it will not do well in the future.

Everything reverts to the mean. The index does not. It continues to give you your share of the market return. And when you look at the numbers, I mean, one of my favorite constructions is, uh, the index fund gives you the advantage of long term compounding of returns while eliminating h the tyranny of long term compounding. Of course, so think about it this way. Let's assume the stock market gives a seven percent return over your life over thirty years or over fifty years um. If you get

to seven percent, each dollar goes up three times. If you get five percent, that would be seven percent less the industry's typical two percent all in cost, you get ten dollars. Wow, So ten dollars versus thirty dollars a huge difference. So you put up of the capital, you took the pent of the risk, and you've got thirty three percent of the return. As I say to people, if that strikes she was a good deal by all means,

do it. So. Morning Star once famously did a study which I'm sure to this day they regret, and the study they became, you know, famous for their Star rankings of mutual funds. And I've written about this. You could google this people and find this. Someone internally did a study and said, if you don't have access to morning Start data, but you just looked at a single data point across the universe of mutual funds, what would be the most helpful Would it be the track record, would

it be the manager? Would it And it turned out that if you forgot about everything else and only picked the lowest cost funds, that generated the highest returns going forward. So how that makes me ask the question how important are keeping costs low? Two investors? Well, when you give the statement that it's only cost that matters, I'm inclined to say, as the kids would say, Mary, duh, it's it seems obvious after the fact. But for the longest periods of time people. So let's let me digress and

talk a little bit about hedge funds. While all this money is flowing a vanguard over the past decade since the financial crisis, you guys went from a trillion to over three trillion. The other segment of the market that attracted a ton of money was the hedge fund industry, which charges two percents forget five basis points two percent of the assets under management, plus of the profits. And they also scaled up across ten thousand funds to three

trillion dollars. How do you explain, despite the obvious duh, how do you explain so much money flowing to a group with such high expenses, well, greed, the buyer's greed and perhaps even the manager's greed because those are very high costs. But people are looking for a better way. You know, it's pretty easy. I've done a lot of

work on this. You may have read some of it to forecast what the stock market return is going to be within reasonable magnitudes over time, not not in year by year, over decades, and uh so you know where you're gonna be roughly in the stock market. And you say a pension pan, and pension plans are very heavy part of the of the hedge fund business because they don't have to worry about the high taxes generated by by hedge funds. And so they say, we've got to

have more. And someone coast comes and shows them their past record and guess what they put the S and P five to shame. Of course they wouldn't show you the record if they didn't, So a little survivorship bias built into that. You sure that, well, the survivorship bias build into it. But most of all, there's it ignores the fact of life in this business. It's everywhere reversion to the mean. Biblically, put Barry, the last shall be first, on the first shall be last. And it happens to

hedge funds, it happens to mutual funds. It is basically a fundamental law. Seven fat years, seven lean years, and there's no way around it. Yeah, the number of years may differ, but you've got it all right. Well, you you reference the Bible and that phrase that always stayed with me. Um. So let's let's stick with the issue of um of indexing for now. And I want to

quote something that Charlie Ellis had wrote. Charlie was not only on the board of the Vanguard Group, a board of directors, but he was also an advisor to the Yale Endowment Fund, and he wrote a wonderful book called Winning the Losers Game. And he he also advocates that individuals should stick with simple indexing, which leads me to a question, how many indices should the average invest your own? Well, very very few is the symbol to that answer to

that question. You need a broad stock index, and you need a broad out bond index, because I'm convinced that everybody should have a little anchor to winward when these bad times come, if for no other reason, to protect themselves and getting emotional and behaving aileen selling out their

portfolios at market bottoms. So leaving aside the allocation between stocks and bonds, you can buy a bond index fund, and you're gonna buy a total stock market index fund, and you're gonna buy the Standard and Poors five hundred index fund, and that's basically eight of the market. The You would think that the that the total stock market would be a better bet because it's more diversified in the SNP five but We're in a time right now and I don't know if this is durable or not.

Nobody does. Where the large companies are doing better than the small companies. So the great Mr Buffett and does his He's leaving his wife the state in the s and Vanguard SNP five index fund. He has a bet with some hedge fund managers. He's winning. He's winning the bet. He's not winning, it's he's killing him. He's absolutely way way ahead. They actually had to create derivatives for this bet. This is a real bet with millions of dollars on it, and he looks it's a runaway. Nobody is else is

even in second. Well, he's got a year ago. This is that's right. It will be a decade after the financial crisis. The hedge fund. For those of you who may not be familiar with the infamous bet, a bunch of hedge fund managers were um arrogant enough to bet Warren Buffett that they could outperform the SMP. He took that bet and it's not even close. It's it's really an amazing story. I didn't realize we're only a year

away from the final outcome of that uh bet. And it's it's theoretically possible they can win, but really mathematically it's it's highly improbable, but very anything can happen. However, I can see that. Jack Bogle, thank you so much for being so generous with your time. This has been absolutely fascinating. For those of you who are interested in hearing the conversation continue, be sure and check out our podcast extras, where we keep the tape rolling and continue chatting.

You can check out my daily column on Bloomberg View dot com or follow me on Twitter at Ritults. I'm Barry Hults. You're listening to Masters in Business on Bloomberg Radio. Welcome back to the podcast. Jack, Thank you so much for doing this. This has really been tremendously fascinating. It was worth the drive to Pennsylvania to come come see you. Um I'm I'm absolutely fascinated by everything you've accomplished. So we've talked a little bit of the advantages of indexing

for equities, and you mentioned bond funds. There have been some pretty reasonable academic arguments that you could do okay with active management with bond funds because there's such a universe of choices. It's not just treasuries, but it's treasuries and its corporates and its municipalities. How do you feel about about bond funds? Do you just own abroad um index of bond funds or do you look at active management and bonds and say, well, maybe there's some value

added there. Well. As a group, bond managers cannot win because they are the market and so they will as a group capture the market return. There's just no question about this. And charging as they do probably in the mutual fund business, probably sixty basis points, seventy basis points, they just don't have a fighting chance over the bond fund index. Now that index has some issues, as they say. And I started the first bond in next fund, by the way, thirty years ago, Yeah, thirty years ago, and

it's done just fine, met the test of competition. But I'm not I think we can do better in bond and next thing than the bond, than the bond and next the way it's constructed, because it's about se treasuries and mortgage backed good mortgage backed government backed instruments, and I think most investors should not have se in the super safe category. I think something like is pretty good. So it should be a better assortment of risk that

potentially is generating more returns. And as long as you're holding it for decades, the short term volatility is irrelevant. Yeah. Well, the the one that I have to use myself is our intermediate intermediate term bond index fund. It has it's just as volatile or as non volatile, because that has the same duration or average maturity, and but it's about thirty governments and it is the same in every other respect.

So if it has a higher yield, the yield and a bond has today's yield correlation with the return you're gonna get in the next ten years, so you might as well take advantage of it. And I'd say particularly, I mean, yes, it's a little riskier, but today people are dying for income, dying for income, and to reach a little bit, you know, I don't believe in big reaching for yield at all. Well, that certainly was was

the close of problems in the last financial crisis. Everybody who reached for yields and said, I understand this is subprime, but the rating agencies tell me it's triple A, so I'm gonna hold my nose and buy this didn't work out that way. It did not work out well, to say the least, So so I didn't realize you had

created the first bond index fund. So we have we have bond indexes, which you would like to see have a little more risk and uh, a little less of the super safe size we've already discussed, uh the equity side. Let's let's talk a little bit about some of the hot buzzwords that are going around today. And I'm curious as I already know what your ranches I'm gonna be, but I feel obligated to ask before we get to that.

Can I just say one thing? Sure? We also started in about nineteen, well in seven, to broaden our index base from the SNP five, we started the bond in next fund. We then started. I realized that there was a certain attractiveness to owning the whole market, so we started something called the extended market in the next on. How many holdings were in that well probably um righting.

It varies amazingly, but probably right now because the Wilshire five thousand is something like stocks, it's it's even less than then it got up to seventh pass and believe it or not, late nineties, Yeah, well, we were cranking out a lot of new companies before we realized that pets dot com wasn't a sustainable thing exactly. So I also had an idea that growth might do better than value for the for for young people investing on a dollar averaging basis wouldn't be that much riskier, and when

they retired they might want an income fund. So I I divided the SMP into two. As soon as the SMP did that, I started a growth index fund half of the SMP and a value index fund the other half. It didn't work out very well. I mean, it worked out fine from performance standpoint. Where we found is the money poured into growth when growth was doing well at

the wrong time, out of growth and into value. So you know, sometimes I think we've got to be very aware of creating things that we know investors are going to use badly. So we don't know, we don't tell them what to use and how to use it, but it happens, and it's a responsibility of us, the sponsor to do that. So that raises a really significant question, which is how important is investor behavior to long term returns and what can the average investor do to make

sure that they don't shoot themselves in the foot. Well, the first thing to do is don't chase performance, and don't if some salesman or you reading the paper for that man, or to blame the salesman for this, says, here's a new manager on a new fund and it's really doing great, or an old manager and the fund is doing great, and this fund is a great twenty year record. Turn away from that, because it's next twenty years aren't going to be anywhere near as good as

its past twenty. There are plenty of examples that, with all due respect and when friends up in Boston Fidelities, Magellan Fund was a star fund for roughly twenty years. Fantastic Peter Lynch and then his one of his successors did really well. Peter Lynch was a superstar performer. And then what happened well with a tiny little fun too, don't forget that. And the fund that wasn't even offered to the public for five or six years. Oh yeah, very interesting. We all have our little secrets, and uh

so I think overrated. But Peter Lynch was certainly a good manager. But you know his principle of being, if you see a product, you liked by the stock you know, makes no rational sense, I'm sorry to say. And Peter Lynch, also at Madelon Magellan Funds hey Day said, in words of one syllable in Barns, most investors would be better off in an index fund. Was that barrens I know, I read that from him, and that's not a concession,

that's the truth. Well, you have him saying that, you have Warren Buffett saying that we have a number of people David Swinson. Swinson at the yell Endownment, he's another one. Um. It's amazing that people push against this because it's long term and boring and there's nothing to talk about. And but I guess shouldn't. That leads to the next question, should investing be long term and boring? If you want to have a comfortable retirement, Believe me, you'll be less

bored in your retirement. If you've got plenty of money, You'll you'll be you'll be so on board. If you don't do it that you'll have to go back to work. So let me ask you about some of the hot buzzwords that are out there and investing these days. And again, this is a cheat because I'm pretty sure. I know what your answers are, but I feel obligated to ask this. So you're index funds are basically put together by market

cap waiting. But now there's something called smart beta, which is different ways of assembling an index that don't rely on cap waiting. What do you think of the idea of smart beta? Smart beta is stupid? Okay, that's why. Well, I mean I didn't say that's that's what Nobel Laurea, Bill Sharp says. I just quoted him. And the reason is just think about this for a minute. It's it's

another form of active management to begin with. But if smart beta is good, and that that means it beats the index, then dumb beta this does even worse than the index. Right, so smart and dumb are different. But why are people going to be dumb if it's so easy to be smart? It's just another claim that I can do this better now. Happily, after Wisdom Tree and and Rob Arns fund came out a decade ago, his fund is now more than ten years old. What happened

and the answer is essentially nothing. His fund beat the SMP five d B I think thirty basis points, but it was more vowel and therefore it's sharp ratio the relationship relationship between risk and reward. I don't hold me to the numbers, but the sharp ratio of I mean, I mean his guests here, I won't be too far off the sharp ratio of the five of us like forty one. On the sharp ratio of Arno's fund was thirty six. So he lost. He had ten years to

prove it. Now maybe he'll prove it the next ten years. Who can say, But why would that be? I mean, where's all the brain power. He's a very smart guy, by the way, one of the smartest guys in this business. He was a four guest on the show, one of our earliest guests. He's a delightful gentleman. I always enjoy his company. UM, And it was really an insightful thought to say, let's think of different ways to put together UM, to put together indexes. But your position is this isn't

after fees, after everything else. Once you now you risk adjusted, you look at all this volatility. Your your conclusion is this just isn't worth it well. And even if you look at absolute returns, it's like thirty basis points better over ten years now, that's not trivial. When he has essentially the same portfolio as the index fund with different waitings, you can't expect anything to be too different. So I

think it's it's over sold. Jeremy Siegell of Wisdom Tree described this as a new Copernican view of the world. Everybody had it wrong, and Copernica said, oh, by god, that son is in the middle, and the new sun is smart Beta can't be because we're all as a group average. And if they are these smart guys over there, they are dumb guys over there. Smart and dumb both

also net net. When you're buying smart data, you're really buying a distribution of really smart guys, really average guys, really dumb guys, and you don't know who's who across all the smart beta funds. You know, and then think about this one step further. The index essentially guarantee the dollar value index essentially guarantees you the return that all investors share. So that's written stone etched in stone. Uh, smart beta may do a little better, may do a

little worse. What is the point of taking the risk when the guarantee of getting the market return is right at your hand, Why would you speculate, Why would you speculate on maybe this guy can do it better? And believe me, some of these smart beta funds was for a short period of times will do it and some of them won't. I mean that's the nature of the beast. I've described it as why do you want to romance alpha and forsake beta when beta is a sure thing? Yeah,

so that's smart beta. Let me ask you about something else that I suspect they know to your know your answers. This year commodities have gold especially has had a huge bounce back. We sort of tremendous commodity run from the early two thousand's till two thousand eleven. What are your thoughts on things like commodity funds, gold, and uh energy for for investors? No, no, and no no. Let's repeat this in case those of you missed gold. No commodity funds,

no oil funds. No tell us why? Okay, well oil is it commins I'm peak of oil as a commodity now and then is think about what a stock is. Stock has an internal rate of return and it's composed of the earnings growth in the divin end yield. When you buy it, it's there. If the stock goes up and down, that return is there. It has an underlying internal rate of return. You have a discounted cash flow from the future. You're buying an existing business that's gonna

generate revenue and profits and you get to participate in that. Now, take a bond. It has an internal return equal to the interest coupon that you're gonna get over the next ten years or twenty five years, whatever the case may be. Commodities have no internal rate of return, and there's a cost of storage and security for things like gold or oil. So when you buy a unit of gold, why do you buy it because you think you can sell it to somebody for a higher price. That is the definition

of speculation. That's the classic greater fool theory. You may have paid a lot, but someone will pay more. And well, I mean, you may be right, by the way, and there's no reason you can't be right, but that just means the other guy is wrong. And you don't know as you as the investor, you don't know which of those two parties you're gonna be five years from that. And another thing when you mentioned gold is it brings

to mind is everybody used to talk about gold. Forbes magazine highlighted in all their reviews for years and years when they picked the best funds gold funds, gold funds. And then we we had the boom and gold, and then we had the collapse and nobody started talking about Nobody talking about gold. Now we have another boom and everybody's talking about gold. Then gold collapses last year, nobody's talking about gold. Now gold is up this year. Everybody.

This is metaphorically speaking, everybody's talking about gold. You know, don't pay any attention to gold. I mean, it would not be stupid. I wouldn't do it, but it would not be stupid to have a very small position in gold as a hedge against worldwide hyperinflation. Maybe five I wouldn't do any more than that, But I don't think you should do that. But it's at least defensible because you're you have a specific goal in mind, and it's insurance.

You're paying a five percent insurance on the remote possibility of global hyper inflation. But if you're wrong, it's a giant five percent drag on your portfolio for the next few decades. Yeah, and that's huge. That is well, you guys are talking about five basis points. This is five hundred basis points. That's a tremendous, tremendous drag. Let's talk a little bit. And by the way, I'm pretty much

what I expected you to say about commodities. Let's let me find two things to talk to you about that I'm gonna have to push back a little bit. One is e t fs exchange traded funds. I know you're not a big fan of them, but lots of investors find it's a very inexpensive, simple way to get exposure to the S and P five hundred or whatever asset class they want. Why are you not a big fan

of ETFs? Well, I'll start with little anecdote. A wonderful guy named Nathan mose came to visit me right in my office upstairs here at Vanguard, and he said, I have a great idea for you. We I want to start the first exchange traded mutual fund and have Vanguards

my partner there. I was I could have not only created the first index mutual fund, but the first et F. And I said, Nate, no way, because the description that you got from from Nathan, or at least their first adds later on, was now you can trade the S and P five hundred all day long in real time. And I would say, that's what kind of a nut would want to do that. I mean, there must be better things to do than that in this life. But

in any event, it's the trading idea. When my idea of indexing broad market indexing by the SNP five and hold it forever, what is said to be worn Warren Buffett's favorite holding period is forever. So so the idea of an SMP five hundred funds that if you're gonna, if you're gonna do that exposure, you're better doing it with the low cost mutual funds than an index funds. Uh. Then in uh E t F so there is no temptation to trade intra day or to play around that.

That's not what you think people should be doing with their time or not. But let's let's examine the E t F business for just a minute. And that is if you look at E t F s, all the big ones. Man, I can't look at all of them, but the big ones, particularly in the normal ones, are about seventy by financial institutions. They're trading them in the marketplace every day. The spider, the SMP five UM e T F or the NASA one spider is the most

widely traded stock in the world every day. And if you look further this year, which is a little more bottle than most years so far, the dollar volume of trading in e T s is the same size as the dollar volume of trading and common stocks. Unbelievable because common stocks are worth about twenty three trillion dollars and the spiders are worth about two. So spiders are turning over it three thousand percent a year and stocks are turning over it two a year or something like that.

So they're trading instruments owned by large institutions. I mean, look at the spider head. It says institutions, here's what you need to trade. I mean, it's practically verbatim from

the ad. It's just it may be irrelevant, but I don't think in the long run and that has anything to do with the mutual fund business or individual And it certainly shouldn't have anything to do with individuals, because why would you as an individual want to trade against these giant institutions who do nothing but use this as a either a trading tool or a hedging tool or whatever it is. You're saying, this is not a playground for individuals to step into. And that looks like it's

roughly seventy percent of the business. And you know, I don't you mean even to criticize it. It's kind of irrelevant when you get to the other of the business. And I may be a little often my percentages here, but they're individuals and you know, something like two thirds of them are using e t f s to trade, and one third of them that would be the total all the e t F market are using them, buying and holding them and maybe using them. You know, we

have it's a funny technical thing in this business. But you know, if you want to put it in a thousand dollars a month into a van guard fund and then you want to take out five thousand dollars at the end of the year and buy Christmas presents whatever you might want, um, it's very difficult to do that here because we don't like buying and selling at the same time. You can do it with our e t

f s very easily. So a certain market place there of people who aren't traders but like the flexibility ETFs had, and I have no problem with that. The other the other part of the problem, however, the E t F problem, is there is this huge amount in number, not so much an asset of funds that are doing things that no intelligent investor would ever do. Triple leverage and you can bet every day whether the market's going up or down. Isn't that grand? Not only triple leveraged up, but inverse

triple leveraged. As long as you know whether the market's going up or down during the day, you're gonna make a fortune. Who who knows if the market's going to go up any or down any given day. Well, I guess these smart people that have these funds, but they all have both of them, that's right. They don't compete with each other. And there are a whole lot of

other wacky things. I mean, I don't think US investors, you'll, I'm sure you're gonna come to this, should be buying individual foreign non US So let's let's ask that question. A lot of the academic data says that if you're diversified internationally, parts of the world are sometimes doing better than the US, and sometimes the US is doing part

of the world. If we want to really be diversified, you need US and not just have an overwhelming home country bias UH Developed World x US and then emerging markets. What's wrong with having a smattering of those in your portfolios so that you get to take advantage of the growth of the Pacific RIM in China and South America and etcetera. Well, the question is is an advantage I mean, tell someone to put all their money in Brazil two years ago because somebody who put in all their money

in China year ago. Isn't an advantage or is it just you know, kind of a little bubble going on in those Well, but you're not picking individual countries. You're gonna have a broad index of international companies, and therefore it should theoretically the gain should offset the losses and then some and so you have exposure elsewhere. You're not a big fan of that, Well, I'm not. And and the reason goes back to when I started to think

about it seriously writing my book bogelon Mutual Funds. Back in Bogel on Mutual Funds, let's see what I have here. I have common sense on mutual funds that probably says something very similar to this, But this is a little more recent, so I said, tenth edition forward by David Swinson. So when you say recent, this came originally came out almost fifteen years ago, right, and the original was seventeen

years ago. Interestingly enough, I'll get back to the other subject in a second, but interesting enough, the first book came out at a market high and the second and the second book came out on the market low. And I would hardly change one word in the whole second edition. I reprinted it verbatim and then Mark put red Nantucket read for any changes that took place in the book. Now on the tenth edition, that's that's used after the financial crisis, you could see some of the changes that

were made, but they're really very modest. You really didn't change any of the themes in this. You just kind of fleshed it out post crisis. It worked. Indexing worked in the good market. Indexing worked, they're not so good market as and course low cost worked in the good market and not so good also, and they're not so good market It has to So getting back to I said in my first book, Uh, look us companies got

half of their revenues. This is true now at least a little bit less than half of the revenues and a half of their earnings from outside the US. We you have an international portfolio, why do you want a larger one? And then I say, take a look at what comprises that international portfolio. Your largest investment is Japan, Your second largest investment is the UK, Your third largest

investment is France. Now, if returns are developed out of national economic strength, does anybody think that the UK and Japan and France are gonna do better than the US in the next ten, fift twenty years. I can't imagine it. And now I may be wrong. I'm not saying this is written in stone, but that's four that's forty five p end of the money. So if people knew they were putting forty percent of their international money, so called

international non US is a better formulation. In Great Britain, France, and and the Japan, I mean with every one of those economies has real problems. The French don't work very hard, the Japanese have a structured and deeply aging economy, over burdened by future retirement claims, terrible demographics, and they're a great exporter. But then they have issues and Britain doesn't know what's going to happen if they do the the exit from the European Community, and or do they know

what's going to happen if they stay in? So what would happen if a sharp upstart company, let's call them Vanguard, says, here's a broad international index that's fairly evenly weighted. It's not just these three countries. Might that change your perspective or do you still think, Hey, you get plenty of the SMP five hundred. Half the revenue comes from overseas.

That's all the overseas exposure anyone really needs. I don't like the idea because you would have as much and I don't know Honduras as you do in in Great Britain. It wouldn't make any sense. Uh so, But to make matters worse, when I made this statement in we now have twenty two years of history, right, how was the prediction? And the answer is that don't hold me to the exact numbers. But the US portfolio is up about say seven, and the non US portfolios up about two. So the

US is still winning versus the international. So I committed the elements in very I was right. Now I want to be very clear in this. Does that mean I will be equally right in the future. I can't imagine it. You think eventually, I mean reversion comes in. Yeah, and eventually those two positions will reverse. The US Well, I don't think they will reverse. But I don't think that spread is a durable spread. And the reason I don't think that reverse is we have this fabulous economy here.

I mean, yes, it has problems, but probably less problems than any country in the world, no doubt about that. And the my favorite quote is this is the cleanest shirt in a dirty hamper. Sure, exactly right. And well, I mean I'd say was even cleaner than that. We're number one in innovation and technology. Uh, we're not number

one an entrepreneurship. We're still a great manufacturing company, all not as great as we are, and we still have, you know, all these new companies being started, existing companies being run more and more efficiently and more than anything else, or at least as much as all that. We have

great institutional structure in this country. We have legal protections, we have courts, we have laws, and no one's going to take your stock away from you confiscated overnight and shareholder rights are as good as any country in the world, maybe with the exception of I don't think they do any better, but they don't do any worse. Probably Switzerland and Great Britain be the two big competitors. Now you see, you see what happens in China, your stocks may not

be your stocks. It's very hard to be forget as a as a local, as an international investor. It's very hard to be an investor in China if you don't know am I gonna be able to ever cash this out? Or maybe there's gonna be a vacation period where no sales for the next month, as we saw last year. Yeah, and let me add to this that just about everybody says I'm wrong, by the way, but everybody said I

was wrong with an index. I was gonna say. That's only gonna make you, that's only gonna make you double down and think you're right, because there's a track record of people predicting you're gonna be wrong, and they've all they've all proven themselves false. So but let me just

say one more thing. In international just think what would you would have done if you had an internationally waited or a non you wise waited in when you had fifty percent, that is to say, five percent of your money in Japan, right when the nick was forty six thousand or something like that. No one was talking this way then, But that could happen again, and I don't think he should be subject to these funny speculative booms

that can take place in other countries. I just can't imagine that there will be a significant advantage in international companies over US companies. I'm not talking about stocks now, I'm talking about companies and economies over the US. Now, look, I could be wrong on this, and if you think I'm wrong, go buy all the international and non US stocks you want by a non US stock index by individual countries. I wouldn't do any of that. And what

we didn't even mention the currency side of things. How significant is currency fluctuations to UH to this sort of international exposure if you're domicile team in the US, what kind of currency currencies here? Well, that that is an issue because the dollar has been very strong, and it won't be strong forever, because international trade has a way of balancing out. When the dollar is strong, the trade balance has changed and all that. So I don't think

you should count on a good strong dollar forever. So won't won't, won't impact it. Let's let's talk UM. But I want to talk a little more about Vanguard. But before we get to that, to two last questions about indexing. The first is is there any sort of active management you would favor Vanguard about of the sets here or in active managed funds. What do you think about having a small slug of someone's portfolio in something that might

not be a passive index. Well, let me give you this very important background about our actively managed funds, and this is what I've been saying since we started Vanguard in nineteen seventy four. I want our active management, actively managed funds to have returns that are relatively predictable, relative predict ability relative to their group. There they're group like large cap value funds, a long term municipal mound, phones,

whatever it might be. UM, and the idea would be look at those funds and not don't get too far out of line so you'll have an average perform if you If you have six managers, there's where the multi manager thing comes from. If you have six managers, the idea that they will do about the same as another, as your competitive group with sixty managers is almost guaranteed to do the same. So what's so good about that?

What's so good about that is we think we have a one and a half percent to two cost advantage through lower expenses, lower turnover, no sales loads, and we should win by a point and a half a year, not on brilliance, but on cost. So let's guarantee. Now, let me just give you the punch line here. If you win, what's so good about one over ten years?

You have a higher return. That that's tremendous. So I previously interviewed your CEO and Airman Bill McNabb, and one of the comments he had made is that he still felt there was room to squeeze costs lower. You guys are three and a half trillion dollars. Is there a floor on how low costs can go or are you eventually gonna run out of efficiencies? Well, we have yet to squeeze cost lower because our costs go up and

up and up. But as a percentage you can squeeze a little lower on a per well dollar invested basis. Is there no one to disagree with our CEO. But it's not we're squeezing, but we're the captive of the market. If the market goes way down, our expense ratio is going to go up. There's no way we could squeeze enough out of our expenses if we had less assets. So we should be very careful about expenses, and we are.

I think we're managed in a very strong way, but we're The expense ratio is a combination of something we can control more or less how much we spend, and something we can't control at all, the level of the stock market. So the expense ratio is a mystery in the whether gupper Dad. Now, if it goes way down, it's gonna mean we have very good markets. That sounds great.

Can indexing ever get too big or can indexing ever take over the market as some people have alluded, or is there a place for a combination of indexing and active managers in the actual marketplace? Well, it's not in the nature of things that in indexing could be of the market. If it were, we would have chaos. There will be no evaluations, there'll be no liquidity, there'll be no enny. So what are the chances that indexing get

to zero? Right now? It's I think I had of the total market of the mutual fund industry, of the equity mutual fund industry, and so it means that that hunk of business is in broadly stated, just removed from the turnover level. So if a turnover, we're in the end market indexed the turnover. I came into this business when turnover was and everything was fine. It's gonna take a long time to get the pent a long long

time and maybe never gets there. So when you put reality in the face of the theory that if everybody indexes uh, then then it's going to be just it's just not gonna happen. But the other thing is people follow this statement by saying, if the market gets more and more indexed, then it will be less efficient and

we'll be able to beat it more easily. No, unequivocally, no, some will beat it, some will lose to it if they If the market is is less efficient and the and the winners and the losers will average, the more can return. There's no way around that. So that leads me to a quote of yours, and I have to ask you about it because I find it's fascinating. You once wrote, the stock market is a giant distraction to

the business of investing. Explain well, investing is about the long term, and investing is about earning what I call the investment return, which is the dimon end yield when you go into the stock market and the earnings growth

that follows. That's investment return. The market return is also has a speculative return, and that is is the price earnings multiple of the evaluation is high or low when you come in, and if they're high, they're going to detract from that return, and evaluations are low and they're going to add to that return because the low will in in the valuations. The price earnings multiple reverts to

the mean perfectly. It's about what today. Although it's a little bit higher than this today because the market is a little bit isn't hardly inexpensive, But the reality is it's just about the same level it was. So we had ups and downs, booms bust in the long run, speculative return at zero. So concentrate on the investment return. Forget the speculative return, which is very difficult to predict, and just get with business can give you now if

you look every day, you're apt to do something. And one of my basic rules is don't do something, just stand there. And if you've been doing that this year, I think you're a lot better off. This is a tough year so far, not that bad. I mean, you think the SMP is off about three and a half percent, it's really nothing. And although you think it was the end of the world, uh so, it's Don't let the stock market moves distract you. They are a tale told

by an idiot. These moves, daily moves, hourly been minute by minute moves, a tale told by an idiot, full of sound and furious, signifying nothing. I have a bunch of questions that I ask all of my guests, but they're all specific to each individual because they're so um so so detailed. So who are your early mentors? I know in one of your books you mentioned somebody, Uh you thank somebody who you had mentioned in uh the earlier part of of the conversation, who do you think

of as as mentors? Well outside of my teachers, by my first real grown up mentor was a guy named Jim Harrington who was a graduate student and engineer at Princeton University, and he was running the Athletic Ticket Association ticket office and when he stopped doing that. He pulled me out of the crowd and asked me to run in for him. So I learned how to do a job, and I learned how to do it with integrity, and I learned how to do it with on time. I learned how to do it with keeping my emotions out

of it. This is just selling tickets to Princeton students forts basketball, baseball, whatever it might be, particularly football, And that was a seminal experience to you, uh and helped form your your own character. He had just a great sense of business values and like all engineers he was you know, they kind of go step by step right. Sometimes it's not a lot of exciting, but it's always right structured, organized, and and you're dealing with a lot

of money. And sure, what Princeton Stadium is how many people? That's ah? And that was the old Palmer Stadium that held people, right, and now it's almost double that size. It's it's huge. Isn't we want way down? We're about you want the other direction, okay, And we can't fill it now. We used to every every game I worked with the sellout right, that was back in the day, So that was really quite an education. Um, you dedicated common Sense on mutual funds to Walter Morgan? Who is

he in your in your pantheon? Well, he was the greatest of my mentor is he hired me? He read my thesis out of Princeton. He wrote, I think a little bit over the top that Mr bogel knew more than he did about them than we did about the mutual fund industry. And so he liked it. And he was a Princetonian himself, class of nineteen twenty, and I was the class of nineteen fifty one, and I watched

him work. He was very much a renaissance man, interested in investing, interested in marketing, probably less interested in the detail of the business share old of record keeping and stuff, which was so much simpler those days, but also a renaissance man in terms of his interest. He was um outdoorsman, a hunter, a fisherman, things that I that I don't do at all. And but he had a high sense

of standards. And he they said at the beginning, and UH turned the company over to me when I was thirty five years old, So I must have had an awful lot of confidence in me, and I saved Wellington Fund finally for him, after the catastrophe I described earlier, we told Wellington Management Company how we wanted to run and they've been running it that way ever since. We've met. Much more focus on income and income stocks and less

focus on growth stocks, and it's worked out. We had a whole renaissance of the Welling and Fund and he saw a lot of that, and he was he he died but the year that book came out, and a little bit before, but I had shown him the title page with his name on it. He was very pleased and very pleased with the revival and renaissance of his wonderful Welling and fun I barely had a moral obligation

say it. So what about other investors who hasn't influenced your thought process, your philosophy, Perhaps not your approach to investing, but what other investors have colored your worldview? Well, you certainly start with Benjamin Graham. He's the basically ground zero and the intelligent investor. His book, I hadn't like, the fourth edition, which is much more into into the I think it was nineteen seventy four, has much more about

mutual funds and things of that nature. And he's very clear on that, and so he would certainly be one. Um Mr Morgan, um Mr Brin had a couple of associates, Joe Welsh, the president of the company, and Andy Young, his lawyer, very quick, quick witted, smart guy, and they all saw something in me. I don't know what it was that gave them confidence that I had the judgment

to do the job. And another, interestingly enough, another one of my great mentors was the man who when I came on the investment company's two board of governors, he was the chairman. His name was d. George Sullivan and he was executive vice president of Fidelity. Oh really, and

we had a great relationship. That's fascinated and so he would have been you know, if people have confidence in you, they bring out your best and he really did, and Mr Morgan did, and Mr Welsh did, Andy Young did, and so that those would be the big names I think, both as mentors and investors. Let's let's talk about books. You've written your fair share of books. Who's what other authors books being on investing or what have you have

you enjoyed? What what books would you recommend to people? Well, I've already mentioned The Intelligent Investor by Graham Intelligent Investor by Graham. I think Bert Malkil, who's a friend of ours and friend of mine and former foremer director here for many, many years and are really the best director we've ever had outside director at his random Walked down Wall Street, which updated every couple of years is another UM. David Swinson's book On for the Individual Investor is really superb.

Peter Bernstein's Against the Gods Just I just read that over the holidays, fantastic book. Well, he was a very gifted man. We were very close Peter and I, and we had our little disagreements here and there, but overall we were on the same team. And then Bill Bernstein Four Pillars of Investment Wisdom is A is A is a wonderful book, and there aren't. It's hard me to go a lot, a lot beyond that, to be honest with you. Well, that that's a great starting list right there.

You can certainly do worse than any of those half dozen books. UM. We've talked a lot about how you've changed the industry since you began way back in the sixties and seventies. How else has the industry changed that you think is either for the better or for the worst. What what stands out as to how finance has evolved over those those years. I think when I came into this industry in it was a much better industry than

it was thereafter. The big part of that change within the Go go era, when we had this idea, we went from investment committees, prudent investment committees buying blue chip stocks, to portfolio managers comments uh and not stars, comments that burn out and their ashes drift gently down to earth. And that's happened to so many, so many comment managers. I mean, you can hardly lose count. You wonder the real the real superstars just don't stay there, you know.

I always just to wish Bill Miller, well, he beat He's at leg Mason. He beat the market, I think sixteen years in a row, and every time I saw him, I'd say good luck, good luck in the future. I liked them. My wishes of good luck didn't do any good at all. He very famously imploded and went from the literally the top performing fund to the bottom one

percent following the financial crisis. What had worked for him previously just eventually stopped working, and he got caught in a lot of paper that turned out to be not worth what he thought it was well in an earlier area. Remember Gerald Say ran Fideliti Capital Fund, and he had the best record in the business. He goes out and starts his own fund, Manhattan Fund gets a huge underwriting. It was four a million dollars. Nobody ever sent anything

like that in this business. That's the old days. And it had after ten years of operation, the worst record in the mutual fund industry. And you know, I tell people, when you think about the nature of the securities markets, it's gifts as difficult to be last as it is to be first. What was his name about that? That's amazing? What was his name again? Gerald Side t s A I T s A great um. So some of my my last few questions. You've mentioned a lot of things

have changed since nineteen fifty one. What do you see as changing in the future. I guess I'd say, not to beat the phrase to death, reversion to the mean. I see the industry going back to its roots. Uh,

much more of a fiduciary focus, I hope. So I'm very much in favor of the fiduciary rule, although someone else's have to work out the details that seemed to make it difficult to operate, and uh, but it shouldn't make it difficult to operate because all you have to do is ask yourself as an advisor, one question, Hey, is this in the client's best interest? And if the

answer is no, you can't do it. It's much simpler than the complicated suitability rules, which have all sorts of ifs and thens and clauses best interests of the client. Yes you can do it, No you can't. What could be what could be easier when you unfortunately kind of documentation how you're doing things. In all that, it is a little laborious because we have to have you know, a lot of lawyers work on this, and you and I have the spirit of fiduciary duty and they've got

to get to the letter of it. And it's it's more complex than it ought to be, but it's coming. And you know, with so many funds being flashes in the pan, investors are going to learn by their own experience. You know, I was told this was a great fund, and it was a great fund for two days and that was the end of it. Uh. And we overestimate

our own ability to pick funds in stocks. We over overestimate the ability of our managers to do better consistently, and if people just got the idea of reversion of the mean again and again and again. You know the we were looking at some data the other day, Barry, and if you're in the top quartile for a given five year period, only fifteen percent of you are going to be in the top quartile in the next five

year period. And if you're in the bottom quartile of you will be in the top quartile in the next period. And over time, that sort of returns don't help help anybody. I think was Howard Marx who said, if you're consistently in the top forty over time, that puts you in the top ten percent. But you have to be consistent. You can't be a shooting star, outperforming, under performing, out performing under performing. You have to be top forty. But he runs a distress bond funds, not not necessarily a

stock pick. Let me, let me add us if mame, what is the objective of the individual investor. It's to have a lifetime of investing. Investing for a lifetime. And for a young investor, believe it or not, twenty five year old investor has a seventy year life expectancy seventy years, they're gonna be probably be a hundred. So what's the best way to invest for seventy years. If a mutual fund manager lasts for seven years, that's the average, you're

gonna have ten of them. The average fund goes out of business every every decade, every decade, excuse me, really, it's that high. That's and then the news the new guy comes in and sweeps clean. Managers get fired. There is no way, none, zero, that if you own three or four mutual funds, which is typical, there is no way that over seventy years, you have even a fighting

chance to beat the market. And if you do the index fund, I guarantee you that you will have the same non manager seventy years from now as the manager you have today. So that raises a really interesting question, which happens to be coincidentally one of my last two questions. What advice would you give to a millennial or a kid just graduating college today beginning their career. What would you tell them about what they should do with their

career and what would you tell them about investment? Well, people have to find their own way in this life. And I've I've talked to a number of groups at Princeton, one on religion and business and one on ethics and business, two separate groups. And one is a small seminar and one of a large lecture course. And I get that kind of lecture. Should I not go into the financial business? And I say, no, go into the financial business and make it better than it is today. You know, I don't.

People have to find their own way in this life. I had to find my own way, Barry, you have defined your own way, a lot of bumps along the way. You gotta have a little residience. You've got to be able to take defeat and turn into victory. I think that's what i'd maybe a little bit. And and so it's this, This deal is going to shrink hugely. There's no question about that. It already has just since oh nine,

no doubt about it. The combination of technology and the knowledge and the spread of this disease called indexing is not going to go away. It's habit forming, it's catching, it's contagious, it's spreading. And and my final question, and I'm I'm I feel awful that it's a ninety minutes is already up. I'd like to continue going for another ninety minutes. What is it that you know about investing today that you wish you knew when you started in

nineteen fifty one. Well, I'd say quite a bit. I mean, I I was on the Welling and Fund Investment Committee, and I saw how what hard it was to beat the market. I wouldn't have told you that back in and I worked for a long time with John Neff, who had many, many years of success in beating the market. But he's an exception, and even his record and in later years deteriorated. But then he mean, he hadn't gonna, He's not running winds are funny, ran it for thirty years,

I think, But he's not gonna. He's not running it anymore. So managers come and go. So I'd say things like the power of compounding, the beauty of keeping costs low, uh, the need to ignore the market, they need to do something. Are all things that have and and the difficulty. This is a very very hard business, this business of investment management. And in the long run, we're all average, we're below

averages my thesis suggested, below the market averages. And so I don't think it's easy, don't think you're smarter than anybody else. Just get in the middle, get costs out, and don't peak. John Boggle, this has been a fascinating conversation. I again, thank you so much for being so generous with your time. If you enjoy this conversation, you could look up an Inch or down an Inch on Apple iTunes and see the other eighty or so of these that we've had. UH. Be sure and check out uh

all the rest of our our chats. They're really quite fascinating. I have to thank Mike bat Nick, my head of research, for helping to put together all these questions. My producer and engineer Charlie Vollmer for dragging himself out of bed at an undoddly hour in the morning to drive here to Malvern, Pennsylvania to Vanguard UH mother ship. Jack, thank you again so much. This has been absolutely fascinating. Great to be way. You're married.