Replay Interview With Burt Malkiel: Masters in Business (Audio)

have a very special guest. His name is Professor Burton Malkiel. And when I say I have a special guest man, I am not kidding this week. Professor Malkiel is perhaps best known for writing one of the most seminal books on investing, A Random Walk down Wall Street. It's now and it's eleventh edition, having sold more than a million and a half copies. UH Professor of Economics at Princeton,

twice Chairman of the department there. He ran the Hell School of Management for about eight years, and over the course of that period he was for twenty eight years on the board UH Vanguard. He is currently the chief investment officer of Wealth Front Friends with other guests of the show like Jack Bogel and Charlie ellis really Professor Malkiel is unique um in the annals of of investing. He's a rock star. And I don't know if there are many people who are more knowledgeable and more influential

uh than he is. So the man who pretty much invented the blindfolded monkey throwing darts, the person who suggested that Wall Street created an index fund so that investors could make low cost indexed investments. What else can I say? Why don't I say nothing else? And with out any further ado my conversation with Bert Malkiel. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special

guest today. And I know you make fun of me when I say that, but my special guest today is truly a special guest and a legend in the world of finance. Let me read just a short version of his curriculum vitae. His name is Professor Burton Malkiel. He used to be the Chemical Bank Professor of Economics at the Princeton UH At Princeton University. He is a two time chairman of the Economics Department, served as a member of the Council of Economic Advisors from to nineteen seventy seven,

became president of the American Finance Association. After that, he was dean of the Yale School of Management in the eighties and spent twenty eight years as a director of the Vanguard Group. He's probably best known for authoring the book A Random Walk Down Wall Street. It's now and it's eleventh edition. The paperback came out again, updated and revised.

It's sold one point five million copies, and a number of people have said, if you read only one book about investing, Random Walk Down Wall Street is the one to read. Professor Malkiel, Welcome to Bloomberg. Thank you very enjoy being here, and I am am thrilled to have you. By the way, I left out so much from your CV. UM bachelor's and NBA from Harvard and fifty three and

fifty five doctorate from Princeton in sixty four. You're currently Chief investment Officer for wealth Front, which is a software based financial advisor. UM. The list goes on and on. I'm gonna stop that because if I keep discussing your CV will run out of time for questions. You're probably best known as someone who who was early in the history of recognizing that quote markets are efficient. Why are

markets efficient? First of all, sometimes people get wrong what efficient markets mean, so giving a definition, so let me let me tell you the way I define it. There are two parts to uh, the idea of efficient markets, and one part that many people associate with it that's wrong. The parts that are right are one that information gets

reflected very quickly into stock prices. If there's some favorable news about a company, uh that's going to increase at stock price ten percent, the stock price tends to go up ten percent right away because anybody who uh waits uh to uh get take advantage of it will find that quicker people have come in beforehand. So one information gets reflected right away. Now, what efficient markets is often associated with, which is wrong, is that efficient markets mean

the price is always right. The price is exactly the present value of all of the dividends and earnings that are going to come in the future, and the price is perfectly right. That's wrong. The price is never right. In fact, prices are always wrong. What's right is that nobody knows for sure whether they're too high or too low, and that leads to the second point about efficient markets. It's not that the prices are always right. It's that

it's never clear that they are wrong. There's nothing systematically wrong about them. Therefore there are no arbitrage opportunities, and therefore the market is really very very difficult to beat, and so information gets reflected. The market's tough to beat. But prices are not always right. We know perfectly well they're always wrong, but nobody knows for sure whether they're

too high or too low. We were recently having a discussion about fair value when people were complaining, well, the market is not at fair value, and my my response was, well, you just briefly pass fair value as you crean too much to the upside of too much to the downside. You're saying, even when you go by fair value, we don't really know exactly what it is. We don't know, we don't know for sure. Look, we know perfectly well that in March of two thousand there was a bubble

in the stock market. UH. We had internet companies selling a triple multiples. We had companies changing their name UH to put dot com at the end of it, and the price would double. We know that there were crazy things going on but the problem is the people who are associated with the view I told you so I knew that. The problem is they knew it in and

that's the problem. After the fact, we know perfectly well the prices were wrong, But the difficulty was the people who said we knew it, knew it early in the nineteen nineties and missed one of the best bull markets we've ever had. I very famously remember Lewis Rukaiser's his elves saying these things in nine six. He ended up demoting a few of them because they were right. Stocks were of valued. But so you missed four years of

double digit gains this last collapse. I recall, in real time, very very few people were warning about credit, about derivatives, about housing. These days, I have meant more people who claim to have seen that collapse coming, and that would be a little bit of hindsight bias. Now exactly, and that's precisely the thing that happens uh before the fact, we really don't know, and we don't know today. Are the is the stock market too high or too low?

It's high now, there's no question valuations are stretched. But it's also the case that the short term government interest rate is zero, and the long term interest rate after inflation is probably zero or below zero. So in that environment, everything is going to be more highly priced. I'm Barry Hults. You're listening to Masters in Business on Bloomberg Radio. My special guest is Professor Burton Malkiel of Princeton and Vanguard and the author of A Random Walk Down Wall Street.

The paperback is now and it's eleventh edition and it's sold a million and a half copies. Um, let's talk a little bit about indexing versus active management. Uh. There was a quote from the book that I've always enjoyed this number of quotes from the book, but you had said back in nine seventy three. Fund spokesman are quick to point out that you can't buy the market averages. It's time the public could so explain your role in

the development of the index funds. Well, basically I said that in nineteen seventy three, and the first index fund was not started until seventy six. Now. Uh, you know, I want to give Jack Bogel all the credit in the world, because it's one thing for an academic to say, hey, there ought to be index funds. It's another thing for somebody to bet his company on starting an index fund, and let me tell you, it wasn't easy. At the beginning.

They had an underwriting where they were hoping to do a hundred million or more in the index fund, and in fact the book wasn't oversubscribed. They sold eleven million. And sometimes I used to joke, because uh I then was on the Vanguard board that Jack Bogle and I were about the only people I knew who actually owned

shares in the index fund. It was very, very slow to catch on, but it did catch on, UH And in fact, last year, hundreds of millions of dollars moved from actively managed funds into index funds, and index funds now now have maybe somewhere between thirty and thirty five percent of people's money of individuals or institutions, more institutional than individual. Uh. Individuals are slower to catch onto this, so with the institutions it's maybe thirty five or more.

With individuals it's probably a bit less than thirty. But the point is the market is catching up to the idea, and UH I am obviously simply delighted since I've basically been an evangelist for index funds all my life. So Vanguard you. You mentioned your you you served with Jack Bogel. You were on the board for twenty eight years. They're now over three trillion, that's trillion, with of which two thirds are actively are actually passive indexes are actually they

still have about a third that are active management. But that leads to a really interesting question. What's more significant the low cost aspect of it or the passive aspect of it of index Well, I think they're both both are important. Clearly, the low cost is important in that Uh, you know, let me tell you, any of us who talk about financial markets need to be very modest about

what we know and don't know. But let me tell you the one thing I'm absolutely sure about with respect to financial markets, and that is the lower the fee I pay to the purveyor of the investment service, the more that's going to be for me. And the problem is for active managers, it is still the case that probably a hundred basis points one percentage point a year is what they are charging, and the index fund or e t F, the exchange traded index fund, charges five

or four basis points. Uh. And that difference is basically a difference that comes to the investor. It's also the case that trading is not free. There are bitass spreads, there are market impact costs. Uh, it's not free. So there's an extract cost uh, including what I think people do not appreciate, and that's the tax cost of the active trading. When you have an actively managed fund, you've got a ten ninety nine at the end of the year.

Very often and they will say, hey, we realize some short term and long term capital gains on your behalf and you've got to report those on your income tax. You have a partner named Uncle Sam, and he's going to take exactly that. That's that's quite astonishing. So how do I'm curio is, how did you find your way to Vanguard from Princeton. Well, I think Vanguard found its way to me in that people knew uh that I

had been a proselytizer for index funds. I believed in low cost uh, and so it was such a very natural fit. And Vanguard came to me. I didn't come to them. So let me throw another of your quotes from the book out that that I adore. And I'm curious as to the sort of pushback this generates. But by the way we take this quote for granted, and I have found a number of quotes that are yours that a number of other people have have taken credit for.

But in a random walkdown Wall Street, you wrote, a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well, one selected carefully by the experts. What was the response to that. Oh, the response was really uh, definitely bad. Uh. The former Bloomberg business Week was just Business Week, And my book when it first came out, was reviewed by an investment professional in Business Week, and it was probably the worst

review I've ever had in my life. The reviewers said, this is the biggest piece of garbage that you could possibly imagine, because professional, uh, investment people really don't like

to be compared to a blind to blindfolded chimpanzee. So I remember, for a long time the Wall Street maybe it was fifteen years they were doing this, The Wall Street Journal was literally throwing darts at stock pages and compared to an absolutely and in fact, they had invited me to throw out the first darts when they did this. And basically what they found was there was a little bit of an effect because when the Wall Street Journal

put the column out. The column had five picks of the experts, and the expert picks, Uh, maybe got a little bit for a day, the price went up a bit, but generally, after the fifteen years of doing this, it came out basically pretty even. And you know, that really leads to a very very important point about indexing. You know, we talked about the markets being reasonably efficient. Suppose they weren't efficient. It doesn't matter when you think of it. All the stocks in the United States have to be

held by somebody. Every share of General Motors is held by somebody. Every share of Facebook is held by somebody. Any every share of Salesforce is held by somebody. So what that means is if you, as a professional investor, hold just a few of the stocks, what that means is and say that they're the good ones, the ones that went up more than the market. What that has to mean is that somebody else is holding the stocks

that went up less than the market. It it must follow that investing has to be a zero sum game. If somebody is outperforming, then somebody else has got to be underperforming because the index holds everything. And the reason the index fund wins is the index fund is holding everything and essentially charging a zero the and the active manager is holding some of the stocks and charging a

one percent fee. So even if before fees, the active managers balance each other out, after fees, they're going to underperform. And what we know, we know so clearly is year after year after year, the active funds are underperforming. Every year. I always read columns, this is going to be a stock pickers market year, you know, every year people are going to say that, or beginning of this year, there's going to be more of volatility. This year, the unactive

managers will be able to outperform. And Standard in Pores does a so called SPIVA report each year Standard and Poor's indices versus active, and every year we get the same thing. Two thirds of the actively managed mutual funds underperformed the index, and the third that outperform in one year aren't the same as the third that outperformed in

the next year. So that uh uh, you know, it's not that it's impossible to outperform, and in fact, there are a few outperformers, but when you go active, you're much more likely to be in the bottom end of the distribution and index investing isn't mediocre investing, it isn't average investing. It's actually above average investing. I'm Barry Riults. You're listening to Masters in Business on Bloomberg Radio. My

special guest today is Princeton Emeritus Professor Burton Malkiol. He is probably best known for his book A Random Walk Down Wall Street. The paperback is now in its eleventh edition. It's already sold over a million and a half copies and is widely regarded as the one book to read

on investing if you're only going to read one. Uh. He is also, in addition to a long and glorious uh academic career, he is also the chief investment officer of wealth Front, which is one of the larger new software driven asset management firms, which is running about three billion dollars. Is that about right? So how did you get involved with something like a robo advised or something like Wealthfront? Well, again, they just as with Vanguard, they

found they came to me rather than vice versa. Uh. And again it was just such a natural fit because a they use only index funds, and as you know, UH, that's what I have believed in all of my life.

And secondly, uh, they are charging very low fees. They charge nothing for the first fifteen thousand dollars under management, and then they charge twenty five basis points a quarter of one percent on anything over there versus a traditional investment advisor that will put together a portfolio for you and charge probably at least one percent uh and sometimes even more. And the problem I think with many professional investment advisors is that we ought to recognize that they

often have a conflict of interest. What I think is not as well known as it should be, is that if you go to an investment advisor who sits down with you and says, okay, uh, we'll put together a portfolio for you, that that advisor gets paid for selling you an actively managed fund. It's not only that the fund itself is charging you maybe one but there's a conflict of interests the advisor. Uh. In fact, that's one of the reasons why there's such a battle now about

the so called fiduciary standard. And again, what this advisor, uh, this automated advisor, we have no conflict of interests. We just use In fact, uh, we use a lot of Vanguard ETFs. But if Charles Schwab has a cheaper e t F. H we will use that and we are able to automatically rebalance the portfolio to keep it within the risk level that the client wants. If it's a taxable account, uh, we do uh tax loss harvesting. I mean, for example, last year, we had a bit of the

portfolio in emerging markets. Emerging markets were terrible last year, so that if you bought an emerging market e t F you had a loss. What we will then do is we will then sell that e t F keep your position in emerging markets by buying another one that's similar but not identical. And the reason you can do that and have it not be a wash sale is say you sell an M S c I Emerging market e t F and you buy a Vanguard one. They are index to two different indices, so it's not a

wash sale. And so we're able to do all the things that a sophisticated investment advisor will do for you and do it at a fraction of the cost. And again, as I said before, the thing I'm sure about is the lower the costs that I pay, the more that's

gonna be for me. And UH, I think it's been very effective and in fact, in a lousy year like last year, we were able to realize for various accounts between two and three percentage points of tax losses, so that even in a year when markets were pretty darn flat and did very little, we were able to, UH, I think benefit the people who are our clients. So so within this and I find the term robo adviser

to be a little misleading. But well, I don't like it because it suggests that, in fact, you know, there's some senseless robot who's doing it. And since I'm the chief Investment Office, I can tell you that, in fact, there are a lot of smart people behind what we are doing. I'm Barry Rich Hults. You're listening to Masters

in Business on Bloomberg Radio. My special guest today is Professor Burton Malkiel, formerly of Princeton where he is still UH professor emeritus, a former board member of Vanguard for twenty eight years, and author, now in its eleventh edition, A Random Walk Down Wall Street. UH. The book has sold over a million and a half copies. UH. Let's talk a little bit about UM. Some other guests I've had on the show that that you know, so you

worked with Jack Bogel for a number of years. He was a guest on the show a few months ago. What can you tell us about Jack that that we probably don't know? Well, I don't know whether you know. Jack is very well known, and I think the some of his habits are uh probably better known than the habits of some of your other guests. But one of the things about Jack is that maybe people don't know, is this idea of low cost uh is really into

his DNA. This is a guy who will go to a hotel uh and when they say, well, we've got a very good room, and we've got a bargain, uh it's a hundred and fifty dollars a night, Jack will go and say, well, do you have anything at a hundred dollars a night? Jack has this sort of calvinist streak uh that uh uh he uh as much money as he has, and he's certainly been very successful financially, just lives his life as frugally as you can imagine. And of course I think that's really what has gotten

into his company. A vanguard that uh that's really into Jack's uh d n A. And you know the interesting thing, I'll tell you one other little funny story about Jack Vogel. So many Wall Street people, uh have you know the eight thousand dollar watch on and uh the Italian Uh, the Italian suits and so forth. Uh. Jack is always

sort of in a rumpled suit. And interestingly enough, when he first met Warren Buffett, uh, they were actually at a hotel together, and Jack recognized Warren went up and introduced himself, and he said to Warren, you know the thing I really like about you is you have rumpled suits just the same as uh I do. And Jack

and Warren have become very very good friends. And as you probably know, because Warren is the sort of exception to indexing that everybody mentions that, Warren has said, I've got told my widow when I'm gone, I just want you to own index funds. So there's a couple of things about Jack. He's been a lifelong friend and uh, just a wonderful guy. But Buffett has said publicly most people should be in indexes. That absolutely what what the

average person should be doing. But so let's talk a second about Buffett, because when we talk about the efficient the concept about the efficient market hypothesis, the name that always comes up is Warren Buffett? Is is he an outlier? Is he lucky? Or is he uniquely skilled? Look? I think he is enormously is skilled. I wouldn't take anything away from him. But he's also a very good businessman.

Let me tell you a little story. At one point, when I was the dean of the Yale Management School, we had Katherine Graham come to speak to our class, and uh, she fortunately got the time wrong, but not to come an hour later an hour earlier. So I was able to sit down with her for about an hour. And of course, the first thing I wanted to ask her was, look, I know that one of Warren Buffett's

first great investments was the Washington Post. And tell me about Buffett, because Buffett generally buys companies, are huge stakes in companies. And she said, uh. I said, what was it like working with him? She said, you know, when I had learned that he had bought a steak in our company, I was just scared to death. I thought he clearly wanted to take over the company. Uh, and I would be out in my ear. So I called him and he said, no, really, I just did this

as an investment. And she said, I really sort of liked him. He seemed very honest and straightforward. And I then confided at him, we're going bankrupt. We're really in terrible shape. Would you please come join my board and help me right this company? Buffett joined the board. Buffett actually was to Catherine Graham enormously helpful as a business person,

moving the thing around and making it finally successful. And so when you think of Warren Buffett, I don't think it's just that he read Graham and Dodd bought a value stock uh and uh and it was good. He's also made sure not himself, but he's put good management in and has helped managements. And I think that's been the genius of Warren Buffett as opposed to Uh No, it's very easy. You just read Graham and Dodd and

run a good portfolio. Let me also say about Buffett that given the size that Berkshire Hathaway is now, it's virtually impossible for him to do the kinds of things that he has done in the past. He does um bring a certain good housekeeping stamp of approval. And he is also and I recall the most recent addition you referenced him, he gets access and creates deals that the

average stock picker is just never going to have access to. Oh, absolutely, and he's got the capital that during the financial crisis, UH, he was able to go to financial institutions, get a ten percent coupon, get an equity participation, and do what other people were not able to do. So let's last word about Buffett. He made a tremendous investment in Goldman Sachs,

which turns out to be hugely usually successful. Most people probably don't realize that he had offered Dick Fold of Lehman Brothers an investment and Fold turned them down, which is stop and think about how how brilliant and insight that was. So, so let me go back to UM some of some of my favorite quotes from the book. I recall hearing this way back when, and then when I started researching UM things for this conversation, I was shocked to see that this was a quote of yours

you had written in or said in some interview. Tip of the week if you bought a thousand dollars worth of Nortel stock one year ago. By the way, this was in the late nineties when Nortel UH symbol NT was a house of fire. UM if you had board a thousand dollars worth of Nortel a year ago, today,

it's worth forty nine dollars. But if instead you went out and bought a thousand dollars worth of Budweiser, the beer not Anheuser bush stock a year ago, if you drank all the beer and traded in all the cans for the nickel deposit, it'd be worth seventy nine dollars more than Nortel. My advice to you start drinking heavily. I remember seeing that in the late nineties, and it was never attributed to you. Is that really a quote

from burton Mouth? Hiel, Oh, yes, it definitely is. But you know, my feeling is imitation is the best form of flattery. I'm you know, I'd obviously prefer uh that someone gave me credit for it, but uh, the imitation is fine. And the point about the book, and I think one of the reasons that the book has done well is that it is written in a rather lighthearted fashion, because a lot of people's eyes glaze over when they're

talking about facts and figures and numbers. So I've really tried as hard as I could to make it as interesting as possible. Well, you certainly you're certainly succeeded. There Another book that that I've been a fan of, uh is The Winning the Loser's Game by Charlie Ellis. He was also on the board of Vanguard for a long time and uh on the Yale Advisement, Yale Endowment Advisory Board, where where you were um chairman of the School of Management.

I assume you and Charlie know each other fairly well. We do know each other fairly well. And uh, Charlie and I have actually written things together. And and again I think one of the things Charlie and I want to give him credit, this is his Charlie has I think uh uh just uh this wonderful analogy about investing that is just so true. Uh. And it's one of the things he's best known for. He says, Listen, suppose you're a tennis player, but you're not a professional. Now.

Professionals win points by some uh you know, huge fast serve, uh, some drop shot, some superb shot uh that the other player can't get. But when you think of ordinary people playing tennis, the people who win are the people who have just made the fewer errors that trying to do something extra is a loser's game, and uh, that of course is what Charlie is best known for. Obviously, Charlie and I are Kendred Spirits in that we both believe

in indexing. Charlie, for example, started his career and started a company, Granite Associates, where they were helping to choose the best investment advisors. Charlie believed in active management, and only after experience with it he now realizes that he is a convert. And Uh, there is no better person uh to sing the praises of indexing than Charlie Ellis. Uh.

He's a great guy and a very good writer. So if people want to find more of your writings other than the book, and this isn't the only book you've written a number of them, where else would they go to to learn more about the works of Burton Malkiel. Well, I've done other things, uh, such as and maybe this, you know, gets into a different subject. I've written about emerging markets and a book called Global Bargain Hunting. I've written about China in a book called From Wall Street

to the Great Wall. Uh. And I think in general today, uh, probably if I have any investment advice for a long run portfolio. I suspect that people are smitten with what we call the home country bias, that they just have US stocks uh to the detriment to their own detriment, and they are ignoring some of the fastest growing parts of the world. Emerging markets now have about half of the world's GDP. Emerging markets have eighty five percent of

the world else population. Emerging markets have about of the world's capitalization. And today emerging markets are very unpopular, which means attractively priced, which means that they are probably the

most attractively priced markets in the world. Now that doesn't mean the next month or the next year they're going to do well, but we can look at very long run rates of return and get some idea as to whether they're going to be high or low by looking at valuations and look, valuations in the United States are high. They're higher than average. Because emerging markets have been so unpopular, valuations are well below normal. Emerging markets are still growing.

China is slowing down. Yeah, China is probably only growing at six six and a half percent now rather than ten. And everybody says China is crashing and burning. I wish we were growing at six for sure, So I think there's a lot of growth there. Valuations are better, and I just think that if somebody has a portfolio and has nothing in emerging markets, you ought to take a look.

And of course I would say you take a look by indexing, because a lot of people say, oh, emerging markets are very inefficient, you don't want to index there. In fact, of emerging market active managers are outperformed by the index in part because of the inefficiency of emerging markets. So that asks spreads are high market impact costs when you buy and sell, there are stamp taxes and emerging

markets you really want to be more passive there. And my advice for investors is take a look and at least a small piece of the portfolio should be put there, and I think over the next decade people will be well served. This puts you a little bit at odds with Jack Bogel, who is not a fan of investing overseas. He's concerned about the currency risk, and he says, hey, half of the S and P five hundred uh revenue

comes from overseas. How do you respond to jile? Absolutely, Uh, there's no question you get some of it with us multinationals. But my feeling is, uh, you will also get some good portfolio effects because emerging markets are not totally correlated with the US market. I think that you're missing something. And even though Jack is one of my absolutely best friends and we agree on ent of things, Jack also doesn't like a t f S and I think are a great uh, are a great invention and uh great

for people. So a little Burton Malkiel, Jack Bogel Trivia, my head of research and I were putting these questions together and we noticed that Jack Bogel was born at the peak of the market and you were born at the depth of the crash. Uh huh. That's very interesting. That's fascinating, a little bit of fascinating, a bit of information and uh uh uh. I was a depression baby and so is so is Jack. Um. Professor Malkiel, you can hang around a little bit. We'll we'll continue chatting

for a while. So h and if I forget to say this later, thank you so much for doing this and being so generous with your time. We have been speaking with Professor Burton Malkiel of Princeton University, author of A Random Walk down Wall Street Now and it's eleventh edition. If you enjoy this conversation, be sure and stick around for our podcast extras, where we keep the digital tape

rolling and continue chatting about all things investing. Be sure and check out my daily column on Bloomberg View dot com. You can sign up for my Daily Reads also at Bloomberg dot com, or follow me on Twitter at Rit Halts. I'm Barry Rit Halts. You're listening to Masters in Business on Bloomberg Radio. What could your future hold more than you think? Because at Merrill Lynch we work with you to create a strategy built around your priorities. Visit mL

dot com and learn more about Merrill Lynch. An affiliated Bank of America. Mery Lynch makes available products and services offered by Merrill Lynch Pierce feder Smith incorporatedor Register Broker Dealer remember s I PC. Welcome to the podcast extras. Bert, Thank you so much for doing this. This is really fascinating.

I'm a fan of yours for forever. You could tell by the other folks I've had on the show, Jack Bogel, Charlie Ellis, Bill McNab, Jack and in you are you are right in the same circle of of excellence as these folks. There's so many questions I want to get to you get through. Let's let's see how many of these we can we can click through. Let let me start with a softball. Why is stock picking so difficult? Basically,

it's partly difficult. Is that partly the reason is that there are so many people doing it and that they are so professional in doing it. You know, if you have a market where say ten percent of the people in the market or professional and n are individuals who don't know anything, and they will pick a stock because they like the name, or they will pick a stock because uh uh, they drive a Fiat so they'll buy

Fiat Chrysler. They'll do it that way. That gives the professionals a possibility of finding things that may be improperly priced. But when you have a market now that is ninety percent professional and probably of the trading is done professionally, that competition means that if somebody has got a good idea, they act on it and the price reflects that good idea. And that's I think the problem. When you've got a market that you have individuals who are buying stocks for

different reasons other than do they represent good value. Maybe there's a chance of doing it, and maybe this worked fifty years ago. But the problem is as the market gets more and more professional, when people are better trained, when people have better sources of information, when people can go to their Bloomberg terminals and the information gets disseminated immediately to all the professionals, it's then harder and harder to actually beat the market. So that raises another question

that raises a number of other questions. Uh, why are so many people still so involved in chasing alpha? Why is it that the majority of market participants seem to be spending so much time chasing uh that the dream about performance. Let me give you two reasons. One is, uh, that they get paid for doing it. This is and well paid at that this is a very well paid profession.

Uh so, uh, they do get paid for it. The second is, and this goes to the work of Danny Kahneman, who was one of my colleagues at Princeton, that there does seem to be in our d n a a feeling of over optimism. These people who are chasing alpha. Yeah, they do it because they get paid to do it. But I think they honestly, you know, it's it's not that they're bad people and that they're lying. They really

believe something. Yeah, they're direct and the and and this is I think the problem that this over optimism is just a part of our human nature. Uh and uh even though they think it's difficult, uh, they think I can do it. You know we uh we and uh we now is myself and Danny Kahneman, because I've done

these experiments. You ask a group of students. I've got two hundred students in the room, and I give them some questionnaires and one of them is are you a better driver or the worst driver than all the other students in the room. And of them say that they're better than averages like like will be gone. Yes, you know,

we're all better, we're all better than average. And I think that there's a lot of that in uh uh in this that you know, you just uh you you you you hope uh and you think that yeah, it's hard to do, but I can do it. You know. The joke story about this being in our DNA is a few hundred thousand years ago there were two groups of cave men, and one group of cavemen saw some mammoth down on the plains and said, I have an idea. Let's take sharpened sticks and see if we could go

bring down this three ton mammoth. And the other group of people weren't optimistic, and they stayed in the cave. Well, the first cave might have lost a few participants, but they had mammoth meat all winter and they made it through to the spring. The risk of us group, they didn't have anything to eat, and therefore we we have tend to be over optimistic. We may lose a few people along the way, but as a group, the tribal

will survive. And I always thought that was an amusing I think I think that's right, because I really do think it's in our d n A. So this raises another question. I mentioned. Vanguard is now up to three trillion with a TU charging an average of something like eleven basis points across all their funds. But at the same time, the hedge fund community is also up to three trillion, and they charged two hundred basis points plus

another of the profits. Some people have described hedge funds as a fee transfer mechanism UH disguised as a asset class. How do we explain the simultaneous success of really low cost indexing and really expensive active private management. Well, I don't think the hedge fund fees are going to continue. I think there's already uh some pressure on the fees, and there are some institutional investors, such as CalPERS, who have in fact realized that this may not be as

good a deal as they had hoped. Hedge funds worked for a while, and you know, again this goes back to the paradox of professional advice. At the beginning, there were hedge funds who made a lot of money and who actually did find arbitrage opportunities. Let me give you an example. Uh, we have standard and Poor's futures. We

have standard and Poor's e t fs. Sometimes those futures and the e t F sold at prices that were different from the prices of the underlying and when you were able to do efficiently a program trade, you might be able to get an arbitrage where the future is too high, so you short the future and by the underlying or vice versa, a relatively low risk transaction. There were some arbitrages, and some hedge funds, like Citadel was one example of a hedge fund that got built up

that way. Did very very well. Those opportunities now have basically been arbitraged away. That's the idea of efficiency that has more and more good people get into something, the opportunity goes away. It's like, you know, suppose there was a Christmas rally that the market goes up between Christmas and New Year's. Well, then if you know about it, then what you do is you buy the day before the Christmas holiday and you sell the day before New

Year's UH, in order to take advantage of it. But then you realize you've got to go two days before and sell two days before the end. And then of course it disappears. And so I think what's happened is that worked for a while, it does not work now. And the hedge fund returns have been just terrible over the last five years. And I think what you are seeing slowly, these things don't happen overnight, but slow you were seeing pressure on fees and more and more institutions questioning, UH,

the idea of hedge funds. And and again let me talk about another person. I don't know if you've ever had him on your show, UH, David Swenson, who wrote the book on institutional management of using hedge funds, and David was then going to write a book for individuals. He then looked at the situation today and said, oh my god, you can't do it anymore by index funds. I haven't had Swenson on, but i'd absolutely love to. You know, you mentioned uh some years ago the hedge

funds were making money. Jim Chenos, who runs kind of Coast Associates, said, twenty five years ago when he or thirty years ago when he launched his hedge funds, they were about a hundred hundred hedge funds and they were all making alpha. They were all actually making money. Now there's ten thousand hedge funds, and the same hundred hedge funds are still uh making creating alpha, and none of the rest are. So you're right, is a handful of

them that did, and some of whom still are. Uh. Look at look at Renaissance Technologies and Jim Simons um hand uh, David Tepper and Appalouse Associates. There's a small run of folks that seem to be making money. I don't want to quite say consistently, although when you look at Bridgewater and you look at Renaissance, some of them have been fairly consistent over the years, but it sounds like the you're you're of the opinion the bulk of

them just don't get it. I think the bulk of them don't, and I think it's getting harder and harder and the paradox of professional advice. Uh, if it works, it's going to destroy the alpha's. And I'm very suspicious. I don't think that supposed there even is some alpha around. Uh, the two and twenty means the alpha's all gonna go to the purveyor of the service. I think they'll be

less and less of it. And again, when we talk about the things that Yale University did that my own university did, remember also that a lot of these things, it's less well known, would cut their own deals with these people, and they wouldn't necessarily pay two and twenty. The alpha's that are around, if there are any, are not going to justify two and twenty for the buyer of the fund. So let me throw another quote at yours, the of you. Let me know, throw another quote at

you of yours that that I really like. It's not that stock prices are capricious, it's that the news is capricious. Explain what you meant by that, Well, look, if there is a headline UH that comes out tomorrow, UH, and it says, uh, men's stores are gearing up for a Father's Day buying season, that's not news. I could have written that six months ago the calendar, you know, Christmas exactly. Uh. What's news is something that you can't predict from the past.

What's news is uh, for example, today it looks like an Egyptian airliner was taken down by terrorists. That's news. You couldn't predict that yesterday. You couldn't predict that the day before. And so news is in some sense random, and by random I mean unpredictable. And it's the unpredictable things that move prices. And what I am suggesting is that to the extent that they mean that prices should be higher or lower, the prices changed right away. So

I like the way you describe that. Let's talk a little bit about what's become one of the hottest bud buzzwords and investing, smart Beta, which you actually added a whole section in the in the whole Champion. So, so is smart beta just smart marketing or does it have some real I believe that smart beta is mainly smart marketing, and it's not smart investing. Now, what smart beta is is the following. What we know from history is that there are certain factors that have been associated did with

somewhat higher stock returns. Example, we know over time the returns from smaller companies have been generally a little bit higher than the return from larger companies. Now, my sense is that's probably right, it probably will continue. But in fact, smaller companies are riskier than larger companies, so that if you get a somewhat higher rate of return for taking on more risk, that doesn't mean the market is inefficient, that doesn't mean it's a real alpha. That just means

you took on more risk. Uh. Junk bonds yield more than triple A bonds, of the of which there are only a few now. But the point is, yes, you can get a higher rate of return for taking on more risk. UH. So what smart beta says is, let's put the portfolio together with some of these factors that have been associated with higher returns. And my sense is that either you get the higher rate of return because you've taken on more risk, or that the factor isn't

nearly as dependable as it's been in the past. For example, value has generally done a little better than growth over the years. I think largely because of the situation UH in the year two thousand when growth stocks sold a triple digit multiples, and I remember my own public service of New Jersey sold at a multiple not too much over ten. So obviously the growth stocks went way down, the value stocks did well. Not depend endable though year to year. In fact, the last few years value stocks

have been a trap. They haven't been good. So my sense is it's really an excuse to charge instead of five basis points, seventy five or a hundred basis points, And if you do get a higher rate of return, it's only because you've taken on more risk. And these other factors are really not nearly as dependable as the proselytizers for smart beta suggests. So let's hold smart beta side for second and talk about the French Fama three factor model, which since has been expanded. So I think

five factors. So small cap is one, value is the three factor, and the regular beta. The regular volatility is the third one of the Fama French three factor model. Now now there's also two additional factors. One is quality where you're avoiding heavily indebted or some other quantitatively way to to eliminate names and momentum on top of it. How do we adjust those sort of models that seem

to do somewhat better than the actual um benchmark? Is it that there are inefficiencies and it's too challenging to to sift through. When you look at the Wall Street coverage, for example, the analysts coverage of big cap stocks Apple, Walmart, Google, there's a hundred analysts covering them. You look at any of the mid size or even small cap stocks, there's a dearth of coverage. There's a dearth of banking services. It seems like there's not a lot of information about that.

Is that potentially an inefficiency that that could contribute to small cap so called premium It's possible, But I would also say, uh, since there are a lot of small camps uh that really can lose half or three quarters of their value. Uh, they're also I think, in my view, intrinsically risk ear And I think that's the other point about this. Let's take momentum, which is one of the ones that there's been a lot of recent work on. There is a little bit of past evidence that there

is some momentum in the market. There are also what is called momentum crashes. But sometimes you get a momentum stock and uh it works fine, uh until uh uh until it doesn't. I mean again, you know that uh this uh fellow on a different network who will be nameless, would talk about the fang stocks Facebook. You know, all of these were just doing well. There was a lot of momentum, and then all of a sudden, uh, it crashed.

And so while there might be something there, I think there's also an inherent risk in following some of those factors. So again my view is that they're not nearly as dependable as people argue they are. They probably are associated with larger risk. And as I've looked at all the smart beta ETFs over the last five years, I do not find that as a group, after expenses, that they have in fact been a good deal for investors. So my view is plain vanilla capitalization waited indexing is still,

in my view, the way to go. So given the success of indexing and the success of Vanguard and a host of other advisory firms that advocate indexing, that leads to an obvious question, when does indexing get to be too big? Can we ever reach a point where too many people are in are in indexes and that creates

opportunities for the active managers. Well, you know, when indexing is of the total, I might start to worry about that, But I think with the indexingt pent of the total, there are still plenty of active managers out there to make sure that information gets reflected quickly. And in fact, I think it'll always be the case. Suppose indexing was so great that, in fact, the market wasn't reflecting the news, then it will pay somebody to jump into the market.

And you know, that's the wonderful thing about capitalism. Uh, if you have free markets and somebody can jump into a market, if there is an opportunity, you can count on the fact that somebody will. So I'm not worried about it. Uh. If in fact it was the case that markets were getting less and less efficient in reflecting information, believe me, that'd be a profit motive for somebody to jump in. Because if there's a chance to make money

in this world. Uh, that's the beauty of capitalism. Somebody will find a way to do it. So I mentioned to a friend that I was speaking with you today and Uh. This person is an active manager, and he said, ask him what his problem is with market timing. If I see a train coming down the tracks, don't I want to jump out of the way. So I know what the answer is, but let's hear it directly from Well, look, absolutely,

you want to jump out of the way. The problem is, UH, it just isn't that obvious that there's the train uh coming? You know, maybe maybe it's a light at the end of the tunnel rather than the train coming in the opposite direction. And I think the people who have tried to do market timing, uh have I think, uh really not been successful. I have never known. Look, I remember I've been uh on boards like Vanguard where we had some people trying to do market timing, because Vanguard, as

you pointed out earlier, has some actively managed funds. I've been a long term director of Prudential Financial. We had people trying to I have never known anyone who could consistently time the market. And in fact, I've never known anyone who knows anyone who was able to consistently time the market. Sure, jump out of the tracks of a train is coming. But it isn't that obvious. So let's talk a little bit about the behavioral side. We've alluded

to it throughout the conversation. Behavioral economics today is widely understood, widely followed back a few a decade or two ago, it really wasn't understood. Here's a quote from you, and this is directly from the book. There are four factors that create a rational market behavior over confidence, biased judgments, herd mentality, and loss aversion. What does that mean to the to the average investor, Well, I think when you actually look at how this works with what people do,

let me tell you what I think. The main lesson is one of the things that we know is that people tend to sell out when things are looking grim and to buy when everybody is optimistic. We we have very good data on the flow of money from individuals into equity mutual funds, and what we know from those data, uh is the following fact that money flows into the

market when everyone's optimistic. In the first quarter of two thousand, at the top of what it clearly in retrospect was a bubble, more money came into equity mutual funds than ever before that that quarter Q one two thousand, Q one two thousand. That's when the money came in right at the top and in fact went into the growth funds, went into probably the most overpriced part of the market.

We used to have a sick joke at Vanguard at that period because value funds, which were actually cheap had outflows. We uh we at Vanguard. The flagship value fund that we had was called the Windsor Funds, was run by a man by the name of John f a great money manager. He was losing money all the time. Now, you don't know in a mutual fund complex exactly where those flows were going, because when you redeem in a complex like Vanguard, you just redeem the fund and it

goes into the money market fund. So you have to look at where the checks were written. So we looked at where the checks were written, and in fact, the checks were being written to this company in Denver called Jens Janice. Oh sure, and the Janie Fund had something called the Janie twenty the twenty best ideas that they had.

They were all internet companies. And the sick joke that we had is, you know what, why do we have to go and do the accounting of having the money go from Windsor into the money fund and then to Janice. Why don't we just package up the money and send it to Denver right away. Well, you know what happened. The Janie fund lost eight percent of its value. Uh. In fact, value funds did very well after the market crashed.

So here is the problem. People are putting their money in when they're optimistic, they're going into this these momentum types of things. The money then came out when the market was low in two thousand and two, and when did most of the money come out of the stock market,

out of equity mutual funds? Individuals took out scores and scores of dollars in the third quarter of two thousand and eight, which turned out that was one of the mark that when the world was collapsed, and when we we saw the first quarter of two thousand nine, the flows actually accelerated and there was just a huge get me out at any price exactly. And of course what we know is that was precisely the time to get in rather than going out. And in fact, this is

where our emotions get ahold of us. And in fact, if it's the best thing that an investment advisor can do, whether it's a regular investment advisor or one of the automated advisors that I work with, is to keep people on an even keel. That's the best lesson that we can have is, for heaven's sakes, uh, don't let your emotions get ahold of you. Be a regular investor for retirement.

Put money in every pay period every quarter you'll get take the advantage of dollar cost averaging, which in a volatile market will actually help you because you buy more shares when the price is down that when the price is up. Don't try to time the market, because it's not that you don't it's even worse than that you don't know how to do it. It's that when you do it, you're much more likely to be wrong rather

than right. One of the things I noticed in the O eight oh nine collapse was even the people who saw the train coming and got off the tracks when the market bottomed in March O nine, they refuse to believe it. They stayed in cash. And we watched people sit in cash oh nine in two thousand ten and two thousand eleven, and all we heard about for a couple of years was this is just a head fake. This is a temporary rally. It's gonna go even lower. And what are we two hundred and six percent higher

from then? It's amazing. Lesson about timing is uh, not only do you not know when to get in, you don't know when to get out and when you market time. You gotta be right twice. You gotta know when to get out and when to get in. And nobody and I really believe this, nobody, but nobody can do that. So you mentioned the behavioral counseling for financial advisors as well as the software um advisors. Let me let me

ask a question a little differently. What is it that the financial services industry actually gets right for their customers to the extent that they get their customers to diversify, to have some safe parts of the portfolio, to keep an on an even keel uh two tax uh manage that is, to the extent that you have H an I R A or a four oh one K. To the extent that you have that and have some fixed rate instruments, Uh, they ought to go into that part

of the portfolio. Uh. And to the extent that you're in the taxable portfolio, maybe that's when you put some municipal bonds in if you want some bonds. And you know, this may seem very obvious, but that's something that individuals don't obviously think about. So there's a lot that financial advisors can do UH. And what I think is particularly useful in terms of what I'm doing with this automated advisor is if we can do it more efficiently, if we can do it at lower cost, it's going to

be much better for the individual. So we have about thirty minutes left before I have to send you off to chat with Arthur Levitt. Before I do that, let me run through some of my favorite questions I asked all of my guests. UM, it didn't look like you were gonna go into finance when you came out of school with an m b a. I from what I read, you were thinking about going into business rather than finance.

How did you make that transition? What what shifted your focus more towards investing asset management and finance rather than working with UH corporate entity. Well, I was always interested in finance. I mean I grew up a poor kid in Roxbury, Massachusetts, which is part of Boston, and I UH, we lived in a tenement house. We had no money, but I was just sort of fascinated with numbers. I

was fascinated with the stock market. I had no UH money in the stock market, but I knew the price of General Motors stock as well as I knew Ted Williams batting average. UH. And when I was in college, I was a good economic student. And my professors in college said you ought to go to graduate school and be an economist. And I said, no, no, look, and I grew up poor. I want to go and make some money. So I did go into UH. I did go to business school. I did UH then go into

Wall Street. I worked for Smith Barney for almost three years. I was an investment banker. But what I found was I was thinking I really did like economics. I was trying to go to n y U UH and get a PhD. At the same time that I worked for Smith Barney. But I was an investment banker, I was traveling, I was missing more of my classes. And what finally happened was I finally did make enough money so that I didn't feel poor anymore, and I took a leave of absence to go to Princeton UH get a PhD.

I expected to go back into Wall Street. I still liking finance, but an interesting thing happened. Uh. They said to me, hey, you've been a pretty good student, come and stay and teach. Really and so two things happened. I said, all right, I'll try it for a year

and see if I like it. And secondly, Prudential Financial had had a scandal at one point where the chairman was having Prudential lend to some of the entities that the chairman UH controlled, and the legislature decided that there had to be six public directors of Prudential, chosen by the UH Supreme the Chief Justice of the New Jersey

Supreme Court. The Chief Justice interviewed a number of people for this, including me, put me on the Prudential board, and again came to the point and said, you know, I could be a professor and still be a business. You know, I sort of never decided when I he

gave me both options. I then was on the Prudential board uh for uh longer actually than even on the Vanguard board, so that I uh then being on the Prudential board and knowing other people got on other boards and basically became uh someone who could live in both worlds and who could make a good living from being in the business world. Uh, and UH did the writing Uh and teaching that I enjoyed. I enjoyed teaching. It's one of the reasons why I wrote random Walk. Oh really,

that's interesting. So basically that was kind of my career of not deciding what I wanted to be when I grew up, Uh, and in fact thinking well, maybe I can do both things. And I have you told it at Princeton? Am I right? And saying almost forty years is right? Well, I I was at Princeton, as you pointed out in your introduction. I worked for the government for a couple of years on the President's Council of Economic Advisors. I was a management school old dean at

Yale for seven years. So I've done a lot of different things, and I've enjoyed that because I think life is richer to the extent that you get more and more experiences, always always keep it fresh, always always mix it up. So let me ask you, uh this fascinating question. Who were your early mentors? Who who was giving you

advice and insight as to what to do with your career? Well, as I said, I think I had a couple of professors who were very influential who really did want me to be uh an academic, who in fact, UH were very disappointed uh when uh I first went into business. Within the UH business community, I guess UH people UH like Jack Bogel, who we've talked about before, who I liked particularly both because he and I did see eye to eye on of the things about investing, and who

also had a social conscience. Uh. This was a business person who showed you that you could actually do well financially by doing well for your client. And I guess that was a particular influence for me in the things that I had done. UH. And look, finance is fascinating uh. You know, as I said, it interested me before I had any money and could do anything with it. So

finance is fascinating and I do think that UH. While a lot of people are very angry about finance because finance did practically bring the world down in the financial crisis, UH, finance is also absolutely essential UH and UH can help people uh more than it can hurt them. What what's a financial crisis or two amongst friends? Right? It's um so so you mentioned and I'm only kidding before you

people start sending the emails. Um, you mentioned the mentors you previously mentioned David Swenson of Yale and Warren Buffett, any other investors stand out as influencing your thought process or affecting the way you looked at markets? Now, I think that, uh, clearly those are the main names in terms of my own career, in my own life of people who have been influential. So let's talk about some books, uh, in addition to the eleventh edition of a random of

Down Wall Street. UH, tell us about some books that you found influential. They could be fiction, non fiction, they don't have to have anything to do with finance. What are some of the books that that very much influenced your thought process? Well, let me give you one in the finance, uh academic area, and umh one uh part of uh, you know, my own career. You know, sometimes I think it would be nice to have eight or nine lives because there are a lot of different things,

uh that would be fun to do. I mean, we haven't talked about this, but I was in the Army for three years and the Army Finance Corps. I actually liked the Army. What did you do for for the in the Army. Actually, what I did was we uh can I did this right after business school. Uh. There was a colonel in the Army who was the commandant of the Army Finance Corps and we were putting in a computerized pay an accounting system. And this colonel decided, what we need are well trained people to go into

various posts to do it. And so I was a direct commissioned into the U. S. Army Finance Corps did uh uh did the conversion of our pay and accounting system into a computerized one. And at the age of twenty two, I had more responsibility than anybody could possibly have had at that in the private sector. For sure, certainly more than you'd ever out in the private sector.

And I loved my experience. In fact. Uh you know, while as I told you, I grew up poor and I did want to get out and earn some money. The army is not a place to earn a lot of money. But I actually thought, gee, you know, this wouldn't have been a bad career. The other possible career that I would have loved is I am a frustrated Shakespearean actor. Uh. In that uh, I uh as a with a lean and hungry. Look, I was a wonderful Cassius and a high school play. I would have loved

to have done that. And I love reading Shakespeare. I love theater. Uh. And actually a lot of the things, the so called fiction things that I read, are plays, because it would have been a wonderful career to have had uh. And other than thinking that it meant a life of being poor, I might have actually done that. With respect to other books that I think are very very influential, I would point out Danny Kahneman's book Thinking

Fast and Slow Again. I think that the insights of you know, it's like the old Pogo line, We've met the enemy and it's us. Uh. This is I think the biggest problem that we have and investing and the insights uh in that book, which is a wonderful summary of what we know about behavioralism. Uh. This is uh. I think you you ought to read my book, But boy, I would definitely read that book. It's a terrific book.

I've read it. And I'm gonna tell you most of our listeners, or or at least many of our listeners, most of our listeners are familiar with the book, and I would bet many of them have read Danny Khneman's work. It's it's just seminal um in the space. And so that's the the non fiction non finance book. What what else do you, uh do you want to mention in terms of books? Well, I think those are you know as um again we've talked about it and it's very

well written. Charlie Ellis's book Show on Winning the Losers Game, uh is I think very uh important. And uh you know, Jack Boggle has um written some great books. In fact, I think uh probably uh one of his uh best books uh is not directly about finance, and as uh

says a lot about Jack Bogel. The book is called Enough and it comes from uh this uh h idea uh that there was a discussion with a writer and who had sold a lot of books, and the vellow pointed out to a hedge fund guy who had made billions of dollars and said to the writer, ah, gee, you know you've sold a lot of copies of books, but you have got a pittance relative to this hedge fund guy. And the writer said, yeah, but I have got something uh that that fellow will never have, and

that's enough. Uh. And again this is an idea that's uh, it's it's actually a wonderful book of Jack Buggles UH that I recommend warmly to people, a philosophical perspective on what you need to be happy as opposed to never never achieving that. So you've been watching the finance industry for a good long time. UM, what do you think

are the most significant changes that we've witnessed? And we could probably talk for hours just about what's changed, But what is it that stands out as this is really something that's going to have a lasting effect, uh, decades into the future. Well for me, because as you know, I wrote there auto be index funds three years before the first index fund was put into effect. What I am so pleased about is that indexing finally has taken off, uh, that money is flowing in. I think the E t

F revolution uh is a terrific big thing. While there are some ETFs, and here I would agree with Jack Bogel, there are some E t F that I think are terrible. I don't think people should buy the E t F gives you three times the of the S and P. There are some of them that are terrible. But the plane Vanilla ones allow people to basically buy the market at close to a zero cost. I think this is a revolution, and I think it's uh just extremely important. I think that one of the big mistakes also that

people make is that they don't save enough. I think that we do have a crisis in this country that as we are aging, many people are woefully unprepared for retirement. One of the things that I wish we had done as a nation. When George Bush was hoping to privatize social Security, what I would have preferred that he do is do a private add on to the regular Social Security where you would have another percentage or so that would come out of your salary, and this would be

yours that could have been invested in index funds. I think if he had proposed that, it would have passed as opposed to trying to redo the whole system. I still would like to see something like that because I think as a nation, we are not saving enough, uh and many people are unprepared for retirement. That that's Charlie Ellis's most recent That's arl A Ellis's most recent book,

exactly the coming coming retirement Crisis. Let me before I forget, let me just make a note, don't buy triple leveraged inverse funds. Got it. I don't think anyone's going to take that as a news flash from you know, but but it's always good hearing it, uh, straight from the horse's mouth. Alright, So you mentioned indexing as the most index funds as the most significant shifts since you joined the industry. Looking forward, what do you think are the

next changes that are going to take place? Well, being UH in the vanguard of automated UH investment advisories and trying to build that business up. I do believe that this will become increasingly important, and we will be able to automate investment advice because by doing so, we can charge less. And as I've said many times, I'm very modest about what I know or don't know about finance. But what I'm just absolutely sure about is if we

can provide services at lower cost. UH, that's a win win for people, because the lower the price I pay to the purveyor of any service, the more that's going to be for me, especially if you're going to compound that over decades, you bet you, because costs again, UH, my friend Jack Boggle would call it just as Einstein said at one point that compound interest is one of the greatest forces in the world. Well, the costs compound two, which Jack calls the tyranny of the compounding of costs.

So we're down to our last two questions. These are two of my favorite questions. I ask all of my guests. If somebody who is just graduating college um as a millennial as they're referred to these days, came to you when asked, said they're interested in a career in finance,

what sort of advice would you give them. I would tell them that while finance sometimes has a a very bad name, I mean, after all, we've had uh people uh, and they're really very very similar Bernie in this campaign, Bernie Sanders says all the problems in the world are because of Wall Street and uh uh and break up the banks and everything's gonna be fine. And Donald Trump has not been very different from Bernie sand really uh in say sing that Wall Street is all bad, don't

believe it. Uh, it's a fascinating career. Uh and uh uh. Finance has in fact been extremely important in improving welfare. And we were talking about books. There's a book by Getsman which has just come out about how money has in fact been absolutely essential in improving people's standard of living. What what's the name of the Getsman book? Uh, it's money and uh uh you might be able to find it. I don't think I've got the other part of it.

Exact money changes every Money changes everything. Fine, Yeah, I give credit to Google for that money changes everything. How finance made civilization possible? By William oh And I recognized this pyramid on the on the cover of the book. Um. And our final question, God, I have like a million other things to talk to you about, but I can't keep you here forever. What is it that you know about? And I know the answer to this, but I have

to ask it. What is it that you know about investing today that you wish you knew forty years ago when you started your career. Well, I didn't know about indexing. Uh. In fact, when I worked at Smith Barney, I spent a lot of time with the research people. I Uh, I had drunk that kool ai that at that point I believed it could be done. And actually one of the things that I just found absolutely fascinating was it

wasn't necessarily because people weren't good at it. UH. My mentors at that time where people by the name of Bill, Grant, Nelson, Shannon, Uh. They were very good at it. But I began to realize, which I didn't know at the beginning, was the paradox that the more the talented people are in this game,

the less they can profit from it. Because the more the talented people work and invest and make market prices change, the better the market becomes, and the better off people are just accepting the tableau of market prices that are out there and buying an index fund. And it was that kind of experience that finally led to this view that indexing was the way to go. Professor Malkiel, thank you so much for being so generous with your time.

This has been an utterly fascinating UH tour to force conversation about the everything you've learned and the proper way for most people UH to invest. I hope all the listeners have have enjoyed this conversation. If you have to be sure and look up an inch or down an inch on Apple iTunes, you can see the other ninety two or so such conversations we've had. I would be remiss if I did not thank Taylor Riggs, our booker for for scheduling these UH conversations and staying on top

of all of our very various guests. My engineer is Charlie Volmer and my head of research is Mike at Nick. You've been listening to Masters in Business on Bloomberg Radio. Our world is always moving, so with Merrill Lynch you can get access to financial guidance online, in person or through the app. Visit mL dot com and learn more about Merrill Lynch. An affiliated Bank of America. Mery Lynch

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