Bogleheads® Conference 2011 - John Bogle Q & A

00:00:00.000 | We have a program, which is really a lot of fun, because now we're going to get down to

00:00:10.000 | serious questions.

00:00:12.000 | Jack likes to take the majority of the questions from the audience, but because we don't have

00:00:17.720 | the mics in the ceiling like we did last time, I've collected questions from a lot of the

00:00:25.120 | attendees.

00:00:26.120 | So when I call your name out and ask the question, would you stand so Jack can address you and

00:00:33.560 | respond to your question.

00:00:35.280 | The first question is from Victoria, and she said, "Jack, we know that you're applying

00:00:40.760 | significant effort on educating policy makers on prudent regulation of the financial industry.

00:00:47.080 | How can we help you?"

00:00:50.080 | Victoria?

00:00:51.080 | Are we there?

00:00:59.000 | The political system is such a mess, and I don't know how to talk politics, so I'm sorry.

00:01:08.040 | But even I-

00:01:09.040 | You need a special dispensation Jack.

00:01:10.040 | Even I have very little impact on it.

00:01:11.040 | I can talk, and talk, and talk, and I sometimes don't think anybody is listening.

00:01:19.920 | I have had a number of people interested in the retirement plan system, and happily for

00:01:26.040 | me I gave a very extensive, this would also be on the website, a very extensive analysis

00:01:30.000 | of what had to be done to fix it in my testimony before Congress, and this is like a probably

00:01:34.920 | 20 page paper.

00:01:35.920 | But of course when you go down to the Congress, they want you to summarize it in two minutes.

00:01:41.480 | And you do, and they were all fine, but nothing happens.

00:01:44.720 | So getting through the thicket down there is very difficult.

00:01:48.240 | I would say the best grassroots methodology you can use is to go to your local congressman,

00:01:53.680 | write to your local, visit your local congressman if you can, and try and do it in the hope

00:01:58.640 | that all of us together can make a difference.

00:02:00.560 | It's a little bit like people saying, "They're not going to vote anymore because their vote

00:02:04.760 | doesn't count."

00:02:05.760 | Well, it doesn't matter, and if everybody observed that rule, we would have even more

00:02:13.720 | chaos than we have now in our democracy.

00:02:15.840 | But the fact is, we're in a testing time where the issues of which I speak are not particularly

00:02:23.240 | interesting to anybody in Washington.

00:02:26.240 | I have talked to a couple of guys on the, lower guys, on the President's Council of

00:02:32.160 | Economic Advisers.

00:02:33.160 | I did talk a little bit to Jared Bernstein, who was Vice President Biden's economic policy

00:02:42.560 | guy and fairly high up in the economic policy circles in the White House, but now he's left

00:02:46.920 | to do something else.

00:02:49.440 | So I think it's just speaking out and being totally prepared to say, and to be ignored.

00:02:56.320 | I mean, I think if we're at a time, like those kids up on Wall Street, where the mere fact

00:03:02.780 | of protesting at least gets in the papers, and politicians will often listen to the papers

00:03:07.760 | more than they'll listen to anybody else, because that's what they think everybody's

00:03:10.160 | going to be basing their decisions on.

00:03:13.680 | So it's hard to help, but it's hard for me even to help myself.

00:03:17.760 | So that's the best I can do as a Vice President.

00:03:21.200 | Jack, the next question is from Mel Turner.

00:03:23.960 | Mel, would you stand so Jack can address you?

00:03:27.360 | He says, "What will be the regulatory response if money market funds break the buck?"

00:03:34.200 | Well, we have a really difficult issue in money market funds.

00:03:40.480 | They're still, as I understand it, have the Treasury guarantee of a couple of years ago.

00:03:46.200 | So there's obviously policy makers are worried about what would happen.

00:03:50.700 | There is going to be more regulation in money market funds, and I just don't see that it's

00:03:55.640 | even remotely possible that we'll keep the same structure that we have now.

00:04:01.800 | You know, we have free market capitalism, and people can do a lot of things.

00:04:05.960 | I mean, not all rating services are created equal.

00:04:09.000 | You buy one bad bond and one bad money market instrument, a commercial paper, as a reserve

00:04:17.780 | fund did, and they're gone, wiped off the face of the earth, the first mutual fund,

00:04:22.840 | and they're paying the penalty.

00:04:23.840 | This is not really a problem anymore, but their mistake, as I would explain it to people,

00:04:31.520 | is they wanted to be the highest yielding institutional money market fund, and it's

00:04:36.440 | the easiest thing in the world to do when you look at the man.

00:04:40.000 | One, you can slash your costs.

00:04:42.440 | Two, you can slash your quality.

00:04:46.120 | Guess which the manager did, and that's what cost them.

00:04:50.600 | He wasn't about to cut his revenues, and so there's a fundamental conflict of interest

00:04:55.000 | in that area, and if we're going to be bailed out by the government or have this Treasury

00:05:00.120 | Guarantee continue, we're going to have to pay for that, and I had an idea many, many,

00:05:05.160 | many years ago, probably in the mid-80s, that we should start an insured money market fund,

00:05:12.400 | but the cost of private insurance was like 75 basis points.

00:05:16.320 | We started, actually.

00:05:17.320 | We started it.

00:05:18.320 | It was the first and only insured money market fund, and it didn't work because the commercial

00:05:24.320 | portfolio, that 75 basis point insurance cost, made the commercial portfolio yield less than

00:05:30.080 | the Treasury portfolio.

00:05:31.080 | I mean, the mathematics are all important here, and so that was one, but everybody says

00:05:37.920 | it will be the end of the industry as we know it if we go to a floating asset value.

00:05:43.400 | That may be.

00:05:44.400 | I said we have some people at Vanguard working on this and who sit right near me in the office

00:05:49.240 | there, the legal department, and I stopped in one office and said, "You know, they're

00:05:56.240 | trying to protect the present system as anybody who's in the system now would do," and I said,

00:05:59.720 | "You know, you've really got your work cut out for you because you look at the Wall Street

00:06:02.940 | Journal and the Federal Reserve is against you, and Paul Volcker is against you, and

00:06:09.160 | I don't want to fight those two.

00:06:11.160 | I mean, they're too powerful," and so a lot of very intelligent people say the system

00:06:17.000 | has to change, and I would say the system will be changed, and I don't see what's the

00:06:21.800 | bad about a floating asset value, and I can see it's not as attractive to investors, but

00:06:26.200 | with our tax statements that we do, you know, I do most of my short-term investing in limited-term

00:06:32.280 | muni, and so I get a tax statement every year, and I either have $275 -- this is a big account

00:06:40.280 | -- $275 in short-term gains, and $111 in long-term gains or losses, whatever the case may be,

00:06:48.280 | and it's very easy to take care of the tax thing, and we've got systems that take care

00:06:52.280 | of that, and so I don't see -- I mean, I know it's not attractive from a marketing standpoint,

00:06:56.280 | but at some point, we have to say we're in the investment business and not in the marketing

00:07:02.280 | business, and that's a discipline that's going to be very difficult to voice in this industry,

00:07:06.280 | so I think change is coming, and money market funds -- almost certainly, by the way, I don't

00:07:12.280 | know if you can follow me -- will be designated -- oh, they've got some initials -- nationally

00:07:18.280 | risk -- nationally important to our financial system, and then this new committee that the

00:07:28.280 | Treasury and the Federal Reserve are part of is going to come into play. Significant

00:07:34.280 | financial institutions have to be -- yeah, I'm sorry -- significant financial institutions

00:07:38.280 | have to be -- have certain controls, and they will be tough controls. So I'd look for change,

00:07:43.280 | but I would look for change as being a positive. It won't seem like that to the managers, and

00:07:50.280 | it won't seem like that to the investors. Of course, with yields where they are now,

00:07:54.280 | I think I used a tenth of one percent. It doesn't really matter what you do. An awful

00:07:57.280 | lot of people are waiving their fees, and so they even have a tenth of one percent,

00:08:00.280 | and the yields are just terrible, and we're all required to have -- I think it's 40 percent.

00:08:04.280 | Don't hold me to this because I'm going into detail, but 40 percent in Treasury -- short

00:08:08.280 | Treasuries, anyway -- 30 or 40 percent. So it's -- I'm not worried about money markets

00:08:15.280 | going down. I think the industry is worried, and the ICI represents managers, not shareholders,

00:08:21.280 | is going to fight until their last breath to keep the system the way it is. But I don't

00:08:26.280 | think the system is sound the way it is, to be honest.

00:08:31.280 | Okay, this question is from Dan Smith. He asks, "What do you think of Louis Brand's

00:08:36.280 | book, 'The House of Oglebill'?"

00:08:42.280 | You're among friends, Jack.

00:08:46.280 | Well, first of all, I haven't read it. And we did as kind of a check. I did ask Kevin

00:08:54.280 | to read it, and he did read it. And he said, "I would like a lot of it and would hate a

00:08:59.280 | lot of it." I guess that's okay. And I think he did find some egregious errors in there,

00:09:05.280 | which were eliminated in the final draft. But he couldn't get them to change the tone.

00:09:13.280 | And I think many of the commentators, many of you -- some of you who are here in the

00:09:17.280 | room, by the way, it's an interesting kind of book because I check it on Amazon periodically

00:09:22.280 | every other month or something. And he has these glowing five-star reviews from everybody.

00:09:28.280 | Everybody loved the book, which I guess is nice. But the selling, you know, basically

00:09:36.280 | nothing. It would make anything I wrote seem like going with the wind or something.

00:09:41.280 | [Laughter]

00:09:45.280 | But it apparently has a cynical tone to it, which is okay. A lot to be cynical about in

00:09:50.280 | life, in Vanguard and in Bogle. But I think the thing most people have observed, those

00:09:56.280 | readers -- and Kevin mentioned this, too -- he just doesn't have any credibility when he

00:10:01.280 | talks about the future of Vanguard and the future of indexing in saying new forms of

00:10:05.280 | indexing are going to supplant the old. I mean, I don't know what his standing is for

00:10:09.280 | making that kind of a statement. He doesn't know anything about it. And it's -- obviously

00:10:15.280 | -- it must be obvious to you all, it's simply not possible for new ways of indexing to supplant

00:10:20.280 | the old. Maybe for a minute, maybe for an hour, maybe for five years. But in the long

00:10:24.280 | run, the idea is to have a return that captures the market return. And the market is valued

00:10:30.280 | in dollars. And so if you match it like we do in the S&P and then to a lesser extent

00:10:36.280 | -- or to a greater extent, the total stock market, that's the only guarantee out there.

00:10:43.280 | And some of the ETS that I mentioned have done -- proclaimed to be much better, have

00:10:51.280 | proved not to be much better, because how could they? I mean, when you look at the portfolios,

00:10:55.280 | they're all in pretty much the same stocks, and just different weightings. So there are

00:11:00.280 | never going to be huge variations, although the Arnon Fund, as I mentioned, is so much

00:11:04.280 | more volatile. So the guy had fun writing the book. I like the picture on the cover.

00:11:09.280 | I did get that far. And, you know, I will probably look at it at some point. My brother

00:11:15.280 | said -- they said -- quoted him as saying some things he didn't say that he didn't

00:11:18.280 | say to Sam. But apparently a lot of kind of nasty stuff. And that's okay. I mean, there's

00:11:23.280 | a lot of nastiness in life. So what else can I say? It will come and go. And the idea that

00:11:31.280 | I would be dwelling on it in some horrifying, wonderful way -- well, I'm protected by that

00:11:35.280 | by not reading it. But the main reason I didn't read it was honestly. And Kevin told me about

00:11:42.280 | it when someone called up and said -- the press or something said -- which they never

00:11:46.280 | did -- "What do you think of it, this nut?" And I could say, "Sorry, pal, I haven't read

00:11:50.280 | it." So it will come and go. And it will be part of history, I guess. A number of people

00:11:56.280 | have observed to me that the first book was much better. And the idea -- by the way, I

00:12:01.280 | want to be very, very clear on this. I had no idea it was sponsoring a thing. McGraw-Hill

00:12:05.280 | came to me and said, "Would I cooperate and talk to this writer?" And I said, "Sure."

00:12:09.280 | Because the first book, called "John Vogt and the Vanguard Experiment," ended 15 years

00:12:14.280 | ago. And I thought they were going to keep that and then add what happened in the last

00:12:20.280 | 15 years. But they went quite a bit beyond that. And I know there's some repetition of

00:12:25.280 | that earlier book. But -- and it was a nice, friendly book, mostly. So we have what we

00:12:31.280 | have. How many of you read it? How about that? Well, that proves what I said about not shooting

00:12:40.280 | the lights out. If you guys don't read it, who's going to read it?

00:12:46.280 | >> I think what happens, Mike, is some of the early readers did some reviews on the

00:12:52.280 | form, and it didn't sound too flattering. So I think that turned a lot of people off.

00:12:59.280 | So the next question is from Joe Dugan. You've touched on this a number of times before,

00:13:05.280 | but he'd like an answer. How important is an international holding in the stock portion

00:13:10.280 | of a portfolio?

00:13:12.280 | >> Well, I mean, I talked about that at some length. He's saying, first, look, what is

00:13:16.280 | an international? I'll just repeat my views, not repeat them from the speech, because I

00:13:22.280 | didn't use it there. But my skepticism about international, my idea that international

00:13:27.280 | will not add a huge amount of value to your returns, is based on, first, financial markets

00:13:35.280 | are a great arbitrage -- great way to arbitrage between the present and the future. So if

00:13:40.280 | emerging markets are going to grow much faster in America, that's not going to be news to

00:13:44.280 | people that own Brazil and China and Russia and South Korea and Taiwan. It's in the price.

00:13:50.280 | Everything is in the price. So that's number one. It's hard for me to see what would be

00:13:54.280 | totally different in return. And if it produces, say, a return of, let me say, 3% a year, which

00:13:58.280 | would be huge in the next decade over U.S., and you have 20% of your money in it, that's

00:14:03.280 | 6/10 of 1%. Well, there's so many better ways to save 6/10 of 1%, including buying Vanguard

00:14:09.280 | funds instead of somebody else's, where it's a guaranteed 6/10 of 1%, and not a speculative

00:14:15.280 | one. So that's number one. Number two is, when things are hot -- well, number two really

00:14:24.280 | is, I should put this number one. America is an international nation. 50% is the number

00:14:31.280 | IOT is. 50% of the revenues of the companies in the S&P 500, and presumably in the companies

00:14:37.280 | comprised of the total stock market, are in revenues and profits. 50% of their revenues,

00:14:44.280 | 50% of their profits come from outside the U.S. So you're already 50/50. Do you need

00:14:49.280 | to make that higher? I leave that to you. It used to be said that the big value was

00:14:55.280 | -- and I mentioned this slightly briefly before -- the big value was that it diversifies because

00:15:00.280 | foreign markets don't react in the same way to things that U.S. markets do. And that's

00:15:04.280 | no longer true. It will probably be true again because these things revert to the mean back

00:15:08.280 | and forth and back and forth. Next, when does international get popular? Investment advisors

00:15:15.280 | will often say, "Well, you need this as an additional diversification." But they almost

00:15:20.280 | always look for additional diversification in the things that are the hottest. No one's

00:15:24.280 | going to tell you to buy, I don't know, pork bellies to diversify. And gold is the ultimate

00:15:31.280 | diversifier. It's the best diversifier you can possibly find. But people weren't talking

00:15:36.280 | about diversification 10 years ago by using gold. They're talking about it now. So it

00:15:41.280 | makes me skeptical. And the same thing is true of international. Although with a bad

00:15:45.280 | year for international, it will be interesting to see, which I don't think we see yet, if

00:15:49.280 | money is going to go out of emerging market international funds back into the U.S. Investors

00:15:55.280 | must be clearly disappointed. I think we had, what, a 25% drop in the emerging markets last

00:16:00.280 | year. In the U.S. market, it's almost unchanged now. And that may be, by the way, the perfect

00:16:06.280 | time not to get out of it, not to get into it, but not to get out of it. So I don't have

00:16:12.280 | any easy answers to that. And I'm me and you're you. And I would say you probably won't hurt

00:16:16.280 | yourself a lot if you use it modestly. I just don't see the point of having an international

00:16:22.280 | portfolio in which the U.S. is about 40%. In developed markets, a little over 40%. In

00:16:33.280 | emerging markets, a little under 20% in very random numbers. I don't think you need to

00:16:37.280 | go that far to get 60% outside of the U.S. I mean, we earn our money in dollars. We pay

00:16:44.280 | our bills in dollars. We save in dollars. It's a dollar economy. And so to speculate

00:16:53.280 | whether foreign currencies, which is a big part of when emerging markets and developed

00:16:59.280 | markets are different, it's currency change and not fundamental value change, not global

00:17:03.280 | currency change. So I just don't think it's necessary. But if you said, what's the matter

00:17:08.280 | with 20%? I would say nothing. I advise you not to go to 50%. But I could be wrong. I

00:17:16.280 | don't think it's going to be all that different. But I don't do it myself. I'm only about 20%

00:17:21.280 | in equities anyway. I thought at one point about getting into emerging markets. But to

00:17:28.280 | confess totally, and I'll say not only the thought about investing in emerging markets

00:17:34.280 | came to me. I thought maybe you want to do that. The idea of putting 1 or 2% in gold

00:17:39.280 | came to me. And the idea of getting much more conservative when I saw how far stocks would

00:17:45.280 | fall. I had the same temptations. Everybody does. Stock market, what am I doing with 20%

00:17:50.280 | stocks? And the secret of my success, such as it may be, is I don't succumb to those

00:17:55.280 | temptations. So I just leave things alone. The burden of proof for me is actually making

00:18:03.280 | the change. Do you really want to do it? When do you want to do it? And that's a hard thing

00:18:08.280 | to do. I wouldn't want to scare anybody out of international. It could be something I

00:18:13.280 | should be doing, trying to scare you out of it. But we don't know the answer. So to make

00:18:18.280 | sure you're widely diversified, hang on to it. I wouldn't change your positions or relative

00:18:24.280 | to anything I say or do. But just think about, and particularly that idea about composition

00:18:31.280 | of the index. It's remarkably concentrated in a very small number of countries. And China

00:18:36.280 | is either the answer to our prayers for investing for the red, and this is Dr. Malkio's point

00:18:41.280 | of view, forever. Or maybe it's going to be the next great big collapse. And I'd say the

00:18:48.280 | odds of those two things happening are about 50/50 in each case. A lot of funny stuff goes

00:18:54.280 | on over there. Okay, the next question is from Sue, Lady Inc., right here in the front.

00:19:01.280 | She says, "Do you think that a 4% safe withdrawal rate in retirement is a good objective?" We're

00:19:07.280 | back to the Trinity study here. Yeah, but 4%, and we've gone from an era where everybody

00:19:14.280 | thought 5% was right, and I've always thought 5% was too high. Because when you think about

00:19:20.280 | the climate for market returns, it's going to be something like 7% for stocks, I believe,

00:19:27.280 | and 3% for bonds, 3.5%. And that's going to give you a portfolio return of, I'll call

00:19:35.280 | it 5%. 4% isn't safe, but I think you can do that in those circumstances, change. I

00:19:43.280 | keep a little eye on whether you're consuming capital. And what you're doing, though, with

00:19:48.280 | that kind of return, is with the knowledge, certain, the purchasing power of your assets

00:19:53.280 | will be smaller 10, 20 years from now than they are today. If we have inflation of 3%,

00:20:00.280 | and right now inflation is, I guess, 1% or something, and the bond market and the inflation

00:20:08.280 | bonds tell us the inflation rate will be, even up to 30 years, will be 2%. And that

00:20:13.280 | may be right, but if it's right, we've got a lot of problems. This economy is not going

00:20:18.280 | to be growing if we have 2%, if we have 2%, only 2% inflation. So, you know, I'd stick

00:20:27.280 | with 4. I mean, it's too fine-tuned. I think 3 of 3 is a little bit lower than it needs

00:20:31.280 | to be. If I was to tell you no 3.5 would be better than 4, I'd be talking through my

00:20:35.280 | hat. As usual.

00:20:39.280 | The next question is from Chester Scarobo. I hope I pronounced that correctly. It's a

00:20:45.280 | three-part question. If you had a magic wand, what changes would you make to, number one,

00:20:51.280 | what is currently available to retail investors, number two, how Vanguard is run, and number

00:20:59.280 | three, the overall investing atmosphere in the country?

00:21:04.280 | Well, I'm thinking about the second one. I think, you know, this has become a product

00:21:17.280 | industry, and I banned the word product, Vanguard, when I was running it. And you have to pay

00:21:22.280 | a $5 fine if you ever use such a word. And the reason for that is quite simple. We are

00:21:29.280 | not in the business, or should not be in the business, of selling products. You know, that's

00:21:33.280 | somebody else's business. You know, whether it's Campbell Soup's business or Budweiser

00:21:38.280 | Beer's business. You know, make it and get rid of it. And that's not the business that

00:21:45.280 | is the core of what Vanguard should be about. The word is crepe back in, and we use it all

00:21:50.280 | the time. I don't mean that in a too critical way, a little bit critical way, because there

00:21:55.280 | aren't a thousand other words. I mean, you say a financial service or a trust service,

00:21:59.280 | and it doesn't kind of, it seems a little complicated and cumbersome. So, product is

00:22:04.280 | kind of a good word until you think about it. And so, I didn't like the idea. It left,

00:22:11.280 | and, you know, it's just not a happy way to think about the business in which I find myself.

00:22:18.280 | So, I think, I think you said the first part of the question of what retail products or

00:22:24.280 | services should we have to make available product for the retail investor. And I say,

00:22:30.280 | less, less. Why do we need more? You know, there are, I don't know, thousands of funds

00:22:38.280 | out there. Now, we've reached totally the wall. It's absolutely like going to Starbucks

00:22:44.280 | in the morning and getting that iced latte with blah, blah, blah. I mean, you hear more,

00:22:52.280 | that must be terribly expensive. And I, by the way, I only drink Benny Bowl. Benny means

00:22:57.280 | large, by the way. Those of you who don't know. And so, I say less, and that's not going

00:23:04.280 | to happen. But the message I'm trying to send is don't complicate the job. And, you know,

00:23:10.280 | the first rule of shooting is don't shoot yourself. And you know what the second rule

00:23:18.280 | is? I don't think it's relevant here. I hope not. If you shoot somebody else, be sure you

00:23:22.280 | kill them. I have a philosophy for you. At Vanguard, you know, there are some things

00:23:36.280 | that can't be changed. We've gotten big. And I'm not a big company guy. I wouldn't work

00:23:41.280 | for a big company. And we have, by the way, the most incredibly dedicated people at Vanguard.

00:23:47.280 | They have a high respect for me, even if I'm in the waning years of my life and career.

00:23:52.280 | And they enjoy being with me. They ask me to come to their retirement parties, which

00:23:56.280 | I only do, religiously only do, if the management's not there. When I get one of these invitations,

00:24:01.280 | I say, "I'll be glad to come and talk to you all if the coast is clear, if you know what

00:24:04.280 | I mean." And they write back and say, "I do know what you mean. Yes, the coast is clear."

00:24:09.280 | And that's not a cynical comment. And I don't want to interfere with, you know, the management

00:24:14.280 | wants, they can't do all these things when we've got 12,000 people. So I'm happy to fill

00:24:18.280 | that gap, and my crew is certainly very happy to do it. Let me give you an example I often

00:24:24.280 | talk about when, you know, when you talk to these crew members that I told you I did for

00:24:29.280 | an hour at a time. Usually we don't have a time limit, but sometimes it goes longer,

00:24:33.280 | but it seems about right. You know, you'd never, never, never be talking to one of these

00:24:38.280 | wonderful people. Often been there a long time, got the award for excellence for cooperation,

00:24:43.280 | and excellence, and working well with colleagues, and all that. And you'd never say, "Well,

00:24:49.280 | an hour's up, that's it." I mean, you just let it go until it kind of doesn't go anymore.

00:24:53.280 | But we talk about the rise of bureaucracy. And I think I mentioned that line, I did mention

00:25:00.280 | that line to you. For God's sake, let's always keep a place, bank our place where judgment

00:25:05.280 | has at least a fighting chance to triumph over process. And I say, "Look, here's all

00:25:11.280 | judgment, and here's all process." And the bigger you get, the more that line moves

00:25:18.280 | over. And when you get big, it's going to be here, say somewhere three quarters of the

00:25:22.280 | way across. There's no way around that. Although I do observe that if the chief executive loves

00:25:28.280 | process, it's going to be over here. And if the chief executive hates process, it's going

00:25:33.280 | to be over here, but it's never going to be back here. And there's no way around that

00:25:36.280 | when you get big. That's one of the hazards of companies growing. And of course, when

00:25:41.280 | you think of people like GE, and God knows who else, who have 200 or 300, I think, Walmart,

00:25:46.280 | 200 or 300,000 employees or more, I guess. If not, Vanguard really isn't big at all.

00:25:52.280 | But we started, I couldn't help observing as I looked at your program today, but it

00:25:59.280 | looks like we have around 30, I mean, I think it's a really great sign, by the way, some

00:26:04.280 | arms length stuff with Vanguard in the global heads for quite a while. And that seems to

00:26:07.280 | be all amended, fortunately, or mostly amended anyway. And there are, I think, 30 Vanguard

00:26:13.280 | people that are going to be around here today. And they're going to have this little fair

00:26:18.280 | where you talk to people about ATFs or whatever else you want to talk to, and talk about,

00:26:23.280 | and then the participants in the panel, and then I guess a number of people to help you

00:26:27.280 | around A to B. And I couldn't help thinking when I looked, I didn't do an exact count,

00:26:32.280 | but I think 30 is about the right number, it occurred to me that when I started Vanguard

00:26:36.280 | we had 28 crew members. So you're going to see two more people than I saw. Actually three

00:26:43.280 | if I didn't count myself. So you get bigger and they can't help that. I think Bill McNabb

00:26:49.280 | is, tries to keep everything as personal as he can. But you have to do so much by video,

00:26:54.280 | which doesn't cut it for me, and I know they have to do it. And I think we're very sensitive

00:26:59.280 | on the flagship side to trying to maintain, fairly easy to get your flagship representative

00:27:05.280 | on the phone. Very, very important thing, particularly now with Admiral's shares being

00:27:10.280 | so much more, I think I said 35%, 31% I guess, of our business. So you try and fight it where

00:27:17.280 | you can. But the key thing, the two key tasks as I see it for Vanguard are one, don't do

00:27:25.280 | anything stupid on the investment side. And you can argue about some of these things.

00:27:31.280 | I'm not so sure about, you're going market neutral. I'm not so sure about the way we're

00:27:37.280 | running target retirement. I haven't figured out what the heck managed payout is all about

00:27:42.280 | yet. But give me a little time, I'm sure I will. But that doesn't have to affect any

00:27:49.280 | Vanguard shareholder, because you don't have to do the things. I do wonder a little bit,

00:27:54.280 | the big tension in this business is always the tension between management, professional

00:28:00.280 | management and marketing. And marketing is a terrible driver. When everybody else has

00:28:07.280 | some hot idea, a lot of copying goes on. And it's a strategy. You can argue it's a business

00:28:17.280 | strategy. It's a strategy. It's a strategy. It's a strategy. It's a strategy. It's a strategy.

00:28:39.280 | I did mention the second of those rules when it came to my attention. We're thinking about

00:28:43.280 | buying Barclays ETF operation. Market share must be earned and not bought, pal. And I

00:28:51.280 | could never figure out how that would work. I was not pleased that we were considering

00:28:55.280 | it, but I was ecstatic that we didn't do it. I don't think it would have high cost ETFs,

00:29:02.280 | the same platform as low cost ETFs. And if you make their high cost ETFs into our low

00:29:09.280 | cost ETFs, what are you buying the thing for? They're going to all their profits. And it's

00:29:13.280 | a very profitable business. So I don't really think management is coping with difficult

00:29:21.280 | circumstances of growth, difficult circumstances of trying to be competitive. And I'm the competitive

00:29:27.280 | guy. I mean, I'd like to slug everybody in the nose. And I don't understand why anybody

00:29:33.280 | else is doing any business at all but paying for it out there in the marketplace. But I

00:29:38.280 | think they're handling that tension as well as they can. So I really don't think I can

00:29:42.280 | complain about it at all.

00:29:44.280 | This next question...

00:29:45.280 | Oh, no, I didn't get to the third one.

00:29:52.280 | The overall investing atmosphere in this country.

00:29:57.280 | Crazy. And I mentioned this in my talk, the triumph of speculation over investment. Yeah,

00:30:05.280 | I'm sorry. So what I'm saying about the overall investment atmosphere is the question is,

00:30:10.280 | in effect, ill chosen because we don't have an investment atmosphere in this country anymore.

00:30:14.280 | It's all speculation. What happens in the marketplace is 90% speculation or even higher

00:30:21.280 | than 90% believe it or not. People trading with each other as if they were in a great

00:30:26.280 | big gambling casino with no gain to society and a loss to those investors who were doing

00:30:30.280 | the trading. I mean, to give you the example that I usually use. And then let's assume

00:30:35.280 | that each stock in the Standard & Poor's index, half of each stock was owned by speculators

00:30:40.280 | and half was owned by investors. Well, we know that the investors who don't trade at

00:30:44.280 | all as a group will capture the market return exactly. And we know that the speculators

00:30:49.280 | will also capture the market return. But by trading with each other, because there's no

00:30:52.280 | one else to trade with, they'll pay these croupiers and they'll end up with less than

00:30:56.280 | the market return. So the idea of investing over speculation, the triumph of investing

00:31:00.280 | over speculation, what we have now, the triumph of speculation over investment, is a mathematical

00:31:05.280 | certainty. A mathematical certainty. And, you know, I tried to build a company out of

00:31:10.280 | mathematical certainty. Gross return minus cost equals net return. You heard it here.

00:31:15.280 | [laughter]

00:31:19.280 | So it's crazy. And think about it this way. From my eye on the market this year, below,

00:31:26.280 | the value of American businesses represented by the price of stocks dropped by $2 trillion,

00:31:31.280 | say from $16 trillion to $14 trillion. Does anybody really think that the value in that,

00:31:37.280 | I don't know, four month period of American business dropped by $2 trillion? I mean, it's

00:31:42.280 | conceivable. It was pretty much the same at the end of the period at the beginning.

00:31:46.280 | But market expectation was a big problem and created an environment for stock prices that

00:31:52.280 | was divorced from the value of securities.

00:31:57.280 | >> The next thing is from one of your favorite Bogo heads, Kathleen Ryan, who had to cancel.

00:32:03.280 | The question's at the beginning, but she has a note to you after that. The question is,

00:32:09.280 | "Being you were born in 1929, did that influence you at all with regards to your study of investing

00:32:15.280 | in the stock market?" She says, "When my grandmother passed away at the age of 97 years

00:32:20.280 | and eight months, I went through her important papers and found a fractional stock warrant

00:32:25.280 | dated December 10, 1929. I felt that she was very courageous to invest in the stock market

00:32:31.280 | only about two months after the crash of '29. The fractional warrant was from Transamerica

00:32:38.280 | Company with a signature stamp from A.P. Giannini. Had I known, I would have asked her if she

00:32:44.280 | met him. I like to think she did. How cool is that, that if she had met him, she would

00:32:50.280 | have met the founder of Transamerica, and I, her granddaughter, had met the founder

00:32:55.280 | of Vanguard. Two very big captains of industry. I mean, wow. With best wishes to you always,

00:33:01.280 | Dad." So the question is, "Being you were born in 1929, did that influence you at all

00:33:14.280 | with regards to your study of investing in the stock market?"

00:33:18.280 | Well, first, not to belabor the obvious, I was quite young in 1929. I don't remember

00:33:29.280 | anything about it. I saw the look in my father's eyes when he came home with the newspaper,

00:33:35.280 | and I knew there was some real trouble. But I was at that point six months old. I think

00:33:43.280 | in a sense, it's a pretty good question, but it's not so much the '29, but the '30s,

00:33:49.280 | where my family had a nice amount of money for those days, and it all vanished at the

00:33:53.280 | Montclair Trust Company. Banks were doing the same thing they were doing in the last

00:34:00.280 | big bust, buying the things that were hot, and the buying probably leveraged those Goldman

00:34:05.280 | Sachs, leveraged closed-end investment companies that actually all went bankrupt. And that's

00:34:11.280 | Goldman Sachs for you. Change the script, but you can't change the outcome.

00:34:16.280 | And so I think going through a period where I knew practically nothing about the stock

00:34:24.280 | market, instead of getting, like anybody else, these wonderful confirmations about how much

00:34:30.280 | our 401(k) plan was worth, we were getting notices from the personal finance company

00:34:34.280 | saying, "If you don't pay up, we're going to take over your house." That's a whole

00:34:38.280 | different environment. So I remember the economic privation that came out of the boom and the

00:34:44.280 | bust very, very well. And it's made me a lot of luck, made me the way I am. I don't

00:34:51.280 | like to spend money. I really do not like to spend money, period. And I don't buy anything

00:34:57.280 | for myself, almost nothing. I did buy a new pair of khakis last summer. Only at my wife's

00:35:07.280 | insistence. But I just don't enjoy that. And that comes out of your own brain. But

00:35:14.280 | in a lot of ways, your persona is shaped by not having a lot of money, knowing you have

00:35:19.280 | to earn what you get. And I'd call those really good things. It's an advantage in

00:35:24.280 | life. I was mentioning this earlier, that one of you came up and chatted with me about

00:35:29.280 | leadership, I guess with Laura. And I read those little things in the New York Times

00:35:34.280 | on page two every Sunday about leaders or purported leaders and what their background

00:35:39.280 | is and what they look for in leadership. And some of it's pretty good, some of it's

00:35:43.280 | pretty horrifying. But what is really interesting is I think at least a third of them had been

00:35:49.280 | waiters when they were young. And I think waiting on a table is probably the best training

00:35:54.280 | anybody could ever get. You know you've got to do it. And no matter how unhappy you

00:35:59.280 | may be, and I was never unhappy doing it, and you're serving somebody else. When

00:36:04.280 | I'm a poor kid at Princeton waiting on the rich kids in the dining hall the way they

00:36:10.280 | used to do it. And I thought it was great. It was very democratic and very fair. And

00:36:16.280 | now we're more democratic and I don't think that's very good. I think if the kids

00:36:20.280 | that don't have money have to work to get it, well that's life. But I think it came

00:36:24.280 | out of it with a big advantage. A big advantage of knowing what it is to stand up for yourself,

00:36:31.280 | knowing how to take responsibility, and knowing that sometimes no matter how difficult circumstances

00:36:37.280 | are you still have to smile and you can't get angry. And the customer or the client

00:36:44.280 | or the person you're serving dinner to is always right. And I do remember dropping

00:36:48.280 | one of the biggest trays down. Eagle, Lower Eagle Dining Hall, you know you used to carry

00:36:53.280 | these trays like that. Probably had 12 plates, 12 butter plates, 12 saucers, 12 cups. I can

00:37:00.280 | still hear the noise. I didn't do it deliberately by the way.

00:37:08.280 | So the next question is from Dan Smith. It says, "What's your opinion on the value

00:37:14.280 | of an Ivy League education? How important is it to go to Princeton instead of Rutgers?"

00:37:19.280 | Well, let me say this. As you can probably imagine, a number of friends, classmates of

00:37:32.280 | mine from Princeton and friends of mine here will ask me to interview their kids and write

00:37:38.280 | a letter to Princeton. And I pretty much do them all, maybe for a year. I'm very clear

00:37:47.280 | about my recommendation. I can't say I've done this kid all of his life or her life

00:37:53.280 | and seen him grow because I haven't. I say his father asked me to interview him and here's

00:37:58.280 | what I find. I'm very clear about that. I don't want to do anything deceptive or duplicitous.

00:38:02.280 | It's not a good idea. And I always say to the kids, you know, I know you want to get

00:38:08.280 | into Princeton. The odds are terrible. They're much worse than the posted odds. I mean they

00:38:12.280 | claim to take 8% of the applicants and the real number I'm sure is like 4% if you count

00:38:21.280 | a football player here or there, another kind of an athlete. You need a tuba player. Generous

00:38:27.280 | alumni, I think they're entitled to some kind of a legacy and they are. I mean they get

00:38:31.280 | it and I would argue they are but that's another story. But you take that group out and the

00:38:39.280 | real admission rate is probably 4% or 3%. Very impressive. And I say, you know, it's

00:38:43.280 | amazing how I say to these young men and women, it's amazing how many people I know who had

00:38:48.280 | enormously successful careers, happy families, fulfilling lives that never went to Princeton.

00:38:54.280 | It's amazing. Would I prefer Princeton to Rutgers? Yes. But you know it was just a great

00:39:03.280 | place for me. It was so different and diverse now. We have a lot more, well I think it's

00:39:10.280 | exactly half, almost exactly half women. There were no women when I was there. There was

00:39:14.280 | a black young man in our class who we didn't even know was black. It was kind of, you know,

00:39:18.280 | dark but he was black. It had limits on Jewish kids and there were very, very few Asians

00:39:27.280 | and all that has changed. I mean Princeton is adjusting to modern times and you know

00:39:32.280 | I loved it the way it was when I was there but I realize you can't, you know, I look

00:39:38.280 | back with great affection. It was a wonderful, wonderful time in my life and you know if

00:39:42.280 | I hadn't gone to Princeton there wouldn't be any Vanguard, right? And I wouldn't have

00:39:46.280 | had a senior thesis in the mutual fund industry because no other college in the country asked

00:39:49.280 | the undergraduates to write a senior thesis. So it was a great blessing and I wouldn't

00:39:56.280 | take it back. I owe it an awful lot. But today, you know, the world of talent will emerge

00:40:06.280 | and I'm sure you can get a good education at Rutgers. I'm sure you can get a good

00:40:12.280 | education at West Chester University here. Little, big, it ends up being up to you and

00:40:19.280 | you know I'm a believer that we have ourselves to answer for fondly and the idea you don't

00:40:26.280 | get into Princeton say and spend the rest of your life complaining about how your future

00:40:30.280 | was ruined by not getting into Princeton. There is the perfect identity of a loser.

00:40:36.280 | The next question, there's a little inside explanation for those who don't know. Jack

00:40:43.280 | really does have a slide rule on his desk and he knows how to use it. So the next question

00:40:49.280 | is from Dan Smith and he wants to know what kind of slide rule do you use? Pick an echo

00:40:54.280 | or COFL and ICER. Which is best? Why do you use the slide rule instead of Excel?

00:41:00.280 | The answer to the second part of the question is COFL and ICER. And it's aluminum. The

00:41:07.280 | wooden ones get very sticky and I also have a little mini one that doesn't work very

00:41:11.280 | well. I have three of them. So when I start banging on my desk to find one under all that

00:41:15.280 | paper, I always find one. Everybody says it's kind of a joke but I got into this a long,

00:41:22.280 | long time ago. I didn't use it. I wasn't an engineer or anything which is where you

00:41:26.280 | see slide rule was used mostly in undergraduate days and when I was in college. But I was

00:41:33.280 | doing every, the end of every month I would have to go over to our Camden office where

00:41:38.280 | our funds were located as compared to the management company and get yields and everything

00:41:43.280 | in the portfolio. And so that was what we did in those days. And you know I had my little

00:41:50.280 | Monroe calculator and it kind of made me crank. Well I found out the yield on General Motors

00:41:55.280 | say was 6.48329 on my computer. Wonderful. What the hell do you do with that? I found

00:42:03.280 | out by a quick switch of the slash of the slide rule. I got 6.4 and I didn't care about

00:42:07.280 | the 82419. I mean it's very, very efficient compared to what we were doing then. I don't

00:42:14.280 | use it as much now but I don't think many days go by when I don't do something with

00:42:19.280 | it. And it's because I'd rather be approximately right than precisely wrong. This question

00:42:28.280 | is from the forum Jack. It's from Joel and he asks Mr. Margo what are your top priority

00:42:34.280 | projects for the next one or two years? Thanks for what you've done for individual investors.

00:42:40.280 | Well my highest priority and you know things keep getting, it's amazing how every day

00:42:47.280 | something new pops up. And you'd think that the demand for my ideas, services, whatever

00:42:56.280 | would fade. But they don't. And in a certain way I think I could make a statistical case

00:43:03.280 | without even the slide rule. They're actually intensifying. Right now, I spend a lot of

00:43:11.280 | time on things like the talk I gave to the endowment fund officers in Washington. And

00:43:17.280 | I spend a lot of time doing this this morning, a little slap dash from me. But it doesn't,

00:43:21.280 | you know you don't just say well let's throw together some charts Mike and say that to

00:43:26.280 | him at 4 o'clock yesterday afternoon. That's just not the way the system works. So all

00:43:30.280 | these things are diversions from what I really want to get out of the way for my next priority.

00:43:35.280 | Just finishing the darn book. I mentioned the deadline got lengthened because of my

00:43:41.280 | disability or inability as the case may be. So that's my first priority. And then I don't

00:43:47.280 | think I'm going to write a book anymore. I think that really will be my last book. It's

00:43:52.280 | a lot of work and it's the overhang of having a task that has to be done when you're 82

00:44:00.280 | years old. And so it will be done by my deadline at the end of February. And it will be done

00:44:07.280 | well. I don't want to compromise on quality. As well as I can do it I should say. I don't

00:44:12.280 | want to compromise on quality. And then there will be periodic speaking invitations. I'm

00:44:17.280 | doing very few between now and then. And I did get an invitation to speak in Lexington,

00:44:22.280 | Kentucky in 2014. 2014? I told them I was busy that day. And I don't much like anymore

00:44:38.280 | flying. You know we grew up with getting there is half the fun. Getting there is not half

00:44:43.280 | the fun anymore. I guess that was the Cunard Line slogan. Travel doesn't really appeal

00:44:48.280 | to me. So I'm trying to limit my ambit where at all possible to New York, Boston which

00:44:53.280 | I can get to by training easily. And Philadelphia and Washington. So I have little speeches.

00:45:02.280 | The National Association of Business Economists down here is coming up. I'm going to do a

00:45:07.280 | seminar I must say that was greatly complimented by this. I don't know how many of you follow

00:45:11.280 | Jim Grant, the interest rate observer guy. The best writer in this business without any

00:45:16.280 | question. And he has a big forum every year that's very prestigious. And he asked me to

00:45:21.280 | just do a Q&A with him this year. And he really needed me. So I took that as a great compliment

00:45:27.280 | so I'll be up in New York and I'll attend that whole thing which probably starts at

00:45:31.280 | 8.30 in the morning and goes till 4.00 or 5.00 in the afternoon. But I'm interested

00:45:35.280 | in getting home at night. Getting home at dinner. So I'm going to leave you this afternoon

00:45:42.280 | probably around 6.30. I'll be there up until then. But I just want to see how our guys

00:45:47.280 | do. Get a chance to chat with you all a little bit. And we'll chat a little bit. And then

00:45:55.280 | if you're going to do television interviews. And this is you know, it's a ridiculous kind

00:46:00.280 | of discipline. But if you're going to do even a simple television interview with an

00:46:07.280 | ignorant question. They're not all ignorant by the way. I don't mean to suggest that

00:46:14.280 | but it's been known to happen. And you have to be prepared. So you end up trying every

00:46:21.280 | day to keep up with what's going on. And if you're interested in every single thing that

00:46:26.280 | is happening in the world, which would mean you're in the financial business. You know

00:46:30.280 | this is the New York Times. This is the Wall Street Journal. On Saturday morning I can

00:46:34.280 | spend two and a half hours with those two newspapers. During the week I do one of them

00:46:38.280 | coming to work and one of them going home. Because the company is still nice enough to

00:46:42.280 | have our mail room guys take me back and forth. And so just keeping up and being interested

00:46:48.280 | in everything. And then after I get the book done, I was telling someone earlier, I don't

00:46:55.280 | think a day goes by without some idea in my mind for an op-ed in the Wall Street Journal

00:47:02.280 | or an op-ed in the New York Times or even the Financial Times. They want me to do something.

00:47:07.280 | They haven't even said what. But they come to me. I don't know exactly why. Maybe it's

00:47:12.280 | irreverence. Maybe it's age. Maybe it's wisdom. God alone knows. Maybe it's because they know

00:47:19.280 | I'm a pain in the duffle bag. But I could write an op-ed at least, I say every day on

00:47:26.280 | a different subject. But I can't do it because it takes a day to write the darn thing. Can

00:47:33.280 | I just tell a funny kind of story? Sure. One of my most amusing was in the Wall Street

00:47:39.280 | Journal. And I get a little note from Tucku Vaginaria, the guy that ran the Indian Educated

00:47:46.280 | in Britain. He was kind of an irreverent guy and we got along pretty well. So I wrote a

00:47:54.280 | lot of stuff for him. And the editorial guys over there really didn't like much of what

00:47:58.280 | I was writing, particularly when I wrote something nice about Eliot Spitzer. But they would print

00:48:04.280 | and he would essay. I get a note from him one day and it says, "Don't you hate dot,

00:48:10.280 | dot, dot," the title I think, and then dot, dot, dot in the next line, "DAVOS." DAVOS

00:48:16.280 | for the World Economic Forum takes place every year. And so I write back and say, "It's

00:48:23.280 | absurd, ridiculous, and a waste of everybody's time except the egos of all those big shots

00:48:28.280 | that go there." So he writes back and says, "Can you give me 1,200 words on it?" But since

00:48:38.280 | they're all in Europe, you've got to meet the deadline for the afternoon for the European

00:48:45.280 | edition, so it has to be done by 3 o'clock this afternoon. So I write the thing and my

00:48:53.280 | granddaughter was coming in for lunch, one of my granddaughters, and believe me, she's

00:48:58.280 | not going to be part of my type of time schedule. If you have a chance to have lunch with your

00:49:02.280 | granddaughter, don't let anything interfere with that ever, ever, ever, ever. So I got

00:49:06.280 | it typed up, took her out to lunch, obviously at the cheap Vanguard cafeteria, came back,

00:49:16.280 | edited the thing, and had it all up in a quarter of three. And it was a really, one of the

00:49:22.280 | most fun op-eds I've ever done, probably the best one I've ever done. It was fresh, it

00:49:26.280 | was irreverent, and I complained about all these guys. And then I said, "You know, I

00:49:32.280 | am interested enough," the last line said something like this, "I am interested enough

00:49:36.280 | that when I read President Clinton is flying over to give the concluding address tomorrow,

00:49:41.280 | if he calls me up and will take me on his plane, darn if I won't go with him." He didn't

00:49:48.280 | call. So it's a lot of fun and there will be things to do, but a book is really a big

00:49:57.280 | project. And I have to tell you, I love when I look at chapters in the past books, I don't

00:50:04.280 | dwell on them, but every once in a while I'll look and see what I said. And I really love

00:50:09.280 | what I've written and how I've written it. It's very egotistical, very self-serving,

00:50:14.280 | but I really do, and I think it's my fault for writing very important issues. But the

00:50:21.280 | first drafts are so pathetic that if I was your student and you were a teacher, you'd

00:50:26.280 | say, "Pal, you got no future. You need an extra year." That's in a lot of ways what

00:50:31.280 | I am anyway.

00:50:33.280 | This question is from Got There Late. I know he's out there somewhere. "Do you have

00:50:38.280 | any regrets about your founding of Vanguard, and what would you do differently if you had

00:50:42.280 | it to do all over again?"

00:50:47.280 | Well, there are two things I'd do differently, one of which I talk about and one of which

00:50:51.280 | I don't. Duh. I feel comfortable in saying I kind of wish that I'd had a gentler, I mean

00:51:06.280 | I'm basically fundamentally a gentle person, but if you're trying to put a new company

00:51:11.280 | and new ideas on the map, you can be pretty darn abrupt. And I don't think anybody would

00:51:15.280 | tell you if I was ever in a mean-spirited, put-down way, but things have to be done,

00:51:21.280 | and you can't convene a committee to do them, and I never did. You try things in this

00:51:27.280 | life, and given my work ethic, which is superb or pathetic, depending on how you look at

00:51:34.280 | it, I'm going to know more just because it's the kind of person I am, not because

00:51:39.280 | I'm any smarter. I'm going to know more about the issues I want to talk about than

00:51:42.280 | the people around that table. And I don't want to have other people who know less. If

00:51:46.280 | they know more than I do, I'm more than willing to help them. But they haven't thought

00:51:50.280 | about it, they haven't walked around it. It's a new exposure for them, this is not

00:51:53.280 | their fault, we are who we are. And so I was probably much, and I've confessed to this,

00:52:00.280 | much more of a dictator, high-handed probably, but I think in a decent way that people pretty

00:52:06.280 | much understood. And so maybe I should have been, according to George Bush I, a kinder,

00:52:14.280 | gentler executive, chief executive. But maybe there wouldn't be any vanguard if I were.

00:52:21.280 | So you've got to take the good and the bad. And no one can really imagine what it was

00:52:26.280 | like in those early years to try and get stuff done. And you know, you say, "Do it!"

00:52:32.280 | And, or often, with a group of four or five people, I don't know who's going to do

00:52:37.280 | what, would you guys figure that out? Here's what has to be done. And that was it. And

00:52:41.280 | I don't think that's a bad management style, actually. But I never thought about management

00:52:46.280 | style. And someone, Laura, I think again, asked me about leadership. First rule is,

00:52:51.280 | for God's sake, be who you are. Because people can spot a phony a thousand yards away. I

00:52:55.280 | don't think anybody has ever called me a phony. How could they? Good. The reality is so terrible

00:53:01.280 | they don't need to.

00:53:03.280 | (audience laughing)

00:53:06.280 | you

Bogleheads® Conference 2011 - John Bogle Q & A

Chapters