Bogleheads® Conference 2015 - John Bogle Q & A

00:00:00.000 | We're going to move right into the Q&A after just a few words, and we'll move right into the Q&A.

00:00:07.000 | Okay, well here I am again.

00:00:10.000 | [Applause]

00:00:17.000 | I don't know if Gus is still here or not, but a funny anecdote about my work with Gus over the years.

00:00:22.000 | You know, when you stop being the head of the company, a lot of relationships break down.

00:00:26.000 | That would never be true of Gus and me, and in February of 2009, I ran into him in the hall,

00:00:33.000 | and we got talking about the markets, and he said, "You know, I think this is the greatest opportunity

00:00:39.000 | to buy a common stock I've ever seen in my entire lifetime."

00:00:43.000 | And I said, "Would you say that publicly?"

00:00:47.000 | And he said, "Are you kidding?"

00:00:50.000 | [Laughter]

00:00:53.000 | So we all bear the burden of our own palability.

00:00:57.000 | He comes at the issue of market returns very differently from what I do, the way I do,

00:01:03.000 | and almost antithetical, and yet we come out in the same place.

00:01:07.000 | Gus doesn't seem to be as smart as I am in so many ways, and this may be the most important thing.

00:01:12.000 | He didn't put any numbers on his prediction.

00:01:15.000 | He just said, "Lower than the past."

00:01:17.000 | And so I took a look at what I said to you all yesterday, and I looked at a sort of low bearish return,

00:01:25.000 | assuming a bunch of things go wrong, about a 4% return on stocks in the next decade.

00:01:31.000 | That's with a severely large decline in the P/E.

00:01:36.000 | And then I looked at what my system would predict for the next decade,

00:01:40.000 | because I was kind of weighing in on my impression, and that's what I had in the charts.

00:01:44.000 | And my system, which is also on slide 41--43, I should say.

00:01:50.000 | And by the way, we're going to put those slides up on Monday on my website,

00:01:54.000 | so if any of you want to get them, it would be very easy to do.

00:01:57.000 | It's my e-book, www.johncbogle.com.

00:02:05.000 | There's a dot.

00:02:06.000 | And so you'll see in there that the system predicts a 8.1 return.

00:02:10.000 | So just for the heck of an average, we're talking about a 6% return compared to a 9.1% historical.

00:02:17.000 | So Gus and I are going to be--if you give him a number, I'm going to guess it's going to be 7% of the mills.

00:02:23.000 | So we come out of the same place, but what a difference in the way we get there.

00:02:28.000 | And I have a lot of quarrels with the efficient market hypothesis,

00:02:35.000 | and a lot of problems with the math, and that is that we talk a lot about risk.

00:02:42.000 | Let me put a number like 9 or 14 or whatever it is on that.

00:02:47.000 | That is unequivocally not risk.

00:02:52.000 | That is the volatility of the stock market or the volatility of your portfolio.

00:02:57.000 | Now, I'm guessing all of you know this intuitively, because I'd like to have a show of hands here.

00:03:03.000 | Bill Bernstein is not allowed to answer this question.

00:03:07.000 | What is the volatility--do you know the volatility, the standard deviation of your equity portfolio?

00:03:12.000 | Does anybody here know that?

00:03:16.000 | One? One hand went up and then down.

00:03:21.000 | Nobody knows that.

00:03:23.000 | And the index, depending on how you do it, the S&P is around 14%.

00:03:27.000 | That doesn't have anything to do with risk. That has to do with volatility.

00:03:31.000 | And the risk of the market, I'm persuaded today, is quite large,

00:03:35.000 | and I think the market recognizes some of that risk, but not all.

00:03:39.000 | And when you think about risk, what are you really thinking about?

00:03:43.000 | You're thinking about the state of the world.

00:03:45.000 | You're thinking about war.

00:03:47.000 | You're thinking about the state of the economy.

00:03:49.000 | You're thinking about financial leverage, greatly acceptable all over the world.

00:03:53.000 | You're thinking about a lot of things that can go wrong--global warming, health epidemic,

00:03:59.000 | growing concentration and bigness of our world.

00:04:02.000 | These are all big risks that we'll have to deal with over time.

00:04:06.000 | And I went through my whole list here.

00:04:10.000 | I would come up with a conclusion that when you put all this together,

00:04:14.000 | according to somebody named Larry Siegel,

00:04:18.000 | you would absolutely conclude that the world is going to hell in a handbasket.

00:04:23.000 | The fact of the matter is, in history, it's always been going to hell in a handbasket.

00:04:27.000 | But it never quite gets there.

00:04:30.000 | So that's called hope, not risk.

00:04:34.000 | So I look at it in a very different way, and I come out about where he does.

00:04:40.000 | And so the efficient frontier changes.

00:04:44.000 | And then there's--I've always had this argument, which you may have heard me use from time to time.

00:04:49.000 | If you look at that chart of justice, and there's a percentage point here and a percentage point there,

00:04:54.000 | and here's the risk, and here's the--I guess the return is over here, and the risk is down here.

00:05:00.000 | And it kind of equates a percentage point in standard deviation, the way that line is drawn,

00:05:06.000 | with a percentage point in future returns.

00:05:09.000 | You take one percentage point more risk, you get one percentage point more return.

00:05:14.000 | Well, I always argue, in kind of a nasty way,

00:05:19.000 | that what sense does that make when an extra percentage point of return is priceless

00:05:25.000 | and an extra percentage point of standard deviation is meaningless?

00:05:30.000 | Think about that. You're comparing the meaningless with the priceless.

00:05:34.000 | So be a little skeptical of all these things, even though Gus, intellectually honest,

00:05:39.000 | at the University of Chicago, efficient frontier model,

00:05:43.000 | probably comes out about the same place I do with the future returns.

00:05:47.000 | So we'll just have to see what happens.

00:05:50.000 | I want to mention one other thing about Gus talking about threats to Vanguard,

00:05:55.000 | and he used complacency.

00:05:57.000 | And I have a different kind of threat, which is best exemplified.

00:06:01.000 | This is not to do with innovation in the firm.

00:06:05.000 | You know, all those wonderful people you saw last night.

00:06:08.000 | And I saw a group I didn't even know existed at Vanguard,

00:06:10.000 | helping to educate children at the grade school, the high school, and the college level.

00:06:15.000 | It was a fabulous idea.

00:06:17.000 | Those lovely, young ladies.

00:06:21.000 | Don't make me poke.

00:06:25.000 | And I was so happy to meet so many crew members that I hadn't met before.

00:06:29.000 | These are not the big shots.

00:06:30.000 | These are the people who are doing the hard work of keeping this place going every day.

00:06:34.000 | When you talk about, I think, one of our big risks is a different kind of innovation,

00:06:39.000 | and that's trying to innovate in the funds we offer.

00:06:43.000 | And I think that is a very bad idea.

00:06:46.000 | How can you bring out a new fund that you think will do better than the index?

00:06:51.000 | Why would it do that?

00:06:52.000 | How could it do that?

00:06:53.000 | It can't do that.

00:06:54.000 | It can come and go.

00:06:55.000 | It creates still an additional risk.

00:06:57.000 | So I'm reminded of one of my favorite stories, as much as no one knows,

00:07:01.000 | about the fabled shredded wheat biscuit.

00:07:05.000 | And there was an ad in the New York Times three or four years ago,

00:07:09.000 | and all it has in the middle of the page is a shredded wheat biscuit.

00:07:13.000 | I just put it up to the right side.

00:07:15.000 | This is for a full page at a time.

00:07:17.000 | And it says, "This is the same biscuit we've made for 100 years.

00:07:22.000 | It has the same ingredients.

00:07:24.000 | It's made with the same care.

00:07:26.000 | It's made with the same machinery.

00:07:28.000 | And it tastes exactly the same and bites exactly the same."

00:07:32.000 | We put the "no" back in innovation.

00:07:36.000 | [laughter]

00:07:39.000 | And when it comes to, "I think our risk is over-innovating,"

00:07:42.000 | that probably said to anybody who's progressive,

00:07:45.000 | as a typical statement by an aging veteran who thinks there's only one way to do things,

00:07:50.000 | is, "I am an aging veteran, and I do think there's only one way to do things."

00:07:55.000 | [laughter]

00:07:57.000 | What can I say?

00:07:59.000 | I think that's probably enough, Mel, to open the session.

00:08:06.000 | And we'll turn it over to you.

00:08:08.000 | You can give me a couple of minutes at the end.

00:08:10.000 | Okay. We'll do that, Jack.

00:08:12.000 | I know you like to respond to questions from people who are attending,

00:08:17.000 | so I'll call your name out.

00:08:19.000 | Just raise your hand so Jack knows who he's speaking to.

00:08:22.000 | This question is from Dion.

00:08:27.000 | He asks, "When Vanguard was developed as a mutual company,

00:08:30.000 | you thought other companies would follow.

00:08:33.000 | They haven't. Do you think they will?"

00:08:37.000 | Well, I'm not sure I really thought other companies would follow.

00:08:41.000 | I didn't see how they could follow, and I don't think they will follow,

00:08:45.000 | because this is a business that is basically turned from a professionally managed,

00:08:49.000 | as it was when I came in, very small business,

00:08:53.000 | where, as I said yesterday, we sold what we made.

00:08:58.000 | It's a great marketing endeavor.

00:09:00.000 | We make what we sell, and it's gotten bigger,

00:09:03.000 | and largely because of public ownership, conglomerate ownership,

00:09:06.000 | of so many mutual fund management companies.

00:09:08.000 | About 80% of it has become an entrepreneur's dream,

00:09:11.000 | to start a mutual fund company and get rich.

00:09:14.000 | And when you look at what's going on in the ETF world,

00:09:16.000 | exchange-traded fund world, we have a lot of entrepreneurs out there.

00:09:20.000 | They're in it simply to capture the next moment.

00:09:22.000 | They're in it to make money for themselves rather than clients.

00:09:25.000 | They're what Henry Kaufman called, I think I used this yesterday,

00:09:29.000 | financial buccaneers.

00:09:31.000 | That's not good for the investor.

00:09:33.000 | It's great for the entrepreneur, and they'll all make a lot of money,

00:09:36.000 | but their shareholders will not.

00:09:38.000 | So if you're making a lot of money and losing to performance all the time,

00:09:42.000 | to the index, you really can't change.

00:09:45.000 | If someone were to try and get their costs down,

00:09:49.000 | I might have mentioned this briefly yesterday,

00:09:51.000 | get their costs down to Vanguard's expense ratio,

00:09:54.000 | which I think is a weighted number of about 15 basis points.

00:09:57.000 | Well, take someone like Fidelity or T. Rose Price,

00:10:00.000 | or even Dodge and Cox, which are a little bit lower.

00:10:03.000 | They're running at about 70 basis points on Woodford's expense ratio.

00:10:07.000 | And if they destroyed the firm, eliminated marketing,

00:10:10.000 | fired the portfolio manager, started indexing,

00:10:13.000 | took away a little bit of Ned Johnson's 26 billion,

00:10:17.000 | it's a living.

00:10:20.000 | [laughter]

00:10:23.000 | They could probably get their costs down from, say,

00:10:26.000 | 70 basis points weighted to, let me say, 40.

00:10:30.000 | And what's the point of that?

00:10:33.000 | There's still three times what our expense ratio is.

00:10:36.000 | They're not competitive, and they've given up all the purchases

00:10:39.000 | and stuff that they have, and they're all the way up doing things.

00:10:42.000 | So it's going to be very hard.

00:10:45.000 | And to visualize it even a little more clearly,

00:10:48.000 | there must be an innovator out there, not in the industry,

00:10:51.000 | saying, "Well, it looks like this industry has only one way to go.

00:10:54.000 | "It is the Vanguard way.

00:10:56.000 | "So I'm going to start a mutual company now.

00:10:58.000 | "I want to go out and raise capital to get into the business.

00:11:01.000 | "It's going to take"-- let me pull a number out of the air--

00:11:03.000 | "$200 million to bust into the mutual fund business.

00:11:07.000 | "But how am I going to get that capital?

00:11:09.000 | "When someone gives me $200 million,

00:11:11.000 | "they're going to want a 15% minimum return on that capital.

00:11:15.000 | "So somehow they've got to make $30 million a year.

00:11:18.000 | "There's no way-- what a selling--

00:11:21.000 | "I've got this new IPO, this wonderful innovation,

00:11:24.000 | "but it's not going to produce any money for you at all.

00:11:27.000 | "Invest now." [laughter]

00:11:30.000 | So I don't know at what point competitive pressure

00:11:34.000 | drives people into trying to protect their market share

00:11:39.000 | and their cash flow when they're making money now.

00:11:42.000 | And I think the honest answer to that is

00:11:45.000 | the people in this business see that.

00:11:48.000 | They see that their future prospects

00:11:51.000 | for significant earnings growth are gradually diminishing,

00:11:55.000 | but they're sitting on a great cash cow.

00:11:58.000 | So this cash cow will generate money to the managers,

00:12:01.000 | money to the conglomerates, money to the public shareholders,

00:12:06.000 | but they will be diminishing.

00:12:08.000 | And a lot of the companies that are now owned by conglomerates--

00:12:12.000 | or self-owned Fidelity, for example--

00:12:14.000 | I would guess would be sold to some kind of a financial firm

00:12:17.000 | within, say, five years for each work period.

00:12:20.000 | I hate to make five-year predictions,

00:12:22.000 | because it's the least possible I'll be alive

00:12:24.000 | to see whether they came true. [laughter]

00:12:27.000 | So I don't even see what's happening, and it's dramatic.

00:12:32.000 | You saw those charts yesterday.

00:12:34.000 | They're doing 140% of the industry's cash flow.

00:12:36.000 | But other people aren't going to concede,

00:12:38.000 | because they're still making a lot of money.

00:12:40.000 | They're happy there's enough money to keep everybody rich.

00:12:44.000 | Capital-proof people, private company.

00:12:47.000 | I think on every ranch in Montana--

00:12:50.000 | well, maybe not quite every one.

00:12:52.000 | I'm getting a little hyperbole here.

00:12:54.000 | But it's going to be-- if it changes,

00:12:58.000 | it's going to be a very, very slow change.

00:13:00.000 | Well, Jack, did you get any degree of satisfaction

00:13:05.000 | when Fidelity tried to respond to Vanguard's index funds

00:13:09.000 | when it was a Vanguard-- I mean, Spartan Funds out?

00:13:12.000 | You know you were responsible for that.

00:13:14.000 | Yeah, well, the Spartan Funds are a pretty good--

00:13:18.000 | first of all, be clear on the Spartan Funds.

00:13:20.000 | They're the only-- Fidelity is the only fund group,

00:13:24.000 | only fund sponsor in the entire industry

00:13:27.000 | that has taken indexing seriously.

00:13:29.000 | They probably have-- is it 50 billion, 400 billion?

00:13:35.000 | About 150 or so.

00:13:37.000 | 150 billion indexing.

00:13:38.000 | I mean, it's just a drop in the bucket.

00:13:40.000 | But nobody else is anywhere near that.

00:13:42.000 | And they charge kind of Vanguard-type prices.

00:13:45.000 | Every once in a while, they try and undercut.

00:13:47.000 | Doesn't seem to do them any good.

00:13:49.000 | And then they go back to trying to make a little penny here

00:13:52.000 | and there in their index fund.

00:13:54.000 | But T. Rowe Price has an index business.

00:13:58.000 | They won't even tell you about it.

00:13:59.000 | Well, maybe they will.

00:14:00.000 | I call them on the phone.

00:14:02.000 | [LAUGHTER]

00:14:04.000 | But they're charging 23 basis points.

00:14:07.000 | 23 basis points for an S&P 500 fund.

00:14:10.000 | I think those directors have breached their fiduciary duty

00:14:13.000 | to that fund.

00:14:14.000 | And it just-- it doesn't work.

00:14:18.000 | And I think it's--

00:14:20.000 | Morgan Stanley is even worse.

00:14:21.000 | There's a JP Morgan that charges 100 basis points.

00:14:26.000 | But they only charge 50 basis points

00:14:28.000 | and pay a 5% sales commission.

00:14:30.000 | [LAUGHTER]

00:14:31.000 | Only.

00:14:32.000 | By the way, I don't know how that word slipped out.

00:14:35.000 | So it's pretty much monopoly, except for BlackRock,

00:14:43.000 | which is doing quite well, and State Street, which is just

00:14:46.000 | kind of hanging in there and has the most widely traded stock

00:14:49.000 | in the world.

00:14:50.000 | And that's Spider.

00:14:51.000 | But it's not going to be a very profitable business for them.

00:14:54.000 | And they're pretty marginal in terms of cash flow.

00:14:57.000 | So it's basically come down to BlackRock and Vanguard.

00:15:01.000 | And we're 25% of the ETF business

00:15:04.000 | and 75% of the traditional index fund business.

00:15:08.000 | And BlackRock is probably 5% of the traditional fund business,

00:15:12.000 | index fund business.

00:15:14.000 | And they're bigger than we are.

00:15:15.000 | So they're probably 35% of the ETF business.

00:15:20.000 | So we'll be bigger than BlackRock.

00:15:22.000 | And whether that will give me any satisfaction or not

00:15:25.000 | is another question.

00:15:27.000 | There are ways to use our ETS that are satisfactory

00:15:31.000 | and important and valuable to investors.

00:15:35.000 | But there seem to me to be a lot more ways to use them

00:15:37.000 | in a very foolish way, not so much as Vanguard.

00:15:40.000 | But when you get-- we talked about this yesterday.

00:15:42.000 | You get this triple leverage.

00:15:45.000 | And then you get somebody like Wisdom Tree

00:15:47.000 | that had a decent idea at the beginning.

00:15:49.000 | And it's now basically 100% of their cash flow

00:15:52.000 | is in Japanese and European index funds,

00:15:59.000 | which you can trade to your heart's content.

00:16:02.000 | And they're making a lot of money.

00:16:04.000 | But investors are only going to lose with that strategy

00:16:06.000 | because nothing is good forever.

00:16:08.000 | So it's probably a little dumb to say I don't see

00:16:12.000 | any real major competitor on the horizon.

00:16:16.000 | But the mathematics that I always come back to--

00:16:19.000 | and you've got to look at the incentives.

00:16:21.000 | You've got to look at the motivation.

00:16:23.000 | And no matter what they do-- and I think this is

00:16:25.000 | an important point-- if they can do anything,

00:16:27.000 | they want to compete with us.

00:16:28.000 | If you want to lose money, they can bring in that index fund

00:16:31.000 | in four or five days at a point.

00:16:33.000 | But what we really have going for us

00:16:36.000 | is having had missionary zeal for indexing,

00:16:41.000 | basically not from day one.

00:16:43.000 | That was just an idea that goes into the investment

00:16:45.000 | management system back in 1975.

00:16:48.000 | But from, say, 1980, 1985 on, particularly in the '90s,

00:16:53.000 | this zeal of perpetuating the value of indexing--

00:16:56.000 | books, academic articles, the kind of things I've been doing.

00:17:00.000 | Having somebody that's been dragged kicking and screaming

00:17:03.000 | into the index business compete with someone

00:17:06.000 | who has this missionary zeal, as if it's the Holy Writ,

00:17:10.000 | which is not a fair trade.

00:17:12.000 | So we will sustain our position, I'm quite sure,

00:17:17.000 | unless we over-innovate.

00:17:19.000 | And that would have such a small-- at the beginning,

00:17:22.000 | very small impact on what we do at Vanguard.

00:17:25.000 | So you don't require anybody in indexing to go somewhere else.

00:17:28.000 | And I would not recommend that.

00:17:30.000 | Nothing will be better, in my opinion.

00:17:33.000 | Here's another follow-up question from Dion.

00:17:36.000 | In your wildest dreams, did you ever

00:17:38.000 | think Vanguard would reach $3 trillion?

00:17:42.000 | No.

00:17:45.000 | But I did, I think, back in about 1989.

00:17:50.000 | You could see, almost touch, the growth in our firm.

00:17:57.000 | It was not going to slow down.

00:17:59.000 | So in 1989, it was not going to slow down very much.

00:18:03.000 | We had been growing at a 24% rate, annual rate.

00:18:06.000 | I mean, your assets double every three years.

00:18:09.000 | And we were doubling every three years, in fact.

00:18:12.000 | And so I gave a speech to the crew

00:18:16.000 | and to our internal staff previously called

00:18:19.000 | "The Tyranny of Compounding."

00:18:21.000 | You know, we always talk about the miracle of compounding.

00:18:24.000 | What I was trying to point out was a lot of tyranny to it.

00:18:27.000 | So I said, look, if we continue to grow through the '90s

00:18:32.000 | at, say, an 18% rate or a 15% rate,

00:18:35.000 | because 24% is not sustainable, we're

00:18:38.000 | going to be a trillion-dollar company in--

00:18:42.000 | I guess I said $800 billion in 1999.

00:18:47.000 | And I would have gotten to this trillion

00:18:49.000 | a couple of years later.

00:18:50.000 | I probably should have repeated that exercise in 2000.

00:18:54.000 | But it would have come out the same way.

00:18:56.000 | Our growth rate now is not 24%.

00:19:00.000 | And it is not 18%.

00:19:02.000 | It's not 15%.

00:19:03.000 | Our cash flow growth rate is 5%, 5 and 1/2%.

00:19:07.000 | That's what cash flow does.

00:19:09.000 | You get a lot of inflation and growth

00:19:11.000 | when you have very good markets.

00:19:13.000 | Then you get a lot of deflation and growth

00:19:15.000 | when you have bad markets.

00:19:17.000 | So the way to look at a firm's growth rate

00:19:19.000 | is cash flow as a percentage of assets.

00:19:21.000 | And that's a very healthy growth rate.

00:19:23.000 | Our GDP is growing at maybe 3% a year.

00:19:28.000 | So if you can grow at 6%, 5%, 5 or 6%,

00:19:32.000 | you're going to do just fine.

00:19:34.000 | And of course, the dollars get so big.

00:19:36.000 | If you're dealing at 6% of the free trade,

00:19:39.000 | that's $180 billion.

00:19:41.000 | And that's not too far from a little bit higher.

00:19:43.000 | I think our cash flow for this year

00:19:45.000 | is projected to be maybe $165 billion,

00:19:48.000 | something like that.

00:19:51.000 | There's a question about the bond duration.

00:19:53.000 | And it says, do you think shorter duration bond funds,

00:19:56.000 | two to three years, would be a better choice

00:19:59.000 | or stay with intermediates and heavier on corporate bonds?

00:20:05.000 | Yes and yes.

00:20:07.000 | Maybe I ought to amplify that.

00:20:10.000 | Shorter duration is not a good bet, period.

00:20:15.000 | Because the long run of the bond yield

00:20:17.000 | is determined by the coupon.

00:20:19.000 | And the long bond's yield is probably

00:20:22.000 | a percentage point and a quarter, something like that,

00:20:24.000 | more in the intermediate term.

00:20:26.000 | And two percentage points more in the short term.

00:20:28.000 | Maybe even three.

00:20:30.000 | So you will do better in the long bond.

00:20:32.000 | I just have been around so long.

00:20:35.000 | I can't look at the numbers in the abstract

00:20:38.000 | without saying how will people react

00:20:41.000 | if interest rates go to 4%

00:20:43.000 | and that long-term bond drops by 40% back,

00:20:46.000 | which is roughly what would happen, very roughly.

00:20:49.000 | And I think most people could not handle that.

00:20:52.000 | So no matter how good the long run is,

00:20:54.000 | we all have a little, we're influenced by the short run.

00:20:58.000 | The long run, God knows how long it is.

00:21:01.000 | And if you have a retirement plan,

00:21:04.000 | you think, gee, I'd better do something about this.

00:21:07.000 | I can't handle those losses.

00:21:09.000 | So it's the psychosomatic or behavioral effect

00:21:11.000 | that worries me.

00:21:12.000 | So what I do myself is do,

00:21:15.000 | well, in my personal account,

00:21:18.000 | limited term uni and intermediate term uni,

00:21:20.000 | about half and half.

00:21:22.000 | So it gets me to a duration of probably

00:21:25.000 | maybe four years, something like that.

00:21:27.000 | And does that sound right, Mike?

00:21:29.000 | He's a good man.

00:21:32.000 | Why don't you say exactly four?

00:21:35.000 | - And on my corporate, I have some mostly short term.

00:21:38.000 | We don't have limited term on the corporate side

00:21:40.000 | and the index side.

00:21:42.000 | And I'm a little down on this.

00:21:45.000 | I told you yesterday, I'm a total bond marketer.

00:21:48.000 | I just think that's too much in the way of government,

00:21:50.000 | too much in some abstract way.

00:21:52.000 | Can I prove that?

00:21:53.000 | No, I cannot prove it.

00:21:54.000 | And my big booster, David Swenson from Yale,

00:21:58.000 | thinks the only bond he should know

00:22:00.000 | is the owner-government bond, Treasury bond.

00:22:03.000 | And I think in the real world,

00:22:06.000 | that's just not enough return.

00:22:08.000 | The amount of risk, I'm talking real risk

00:22:10.000 | and not standard deviation, is quite small.

00:22:13.000 | And you will do significantly worse

00:22:16.000 | than the Treasury bond if you have corporates.

00:22:19.000 | The low default rate, maybe the corporate return

00:22:21.000 | will be less than the coupon,

00:22:23.000 | but not enough to get it down to the Treasury rate.

00:22:25.000 | These are all expectations born of

00:22:27.000 | too many years of experience, perhaps.

00:22:30.000 | So I'd say yes, stay short duration.

00:22:33.000 | Don't overemphasize government.

00:22:35.000 | It troubles me that Treasuries and mortgage-backed,

00:22:38.000 | Treasury-backed mortgage-backed

00:22:41.000 | are 70% on the bond index.

00:22:45.000 | And I just think that's too much.

00:22:49.000 | And I've tried to get Vanguard to change it,

00:22:51.000 | but you can imagine what they think

00:22:52.000 | when they get a letter from me saying,

00:22:54.000 | "You know, we're doing the bond thing wrong."

00:22:56.000 | (audience laughing)

00:22:58.000 | I've started it that way.

00:23:00.000 | I don't need anybody to advise me.

00:23:02.000 | I'm not sure I've looked enough,

00:23:03.000 | but the returns were so high,

00:23:06.000 | and the yields were so high

00:23:07.000 | when I started that bond index fund,

00:23:09.000 | first bond index fund in 1986.

00:23:11.000 | It just seemed like a no-brainer.

00:23:13.000 | And the yields were so high,

00:23:15.000 | the risk was, let me say, 7%, 8%.

00:23:17.000 | It didn't look so stark.

00:23:19.000 | When you get to 2% and 3%, that's a 50% difference.

00:23:22.000 | So, or you look.

00:23:26.000 | Lord Keynes said,

00:23:28.000 | you know, that's not what you said

00:23:29.000 | the last time you talked to us.

00:23:31.000 | And Lord Keynes responded,

00:23:34.000 | "When the bats change, I change my mind."

00:23:37.000 | (audience laughing)

00:23:40.000 | - Well, Jack, the comeback on that

00:23:42.000 | from a lot of people is that

00:23:46.000 | you take the risk on the equity side.

00:23:49.000 | You want your bonds to be your safe harbor.

00:23:52.000 | And there's nothing safer than treasuries.

00:23:56.000 | And so why do you think that the 70%

00:23:59.000 | in a government bond is too risky

00:24:03.000 | when we're talking about

00:24:05.000 | looking for balance in bad times?

00:24:07.000 | - Well, you have to think a little bit

00:24:09.000 | about what that 70% is all about.

00:24:11.000 | You know, what is the proper ratio?

00:24:14.000 | What is the normal government bond,

00:24:18.000 | treasury, infinity bond for U.S. investors?

00:24:21.000 | We've got huge amounts of treasuries

00:24:23.000 | that are owned by China and Japan.

00:24:25.000 | And if you take them out of the program,

00:24:28.000 | you're gonna all of a sudden have bonds

00:24:30.000 | that maybe, I don't know the exact number,

00:24:32.000 | but let me say 40% of the portfolio.

00:24:34.000 | What does it matter what China and Japan

00:24:36.000 | are doing in terms of your portfolio?

00:24:38.000 | So if you look at other portfolios,

00:24:39.000 | pension fund portfolios, for example,

00:24:41.000 | they're gonna be more like 35% government.

00:24:44.000 | I'm not saying that's right.

00:24:45.000 | And I am saying, I'm making a judgment,

00:24:47.000 | which is a fragile judgment.

00:24:49.000 | And like everything I've ever done

00:24:51.000 | in my entire life, it could be wrong.

00:24:53.000 | But I have a feeling, and I think

00:24:55.000 | it's a duty to express it.

00:24:57.000 | - I don't know about that.

00:24:59.000 | - Because the point is, just remember,

00:25:01.000 | an extra percentage point of return is priceless.

00:25:04.000 | - And I think you touched on this,

00:25:06.000 | but the question is from Cameron Bennett.

00:25:09.000 | If you care to share,

00:25:10.000 | what is your personal asset allocation and why?

00:25:13.000 | - Okay.

00:25:15.000 | And believe it or not, I just actually changed it.

00:25:18.000 | For the first time in many, many years.

00:25:21.000 | Let me go back a little bit in time with you

00:25:23.000 | to an interview I had with Don Phillips

00:25:25.000 | at Morningstar in, I think, the spring of 2000.

00:25:31.000 | Could have been the fall of 1999.

00:25:33.000 | Could have been a little bit later.

00:25:35.000 | Right around the high of the stock market.

00:25:37.000 | And he asked me about my asset allocation.

00:25:39.000 | And I said, well, right then,

00:25:43.000 | it was about 65% stocks, 35% funds.

00:25:46.000 | I'm a conservative person.

00:25:48.000 | And at that time, bond yields were 8%

00:25:51.000 | and stock yields were 1%.

00:25:53.000 | And I said to him, we looked this up in my interview

00:25:56.000 | on the Morningstar board a little while ago.

00:25:59.000 | And I said, you know,

00:26:00.000 | with stocks selling at 30 times earnings

00:26:03.000 | and yielding 1% and bonds yielding 8%,

00:26:06.000 | there's really not a chance in the world

00:26:08.000 | that over the next decade,

00:26:09.000 | stocks will do nearly as well as bonds.

00:26:12.000 | And then I asked myself rhetorically,

00:26:14.000 | then why am I holding any stocks at all?

00:26:17.000 | And did something about it.

00:26:19.000 | Very rare for me.

00:26:20.000 | I just don't fuss around with changing.

00:26:22.000 | So I went from, in very rough terms,

00:26:24.000 | and I combined various retirement plan accounts,

00:26:27.000 | personal accounts, trust accounts,

00:26:29.000 | to get this number.

00:26:30.000 | But I reduced, I wouldn't dare down the stock market.

00:26:33.000 | I'm not smart enough to do that.

00:26:35.000 | That would have been called for then.

00:26:37.000 | You would have been smart to do it.

00:26:38.000 | But I'm just not smart enough to do it.

00:26:40.000 | So I reduced it in very rough terms

00:26:42.000 | and this is out of memory too,

00:26:44.000 | but I know where it came out.

00:26:46.000 | I reduced my equities from about 65% of my portfolio

00:26:50.000 | to about 40%.

00:26:52.000 | And I was very happy with that.

00:26:54.000 | That occurred in the '90s.

00:26:55.000 | I didn't see any rebalance,

00:26:57.000 | but I did not rebalance at the end of the,

00:27:00.000 | I'm sorry, at the end of 2010.

00:27:02.000 | So I've stuck with that.

00:27:04.000 | And gradually, because of changes

00:27:05.000 | in the stock and bond market relative to one another,

00:27:07.000 | I got to about 55% recent present position,

00:27:13.000 | 55% equities, 45% bonds.

00:27:16.000 | And these are combining taxable

00:27:18.000 | and retirement plan accounts.

00:27:20.000 | It's a crude number,

00:27:21.000 | but it will get the point across.

00:27:23.000 | And not precise.

00:27:24.000 | I don't do precise in any way.

00:27:27.000 | It doesn't matter.

00:27:28.000 | And I decided at the beginning of the year,

00:27:30.000 | as I looked around this risky world out there,

00:27:33.000 | all the things that are going on,

00:27:34.000 | international conflicts, problems in the U.S.,

00:27:37.000 | the financial system,

00:27:38.000 | the kind of thing,

00:27:39.000 | the world's financial system,

00:27:40.000 | possibility of war,

00:27:42.000 | even more subtle things like

00:27:45.000 | the role of technology in price competition.

00:27:48.000 | Everybody knows that technology

00:27:51.000 | has changed the dimensions of price competition

00:27:54.000 | in this country.

00:27:55.000 | And it's been in favor of consumers,

00:27:58.000 | and therefore against the interest of producers.

00:28:00.000 | The producers of the companies are making money.

00:28:02.000 | And you see this in Walmart, for example,

00:28:04.000 | and it's recent earnings.

00:28:06.000 | So I put them all together,

00:28:07.000 | and I thought I really want to go down

00:28:09.000 | from 55% equities to about 45%.

00:28:13.000 | And I found it very difficult to do

00:28:16.000 | because in my personal account,

00:28:19.000 | I have such gains on the index funds

00:28:22.000 | I bought 20 years ago.

00:28:25.000 | So I started to have a big tax burden,

00:28:27.000 | and the amount of money involved

00:28:29.000 | is probably a 27% or 28% capital gains tax.

00:28:33.000 | And so I've got to say,

00:28:34.000 | "Well, if the market's going to go down,

00:28:35.000 | "27% or 28%,"

00:28:37.000 | I'd admit to you,

00:28:38.000 | I'd stop and do lower basis.

00:28:39.000 | And I didn't think that was very likely,

00:28:40.000 | but I still did a little bit

00:28:42.000 | in my personal account.

00:28:44.000 | And that hedge fund got down to 50/50.

00:28:48.000 | And then in my retirement plan account,

00:28:50.000 | we're still going to charity anyway,

00:28:51.000 | so I'm having a funny way of looking at things,

00:28:54.000 | but I thought if everything else failed,

00:28:55.000 | I could always draw money out of it,

00:28:56.000 | so I'll be able to consider it there.

00:28:58.000 | I'll reduce another 5 percentage points,

00:29:00.000 | and so forth and so on.

00:29:01.000 | So now I'm 45,

00:29:04.000 | 45, 55, 45 in stocks,

00:29:07.000 | and 55 in largely short-term

00:29:09.000 | and long-term bonds.

00:29:11.000 | So that's the story.

00:29:14.000 | - This is not an investment.

00:29:16.000 | We have a question,

00:29:17.000 | but it's about your management style

00:29:19.000 | and your productivity.

00:29:20.000 | It's from Janet Heffernan.

00:29:23.000 | "James, how does your office management style

00:29:26.000 | "contribute to your productivity,

00:29:29.000 | "and what time of the day do you find

00:29:32.000 | "to be the most creatively productive?"

00:29:36.000 | - Well, let me try the last one,

00:29:38.000 | which of course has no answer.

00:29:41.000 | What time of day do I find to be the most creative?

00:29:45.000 | Well, I have this funny mind.

00:29:50.000 | I can attest to this.

00:29:52.000 | I'm thinking of everything all the time.

00:29:54.000 | (audience laughs)

00:29:56.000 | That's a lot of thought,

00:29:57.000 | and it's pretty true,

00:29:58.000 | and I'll come in every morning

00:30:00.000 | with a half-dozen new ideas,

00:30:01.000 | and Mike and I will explore them

00:30:03.000 | and look at what the data looks like.

00:30:05.000 | I mean, I trust my judgment,

00:30:07.000 | but I'd like to see data

00:30:09.000 | on a whole variety of things.

00:30:11.000 | It's so far-fetched,

00:30:12.000 | you wouldn't even believe it.

00:30:14.000 | I had one of them to give you an idea

00:30:16.000 | where my mind is working.

00:30:18.000 | I met with some Australians

00:30:21.000 | when coming out of the galley,

00:30:23.000 | and I was gonna meet

00:30:24.000 | the head Australian chief investment officer

00:30:26.000 | at ANZ the next morning.

00:30:28.000 | So these fellows were sitting

00:30:31.000 | with a Vanguard rep,

00:30:33.000 | and it happened to be a nice day.

00:30:35.000 | They were outside,

00:30:36.000 | and the outside portion,

00:30:38.000 | outside of our galley,

00:30:40.000 | is almost totally shady,

00:30:43.000 | but all the way over,

00:30:44.000 | coming back on the right side,

00:30:45.000 | there was this bright sun coming through.

00:30:48.000 | And so I had a nice chat with these guys,

00:30:54.000 | and I said,

00:30:55.000 | "I don't know what you're doing

00:30:57.000 | "sitting in the sun like this.

00:30:59.000 | "I mean, it's the only--

00:31:00.000 | "you're gonna get burned up or something."

00:31:02.000 | And then I said,

00:31:03.000 | "You know, it reminds me

00:31:04.000 | "of that quote from Shakespeare,

00:31:05.000 | "'I'm too much, he the sun.'"

00:31:07.000 | As soon as I got back,

00:31:08.000 | the officer said,

00:31:09.000 | "Mike, check that one out for me.

00:31:10.000 | "See how right I was."

00:31:11.000 | [laughter]

00:31:13.000 | Mike failed me.

00:31:15.000 | So that night, I did it myself.

00:31:17.000 | I Googled,

00:31:18.000 | "I'm too much, he the sun."

00:31:20.000 | It's Hamlet, Act I, Scene 3,

00:31:23.000 | and contains,

00:31:24.000 | which I never knew

00:31:25.000 | until I looked it up on Google,

00:31:26.000 | not just "too much in the sun,"

00:31:28.000 | Hamlet being,

00:31:29.000 | feeling he was too much

00:31:30.000 | in the spotlight

00:31:31.000 | after his father was murdered,

00:31:33.000 | but also his uncle

00:31:36.000 | had murdered his father.

00:31:37.000 | You know the story.

00:31:39.000 | And so it was a pun on

00:31:41.000 | "I'm too much in the sun,"

00:31:43.000 | S-O-N, from this guy.

00:31:46.000 | So I learned a little bit.

00:31:48.000 | Mike learned a little bit.

00:31:49.000 | And when the Brit came in,

00:31:50.000 | I mean,

00:31:51.000 | the Aussie came in the next morning,

00:31:53.000 | I let him have all barrels.

00:31:55.000 | [laughter]

00:31:57.000 | So, is this useful?

00:31:58.000 | Is this productive?

00:31:59.000 | No, this is crazy.

00:32:01.000 | [laughter]

00:32:02.000 | It's a sign of a mind

00:32:03.000 | that didn't ferment perfectly.

00:32:06.000 | And so,

00:32:09.000 | I don't have a simple answer

00:32:11.000 | to these questions.

00:32:12.000 | That thing's popped me.

00:32:13.000 | I was sitting into it

00:32:14.000 | in an investment company.

00:32:15.000 | I'll give you another

00:32:16.000 | more correlative example.

00:32:18.000 | Many years ago,

00:32:19.000 | probably 20,

00:32:21.000 | I was sitting in the audience

00:32:24.000 | at the Investment Company Institute,

00:32:26.000 | a general membership meeting,

00:32:28.000 | a little bored,

00:32:30.000 | and I started thinking.

00:32:33.000 | And I thought, you know,

00:32:35.000 | we have a short term

00:32:36.000 | municipal bond fund,

00:32:37.000 | an intermediate term,

00:32:39.000 | but the short term

00:32:40.000 | is really too short.

00:32:42.000 | So I write down

00:32:43.000 | a limited term meeting.

00:32:45.000 | The next day,

00:32:46.000 | I came in the office,

00:32:47.000 | gathered my little staff around,

00:32:48.000 | probably four people,

00:32:49.000 | and said we're going to start

00:32:50.000 | a limited term municipal bond fund.

00:32:52.000 | That's how the process worked.

00:32:54.000 | And, you know,

00:32:55.000 | it seems crazy.

00:32:56.000 | It seems stupid.

00:32:57.000 | It seems arrogant.

00:32:59.000 | Rarely do I consult with anybody,

00:33:01.000 | as I've told you

00:33:02.000 | in a couple other contexts.

00:33:04.000 | But it all seemed to work out well.

00:33:06.000 | And it says something,

00:33:09.000 | I think,

00:33:10.000 | and I'm not sure about any of this,

00:33:12.000 | but something about the individual

00:33:14.000 | compared to the consensus.

00:33:16.000 | I wanted to start

00:33:17.000 | an insured municipal bond fund.

00:33:19.000 | So my friend Jeremy Duffield said,

00:33:21.000 | "We're going to do a survey

00:33:22.000 | "and see if anybody wanted one."

00:33:24.000 | Nobody wanted

00:33:25.000 | an insured municipal bond fund.

00:33:27.000 | I said, "We're going to start

00:33:28.000 | "an insured municipal bond fund."

00:33:29.000 | We had a lot of trouble

00:33:30.000 | out in the Pacific Coast.

00:33:32.000 | Washington State Power Authority

00:33:33.000 | went bankrupt.

00:33:35.000 | And I thought it would just be

00:33:36.000 | a good idea in the abstract.

00:33:38.000 | So we started.

00:33:39.000 | It's been a big success.

00:33:40.000 | Now, one of the great things

00:33:44.000 | about a very small company

00:33:46.000 | run by a dictator--

00:33:48.000 | [laughter]

00:33:50.000 | I mean, I'm sorry.

00:33:51.000 | That's really the way it was.

00:33:53.000 | I just--you know,

00:33:54.000 | I don't know if anybody

00:33:55.000 | will own up to this,

00:33:56.000 | but it was that way.

00:33:58.000 | And there's something

00:34:00.000 | to be said for that

00:34:02.000 | if you're trying to do something

00:34:04.000 | that no one has done before.

00:34:07.000 | When you get big,

00:34:08.000 | it's much more difficult to do.

00:34:09.000 | You go through a process,

00:34:10.000 | process, process.

00:34:12.000 | Judgment, as I mentioned,

00:34:13.000 | takes a back seat.

00:34:15.000 | So I guess it's just--

00:34:18.000 | I'm not sure it's healthy,

00:34:19.000 | by the way.

00:34:21.000 | At least some of my thought process

00:34:23.000 | involves things other than investing.

00:34:25.000 | I'm not sure enough.

00:34:27.000 | And at least I try and keep

00:34:30.000 | spending a good amount of time

00:34:31.000 | with my family and mine.

00:34:32.000 | I'm not sure I do

00:34:33.000 | a great job on that,

00:34:34.000 | but I do an adequate one.

00:34:36.000 | And I think everybody understands.

00:34:38.000 | And so it's--

00:34:40.000 | idea generation

00:34:42.000 | is much more impulsive

00:34:44.000 | and much less processed

00:34:46.000 | than anybody can imagine.

00:34:49.000 | And, you know,

00:34:50.000 | you tell this to a consultant

00:34:51.000 | who's going to tell you

00:34:52.000 | some damn thing

00:34:53.000 | like part of the expression.

00:34:57.000 | If you can measure it,

00:34:58.000 | you can manage it.

00:35:00.000 | Of all the idiotic comments

00:35:02.000 | ever made.

00:35:03.000 | I mean, is it all about

00:35:04.000 | measuring things?

00:35:05.000 | I mean, really?

00:35:07.000 | What about people?

00:35:08.000 | How do you measure character?

00:35:09.000 | How do you measure integrity?

00:35:11.000 | How do you measure loyalty?

00:35:13.000 | Oh, we have some tested measures,

00:35:15.000 | they say.

00:35:16.000 | I don't believe any of those measures.

00:35:18.000 | And so I'm afraid

00:35:20.000 | I'm showing you

00:35:22.000 | reluctantly.

00:35:23.000 | Well, not so reluctantly.

00:35:24.000 | My very worst side.

00:35:27.000 | - Jack,

00:35:29.000 | the number one topic

00:35:31.000 | that we had on the forum,

00:35:33.000 | questions for you,

00:35:35.000 | and from the members here

00:35:37.000 | and from the board members,

00:35:39.000 | was about your thoughts and views

00:35:40.000 | on international investing,

00:35:42.000 | which you talked about yesterday.

00:35:44.000 | But an interesting question on that

00:35:47.000 | was from Lissy.

00:35:49.000 | I'm sorry,

00:35:50.000 | it's stated, of course.

00:35:52.000 | It says, "If you were born

00:35:53.000 | "on the same day in Japan

00:35:55.000 | "and grew up as Jack Shigahara,

00:35:58.000 | "for example,

00:35:59.000 | "but you still had the same

00:36:01.000 | "fervor for home country buys

00:36:03.000 | "and equity investing as you do

00:36:05.000 | "at Jack Vogel,

00:36:06.000 | "born and raised in America."

00:36:08.000 | - Oh, that's so easy to answer.

00:36:11.000 | Japan is not America.

00:36:13.000 | America has the most diversified economy

00:36:15.000 | in the world,

00:36:16.000 | the greatest innovation,

00:36:17.000 | the greatest entrepreneurship,

00:36:20.000 | the greatest productivity,

00:36:22.000 | the greatest technology base,

00:36:24.000 | the greatest protections for shareholders,

00:36:26.000 | and ownership of private property

00:36:28.000 | of any company in the world,

00:36:30.000 | not last but I will make

00:36:31.000 | a possible exception

00:36:32.000 | of Great Britain and Switzerland.

00:36:34.000 | These things are vital.

00:36:35.000 | These things underlie America.

00:36:37.000 | None of them underlie Japan.

00:36:39.000 | I mean, they're barely getting out

00:36:40.000 | of the imperial age over there.

00:36:43.000 | They have terrible demographics,

00:36:45.000 | as Gus mentioned this morning.

00:36:48.000 | They have a very structured economy

00:36:50.000 | where you go up these little chairs

00:36:52.000 | and sing the company song,

00:36:53.000 | "Oh, My God."

00:36:55.000 | (audience laughing)

00:36:59.000 | I'm vocalizing.

00:37:00.000 | But I'm actually having a good time.

00:37:02.000 | (audience laughing)

00:37:05.000 | - This next question is from Brian.

00:37:07.000 | He says, "There have been recent studies

00:37:09.000 | "that propose starting retirement withdrawals

00:37:12.000 | "at a lower stock-bond mix

00:37:15.000 | "and later raising the stock-bond mix

00:37:17.000 | "after you have avoided

00:37:18.000 | "the stock market volatility risk

00:37:20.000 | "in the initial phase of retirement.

00:37:22.000 | "What do you think about this proposal

00:37:24.000 | "versus a more traditional

00:37:26.000 | "get-more-conservative-as-your-age approach

00:37:29.000 | "to the mix at the time

00:37:31.000 | "of the stock market volatility risk?"

00:37:33.000 | - Well, to begin with,

00:37:35.000 | I think it's appropriate to challenge

00:37:37.000 | the age-based kind of work.

00:37:40.000 | And to be clear, I have never said

00:37:42.000 | this is some kind of geometrical thing

00:37:44.000 | that you do automatically.

00:37:46.000 | I say it's a good place to begin.

00:37:48.000 | Think about your age.

00:37:49.000 | Think about your bond position

00:37:50.000 | equaling your age.

00:37:51.000 | Why?

00:37:52.000 | Because the yield on bonds,

00:37:54.000 | the income yield,

00:37:55.000 | the interest rate on bonds is higher

00:37:57.000 | than the dividend yield on bonds and stocks.

00:38:00.000 | So as you get older,

00:38:01.000 | you'll want more protection

00:38:02.000 | and you'll want more income.

00:38:03.000 | So that kind of logic permeates the idea.

00:38:07.000 | And that's a decent logic as far as it goes.

00:38:10.000 | But the fact is, we know so little.

00:38:13.000 | Rob Arnott,

00:38:14.000 | not exactly my dearest friend in the business,

00:38:18.000 | who runs the RAFI,

00:38:24.000 | R-A-F-I,

00:38:25.000 | Research Association,

00:38:26.000 | R-A-F-I,

00:38:28.000 | and does the smart beta kind of thing

00:38:31.000 | with his fundamental indexing thing,

00:38:33.000 | which has not proved itself at all yet,

00:38:35.000 | but he's only had 10 years.

00:38:37.000 | (audience laughing)

00:38:38.000 | I did not have to say that.

00:38:41.000 | But I don't think there are easy answers.

00:38:44.000 | And I do think,

00:38:45.000 | and I struggle a lot with this.

00:38:47.000 | Now, intellectually,

00:38:48.000 | I do think there's a difference

00:38:50.000 | when I started talking about that

00:38:52.000 | and bought yield for maybe 7%

00:38:55.000 | and stock yield for maybe 2%,

00:38:57.000 | not the extreme 50 or 2000.

00:38:59.000 | I do think we have to think to ourselves

00:39:02.000 | that the idea is to get more income

00:39:03.000 | by having bonds when you're older.

00:39:05.000 | And the dividend yield on stocks is 2.1%,

00:39:08.000 | and the best you can do

00:39:09.000 | on a reasonable, high-quality bond portfolio

00:39:12.000 | is maybe 2 3/4 or 3%.

00:39:15.000 | I think we have to challenge our assumption

00:39:17.000 | that there's not a lot that's permanent in this field.

00:39:20.000 | I don't know how.

00:39:21.000 | I don't have the answer to that.

00:39:23.000 | I don't know if we'll be able to change

00:39:24.000 | the way we do our target date funds.

00:39:26.000 | But I'm a little suspicious,

00:39:27.000 | and I wonder if those life strategy funds,

00:39:30.000 | just pick one and have a permanent ratio,

00:39:35.000 | is not a bad idea.

00:39:37.000 | And then I would add this.

00:39:39.000 | What do we know about rebalancing?

00:39:42.000 | It's a little related to that.

00:39:44.000 | And we know that it is an unwise thing to do

00:39:48.000 | for a long-term investor,

00:39:50.000 | because when you rebalance,

00:39:52.000 | you're selling the higher-returning asset,

00:39:54.000 | usually common stocks,

00:39:56.000 | and buying the lower long-term return asset, bonds.

00:39:59.000 | So the more you rebalance, the less wealthy you do,

00:40:02.000 | compared to just hanging on to the stocks

00:40:04.000 | and keeping a higher and higher position.

00:40:07.000 | And just leaving the bonds

00:40:11.000 | in the lower return,

00:40:13.000 | the smaller and smaller portion of the portfolio.

00:40:16.000 | That's not a mantra for me.

00:40:19.000 | It's something that we all want to think about.

00:40:22.000 | And times change, conditions change, interest rates change.

00:40:27.000 | So basically the answer is there is no answer.

00:40:31.000 | But I do think that the target date approach

00:40:34.000 | is a reasonable approach.

00:40:36.000 | I think it should be compared to the life strategy approach,

00:40:39.000 | which is a firmly conservative growth income objective,

00:40:42.000 | serious objective.

00:40:44.000 | Probably, I don't even know,

00:40:46.000 | but 30% equities, 50% equities, 70% equities,

00:40:49.000 | or something like that, maybe even a little higher,

00:40:52.000 | is another way to do it.

00:40:54.000 | There's no guarantee in any of this.

00:40:56.000 | There is a behavioral element,

00:40:58.000 | comfort level, if you will,

00:41:00.000 | that if you get older,

00:41:02.000 | you know, I know this feeling.

00:41:04.000 | I didn't even talk about this

00:41:06.000 | when I talked about the difference

00:41:08.000 | between an older age income, for example,

00:41:10.000 | and lower risk.

00:41:12.000 | But there's also this human factor.

00:41:14.000 | You know, we get a little bit crotchety and nervous

00:41:16.000 | when we get old.

00:41:18.000 | I don't, but everybody else does.

00:41:20.000 | - We're talking just on the life strategy funds

00:41:23.000 | and the target date funds.

00:41:25.000 | Do you have any idea, when an investor looks,

00:41:27.000 | let's say a retiree looks,

00:41:29.000 | and they're looking, thinking,

00:41:31.000 | being conservative and income,

00:41:33.000 | the life strategy income fund is 40% equity,

00:41:36.000 | or the life strategy target,

00:41:38.000 | the target date income fund is 30% equity.

00:41:42.000 | Do you have any idea why Vanguard

00:41:45.000 | has the same income in portfolios

00:41:48.000 | that are 10% more in equity?

00:41:51.000 | - No.

00:41:53.000 | I started those funds,

00:41:55.000 | and I didn't know that.

00:41:57.000 | There is, in all my bragging

00:41:59.000 | about the number of things that are on my mind,

00:42:02.000 | everything is off my mind.

00:42:04.000 | And I'd actually be very surprised at that.

00:42:07.000 | I'd like you to check that out for me, okay?

00:42:09.000 | Or do you know it's true?

00:42:11.000 | - I'm not sure.

00:42:12.000 | - That's the first time you've ever answered that.

00:42:14.000 | - I know what a strategy is.

00:42:16.000 | - So we'll check it out.

00:42:17.000 | It seems very funny.

00:42:18.000 | Because at 10%,

00:42:19.000 | you know, if they get a 10 percentage point difference,

00:42:21.000 | and you multiply it by the expected stock return

00:42:24.000 | and the expected bond return,

00:42:26.000 | and it really doesn't change

00:42:28.000 | your risk or your return very much

00:42:30.000 | if you have 10% more left.

00:42:32.000 | I think sometimes we're too darn mathematical.

00:42:35.000 | And it's basically,

00:42:38.000 | what are you comfortable with?

00:42:40.000 | What do the numbers tell you to do?

00:42:42.000 | How much do you think your risk is?

00:42:44.000 | How much money do you have at stake?

00:42:46.000 | Someone has a huge amount of money at stake.

00:42:48.000 | It could be very different.

00:42:49.000 | Someone's struggling for every penny,

00:42:51.000 | so they don't have to call on their kids

00:42:53.000 | when they retire,

00:42:55.000 | or when they get 10 years into retirement.

00:42:57.000 | So none of this is easy.

00:42:59.000 | And that's why anything that is too formulaic

00:43:02.000 | kind of worries me.

00:43:04.000 | And yet, okay,

00:43:05.000 | gross return minus cost equals net return.

00:43:08.000 | That sounds kind of formulaic to me.

00:43:10.000 | So I guess what I'm saying is

00:43:11.000 | anyone that uses my formula is okay,

00:43:13.000 | but anyone that uses other people's formulas

00:43:15.000 | probably ought to be careful.

00:43:16.000 | [laughter]

00:43:18.000 | I am trying to make, by the way,

00:43:19.000 | a serious point there,

00:43:21.000 | and that not everything can be converted to numbers.

00:43:23.000 | Read my book called Don't Count On It.

00:43:25.000 | - Jack, I may have misquoted those numbers.

00:43:27.000 | I think I was trying to be conservative

00:43:29.000 | versus the target date retirement.

00:43:32.000 | - Well, see, that would depend on which retirement.

00:43:35.000 | - Right.

00:43:36.000 | The target retirement income fund

00:43:37.000 | is the final fund of everything.

00:43:39.000 | - But you'd be picking a particular

00:43:41.000 | target date retirement age

00:43:44.000 | to get that 30%.

00:43:45.000 | I don't know what that is.

00:43:46.000 | - No, but all funds end up

00:43:48.000 | in the target retirement income fund,

00:43:50.000 | which is maybe 30%.

00:43:52.000 | - The target retirement doesn't have

00:43:54.000 | an income fund as such.

00:43:56.000 | It's just a gradual scaling of the equity ratio.

00:43:58.000 | - Yeah, but I think they call it

00:44:00.000 | the target retirement income fund.

00:44:02.000 | - Well, they should stop that.

00:44:03.000 | [laughter]

00:44:05.000 | We'll check those out.

00:44:07.000 | - We'll move on, because I'm totally

00:44:09.000 | in trust memory of those two.

00:44:12.000 | Question from Nisi.

00:44:14.000 | What do you make of predictions

00:44:16.000 | that investment returns going forward

00:44:18.000 | will be lower than we're used to?

00:44:20.000 | I think we all know your answer to that.

00:44:22.000 | Do you think that they will

00:44:25.000 | be lower than normal for longer?

00:44:30.000 | - Let me say a couple things about that.

00:44:33.000 | When you look at things in 10-year average,

00:44:35.000 | and let me use my central number,

00:44:38.000 | which is the 6% future return

00:44:40.000 | for the bottom line stock.

00:44:42.000 | Start with the knowledge certain

00:44:45.000 | that it's not going to be 6, 6, 6, 6, 6, 6, 6, 6.

00:44:50.000 | It's going to be plus 20 and minus 40,

00:44:53.000 | and it's going to jump all over the place.

00:44:55.000 | So that in itself kind of gives a lie

00:44:59.000 | to thinking about things at the time continuity.

00:45:03.000 | The reality is that this could all be,

00:45:07.000 | and Gus kind of hinted at this, I think,

00:45:09.000 | or maybe you came close to hinting at it.

00:45:11.000 | We got a good solid 40% market decline,

00:45:14.000 | and all would be well.

00:45:16.000 | And if you think about it for a minute,

00:45:18.000 | and I don't think too many of you here

00:45:20.000 | are in this category, certainly I'm not,

00:45:22.000 | but if you're building a fund for retirement,

00:45:24.000 | pray for a 40% market decline,

00:45:27.000 | not just Sunday, but Monday, Tuesday, Wednesday,

00:45:31.000 | Thursday, Friday, and Saturday,

00:45:32.000 | because you'll be investing at lower prices for years.

00:45:35.000 | So we have this kind of funding bias

00:45:38.000 | that market highs, rising markets are good

00:45:43.000 | and falling markets are bad,

00:45:45.000 | and the fact of the matter is

00:45:46.000 | that everybody must know that rising markets

00:45:48.000 | are good for sellers and bad for buyers,

00:45:50.000 | and falling markets are good for buyers

00:45:52.000 | and bad for sellers.

00:45:53.000 | There's this eternal equation,

00:45:55.000 | and nobody can challenge that anymore

00:45:57.000 | than they can challenge the growth of retirement.

00:45:59.000 | Just so you get the full point,

00:46:01.000 | finance qualities of debt retirement.

00:46:03.000 | - Jack, you said, the first two words you said

00:46:06.000 | in your opening remarks the other night

00:46:09.000 | were "Taylor, where am I?"

00:46:11.000 | I have a message for you from Taylor.

00:46:14.000 | It says, "Dear Jack, no one in the mutual fund industry

00:46:18.000 | "has a greater combination of character,

00:46:20.000 | "practical experience, knowledge, inventive genius,

00:46:24.000 | "wisdom, perseverance, management ability,

00:46:27.000 | "literary ability, kindness, modesty,

00:46:30.000 | "and a desire to help others.

00:46:32.000 | "What are your most important words of wisdom

00:46:35.000 | "to give to your own mind?"

00:46:37.000 | - Well, first of all, my wife would agree with all that.

00:46:40.000 | (audience laughing)

00:46:43.000 | She said, "Who's he talking about?"

00:46:46.000 | (audience laughing)

00:46:48.000 | As always, my wife is right.

00:46:50.000 | (audience laughing)

00:46:52.000 | We'll be celebrating our 60th wedding anniversary

00:46:55.000 | next September, and so I don't want to do anything

00:46:58.000 | to disturb her, I don't argue about that.

00:47:00.000 | (audience laughing)

00:47:03.000 | I think advice really is simple.

00:47:05.000 | Look at investment principles,

00:47:07.000 | know what the game is about,

00:47:09.000 | understand where the sources of return,

00:47:12.000 | it's one of my big themes, promote your bonds and stocks,

00:47:15.000 | and just try and figure out how much risk you can tolerate.

00:47:19.000 | You know, it's easy to put in a questionnaire,

00:47:21.000 | "What would you do if the market went down 50%?"

00:47:24.000 | And people say, "I guess it wouldn't bother me at all."

00:47:28.000 | Well, that's a bare-faced lie.

00:47:30.000 | It's easy to contemplate 50% decline and say,

00:47:33.000 | "Fine, I know it's gonna come back."

00:47:35.000 | Then it goes down 50%, you're on your way out the door.

00:47:38.000 | So it's behavior, it's who you are,

00:47:43.000 | and always be who you are.

00:47:45.000 | Life is too short to be anybody else.

00:47:47.000 | But take into account the fundamentals.

00:47:50.000 | You know, listen to what people like me are telling you

00:47:53.000 | that are reasonably unbiased about future market returns.

00:47:56.000 | And conservative, I would always lean to the conservative,

00:48:01.000 | because you will then be in the awful position of over-saving,

00:48:05.000 | which is so much better than being in a position of under-saving

00:48:08.000 | when that great retirement date comes.

00:48:11.000 | And then I would add, and I'll throw a little anecdote here,

00:48:15.000 | that I had this expression,

00:48:20.000 | "Don't peek, don't peek, P-E-E-K,

00:48:24.000 | "at your 401(k) envelope when it comes in,

00:48:27.000 | "or your IRA envelope when it comes in,

00:48:29.000 | "every month in your anecdote.

00:48:31.000 | "Just throw the darn thing in the wastebasket."

00:48:34.000 | And keep doing that until you retire.

00:48:39.000 | And when you retire, open the envelope.

00:48:44.000 | But be sure and have a cardiologist.

00:48:47.000 | [laughter]

00:48:49.000 | Because you're going to have a heart problem,

00:48:51.000 | and you won't believe what you've accumulated.

00:48:53.000 | And the anecdote part of this, and every once in a while,

00:48:56.000 | you find out, yes, in spite of the odds,

00:48:59.000 | somebody is actually reading this stuff,

00:49:01.000 | and somebody is getting the point.

00:49:03.000 | And I've been doing that for a long time,

00:49:05.000 | and I got a letter from an airline.

00:49:07.000 | Todd was just retired, not so long ago.

00:49:09.000 | Long letter, and a couple of long follow-ups.

00:49:11.000 | And his first letter began, "Dear Mr. Bogle,

00:49:13.000 | "I have just opened the envelope."

00:49:15.000 | [laughter]

00:49:17.000 | It gave me such gratification.

00:49:19.000 | - You know, it's interesting,

00:49:21.000 | because the next question was from Backpacker,

00:49:23.000 | and it says, "You've said that investors

00:49:25.000 | "shouldn't peek into the portfolio here.

00:49:27.000 | "Say once."

00:49:29.000 | I believe your exact words were, "Don't peek, don't peek,

00:49:31.000 | "don't peek."

00:49:33.000 | "This helps them save a course,

00:49:35.000 | "and when they look at their portfolios

00:49:37.000 | "right before retirement,

00:49:39.000 | "they'll be floored by how much they've saved.

00:49:41.000 | "How does that work in practice, though?

00:49:43.000 | "Don't investors need to monitor their portfolio

00:49:45.000 | "to rebalance, maintain the aging bonds,

00:49:47.000 | "and watch what's wrong?"

00:49:49.000 | - Well, you've got to distinguish

00:49:51.000 | between the real world

00:49:53.000 | and the hypothetical world.

00:49:55.000 | I mean, you know, read "The Tortoise and the Hare."

00:49:57.000 | It's a great story,

00:49:59.000 | and it's a better story for an investor.

00:50:01.000 | But it's overdrawn, it's hyperbolic,

00:50:03.000 | and none of us are tortoises

00:50:05.000 | or hares.

00:50:07.000 | So the question is, how much of us is a tortoise,

00:50:09.000 | and how much of us is a hare?

00:50:11.000 | You read these things about how all people are divided

00:50:13.000 | into two classes.

00:50:15.000 | Are you kidding me?

00:50:17.000 | I'm looking at 220 people or something here,

00:50:19.000 | and not one of them.

00:50:21.000 | I mean, this group is divided into 220 different classes.

00:50:23.000 | And so,

00:50:25.000 | you have to recognize people's individuality,

00:50:27.000 | and you have to recognize

00:50:29.000 | the difference,

00:50:31.000 | and I'm not sure I'm good at this, by the way,

00:50:33.000 | the difference between kind of

00:50:35.000 | a little hyperbole to make a point

00:50:37.000 | and hoping

00:50:39.000 | that people understand

00:50:41.000 | it's like an ideal

00:50:43.000 | or a fable or a moral

00:50:45.000 | that you adjust around

00:50:47.000 | to deal with who you are yourself.

00:50:49.000 | And that scene is

00:50:51.000 | a little bit like one of my commencement speeches

00:50:53.000 | in one of my books.

00:50:55.000 | I guess it's in

00:50:57.000 | "Don't Count On It."

00:50:59.000 | "If this above all

00:51:01.000 | that I own itself

00:51:03.000 | be true, then thou

00:51:05.000 | canst not be false to any man."

00:51:07.000 | Shakespeare probably would have said, "Man over man or woman."

00:51:09.000 | And that's also

00:51:11.000 | from Hamlet, for those who care.

00:51:13.000 | And so,

00:51:15.000 | the idea

00:51:17.000 | that there's some answer,

00:51:19.000 | you know, young people,

00:51:21.000 | crew members will often come to see me

00:51:23.000 | and say, "I'd love to come and meet you."

00:51:25.000 | And I do my best to accommodate them.

00:51:27.000 | And they basically,

00:51:29.000 | if I can simplify the conversation,

00:51:31.000 | say, "Okay, what's the secret?

00:51:33.000 | What's the secret?"

00:51:35.000 | And you get to be

00:51:37.000 | the head of a $3 trillion company

00:51:39.000 | or whatever we were when I last ran it.

00:51:41.000 | And I say,

00:51:43.000 | "Look,

00:51:45.000 | you have a lot of assets

00:51:47.000 | that I do not have,

00:51:49.000 | and I have a lot of liabilities

00:51:51.000 | that I do not have.

00:51:53.000 | We're different people.

00:51:55.000 | Every person's secret is different.

00:51:57.000 | So just learn what you can.

00:51:59.000 | Watch others. Watch what they do.

00:52:01.000 | See what you can identify. Do what you can.

00:52:03.000 | But for God's sake,

00:52:05.000 | be true to yourself."

00:52:07.000 | And so, you know, I don't have

00:52:09.000 | this kind of Confucian

00:52:11.000 | sort of wisdom.

00:52:13.000 | But I do have a certain kind of wisdom

00:52:15.000 | that calls for perspective.

00:52:17.000 | And maybe

00:52:19.000 | I shouldn't use the word "modesty,"

00:52:21.000 | but I'll say "modesty" in the extremity

00:52:23.000 | of my views on a human being.

00:52:25.000 | And so

00:52:27.000 | we all struggle on different

00:52:29.000 | family circumstances. I mean, they're so different.

00:52:31.000 | Everything is so different.

00:52:33.000 | When someone says, "I can tell you

00:52:35.000 | what the rule is,"

00:52:37.000 | the rule is there is no rule.

00:52:39.000 | I mean, there's common sense.

00:52:41.000 | There's mathematics.

00:52:43.000 | There's what stage of life

00:52:45.000 | you're at.

00:52:47.000 | It's family.

00:52:49.000 | What your objectives are

00:52:51.000 | to leave money to your children

00:52:53.000 | or make enough money for yourself

00:52:55.000 | to have a comfortable retirement.

00:52:57.000 | There are abstract goals,

00:52:59.000 | but ultimately are measured

00:53:01.000 | with a dollar sign and a certain number of digits.

00:53:03.000 | So I know, you know,

00:53:05.000 | I'd love to have some really...

00:53:07.000 | Do we have a "why" sentence, Mike?

00:53:09.000 | Could you give me a "why" sentence

00:53:11.000 | that I should give you?

00:53:13.000 | [laughter]

00:53:15.000 | Stay the course. That's good.

00:53:17.000 | [laughter]

00:53:19.000 | This next one is from Jane.

00:53:23.000 | Since Vanguard has publicly

00:53:25.000 | maintained that HFT

00:53:27.000 | high frequency traders are needed

00:53:29.000 | as market makers,

00:53:31.000 | given that Fidelity and other large fund companies

00:53:33.000 | are starting their own dark pool,

00:53:35.000 | why isn't Vanguard joining them

00:53:37.000 | to potentially get the best price

00:53:39.000 | for the customer?

00:53:41.000 | Is there a disadvantage of placing trades

00:53:43.000 | in an internal dark pool first

00:53:45.000 | before going to external exchanges?

00:53:47.000 | Well, that's actually

00:53:49.000 | particularly in this day and age,

00:53:51.000 | kind of out of my pay grade.

00:53:53.000 | I don't know exactly how we do it.

00:53:55.000 | The idea that we are doing other than best execution

00:53:57.000 | and maximum shares volume

00:53:59.000 | at a given price or close to a given price

00:54:01.000 | is, I think, eternal.

00:54:03.000 | And that has to be the rule

00:54:05.000 | for a firm like Vanguard.

00:54:07.000 | And the extent to which we use dark pools,

00:54:09.000 | I imagine we use them, but I don't know.

00:54:11.000 | And how you even define

00:54:13.000 | a dark pool is a little bit funny

00:54:15.000 | in itself. So I just have to bagel off.

00:54:17.000 | It's the first question I've been asked

00:54:19.000 | in two days, so I really have to bagel off

00:54:21.000 | the answer.

00:54:23.000 | This is an interesting question.

00:54:25.000 | It's not

00:54:27.000 | investing related, but I've always wondered

00:54:29.000 | why Mr. Moto decided to keep

00:54:31.000 | Vanguard headquarters in Malibu,

00:54:33.000 | as opposed to moving to one of the

00:54:35.000 | money center cities.

00:54:37.000 | Well, the answer

00:54:39.000 | to that is pretty easy.

00:54:41.000 | I'll give you a little anecdote to go

00:54:43.000 | with this, too, which very few people know.

00:54:45.000 | And that is

00:54:47.000 | for a whole lot of reasons, including

00:54:49.000 | Philadelphia taxes. We were in Philadelphia

00:54:51.000 | at Wellington from

00:54:53.000 | 1928 to

00:54:55.000 | 1974.

00:54:57.000 | And early in '74, we decided

00:54:59.000 | we could get better real estate

00:55:01.000 | prices,

00:55:03.000 | better workforce,

00:55:05.000 | eliminating Philadelphia

00:55:07.000 | wage tax,

00:55:09.000 | and therefore being able to recruit

00:55:11.000 | a better workforce

00:55:13.000 | on a financial basis.

00:55:15.000 | And so we moved out to

00:55:17.000 | what do we call it?

00:55:19.000 | Right around the corner

00:55:23.000 | from the Chester Brook building we had.

00:55:25.000 | And a small building.

00:55:27.000 | And then when the company blew up,

00:55:29.000 | it was sold.

00:55:31.000 | So we then built the building

00:55:33.000 | in Chester Brook, and we got a little bit bigger.

00:55:35.000 | And that was back in '74

00:55:37.000 | was the first one, then we moved to

00:55:39.000 | Chester Brook in 1983.

00:55:41.000 | So we got out of Philadelphia, number one,

00:55:43.000 | primarily for tax reasons.

00:55:45.000 | Even when we got out of Philadelphia,

00:55:47.000 | we had a big problem with the Pennsylvania

00:55:49.000 | taxes.

00:55:51.000 | They had a very peculiar way of taxing investment

00:55:53.000 | companies that was finally

00:55:55.000 | unacceptable to us.

00:55:57.000 | So we could have moved to a county without

00:55:59.000 | any personal property taxes, say,

00:56:01.000 | I'm not sure what the county is,

00:56:03.000 | a county maybe where Harrisburg is,

00:56:05.000 | and solve the whole problem.

00:56:07.000 | But nobody wanted to go to Harrisburg.

00:56:09.000 | So I decided we would change the law.

00:56:11.000 | People think big.

00:56:13.000 | So I got a really good lobbyist,

00:56:17.000 | former Governor Ernie Fine.

00:56:19.000 | And when I say a good lobbyist,

00:56:21.000 | I mean someone that is totally

00:56:23.000 | above board.

00:56:25.000 | Not a contingent fee guy, we pay them

00:56:27.000 | the normal legal fees.

00:56:29.000 | Great contacts out there.

00:56:31.000 | I said to the people, we're going to have to leave the state

00:56:33.000 | unless they change the law.

00:56:35.000 | And within about a year, oh by the way,

00:56:37.000 | I should tell you, this will also tell you

00:56:39.000 | more about me if you want to know.

00:56:41.000 | On Pennsylvania, there were

00:56:43.000 | probably six companies in Pennsylvania,

00:56:45.000 | smaller than we were, but

00:56:47.000 | some of them were decent sized.

00:56:49.000 | And they said, we'll work with you on this,

00:56:51.000 | we'll help pay the bills. And I said,

00:56:53.000 | no you will not. We're going to do this

00:56:55.000 | all on our own, happy to pay the bills,

00:56:57.000 | but I don't want anybody mucking up the

00:56:59.000 | process around here.

00:57:01.000 | So we did it all by ourselves, and they got the benefit too.

00:57:03.000 | We then got a unanimous

00:57:05.000 | passage of a bill that eliminated

00:57:07.000 | these taxes in Pennsylvania.

00:57:09.000 | Did away with the plaque

00:57:11.000 | in probably 1976

00:57:13.000 | roughly.

00:57:15.000 | And

00:57:17.000 | the unanimous,

00:57:19.000 | the Senate unanimous in the House

00:57:21.000 | was signed by the Governor, it was then Dick Thornbury.

00:57:23.000 | And

00:57:25.000 | all of a sudden the tax problem is gone.

00:57:27.000 | The taxes would have cost us

00:57:29.000 | now about 10 basis points

00:57:31.000 | a year. So add that

00:57:33.000 | to 17 basis points of expense ratio

00:57:35.000 | over 15, and you get the same

00:57:37.000 | 25 basis points. It was just

00:57:39.000 | unacceptable, it would not be something the fiduciary

00:57:41.000 | could afford to do. So

00:57:43.000 | when all else fails,

00:57:45.000 | change the law.

00:57:47.000 | I have a follow up question to that.

00:57:49.000 | Do you feel that being in

00:57:51.000 | Melbourne, as opposed to

00:57:53.000 | one of the money centers,

00:57:55.000 | helped to keep the distinct culture

00:57:57.000 | of Vanguard?

00:57:59.000 | Well,

00:58:01.000 | I guess it

00:58:03.000 | helps in a way.

00:58:05.000 | First, we have

00:58:07.000 | a much better

00:58:09.000 | ability to draw people from the community,

00:58:11.000 | from the counties around

00:58:13.000 | Vanguard, counties and towns

00:58:15.000 | around Vanguard,

00:58:17.000 | and don't have to deal with the problem of Philadelphia

00:58:19.000 | population, which is basically

00:58:21.000 | a measure of far too much poverty.

00:58:23.000 | Far too much poverty.

00:58:25.000 | And you get,

00:58:27.000 | and I'm sad to say this,

00:58:29.000 | a better workforce, although

00:58:31.000 | it's still possible for you to get a workforce from

00:58:33.000 | Philadelphia, and we still do it. They come out in the

00:58:35.000 | train. Mike comes out in the train

00:58:37.000 | himself most of the time.

00:58:39.000 | Philadelphia is president now.

00:58:41.000 | And so I think

00:58:43.000 | we have a better workforce. Whether it's some intellectual,

00:58:45.000 | are we

00:58:47.000 | free from the influence of Wall Street,

00:58:49.000 | whether you're an indexer,

00:58:51.000 | free from the influence of Wall Street anyway.

00:58:53.000 | So I'd

00:58:55.000 | say we could have gone to

00:58:57.000 | Harrisburg. We could be

00:58:59.000 | in, I don't know,

00:59:01.000 | Pittsburgh.

00:59:03.000 | Oh God, no.

00:59:05.000 | Sorry about Pittsburghers.

00:59:07.000 | [laughter]

00:59:09.000 | And I think

00:59:11.000 | being outside the city is

00:59:13.000 | kind of, it sounds great, but then

00:59:15.000 | you're away from all that funny influence and all that

00:59:17.000 | trading blah blah. I don't think it matters

00:59:19.000 | that much. And so what keeps

00:59:21.000 | us going is not necessarily being in

00:59:23.000 | Malvern, or as I still say, Valley Forge.

00:59:25.000 | What keeps us going is

00:59:27.000 | two great innovations.

00:59:29.000 | One is mutual structure,

00:59:31.000 | which is easier to do in Pennsylvania

00:59:33.000 | once the laws have changed.

00:59:35.000 | And the idea of indexing.

00:59:37.000 | And any firm that has done that, like we

00:59:39.000 | had done, I don't think it would really matter

00:59:41.000 | whether they were in Syracuse,

00:59:43.000 | an interesting place to be, I guess,

00:59:45.000 | or not.

00:59:47.000 | I think it's mostly

00:59:49.000 | a workforce issue. We have really

00:59:51.000 | good people working

00:59:53.000 | here. I was really

00:59:55.000 | impressed last night,

00:59:57.000 | other than

00:59:59.000 | 114 selfies

01:00:01.000 | by actual

01:00:03.000 | talent

01:00:05.000 | with the wonderful young people that we

01:00:07.000 | recruit here. I think it helps them in that way,

01:00:09.000 | workforce way.

01:00:11.000 | I'm not even sure of that.

01:00:13.000 | In fact, this next thing is

01:00:15.000 | not a question, it's more a nice comment

01:00:17.000 | from Miriam.

01:00:19.000 | And I want to pass this along. It says,

01:00:21.000 | "I just received my beautiful hardcover

01:00:23.000 | 2015 edition of John Bogle

01:00:25.000 | on investing the first 50 years

01:00:27.000 | for Walnut Publishing.

01:00:29.000 | Martin's dedication states,

01:00:31.000 | and especially those Bogle heads

01:00:33.000 | of the internet, that dedicated

01:00:35.000 | and loyal cadre of Vanguard.org

01:00:37.000 | to give me strength to carry on my mission.

01:00:39.000 | It's incredible to think

01:00:41.000 | that we, as foreign members, give him

01:00:43.000 | the strength to carry on his mission.

01:00:45.000 | Perhaps we could thank him for his dedication

01:00:47.000 | to his national land

01:00:49.000 | and work with Bogle heads that meant to him."

01:00:51.000 | And I really reject that

01:00:53.000 | dedication.

01:00:55.000 | [applause]

01:01:05.000 | I probably should not,

01:01:07.000 | but that hasn't stopped me yet.

01:01:09.000 | A little anecdote.

01:01:11.000 | And that is, there was a

01:01:13.000 | Bogle head who died

01:01:15.000 | before the reunion came.

01:01:17.000 | He had a farm out in Valley Forge.

01:01:19.000 | The Bogle heads came out there

01:01:21.000 | for, I guess, Bogle Heads 2 or 3.

01:01:23.000 | 2.

01:01:25.000 | And so it was easy for me to come out there.

01:01:27.000 | People are still telling stories

01:01:29.000 | about my taking home a half a sandwich I didn't finish.

01:01:31.000 | [laughter]

01:01:33.000 | By now.

01:01:35.000 | And then the next year

01:01:37.000 | we decided to invite him to

01:01:39.000 | come to the campus

01:01:41.000 | for a visit.

01:01:43.000 | And I was told, "You would not be allowed on campus."

01:01:45.000 | And, uh,

01:01:47.000 | I won't even get into that.

01:01:49.000 | That seemed ridiculous to me.

01:01:51.000 | I didn't know quite what to do about it.

01:01:53.000 | I was trying to figure out what to do about it.

01:01:55.000 | But I truly would have done something

01:01:57.000 | if Kevin was with me.

01:01:59.000 | And we made signs

01:02:01.000 | welcoming the Bogle heads.

01:02:03.000 | He was standing out there in the driveway

01:02:05.000 | to welcome you in.

01:02:07.000 | "They're not coming in here."

01:02:09.000 | Well, it happened that

01:02:11.000 | the day before you came

01:02:13.000 | there was an article in the Philadelphia Enquirer

01:02:15.000 | about the Bogle heads.

01:02:17.000 | They had photographs and that kind of thing.

01:02:19.000 | And all of a sudden

01:02:21.000 | management changed its mind.

01:02:23.000 | They said, "Okay, they can come in."

01:02:25.000 | And they said, "However,

01:02:27.000 | we don't really like the fact

01:02:29.000 | that you blackmailed us into this."

01:02:31.000 | [laughter]

01:02:33.000 | They thought I had placed the article.

01:02:35.000 | I wish I had that power.

01:02:37.000 | But I did not.

01:02:39.000 | And did not.

01:02:41.000 | But then we had a really nice meeting.

01:02:43.000 | And then the next year we got a little bit of religion.

01:02:45.000 | Hal was kidding me about this a few minutes ago.

01:02:47.000 | A little bit of religion.

01:02:49.000 | And we got little paper cups

01:02:51.000 | with popcorn in them.

01:02:53.000 | It was delicious, wasn't it?

01:02:55.000 | Oh, yeah.

01:02:57.000 | And then the next year, I think it was mainly Glenn Reeves.

01:02:59.000 | One of the...

01:03:01.000 | fairly new at Vanguard.

01:03:03.000 | He said, "Come on, let's welcome them.

01:03:05.000 | They're important to us.

01:03:07.000 | Let's give them the full treatment.

01:03:09.000 | And boy, I saw last night...

01:03:11.000 | Aren't you overdoing it a little bit?"

01:03:13.000 | [laughter]

01:03:15.000 | [inaudible]

01:03:17.000 | So that little turnaround

01:03:19.000 | I think shows you

01:03:21.000 | not what I think, because everybody knows

01:03:23.000 | what I think about all of you,

01:03:25.000 | but what the company thinks is an important asset.

01:03:27.000 | I imagine we had some reader there

01:03:29.000 | at Vanguard

01:03:31.000 | who reads your comments full-time

01:03:33.000 | because you're a valuable resource.

01:03:35.000 | When something goes wrong

01:03:37.000 | and you put it up on your board, we listen.

01:03:39.000 | And I still get letters from shareholders.

01:03:41.000 | I still write back

01:03:43.000 | handwritten letters to every single one of them.

01:03:45.000 | I have to pass them on to somebody else

01:03:47.000 | because I don't have any...

01:03:49.000 | I can't get access

01:03:51.000 | to our shareholder records

01:03:53.000 | to find out who's right or who's wrong.

01:03:55.000 | But I give them personal attention.

01:03:57.000 | And I think the biggest

01:03:59.000 | single thing we've got to be careful

01:04:01.000 | of here is to make sure

01:04:03.000 | we don't forget the coin of grace

01:04:05.000 | I've used 10,000 times.

01:04:07.000 | Be honest to God down

01:04:09.000 | to earth human beings

01:04:11.000 | who are our clients and who are

01:04:13.000 | our crew members

01:04:15.000 | who serve those clients,

01:04:17.000 | each one with its own hopes

01:04:19.000 | and fears

01:04:21.000 | and financial goals.

01:04:23.000 | And we don't forget... I was up at Harvard

01:04:25.000 | Business School, and one of the wise acres

01:04:27.000 | in the class said a few years ago,

01:04:29.000 | "What's all this about human beings?

01:04:31.000 | Why do you have a chapter or section

01:04:33.000 | in your book

01:04:35.000 | Common Sense

01:04:37.000 | on Mutual Funds on human beings?

01:04:39.000 | What's that all about?"

01:04:41.000 | And I said, "You can quite say it this way.

01:04:43.000 | Look, pal, who do you think

01:04:45.000 | we're investing all that money for?

01:04:47.000 | You know, it's not some big abstract

01:04:49.000 | probably a trillion dollars.

01:04:51.000 | It's people.

01:04:53.000 | Humans with their own needs.

01:04:55.000 | And if we ever forget that,

01:04:57.000 | either with respect to our crew

01:04:59.000 | or with respect to our clients,

01:05:01.000 | that would be all of the

01:05:03.000 | things that take a long time to happen.

01:05:05.000 | All of them are the kids of death.

01:05:07.000 | So how do you keep humanity in the picture?

01:05:09.000 | You know, I'm doing my best

01:05:11.000 | every day to do it.

01:05:13.000 | I may not be here forever,

01:05:15.000 | although sometimes I entertain

01:05:17.000 | the contrary side of that proposition.

01:05:19.000 | [laughter]

01:05:21.000 | Jack has to leave at 40 days.

01:05:23.000 | He wants to say a few words.

01:05:25.000 | Okay, well,

01:05:27.000 | let me say very quickly.

01:05:29.000 | I don't think

01:05:31.000 | I've ever had more fun

01:05:33.000 | than Bogo Hits 14.

01:05:35.000 | You're all so gracious

01:05:37.000 | and kind.

01:05:39.000 | So thoughtful of me.

01:05:41.000 | I won't comment about the selfies.

01:05:43.000 | [laughter]

01:05:45.000 | I've done a little count,

01:05:47.000 | and one of you has not got a picture

01:05:49.000 | of themselves with me.

01:05:51.000 | [laughter]

01:05:53.000 | You will identify yourself.

01:05:55.000 | I'll meet you out in the lobby later on.

01:05:57.000 | [laughter]

01:05:59.000 | So, it's just been a thrilling

01:06:01.000 | experience, and last night

01:06:03.000 | more and more bringing out and meeting

01:06:05.000 | the wonderful young people that we have over there.

01:06:07.000 | And they sort of, in spite of the fact

01:06:09.000 | that I don't even know how they recognize me,

01:06:11.000 | there's a lot of

01:06:13.000 | hero worship and a lot of

01:06:15.000 | appreciation and a lot of joy

01:06:17.000 | from these young people about the situation

01:06:19.000 | in which they find themselves at this stage

01:06:21.000 | of their career. So this has been a wonderful

01:06:23.000 | time. I want to thank you for that. Number two,

01:06:25.000 | I thank you for

01:06:27.000 | [pause]

01:06:29.000 | [laughter]

01:06:31.000 | my walking stick.

01:06:33.000 | And, uh,

01:06:35.000 | the motto when we gave it to Jack is

01:06:37.000 | "If you can lean on us, we support you."

01:06:39.000 | [laughter]

01:06:41.000 | And, uh, so that's

01:06:43.000 | a nice touch, and I certainly want to

01:06:45.000 | thank Mel for his leadership

01:06:47.000 | of this thing, and also

01:06:49.000 | this whole group of you. And not only

01:06:51.000 | Mel and Marlene, but

01:06:53.000 | Ted and Linda, Paul and Linda

01:06:55.000 | I should say, Gail Cox, of course

01:06:57.000 | Gail Cox, uh, Mel and

01:06:59.000 | Kathy, and I think

01:07:01.000 | maybe

01:07:03.000 | Ed and Patty were so great.

01:07:05.000 | Uh, you know, you're kind of

01:07:07.000 | becoming old pals, and

01:07:09.000 | uh, we get together once a year.

01:07:11.000 | It's a little bit, a little

01:07:13.000 | bit like a family holiday.

01:07:15.000 | And, uh, that's a big part

01:07:17.000 | of me doing this over and over again

01:07:19.000 | for years. And, uh,

01:07:21.000 | so,

01:07:23.000 | thank you all

01:07:25.000 | from the bottom of my heart.

01:07:27.000 | [applause]