Bogleheads® Conference 2017 - John Bogle & Bill Bernstein Fireside Chat

00:00:00.000 | A number of years ago, Jack asked if he and Bill Bernstein could have an informal non-political

00:00:21.540 | chat as part of the agenda, and we all know that what Jack wants, Jack gets. So it's been

00:00:30.600 | so popular it's become a regular part of our conference agenda ever since, and it's now

00:00:36.120 | affectionately known as the Farside Chat. Jack's companion for this Farside Chat is

00:00:42.200 | a retired neurologist who helped co-found Efficient Frontier Advisors. He's written

00:00:47.480 | a number of bestselling titles on both finance and economic history. He holds both a Ph.D.

00:00:54.360 | in chemistry and an M.D. Please welcome one of the smartest guys I know, Dr. Bill Bernstein.

00:01:08.120 | Jack and Bill, since the Boglehead community is a politics-free group, we respectfully

00:01:13.680 | request that you honor and refrain from discussing anything political. Other than that, the floor

00:01:19.920 | is yours. Take it away, Bill. Okay. Well, thank you very much. I don't know

00:01:24.160 | who you're talking about. The first observation I would like to make is just to thank the

00:01:34.200 | moderators of the board. That's the main public forum of this organization. It's the one that

00:01:42.560 | almost certainly does the most public good among all the things that the Bogleheads do,

00:01:48.080 | and I particularly want to thank the moderators. Susan "Lady Geek" Alex Fracht. Jim, who

00:01:59.320 | is prudent on the board. Thank you. Mel does. Mel moderates the board, too, because we all

00:02:06.240 | know what happens to boards very quickly when they are not moderated.

00:02:11.480 | I want to make an observation, Jack, which is there's a famous scene which repeats a

00:02:16.480 | bit of urban folklore from The Big Short. It's when one of the characters in the movie

00:02:26.000 | says to one of the others, "Don't gloat about your great success in predicting the crisis

00:02:30.520 | because for every $3 million that disappears from the economy, there's one excess death."

00:02:37.080 | This is going to kill a lot of people. It's going to hurt a lot of people as well. You

00:02:45.480 | quoted a figure, and that's something which is reasonably well accepted, I think, among

00:02:50.240 | epidemiologists and healthcare economists. You quoted that just in your most recent talk

00:02:57.400 | this morning, that Vanguard saves investors $2.5 trillion, or has $2.5 trillion in assets,

00:03:09.320 | so that if you do that computation, it's saving investors somewhere in the vicinity of $25

00:03:16.720 | billion a year. That's just in fees. You add transactional expenses on top of that. It's

00:03:24.360 | maybe $40 billion in fees. If you do that division, $3 million a life, you're saving

00:03:31.360 | about 10,000 lives per year. I wondered if you would ever consider that. I'd add one

00:03:38.280 | other thing, which you're probably contributing to excess mortality, conversely, among active

00:03:43.480 | managers. I wonder if you've ever thought about that one.

00:03:53.400 | Well, the answer is I have not thought about that. You can't think of everything. It's

00:03:59.200 | a good question. I didn't quite get the transition from dollars to lives.

00:04:05.600 | That's the regression slope of excess mortality on decrease in GDP. In other words, for every

00:04:10.800 | $3 million of GDP that's lost, there's one excess mortality in the population.

00:04:19.600 | Got it.

00:04:24.160 | As long as we're having fun with that, I thought I'd segue to something else. I don't think

00:04:32.080 | this is political. There are certain things in the economy that are best run by the state.

00:04:37.800 | Even if you're jumping up and down libertarian, you admit that defense and the courts and

00:04:43.560 | maybe even infrastructure fall within the purview of the state. Conversely, even if

00:04:50.720 | you're a socialist, you believe that the private sector should be producing most goods and

00:04:57.920 | services.

00:04:58.920 | There's a third area of the economy, which is non-profits, which dominate, and rightfully

00:05:05.160 | so, certain parts of the economy. Education, for example. No one wants to go to San Diego

00:05:11.720 | University. Hospitals. Is there a doctor in this room who would want to be a patient in

00:05:20.120 | a for-profit hospital?

00:05:23.680 | Vanguard is a non-profit organization, for all practical purposes. What you demonstrated

00:05:31.840 | in your talk is it's slowly taking over the industry. Do you think that non-profit organizations

00:05:40.480 | like Vanguard, or maybe only Vanguard, maybe that finance is one area that should be run

00:05:46.320 | by non-profits?

00:05:47.320 | Well, I wouldn't be in this for a dictate, a law, pass a law to do that because the issue

00:05:57.880 | is far too complicated for that. I do think that the one thing people don't quite understand

00:06:04.640 | about Vanguard, and mutual funds generally, is the reason you can mutualize is you need

00:06:10.680 | almost no capital. When we started Vanguard, I think our capital was maybe under a million

00:06:17.080 | dollars, maybe a million to two million dollars. The funds had plenty of money. I guess at

00:06:25.720 | that point, a billion and five in assets, but a couple of million dollars is just rounding

00:06:31.520 | error there. You really don't need to have as much capital as we had. You can rent computers,

00:06:38.160 | you can rent land, you can rent buildings, and your ongoing cost, employee cost, usually

00:06:43.560 | about two-thirds of the cost, 65%, 75% of most businesses, you pay every month. That's

00:06:49.080 | not a capital item. You just have to have the revenues to support it. It works.

00:06:55.120 | The more interesting question is, why don't more people do it? Why aren't? I've told people

00:07:02.960 | often we started this Vanguard, we called it Vanguard, meaning the leader in a new trend

00:07:08.440 | back in 1974. Here we are, 43 years later, and we have yet to find our first follower.

00:07:16.240 | How can you be a leader if you don't have any followers? It's a kind of existential

00:07:19.780 | question. The reason it's going to take-- so you don't need the capital. You can run

00:07:28.360 | a company this way. I don't want to go too far here, but it is mutual, truly mutual,

00:07:36.400 | but there are no limits on the amount we can pay people. Our executives are very highly

00:07:40.000 | paid. They don't want to disclose it even to me, but it's a different world than when

00:07:44.000 | we started all those years ago. There are certain reasons it should be very high and

00:07:50.080 | certain reasons maybe it is not, and it should not be. That's a kind of pressure that the

00:07:56.620 | typical nonprofit, National Constitution Center, let's say, doesn't face.

00:08:04.160 | I would not pass a law, but at some point, competition has to rear its ugly head. It's

00:08:11.440 | amazing that at this stage of the industry's development, despite-- someone asked me yesterday,

00:08:17.400 | maybe even last evening-- I think maybe you did last evening, Bill-- and asked me, how

00:08:24.360 | do these mutual fund companies survive with assets shrinking? The assets haven't shrunk

00:08:29.720 | at all because they've had net liquidations pretty much year after year for 12 years or

00:08:36.360 | so, more money going out than coming in, a lot more going out, but the market's been

00:08:41.100 | going up, and so the assets of mutual funds are actually larger. I'm quite sure about

00:08:45.440 | this. Larger than it was 12 years ago.

00:08:48.000 | So a bull market is going to keep people from making the necessary changes. A bear market

00:08:53.400 | will make consumers much more sensitive to performance, much more sensitive to costs,

00:09:00.600 | much more sensitive to the industry as a whole, even investing in stocks. That's what bad

00:09:05.760 | markets do. Very perverse. So I think it's going to gradually happen, and once it happens,

00:09:13.640 | it will be like a little rolling stone that gathers a lot of moss on the way down.

00:09:19.640 | It sort of reminds-- sort of analogous to Warren Buffett's famous statement that you

00:09:23.840 | don't know who's been swimming naked until the tide goes out. All right. Well, let's

00:09:31.320 | talk segue to the composition of the market portfolio now. Everybody-- not people in this

00:09:38.720 | group, of course, but everybody else is talking about the FAANG stocks, F-A-A-N-G. What? Facebook,

00:09:45.080 | Amazon, Apple, Netflix, Google. And they're something on the order of what, 15 or 18 percent

00:09:53.720 | of market cap. Not unusual. If you look at market history for five or six stocks to the

00:10:02.440 | top five or six stops to occupy that much market cap. What is unusual is that they're

00:10:08.120 | all tech companies that are selling for high valuations. It's one thing when ExxonMobil

00:10:13.120 | and Procter & Gamble are the biggest stocks in the index. It's another when there are

00:10:17.720 | companies that could easily vaporize over the next 10 or 15 years. And I'm wondering

00:10:22.040 | if you have any thoughts about that. Well, of course, I've thought about it. And we've

00:10:28.520 | done a little research on it. It's not so easy to do. But the reality is that-- let

00:10:33.360 | me use your number-- 16 or 17 percent of the index fund's assets are in these tech stocks

00:10:40.680 | or market disruptive companies, whatever you want to call it. But the same amount, about

00:10:47.560 | 16 or 17 percent, is in those stocks held by active managers. There's finally no way

00:10:53.200 | around this because you can't-- if a certain set of stocks or 17 percent of the industry

00:10:59.840 | and there's index funds that own, let's say, a third of it, and that the remaining two

00:11:04.760 | thirds of the assets have to be invested in the same stocks because they're there. I mean,

00:11:09.440 | somebody has to own them. And we took it even a little bit further than that. Mike did some

00:11:13.680 | good work. Mike Nolan did some good work for me on this and tried to isolate out the mutual

00:11:17.960 | fund industry as compared to all other investors. And it turns out that the concentration is

00:11:23.640 | almost identical in the mutual fund field. So if the market goes to-- is this political,

00:11:29.200 | Mel, if I ask what the market does? But if the market were to go way down, other funds

00:11:35.840 | will go down just like the index fund. Other funds as a group will go down just like the

00:11:39.320 | index funds do. There is a certain risk-- I'm editorializing a little bit here, Bill--

00:11:44.600 | a certain risk that with all this money coming into the index fund at very high prices, with

00:11:50.920 | people having an awful lot of shareholders, never having experienced a bear market, that

00:11:56.680 | the index fund could be hit more heavily with redemptions from disappointed investors. They

00:12:01.640 | shouldn't be because if they've been listening to me, all I did was ever promise them their

00:12:05.400 | fair share of market returns, good or bad. And sometimes I think they only hear good.

00:12:10.720 | You know the way the world is. So it does not worry me. Maybe it should, but it does

00:12:15.840 | not.

00:12:18.880 | OK. Let me ask another somewhat related question. I'm sure you're aware, Jack, of-- I think

00:12:28.440 | it's still a working paper, but it's gone viral by these three authors, Azar, Schmaltz,

00:12:35.720 | and Tessu. And for those of you who aren't familiar, the title of the article is The

00:12:40.920 | Anti-Competitive Effects of Corporate Ownership. And basically, one of the hints is that--

00:12:49.040 | or one of the propositions that these professors put forward is that mutual funds in general

00:12:57.360 | and index funds in particular are bad for competition. The concentration of ownership

00:13:05.520 | means that they really don't care about how companies compete. In fact, the best thing

00:13:10.200 | is for them to collude to increase their profits. And this is bad for society in general because

00:13:17.840 | it distributes wealth away from consumers who are paying for the higher profits and

00:13:23.520 | towards the owners of capital. So I'm sure you've thought about it. And I thought I'd

00:13:29.320 | open it up for your comments.

00:13:30.800 | Yeah, I have thought about it. And I actually-- like everything in my life, there's an anecdote

00:13:35.240 | about it. And the anecdote is that for a whole lot of reasons, one of the Pine Prize winner

00:13:43.200 | at Princeton, most outstanding student, young woman, was engaged to a young man. They were

00:13:48.240 | both graduating the same year. And he was the valedictorian. And when you get the Pine

00:13:52.280 | Prize winner married to the valedictorian, one wonders what that holds for the future

00:13:57.000 | generations. It's kind of awesome. And Glenn Weil is the valedictorian's name. And he is

00:14:04.040 | part of the group with Eric Posner and one other gal from Yale, Fiona somebody. I can't

00:14:11.320 | remember her last name offhand. And they are big in the same thing. They've written papers

00:14:15.960 | about it. They had an op-ed published in the Times. And the Times wouldn't publish my rebuttal.

00:14:20.800 | But Eric got his Ph.D. in-- I'm sorry, Glenn got his Ph.D. five months after he graduated

00:14:30.480 | from Princeton. He's a little smarter than I am. And he is one of those-- we are having

00:14:37.440 | violent philosophical arguments about this. And the first thing is-- I mean, there are

00:14:42.800 | a number of levels of which I can respond to this on. One involves Pascal's wager, whether

00:14:51.000 | God exists or God does not exist. And the conclusion is-- you probably all know this.

00:14:55.780 | But the conclusion is, consequences must always outweigh probabilities. So they're saying,

00:15:01.760 | in effect, that the probabilities are that we're destroying Will's concentration of ownership.

00:15:09.000 | We're limiting competition and reducing competition. And we ought to not be allowed to own more

00:15:15.320 | than one stock in a given industry. And they always use the airline industry as the example.

00:15:20.560 | We probably own eight airline stocks. Let me take a guess. That would be all there are.

00:15:25.440 | And so that's the only-- I mean, I wish they'd give us another example. But that argument

00:15:35.320 | ignores the fact that we would then have-- and I'm trying to get this number out of them.

00:15:39.520 | And they can't give it to me, because they haven't done their work. And that is, how

00:15:43.200 | big would the S&P 500 fund-- how many stocks would it hold if you couldn't own any competing

00:15:48.760 | stocks? And they say, well, it's very difficult to do that, because we don't know what an

00:15:53.460 | industry is. What industry is Amazon in? Well, if you don't know that, what is the point

00:15:59.840 | of saying that you can only hold one stock in an industry? I mean, it just makes no sense

00:16:04.160 | at all. And it would destroy the index business, because you would have-- and that's the consequence

00:16:11.360 | of this possibility-- I hesitate to call it a probability-- the possibility there's an

00:16:16.320 | anti-competitive effect here, to destroy an industry.

00:16:20.260 | Just think about the capital gains that funds would throw on their shareholders, for example,

00:16:25.460 | if they had to divest all the companies in the industry but one. And then think about

00:16:30.240 | Vanguard buy bets on, let me say, Google. And Fidelity, in their index fund, decide

00:16:38.600 | not to bet on Google in that category, but to bet on, let's say, Apple. I'm not sure

00:16:45.400 | how-- these categories are not exact. So then Apple does better than Google. And so we got

00:16:51.200 | some people at Vanguard say, we've got to get out of this Google and into Apple. It's

00:16:55.080 | a managed fund. And that's the way it would work. So it would destroy a great idea. That's

00:17:01.760 | the number one thing. And is it worth it to do it for that? OK, that's one level.

00:17:07.280 | And the second level is, what is happening about there? Where is this pressure, as it's

00:17:13.440 | generally stated, pressure on companies to reduce wages and increase prices coming from?

00:17:18.880 | Well, first, it comes from a system where capitalism is trying to reward its owners.

00:17:24.640 | I'm not sure that's good, but it doesn't have anything to do with index funds as such. That's

00:17:29.360 | the way capitalism works. And the Glenn Weil, Eric Posner thing is really a socialist kind

00:17:37.120 | of thing. They don't like that. They don't want capitalism to work that way. And they

00:17:41.760 | think indexing is abetting it. And that may actually be. But we're not doing anything.

00:17:46.600 | This is the point. And Vanguard, under Glenn Borum, has about, I think, 40 analysts who

00:17:52.240 | look at corporate proxies and that kind of thing. And a little postscript here, we put

00:17:57.960 | out a lovely booklet on full disclosure, which I've been asking for for years, of exactly

00:18:02.880 | how we do our proxy voting every year. Just came out. You should go to our website, all

00:18:07.320 | of you, or any of you that are interested, and see how we do the voting. But it doesn't

00:18:10.960 | have anything to do with calling the head of United Airlines or American Airlines and

00:18:15.880 | saying, you know, we really want you to raise your prices and to reduce your wages. We don't

00:18:20.840 | get into that with these companies.

00:18:23.000 | The essence of governance, from an index point of view, is to make sure that the company

00:18:28.680 | is run in the interest of shareholders. And if that means some bad things for the system,

00:18:34.240 | you know, favoring capital against income, well, that's the way capitalism has worked

00:18:38.200 | forever. And, you know, I don't need to defend capitalism. Everybody knows these two things

00:18:42.520 | about it. It's the best economic system, the best system for allocating resources ever

00:18:47.880 | designed, and it distributes those benefits very, very disproportionately. And that's

00:18:54.680 | why we have this large gap between the wealthiest one-tenth of one percent or even one-hundredth

00:19:00.600 | of one percent. It's kind of scary. And the rest of the people and the rest of the owners

00:19:06.560 | and the rest of the income earners in the country.

00:19:10.480 | So there are a lot of repairs we need, but none of them have anything to do with changing

00:19:15.440 | the S&P 500 into the S&P 411 or 382. They won't give me the answer. Someday they're

00:19:24.440 | going to find it. They claim they can figure it out. But if they can't even adequately

00:19:27.760 | define industry, how are they going to answer my question? But this is not a specious attack.

00:19:34.880 | This is an attack that can be regarded as possibly even winning, because the Clayton

00:19:41.080 | Act, 1914, is designed to protect competition. And even the suspicion of anti-competitive

00:19:49.480 | actions or structures puts the burden on you to prove that you're not doing it, and

00:19:54.720 | not on the government to prove you're doing it.

00:19:56.840 | So it's complicated. It is threatening. I've been -- I don't know how this exactly

00:20:02.120 | happened, but I've been kind of the lead person at Vanguard, even though I'm not

00:20:06.400 | technically in Vanguard, on responding to these authors. And we're going to have

00:20:11.960 | at it. And one more good fight. Get the blood boiling and the heart pounding. I love it.

00:20:22.920 | But it is a real threat.

00:20:24.680 | To which I would add that the data are very fragmentary, that we really only looked at

00:20:30.480 | one industry, which, as you point out, is the airline industry. And also, I just don't

00:20:37.120 | imagine how, you know, the managers of Vanguard's and BlackRock's index funds get together with

00:20:47.120 | the leaders in all these industries and say, "Hey, why don't you guys get together

00:20:50.320 | and just have a quiet little chat about pricing and labor costs so that, you know, you can

00:20:56.560 | collude against consumers?" It just doesn't make sense. It reeks of a certain amount of

00:21:03.960 | paranoia, I think.

00:21:05.960 | Let me add, if I may, Bill, one editorial thing. And that is, when you get big and successful,

00:21:13.800 | there are going to be a lot of problems that are raised in the competitive markets and

00:21:17.960 | by governments all over the world, not just the U.S., because the ETFs and so on are growing

00:21:23.880 | every bit as fast outside of the U.S. TIFs, not at all. TIF means traditional index funds,

00:21:30.120 | have you all got that yet?

00:21:33.360 | So those threats are going to be there when you get large. It's inevitable. And there

00:21:38.040 | will be tough threats. I mean, it's pretty clear that there's an oligopoly, I mentioned

00:21:42.480 | that in my remarks earlier, between, among Vanguard, number one, BlackRock, number two,

00:21:48.960 | State Street, week number three. But that's about it. And you can't really see somebody

00:21:54.880 | else coming into the business to try and tackle that oligopoly.

00:22:00.640 | We have, I guess, $4 trillion technically, or $3 trillion technically indexed, purely

00:22:05.640 | indexed assets. And BlackRock probably has $2 trillion. Well, outside of their ETFs,

00:22:14.520 | they have more assets than we do. And so we compete, but other people can never ascribe

00:22:25.640 | or achieve those economies of scale that those three firms have been able to do.

00:22:31.600 | State Street's a little bit different issue, because it's almost all institutional kind

00:22:34.940 | of business. One institution betting, trading with another. What a great business. I don't

00:22:42.040 | even care for it, but then it seems useless. So you get that threat. You get governmental

00:22:51.840 | threat. You get competitive threat. But nobody wants to jump into the water, because they

00:22:56.760 | would have to spend years and millions of dollars in losses to get anything like the

00:23:01.160 | economies of scale that we deliver to investors. But if you deliver them to investors, you're

00:23:06.360 | not delivering them to managers. This is a very perverse business. It's really run, to

00:23:11.680 | be blunt about it, run more for the managers than for the shareholders. And so that's what

00:23:15.720 | makes our stock and trade so high.

00:23:17.920 | Yeah. I mean, again, without trying to get Mel to break into a sweat here, Thomas Piketty,

00:23:26.160 | when he wrote Capital in the 21st Century about inequality, missed really one essential

00:23:34.600 | point, which is that if you look at how income inequality has grown in the United States,

00:23:40.120 | 70% of its growth has been basically compensation to corporate managers. That's really where

00:23:47.160 | it's all coming from. And you could say that corporate managers are basically looting the

00:23:54.960 | system, but I don't want to get into that too much.

00:23:59.200 | All right. Well, there's a school of thought, Jack, that says that persistently and artificially

00:24:08.160 | low interest rates, very expansive Fed policy, has contributed to the slowdown in economic

00:24:19.760 | growth and has also made the system more unstable. It's slowed down economic growth because it

00:24:26.040 | misallocates capital. When interest rates are so low, people put it into unproductive

00:24:30.600 | projects, particularly real estate, which is not at all productive and away from things

00:24:37.520 | that are productive. So not only does it slow down the economy, but by inflating asset class

00:24:42.700 | bubbles and producing very high asset class prices, it also makes the system more unstable

00:24:50.840 | as well. It's the classic Austrian point of view. And I'm wondering if that worries you

00:24:56.200 | at all.

00:24:57.200 | Well, honestly, only to the extent that everything worries me. And when you get into totally

00:25:05.960 | uncharted waters, where we are on interest rates and the Fed balance sheet, I think predicting

00:25:12.300 | is that-- I wouldn't know who to lean on to say, tell me what's going to happen and have

00:25:16.920 | any confidence in their answers. Nobody has been in this situation before. A lot depends

00:25:21.600 | on how quickly they take that balance sheet down. I think the Fed balance sheet went from

00:25:25.440 | around a trillion to around $4 or $5 trillion, something like that. And no one knows the

00:25:31.320 | impact of it coming back down. Then you've got the fact that China owns, I think, 26%

00:25:37.520 | of-- or 16%, maybe, a very large portion-- don't hold me to the number-- of US treasuries.

00:25:43.720 | And if they were ever to sell, those rates would go up so quickly you couldn't even find

00:25:47.440 | it.

00:25:48.440 | So just honestly, for me-- and I'm not the brightest bulb in the ground-- unpredictable.

00:25:56.720 | And you kind of hope that we will muddle through. And we've muddled through before, because

00:26:01.720 | the system works in a supply and demand sense. It usually works pretty well. Whether it will

00:26:06.600 | in this case, I don't know. But of course, it worries me.

00:26:11.440 | For those of you who aren't familiar with the name Hyman-Minsky, he produced the instability

00:26:17.640 | hypothesis that basically says that stability produces instability, and instability produces

00:26:24.040 | stability. And you go around and around in these cycles that last about 10 years or so.

00:26:29.080 | And the moment when it all falls apart is called the Minsky moment, September 15, 2008.

00:26:38.280 | There was a rather very important person who used that phrase this morning, and that was

00:26:46.040 | the head of the Chinese Central Bank. It was just something I picked up from the headlines.

00:26:53.520 | All right. Well, let's shift gears again. You have that graph, one of the graphs you

00:27:00.680 | showed, that just points ever, ever upward, the percentage of assets that are actively

00:27:06.040 | managed. So my wife keeps telling me I either need new jokes or new audience. And so I think

00:27:15.080 | I have kind of a new audience here. So I'll ask a question which I've asked you in pretty

00:27:19.200 | much the same form every year, and maybe put a little bit of editorializing on it too before

00:27:24.200 | I ask it, which is that it is said that if too many people index, that active managers

00:27:31.680 | will succeed. But we both know that can't possibly be true, because even if 99 percent

00:27:37.360 | of assets are indexed, that 1 percent that is left for active managers to invest in is

00:27:42.320 | still the market. And they're going to get the market return minus their expenses. But

00:27:48.480 | some weird stuff is going to happen if we get to that point. So the question is threefold.

00:27:56.720 | One, will it happen? Two, at what point does it happen? And three, if it does happen, what

00:28:04.760 | weird stuff is going to happen? Do I have to answer all three? Not necessarily. You

00:28:13.280 | can cut it short by saying it'll never happen, and then I've got to go on to the next question.

00:28:18.120 | When you get to 99 percent or something like that, God knows what would happen. I mean,

00:28:22.520 | that's so close to 100 percent that I'm not sure the market would, in fact, function very

00:28:25.880 | well. But would it function well at 50 percent? Indexing is now said to be, you know, it's

00:28:30.760 | 41 percent of the mutual fund business. But overall in the U.S., at least, it's probably,

00:28:36.440 | say, 26, 27 percent. Well, it's got a long way to go, and a precipitous kind of ride

00:28:42.520 | up and down. And a bear market would slow down indexing, whether it would slow down

00:28:47.920 | other people by a greater amount. We just don't know, given the fact, as I mentioned,

00:28:52.800 | that a lot of money is coming into the index funds at a high level. And so I don't worry

00:28:58.400 | about it. It's going to take a long, there'll be diminishing returns. You know, if indexing

00:29:03.560 | has gone from 20 percent to 40 percent in the mutual fund industry, to go to 80 percent

00:29:10.020 | would require, you know, I guess 100 years or something like that, to me, anyway. So

00:29:19.520 | indexing will continue to do okay. But there are other challenges, in particular, the money

00:29:28.880 | coming in at a high point, which I mentioned. And then I want to get to your third point,

00:29:32.720 | but I can't remember it. What weird stuff happens if we ever get there? Okay, well,

00:29:38.560 | that gives me a chance to comment on one of the great canards of all this. And the active

00:29:42.800 | managers say, or their representatives say, if all these people are indexing, the market

00:29:48.200 | will be less efficient and it'll be easier for managers to win. Well, of course it will.

00:29:55.600 | No argument about that. The less efficient the market, the easier it is for managers

00:29:59.380 | to systematically win. Which managers, I don't know. But it's also easier by the same amount

00:30:07.760 | for active managers to lose. Because you can't have all the active managers winning when

00:30:14.120 | they own, as a group, the index. So it'll be easier to lose and easier to win. What

00:30:19.480 | else is new? So I don't worry about the market becoming so efficient that a certain cadre

00:30:27.120 | of active managers will start to outperform for the first time. They're really locked

00:30:32.040 | into a system. There's something that very little, if anything, has been written about.

00:30:38.200 | But the industry is totally dominated by very, very big firms. I think more so than in the

00:30:42.400 | past. I don't see a reason why a little money manager in Minnesota or something can't do

00:30:48.240 | perfectly well in this system. He probably can't beat the market. But he can keep a business

00:30:52.600 | going and be happy in good markets. And so the dominance of the big managers means they're

00:31:01.720 | really at their peril in getting into indexing. Because they're looking for the big profit

00:31:06.800 | stream. And the simple fact of the matter is that the easy entry into the index market

00:31:13.400 | is the ETF. I don't know when the last traditional index fund was started. Maybe it was 1974.

00:31:24.080 | But that was a very slow thing at the beginning. And now ETFs just come and go at a rapid rate.

00:31:31.480 | But that's the means of entry. So that's good if you're distributing your shares through

00:31:36.360 | stockbrokers. Because the great thing-- I'll put great in quotation marks with a big question

00:31:44.200 | mark next to it-- is the way to do distribution through broker-dealers. And I got out of that

00:31:50.320 | system deliberately in 1977 when we went no load. But we're now much bigger in the broker-dealer

00:31:56.920 | system than we ever were then in terms of the percentage of our assets that are distributed

00:32:02.240 | by brokers. So anything that gives the middleman strength-- the broker's strength in this case--

00:32:11.520 | costs money. And anything that involves more trading costs money. And trading is the investor's

00:32:17.760 | enemy. Because all these traders together get the market return, unless the cost-- none

00:32:22.080 | of it is very complicated. So I don't see a real challenge from within the industry.

00:32:29.720 | Because I think the ETF is a step too far. And the TIF is just an awkward way to get

00:32:36.860 | into the business. Let alone, in your own internal frame philosophy in your firm, you've

00:32:44.120 | been condemning indexing for all these years. And now you say we're going to do this.

00:32:50.440 | I'll tell you a little anecdote if I have a minute here. And that is, I was walking

00:32:57.020 | out in the hall one afternoon at Vanguard. And there was a man, not Vanguard person,

00:33:03.680 | looking around like this. And I said, can I give you a hand? Are you looking for something?

00:33:06.720 | He said, yeah, I'm looking for the men's room. And I said, it's right over there. There's

00:33:11.440 | a great big sign that says men. So I said, this guy may not be the brightest bulb either.

00:33:17.720 | And I said, what brings you down here? And he said, well, I'm marketing the Eaton Howard,

00:33:24.620 | I guess it is. Is Eaton Howard that has this new way of trading funds? Eaton Vance. Eaton

00:33:31.120 | Vance. I'm back in the old name. And they have a way of trying to compete with regular

00:33:36.400 | mutual funds, but have them traded in the stock market. One of the worst ideas ever

00:33:41.080 | in going nowhere. Is that called Next? Next? Next Shares. So he said, I'm down here. Well,

00:33:49.240 | I said, I don't run this place, but I don't think we're going to be very interested. And

00:33:54.400 | I said, what did you do before that? He said, oh, I was the marketing manager for the index

00:34:02.680 | funds at Fidelity. And I said, well, at least you made a step up.

00:34:13.960 | Thank you, Jack and Bill. It's time for a break, and we'll take 20 minutes and come

00:34:18.880 | right back.

00:34:19.400 | [APPLAUSE]

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Bogleheads® Conference 2017 - John Bogle & Bill Bernstein Fireside Chat

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