Bogleheads® Conference 2013 - John Bogle Keynote

00:00:00.000 | It's great to see all of you again, I saw a lot of you last night, I didn't get a chance

00:00:15.440 | to shake any hands, I'm out of light, and I hope you all had a nice dinner, I got a

00:00:21.360 | pause when I got home, my wife was expecting me to be out for dinner, and they were having

00:00:25.600 | a little problem with my, continuing to be busy at my age, and I have worse to tell you

00:00:35.360 | about my schedule today, I just can't kind of help the full disclosure, I am going to

00:00:45.120 | be with you all day until, I just finished that half an hour interview with Christine

00:00:49.920 | Pence from Morningstar, and I'll be with you all day until around 2 o'clock, 2.30, I'll

00:00:55.840 | be back in the office until 3.30, and then for reasons best known to the Lord, I guess,

00:01:03.200 | I'm getting driven to New York to go to a bi-annual meeting of the Princo, it's an investment

00:01:12.080 | management company, a board of trustees, and every other year they invite the former trustees

00:01:17.600 | back of the investment company for Princeton's endowment, and I've been involved in it for

00:01:22.720 | a long time, I haven't been a director, I don't think for maybe 8 or 10 years, but I

00:01:27.680 | can't kind of resist the temptation to go back once more and see how we're doing, see

00:01:33.280 | who's on the board, there's some very, very smart people, actually they went to Princeton

00:01:38.560 | for heaven's sake, and it's kind of nice, and it conflicts a little bit with my priority

00:01:46.800 | to be with you, and my priority to be over at Vanguard tonight, but I do want to say,

00:01:54.640 | so I regret that I can't be there, there's no political implications at all, and then

00:02:00.640 | about 9 o'clock on a certain night, I'm coming back to Philadelphia in the car, and I know

00:02:07.280 | everybody's saying the man is nuts, and where's my wife, but she said I could do it, sort

00:02:14.800 | of, so it's kind of a busy day, and I'll be with you again tomorrow morning to hear Gus

00:02:21.600 | in particular, but to hear anybody else, and hear all of you, and I'll hear some of you

00:02:26.320 | this afternoon, but I'd like to hear the input from you all, and then this may be TMI, but

00:02:33.600 | I have to leave here tomorrow at about 11.30, and I get a CAT scan on my ailing shoulder,

00:02:40.640 | which is not mending the way it's supposed to mend, and then I'm taking the afternoon

00:02:44.880 | off.

00:02:45.600 | [laughter and applause]

00:02:50.640 | Excuse me, the Lord rested on the sixth day, or as I said, so I'm glad to be with you,

00:02:56.080 | and I just wanted to tell you that we've come a long way at Vanguard, and we've engaged

00:03:03.840 | with Boba Fett, and I don't think it's any secret that the first time Kevin and I were

00:03:09.920 | working on signs to welcome you to our campus, about probably eight or nine years ago, we

00:03:16.000 | were told to take down the signs, 2001, told to take down the signs, no one would be allowed

00:03:22.400 | on the campus, and we have our ways of dealing with that, but the orders were rescinded,

00:03:31.120 | and then the door got open, got ajar, and then what, first ajar, and then wide open,

00:03:37.280 | and the last two or three years, we've really, I think, measured up in a very good way.

00:03:41.600 | I want to give great credit to John Werth, our PR guy, and even more credit to Glenn

00:03:47.840 | Reed, our relatively new Managing Director, with whom I'm quite close, and he just wants

00:03:52.880 | to make sure all this gets done just right for you all, because everybody there now recognizes

00:03:58.960 | after some delay what a huge, huge asset you are individually, and as a group, to Vanguard

00:04:07.200 | Sustainment and Reputation, and John Werth said something about you're our biggest boosters

00:04:12.640 | and our fiercest critics, and you need criticism, you need criticism, we need criticism, and

00:04:19.680 | I may overdo it a little bit, but be that as it may, it's going to be a nice evening

00:04:27.440 | for you all, I'm just sorry I can't join you tonight, but it's a busy day, and I'm looking

00:04:34.240 | forward to it all. I want to begin in a way, a curious way, that sets the tone for what

00:04:44.560 | I'm going to be doing today, perhaps be a tie-in with a man for whom I have enormous

00:04:49.360 | respect, and that would be Taylor Laramore, and I don't know, is Taylor here this morning?

00:04:53.360 | Yes. So I have to tell a story to Taylor. First, I have to apply my spectacles. At the

00:05:03.600 | end of my remarks this morning, if I have time, I'm going to tell you about a new book

00:05:07.040 | that's coming out, which my wonderful assistant, Michael Nolan, calls M.I.T.A., it's called

00:05:15.520 | Man in the Arena, and it's not written by me, it's written by a lot of people who did

00:05:22.080 | the Legacy Forum at Wall Street a year ago, and has transcripts of that, a lot of other

00:05:27.520 | information in it, and some of my more recent speeches and that kind of thing, and some

00:05:34.560 | of those before are still in my books, such a distinguished group of people, and so, getting

00:05:45.840 | into that, we have letters from many shareholders, from many, like, big shots, Warren Buffett,

00:05:54.480 | etc., and about ten letters from the Bogleheads, and one of those letters, this is in the book,

00:06:02.640 | is a fairly long letter from Taylor Laramore, and I'm going to quote you from that, because

00:06:08.720 | it's one of my remarks today. "In 1999," this is quoting Taylor, "I learned Mr. Bogle was

00:06:15.440 | going to be the keynote speaker in the Money Show, and my wife, in Orlando, and my wife

00:06:20.880 | Pat and I made the decision to go hear the speech, and hope to meet him personally. He'd

00:06:26.480 | been on the cover of Financial World, blah, blah, blah, and we'd expected John Bogle,

00:06:31.440 | chairman of the giant mutual fund company, to be surrounded by guards and staff, not

00:06:36.480 | two old ladies seeking advice. Pat and I listened to the conversation, we followed Jack into

00:06:45.200 | the auditorium, and the ladies into the auditorium, we immediately went to the podium to speak

00:06:49.040 | before a crowd of several thousand." This is a portion of his exact words, it's recorded

00:06:53.440 | by the press. This is my words from the speech at the Money Show, there are all these people

00:06:59.280 | selling him stuff. So I began by saying, "I count you'll have the opportunity to attend

00:07:05.760 | roughly 130 different seminars, masterminded by more than 100 speakers. It looks to me

00:07:12.080 | that the great preponderance of them will offer you their secrets for success in the

00:07:16.560 | new millennium. Many speakers will offer you tempting solutions involving the best complexity

00:07:22.960 | and a worse financial veter-domain, witchcraft. I must confess, no offense intended to the

00:07:29.040 | presenters," he said, "I wince when I see so many subjects that seem to offer easy roads

00:07:35.440 | for you to build your capital. Wealth creation and preservation, increasing yields to 15

00:07:41.280 | to 20 percent, the trillion dollar opportunity of the internet." I mentioned that. "Finding

00:07:47.360 | future wealth in diamond mines, high profit, low risk strategies, et cetera. I assume,"

00:07:53.760 | I continued when opening my remarks, "from the titles these speakers will offer you the

00:07:58.480 | secrets to success, let me offer mine. The one great secret of investment success is

00:08:06.080 | that there is no secret. Investment success, it turns out, lies in simplicity as basic

00:08:12.160 | as the virtues of thrift, independence of thought, financial discipline, realistic expectations,

00:08:19.600 | and common sense." Taylor then gets back to his words, "I doubt Mr. Vogel will be

00:08:26.080 | invited back." And I wasn't. But I didn't lose my candor as a result of that favor to

00:08:44.080 | get a second invitation. By the way, the guy that ran the money show, I'm standing here

00:08:52.080 | doing my speech, and he's sitting next to me just like Romello is sitting in front of

00:08:56.080 | me now. And I'm sensing. Well, I don't know what I'm sensing. You can probably figure

00:09:02.080 | it out better. But I didn't lose my candor. I haven't lost my candor. And so I'll be as

00:09:12.080 | tactful as I can today. But it's hard for me to say something except the words that

00:09:18.080 | other people put in my mouth. It's hard for me to expand my own opinion. And I guess when

00:09:22.080 | you're 111 years old, that's a little bit early. You ought to say what you think. And

00:09:28.080 | I've been spooing that for more years than I care to count. And you'll hear more of it

00:09:32.080 | today. So thanks, Taylor, for that. And thanks for being here with us. I said some things

00:09:38.080 | about you last night. You've been a very dear friend. You've gone through terribly

00:09:42.080 | troubled time. We all have to go through one way or another in our lives. But you've been

00:09:48.080 | a great ally, a great booster. And his friendship and loyalty and just his integrity as a human

00:09:54.080 | being, that's a phrase I made up somewhere, speaks volumes. I think the spirit of all

00:10:00.080 | the local heads, he's really the founder. So I want to thank Mike Nolan again for helping

00:10:06.080 | me with these slides. I decided we had too many slides last year. We're going to have

00:10:12.080 | four more this year. I'm going to go through them fairly quickly and just cover what we

00:10:16.080 | can. And so we'll just go on now. Mike and I have been very busy in the last couple of

00:10:27.080 | weeks, really, trying to get ready for this and think about some new things and put it

00:10:34.080 | in some cogent way. We're trying to do, he's trying to do the final proofs of The Man in

00:10:40.080 | the Arena, his book about me. And it seems to be our responsibility. A lot of the publishers

00:10:47.080 | don't do a very good job on that. So he was in the office, I think, until nine or ten

00:10:51.080 | last night. Something like that. Midnight. Midnight. You okay this morning? I'm fine,

00:10:59.080 | I guess. Mike is Kevin's replacement. Kevin gave me 11 years of loyal service and Kevin

00:11:07.080 | is, I think, going to stop by and see all of you. I don't know if any of you remember

00:11:10.080 | him. Is Emily in the room now? She is. Where is Emily? Do we have to hand some of that?

00:11:17.080 | [applause] Everyone for Emily, who takes such good care of me, has the patience of Joe.

00:11:30.080 | When I get excited or upset, which is very, very rare. [laughter] Where are my glasses,

00:11:37.080 | Emily? She soldiers through it. She's been very loyal. She's been with me for 24 years

00:11:44.080 | now. She doesn't look old enough to do this, I'll say that, but she's been with Vanguard

00:11:50.080 | maybe 27 or 28 years, I'm not sure exactly. But we owe her all of you. She's a big participant

00:11:57.080 | in helping you all get around and getting the things that need to be done here. So with

00:12:01.080 | Mike and Emily and Sarah, who's not quite involved in all this, that's my move team.

00:12:06.080 | And we got a lot done, and I enjoy it. And their patience and understanding is beyond

00:12:15.080 | any reasonable belief. So I want to thank them, starting from you. And in the middle

00:12:23.080 | of trying to do these three or four things, which is pretty much a full-time job anyway,

00:12:27.080 | outcomes. I'm going to start with this slide in a minute. Outcomes. Outcomes, the Wall

00:12:37.080 | Street, the newspaper yesterday, and it's about these new Nobel laureates. And the op-ed

00:12:46.080 | in the Wall Street Journal said something to the effect of, "I owe a great debt of gratitude

00:12:52.080 | to Gene Bauma for coming up with the efficient markets theory." And that is so far from

00:12:59.080 | the truth that I felt compelled to write a letter to the editor of the journal about

00:13:03.080 | it. And the problem with it is two things. One, I'd never heard of Gene Bauma when I

00:13:10.080 | came up with the idea for the index fund, which is a significant difference from what

00:13:14.080 | this fellow argued. And number two, I don't even agree with him. He's a very strong-minded,

00:13:21.080 | and I can't say that I'm right and he's wrong. But what does one say about a hypothesis that

00:13:27.080 | is sometimes right and sometimes wrong? Sometimes markets are efficient. Sometimes markets are

00:13:33.080 | inefficient. And we never really quite know when, but we do know from the work I've done,

00:13:38.080 | and I'm going to show you a little bit this morning, that in the long run, they're highly

00:13:44.080 | efficient, and in the short run, this is stock value relative to bonds, what kind of efficiency.

00:13:50.080 | And in the short run, that could be years, even decades of inefficiency. So I don't subscribe

00:13:55.080 | to the theory, and that gave rise for me to tell the journal that the EMH had nothing

00:14:03.080 | to make an efficient markets hypothesis. So I had to come up with a nice resounding counter

00:14:08.080 | to that, which I call the CMH, the cost matters hypothesis. You've seen me write about that.

00:14:13.080 | And that hypothesis is universally true every minute, every day, every century, and that

00:14:20.080 | is everybody shares the market return. The ones that do best have the lowest cost. It's

00:14:25.080 | as simple as that. It is as simple as that. It's a simple theory of mine. And it doesn't

00:14:29.080 | have anything to do with Gene Fama. I wrote a letter, which by the way, Emily and Mike

00:14:33.080 | both told me not to send. And I did modify it, right Mike?

00:14:41.080 | You did, yes.

00:14:44.080 | I think a little bit. And so they liked it a lot. I talked to the editor, writer, who

00:14:53.080 | I've had some correspondence with over the last couple of years. And what's going to

00:14:58.080 | happen to it, I don't know. But I'll probably publish what I sent somewhere along the way.

00:15:04.080 | But it's still up in the air, and I'm going to guess that they will have some shortened

00:15:08.080 | version of this 500 word letter to the editor. 495 actually. Actually, there was one word

00:15:15.080 | that shouldn't have been in it. "Of" didn't belong, so it's only 494. And we'll see what

00:15:21.080 | happens. So I'm going to talk a little bit about Nobel One, which is Gene Fama. What

00:15:27.080 | does that thing say? Oh yeah. Oh, this is the interesting point. I told the journalist,

00:15:35.080 | he likes indexing so much, maybe he's the father of indexing or something somehow. Why

00:15:40.080 | did he start a non-index firm called BFA, Dimensional Fund Advisors? He believes there

00:15:47.080 | are sections of the market that are permanently undervalued, persistently undervalued. And

00:15:54.080 | I don't have to believe that. And BFA has built a big business, a highly profitable

00:16:00.080 | business, on the very idea that you can find a lot of Japanese small cap stocks, for example,

00:16:08.080 | or value stocks, or small cap stocks generally. And sometimes he's right and sometimes he's

00:16:13.080 | wrong. He doesn't tell you too much about the latter. So that first one, let me get

00:16:19.080 | my copy of it here. I'm going to keep looking around and wait for the night. And then, what

00:16:36.080 | do I want to do next? We'll come to this in one second. He says, he doesn't believe there's

00:16:44.080 | such thing as bubbles. And I'm going to show you there are such thing as bubbles, and anybody

00:16:49.080 | should be able to figure it out. So let's go to that next slide, Mike. Bob Shiller,

00:17:00.080 | who you probably know about. He has his way of looking at markets in 10-year or 15-year

00:17:05.080 | aggregate earnings. He's perfectly valuable. Sometimes he's right, sometimes he's wrong.

00:17:10.080 | But he is another Nobel laureate for the year. And he disagrees with Gene Common. And as

00:17:19.080 | he says, he thinks efficient markets is the most damaging investment hypothesis in history.

00:17:27.080 | So I did tell the journal in my book, I was a little over the top. I mean, that was Charlie

00:17:34.080 | Fawcett. So they raise these issues, and it's the issue of who two guys win the Nobel Prize,

00:17:46.080 | and they disagree. Let me talk about, and Burt Malfield, because I'm wrong on this,

00:17:51.080 | you should know that. But let's see how I'm going to look at the markets if there are

00:17:56.080 | bubbles. Can there be bubbles? Well, one way to look at it is the economic capitalization

00:18:01.080 | relative to our gross domestic product, the reality of GDP, the national economy, and

00:18:08.080 | the total capitalization of the stock market. And it got up to, you can see that the market

00:18:15.080 | cap was twice the stock market, 1.82 times. And that was in the bubble of 2000, the tech

00:18:21.080 | bubble, and it came down below in 2009 to 8.84. Well, that's because stocks had a bubble

00:18:30.080 | in them. The intrinsic value of stocks, measured by GDP, was vastly exceeded by the market

00:18:41.080 | value of stocks, people's expectations. So you can see hints of a bubble there. I don't

00:18:46.080 | think you need to look at this over long periods of time. But you can see there are big jumps

00:18:50.080 | in those. I don't think it has a time factor in it. Actually, there are a lot of factors

00:18:54.080 | that go into it. But you can see what it was doing in 1929, what it was doing even when

00:19:00.080 | the '40s began. You can see the '70, '72, '74 crash, '81 to '37. And the dimensions

00:19:09.080 | of these things are not too far off. There's a cut in half, and again, cut in half in '82

00:19:14.080 | to '84. So there is persistent overvaluation, and then it changes.

00:19:21.080 | Another good one, people don't look at these things very often, and this is really quite

00:19:26.080 | striking. This is the value of the prices Dow Jones averaged relative to... Did we get

00:19:35.080 | that title right? No, we got the right title, right?

00:19:38.080 | It's the market valuation.

00:19:40.080 | Yeah. This is the market value of Dow relative to the book value of Dow. And we'll fix that

00:19:48.080 | up in round two, and I can repeat this to you tomorrow morning or something. And you

00:19:53.080 | can see for eight times, the market value is eight times the book value, where a norm

00:19:58.080 | looks to be two and a half to three times. And things change over time, I know that.

00:20:03.080 | But eight times does seem, to any normal person at least, a little over the top. And then

00:20:08.080 | it reverts to normal, which is where it is now. And both of those things suggest that

00:20:13.080 | the market is in broad range and fairly valued then. It's a hype, it's a hype of the world,

00:20:18.080 | you don't really need to worry about it. But that's the way it seems to me.

00:20:23.080 | And you've all seen, this is something you've seen before, and I just want to show you something

00:20:27.080 | you've had. I've used this chart for a long, long time, and it's the sources of stock market

00:20:33.080 | returns over the decade. And you can see investment return. This is a long-term return created

00:20:39.080 | by business, in effect, dividend yield being entered, earnings growth that follows. And

00:20:44.080 | you can see it's pretty steady. You know, eight percent, six percent, big 14 there.

00:20:50.080 | Yeah, thanks, Bill. I'll try and keep my eye on that. And then this last decade, of course,

00:20:55.080 | very poor, in part because it starts with such a terrible dividend yield. And you can

00:21:01.080 | see how it all comes out, dividend yield, earnings growth, and there's where the 9.3%

00:21:05.080 | you read about in the market comes from. The speculative return is whether those P/Es

00:21:10.080 | are rising, valuations are rising or falling. And you can see really an odd pattern of reversion

00:21:16.080 | of the mean here. I don't know how much to read into it, but it's the way things happen

00:21:20.080 | in the market. And that is, speculative return was a big drag on returns in the 1910s, and

00:21:26.080 | it had almost exactly the same amount in the 1920s. Big drag on return in the '40s.

00:21:32.080 | And on a slightly larger improvement in returns in the '50s. A big drag in the '70s.

00:21:39.080 | Exactly commensurate increase in the '80s, taking 7.5% off the investment return and

00:21:46.080 | adding 7.7%. And then for the first time in history, repeats itself in the next decade.

00:21:51.080 | That in itself is a warning sign. So you can see where these returns come from and what

00:21:55.080 | you can count on. The whole point of this is it's all about fundamental returns, investment

00:22:00.080 | returns, owning corporate America, and not owning the markets. So we look at this, use

00:22:07.080 | this chart, and I'll show you one new one. But you can see how closely in the long run

00:22:11.080 | the market return, total return on the market, tracks the investment return. The investment

00:22:16.080 | return clearly drives the market return. And if you divide one into one, those little jiggles

00:22:24.080 | amount to something much bigger. It's the same chart, just worked out a different way.

00:22:28.080 | And again, you can see the investment return go way high up in the tech boom, and then

00:22:33.080 | back to more or less a normal phase. That one would be the exact. It starts at one end

00:22:39.080 | at 1.1, and it probably will end at 1.0, somewhere along the line. So you can have a pretty good

00:22:45.080 | handle on long-term returns from buying corporate business.

00:22:50.080 | Now one thing I had never plotted before, however, was the investment return, and this

00:22:55.080 | chart, and just plotted the speculative returns separately. And you can see the investment

00:23:00.080 | return grows, and grows at a rate of around 9% a year. The speculative return is up, and

00:23:07.080 | it's down, and it's zero. So it's all a business of capturing the returns earned by corporate

00:23:14.080 | America, and not worrying about the valuations placed on those earnings by Wall Street. And

00:23:20.080 | it's quite a remarkable chart. It goes nowhere. If one goes nowhere, this is what one would

00:23:25.080 | expect in 113 years, in terms of the addition and subtraction of speculative return. It's

00:23:32.080 | business return that drives it. And that's central to my own investment policies and

00:23:37.080 | theories. And so it's worth thinking about that. I'll be using that chart a little bit

00:23:42.080 | more, just to try and get things across to academics and others. I think it will complicate

00:23:47.080 | it for some of you, but I think the chart's making it pretty clear. The basic proposition

00:23:52.080 | would probably be more obvious. Rely on investment return. Think about how corporate earnings

00:23:58.080 | are going to grow, corporate dividends. And forget all these fluctuations, these nutcases,

00:24:04.080 | for want of a better word, on Wall Street. And looking at expectations drive up at that.

00:24:09.080 | If you want a big picture of that, just think of the last two weeks, up with 100 points,

00:24:16.080 | down 100 points. To what avail? What does all that mean? People speculating about whether

00:24:21.080 | the government's going to close down. And they're not, when you think about it and understand

00:24:25.080 | the market, they're not really speculating. And this is a very important point, not speculating

00:24:30.080 | on whether our government's going to close down. They're speculating about whether other

00:24:34.080 | investors will think our government's going to close down, right? So they're guessing

00:24:39.080 | at what other people might do. This makes no sense. It's misleading, it's silly. And

00:24:46.080 | so we're trying with our theories about indexing and so on to drive the nutcakes and the fruitcakes

00:24:53.080 | out of the system and get down to real investing. It's a big issue, and we just keep pounding

00:25:00.080 | away with greater and greater acceptance, I think.

00:25:03.080 | Now, I'm going to talk a little about competition, changing the subject from the Nobel Prize

00:25:08.080 | winners to the sources of market returns to competition. And let's throw this first chart

00:25:14.080 | up of the largest fund managers. You can see this has been a dramatic change in the last

00:25:19.080 | three or four years is all of Vanguard's ideas about indexing and having a bottom-front look

00:25:25.080 | at business and operating at minimum cost, at no longer roost. And here we are, $800

00:25:34.080 | billion larger than Fidelity. They used to be probably $100 billion larger than we were.

00:25:40.080 | And American funds having their own troubles. They've just gotten too big to be able to

00:25:47.080 | manage. When you get to a trillion dollars, you really can't be an active manager of funds.

00:25:54.080 | And I'm trying to have some correspondence with Morningstar about the American Funds

00:26:00.080 | because they've calculated 8,000 ten-year periods or something, and said that they beat

00:26:06.080 | the market at 80% of them or something. And the reality is, I don't need to look at the

00:26:12.080 | data, but I can tell you what the reality is. And that is 98% of the 80% came before

00:26:18.080 | they happened to be $1 trillion. Then you can do an awful lot when you're small, and

00:26:23.080 | sometimes right, sometimes wrong, I think. But there we are, and then there's the new

00:26:28.080 | ETF-driven BlackRock indexing business. And then PIMCO, of course, this is their mutual

00:26:35.080 | funds. Their total book of business is around $3 trillion. They're somewhat larger than

00:26:41.080 | they are overall. And it brings me up, I can't remember if I said this last evening or not,

00:26:47.080 | but here we are over $2 trillion is what's to be said. And an audience Q&A with an audience

00:26:54.080 | about a few months ago, people asked me a wildest question having nothing to do with

00:27:01.080 | what I'm talking about, which I guess is some sort of a compliment, I don't know. Said,

00:27:07.080 | "You must be very proud to have reached the $2 trillion mark." And I said, "Look, what

00:27:17.080 | do you think $2 trillion means to someone who's written a book called Enough?" And

00:27:26.080 | it's a delicate balancing act. I tried to find some strategic consultants, Harvard Business

00:27:35.080 | School kind of thing, many, many years ago. And the question I asked them was, "What can

00:27:42.080 | we do to slow the company's growth rate?" Why? Why would anybody want to slow the company's

00:27:50.080 | growth rate? You can see the handwriting was on the wall all those years ago. We were just

00:27:55.080 | on the verge of getting the kind of big momentum that we see later on. And yes, as the directors

00:28:01.080 | used to warn me, or used to quite, I guess, try and help me out through this dilemma,

00:28:06.080 | we're giving good employment opportunities in an ethical company, with a missionary kind

00:28:12.080 | of zeal, and an awful lot of people, probably 35,000 or so now that have come through our

00:28:18.080 | doors. Some people have gone, of course, the nature of things. And yes, we're giving probably

00:28:26.080 | 20 million investors better returns than they otherwise might have had. And those are nice

00:28:32.080 | things. When you get to 14,000 crew members, it's just an awful lot. You lose a lot of

00:28:38.080 | personality. I talked to all our Award for Excellence winners, usually about, I think

00:28:45.080 | about eight or ten a quarter, for an hour each. Just kind of get a feeling of the kind

00:28:51.080 | of people we're hiring, which are terrific, their view of the company, which is very positive,

00:28:55.080 | no matter how big it is. And so it's all okay. But we still have a problem, which I define

00:29:04.080 | as something I wrote years ago when I was running Vanguard. For God's sake, let's always

00:29:10.080 | keep Vanguard a place where judgment has a fighting chance, triumph over process. And

00:29:17.080 | when you're running a company with 28 people, there happened to be a dictator running it

00:29:25.080 | who didn't hesitate to decide, this is what we're going to do, and just go do it. And

00:29:31.080 | if you need any help, I can kind of pitch in. And that's a lot of judgment, very little

00:29:37.080 | process. And when you get to 14,000 crew members, now 15, I suppose, 15,000, there's an awful

00:29:44.080 | lot of process and not nearly as much judgment. And you get more and more committees, more

00:29:49.080 | and more groupthink, more and more concern about whether a dissent is encouraged or discouraged,

00:29:56.080 | all those kind of things. And there's a simple reality here, and that is historically aligned.

00:30:03.080 | It has a percentage of the company that's judgment, the percentage of process, you start

00:30:08.080 | way down here, and when you get to 14,000, you're way out here, process dominates everything.

00:30:14.080 | And it has to. There's nothing anybody can do, there's nothing I can do about it. But

00:30:19.080 | I think it's important to be aware of it, and to be aware that no matter who's running

00:30:24.080 | that company, if you love bureaucracy, that line may be here. And if you hate bureaucracy,

00:30:32.080 | it may be here, but it's never going to be back here. You just can't get there. So I

00:30:37.080 | worry about that. I mean, I believe in the human side of business, and I believe it's

00:30:41.080 | very difficult to do without putting a huge effort and a huge amount of consciousness

00:30:46.080 | and awareness into the importance of the individual always comes in. And maybe just my idealism,

00:30:55.080 | shameless as always, but that's I think the big struggle that we really have, in my opinion,

00:31:01.080 | in the investment side, locked in. The index fund is the gold ingot. It is the way of capturing

00:31:08.080 | your fair share of market returns. And yes, somebody else, I'll talk about this in a few

00:31:12.080 | minutes, somebody else may get more than that share of market returns, but then somebody

00:31:17.080 | else is going to lose. There's no systematic way to do it. So I think we're operating

00:31:22.080 | with the right strategy, and I'm sure we are. So still in the competition, you can see our

00:31:29.080 | cash flows are just enormous, and just keep growing and growing and growing. This year

00:31:36.080 | looks like we had a little pot last year. Imagine bringing in $137 billion more than

00:31:44.080 | the last year. It looks like about, the last six years, it looks like about a trillion

00:31:48.080 | dollars, something huge, maybe eight years. And most of them are long-term funds and not

00:31:53.080 | money market funds. So this is booming. Our market share, which we do, and you can do

00:32:01.080 | both ways. Market share is long-term assets of funds, bonds, stock funds. Or, that feels

00:32:11.080 | good. But we do it with long-term assets because someone like Dimco, Capital Group, American

00:32:21.080 | Funds, don't have any money market funds. So knock that way down. And Fidelity, big

00:32:27.080 | money market fund thing. And the numbers don't change a lot. But you can see how we've come

00:32:32.080 | from 1974 at 18% of industry assets, almost 18%. It just grows very steadily. You can

00:32:41.080 | see it actually with the small print. You can see it month after month. There's a trend

00:32:46.080 | going on here. And I think it's going to be very, very difficult for anybody to break

00:32:51.080 | it. It's going to be very hard for a lot of people. BlackRock has a terrible job because

00:32:57.080 | they have two masters. Is that good, too? Can you hear me okay in that? They have two

00:33:06.080 | masters to serve. And the shareholders of BlackRock Corporation, the shareholders of

00:33:12.080 | BlackRock and the ETS. And that poses the issue with great clarity. Because they can't

00:33:20.080 | say, "Yeah, we charge more, but we're better managers." Because they're managing an index

00:33:27.080 | fund. They're going to do exactly the same, no better or worse than our index fund. So

00:33:31.080 | they are being driven, the marketplace is driving them. They were the shareholders of

00:33:36.080 | the ETS and their funds, rather than the shareholders of their management. And Larry Fink is a very

00:33:42.080 | nice, very smart guy. He's really stunned by this. He thought it was outrageous that

00:33:48.080 | anybody would ever run their funds at cost. And actually, a story that I haven't told

00:33:53.080 | to too many people, but back in 1974, the spring of 1974, when he was trying to get

00:33:59.080 | Vanguard going, I was at a capital group. I had some friends from the ICI board, and

00:34:05.080 | I was out in California. I did a little tour of their office. They were all pretty small.

00:34:09.080 | And John Lovelace, the president of it, who's inherited from his father. I saw everybody

00:34:17.080 | but him. But he came in at the last meeting and said, "I really have to talk to you before

00:34:21.080 | you leave Los Angeles." And I said, "Why, you know, I can't do it today. I'm leaving

00:34:25.080 | tomorrow morning at 7 o'clock. So I'd be glad to meet you in the old bar stool in the

00:34:31.080 | diner at 6.30 or 6 o'clock." He said, "I'll be there." And he said, "Listen and listen

00:34:42.080 | carefully. Don't start a mutual company that will ruin this industry." And in a certain

00:34:52.080 | way, it has. It's been good for the consumer, and that's been the investor, and that's

00:35:00.080 | really what I care about. So, when I say we're... And now we've got this tri-language in the

00:35:09.080 | wrong place, but we'll throw it in anyway. This just shows the impact of ETS on the connection

00:35:17.080 | between the two of us. And I'll talk about that as a separate subject in a few minutes.

00:35:21.080 | But you can see that there's still, since 2008, been a very nice growth in the assets

00:35:27.080 | of traditional index funds. I use the term so often in my book, "Prize for the Cultures"

00:35:33.080 | that I had to think of an acronym. We all have an acronym. And so I call them TIS, Traditional

00:35:40.080 | Index Funds. I never thought I'd be reduced to that, but there we are. And they're two

00:35:45.080 | of my favorite businesses by and large. So in any event, it's index funds, including

00:35:51.080 | index funds of all kinds, that are in the driver's seat. And you'll see they're like

00:35:56.080 | $600 billion almost since the end of 2005, going into index funds, and $530 billion coming

00:36:05.080 | out of active funds. This is a trend. This is something that's not going to go away.

00:36:10.080 | This is part of our lives. And so we better get used to our growth and be prepared for

00:36:18.080 | our growth. And I'm interwoven in this to maybe some bad thing happening. I used to

00:36:23.080 | tell people when they were struggling to get Vanguard going that just when you think you've

00:36:28.080 | got it all made, some great big bruiser comes up behind you with a poleaxe and smacks you

00:36:38.080 | right here in the neck. Bam. And so maybe that's going to happen. Who knows really,

00:36:45.080 | but I don't think so. So let me turn now to some of what I'm doing now. We'll review

00:36:51.080 | it in a year. And you tell me, Mel, if I'm just trying to go through this little thing

00:36:58.080 | that I prepared for the meeting. You've got whatever time you need. The elephant in the

00:37:05.080 | room, I've got whatever time I need. I don't want to bore you to death, but I continue

00:37:09.080 | to be pretty busy, if not very busy. I'm trying to be, in honesty, I'm getting a little old.

00:37:17.080 | I don't usually leave home until about 8 o'clock to come to work. I used to be 6. And I don't

00:37:24.080 | usually go home at 6.30 or 7 anymore. I usually try to get out by about 4. And so I'm cut

00:37:33.080 | back on my schedule. I will say, just to be honest with you, it's amazing how I can't

00:37:38.080 | get it done during the week. So there are very few weekends when I'm not spending 4

00:37:43.080 | or 5 hours doing some kind of reading or some kind of catch-up or something like that. Then

00:37:48.080 | I do all the things you do just in the ordinary course of a non-business day, like read the

00:37:52.080 | Times, read the Wall Street Journal, and so on. But in any event, some of the things you've

00:37:56.080 | seen are the bigger speeches I've given, and the lecture at Princeton, the financial system,

00:38:04.080 | a warning of change is coming, and one of my favorites, Big Money in Boston, a Boston

00:38:11.080 | security analyst, which will be a chapter in the new book, just because it hadn't been

00:38:16.080 | published before. And that will also be published in the Journal of Portfolio Management almost

00:38:22.080 | immediately. I guess we just sent those proofs back. A lot of work goes into this. I haven't

00:38:32.080 | had this one typed up yet, but this is the Financial Education Association and a bunch

00:38:38.080 | of teachers, academics, where they gave me the Scholar Educator Award. One more little

00:38:43.080 | goal, but I wasn't doing all of them. I was down in, actually I was in Southampton, Bermuda,

00:38:52.080 | and I didn't think I should be flying down there. Flying is very difficult for me. But

00:38:56.080 | I told them I'd do it, so I did it. It was before my injury anyway. And I was in Bermuda

00:39:01.080 | for 24 hours, and never breathed air. Had nice sea air down there. Used to go to Bermuda

00:39:11.080 | a lot, every day. So I'll have that. That will be published eventually. And then I was

00:39:18.080 | asked to give the keynote address of the 78th anniversary of CFA Philadelphia. I think that's

00:39:24.080 | up on my site, Mike.

00:39:26.080 | I believe so.

00:39:27.080 | You believe so?

00:39:28.080 | I believe it exists.

00:39:29.080 | You didn't put it there.

00:39:32.080 | I say yes, Mike.

00:39:34.080 | And that was a funny one, because I think I told some of you this story last night about

00:39:41.080 | this was after the crash on my shoulder. And my wife said, "You're not going to go in there

00:39:51.080 | to give a public speech, are you?" And I said, "Yes, I am. Why? Because it may be for women."

00:39:56.080 | I'm repeating, I think, what I said to many of you last night. And she said, "This is

00:40:01.080 | the apocryphal part of the story." And she's right. She's always right. She said, "What

00:40:07.080 | would happen if you were dead?" And I said, "Well, you know, I think I'd probably be there

00:40:10.080 | anyway."

00:40:11.080 | [laughter]

00:40:12.080 | So, and then I just got yet another award from Colin and Joan group here, the Intrepid

00:40:17.080 | Leader Award. And then, oh yeah, here we are. And I also have a couple of financial analyst

00:40:28.080 | journals. I've probably had, I think, eight or ten articles in financial analyst journals.

00:40:33.080 | And this year, Big Money in Boston, as I mentioned, is going in. And it's really a pretty powerful

00:40:39.080 | speech, I think, and a pretty powerful essay. We edited a lot for the final publication.

00:40:46.080 | And then I'm doing another one, which you will soon see the light of day, which is a

00:40:50.080 | financial analyst journal. And Bill Sharpe had written, Nobel Laureate Professor Sharpe

00:40:56.080 | out of Stanford, had written an article called The Arithmetic of All In Investment Expenses.

00:41:01.080 | And he talked about an expense ratio of 1.06% for the average large cap fund. 0.6, he picked

00:41:10.080 | up a stock market fund and said that the active management group will, just doing the math,

00:41:17.080 | will give you, like he said, 80% of the return you get on the index. And these things have

00:41:25.080 | been driving me nuts for years. When people act as if the expense ratio is the only cost

00:41:31.080 | worth talking about. And it turns out to be less than half, a lot less than half, in fact,

00:41:36.080 | of mutual fund costs. So I wrote an article, which is supposed to be a rebuttal, and it

00:41:40.080 | turned out to be, I don't know, maybe 25 or 30 pages. And they agreed to print and to

00:41:50.080 | take a look at all the costs of investing. And the problem with the other costs of investing,

00:41:55.080 | portfolio turnover costs, cash drag, because most funds have a significant cash position,

00:42:01.080 | and marketing costs, sales loads, investment advisory, the fees paid to financial advisors

00:42:07.080 | are outside of anybody's ambit, and no one, no one, no one can calculate them with precision.

00:42:14.080 | The, for whatever it's worth, the expense ratios are precise figures, so they're easy

00:42:20.080 | to deal with. So when you eliminate, and my thesis is that if you eliminate a consideration

00:42:27.080 | of anything that is a big drag, but imprecise, you better estimate it. So I went through

00:42:33.080 | there, and I got to a very conservative estimate, of I think 2.26% for all income costs, which

00:42:40.080 | using Bill Sharpe's mathematics gives you, an active fund gives you not 80% of the market's

00:42:48.080 | return of the index fund's return, but about 60% of the index fund's return of the return

00:42:53.080 | on investment. So that's going to be an important article. I think a lot of people are going

00:42:58.080 | to think I was too high on my expense estimates, and I'm sure I'm not. And a lot of people

00:43:03.080 | think they're too low, and so presumably both sides will speak out. But in any event, it's

00:43:12.080 | fun to be in the, still writing, and then, you know, doing things like interrupting my

00:43:18.080 | writing, and every day it seems like there's some darn thing I read in the paper that gets

00:43:22.080 | me so excited. I can't wait to deal with it when I get in the office. And there go all

00:43:26.080 | the other projects. So, you know, sometimes it's noon before I start to get to, you know,

00:43:36.080 | cleaning up yesterday's work. So it's crazy. I understand that. I'm probably too old to

00:43:43.080 | do it. I think that's true. And when my mind isn't up to it, I guess I'll just stop. I

00:43:52.080 | don't expect that to be very soon. But who knows? It's not in my hands anymore. We age.

00:43:59.080 | So a lot, I think we've accomplished a lot this year. And thanks in many respects to

00:44:06.080 | Mike and Emily and to the lesser extent to Sarah. And so they get us through the day.

00:44:14.080 | Now, I don't know how we got to projects here. Three, don't put that up yet. But I want to

00:44:24.080 | talk about how fragile. I want to talk about the beginning of Vanguard. I want to talk

00:44:28.080 | about the end of Vanguard, where we are today, this huge momentum, unbelievable. And how

00:44:36.080 | we began. And we began, to be honest, without a fighting chance. And in the written, in

00:44:44.080 | the speech I did in Boston, I had slides so I could do this. I couldn't do it in the book

00:44:49.080 | where it's reprinted, the man in the arena book. But I've got two slides coming up here

00:44:56.080 | about how fragile and how the odds are so totally against Vanguard even existing. And

00:45:07.080 | you want to throw that in. When I was out in San Francisco, I bought the New York Times

00:45:13.080 | out there. They published out there. The list looks pretty good. House of Fun Man to come

00:45:17.080 | back was the headline. They greeted me when I got on the plane. Oh, that's nice. And then

00:45:22.080 | I stayed in my office probably later in the day. It was later in the day. The next morning,

00:45:29.080 | there's the article in the New York Times published in New York. And look at that bloody

00:45:34.080 | question mark. Would he or would, does she or doesn't she, is the headline. Wave or something

00:45:44.080 | they used to say. And it's just an evidence of the delicate balance act that it took to

00:45:51.080 | get Vanguard going. And what we finally did, I mean, it was really close quotes, tears,

00:45:59.080 | not so much laughter, determination, disingenuity on my part. And I just wanted to get it done.

00:46:11.080 | I don't think I'll ever understand exactly why except I'm a competitive person. And like

00:46:16.080 | having my own company being taken away from me by people who have caused its failure.

00:46:22.080 | So that was fragile. And then we started finally to get business, as you know, on September

00:46:29.080 | 26th, I think 24th, 24th of 1974. And so we just had our 39th anniversary, which was not

00:46:38.080 | much recognized. Well, a couple of other publications recognized it. A couple more are still doing

00:46:43.080 | it. 39th anniversary. And the beginning, just to give you an idea of what we're confronting,

00:46:51.080 | I think this chart is called the fragility of Vanguard. Yeah. How about that? You know,

00:46:59.080 | we lost $108 million. That was a lot of money. We had a billion and a half, 1.4 billion enterprise.

00:47:08.080 | Then we lost another $103 billion in liquidations. Then we lost $171 billion. And at the end

00:47:15.080 | of the next year, I was so excited. We had a $33 billion improvement cash out. That's

00:47:26.080 | what you got to think when you're down those depths, believe me. And so from that start,

00:47:33.080 | trying to get so much done in such a short time, you know this story, but again, the

00:47:42.080 | first thing you got to do is realize that you're in a business you don't really want

00:47:45.080 | to be in, administering the funds. I mean, it has to be done right, but you're not going

00:47:49.080 | to change the course of the world by being a good shareholder record keeper or a good

00:47:55.080 | accountant or a good compliance officer. You're going to change it by the kind of funds you

00:48:00.080 | have, by the way you decide to run them, by how you decide to distribute them, how you

00:48:04.080 | decide to evaluate them. And so we had to get to that. And this is, I think, fairly

00:48:10.080 | well known. I had to promise the directors in writing, I had a little memo of understanding

00:48:15.080 | that I would not get into investment management and I would not get into distribution. And

00:48:20.080 | in two years, from the time we started, less than two years, we had gotten into investment

00:48:25.080 | management and distribution. And that's where the disingenuity came in. You know, I said

00:48:30.080 | we're going to start an index fund. I want your approval of a new fund called an index

00:48:34.080 | fund. You're not allowed to get into investment management. And I said, well, this fund is

00:48:38.080 | not managed. Ta-da! And believe it or not, they bought it. So that was the beginning,

00:48:46.080 | the index fund, very important. And the next was, I want to take the fund's no-load, February

00:48:53.080 | '77. And it seemed like obvious, we're going to be a low-cost provider and expenses through

00:48:59.080 | our mutual structure. We might as well chuck the entire distribution system. They've been

00:49:03.080 | supporting us for 50 years. And it seems like extreme, maybe, it didn't seem extreme to

00:49:09.080 | me. I didn't think it would be a problem for us. And we did it. And it was a problem for

00:49:15.080 | a couple of days. And we just, late Wednesday night, we're meeting in New York. And on Thursday

00:49:24.080 | we announced it to the press and told all the broker-dealers, there will be no commissions

00:49:29.080 | as of Thursday. This is called going cold turkey, which I don't know why I should use

00:49:37.080 | that expression because I don't get into that part of the world. So it was bold. You could

00:49:44.080 | argue it was risky. But it all worked and had to be done in a short period of time.

00:49:51.080 | And then we had municipal bond fund multi-tier maturity with a huge difference in the bond

00:49:57.080 | industry. And tax-managed funds, first of them. And so on. It all came out in the end

00:50:06.080 | very well, as you can see. So we have, I guess this is really where I should, sharp chart,

00:50:15.080 | do you want to go to the next chart? Yeah, this is the basis. I shouldn't, I've got these

00:50:21.080 | charts a little bit out of order. This is the basis for that FHA article. It's set to

00:50:26.080 | be published, I think. And I didn't take all of this into account. But you can see, one

00:50:34.080 | reason it's all confusing is that some of the costs are borne by the investor himself.

00:50:40.080 | Don't go through the fund books. Sales loads. I throw in tax inefficiency. That's not total

00:50:45.080 | taxes. But the tax inefficiency, extra taxes paid by advisors, by advised funds, actively

00:50:52.080 | managed funds. And then investor behavior whose funds are buying too late. So it becomes,

00:50:57.080 | that number becomes like, almost 4%. But I don't take those tax inefficiencies. And investor

00:51:08.080 | behavior, no doubt, my overall matrix. I mentioned it in the books. People get the idea. And

00:51:14.080 | there you can see the index enhancement after 40 years. It's a 65% increase in the value

00:51:20.080 | of your account. It seems unbelievable. That's just the way it is. And that data will be

00:51:24.080 | in there. Although I don't extend it for those last three factors in there. So it's an analytical

00:51:30.080 | article. And I think it will be a significant article. But I just hope it gets some attention.

00:51:39.080 | Because people are thinking a lot about retirement today. So that's part of the project that

00:51:46.080 | I should have mentioned earlier. Another project, books. What are we saying here? Oh. Well,

00:51:53.080 | I don't have anything else to do. Someone asked me to write a forward to their book.

00:51:57.080 | So I've written forwards to a book by John Wasik called "Cain's Way to Wealth." And I've

00:52:07.080 | been very interested in Cain since my days at Princeton. Been a very important part of

00:52:11.080 | my life. So I was happy to write that. And these people expect about 500 words. And I

00:52:16.080 | wrote about 5,000. But that seems to be OK. And then we have a biography of Paul Callum.

00:52:27.080 | And actually, it's arguable. It's State Street, in fact. It was the oldest mutual fund before

00:52:33.080 | MIT. Because it started operations earlier than MIT. It's the Best Investors Trust. It

00:52:39.080 | got incorporated later. So an informal thing has been given to MIT, the oldest mutual fund,

00:52:45.080 | the first mutual fund. But it's a fascinating biography, in which I show how the industry

00:52:51.080 | was much closer than when it began. Much more fiduciary, much more pure than Boston. I'll

00:52:59.080 | use the expression. But it is today. And this is also a theme of my big money in Boston

00:53:05.080 | speech. It went from being fiduciaries, prudent, puritanical, Boston trustee, to being this

00:53:12.080 | great big marketing business. And I describe Vanguard and this big marketing business as

00:53:18.080 | being basically, as a book came out a few years ago, called Puritan Boston at Quaker

00:53:24.080 | Philadelphia. And when you think about it, which I did, is that Vanguard is very much

00:53:30.080 | a Quaker firm. I don't have to be a Quaker. But it's what's Quakerism about. It's about

00:53:37.080 | simplicity. And it's about thrift. And I think we live up to that. So we are bringing the

00:53:46.080 | business back to work again, at least I think I hope. Now, like everything I do, there's

00:53:53.080 | probably a little overstatement here, a little hyperbole. But I believe it. And I don't really

00:53:58.080 | expect anybody else to, but I think one of us will. So now let's go to, oh my goodness,

00:54:08.080 | we have a lot of stuff here. We're not going to talk about PETA yet, right? Not yet. Okay.

00:54:13.080 | We're going to go to some issues that I see facing the industry, and perhaps facing Vanguard,

00:54:19.080 | which I call emerging issues. I don't know if you can hear me exactly. Actually, Mr.

00:54:24.080 | Bogle, do you want to, we've got this quote from Adam Smith here. We've got the Adam Smith

00:54:30.080 | book, "Forecoming the Princeton Review of Adam Smith." Oh, that comes from the, that's

00:54:42.080 | Jordan. Yeah, the Adam Smith book that Richard Hanley was doing. Okay, this is a, well, let

00:54:51.080 | me see where we are here. I hate this stuff. And then we'll do the next quote. We're skipping

00:54:57.080 | it, Matt. You're great. Let me just take a quick breath here, show a little of the bad

00:55:09.080 | stuff, and then throw it. I hope this kind of informal exposition that I'm giving you

00:55:22.080 | is okay. I think, I kind of enjoy the informality. I'm doing a lot of, by the way, when I talk

00:55:29.080 | about speeches. I've probably given, in the last year, maybe half a dozen, at least, speeches

00:55:38.080 | that I do Q&A. And they require no preparation. And they're very informal. If you've got a

00:55:45.080 | good moderator, and a tough moderator, even like Don Phillips out of Morningstar, really

00:55:51.080 | tough, you can have really a good session. So with a good moderator, I think the audience

00:55:56.080 | probably likes it better than a formal speech. But the reason I still stick to a certain

00:56:00.080 | amount of formal speeches is I continue to believe the history of this business and the

00:56:05.080 | history of this company are important. And so if you give a formal speech, you give it

00:56:11.080 | not really, because the speech is an important chapter in one's thinking, or one's life,

00:56:18.080 | or the life of one's company. And so I do that, and I'm disciplined for the historical

00:56:25.080 | implications of it. I've gotten to be, and this apparently happens to a lot of people

00:56:30.080 | today, antique. A real interest in history. And the history of this industry is really

00:56:36.080 | shoddy. There's not very much written about it. And you can find books here and books

00:56:41.080 | there. I've tried to collect as many of them as I can, but there are probably six books,

00:56:46.080 | including Michael Young's book on Paul Cabot, that are pretty good insights into how the

00:56:51.080 | industry grows. Because I think if you don't know where you've come from, you're just going

00:56:55.080 | to be a loser. You've got to understand where you've come from. If you've got something

00:57:00.080 | going for you, when you begin, how do you maintain that at the end? And that's, of course,

00:57:04.080 | a huge issue. But in any event, I think this is at the end of Big Money in Boston. And

00:57:15.080 | this ties in with what I did, because I asked to do this Adam Smith quote that I mentioned

00:57:20.080 | there. And that's being done by Professor Marquette, being published by Oxford University.

00:57:25.080 | And I've written the final chapter called Adam Smith Capitalism. And I really enjoyed

00:57:29.080 | it. I did a lot of research. I felt like I was back in Princeton. And really a lot of

00:57:33.080 | fun to do, and a lot of research. And The Wealth of Nations, no matter what anybody

00:57:38.080 | tells you, is not an easy read. But I read an awful lot of it over again after all those

00:57:42.080 | years. I never read it cover to cover. I don't think we had to do that. But the final quote

00:57:47.080 | in that book says something about Vanguard. It says something about the word world. And

00:57:53.080 | it says something about the enduring fundamental principle that comes from Adam Smith in 1776,

00:58:00.080 | which is what drives Vanguard. And that's the part that's italicized at the bottom.

00:58:05.080 | You read the whole thing. The interest of the producer ought to be catered. They tend

00:58:09.080 | to do only so far as it may be necessary. But promoting that of the consumer, the maxim

00:58:14.080 | is so perfectly self-evident, says Adam Smith, that it would be absurd to even attempt to

00:58:20.080 | prove it. The interest of the consumer must be the ultimate end of an object of all industry

00:58:26.080 | and commerce. And that's what we are doing, I think. That's what the mutual structure

00:58:30.080 | means. And that's why people are going to see this industry change. And they're going

00:58:36.080 | to have to either get along or get out. And in the long run, this industry is going to

00:58:41.080 | look very different than it does today. And I'm sure Ned Johnson is going to have his

00:58:45.080 | cash cows up there. And he's going to take oodles, hundreds of millions, maybe more,

00:58:51.080 | out of the fidelity funds and his other businesses. He has quite a few businesses up there, year

00:58:56.080 | after year. But they're going to have to dwindle. He's going to lose market share.

00:59:01.080 | It's just going to happen, whether he likes it or not. There's very little he can do

00:59:05.080 | except enjoy the couple hundred million a year. And I suppose that's easy to do. I've

00:59:10.080 | never really thought about it too much. I don't need a yacht. So that is an enduring

00:59:18.080 | principle. When you think about it, it's the bottom line, the fundamental principle

00:59:23.080 | that Vanguard is based on. So when I discovered that sentence in The Wealth of Nations, and

00:59:27.080 | I'd probably seen it before if I didn't make a big note of it, it not only fits into

00:59:31.080 | the Adam Smith whole idea that drew across in Quaker Philadelphia, but fits into the

00:59:38.080 | whole context of how economies work, how consumerism works. And if that's what you're

00:59:45.080 | facing, then that's going to be very enduring. Now we'll go over to some of these emerging

00:59:49.080 | issues. And first is target date funds. You want to go up to 31. So here we are. I don't

01:00:16.080 | know why I didn't think about this before, but I have a concern, not really a serious

01:00:21.080 | concern, maybe it is, of the fact that target date funds seem to assume that all of your

01:00:28.080 | retirement assets are invested in security funds. And up to that point, they make a certain

01:00:35.080 | amount of sense. I mean, nothing is perfect. They're probably better than the alternative

01:00:38.080 | for an awful lot of investors. But the reality is that, and I wrote a memo to some of the

01:00:46.080 | people at Vanguard, that when you ignore social security, you ignore something very, very

01:00:51.080 | important. And I said I had no idea what percentage of retirement plan target date fund investors

01:00:57.080 | are on social security, or have social security available, or will have. And it turns out

01:01:02.080 | they know the answer to that. Steve Buck is a very, very good guy we have at Vanguard.

01:01:06.080 | I don't know if he's going to speak tonight. Is he going to be there tonight? He's a really

01:01:11.080 | good guy. He runs our retirement something unit, some kind of unit. And he's very good.

01:01:17.080 | And he said 85%. They know that 85% of our target date holders are on social security.

01:01:27.080 | So just look at what difference it makes. I took an average investor at age, retiring

01:01:33.080 | at age 62, that would be kind of a low ball number, $300,000 value, capitalized value

01:01:39.080 | of your social security. And I took a top-earning under social security investor, retiring at

01:01:46.080 | 70. And man, is that check, I think the check goes up 50% from the time you're 60 to the

01:01:52.080 | time you're 70. And you get paid 10 years less. It's not necessarily a steal at all.

01:01:57.080 | Maybe a bad judgment. Payments are doubled roughly in that period. And that's $575,000.

01:02:05.080 | So you think, well, if I've got $575,000 and I put it into a target date fund outside of

01:02:12.080 | this, and not a lot of investors are sitting around with $575,000, and I put 100% in stocks,

01:02:19.080 | I'm 50% in stocks and 50% in fixed income. $575,000 in social security and $575,000 in

01:02:28.080 | stocks. That probably is not excessive. And I don't know if I have that next elusive chart.

01:02:41.080 | Yeah, they really, well, I'll cover that in just one sec. So we really ought to rethink

01:02:46.080 | the way we present and the way we maybe warn investors or inform investors. They have to

01:02:51.080 | take social security into account. And I have to say, I'm one who does not feel social security

01:02:55.080 | is endangered. We had that legacy forum for me in New York. I was sitting up there with

01:03:04.080 | Paul Volcker and Kathleen Hayes, the interviewer, said something about, "Do you worry about

01:03:08.080 | social security?" kind of thing. And I said, "Well, it's a matter of political will. It's

01:03:15.080 | a matter of economics." I said, "Paul and I could fix it in 20 minutes, and you just

01:03:20.080 | make us sorrows." And Paul looks at me and says, "Couldn't we fix anything?" And I think

01:03:27.080 | the answer to that is yes. There's so much politics surrounding common sense economics.

01:03:33.080 | But in any event, that's a big issue that we ought to be thinking about. And then I

01:03:39.080 | do wonder a little bit about some of the change. We'll talk about this in terms of some of

01:03:45.080 | the new products, so-called major organics. And that is should international bond be 20

01:03:51.080 | percent of the total of the 40 percent bond? Is that 40 percent bond? No.

01:03:58.080 | >> It's about 45.

01:04:00.080 | >> Forty-five percent. And so 9 percent of the 45. Is that a good idea or not? And I

01:04:07.080 | think we want to be a little careful in this world to stay as close to simplicity and avoid

01:04:13.080 | distraction as we can. You know, I don't know when you're going to talk about this a little

01:04:17.080 | bit later. I don't know whether international bonds will be better in the U.S. or not. I

01:04:23.080 | don't even know that. But it seems to me that in the bond market in particular, you know,

01:04:28.080 | maybe they'll be one percent of your value. We're talking one value against another out

01:04:32.080 | there. And you get one percent more return on X percent of your money. And it just gets

01:04:38.080 | long since lost in the shuffle. So is it worth doing a little extra projects, putting a lot

01:04:44.080 | of money in a new fund? Or is that an issue that we should be talking about? An emerging

01:04:50.080 | issue perhaps. Then on the same, basically on the same subject, and that is once you

01:04:57.080 | retire, I was trying to explain this. So maybe Christine Betts, I think we talked about this

01:05:02.080 | this morning. We've got to stop focusing on the level of the stock market. You know, it

01:05:08.080 | goes up and it goes down. What else is to be said? It fluctuates. It's fluctuating since

01:05:12.080 | the button would create in the 70s, 85 or something, and it will continue to fluctuate.

01:05:18.080 | It's just a great big misleading indicator. And what's important is the income you get.

01:05:23.080 | So when you own that Social Security, you're going to get a check every month. I guess

01:05:28.080 | you get a check every month. And mine is big, by the way. And you get an income check. Let's

01:05:36.080 | say you have a monthly income. What matters to you is that those two checks amount to,

01:05:43.080 | let me say, $2,000 a month. It doesn't matter whether the value of the stock behind that

01:05:53.080 | income is going up or down. It's dividends that are important. And you can see here,

01:06:00.080 | what a remarkable record. I mean, this dividend in the S&P, it pretty much goes up without

01:06:05.080 | interruption. Sometimes a little slower, sometimes a little faster. We, of course, had the crash

01:06:10.080 | in '29, '33. See a big drop there. And the only other significant drop in dividend income

01:06:18.080 | since 1929, '33 was in 2008, 2009, or 2007, 2008, when all the financial stocks eliminated

01:06:27.080 | their dividend. So the dividend drops have been pretty big, 20% or so. $28, $21. But

01:06:33.080 | look where it is now. It's back to $32. And the banks aren't doing much help to them.

01:06:38.080 | This is normal dividend growth that we expect our corporations to produce, because they

01:06:42.080 | make good products and services, and they're competitive all over the world. So it's dividend

01:06:47.080 | growth, the amount of the dividends, that we ought to be focusing on. And it's amazing

01:06:52.080 | to me how few people are paying a lot of attention to dividends and dividend yields, and how

01:06:58.080 | much dividends matter in the long run. This next chart, I guess it's called Dividends

01:07:04.080 | Matter, just shows you that if you invested in the stock market all those years ago, at

01:07:10.080 | a capital return of $5.72, we're supposed to fix that chart, right?

01:07:14.080 | That's right. When you reinvest the dividends, it's almost half.

01:07:19.080 | Say again?

01:07:21.080 | Without dividends reinvested, it's $5.72. But if you reinvest dividends all along, it's

01:07:27.080 | almost 10% per year.

01:07:29.080 | That's right. We were going to put in, don't you remember this? Can't you remember anything?

01:07:33.080 | [laughter]

01:07:35.080 | We're going to leave out a dividend reinvestment for the 4/20.

01:07:39.080 | We'll do that tomorrow.

01:07:41.080 | Okay, tomorrow. I think if I get votes. So you can see a difference between $132,000

01:07:47.080 | and $4.23 million, which is what he reinvested in. That's a difference, isn't it?

01:07:53.080 | And so we shouldn't forget dividends. I think the reason the industry forgets them is that

01:07:59.080 | a typical equity fund consumes about 50% or 60% of the yield in investment expenses.

01:08:06.080 | So in a 2% market, the average fund with a 1% expense ratio, it's actually higher than

01:08:11.080 | that. It's going to give you a 1% yield. They take 50%, the industry does generally, not

01:08:18.080 | a lot of variation until you get to the main part, takes 50% or 60% even of your dividend

01:08:24.080 | yield.

01:08:25.080 | With a dividend yield, it's quite obvious the difference between failure and success.

01:08:30.080 | People would only focus on this, but you're not going to find your fund manager focusing

01:08:34.080 | on it. If you ever convert it to real terms, that is to say, just for the value of the

01:08:40.080 | dollar, the result is going to be really quite shocking in the cost of the mutual funds.

01:08:47.080 | You can see it in their income statement. 1% yield on 2.1% market is 2% market. 1% yield

01:08:56.080 | is consuming 1% expenses, consuming 50% yield.

01:09:00.080 | So I'm just trying to wake up people to these obvious things that are happening, but they're

01:09:07.080 | I think self-servingly eliminated in the way the industry does.

01:09:12.080 | I'm going to talk a little bit now about the bond index. I talked about this last year.

01:09:17.080 | I'm not going to say too much more, but I'm uncomfortable with the way the bond index

01:09:21.080 | is structured. It's 70% government, 76% government and government-related bonds, and the remainder,

01:09:29.080 | less than 30%, in corporates where corporate bonds have a higher yield and therefore will

01:09:36.080 | do better in the long run than governments. They always have and they always will just

01:09:40.080 | avail a higher yield. And the attrition rate in corporates, the default rate is so small

01:09:47.080 | it doesn't really dig much into that. This is a good break point.

01:09:50.080 | So I think we should be trying to either get Barclays to put a new index together or think

01:09:57.080 | about the weaknesses that's existing in the index, because people need yield out there.

01:10:03.080 | People are dying for yield, and you all know that. And so if you can get a little more

01:10:08.080 | yield by being in a corporate bond index fund as part of an overall bond index, or change

01:10:13.080 | the bond index, which is something that's not going to happen, you have to be very bold

01:10:16.080 | to do that, but I'd say "faint heart" and "one fair lady" or something like that.

01:10:21.080 | You know, sometimes in this life you've got to step up to the plate. And I would say

01:10:25.080 | this is one of them. And so I'm looking for these people to get concerned about yields

01:10:31.080 | and easy ways to improve yields, at least I think they're easy. And, what number are

01:10:38.080 | we looking at, 35? Yeah, so that's really, I just bring it up again, it's something

01:10:43.080 | I keep my eye on.

01:10:45.080 | Next issue is a competitor called DFA. I mentioned that Gene Fama is a director and one of the

01:10:55.080 | inspirations for the founding of DFA, and he gets all this credit for indexing when

01:10:59.080 | he didn't even like it. They have an interesting firm, they're good people, they charge an

01:11:05.080 | awful lot for what they do, and they have proved unable to isolate segments of the market

01:11:12.080 | that are persistently undervalued. And they try, but it just doesn't happen. I think

01:11:17.080 | it's very counterintuitive to think they've ever done that. You can look back and see

01:11:21.080 | it, but as soon as you can see it backwards, it's not going to happen forward. At least

01:11:25.080 | it didn't. So, they're doing very well, they're probably our biggest real competitor in terms

01:11:31.080 | of quality, in terms of cost, but still because of their cost, I don't know if I have their

01:11:37.080 | cost ratio there, I'll give it to you in a sec, but we still do better than DFA. When

01:11:43.080 | you look at the morning star ratings, these are all in the appendix to Clash of Cultures,

01:11:51.080 | the data for the 50 largest funds are there. So, they're a tough competitor. They charge,

01:11:57.080 | I think their report expense ratio is .36, which means that they're way above average

01:12:05.080 | in terms of returns, but behind Vanguard, I think we were number 2 or 3 and they're

01:12:11.080 | number 12 or something. But their total cost, they report to you, don't include all their

01:12:15.080 | costs, and I haven't quite figured all this out yet, I'm not sure anybody has, but investors

01:12:21.080 | have to pay 50 basis points to the advisor to get to the DFA. So, instead of 36, it's

01:12:25.080 | 86, and that doesn't appear in the data. So, we continue to maybe give the competition

01:12:30.080 | a hard time. Another emerging issue is so-called fundamental indexing. Very valley hood, Rob

01:12:37.080 | Arnott does that. I won't let anybody else use the term fundamental, although I use it

01:12:41.080 | all the time. He hasn't sued me yet, but he says he's discovered the way, weight stocks

01:12:51.080 | by their earnings, dividends, book values, number of employees, whatever he uses, and

01:12:58.080 | he has a secret. Well, you can see there isn't much of a secret there. That Racket 1000 has

01:13:04.080 | had an average return of 7.3%, which is about a perfect fit with our mid-cap ETF, because

01:13:09.080 | that's what it turns out he's selling, which is really an active managed index fund in

01:13:13.080 | Raffey's case. And he has a high correlation with it, probably about 99 of those two together.

01:13:20.080 | And even if you look at it compared to total stock market, our total stock market ETF,

01:13:26.080 | he's done about 80 basis points a year better, which is fine, but only at the expense of

01:13:32.080 | having a risk level standard deviation volatility of about 20% more. So he's taking more risk,

01:13:42.080 | he's getting more return. What else is new? So he's kind of flogging that, and more power

01:13:47.080 | to him, I guess. I just be very careful of anybody who says they've discovered something

01:13:53.080 | better than indexing, I guess that's it. Next, I want to talk a little bit about ETFs.

01:14:05.080 | We keep getting painted into this box where Vanguard loves ETFs and I hate ETFs. Well,

01:14:11.080 | I guess you could call that an innocent opinion, but it's not true. The Vanguard people who

01:14:17.080 | talk to you periodically about all this basically agree with me. For someone who wants to buy

01:14:23.080 | and hold an S&P 500 ETF, that's a very good investment. For someone who wants to trade

01:14:29.080 | into a triple leveraged, in that case, ETF, that's just crazy. And they're all ETFs,

01:14:38.080 | so it depends on the distinction that you make. And I think the difference between Vanguard

01:14:42.080 | and Gold are actually way overdone, and the press likes this kind of stuff. And they say,

01:14:53.080 | "I understand you hate ETFs." I've had to develop a response to that. I spent a lifetime

01:14:58.080 | trying to avoid hating any inanimate object. So you get a response and they use it over

01:15:05.080 | and over again, so even you get tired of it. So it's a huge part of the business. But look

01:15:13.080 | at how they turn over. If they're all long-term investors, how do we get 2,203 turnover for

01:15:22.080 | State Street? That's the spider group. And 5,000, 4,000, 600% turnover in the spider.

01:15:29.080 | This is not long-term investing. And Vanguard does very well at 213% turnover ratio. But

01:15:36.080 | in our funds, that number is about 12% or 15%. So it's very high for many of our use

01:15:41.080 | models. There's a lot of gambling going on here. That's a line from, what's the movie?

01:15:48.080 | - "Casablanca." - "Casablanca." A lot of gambling going on around here. And seeing

01:15:56.080 | just the facts, that direction sells these leverage funds. 10,592% turnover. And this

01:16:04.080 | is called long-term investing. I mean, someone's pulling somebody's leg here. And the reason

01:16:09.080 | is that only about half of the shares of ETFs are held by individuals. More than half, mostly,

01:16:19.080 | are held by financial institutions that are trading. People are speculating, arbitraging,

01:16:24.080 | all those funny things. And you can see the numbers there. I guess those are the Vanguard

01:16:28.080 | ETFs. 72% of their bond market seems a funny way to do that. People like to be in and out

01:16:33.080 | of the market. Yes, that's what it's doing. And you can see that institutions are a big

01:16:38.080 | part of the ETF business. And they're traders. That's all. They're just traders. So then

01:16:46.080 | we look at-- Vanguard did a survey of our retail accounts. And this is a kind of interesting

01:16:52.080 | thing. I think they probably wish I wasn't such a dog on statistics. But this table at

01:17:00.080 | the left up there is a table-- it's also a report Vanguard did with its own shareholders

01:17:07.080 | comparing holders of, say, total stock market index with holders of the ETF index. Very

01:17:13.080 | very impressed. And they find out that there's still much more of a long-term bias than there

01:17:20.080 | is trading, hands-on trading, or short-term trading. And the problem I had with that study

01:17:26.080 | is, first-- and I didn't realize this until last night. I was talking to a couple of our

01:17:31.080 | ETF people. And that is, in the article they wrote, they tried to generalize that ETF holders

01:17:38.080 | are long-term by looking at Vanguard holders. And that's just a conceptual mistake. Everybody

01:17:44.080 | knows we're going to have more long-term holders than anybody else. And number two, we've ignored

01:17:51.080 | the activities of its compliance. And it turned out that-- I'm not sure of this number, but

01:17:58.080 | it turned out that survey we took included 5% of our shareholders. So I don't know what

01:18:05.080 | you want to do about a survey that shows decent results that only includes 5% of your shareholders

01:18:12.080 | in total. And maybe 7% or 8%, but it's not important now. And so that gets into another

01:18:19.080 | way of looking at the chart. This is the way you want to look at it if you don't like the

01:18:25.080 | data. We have a 25% drop in the very same data in long-term holders, and 125% and 140%

01:18:33.080 | increase in short-term trading holders. So I'm not sure that the chart is as good as

01:18:38.080 | it is today. And so those are big changes going on. And the ETF is a different business.

01:18:44.080 | It's a marketing business. I'm not sure it's bad for us to be in it. It's already been

01:18:49.080 | a good marketing opportunity. And probably is a better way-- going to Vanguard through

01:18:54.080 | your ETF is probably a better way than going to anybody else. But I still wonder about

01:18:58.080 | the underlying premise of EPS. And I kind of die hard. I have an idea, and I don't give

01:19:06.080 | up. Let me just give you a few more. I do like the informality. I'm afraid some of you

01:19:14.080 | just want to stretch together. That's quite the way I want to do it. But we do what we

01:19:20.080 | can do. And I feel a little bit this morning like I've often warned, they bring in a lot

01:19:25.080 | of shareholders to see me. And every one of them has wonderful, wonderful ideas and things

01:19:32.080 | to share. A lot of adulation, I confess, which is nice. Which is nice. But I always leave

01:19:40.080 | with a feeling when they leave, and I think they're saying when they leave my office,

01:19:46.080 | my god, there certainly is a lot less to hold both of them against the eye. I hope that's

01:19:53.080 | not the impression I'm leaving with you. But I'm just being who I am, telling it as great

01:20:00.080 | as I dare, and having a little fun kind of reviewing where we've been and where we are.

01:20:06.080 | Our next slide is going to take us to Vanguard currently. And Vanguard, people have asked

01:20:12.080 | us about this, is still being driven by the basic, not only basic ideas, but basic investments

01:20:18.080 | we started four years ago. I use the phrase old friends and good friends. You start to

01:20:23.080 | use that phrase a lot when you get older. People that you know, my friends these days

01:20:30.080 | at such a mortality rate that I'm the only thing I can think of is, my god, they're now

01:20:34.080 | shooting at us. And so they are, and they haven't hit me yet, but who knows. So you

01:20:41.080 | can see that the funds that we've been involved in all along, the new funds, the index funds

01:20:47.080 | drive us, the return of Wellington Fund, the recovery of Wellington Fund. I strongly encourage

01:20:53.080 | you to read that chapter about what it took to make Wellington Fund recover, taking it

01:20:58.080 | back to its roots. And I feel that's one of the great accomplishments of my career. And

01:21:03.080 | also one of the things I owe to my great mentor, Walter Norton. And one doesn't want to forget

01:21:08.080 | one's debts to those who bring them along in this world. But you can see that the funds

01:21:15.080 | that we had back then, these are just the largest 10. I guess every one of them was

01:21:19.080 | created except for one. Before, back when I was running the company, if you look at

01:21:25.080 | all the funds, it's 87% of the funds we have. So we're still on the same track, and the

01:21:30.080 | way we're going to go in a minute is even a little bit different. I have to confess

01:21:35.080 | I scratch my head a little bit about the new things that are going on. I don't think I

01:21:41.080 | understand global minimum volatility. It sounds pretty good, I guess. But I don't even

01:21:49.080 | honestly, I don't even know what it means. And I can't say that I don't think anything

01:21:55.080 | fundamentally wrong with the International Bond Index, but I think those assets, it's

01:21:59.080 | that big because we put it in our target date fund to leave it to wiser heads to decide

01:22:04.080 | whether that's a good idea or not. If anything goes out of the mainstream, it's going to

01:22:09.080 | find Vogel skeptical. And Vogel skepticism, it's going to be right X percent of the time,

01:22:14.080 | and it's going to be wrong X percent of the time. If I said I think the right is going

01:22:20.080 | to be a much larger number than the wrong percentage, I wouldn't be true to myself.

01:22:25.080 | I didn't own up to that. But you look at some of these things, and some of them make

01:22:31.080 | sense. I don't know about managed payout funds. I've always been skeptical of them.

01:22:37.080 | Market neutral, I just scratch my head and think, what's that all about? And there

01:22:41.080 | are 216 of them out there in the industry. I think it's 216. And they're all going

01:22:47.080 | nowhere. And diversified equity, they may be going nowhere backward. And growth equity

01:22:58.080 | is that Turner Fund, the technology fund. We began right at the market high, and it

01:23:05.080 | was actually approved the previous year. And I was on the board, and I said, you're

01:23:09.080 | not going to tell me that these, I probably said these jaspers are going to do better

01:23:13.080 | than the market. I absolutely didn't look at their past record. I said, of course I

01:23:16.080 | looked at their past record. That's what makes me sure they won't be able to do it

01:23:19.080 | in the future. But that was the only redeeming thing about growth equity, is there was a

01:23:26.080 | technology fund that we didn't call a technology fund. And that's the moment of redemption.

01:23:31.080 | That's the biggest gap between a fund reported returns and investor returns of just about

01:23:39.080 | any fund in the entire mutual fund industry. At the time it was atrocious. I don't know

01:23:44.080 | if that will be around forever or not, I doubt it. So there's always a question about how

01:23:48.080 | long these new funds will last. But there's no question in my mind about how long the

01:23:53.080 | original funds will last. I haven't really followed this very closely, but we're doing

01:23:59.080 | a bunch of mergers just announced recently. And I don't really have any comment about

01:24:04.080 | that except we should always be looking to see, you know, it's hard to admit when you've

01:24:10.080 | done something wrong. And just to be honest about it, it may be harder for me to admit

01:24:16.080 | that I've done something wrong than most people. Or maybe even anybody. And one never

01:24:22.080 | likes that. And you can see growth equity, which I just talked about, is now going to

01:24:27.080 | go in the U.S. growth, which in itself had a tragic kind of a record. I guess it's doing

01:24:33.080 | a little better now. And the fact of the matter is, I won't spend too much time on this, but

01:24:39.080 | well, actually I'll come back to it in a minute. And there's the managed payout funds, which

01:24:43.080 | is a question of, I think, what's the point? Are they going to be a single portfolio? One

01:24:51.080 | thing that is going right, and I'm not sure, I have no idea actually whether this is an

01:24:55.080 | accident of design, is correlation. When Vanguard started, I talked about what we want here

01:25:03.080 | is relative predictability of fund returns. That was the phrase I used in the old days.

01:25:08.080 | We didn't use R-squared, we didn't use correlation. But we wanted funds that didn't get out of

01:25:13.080 | line with their peers. And we wanted that because you didn't have to be very smart to

01:25:20.080 | realize that if you were more interested in management than marketing, that funds that

01:25:26.080 | are very different from their competitors will do much better and then much worse. That's

01:25:31.080 | the version of the main that I documented some length in The Clash of the Cultures.

01:25:35.080 | But you can say, what's the matter with that? And in a sense, it's just a way of life, and

01:25:40.080 | there's nothing the matter with it. Except, and this is a big exception, that people pour

01:25:44.080 | their money into the fund after it does well, and pull their money out when it does badly.

01:25:49.080 | They expect too much. They expect the past to be prologue. And if there's anything we

01:25:54.080 | know about this business, it's the past is not prologue. And actually, I would argue

01:25:59.080 | we know something even more important than that. And that is the past is kind of anti-prologue.

01:26:04.080 | If you've done well in the past, it reverts to the mean in the future. A very important

01:26:08.080 | part of my whole thinking about the markets. But what's happening, and to my surprise,

01:26:14.080 | all the index funds, as you can see, have basically 100% correlation with their index.

01:26:21.080 | Not very surprising. They're 99. And funds look very much like the index, or are the

01:26:26.080 | index, you know, are up in the 90s. But what I'm looking at here is what is the direction

01:26:33.080 | of change for these funds? And this is what I don't know whether it's accident or design,

01:26:39.080 | but our funds have gotten much more correlated, much more relative predictability relative

01:26:45.080 | to their peers in recent years than earlier. They were very high earlier. And if you look

01:26:52.080 | at the 10-year correlations, that's everything in the last 10 years, obviously. And then

01:26:57.080 | compare that with the 3-year correlations. And these very, very high correlations, 97,

01:27:02.080 | 95, 93, have all gone up as those arrows. And Wellington Fund may not be an index, a

01:27:11.080 | balanced index fund, but its correlation is now at 98 with the market. I mean, that's

01:27:16.080 | too close to observe the difference. And I like that. And that was the whole reason,

01:27:21.080 | although I don't think present management likes to do it and be expressed this way.

01:27:25.080 | That's the reason I like money manager funds, multi-manager funds. And that is not that

01:27:31.080 | you can pick good managers. How can anybody do that? I couldn't. And I may have set a

01:27:38.080 | low bar of entry. But you make mistakes. And no matter how disciplined you are, no matter

01:27:45.080 | how much history you know, no matter how skeptical you are about the past, you make mistakes.

01:27:50.080 | And if the odds are 50/50, you can pick a manager well, just for the fun of it here.

01:27:55.080 | And if the odds are 1 in 4, you can pick two managers. 1 in 8, you can pick three.

01:28:01.080 | 1 in 16, you can pick four. 1 in 32, you can pick five. 1 in 64, you can pick six.

01:28:08.080 | And 1 in 128, you can pick seven. And I think we have one fund with seven managers,

01:28:13.080 | maybe Windsor too or something. And so you know that you're going to get an average

01:28:18.080 | return compared to your peer group. It's like the large, we're all large numbers.

01:28:22.080 | Your peer group is, let's say, seven funds. And you pick seven representative funds

01:28:27.080 | to compare yourself with. Those seven, or two, to run your money for you.

01:28:31.080 | Those seven funds are going to almost inevitably have the same return on average

01:28:36.080 | as the average seven, as the total seven. So you like that because you win on cost.

01:28:42.080 | If we just be average, the more managers, the more average you are. And you win on cost.

01:28:48.080 | You win maybe 50 or 60 basis points on expense ratio.

01:28:53.080 | You win probably 30 or 40 basis points on negotiating fees with the manager.

01:28:59.080 | Low expense ratio in the economy is the scale of the administrative side.

01:29:03.080 | 30 or 40 basis points on negotiating with managers.

01:29:09.080 | Maybe hiring long-term managers instead of short-term managers.

01:29:13.080 | Say 50 basis points on lower turnover costs. And finally, you're selling at no load

01:29:18.080 | compared to other people who are mostly selling at load, sales load, 1% a year

01:29:23.080 | or something like that. And you should win by 1.5% a year at least over a decade.

01:29:27.080 | If you do that, your returns beat the competition by 20%.

01:29:31.080 | And that's basically what the data show us. But that is not, as is sometimes alleged,

01:29:38.080 | that we are smart manager pickers. It's because the difference is cost.

01:29:43.080 | We are average manager pickers. And really, you know, it seems so awful in this world

01:29:49.080 | to say we're picking average managers. Or I would even say we want to pick the average managers

01:29:55.080 | and win on cost. But it's the sure way and not the speculative way.

01:30:00.080 | So in any event, it's moving in that direction. I'm happy with that.

01:30:04.080 | But I don't think it may be delivered. It may not be delivered.

01:30:08.080 | And I should say this, going back to Mr. Lovelace, John Lovelace.

01:30:14.080 | He has this theory, which is not so different from ours.

01:30:17.080 | He has a very small number of funds, but they just keep adding portfolio counselors,

01:30:22.080 | he calls them. That's what I call investment advisors.

01:30:25.080 | And so he has somebody running 10% of the portfolio.

01:30:29.080 | I think a couple of their portfolios, in fact, have seven or eight.

01:30:32.080 | One of them has even 11 portfolio counselors.

01:30:34.080 | He said, "There's no such thing as too big. We just hire another portfolio counselor."

01:30:38.080 | Without realizing, when you go from one to 11, you're that much closer to being average overall.

01:30:43.080 | But they don't bring the low cost into the situation.

01:30:46.080 | And in fact, mysteriously, at the huge size they are now,

01:30:51.080 | their portfolio turnover is twice what it was a decade ago.

01:30:55.080 | It was much, much, much smaller.

01:30:57.080 | So that cost, the cost of executing transactions in a huge portfolio,

01:31:02.080 | are obviously much higher than the other costs.

01:31:05.080 | So in any event, I call these funds "virtual index funds,"

01:31:10.080 | and that gets the people that are running them to community funds.

01:31:15.080 | I think someone bothered, so I'll stick with that.

01:31:19.080 | And let's skip that next slide and go to the final section of this.

01:31:23.080 | I don't want to take too much time.

01:31:25.080 | This is the man in the arena of the new book.

01:31:28.080 | And it's edited by Duke Rostad, this fiduciary duty kind of self-appointed guy.

01:31:36.080 | He's very active, and he helped to create this legacy today in Wall Street,

01:31:42.080 | which is what this thing is based on.

01:31:44.080 | You probably have seen this, the next slide.

01:31:48.080 | That was held in Wall Street in January of 2012.

01:31:52.080 | He decided to do a transcript of that,

01:31:55.080 | and has great people like Gus Sorter and David Swenson.

01:31:58.080 | They have some violent disagreements, by the way, in the middle.

01:32:00.080 | It's kind of fun to read the disagreements about whether you should--

01:32:05.080 | well, I'll just express them directly.

01:32:08.080 | Gus has a formula of some kind that says how much you should have in index funds

01:32:13.080 | and how much you should have in actively managed funds, depending on A, B, or C.

01:32:18.080 | David Swenson, who I just heard from the other day, is really a great guy.

01:32:22.080 | And so is Gus, by the way.

01:32:23.080 | I don't mean to make any comparisons, but really the top of their games, two of the best that I'll ever meet.

01:32:30.080 | And he says, "Nope, all or nothing. Index or don't index. There's nothing in between."

01:32:38.080 | So that's a nice little part of this.

01:32:40.080 | This new book, again, with the transcripts of those things, including a transcript of the interview with me and Paul Volcker,

01:32:52.080 | which I must say is I've never done an interview with Paul Volcker, and probably most of you won't.

01:32:56.080 | You can't imagine what fun it is.

01:32:58.080 | I mean, the guy is so fun.

01:33:00.080 | [laughter]

01:33:02.080 | He makes me look like sort of a Penny Annie.

01:33:04.080 | [laughter]

01:33:08.080 | I've had to tone my game up a little bit.

01:33:10.080 | [laughter]

01:33:12.080 | It begins, and I'm not sure exactly how this happened, but New Russ, that one of them, put a lot of things that I've done in the book.

01:33:19.080 | And, I don't know if we have the, can we do the table?

01:33:22.080 | Oh, yeah, I'll show you the table of contents in a minute.

01:33:24.080 | And it brings with it this great quote from one of many, many, many great quotes from Paul Samuelson.

01:33:33.080 | I'll tell you personally, the idea that this giant has spent one minute with his poor little Penny Annie numbers counter,

01:33:43.080 | who is having us out, is quite remarkable.

01:33:48.080 | But he has said such generous things about me and about the fund that we, of course, begin to track if he wanted me to re-enroll.

01:33:55.080 | But, I'll just go very, very quickly through the contents.

01:34:01.080 | Andy Goldman, Princeton, all the speeches that I'll be saying tonight.

01:34:05.080 | President Pringle wrote a lovely foreword.

01:34:07.080 | I didn't even see it until I saw the proofs.

01:34:12.080 | And then, there's a legacy for us.

01:34:16.080 | Chapter one, chapter two is Paul Volcker.

01:34:20.080 | Then, we've done some sort of sections around the vanguard vision, part of character counts, part of the time to dance.

01:34:28.080 | It's my first billion-dollar speech out of the group.

01:34:32.080 | And, other things I've written over time, including primarily, I think one of my better works, more historically oriented, is Big Money in Boston.

01:34:40.080 | It's also going in the JPN Journal of Pavilion Management.

01:34:43.080 | But, it had never been in a book before.

01:34:46.080 | I like kind of the idea of having these things, things that I've done.

01:34:50.080 | I hope they're worthwhile. I don't know.

01:34:52.080 | But, they're protected for a long time, within the covers of a book.

01:34:56.080 | Part three is the Index Fund Vision.

01:35:00.080 | And, then, Joe Masqueda, Morningstar, wrote the introduction.

01:35:06.080 | Although, Joe told me, actually, John Reckenthaler wrote it, which was great.

01:35:11.080 | And, I was going to mention at the beginning, I've had kind of this spate, if you want a better word, of publicity in the last three or four months.

01:35:19.080 | I never know where it comes from. It seems like an awful lot.

01:35:22.080 | Including, give me a B, give me an O, give me a G.

01:35:26.080 | Give me an L, give me an E. It might not do well with me.

01:35:29.080 | And, also, that paragraph, I should have mentioned this, that paragraph in Taylor's letter about what investing is all about, in my speech to the money fund.

01:35:40.080 | It turned up, and this is such a funny thing to take pride in, but it appeared in a long article about successful investing in the mutual fund edition of the Wall Street Journal.

01:35:52.080 | And, they got all the way to the last paragraph, this long article, at the very bottom.

01:35:56.080 | And, there's this quote that I gave in 1998.

01:36:00.080 | And, I couldn't believe it. I took it as a huge honor.

01:36:05.080 | I think that's something I'd written 15 years ago.

01:36:08.080 | Somebody, God knows where, found it.

01:36:11.080 | I don't know how people dig this stuff up, but that was very rewarding to me.

01:36:16.080 | And, John Reckenthaler's later tribute, nothing to do with the interview, with the introduction here,

01:36:23.080 | about saying, "My legacy was cemented before the last five years, and it's been cemented even more in the last five years."

01:36:29.080 | And, the reason I like that, I mean, they're all very syncretic.

01:36:33.080 | Everything depends on the source who's saying it.

01:36:35.080 | And, you can take great compliments as nothing if they come from somebody who doesn't, kind of, basically matter.

01:36:42.080 | But, John is a skeptic.

01:36:44.080 | He's cynical. He's analytical. He has a sense of history.

01:36:48.080 | And, to have him give me this huge accolade in his review of the last five years is really deeply touching to me.

01:36:58.080 | Then, we have Chapter 9 is the, oh, that's the Gary Brinson speech I gave.

01:37:05.080 | Pretty comprehensive speech that I gave at Pullman, Washington, to Washington State University, I guess.

01:37:13.080 | And then, we include the entire BOGO issue of the Journal of Indexing.

01:37:17.080 | Nice definition, I guess.

01:37:19.080 | Corporate governance, big part of the book, two chapters.

01:37:22.080 | And, Nell Minow wrote the book. She's a corporate government activist from Washington, D.C.

01:37:28.080 | She worked with Bob Bunks for a long time.

01:37:32.080 | She's a terrific person and a pretty good writer, too.

01:37:35.080 | And then, the vision of service to society is part five.

01:37:38.080 | Fiduciary duty, that speech is out there.

01:37:41.080 | No man can serve two masters.

01:37:43.080 | And then, I had a little bit of that philanthropy written in my book.

01:37:47.080 | Enough, but I built that up a little bit at the editor's request with some new material and my own giving philosophy.

01:37:55.080 | And so, then we get all the way to the end, and we get sort of rewards for the vision.

01:38:02.080 | And Alan Roth wrote an article about the BOGO heads.

01:38:06.080 | That's where Taylor's comment came from, comments from the BOGO heads I mentioned earlier.

01:38:12.080 | And then, we have letters from clients and letters from the main crew members.

01:38:17.080 | And then, we have the last, oh, next to the last slide, we have two people who are actually at the Legacy Forum.

01:38:25.080 | We're here today, Alan Roth and Rick Ferry, both big boosters.

01:38:31.080 | And here are some of the other contributions in the book that are listed there from the BOGO heads.

01:38:38.080 | So, the BOGO heads are an important part of the book, quite naturally.

01:38:41.080 | And finally, Jeremy Dunfield, my former associate, one of the great people in my business life.

01:38:46.080 | I wrote the introduction to my communication ability.

01:38:50.080 | And then, we have reprinted the, I guess I'd have to say, honestly, star-studded list of people who have written forwards to my books over the years.

01:38:58.080 | And starting to run out of forward writers here, guys.

01:39:03.080 | But then, even, that's the way the book ends.

01:39:06.080 | And that is the way my remarks this morning end.

01:39:10.080 | And now, we'll go to the Q&A.

01:39:11.080 | Thank you all very, very much.

01:39:12.080 | [Applause]

Bogleheads® Conference 2013 - John Bogle Keynote

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