Bogleheads® Conference 2018 -John Bogle Keynote 2018

00:00:00.000 | Vanguard Group, and President of the Vanguard's Bogel Center Financial Markets Research Center.

00:00:23.660 | He created Vanguard in 1974 and served as chairman until 2000.

00:00:30.060 | He entered the investment field immediately following his graduation from Princeton University,

00:00:35.660 | where he graduated magna cum laude with a degree in economics in 1951.

00:00:41.940 | If I listed all of his honors and achievements, which most of you already know about, we wouldn't

00:00:46.780 | have any time left for his presentation.

00:00:49.540 | So I'll dispense with this and ask you to please welcome our very special guest of honor,

00:00:54.380 | Mr. Jack Bogel.

00:01:00.100 | Welcome, Jack.

00:01:19.780 | Thank you all very much.

00:01:36.140 | I really appreciate that.

00:01:38.500 | Thank you so much.

00:01:41.940 | That enthusiastic welcome, I think, is in part—I assume is in part—because I had

00:02:00.580 | a little problem yesterday, a little problem resolved yesterday with my heart, which was

00:02:08.460 | out of rhythm, and I wasn't sure I could be here at all.

00:02:12.740 | So I'm obviously happy to be here, and in my eighty-nine-and-a-half year, happy to be

00:02:18.540 | here.

00:02:20.420 | Don't knock it.

00:02:26.560 | It's all I was doing yesterday, and they've done it to me before a number of times, is

00:02:35.240 | when your heart gets out of rhythm, shock it back into rhythm.

00:02:40.200 | And this little machine happened to be designed by one of my first cardiologists, Dr. Bernard

00:02:46.260 | Land up in Boston, called the Cardioverter, and it always is a shock, and it's over

00:02:53.460 | and you're out during—they give you a little very light anesthetic.

00:02:59.180 | And so it's back, got back to normal yesterday, and I'm pleased to report that I've already

00:03:09.300 | sent it in on my iPhone to my cardiologist this morning, and the first words I saw were

00:03:16.140 | "normal," and I've seen so few normals in the last couple of years that I don't

00:03:23.900 | quite know what to say about that.

00:03:25.300 | Well, here we are again.

00:03:27.700 | Here's my wonderful Mike Nolan, who I couldn't get anything done.

00:03:37.300 | And there's my staunch Emily Snyder.

00:03:44.380 | And we have a photo of the three of us, and actually with Kathy Junker, our kind of part-time

00:03:51.260 | person, in the new book—I'll get to that later—and it says, "Never so much owned

00:04:04.260 | was owed by so many to so few."

00:04:07.260 | That's a Churchill expression about the Royal Air Force in World War II.

00:04:13.220 | And so our three of us and Kathy are our little team, and man, do we crank it out.

00:04:19.140 | It's pretty exciting, and everybody seems to get along well together, does get along

00:04:24.140 | well together, and without them my life would not be a hell of a lot of fun, to be quite

00:04:29.660 | honest with you.

00:04:30.660 | When I come in in the morning, they're off and chatting, and they immediately sit down

00:04:34.100 | and get back to work.

00:04:36.180 | It's as if someone says, "Here he comes," and we have a good time together, I think,

00:04:45.220 | and I know I do.

00:04:47.140 | So here we are again, Boglehead '17, particularly I'd like to welcome Tim Dempsey, who is here

00:04:54.900 | for his seventeenth time.

00:04:57.320 | Are you there, Tim?

00:05:01.940 | [Applause.]

00:05:04.300 | I told him I thought the cruel and unusual punishment was prohibited by the U.S. Constitution,

00:05:09.660 | but apparently not.

00:05:11.340 | So I've got a presentation, obviously not the same as last year, but similar in a lot

00:05:18.220 | of ways.

00:05:19.220 | It seems to be what you like, and Mike has helped me out, done all the work on the slides,

00:05:24.340 | which is a huge job we keep revising and changing.

00:05:27.780 | So we have a large number of slides, some of which will take only a second.

00:05:32.820 | And so here we go.

00:05:33.820 | We're going to start off with some of the bigger news clippings of the year.

00:05:39.740 | And there's a nice cover story on Barons.

00:05:43.700 | I look a little, hmm, maybe morose or something on the cover, but we quickly look happy when

00:05:54.780 | we get inside.

00:05:57.540 | And it even shows I went to Princeton, by the way, if you look carefully, which is nice.

00:06:02.920 | Another really substantial article called, it was in Advisor Perspective, by Larry Siegel,

00:06:10.540 | who is the chief financial expert for the Chartered Financial Analyst, CFA, the professional

00:06:20.520 | organization.

00:06:22.260 | And it was nice.

00:06:23.260 | It was a very substantive interview.

00:06:26.460 | And I'll come back to this later.

00:06:28.920 | There was only one thing, I didn't bring it up here with me, but I said something very

00:06:37.900 | controversial to a lot of people, I guess, I'll get to the chart later, but it expressed

00:06:46.420 | my opinion that I think growth and value, which is the better choice, and I'll talk

00:06:52.320 | about that later, is basically all the good years for value were concentrated at the beginning

00:07:00.820 | of a 90-year period.

00:07:03.380 | And the recent years, 30 years probably, it's been back and forth, back and forth, back

00:07:07.980 | and forth with no difference.

00:07:09.900 | So what I said in the article, in the interview with Larry, that I assumed that was because

00:07:15.460 | having seen the past 30 years ago, people decided they would get into value and out

00:07:23.340 | of growth, and that bid up the value stocks and down the growth stocks, and so we had

00:07:28.100 | no reversion to the mean, this would not be uncommon.

00:07:31.700 | And a person took, there was a lot of response to that in this article.

00:07:38.020 | In fact, Mike was nice enough to send it to me, I could look at it last night, should

00:07:41.620 | have put me to sleep.

00:07:43.980 | Sixty-one pages of comments about that conclusion, 61 pages, and many of them were from Larry

00:07:50.980 | Swedrow, who had the first one.

00:07:54.660 | Larry Swedrow is in the Bogle head, is he?

00:07:56.900 | Is he here?

00:07:58.580 | Okay, then I'll continue to speak freely.

00:08:03.780 | His first sentence was, "Jack Bogle is wrong again."

00:08:08.860 | And it's easily possible, of course, that he's right.

00:08:12.580 | But 61 pages of comments, and I'm talking about a little tiny type on the page.

00:08:20.220 | It's unbelievable.

00:08:21.220 | I didn't bring it up here because it's too heavy.

00:08:25.180 | So that was it, but it was overall a nice article.

00:08:28.540 | And I just throw this one up here, influential financial revolutionary, with no interest

00:08:34.220 | in crypto, simply because I had this wonderful phrase, "a grandfatherly assassin."

00:08:44.460 | And I don't know, I've never been called a grandfatherly assassin before in my life

00:08:50.340 | and will probably never be called one again.

00:08:52.440 | And then this next Bloomberg Businessweek by Justin Fox said something that I found

00:08:57.940 | very heartwarming, if you will, no pun intended.

00:09:03.900 | And he says, "I call Bogle because he's the author of the clearest outline of the

00:09:09.700 | economic role of the asset manager that I've ever read, ever, in his 1951 Princeton senior

00:09:15.540 | thesis, 'The Economic Role of the Investment Company.'"

00:09:17.980 | I mean, it's nice to see people still reading that.

00:09:20.500 | It's not all that good.

00:09:21.500 | It's in one of my books, and it's okay.

00:09:26.460 | But if people want to overstate my abilities and contribution, who am I to stop them?

00:09:33.180 | And then finally, I guess under the clips, even on vacation, of course, I do a little

00:09:40.100 | work.

00:09:41.100 | And this was at the Lake Placid—or Adirondack, I should say—roundtable.

00:09:44.460 | And it was a really nice speech.

00:09:48.700 | I did it in a little bit different style, and it ended in a standing ovation.

00:09:53.780 | But I think that's because—at the Full House—I think that's because I ended with

00:10:00.460 | a prayer, a Lake Placid prayer that we do in our family.

00:10:05.860 | And so in any event, that was a fun thing to do.

00:10:09.100 | And then another article here in the Enquirer, it keeps saying, "Bogle, Bogle, Bogle, Bopo

00:10:14.660 | for Bogle," but it's about the Bogleheads Philadelphia chapter.

00:10:19.820 | And that photograph there, of course, was taken here last year at the National Chapter,

00:10:25.060 | if you will.

00:10:26.500 | And it's really a nice article and a nice tribute, in fact, to all of you.

00:10:32.900 | And I should say at this point that you mean a lot to me, all of you.

00:10:41.700 | And to have this Full House here, this full gathering, and getting such an enthusiastic

00:10:47.420 | welcome, is—you can't imagine how it feels, how comforting it is, you know.

00:10:53.700 | I'm getting a little bit old, and so I'm starting to reflect a little bit about my

00:11:00.780 | career.

00:11:02.140 | And I've never wanted to do that particularly, because of following Sopocles, and when you're

00:11:13.300 | in trouble always quote Sopocles, "One must wait until the evening to enjoy the splendor

00:11:19.900 | of the day."

00:11:21.740 | And I used to say, "My evening is not here yet, so I'm not fooling around with the

00:11:26.500 | splendor of the day yet, but I think my evening is here."

00:11:31.620 | And I don't much like that, but there it is.

00:11:35.900 | Another—I always like to be a little rabble-razzer, you know, and so the Wall Street Journal had

00:11:44.300 | an article about the Corporate Social Responsibility Fund not doing as well as the market.

00:11:54.980 | And I got the S&P 500, and so I wrote back a nice short letter.

00:12:01.340 | They like them short.

00:12:02.340 | I've had to work with the editor, the letters editor, they have a special guy in that job,

00:12:08.260 | and just said, "So does everybody else like the S&P 500, essentially."

00:12:13.420 | So it gives me a chance to plug in the last sentence, "The S&P 500 remains a tough standard

00:12:19.220 | for all invective managers to outpace."

00:12:23.100 | The Corporate Social Fund was a letter to the editor of Barron's by a professor at

00:12:28.700 | MIT, and—I'm sorry, a Ph.D. from MIT, professor at Harvard, who I saw an article

00:12:36.780 | in Barron's.

00:12:37.780 | I couldn't let it go.

00:12:39.340 | And the article said, "In a speculative bubble, everyone buys because everyone else

00:12:43.380 | is buying, and then the bubble bursts and everyone sells," to which I responded, "Really?"

00:12:49.860 | The simple self-evident fact is that when, quote, "everyone is buying," someone else

00:12:54.160 | is selling.

00:12:56.740 | Duh.

00:13:00.420 | Dollar for dollar.

00:13:01.940 | And when everyone is selling, someone else is buying.

00:13:06.020 | This is the eternal reality of the financial markets.

00:13:10.640 | So the fun thing was that Barron's wrote—put my letter in a special box in there, and put

00:13:17.460 | his response, and his response was, "First let me say, you are a hero of mine."

00:13:26.780 | This guy really has good openers.

00:13:30.820 | And then he adds, a little icing on the cake, "That isn't something that I have said

00:13:35.180 | lightly or ever.

00:13:37.060 | For thirty-five years, I've put my spare savings in the Vanguard Index Fund and done

00:13:41.420 | very well with it."

00:13:43.980 | I think he means them, but I would never correct a Harvard professor.

00:13:48.780 | But I was a little bit concerned, and I thought his escape hatch was not such a good one.

00:13:56.400 | And now to your questions.

00:13:57.400 | One, you were right, of course, that for every buyer there's a seller.

00:14:00.380 | Doesn't seem to me that's a particularly big concession.

00:14:06.600 | The language you identified was knowingly loose for journalistic purposes.

00:14:11.580 | I would never use those words in a more scholarly paper.

00:14:15.020 | Well, you know, I write a lot of scholarly stuff, and you don't have to—you can write

00:14:20.420 | the English language, you can write the truth in a journalistic purpose or a scholarly purpose.

00:14:26.460 | I overlap a lot.

00:14:29.900 | Then we must talk about a couple of fun awards that I got.

00:14:34.700 | First is the American Indian College Fund, which I supported for a long time, and they

00:14:39.220 | claim that I've helped 500 young Indian Native Americans with their college educations.

00:14:47.480 | I don't think it's that many, but when I send them the money, I don't—the total

00:14:54.840 | scholarship for an American Indian College is $1,000.

00:14:59.420 | That's all it is.

00:15:00.740 | And so the reason there may be to get to 500 may be partial scholarships that I've given.

00:15:05.780 | I don't know, but that's their number, and that made me very happy.

00:15:08.900 | And they offered me the Bill Apache Award, and Bill Apache meaning "Friend of the People,"

00:15:16.420 | their big award at a big party they have.

00:15:19.300 | I told them I just am not up to doing big galas in New York City.

00:15:26.300 | And so my daughter accepted the award, and that is her with her glasses looking very

00:15:30.060 | charming there, as she is.

00:15:32.540 | And she did a great job, and I actually sent my son with her, and he held up his phone

00:15:42.360 | so I could hear the speech.

00:15:45.060 | She did a really wonderful job.

00:15:46.060 | I'm very proud of my kids, all six of them.

00:15:49.820 | But what I particularly liked was she cited this quote from Chief Sitting Bull about warriors.

00:15:57.280 | And there's an article in the American Airlines magazine, American Airways, called "The Warrior."

00:16:05.060 | I think it's called "The Warrior."

00:16:07.260 | And you think of warriors in a certain way.

00:16:09.200 | We all do.

00:16:10.200 | But for us, the Indians, warriors are not what you think of as—think of as warriors.

00:16:16.500 | A warrior is not someone who fights because no one has the right to take another life.

00:16:21.740 | The warrior for us is one who sacrifices himself for the good of others.

00:16:26.100 | His task is to take care of the elderly, the defenseless, those that cannot provide for

00:16:31.620 | themselves, and above all, the children, the future of humanity.

00:16:37.180 | And I could not write any better what I have tried to do with my career.

00:16:45.100 | And then there's a big award, kind of a fun one.

00:16:49.280 | They offered me this award down in Florida.

00:16:51.220 | It came with, off the record now, it came with $50,000.

00:16:56.940 | And they don't usually give you any awards.

00:16:58.400 | Sometimes I think they charge you for the award.

00:17:02.240 | But I said, "I can't come in person.

00:17:07.420 | It's just too much for me to get to Naples, Florida."

00:17:10.440 | And so they said, "How about if we fly you down?"

00:17:14.780 | And I said, "Well, that would be fine."

00:17:16.880 | So Mike and I get out of the airport, Eve doesn't like it when I travel alone, and

00:17:21.700 | I have great—Mike has great company.

00:17:24.540 | And so I get to—we get down and pull into Naples Airport, and you can't land in Naples

00:17:31.340 | with a commercial plane.

00:17:32.840 | Oh, no.

00:17:34.680 | Commercial planes in Naples?

00:17:36.360 | And with all the big Ritz-Carltons and all that money, no, no, no, no, no.

00:17:42.620 | And there's a limousine to meet us, and we go and give the speech and get the awards.

00:17:49.080 | And I gave them a pretty good—some of you have suggested that I should get the Nobel

00:17:55.920 | Prize in economics, and it's not going to happen.

00:17:59.200 | I don't do that kind of work.

00:18:01.200 | But two of the three people that gave me the award were Nobel laureates.

00:18:05.480 | And so we had our picture taken together to show that I came close.

00:18:11.700 | What I did when I traced the history of the index fund—this is really important—there's

00:18:18.240 | so much untruth about the development of the indexing generally.

00:18:25.600 | Nobody argues that I—I mean, everybody understands and agrees that I started the first index

00:18:32.640 | mutual fund.

00:18:33.640 | That's a given, because that's an easy fact to identify.

00:18:36.640 | As to starting indexing, there's a lot of lore in there which doesn't—seems to say

00:18:46.320 | that other people were doing this too.

00:18:48.680 | So let's say they are, and there were people working on it.

00:18:53.000 | But I said in my talk there to all these people, "Am I saying that one with a mere A/B degree

00:18:59.000 | from Princeton and an MBA from Wharton"—that would be Jan Twardowsky, my assistant—"are

00:19:04.800 | starting all these—those with PhDs and master's degrees who were groomed at the University

00:19:12.700 | of Chicago, Stanford, and Harvard?"

00:19:15.600 | Of course not.

00:19:17.360 | Truth told.

00:19:18.360 | Yes, I am.

00:19:19.360 | But it didn't seem like the right thing to say.

00:19:26.720 | But the main thing is about—there were a whole lot of roiling going around about indexing

00:19:32.400 | when I started the first index fund.

00:19:33.920 | I didn't happen to know about any of it.

00:19:36.280 | Not anything.

00:19:37.440 | I didn't know about the efficient market hypothesis.

00:19:40.480 | I didn't know about these guys that won the Nobel Laureate.

00:19:43.040 | I guess that would be French and Fama or Fama.

00:19:47.800 | And when I found out about them, I didn't think they were right.

00:19:51.340 | But in all our fussing around indexing, this is the important thing, because they all brought

00:19:56.880 | out something, maybe seven or eight different enterprises.

00:20:00.720 | Not one of those fledgling efforts in indexing bore fruit.

00:20:05.080 | Not one of those early pilot lights ignited the flame of indexing.

00:20:08.960 | That's a pretty good sentence.

00:20:11.680 | All of those tentative forays failed to create a single index fund that was sustainable and

00:20:17.240 | successful, all except one, Vanguard Index Investment Trust, First Index Investment Trust.

00:20:24.760 | So whatever the case, I find myself defending my heritage, for want of a better word, of

00:20:32.640 | the index fund, and I've had a good chance to make that clear.

00:20:36.480 | We're going to books for a second now.

00:20:39.880 | Number 12 has come out.

00:20:41.680 | I'm heading for a million copies, as you'll see at the top, 949,000 copies.

00:20:46.880 | It's just amazing how well these books sell, and sometimes for odd reasons.

00:20:50.880 | I think when you look at Common Sense on Mutual Funds, 10th Anniversary, 59,000 books, it's

00:21:01.200 | sold almost as many copies as its original, which was 1999, which sold 67,000 copies.

00:21:09.040 | But I think the reason the second edition did so well is the publisher, not I, but the

00:21:13.440 | publisher, asked David Swensen to write the forward, and David Swensen is a word that

00:21:18.240 | elates investors, excites investors, impresses investors, and he turned out to be a wonderful

00:21:26.320 | friend of mine and actually sent me, in I guess respect, Yale gave him 30 bottles of

00:21:39.480 | expensive wine, Chateau, I think it was called, Chateau $5,000.

00:21:47.480 | I don't want to tell you the price, but they put it right on the label.

00:21:52.600 | He sent me one, and that was about as thoughtful of a gesture as you can imagine.

00:22:00.040 | And when actually I sent him, he wrote me a note saying he'd love to have a copy,

00:22:08.360 | some copies for the new edition, the 1999 edition, when I changed the cover.

00:22:13.440 | It was an ugly cover, and I changed it into a beautiful one.

00:22:17.440 | I think that's fair.

00:22:19.520 | I do like what I've done myself the best, and he said, "I'd love to have a copy

00:22:25.000 | for every member of my staff, so if I send them down to you, would you sign them?"

00:22:31.240 | I wasn't born yesterday.

00:22:33.760 | I waited two days, and then I said, dropped an email, "David, we'll catch you off

00:22:42.120 | a store, they're right there, all signed," because I just signed them and sent them up

00:22:46.280 | FedEx and waited two days to respond to his email.

00:22:49.600 | So he was duly impressed, and I think should have been.

00:22:54.240 | You know, I love to do those things.

00:22:57.660 | Little things mean so much in this life.

00:23:00.480 | I'm a little off subject here, but I get letters from investors, letter from crew members,

00:23:08.480 | people that are in deep trouble, someone that I worked with in Wellington Management Company

00:23:14.040 | thirty years ago is dying, and his daughter thought it would be nice if I would just send

00:23:20.240 | him a little letter.

00:23:21.240 | Of course I did.

00:23:23.360 | I mean, what kind of person would not do that?

00:23:26.440 | It doesn't matter how busy you are.

00:23:29.020 | Make the damn time.

00:23:31.800 | And that's my philosophy, no matter how little.

00:23:39.400 | And we'll talk about Stay the Course, the story of Vanguard and the Index Revolution

00:23:44.080 | later on.

00:23:45.080 | That'll be my closing section today.

00:23:48.280 | And here we are, there are other people writing good things about books and bogleheads.

00:23:57.280 | And so I'd like to congratulate Taylor on his new Bogleheads book, which is doing very

00:24:06.320 | well.

00:24:07.320 | I will say the Bogleheads seem to love it.

00:24:09.320 | You know, you read the responses on Amazon, and they're just so enthusiastic.

00:24:13.280 | I didn't have a chance to look and see how well it's doing at the box office, but it's

00:24:17.160 | fine.

00:24:18.160 | It's a good book, and it was my honor to write the forwards.

00:24:23.160 | So let's talk a little bit about speeches.

00:24:27.680 | One of the more interesting ones came shortly after Bogleheads '16, and if you can look

00:24:33.640 | down at the bottom of that big black thing, you'll see two things of note, a major address

00:24:41.120 | by John C. Bogle and a special introduction by Chairman Jay Clayton of the SEC.

00:24:48.620 | As to the major, I didn't know what I was going to write about until I got the program.

00:24:54.040 | And you know, I wasn't born yesterday.

00:24:55.880 | I thought, "I guess I'd better give him a major speech.

00:24:58.520 | I mean, isn't that what you would do?"

00:25:01.920 | And so I did, and it was actually good, and later printed in essay form in the Financial

00:25:10.880 | Analyst Journal.

00:25:13.340 | But even more interesting was special introduction, and I said to the people running the public

00:25:18.600 | company accounting board, accounting oversight board, "Had you ever talked Jay Clayton

00:25:24.480 | into coming over to talk?"

00:25:25.680 | He said, "We didn't talk him into it.

00:25:27.540 | He called us up when he heard you were speaking here and said he would like to do the introduction."

00:25:33.160 | And I'm thinking, "Huh?

00:25:36.220 | Or was it duh?"

00:25:38.480 | And he gave this lovely speech, short, sweet, and I'll just read you one paragraph, which

00:25:45.080 | I think I can do.

00:25:46.080 | I guess I'd better get my binoculars on for this.

00:25:54.680 | You want to put the second page up, Mike?

00:26:00.200 | He had three different ideas he wanted to talk about, one personal, one intellectual,

00:26:09.560 | and one professional, and I'll just read you the intellectual one.

00:26:15.520 | "I love markets and the study of markets, and both amazing things.

00:26:23.120 | They do, and the failures, in an imperfect way, imperfectly.

00:26:36.600 | Mr. Bogle is a student of markets, and the best kind of student, who can see the changes

00:26:43.240 | before they arrive and plan for them to make markets better.

00:26:48.800 | John is to make life better for the long-term individual retail investor.

00:26:56.360 | Mr. Bogle's every effort reflects that goal."

00:26:59.040 | Well, I must say, I was basking in it.

00:27:01.440 | I was sitting up there listening to it, and I just, I mean, I think it must be something

00:27:06.600 | almost without precedent, and he was a very nice guy, by the way.

00:27:11.120 | So that speech was the modern corporation of the public interest, and there's the essay

00:27:15.920 | that it was turned into.

00:27:16.920 | I often try and do that, if the speech is any good, and this one goes way back at the

00:27:21.920 | beginning and goes back, actually, in my Princeton thesis, or my Princeton studies of the role

00:27:27.280 | of investors in corporate governance, and so I was pretty happy with that.

00:27:31.920 | That was my third-in-three-years lead article in the Financial Analyst Journal.

00:27:37.280 | The previous year, second quarter of '17, was a really good one, I think, balancing

00:27:43.600 | professional values and business values, and they asked me to do a piece on disorder, and

00:27:50.560 | I wasn't sure how to do it, so I went back, and that was, to me, quite a compliment, and

00:27:57.520 | I went back and looked at some of the things I'd written before, and it's, I was stimulated,

00:28:03.720 | greatly stimulated, by the fact that I'd given a speech called Mutual Funds, Business

00:28:08.240 | or Profession, and when I saw that, I knew immediately what a jackass I was, because

00:28:14.320 | everything is both business and profession, everything.

00:28:18.120 | Might be a little teeny-weeny business and a big profession, or a big little profession

00:28:24.640 | and a big business, but it has to be balanced, and that was the theme I used there, and so

00:28:32.200 | I was happy with that, and the year before that, I had a piece in the January, February

00:28:39.160 | of '16, again the lead article, about indexing, and I can't believe this article was that

00:28:51.520 | big a success, but I said, when I was talking to them about the following article, they

00:28:56.360 | don't tell me any of this in advance, I can't believe this was going to be the case, but

00:29:02.160 | I said to them, "You know, I understand this was the most popular article, most widely

00:29:07.000 | read article in the Financial Analyst Journal in '16," and they said, "No, no, that's

00:29:13.440 | not true.

00:29:14.440 | It's the most widely read article in the history of the Financial Analyst Journal."

00:29:20.240 | I couldn't believe that, but that, you know, I like a good compliment every once in a while,

00:29:25.920 | and that's a good one, so then I'm still doing a little speaking, I'm cutting back

00:29:32.880 | actually a good bit, and so I'll be going to London in October, right after I get back

00:29:41.760 | from Mumbai, and then speaking to the Philadelphia Analysts at the Philadelphia Country Club.

00:29:48.320 | No, I just lied to you.

00:29:53.080 | I will be doing a video to accept the Financial News Asset Management Award for Lifetime Achievement

00:29:59.560 | in London, be doing video, and I'll be doing video for the Morningstar Investment Conference

00:30:05.080 | in Mumbai, and God willing, I'll be able to do both videos at the same time, because

00:30:10.080 | it'd be very effective to do.

00:30:12.960 | So let's talk a little bit about business now.

00:30:15.560 | Let's talk first about, we've done this before, and these are updates, the index revolution,

00:30:22.960 | and you'll see a chart, those of you who've been here in previous years have seen it,

00:30:39.720 | and those lines get closer and closer to the semi-log scale, and I think one would expect

00:30:47.200 | them to cross, probably in 2021, something like that, and indexing will then be the real

00:30:53.420 | driver of the mutual fund industry.

00:30:57.680 | It's gone from 10 million, that's 10 million over at the left, to 5.8 trillion, a growth

00:31:08.840 | rate of 36% a year, and rather uncommonly high, while active management has grown, thanks

00:31:14.520 | to the market, at 13%.

00:31:18.840 | Indexing share mutual fund assets, shown on this chart, you see in stock fund assets,

00:31:23.520 | it's already up to 44%.

00:31:25.880 | Just think about that when we talk about the index revolution, and that's the end of my

00:31:31.800 | subtitle for State of the Course, my new book, The Story of Vanguard and the Index Revolution.

00:31:39.060 | So it is a revolution, and those lines I think are going to keep rising and rising and rising.

00:31:44.840 | There are a lot of things that don't keep rising, they get interrupted, but I believe

00:31:49.420 | that these things will keep growing, and indexing will become more and more important, and make

00:31:53.660 | more and more of a mark on the industry, and do a better, better job for fund investors.

00:32:01.760 | Indexing, however, has taken two courses now, traditional index funds, an acronym which

00:32:08.360 | I have had absolutely no one else using, but I will continue to use it until hell freezes

00:32:14.320 | over, thank you, and traditional index funds and exchange traded funds, and you can see

00:32:22.080 | what a tiny beginning it was, even as recently as '90, and don't forget we started the first

00:32:27.000 | index fund in 1975, so 15 years of patience, and for the want of a better phrase, staying

00:32:35.240 | the course, and finally it begins to take off in the '90s, and starts to grow and grow

00:32:40.720 | and grow.

00:32:41.720 | Traditional index funds, that's the blue section of the chart, and right now ETFs have grown

00:32:47.860 | even faster, exchange traded funds, they are quite different, I think I have a chart on

00:32:52.840 | this later, but there are intelligent ways of using ETFs and non-intelligent ways of

00:32:58.640 | using ETFs, and for that matter, intelligent and non-intelligent ways of using traditional

00:33:04.280 | index funds, but the big non-intelligent ways are concentrated in the ETF area.

00:33:11.360 | You open the Wall Street Journal, and we have the most exciting news for investors, someone

00:33:17.320 | somewhere has created a vegan ETF.

00:33:25.320 | You can buy stocks that don't like meat, or something.

00:33:31.720 | So it's just a wild business, but it's been a rapidly growing business, and we just go

00:33:37.320 | back to 1998, you'll see in the next chart, traditional index funds have been growing

00:33:43.240 | at 99%, ETFs, 19%, and thanks to the market, active managers at 4% a year, so ETFs have

00:33:57.160 | replaced traditional index funds as the main source of indexing.

00:34:02.360 | Now that brings up an interesting, fascinating point, and that is, where did the growth come

00:34:09.880 | from that got them bigger than the ETFs, and this chart is a year old, but what you'll

00:34:17.520 | see there is ETF, exchange traded funds, have had $1 trillion of their $1.9 trillion of

00:34:26.680 | assets coming from cash flow, people buying them, and $790 billion coming from performance,

00:34:33.440 | the market, while traditional index funds have had cash flow only half as large, $500

00:34:40.800 | billion, and market appreciation of $1.1 trillion to get to their $2 billion of growth.

00:34:58.720 | And therefore, when I looked into why we got performance, which is measured by market appreciation,

00:35:06.400 | on the two sides, we get an 8.4% investor return compared to a 5.5% ETF return, and

00:35:15.460 | people will learn from that sooner or later.

00:35:19.840 | My new book is a little more tolerant of ETFs than some of my other words, I don't want

00:35:25.400 | to be too tough on them, because they do have good uses, they're just not used nearly enough.

00:35:32.400 | But they're not the same, and the institutional ownership is very different, if you look at

00:35:37.480 | the largest traditional index fund, it has turnover, that's our fund, of 21%, and then

00:35:45.360 | you look at the ETFs, the largest ETFs, our turnover is 135%, which I would have said

00:35:53.480 | was awfully high, until you look at BlackRock at 435%, and State Street at 1,280% annual

00:36:03.240 | turnover.

00:36:05.240 | I think it's fair to say these are not long-term holders of stocks, they're long-term traders

00:36:09.920 | of stocks, they're short-term traders of stocks.

00:36:12.680 | So I'm going to get into the really active ones, the hot shots, ProShares, 2,808% turnover

00:36:20.760 | of the shares of the fund, and something called Direction, 4,752%, higher than anything else

00:36:31.720 | there.

00:36:32.720 | Those are just places for people to speculate, it's very clear.

00:36:36.640 | We don't have Invesco in there, do we?

00:36:38.640 | Not yet.

00:36:39.880 | Not yet.

00:36:40.880 | Okay, well, those that are hanging on to every word, we'll get the Invesco number to you

00:36:45.520 | later.

00:36:46.520 | What we do have going for us in the mutual fund industry and in the index business, particularly

00:36:50.960 | the index business, is people are always trying to beat the market.

00:36:57.920 | They don't realize how difficult it is.

00:37:02.920 | Look at how difficult it is from simply saying how competitive market indexes are compared

00:37:10.920 | to large groups of mutual funds.

00:37:13.720 | On average, I'm not sure the average is in there, but 93% of the time, 93% of the funds

00:37:27.360 | are outperformed by their appropriate indexes.

00:37:31.800 | 93%.

00:37:33.800 | Just think of that.

00:37:35.040 | You wonder how anybody can do anything else.

00:37:39.080 | What's of particular interest in that page, which is a little bit out of sequence here,

00:37:43.900 | is when you see we have at the bottom line, chart 38, at the bottom line we have the annual

00:37:53.560 | advantage of the index over the actively managed fund, and you can see these numbers running

00:37:59.240 | around 1.5%, 2%.

00:38:02.200 | I decided to do one other exercise here, just say how are we doing in large cap funds as

00:38:07.000 | a group, mid cap funds as a group, small cap funds as a group, and the index advantage

00:38:13.840 | is in large cap 1.54%, in mid cap 2.01%, and in small cap 2.24%.

00:38:22.600 | This is so intuitive because we know some things about small cap funds, for example.

00:38:28.800 | One is their fees tend to be higher.

00:38:30.840 | Two, they tend to have a high turnover at a higher cost because they're dealing with

00:38:37.840 | smaller stocks.

00:38:38.840 | So, it's an intuitive answer that may even be right, but it's worth thinking about.

00:38:46.800 | It suggests that this is not random, what you've seen about the 93% outperformance,

00:38:52.840 | that it all comes out of expenses.

00:38:54.840 | Now, I've been writing that since, I don't know, 1975 I guess, and believe it more than

00:39:02.480 | ever with each passing day, and have a large number of allies on that same point.

00:39:10.080 | I asked Mike, we didn't get too far on this, but I'd like to see on Google the number of

00:39:19.640 | times that mutual fund expenses, mutual fund costs, and mutual fund fees were mentioned

00:39:27.300 | in 1980, and how many times they were mentioned in 1917, in 2017, excuse me, 2080 and 2017.

00:39:39.160 | I'm sorry, 1980 and 2017, and we couldn't really quite get our hands on that, but it

00:39:44.520 | looks like it was like 8,000%, 80,000%, the number is just staggering, and we're going

00:39:51.880 | to continue to work on that and see if we can't get a better number for you.

00:39:56.160 | But it's become, the idea of expenses has become part of the business of investing.

00:40:02.700 | It's not a sideline.

00:40:04.240 | It's not something that no one ever thought about, which they didn't when I came into

00:40:07.040 | this business.

00:40:08.040 | Nobody gave it a second thought, and now it's just about everything.

00:40:14.600 | So of course, yeah, the costs are there, and yeah, the index wins, but I like to pick winners,

00:40:22.120 | so you pick winners.

00:40:23.960 | And here's a reversion of the mean chart, quite striking, that shows you how difficult

00:40:29.200 | it is to pick winners.

00:40:31.960 | If you visualize 20% for each of these columns is the highest return funds, which were 20%

00:40:39.080 | of the total, 14% of them continued to be in the highest quartile, highest quintile.

00:40:50.380 | And how about worst, 20% fell into the low quintile, and 24%, 44% in the lowest two return

00:40:59.840 | categories.

00:41:02.400 | And this is a very counter, this is a very intuitive chart, too.

00:41:06.900 | It's a little surprising in some areas, and it's probably overstated, that one example.

00:41:12.520 | But the middle, like high and medium, are almost exactly predictable in the middle.

00:41:20.040 | And they start in the middle, and they're right in the middle.

00:41:22.640 | So it's at the extremes that you see this.

00:41:25.960 | And of those lower rated stocks at the beginning, 20% lower rated, 30% had higher returns, and

00:41:32.760 | only 16% had lower returns, lowest returns, and only 10% had low returns.

00:41:39.440 | That's 26% out of a possible 40.

00:41:43.400 | So you look at that and say, past performance doesn't get you very far.

00:41:50.680 | And in talking to Chairman Clayton on a different occasion, we talked about the possibility

00:41:56.000 | of banning the use of past performance figures, because they're so misleading.

00:42:01.580 | And we know, you know, we can't ban them.

00:42:05.000 | But people ought to have a much bigger caution than the future may not represent the past

00:42:11.320 | or something like that.

00:42:12.880 | There should be a big warning sign.

00:42:15.440 | Because the reality is, when you bring out a really hot fund, you know that it will not

00:42:20.720 | repeat that record.

00:42:21.720 | You know that.

00:42:23.200 | And I think we ought to be able to come across that better.

00:42:28.000 | So okay, so picking in this period, in recent period, it's been an index market, a good

00:42:36.980 | market for indexing.

00:42:39.120 | So what happens when we get into a stock picker's market?

00:42:42.480 | Ooh, a stock picker's market.

00:42:46.560 | There's no such thing now or ever.

00:42:50.640 | Why?

00:42:51.760 | Because as I told the professor, each smart investor has to buy what it buys from a dumb

00:42:57.520 | investor.

00:42:58.520 | So-called dumb.

00:42:59.520 | There's just, I don't know why people don't get it.

00:43:03.040 | The reality of investing is you're betting against the person that's doing the other

00:43:07.400 | side of every trade.

00:43:09.360 | And so we may have stock pickers, good stock pickers, doing well, but we will have bad

00:43:15.960 | stock pickers doing exactly the same amount of badness as they had goodness.

00:43:21.560 | So it's just a realization of what the market is.

00:43:25.200 | And then there is, let's leave the stock market and forget all those performance things and

00:43:31.320 | go to Bitcoin.

00:43:38.120 | And this is a happy example.

00:43:41.120 | My timing wasn't quite right, but I was invited to speak at the Council of Foreign Relations

00:43:45.320 | in New York on November 28th, '17, and I was asked my first question.

00:43:51.760 | First question I was asked.

00:43:52.760 | Of course, it was New York City and a lot of financial people in the room, big crowd.

00:43:58.640 | And someone said, "What did I think of Bitcoin?"

00:44:01.320 | And I answered with my usual tact, "Avoid it like the plague."

00:44:07.080 | And so how good was that advice?

00:44:11.060 | I also added, "And don't tell me I'm wrong when it gets to $20,000.

00:44:16.080 | I'll tell you what it's worth when it gets to a dollar.

00:44:20.160 | Might as well be extreme."

00:44:21.600 | And it got to $20,000 or almost $20,000 a week or two later, and there's the dissent.

00:44:30.600 | It's just a speculation.

00:44:32.480 | So maybe it will do well, maybe it won't, because speculators control their own returns

00:44:39.620 | and things get bid up.

00:44:42.840 | There's no fundamental value here.

00:44:45.200 | And so if you have a little tiny bit of Bitcoin, I wouldn't con you out of it, but I'm disinclined

00:44:54.400 | to do it at all.

00:44:55.680 | As you can imagine, I wouldn't dream of doing it myself.

00:44:58.360 | It's one more speculation, you don't need that.

00:45:02.560 | And now we're going to turn to a little different subject, factor investing.

00:45:07.480 | And I want to start off with the big factor, value stocks versus gross stocks.

00:45:12.720 | And this is the chart that got me into all that trouble in Larry Siegel's article.

00:45:18.240 | And you can see right here what I'm saying, and that is up until 1972, value did much

00:45:25.960 | better, 10.7% return versus 8.8%.

00:45:30.160 | When you take it over all those years, almost, what would that be, 30, 32, 33 years, or is

00:45:37.640 | it 40?

00:45:38.640 | Well, you do the math for me, Mike.

00:45:40.920 | And it's the difference is staggering.

00:45:43.720 | Why would anybody buy anything but value?

00:45:46.320 | Oh, there we are.

00:45:48.120 | It's right there.

00:45:49.120 | Well, even for the full period today, it's 11.3 and 9.2.

00:45:57.320 | And so value is worth $1,141,000, I'm sorry, we should have these in dollars, but it's

00:46:04.640 | up $1,491,000, and gross is up a mere 269,000%.

00:46:12.880 | That's the full period in the chart, '28 to '17.

00:46:16.540 | We're talking about 90 years.

00:46:19.000 | But look what happens in the chart.

00:46:22.360 | The advantage of value is steady, moderate, all the way up until 1972.

00:46:31.400 | And that's where the big advantage is.

00:46:34.600 | And then it's pretty quickly going to come to an end.

00:46:37.640 | And if you go back to 1973, it's an all-time high, that's the ratio of one to the other.

00:46:45.080 | And now it's 5.5.

00:46:47.960 | So it was 4.5 in, it looks like, 1980.

00:46:53.880 | So basically since 19—let's see if I've got this right—well, 1999, let's use the

00:46:59.160 | number on the chart, value has done 6%—1999, that doesn't look right.

00:47:08.800 | Is that right, Mike?

00:47:11.800 | 6.2 and 4.8?

00:47:14.000 | But if you look at 1988 to 1999, value 21.3—I'm sorry, value 15.9 and growth 21.

00:47:23.480 | So you can see there are cycles of growth.

00:47:26.320 | And this is what got me into all that trouble with Larry Swedbro.

00:47:29.800 | First, he didn't—he said, "I'd pick this chart from mutual funds, value and growth,"

00:47:36.580 | and I didn't.

00:47:38.840 | But it doesn't—nobody knows whether value will do better than growth.

00:47:46.280 | All I was trying to do was illuminate the fact that if you think something will be better

00:47:51.160 | forever, it's highly unlikely that it will be better forever.

00:47:55.240 | And when you break down things—and I love this little one-under-one chart we call it,

00:48:00.720 | sometimes the Bogle chart, because that shows you, you know, if you're starting to look

00:48:04.780 | at something and say, "How did growth and value do?" and you see 11.3 percent versus

00:48:09.560 | 9.2, it's a fact, but it's so different when you look at the various cycles of value

00:48:16.560 | and growth.

00:48:17.560 | I mean, it's just—looks like randomness to me.

00:48:20.680 | So I don't believe it.

00:48:24.560 | Another vanguard, first, is we created the first two factor funds.

00:48:36.060 | 1993, I had said in a speech a year or so before that the creation of growth and value

00:48:43.680 | index funds awaits only the creation of growth and value indexes.

00:48:49.080 | And when Standard & Poor's created them in 1993, we quickly started our two funds.

00:48:54.220 | They happen to be the two oldest and the two largest so-called strategic beta funds, factor

00:48:59.200 | funds, whatever.

00:49:01.620 | Don't be mad at me for that.

00:49:06.200 | What I did was I thought very rational, and that is you could accumulate—it was not

00:49:12.180 | a terrible strategy—you accumulate money in growth funds where you had a lower income

00:49:18.480 | and therefore lower tax deduction until you retire, and then you go into value index funds,

00:49:26.000 | have a higher yield, which you want then and need then, a little lower volatility and much

00:49:32.140 | higher income.

00:49:33.820 | So that was the reason for creating them.

00:49:37.180 | And when I did, I was not born yesterday, I said, "Don't trade them.

00:49:45.160 | The returns over the next 25 years have to be the same, growth and value."

00:49:50.940 | I am not sure how many people would have said that, but if you read the end of this, "Resist

00:49:59.540 | the temptation to abandon," this is from a 1994 annual report, "to abandon one strategy

00:50:04.860 | and move to another, inevitably after performance disappointments."

00:50:09.780 | And the next year I was even stronger in my trying to remind investors that these are

00:50:16.660 | not to be traded, they are not factor funds in the sense that you think value is doing

00:50:21.340 | better than growth, or growth is doing better than value.

00:50:23.980 | I am going to read most of this.

00:50:26.460 | You may recall, and I mentioned to you one year ago, that various market segments seem

00:50:30.540 | to enjoy cycles of superiority in their unpredictable returns, but over longer periods their respective

00:50:36.800 | returns tend to converge to be sure investors must stick to their objectives with consistency

00:50:41.660 | and firmness, ignoring the siren songs that suggest that moving money back and forth from

00:50:47.380 | one segment to another will result in a sustainable advantage.

00:50:52.000 | Such market timing is all too likely to be self-defeating.

00:50:55.780 | Whichever of the trust portfolios you have selected, a long-term, steady-as-she-goes

00:51:01.340 | approach is virtually certain to be the most productive strategy.

00:51:06.500 | Now the record, well, my guess, and this is really a good guess, that the returns would

00:51:14.260 | be the same over that 25-year period, 24-year period, certainly came true.

00:51:20.700 | Growth index fund 9.52% and value index fund 9.64%.

00:51:27.740 | You really can't get much closer than that.

00:51:29.780 | I don't know if I was really making a prediction, but it certainly came out nicely for the fund's

00:51:34.860 | first quarter century.

00:51:36.840 | But look at the investor returns below those 9.52 and 9.64.

00:51:42.780 | The investor, these are investor returns, not fund returns, and the investors lag the

00:51:47.380 | fund by 2.2% a year in growth and by 1.3% in value.

00:51:54.540 | So the net result when you accumulate them is the investors fell short of the fund return

00:52:01.620 | by 385%, that's just accumulating all of those twos and ones, and in value index they

00:52:11.280 | fell 264% short.

00:52:18.940 | What more information do you need to say it's just not a good idea to have funds that are

00:52:24.900 | traded because people go with the hot fund of the day?

00:52:29.140 | And so overall, I won't spend too much time on this chart which has too many numbers,

00:52:33.500 | it's my fault, not anybody else's, but just take a look at the bottom line on this

00:52:39.140 | idea of long-term value advantage.

00:52:44.440 | And you can see in 2014 through 2018, the value lost in 2014, lost in 2015, lost big

00:52:55.300 | in 2016, lost in 2017, and lost in 2018.

00:53:02.260 | That is a lot of losses for people that think their future is in value, which just began

00:53:07.340 | with all these factor funds back in around 2014 is when factor funds started to come

00:53:13.860 | into play.

00:53:14.860 | It's what you expect to happen when something gets popular and sometimes it doesn't, sometimes

00:53:20.660 | it doesn't, I'll admit that, but when something gets popular, it's probably a good idea

00:53:26.060 | to avoid it.

00:53:27.340 | And when mutual fund companies are advertising and hyping and promoting these funds and even

00:53:34.580 | giving them shaky records by buying new issues and stuff when they're small, you want

00:53:39.340 | to avoid that as much as you can.

00:53:42.040 | But there we are looking down the chart, the Vanguard growth index, 86 million, almost

00:53:47.060 | twice as big as contender, and value index almost twice as big as its big contender.

00:53:54.620 | So these two lousy ideas prove to be—the two ideas which together make sense separately

00:54:03.100 | do not make sense, and yet here we have what you see there, and that is the—it's not

00:54:11.120 | anywhere near extreme, I'll admit that, as I expected, but you can see that in the

00:54:15.860 | value index, you shoot up from 2.1 billion, I guess, in 2015 to 8.4 billion in 2018, as

00:54:28.660 | all this catches on.

00:54:30.300 | But I think it will go down, and you can see that the other value funds, a number of the

00:54:38.140 | other value funds category have gone down.

00:54:41.620 | So just one more argument, and I know I don't need to make it here, to buying and holding

00:54:51.020 | the market forever, don't shift, stay the course, you've heard that before.

00:54:58.280 | Now Vanguard recently brought out some new factor funds to which Bloomberg said, "Add

00:55:07.220 | the hot sauce, hold the bogo."

00:55:13.340 | I think that's a very accurate description.

00:55:15.220 | They've actually done okay.

00:55:17.540 | There's their return in short term, March through August, and they've done very nicely

00:55:25.300 | in performance, but for better or for worse, they have not attracted much investor attention.

00:55:33.120 | You will see that value is the biggest, but all these other things, I'm sorry, value

00:55:39.820 | is the biggest individual factor, and when they're all collective, that's even bigger.

00:55:44.620 | But they're all in the million dollar mark, and that's small change for us.

00:55:48.860 | So I take, I guess, some comfort from that.

00:55:51.700 | And let me just say this, I try to avoid criticizing Vanguard as much as I possibly can.

00:56:00.700 | I can never, never say something that I believe to be untrue.

00:56:07.300 | And so we have arguments about size, and I get in trouble.

00:56:13.740 | I hear, never directly from anybody, but I hear when I say, "Vanguard may be getting

00:56:19.400 | too big," and I get criticism for that, to which I respond in my usual tactful way.

00:56:27.720 | If every member of our top management isn't worried about getting too big, they should

00:56:32.480 | be fired.

00:56:33.480 | Did I make myself clear?

00:56:37.840 | And another one is international versus U.S., and I don't know if Jason is here today, but

00:56:45.660 | he had a very good article about it last week.

00:56:47.960 | Is he here?

00:56:48.960 | Go ahead.

00:56:49.960 | Where are you, Jason?

00:56:50.960 | I just stepped out.

00:56:51.960 | Well, that was a hell of a time to do that.

00:56:57.440 | You can tell him I gave him an accolade.

00:57:05.840 | But he said in his article, and I'm now on the S&P versus IFA cumulative returns, that

00:57:11.320 | one in the one chart, that you shouldn't write off international, or non-U.S., I should say,

00:57:16.840 | much more accurately.

00:57:19.020 | And there's nothing about it with saying that at all.

00:57:22.040 | He may be right.

00:57:23.040 | He may be wrong.

00:57:24.960 | I may be right.

00:57:25.960 | I may be wrong.

00:57:27.220 | But the first time I made my prediction in 1993 was in my book, Bogo on Mutual Funds,

00:57:32.360 | and I talked about balance and diversification, and I said you do not need to own any non-U.S.

00:57:40.120 | stocks, gave my reasoning, and if you do want to own non-U.S. stocks, no more than 20 percent.

00:57:48.240 | That turned out to be a little bit like growth in value, a remarkable impression comment,

00:57:55.280 | because from 1993 to today, to this date roughly, the S&P is up 9.8 percent a year, and the

00:58:05.360 | IFA is up 6.2 percent a year.

00:58:10.440 | Now like so many other things, those little percentages conceal so much.

00:58:15.840 | If you accumulate those percents, those that stuck with the S&P 500 had a 904 percent gain,

00:58:22.980 | and those that stayed in IFA had a 341 percent gain.

00:58:26.640 | That's a huge difference.

00:58:28.280 | I don't think you ever make that up, not for a long time anyway, but when Jason says you

00:58:34.280 | should not give up on non-U.S., I'm inclined to agree with him, because when something

00:58:39.520 | has done so well for so long, I mean look at that trend from about 2005 to 2018, and

00:58:48.320 | look at the overall trend from 1993 to 2018 with that one interruption, and it seems it's

00:58:55.440 | not going to go on forever, but I'm still a U.S. market believer myself.

00:59:04.640 | Now let's talk about competition, Vanguard and the mutual fund marketplace, and something

00:59:11.600 | difficult is going on here.

00:59:13.160 | I presume it will persist for the end of the year, but I don't even know that.

00:59:17.680 | Look at Vanguard's cash flows.

00:59:20.080 | These are annualized.

00:59:23.200 | The 2018 data are annualized, and from $359 billion inflow last year, it looks like we'll

00:59:30.240 | do around $212 billion this year.

00:59:33.440 | That's a big drop.

00:59:36.000 | I think when I talked to you last year, and we were at the $359 billion mark, I raised

00:59:41.880 | the question of what is enough?

00:59:43.760 | Well, apparently $359 billion is enough, and I don't regard this with any panic or any

00:59:50.880 | concern.

00:59:51.880 | I regard it as natural, and this business is getting more and more competitive, and

00:59:57.600 | I'll show you that in a second, but I can't tell you that that gap is going to hold through

01:00:03.480 | the year.

01:00:04.480 | We still have September, October, November, and December, but for the first eight months

01:00:08.560 | annualized, we're way behind last year, and I'm sure we'll end the year behind last

01:00:13.360 | year no matter what.

01:00:16.440 | Now, when we look at that cash flow slowdown, and this is year-to-date.

01:00:25.240 | We didn't annualize these data, and you'll see that in 2017, we did—this year-to-date,

01:00:39.560 | I can't even read my own writing—our volume on traditional index funds, that would be

01:00:46.840 | our big strength, is down from $137 billion to $75 billion.

01:01:00.960 | Our ETFs are down even more, $94 billion to $49 billion.

01:01:07.920 | And our total funds are down by more than half, $244 billion to $112 billion.

01:01:16.400 | That's essentially what you saw in the previous chart.

01:01:19.080 | So when you look at the overall picture, you'll see that it's—except for TIFs, traditional

01:01:27.000 | index funds, where our market share is going from 81% to 60%, and that may be some big

01:01:32.620 | liquidations from—I just don't know.

01:01:35.080 | Maybe liquidations up, maybe volumes down, but it's certainly a warning sign.

01:01:40.560 | And our ETFs were 33% of ETF business last year, and 35% for the first eight months this

01:01:50.200 | year.

01:01:51.420 | So that's actually improving.

01:01:53.320 | And our total share of mutual fund business, despite that big drop, is at 53%.

01:01:58.520 | And I don't think it's possible.

01:01:59.880 | We have an industry issue as well as, to some extent, at least a Vanguard issue.

01:02:04.600 | And we're always going to be based on the industry, one way or the other.

01:02:09.920 | And if the industry does well, we will do well.

01:02:13.240 | Maybe better, maybe worse, but well, and the same in reverse, and vice versa.

01:02:18.280 | So it's gotten to be a very competitive business.

01:02:20.560 | You know all that.

01:02:23.160 | Most recently, Fidelity with zero funds—and they even have zero in the name of the funds.

01:02:29.240 | They can't very easily walk away from it.

01:02:31.400 | So they're going to be selling their index funds at zero, and they've reduced accordingly

01:02:36.040 | their other funds.

01:02:37.880 | And that's going to be tough competition, particularly when you get into the million

01:02:43.480 | or two million or the three million or four million.

01:02:45.440 | That's going to be tough competition for new business, and I think not, I hope, not

01:02:51.720 | for old business, because if somebody with $3 million with a cost basis of $1 million

01:02:58.040 | shifts into Fidelity and pays a 26% tax on $2 million, it's going to take a long time

01:03:05.640 | for that 0.1% or 0.4% to be justified, that saving.

01:03:12.480 | So it's not the end of the world.

01:03:14.560 | And it is, you know, when you think about it.

01:03:18.720 | And I like to look at things this way, and I think, what would I do if I was in the box

01:03:25.320 | that Fidelity was in?

01:03:28.240 | They mocked the index fund at the beginning.

01:03:30.400 | Ned Johnson said, "Our clients would never be satisfied with market returns."

01:03:38.780 | And they weren't getting them either, that's another story.

01:03:43.240 | And so now they are on the bandwagon.

01:03:46.040 | And so we'll talk, there's another little chart about which will show Fidelity.

01:03:51.800 | But they've clearly made an effort, or are making an effort, to make a big show in the

01:03:57.240 | index business and make nothing.

01:04:01.240 | Make nothing.

01:04:02.240 | Well, how is that possible?

01:04:04.620 | Because the rest of their business last year, all businesses, not just the fund business,

01:04:09.300 | but the recordkeeping business and so on, had a net profit, operating profit of, was

01:04:14.120 | it 2.9?

01:04:15.120 | Was that a yes?

01:04:20.120 | And the profit of their company is 2.9 billion.

01:04:23.880 | And it really doesn't matter whether they bring in this money at zero basis points or

01:04:28.000 | two basis points or three.

01:04:30.420 | It's going to be a big loss leader for them.

01:04:32.440 | But they've got this huge package.

01:04:34.760 | And so it's what I would do, I think, if I were Fidelity.

01:04:38.320 | You know, you got to break in, you blew it for all those years.

01:04:41.640 | Let's do something wild and dramatic and advertise the hell out of it.

01:04:45.320 | And so that's what they have done.

01:04:47.240 | Nonetheless, we still dominate the industry cash flow, Vanguard, up to date.

01:04:53.520 | It's amazing that since 2015, actually since 2014, January of 2015, the industry has done

01:05:01.680 | $1.2 trillion, of which Vanguard has done $961 billion.

01:05:08.080 | And all other firms put together $241 billion.

01:05:13.560 | So we've been doing 80 percent.

01:05:15.280 | Eighty percent, I mean, it's so unprecedented, it almost takes your breath away.

01:05:23.560 | But you know it will not continue.

01:05:25.880 | Anyone who thought that would continue is just a damn fool, because things don't go

01:05:29.280 | on forever.

01:05:30.280 | Trees don't go to the sky.

01:05:31.280 | You've heard all the things.

01:05:33.580 | But indexing is still the key to what we do here at Vanguard.

01:05:37.400 | I guess I'm still allowed to say "we."

01:05:39.920 | And you can see that it's helped our whole business.

01:05:44.280 | And we started at 5.9 percent market share back in '74, and stock and bond funds only,

01:05:53.280 | and actually went down in 1986.

01:05:55.560 | I forget how I explained that in 1986, but I probably didn't talk about it.

01:06:00.480 | That would be more likely for me.

01:06:02.800 | Talk about how much our assets have grown, how much our shares have fallen.

01:06:06.640 | And then it's been onward and upward almost every year, if not every year, higher market

01:06:11.040 | share.

01:06:12.040 | At 24.6, no one else has ever gotten anywhere close to that.

01:06:16.520 | The old industry maximum was 15 percent, and we're way ahead of that.

01:06:21.200 | So that is going to be very hard to sustain in a more competitive world.

01:06:26.480 | So let's see what the competitive world looks like.

01:06:29.680 | Here are the assets of our large competitors.

01:06:32.620 | We were at this time 4.9 trillion, Fidelity 2.1 trillion, so we're 2.8 trillion larger

01:06:47.280 | than Fidelity, and we were $204 billion back at the beginning of that chart.

01:06:53.960 | That's one of the most remarkable turnarounds, and it gives me a lot of comfort in the sense

01:06:58.040 | that it's helped a lot of people to invest more wisely.

01:07:01.520 | You can see BlackRock is growing steadily, but still even smaller than Fidelity.

01:07:06.360 | American Funds, which uses stockbrokers very widely, is kind of holding its own on assets

01:07:12.920 | and losing market share.

01:07:15.120 | And then the new entrant, State Street, is of course $751 billion, is by and large an

01:07:20.680 | index fund.

01:07:22.000 | So we have Vanguard, BlackRock, and State Street, all of the big three of indexing.

01:07:29.400 | Three of exchange-traded funds.

01:07:33.640 | And I also thought we didn't do this, we showed you that chart last year, but I thought

01:07:37.440 | we'd do this, show this chart.

01:07:39.320 | These are kind of the winners of the last 18 years, this century so far.

01:07:45.200 | And here are people who don't look like such good winners.

01:07:48.120 | You can see they've grown a lot, starting with Invesco, and that's the green line.

01:07:54.680 | They've grown from $297 to $434 billion, way behind the industry.

01:07:59.680 | Putnam.

01:08:00.680 | Poor Putnam, I mean, I tried to get them to mutualize, you probably heard that.

01:08:06.040 | It's in the new book, I tell the story of trying to get them to mutualize.

01:08:10.000 | And their assets have gone from $234 billion to $76 billion.

01:08:15.400 | They're down, what would that be, 60% or something?

01:08:21.840 | And they're 80%, I don't know.

01:08:23.280 | You do the percent for me, Mike.

01:08:26.840 | Actually down in assets in this boom period for everybody else.

01:08:30.200 | And I know, this proud old name, went the wrong way, and is paying the price for it.

01:08:37.920 | And anybody that looks at that chart from Vanguard, who doesn't realize there is such

01:08:42.120 | a thing as the wrong way, and we better keep doing it the right way, or we will be doing

01:08:46.440 | exactly the same thing.

01:08:48.600 | And Janus had its ups and downs, as you can see.

01:08:51.480 | I guess that's the green line.

01:08:54.880 | And it's down a little bit after a big bump in 2006.

01:09:00.600 | They're just steadily down.

01:09:03.760 | The one that stands out here is, of course, PIMCO, started at $55 billion, and is now

01:09:08.400 | $375 billion.

01:09:11.400 | No mean accomplishment.

01:09:12.400 | But when they had the great Bill Gross, who, alas, my friend Bill Gross, is not doing so

01:09:18.120 | well with the fund he runs for Janus, but they had his, and when he left, look at that

01:09:22.520 | drop in assets.

01:09:24.080 | And that's another risk to which Vanguard is not exposed.

01:09:26.920 | We don't have anybody that was ever that dominant in assets.

01:09:30.400 | So there's the other side of the street, how difficult this business is.

01:09:35.080 | I want to spend a minute now on kind of a fun thing, and that is talk about two companies

01:09:40.680 | that were big competitors at the beginning of the period.

01:09:43.520 | When I came into this business, Vanguard being much smaller, $154 million compared to $386

01:09:55.720 | million per mass investor's trust, and that, you will recall, was the company that was

01:10:05.040 | written up in the article in Fortune that caught my eye and brought me into this industry.

01:10:09.400 | So I have a kind of a kinship with them, at least I feel that way.

01:10:15.240 | And you can see that we had pretty much caught up to them by 1980, and now the semi-log chart

01:10:22.260 | doesn't really do justice to the change, but the numbers speak for themselves.

01:10:32.600 | We're both $2.6 billion in 1980, and now we're $4.6 trillion, and they are $234 billion.

01:10:43.760 | God, I can't keep the damn thing straight, I must be getting old.

01:10:51.280 | It's fascinating to see how that could happen, and that's this next chart which puts it into

01:10:56.760 | a little different perspective.

01:10:58.840 | That's market share for the two of us, 15% MIT, and now Mass Financial, they brought

01:11:06.560 | a new company that ran MIT and other funds, 15%, 7%, 3%, 1%.

01:11:14.240 | They really can't get any, you can get lower than 1%, but they're just kind of holding

01:11:18.500 | their own now, as you can see, 1% in 2010, 1% in 2018.

01:11:24.400 | Their vanguard is 6, 5, crosses the line, 5, 15, 25.

01:11:31.680 | How could that have happened?

01:11:33.600 | Well, read the note in the middle.

01:11:37.360 | Through 1969, Mass Financial was run by its own trustees.

01:11:43.520 | It was sort of a quasi-vanguard, they didn't do distribution or anything, and they didn't

01:11:48.520 | do administration, but the trustees ran it, and it was very cheap.

01:11:55.840 | Expense ratio in 1969 was 0.20.

01:11:59.200 | Then they went private.

01:12:00.520 | The trustees, in their wisdom, privatized the company and gave themselves the stock.

01:12:07.240 | Trustees give themselves the stock, I mean, I find that kind of not so good, and the expense

01:12:14.160 | ratio immediately goes up to 0.75, not immediately, but in a decade.

01:12:19.480 | And then, not satisfied, I guess, with how well they're doing, they sell to Sun Life

01:12:24.160 | of Canada.

01:12:25.520 | So in 1980, since 1980, they've been owned by a financial conglomerate, and the expense

01:12:31.600 | ratio has gone up to 1.2% for the average fund.

01:12:35.940 | That's six times what it was in 1969 when these lines began to think about crossing.

01:12:43.320 | So what about Vanguard?

01:12:45.040 | We were private until 1960, expense ratio of 41.

01:12:50.120 | We were public until 1974, that was a bad thing, and the expense ratio went up to 0.79.

01:12:57.160 | And today, we are mutual, and the expense ratio is 0.15.

01:13:02.620 | So it's an interesting story that in 1974, early in the mid-1974, as our directors at

01:13:10.020 | Wellington were trying to figure out the best way whether to go along with my idea to mutualize.

01:13:17.200 | And so, of course, they went up to Boston to see the trustees of Mass Investors Trust,

01:13:20.920 | and the trustees of Mass Investors Trust said to them, "You guys must be crazy.

01:13:27.500 | We just did the opposite thing.

01:13:29.400 | We know what's going on.

01:13:30.400 | We did the opposite, and here it is.

01:13:32.520 | You tell me who's crazy there."

01:13:36.080 | So they withstood that, and the directors blessed them, and it all lies in, I think,

01:13:45.280 | mutualization, trying to run mutual funds for their shareholders and not for their managers.

01:13:51.240 | And we'll hear more and more and more about that.

01:13:54.120 | So Vanguard share of index assets keeps rising.

01:13:58.160 | Believe it or not, I mean, we're at 84% back in 1985.

01:14:01.760 | We didn't have much competition at all, and we dropped to 44%, but since 2006, we are

01:14:07.320 | actually going over the 50% mark in index fund total assets.

01:14:12.680 | That number is going to come down.

01:14:16.360 | Our regular share of assets is, in TD, traditional index fund, obviously my choice as a way to

01:14:22.760 | invest is come down a little bit, but our huge growth in ETF, share of ETF index assets

01:14:32.280 | is all the way up to 35% now.

01:14:35.200 | So it's all different, and we have a little problem of concentration, and I'll talk about

01:14:43.760 | that in a minute a little more, but -- what's my time?

01:14:53.440 | Is it okay if I go on a little bit longer?

01:14:56.920 | I thought you'd say that.

01:14:59.920 | Sorry, just too much to cover.

01:15:04.280 | We have an issue about the concentration of index fund assets in three firms, and I have

01:15:10.920 | used the word oligopoly, which I think is the correct word, or in management, properly

01:15:16.240 | perhaps.

01:15:17.240 | I don't like the term oligopoly, but certainly the term big three fits this with dominated

01:15:23.680 | by ETFs entirely, and we're up there because of our share of the TIF market, and so you

01:15:33.000 | see the big three with 71, 80% of total index assets, and that is a lot of concentration,

01:15:46.640 | and that is a lot of firms, but an oligopoly usually is firms that get together and keep

01:15:51.760 | prices high, and the problem with this oligopoly, if such should be, is that we keep prices

01:15:57.380 | so low that no other providers want to enter the business except Fidelity, and they have

01:16:02.800 | their own entryway to do it, and they will become more important, so they will become

01:16:06.960 | one of the big four, I think, in a period of a decade.

01:16:14.000 | Concentration of assets, I'm going to skip that one that I just talked about.

01:16:18.720 | Fidelity is in there, 12% of the TIF business, and Fidelity's equity assets are now 25% of

01:16:27.160 | their total, index assets are 25% of their total equity assets.

01:16:32.200 | It's growing a lot, but there are threats to the index fund, and they are big threats,

01:16:38.400 | and I don't know, can I have that sheet, Mike, I don't have the same thing you do.

01:16:46.640 | Do you have it, Andy?

01:16:48.640 | We won't wait.

01:16:51.320 | The first one is, it's a big move, academic move, to ban the ownership, common ownership

01:17:01.480 | of funds in a given industry.

01:17:04.200 | That is to say, a fund can own no more than one airline stock, one bank stock, one this.

01:17:11.800 | No large investor can own more than one company per industry.

01:17:16.200 | That's in the abstract, I don't know what to call it, it's not ridiculous, but it's

01:17:21.160 | not true.

01:17:22.560 | We have probably seven airline stocks.

01:17:25.040 | By the way, the only example I ever use is the airlines.

01:17:29.920 | Their businesses are very different, but it would do away with the index fund, and the

01:17:37.000 | S&P 500 index fund would become the S&P 173, let me say.

01:17:44.520 | I've been after these writers for two years to tell me what that number is.

01:17:49.920 | Okay, we're going to do what you say.

01:17:52.560 | How many stocks do we own, so I can tell you the S&P 500, and in two years, I have yet

01:17:57.600 | to get an answer.

01:17:58.600 | I don't know why it's so difficult.

01:18:03.920 | They have their view that's anti-competitive, legal implications, the Clayton Act bans possible

01:18:14.120 | cooperation among companies, and they want to argue that owning all airline stocks, using

01:18:21.080 | their example, we're telling the airlines keep prices high and keep wages low, and we'll

01:18:28.200 | make sure your competitors do the same.

01:18:30.560 | As if we had that much of a voice with the airlines.

01:18:34.400 | So there's that issue, and there's who decides what an industry is.

01:18:39.120 | It's very complicated.

01:18:40.120 | It ends up probably being a government bureaucrat, and it would destroy the equity, it would

01:18:47.280 | destroy the S&P 500, and it would be a terrible problem for people like American Funds, which

01:18:52.920 | has lots of holdings in each industry, but the worst impact would be on the large index

01:19:00.960 | funds.

01:19:02.160 | And they're well-meaning, perfectly decent people.

01:19:04.960 | Actually one of them is a friend of mine who was the valedictorian at Princeton in 2007,

01:19:09.520 | and he's still a friend of mine, he's allowed to think what he wants, but they write pretty

01:19:15.360 | violently about, they tell us that the index fund is the cause of the golden age, the gilded

01:19:23.120 | age that we have today.

01:19:24.120 | Well, that's a little pushy.

01:19:27.320 | The other threat is, I'm going to use this example, the hidden power of the Big Three.

01:19:32.440 | This is a concentration of ownership.

01:19:34.880 | The likelihood that in the near future, roughly 12 individuals, I would use a smaller number,

01:19:40.640 | will have practical power over the majority of U.S. public companies.

01:19:45.480 | And that is a concerning issue, a real issue, unlike the issue of common ownership.

01:19:51.560 | It's almost the other side.

01:19:54.440 | And think about that.

01:19:57.780 | They say 12, I'd say six individuals might be more like it, will have practical power

01:20:02.920 | to control a majority of U.S. public companies.

01:20:06.520 | Right now, Vanguard's about eight, BlackRock's about eight, and State Street's about four.

01:20:15.460 | And that's 20% now.

01:20:17.680 | How long will it take that 20% to go to 30%?

01:20:21.120 | I don't know.

01:20:22.120 | It's going to have to slow down.

01:20:24.000 | And I think I can guarantee to you, this might sound like a funny statement, that we will

01:20:30.120 | never get there.

01:20:32.040 | U.S. public policy will never permit Vanguard or any other large giant institution from

01:20:40.520 | having practical power over the majority of U.S. public companies.

01:20:44.080 | I can't tell you why it will happen, I can't tell you when it will happen, but I can tell

01:20:48.840 | you it will happen.

01:20:51.000 | It's just not going to be allowed for a few individuals, really, chief executives of these

01:20:57.480 | management companies, these individuals, to control American business.

01:21:03.800 | I mean, it would be absurd.

01:21:04.800 | Who the hell are they?

01:21:05.800 | I mean, I was one of them, I know.

01:21:07.600 | I couldn't control American business.

01:21:09.040 | I wouldn't even want to think about trying.

01:21:11.960 | So that's yet two big issues, but I'm sure the S&P 500, as everybody knows, the greatest

01:21:21.520 | invention for the individual investor in the history of finance, we're never going to get

01:21:32.000 | a Congress to approve this kind of divestiture, leaving aside the tax impact and all that.

01:21:41.760 | So it's not going to happen that way, but growth will slow down and there may be a whole

01:21:48.280 | lot of new ways to deal with the issue of governance.

01:21:51.560 | I'm going to skip the next two in the interest of time, it's about time.

01:21:56.160 | Just to say on these two, I'm just pointing out that we are really more of an index company

01:22:01.200 | than anybody knows or thinks, because so many of our stocks are so closely correlated with

01:22:07.840 | their target indexes or target competitive groups.

01:22:12.460 | In Wellington Fund, 97% of Wellington Fund's performance is explained, for example, by

01:22:19.880 | the performance of the S&P 500, 65%, and the Barclays Bloomberg bond index, total bond

01:22:31.120 | market index, 35%, and its competitors too.

01:22:35.920 | So we have just about all of our big funds have that kind of a number, 95, 96, 97.

01:22:42.280 | Time caps an exception, and a nice exception.

01:22:45.300 | Now as to future returns, you've probably read what I've had to say about this, we're

01:22:49.040 | looking for, we'll go through this quickly, Mike, 4% for stocks, and you can see 6% fundamental

01:23:01.080 | return minus 2% speculative return, lower valuations.

01:23:06.120 | And for bonds, way below, since 1974, 8% versus 3.5%.

01:23:15.000 | So I think combination returns of bonds and stocks could be, and we will use this chart,

01:23:22.960 | could be more like 4% compared to 12%, these are equities only, 12% over Vanguard's history.

01:23:30.440 | 12%.

01:23:31.760 | I mean you guys that have been investors that time, most of it, last, well I've got 60 years

01:23:39.280 | here, nobody's been that, but 60 years is kind of an investor's lifetime today.

01:23:45.160 | And look what happens when you compound at 12% versus 4%.

01:23:49.040 | And the math is easy, you divide that number into 72 and see how often it will double.

01:23:54.320 | So at 12% you double every 6 years, and at 4% you double it every 18 years.

01:24:00.200 | So at 4% after 60 years, your original dollar goes to $11, and at 12% your original dollar

01:24:08.680 | goes to $898.

01:24:11.800 | So small differences in return, or even big differences in return, big differences in

01:24:15.880 | return, more or less than I expect, suggest that we are basically, our reasonable expectations

01:24:23.960 | are better save more money, better save more money, better get more costs out of the equation,

01:24:34.720 | and so when I get to, I'm going to go over to 72 now, I guess I'm not alone.

01:24:43.440 | My number for future equity returns are around 4%.

01:24:47.040 | It's shared by just about everybody, it's amazing, AQR, which is Cliff Asness, 4.2%,

01:24:54.180 | Keith Ambach, Canadian, writes a really refined, thoughtful newsletter, 4.5%, BlackRock 4,

01:25:02.560 | Vanguard 3-5, GMO, that's Jeremy Grantham, minus 4.7, that's the only outlier, State

01:25:09.480 | Street 4.1.

01:25:12.760 | So do I take cover in this, being the same as everybody else?

01:25:18.160 | No, because I was brought up with the idea that the crowd is always wrong.

01:25:23.240 | So who knows what to expect?

01:25:24.960 | You don't need to take that as gospel.

01:25:28.800 | And in the wrapping up, I'm going to skip the wrapping up page and go to

01:25:38.680 | the book.

01:25:39.680 | And what number do you have for the Princeton?

01:25:42.920 | No, I want to do—where does this go?

01:25:48.120 | All right, okay, now to the book.

01:25:53.440 | This will be a little fun way to end.

01:25:58.280 | I chose the title of "Stay the Course" after a foray into a couplet by Johnny Cash,

01:26:06.320 | which ends, "The songs I sang will still be sung."

01:26:10.240 | And everybody hated the title except me.

01:26:15.160 | And that made me even more determined to do it.

01:26:19.480 | But then Johnny Cash of the state wanted $25,000 for the use of that.

01:26:26.200 | And I told the publisher, I was about to tell the publisher, "Tell them $2,500 and that's

01:26:30.440 | it.

01:26:31.440 | We're out of here."

01:26:33.040 | I woke up the next morning, and I thought, "The hell with that.

01:26:36.760 | We're out of here anyway."

01:26:39.560 | So I changed it into a much better title, "Stay the Course, the Story of Vanguard

01:26:43.920 | and the Index Revolution."

01:26:46.480 | And it turns out to be not just an investor's motto, a winning investor's motto, stay

01:26:51.960 | the course with your investment program, but an entrepreneur's motto.

01:26:56.600 | A lot of it in the book is a lot about this, about how tough it is to really build a company

01:27:01.960 | out of nothing, to build a skeleton into a full body.

01:27:06.320 | And so it's also the title of a book, as well as those mottos, those two different

01:27:11.000 | mottos for investors and for entrepreneurs.

01:27:14.880 | And here's the cover.

01:27:17.880 | I saw the cover of Jim Comey's book, and I said to the publisher, "I am really

01:27:23.520 | pain in the neck."

01:27:24.520 | And I said, "I want the cover of my new book to look exactly like that.

01:27:28.740 | So if you think this looks exactly like Jim Comey's book cover, you're right."

01:27:35.920 | Now we're running much too long, I'm sorry.

01:27:42.400 | We'll hand these out, I think.

01:27:44.540 | But we have great endorsements.

01:27:48.840 | The nicest one by far from Paul Volcker, who really reveled in the book.

01:27:54.280 | Another one from Cliff Asness, you'd think a competitor who's into alternative investments.

01:28:02.380 | Very big, a couple of hundred billion dollars.

01:28:06.420 | Might not like indexing, he loves indexing, and I think you could say he loves me.

01:28:11.700 | Jim Collins, another one, best-selling author of Good to Great, and co-author of Built to

01:28:17.000 | Last, and finally the wonderful Andy Lowe, professor at MIT, who I have a very close

01:28:23.860 | relationship with and interviewed with him and all that kind of thing.

01:28:27.880 | So it has a good heritage.

01:28:31.220 | It has a—here's the—state of the course, here's the table of contents.

01:28:35.580 | You won't be able to read them now.

01:28:38.060 | But it just takes Vanguard through various eras in the tough—it was not easy to build

01:28:46.300 | Vanguard, and it took a long time for indexing to catch on.

01:28:51.160 | And you'd be amazing, at least I was amazed, at the number of things I had done that we

01:28:57.100 | had to do to stay alive.

01:28:59.460 | We had to create a lot of funds, and most people didn't like any of them.

01:29:06.260 | Everybody loved Prime Cap, by the way, afterward.

01:29:12.800 | So I wrote the book around the idea of landmarks, and with the seven or eight steps that had

01:29:21.700 | to be taken to get that little skeleton doing very little of anything when Vanguard started,

01:29:28.380 | the new company, 28 employees, to get into the largest company in the world.

01:29:33.480 | And so it was a landmarks kind of book, and I read it about the third time and I thought,

01:29:42.380 | this book really stinks.

01:29:46.300 | I didn't like the way it was written, because it left out the most important thing of all,

01:29:51.640 | and that is the character of Vanguard, what I tried to build into this firm in terms of

01:29:57.380 | people, including all of you, including the people that work there and work here, and

01:30:04.240 | all of our shareholders.

01:30:06.160 | And so I added a chapter called Caring, the Founder's Legacy, and then I changed the

01:30:11.760 | earlier chapters, amended them, and I think we actually have a pretty good book.

01:30:15.880 | That's the first part.

01:30:16.880 | That's the guts of the book, the first ten chapters.

01:30:21.000 | Part two is chapters on the individual funds.

01:30:23.760 | You know, you can talk about Vanguard till hell-freezes over, but if you don't talk

01:30:27.920 | about Wellington Fund, if you don't talk about the index fund, if you don't talk

01:30:30.840 | about the Windsor funds, don't talk about the bond funds, the Prime Cap funds.

01:30:35.480 | And then in chapter 16, the funds that failed.

01:30:39.680 | This book is, by the time you get through reading this book, if you do, you'll think

01:30:43.160 | that Vogel is probably the biggest jerk ever to come across.

01:30:47.120 | I linger on my mistakes, of which there have been so many.

01:30:51.040 | And then part three, the future of investment management, with the last minute only ten

01:30:57.620 | days ago, I decided to change that from being one chapter to three.

01:31:02.140 | So the three chapters of the fund industry becomes mutual, the challenge to the S&P 500

01:31:07.440 | index fund, which I've discussed, and then chapter 19 is the Financial Institutions Act

01:31:12.000 | of 2030.

01:31:13.200 | We will get new legislation because the old legislation doesn't fit the new industry.

01:31:17.800 | So I thought I'd learn about the future of investment management by having a private

01:31:23.320 | seminar.

01:31:24.320 | I picked Princeton University to do it in and invited the smartest people, the most

01:31:29.600 | independent people I knew, a very small group.

01:31:32.520 | Do you want to put them up?

01:31:35.280 | There we are.

01:31:36.720 | And there's Cliff Asnesh, you'll see.

01:31:40.600 | There's Gus Sauter.

01:31:41.600 | I don't know where it is.

01:31:47.000 | Here it is.

01:31:48.000 | No.

01:31:49.000 | Here we are.

01:31:51.720 | I can't see what you can see.

01:31:54.640 | There's Andy Lowe reading over.

01:31:57.360 | There's Eric Posner, who's one of the leaders of this no more than one company per industry.

01:32:03.600 | I thought it was a good idea to invite the enemy.

01:32:06.200 | There's John Reckenthaler, not there as a journalist, but as someone who knows the industry

01:32:10.260 | inside and out.

01:32:12.280 | There's me.

01:32:13.280 | There's Burt Malkiel.

01:32:14.280 | There's Ted Aronson, local investment advisor, very outspoken.

01:32:17.200 | There's Gus.

01:32:18.200 | There's Cliff Asnesh.

01:32:19.200 | And there's the biggest contributor of all, Michael Nolan.

01:32:29.840 | And it was a fun day.

01:32:33.640 | We started around 10 and finished at 3.

01:32:37.040 | But this entire group sees very little change ahead.

01:32:41.960 | They think indexing is going to grow and grow and grow to 75%.

01:32:44.680 | Now, I do not believe that.

01:32:47.080 | So I got it more as they're wrong.

01:32:52.520 | And so I wrote my chapter.

01:32:53.520 | I'd written my chapter before.

01:32:54.520 | I didn't see any reason to change it on the future of investment management.

01:32:57.660 | That was the subject of the forum.

01:32:59.800 | But it was an interesting day to see all of us together, advocates and detractors, really

01:33:06.000 | good minds, really outspoken minds, people that are not known for shyness, led by a person

01:33:13.640 | that was not known for shyness, I think.

01:33:17.120 | So that's the story of the last chapter.

01:33:20.720 | Then there are a bunch of photos.

01:33:21.720 | You'll like them.

01:33:22.720 | I stuck two in here.

01:33:24.920 | One is these two handsome guys.

01:33:28.080 | One is Blair and one is Princeton graduate yearbook pictures.

01:33:30.320 | God, he was a good-looking kid at Blair, and then he started to get fat.

01:33:36.240 | And then as a peculiar coincidence at the Nassau Inn and Princeton Nassau, I guess Nassau

01:33:43.960 | Inn, the Yankee Doodle taproom has kind of a wall of fame, famous Princetonians.

01:33:50.080 | And when I was at Princeton, they were all football players and maybe a couple of basketball

01:33:54.220 | players thrown in.

01:33:56.840 | But they've now changed that, and they have business people there.

01:34:00.720 | And right next to each other are what I call two Princeton entrepreneurs.

01:34:06.400 | One is me, people who have been the most destructive entrepreneurs of the modern age, right next

01:34:12.000 | to each other on the wall of fame of the Yankee Doodle taproom.

01:34:16.120 | There's John C. Bogle, and that's, for those who can't read it or don't recognize him,

01:34:19.840 | is Jeffrey P. Bezos.

01:34:23.240 | So he did a little better financially than I did.

01:34:28.080 | And you'll also enjoy—this is just a fun one—my mother, who had only lived another

01:34:35.320 | year, took a picture of me with a little brownie hawkeye and getting my AB degree in 1951.

01:34:44.080 | You'll see that over on the left here.

01:34:46.380 | And then when I got my honorary Doctor of Laws degree, there I am again, two different

01:34:51.320 | degrees.

01:34:52.320 | So it's fun to have that little run-through time.

01:34:57.640 | And now I am with a decently long quote at the end.

01:35:04.120 | Let me say that the book ends with something that I think all of you will enjoy more than

01:35:08.440 | anything else in the book.

01:35:10.000 | I decided I wanted to incorporate a sort of memoir, A. And B, I decided I didn't want

01:35:16.560 | to write anymore.

01:35:18.320 | Writing is very hard for me to do, particularly at this age, I think.

01:35:21.760 | You know, you have transitions, you've got to worry about reputation.

01:35:25.000 | So I didn't want to write a memoir as such.

01:35:27.860 | So what I decided to do, for the first time in history—and I think this will never be

01:35:31.400 | adopted by anybody else, but if it is, it worked well for me—I just took the alphabet

01:35:39.200 | and went right through it and things that mattered to me during my life, anywhere from

01:35:43.840 | advice to—I don't know, there's obviously four or five paragraphs about Princeton, four

01:35:49.520 | or five paragraphs about Blair, two or three paragraphs about American Indian College,

01:35:54.400 | and then quotes that I've liked.

01:35:57.600 | The shortest one is, under G—I have big initials there—under G, "God," and it says, "Is

01:36:09.400 | there a God?

01:36:12.400 | Yes."

01:36:14.080 | That's it.

01:36:15.080 | I mean, I didn't know what to add to that.

01:36:20.440 | And I'm just going to quickly—it's a quirky way of doing it, but it's sort of

01:36:25.160 | fun, and some is very sad, because there's been a lot of sadness in my life.

01:36:31.040 | I mean, I have far more joy than sadness, but you'll see it, it'll come out to you.

01:36:37.040 | And then, I wanted this to be the last quote, and so it's under—it was going to be the

01:36:42.600 | universe, but then work would come next, and I wanted this to be the last quote.

01:36:48.240 | So this is the final write-up in the memoir part of the book, in the end of the book.

01:36:55.000 | You and Me and the Universe.

01:36:57.680 | Our Earth is but a single planet in the solar system, which in turn is part of the Milky

01:37:02.780 | Way galaxy, our huge galaxy, a hundred thousand or so light-years in diameter.

01:37:10.720 | Our galaxy, in turn, is but one of at least 200 billion galaxies in our universe, each

01:37:17.760 | galaxy with more than 100 billion stars.

01:37:22.920 | If you want to measure the relative importance of a single human being, just do the math.

01:37:30.240 | And yet, and yet, to dwell on our own insignificance in the grand scheme of things doesn't seem

01:37:37.840 | particularly useful.

01:37:40.120 | There's work to be done here on Earth, and we best get on with it.

01:37:43.920 | We might begin by acting before it's too late to save our own planet.

01:37:48.960 | Beyond that, our task is to live productive lives, to raise our families, to contribute

01:37:54.520 | to our communities, and to serve our nation and our global society.

01:38:00.760 | That's the end of the book, and that is, at tortuous end, my remarks this morning.

01:38:06.000 | Thanks for bearing with me.

01:38:27.440 | It's so great to be with you all, and I thank you for another standing O. I don't

01:38:54.000 | know how many more years I can do this.

01:38:56.160 | Nobody knows.

01:38:57.560 | I'm not saying I can, but you'll see a little poetry at the beginning of my book,

01:39:02.320 | which suggests—it's a fun book.

01:39:06.280 | Actually, I love where it is now.

01:39:08.880 | I hope it'll come out.

01:39:11.080 | But it's just such a thrill to be able to be with you—I don't know if I'd make

01:39:14.920 | it or not—and to see all of you, to get your enthusiasm, really feel it as well as

01:39:24.800 | hear it and see it.

01:39:27.760 | Just like the "thank you very much," it means everything to me and validates my long

01:39:32.920 | career.

01:39:33.920 | Thank you.

01:39:34.920 | Thank you, Jack.

01:39:35.920 | [Applause]

01:39:35.920 | [End of transcript]

01:39:37.760 | 1

01:39:38.760 | 1

01:39:39.760 | 1

01:39:40.760 | 1

01:39:41.760 | 1

01:39:42.760 | 1

01:39:43.760 | 1

01:39:44.760 | 1

01:39:45.760 | 1

01:39:46.760 | 1

01:39:47.760 | 1

01:39:48.760 | 1

01:39:49.760 | 1

01:39:50.760 | 1

01:39:51.760 | 1

01:39:52.760 | 1

01:39:53.760 | 1

01:39:54.760 | 1

01:39:55.760 | 1

Bogleheads® Conference 2018 -John Bogle Keynote 2018

Chapters