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Bogleheads® 2022 Conference – Burton Malkiel in Conversation with Rick Ferri


Whisper Transcript | Transcript Only Page

00:00:00.000 | (audience applauding)
00:00:03.160 | Okay, Dr. Burton Malkiel is an economist and a writer,
00:00:09.360 | most famous for his classic finance book,
00:00:11.960 | "A Random Walk Down Wall Street,"
00:00:14.400 | now in its 12th edition,
00:00:16.920 | and the new 50th year anniversary edition
00:00:21.920 | coming out in January.
00:00:24.520 | Look for that.
00:00:26.200 | Professor Malkiel is the Chemical Bank Chairman's
00:00:28.640 | Professor of Finance of Economics at Princeton University,
00:00:32.640 | a two-time chairman of the Economics Department there.
00:00:35.800 | He is a leading proponent of the efficient market hypothesis
00:00:40.120 | and one of the original thought leaders
00:00:43.040 | that led to the creation of index funds.
00:00:46.480 | Dr. Malkiel received his undergraduate and master's degree
00:00:51.160 | from Harvard University
00:00:53.080 | and his PhD from Princeton University.
00:00:56.640 | So welcome, Dr. Malkiel.
00:00:58.920 | (audience applauding)
00:01:00.120 | - Well, I'm absolutely delighted to be here
00:01:04.520 | in this world of a lot of bad investment information
00:01:10.720 | and self-serving investment information.
00:01:14.720 | It's nice to be with a group that has done nothing
00:01:19.720 | but give people really useful
00:01:24.560 | and really helpful information.
00:01:28.120 | I'm also delighted to be with a group
00:01:31.040 | that is really established to preserve the legacy
00:01:36.040 | of a man who was my lifelong friend, Jack Bogle,
00:01:42.240 | and who I shared a lot of wonderful memories with
00:01:53.400 | and a guy who really was the small investor's best friend.
00:01:58.400 | So as Rick said, it's been 50 years,
00:02:04.200 | the 50th anniversary edition of my book is coming out.
00:02:08.840 | I went back and just sort of thought
00:02:11.280 | of what its reaction was when it was first published.
00:02:16.280 | And basically it made two points.
00:02:21.000 | One, that markets were reasonably efficient,
00:02:26.000 | information got reflected quickly,
00:02:29.200 | and with information reflected quickly,
00:02:33.640 | the tableau of market prices, not always correct,
00:02:38.440 | but was sufficiently efficient
00:02:42.120 | that the market was very, very hard to beat.
00:02:45.800 | And I said at the time that people would be better off
00:02:49.560 | just buying and holding a broad-based index fund.
00:02:54.040 | Whenever I used to say that, people would say,
00:02:56.520 | "Yeah, but you can't buy the index."
00:02:58.520 | And I said in the first edition of the book,
00:03:01.640 | "Well, it's about time you should."
00:03:04.920 | Three years later, Jack Bogle started the first index fund.
00:03:09.920 | The reaction to my book by professionals
00:03:14.200 | was uniformly negative.
00:03:16.680 | Of course, investment professionals
00:03:19.000 | could beat the market.
00:03:20.680 | When Jack started the first index fund,
00:03:25.600 | as I'm sure you know the history,
00:03:28.520 | they originally had hoped to do an underwriting
00:03:31.280 | of 150, actually 250 million.
00:03:35.960 | The underwriters then reduced it to 150 million.
00:03:40.000 | And by the time the last purchase was made,
00:03:44.920 | they sold $11 million of the index fund.
00:03:49.920 | It was considered an abject failure.
00:03:54.280 | It was called Bogle's Folly.
00:03:56.880 | And I remember I used to joke with Jack Bogle
00:04:01.000 | that he and I were the only holders
00:04:03.800 | of that first index fund.
00:04:06.080 | Well, a lot has changed over the 50 years.
00:04:09.960 | Now people are complaining that there's too much indexing,
00:04:14.240 | that indexing has too much of a share of the market.
00:04:18.320 | And it's just quite a difference
00:04:21.200 | from the original reaction to the ideas
00:04:25.600 | and to the first index fund.
00:04:28.040 | So I am, as I say, delighted to be with you
00:04:32.680 | and will be delighted to respond
00:04:35.600 | to whatever things are on your minds.
00:04:39.680 | - Well, thank you.
00:04:40.520 | And we will have audiences asking some questions
00:04:43.280 | a little later, but I happen to have in front of me,
00:04:45.600 | my book, this is the original edition
00:04:48.400 | of "A Random Walk Down Wall Street."
00:04:50.680 | I have yet to get it signed by you, but soon.
00:04:53.880 | Maybe at the next conference, possibly.
00:04:57.320 | Anyway, and you did, you made a quote in this book.
00:05:00.960 | Now 1973, I'll go even before that,
00:05:04.840 | but I do wanna make this quote
00:05:07.480 | 'cause you alluded to it.
00:05:08.640 | This is 1973, no index fund existed.
00:05:11.520 | And in this book, on page 226, you wrote,
00:05:14.880 | "What we need is a no-load,
00:05:18.080 | "minimum management fee mutual fund
00:05:20.240 | "that simply buys the hundreds of stocks,
00:05:22.400 | "making up the broad stock market averages,
00:05:25.880 | "does no trading from security to security
00:05:28.400 | "in attempt to catch the winners.
00:05:30.760 | "Whenever below average performance
00:05:33.000 | "on the part of any actual mutual funds is noticed,
00:05:36.120 | "fund spokesmen are quick to point out
00:05:37.720 | "that you can't buy the averages.
00:05:40.440 | "It's time the public could."
00:05:43.000 | That was 1973, which in my view,
00:05:46.680 | this was a huge inspiration to Jack Bogle
00:05:49.120 | when he was looking into creating the first index fund.
00:05:52.320 | And you ended up on the Vanguard board.
00:05:56.520 | When did you first talk with Jack Bogle about this idea?
00:06:00.080 | - Well, I actually was in Washington.
00:06:05.960 | I was on the President's Council of Economic Advisors
00:06:09.640 | during the time when Jack initiated the first index fund.
00:06:15.520 | And then after I left Washington,
00:06:21.120 | I then joined the Vanguard board a year later.
00:06:25.800 | So I certainly can't tell you that I was right there
00:06:33.560 | at the time of the first index fund.
00:06:38.280 | Although I will say that I was the chairman
00:06:43.160 | of the New Products Committee
00:06:44.720 | and a board member of the American Stock Exchange
00:06:48.200 | when the first index ETF started.
00:06:52.840 | So clearly I was around and talking about this
00:07:01.880 | for as long as I can remember.
00:07:04.200 | - And we'll get to all the ETF question in a minute.
00:07:09.920 | But what I also have in front of me is the 12th edition
00:07:14.680 | of "A Random Walk Down Wall Street."
00:07:16.720 | And I assume that the 50th edition
00:07:20.920 | will be the 13th edition?
00:07:24.200 | - Right.
00:07:25.040 | - Okay, and very good.
00:07:27.920 | Okay, so what I wanna do now
00:07:30.040 | is talk about investing with you, okay?
00:07:33.440 | Well, let me do one more Vanguard thing before we do that.
00:07:35.280 | So you were now on the Vanguard board
00:07:37.560 | and indexing did not really take off right away.
00:07:40.520 | I mean, it took about, what, 11 or 12 years
00:07:44.880 | before the S&P 500 fund actually accumulated
00:07:49.880 | about a billion dollars in assets
00:07:52.920 | and it wasn't a overnight success.
00:07:56.120 | Can you talk about those days?
00:07:57.360 | I mean, you talk about those days,
00:08:01.680 | that 12 year period of, is this thing gonna survive?
00:08:05.000 | Is it not gonna survive?
00:08:05.840 | And what was going on with Jack Bogle in these discussions
00:08:09.280 | when you were there at the time?
00:08:10.960 | - Well, I think good as any of you who have known Jack
00:08:17.760 | know that he was absolutely not dissuaded.
00:08:24.800 | Jack believed in this with all of his heart
00:08:29.800 | and the more people criticized him,
00:08:35.480 | the tougher he got.
00:08:40.240 | He would actually put in his office
00:08:42.880 | the derogatory signs that indexing
00:08:47.200 | was a stupid investment strategy,
00:08:53.720 | that indexing was un-American,
00:08:57.120 | that this was Bogle's folly.
00:09:00.080 | So I would say that, and again,
00:09:05.080 | the discussions I certainly had with Jack
00:09:10.440 | all the time in those early years,
00:09:14.160 | Jack was just even more convinced
00:09:18.240 | that indexing was the right way to go.
00:09:22.680 | And fortunately, what has happened,
00:09:27.000 | and I think this is one of the reasons
00:09:28.760 | why indexing is so popular now,
00:09:32.760 | is that as evidence accumulated,
00:09:35.680 | people began to realize that indexing
00:09:41.880 | was not guaranteed mediocrity, as it was used to be called,
00:09:47.080 | but rather one got above average performance
00:09:52.360 | and in fact, that evidence has been absolutely clear
00:09:57.360 | over the entire 50 years since certainly
00:10:06.040 | I wrote "Random Walk" and the almost 50 years
00:10:10.640 | since Jack started the first index fund.
00:10:13.720 | - And so even though the S&P 500 was not,
00:10:17.440 | I mean, it was a very, very slow start,
00:10:19.680 | and Jack continued to innovate,
00:10:22.920 | and you came out at Vanguard with the first bond index fund,
00:10:27.920 | which was not allowed to be called a bond index,
00:10:30.880 | if I recall at the time.
00:10:32.480 | And then you--
00:10:34.800 | - Yeah, that'd be the difficulty.
00:10:36.920 | It's easier to say that you could take an index,
00:10:41.400 | you could take the S&P,
00:10:45.000 | you could take what used to be the Wilshire Index,
00:10:50.000 | now the Dow Wilshire Index,
00:10:53.680 | and you had a certain number of securities,
00:10:56.680 | you could cap weight them and put them into a fund.
00:11:01.040 | It basically was not quite as easy to do in the bond market
00:11:06.040 | because you've got so many illiquid small bond holdings,
00:11:12.840 | and so you had to do this with a kind of algorithm
00:11:17.840 | that tried to give you as close as you could
00:11:23.560 | what the cap weighted bond market index was,
00:11:27.640 | but it wasn't the same kind of thing
00:11:30.800 | that you could do with equities.
00:11:32.560 | - And the SEC would not allow that fund
00:11:34.520 | to be called a bond index fund for several years.
00:11:37.840 | - Right.
00:11:38.880 | But Jack continued to innovate,
00:11:41.280 | came out with a developed market fund,
00:11:44.920 | a REIT fund, and then a total international fund.
00:11:47.640 | So by 1996, when he left Vanguard,
00:11:51.440 | there was a total U.S. stock market index fund,
00:11:54.080 | a total international fund,
00:11:56.160 | there was a total bond market fund,
00:11:58.200 | and there was a REIT fund.
00:11:59.440 | Basically you had the four core four funds
00:12:02.800 | that Jack created,
00:12:04.840 | and then of course he stepped down for health reasons.
00:12:07.640 | So he kept on innovating,
00:12:08.680 | even though at first this was not a great idea.
00:12:12.200 | How long did you stay at Vanguard on the board of directors?
00:12:15.120 | - I was on the board of directors for 28 years.
00:12:18.480 | - Wow.
00:12:19.640 | And when did you, did you leave in the early 2000s?
00:12:23.880 | - I did, we did have a retirement age,
00:12:29.800 | and even though I have been retired and still there,
00:12:38.040 | as active as I can be,
00:12:40.680 | that was the way things worked.
00:12:43.920 | And I think fortunately that is changing now,
00:12:48.920 | and one realizes as the population ages
00:12:52.720 | that we've got a lot of people over 70
00:12:57.040 | who still have a lot to add to economic activity
00:13:01.600 | and intellectual activity.
00:13:05.320 | - Well, I want to start talking
00:13:06.880 | about some different investments with you.
00:13:09.360 | So I want to spend the rest of my time that I have
00:13:11.680 | before we start taking questions
00:13:13.200 | about your view of investments.
00:13:15.280 | And I'll start out with the one that you mentioned,
00:13:17.040 | exchange-traded funds.
00:13:18.760 | So Jack said exchange-traded funds were like giving gasoline
00:13:23.240 | and matches to an arsonist.
00:13:25.080 | How do you feel about exchange-traded funds,
00:13:27.960 | and did you agree with them?
00:13:29.880 | - No, I would say that that was probably
00:13:34.520 | the only area where Jack and I disagreed.
00:13:38.840 | Jack and I were absolutely a consonant
00:13:43.120 | on almost all of our ideas about investing,
00:13:47.480 | but ETFs were not one of them.
00:13:49.920 | And the way the argument went was as follows.
00:13:53.800 | You're right, he did think it was an arsonist.
00:13:56.920 | I remember Jack would argue with me,
00:14:00.000 | and he would say in his inimitable way,
00:14:04.560 | why would anybody want to buy the market
00:14:06.820 | at 10 o'clock in the morning
00:14:08.280 | and try to sell it at two o'clock in the afternoon?
00:14:10.960 | They'll cut their throats doing it.
00:14:13.480 | And I would say to Jack,
00:14:15.520 | Jack, you don't think that's a good idea,
00:14:19.240 | and I don't think it's a good idea,
00:14:22.000 | but the problem is that there are people
00:14:25.760 | who think erroneously that they can do it.
00:14:29.520 | There are people who will try to do it,
00:14:32.840 | and if they do it in the context of a mutual fund,
00:14:37.100 | you could create costs for other people,
00:14:40.240 | like the holders, the buy and hold people
00:14:43.080 | in the mutual fund.
00:14:44.720 | And in fact, if you had a bad bear market
00:14:49.440 | and all kinds of people sold,
00:14:51.480 | you might cause the mutual fund to have to sell securities,
00:14:55.240 | and it would create tax problems for the holders.
00:14:59.100 | The beauty of the ETF is you don't do that
00:15:04.100 | within the mutual fund context.
00:15:07.200 | You do that on the exchange,
00:15:11.080 | and in fact, the ETFs,
00:15:14.880 | when they make purchases and sales,
00:15:18.960 | this is not considered a taxable event.
00:15:23.060 | It's considered part of the business operation
00:15:26.360 | to keep the net asset value
00:15:29.760 | and the market price consonant
00:15:32.660 | so that you don't get into big premiums or discounts.
00:15:37.660 | And so there were even certain tax advantages of ETFs.
00:15:43.440 | And I said, look, I don't want people to go and buy
00:15:50.440 | and sell ETFs,
00:15:54.120 | but for the buy and hold investor,
00:15:58.120 | this may be an even better way to do it
00:16:01.320 | than through a mutual fund.
00:16:04.280 | Now, having said that, as ETFs develop,
00:16:08.640 | and you have these crazy ETFs,
00:16:11.520 | and they're narrower and narrower,
00:16:14.240 | and we've got an ETF that gives you three times the upside
00:16:19.240 | or three times the downside of the S&P,
00:16:23.840 | and they only do that for one day,
00:16:25.640 | they don't actually do that in perpetuity,
00:16:29.240 | that was all absolutely crazy.
00:16:31.340 | And there, Jack and I agreed,
00:16:33.400 | but for the standard ETF,
00:16:35.760 | the standard S&P ETF, total stock market ETF,
00:16:40.760 | total international ETF,
00:16:43.480 | I thought it made a lot of sense.
00:16:46.040 | And I think, frankly,
00:16:50.160 | Vanguard was a little slow.
00:16:53.440 | I mean, it was not done until after Jack retired,
00:16:57.480 | but I think it's been highly successful,
00:17:02.560 | and I think it's been very useful
00:17:05.680 | for the individual investor.
00:17:08.160 | - Well, I'm gonna go through a little bit
00:17:09.400 | of a lightning round with you,
00:17:11.520 | asking you about different investments.
00:17:13.400 | Some of them you did cover in your 12th edition,
00:17:18.280 | or in previous editions of "A Random Walk Down Wall Street,"
00:17:21.520 | but we've had discussions here at the conference
00:17:24.600 | of about a lot of different types of investments,
00:17:27.720 | and you haven't heard any of these discussions,
00:17:29.800 | so you don't know what people have been saying.
00:17:32.320 | So we're gonna get your opinion about these investments.
00:17:36.600 | Okay, are we ready?
00:17:38.560 | Okay. - I'm ready.
00:17:39.520 | - You're ready, good.
00:17:40.360 | Well, now there may or may not,
00:17:43.680 | we'll have to see how this goes.
00:17:45.640 | How do you feel about international stock investing?
00:17:50.280 | Your positive, negative, what are your views?
00:17:53.680 | This is long-term.
00:17:54.560 | - My views are positive,
00:17:59.320 | that in general,
00:18:05.480 | it has been a way to take advantage
00:18:11.400 | of the larger growth of some economies,
00:18:18.160 | and it's been a way to diversify
00:18:23.080 | even more than in the United States.
00:18:27.280 | Now, I fully understand
00:18:29.760 | that it's got a very bad name right now,
00:18:33.960 | because international stocks and emerging market stocks
00:18:38.440 | have done very, very poorly,
00:18:41.720 | in part because of the enormous strength of the dollar,
00:18:46.960 | but I would say that as of today in particular,
00:18:51.000 | where valuations in international markets
00:18:54.840 | are well below average and well below US valuations,
00:18:59.840 | that I think some diversification
00:19:04.200 | into international stocks makes sense.
00:19:07.120 | - Okay, thank you.
00:19:08.960 | All right, the next one, real estate.
00:19:13.000 | Do you consider REITs, Real Estate Investment Trust,
00:19:16.800 | to be a separate asset class
00:19:20.440 | from the rest of the equity market?
00:19:22.680 | - In some way, yes.
00:19:27.200 | And I think particularly in a period
00:19:31.720 | that we are in today,
00:19:35.000 | where after many years of having inflation so low
00:19:40.000 | that we could ignore it,
00:19:42.640 | that real estate,
00:19:45.240 | which has been a slightly more dependable
00:19:50.240 | inflation hedge than equities,
00:19:53.160 | equities are a good inflation hedge,
00:19:55.160 | and it's one of the reasons
00:19:57.400 | why I don't think we want to abandon equities at all,
00:20:00.680 | despite the fact that we've had
00:20:03.680 | some tough stock markets recently.
00:20:06.760 | But I do think that real estate
00:20:09.960 | as a real asset over a hundred years,
00:20:14.760 | real estate has been a dependable inflation hedge,
00:20:19.400 | and I think it definitely deserves a place
00:20:24.080 | in a diversified portfolio.
00:20:27.160 | - The next asset class,
00:20:28.520 | or at least a segment of an asset class,
00:20:31.600 | are Treasury Inflation Protected Securities, TIPS.
00:20:34.960 | What are your feelings about TIPS?
00:20:39.560 | - For the individual investor,
00:20:42.600 | the I-bond,
00:20:46.040 | which is the bond that individuals
00:20:50.320 | can buy directly from the Treasury,
00:20:54.240 | which have a zero base rate,
00:20:59.240 | but pay at the rate of inflation,
00:21:03.440 | which was over 9% recently,
00:21:09.440 | the new rate is somewhat lower than that,
00:21:13.760 | but it is the most dependable
00:21:18.280 | and absolutely risk-free asset,
00:21:23.640 | and people should be buying as many I-bonds
00:21:28.640 | as they can afford and that they are allowed to do.
00:21:33.520 | The rule now is each individual can buy $10,000 worth,
00:21:39.520 | so a couple could buy $20,000 worth.
00:21:42.880 | You could also buy an extra $5,000
00:21:47.880 | with an income tax refund,
00:21:50.200 | and the Treasury is now considering
00:21:56.240 | changing the limit from $10,000 to $30,000.
00:22:01.400 | This is an absolutely perfect inflation hedge.
00:22:08.000 | It's the only absolutely perfect inflation hedge,
00:22:12.280 | and I think particularly today,
00:22:15.000 | where we have high inflation,
00:22:17.480 | and I worry that we're not just quickly
00:22:21.320 | gonna go back to 2% inflation.
00:22:23.960 | I think we're gonna have some inflation
00:22:26.120 | for a long period of time.
00:22:28.720 | I think the I-bonds are a perfect investment
00:22:33.000 | for the individual investor.
00:22:34.520 | - Okay, let's go on to the next topic,
00:22:37.680 | and this was having to do with something
00:22:40.360 | you did have in your book,
00:22:42.400 | high-dividend-yielding stocks versus the market.
00:22:47.400 | - As I think people who have followed the market know,
00:22:54.160 | there was a fair amount of empirical work
00:22:58.360 | that suggested that stocks that are "value stocks"
00:23:06.640 | sell at low ratios to their book value,
00:23:11.640 | low price earnings multiples,
00:23:15.880 | have historically had a somewhat higher rate of return
00:23:20.200 | than other stocks.
00:23:24.600 | It's been suggested that small stocks,
00:23:29.600 | that is, small capitalization companies,
00:23:32.920 | have had higher rates of return
00:23:35.280 | than large capitalization companies.
00:23:37.960 | Not because the market's necessarily inefficient,
00:23:41.280 | but rather because they are somewhat riskier,
00:23:45.080 | and risk and return are certainly related in markets.
00:23:51.000 | We know that from hundreds of years of experience.
00:23:57.280 | So what has come to pass, then,
00:24:00.840 | is that people have tried to make a business
00:24:04.440 | of segmenting the market,
00:24:08.080 | and probably the company that's best known
00:24:14.160 | for having done that is Dimensional Fund Advisors.
00:24:18.520 | And for a long time,
00:24:21.240 | the Dimensional Fund Advisors portfolios
00:24:24.160 | did a little better than a simple index fund,
00:24:28.000 | because while they were passive,
00:24:31.080 | and basically Gene Fama,
00:24:37.440 | who was the intellect behind it,
00:24:40.080 | believes very much in the efficiency of markets,
00:24:43.520 | but this, by tilting toward what he considered
00:24:48.520 | a little bit riskier portfolios,
00:24:52.760 | you could get a little higher rate of return.
00:24:54.840 | Not an inefficiency,
00:24:56.520 | just a little extra return from taking extra risk.
00:25:01.520 | Well, the market seems to have,
00:25:04.080 | this is actually one of the things in the new edition
00:25:08.040 | that I've looked at very carefully,
00:25:11.920 | and certainly over the last few years,
00:25:16.000 | the market seems to have caught up with this,
00:25:18.800 | and even Dimensional Fund Advisors portfolios
00:25:22.680 | have in fact underperformed
00:25:27.240 | some of these so-called factor fund portfolios,
00:25:31.680 | where you tilt in favor of one factor or another.
00:25:36.640 | So again, it just frankly makes me think
00:25:41.640 | more and more that yeah,
00:25:46.440 | there are some new ideas under the sun,
00:25:50.040 | but once the market looks at these things,
00:25:53.760 | the good old fashioned broad-based index fund
00:25:58.760 | ought to be the core of everybody's portfolio.
00:26:02.840 | - Thank you.
00:26:03.680 | Let me point out a paper
00:26:07.240 | that you and Jack Vogel co-authored
00:26:12.000 | back in 2006 at the height
00:26:15.880 | of the small cap value run in the market,
00:26:20.680 | that this paper was called
00:26:23.120 | Turn on a Paradigm by John C. Vogel and Burton Malkiel,
00:26:27.520 | June 27th, 2006.
00:26:30.040 | And it basically said,
00:26:31.920 | "Eugene Fama and Ken French have suggested
00:26:33.720 | "that higher returns can be generated
00:26:35.220 | "by index portfolios of stocks with small capitalizations
00:26:38.520 | "and low price to book ratios."
00:26:40.880 | These analysts, and you talked about Rob Arnott
00:26:43.880 | and some other people as well,
00:26:45.240 | these analysts have all argued
00:26:47.280 | that fundamentally weighted indexes
00:26:49.040 | represent a new paradigm for index fund investing.
00:26:52.760 | Are they correct?
00:26:54.200 | We think not.
00:26:56.720 | That was 15 years ago.
00:26:58.120 | So you're a spot on on that one, at least so far.
00:27:02.300 | All right, I got a few more,
00:27:04.640 | and if people would like to start lining up for questions,
00:27:07.640 | please do so.
00:27:08.480 | I've got a few more here.
00:27:10.140 | We also talked about ESG.
00:27:13.140 | ESG.
00:27:13.980 | I know this is one of your favorite topics.
00:27:17.620 | So I'm gonna ask you because I read the introduction
00:27:20.100 | that you wrote to Larry Suedro's book,
00:27:22.860 | and I found it fascinating.
00:27:25.020 | So could you tell us your views on ESG investing?
00:27:28.020 | - I have frankly become more and more skeptical
00:27:34.780 | about ESG investing.
00:27:39.580 | I mean, first of all,
00:27:41.660 | it's just extraordinarily difficult
00:27:46.660 | to know what are good companies and what aren't.
00:27:51.860 | Let's take a company,
00:27:56.500 | there's a public utility that burns coal,
00:28:01.340 | but that also has been the only public utility
00:28:06.340 | that has suggested that they would go
00:28:11.380 | to being completely carbon free by a date certain,
00:28:15.540 | and they're investing tons of money
00:28:18.140 | in solar power and wind power.
00:28:20.780 | So is it a bad company because it burns coal,
00:28:24.580 | or is it a good company because they are transitioning?
00:28:27.940 | In fact, it's very hard to really know,
00:28:31.660 | and the people who go and do the ESG ratings
00:28:36.100 | are all over the map.
00:28:38.060 | The correlations between the ESG raters
00:28:41.740 | are something like 0.4, 0.5.
00:28:48.380 | And just to put that in perspective,
00:28:51.060 | the correlations between Moody's and Standard & Poor's
00:28:55.140 | and doing bond ratings are 0.99.
00:28:58.500 | So it's just very, very hard to know what's a good company.
00:29:03.500 | Is a natural gas company a good company
00:29:07.020 | because that's the transition fuel that we need
00:29:10.500 | when we go to a more carbon free environment,
00:29:13.940 | or are they bad because it's carbon?
00:29:16.400 | It's just not possible to know.
00:29:19.060 | There's a lot of so-called greenwashing
00:29:21.420 | where companies are trying to make themselves look good.
00:29:24.820 | And I just really worry a lot about that.
00:29:29.820 | Now, what I did in my introduction to that book
00:29:33.660 | is I fully understand that investing is emotional
00:29:38.660 | as well as simply we're trying to make
00:29:45.620 | as much money as possible.
00:29:47.700 | And there are people who like to have the idea
00:29:52.020 | that, gee, their investments are doing fine.
00:29:56.660 | Well, I say this, and this was the recommendation
00:29:59.780 | I put in my introduction.
00:30:01.620 | If that's what you wanna do,
00:30:04.020 | index the core of your portfolio.
00:30:06.840 | If you wanna buy a wind power company,
00:30:10.820 | if you wanna buy a solar panel company, go and do it,
00:30:15.220 | but you can do it with much less risk
00:30:17.980 | if the core of your portfolio is indexed.
00:30:21.020 | And let me just be clear.
00:30:23.740 | Don't think that you're going to make a higher rate
00:30:28.460 | of return by being green.
00:30:33.140 | While at some point, if green investments get very popular,
00:30:38.140 | they could outperform for a while,
00:30:42.420 | but after they have become popular
00:30:45.460 | and there is something about them that people like
00:30:48.860 | and are willing to pay a higher price for,
00:30:51.820 | then my guess is you're gonna get lower rates of return,
00:30:56.380 | not higher rates of return.
00:30:58.420 | So just be very, very careful.
00:31:00.740 | Don't turn up your nose at regular index funds
00:31:05.340 | and think that you can do good for humanity
00:31:08.880 | and make more money too,
00:31:12.140 | because if you look at a lot of those so-called green funds,
00:31:17.140 | you may be doing neither.
00:31:19.180 | - I have one more question for you,
00:31:22.120 | and then we're gonna turn it over to our audience.
00:31:24.580 | You co-authored a book on China in 2008
00:31:27.700 | in which you were bullish.
00:31:29.580 | Number one, are you still bullish on China
00:31:32.340 | and how do you feel about emerging markets in general?
00:31:35.840 | - I am less bullish on China than I was.
00:31:42.980 | What China did when Deng Xiaoping came into power
00:31:52.900 | is he turned over the book on Marxist economics
00:31:57.900 | and allowed free enterprise.
00:32:02.780 | And by allowing free enterprise,
00:32:06.220 | the Chinese economy grew at enormously rapid rates.
00:32:11.220 | And I thought that that was going to continue.
00:32:18.740 | Well, it has continued to some extent,
00:32:21.400 | but I get very troubled by the current leadership,
00:32:26.400 | which I think has turned their backs on Deng Xiaoping.
00:32:31.900 | And so I am less enthusiastic about China
00:32:36.900 | than I was, also in part,
00:32:45.580 | because since their one-child policy,
00:32:49.260 | they're aging so rapidly now
00:32:52.700 | that they look very much like economies in the West.
00:32:56.600 | Now, having mentioned that,
00:32:58.600 | let me just say why I am still optimistic
00:33:01.820 | about emerging markets.
00:33:03.760 | I think all of our Western economies
00:33:07.520 | are suffering from small or negative population growth
00:33:12.520 | and a lot of aging.
00:33:15.100 | People do these statistics of the dependency ratios,
00:33:20.100 | the number of people of working age versus non-working age.
00:33:25.340 | I hate these statistics because the argument is
00:33:28.660 | if you're over 70,
00:33:30.700 | you might as well be put into the scrap heap
00:33:33.680 | because you're not productive.
00:33:35.840 | But when you look at these things,
00:33:38.140 | you see that the Western world is just aging very rapidly.
00:33:43.000 | And in economies like Japan,
00:33:45.700 | they are losing population.
00:33:47.860 | They are aging rapidly.
00:33:50.160 | Japan is losing population.
00:33:52.820 | It will lose a third of its population
00:33:55.420 | over the next 20 years.
00:33:57.380 | And this worries me about the Western economies,
00:34:01.180 | whereas the young economies are the Indias, the Vietnams.
00:34:06.180 | And I think they are gonna have more growth.
00:34:10.560 | They are riskier.
00:34:13.000 | They have been terrible investments recently.
00:34:17.760 | They are extremely cheap now.
00:34:20.680 | And I think they deserve a place
00:34:22.840 | in a well-diversified portfolio.
00:34:24.960 | - Thank you. - You're welcome.
00:34:27.300 | [BLANK_AUDIO]