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Bogleheads® Conference 2010 - John Bogle & Bill Bernstein Fireside Chat


Whisper Transcript | Transcript Only Page

00:00:00.000 | I'm going to go back to your meeting to go where Jack and Bill do what I call the Marcian
00:00:12.000 | check. There's nothing structured or anything, they can just go wherever it takes them. So,
00:00:19.000 | I'll get out of the way and let's hear from Mr. Jack and Bill.
00:00:23.000 | I'm going to lead off with a question for you, Jack, which is you gave us your expected
00:00:30.000 | asset class returns. And with stock returns, you have a term in your hand for the mean
00:00:37.000 | reversion, which is the way it was set, and I'm familiar with that. And I noticed there
00:00:43.000 | was the only mean reversion term in the bond series. I'm going to ask you why.
00:00:49.000 | Okay, well, first I can't imagine anybody wants to hear me say anything more. I'm all
00:00:54.000 | set out. But that's a good question. And that is, what's different about the mean
00:01:00.000 | reversion in bonds? Well, we have mean reversion in stocks. We have dividend yield, and we
00:01:06.000 | have earnings growth. And then we have, what's the 48th mean reversion? It's how much people
00:01:11.000 | pay per dollar. In bonds, if you hold them as investments, not as you hold them in speculation,
00:01:17.000 | that doesn't matter. Almost all of the bonds return over time is accounted for by the interest
00:01:22.000 | rate bond. It's not 95% where you hold them. You have 100% of the bond returns already
00:01:28.000 | in the beginning. So there is no mean reversion. There would be a mean reversion. For example,
00:01:32.000 | it couldn't be. If you have a 30-year bond, from 10 years, it's great. It's going to be
00:01:36.000 | higher at all where it lost at least 20 years ago. And I don't know how to predict that.
00:01:40.000 | So my recommendation is I don't like the bond bonds because it fluctuates too much for me.
00:01:46.000 | The record is quite clear that the bond bonds pay higher returns in the intermediate and
00:01:50.000 | short because we know that there are yields. The bond bonds yield more. And since the only
00:01:55.000 | source of return from a bond is its yield, that's what you get at the end of the period.
00:02:00.000 | But there shouldn't be a mean reversion in the short period. If you buy a 10-year bond,
00:02:06.000 | then you'll have a 10-year return. More or less is more for me. But if you buy the total
00:02:13.000 | bond index bond, can interest rates go from 3.5%, 4% to 10%? Your 10-year return should
00:02:23.000 | be lower. Well, you have two factors. One, if interest rates go up, the price goes down,
00:02:32.000 | as we discussed at some point in the lunch and wine. But the return on your reinvestment
00:02:39.000 | of those two bonds goes up. And if interest rates go down, the price goes up, but the
00:02:45.000 | reinvestment goes down. They are more or less mostly law-setting factors. So I don't have
00:02:51.000 | to complicate things too much when we try and guess what happens in shorter periods,
00:02:57.000 | which it can. And then you get this funny timing thing. For example, you buy this 10-year
00:03:05.000 | bond, and it's only about 2.4%. But if interest rates go to 10%, the price of that bond will
00:03:11.000 | plummet that day, or that week, or that month. And there's a difference in one half, whether
00:03:17.000 | that half's on the first day you want it, or the last day you want it. Now, the bond
00:03:22.000 | itself on the last day you want it, it only has one day, two days to maturity. So it changes
00:03:27.000 | to a 10% return on the last day of maturity. So I'm just this merchant of simplicity. And
00:03:35.000 | I don't know if you get a 10% interest rate, which is certainly possible. If it happens
00:03:42.000 | quickly, you have one hand in a bet. If it happens in the middle of a period, you have
00:03:46.000 | another. If it happens at the end of the period, you get a point for another, or not. I think
00:03:50.000 | it's complicated. So I just like to look at it and say, well, make the best judgment
00:03:56.000 | you can. I should also say this, that there doesn't seem to be any difference between
00:04:01.000 | the two. I'm not really critical of them. If we all need a Treasury bond, or a Treasury
00:04:06.000 | bond, or a corporate bond, they have the same type of portfolio. You have an index bond,
00:04:10.000 | an intermediate index bond, and the intermediate index is shipping to us. It's time for money
00:04:18.000 | to go out. That doesn't seem to matter, unless we take a look at the actual Treasury bond
00:04:23.000 | return for that period, compared to the return on the bond. And the intermediate fund is
00:04:28.000 | the intermediate return, compared to the return within, you know, close enough around the
00:04:32.000 | portfolio, so to say. So I think maybe we over-indicate all those elements while we're
00:04:38.000 | there. But I don't think we can afford a bet on whether interest rates go up 10% at a certain
00:04:45.000 | time, which is pretty painful. Because even if we're right, that amount of time is just
00:04:51.000 | too much gas to burn. In the long run, the odds, the correlation of the day-to-day yield
00:04:57.000 | on that intermediate return portfolio, correlation over time, and they're remarkably, I think
00:05:03.000 | I've got this chart, is Kevin here? I think we have that chart in the new book, don't
00:05:09.000 | we, Kevin? The 191% correlation chart. And it's very, very consistent, in that here's
00:05:17.000 | the initial interest rate, and here's the return over the next 10 years, and the lines
00:05:21.000 | are like this. They break out along those. So I think that's the best way to do it.
00:05:29.000 | It's interesting. What fascinated me was the chart we had run by decades, and enthusiasm
00:05:38.000 | versus non-enthusiasm for stocks. And the one thing that struck me is, as I was coming
00:05:47.000 | out, because I went through that bookstore and heard of the illustrator working in Chicago
00:05:51.000 | at the intersection of the H and K Concourse, while I was on these phones and heading to
00:05:55.000 | the Senate, I could not find one book there that I would call an investing book. Nothing
00:06:02.000 | by you, nothing by Sue Jordan, nothing by Jim Cramer, and the CTO. I don't know if
00:06:13.000 | there are any small deliriums. The closest that I could get was one or two of my senior
00:06:20.000 | labs books. And what I kept out there, and this is just really anecdotal to me, is a
00:06:33.000 | total lack of interest in investing among the general public. These people came in trusting
00:06:35.000 | what we did, and they were interested, and now they're not interested. They shouldn't
00:06:39.000 | be selling anything. I find that fairly bullshit.
00:06:44.000 | Well, you know, the investment books that sell are those that promise riches, wealth
00:06:51.000 | without risk. Peter Lynch's books, I think, sold well. At the time, he was doing very
00:06:59.000 | well. I guess they're probably not doing so well now. And that's a whole other story
00:07:05.000 | in and of itself. A good example of something that's got too big to do, I think, a lot of
00:07:10.000 | them are surprised. You know when Magellan got $300 billion? It should have been an index
00:07:15.000 | fund. I never should have been saying, "Well, he's right, but it was lost." But they got
00:07:19.000 | to market time, and he overhauled that. And they got, like, a 25% cash position, and stocks
00:07:26.000 | kept. 114% for the manager going up. And just one more example, hey, you can't put a manager
00:07:31.000 | money in a big size. And they shouldn't try it. They've done all kinds of funny things,
00:07:36.000 | and they're always late to do them. He was looking back, putting in an international
00:07:40.000 | end much after his work. And so I'm going to turn to a few people. I'll tell you this.
00:07:46.000 | I wrote a book there that I did, duh, again, 10 years ago, and put it out again 10 years
00:07:55.000 | later. I mean, most of the books that were written 10 years ago were disasters. And people
00:08:01.000 | at the bottom were just, "I don't know if people buy these books. I just hope they don't
00:08:08.000 | do what the authors tell them to do." But then what's the point of buying books?
00:08:13.000 | I mean, one of my favorite methods of estimating the level of risk premium is your method.
00:08:33.000 | And so those are filling the shelves. You know the risk premiums, what the risk premiums
00:08:38.000 | are. And then when you see, you know, what's the type of depression of 2015, how about
00:08:46.000 | a real disaster, how about - well, you know the stock. The equity risk premium is fairly
00:08:52.000 | high. The other question I have for you about response -
00:08:56.000 | >>Let me just interject one second, though. You mentioned Dow 36,000. Not exactly a brilliant
00:09:01.000 | exercise in market forecasting and timing. And so Jim Glassman has written another book,
00:09:09.000 | and it's called Dow 10,000. No, I'm kidding. It's not. He has a new theory, and it's called
00:09:15.000 | "Margin of Safety." And he wants me to endorse it. And I shouldn't say to you, because you
00:09:22.000 | may have sold, but I did, because I've known you guys for a long time, and I want to be
00:09:26.000 | a nice guy. I did endorse Dow 36,000. But I said don't be deceived by the title. We're
00:09:33.000 | going to get to 36,000. But it's going to be a long, long road, and a very bumpy one.
00:09:38.000 | So we'll probably get to 36,000. Some of that may be 2050. I don't know. 2035, maybe
00:09:43.000 | a year and a half. But I don't think he wants me to endorse this one. I just don't know
00:09:49.000 | what I'd do on it. I think one of the great triumphs of human optimism is that people
00:09:55.000 | still use Jim Glassman. A triumph of over-experience. Yeah, I don't know. The triumph that he had,
00:10:04.000 | Jack, that fascinated me the most, was the dollar-rated versus time-rated gap for the
00:10:09.000 | ETS. And I don't know if you have these data, but what I'd be really interested to know
00:10:14.000 | is, are the gaps bigger for the ETS than for the corresponding funds? If you take those
00:10:21.000 | landlord funds that have lower classes, is the gap higher for the ETS than the investor
00:10:28.000 | in a lot more cash shares, the old cash shares? That's a very good question. Actually, we
00:10:32.000 | looked at it, and I decided not to use the chart. Not because it did not show what you
00:10:37.000 | would expect. It showed loans in stronger hands than the ETF. But rather, we had some
00:10:44.000 | struggle with getting the numbers right, that the money goes out of the investor class and
00:10:48.000 | into the admiral class. So it will be done, and Kevin and I are going to do some work
00:10:52.000 | on that. But in your intuition, and in this case I think it's usually right, and in this
00:10:58.000 | case I think it is right, is the gap. And we've done this earlier. We've said a couple
00:11:03.000 | of things about statistical methodology. It showed very clearly the gap was much smaller
00:11:09.000 | than the ADAPT, than the ADAPT, than the family index fund, than the ETF. It didn't get much
00:11:14.000 | closer. Sometimes it did almost exactly as well as the investment itself. The regular
00:11:19.000 | fund had the same lack of casualties as the other funds. But it's hard to calculate what's
00:11:25.000 | going on in ETS, because that daily volume, which is the only way we have of measuring
00:11:32.000 | how much money is coming in and going out, it's very hard to do. If you get a daily volume,
00:11:37.000 | if an ETF has, I don't want to say a million shares, we have no way of knowing whether
00:11:45.000 | it's a million purchases or a million sales. If it's a million in volume, and somebody
00:11:51.000 | may be coming up and picking up, they'll have to equalize someone else to be the market
00:11:55.000 | there. And if it's a million sales, they've got to be taking it in and putting it out.
00:12:00.000 | And if it's a million purchases, they've got to be investing it. If there's no difference
00:12:03.000 | in the energy in the volume, so we're still struggling with that. But I'm sure - I'm not
00:12:08.000 | showing you that chart, but I think that's the best we can do to illustrate this point.
00:12:14.000 | What happens is, like I said this morning, I think it was 270 out of 275 funds, or something
00:12:20.000 | like those kind of numbers. And nothing more than that is collaboration.
00:12:25.000 | Should the investors in this room be at all worried that their strong hands are being
00:12:34.000 | disadvantaged by the weak hands of the ETF class of shares that they own?
00:12:38.000 | Well, in general, I think the answer to that is no. Because those weak hands will give
00:12:45.000 | you aberrations in the market. We saw this with particular clarity, maybe too much clarity
00:12:49.000 | in the flash crash. But at the end of the day, or at the end of the week at least, you
00:12:54.000 | were just as well ahead as if it was a flash crash for you if you held shares to that.
00:12:58.000 | You were just as well over as you were before the crash ever happened. It didn't matter.
00:13:04.000 | In the long run, those market imperfections don't matter. You can ignore this.
00:13:10.000 | As I've often said, from a tale told by an idiot full of sound and fury, signify nothing.
00:13:15.000 | I'm quoting Mr. Shakespeare on a slightly different subject.
00:13:17.000 | On the other hand, there is something that I worry a little bit about.
00:13:21.000 | I actually have a piece of data that I decided not to use this morning, but I'll give it to you now.
00:13:26.000 | I start to think about what's going on in emerging markets.
00:13:31.000 | Very popular, I think, two of the largest ten marketplaces, the black market I should say, are two of the five or six largest ETFs.
00:13:48.000 | Maybe two of them, maybe three, eight largest ETFs.
00:13:51.000 | The data, we found that 33% of all emerging market holdings in mutual funds, 33% of their holdings were in ETFs.
00:14:04.000 | ETF investors are traders.
00:14:07.000 | That makes me worry.
00:14:09.000 | Supposing something happens to a big emerging market.
00:14:12.000 | Supposing something happens to China.
00:14:14.000 | Supposing something happens to Brazil.
00:14:16.000 | And the ETF people decide to get out.
00:14:21.000 | There could be a big gap because of the marketplace.
00:14:24.000 | In poisoning that market with 33%, that's pretty remarkable.
00:14:29.000 | To be held by self-identified traders, if you will.
00:14:32.000 | So the concerns being on the ETFs dominate in terms of holdings in any category.
00:14:40.000 | Now still, in the long run, that should not matter.
00:14:44.000 | But if the ETFs, I'm sorry, the emerging market funds are held up by mutual fund demand,
00:14:52.000 | then when they go, you could make a permanent, permanent emerging market return.
00:14:57.000 | I don't think we could do that.
00:14:59.000 | That's one thing I worry about.
00:15:01.000 | And I particularly think that we at Vanguard, I should say we at Vanguard,
00:15:05.000 | I should be very careful about getting into these speculative funds and maybe focus on trying to,
00:15:14.000 | for our ETFs, for example, on the managers that meet certain qualifications,
00:15:21.000 | the investment body that meets certain qualifications.
00:15:23.000 | And I've written in one Vanguard piece the other day that apparently it is disqualified
00:15:28.000 | to make more than 25 trades in any six-month period.
00:15:32.000 | 25 trades in a six-month period?
00:15:35.000 | I mean, really?
00:15:37.000 | Maybe 25 trades in your life.
00:15:40.000 | Maybe 25 trades in your wife and your life together.
00:15:45.000 | And the likes of children and grandchildren.
00:15:50.000 | You can go on and on.
00:15:52.000 | But it troubles me and it's not good for investment.
00:15:56.000 | It's not good for people at all.
00:15:58.000 | And as I mentioned this morning, a lot of our worst branded ETFs,
00:16:04.000 | the reverse this and that, two times up, two times down, three times up, three times down.
00:16:10.000 | Multiply the effects of the market.
00:16:12.000 | And that seemed to be losing market share.
00:16:15.000 | And a lot of ETFs that are out of business.
00:16:18.000 | I wonder about Wisdom Tree.
00:16:20.000 | They aren't doing very well.
00:16:21.000 | And they're a publicly held company, so we know how much cash they've got left.
00:16:24.000 | It isn't much as accounting.
00:16:26.000 | Didn't they have to raise a little bit?
00:16:28.000 | They did raise a little bit, yeah.
00:16:32.000 | Josh Jaffa, a mutual fund company that deals only with advisers.
00:16:37.000 | I like that idea.
00:16:40.000 | You know, I think that if I hear the term "new normal" one more time,
00:16:46.000 | I won't be responsible for my actions.
00:16:49.000 | But this concept that emerging markets are what it's at because that's what economic growth is,
00:16:57.000 | I think most of you know how I feel about that,
00:17:00.000 | which is that there's a converse relationship between economic growth and stock returns.
00:17:07.000 | The problem has to do with dilution.
00:17:12.000 | And when people talk about returning emerging markets,
00:17:16.000 | and the bull market by definition, bubble market by definition,
00:17:20.000 | is a market where people only think about return, not risk.
00:17:24.000 | Twice in the past 15 years,
00:17:27.000 | the leading index of emerging market stocks has lost about two-thirds of its value.
00:17:33.000 | And you can bet that most of the people who are invested in EWO,
00:17:37.000 | and I even wonder about the DFA Emerging Markets Value Fund,
00:17:40.000 | which has a spectacular record.
00:17:42.000 | It is also the LTIA's biggest fund.
00:17:46.000 | It may not also have the same problem.
00:17:50.000 | One of the issues, I hope Steve Dunn doesn't get angry at me for this,
00:17:56.000 | but I think Steve demonstrated to me the proper response to the flash crash,
00:18:00.000 | which was when Jack was talking about it, he leaned over to me and said,
00:18:04.000 | "What was the flash crash?"
00:18:07.000 | But that was the right response.
00:18:12.000 | I'm not sure that I have that much to add to what you're saying,
00:18:19.000 | because we don't have time for questions.
00:18:21.000 | Sure.
00:18:22.000 | Let's hear some of the big quotes.
00:18:25.000 | Let me ask you, how will you sauce up fragile predictions
00:18:30.000 | about future returns in the next decade?
00:18:34.000 | I think...
00:18:36.000 | Don't be scared to disagree, by the way.
00:18:39.000 | I was trying to drown you out, but I'll figure it out.
00:18:47.000 | I think in terms of real returns,
00:18:55.000 | so I see real programs on a per capita, per share basis.
00:19:01.000 | If you look at the shillers data, around a percent and a half of your money,
00:19:07.000 | you've got 2% dividend yield, so that's 3.5%.
00:19:13.000 | When I look at bonds, and I wonder about real returns for bonds,
00:19:18.000 | I start to tremble,
00:19:21.000 | because I think the review shows the best case scenario.
00:19:25.000 | I think that 4% return for bonds with 2% inflation on top of that
00:19:30.000 | with 2% historical return,
00:19:32.000 | I think that's the best case scenario.
00:19:34.000 | I think that in the worst case scenario,
00:19:38.000 | we could see real inflation,
00:19:41.000 | not even forgetting about that fiscal analysis that we need.
00:19:48.000 | We've seen falls in the bond market in the past several decades
00:19:54.000 | of 50% on one bond.
00:19:57.000 | I worry about that risk.
00:19:59.000 | My default bond position is a very short treasury investment a year,
00:20:05.000 | which has an expected return of -1.5%.
00:20:09.000 | I think that's acceptable,
00:20:12.000 | because I don't think it's going to be -1.5% for very long.
00:20:16.000 | I'm very afraid of taking the risk of a spectacularly long negative return
00:20:24.000 | if you buy bonds of the duration.
00:20:30.000 | Yes, you may wind up with a nominal 4% return if you hold a bond for 10 years,
00:20:35.000 | but if inflation is averaging 6% or 8% or 9% over that period of time,
00:20:41.000 | you're not going to be happy with that duration.
00:20:46.000 | I think that's the role of maturity.
00:20:53.000 | I don't see any other consequences that would fall too far outside of that.
00:21:00.000 | Let me say a couple of things about real returns.
00:21:03.000 | First, the reason we use 2%, essentially,
00:21:06.000 | is that's what the spread between the inflation hedge 10-year bond
00:21:12.000 | and the regular 10-year bond is.
00:21:15.000 | The standard market is called 2% inflation.
00:21:18.000 | I'm very clear on the bill,
00:21:20.000 | and I think it's going to be higher than that.
00:21:22.000 | How much higher, I don't have a way of knowing.
00:21:24.000 | Of course, there's always this possibility of some kind of a really bad economic situation
00:21:29.000 | that might only be 1%.
00:21:31.000 | Who really knows?
00:21:32.000 | In compression, we get negative CPIs for years, for four or five years.
00:21:38.000 | So, don't take the 2% as a "fate."
00:21:43.000 | One reason I know I haven't spent a lot of time,
00:21:46.000 | I haven't spent a fair amount of time, but not a lot,
00:21:48.000 | on looking at real returns as compared to nominal returns,
00:21:51.000 | is that real returns take the same amount of all the bonds.
00:21:55.000 | Returns on the 4% stocks and the bonds take the same amount of all both.
00:21:58.000 | 3% bonds will return 3% less than the nominal returns.
00:22:02.000 | Stocks will return 3% less than the nominal returns.
00:22:05.000 | So, you're not muddying the water too much by using nominal returns,
00:22:13.000 | except to say that once you get--
00:22:16.000 | I don't know if you think about this, but I think I wrote about this in
00:22:21.000 | a little bit of nonsense investing.
00:22:24.000 | And that is, when you start taking these numbers down in real terms,
00:22:29.000 | then expenses really have an impact.
00:22:32.000 | You can take 2.5% out of 7, and I think we were using 2% inflation that way.
00:22:38.000 | All of a sudden, let's just say a third of the return is consumed by inflation.
00:22:43.000 | You take that 5, and half of the return is consumed by cost.
00:22:50.000 | We used to have this inflation before.
00:22:52.000 | I mean, it cost half of it.
00:22:54.000 | And, you know, if you think about half of the cost,
00:22:58.000 | you take 2% out of 7, and that gives you 5.
00:23:04.000 | Take 2.5% out of 5, that's 2.5.
00:23:08.000 | That's 100% of the return you got.
00:23:10.000 | We can put that in a different way.
00:23:13.000 | And it just becomes just overpowering.
00:23:16.000 | I guess if I was smart or a marketing kind of person,
00:23:20.000 | I would always use real.
00:23:22.000 | Because the impact of the cost just is magnified and magnified
00:23:25.000 | and magnified over and over again.
00:23:28.000 | Obviously, the number of the denominator, I guess,
00:23:31.000 | much bigger than us is the second grade.
00:23:34.000 | The lower the denominator, the bigger the impact that will seem.
00:23:38.000 | And then taxes, again, you can do it with the charts.
00:23:42.000 | Taxes are murdered.
00:23:44.000 | If you're named taxes, not on 7% return,
00:23:47.000 | but you might get a 7% return from the usual fund.
00:23:49.000 | You get a 5, 4.5% return.
00:23:53.000 | Taxes on that 4.5% are going to be at least 1%.
00:23:57.000 | And that's one more big deduction.
00:23:59.000 | It changes the expenses from 2.5% to 3.5%.
00:24:02.000 | So it's probably a pretty good idea to spend more time on real returns
00:24:09.000 | than on non-real returns.
00:24:11.000 | But I hate to scare people.
00:24:13.000 | I know I do a whole marketing thing anyway, still.
00:24:16.000 | And we shouldn't scare people.
00:24:19.000 | And just make them think through it, worry how much they'll have
00:24:23.000 | when they actually do retire.
00:24:25.000 | It's always bothered me, using implied-- taking implied inflation
00:24:32.000 | as the difference between over a given period,
00:24:35.000 | the difference between the 20-year-old, 30-year-old, and the 10-year-old.
00:24:40.000 | And I've never really figured out why that bothered me.
00:24:43.000 | It's probably because I read a couple of articles,
00:24:45.000 | and one of which might not have been a desk asker,
00:24:48.000 | but now it's important to me.
00:24:51.000 | And basically, this theory--
00:24:53.000 | I think it's correct--
00:24:55.000 | is that there's an implied liquidity premium
00:24:58.000 | in the TIPS yield.
00:25:00.000 | So in other words, the TIPS yield, let's say,
00:25:02.000 | is 1.4% at the long end right now.
00:25:04.000 | But that's really higher than it should be,
00:25:07.000 | because it has to be higher because of the liquidity problems
00:25:10.000 | and the liquidity shocks that you can have,
00:25:12.000 | which we certainly saw during the crisis.
00:25:15.000 | And during the crisis, long-term inflation was short in value,
00:25:20.000 | and the long-TIPS--
00:25:23.000 | I think the long-TIPS fell by something like 20% or 25%.
00:25:27.000 | So it's a liquidity premium.
00:25:29.000 | That number is higher than it should be,
00:25:31.000 | which means that it unresonates inflation
00:25:34.000 | when it's tracking lower number than the higher number.
00:25:37.000 | If the lower number is bigger than it should be,
00:25:40.000 | then high inflation is really where it's falling to.
00:25:43.000 | This implies 2% inflation.
00:25:45.000 | I think that what we're looking at probably implies
00:25:47.000 | at least 30% inflation.
00:25:51.000 | So I agree with you that 2% is probably an underestimate.
00:25:58.000 | What we also-- you might want to comment on this.
00:26:02.000 | How accurate is that inflation number?
00:26:04.000 | How accurate is the TIPS?
00:26:06.000 | It depends on what you're paying for.
00:26:08.000 | If you're paying for computers
00:26:11.000 | or you're buying long-distance service,
00:26:14.000 | that's a pretty good number.
00:26:16.000 | If you're buying health care, lots of luck.
00:26:20.000 | If you're buying health insurance, lots of luck.
00:26:24.000 | The-- I do have my new book.
00:26:27.000 | I know I do, but I can remember the number, though.
00:26:29.000 | I commented that we made some substantial adjustments
00:26:32.000 | to the CPI in, I think, 1982.
00:26:36.000 | And we had made those adjustments.
00:26:40.000 | The CPI of that period was not 3% a year,
00:26:43.000 | but 8% a year, something like that.
00:26:45.000 | And so we're, again, the victim of numbers,
00:26:48.000 | which is what this book is all about.
00:26:50.000 | It's been a reliable-- say, oh, inflation at 20.
00:26:54.000 | You don't remember what you're spending your money on.
00:26:56.000 | And it all depends on-- a lot of it depends on politics.
00:27:00.000 | And I heard on the radio the other day
00:27:02.000 | that Social Security is going to have no ECOA this year.
00:27:04.000 | If there's any inflation by any measure,
00:27:06.000 | well, that's probably long overdue.
00:27:08.000 | We just have to fix that system.
00:27:10.000 | And ECOA is part of it.
00:27:12.000 | And this is not the stuff I'm happy about.
00:27:14.000 | It's my own personal inflation.
00:27:15.000 | But it is sort of new news.
00:27:17.000 | But that's also how my health care costs go.
00:27:19.000 | [LAUGHTER]
00:27:23.000 | Bill.
00:27:24.000 | I got a question for not only Jack and Bill,
00:27:28.000 | but the gentleman who was a [INAUDIBLE]
00:27:31.000 | savings plan.
00:27:32.000 | But he also wants to comment.
00:27:34.000 | I have always felt that, in fact, when
00:27:37.000 | I was writing early on, back in December of 1999,
00:27:41.000 | when everyone was in love with the 401(k) plan,
00:27:44.000 | I had a little bit of a problem that the 401(k) plan
00:27:47.000 | was going to be at the bottom of the likes
00:27:49.000 | of which this country has never seen.
00:27:51.000 | And last year, Time magazine had a cover story
00:27:54.000 | saying it's time to retire the 401(k) plan,
00:27:57.000 | retire the 401(k) plan.
00:27:59.000 | I've always felt that it's ludicrous to think
00:28:02.000 | that the average intelligent person can save enough money
00:28:07.000 | and invest it wisely and then withdraw it
00:28:10.000 | in an intelligent manner over a 60- to 70-year period.
00:28:13.000 | It's just asking too much.
00:28:15.000 | It's not that they aren't smart, intelligent people.
00:28:17.000 | But it's just a thought in the past.
00:28:19.000 | My question is, how close are we to a system
00:28:23.000 | where it may be more like Chili's or something,
00:28:27.000 | where a person is kind of forced to say
00:28:29.000 | that it's a combination of time contribution, combined
00:28:34.000 | with a private defined benefit plan, where somebody saves
00:28:37.000 | enough money, and then they put it into a single premium
00:28:40.000 | inflation-adjusted annuity, where they're kind of forced
00:28:43.000 | to do that so that they're focused not on how much
00:28:46.000 | emerging markets they have, but how much they're saving
00:28:49.000 | and how that equates to withdrawing
00:28:51.000 | 30, 40, 50 years down the road?
00:28:53.000 | Let me tackle that one first.
00:28:55.000 | First of all, Bill, you probably couldn't have said it
00:28:58.000 | better yourself.
00:29:00.000 | I mean, I agree with everything you said.
00:29:04.000 | Our 401(k) systems at the moment, the shift from defined benefit
00:29:09.000 | to defined contribution is a social experiment
00:29:12.000 | that has failed catastrophically.
00:29:16.000 | My basic concept is the less autonomy you give people,
00:29:20.000 | the better.
00:29:22.000 | The more choice you give them, the worse things
00:29:25.000 | you want it to be for them.
00:29:26.000 | So sure, force them to do all those things.
00:29:29.000 | But why not put the money into an independently run
00:29:35.000 | pension plan that is perfectly transparent,
00:29:39.000 | that doesn't even give them the option of amortizing it,
00:29:42.000 | and it is amortized?
00:29:44.000 | Exactly.
00:29:46.000 | I don't get along with that.
00:29:48.000 | I'm all for physical channels.
00:29:50.000 | And I personally think that a lot of people
00:29:52.000 | have signed up for the hard-to-get, most pension
00:29:54.000 | credit, which is low-cost.
00:29:56.000 | So that's how they get people to say, OK,
00:29:58.000 | I feel like it's every day that people
00:30:00.000 | are coming to the bank.
00:30:02.000 | Tell me how much I need to save.
00:30:04.000 | I'll do it.
00:30:05.000 | And there's so many others.
00:30:06.000 | There's a gazillion other moving parts.
00:30:08.000 | And nobody got people thinking about, well,
00:30:10.000 | how much time are you putting into emerging markets
00:30:12.000 | and this and that.
00:30:13.000 | It's like, that's the last thing you need to be worried about.
00:30:15.000 | The thing you need to be worried about
00:30:16.000 | is what our grandfathers and grandmothers worried about.
00:30:18.000 | And that's the only safe way to understand it.
00:30:21.000 | And I think the ICAs will remove all the ideas, too, right?
00:30:24.000 | [LAUGHTER]
00:30:27.000 | I don't think the ICA likes anything.
00:30:30.000 | Let me say something about 401(k) and [INAUDIBLE]
00:30:35.000 | And that is, think about what it is and how discouraging
00:30:41.000 | it, therefore, is.
00:30:43.000 | One, you're going to borrow money from it.
00:30:46.000 | Two, when you change jobs-- and maybe when you don't
00:30:49.000 | change jobs, you can just take all your money out
00:30:51.000 | and do whatever you want.
00:30:53.000 | Three, you don't have to make a contribution
00:30:55.000 | and go out for your company and cut back your contributions
00:30:58.000 | or eliminate them whenever they want.
00:31:00.000 | And they do that.
00:31:01.000 | They do that to a significant extent.
00:31:04.000 | Five, I guess, you really get no guidance,
00:31:07.000 | no significant guidance from the companies.
00:31:09.000 | I helped the companies a long time ago.
00:31:11.000 | When I first got into the 401(k),
00:31:13.000 | I guess it would have been in the late '70s or early '80s
00:31:17.000 | when they started.
00:31:18.000 | It seemed like a national market for them,
00:31:20.000 | where actually, they're not being much more complicated
00:31:22.000 | than I thought.
00:31:23.000 | That never bothered me.
00:31:24.000 | And it seemed like the ideal way.
00:31:28.000 | The index fund, low cost, old forever, right up our alley.
00:31:33.000 | And it turned out that people wanted the general fund,
00:31:36.000 | the most popular 401(k) choice.
00:31:38.000 | And you give investors their choices.
00:31:40.000 | That's what they do.
00:31:41.000 | And now it's World Fund of America.
00:31:43.000 | And I guess index is maybe third, something like that.
00:31:46.000 | And the most popular one's not so bad.
00:31:49.000 | There's too much junk running around there.
00:31:52.000 | All those flaws, how can it possibly lead
00:31:54.000 | to a comfortable retirement?
00:31:56.000 | First, the answer is, look, the data doesn't.
00:31:59.000 | The average accumulation in 401(k) is--
00:32:02.000 | I mean, I can't remember the exact number--
00:32:04.000 | somewhere between $34,000 and $54,000
00:32:07.000 | will have a great retirement.
00:32:09.000 | Imagine your friendly neighborhood mutual fund
00:32:11.000 | delivering 1% annual expenses out of these conditions.
00:32:14.000 | So if you've got $54,000, you've got $540 a year.
00:32:20.000 | Right.
00:32:22.000 | You have to indulge them when you get a dent in your fender.
00:32:27.000 | Think about that.
00:32:29.000 | And so the way to improve it is to eliminate the flaws.
00:32:34.000 | It's actually, believe it or not,
00:32:36.000 | not that far from what President Bush, who never returns
00:32:41.000 | the idea of privatizing Social Security
00:32:43.000 | into a new reform firm proposal.
00:32:47.000 | But it's basically a personal retirement plan, privatized.
00:32:52.000 | So you have your own account.
00:32:54.000 | You can't take away from it.
00:32:56.000 | You're not depending on somebody else
00:32:58.000 | telling you what the cost of living is,
00:33:00.000 | how much the payout's going to be, and all that.
00:33:02.000 | And you have your own plan, pension plan,
00:33:04.000 | or a property sharing plan, or a contribution plan,
00:33:08.000 | or a defined-value plan.
00:33:11.000 | Without all the flaws.
00:33:13.000 | And then we have to make sure that--
00:33:16.000 | I like to leave it at the private enterprise.
00:33:18.000 | Because I've often said we need some sort of a government board
00:33:21.000 | to give you sealed approval or eligibility
00:33:25.000 | to have your shares.
00:33:27.000 | You can tell me how to do it.
00:33:29.000 | I'm a mutual fund manager.
00:33:30.000 | I've got these shares to my plate.
00:33:32.000 | And if you don't have a low cost, forget it.
00:33:34.000 | And if you're going to have high turnover, forget it.
00:33:36.000 | And if you've got a big sales book, forget it.
00:33:38.000 | Those kind of things aren't acceptable.
00:33:40.000 | So you've got to keep them in a sort of disciplinary thing.
00:33:43.000 | But only because it is.
00:33:45.000 | And no one flaws consistently.
00:33:48.000 | What do we know about all these millions and millions,
00:33:51.000 | tens of millions, probably 50 million people,
00:33:55.000 | or whatever the number is, who have defined contribution plans?
00:34:00.000 | And that is, if we leave them to their own devices,
00:34:03.000 | say we're getting a marked return, a less astonishing cost,
00:34:06.000 | I mean, they can't hold you to the market, right?
00:34:08.000 | Seems unlikely.
00:34:09.000 | And they really can't hold you to the market,
00:34:11.000 | as we were saying earlier.
00:34:13.000 | It's very hard to fail.
00:34:14.000 | And so it's an average return, a huge cost.
00:34:17.000 | And so that's just quite unacceptable.
00:34:20.000 | So you have to have some, I think, agency of some kind.
00:34:23.000 | Maybe it's a new consumer finance agency.
00:34:26.000 | I don't know.
00:34:27.000 | But say, use the standards for getting in.
00:34:29.000 | And then let people compete.
00:34:31.000 | Have less service and less price.
00:34:33.000 | But without all the rigidities of free food,
00:34:38.000 | the exercise of free will.
00:34:40.000 | And that doesn't make you popular.
00:34:41.000 | But we all know what the facts are.
00:34:43.000 | And that doesn't mean that you can go very well.
00:34:45.000 | No, there's only more choices you have.
00:34:47.000 | And like I said, the more decisions you have,
00:34:49.000 | the more flexibility you have, the more likely it is you will end up
00:34:52.000 | with not only an accurate plan.
00:34:54.000 | My favorite factoid for 401(k)s is similar to your observation,
00:34:59.000 | which is the last I saw sorority associates dating,
00:35:03.000 | you know, if you look at people pre-retirement in '60 to '64,
00:35:07.000 | the median -- excuse me, the average 401(k) balance was
00:35:13.000 | about $70,000.
00:35:15.000 | But the median was about $25,000.
00:35:20.000 | The average cost, out-of-pocket cost for health care,
00:35:25.000 | for the average Medicare recipient from age 65 to demise,
00:35:29.000 | was $4 million.
00:35:39.000 | [ Inaudible ]
00:36:08.000 | [ Inaudible ]
00:36:37.000 | Basically, I agree with Bill, too, but I would say something about --
00:36:41.000 | and we may do a little interpretation,
00:36:43.000 | but I'm not going to certainly say you shouldn't worry about real returns.
00:36:47.000 | You shouldn't worry -- that's the only thing you should worry about.
00:36:49.000 | When you get right down, it's a question of whether you present them
00:36:51.000 | integrally to the equation and inside,
00:36:54.000 | or where you get to, you know, figuring it out,
00:36:56.000 | or you show what the nominal returns are,
00:36:58.000 | what you're all accustomed to, and then take them out there.
00:37:00.000 | You both end up with real returns.
00:37:02.000 | And so I haven't thought quite the same way as he did.
00:37:07.000 | But it's a very, very problematic kind of thing,
00:37:13.000 | to wake an investor up to the risk of having how much money they have
00:37:18.000 | by the time they retire.
00:37:20.000 | It's just something that's not going to go away.
00:37:22.000 | And in a way, the results are so discouraging.
00:37:25.000 | If you look at returns, that's one thing I don't like about money.
00:37:30.000 | I love simulations.
00:37:31.000 | Well, there are many things I don't like about money.
00:37:33.000 | I love simulations.
00:37:34.000 | They may take returns out.
00:37:36.000 | But just to give you a chart,
00:37:37.000 | as if the market is some kind of actuarial table,
00:37:40.000 | it isn't an actuarial table.
00:37:42.000 | And in terms of the correlation between inflation and stocks,
00:37:48.000 | I can say two things pretty much by vote.
00:37:50.000 | One, there is almost no correlation between inflation and stock prices.
00:37:56.000 | Stock prices do whatever they want to.
00:37:59.000 | And if you want to find a correlation,
00:38:01.000 | look it over every 25-year period,
00:38:03.000 | you might get a decent correlation.
00:38:05.000 | That's not really what correlation is about.
00:38:07.000 | The inflation number looks like this,
00:38:10.000 | and the stock return number looks like this.
00:38:13.000 | And if you measure that correlation like that,
00:38:15.000 | you probably get about 0.20 or something.
00:38:18.000 | There is, or at least was, I haven't done this carefully,
00:38:20.000 | but I'm going to do this again.
00:38:22.000 | And the total dividends in the S&P 500,
00:38:25.000 | dividends, compared to inflation,
00:38:28.000 | had, for a long period of time,
00:38:30.000 | had a correlation.
00:38:32.000 | That is, they both moved up gradually,
00:38:34.000 | without a lot of aberrations,
00:38:36.000 | and without a lot of downs.
00:38:37.000 | I don't know if you noticed when I mentioned this morning
00:38:39.000 | the big decline in dividends in 2008.
00:38:43.000 | But those lines look very much alike.
00:38:45.000 | It's a high correlation between corporate dividends,
00:38:48.000 | or was at least a high correlation,
00:38:50.000 | between corporate dividends, called S&P dividends,
00:38:53.000 | and the CPI.
00:38:55.000 | But virtually no correlation.
00:38:56.000 | You can just check that correlation,
00:38:57.000 | because you can get it back.
00:38:59.000 | And, you can see this.
00:39:04.000 | Because, you know, we didn't get a 57% decline
00:39:09.000 | in the cost of living when the market dropped 57%.
00:39:11.000 | Nor did we get a 50% decline when the market dropped 50%
00:39:14.000 | back in 1973, '74.
00:39:17.000 | It was in late '72, '74.
00:39:19.000 | So, I don't have any movement for correlation,
00:39:23.000 | but we really can't find it.
00:39:24.000 | We've talked about stock prices,
00:39:26.000 | which in the short term are so heavily driven
00:39:28.000 | by promotion and speculative return.
00:39:31.000 | But in the long run, as I said this morning,
00:39:33.000 | it's a crystal clear,
00:39:34.000 | that stock returns are driven by the productivity,
00:39:37.000 | dividend, power, and earnings growth.
00:39:40.000 | And I just have that.
00:39:42.000 | - There's just one other comment,
00:39:44.000 | which was, if you remember back in the early 1980s,
00:39:48.000 | the mid-1970s, people were turning their stocks
00:39:51.000 | because they were only yielding 6%.
00:39:55.000 | But that was a 6% yield yield.
00:39:58.000 | So, it's just not having the tips.
00:40:00.000 | The yield is 6%, not always good,
00:40:02.000 | but say it as it comes out.
00:40:05.000 | - Actually, I just made my,
00:40:07.000 | you're talking about stocks with dividends.
00:40:10.000 | Isn't it, I didn't think all stocks paid dividends.
00:40:14.000 | It's a beginner question here,
00:40:17.000 | but I know there's lots of stocks that don't pay dividends,
00:40:19.000 | so you're accounting for that somehow.
00:40:22.000 | - Well, most stocks don't pay dividends.
00:40:24.000 | And when you take the S&P, the total stock market,
00:40:26.000 | you just take the aggregate dividends
00:40:28.000 | paid by all the companies.
00:40:29.000 | And I would guess that probably 20% corporations do not.
00:40:35.000 | Most of them are gonna be on NASDAQ, not listed.
00:40:38.000 | Most of them are gonna have short histories,
00:40:41.000 | very long histories.
00:40:43.000 | And in the long run, you know,
00:40:46.000 | be very clear on this.
00:40:48.000 | The value of a stock is a discounted value
00:40:52.000 | of its future cash flow.
00:40:55.000 | There's no way around that.
00:40:57.000 | And the only cash flow you get from the stock
00:40:59.000 | is its dividend.
00:41:01.000 | Years ago, a company came along,
00:41:04.000 | kind of a growth company in the market business,
00:41:06.000 | I'll say the name, you probably know it,
00:41:08.000 | you've never heard of it, but it's long gone.
00:41:10.000 | And they were on the cover of Time magazine,
00:41:12.000 | and they promised never to pay a dividend.
00:41:15.000 | We will never pay a dividend,
00:41:17.000 | this is considered a big selling point.
00:41:19.000 | Because they had, you know, they wanted to open a new store,
00:41:22.000 | that's what they were going at.
00:41:23.000 | And before they even had a chance to rethink,
00:41:26.000 | they were out of business, and the place was full.
00:41:28.000 | Does anybody remember P.J. Forbett?
00:41:30.000 | - Yeah. - Yeah.
00:41:32.000 | - Where is it now?
00:41:33.000 | I haven't seen him around in a while.
00:41:35.000 | It's bankrupt.
00:41:37.000 | So, dividends are an important sign
00:41:40.000 | of management's ability to spend cash.
00:41:42.000 | And I would argue, and I've been used to those points,
00:41:45.000 | I think managers, corporate managers,
00:41:47.000 | are very bad users of cash flow.
00:41:51.000 | They merge, they start new businesses,
00:41:53.000 | they start new product lines,
00:41:55.000 | and they seem to invariably fail.
00:41:57.000 | And sometimes, for, let's give you this little example,
00:42:01.000 | sometimes, because of the messed up nature of them,
00:42:05.000 | I don't want to use that word,
00:42:07.000 | of our financial selection investment system.
00:42:11.000 | And one example that comes to mind
00:42:13.000 | are the beleaguered MBIA, municipal bond insurance,
00:42:17.000 | and financial, as I say, it's a bulkhead.
00:42:21.000 | Financial security bonds and insurance bonds.
00:42:24.000 | And, of course, Wall Street wanted them to grow
00:42:26.000 | 10% a year.
00:42:28.000 | As a manager, you could grow 10% a year, or 110.
00:42:31.000 | So, there were no more municipal bonds to insure.
00:42:36.000 | They insured them all.
00:42:38.000 | So they were helping the growth of the mutual fund,
00:42:40.000 | of the municipal bond market.
00:42:42.000 | And that maybe has a one or two percent growth rate.
00:42:45.000 | Not good enough.
00:42:47.000 | We'll have to find something else to insure.
00:42:50.000 | I've got an idea.
00:42:52.000 | Let's insure collateralized debt obligations.
00:42:55.000 | (audience laughing)
00:42:57.000 | Right?
00:42:58.000 | And so they did.
00:43:00.000 | And where are they now?
00:43:01.000 | I think they're technically bankrupt,
00:43:03.000 | except those municipal bonds are such a long tail.
00:43:05.000 | And then there's now a lot of litigation going on.
00:43:08.000 | I don't want to get into this over my death,
00:43:10.000 | but you can say that if you wish.
00:43:12.000 | But they separated MBIA into two things.
00:43:15.000 | The CDO portfolio and the muni portfolio.
00:43:19.000 | And now they've got litigation from bondholders.
00:43:21.000 | They've got one portfolio, they've got a portfolio,
00:43:23.000 | they didn't want.
00:43:25.000 | They tarred out the bank portfolio,
00:43:27.000 | and they've got an interest in that.
00:43:29.000 | I'm not sure exactly how it worked.
00:43:31.000 | It's been a good part.
00:43:32.000 | So now I think mergers are done for the corporate ego.
00:43:37.000 | Corporate building complex.
00:43:41.000 | And I've got to be a builder.
00:43:45.000 | I've got to do it.
00:43:47.000 | Imagine a corporate executive who comes in
00:43:49.000 | and the CEO comes in and says,
00:43:50.000 | "Good morning.
00:43:51.000 | "Everything looks pretty fine to me.
00:43:53.000 | "I don't think we need to do anything."
00:43:55.000 | You know, probably 80% of the time,
00:43:57.000 | that's what he should say, but he can't.
00:43:59.000 | He's got to improve on his predecessor.
00:44:01.000 | He's got to prove himself to the board.
00:44:03.000 | And that means doing something.
00:44:05.000 | And then you say,
00:44:07.000 | "Well, I'm not going to do anything."
00:44:09.000 | And it works.
00:44:10.000 | They're saying, "What do we need you for?"
00:44:12.000 | So it's just, "I'm not kidding, really, about this."
00:44:15.000 | And then you start to play accounting games.
00:44:17.000 | Make insurance, well, you know, all this.
00:44:20.000 | And why do you count something at all?
00:44:22.000 | And I've gotten into more trouble about all this stuff.
00:44:24.000 | I mean, they're not quite as bad as the rating,
00:44:26.000 | but that's a pretty low bar, isn't it?
00:44:29.000 | [laughter]
00:44:31.000 | You rarely on the court use the cash.
00:44:33.000 | - I really don't.
00:44:35.000 | I can't think of one law or promotion
00:44:37.000 | that hasn't been used before now.
00:44:42.000 | It is the one for you.
00:44:44.000 | And let's start from the first principles, all right?
00:44:47.000 | The economy grows or productivity grows at 2%.
00:44:51.000 | That's one of the constants of capitalism
00:44:54.000 | in the development of the economy.
00:44:56.000 | Okay, 2% growth.
00:44:57.000 | China shouldn't, but we're going to do 5% or 6% or 7%
00:45:00.000 | or 8% because you're catching up in technology.
00:45:04.000 | If you're at the leading edge,
00:45:06.000 | 2% is as good as it gets in the first issue.
00:45:09.000 | We get another percent in this country for inflation.
00:45:13.000 | So, okay, we're at 3% when things are really,
00:45:16.000 | people will all know in the long term.
00:45:19.000 | That's not what you see when you want to share a stock.
00:45:22.000 | A stock's value is shared for more than 2%.
00:45:25.000 | So it's 2% more shares every year.
00:45:27.000 | So that per share that you give
00:45:29.000 | only grows at a percent or a percent and a half.
00:45:32.000 | Now, what CEO, chairman of the board,
00:45:35.000 | is going to go before his shareholders and say,
00:45:38.000 | "I'm going to grow our earnings on a per share basis
00:45:41.000 | of a percent and a half every year.
00:45:43.000 | Don't you just love me?"
00:45:44.000 | All right, well, he's got to grow 10%, 15%.
00:45:47.000 | And to get 10%, 15% early,
00:45:49.000 | you start really doing the wrong things and losing it.
00:45:53.000 | The best example that I can think of--
00:45:55.000 | I mean, there's all sorts of data in finance literature
00:45:58.000 | you don't want to know about--
00:45:59.000 | that basically says that corporations
00:46:01.000 | have to fund their projects externally.
00:46:03.000 | In other words, that's the bottom of the bank,
00:46:06.000 | the bond-holding public, bond-buying public,
00:46:09.000 | that they tend to do pretty well.
00:46:11.000 | But when they take the capital internally,
00:46:14.000 | it's not subject to the discipline of the bank.
00:46:17.000 | They take it from their cash flow or their cash pad.
00:46:20.000 | But these projects do very, very poorly
00:46:22.000 | because they're not subject to the same discipline.
00:46:25.000 | Finally, the best example that I can think of
00:46:27.000 | is we now have a 30-year, a 40-year track record, almost,
00:46:30.000 | on real estate investment trusts.
00:46:32.000 | On real estate investment trusts.
00:46:35.000 | And the return on rates over the past 40 years,
00:46:40.000 | if I've got my facts straight,
00:46:42.000 | are about a percent or a percent and a half higher
00:46:47.000 | than the overall market.
00:46:49.000 | Why?
00:46:50.000 | Because rates have to distribute out 90% of their earnings
00:46:55.000 | to the public, to the shareholders.
00:46:57.000 | All right?
00:46:58.000 | And then the shareholders get to decide
00:47:01.000 | how to deploy that capital and not the company.
00:47:04.000 | And that's why they do better.
00:47:06.000 | - Let me add to that.
00:47:07.000 | I've seen this happen.
00:47:08.000 | I was a director of a very large paper company now gone.
00:47:12.000 | And it was fun.
00:47:14.000 | It was a Fortune 500 company.
00:47:15.000 | It was a Fortune 200 company, actually.
00:47:17.000 | And so I saw this happening.
00:47:19.000 | And when I finally concluded,
00:47:21.000 | after a long period of experience in New York,
00:47:23.000 | and it took me a long time to learn what it was all about
00:47:26.000 | and learn how to behave as a corporate director,
00:47:28.000 | it was not really my style.
00:47:30.000 | But it was a fun learning experience
00:47:31.000 | that I kind of got a hold of things.
00:47:32.000 | One, investment factors.
00:47:35.000 | Wall Street is always wanting to do a deal.
00:47:38.000 | This will not surprise anyone.
00:47:40.000 | So they come to the head of the company and say,
00:47:41.000 | "Well, I've got a company for you."
00:47:43.000 | And they give you all this paper, right?
00:47:46.000 | All this paper.
00:47:47.000 | And so you look at all the numbers for the deal,
00:47:51.000 | and they don't look very good.
00:47:53.000 | So the problem, one, is there are wheelers and dealers
00:47:56.000 | that are willing by getting companies
00:47:57.000 | to take over other companies' investment value.
00:48:00.000 | And then there's waiting companies to do something
00:48:03.000 | not because it will increase their growth,
00:48:06.000 | but because when they put the two companies together,
00:48:08.000 | they will get synergies.
00:48:10.000 | So it might be hundreds of millions of dollars a year
00:48:13.000 | for synergies, without which the numbers won't work.
00:48:16.000 | And you say, "This will be non-pollutive,
00:48:18.000 | maybe even accretive."
00:48:21.000 | Then the world believes you
00:48:22.000 | if you bring out all these numbers.
00:48:24.000 | But the accretion is because of these synergies,
00:48:27.000 | you get hundreds of millions of dollars.
00:48:28.000 | And then the deal is done,
00:48:30.000 | and we wait for the synergies to come in.
00:48:32.000 | And they don't announce themselves.
00:48:34.000 | Like Santa Claus on Christmas Eve
00:48:36.000 | coming in with a sleigh and 820 reindeer.
00:48:39.000 | You know, it's a kind of day-by-day thing,
00:48:41.000 | and other things happen.
00:48:43.000 | And the synergies, as far as I can see,
00:48:45.000 | never happen in any way like the way they were projected to happen.
00:48:50.000 | So those two things could be odds on any kind of merger.
00:48:54.000 | They could make the odds very long before.
00:48:58.000 | As I said this morning, 62%, 65% of these kind of acquisitions
00:49:04.000 | and accommodations fail.
00:49:06.000 | That's all in terms.
00:49:08.000 | It's also advising people to do something.
00:49:10.000 | Because there are limits, as Bill says,
00:49:12.000 | limits on what you can earn on capitalism, competitive markets.
00:49:15.000 | This is capitalism.
00:49:16.000 | That's a harsh, unforgiving market.
00:49:20.000 | And corporations, shoemakers will stick to their legs.
00:49:25.000 | It used to be said, back in the days when there were shoemakers,
00:49:28.000 | in Italy, I guess,
00:49:30.000 | that these corporations think they can do all things for all people.
00:49:34.000 | I just don't think you can do that.
00:49:37.000 | I think it's one of the great mysteries of investing in capitalism
00:49:40.000 | is why sophisticated, long-term investors can realize that.
00:49:45.000 | Although, what's it going to do for the economy?
00:49:47.000 | What are the companies that are going to grow?
00:49:49.000 | Smart people just buy a company that sticks to its name
00:49:52.000 | and gives you a less competitive path to help you get it done,
00:49:55.000 | and you get it decided to help you get it done.
00:49:57.000 | You know, one thing I think you've omitted
00:50:00.000 | of involving internal development in the economy
00:50:04.000 | is that it's a lot easier to buy a company,
00:50:08.000 | to emerge, and then come close.
00:50:10.000 | And they tend to get down the sheet
00:50:12.000 | and there's various kinds of fooling methods,
00:50:14.000 | but it's a good thing I've been around for a long time.
00:50:16.000 | On the other hand, if you're not sticking to your name
00:50:19.000 | but trying to diversify,
00:50:20.000 | it's hard to start a business.
00:50:22.000 | You need to create new areas.
00:50:24.000 | And that's why, I think, it's easy.
00:50:27.000 | It's a good thing to also have a point of capital.
00:50:30.000 | Hi, I just want to read a line from one of these companies.
00:50:44.000 | By the way, Peter Lynch calls this thing "diversification."
00:50:47.000 | Do you remember Peter Lynch's book?
00:50:49.000 | It's a company that's very good at one thing,
00:50:51.000 | but not very good at another thing,
00:50:53.000 | and they do worse at mine.
00:50:55.000 | And the last company, in my opinion, to do this is Google.
00:50:59.000 | I don't know how many of you caught the story
00:51:02.000 | that Google is getting into power transmission business.
00:51:05.000 | They are teaming up with a company
00:51:08.000 | called Atlantic Link Connection,
00:51:10.000 | and they're spending roughly $5 billion
00:51:12.000 | to create the Eastern Bergen Gulf and the East Coast
00:51:15.000 | because they decided that they wanted to be good to the--
00:51:18.000 | not good to the economy, but good to the environment.
00:51:22.000 | And so they've got a company that,
00:51:24.000 | if they got all this cash on hand,
00:51:26.000 | in my opinion, they should be paying it out
00:51:28.000 | in the form of a dividend,
00:51:29.000 | but they're not ready to do that yet,
00:51:31.000 | so they're diversifying now.
00:51:32.000 | This is just the end.
00:51:34.000 | They're also in another business.
00:51:36.000 | You may have read something about it in the last few days,
00:51:38.000 | and that is they have a car
00:51:40.000 | that drives perfectly well without a driver.
00:51:43.000 | And where that leaves all of us, I'm not sure.
00:51:45.000 | [laughter]
00:51:47.000 | But it's parading around out there.
00:51:49.000 | They have somebody sitting in it just in case.
00:51:52.000 | But Atlantic Link--
00:51:55.000 | - They're also coming up with their own inflation index, too.
00:51:58.000 | - Yeah, I'm sure.
00:52:02.000 | - Well, I think it's time to wrap up.
00:52:06.000 | That's got to go.
00:52:07.000 | And we want to get to the book signs,
00:52:09.000 | the next book sign before it does.
00:52:11.000 | So I thank you all,
00:52:13.000 | and we'll turn the book on.
00:52:15.000 | [applause]
00:52:17.000 | - Thank you again for all the attention you've given me today.
00:52:19.000 | I don't think it's perfect, but we'll get it done.
00:52:21.000 | We won't go without your dad for another hour and a half,
00:52:23.000 | that's fine.
00:52:24.000 | It's not as good a book.
00:52:25.000 | But let me say a couple things.
00:52:27.000 | We've got my new book out there,
00:52:28.000 | just 10 copies of the first 150 copies or so that we have.
00:52:33.000 | And as Mel said, I can only do a signature.
00:52:35.000 | There's just too many people that are going to message to everybody.
00:52:38.000 | But I only want a signature.
00:52:39.000 | I'm going to have to wait it out and do that.
00:52:41.000 | And then, if we have a limited number of copies,
00:52:45.000 | we're going to ask you people who have copies here,
00:52:49.000 | if only you'd take one for the family.
00:52:52.000 | So I feel bad for you about that.
00:52:54.000 | You might have to teach how to do that.
00:52:56.000 | It's your own book.
00:52:58.000 | But the copy will be $18.95.
00:53:00.000 | It's the last of us.
00:53:02.000 | And if you get one for free,
00:53:03.000 | that's only going to judge the prices.
00:53:05.000 | It's $9.50.
00:53:06.000 | [laughter]
00:53:09.000 | So thank you again.
00:53:11.000 | I'm sorry I can't do with you.
00:53:14.000 | [inaudible]
00:53:31.000 | So thanks, and let's go sign the book.
00:53:32.000 | [laughter]
00:53:33.000 | [silence]
00:53:39.000 | [BLANK_AUDIO]