Bogleheads® Speaker Series – Bill Bernstein & Bob Pisani

00:00:00.000 | (silence)

00:00:02.160 | My name is Rick Ferry and I'm the president

00:00:06.320 | of the John C. Vogel Center for Financial Literacy.

00:00:09.060 | We are a non-profit organization, a 501(c)(3) organization.

00:00:13.620 | You can go to vogelcenter.net.

00:00:16.060 | That means your tax-deductible contributions

00:00:18.420 | are greatly appreciated.

00:00:21.060 | And today we feature Bob Pisani

00:00:24.540 | as CNBC's Senior Markets Correspondent

00:00:27.980 | who has covered Wall Street for 25 years.

00:00:31.980 | Today he'll be interviewing Dr. Bill Bernstein

00:00:35.500 | about his new book, "The Delusions of Crowds."

00:00:38.380 | And if you missed this or can't watch the whole thing,

00:00:42.740 | we are recording it and it will be available

00:00:44.780 | on vogelheads.org as well as the Vogel Center site,

00:00:48.780 | vogelcenter.net within a few days.

00:00:51.660 | So with no further ado, I'm going to turn it over to Bob.

00:00:56.060 | - I can't tell you how honored I am to be here.

00:00:59.740 | I am a Markets Correspondent, as you heard.

00:01:02.740 | I've been with CNBC for 31 years.

00:01:04.500 | I've been the Markets Correspondent since 1997.

00:01:09.380 | I met Jack Vogel in 1997 at that time

00:01:12.980 | and had a phone conversation with him

00:01:15.540 | and was profoundly influenced by him so much.

00:01:18.540 | So I opened a Vanguard account for my wife

00:01:20.220 | in that year in 1997.

00:01:22.220 | I'm a Vogelhead in certainly maybe not officially a member,

00:01:27.220 | I'd like to be, but I have been for 24 or 25 years.

00:01:31.860 | So it's a great honor and I'm a big fan of Rick Ferry

00:01:34.660 | and William Bernstein.

00:01:36.980 | We're gonna try to keep to the time here.

00:01:39.380 | It's a Saturday afternoon, it's beautiful.

00:01:41.180 | Spend a lot of your time.

00:01:43.380 | We're gonna try to keep it to one hour.

00:01:45.780 | Bill Bernstein, when I, I've known Jim for many years,

00:01:50.020 | when Jim took this over and said,

00:01:51.940 | "I'm gonna do something with the Vogelheads."

00:01:53.380 | I said, "I want in on this."

00:01:54.460 | And he said, "Well, Bill Bernstein's doing it."

00:01:56.580 | And I said, "I've known Bill Bernstein's work for years."

00:01:59.940 | "The Birth of Plenty" is one of my favorite

00:02:02.900 | economics history books.

00:02:04.620 | And I read the new one, "The Delusion of Crowds"

00:02:06.780 | and "Why People Go Mad in Groups."

00:02:08.020 | And that's what we wanna at least start out talking about.

00:02:10.660 | I wanna remind everyone, if you have a question,

00:02:12.500 | you can put it on the right side.

00:02:13.660 | I will do my very best to make sure Bill hears about it.

00:02:17.860 | But Bill, tell us a little bit

00:02:19.900 | about "The Delusion of Crowds."

00:02:21.660 | Obviously McKay's book, and it's not pronounced McKay,

00:02:26.020 | fix that for us, but "Extraordinary Popular Delusions

00:02:29.540 | "and the Madness of Crowds"

00:02:30.780 | covered some of the stuff you covered before,

00:02:32.780 | but you felt the need to sort of, I don't know,

00:02:34.740 | update it is the right word,

00:02:36.060 | but tell us a little bit, very briefly,

00:02:37.780 | about what's the genesis of this new book?

00:02:40.820 | Why did you feel the need to look

00:02:42.740 | at "Extraordinary Popular Delusions" again?

00:02:46.220 | - Well, the genesis of the book was almost 30 years ago

00:02:51.220 | when I read Charles McKay's book.

00:02:53.780 | It's McKay if you're Scotsman,

00:02:55.180 | if you're American, it's okay to say McKay.

00:02:57.100 | Yeah, if you're an American, it's okay to say McKay.

00:03:00.020 | And I read this book,

00:03:00.940 | "Extraordinary Popular Delusions

00:03:02.700 | "and the Madness of Crowds."

00:03:03.980 | And the original version of this book was written in 1841.

00:03:08.220 | And it's a remarkable book

00:03:10.060 | because it describes many different mass delusions,

00:03:14.460 | religious ones, and also financial ones.

00:03:17.460 | And it's most famous for its descriptions

00:03:19.900 | of the three great bubbles of the 17th and 18th centuries,

00:03:23.780 | the tulip mania, the famous tulip mania.

00:03:25.700 | He's the one who actually coined that term

00:03:28.460 | and brought it into the English language,

00:03:30.140 | as well as the twin bubbles in Paris and London in 1720.

00:03:34.180 | And the descriptions are absolutely remarkable

00:03:38.340 | of people just going absolutely nuts

00:03:41.060 | over stocks or tulips or what have you.

00:03:44.580 | And how it became a society-wide mania.

00:03:48.220 | And then it all crashed down.

00:03:49.700 | And at the time that I read this book in the early 1990s,

00:03:52.540 | I thought it was kind of interesting,

00:03:55.340 | kind of like a B movie about the Roman Empire,

00:03:57.780 | not terribly relevant to anything that I was seeing today.

00:04:01.060 | And then lo and behold, before my very eyes,

00:04:03.220 | several years later, the tech bubble blew

00:04:06.940 | and people began behaving

00:04:08.780 | in exactly the same way that McKay described.

00:04:12.260 | And I thought to myself, gosh,

00:04:14.180 | I've seen this movie before and I know just how it ends.

00:04:18.420 | And it certainly redounded

00:04:21.340 | to the bottom line of my portfolios.

00:04:23.420 | I was able to ignore the madness and stay away.

00:04:28.020 | And it turns out that that's not a unique experience.

00:04:30.180 | McKay has been saving people's bacon for the past 150 years.

00:04:34.620 | Most famously, Bernard Baruch read the book in 1907

00:04:39.620 | and it saved his bacon back then.

00:04:42.220 | And he was so impressed with it

00:04:43.460 | that he actually wrote the forward

00:04:45.220 | to the 1932 version of the edition of the book.

00:04:48.420 | It's been in print ever since.

00:04:51.140 | So, you know, the book really impressed me.

00:04:53.820 | And then several years ago,

00:04:57.140 | I observed like all the rest of us

00:04:58.740 | how the Islamic State was able to attract people

00:05:03.740 | from around the world to one of the worst places

00:05:06.860 | on the planet to fight and to die.

00:05:09.420 | And it turned out that they did that

00:05:11.900 | with a narrative that was very similar

00:05:13.820 | to the one that McKay wrote about in his book

00:05:17.340 | about the Crusades and other religious manias.

00:05:21.980 | And so I thought, you know, the time has come

00:05:24.380 | to write a new version of the book,

00:05:27.740 | an updated version of the book

00:05:29.260 | and updated with some of the modern science behind it.

00:05:32.260 | Now I have a trigger warning about the book,

00:05:34.100 | which is more than half the book is about religious manias.

00:05:38.060 | And if that's not your cup of tea

00:05:40.300 | or if you're a particularly devout follower

00:05:43.420 | of one religion or another,

00:05:45.260 | you may not want to read the book.

00:05:47.500 | But if you're interested in financial manias,

00:05:50.860 | you're interested in the psychology behind financial

00:05:54.020 | and religious manias, then proceed at your own pace.

00:05:58.060 | - Well, I read every word of the book, Bill,

00:06:00.420 | in preparation for this.

00:06:01.420 | And I have to say, I marveled at your stamina

00:06:04.740 | to go through so many hundreds of years of religious mania.

00:06:08.260 | The Anabaptist chapter was fascinating.

00:06:10.420 | It really was something.

00:06:11.740 | I want to get to the conclusions here of the book,

00:06:14.940 | because even though there is some,

00:06:18.380 | I understand modern challenges about McKay's interpretation

00:06:21.460 | of how severe the mania thing was.

00:06:24.140 | As you know, there's some modern research

00:06:25.940 | that suggests it wasn't as bad,

00:06:27.420 | but I don't think that really matters.

00:06:29.460 | I think there's a whole point to all of this,

00:06:31.540 | which is that the way human brains are structured,

00:06:34.340 | people tend to keep behaving the same way

00:06:36.260 | over and over again.

00:06:37.220 | I'm wondering if you could get to the core point

00:06:40.060 | about the book, the lesson from the book,

00:06:41.860 | which is why humans tend to hurt a bit,

00:06:44.460 | why they're so susceptible to manias of all types.

00:06:47.260 | Can you give us the conclusion here

00:06:48.700 | of what the book concludes, essentially?

00:06:52.180 | - Well, the book is really a meditation on human nature.

00:06:56.220 | First and foremost, we are running around this planet

00:07:01.220 | with Stone Age brains, brains that evolved

00:07:04.020 | during the Stone Age, in the Space Age.

00:07:06.940 | So we're navigating a Space Age world with Stone Age minds.

00:07:10.860 | And the first thing that you have to know about human beings

00:07:16.020 | is that first and foremost, we are the ape that imitates.

00:07:19.260 | We do what other people around us do.

00:07:22.180 | And the question is, why do we do that?

00:07:26.060 | And the answer is pretty simple.

00:07:27.540 | The best way to think about it

00:07:30.220 | is to think about the spread of humankind

00:07:34.620 | throughout North America and South America,

00:07:37.860 | which took place over a very short period of time,

00:07:41.180 | several thousand years,

00:07:42.940 | from the Bering Strait down to the Tierra del Fuego,

00:07:46.020 | maybe at most 10,000 years.

00:07:48.060 | And in the process, human beings had to learn

00:07:50.500 | how to make kayaks and hunt whales and seals,

00:07:53.900 | and then hunt bison on the Great Plains,

00:07:56.500 | and then to fashion pulleys and blowguns in the Amazon.

00:08:01.500 | And if you've never done any of those things before,

00:08:04.500 | you're never going to figure it out for yourself.

00:08:06.940 | So you have to find the one lucky person or people

00:08:11.540 | who gradually over time figure out

00:08:14.060 | how to do each of those things, and then you imitate them.

00:08:16.980 | So it turns out that imitation

00:08:20.100 | is an enormously valuable skill

00:08:22.780 | to the survival of our species.

00:08:25.100 | And it served us very well during the Stone Age.

00:08:27.900 | But in a modern post-industrial society

00:08:30.140 | where you have to invest decades in advance,

00:08:32.740 | it's not so salutary.

00:08:35.100 | Now, the other characteristic

00:08:36.820 | is that we are the ape that tells stories.

00:08:39.820 | You know, when Stone Age hunters

00:08:42.380 | went out to hunt a mastodon,

00:08:45.540 | they didn't issue each other vectors

00:08:47.940 | or mathematical descriptions or geometric descriptions.

00:08:50.660 | They just, one guy said to the other,

00:08:52.420 | "Hey, you go right, I'll go left,

00:08:53.740 | "and we'll spear the beast from both sides."

00:08:55.580 | Okay, we tell stories, in other words.

00:08:58.180 | And so we are uniquely susceptible

00:09:01.300 | to narratives as opposed to hard facts.

00:09:05.020 | So those are the two basic characteristics

00:09:07.780 | of why we behave the way we do

00:09:09.540 | in the modern capital markets.

00:09:11.420 | - So narratives are essentially shortcuts

00:09:14.660 | to understanding the world, is that correct?

00:09:17.300 | And sometimes they can hijack

00:09:19.260 | the more rational center of the brain.

00:09:20.660 | There's a very important point here

00:09:21.940 | about narratives that you're trying to make.

00:09:24.300 | - Yeah, narratives, it turns out,

00:09:26.060 | are the way that we understand things,

00:09:28.420 | and we respond much more to narratives

00:09:31.020 | than to dull facts.

00:09:35.380 | And I'll give you an example of this,

00:09:36.540 | and it's political,

00:09:37.380 | but I'm even gonna mention Donald Trump's name,

00:09:39.380 | but I think it's pretty neutral,

00:09:40.980 | which is that late in 2015,

00:09:43.660 | during one of the Republican nominating debates,

00:09:47.820 | the primary debates, somebody asked Ben Carson

00:09:51.780 | about vaccinating his children

00:09:56.060 | and whether we should be vaccinating children or not.

00:09:58.460 | And he gave a very good scientific answer.

00:10:00.620 | He's a neurosurgeon after all.

00:10:01.980 | And he said, "Look, I've seen the data,

00:10:03.620 | "and the data is that it doesn't cause,

00:10:05.380 | "vaccinations don't cause autism,

00:10:07.500 | "and we should vaccinate our children."

00:10:11.340 | Now, he was a good Republican,

00:10:12.860 | so he said, "The government shouldn't force us to do it."

00:10:15.340 | It was a pretty good answer, okay?

00:10:16.820 | And then Donald Trump broke in and said,

00:10:20.620 | "I had an employee who had a child, a beautiful child,

00:10:24.700 | "and she was vaccinated, and she got autism."

00:10:29.060 | And this is turning into an epidemic, I tell you.

00:10:32.380 | Every single person, every single political talking head

00:10:35.220 | who saw that scored that in Trump's favor, okay?

00:10:38.620 | Even though he had gotten the facts completely wrong,

00:10:42.100 | because he had a better narrative than Ben Carson did.

00:10:46.300 | And that's something we see time and time again

00:10:48.260 | in the capital markets.

00:10:49.460 | - Right, and that narrative, in that case,

00:10:51.380 | that narrative appealed to the fear center in your brain,

00:10:54.380 | whatever, the amygdala,

00:10:55.340 | whatever part of your brain that went off,

00:10:56.980 | and it had more relevance than simply stating a dry fact,

00:11:00.460 | which is the evidence is that there is no problem

00:11:02.980 | with vaccination and autism.

00:11:04.540 | - Yeah, the message went straight to the amygdala,

00:11:07.300 | and that pathway is very fast,

00:11:09.540 | and it overwhelms the pathways

00:11:11.740 | to our higher thinking centers in the cortex,

00:11:15.820 | which are very slow.

00:11:17.540 | - Right, let me move on to bubbles,

00:11:20.060 | and let's try to make some conclusions about what bubbles.

00:11:24.100 | One interesting thing about bubbles

00:11:25.860 | is they all exhibit certain characteristics in common.

00:11:29.580 | You had a very interesting discussion about Minsky,

00:11:32.460 | who was a fairly obscure economist,

00:11:35.140 | as far as I can tell,

00:11:37.380 | but is sort of now widely cited

00:11:39.660 | for his study of bubbles and bubble conditions,

00:11:42.460 | and he noted there were two essential factors.

00:11:44.860 | I'm not sure there's just two,

00:11:45.900 | but you point out in the book

00:11:48.860 | that in order to have a bubble,

00:11:50.100 | you need to have very cheap money, credit,

00:11:54.500 | and you need a revolutionary technology.

00:11:56.380 | Can you very briefly discuss that,

00:11:57.940 | and are there other factors

00:11:59.340 | that modern scholarship might have identified?

00:12:02.220 | They all have something in common, that's my point,

00:12:03.980 | and we should all be able to recognize and say,

00:12:06.180 | tulip mania bubble and the dot-com bubble

00:12:09.100 | actually had something in common,

00:12:10.380 | and these are the common characteristics.

00:12:12.100 | - Yeah, the two driving characteristics

00:12:14.420 | of any financial bubble are cheap credit

00:12:17.180 | or low interest rates,

00:12:18.420 | which is another way of saying that,

00:12:21.300 | and a revolutionary technology

00:12:26.020 | that captures people's imagination.

00:12:28.740 | So, for example, right now,

00:12:32.420 | what's there to invest in?

00:12:33.900 | You can't put your money into bonds

00:12:36.460 | because they have a near zero yield

00:12:38.420 | with any reasonable quality at all.

00:12:41.100 | You can't put your money into traveling.

00:12:43.540 | You can't go to restaurants.

00:12:46.580 | It doesn't make any sense to buy nice clothes

00:12:49.780 | as we both demonstrated right now,

00:12:52.540 | so you put your money into stocks.

00:12:54.740 | Well, the stocks of what companies?

00:12:56.020 | Well, you pick whatever is the most exciting technology

00:12:59.100 | you can find, whether it's cryptocurrency

00:13:03.620 | or Tesla or whatever,

00:13:05.820 | and so the price gets driven up,

00:13:07.580 | and that becomes a self-reinforcing phenomenon.

00:13:10.340 | The more prices rise, the more money that people make,

00:13:12.580 | the more excited they get,

00:13:15.140 | and eventually, it reaches a breaking point

00:13:18.620 | where it explodes,

00:13:20.420 | but you can say what's going to happen,

00:13:24.340 | but you just can't say when.

00:13:26.540 | - Yeah.

00:13:28.180 | There's been some other studies that have done

00:13:30.060 | that add a few other things

00:13:31.220 | besides easy money and disruptive technology,

00:13:33.380 | so I guess financial innovations,

00:13:35.900 | I mean, so the mortgage products

00:13:38.060 | that were introduced in the 1990s, for example,

00:13:41.140 | that helped lead to the financial crisis.

00:13:45.460 | Maybe some other things like supply/demand imbalances

00:13:49.260 | and things like that.

00:13:50.940 | Let me ask you about a very specific bubble right now.

00:13:53.140 | I'm going to defer back to the book,

00:13:54.900 | but I want to divert and go right to this point

00:13:57.780 | 'cause I've had questions here about Bitcoin.

00:14:00.300 | Is Bitcoin a bubble?

00:14:02.260 | Is it a mania?

00:14:04.700 | I'm not asking you to pronounce long-term

00:14:06.420 | what you think of cryptocurrencies.

00:14:07.580 | If you want, go ahead,

00:14:08.980 | but let me try to make it very immediate right now.

00:14:11.700 | Give us your thoughts on what's going to happen to Bitcoin.

00:14:16.460 | - Well, I'll try not to be inflammatory.

00:14:19.580 | I will not use terms like coinpocalypse or cointastrophe

00:14:24.580 | or cointribulation.

00:14:27.620 | I will simply say that there's a lot of...

00:14:29.940 | (laughs)

00:14:31.020 | There's a lot of-

00:14:31.860 | - I love it when you talk in parentheses, which is great.

00:14:34.700 | I don't want to use apocalyptic terms,

00:14:36.980 | but let me name them right now.

00:14:38.620 | - Yeah.

00:14:39.660 | - Go ahead, I'm just giving you-

00:14:41.220 | - No, no, no, no.

00:14:42.060 | I deserve that.

00:14:42.900 | What I will say is that there's a lot of speculation

00:14:48.220 | by people who are less than well-informed

00:14:50.860 | and the history of how this falls out

00:14:56.980 | is not very encouraging.

00:14:59.220 | And that's the whole point of reading the Mackay book

00:15:01.460 | is you see not only the manias,

00:15:03.740 | but you also see how they ended.

00:15:06.500 | Now, not all manias end in a bust.

00:15:09.460 | Maybe only 80 or 90% do.

00:15:13.180 | It's been pointed out to me that there were some manias

00:15:15.180 | that really didn't result in a horrible bust

00:15:18.620 | that are relatively obscure examples.

00:15:20.660 | For example, there were three railway manias in England

00:15:23.180 | during the 19th century.

00:15:24.820 | And the second one really didn't end in much of a bust,

00:15:28.980 | but the other nine or 10 ones that you can easily name did.

00:15:33.500 | So yeah, there's no question in my mind

00:15:36.260 | that Bitcoin is a mania.

00:15:38.220 | And the question is, why do I say that?

00:15:41.540 | Because they fit Mackay's descriptions

00:15:45.260 | and the Mackay description of a mania,

00:15:48.900 | as well as what we all observed during the housing crisis,

00:15:52.260 | during the housing bubble, excuse me,

00:15:54.700 | or during the tech bubble of the late '90s

00:15:57.820 | were four things.

00:15:59.380 | And the first thing that you see

00:16:01.500 | is that speculation becomes topic A.

00:16:05.220 | When everybody starts talking about a given investment

00:16:08.260 | at a party or when they meet casually,

00:16:10.460 | that is a bubble, all right?

00:16:12.260 | When you see people who are quitting otherwise good jobs

00:16:16.220 | to trade assets,

00:16:18.500 | thinking they're going to become fabulously rich

00:16:20.500 | and they'll never have to work again, that is a bubble.

00:16:23.620 | And then there are two other things

00:16:24.860 | which are a little, not as commonly observed,

00:16:27.940 | but are still characteristic,

00:16:29.660 | which are when skepticism is met with vehemence.

00:16:32.660 | I can remember several times during the late 1990s

00:16:35.660 | when I expressed skepticism about the tech bubble,

00:16:39.220 | being basically told that I was an idiot,

00:16:41.740 | if not seeing my parentage insulted.

00:16:44.460 | That sort of vehemence, you're also seeing with Bitcoin

00:16:48.100 | as well, people will get very angry at you

00:16:52.380 | if you express skepticism.

00:16:53.700 | You're an old fogey, you just don't get it.

00:16:56.540 | You don't get it or you just don't get it

00:16:59.140 | are five words that you hear very frequently

00:17:02.380 | at the top of a mania.

00:17:04.540 | And then finally, it's extreme predictions.

00:17:06.660 | Bitcoin's not going to go to 100,000,

00:17:08.660 | it'll go to 500,000 or a million or 10 million

00:17:11.420 | because don't you know, they're not making any more of them.

00:17:13.980 | When you start hearing those sorts of extreme predictions,

00:17:16.420 | that's the fourth factor.

00:17:17.900 | And we've seen all four of those things right now

00:17:20.140 | with Bitcoin.

00:17:22.100 | - Yeah, I agree with your point.

00:17:25.380 | The only I would point out is, as you pointed out in the book

00:17:29.580 | .com was a bubble, it blew up, but the internet lasted.

00:17:33.980 | Why can't Bitcoin blow up, but blockchain really does last?

00:17:37.860 | Doesn't that seem like a lasting technology to you?

00:17:40.580 | - Oh, absolutely.

00:17:42.420 | And this is one of the central points

00:17:45.660 | of the financial section of the book,

00:17:48.100 | which is that bubble investors turn out to be

00:17:51.420 | capitalism's philanthropist.

00:17:53.340 | They wind up losing a lot of money

00:17:56.540 | in order to fund these technologies that last.

00:17:59.460 | So there's no question that blockchain may turn out

00:18:01.980 | to be a very transformational technology

00:18:06.500 | in the way we do finance.

00:18:07.900 | It's just that the people who are investing

00:18:10.700 | in the Bitcoin related companies

00:18:12.100 | probably aren't going to benefit.

00:18:14.300 | The best example of that I had in--

00:18:16.700 | - The Fiverr, right?

00:18:17.740 | - Yeah, it was Fiverr. - WorldCom, right?

00:18:18.940 | - Yeah, it was WorldCom.

00:18:20.220 | I mean, the people who invested in WorldCom

00:18:23.820 | got taken to the cleaners,

00:18:26.340 | but the Fiverr that WorldCom laid

00:18:28.460 | still is something like 20%

00:18:30.420 | of today's submarine traffic capability.

00:18:35.060 | So WorldCom and Gary Whittock,

00:18:37.660 | the guy who did the company,

00:18:39.300 | absolutely savaged his investors,

00:18:42.060 | but he was a real benefactor

00:18:43.380 | to society and the world at large.

00:18:45.740 | - Yeah, I agree with your point.

00:18:47.580 | I have no idea whether Bitcoin is worth 5,000 or 50,000.

00:18:51.580 | Just, I don't have any idea whether, you know,

00:18:54.020 | it's worth somebody spending $69

00:18:57.420 | for a non-fungible token or NFT that just happened.

00:19:01.340 | I used to collect comic books in the 1960s.

00:19:03.300 | Somebody just paid 3.25 million

00:19:05.620 | for the first "Superman" action one the other day.

00:19:08.460 | And you might say, "What idiot is gonna spend 3.25 million

00:19:11.340 | "for a comic book?"

00:19:12.460 | But somebody did.

00:19:13.700 | So I'm very agnostic on prices.

00:19:15.500 | What I am excited about is blockchain

00:19:17.580 | is a long-term disruptive technology.

00:19:20.140 | I think it's gonna last.

00:19:21.460 | I would pay very close attention

00:19:22.740 | to the Coinbase direct listing this week.

00:19:25.220 | That's gonna be, depending on how that thing prices,

00:19:28.860 | that could force another whole new wave

00:19:31.100 | of investment in crypto, because that thing is so big.

00:19:34.260 | We literally don't know what it's worth,

00:19:36.660 | 50 billion, 100 billion.

00:19:37.860 | It's literally don't know.

00:19:39.100 | But I'll give you an idea.

00:19:39.940 | If it goes at $50 billion,

00:19:43.260 | NASDAQ is currently valued at 25 billion.

00:19:46.260 | The New York Stock Exchange, with ICE,

00:19:48.020 | with the entire organization around New York Stock Exchange

00:19:50.460 | is 65 billion.

00:19:51.940 | So essentially there's an exchange here.

00:19:54.060 | It's really an exchange, Coinbase,

00:19:56.340 | that is suddenly valued as much as the New York Stock Exchange

00:19:59.460 | and all the exchanges that are built around the NYSE.

00:20:03.180 | Yeah, that's pretty amazing.

00:20:04.460 | I don't know if that's signs of a bubble or mania,

00:20:06.500 | but it's a sign that a lot of people think

00:20:08.980 | there's a lot of potential

00:20:10.020 | in blockchain technology in general.

00:20:12.580 | And that's what I think people should pay attention to.

00:20:14.940 | Let me just move on.

00:20:15.940 | You mentioned the sort of bubble path,

00:20:19.260 | the physiology, diagnostic signs.

00:20:22.300 | You had the four P's that I liked very much, the promoters.

00:20:25.660 | So you need somebody out there

00:20:27.420 | and talk about the new technology.

00:20:29.580 | You need participants, you need buyers.

00:20:32.340 | You need a press.

00:20:33.900 | One of the things Robert Shiller pointed out

00:20:35.420 | in "Irrational Exuberance," another book

00:20:37.500 | that I got in the first three years going down to the NYSE.

00:20:41.780 | I met Shiller and when it came out in 2000,

00:20:44.740 | I think, "Irrational Exuberance,"

00:20:46.220 | I met him just after that.

00:20:47.340 | He pointed out that one of the common characteristics

00:20:50.740 | of mania was bubbles first started appearing

00:20:53.340 | when the press started appearing in the 1600s.

00:20:55.700 | And he was very big, just as you were,

00:20:57.900 | pointing out the role of the press

00:20:59.820 | in helping promote these manias.

00:21:04.820 | And politicians, of course, getting involved various ways

00:21:09.140 | in either promoting them or changing the law.

00:21:12.380 | So I don't have a question here, Bill.

00:21:14.700 | I just want everyone to realize

00:21:16.140 | that what are the characteristics of bubbles?

00:21:18.580 | They mean four things, the promoters, the participants,

00:21:22.620 | the press, and the politicians.

00:21:26.500 | Is there anything you want to add to that at all?

00:21:27.940 | I'm doing a little learning thing here

00:21:29.580 | for everyone who hasn't read the book.

00:21:31.460 | - Well, yeah, what I do is I have this medical,

00:21:34.140 | I'm a doctor, so I have this medical model of bubbles.

00:21:37.500 | So we already talked about the underlying path

00:21:39.580 | of physiology, which is the Minsky criteria,

00:21:41.900 | credit and technology, be it financial or technological,

00:21:47.540 | to which I add two things, which are amnesia.

00:21:50.100 | And then, and particularly the fourth thing

00:21:53.180 | is the amnesia for traditional valuation criteria,

00:21:56.140 | which go down the drain during a bubble.

00:21:58.460 | And then there's the anatomy

00:22:00.100 | and these forced locuses of the anatomy,

00:22:02.420 | which you just mentioned.

00:22:04.620 | There's the promoters, the participants,

00:22:07.020 | the press, and the politicians.

00:22:09.700 | And to me, the most fascinating thing in the book

00:22:13.140 | that I wrote about in the book were these promoters

00:22:16.420 | of the various schemes involved with the bubble.

00:22:20.060 | So starting with John Law,

00:22:22.260 | with the Mississippi Company bubble,

00:22:24.860 | and then there was a guy in London named John Blunt,

00:22:28.380 | who was a real scoundrel.

00:22:30.340 | And then there was a man by the name of George Hudson,

00:22:32.500 | who basically built out a lot of England's rail network.

00:22:36.260 | And a man named Samuel Insull in the 1920s,

00:22:39.900 | who built out the electrical utility infrastructure

00:22:43.700 | of a large part of the country.

00:22:45.340 | And both of these guys, both Hudson and Insull,

00:22:49.660 | left us with very valuable infrastructure,

00:22:53.060 | enormously valuable infrastructure,

00:22:55.020 | but they also became the capitalist heroes of their age.

00:22:58.740 | And eventually wound up almost going to jail for fraud

00:23:03.740 | because of their fraudulent financial dealings.

00:23:07.660 | And whenever you see, and the lesson here

00:23:11.660 | is that whenever you see somebody lionized in the press

00:23:14.660 | as being the capitalist genius of their time,

00:23:17.500 | you have to really look out, okay?

00:23:20.100 | We have two very recent examples of that,

00:23:21.900 | one of which has already blown up,

00:23:23.100 | which is Adam Neumann with WeWork,

00:23:25.100 | who was this very charismatic guy

00:23:28.900 | who just went completely off the rails

00:23:31.980 | in terms of the way he managed WeWork,

00:23:34.140 | because he was so charismatic

00:23:35.500 | and got so little negative feedback,

00:23:37.540 | he went completely off the rails.

00:23:39.180 | And then of course, the one who's still left standing

00:23:42.060 | is Elon Musk, who may wind up as a hero

00:23:46.740 | who will transform our transportation technology

00:23:51.740 | and other technologies as well.

00:23:53.940 | But he's also showing some very worrisome

00:23:56.300 | characterological signs that you often see

00:23:59.060 | with these people who are the recipients

00:24:01.180 | of large amounts of adulation in the press.

00:24:04.180 | - Yeah, but he may be real.

00:24:06.620 | I mean, honestly, the man has revived the space program.

00:24:10.700 | I mean, I grew up like you did in 1960s.

00:24:13.820 | I'm a science fiction fan.

00:24:14.900 | I grew up with Arthur C. Clarke and Isaac Asimov.

00:24:18.500 | And Arthur Clarke wrote "2001, A Space Odyssey" in 1968.

00:24:22.820 | And it was about 2001 going to Venus.

00:24:25.540 | I mean, my generation grew up with the whole,

00:24:28.860 | where's my jet pack crowd?

00:24:30.300 | Like what happened?

00:24:31.460 | Where did the future go?

00:24:33.620 | And I mean, Musk has helped revive the space program.

00:24:36.820 | I mean, Thomas Edison was real.

00:24:38.740 | He was a real person.

00:24:39.700 | He had his own problem, but there was a Thomas Edison,

00:24:42.100 | who really was a genius.

00:24:43.100 | So I agree in terms of brain characteristics

00:24:48.100 | and maybe some mental disorders,

00:24:50.700 | he exhibits some characteristics,

00:24:52.220 | but so far he has remarkably delivered.

00:24:55.900 | And I'm very close to the SEC,

00:24:58.900 | and I'm aware of how much agita he's given the SEC.

00:25:01.820 | And I think he's obviously bent at the securities laws

00:25:05.620 | with his comments on Twitter.

00:25:06.740 | But I think the guy is brilliant.

00:25:09.420 | And even if he stopped right now,

00:25:11.940 | his contributions would be significant.

00:25:14.420 | I don't know about the valuations of Tesla at all.

00:25:17.780 | I tend to be very agnostic on those things.

00:25:20.700 | But I mean, you do admit genius does exist, right?

00:25:25.100 | - Oh, absolutely.

00:25:25.940 | And I agree with every single thing you said,

00:25:27.980 | and I make that point in the book.

00:25:29.860 | George Hudson and Samuel Insull transformed

00:25:36.180 | the England and the United States respectively

00:25:42.740 | in the way that we live.

00:25:43.620 | They were absolute geniuses,

00:25:46.060 | but they did not come to good ends

00:25:48.100 | because of the hubris that evolved

00:25:50.940 | in the course of doing all the wonderful things they did.

00:25:53.060 | So the question really is,

00:25:54.500 | is does Elon Musk wind up like Samuel Insull,

00:25:57.820 | which was not a good ending.

00:25:59.500 | Insull actually wound up dying penniless in Paris.

00:26:02.180 | Or does he wind up like Thomas Edison,

00:26:06.340 | who will be remembered?

00:26:07.860 | I don't know the answer to that.

00:26:10.580 | I would not be surprised either way.

00:26:12.700 | - Or Tesla himself, what happened to Tesla?

00:26:15.140 | He's a brilliant man,

00:26:16.180 | and really essentially ended up with almost nothing.

00:26:19.620 | I wanna move on because we've had some specific questions

00:26:23.260 | from the listeners,

00:26:24.740 | and I wanna try to address them.

00:26:26.580 | We've got a half an hour lesson.

00:26:27.540 | Folks, if you've got some questions, let me know,

00:26:29.020 | but I try to get to a couple of them.

00:26:32.660 | Very specific questions in general about investing.

00:26:36.540 | I don't know how much you wanna take them,

00:26:37.900 | but I wanna do something I'm very interested in,

00:26:40.340 | which is what should we be advising people to be doing now?

00:26:45.820 | I'm obviously a Jack Bogle disciple,

00:26:48.620 | and I spend a lot of time ETFs

00:26:51.620 | and index investing in general.

00:26:54.980 | Do you feel, in my view,

00:26:58.340 | ETFs and index investing have generally triumphed?

00:27:01.780 | It is widely known now that almost all active management

00:27:06.780 | is not successful over long periods of time.

00:27:09.700 | Not that there isn't, I know Jack would always correct me.

00:27:12.700 | It's not that there isn't any.

00:27:14.260 | We have very good active investors at Vanguard and VAT funds,

00:27:18.340 | but they're rare, and it's hard to find them,

00:27:20.660 | and they cost too much.

00:27:22.060 | So with that said, how do you feel about the progress

00:27:25.660 | of, lack of a better word, the Jack Bogle ideology,

00:27:29.420 | the keeping costs low, generally index funds?

00:27:34.420 | Do you feel that that is winning the day

00:27:37.380 | compared to, say, 20 years ago?

00:27:40.540 | - Very, very slowly.

00:27:43.140 | And what I worry about is that the learning curve

00:27:46.260 | may be shallower than the birth rate, all right?

00:27:50.180 | I see it happening, and I certainly,

00:27:54.020 | certainly you walk into a Bogleheads conference,

00:27:56.180 | and you think that everybody has got religion

00:27:58.460 | and is doing things right.

00:28:00.780 | And within the confines of a Bogleheads meeting,

00:28:03.300 | yes, that's very true.

00:28:04.940 | But when I walk out into the wider world,

00:28:07.100 | and I talk to people about investing,

00:28:09.340 | my sampling shows a very low incidence of Bogleheads.

00:28:12.140 | For every person that I meet that's read "Bogle"

00:28:16.260 | or "Rick Ferry" or "Larry Suedro,"

00:28:18.260 | I meet 50, 100 who are still listening to their stockbroker.

00:28:26.260 | - Right, well, isn't this because literacy in general

00:28:30.100 | is not very good?

00:28:31.500 | Financial isn't very good.

00:28:33.220 | I mean, the education system is failing us.

00:28:34.940 | I mean, what really disturbs me,

00:28:37.620 | I mean, I belong to the skeptical inquirer group,

00:28:42.100 | and you're not taught critical anymore.

00:28:48.140 | Critical thinking in science,

00:28:49.420 | critical thinking, inductive reasoning, you're not taught.

00:28:53.140 | Why would you even be taught financial literacy?

00:28:55.740 | Like, what's the Federal Reserve?

00:28:57.300 | What's a stock and what's a bond?

00:28:59.380 | People come out of high school,

00:29:00.340 | it's shocking how little they know.

00:29:02.380 | I graduated in '64.

00:29:03.820 | I had not a single course on finance.

00:29:05.540 | I learned how to type.

00:29:06.900 | I learned a little mathematics, trigonometry and geometry,

00:29:11.300 | a little science, a little history,

00:29:13.740 | but I literally didn't know how to balance a checkbook

00:29:16.980 | when I was 18.

00:29:18.780 | Literally, I had to learn it myself.

00:29:20.700 | So, shocking that this happens?

00:29:23.660 | - Yeah, no, it's not shocking at all.

00:29:26.180 | There's that, the fact that Americans

00:29:30.460 | are very good at critical thinking.

00:29:31.740 | Of course, Europeans and Asians

00:29:35.380 | are even more enamored of active investing

00:29:37.860 | than we are here in this country.

00:29:39.700 | There's very little of an indexing community

00:29:43.180 | outside of the United States, maybe, and Canada.

00:29:46.620 | So, there's that,

00:29:50.460 | but there's a more basic factor involved here,

00:29:52.980 | which is how compelling are the narratives?

00:29:54.780 | What my book is really about,

00:29:56.380 | aside from disquisition on human nature,

00:29:58.660 | is it's also a story of compelling narratives.

00:30:03.860 | - Right, so why, I'm sorry to interrupt,

00:30:05.740 | but this is a very important point.

00:30:06.900 | Why is active management a more compelling narrative

00:30:10.380 | than indexing?

00:30:11.700 | - Oh, well, it's because indexing is a very, very dull

00:30:16.100 | and non-compelling narrative.

00:30:17.300 | It's invest in three different index funds,

00:30:19.940 | spend 15 minutes a year doing it,

00:30:21.940 | and don't even, don't think about it beyond that

00:30:24.780 | and go about and live your life.

00:30:26.260 | That's a very dull, uncompelling narrative.

00:30:30.500 | The real narrative is to turn on the financial media

00:30:34.340 | and watch Jim Cramer jump up and down on the desk

00:30:37.540 | in a gorilla suit and go booyah.

00:30:39.340 | That is what compels people,

00:30:41.780 | or to hear a corporate executive come

00:30:43.260 | and talk about what a great company he has,

00:30:45.220 | or to hear a, listen to a strategist,

00:30:48.420 | a market strategist from a large bank

00:30:50.980 | talk about where he thinks the market is going

00:30:53.260 | in the next six months.

00:30:54.260 | That's much more compelling than buy three funds

00:30:57.740 | and rebalance it once a year and forget about it.

00:31:01.660 | It's just that the bogey head narrative is so dull.

00:31:05.540 | Now, where the bogey head narrative wins, of course,

00:31:08.060 | is on the data.

00:31:09.180 | But as we've already talked about,

00:31:11.020 | narrative always trumps data.

00:31:13.780 | - Yeah.

00:31:14.620 | It's funny, I spent a lot of time

00:31:17.220 | with the academic community.

00:31:19.500 | And of course, the academic community

00:31:20.900 | has a very dim view of the active management community,

00:31:25.100 | but they call them out.

00:31:26.060 | We know the numbers and the data.

00:31:27.660 | I covered the SPIVA study.

00:31:30.300 | Well, they're out twice a year, which is S&P.

00:31:34.100 | But that's something I can get on the air every year,

00:31:38.220 | twice a year.

00:31:39.620 | So the academic looks down

00:31:41.260 | on the actively management community.

00:31:43.060 | And the active management community

00:31:44.540 | despises the academic community

00:31:46.660 | because they call them out on it.

00:31:47.940 | They think they're a bunch of eggheads.

00:31:50.140 | And the active management community

00:31:55.060 | and the academic community

00:31:56.060 | also somewhat looks down on financial press

00:31:59.620 | because they feel, that's us folks, that's me.

00:32:03.380 | We are too complicit in going along

00:32:06.340 | with the active management narrative,

00:32:09.220 | which is also, you bring up in your book as well.

00:32:12.100 | So there's a lot of compelling,

00:32:16.900 | there's a lot of competing forces that are going on here.

00:32:20.220 | I will tell you, I'm afraid I don't just,

00:32:23.420 | I don't agree with you with your idea

00:32:24.940 | that indexing is not winning.

00:32:26.700 | I was a proponent of ETFs from 1997,

00:32:31.100 | and the time I became,

00:32:33.140 | and I've seen nothing but victory in indexing forces.

00:32:37.060 | I know people in the, I'm close to this community,

00:32:40.140 | the active management community.

00:32:41.740 | They're terrified.

00:32:43.180 | They are really worried that indexing is sweeping the world.

00:32:46.980 | So I've agreed everything you said,

00:32:49.180 | but I really think the bogey heads are winning.

00:32:53.380 | And the active management community is terrified.

00:32:56.140 | And you see it in their responses in the last 10 years,

00:33:00.220 | old fogies coming out and saying,

00:33:01.860 | "Oh, wait 'til this ETFs blow up,

00:33:03.740 | 'cause there's not enough of the underlying stuff out there.

00:33:06.740 | It's all gonna blow up."

00:33:07.860 | It's all a lot of nonsense.

00:33:09.100 | It hasn't happened yet.

00:33:12.140 | Saying, "Oh, this is like communism.

00:33:14.780 | It's like brainless thinking."

00:33:17.060 | All nonsense.

00:33:18.140 | People know what high costs are.

00:33:20.980 | People have better understanding.

00:33:23.500 | The whole fund community is moving towards ETFs.

00:33:26.700 | They're moving towards lower costs.

00:33:28.260 | So I don't, am I crazy, Bill?

00:33:30.420 | I mean, did anything I said make any sense there?

00:33:32.860 | Don't you?

00:33:33.700 | - No, no, no, no.

00:33:34.540 | I agree with you.

00:33:35.380 | And remember, when you asked the question initially,

00:33:37.500 | I said, yes, the bogey heads are winning.

00:33:39.940 | But what I'm saying is they're winning very, very slowly.

00:33:42.460 | It's a glacial process.

00:33:44.900 | And it could be that my sampling of people is skewed

00:33:49.660 | in the sense that I'm talking to relatively ordinary people.

00:33:53.140 | But when I, just my acquaintances,

00:33:56.020 | to the extent that anybody who lives in Portland

00:33:59.140 | is ordinary, I suppose.

00:34:00.580 | But what I'm getting at is that,

00:34:04.100 | what I guess I'm trying to say

00:34:05.380 | is that the people who really matter,

00:34:07.100 | yes, are the people who are in the HR departments

00:34:09.900 | who are picking the funds.

00:34:11.740 | They're picking Vanguard funds.

00:34:12.940 | It's true.

00:34:13.780 | They're picking low cost index funds.

00:34:16.500 | Now, almost anybody in any kind of a decent,

00:34:18.980 | let me phrase it differently.

00:34:22.180 | 20 years ago, it was very hard

00:34:23.580 | to find a decent 401(k) plan.

00:34:25.940 | Now, you look at most 401(k) plans,

00:34:28.860 | and most 401(k) plans have very good low cost choices.

00:34:32.420 | So the battle is being won, I think,

00:34:35.980 | at that very high level.

00:34:38.020 | But when you ask the average person on the street

00:34:41.100 | about indexing, and you ask them about finance,

00:34:43.980 | to them, finance is the guy on the TV

00:34:47.460 | who's picking stocks, and it's their broker.

00:34:51.220 | It's not the wisdom of Jack Bogle.

00:34:54.340 | - Yeah.

00:34:55.180 | Let me just move on here a bit

00:34:59.860 | and talk about the three fund portfolio,

00:35:02.780 | because people ask me all the time,

00:35:04.660 | what portfolio would I find compelling?

00:35:10.660 | And I said, "Investing should be simple.

00:35:13.220 | It shouldn't be that hard."

00:35:15.620 | And I always bring up the three fund,

00:35:17.740 | the Bogle has three fund portfolio book,

00:35:19.540 | which is basically some combination

00:35:21.700 | of total stock, total bond, and international.

00:35:25.340 | I'm wondering if you feel that still is a valid look.

00:35:29.380 | And what I'd love to do is,

00:35:32.940 | I constantly get people who send me 20 portfolios,

00:35:36.900 | very impressive, and many of them are indexing.

00:35:38.980 | They're not like crazy.

00:35:40.340 | And they say, "What do you think of this?"

00:35:41.980 | And I say, "Well, this is very interesting,

00:35:44.940 | but I wonder how your 20 fund portfolio

00:35:47.620 | would stack up against the Bogle had three fund portfolio."

00:35:50.900 | And obviously it depends on the mix

00:35:52.180 | of the three fund portfolio,

00:35:53.940 | but even if you just take, you know,

00:35:56.260 | 60, 20, 20, or 50, you know, 30, 20, some combination.

00:36:03.460 | I wonder, and maybe Rick, you can answer this,

00:36:06.700 | if we ever did anything that stacks up

00:36:10.380 | that three fund portfolio

00:36:11.820 | against a really comprehensive portfolio.

00:36:15.620 | My point is, I think you can show simplicity would work.

00:36:19.100 | I think that three fund portfolio,

00:36:20.740 | and again, it depends how you slice it up,

00:36:23.300 | would probably perform as well as anybody's, you know,

00:36:26.820 | decent broad portfolio that 20 funds in it.

00:36:31.700 | Any thoughts about that?

00:36:33.380 | - Well, yeah, first of all, let me,

00:36:35.980 | I would say one thing that's really important here,

00:36:37.980 | which is it really doesn't matter whether you have

00:36:40.940 | a 20 fund portfolio or a three fund portfolio,

00:36:45.340 | because in the end, what is far more important

00:36:47.700 | than one of the, you've got, you know,

00:36:48.700 | 20 funds sliced and diced all these different ways,

00:36:51.340 | or a simple three fund portfolio,

00:36:54.700 | what matters more is that you stick

00:36:56.500 | to whatever your discipline is,

00:36:58.140 | stick to whatever your allocation is.

00:37:00.380 | That is far more important

00:37:03.180 | than what your precise allocation is.

00:37:05.780 | And that's really what you should be training to do,

00:37:08.540 | is to have a portfolio that you can stick with

00:37:11.220 | through thin and thin.

00:37:13.540 | Now, the second thing that I want to say

00:37:14.860 | is that I'm a big fan of the three fund portfolio,

00:37:18.580 | and it has done particularly well

00:37:21.300 | over the past 15 or 20 years,

00:37:23.980 | because this has been a particularly bad period

00:37:27.020 | for pretty much every other asset class

00:37:28.780 | you'd want to look at,

00:37:29.980 | whether it's value stocks or small stocks,

00:37:32.180 | or more of a weight to foreign stocks.

00:37:35.180 | If you did those things,

00:37:36.780 | you're not going to do as well as you would have done

00:37:38.780 | with a three fund portfolio.

00:37:40.300 | I'm not sure that that's going to be true going forward,

00:37:43.940 | but again, that's angels on the head of a pin.

00:37:47.140 | What's far more important is that you pick an allocation.

00:37:49.900 | Now, there's something that in my mind

00:37:51.820 | may even be better than a three fund portfolio,

00:37:54.500 | and that's a one fund portfolio, okay?

00:37:56.740 | If you've got a good target date fund in your 401k,

00:38:01.340 | that's really all you need, all right?

00:38:04.100 | And the advantage of a one fund portfolio

00:38:07.340 | is because you're not going to see the international

00:38:11.020 | or the foreign stock part of that portfolio

00:38:13.780 | get horribly creamed.

00:38:15.020 | It won't be as visible,

00:38:16.260 | even though you own it when you own a target date fund.

00:38:19.180 | You're not going to see that in the pricing.

00:38:20.900 | You're not going to see that,

00:38:21.740 | "Oh my God, one of my components lost 55%

00:38:24.660 | "over a trailing 15-month period,"

00:38:27.260 | as has happened a couple of times

00:38:28.900 | in the past couple of decades.

00:38:30.980 | - Yeah, I'll give you one, Vanguard Wellington.

00:38:33.660 | If you had a, people ask me all the time,

00:38:36.100 | if I had to one fund, I'd say, that's a hard one,

00:38:39.380 | but I'd pick Vanguard Wellington myself.

00:38:41.260 | I think-

00:38:42.100 | - Yeah, I agree with that.

00:38:44.460 | Wellington is the one non-indexed fund

00:38:47.260 | that I do recommend happily to people.

00:38:49.300 | - Yeah.

00:38:50.140 | - Or wealthy.

00:38:51.980 | - Yeah, just move on.

00:38:53.980 | In terms of factors, there's been a lot of debate

00:38:57.820 | about what factors matter in Fama-French models,

00:39:01.740 | and I've had a lot of discussion

00:39:03.860 | with other people about this.

00:39:06.860 | Is there any evidence that you should continue

00:39:10.020 | to have a value small cap tilt to your portfolio,

00:39:14.860 | or does that matter at all?

00:39:17.220 | It certainly hasn't worked in the last decade,

00:39:19.220 | but I'm just asking generically,

00:39:22.100 | does the factor debate matter to you at all?

00:39:24.940 | - Well, it matters to me because that's how we invest.

00:39:30.020 | We are factor loaded,

00:39:32.660 | and we're quite happy with our results

00:39:34.140 | over the past 20 years.

00:39:36.100 | We were extremely happy with our results

00:39:38.180 | from 2000 to 2010,

00:39:41.420 | not so happy with our results in the past 10 years.

00:39:44.780 | Over the past 20 years, we're quite happy with our results,

00:39:48.980 | but that's the hard part.

00:39:50.100 | In other words, we do believe that there is a premium

00:39:52.300 | to investing certainly in value stocks,

00:39:54.340 | maybe even to small stocks,

00:39:55.900 | although that's less certain.

00:39:58.220 | But that premium, if there is a premium,

00:40:00.420 | doesn't come for free.

00:40:02.460 | That premium comes at a cost,

00:40:04.260 | which is a period like the past 10 years.

00:40:06.540 | Now, I'm not gonna get into the weeds

00:40:09.140 | about whether value stocks have gotten much cheaper

00:40:13.260 | than growth stocks have.

00:40:14.660 | I think that they have,

00:40:15.780 | and I continue to believe that,

00:40:19.420 | but there are no certainties in investing.

00:40:22.620 | I could easily be wrong.

00:40:23.940 | But if I had to bet one way or the other,

00:40:25.420 | I would bet that over the next 10 or 20 years,

00:40:27.820 | value stocks will outperform growth stocks,

00:40:29.860 | but I have no certainty about that.

00:40:32.180 | - Well, if you believe in reversion to the mean,

00:40:34.220 | that would certainly make some sense.

00:40:35.740 | And we've seen that recently with small cap value

00:40:39.140 | being the biggest outperformer this year.

00:40:40.980 | I wanna hit you on, we've got another 20 minutes left.

00:40:44.180 | I wanna hit you on six or seven questions

00:40:47.220 | the viewers, the listeners are writing in.

00:40:49.420 | Keep the answers relatively short

00:40:51.740 | so I can get a number of questions in.

00:40:53.780 | Here's one that I think is a good one.

00:40:55.180 | Why is it so many institutional investors,

00:40:58.100 | endowments and foundations in particular,

00:41:00.500 | continue to be such firm believers

00:41:02.380 | in alternatives and active management,

00:41:04.260 | even though they know or should know

00:41:06.380 | the evidence on all of this?

00:41:08.260 | - Two reasons to be very fast.

00:41:09.780 | Number one is they are facing horrible constraints

00:41:14.460 | in terms of traditional assets.

00:41:17.660 | So if every day plain vanilla stocks and bonds

00:41:21.020 | aren't going to enable you to fund

00:41:23.020 | your participants' liabilities or your spending,

00:41:28.020 | then gosh, we should try something else.

00:41:30.980 | And that's something else is alternatives.

00:41:32.660 | And then the second answer, the second reason is consultants.

00:41:35.300 | There's an entire consultant industry out there

00:41:37.820 | whose rice bowl is basically shouldering responsibility

00:41:41.340 | when things go bad.

00:41:43.100 | So the consultant industry is the consultant

00:41:46.220 | is the person you blame when things head South

00:41:48.820 | and a consultant isn't going to have a very good,

00:41:52.180 | make a very good living

00:41:53.140 | if he recommends a three-fund indexed portfolio.

00:41:56.300 | - Yeah, that's a very good answer.

00:41:57.860 | I completely agree with that.

00:41:59.500 | Let me move on.

00:42:00.500 | The current Bill Miller of the day is Kathy Wood

00:42:04.100 | over at ARK Investing.

00:42:05.460 | She has attracted in nine days,

00:42:08.940 | $500 million to her space ETF,

00:42:12.660 | even though she has almost nothing to buy there

00:42:16.740 | and has got here is considered a space investment.

00:42:21.740 | But let me just ask you any particular thoughts

00:42:24.980 | on Kathy Wood as the new current superstar?

00:42:28.820 | - Well, if you know anything about mutual fund history,

00:42:32.540 | she's an easily recognizable type.

00:42:34.820 | She's the superstar who bakes three or 400%

00:42:38.300 | over a couple of year period and then flames out.

00:42:42.260 | My favorite was Ryan Jacob, which is an interesting story.

00:42:46.380 | Ryan Jacob ran the Internet Fund back in the late '90s

00:42:50.100 | and then he switched to the Ryan, excuse me,

00:42:53.340 | the Jacob Internet Fund, I think it was, after that.

00:42:58.260 | And that fund posted returns of, I think, 300%,

00:43:01.140 | one year, 200% the next year,

00:43:04.060 | and then proceeded to fall in price by 95%

00:43:07.940 | between 2000 and 2002.

00:43:10.300 | Now, what's interesting is that fund is still around.

00:43:12.620 | And if you string together all of his results,

00:43:14.540 | he actually beats the S&P 500.

00:43:17.700 | But I don't think there are any sentient beings

00:43:19.980 | in this quadrant of the galaxy

00:43:21.700 | that actually held on with him for 22 years or 23 years.

00:43:26.700 | And so he's a perfect example.

00:43:30.460 | So do I think that Kathy Wood's portfolios

00:43:34.020 | are going to crash and burn?

00:43:36.020 | I think it's highly likely because you could name

00:43:40.260 | not just Ryan Jacobs, but Garrett Van Wagoner,

00:43:44.300 | Helen Young Hayes, Bill Miller,

00:43:46.660 | all people who did very well

00:43:47.980 | for a relatively short period of time,

00:43:50.100 | except Bill Miller, he did well for 15 years,

00:43:52.180 | and then imploded.

00:43:53.380 | That's the history.

00:43:54.660 | - Yeah, I think that's a great point.

00:43:58.340 | The first conversation I ever had with Jack Bobo,

00:44:00.740 | that's exactly what he said to me in 1997.

00:44:03.020 | And it was about Bill Miller.

00:44:04.020 | He said, "He's a very decent fellow,

00:44:05.460 | "but you understand how rare they are."

00:44:07.260 | So in a sense, I hate bringing up the...

00:44:10.540 | Somebody's gonna be a superstar

00:44:12.140 | just by the sheer numbers of people

00:44:13.700 | that are out there picking stocks.

00:44:15.180 | Somebody's gonna hit it right.

00:44:17.300 | And so we're gonna anoint them as geniuses,

00:44:19.700 | even when, as the academics would say,

00:44:22.740 | it's a statistical probability

00:44:24.340 | that someone's going to be correct.

00:44:27.780 | So I always go back and forth between...

00:44:30.060 | Should we ignore anybody that's successful?

00:44:32.580 | No, I would say you're just a statistical anomaly,

00:44:35.540 | therefore you're not important.

00:44:37.020 | I don't think so.

00:44:37.860 | But I think people should be very aware

00:44:40.700 | of the point that you're making.

00:44:42.380 | - Let me interrupt and just add one fast thing,

00:44:45.900 | which is that if you're gonna run a stock picking,

00:44:48.660 | you enter a stock picking contest,

00:44:50.220 | like the ones that get done at the high school level,

00:44:53.260 | you don't invest in the S&P 500.

00:44:54.900 | You would pick the hairiest, riskiest tech stocks

00:44:58.380 | you can find, and you hope that you just hit it lucky.

00:45:01.020 | That's how you win that contest, right?

00:45:03.420 | And it's the same thing with superstar fund managers.

00:45:07.620 | That's what they do.

00:45:08.460 | They have very concentrated portfolios in very hot areas.

00:45:11.260 | And that is a recipe in the long-term for failure.

00:45:14.340 | - Yeah.

00:45:15.180 | By the way, I forgot to ask you, what do you own?

00:45:17.580 | I know that's...

00:45:18.740 | I don't wanna be personal too much,

00:45:20.180 | but people always ask me the question,

00:45:21.860 | and I'm always amazed how rarely anybody ever asks

00:45:26.140 | people in private, what actually do you own?

00:45:30.620 | I've owned about a dozen funds.

00:45:32.020 | They're all Vanguard funds and almost all index funds,

00:45:34.660 | but I tried paring it down over the years

00:45:37.820 | and I'm getting better at it,

00:45:39.180 | but I don't know, what, generically, what do you own?

00:45:42.780 | - Well, on the bond side, it's very simple.

00:45:44.300 | I own pretty much almost exclusively treasuries

00:45:47.300 | with a bit of munis in my taxable portfolio.

00:45:52.100 | And on the stock side, I use Vanguard for total stock market

00:45:56.940 | or large market in the stock space.

00:46:01.540 | And for the small and value tilt, I use Dimensional.

00:46:05.780 | - Yeah, wonderful organization.

00:46:08.340 | I think very highly of Dimensional.

00:46:10.140 | And there's another organization

00:46:11.260 | that's transitioning to an ETF platform.

00:46:15.140 | And obviously with Eugene Fama there on the board,

00:46:21.500 | a big thing.

00:46:22.340 | Let me get to some more specific questions here.

00:46:24.340 | There are actually,

00:46:25.180 | people actually want your investment advice here.

00:46:28.620 | You asked Bill about buying corporate bonds through ETFs.

00:46:32.380 | I understand he said not to do that.

00:46:34.100 | Is there a specific recommendation?

00:46:35.700 | There seems to be a lot of interest in bonds here.

00:46:38.380 | - Well, I don't like corporate bonds in general.

00:46:42.060 | And this is, I guess, where I part company with Jack Bogle,

00:46:44.780 | because what you're doing is you're getting extra yield,

00:46:47.140 | but you're doing it by taking equity-like risk.

00:46:49.540 | And I'm a big believer in having a risky part

00:46:53.380 | of the portfolio, which is long-term,

00:46:55.900 | and then a riskless part of the portfolio.

00:46:58.580 | You know, if you invested in corporate bonds, for example,

00:47:04.100 | in 2008, you had the experience

00:47:07.820 | of watching what you thought was a safe asset

00:47:09.980 | lose five or 10 or 15% of its capital value.

00:47:14.180 | And that's the money, you know,

00:47:15.380 | that's the money you're gonna live on

00:47:16.460 | when you lose your job.

00:47:17.300 | That's the money you're going to use

00:47:18.260 | to buy stocks at the fire sale.

00:47:20.060 | And it is very discouraging to see that head south

00:47:23.860 | during a real financial crisis.

00:47:25.820 | And not overly fond on top of that of ETFs,

00:47:30.500 | because of the spreads that open up.

00:47:33.380 | You know, you can have this,

00:47:34.260 | there's this philosophical argument

00:47:35.740 | is what's the real price?

00:47:37.580 | Is the real price the open-end fund price

00:47:41.260 | at the end of the day,

00:47:42.100 | or is the real price the ETF price?

00:47:43.700 | Because quite a gap can open up between those two prices.

00:47:48.220 | But there's no question

00:47:49.620 | that the open-end price functions better.

00:47:52.100 | So if you're going to own corporate bonds in a fund,

00:47:55.220 | you're probably better off in an open-end fund.

00:47:59.540 | - An open-end fund.

00:48:01.340 | - Correct, not as opposed to an ETF, yeah.

00:48:03.780 | And I'm not a big, as I said,

00:48:05.060 | I'm not a big believer in owning corporate bonds anyway.

00:48:07.860 | - So you, in your personal fund, in your tax account,

00:48:12.340 | you own all treasuries?

00:48:14.940 | - Treasuries and a bit of munis, yeah.

00:48:17.620 | - Okay.

00:48:18.460 | And you don't, it's not that you don't like corporate bonds.

00:48:22.860 | You don't like corporate bonds in general.

00:48:25.380 | Some people don't like bond funds themselves

00:48:27.940 | because they keep rolling over and having new bonds

00:48:30.740 | and there's a lot of people come on

00:48:32.540 | are owning individual bonds,

00:48:34.580 | whether they're corporate bonds or treasuries or munis.

00:48:38.460 | You're not making that distinction

00:48:39.900 | between the funds versus owning them individually.

00:48:42.420 | You don't like corporate bonds in general.

00:48:44.980 | - In general, and again, you've asked another question,

00:48:47.940 | which is, what about owning individual corporates

00:48:50.740 | versus owning a corporate bond fund?

00:48:53.180 | And owning individual corporates

00:48:54.500 | is not a game that individual investors should play.

00:48:57.820 | Those are relatively opaque, mark very high spreads.

00:49:02.260 | Leave that to the person at the fund company

00:49:05.300 | who knows what they're doing.

00:49:06.740 | - Yeah.

00:49:07.980 | Some questions on international investing.

00:49:11.060 | You know, I remember talking to Jack in 2006,

00:49:13.660 | I actually called him and said,

00:49:15.820 | I'll show you mine if you show me yours,

00:49:17.300 | tell me what you own.

00:49:18.460 | And he declined to do that.

00:49:20.540 | I think his son ran a hedge fund at the time

00:49:23.940 | and he had some money in the hedge fund with his son,

00:49:25.380 | but he made it very clear.

00:49:26.220 | Largely, it was total stock and total bond.

00:49:29.780 | And I was surprised he didn't seem very big

00:49:31.740 | on international investing.

00:49:33.140 | I understand he kind of changed that as time went on.

00:49:35.900 | How do you feel about international investing right now

00:49:38.260 | as a percentage of the portfolio?

00:49:40.500 | Where does it fit in?

00:49:41.860 | And if you can give me a percentage,

00:49:44.100 | maybe that's tying you down too much,

00:49:46.580 | but should it be 10%, 20% or...

00:49:49.620 | - Well, here's the way I look at it,

00:49:51.980 | which is that very, very roughly,

00:49:54.140 | and I haven't looked at it recently, I'll admit.

00:49:56.980 | You know, the world stock market

00:49:58.620 | is roughly half foreign and half US, all right?

00:50:01.540 | So efficient markets would tell you

00:50:03.900 | that's about what you should be.

00:50:05.100 | You should have an equal amount of the two.

00:50:07.220 | Now, having said that,

00:50:08.500 | there are good reasons to tilt toward the US.

00:50:11.220 | Number one is, especially in a sheltered account,

00:50:15.020 | you lose the foreign tax advantage that you have

00:50:19.660 | by owning it in a taxable account.

00:50:22.220 | So that's number one.

00:50:24.020 | Number two, you're going to be spending US dollars

00:50:26.300 | in your retirement unless you're moving to Europe

00:50:29.380 | and you'll be spending euros.

00:50:30.780 | So you wanna take the currency risk,

00:50:33.220 | a little bit of that currency risk out.

00:50:35.260 | So you should certainly tilt more heavily towards US stocks.

00:50:38.460 | So, you know, if your portfolio is 50/50,

00:50:41.660 | there's nothing wrong with being 30/20 or 35/15.

00:50:45.260 | In other words, you know, my set point is somewhere

00:50:48.180 | between 30 and 40% of your stock portfolio being foreign.

00:50:53.180 | - Do you have any problem with, for example, China,

00:50:56.980 | where, you know, viewers, some viewers call in and say,

00:51:00.500 | "Bob, you know, for every Alibaba

00:51:03.180 | "that's supposedly privately owned,

00:51:05.180 | "a very large part of Chinese stock market is largely,

00:51:10.180 | "particularly the older school industrial banks,

00:51:13.380 | "largely controlled by the government.

00:51:16.420 | "Nominally, they may seem private,

00:51:18.260 | "but in fact, the government controls them."

00:51:22.180 | Does that figure into your calculation?

00:51:24.580 | Does it matter, does political systems matter

00:51:28.740 | even when China has capitalistic characteristics?

00:51:33.380 | Does that, where does that fit in,

00:51:35.220 | the political situation in terms of investing?

00:51:38.500 | - Well, Chinese equity has a much, much bigger problem

00:51:42.500 | than what you just talked about, which is dilution.

00:51:44.620 | All right, and all you have to do is step back

00:51:47.700 | and look at things from the Chinese market for 50,000 feet.

00:51:51.020 | And what you see is that over the past,

00:51:52.980 | I don't know, 28 years or so that the data's been kept,

00:51:57.980 | the return on Chinese stocks in US dollars

00:52:01.220 | has been paltry, a couple of percent at most.

00:52:03.860 | And that's, you know, that's only been very recently

00:52:06.020 | that it's actually nudged into positive nominal territory

00:52:08.740 | with the results of the past couple of years.

00:52:11.100 | And the reason for that is equity dilution.

00:52:13.260 | It doesn't do you any good at all

00:52:15.220 | if an economy is growing at eight or 10% a year

00:52:17.940 | if the stock pool is being diluted at 20% per year,

00:52:21.220 | which is what's happening in China.

00:52:25.100 | To give you the opposite example, over a very long term,

00:52:27.900 | the Swedish market has had about the highest returns

00:52:31.580 | over the past 120 years of any developed market.

00:52:34.740 | Why is that?

00:52:35.580 | Because the Swedes don't dilute their stock pool, okay?

00:52:39.500 | So that's a good reason to be wary of emerging markets.

00:52:42.900 | And it is a problem with emerging markets index funds

00:52:45.940 | because they are now very heavily weighted towards China.

00:52:50.940 | And I might add parenthetically,

00:52:52.660 | it's why I prefer DFA's emerging markets funds

00:52:55.620 | to Vanguard funds, because they're less exposed to China

00:52:58.260 | than the Vanguard fund is.

00:52:59.780 | - Yeah, that's a very good point.

00:53:01.900 | A couple of more specific questions.

00:53:03.620 | We had somebody, several people asked about insurance.

00:53:06.620 | A couple people asked about long-term care

00:53:09.540 | and life insurance policies.

00:53:11.300 | I don't know if you want to comment on that

00:53:13.260 | or if you feel strongly about that.

00:53:15.380 | Had a couple of questions on annuities in general.

00:53:17.180 | I know annuities have changed in the last 10 years,

00:53:20.660 | but any thoughts on any of this?

00:53:22.980 | - Yeah, I'm gonna pass on long-term care insurance.

00:53:28.820 | That is just well beyond my field of expertise.

00:53:32.900 | My strategy for long-term care insurance

00:53:36.220 | is to acquire enough assets so that you don't need it.

00:53:38.920 | And I have to admit, I don't have a lot of advice

00:53:42.180 | to offer to the person who can't do that.

00:53:46.220 | And then your second question is annuities.

00:53:51.620 | I have nothing against fixed immediate annuities,

00:53:54.460 | the simplest, cheapest possible product, a SPIA,

00:53:57.540 | a single premium immediate annuity is a fine product

00:54:01.020 | with one caveat, which is don't even think about buying one

00:54:04.420 | until you've figured out how you're going to

00:54:06.780 | delay social security until 70,

00:54:10.420 | because that is effectively the cheapest annuity

00:54:12.900 | and the best annuity that money can buy.

00:54:15.020 | - Yeah, so rather than maximum social security,

00:54:20.020 | well, full social security is 66 years and four months,

00:54:22.980 | right?

00:54:24.380 | - It depends upon your age, yeah.

00:54:25.500 | - Yeah, and so if you stay till 70,

00:54:27.660 | you get about 30% more, right, I believe so.

00:54:31.860 | - Per year.

00:54:32.700 | - Yeah, somebody at 66 and four months

00:54:34.940 | would get $3,000 a month, would get 4,000,

00:54:37.780 | they stay till 70, I think.

00:54:40.140 | - Yeah, in other words, if you take, you know,

00:54:44.180 | $100,000 to cover your residual living expenses

00:54:47.460 | between the time you're 66 and four months and age 70,

00:54:51.620 | okay, that is the same as buying an annuity

00:54:56.100 | that not only yields close to 8% or about 8%,

00:55:00.660 | but it's also an inflation protected annuity,

00:55:02.780 | which you can't buy for love or money now anywhere else.

00:55:05.020 | - Yeah, and of course, a lot depends on your guessing

00:55:07.700 | how long you're going to live.

00:55:08.620 | I mean, if you think you're going to die at 73,

00:55:11.820 | obviously getting-

00:55:13.780 | - And your spouse, in other words, it's a joint problem.

00:55:17.420 | So if you're convinced that both you and your spouse

00:55:20.060 | are going to be pushing up the daisies

00:55:21.940 | long before your time, then yes, don't buy, don't do that.

00:55:24.900 | But for 90% of people, it's a good choice.

00:55:27.460 | - We only have two or three minutes

00:55:28.620 | and I pledge to everyone, we get out on time,

00:55:30.260 | but let me just ask you about the debate

00:55:31.980 | about the 60/40 portfolio,

00:55:34.020 | which never made a lot of sense to me particularly,

00:55:36.540 | and seems to be under assault

00:55:38.180 | for the obvious reason we're all living a lot longer

00:55:41.380 | and bonds aren't returning much.

00:55:42.500 | But can you give us two minutes

00:55:44.100 | on that whole debate, the 60/40 portfolio?

00:55:47.660 | Is that even useful to discuss anymore?

00:55:49.660 | - It's still a thing.

00:55:52.540 | I have nothing wrong.

00:55:53.380 | I have no problem with a 60/40 portfolio.

00:55:55.380 | I mean, it really depends

00:55:58.940 | upon your own personal circumstances,

00:56:00.780 | in particular your burn rate, okay?

00:56:03.180 | If you're 60, if you're retiring at age 60

00:56:05.140 | and you've got a 5% burn rate,

00:56:08.620 | a 60/40 portfolio may very well put you in a bad place

00:56:12.140 | if you have a bad initial sequence.

00:56:14.700 | On the other hand, if your burn rate is two or 3%,

00:56:16.740 | it almost doesn't matter what your asset allocation is

00:56:19.980 | as long as you have at least

00:56:21.180 | a reasonable amount of money in stocks.

00:56:22.900 | - Yeah, okay.

00:56:24.580 | - But I mean, one thing I might add

00:56:26.460 | is that you hear this every five years,

00:56:28.260 | the 60/40 portfolio is dead.

00:56:30.420 | And I've heard that in one form or another

00:56:32.580 | for the past 30 years.

00:56:33.580 | It's wrong.

00:56:34.420 | - Yeah, yeah, I agree.

00:56:36.380 | Folks, it is precisely two o'clock.

00:56:38.500 | This has been wonderful, stimulating.

00:56:41.180 | It's a great honor to be with the Bogleheads.

00:56:42.980 | I hope to be back with you again.

00:56:45.420 | And Bill, thank you so much for joining us.

00:56:50.420 | I've been a great admirer of your work for many, many years.

00:56:53.860 | Rick Ferry is back with us.

00:56:55.340 | And Rick, I'm an admirer of your work too.

00:56:56.860 | And I really would like, I would get on the air

00:57:02.460 | a Boglehead three portfolio.

00:57:04.980 | And I'd like to talk to you about it

00:57:06.220 | versus a wider portfolio.

00:57:07.900 | 'Cause I think that's a useful way

00:57:09.580 | of educating people more about the value of it.

00:57:12.620 | Part of the problem is,

00:57:14.220 | and I think this goes to Bill's point about neuropsychology,

00:57:17.100 | is people think if I have 20 funds

00:57:19.940 | that this activates my brain,

00:57:22.100 | plus the dopamine, more than three funds.

00:57:24.260 | So it's, I think Bill's right.

00:57:26.140 | There's nothing wrong with 20 funds,

00:57:27.620 | but do you really need it?

00:57:28.660 | Well, I don't know,

00:57:29.500 | but I feel more like I'm more important

00:57:30.900 | or I'm activating my brain cells more

00:57:32.900 | if I have 20 funds instead of three funds.

00:57:34.780 | And if we can show them,

00:57:36.300 | here's your 20 funds since 1999.

00:57:39.780 | And here's your three funds since 1999.

00:57:42.580 | I think that would go a long way towards telling people,

00:57:44.940 | all right, calm down.

00:57:46.220 | You don't need, you really don't need 20 funds.

00:57:48.380 | So maybe you have-

00:57:49.380 | - Yeah, what you're talking with,

00:57:51.180 | a psychologist would call that,

00:57:52.820 | call 20 fund portfolio illusion of control.

00:57:55.500 | - Ah, thank you.

00:57:57.180 | Okay, maybe we can collaborate and do something on that.

00:57:59.780 | - Well, thank you.

00:58:00.620 | And simplicity is the greatest genius, correct?

00:58:03.860 | Take something that's complicated and make it simple.

00:58:07.220 | And that's a greater genius

00:58:09.220 | than having 20 funds in a portfolio.

00:58:11.620 | But thank you, Bob and Bill.

00:58:13.620 | I mean, that was a fascinating discussion.

00:58:15.340 | I mean, everybody agrees that was listening to Guhaan

00:58:17.780 | for a couple more hours.

00:58:19.060 | So really appreciate both of you being on today,

00:58:22.060 | a wonderful discussion.

00:58:23.500 | And we hope everyone who joined today

00:58:25.780 | enjoyed this presentation.

00:58:27.700 | It was recorded and it will be available on bogleheads.com

00:58:31.580 | and on the boglecenter.net website.

00:58:34.900 | Our next Boglehead speaker event will be in May

00:58:38.140 | with a guest to be announced soon.

00:58:40.700 | So thanks for joining us and see you next time.

00:58:43.060 | And thanks, Jim, for hosting this.

00:58:44.980 | It went great.

00:58:45.900 | - Thank you.

00:58:46.900 | [BLANK_AUDIO]

Bogleheads® Speaker Series – Bill Bernstein & Bob Pisani

Chapters