Bogleheads® Conference 2011 - John C Bogle Keynote.

00:00:00.000 | >> Our distinguished guest of honor is the founder of the Vanguard Group and president

00:00:11.420 | of the Vanguard Global Financial Markets Research Center.

00:00:16.020 | He created Vanguard in 1974 and served as Chairman and Chief Executive Officer until

00:00:23.060 | 1996 and then as Senior Chairman until 2000.

00:00:27.100 | He entered the investment field immediately following his graduation from Princeton University

00:00:32.020 | Magna Cum Laude in Economics in 1951.

00:00:36.380 | In 2004, Time Magazine named Mr. Bogo as one of the world's most powerful and influential

00:00:44.580 | people.

00:00:45.580 | An institutional investor, presented him with his Lifetime Achievement Award in 1999.

00:00:52.540 | Time Magazine designated him as one of the Investing Industries for Giants of the 20th

00:00:58.140 | Industry.

00:00:59.140 | In the same year, he received the Woodrow Wilson Award from Princeton University for

00:01:03.500 | Distinguished Achievement in the Nation's Service.

00:01:06.660 | In 1997, he was named one of the financial leaders of the 20th century in leadership

00:01:11.900 | and financial services.

00:01:12.900 | In 1998, Mr. Bogo was presented the Award for Professional Excellence from the Association

00:01:19.300 | for Investment Management and Research, and in 1999, he was inducted into the Hall of

00:01:24.380 | Fame for the Fixed Income Security Analysis Society.

00:01:27.780 | If I listed all his honors and achievements, we'd be out of time.

00:01:33.980 | So without further ado, I'll dispense with that and ask you to please welcome our very

00:01:39.420 | special guest of honor, Mr. Jack Bogo.

00:01:49.420 | There we go.

00:01:50.420 | Well, that says it all.

00:01:51.420 | It's so nice to be with all of you, and I'm so honored by your trust in me and your confidence

00:02:00.420 | in me.

00:02:01.420 | And of course, in Vanguard, too, and just a terrific pleasure to be able to come and

00:02:07.420 | talk to all of you today.

00:02:09.420 | I'm a little embarrassed about all those awards.

00:02:12.420 | It doesn't really matter.

00:02:13.420 | I haven't gotten many recently.

00:02:14.420 | But we'll hang on and press on regardless, I guess.

00:02:23.420 | I'm happy you'll all be familiar with that phrase.

00:02:26.420 | I'll probably take up pretty much the hour.

00:02:28.420 | I don't know how to time this.

00:02:31.420 | We were busy putting it all together, but I'm sure that we'll use a lot of time.

00:02:35.420 | And I presume that's what you want.

00:02:37.420 | So we'll do our best.

00:02:40.420 | You all honor me by your presence here this morning.

00:02:43.420 | And yet another gathering of the Bogo heads.

00:02:47.420 | Obviously, I'm glad to be here with my 16th anniversary of a heart transplant coming

00:02:53.420 | up in February.

00:02:55.420 | Obviously, I'd be glad to be anywhere this morning.

00:03:02.420 | I'm pleased to say my longtime sidekick, so well-known to many of you, Kevin Laughlin,

00:03:07.420 | is here this morning.

00:03:09.420 | And are you back there, Kev, somewhere?

00:03:16.420 | His fabulous work has moved in June into the Vanguard mainstream that not much of a career

00:03:22.420 | pad, but there are four people at the Bogo National Market Research Center.

00:03:26.420 | And I don't think I'm going to be replaced when I go.

00:03:29.420 | [LAUGHTER]

00:03:33.420 | But the center is actually-- we supported Kevin to his ticket years.

00:03:39.420 | So he's done gratis, like Mike Nolan, who's here with me this morning at the head table,

00:03:44.420 | who's Kevin's replacement.

00:03:46.420 | And Mike's doing a wonderful job.

00:03:48.420 | I started around June, June 1.

00:03:51.420 | And so a very short learning curve has already become especially important part of our tiny

00:03:59.420 | research unit, along with Emily Snyder.

00:04:01.420 | I don't know if Emily's here now.

00:04:03.420 | She'll be here.

00:04:04.420 | Many of you know her.

00:04:06.420 | My longtime assistant of 25 years is Sarah Hoffman, who works with Emily.

00:04:10.420 | And that's the Bogo Financial Markets Research Center.

00:04:13.420 | And it's, in a way, encouraging to see all the new faces out in the audience this morning.

00:04:20.420 | I understand there are 60 of you or so that are here for the first time.

00:04:24.420 | And I guess I'm a little disappointed.

00:04:27.420 | 60 people at the airport apparently didn't want to come back again.

00:04:30.420 | [LAUGHTER]

00:04:33.420 | I do salute you for your courage.

00:04:35.420 | [LAUGHTER]

00:04:38.420 | And a special welcome from Mel and also Tim Dempsey, who I think have been an amazing

00:04:42.420 | group, who I think have been at all nine previous BogoHead gatherings.

00:04:46.420 | And I'm closely followed by Gail Cox, who has done eight.

00:04:49.420 | And I've already seen Gail this morning.

00:04:51.420 | And we have a number of BogoHeads who are on your program, as you know.

00:04:55.420 | Ed Tauro already spoke this morning.

00:04:57.420 | I didn't get a chance to get briefed on what he said.

00:04:59.420 | So what I said, watch the base of anything you're doing.

00:05:02.420 | Well, we'll work that out in these two sessions.

00:05:05.420 | And you're going to hear from Bill Schultz.

00:05:08.420 | He's a long-term president.

00:05:10.420 | Bill Bernstein.

00:05:12.420 | Rick Perry just wrote a wonderful article for Forbes Hotline.

00:05:15.420 | He's out being interviewed with Christine Benz from Morningstar, which is something

00:05:19.420 | I just completed.

00:05:20.420 | And Laura Dogu.

00:05:22.420 | And Alan Roth is here.

00:05:23.420 | And Mel Lindauer.

00:05:24.420 | I think they're all here.

00:05:26.420 | And also, I think he's here.

00:05:28.420 | If you raise your hand, you will.

00:05:30.420 | His first visit is my friend Eric Schoenberg, who is the former editor of Money.

00:05:34.420 | Is Eric here?

00:05:35.420 | Eric Schoenberg, we had to cancel the last one.

00:05:38.420 | What the heck was that?

00:05:39.420 | [laughter]

00:05:46.420 | So I'll be seeing you on the podium here.

00:05:48.420 | We're going to do a little break and then a Q&A.

00:05:51.420 | And if this ends prematurely, don't get any ominous by that.

00:05:55.420 | [laughter]

00:05:57.420 | We can start the Q&A before it's over.

00:06:01.420 | And at the end, before we have a break.

00:06:03.420 | And then I'll be with you for lunch.

00:06:05.420 | I brought some books that we're just going to give away.

00:06:09.420 | I'll let Mel or somebody work out who's going to get them.

00:06:12.420 | I've got 10 copies of Don't Count On It and 15 copies of the paperback edition of Enough,

00:06:18.420 | which has a board by Bill Clinton and an introduction by Tom Peters,

00:06:22.420 | the management group.

00:06:24.420 | And so we'll be able to sign in after lunch.

00:06:28.420 | But I'm going to retreat and probably take a nap.

00:06:31.420 | And Bill, I will be with you at Vanguard later on in the afternoon.

00:06:35.420 | And then, as if you haven't had enough of me, I'll be with Bill Bernstein in the traditional fireside chat.

00:06:46.420 | And tomorrow morning I always look forward to working with Bill.

00:06:50.420 | He and I have many, many ideas that are similar, if not identical,

00:06:54.420 | and a few, which might be interesting to talk about, a few differences along the way.

00:06:58.420 | So here we are.

00:07:00.420 | It's hard to believe it's 61 years.

00:07:04.420 | I'm sorry, 51 years since my first heart attack in 1960.

00:07:10.420 | And on a tennis court wearing a cricket club, I did win.

00:07:16.420 | [laughter]

00:07:19.420 | Coming up, of course, the anniversary of my heart transplant.

00:07:25.420 | I had kind of a hard summer, as some of you know from Jason's wife's interview.

00:07:29.420 | And stupidly, I broke four ribs and ripped my left side, hit the tail.

00:07:35.420 | But, you know, time heals all wounds.

00:07:39.420 | And finally, you get over it. That's about that.

00:07:43.420 | I do notice at this stage in my life that I kind of divide it into two phases.

00:07:52.420 | One, the much more frequent times when my energy is summoning me.

00:07:58.420 | And the much less frequent times when I had to summon my energy.

00:08:02.420 | And I had to do that before my heart transplant.

00:08:05.420 | I had to summon my energy after my tumble.

00:08:09.420 | But it's all back now.

00:08:12.420 | And now my energy is summoning me to be with you this morning.

00:08:17.420 | It's been a very busy year for me.

00:08:19.420 | I have another book that came out just after our last meeting,

00:08:23.420 | or at the same time, actually, of our meeting a year ago.

00:08:25.420 | I'm counting on those couple of books here to be signed or whatever you'd like to say.

00:08:31.420 | I've done a bunch of op-eds, as many of you know, for the Wall Street Journal,

00:08:35.420 | the New York Times, the Financial Times.

00:08:38.420 | And they periodically ask me to send it in, and sometimes I do.

00:08:43.420 | And I expect to do even more of that in 2012.

00:08:47.420 | I've also been very busy on the interview scene, as some of you know.

00:08:51.420 | The television demands seem almost insatiable.

00:08:55.420 | I think I've done six or eight of them in the last two or three weeks.

00:08:59.420 | And especially in this age of market turbulence, I do observe, for whatever it's worth,

00:09:05.420 | that they call me much more often at down markets than up markets.

00:09:09.420 | [laughter]

00:09:12.420 | I don't know what to say about that. It's so genie.

00:09:15.420 | All of this stuff is on my e-blog at johncbogle.com.

00:09:20.420 | I guess www.johncbogle.com.

00:09:23.420 | And it doesn't get a lot of traffic, I don't think.

00:09:26.420 | But in any mental way or anything you want to see that you miss, it's right there.

00:09:30.420 | And Michael's doing a terrific job of keeping that posted and current.

00:09:34.420 | You probably wonder why it's called an e-blog.

00:09:37.420 | It's not a blog. It's because e-blog is an anagram for Bogle.

00:09:42.420 | Think of it. [laughter]

00:09:45.420 | And also during this year I celebrated my 60th year at Vanguard, July 5, 2011.

00:09:55.420 | So that anniversary gives me kind of a nice segue into Vanguard Today,

00:10:03.420 | which is the first part of this talk.

00:10:06.420 | And on that date, this last summer, I wrote a two-page memo to our veteran crew members

00:10:12.420 | who are 15 years or more, about 1,000 strong, and our Vanguard principals,

00:10:19.420 | which we now have 220 of them.

00:10:21.420 | So I send my stuff out to them, and it seems worth doing.

00:10:25.420 | And it's in a memo entitled "After 60 Years of Past Service, Looking to the Future,"

00:10:31.420 | and that's also on my e-blog.

00:10:33.420 | And rather than dwell on the past, however, there's not really much point to that.

00:10:37.420 | I wanted to look ahead to Vanguard's 100th anniversary,

00:10:41.420 | which will take place on December 28, 2028.

00:10:46.420 | That will be the 100th anniversary of our first fund, the Wellington Fund.

00:10:50.420 | And in this memo to the crew, I attached excerpts from a speech I gave way back in 1992,

00:10:57.420 | which was entitled "Vanguard, the First 100 Years," prematurely, of course.

00:11:04.420 | And I also attached predicting that we'd still be around 100 years from now.

00:11:08.420 | Very few corporations are, but one of them happened to be IBM.

00:11:15.420 | And they, in June, published a nice pamphlet, two or three pages in the Wall Street Journal,

00:11:21.420 | entitled "IBM at 100," published on their 100th anniversary,

00:11:26.420 | describing a huge change in the world we live in.

00:11:29.420 | And for IBM, since it was founded by Thomas J. Watson way back in 1911,

00:11:35.420 | closing with a conviction, quote, "A company can and must change everything about itself,

00:11:41.420 | everything about it except itself, about it, about itself, except its beliefs."

00:11:48.420 | And the final words in the IBM piece are "ever onward."

00:11:54.420 | And so it is with Vanguard.

00:11:56.420 | As we look ahead to that, except that I end my memo with "not ever onward,"

00:12:01.420 | but, of course, pressed on regardless.

00:12:04.420 | As I look at Vanguard today, those founding beliefs are pretty much intact.

00:12:11.420 | Simple investment strategies that apply to the core of our mission

00:12:15.420 | and the basic human values of fairness to our client owners.

00:12:19.420 | That's you representing them all here today.

00:12:22.420 | And respect for one another who serve our crew.

00:12:25.420 | All our exponential growth puts terrible pressure on your ability to work in a nice human way.

00:12:32.420 | I have a statement that I made many, many years ago when I was running the place.

00:12:38.420 | We have an awful lot of crew members here that have posted on their little cubicles,

00:12:41.420 | which is, "For God's sake, let's always keep Vanguard a place where judgment

00:12:47.420 | has at least a fighting chance to triumph over process."

00:12:51.420 | And it's very difficult to do when you get big.

00:12:56.420 | Everybody knows that.

00:12:57.420 | So we fight against it, and I fight against it wherever I can.

00:13:00.420 | I actually spend an hour in each award for excellence winners.

00:13:03.420 | It's probably six or eight every quarter or ten.

00:13:06.420 | And so I try and stay in touch and do what I can in my small way and keep Vanguard

00:13:12.420 | the same human values that I've always liked, enjoyed, and held high.

00:13:18.420 | It's not to say that I agree, and we'll talk a little bit about it this morning,

00:13:22.420 | with all of Vanguard's policies and operating decisions.

00:13:25.420 | I couldn't possibly agree with everything.

00:13:28.420 | But I try and speak out what I do and act.

00:13:30.420 | I don't get much complaint about it at all, at least to my face.

00:13:33.420 | [laughter]

00:13:35.420 | But I do understand, as I think everybody explains,

00:13:37.420 | that our management team has to make tough choices,

00:13:40.420 | taking into account not only probabilities but consequences.

00:13:44.420 | And I'm free of those responsibilities.

00:13:46.420 | I don't have to worry about it.

00:13:48.420 | So it's probably a good thing that I am.

00:13:51.420 | And we have a fine management team.

00:13:52.420 | Some of you will hear from me this afternoon, many of whom I know quite well.

00:13:57.420 | And I'm pretty sure you'll be impressed.

00:14:00.420 | So let's then go through a look at Vanguard today by going to our first slide.

00:14:16.420 | Our assets have grown enormously, 500 times over since 1980.

00:14:24.420 | Actually, it's more than that.

00:14:27.420 | It's 1,000 times over if you go back to 1974, when we started 1.4 billion of assets,

00:14:32.420 | and now we're 1.6 trillion.

00:14:34.420 | Expenses also have soared up 350 times.

00:14:37.420 | But the point is that two points in this chart.

00:14:40.420 | One, if you're growing extremely rapidly, you can afford to spend an awful lot of money

00:14:45.420 | and still make sure that the growth of expenses, which are up 350 times,

00:14:50.420 | I think I said that, is less than the growth in assets.

00:14:53.420 | And hence our expense ratio has come down way, way, way down

00:14:57.420 | and continues to double our competitors.

00:15:03.420 | You can see the number of crew members there on the chart per billion of assets.

00:15:09.420 | And we've done a great job on that.

00:15:12.420 | In fact, our 12,000 crew members today are almost the exact same number we had

00:15:18.420 | when Vanguard hit 800 billion, I guess, in about 2002 or 2003.

00:15:25.420 | So that's been a great job that we've done, partly economies of scale,

00:15:31.420 | which are natural, partly a really good job, Paul Heller, Morgan, Bob, and Stefano,

00:15:36.420 | on technologies and technology.

00:15:38.420 | A lot of it's pretty impersonal, but that's the way it has to be done today,

00:15:42.420 | and I think people are getting more and more used to it.

00:15:45.420 | So that's the theory of compounding I've talked a lot about.

00:15:50.420 | And if you want to go to the next chart, Michael,

00:15:53.420 | how big will Vanguard be in the future?

00:15:56.420 | And we grew in the early years, which is 25 years, 25% a year,

00:16:01.420 | a remarkable growth rate.

00:16:03.420 | Obviously it never continued.

00:16:05.420 | In the last 11 years, we've grown a 10% growth rate.

00:16:09.420 | And even if we grow at, say, a 7% rate by 2025, it would be $4.1 trillion.

00:16:15.420 | And 7% is probably not unreasonable,

00:16:17.420 | provided we don't have the apocalypse or something like that,

00:16:21.420 | because these funds will have, of course, an internal rate of return

00:16:25.420 | and diminish, though it may be, from the past.

00:16:27.420 | So we're going to get very big.

00:16:29.420 | And I tried when I was here.

00:16:34.420 | The speech I gave all those years ago was called

00:16:37.420 | "The Tyranny of Compounding,"

00:16:39.420 | to be very conscious of how numbers grow as you grow in size

00:16:43.420 | and at any kind of a reasonable growth rate.

00:16:46.420 | And so I always was in favor of organic growth,

00:16:51.420 | letting our record and service speak for themselves

00:16:55.420 | and not forcing growth.

00:16:57.420 | So as you can imagine, I'm a little bit skeptical about money spent on Vanguard-ing.

00:17:01.420 | [laughter]

00:17:05.420 | The one caveat that--

00:17:07.420 | it's one slogan that I--one turn of the English language--

00:17:10.420 | that Merrill Lynch cannot use.

00:17:13.420 | [laughter]

00:17:20.420 | So I'm still a small but beautiful guy.

00:17:22.420 | Small but beautiful guy.

00:17:24.420 | But nice that, in the face of this enormous growth,

00:17:27.420 | we picked at the very beginning--

00:17:29.420 | and I'll talk much more about this later on--

00:17:31.420 | an investment strategy that is basically scale-indexing

00:17:34.420 | and does not have the problems of size that, for example,

00:17:37.420 | a fair amount of capital group has.

00:17:39.420 | You can't run a trillion and a half dollars

00:17:42.420 | on an active management basis

00:17:44.420 | and expect to get any more significant.

00:17:46.420 | So the problem is, on the human side of the business--

00:17:50.420 | and I think everybody at Vanguard is trying to deal with it

00:17:53.420 | to the extent we can make it still a personal place

00:17:56.420 | where everybody feels respected

00:17:58.420 | and so much the better.

00:18:01.420 | So growth--there it is. Here it comes.

00:18:04.420 | And measured, I guess, mostly by our share of industry assets.

00:18:09.420 | And you can see it just goes up and up and up.

00:18:12.420 | And I don't know what's going to stop it.

00:18:16.420 | So I've observed a couple of places.

00:18:18.420 | These are long-term funds.

00:18:20.420 | No, these are fall funds.

00:18:23.420 | And county money market.

00:18:26.420 | Our long-term shares are around 16% or 17%.

00:18:29.420 | And no one in this business ever has had a market share that low.

00:18:33.420 | I say usually top out around 12% or 13%.

00:18:37.420 | But even as that share grows,

00:18:39.420 | I have to confess that I don't take any of it for granted.

00:18:42.420 | I still love a good fight.

00:18:45.420 | And so I'm particularly amused by this next comparison.

00:18:48.420 | I want to throw that up my noose.

00:18:50.420 | [laughter]

00:18:53.420 | These are long-term assets.

00:18:56.420 | That's 16.2% from 5.2% or actually up from 4%.

00:19:00.420 | While Fidelity is just going down and down.

00:19:03.420 | They've lost market share year after year after year.

00:19:05.420 | And I wonder what they're thinking.

00:19:07.420 | We had a director at Fidelity who was a good friend of a Vanguard director.

00:19:11.420 | And I was known as "God" in their boardroom.

00:19:14.420 | Not as a compliment, by the way.

00:19:16.420 | [laughter]

00:19:18.420 | It was like Ed Johnson saying,

00:19:20.420 | "What do you suppose God's going to do about this?"

00:19:23.420 | [laughter]

00:19:27.420 | I don't know.

00:19:29.420 | But it's an interesting competition, or was,

00:19:33.420 | between Fidelity and us.

00:19:36.420 | Because for them it's kind of war and bad feelings.

00:19:39.420 | With me it's kind of a happy competition

00:19:43.420 | in which whoever offers the best products at the lowest prices and the best service is going to win.

00:19:47.420 | And I think that's what we're seeing on this chart.

00:19:50.420 | And you can see their turn, if you look carefully.

00:19:53.420 | Came right at the time that the bubble in the stock market burst in 1999.

00:19:58.420 | That's their peak.

00:20:00.420 | And it's down 40%. That's a big loss of market share.

00:20:02.420 | A 40% decline to the 9% today.

00:20:05.420 | And it's only a matter of time until we'll be twice as big as they are in market share.

00:20:10.420 | It's amazing.

00:20:12.420 | And these are long-term assets.

00:20:14.420 | You can see they're much bigger than we are in the money market.

00:20:16.420 | Funfield, which has been very quiet at the moment.

00:20:20.420 | And when you take that into account,

00:20:22.420 | and we're only, if that's the right word to use,

00:20:24.420 | $375 billion ahead of them.

00:20:27.420 | So it's fun, and I like a good fight.

00:20:30.420 | But it's not just Fidelity.

00:20:33.420 | We're wearing the crown right now, the largest firm in the industry.

00:20:39.420 | As I mentioned, we're an all-time high in market share.

00:20:42.420 | And when you take it and compare it to the competitive landscape when Vanguard began,

00:20:48.420 | we didn't do 74. It was easier to find the 1980 data.

00:20:52.420 | We'll do 74 shortly when we have time.

00:20:56.420 | And you can see what's happened to those market shares of the leaders in those days.

00:21:02.420 | And you can see that just about everybody has lost, in some cases a lot.

00:21:07.420 | You can see Putnam going from 4.2 to 0.6.

00:21:11.420 | That's, as you tell me, an 80% loss in market share.

00:21:14.420 | And they earned every penny of it.

00:21:17.420 | [laughter]

00:21:20.420 | And Capital Group just slowed that way down.

00:21:22.420 | I was afraid it was actually shrinking at the moment.

00:21:24.420 | It was the only significant one.

00:21:27.420 | The only one that went up in market share compared to Vanguard.

00:21:32.420 | So the competitive landscape is saying, I think,

00:21:40.420 | that indexing is popular, that the demands in the marketplace,

00:21:46.420 | that the balance between bond funds and stock funds is much more oriented towards bonds.

00:21:52.420 | And most people in the industry have had a big help in the last decade.

00:21:55.420 | Our performance has been good. We'll talk a little bit about that.

00:21:59.420 | People trust Vanguard, and I see this in that correspondence that I get literally every day.

00:22:05.420 | And so it's hard to see at the moment how that growth is going to be interrupted

00:22:12.420 | and where the real competition is coming from.

00:22:15.420 | There are a few big firms on this list.

00:22:19.420 | You see Putnam, Capital, Merrill Lynch, BlackRock, that's a merger, and the rest of them.

00:22:28.420 | And Fidelity, of course.

00:22:30.420 | And then you go way down, and the next firm is probably really 3% or so of the industry assets,

00:22:36.420 | way down in leaders, and that has some implications that I hope everybody at Vanguard is thinking about.

00:22:41.420 | And we've also become much more attractive to large investors, if you want to put up that chart.

00:22:46.420 | Way back in 1992, I had this idea that we should let the competitors know there was no point in their cutting costs,

00:22:53.420 | because we'd cut them further, and so they're just going to lose.

00:22:57.420 | And so we did what we call "selective scale prices."

00:23:01.420 | That's what I called it then, back in 1992.

00:23:04.420 | We started our first Admiral Fund, which meant if you put in larger amounts of money, you got a lower expense ratio.

00:23:09.420 | Simply respecting a brilliant decision, but simply reflecting the reality of pricing in this business.

00:23:17.420 | And that is a $100,000 account, and probably has the same cost to us, maybe even a lower cost to us,

00:23:24.420 | than a $2,000 account, and yet they were both paying pretty much the same expense ratio.

00:23:29.420 | So we decided to do what was proper, encourage the larger investors who are important to our being,

00:23:34.420 | and we'll reduce overall expense ratios for everybody.

00:23:37.420 | So this was a kind of low-cost, attracting 31% of our assets now, our admiral shares.

00:23:48.420 | This, I think, speaks for itself.

00:23:51.420 | But unfortunately, the press doesn't seem to get it right.

00:23:54.420 | They think we're cutting costs for the admiral shares.

00:23:57.420 | Really, we're not cutting costs, we're operating costs.

00:24:00.420 | So when you reduce the cost on a certain group of funds, you're raising them, maybe immeasurably,

00:24:05.420 | more than someone else, but it's not a big gap.

00:24:07.420 | It doesn't change our revenues one penny over the other.

00:24:11.420 | So it looks pretty good, Vanguard growing, and doing, I think, pretty much the right things.

00:24:17.420 | New York growth, of course, index funds, the driving force.

00:24:23.420 | Yes, we did start the first index mutual fund.

00:24:26.420 | There was a little controversy about this, which you all, some of their number,

00:24:29.420 | are quite close on this point, but there were a couple letters in the Wall Street Journal

00:24:35.420 | implying that somehow I didn't really start the first index fund.

00:24:39.420 | Well, if there's anything that is clear in all this, that is the first index fund, period,

00:24:45.420 | the first index mutual fund.

00:24:47.420 | No one argues with that, but they say other people had the ideas.

00:24:50.420 | Even I had some back in my senior thesis in 1951,

00:24:53.420 | talking about how hard it was to beat the index.

00:24:56.420 | And one thing I want to mention to you, because you get to a point in this life

00:25:01.420 | where all you have is your credibility, and I thought some of those letters suggested

00:25:05.420 | I wasn't telling the whole truth about the other people that worked on this issue.

00:25:09.420 | And the fact is, I've been telling the truth about it, the whole truth,

00:25:13.420 | about the truth, since about 1995 or '96 when indexing started to get popular,

00:25:18.420 | giving full credit to Jeremy Grantham, who tried to do indexing and failed back in 1971,

00:25:24.420 | and for his trouble was awarded by Pensions and Investment magazine,

00:25:29.420 | the worst idea in years.

00:25:32.420 | Pensions and Investment described Jeremy's foray.

00:25:35.420 | And I talked about guys I know personally, like Bill Faust, and Macklepone,

00:25:38.420 | and Wells Fargo, they were pioneers in this area in a very sophisticated way.

00:25:42.420 | I don't do it in a sophisticated way.

00:25:44.420 | And other people that had come along the road.

00:25:47.420 | And so we did start the first index fund, and as I've often reminded our crew,

00:25:55.420 | in another context, totally irrelevant here, sure the ideas are out there,

00:25:59.420 | but what I've said is ideas are a dime a dozen, but implementation is everything.

00:26:05.420 | And we didn't think about that term, implementation is everything.

00:26:09.420 | We did it, I'm not sure the landscape would be much different if we hadn't been first,

00:26:13.420 | if we'd been second, or third, or fourth, but the fact of the matter is,

00:26:17.420 | a recollection now, we started the fund, I know we started the fund in 1975,

00:26:21.420 | and I think the second index mutual fund was started by, I believe, Wells Fargo in 1982.

00:26:29.420 | That's a great idea when nobody copies it for six years.

00:26:34.420 | So I wrote to the journal editors, did my piece with me, which was cut markedly,

00:26:42.420 | like a period, I sent it actually to the journal editors, I'll just tell you a little anecdote,

00:26:48.420 | because I wanted some observation of our 30th anniversary, and I got going a little bit late,

00:26:54.420 | I just had the idea one afternoon of writing this piece, and I wrote it and got it home to them.

00:26:58.420 | At that time it was, I think maybe July, August 28th or something,

00:27:06.420 | and the date is August 31st, when the underwriting took place.

00:27:10.420 | And so I sent them this piece, the guys I know on the op-ed page don't know them well,

00:27:15.420 | and I said I want this to go into the review, it's too long for you guys.

00:27:19.420 | So they looked at it and said, well why don't you give it to us first.

00:27:22.420 | So I sent it to them, it was 2,000 words, and I knew they just don't do 2,000 words op-eds.

00:27:28.420 | They said if you can get it to 1,400 words, we think we can use it.

00:27:33.420 | So I was a sucker, I cut it to 1,400 words, and I said to somebody,

00:27:39.420 | doing that cutting reminded me of James Franco in 127 hours, cutting off his arm.

00:27:45.420 | That's what editing my own commentary is.

00:27:49.420 | And they come back with some more edits, we're now done with 1,000 words.

00:27:53.420 | So it missed a lot, but it kept a lot, it kept the sense of it.

00:27:57.420 | I had the option of saying nope, that's too much, you're out.

00:28:00.420 | But then you get to that point and you say publish it the way it is.

00:28:03.420 | So it wasn't as complete as I'd like it, but I have the complete one on my website too.

00:28:07.420 | So for whatever that's worth.

00:28:09.420 | But I am sensitive to anyone saying anything except yes, he did start the first index fund,

00:28:15.420 | and no, he wasn't the first one to have the idea, I freely concede that.

00:28:19.420 | Unless 1952, '51 was the first chance it met.

00:28:23.420 | So our strategies go far beyond the index fund.

00:28:28.420 | And that's what I'm going to talk mostly about here.

00:28:30.420 | I'm going to talk about index funds, going to what I call virtual index funds.

00:28:35.420 | And that's a description that people in our bond department do not like.

00:28:39.420 | But the whole idea of some of the funds we consider active is to have them as much like an index

00:28:47.420 | as we can possibly make them when there isn't a suitable index around.

00:28:51.420 | So indexing share of equity fund assets has converged, giving rise to this great paradox.

00:29:00.420 | The title of the speech I gave five or six, eight years ago, I can't remember.

00:29:04.420 | Converges to great paradox, even as active management reflected in higher R-squares gets more and more like indexing.

00:29:12.420 | So indexing gets more and more like active management.

00:29:16.420 | And so I'm a kind of, what have they done to my song, mom?

00:29:20.420 | Tied it up in a plastic bag and turned it upside down.

00:29:24.420 | And much of the growth of indexing, you can see it there, coming from exchange traded funds.

00:29:30.420 | But indexing was 25%, 24% of equity fund assets.

00:29:36.420 | If you go back five years, you think of the real importance of indexing and how it's taken over.

00:29:42.420 | Cash flows into index funds, index mutual funds in the last five years were $630 million.

00:29:49.420 | And cash flow into actively managed equity funds was $7.6 million.

00:29:57.420 | That's a big difference, and that impact is going to continue.

00:30:03.420 | Indexing is going to be more important, and people kind of don't recognize it, but they're starting to recognize it more, almost every day.

00:30:09.420 | You see it in the financial analyst journals, you see it in the economist newspaper, you see it in a buttonwood column there.

00:30:16.420 | It's become an accepted thing, you don't have to explain it anymore.

00:30:21.420 | But beyond that, indexing, our great strategy from the beginning, I struggled for years and years to find the right words to describe it.

00:30:31.420 | What I described in the beginning is having funds that have relative predictability.

00:30:35.420 | There must be relative predictability to their categories.

00:30:39.420 | And the idea is you can reduce behavioral problems of investors jumping on the hottest of things when buying it.

00:30:47.420 | If you kind of tie, anchor your funds to a certain standard and have a high relative predictability.

00:30:54.420 | So not pure indexing, but virtual indexing, which has high correlation with a target, which has low turnover, low cost of course,

00:31:03.420 | very low cost, and specific maturity standards in the case of compound funds.

00:31:10.420 | And it's also true, I'll talk a little bit about this later on, it's also true of our multi-manager strategy.

00:31:17.420 | I've always liked the multi-manager strategy.

00:31:20.420 | Not because we can pick great managers, because we can't, and I couldn't.

00:31:24.420 | I'm not casting any spurts, I think I batted 510, which I will say is probably better than Ted Williams, 406.

00:31:32.420 | But not very good, and I don't know if we're batting 510 or 490 now.

00:31:37.420 | But conceptually it's going to be, if you pick five managers of fund, they're going to end up being pretty much average.

00:31:42.420 | So when you go over to our market share, we totally dominate the index fund market.

00:31:48.420 | And relatively small factor so far, ETS, and that's like 14% active fund share in the industry.

00:32:01.420 | Now I want to talk a little bit about this idea of correlations relative predictability.

00:32:07.420 | So we can put this next chart up, and show you here the correlation of our, over on the far right,

00:32:16.420 | the correlations of our funds in each category with their targets.

00:32:22.420 | Index funds, the correlation is 93, you look at virtual index funds, the index funds are 99, I'm surprised not 100.

00:32:32.420 | Balanced funds are 100, meaning we match the index very closely.

00:32:39.420 | The virtual index funds are very high, 93.

00:32:42.420 | The bond funds usually explain by, those are our municipals mostly,

00:32:46.420 | usually explain by small differences in maturity or strategy compared to the industry.

00:32:51.420 | And balanced funds, those Wellington funds, way up there, 98 I think, or 96 correlation.

00:32:57.420 | On average, balanced funds are 99, and the actives, even so with multi-manager,

00:33:05.420 | particularly in balance and equity, are 92 correlations.

00:33:11.420 | And the idea is that don't have something that gets hot, like where Mr. Berkowitz is down 30% this year,

00:33:20.420 | I'm a last year's hero, it happens all the time.

00:33:24.420 | I was talking to Christine Benz, the Morning Star lady, a little while ago,

00:33:28.420 | and I said, you know, you probably ought to stop picking managers of the year.

00:33:32.420 | Every one of them turns out, ultimately, every one of them turns out to be,

00:33:37.420 | a phrase I've often used, you think they're stars, but they turn out to be comets.

00:33:43.420 | Lighting up the firmament for a moment in time.

00:33:46.420 | They're then burning out, their ashes drifting gently down.

00:33:50.420 | (laughter)

00:33:52.420 | Not a bad phrase, right?

00:33:54.420 | (laughter)

00:33:56.420 | So, we do this with multi-manager, we do it with municipal bond funds,

00:34:01.420 | with specific maturities, and give that relative predictability that we see.

00:34:05.420 | A, with low cost, it's a perfect strategy.

00:34:08.420 | Because if your correlation is perfect and you have lower cost, you're going to win.

00:34:12.420 | And so, that's what it's all about, and we continue to do that.

00:34:16.420 | I'll talk a little bit later about some places where I'm not so sure.

00:34:19.420 | We haven't lost sight of that centrality of that goal,

00:34:22.420 | but there's not any point in having a hot manager.

00:34:26.420 | Good for a year, good for two years, maybe good for ten,

00:34:29.420 | but in the long run, it doesn't work so well.

00:34:33.420 | So, we can, oh I guess this is a repeat.

00:34:38.420 | What have you got next there?

00:34:41.420 | What are we showing, did I just talk about that?

00:34:44.420 | Oh, those are some individual funds.

00:34:46.420 | And you'll see Wellington there, '96 was their correlation.

00:34:49.420 | Windsor '96, amazing, Windsor too.

00:34:52.420 | Strategic equity even surprised me.

00:34:54.420 | '98 prime cap, '93.

00:34:57.420 | And so, you'll see those individual funds are very, very tightly tied to their targets

00:35:07.420 | and their best fit indexes, and they win because of that column.

00:35:11.420 | Oh, they're on the right, low expenses.

00:35:14.420 | This is not complicated, and it looks little on a year-to-year basis.

00:35:19.420 | These are annual expense ratios.

00:35:21.420 | When they compound over the years, there's all the difference in the world.

00:35:25.420 | So, we see that growing, and see a growing part,

00:35:34.420 | portion of bank arts assets, and you'll see what I call virtual.

00:35:39.420 | Again, they don't like that term in the office.

00:35:41.420 | They think they're active managers.

00:35:43.420 | In terms of muni bonds, which is sort of an issue here,

00:35:46.420 | they are in their own way active managers.

00:35:48.420 | We have very definite maturity standards, very definite quality standards,

00:35:52.420 | and they're not to be violated, and they don't change all the time.

00:35:56.420 | So, in any event, active share is very, very high.

00:36:02.420 | It's dwindling half what it was in 1990, roughly half,

00:36:06.420 | and the virtual share is now up to about 82%.

00:36:09.420 | These aren't foreign numbers or anything like that,

00:36:12.420 | but just to give you an idea of the direction in which we're going.

00:36:15.420 | So, the idea is not to disappoint, or as the subtitle of my 2005 book said,

00:36:25.420 | "The only way to guarantee your fair share of stock market returns," and it is.

00:36:31.420 | So, in all this, the equity funds are kind of a wild card,

00:36:38.420 | and I'll show that next time.

00:36:42.420 | Can we do this here?

00:36:44.420 | Yeah, I guess we can do that here.

00:36:45.420 | You can see how important cost is to this whole equation.

00:36:49.420 | It's not the ability to pick great managers.

00:36:52.420 | Not me either, as I said, but it's about keeping cost in,

00:36:56.420 | and you'll see things from Vanguard that give you those blue bars there,

00:37:01.420 | the extent to which our 10-year performance outpaces those of our competitors.

00:37:06.420 | And you can see we're 100% in the bond area, 100% in the money market area,

00:37:12.420 | almost 90% in the balanced area, 61% in the stock area,

00:37:16.420 | meaning we have performance for our competitors.

00:37:19.420 | But the reality is we're there because we have no low cost.

00:37:23.420 | So, if you look at stock funds, we're below average manager picker.

00:37:27.420 | X cost, just a little bit above average in bonds,

00:37:32.420 | which I don't think is a material thing in one way or the other.

00:37:34.420 | Below average would just mean we have higher quality.

00:37:39.420 | In balanced funds, money market funds, balanced funds maintain pretty well,

00:37:43.420 | and money market funds, of course, drop radically.

00:37:46.420 | And that drop in the money market is simply because we've stayed with higher quality,

00:37:51.420 | and I'd never regret that.

00:37:52.420 | This is not a definitive chart.

00:37:53.420 | This is a directional chart.

00:37:55.420 | So, just a reality check.

00:37:59.420 | So, it's not a good idea to brag about our ability to pick great managers

00:38:03.420 | because when you see the 61% or the 100% or the 89%,

00:38:07.420 | you're ignoring the fact that most of our advantage is in cost.

00:38:11.420 | We had a guy that worked in our municipal department,

00:38:13.420 | a senior person, Jerry Jacobs, who had a superb record.

00:38:17.420 | He ran the intermediate term municipal bond fund.

00:38:20.420 | He was hired away for many millions of dollars a year by Putnam.

00:38:24.420 | And all of a sudden, this top manager became a bottom manager.

00:38:29.420 | Did he lose all his intelligence? No.

00:38:32.420 | He went to work for a municipal bond fund and charged one and a quarter percent

00:38:35.420 | instead of two-tenths of one percent, and there went his record.

00:38:38.420 | I don't know why Putnam didn't examine it this way.

00:38:40.420 | They might have done a little bit better.

00:38:41.420 | They had a lot of problems there.

00:38:43.420 | But in any event, it's a very growing impact on its cost,

00:38:50.420 | and it affects everything we do.

00:38:54.420 | I now want to turn to ETS as such.

00:38:57.420 | I mentioned that before.

00:38:58.420 | I'll give you a little presentation here.

00:39:02.420 | I mentioned what have they done to my song.

00:39:04.420 | This is the answer.

00:39:05.420 | This is my idea of buying and holding forever.

00:39:08.420 | And then if you look back on the history of exchange-traded funds,

00:39:13.420 | it's going to be probably the greatest marketing strategy of the first decade

00:39:18.420 | of the 21st century.

00:39:21.420 | Has it been the greatest investment strategy?

00:39:25.420 | Absolutely not.

00:39:27.420 | How can we have a great marketing strategy for its investors?

00:39:30.420 | Well, they won't figure it out.

00:39:31.420 | Okay.

00:39:32.420 | There's nothing the matter, to be clear, about buying an ETF

00:39:36.420 | and holding it forever.

00:39:38.420 | You will do just as well if you do the total stock market,

00:39:41.420 | Vanguard total stock market.

00:39:42.420 | If you buy the ETF, hold it as if you buy the regular fund.

00:39:47.420 | I always thought when I came into this business,

00:39:49.420 | "My God, you can get your money back on any given day?"

00:39:52.420 | This was 1951.

00:39:53.420 | I thought that was a miracle.

00:39:55.420 | And now it's in any given second.

00:39:58.420 | And it does hold out the temptation to trade and is used to trade.

00:40:04.420 | So we see ETFs now coming in for a certain amount of attention.

00:40:09.420 | The New York Times had a headline the other day, "Volatility.

00:40:13.420 | Thy name is ETF."

00:40:15.420 | So I named the ETFs, particularly these triple, double, reverse lattes.

00:40:20.420 | [laughter]

00:40:22.420 | Or whatever they are.

00:40:23.420 | I hear people arming those things.

00:40:25.420 | I don't know what they are.

00:40:27.420 | But we'll fancy it up.

00:40:30.420 | Double leverage wasn't enough, so now it's triple leverage.

00:40:32.420 | Going up was not fun.

00:40:34.420 | Now I've got to get it to go down.

00:40:36.420 | And it's not any question it played a big role in the flash crash

00:40:39.420 | a couple of years ago.

00:40:41.420 | It is playing a big role in these wild gyrations.

00:40:44.420 | We get closing hours in the market--closing hour in the marketplace.

00:40:48.420 | And it doesn't seem to be part of the high-frequency trading syndrome,

00:40:53.420 | but that's another cause of all this volatility.

00:40:57.420 | ETFs have also been at the center of a number of frauds and market manipulations,

00:41:02.420 | including that $2 billion loss taken by United UBS out of Switzerland,

00:41:07.420 | including a Goldman Sachs partner who was doing something illicit,

00:41:10.420 | which I can't remember.

00:41:11.420 | And I'm sure a lot more is done in the ETF area.

00:41:15.420 | I was struck the other day--I'll open this one up for a second.

00:41:19.420 | My wife and I were out shopping or something on a Saturday morning.

00:41:22.420 | I looked at the license plate on a car, on the car in front of me,

00:41:28.420 | and here's what it said.

00:41:30.420 | "Oh, gee."

00:41:32.420 | [laughter]

00:41:35.420 | She said--Eve said, "What does that mean?"

00:41:38.420 | [laughter]

00:41:39.420 | I said, "Oh, my God, my idea. It's highest form. Index trader."

00:41:44.420 | And, of course, the guy was driving a Jaguar.

00:41:47.420 | [laughter]

00:41:50.420 | That's the world we have.

00:41:53.420 | Vanguard has become a very strong entrant in the ETF market, I think, in a better way.

00:41:58.420 | As far as I can tell, in a better way.

00:42:01.420 | While our market share is creeping up at 12%--we actually did 33%--

00:42:10.420 | that's creeping up from 4% to 12%, a triple in years.

00:42:17.420 | It's pretty good. Five years would be good.

00:42:19.420 | Or, I'm sorry. Yeah, it's five years.

00:42:22.420 | And we're actually now doing 33% of all the cash flow on the ETFs.

00:42:32.420 | So that's going to grow and grow.

00:42:34.420 | And I just hope--and I have no way of knowing this.

00:42:37.420 | You'll see that they'll be over there this afternoon, the guys that run our ETF business.

00:42:42.420 | But I don't have to know.

00:42:44.420 | And I've introduced myself to one of them. I hope to see you this afternoon.

00:42:48.420 | [laughter]

00:42:49.420 | I hope they won't be nice.

00:42:51.420 | [laughter]

00:42:53.420 | But I think, deep down, there honestly isn't a big difference between management's view and mine.

00:42:59.420 | Implementation, again, may be different.

00:43:01.420 | But nobody at Vanguard thinks trading ETFs for this kind of rapidity is a good idea.

00:43:06.420 | You just can't believe that.

00:43:07.420 | And so we try and avoid that.

00:43:09.420 | Yet, there's a lot of volatility in what we do and what everybody else does.

00:43:13.420 | You can see this turnover is unbelievable.

00:43:16.420 | If you want to go to the next chart.

00:43:18.420 | The ProShares and Ultra SP flip, turns over at 17,669% a year.

00:43:26.420 | An average holding period of 2.1 days.

00:43:29.420 | Spiders typically run around 10,000% a year.

00:43:33.420 | And Ultra Short, now that's popular.

00:43:35.420 | And take a guess at what the market's going to do.

00:43:37.420 | Magnified by three.

00:43:39.420 | 10,000% a year.

00:43:41.420 | And then the more speculated index is Spiders via Qs.

00:43:45.420 | Other ones that are hot periodically.

00:43:48.420 | China.

00:43:49.420 | Look at Brazil.

00:43:50.420 | 2,146 holding period, 12 days.

00:43:54.420 | iShares emerging markets, 2,500.

00:43:58.420 | Spider Gold shares, 1,500.

00:44:00.420 | IFA index, more conservative than most, but still 1,000% a year.

00:44:05.420 | 36-day holding period.

00:44:07.420 | Vanguard is obviously doing better than that.

00:44:10.420 | But probably not better to suit May.

00:44:12.420 | I think we're doing it right.

00:44:14.420 | For example, our emerging markets index turns over at about 750% a year.

00:44:21.420 | And that's a quarter, or whatever one wants to say, of what the MSCI is.

00:44:28.420 | 757%, still an awful lot of turnover.

00:44:31.420 | Our total stock market is better.

00:44:33.420 | The quality at 300% a year, that's better.

00:44:37.420 | I'm a guy that believes 20% turnover is pushing the envelope.

00:44:41.420 | So I look at these things and I think, what the hell?

00:44:44.420 | What the heck is going on?

00:44:48.420 | But it raises the issue of is all this turnover good for investors?

00:44:54.420 | And a number of Vogelhead posts on this comment, you've probably seen many of them,

00:44:59.420 | saying that the idea that I have, they don't refer to any of these posts at all,

00:45:04.420 | that we want to be examining investor returns,

00:45:08.420 | returns those investors are making in these various ETF categories compared to the returns the fund makes.

00:45:15.420 | To take an easy one, the large cap ETF investment funds have produced,

00:45:23.420 | obviously not a very good return over the last 10 years of 3.2% a year.

00:45:33.420 | But the average investor in those funds has earned 1.7%.

00:45:37.420 | So that's a cumulative loss over a decade of 18% of your capital,

00:45:42.420 | just by all I've traded.

00:45:45.420 | In business small cap, the cap is 48% over a decade.

00:45:48.420 | Add your money lost to the index standard.

00:45:53.420 | International developed markets, these are what you know about, we'll talk more about that later.

00:46:00.420 | 91% of the capital gets lost.

00:46:03.420 | And in individual countries, it's 223.2.

00:46:09.420 | We didn't have emerging markets in individual countries.

00:46:16.420 | The international developed was a lot of cold market.

00:46:18.420 | And then we go to individual countries.

00:46:20.420 | So people are betting on things like Brazil, or Nepal, or wherever else they are.

00:46:25.420 | And you can see that a 10% return is enormously different from compounding.

00:46:30.420 | 4% and the investor grows to 56%, a very nice return, I admit.

00:46:35.420 | 14% is fund earns.

00:46:39.420 | And it's regular time-weighted.

00:46:45.420 | Unit-weighted, if you will.

00:46:47.420 | Return at 280%.

00:46:50.420 | It's a huge gap.

00:46:52.420 | We don't have these inverse and leveraged equity funds for 10 years.

00:46:57.420 | So we used to look at five years, if you could put them in the above chart.

00:47:01.420 | And you can see they're not starting off so very well.

00:47:05.420 | Emerging markets lost 20% of your capital.

00:47:10.420 | Inverse equity, 7%.

00:47:12.420 | But look at how good the people were picking the inverse times.

00:47:16.420 | If you stayed in that fund for five years, you lost 56% of your capital.

00:47:23.420 | Yeah, you lost just 56% compared to only 49% for the return by the fund in that period of leverage.

00:47:31.420 | So you just see this.

00:47:35.420 | Time-weighted returns are a little controversial.

00:47:38.420 | I mean, sorry, investor returns, dollar-weighted returns.

00:47:41.420 | So uncontroversial.

00:47:43.420 | I first started talking about them.

00:47:46.420 | We should have funds report them.

00:47:49.420 | Way back in 1996, one of my first speeches after getting out of the hospital.

00:47:55.420 | And everybody thought it was the dumbest idea they'd ever heard.

00:47:58.420 | Because everybody knows what the fact is.

00:48:00.420 | If you want to look at the return, the fund says, "Here's what we earned."

00:48:03.420 | You know in almost every case the investor earned less.

00:48:06.420 | A little less, or a lot less, but less.

00:48:09.420 | And you look at standard mutual funds, not ETS, the gaps are there, but much, much smaller.

00:48:15.420 | So it's part of the business, but I don't think we should be in the business of taking advantage

00:48:21.420 | of people's shortcomings and behavioral problems.

00:48:25.420 | So you commented, and that's an interesting subject,

00:48:29.420 | that one of the reforms I would like to see is that all mutual funds, ETS or otherwise,

00:48:34.420 | actually be required to report the returns their investors earned,

00:48:37.420 | and not just the returns the funds earned.

00:48:40.420 | It's well within our technological capability.

00:48:43.420 | And you see these gaps shown in the next chart.

00:48:46.420 | I just didn't, so dramatically, what I did was take the right-hand section of the other chart

00:48:50.420 | and grabbed it, made a graphic.

00:48:55.420 | And it's really quite startling, some of these are quite startling.

00:48:58.420 | And so the ETS is getting more and more extreme, it's good marketing.

00:49:02.420 | And so it's very disruptive to the markets, particularly these inverse equities, leverage equities.

00:49:09.420 | And we shall see, but I don't like what I see so far.

00:49:13.420 | In addition to these specialty areas, ETS has become the vehicle.

00:49:18.420 | When you've got some amazing new investment idea, you go the ETF route rather than the regular fund route.

00:49:25.420 | Because the idea of ETS is a hot marketing idea.

00:49:28.420 | And so you'd never probably hear of people like Rafi 100, Rob Arnott's thing,

00:49:34.420 | or Jeremy Siegel's wisdom total dividend thing, if they just did it in the conventional way.

00:49:39.420 | So they do the ETS, and they have the answers, these fundamental indexes.

00:49:46.420 | Do you want to go to that?

00:49:49.420 | And you can see that Jeremy Siegel was quoted as saying,

00:49:56.420 | "We're the pernickets of the new age, who buys the rules of the heavens."

00:50:03.420 | It's all going to be different now, and it's not.

00:50:06.420 | You can see in the blue, that's Arnott's thing.

00:50:09.420 | It's much more volatile, produces a return, a point different from the Vanguard total stock market.

00:50:18.420 | Not much difference, and that's a very short period.

00:50:21.420 | I'm confident that the differences will just exist in a very small level,

00:50:26.420 | and maybe a losing level in the long run because these funds cost not just their expense ratios,

00:50:31.420 | which are high by my standards, but because of the turnover it takes to do that.

00:50:35.420 | And curiously enough, I like that Jeremy Siegel's wisdom tree fund based on index,

00:50:42.420 | the total amount of dividends paid, so a big dividend pair would be larger on the list.

00:50:46.420 | And if that was basically a total bomb, and that total dividend fund is now 1% of wisdom tree's total assets.

00:50:57.420 | 1% is about 170 million out of 13 billion, and they've got more things for trading currencies.

00:51:05.420 | I have a list of them here, but I won't take your time to read it.

00:51:07.420 | But you look like you're reading a lunatic's map of the world.

00:51:11.420 | Who wants to buy or sell Indian rupees?

00:51:16.420 | But it's a strategy.

00:51:19.420 | But in any event, if you took out of that chart over there,

00:51:22.420 | the fact that Barnum and Ratley is significantly more volatile than, like, 15% more volatile than Vanguard's whole stock market,

00:51:32.420 | it really accounts for the entire difference.

00:51:34.420 | So it's much value.

00:51:36.420 | He's the greatest salesman since P.T. Barnum, I think, and he still believes it's working.

00:51:43.420 | But even I'm looking at this record.

00:51:46.420 | So there we are, industry headed off in the wrong direction.

00:51:51.420 | In my opinion, and that's a big growth part of the industry.

00:51:57.420 | It has to taper off, and investors have to get wise about the fact there's no trading.

00:52:01.420 | There's no money in trading rapidly in the stock markets.

00:52:04.420 | And eventually, of course, like the gamblers in Las Vegas, they will have no money left.

00:52:09.420 | And so that will be the end of the ETF.

00:52:13.420 | I'm saying that a little hyperbolically.

00:52:15.420 | But just use properly the right kind of funds, help in the long term, very diversified funds, bonds, stock, develop markets,

00:52:25.420 | maybe even emerging markets.

00:52:27.420 | We'll talk about that later.

00:52:29.420 | It's okay.

00:52:31.420 | But if that accounts for 5% of the use of ETFs, it might be absolutely amazing.

00:52:36.420 | And no one knows how to count that.

00:52:39.420 | So let me talk now about, first, books.

00:52:44.420 | And then some closing reflections on my lifetime.

00:52:49.420 | And I have copies of, I think I've brought about 10 copies of, don't count on it.

00:52:58.420 | If you flew here, don't buy one.

00:53:01.420 | I'm giving them away, so.

00:53:02.420 | Mel, you'll have to figure out how to get rid of them.

00:53:05.420 | I'll be glad to sign, as I said this afternoon.

00:53:07.420 | I've had 15 copies of paper backing up, which is fine for the airplane travelers.

00:53:11.420 | And I'll sign them after lunch.

00:53:14.420 | So I just thought it might be interesting to reflect on the books.

00:53:19.420 | Which, you know, I don't know.

00:53:22.420 | I keep thinking that there must be something terribly the matter with me.

00:53:26.420 | Because I don't know anybody else in the industry except for Peter Lynch who has written one book or two.

00:53:31.420 | And there may be other people.

00:53:33.420 | But I don't know them, so don't correct me if I'm wrong.

00:53:36.420 | So I'm wondering, as an old expression, everybody is out of step but me.

00:53:41.420 | [laughter]

00:53:43.420 | So maybe it's stupid.

00:53:45.420 | In any event, they now go back to 1993.

00:53:48.420 | Which, tragically, tragically, I was the best seller of the whole bunch.

00:53:53.420 | And I've gone downhill from there.

00:53:55.420 | [laughter]

00:53:56.420 | But they all do pretty well.

00:53:58.420 | And in particular, Little Book of Common Sense, the best thing is it's a small book.

00:54:06.420 | And the only way to guarantee your fair share is Hop Market, which continues to do extremely well.

00:54:10.420 | And even though it's now four years old, and we go by sales, we go by Amazon, we go by comments.

00:54:18.420 | They get great comments on Amazon, mostly.

00:54:21.420 | Four and a half stars.

00:54:22.420 | There's always somebody that doesn't like your books on Amazon.

00:54:26.420 | It's very humbling to read that.

00:54:28.420 | And my favorite comment was, "This author has a real problem.

00:54:34.420 | He writes more like a novelist than an economist."

00:54:38.420 | [laughter]

00:54:41.420 | And I thought, "Well, if that's my problem, I'm feeling pretty good."

00:54:43.420 | [laughter]

00:54:45.420 | And someone wrote about Vogel and Mutual Funds way back among those years.

00:54:49.420 | You never forget the nasty comments.

00:54:51.420 | You forget the good ones pretty quickly.

00:54:53.420 | But good analysis, poor conclusions.

00:54:59.420 | [laughter]

00:55:01.420 | Just what you'd expect from an MBA.

00:55:03.420 | [laughter]

00:55:05.420 | I was heartened by the fact I didn't have an MBA.

00:55:07.420 | [laughter]

00:55:10.420 | So, and even that great big orange tone, really did pretty well.

00:55:14.420 | I can't tell you the numbers, but maybe 25,000 copies or something a typical business book sells, about 5,000.

00:55:20.420 | And you know, it's not Michael Lewis territory, that I can assure you.

00:55:23.420 | But I feel pretty good.

00:55:25.420 | I want someone to look at these things and feel pretty good about what I've written, what I've written.

00:55:29.420 | And I think they will stand.

00:55:31.420 | Someone wants to look at them and get a picture of this whole group of books

00:55:34.420 | on the development of the financial industry and the mutual fund industry

00:55:37.420 | in its great growth phase in the '20s to the end of the '20s century.

00:55:43.420 | And sort of consolidating phrase, "The phase that begins thereafter."

00:55:47.420 | I think they will get a good picture.

00:55:49.420 | What life really was.

00:55:51.420 | Not in retrospect, but what I was thinking and saying then.

00:55:55.420 | Does anybody really care about that?

00:55:57.420 | I have absolutely no idea, but I care about it.

00:55:59.420 | And that's good enough for me.

00:56:01.420 | I'm working on my next book.

00:56:04.420 | And you've seen, I think, the original essay, which was turned into a speech at the Museum of Financial History.

00:56:11.420 | The book is titled the same as the speech, "The Clash of Cultures, Investment vs. Speculation."

00:56:17.420 | And I don't know, I think I only published it under the orange cover.

00:56:21.420 | But that's where we are. They left that to me.

00:56:24.420 | But that will be coming out.

00:56:26.420 | I had to postpone it a little bit until February '28.

00:56:30.420 | I had such a big setback in my health and my ability to sum up my energy for that matter.

00:56:38.420 | It just took a little longer. It will take a little longer.

00:56:40.420 | I'm not really deeply into it yet.

00:56:42.420 | But once I get through this thing today, I will be back to it pretty much full-time for the rest of the year.

00:56:47.420 | As much as I can.

00:56:49.420 | So, I mentioned that first speech.

00:56:52.420 | And I just want to give you this one example of how much speculation has taken over to the detriment of our society.

00:56:59.420 | And that is, if you look at investment as we conventionally do, capitalism, capital formation.

00:57:07.420 | That's directing capital to its highest and best uses.

00:57:10.420 | Companies that are growing, companies that are providing better products and services at lower and lower prices.

00:57:15.420 | That's what investing in is, putting money in those companies.

00:57:18.420 | And every year, the American financial system directs about $200 billion into IPOs and into additional middle core frames of existing companies.

00:57:28.420 | How much is speculation? If you take share turnover in the markets and multiply it by the price of shares, it is $40 trillion.

00:57:42.420 | So that's 200 times, if I may, of speculation as we do investment.

00:57:49.420 | And that's just a big waste for everybody except the croupiers and Wall Street.

00:57:54.420 | They aren't too happy being quoted as croupiers.

00:57:58.420 | They don't complain directly.

00:58:00.420 | So that's going to be the first chapter.

00:58:02.420 | The second one is very tandem.

00:58:04.420 | I'm talking about the happy conspiracy between corporate managers and fund managers.

00:58:07.420 | In this, there's been nothing written about this.

00:58:10.420 | The problem is based on what I call a dual agency society.

00:58:13.420 | Agents always have problems putting their principal's interest before their own.

00:58:19.420 | Whether it's money managers or corporations.

00:58:21.420 | But now we have agents of agents.

00:58:24.420 | And that is to say these corporations are not owned by individuals.

00:58:27.420 | That would be the conventional agency problem.

00:58:29.420 | But corporations that are controlled by corporations that represent individuals.

00:58:33.420 | And that's institutional investors and mostly mutual funds, the largest segment of that.

00:58:39.420 | And these institutions own 70% of all the stock in America.

00:58:44.420 | So this is a tremendous conflict of interest.

00:58:47.420 | And many, many other things arise from this dual agency society.

00:58:53.420 | I'm going to try and think of a better term for that.

00:58:55.420 | I like to term happy conspiracy.

00:58:57.420 | I used the title "The Silence of the Lambs" before.

00:58:59.420 | It was taken when "The Silence of the Lambs" was in the news.

00:59:01.420 | It was an evil movie.

00:59:03.420 | And I want to get into the implications of all this trading and all these agency problems.

00:59:10.420 | Into the lack of interest in corporate governance.

00:59:13.420 | You've heard about that from me.

00:59:15.420 | About our failure to do anything about the sane executive compensation.

00:59:18.420 | Our unwillingness to stand up and be counted on corporate political contributions.

00:59:21.420 | One of America's great outrages.

00:59:23.420 | I know I'm not supposed to talk politics, but I said it and here it is.

00:59:28.420 | I changed character in the mutual fund industry.

00:59:31.420 | In ETF chapter, index fund for investment or index fund for speculation.

00:59:36.420 | I spent a lot of time talking about fiduciary duty and in fact have some work I've done earlier.

00:59:42.420 | A measurement system.

00:59:44.420 | Fiduciary duty, whether your manager is observing it or not.

00:59:48.420 | Our retirement system.

00:59:50.420 | The basic fundamental part of America, making sure we don't have everybody on a leaf when they retire.

00:59:54.420 | And it's failing us.

00:59:56.420 | And I have a lot of ideas for fixing that.

00:59:59.420 | I have some simple investment advice.

01:00:02.420 | And then a chapter I'm really happy with and I am actually working on this now.

01:00:07.420 | Is an example of what happens when a fund turns from investment to speculation.

01:00:12.420 | And that is what happened in the case of Wellington Fund.

01:00:16.420 | And I do that chapter first because we pay more attention to history.

01:00:21.420 | And it's all gone.

01:00:23.420 | And when I'm gone, I don't think anyone is even going to know the history that I'm describing in that chapter.

01:00:28.420 | It's amazing.

01:00:29.420 | But I've been in Wellington for 60 years, if it's 80 years, 83 year existence.

01:00:35.420 | And I'm kind of the last guy that has the knowledge to do it.

01:00:41.420 | So I think I have an obligation to do it.

01:00:43.420 | I also have an obligation to honor my great mentor, Walter Morgan.

01:00:46.420 | Who picked me up out of the air and made me into something I probably never would have been otherwise.

01:00:50.420 | And that's a fun chapter.

01:00:52.420 | It's like the real message.

01:00:54.420 | Because the fall came, we did the merger back in 1967.

01:00:58.420 | And in the following 10 years, the fund had the worst record relative to its competitors in its entire history.

01:01:04.420 | You can see it.

01:01:05.420 | Because we compromised on quality.

01:01:07.420 | We had a slightly higher turnover.

01:01:09.420 | And we took funds, a beta measurement to the market.

01:01:17.420 | Which in Wellington should be about a 65, has been.

01:01:19.420 | We took it to 104.

01:01:22.420 | We made Wellington into a stock fund.

01:01:24.420 | And it was only with a 73 or 74% equity ratio higher than we ever had.

01:01:28.420 | When the stocks are more speculative, you take that risk right up.

01:01:33.420 | And then everything fell apart.

01:01:35.420 | Fund drops. It's really a great story.

01:01:37.420 | Fund assets dropped from $2 billion to $400 million.

01:01:42.420 | And now it's back to $52 or $53 billion.

01:01:47.420 | And leading the balanced fund segment in the industry once again.

01:01:51.420 | So it's a fun story.

01:01:53.420 | It's a story with a real lesson.

01:01:55.420 | It's a story which is the very least of what I ought to be writing anywhere.

01:01:59.420 | And I don't know what I'll do about looking ahead.

01:02:01.420 | I'll think of something by then.

01:02:03.420 | [Laughter]

01:02:05.420 | So now a few reflections on the market and a few investment principles.

01:02:09.420 | Or at least reminders of the same.

01:02:15.420 | What should I do now?

01:02:18.420 | Keep going.

01:02:20.420 | [Applause]

01:02:26.420 | This should be maybe five more minutes.

01:02:34.420 | The Asian market is 2011.

01:02:38.420 | We've had bear markets all over the world, even in the U.S.

01:02:41.420 | They don't tell us we had a bear market, but some genius once said it was a 20% decline.

01:02:46.420 | 500 didn't go up, 500 didn't develop, a good performer this year.

01:02:49.420 | Total stock market index in fact was down 20%.

01:02:52.420 | Developed market index is 25, 26.

01:02:55.420 | Emerging dropped to 30.

01:02:57.420 | And total international, combining the two, dropped to 27.

01:03:03.420 | So we had this huge recovery.

01:03:07.420 | I'll talk about that in a minute.

01:03:08.420 | Since then, I've been very comfortable.

01:03:11.420 | The first big crash came, everyone wanted to know what to do.

01:03:13.420 | And I said, "My advice is do nothing."

01:03:15.420 | Don't just stand there.

01:03:17.420 | The old rule is don't just stand there, do something.

01:03:22.420 | That's what we always do in times of crisis.

01:03:24.420 | And I said, "Don't do something, just stand there."

01:03:27.420 | [Laughter]

01:03:29.420 | You know, it takes a little, I guess, guts or stupidity to say that.

01:03:33.420 | Because nobody knows, least of all, what's going to happen in the next days and weeks and months.

01:03:38.420 | It turned out to be very good advice throughout all of this.

01:03:42.420 | Because right now, we're back, I don't know how much I've updated.

01:03:45.420 | Yeah, this is updated as of yesterday.

01:03:47.420 | Okay, so you can see we've had an enormous recovery.

01:03:49.420 | 500 index is not too far up to the year.

01:03:53.420 | Emerging markets down 17%.

01:03:57.420 | Total international down 12.

01:03:59.420 | And then, of course, bonds giving a nice protective element.

01:04:02.420 | All I have to say is this doesn't fit in the chart at all.

01:04:05.420 | But I had to say it anyway.

01:04:07.420 | But interestingly enough, it's been a great year for the bond market index fund.

01:04:11.420 | Not because it's great.

01:04:13.420 | It's very heavily weighted toward treasuries, U.S. treasuries, mortgage-backed bonds.

01:04:17.420 | 70% or something like that.

01:04:19.420 | Where that's a, you know, you'd say over-weighted in treasuries, except that's the market weight.

01:04:25.420 | And so that made us very good in 2008, very bad in 2009.

01:04:30.420 | Okay in 2010, now excellent in 2011.

01:04:34.420 | And I just can't resist noting that the genius, and he is a genius, by the way, Bill Gross.

01:04:40.420 | I don't mean to take anything away from him.

01:04:42.420 | But even the best generals make mistakes.

01:04:45.420 | His bet against the treasuries proved to be wrong.

01:04:48.420 | So we picked up 500 basis points.

01:04:50.420 | Very, very unusual for the year.

01:04:54.420 | Now, we have a bear market.

01:04:58.420 | Working on this new world has come back as well as after it.

01:05:01.420 | And I was trying to make the point that sometimes in history,

01:05:05.420 | I always like to take a historical perspective,

01:05:07.420 | bear markets stop around 20% when you get over there.

01:05:12.420 | And at some point, they continue to go down.

01:05:16.420 | And we never know which is which.

01:05:18.420 | But here's what this one looks like.

01:05:23.420 | These are all the bear markets in the post-war period.

01:05:26.420 | And you can see that you probably can't count them too quickly, but post-World War II,

01:05:29.420 | there were 12 such bear markets.

01:05:31.420 | I counted that 19 as a 20.

01:05:33.420 | Three got much worse, and nine didn't.

01:05:36.420 | And we had no idea whether this was a pause, an interregnum,

01:05:38.420 | or whether it was going to get worse.

01:05:40.420 | But I have to say, I'm always comforted when things start to consolidate and level out.

01:05:46.420 | I don't like these bear markets.

01:05:48.420 | They make me nervous, not so much nervous because I'm predicting the market,

01:05:52.420 | but nervous because at some point in which you have huge behavioral problems

01:05:56.420 | when the market does a certain thing, or it redeems their shares, and that makes it worse.

01:06:00.420 | So I think maybe it's a slightly hopeful sign.

01:06:05.420 | We shouldn't be looking so much at a chart like this,

01:06:08.420 | but rather what rational expectations are for the future.

01:06:12.420 | And that brings me to a rule that you've heard from me a long time,

01:06:17.420 | if you read all my stuff, nobody could.

01:06:20.420 | And that is the idea is to stay the course if you're on the right course for you.

01:06:25.420 | And that may involve being conservative for some and aggressive for others,

01:06:29.420 | depending on age and other factors.

01:06:31.420 | But control what you can.

01:06:33.420 | You can control time in two senses.

01:06:36.420 | Start investing as early as you can, for example.

01:06:38.420 | The difference between investing early and late is enormous.

01:06:41.420 | And then use long-term managers, not use short-term speculative managers.

01:06:45.420 | Tax impact.

01:06:46.420 | Risk, you can control.

01:06:49.420 | If the fund controls it, and I mentioned Wellington Fund,

01:06:54.420 | you control risk at Wellington Fund back in the late '60s and early '70s.

01:06:59.420 | Wellington Fund didn't control its own risk.

01:07:01.420 | So keep an eye on fund base.

01:07:03.420 | And you can, of course, control costs, low-cost providers.

01:07:08.420 | Use low-cost providers, use low-turnover funds, use no-over funds.

01:07:12.420 | And when you can't control, which is returns, have rational expectations.

01:07:17.420 | Let me just give you a quick gander at these rational expectations.

01:07:20.420 | You've seen this in my stuff.

01:07:22.420 | And this is the way to look at markets.

01:07:24.420 | I mean, it's unequivocal that the source of market returns

01:07:27.420 | are dividends, earnings growth, and P/E change.

01:07:29.420 | Any period you want to look at, days, weeks, months, that's all that happens.

01:07:33.420 | So this is kind of a rough guess of 2% dividend yield today,

01:07:38.420 | maybe 6% or 7% earnings growth, maybe 5%.

01:07:42.420 | But in any event, maybe it's slightly over P/E.

01:07:45.420 | Because P/E, as I mentioned to Christine,

01:07:49.420 | I don't think too much out of line, a little bit on my side.

01:07:52.420 | And maybe 7% on stocks, which is doubling your money.

01:07:56.420 | And bond returns are 2% on the 10-year Treasury, the benchmark.

01:08:01.420 | But I think you almost have to be more aggressive than that now,

01:08:05.420 | because the benchmark is so short-term.

01:08:07.420 | It's probably got a 5- or 6-year duration.

01:08:10.420 | And 70% U.S. Treasuries.

01:08:13.420 | And so it's probably a little more aggressive in your portfolio composition,

01:08:19.420 | I mean, a level of the bond market.

01:08:21.420 | And I'm certainly not eliminating my position in the bond market.

01:08:24.420 | I mean, if you look at these seemingly modest returns,

01:08:27.420 | 100% for stocks, possibly 50% for bonds, that's 3.5%.

01:08:32.420 | Those returns aren't bad, but they're not gross returns.

01:08:37.420 | So give your bond manager 100 basis points,

01:08:40.420 | and all of a sudden you get 3.5%, all of a sudden you're at 2.5%.

01:08:44.420 | Give your stock manager a portfolio turnover, sales loads.

01:08:49.420 | And then calculation, don't forget inflation.

01:08:51.420 | These are nominal returns.

01:08:53.420 | And they really don't look very good.

01:08:56.420 | But should you very prematurely leave the market standard,

01:09:00.420 | you can't handle the low returns, I don't recommend that.

01:09:05.420 | You're bound by the market returns, ultimately, all of us as investors are.

01:09:09.420 | No secret about that.

01:09:11.420 | But think about inflation when you look at that chart.

01:09:14.420 | And then think about the fact those returns are before costs.

01:09:17.420 | Costs matter.

01:09:19.420 | Yields are hard to come by today in that next chart.

01:09:24.420 | There are the yields on our funds, and they're kind of funny.

01:09:26.420 | I'm not sure exactly how we calculate them.

01:09:29.420 | But those are what you'll see if you go to our website.

01:09:32.420 | But we know that the yields in recent years have ranged, bond yields,

01:09:38.420 | from 4% to 7%.

01:09:40.420 | And now they're coming up with 2% to 3% these last couple of years.

01:09:45.420 | So they're way below historical standards.

01:09:47.420 | But I still don't believe in reaching.

01:09:50.420 | But if you want to go toward the long and toward the corporate

01:09:53.420 | as compared to governments, municipal bonds are quite attractive

01:09:56.420 | on a tax-adjusted basis.

01:09:58.420 | And it's your own call.

01:10:01.420 | And I don't do it, but people ought to be aware

01:10:03.420 | that those yields are really pretty pathetic.

01:10:06.420 | How much should it be in international?

01:10:09.420 | I think this is my kind of closing comments here.

01:10:13.420 | I tried to say, and I did it dramatically this year,

01:10:17.420 | don't talk about international.

01:10:19.420 | Just look at the international, look at what you're buying.

01:10:21.420 | So we want to put that next chart up.

01:10:23.420 | You can see that if you want 55% of your money in Japan,

01:10:27.420 | which is not doing so well, in Britain, which austerity is costing them a lot,

01:10:32.420 | in France, which still doesn't work, that's 55% of your assets.

01:10:37.420 | If that's what you want, do it.

01:10:38.420 | But don't put it under some idea that you have to be in international.

01:10:43.420 | You have to be in those countries is what you're really saying.

01:10:46.420 | It's half of the developed market index.

01:10:48.420 | So think about that.

01:10:49.420 | When you get to the emerging markets, good or bad,

01:10:52.420 | realize that half of it is in China, Korea, and Brazil.

01:10:56.420 | As we all know in recent years is so-called BRICS.

01:10:59.420 | Brazil, China, India, and Russia have been very good performers.

01:11:04.420 | Inevitably, when the value goes, they're not going to do well.

01:11:07.420 | Think about what you're buying when you buy international.

01:11:10.420 | I don't do international.

01:11:12.420 | I've told you my reasons before.

01:11:14.420 | I don't think it's going to matter much in the long run,

01:11:17.420 | and the record would show that there are short-term fluctuations,

01:11:20.420 | but not long-term.

01:11:21.420 | The main message I want to leave you is think about what you're getting.

01:11:24.420 | Don't just say international is good.

01:11:26.420 | And the correlation is, of course, with U.S. markets.

01:11:29.420 | It's bad and almost 100% 100.

01:11:36.420 | In international diversification, the wise man set lets us down

01:11:42.420 | just when we need it the most, and that's true.

01:11:45.420 | Finally, you have a bunch of posts on the board.

01:11:51.420 | Our target of change and our target of retirement funds.

01:11:54.420 | I just took this example for the 2005 to show you how much it's changed.

01:11:58.420 | First, to increase the equity ratio, probably back in 2004 or '05,

01:12:03.420 | significantly increase it from the 60% it was at our inception,

01:12:09.420 | and then today 12% international for each U.S.,

01:12:12.420 | and then recently from 73% with the additional international

01:12:21.420 | and the additional change back in 2004 and '05.

01:12:25.420 | 73%--that's a big change.

01:12:27.420 | 73% and 22% international compared to '12,

01:12:32.420 | and the international change was made just recently.

01:12:35.420 | And I don't--you know, I'm on the inside track,

01:12:39.420 | but I'd love to know the rationale for that.

01:12:42.420 | There are people who are going to tell you.

01:12:43.420 | You tell us, as a matter of fact, yourselves.

01:12:45.420 | It looks like we just do things to be competitive.

01:12:47.420 | You also tell us that we couldn't have picked a worse time

01:12:50.420 | at international.

01:12:52.420 | It happens to be true.

01:12:54.420 | I showed you we just left the darn thing alone.

01:12:58.420 | The cumulative return would have been 51%, 51.5% total return,

01:13:04.420 | and then the fund actually delivered 37.9.

01:13:07.420 | Now, is that a prediction that we did the wrong thing?

01:13:10.420 | Please, no.

01:13:11.420 | I have no idea whether they've done exactly the right thing or not,

01:13:14.420 | but I do think maybe it would be worthwhile to have a little more

01:13:18.420 | explanation of why it gets done, because it's very important.

01:13:24.420 | All right, now I have--that's it for the charts and numbers.

01:13:28.420 | They're not there for themselves, all these numbers.

01:13:31.420 | Underline--try and explain--underlie and explain the concept

01:13:36.420 | to apply my absolute conviction that mathematics and simplicity

01:13:40.420 | and economy and efficiency are the keys to successful investing

01:13:45.420 | for a lifetime.

01:13:47.420 | Ultimately, I'm going to ask after I'm gone, those principles will

01:13:52.420 | in fact change the world of investing, and much more parenthetically.

01:13:57.420 | We'll finally get the institutional money managers,

01:13:59.420 | who I mentioned control 70% of every public corporation in America,

01:14:04.420 | off their darn duffel bags, honor their fiduciary duty,

01:14:08.420 | and assume their full responsibility for citizenship.

01:14:13.420 | That's not happening.

01:14:15.420 | And the index funds are at the bottom of the deck

01:14:17.420 | in terms of--ours and others--are at the bottom of the deck

01:14:21.420 | in terms of activity and corporate governance.

01:14:23.420 | It's easy to measure how you work on compensation plans.

01:14:27.420 | That's a leadership vacuum that for the good of our country, I think,

01:14:33.420 | has to be filled.

01:14:35.420 | The obvious leader is the index fund--should be, must be--

01:14:39.420 | because they buy and hold forever, and they can't follow the Wall Street rule,

01:14:43.420 | which is if you don't like the management, sell the stock.

01:14:46.420 | Benjamin Graham, in his initial books, was very strong in recommending

01:14:49.420 | much more activism on the part of institutional investors

01:14:53.420 | when it was only a small portion of what it is now.

01:14:57.420 | And we should assume that wisdom and get back where we ought to be

01:15:03.420 | as corporate citizens.

01:15:05.420 | So here I stand at age 82.

01:15:10.420 | I can't believe it.

01:15:13.420 | Just a few simple innovations to my credit, I guess.

01:15:16.420 | Mutual structure, the index fund, the defined maturity bond fund,

01:15:22.420 | changes that as modest as they seem and as simple as they in fact are,

01:15:26.420 | are central to a mission with a giant goal--my giant goal--

01:15:33.420 | to make the world a better place for the investors

01:15:37.420 | who are earnestly seeking to save for their financial futures.

01:15:41.420 | That's what's important about the financial system.

01:15:44.420 | Compared to Steve Jobs--I guess I want to mention him and everybody else does--

01:15:49.420 | who simplified, packaged, and marketing "insanely great" products

01:15:54.420 | that changed all of our lives, my accomplishments, if I dare to even compare them,

01:15:59.420 | are modest to a fault.

01:16:02.420 | I am struck with both the unfairness of life that enabled me,

01:16:07.420 | thanks to the miracles of modern technology and care,

01:16:10.420 | to outlive a man who was born four years after I graduated from college.

01:16:16.420 | It's very, very sad.

01:16:19.420 | Nonetheless, as I read the stories about his amazing life, truly amazing life,

01:16:23.420 | I'm really struck by some of the similarities we share.

01:16:26.420 | Let me give you these couple.

01:16:28.420 | Comment by venture capitals, Arthur Brock and Steve Jobs.

01:16:31.420 | He got ideas in his head, and the hell with what anybody else wanted to do.

01:16:35.420 | [laughter]

01:16:37.420 | Steve Jobs himself--getting fired, in his case, from Apple,

01:16:40.420 | in my case, from Wellington--was the best thing that ever happened to me.

01:16:44.420 | Steve again--I never asked customers what they wanted.

01:16:48.420 | If it's something truly revolutionary, they won't be able to help you.

01:16:53.420 | Simplify, simplify, simplify.

01:16:56.420 | And finally, great companies must have a noble cause.

01:17:00.420 | It's the leader's job to transfer that noble cause into an inspiring vision.

01:17:05.420 | I'm sure you see the parallels, even I acknowledge the comparisons,

01:17:09.420 | self-serving and very rewarding.

01:17:12.420 | But whatever the elusive truth would tell us,

01:17:14.420 | it's not yesterday's accomplishments that interest me.

01:17:17.420 | It's tomorrow's challenges in changing the way we think about investing,

01:17:23.420 | even as I wait patiently--well, not really patiently, actually.

01:17:27.420 | [laughter]

01:17:30.420 | But I'll press on, regardless.

01:17:34.420 | So thank you for your patience. Sorry to run over.

01:17:37.420 | We'll take a little break to catch our breath, and then I'll answer your questions.

01:17:40.420 | Thank you all so much.

01:17:42.420 | [applause]

01:17:50.420 | [end of transcript]

01:17:52.420 | you

01:17:54.480 | [BLANK_AUDIO]

Bogleheads® Conference 2011 - John C Bogle Keynote.

Chapters