Bogleheads® Conference 2010 - John Bogle Q & A
00:00:00.000 | - I have a question raised my hand, are you writing that?
00:00:07.840 | Yes or no?
00:00:10.100 | - Mr. Bowles, I have a hard time calling you Jack for some reason,
00:00:13.000 | but you're my financial hero, and in your book you talked about the irresponsibility
00:00:19.140 | of board of directors giving bonuses and paying the CEOs and managing the company
00:00:24.320 | to write in bankruptcy, why doesn't Vanguard withhold proving the board of directors
00:00:31.120 | and send the message out to the company?
00:00:34.200 | - Well, first of all, I can't speak for great expertise on that.
00:00:37.400 | My understanding is there are some cases where we have withheld votes
00:00:42.000 | for compensation from the investors.
00:00:44.480 | How widespread that is, how ripe it is, my guess is it's not very much so.
00:00:49.840 | And by so-and-so's grade, we didn't look as good about it as most of our competitors.
00:00:55.280 | And I find that a little embarrassing, and somebody may find it a little absurd,
00:00:58.360 | and I don't know.
00:01:00.200 | But that has to come, and there's a very, that's a funny...
00:01:06.160 | This has always been a funny mix of a perfection and a business.
00:01:09.560 | And if Vanguard is going to hang, it showed it as far as I was able to.
00:01:15.400 | The board, though that implementation may have been a monopoly, to get over to the
00:01:19.880 | professional side and out to the business side, you're always on the business side,
00:01:24.520 | but minimized, and most companies in the industry are exactly the opposite,
00:01:28.160 | go over to the business side and then out to the professional side.
00:01:32.400 | It's all bringing in money, it's building assets under management,
00:01:35.720 | it's making a lot of revenues.
00:01:37.560 | Most of these companies are publicly held.
00:01:40.360 | The big companies are financial institutions, banks, insurance companies, and so on,
00:01:45.480 | foreign and domestic.
00:01:46.960 | And they're in to make a return on their capital, not your capital.
00:01:51.080 | So, of course, the governance either subtracts from that cause,
00:01:55.480 | they offend clients, for example, or they vote on an issue that half their shareholders
00:02:01.160 | don't like, and it's in this controversy that we have here.
00:02:04.200 | You know, the difference between winning and losing.
00:02:06.720 | A landslide is 55% of the spending, so let's be generous and say you get another
00:02:12.720 | side of that, and you're taking 45% of your shareholders.
00:02:18.200 | You just don't want to do that.
00:02:19.360 | It's better to keep a low profile, stick your head up and get a shot off.
00:02:23.200 | And it's a controversial issue, so we can't do that.
00:02:26.200 | So those weren't very satisfactory.
00:02:28.040 | I always thought that the Vanguard, in large measure, I think,
00:02:36.480 | got where we were at the beginning, through the beginning years,
00:02:41.120 | of being outspoken and critical, you know, raising hell.
00:02:44.800 | And I think a lot of people have denigrated that.
00:02:49.040 | They say, "Well, I was raising hell because I like to raise hell.
00:02:51.360 | I do like to raise hell."
00:02:53.920 | But the fact of the matter is, when I was asked to comment on something,
00:02:57.720 | I was always commenting on what a certain act meant, what a certain event meant,
00:03:01.880 | in terms of, was it a good or bad for mutual fund shareholders.
00:03:05.160 | And so when the press called, that's what I said, and when they called everybody
00:03:09.320 | else in the industry, they were thinking it was a good or bad for our company,
00:03:12.520 | and it was going to make the stock go up, and make us more money or less money.
00:03:16.080 | So they always could get a negative answer.
00:03:17.920 | Now, if you look at those interests like this, they're just slamming into each other.
00:03:21.720 | So I would hope, sooner rather than later, Vanguard would say, "Oh, damn it.
00:03:28.240 | We're going to be…we're going to raise a lot of corporate dividends.
00:03:31.400 | And we're going to put these proxy proposals in and say,
00:03:34.040 | "No corporate dividends."
00:03:35.760 | And he knew, maybe he won't ask about that this evening,
00:03:40.560 | but I know that they know how I feel.
00:03:45.560 | And I should tell you, by the way, that a lot of my autographs go to him.
00:03:50.040 | I don't think I've ever had a complaint when he said anything, I would imagine,
00:03:53.640 | about, quote, "Bernie, correct," about, you know, "Can't you stop saying things?"
00:03:59.640 | And I heard him say that, you know, "I publicly disagree with Daniel."
00:04:09.640 | I don't think that's ever been the case.
00:04:11.720 | I say what I think, I don't know what the position is at all.
00:04:15.720 | I haven't seen him in a long time.
00:04:16.720 | I don't know.
00:04:18.320 | Do you know what I have to do about late shows?
00:04:20.920 | He was always very well-prepared.
00:04:22.520 | He always had his little, you know, the rest of us didn't,
00:04:24.920 | but he had his little telemarketer right there.
00:04:26.920 | You couldn't see it, but I could see it.
00:04:28.920 | And this was in the middle of, actually, a corporate governance thing.
00:04:32.920 | And I think we were talking, you know, he had a chair with a voice and everything like that.
00:04:37.920 | And, you know, Lou was a man who was well-read for that, in the papers.
00:04:42.920 | And he said, "Jack, I understand you disagree with Maynard on that point."
00:04:46.920 | And I said, "No."
00:04:48.920 | And he wasn't astonished.
00:04:50.920 | I mean, you should have seen the look on his face.
00:04:52.920 | And I paused a minute and said, "It's not that I disagree with him here.
00:04:55.920 | I disagree with Maynard.
00:04:56.920 | It's that Maynard disagrees with me."
00:04:58.920 | [laughter]
00:05:02.920 | And we've got three more questions, and the panel will stop laughing.
00:05:06.920 | [laughter]
00:05:07.920 | Very exciting.
00:05:09.920 | But then, I mean, I know what our market world is.
00:05:13.920 | I know you can't give up on marketing.
00:05:16.920 | I believe deeply that we have to minimize doing things for marketing reasons.
00:05:20.920 | But you can't ignore them, because they're part of our world.
00:05:23.920 | And so, you know, it's fragile, it's flawed.
00:05:26.920 | But, you know, I guess sometimes you don't know.
00:05:30.920 | I think they're going to say they're doing something.
00:05:33.920 | And there's also a thing that I find difficult to deal with.
00:05:36.920 | I guess they're working behind the scenes.
00:05:38.920 | Well, I'm sure they're talking truth.
00:05:41.920 | But if nothing's happening, maybe we should work in front of the scenes.
00:05:46.920 | I don't know.
00:05:48.920 | We have a question from a good friend of both of our, Mr. Taylor, who's with us in spirit.
00:05:53.920 | He says, "Dear Jack, could you please give us your thoughts about rebalancing portfolios?"
00:05:59.920 | Okay, well, I'll say a couple of my thoughts about what I've heard.
00:06:06.920 | I don't have an uncritical answer about rebalancing portfolios.
00:06:11.920 | I do know that the facts say not rebalancing.
00:06:15.920 | Two things, the facts say it.
00:06:17.920 | Not rebalancing your portfolio is a better strategy than rebalancing.
00:06:22.920 | Simply because stocks have a higher momentum in the long run over your lifetime.
00:06:27.920 | And therefore, whenever you rebalance, you're going to have a higher yielding asset, a lower yielding asset.
00:06:32.920 | Not complicated.
00:06:34.920 | And so, that's what the data says.
00:06:37.920 | It also says something else, too, that's interesting.
00:06:40.920 | And that is, when rebalancing, when not rebalancing, loses rebalancing, and that would be errors.
00:06:46.920 | I mean, it does lose.
00:06:48.920 | The loss is pretty small, maybe a percentage point a year.
00:06:51.920 | Not systematic.
00:06:53.920 | And so, on the other hand, so then that says, don't bother.
00:07:00.920 | And I guess I'd say, for most investors, don't worry about that.
00:07:08.920 | If you feel like rebalancing, do it.
00:07:12.920 | It's not going to be devastating to you.
00:07:14.920 | It's intelligent to do it.
00:07:16.920 | It just may not be the best long-term strategy.
00:07:18.920 | But on the other hand, it may be a good short-term strategy.
00:07:22.920 | And again, every stock is different depending on what you do.
00:07:25.920 | And so, I'd say, if you want to rebalance, just follow a couple of rules.
00:07:30.920 | Don't do it very often.
00:07:33.920 | I mean, if you want to rebalance every month, I just don't know which rule to follow.
00:07:38.920 | That would usually be consumed by later 52% of stocks, or 49%, or 53%, or 44%.
00:07:46.920 | I don't know what stocks you want to go.
00:07:48.920 | Index, if you don't, or bond, if you don't.
00:07:50.920 | I don't know what to do.
00:07:52.920 | So, you know, maybe rebalance once a year.
00:07:56.920 | I would say only for the significant parts of it.
00:08:00.920 | If you want to be at 50-50, and you get it at the end of the year, 52-48.
00:08:04.920 | Honestly, I don't know if it's worth worrying about.
00:08:07.920 | On the other hand, corporate recruiting time, you want to be at 50-50,
00:08:11.920 | and you get up to 50-60, and you want to rebalance.
00:08:15.920 | Then rebalance on that basis.
00:08:17.920 | So, I don't have an easy answer.
00:08:19.920 | I think what will make investors feel better,
00:08:21.920 | maybe, will be those non-investment problems, behavioral problems.
00:08:26.920 | So, it's pretty much, as I mentioned, I don't do it.
00:08:31.920 | On the other hand, I rebalance.
00:08:33.920 | For me, in the last 15 years, bonds did about 67% a year.
00:08:37.920 | Stocks did, for 15 years, very hard.
00:08:40.920 | 102% every three years, I don't know.
00:08:42.920 | And so, all of a sudden, I'm at 80 bonds.
00:08:44.920 | And I'm happy with that.
00:08:46.920 | Short intermediate duties.
00:08:48.920 | Short photobond market.
00:08:50.920 | Short invest in photobond.
00:08:52.920 | Short invest in my retirement budget.
00:08:56.920 | And so, it's kind of free to them all, I think.
00:09:02.920 | Okay, if you have a question, raise your hand.
00:09:04.920 | And then Jack will answer it.
00:09:05.920 | I'll be right back.
00:09:11.920 | Hi, Jack.
00:09:12.920 | Great to see you so well.
00:09:14.920 | Thank you.
00:09:15.920 | [Indiscernible]
00:09:38.920 | I had a look at that chart.
00:09:40.920 | [Indiscernible]
00:09:43.920 | I'm sure you're right.
00:09:45.920 | [Indiscernible]
00:09:52.920 | On the chart, I have like 59, 35, 27, 23.
00:09:56.920 | [Indiscernible]
00:10:00.920 | Yeah.
00:10:01.920 | [Indiscernible]
00:10:06.920 | [Laughter]
00:10:11.920 | I want to know what you do.
00:10:13.920 | [Indiscernible]
00:10:17.920 | Who do you consider you?
00:10:19.920 | [Indiscernible]
00:10:22.920 | [Indiscernible]
00:10:47.920 | You're right.
00:10:49.920 | It's a free rider kind of thing.
00:10:52.920 | You make the company better.
00:10:54.920 | [Indiscernible]
00:10:57.920 | And you risk 98% of what you're doing.
00:11:03.920 | There's no easy answer to that.
00:11:05.920 | [Indiscernible]
00:11:26.920 | So one thing is it shouldn't be that expensive.
00:11:28.920 | [Indiscernible]
00:11:53.920 | So you have the resources to do it.
00:11:55.920 | But even more importantly, I'm trying to organize.
00:11:59.920 | This is a funny story.
00:12:01.920 | I tried to organize.
00:12:03.920 | I had this foundation for long-term investors.
00:12:07.920 | Coalition for long-term investors.
00:12:09.920 | [Indiscernible]
00:12:13.920 | Trying to get together.
00:12:15.920 | [Indiscernible]
00:12:18.920 | [Indiscernible]
00:12:21.920 | To get together and do something together.
00:12:24.920 | [Indiscernible]
00:12:27.920 | [Indiscernible]
00:12:29.920 | So that was a attempt to fail.
00:12:34.920 | But what made it kind of amusing is this meeting came to this conclusion.
00:12:39.920 | Chris Davis is also in New York.
00:12:42.920 | [Indiscernible]
00:13:11.920 | So those are issues that I don't think is a cause of issue.
00:13:17.920 | [Indiscernible]
00:13:40.920 | Yes, sir.
00:13:41.920 | [Indiscernible]
00:14:10.920 | Do you have any comments about that right now?
00:14:13.920 | [Indiscernible]
00:14:42.920 | And that is certainly true.
00:14:45.920 | [Indiscernible]
00:15:14.920 | [Indiscernible]
00:15:38.920 | Think about that.
00:15:39.920 | It's awful.
00:15:40.920 | [Indiscernible]
00:15:46.920 | But it's vicious.
00:15:47.920 | It's nasty.
00:15:48.920 | It's self-serving.
00:15:49.920 | And you can't get any more on it.
00:15:52.920 | [Indiscernible]
00:16:12.920 | I don't know.
00:16:15.920 | It's a bad system.
00:16:16.920 | It didn't used to be a bad system.
00:16:18.920 | And so we need a lot of work there on the financial reform.
00:16:22.920 | I think I touched on it.
00:16:23.920 | And that is first, we don't really know how much progress we're making until we get the regulations.
00:16:29.920 | As you mentioned earlier in the day, that's a shield there.
00:16:33.920 | [Indiscernible]
00:16:34.920 | We're really going to be talking about banning capital requirements.
00:16:37.920 | And providing some capital for non-depositors who belong to your capital.
00:16:42.920 | Any of them.
00:16:43.920 | And if we get that done, it will have a huge impact on the financial system.
00:16:47.920 | [Indiscernible]
00:16:54.920 | I just don't get that.
00:16:55.920 | So we won't know how much the regulations get done.
00:16:59.920 | But of course, the lobbyists will probably have even more power.
00:17:02.920 | [Indiscernible]
00:17:15.920 | Really?
00:17:17.920 | And so it remains to be seen.
00:17:20.920 | I think the act probably is better than nothing.
00:17:23.920 | Not a lot.
00:17:24.920 | I would go a lot further.
00:17:25.920 | I would have gotten back side of the investment banking business.
00:17:28.920 | Bring back Glass-Steagall.
00:17:30.920 | [Indiscernible]
00:17:32.920 | I don't care.
00:17:33.920 | Just use your common sense.
00:17:38.920 | Jack, here's a question that was asked by a lot of foreign people.
00:17:43.920 | It's one of the most controversial discussions on this forum in the last year.
00:17:48.920 | It's about Mr. Vogel's suggestion to include pensions and Social Security as part of the bond obligation.
00:17:54.920 | It would be enlightening to have him elaborate on this.
00:17:57.920 | This question could be illustrated with a simple example.
00:18:01.920 | Should a 50-year-old with a $300,000 portfolio with 300,000 Social Security vendors be 100% bankers?
00:18:12.920 | Okay.
00:18:13.920 | Let me say a couple things.
00:18:15.920 | One, I don't think they want to get into the 50-year-old.
00:18:18.920 | They may not want to get into the 62-year-old.
00:18:21.920 | Let's take the 62-year-old.
00:18:23.920 | [Indiscernible]
00:18:27.920 | And the answer is statistically and arithmetically, if you want to be able to keep that people,
00:18:33.920 | and you're 62 years old, and you have a value in Social Security, as long as it's good and will be good,
00:18:39.920 | because we're fixing Social Security.
00:18:41.920 | [Indiscernible]
00:18:44.920 | [Indiscernible]
00:18:53.920 | And eventually something has to happen.
00:18:56.920 | Nobody's going to let the thing go down.
00:18:58.920 | But let's consider Social Security for the purpose of money-making.
00:19:03.920 | He's going to pay you an extra turn year after year.
00:19:06.920 | It's amazing.
00:19:08.920 | [Indiscernible]
00:19:10.920 | I feel a little guilty about it, but I paid for it.
00:19:14.920 | I invested.
00:19:16.920 | [Indiscernible]
00:19:19.920 | So the idea of retirement to me is having not to spend an overwhelming amount of time on capital value,
00:19:28.920 | but to spend a lot of time on income.
00:19:31.920 | What income can be produced?
00:19:33.920 | That's why I like the event-paying spots.
00:19:35.920 | [Indiscernible]
00:19:52.920 | We have the biggest cut in dividends, 23% of the state.
00:19:57.920 | [Indiscernible]
00:20:01.920 | And the second biggest cut in the history of the index,
00:20:04.920 | going way back to giving back to where the S&P index existed.
00:20:09.920 | I think somebody takes those figures back.
00:20:11.920 | Maybe Bob Schiller.
00:20:13.920 | Maybe the guys at Yale.
00:20:15.920 | Back to 100 years, anyway.
00:20:18.920 | So, you know, an income stream.
00:20:21.920 | And Social Security takes care of that.
00:20:25.920 | So, from an arithmetic standpoint, if you want to be 50/50,
00:20:29.920 | I see no reason you shouldn't be 50%.
00:20:32.920 | 100% stocks, 50% of your assets.
00:20:35.920 | 100% stocks, therefore 50% of your total assets.
00:20:38.920 | [Indiscernible]
00:20:40.920 | Now, it's not just an arithmetic matter.
00:20:43.920 | It's behavioral matter.
00:20:46.920 | Because your stocks can add 57%.
00:20:49.920 | And your income may not even be changed.
00:20:53.920 | But you're going to have to get out of stocks to do that.
00:20:56.920 | [Indiscernible]
00:21:01.920 | This is an interesting -- I don't have much work on it.
00:21:03.920 | I've got a lot of things I need to work on before I do this.
00:21:06.920 | But why is it we think in terms of performance?
00:21:10.920 | Think of that, for example, there's going to be a balance fund.
00:21:15.920 | There's going to be 50/50 in stocks and bonds.
00:21:17.920 | So we have that fund that goes kind of like this.
00:21:20.920 | And then we also have alternately 50% bond index fund,
00:21:26.920 | 50% stock index fund, two separate funds,
00:21:28.920 | where the performance is just the same.
00:21:30.920 | But it's not that the stocks are going to add anything.
00:21:33.920 | And one thing about your net demand curve is that you didn't get all of it here in a balance fund.
00:21:37.920 | You got all of it here in the stock account.
00:21:39.920 | So we have to fix these or at least ameliorate these behavioral problems.
00:21:46.920 | But I don't think people are going to actually do that.
00:21:49.920 | I'm not sure I'd recommend doing it.
00:21:51.920 | Because we have a lot of money for it to take.
00:21:53.920 | But I mean that one.
00:21:55.920 | I wouldn't say social security has a zero property for that.
00:21:59.920 | In fact, the way the question reads,
00:22:03.920 | I'm saying you should value security, social security, 100%.
00:22:07.920 | What do you think it's worth?
00:22:09.920 | Let's say $300,000.
00:22:11.920 | Maybe you should say, well, social security is half of my net income.
00:22:16.920 | So you rebalance over 3/4 of the total.
00:22:19.920 | You have 50/50 on that.
00:22:21.920 | I think 65-70% of the stock.
00:22:24.920 | But there aren't easy answers.
00:22:26.920 | Particularly when you get to the major.
00:22:28.920 | But the math is clear.
00:22:30.920 | And that is, if you want 50/50 social security or good corporate pensions,
00:22:36.920 | it's very much the same thing.
00:22:38.920 | Although somebody's going to say, can you name a good corporate pension?
00:22:42.920 | They're deeply in danger.
00:22:44.920 | We're also worried pretty much.
00:22:45.920 | And then they go into the [INAUDIBLE]
00:22:47.920 | and you get half the income you expected.
00:22:49.920 | So our whole benefit system, our pension system is a mess.
00:22:52.920 | And so I say, think about that as a kind of a rule of thumb.
00:22:57.920 | And not something that, quote, "great" unquote says.
00:23:02.920 | Do this, do that.
00:23:03.920 | No, you should do that.
00:23:04.920 | [INAUDIBLE]
00:23:05.920 | No, I don't think it works at all, really.
00:23:08.920 | But do you think that you had mentioned several times about the dividends
00:23:12.920 | and the reduction in dividends.
00:23:15.920 | Couldn't that be attributed to the lower capital gains tax rate situation?
00:23:21.920 | Couldn't that be attributed to the lower dividend distribution?
00:23:27.920 | It shouldn't be.
00:23:28.920 | And it shouldn't be for maybe an obvious reason.
00:23:31.920 | And that is, most of the dividends would never get taxed.
00:23:35.920 | Think about that.
00:23:36.920 | 70% of all money is managed by institutions.
00:23:40.920 | College endowments aren't taxed.
00:23:41.920 | State and local government pensions aren't taxed.
00:23:43.920 | Corporate pensions aren't taxed.
00:23:45.920 | [INAUDIBLE]
00:23:50.920 | So don't let that little bit of the brains overwhelm your common sense.
00:23:56.920 | It's a long exercise.
00:23:58.920 | I mean, I think the Lord, I quote, "Confess your name to the soul."
00:24:01.920 | I'm not bragging.
00:24:02.920 | I think the Lord did do me a healthy amount of common sense.
00:24:06.920 | And it didn't do me a great brain.
00:24:08.920 | And it didn't do me a sophisticated brain.
00:24:10.920 | But the more I think about it, the more I'm just happy about my common sense.
00:24:14.920 | I look through conventional wisdom and say, "Why should that be?"
00:24:18.920 | "What more do I need to know?"
00:24:20.920 | "What's going on out there?"
00:24:22.920 | "Not a lot of people sit."
00:24:23.920 | "What's going on out there that isn't spoken or written about?"
00:24:26.920 | "What do you mean by out of speech?"
00:24:28.920 | "Why do you do that?"
00:24:30.920 | And so it shouldn't be a big deterrent.
00:24:35.920 | And then you should also realize that the remainder of mutual funding is free.
00:24:40.920 | Not the 401(k), not the tax-deferred half.
00:24:44.920 | These funds are run--first of all, I don't want to get away with it.
00:24:48.920 | Tax-deferred investors is a crazy thing.
00:24:51.920 | And I don't want to hear from you tax-deferred investors about tax-deferred funds.
00:24:55.920 | And that's why, quote, "I have tax-managed funds."
00:24:59.920 | And we did it in 1993, I think.
00:25:03.920 | And it's the way to run money.
00:25:07.920 | You go to a trust officer somewhere who he's going to want to know,
00:25:11.920 | "Well, how much do you tax that?"
00:25:13.920 | It gets into this 401(k).
00:25:15.920 | It gets into gross costs versus income stocks.
00:25:18.920 | And so it shouldn't be a big deterrent.
00:25:23.920 | It's never taxed under any circumstance.
00:25:26.920 | And the fund managers run the remainder of the portfolio.
00:25:29.920 | They don't care about taxes.
00:25:31.920 | They get paid on pre-tax returns, not after-tax returns that you get.
00:25:35.920 | And so they're running those portfolios as if there's no difference.
00:25:40.920 | And then there's this.
00:25:43.920 | As those people--I don't read my Wall Street Journal.
00:25:45.920 | It's just a Wall Street outlet.
00:25:47.920 | Usually I don't have to worry much about taxes.
00:25:50.920 | Because they're taking 4% of the dividend income themselves,
00:25:54.920 | consuming it.
00:25:57.920 | Consuming it before you get it.
00:25:59.920 | So there's only 160% of it.
00:26:01.920 | There's not a hundred.
00:26:03.920 | And obviously they don't care at all.
00:26:05.920 | So when you put all that together, I don't think taxes are the reason.
00:26:09.920 | I think taxes on the dividend income are probably what throws you down the lane.
00:26:13.920 | But we'll see.
00:26:14.920 | We now have--you know, it's a funny question.
00:26:16.920 | It's sort of dumb.
00:26:17.920 | I don't do it.
00:26:19.920 | We now have a situation where, whatever you believe,
00:26:23.920 | if nothing happens by the end of the year,
00:26:25.920 | taxes on the dividend income go up 39%.
00:26:28.920 | They do nothing.
00:26:30.920 | It's a good thing that some people want to do something about that.
00:26:32.920 | It's important.
00:26:34.920 | But I think probably Democrats would be willing to do it.
00:26:38.920 | Then you get no inheritance taxes, which I should say is a paradox.
00:26:41.920 | There's no profit in the inheritance tax.
00:26:43.920 | I think we should have.
00:26:46.920 | I do that a lot.
00:26:48.920 | When I was supporting Andrew Carnegie, he brought up inheritance taxes.
00:26:51.920 | When I was talking to him in Boston about counting religious values.
00:26:55.920 | And Dan Gross talked about that.
00:26:58.920 | Andrew Carnegie wanted basically an inviscidory tax on the state.
00:27:02.920 | So it was a 90% tax.
00:27:05.920 | What good is it?
00:27:06.920 | You're ruining children.
00:27:07.920 | It's bad for society.
00:27:09.920 | And he'd done okay.
00:27:10.920 | But he left all the young people in libraries all over America.
00:27:13.920 | You can't go into a small town in America.
00:27:15.920 | Okay, what do you mean?
00:27:16.920 | That's the only party you can operate in.
00:27:18.920 | He ended out.
00:27:19.920 | He got an egg in his rack to start.
00:27:21.920 | Did all kinds of useful things.
00:27:23.920 | Maybe there wasn't enough money left in the market to support it.
00:27:26.920 | But that's the kind of attitude that's pretty rare today.
00:27:29.920 | Mr. Gates, Sr. doesn't have much money.
00:27:32.920 | Mr. Gates, Jr. doesn't at all.
00:27:34.920 | And Warren Buffett.
00:27:37.920 | And I think David Rockefeller was in this group.
00:27:40.920 | And a few others.
00:27:42.920 | And the small way I am too.
00:27:44.920 | And we benefited from this great society.
00:27:47.920 | This great market.
00:27:48.920 | This great economy.
00:27:50.920 | This great country.
00:27:52.920 | Do we really own nothing?
00:27:55.920 | Do we really own nothing?
00:27:57.920 | Why?
00:27:59.920 | Where will we be?
00:28:01.920 | We've been born in America.
00:28:03.920 | We're supposed to be this country.
00:28:05.920 | And someone told me that he didn't know himself.
00:28:08.920 | I said, I think that's wonderful.
00:28:10.920 | I don't need too many people.
00:28:11.920 | I'm a very successful person.
00:28:13.920 | And so are all successful people.
00:28:15.920 | My father is successful.
00:28:17.920 | And then I said, he said, I didn't know myself.
00:28:19.920 | And I said, I didn't know myself.
00:28:24.920 | How to arrange to be born in the United States of America.
00:28:27.920 | [laughter]
00:28:31.920 | And that's the way I feel.
00:28:32.920 | I'm lucky to be here.
00:28:33.920 | I'm lucky to have the opportunity to pay insurance tax.
00:28:35.920 | Related to that.
00:28:37.920 | Yes, sir.
00:28:39.920 | What are your thoughts on the future of the U.S. dollar and the federal debt?
00:28:43.920 | And the impact on us as investors?
00:28:46.920 | And is there high correlation?
00:28:50.920 | There are some questions that are too big for me.
00:28:52.920 | [laughter]
00:28:54.920 | Believe it or not.
00:28:55.920 | You know, there are so many financial forces out there.
00:28:59.920 | And so many different opinions about what should happen.
00:29:02.920 | You know, the dollar is clearly weakening.
00:29:07.920 | We should be lightening it.
00:29:09.920 | Because we want the renminbi.
00:29:10.920 | We want the Chinese currency to be strengthening.
00:29:13.920 | And, you know, you say we want a weak dollar.
00:29:18.920 | We have one at the moment.
00:29:20.920 | I guess the dollar came out here in the euro.
00:29:23.920 | I think it was around $1.70 or $1.10.
00:29:26.920 | It came around to $1.15.
00:29:27.920 | It went up to about $1.60.
00:29:29.920 | And then back to about $1.20.
00:29:31.920 | And now it's about $1.35 or $1.40.
00:29:34.920 | I'm not sure exactly.
00:29:35.920 | And I don't see how you can predict with anybody.
00:29:38.920 | It's hard to believe that a strong dollar, when we have a federal and state culture,
00:29:44.920 | that kind of fiscal mess that we have.
00:29:46.920 | You know, we're going to need to be doing a lot of work to get home on time.
00:29:50.920 | And I don't think that's consistent with a strong dollar.
00:29:52.920 | And I don't think anybody can do anything about it.
00:29:55.920 | I mean, just go out and have another meeting at the Plaza Hotel.
00:29:59.920 | James Avery was Secretary of the Treasury in probably 1998 or so.
00:30:04.920 | And then they seem to bring a little reality to the world market, currency markets.
00:30:10.920 | But it's a very different economy.
00:30:13.920 | We are not the strong hand in the world.
00:30:15.920 | The Treasury is not the strong hand in the world.
00:30:17.920 | We're weak financially.
00:30:19.920 | And eventually, we'll be weak in a lot of other ways.
00:30:22.920 | So, you know, it must be obvious that you can only run so much debt so far
00:30:28.920 | for the interest cost of the Treasury.
00:30:31.920 | And if I was in charge of the Treasury, man, right after I've been finance everything
00:30:35.920 | for the next 30 years, creating 400%, that's going to seem like a bargain.
00:30:40.920 | So, I don't know if those interest rates happen a lot.
00:30:43.920 | And yet, the Chinese are basically the 11th.
00:30:46.920 | They own, I don't know, 2 trillion more debt.
00:30:52.920 | Debt's around 12 trillion.
00:30:54.920 | In China, I don't know if the brand number is 2 trillion.
00:30:56.920 | I'm not sure.
00:30:57.920 | But it's a big number, certainly in the trading range.
00:31:00.920 | And imagine those loans are going to go down if interest rates go up.
00:31:04.920 | So they're riding what they fell tiger to.
00:31:07.920 | So, you know, I wish I had the answers.
00:31:09.920 | I don't think even the great economists really have the answers.
00:31:12.920 | And, you know, it's very unpredictable.
00:31:16.920 | The actions of the nations are unpredictable.
00:31:19.920 | I wasn't surprised that the euro crisis didn't get even worse.
00:31:25.920 | And I think it might get worse again in Britain.
00:31:27.920 | It's not going to go out in much better shape.
00:31:30.920 | Greece, some of it, but not a lot.
00:31:31.920 | Or Spain.
00:31:32.920 | What are they calling the pigs?
00:31:34.920 | Portugal, Italy, Ireland.
00:31:38.920 | Where's Ireland?
00:31:39.920 | Greece.
00:31:41.920 | And Spain.
00:31:43.920 | Aren't we great in acronyms?
00:31:46.920 | Is this a great country or what?
00:31:49.920 | So I really don't know.
00:31:51.920 | I think you need to try and protect yourself.
00:31:53.920 | But the answer is by the table.
00:31:55.920 | What would you do?
00:31:56.920 | And I guess you go short.
00:31:58.920 | Not short selling.
00:31:59.920 | Short maturity.
00:32:00.920 | I don't believe in short selling.
00:32:02.920 | It might be a good idea.
00:32:03.920 | But I just think whatever.
00:32:04.920 | I don't know.
00:32:05.920 | I don't know any of the losses.
00:32:07.920 | And it doesn't intimidate.
00:32:09.920 | It's a timing strategy.
00:32:10.920 | And timing is what it is.
00:32:13.920 | And you know what you do consistently.
00:32:15.920 | So, you know, you go short.
00:32:18.920 | You're worried about that kind of thing.
00:32:20.920 | You go into gold.
00:32:22.920 | You get argument in commodities.
00:32:24.920 | And I wish you well.
00:32:28.920 | But I wouldn't do it.
00:32:29.920 | I have to go buy some gold.
00:32:31.920 | You know, just the ultimate protection.
00:32:33.920 | But I haven't done it.
00:32:34.920 | And I probably won't do it.
00:32:35.920 | I have to do other things.
00:32:37.920 | Okay.
00:32:38.920 | Next question.
00:32:40.920 | When you lie down at night and you think about today,
00:32:44.920 | do you ever spend time thinking about all the millions of people
00:32:49.920 | that you have provided value to in terms of setting up Vanguard
00:32:56.920 | for the benefit of the investment?
00:32:58.920 | Do you ever think about that?
00:33:00.920 | And if so, how does it make you feel?
00:33:03.920 | Well, first of all, there's a classic.
00:33:06.920 | And that is that last thing I think about when I go to bed is when I finish
00:33:10.920 | "The New York Times" while I sleep.
00:33:12.920 | [Laughter]
00:33:18.920 | Do you do it in the evening?
00:33:19.920 | Yes, I do it in the evening.
00:33:21.920 | [Laughter]
00:33:23.920 | But I guess on Friday we kind of fight for the first four days.
00:33:26.920 | What do we do?
00:33:27.920 | I have a daughter that's very good at it.
00:33:28.920 | She won't be sitting here yet.
00:33:31.920 | Maybe beyond that.
00:33:33.920 | But I don't see a lot.
00:33:34.920 | I mean, I know what you think about that.
00:33:36.920 | I'm sorry to tell you.
00:33:39.920 | There's too much in front of me.
00:33:41.920 | And I worry about what's behind me.
00:33:44.920 | People say you must appear to be very proud of your company.
00:33:47.920 | I'm very proud of it.
00:33:49.920 | I guess in a certain peculiar sense I am.
00:33:51.920 | I don't know.
00:33:53.920 | The idea that I think about a lot.
00:33:56.920 | I've just got too much on my mind.
00:33:58.920 | As you can see, I've got a much neater job that I don't know what I'm going to do.
00:34:01.920 | [Laughter]
00:34:03.920 | But, you know, there's this.
00:34:06.920 | I think it's always good to be looking out.
00:34:10.920 | Are we looking at new ideas?
00:34:14.920 | Are we concerned with the affairs of the world?
00:34:17.920 | Or will we stay at home?
00:34:18.920 | I'm just going to tell you.
00:34:19.920 | That's kind of so chunky.
00:34:21.920 | I'm not even going to watch anything.
00:34:23.920 | Except for the police things.
00:34:25.920 | [Laughter]
00:34:28.920 | I don't know.
00:34:29.920 | I guess it will be a time for introspection.
00:34:32.920 | And in some ways, some of the things you'll read in the new book are probably introspective.
00:34:38.920 | But I don't seem to use them.
00:34:40.920 | I don't want to sell off my past.
00:34:42.920 | And, you know, if I had a college name, Howard Einstein, let's say, which I'm not.
00:34:48.920 | I can see how he would be very proud of the theory of relativity.
00:34:52.920 | But I look at myself and I think, and what have I done that wasn't obvious?
00:34:57.920 | And I can't come up with anything.
00:34:59.920 | [Laughter]
00:35:00.920 | I can't come up with nothing.
00:35:01.920 | And he was talking about this a lot, whether it was in an academic structure, tax-managed funds,
00:35:08.920 | or whatever it might be, animals, all those things, just common sense.
00:35:13.920 | And I don't know how much applause you should get for using your head.
00:35:19.920 | It was pretty easy to guess it.
00:35:21.920 | In "The Battle for the Soul of Capitalism," you talk about the true cost of owning expensive funds.
00:35:29.920 | Am I right in understanding it that the expense ratio doesn't count?
00:35:35.920 | Things like transaction costs and shelf space and bid-ask spreads and all those things there, they're not?
00:35:43.920 | You know, that's a good question.
00:35:44.920 | The question is whether you're buying on top of that cost of performance.
00:35:49.920 | And the points are also, we're all using the expense ratio, simple and short.
00:35:54.920 | And it wouldn't include any expense ratio.
00:35:56.920 | If you're buying shelf space or facility, you're paying for it out of your management savings.
00:36:01.920 | And therefore, that isn't the expense ratio.
00:36:03.920 | And any management company spends is in the expense ratio.
00:36:06.920 | All your fund services are in the expense ratio.
00:36:09.920 | What is not in the expense ratio are basically two things.
00:36:16.920 | Two additional costs, and actually we should be talking about three additional costs.
00:36:20.920 | One is portfolio transaction costs.
00:36:22.920 | And since we don't know exactly what they are in this industry, I don't want to guess precisely what they are.
00:36:28.920 | But I use a rule of thumb about 1% of your turnover.
00:36:34.920 | So, turnover across you, you're 100% turnover across your 1% here.
00:36:38.920 | So, through a rule of thumb, maybe more like 3/4 of your 1%.
00:36:42.920 | If you turn over 50%, it'll be about 35 days, and once in 50 days, it'll be something like that.
00:36:47.920 | We don't know that.
00:36:48.920 | But I would use it.
00:36:49.920 | But I'd rather be generally right rather than precisely wrong.
00:36:56.920 | And so, that's a big cost that's going on.
00:37:01.920 | And the other is sales charges.
00:37:03.920 | If they're in 12B, 1B, that will be in the expense ratio.
00:37:07.920 | But if they're not, because it's run in sales charges, and they're outside of that, then that will not be covered.
00:37:13.920 | And then, of course, taxes are not covered.
00:37:15.920 | And that's a huge thing.
00:37:19.920 | You're going to be fined every day if you pay taxes.
00:37:21.920 | But you're going to run your money in tax evasion.
00:37:24.920 | One of the single most important things you do.
00:37:26.920 | Tax evasion bank run.
00:37:29.920 | But it's all the same thing.
00:37:32.920 | Capture as much of the market return as you possibly can.
00:37:36.920 | So, that's why I use a number about 2 to 2.5% of the overall cost.
00:37:41.920 | And in fact, the average equity run, yeah, the average unweighted equity run is about 1.4.
00:37:51.920 | But in fairness, what we're beginning to see as a whole is about 1% for unweighted run assets.
00:37:57.920 | But again, that comes vanguard.
00:38:00.920 | We're getting big enough for 15% or 6 in the mutual fund industry.
00:38:05.920 | So, you know, all these averages you've got.
00:38:07.920 | Well, I'm going to prove your point.
00:38:11.920 | But I use a number about 2.5% and 2%.
00:38:17.920 | Easily better run than 1% and 2%.
00:38:22.920 | We'll take one more question over here, sir.
00:38:26.920 | It's an honor to ask you a question on a new book that I'm very much impressed with.
00:38:30.920 | You had talked about corporate governance in the United States.
00:38:33.920 | Essentially, you concurred that it was a bit of a mess.
00:38:35.920 | When one goes overseas to invest, it's probably somewhat worse than maybe the transparency of some developing nations.
00:38:42.920 | It's lousy.
00:38:44.920 | Having said all that, what do you see the role of institutions in the United States being?
00:38:49.920 | I remember it as a vanguard in how we reduce the risk of those kinds of information failures in their investments?
00:38:58.920 | You're talking about that abroad or here in the U.S.?
00:39:02.920 | Sure. I mean, we have an engineering group.
00:39:06.920 | It's not a member of another agency.
00:39:08.920 | But it's trying to do a lot in improving governance abroad.
00:39:12.920 | As far as I know, no U.S. interest in that group because it takes a lot of work.
00:39:17.920 | They're just so short-term folks.
00:39:21.920 | They have to understand that governance matters nothing.
00:39:25.920 | Zero.
00:39:27.920 | Daily fluctuation or monthly fluctuation or even yearly fluctuation.
00:39:30.920 | It just doesn't count.
00:39:33.920 | But it's everything.
00:39:35.920 | In the long run, the idea of governance is, to me, a very simple one.
00:39:41.920 | Is this corporation being run, a big corporation that does their own interests, isn't being run in the interest of shareholders?
00:39:49.920 | That's what governance is about.
00:39:51.920 | So we should be saying, we vanguard with the mutual fund industry and with the institutional investment.
00:39:56.920 | We should be saying, we want to be damn sure that we come first for our executive pay,
00:40:02.920 | for stacking the board with our friends, for getting in on mergers.
00:40:07.920 | If we think our company is bigger and I'm going to get paid more than they pay, I think 63% of those mergers do fail.
00:40:14.920 | We should be thinking more about what's the right amount of dividends to be given.
00:40:19.920 | I've often said, this is about the governance issue generally, I don't see why we don't have higher dividends to pay
00:40:25.920 | to institutional investors who've held the stock for over three years.
00:40:31.920 | So if the dividend is $2, give them $2.25, $2.20, $2.50, once you get to that volume period.
00:40:40.920 | And the dividends matter a lot in institutional decisions.
00:40:44.920 | Not as much as they should in the fund industry, because we consume so much of them.
00:40:48.920 | We don't want to talk about dividends.
00:40:50.920 | In the ICF I have never, if I said it, never even hinted on the idea that such a thing as a dividend is a percentage of the income.
00:40:57.920 | Expenses is a percentage of the dividend income.
00:41:00.920 | And I didn't get any nice letters from them.
00:41:04.920 | And I didn't get any nice letters from Mr. Hans either.
00:41:09.920 | Well, I hate that kind of street fighting stuff.
00:41:12.920 | The only letter I really love is 105%.
00:41:15.920 | I probably also have some of these out there.
00:41:19.920 | And I should tell you this, sort of anecdotally, I didn't know it was going to write the letter,
00:41:25.920 | but I talked to the manager of the op-ed.
00:41:27.920 | I talked to him every week for about an hour on Friday morning.
00:41:31.920 | And he said, I love your op-ed.
00:41:35.920 | And actually, I agreed with 75% of it.
00:41:39.920 | And I said, which I was standing in line with him for, I said, you know, that's great.
00:41:44.920 | You're more than 75%.
00:41:45.920 | I'm going to feel like I haven't done my job.
00:41:48.920 | So, but then I see things.
00:41:50.920 | He said he wasn't talking about his company.
00:41:52.920 | He was talking about the industry.
00:41:53.920 | He better believe he wasn't talking about his company.
00:41:55.920 | And that big fund got huge.
00:41:58.920 | It had a high performance record.
00:41:59.920 | And four years since, five years since, it's in the 100th percentile.
00:42:03.920 | It's the first performing fund in the entire category.
00:42:07.920 | So I guess it's not a big fund.
00:42:08.920 | And, you know, it's very boring to be in the throat for a title five years in a row.
00:42:14.920 | [Laughter]
00:42:16.920 | It really is.
00:42:17.920 | If you tried to be there, I guarantee you, you could not get there.
00:42:21.920 | And what would you do?
00:42:24.920 | And someone said, I think it was Michael Ransom, works at Apple, good guy, very analytical,
00:42:33.920 | said there was a piece on skill versus luck.
00:42:36.920 | And he said one of the differences is if you decide you want to fail, if it's all luck,
00:42:44.920 | you can't do it.
00:42:46.920 | Right?
00:42:47.920 | If it's all skill, it's pretty easy to fail.
00:42:49.920 | You know, that heart surgeon who put my new pump in, he wanted to fail.
00:42:53.920 | I can't tell you how easy it would have been.
00:42:55.920 | [Laughter]
00:42:57.920 | But if you want to fail in the investment business, it's just as difficult, really,
00:43:03.920 | when you think about it, it's just as difficult to fail as to succeed, except you make the
00:43:08.920 | failure easier because of all your costs.
00:43:11.920 | And then that turns out to be the differentiator.
00:43:14.920 | So I don't know.
00:43:15.920 | I want skill.
00:43:16.920 | And there's some.
00:43:17.920 | And skill and luck, you can't have a good fund director without skill and luck.
00:43:23.920 | A lot of students in the economy, when you think about Bill Miller, everybody's here,
00:43:27.920 | all that good money manager, nothing to do with Bill Miller.
00:43:30.920 | But he was at the bottom of the day.
00:43:33.920 | He was working 5 to 70 years in a row, and then was 100% at the bottom three, just after
00:43:39.920 | all the money came in.
00:43:41.920 | I mean, it's a vicious business.
00:43:42.920 | It's a hard business.
00:43:44.920 | And I respect money managers who are trying to do a good, honest job, because it is such
00:43:48.920 | a hard business.
00:43:50.920 | And I know that, and I respect them for trying, but they're going to do that by investing
00:43:57.920 | in the wrong people.
00:44:00.920 | OK, we're going to have anybody go to the locker room.
00:44:03.920 | Before we do, Jack, go ahead.
00:44:05.920 | [INAUDIBLE]
00:44:09.920 | We got him.
00:44:10.920 | [LAUGHTER]
00:44:13.920 | [INAUDIBLE]
00:44:15.920 | [SIDE CONVERSATION]
00:44:22.920 | [INAUDIBLE]
00:44:27.920 | I'd like to give you this memento of this occasion, Jack.
00:44:32.920 | And Mr. William Dow, I wonder if you all synchronized Philadelphia, synchronized Derby,
00:44:38.920 | synchronized Freedman.
00:44:40.920 | And of course, our investment being out here in Philadelphia, and your nice work has liberated
00:44:46.920 | millions and millions of investors from high cost, and given us [INAUDIBLE]
00:44:53.920 | And we all thank you so much for that.
00:44:56.920 | I'd like to read the inscription that says, "To Jack Vogel, our friend and mentor,
00:45:02.920 | over your vocal heads."
00:45:03.920 | Philadelphia, 2010.
00:45:06.920 | [APPLAUSE]
00:45:26.920 | Thank you.
00:45:27.920 | Thank you all.
00:45:29.920 | A little bit of ringing already cracked the bell.
00:45:31.920 | [LAUGHTER]
00:45:33.920 | [SIDE CONVERSATION]
00:45:59.920 | [INAUDIBLE]
00:46:06.920 | Yeah, well, that hangs right above a painting of the American flag that I have,
00:46:13.920 | or at least a very nice one, has come to be written right on the flag.
00:46:20.920 | And that's over at my fireplace.
00:46:23.920 | And so we'll put this right in the mail.
00:46:25.920 | I love that.
00:46:26.920 | And I thank you all very, very much.
00:46:28.920 | [APPLAUSE]
00:46:31.920 | [BLANK_AUDIO]