Bogleheads® Conference 2012 - John Bogle & Bill Bernstein Fireside Chat

00:00:00.000 | [ Silence ]

00:00:09.020 | >> Normally I would introduce them but I don't think that Jack

00:00:12.960 | or Bill Bernstein needs any introduction and we don't want

00:00:16.140 | to steal their time from their conversation.

00:00:18.140 | So, at this point, we-- well, this is a free-ranging,

00:00:24.120 | except non-political exchange.

00:00:27.160 | >> Why don't we break that one?

00:00:28.500 | [ Laughter ]

00:00:30.500 | >> Don't do that to me again, Jack.

00:00:31.640 | You got me in a lot of trouble with that last time.

00:00:34.840 | So, anyway, this is called the Lower Side Chat

00:00:37.400 | and you guys hang at it.

00:00:39.900 | >> Well, good morning everyone.

00:00:41.980 | Jack, I'm going to start by asking you like a question

00:00:46.220 | that everyone wants to know, which is what does the retirement--

00:00:50.580 | [ Inaudible Remark ]

00:00:52.580 | >> Can you hear me?

00:00:54.880 | [ Laughter ]

00:00:56.880 | >> Can you hear me?

00:00:57.920 | [ Inaudible Remark ]

00:00:59.920 | >> What does the retirement of Gus mean to those of us

00:01:05.940 | who invest in using those portfolios?

00:01:11.580 | >> Well, first place, he's been a great guy,

00:01:13.480 | a fabulous friend, terrific mathematician, certainly one

00:01:17.620 | of Vanguard's priceless assets.

00:01:20.340 | But think about what he's doing.

00:01:22.720 | He's matching the market.

00:01:24.760 | And that is not complex beyond belief.

00:01:28.020 | There are lots of nuances in it.

00:01:29.560 | But if you follow the performance of, well,

00:01:31.860 | let's say, I'm arguing here, S&P 500 index funds,

00:01:37.980 | they are all the same when you adjust for expense ratio.

00:01:44.520 | Their net returns are identical.

00:01:46.080 | In other words, everybody has picked up how to do this.

00:01:48.620 | Heck, it may be that Gus taught them all.

00:01:50.860 | But I wouldn't spend 30 seconds worrying

00:01:54.320 | about what happens next.

00:01:57.500 | And, you know, an index fund is an index fund.

00:02:01.000 | And one of the great things about it is

00:02:03.500 | that when you buy an index fund, you're really investing

00:02:07.640 | for life without worrying about who the manager is.

00:02:12.400 | I mean, think about this for a minute.

00:02:15.120 | First, if your life is maybe over a span

00:02:18.320 | of, say, 50 years, whatever it may be, some of us

00:02:20.960 | may not have quite that many left.

00:02:23.160 | But there we are.

00:02:24.720 | But over a lifetime, how many managers

00:02:27.400 | are going to be there for a lifetime?

00:02:28.960 | And the answer is none.

00:02:30.680 | They're going to come and they're going to go.

00:02:33.080 | And funds come and go.

00:02:35.440 | Individual mutual funds come and go.

00:02:37.560 | Failure rate is about 50% every 10 years.

00:02:40.200 | Don't worry about that in an index fund.

00:02:42.440 | Regular funds, managers change every five years.

00:02:46.320 | So over, say, 25 years, I think I'm about right on the mat

00:02:49.760 | there, if you own four mutual funds,

00:02:53.400 | about 20 managers in 25 years, roughly a manager a year.

00:02:57.360 | What is the possibility that 20 managers, a manager a year,

00:03:02.880 | can beat the index?

00:03:03.720 | It's zero.

00:03:04.560 | It's very close to zero.

00:03:05.520 | Maybe it's 100% to 1%.

00:03:07.200 | So all the index fund has to do is match the index.

00:03:10.280 | It has become a commodity.

00:03:12.160 | And for all of Gus's fabulous contributions to Vanguard,

00:03:15.520 | he was the one to say that he likes to say and I like to say,

00:03:19.640 | I was the architect and I picked a great builder.

00:03:22.240 | And that's the truth of the matter.

00:03:24.160 | But his requirement will not trouble anybody in this room.

00:03:28.760 | And it's very good to trouble me, except as a friend.

00:03:32.880 | Yeah, I mean, I should mention that here,

00:03:35.080 | just to amplify a point that Jack made.

00:03:36.680 | It was always something that I had wondered about.

00:03:38.720 | But we all know that over the long run,

00:03:40.920 | the odds of beating an index fund are 20%,

00:03:43.240 | which is not horrible.

00:03:45.920 | But the odds of your putting together

00:03:47.840 | a portfolio of active managers that

00:03:51.480 | would beat an indexed approach is much smaller than that.

00:03:56.280 | And Alan Roth finally did that study, an excellent study,

00:03:59.720 | and demonstrated exactly what Jack said,

00:04:03.680 | which is that you're the one percent when you're

00:04:07.120 | putting together a portfolio of active managers.

00:04:11.720 | Do you have any comments, Jack, on the swishing away

00:04:15.840 | from the MSCI indexes?

00:04:17.280 | Do you think that has any significance at all?

00:04:21.360 | No, I think it's a kind of funny thing.

00:04:23.280 | It was a closely guarded secret.

00:04:24.760 | We were thinking about doing this at Vanguard.

00:04:27.320 | And while I have lots of contacts there

00:04:29.520 | and touch with a lot of people, a closely guarded secret

00:04:32.600 | is something they shouldn't tell me about.

00:04:34.440 | And they didn't, and they shouldn't.

00:04:36.000 | And I listened, and the secret comes out in the paper.

00:04:39.280 | And my first reaction was to yawn.

00:04:44.040 | It doesn't matter.

00:04:45.680 | The idea that, say, an MSCI 500, if they have one,

00:04:52.080 | or a Russell 500, or a Vanguard 500,

00:04:55.920 | or a Dow Jones total stock market, all of them

00:05:00.960 | hold a Wilshire 5,000.

00:05:03.600 | And there are probably half a dozen other indexes

00:05:06.460 | at that 500 level or total stock market level.

00:05:09.640 | And they're all going to have the same return

00:05:11.760 | over the long run, no matter which firm is managing them.

00:05:14.800 | Because large cap stocks are large cap stocks.

00:05:17.360 | The correlations between managers

00:05:19.600 | and index portfolios in that area is going to be 100.

00:05:23.960 | And later on, I'll show you charts showing--

00:05:27.200 | and it's sort of relevant here, but I

00:05:29.640 | don't want to get into it until I have the chart.

00:05:31.760 | But the idea, my idea has always been,

00:05:36.180 | for everything we do, including active management,

00:05:38.900 | I used to call it relative predictability.

00:05:41.380 | I'm going to call it, like I said, relative predictability.

00:05:44.020 | And now, in this modern age of wants,

00:05:46.780 | we want to have my R-squares.

00:05:48.740 | But there's no change, except you can understand

00:05:50.820 | what relative predictability means.

00:05:53.460 | I mean, I think it's an interesting issue.

00:05:55.940 | I think it does matter a little bit, maybe,

00:05:58.180 | of the basis point range.

00:06:02.100 | I'd rather be indexing an obscure index, large cap

00:06:06.100 | index in the S&P 500, just from the view of the new Constitution

00:06:12.140 | and the expenses.

00:06:13.220 | I mean, I'm much happier with the large cap index

00:06:15.300 | fund than I am with the index trust 500 fund.

00:06:19.060 | I want to index that particular area.

00:06:21.780 | Chuck, let me ask you--

00:06:23.100 | Yeah, actually, let me basically agree with you on that.

00:06:25.700 | I was making this point to talk about total stock market index

00:06:29.040 | funds, total international funds,

00:06:31.940 | all with very heavy large cap bias.

00:06:34.700 | There could easily be differences between the S&P--

00:06:38.940 | what is it--

00:06:39.980 | 400 or something down there, whatever the small cap index--

00:06:42.700 | 600 for the small cap index.

00:06:44.820 | And the Russell, they have different ways

00:06:46.660 | of reconstituting this.

00:06:47.740 | Or worse, you try to get around a lot of that

00:06:50.580 | by using different indexers.

00:06:52.700 | But as a broad generalization, and when

00:06:55.640 | you can save as much as we are saving--

00:06:57.340 | I don't know the exact number, but it's significant--

00:06:59.740 | these guys get away with murder for calculating.

00:07:02.540 | I mean, you saw the stock at MSCI.

00:07:05.380 | Why an index provider is publicly held

00:07:07.340 | is another real question.

00:07:08.820 | But their stock dropped 33% or something the day

00:07:11.900 | we made this announcement.

00:07:13.300 | We saved money.

00:07:14.580 | They lost money.

00:07:15.940 | And so hats off to Vanguard for doing what we--

00:07:21.380 | eating what we-- what do we say--

00:07:23.300 | eating what we preach or something, eating what we cook.

00:07:26.840 | And so-- but it doesn't--

00:07:30.080 | I think you do have to be, I agree with Bill here,

00:07:32.900 | to feel more careful, if not a lot more careful,

00:07:35.240 | in the lower areas.

00:07:36.600 | But a firm like Vanguard or another big indexer

00:07:39.080 | like Fidelity or BlackRock is going

00:07:42.160 | to be very much able to do these things in the right way.

00:07:47.480 | And if they aren't, time will emerge and tell them that,

00:07:50.400 | and they'll have to change.

00:07:51.720 | So it's-- I've made--

00:07:54.660 | I've never done this before.

00:07:55.860 | I've made two brands of generalization.

00:07:58.040 | Well, maybe almost never.

00:07:59.380 | Almost never.

00:08:01.500 | That segues, Jack, into another question that I have.

00:08:03.980 | And this is sort of a personal interest of mine.

00:08:07.460 | And I apologize for indulging in front of this audience.

00:08:12.820 | But it's a very interesting issue.

00:08:14.300 | I mean, Vanguard is a nonprofit.

00:08:18.260 | And it's a nonprofit which is slowly

00:08:21.120 | gaining market share on those companies that supposedly

00:08:24.980 | should be benefiting from the invisible hand.

00:08:27.780 | And it's not the only area in our society

00:08:30.380 | in which nonprofits outpace for-profit sector.

00:08:36.820 | I'd much rather be in a hospital, for example,

00:08:38.740 | that's run by a nonprofit than one that's

00:08:40.740 | run by the HCA of Nevada.

00:08:42.740 | I'd rather-- how many great for-profit universities

00:08:46.200 | can you mention?

00:08:48.460 | University of Phoenix is the biggest one.

00:08:50.140 | I don't think it has the best reputation in this country.

00:08:54.440 | And so there are some areas that hidden hand doesn't

00:08:59.620 | do as well as a nonprofit.

00:09:01.420 | And you've written, of course, about performance

00:09:03.380 | of mutual funds depending on their corporate structure

00:09:05.720 | and their corporate ownership.

00:09:06.980 | I'm wondering if you have any reflections on that.

00:09:11.420 | Well, let's look at it this way.

00:09:16.420 | The one thing that distinguishes the mutual fund

00:09:20.400 | industry from other industries is

00:09:22.180 | the relationship between cost and return, dollar for dollar.

00:09:27.500 | In other words, you would not necessarily--

00:09:29.340 | cost determines return.

00:09:30.980 | But if you get return x and deduct 20 basis points from it

00:09:35.140 | or 10, you're going to have a big advantage on someone

00:09:39.780 | who provides the exact same performance

00:09:41.960 | and charges the exact same kind of fund

00:09:43.620 | and charges 100 or 200 basis points.

00:09:45.640 | There's no way around the math.

00:09:47.620 | So as long as gross return in the markets

00:09:52.360 | or in your fund minus cost equals net return,

00:09:55.900 | whoever has the lowest cost has the highest return.

00:09:59.040 | This is not complicated.

00:10:00.780 | And our industry is just finally trying to catch up with it.

00:10:04.380 | And they don't know how to.

00:10:07.180 | And the problem is very simple.

00:10:09.980 | They are in business to make money for themselves

00:10:12.540 | or to make money for the financial conglomerates

00:10:14.900 | that own the management companies.

00:10:16.780 | And for those of you who've read my book with great care,

00:10:21.220 | if these aren't the numbers that are in the book, forgive me.

00:10:24.260 | But of the 50 largest mutual fund management companies,

00:10:28.760 | around 36, I believe, are owned by great big financial

00:10:32.380 | conglomerates, unlike Canada right down the line, Deutsche

00:10:36.460 | Bank, and so on.

00:10:38.900 | And those companies have bought mutual fund firms

00:10:42.860 | to earn a return on their capital,

00:10:44.860 | their corporate capital of, say, Deutsche Bank.

00:10:47.260 | And the interest of the shareholders in that fund

00:10:49.540 | is to earn a return on their capital.

00:10:51.540 | And that's a conflict of interest right there.

00:10:55.060 | When you're in business to make money for yourself,

00:10:57.180 | and the people that you're investing for

00:10:58.860 | think you're in business to make money for them.

00:11:00.980 | And so they have a great difficulty

00:11:03.540 | in competing.

00:11:04.640 | Another six or seven firms in this industry

00:11:06.620 | are publicly held.

00:11:08.540 | There's their own stockholders around.

00:11:10.460 | And so I think that leaves about six firms that

00:11:12.420 | are privately held, six big firms, which, of course,

00:11:15.220 | would be Fidelity, Capital Group, California American

00:11:20.540 | Funds, and Dodge and Cox.

00:11:23.260 | There aren't a lot of them.

00:11:24.620 | And then Vanguard, which is sort of privately

00:11:27.380 | held by its own shareholders, if you want to look at it that way.

00:11:30.340 | So we have a tremendous advantage,

00:11:34.900 | because this business not only has cost everything,

00:11:38.980 | but cost can be measured with precision.

00:11:41.500 | I mean, if somebody else's--

00:11:42.780 | I don't know-- Lincoln Continental is more valuable

00:11:46.940 | than somebody else's Mercedes, Benz, or Jaguar,

00:11:51.060 | all that benefit is in the mind, in style.

00:11:54.460 | Maybe a little bit in construction,

00:11:55.940 | but whatever it is.

00:11:57.460 | Diamonds, they may be a girl's best friend,

00:12:00.620 | but it's very hard to measure precise value.

00:12:03.100 | But in this business, you can do it.

00:12:05.140 | You can do the math.

00:12:06.060 | You can see the math.

00:12:07.420 | You can see just where it comes out.

00:12:08.980 | You do have to estimate things like turnover costs.

00:12:12.060 | We always ignore sales commission,

00:12:13.580 | which is still a very big part, sales load, a big part of it.

00:12:16.620 | And Vanguard has, because of our structure and the kind of funds

00:12:20.580 | we choose to run, we have a very low portfolio turnover.

00:12:23.900 | The cost of that is essentially zero.

00:12:25.820 | We have no sales loads.

00:12:27.500 | So when you compare our, say, 18, 20 basis point overall fee,

00:12:32.900 | sometimes as low as five basis points.

00:12:35.300 | With others who are, on average in this industry,

00:12:37.500 | used to call it 100 basis points for a month,

00:12:39.940 | just have this huge advantage, but they can't compete.

00:12:43.140 | The example I use is, if I can just rattle on

00:12:45.420 | for one more minute here, is that--

00:12:48.660 | so we're up in Fidelico, and there's Ned Johnson.

00:12:52.420 | And he says, Vanguard is eating our lunch.

00:12:54.980 | Do something about it.

00:12:55.900 | Get everybody in the room and say, what are we going to do?

00:12:58.360 | Vanguard is eating our lunch.

00:13:00.060 | [LAUGHTER]

00:13:03.000 | [INAUDIBLE]

00:13:05.520 | I'm a little humorated, aren't I?

00:13:07.920 | And so they all come back a week later and say, we got it.

00:13:12.680 | We can get the expense ratio down

00:13:15.240 | by eliminating your profits.

00:13:17.440 | I'm not sure that's going to make the guy happy.

00:13:19.400 | [LAUGHTER]

00:13:20.400 | Cutting out the marketing budget.

00:13:22.520 | No more green lines running across your television screen.

00:13:25.240 | [LAUGHTER]

00:13:28.440 | Becoming much more efficient, taking big bonuses away

00:13:32.840 | from managers who don't perform.

00:13:34.880 | And I think if we do all these things--

00:13:38.400 | no marketing, no profits, much more efficient

00:13:42.400 | on the investment side and on the administrative side,

00:13:47.440 | negotiate with the custodians, the whole works--

00:13:49.880 | we can get down to 50 basis points.

00:13:55.080 | I won't try to emulate Mr. Johnson's accent here.

00:14:01.760 | He says, 50 basis points?

00:14:04.400 | Boy, we'll be 250% higher than Vanguard.

00:14:07.880 | [LAUGHTER]

00:14:09.240 | Why would we do that?

00:14:10.720 | So what is his option?

00:14:12.560 | He cannot do that.

00:14:14.120 | He will not do that.

00:14:15.640 | People don't like to cut their own throats.

00:14:17.920 | Right.

00:14:18.880 | [LAUGHTER]

00:14:20.720 | So he's going to keep milking that cash cow, which will

00:14:24.280 | probably last 20 or 30 years.

00:14:27.680 | And that is the most, without any measure at all,

00:14:32.960 | the most intelligent business decision

00:14:35.840 | he could possibly make.

00:14:37.360 | He's doing the right thing from his personal standpoint,

00:14:41.400 | the standpoint of that firm.

00:14:43.480 | So if he was doing it as a fiduciary and not a businessman,

00:14:48.840 | he would do just the opposite.

00:14:50.640 | And it's a problem Vanguard has.

00:14:52.200 | If we've gotten such scale now, $2 trillion.

00:14:55.840 | Oh my god, OMG.

00:14:58.040 | [LAUGHTER]

00:15:01.600 | Is no one can get to our scale.

00:15:03.880 | So is someone operating exactly the way

00:15:05.840 | we do, which is really impossible,

00:15:07.800 | because no one's going to be pretty close to 95% index.

00:15:12.680 | I'll talk about that later.

00:15:15.880 | So you've got to pay the money manager something.

00:15:18.040 | But if you just paid him on performance,

00:15:20.240 | paid the firm on performance, that

00:15:22.000 | would be a good thing for the clients,

00:15:23.600 | but a bad thing for the manager.

00:15:25.360 | But you could probably get to, let me say,

00:15:27.480 | if you get to 40 basis points.

00:15:30.400 | So what?

00:15:32.480 | As a wise man named Abraham Lincoln once said,

00:15:35.680 | the world will know if you're a longer member.

00:15:39.280 | Yeah, I mean, it's interesting you brought up

00:15:43.480 | Met Johnson to a wonderful, long accent, probably.

00:15:46.800 | [LAUGHTER]

00:15:49.280 | Is that Met Johnson will do what is infidelity's

00:15:52.640 | long-term best interest.

00:15:54.200 | And he may be able to play it out for decades ahead,

00:15:57.640 | determine his heirs and heiresses.

00:16:01.480 | But that's still a better-case scenario

00:16:05.920 | than what you've also written about,

00:16:07.440 | which is what happens to publicly-traded companies,

00:16:09.880 | where they are managing next quarter's profits, which

00:16:12.440 | is a recipe for disaster.

00:16:16.480 | There's also a moral angle to something I think is worth--

00:16:20.040 | you're probably not going to learn more on this.

00:16:22.880 | People become second-rate teachers and marines

00:16:26.560 | and joint diplomatic corps not for the money.

00:16:29.040 | They do it for moral reasons.

00:16:30.680 | They think the world will serve a useful purpose.

00:16:34.280 | And I think that the people at Vanguard

00:16:36.120 | go to work in the morning and realize that they are serving

00:16:39.240 | a socially useful purpose.

00:16:40.880 | You saw it in that tradition, of course.

00:16:42.560 | You saw it as a useful social enterprise.

00:16:45.200 | And I think you certainly inculcated that corporate

00:16:48.040 | culture, just that everybody who works at Vanguard

00:16:51.200 | can be working for somewhere else for a lot more money.

00:16:53.760 | That could be you.

00:16:56.400 | Say it isn't so.

00:16:57.440 | [LAUGHTER]

00:17:01.320 | You didn't have one helicopter, but you

00:17:03.560 | own two helicopters, as I think someone pointed out.

00:17:07.680 | And I think that's the issue, is why are we doing this?

00:17:14.520 | And I think the people who work at the big Wall Street

00:17:17.440 | firms are in it for the bucks.

00:17:19.360 | And the people who work at Vanguard

00:17:21.440 | are in it because they want to be able to look at themselves

00:17:25.160 | in the mirror.

00:17:26.400 | And I think there's some activities

00:17:27.880 | that are socially useful.

00:17:29.080 | I can provide inexpensive investment products,

00:17:32.480 | safe investment products, as one of them.

00:17:35.360 | But making widgets is not.

00:17:36.680 | I mean, you're not going to get non-profit art companies.

00:17:39.080 | You need the municipal band to make those.

00:17:44.720 | Yeah, well, alternatives.

00:17:48.720 | David Swenson's had a rough five years of it.

00:17:53.080 | Not bad.

00:17:53.840 | He's not great.

00:17:54.800 | Yeah, not bad, just not great.

00:17:58.440 | Do you think that he--

00:18:00.520 | why do you think that has happened?

00:18:02.240 | Do you think the ground's just gotten too covered?

00:18:05.200 | Do you think that he has a different approach?

00:18:08.240 | I mean, obviously, he's very ill right now.

00:18:10.960 | But do you think it's possible to sustain

00:18:12.660 | that sort of performance?

00:18:14.520 | Well, I never believed he could sustain

00:18:17.160 | that kind of performance.

00:18:19.600 | And I said that to David, who is a great, great human being.

00:18:22.960 | I mean, he is a straight arrow.

00:18:25.280 | I mean, there's nobody any better as a human being

00:18:27.800 | in the combined money matter.

00:18:29.280 | He's just a wonderful guy, even though he went to Yale.

00:18:32.160 | [LAUGHTER]

00:18:33.920 | He went to Yale.

00:18:34.960 | I guess he didn't go there.

00:18:36.520 | And so I have great respect for him.

00:18:39.440 | But I said, how can he go on like this in the future?

00:18:44.200 | And he said, Jack, you'd be amazed

00:18:46.640 | how many stupid investors there are out there.

00:18:49.600 | And I think there are probably fewer than you expected, Bill.

00:18:52.960 | Fewer than you expected.

00:18:54.440 | But there is-- the advantages these university endowments

00:18:59.120 | funds have is no conflicts of interest,

00:19:02.760 | infinite time horizons, no worry about a massive redemptions,

00:19:06.880 | and no daily reporting, weekly reporting, monthly reporting,

00:19:10.120 | quarterly reporting.

00:19:11.400 | God, they haven't even got out their report.

00:19:13.200 | They're just getting it out now, in October,

00:19:16.240 | for their fiscal years, which always end on June 30th,

00:19:18.920 | academic year.

00:19:20.200 | And they're just getting it out now.

00:19:22.600 | And it doesn't look so good for last year.

00:19:24.520 | I think it's probably going to be about a 0% return.

00:19:26.880 | College endowment funds and a combined--

00:19:30.000 | it's so hard to deal with.

00:19:31.680 | My poor aging brain has a great deal of trouble

00:19:35.640 | going from college fiscal years to calendar years.

00:19:39.920 | So when I tell you what the return on a bond stock

00:19:42.360 | portfolio, I say, well, I can find a balanced index fund.

00:19:45.000 | It was in the year ended June 30th.

00:19:46.880 | I frankly had no idea what that 0% compared with.

00:19:49.560 | Well, it turns out to be about 6%.

00:19:51.360 | It's the average for a 60/40 index endowment fund last year.

00:19:56.280 | Roughly that.

00:19:58.020 | So the colleges aren't going to come up to that.

00:20:00.280 | And the disadvantages, I'm giving you the advantage.

00:20:07.200 | And they have terrific research guys.

00:20:09.400 | And they're all over the world.

00:20:12.680 | They're innovative.

00:20:13.960 | They understand some of these complex instruments

00:20:16.040 | that the rest of us really don't have a fighting chance.

00:20:18.360 | Speaking only for myself, don't have a fighting chance

00:20:20.620 | of understanding.

00:20:21.340 | So they're good.

00:20:23.480 | But what gets in their way now, they've

00:20:27.040 | been doing that for quite a few years,

00:20:28.800 | basically the Swenson model.

00:20:30.240 | They do it at Princeton.

00:20:31.240 | Princeton is right up there with Yale.

00:20:33.680 | I kind of wonder why this is so.

00:20:36.920 | But very similar returns year after year

00:20:40.400 | in the last 10 or 15 years.

00:20:42.760 | I think Yale is about, I don't know, 20 basis points ahead.

00:20:48.000 | Let me say 12% a year compared to 12.2,

00:20:50.360 | something like that now.

00:20:52.440 | And so they're terrific long-term records.

00:20:55.200 | But what happens in the market is other people copy you.

00:20:59.240 | And the market gets more efficient.

00:21:02.160 | There's a lot more price discovery

00:21:03.600 | and high-frequency trading.

00:21:06.440 | There's a lot to do with that, making

00:21:07.920 | the markets more efficient.

00:21:09.400 | And when there's nobody playing your game,

00:21:11.520 | as it was when A.W. Jones started the first hedge fund

00:21:15.280 | in, I think, 1950 or '60, he had a good idea.

00:21:20.920 | When everybody does it, all hedge fund managers

00:21:24.320 | cannot, will not, and are not above average.

00:21:27.640 | They're all average.

00:21:28.840 | And then you take that 20%, 2%, 20% of the gains,

00:21:33.200 | and 2% you're talking probably 4% or 5% a year.

00:21:36.160 | Nobody can overcome that in the long run.

00:21:38.600 | So it's costs are a big negative.

00:21:42.400 | Efficiency, the relative efficiency of the markets

00:21:44.400 | is a big negative.

00:21:46.820 | People are just getting wise to the fact

00:21:48.480 | that these private equity things and hedge funds

00:21:51.360 | are great compensation devices for managers.

00:21:55.080 | And private equity, I won't mention

00:21:57.120 | that I have a certain firm whose president is running

00:22:01.760 | for president of the United States.

00:22:03.220 | [LAUGHTER]

00:22:05.620 | You better watch it.

00:22:06.500 | I mean, Nelson Mandela's holstering up his daughter.

00:22:08.780 | [LAUGHTER]

00:22:10.700 | But they rip people off.

00:22:12.340 | They borrow all this money, over-leverage the thing,

00:22:15.060 | and they pay it to themselves.

00:22:16.900 | And it's pretty seamy stuff.

00:22:20.340 | And I tell everybody to avoid it unless you're

00:22:23.300 | sure you can pick the right hedge fund manager, whatever

00:22:25.900 | it is.

00:22:26.780 | So when everybody's looking for, let's say,

00:22:30.420 | acres of diamonds in their own backyard,

00:22:32.900 | there's only one diamond there.

00:22:36.420 | And so the price of it goes up and up

00:22:38.460 | as people discover that.

00:22:40.020 | So it's competition.

00:22:41.500 | These guys, the general run of people

00:22:43.860 | that are running these hedge funds and these quants

00:22:47.140 | is brilliant.

00:22:49.060 | I mean, they are fantastic, some of the smartest people

00:22:52.820 | I've ever met in my life.

00:22:55.260 | And if I was to draw the scale here,

00:22:59.460 | I would put my intelligence at the baseboard level over there.

00:23:02.820 | And there it's right at that top ceiling level.

00:23:04.780 | There's a big gap there.

00:23:06.060 | But when everybody is doing it, they can't all win.

00:23:09.100 | This is not complicated.

00:23:10.980 | And this is not Lake Woba going either.

00:23:13.060 | [LAUGHTER]

00:23:14.960 | There's always so much alpha out there.

00:23:17.340 | My operating principle is something

00:23:20.140 | that's called Raikenthaler's rule, which

00:23:21.980 | is named after John Raikenthaler who works at Morningstar.

00:23:26.220 | Slip of the lip.

00:23:26.980 | Yeah, right.

00:23:28.300 | He wishes, I guess.

00:23:30.900 | And Raikenthaler's rule for 20 years

00:23:33.300 | has been if the bozos know about it, it doesn't work anymore.

00:23:36.580 | [LAUGHTER]

00:23:38.060 | And I see the bozos now investing in the Yale model.

00:23:46.280 | We see people coming to us at our firm saying,

00:23:48.860 | gosh, we just got shown this by this big investment company

00:23:52.500 | or that big investment company.

00:23:53.900 | And it's the Yale model.

00:23:54.980 | It's one half stocks and bonds, conventional,

00:23:57.860 | and one half alternatives.

00:24:01.060 | And what's alternatives?

00:24:02.060 | Well, it's hedge funds and private real estate

00:24:05.580 | and--

00:24:06.240 | Timber.

00:24:06.740 | --commodity.

00:24:08.220 | I love timber.

00:24:08.980 | I worked for 30 years in a place that

00:24:14.100 | produced nothing but timber.

00:24:16.340 | And what's happening in that area, in rural Oregon,

00:24:19.980 | is these old families who've been in the business who

00:24:22.260 | certainly don't have to value their cash flow, who

00:24:25.220 | sent their sons to work, are now selling out

00:24:29.700 | to people in Greenwich, Connecticut,

00:24:34.100 | who have smooth hands.

00:24:36.180 | Where do you think the information asymmetry is there?

00:24:39.660 | If you don't know your way around a 50-inch chainsaw

00:24:43.940 | and a choker cable, you probably shouldn't

00:24:46.060 | be working in the forest or investing in forest products.

00:24:52.140 | And so the Yale model is the conventional wisdom now.

00:24:55.860 | There's a wonderful section in David Swensen's book

00:24:58.500 | where he says if you're invested in the conventional wisdom,

00:25:01.660 | you will have your head handed to you.

00:25:03.300 | Well, he's the conventional wisdom now.

00:25:05.220 | And I have to believe he's a smart enough man

00:25:10.340 | that he's doing something good right now.

00:25:12.580 | Well, let me put a little icing on that cake

00:25:15.340 | by saying, before I love this phrase,

00:25:18.740 | all new ideas go through these three phases--

00:25:22.220 | first, the innovator; second, the imitator; third,

00:25:26.740 | the idiot.

00:25:29.460 | So I warn investors not to be the idiots.

00:25:32.180 | Another great innovator was John Templeton.

00:25:36.100 | John Templeton, of course, invested in foreign stocks,

00:25:38.380 | particularly Japanese stocks.

00:25:39.700 | Back in the late '40s, when you couldn't even

00:25:41.580 | take good stocks out of the country,

00:25:43.940 | he was a brilliant, incisive man.

00:25:49.180 | And when he saw people piling into Japanese stocks starting

00:25:53.460 | to do so in the late '70s, he sold out to the US market.

00:26:00.340 | And so the most important word, the title of David Swensen's

00:26:05.060 | book, Pioneering Portfolio Management--

00:26:07.780 | it's not portfolio management.

00:26:09.180 | Pioneering is the most important word.

00:26:10.780 | If you're not a pioneer, and you're not first,

00:26:13.860 | you're probably in the wrong game.

00:26:17.100 | And that's something a lot of people don't realize.

00:26:20.900 | The other thing that I think we all know--

00:26:22.940 | I mean, if these guys can't get it right,

00:26:25.820 | if all the college endowments--

00:26:27.340 | I see Rick Furry sitting down at the back.

00:26:29.140 | He wrote a marvelous article for Forbes

00:26:31.580 | about this very subject.

00:26:32.860 | If they're not getting it right, what odds

00:26:34.980 | does the average client of J.P. Morgan Stanley

00:26:38.700 | have who's being put into all these private investments?

00:26:42.780 | Not very good, I would suggest.

00:26:46.700 | The crisis-- we're now four years.

00:26:48.700 | I remember you talking about the Lehman Index at this conference

00:26:53.700 | in September of 2000--

00:26:58.940 | I think it was in San Diego.

00:27:00.100 | And just about when you used the word "Lehman Index,"

00:27:02.740 | you just about shrieked the word "Lehman."

00:27:05.780 | We now have four years' perspective on this, Jack.

00:27:10.140 | And we've seen how things have gone down.

00:27:13.780 | Do you think that we got out of that

00:27:15.240 | as well as we could have out of it?

00:27:17.140 | And the segue, the follow-up to that question

00:27:20.300 | is, if you had been Hank Paulson,

00:27:22.260 | if you had had this position, in September 16, 2008,

00:27:28.420 | knowing what we did now, would you

00:27:30.060 | have done things differently than what you would have done?

00:27:34.620 | Well, let me say, answering the first part of the question,

00:27:38.660 | that when you're confronted with a possible financial catastrophe,

00:27:43.020 | which is what we're confronted with,

00:27:44.980 | that system is so overlinked, so overleveraged,

00:27:49.140 | so misaligned in terms of its incentive,

00:27:51.620 | that we just got totally out of whack.

00:27:53.620 | And it should have been easy to see.

00:27:57.140 | I, unfortunately, did not see as much of it as I should.

00:28:02.340 | If I had spent a week on the West Coast

00:28:07.700 | with a countrywide mortgage salesman,

00:28:11.980 | I would have come back and said, out.

00:28:14.940 | Because you could see the way those things were building up.

00:28:17.440 | I don't call it mortgage companies, Washington Mutuals,

00:28:19.820 | and so on.

00:28:20.820 | Never have.

00:28:22.300 | But I had no idea how much out of hand

00:28:25.260 | their lending had gotten.

00:28:27.140 | But it's so, I guess, really obvious

00:28:32.060 | that when you've got a bunch of salesmen trying to give you

00:28:35.180 | a $250,000 mortgage for a $150,000 house,

00:28:38.620 | and you've got $100,000 left over to yourself.

00:28:42.300 | And that's what happens, or what did happen in some cases.

00:28:46.300 | And in some cases, the people are making $30,000 a year.

00:28:49.700 | Some story about a great picker that was making $16,000 a year,

00:28:54.340 | and he bought a $200,000 house.

00:28:56.060 | That's got to end badly, right?

00:28:58.500 | And so then you break the link between borrower and seller.

00:29:06.340 | And that's what happened in the mortgage business.

00:29:09.060 | The banks would take those mortgages,

00:29:10.760 | make their fees to mortgage banks,

00:29:12.820 | sell them to banks who didn't care.

00:29:15.980 | They probably didn't even look at them,

00:29:17.640 | because they were going to sell them

00:29:19.300 | to some kind of a new underwriting of mortgage-backed

00:29:22.860 | security, securitization.

00:29:24.980 | So the risk holders were completely two levels

00:29:29.300 | removed from the risk-takers and the homeowners

00:29:32.620 | back there who have been borrowing the money.

00:29:36.460 | And that just-- it's only a question of when.

00:29:39.780 | And maybe I was just not alert enough,

00:29:41.880 | and I really feel pretty stupid about it personally,

00:29:44.180 | because I didn't think it would amount to that much.

00:29:46.340 | But if I'd known how much was going on,

00:29:48.620 | you would've been alarmed immediately,

00:29:50.220 | just seeing what happens on the ground.

00:29:52.940 | And a lot of us are a little more elevated

00:29:55.540 | than we should be from the real-world existence.

00:29:58.260 | And you don't get in the ground.

00:29:59.580 | I don't nearly enough.

00:30:00.900 | And that's not my business anyway,

00:30:02.340 | but it's such a big thing that somebody shouldn't

00:30:05.100 | be looking at it somewhere.

00:30:06.500 | I think Bill Gross might have been looking at it

00:30:08.500 | and had some people doing exactly the same thing.

00:30:11.080 | See what's actually happening.

00:30:13.060 | I mean, it's really important.

00:30:14.340 | Don't take anybody else's word for anything.

00:30:16.580 | So the crisis was going to come, and it was going to be terrible.

00:30:20.660 | And I think-- what would I have done if I were Hank Paulson?

00:30:24.700 | I think I just would have tried to do a more comprehensive job.

00:30:30.140 | I thought he was-- I said to somebody,

00:30:31.860 | I thought he was a little bit punch-drunk,

00:30:33.260 | because there was a punch here, and then a few days later,

00:30:35.660 | a punch there, and then another punch.

00:30:38.340 | And I'm not sure that the greatest

00:30:42.980 | credentials for a Treasury Secretary

00:30:44.660 | is to be an investment banker.

00:30:46.860 | He's a very good guy, very smart guy, and a very strong guy.

00:30:52.100 | And without the strength, not much is going to happen.

00:30:55.260 | So I commend him for all that, but I still

00:30:57.540 | think we could have done a better job.

00:31:00.620 | We finally get the so-called TARP,

00:31:02.780 | which was to buy bad assets.

00:31:05.180 | And TARP never did buy any bad assets.

00:31:07.260 | It was so funny.

00:31:07.900 | We called it, I think, TARP, which

00:31:09.300 | is something blah, blah about getting the bad assets out

00:31:12.860 | of the banks, buying them back from them.

00:31:15.540 | And that hasn't happened.

00:31:17.340 | What happened was a whole lot of other very different things

00:31:20.140 | that TARP money was used for.

00:31:23.460 | And probably had to be used again.

00:31:25.380 | I think I would have done more.

00:31:27.300 | I'm more of a Keynesian than ever.

00:31:29.340 | And not perfectly, because none of those things

00:31:31.900 | work perfectly.

00:31:33.020 | But I would have done, if I was the king, two or three steps,

00:31:37.500 | and say at least two or three trillion steps from a throne.

00:31:41.020 | Done more stimulation.

00:31:43.300 | More stimulation in the infrastructure side,

00:31:47.820 | where we put people back to work.

00:31:50.420 | And we may yet have to do that, or try and do it.

00:31:53.340 | Because the greatest price an economy pays for all of this,

00:31:56.420 | ultimately, is the lack of full utilization

00:31:59.340 | of its productive power.

00:32:01.220 | People are out of work.

00:32:02.540 | So I think Ben Bernanke was very good.

00:32:08.500 | I'm not sure what Hank would have amounted to without him.

00:32:11.780 | Ben Bernanke aside, Ben Bernanke--

00:32:14.220 | actually, he was a Princeton professor.

00:32:16.380 | He's extremely smart.

00:32:18.020 | We all are.

00:32:19.260 | I'm kidding.

00:32:21.700 | So I think he's doing what he can.

00:32:24.740 | But he's trying to do the impossible.

00:32:27.140 | And that is, he's trying to solve this problem

00:32:30.540 | with monetary policy, with a money supply.

00:32:33.220 | Buying securities with QE2, which I always

00:32:36.140 | thought was an ocean liner.

00:32:37.700 | [LAUGHTER]

00:32:40.900 | I forget what the other one, the newest one, is called.

00:32:44.020 | Twist, Operation Twist.

00:32:46.180 | Getting out of the short-term securities,

00:32:47.940 | but that ends with buying long-term securities.

00:32:51.180 | And monetary policy--

00:32:54.180 | I mean, sorry, fiscal policy.

00:32:55.940 | Monetary policy can only do so much.

00:32:58.580 | And that's one of the big things behind the blow-up in Europe.

00:33:02.060 | The idea of monetary policy is, basically,

00:33:07.180 | European-wide, because it's based on the market.

00:33:09.860 | But the idea of fiscal policy is each government's

00:33:12.460 | responsibility.

00:33:13.820 | And you separate those two.

00:33:15.460 | And we sure have to separate it here,

00:33:17.540 | just because of the nature of our system.

00:33:19.740 | The government's in charge of both, finally.

00:33:22.420 | But the legislative side is just so stymied,

00:33:27.100 | unable to do almost anything.

00:33:28.420 | I'll give you an example to show you how dumb it's gotten.

00:33:31.420 | But I hope that's not too political.

00:33:34.500 | But we're trying to have monetary policy carry

00:33:40.020 | the burden.

00:33:41.180 | And yet, monetary policy unequivocally cannot do it all.

00:33:46.220 | So we've got to do some fiscal stuff.

00:33:48.020 | God alone knows what's going to come out of this so-called

00:33:50.700 | fiscal cliff.

00:33:53.940 | It's not going to go on the way it is, for sure,

00:33:55.940 | because the EU just can't be sustained.

00:33:58.380 | But it is horrifying to me.

00:34:00.660 | This is not a politically slanted conversation.

00:34:03.940 | But this deadlock between the parties

00:34:06.300 | means no material legislation can get done in Washington, DC.

00:34:10.100 | And the only thing, the only piece of legislation

00:34:12.540 | the two sides have been able to agree on

00:34:14.740 | is probably the worst piece of securities legislation ever

00:34:18.220 | designed by the amount of demand.

00:34:20.260 | And that is the so-called Jobs Act.

00:34:22.180 | Put jobs in it if you want to get it passed.

00:34:24.340 | And it's supposed to increase jobs

00:34:26.400 | by giving small businesses access to public capital.

00:34:29.500 | So all the constraints on very small companies

00:34:32.100 | going public and prospectuses, all that kind of thing,

00:34:35.460 | all those are taken down, limited.

00:34:39.020 | And it's much easier to raise capital out there.

00:34:41.740 | But there are a lot of swindlers out there.

00:34:43.900 | And they are going to come and swindle an awful lot of people

00:34:46.500 | from going to control it.

00:34:47.740 | So we get the Jobs Act.

00:34:48.820 | Both parties think it's wonderful.

00:34:50.260 | And it's going to have to be repealed one day because it

00:34:53.260 | may be, as far as I know, it hasn't created one job.

00:34:57.220 | But it's just a symbol of something

00:35:00.620 | that really lies at the root of many of the problems

00:35:02.820 | we're dealing with in this country.

00:35:04.300 | And that is a political system that is in chaos, unable

00:35:09.140 | to move.

00:35:10.300 | And oftentimes, it's a good idea for the Congress to do nothing.

00:35:13.220 | You could say one of the great blessings is Congress can't

00:35:15.640 | act.

00:35:16.140 | And there is something to that.

00:35:18.020 | But none under these circumstances.

00:35:19.860 | So we'll have to see what comes out of the election

00:35:22.500 | and see if sides can somehow reason together and produce

00:35:27.300 | what's best for the country instead of what's

00:35:29.180 | best for their own individual interests.

00:35:30.940 | I know that's idealistic.

00:35:32.100 | And I hope it's not too political for Mallory

00:35:34.100 | to approach that subject.

00:35:37.220 | - My favorite economist of all time

00:35:39.700 | is Heinlein-Minsky, who wrote about the instability inherent

00:35:43.100 | in our financial system.

00:35:44.220 | And it touches on exactly what Jack was talking about,

00:35:47.420 | which is that if your primary instrument is monetary policy,

00:35:51.900 | then what you do is you get into this cycle

00:35:53.740 | where you stimulate Wall Street.

00:35:56.260 | But you don't stimulate Main Street,

00:35:57.780 | which is what Ben Bernanke is doing.

00:35:59.420 | There's been a lot of stimulation of Wall Street.

00:36:01.460 | Stocks have been on its air.

00:36:02.860 | All the city assets have been on its air.

00:36:05.900 | But it hasn't done a great deal.

00:36:07.580 | It's done something, but not a great deal for the economy.

00:36:09.960 | If you want to do that, you have to do it

00:36:11.660 | on the fiscal side.

00:36:13.020 | And so you wind up with a--

00:36:14.940 | it was more of a map, but you wind up

00:36:17.060 | with this very unstable fiscal system, where you just

00:36:21.500 | get financial boom and bust.

00:36:24.820 | And that does-- of all the things that frighten me,

00:36:27.540 | that frightens me the most is this chronic instability

00:36:30.860 | we have on the financial system.

00:36:32.560 | We started out with four banks that were too big for bail.

00:36:35.020 | Now we've got three that are bigger.

00:36:38.260 | And I think it's a very frightening situation.

00:36:42.800 | It's why I've always believed from the portfolio side

00:36:45.620 | that you want to separate out your risky and riskless assets

00:36:49.540 | and stay away from things that are in the middle,

00:36:51.660 | like corporate bonds and bond bonds and the most

00:36:54.980 | large bids like that, unless you're getting paid

00:36:57.180 | to avoid these little risk premiums.

00:37:01.260 | It's an interesting example of congressional failure,

00:37:03.740 | I think, in that we've got the Dodd-Frank Act.

00:37:07.700 | They've got all these, I think, 194 regulations that

00:37:10.940 | were going on down there.

00:37:12.380 | All of them did what they could have done with one stroke

00:37:15.620 | of the pen by saying, bring back Glass-Steagall Act,

00:37:19.740 | and we'll run that out.

00:37:20.740 | [APPLAUSE]

00:37:25.180 | It's about the so-called capitalism of 2005.

00:37:28.300 | And all we ever say-- I mean, it seems so simple to me.

00:37:32.660 | You can be in the deposit-taking business,

00:37:34.780 | or you can be in the investment-banking business,

00:37:36.820 | but you can't be in both.

00:37:38.980 | We'll call it the mobile law.

00:37:40.540 | [LAUGHTER]

00:37:42.500 | Another question that's important--

00:37:44.780 | and I'll offer what we were talking about before--

00:37:47.540 | but I think it's important to this group, which

00:37:50.020 | is, what do you see as the long-term function

00:37:53.460 | of this organization of the nine parties?

00:37:57.420 | What would you like to be seen as doing 10, 20 years from now?

00:38:00.780 | Well, first of all, I think it's unbelievable how it has emerged.

00:38:05.740 | And I think it's quite remarkable what wonderful

00:38:09.980 | people you guys all are, trying to help others.

00:38:13.020 | It's good human beings, the backbone of America.

00:38:15.640 | You forget that in too many places.

00:38:17.580 | And people are doing all the nation's hard work.

00:38:20.260 | And we're trying to be intelligent investors

00:38:22.860 | in a market that is just the opposite of intelligent.

00:38:26.500 | So I feel very good about the message.

00:38:29.420 | It cannot be the wrong message.

00:38:32.160 | Find another mutual fund manager in America that says,

00:38:34.540 | if you do what I tell you, you can't go wrong.

00:38:38.020 | There's no one who can say that.

00:38:39.900 | I think Peter Lynch-- he was great in 1992.

00:38:44.720 | He left Magellan Fund, and it's dropped.

00:38:46.460 | I'm going to mention this later on, from $105 billion

00:38:49.900 | to around $9 billion.

00:38:52.780 | That's a lot of disappointment for investors.

00:38:55.020 | Very mediocre.

00:38:56.100 | Actually, worse than mediocre.

00:38:58.260 | So to the extent people are looking,

00:39:01.040 | people are looking all over the country for unbiased financial

00:39:04.660 | advice, investment advice, particularly.

00:39:07.940 | And you find it in the actual owners.

00:39:11.260 | There's nothing any better than the owner of a product, car,

00:39:15.060 | service, say, I've done this, and it works.

00:39:20.300 | And so I see this thing spreading,

00:39:24.820 | like an infectious disease, if you will.

00:39:28.360 | And pretty soon, everybody's going to be affected with it.

00:39:30.940 | So I see it getting bigger and bigger.

00:39:33.100 | And I don't know the logistics of putting together your site.

00:39:35.860 | I see some of the stuff.

00:39:40.860 | And Mike Nolan, my assistant, sees some

00:39:43.660 | and gives it to me.

00:39:44.860 | I imagine we have some full-time person at Vanguard

00:39:47.100 | who sees it.

00:39:48.820 | And I believe that the management tries

00:39:51.460 | to respond when they see something significant.

00:39:54.720 | We're full on stage with that kind of thing.

00:39:57.780 | And I still get letters from shareholders asking

00:40:00.380 | me to correct these things.

00:40:01.460 | I can't do that.

00:40:03.800 | But I answer them and send them to someone at Vanguard who will,

00:40:06.500 | or at least is supposed to.

00:40:08.140 | And so I think it's an idea, an independent body

00:40:14.180 | of self-educated investors who have learned the right thing

00:40:21.660 | in an industry that's going the wrong way.

00:40:24.820 | So next year, we should hire Madison Square Garden.

00:40:28.620 | [LAUGHTER]

00:40:30.940 | Well, that leads to just one other very fast question

00:40:33.780 | to one or two people in the audience.

00:40:35.300 | Susan is-- I don't know if Alex is around.

00:40:37.540 | What's happening to website traffic?

00:40:40.500 | It's-- I haven't--

00:40:42.300 | I haven't ever really done the numbers.

00:40:44.020 | But, I mean, there's lulls in activity.

00:40:47.340 | And then I can't answer that overall.

00:40:50.620 | But I think it's increasing.

00:40:51.980 | The increase is also in the wiki side.

00:40:54.860 | Because I think-- but not only from traffic,

00:40:57.580 | but I'm getting a lot of comments

00:40:59.580 | here from people who don't have-- aren't forum members.

00:41:03.180 | And they're saying, thank you.

00:41:04.700 | So it's not just the web traffic.

00:41:06.180 | It's the people who are reading the forum and not--

00:41:08.660 | I mean, if you look at the stats of the views of the--

00:41:12.940 | the views of the topic and how many people post,

00:41:15.420 | you might have 10 posts, but 100 views.

00:41:17.980 | That means I'm helping 100 people,

00:41:20.180 | not the 10 who post in there.

00:41:21.940 | So a lot of the education I try to give

00:41:25.480 | is for those people, not just answering the question

00:41:28.180 | directly.

00:41:29.340 | Because what-- did you all hear that answer?

00:41:31.260 | Can you repeat that, please?

00:41:32.340 | OK.

00:41:32.860 | Basically, what Susan said-- that's Lady Geek--

00:41:37.620 | what Susan said was that she's not

00:41:40.740 | sure about website traffic.

00:41:42.180 | A lot of people are lurking, basically, and not posting.

00:41:47.940 | And then the wiki is also getting a lot of traffic.

00:41:50.100 | But Jack's comment, I think, is well-taken,

00:41:51.980 | which is that maybe the most useful thing we

00:41:54.260 | do is the website.

00:41:55.140 | There's a lot of good that goes on on that website.

00:41:58.060 | It's very high-level, I'm very proud of it.

00:42:01.500 | And I think we are helping a lot of people.

00:42:03.980 | And maybe, just maybe in this era,

00:42:06.100 | that is really where the action's going to be.

00:42:09.780 | I don't know.

00:42:10.340 | I think it's something that's worth looking at.

00:42:13.940 | Finally, one more question on that.

00:42:15.740 | Let me just add one little thing to that, if I may.

00:42:18.740 | I was asked to write the introduction to Fogelhead Guide

00:42:22.300 | to Investing.

00:42:23.860 | And I came up with a quote for him, Alexis de Tocqueville,

00:42:27.940 | Democracy in America.

00:42:29.460 | And he talked about--

00:42:30.420 | I have the quote from the book--

00:42:32.500 | about the tendency of Americans in the year 1818 or something,

00:42:36.820 | a long time ago, the tendency of Americans

00:42:38.860 | to gather together to work on issues and to fix them.

00:42:42.740 | And this is, obviously, if de Tocqueville were around today,

00:42:47.660 | he would say, man, did I hit that one right out of the park.

00:42:52.460 | Of course, Robert Putnam has written a counterpoint to that.

00:42:55.820 | He says that we're not doing as much.

00:42:57.420 | But this may be the answer to that.

00:42:59.900 | He's willing to admit that.

00:43:01.020 | He said, it's an interesting question.

00:43:02.640 | Robert Putnam's the guy who wrote

00:43:04.100 | the book, of course, on the loss of social capital

00:43:06.740 | in the United States.

00:43:08.940 | Finally, one last question, and then I'll get out of your way.

00:43:12.180 | Jack, I've never been able to convince you to think about--

00:43:16.140 | or other people, I have been trying to do it,

00:43:18.020 | but now other people--

00:43:19.100 | not to lose capital, because it doesn't produce a dividend.

00:43:24.180 | It's just an asset.

00:43:25.340 | It's not productive.

00:43:26.700 | So we can't convince you about that as a standalone asset.

00:43:29.460 | We can't probably convince you even

00:43:31.000 | in terms of portfolio ability.

00:43:33.340 | What about insurance?

00:43:35.180 | OK, we're looking at an environment in which we don't

00:43:39.900 | know what is going to be happening to the inflation

00:43:43.500 | supply of money, the inflation rate of the money supply,

00:43:50.500 | and the velocity of money.

00:43:51.980 | If someone came to you and said, look,

00:43:53.580 | I just want to own a few gold coins as insurance.

00:43:57.100 | I'm going to buy them.

00:43:58.060 | And I hope they're going to use them.

00:44:01.760 | I'd say, be my guest.

00:44:03.700 | We live in a totally uncertain world.

00:44:05.980 | And if you believe in the likelihood

00:44:10.460 | that gold would be a good performing asset

00:44:12.260 | in a bad performing world, I wouldn't

00:44:14.580 | hesitate to add it to your portfolio as a diversifier.

00:44:18.620 | Now, 5% probably is not a bad working number to me,

00:44:22.420 | in my opinion, and recognizing that it's strictly

00:44:25.700 | a supply and demand equation.

00:44:27.420 | When you buy, you get no return on your money.

00:44:29.660 | You buy it with the hope you can sell it, if you ever do,

00:44:32.280 | for a larger amount of money.

00:44:33.480 | And you pay for it.

00:44:34.680 | And so it's just another commodity

00:44:36.940 | with this peculiar, almost universal use

00:44:39.980 | since the beginning of time.

00:44:41.600 | And so I wouldn't try and talk anybody out of it.

00:44:44.440 | I don't have to do it in my personal accounts at all.

00:44:47.600 | But I would think about it in a long-term account,

00:44:50.880 | just because we don't know what's coming along.

00:44:54.040 | And there is the possibility of, in all ways,

00:44:56.640 | the possibility of kind of a black swan event.

00:44:59.500 | And that would be a helpful diversifier.

00:45:03.420 | And unfortunately, one of the things, Bill, you know this,

00:45:06.040 | is that whenever somebody comes up with a diversifier,

00:45:11.020 | someone with a hot performing asset,

00:45:12.780 | gold in this case, and says a great diversifier,

00:45:16.300 | it should be at an all-time high.

00:45:18.940 | No one called gold a great diversifier 15 years ago.

00:45:22.220 | Forbes called it a great diversifier, I don't know,

00:45:25.620 | maybe in 1960.

00:45:28.220 | And then they forgot about it because it didn't perform well.

00:45:30.940 | So either it is a great diversifier, or it isn't.

00:45:34.700 | But there's a huge tendency of our financial markets

00:45:37.860 | to rely on, or financial promoters, to rely on--

00:45:43.660 | they know you want to just kind of secretly watch

00:45:45.700 | that price of gold, and it goes up, and you want it.

00:45:48.500 | So they try and intellectually justify it

00:45:50.180 | by saying it's a diversifier.

00:45:51.700 | So I'd say do gold.

00:45:53.020 | Do it in very small accounts, and do it all.

00:45:55.380 | And with great caution.

00:45:57.300 | This is a risk-use time, most difficult time to invest,

00:46:00.020 | I know.

00:46:00.980 | And not so much the risk, but the terrible returns--

00:46:04.460 | I'll talk about this a little bit later--

00:46:06.180 | the terrible returns on bonds.

00:46:07.660 | The customary-- and inevitably, the customary diversifier

00:46:12.460 | for an equity portfolio.

00:46:14.980 | Yeah, you know, there's the famous Eagle song

00:46:18.500 | for Rast Resort with a great line in it called,

00:46:20.700 | "Someplace Paradise Kissed Goodbye."

00:46:22.620 | And I think that's the basic story of all diversifying

00:46:25.220 | and asking questions.

00:46:26.180 | Well, with that, I will thank you, Jack,

00:46:27.860 | and get out of your way.

00:46:29.780 | [APPLAUSE]

00:46:32.820 | [AUDIO OUT]

00:46:36.180 | [BLANK_AUDIO]

Bogleheads® Conference 2012 - John Bogle & Bill Bernstein Fireside Chat

Chapters