It's great to see all of you again, I saw a lot of you last night, I didn't get a chance to shake any hands, I'm out of light, and I hope you all had a nice dinner, I got a pause when I got home, my wife was expecting me to be out for dinner, and they were having a little problem with my, continuing to be busy at my age, and I have worse to tell you about my schedule today, I just can't kind of help the full disclosure, I am going to be with you all day until, I just finished that half an hour interview with Christine Pence from Morningstar, and I'll be with you all day until around 2 o'clock, 2.30, I'll be back in the office until 3.30, and then for reasons best known to the Lord, I guess, I'm getting driven to New York to go to a bi-annual meeting of the Princo, it's an investment management company, a board of trustees, and every other year they invite the former trustees back of the investment company for Princeton's endowment, and I've been involved in it for a long time, I haven't been a director, I don't think for maybe 8 or 10 years, but I can't kind of resist the temptation to go back once more and see how we're doing, see who's on the board, there's some very, very smart people, actually they went to Princeton for heaven's sake, and it's kind of nice, and it conflicts a little bit with my priority to be with you, and my priority to be over at Vanguard tonight, but I do want to say, so I regret that I can't be there, there's no political implications at all, and then about 9 o'clock on a certain night, I'm coming back to Philadelphia in the car, and I know everybody's saying the man is nuts, and where's my wife, but she said I could do it, sort of, so it's kind of a busy day, and I'll be with you again tomorrow morning to hear Gus in particular, but to hear anybody else, and hear all of you, and I'll hear some of you this afternoon, but I'd like to hear the input from you all, and then this may be TMI, but I have to leave here tomorrow at about 11.30, and I get a CAT scan on my ailing shoulder, which is not mending the way it's supposed to mend, and then I'm taking the afternoon off.

Excuse me, the Lord rested on the sixth day, or as I said, so I'm glad to be with you, and I just wanted to tell you that we've come a long way at Vanguard, and we've engaged with Boba Fett, and I don't think it's any secret that the first time Kevin and I were working on signs to welcome you to our campus, about probably eight or nine years ago, we were told to take down the signs, 2001, told to take down the signs, no one would be allowed on the campus, and we have our ways of dealing with that, but the orders were rescinded, and then the door got open, got ajar, and then what, first ajar, and then wide open, and the last two or three years, we've really, I think, measured up in a very good way.

I want to give great credit to John Werth, our PR guy, and even more credit to Glenn Reed, our relatively new Managing Director, with whom I'm quite close, and he just wants to make sure all this gets done just right for you all, because everybody there now recognizes after some delay what a huge, huge asset you are individually, and as a group, to Vanguard Sustainment and Reputation, and John Werth said something about you're our biggest boosters and our fiercest critics, and you need criticism, you need criticism, we need criticism, and I may overdo it a little bit, but be that as it may, it's going to be a nice evening for you all, I'm just sorry I can't join you tonight, but it's a busy day, and I'm looking forward to it all.

I want to begin in a way, a curious way, that sets the tone for what I'm going to be doing today, perhaps be a tie-in with a man for whom I have enormous respect, and that would be Taylor Laramore, and I don't know, is Taylor here this morning? Yes.

So I have to tell a story to Taylor. First, I have to apply my spectacles. At the end of my remarks this morning, if I have time, I'm going to tell you about a new book that's coming out, which my wonderful assistant, Michael Nolan, calls M.I.T.A., it's called Man in the Arena, and it's not written by me, it's written by a lot of people who did the Legacy Forum at Wall Street a year ago, and has transcripts of that, a lot of other information in it, and some of my more recent speeches and that kind of thing, and some of those before are still in my books, such a distinguished group of people, and so, getting into that, we have letters from many shareholders, from many, like, big shots, Warren Buffett, etc., and about ten letters from the Bogleheads, and one of those letters, this is in the book, is a fairly long letter from Taylor Laramore, and I'm going to quote you from that, because it's one of my remarks today.

"In 1999," this is quoting Taylor, "I learned Mr. Bogle was going to be the keynote speaker in the Money Show, and my wife, in Orlando, and my wife Pat and I made the decision to go hear the speech, and hope to meet him personally. He'd been on the cover of Financial World, blah, blah, blah, and we'd expected John Bogle, chairman of the giant mutual fund company, to be surrounded by guards and staff, not two old ladies seeking advice.

Pat and I listened to the conversation, we followed Jack into the auditorium, and the ladies into the auditorium, we immediately went to the podium to speak before a crowd of several thousand." This is a portion of his exact words, it's recorded by the press. This is my words from the speech at the Money Show, there are all these people selling him stuff.

So I began by saying, "I count you'll have the opportunity to attend roughly 130 different seminars, masterminded by more than 100 speakers. It looks to me that the great preponderance of them will offer you their secrets for success in the new millennium. Many speakers will offer you tempting solutions involving the best complexity and a worse financial veter-domain, witchcraft.

I must confess, no offense intended to the presenters," he said, "I wince when I see so many subjects that seem to offer easy roads for you to build your capital. Wealth creation and preservation, increasing yields to 15 to 20 percent, the trillion dollar opportunity of the internet." I mentioned that.

"Finding future wealth in diamond mines, high profit, low risk strategies, et cetera. I assume," I continued when opening my remarks, "from the titles these speakers will offer you the secrets to success, let me offer mine. The one great secret of investment success is that there is no secret. Investment success, it turns out, lies in simplicity as basic as the virtues of thrift, independence of thought, financial discipline, realistic expectations, and common sense." Taylor then gets back to his words, "I doubt Mr.

Vogel will be invited back." And I wasn't. But I didn't lose my candor as a result of that favor to get a second invitation. By the way, the guy that ran the money show, I'm standing here doing my speech, and he's sitting next to me just like Romello is sitting in front of me now.

And I'm sensing. Well, I don't know what I'm sensing. You can probably figure it out better. But I didn't lose my candor. I haven't lost my candor. And so I'll be as tactful as I can today. But it's hard for me to say something except the words that other people put in my mouth.

It's hard for me to expand my own opinion. And I guess when you're 111 years old, that's a little bit early. You ought to say what you think. And I've been spooing that for more years than I care to count. And you'll hear more of it today. So thanks, Taylor, for that.

And thanks for being here with us. I said some things about you last night. You've been a very dear friend. You've gone through terribly troubled time. We all have to go through one way or another in our lives. But you've been a great ally, a great booster. And his friendship and loyalty and just his integrity as a human being, that's a phrase I made up somewhere, speaks volumes.

I think the spirit of all the local heads, he's really the founder. So I want to thank Mike Nolan again for helping me with these slides. I decided we had too many slides last year. We're going to have four more this year. I'm going to go through them fairly quickly and just cover what we can.

And so we'll just go on now. Mike and I have been very busy in the last couple of weeks, really, trying to get ready for this and think about some new things and put it in some cogent way. We're trying to do, he's trying to do the final proofs of The Man in the Arena, his book about me.

And it seems to be our responsibility. A lot of the publishers don't do a very good job on that. So he was in the office, I think, until nine or ten last night. Something like that. Midnight. Midnight. You okay this morning? I'm fine, I guess. Mike is Kevin's replacement.

Kevin gave me 11 years of loyal service and Kevin is, I think, going to stop by and see all of you. I don't know if any of you remember him. Is Emily in the room now? She is. Where is Emily? Do we have to hand some of that? Everyone for Emily, who takes such good care of me, has the patience of Joe.

When I get excited or upset, which is very, very rare. Where are my glasses, Emily? She soldiers through it. She's been very loyal. She's been with me for 24 years now. She doesn't look old enough to do this, I'll say that, but she's been with Vanguard maybe 27 or 28 years, I'm not sure exactly.

But we owe her all of you. She's a big participant in helping you all get around and getting the things that need to be done here. So with Mike and Emily and Sarah, who's not quite involved in all this, that's my move team. And we got a lot done, and I enjoy it.

And their patience and understanding is beyond any reasonable belief. So I want to thank them, starting from you. And in the middle of trying to do these three or four things, which is pretty much a full-time job anyway, outcomes. I'm going to start with this slide in a minute.

Outcomes. Outcomes, the Wall Street, the newspaper yesterday, and it's about these new Nobel laureates. And the op-ed in the Wall Street Journal said something to the effect of, "I owe a great debt of gratitude to Gene Bauma for coming up with the efficient markets theory." And that is so far from the truth that I felt compelled to write a letter to the editor of the journal about it.

And the problem with it is two things. One, I'd never heard of Gene Bauma when I came up with the idea for the index fund, which is a significant difference from what this fellow argued. And number two, I don't even agree with him. He's a very strong-minded, and I can't say that I'm right and he's wrong.

But what does one say about a hypothesis that is sometimes right and sometimes wrong? Sometimes markets are efficient. Sometimes markets are inefficient. And we never really quite know when, but we do know from the work I've done, and I'm going to show you a little bit this morning, that in the long run, they're highly efficient, and in the short run, this is stock value relative to bonds, what kind of efficiency.

And in the short run, that could be years, even decades of inefficiency. So I don't subscribe to the theory, and that gave rise for me to tell the journal that the EMH had nothing to make an efficient markets hypothesis. So I had to come up with a nice resounding counter to that, which I call the CMH, the cost matters hypothesis.

You've seen me write about that. And that hypothesis is universally true every minute, every day, every century, and that is everybody shares the market return. The ones that do best have the lowest cost. It's as simple as that. It is as simple as that. It's a simple theory of mine.

And it doesn't have anything to do with Gene Fama. I wrote a letter, which by the way, Emily and Mike both told me not to send. And I did modify it, right Mike? You did, yes. I think a little bit. And so they liked it a lot. I talked to the editor, writer, who I've had some correspondence with over the last couple of years.

And what's going to happen to it, I don't know. But I'll probably publish what I sent somewhere along the way. But it's still up in the air, and I'm going to guess that they will have some shortened version of this 500 word letter to the editor. 495 actually. Actually, there was one word that shouldn't have been in it.

"Of" didn't belong, so it's only 494. And we'll see what happens. So I'm going to talk a little bit about Nobel One, which is Gene Fama. What does that thing say? Oh yeah. Oh, this is the interesting point. I told the journalist, he likes indexing so much, maybe he's the father of indexing or something somehow.

Why did he start a non-index firm called BFA, Dimensional Fund Advisors? He believes there are sections of the market that are permanently undervalued, persistently undervalued. And I don't have to believe that. And BFA has built a big business, a highly profitable business, on the very idea that you can find a lot of Japanese small cap stocks, for example, or value stocks, or small cap stocks generally.

And sometimes he's right and sometimes he's wrong. He doesn't tell you too much about the latter. So that first one, let me get my copy of it here. I'm going to keep looking around and wait for the night. And then, what do I want to do next? We'll come to this in one second.

He says, he doesn't believe there's such thing as bubbles. And I'm going to show you there are such thing as bubbles, and anybody should be able to figure it out. So let's go to that next slide, Mike. Bob Shiller, who you probably know about. He has his way of looking at markets in 10-year or 15-year aggregate earnings.

He's perfectly valuable. Sometimes he's right, sometimes he's wrong. But he is another Nobel laureate for the year. And he disagrees with Gene Common. And as he says, he thinks efficient markets is the most damaging investment hypothesis in history. So I did tell the journal in my book, I was a little over the top.

I mean, that was Charlie Fawcett. So they raise these issues, and it's the issue of who two guys win the Nobel Prize, and they disagree. Let me talk about, and Burt Malfield, because I'm wrong on this, you should know that. But let's see how I'm going to look at the markets if there are bubbles.

Can there be bubbles? Well, one way to look at it is the economic capitalization relative to our gross domestic product, the reality of GDP, the national economy, and the total capitalization of the stock market. And it got up to, you can see that the market cap was twice the stock market, 1.82 times.

And that was in the bubble of 2000, the tech bubble, and it came down below in 2009 to 8.84. Well, that's because stocks had a bubble in them. The intrinsic value of stocks, measured by GDP, was vastly exceeded by the market value of stocks, people's expectations. So you can see hints of a bubble there.

I don't think you need to look at this over long periods of time. But you can see there are big jumps in those. I don't think it has a time factor in it. Actually, there are a lot of factors that go into it. But you can see what it was doing in 1929, what it was doing even when the '40s began.

You can see the '70, '72, '74 crash, '81 to '37. And the dimensions of these things are not too far off. There's a cut in half, and again, cut in half in '82 to '84. So there is persistent overvaluation, and then it changes. Another good one, people don't look at these things very often, and this is really quite striking.

This is the value of the prices Dow Jones averaged relative to... Did we get that title right? No, we got the right title, right? It's the market valuation. Yeah. This is the market value of Dow relative to the book value of Dow. And we'll fix that up in round two, and I can repeat this to you tomorrow morning or something.

And you can see for eight times, the market value is eight times the book value, where a norm looks to be two and a half to three times. And things change over time, I know that. But eight times does seem, to any normal person at least, a little over the top.

And then it reverts to normal, which is where it is now. And both of those things suggest that the market is in broad range and fairly valued then. It's a hype, it's a hype of the world, you don't really need to worry about it. But that's the way it seems to me.

And you've all seen, this is something you've seen before, and I just want to show you something you've had. I've used this chart for a long, long time, and it's the sources of stock market returns over the decade. And you can see investment return. This is a long-term return created by business, in effect, dividend yield being entered, earnings growth that follows.

And you can see it's pretty steady. You know, eight percent, six percent, big 14 there. Yeah, thanks, Bill. I'll try and keep my eye on that. And then this last decade, of course, very poor, in part because it starts with such a terrible dividend yield. And you can see how it all comes out, dividend yield, earnings growth, and there's where the 9.3% you read about in the market comes from.

The speculative return is whether those P/Es are rising, valuations are rising or falling. And you can see really an odd pattern of reversion of the mean here. I don't know how much to read into it, but it's the way things happen in the market. And that is, speculative return was a big drag on returns in the 1910s, and it had almost exactly the same amount in the 1920s.

Big drag on return in the '40s. And on a slightly larger improvement in returns in the '50s. A big drag in the '70s. Exactly commensurate increase in the '80s, taking 7.5% off the investment return and adding 7.7%. And then for the first time in history, repeats itself in the next decade.

That in itself is a warning sign. So you can see where these returns come from and what you can count on. The whole point of this is it's all about fundamental returns, investment returns, owning corporate America, and not owning the markets. So we look at this, use this chart, and I'll show you one new one.

But you can see how closely in the long run the market return, total return on the market, tracks the investment return. The investment return clearly drives the market return. And if you divide one into one, those little jiggles amount to something much bigger. It's the same chart, just worked out a different way.

And again, you can see the investment return go way high up in the tech boom, and then back to more or less a normal phase. That one would be the exact. It starts at one end at 1.1, and it probably will end at 1.0, somewhere along the line. So you can have a pretty good handle on long-term returns from buying corporate business.

Now one thing I had never plotted before, however, was the investment return, and this chart, and just plotted the speculative returns separately. And you can see the investment return grows, and grows at a rate of around 9% a year. The speculative return is up, and it's down, and it's zero.

So it's all a business of capturing the returns earned by corporate America, and not worrying about the valuations placed on those earnings by Wall Street. And it's quite a remarkable chart. It goes nowhere. If one goes nowhere, this is what one would expect in 113 years, in terms of the addition and subtraction of speculative return.

It's business return that drives it. And that's central to my own investment policies and theories. And so it's worth thinking about that. I'll be using that chart a little bit more, just to try and get things across to academics and others. I think it will complicate it for some of you, but I think the chart's making it pretty clear.

The basic proposition would probably be more obvious. Rely on investment return. Think about how corporate earnings are going to grow, corporate dividends. And forget all these fluctuations, these nutcases, for want of a better word, on Wall Street. And looking at expectations drive up at that. If you want a big picture of that, just think of the last two weeks, up with 100 points, down 100 points.

To what avail? What does all that mean? People speculating about whether the government's going to close down. And they're not, when you think about it and understand the market, they're not really speculating. And this is a very important point, not speculating on whether our government's going to close down.

They're speculating about whether other investors will think our government's going to close down, right? So they're guessing at what other people might do. This makes no sense. It's misleading, it's silly. And so we're trying with our theories about indexing and so on to drive the nutcakes and the fruitcakes out of the system and get down to real investing.

It's a big issue, and we just keep pounding away with greater and greater acceptance, I think. Now, I'm going to talk a little about competition, changing the subject from the Nobel Prize winners to the sources of market returns to competition. And let's throw this first chart up of the largest fund managers.

You can see this has been a dramatic change in the last three or four years is all of Vanguard's ideas about indexing and having a bottom-front look at business and operating at minimum cost, at no longer roost. And here we are, $800 billion larger than Fidelity. They used to be probably $100 billion larger than we were.

And American funds having their own troubles. They've just gotten too big to be able to manage. When you get to a trillion dollars, you really can't be an active manager of funds. And I'm trying to have some correspondence with Morningstar about the American Funds because they've calculated 8,000 ten-year periods or something, and said that they beat the market at 80% of them or something.

And the reality is, I don't need to look at the data, but I can tell you what the reality is. And that is 98% of the 80% came before they happened to be $1 trillion. Then you can do an awful lot when you're small, and sometimes right, sometimes wrong, I think.

But there we are, and then there's the new ETF-driven BlackRock indexing business. And then PIMCO, of course, this is their mutual funds. Their total book of business is around $3 trillion. They're somewhat larger than they are overall. And it brings me up, I can't remember if I said this last evening or not, but here we are over $2 trillion is what's to be said.

And an audience Q&A with an audience about a few months ago, people asked me a wildest question having nothing to do with what I'm talking about, which I guess is some sort of a compliment, I don't know. Said, "You must be very proud to have reached the $2 trillion mark." And I said, "Look, what do you think $2 trillion means to someone who's written a book called Enough?" And it's a delicate balancing act.

I tried to find some strategic consultants, Harvard Business School kind of thing, many, many years ago. And the question I asked them was, "What can we do to slow the company's growth rate?" Why? Why would anybody want to slow the company's growth rate? You can see the handwriting was on the wall all those years ago.

We were just on the verge of getting the kind of big momentum that we see later on. And yes, as the directors used to warn me, or used to quite, I guess, try and help me out through this dilemma, we're giving good employment opportunities in an ethical company, with a missionary kind of zeal, and an awful lot of people, probably 35,000 or so now that have come through our doors.

Some people have gone, of course, the nature of things. And yes, we're giving probably 20 million investors better returns than they otherwise might have had. And those are nice things. When you get to 14,000 crew members, it's just an awful lot. You lose a lot of personality. I talked to all our Award for Excellence winners, usually about, I think about eight or ten a quarter, for an hour each.

Just kind of get a feeling of the kind of people we're hiring, which are terrific, their view of the company, which is very positive, no matter how big it is. And so it's all okay. But we still have a problem, which I define as something I wrote years ago when I was running Vanguard.

For God's sake, let's always keep Vanguard a place where judgment has a fighting chance, triumph over process. And when you're running a company with 28 people, there happened to be a dictator running it who didn't hesitate to decide, this is what we're going to do, and just go do it.

And if you need any help, I can kind of pitch in. And that's a lot of judgment, very little process. And when you get to 14,000 crew members, now 15, I suppose, 15,000, there's an awful lot of process and not nearly as much judgment. And you get more and more committees, more and more groupthink, more and more concern about whether a dissent is encouraged or discouraged, all those kind of things.

And there's a simple reality here, and that is historically aligned. It has a percentage of the company that's judgment, the percentage of process, you start way down here, and when you get to 14,000, you're way out here, process dominates everything. And it has to. There's nothing anybody can do, there's nothing I can do about it.

But I think it's important to be aware of it, and to be aware that no matter who's running that company, if you love bureaucracy, that line may be here. And if you hate bureaucracy, it may be here, but it's never going to be back here. You just can't get there.

So I worry about that. I mean, I believe in the human side of business, and I believe it's very difficult to do without putting a huge effort and a huge amount of consciousness and awareness into the importance of the individual always comes in. And maybe just my idealism, shameless as always, but that's I think the big struggle that we really have, in my opinion, in the investment side, locked in.

The index fund is the gold ingot. It is the way of capturing your fair share of market returns. And yes, somebody else, I'll talk about this in a few minutes, somebody else may get more than that share of market returns, but then somebody else is going to lose. There's no systematic way to do it.

So I think we're operating with the right strategy, and I'm sure we are. So still in the competition, you can see our cash flows are just enormous, and just keep growing and growing and growing. This year looks like we had a little pot last year. Imagine bringing in $137 billion more than the last year.

It looks like about, the last six years, it looks like about a trillion dollars, something huge, maybe eight years. And most of them are long-term funds and not money market funds. So this is booming. Our market share, which we do, and you can do both ways. Market share is long-term assets of funds, bonds, stock funds.

Or, that feels good. But we do it with long-term assets because someone like Dimco, Capital Group, American Funds, don't have any money market funds. So knock that way down. And Fidelity, big money market fund thing. And the numbers don't change a lot. But you can see how we've come from 1974 at 18% of industry assets, almost 18%.

It just grows very steadily. You can see it actually with the small print. You can see it month after month. There's a trend going on here. And I think it's going to be very, very difficult for anybody to break it. It's going to be very hard for a lot of people.

BlackRock has a terrible job because they have two masters. Is that good, too? Can you hear me okay in that? They have two masters to serve. And the shareholders of BlackRock Corporation, the shareholders of BlackRock and the ETS. And that poses the issue with great clarity. Because they can't say, "Yeah, we charge more, but we're better managers." Because they're managing an index fund.

They're going to do exactly the same, no better or worse than our index fund. So they are being driven, the marketplace is driving them. They were the shareholders of the ETS and their funds, rather than the shareholders of their management. And Larry Fink is a very nice, very smart guy.

He's really stunned by this. He thought it was outrageous that anybody would ever run their funds at cost. And actually, a story that I haven't told to too many people, but back in 1974, the spring of 1974, when he was trying to get Vanguard going, I was at a capital group.

I had some friends from the ICI board, and I was out in California. I did a little tour of their office. They were all pretty small. And John Lovelace, the president of it, who's inherited from his father. I saw everybody but him. But he came in at the last meeting and said, "I really have to talk to you before you leave Los Angeles." And I said, "Why, you know, I can't do it today.

I'm leaving tomorrow morning at 7 o'clock. So I'd be glad to meet you in the old bar stool in the diner at 6.30 or 6 o'clock." He said, "I'll be there." And he said, "Listen and listen carefully. Don't start a mutual company that will ruin this industry." And in a certain way, it has.

It's been good for the consumer, and that's been the investor, and that's really what I care about. So, when I say we're... And now we've got this tri-language in the wrong place, but we'll throw it in anyway. This just shows the impact of ETS on the connection between the two of us.

And I'll talk about that as a separate subject in a few minutes. But you can see that there's still, since 2008, been a very nice growth in the assets of traditional index funds. I use the term so often in my book, "Prize for the Cultures" that I had to think of an acronym.

We all have an acronym. And so I call them TIS, Traditional Index Funds. I never thought I'd be reduced to that, but there we are. And they're two of my favorite businesses by and large. So in any event, it's index funds, including index funds of all kinds, that are in the driver's seat.

And you'll see they're like $600 billion almost since the end of 2005, going into index funds, and $530 billion coming out of active funds. This is a trend. This is something that's not going to go away. This is part of our lives. And so we better get used to our growth and be prepared for our growth.

And I'm interwoven in this to maybe some bad thing happening. I used to tell people when they were struggling to get Vanguard going that just when you think you've got it all made, some great big bruiser comes up behind you with a poleaxe and smacks you right here in the neck.

Bam. And so maybe that's going to happen. Who knows really, but I don't think so. So let me turn now to some of what I'm doing now. We'll review it in a year. And you tell me, Mel, if I'm just trying to go through this little thing that I prepared for the meeting.

You've got whatever time you need. The elephant in the room, I've got whatever time I need. I don't want to bore you to death, but I continue to be pretty busy, if not very busy. I'm trying to be, in honesty, I'm getting a little old. I don't usually leave home until about 8 o'clock to come to work.

I used to be 6. And I don't usually go home at 6.30 or 7 anymore. I usually try to get out by about 4. And so I'm cut back on my schedule. I will say, just to be honest with you, it's amazing how I can't get it done during the week.

So there are very few weekends when I'm not spending 4 or 5 hours doing some kind of reading or some kind of catch-up or something like that. Then I do all the things you do just in the ordinary course of a non-business day, like read the Times, read the Wall Street Journal, and so on.

But in any event, some of the things you've seen are the bigger speeches I've given, and the lecture at Princeton, the financial system, a warning of change is coming, and one of my favorites, Big Money in Boston, a Boston security analyst, which will be a chapter in the new book, just because it hadn't been published before.

And that will also be published in the Journal of Portfolio Management almost immediately. I guess we just sent those proofs back. A lot of work goes into this. I haven't had this one typed up yet, but this is the Financial Education Association and a bunch of teachers, academics, where they gave me the Scholar Educator Award.

One more little goal, but I wasn't doing all of them. I was down in, actually I was in Southampton, Bermuda, and I didn't think I should be flying down there. Flying is very difficult for me. But I told them I'd do it, so I did it. It was before my injury anyway.

And I was in Bermuda for 24 hours, and never breathed air. Had nice sea air down there. Used to go to Bermuda a lot, every day. So I'll have that. That will be published eventually. And then I was asked to give the keynote address of the 78th anniversary of CFA Philadelphia.

I think that's up on my site, Mike. I believe so. You believe so? I believe it exists. You didn't put it there. I say yes, Mike. And that was a funny one, because I think I told some of you this story last night about this was after the crash on my shoulder.

And my wife said, "You're not going to go in there to give a public speech, are you?" And I said, "Yes, I am. Why? Because it may be for women." I'm repeating, I think, what I said to many of you last night. And she said, "This is the apocryphal part of the story." And she's right.

She's always right. She said, "What would happen if you were dead?" And I said, "Well, you know, I think I'd probably be there anyway." So, and then I just got yet another award from Colin and Joan group here, the Intrepid Leader Award. And then, oh yeah, here we are.

And I also have a couple of financial analyst journals. I've probably had, I think, eight or ten articles in financial analyst journals. And this year, Big Money in Boston, as I mentioned, is going in. And it's really a pretty powerful speech, I think, and a pretty powerful essay. We edited a lot for the final publication.

And then I'm doing another one, which you will soon see the light of day, which is a financial analyst journal. And Bill Sharpe had written, Nobel Laureate Professor Sharpe out of Stanford, had written an article called The Arithmetic of All In Investment Expenses. And he talked about an expense ratio of 1.06% for the average large cap fund.

0.6, he picked up a stock market fund and said that the active management group will, just doing the math, will give you, like he said, 80% of the return you get on the index. And these things have been driving me nuts for years. When people act as if the expense ratio is the only cost worth talking about.

And it turns out to be less than half, a lot less than half, in fact, of mutual fund costs. So I wrote an article, which is supposed to be a rebuttal, and it turned out to be, I don't know, maybe 25 or 30 pages. And they agreed to print and to take a look at all the costs of investing.

And the problem with the other costs of investing, portfolio turnover costs, cash drag, because most funds have a significant cash position, and marketing costs, sales loads, investment advisory, the fees paid to financial advisors are outside of anybody's ambit, and no one, no one, no one can calculate them with precision.

The, for whatever it's worth, the expense ratios are precise figures, so they're easy to deal with. So when you eliminate, and my thesis is that if you eliminate a consideration of anything that is a big drag, but imprecise, you better estimate it. So I went through there, and I got to a very conservative estimate, of I think 2.26% for all income costs, which using Bill Sharpe's mathematics gives you, an active fund gives you not 80% of the market's return of the index fund's return, but about 60% of the index fund's return of the return on investment.

So that's going to be an important article. I think a lot of people are going to think I was too high on my expense estimates, and I'm sure I'm not. And a lot of people think they're too low, and so presumably both sides will speak out. But in any event, it's fun to be in the, still writing, and then, you know, doing things like interrupting my writing, and every day it seems like there's some darn thing I read in the paper that gets me so excited.

I can't wait to deal with it when I get in the office. And there go all the other projects. So, you know, sometimes it's noon before I start to get to, you know, cleaning up yesterday's work. So it's crazy. I understand that. I'm probably too old to do it.

I think that's true. And when my mind isn't up to it, I guess I'll just stop. I don't expect that to be very soon. But who knows? It's not in my hands anymore. We age. So a lot, I think we've accomplished a lot this year. And thanks in many respects to Mike and Emily and to the lesser extent to Sarah.

And so they get us through the day. Now, I don't know how we got to projects here. Three, don't put that up yet. But I want to talk about how fragile. I want to talk about the beginning of Vanguard. I want to talk about the end of Vanguard, where we are today, this huge momentum, unbelievable.

And how we began. And we began, to be honest, without a fighting chance. And in the written, in the speech I did in Boston, I had slides so I could do this. I couldn't do it in the book where it's reprinted, the man in the arena book. But I've got two slides coming up here about how fragile and how the odds are so totally against Vanguard even existing.

And you want to throw that in. When I was out in San Francisco, I bought the New York Times out there. They published out there. The list looks pretty good. House of Fun Man to come back was the headline. They greeted me when I got on the plane. Oh, that's nice.

And then I stayed in my office probably later in the day. It was later in the day. The next morning, there's the article in the New York Times published in New York. And look at that bloody question mark. Would he or would, does she or doesn't she, is the headline.

Wave or something they used to say. And it's just an evidence of the delicate balance act that it took to get Vanguard going. And what we finally did, I mean, it was really close quotes, tears, not so much laughter, determination, disingenuity on my part. And I just wanted to get it done.

I don't think I'll ever understand exactly why except I'm a competitive person. And like having my own company being taken away from me by people who have caused its failure. So that was fragile. And then we started finally to get business, as you know, on September 26th, I think 24th, 24th of 1974.

And so we just had our 39th anniversary, which was not much recognized. Well, a couple of other publications recognized it. A couple more are still doing it. 39th anniversary. And the beginning, just to give you an idea of what we're confronting, I think this chart is called the fragility of Vanguard.

Yeah. How about that? You know, we lost $108 million. That was a lot of money. We had a billion and a half, 1.4 billion enterprise. Then we lost another $103 billion in liquidations. Then we lost $171 billion. And at the end of the next year, I was so excited.

We had a $33 billion improvement cash out. That's what you got to think when you're down those depths, believe me. And so from that start, trying to get so much done in such a short time, you know this story, but again, the first thing you got to do is realize that you're in a business you don't really want to be in, administering the funds.

I mean, it has to be done right, but you're not going to change the course of the world by being a good shareholder record keeper or a good accountant or a good compliance officer. You're going to change it by the kind of funds you have, by the way you decide to run them, by how you decide to distribute them, how you decide to evaluate them.

And so we had to get to that. And this is, I think, fairly well known. I had to promise the directors in writing, I had a little memo of understanding that I would not get into investment management and I would not get into distribution. And in two years, from the time we started, less than two years, we had gotten into investment management and distribution.

And that's where the disingenuity came in. You know, I said we're going to start an index fund. I want your approval of a new fund called an index fund. You're not allowed to get into investment management. And I said, well, this fund is not managed. Ta-da! And believe it or not, they bought it.

So that was the beginning, the index fund, very important. And the next was, I want to take the fund's no-load, February '77. And it seemed like obvious, we're going to be a low-cost provider and expenses through our mutual structure. We might as well chuck the entire distribution system. They've been supporting us for 50 years.

And it seems like extreme, maybe, it didn't seem extreme to me. I didn't think it would be a problem for us. And we did it. And it was a problem for a couple of days. And we just, late Wednesday night, we're meeting in New York. And on Thursday we announced it to the press and told all the broker-dealers, there will be no commissions as of Thursday.

This is called going cold turkey, which I don't know why I should use that expression because I don't get into that part of the world. So it was bold. You could argue it was risky. But it all worked and had to be done in a short period of time.

And then we had municipal bond fund multi-tier maturity with a huge difference in the bond industry. And tax-managed funds, first of them. And so on. It all came out in the end very well, as you can see. So we have, I guess this is really where I should, sharp chart, do you want to go to the next chart?

Yeah, this is the basis. I shouldn't, I've got these charts a little bit out of order. This is the basis for that FHA article. It's set to be published, I think. And I didn't take all of this into account. But you can see, one reason it's all confusing is that some of the costs are borne by the investor himself.

Don't go through the fund books. Sales loads. I throw in tax inefficiency. That's not total taxes. But the tax inefficiency, extra taxes paid by advisors, by advised funds, actively managed funds. And then investor behavior whose funds are buying too late. So it becomes, that number becomes like, almost 4%.

But I don't take those tax inefficiencies. And investor behavior, no doubt, my overall matrix. I mentioned it in the books. People get the idea. And there you can see the index enhancement after 40 years. It's a 65% increase in the value of your account. It seems unbelievable. That's just the way it is.

And that data will be in there. Although I don't extend it for those last three factors in there. So it's an analytical article. And I think it will be a significant article. But I just hope it gets some attention. Because people are thinking a lot about retirement today. So that's part of the project that I should have mentioned earlier.

Another project, books. What are we saying here? Oh. Well, I don't have anything else to do. Someone asked me to write a forward to their book. So I've written forwards to a book by John Wasik called "Cain's Way to Wealth." And I've been very interested in Cain since my days at Princeton.

Been a very important part of my life. So I was happy to write that. And these people expect about 500 words. And I wrote about 5,000. But that seems to be OK. And then we have a biography of Paul Callum. And actually, it's arguable. It's State Street, in fact.

It was the oldest mutual fund before MIT. Because it started operations earlier than MIT. It's the Best Investors Trust. It got incorporated later. So an informal thing has been given to MIT, the oldest mutual fund, the first mutual fund. But it's a fascinating biography, in which I show how the industry was much closer than when it began.

Much more fiduciary, much more pure than Boston. I'll use the expression. But it is today. And this is also a theme of my big money in Boston speech. It went from being fiduciaries, prudent, puritanical, Boston trustee, to being this great big marketing business. And I describe Vanguard and this big marketing business as being basically, as a book came out a few years ago, called Puritan Boston at Quaker Philadelphia.

And when you think about it, which I did, is that Vanguard is very much a Quaker firm. I don't have to be a Quaker. But it's what's Quakerism about. It's about simplicity. And it's about thrift. And I think we live up to that. So we are bringing the business back to work again, at least I think I hope.

Now, like everything I do, there's probably a little overstatement here, a little hyperbole. But I believe it. And I don't really expect anybody else to, but I think one of us will. So now let's go to, oh my goodness, we have a lot of stuff here. We're not going to talk about PETA yet, right?

Not yet. Okay. We're going to go to some issues that I see facing the industry, and perhaps facing Vanguard, which I call emerging issues. I don't know if you can hear me exactly. Actually, Mr. Bogle, do you want to, we've got this quote from Adam Smith here. We've got the Adam Smith book, "Forecoming the Princeton Review of Adam Smith." Oh, that comes from the, that's Jordan.

Yeah, the Adam Smith book that Richard Hanley was doing. Okay, this is a, well, let me see where we are here. I hate this stuff. And then we'll do the next quote. We're skipping it, Matt. You're great. Let me just take a quick breath here, show a little of the bad stuff, and then throw it.

I hope this kind of informal exposition that I'm giving you is okay. I think, I kind of enjoy the informality. I'm doing a lot of, by the way, when I talk about speeches. I've probably given, in the last year, maybe half a dozen, at least, speeches that I do Q&A.

And they require no preparation. And they're very informal. If you've got a good moderator, and a tough moderator, even like Don Phillips out of Morningstar, really tough, you can have really a good session. So with a good moderator, I think the audience probably likes it better than a formal speech.

But the reason I still stick to a certain amount of formal speeches is I continue to believe the history of this business and the history of this company are important. And so if you give a formal speech, you give it not really, because the speech is an important chapter in one's thinking, or one's life, or the life of one's company.

And so I do that, and I'm disciplined for the historical implications of it. I've gotten to be, and this apparently happens to a lot of people today, antique. A real interest in history. And the history of this industry is really shoddy. There's not very much written about it. And you can find books here and books there.

I've tried to collect as many of them as I can, but there are probably six books, including Michael Young's book on Paul Cabot, that are pretty good insights into how the industry grows. Because I think if you don't know where you've come from, you're just going to be a loser.

You've got to understand where you've come from. If you've got something going for you, when you begin, how do you maintain that at the end? And that's, of course, a huge issue. But in any event, I think this is at the end of Big Money in Boston. And this ties in with what I did, because I asked to do this Adam Smith quote that I mentioned there.

And that's being done by Professor Marquette, being published by Oxford University. And I've written the final chapter called Adam Smith Capitalism. And I really enjoyed it. I did a lot of research. I felt like I was back in Princeton. And really a lot of fun to do, and a lot of research.

And The Wealth of Nations, no matter what anybody tells you, is not an easy read. But I read an awful lot of it over again after all those years. I never read it cover to cover. I don't think we had to do that. But the final quote in that book says something about Vanguard.

It says something about the word world. And it says something about the enduring fundamental principle that comes from Adam Smith in 1776, which is what drives Vanguard. And that's the part that's italicized at the bottom. You read the whole thing. The interest of the producer ought to be catered.

They tend to do only so far as it may be necessary. But promoting that of the consumer, the maxim is so perfectly self-evident, says Adam Smith, that it would be absurd to even attempt to prove it. The interest of the consumer must be the ultimate end of an object of all industry and commerce.

And that's what we are doing, I think. That's what the mutual structure means. And that's why people are going to see this industry change. And they're going to have to either get along or get out. And in the long run, this industry is going to look very different than it does today.

And I'm sure Ned Johnson is going to have his cash cows up there. And he's going to take oodles, hundreds of millions, maybe more, out of the fidelity funds and his other businesses. He has quite a few businesses up there, year after year. But they're going to have to dwindle.

He's going to lose market share. It's just going to happen, whether he likes it or not. There's very little he can do except enjoy the couple hundred million a year. And I suppose that's easy to do. I've never really thought about it too much. I don't need a yacht.

So that is an enduring principle. When you think about it, it's the bottom line, the fundamental principle that Vanguard is based on. So when I discovered that sentence in The Wealth of Nations, and I'd probably seen it before if I didn't make a big note of it, it not only fits into the Adam Smith whole idea that drew across in Quaker Philadelphia, but fits into the whole context of how economies work, how consumerism works.

And if that's what you're facing, then that's going to be very enduring. Now we'll go over to some of these emerging issues. And first is target date funds. You want to go up to 31. So here we are. I don't know why I didn't think about this before, but I have a concern, not really a serious concern, maybe it is, of the fact that target date funds seem to assume that all of your retirement assets are invested in security funds.

And up to that point, they make a certain amount of sense. I mean, nothing is perfect. They're probably better than the alternative for an awful lot of investors. But the reality is that, and I wrote a memo to some of the people at Vanguard, that when you ignore social security, you ignore something very, very important.

And I said I had no idea what percentage of retirement plan target date fund investors are on social security, or have social security available, or will have. And it turns out they know the answer to that. Steve Buck is a very, very good guy we have at Vanguard. I don't know if he's going to speak tonight.

Is he going to be there tonight? He's a really good guy. He runs our retirement something unit, some kind of unit. And he's very good. And he said 85%. They know that 85% of our target date holders are on social security. So just look at what difference it makes.

I took an average investor at age, retiring at age 62, that would be kind of a low ball number, $300,000 value, capitalized value of your social security. And I took a top-earning under social security investor, retiring at 70. And man, is that check, I think the check goes up 50% from the time you're 60 to the time you're 70.

And you get paid 10 years less. It's not necessarily a steal at all. Maybe a bad judgment. Payments are doubled roughly in that period. And that's $575,000. So you think, well, if I've got $575,000 and I put it into a target date fund outside of this, and not a lot of investors are sitting around with $575,000, and I put 100% in stocks, I'm 50% in stocks and 50% in fixed income.

$575,000 in social security and $575,000 in stocks. That probably is not excessive. And I don't know if I have that next elusive chart. Yeah, they really, well, I'll cover that in just one sec. So we really ought to rethink the way we present and the way we maybe warn investors or inform investors.

They have to take social security into account. And I have to say, I'm one who does not feel social security is endangered. We had that legacy forum for me in New York. I was sitting up there with Paul Volcker and Kathleen Hayes, the interviewer, said something about, "Do you worry about social security?" kind of thing.

And I said, "Well, it's a matter of political will. It's a matter of economics." I said, "Paul and I could fix it in 20 minutes, and you just make us sorrows." And Paul looks at me and says, "Couldn't we fix anything?" And I think the answer to that is yes.

There's so much politics surrounding common sense economics. But in any event, that's a big issue that we ought to be thinking about. And then I do wonder a little bit about some of the change. We'll talk about this in terms of some of the new products, so-called major organics.

And that is should international bond be 20 percent of the total of the 40 percent bond? Is that 40 percent bond? No. >> It's about 45. >> Forty-five percent. And so 9 percent of the 45. Is that a good idea or not? And I think we want to be a little careful in this world to stay as close to simplicity and avoid distraction as we can.

You know, I don't know when you're going to talk about this a little bit later. I don't know whether international bonds will be better in the U.S. or not. I don't even know that. But it seems to me that in the bond market in particular, you know, maybe they'll be one percent of your value.

We're talking one value against another out there. And you get one percent more return on X percent of your money. And it just gets long since lost in the shuffle. So is it worth doing a little extra projects, putting a lot of money in a new fund? Or is that an issue that we should be talking about?

An emerging issue perhaps. Then on the same, basically on the same subject, and that is once you retire, I was trying to explain this. So maybe Christine Betts, I think we talked about this this morning. We've got to stop focusing on the level of the stock market. You know, it goes up and it goes down.

What else is to be said? It fluctuates. It's fluctuating since the button would create in the 70s, 85 or something, and it will continue to fluctuate. It's just a great big misleading indicator. And what's important is the income you get. So when you own that Social Security, you're going to get a check every month.

I guess you get a check every month. And mine is big, by the way. And you get an income check. Let's say you have a monthly income. What matters to you is that those two checks amount to, let me say, $2,000 a month. It doesn't matter whether the value of the stock behind that income is going up or down.

It's dividends that are important. And you can see here, what a remarkable record. I mean, this dividend in the S&P, it pretty much goes up without interruption. Sometimes a little slower, sometimes a little faster. We, of course, had the crash in '29, '33. See a big drop there. And the only other significant drop in dividend income since 1929, '33 was in 2008, 2009, or 2007, 2008, when all the financial stocks eliminated their dividend.

So the dividend drops have been pretty big, 20% or so. $28, $21. But look where it is now. It's back to $32. And the banks aren't doing much help to them. This is normal dividend growth that we expect our corporations to produce, because they make good products and services, and they're competitive all over the world.

So it's dividend growth, the amount of the dividends, that we ought to be focusing on. And it's amazing to me how few people are paying a lot of attention to dividends and dividend yields, and how much dividends matter in the long run. This next chart, I guess it's called Dividends Matter, just shows you that if you invested in the stock market all those years ago, at a capital return of $5.72, we're supposed to fix that chart, right?

That's right. When you reinvest the dividends, it's almost half. Say again? Without dividends reinvested, it's $5.72. But if you reinvest dividends all along, it's almost 10% per year. That's right. We were going to put in, don't you remember this? Can't you remember anything? We're going to leave out a dividend reinvestment for the 4/20.

We'll do that tomorrow. Okay, tomorrow. I think if I get votes. So you can see a difference between $132,000 and $4.23 million, which is what he reinvested in. That's a difference, isn't it? And so we shouldn't forget dividends. I think the reason the industry forgets them is that a typical equity fund consumes about 50% or 60% of the yield in investment expenses.

So in a 2% market, the average fund with a 1% expense ratio, it's actually higher than that. It's going to give you a 1% yield. They take 50%, the industry does generally, not a lot of variation until you get to the main part, takes 50% or 60% even of your dividend yield.

With a dividend yield, it's quite obvious the difference between failure and success. People would only focus on this, but you're not going to find your fund manager focusing on it. If you ever convert it to real terms, that is to say, just for the value of the dollar, the result is going to be really quite shocking in the cost of the mutual funds.

You can see it in their income statement. 1% yield on 2.1% market is 2% market. 1% yield is consuming 1% expenses, consuming 50% yield. So I'm just trying to wake up people to these obvious things that are happening, but they're I think self-servingly eliminated in the way the industry does.

I'm going to talk a little bit now about the bond index. I talked about this last year. I'm not going to say too much more, but I'm uncomfortable with the way the bond index is structured. It's 70% government, 76% government and government-related bonds, and the remainder, less than 30%, in corporates where corporate bonds have a higher yield and therefore will do better in the long run than governments.

They always have and they always will just avail a higher yield. And the attrition rate in corporates, the default rate is so small it doesn't really dig much into that. This is a good break point. So I think we should be trying to either get Barclays to put a new index together or think about the weaknesses that's existing in the index, because people need yield out there.

People are dying for yield, and you all know that. And so if you can get a little more yield by being in a corporate bond index fund as part of an overall bond index, or change the bond index, which is something that's not going to happen, you have to be very bold to do that, but I'd say "faint heart" and "one fair lady" or something like that.

You know, sometimes in this life you've got to step up to the plate. And I would say this is one of them. And so I'm looking for these people to get concerned about yields and easy ways to improve yields, at least I think they're easy. And, what number are we looking at, 35?

Yeah, so that's really, I just bring it up again, it's something I keep my eye on. Next issue is a competitor called DFA. I mentioned that Gene Fama is a director and one of the inspirations for the founding of DFA, and he gets all this credit for indexing when he didn't even like it.

They have an interesting firm, they're good people, they charge an awful lot for what they do, and they have proved unable to isolate segments of the market that are persistently undervalued. And they try, but it just doesn't happen. I think it's very counterintuitive to think they've ever done that.

You can look back and see it, but as soon as you can see it backwards, it's not going to happen forward. At least it didn't. So, they're doing very well, they're probably our biggest real competitor in terms of quality, in terms of cost, but still because of their cost, I don't know if I have their cost ratio there, I'll give it to you in a sec, but we still do better than DFA.

When you look at the morning star ratings, these are all in the appendix to Clash of Cultures, the data for the 50 largest funds are there. So, they're a tough competitor. They charge, I think their report expense ratio is .36, which means that they're way above average in terms of returns, but behind Vanguard, I think we were number 2 or 3 and they're number 12 or something.

But their total cost, they report to you, don't include all their costs, and I haven't quite figured all this out yet, I'm not sure anybody has, but investors have to pay 50 basis points to the advisor to get to the DFA. So, instead of 36, it's 86, and that doesn't appear in the data.

So, we continue to maybe give the competition a hard time. Another emerging issue is so-called fundamental indexing. Very valley hood, Rob Arnott does that. I won't let anybody else use the term fundamental, although I use it all the time. He hasn't sued me yet, but he says he's discovered the way, weight stocks by their earnings, dividends, book values, number of employees, whatever he uses, and he has a secret.

Well, you can see there isn't much of a secret there. That Racket 1000 has had an average return of 7.3%, which is about a perfect fit with our mid-cap ETF, because that's what it turns out he's selling, which is really an active managed index fund in Raffey's case. And he has a high correlation with it, probably about 99 of those two together.

And even if you look at it compared to total stock market, our total stock market ETF, he's done about 80 basis points a year better, which is fine, but only at the expense of having a risk level standard deviation volatility of about 20% more. So he's taking more risk, he's getting more return.

What else is new? So he's kind of flogging that, and more power to him, I guess. I just be very careful of anybody who says they've discovered something better than indexing, I guess that's it. Next, I want to talk a little bit about ETFs. We keep getting painted into this box where Vanguard loves ETFs and I hate ETFs.

Well, I guess you could call that an innocent opinion, but it's not true. The Vanguard people who talk to you periodically about all this basically agree with me. For someone who wants to buy and hold an S&P 500 ETF, that's a very good investment. For someone who wants to trade into a triple leveraged, in that case, ETF, that's just crazy.

And they're all ETFs, so it depends on the distinction that you make. And I think the difference between Vanguard and Gold are actually way overdone, and the press likes this kind of stuff. And they say, "I understand you hate ETFs." I've had to develop a response to that. I spent a lifetime trying to avoid hating any inanimate object.

So you get a response and they use it over and over again, so even you get tired of it. So it's a huge part of the business. But look at how they turn over. If they're all long-term investors, how do we get 2,203 turnover for State Street? That's the spider group.

And 5,000, 4,000, 600% turnover in the spider. This is not long-term investing. And Vanguard does very well at 213% turnover ratio. But in our funds, that number is about 12% or 15%. So it's very high for many of our use models. There's a lot of gambling going on here.

That's a line from, what's the movie? - "Casablanca." - "Casablanca." A lot of gambling going on around here. And seeing just the facts, that direction sells these leverage funds. 10,592% turnover. And this is called long-term investing. I mean, someone's pulling somebody's leg here. And the reason is that only about half of the shares of ETFs are held by individuals.

More than half, mostly, are held by financial institutions that are trading. People are speculating, arbitraging, all those funny things. And you can see the numbers there. I guess those are the Vanguard ETFs. 72% of their bond market seems a funny way to do that. People like to be in and out of the market.

Yes, that's what it's doing. And you can see that institutions are a big part of the ETF business. And they're traders. That's all. They're just traders. So then we look at-- Vanguard did a survey of our retail accounts. And this is a kind of interesting thing. I think they probably wish I wasn't such a dog on statistics.

But this table at the left up there is a table-- it's also a report Vanguard did with its own shareholders comparing holders of, say, total stock market index with holders of the ETF index. Very very impressed. And they find out that there's still much more of a long-term bias than there is trading, hands-on trading, or short-term trading.

And the problem I had with that study is, first-- and I didn't realize this until last night. I was talking to a couple of our ETF people. And that is, in the article they wrote, they tried to generalize that ETF holders are long-term by looking at Vanguard holders. And that's just a conceptual mistake.

Everybody knows we're going to have more long-term holders than anybody else. And number two, we've ignored the activities of its compliance. And it turned out that-- I'm not sure of this number, but it turned out that survey we took included 5% of our shareholders. So I don't know what you want to do about a survey that shows decent results that only includes 5% of your shareholders in total.

And maybe 7% or 8%, but it's not important now. And so that gets into another way of looking at the chart. This is the way you want to look at it if you don't like the data. We have a 25% drop in the very same data in long-term holders, and 125% and 140% increase in short-term trading holders.

So I'm not sure that the chart is as good as it is today. And so those are big changes going on. And the ETF is a different business. It's a marketing business. I'm not sure it's bad for us to be in it. It's already been a good marketing opportunity.

And probably is a better way-- going to Vanguard through your ETF is probably a better way than going to anybody else. But I still wonder about the underlying premise of EPS. And I kind of die hard. I have an idea, and I don't give up. Let me just give you a few more.

I do like the informality. I'm afraid some of you just want to stretch together. That's quite the way I want to do it. But we do what we can do. And I feel a little bit this morning like I've often warned, they bring in a lot of shareholders to see me.

And every one of them has wonderful, wonderful ideas and things to share. A lot of adulation, I confess, which is nice. Which is nice. But I always leave with a feeling when they leave, and I think they're saying when they leave my office, my god, there certainly is a lot less to hold both of them against the eye.

I hope that's not the impression I'm leaving with you. But I'm just being who I am, telling it as great as I dare, and having a little fun kind of reviewing where we've been and where we are. Our next slide is going to take us to Vanguard currently. And Vanguard, people have asked us about this, is still being driven by the basic, not only basic ideas, but basic investments we started four years ago.

I use the phrase old friends and good friends. You start to use that phrase a lot when you get older. People that you know, my friends these days at such a mortality rate that I'm the only thing I can think of is, my god, they're now shooting at us.

And so they are, and they haven't hit me yet, but who knows. So you can see that the funds that we've been involved in all along, the new funds, the index funds drive us, the return of Wellington Fund, the recovery of Wellington Fund. I strongly encourage you to read that chapter about what it took to make Wellington Fund recover, taking it back to its roots.

And I feel that's one of the great accomplishments of my career. And also one of the things I owe to my great mentor, Walter Norton. And one doesn't want to forget one's debts to those who bring them along in this world. But you can see that the funds that we had back then, these are just the largest 10.

I guess every one of them was created except for one. Before, back when I was running the company, if you look at all the funds, it's 87% of the funds we have. So we're still on the same track, and the way we're going to go in a minute is even a little bit different.

I have to confess I scratch my head a little bit about the new things that are going on. I don't think I understand global minimum volatility. It sounds pretty good, I guess. But I don't even honestly, I don't even know what it means. And I can't say that I don't think anything fundamentally wrong with the International Bond Index, but I think those assets, it's that big because we put it in our target date fund to leave it to wiser heads to decide whether that's a good idea or not.

If anything goes out of the mainstream, it's going to find Vogel skeptical. And Vogel skepticism, it's going to be right X percent of the time, and it's going to be wrong X percent of the time. If I said I think the right is going to be a much larger number than the wrong percentage, I wouldn't be true to myself.

I didn't own up to that. But you look at some of these things, and some of them make sense. I don't know about managed payout funds. I've always been skeptical of them. Market neutral, I just scratch my head and think, what's that all about? And there are 216 of them out there in the industry.

I think it's 216. And they're all going nowhere. And diversified equity, they may be going nowhere backward. And growth equity is that Turner Fund, the technology fund. We began right at the market high, and it was actually approved the previous year. And I was on the board, and I said, you're not going to tell me that these, I probably said these jaspers are going to do better than the market.

I absolutely didn't look at their past record. I said, of course I looked at their past record. That's what makes me sure they won't be able to do it in the future. But that was the only redeeming thing about growth equity, is there was a technology fund that we didn't call a technology fund.

And that's the moment of redemption. That's the biggest gap between a fund reported returns and investor returns of just about any fund in the entire mutual fund industry. At the time it was atrocious. I don't know if that will be around forever or not, I doubt it. So there's always a question about how long these new funds will last.

But there's no question in my mind about how long the original funds will last. I haven't really followed this very closely, but we're doing a bunch of mergers just announced recently. And I don't really have any comment about that except we should always be looking to see, you know, it's hard to admit when you've done something wrong.

And just to be honest about it, it may be harder for me to admit that I've done something wrong than most people. Or maybe even anybody. And one never likes that. And you can see growth equity, which I just talked about, is now going to go in the U.S.

growth, which in itself had a tragic kind of a record. I guess it's doing a little better now. And the fact of the matter is, I won't spend too much time on this, but well, actually I'll come back to it in a minute. And there's the managed payout funds, which is a question of, I think, what's the point?

Are they going to be a single portfolio? One thing that is going right, and I'm not sure, I have no idea actually whether this is an accident of design, is correlation. When Vanguard started, I talked about what we want here is relative predictability of fund returns. That was the phrase I used in the old days.

We didn't use R-squared, we didn't use correlation. But we wanted funds that didn't get out of line with their peers. And we wanted that because you didn't have to be very smart to realize that if you were more interested in management than marketing, that funds that are very different from their competitors will do much better and then much worse.

That's the version of the main that I documented some length in The Clash of the Cultures. But you can say, what's the matter with that? And in a sense, it's just a way of life, and there's nothing the matter with it. Except, and this is a big exception, that people pour their money into the fund after it does well, and pull their money out when it does badly.

They expect too much. They expect the past to be prologue. And if there's anything we know about this business, it's the past is not prologue. And actually, I would argue we know something even more important than that. And that is the past is kind of anti-prologue. If you've done well in the past, it reverts to the mean in the future.

A very important part of my whole thinking about the markets. But what's happening, and to my surprise, all the index funds, as you can see, have basically 100% correlation with their index. Not very surprising. They're 99. And funds look very much like the index, or are the index, you know, are up in the 90s.

But what I'm looking at here is what is the direction of change for these funds? And this is what I don't know whether it's accident or design, but our funds have gotten much more correlated, much more relative predictability relative to their peers in recent years than earlier. They were very high earlier.

And if you look at the 10-year correlations, that's everything in the last 10 years, obviously. And then compare that with the 3-year correlations. And these very, very high correlations, 97, 95, 93, have all gone up as those arrows. And Wellington Fund may not be an index, a balanced index fund, but its correlation is now at 98 with the market.

I mean, that's too close to observe the difference. And I like that. And that was the whole reason, although I don't think present management likes to do it and be expressed this way. That's the reason I like money manager funds, multi-manager funds. And that is not that you can pick good managers.

How can anybody do that? I couldn't. And I may have set a low bar of entry. But you make mistakes. And no matter how disciplined you are, no matter how much history you know, no matter how skeptical you are about the past, you make mistakes. And if the odds are 50/50, you can pick a manager well, just for the fun of it here.

And if the odds are 1 in 4, you can pick two managers. 1 in 8, you can pick three. 1 in 16, you can pick four. 1 in 32, you can pick five. 1 in 64, you can pick six. And 1 in 128, you can pick seven. And I think we have one fund with seven managers, maybe Windsor too or something.

And so you know that you're going to get an average return compared to your peer group. It's like the large, we're all large numbers. Your peer group is, let's say, seven funds. And you pick seven representative funds to compare yourself with. Those seven, or two, to run your money for you.

Those seven funds are going to almost inevitably have the same return on average as the average seven, as the total seven. So you like that because you win on cost. If we just be average, the more managers, the more average you are. And you win on cost. You win maybe 50 or 60 basis points on expense ratio.

You win probably 30 or 40 basis points on negotiating fees with the manager. Low expense ratio in the economy is the scale of the administrative side. 30 or 40 basis points on negotiating with managers. Maybe hiring long-term managers instead of short-term managers. Say 50 basis points on lower turnover costs.

And finally, you're selling at no load compared to other people who are mostly selling at load, sales load, 1% a year or something like that. And you should win by 1.5% a year at least over a decade. If you do that, your returns beat the competition by 20%. And that's basically what the data show us.

But that is not, as is sometimes alleged, that we are smart manager pickers. It's because the difference is cost. We are average manager pickers. And really, you know, it seems so awful in this world to say we're picking average managers. Or I would even say we want to pick the average managers and win on cost.

But it's the sure way and not the speculative way. So in any event, it's moving in that direction. I'm happy with that. But I don't think it may be delivered. It may not be delivered. And I should say this, going back to Mr. Lovelace, John Lovelace. He has this theory, which is not so different from ours.

He has a very small number of funds, but they just keep adding portfolio counselors, he calls them. That's what I call investment advisors. And so he has somebody running 10% of the portfolio. I think a couple of their portfolios, in fact, have seven or eight. One of them has even 11 portfolio counselors.

He said, "There's no such thing as too big. We just hire another portfolio counselor." Without realizing, when you go from one to 11, you're that much closer to being average overall. But they don't bring the low cost into the situation. And in fact, mysteriously, at the huge size they are now, their portfolio turnover is twice what it was a decade ago.

It was much, much, much smaller. So that cost, the cost of executing transactions in a huge portfolio, are obviously much higher than the other costs. So in any event, I call these funds "virtual index funds," and that gets the people that are running them to community funds. I think someone bothered, so I'll stick with that.

And let's skip that next slide and go to the final section of this. I don't want to take too much time. This is the man in the arena of the new book. And it's edited by Duke Rostad, this fiduciary duty kind of self-appointed guy. He's very active, and he helped to create this legacy today in Wall Street, which is what this thing is based on.

You probably have seen this, the next slide. That was held in Wall Street in January of 2012. He decided to do a transcript of that, and has great people like Gus Sorter and David Swenson. They have some violent disagreements, by the way, in the middle. It's kind of fun to read the disagreements about whether you should-- well, I'll just express them directly.

Gus has a formula of some kind that says how much you should have in index funds and how much you should have in actively managed funds, depending on A, B, or C. David Swenson, who I just heard from the other day, is really a great guy. And so is Gus, by the way.

I don't mean to make any comparisons, but really the top of their games, two of the best that I'll ever meet. And he says, "Nope, all or nothing. Index or don't index. There's nothing in between." So that's a nice little part of this. This new book, again, with the transcripts of those things, including a transcript of the interview with me and Paul Volcker, which I must say is I've never done an interview with Paul Volcker, and probably most of you won't.

You can't imagine what fun it is. I mean, the guy is so fun. He makes me look like sort of a Penny Annie. I've had to tone my game up a little bit. It begins, and I'm not sure exactly how this happened, but New Russ, that one of them, put a lot of things that I've done in the book.

And, I don't know if we have the, can we do the table? Oh, yeah, I'll show you the table of contents in a minute. And it brings with it this great quote from one of many, many, many great quotes from Paul Samuelson. I'll tell you personally, the idea that this giant has spent one minute with his poor little Penny Annie numbers counter, who is having us out, is quite remarkable.

But he has said such generous things about me and about the fund that we, of course, begin to track if he wanted me to re-enroll. But, I'll just go very, very quickly through the contents. Andy Goldman, Princeton, all the speeches that I'll be saying tonight. President Pringle wrote a lovely foreword.

I didn't even see it until I saw the proofs. And then, there's a legacy for us. Chapter one, chapter two is Paul Volcker. Then, we've done some sort of sections around the vanguard vision, part of character counts, part of the time to dance. It's my first billion-dollar speech out of the group.

And, other things I've written over time, including primarily, I think one of my better works, more historically oriented, is Big Money in Boston. It's also going in the JPN Journal of Pavilion Management. But, it had never been in a book before. I like kind of the idea of having these things, things that I've done.

I hope they're worthwhile. I don't know. But, they're protected for a long time, within the covers of a book. Part three is the Index Fund Vision. And, then, Joe Masqueda, Morningstar, wrote the introduction. Although, Joe told me, actually, John Reckenthaler wrote it, which was great. And, I was going to mention at the beginning, I've had kind of this spate, if you want a better word, of publicity in the last three or four months.

I never know where it comes from. It seems like an awful lot. Including, give me a B, give me an O, give me a G. Give me an L, give me an E. It might not do well with me. And, also, that paragraph, I should have mentioned this, that paragraph in Taylor's letter about what investing is all about, in my speech to the money fund.

It turned up, and this is such a funny thing to take pride in, but it appeared in a long article about successful investing in the mutual fund edition of the Wall Street Journal. And, they got all the way to the last paragraph, this long article, at the very bottom.

And, there's this quote that I gave in 1998. And, I couldn't believe it. I took it as a huge honor. I think that's something I'd written 15 years ago. Somebody, God knows where, found it. I don't know how people dig this stuff up, but that was very rewarding to me.

And, John Reckenthaler's later tribute, nothing to do with the interview, with the introduction here, about saying, "My legacy was cemented before the last five years, and it's been cemented even more in the last five years." And, the reason I like that, I mean, they're all very syncretic. Everything depends on the source who's saying it.

And, you can take great compliments as nothing if they come from somebody who doesn't, kind of, basically matter. But, John is a skeptic. He's cynical. He's analytical. He has a sense of history. And, to have him give me this huge accolade in his review of the last five years is really deeply touching to me.

Then, we have Chapter 9 is the, oh, that's the Gary Brinson speech I gave. Pretty comprehensive speech that I gave at Pullman, Washington, to Washington State University, I guess. And then, we include the entire BOGO issue of the Journal of Indexing. Nice definition, I guess. Corporate governance, big part of the book, two chapters.

And, Nell Minow wrote the book. She's a corporate government activist from Washington, D.C. She worked with Bob Bunks for a long time. She's a terrific person and a pretty good writer, too. And then, the vision of service to society is part five. Fiduciary duty, that speech is out there.

No man can serve two masters. And then, I had a little bit of that philanthropy written in my book. Enough, but I built that up a little bit at the editor's request with some new material and my own giving philosophy. And so, then we get all the way to the end, and we get sort of rewards for the vision.

And Alan Roth wrote an article about the BOGO heads. That's where Taylor's comment came from, comments from the BOGO heads I mentioned earlier. And then, we have letters from clients and letters from the main crew members. And then, we have the last, oh, next to the last slide, we have two people who are actually at the Legacy Forum.

We're here today, Alan Roth and Rick Ferry, both big boosters. And here are some of the other contributions in the book that are listed there from the BOGO heads. So, the BOGO heads are an important part of the book, quite naturally. And finally, Jeremy Dunfield, my former associate, one of the great people in my business life.

I wrote the introduction to my communication ability. And then, we have reprinted the, I guess I'd have to say, honestly, star-studded list of people who have written forwards to my books over the years. And starting to run out of forward writers here, guys. But then, even, that's the way the book ends.

And that is the way my remarks this morning end. And now, we'll go to the Q&A. Thank you all very, very much.