I'm going to go back to your meeting to go where Jack and Bill do what I call the Marcian check. There's nothing structured or anything, they can just go wherever it takes them. So, I'll get out of the way and let's hear from Mr. Jack and Bill. I'm going to lead off with a question for you, Jack, which is you gave us your expected asset class returns.

And with stock returns, you have a term in your hand for the mean reversion, which is the way it was set, and I'm familiar with that. And I noticed there was the only mean reversion term in the bond series. I'm going to ask you why. Okay, well, first I can't imagine anybody wants to hear me say anything more.

I'm all set out. But that's a good question. And that is, what's different about the mean reversion in bonds? Well, we have mean reversion in stocks. We have dividend yield, and we have earnings growth. And then we have, what's the 48th mean reversion? It's how much people pay per dollar.

In bonds, if you hold them as investments, not as you hold them in speculation, that doesn't matter. Almost all of the bonds return over time is accounted for by the interest rate bond. It's not 95% where you hold them. You have 100% of the bond returns already in the beginning.

So there is no mean reversion. There would be a mean reversion. For example, it couldn't be. If you have a 30-year bond, from 10 years, it's great. It's going to be higher at all where it lost at least 20 years ago. And I don't know how to predict that.

So my recommendation is I don't like the bond bonds because it fluctuates too much for me. The record is quite clear that the bond bonds pay higher returns in the intermediate and short because we know that there are yields. The bond bonds yield more. And since the only source of return from a bond is its yield, that's what you get at the end of the period.

But there shouldn't be a mean reversion in the short period. If you buy a 10-year bond, then you'll have a 10-year return. More or less is more for me. But if you buy the total bond index bond, can interest rates go from 3.5%, 4% to 10%? Your 10-year return should be lower.

Well, you have two factors. One, if interest rates go up, the price goes down, as we discussed at some point in the lunch and wine. But the return on your reinvestment of those two bonds goes up. And if interest rates go down, the price goes up, but the reinvestment goes down.

They are more or less mostly law-setting factors. So I don't have to complicate things too much when we try and guess what happens in shorter periods, which it can. And then you get this funny timing thing. For example, you buy this 10-year bond, and it's only about 2.4%. But if interest rates go to 10%, the price of that bond will plummet that day, or that week, or that month.

And there's a difference in one half, whether that half's on the first day you want it, or the last day you want it. Now, the bond itself on the last day you want it, it only has one day, two days to maturity. So it changes to a 10% return on the last day of maturity.

So I'm just this merchant of simplicity. And I don't know if you get a 10% interest rate, which is certainly possible. If it happens quickly, you have one hand in a bet. If it happens in the middle of a period, you have another. If it happens at the end of the period, you get a point for another, or not.

I think it's complicated. So I just like to look at it and say, well, make the best judgment you can. I should also say this, that there doesn't seem to be any difference between the two. I'm not really critical of them. If we all need a Treasury bond, or a Treasury bond, or a corporate bond, they have the same type of portfolio.

You have an index bond, an intermediate index bond, and the intermediate index is shipping to us. It's time for money to go out. That doesn't seem to matter, unless we take a look at the actual Treasury bond return for that period, compared to the return on the bond. And the intermediate fund is the intermediate return, compared to the return within, you know, close enough around the portfolio, so to say.

So I think maybe we over-indicate all those elements while we're there. But I don't think we can afford a bet on whether interest rates go up 10% at a certain time, which is pretty painful. Because even if we're right, that amount of time is just too much gas to burn.

In the long run, the odds, the correlation of the day-to-day yield on that intermediate return portfolio, correlation over time, and they're remarkably, I think I've got this chart, is Kevin here? I think we have that chart in the new book, don't we, Kevin? The 191% correlation chart. And it's very, very consistent, in that here's the initial interest rate, and here's the return over the next 10 years, and the lines are like this.

They break out along those. So I think that's the best way to do it. It's interesting. What fascinated me was the chart we had run by decades, and enthusiasm versus non-enthusiasm for stocks. And the one thing that struck me is, as I was coming out, because I went through that bookstore and heard of the illustrator working in Chicago at the intersection of the H and K Concourse, while I was on these phones and heading to the Senate, I could not find one book there that I would call an investing book.

Nothing by you, nothing by Sue Jordan, nothing by Jim Cramer, and the CTO. I don't know if there are any small deliriums. The closest that I could get was one or two of my senior labs books. And what I kept out there, and this is just really anecdotal to me, is a total lack of interest in investing among the general public.

These people came in trusting what we did, and they were interested, and now they're not interested. They shouldn't be selling anything. I find that fairly bullshit. Well, you know, the investment books that sell are those that promise riches, wealth without risk. Peter Lynch's books, I think, sold well. At the time, he was doing very well.

I guess they're probably not doing so well now. And that's a whole other story in and of itself. A good example of something that's got too big to do, I think, a lot of them are surprised. You know when Magellan got $300 billion? It should have been an index fund.

I never should have been saying, "Well, he's right, but it was lost." But they got to market time, and he overhauled that. And they got, like, a 25% cash position, and stocks kept. 114% for the manager going up. And just one more example, hey, you can't put a manager money in a big size.

And they shouldn't try it. They've done all kinds of funny things, and they're always late to do them. He was looking back, putting in an international end much after his work. And so I'm going to turn to a few people. I'll tell you this. I wrote a book there that I did, duh, again, 10 years ago, and put it out again 10 years later.

I mean, most of the books that were written 10 years ago were disasters. And people at the bottom were just, "I don't know if people buy these books. I just hope they don't do what the authors tell them to do." But then what's the point of buying books? I mean, one of my favorite methods of estimating the level of risk premium is your method.

And so those are filling the shelves. You know the risk premiums, what the risk premiums are. And then when you see, you know, what's the type of depression of 2015, how about a real disaster, how about - well, you know the stock. The equity risk premium is fairly high.

The other question I have for you about response - >>Let me just interject one second, though. You mentioned Dow 36,000. Not exactly a brilliant exercise in market forecasting and timing. And so Jim Glassman has written another book, and it's called Dow 10,000. No, I'm kidding. It's not. He has a new theory, and it's called "Margin of Safety." And he wants me to endorse it.

And I shouldn't say to you, because you may have sold, but I did, because I've known you guys for a long time, and I want to be a nice guy. I did endorse Dow 36,000. But I said don't be deceived by the title. We're going to get to 36,000.

But it's going to be a long, long road, and a very bumpy one. So we'll probably get to 36,000. Some of that may be 2050. I don't know. 2035, maybe a year and a half. But I don't think he wants me to endorse this one. I just don't know what I'd do on it.

I think one of the great triumphs of human optimism is that people still use Jim Glassman. A triumph of over-experience. Yeah, I don't know. The triumph that he had, Jack, that fascinated me the most, was the dollar-rated versus time-rated gap for the ETS. And I don't know if you have these data, but what I'd be really interested to know is, are the gaps bigger for the ETS than for the corresponding funds?

If you take those landlord funds that have lower classes, is the gap higher for the ETS than the investor in a lot more cash shares, the old cash shares? That's a very good question. Actually, we looked at it, and I decided not to use the chart. Not because it did not show what you would expect.

It showed loans in stronger hands than the ETF. But rather, we had some struggle with getting the numbers right, that the money goes out of the investor class and into the admiral class. So it will be done, and Kevin and I are going to do some work on that.

But in your intuition, and in this case I think it's usually right, and in this case I think it is right, is the gap. And we've done this earlier. We've said a couple of things about statistical methodology. It showed very clearly the gap was much smaller than the ADAPT, than the ADAPT, than the family index fund, than the ETF.

It didn't get much closer. Sometimes it did almost exactly as well as the investment itself. The regular fund had the same lack of casualties as the other funds. But it's hard to calculate what's going on in ETS, because that daily volume, which is the only way we have of measuring how much money is coming in and going out, it's very hard to do.

If you get a daily volume, if an ETF has, I don't want to say a million shares, we have no way of knowing whether it's a million purchases or a million sales. If it's a million in volume, and somebody may be coming up and picking up, they'll have to equalize someone else to be the market there.

And if it's a million sales, they've got to be taking it in and putting it out. And if it's a million purchases, they've got to be investing it. If there's no difference in the energy in the volume, so we're still struggling with that. But I'm sure - I'm not showing you that chart, but I think that's the best we can do to illustrate this point.

What happens is, like I said this morning, I think it was 270 out of 275 funds, or something like those kind of numbers. And nothing more than that is collaboration. Should the investors in this room be at all worried that their strong hands are being disadvantaged by the weak hands of the ETF class of shares that they own?

Well, in general, I think the answer to that is no. Because those weak hands will give you aberrations in the market. We saw this with particular clarity, maybe too much clarity in the flash crash. But at the end of the day, or at the end of the week at least, you were just as well ahead as if it was a flash crash for you if you held shares to that.

You were just as well over as you were before the crash ever happened. It didn't matter. In the long run, those market imperfections don't matter. You can ignore this. As I've often said, from a tale told by an idiot full of sound and fury, signify nothing. I'm quoting Mr.

Shakespeare on a slightly different subject. On the other hand, there is something that I worry a little bit about. I actually have a piece of data that I decided not to use this morning, but I'll give it to you now. I start to think about what's going on in emerging markets.

Very popular, I think, two of the largest ten marketplaces, the black market I should say, are two of the five or six largest ETFs. Maybe two of them, maybe three, eight largest ETFs. The data, we found that 33% of all emerging market holdings in mutual funds, 33% of their holdings were in ETFs.

ETF investors are traders. That makes me worry. Supposing something happens to a big emerging market. Supposing something happens to China. Supposing something happens to Brazil. And the ETF people decide to get out. There could be a big gap because of the marketplace. In poisoning that market with 33%, that's pretty remarkable.

To be held by self-identified traders, if you will. So the concerns being on the ETFs dominate in terms of holdings in any category. Now still, in the long run, that should not matter. But if the ETFs, I'm sorry, the emerging market funds are held up by mutual fund demand, then when they go, you could make a permanent, permanent emerging market return.

I don't think we could do that. That's one thing I worry about. And I particularly think that we at Vanguard, I should say we at Vanguard, I should be very careful about getting into these speculative funds and maybe focus on trying to, for our ETFs, for example, on the managers that meet certain qualifications, the investment body that meets certain qualifications.

And I've written in one Vanguard piece the other day that apparently it is disqualified to make more than 25 trades in any six-month period. 25 trades in a six-month period? I mean, really? Maybe 25 trades in your life. Maybe 25 trades in your wife and your life together. And the likes of children and grandchildren.

You can go on and on. But it troubles me and it's not good for investment. It's not good for people at all. And as I mentioned this morning, a lot of our worst branded ETFs, the reverse this and that, two times up, two times down, three times up, three times down.

Multiply the effects of the market. And that seemed to be losing market share. And a lot of ETFs that are out of business. I wonder about Wisdom Tree. They aren't doing very well. And they're a publicly held company, so we know how much cash they've got left. It isn't much as accounting.

Didn't they have to raise a little bit? They did raise a little bit, yeah. Josh Jaffa, a mutual fund company that deals only with advisers. I like that idea. You know, I think that if I hear the term "new normal" one more time, I won't be responsible for my actions.

But this concept that emerging markets are what it's at because that's what economic growth is, I think most of you know how I feel about that, which is that there's a converse relationship between economic growth and stock returns. The problem has to do with dilution. And when people talk about returning emerging markets, and the bull market by definition, bubble market by definition, is a market where people only think about return, not risk.

Twice in the past 15 years, the leading index of emerging market stocks has lost about two-thirds of its value. And you can bet that most of the people who are invested in EWO, and I even wonder about the DFA Emerging Markets Value Fund, which has a spectacular record. It is also the LTIA's biggest fund.

It may not also have the same problem. One of the issues, I hope Steve Dunn doesn't get angry at me for this, but I think Steve demonstrated to me the proper response to the flash crash, which was when Jack was talking about it, he leaned over to me and said, "What was the flash crash?" But that was the right response.

I'm not sure that I have that much to add to what you're saying, because we don't have time for questions. Sure. Let's hear some of the big quotes. Let me ask you, how will you sauce up fragile predictions about future returns in the next decade? I think... Don't be scared to disagree, by the way.

I was trying to drown you out, but I'll figure it out. I think in terms of real returns, so I see real programs on a per capita, per share basis. If you look at the shillers data, around a percent and a half of your money, you've got 2% dividend yield, so that's 3.5%.

When I look at bonds, and I wonder about real returns for bonds, I start to tremble, because I think the review shows the best case scenario. I think that 4% return for bonds with 2% inflation on top of that with 2% historical return, I think that's the best case scenario.

I think that in the worst case scenario, we could see real inflation, not even forgetting about that fiscal analysis that we need. We've seen falls in the bond market in the past several decades of 50% on one bond. I worry about that risk. My default bond position is a very short treasury investment a year, which has an expected return of -1.5%.

I think that's acceptable, because I don't think it's going to be -1.5% for very long. I'm very afraid of taking the risk of a spectacularly long negative return if you buy bonds of the duration. Yes, you may wind up with a nominal 4% return if you hold a bond for 10 years, but if inflation is averaging 6% or 8% or 9% over that period of time, you're not going to be happy with that duration.

I think that's the role of maturity. I don't see any other consequences that would fall too far outside of that. Let me say a couple of things about real returns. First, the reason we use 2%, essentially, is that's what the spread between the inflation hedge 10-year bond and the regular 10-year bond is.

The standard market is called 2% inflation. I'm very clear on the bill, and I think it's going to be higher than that. How much higher, I don't have a way of knowing. Of course, there's always this possibility of some kind of a really bad economic situation that might only be 1%.

Who really knows? In compression, we get negative CPIs for years, for four or five years. So, don't take the 2% as a "fate." One reason I know I haven't spent a lot of time, I haven't spent a fair amount of time, but not a lot, on looking at real returns as compared to nominal returns, is that real returns take the same amount of all the bonds.

Returns on the 4% stocks and the bonds take the same amount of all both. 3% bonds will return 3% less than the nominal returns. Stocks will return 3% less than the nominal returns. So, you're not muddying the water too much by using nominal returns, except to say that once you get-- I don't know if you think about this, but I think I wrote about this in a little bit of nonsense investing.

And that is, when you start taking these numbers down in real terms, then expenses really have an impact. You can take 2.5% out of 7, and I think we were using 2% inflation that way. All of a sudden, let's just say a third of the return is consumed by inflation.

You take that 5, and half of the return is consumed by cost. We used to have this inflation before. I mean, it cost half of it. And, you know, if you think about half of the cost, you take 2% out of 7, and that gives you 5. Take 2.5% out of 5, that's 2.5.

That's 100% of the return you got. We can put that in a different way. And it just becomes just overpowering. I guess if I was smart or a marketing kind of person, I would always use real. Because the impact of the cost just is magnified and magnified and magnified over and over again.

Obviously, the number of the denominator, I guess, much bigger than us is the second grade. The lower the denominator, the bigger the impact that will seem. And then taxes, again, you can do it with the charts. Taxes are murdered. If you're named taxes, not on 7% return, but you might get a 7% return from the usual fund.

You get a 5, 4.5% return. Taxes on that 4.5% are going to be at least 1%. And that's one more big deduction. It changes the expenses from 2.5% to 3.5%. So it's probably a pretty good idea to spend more time on real returns than on non-real returns. But I hate to scare people.

I know I do a whole marketing thing anyway, still. And we shouldn't scare people. And just make them think through it, worry how much they'll have when they actually do retire. It's always bothered me, using implied-- taking implied inflation as the difference between over a given period, the difference between the 20-year-old, 30-year-old, and the 10-year-old.

And I've never really figured out why that bothered me. It's probably because I read a couple of articles, and one of which might not have been a desk asker, but now it's important to me. And basically, this theory-- I think it's correct-- is that there's an implied liquidity premium in the TIPS yield.

So in other words, the TIPS yield, let's say, is 1.4% at the long end right now. But that's really higher than it should be, because it has to be higher because of the liquidity problems and the liquidity shocks that you can have, which we certainly saw during the crisis.

And during the crisis, long-term inflation was short in value, and the long-TIPS-- I think the long-TIPS fell by something like 20% or 25%. So it's a liquidity premium. That number is higher than it should be, which means that it unresonates inflation when it's tracking lower number than the higher number.

If the lower number is bigger than it should be, then high inflation is really where it's falling to. This implies 2% inflation. I think that what we're looking at probably implies at least 30% inflation. So I agree with you that 2% is probably an underestimate. What we also-- you might want to comment on this.

How accurate is that inflation number? How accurate is the TIPS? It depends on what you're paying for. If you're paying for computers or you're buying long-distance service, that's a pretty good number. If you're buying health care, lots of luck. If you're buying health insurance, lots of luck. The-- I do have my new book.

I know I do, but I can remember the number, though. I commented that we made some substantial adjustments to the CPI in, I think, 1982. And we had made those adjustments. The CPI of that period was not 3% a year, but 8% a year, something like that. And so we're, again, the victim of numbers, which is what this book is all about.

It's been a reliable-- say, oh, inflation at 20. You don't remember what you're spending your money on. And it all depends on-- a lot of it depends on politics. And I heard on the radio the other day that Social Security is going to have no ECOA this year. If there's any inflation by any measure, well, that's probably long overdue.

We just have to fix that system. And ECOA is part of it. And this is not the stuff I'm happy about. It's my own personal inflation. But it is sort of new news. But that's also how my health care costs go. Bill. I got a question for not only Jack and Bill, but the gentleman who was a savings plan.

But he also wants to comment. I have always felt that, in fact, when I was writing early on, back in December of 1999, when everyone was in love with the 401(k) plan, I had a little bit of a problem that the 401(k) plan was going to be at the bottom of the likes of which this country has never seen.

And last year, Time magazine had a cover story saying it's time to retire the 401(k) plan, retire the 401(k) plan. I've always felt that it's ludicrous to think that the average intelligent person can save enough money and invest it wisely and then withdraw it in an intelligent manner over a 60- to 70-year period.

It's just asking too much. It's not that they aren't smart, intelligent people. But it's just a thought in the past. My question is, how close are we to a system where it may be more like Chili's or something, where a person is kind of forced to say that it's a combination of time contribution, combined with a private defined benefit plan, where somebody saves enough money, and then they put it into a single premium inflation-adjusted annuity, where they're kind of forced to do that so that they're focused not on how much emerging markets they have, but how much they're saving and how that equates to withdrawing 30, 40, 50 years down the road?

Let me tackle that one first. First of all, Bill, you probably couldn't have said it better yourself. I mean, I agree with everything you said. Our 401(k) systems at the moment, the shift from defined benefit to defined contribution is a social experiment that has failed catastrophically. My basic concept is the less autonomy you give people, the better.

The more choice you give them, the worse things you want it to be for them. So sure, force them to do all those things. But why not put the money into an independently run pension plan that is perfectly transparent, that doesn't even give them the option of amortizing it, and it is amortized?

Exactly. I don't get along with that. I'm all for physical channels. And I personally think that a lot of people have signed up for the hard-to-get, most pension credit, which is low-cost. So that's how they get people to say, OK, I feel like it's every day that people are coming to the bank.

Tell me how much I need to save. I'll do it. And there's so many others. There's a gazillion other moving parts. And nobody got people thinking about, well, how much time are you putting into emerging markets and this and that. It's like, that's the last thing you need to be worried about.

The thing you need to be worried about is what our grandfathers and grandmothers worried about. And that's the only safe way to understand it. And I think the ICAs will remove all the ideas, too, right? I don't think the ICA likes anything. Let me say something about 401(k) and And that is, think about what it is and how discouraging it, therefore, is.

One, you're going to borrow money from it. Two, when you change jobs-- and maybe when you don't change jobs, you can just take all your money out and do whatever you want. Three, you don't have to make a contribution and go out for your company and cut back your contributions or eliminate them whenever they want.

And they do that. They do that to a significant extent. Five, I guess, you really get no guidance, no significant guidance from the companies. I helped the companies a long time ago. When I first got into the 401(k), I guess it would have been in the late '70s or early '80s when they started.

It seemed like a national market for them, where actually, they're not being much more complicated than I thought. That never bothered me. And it seemed like the ideal way. The index fund, low cost, old forever, right up our alley. And it turned out that people wanted the general fund, the most popular 401(k) choice.

And you give investors their choices. That's what they do. And now it's World Fund of America. And I guess index is maybe third, something like that. And the most popular one's not so bad. There's too much junk running around there. All those flaws, how can it possibly lead to a comfortable retirement?

First, the answer is, look, the data doesn't. The average accumulation in 401(k) is-- I mean, I can't remember the exact number-- somewhere between $34,000 and $54,000 will have a great retirement. Imagine your friendly neighborhood mutual fund delivering 1% annual expenses out of these conditions. So if you've got $54,000, you've got $540 a year.

Right. You have to indulge them when you get a dent in your fender. Think about that. And so the way to improve it is to eliminate the flaws. It's actually, believe it or not, not that far from what President Bush, who never returns the idea of privatizing Social Security into a new reform firm proposal.

But it's basically a personal retirement plan, privatized. So you have your own account. You can't take away from it. You're not depending on somebody else telling you what the cost of living is, how much the payout's going to be, and all that. And you have your own plan, pension plan, or a property sharing plan, or a contribution plan, or a defined-value plan.

Without all the flaws. And then we have to make sure that-- I like to leave it at the private enterprise. Because I've often said we need some sort of a government board to give you sealed approval or eligibility to have your shares. You can tell me how to do it.

I'm a mutual fund manager. I've got these shares to my plate. And if you don't have a low cost, forget it. And if you're going to have high turnover, forget it. And if you've got a big sales book, forget it. Those kind of things aren't acceptable. So you've got to keep them in a sort of disciplinary thing.

But only because it is. And no one flaws consistently. What do we know about all these millions and millions, tens of millions, probably 50 million people, or whatever the number is, who have defined contribution plans? And that is, if we leave them to their own devices, say we're getting a marked return, a less astonishing cost, I mean, they can't hold you to the market, right?

Seems unlikely. And they really can't hold you to the market, as we were saying earlier. It's very hard to fail. And so it's an average return, a huge cost. And so that's just quite unacceptable. So you have to have some, I think, agency of some kind. Maybe it's a new consumer finance agency.

I don't know. But say, use the standards for getting in. And then let people compete. Have less service and less price. But without all the rigidities of free food, the exercise of free will. And that doesn't make you popular. But we all know what the facts are. And that doesn't mean that you can go very well.

No, there's only more choices you have. And like I said, the more decisions you have, the more flexibility you have, the more likely it is you will end up with not only an accurate plan. My favorite factoid for 401(k)s is similar to your observation, which is the last I saw sorority associates dating, you know, if you look at people pre-retirement in '60 to '64, the median -- excuse me, the average 401(k) balance was about $70,000.

But the median was about $25,000. The average cost, out-of-pocket cost for health care, for the average Medicare recipient from age 65 to demise, was $4 million. Basically, I agree with Bill, too, but I would say something about -- and we may do a little interpretation, but I'm not going to certainly say you shouldn't worry about real returns.

You shouldn't worry -- that's the only thing you should worry about. When you get right down, it's a question of whether you present them integrally to the equation and inside, or where you get to, you know, figuring it out, or you show what the nominal returns are, what you're all accustomed to, and then take them out there.

You both end up with real returns. And so I haven't thought quite the same way as he did. But it's a very, very problematic kind of thing, to wake an investor up to the risk of having how much money they have by the time they retire. It's just something that's not going to go away.

And in a way, the results are so discouraging. If you look at returns, that's one thing I don't like about money. I love simulations. Well, there are many things I don't like about money. I love simulations. They may take returns out. But just to give you a chart, as if the market is some kind of actuarial table, it isn't an actuarial table.

And in terms of the correlation between inflation and stocks, I can say two things pretty much by vote. One, there is almost no correlation between inflation and stock prices. Stock prices do whatever they want to. And if you want to find a correlation, look it over every 25-year period, you might get a decent correlation.

That's not really what correlation is about. The inflation number looks like this, and the stock return number looks like this. And if you measure that correlation like that, you probably get about 0.20 or something. There is, or at least was, I haven't done this carefully, but I'm going to do this again.

And the total dividends in the S&P 500, dividends, compared to inflation, had, for a long period of time, had a correlation. That is, they both moved up gradually, without a lot of aberrations, and without a lot of downs. I don't know if you noticed when I mentioned this morning the big decline in dividends in 2008.

But those lines look very much alike. It's a high correlation between corporate dividends, or was at least a high correlation, between corporate dividends, called S&P dividends, and the CPI. But virtually no correlation. You can just check that correlation, because you can get it back. And, you can see this.

Because, you know, we didn't get a 57% decline in the cost of living when the market dropped 57%. Nor did we get a 50% decline when the market dropped 50% back in 1973, '74. It was in late '72, '74. So, I don't have any movement for correlation, but we really can't find it.

We've talked about stock prices, which in the short term are so heavily driven by promotion and speculative return. But in the long run, as I said this morning, it's a crystal clear, that stock returns are driven by the productivity, dividend, power, and earnings growth. And I just have that.

- There's just one other comment, which was, if you remember back in the early 1980s, the mid-1970s, people were turning their stocks because they were only yielding 6%. But that was a 6% yield yield. So, it's just not having the tips. The yield is 6%, not always good, but say it as it comes out.

- Actually, I just made my, you're talking about stocks with dividends. Isn't it, I didn't think all stocks paid dividends. It's a beginner question here, but I know there's lots of stocks that don't pay dividends, so you're accounting for that somehow. - Well, most stocks don't pay dividends. And when you take the S&P, the total stock market, you just take the aggregate dividends paid by all the companies.

And I would guess that probably 20% corporations do not. Most of them are gonna be on NASDAQ, not listed. Most of them are gonna have short histories, very long histories. And in the long run, you know, be very clear on this. The value of a stock is a discounted value of its future cash flow.

There's no way around that. And the only cash flow you get from the stock is its dividend. Years ago, a company came along, kind of a growth company in the market business, I'll say the name, you probably know it, you've never heard of it, but it's long gone. And they were on the cover of Time magazine, and they promised never to pay a dividend.

We will never pay a dividend, this is considered a big selling point. Because they had, you know, they wanted to open a new store, that's what they were going at. And before they even had a chance to rethink, they were out of business, and the place was full. Does anybody remember P.J.

Forbett? - Yeah. - Yeah. - Where is it now? I haven't seen him around in a while. It's bankrupt. So, dividends are an important sign of management's ability to spend cash. And I would argue, and I've been used to those points, I think managers, corporate managers, are very bad users of cash flow.

They merge, they start new businesses, they start new product lines, and they seem to invariably fail. And sometimes, for, let's give you this little example, sometimes, because of the messed up nature of them, I don't want to use that word, of our financial selection investment system. And one example that comes to mind are the beleaguered MBIA, municipal bond insurance, and financial, as I say, it's a bulkhead.

Financial security bonds and insurance bonds. And, of course, Wall Street wanted them to grow 10% a year. As a manager, you could grow 10% a year, or 110. So, there were no more municipal bonds to insure. They insured them all. So they were helping the growth of the mutual fund, of the municipal bond market.

And that maybe has a one or two percent growth rate. Not good enough. We'll have to find something else to insure. I've got an idea. Let's insure collateralized debt obligations. (audience laughing) Right? And so they did. And where are they now? I think they're technically bankrupt, except those municipal bonds are such a long tail.

And then there's now a lot of litigation going on. I don't want to get into this over my death, but you can say that if you wish. But they separated MBIA into two things. The CDO portfolio and the muni portfolio. And now they've got litigation from bondholders. They've got one portfolio, they've got a portfolio, they didn't want.

They tarred out the bank portfolio, and they've got an interest in that. I'm not sure exactly how it worked. It's been a good part. So now I think mergers are done for the corporate ego. Corporate building complex. And I've got to be a builder. I've got to do it.

Imagine a corporate executive who comes in and the CEO comes in and says, "Good morning. "Everything looks pretty fine to me. "I don't think we need to do anything." You know, probably 80% of the time, that's what he should say, but he can't. He's got to improve on his predecessor.

He's got to prove himself to the board. And that means doing something. And then you say, "Well, I'm not going to do anything." And it works. They're saying, "What do we need you for?" So it's just, "I'm not kidding, really, about this." And then you start to play accounting games.

Make insurance, well, you know, all this. And why do you count something at all? And I've gotten into more trouble about all this stuff. I mean, they're not quite as bad as the rating, but that's a pretty low bar, isn't it? You rarely on the court use the cash.

- I really don't. I can't think of one law or promotion that hasn't been used before now. It is the one for you. And let's start from the first principles, all right? The economy grows or productivity grows at 2%. That's one of the constants of capitalism in the development of the economy.

Okay, 2% growth. China shouldn't, but we're going to do 5% or 6% or 7% or 8% because you're catching up in technology. If you're at the leading edge, 2% is as good as it gets in the first issue. We get another percent in this country for inflation. So, okay, we're at 3% when things are really, people will all know in the long term.

That's not what you see when you want to share a stock. A stock's value is shared for more than 2%. So it's 2% more shares every year. So that per share that you give only grows at a percent or a percent and a half. Now, what CEO, chairman of the board, is going to go before his shareholders and say, "I'm going to grow our earnings on a per share basis of a percent and a half every year.

Don't you just love me?" All right, well, he's got to grow 10%, 15%. And to get 10%, 15% early, you start really doing the wrong things and losing it. The best example that I can think of-- I mean, there's all sorts of data in finance literature you don't want to know about-- that basically says that corporations have to fund their projects externally.

In other words, that's the bottom of the bank, the bond-holding public, bond-buying public, that they tend to do pretty well. But when they take the capital internally, it's not subject to the discipline of the bank. They take it from their cash flow or their cash pad. But these projects do very, very poorly because they're not subject to the same discipline.

Finally, the best example that I can think of is we now have a 30-year, a 40-year track record, almost, on real estate investment trusts. On real estate investment trusts. And the return on rates over the past 40 years, if I've got my facts straight, are about a percent or a percent and a half higher than the overall market.

Why? Because rates have to distribute out 90% of their earnings to the public, to the shareholders. All right? And then the shareholders get to decide how to deploy that capital and not the company. And that's why they do better. - Let me add to that. I've seen this happen.

I was a director of a very large paper company now gone. And it was fun. It was a Fortune 500 company. It was a Fortune 200 company, actually. And so I saw this happening. And when I finally concluded, after a long period of experience in New York, and it took me a long time to learn what it was all about and learn how to behave as a corporate director, it was not really my style.

But it was a fun learning experience that I kind of got a hold of things. One, investment factors. Wall Street is always wanting to do a deal. This will not surprise anyone. So they come to the head of the company and say, "Well, I've got a company for you." And they give you all this paper, right?

All this paper. And so you look at all the numbers for the deal, and they don't look very good. So the problem, one, is there are wheelers and dealers that are willing by getting companies to take over other companies' investment value. And then there's waiting companies to do something not because it will increase their growth, but because when they put the two companies together, they will get synergies.

So it might be hundreds of millions of dollars a year for synergies, without which the numbers won't work. And you say, "This will be non-pollutive, maybe even accretive." Then the world believes you if you bring out all these numbers. But the accretion is because of these synergies, you get hundreds of millions of dollars.

And then the deal is done, and we wait for the synergies to come in. And they don't announce themselves. Like Santa Claus on Christmas Eve coming in with a sleigh and 820 reindeer. You know, it's a kind of day-by-day thing, and other things happen. And the synergies, as far as I can see, never happen in any way like the way they were projected to happen.

So those two things could be odds on any kind of merger. They could make the odds very long before. As I said this morning, 62%, 65% of these kind of acquisitions and accommodations fail. That's all in terms. It's also advising people to do something. Because there are limits, as Bill says, limits on what you can earn on capitalism, competitive markets.

This is capitalism. That's a harsh, unforgiving market. And corporations, shoemakers will stick to their legs. It used to be said, back in the days when there were shoemakers, in Italy, I guess, that these corporations think they can do all things for all people. I just don't think you can do that.

I think it's one of the great mysteries of investing in capitalism is why sophisticated, long-term investors can realize that. Although, what's it going to do for the economy? What are the companies that are going to grow? Smart people just buy a company that sticks to its name and gives you a less competitive path to help you get it done, and you get it decided to help you get it done.

You know, one thing I think you've omitted of involving internal development in the economy is that it's a lot easier to buy a company, to emerge, and then come close. And they tend to get down the sheet and there's various kinds of fooling methods, but it's a good thing I've been around for a long time.

On the other hand, if you're not sticking to your name but trying to diversify, it's hard to start a business. You need to create new areas. And that's why, I think, it's easy. It's a good thing to also have a point of capital. Hi, I just want to read a line from one of these companies.

By the way, Peter Lynch calls this thing "diversification." Do you remember Peter Lynch's book? It's a company that's very good at one thing, but not very good at another thing, and they do worse at mine. And the last company, in my opinion, to do this is Google. I don't know how many of you caught the story that Google is getting into power transmission business.

They are teaming up with a company called Atlantic Link Connection, and they're spending roughly $5 billion to create the Eastern Bergen Gulf and the East Coast because they decided that they wanted to be good to the-- not good to the economy, but good to the environment. And so they've got a company that, if they got all this cash on hand, in my opinion, they should be paying it out in the form of a dividend, but they're not ready to do that yet, so they're diversifying now.

This is just the end. They're also in another business. You may have read something about it in the last few days, and that is they have a car that drives perfectly well without a driver. And where that leaves all of us, I'm not sure. But it's parading around out there.

They have somebody sitting in it just in case. But Atlantic Link-- - They're also coming up with their own inflation index, too. - Yeah, I'm sure. - Well, I think it's time to wrap up. That's got to go. And we want to get to the book signs, the next book sign before it does.

So I thank you all, and we'll turn the book on. - Thank you again for all the attention you've given me today. I don't think it's perfect, but we'll get it done. We won't go without your dad for another hour and a half, that's fine. It's not as good a book.

But let me say a couple things. We've got my new book out there, just 10 copies of the first 150 copies or so that we have. And as Mel said, I can only do a signature. There's just too many people that are going to message to everybody. But I only want a signature.

I'm going to have to wait it out and do that. And then, if we have a limited number of copies, we're going to ask you people who have copies here, if only you'd take one for the family. So I feel bad for you about that. You might have to teach how to do that.

It's your own book. But the copy will be $18.95. It's the last of us. And if you get one for free, that's only going to judge the prices. It's $9.50. So thank you again. I'm sorry I can't do with you. So thanks, and let's go sign the book.