A number of years ago, Jack Eisgott, he and Bill Bernstein could do an informal chat as part of the agenda. We all know what Jack wants, Jack gets. So it's become a regular part of our conference agenda ever since. It's now affectionately known as the Fireside Chat. Jack is here, but Jack's companion for the Fireside Chat is a retired neurologist.

He's written a number of best-selling titles on both finance and economics history. He holds both a Ph.D. in chemistry and an M.D. Please welcome one of the smartest guys I know, Bill Bernstein. Well, you know, before we start, you know, Steve Dunn told this lovely story. I'm going to tell a little bit of a story out of this, out of school, because it had to do with a lunch I had with a representative from another large passively-based mutual fund company that has, I think it's no secret, a succession problem.

This company has excellent management, this management has no succession issues at all. They have a very deep bench in that regard. But their problem is ownership. They've got two owners, and the owners want to get their, justifiably, their just deserts out of it. And there's, in their eyes, really only two ways to do this.

One is to have an initial public offering, which would be bad news. And then the other solution would be to sell to a larger financial corporate entity, which would be even worse news. And so I've suggested to them multiple times that they Vanderbiltize, which is basically to sell themselves to their shareholders, so that after ten years or so, they wind up being owned by their shareholders, like Vanderbilt does.

And they looked at me and said, "Well, Jack Bogle did this, how much did he charge?" And I said, "Zero. Gave it away for free." And they said, "Well, why would he do that?" And you have to know me, I tend to blurt things out. I said, "Well, because he's a Mitch." So, you know, of course they're not going to listen to me.

But I thought I'd, excuse me, start off, Jack, and ask you about your personal feelings about the recent Nobel Prize laureates. I'm not going to ask you about Hanson, because he's kind of a mechanic. And so I'll ask you about what you think the legacy of Schiller and Thomin is, what you've learned from them, where you disagreed from them, and, you know, their work is not entirely consistent with each other.

>> To say the least. >> Yeah. And so I'd like your opinion on that, too. >> Well, I talked a little bit about this, I think, before you got here, Bill, but let me just kind of reiterate what I think. One is, I don't see how efficient markets can even be a hypothesis, because it's sometimes right and sometimes wrong.

A hypothesis does not have a whole lot of Swiss cheese in it. And the, I think the one place that both Schiller and Thomin agree is that in the long run the markets are a lot more efficient than they are in the short run, and I would totally endorse that.

But the data are crystal clear that they tend to move toward, if you want to call it an equilibrium, I don't want to use too high-powered, highfalutin phrases, because that's just not my style and not my preference, but it's, efficient markets, however, have nothing to do, zero, nada, with my creation of the index funds.

I never heard of Thomin then, as you all know, and I didn't believe in efficient markets, and I spent a lot of time in my books saying, you know, there is the quantitative school, guys out of Wells Fargo were very good, and they rented some money for us for a while, it didn't work that well for about 15 years, and then it didn't work out any more, other than the sort of asset allocation stuff.

They're all quants deeply into trying to prove the market is efficient. The Sansonite well-known pension plan, it was the first pension account to do this, and it failed, because they picked the wrong index. I take some pride in the fact that they finally picked the right index after Payne-Garden 500 came out.

I don't think they were necessarily following it, they needed a good index, and they picked the bad one. So, the efficient markets have never had anything to do with my idea. My idea was that, this is, I've mentioned it before and I'll mention it again, is all you need is the CNH, which is the Consistent Cost Matters Hypothesis, and that is true under any momentary time period or any internal time period.

And that is the less cost you pay, the more your share of the market returns goes up, whether the market is efficient or inefficient, long-term, short-term, whatever it is. So, I think efficient markets is overrated, but not as bad as Shiller says, has done more damage to economic thinking than any idea in the history of economic thought, or some understatement like that.

He really did say that in one of his books. So they disagree, and I think it's kind of interesting, and in a way I like it when they award the Nobel Prize to two people who think exactly the opposite of one another. As to Bob Shiller, he's very creative, very smart.

I like the idea of an ease of the 15-year moving earnings target to calculate the PE. It's a long way from perfect, but it's probably better than using the last year or the next year pumped up with expectations, and so, and he's a good thinker. He has some very complicated ideas, which I think are oversimplified.

For example, he wants to create a whole bunch of new financial instruments to protect us from problems of our home mortgages and that kind of thing. And the problem with any aggregator of any kind of asset class, or whatever you want to call it, or any kind of derivative, is they cost money.

The system takes money out. So it works less well for investors in the group that does when it's on paper, because they don't count, they do the pricing, they don't count the intermediary share. So are they both worthy of the Nobel Prize? I would have no idea, but heck, the Nobel Prize Committee has been all over this, and they decide they are.

So I salute them, but that doesn't mean I have to follow every word that they have. And I am, this will really surprise you, totally un-intimidated by the idea of taking them both on a little bit, which I did in that Wall Street Journal letter, which may or may not ever get published.

And it's such a good letter, Emily hated it, Michael hated it, and the more they hated it, the more I wanted it. I mean, I did try to adjust to what they said a little bit, kind of smack in the face sort of thing. But anything that gets us thinking about these issues, and particularly issues, I mean, I've always spent a lot of time on issues that are opposed to what I say, I think it's much more valuable.

And by the way, what an honor it is for me to be with this guy, right off the hospital bed. Now you're making me look like a piper. I hate that. And so, anything that makes you think, you know, maybe I'm wrong, and I have been known to think that for a moment or two.

So you try and learn, you try and keep up with the academic journals, and I can say this about what Taylor mentioned, his citation for the journal, news story, and op-ed on Monday, the efficient markets had nothing to do with my creation of the index fund. But it's worthwhile to look at that hypothesis, to challenge it, and I'm pretty good at that, but I just want to add that there was an article from a Nobel Prize winner that in fact did inspire my creation of the first index fund, and that would be Paul Samuelson's article in the first edition of the Journal of Portfolio Management, called "Challenge to Judgment".

And Paul Samuelson, and he's in my group, he doesn't get into what efficient markets are, he says, "Show me the root evidence that managers can win." And no one ever showed him any root evidence that managers can win, and they haven't shown him yet. So he and I were, he's the inspiration for me, not Gene Plomkin.

So I said that to the Wall Street Journal, and Paul's, if someone like Paul Samuelson turns out to be one of the nicest guys you'll ever meet, he's just so brilliant, it's an embarrassment to be in the same room with him, but I get over it. And he's a very, in a lot of ways, a humble guy, not, I mean, like academics, he maybe has a touch of arrogance, but I know a particular person who's not an academic who has a touch of arrogance too.

I'm not gonna identify him. He's right in front of me, and I'm not talking about Bill. So I think he should get his credit, 'cause it really did help me sell the IDD index fund to the board. I'd done all the data myself, and then, you know, line by line, calculator by calculator, in 1975, before, that was the first thing I did, was bring that index fund to the board of directors, after Vanguard started in May, and it was on their desk by, I think, September, August or September, and they didn't know what to do about it, you know, it had, it was being managed, but not actively managed, and that was a hurdle.

The data was a hurdle, but when you have Paul Samuelson, you've got a pretty potent weapon. I mean, it shows you're not nuts, it may be all it shows, but that was enough. Yeah, I'm gonna do two very fast observations, and then I'll segue into another question. The first observation is that when I fall face-first into my mashed potatoes, I will not want for lack of medical attention in this audience.

The second is more serious, that, you know, I think Schiller is one of the most brilliant, he has a peculiar intellect, a peculiar personality, that makes, that gives him his brilliant intellect, I think. It's sort of a very dissociated way of looking at the world, and he's one of the few people whose macroeconomic analyses and financial terms I listen to, because he's so rational, he's so divorced from popular thinking, but a lot of the ideas that he has are truly bad ideas, and one of the ones is the one that Jack just mentioned, which is derivatizing housing markets, you know, theoretically they can be used to hedge, wonderful, so can most other derivatives be used to hedge, but you know that's not what they're going to be used for.

You know they're going to be used to destabilize the system, and not to stabilize it, they're going to be used for speculating. With that said, I want to come up with something, talk about something else that Gene Fonda has said, which gets him off the reservation, at least, but I think it's extremely important, which is that one thing I think we've learned over the past several years, and we didn't know it already, is how important banks are, alright?

You know, first there's police stations and courts, then there's banks, then there's hospitals, because if you don't have banks, there aren't hospitals, and we have an unstable banking system, and one of Gene Fonda's ideas, Jack, is that about a quarter of bank capitalization should be equity, alright? Equity can be loaned, it's not going to be idle money sitting there, it's money that can earn a profit for the owners, and it's kind of a naive idea, but at the same time, it has a certain appeal and also a certain support within some of the more serious members of the banking industry, so I want to know what you think about our banking structure in general, and also what you think about Professor Obama's suggestion.

Okay, well, on the banking system, I even go beyond that, Bill, and say, you know, what's happening to the world of capitalism, and I think the most worrisome trend is growing concentration everywhere, larger and larger, and the banks say, I mean, listen to Jamie Dimon, listen to anybody else in the banking area, we have to be large because our clients are so large, our customers, the borrowers, and the lenders are so large, we have to be able to accommodate them, and that is true, so I don't know how to get out of this mess, but to have the concentration of our banking system is in fact larger, I think the top five banks have over 50% of the deposits of all banks now, and it's probably 40% of what happens with these little banks and smaller banks, not little banks at all, smaller banks, they merge into a big one, and that concentration gets worse and worse, and every corporate merger makes the clients get bigger and bigger and demanding of more and more big banking services, and in the long run, we get a whole system of oligopoly, I'm troubled by the fact it's also happening, as I've said before, in the mutual fund industry, where the top five firms have almost 50% of the assets, and they're all index firms, you know, you like diversity in capitalism, corporate America, diversity, I'm not talking about all this gender stuff, just in terms of the number of participants in the system, the greater number of participants in the market system, the more you're likely to get efficient markets, and it's all dwindling and getting larger and larger, I don't know what to do about that, it's well known, I haven't done any research on this, but I will get into it one day, thanks Michael, be ready, but the number of stocks that we used to have, the Wilshire 5000, and it's now called the total stock market index, I guess it's Dow Jones or whoever does it, and it got up to 7,000 stocks in the year 2000, now it's gone, that's way above, it's the 5000 it originally began with, and now it's down to I think 3200, over half of the stocks that were in it at the market high are gone, and some of that is by merger, some of that is because the tech stocks came and then they went, and you know, it's interesting to me, it's a vital intellectual question, where did those companies go, and what happened to them, and to the extent they're mergers, why do we do all those mergers, and I happen to be a real, this is really going to surprise you, a real cynic about these corporate mergers, I think they're done for one of two reasons, or maybe both of them at the same time, and that is one, bigger corporations pay their executives bigger salaries, so the CEO wants to do a merger, he thinks he knows everything, the board thinks he knows everything, and they pay him a lot of money for doing pretty much nothing, I think, and so that's one part, and the other part is, it muddies the accounting waters, you do a merger, and nobody knows proforma, this, proforma, that, and all of a sudden the shoddy record looks like a good record, and in terms of earnings per share, and they're just basically not credible and not believable, but we take anything that is quantified, that we can, it's the perils of numeracy, one of the talks I gave all over again, and reminding me of a thing in Einstein's office, which Bill knows well, I'm sure, and that is, there's a sign, it's said to be a sign in Albert Einstein's office, the former office of the Princeton Institute of Advanced Study, saying there's some things that count that can't be counted, and there's some things that can be counted that don't count, and you know, and here I am, a big math guy, beta mogul, the data devil, and skeptical about the idea that we can quantify everything, and that's why I'm pleased to have gotten this article in the Financial Analytics Journal, where my guesses about the cost of transaction costs, about advisory costs, about cash drag, aren't just estimates, but it's better to have the estimates there, up or down, do what you will with them, anybody can change the math, and then ignore these huge costs that come along with the fund expense ratios, so I'll be glad to have that out of the way, but on banking, I had a chapter in my book called The Battle of the Soul of Capitalism, not a chapter, but a take out from another chapter, it's called Bring Back Glass-Steagall, and that's what we should have done, but we couldn't do that, so we get the Volcker Rule, which is, I think, 198 pages in the Glass-Steagall Act, 65 pages, because you're trying to fuss around the edges of the system, and it still hadn't gotten anywhere, it still hadn't been implemented, so you get a lot of people, banks, these get into the big issues that confront the American Republic today, and that is the power of money in the system, but banks are out there with these high-paid lobbyists fighting every comma, every paragraph, everything they can with all their might, and they can, of course, out-think the civil servants of the SEC, and so on, and it's not putting down the SEC, it's just, they've gotten into such a complicated mess, but you tell me that Jamie Dunn can take you through the annual report, or J.P.

Morgan, and explain every item to you, and I'll say, "I'm not hanging by my thumbs in the latter." Yeah, that actually raises a couple of subsidiary questions, the first of which is, if you're a libertarian, you blame Sarbanes-Oxley for a decrease in the number of publicly traded companies, do you think that's a valid argument?

I'd like to look at the data, but I doubt it very much, it's an easy out, you know, it's so demanding to be a public company and not be a private company. First place, it's much easier said than done to do that, and second, at a certain level, when you get to really big corporations, going private is impossible.

I think one of the challenges to the long-term investment management business is as our investment universe shrinks, it's the kind of things, Bill, that very few people, but you, are even thinking about, and that's why we need you. I'm not sure who needs me these days, except my granddaughter.

Well, that leads me to an actually very leading question, which is the quality of financial regulation during the most current administration. We had a woman who was the SEC chairman, who as far as I can see did not have great accomplishments, she went from one job in a quasi-private regulatory agency, in which she had a seven-figure salary, and now she's gone through the revolving door, into another job with an eight-figure salary, and one should not be surprised, or might not be surprised, if she didn't do great things.

I'm wondering what your view of her tenure was. Now this is, who's tenure? Mary Shapiro. Well, first of all, I empathized with Mary Shapiro. She was trying her best to do the right thing, and the industry ganged up, and so it was irresponsible and disgraceful. Like in Union Station, the SEC is now right next door, they had all these signs saying, you know, down with asset value, floating asset value, money, money, money.

Basically, arguing with the SEC, and with the people who are walking in and out of the SEC doors every day. You know, I don't think we need to stoop to that. There's a rational argumentation that we should use, and not a sensationalist orientation. But, you know, she was right on money market funds, she was right on a lot of things, and basically ended up getting very, very little done.

Because this industry mobilizes, I mean, this is a powerful lobbying industry, and I think it should look to its own interests more. Obviously, a complete conflict of interest in the fund industry. It's being run, they call it the Investment Company Institute, and it's the Investment Managers Institute. That's a big difference.

I don't see any evidence they're looking after the interests of fund shareholders. It's run by the managers, and the managers are paying the dues, and the managers have their own lobbyists. So, I'm not bothered by her accession. I should say this, I come to it from a background before she took over the chairmanship of being pretty skeptical of Mary Shapiro.

And I ended up being kind of a Mary Shapiro booster. And maybe I'm just a sucker for, you know, someone who's trying to do the right thing and gets it thrown back in their face. I know a lot about that subject. Well, to shift gears ever so slightly, as simulating as this year is going to be, it won't be quite as interesting as Die Hard 8 was in 2008, which I think was what, two weeks, one week post-Lehman.

We almost got there, though. And so, that's my next question, which is the view from the precipice, which we just stopped short of, and the view over the precipice. I think the long run down, which was done in the financial system with the most recent growth deal in Washington.

And what could have happened? Well, you know, those are, I guess I was going to say, questions about my pay grade. But let me just give you a couple of reflections. I begin, which in turn had to be totally true with our idiotic statesman, listen statesman like elected officials.

And that is, I begin with Churchill's statement that Americans always do the right thing, but only after they've tried everything else. And we came, I mean, I'm not sure, I didn't get a chance to read the morning papers yet, but we probably came within an hour to get President Obama's signature on that bill, an hour of the actual report.

I think it was done before midnight, pretty much had to be. Maybe Congress often sets the clock back, so it makes everything that's illegal, legal. But it's, to me, incredible how people can get so dug in with their own personal agenda that they can fail to see what is obviously good for the nation.

And they can fail to see, I mean, I don't want to get into too much politics here, but I might have mentioned this word before, but the president cannot be held hostage, cannot have hostages held and said you do this if you want to ever see your cousin again or your wife again.

That's just not the right way to negotiate. There's a big difference between negotiating over the right things and negotiating in a hostage situation. And it's just about every government and every corporation has found out you just can't finally negotiate with people who are holding hostages. There's no final way to win, so you just say do what you will and then get as many bodies in there, FBI, whatever it might be, to try and undo the situation by intervention of some kind.

And it's a risky thing to do. So that's what we're going to see, I guess, in Captain Phillips. I haven't seen that yet, but those kind of hostage-taking things are not the right way to do it. So it's time for negotiation and time not. And what I have been amazed at, honestly, Bill, is true to my trying to keep against all odds a balanced viewpoint about the political system.

I read the Wall Street Journal as well as the New York Times, and the Journal has been so much more scathing than the New York Times about how the Republicans, basically the Journal's constituency, got themselves into such a loser's game, a mess, that it's really tough on the Republican Party.

Everybody knows that they finally give up because they're losing in the court of public opinion. But that brings up the worst point that affects our, I think, single worst thing that affects our political system, and that is these safe boroughs, we used to call them rotten boroughs in England, like Bigville, in the old days, the long old days, but these safe seats that, you know, the more strident, the less reasonable you are, the more likely you are to be re-elected.

And if you're even a moderately conservative person, you're probably going to be confronted in the next primary with someone who's just off the wall, on the right side of things. There doesn't seem to be a contravening force on the left. Although I think the Journal would say that the labor unions are such a force.

I'm not sure they have that much power, but there we are, we just own them that way. So that's a real problem, to have these basically locked in seats, that care, that are so safe, that they may be around for a long time. I read this data the other day, and I'm not sure I'm going to get it right, but as everybody knows, the House of Representatives is around number 60-40 Republican.

But the votes cast for the House of Representatives are roughly 60-40 in favor of Democrats. Think about that. So when these people say, "We're representing the people," they're representing this minority of people, and not the majority of people. I'm reminded, if I can give you one more of the better quotes of the day, not a current one, but a quote that will indicate that Benjamin Franklin was not without some wisdom about the long term.

He came out of the Constitution Convention in Independence Hall down here. When the deal had been signed, the Constitution had been approved by the Constitutional Convention, going out to the states, and a woman comes up to him and says, "What have you given us, Dr. Franklin?" And he said, "We have given you a republic, if you can keep it." And I think we are endangering that, and I think that's a very, very serious, if totally unquantifiable risk.

But, to get to the second question, Jack, which is, what do you think could have happened, and what would have happened, do you really think, had we fallen from our treasuries? I think it would have resulted in such financial chaos all over the world, that we would have thrown ourselves into not a depression, a very deep recession.

And there's no way to know that, thank God there's no way to know it. But, when you think about the dollar being the international world currency, basically the currency of the world right here, that would go under those circumstances, I think. But to think about this powerful nation, the most powerful, except from a financial standpoint, nation on earth, not able to pay, or not willing to pay its interest, and that gets to the interest on its debt, and that gets to the idiocy, the utter idiocy of a debt limit.

Because a debt limit is basically a way of saying, we're going to spend X, and we're not going to charge any taxes for it, and if you end up, so you're going to borrow money, but we're going to tell you how much you can borrow with the mathematics of that equation, or establish the moment you undertake the expenditure.

You've got to pay for it, it may be difficult to do, you've got to hire taxes, you've got to get rid of tax loopholes, whatever you want to say. And that gets me to another of my favorite, I don't know if I should be talking politics here, I know I shouldn't, but the idiocy, the arrogance, the disgrace of these hedge funds getting capital gains taxes, 100% of fees, is just so moronic, and so unfair, and it's just, I call it a national disgrace.

Why should that be? Why should the people that have more than anybody else in America pay lower taxes? And that's because Senator Schumer, who happens to be a director, is head of the Senate Finance Committee, and he's not going to let it happen. His constituency, down there in Wall Street mostly, is not going to let it happen.

And of all the simple reforms, and the only argument I've ever heard against it is it would affect some other things, I don't know how that would be, and the other one would be, it doesn't raise a lot of money. Well damn it, if it's wrong, it's wrong. If it raises five cents, or even to do it right, loses five cents, I couldn't care less.

But there is such a thing as moral absolutism, and there is such a thing as right and wrong. And sometimes they're very difficult to see, and sometimes I think I see it a little more clearly than the fact is, I'll admit that. But, you know, we've just got to have more of a thought about what's good for this great nation, and what's going to keep us from getting in even more trouble than we're having now.

I was intrigued by the identification of the big fund companies. BlackRock, Vanguard, as saying systemically important financial institutions, CIPIs. And, you know, I can see how AIG and Lehman did stupid stuff, and got themselves and the financial system into trouble. What kind of stupid stuff could Vanguard, Fidelity, and BlackRock do to get the financial system into trouble?

Well, usually trouble comes, everybody knows, from leverage. You know, you've got obligations you can't meet, and interest payments due on the money you've borrowed. And that's what banking is all about, of course, finally. And you don't have those kind of issues in sci-fi. What do you call sci-fi? SIPI.

Sci-fi sounds better, science fiction. And you don't have the borrowing issue. But I do think that we are, in fact, systematically important financial institutions. The concentration in this business has gotten bigger. It's gotten more narrow. That is to say, my firm's acquired, I must have mentioned this before, half of all the mutual fund assets.

And I don't think that's a particularly healthy thing. But I can't put my finger on precisely what's wrong. But the things I would look first to is, supposing there is a run of redemptions. What you're going to say, or somebody, not you, Bill, I'm going to say, well, you know, if you get too many redemptions, there'll be a lot of sales, and the market will, you know, find its intersection.

And it'll go down, and then the black will come in, and that's just life in the marketplace. And in some of these scares we've had in the last few years, that short-term malfunction in the marketplace, you know, door and well are going to be corrected pretty quickly, you know, maybe in a day.

And investors care about that, but only very foolish investors care about that. You know, it's going to be all come out in the relationship of price to value, and whether there's a bubble or not. So, you know, it's not easy to say what the consequences of it are. Even as I say, absolutely, you know, if these five firms control, let me say, 20% of all the stock in America, and if you had another 10 firms, it's probably 50%, 10 firms controlling 50% of the stock in America.

There's something you ought to be concerned about. The fact that you don't particularly know what you should be concerned about doesn't mean you should raise a little alarm to me. And alert everybody, await the ICI's compassionate response, stay out of our business. And I do particularly worry about, on the municipal bond side, and particularly for Vanguard, because we're the dominant force in the immunity market.

Everybody knows it's not particularly liquid, and I might talk a little bit about this earlier. So, you know, maybe some kind of an idea of having a reasonable amount of reserves to meet demand, to meet redemptions in that business would be a good idea. I hope we still do, but I don't know.

And if the concentration grows, and there's no signs of it growing, you know, at some point, it's just too much concentration. But we never know how much is too much. I mean, it's, you know, like, write down a number, and I don't think that does it. I think what captures it is basically a little bit like corporate America, a concentration of economic power.

And we're systematically important, because we can tell any corporation in America, the mutual fund industry can, what we want them to do. We can tell them how much to pay their CEOs, we can tell them anything we wish to. And we don't do any of that, that's a whole other issue.

But that means you're systematically important. It doesn't mean there's any terrible risk coming with it, although I think there is the liquidity idea of risk. And that's all I can honestly come up with to think about something nearby. But I'm glad to have the government look at it that way.

It's 31 pages long. I've read it, because I read that kind of stuff. And I didn't see anything to really worry, but they have the same kind of numbers that I'm doing every day, the concentration of oil, oil resources, and things like that. And it's a pretty good report, they don't come out with any conclusions.

But I think the idea that we are systematically important basically has to be tautologically correct. You know, if you own, as mutual funds do, about 32% of all the stock in America. And that in itself, not to get you into this any deeper than you want to be, but it's only the tip of the iceberg.

Because when you look at these 25 largest mutual fund firms, every single one of them also has a pension management affiliate. When you take the two of them together, their pension funds and their mutual funds, they own, I think it's 55% of all the stock in America. These are powerful institutions.

And the fact they aren't exercising that power is either A, a national disgrace, or B, a national asset. And you'll have to tell me which is which. Okay, well, I think what I'll next do, and perhaps close it up, at least in terms of the formal fires out of Chad here, is, unless Chad has questions for me, which is, end with a personal finance question.

Which is, I don't know if Wade Fowl is in the audience? If he is, raise your hand. Wade. There you go, hey, Wade. You haven't presented your paper yet, have you? Okay, great. Well, Wade has done a very important piece of work, which bears on the glide path of asset allocation throughout age, or at least in retirement.

Correct me if I'm wrong, Wade, but, you know, the rule of 100 serves pretty well. I think it's a pretty good rule. Starting point. Yeah, pretty good starting point. And Wade has come up with something different. It's a very fine analysis that shows that if you start retirement with a given allocation, you're actually better off if you raise that allocation throughout retirement as you get older.

And I think, you know, he's done an excellent analysis. I think he's right. And I can even come up with some narrative stories that explain why he's right. But I'm wondering what you think of that idea. In other words, you should really be 80% or 90% stuck. As Bob Dole would say, "Whatever." There's one thing about mathematical analysis, which depends on a whole lot of hypotheses about future returns will be, all of which are uncertain.

Even the great Vogels, that's in quotes, are uncertain. And you want to really be careful of extending, you know, your ideas into somebody's actual living platform. You do not want to ignore the behavioral problem. You would like to ignore it. You should ignore it. Investors should ignore it. But you're building kind of a world there where you're asking for the impossible.

So I'm going to be interested in hearing Wade's thing. But before we end this, you know, I hope I can just push Bill a little bit. If he's up to it after getting out of the hospital, oh, my God, what a miracle. You're making me look bad, man. But talk a little bit about your three books, your three chapters on the investor.

Okay, well, for those of you who haven't yet bought all three of my e-books, I have a series which is called "Investing for Adults." What I say by adults, I mean people who know all the things that just about everybody or everybody in this audience knows about active management, about there's no stock-picking theory, there's no market-timing theory, there's no risk theory.

And so the first book, who looked at life cycle investing, was somewhat congruent, actually, with the paper that Wade did as well. In fact, Wade helped me with it. And it just looks at life cycle throughout age, and it takes a somewhat different point of view from the rule of 100.

I say it's a good place to start. But at the end of the day, I default back. The retirement really isn't two-bucket territory. It's nice to have one bucket and think of one portfolio throughout most of your life. But when your human capital runs out or is about to run out, what really matters to you most is your liability-matching portfolio.

That is, the portfolio you need, the money you need, in addition to whatever pensions and Social Security you've got, to make sure that you're not diving the dumpster, all right? And maybe have a living standard which is closer to what you might be. And beyond that, you can invest in very, very risky assets.

Well, if you think about what happens as your retirement progresses, you start out age, if you're a go-go head, 48. And you have no human capital left because you're bouncing your grandkids on your knee. You're spending all your time in Florence. And so you have this liability-matching portfolio that's pretty large that you need.

You probably don't have a lot of money left over from that, okay? Well, that's a low stock allocation. That's a high-bond stock allocation. Well, as you get advanced slowly into geezerhood, what happens is that you need less and less of a liability-matching portfolio. And if you're reasonably disciplined and you're a go-go head, your risk portfolio gets larger, okay?

Now, unfortunately, in the United States, most people don't get anywhere near having a liability-matching portfolio. But then again, this is an alternative universe in this room. So we're not really talking about that. The second book really wasn't aimed at this audience. It was a book called Skating Where the Puck Was, and it's about alternatives.

And basically, alternatives weren't a bad idea 20 to 10 years ago. Most ones actually did have positive alpha 15 to 10 years ago. They don't anymore. And that's simply because David Swensen went through the head of the buffet table, and he got the sirloin and the lobster tail, and the guys who came through behind him got the chopped hamburger.

And unfortunately, David Swensen then went and tried to go through the line a second time, and he got mac and cheese from 2007 until 2012. And that's what that book is about. It's why alternatives in the modern era, that is, you know, the past five or ten years, are simply a terrible idea because there's far too many people chasing far too many alternatives, including one that might be important to discuss in this audience, and that's commodities.

I have two words about commodities, which is "stay away." Or at least commodities futures funds. I'm more sympathetic towards commodities producers. The third book was a book called "Deep Risk." And "Deep Risk" is about the two different kinds of risk, which you can-- and I don't mean to denigrate shallow risk.

Shallow risk is, you know, temporary stock market falls, which can be a very high magnitude, but eventually are fairly quickly recovered. And I don't mean to denigrate shallow risk, because if you are someone with very little or no human capital, then shallow risk is really important. And in fact, you shouldn't even be concerned about deep risk at all.

But if you're 23 years old and you have no investment capital, and you have a large amount of human capital left, then you should be very concerned with deep risk. And what are the deep risks? Well, I list them there. Inflation, deflation, confiscation, and devastation. All right? And inflation is the single most important one.

And if you look at the long-term returns of stocks and bonds in multiple countries over the past century, almost a quarter, what you find is that inflation is a much bigger risk to bonds than to stocks. If you have inflation for a period of 30 or 40 or 50 years, it's a very high magnitude, you can actually have real stock returns, which happen in a number of countries, most particularly Israel and Chile.

And even the nations that you think of as having awful inflation, like Argentina and Brazil, over 20 and 30 years, at least had zero real returns. You didn't lose real purchasing power. I was amazed to find that during the Weimar inflation of the 1920s, the wheelbarrow phase, stocks actually had a positive real return, because they were viewed as a real store of value.

Bonds, on the other hand, get absolutely hammered. You lose all your money in bonds. So if you're concerned about deep risk, you really do want to invest in stocks for the long run. I don't view deflation and the fiat money era, now that we're off the gold standard, as being a serious issue, because it just doesn't exist anymore.

Japan really hasn't had--people talk about Japan having deflation. During the past 10 or 12 years, I think they've had 2% total deflation. Ireland and Hong Kong had, I think, double digits for a relatively short period of time. That's it. Three countries out of 200 and some odd countries in the world.

But it really had deflation. Confiscation, you can move abroad with that. You can play Gérard Depardieu and become a Russian citizen. When you talk about devastation in this day and age, you can buy an interstellar spacecraft. So that's what the book is really about, is how you think about portfolio management in terms of those risks.

One thing I like about what Bill has done, and I thought the same thing about Peter Bernstein, is I am looking at myself in a kind of Jonas man, kind of a one-trick pony. But Peter Bernstein, to a much greater extent, Bill, has such a range of interests. And I love it when investment people, even self-trained investment people, have a lot of other interests.

And he's written these books about the history of the world of plenty, it's called, something close to that, The Birth of Plenty. And then his newest one is about communications, is that a fair way to describe it? Communications technology. And communications technology. Another is about world trade, called A Splendid Exchange.

I'm plugging you here, Bill. Thank you. All available on Amazon. But it's the broad-gauge view that I think finally is, in a way, a counterpoint to what I do. I'm very happy with what I do. I'm sure it's right because it's a simple man. But if you're going to go beyond that, listen to someone like Bill, who has such a broad range of experience and such a, not to embarrass him, but such intellectual brilliance.

And it's a little bit like Paul Sagas, and I'll put you in his camp. And that is, I love to be associated with people who are hell-bound smarter than I am. It's amazing how much you can learn if you just take a minute to think. Take a minute to think of ideas in particular that are not those that you hold dear, but maybe even counter-opposing ideas.

And one of the issues, and I hope that Bill can have a minute to comment on this, is when you get to asset allocation. It seems to me quite apparent, I don't know how to do it, but it's quite apparent the way you look at asset allocation depends on the relationship, oversimplified statement, but it'll make the point, on the relationship between bond yields and stock yields.

And back in the Paul Volcker era, the 10-year treasury was 16%, or at least 15%, and it got down to 1.5%. So what rule might have applied when you had that kind of an option to protect your money in the early 1970s, when bond yields were so generous, and they were generous for years and years, and that's why we have a bull market in bonds, with the returns going down as interest rates go down.

The returns were good for those that held it, and probably when you get back into the treasury, just by a principle-only treasury bond, there could have been no better investment than the U.S. Treasury. Nobody saw it at the time, but that's, I think, because they couldn't do the math, and I'm afraid even I didn't think about it enough at the time.

But my question, I guess, Bill, is what do you think about, conceptually, the idea of taking into account, when you're talking about safety in bonds, and growth in stocks, if you will, about taking into account the yield differential that exists, sometimes greatly in favor of bonds, sometimes kind of today I would call it more or less neutral, maybe a little bit better in bonds, but not much, about taking that into account conceptually?

And then the much more difficult question is, when you come to grips with it conceptually, assuming you think there's some reason to it, how the hell do you implement it, and when? Well, that's a very interesting question, Jack. I'll tell another story out of school here. First of all, the first part, that was a little older-dash.

When people ask me, usually it's people who aren't from New York asking me, because my last name is Bernstein, I was related to Peter, and I always say two things, number one is I wish, and number two is he's who I want to be when I grow up. But I learned at the feet of a master, Jack.

You taught me the three-step for estimating stock returns and comparing them to bond returns, and of course it matters. And now I'll tell my out-of-school story, which is I had dinner with you some years ago, but not too far from 2000. And I waited until you had drank, I think it was your dry martini, before I asked you this question.

And I finished my beer, because I needed to screw up my courage, and I said, well, Jack, tips are now yielding 4%, and stocks look like they're priced to yield a real return of 2%. This was in the day when yields were 1% back in the early 2000s or late 1990s.

And I said, doesn't that impact your asset allocation just a little bit? And you said, yeah, I'll probably own 5% less stocks. And of course, not too long after that, Jack, I think I went to my first boogleheads, and he flips up a slide, and he projected negative nominal returns for the next 10 years for stocks, and everybody guessed, because you brought in mean reversion, which was something that I wasn't even willing to think about.

- Mean reversion of the P/E. - Yes, mean reversion of the P/E. So what's it look like in 2013? Well, you can do the math as well as I can. Stocks--excuse me--bonds have a zero return pretty much, certainly a zero real return. Stocks are priced to yield a positive 3.5% return, real return, real return.

So all right, maybe you should own more stocks now. But then what happens, Jack, if we get mean reversion of P/Es? - Well, that gets to--and I talked a little bit about this maybe before you got here-- about where the P/E is today. And there are so many ways of calculating, and I went through that earlier, and I won't take you through it again.

But I'd say they are within the bounds of reason in terms of the future. I don't think--I mean, the P/Es go from-- I mean, I'm using a range of--I think it's 20 for the reported earnings, past reported earnings, and about 15 for the future earnings, the so-called accounting-only operating earnings, the lower earnings, the higher earnings figure.

And so let's just use 17 just for the element. You've got to start somewhere. And, you know, if you went to 20, that would have very little impact on your return to P/E of 20 from there. And if you went from 15, that would have very little positive impact.

And not enough--since they're all guesses, I'd say not enough to change your course of action. So I don't see a lot of mean reversion there, although that's the reality. And I think I might have it--do I have this in John Wasik's book? Michael, your version of P/Es. It will--I think it's in--I think I put it in the former I wrote to John's book.

And that is what we know about past experience, which is not--without utility here, is that if a P/E is over 20, the odds are about 85% that it will go down in the next 10 years, by the end of the next 10 years. And if the P/Es are under 12, the odds are also about 85% it will go up in the next 10 years.

So you have a little bit of that going for you. A little bit of knowledge about some kind of reversion that's more likely to take place than not. Not mathematical purity or precision at all. But when you get through it all, you know, the dividend yield is pretty precise and it's highly unlikely to be cut again for a long time, but it could be, of course.

Earnings growth is going to have something to do with the GDP. Earnings growth is slower, as everybody should know. But there should be earnings growth of some dimension. And the one thing I'd be interested in what you think about this bill is I assiduously calculate nominal stock returns and then take out an estimated inflation number.

So there are two discrete numbers that lead to the real return. I'm very uncomfortable with numbers that don't have that kind of a split where they build CPI into maybe earnings growth, from nominal earnings growth to real earnings growth. First, I'm not sure where it all should come out of there.

I'm not sure how to handle that. But I like the knowledge that I can make my own inflation adjustment looking ahead and not be wrapped up in somebody else's. So I can take each step of this way. And what I like about it, it's so fragile, I like one of my own ideas.

But what I like about mine is they're very discrete. You cannot argue about the dividend yield. You can argue about the earnings growth, but only within limits. I mean, I think we all know it's not going to be 15%. And we all assume it's not going to be zero.

So you pick your own number of earnings growth. That's two-thirds of the equation, a known and a highly likely. And the PE, when you get down there, you know the probabilities. So it takes a lot of the mystery out of stock returns. And it focuses on anything less than 10 years.

Oh, they still ask me. Maria Barnaromo still says, how do you feel about today's market? Yeah. Okay, well, Mel just told me his stomach is really starting to growl. So I'll make this snaggy. You're right. Well, that's great food for thought. People probably want to put some food in their belly.

So I hadn't figured mine was that much. Jack, you earlier quoted Ben Franklin. And Ben Franklin has another famous saying that I like to quote. And that's, "A penny saved is a penny earned." So we thought this Ben Franklin bust was appropriate because he saved investors trillions of pennies and billions of dollars.

Please accept this as a reminder of the 2013 Volcanics Conference and a reminder of all the money we've saved investors. Good God. Three hours and 45 minutes with Vogel. And even with the help of Bernstein to bail me out at the end. It was quite remarkable. You should know that I've received, I think, four of these.

A long enough for these things. I've got Independence Hall. I've got the Love Statue. And they all sit right on my mantelpiece in my den. And this will go next to them. But something's going to have to go off it now. I know you said that, but we just thought this was so appropriate.

Oh, this is perfect. This will be the last one. Oh, I don't want to hear about the last anymore. I don't want to hear about the last hurrah. I know you're out of space in your den. Well, thank you all very much. And how you can handle this much provo is beyond my comprehension.

But you've all been very generous. When my wife says--she doesn't do it anymore--she says, "How's the speech go?" And I say, "Well, I don't really have any idea, but I do know this. When I laughed, they laughed. When I cried, they cried. And when I sat down, they applauded." Thank you all very much.