Bogleheads® on Investing Podcast 023 – Dr. Burton Malkiel, host Rick Ferri (audio only)
Chapters
0:00:58 Dr Burton Malkiel
16:39 The Death of Equities
19:54 Exchange Traded Funds
30:7 High Dividend Yielding Stocks
33:2 Being a One Factor Investor
38:8 Multi-Factor Etfs
46:34 The Allocation between Stocks and Bonds for Different Age Groups
52:3 Direct Indexing
00:00:00.000 | [MUSIC PLAYING]
00:00:09.560 | Welcome to Bogle Heads on Investing, episode number 23.
00:00:13.160 | Today, our special guest is Dr. Burton Malkiel,
00:00:16.920 | a Princeton economist and the author of A Random Walk
00:00:20.920 | Down Wall Street.
00:00:22.160 | First published in 1973, this book
00:00:24.760 | was an inspiration for Jack Bogle
00:00:26.560 | to start the first index mutual fund.
00:00:29.040 | [MUSIC PLAYING]
00:00:38.000 | Welcome, everyone.
00:00:38.880 | My name is Rick Ferry, and I'm the host
00:00:40.680 | of Bogle Heads on Investing.
00:00:42.440 | This podcast, as with all podcasts,
00:00:45.240 | is brought to you by the John C. Bogle Center
00:00:48.160 | for Financial Literacy, a 501(c)(3) nonprofit organization
00:00:53.920 | that can be found at boglecenter.net.
00:00:57.680 | Today, our special guest is Dr. Burton Malkiel.
00:01:01.120 | He needs no introduction to many of the Bogle Heads.
00:01:03.920 | Dr. Malkiel received his undergraduate and master's
00:01:06.520 | degree from Harvard University and then
00:01:08.360 | went on to Princeton University to receive his PhD, where he
00:01:11.800 | started a long and illustrious career.
00:01:14.520 | Back in 1973, he wrote a book called A Random Walk Down Wall
00:01:18.280 | Street, where he called for the first index mutual fund
00:01:21.320 | to be created, which led to the index fund revolution.
00:01:25.160 | With no further ado, a man who needs no introduction
00:01:28.360 | to the Bogle Heads, Dr. Burton Malkiel.
00:01:32.000 | Welcome, doctor.
00:01:33.480 | Thank you very much.
00:01:35.200 | It's a pleasure to have you on Bogle Heads on Investing.
00:01:39.980 | This is a podcast that a lot of people
00:01:42.880 | were widely anticipating.
00:01:45.800 | And before we get into the nuts and bolts of investing,
00:01:49.960 | because we have a lot of topics to talk about,
00:01:54.320 | a lot of them come from your latest edition of A Random
00:01:57.000 | Walk Down Wall Street.
00:01:57.960 | And then there's other things that we'll be talking about.
00:02:00.720 | But this will be an investing show.
00:02:04.360 | But before we get into that, if you
00:02:06.280 | could tell us some of your early background,
00:02:10.440 | where you grew up, where you went to school,
00:02:12.800 | and how you got involved in the investment industry.
00:02:15.760 | Well, I grew up in the city of Boston,
00:02:20.400 | in a part of Boston, Roxbury, Massachusetts.
00:02:26.080 | I grew up in a tenement house.
00:02:29.280 | For some reason, I was always interested in numbers.
00:02:36.720 | And even though I had no money, and my family had no money
00:02:42.320 | to invest in the stock market, I knew the price of General
00:02:47.760 | Motors stock just about as well as I knew Ted Williams'
00:02:53.040 | betting average.
00:02:54.800 | So this is something, for some reason, that interested me,
00:03:00.680 | followed me through my youth.
00:03:04.280 | I went to college and majored in economics,
00:03:09.640 | and then went to business school,
00:03:14.040 | much to the regret of some of my economics tutors, who said,
00:03:21.520 | you're really a very good economics student.
00:03:25.080 | You ought to go into the Academy.
00:03:28.160 | And since I had grown up poor, I decided that the Academy
00:03:34.920 | wasn't for me.
00:03:35.760 | I didn't want to continue to be poor.
00:03:38.240 | I wanted to go to Wall Street, which had interested me
00:03:41.440 | since I was a little kid.
00:03:44.320 | And so I got a job with Smith Barney, the investment bank
00:03:52.400 | that's now part of Morgan Stanley.
00:03:54.880 | But Dr. Malkiel, this wasn't just any business school.
00:03:58.440 | You received your bachelor's degree and MBA
00:04:02.040 | from Harvard University.
00:04:03.960 | Well, that is true.
00:04:05.880 | That is true.
00:04:08.560 | Before I actually joined Smith Barney,
00:04:11.760 | there was a draft at the time.
00:04:13.480 | And a few of my Harvard Business School classmates
00:04:17.040 | and I received direct commissions in the US Army
00:04:21.080 | Finance Corps, where we put into effect at various Army
00:04:26.440 | posts around the world a computerized pay and accounting
00:04:30.960 | system.
00:04:32.160 | But then I did go to Wall Street.
00:04:34.600 | I was an investment banker for two to three years.
00:04:41.160 | Did finally start investing myself and made enough money
00:04:48.440 | so that I was convinced then that I would not
00:04:52.160 | continue to be poor.
00:04:54.720 | And the thought of possibly maybe getting
00:04:59.920 | a PhD in economics, since my college advisors had strongly
00:05:06.160 | urged me to do, was maybe something I should do.
00:05:10.240 | And I went to New York University night school
00:05:15.800 | to try to do some courses.
00:05:18.600 | But I found that it was simply impossible.
00:05:21.800 | Because as an investment banker, we
00:05:24.640 | would be doing some due diligence for a company
00:05:27.960 | in Iowa or Chicago or the West Coast.
00:05:32.600 | And I was missing 3/4 of my classes.
00:05:36.400 | Realized that that didn't work.
00:05:39.680 | And I then took a leave of absence.
00:05:45.080 | And I was living in Princeton, New Jersey at the time,
00:05:48.120 | and went to graduate school at Princeton.
00:05:51.520 | I fully expected to go back to Wall Street.
00:05:54.200 | But two things happened that I had not expected.
00:05:59.200 | One was that the people at Princeton
00:06:02.200 | said, gee, we'd like to hire you to teach.
00:06:06.600 | And the second thing was that there
00:06:10.400 | was a scandal at Prudential Financial, where the CEO had
00:06:16.840 | been lending Prudential's money to companies
00:06:21.320 | with which he was affiliated.
00:06:23.480 | And when this broke, he was fired.
00:06:27.760 | And the New Jersey legislature decided that from now on,
00:06:34.040 | Prudential would have to have six public directors chosen
00:06:40.040 | by the Chief Justice of the New Jersey Supreme Court.
00:06:44.160 | The Chief Justice wanted to have an economist there,
00:06:47.160 | interviewed me.
00:06:48.120 | And even though I was just a fledgling economist
00:06:51.560 | at the time, he liked what I had to say.
00:06:54.880 | And I became a director of Prudential Financial.
00:07:01.320 | And that made me decide, well, let me see if I like teaching.
00:07:07.360 | I've now got a foot in business.
00:07:11.440 | Maybe I can do both of these things at the same time.
00:07:16.640 | And the board membership of Prudential
00:07:20.160 | led to a number of board memberships.
00:07:23.360 | And I enjoyed teaching.
00:07:26.000 | I was able to research the stock market, which
00:07:29.880 | had interested me since I was a little boy.
00:07:33.320 | And I then developed a life that, in my view,
00:07:37.680 | had the best of both worlds.
00:07:39.960 | So I was still in the business and financial community.
00:07:45.880 | And at the same time, I was able to work
00:07:49.800 | on the projects that interested me in financial markets.
00:07:55.840 | That's really the quick story of how I came to do the things
00:08:02.640 | that I've done.
00:08:04.160 | It's interesting when I look at your bibliography of what
00:08:07.080 | you've written that early on in the '60s,
00:08:12.880 | you had written a few papers on the bond market
00:08:16.560 | and the term structure of interest rates.
00:08:19.480 | A couple of papers.
00:08:20.640 | One of them was-- the first one was published in the Quarterly
00:08:23.240 | Journal of Economics.
00:08:25.280 | Then you went on to write a book, your very first book,
00:08:29.440 | on options and option strategies.
00:08:32.160 | So it wasn't just the stock market.
00:08:34.040 | I mean, you were really expanding out
00:08:36.280 | into all of the financial markets at this time.
00:08:39.320 | Exactly.
00:08:40.840 | And was definitely interested in financial markets.
00:08:45.360 | The early work that I had done was all technical
00:08:50.000 | because you do not get tenure at a first-class university
00:08:56.280 | by writing things that were popular.
00:08:59.080 | I wrote A Random Walk Down Wall Street in the early '70s
00:09:03.720 | and wrote it right after I was given tenure at Princeton.
00:09:10.440 | So I was always interested in doing
00:09:12.920 | things that would be more popular than the professional
00:09:18.680 | journal stuff that I did at the beginning.
00:09:21.200 | But I only did that after I had tenure at Princeton University.
00:09:29.360 | So let's go ahead and move on to A Random Walk Down Wall Street.
00:09:32.920 | And I have in my hand your original first edition
00:09:36.880 | because right now you're up to the 12th edition.
00:09:39.680 | That is correct.
00:09:41.480 | The original book itself in the 12th edition is still there.
00:09:45.400 | It's still at the beginning of the book for the most part.
00:09:48.000 | And you've just been adding to the book
00:09:50.160 | as we have been moving along.
00:09:52.120 | So I've read both the original edition.
00:09:55.760 | I've read other editions over time.
00:09:57.760 | And now the 12th edition, which I also have.
00:10:00.560 | But I want to quote something here in your first edition.
00:10:04.880 | You were an inspiration to many people,
00:10:09.680 | but particularly to Jack Bogle with the idea
00:10:13.760 | that what was needed is a index fund that just gives you
00:10:19.240 | the market return.
00:10:20.240 | And here's what you wrote.
00:10:21.800 | Again, this was written in 1973.
00:10:24.280 | That's when the book was published, 1973.
00:10:27.040 | So you were actually thinking about this and writing about it
00:10:30.240 | or putting your words on paper even before then.
00:10:33.440 | But here's what you wrote.
00:10:34.480 | This is on page 226.
00:10:36.600 | "What we need is a no-load minimum management fee mutual
00:10:41.240 | fund that simply buys the hundreds of stocks,
00:10:44.360 | making up the broad stock market averages,
00:10:46.920 | and does no trading from security
00:10:49.640 | to security in an attempt to catch the winners.
00:10:53.040 | Whenever below average performance
00:10:54.920 | on the part of any mutual fund is noticed,
00:10:57.920 | fund spokesmen are quick to point out
00:11:00.160 | you can't buy the averages.
00:11:02.240 | It's time the public could."
00:11:04.800 | And that was really an inspiration,
00:11:07.000 | I believe, to Jack Bogle.
00:11:09.720 | How did you meet Jack Bogle?
00:11:12.040 | And tell me what this first discussion was about.
00:11:16.560 | Let me first of all say two things.
00:11:18.520 | I appreciate your quoting that.
00:11:22.040 | And I am certainly very pleased to have
00:11:26.080 | been one of the earliest people to recommend indexing.
00:11:32.680 | But I appreciate being given the credit.
00:11:37.160 | But I do think it's one thing for an academic
00:11:42.640 | to say crazy things.
00:11:44.920 | And believe me, the first reviews
00:11:47.440 | of my book by professionals said that it was the biggest
00:11:52.000 | piece of garbage in the world.
00:11:54.320 | So it's one thing for an academic to do this.
00:11:57.440 | Jack Bogle deserves all the credit in the world
00:12:02.080 | because he bet his whole company on it.
00:12:06.680 | And yeah, I was early in recommending it.
00:12:11.320 | But he was the doer.
00:12:14.000 | And believe me, this was a very unpopular idea.
00:12:21.400 | As you may know the story that Jack
00:12:25.560 | had hoped to raise $150 million at least
00:12:32.640 | and hoped for $250 million in the initial public offering
00:12:38.320 | of the first index fund.
00:12:41.040 | They, in fact, raised $11 million.
00:12:45.040 | It was called Bogle's Folly.
00:12:47.640 | You talk about early conversations with Jack.
00:12:52.040 | Sometimes I used to kid him that he and I
00:12:55.400 | were the only holders of the first index fund.
00:13:01.200 | But just in terms of the chronology,
00:13:05.800 | I was in Washington in 1975 and '76
00:13:15.960 | on the President's Council of Economic Advisors.
00:13:20.800 | I left Washington in January of '77.
00:13:25.280 | And then Jack had asked me to go on the Vanguard board.
00:13:31.840 | And I was a Vanguard board member for 28 years.
00:13:35.640 | And obviously, in terms of initial conversations,
00:13:40.960 | Jack and I were certainly kindred spirits
00:13:44.600 | because both of us firmly believed and were both convinced
00:13:51.400 | that this was the absolutely best way for individuals
00:13:58.240 | to invest.
00:14:00.080 | And you were both about the same age, too.
00:14:02.560 | That is correct.
00:14:04.040 | Jack was a bit older, but Jack and I were roughly the same age.
00:14:09.360 | And Jack and I both had the connection
00:14:13.840 | to Princeton University, where he
00:14:16.440 | was an extremely loyal and an extremely generous alumnus.
00:14:27.200 | The index concept, great idea.
00:14:30.600 | But it took so long before it caught on.
00:14:34.080 | In the early years, as you said, they only
00:14:37.520 | raised $11 million in the initial offering.
00:14:41.000 | Now, a lot of that had to do, if I recall the story correctly,
00:14:44.360 | it was actually sold through brokerage companies.
00:14:48.960 | And it was sold with a commission.
00:14:51.600 | And the commission was a little bit lower than the commission
00:14:55.160 | to sell active managed funds.
00:14:57.760 | So it didn't get any attention from the brokerage industry
00:15:02.440 | in many ways.
00:15:04.160 | That is certainly correct.
00:15:06.200 | But it was also an idea that the brokerage community really
00:15:14.440 | didn't believe.
00:15:15.720 | I mean, there was still a view that the reason the broker was
00:15:21.920 | important for the customer is the broker
00:15:25.320 | would be able to find the mutual fund or the individual stocks
00:15:31.480 | that were going to outperform.
00:15:33.600 | And so the view that an index fund was the way to go
00:15:40.600 | was pooh-poohed with the idea that who wants to be mediocre?
00:15:46.640 | And that was what the index fund was.
00:15:49.080 | Well, this is a mediocre investment.
00:15:52.400 | This is average.
00:15:53.720 | The fact of the matter is that index investing
00:15:57.720 | proved to be quite above average when
00:16:01.160 | you think of all the other investment products that
00:16:04.880 | were out there.
00:16:07.200 | I looked at the data.
00:16:08.520 | In the first few years that the S&P 500, the first index trust,
00:16:14.120 | as it was called, was out.
00:16:16.800 | And the first year, it was attempted
00:16:18.960 | to be sold through the brokerage firms.
00:16:20.600 | But then it went no load in 1977, about a year later.
00:16:25.520 | And so Vanguard was out on its own selling it.
00:16:27.960 | But there was a period of time when
00:16:30.160 | there was volatility in the market.
00:16:33.080 | Stocks weren't doing very well during the late 1970s.
00:16:37.180 | In fact, Businessweek ran an article
00:16:39.280 | called The Death of Equities.
00:16:41.200 | I mean, so everything was against this fund.
00:16:44.160 | I mean, it was incredible that it actually survived.
00:16:48.160 | However, in around the beginning of the 1980s,
00:16:50.320 | say 1982, '83, when the market started coming back,
00:16:53.320 | the fund finally started to pick up assets.
00:16:55.640 | And I believe it hit a billion dollars in assets
00:16:59.560 | in the late 1980s.
00:17:01.960 | It took, I think, 12 years before the S&P 500
00:17:05.320 | fund hit a billion dollars.
00:17:06.840 | But by that time, I think Vanguard
00:17:08.260 | was already looking at doing other index funds as well.
00:17:11.680 | And this was sort of the genius of Jack Bogle.
00:17:13.800 | He wanted to index everything.
00:17:15.840 | Absolutely.
00:17:16.760 | And Jack was the one who said, we really
00:17:20.400 | ought to be suspicious of the bond managers who tell you
00:17:25.400 | that they can outperform.
00:17:28.560 | Maybe we ought to have a bond index fund as well.
00:17:33.560 | And do we need just the S&P 500 and what
00:17:38.600 | used to be the Barclays Aggregate Bond Index?
00:17:43.280 | Maybe what we ought to have is a real estate index, REITs.
00:17:50.160 | And maybe we ought to have international indices.
00:17:54.360 | We ought to have an index that tracks
00:17:57.160 | IFA, Europe, Australia, and Far East.
00:18:01.280 | So you're absolutely right.
00:18:03.200 | And this was, I think, the genius of Jack Bogle,
00:18:08.160 | that there's no reason why indexing
00:18:11.720 | ought to be confined to simply the US stock market.
00:18:17.400 | Indexing should work and does work in all asset classes.
00:18:23.040 | When I interviewed Jack looking at the chronology of when
00:18:26.560 | different index funds were launched at Vanguard,
00:18:31.200 | it was actually 1996 by the time the last sort of major market
00:18:39.760 | index fund was launched, which was also, ironically,
00:18:43.960 | the year that he had heart issues
00:18:47.200 | and ended up having his heart transplant
00:18:49.360 | and ended up then resigning as the chairman.
00:18:52.440 | But at that point, 1996, a person could go to Vanguard,
00:18:57.360 | and you had a whole suite of index funds.
00:18:59.760 | You had the US market total market index fund.
00:19:02.520 | You had an international index fund, emerging markets index
00:19:05.200 | funds.
00:19:05.700 | You had a REIT index fund.
00:19:06.920 | You had a bond index fund.
00:19:08.600 | It was all there.
00:19:10.480 | You could do a all index portfolio now at Vanguard
00:19:15.560 | by 1996.
00:19:16.800 | So I think that was just an incredible accomplishment
00:19:19.360 | to get to that point.
00:19:20.280 | Absolutely, and remember also, because of Jack,
00:19:24.560 | we introduced a tax-exempt money market fund,
00:19:30.240 | introduced bond funds with different maturities
00:19:34.240 | so that you had a short term, an intermediate term,
00:19:38.880 | and a long term.
00:19:41.480 | From the standpoint of Vanguard, there
00:19:43.720 | was a whole host of products that was really
00:19:48.160 | all that an individual investor needed.
00:19:52.160 | I want to pivot here for a second
00:19:53.880 | and start talking about exchange-traded funds,
00:19:56.520 | because Jack did not like the idea.
00:19:59.560 | That was one of the few instances
00:20:03.000 | where Jack and I disagreed.
00:20:06.760 | There's very little that we disagreed on,
00:20:09.560 | because as I said earlier, we were really kindred spirits.
00:20:14.120 | But you're absolutely right.
00:20:16.760 | From Jack's point of view, exchange-traded funds
00:20:21.200 | were the instrument of the devil.
00:20:23.280 | Like giving gasoline and matches to an arsonist or something
00:20:26.960 | like that.
00:20:27.720 | Well, as I remember, I can't tell you
00:20:30.640 | how many times Jack and I would have this argument where Jack
00:20:35.640 | would say, who in their right mind
00:20:38.760 | would want to buy the market at 10.30 in the morning
00:20:42.760 | and sell it at 1 o'clock in the afternoon?
00:20:46.360 | Anybody who thinks that they can do that and make money
00:20:50.040 | is absolutely crazy.
00:20:52.160 | People are just going to cut their throats on these things.
00:20:56.400 | They're an instrument of speculation.
00:20:59.720 | And we will never do exchange-traded funds,
00:21:04.720 | because I, as a board member, had actually
00:21:07.120 | urged Vanguard to do them.
00:21:09.280 | And my argument to Jack was, Jack,
00:21:13.120 | you don't think that buying and trading exchange-traded funds
00:21:19.240 | is something that is likely to be productive for people.
00:21:25.960 | And I agree with you entirely.
00:21:28.800 | But you and I both know there are some people who
00:21:31.880 | will still want to do this.
00:21:34.480 | And when people do this in the context of a mutual fund,
00:21:41.000 | they can create transactions costs, accounting costs,
00:21:45.400 | and possibly even potential tax costs for those
00:21:50.840 | who stay in the mutual fund.
00:21:55.120 | It's much better for those people
00:21:58.440 | who want to try to do this to do it
00:22:00.680 | through an exchange-traded fund, where there are even
00:22:04.440 | some tax advantages of the exchange-traded funds.
00:22:08.520 | And for the buy-and-hold investor,
00:22:12.040 | an exchange-traded fund is terrific.
00:22:14.640 | And you can do it at an even lower cost.
00:22:17.720 | So that was the argument that we had.
00:22:21.000 | And Jack was never, to the day he died,
00:22:24.640 | never convinced that exchange-traded funds were
00:22:29.520 | worth it.
00:22:30.560 | And had Jack stayed as CEO of Vanguard
00:22:36.160 | through his long and productive career,
00:22:39.800 | Vanguard probably never would have had exchange-traded funds.
00:22:44.000 | I have to tell you, during the late '80s and '90s,
00:22:47.480 | I was working as a broker, first at Kidder Peabody,
00:22:52.120 | and then at Smith Barney, your old firm.
00:22:54.840 | And I had very little access to indexes.
00:22:58.520 | I had my aha moment about indexing around 1996,
00:23:03.240 | when I read Jack's book, Bogelan Mutual Funds.
00:23:07.200 | And I had also heard him speak at a CFA Society annual event.
00:23:11.960 | It was actually the first speaking event
00:23:13.560 | that he had after he had his heart transplant.
00:23:16.280 | But I mean, I wanted access to Vanguard mutual funds.
00:23:20.280 | But I could not get access when I was working at Smith Barney.
00:23:24.320 | Having ETFs would have given me access,
00:23:27.160 | given my clients access to these ETFs, to Vanguard funds.
00:23:32.160 | But they weren't available.
00:23:33.280 | Because Vanguard wouldn't pay for distribution, which
00:23:36.520 | I think was absolutely right.
00:23:38.720 | The only way that someone in the brokerage community
00:23:43.040 | who believed in this could give the client access
00:23:48.120 | to these wonderful index funds was through the ETF.
00:23:53.720 | With Vanguard's credit, especially with the patent
00:23:58.200 | that Gus Sauter, who was the former chief investment
00:24:02.200 | officer, created, Vanguard didn't just create ETFs.
00:24:07.360 | I mean, they actually created a patent
00:24:09.840 | where when they did launch ETFs--
00:24:12.080 | and they were called Vipers at the time.
00:24:14.240 | They're not called that anymore.
00:24:15.560 | They're just Vanguard ETFs.
00:24:16.720 | But I think it was 2001 or 2002 when they launched ETFs.
00:24:21.200 | They did them as a share class of their opened-end funds,
00:24:26.560 | which was unique.
00:24:28.560 | It was patented.
00:24:29.440 | No one has done that since.
00:24:31.440 | And what that did was make the mutual fund itself
00:24:36.480 | more tax-efficient, because the ETF was now part of that.
00:24:41.200 | Absolutely.
00:24:42.400 | And to the extent that there were flows out of the ETF,
00:24:47.280 | what you could do is lay off the low-basis stock, which
00:24:52.280 | had the effect exactly what you said of making the mutual fund
00:24:57.960 | more tax-efficient.
00:24:59.320 | Now, there is still a considerable amount
00:25:05.680 | of unrealized capital appreciation
00:25:09.480 | in the mutual fund.
00:25:11.480 | And to the extent that one can lower that, if, God forbid,
00:25:18.800 | everybody started to liquidate their mutual funds,
00:25:23.400 | a poor mutual fund holder might get a 1099
00:25:27.880 | at the end of the year saying, we
00:25:30.480 | realized the following capital gains on your behalf,
00:25:34.480 | and you owe some tax to the US government.
00:25:38.320 | To the extent that you have the ETF as a share class,
00:25:42.880 | you are making the mutual fund more potentially tax-efficient.
00:25:47.520 | Now, this unrealized appreciation problem
00:25:52.080 | has so far been only a theoretical problem,
00:25:56.840 | because the funds and the ETF have continued to attract money
00:26:04.240 | from investors, and you have not had the liquidations that
00:26:08.960 | would create potential tax events.
00:26:13.280 | But it is a theoretical possibility,
00:26:17.440 | and to the extent that you can get rid
00:26:20.040 | of the low basis stock through the ETF,
00:26:24.520 | you are making the mutual fund a more efficient vehicle.
00:26:31.240 | Well, the interesting occurrence at Vanguard now seems to be--
00:26:38.720 | and I know you're no longer on the board of directors--
00:26:41.480 | but there seems to be a big or bigger
00:26:45.760 | push to get people to invest in ETFs, as opposed
00:26:52.760 | to directly in mutual funds.
00:26:57.920 | People write about this on the Bogleheads forum
00:27:00.200 | quite frequently.
00:27:01.000 | I feel that this is occurring.
00:27:04.160 | I don't consider it a bad thing because of the benefit,
00:27:07.800 | the tax benefit that occurs for everybody.
00:27:11.440 | If there becomes a parity, if you will,
00:27:14.880 | between the amount of money in the open-end mutual fund
00:27:17.400 | side and the amount of money in the ETF side,
00:27:20.640 | if there's redemptions on the open-end mutual fund side,
00:27:27.520 | you would sell the stock that is at a high-cost basis,
00:27:31.200 | basically that's at a loss, so that the fund could
00:27:33.840 | take a capital loss inside the fund.
00:27:36.560 | And if there are redemptions on the ETF side,
00:27:40.560 | then you push out of the fund the low-cost basis stock.
00:27:44.000 | Exactly, yes.
00:27:45.320 | It's this double-edged way of cutting taxes.
00:27:49.600 | And I just think it's a fantastic idea
00:27:52.160 | they came up with this years ago.
00:27:53.840 | And I really don't know why other open-end mutual fund
00:27:58.240 | companies have not licensed this idea from Vanguard
00:28:01.640 | and done it themselves.
00:28:02.800 | But it doesn't seem like anybody wants to pay
00:28:04.680 | Vanguard for the process.
00:28:08.240 | I think you're probably right.
00:28:09.800 | But I agree with everything you said.
00:28:12.440 | That's been a wonderful way of doing it.
00:28:15.600 | And it's another reason why Vanguard's
00:28:19.160 | going into the ETF business, finally,
00:28:21.760 | has been a major plus for the firm.
00:28:28.000 | Well, let's go ahead and get into your book,
00:28:30.480 | A Random Walk Down Wall Street.
00:28:32.000 | And the latest edition, there's a lot of new stuff
00:28:36.640 | that you put in.
00:28:38.000 | And this has been added over the years, various editions.
00:28:42.160 | So the book is getting thicker.
00:28:45.880 | Well, there's more and more going into the book.
00:28:48.400 | Remember, the book was originally
00:28:50.120 | written as an investment guide.
00:28:52.680 | And when you realize, from 1973 on,
00:28:59.040 | the whole investing world has changed.
00:29:01.680 | There were no index funds in '73.
00:29:05.040 | What I had recommended in '73 was
00:29:09.040 | buying some closed-end funds at a discount, which--
00:29:12.120 | and the discounts were something like 40% at the time.
00:29:16.200 | Those discounts are largely gone now.
00:29:19.200 | But there were no index funds.
00:29:21.240 | There were no money market funds.
00:29:23.200 | There were no tax-exempt money market funds.
00:29:26.800 | And in terms of the length of the book,
00:29:29.280 | it's actually been, for the last several editions,
00:29:34.280 | the length has not increased.
00:29:37.200 | Because if there was new material added,
00:29:41.800 | I've tried to compress other parts of the book.
00:29:46.440 | So it really isn't thicker than it was 10, 20 years ago.
00:29:55.160 | There have been a lot of new things that I could tell--
00:29:57.600 | Absolutely.
00:29:58.440 | --went in there.
00:29:59.320 | And one of the things you've talked more about
00:30:02.880 | in more recent editions is the value premium
00:30:07.400 | and high-dividend-yielding stocks.
00:30:09.560 | And could you tell us your views on, call it, factor investing?
00:30:16.120 | Well, let me make two points about that.
00:30:18.680 | First of all, one of the reasons that I've
00:30:21.840 | become far more interested in dividend-paying stocks
00:30:27.760 | is that I really think we've got a very tough situation facing
00:30:36.560 | individual investors, and particularly
00:30:40.240 | facing retired investors for whom the original advice was
00:30:47.520 | very simple.
00:30:49.360 | You need income, and you have a big chunk
00:30:53.520 | of bonds in your portfolio, both because of their stability
00:30:59.360 | and because bonds had been producing interest
00:31:04.080 | rates of 5%, 6%.
00:31:07.440 | So the retired people could, without having
00:31:11.760 | to go to their brokers to buy and sell things,
00:31:15.600 | could have that nice income coming in regularly.
00:31:21.360 | That doesn't occur anymore.
00:31:23.520 | We're basically in a world where more than half
00:31:27.760 | of the sovereign debt in the world
00:31:30.000 | sells at negative interest rates.
00:31:33.000 | Interest rates for the 10-year Treasury in the United States
00:31:37.760 | is just over half of 1%.
00:31:40.400 | We live in an era that's been called
00:31:43.160 | an era of financial repression.
00:31:46.560 | So what do you do as a retired individual?
00:31:52.120 | What can you do to get some income?
00:31:56.280 | And I do think that one of the, on a relative basis,
00:32:02.320 | more attractive parts of the US stock market
00:32:08.280 | are blue-chip companies that pay well-protected dividends.
00:32:17.360 | That strikes me as being a reasonable substitute
00:32:23.040 | for what otherwise would have been a bond portfolio that
00:32:28.560 | otherwise might have-- where I might have recommended
00:32:32.040 | a total bond market index fund.
00:32:36.920 | The old kind of bond portfolio being something
00:32:42.080 | that you needed both for stability and for income
00:32:46.480 | doesn't work the way that it did in periods past.
00:32:54.480 | Let me now get to your point about factor investing.
00:32:58.320 | I have been somewhat suspicious about being a one-factor
00:33:06.120 | investor.
00:33:07.480 | While there's been a long-term history of value
00:33:12.880 | being better than growth, we know
00:33:14.760 | that we go through many years, including
00:33:17.120 | many of the recent years, where value investing has
00:33:22.040 | been absolutely terrible.
00:33:25.560 | When people like Rob are not, say, indexing is OK,
00:33:30.920 | but you want to do fundamental indexing, which basically
00:33:35.480 | is a way of tilting the portfolio toward value
00:33:40.080 | stocks and small stocks, that I think
00:33:44.360 | of that as a very good way of charging 50 basis
00:33:50.120 | points or more for something that is not and has not,
00:33:56.360 | over the long pull, been better than regular index funds.
00:34:01.680 | Now, having said that, to the extent
00:34:05.160 | that one wants to be a factor investor,
00:34:09.760 | I think a multi-factor model may give you
00:34:16.240 | index-type performance with possibly a bit less volatility
00:34:24.680 | than a regular index fund.
00:34:27.800 | And so to the extent that one wants
00:34:32.560 | to consider factor investing, I don't think
00:34:37.600 | you do it by buying a value fund.
00:34:40.760 | I don't think you do it by just buying a small-cap fund.
00:34:44.840 | I don't think you do it by buying a low-volatility fund,
00:34:49.520 | because we know that on the individual factors,
00:34:53.280 | there will be long periods of underperformance.
00:34:57.400 | But what we know about the factors
00:34:59.800 | is that they tend to be uncorrelated.
00:35:05.120 | When one factor does poorly, another factor may do well.
00:35:12.640 | And what you're looking for in investing
00:35:17.200 | is a portfolio where everything doesn't happen at once.
00:35:23.840 | Everything doesn't go down at once.
00:35:28.120 | And so I have a little bit of sympathy
00:35:31.600 | for a multi-factor approach if it's low cost.
00:35:37.880 | And I think something like a Goldman Sachs ETF, which
00:35:42.840 | is a multi-factor ETF that has had a reasonable return,
00:35:50.120 | I don't think you're going to do much better, if at all,
00:35:54.920 | than a regular index fund.
00:35:57.560 | And for most people, I'd say keep it simple.
00:36:01.040 | But it is possible that a multi-factor approach could
00:36:06.160 | give you index-type returns with a bit less volatility
00:36:12.680 | and therefore give you a slightly higher Sharpe ratio,
00:36:18.480 | which is basically the return divided by the volatility.
00:36:24.480 | So that if the volatility is a bit lower,
00:36:27.480 | you get a little bit higher Sharpe ratio.
00:36:31.160 | To backtrack a little bit to clear it up,
00:36:33.480 | the high dividend yield approach to investing
00:36:36.120 | that you do advocate, especially for retirees,
00:36:38.800 | isn't because you expect higher returns
00:36:41.480 | through the factor side of higher dividend yielding
00:36:44.880 | stocks.
00:36:46.240 | That's really two different arguments.
00:36:49.160 | One is just to get the higher dividend income.
00:36:51.760 | That's why you would do high dividend yielding stocks.
00:36:55.000 | And by the way, Vanguard has a couple of really good high
00:36:57.680 | dividend yield.
00:36:58.720 | Absolutely, right.
00:37:01.040 | Those are exactly the kinds of things in the category
00:37:05.600 | that I would recommend.
00:37:06.800 | And it is largely a transactions cost argument.
00:37:12.640 | I mean, I believe in the old Modigliani-Miller
00:37:16.120 | theorem that dividends really don't matter.
00:37:20.200 | You could always create artificial dividends
00:37:23.840 | by selling off a few shares.
00:37:27.040 | But both from the standpoint of the transactions cost
00:37:32.320 | and the bother for people of having
00:37:35.800 | to think about periodically looking at their portfolio
00:37:40.640 | and selling off a few shares periodically to get income,
00:37:44.720 | it's an ease of actually accomplishing what you want
00:37:48.640 | and a minimizing transactions cost strategy.
00:37:53.120 | Very good.
00:37:53.640 | Well, thank you for clearing that up.
00:37:55.840 | By the way, if people were interested in doing
00:37:58.560 | multi-factor investing, which would include value
00:38:01.720 | and small cap, momentum and quality, all these--
00:38:05.400 | the factor zoo, Vanguard also has multi-factor ETFs,
00:38:10.040 | which are very low cost.
00:38:11.440 | Vanguard has recently introduced one.
00:38:15.000 | That's absolutely right.
00:38:17.320 | One new area that you have written about more recently
00:38:22.560 | and one of the companies that you're
00:38:24.760 | on the board for, which is Wealthfront,
00:38:27.120 | has developed and launched is a risk parity strategy.
00:38:32.440 | Could you comment on risk parity?
00:38:34.160 | And you believe in it, but how strongly do you believe in it?
00:38:39.800 | Well, one of the interesting things about markets
00:38:44.840 | is that very safe assets may very well
00:38:50.840 | yield more than they should.
00:38:56.200 | And let me make an analogy to the racetrack.
00:39:02.600 | And I've actually done articles on racetrack betting.
00:39:08.960 | And there's an empirical regularity
00:39:12.280 | that we know about racetrack betting
00:39:15.840 | that I will describe to you.
00:39:18.920 | If you bet on every horse in the race,
00:39:23.680 | you will have a winning ticket.
00:39:26.400 | And you will lose about 20% of your money.
00:39:29.960 | Why do you lose 20% of your money?
00:39:33.040 | Because that's the track take.
00:39:37.240 | When the track figures out the parimutuel pool,
00:39:41.000 | it deducts 20% for their operating expenses
00:39:45.400 | for the taxes that they have to pay to the government.
00:39:50.200 | And they don't give that back to you.
00:39:54.160 | So you lose about 20%.
00:39:55.960 | Now, let's say instead you bet on every favorite.
00:40:02.000 | Well, it turns out you lose about 5% or 6% of your money.
00:40:06.400 | Let's assume instead you bet on the longest shot in the race.
00:40:10.720 | You lose about 40% of your money, 50% of your money.
00:40:17.440 | In other words, there's a bias in the odds
00:40:21.240 | where long shots go off at far less favorable odds
00:40:27.640 | than favorites do.
00:40:30.040 | So it may be the same thing in the stock market
00:40:33.680 | and in the bond market, where safe assets actually
00:40:38.200 | yield more than they should if this was simply
00:40:44.760 | on an expected value basis the same kind of rate of return
00:40:52.000 | expectation for all classes of assets.
00:40:57.640 | Well, if that's true, and there's maybe some long run
00:41:03.000 | evidence that it's true, then maybe the best thing to do
00:41:09.280 | is to buy some safe asset and leverage them so that they have
00:41:15.880 | the same volatility as the risky asset,
00:41:19.760 | but that they will then give you a higher rate of return.
00:41:25.680 | Oh, that's an interesting observation.
00:41:28.440 | And I think that's the argument for it.
00:41:31.800 | As I say in the book, there is some evidence
00:41:36.800 | that, at least in the bond market,
00:41:39.240 | this has been a winning strategy.
00:41:42.200 | If a few years ago you bought 2.5% 10-year treasuries
00:41:48.480 | and leveraged them by borrowing at 1% or less,
00:41:54.120 | you actually then got a much higher rate of return.
00:41:59.600 | And the rate of return would have
00:42:01.440 | been better than buying the 30-year treasury bond.
00:42:07.160 | Now, so far that's worked well.
00:42:11.040 | It made money for people like Ray Dalio.
00:42:14.120 | And you can't deny that it's worked well.
00:42:18.960 | At Wealthfront, our risk parity fund
00:42:22.280 | has actually done better than Dalio's because our expense
00:42:28.200 | ratios are much lower than Dalio's expense ratios.
00:42:34.720 | So it has worked.
00:42:36.120 | Now, as I point out in the book, it
00:42:39.920 | might continue to work as long as the Federal Reserve keeps
00:42:44.320 | pumping money into the economy at the same rate
00:42:47.560 | that they've been doing it in the past.
00:42:49.880 | But God forbid we come to the other side of the COVID-19
00:42:54.640 | crisis, the world economy goes back
00:42:57.920 | to some semblance of normality, and we
00:43:02.240 | have a little bit of inflation with all the money floating
00:43:05.320 | around the world, this is a strategy that might not work.
00:43:11.280 | Dr. Malkiel, do you believe that the Powell put,
00:43:15.000 | as it's called, the Fed buying up corporate bonds,
00:43:19.760 | buying up treasury bonds, is distorting
00:43:22.840 | this relationship between quality and return?
00:43:28.320 | Yeah, I do think that, as we say in the drug industry,
00:43:33.880 | there are some uncomfortable side effects.
00:43:38.440 | I am very worried about the explosion of corporate debt.
00:43:47.120 | I'm very worried about things I worry about today,
00:43:51.200 | that Hertz can raise equity money in bankruptcy,
00:43:56.720 | that when you look at institutions like Robinhood
00:44:01.600 | and find that Hertz was the leading stock that people
00:44:06.760 | had in their trading account when it went from 1 to 5,
00:44:12.800 | I think those are very undesirable side effects.
00:44:17.640 | And on the one hand, there's no question
00:44:22.200 | that COVID-19 produced an enormous crisis.
00:44:26.400 | We had to do something extraordinary.
00:44:30.600 | So I don't fault the Fed with what it's done,
00:44:34.720 | but I count me as somewhat worried
00:44:40.080 | that there are side effects, and one should not ignore them.
00:44:47.280 | I'm going to do a quick lightning round on Boglehead,
00:44:50.040 | other Boglehead questions, just to wrap it up.
00:44:53.320 | If you don't mind, it'll just take a few minutes.
00:44:57.080 | A safe withdrawal rate has been touted at 4%.
00:45:02.000 | Are we still at 4%?
00:45:04.000 | I don't think so.
00:45:04.960 | I think, again, this is one of the unfortunate side
00:45:09.320 | effects of what has gone on with monetary policy
00:45:13.840 | around the world.
00:45:15.600 | The base rate, if you think of the sovereign rate
00:45:20.240 | from sovereigns like the United States and Germany,
00:45:25.120 | the EU, that have the least risk,
00:45:28.760 | are essentially zero, so that the whole base of returns
00:45:33.960 | starts at zero.
00:45:35.880 | And even if the risk premium on equities
00:45:39.360 | continued to be 5%, which it's been historically,
00:45:44.280 | according to the Ibbotson data, then equities
00:45:48.800 | would give you 5% or maybe 5 and 1/2%.
00:45:52.680 | So you will not preserve the real value of an endowment
00:45:58.040 | with a 4% withdrawal rate.
00:46:00.720 | The appropriate rate is clearly lower.
00:46:04.920 | And I think that institutions that
00:46:09.240 | retain the 4%, 5%, 6% withdrawal rates
00:46:14.480 | are not living in what is, in my view, the appropriate world.
00:46:22.520 | But my clients, they tend to use 3%.
00:46:25.080 | Would you agree that 3%--
00:46:26.400 | Yours is much better than 4%.
00:46:28.480 | OK.
00:46:29.240 | Well, that leads us into another question by the Bogleheads.
00:46:31.720 | And that is, in your book, you talk
00:46:34.040 | about the allocation between stocks and bonds
00:46:37.720 | for different age groups.
00:46:40.160 | And you say, for people who are in their 60s,
00:46:44.680 | they should have 60% to 80% stocks, 70s, 40% to 60% stocks,
00:46:50.120 | 80s, 30% to 50% stocks.
00:46:52.840 | Has that changed in this new world that we're in?
00:46:57.580 | If you look back at the additions,
00:47:00.120 | I have increased the stock allocation
00:47:03.720 | and reduced the bond allocation.
00:47:08.960 | And frankly, if I were writing the 13th edition right now,
00:47:16.760 | under today's circumstances, I would probably
00:47:20.400 | increase the stock allocation and reduce the bond allocation
00:47:24.840 | a little further.
00:47:28.080 | ESG, Environmental, Social, and Governance,
00:47:31.160 | seems to be more popular here in the United States.
00:47:34.880 | Well, what is your feeling on ESG?
00:47:37.080 | And if you could, could you address
00:47:39.280 | the expected returns of ESG versus the expected returns
00:47:43.480 | of, say, just the market?
00:47:45.740 | Well, let me take the second question first.
00:47:48.880 | While ESG investing has recently,
00:47:53.360 | like in the first quarter of 2020,
00:47:57.120 | ESG funds have done a little better than regular index
00:48:00.440 | funds, the reason being that they avoid all oil companies.
00:48:05.720 | And as you know, the oil companies
00:48:09.000 | have not been the place to be investing in the first quarter.
00:48:13.480 | However, over the longer run, there
00:48:17.240 | is no credible evidence that ESG investing will give you
00:48:21.720 | a higher rate of return.
00:48:24.200 | There have been some periods where it has,
00:48:26.720 | some periods where it's given you a lower rate of return,
00:48:30.360 | but there's no credible evidence that you'll
00:48:34.360 | be helping the world will give you a higher rate of return.
00:48:40.120 | In fact, quite the opposite.
00:48:42.080 | If, for example, oil companies are permanently lower
00:48:47.240 | because many institutions avoid them,
00:48:51.840 | then they will probably give you a higher rate of return
00:48:55.080 | over the long haul.
00:48:57.120 | If a particular type of company is hated and therefore
00:49:01.800 | sells at a lower valuation than it deserves,
00:49:06.880 | it's going to give you a higher rate of return in the future.
00:49:10.040 | Not a lower rate of return.
00:49:12.080 | So number one, don't think you can do this
00:49:16.000 | and you can both feel good and you're
00:49:19.680 | sure of getting a higher rate of return.
00:49:22.280 | Secondly, I'm very suspicious that you really
00:49:27.080 | ought to feel good about buying an ESG fund.
00:49:30.840 | There are various institutions that
00:49:33.680 | give companies ESG ratings.
00:49:36.920 | They're wildly different.
00:49:38.920 | Some people will give you a high ESG rating.
00:49:42.440 | Some will give you a low ESG rating.
00:49:45.240 | You ought to really look at what you're owning.
00:49:47.800 | It's not at all clear that if you look at these things
00:49:52.120 | that you ought to feel good.
00:49:53.760 | For example, one of the companies
00:49:57.000 | that gets a very low ESG rating is
00:50:01.400 | Kinder Morgan, a natural gas pipeline company.
00:50:05.680 | Now, it gets a low rating because it's carbon.
00:50:09.240 | On the other hand, to the extent that we use natural gas rather
00:50:13.640 | than coal, this will be great for the environment.
00:50:17.120 | We're never going to get rid of carbon completely.
00:50:20.240 | As an interim step, you're much better burning natural gas
00:50:24.360 | than burning oil.
00:50:27.280 | It's much better transmitting this through pipelines
00:50:30.380 | rather than through trucks or through rails
00:50:34.000 | where there can be accidents and where the trucks are generally
00:50:40.120 | burning fuel to transmit oil or natural gas.
00:50:45.840 | So is Kinder Morgan really a very bad company,
00:50:50.600 | or is it one of the better companies?
00:50:53.480 | I think you can do that with a lot of those companies
00:50:57.200 | that get terrible ESG scores.
00:51:00.200 | Now, what about the companies that get great ESG scores?
00:51:04.200 | If you look at what you're holding in an ESG fund,
00:51:07.960 | one of the big holdings is Facebook.
00:51:10.720 | Well, should you feel very good about holding Facebook or not?
00:51:16.920 | I don't know that I'm going to feel any better in my portfolio
00:51:21.440 | because I hold Facebook and Twitter than if I don't.
00:51:27.600 | Now, it's true, there's very little carbon output
00:51:30.720 | from Facebook.
00:51:32.120 | But again, I'm very suspicious that you
00:51:35.560 | ought to feel better about holding these portfolios.
00:51:40.640 | And I think if this continues to grow in popularity,
00:51:45.360 | it's much more likely that they will give you
00:51:48.120 | lower rates of return in the future
00:51:51.120 | rather than higher rates of return.
00:51:53.720 | And so neither should you feel good,
00:51:56.280 | nor should you expect to get an attractive rate of return
00:52:00.720 | by buying an ESG fund.
00:52:04.480 | Direct indexing is growing in popularity,
00:52:08.920 | which is very simply, instead of buying an index fund,
00:52:13.360 | people are buying or companies are buying individual stocks
00:52:17.880 | for you, say all the stocks in the S&P 500,
00:52:21.480 | and selling each individual stock that
00:52:24.480 | may be at a loss to generate larger capital losses
00:52:29.040 | than you could generate if you just had index funds
00:52:32.800 | and the market went down and you did tax-loss harvesting.
00:52:35.480 | Now, I find that this works well with people
00:52:38.440 | who may have sold an asset and have a large capital gain,
00:52:42.280 | but it leaves you with 500 individual stocks
00:52:46.640 | and probably a lot of tax problems
00:52:48.520 | later on down the road.
00:52:50.320 | So even though I'm expressing my concerns about direct indexing,
00:52:53.200 | could you tell me, how do you feel about direct indexing?
00:52:56.440 | No, I'm actually more of a fan of direct indexing.
00:53:00.920 | And we do this at Wealthfront.
00:53:03.040 | The surest way of getting an alpha
00:53:06.000 | is not by picking stocks, but by getting an after-tax alpha.
00:53:13.440 | In my own Wealthfront account, it's
00:53:15.880 | been used to offset some capital gains from some
00:53:21.000 | of the real estate funds and real estate index funds
00:53:25.760 | that I own.
00:53:27.440 | And I think it's actually a very good thing.
00:53:32.000 | With respect to the longer run, are you, in fact,
00:53:37.320 | then just getting rid of all of your losses
00:53:42.560 | and your portfolio will then have
00:53:45.680 | larger and larger unrealized capital gains?
00:53:50.520 | I would say this.
00:53:51.880 | Unless we change the tax law where, at depth,
00:53:56.880 | there is no writing up of your assets
00:54:01.680 | where you have to realize the capital gains,
00:54:06.480 | but in fact, what you do is just write the value, the basis up,
00:54:14.000 | then you avoid the long run problem of your portfolios
00:54:19.080 | will tend to have more unrealized capital gains.
00:54:24.480 | Now, if they change the tax law, I'd
00:54:26.720 | agree with you that in the longer run,
00:54:29.480 | you're going to pay some price.
00:54:32.080 | But do remember that avoiding capital gains for several years
00:54:39.400 | has an advantage, even if you later have to pay the tax,
00:54:44.200 | because a dollar today is worth more than $1.10 or 20 years
00:54:49.840 | from now.
00:54:51.200 | I would agree with you with no disrespect.
00:54:55.480 | At your age, direct indexing would make a lot of sense
00:54:58.320 | if you had capital gains.
00:55:01.320 | However, I'm not sure if direct indexing makes sense
00:55:04.000 | for a 35-year-old who sold their app company for $10 million
00:55:09.240 | to do it because they sort of get saddled and stuck
00:55:12.800 | in these 500 stocks for 50, 60 years,
00:55:17.520 | and they have to pay fees on the portfolio to maintain it.
00:55:22.360 | And that is--
00:55:22.960 | Well, it's OK.
00:55:23.560 | We can agree on absolutely everything.
00:55:25.840 | OK.
00:55:26.680 | Very good.
00:55:28.200 | OK, one last question.
00:55:29.400 | This has to do with your view on China.
00:55:33.560 | You co-authored a book on China, which came out in 2008.
00:55:41.080 | China has not performed well since that time,
00:55:45.560 | because the question was this huge 500% run-up
00:55:49.160 | in the couple of years prior to the book being published.
00:55:51.880 | But how do you still feel about China?
00:55:54.920 | I think the problem, and what's actually
00:55:57.840 | been disappointing about President Xi,
00:56:01.120 | is China's growth has almost entirely
00:56:06.080 | been on the private sector, not the sector
00:56:11.600 | of government-owned enterprises.
00:56:15.120 | The overall indices have done very poorly
00:56:18.800 | because the government-owned enterprises have been terrible.
00:56:24.480 | But the private enterprises, the Tencent, the Baidu's,
00:56:30.360 | the Alibaba's, those have done particularly well.
00:56:36.520 | You know, you have to look at what's in an index.
00:56:39.320 | The problem is that the index, like the FXI, has not done well.
00:56:46.160 | And it's not done well because of the state-owned enterprises.
00:56:52.640 | The private companies, though, have done well.
00:56:55.640 | And I am still optimistic about them.
00:56:59.000 | And to just give you an idea of how you could get just
00:57:03.400 | the private stuff, there's an ETF
00:57:06.120 | called EMQQ, which has the Alibaba's and the Tencent's,
00:57:11.840 | and in fact, all of the internet companies in China
00:57:17.360 | that have done particularly well.
00:57:20.040 | So I think the answer is, I am still optimistic about China,
00:57:27.200 | but not the whole economy, because I
00:57:31.360 | think that President Xi has been, unfortunately,
00:57:36.200 | emphasizing the state-owned enterprises.
00:57:39.160 | And I think that's a big mistake.
00:57:42.640 | And it's one of the reasons why China's overall growth will not
00:57:47.920 | be anything like it's been in the past.
00:57:50.680 | Dr. Valkeel, it's been a real pleasure.
00:57:52.360 | We could go on for another two hours easily.
00:57:57.120 | Thank you so much for being on the Bogle Heads on Investing
00:57:59.440 | podcast.
00:58:00.240 | It's been my pleasure, Rick.
00:58:02.320 | This concludes Bogle Heads on Investing, episode number 23.
00:58:06.320 | I'm your host, Rick Ferry.
00:58:08.200 | Join us each month to hear a new special guest.
00:58:11.560 | In the meantime, visit bogleheads.org
00:58:14.920 | and the Bogleheads Wiki.
00:58:16.640 | Participate in the forum and help others find the forum.
00:58:20.400 | Thanks for listening.
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00:58:26.480 | [MUSIC ENDS]
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