Bogleheads® Conference 2024 Bogleheads Banquet Scott Burns, Keynote Speaker
00:00:00.000 | (audience applauding)
00:00:03.160 | - Well, before I get started on introducing Scott,
00:00:08.440 | I just wanna add my note of thanks to Alex.
00:00:12.240 | Just out of curiosity, raise your hand,
00:00:14.080 | how many people here fairly regularly visit the forum?
00:00:18.400 | So, looks like a roughly, I would say,
00:00:21.540 | half, maybe a little less.
00:00:23.020 | You know, we like to think we do good work
00:00:26.320 | at the Bogle Center and at this conference,
00:00:28.440 | but the forum is really where the bulk of the work
00:00:32.880 | gets done, it's where people come with their questions,
00:00:36.200 | some of them very easy, simple, basic questions,
00:00:38.680 | some of them more advanced questions,
00:00:41.520 | and it's where an enormous, an enormous amount
00:00:44.720 | of education gets done, thousands of posts a week,
00:00:49.720 | you know, tens of thousands of threads,
00:00:53.920 | most of which, or almost all of which,
00:00:55.640 | convey extremely useful information to ordinary investors
00:01:00.640 | like all of us, all of us here.
00:01:02.900 | So, again, a round of applause for Larry for, please,
00:01:07.900 | for making the forum the place that it is,
00:01:11.400 | because without him, it would be overrun with trolls.
00:01:14.800 | (audience applauding)
00:01:17.960 | 'Cause that's the natural history of forums,
00:01:22.400 | you have to be constantly battling that entropy,
00:01:25.920 | and that's what Larry and Alex and Sue
00:01:29.840 | and their associates are doing.
00:01:32.000 | Well, all right.
00:01:32.840 | 30 years ago, I was a modestly bored neurologist
00:01:38.880 | scribbling about finance, not knowing that I would be
00:01:42.480 | spending the last half of my adult life doing it
00:01:45.160 | and writing about it, until I heard from Scott,
00:01:50.920 | who looked at a few of the things that I had written
00:01:54.320 | and said, you know, Bill, you write tolerably well,
00:01:59.320 | and you seem to be able to do the math,
00:02:03.240 | and that is a very useful combination.
00:02:05.880 | You actually have a future ahead of you
00:02:07.600 | in financial writing, so keep at it, Bill.
00:02:10.780 | And so I did, and it's largely thanks to Scott
00:02:16.120 | that I'm here talking to you tonight.
00:02:20.640 | Scott graduated MIT half a century ago,
00:02:25.640 | more than half a century ago.
00:02:28.800 | Used to, he tells me, amble over to Harvard
00:02:31.240 | to take lessons in writing from Archibald MacLeish,
00:02:34.840 | if you can remember who Archibald MacLeish was,
00:02:36.680 | very famous poet who fought in the First World War,
00:02:40.120 | among other things.
00:02:41.240 | And he, I believe, started out at the Boston Herald
00:02:46.320 | and then wound up at the Dallas Morning News,
00:02:48.120 | where he ran a syndicated columnist,
00:02:50.200 | hundreds of newspapers read by millions and millions
00:02:53.120 | of people, a well-beloved financial writer.
00:02:56.600 | But more importantly than that, he did important stuff.
00:03:00.560 | He wrote a very influential book
00:03:02.520 | called The Coming Generational Storm
00:03:04.200 | with economist Larry Kotlikoff,
00:03:07.960 | and even more important than that,
00:03:09.720 | he wrote a white paper for, I believe,
00:03:11.560 | it's the National Center for Policy Analysis,
00:03:14.240 | Reinventing Retirement Income in America,
00:03:18.840 | which is one of the major reasons
00:03:20.960 | why so many millions of Americans
00:03:22.760 | now have default options in their 401(k) plans
00:03:27.760 | of target-gate funds.
00:03:29.760 | And if that's not a major accomplishment,
00:03:32.080 | I don't know what is.
00:03:33.280 | But even more famously than that,
00:03:36.720 | he's the inventor of the couch potato portfolio.
00:03:40.520 | And there's a very famous story
00:03:43.400 | about the financial theorist, Harry Markowitz,
00:03:46.880 | who knew about more assembling efficient portfolios
00:03:49.640 | than anybody else on the planet.
00:03:51.280 | And when Jason Zweig asked him for The Wall Street Journal,
00:03:55.920 | how he designed his portfolio, he said,
00:03:59.160 | "Well, something like, you know,
00:04:00.480 | "I want to minimize regret.
00:04:02.400 | "I'm going to split things 50/50,
00:04:04.120 | "so I own half stocks and half bonds."
00:04:06.840 | And it fell to Scott to define what that portfolio was
00:04:11.800 | for millions of people.
00:04:13.400 | A very successful portfolio, indeed it is.
00:04:17.040 | So without further ado,
00:04:19.280 | I'd like to ask Scott to come up and address you all.
00:04:24.280 | (audience applauding)
00:04:27.520 | - You only need to read one of Bill's things
00:04:32.440 | to know that this guy is a wonderful writer,
00:04:36.320 | and I like wonderful writers.
00:04:40.080 | And you also realize that he's a guy
00:04:46.200 | who is blissfully unaware of just how smart he is.
00:04:51.440 | And that's very rare.
00:04:55.600 | And when you combine it with actual humility,
00:04:58.560 | that's totally rare.
00:05:00.960 | So I hope I won't disappoint you
00:05:05.800 | after that introduction.
00:05:08.040 | 'Cause I'll just tell you a story to assure you
00:05:13.040 | that I am a callow, ink-stained wretch.
00:05:16.280 | Okay?
00:05:17.560 | Just before we go any further.
00:05:20.520 | Last weekend, I was in Boston with my wife.
00:05:24.080 | We'd been on a St. Lawrence Seaway cruise
00:05:27.120 | that ended in Boston.
00:05:29.600 | My friend on the cruise was eager to go
00:05:35.480 | to Harvard Square and see it.
00:05:38.600 | And of course, decided that I was the appropriate guide.
00:05:42.520 | So I took him and his wife, and my wife,
00:05:47.520 | and we took the MTA, best way to see Boston
00:05:54.280 | is to go over the salt and pepper shakers
00:05:58.680 | into MIT and then on to Harvard.
00:06:02.120 | But it was a really unnerving experience
00:06:06.000 | because it had changed so much.
00:06:10.480 | I would like to have shown him, for instance,
00:06:13.040 | the little bar where Matt Damon
00:06:17.400 | got Minnie Driver's phone number,
00:06:20.360 | even though he was a Southie from Boston.
00:06:22.880 | But it's not there anymore.
00:06:26.960 | The Club 47 on Mount Auburn Street,
00:06:31.360 | which is where Joan Baez, Bob Dylan,
00:06:34.080 | and Tom Rush got their starts,
00:06:36.200 | it is not, there's nothing there anymore.
00:06:40.360 | There's a plaque on the wall, and next to it,
00:06:42.920 | there's a window that's filled with restaurant,
00:06:47.120 | you know, disposable supplies.
00:06:49.080 | And I have fond memories of that place,
00:06:52.280 | including one where I was walking with a friend
00:06:55.280 | and wanted to go in, and was about to go in,
00:06:59.480 | my friend, who was an aspirant poet,
00:07:01.160 | grabbed me and said, "Hey, Scott, I can't go in there."
00:07:05.120 | I said, "Well, why, Roger?"
00:07:06.320 | And he said, "Well, I'm a known dealer."
00:07:09.560 | (audience laughing)
00:07:12.560 | There were a lot of times in Harvard Square
00:07:17.480 | that were very interesting.
00:07:19.000 | But I also have wonderful memories of Jack Bogle.
00:07:22.520 | One of them was, he appeared at a Cebu meeting,
00:07:27.360 | and that's the Society of American Business Editors
00:07:29.640 | and Writers, I can't remember what city it was in,
00:07:32.880 | but he opened his talk by saying,
00:07:37.040 | "Well, since we last met, I've had a change of heart."
00:07:40.720 | And you knew immediately that that was a very prepared line,
00:07:45.720 | and he was really, really grateful
00:07:48.760 | that he had a new heart that worked.
00:07:51.680 | But he made a wonderful presentation,
00:07:54.320 | including the discussion of the three factors
00:07:57.240 | that determine the future rates of return on stocks.
00:08:01.400 | And he was dour about the possibilities,
00:08:05.160 | which was proof that anticipating the future
00:08:10.160 | is very difficult,
00:08:11.480 | because he actually turned out to be wrong,
00:08:13.600 | even though the equation was wonderful.
00:08:15.560 | I also remember interviewing him,
00:08:20.080 | and there's just a peculiar thing.
00:08:23.280 | He had a mild scent of whiskey.
00:08:26.640 | This is usually a scent that I don't find attractive.
00:08:31.600 | But he wore it like a gentleman's aftershave
00:08:38.320 | that you could get from Penhaligon.
00:08:40.760 | There was just something wonderful about it.
00:08:43.160 | And I don't know, I just found him to be
00:08:46.280 | a very magnetic guy, I think for all the reasons
00:08:50.960 | that he is so admired.
00:08:53.600 | He really was very serious about being the investor's friend,
00:08:57.400 | and he was a titan.
00:08:59.600 | But if we're being grateful for Jack Bogle,
00:09:06.080 | there are other reasons to be grateful here as well.
00:09:09.920 | One of them is for the existence of Morningstar.
00:09:14.880 | And I'll give you some very specifics for me in a moment.
00:09:20.600 | But he made a, in retrospect, simple decision
00:09:25.600 | that the consumer was the ultimate customer.
00:09:31.400 | Earlier, I was having a senior moment
00:09:35.960 | trying to remember the original company
00:09:38.280 | that gave all the facts and figures on mutual funds.
00:09:41.680 | And I couldn't remember it.
00:09:44.400 | Christine couldn't remember it.
00:09:46.760 | Bill Bernstein could.
00:09:48.280 | It was Lipper.
00:09:49.600 | But does anyone remember Lipper?
00:09:52.720 | Okay, a few, but they sold their information
00:09:57.520 | strictly to mutual funds who could use it for benchmarking.
00:10:02.520 | Mensuedo, with that simple decision,
00:10:06.000 | moved things in a direction toward consumers
00:10:09.480 | and started the ball rolling for us being
00:10:13.200 | do-it-yourself investors.
00:10:15.760 | He also made the wonderful decision to hire people
00:10:19.160 | who actually wrote in English
00:10:20.840 | and thought in English as opposed to numbers,
00:10:25.600 | which was a great benefit.
00:10:27.480 | For me, the real start as a journalist
00:10:32.480 | was the time when Morningstar's database
00:10:38.720 | and screening software was put on floppy disks.
00:10:42.880 | And they were such a small company at that time
00:10:46.120 | that they had it distributed through Business Week.
00:10:49.920 | But you could pay for that.
00:10:51.560 | And all of a sudden, I had a tool that I could use
00:10:56.560 | that others could use.
00:10:58.600 | So I could do research on mutual funds and write about it,
00:11:03.600 | and knowing that my readers could verify it.
00:11:10.680 | And that was a sea change.
00:11:13.600 | It meant that I was no longer like a reporter
00:11:18.160 | at a press conference where you are led by the nose
00:11:22.240 | by people who are on message all the time
00:11:25.280 | and who control all the information.
00:11:27.920 | I had information that I could use, sort,
00:11:32.920 | and make different queries about.
00:11:35.880 | It changed my ability to address an audience.
00:11:42.000 | So I would like to just go on with some other
00:11:47.000 | sometimes impolite observations.
00:11:50.240 | We're now in a position where the towers of Babel out there,
00:11:58.200 | and we've become a gigantic tower of Babel.
00:12:02.320 | They all have a lot of messages.
00:12:04.080 | They're all loud distractions.
00:12:06.560 | They agree on nothing.
00:12:07.840 | They just have a common theme.
00:12:10.120 | And that theme is that it's important now to do something.
00:12:13.960 | And everything depends on this hour, this minute.
00:12:18.480 | And you should buy, you should sell, you should do something.
00:12:22.120 | But I've gathered some information
00:12:25.320 | on the unimportance of elections.
00:12:27.920 | This is from an investment manager named David Bainson,
00:12:31.280 | and he noted these findings recently.
00:12:34.000 | One, energy was the best performing sector under Obama.
00:12:40.000 | Despite his constant attacks on energy.
00:12:44.000 | Technology was the best performing sector under Trump.
00:12:48.160 | Also, despite his constant attacks on technology.
00:12:52.480 | The equity market rose in all eight years under Obama,
00:12:57.600 | in spite of his being a pinky como, you know what.
00:13:00.240 | And the equity market rose 70% under Trump despite COVID.
00:13:06.800 | Markets, in fact, generally,
00:13:09.440 | but not always, rise under both parties.
00:13:13.280 | Of course, that doesn't mean they're both good things.
00:13:16.360 | It just means they're things.
00:13:18.080 | There's another fact that isn't discussed,
00:13:22.080 | and that's that under both parties,
00:13:25.240 | the government debt rises,
00:13:26.880 | and they have a great agreement
00:13:31.720 | that they won't talk about that topic
00:13:34.080 | in this content-free election period.
00:13:36.600 | So we can't do much about that.
00:13:44.480 | I've been a student of Social Security for a long time.
00:13:49.320 | I researched my first book in the late '60s.
00:13:52.480 | It was published by Doubleday in 1972,
00:13:57.480 | which is a year before the first CFP degree was given out,
00:14:02.960 | and it was based on Modigliani's Life Cycle Hypothesis,
00:14:06.480 | and I was really interested in biology
00:14:08.520 | and human creatures, and still am.
00:14:10.440 | It was well-received, never became a paperback,
00:14:21.680 | which is my notion of how a book should be.
00:14:26.080 | If you're successful with a book,
00:14:27.800 | it goes beyond hardcover and gets to have a paperback,
00:14:32.280 | but as a journalist, I had different opportunities
00:14:37.280 | for writing papers, and my first paper on Social Security
00:14:43.600 | appeared in a very well-known journal called Playboy,
00:14:50.360 | and the story for how this happened
00:14:55.200 | is that Esquire magazine solicited me
00:14:58.640 | to write an article about personal bankruptcy,
00:15:01.640 | 'cause they really had in mind an article
00:15:03.840 | that was even happening to executives, God forbid,
00:15:08.040 | and I researched the article and wrote it,
00:15:12.680 | but I decided that the data didn't show that.
00:15:16.360 | It was all wrong, and so I wrote an article
00:15:21.240 | on bankruptcy as a political act,
00:15:24.040 | and tons of people going and declaring personal bankruptcy
00:15:29.760 | deliberately just before the then-coming presidential race.
00:15:34.760 | Well, Esquire didn't like that, wasn't their idea,
00:15:41.440 | so they sent a kill fee, and I redirected the article
00:15:46.440 | to my column in Boston magazine,
00:15:49.960 | and then Playboy called Boston
00:15:53.440 | and wanted an article on bankruptcy,
00:15:56.680 | so I wrote the article, researched it,
00:16:00.440 | and it appeared in Playboy, and that's, you know,
00:16:05.040 | you would think that an idea like let's do nothing
00:16:10.040 | and let's be slothful would be really popular.
00:16:15.360 | You know, people would immediately grasp it,
00:16:18.640 | but it's not, it's a slow idea,
00:16:24.240 | and I'll give you some ideas about it.
00:16:28.000 | Earlier this year, I think it was in January or February,
00:16:30.440 | John Reckenthaler, who was writing I also love,
00:16:34.640 | he noted that index funds now account
00:16:37.440 | for half of all fund assets.
00:16:39.860 | That means they've removed hundreds of billions,
00:16:44.320 | I guess at this point trillions,
00:16:46.920 | from active asset management.
00:16:50.040 | Now, that can't happen overnight,
00:16:53.520 | but it's taken half a century,
00:16:56.240 | so I want to give you some kind of relative measures.
00:17:01.260 | Scholars tend to choose Charles Ellison's The Loser's Game
00:17:06.400 | in 1973 as the kind of bellwether thing
00:17:11.400 | on how professional managers can't beat the market
00:17:15.200 | because they were the market.
00:17:20.040 | I had a different vehicle of recognition.
00:17:25.040 | It was two double pages in The Wall Street Journal
00:17:29.440 | under the title Portfolios Without Managers,
00:17:32.720 | in which a data freak at a newspaper company
00:17:35.160 | called Media General used computers
00:17:38.160 | to effectively create the millions of monkeys
00:17:43.160 | that would eventually write Shakespeare
00:17:46.280 | or manage a decent portfolio.
00:17:48.640 | You just had to pick the right monkey.
00:17:50.560 | Though that exercise routinely showed
00:17:54.320 | that the S&P 500 was at about the 70th percentile
00:18:00.480 | from the top and that most of the funds,
00:18:06.920 | managed funds, were under the 50th percentile.
00:18:12.080 | So that was a kind of constant message
00:18:14.760 | that humiliated active managers.
00:18:18.640 | It didn't last long,
00:18:24.360 | and neither did the media general effort.
00:18:28.560 | So let's get some idea of just how slow this slow idea is.
00:18:33.560 | I think you're all aware that you can't use
00:18:41.640 | the word index investing and viral in the same sentence
00:18:46.120 | 'cause it definitely wasn't.
00:18:48.080 | But here are some halftimes
00:18:50.000 | on some popular consumer products.
00:18:52.680 | Homes with TV sets rose from nearly nothing in 1946
00:18:57.360 | to half of all homes by 1955.
00:19:00.440 | That's less than a decade.
00:19:02.400 | Homes with electricity rose from 8% in 1907
00:19:06.400 | to 50% in 1925, a period of 18 years.
00:19:11.960 | About 8.4% of households owned a home computer in 1984.
00:19:16.960 | The figure rose to 53.6% by 2001, that's 17 years,
00:19:22.120 | and 69.7% by 2003, 19 years.
00:19:26.640 | You notice that index investing
00:19:29.000 | isn't anywhere in that ballpark.
00:19:30.760 | Henry Ford started producing the Model T in 1918.
00:19:35.200 | By 1920, 20% of households owned cars.
00:19:39.440 | By 1929, 60%.
00:19:42.880 | So you might be asking,
00:19:44.040 | was anything slower than index investing?
00:19:47.880 | And yes, there was.
00:19:49.360 | I can proudly announce that it was
00:19:52.600 | the Insinkerator Manufacturing Company.
00:19:55.560 | It was the first kitchen disposal maker established in 1938.
00:20:01.680 | The household ownership reached 50% in 2007,
00:20:05.840 | a period of 69 years.
00:20:08.620 | And that, I think, everyone who lives
00:20:13.220 | without city septic sewer service knows
00:20:16.660 | that the reason that was so slow was the septic pushback,
00:20:21.660 | which I think also applies to the septic pushback
00:20:27.260 | that has come from the financial services industry
00:20:31.820 | against funds.
00:20:36.940 | And they do it in different ways.
00:20:39.240 | Again, they are masters of content-free discussion.
00:20:43.940 | They say, it's a stock picker's market.
00:20:48.740 | What does that mean?
00:20:50.200 | They say, it's not a buy and hold market.
00:20:54.120 | There's danger ahead.
00:20:58.180 | There's always danger ahead.
00:21:00.020 | Life is dangerous.
00:21:02.140 | Do you really wanna be just average?
00:21:05.180 | Well, if it beats everyone else, you bet.
00:21:07.700 | (audience laughing)
00:21:09.780 | So I'd like to share a few things
00:21:14.100 | that I've never written about because,
00:21:18.140 | well, they're just so outrageous.
00:21:21.700 | They might make me appear to be a very biased,
00:21:27.640 | anti-professional person, but here are a few of them.
00:21:34.860 | A PI guy, PR guy, who worked for a very large
00:21:39.500 | insurance company that had been formed
00:21:41.420 | by an American revolutionary.
00:21:44.260 | We won't name the company, just, it's in Boston.
00:21:47.820 | (audience laughing)
00:21:50.220 | I was recently in a pub in Boston
00:21:53.900 | where I could drink his beer cold
00:21:57.320 | and look across to the cemetery
00:21:59.140 | where his cold corpse was, and they advertise that fact.
00:22:04.500 | The PR guy said, but you know, Scott,
00:22:07.840 | really one of my jobs is to make sure
00:22:11.360 | some of our people never see the media
00:22:14.580 | because they were not people that should be seen.
00:22:20.580 | They weren't proud of them.
00:22:22.900 | PI guy, PR guy at another large institution,
00:22:28.980 | the Boston Safe Department and Trust,
00:22:33.160 | looked at me one day and said, Scott,
00:22:34.980 | the best thing that could happen to this building
00:22:37.320 | is that the top two floors could be blown away.
00:22:40.060 | And I kind of looked at that, and he was right.
00:22:44.240 | Two guys named Monk and Christian
00:22:46.160 | later made a takeover offer and the top two floors
00:22:49.960 | were, in effect, blown away, but unfortunately,
00:22:52.960 | they were not impoverished.
00:22:54.400 | Another guy who is the head of a trust operation
00:23:01.520 | for the largest bank in Boston.
00:23:03.300 | I had this experience 'cause a guy had negotiated
00:23:09.440 | to write a newsletter for their advisory group
00:23:12.640 | and the many vice presidents kept shooting down
00:23:16.640 | everything that he did, and he thought
00:23:18.940 | I had enough credibility that I would be able
00:23:21.240 | to get by this army of vice presidents.
00:23:26.240 | And I had written a thing suggesting,
00:23:30.060 | okay, CD rates aren't very good now,
00:23:33.320 | but treasury bills are much higher
00:23:36.520 | because of the way the return on treasury bills
00:23:39.880 | is calculated compared to CDs.
00:23:42.780 | And because they're from the treasury,
00:23:46.080 | you know, it didn't go on much further than that.
00:23:48.200 | And he looked at me and said,
00:23:50.160 | well, we really can't write that.
00:23:56.260 | That money that stays in the bank,
00:24:01.260 | all that goes straight to our bottom line.
00:24:03.920 | And I was biting my tongue, I wanted to say,
00:24:09.100 | can you spell fiduciary?
00:24:11.960 | And I didn't 'cause I knew that was hopeless.
00:24:17.340 | And to give you another idea of just how tone deaf
00:24:21.500 | this trust operation was, they were called
00:24:25.520 | the first advisory, first,
00:24:30.520 | I can't remember, having a senior moment.
00:24:34.440 | But if you turn it into an acronym, it was Fiasco.
00:24:38.720 | (audience laughing)
00:24:41.720 | Early on, Ned Johnson, and I'll talk about him
00:24:48.160 | a little later in spite of the excoriations
00:24:51.320 | he received from Jack Bogle,
00:24:53.120 | asked me to help write the original discussions
00:25:00.160 | of the Fidelity Equity Income Fund,
00:25:03.360 | which is one of the first funds that sought
00:25:06.540 | a higher dividend yield than the S&P 500, but also growth.
00:25:11.540 | So I wrote that, and then years later,
00:25:16.680 | I go to interview the anointed prince
00:25:20.760 | who managed that fund very successfully, Bruce Johnston.
00:25:24.720 | I meet him at the Four Seasons in Irving, Texas.
00:25:29.720 | I always feel lucky when I'm in a Four Seasons,
00:25:33.520 | which isn't very often.
00:25:34.820 | So I was having breakfast with him,
00:25:36.760 | and his breakfast arrives, and he sends it back.
00:25:41.400 | How many of you have ever sent a breakfast back
00:25:45.240 | from anywhere, let alone a Four Seasons?
00:25:48.720 | So I asked him, what is this all about?
00:25:53.720 | And he said, "Well, they didn't meet my requirements."
00:25:57.400 | I said, "Do you have a lot of requirements?"
00:26:00.360 | (audience laughing)
00:26:01.200 | And he said, "Yes, I do."
00:26:03.080 | And I said, "Could I see them?"
00:26:06.600 | And he gave me two pages of typewritten requirements
00:26:11.440 | for his princely presence.
00:26:16.760 | And so, you know, that kind of made me think
00:26:21.520 | about, you know, that maybe egos get a little bit big
00:26:25.120 | in financial services if they don't start big.
00:26:27.740 | Another is an experience with Peter Lynch, revered figure.
00:26:35.160 | He published an article in Worth Magazine
00:26:39.680 | in which he declared, much like Dave Ramsey,
00:26:45.300 | that you could take 7% from your investments in stocks
00:26:50.000 | and never run out of money, because stocks return 10%,
00:26:55.000 | and you reserve 3% for inflation and 7%.
00:27:00.080 | So at that time, which is around 1995,
00:27:04.340 | there wasn't the kinds of software we have now
00:27:07.640 | that you can get online.
00:27:09.760 | So I went and visited with a broker friend
00:27:15.120 | who had the American Funds software called Hypo,
00:27:19.580 | and we ran a number of examinations about, okay,
00:27:23.480 | how many people would survive at different rates?
00:27:27.720 | And, well, it turned out to be a disappointing number at 7%.
00:27:32.720 | I can't remember what it is,
00:27:34.940 | but the column is on my website.
00:27:37.380 | So then I called Lynch, and he was kind of flustered.
00:27:44.340 | And he said, "I checked it with our quant."
00:27:47.260 | I'll give you a message about quants in a moment.
00:27:50.240 | And it turned out, actually,
00:27:55.980 | that he hadn't written the article.
00:27:58.900 | It had been ghostwritten.
00:28:00.940 | And, you know, I don't know what Lynch did to check it,
00:28:05.440 | but there it was, making declarations that are impossible.
00:28:09.760 | So he was the first Dave Ramsey.
00:28:13.060 | (audience laughs)
00:28:15.900 | Then, I'll tell you,
00:28:20.480 | I had a contact over at Mass Financial Services,
00:28:26.140 | a major rival of Fidelity,
00:28:29.820 | and Roger asked,
00:28:32.980 | "Scott, would you write our shareholder report?"
00:28:36.780 | And I said, "Roger, you know, you got a whole staff here.
00:28:40.700 | "Why would you want me to write your annual report?"
00:28:44.940 | And he said, "Scott, if anyone on staff does it,
00:28:51.840 | "they'll just be torn apart by all the egos here.
00:28:54.840 | "They'll behave if they have an outsider."
00:28:59.260 | So I wrote their annual report for quite a number of years.
00:29:05.440 | Now, I learned a lot of things during that,
00:29:10.520 | and one of them was about
00:29:14.460 | the Massachusetts Financial Services quant.
00:29:17.420 | They, like all firms, they had a guy
00:29:19.500 | who did all the numbers.
00:29:21.140 | But I had a Russian friend
00:29:24.680 | who took care of their computer equipment.
00:29:30.700 | His name was Yuri.
00:29:32.300 | He was a physicist who worked in programming
00:29:36.500 | for Russian weapons.
00:29:39.340 | He wanted to take the opportunity to leave Russia
00:29:42.460 | and said so, and they said, "Fine, Yuri,
00:29:46.940 | "but you'll have to stay here
00:29:49.140 | "until your knowledge is out of date."
00:29:52.440 | So he worked for six years as a masseur
00:29:55.780 | before his knowledge was out of date,
00:30:00.220 | then came right over and got a job working with Otto Eckstein,
00:30:03.860 | one of the first big data providers.
00:30:06.380 | Then he went on to consulting things,
00:30:09.320 | and he was taking care of the digital equipment
00:30:11.640 | that Mass Financial Services had.
00:30:14.940 | And what he found was that the quant at Mass Financial,
00:30:18.980 | his major use of the digital equipment computer
00:30:23.220 | was for all the calculations he was making
00:30:26.740 | for doing the Bermuda race in his sailboat.
00:30:29.400 | While I was in Boston, we were there on a Sunday,
00:30:37.180 | and it was sad, 'cause we were just around the corner
00:30:39.880 | from the Cafe Marleya, and some of you may remember
00:30:42.840 | that was a scene in the Thomas Crown Affair.
00:30:46.200 | Well, my memorable time from that
00:30:52.160 | is I had lunch with Ned Johnson there.
00:30:54.220 | We were both downtown on a Saturday.
00:30:58.280 | I think we were both bachelor boys.
00:31:00.200 | My wife was on the Cape.
00:31:01.340 | His wife was probably in Nahant.
00:31:03.600 | And so there we were, and Ned said,
00:31:05.940 | "All right, let's go have lunch."
00:31:07.280 | So we did, and I took the opportunity to ask,
00:31:12.280 | "You know, Ned, you got, most of your funds
00:31:17.880 | "have their annual meetings here in Boston,
00:31:20.100 | "but the others, like the older funds,
00:31:23.660 | "Trend and so forth, they have their meetings in Miami.
00:31:28.380 | "What's, why?"
00:31:31.280 | He said, "Well, Scott, funds have a life cycle,
00:31:35.160 | "and as funds age, their shareholders age,
00:31:40.700 | "and that's where the shareholders are."
00:31:43.320 | And he said that, "You know, that's a problem,
00:31:44.840 | "'cause that money eventually will leave."
00:31:48.680 | And Ned was one of these kind of perverse thinkers
00:31:54.960 | who is always looking for a contrary thing,
00:32:00.800 | and I think it was 10 years later,
00:32:04.160 | I'm going to a meeting at the Dallas Country Club
00:32:08.800 | where Fidelity announced the introduction
00:32:12.640 | of the first charitable gift fund.
00:32:14.540 | Johnson had finally found the solution
00:32:19.060 | to the problem of asset runoff.
00:32:21.120 | "You can die, but leave your money behind,
00:32:25.100 | "and everything will be fine, at least for Fidelity.
00:32:29.000 | "You might be dead, but, you know, that happens."
00:32:32.000 | And you may wonder, I am a lowly journalist,
00:32:39.080 | how would I have contact with Ned Johnson?
00:32:41.360 | Well, it turns out, you know,
00:32:42.440 | this is a small, really weird world.
00:32:45.120 | We had two acquaintances in common.
00:32:49.120 | One was a manic-depressive sculptor
00:32:52.240 | whose grandfather was head of the New York Stock Exchange,
00:32:56.840 | and the other was a Buddhist,
00:32:59.480 | head of the San Francisco Zen Center, named Richard Baker,
00:33:03.400 | both of whom had gone to Harvard,
00:33:05.040 | and Harvard has a lot of strange people.
00:33:08.580 | So when our mutual friend was in a manic state,
00:33:15.800 | he would call, create a foundation,
00:33:19.920 | and he would call Ned and a fellow named Jim Storey
00:33:23.840 | at one of the larger law firms that ran money, and me.
00:33:28.840 | The only reason he would have called me
00:33:33.800 | is that I figured out an equitable divorce formula
00:33:37.880 | for him and his wife, who were both friends.
00:33:40.920 | But I would watch him try to get some money from them
00:33:47.840 | to support his manic idea, of which he had many,
00:33:54.240 | and the other connection, Baker.
00:33:59.240 | Baker, some of you may know, he's the Roshi
00:34:06.760 | who was kicked out of the San Francisco Zen Center
00:34:09.520 | after he failed to recognize where his wife ended
00:34:13.640 | and Paul Hawkins' wife began.
00:34:20.200 | So I am quite accustomed to the weirdness of we humans,
00:34:25.200 | and one of the things that I think is wonderful
00:34:33.260 | about this group, and I really wish I'd been here
00:34:36.480 | participating in it earlier, longer,
00:34:39.700 | is I think everyone here has a sense
00:34:47.200 | that money just has a place.
00:34:49.560 | It is not everything, and I think everyone here
00:34:54.560 | is wise enough to know that if a problem
00:34:58.440 | can be solved with money, it's not a real problem.
00:35:03.400 | The problems that get us are the ones
00:35:05.960 | that tear our hearts out, and they have nothing
00:35:08.520 | to do with money, so anyway, that's a, sorry.
00:35:15.120 | Let's go a little further into why the media
00:35:19.560 | and financial services are a problem.
00:35:22.600 | Transactions are the lifeblood of financial services.
00:35:27.480 | Without transactions, they don't got no money.
00:35:32.200 | They can't pay their Mercedes payments.
00:35:36.360 | That's why they need shifts in strategy,
00:35:41.720 | they need reasons to change, et cetera.
00:35:44.240 | There's an unholy alliance with media
00:35:47.960 | because media, any media, needs change
00:35:52.960 | to justify tomorrow's edition.
00:35:58.840 | That includes newspapers, it includes magazines, et cetera,
00:36:03.840 | and if you look at the movement of communications
00:36:10.360 | over the last 30 years, it's a declining spiral.
00:36:14.240 | You compare books to newspapers and magazines,
00:36:19.240 | then compare newspapers and magazines
00:36:21.880 | to articles on the web, then compare the web
00:36:26.880 | to Instagram and other more transient forms,
00:36:32.540 | and it's this decreasing spiral of content.
00:36:41.120 | Just getting worse and worse.
00:36:44.520 | So the business responds to a threat.
00:36:51.520 | The threat is how can they respond to index funds,
00:36:58.960 | and they have this wonderful idea,
00:37:06.920 | well, mutual funds, index funds are popular.
00:37:11.400 | Let them have lots of them, and that's what they've done.
00:37:16.440 | They've done what law firms do
00:37:18.160 | when they want to bury small firms.
00:37:20.560 | They bury them in discovery.
00:37:22.320 | So we are buried as consumers in a surfeit of indexes,
00:37:27.320 | most of which, many of them are entirely useless.
00:37:35.680 | I think we've had statistics like this earlier today,
00:37:39.080 | but between the New York Stock Exchange and NASDAQ,
00:37:42.120 | there are 5,700 traded stocks,
00:37:44.840 | but they've been used to create 3,300 ETFs
00:37:49.280 | and over 7,000 mutual funds,
00:37:51.600 | and that, of course, includes some bond funds,
00:37:56.040 | so it's an exaggeration, but they've made
00:37:58.840 | kind of more funds than the church has saints.
00:38:03.840 | They've also gone on to create a whole bunch
00:38:15.960 | of other diversions that keep us from the main message,
00:38:20.800 | lifecycle funds.
00:38:22.360 | All the research on lifecycle funds
00:38:24.200 | shows that their only benefit, which is a major one,
00:38:27.860 | is that they keep people from making a lot of transactions,
00:38:30.800 | so they're good in that sense,
00:38:32.120 | but every bit of research shows that A,
00:38:36.040 | there's no agreed way to invest.
00:38:40.060 | All the formulas are different.
00:38:42.000 | You can go down, you can go up, you can stay constant,
00:38:48.120 | but it really doesn't have much effect.
00:38:51.080 | WRAP accounts, another way of disguising taking fees.
00:38:56.840 | Equity index funds from insurance companies.
00:39:00.300 | That's a formula for playing three-card monte
00:39:03.620 | with an actuary, you're just not gonna win.
00:39:07.780 | Alternative asset classes in pension funds.
00:39:10.720 | The Texas Teachers' Pension now has about 40%
00:39:15.700 | of its assets in alternative assets,
00:39:18.460 | all of which extracts higher fees,
00:39:20.660 | and they're doing this from people
00:39:22.460 | who report themselves to be quite smart,
00:39:26.140 | so why are they doing it?
00:39:28.300 | It doesn't make sense.
00:39:31.580 | We now are getting alternative asset classes in 401(k) funds.
00:39:37.580 | Then there's direct investing, I mean, excuse me,
00:39:40.260 | direct indexing, which has been discussed today,
00:39:43.420 | and of course, we have this movement
00:39:45.500 | toward getting life annuities in 401(k) and 403(b) plans,
00:39:50.120 | and that's without going to the fact
00:39:55.420 | that if you go to a fidelity advisor,
00:40:00.420 | he will sell you an annuity product of some kind,
00:40:05.520 | whether you need it or not.
00:40:06.700 | Friend of mine's a recently retired Delta pilot,
00:40:09.620 | has a military pension, he has social security,
00:40:14.100 | he has a ton of cash, he owns his house free and clear,
00:40:17.820 | and he goes to this fidelity representative,
00:40:22.700 | and he wants him to buy an annuity.
00:40:26.120 | You know, like, this guy is very conservative,
00:40:31.120 | except he still flies.
00:40:34.000 | He has a low-wing experimental plane,
00:40:42.320 | and we're gonna fly to Lajitas outside of Big Bend,
00:40:47.600 | where I want to interview the goat
00:40:52.880 | that is the mayor of Lajitas,
00:40:54.800 | and then interview the statue of Robert E. Lee
00:40:58.200 | that was taken out of Dallas and moved to Lajitas,
00:41:02.360 | so I want to start, see if I can start a movement
00:41:06.240 | toward gathering all the forbidden statues in one place
00:41:11.240 | so we can visit them.
00:41:14.940 | Not sure how that column will be received.
00:41:21.900 | (audience laughing)
00:41:24.900 | The other major problem we have is that, you know,
00:41:29.340 | we are wired to want a yes or no answer,
00:41:33.260 | and there's any number of sociopaths
00:41:39.780 | who will be delighted to give us our yes or no answer
00:41:42.940 | with great confidence.
00:41:44.020 | Yes, I can do that for you, yes,
00:41:46.820 | and you will have a superior performance.
00:41:48.940 | We have the smartest people.
00:41:51.700 | Convinced?
00:41:53.480 | The trouble is that all the answers that we look for,
00:42:00.020 | and that was made evident in the discussion
00:42:01.940 | of portfolio survivor rates today,
00:42:06.180 | are mushy, they're probabilistic.
00:42:10.100 | That was the great thing that Bill Bengen introduced.
00:42:13.860 | You know, he brought people up to date
00:42:17.580 | with data that actually showed how things performed.
00:42:22.580 | And there, there's a story I like to tell.
00:42:28.660 | I call it the missing bullets problem.
00:42:31.160 | This is how things get misrepresented.
00:42:35.380 | During World War II, they were concerned during the war
00:42:38.540 | about the number of planes that were not coming back,
00:42:41.900 | so they gathered the military people
00:42:45.140 | and a bunch of mathematicians in a room,
00:42:47.880 | a hangar filled with airplanes,
00:42:51.820 | and they examined them, and counted the bullet holes,
00:42:55.500 | and looked at the areas where they found
00:42:57.220 | the most bullet holes, and they started discussing,
00:43:00.660 | well, we could add some armor here,
00:43:04.260 | and we could add some armor there.
00:43:06.140 | It might protect those places where the bullet holes are.
00:43:08.860 | Then a number of theorists, Abraham Wald came in,
00:43:12.420 | and he said, well, no, that's really not the answer.
00:43:15.300 | And they asked him why.
00:43:17.820 | He said, well, we need to know
00:43:19.980 | where the missing bullet holes are.
00:43:22.240 | And they looked at him, didn't quite understand.
00:43:28.620 | He said, well, if you assume that the bullets,
00:43:32.420 | holes are distributed randomly,
00:43:34.680 | the missing bullet holes are the ones on the planes
00:43:40.580 | that didn't come back, and that actually is
00:43:45.580 | an example put into money management of survivor bias.
00:43:53.140 | If you're only counting a limited sample,
00:43:58.800 | you're not getting the real number,
00:44:02.940 | and that's another way that the mutual fund industry
00:44:06.440 | misleads people, because return,
00:44:11.000 | the relative performance is significantly higher
00:44:14.440 | if you account for all the mutual funds and ETFs
00:44:19.440 | that are quietly interred when no one's looking,
00:44:26.280 | so that you don't really find out how many
00:44:29.000 | funds were just quietly taken out and shot.
00:44:35.960 | Here's some examples.
00:44:39.640 | For the year ending 2023, large cap managed funds
00:44:45.360 | trailed the S&P index 59.68% of the time.
00:44:49.640 | Over three and five year periods,
00:44:51.200 | the percentage rose to 80%.
00:44:52.920 | By 20 years, the fail rate rose to 93%.
00:44:56.240 | How much more does the industry need to know
00:45:01.640 | before they accept index funds and stop pushing back?
00:45:06.640 | Well, there's a wonderful quote about that,
00:45:13.420 | which is from Upton Sinclair, I'm trying to find it here.
00:45:19.040 | But it's to the effect that you can't make a man
00:45:27.440 | change his mind if his salary depends on something else.
00:45:32.440 | It's often quoted and absolutely true.
00:45:35.260 | These figures go on, and the SPIVA report
00:45:40.120 | has been coming out for, I think it's 23 years now,
00:45:43.140 | and every issue shows the same thing.
00:45:48.680 | The longer the time period, the lower the possibility
00:45:52.920 | that managed funds will beat their appointed index.
00:45:56.960 | It goes still further, and this we can thank Alan Roth for.
00:46:01.960 | He did an exercise showing the increased failure rate
00:46:08.960 | when you started selecting more funds.
00:46:11.620 | If you had a portfolio of two funds,
00:46:14.360 | or three funds, or four funds.
00:46:15.620 | The more funds you have, the greater your chances
00:46:18.960 | of failure if they're managed funds.
00:46:22.360 | So I think the number there is that at 10 years,
00:46:27.360 | only 6% of managed fund portfolios with 10 funds
00:46:31.640 | beat comparable index fund portfolios, 6%.
00:46:36.640 | And yet, what do the people on Wall Street try to do?
00:46:42.920 | They give us portfolios with 13 funds in them,
00:46:47.640 | some with totally irrelevant percentages of investment,
00:46:52.640 | and we get confused.
00:46:58.240 | Because who wants to manage 13 funds
00:47:02.560 | and know about 13 funds?
00:47:03.920 | I know.
00:47:04.760 | So it all comes down, for me, to one question.
00:47:11.520 | Do you want your retirement to be a low probability event?
00:47:16.860 | (audience laughing)
00:47:19.060 | And I don't, and I didn't.
00:47:21.820 | And I can happily say that in spite of being
00:47:24.780 | an ink-stained wretch, the Burns family
00:47:28.180 | is doing quite nicely, and far better than we expected,
00:47:32.540 | because I've been a cheap investor,
00:47:36.460 | looking for index funds, and following that.
00:47:41.540 | Now, I would like to bring up another problem,
00:47:46.540 | and that's the last of my comments.
00:47:50.120 | Bogle cited a conversation between Kurt Vonnegut
00:47:56.700 | and Joseph Heller at a meeting,
00:47:59.340 | where Vonnegut said that the guy throwing the party
00:48:02.460 | had made more money in one day than Heller had made
00:48:07.660 | on the entire sales of his book.
00:48:12.020 | Heller answered back, yes, but I have something
00:48:15.460 | he will never have, enough.
00:48:18.160 | And Bogle quoted that, but I think it tells us
00:48:24.660 | of another problem, which I find myself
00:48:33.580 | more and more interested in, which is
00:48:37.940 | that what we really suffer from,
00:48:42.820 | in addition to what I call wealth porn,
00:48:46.100 | which is in most financial publications,
00:48:49.220 | is wealth addiction.
00:48:52.500 | And there's a story, there's a book by that title,
00:48:57.420 | by Philip Slater.
00:48:58.780 | Slater wrote The Pursuit of Loneliness,
00:49:01.180 | American Culture at the Breaking Point
00:49:02.740 | of the Mid '60s, very well-known book.
00:49:04.940 | And wealth addiction, he wrote in 1983.
00:49:11.780 | It's a sign of the times.
00:49:14.500 | That book is out of print.
00:49:16.760 | But it's something we should study.
00:49:21.060 | Thank you for listening.
00:49:22.260 | (audience applauds)
00:49:27.180 | - Thank you.
00:49:28.180 | Thanks a bunch for that, Scott.
00:49:36.380 | I want to amplify just one quickly quick point you made,
00:49:39.140 | which is to thank Morningstar, like 30 years ago,
00:49:42.740 | for the floppy disk sets that they would put out.
00:49:46.100 | Like you, it gave me a lot to write about.
00:49:48.900 | It was $99 a year, Christine.
00:49:52.180 | And my favorite, the favorite use I had for it
00:49:57.020 | was I would hear some money manager
00:49:59.620 | being interviewed by some gullible journalist,
00:50:04.420 | and I would immediately fire up my computer,
00:50:06.340 | throw in the disk, and see that this money manager
00:50:09.060 | was a moron.
00:50:10.380 | It was a constant source of joy.
00:50:15.440 | So, couple of questions here.
00:50:19.540 | Which column of yours is the one that you're most proud of?
00:50:23.520 | - I don't know.
00:50:25.740 | I don't know.
00:50:30.360 | The only thing I can say is that when I look back,
00:50:35.260 | I think, "Gee, I was so much smarter then."
00:50:38.640 | (audience laughs)
00:50:41.480 | I think the one, I'm really proud of the one
00:50:46.700 | about Peter Lynch because it,
00:50:50.940 | I got to work with a broker, with the tools he had,
00:50:56.920 | and prove something wasn't true.
00:51:02.900 | I'm kind of an, you know, an autodidact,
00:51:07.100 | and I don't learn things in the way normal people do.
00:51:11.300 | And so, I just gather things from everywhere,
00:51:15.300 | and I was really glad that I had a friend
00:51:17.500 | who was a broker, who was also interested in,
00:51:21.780 | he's one of the few brokers I know
00:51:23.060 | who really wanted to help people.
00:51:24.700 | - And then one final question, which is,
00:51:30.180 | you know, you wrote this very well-known piece
00:51:32.300 | about reinventing retirement income in America.
00:51:36.380 | If they made you retirement czar of the United States,
00:51:40.980 | and you had to build the system from the ground up,
00:51:44.700 | how would you, what would you design?
00:51:47.500 | - Oh, well, since violence is getting
00:51:54.340 | to be more and more popular,
00:51:55.980 | I'd probably have a few ritual executions.
00:51:58.640 | (audience laughs)
00:52:01.480 | Just, you know, I would like it if the people
00:52:07.780 | who got away with creating the crash of 2008 and 2009
00:52:14.740 | actually paid a price.
00:52:16.260 | They didn't, and they still go on.
00:52:21.680 | The worst that happened is they lost their jobs,
00:52:25.660 | but not their wealth.
00:52:26.900 | - Okay, yeah.
00:52:29.580 | - I know that's a harsh answer,
00:52:30.900 | but I mean, I've heard so much BS,
00:52:35.900 | and, you know, that's why I told the anecdotes
00:52:43.660 | that I did the, there, you know,
00:52:45.860 | the people in financial services,
00:52:52.500 | they, so many of them, particularly portfolio managers,
00:52:56.380 | they think they're so smart, and, you know,
00:52:59.980 | if you have any doubt,
00:53:02.140 | they'll tell you how smart they are, you know?
00:53:04.660 | And it just bothers me that there could be
00:53:08.700 | that much arrogance and so little humility
00:53:11.980 | in the face of all the uncertainties of human life
00:53:16.020 | that they could, yeah.
00:53:19.820 | So I would like to mete out punishments.
00:53:22.940 | Maybe something less harm, less violent than shootings,
00:53:27.180 | but some form of public humiliation.
00:53:30.180 | Let's bring the stocks back.
00:53:32.940 | - Yeah.
00:53:33.780 | - Not the common stocks, the lockup stocks.
00:53:36.420 | - Yeah, well, yeah, I mean,
00:53:38.180 | as long as we're into Old Testament wrath,
00:53:40.700 | I would like, I would reserve capital punishment
00:53:44.220 | for the designers and sellers
00:53:46.540 | of inverse and leveraged funds.
00:53:48.700 | Okay, well, with that, let's give Scott a round of applause.
00:53:52.860 | (audience applauding)
00:53:56.020 | you
00:53:58.080 | [BLANK_AUDIO]