Bogleheads® Conference 2011 - John Bogle & Bill Bernstein Fireside Chat
Chapters
0:09:33 The Age Equals Bonds Rule
11:40 Beware of Reaching for Yield
15:39 Social Security
16:10 Inflation-Adjusted Variable Annuity
19:5 The Impact of High Frequency Trading
25:27 Never Invest in a Tips Fund
32:57 Why Do You Think the Market Is Still Overvalued
56:32 Trustees Equity Fund
00:00:00.000 | I got a note from Taylor that he asked me to read to the crowd.
00:00:17.660 | So it says, "Dear Mel, if you have the opportunity, please relay this message to my friends at
00:00:22.820 | Bogleheads 10.
00:00:23.820 | My first visit to the Vanguard campus was during our second Boglehead reunion in June
00:00:30.340 | 2001.
00:00:31.340 | I will never forget the thrill of meeting and listening to Mr. Bogleheads and meeting
00:00:35.860 | face-to-face with individual forum Bogleheads whom I had come to know and respect.
00:00:42.780 | It's an honor for all of us to be part of Mr. Bogleheads' great crusade to give ordinary
00:00:46.820 | investors a fair shake.
00:00:49.700 | Savor the moment.
00:00:50.700 | I know that someday each of you will look back on this occasion as three of the most
00:00:55.900 | memorable days of your life.
00:00:58.060 | Best wishes, Taylor."
00:00:59.060 | And now, this is a special part of the program that started probably five or six years ago.
00:01:11.660 | We call it the Farside Chat, and there's nothing organized about it.
00:01:16.240 | Bill and Jack are going to ramble in any fashion and talk about any subject they want, just
00:01:23.380 | about any subject they want.
00:01:24.380 | That's an inside joke.
00:01:25.380 | So anyway, I'll get out of the way.
00:01:26.380 | I'll turn it over to Bill and Jack.
00:01:27.380 | I'm going to start off with just a real, real softball here for Jack, which has to do with
00:01:28.380 | the fact that a lot of you folks are coming here for the first time, something like 40%
00:01:46.720 | of people are coming here for the first time, and I think it would be worthwhile for those
00:01:53.060 | people to hear.
00:01:54.060 | It's always a story that, you know, you may have heard it before, it's worth hearing again,
00:01:55.060 | of how the Bogleheads and Jack got together and how it more or less got started from Jack's
00:02:05.300 | perspective.
00:02:06.300 | It was, I guess, 10 or 11 years ago, and when I was speaking at a conference in Florida,
00:02:12.100 | and this wonderful gentleman came up and chatted with me, and that turned out to be Taylor
00:02:15.740 | Larimer.
00:02:16.740 | And we talked about this and that, we got acquainted, and I gave a speech that was so
00:02:21.900 | anchored to the investment salesmen that were at this conference that the guy running the
00:02:28.580 | conference walked off the head table, and all I was doing was telling him the truth.
00:02:35.460 | In any event, with that as the beginning, we struck up a wonderful friendship, and I
00:02:41.260 | got to know his wife, his lovely wife, Pat, and it became greater and greater than we
00:02:46.580 | had.
00:02:47.580 | I was speaking down in Florida then, again, another year, I think a year later, and he
00:02:51.600 | said, "Why don't we get the Bogleheads that are down there at this, maybe, company's conference,
00:02:57.300 | and we'll go all get together."
00:02:58.300 | So, I come down, get off the elevator, and there is a sign saying, as it was called then,
00:03:04.780 | "Vanguard Diehards, meet here."
00:03:05.780 | And I thought, "Wow, this is getting a little out of hand."
00:03:06.780 | So, we went over to Taylor's lovely condominium over on Biscayne Bay, and just had a nice
00:03:14.860 | evening together.
00:03:15.860 | I think there were about 15 of us, I can't remember, not huge, and we just had a great
00:03:19.620 | time together.
00:03:20.620 | I typed out a little note to all the rest of the diehards, and we went on from there,
00:03:25.340 | getting more and more formal each time.
00:03:27.660 | I should tell you, I think this is okay to tell you, that, and this is very much related
00:03:32.620 | to it, what went on at Vanguard last night was really, I thought, incredibly wonderful.
00:03:39.060 | They turned out a wonderful group of people, a fine panel, some of these guys, the guy
00:03:46.500 | that, Rick Giannone, Giannone who runs our ETF effort, our newly expanded ETF effort.
00:03:54.300 | I went over to apologize to him for causing him so much trouble.
00:04:00.820 | And he said, "Basically, you're who we talk about all the time.
00:04:05.500 | You have the way of doing it right, and we want to do it that same right way."
00:04:08.740 | So I was very relieved by that.
00:04:09.740 | And I also said, "How long have you been here, Rick?"
00:04:10.740 | And he said, "20 years."
00:04:11.740 | And I said, "Oh, Lordy, I just can't believe that you're going to be at Vanguard in 20
00:04:12.740 | years, and I don't think I've ever met you before."
00:04:13.740 | I just hate that when it happens.
00:04:14.740 | I always talk to people in the lunch line, that sort of thing, at the galley, and I'm
00:04:15.740 | like, "You know what?
00:04:16.740 | If there's a woman, I give them a kiss, and they go, "Lordy, I love that."
00:04:37.700 | He said, "No, we didn't meet."
00:04:38.700 | He said, "You talked to us on my first day here."
00:04:39.700 | So that was a nice part of it for me, and I know the guys that are doing the foundation.
00:04:50.340 | And I thought Rebecca Katz, who used to be kind of a shy, introverted person, was the
00:04:55.560 | most wonderful emcee.
00:04:56.560 | She was a superwoman, and she's been kind of a nice ally of mine for many, many years.
00:05:02.360 | But when the idea of Vogelheads, you can't die hard, came to Vogelheads, I guess, under
00:05:06.460 | the influence of Taylor, and perhaps Mel, and it was not, in a little difficult political
00:05:13.500 | time at Vanguard, it was not really all that welcome a designation.
00:05:20.060 | And the very first time, this is a funny story, I think, the very first time we had a meeting
00:05:25.780 | in Valley 4, somebody's farm out there, do you remember that?
00:05:29.360 | Anybody remember that?
00:05:31.260 | And so I invited everybody over to Vanguard on a Saturday to spend a half a day in the
00:05:38.260 | office, and I was told, "You wouldn't be allowed on the campus."
00:05:42.740 | Wow.
00:05:43.740 | And an article appeared in the paper saying you were all coming to Philadelphia, and I
00:05:48.640 | was accused, they changed their mind quickly, and I was accused of blackmail for planning
00:05:53.260 | the article, but I hadn't planned the article.
00:05:55.460 | But in any event, we then got to a more welcoming stage last year, and I'm not so good on the
00:06:04.460 | little things that mean a lot in these kind of meetings, so they stepped up their act
00:06:08.020 | last year, a nice little formal program with photographs, a whole lot of staff around there
00:06:12.060 | to help you out, and a wonderful panel, and I gather they gave you like little goodie
00:06:16.020 | bags or something like that.
00:06:17.020 | I don't know that, they didn't give me one.
00:06:18.020 | No, I had to leave early, I promised that he'd let me go for dinner by seven, and we
00:06:25.020 | finally aided aid, I think, but in any event, it's now you're really getting enrolled.
00:06:32.620 | Everybody loves to have you there.
00:06:34.700 | They put on a real show for you last night, and I was really immensely proud of all those
00:06:40.060 | people representing us out there, not only on the stage, and introducing our emcee, of
00:06:45.780 | course, I mentioned, but also the people that had their little ETF booth, foundation booth,
00:06:51.940 | and investment advisory, and so on down the line.
00:06:55.260 | So it's reached kind of a full fruition where you're really integral to this community,
00:06:59.260 | and you should have been all along.
00:07:01.140 | I mean, you represent who Vanguard is.
00:07:03.740 | We don't usually get 150, or 60, or 70, whatever it is, people in one place, the stockholders
00:07:10.380 | that are basically our mission in life, so it's just been a wonderful thing, and knowing
00:07:16.380 | Taylor from the very beginning was wonderful.
00:07:18.540 | I actually wrote him, I tried to stay in touch with him a little bit, I never know exactly
00:07:21.660 | how his health is, but I wrote him about a week ago, telling him how we miss seeing him
00:07:26.820 | here, and he wrote me back, I think it must have been the same day, or maybe it was just
00:07:30.860 | a coincidence that he wrote me at about that time.
00:07:34.100 | So that was a beautiful part of the whole thing.
00:07:37.140 | So I very, very much appreciate, I don't want to make this too long, Bill, but I so
00:07:40.300 | much appreciate your being with me, and supporting me, and when we're out in Denver, I don't
00:07:48.740 | know how many of you remember Denver, I got you all invited to the Financial Analysts
00:07:52.700 | Federation meetings, and the first question they asked me after I was speaking out there,
00:07:58.220 | the first question they asked me is, "Who are the Vogelheads?"
00:08:01.780 | How can I join them?
00:08:05.700 | So you're doing a great job, your fellow investors, and I'm just thrilled to be with you, and
00:08:10.180 | I'm sorry, by the way, I hope this mic is, I'm using it a little bit better than yesterday's,
00:08:13.180 | I don't like those things, but in any event, so it's onward and upward, and I'm proud
00:08:18.380 | to be part of you, and I never would have thought that my name as a borrower would be
00:08:22.460 | copyrighted.
00:08:23.460 | A couple of years ago, we moved, and as one's want to do, one goes through a bunch of things
00:08:46.780 | one has to go through in order to move, and one of them was a pile of letters, and this
00:08:47.780 | goes back to about, it was a letter that went back to about 1990, before I had done any
00:08:48.780 | writing, and it was in response to a really whiny letter I had written to Jack about why
00:08:55.540 | there wasn't an international bond fund, and the letter was two and a half pages, single
00:09:04.340 | spaced, telling me why I was wrong, and that's Jack, I mean, how many corporate chairmen
00:09:13.940 | are going to give that sort of response to a corporate customer, a very small and unknown
00:09:21.540 | one, so that's why Vanguard is what Vanguard is today.
00:09:26.660 | I thought I might start with something that we perennially talk about, which is the age
00:09:34.420 | equals bonds rule, which is when might you want to deviate that, and from that, perhaps
00:09:42.220 | we'll segue into what alternate strategies you might consider or might not consider for
00:09:49.660 | someone who is retired and concerned about longevity, a 70-year-old person not working,
00:09:55.060 | who perhaps needs a 5 or 6 or a 4% drawdown, does age equals bonds work for that person,
00:10:03.460 | or are there other strategies, more better-than-usable strategies that they might consider?
00:10:09.880 | First of all, as I've tried to say, the age equals bonds is a wonderful way to begin,
00:10:16.100 | a wonderful kind of framework for what you think for the simple reason that when you're
00:10:20.100 | young, as was discussed a little bit yesterday, that when you're young, you depend on human
00:10:25.420 | capital for your wealth, and when you're older, you depend on investment capital for your
00:10:30.060 | wealth when you're retired, and so the reality is that you've got to think a lot more about
00:10:36.100 | income when you're older. When you mentioned, Bill, something about 5 or 6% withdrawal rate,
00:10:43.220 | that's just almost no matter how old you are, that's just excessive, and I'm starting to
00:10:49.460 | wonder a little bit whether in the environment that seems most likely in the years ahead,
00:10:55.580 | that even 4% might be a little high, maybe 3.5%, and there's risk in all this whenever
00:11:00.180 | you're taking money out, so you want to be very careful of it. That's the basis of it.
00:11:04.860 | To me, no strategies that go beyond the basic public markets that give you the greatest
00:11:12.020 | chance of reaching your goals, but the public markets are things, as I mentioned in one
00:11:17.200 | of those late slides yesterday, the one thing you can't control is return. You can control
00:11:21.980 | time, you can control cost, you can control risk, but you can never control return, and
00:11:26.740 | so I don't know what other options there are out there. In a way, I don't pride myself
00:11:34.420 | on my great consistency. I'm fairly consistent, but I don't think overbearingly so, but even
00:11:40.100 | as I say, beware of reaching for yield, I was telling you that you ought to think about
00:11:46.380 | reaching for a little yield, because if you're in the bond index, because the Treasury bonds
00:11:51.460 | have so dominated the industry, the index, that was not the case when the bond was formed
00:11:56.460 | way back in 1986, and the yield is pathetic 2.3, not pathetic in this market, but not
00:12:02.900 | particularly attractive would be 2.3%, so I think you can go into corporates, which
00:12:09.020 | can give you as much as 4.5 or 5 investment grade corporates according to the data, and
00:12:15.300 | so we have to have, it's pretty easy to do the math, they have to have a 2 or 3% default
00:12:19.780 | rate to get you down to the Treasury level, and you make a judgment, can the default rate
00:12:24.940 | be that high? The answer is of course it can, and what are the probabilities that it'll
00:12:29.900 | be that high? I think very low, and as always, in Pascal's famous wager about the existence
00:12:36.460 | of God, you've got to consider not only the probabilities, but the consequences to you,
00:12:42.060 | and another variation on this, and someone said maybe one of the Vogelheads, I'm not
00:12:46.860 | very consistent here, but I say you want to take Social Security into account, of course
00:12:51.180 | you want to take Social Security into account, Social Security, as long as it functions,
00:12:55.860 | which I think will honestly be a long time, and if it fails, you still are going to be
00:13:00.380 | getting 80% or something of what was promised, I don't expect that to happen, and you have
00:13:07.100 | a great inflation-proof bond portfolio that doesn't fluctuate in value, and goes up pretty
00:13:13.900 | much year after year, even with a little bit of inflation, so if that's your bond account,
00:13:19.500 | and you have say, a typical Social Security account for someone who ran 65, has had a
00:13:24.860 | reasonably successful at least working career, this could probably have a capitalized value,
00:13:29.940 | I think the number's around $300,000, give or take, so if you're 100% in equities, you're
00:13:35.100 | 50/50, and that income stream, and this is really what we ought to be thinking about,
00:13:40.460 | there's so much that we've, I think, kind of lost sight of in this world, and as we
00:13:45.020 | look at total return, but what you spend, what do you care about in a bank about total
00:13:49.580 | return, if dividend income keeps going up, and up, and up, and up, and up, as it typically
00:13:54.380 | does every year, although I quickly add, probabilities and consequences, that in 2008, the dividend
00:14:01.060 | yield in the S&P Index went down, I believe it was 23%, something in that range, the largest
00:14:07.180 | decline, one of the three largest declines ever had in history, so you want to be very
00:14:11.980 | careful with it, as long as the income comes along, when you're retired, that check comes
00:14:15.980 | in, the Social Security check comes in, and you shouldn't worry about capital fluctuations,
00:14:20.420 | so I don't see going outside the public financial markets, to try and do better, it's a little
00:14:27.860 | bit like if you're starting to lose, a little bit like you're going to the worst races,
00:14:33.340 | and you lose everything that you've got except 100 bucks or something, through the first,
00:14:39.780 | I don't know how many races they had, let's say 11, so on the 12th race, the last race,
00:14:45.940 | you take that $100, and bet it on a long shot, to recoup, that is not a good strategy, so,
00:14:53.660 | is that responsive?
00:14:55.620 | Yeah, I think it gets fairly deeply into the issue, what I'm thinking of, are people like
00:15:05.580 | Steve Bode, and Rob Arnott, who've written long and hard, Moshe Volefsky as well, who
00:15:14.380 | say that really, when you're retired, conventional asset allocation goes out the window, and
00:15:19.260 | what you really ought to be looking at is de-feasing your living expenses, and so, to
00:15:26.100 | my way of thinking, there are three things that can do that, and you've already mentioned
00:15:30.660 | one of them, Social Security, and you're right, the return on the public markets is not great,
00:15:38.460 | but the return on deferring your Social Security from '66 until '70 is 8% per year, so that's
00:15:44.780 | certainly one strategy, now that's got a problem, which is that the federal government could
00:15:48.620 | means test Social Security when it needs to have an inflation behind the eight ball, so
00:15:52.540 | there's a risk to that, even with Social Security, TIPS are an excellent strategy, but they have
00:16:00.060 | the risk the federal government could rejigger the inflation formula, so there's still a
00:16:07.580 | risk there, and then finally, you know, you can get an inflation-adjusted variable ability,
00:16:13.660 | the problem with those is twofold, number one is the companies can go belly up, I wouldn't
00:16:18.300 | want to bet on the survival of any company in the current financial system, any insurance
00:16:24.940 | company, and in a systemic event, you know, the usual thing, the state guarantees, the
00:16:30.060 | state insurance funds would be a speed bump, so that really doesn't help you, and then
00:16:35.260 | finally, the insurance riders that you buy with a lot of variable annuities really have
00:16:41.420 | some limitations, the one that Vanguard has, I think, has like a 3% inflation cap, which
00:16:46.460 | isn't going to do you a lot of good if we have hyperinflation, so I think what the rational
00:16:52.220 | person might do is to consider some combination of those three things in retirement, and of
00:17:00.700 | course, you know, really, I guess the other issue is if you're someone, a real go-ahead,
00:17:05.900 | and you wind up at age 70 with more money than you know what to do with, and that you
00:17:10.540 | can possibly spend, which is a problem I think I'm afraid a lot of you are going to have,
00:17:14.380 | then you have, you know, this large pile of assets on top of it, which really, you're
00:17:21.660 | not investing it for you, you're investing it for whoever your beneficiaries are, whether
00:17:25.980 | it's your relatives or charitable, or you want to give the government money, you know,
00:17:31.260 | I say that, I don't say that in jest, I don't mind paying taxes to the government, I'm sorry,
00:17:38.540 | sorry, sorry. Sorry Warren. Yeah, all right, well, you know, the other comment I thought
00:17:49.660 | I would make is, you know, you threw out yesterday, Jack, that really, you know, it's just professional
00:17:59.340 | money managers out there trading with other professional money managers, you were just
00:18:02.460 | making the group of your careers rich, which is certainly true, but I think there's something
00:18:07.260 | that's even more profound going on here, is we have now reached the point where it's not
00:18:11.580 | people trading with other people, it's computers trading with other computers. It's a wonderful
00:18:18.140 | thing to be able to do. I mean, you know, it's a wonderful thing to do, but I think
00:18:26.460 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:18:31.500 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:18:37.180 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:18:43.020 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:18:51.820 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:18:59.660 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:19:05.820 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:19:11.900 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:19:18.060 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:19:23.180 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:19:28.940 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:19:35.340 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:19:42.940 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:19:49.580 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:19:56.620 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:20:02.940 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:20:08.380 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:20:14.220 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:20:19.820 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:20:25.660 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:20:31.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:20:37.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:20:43.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
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00:20:51.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:20:55.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:20:59.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:21:03.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:21:07.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:21:11.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:21:15.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:21:19.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:21:23.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:21:29.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:21:33.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:21:37.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:21:41.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:21:45.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:21:49.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:21:53.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:21:57.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:22:01.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
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00:22:09.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:22:13.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:22:19.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:22:23.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:22:27.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:22:31.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:22:35.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:22:39.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:22:43.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:22:47.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:22:51.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:22:55.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:22:59.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:23:03.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:23:09.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:23:13.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:23:17.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:23:21.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:23:24.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:23:27.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:23:30.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:23:34.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:23:38.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:23:42.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:23:46.980 | do. I think it's a good thing to do. I think it's a good thing to do. I think it's a good
00:23:50.980 | thing to do. I think it's a good thing to do. I think it's a good thing to do. I think
00:23:54.980 | it's a good thing to do. I think it's a good thing to do. I think it's a good thing to
00:23:58.980 | do.
00:24:00.980 | Okay, well, I'll throw just a small bomb out, just a tiny one, which is that I've spent
00:24:08.980 | some time the past year or two thinking about TIPS. They're a fascinating asset class, and
00:24:16.980 | they became even more fascinating in '08-'09 when they underwent just a larger decline
00:24:24.980 | in capital price than I think anybody had ever thought possible. I think Long-TIPS fell
00:24:28.980 | something like 25% between the top and the bottom of the market in '08. And they're a
00:24:36.980 | fascinating asset class because they demonstrate that they're very risky in the short term,
00:24:40.980 | and yet they are absolutely riskless in real terms in the long term if you hold them until
00:24:48.980 | maturity. So they're only riskless when they're held until maturity. So they are the perfect
00:24:53.980 | asset class to defuse or to offset your liabilities at given stages. So the ideal strategy, if
00:25:02.980 | you're going to offset your liabilities, your future liabilities with TIPS, is to buy a
00:25:07.980 | ladder, a five-year ladder, one-year intervals, whatever you want to do. It's quite possible
00:25:12.980 | to do. I think there's still a gap between '29 and '32, but you'll be able to do that
00:25:17.980 | soon enough. Maybe that's gone now. I don't know. But at any rate, in principle, it's
00:25:22.980 | practical. So my suggestion is that you should never invest in a TIPS fund for at least two
00:25:31.980 | reasons. Number one is you can generally buy TIPS cheaper, even than the cheapest TIPS
00:25:36.980 | fund. And secondly, you might need the money at some point. And if you need the money at
00:25:45.980 | a point where TIPS are having the kinds of liquidity problems they had in '08, '09,
00:25:53.980 | your TIPS fund is going to have to take a haircut if you're going to need that money
00:25:57.980 | out. So I think they're a fascinating asset class in any number of ways. I think the proper
00:26:03.980 | way to use them is not in a fund, but in a ladder.
00:26:09.980 | I want to ask you a question. Kathleen Ryan wrote in a comment and a question about whether
00:26:16.980 | you were born in 1929 and how that affected you. But it raises another question in my
00:26:26.980 | mind, which is that certainly the Depression affected you. It affected me fairly directly
00:26:35.980 | as well. My parents grew up right in the middle. My father started his law practice in 1926,
00:26:40.980 | if you can imagine, small family law practice. So I learned from my parents about the Depression
00:26:47.980 | and what it mean. An enormous amount of that rubbed off on me as well. And then we entered
00:26:54.980 | this age of unbridled prosperity. People took on debt. The sky was the limit. And then in
00:27:00.980 | '08, '09, a lot of people found out that it's not all beer and pizza. And so the question
00:27:08.980 | I have for you is that do you think anything fundamental changed about the temperament
00:27:13.980 | of investors, people in general in '08, '09?
00:27:18.980 | Yes, I do. And I think it is kind of the tragedy of American finance, and that is we can teach
00:27:25.980 | and teach and teach and teach. But finally, people learn from their own experience. And
00:27:33.980 | the great trick in life is to learn from the experience of others. Not so easy to do. So
00:27:41.980 | I think they learn more about risk in the market. We had this incredible consecutive
00:27:46.980 | decades of 17% stock returns. And people kind of, as they would say, a phrase I don't really
00:27:51.980 | use, have that baked into their expectations. That's absolutely absurd. And this gets a
00:27:57.980 | little bit to eventually they're going to look at things, I believe, with the same kind
00:28:03.980 | that Bill will call the Gordon model, very close to what I call the Vogel model, modestly
00:28:08.980 | enough, which is given that yield plus earnings growth, plus or minus PE change is what determines
00:28:15.980 | returns. And that's not unpredictable, as I mentioned yesterday, over the long run.
00:28:19.980 | I want to quickly add, however, because someone asked me about this, and I guess I failed
00:28:24.980 | to make it clear, which is pretty disgraceful on my part, and that is those were all nominal
00:28:30.980 | returns. So if you're looking at 3.5% in bonds and 7% in stocks, you're looking at real returns.
00:28:37.980 | I was sort of vaguely assuming, and you don't have to assume anything to do those numbers,
00:28:42.980 | but you've got to say, what's the inflation rate going to be? And I was vaguely assuming
00:28:46.980 | 2 or 3%. I don't think we can do much better than that. I think 2% looks like a better
00:28:50.980 | bet now, as you heard a little bit last night. I was using 3%, so that gives you a nominal
00:28:55.980 | return on stocks of 4% before expenses, before investor behavior, which, as we all know,
00:29:05.980 | particularly in ETS, there is between fund returns and investor returns, which I showed
00:29:09.980 | you yesterday. I just showed you the ETS side. The fund investors are suffering the same
00:29:14.980 | disease, but just in a milder form, and God knows what those people that went with Bill
00:29:21.980 | Berkowitz at Farrell, who's down 30% this year, that's a pretty handy drop in a year
00:29:26.980 | where the market is, I guess that's at the close yesterday. S&P, anyway, is down about
00:29:32.980 | 2%. That's a 28% gap, and those kind of things can happen. People pour their money into the
00:29:37.980 | winners. As Bill said, one of the things I was reading, two words explain why the mistakes
00:29:43.980 | you make by following past performance. The first word is Bill, and the second word is
00:29:48.980 | Miller. So, behavior is a big problem. Let me just ask Bill about this. We all talk about
00:29:57.980 | behavioral problems among investors. There are books written about it, erudite scholarly
00:30:02.980 | books. That's the kind of thing I do, which shows you mutual fund behavior. But in final
00:30:06.980 | analysis, Bill, why is behavior a problem? Because your bad behavior is inevitably offset
00:30:12.980 | by somebody else's good behavior. There's no way around it. Yeah, that's exactly the
00:30:16.980 | case. For every winner, there is a loser. What I like to say is that investing is an
00:30:23.980 | operation in which wealth is transferred to people who have a plan and can stick to it
00:30:27.980 | from those who don't and can't, and the people who let their behavior ... I mean, my behavior,
00:30:33.980 | you admitted yourself that you feel the same impulses. Certainly so do I, and I imagine
00:30:37.980 | everybody else in this audience does, unless you suffer from severe Asperger's, probably
00:30:41.980 | does too. And by the way, I happen to believe that Asperger's, mild Asperger's, is probably
00:30:49.980 | a very ... is an enormous advantage in any professional investor. If you read Michael
00:30:56.980 | Lewis's book, The Big Short, one of the people there, who happened to be an unsuccessful
00:31:02.980 | neurologist, as you Jack knows, was very successful exactly for that reason. He could
00:31:09.980 | feel other people's emotions. So it's a continuum, and Bill Sharpe puts it another way. He describes
00:31:18.980 | convex and concave investors, people who follow momentum followers and rebalancers. And Bill
00:31:27.980 | believes that they're exactly balanced off in each other, but his central insight is
00:31:31.980 | that in a world that is dominated by momentum players, rebalancers, who are hopefully the
00:31:36.980 | kinds of people who are in this audience, will profit. And I think that it's fairly
00:31:40.980 | clear what world we live in. We live in a world that's dominated by emotional people
00:31:44.980 | who are all in momentum. That's not to cast aspersions on people who've raised the momentum
00:31:50.980 | factor, like your son, who do a very good job of it, but most people don't do it as
00:31:54.980 | well as your son does. I happen to think the Vogel model is greatly superior to the Gordon
00:32:03.980 | model, which is one of the reasons why I come here every year. I know what the first two
00:32:07.980 | terms are before I get here, and so I wait with bated breath and you tell me what the
00:32:11.980 | third term is, which is the change in P.E. And God damn it, you've been right.
00:32:21.980 | Would you mind repeating that?
00:32:25.980 | You came here during the very first ones, and you basically predicted a nominal return
00:32:34.980 | of zero, and everybody gasped. I think it was, I don't know, 2002 or something like
00:32:39.980 | that, or 2003. And everybody gasped, and you were, of course, right. So yesterday, you
00:32:46.980 | came in and you said that it's minus 1%, and it's a small quibble. I expected you
00:32:52.980 | to tell me that it was zero or even slightly positive. So why are you saying minus 1%?
00:32:57.980 | Why do you think the market is still overvalued?
00:33:00.980 | Well, the minus 1%, I think, was what my formula would have shown for the decade beginning
00:33:06.980 | January 1, 2000, and ending December 31, 1999. And the reason I think the market now may
00:33:14.980 | be a little bit overvalued is I do like the Shiller model. I know a lot of people do not.
00:33:18.980 | Ten-year average. I like two things about it, as I think I mentioned yesterday that
00:33:22.980 | are worth repeating. One, he uses reported earnings. After all, those bad things that
00:33:27.980 | corporations don't include in operating earnings, so they're much lower than operating
00:33:31.980 | earnings. Year after year after year, the tune of billions and tens of billions of dollars
00:33:36.980 | of earnings for the S&P companies, and they're just plain overstated when you use operating
00:33:40.980 | earnings, but that's what we get. So I like Shiller for using the correct earnings number.
00:33:45.980 | And then, you know, the market is full of big events, short-term events. So ten years
00:33:51.980 | seems like a more reasonable thing to do than looking at the past year. And of course, to
00:33:56.980 | make matters worse, so many people, Wall Street has this bullish bias, as everybody knows,
00:34:01.980 | and so they're looking at next year's earnings now. Whatever they are, they have no idea
00:34:05.980 | what they are. But they're going to be bigger than this year's, of course, because your
00:34:10.980 | job is to predict something good. And if you don't, as Merrill Lynch people have found,
00:34:14.980 | and maybe so a lot of others, the economists that forecast declining markets in the coming
00:34:19.980 | year lose their jobs. I mean, they literally do. It's not popular to be a bear on Wall
00:34:24.980 | Street. So Shiller gets over that by using a ten-year thing in the news forecast. And
00:34:30.980 | I think his number says the average for the last ten years is, I think, 17 or 18 times.
00:34:36.980 | And I think we're around, by where we are now, the average, I should say long-term average,
00:34:44.980 | is 17 or 18 times earnings. And right now, I think it looks to me like we're around 20
00:34:51.980 | or 21 times earnings. Now that's not, you can drive yourself nuts. That's as I probably
00:34:56.980 | got through yesterday. That's why I use a slide rule instead of a calculator to do these
00:35:00.980 | things. They'll keep me from precision, where precision is not varied in anything that we
00:35:05.980 | do. We just don't know about the future.
00:35:08.980 | One of the classic jokes about economists is to ask, "How do you know that economists
00:35:13.980 | have a sense of humor?" And the answer is because they use decimal points.
00:35:16.980 | [laughter]
00:35:19.980 | Well, my last sort of direct question to you is this. You do a lot of CNBC chat. And the
00:35:29.980 | question I have is, we all have print journalists, I think, who we respect a great deal. I think
00:35:36.980 | there's some people on radio, particularly at NPR, who were spectacularly good. But you
00:35:42.980 | also talked to a lot of people on TV, and you didn't have very nice things to say about
00:35:46.980 | them. And so the question is, is there anybody on television that you talk to who you have
00:35:51.980 | some respect for?
00:35:53.980 | Oh, absolutely. Jim Cramer.
00:35:55.980 | [laughter]
00:36:02.980 | I guess the one that comes closest would be Tyler Matheson, who I've known for about
00:36:06.980 | 20 years, more than 20 years. And he wrote some great stuff in Money Magazine when he
00:36:11.980 | was an executive editor about the triumph of indexing, it was called. He wrote that
00:36:16.980 | in, I think, 19-- well, I know exactly when now that I think of it. He wrote that way
00:36:20.980 | back in 1995, before I was going into the hospital for a heart transplant. And he said
00:36:27.980 | the last words were-- you remember these sometimes-- "You were right, Jack. Indexing should be
00:36:32.980 | the core of all investors' portfolios," in 1995. And the world has changed radically
00:36:37.980 | in favor of that proposition ever since. He also, getting back to the forecasting thing,
00:36:42.980 | he said-- he interviewed me again after the heart transplant, which was about a year later,
00:36:49.980 | and he said-- what did he say? Some proof that I actually had a heart now.
00:36:56.980 | [laughter]
00:36:59.980 | Or I had a change of heart, I guess is what it was.
00:37:02.980 | [laughter]
00:37:04.980 | He said, "What are your returns going to be from here?" This was in 1996, probably
00:37:08.980 | mid-year. I said, "I don't know." I thought about my little formula, and I said probably
00:37:12.980 | between 7% and 9% over the next decade. And they turned out to be 8.3%. This is not a
00:37:18.980 | foolish exercise, and it's not always right. But you do know when P/Es are high, they're
00:37:23.980 | apt to go down; when they're low, as I mentioned yesterday, they're apt to go up.
00:37:27.980 | So the one thing we don't-- and I'll turn the tables a little bit on you, Bill, is--
00:37:31.980 | and I should tell you a little inside story. I wanted to be briefed on Bill's book, and
00:37:36.980 | so I have one signed copy beautifully inscribed by Bill, "In my office," quote. So when I
00:37:42.980 | got back there between our sessions yesterday, I looked up to see how Bill dealt with Armageddon.
00:37:49.980 | Is there any way of dealing with Armageddon, really? And Kevin had stolen my book.
00:37:56.980 | [laughter]
00:37:58.980 | He says he only borrowed it. But we retrieved it, but I still didn't have to look.
00:38:03.980 | So let me ask you, is there really-- I think we live in an extraordinarily fragile world,
00:38:08.980 | and we take for granted pretty much, because we're Americans, as Woodrow Wilson said,
00:38:13.980 | the only idealistic nation on Earth. We take for granted kind of a similarity to the future,
00:38:20.980 | to what it's like today in many, many ways. We don't really realize how much, for example,
00:38:26.980 | technology has changed the world, because we live with it every day, and each day changes
00:38:30.980 | a little bit, and when you get 10 years ago, it's different. And it says a lot of things
00:38:35.980 | about our economy, because technology is only at the beginning, I think, of its impact on
00:38:41.980 | us. It hasn't impacted me much, because I'm not smart enough. My grandchildren help me
00:38:45.980 | when I'm in trouble. And so is there really a way of dealing with Armageddon when we're
00:38:51.980 | at a stage in the world's history that is, I think, remarkably different and remarkably
00:38:58.980 | more difficult than we have had for a long time? Certainly different.
00:39:03.980 | Can goods and ammo?
00:39:05.980 | [laughter]
00:39:07.980 | The answer, that translates down to no. There really is not. I mean, one of the joys of
00:39:14.980 | being a student of economic history is that it enables you to look at what's happening
00:39:21.980 | in the financial markets and place it in its historical context. You know, hard-to-recognize
00:39:28.980 | bubbles. You can do a pretty good job. Hard-to-recognize real panics, inappropriate panics, but again,
00:39:34.980 | you can be right most of the time. But the real frightening thing about knowing some
00:39:43.980 | economic history is that you also realize there are circumstances in which you are utterly
00:39:50.980 | helpless. If you were a citizen of Hungary during the post-World War II period, or in
00:39:59.980 | Germany during the early Weimar Republic, there was nothing you could do. Or Zimbabwe,
00:40:06.980 | more recently. There was nothing you could do about gazillion percent inflation. Bonds
00:40:12.980 | actually disappeared. I think the value of stocks in Weimar Germany declined by 99 percent.
00:40:18.980 | And that's, there's just nothing you can do about it. And that's also why I believe
00:40:25.980 | that when you start working with these portfolio, these Monte Carlo simulators, these retirement
00:40:30.980 | simulators that tell you that there's a 95 percent survival rate of your portfolio in
00:40:39.980 | a period of 30 or 40 years of retirement, that's fiction. There's no such thing as
00:40:43.980 | a 95 percent survival rate of any society over a 40-year period. Because that implies
00:40:48.980 | survival of a thousand years. That doesn't happen in history. And so, no. And the other
00:40:55.980 | answer, I guess, and it's sort of a mincing sort of thing to say, is that sometimes as
00:41:00.980 | an author, particularly when you're not of jack stature, you don't have as much control
00:41:04.980 | over your book as you'd like.
00:41:11.980 | Well, I do know, I mean, I thought you were going to say something about gold would be
00:41:16.980 | a kind of refuge, but I do know a very highly placed Wall Street, or one of the veterans,
00:41:20.980 | one of the really best people in Wall Street's history, I'll remove all doubt by saying
00:41:24.980 | this one happens not to be Paul Volcker, but he's really worried that the United States
00:41:28.980 | is going to go bankrupt. And he wants to do something in gold, and maybe he's already
00:41:33.980 | done it, he didn't quite make that clear to me. But he said he's worried about leaving
00:41:36.980 | it in the bank, because when the bank fails, he won't be able to get his hands on it.
00:41:41.980 | And that's probably a good definition other than Hungary from Armageddon.
00:41:46.980 | And also, Bill, there are things in your wonderful work about the birth of plenty, showing that
00:41:54.980 | the world went from infinity to about, I guess the number is 1750 or something, without any
00:42:00.980 | measurable progress in the way it lived. And then we went into this era of steady growth
00:42:06.980 | for years and years, right up to today, and continuing certainly into the tomorrows, a
00:42:10.980 | few tomorrows ahead at least. Is there any chance that that's going to change? Is that
00:42:15.980 | upscale growth of the world economy built into the way we live today? And the other
00:42:24.980 | related question is, which I spent a little time on in my book, The Battle for the Soul
00:42:28.980 | of Capitalism. The American Empire looks to me in many ways like the Roman Empire. And
00:42:34.980 | at the very beginning of the book I quote Gibbon, and what he said about the fall of
00:42:38.980 | the Roman Empire at the beginning, and I just changed a half a dozen words and it sounded
00:42:42.980 | exactly like America, which is another, I have to tell you this funny story. And I said
00:42:46.980 | that to the Yale University Press. I said, "No, I want that note of the original Gibbon's
00:42:51.980 | words on the same page as the footnote." And they said, "At Yale University Press,
00:42:57.980 | footnotes are placed in the rear of the book." And I said, "Well, in that case, I guess
00:43:02.980 | I'll just have to find another publisher." So the footnote is right there where you can
00:43:07.980 | see it. But I do observe, and this is true, much as we don't want to hold the idea in
00:43:13.980 | our mind for very long, no empire has ever lasted forever. That's life, that's history,
00:43:20.980 | that's human nature, the whole lot of reasons go into that. So comment on those things,
00:43:27.980 | would you?
00:43:28.980 | Well, two questions. Number one is, since 1820 approximately, per capita GDP in the
00:43:35.980 | world has grown in a real sense, in real terms, by about 2% per year, which basically means
00:43:41.980 | by the rule of 72 that on average the life of the child is about twice as prosperous
00:43:48.980 | as the life of the parent. And I know that seems like a dubious proposition in this particular
00:43:54.980 | year and the past couple of years, but it's a function of technological advance. And I
00:43:58.980 | don't think that the current economic difficulties that we have have slowed down technological
00:44:04.980 | advance one single bit. I'm reasonably optimistic, at least in the short term. But if you do
00:44:09.980 | the math, 2% real growth over millennia leads to an impossible degree of wealth, everybody
00:44:16.980 | will be worth a spear of gold several light years in diameter. So we're in Turanova, I
00:44:21.980 | don't think that anyone knows the answer to that question since we've only been in this
00:44:26.980 | regime for the past 200 years or so. The obvious answer seems to be that we'll experience some
00:44:36.980 | catastrophe. We'll put a stop to that or at least level it out. But interestingly, I did
00:44:42.980 | have the opportunity once to sit down at lunch with Bill Baumol, who's a very famous economist
00:44:48.980 | and who's thought very deeply about these kinds of issues, particularly about the relationship
00:44:52.980 | between technology and growth. And he just smiled at me and said, "Of course we're going
00:44:58.980 | to become that wealthy because technology will continue to advance and there's nothing
00:45:04.980 | that's going to stop that." So you can, at least one very smart person who's thought
00:45:09.980 | about that very deeply has made exactly that case. Now, Jack's second question is relating
00:45:17.980 | the decay of our society to the decay of the Roman Empire. First of all, I think that our
00:45:22.980 | institutions are better than Rome's. Certainly we're going to lose our place in the world
00:45:29.980 | as the leader of the world's economy. I mean, in 1945, we produced half the world's industrial
00:45:36.980 | output and it's been going down since. It's actually leveled off over the past couple
00:45:40.980 | of decades at around pretty close to 20%. It's not decreased that much in percentage
00:45:47.980 | terms. But eventually, you know, we have to get swapped by other developed countries,
00:45:53.980 | particularly those in Asia. That's not necessarily a bad thing. Our piece of the pie will still
00:45:59.980 | -- the slice of the pie will decrease, but we'll still have the actual size of the pie
00:46:04.980 | is going to increase. And the nation to think about is Britain. I mean, Britain went in
00:46:09.980 | 1900 from ruling the waves, the world's greatest economic and military power, to right now
00:46:16.980 | it's basically an open-air theme park with a nuclear deterrent. And yet, would you rather
00:46:25.980 | be a citizen of the UK now or in the year 1900? I shudder to think what it would be
00:46:31.980 | like to be an ordinary person in the UK in 1900. I mean, you had a society in which something
00:46:36.980 | like 20 to 25% of people were so unemployed that they were in domestic service. All right,
00:46:41.980 | that's not the kind of society I want to live in. So, I'm reasonably optimistic, I suppose.
00:46:47.980 | Well, I'm always optimistic, but I'm just trying to think a little bit more about the
00:46:52.980 | hardships that we may endure out there. I worry terribly about this unusual unemployment
00:46:57.980 | situation. It is unusual, much longer term unemployed, long-term unemployed. That's over
00:47:03.980 | a year, say, and unemployment benefits running out, which we don't quite know what to do
00:47:07.980 | with all our fiscal problems come into this. So, I'm a worrier, but I'm still well aware
00:47:13.980 | of the fact that when anybody else in the face of this globe wants to get out of their
00:47:16.980 | own country, there's only one country they really want to go to. And immigration has
00:47:21.980 | been a huge part of the American ethic, the American history, the American, I don't know,
00:47:27.980 | values, American hope, American entrepreneurship, all that kind of thing. And you see an awful
00:47:33.980 | lot of it still in small ways. You know, look around your town. You know, I used to think
00:47:38.980 | these were hardware stores that were selling nails, but it turns out they're another kind
00:47:42.980 | of nail thing you're starting out. And so, I still see the good side, but I worry a lot
00:47:48.980 | about whether our institutions, which are the best in the world, and our property rights
00:47:52.980 | are the best in the world. There's no question about that. And we have more stability than
00:47:56.980 | just about anybody else in the world. But you start to fracture the society, what's
00:48:02.980 | going on in whatever, Occupy Wall Street is, I think, not a trivial event. It's sending
00:48:09.980 | a message out there. And I worry most about whether, and I'd be interested in your comment
00:48:15.980 | on this bill, particularly, and what I see really worries me about America more than
00:48:20.980 | in a way anything else, is bigness. Corporations merge with each other, and they get bigger
00:48:25.980 | and bigger and bigger. And this includes Vanguard. You know, I mentioned yesterday, our market
00:48:30.980 | share was, I think, the biggest in history, in mutual funds, in industry history, 16,
00:48:35.980 | 17%, whatever it was, and it's not going to go down. But we don't have the same kind
00:48:40.980 | of problems that typical big companies do. But they merge, they merge for accounting
00:48:44.980 | reasons, they merge for power reasons, they merge for compensation reasons, and corporate
00:48:49.980 | America is a vital part of our nation's progress. And yet, you see the management's
00:48:56.980 | being, in many respects, corporate management being, in many respects, divorced from the
00:49:01.980 | interest of their shareholders. And the shareholders, of course, I mentioned yesterday, what I call
00:49:06.980 | the double agency society, don't care because they're not direct shareholders. They've
00:49:10.980 | got their own agents, and the mutual fund agents aren't doing their job, and nothing
00:49:15.980 | is going to happen very good until we can restore some sense of fiduciary duty to our
00:49:19.980 | society, and I mentioned that yesterday. But I think that's absolutely crucial to resolve
00:49:23.980 | these problems. They are not going to resolve themselves. There's an old saying, which
00:49:27.980 | you're all familiar with, "We get the government we deserve." Man, if that were
00:49:31.980 | ever true, it's true today.
00:49:33.980 | You know, I'll answer that question as best I can until I see mail waving frantically
00:49:38.980 | at me. Basically, I couldn't agree with you more. I mean, if I were to step back
00:49:46.980 | and say, "What were the real risks that we face now?" And it's always, you know,
00:49:52.980 | you never see the truck that's going to hit you, but the truck that I see that I
00:49:55.980 | think is going to hit us is two things. One thing you've already mentioned, which
00:49:59.980 | is that we have a system, a financial system, which is derivative-based, which is
00:50:04.980 | lightning-fast, is extraordinarily complex and linked. And if you're a systems analyst,
00:50:11.980 | when you say complex and linked, what that equals is Three Mile Island. You have a
00:50:20.980 | system that can very quickly spin out of control, and I think what we saw in May of
00:50:28.980 | '10 with the flash crash was just the tiniest taste of what we could see if things
00:50:35.980 | go seriously and unexpectedly haywire.
00:50:40.980 | You know, the other thing is that we've, you know, the tarp, I think, was the right
00:50:46.980 | thing to do. I think that I shudder to think what would have happened if they
00:50:51.980 | hadn't bailed out the financial system. But at the same time, what do we have now?
00:50:57.980 | We have something that's even worse. We have, you know, instead of having N large
00:51:01.980 | banks, we now have N minus 2 large banks. And so too big to fail has gotten a whole
00:51:08.980 | lot worse. I think the tarp was the right thing to do. I think that in retrospect,
00:51:12.980 | politically, the correct thing to have done would have been to send Elizabeth
00:51:18.980 | Warren out in late 2008, go to the banks, and say, "What part of we're bailing you
00:51:24.980 | out don't you understand?" And then seize the banks because they were insolvent,
00:51:28.980 | including Goldman. They were all insolvent. And that would have avoided the
00:51:31.980 | political problem that we have right now, which are people who are angry at all the
00:51:36.980 | big bonuses and the fact that Wall Street is fatter and more profitable than ever we
00:51:41.980 | should have done to the whole system when we did the AI chip.
00:51:45.980 | Jack, what do you think about that?
00:51:48.980 | I agree with you. The financial system is right at the root of all this. We treated
00:51:52.980 | it much too graciously. In this troubled asset repurchase program, I believe it's
00:51:57.980 | correct to say that no troubled asset has ever been repurchased. The bank stock gave
00:52:01.980 | the banks capital, but aren't I correct? We didn't buy any of those mortgage bonds
00:52:06.980 | or collateral debt obligations from the banks. So tarp, I'm always amused when
00:52:10.980 | people mention it. I'm also struck by the fact, as you're all reading in today's and
00:52:16.980 | yesterday's papers, that we have a simple proposition. I wanted to have, bring back
00:52:20.980 | Glass-Steagall. I actually wrote about that in 2005, the act that separated investment
00:52:26.980 | banking from deposit banking or commercial banking. And I said, bring back Glass-Steagall.
00:52:31.980 | And that wasn't even going to be on the agenda, but we did get the Volcker Rule that
00:52:35.980 | said banks could not essentially trade for their own accounts. Now we're implementing
00:52:40.980 | that rule. And the implementation paper is 298 pages long. And there are probably six
00:52:50.980 | lobbyists in Washington per page. And one can only imagine what comes out of this, in
00:52:56.980 | this vague act to try and put some meat in the bones. I'm not optimistic that we'll
00:53:02.980 | achieve the objectives for Volcker 1. And he's pretty much the same way. He's very
00:53:07.980 | discouraged. I ran into him the other day. And I said, are you still going to Washington
00:53:11.980 | a lot, Paul? And he said, only when I need a photo op.
00:53:14.980 | [laughter]
00:53:17.980 | And let me, are we getting toward the end? Yeah, could I have a couple, just to say a
00:53:21.980 | couple things? One, it's always great to be with Bill. He brings a great intellectual
00:53:27.980 | stature and a great knowledge of history. His books, I commend every one of them to
00:53:32.980 | you, from I guess the first book was The Four Pillars, was it?
00:53:37.980 | Intellectual Mass Analog.
00:53:38.980 | Oh yeah, Intellectual Mass Analog, which was the one you wrote those nice things about
00:53:41.980 | me.
00:53:42.980 | Oh, well.
00:53:43.980 | [laughter]
00:53:44.980 | That's a good place to begin. But just being associated with Bill is the highlight of my
00:53:50.980 | life, honestly. And I wish I had his writing talent and historical grasp, but the Lord
00:53:55.980 | bestows his blessings unevenly. But I do want to say something. We've been talking about
00:54:00.980 | data, and I've shown you charts, and we're talking economics, we're talking markets,
00:54:06.980 | we're talking the financial system, things of that nature. And I think that what I've
00:54:11.980 | done in that area has been correct and good and helpful, and I do get letters almost every
00:54:17.980 | day. But I want to just close by saying that if I've ever been able to do anything, it's
00:54:24.980 | to keep being who I grew up as. A friend of mine said to me the other day, "You're exactly
00:54:32.980 | the same kid I knew at Princeton." I took that as the highest compliment I've ever had.
00:54:36.980 | And part of that, therefore, which gives me some satisfaction, I'll never be fully satisfied
00:54:42.980 | with my career, goes back to the start of Bill's letter, the letter I wrote to Bill,
00:54:47.980 | and that is, "I've always liked to stay in touch with the actual investors who are here,
00:54:53.980 | you guys who are paying my compensation, and you guys who are supporting my name and reputation,
00:54:58.980 | you guys who are trusting Vanguard and trusting me too, and we can shake hands, we can look
00:55:04.980 | each other in the eye." And that part of a big company is far more important to me than
00:55:09.980 | some number like 1.6 trillion, or 1.6 quintillion, I don't know. But I do want to close with
00:55:16.980 | two letters that will amuse you, because part of that practice I've had, just trying to
00:55:22.980 | treat people as individuals and not as part of great big groups, are two other letters
00:55:26.980 | which I thought about when Bill talked about the letter I wrote to him. They're really
00:55:30.980 | two amusing anecdotes, and it's so funny that little things you do at the time, just because
00:55:38.980 | it's the right thing to do, come back to be very helpful to you. And one of them, I got
00:55:44.980 | a letter from a Latino down in Florida, and he wanted to know some fairly obscure investment
00:55:50.980 | question, and I'd never heard of him before. He wasn't anybody, and I wrote him a two-page
00:55:55.980 | answer to his question, because it was the right thing to do. And he turned out to be
00:55:59.980 | Humberto Cruz, the financial editor of the Miami, one of the Miami, one of the, it sounds
00:56:04.980 | like Fort Lauderdale, I guess, times. And so he's always said nice things about me.
00:56:09.980 | That letter really paid off. And even better, we had a kind of catastrophic experience with
00:56:18.980 | my former employer in the go-go era. We started a really stupid fund, and gave it a stupid
00:56:25.980 | name, and it was very much an aggressive go-go fund, and it blew up. It was originally called
00:56:32.980 | Trustees Equity Fund, and of all the people it was not suitable for, it was Trustees.
00:56:37.980 | But in any event, it was hot, and it came and went, and was never heard from again.
00:56:43.980 | I got a letter from a doctor in Boston, and he said I had ruined his father's life. It
00:56:49.980 | was inexcusable. He was kind of a suess, and in many respects he was actually right. It
00:56:56.980 | was a disgrace. His father was retired down in Arizona, and I wrote him a two-page letter,
00:57:01.980 | which he has never forgotten. How do I know he's never forgotten it? He turned out to
00:57:04.980 | be the cardiologist that recommended I get a heart transplant. [laughter] Roman the Sanctus
00:57:15.980 | by name. So you don't need too many of those things to keep you going. So thank you all
00:57:21.980 | for being great human beings. It's just been marvelous. I'm going to stay until around
00:57:25.980 | 10.30, which I've got to do something for British TV. They're coming down to see Bill
00:57:29.980 | Graham, and they're going to throw me in at the end, I think. So I have to leave here
00:57:33.980 | at 10 o'clock, but I'll look forward to being with your experts panel, and maybe I can even
00:57:38.980 | learn a little bit more. But thank you all for your support.
00:57:41.980 | [applause]
00:57:58.980 | >> Jack, on behalf of the Parliament, I really want to thank you for spending this time.
00:58:04.980 | It's been a real treat to have you for a couple of days. And as a memento of this occasion,
00:58:11.980 | I'd like to present you with a replica of the love statue that is in Love Park in Philadelphia
00:58:20.980 | right across from the Art Museum. And we want it to be a memento of this occasion, but also
00:58:26.980 | to represent the love of your bow heads.
00:58:29.980 | [applause]
00:58:41.980 | >> And since it's a little too heavy to carry around, we would like to also give you the
00:58:46.980 | lapel pin version of it that you can wear, and know that you have your bow heads with
00:58:52.980 | you in your fight.
00:58:54.980 | >> Well, thank you so much.
00:58:56.980 | [applause]
00:59:05.980 | >> First, I want to thank Mel for his leadership of all this. He's done an unbelievably great
00:59:09.980 | job in keeping all this going, and thank you for that. I know everybody here thanks you
00:59:15.980 | too. I do want to say that each year you've been kind enough to give me a little memento,
00:59:21.980 | and I'm not sure I really deserve it, but they are all over my mantelpiece, and this
00:59:25.980 | will go up with the next one that Liberty Bell, you gave me. I can't remember if it
00:59:28.980 | was last year or two years ago. Liberty Bell inscribed, and then somebody gave me a bugle
00:59:33.980 | years ago, and that's in a nice little frame, and that's hanging above my mantelpiece.
00:59:39.980 | So they mean a lot to me, and they remind me of you, and they keep me going day after
00:59:43.980 | day. So thanks. Sure, it's a little trinket, but it's a memory of just another great occasion.
00:59:49.980 | So thank you all again, and thank you Mel.
00:59:51.980 | (applause)
00:59:53.980 | (music)
00:59:55.980 | you
00:59:58.040 | [BLANK_AUDIO]