[APPLAUSE]
ADAM NASH: Well, thanks, everyone.
Thanks for showing up this afternoon.
This is a big delight for me.
My name is Adam Nash.
I'm the chief operating officer at Wealthfront.
I've been at a lot of technology companies-- Apple, EBay,
LinkedIn.
It's a particular delight for me to have ended up
at a company, a great software company, at least one
we're trying to build, where it's actually part of my job
description to get to work with world class
financial experts like Burt and Charlie here.
So hopefully you'll feel the same
after we go through these questions.
I know that you have a lot you probably
want to hear from them.
We've tried to solicit from some folks
good questions to cover some basic material.
And then we'll have time at the end for additional questions,
if that make sense.
So anyway, Wealthfront is a startup,
but we're the largest and fastest-growing software-based
financial advisor.
Probably the first question for both of you
is pretty simple, which is, I mean,
you've both had such amazing careers
defining financial expertise for the industry.
Why the involvement at Wealthfront
at this point, maybe just a retrospective?
BURTON MALKIEL: Well, from my standpoint,
it was largely because I think most people get
just terrible financial advice, and it's too expensive.
Most financial advisers charge a very high fee themselves.
And they are conflicted in that when
they suggest that you buy this or that mutual fund, what's
sort of little known is that they usually
get a payment from that mutual fund company
to put you in that mutual fund.
They're high-cost funds.
And I've spent my life studying the fact,
as the introduction said, that over time, very
high-cost mutual funds don't beat the market-- rather,
they underperform the market-- and that they underperform
the market by at least the amount of their excess cost.
So you've got costs of the adviser.
You've got high-priced funds and what the adviser recommends.
The advisor is typically conflicted.
And here, you have something where,
with the advantage of doing this with software
and doing this electronically, that you
can give unconflicted advice.
And we use the funds that I have recommended all my life,
low-cost index funds that competition has now driven down
to have very close to zero fees.
So we can provide this electronically.
It's inexpensive.
I think it's as good advice as any high-priced investment
adviser will give you.
And we can then, particularly for funds
that are over $100,000, do things
like tax loss harvesting.
None of us can control what the stock market's going to do,
but the one thing we can control is
the things that are controllable.
And one of them is costs, and one of them is taxes,
and this we can do very inexpensively electronically.
And I'm actually very, very proud to be
a part of an organization that I think
is doing a great job for people.
ADAM NASH: Charley?
CHARLEY ELLIS: We differ.
Burt would say it's low cost and a much better product,
and I would say it's much better product and low cost.
ADAM NASH: [LAUGHS]
CHARLEY ELLIS: Seriously, if you look back over the last 50
years, I think both of us would be truly aggravated
by the crowd we know best not doing anything like a really
good job, and candidly, charging quite large amounts.
There are a lot of different ways of looking at that,
and we can come back to it if you want to.
But it is very unsettling to have the crowd
that you're part charging a lot and delivering a little.
So you're looking all the time.
And when I heard from Burt that he
was involved with Wealthfront, seemed to me
like a great deal of sense.
ADAM NASH: Well, I mean, I'm glad you mentioned that.
You two have known each other for a long time now.
CHARLEY ELLIS: We were born in the same hospital,
so it goes back quite a ways.
ADAM NASH: Do you want to tell a bit about how you two first met
and worked together?
I'm sure people would love to hear it.
CHARLEY ELLIS: Do you remember?
BURTON MALKIEL: Well, I think we have been-- of course,
the first index fund was founded by a company called Vanguard,
and Vanguard now is the biggest index fund provider.
And they also provide ETFs, which are basically
funds that trade as stocks.
And they're basically-- the ones that Vanguard
has are index funds.
And Charley and I, for a long period of time,
sat next to each other on the Vanguard board.
And I think one of the reasons that we
got to really like each other is that--
CHARLEY ELLIS: Oh, it's agreed.
[LAUGHS]
BURTON MALKIEL: Yeah, that was the problem.
We would all make a point, and somehow or other,
you and I always agreed.
And we sat next to each other.
And if we didn't even talk, we would just sort of nod.
So that was how it all started.
And my god, I don't want to count the number of years,
but it was long number of years.
And we became friends and became co-authors,
because the little book that's been featured
is our attempt to put down everything
we know in a book that would take an hour and a half
to read.
And we had a lot of fun doing it together.
CHARLEY ELLIS: That's if you're a slow reader.
BURTON MALKIEL: If you're a slow reader, right.
ADAM NASH: [LAUGHS] That's great.
I mean, Burt, this isn't the first time
I think you've been at Google.
In 2004, I remember when Google went public.
It was the big IPO at the time, because there
hadn't been a lot of big IPOs in a few years.
I thought Google did something fairly unique
given its dedication to its employees
and their financial health, is that you were invited here--
not here in the New York office, but in Mountain View,
in California-- to talk to the employee
base about the markets, and help prepare them
for what it meant to have wealth in the market.
What was it like speaking to Google 2004?
BURTON MALKIEL: Actually, you know, my first time at Google,
I had two main impressions.
First of all, I've been an academic most of my life,
but started my investment career as an investment
banker in New York.
And as I got into this business, we
had a training program of about a half a dozen guys.
And we were going to be given a lecture by the senior partner
of the firm, and the air conditioning
broke in the building.
Actually, it was the building 20 Broad Street,
right next to the New York Stock Exchange.
So we were all coat and tie, obviously,
and the other trainees took their coats off.
The senior partner then started to address us,
and said, "it's OK when the air conditioning breaks that you
can take your jackets off," but then
looked at one of the trainees who
had a short-sleeved shirt on-- "but never, never,
never take your coat off if you've
got a short-sleeved shirt on."
So this is how I came into the business world.
So you can imagine my first impression
of going to Google of what an informal place this was.
People had t-shirts, shorts, flip-flops.
People were throwing Frisbees inside the building.
There were dogs running around.
And I couldn't help but think back
to the beginning of my business career.
And I say, oh my god.
I knew the West Coast was always less formal than the East
Coast, but what a difference this is.
And I also visited at the time-- because I had known him,
I'd been on a couple of panels with him--
Eric Schmidt, who was then the CEO, was a Princeton trustee.
And here was Eric Schmidt in this little tiny office.
And I was thinking of the partners' offices
in the investment banks.
And so the first impression was, my god,
what a different world this was from the world
that I grew up in.
I think the second impression that I had,
when you go into the Google headquarters,
there's this huge map of the world with lights.
And every time somebody does a search,
in whatever part of the world it is, a light goes off.
So you're looking at this sort of map of the world,
and lights are blaring at you.
It's like a Christmas tree.
And everywhere-- I mean, it must have
been three o'clock in the morning in Tokyo,
but Japan was all lit up.
And you know, it occurred to me, what a worldwide phenomenon,
and what an amazing company this is,
and what a worldwide company it is.
And also, as kind of an economist who
is interested in economic development,
I thought, what a way of showing the parts of the world that
are undeveloped, because as you looked at the map, the only
dark part was between sub-Sahara Africa and southern Africa.
And there were no lights going on there.
And you realize, how could you build a better show where
the world is the economically developed and where it isn't?
So those were kind of my first two impressions.
It was an absolutely wonderful experience.
We were giving out parts of my "Random Walk" book.
And at lunch, Mario Batali was there,
and he was cooking for all the Googlers,
and I traded books with him.
And it was one of my-- you think of
the unforgettable experiences in your life,
and that was one of them, my first visit to Google.
ADAM NASH: Yeah.
Well, it's fascinating, because Google came public,
like I said, a few years after the first big market
crash, the kind of 2000 to 2001--
at least the big market crash in recent memory.
And then just a few years later, of course, in 2008,
we had the massive financial dislocation.
And this is a question for both of you, but how
do you feel that affects the advice that you give people
or how they receive it, now that they've been through not one,
but two of these big events?
CHARLEY ELLIS: It gathers the attention.
It depends on your own perspective.
We're both of us in an age cohort where
we've been around long enough so you can't help but think
about times way back and stuff like that.
Markets go up and down.
Mr. Morgan was one asked, what do you
think of the stock market?
He said, it will fluctuate.
And sure enough, still does.
Sometimes it fluctuates like a punch in the face,
and sometimes it's like a beautiful woman's soft touch,
just everything is working out perfectly.
But most the time, it's to sort of wobbling around out there.
And I think it's dreadfully dangerous,
because it attracts your attention.
And candidly, the best line ever, ever given
about the market was "frankly, madam, I do not give a damn."
None of us should be paying attention to the stock market
nearly as much as we pay attention to ourselves.
If you know who you are, where you are, where you want to go,
you will do more good for yourself than if
all about the stock market, partly because it'll disappear,
because markets are very temporary and gone.
But you really are important, and the rest of it is details.
And the specificity and the intensity and excitement
of the details can attract attention.
But if you didn't know a thing about what was going on,
you could still find your pathway
through what's going to be going on in the long run.
I assume you've read Nate Silver's wonderful book
about "The Signal and the Noise."
It's a terrific book, and a terrifically smart guy
who's put together an awful lot of insight and understanding.
He's right.
The signal and the noise-- pay attention to the signal.
Don't worry about the noise.
And if the signal tunes in for you in a particular way,
or you can tune in with it, you can
do some important value adding decision making.
All the other things are best ignored.
BURTON MALKIEL: And in fact, they
ought to be ignored, because to the extent that they affect
you, they make you do the wrong thing.
One of the things--
CHARLEY ELLIS: If you're a human being.
BURTON MALKIEL: And that's where this new field
of the behavioral finance comes in.
We have very good data on the flow of money
into equity mutual funds.
And what we know is that money flows
in when everyone's optimistic.
More money flowed into equity mutual funds
in the first quarter of 2000 that
happened to be the top of the internet bubble than ever
before.
And then at the market bottom in about the third quarter
of 2002, the money went out, then the money came back in.
And more money came out than ever
before in the third quarter of 2008,
at the height-- or the depth, if you
wish-- of the financial crisis, when everyone
thought the world was going to end.
So the problem with looking at the noise
is it makes you do the wrong thing.
You're selling when, if anything, you should be buying.
And you're buying when everyone is very optimistic,
and if anything, you should be careful.
And that's the real problem of letting
the noise effect you, rather than simply if you're
saving for trying to build up a big retirement nest egg,
of just doing it to evenly over time,
take advantage of the opportunities
when the market's down, not sell, but keep a study course.
ADAM NASH: You know, it's-- oh, sorry.
Go ahead.
CHARLEY ELLIS: All three of us went
to Harvard Business School.
It was a great place to go.
You can learn a lot.
You can take the course on investment management.
You can learn a lot.
You'd learn more if you could just take five years
and be a parent of a teenage child.
You realize, it's very exciting.
It's very interesting.
It really gets you excited positively sometimes,
and it gets you very excited negatively sometimes.
And it doesn't matter.
They grow up to be wonderful, long run.
ADAM NASH: My teenage years weren't so exciting,
but I may have done it wrong.
[LAUGHS]
CHARLEY ELLIS: Depends-- exciting to you,
or exciting to your parents?
ADAM NASH: I'm sure it was exciting to them.
CHARLEY ELLIS: I would have thought
they'd have been really deeply afraid.
ADAM NASH: [LAUGHS] They're still
trying to figure out how their son ended up in a career
where he doesn't have to dress up every day.
CHARLEY ELLIS: Right.
ADAM NASH: Actually, I like this focus
on long term and investing.
I see a big parallel.
But great technology companies have always
been the ones that got out of the day-to-day quarter focus,
even when public, and focused on initiatives three, five,
10 years out.
I mean, Larry's done that here at Google.
I think Jeff has done that fantastically well at Amazon.
I think that it's rare.
But the great technology companies
know that technology reinvents the rules every few years,
but it's fairly predictable that scale will increase,
speed will increase, and what's now possible.
So a lot of the folks in this room,
their first job may have been at Google,
or they may have been other technology companies.
You were both involved with Vanguard
in the very earliest of days.
And for most of the people in this room,
Vanguard is a huge fact of the financial industry--
trillions in assets, index funds.
It's a staple of what people think is available,
but that wasn't always true.
Vanguard was effectively a startup as well.
Do you guys want to comment on--
CHARLEY ELLIS: Well, we differed on that.
Burt wisely said, "I think this could work,"
and worked with Jack Bogle to make it go.
And I unwisely went to Jack and said, "Jack, you
made a terrible mistake.
You're in a short, dead-end street.
It's not going to work out.
All of your friends know you've really
screwed up making this commitment.
If you just stop now and come back into the normal world,
you'll be OK."
Forgiveness is a part of the investment management world.
[LAUGHTER]
CHARLEY ELLIS: On the whole, Burt was dead right.
On the whole, I was dead wrong.
BURTON MALKIEL: But you know, the fact is,
when I first wrote my "Random Walk" book, which
is in all of these editions-- it was actually 1973--
and it recommended that people would
be better off with index funds.
And I had a market professional review my book
in "Business Week," as it was the worst review I ever got.
They said this is the biggest piece of garbage
that they had ever seen.
And when Jack started the first index fund,
it was called Bogle's Folly.
And in fact, I sometimes like to think that Jack and I were
the only to investors in the index fund.
It was very slow to start.
It wasn't that this just took off right away.
It didn't.
It was years and years before it had any significant assets.
And again, that just shows you the importance of,
it was right.
People say, well, who wants to be mediocre?
It's not mediocre.
It's being above average, being in a low-cost index fund.
And after a while, it did start to take off.
But believe me, it was very, very slow.
And people thought this was the stupidest idea in the world.
CHARLEY ELLIS: There were advertisements taken out
in a trade magazine.
"Index funds are un-American."
And it was run over and over and over again,
because it got the laughs, but it also
was what people really felt emotionally.
ADAM NASH: I think it's seductive to believe that you
can outsmart the market or figure these things out.
CHARLEY ELLIS: Well, can I interrupt you just
for a second?
ADAM NASH: Oh, yeah.
CHARLEY ELLIS: If you're trying to outsmart the market,
that's self deception.
It's not as though the market is out there
doing whatever markets do.
There's a smart son of a bitch on the other side
of every trade.
And when we were children and just getting
started in investment management 50 years ago, 92%, 94%, 95%
was done by individual investors.
What's an individual investor?
Well, he makes a trade every year and a half.
Every year and a half?
One trade?
Why does he buy or sell?
Well, he buys because he got a bonus of a thousand dollars,
or he sells because he wants to help his daughter
pay for college.
It has nothing to do with the stock market.
He doesn't do any comparison shopping.
Half of them bought AT&T, and then half of the rest
bought the company they worked for,
and the rest bought some company they'd heard about,
that must be a good company because one of their friends
told them about it.
Honest to goodness, it's not hard to beat people
who have no access to information or research,
have no comparison value, aren't doing it
with anything like rigor analysis.
They just kind, well, I've got some.
Why don't I buy some.
Today, it's not 95% done by individuals.
It's 96% done by experts.
48 of the 96 are done by the 50 largest, most active investors.
These are people that really care.
And they've got terrific equipment.
They've all got it-- at least a couple Bloombergs,
usually have one at home, one at the office.
They've got tremendous access to factual information.
Everybody gives them the first call.
Everybody wants to do business with them.
They are so actively in the market so much of the time,
and they've spent years mastering the industry
that they're working in.
And when they get you in the crosshairs--
it was all well and good when George Plimpton
would go out and play against the NFL team.
But personally, if I were to go out,
that would be the way I would be.
I'd be absolute bait for destruction.
And the same thing is in the stock market.
If you take on these guys, they're really good.
And they're killers.
ADAM NASH: It's ironic that a good, low-cost,
diversified portfolio--
CHARLEY ELLIS: Wait a minute.
Let me give you the punch line.
You don't have to take them on.
You can let them do all the work, all the work,
and the rest is on automatic.
And that's basically what index funds are all about.
After they've figured out what the prices ought to be--
and there's a lot of work on price discovery,
and they get really good at discovering the prices--
once they've figured it out, say fine.
I'll take what they've got.
I'll have what she's having.
ADAM NASH: Well, you know, what's
fascinated me is Wealthfront, our average customer right now
is in their 30s.
A lot of twentysomethings, thirtysomethings,
fortysomethings, they tend to be more technical.
And they've been through these two market crashes,
so the thing that I hear over and over again
from folks-- I like to talk to customers--
is that they don't think they're going
to make their money by beating the market.
They think they're going to make their money by being
a great engineer or a great designer or building a company.
They just want to have their money soundly invested
in a low-cost way.
When you folks talk to young people
now-- I know you're both involved
a lot with different groups and teaching-- how do you give
advice to folks in Gen Y, Gen X, young people who
are at early stages in their career?
BURTON MALKIEL: Well, I generally
tell them to put money into their investments
regularly over time, no matter what is happening, and don't
worry if the stock market goes down.
There's probably one of these professionals
that Charley's talking about, and maybe the best investor
that we've got in the country, is Warren Buffett.
And he has a wonderful essay which says,
suppose you love hamburgers, and that you're
going to be eating hamburgers all your life,
and you're not a cattle rancher.
Would you like the price of hamburgers
to go up or down in the future?
You say, well, OK, I'm going to be buying hamburgers.
Let's just assume the hamburgers I buy next week
and next year are lower.
You say OK, you got that one right.
OK, here's the second part of the quiz.
Suppose you're going to be buying automobiles
all your life, and you're not an automobile manufacturer.
Do you want the price of automobiles to go up or down?
You say, well, I'd just assume the next auto I buy is actually
cheaper than the one I just bought.
And Buffet says, good.
You got that one right too.
Now, for the final exam, suppose you're
going to be investing all your life.
You're going to be putting money aside all your life.
Do you want the stock market to go up or down?
And Buffett says this is where people generally
flunk the final exam.
It's only if you're in retirement and taking money out
that you want the stock prices to be high.
It's as if you're asking that the hamburgers that you're
going to be buying and the cars that you're going to be buying
are going to go up in price.
In fact, through something that's-- actually,
the technical term for it is dollar cost averaging--
if, in fact, the price goes down,
your money goes even further.
You can buy more shares.
And you can put a little example down
of how even when the market is very volatile
and doesn't go up at all, you can make money
because you bought more shares when the market was down.
And one of the simulations that I've done
is take a decade-- the first decade of the 2000s, which
has been called by investors "the lost decade," because
in general, if you put money in the S&P 500
on January 1 of 2000 and looked at what
it was worth on December 31 of 2009,
you didn't make any money.
The second decade's been pretty good,
but the first decade was terrible.
But if you put money in every quarter, regularly,
you actually made a pretty good rate of return
even during the lost decade.
So what I try to tell people is, generally,
put the money in steadily.
Nobody can time the market.
Professionals can't do it.
Look, I've been in this game for 50 years.
I've never known anyone who can time the market.
I've never known anyone who knows
anyone who can time the market.
It's not that the efficient market hypothesis means
that prices are always right, and that's
how some people poo-poo the idea.
Prices are not always right.
They're always wrong.
The problem is, no one knows for sure
whether they're too high or too low.
ADAM NASH: What I love about that advice
is it highlights actually good financial fundamentals.
It turns out the most important for young people
is just to be saving, they save regularly, and put
in the market.
It's actually better for them if the market has up and down,
because they'll get some of the downs.
True, you get some of the ups, but the long-term trend
is obviously their friend.
Sorry, go ahead.
CHARLEY ELLIS: You just said it, but saving is number one.
ADAM NASH: Yes.
CHARLEY ELLIS: Not getting excited,
either at the top or the bottom, is number two.
And then regular investing, ho-hum,
steady, steady, steady-- number three.
And it works out fabulously.
But it takes some self discipline when
the excitement around you, and all the people
are talking in the newspapers and magazines
and television programs are talking about,
this may be the last chance to get in
on a wonderful opportunity.
It's very hard not to get deeply concerned when
you see the whole economy's falling apart,
Asia's going wrong, Europe's going wrong,
the president's having a terrible time,
the president's wife is unhappy with him,
your wife is unhappy with you, and your friends are all
deeply concerned, and the food doesn't taste good.
It's pretty hard not to get depressed.
But you've got to hang in there, because that's
the time of your best chance of your lifetime.
BURTON MALKIEL: And control the things that you can control.
You can't control the ups and downs of the market.
You can control your costs.
You can control your taxes that you pay.
And you can use the best friend you've got for reducing risk,
and that's diversifying.
So diversify, control the things that you can control,
and as much as the market might fluctuate,
don't worry about it.
You'll come out OK.
ADAM NASH: You know, I think it's such good advice.
Ironically I think in some ways, we've
made it harder on ourselves in this generation.
We all have smartphones in our pockets.
They buzz all the time.
We're checking our feeds, whether it's Google+ Facebook
or Twitter.
There's this stuff happening all the time.
So learning that basic fact that,
that there are some things you can control
and some things you can't, is really
important with investing.
CHARLEY ELLIS: One thing, just an easy metric on this,
is don't never do nothing that you're not
prepared to hold onto for at least 10 years, whatever it is.
ADAM NASH: 10 years.
I mean, actually it's a good segue.
You did an interview, I think, recently, with--
was it "Investor News," or--
CHARLEY ELLIS: "Institutional Investor."
ADAM NASH: "Institutional Investor."
I think of the title the article was "Is Alpha Dead?"
And I mean, compared to 40 years ago,
do you feel like-- is it the same as it's always been,
or has it got even harder to beat the market?
CHARLEY ELLIS: 50 years ago, it was relatively
easy to do better than the market rate of return,
because the competition wasn't very good.
Today, the competition is just marvelous.
Every time you buy, you buy from somebody
who knows a hell of a lot about it.
Every time you sell something, you're
selling it to somebody who knows a hell of a lot about it.
They may make mistakes, but how smart are you
that you won't have made at least about the same the number
of mistakes, plus the cost of being there in the activity?
It's just, the world has changed.
And McCain said, one wonderful sentence,
"When the facts change, I change my mind.
What do you do about yours?"
And it's worth thinking about.
And the world of investing has changed.
And so what would be sensible 50 years ago
could now be not at all sensible.
All the evidence is that it doesn't
work to do what would have worked 50 years ago.
Fine.
ADAM NASH: Well, I think it's magical in some ways
that we've evolved the industry to the point where you can own
the entire US stock market for such an incredibly cheap rate.
I mean, five basis points is kind of amazing.
It's good to know that even in this arms race that's
going on amongst the professional investor set
that you can do better than most of them
just by buying the simple index funds.
Let me segue a bit, some kind of topical news.
The Federal Reserve has been in the news a lot lately.
Both of you have had careers-- you worked with Alan Greenspan
at one point, Ben Bernanke, I think even Janet Yellen,
we were talking about.
Any comments about what the differences
are, what it takes to be a great Federal Reserve chairman?
I mean, it's something you going to really look over
over decades.
It's not something you can really understand just
looking at the most recent candidates.
CHARLEY ELLIS: Oh, I think there's
some things you could say.
Number one, Federal Reserve governance is a team sport.
So if you are not really good at working with other people,
you've got a real problem.
Secondly, I think you could easily
say we have been really fortunate to have
some extraordinary people serving
in the governorship, but particularly the chairman.
You should talk about Ben Bernanke,
because you really worked closely with him.
I knew him, but-- I knew Janet Yellen quite closely at Yale.
These are extraordinary people who
have studied and studied and studied the field in which they
are then put to test.
Everything that they live with is new, difficult,
fast moving, and the data is not available.
So it's a really tough job.
But if you wanted to pick people who
are wonderfully well-suited to that,
out of all the people that might be chosen,
we've been very, very fortune as a nation.
And what's wonderful is that the rest of the world
has very talented people in their central banks also,
but that these people talk to each other all the time.
And the factual information that's
accessible to the bankers is terrific.
Is it perfect?
Certainly not.
Is it a hard job?
You bet.
An unwinding of this massive purchase of mortgages
is going to be an unbelievably challenging--
when do you do it?
How do you do it?
How do you communicate about it?
It's going to be hard.
BURTON MALKIEL: I would agree with you, surely,
that the consensus building is so important.
And Ben came from my university, and so I've seen Ben in action.
Herding a group of prima donna faculty
around is not one of the easiest things in the world,
and Ben was a brilliant department chairman.
And I think Ben was quite brilliant
as the leader of the Federal Reserve.
And I think one of the things that
is very likely to be the case for Janet Yellen
is that she has some of the same qualities.
So I agree with you that we've got a big enough government
portfolio that there are really some questions about whether we
have done something to hurt the market.
Unwinding this, which is certainly
something that needs to be done, is
going to be very, very tricky.
But I think we've got the right people on board to do it.
ADAM NASH: That's good to hear. [LAUGHS] A little bit
of good news.
Before we open it up to questions,
because I know people must have quite a few,
I wanted to make sure to ask a fundamental one.
You've both been a part of some very fundamental improvements
in the structure of the industry-- what clients deserve
from their advisors, index funds, passive investing-- I
mean, just a wide range of advocacy
for making investing better for individuals.
How do you think about your legacy,
or what you want to make sure continues going forward,
given the progress that we've been
able to make over the last few decades?
BURTON MALKIEL: Well, one of the things
that I have the worked on recently
is to try to see if we could get the whole industry to sign onto
something that's called the fiduciary standard.
And it's sort of very simple-- that you don't do anything
for your client that you're not absolutely 100%
convinced is in your client's interest.
And that's basically what I think
is the fundamental problem with the industry,
that there is this severe conflict of interest.
I mean, this is one of the things that
happened in the financial crisis.
If you are making a lot of money selling
mortgage-backed securities, well, we're
not going to worry what kind of toxic stuff is in there.
If people want to buy it, let them buy it.
That was basically what the industry did.
And I think what is the answer is,
what informs every decision you make is not whether it's
good for me, whether it's going to be good for my bottom line,
but whether it is good for the bottom line of the people
we're serving.
And if I had a legacy that I wanted
to leave on my tombstone, that would be it.
ADAM NASH: Charley?
CHARLEY ELLIS: I don't believe in legacy.
[LAUGHTER]
CHARLEY ELLIS: I would just say read
what Burt wrote on his tombstone.
That'd do fine.
It's a cultural problem.
If we get enough misbehaving, we'll
get enough correctives so that the culture will
move towards doing the right sorts of things.
But once you separate the professional value
from the economics of the business,
the business economics are going to take off and get
to be dominant.
And it will attract people who say, well, you
get pretty good pay over there.
It doesn't look like all that boring work,
so I'd like to do it, and that recreates.
If you go back and read economic history in the '30s,
there were some marvelous hearings in Washington
where one banker after another was embarrassed something
unbelievable to be asked a series of questions--
the Pujo hearings.
And it's kind of fun to read back over that.
It's just so similar to what we did.
In the last round-- 2008, and the break in the market--
you can trace an unfortunately large fraction
of the really severe difficulties
to very specific individuals who misbehaved.
And it wasn't the people down the line
that did the worst of it.
It was the people at the top of those organizations
that did the worst of it, and that's a shame.
ADAM NASH: Well, I think I have more questions.
But I want to make sure, just given the time,
and also that we--
CHARLEY ELLIS: I have one that I want to squeeze in,
because I'm all excited about this.
ADAM NASH: Sure, yeah.
CHARLEY ELLIS: As you've heard, I've
been around for a long time.
I'm sitting in an investment committee meeting,
and we're getting a review by the manager of why it didn't
happen to be their particular kind of market,
and it just happened to be that instead of doing better
than the market, they happened to do slightly less well,
but they've done some wonderful things to improve,
and they're going to be able to do to terrific in the future.
And I'm looking at the numbers, and I realized-- never actually
realized it after 40 some odd years,
48 years-- I hadn't realized what the fees are.
Now, most of us in this room would
be able to say, oh, fees are small.
Fees are really small.
It's usually a four-letter word and a single number.
"Only" is the four-letter word, and 1% is the single number.
Well, the 1% is not accurate.
Mutual funds typically run closer to 1 and 1/4%
of the assets.
But then I would turn to Burt and say, "but Burt,
you've already got the assets."
So the fee isn't what you're paying for what you're getting,
because you've already got the assets.
What are you getting?
Oh, Charley, we're getting a return.
Great.
Normal expectation of returns here,
given the market's gone up a fair amount, going forward,
might be 7% or 8%, on average, with lots
of ups and downs in between.
So that 1%, or a little over 1%-- as a percent,
not of assets, but a percent of the returns--
what's that work out to be?
Oh, let me do the math.
Well, call it 15%.
That doesn't sound like "only."
I guess not.
I guess that's really actually pretty high.
And then when I was in school studying economics,
we all were taught everything is comparative price.
So what's the commodity product and the commodity price?
And then what's the custom product and the custom price?
The commodity product is an index fund.
It gets you the market rate of return every day,
every week, every month, every year, same old, same old market
rate of return, at no more, no less than the market
level or riskiness.
OK, that's a pretty good commodity product.
What's it cost?
One-tenth of one percent.
Now, you can get a custom-tailored product,
and what does it cost?
Well, it costs-- if it's 10 basis points for one,
it's 120 basis points for the other.
So incremental cost is 110 basis points.
Gee, I must get a pretty good return in exchange for that,
don't I?
No, Charley.
I'm sorry, but you don't.
Actually, you get more risk.
You get a lot of uncertainty, because you never
know when something's really going to go wrong.
But leave that aside-- more risk,
and on average, 3/4 of the funds that are actively
managed-- maybe it's 80% of the funds,
somewhere in there-- underperform the benchmark
that they said they were going to match.
And you never can figure out who's
going to underperform-- most-- and you could never
figure out who's going to outperform.
There's no way of doing it.
So what you're doing when you get a custom-tailored product
is you're paying a much higher fee
for less quality and a lower return.
And it is just amazing that that's
something that continues year after year after year.
And it can't last for long, but really smart people
are going to figure it out and say, I'm not going to do that.
I'm going to take the commodity product because it's
cheaper and better return, and I've got better things
to do with my time than chewing my nails over whether I'm
going to be OK or not OK.
BURTON MALKIEL: Let me just put a footnote on this, Charley,
because I've just done some work on 401(k) plans.
And in general, the cost is more like 2% than 1%,
because then there's a rep fee around the high-priced mutual
funds that are in there.
And so you might say, instead of getting a 7% return,
you get only a 5% return.
So your way of looking at it is, it's not 2%.
It's really 2/7 is what you're paying.
But it's even worse than that, because these costs compound.
If you think of putting money in at 7% for 40 years
or putting money in at 5% for 40 years,
that difference at the end isn't even 2/7.
You're getting about half the amount at the end,
because the tyranny of the compounding of the costs
gets you.
So again, it is just so important,
if you got something for it, fine, but you don't.
The evidence is unmistakable that you don't.
It's getting tougher and tougher all the time.
The market's not always right, but there
are few Warren Buffetts.
I sometimes say if when I wrote my book,
I knew that Warren Buffett was going to be Warren Buffett,
I wouldn't have said "buy an index fund."
I would have said, "go buy Berkshire Hathaway," which
is Warren Buffett's investment company.
And you know what, there will be Warren Buffetts
over the next 40 years.
There'll be maybe five or six of them.
It could very well be.
But as you said, I don't know who they are.
You don't know who they are.
And when you try to go for them, you're
much more likely to be on the negative side
of the distribution, and you're going to be a loser.
So index investing isn't mediocre.
It isn't average.
It's way above average.
CHARLEY ELLIS: One place that I would differ slightly
from you, Burt-- same conclusion.
You say you would only get half as
much if you went active as opposed to index.
I'd just like to turn it around and say the other way,
you get twice as much at the end of the run--
I won't argue with you at all.
CHARLEY ELLIS: If you do index instead of--
BURTON MALKIEL: Won't argue with you at all, Charley.
ADAM NASH: Well, I'll tell you guys,
this is great, because my background is in software
as an engineer, and I focused on human computer interaction.
But I'll tell you, after joining Wealthfront, finding ways
to explain to people that 1% to 2%
is actually a really big number is one of the hardest problems
that I've run into.
CHARLEY ELLIS: Say that to a balloon that
meets a pin-- beautiful big balloon, one tiny little pin.
BURTON MALKIEL: Albert Einstein said
that compounding is the greatest force in the world.
Well, the cost compound too, and that's what gets you.
CHARLEY ELLIS: Before we leave it,
could we just all agree that nobody should ever
use credit card debt?
Because not only is that a big interest, but boy,
when that compounds, it really goes.
ADAM NASH: Yeah.
When people find out that debt compounds just the same way
with much bigger interest rates, it's usually real depressing.
CHARLEY ELLIS: They say ooh, wow.
ADAM NASH: So great.
So I think in terms of time, we wanted
to leave some time for folks to ask questions.
We have microphones set up for the folks
who are watching remotely.
Feel free, and I'll just call on folks.
Yeah, maybe your name and who the question's for.
AUDIENCE: Sure.
My name's David.
A question about for Burt.
So you said earlier you can control the taxes that you pay.
I'd love to know how.
BURTON MALKIEL: Basically, you can control the taxes
by something that's called tax loss harvesting.
If you have a portfolio-- let's say
that you just have a portfolio of US stocks,
or even US technology stocks, and it's an index.
There are always going to be a few of those stocks that
have gone down.
You've got Google, that's gone up.
You have Groupon, that went down.
So what you do in tax loss harvesting
is that you sell the loser and put an equivalent one in.
And we can do this with index funds.
We have a diversified portfolio of US stocks,
of international stocks, of developed countries,
of emerging market stocks, of foreign bonds.
In other words, we've got a whole bunch of asset classes.
So in a period such as this past year, where the US stock
market has gone way up, but emerging markets have actually
gone down-- emerging markets have been weak this year--
you sell one emerging market index fund and buy another.
So you keep the exposure, but you recognize a loss,
and that loss is deductible from your taxes
up to a certain amount, or could be
used to offset other capital gains.
So it's the harvesting of the losses that
is a way of controlling your taxes.
And again, up to a certain amount,
even if you had no other capital gains,
you could deduct this on your 1040 for the year.
ADAM NASH: This is one of the things
that humans can do-- if you're really on top of it,
you'll see advisers do once a year-- you always see
the articles and papers about harvesting
some losses in the end of November,
somewhere between Thanksgiving and that 30-day window.
Wealthfront, because we did in software,
we can actually look for those opportunities every day.
It just turns out that the computers never sleep.
But yeah, it's a great technique.
There's no question.
Go ahead.
AUDIENCE: So hi, there.
My name is Doug.
And by the way, I'm from the Yale school
of management, class of 2013, so very nice.
By the way, the same thing is taught at Yale,
so also, double thumbs up on that.
My question is about diversification.
So I somehow can't believe the answer is invest only
in index funds.
It seems like-- I mean, index fund, by its definition,
is diverse, because it invests in many different things-- it's
as if you don't diversify your risk.
And my question is, what would you say to that?
BURTON MALKIEL: Well, you are diversifying your risk
using index funds.
A lot of people will tell me, because I believe
in buying index funds for emerging markets,
and a lot of people make the following argument.
Look, emerging markets are very inefficient.
Information isn't, in fact, as available for each stock
as it is in, let's say, the United States market.
And that's absolutely correct.
But when you look at the data, you
look at the data over the last 10 years,
and it's not 2/3 over that period who
were worse than the index.
It was basically over 90% of active emerging market managers
were worse than an emerging market index,
and it was in part almost because of the inefficiency.
The trading markets are very inefficient in emerging
markets.
There are big bid-ask spreads.
So if you trade, you're paying a big gap, because you're always
a buying at the ask price and selling at the bid price.
There are stamp taxes in emerging markets,
so that there's an extra tax when you trade.
When there are so-called market impact costs,
there's so little liquidity.
So it's not like buying 500 shares of Google
and you don't move the market.
You move the price against you.
And so even in markets that seem less efficient,
the markets are going to move.
Different markets are going to move differently.
Emerging markets are very unpopular.
During that lost decade, when the US market did nothing,
emerging markets did 10% a year.
During the last year, the US market is up 15% plus,
and emerging markets were down 4% or 5%.
So there is the opportunity for tax loss harvesting,
there is the opportunity for diversification,
and I don't see why you have to go to individual stocks
to get those opportunities.
I think they're still there with index funds,
as long as you're in different markets that
react to different economic realities.
AUDIENCE: Hello.
My name is Jeff.
You talk about dollar cost averaging and investing
slowly over the course of one's life-- excellent advice,
but it's sort of one-dimensional.
And so suppose that over the course of an investment
lifetime, I have several different index
funds-- US indices, emerging market, whatever--
and over time, I say, well, maybe this index here
isn't really the best one to have,
or I don't think it's got the best future,
and I'd like to shifts my focus.
And I'm curious how you see that sort of reallocation.
Like, what's the right way to reallocate, or even
to do it at all, because there's this element of,
well, you shouldn't think about that.
You should just keep plodding forward.
CHARLEY ELLIS: Well, I think you should think about it.
And this actually gets to another thing
that we do at Wealthfront that I think
is extremely valuable-- tactical asset allocation, which is,
gee, I don't like China now.
I think I ought to be in Brazil.
Or, I don't like emerging markets.
I think I ought to be in the US market.
I think that doesn't work.
I've seen many professionals try to do it.
I think it simply cannot be done.
But what you can do is rebalance.
And what rebalancing does is it simply says,
let's say you thought your portfolio ought
to be, let's say 50% US, 25% developed foreign,
25% emerging.
I'm just making up the numbers.
And then what you do is at least once a year,
you re-balance to that.
And what that makes you do is it makes
you take some money off the table on the market that
did particularly well, and makes you put the money back
into the market that did relatively poorly.
If you want, it's the opposite of what people do,
because what people actually do is
they put more money into the market that did well
and take the money out of the market that did poorly.
And my own work suggests that rebalancing over the last 15
years-- and just once a year, very simply-- added between one
and two percentage points to your return
of a diversified portfolio.
And that's one of the other services of Wealthfront
is that we do a systematic rebalancing.
I understand the argument "couldn't we do it tactically?"
And I just don't think anybody knows how to do it.
I don't know, Charley, what your view is.
CHARLEY ELLIS: Well, there are people who know how to do it,
but only briefly.
[LAUGHTER]
BURTON MALKIEL: Right, not consistently.
I mean, there will always be people
who get it right once in a while.
AUDIENCE: Yeah.
Thanks.
ADAM NASH: Thank you.
AUDIENCE: Hi.
My name is Tom.
I was wondering, as more and more people seem
to take your advice and use sort of a passive approach
and stop picking winners and losers,
does there ever become a tipping point in the future
where it sort of becomes the 1950s again,
and since no one is paying attention at all,
it actually becomes possible to pick winners and losers?
CHARLEY ELLIS: Yeah.
There is a point at which it becomes, once again,
a terrific opportunity.
It's that time when people say, I'm
not going to be an investment manager.
There's no point in it.
The pay have gone down so badly.
You can get much better jobs doing something else.
It's going to come at a time when the securities firms don't
have analysts that are pumping out
a tremendous amount of factual information,
when Mike Bloomberg says, you know,
we're going to pull back all those machines because nobody's
subscribing anymore.
We're going to junk them.
There is a point.
But walk through the mathematics.
A typical index fund will have turnover of about 5%.
The market as a whole has turnover of about 100%,
120%, somewhere in that range.
So if you move 50% of the assets into indexing,
what fraction of the market will that be?
It's about 3%.
If you move 80% into indexing, a fraction of the total market
activity, you're starting to get close.
When you get to 95% of the money is now indexed,
the amount of opportunity off indexing would be high.
But by then, all those sad things
I was talking about earlier, people saying,
this business is over, I can't get a job.
I can't get any equipment.
I can't get any services.
To hell with it.
Then, we'll be back with grass growing
through the streets of New York, and we'll
have all kinds of opportunities for people
to get into active investment management.
But they'll be alone, and they won't
be able to get the services and help,
and so it won't work for them anyway.
I mean, this is one of those marvelous mythical questions
that I love your asking it, because it's a setup.
In the reality, the math, it just
doesn't work that there will come
a time there's so much index that somebody ought
to be really out there doing active investing.
BURTON MALKIEL: Indexing has grown.
I mean, it is getting close to 25% of individual money,
and probably close to a third of institutional money is indexed.
And when it gets to be 95%, I'm going
to worry about that question.
But I'm with Charley.
It's a good theoretical question,
but I don't think it's ever going to happen.
CHARLEY ELLIS: You know that old poem?
"Breathes there a man, with soul so dead, who never to himself
hath said, this is mine own, my native land?"
Well, it's the same thing with active investing.
We all believe we can do better.
We all know from all the other experiences
that we have in our lives that you can do better.
It just happens in this particular one,
if you're trying to do better, you're
up against an invisible competition that
is so damn good that it doesn't make sense to be doing it.
And I'm back to George Plimpton going out
and playing in the NFL.
Nice guy, reasonably strong, reasonably healthy,
was six foot tall, but you could get killed out there
in the line playing against a guy who weighs 300 pounds
and does the 10-yard dash.
Who wants to do that?
Same problem.
ADAM NASH: We have a bunch of questions in--
CHARLEY ELLIS: Wonderful question.
ADAM NASH: It's a great question.
We have a bunch of questions in from remote viewers.
So you can see them ranked by popularity,
so I'll just read a couple of these.
The first one is actually a great one.
It says, "Bonds are scary because interest rates are
low," and "Stocks are scary because the economy has
high unemployment and profits are an all-time high
due to a lot of cost cutting."
Peter asks what should he do with his cash.
BURTON MALKIEL: Well, I think bonds are scary,
because I think when you look at our dysfunctional government,
and when you look at how hard it is for us to rein in our budget
deficit and do something about our long-run budget deficit,
you realize that we've got a very high debt-to-GDP ratio,
and the government's got to do something about it.
Well, what the government is doing
is something that goes under the name financial repression.
We are keeping interest rates very, very low.
The last time the 10-year treasury
yielded about 2 and 1/2%, which it yields now-- it's actually
up to 2.7% right now, but it's somewhere around that--
was in 1946.
In 1946, we have a debt-to-GDP ratio of 133%,
much higher than it is now.
And we were trying to finance that deficit,
and keeping interest rates very, very low.
Well, we actually had interest rates pegged into the 1950s,
and then we let them rise very, very gradually until 1980.
And what happened in 1980, we had a moderate inflation.
It was a little bigger, and there
was an oil and food shock in the '70s.
But in general, it was a moderate inflation.
And the debt-to-GDP ratio of the United States in 1980 was 30%.
So what this financial repression does
is it's a way of getting rid of your debt,
of letting inflation inflate it away,
and you do it on the backs of the bondholders.
And I am very worried about that.
And we at Wealthfront have, I think,
some very interesting strategies in our asset allocation.
For one thing, we use for part of what might be the safer bond
portfolio-- which is still needed for people,
particularly those who worry about volatility--
is we use an equity substitution strategy.
And by that, I mean we try to use very safe,
high-dividend growth stocks to substitute for the bond
portfolio.
Just to give you an example, AT&T's stock
yields something over 5%.
And the dividend on AT&T has been growing at 5% a year.
My guess is, it won't throw it quite that rate in the future,
but it's likely to grow.
AT&T 10-year bond's yield 4%.
Now, I can't believe that you won't
be better off as an investor with AT&T stock.
I think you'll get a higher rate of return.
And there was a time when bond prices and yields were
adjusting in the 1970s when bonds
were more volatile than stocks.
So that's some part of it.
Another part of it is to look at some foreign countries
with budget deficits under control,
and with debt-to-GDP ratios low, that have higher yields.
So we're very conscious of that, and have adjusted the asset
allocation to take advantage with of that.
Stocks are scary.
They're always scary.
Profits are at an all-time high.
On the other hand, because we have high unemployment
I don't think is a reason to be negative on stocks.
It means we've got a lot of excess capacity,
and we could in fact grow as a nation
at a much faster rate in the future.
In fact, my own economic forecast
is, we've been growing at 2% a year.
I think we're very likely to see in 2014 a growth rate that's
over 3%.
So I think that's actually an argument for stocks,
because I think you're going to see more growth in the future
than you have in the past.
And in general, our portfolio's particularly for young people,
are very much equity-oriented, and we've
been very careful about the bonds with some of the ideas
that I gave you earlier.
CHARLEY ELLIS: Can I add onto that?
Because it's really worth thinking about.
Being young is the best competitive advantage
you could possibly have as an investor,
because you've got time.
The big problem is you haven't been
around long enough to realize what
a terrific thing it is to be young.
BURTON MALKIEL: It's wasted on the young?
[LAUGHTER]
CHARLEY ELLIS: You can read Burt's book
and that'll catch you up, but that's a huge advantage
to have time on your side.
And most of the people here are going
to be investing, and buying securities, and buying houses,
and buying art, and investing and accumulating
for the next 30, 40 years.
Most of you will work until 75.
You'll enjoy the work so much you won't want to stop.
Then we'll move retirement ages out.
So 75 is a reasonable bet.
Most of you are under 40, so you've got a long shot.
Even when you retire, you're going
to live for another 20 or 25 years after that.
So your average length of time between now
and when you sell them to pay for your way of living,
it's not 35 years.
It's 45 years.
Nobody who's got 45 years would say, ooh, let's buy bonds,
unless they're anxious about ups and downs in the market.
If you just keep your vision on the long distance
and don't worry about the ups and downs in the market,
that's a calm under pressure.
It's a tremendous advantage.
Let me try one more dimension of this.
Everybody in this room has got a job.
Everybody in all the other rooms that are tied in
has got a job, with a damn good company.
Interesting place to work, probably all are super smart,
and know that they could easily walk across the street
and get a terrific job at another really interesting
company any time they wanted to.
So security with regard to earned income
is very, very high.
The only thing you don't know is how rapidly you
will rise in net earned income.
You know in five years from now, it's
not going to be less than it is now,
unless you happen to shoot the lights out
with some spectacular bonus, so once in a lifetime.
Leave that aside.
Salary, and regular bonuses, whatever, compensation,
is going to go clunkity clunkity clunkity clunk.
That's essentially an income that is fixed-- on a slope,
but it's fixed.
Think of that as being a bond equivalent.
5%'s a reasonable interest rate.
OK, multiply your salary by 20.
That's how much you've got in fixed income right now.
That is such a big fraction of your total wealth compared
to what you've got in securities investment.
Look at the whole picture.
I believe you will say, I want to reconsider how much I have
in stocks versus bonds, because now that I realize
I've got a fixed income that is huge,
I'm way behind on what I ought to do in the stock area.
I think most people who are in their 30s and 40s
should be thinking seriously how much emotional stability
they've got up to that level that they can live with.
They should be piling everything they've
got into equity type investing, rather than into fixed income
investing, because their biggest thing they've got,
their biggest value, is their intellectual property,
the ability come into an outfit like Google and say, I'm here,
and I'm willing to work with you.
What a fabulous sentence that is to be able to say out loud.
Recognize the reality.
Your intellectual property value is very large
ADAM NASH: People in general underestimate the value
of that human capital asset.
A lot of people in the room, technology industry,
we spend so much time keeping our skills up to date.
We learn the new languages.
We learn the new platforms.
We learn new solutions to old problems.
But that doesn't always factor in to how
people think about money.
I want to be careful, because we have
a couple more questions, on time.
There's one that I see highlighted in blue.
I'm assuming that means I'm supposed to read it.
I assume blue is good.
We talked about this briefly, but for folks
in the audience who may have a lump sum
or have been out of the market in some way, what
are your opinions about lump sum investing versus dollar cost
averaging?
CHARLEY ELLIS: I think it's a great idea
to put everything you've got on the number that's
going to work out really, really well.
When you're gambling, that's exactly what you should do.
And in investing, if you just have the ability
to time the market, you should definitely do it.
If, on the other hand, you're like all those boring people
that Burt and I know, real human beings who could easily be
misled and would rather settle for normal,
break it up into parts and spread it out over some time.
Don't try to be too cute and clever.
All you do is hurt yourself.
If, for God's sake, you're right, you'll then think,
hey, you know, Burt, I'm really good at this.
I think I'll do it again.
And you get at that time.
Worse than that, you're right the second time.
Now, you're really in trouble, because you'll honest-to-god
believe you can do it.
It will get you.
ADAM NASH: You don't get good at coin flipping?
That doesn't happen?
No?
Burt, do you have anything to add?
BURTON MALKIEL: No.
I think that says it very well.
And as I suggested to you, there's
a little example that I give of a market that's
very volatile over five periods and ends up exactly where
it is, but goes down first, and another market
that goes up consistently.
And you're actually better off with the market
that was very volatile, and can make even more money.
And it's much less risky.
ADAM NASH: Yeah.
The great thing about dollar cost averaging
is that you get in the habit of putting money in,
that first time that you realize that the volatility actually
works for you, that you ended up putting in money last month
and now the market-- you realize it's actually
a very boring process.
You put in money continuously.
Let the markets do their thing.
I think there's one more question here.
AUDIENCE: I'd like to get your thoughts on how indices
are composed, whether or not they be market cap based,
fundamentally based, equal weighting, anything like that.
Just, what do you think of those?
BURTON MALKIEL: In general, I believe
in market capitalization weighting.
And this actually gets to one of the other questions that's
on the screen that you didn't rated.
When you think of it, let's say you disagreed with me
and you thought that markets were really quite inefficient.
You still ought to be an indexer, because investing
has got to be a zero sum game.
CHARLEY ELLIS: Minus the course of playing the game.
BURTON MALKIEL: Well, yeah.
If somebody has got all the stocks that
went up more than average, somebody else
has got to be holding the ones that went down.
But in fact, it's a negative sum game,
because of the costs involved.
So the first thing to remember is,
once you stray from all the stocks in the market which
are weighted by their market capitalization-- that
is what the market is-- you are making a bet.
And maybe would be right, but then
somebody else has got to be wrong.
Now, what all of the other things
do-- whether it's equal weighting, whether it's
fundamental indexing, whether it's value investing-- is
you put certain tilts into your portfolio.
Fundamental indexing has been very popular.
There, you weight by the company's earnings,
or its sales, or its book value.
And what that does is it puts two tilts into your portfolio,
it makes your portfolio slightly more small cap than large cap,
and it makes your portfolio slightly more
quote "value," if we define value as having lower price
earnings and lower price-to-book value.
There have been lots of periods where those tilts have worked.
And there's a big dispute in the academy.
Is it because markets are inefficient,
or is it because of risk?
I think the people who favor these sorts of things
better think it's risk, because if it's in an efficiency,
somebody's going to arbitrage it away in the future.
But let's say you believe in that
and that that's what you want.
I don't.
I want to be a capital market capitalization indexer.
But let's say you think that-- this is something
that has worked in certain past periods.
There's no question about it.
And you think it's going to work in the future.
If you want that, don't buy the fundamental index.
Buy a Vanguard value index at a very, very low fee.
Realize what tilts are in those kinds of portfolios.
Or buy small cap, which is-- in fact,
we've got some weighting of small cap
in our overall portfolios.
And by it at a low fee.
Don't buy these things that are advertised, like fundamentally
index-weighted portfolios, because they've
got a much higher fee.
And it's a great for the purveyor of the investment
product, and not so good for you.
And look, I think all of us who talk about the stock market
need to be very modest about what we know and don't
know about the stock market.
But the only thing I'll tell you that I am 100% sure of,
and that is at the lower the fee I pay
to the purveyor of the investment product,
the more there's going to be for me.
ADAM NASH: I see we have a couple more questions up here.
I think the next leading question
is-- I think it's for you, Burt.
You're affiliated with--
BURTON MALKIEL: No, Charlie is as well.
Charlie can take that, about Rebalance IRA and Wealthfront.
ADAM NASH: Yeah, we have two firms-- Rebalance IRA
and Wealthfront.
BURTON MALKIEL: Yeah, both of us are on that advisory board too.
ADAM NASH: Both, if you want to compare or talk about it.
CHARLEY ELLIS: I'll just say, in both cases,
there's an effort to bring cost structures that are high,
to go past them with a different cost structure that
is low, and trying to deliver access to value.
That's why we're at Vanguard.
That's why we're doing this.
It's very much the same thing.
You could get really upset if you spend very much time
realizing how much wealth has been created for investment
managers by the game that's played,
and try to find the wealth that was created for the clients,
or the customers.
And on average, it isn't a wealth-creating.
It's a wealth-diminishing activity.
And if you get irritated about that,
you start looking for opportunities
to do something about it.
And that's, I think, the main--
BURTON MALKIEL: The finance industry
has grown in its share of US GDP from 4% to 8%.
And some of it is devising all of these derivative products
and so forth that practically blew up the world.
But a third of it is this increase
in financial advice, mutual fund fees.
And that, Charlie and I think, actually,
is an increase in fees, that, as I often say,
I can't think of any service that
is priced at so high a level relative to its value, which
I think is very, very low.
There was a famous book that was written
in the Depression of a person visiting New York.
And at that time, in downtown New York,
there were a lot of yachts on the Hudson River.
And this visitor came down to visit Wall Street,
and looked at these and asked the guide,
"Whose yachts are those?"
And the guide said, "Oh, those are the yachts of the Wall
Street investment advisers."
And the fellow asked, "Well, where
are the customers' yachts?"
And I think that's the question that I would raise,
is where are the customers' yachts?
ADAM NASH: Well, it's funny, I think
the macro trends you got right.
It's the biggest sea change that's happening,
and it's been happening for decades, is people recognition
that they don't have to pay those fees,
that index investing is the right approach,
that a low-cost diversified portfolio is
the right approach.
If I were to just add-- Rebalance IRA,
Wealthfront both have that idea--
the average financial firm right now
is spending all of their effort looking
after baby boomers in retirement,
because there's this amazing wave
of people focused on that problem.
Wealthfront, we focused on a different audience,
which is really young people, tech savvy, who
have slightly different concerns.
They're more focused on things like taxable accounts,
because they're still accruing a lot of wealth.
So we've invested in features like tax location.
What portfolio you should have in a taxable account
is different than a portfolio for a retirement account.
We've invested in tax loss harvesting, which is really
something that only makes sense outside of an IRA.
It doesn't make sense inside an IRA.
But I think the basic spirit is the same, which
is, the truth is, more investors would be better off
taking advantage of low-cost diversified portfolios.
Be smart about taxes.
I mean, I'm borrowing your statements, Burt.
I've been trained.
These are the things you can control.
You can't control the market.
CHARLEY ELLIS: Let me just emphasize once again.
I started off at the beginning saying,
we've got to pay more attention to each one of us
as an individual.
My fingerprint can send me to prison, because it's unique.
My iris is so unique that I can go in and out
of highly sophisticated encrypted facilities,
and they know exactly who I am because they took a camera
photo earlier.
In investing, we're all unique.
We may look a lot the same, but we're not.
We're different in age.
We're different in wealth.
We're different in income.
We're different in anxiety.
We're different in experience.
We're different in how much time we've got to spend on.
We're different in how much we're really interested.
And we're really different in terms
of whom we're responsible for, how many kids we have,
how many grand kids, all that sort of thing.
When you get it all figured out, we really are unique.
And price discovery has been worked out.
But value discovery, what's right for you personally,
has not been really worked out, and that's really important.
And any time that we spend on value discovery,
instead of wasting it on trying to do price discovery better
than the experts who are there full time all the time,
it just makes so much sense to concentrate on the value.
Who are you?
What are you trying to accomplish?
Knowing with confidence that you don't
have to do all the hard work of figuring out the right prices.
It's done for you.
So please, concentrate on that.
After that, candidly, you've got much better things
to do with your time and energy and your talent
than to try to compete against the very, very,
very best at price discovery.
They're doing it all the time because they have to.
Therefore, you don't have to do any of it.
And you can get the full benefit of the very best work done
by the very best people working all the time with the best
equipment, the best information, and I mean all the time,
working on your behalf to be sure the prices are always
right.
ADAM NASH: Well on that note, I'm
seeing a signal here of the questions going away,
meaning that we're out of time.
But thank you, everyone, for coming out.
And thank you for those online.
We were happy to be here.
[APPLAUSE]