Dr. William Bernstein and John Rekenthaler in Conversation

Added: 2026-05-25

[00:00:01][applause] All right. Well, um, as we all know, it's much better to be lucky than smart.

[00:00:11]Uh, and and I was lucky, uh, with at least three people 30 years ago, one of whom, uh, you've already seen, uh, Scott Burns, who, you know, 30 years ago told me, you know, young man, keep at it. Uh, you know, you'll do well. Uh and then the second person who you also heard about uh was Jonathan Clemens who was uh you know just unbelievably generous uh and forthcoming with encouragement and advice. And the third person who I came across almost at exactly the same time is this guy sitting here uh who not only uh provided me with encouragement and advice but uh also uh with uh a very interesting connection which was that we were he John's also a very lucky guy by the way uh starting with Morning Star in 1988 um and uh then he was also very lucky because Morning Star is in Chicago and he got connected up with Richard Thaylor, Nobel Prizewinning economist, probably the most famous uh behavioral economist uh around. Uh and um I don't know whether it was Dick or you who forwarded me the syllabus from the course you took this big I can still see it. I can't find it anymore, but it's this big brown syllabus that got connected me up with the behavioral economics uh literature which was enormously um uh val valuable. So I'll I'll start off with with a question um which is that um in in uh 19 well uh which is that in 2017 excuse me you you wrote a column entitled most stocks stink uh >> it was one of my better titles. Yeah.

[00:01:56]>> Yeah. Exactly. So why don't you explain to you you've already heard a little bit about this work reference, but it's such an important piece of work that uh I think that uh uh John would do well to explain it to you.

[00:02:10]>> Yeah, I ran across an article by an academic with a fine name of Hendrickk Bessim Binder. So I got a chance to practice my high school German a little bit. uh and um you know we've I think pretty much everybody here has heard the story about a few stocks end up leading the portfolio or end up leading leading the index and if you don't own those stocks I mean that's an argument for diversification right if you don't own those stocks and they're not in your portfolio you miss out uh well uh Dr. Besson Binder um put his research to tool research uh to work on this and went back and looked through the history of the stock market at least the last hundred years or so.

[00:02:58]He looked at 26,000 US companies and tracked them from when they went public to either now if they're still alive but most are not because there aren't 26,000 publicly traded companies. There's about 20 less there's about 4,000 or 3,500 now or when they were purchased or when they went bankrupt or whatever. And he found that 51% of them were had negative returns for the entire history of the company. So only 49% of companies managed to turn a or stocks managed to turn a profit during their existence. And this is this is nominal return. It's not real return. This is nominal return. When you look at the real performance, it's worse. He found that 86 companies out of those 26,000 86 companies, which is 0 uh which is 0.33% 1/3 of 1%. We're responsible for half of the stock market's growth when you market cap weight their results.

[00:04:04]and 930 companies or something like that. I think it was 933 companies were responsible for 100% of the growth.

[00:04:13]Basically 900 companies gave you everything and the other 25,000 were net zero. Some made a little money, some lost a little money. So that was a I mean I found that those numbers to be fascinating and they certainly backed up the idea that in and we we'll probably touch on this some more because I've been looking at some other recent numbers that in a portfolio it's very often if you've got 20 stocks in a portfolio it's one or two that are that are doing all the lifting for you and you've got 10 that aren't really doing much one way or the other and then a few more that you really regret.

[00:04:49]>> Yeah. That that's the academic heft behind the famous bogalism which is don't look for the needles in the hay stack, own the whole hay stack. Uh which is certainly an incredible piece of of wisdom. C >> can I open with a question for you?

[00:05:03]>> Absolutely.

[00:05:04]>> This is my first conference here and I was le I've been led to understand that you used to do this with Jack Bogle.

[00:05:12]>> Indeed. Scared the pants out of me.

[00:05:14]>> So So I'm sitting in Jack's seat.

[00:05:17]>> Indeed you are. How the world has declined. [laughter] >> Yeah, indeed. And I'm not getting any better.

[00:05:27]>> So, you're scared? What about me?

[00:05:29]>> Yeah, I'm I'm I'm not getting any better either. All right. Um Okay. Well, here's here's here's something that you and I go round and round about. We're going to have fun with this one. Uh which is our tech stocks overvalued? Uh is the Magnificent uh 7 overvalued? Should we still be owning the S&P 500 or maybe should we just be owning the S&P 493?

[00:05:54]>> Okay, there's a big question for you.

[00:05:56]Um, well, one, I think we've both learned over time that in most cases if we think we're smarter than the market, the market's smarter than us. Uh, that certainly would have been the case because we these discussions were going on 10 years ago, should we be be out of these? There was still a version of the Magnificent 7. And the answer as it turned out was it was definitely right to be in the Magnificent 7 10 years ago.

[00:06:19]You we had talked on on before this discussion a little bit about historically it's been a bad idea to buy say the 10 biggest stocks in the US because their their business successes this is the kind of the Tom Peters excellent story.

[00:06:36]You look at the companies that people think are excellent in hindsight. They had the best business results. Well, there's a lot of expectations built into their stock. Plus, their businesses also are likely to reverse to the mean. So, you get a double hit. One, the businesses aren't quite as spectacular going forward in terms of the operating performance and the earnings. And two, there's disappointment from investors because they had bit up those businesses. So, the stocks take a double hit. If you look back 20 years ago, that was absolutely true. Uh if you look back 20 years ago and you bought an asset weighted uh basket of the 10 largest US stocks that made 3% over the last 20 years that basket and the market was up 11. That was exactly what you were saying. It's a mistake to go buy the previous winners. But if you look 10 years ago and you bought a basket of the 10 largest stocks, they're up 17% and the market was up 14. So that and if you bought the 10 largest technology stocks, they were up 21%.

[00:07:41]Um, the big got bigger. Apple and Microsoft were the were the biggest back then and they did great in the last 10 years. So I am I'm of a mixed mind on this. I I while I understand the adage and the general principle, there's has been something different going on because this is not all multiple expansion. In fact, some of these companies, their price earnings ratios are Apple's has gone up a lot, but Microsoft's is not much different than it was 10 years ago. Um, Facebook's has gone down a lot, uh, some of the others. So, I mean, there's just been tremendously good operating performance.

[00:08:22]>> You've you've used the word moat as well in this in this regard, and I'm wondering if you can expand on that.

[00:08:27]>> Well, yeah. I mean, the idea of a moat, this is a big Morning Star thing, right?

[00:08:31]and we we stole it borrowed it from from Warren Buffett. A lot of people borrow from Warren Buffett, so I don't feel too guilty about that. I think we we use our own term, but the idea is, you know, businesses that have a protection or some sort of um they're not a commodity business. It's hard to get in there and compete with them. And it certainly seems that Microsoft and Apple with the way that they're embedded into so many uh technology products and you know and metas I keep I keep wanting to call Facebook but it is a meta platform and others have business not just you know US modes but global modes. So there's some sense to that I have that these businesses are different. I realize it's a dangerous thing to say this time is different. It has been different the last 10 years.

[00:09:20]multiples on these stocks are up more than they were before overall, even though some of them are not. Um, so overall, I'm at a a mixed point. These these businesses have been better businesses than anybody forecasted.

[00:09:36]Really, they have been they've outdone expectations. is not just at you know crazy investors throwing money or index funds causing bubbles and all the stuff that that other people have written about. At the same time the expectations are really high with these companies. I would be I would be surprised if the top 10 stocks outperformed the rest of the market over the next 10 years. I sounded like Paul Marman a little bit here now.

[00:10:04]Uh but I don't think they're going to I don't think it's going to be a disaster.

[00:10:07]I mean, most of these companies here I have a little bit of a list. Um, uh, Broadcom, Tesla, Oracle, and Palunteer have P price earnings ratios over 60. I don't like over 60. Maybe that's because 60 was the number for the Japanese market in 1989, but that's my magic bad number. And NASDAQ, the ones that had earnings were something, well, even a little higher in 1999. Um, but a lot of the others, as I mentioned, Microsoft, Apple, Alphabet, Amazon, Meta, and such are quite a bit below that level. Uh, I think those companies performances could disappoint some and maybe probably will if if they don't quite meet expectations, but they're not going to tank.

[00:10:50]>> Yeah, I I would [snorts] >> that's a long-winded answer, but I have a lot of those.

[00:10:52]>> Yeah, I I would agree with that. I mean, the problem that I have with the term moat is that in the moment, everybody seems to have a moat. Had you gone back 70 years ago, 80 years ago, you would have said Pennsylvania Railroad has a moat. Who's how how do you compete with Pennsylvania Railroad? Okay. And it would have been the same thing. Of course, >> it's a stock until it's a commodity stock.

[00:11:13]>> Exactly. Same thing. You could have my god. I mean, IBM IBM looked, you know, 40 years ago looked absolutely uh unbeatable. How how how could you possibly compete with with IBM? They weren't even selling their machines.

[00:11:25]They were renting them for for a king's ransom. How do you compete with that with with with IBM? Well, >> I worked at IBM in 1985, by the way. I was the lowest person on the rung at IBM. The single low I was an assistant a product support assistant. So, did you >> that was uh but but I can tell you that um we everybody I say we I was only there briefly. Yeah. We thought nobody was ever going to catch up with us.

[00:11:52]Somebody came in once to a presentation and to look at it an IBM little mini frame that they were selling and after he left the salesman said dismissively with disgust he wanted an Apple.

[00:12:06]>> Yeah.

[00:12:06]>> Yeah. He was it was like we we don't sell to those kind of people. He was like an Apple customer.

[00:12:12]>> I I had the same experience 40 years ago. The most overconfident person I ever my community my local community was the local IBM salesman.

[00:12:20]>> Yeah. Well, there were about 100 thousand of them then.

[00:12:23]>> Yeah. [laughter] All right. Um well, um you uh wrote a brilliant column in uh uh was it was your I believe it was your your your um well, no it wasn't a valid dictory column. This was in 2020. Uh it was a absolutely brilliant column. You said that long bonds are for fools. Uh, and I believe that and you believe that and and I bring this up because there was a probably the most popular thread on the Bogleheads forum at that point was a thread that was titled put the first 20% of your portfolio in long bonds. Okay.

[00:12:59]And and people had a lot of a lot of fun with that particularly in retrospect. So go ahead and elaborate on that one if you could.

[00:13:06]>> Yeah. You had mentioned to me that you thought my reasoning was more sophisticated than yours, but I don't think it was. Uh, I looked and said 1% because I hit 1%. Who on earth would want to get a 1% return for the next 30 years, you know, nominal return.

[00:13:26]>> And then I backed up and I did. And so then I So then I thought, well, I tried to answer my question. Who would want this? Because I know the answer was it wasn't me. Yeah, >> but somebody did because bonds were trading at 1%. So, somebody was willing to own them. And then I went through and that's how they came to the title because my argument was, okay, maybe it's somebody who doesn't really think I I don't know who would want to own an asset making 1% for 30 years. But maybe you're thinking yields are going to continue to drop and you're going to sell it to somebody who's willing to take half a percent. A greater fool. So that's why I said long bonds are for fools to to sell to a greater fool. So maybe okay, maybe there's a logic in that. That's speculation I think more than an investment, but that's a possibility. And then I talked a bit about central banks and there might be other buyers that are really not economic buyers. Um and and and I suppose you could say somebody [snorts] who has locked in, they're going to invest 20% in long bonds kind of no matter what the price if you have an asset allocation that locked in then then you're not an economic buyer either. And that so I do have a a well a concern a little bit about you know this thought that if you have an asset allocation you should stick with it for life and stick to your discipline. I don't think if your asset allocation is to own 20% of your portfolio in long bonds that you wanted to do that at 1%. You might say, well, this is the time to make an exception and just I'll hold some cash there instead or something shorter.

[00:15:03]>> Yeah, it's it's always fun in retrospect to look at what's the conventional wisdom uh at the time. And one of the conventional wisdoms at the time uh was an idea put forth by Ken Rogoff, famous Harvard economist, brilliant guy who said, "Let's take all the cash out of the system. No one can use cash anymore.

[00:15:20]And if you take the cash out of the system, then the government can debase the currency and people can't put the cash in the mattress to to to get a a positive real return if you have negative real returns." And so the idea was that bonds were going to have soon enough negative negative returns, negative nominal returns. And that um uh prompted uh Ed Chancellor, brilliant observer, economic historian, to say, "Well, it appears people are doing now is they're buying bonds for capital appreciation and stocks for the yield."

[00:15:50]>> Okay? Uh which of course is not the way that it worked out. Well, I >> I think that you know in general that's almost that that column is almost like a once in a generation type column because I I don't see pricing anomalies very often that seem obvious. You know, when I we you talked about 1966 to 1982, I was an adult by the end of that period, but I wasn't really following the markets. And in hindsight, I think if I had been following the markets, I would have said, well, 15% on bond return in the early 80s, even with inflation being high, was a pretty good signal that you might want to be in a long bond. Certainly, Japan with PE ratio of 60 uh US uh technology stocks in 1999. I don't think we're quite there yet. Now, I would not say we're at that period because I just said that that we're not I don't think we're at that period. We're there. But, you know, it doesn't happen very often. So, I don't most the vast majority of time I've seen people say this is too much. They were wrong. So, I very I'm very I want to be very careful with that. And I admit that some of the things I've said are also somewhat in hindsight with me. So, don't take anybody including me too seriously when they say I've figured out that this is the top or near the top.

[00:17:12]>> Yeah. Uh I'm longer in the tooth than you are and I actually did buy long bonds uh back then. I should have bought stocks, okay? I'd have done better in stocks. Uh and it's the same thing that people look back to, you know, the late 90s when tips first came on the market.

[00:17:26]People didn't know how to price them. Uh and you look and you say, "God, I should have bought all those those tips at 4%."

[00:17:32]Guess what? You'd have been you'd have done still would have done better.

[00:17:35]>> We talked in the late we talked in the late 90s or email talked as the case may be. And you were talking about REITs.

[00:17:40]>> Yeah.

[00:17:41]>> Get out of tech and get into REITs. And I'm like, who's this doctor guy out in Oregon and what's he talking about? And uh 3 years later, I was like, okay, I need to keep keep in touch with him because Reed did fantastically well. And believe me, in in 199 Well, reach nobody likes them now either. It was the same kind of mindset. They were just in 1999, if you had a list of 97 investments, REITs would be either 96th or 97th on the glamour list.

[00:18:06]>> Yeah. Two two things two things made me decide back then that REITs were a good deal. One of them uh was that uh was the yields of course that they were you know almost double digit yields back then but the other thing was we all have our personal contrary indicators people who we we you know who always get things wrong and you go opposite to and one of them was a physician colleague of mine actually another neurologist who when I talked to him about REITs and he actually had written about them and he read my article and he called me up it was about a 15-second phone call he said I read your article about REITs I've done nothing but lose money on them.

[00:18:41]Hung up the phone.

[00:18:42]>> Well, he was right about that part.

[00:18:44]>> Yeah, exactly. And that and that and that, you know, that rang the bell for for me. Well, on the same subject, >> John Luskin here from the John C. Bogle Center for Financial Literacy. We're able to provide these videos from the Bogles Conference for free thanks to generous donors like you. Consider making a taxdeductible donation at bogalcenter.net/donate.

[00:19:08]Your contribution helps us continue our mission building a world of well-informed, capable, and empowered investors. And now back to the conference.

[00:19:18]>> Um, you know, your your validtory column said that, you know, and this was not too long ago. It was about last year, I believe, >> November.

[00:19:25]>> Yeah. And and you said that bonds are still too expensive, but gosh, these tips, they're their yields look pretty good. So, how do you resolve, you know, with with nominal yields not being all that impressive, but y real yields being impressive? I'm guessing what you're saying is that you expect there to be big- time inflation.

[00:19:42]>> Well, bigger than than the uh break even inflation rate on tips, which is the break even inflation rate means effectively if inflation is is over that level that that is calculated, then you're better off being in an inflation protected bond with TIPS. And if it's below that level, you're better off at being in a nominal bond. And that's about it's 2.25% right now for a 30-year. I I could do the show of hands things, but I I doubt there's anybody here that's really comfortable saying, you know, wow, for 30 years, I'm going to I'm going to absolutely, you know, without worry, lock in and expect inflation to be less than 2.25%.

[00:20:27]by owning a nominal bond rather than owning a Treasury inflated bond. You might think, okay, inflation might be 2% or 1.5% average over 30 years and I'll make money. But I think you have to concede there's some sort of possibility of, as was talked about yesterday, a debt spiral of of a of the of the Fed or the, you know, of the uh government trying to inflate its way out of this monstrous debt that we do have. That has to be considered a possibility. And if it is, you're getting clocked in those nominal bonds compared to tips. It just it doesn't seem like the bet is in the favor of the nominal bond. I would want something more like >> 6%.

[00:21:09]>> As opposed to four and a half to five, which is the range now.

[00:21:11]>> Yeah. Yeah, I think you're right. It's it's it's all about asymmetric consequences. I mean, you you can even >> bigger word than I use.

[00:21:17]>> Yeah. If you if you want to concede that that the market is usually right these things and that's the best central estimate that the break, you know, 2.25% 25% inflation over the next 30 years.

[00:21:27]Uh, and you know, and if you make the bet that that that you know that you think it's going to be higher than that and you're wrong, inflation's only 1.5%.

[00:21:35]Well, you've lost 3/4 of a percent of yield. Big deal. Okay. Whereas, if you're wrong in the other direction, you can be wrong by a lot more than 1.5%.

[00:21:45]Uh, by investing in nominals.

[00:21:48]>> Yeah, that's framed very well, Bill.

[00:21:50]That's that's exactly what I was trying to say. If you're right on one end, how right are you going to be? It's not a it's not that big a deal. It's not going to make or break or anything remotely your your uh your investment results or your retirement, you know, your retirement lifestyle. But if you have quite a bit in nominal bonds and you're wrong, that's that's real pain. And what's the point of of doing that? I mean, we're supposed Aren't we supposed to be avoiding risks of of very bad events during retirement when we can't work and make up for it?

[00:22:21]>> Yeah. One of the other voices that that was very loud at that point was Dick Sillas uh who was here last year, Dean of American and Financial Historians who pointed out that yields were at a 5,000-year low. Um you know, that sort of gets your historian. I didn't go back that far.

[00:22:39]>> Yeah. Talk talk about the long view. you know, uh, it's what I've always loved about about Professor >> whenever you whenever you contact uh, Bill, he'll always give you the 5,000-year number. [laughter] >> Whether it's gold prices or trading history or whatever, it all it's somewhere back in Sumeriia is where he is. [laughter] >> Okay. Well, before I turn the questioning over to you, John, uh, you wrote one column that that is very salient to this audience, which is, has Vanguard lost its way? What do you think?

[00:23:11]>> Yeah, I wrote this column a few years back and and until my final retirement column where I got more emails and they were very nice. Maybe somebody here sent me one. Thank you. Um that was the most popular column that I had ever written.

[00:23:26]Had a lot of people read it too. uh for since I started at Morning Star in 1988 until I wrote this which I think was 2021 2022 anyway a little while ago.

[00:23:41]>> Yeah, December 21.

[00:23:42]>> Okay. I had uh so consistently been said positive things about Vanguard, the fund company, about Vanguard funds, about ogalism that I had been accused by other journalists sometimes of being, you know, Vanguard's lap dog. That was actually a phrase that was used. Um >> shill chill.

[00:24:09]>> Yeah.

[00:24:10]>> Yeah. I had somebody once call me a hedge fund show, which is funny by the way because I've never said a single positive word about hedge funds ever. So that was not a close reader. Uh [laughter] but anyway, so but I started hearing troubling things, and this won't come as news to anybody here about Vanguard's customer service and technology. and I was getting notes from people explaining that the problems they had and um you know looked into it more wrote that it seemed pretty clear that Vanguard had a problem with customer service and it used to have such a great customer service back in the day. Jack Bogle famously would get on the man the phones when they got too busy and that whole pitch. And in fact, Morning Star to an extent modeled itself after what Vanguard did and our CEO would be down there picking up the phones when we got busy too and all that sort of thing. And at the same time, Vanguard announced its relationship with private equity provider, which seemed not quite traditional Vanguard since private equity is illquid, expensive, blah blah blah. And worst of all to me was at the time Vanguard had announced um if you entered into its private advisory service I think it is the name of it where you get an adviser and it's 30 basis points or something like that and you get advice you would have access to special funds that nobody else could get to. This was a pure you know Dean Whit Meil Lynch old school 30 years ago kind of thing load fund. we have secret funds that you can't get to unless you're our customer.

[00:25:54]It seemed just bizarre to me that Vanguard would do that. Uh so I wrote this column. I guess it was a you know a warning shot like I'm concerned and I got 51 emails and 50 of them were darn right cranky people mostly about the customer service and one told me I had no right to criticize Vanguard.

[00:26:15][laughter] Uh I feel better about things since then. I I know that their the technology and customer service is still imperfect.

[00:26:23]I hear about it, but they're certainly aware of the issues. Um it and I haven't seen any sort of further steps with their product lines that concerned me back then. So I would say um I wouldn't say that Vanguard has lost its way. It was a question at the time.

[00:26:42]I didn't make a statement. Has Vanguard lost its way? uh you know I do think it's natural that these that Vanguard, Schwam, Eyesshares, you know, these biggest firms in some ways do start to look more like each other as they all become giants.

[00:27:02]They've for one thing, you know, Fidelity, they they've mimicked a lot of what Vanguard does. So even Vanguard doesn't change, they look a lot more like Vanguard than they did 30 years ago. Um so it's You know, Vanguard to me still stands out as being different, but it's not as different as it was 25 or 30 years ago, and it's inevitable.

[00:27:23]>> Yeah. One of the fundamental features of American late financial capitalism is people who are wellinformed taking advantage of people who aren't wellinformed. Okay. So, you know, the if you get free checking, you're subsidized by the people who do with the overdrafts. Uh same thing if you pay off your credit card uh you're being subsidi you know every month you're being subsidized by the people who don't. One thing that will warm the cockals of almost everybody in this audience which is if you're flying coach you are being subsidized by the people who are flying first class. Thank you.

[00:27:54]>> Yes.

[00:27:55]>> Uh and and the problem that Vanguard has in when they compete with Fidelity and Schwab is that Vanguard doesn't have any suckers.

[00:28:06]>> Yeah. to subsidize the people who are getting low.

[00:28:10]>> I think you could say I wouldn't say suckers, but clearly the personal advisory service is is a is a service that brings in a higher fee level and helps to >> Yeah, that may that may be the service that that that that saves them. Uh but you know, I sure, you know, I mean, I sure wouldn't want to compete with, you know, Schwab's ability to have to only pay out, you know, 50 basis points on cash. That's a that's a cash cow. I think that Allan pointed out that in one year 130% of Schwab's profit came from from from from charging so little from paying so little on the uh on their cash. Uh what is how do you get 130% of profits? It means that the rest of Schwab is losing money. All right.

[00:28:50]Beyond beyond that. All right. Well, I'll turn it over to to you now.

[00:28:54]>> Okay. Um, I'll ask what advice that that you received when you started investing when you first became interested in investing proved most helpful or most insightful and what was the worst?

[00:29:07]>> Well, the the best advice that I of course got was from Jack Bogle uh which is I mean what I mean what do I [laughter] mean I don't have to say anything more than that was you know you know is just to not try to uh predict the future. uh and you know if I wanted academic backup from that it's my my favorite uh uh psychology and economics author who was Phil Tetlock who basically you know pointed out that no one forecasts uh at all well least of all experts. So, you know, if it's a uh you know, and if I had to um you know, distill it down even further, it's a piece of advice I got from Ken Fischer, bless his soul, who said that, you know, he pays close attention to the headlines, uh because if it's above the fold, he doesn't have to worry about it.

[00:29:50]It's already in the price. All right. If it's in the paper, it's in the price. Uh the worst advice, my god, there's so much awful advice out there. Uh I mean, almost >> Oh, there's the rest of our session.

[00:30:00]>> Yeah. Yeah. I mean, almost anything you hear from Morgan Stanley is going to be bad advice. So [laughter] next question >> um uh talk let's talk a little bit about the international stocks we've done that already but the international markets have uh you know last 15 years or so disappointed until this year have disappointed relative to US market although they although they've made money in real terms yeah >> international equities but >> what's your take on on the prognosis going why that happened and prognosis going forward Well, what happened was tech uh and it has to do with uh improved corporate profits and profitability. Uh the best analysis that I've seen uh was done by Cliff Aznes at AQR. uh and he did some very fancy regressions and came up that came with the fact that maybe 20% of the outperformance of international was due to improved profitability and earnings and the other 80% was due to increased uh valuation. The way I look at it is that you know foreign pees are not much more than half uh of US profitability.

[00:31:14]So you have to pay, you know, to get So if you pay a dollar uh or $100, you're you're getting, you know, maybe $3 of earnings here and you're getting $6 of earnings abroad. Well, what that tells you is that for the US stocks, that $3 from the US to come up to $6 from the foreign stocks, the US is going to have to grow their earnings to be twice as big as they are now relative to foreign stocks. That's not a bet I'm willing to make. Okay? And I'm not saying I now the really nice thing about that though is that the the valuations have driven up the the market cap of US stocks relative to the world cap. So it for the very first time makes an all world all cap index an attractive index that's now 6040 foreign US whereas you know years ago it was the other way around which didn't make any sense for a US investor.

[00:32:03]I mean I'm you know all against home home you know all against home country bias but owning 60% of foreign stocks is too much. uh and now it's the other way around. So it makes VT a darn fine choice.

[00:32:14]I'm going to push back although I don't entire well the first part I believe more the second part I'm not so sure but a counterargument it might be one okay bill but US is exceptional one technology clearly the the US is the world technology leader of of the companies that I I mean US has seven of the 10 largest most valuable companies in the world and it's not all multiples it's if you look at earnings it's not that much different and the Second is the doctrine of shareholder value that is kind of taken over in the United States. The notion that for a company what matters first, second, third, and fourth is getting the stock price higher, not necessarily making your employees happy or being a good community servant or all those sorts of things. As Milton Friedman would say, those are beside the point. your job is to is to increase the price of your shares and you can if you set aside your shareholder hat and put on a political hat you can like that or not like that but from the point of view of an investor one could say well that's a benefit for investors for in US stocks that maybe they don't get from other countries that have say uh strict labor laws where you can't lay somebody off if you're overstaffed you can't lay people off without giving giving them a year's notice and so forth and it makes these other companies less nimble and less competitive than the United States.

[00:33:46]>> Yeah, I I I mean I I don't disagree with that at all. Institutions matter. Um, if you look at the Dimson Marsh and Stuntton database and you look at their graph, all of the countries off to the right of their bar graph that have the highest returns of their, you know, God knows how many countries they're looking at at now, they all, you know, uh, almost all of them are English-speaking nations. Okay, it it's not Shakespeare, okay? It's not the language of Shakespeare that causes returns. It's the English common law that does the sorts of things that John is talking. uh about um and I think where that really comes into play is in emerging markets.

[00:34:25]I do not buy emerging market stocks unless they are selling at a significant discount which they are now to US stocks because a country that does not protect its children against contaminated milk and seismically unsafe schools is not going to pay too much attention to the minority rights of foreign shareholders either. Okay. So I I've never been a fan of of Chinese stocks for example for for that reason. So I I I'll grant you that the institutions are important. Now the one thing that maybe we'll get to in a bit which which I think one or two more of the downstream questions is that the economic return to capital in this country is increasing and the economic return to labor is decreasing. Okay. So shareholders are doing well, workers not so much. And a lot of, you know, I I I don't think I have to offend too many people politically when I say that we are a polarized country. And if there's one thing that's polarized driving that polarization, it's that. Uh, and I don't think, you know, eventually we're going to get to the point where you can't get to the point where, you know, capital takes 100% of the pie. You know, that's pitchfork territory.

[00:35:36]>> It's trying though. I mean, that's that's that's the job of capital, right?

[00:35:40]>> Yeah, that's true. That's true. That's true. And the trouble is that capital doesn't do such a good job of looking after itself as as as well as you know for example Boeing demonstrated very nicely.

[00:35:49]>> I mean I have the same view with you on on emerging market stocks. Uh and it's related but coming at it from a slightly different angle. Um starting in 2013 I I that was the first time I ran this study and I've repeated a couple times since then. I looked at the relationship between a nation's corruption. There's a corruption index that's put out by a nonprofit organization and they rank them, you know, what perceptions of people of how corrupt is this country and doing business in there and like, you know, Norway and [snorts] and uh Denmark and such are very the least corrupt and very near the top of the list and you know, Sudan and Russia are down at the bottom and US is about number 20 or so, but it's not it's not in the top 10. And when you do a correlation between the level of corruption and the performance of stocks, you'll find that that that there is one um that it's that the the companies that show up as less corrupt have tended to have better stock market returns. Just another way of measuring the same thing that that we've been talking about, which is is this business that's being conducted, is the money flowing through to investors or is it being leaked out somewhere? Is it being leaked out to government officials or is management feathering its pockets or whatever it is that is preventing uh investors from getting their money? Um it's something to take into consideration because as you know we heard so much when emerging markets were presented to the public in in the 1990s or early 90s was the biggest time >> uh to came in as mutual funds about the growth rates of these countries and you could get it you could get countries that were growing at five 6% GDP rate and US was you know 2% GD in developed markets that's where you wanted to be to make the money. Well, it hasn't worked out that way. Even though the growth has been there, it's an example where the growth they were growth countries, but they weren't growth stocks.

[00:38:00]>> Yeah. The wedge reason. Yeah. The the wedge there is theft and dilution. Okay.

[00:38:05]You look at share dilution in China. It is absolutely astron.

[00:38:08]>> That's right. Delilution. That's a good point.

[00:38:10]>> Yeah. I mean, there's a there's a >> it's related to theft. Theft to shareholders.

[00:38:15]>> Exa. Exactly. Same same thing. I mean, what I like to say is that there's there's a there's a test that I apply to any country that you want to invest in, which is if you are robbed in broad daylight by uh known as in the presence of witnesses, who do you go to? If you go to the police, that's country you want to invest in. If the answer is you go to your cousins, you don't want to invest in [laughter] that country.

[00:38:39]>> Okay.

[00:38:42]>> I guess you invest with your cousins then.

[00:38:43]>> Yeah. [laughter] Ex. Exactly. Yeah.

[00:38:46]So, Bill, um, say the last 25 years or so, this is a this is a discussion that that that Jack and I used to actually have a bit and we didn't didn't fully agree. Do you think that the fund industry, speaking broadly, mutual funds and ETFs, is improving or not? Do you think investor experiences are improving? Do you think we're in a better place?

[00:39:08]>> Uh, the central tendency is obviously improvement. Okay. Um, wasn't so sure it was obvious, but that's in part because he disliked ETFs so much.

[00:39:19]>> Yeah. But, but if you look at the, you know, the asset weighted expense ratios, they're clearly decreasing and people are getting smart about indexing and ETFs, I have to admit, have have helped with that. But at the fringes, my god, you're seeing all sorts of Mishagos.

[00:39:33]>> Yes.

[00:39:33]>> Okay. Uh, that's Yiddish. That's a technical term.

[00:39:35]>> That's a technical term. It's Yiddish for craziness. Yeah.

[00:39:38]>> Janky funds is another technical term.

[00:39:40]That's an investment.

[00:39:41]>> More that's more of a wasp thing. Yeah.

[00:39:43]>> Okay.

[00:39:43]>> Yeah.

[00:39:43]>> Well, there you go. Yeah. And and uh yeah. So I mean you know I mean what what can you what can you say about you know the triple the triple leveraged uh strategy fund which is a which is a which is a fund that that invests in one stock 200% leverage which is strategy which is a fund which is itself is a leveraged holding of bitcoin. Um, so it's a [laughter] I I mean I mean people >> that's worse than any mutual fund that we have.

[00:40:15]>> Yeah. Yeah. People People Well, it is a mutual fund. It's an ETF.

[00:40:19]>> Well, but No, that's not a I'm not a PL not >> I'm an open-end person.

[00:40:23]>> You're an open-end person. There we go.

[00:40:25]Yeah. I've I've long since lost that um lost that distinction when you know go when when when I think that Jack tells the story uh of of Gus Solder was finally able to convince Vanguard that the ETFs you know were a thing and they had real theoretical advantages to say nothing of financial advantages and and he was you know Jack wanted nothing to do with it and he saw Jack and he saw uh Gus um you know going out of the cafeteria and he yelled called them across like a 100 people. Well, you finally got your way, Gus. You know, um, another new type of fund that's been out since you're talking about new funds are these buffer funds. The funds that are that that will say they'll cap your gains, but they'll protect you on the downside.

[00:41:17]There's 50 I mean, it's not a huge number by by VTI standards, but there's been 50 billion that's gone into them pretty quickly. You have any thoughts on funds like that?

[00:41:26]>> Yeah, they're they're they're they're not a strategy. They're a compensation scheme. Uh BA basically there is >> he has thoughts.

[00:41:33]>> Yeah. Yeah. There is aside from that, they're a pretty good idea. Uh no, I I mean theoretically, if you want to reduce your downside, you sell stocks and you buy cash or bonds. Okay. And in fact, I I I'm not a good enough mathematician to do this, but I'm reasonably sure that you can prove mathematically that that is will always be sus superior to a buffer strategy. Um I I >> especially since a buffer strategy is 80 coming in with 80 basis points of expenses and you can get your stock fund with two two or three basis points in your cash with nothing. So >> yeah, I I I had a back and forth with a salesman from from one of these these these companies that's producing it and I basically very nicely demonstrated to him that that you know given I was able to to to reverse engineer what their algorithm was and then I showed him that it was grossly inferior to cash and and bonds and he very he very pointedly asked me to please not show that to anybody else.

[00:42:29]>> [laughter] >> So, >> should we open it up to questions if there?

[00:42:35]>> Sure.

[00:42:36]>> Did anybody hands several questions? [snorts] >> You you'll read the questions, right, Rick?

[00:42:42]>> I have questions.

[00:42:43]>> Okay, good.

[00:42:44]>> Make him do the work.

[00:42:45]>> Yeah.

[00:42:46]>> All right. Here we go. Several questions and uh a lot of great questions, but uh let's start with u something down your alley of the stock market. What do should we think about investing in Intel and other companies that the government takes a stake in?

[00:43:03]>> Go ahead, John. I [laughter] >> I'll do I'll do the next one.

[00:43:09]>> Well, so far I think the government's only taken a stake in Intel at 10%.

[00:43:15]Um, so I don't know how much that affects the stock price except pretty clearly I guess that stock's not going to zero since the government seems to be interested in having it around and wants to protect its stake. So this seems more theoretical to me at this stage. I I mean it's a it's a headscratching move for me. It's it's different. uh the on the one hand I see the argument of national security and protection of technology and so forth. On the other hand that's not private enterprise which >> yeah I I mean it's it's too >> I wouldn't want the government owning 10% of Morning Star which is where I worked for forever and ever. So and it's not what I was raised to believe in. So I don't know.

[00:44:02]>> Yeah. I I mean it's too bad it's only one stock if because that's not terribly well diversified. Uh but but but but if if if it was a nice you know big fat portfolio of them that would be a good portfolio to short. [laughter] >> Okay. So here's another question on the stock side and this comes up a lot. What do you think about planning to live on stock dividends in retirement? In other words, buying high dividend yield stocks, which you remember, Jack years ago said there's growth and there's value and the value is for retirement because it pays higher dividends. I mean, how do you feel about that strategy for getting income in retirement from dividends?

[00:44:48]>> Oh, it's a dividend fallacy. I mean, what's the difference between, you know, having a 4% dividend and hing off uh 4% of your of your of your capital uh value? was, you know, the Modiglani uh theory was the what's what's the mm something? Mediglani Merin. No.

[00:45:09]>> Yeah. [laughter] >> Miller.

[00:45:11]>> Yeah. Merin Miller. Medigian.

[00:45:14]>> 20 M.

[00:45:15]>> Yeah. 20 M. Yeah. And it's basically that it doesn't, you know, a stock that yields 4%, all that the market's telling you is it's going to grow 3% less than the stock that's yielding 1%. That's that's what theory tells you. So it's it's not it's not a it's not a rational strategy.

[00:45:30]>> I'm slightly more sympathetic to that than than Bill in the sense that obviously people get a psychological comfort from the idea of that that they're not touching their principle and they're and they're spending this the dividends. The danger with dividend strategies is they can become concentrated. Uh like 20 years ago there were a lot of financials in that were high dividend stock. you could there were dividend uh funds and dividend indexes that were 40 50% financials bank stocks and those have not done well. So that would not have been a good thing.

[00:46:04]You have to be careful in in getting diversification and making sure you're getting companies that are viable and have some moderate growth prospects as opposed to ones that are paying a high dividend because they're just going nowhere and sinking. It's it's not a path that I actually use in my own retirement. I'm more on bills. I have I'm mostly in equities and I sell equity shares uh to as a general rule. I mean, I get some dividends, but not as that's not enough for me to to to sustain me in my retirement. But I'm planning on the on the equity shares, selling the equity shares. But I realized, you know, I I I've been involved with investing for a long time and it so the idea of touching capital doesn't bother me because over time that capital grows and it's I'm I'm not actually depleting capital in a long enough term. But not everybody would would be up for that, I don't think. I mean, I know not everybody's up for that. That's why dividend strategies are popular or one reason why.

[00:47:00]>> Yeah. Well, you almost stole my favorite line, one of my favorite lines, which is that a uh a sub-optimal portfolio that you can execute is better than an optimal one you can't.

[00:47:10]>> Yes. Yes. Or uh don't let a don't let a great idea get in the way of a good idea. That was that's a morning that's the morning star ism. That's that's our our our founder. So, we're going to go over to the fixed income side now and we're going to speak about tips and uh the question is paraphrasing. How reliable is the CPI data used to price tips and what does it mean if it's not reliable?

[00:47:39]>> Yeah, we talked about that.

[00:47:40]>> Yeah, I mean I this this audience must be hardly sick of hearing about tips. Uh but but the short answer which I gave yesterday is that uh it's even before the bond the bond market would scream bloody murder uh if if that happened. Uh but even before the bond market screams bloody murder 75 million people uh social security recipients who are seeing uh their their benefits obviously the base uh will will hit that uh that that uh that that kill switch even before the bond markets do. Retirees do have a lot of power. That's one of the themes that we didn't dis discuss here and we didn't we we didn't talk about retirement issues which we can do for another time. But um I absolutely was it was it Sean I think yesterday was talking about the power of of retirees in in uh Melany whatever his anyway uh I've done quite a bit of work on this and and the long story over the last 50 years is the group that has fared the best relative to they were 50 years ago financially are retirees and the ones that have for been the worst are young people and my theory is it's because they don't vote and people don't and politicians don't watch out for them because it doesn't you don't lose votes by doing things that don't help young people. You do lose votes if you do things that retire that hurt retirees because they notice and they vote.

[00:49:13]So >> okay sticking on the uh topic of tips we have the three fund portfolio which is US stocks, international stocks and a total bond fund but the total bond index does not include tips. So should it be a core four portfolio which would be US international total bond and tips?

[00:49:38]>> Yes. Yes.

[00:49:40]>> That's it. Okay. Okay, I got to find another question.

[00:49:42]>> Well, it says 30 seconds. [laughter] >> It says 28 seconds. So, we were trying.

[00:49:49]>> All right.

[00:49:50]So, I'll find another question.

[00:49:52][laughter] >> Okay. So, here's one about direct indexing. How do you feel about direct indexing? And you think do you think it's useful uh or valuable way to invest and harvest losses?

[00:50:07]>> Yeah, go ahead. Well, I've written quite a bit about direct indexing. The the the short version of the story since it says zero seconds now.

[00:50:14]>> You can take another 30 seconds.

[00:50:16]>> All right. Well, the short version of the story is direct index indexing.

[00:50:19]Direct indexing which is buying an index of stocks directly than rather than through a fund so that you can time or you can sell off the losing positions and use that to negate gains in your portfolio. It's a good strategy for people for a small percentage of people who have quite a bit of money in a concentrated position and need to work that off as a general retail strategy.

[00:50:47]And there are people out there offering direct indexing, you know, for get in for $50,000 or $100,000 or something like that. there's you're not getting any there's a cost associated with it and the benefit matches or ex is less the cost matches or exceeds the benefit.

[00:51:04]So for the if you're the sort that's looking into accredit investor more than just a normal incred investor high-end in credit investor looking into a bunch of sophisticated strategies you want to look at direct indexing fine most people no it's it's it's it's an extra complication without it's not going to get you anywhere better. Yeah, Alan Roth did a did an excellent analysis of that and came to pretty much the same conclusion and and found that the benefit very rapidly uh tails off uh and becomes a negative.

[00:51:38]>> I'm actually after several years >> friends with one of the with one of the leaders in the direct indexing industry and he's I mean he's been out there openly saying this stuff is being way oversold. It's this is you know we developed this for an institutional and very high-end audience and it makes sense for these applications but this is another thing that's that okay it's maybe a good idea for some people under some circumstances at a but a a small number of people hey let's take it retail everybody can do it yeah all right well thank you Bill thank you John fantastic discussion >> [applause] >> If you enjoyed this video, we have dozens more on personal finance and investing available on this channel. Hit that subscribe button to get notified when we release new content, including our monthly podcast, Bogleheads on Investing, and more conference sessions like this one. To watch more right now, click the video card on your screen.