 It's great to see all of you again. I saw a lot of you last night You get a chance to shake any hands, but I'm out of light. I hope you all had a nice dinner I got a pull-up when I got home. It was my wife who expected me to be out for dinner, and they were having a little problem with mine. She needed me. She needed me to be busy at my age and make my life worse to tell you about my schedule today and I just can't kind of help with the full disclosure I am gonna be with you All day until I just finished that half an hour interview with Christine Benz from Morningstar And I'll be with you all day to learn to a clock to 30 on the back of the office or 3.30 and then for reasons best known to Lord, I guess I'm getting driven to New York to go to a my annual biennial meeting of the PRINCO Investment Management Company at Board of Trustees and every other year They invite the former trustees back of the investment company for Princes and Thames And I've been involved in it for a long time. I haven't been a director I don't think for maybe eight or ten years But I can't kind of resist the temptation and to go back once form and see how we're doing see who's on the board There's some very very smart people Actually, I went to Princeton to have him say And It's kind of nice and it's a Conflicts a little of my priority to be with you and my priority to be with Over a bank card tonight But I do want to say so I regret though that I can't be there There's no political implications at all and then about nine o'clock and so tonight I'm coming back to build up in the car, and yeah, I know everybody's saying the man is nuts Where's my wife But she said I could do it sort of So it's kind of a busy day I'll be with you again tomorrow morning to hear Gus in particular, but if you're anybody else And you're all of you and I'll hear some of you this afternoon So I'd like to hear the input from you all and then this may be PMI but I have to leave here tomorrow about 1130 and To get a catch scan on my a link shoulder, which is not mending the way it's supposed to men and then I'm taking the afternoon off Lord rested on the sixth day So I'm glad to be with you and that's what I'm going to tell you that We've come a long way at Van Nort We've engaged with Boba mates And I don't think it's any secret that the first time Kevin Kevin and I were working on signs to welcome you to our campus About probably eight or nine years ago. We were told to take down the signs 2001 told to take down the signs. No one would be allowed in the campus and We have our ways of dealing with that The orders were rescinded and then the door got open Got a jar and then what the first the jar and then why don't Last three years have we really haven't measured up in a very good way I want a great credit to John Ward or PR guy and even more credit to Then read a relevant new management director With a month quite close and he just wants to make sure all this gets done just right for you all Because everybody there now recognizes after some delay What a huge huge asset you are individually and as a group to Van Nort staying in reputation John Ward said something about you're our biggest boosters in our fiercest critics and You need criticism need criticism. We need criticism I may overdo it a little bit To you that is in May It's gonna be a nice evening for you all. I'm just sorry. I can't join you tonight. It's a busy day and I'm looking forward to it all I Want to begin Way a curious way Sets the tone What I'll be doing today has to be a tie-in For the man for whom I have enormous respect and that would be Taylor Lara more on those Taylor here this morning So I have to tell a story first day At the end of my remarks this morning if I have time I'm gonna tell you about a new book that's coming out Which wonderful system Michael Nolan calls me to MIT a man in the arena and It's not written by me It's written by a lot of people who did the full legacy form Wall Street I'm a year ago and has transcripts of that a lot of other information in it and And so on some of my night more recent speeches in that kind of thing and some of it is the fours of my books such a distinguished People and so Getting into that We have letters and share holders and from many like big shots more info that's in front and One of that about ten letters from the bubble heads and one of those letters. This is in the book Is it fairly long letter from? Taylor Lara more And I'm gonna quote you back to the center of our remarks today In 1999 is quoting Taylor. I learned Mr. Bogle was going to be the keynote speaker in the money show And my wife in Orlando and my wife Pat and I made the decision to go here to speech and hope to be in personally He'd been on the cover of the financial world blah blah blah and we expected John Bogle Chairman of the giant mutual fund company to be surrounded by guards and staff Not too old ladies seeking advice I Listened to the conversation We follow a jacket in the auditorium and ladies in the auditorium immediately went to the podium to speak before crowded several thousand This is a portion of the exact words is reported by the press. This is my worst speech to the money show There are all these people selling it stuff So I began by saying I count you'll have the opportunity to attend roughly a hundred and thirty different seminars masterminded by more than a hundred speakers Looks to me that the great preponderance of them will offer you their sequence for success in the new millennium Many speakers will offer you tempting solutions involving in best complexity and a worse financial bedroom a witchcraft I must confess no offense intended to the presenters He said I wince when I see so many subjects that seem to offer easy roads for you to build your capital wealth creation and preservation increasing yields to 15 to 20 percent a Triggered our opportunities and internet mentioned that Finding future wealth and diamond mines My problem over the strategies at Citroën. I assume I can pay you in mind From the titles these speakers will offer you the secrets and success Let me offer mine The one great secret of investment success Is that there is no secret Investment success it turns out Lies and simplicity is basic as the virtues of thrift independence of thought financial discipline realistic expectations and common sense Taylor never gets back to his words. I doubt mr. Bola will be invited back I didn't lose my candor as a result of that God that run the random money shows like I'm standing here doing my speech and he's sitting next to me Just like we're no city And I'm sensing But I didn't lose my candle I have lost my candle and So I'll be as tactful as I can today It's hard for me To say something some words other people put in my mouth and it's hard to do a thing in my own opinion And I guess when you're 111 years old, that's a little bit pervy You want to say what you think? And I've been spilling that for more years than I care to count and you'll hear more of it today So thanks Taylor for that and thanks for being here with us. You know, I said some things of that show last night Very dear friend you've gone through every trouble time But you've been a great ally a great booster and his friendship Loyalty and just his integrity in human being this phrase I made up somewhere Speaks volumes I think the spirit of all the local heads He's really the founder So I want to thank my own again for some new these slides We I decided we hit too many slides last year. We have four more this year I'm gonna go through it fairly quickly and just cover what we can and so We'll just Go on now Like I've been very busy in the last couple of the last couple weeks really Trying to get ready for this and do you know think about some new things and put it in some coaching way We're trying to do he's trying to do the final proofs of Man in the arena this book about me and And seems to be our responsibility rather than Polishers. I wish you don't do a very good job on that So he was in the office. I think killed nine or ten last night Midnight You okay this morning I Will Mike is Kevin's replacement Kevin gave me 11 years of oil service tonight Kevin's I think can stop by and see all of you I don't know if any of you remember as Emily in the room now. Cheers. Where's Emily? Do we got a handsome? Emily takes such good care of me as the patience of Joe When I get excited or up step Which is very very rare Where are my glasses? She soldiers through it. She's been very loyal. She's been with me for 24 years now She doesn't look open up to do this. I'll say that But it's in the bank or maybe 27 or 28 years. I should know exactly But many then we over all of you She's a big participant in helping you all get around and things need to be done here So with Mike and Emily and Sarah who's not quite involved in all this. That's my move team and we got a lot done and I enjoy it and their patience and understanding is Beyond any reasonable week so and I Want to thank them start you and the middle of trying to do these three or four things pretty much full-time job anyway Outcomes I'm going to start with this kind of slide a minute Outcomes that Outcomes the Wall Street the newspaper yesterday and it's about these new and no metal or yes and The op-ed in Wall Street Journal said something the effect of I owe a great debt of gratitude to Gene Palmer for coming up with the efficient market theory and That is so far from a truth Well, I felt you know to run away with the editor to the chairman and the problem is two things one I'd never heard of Gene Bono I came up with the idea of the next one which is a significant difference from what this fellow argued and number two I don't even agree with him He's a very strong minded and I can't say that I'm right. He's wrong But what does one say about a hypothesis that is sometimes right sometimes wrong Sometimes markets are a vision sometimes markets are inefficient and we never really quite know when but we do know I'm going to show you a little of this this morning That in the long run they're highly efficient and the short run This is stocked back it all up to bonds What kind of efficiency and the short one they can be years even decades of inefficiency So I don't subscribe to the theory and that gave rise for me to tell the journal that The emh and nothing to me efficient market hypothesis So I had a club of nice resounding Counter to that which I call see emh the cost matters hypothesis. You see me right about it And that hypothesis is universally true every minute of every day every century And that is everybody shares the market return the ones do best have the lowest cost It's as simple as that it is as simple as that the simple theory And then I do a gene problem. It's her little letter which by the way, Emily and my quote told me not to send And I did modify it right like I think a little bit and So they're very late they liked it a lot I talked to the writer of some correspond to it over the last couple of years and What's gonna happen to it? I don't know But I'll probably have published what I sent Somewhere along the way, but it's still up in the air. I'm a big guest They will have some shortened version of this 500 word letter to the editor 295 actually And we'll see what happens So I'm gonna talk a little bit about Nobel one, which is gene mama. What does that thing say? Oh, yeah Oh, that's the interesting point. I told the drill was if you like indexing so much And if he's the father of indexing or something somehow Why do you start a non-index firm? Well BFA the initial fund advisors, I mean he believes there's sections of the market they're permanently under value persistently under value and I don't even believe that and DFA a little big business a highly profitable business on them On the very idea that they're you can find on Japanese small cap stocks It's one example or value stuff or small cap stock generally and sometimes he's right and sometimes he's wrong He doesn't tell you too much about the latter. So that first one my copy of here And then I want to do next We'll come to this in one second and He says he doesn't believe there's such thing as bubbles and I'm gonna show you there are such things bubbles and anybody to be able to figure it out. So let's go to that next slide line Bob Schiller We probably know about he has this way of looking at markets in 10 year or 15 year aggregate earnings Perfectly valuable sometimes is right sometimes wrong but he is another Nobel laureate for the year and He disagrees with Jane Mama and as he says he thinks efficient markets. It's the most damaging investment hypothesis in history So I think I did tell the journal in my bag. Look, I was a little over the top I mean, that's trolley-ponsy So they They raise these issues and the issue of who two guys win the Nobel Prize and they just agree Let me talk about and Burt mouth you'll sound wrong as you should know that but let's let's see how I look at The markets if there are bubbles can there be bubbles? Well one way to look at it is the Capitalization relative to our gross domestic product the reality of GDP national economy and the total capitalization of the stock market and got up to you can see that the market cap is twice the stock market 1.82 times and that was in the bubble 2010 level and came down below in 2009 to 8.84 Well, that's because stocks had a bubble in them the Intrinsic value of stocks and as measured by GDP Was vastly exceeded by the market value of stocks people's expectations So you can see hints of a bubble there I don't think you need to look at this over long periods of time But you can see there are big jumps. I don't think it has a time factor in it There are a lot of factors that go into it. You can see what I was doing in the 1929 What was doing even when the 40s began you can see the 70? 72 74 crash 81 to 37 and the dimensions of these things are not too far off There's a cut in half and again cut in half 182 to 84 So there is persistent Overvaluation and then it changes another good one People don't look at these things very often and this is really quite striking. This is the value of This is the prices of Dow Jones average Relative to It's at the market valuation Yeah, it's in this the value the market value of that on and relative to the book value of that and And fix that up around to what I think just three in one morning And you can see for eight times The market page eight times the book value were enormous to be Two and a half to three times and things change over time. I know that eight times does seem any normal person to be little over the top and then it reverts to normal Which is where it is now and both of those things suggest that the market is in broad range and fairly value It's a Piper they don't really need to worry about it, but that's that's what it seems to me You all seen this is something you've seen before I just want to show you something event. I've used this chart for a long long time and It's the sources of stock market returns over the decade and you can see investor return This is a long-term return created by business in effect They've been ideal to enter earnings growth and you can see it's pretty steady You know eight percent six percent big 14 there and next down I'll try to keep my eye on that and then this last decade of course very poor in partners it starts such a terrible dividend yield and You can see how it all comes out of dividend yield earnings growth There's for the nine point three percent you leave about the market comes from the speculative return is whether those Bees are rising the valuations are rising or falling and you can see it really an odd pattern of a version of the main here I don't know how much to read into it was the way things happen in the market And that is speculative return was a big drag on returns in the 1910s And almost exactly the same amount in the 1920s big direct drag on return in the 40s and on a slightly larger improvement returns in the 50s big drag in 70s Exactly commensurate increase in the 80s take the seven and a half percent off the investment return And then for the first time the history repeats itself in the next decade that itself is a warning sign So you can see where these returns come from what you can count The whole point of this is it's all about fundamental returns of best return only corporate America and not only the markets So we look at this Use the this chart and show you one new one But you can see how closely in the long run the market return total return in the market tracks the investment return investment return really drives the market return and If you divide one to one that little those little jiggles And that's just something much bigger is the same charges with that in a way and again You can see the investment return go way high up in the tech boom and then back to that more of us in normal days That one would be though the exact it starts at one ends at 1.1 Probably Somewhere along the line see if you have a pretty good a handle on long-term returns like for business Now one thing I had never plotted before however was the investment return is the next chart and Just plot the speculative returns separately and you can see the investment return grows and grows the rate of 99% a year the speck of the return is up and it's down and zero so it's all a business of capturing the returns earned by corporate America and Not worrying about valuations placed on those earnings by Wall Street and it's quite a remarkable charge It goes nowhere one goes nowhere We expect in 113 years in terms of the addition to subtracting speck of return It's business return across it and that's central to my own investment policies and theories and So we're thinking about that I'll be using that chart a bit more Try and get things across to academics and others and it will complicate it for some of you But I think the charts make it pretty clear the basic propositions would hardly be more obvious Rely on investment return think about how corporate earnings are going to grow for dividends and Forget all these situations These not cases the one of a better word on Wall Street And looking at expectations drive up to that if you want a big picture of that just think of the last two weeks I'm with the hundred points down a hundred points. So what a veil what does all that mean people? Speculating about whether the government's going to close down and they're not when you think about it to understand the market They're not really speculating Point not speculating They're speculating about whether other investors will think our government's gonna close down, right? So they're guessing of what other people might do. This makes no sense It's misleading. It's silly and So we're trying your there's been index against all the time Then that cakes fruit cakes out of system Get down to real investing it's a big issue and We just keep pounding away the greater and greater Now I'm gonna talk about competition Changing the subject from the Nobel Prize winners in the sources of Margaret returns The competition now let's throw this first chart out of the largest fund managers You can see it has been a dramatic change When that's three or four years old and guards ideas about indexing and having a bottom-front look at business Operating at minimal cost And here we are $800 billion large of fidelity they used to be probably a hundred billion large we work and American funds having their own troubles. We've just gotten too big Be able to manage When you get to a trillion dollars, you really can't be an active manager of funds and Trying to ask correspondence with Morningstar about the American funds defense They've calculated eight thousand ten-year periods or something Instead that they beat the market of 80% of and Or something and the reality is how to move the data, but I can tell you what the reality is and that is 98% of the 80% came before they got to be one trillion dollars then you can do an awful lot when you're small and Sometimes right sometimes wrong and then so there we are then this is the new ETF driven black rock indexing business and then PIMCO of course This is their mutual funds They're they're total book of business. They're at three trillion dollars. There's so much larger things are overall and Brings me up. I can't remember if I said this last evening or not Here we are over two trillion dollars. What's to be said and an audience Q&A with the audience about a few months ago and people had A wildest question. I mean, don't you do what I'm talking about? Which I guess is some sort of a compliment. I don't know said he Must be very proud of the two trillion mark And I said Look What do you think two trillion dollars means? To someone who's written a book called enough And it's a delicate balancing act you know the director just I was I Try to find some strategic consultants for our business school kind of thing Many many years ago and the question I asked him was what can we do to slow the company's growth rate? Why Would anybody want to slow the company's growth rate? You can see the handwriting was on the wall almost years ago we were just in the verge of getting a kind of big momentum that we'll see later on and Yes, as the directors used to warn me we're used to quite and I guess trying to help me out through this dilemma we're giving good employment opportunities in an ethical company with a missionary kind of seal and We're awful a lot of people probably 35,000 or so now come through our doors of course nature of things and yes We're giving probably 20 million investors Better returns than they otherwise might have had and those are nice things When you get to 14,000 crew members, it's just an awful lot. You lose a lot of person Personality I talked to all our work for excellence winners usually about Hater's kind of quarter and for an hour each Just kind of get a little kind of feeling it kind of people are hiring a terrific their view of the company which is very positive and no matter how big it is and So it's all okay, but we still have a problem which I define us So my row years years ago when I was running there for God's sake Let's always keep an order place where judgment has a fighting chance Triumph over the process And when you're running when you're running a company with 28 people There happen to be a dictator running it Who didn't didn't hesitate to decide is what we're gonna do and you know, just go do it and if you need any help like we had to pitch in and That's a lot of judgment very little process. I'm gonna get to 14,000 for the members now 15. I suppose 15,000 as an awful lot of process and not nearly as much judgment And they had more and more committees more and more group think more and more concerned about Whether a dissent is encouraged or discouraged all those kind of things and There's a simple reality here and that is to start with a line that has percentage of the company this Judgment of your sentence process should start way down here And when you get to 14,000 the way out here process dominates everything and it has to there's nothing anybody can do Like I can do about it But I think it's important to be aware of it and to be aware that And no matter who's running that company. I know if you'll love bureaucracy that line may be here and And if you hate bureaucracy, maybe here, but it's never gonna be back here So I worry about that. I mean, I believe in the human side of business and I believe it's very difficult to do without putting a huge effort and a huge amount of consciousness and awareness into importance of the individual always comes in and Maybe maybe just my idealism Shameless as always but that's I think the big struggle that you really have in my opinion the investment side Locked in In the index fund is the goal they get it is the way of capturing your fair share of market returns And yes, somebody else will talk about this in a few minutes somebody else make and get more than that share of market returns But then somebody else gonna lose there's no systematic way to do So I think we're operating the right strategy and I'm sure we are so Still in the competition, you can see our cash flows are just enormous and Just keep growing and growing and growing this year. It looks like a little lot last year as you bring in 137 billion dollars More and the last year it looks like about the last six years It's like about a trillion dollars something huge in the eight years And most of the long-term funds and not money market funds So this is the booming our market share which we do You can do both ways market share of long-term assets of funds but it's not fun or what we do at the long-term assets because Some of like demgos and a capital group American funds don't have any money market knock them way down And fidelity big money market The numbers don't change a lot, but you can see how we've come from 1974 and 18% of industry assets almost 18% and just rose very slowly you can see it actually Small print you can see it month after month There's a trend going on here, and I think it's going to be very very difficult Anybody to break it? Very hard for a lot of people, you know black rock has a terrible job Because they have two two masters that good too. Can you hear me? Okay, and back? Yeah They have two masters to serve and But the shareholders of black rock corporation the shareholders of black rock and the ETFs and That that poses the issue of great clarity Because they can't say yeah We call we charge more Who are better managers because they're managing any next one they're gonna do exactly the same no better or worse than our index So they are being driven The marketplace is driving them favorite the shareholders of the ETFs and their funds rather than the shareholders of their manager and Larry think is a very nice very smart guy He's really stunned by this he follows outrageous anybody would ever run their funds of cost and Actually story that I haven't told too many people to the back in 1974 spring in 1974 where he's trying to get the thing or going I was out of capital group and some friends from the ICI board know that in California a little tour of their office we're all pretty small and John Lovelace the president of it inherited his father So everybody but him but he came into the last meeting so I really have to talk to you before you leave Los Angeles So I am leaving tomorrow morning at 7 o'clock So I'd be glad to meet you and oh Our school the diner At 6 30 or 6 o'clock. He said I'll be there and He said Listen and listen carefully Don't start a usual company And in a certain way it has It's been good for the consumer and that's all that's the investor So The and I say we're and now we got this try like this in the wrong place, but we'll throw it in anyway This just shows the impact of ETS On the next business I'll talk about that as a separate subject in a few minutes But you can see that this still 20-08 and a very nice growth in the assets of traditional index funds I used the term submit so often in my in my book Clash of the Cultures that I had to think of it Acronym we all have to have an acronym and so I call them TIS Traditional index funds never thought to be reduced to that but there we are and they're two very different businesses by a large element layer from any event it's index funds including indexes most of all kinds They're in the driver seat you see there like 600 billion dollars almost since the end of 2005 Going into index funds and five hundred thirty billion coming out of active funds. This is a trend This is something that's not going to go away this is part of our lives and so We're very used to our growth. I'll be there for our growth and You know, I made your woman is to maybe some bad thing happening I used to tell people when you're struggling to get a van door going But just when you think you've got all made some great big bruiser comes up on you with a whole axe and Snacks you're right here in the nick of the neck BAM and So maybe that's going to happen. Who knows really, but I don't think so so let me turn now to some of what I'm doing now review here and You tell me now if I'm just trying to go through this little Little thing that I prepared for the meeting The elephant in the room. I've got whatever time I need I don't want to worry to death, but I I continue to be pretty busy It's not very busy. I'm trying to be an honest in honesty. I'm a little old I don't Usually leave home until about eight o'clock to come to work used to be six and I don't usually go home at six thirty or seven anymore We all strength it out by that for And so I'm even cut back on my schedule I will say just to be honest with you It's amazing how I can't get it done during the week So I do them very few weekends, and I'm not spending four or five hours Doing something I read or some kind of catch up or something like that The other wall things you do just the ordinary force of a non-business day Like read the time through the Wall Street Journal and so on, but many events some of the things you've seen are the bigger speeches I've given and And the lecture of Princeton financial system a warning to change is coming one of my favorites Big money in Boston at Boston Security Analyst, which will be a chapter in the new book And I'm just going to publish before and that's Also be published in the journal portfolio management Almost immediately. I guess we just sent those fruits back a lot of work was in this and oh I haven't had this one typed up yet This is a financial education Association and a bunch of teachers academics and where they gave the scholar educated reward by what they do about them Down in them Actually was in South and Bermuda And I didn't think I should be flying down. It's flying. It's very difficult for me But I told them I do it so I did it just before my injury anyway and I was in Bermuda for 24 hours and Never So I'll have that that will be published eventually and then I was asked to give the Key address 78th anniversary of CFA filled up. Yeah, I think that's up in my site like You believe so You didn't put it there And that was a funny one because I think I told somebody this story last night about This is after the crash on my shoulder and My wife said you're not going to give a public speech or and I said, yes, I am why I think She said this is the apartment part of the story And she's right She said what would happen if you were dead nice, you know, I think I'd probably give it anyway So and then I just got another award from Colton and John through beer Intrepid leader award and then I also Couple of financial analyst journal. I probably had a gator ten articles in financial analyst journals And this year big money in Boston I mentioned this going in and it's really a pretty powerful speech, I think and Pretty powerful essay we added a lot to the publication and then I'm doing another one soon see the light of day which is the financial analyst journal and Bill Sharp I've written professor Novel Lory a professor sharp out of Stanford. There is an article called the arithmetic of all the investment expenses and He talked about an expense ratio of one 206 percent for the average large cap on 0.6 He picked the man who had stock market fund and said that the active management route Will just doing the math will Give you an idea he said 80% of the return you know you get the index and These things have been driving me nuts for years When people act as if the expense ratio is the only cost where they're talking about and it turns out to be less than that A lot less than that of mutual cost. So I wrote an article just supposed to be a rebuttal up turned out to be I don't know maybe 25 or 30 pages and They agree to print and To take a look at all costs of investing and the problem with the other costs of investing portfolio turnover cost cash drag most funds have a significant cash position and marketing costs sales loads investment advisory These payment financial advisors are outside of anybody's avid and no one no one no one Can calculate them with precision? The or whatever it's worth the expense ratios are precise figures. So they're easy to deal with So when you eliminate my thesis is if you eliminate a consideration of anything as a big drag But in precise you better estimate it So I went through there and I got to a very conservative estimate But I think two point two six percent for all and cost choosing Bill Sharps mathematics gives you Active fun gives you not 80% of the markets return of the index funds return But about 60% of the index fund return So that's going to be an important article I think a lot of people are going to think I was too high on my expense estimates. I'm sure I'm not and a lot of people think they're too low and So presumably both sides could speak out but in any event it's Fun to be in the still writing and then you know doing things like interrupting my Writing every day. There's some darn thing. I read the paper that gets me so excited I can't wait to get with it when I get in the office and they're all the other projects so You know sometimes it's Before I start to get to Meaning I guess your day's work. So it's it's crazy. I understand that Probably too old to do it I think that's true. And when my mind is not to it I guess I'll just stop I Don't expect that to be very soon Who knows not my hands anymore? We age so a lot I think we've accomplished a lot this year and Thanks many respects like Emily the lesser extent to Sarah and And So they they get us through the day Now and then how we got to projects here three don't put that up yet, but I Want to talk about how fragile I want to talk about the beginning of it. I'll go about the end of it or where we are today this huge momentum Unbelievable how we began and we began to be honest without a fighting chance In the written in the speech I didn't boss and I had slides so I could do this I couldn't do it in the book where it's reprinted Man in the arena book But I got two slides coming up here about how fragile And how the odds were so totally against my bank card even existing and they want to throw that When I was out in San Francisco I bought the New York Times out there. They published out there The list looks pretty good house of fun man to come back with the headline agree when I got my plane That's nice. And then I get to my office Why we later in the day was later in the day The next morning, there's the article in the New York Times published in New York And look at that bloody question mark What he or was does she or doesn't she as I had way or something used to say and it's just an evidence of the Delicate balance act that took you get Van Gogh and going and that when we finally didn't give me it was really close quotes tears Not so much laughter and determination disingenuity Of my part and I just wanted to get it done I don't think I'll ever understand exactly why except I'm a competitive person and like having them Being taken away from me my people would cause this failure. So That was fragile and then we started finally to get business as you know in September 26th, I think 24th or 24th of 1974 and So we just had our 39th anniversary, which was not much recognized a couple of other publications a couple more still doing it at 39th anniversary and But the beginning just to give you an idea while we're running I think this chart is called the fragility of Van Gogh you know About that 108 million dollars that's a lot of money we had billion and a half 1.4 billion Aircraft then we lost another hundred and three billion liquidation Then we lost 171 billion and at the end of the next year I was so excited we had a 33 billion dollar improved That's what you got to think when you're down those depths believe me and so From that start, you know trying to get so much done since a short time, you know this story ball Move it again The first thing you got to do is realize that you're in a business You don't really want to be in administering the funds I mean has to be done right, but it's not gonna you're not gonna change the course of the world by being a good Shareholder record keeper or a good account or a good compliance officer You're gonna change it by the kind of funds you have a way you decide to run them like I decided was freedom and you decide to evaluate them and We had to get to that And this is I think fairly well known. I had to promise the directors in writing and a little memo of understanding I would not get into investment management No, I'm not getting a distribution And in two years from the time we started less than two years We've gotten into investment management distribution That's where this ingenuity came in, you know, I said we're gonna start the index fund I want you approval of a new fund called the index fund, you know, I like to get no investment management And I said well worth this fund is not managed And believe it or not So that was the beginning the index one very important And the next was and I want to take the funds no load during 77 and Seem like obvious here to be the low-cost provider expenses for our mutual structure You might as well chuck the entire distribution system been supporting us for 50 years and it seems like extreme Maybe it seemed extreme to me. I didn't I think we would be a problem for us And we did it and it was a problem for a couple of days We just Wednesday night we're meeting in New York Thursday we announced the press and Told all the roger dealers. There would be no commissions as of Thursday. This is called Going cold turkey Which I don't know why I should use that expression because I don't get into that part of the world So it was bold You can argue it was risky But it all worked and had to be done in a short period of time And then we had this a lot of fun. I'll talk to your maturity with huge huge differences on the street and tax-managed funds first of them So on it all it all came out in the end very well So we have I guess this is really where I should Yeah, this is this is the basis I shouldn't I got these charts over the board. This is the basis for that FHA article And I didn't take all this into account But you can see the reason one reason it's all confusing is that Some of the books are born by the investor himself. Don't go through the fun books sale clothes I throw in taxing efficiency. That's about total taxes But the tax and efficiency extra taxes paid by advisors by advice fund Actually manage funds and then investor behavior. There's funds are buying too late. So it becomes that that number becomes like almost Almost 4% but I don't I don't take those those tax and efficiencies That's your behavior to account my overall makers. I mentioned books you will get the idea and There you can see the index enhancement after 40 years. It's a 65% increase Value of your account seems unbelievable. That's just the way it is and that data will be in there although I don't extend it for those last three So it's an analytical article and I think we'll be a significant article but I Just hope it gets some attention because people are thinking a lot about my car So that's part of the project I should have mentioned earlier another project books What do we say here? Oh? Well, I don't have anything else to do someone has me around forward to their book so I've written forwards to Book by John Wasing called Cane's way to wealth Very interesting canes my days at Princeton and very important part of my life So I was happy to write that and these people expect about 500 words. I give them about 5,000 That seems to be okay, and then we have my overview of Paul Cattle And actually it's arguable. It's stay street. That was the oldest mutual fund for MIT It started operations earlier in MIT It's best investors trust got incorporated later. So and Formal thing has been given the MIT the oldest mutual fund the first mutual fund But it's a fascinating biography in which I show had the industry was much closer And began Much more fiduciary much more pure pure and close values it is today and This is also a theme of a big money in Boston's speech. We went from being fiduciary is pure technical Boston trustee being this great big marketing business And I described Vanguard this big marketing business as being basically the book came out a few years ago called pure Boston and Flaker Philadelphia When you think about it, which I did is Vanguard is very much Flaker firm. I don't have to be a Quaker, but it's what's Quaker isn't a batter it's about simplicity and it's about friction and I think we live up to that. So we are bringing This is back to work again, at least I think now like everything I do Is it probably a little overstatement here a little hyperbole? But I believe it I don't really expect anybody else do it. I think one of this So now let's go to We're not going to talk about it yet, right? Okay, we're going to go to some issues that I see facing the industry and perhaps facing Vanguard Which I call emerging issues that Exactly Actually, Mr. Roble, do you want to cut this quote from Adam Smith here? We've got the Adam Smith book before coming to Princeton Review of Adam Smith. Oh, that comes from the, um, that's Jordan, that's Jordan. Yeah, Adam Smith book. That's where the handling is going. Okay, this is that yeah Well, let me see what we are here. I hate this stuff. And then we'll do the next book, the man of the every man. Yeah, we're just giving it man. You're great Let me just take a quick breath here. Show a little bad stuff. And you throw it. I hope this kind of informal exposition that I'm giving you is okay. I think I kind of enjoy the informality. I'm doing a lot of, by the way, I want to talk about speeches I've got. I've probably given last year maybe half a dozen at least speeches that I do Q&A and they require no preparation and they're very informal. If you've got a good moderator and a tough moderator even like Don Phillips that morning, so all right. Really tough. You can have really a good session. So with a good moderator, I think the audience probably likes it better than formal speech. But the reason I still stick to certain uninformal speeches is I continue to believe the history of this business and the history of this company are important. So if you give a formal speech you give it not really because it's a speech it's an important chapter in one's thinking or one's life or the life of one's company. So I do that for the historical implications of it. I've gotten a bid and this apparently happens to a lot of people when they get antique a real interest in history. And the history of this industry is really shoddy. There's not very much written about it. You can find books here and books there. I've tried to collect as many of them as I can because there are probably six books including Michael Young's book on all cavits but they're pretty good insights into how the industry grows because I think if you don't know where you've come from you're just going to be a loser and you've got to understand where you've come from. If you've got something going for you, we'll do it again. How do you maintain that at the end? That's of course a huge issue. And I think this is at the end of this is at the end of Big Money in Boston and this ties in with what I did because I had to do this Adam Smith book that I mentioned there that's being done by Professor Marquette who published by Oxford University and I've written the final chapter called Adam Smith Capitalism. I really enjoyed it. I did a lot of research and felt like I was back in Princeton and really a lot of fun to do and a lot of research and the wealth of nations no matter what anybody tells you is not an easy read but I've written an awful lot of them over again after all those years I've never read a cover to cover I don't think we have to do that. But the final quote in that book says something about Vanguard it says something about the word world and it says something about the enduring, fundamental principle that comes from Adam Smith in 1776 is what drives Vanguard and that's the part that's italicized at the bottom. You can read the whole thing. The interest of the producer ought to be catered to tend to do only so far as it may be necessary. Promoting that of the consumer the maximum is so perfectly self-evidence in Adam Smith that it would be absurd to even attempt to prove it. The interest of the consumer must be the ultimate end of an object of all industry and commerce and that's what we are doing a thing that's what the mutual structure means and that's why people are going to have to are going to see this industry change and they're going to have to either get along or get out and in the long run this industry will look very different than it was today. I'm sure Ned Johnson is going to have his cash cash up there and he's going to take year after year but they're going to have to dwindle he's going to lose market share and he's just going to have to happen whether he likes it or not there's very little he can do except enjoy the couple hundred million a year and I suppose that's easy to do I haven't really thought about it too much don't need a yacht so that is an enduring principle when you think about it as the bottom line and the fundamental principle is bang or space stuff so when I discovered that sentence in the wealth of nations and I've probably seen it not only fits into the Adam Smith whole idea about Jordan Boston bigger Philadelphia but it fits into the whole context how economies work how consumerism works and that's what we're facing and that's going to be very enduring now we'll go over to some of these emerging issues and the first is target day funds we'll go up to 31 31 so here we are I don't know why I didn't think about this before but I have a concern I'm not really a serious concern maybe it is back at target day funds seem to assume that all of your retirement assets are invested in security and up to that point they make a certain amount of sense I mean nothing is perfect we're better with the alternative we're an awful lot of investors but the reality is that I work with members of several people in Bangor but when you ignore social security you ignore security very very important and I said I had no idea what percentage of retirement plan target day fund investors are on social security or have social security available and it turns out they know the answer to that Steve Buck was a very very good guy I don't know if he's going to speak tonight is he going to be there tonight he's a really good guy who runs our retirement something unit and he's very good and he said 85% they know that 85% of our target day holders have social security so just look at what difference it makes you know I took an average investor at age retirement at age 62 that would be kind of a low ball number $300,000 to capitalize the value of your social security and I took a top earning under social security investor and a retiring 70 and man is that check I think I think the check goes up 50% the time you're 60 to the time you're 70 you get paid 10 years less it's not necessarily a steal at all maybe a bad judgment payments are double roughly in that period and that's 575 so you think well if I've got $575,000 and I'm putting into a target date but outside of this and not a lot of investors are sitting around with $575,000 and I put 100% in stocks I'm 50% in stocks and 50% in fixed income $575,000 in social security and $575,000 in stocks that probably is not excessive and I don't know if I have that next elusive chart yeah they really well I'll come to that in just one sec so we really ought to rethink the way we present and the way we maybe warn investors or inform investors they have to take social security into account and I have to say I'm one who does not feel social security is in danger and we had the legacy forum for me in New York I was taken up here with Paul Wokler and Kathleen Hayes the interviewer said something about do you worry about social security and I said well it's a matter of political will it's not a matter of economics I said Paul and I could fix it in 20 minutes and you just peck a czar Paul looks at me and says couldn't we fix anything and I think the answer to that is yes so much politics surrounding common sense economics but many of it is a big issue that we ought to be thinking about and then I do wonder a little bit about some of the change we'll talk about this in terms of some of the new products so called and that is should the international bond be 20% of the 40% bond is that 40% bond no 45% and 45% is that a good idea or not and I think we want to be a little careful in this world to stay as close to simplicity and avoid distractions as we can you know I don't know what we're going to talk about this later I don't know what the international bonds will be better in the US or not how would anybody know that but it seems to me that in the bond market in particular you know maybe that'll be 1% of your battery quality and you have 1% more return on X% of your money and it just gets long since lost in the shuffle it was a work doing a little extra projects putting a lot of money in the new fund or is that a an emerging issue perhaps then on the same, basically on the same subject and that is once you retire I was trying to explain this so maybe that's I think we talk about this this morning we've got to stop focusing on the level of the stock market you know it goes up and it goes down, what else is to be said fluctuates, fluctuating since the button would train 1785 or something and it will continue to fluctuate it's just a great big misleading indicator and what's important is the income you get so when you own that social security you're going to check every month so I don't take I guess you do and that money is big by the way and you get an income check let's say a monthly income pay what matters to you is that those two checks amount to let me say $2,000 a month it doesn't matter whether the value of the stock behind that income is going up or down there are some good ends that are important and you can see here what a remarkable record it pretty much goes up with that interruption sometimes a little slower, sometimes a little faster we of course had the crash in 2933 see a big drop there and the only other significant drop in dividend income since 1929-33 was in 2008-2009 in 2007-2008 all the financial stocks of the minute they're dividend so the dividend drops pretty big 20% or so $28-21 but before it is now it's back to $32 and the banks aren't doing much help to them normal dividend growth we expect our corporations to produce because they make good products and services and they're competitive all over the world so it's dividend growth the amount of the dividends is amazing to me how few people are paying a lot of attention to dividends and dividend deals and how much dividends matter in the long run this next chart I guess it's called dividends matter it just shows you that you invested in the stock market all those years ago at a capital return of $5.72 we're supposed to fix that chart that's right when you reinvest dividends it's almost $10 say again when you reinvest dividends it's $5.72 but if you reinvest dividends all along it's almost 10% per year that's right we were going to put in can't you remember anything we're going to do that reinvest the 4.20 we'll do that tomorrow okay tomorrow see you guys the difference between $132,000 and $4.23 million what do you reinvest? that's a difference, isn't it? we shouldn't forget dividends I think the reason the industry forgets them is a typical equity fund consumes about 50 or 60% of the yield in investment expenses so at a 2% market the average fund with a 1% expense ratio is actually higher than 100% it's going to give you a 1% yield they take 50% that's generally not a lot of variation until you get to Vanguard it takes 50% or 60% even of your dividend yield when the dividend yield is quite obvious there's a big failure in success people only focus on this but you're not going to find your fund manager focused on it if you ever convert it to real terms that is to say just for the value of the dollar the result is going to be really quite shocking in the cost mutual funds and you can see there's an income statement 1% yield 2.1% market 2% market 1% yield is consuming 1% expenses 2% yield so I'm just trying to wake up people to these obvious things that are happening but they're self-servingly eliminated what the industry does I'm going to talk a little bit now about the bond index I talked about this last year I'm not going to say too much more but I'm uncomfortable with the way the bond index is structured it's 70% government 76% government government-related bonds and a remainder less than 30% in corporates where corporate bonds have a higher yield and therefore will do better in the long run than governments they always have and they always will and the attrition rate of corporates is so small it doesn't really dig much into that it's a good rate so I think we should be trying to either get workplace put a new index together or think about the weaknesses of this in the index because people need yield out there people are dying for yield and you all know that and so if you get a little more yield the bond index bond is part of an overall bond index or change the bond index which is something that's not going to happen you have to be very bold to do that but say faint heart and air were one fair lady or something like that sometimes in this life you've got to step up to the plane and I would say this will fall down and so I'm looking for these people who get concerned about yields easy ways to improve yields at least I think they're easy and 35 so that's really I'll just bring that up again next issue is competitive well DFA I mentioned that Gene Fama is a director of one of the inspiration for the founding of DFA and he gets all this credit for indexing and he doesn't even like it they have an interesting firm they're good people for what they do and they have proved unable to isolate segments of the market and persistently improve that yield they try but it just doesn't happen I think it's very counterintuitive you can look back and see it as soon as you can see it backwards so they're doing very well they're probably our biggest real competitor in terms of quality in terms of cost but still because of their cost they don't have their cost ratio there I'll give you a second but we still do better in DFA when you look at the morning store ratings these are all in the appendix to classroom cultures with data from the 50 large sponsor there so they're a tough competitor they charge I think their report expense ratio is .36 which means a way above average in terms of returns but behind Vanguard I think we've come to two or three and they're number 12 or something but their total cost they report to you don't include all their costs and I haven't quite figured all this out yet I'm not sure anybody has but invest you have to pay 50 basis points to the advisor to get to the DFA so instead of .36 to .86 and that doesn't appear in the data the other emerging issue is so-called fundamental indexing very value does that anybody else use the term fundamental although I use it all the time I haven't sued me yet but he says he's discovered the way weight stocks by their earnings dividends book values number of employees and he has a secret there that RAPI 1000 has had an average return of 7.3% just about a perfect fit with our mid cap ETF because that's what turns out he's selling a trillion active manage index money in RAPI's case and he had a high correlation with probably about 99 of those two together and even if you look at it compared to total stock market our total stock for the ETF I see here better which is fine but only at the expense of having a risk level standard deviation volatility of about 20% more so he's taking more risks he's getting more return what else is new so he's kind of flogging that and more power to him I guess and I just be very careful anybody who says they've discovered something better than indexing because that's it next I want to talk about ETFs this school we keep getting painted into this box for Vanguard who loves ETFs and I hate ETFs well I guess you're cool I think it's an opinion but it's not true the Vanguard people who talk too periodically about all this basically agree with me for some of them wants to buy and hold an S&P 500 ETF that's a very good investment for some of them wants to trade into a triple leverage in that case ETF that's just crazy and they're all ETFs so it depends on the distinctions you make and I think the difference between Vanguard and Gold are actually way overdone and the press likes this kind of stuff and they say I understand you hate ETFs not that you develop a response to that I spent a lifetime trying to avoid hating any inanimate object you get a response they use it over and over so even you get tired of it so it's a huge part of business but look at how they turn over if they're all long term investors how do we get 2,203 turnover for State Street that's the spider group and 5,000 turnover for the spider this is not long term investing and Vanguard does very well 213% turnover ratio but in our funds that number is about 12% or 15% so it's very hot there's a lot of gambling going on here that's a line what's the movie? Casablanca a lot of gambling and seeing just the facts that direction sells its leverage but 10,590% this is called long term investing I mean someone's pulling somebody's leg here and the reason is that only about half of the shares of ETFs are held by individuals more than half, mostly are held by financial institutions that are trading people that are speculating arbitrage and doing all those funny things and you can see the numbers there I guess those are the Vanguard ETFs 72% of the bottom line seems a funny way to do that people like to be in and out of the market that's what it's doing and you can see that institutions are a big part of the ETF business and they're traders, that's all they're just traders so then we look at Vanguard to the survey of our retail accounts and this is a kind of interesting thing I think they probably wish I was such a dog on statistics but this table left up there is a table Vanguard did its own shareholders comparing total stock market index with the holders of the ETF index very very fast and they find out they're still much more long term wise then there is trading and the problem I had with that study is first, and I didn't realize this until last night I was talking to a couple of other ETF people and that is they tried in the article they wrote they tried to generalize that ETF holders are long term by looking at Vanguard holders and that's just a conceptual mistake everybody knows we're going to have more long term holders than anybody else but number two would ignore the activities of the clients and it turned out that I'm not sure of this number but it turned out that survey we took included 5% of our shareholders so I don't know what you want to do but a survey shows decent results and it only includes 5% of your shareholders in total and maybe 7 or 8% but it's not enough and so that gets into another way of looking at the chart this is the way you want to look at it if you don't like the data we have a 25% drop the very same data in long term holders 125%, 140% increase in short term trading holders so I'm not sure the chart is as good as they say so those are big changes and the ETF is a different business it's a marketing business I'm not sure it's bad for us to be in it it's already been a good marketing opportunity and probably is a better way going to Vanguard through your ETF is probably a better way for anybody else but I still wonder about the underlying premise of EPS and you know I kind of die hard I have an idea and I don't give it up but let me just give you a few more so I do like the informality I'm afraid some of you stretch together quite the way I want to do it but we do what we can do and I feel a little bit this morning like I've often warned they bring in a lot of shareholders to see me and I think every one of them has wonderful, wonderful ideas and things to share a lot of adulation I confess which is nice but I always leave with the feeling when they leave and I think they're saying when they leave my office my god there certainly is a lot less to hold over what meets the eye I hope that's not under the impression I'm leaving with you but I'm just being who I am telling it as great as I dare and having a little fun kind of reviewing where we've been and where we are our next slide is going to take us to Vanguard currently Vanguard people have asked is still being driven by the basic not only basic ideas the basic investments we started over years ago you use the phrase old friends good friends you start to use that phrase a lot people you know my friends these days such a mortality rate my god they're now shooting at us so they are they haven't hit me yet so you can see that the funds that we've been involved in all along the new funds, the index funds drive us the return of welling and fund the welling and fund I strongly encourage you to read that chapter about what it took to connect welling and fund and recover taking it back to its roots and I feel that's one of the great accomplishments of my career and also one of the things I owe to my great mentor and one doesn't want to forget one debts to those who bring it along in this world but you can see the funds that we had back then these are just the largest 10 I guess every one of them was created except the one before back when I was running the company we looked at all the funds it's 87% of the funds we have so we're still on the same track in the way even a little bit different I think it's best I scratch my head a little bit about the new things that are going on I don't think I understand what will minimum volatility sounds pretty good I guess but I don't even honestly I don't even know what means and I don't think any fundamentally wrong with the international fund index but I think those assets it's that big because we put it in our target date fund we put the wiser heads and decide whether that's a good idea or not but anything goes out of the mainstream it's going to find and local skepticism it's going to be right x% of the time it's going to be wrong x% of the time if I said I think the right is going to be a much larger number than the wrong percentage I wouldn't be true to myself I didn't own up to that but you look at some of these things and some of them make sense and I don't know about managed pay our funds have always been skeptical of them market neutral I just scratch my head and think what's that all about and there are 216 of them out there and the industry is 216 and they're all going nowhere and first by equity they made them going nowhere backward and growth equity is that turner fund we began right at the market high and it was actually approved previous year and I was on the board and I said you know I can't tell me that these I probably said these jasper's could do better at the market I absolutely didn't look at their past record I said of course I looked at their past record that's what makes me sure they won't be able to do it in the future but that that was a the only redeeming thing about growth equity is over the technology fund we didn't call it technology fund and that's the small amount of redemption that has the biggest gap between a fund reported returns and fund investor returns of just about any fund in the entire mutual fund industry time is atrocious I don't know if I'll be around forever or not I doubt it so there's always a question about how long these new funds will last but there's no question in my mind about how long the original funds will last I haven't really followed this very closely but we're doing a bunch of mergers just announced recently and I don't really have any comment about that except we should always be looking for city and it's hard to it's hard to admit when you've done something wrong and just to be honest about it it may be harder for me to admit that I've done something wrong but most people or maybe even anybody anybody and one never liked that and you can see growth equity which I just talked about is now going to go in the U.S. growth which itself had a tragic record I guess it's doing a little better now and the fact of the matter is I don't spend too much time on this but well actually I'll come back to it in a minute and there's the managed payout funds which is a question what's the point are going to be a single portfolio one thing that is going right and I'm not sure I have no idea actually whether this is an accurate design is correlation when Vanguard started I talked about what we want here is relative predictability of fund returns that was the phrase I used in the old days we didn't use R-square, we didn't use correlation but we wanted funds that didn't get out of line with their peers and we wanted that because you didn't have to be a smart so if you were more interested in management and marketing the funds that are very different from the others will do much better and then much worse that's the reverse to the meaning that I documented some length in the clashes of cultures but you can say what's the matter with that and it senses just the way of life and there's nothing to matter with it except, and this is a big exception that people pour their money into the fund after it does well they expect too much they expect the past to be prologged and if there's anything we know about this business is the past is not prologged and actually I would argue we know something even more important than that and as the past is kind of anti prologged we get done well in the past it reverts to the meaning in the future a very important part of my whole thinking about the markets but what's happening to my surprise all the index funds as you can see that have basically 100% correlation with their index not very surprising or 99 and funds look very much like the index or are the index you know are up in the 90s but what I'm looking at here is what is the direction of change for these funds and this is what I don't know whether it's accident or design but our funds have gotten much more correlated much more relative predictability relative to their peers in recent years and earlier they were very high earlier and if you look at the 10 year correlations that's ever been realized 10 years obviously and then compare them with the 3 year correlations and these very very high correlations 97 95 93 have all gone up as those arrows and welling and fund may not be an index but balanced index fund and the correlation is now 98 with the market I mean that's too close to observe the difference and I like that and that was the whole reason although I don't think the president likes it to be expressed this way that's the reason I like money manager funds multi manager funds and that is not that we can pick good managers how could anybody do that and I couldn't and I may have said a low bar low bar of entry and you make mistakes no matter how disciplined you are no matter how much history you know no matter how skeptical you are about the past you make mistakes and if the odds are 50-50 you can pick a manager well just for the fun of it here and if the odds are 1 in 4 you can pick 2 managers 1 in 8 you can pick 3 1 in 60 you can pick 4 1 in 32 you can pick 5 1 in 64 you can pick 6 1 in 28 you can pick 7 and I think we have 1 fund with 7 managers maybe 1's or 2 or something and so you know that you're going to get an average return compared to your peer group it's like the large numbers your peer group is let's say 7 funds and you pick 7 representative funds to compare yourself with those 7 or 2 to run your money for you those 7 funds are going to almost inevitably have the same return as the average on average as the total is 7 so you like that because you win on cost if we just be average the more managers the more average you are and you win on cost you win maybe 50 or 60 basis points on expense ratio you win probably 30 or 40 basis points on negotiating fees with a manager both expense ratio the economy, the scales, the administration 30 or 40 basis points on negotiating with managers maybe hiring long term managers instead of short term managers say 50 basis points on lower turnover cost and finally you're selling at no load compared to other people who are mostly selling at load sale load 100% a year or something like that and you should win by 1.5% a year at least over a decade if you do that your returns feed the competition by 20% that's basically what the data show us but that is not as is sometimes alleged that we are smart manager pickers it's because the difference is cost that we are average manager pickers and really now it seems so awful in this world to say we're picking average managers or I would even say we want to pick the average managers and win on cost but it's the sure way and not the spectacular way I'm happy with that but I don't think it may be delivered it may not be delivered and I should say this on back to Mr. Lovelace John Lovelace he has this theory which is not so different from ours he's a very small number of funds but they just keep adding portfolio counselors he calls like all investment advisors and so he has somebody running 10% of the portfolio and a couple of their portfolio in fact have 7 or 8 maybe one of them has even 11 portfolio counselors he said there's no such thing as too big we just hire another portfolio counselor without realizing when you open 1 to 11 you're that much closer to being average overall but they don't bring the lowest cost in the situation and in fact mysteriously at the huge size they are now their portfolio turnover is twice what was a decade with much much much smaller cost so that cost that cost that executed transactions in a huge portfolio are obviously much more much higher than the other funds so in any event I call these funds virtual index funds and that gets the people that are running the 50 muni funds I think someone bothered but I'll stick with that and let's skip that next slide and then go to the final section of this I don't want to take too much of that this is the man in the area of the new book and edited by new Rostad this fiduciary dude he's a self-appointed guy he helped to create this legacy in Wall Street which is what this thing is based on you probably have seen this the next slide I was held in Wall Street in January 2012 and we decided to do a transcript and it has great people like us or David Swenson have some violent disagreements by the way it was kind of fun to read and the disagreements about what he should I'll just express it directly Gus has a formula of some kind that says how much you should have an index fund and how much you should actively manage funds depending on AP or C and David Swenson who just heard from the other day Gus, by the way, I don't need to make any comparisons but really at the top of their games through the best with all of our meat and he says no, all in nothing index or don't index there's nothing between and that's a nice little part of this but many of this new book began with those transcripts of those things including transcripts of the interview with me and Paul Volcker which I must say I've never done an interview with Paul Volcker and probably most of you won't you can't imagine what fun it is I mean the guy is so fun and he makes me look like sort of a Penny Andy I had to tone my game up a little bit and it begins it kind of, I'm not sure exactly how this happened but to do Rust at one of them put a lot of things that I've done in the book and I'll show you the table and it brings with this this great great quote from many, many, many great quotes from Paul Sinoson so I just got to tell you personally the idea of this giant and it spends one minute with this poor little Penny Andy numbers counter who doesn't have a guess out is quite remarkable but he has said such generous things about me and about the fun that we of course begin to track if you want to be able to read all of them right but I'll just go very, very quickly through the contents Andy Goldman Prince of the All Species that I'll be seeing tonight President Prince Gellruth is just a lovely forward I didn't even see it but I saw the proofs and then I guess he wore on this Chapter 1, Chapter 2 and then we done some sort of sections part of character counts part of the time to dance is my first billion dollar speech out of the crew and other things I've written over time including primarily I think one of my better works more historically oriented is big money in Boston and but it had never been in a book before I like kind of the idea of having these things things that I've done I hope they're worthwhile, I don't know but they're protected for a long time within the covers of the book Part 3 is the Index Foundation and then Joe Mesquiteau Morningstar wrote the introduction although Joe told me actually John Reckenthaler wrote it which was great and I was going to mention at the beginning that kind of spate for one of a better word of publicity in the last three or four months in there no matter where it comes from it seems like an awful lot including give me a B, give me an O, give me a G give me an L, give me an E and also that paragraph I should have mentioned this not that paragraph in Taylor's letter about what investing is all about which to the money fund it turned up and this is such a funny thing to take pride in but it appeared in a long article about successful investing in the Neutral Fund Edition of the Wall Street Journal and they got all the way to the last paragraph this long article, the great bottom and there's this quote that I gave in 1998 and I couldn't believe it, I took it as a huge honor to think that's something I'd written about 15 years ago somebody God knows where found it I don't know how people dig this stuff up but that was very rewarding to me and John Reckon-Fallers later tribute nothing to do with the introduction here about saying my legacy was cemented before the last five years and it's been cemented even more in the last five years and the reason I like that and they're all very easy to get significant those who were saying it you can take great compliments as nothing if they come some of you have done a basic matter but John is a skeptic he's cynical he's analytical, he has a sense of history and to have him give me this huge back away in his review of the last five years was really deeply touching to me then we have Chapter 9 oh that's the Gary Brinson speech I gave I gave that in Washington the Washington State University and then we included the entire BOGO issue with the Journal of Indexing Corporate Governance big part of the book, two chapters and Neil Minow wrote the book she's the corporate governor and activist from the Washington DC it worked a lot of bunks for a long time just a terrific person and then the vision of service to society is part 5 fiduciary duty that speech is out there and no man can serve two masters and then I had a little bit of that philanthropy written in my book enough but I built that up a little bit the editor's request was some new material in my own giving philosophy and so we go all the way to the end and we get sort of rewards for the vision Alan Roth wrote an article about the BOGO heads that's where Taylor's comment came from I mentioned earlier and then we have letters from the clients and letters from the big crew members and then we have for the last oh next to the last slide we have two people who are actually at the legacy forum we're here today Alan Roth Rick Ferry Big Boosters and here are some of the other contributions in the book listed there from the BOGO heads so the BOGO heads are an important part of the book quite naturally and finally Jeremy Duffield, my former associate one of the great people in my business life I wrote the introduction to my communication ability and then we reprinted a list of people who have written forwards to my books over the years and starting to run out of forward writers here but then even that's the way the book ends and that is the way my remarks this morning end and now we'll go to the Q&A thank you all very much