 Okay, Dr. Burton Malkiel is an economist and a writer most famous for his classic finance book a random walk down Wall Street now in its 12th edition and the new 50th year anniversary edition coming out in January. Look for that. Professor Malkiel is the chemical bank chairman's professor of finance of economics at Princeton University, a two-time chairman of the economics department there. He is a leading proponent of the efficient market hypothesis and one of the original thought leaders that led to the creation of index funds. Dr. Malkiel received his undergraduate and master's degree from Harvard University and his PhD from Princeton University. So welcome Dr. Malkiel. Well, I'm absolutely delighted to be here in this world of a lot of bad investment information and self-serving investment information. It's nice to be with a group that has done nothing but give people really useful and really helpful information. I'm also delighted to be with a group that is really established to preserve the legacy of a man who was my lifelong friend Jack Bogle and who I shared a lot of wonderful memories with. And a guy who really was the small investor's best friend. So, as Rick said, it's been 50 years, the 50th anniversary edition, my book is coming out. I went back and just sort of thought of what its reaction was when it was first published. And basically it made two points. One, the markets were reasonably efficient, information got reflected quickly. And with information reflected quickly, the tableau of market prices not always correct, but was sufficiently efficient that the market was very, very hard to beat. And I said at the time that people would be better off just buying and holding a broad-based index fund. Whenever I used to say that, people would say, yeah, but you can't buy the index. And I said in the first edition of the book, well, it's about time you should. Three years later, Jack Bogle started the first index fund. The reaction to my book by professionals was uniformly negative. Of course, investment professionals could beat the market when Jack started the first index fund. As I'm sure you know history, they originally had hoped to do an underwriting of 150, actually 250 million. The underwriters then reduced it to 150 million. And by the time the last purchase was made, they sold $11 million of the index fund. It was considered an abject failure. It was called Bogle Folly. And I remember I used to joke with Jack Bogle that he and I were the only holders of that first index fund. Well, a lot has changed over the 50 years. Now people are complaining that there's too much indexing. That indexing has too much of a share of the market. And it's just quite a difference from the original reaction to the ideas and to the first index fund. So I am, as I say, delighted to be with you and will be delighted to respond to whatever things are on your minds. Well, thank you, and we will have audiences asking some questions a little later. But I happen to have in front of me my book. This is the original edition of a random walk down Wall Street. I get to get it signed by you, but soon. Maybe at the next conference, possibly. Anyway, and you did. You made a quote in this book. Now, 1973. I'll go even before that, but I do want to make this quote because you alluded to it. This is 1973. No index fund existed. And in this book on page 226, you wrote, what we need is a no load minimum management fee mutual fund that simply buys the hundreds of stocks making up the broad stock market averages does no trading from security to security in attempt to catch the winners. Whenever below our average performance on the part of any actual mutual funds is noticed. Fund spokesmen are quick to point out that you can't buy the averages. It's time the public could. That was 1973, which in my view, this was a huge inspiration to Jack Bogle when he was looking into creating the first index fund. And you, you ended up on the Vanguard board. When did you first talk with Jack Bogle about about this idea? Well, I actually was in Washington. I was on the president's council of economic advisors during the time when Jack initiated the first index fund. And then after I left Washington, I then joined the Vanguard board a year later. So I certainly can't tell you that I was right there at the time of the of the first index fund. Although I will say that I was the chairman of the new products committee and a board member of the American Stock Exchange when the first index ETF started. So clearly I was around and talking about this for as long as I can remember. And we'll get to all the ETF question in a minute. But what I also have in front of me is the 12th edition of a random walk down Wall Street. And I assume that the 50th edition will be the 13th edition. Right. Okay. And very good. Okay. So what I want to do now is talk about investing with you. Okay. Well, let me do one more Vanguard thing before we do that. So you are now on the Vanguard board and indexing did not really take off right away. I mean, it took about what 11 or 12 years before the S&P 500 fund actually accumulated about a billion dollars in assets and wasn't a overnight success. Can you talk about those days? You know, that 12 year period of, you know, is this thing going to survive? Is it not going to survive? And what was going on with Jack Bogle in these discussions when you were there at the time? Well, I think good as any of you who have known Jack know that he was absolutely not dissuaded. He believed in this with all of his heart and the more people criticized him, the tougher he got. He would actually put in his office the derogatory signs that indexing was a stupid investment strategy. That indexing was un-American, that this was Bogle's folly. So I would say that, and again, the discussions I certainly had with Jack all the time in those early years, Jack was just even more convinced that indexing was the right way to go. And fortunately, what has happened, and I think this is one of the reasons why indexing is so popular now, is that as evidence accumulated, people began to realize that indexing was not guaranteed mediocrity as it was used to be called, but rather one got above average performance. And in fact, that evidence has been absolutely clear over the entire 50 years, since certainly I wrote random walk and the almost 15 years since Jack started the first index month. And so even though the S&P 500 was not, I mean it was a very, very slow star, Jack continued to innovate and you came out at Vanguard with the first bond index fund, which was not allowed to be called a bond index, if I recall at the time. The difficulty, it's easier to say that you could take an index, you could take the S&P, you could take what used to be the well share index, now the Dow well share index, and you had a certain number of securities, you could cap weight them and put them into a fund. Basically, what's not quite as easy to do in the bond market, because you've got so many illiquid, small bond holdings, and so you had to do this with a kind of algorithm that tried to give you as close as you could what the cap weighted bond market index was, but it wasn't the same kind of thing that you could do with equities. And the SEC would not allow that fund to be called a bond index fund for several years. Right. But Jack continued to innovate, came out with a developed market fund, a REIT fund and then a total international fund. So by 1996, when he left Vanguard, there was a total US stock market index fund, a total international fund, there was a total bond market fund and there was a REIT fund. Basically, you had the four funds that Jack created and then, of course, he stepped down for health reasons. So he kept on innovating even though at first this was not a great idea. How long did you stay at Vanguard on the board of directors? I was on the board of directors for 28 years. Wow. And when did you leave in the early 2000s? I did. We did have a retirement age. And even though I haven't been retired and still as active as I could be, that was the way that things worked. And I think fortunately, that is changing now. And one realizes as the population ages that we've got a lot of people over 70 who still have a lot to add to economic activity and intellectual activity. Well, I want to start talking about some different investments with you. I want to spend the rest of my time that I have before we start taking questions about your view of investments. And I'll start out with the one that you mentioned, exchange-traded funds. So Jack said exchange-traded funds were like giving gasoline and matches to an arsonist. How do you feel about exchange-traded funds? And did you agree with them? No. I would say that that was probably the only area where Jack and I disagreed. Jack and I were absolutely consonant on almost all of our ideas about investing, but each TS were not one of them. And the way the argument went was as follows. You're right. He did think it was an arsonist. I remember Jack would argue with me and he would say in his inimitable way, why would anybody want to buy the market at 10 o'clock in the morning and try to sell it at 2 o'clock in the afternoon? They'll cut their throats doing it. And I would say to Jack, Jack, you don't think that's a good idea and I don't think it's a good idea. But the problem is that there are people who think erroneously that they can do it. There are people who will try to do it. And if they do it in the context of a mutual fund, you could create costs for other people like the holders, the buy and hold people and the mutual fund. And in fact, if you had a bad bear market and all kinds of people sold, you might cause the mutual fund to have to sell securities and it would create tax problems for the holders. The beauty of the ETF is you don't do that within the mutual fund context. You do that on the exchange. And in fact, the ETFs, when they make purchases and sales, this is not considered a taxable event. It's considered part of the business operation to keep the net asset value and the market price consonant so that you don't get into big premiums or discounts. And so there were even certain tax advantages of ETFs. And I said, look, I don't want people to go and buy and sell ETFs, but for the buy and hold investor, this may be an even better way to do it than through a mutual fund. Now, having said that, as ETFs develop and you have these crazy ETFs and they're narrower and narrower, and we've got an ETF that gives you three times the upside or three times the downside of the S&P and they only do that for one day. They don't actually do that in perpetuity. That was all absolutely crazy. And there Jack and I agreed, but for the standard ETF, the standard S&P ETF, total stock market ETF, total international ETF, I thought it made a lot of sense. And I think, frankly, Vanguard was a little slow. I mean, it was not done until after Jack retired. But I think it's been highly successful. And I think it's been very useful for the individual investor. Well, I'm going to go through a little bit of a lightning round with you asking you about different investments. Some of them you did cover in your 12th edition or previous editions of a random walk down Wall Street. But we've had discussions here at the conference of about a lot of different types of investments. And you haven't heard any of these discussions, so you don't know what people have been saying. So we're going to get your opinion about these investments. Are we ready? I'm ready. You're ready. Good. Well, now there may or may not, we'll have to see how this goes. How do you feel about international stock investing? Your positive, negative, what are your views? This is a long term. My views are positive that in general, it has been a way to take advantage of the larger growth of some economies. And it's been a way to diversify even more than in the United States. Now, I fully understand that it's got a very bad name right now. Because international stocks and emerging market stocks have done very, very poorly in part because of the enormous strength of the dollar. But I would say that as of today in particular, where valuations in international markets are well below average and well below US valuations that I think some diversification into international stocks makes sense. Okay, thank you. All right. The next one, real estate. Do you consider REITs real estate investment trusts to be a separate asset class from the rest of the equity market? In some way, yes. And I think particularly in a period that we are in today, where after many years of having inflation so low that we could ignore it. That real estate, which has been a slightly more dependable inflation hedge than equities. Equities are a good inflation hedge. And it's one of the reasons why I don't think one ought to abandon equities at all despite the fact that we've had some tough stock markets recently. But I do think that real estate as a real asset over 100 years, real estate has been a dependable inflation hedge. And I think it definitely deserves a place in a diversified portfolio. The next asset class or at least segment of an asset class are Treasury inflation protected securities tips. What are your feelings about tips? For the individual investor, the I bond, which is the bond that individuals can buy directly from the Treasury, which have a zero base rate, but pay at the rate of inflation, which was over 9% recently. The new rate is somewhat lower than that. But it is the most dependable and absolutely risk free asset and people should be buying as many I bonds as they can afford and that they are allowed to do. The rule now is each individual can buy $10,000 worth. So a couple could buy $20,000 worth. You could also buy an extra $5,000 with an income tax refund. And it is the Treasury is now considering changing the limit from $10,000 to $30,000. This is an absolutely perfect inflation hedge. It's the only absolutely perfect inflation hedge. And I think particularly today where we have high inflation and I worry that we're not just quickly going to go back to 2% inflation. I think we're going to have some inflation for a long period of time. I think the I bonds are a perfect investment for the individual investor. Okay, let's go on to the next topic. And this was happened to do with something you did have in your book. High dividend yielding stocks versus the market. As I think people who follow the market know there was a fair amount of empirical work that suggested that stocks that are quote value stocks sell at low ratios to their book value. Low price earnings multiples have historically had a somewhat higher rate of return than other stocks. It's been suggested that small stocks that is small capitalization companies have had higher rates of return than large capitalization companies, not because the markets necessarily inefficient, but rather because they are somewhat risky. And risk and return are certainly related in markets. We know that from hundreds of years of experience. So what has come to pass then is that people have tried to make a business of the segmenting the market and probably the company that's best known for having done that is dimensional fund advisors. And for a long time, the dimensional fund advisors portfolios did a little better than a simple index fund because while they were passive. I mean they and basically Jean Fama, who was the intellect behind it believes very much in the efficiency of markets, but this by tilting toward what he considered a little bit riskier portfolios, you could get a little higher rate of return, not an inefficiency, just a little extra return from taking extra risk. Well, the market seems to have. This is actually one of the things in the new addition that I've looked at very carefully. And certainly over the last few years, the market seems to have caught up with this and even dimensional fund advisors portfolios have in fact underperformed some of these so called factor fund portfolios where you tilt in favor of one factor or another. So, again, it just frankly makes me think more and more that yeah, there are some new ideas under the sun. But once the market looks at these things, the good old fashioned broad based index fund ought to be the core of everybody's portfolio. Thank you. Let me point out a paper that you and Jack Bogle co authored back in 2006 at the height of the small cap value run in the market that this paper was called Turn on a Paradigm by John C. Bogle and Burton Malkiel June 27 2006. And it basically said Eugene from and Ken French have suggested that higher returns can be generated by index portfolios of stocks with small capitalizations and low price to book that ratios. These and these analysts and he talked about Rob are not and some other people as well. These analysts analysts have all argued that fundamentally weighted indexes represent a new paradigm for index fund investing. Are they correct. We think not. That was 15 years ago. So you're a spot on on that one at least so far. All right, I got a few more. And if people would like to start lining up for questions, please do so. I've got a few more here. We also talked about ESG. I know this is one of your favorite topics. So I'm going to ask you because I read the introduction that you wrote to Larry Swedrow's book and I found it found it fascinating. So could you tell us your views on ESG investing. I have frankly become more and more skeptical about ESG investing. I mean, first of all, it's just extraordinarily difficult to know what are good companies and what aren't. Let's take a company. There's a public utility that burns coal, but that also has been the only public utility that has suggested that they would go to being completely carbon free by a date certain and they're investing tons of money in solar power and wind power. So is it a bad company because it burns coal or is it a good company because they are transitioning. In fact, it's very hard to really know and the people who go and do the ESG ratings are all over the map. The correlations between the ESG raters are something like 0.4, 0.5. And just to put that in perspective, the correlations between Moody's and Standard & Poor's and doing bond ratings are 0.99. So it's just very, very hard to know what's a good company is a natural gas company, a good company because that's the transition fuel that we need when we go to a more carbon free environment, or are they bad because it's carbon. It's just not possible to know there's a lot of so called greenwashing where companies are trying to make themselves look good. And I just really worry a lot about that. Now, what I did in my introduction to that book is I fully understand that investing is emotional as well as simply we're trying to make as much money as possible. And there are people who like to have the idea that, gee, their investments are doing fine. Well, I say this and this was the recommendation I put in my introduction. If that's what you want to do, index the core of your portfolio. If you want to buy a wind power company, if you want to buy a solar panel company, go and do it, but you can do it with much less risk if the core of your portfolio is index. And let me just be clear. Don't think that you're going to make a higher rate of return by being green. While at some point, if green investments get very popular, they could outperform for a while. But after they have become popular, and there is something about them that people like and are willing to pay a higher price for, then my guess is you're going to get lower rates of return, not higher rates of return. So just be very, very careful. Don't turn up your nose at regular index funds and think that you can do good for humanity and make more money too, because if you look at a lot of those so-called green funds, you may be doing neither. I have one more question for you, and then we're going to turn it over to our audience. You co-authored a book on China in 2008 in which you were bullish. Number one, are you still bullish on China, and how do you feel about emerging markets in general? I am less bullish on China than I was. What China did when Deng Xiaoping came into power is he turned over the book on Marxist economics and allowed free enterprise. And by allowing free enterprise, the Chinese economy grew at enormously rapid rates. And I thought that that was going to continue. Well, it has continued to some extent, but I get very troubled by the current leadership, which I think has turned their backs on Deng Xiaoping. And so I am less enthusiastic about China than I was, also in part, because since their one child policy, they're aging so rapidly now that they look very much like economies in the West. Now, having mentioned that, let me just say why I am still optimistic about emerging markets. I think all of our Western economies are suffering from small or negative population growth and a lot of aging. People do these statistics of the dependency ratios, the number of people of working age versus non-working age. I hate these statistics because the argument is, if you're over 70, you might as well be put into the scrap heap because you're not productive. But when you look at these things, you see that the Western world is just aging very rapidly. And in economies like Japan, they are losing population. They are aging rapidly. Japan is losing population. It will lose a third of its population over the next 20 years. And this worries me about the Western economies, whereas the young economies are the Indians, the Vietnam's, and I think they are going to have more growth. They are riskier. They have been terrible investments recently. They are extremely cheap now, and I think they deserve a place in a well-derived portfolio.