 My name is Rick Ferri and I'm the president of the John C. Vogel Center for Financial Literacy. We are a non-profit organization, a 501C3 organization. You can go to vogelcenter.net and that means your tax-deductible contributions are greatly appreciated. And today we feature Bob Pazzani as CNBC Senior Markets Correspondents who has covered Wall Street for 25 years. Today he'll be interviewing Dr. Bill Bernstein about his new book, The Delusions of Crowds. And if you missed this or can't watch the whole thing, we are recording it and it will be available on vogelheads.org as well as the Vogel Center site vogelcenter.net within a few days. So with no further ado, I'm going to turn it over to Bob. I can't tell you how honored I am to be here. I am as correspondent as you heard, I've been with CNBC for 31 years. I've been the market's correspondence since 1997. I met Jack Vogel in 1997 at that time and had a phone conversation with him and was profoundly influenced by him so much so I opened a vanguard for my wife in that year in 1997. I'm a vogelhead and certainly maybe not officially a member, I'd like to be, but I have been for 24 or 25 years. So it's a great honor and I'm a big fan of Rick Ferry and William Bernstein. We're going to try to keep to the time here. It's a Saturday afternoon. It's beautiful to spend a lot of your time. We're going to try to keep it to one hour. Bill Bernstein, when I've known Jim for many years, when Jim took this over and said, I'm going to do something with the vogelheads, I said I want in on this and he said, well, Bill Bernstein is doing anything. I said, I've known Bill Bernstein's work for years. The Birth of Plenty is one of my favorite economics history books. And I read the new one, The Delusion of Crowds and Why People Go Mad in Groups. And that's what we want to at least start out talking about. I want to remind everyone if you have a question, you can put it on the right side. I will do my very best to make sure Bill hears about it. But Bill, tell us a little bit about The Delusion of Crowds. Obviously McKay's book, and it's not pronounced McKay, fix that for us, but Extraordinary Popular Delusions and the Madness of Crowds covered some of the stuff you covered before, but you felt the need to sort of, I don't know, update it is the right word. But tell us a little bit very briefly about how what's the genesis of this new book? Why did you feel the need to look at Extraordinary Popular Delusions again? Well, the genesis of the book was almost 30 years ago when I read Charles McKay's book. It's McKay, if you're a Scotsman, if you're an American, it's okay to say McKay. It's okay to say McKay. And I read this book, Extraordinary Popular Delusions and the Madness of Crowds. And the original version of this book was written in 1841. And it's a remarkable book because it describes many different mass delusions, religious ones, and also financial ones. And it's most famous for its descriptions of the three great bubbles of the 17th and 18th centuries. The Tule of Mania, the famous Tule of Mania, he's the one who actually coined that term and brought it into the English language, as well as the twin bubbles in Paris and London in 1720. And the descriptions are absolutely remarkable of people just going absolutely nuts over stocks or tulips or what have you, and how it became a society wide mania. And then it all crashed down. And at the time that I read this book in the early 1990s, I thought it was kind of interesting, kind of like a B movie about the Roman Empire, not terribly relevant to anything that I was seeing today. And then lo and behold, before my very eyes, several years later, the tech bubble blew and people began behaving in exactly the same way that McKay described. And I thought to myself, gosh, I've seen this movie before and I know just how it ends. And it certainly were down to the bottom line of my portfolios. I was able to ignore the madness and stay away. And it turns out that that's not a unique experience. McKay has been saving people's bacon for the past 150 years. Most famously, Bernard Baruch read the book in 1907. And it saved his bacon back then. And he was so impressed with it that he actually wrote the forward to the 1932 version of the edition of the book. It's been in print ever since. So, you know, the book really impressed me. And then several years ago, I observed like all the rest of us how the Islamic State was able to attract people from around the world to one of the worst places on the planet to fight and to die. And it turned out that they did that with a narrative that was very similar to the one McKay wrote about in his book about the crusades and other religious manias. And so I thought, you know, the time has come to write a new version of the book, an updated version of the book, and updated with some of the modern science behind it. Now, I have a trigger warning about the book, which is more than half the book is about religious manias. And if that's not your cup of tea, or if you're a particularly devout follower of one religion or another, you may not want to read the book. But if you're interested, if you're interested in financial manias, you're interested in the psychology behind financial and religious manias, then proceed at your own pace. Well, I read everywhere the book bill in preparation for this. And I have to say, I marveled at your stamina to go through so many hundreds of years of religious mania. The Anabaptist chapter was fascinating. It really was something. I want to get to the conclusions here of the book, because even though there is some, I understand modern challenges about McKay's interpretation of how severe anything was, as you know, there's some modern research that suggests it wasn't as bad. But I don't think that really matters. I think there's a whole point to all of this, which is that the way human brains are structured, people tend to keep behaving the same way over and over again. I want to get to the core point about the book, the lesson from the book, which is why humans tend to hurt a bit, why they're so susceptible to manias of all types. Can you give us the conclusion here of what the book concludes, essentially? Well, the book is really a meditation on human nature. First and foremost, we are running around this planet with stone age brains, brains that evolve during the stone age in the space age. So we're navigating a space age world with stone age minds. And the first thing that you have to know about human beings is that, first and foremost, we are the ape that imitates. We do what other people around us do. And the question is, why do we do that? And the answer is pretty simple. The best way to think about it is to think about the spread of humankind throughout North America and South America, which took place over a very short period of time, several thousand years, from the Bering Strait down to the tier of Del Fuego, maybe at most 10,000 years. And in the process, human beings had to learn how to make kayaks and hunt whales and seals and then hunt bison on the Great Plains and then to fashion toys and blow guns in the Amazon. And if you've never done any of those things before, you're never going to figure it out for yourself. So you have to find the one lucky person or people who gradually over time figure out how to do each of those things, and then you imitate them. So it turns out that imitation is an enormously valuable skill to the survival of our species. And it served us very well during the Stone Age. But in a modern post-industrial society where you have to invest decades and advance, it's not so salutary. Now, the other characteristic is that we are the ape that tells stories. You know, when Stone Age hunters went out to get and hunt a mastodon, they didn't issue each other vectors or mathematical descriptions or geometric descriptions. They just, one guy said to the other, hey, you go right, I'll go left and we'll spear the beast from both sides. Okay, we tell stories, in other words. And so we are uniquely susceptible to narratives as opposed to hard facts. So those are the two basic characteristics of why we behave the way we do in the modern capital markets. So narratives are essentially shortcuts to understanding the world. Is that correct? And sometimes they can hijack the more rational center of the brain. Is it the very important point here about narratives that you're trying to make? Yeah, narratives, it turns out, are the way that we understand things and we respond much more to narratives than to dull facts. And I'll give you an example of this. And it's political, but I'm going to mention Donald Trump's name, but I think it's pretty neutral, which is that late in 2015, during one of the Republican nominating debates, the primary debates, somebody asked Ben Carson about vaccinating his children and whether we should be vaccinating children or not. And he gave a very good scientific answer. He's a neurosurgeon after all. And he said, look, I've seen the data. And the data is that it doesn't cause vaccinations, don't cause autism. And we should vaccinate our children. Now, he was a good Republican, so he said the government shouldn't force us to do it. It was a pretty good answer. And then Donald Trump broke in and said, I had an employee who had a child, a beautiful child, and she was vaccinated. And she got autism. And this is turning into an epidemic, I tell you. Every single person, every single political talking head who saw that scored that in Trump's favor. Even though he had gotten the facts completely wrong, because he had a better narrative than Ben Carson did. And that's something we see time and time again in the capital markets. In that case, that narrative appeared to the fear center in your brain, whatever, the amygdala, whatever part of your brain that went off. And so it had more than simply stating a dry fact, which is the evidence is that there is no problem with vaccination and autism. The message went straight to the amygdala, and that pathway is very fast, and it overwhelms the pathways to our higher thinking centers in the cortex, which are very slow. Let me move on to bubbles. And let's try to make some conclusions about what bubbles. One of the interesting things about bubbles is they all exhibit certain characteristics in common. Very interesting discussion about Minsky, who was a fairly obscure economist, as far as I can tell, but is sort of now widely cited for his study of bubbles and bubble conditions. And he noted there were two essential factors. I'm not sure there's just two, but you point out in the book that in order to have a bubble, you need to have very cheap money, credit, and you need a revolutionary technology. Can you very briefly discuss that? And there are other factors that modern scholarship might have identified. They all have something in common. That's my point. And we should all be able to recognize and say, tool at many a bubble, and the dot com bubble actually had something in common, and these are the common characteristics. Yeah, the two driving characteristics of any financial bubble are cheap credit or low interest rates, which is another way of saying that and a revolutionary technology that captures people's imagination. So for example, right now, what's there to invest in? You can't put your money into bonds because they have a near zero yield with any reasonable quality at all. You can't put your money into traveling. You can't go to restaurants. It doesn't do any make any sense to buy nice clothes as we both demonstrated right now. So you put your money into stocks, well, the stocks of what companies? Well, you pick whatever is the most exciting technology you can find, whether it's cryptocurrency or Tesla or whatever. And so the price gets driven up and that becomes a self-reinforcing phenomenon. The more prices rise, the more money that people make, the more excited they get. And eventually, it reaches a breaking point where it explodes. But you can say what's going to happen, but you just can't say when. Yeah, there's been some of the studies that have done that add a few other things besides easy money and technology. So I guess financial innovations, I mean, so the mortgage products that were introduced in the 1990s, for example, that helped lead to the financial crisis. Maybe some other things like supply-demanding balances and things like that. Let me ask you about a very specific bubble right now. I'm going to go back to the book, but I want to divert and go right to this point because I've had questions here about Bitcoin. Is Bitcoin a bubble? Is it a mania? I'm not asking you to pronounce long-term what you think of cryptocurrencies if you want. Go ahead, but let me try to make it very immediate right now. Give us your thoughts on what's going to happen to Bitcoin. Well, I'll try not to be inflammatory. I will not use terms like coin-pocalypse or coin-tastrophe or coin-tribulation. I will simply say that there's a lot of parentheses, which is great. I don't want to use apocalyptic terms, but let me name them right now. What I will say is that there's a lot of speculation by people who are less than well-informed, and the history of how this falls out is not very encouraging. That's the whole point of reading the Mackay book, is you see not only the manias, but you also see how they ended. Now, not all manias end in a bust, maybe only 80 or 90 percent do. It's been pointed out to me that there were some manias that really didn't result in a horrible bust, so relatively obscure examples. For example, there were three railway manias in England during the 19th century, and the second one really didn't end in much of a bust, but the other nine or 10 ones that you can easily name did. There's no question in my mind that Bitcoin is a mania. The question is why do I say that? Because they fit Mackay's descriptions. The Mackay description of a mania, as well as what we all observed during the housing crisis, during the tech bubble of the late 90s, were four things. The first thing that you say is that speculation becomes topic A. When everybody starts talking about a given investment at a party or when they meet casually, that is a bubble. When you see people who are quitting otherwise good jobs to trade assets, thinking they're going to become fabulously rich and never have to work again, that is a bubble. Then there are two other things, which are a little not as commonly observed, but are still characteristic, which are when skepticism is met with vehemence. I can remember several times during the late 1990s when I expressed skepticism about the tech bubble being basically told that I was an idiot if not seeing my parentage insulted. That sort of vehemence you're also seeing with Bitcoin. As well, people will get very angry at you if you express skepticism. You're an old fogey, you just don't get it. You don't get it or you just don't get it or five words that you hear very frequently at the top of a mania. Then finally, it's extreme predictions. Bitcoin's not going to go to 100,000. It'll go to 500,000 or a million or 10 million because don't you know they're not making any more of them? When you start hearing those sorts of extreme predictions, that's the fourth factor. We're seeing all four of those things right now with Bitcoin. I agree with your point. The only thing I would point out is, as you pointed out in the book, .com was a bubble. It blew up, but the internet lasted. Why can't Bitcoin blow up? The blockchain really does last. Does not seem like a lasting technology to you? Oh, absolutely. This is one of the central points of the financial section of the book, which is that bubble investors turn out to be capitalism's philanthropist. They wind up losing a lot of money in order to fund these technologies that last. There's no question that blockchain may turn out to be a very transformational technology in the way we do finance. It's just that the people who are investing in the Bitcoin-related companies probably aren't going to benefit. The best example of that I had in the fiber was WorldCom. The people who invested in WorldCom got taken to the cleaners, but the fiber that WorldCom laid still is something like 20% of today's submarine traffic capability. WorldCom and Gary Wittich, the guy who did the company, absolutely savaged his investors, but he was a real benefactor to society in the world at large. I agree with your point. I have no idea whether Bitcoin is worth 5,000 or 50,000. I don't have any idea whether it's worth somebody spending $69 for a non-fungible token or NFT that just happened. I used to collect comic books in 1960. Somebody just paid $3.25 million for the first Superman, actually one, the other day. Now you might say, what idiot is going to spend $3.25 million for a comic book, but somebody did. I'm very agnostic on prices. What I am excited about is blockchain is a long-term disruptive technology. I think it's going to last. I would pay very close attention to the Coinbase direct listing this week. That's going to be, depending on how that thing prices, that could force another whole new wave of investment in crypto because that thing is so big. We literally don't know what it's worth, $50 billion, $100 billion. It's literally don't know, but I'll give you an idea. If it goes at $50 billion, NASDAQ is currently valued at $25 billion. The New York Stock Exchange is ice with the entire organization around the New York Stock Exchange is $65 billion. Essentially, there's an exchange here. It's really an exchange, Coinbase, that is suddenly valued as much as the New York Stock Exchange and all the exchanges that are built around the NYSE. That's pretty amazing. I don't know if that's signs of a bubble or mania, but it's a sign that a lot of people think there's a lot of potential in blockchain technology in general. That's what I think people should pay attention to. Let me just move on. You mentioned the bubble path, the physiology, diagnostic signs. You had the four P's that I liked very much, the promoters, so you need something out there and talk about the new technology. You need participants, you need buyers, you need a press. One of the things Robert Shiller pointed out in Irrational Exuberance, another book that I got in the first three years going down the NYSE, I met Shiller. It came out in 2000, I think, Irrational Exuberance. I met him just after that. He pointed out that one of the common characteristics of mania was bubbles first started appearing when the press started appearing in the 1600s. He was very big, just as you were, pointing out the role of the press in helping promote these manias. Politicians, of course, getting involved various ways and either promoting them or changing the law. I don't have a question here, Bill. I just wanted everyone to realize what are the characteristics of bubbles? They need four things, the promoters, the participants, the press, and the politicians. Is there anything going to add to that at all? It's doing a little learning thing here for everyone who hasn't read it. Well, yeah. What I do is I have this medical, I'm a doctor, so I have this medical model of bubbles. We already talked about the underlying pathophysiology, which is the Minsky criteria, you know, credit and technology, be it financial or technological, to which I add two things, which are amnesia and particularly the fourth thing is the amnesia for traditional valuation criteria, which go down the drain during a bubble. Then there's the anatomy, and it is forced locuses of the anatomy, which you just mentioned. There's the promoters, the participants, the press, and the politicians. To me, the most fascinating thing in the book that I wrote about in the book were these promoters of the various schemes involved with the bubble, so starting with John Law, with the Mississippi company bubble, and then there was a guy in London named John Blunt, who was a real scoundrel, and then there was a man by the name of George Hudson, who basically built out a lot of the England's rail network, and a man named Samuel Insel in the 1920s, who built out the electrical utility infrastructure of a large part of the country, and both of these guys, both Hudson and Insel, left us with very valuable infrastructure, enormously valuable infrastructure, but they also became the capitalist heroes of their age, and eventually wound up almost going to jail for fraud, because of their fraudulent financial dealings. The lesson here is that whenever you see somebody lionized in the press as being the capitalist genius of their time, you have to really look out. We have two very recent examples of that, one of which is already blown up, which is Adam Newman with WeWork, who was this very charismatic guy who just went completely off the rails in terms of the way he managed WeWork, because he was so charismatic and got so little negative feedback, he went completely off the rails, and then of course the one who's still left standing is Elon Musk, who they wind up as a hero who will transform our transportation technology and other technologies as well, but he's also showing some very worrisome characterological signs that you often see with these people who are the recipients of large amounts of adulation in the press. Yeah, but he may be real. Honestly, the man has revived the space program. I grew up like you did in the 1960s. I'm a science fiction fan. I grew up with Arthur C. Clark and Isaac Asimov, and Arthur Clark wrote 2001 A Space Odyssey in 1968 and was about 2001 going to Venus. My generation grew up with the whole, where's my jetpack crowd? Like what happened? Where did the future go? And I mean, Musk has helped revive the space program. I mean, Thomas Edison was real. He was a real person. He had his own problem, but there was a Thomas Edison who really was a genius. So I agree. In terms of brain characteristics and maybe some mental disorders, he exhibits some characteristics, but so far he has remarkably delivered, and I'm very close to the SEC and I'm aware of how much agile that he's given the SEC. And I think he's obviously bent into securities loss with his comments on Twitter, but I think the guy is brilliant. And even if he stopped right now, his contributions would be significant. I don't know about the valuations of Tesla at all. I tend to be very diagnostic on those things, but I mean, you do admit genius does exist, right? Oh, absolutely. And I agree with every single thing you said. And I make that point in the book. George Hudson and Samuel Insel transformed England and the United States respectively in the way that we live. They were absolute geniuses, but they did not come to good ends because of the hubris that evolved in the course of doing all the wonderful things they did. So the question really is, does Elon Musk wind up like Samuel Insel, which was not a good ending. Insel actually wound up dying penniless in Paris. Or does he wind up like Thomas Edison, who will be remembered? I don't know the answer to that. I would not be surprised either way. Or Tesla himself, you know, look what happened to Tesla, he's a brilliant man and really essentially ended up with almost nothing. I want to move on because we've had some specific questions from the listeners and I want to try to address them. We've got a half an hour lesson. Folks, if you've got some questions, let me know. But I try to get to a couple of them. There's some very specific questions in general about investing. I don't know how much you want to take them, but I want to do something I'm very interested in, which is what should we be advising people to be doing now? I'm obviously a Jack local disciple and I spend a lot of time ETFs and index investing in general. Do you feel, in my view, ETFs and index investing have generally triumphed? It is widely known now that almost all active management is not successful over long periods of time. Not that there isn't I know Jack would always correct me. It's not that there isn't any. We have very good active investors at Vanguard and funds, but they're rare and it's hard to find them and they cost too much. So with that said, how do you feel about the progress of, a lack of a better word, the Jack Bogle ideology, the keeping costs low, generally index funds? Do you feel that that is winning the day compared to say 20 years ago? Very, very slowly. And what I worry about is that the learning curve may be shallower than the birth rate. I see it happening and I certainly walk into a Bogleheads conference and you think that everybody has got religion and is doing things right and within the confines of a Bogleheads meeting, yes, that's very true. But when I walk out into the wider world and I talk to people about investing, my sampling shows a very low incidence of Bogleheads. You know, for every person that I meet that's read Bogle or Rick Ferrier, Larry Swedrow, you know, I mean 50, 100 who are still listening to their stock broker. Right. Well, isn't this because literacy in general is not very good? Financial isn't very good. I mean, the education system is failing us. I mean, what really disturbs me, I mean, you know, I belong to a skeptical inquire, you know, group and you're not taught critical anymore. Critical thinking in science, critical thinking, inductive reasoning, you're not taught. Why would you be taught financial literacy? Like what's the Federal Reserve? What's the stock and what's the bond? It's people come out of high school, it's shocking how little they know. I graduated in 64. I had not a single course on finance. I learned how to type. I learned a little mathematics, trigonometry and geometry, a little science, a little history, but you know, I literally did not have to balance a checkbook when I was 18. So shocking that this happens. Yeah, no, it's not shocking at all. There's that, you know, the fact that very good at critical thinking. Of course, you know, Europeans and Asians are even more enamored of active investing than we are here in this country. There's almost, there's very little of an indexing community outside of the United States Navy and Canada. So there's that. But there's a more basic factor involved here, which is how compelling are the narratives? What my book is really about aside from Disquisition on Human Nature is it's also a story of compelling narratives. Well, so why, I'm sorry to interrupt. This is a very important point. Why is active management a more compelling narrative than indexing? Oh, well, because it's because indexing is a very, very dull and non compelling narrative. It's invest in three different index funds, spend 15 minutes a year doing it and don't even, you know, don't think about it beyond that and go about and live your life. That's a very dull, uncompelling narrative. The real narrative is to turn on the financial media and watch Jim Cramer, you know, jump up and down on the desk in a gorilla suit and go boo-yah. That is what compels people or to hear a corporate executive come and talk about what a great company he has or to hear a listen to a strategist, a market strategist from a large bank talk about where he thinks the market is going in the next six months. That's much more compelling than buy three funds and rebalance it once a year and forget about it. It's just that, you know, the Boglehead narrative is so dull. Now where the Boglehead narrative wins, of course, is on the data. But as we've already talked about, narrative always trumps Trump's data. Yeah, it's funny. I spend a lot of time with the academic community. And of course, the academic community has a very dim view of the active management community that call them out. We know the numbers and data. I cover the SPIVA study. They're out twice a year, which is S&P. But that's something I can get on the air every year, twice a year. So the academic looks down on the actively management community and the active management community despises the academic community because they call them out on it. They think they're a bunch of eggheads. And the academic community also somewhat looks down on financial press because they feel that's us folks. That's me. We are too complicit in going along with the active management narrative, which is also you bring up in your book as well. So there's a lot of compelling, there's a lot of competing forces that are going on here. I will tell you, I'm afraid I don't agree with you with your idea that indexing is not winning. I was a proponent of ETS from 1997 and time I became and I've seen nothing but victory indexing forces. I know people in the act. I'm close to this community, the active management community. They're terrified. They are really worried that indexing is sweeping the world. So I've agreed everything you said, but I really think the bogelheads are winning. And the active management community is terrified and you see it in their responses in the last 10 years. Old fogies coming out and saying, oh, wait till this ETS blow up because there's not enough of the underlying stuff out there. It's all going to blow up. It's all a lot of nonsense. It hasn't, it hasn't happened yet. Saying, oh, this is like communism. It's like brainless thinking. People know what high costs are. People have better understanding. The whole fun community is moving towards ETS. They're moving towards lower costs. So am I crazy, Bill? I mean, did anything I said make any sense there? Don't you? No, no, no. I agree with you. And remember when you asked the question initially, I said, yes, the bogelheads are winning. But what I'm saying is they're winning very, very slowly. It's a glacial process. And it could be that my sampling of people is skewed in the sense that I'm talking to relatively ordinary people. But when I, you know, just my acquaintances, you know, to the extent that anybody who lives in Portland is ordinary, I suppose. But what I'm getting at is that what I guess I'm trying to say is that the people who really matter, yes, are the people who are in the HR departments who are picking the funds. They're picking Vanguard funds. It's true. They're picking, you know, low cost index funds. Now, almost anybody in any kind of a decent, you know, let me, let me phrase it differently. 20 years ago, it was very hard to find a decent 401k plan. Now, you look at most 401k plans, most 401k plans have very good low cost choices. So that, so the battle is being one, I think at that very high level. But when you ask the average person on the street about indexing and you ask them about finance, to them, finance is the guy on the TV who's picking stocks and it's their broker. It's not, it's not the wisdom of Jack Bogle. Yeah. Let me just move on here a bit and talk about the three fund portfolio, because people ask me all the time what, you know, what portfolio would I find a compelling? And I said, you know, investing should be simple. It shouldn't be that hard. And I always bring up the three fund, the Bogle has three fund portfolio book, which is basically some combination of total stock, total bond and international. I'm wondering if you feel that still is a valid look. And what I'd love to do is I constantly get people who send me 20 portfolios, very impressive. And many of them are indexing. They're not quite crazy. And they say, what do you think of this? And I say, well, this is very interesting. But I wonder how your 20 fund portfolio would stack up against the Bogle had three fund portfolio. And obviously it depends on the mix of the three fund portfolio. But even if you just take, you know, 60, 20, 20 or 50, you know, 30, 20, some combination, I wonder, and maybe Rick, you can answer this if we ever did anything that stacks up that three fund portfolio against a really comprehensive portfolio. My point is, I think you can show simplicity would work. I think that's refund portfolio. And again, it depends how you slice it up, would probably perform as well as anybody's, you know, decent, broad portfolio that 20 funds in it. Any thoughts about that? Well, yeah. First of all, let me, I would say one thing it's really important here, which is it really doesn't matter whether you have a 20 fund portfolio or a three fund portfolio, because in the end, what is far more important than one of the, you've got, you know, 20 funds, sliced and dice, all these different ways or three simple three fund portfolio. What matters more is that you stick to whatever your discipline is, stick to whatever your allocation is. That is far more, that is far more important than what your precise allocation is. And that's really what you should be training to do is to have a portfolio that you can stick with through thin and thin. Now, the second thing that I want to say is that I'm a big fan of the three fund portfolio, and it has done particularly well over the past 15 or 20 years, because this has been a particularly bad period for pretty much every other asset class you'd want to look at, whether it's value stocks or small stocks, or more of a weight to foreign stocks. If you did those things, you're not going to do as well as you would have done with three fund portfolio. I'm not sure that that's going to be true going forward. But again, that's angels on the head of a pin. What's far more important is that you pick an allocation. Now, there's something that in my mind may even be better than a three fund portfolio, and that's a one fund portfolio. Okay, if you've got a good target date fund in your 401k, that's really all you need. All right. And the advantage of a three of a one fund portfolio is because you're not going to see the international or the foreign stock part of that portfolio get horribly creamed. It won't be as visible, even though you own it when you own a target date fund. You're not going to see that in the pricing. You're not going to see that, oh my God, one of my components lost 55% over the Australian 15 month period, as has happened a couple of times in the past couple of decades. Yeah, I'll give me one. Vanguard Wellington. If I, people ask me all the time, if I had to one fund, I'd say that's a hard one, but I'd pick Vanguard Wellington myself. I agree with that. Wellington is the one non-indexed fund that I do recommend happily to people. Yeah. Or well, or well-leaved. Yeah, just move on. In terms of factors, there's been a lot of debate about what factors matter in Fama French models. And I've had a lot of discussion with other people about this. Is there any evidence that you should continue to have a value small cap tilt to your portfolio, or does that matter at all? It certainly hasn't worked in the last decade, but I'm just asking generically, does the factor debate matter to you at all? Well, it matters to me because that's how we invest. We are factor loaded. And we're quite happy with our results over the past 20 years. We were extremely happy with our results from 2000 to 2010, not so happy with our results in the past 10 years. Over the past 20 years, we're quite happy with our results. But that's the hard part. In other words, we do believe that there is a premium to investing, certainly in value stocks, maybe even to small stocks, although that's less certain. But that premium, if there is a premium, doesn't come for free. That premium comes at a cost, which is a period like the past 10 years. I'm not going to get into the weeds about whether value stocks have gotten much cheaper than growth stocks have, I think that they have. And I continue to believe that. But there are no certainties in investing. I could easily be wrong. But if I had to bet one way or the other, I would bet that over the next 10 or 20 years, value stocks will outperform growth stocks. But I have no certainty about that. Well, if you believe in reversion to the mean, that would certainly make some sense. And we've seen that recently, with small cap value being the biggest outperformer this year. I want to hit you on, we've got another 20 minutes left. I want to hit you on six or seven questions to viewers, listeners are writing in. Keep the answers relatively short so I can get a number of questions in. Here's one that I think is a good one. Why is it so many institutional investors, endowments and foundations in particular, continue to be such firm believers in alternatives and active management, even though they know or should know the evidence on all of this? Two reasons to be very fast. Number one is they are facing horrible constraints in terms of traditional assets. So if every day playing vanilla stocks and bonds aren't going to enable you to fund your participants' liabilities or your spending, then gosh, we should try something else. And that's something else's alternatives. And then the second reason is consultants. There's an entire consultant industry out there whose rice bowl is basically shouldering responsibility when things go bad. So the consultant industry is the consultant is the person you blame when things head south. And a consultant isn't going to have a very good, make a very good living if he recommends a three fund indexed portfolio. Yeah, that's a very good answer. I completely agree with that. Let me move on. The current Bill Miller of the day is Kathy Wood over at Ark Investing. She has attracted in nine days $500 million to her space ETF, even though she has almost nothing to buy there and it's got here, it's considered a space investment. But let me just ask you, any particular thoughts on Kathy Wood is the new current superstar? Well, if you know anything about mutual fund history, she's an easily recognizable type. She's the superstar who makes 300 or 400 percent over a couple of year period and then flames out by favorite was Ryan Jacob, which is an interesting story. Ryan Jacob ran the internet fund back in the late 90s and then he switched to the Ryan, excuse me, the Jacob internet fund, I think it was after that. And that fund posted returns of I think 300 percent one year, 200 percent the next year, and then proceeded to fall in price by 95 percent between 2000 and 2002. Now, what's interesting is that fund is still around. And if you string together all of his results, he actually beats the S&P 500. But I don't think there are any sentient beings in this quadrant of the galaxy that actually held on with him for 22 years or 23 years. All right. And so he's a perfect example. So do I think that Kathy Woods portfolios are going to crash and burn? I think it's highly likely because, you know, you could name not just Ryan Jacobs, but Garrett Van Wagoner, Helen Young Hayes, Bill Miller, all people who did very well for a very short, relatively short period of time, except Bill Miller, who did well for 15 years and then imploded. That's the history. Yeah. I mean, I think that's a great point. The first conversation I had ever had with that's exactly what he said to me in 1997. And it was about Bill Miller. He said he's a very decent fellow, but you understand how rare they are. So in a sense, I hate bringing up the somebody's going to be a superstar just by the sheer numbers of people that are out there picking stocks. Somebody's going to hit it right. And so we're going to anoint them as geniuses, even when, as the academics would say, it's a statistical probability that someone is going someone's going to be correct. So I always go back and forth between, that doesn't, should we ignore anybody that's successful? No, I would say you're just a statistical anomaly. Therefore, you're not important. I don't think so. But I think people should be very aware of the point that you're making. Let me interrupt and just add one fast thing, which is that, you know, if you're going to run a stock picking, enter a stock picking contest, like the ones that get thrown at the high school level, you don't invest in the S&P 500. You pick the hairiest, riskiest tech stocks you can find and you hope that you hit it lucky. That's how you win that contest. And it's the same thing with superstar fund managers. That's what they do. They have very concentrated portfolios in very hot areas. And that is a recipe in the long term for failure. By the way, I forgot to ask you, what do you want? I know that's, I don't want to be personal too much, but people always ask me the question. And I'm always amazed how rarely anybody ever asks people in private what actually do you own? I've owned about a dozen funds. They're all Vanguard funds and almost all index funds. But I tried paring it down over the years and I'm getting better at it. But I don't know what generically what do you own? Well, on the bond side, it's very simple. I own pretty much almost exclusively treasuries with a bit of munis in my taxable portfolio. And on the stock side, I use Vanguard for total stock market or large market in the stock space. And for the small and value tilt, I use Dimensional. Yeah, wonderful organization. I think very highly of Dimensional. There's another organization that's transitioning to an ETF platform. And obviously, Eugene Fama there on the board, a big thing. Let me get to some more specific questions here. There are actually people that actually want your investment advice here. You asked Bill about buying corporate bonds through ETFs. I understand he said not to do that. Is there a specific recommendation? There seems to be a lot of interest in bonds here. Well, I don't like corporate bonds in general. And this is, I guess, where I park company with Jack Bogle because what you're doing is you're getting extra yield, but you're doing it by taking equity like risk. And I'm a big believer in having a risky part of the portfolio, which is long-term and that a riskless part of the portfolio is safe. If you invested in corporate bonds, for example, in 2008, you had the experience of watching what you thought was a safe asset lose five or 10 or 15% of its capital value. And that's the money you're going to live on when you lose your job. That's the money you're going to use to buy stocks, the fire sale. And it is very discouraging to see that head south during a real financial crisis. And not overly fond on top of that of ETFs because of the spreads that open up. Now, you can have this, there's this philosophical argument is what's the real price? Is the real price, the open-end fund price at the end of the day, or is the real price the ETF price? Because quite a gap can open up between those two prices. But there's no question that the open-end price functions better. So if you're going to own corporate bonds in a fund, you're probably better off in an open-end fund. In open-end fund? Correct. Not as opposed to a ETF, yeah. And I'm not a big, as I said, I'm not a big believer in owning corporate bonds anyway. So you, in your personal fund and your tax account, you own all treasuries? Treasuries and a bit of munis, yeah. Okay. And you don't, it's not that you don't like corporate bonds. You don't like corporate bonds in general. Some people don't like bond funds themselves because they keep rolling over and having new bonds. And there's a lot of people come on are owning individual bonds, whether they're corporate bonds or treasuries or munis. You're not making that distinction between the funds versus owning them individually. You don't like corporate bonds in general. In general. But again, you've asked another question, which is what about owning individual corporates versus owning a corporate bond fund? And owning individual corporates is not a game that individual investors should play. Those are relatively opaque, marked, very high spreads. Leave that to the person at the fund company who knows what they're doing. Yeah. Some questions on international investing. I remember in the Jack in 2006, I actually called and said, I'll show you mine if you show me yours, tell me what you own. And he declined to do that. I think his son ran a hedge fund at the time and he had some money in the hedge fund with somebody made it very clear. Largely, it was total stock and total bond. And I was surprised he didn't seem very big on international investing. I understand he kind of changed that as time went on. How do you feel about international investing right now as a percentage of the portfolio? Where does it fit in? And if you can give me a percentage, maybe that's tying you down too much, but should it be 10%, 20% or 20%? Well, here's the way I look at it, which is that very, very roughly, and I haven't looked at it recently, I'll admit, the world stock market is roughly half foreign and half U.S., all right? So efficient markets would tell you that's about what you should be. You should have an equal amount of the two. Now, having said that, there are good reasons to tilt toward the U.S. Number one is especially in a sheltered account, you lose the foreign tax advantage that you have by owning it in a taxable account. So that's number one. Number two, you're going to be spending U.S. dollars in your retirement unless you're moving to Europe and you'll be spending euros. So you want to take the currency risk, a little bit of that currency risk out. So you should certainly tilt more heavily towards U.S. stocks. So if your portfolio is 50-50, there's nothing wrong with being 30-20 or 35-15. In other words, my set point is somewhere between 30 and 40% of your stock portfolio being foreign. Do you have any problem with, for example, China where some viewers call in and say, for every Alibaba that's supposedly privately owned, a very large part of the Chinese stock market is largely, particularly the older school industrial banks, largely controlled by the government. Nominally, they may seem private, but in fact, the government controls them. Does that figure into your calculation? Does political systems matter even when China has capitalistic characteristics? Where does that fit in, the political situation in terms of investing? Well, Chinese equity has a much, much bigger problem than what you just talked about, which is dilution. And all you have to do is step back and look at things from the Chinese market for 50,000 feet. And what you see is that over the past 28 years or so that the data has been kept, the return on Chinese stocks in US dollars has been paltry a couple of percent at most. And that's only been very recently that it's actually nudged into positive nominal territory with the results of the past couple of years. And the reason for that is equity dilution. It doesn't do you any good at all if an economy is growing at 8% or 10% a year if the stock pool is being diluted at 20% per year, which is what's happening in China. To give you the opposite example of a very long term, the Swedish market has had about the highest returns over the past 120 years of any developed market. Why is that? Because the Swedes don't dilute their stock pool. So that's a good reason to be wary of emerging markets. And it is a problem with emerging markets index funds, because they are now very heavily weighted towards China. And I might add parenthetically, it's why I prefer DFA's emerging markets funds to Vanguard funds, because they're less exposed to China than the Vanguard fund is. Yeah, that's a very good point. A couple of more specific questions. We had somebody, several people asked about insurance. A couple people asked about long term care and life insurance policies. I don't know if you want to comment on that, feel strongly about that. I had a couple of questions on annuities in general. I know annuities have changed in the last 10 years, but any thoughts on any of this? Yeah, I'm going to pass on long term care insurance. That is just well beyond my field of expertise. My strategy for long-term care insurance is to acquire enough assets so that you don't need it. And I have to admit, I don't have a lot of advice to offer to the person who can't do that. And then your second question is annuities. I have nothing against fixed immediate annuities. The simplest, cheapest possible product, the SPIA, single premium immediate annuity, is a fine product with one caveat, which is don't even think about buying one until you figured out how you're going to delay social security until 70, because that is effectively the cheapest annuity and the best annuity that money can buy. Yeah, so rather than maximum security, well full social security, 66 years and four months, right? It depends upon your age, yeah. Yeah, and so if you stay till 70, you get about 30% more, right? I believe so. Per year. Somebody at 66 and four months would get $3,000 a month would get 4,000 a state till 70 I think. Yeah, in other words, if you take $100,000 to cover your residual living expenses between the time you're 66 and four months in age 70, that is the same as buying an annuity that not only yields close to 8% or about 8%, but is also an inflation protected annuity, which you can't buy for Weber money now anywhere else. Yeah, and of course, it all depends on your guessing how long you're going to live. I mean, if you're only going to, if you think you're going to die at 73, obviously getting. And your spouse, in other words, it's a joint, it's a joint problem. So if you're convinced that both you and your spouse are going to be pushing up the days, he's long before your time, then yes, don't buy, don't do that. But for 90% of people, it's a good choice. We only have two or three minutes and I pressed everyone and we get out on time. But let me just ask you about the debate about the 6040 portfolio, which never made a lot of sense to me particularly, it seems to be under assault for the obvious reason we're all living a lot longer and bonds aren't returning much, but you give us two minutes on that whole debate, the 6040 portfolio, is that even useful to discuss anymore? It's still a thing. I have nothing wrong. I have no problem with the 6040 portfolio. I mean, it really depends upon your own personal circumstances, in particular your burn rate. If you're retiring at age 60 and you've got a 5% burn rate, a 6040 portfolio may very well put you in a bad place if you have a bad initial sequence. On the other hand, if your burn rate is 2% or 3%, it almost doesn't matter what your asset allocation is as long as you have at least a reasonable amount of money in stocks. But I mean, one thing I might add is that you hear this every five years, the 6040 portfolio was dead and I've heard that in one form or another for the past 30 years, it's wrong. Yeah, yeah, I agree. Folks, it is precisely 2 o'clock. This has been wonderful, stimulating. It's a great honor to be with the Bogleheads. I hope to be back with you again. And Bill, thank you so much for joining us. I've been a great admirer of your work for many, many years. Rick Ferry is back with us and Rick, I'm an admirer of your work too and I really would like, I would get on the air, the Boglehead 3 portfolio and I'd like to talk to you about it versus a wider portfolio because I think that's a useful way of educating people more about the value of it. Part of the problem is, and I think this goes to Bill's point about neuropsychology, is people think if I have 20 funds that this activates my brain place to dope me more than three funds. So it's, I think Bill's right. There's nothing wrong with 20 funds, but do you really need it? Well, I don't know, but I feel more like I'm more important or I'm activating my brain cells more if I have 20 funds instead of three funds. And if we can show them, here's your 20 funds since 1999, and here's your three funds since 1999. I think that would go a long way towards telling people, all right, calm down. You don't need, really don't need 20 funds. So maybe you... Yeah, what you're talking about, psychologists would call that a call 20 fund portfolio, a revolution of control. Thank you. Okay, maybe we can collaborate and do something on that. Well, thank you, and simplicity is the greatest genius, correct? Make something that's complicated and make it simple and that's a greater genius than having 20 funds in a portfolio. But thank you, Bob and Bill. I mean, that was a fascinating discussion. I mean, everybody agrees that was listening to Guhaan for a couple more hours. So greatly appreciate both of you being on today. A wonderful discussion. And we hope everyone who joined today enjoyed this presentation. It was recorded and it will be available on bogelheads.com and on the bogelcenter.net website. Our next bogelhead speaker event will be in May with the guest to be announced soon. So thanks for joining us and see you next time. And thanks, Jim, for hosting this and went great.