 Our distinguished guest of honor is the founder of the Vanguard Group and president of the Vanguard's Global Financial and Markets Research Center. He created Vanguard in 1974 and served as chairman and chief executive officer until 1996, and then as senior chairman until 2000. He entered the investment field immediately following his graduation from Princeton University, Magna Cum Laude in economics in 1951. In 2004, time magazine named Mr. Mogo as one of the world's most powerful and influential people, an institutional investor presented him with his Lifetime Achievement Award in 1999. Fortune designated him as one of the investing industries for giants of the 20th industry. In the same year, he received the Woodrow Wilson Award from Princeton University for Distinguished Achievement and the Nation Service. In 1997, he was named one of the financial leaders of the 20th century in leadership and financial services. In 1998, Mr. Mogo was presented the award for professional excellence from the Association for Investment Management and Research, and in 1999, he was inducted into the Hall of Fame for the Fixed Income Security Analysis Society. About this at all is honors and achievements. We'd be out of time, so without further ado, I'll dispense with that and ask you to please welcome our very special guest of honor, Mr. Jack Mogo. That says it all. It's so nice to be with all of you. And so honored by your trust in me and your confidence in me and Fortune Vanguard too and just a terrific pleasure to be able to come and talk to all of you today. I will embarrass about all those awards that this program has gotten many recently. But we'll hang on and press on regardless, I guess. I'm happy you'll all be familiar with that phrase and I'll probably take up pretty much the hour. I don't have time for this and we were busy putting it all together but I'm sure that we'll use a lot of time and I presume that's what you want. So we'll do our best. You all honor me by your presence here this morning and yet another gathering of the Bogo hands is obviously I'm glad to be here with my 16th anniversary of a heart transplant coming up. Honestly, I'd be glad to be anywhere this morning. I'm pleased to say my long time in Sidekick so well known to many of you. Kevin Laughlin is here this morning. And are you back there, Kev, somewhere? Mainstream, the knowledge of your career path. There aren't four people at the Bogo Financial Market Research Center and I don't think I'm going to be replaced when I go. The center is actually, we supported Kevin to his ticket years. So he's done gratis like Magnolan who's here with me this morning at the head table who's his Kevin's replacement and Mike's doing a wonderful job. He started around June and June 1st and so a very short learning curve has already become especially important for our tiny research unit along with I don't know if they're going to be here now. She'll be here, many of you know her. Mike, my longtime assistant for 25 years and Sarah Hoffman who works with Emily and that's the Bogo Financial Market Research Center. It's in a way encouraging to see all the new bases out in the audience this morning. I understand there are 60 of you or so that are here for the first time and I guess I'm a little disappointed that 60 people there apparently didn't want to come back again. I do salute you for your courage and a special welcome for Mel and also Tim Dempsey who I think have been at all nine previous Bogo head gatherings and I'm closely involved with my Gail Cox who has done eight. I've already seen Gail this morning and we have a number of Bogo heads who are on your program as you know and Ed Tower already spoke this morning and I didn't get a chance to get briefed on what he said. So what I said, lots in the face of anything you're doing. Well, we'll work that out in two sessions and you're going to hear Bill Schulte and Bill Bernstein, Rick Berry, who just wrote a wonderful article for us online except being interviewed with Christine Benz from Morningstar, which is something I just completed and Laura, Dogu and Alan Roth is here and Mel Bindow I think they're all here and also I think he's here raise your hand his first visit is my friend Eric Schurter who's the former editor of Money is Eric here Eric who's like we had to cancel the license Well my heck with it So a lot of other people can be seeing you on the podium here we're going to do a little break and then a Q&A and if this ends prematurely I'm going to hang on to us by that so we're going to start the Q&A before it's over at the end before we have a break and then I'll be with you for lunch and I've brought some books that we're just going to give away I'll let Mel or somebody work out who's going to get them and I've got 10 copies you can count on it and 15 copies of the paperback edition of Enough which has a board by Bill Clinton and introduction by Tom Peters management group and so we'll be able to do a sign-in after lunch but I'm going to retreat and probably take a nap and I will be with you at the time part later on in the afternoon and then as if you as if you haven't had enough of me and I'll be with Bill Bernstein in the traditional fireside chat and tomorrow morning I always look forward to working with Bill and he and I have many many ideas similar not identical and few few differences along the way and so here we are and it's hard to believe it's 61 years um I'm sorry 51 years since my first heart attack in 1960 um on tennis court bearing trade club I did win and coming up of course the anniversary of kind of a hard summer some of you know Jason's wife's interview and stupidly broke four ribs and ripped my left side at the toe but you know time heals all wounds and finally you get over it that's about that I do notice at this stage in my life that I kind of divide it into two phases much more frequent times my energy is summoning me and the most less frequent times when I had to summon my energy and I had to do that before my heart transplant I had to summon my energy after my tumble but it's all back now and now my energy is summoning me to be with you this morning it's been a very busy year for me I have another book that came out just after our last meeting or at the same time actually over a meeting a year ago so I wrote those couple of books here to be signed or whatever you'd like to say I've done a bunch of op-eds as many of you know for the Wall Street Journal The New York Times Financial Times they periodically ask me what I'm just sending in and sometimes I do and I expected to do even more of that in 2012 I've also been very busy on the interview seeing as some of you know television demands seem almost insatiable I think I've done six or eight of them in the last two or three weeks and especially in this age of market turbulence I do observe, whatever it's worth they call me much more often in down markets than in up markets I don't know what to say about that it's just so shiny all of this stuff is on my e-blog at johncvogel.com I guess www.JohnCVogel.com and it doesn't get a lot of traffic I don't think but many minutes away or anything you want to see that you missed is right there and Michael's doing a terrific job keeping that posted current you probably wonder why it's called an e-blog not a blog it's because e-blog is an anti-ramp above think about it also during this year I celebrated my 60th year in Vaingor on July 5th, 2011 so that anniversary gives me kind of a nice segue into Vaingor today which is the first part of this talk and on that date this last summer I wrote a two-page demo to our veteran crew members who were 15 years or more about 2,000 strong about 1,000 strong about 220 of them so I send my stuff out to them and it seems worth doing in a memo entitled after 60 years of past service looking into the future and that's also on my e-blog and rather than welling in the past however I thought really much point to that I wanted to look ahead to Vaingor's 100th anniversary which will take place on December 28th 2028 that will be the 100th anniversary of our first one, the Wellingham Club and in this memo to the crew I attached tech service to my speech way back in 1992 which was entitled Vaingor the first 100 years prematurely of course and I also attached predicting that we'd still be around 100 years to now very few corporations are but one of them happened to be IBM and they in June published a nice pamphlet two or three pages in the Wall Street Journal entitled IBM at 100 published on their 100th anniversary describing a huge change in the world we live in and for IBM to expand it by Thomas J. Watson way back in 1911 and closing with a conviction that a company can and must change everything about itself everything about it except itself about itself except its beliefs and the final words in the IBM piece are ever onward and so it is with Vaingor as we look ahead to that except that I end my memo with not ever onward but of course pressed on regardless and as I look at Vaingor today those founding beliefs are pretty much intact simple investment strategies and applied to the core of our mission and the basic human values of fairness to our client owners that's you representing them all here today and respect for one another to serve our crew or exponential growth and your ability to work in a nice human way I have a statement that I made many years ago when I was running the place that we have a lot of crew members posted on our little cubicles which is for God's sake let's always keep Vaingor out of place where judgment has at least a fighting chance to triumph over the process it's very difficult to do when you can't get big everybody understand so we fight against and I fight against wherever I can actually spend an hour each award for excellence winners probably six or eight every quarter or ten and so I try to do what I can my small way to keep Vaingor seeing human values I've always enjoyed and helped by it's not to say that I agree we'll talk a little bit about this morning with all of Vaingor's policies and operating decisions I couldn't possibly agree with everything but I try and speak out I don't get much complaint about it at least to my face but I do understand as I think everybody explains that our management team has to make tough choices taking into account all the probabilities the consequences and I'm free of those responses but I don't have to worry about it so it's probably a good thing that I am and we have a defined management team some of you will hear about Sarah Henn my name went out quite well and I'm pretty sure you will be impressed so let's then go through a look at Vaingor today by going to our first slide our assets have grown enormously 500 times over since 1988 actually it's more than that it's a thousand times over if you go back to 1974 when we started 1.4 billion of assets in our 1.6 trillion expenses also are sort of 350 times but the point is that 2 points in this chart one if you're growing extremely rapidly you can afford to spend a lot of money and still make sure that the growth of expenses which are up 350 times I think I said that is less than the growth of assets and hence our expense ratio has come down way way way down and continues to devil our competitors the you can see the number of crew members there on the chart and we've done a great job on that in fact our 12,000 crew members today are almost the exact same number we had when Vaingor hit 800 billion I guess in about 2002 or 2003 so that's a little, it's been a great job that we've done partly economies of scale, which are natural partly a really good job Paul Heller, Morgan, Bobby, Stefano using technology a lot of it's pretty impersonal but that's the way it has to be done today and I think people are getting more and more used to it the theory of compounding I've talked a lot about and if you want to go to the next chart Michael how big will Vaingor be in the future and we grew in the early years there's 25 years 25% a year more growth rate in the last 11 years we've grown a 10% growth rate and even if we grow it say a 7% rate by 2025 it'll be $4.1 trillion and 7% is probably not reasonable providing we don't have the apocalypse or something like that because these funds will have of course an internal rate of return and diminish though it may be from the past so we're going to get very big and I tried when I was here and you know the speech I gave all those years ago was called the tyranny of compounding to be very conscious of how numbers grow as you grow in size and at any kind of reasonable growth rate and so I always it was in favor of organic growth letting our record and service speak for themselves and not forcing growth so you can imagine I'm a little skeptical about when he spent van guarding and with one caveat it's one slogan that I one turn of the English language that Merrill Lynch cannot use you're slow so I'm still a small but beautiful guy small and beautiful guy but nice that in the faces of enormous growth we picked at the very beginning and I'll talk much more about this later on an investment strategy that is basically scale indexing and does not have the problems of size for example a plant capital group that you can't run a tree and a half dollars on that management basis expected getting more significant so the problem is on the human side of the business and I think everybody at Van Guard is trying to deal with it to the extent we can make it still a personal place where everybody is respected so much better so there it is here it comes and measured I guess mostly by our share of these three assets and you can see it just goes up and up and up and I don't know what's going to stop it so I've observed in a couple of places these are long-term funds no these are full funds and the money market our long-term shares up around 16% or 17% and no one in this business ever has had a market share that low as they usually top out around 12-13 but even as that share grows I have to confess that I don't take any of the bread and I still love a good fight and so I'm particularly amused by this next comparison I won't throw it up I know and these are long-term assets that's 16.2% from 5.2% or actually up from 4% while Pidelity is just going down and they've lost market share year after year after year and I wonder what they're thinking you know we had a director to Pidelity who was a good friend of a Vanguard director and I was known as God in their boardroom and not as a compliment by the way it was like Ed Johnson saying what do you suppose that's going to do about this but it's an interesting competition between Pidelity and us because for them it's kind of war and bad feelings with me it's kind of a happy competition in which whoever offers the best products the lowest prices and the best service is going to win and I think that's what we're seeing on this chart and you can see their turn if you look carefully came right at the time that the bubble in the stock market first in 1999 was repeat and it's down 40% that's a big loss of market share 40% decline to 90% today and it's only a matter of time and it will be twice as big as they are in market share it's amazing and these are long-term assets you can see how much bigger we are on the money market the field has been the field is very quiet at the moment and when you take that into account and we're only, because that's the right word to use at $375 billion that hit them so it's fun and I like a bit of fight but it's not just Pidelity it's it's we're wearing the crown right now just from the industry as I mentioned we're a whole time buying market share and when you take it a landscape, a competitive landscape when Vanguard began we didn't do 74, it was easier to supply them making 80 data we'll do 74 shortly and we have time and you can see what's happened to those market shares the leaders in those days and you can see that just about everybody has lost in some cases a lot and you can see put them going from 4.2 to 0.6 that's at least them lost in market share and they earned every penny of it and capital group just slowed that way down it's actually shrinking at the moment it's the only significant one the only one that went up in market share that compared to Vanguard so the competitive landscape is saying, I think that indexing is popular that the demand is in the marketplace that the balance between bond funds and stock funds is much more oriented toward bonds and most people in the industry that's been a big help in the last decade our performance has been good we'll talk a little bit about that people trust Vanguard and I see this and that corresponds when I get literally every day and so at the moment how that growth is going to be interrupted and where the real competition is coming from there are a few big firms in this list C. Putnam Capital NeuroLinge BlackRock that's Merger and the rest of them Fidelity of course and then you go way down next firms probably really 3% or so and that has some implications I hope everybody at Vanguard is thinking about and we've also become much more attractive to large investors if you want to look at that George way back in 1992 I had this idea that we should let the competitors know there was no point in their cutting costs because we'd cut them further and so they're just going to lose and so we did what we call selective scale prices that's what I called it then back in 1992 when you put in larger amounts of money you got a lower expense ratio simply respecting and not a brilliant decision but simply reflecting the reality of pricing in this business and then it's a $100,000 account and probably has the same cost of us, maybe even a lower cost of us than a $2,000 account and then they were both paying pretty much the same expense ratio so we decided to do what was proper encourage the larger investors that were important to our being able to reduce overall expense ratios for everybody so this was a kind of low cost attracting 31% of our assets now in our annual shares speaks for itself but unfortunately the press doesn't seem to get it right, they think we're cutting costs for the annual shares we're not cutting costs, we're operating costs so when you reduce the cost of a certain group of funds you're raising them maybe immeasurably someone else because not a big gap doesn't change our revenues one penny or the other, I'll speak so it looks pretty good Vanguard growing and doing that can pretty much do the right things the key to our growth is of course the index funds and the driving force yes we did start the first index mutual funds there was a little controversy about this there were a number of global employees close on this point but there were a couple of letters to the Wall Street Journal implying that somehow I didn't really start the first index fund well there's anything that is clear and all this that is the first index fund period, the first index mutual fund no one argues with that they say other people had the ideas even I had some back in my senior thesis in 1951 talking about beating how hard it was to beat the index and one thing I want to mention to you because you get to a point in this life where all you have is your credibility and I thought some of those letters suggested I wasn't telling the whole truth about the other people that worked on this issue and the fact is I've been telling the truth about it, the whole truth and nothing about the truth since about 1995 or 6 when indexing started to get popular giving full credit to Jeremy Grantham who tried to do indexing and failed in 1971 and for his trouble it was awarded by Pensions of Investment Magazine the worst idea in years Pensions of Investment was described by Jeremy Grantham and I talked about guys I know personally like Bill Fausen, Aquaphone and well, Spargel they were pioneers in this area in a very sophisticated way I don't do it in a sophisticated way and other people that had come along the road and so we did start the first index fund and it's an open reminder that our crew in another context, totally relevant here sure the ideas are out there what I've said is ideas or a dime a dozen but implementation is everything and we didn't think about that implementation is everything so we did it, I'm not sure the landscape would be much different if we had members we've been second or third or fourth but the back of the matter is our recollection now we started the fund, I know we started the fund in 1975 and I think the first the second index mutual fund was started by I believe well, Spargel in 1982 that's a great idea nobody copies it for six years so I wrote to the journal editors did my piece with me which was cut markedly I sent it actually to the journal editor because I wanted some observation of our 30th anniversary and I got going a little bit late I just had the idea of writing this piece and I wrote it and got it off to them at that time I think maybe July August 28th or something and the date is August 31st with the other people and the underwriting took place and so I sent this piece the guys I know on the op-ed page and I said I want this to go on to the review it's too long for you guys so they looked at it and said well why don't you give it to us first so I sent it to almost 2,000 words and they just don't do 2,000 words op-ed so they said you can get it to 1,400 words we think we can use it so I wrote the sucker I cut it to 1,400 words and I sent it to somebody and doing that cutting reminded me of James Franco in 127 hours cutting off his arm that's what getting my own commentary is and they come back with some more edits we're now done with 1,000 words so it missed a lot but it kept a lot of sense of it and you know I had the option of saying no that's too much you're out so it wasn't as complete as I like it but I have the complete one on my website too so for whatever that's worth but I am sensitive to anyone saying anything except yes he did start the first index fund and nobody was in the first one to have the idea I freely concede that in 1952 1951 was the first chance of that so our strategies go far beyond the index fund and Gordon that's what I'm going to talk mostly about here index funds that go into like a virtual index funds and that's a description that people in our bond department do not like but the whole idea of some of the funds we consider active is to have them as much like an index as we can possibly make them when there isn't a suitable index around so index and share of equity fund assets and version giving rise to this great paradox the title of the speech I gave 5 or 6 or 8 years ago I can't remember the conversion is a great paradox even as active management reflected in IRR squares gets more and more like indexing so indexing gets more and more like active management and so I'm like what have they done to my song mom tied up in a plastic bag and turned it upside down and much of the growth of indexing you can see it there coming from exchange traded funds but indexing was 25% 24% of equity fund assets if you go back 5 years to think of the real importance of indexing and how it's taken over cash flows and index funds index mutual funds the last 5 years were $630 million and cash flow into actively managed equity funds was $7.6 million that's $630 to $7 or $7.5 that's a big difference and that impact is going to continue indexing it's going to be more important and people kind of don't recognize it more almost every day you see it in the financial analyst journals you see it in the economist newspaper you see it in a button when you come on there it's become an accepted thing you don't really have to explain it anymore but beyond that indexing our great strategy at the beginning I struggle for years and years to find the right words to describe it but I describe it as having funds that have relative predictability there must relative predictability to their categories and the idea is you can reduce behavioral problems for the investors jumping on the hottest if you kind of tie anchor your funds to a certain standard and have a high relative predictability so not pure indexing but virtual indexing which has high correlation with a target which has low turnover low cost of course very low cost and specific maturity standards in the case of a fund fund and it's also true I'll talk a little bit about this later on it's also true of our multi-manager strategy I've always liked the multi-manager strategy not because we can pick great managers because we can and I couldn't, I'm not cast any as per se and I think I've batted 510 which I will say it's probably better than Ted Williams 406 but not very good and I don't know if we're batted 510 or 490 now but conceptually it's going to be if you pick five managers of funds they're going to end up being pretty much average so when you go over to our market share we totally dominate the index fund market and there will be small factors so far ETS and that's a 14% active fund share now I want to talk a little bit about this idea correlations relative predictability so we can put this next chart up and show you here the correlation of our over on the far right the correlations of our funds in each category with their targets the index funds the correlation is 93 if you look at virtual index funds they're 98 and I'm surprised about 100 balance funds are 100 meaning we match the index very closely the virtual index funds are very high 93 the bottom funds usually explained by usually explained by small differences in maturity or strategy compared to the industry balance funds, welling and funds way up there with a 98 I think or 96 correlation in average balance funds are 99 and the actors even so with multi manager typically in balance and equity are 92% correlation and the idea is that don't have something that gets hot like Mr. Berkowitz has done 30% this year last year's hero happens all the time the morning star they do a while ago and you probably would stop picking managers every one of them turns out ultimately every one of them turns out to be the phrase I often use you think they're stars but they turn out to be comets lighting up the firmament for a moment they're burning out they're actually not drifting gently down I'm not a bad phrase myself I'm not so bad we do this with multi manager we do this with bond funds and give that we seek a low cost it's a perfect strategy because if your correlation is perfect you have lower cost you're going to win and so that's what it's all about and we continue to do that I'll talk a little bit later about some places where I'm not so sure we haven't lost sight of that centrality but it doesn't mean at any point having a hot manager good for a year, good for two years maybe good for ten but in the long run it doesn't work so well so we can I guess this is a repeat what do we got next there are we showing that did I just talk about that although there's some individual funds and you'll see Wellington there 96 was their correlation they're 96 amazing strategic equity 98 prime cap 93 and so you'll see those individual funds are very very tightly tied to their their targets and their best fit indexes and they win because of that column or they're over on the right low expenses this is not complicated and it looks little on a year to year basis these are annual expense ratios when they come down over the years there's all the difference in the world so we see that growing and see an active growing part portion of bank parts assets and you'll see what I call virtual and again they don't like that term they think they're active managers in terms of immunity bonds they are in their own way active managers we have very definite maturity standards very definite quality standards and they're not to be violated and they don't change all the time so in any event an active share is very very high it is dwindling half what it was in 1990 roughly half and the virtual share to about 82% these aren't foreign numbers or anything like that but just to give you an idea of the direction so the idea is not to disappoint or as subtitle of my 2005 book said the only way to guarantee your fair share stock market returns and it is so in all this the equity funds are kind of a wild card and did I do this here I guess we can do that here the only cost is this whole equation it's not the ability to pick great managers not me either as I said but it's about keeping cost in and you'll see things from Vanguard to give you those blue bars there the extent to which our 10 year performance outpaces those of our competitors and you can see we're 100% in the bond area 100% in the money market here almost 90% in the balanced area 61% in the stock area but the reality is we're there because we have low cost so if you look at stock funds we're below average manager ticker X cost just a little bit above average in bonds which I don't think is a material thing the other below average which means we have higher quality in balance funds money market funds pretty well and money market funds of course drop radically and that drop in the money market is simply because we've stayed with higher quality and I never regret that this is not a definitive chart this is a directional chart just the reality check so it's not a good idea to brag about our ability to pick great managers because when you see the 61% of the 100% of the 89% you're ignoring that most of our advantages in cost we had a guy that worked in our municipal department a senior person Jerry Jacobs who had a superb record he ran the intermediate term municipal bond fund he was hired away for many millions of dollars a year by Putnam and all of a sudden this top manager became a bond manager did he lose all his intelligence no he went to work for a municipal bond fund and charged 1.25% instead of 2.10 of 1% and there went his record I don't know why Putnam didn't examine this way they might have done a little bit better than there are problems there but in any event it's a very growing impact that is cost and it affects everything we do I now want to turn to ETS as such I mentioned that before give you a little presentation here I mentioned what are they done to my song this is the answer I'm holding forever and then when you look back on the history of exchange traded funds it's going to be probably the greatest marketing strategy of the first decade of the 21st century has it been the greatest investment strategy absolutely comes how can we have a great marketing strategy for its investors they won't figure it out but buying an ETF and holding it forever you will do just as well and if you do the total stock market if you buy the ETF and hold it as if you buy the regular fund when I came into this business my god you can get your money back on any given day this was 1951 I thought that was a miracle and now it's in any given second and it does hold that temptation to trade is used to trade so we see ETFs now coming in for a certain amount of attention New York Times had a headline the other day Volatility, my name is ETF signing ETFs particularly these triple double reverse lattes or whatever they are I hear people order me those things I don't know what they are but well double leverage wasn't enough so now it's triple leverage and going up it's not like I've got to get it going down and that's not the question I played a big role in the flash crash a couple of years ago it is playing a big role in these wild generations we get closing hours closing hours in the marketplace and it doesn't seem to be part of the high frequency trading syndrome but it will also be in the center of a number of frauds and more manipulations including that 2 billion lost taken by the United UBS of Switzerland including a Goldman Sachs partner who is doing something elizabeth which I can't remember and I'm sure a lot more he's done in the ETF area and I was struck the other day and I opened this one up for a second and I was waiting on our shopping or something on a Saturday morning on the car in front of me and here's what it said oh jeez she said he said what does that mean I don't know my idea is highest one index trader and of course the guy was driving a Jaguar that's the world we have and Vanguard has become a very strong entry in the ETF market I think in a better way as far as I can tell in a better way while our market share is creeping up and 12% we actually did 33% we won't put that creeping up from 4% to 12% in triple years it's pretty good or I'm sorry it's 5 years and that we're actually now doing 33% of all the cash flow on the ETFs so that's going to grow and grow and I just hope and I have no way of knowing this and you'll see that they'll be over there in a second and the guys will learn our ETF business and I want to let them know and introduce myself to them I hope to do a second and I hope they will be nice but I think deep down there honestly isn't the big difference between management's view and mine implementation and maybe different but nobody at Vanguard thinks trading ETFs for this kind of rapidity is a good idea you just can't believe that and so we try and avoid that yet there's a lot of volatility in what we do and what everybody else does you can see this turnover is unbelievable if you want to go there next time the pro shares will be 500 turns over at 17,669% a year an average holding period of 2.1 days spiders typically run around 10,000% a year and over short now that's popular and take a guess at what the market's going to do magnified by 3 10,000% a year and then the more speculative index the spiders the accused other ones that are hot periodically Brazil 2,146 holding period 12 days iShares emerging markets 2,500 spider gold shares 1,500 Kiva index more conservative than muslims 1,000% a year 36-day holding period Vanguard is obviously doing better than that but probably not a better suit made if we're doing it right for example our emerging markets index are at about 750% a year and that's the quarter whatever one wants to say of what the MSCI is 757% still an awful lot of turnover our total stock market is better but while the 300% a year that's better Navigate believes 20% turnover is pushing the envelope so I look at these things and I think what the hell but it raises the issue of his all this turnover good for investors and the number of Boglehead posts on this comment you've probably seen many of them saying that the idea that I have they don't fit any of these posts at our goal and that we want to be examining investor returns returns those investors are making in these various ETF categories compared to the returns the fund makes it's taken easy when the large capital ETF investing funds have produced obviously not a very good return over the last 10 years of 1.7% a year with the average investor and I'm sorry of 3.2% a year with the average investor in those funds is earned 1.7% so that's a cumulative loss over a decade of your capital despite all that trading in business small capital capital is 48% over a decade add your money loss to the index standard international development markets which you know about more about that later 91% of the capital gets lost and in individual countries it's 223.2 we didn't have emerging markets individual countries the international development was on the whole market and then we go to individual countries so people are betting on things like Brazil or Nepal or whatever else they are and you can say that 10% return is enormously different compounding 4% and the investor grows to 56% a very nice return I admit 14% it's fund earns and it's regular time weighted return 280% it's a huge gap we don't have these inverse and leveraged equity funds for 10 years so we just devoted 5 years and you can see they're not starting also very well emerging markets lost 20% of your capital inverse equity 7% and if we're looking at how good the people were picking the inverse times and if you stayed in that fund for 5 years you lost 56% of your capital you lost 56% compared to all of me if all of me is the right word 49% for the return by the fund in that period or that leverage so you just see this time weighted returns will come controversial investor returns, dollar weighted returns so uncontroversial and I first started talking about them we should have funds report them in the way back in 19 96 one of my first speeches after getting out of the hospital and everybody thought it was the dumbest idea they've ever heard because everybody knows what the fact is and if you want to look at the return the fund says here's what we earn you know in almost every case the investor earns less but less and if you look at standard mutual funds on ETS the gaps are there much much smaller so it's part of the business but we shouldn't, I don't think we should be in the business of taking advantage of people's shortcomings and behavioral problems so you've commented and that's an interesting subject but one of the reforms I would like to see is that all mutual funds actually be required to report the returns their investors are and not just the return well within our technological capability and when you see these gaps showing the next chart just so dramatic it was taking the right hand section of the chart and grabbed it and it's really quite startling some of these will start and so the ETS is getting more and more extreme it's good marketing and so it's very disruptive to the markets particularly these inverse equities leverage equities and we shall see but I don't quite what I see so far in addition to these specialty areas ETS has become the vehicle where you've got some amazing new investment idea you go to ETS rather than the regular fund group because the idea of ETS is a hot marketing idea and so you never probably hear people like Rafi 100 or Jeremy Segal's wisdom total dividend thing if they just did it in a conventional way so they do the ETS and they have the answers these fundamental index and let's go up and want to go to that and you can see Jeremy Segal is quoted as saying this is where the pernicans of the new age lies the rules of the heavens and it's all going to be different now and it's not and you can see in the blue that's Arnaud's thing it's much more volatile and produces a return a point different from the campaign card total stock market not much difference and that's a very short period of confidence in the differences it exists in a very small level and maybe a losing level will run because of these funds cost not just their expense ratios but because of the turnover it takes to do that and curiously enough I like that Jeremy Segal's wisdom tree one based on index the total amount of dividends paid so a big dividend pair would be larger on the list and if that was basically a total bomb and then total dividend fund is now 1% wisdom tree is total assets it's what it did 1% about 170 million they have 13 billion and they've got more things for trading currencies I have a list of I won't take your time to read but you look like you're reading a lunatics map of the world who wants to buy or sell to be in rupees okay but it's a stretch but many of them, if you took out of that chart over there the fact the Arnaud Rappie is significant more volatile and like 15% more volatile than stock market it really accounts for the entire difference so it's much value he's the greatest salesman since P.T. Barnum I think and he still believes it's working but I'm looking at this record so there we are an industry headed in the wrong direction my opinion that's a big growth part of the industry and investors have to get wise but in fact there's no trading there's no money in trading rapidly in the stock markets and eventually of course like the gamblers of Las Vegas they will not have no money left and so that will be the end of the ETF I'm saying not a little hyperbolicly but it just used properly in the right kind of funds held for the long term very diversified funds stock developed markets and we'll talk about that later it's okay that accounts for the 5% of the use of ETFs might be absolutely amazing and no one knows how to count that so let me talk now about first books and then some closing reflections on my light and times and I have copies of I think I've grown ten copies of don't count on if you flew here don't buy one don't come out and give it away so I'm barely able to figure it out I'll get rid of I've had 15 copies of paper backing up just fine for the airplane travelers and I'll sign them at lunch so I just thought it might be interesting to reflect on the books I don't know there has to be something terribly that would matter with me because I don't know anybody else in the industry except for Peter Lynch who has written one book or two and there may be other people but I don't know them someone direct me if I'm wrong so I'm wondering is an old expression everybody is out of step with me so maybe it's stupid but then even they now go back to 1993 and I'm downhill from there but they all do pretty well in particular common sense investing in a small book and the only way to guarantee your fair share is hot market continues to do extremely well even though it's now four years old we go by sales, we go by Amazon things, we go by comments they get great comments on Amazon mostly four and a half stars and he doesn't like your books on Amazon so it's very humbling to read that my favorite comment was this author has a real problem he writes more like a novelist than an economist and I thought well if that's my problem I'm feeling pretty good then someone wrote a book on mutual funds way back in a few years you never forget the nasty comments pretty quickly he said analysis, poor conclusions just what you'd expect just what you'd expect from an NBA I was heartened by the fact I didn't have an NBA and even that great big orange tone really did pretty well I can't tell you the numbers maybe 25,000 copies or something a business book sells about 5,000 and you know it's not Michael Lewis territory that I can assure you I'm feeling pretty good I wasn't allowed to make these things I feel pretty good about what I've written and the way I've written but I think they will stand someone wants to look out and get a picture of this whole group of books on the development of the financial industry the mutual fund industry in the great growth phase the end of the 20th to the end of the 20th century and sort of consolidating phrase phase begins thereafter I think they will get a good picture of what I was thinking and saying that as anybody really care about that I have absolutely no idea but I care about it and that's good enough for me I'm working on my next book and you've seen I think the original essay which was turned into a speech in the Museum of Financial History the book is titled the same as the speech Clash of Cultures, Investment Versus Speculation and I don't know I think Emily Gobi said that they're orange cover but then that's where we are but that will be coming now I had to I had to postpone it a little bit until February 28 but I had such a big setback my health and my ability to summon my energy for that matter will take a little longer I'm not really deeply into it yet but once I get through this thing today I'll be back to it pretty much for the time the rest of the year as much as I can I mentioned that first speech and I just want to give you this one example how much speculation has taken over since the detriment of our society and that is if you look at investment as we conventionally do capitalism, capital formation that's directing capital to its highest and best uses companies that are growing companies that are providing better products and services at lower and lower prices that's what investing in is every year the American financial system directs about 200 billion dollars into IPOs into additional mobile companies 200 billion how much is speculation if you take share turnover in the markets and multiply it by the price of shares it is 40 trillion dollars so that's 200 times by my knowledge of speculation and that's just the big ways for everybody except the croupiers and Wall Street they aren't too happy to be called croupiers they don't complain directly so that's going to be the first chapter second one dude very tender happy conspiracy between corporate managers fund managers there's been nothing for them at this the problems faced by what I call a dual agency society agents always have problems with those interests before their own whether it's money managers or corporations but now we have agents of agents and that is to say these corporations are not only individuals that would be the conventional agency but corporations that are controlled by corporations that represent individuals and that's institutional investors and mostly mutual funds the largest segment of that and these institutions own 70% of all the stock in America so this is a tremendous conflict of interest and many many other things arise from this dual agency society I'm going to try and think of a better term for that I'd like to turn happy conspiracy I used the title of silence as a fund before it was taken in silence in the lands it was an evil movie and I want to get into the implications of all this trading and all these agency problems into a lack of interest what about that about our failure to do any of that the same executive compensation or unwillingness to stand up and be countered by corporate political contributions what about America's great outrageous I know I'm not supposed to talk politics from now but I said it here it is I changed character to the mutual fund industry in ETF chapter index fund for investment or index fund congratulations I spent a lot of time talking about earlier a measurement system whether you're a manager, observant or not our retirement system the basic fundamental part of America making sure we don't have everybody on the lead when they retire and he's failing us and I have a lot of ideas for fixing that I have some simple investment advice and then chapter I'm really happy with I am working on this now is an example of what happens when one turns from investment to speculation and that is what happened in the case of welling and I do that chapter first because we pay more attention to history and it's all gone and when I'm gone I don't even know the history that I'm describing it's amazing but I've been welling for 60 years if it's 80 or 83 year existence and I'm kind of the last last guy that has the knowledge to do it so I think I have an obligation to do it I also have an obligation to honor my great mentor Walter Morgan who picked me up out of the air and made me into something that I probably never would have been otherwise and that's a fun chapter right with the real message because the fall came when we did the merger back in 1967 and the following 10 years had the worst record relative to its competitors in its entire history because we compromised on quality we had a slightly higher turnover and we took funds or a data measurement to the market which should be about 65 has been we took it to 104 we made welling into a stock fund and that was only with a 73 or 4% equity ratio higher than we had when stocks are more speculative you take that risk right up and then there ain't no part fund draws is really a great story and the fund fund assets dropped from 2 billion dollars to 400 million and now it's back to 52 or 3 billion and leading the balanced fund segment of the industry once again, so it's a fun story it's a story of a real lesson it's a story which is the very least of what I owe to my great mentor and then I don't know what I'll do but I'll think of something by then so now a few reflections on the market and a few investment principles or at least reminders of the same what should I do now? keep going and this should be maybe 5 more minutes today's market is 2011 we've had bear markets all over the world even in the US they don't tell us we had bear market it was 20% decline and while the 500 didn't develop a good performance this year so the stock market index in fact was down to 20% the stock market index is 25 and 6, emerging dropped 30 and total international buying the 2 dropped 27 so we've had this huge recovery I'll talk about that in a minute since then making it very comfortable and the crash came and I said my advice is do nothing don't just stand the old rule is don't just stand there do something that's what we always do in times of crisis and I said don't do something just stand there and it takes a little I guess guts or stupidity I have to say that but nobody knows and I'm very good advice throughout the world because right now we're back I don't know how much we're updating yeah this is all due to yesterday so you can see we had an enormous recovery 500 index is not too far from up to the year emerging markets down 17% total international then 12 and then of course bonds giving a nice protective element all I have to say is this doesn't fit in the chart at all but I had to say it anyway interestingly enough there's been a great year on market index not because it's great it's very heavily weighted for treasuries, US treasuries mortgage back bonds 70% or something like that where you say over weighted in treasuries except that's the market weight and so that means very good in 2008 very good in 2009 okay in 2010 excellent in 2011 and I just can't resist noting the genius and he is a genius by the way I don't mean to take anything away from him but even the best generals make mistakes his bet against the treasuries proved to be wrong so we picked up 500 basis points very very unusual again for the year now we have a bear market working on his control this comeback as well as the actor and I was trying to make a point that sometimes in history I always like to take a historical perspective bear markets stop around 20% when you get over there and at some points they go and continue to go down and we never know which is which but here's what this one looks like these are all the bear markets in the post-war period and you can see that you probably can't count them too quickly but post-war World War II there were 12 such bear markets and counted that 19 is a 20 3 got much worse and 9 didn't I had no idea it was just a pause an irregnum whether it was going to get worse but I have to say I'm always comforted when things start to consolidate I don't like these bear markets they make me nervous not so much nervous because I'm predicting the market nervous because at some point at which we have huge behavioral problems when the market does certain things it redeems their shares and that makes it worse so we I think maybe a slightly hopeful sign but we shouldn't be looking so much at a chart like this but rather what rational expectations are for the future and that brings me to a rule that you've heard from me a long time if you read all my stuff if nobody could and that is the idea is to stay the course if you're on the right course for you and that may involve being conservative for some and aggressive for others and age and other factors or what you can you can control time in two senses start investing as early as you can for example the difference between investing early and late is enormous and then use long term managers don't use short term speculative managers tax impact risk you can control if the fund controls it and I mentioned welling in the fund you can control risk of welling in the fund back in the late 60s and early 70s on risk so keep an eye on fund-based and you can of course control costs low cost providers use low cost providers use low turnover funds use no lower funds and when you can't control just returns have rational expectations let me just give you a quick gander with these rational expectations you've seen this in my stuff and this is the way to look at markets I mean it's unequivocal it's a growth in PE change any period you want to look at days, weeks, months, it's all that happens so this is kind of a rough guess of 2% dividend yield today maybe 6% or 7% earnings growth maybe 5% but in any event maybe a slightly lower PE and there's PE's as I mentioned if I get to mention the Christine I don't think too much out of line a little bit in the high side and maybe 7% on stocks on returns are 2% on the 10 year treasury the benchmark but I think you have to almost have to be more aggressive than that now because the benchmark is so short-term probably got a 5 or 6 year duration and 70% U.S. Treasuries and so it's probably a little more aggressive in your portfolio composition I mean a level of the bond market and I'm certainly eliminating my position with the bond market if you look at these seemingly modest returns 100% for stocks possibly 50% for bonds that's 3.5% but those returns aren't bad but they're not gross returns so give your bond manager 100 basis points and you're all of a sudden they can get the 3.5 all of a sudden you're 2.5 and give your stock manager portfolio turnover sales loads and then calculation don't forget inflation these are nominal returns and they really don't look very good but should you vary the manager you leave the market standard you can't handle low returns I don't recommend that you're bound by the market returns all of us investors are no secret about that but think about inflation when you look at that chart and then think about the fact that those returns are before cost, cost, matter yields are hard to come by today next chart there are the yields of our funds and they're kind of funny I'm not sure exactly how we calculate but those were to see if you have more website but we know that the yields in recent years a range of bond yields 4% to 7% and now they're coming up with 2% to 3% in these last couple of years so they're way below historical standards but I still don't believe in reaching but if you want to go toward the long and toward the corporate and municipal bonds are quite attractive on a tax-adjusted basis and it's your own call and I don't do it but people ought to be aware that those yields are really pretty pathetic how much should be an international I think this is my kind of closing comments here I tried to say I did track of issues don't talk about international just look at the international look at what you're buying so if you want to put that next chart up you can see that if you want 55% of your money in Japan which is not doing so well in Britain which is austerity is costing them a lot in France which still doesn't work that's 55% of your assets it's after you want to do it but don't put it under some idea that you have to be an international country which is what you're really saying is the developed market index so think about that when you get to the emerging markets good or bad I realized that half of it is in China and three in Brazil as we all know in recent years Bricks, Brazil, China, India Russia have been very groupie former so think about what you're buying when you buy international I don't do international business before and I don't think it's going to matter much in the long run and the record would show that their short-term fluctuations are not long-term the main message I want to leave you is to think about what you're getting don't just say international is good and the correlations of course when the US market is going to be like it's bad and almost 100% 100% in international diversification the wiseband set leads us down just when we need it of course and that's true so finally you have a bunch of posts on the boat with its board aren't targeted to change, aren't targeted to retirement I just took this example for the 2025 to show you how much it's changed first to increase the equity ratio probably back in 2004 or 2005 significantly increase it from the 60% it was at our inception and then today 12% international for the US and then recently from from 73% with the additional international and the additional change back in 2004 or 2005, 73% that's a big change 73% 22% international for 2012 and the international change maybe it's recently I don't have an inside track but I'd love to have a rationale for that people are going to tell you you tell us, matter of fact yourself it looks like we just do things to be competitive you also tell us that we couldn't have picked the worst time to add international it happens to be true I showed you, we just left the darn thing alone the cumulative return would have been 51%, 51.5% total return and the fund actually delivered 37.9% now is that a prediction that we did the wrong thing please, no, I have no idea where they've done exactly the right thing but I do think maybe it's worthwhile and have a little more explanation of why it has done because it's very important alright now I have that's it for the charts and numbers they're not there for themselves, all these numbers underline to try and explain underlie and explain the concept to define my absolute conviction that mathematics and simplicity and economy and efficiency are the keys to successful investing for a lifetime all the money will last after I'm gone those principles will in fact change the world of investing and much more current that way will finally get the institutional money managers who I mentioned control 70% of all every public corporation in America or if they're darned duffel bags honor their fiduciary duty and assume their full responsibility full citizenship that's not happening and the index runs through the bottom of the deck in terms of ours and others or the bottom of the deck in terms of activity and corporate governance easy to measure how do you vote on compensation that's a leadership vacuum but for the good of our country the thing has to be filled the obvious leader is the index fund should be, must be because they buy and hold forever and they can't follow the Wall Street rule which is if you don't like the management sell the stock and Benjamin Graham and his initial books are very strong and recommending much more activism than part of institutional investors and whatever's only a small portion of what it is now and we should assume that wisdom and the get back where we want to be as corporate citizens so here I stand at age 82 just a few simple innovations to my credit I guess mutual structure the index fund the fine maturity bond fund changes as modest as they seem as simple as they in fact are are central to the mission of the giant gold my giant gold to make the world a better place for the investors who are earnestly seeking to save their financial futures that's what's important compared to Steve Jobs I guess I want to mention him and everybody else does we all we simplify package and marketing insanely great quote products to change all of our lives my accomplishments of my deity compare them and are modest to a fault but I am struck with both the unfairness of life enabled me thanks to the miracles of modern technology and care I'll live a man born four years after I graduated from college it's very very sad nonetheless as I read the stories about this amazing life truly amazing life I'm struck by some of the similarities we shared let me give you these comment by venture capital he got ideas in his head and the hell would anybody else want to do Steve Jobs himself getting fired in his case from Apple in my case was the best thing that ever happened to me Steve again I never asked customers what they wanted if it's something truly revolutionary they won't be able simplify, simplify, simplify and finally great companies must have a noble cause that is the leader's job to transfer that noble cause into an inspiring vision sure you see the parallels even like knowledge and comparisons self-serving of their reward but whatever the elusive truth would tell us it's not yesterday's accomplishments it's interesting tomorrow's challenges changing the way we think about investing even as I wait patiently well not really patiently actually financially this video has gathered but press on regardless so thank you for your patience sorry to run over we'll take a little break to catch our breath and then I'll answer your questions thank you so much