The Elements of Investing | Charley Ellis & Burton Malkiel | Talks at Google

The Elements of Investing | Charley Ellis & Burton Malkiel | Talks at Google

thanks, everyone. Thanks for showing
up this afternoon. This is a big delight for me. My name is Adam Nash. I'm the chief operating
officer at Wealthfront. I've been at a lot of technology
companies– Apple, EBay, LinkedIn. It's a particular delight
for me to have ended up at a company, a great
software company, at least one we're trying to build, where
it's actually part of my job description to get to
work with world class financial experts like
Burt and Charlie here.

So hopefully you'll
feel the same after we go through
these questions. I know that you have
a lot you probably want to hear from them. We've tried to solicit
from some folks good questions to cover
some basic material. And then we'll have time at the
end for additional questions, if that make sense. So anyway, Wealthfront
is a startup, but we're the largest and
fastest-growing software-based financial advisor. Probably the first
question for both of you is pretty simple,
which is, I mean, you've both had
such amazing careers defining financial
expertise for the industry. Why the involvement
at Wealthfront at this point, maybe
just a retrospective? BURTON MALKIEL: Well,
from my standpoint, it was largely because
I think most people get just terrible financial
advice, and it's too expensive. Most financial advisers charge
a very high fee themselves. And they are
conflicted in that when they suggest that you buy this
or that mutual fund, what's sort of little known
is that they usually get a payment from that
mutual fund company to put you in that mutual fund.

They're high-cost funds. And I've spent my life
studying the fact, as the introduction said,
that over time, very high-cost mutual funds don't
beat the market– rather, they underperform the market–
and that they underperform the market by at least the
amount of their excess cost. So you've got costs
of the adviser. You've got high-priced funds
and what the adviser recommends. The advisor is
typically conflicted. And here, you have
something where, with the advantage of
doing this with software and doing this
electronically, that you can give unconflicted advice.

And we use the funds that I
have recommended all my life, low-cost index funds that
competition has now driven down to have very close to zero fees. So we can provide
this electronically. It's inexpensive. I think it's as good advice
as any high-priced investment adviser will give you. And we can then,
particularly for funds that are over
$100,000, do things like tax loss harvesting. None of us can control what
the stock market's going to do, but the one thing
we can control is the things that
are controllable. And one of them is costs,
and one of them is taxes, and this we can do very
inexpensively electronically. And I'm actually
very, very proud to be a part of an
organization that I think is doing a great job for people. ADAM NASH: Charley? CHARLEY ELLIS: We differ. Burt would say it's low cost
and a much better product, and I would say it's much
better product and low cost.

you look back over the last 50 years, I think both of us
would be truly aggravated by the crowd we know best not
doing anything like a really good job, and candidly,
charging quite large amounts. There are a lot of different
ways of looking at that, and we can come back
to it if you want to. But it is very unsettling
to have the crowd that you're part charging a
lot and delivering a little. So you're looking all the time. And when I heard
from Burt that he was involved with
Wealthfront, seemed to me like a great deal of sense. ADAM NASH: Well, I mean,
I'm glad you mentioned that. You two have known each
other for a long time now. CHARLEY ELLIS: We were
born in the same hospital, so it goes back quite a ways. ADAM NASH: Do you want to tell a
bit about how you two first met and worked together? I'm sure people would
love to hear it. CHARLEY ELLIS: Do you remember? BURTON MALKIEL: Well, I think
we have been– of course, the first index fund was founded
by a company called Vanguard, and Vanguard now is the
biggest index fund provider.

And they also provide
ETFs, which are basically funds that trade as stocks. And they're basically–
the ones that Vanguard has are index funds. And Charley and I, for
a long period of time, sat next to each other
on the Vanguard board. And I think one of
the reasons that we got to really like
each other is that– CHARLEY ELLIS: Oh, it's agreed. [LAUGHS] BURTON MALKIEL: Yeah,
that was the problem. We would all make a point,
and somehow or other, you and I always agreed. And we sat next to each other.

And if we didn't even talk,
we would just sort of nod. So that was how it all started. And my god, I don't want to
count the number of years, but it was long number of years. And we became friends
and became co-authors, because the little book
that's been featured is our attempt to
put down everything we know in a book that would
take an hour and a half to read. And we had a lot of
fun doing it together. CHARLEY ELLIS: That's
if you're a slow reader. BURTON MALKIEL: If you're
a slow reader, right. ADAM NASH: [LAUGHS]
That's great. I mean, Burt, this
isn't the first time I think you've been at Google. In 2004, I remember
when Google went public. It was the big IPO at
the time, because there hadn't been a lot of
big IPOs in a few years. I thought Google did
something fairly unique given its dedication
to its employees and their financial health, is
that you were invited here– not here in the New York
office, but in Mountain View, in California– to
talk to the employee base about the markets,
and help prepare them for what it meant to have
wealth in the market.

What was it like
speaking to Google 2004? BURTON MALKIEL: Actually, you
know, my first time at Google, I had two main impressions. First of all, I've been an
academic most of my life, but started my investment
career as an investment banker in New York. And as I got into
this business, we had a training program of
about a half a dozen guys. And we were going to be given
a lecture by the senior partner of the firm, and
the air conditioning broke in the building. Actually, it was the
building 20 Broad Street, right next to the New
York Stock Exchange. So we were all coat
and tie, obviously, and the other trainees
took their coats off. The senior partner then
started to address us, and said, "it's OK when the air
conditioning breaks that you can take your jackets
off," but then looked at one of
the trainees who had a short-sleeved shirt
on– "but never, never, never take your
coat off if you've got a short-sleeved shirt on." So this is how I came
into the business world.

So you can imagine
my first impression of going to Google of what
an informal place this was. People had t-shirts,
shorts, flip-flops. People were throwing
Frisbees inside the building. There were dogs running around. And I couldn't
help but think back to the beginning of
my business career. And I say, oh my god. I knew the West Coast was
always less formal than the East Coast, but what a
difference this is. And I also visited at the
time– because I had known him, I'd been on a couple
of panels with him– Eric Schmidt, who was then the
CEO, was a Princeton trustee. And here was Eric Schmidt
in this little tiny office. And I was thinking of
the partners' offices in the investment banks. And so the first
impression was, my god, what a different world
this was from the world that I grew up in.

I think the second
impression that I had, when you go into the
Google headquarters, there's this huge map of
the world with lights. And every time
somebody does a search, in whatever part of the world
it is, a light goes off. So you're looking at this
sort of map of the world, and lights are blaring at you. It's like a Christmas tree. And everywhere– I
mean, it must have been three o'clock in
the morning in Tokyo, but Japan was all lit up. And you know, it occurred to
me, what a worldwide phenomenon, and what an amazing
company this is, and what a worldwide
company it is. And also, as kind
of an economist who is interested in
economic development, I thought, what a way of showing
the parts of the world that are undeveloped, because as
you looked at the map, the only dark part was between sub-Sahara
Africa and southern Africa. And there were no
lights going on there.

And you realize, how could
you build a better show where the world is the economically
developed and where it isn't? So those were kind of my
first two impressions. It was an absolutely
wonderful experience. We were giving out parts
of my "Random Walk" book. And at lunch, Mario
Batali was there, and he was cooking
for all the Googlers, and I traded books with him. And it was one of
my– you think of the unforgettable
experiences in your life, and that was one of them,
my first visit to Google. ADAM NASH: Yeah. Well, it's fascinating,
because Google came public, like I said, a few years
after the first big market crash, the kind
of 2000 to 2001– at least the big market
crash in recent memory. And then just a few years
later, of course, in 2008, we had the massive
financial dislocation. And this is a question
for both of you, but how do you feel that affects the
advice that you give people or how they receive it, now that
they've been through not one, but two of these big events? CHARLEY ELLIS: It
gathers the attention.

It depends on your
own perspective. We're both of us in
an age cohort where we've been around long enough
so you can't help but think about times way back
and stuff like that. Markets go up and down. Mr. Morgan was one
asked, what do you think of the stock market? He said, it will fluctuate. And sure enough, still does. Sometimes it fluctuates
like a punch in the face, and sometimes it's like a
beautiful woman's soft touch, just everything is
working out perfectly. But most the time, it's to sort
of wobbling around out there.

And I think it's
dreadfully dangerous, because it attracts
your attention. And candidly, the best
line ever, ever given about the market was "frankly,
madam, I do not give a damn." None of us should be paying
attention to the stock market nearly as much as we pay
attention to ourselves. If you know who you are, where
you are, where you want to go, you will do more good
for yourself than if all about the stock market,
partly because it'll disappear, because markets are
very temporary and gone. But you really are important,
and the rest of it is details. And the specificity and the
intensity and excitement of the details can
attract attention. But if you didn't know a
thing about what was going on, you could still
find your pathway through what's going to be
going on in the long run. I assume you've read Nate
Silver's wonderful book about "The Signal
and the Noise." It's a terrific book, and
a terrifically smart guy who's put together an awful lot
of insight and understanding.

He's right. The signal and the noise–
pay attention to the signal. Don't worry about the noise. And if the signal tunes in
for you in a particular way, or you can tune in
with it, you can do some important value
adding decision making. All the other things
are best ignored. BURTON MALKIEL:
And in fact, they ought to be ignored, because
to the extent that they affect you, they make you
do the wrong thing. One of the things– CHARLEY ELLIS: If
you're a human being. BURTON MALKIEL: And that's
where this new field of the behavioral
finance comes in. We have very good data
on the flow of money into equity mutual funds.

And what we know
is that money flows in when everyone's optimistic. More money flowed into
equity mutual funds in the first
quarter of 2000 that happened to be the top of
the internet bubble than ever before. And then at the market bottom
in about the third quarter of 2002, the money went out,
then the money came back in. And more money
came out than ever before in the third
quarter of 2008, at the height– or
the depth, if you wish– of the financial
crisis, when everyone thought the world
was going to end.

So the problem with
looking at the noise is it makes you do
the wrong thing. You're selling when, if
anything, you should be buying. And you're buying when
everyone is very optimistic, and if anything, you
should be careful. And that's the real
problem of letting the noise effect you,
rather than simply if you're saving for trying to build
up a big retirement nest egg, of just doing it to
evenly over time, take advantage of
the opportunities when the market's down, not
sell, but keep a study course. ADAM NASH: You know,
it's– oh, sorry. Go ahead. CHARLEY ELLIS: All
three of us went to Harvard Business School. It was a great place to go. You can learn a lot. You can take the course
on investment management.

You can learn a lot. You'd learn more if you
could just take five years and be a parent of
a teenage child. You realize, it's very exciting. It's very interesting. It really gets you excited
positively sometimes, and it gets you very excited
negatively sometimes. And it doesn't matter. They grow up to be
wonderful, long run. ADAM NASH: My teenage
years weren't so exciting, but I may have done it wrong. [LAUGHS] CHARLEY ELLIS: Depends–
exciting to you, or exciting to your parents? ADAM NASH: I'm sure it
was exciting to them. CHARLEY ELLIS: I
would have thought they'd have been
really deeply afraid. ADAM NASH: [LAUGHS]
They're still trying to figure out how
their son ended up in a career where he doesn't have
to dress up every day. CHARLEY ELLIS: Right. ADAM NASH: Actually,
I like this focus on long term and investing. I see a big parallel. But great technology
companies have always been the ones that got out of
the day-to-day quarter focus, even when public, and focused
on initiatives three, five, 10 years out.

I mean, Larry's done
that here at Google. I think Jeff has done that
fantastically well at Amazon. I think that it's rare. But the great
technology companies know that technology reinvents
the rules every few years, but it's fairly predictable
that scale will increase, speed will increase,
and what's now possible. So a lot of the
folks in this room, their first job may
have been at Google, or they may have been
other technology companies. You were both
involved with Vanguard in the very earliest of days. And for most of the
people in this room, Vanguard is a huge fact of
the financial industry– trillions in
assets, index funds. It's a staple of what
people think is available, but that wasn't always true. Vanguard was effectively
a startup as well. Do you guys want to comment on– CHARLEY ELLIS: Well,
we differed on that. Burt wisely said, "I
think this could work," and worked with Jack
Bogle to make it go. And I unwisely went to
Jack and said, "Jack, you made a terrible mistake.

You're in a short,
dead-end street. It's not going to work out. All of your friends
know you've really screwed up making
this commitment. If you just stop now and come
back into the normal world, you'll be OK." Forgiveness is a part of the
investment management world. [LAUGHTER] CHARLEY ELLIS: On the
whole, Burt was dead right. On the whole, I was dead wrong. BURTON MALKIEL: But
you know, the fact is, when I first wrote my
"Random Walk" book, which is in all of these editions–
it was actually 1973– and it recommended
that people would be better off with index funds. And I had a market
professional review my book in "Business Week," as it was
the worst review I ever got. They said this is the
biggest piece of garbage that they had ever seen.

And when Jack started
the first index fund, it was called Bogle's Folly. And in fact, I sometimes like
to think that Jack and I were the only to investors
in the index fund. It was very slow to start. It wasn't that this just
took off right away. It didn't. It was years and years before
it had any significant assets. And again, that just shows
you the importance of, it was right. People say, well, who
wants to be mediocre? It's not mediocre. It's being above average,
being in a low-cost index fund. And after a while, it
did start to take off. But believe me, it
was very, very slow. And people thought this was the
stupidest idea in the world. CHARLEY ELLIS: There were
advertisements taken out in a trade magazine. "Index funds are un-American." And it was run over and
over and over again, because it got the
laughs, but it also was what people really
felt emotionally. ADAM NASH: I think it's
seductive to believe that you can outsmart the market or
figure these things out.

can I interrupt you just for a second? ADAM NASH: Oh, yeah. CHARLEY ELLIS: If you're
trying to outsmart the market, that's self deception. It's not as though the
market is out there doing whatever markets do. There's a smart son of a
bitch on the other side of every trade. And when we were
children and just getting started in investment management
50 years ago, 92%, 94%, 95% was done by
individual investors. What's an individual investor? Well, he makes a trade
every year and a half. Every year and a half? One trade? Why does he buy or sell? Well, he buys because he got
a bonus of a thousand dollars, or he sells because he
wants to help his daughter pay for college. It has nothing to do
with the stock market. He doesn't do any
comparison shopping. Half of them bought AT&T,
and then half of the rest bought the company
they worked for, and the rest bought some
company they'd heard about, that must be a good company
because one of their friends told them about it. Honest to goodness, it's
not hard to beat people who have no access to
information or research, have no comparison
value, aren't doing it with anything like
rigor analysis.

They just kind,
well, I've got some. Why don't I buy some. Today, it's not 95%
done by individuals. It's 96% done by experts. 48 of the 96 are done by the 50
largest, most active investors. These are people
that really care. And they've got
terrific equipment. They've all got it– at
least a couple Bloombergs, usually have one at
home, one at the office. They've got tremendous access
to factual information. Everybody gives
them the first call.

Everybody wants to do
business with them. They are so actively in the
market so much of the time, and they've spent years
mastering the industry that they're working in. And when they get you
in the crosshairs– it was all well and good
when George Plimpton would go out and play
against the NFL team. But personally, if
I were to go out, that would be the
way I would be. I'd be absolute bait
for destruction. And the same thing is
in the stock market. If you take on these
guys, they're really good. And they're killers. ADAM NASH: It's ironic
that a good, low-cost, diversified portfolio– CHARLEY ELLIS: Wait a minute. Let me give you the punch line. You don't have to take them on. You can let them do all
the work, all the work, and the rest is on automatic.

And that's basically what
index funds are all about. After they've figured out
what the prices ought to be– and there's a lot of
work on price discovery, and they get really good
at discovering the prices– once they've figured
it out, say fine. I'll take what they've got. I'll have what she's having. ADAM NASH: Well,
you know, what's fascinated me is Wealthfront,
our average customer right now is in their 30s. A lot of twentysomethings,
thirtysomethings, fortysomethings, they
tend to be more technical. And they've been through
these two market crashes, so the thing that I
hear over and over again from folks– I like
to talk to customers– is that they don't
think they're going to make their money
by beating the market.

They think they're going to
make their money by being a great engineer or a great
designer or building a company. They just want to have
their money soundly invested in a low-cost way. When you folks talk
to young people now– I know you're
both involved a lot with different groups
and teaching– how do you give advice to folks in Gen Y,
Gen X, young people who are at early stages
in their career? BURTON MALKIEL:
Well, I generally tell them to put money
into their investments regularly over time, no matter
what is happening, and don't worry if the stock
market goes down.

There's probably one
of these professionals that Charley's talking about,
and maybe the best investor that we've got in the
country, is Warren Buffett. And he has a wonderful
essay which says, suppose you love
hamburgers, and that you're going to be eating
hamburgers all your life, and you're not a cattle rancher. Would you like the
price of hamburgers to go up or down in the future? You say, well, OK, I'm going
to be buying hamburgers.

Let's just assume the
hamburgers I buy next week and next year are lower. You say OK, you
got that one right. OK, here's the second
part of the quiz. Suppose you're going to
be buying automobiles all your life, and you're not
an automobile manufacturer. Do you want the price of
automobiles to go up or down? You say, well, I'd just assume
the next auto I buy is actually cheaper than the
one I just bought. And Buffet says, good. You got that one right too. Now, for the final
exam, suppose you're going to be investing
all your life. You're going to be putting
money aside all your life.

Do you want the stock
market to go up or down? And Buffett says this is
where people generally flunk the final exam. It's only if you're in
retirement and taking money out that you want the stock
prices to be high. It's as if you're asking that
the hamburgers that you're going to be buying and the cars
that you're going to be buying are going to go up in price. In fact, through something
that's– actually, the technical term for it
is dollar cost averaging– if, in fact, the
price goes down, your money goes even further. You can buy more shares. And you can put a
little example down of how even when the
market is very volatile and doesn't go up at
all, you can make money because you bought more shares
when the market was down. And one of the
simulations that I've done is take a decade– the first
decade of the 2000s, which has been called by investors
"the lost decade," because in general, if you put
money in the S&P 500 on January 1 of 2000
and looked at what it was worth on
December 31 of 2009, you didn't make any money.

The second decade's
been pretty good, but the first
decade was terrible. But if you put money in
every quarter, regularly, you actually made a
pretty good rate of return even during the lost decade. So what I try to tell
people is, generally, put the money in steadily. Nobody can time the market. Professionals can't do it. Look, I've been in
this game for 50 years. I've never known anyone
who can time the market. I've never known
anyone who knows anyone who can time the market. It's not that the efficient
market hypothesis means that prices are always
right, and that's how some people
poo-poo the idea. Prices are not always right. They're always wrong. The problem is, no
one knows for sure whether they're too
high or too low.

love about that advice is it highlights actually
good financial fundamentals. It turns out the most
important for young people is just to be saving, they
save regularly, and put in the market. It's actually better for them
if the market has up and down, because they'll get
some of the downs. True, you get some of the
ups, but the long-term trend is obviously their friend. Sorry, go ahead. CHARLEY ELLIS: You just said
it, but saving is number one. ADAM NASH: Yes. CHARLEY ELLIS: Not
getting excited, either at the top or the
bottom, is number two. And then regular
investing, ho-hum, steady, steady,
steady– number three. And it works out fabulously. But it takes some
self discipline when the excitement around
you, and all the people are talking in the
newspapers and magazines and television programs
are talking about, this may be the last
chance to get in on a wonderful opportunity.

It's very hard not to
get deeply concerned when you see the whole
economy's falling apart, Asia's going wrong,
Europe's going wrong, the president's having
a terrible time, the president's wife
is unhappy with him, your wife is unhappy with
you, and your friends are all deeply concerned, and the
food doesn't taste good. It's pretty hard not
to get depressed. But you've got to hang
in there, because that's the time of your best
chance of your lifetime. BURTON MALKIEL: And control the
things that you can control. You can't control the ups
and downs of the market. You can control your costs. You can control your
taxes that you pay. And you can use the best friend
you've got for reducing risk, and that's diversifying. So diversify, control the
things that you can control, and as much as the
market might fluctuate, don't worry about it. You'll come out OK. ADAM NASH: You know, I
think it's such good advice.

Ironically I think
in some ways, we've made it harder on ourselves
in this generation. We all have smartphones
in our pockets. They buzz all the time. We're checking our feeds,
whether it's Google+ Facebook or Twitter. There's this stuff
happening all the time. So learning that
basic fact that, that there are some
things you can control and some things you
can't, is really important with investing. CHARLEY ELLIS: One thing,
just an easy metric on this, is don't never do
nothing that you're not prepared to hold onto for at
least 10 years, whatever it is. ADAM NASH: 10 years. I mean, actually
it's a good segue. You did an interview, I
think, recently, with– was it "Investor News," or– CHARLEY ELLIS:
"Institutional Investor." ADAM NASH:
"Institutional Investor." I think of the title the
article was "Is Alpha Dead?" And I mean, compared
to 40 years ago, do you feel like– is it the
same as it's always been, or has it got even harder
to beat the market? CHARLEY ELLIS: 50 years
ago, it was relatively easy to do better than
the market rate of return, because the competition
wasn't very good.

Today, the competition
is just marvelous. Every time you buy,
you buy from somebody who knows a hell
of a lot about it. Every time you sell
something, you're selling it to somebody who
knows a hell of a lot about it. They may make mistakes,
but how smart are you that you won't have made at
least about the same the number of mistakes, plus the cost of
being there in the activity? It's just, the
world has changed.

And McCain said, one
wonderful sentence, "When the facts change,
I change my mind. What do you do about yours?" And it's worth thinking about. And the world of
investing has changed. And so what would be
sensible 50 years ago could now be not
at all sensible. All the evidence
is that it doesn't work to do what would
have worked 50 years ago. Fine. ADAM NASH: Well, I think
it's magical in some ways that we've evolved the industry
to the point where you can own the entire US stock market for
such an incredibly cheap rate. I mean, five basis points
is kind of amazing. It's good to know that even
in this arms race that's going on amongst the
professional investor set that you can do better
than most of them just by buying the
simple index funds. Let me segue a bit, some
kind of topical news. The Federal Reserve has been
in the news a lot lately. Both of you have had careers–
you worked with Alan Greenspan at one point, Ben Bernanke,
I think even Janet Yellen, we were talking about.

Any comments about
what the differences are, what it takes to be a
great Federal Reserve chairman? I mean, it's something you
going to really look over over decades. It's not something you
can really understand just looking at the most
recent candidates. CHARLEY ELLIS: Oh,
I think there's some things you could say. Number one, Federal Reserve
governance is a team sport.

So if you are not really good
at working with other people, you've got a real problem. Secondly, I think
you could easily say we have been really
fortunate to have some extraordinary
people serving in the governorship, but
particularly the chairman. You should talk
about Ben Bernanke, because you really
worked closely with him. I knew him, but– I knew Janet
Yellen quite closely at Yale. These are extraordinary
people who have studied and studied and
studied the field in which they are then put to test. Everything that they live
with is new, difficult, fast moving, and the
data is not available. So it's a really tough job. But if you wanted
to pick people who are wonderfully
well-suited to that, out of all the people
that might be chosen, we've been very, very
fortune as a nation. And what's wonderful is
that the rest of the world has very talented people in
their central banks also, but that these people talk
to each other all the time.

And the factual
information that's accessible to the
bankers is terrific. Is it perfect? Certainly not. Is it a hard job? You bet. An unwinding of this massive
purchase of mortgages is going to be an
unbelievably challenging– when do you do it? How do you do it? How do you communicate about it? It's going to be hard. BURTON MALKIEL: I would
agree with you, surely, that the consensus
building is so important. And Ben came from my university,
and so I've seen Ben in action. Herding a group of
prima donna faculty around is not one of the
easiest things in the world, and Ben was a brilliant
department chairman. And I think Ben
was quite brilliant as the leader of
the Federal Reserve. And I think one
of the things that is very likely to be the
case for Janet Yellen is that she has some
of the same qualities.

So I agree with you that we've
got a big enough government portfolio that there are really
some questions about whether we have done something
to hurt the market. Unwinding this,
which is certainly something that
needs to be done, is going to be very, very tricky. But I think we've got the
right people on board to do it.

ADAM NASH: That's good to
hear. [LAUGHS] A little bit of good news. Before we open it
up to questions, because I know people
must have quite a few, I wanted to make sure to
ask a fundamental one. You've both been a part of some
very fundamental improvements in the structure of the
industry– what clients deserve from their advisors, index
funds, passive investing– I mean, just a wide
range of advocacy for making investing
better for individuals. How do you think
about your legacy, or what you want to make
sure continues going forward, given the progress
that we've been able to make over
the last few decades? BURTON MALKIEL: Well,
one of the things that I have the
worked on recently is to try to see if we could get
the whole industry to sign onto something that's called
the fiduciary standard. And it's sort of very simple–
that you don't do anything for your client that
you're not absolutely 100% convinced is in your
client's interest.

And that's basically
what I think is the fundamental
problem with the industry, that there is this severe
conflict of interest. I mean, this is one
of the things that happened in the
financial crisis. If you are making a
lot of money selling mortgage-backed
securities, well, we're not going to worry what kind
of toxic stuff is in there. If people want to buy
it, let them buy it. That was basically
what the industry did. And I think what
is the answer is, what informs every decision
you make is not whether it's good for me, whether it's going
to be good for my bottom line, but whether it is good for
the bottom line of the people we're serving. And if I had a
legacy that I wanted to leave on my tombstone,
that would be it. ADAM NASH: Charley? CHARLEY ELLIS: I don't
believe in legacy. [LAUGHTER] CHARLEY ELLIS: I
would just say read what Burt wrote
on his tombstone.

That'd do fine. It's a cultural problem. If we get enough
misbehaving, we'll get enough correctives
so that the culture will move towards doing the
right sorts of things. But once you separate
the professional value from the economics
of the business, the business economics are
going to take off and get to be dominant. And it will attract
people who say, well, you get pretty good pay over there. It doesn't look like
all that boring work, so I'd like to do it,
and that recreates. If you go back and read
economic history in the '30s, there were some marvelous
hearings in Washington where one banker after another
was embarrassed something unbelievable to be asked
a series of questions– the Pujo hearings. And it's kind of fun
to read back over that. It's just so similar
to what we did. In the last round– 2008,
and the break in the market– you can trace an
unfortunately large fraction of the really
severe difficulties to very specific
individuals who misbehaved.

And it wasn't the
people down the line that did the worst of it. It was the people at the
top of those organizations that did the worst of
it, and that's a shame. ADAM NASH: Well, I think
I have more questions. But I want to make sure,
just given the time, and also that we– CHARLEY ELLIS: I have one
that I want to squeeze in, because I'm all
excited about this. ADAM NASH: Sure, yeah. CHARLEY ELLIS: As
you've heard, I've been around for a long time. I'm sitting in an investment
committee meeting, and we're getting a review by
the manager of why it didn't happen to be their
particular kind of market, and it just happened to be
that instead of doing better than the market, they happened
to do slightly less well, but they've done some
wonderful things to improve, and they're going to be able to
do to terrific in the future.

And I'm looking at the numbers,
and I realized– never actually realized it after
40 some odd years, 48 years– I hadn't
realized what the fees are. Now, most of us
in this room would be able to say,
oh, fees are small. Fees are really small. It's usually a four-letter
word and a single number. "Only" is the four-letter word,
and 1% is the single number.

Well, the 1% is not accurate. Mutual funds typically
run closer to 1 and 1/4% of the assets. But then I would turn to
Burt and say, "but Burt, you've already got the assets." So the fee isn't what you're
paying for what you're getting, because you've already
got the assets. What are you getting? Oh, Charley, we're
getting a return. Great. Normal expectation
of returns here, given the market's gone up a
fair amount, going forward, might be 7% or 8%,
on average, with lots of ups and downs in between. So that 1%, or a little
over 1%– as a percent, not of assets, but a
percent of the returns– what's that work out to be? Oh, let me do the math.

Well, call it 15%. That doesn't sound like "only." I guess not. I guess that's really
actually pretty high. And then when I was in
school studying economics, we all were taught everything
is comparative price. So what's the commodity product
and the commodity price? And then what's the custom
product and the custom price? The commodity product
is an index fund. It gets you the market
rate of return every day, every week, every month, every
year, same old, same old market rate of return, at no more,
no less than the market level or riskiness. OK, that's a pretty
good commodity product. What's it cost? One-tenth of one percent. Now, you can get a
custom-tailored product, and what does it cost? Well, it costs– if it's
10 basis points for one, it's 120 basis
points for the other. So incremental cost
is 110 basis points. Gee, I must get a pretty good
return in exchange for that, don't I? No, Charley. I'm sorry, but you don't. Actually, you get more risk. You get a lot of uncertainty,
because you never know when something's
really going to go wrong.

But leave that
aside– more risk, and on average, 3/4 of the
funds that are actively managed– maybe it's
80% of the funds, somewhere in there–
underperform the benchmark that they said they
were going to match. And you never can
figure out who's going to underperform–
most– and you could never figure out who's
going to outperform. There's no way of doing it. So what you're doing when you
get a custom-tailored product is you're paying
a much higher fee for less quality
and a lower return. And it is just
amazing that that's something that continues
year after year after year. And it can't last for long,
but really smart people are going to figure it out and
say, I'm not going to do that. I'm going to take the
commodity product because it's cheaper and better return,
and I've got better things to do with my time than chewing
my nails over whether I'm going to be OK or not OK.

BURTON MALKIEL: Let me just put
a footnote on this, Charley, because I've just done
some work on 401(k) plans. And in general, the cost
is more like 2% than 1%, because then there's a rep fee
around the high-priced mutual funds that are in there. And so you might say, instead
of getting a 7% return, you get only a 5% return. So your way of looking
at it is, it's not 2%. It's really 2/7 is
what you're paying. But it's even worse than that,
because these costs compound. If you think of putting
money in at 7% for 40 years or putting money in
at 5% for 40 years, that difference at the
end isn't even 2/7. You're getting about half
the amount at the end, because the tyranny of the
compounding of the costs gets you. So again, it is
just so important, if you got something for
it, fine, but you don't. The evidence is
unmistakable that you don't.


It's getting tougher and
tougher all the time. The market's not
always right, but there are few Warren Buffetts. I sometimes say if
when I wrote my book, I knew that Warren Buffett was
going to be Warren Buffett, I wouldn't have said
"buy an index fund." I would have said, "go buy
Berkshire Hathaway," which is Warren Buffett's
investment company. And you know what, there
will be Warren Buffetts over the next 40 years. There'll be maybe
five or six of them. It could very well be. But as you said, I
don't know who they are. You don't know who they are. And when you try to
go for them, you're much more likely to be
on the negative side of the distribution, and
you're going to be a loser.

So index investing
isn't mediocre. It isn't average. It's way above average. CHARLEY ELLIS: One place
that I would differ slightly from you, Burt–
same conclusion. You say you would
only get half as much if you went active
as opposed to index. I'd just like to turn it
around and say the other way, you get twice as much
at the end of the run– I won't argue with you at all. CHARLEY ELLIS: If you
do index instead of– BURTON MALKIEL: Won't argue
with you at all, Charley. ADAM NASH: Well,
I'll tell you guys, this is great, because my
background is in software as an engineer, and I focused
on human computer interaction.

But I'll tell you, after joining
Wealthfront, finding ways to explain to
people that 1% to 2% is actually a really big number
is one of the hardest problems that I've run into. CHARLEY ELLIS: Say
that to a balloon that meets a pin– beautiful big
balloon, one tiny little pin. BURTON MALKIEL:
Albert Einstein said that compounding is the
greatest force in the world. Well, the cost compound too,
and that's what gets you. CHARLEY ELLIS:
Before we leave it, could we just all agree
that nobody should ever use credit card debt? Because not only is that
a big interest, but boy, when that compounds,
it really goes. ADAM NASH: Yeah. When people find out that debt
compounds just the same way with much bigger interest rates,
it's usually real depressing. CHARLEY ELLIS:
They say ooh, wow. ADAM NASH: So great.

So I think in terms
of time, we wanted to leave some time for
folks to ask questions. We have microphones
set up for the folks who are watching remotely. Feel free, and I'll
just call on folks. Yeah, maybe your name and
who the question's for. AUDIENCE: Sure. My name's David. A question about for Burt. So you said earlier you can
control the taxes that you pay. I'd love to know how. BURTON MALKIEL: Basically,
you can control the taxes by something that's called
tax loss harvesting.

If you have a
portfolio– let's say that you just have a
portfolio of US stocks, or even US technology
stocks, and it's an index. There are always going to be
a few of those stocks that have gone down. You've got Google,
that's gone up. You have Groupon,
that went down. So what you do in
tax loss harvesting is that you sell the loser
and put an equivalent one in. And we can do this
with index funds. We have a diversified
portfolio of US stocks, of international stocks,
of developed countries, of emerging market
stocks, of foreign bonds. In other words, we've got a
whole bunch of asset classes. So in a period such as this
past year, where the US stock market has gone way up, but
emerging markets have actually gone down– emerging markets
have been weak this year– you sell one emerging market
index fund and buy another.

So you keep the exposure,
but you recognize a loss, and that loss is
deductible from your taxes up to a certain
amount, or could be used to offset
other capital gains. So it's the harvesting
of the losses that is a way of
controlling your taxes. And again, up to
a certain amount, even if you had no
other capital gains, you could deduct this on
your 1040 for the year.

ADAM NASH: This is
one of the things that humans can do– if
you're really on top of it, you'll see advisers do once
a year– you always see the articles and
papers about harvesting some losses in the
end of November, somewhere between Thanksgiving
and that 30-day window. Wealthfront, because
we did in software, we can actually look for
those opportunities every day. It just turns out that
the computers never sleep. But yeah, it's a
great technique.

There's no question. Go ahead. AUDIENCE: So hi, there. My name is Doug. And by the way, I'm
from the Yale school of management, class
of 2013, so very nice. By the way, the same
thing is taught at Yale, so also, double
thumbs up on that. My question is about
diversification. So I somehow can't believe
the answer is invest only in index funds. It seems like– I mean, index
fund, by its definition, is diverse, because it invests
in many different things– it's as if you don't
diversify your risk.

And my question is, what
would you say to that? BURTON MALKIEL: Well, you
are diversifying your risk using index funds. A lot of people will tell
me, because I believe in buying index funds
for emerging markets, and a lot of people make
the following argument. Look, emerging markets
are very inefficient. Information isn't, in fact,
as available for each stock as it is in, let's say,
the United States market. And that's absolutely correct. But when you look
at the data, you look at the data over
the last 10 years, and it's not 2/3
over that period who were worse than the index. It was basically over 90% of
active emerging market managers were worse than an
emerging market index, and it was in part almost
because of the inefficiency. The trading markets are
very inefficient in emerging markets. There are big bid-ask spreads. So if you trade, you're paying
a big gap, because you're always a buying at the ask price
and selling at the bid price.

There are stamp taxes
in emerging markets, so that there's an extra
tax when you trade. When there are so-called
market impact costs, there's so little liquidity. So it's not like buying
500 shares of Google and you don't move the market. You move the price against you. And so even in markets
that seem less efficient, the markets are going to move. Different markets are
going to move differently. Emerging markets
are very unpopular. During that lost decade, when
the US market did nothing, emerging markets did 10% a year. During the last year, the
US market is up 15% plus, and emerging markets
were down 4% or 5%. So there is the opportunity
for tax loss harvesting, there is the opportunity
for diversification, and I don't see why you have
to go to individual stocks to get those opportunities.

I think they're still
there with index funds, as long as you're in
different markets that react to different
economic realities. AUDIENCE: Hello. My name is Jeff. You talk about dollar cost
averaging and investing slowly over the course of
one's life– excellent advice, but it's sort of
one-dimensional. And so suppose that over
the course of an investment lifetime, I have
several different index funds– US indices,
emerging market, whatever– and over time, I say,
well, maybe this index here isn't really the
best one to have, or I don't think it's
got the best future, and I'd like to shifts my focus.

And I'm curious how you see
that sort of reallocation. Like, what's the right
way to reallocate, or even to do it at all, because
there's this element of, well, you shouldn't
think about that. You should just keep
plodding forward. CHARLEY ELLIS: Well, I think
you should think about it. And this actually
gets to another thing that we do at
Wealthfront that I think is extremely valuable– tactical
asset allocation, which is, gee, I don't like China now. I think I ought to be in Brazil. Or, I don't like
emerging markets. I think I ought to
be in the US market. I think that doesn't work. I've seen many
professionals try to do it.

I think it simply
cannot be done. But what you can
do is rebalance. And what rebalancing
does is it simply says, let's say you thought
your portfolio ought to be, let's say 50% US,
25% developed foreign, 25% emerging. I'm just making up the numbers. And then what you do is
at least once a year, you re-balance to that. And what that makes
you do is it makes you take some money off the
table on the market that did particularly well, and
makes you put the money back into the market that
did relatively poorly.

If you want, it's the
opposite of what people do, because what people
actually do is they put more money into
the market that did well and take the money out of
the market that did poorly. And my own work suggests that
rebalancing over the last 15 years– and just once a year,
very simply– added between one and two percentage
points to your return of a diversified portfolio.

And that's one of the other
services of Wealthfront is that we do a
systematic rebalancing. I understand the argument
"couldn't we do it tactically?" And I just don't think
anybody knows how to do it. I don't know, Charley,
what your view is. CHARLEY ELLIS: Well, there are
people who know how to do it, but only briefly. [LAUGHTER] BURTON MALKIEL: Right,
not consistently.

I mean, there will
always be people who get it right
once in a while. AUDIENCE: Yeah. Thanks. ADAM NASH: Thank you. AUDIENCE: Hi. My name is Tom. I was wondering, as more
and more people seem to take your advice and use
sort of a passive approach and stop picking
winners and losers, does there ever become a
tipping point in the future where it sort of
becomes the 1950s again, and since no one is
paying attention at all, it actually becomes possible
to pick winners and losers? CHARLEY ELLIS: Yeah. There is a point at which
it becomes, once again, a terrific opportunity.

It's that time when
people say, I'm not going to be an
investment manager. There's no point in it. The pay have gone down so badly. You can get much better
jobs doing something else. It's going to come at a time
when the securities firms don't have analysts that
are pumping out a tremendous amount of
factual information, when Mike Bloomberg
says, you know, we're going to pull back all
those machines because nobody's subscribing anymore.

We're going to junk them. There is a point. But walk through
the mathematics. A typical index fund will
have turnover of about 5%. The market as a whole has
turnover of about 100%, 120%, somewhere in that range. So if you move 50% of
the assets into indexing, what fraction of the
market will that be? It's about 3%. If you move 80% into indexing,
a fraction of the total market activity, you're
starting to get close. When you get to 95% of
the money is now indexed, the amount of opportunity
off indexing would be high. But by then, all
those sad things I was talking about
earlier, people saying, this business is over,
I can't get a job. I can't get any equipment. I can't get any services. To hell with it. Then, we'll be back
with grass growing through the streets
of New York, and we'll have all kinds of
opportunities for people to get into active
investment management.

But they'll be
alone, and they won't be able to get the
services and help, and so it won't work
for them anyway. I mean, this is one of those
marvelous mythical questions that I love your asking
it, because it's a setup. In the reality,
the math, it just doesn't work that
there will come a time there's so much
index that somebody ought to be really out there
doing active investing. BURTON MALKIEL:
Indexing has grown. I mean, it is getting close
to 25% of individual money, and probably close to a third of
institutional money is indexed. And when it gets to
be 95%, I'm going to worry about that question. But I'm with Charley. It's a good
theoretical question, but I don't think it's
ever going to happen. CHARLEY ELLIS: You
know that old poem? "Breathes there a man, with soul
so dead, who never to himself hath said, this is mine
own, my native land?" Well, it's the same thing
with active investing.

We all believe we can do better. We all know from all
the other experiences that we have in our lives
that you can do better. It just happens in
this particular one, if you're trying to
do better, you're up against an invisible
competition that is so damn good that it doesn't
make sense to be doing it. And I'm back to George
Plimpton going out and playing in the NFL. Nice guy, reasonably
strong, reasonably healthy, was six foot tall, but you
could get killed out there in the line playing against
a guy who weighs 300 pounds and does the 10-yard dash. Who wants to do that? Same problem. ADAM NASH: We have a
bunch of questions in– CHARLEY ELLIS:
Wonderful question. ADAM NASH: It's
a great question. We have a bunch of questions
in from remote viewers.

So you can see them
ranked by popularity, so I'll just read
a couple of these. The first one is
actually a great one. It says, "Bonds are scary
because interest rates are low," and "Stocks are scary
because the economy has high unemployment and
profits are an all-time high due to a lot of cost cutting." Peter asks what should
he do with his cash. BURTON MALKIEL: Well, I
think bonds are scary, because I think when you look
at our dysfunctional government, and when you look at how hard it
is for us to rein in our budget deficit and do something about
our long-run budget deficit, you realize that we've got a
very high debt-to-GDP ratio, and the government's got
to do something about it.

Well, what the
government is doing is something that goes under
the name financial repression. We are keeping interest
rates very, very low. The last time the
10-year treasury yielded about 2 and 1/2%, which
it yields now– it's actually up to 2.7% right now, but
it's somewhere around that– was in 1946. In 1946, we have a
debt-to-GDP ratio of 133%, much higher than it is now. And we were trying to
finance that deficit, and keeping interest
rates very, very low. Well, we actually had interest
rates pegged into the 1950s, and then we let them rise very,
very gradually until 1980. And what happened in 1980,
we had a moderate inflation. It was a little
bigger, and there was an oil and food
shock in the '70s. But in general, it was
a moderate inflation.

And the debt-to-GDP ratio of the
United States in 1980 was 30%. So what this financial
repression does is it's a way of getting
rid of your debt, of letting inflation
inflate it away, and you do it on the
backs of the bondholders. And I am very
worried about that. And we at Wealthfront
have, I think, some very interesting strategies
in our asset allocation. For one thing, we use for part
of what might be the safer bond portfolio– which is
still needed for people, particularly those who
worry about volatility– is we use an equity
substitution strategy.

And by that, I mean we
try to use very safe, high-dividend growth stocks
to substitute for the bond portfolio. Just to give you an
example, AT&T's stock yields something over 5%. And the dividend on AT&T has
been growing at 5% a year. My guess is, it won't throw it
quite that rate in the future, but it's likely to grow. AT&T 10-year bond's yield 4%. Now, I can't believe
that you won't be better off as an
investor with AT&T stock.

I think you'll get a
higher rate of return. And there was a time when
bond prices and yields were adjusting in the
1970s when bonds were more volatile than stocks. So that's some part of it. Another part of it is to look
at some foreign countries with budget deficits
under control, and with debt-to-GDP ratios
low, that have higher yields. So we're very conscious of that,
and have adjusted the asset allocation to take
advantage with of that. Stocks are scary. They're always scary. Profits are at an all-time high. On the other hand, because
we have high unemployment I don't think is a reason
to be negative on stocks. It means we've got a
lot of excess capacity, and we could in fact
grow as a nation at a much faster
rate in the future.

In fact, my own
economic forecast is, we've been
growing at 2% a year. I think we're very likely to
see in 2014 a growth rate that's over 3%. So I think that's actually
an argument for stocks, because I think you're going to
see more growth in the future than you have in the past. And in general, our portfolio's
particularly for young people, are very much
equity-oriented, and we've been very careful about the
bonds with some of the ideas that I gave you earlier. CHARLEY ELLIS: Can
I add onto that? Because it's really
worth thinking about.

Being young is the best
competitive advantage you could possibly
have as an investor, because you've got time. The big problem is
you haven't been around long enough
to realize what a terrific thing
it is to be young. BURTON MALKIEL: It's
wasted on the young? [LAUGHTER] CHARLEY ELLIS: You
can read Burt's book and that'll catch you up,
but that's a huge advantage to have time on your side. And most of the
people here are going to be investing, and buying
securities, and buying houses, and buying art, and
investing and accumulating for the next 30, 40 years. Most of you will work until 75. You'll enjoy the work so
much you won't want to stop.

Then we'll move
retirement ages out. So 75 is a reasonable bet. Most of you are under 40,
so you've got a long shot. Even when you
retire, you're going to live for another 20
or 25 years after that. So your average length
of time between now and when you sell them to
pay for your way of living, it's not 35 years. It's 45 years. Nobody who's got 45 years would
say, ooh, let's buy bonds, unless they're anxious about
ups and downs in the market. If you just keep your
vision on the long distance and don't worry about the
ups and downs in the market, that's a calm under pressure. It's a tremendous advantage. Let me try one more
dimension of this. Everybody in this
room has got a job.

Everybody in all the other
rooms that are tied in has got a job, with
a damn good company. Interesting place to work,
probably all are super smart, and know that they could
easily walk across the street and get a terrific job at
another really interesting company any time they wanted to. So security with
regard to earned income is very, very high. The only thing you don't
know is how rapidly you will rise in net earned income. You know in five
years from now, it's not going to be
less than it is now, unless you happen to
shoot the lights out with some spectacular bonus,
so once in a lifetime.

Leave that aside. Salary, and regular bonuses,
whatever, compensation, is going to go clunkity
clunkity clunkity clunk. That's essentially an income
that is fixed– on a slope, but it's fixed. Think of that as being
a bond equivalent. 5%'s a reasonable interest rate. OK, multiply your salary by 20. That's how much you've got
in fixed income right now. That is such a big fraction
of your total wealth compared to what you've got in
securities investment.

Look at the whole picture. I believe you will say, I want
to reconsider how much I have in stocks versus bonds,
because now that I realize I've got a fixed
income that is huge, I'm way behind on what I
ought to do in the stock area. I think most people who
are in their 30s and 40s should be thinking seriously
how much emotional stability they've got up to that level
that they can live with. They should be piling
everything they've got into equity type investing,
rather than into fixed income investing, because their
biggest thing they've got, their biggest value, is
their intellectual property, the ability come into an outfit
like Google and say, I'm here, and I'm willing
to work with you. What a fabulous sentence that
is to be able to say out loud. Recognize the reality. Your intellectual property
value is very large ADAM NASH: People in general
underestimate the value of that human capital asset.

A lot of people in the
room, technology industry, we spend so much time keeping
our skills up to date. We learn the new languages. We learn the new platforms. We learn new solutions
to old problems. But that doesn't
always factor in to how people think about money. I want to be careful,
because we have a couple more
questions, on time. There's one that I see
highlighted in blue. I'm assuming that means
I'm supposed to read it. I assume blue is good. We talked about this
briefly, but for folks in the audience who
may have a lump sum or have been out of the
market in some way, what are your opinions about lump
sum investing versus dollar cost averaging? CHARLEY ELLIS: I think
it's a great idea to put everything you've
got on the number that's going to work out
really, really well.

When you're gambling, that's
exactly what you should do. And in investing, if you
just have the ability to time the market, you
should definitely do it. If, on the other hand, you're
like all those boring people that Burt and I know, real
human beings who could easily be misled and would rather
settle for normal, break it up into parts and
spread it out over some time. Don't try to be too
cute and clever. All you do is hurt yourself. If, for God's sake, you're
right, you'll then think, hey, you know, Burt,
I'm really good at this. I think I'll do it again. And you get at that time. Worse than that, you're
right the second time. Now, you're really in trouble,
because you'll honest-to-god believe you can do it.

It will get you. ADAM NASH: You don't get
good at coin flipping? That doesn't happen? No? Burt, do you have
anything to add? BURTON MALKIEL: No. I think that says it very well. And as I suggested
to you, there's a little example that I
give of a market that's very volatile over five periods
and ends up exactly where it is, but goes down
first, and another market that goes up consistently. And you're actually
better off with the market that was very volatile, and
can make even more money.

And it's much less risky. ADAM NASH: Yeah. The great thing about
dollar cost averaging is that you get in the
habit of putting money in, that first time that you realize
that the volatility actually works for you, that you ended
up putting in money last month and now the market– you
realize it's actually a very boring process. You put in money continuously. Let the markets do their thing. I think there's one
more question here. AUDIENCE: I'd like to get
your thoughts on how indices are composed, whether or not
they be market cap based, fundamentally based, equal
weighting, anything like that. Just, what do you
think of those? BURTON MALKIEL: In
general, I believe in market capitalization
weighting. And this actually gets to one
of the other questions that's on the screen that
you didn't rated.

When you think of it, let's
say you disagreed with me and you thought that markets
were really quite inefficient. You still ought to be an
indexer, because investing has got to be a zero sum game. CHARLEY ELLIS: Minus the
course of playing the game. BURTON MALKIEL: Well, yeah. If somebody has got
all the stocks that went up more than
average, somebody else has got to be holding
the ones that went down. But in fact, it's a
negative sum game, because of the costs involved. So the first thing
to remember is, once you stray from all the
stocks in the market which are weighted by their
market capitalization– that is what the market is–
you are making a bet. And maybe would
be right, but then somebody else has
got to be wrong. Now, what all of
the other things do– whether it's equal
weighting, whether it's fundamental indexing, whether
it's value investing– is you put certain tilts
into your portfolio.

Fundamental indexing
has been very popular. There, you weight by
the company's earnings, or its sales, or its book value. And what that does is it puts
two tilts into your portfolio, it makes your portfolio slightly
more small cap than large cap, and it makes your
portfolio slightly more quote "value," if we define
value as having lower price earnings and lower
price-to-book value. There have been lots of periods
where those tilts have worked. And there's a big
dispute in the academy. Is it because markets
are inefficient, or is it because of risk? I think the people who
favor these sorts of things better think it's risk, because
if it's in an efficiency, somebody's going to arbitrage
it away in the future. But let's say you
believe in that and that that's what you want. I don't. I want to be a capital market
capitalization indexer. But let's say you think
that– this is something that has worked in
certain past periods.

There's no question about it. And you think it's going
to work in the future. If you want that, don't
buy the fundamental index. Buy a Vanguard value index
at a very, very low fee. Realize what tilts are in
those kinds of portfolios. Or buy small cap,
which is– in fact, we've got some
weighting of small cap in our overall portfolios. And by it at a low fee. Don't buy these things that are
advertised, like fundamentally index-weighted portfolios,
because they've got a much higher fee. And it's a great for the
purveyor of the investment product, and not
so good for you.

And look, I think all of us
who talk about the stock market need to be very modest
about what we know and don't know about the stock market. But the only thing I'll tell
you that I am 100% sure of, and that is at the
lower the fee I pay to the purveyor of the
investment product, the more there's
going to be for me. ADAM NASH: I see we have a
couple more questions up here. I think the next
leading question is– I think it's for you, Burt. You're affiliated with– BURTON MALKIEL: No,
Charlie is as well. Charlie can take that, about
Rebalance IRA and Wealthfront. ADAM NASH: Yeah, we have
two firms– Rebalance IRA and Wealthfront. BURTON MALKIEL: Yeah, both of us
are on that advisory board too. ADAM NASH: Both, if you want
to compare or talk about it. CHARLEY ELLIS: I'll
just say, in both cases, there's an effort to bring
cost structures that are high, to go past them with a
different cost structure that is low, and trying to
deliver access to value.

That's why we're at Vanguard. That's why we're doing this. It's very much the same thing. You could get really upset
if you spend very much time realizing how much wealth has
been created for investment managers by the
game that's played, and try to find the wealth that
was created for the clients, or the customers. And on average, it
isn't a wealth-creating. It's a wealth-diminishing
activity. And if you get
irritated about that, you start looking
for opportunities to do something about it. And that's, I think, the main– BURTON MALKIEL: The
finance industry has grown in its share
of US GDP from 4% to 8%. And some of it is devising all
of these derivative products and so forth that practically
blew up the world. But a third of it
is this increase in financial advice,
mutual fund fees. And that, Charlie and
I think, actually, is an increase in fees,
that, as I often say, I can't think of
any service that is priced at so high a level
relative to its value, which I think is very, very low.

There was a famous
book that was written in the Depression of a
person visiting New York. And at that time, in
downtown New York, there were a lot of yachts
on the Hudson River. And this visitor came
down to visit Wall Street, and looked at these
and asked the guide, "Whose yachts are those?" And the guide said, "Oh, those
are the yachts of the Wall Street investment advisers." And the fellow
asked, "Well, where are the customers' yachts?" And I think that's the
question that I would raise, is where are the
customers' yachts? ADAM NASH: Well,
it's funny, I think the macro trends you got right. It's the biggest sea
change that's happening, and it's been happening for
decades, is people recognition that they don't have
to pay those fees, that index investing
is the right approach, that a low-cost
diversified portfolio is the right approach.

If I were to just
add– Rebalance IRA, Wealthfront both
have that idea– the average financial
firm right now is spending all of
their effort looking after baby boomers
in retirement, because there's
this amazing wave of people focused
on that problem. Wealthfront, we focused
on a different audience, which is really young
people, tech savvy, who have slightly
different concerns. They're more focused on
things like taxable accounts, because they're still
accruing a lot of wealth.

So we've invested in
features like tax location. What portfolio you should
have in a taxable account is different than a portfolio
for a retirement account. We've invested in tax loss
harvesting, which is really something that only makes
sense outside of an IRA. It doesn't make
sense inside an IRA. But I think the basic
spirit is the same, which is, the truth is, more
investors would be better off taking advantage of low-cost
diversified portfolios. Be smart about taxes. I mean, I'm borrowing
your statements, Burt. I've been trained. These are the things
you can control. You can't control the market. CHARLEY ELLIS: Let me
just emphasize once again. I started off at the
beginning saying, we've got to pay more
attention to each one of us as an individual. My fingerprint can send me to
prison, because it's unique. My iris is so unique
that I can go in and out of highly sophisticated
encrypted facilities, and they know exactly who I
am because they took a camera photo earlier.

In investing, we're all unique. We may look a lot the
same, but we're not. We're different in age. We're different in wealth. We're different in income. We're different in anxiety. We're different in experience. We're different in how much
time we've got to spend on. We're different in how much
we're really interested. And we're really
different in terms of whom we're responsible
for, how many kids we have, how many grand kids,
all that sort of thing. When you get it all figured
out, we really are unique. And price discovery
has been worked out. But value discovery, what's
right for you personally, has not been really worked out,
and that's really important. And any time that we
spend on value discovery, instead of wasting it on trying
to do price discovery better than the experts who are
there full time all the time, it just makes so much sense
to concentrate on the value.

Who are you? What are you trying
to accomplish? Knowing with confidence
that you don't have to do all the hard work of
figuring out the right prices. It's done for you. So please, concentrate on that. After that, candidly, you've
got much better things to do with your time and
energy and your talent than to try to compete
against the very, very, very best at price discovery. They're doing it all the
time because they have to. Therefore, you don't
have to do any of it. And you can get the full benefit
of the very best work done by the very best people working
all the time with the best equipment, the best information,
and I mean all the time, working on your behalf to be
sure the prices are always right.

on that note, I'm seeing a signal here of
the questions going away, meaning that we're out of time. But thank you, everyone,
for coming out. And thank you for those online. We were happy to be here. [APPLAUSE].

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