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Burt Malkiel

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2016-05-26

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2016-05-26

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1. “At the beginning there were hedge funds who made a lot of money and who actually did find arbitrage opportunities. Let me give you an example. We have standard and poor's futures. We have standard and poor's ETFs. Sometimes those futures and the ETF sold at prices that were different from the prices of the underlying, and when you were able to do efficiently a program trade, you might be able to get an arbitrage where the future is too high, so you short the future and buy the underlying or vice versa.”

   2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

2. “Well, I don't think the hedge fund fees are going to continue. I think there's already some pressure on the fees, and there are some institutional investors, such as Calpers, who have, in fact, realized that this may not be as good a deal as they had hoped. Hedge funds worked for a while. And, you know, again, this goes back to the paradox of professional advice.”

   2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

3. “This over optimism is just a part of our human nature. And even though they think it's difficult, they think I can do it. You know, we now as myself and Danny Kahneman, because I've done these experiments, you ask a group of students, I've got 200 students in the room, and I give them some questionnaires. And one of them is, are you a better driver or a worse driver than all the other students in the room? And 90% of them say that they're better than average. It's like Woebe Gone. Yes, absolutely. We're all better than average. And I think that there's a lot of that in this, you know, you just... You hope and you think that, yeah, it's hard to do, but I can do it.”

   2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

4. “This is a very well paid profession, so they do get paid for it. The second is, and this goes to the work of Danny Conneman. Who was one of my colleagues at Princeton that there does seem to be in our DNA a feeling of over-optimism? These people who are chasing alpha, yeah, they do it because they get paid to do it, but I think they honestly, you know, it's not that they're bad people and that they're lying. They really believe the Kool-Aid. And this is, I think, the problem that...”

   2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

5. “And that's, I think, the problem. When you've got a market that you have individuals who are buying stocks for different reasons other than do they represent good value, maybe there's a chance of doing it, and maybe this worked 50 years ago. But the problem is, as the market gets more and more professional, when people are better trained, when people have better sources of information, when people can go to their Bloomberg terminals and the information gets disseminated immediately to all the professionals, it's then harder and harder to actually beat the market.”

   2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

6. “Basically, it's partly difficult is that partly the reason is that there are so many people doing it and that they are so professional in doing it. You know, if you have a market where, say, 10% of the people In the market are professional and ninety percent of Are individuals who don't know anything. and they will pick a stock because they like the name Or they will pick a stock because they drive a fiat, so they'll buy fiat Chrysler. They'll do it that way. That gives the professionals a possibility of finding things that may be improperly priced. But when you have a market now that is ninety percent professional. And probably ninety-five percent of the trading is done professionally That competition means that if somebody has got a good idea, they act on it and the price reflects that good idea.”

   2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

7. “Well, absolutely. There's no question you get some of it with U.S. multinationals. But my feeling is you will also get some good portfolio effects because emerging markets are not totally correlated with the U.S. market. I think that you're missing something. And even though Jack is one of my absolutely best friends, and we agree on 95% of things, Jack also doesn't like ATFs, and I think ETFs are a great invention and great for people.”

   2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

8. “And my advice for investors is take a look at at least a small piece of the portfolio should be put there. And I think over the next decade, people will be well served.”

   2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

9. “So, I think there's a lot of growth there. Valuations are better. And I just think that if somebody has a portfolio and has nothing in emerging markets, you ought to take a look. And of course, I would say you take a look by indexing because a lot of people say, oh, emerging markets are very inefficient. You don't want to index there. In fact, 90% of emerging market active managers are outperformed by the index, in part because of the inefficiency of emerging markets. Did ask spreads are high, market impact costs. When you buy and sell, there are stamp taxes in emerging markets. You really want to be more passive there.”

   2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

10. “which means that they are probably the most attractively priced markets in the world. Now, that doesn't mean the next month or the next year they're going to do well, but we can... Look at very long run rates of return and get some idea as to whether they're going to be high or low by looking at valuations. And look, valuations in the United States are high. They're higher than average because emerging markets have been so unpopular, valuations are well below normal, emerging markets are still growing, China's slowing down. Yeah, China's probably only growing at six, six and a half percent now rather than 10. And everybody says China is crashing and burning. I wish we were growing at 6%. For sure.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

11. “to the detriment to their own detriment and they are ignoring some of the fastest growing parts of the world. Emerging markets now have about half of the world's GDP. Emerging markets have 85% of the world's population. Emerging markets have about 25% of the world's capitalization. And today, emerging markets are very unpopular.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

12. “Well, I've done other things such as, and maybe this gets into a different subject, I've written about emerging markets in a book called Global Bargain Hunting. I've written about China in a book called From Wall Street to the Great Wall. And I think in general today probably if I have any investment advice for a long-run portfolio, I suspect that people are smitten with what we call the home country bias, that they just have U.S. stocks”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

13. “People playing tennis, the people who win are the people who have just made the fewer errors. That trying to do something extra is a loser's game. And that, of course, is what Charlie is best known for. Obviously, Charlie and I are kindred spirits in that we both believe in indexing. Charlie, for example, started his career and started a company Greenwich Associates where they were helping to choose the best investment advisors. Charlie believed in active management and only after experience with it, he now realizes that he is a convert and there is no better person to sing the praises of indexing than Charley Elliot. He's a great guy and a very good writer.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

14. “We do know each other fairly well, and Charlie and I have actually written things together. And again, I think one of the things that Charlie, and I want to give him credit, this is his, Charlie has, I think, just this wonderful analogy about investing that is just so true. And it's one of the things he's best known for. He says, listen, suppose you're a tennis player, but you're not a professional. Now, professionals win points by some huge fast serve, some drop shot, some superb shot that the other player can't get. But when you think of ordinary...”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

15. “Oh, yes, it definitely is. But, you know, my feeling is imitation is the best form of flattery. I'd obviously prefer that someone gave me credit for it, but the imitation is fine. And the point about the book, and I think one of the reasons that the book has done well is that it is written in a rather lighthearted fashion because a lot of people's eyes glaze over when they're talking about facts and figures and numbers. So I've really tried as hard as I could to make it as interesting as possible.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

16. “Oh, absolutely. And he's got the capital that during the financial crisis he was able to go to financial institutions, get a 10% coupon, get an equity participation, and do what other people were not able to do.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

17. “Moving the thing around and making it finally successful. And so when you think of Warren Buffett, I don't think it's just that he read Graham and Dodd bought a value stock and it was good. He's also made sure not himself, but he's put good management in and has helped managements. And I think that's been the genius of Warren Buffett as opposed to, no, it's very easy. You just read Graham and Dodd and run a good portfolio. Let me also say about Buffett that given the size that Berkshire Hathaway is now, it's virtually impossible for him to do the kinds of things that he has done in the past.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

18. “And she said, What was it like working with him? She said, you know, when I had learned that he had bought a big steak in our company, I was just scared to death. I thought he clearly wanted to take over the company and I would be out in my ear. So I called him and he said, no, really, I just did this as an investment. And she said, I really sort of liked him. He seemed very honest and straightforward. And I then confided in him, we're going bankrupt. We're really in terrible shape. Would you please come join my board and help me write this company? Buffett joined the board. Buffett actually was to Catherine Graham, enormously helpful as a business person.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

19. “Look, I think he is enormously skilled. I wouldn't take anything away from him. But he's also a very good businessman. Let me tell you a little story. At one point when I was the dean of the Yale Management School, we had Catherine Graham come to speak to our class. And she fortunately got the time wrong, but not to come an hour later, an hour earlier. So I was able to sit down with her for about an hour. And of course the first thing I wanted to ask her was, look, I know that one of Warren Buffett's first great investments was the Washington Post. And tell me about Buffett, because Buffett generally buys companies or huge stakes in companies.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

20. “And interestingly enough, when he first met Warren Buffett, they were actually at a hotel together, and Jack recognized Warren, went up and introduced himself, and he said to Warren, you know, the thing I really like about you is you have rumpled suits just the same as I do. And Jack and Warren have become very, very good friends. And as you probably know, because Warren is the sort of exception to indexing that everybody mentions, that Warren has said, I've told my widow when I'm gone, I just want you to own index funds. So there's a couple of things about Jack. He's been a lifelong friend and just a wonderful guy.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

21. “Certainly been very successful financially, just lives his life as frugally as you can imagine. And of course, I think that's really what has gotten into his company of Vanguard. That's really into Jack's DNA. And the interesting thing, I'll tell you one other little funny story about Jack Bogle. So many Wall Street people have the $8,000 watch-on and the Italian suits and so forth. Jack is always sort of in a rumpled suit.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

22. “Well, I don't know whether, you know, Jack is very well known, and I think some of his habits are probably better known than the habits of some of your other guests. But one of the things about Jack is that maybe people don't know, is this idea of low cost is really into his DNA. This is a guy who will go to a hotel, and when they say, well, we've got a very good room and we've got a bargain. It's $150 a night. Jack will go and say, well, do you have anything at $100 a night? Jack has this sort of Calvinist streak that he has much money as he has.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

23. “Well, I don't like it because it suggests that, in fact, there's some senseless robot who's doing it. And since I'm the chief investment officer, I can tell you that, in fact, there are a lot of smart people behind what we are doing.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

24. “And do it at a fraction of the cost. And again, as I said before, the thing I'm sure about is the lower the cost that I pay, the more there's going to be for me. And I think it's been very effective. And in fact, in a lousy year like last year, we were able to realize for various accounts between two and three percentage points of tax losses so that even in a year when markets were pretty darn flat and did very little, we were able to, I think, benefit the people who are our clients.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

25. “For selling you an actively managed fund. It's not only that the fund itself is charging you maybe 1%, but there's a conflict of interest. The advisor, in fact, that's one of the reasons why there's such a battle now about the so-called We had a bit of the portfolio in emerging markets, emerging markets were terrible last year, so that if you bought an emerging market ETF, you had a loss. What we will then do is We will then sell that ETF. Keep your position in emerging markets by buying another one that's similar but not identical. And the reason you can do that and have it not be a wash sale is say you sell an MSCI emerging market ETF. You buy a Vanguard one, they are indexed to two different indices, so it's not a wash sale. And so we're able to do all the things that a sophisticated investment advisor will do for you.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

26. “And as you know, that's what I have believed in all of my life. And secondly, they are charging very low fees. They charge nothing for the first $15,000 under management, and then they charge 25 basis points, a quarter of 1% on anything over there versus a traditional investment advisor that will put together a portfolio for you and charge probably at least 1% and sometimes even more. And the problem, I think with many professional investment advisors is that we ought to recognize that they often have a conflict of interest. What I think is not as well known as it should be is that if you go to an investment advisor who sits down with you and says, okay, we'll put together a portfolio for you, that advisor gets paid”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

27. “Well, again, just as with Vanguard, they came to me rather than vice versa. And again, it was just such a natural fit because A, they use only index funds.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

28. “Two-thirds of the actively managed mutual funds underperform the index, and the third that outperform in one year aren't the same as the third that outperform in the next year. So that, you know, it's not that it's impossible to outperform. And in fact, there are a few outperformers, but when you go active, you're much more likely to be in the bottom end of the distribution, and index investing isn't mediocre investing. It isn't average investing. It's actually above average investing.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

29. “And the reason the index fund wins is the index fund is holding everything and essentially charging a zero fee and the active manager is holding some of the stocks and charging a 1% fee. So even if before fees the active manager is balance each other out after fees they're going to underperform. And what we know so clearly is year after year after year the active funds are underperforming. Every year I always read columns. This is going to be a stockpicker's market year. Beginning of this year there's going to be more volatility this year. Unactive managers will be able to outperform. Standard and poor's does a so-called SPIVA report each year. Standard and Poor's indices versus active. And every year we get the same thing”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

30. “Every share of General Motors is held by somebody. Every share of Facebook is held by somebody. Every share of Salesforce is held by somebody. So what that means is If you as a professional investor hold just a few of the stocks What that means is, and say that they're the good ones, the ones that went up more than the market. What that has to mean is that somebody else is holding the stocks that went up less than the market. It must follow that investing has to be a zero sum game. If somebody is outperforming, then somebody else has got to be underperforming because they index holds everything.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

31. “Absolutely. And in fact, they had invited me to throw out the first darts when they did this. And basically what they found was... There was a little bit of an effect because when the Wall Street Journal put the column out, the column had five picks of the experts, and the expert picks maybe got a little bit for a day the price went up a bit. But generally after the 15 years of doing this, it came out basically pretty even. And you know that really leads to a very, very important point about indexing. You know, we talked about the markets being reasonably efficient. Suppose they weren't efficient. It doesn't matter. When you think of it, all the stocks in the United States have to be held by somebody.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

32. “The response was really deafeningly bad. The former Bloomberg Business Week was just business week. Right. And my book, when it first came out, was reviewed by an investment professional in Business Week. And it was probably the worst review I've ever had in my life. The reviewer said, this is the biggest piece of garbage that you could possibly imagine because professional investment people really don't like to be compared to a blindfold a monthfolded chimpanzee.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

33. “Well, I think Vanguard found its way to me in that people knew that I had been a proselytizer for index funds. I believed in low cost. And so it was such a very natural fit. And Vanguard came to me. I didn't come to them.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

34. “There are bed ass spreads, there are market impact costs. It's not free, so there's an extra cost, including what I think people do not appreciate, and that's the tax cost of the active trading when you have an actively managed fund, you got a $1099 at the end of the year, very often, and they will say, hey, we realized some short-term and long-term capital gains on your behalf, and you've got to report those on your income tax.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

35. “Well, I think both are important. Clearly, the low cost is important in that, let me tell you, any of us who talk about financial markets need to be very modest about what we know and don't know. But let me tell you the one thing I'm absolutely sure about with respect to financial markets, and that is the lower the fee I pay to the purveyor of the investment service, the more there's going to be for me. And the problem is for active managers, it is still the case that probably 100 basis points, one percentage point a year is what they are charging and the index fund or ETF traded index fund charges $5 or $4 basis points. That difference is basically a difference that comes to the investor. It's also the case that trading is not free.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

36. “More institutional than individual. Individuals are slower to catch on to this. So with institutions, it's maybe 35 or more with individuals. It's probably a bit less than 30. But the point is the market is catching up to the idea. And I am obviously simply delighted since I've basically been an evangelist for index funds all my life.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

37. “But it did catch on. And in fact, last year, hundreds of millions of dollars moved from actively managed funds into index funds. And index funds now have maybe somewhere between 30 and 35 percent of people's money.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

38. “Well, basically, I said that in 1973, and the first index fund was not started until 1976. Now, you know, I want to give Jack Bogle all the credit in the world because it's one thing for an academic to say, hey, there ought to be index funds. It's another thing for somebody to bet his company on starting an index fund. And let me tell you, it wasn't easy at the beginning. They had an underwriting where they were hoping to do $100 million or more in the index fund. And in fact, the book wasn't oversubscribed. They sold 11 million. And sometimes I used to joke because I then was on the Vanguard board that Jack Bogle and I were about the only people I knew who actually owned shares in the index fund. It was very, very slow to catch on.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source

39. “No, exactly, and that's precisely the thing that happens. Before the fact we really don't know and we don't know today is the stock market too high or too low. It's high now. There's no question. Valuations are stretched. But it's also the case that the short-term government interest rate is zero. And the long-term interest rate after inflation is probably zero or below zero. So in that environment, everything is going to be more highly priced.”

    2016-05-26 · Masters in Business · Interview With Burt Malkiel: Masters in Business (Audio) · IDENTIFIED FROM THE TRANSCRIPT · source