In Pursuit of the Perfect Portfolio: Charles D. Ellis

hello I'm Steve Forrester welcome to our project in pursuit of the perfect portfolio it's my pleasure today to have with us dr. Charles Ellis more commonly known as Charlie Ellis who is joining us today Charlie is the best-selling author of winning the losers game and more recently the index revolution he's also the founder of Greenwich associates and we're delighted to have you here Charlie I'm glad to be with you I want to take you back to before your investment career you had your start in radio that started at Yale at Yale and then eventually at WGBH yeah what was what was that experience like and what did you take away from that that might have helped you later in your career first of all there's a lot of fun the second thing is I learned at Yale that I really liked working with a group of partners and that a flat organization where we were working together as a team made a huge difference it's not just you add up talents but they're different kinds of talents so you bring them together no sudden you've got much much more talent focused on the purpose that'd be one second is the value of strategic thinking because we did some really interesting things particularly when you think we were students who should have been in class planning most of our time and we spent an enormous amount of time working this organization but it made a big difference to think long-term and then to work through people and to do that in a partnership routine like basis and basically WGBH in Boston was very much the same sort of an experience everybody there was older than I was everybody there knew more than I did but I was quote-unquote the boss and so you learn a lot about respect for other people and their talent and you'll also learn nobody does anything unless they want to they don't do anything well unless they want to that if you provide the right opportunities for people to feel inspired and enthusiastic and make that extra commitment they'll do it while you were at WGBH you started dating a woman who gave you some advice and and she told you about these things called b-schools business schools and she said to you that that Charlie you you ought to go to B school and you ought to go to the Harvard Business School well she said I should go to the B school I said what is a B school and she said Business School for goodness sake and I said well that's nice but you said thee what does that mean she's it there's only one I said come on it gotta be Maurice it's only one you should go to so wasn't the Harvard Business School and we did and what was that experience like oh we're about transformation always you know the school likes to say it's a transformational experience then almost everybody who's never gone through the school would say that doesn't sound plausible to me that's a little bit too highfalutin anybody who has gone to the school would say oh yeah that's exactly what happens first of all it's exciting and fun you're with eighty other students all of whom are terrified that everybody else must know more than they do because it seems like the group as a whole knows a lot more than any individual and that's true groups always know more than any individual the second thing is you learn that you've got an hour and a half to figure out together what is the answer to a problem but first you got to figure out what is the problem and what's the real real problem not the one that's identified that's easy almost always there's a problem behind a problem that's really driving things sometimes it's the problem behind the problem behind the problem behind the problem that's driving things and it's always about people so while you do an awful lot of math analysis what you're really trying to do is figure out there's a language being spoken here language of accounting it's part of it language of interactions and people but it's always trying to find out what are people trying to do and how could you organize things so that they could be more successful individually and more successful collectively and more successful over time and if you get that done you can be damn sure an hour and a half has just finished and we're all waiting to go to the next class and do the same thing all over again with another cockamamie problem that is gonna gather your attention you wonder how that Dickens we're gonna figure this one out but looking ahead at things trying to anticipate things and always remembering it's all about people all about people all about people every single time none of the people yeah the people so you're having lunch with a friend of yours and and he tells you that his father's friend a fellow named Robert strange is that Rockefeller and he's looking for an MBA and you should apply to it and what was your what was your thought in terms of what you were getting into and how did you end up at the Rockefeller family office well WGBH was obviously not-for-profit and I thought you know maybe this is a great idea of because the Rockefeller Foundation would be kind of interesting and so I thought well I should certainly talk to this guy but said my friend was a sensible person and had a good judgment and I thought if he's recommending I do this is probably pretty damn good idea so give it a try and halfway through the interview with Bob strange I realize he's not talking about the foundation in fact he doesn't work at the foundation but I got to find out what he really really does because I like this man he's obviously brilliant and he's very warm and empathic and I think I I knew I needed to learn a lot I know it's green and wet behind the ears so that was not a problem for me I knew I was an innocent babe and I thought you know if I work with this man I could learn an awful lot but I better figure out what he's doing for a living cuz I don't think I know yet all I know it's what he's not doing not giving money away it's something else so second half-hour I've figured out yeah he's in the investment management world and he's enjoying it greatly and he finds it intellectually stimulating and interesting well what the heck give it a try because chance to work with a really first-rate human being so you got the job you took the position you hadn't taken any investment courses that weren't at Harvard in those days there was a course on trust administration it went from 11:30 to 1 o'clock it was boring really boring and since the time is 11:30 to 1 that was called obviously darkness at noon nobody took that course if they could avoid it so while you're at at Rockefeller Brothers you then got immersed in terms of some some additional learning outside of outside of the the office including what would lead you to a PhD yeah my first report was so obviously drenched in innocence and ignorance probably equal proportions to the to my super buddy the Jolly jolly didn't you learn nothing at the half of Business School I said well they didn't have any courses fell so I guess the answer is no he said well you know just between you and me this is a rich family but they hate that rich you got to learn something about this so he sent me to a Wall Street firm to get in their training program and said and you should take some courses at NYU which in those days had its teaching facilities in the Wall Street area so I went down to sign up then I'd been in the Army so I know what you do when you see online you get in the back of the line and wait to get to the front when I get to the front it was a card table the typewriter on a very nice young woman behind it said you're next your regular student or make a special student I said I'm sorry I don't know the difference regular students in a degree program special student is just taking courses there which cost the most the same price I said where'd you just fit in where have you been in school I said well I just graduate from Harvard Business School Oh Harvard Business School how exciting you should be in our ph.d program so I send up for the ph.d program and I got into it the more I got into it the more fabulously interesting I found there were some very very bright people were doing all kinds of very creative things about Investment Management in those days they were blending it with economics which I had studied some in college and it's Fanny South Victoria so I kept taking classes and took more classes and took more classes and one day I'm looking around to you know they're in the ph.d program do you think lawful lot of classes you might actually be getting pretty close to earning the degree so I checked in to find out what was required and about that time I'd also started Greenwich associates and a really long boy there's a lot of work before you have passed your general exam and then you got to do a long paper on a narrow subject I don't think I can do everything so I was about to stop when I had a conversation with my son he said dad let's go shovel and I knew what he meant he'd just gotten a boys shovel for Christmas so we went out there's a light snow falling went out and started doing a little bit of light shoveling and then after a while I thought he might be tired of that so I asked him would you like to stop for a minute and talk he said sure I said Harold how school he said I like school dad teachers are good and like the other kids then we're learning a lot how school with you he said well Harold you know with a new firm I'm working so hard I think I'm gonna have to stop dad you can't stop school till you finish so the next day I went back to work at school and then kept John clunking away 14 years from start I had the PhD quite an accomplishment given all the other things that I want to come back to Greenwich associates in a little while but lots of other things that were going on in your life at the time so that was quite quite an achievement while you were at the Rockefeller you had an offer that you couldn't refuse a friend of yours my former classmate was that a little firm known as DL J and offered to double the salary that you were making bonus opportunities low and double it was triple triple well there you go there you go what was the attraction and what was the unique interaction really wasn't the financial center although my wife had decided to have children and therefore she was no longer gonna be a schoolteacher and therefore we were really in trouble living in New York City so I knew I had to get a job to pay more I hadn't realized you could get a job to pay that much more but I was at a low base of triple a small base it's not gigantic anyway but the real attraction was was a terrific group of people bright Suze astrick hard-working very creative and they were surely going to be one of the driving forces in a new Wall Street remember there was a depression in the 30s of the war in the 40s and then there was a cold war in the 50s so there's a long period of time when nobody went into Wall Street and certainly nobody real talent was interested in getting in that field if they had an alternative there were some marvelously talented people but honestly I think they mostly didn't have an alternative that was very attractive and then we were dynamic as an organization in a world that was dynamic and changing the people inside the firm were just wonderful fun people to be with and we had a great good time being revolutionaries revolutionary what in what sense well it's hard to believe but if you go back to those days most securities firms did not have a research department we were all about research secondly most people put out a report it would be two pages long at the most we were doing 50 75 100 150 page reports we were really making an effort to understand the companies very very well so we were doing the classic thing stuck to the competitors talked to the suppliers talked to the customers and really analyzed the companies and because we had some very very bright people who were attractive because we had other really bright people there's a lot of creativity in the organization and Kennedy was an exciting bunch to be with there's still very good friends that I made during that period of time so what made you then start your own firm Greenwich associates this was 1972 that's quite a big risk that you're taking going out on your own and and developing what now is a world-class consulting firm depends when you want the true answer or the normally public answer and I'll give you both normally public answers true it was clear to me that I had no idea how well I was doing I was working very very hard I knew that I knew that I knew a lot about my individual client my institutional clients and I also know I didn't know very much about how they really thought about me and I didn't know how they thought about any other firm yeah you know if anybody could go out and find out what they really think that would be tremendously valuable to everybody and that was basically a lightbulb it just kind of came out of the sky presented itself wow that could be something not at the time I didn't think of anything outside the United States then I was really thinking mostly about securities business and the pension business it didn't occur to me the commercial banking and Investment Banking and bomb dealing and foreign exchange trading other financial services would be at all interesting didn't occur to me that we'd be working all over Europe and all over Asia done to the Australia New Zealand there are a hundred and thirty institutional or professional financial markets in the world and at the end of 30 years we were covering every one of them who the same original idea although we learned a lot about how to make it better and better and better and better more useful to clients basic ideas there are thousand people 500 people who are the dominant buyers of a particular service they know exactly what's going on they know who's good what they're good at they know how they've improved or not improved over the last year they know what they would like to see more of and if somebody would come and talk to them candidly for an hour in confidence they would tell you so what we did is in confidence one-hour interviews with the principal buyers of one after another after another after another major financial service and we would ask them which of the firm's used the most in the exact order of their importance to you and then evaluate those firms who's really good at this who's really good at that who's really good at this who's really good at that we never asked who's a bad at this or bad at that because you don't have to you don't have to if you're the least athletic kid in your fifth grade class you know that you're the one that doesn't get chosen for all those teams mm-hmm what so is this a revelation to the firms when they when they miss information amazing how much you could learn we could create the information for the firm as a whole you could create the information for the Boston institutional investors you could then create the information for seven really important Boston institutional investors we guaranteed everybody confidentiality so we wouldn't talk about an individual institution but groups for groups and groups so you had a group of clients I had a group of clients and we're both serving Boston we've done one report on your clients what they thought about our firm I eat you and if I were responsible for another group what they thought about our firm ie me it made a huge difference in a couple of different ways first of all it decayed senior management undeniable information so if they said to anybody look this is what the clients are saying about you that had to be accepted there was no way you could say no no then that leads to a lot of accountability and planning and it's a terrific positive tool if you can show somebody who's doing well you're doing well at this but you're holding yourself back over here so if you can build that up you'd really be doing very well so it's tremendous positive reaction that way so really this is helping to raise the raise the tide in terms of the investment professional investment management profession you know it really did make a difference that way but it also made a difference to each individual who was really good and individuals who are not really good so if you know the old saying if you delete the duds and enhance the stronger participants you can't help but improve the overall performance and if you do it in your firm then I've got to do it in my firm these guys are gonna do it near firm and those guys are gonna do it in their firm otherwise they're gonna be dropped out so some tough markets in the in a tough market environment in the early 70s you you came out with a really impactful and revolutionary and controversial article in 1975 called the losers game which was inspired by a book on tennis can you talk about what went into that article and the reaction to it yeah let me talk a little bit about the book because it's really worth celebrating Simon Remo was a fabulously wonderful human being on a lot of different levels people liked him a lot he was also the remo of Thompson Remo Wooldridge or TRW which is the organization that did almost all the general contracting for the American space program so you could argue sensibly the team more than any other American made an enormous impact on the space program which was an exciting extraordinarily powerful and very substantial impact in economics since the way we think about herself so great industrialists inspiring leader you also happen to be a gifted musician he and three members of the Los Angeles Symphony Orchestra played in concert as a quartet and he happened to be pretty good athlete and he being trained as an engineer looked on tennis in a way that nobody had ever looked at tennis before and he realized that two games with tennis and they used the same equipment the same court the same dress code and they keep score in the same way but other than that they're completely different in professional tennis or expert tennis and there are very few people that really play expert tennis but there are people and we've all seen them one you can see the Williams sisters some of the others they are really good and they don't make mistakes but they force the other person to do just a little bit harder to do it a little bit harder to do it sooner or later a forced error was made and they win points most of the time I don't know about you but I do know about me when I play tennis I play for fun and I lose points and I hit the net the really good players never hit it in that by double fault good players almost never double full I hit it out of the court it won't hit it out of the court they get close to the line but don't know and I give you lay up after layup after layup easy shots you can put away so he said you know you have to understand which game of tennis you're playing and if you're brilliant athlete fabulous tennis player you should play a winning strategy but if you're not you should play to not lose you should be defensive keep the ball in play my father-in-law is a terrific athlete that if you get the ball back three times on every point you win every match for the rest of your life and he was right the loser tennis is what I play Williams sisters play winning tennis and once you get that in your mind it's hard to shake and you'll see it showing up in one place after another after not driving for an example is don't make mistakes don't have accidents don't do anything that's dangerous and you'll be fine if you want to be a fabulous Indianapolis 500 driver that's your choice but that's a different line of work investment management there are people who were playing a winner's game and they are doing something that is so beautifully done that you and I would be very kind of they'll keep it up then there are a lot of people who are in there competing as best they can but Canada they make mistakes they buy high sell low and they have the portfolio arranged the wrong way and sooner or later they fall short of what they're trying to do and because I was working with a large number of different investment management firms I could see for myself they're all the same in such ways as really bright people who really studied Investment Management and know a lot about how to do it now to think about they are very good at networking with other people and gathering information that got access to terrific information resources and they are excited about the information they've got they've got computing power that's terrific and they're all competing with each other and they don't realize it's not the market that they're competing with it's those other guys and those other guys are pretty good and it's pretty hard to beat them and that was the genesis of realizing what Ramos talking about in tennis applies to investment management aim of the article thesis was how to not lose this realize mistakes are terribly important trying to avoid mistakes and called the article the losers game because the game is dominated not by the winner but by the loser so what was the reaction in the investment profession when this well everybody I knew this was close thought you're going to have a tough reaction a lot of people are going to be angry no I don't chance they also do this is that's cute it's of course doesn't imply to me but it applies to a lot of these other guys not to me I mean I'm really doing well so so then that became the impetus for for the book that that eventually morphed into winning the losers game and you provide some important insights and and one of the big takeaways from it is that you say winning the losers game of beating the market is easy don't play it so can you expand on that and and other insights in terms of the book well give you just current information if you said I would like to be in the top 25% top quartile of investment results with my investment manager I could say to you comfortably you can do that easily yeah well actually top 25% is fine but I'd like to actually be in the top 15% can you do that yep I can guarantee you that you'll be in the top 15% top 5% no I can't guarantee the top 15% guarantee yeah over 15 or 20 year period you'll be in the top 15% if you follow my simple guideline cheeky Charlie that sounds like a winning proposition it is what do you do do you invest in a low-cost index fund and relax because it's going to happen and the reason for that is really something that's important let me just take a minute sure some of the mechanics back in a day 50 years ago 60 years ago less than 10% of trading on the New York Stock Exchange was done by institutions and those institutions candidly were mostly regional trust apartments that bought blue chip stocks to hold forever and they had an investment committee that chose which ones would be on the approved list and then younger guys would implement them this was not an aggressive group of institutions so we've gone from 9 or 10% institutional and I put that in quotes up to now 98 99 % institutional and those institutions are enormously aggressive intensive well armed well staffed wonderfully can't competitive people when you get to a point where I could buy and sell nine out of ten times from an amateur who's not involved in the market at all and does it honestly know what's really going on that's one when you step up and you say any time I want to buy a stock I've got to buy from knows a guy who knows exactly what I know and it's just a matter of my judgement on those facts versus his judgment on those facts that's hard now if you want to sell that stock you got to sell it to the same kind of person 50% of the trading is done by either computer machines computers or by the largest institutions in terms of volume of activity and half of them are hedge funds these are very rational hard-hitting aggressive and it's hard for anybody who hasn't seen it up close how aggressive aggressive is but they are constantly striving little micro advantages all the time or get the same tools or got the same equipment we all get same information and you're gonna buy and sell from those guys and all you have to do to keep up with the market is earn back your fees and let's call that 1% of assets plus your cost of operation that's either one percent of assets or two percent of assets depending on how you want to count it let's say it's just 1% so that's one plus one is two and you've got to earn that back in what kind of a market well consensus seems to be somewhere between the 6 or 7 percent return expectation over the next decade okay so let's say six percent just for convenience six percent two percent holy smokes I have to do 30 percent thirty three percent better than the competition just to break even just to keep up with the market I've got to beat the competition by thirty three percent who that Dickens is going to be able to do that who among us is going to be able to do that well there are some people who think they can but they're very very few and to think that I'm going to find a manager who's going to be able to do that it's one thing to look backwards to say if you have but it's another thing to try and pick those in advance that be one the second thing is let's say we found one if you could produce 33% rates of return why wouldn't you just manage your own money why do you wouldn't have the burden of carrying my money around with you though that's very real problem then as you know there have been starved managers who have closed down and said I can do better for my family managing the money on my own and not having to carry all that public money so it's a major major changed the world in it what's amazing to me is that we really have stayed with the mythology rather than recognizing the realities underneath it and the realities are profound and they are powerful and they're unrelenting there's no way that we're gonna go back to a time when oh yeah let's all go down and beat the market it just isn't gonna happen I want to come back to this whole Index revolution in just a few minutes I won't take you back to you mentioned Yale and and your affiliation with with Yale but it goes beyond your undergraduate degree you were in the position of being the chair of the investment committee for Yale's endowment fund and you had a front-row seat observing David Swensen and and Yale has this fabulous reputation in terms of its endowment fund and really thinking in a non-traditional way so what is the what what's become known as the Yale model and what are the lessons for individual investors none okay no that's not true David would say oh yes sir and I would agree no but the lessons are not the ones that I'll do what David Swensen Stu who that's what I mean by none if you said look what should an individual investor do first understand who you are and what you're trying to accomplish so look at Yale it's a 300 plus year old university it's been around for a long time it'll probably be around for a long time okay that's pretty important if you convert it into the way in which you would operate secondly while it's located in the United States it's truly an international phenomenon therefore you think comfortably about international activity third would be that this is an institution that with a sensible spending rule is smooth can handle the ups and downs but it'll always be short on finances because the people who are involved on the faculty could always use more money to do more creative research and advanced human time so you really are playing for highest return there for heavy inequity and you want to be diversified so that you don't have a heavy on one kind of equity but on several different kinds so you have different characteristics of behavior so your aggregate portfolio will be more consistent in performing over time than it would be if it was in any one component part blend up with the spending rule you can be quite nervy as other people would see it well what do you mean by that now 10% in bonds less than 10% in US equities listed equities that's really different yes it is different from what we think of as the historically traditional 6044 for pension funds endowments yeah and most of which candidly is following somebody else is following somebody else is following somebody else following somebody else sort of like the lemmings out if they get together they follow each other if you said no I'm gonna do that differently I'm gonna think through rigorously what's specific about me what's important to me what's my capacity really to handle risk market risk in particular and what does it benefit me to absorb risky Ness in order to get a higher rate of return it'll lead you in a very different set of conclusions than well I want to put everybody else once I want 60/40 clinically it's worth keeping in mind if you go back 50 years public pension funds were 95% invested in bonds why because that's what they were all invested in what does that make any sense no it didn't make any sense but that's what they were why 60/40 well most actuaries use a five-year horizon then if you use a five-year horizon you can pretty well work out the risk balance brings you in at 60/40 ratio if you made that tenure arising you'd be at 70/30 if you make it at twenty five-year horizon you'd be at 8020 it's in the math that can't be avoided it just the calculation comes out that way they said well how about if yours thought of in terms of honored when you come down to most of all of its going to be equity but human beings don't have a hundred so human beings have to think somewhat differently second thing is David Swensen and his team are exceedingly rational which is a wonderful advantage to have most human beings candidly or not an exceedingly rational it's just not who we are another characteristic is they know a lot about the economy they know a lot about investing and they know a lot about investment managers most of us don't so they don't have to protect against that kind of innocence or lack of knowledge were caught by this blunt word ignorance they are fearless and I don't mean that they are cavalier about things that might cause others fear but they make a point of understanding things so that they can then be fearless Yale because of its depth of knowledge 30-plus years of working with investment managers and they working with David Swensen and there's no one in the investment world it wouldn't be thrilled if they could be the one that gave David an insight or an idea that he found helpful which leads us to this pursuit of a perfect portfolio if there is such a thing but no there isn't well let's talk about the portfolio first of all how do you see one's portfolio and then we will talk about the pursuit of it they really mean to be specific when they for example people like to point out that Harvard Yale and Princeton for years and years and years have been very collegial Stanford as part of that communication MIT as part of that communication it's a group of people with the same kind of mission the same large endowment same desire to do things creatively and well and very disciplined and very bright engaging people in charge in each case but Harvard's problem investment problem is very different from Yale's investment problem and Yale's investment probably very different from MIT and MIT it's very different from Princeton and Princeton is really different from Stanford and each of them is so different when you really understand that they're investing program should be very different you and I look like businessmen fine you're a professor I teach you probably do some things of a business like nature sometimes we get along pretty well similar in many many ways if we were in another country say yeah yeah that's North American you're Canadian I'm not but that's alright I grew up in northern us you know spend a lot of time in Canada my son's married to a Canadian so there's a lot of different ways in which we're close and you might think okay but we're really different we're well when I wear reading glasses I'll bet that's not quite the same prescription you use and maybe your collar is the same as mine but maybe not then your shoe size might be a little different and the clothes that you like to wear might be a little different and the ties that you would prefer might be a little different and we're just getting started and then you think of well what do you prefer to eat what's your health condition what academic disciplines have you pursued what has been your personal history and investing we're still getting faster and faster differentiation then we haven't gotten to the really important things like what are your assets how long do you have ahead of you are you 99 and you're basically at the end of your run or you've nine and you've got a long way to go now do you have others who are dependent on you or you an individual person you have any family members do you have any cousins nephews do you have any friends that you're trying to help out in a problem is it have you studied investing all these years or did you do other things instead have you had a wide acquaintance with people in the investment business and do you chitchat with them all the time about everything that has to do with investing and you just can't resist the temptation to talk to another guy another guy where do you sort of suit no I don't actually talk with all that many people well gosh if you haven't spent any time in the Middle East you haven't spent any time in Japan you haven't spent any time in Australia and New Zealand you haven't spent any time in Germany haven't spent any time to Canada you haven't spent any time how could you possibly know very much about different so pretty soon you realize we're very very different and when you go to some investment management it's really worthwhile how many different colors are required to create the iris of your eye six okay so what's the big deal about eyes your eye is unique there is no other person in the world who has quite the same eye that you have your fingerprint is unique worried about that your DNA is unique you are who you are and from an investing point of view if you take age income spending assets knowledge of investing comfort with risk interest in spending more time on investing access to information access to judgment all those characteristics you know you were unique and every investor is whether they want to accept it that way or not every investor is unique so what's right for one person isn't maybe close to right but is it quite right when you and I could swap suit jackets no problem but shoes I'm not so sure my glasses I'm pretty sure would be hard so so I bring this uniqueness to an advisor and I share all of these attributes that are unique to though you won't do that nobody does that nobody ever says now I'm going to tell you the truth about Who I am and what I care about from an investment point of view and what I'm trying to accomplish that's not what we do what we do is say I want to have a good investment program that will do in the market and so advisers say well tell me a little bit about how you feel about residency well I don't don't mind taking some risk but I don't want to take too much risk do you want to give me any further details no that's about the way I feel about when it's the last really positive experience you had in the investment world and what's the land please tell me about it when was the last time you had a really negative experience please tell me about that and then advice we'll try to come up with who are you the kind of guys should be 60/40 or 70/30 and you and that advisor would both be banking one of the most obvious mistakes you could possibly make if you stood back from them you're looking at the portfolio of securities and that's what you're studying and you're paying no attention to all the other variables that make a big difference other than you as a human being some what you not come candid with him and he won't be able to ask you the right questions and you won't get there because it takes a lot of discipline thinking to get the exact insight and exact understanding now your tailor can help and your obstetrician your eyeglasses doctor who can help and if you're married your spouse can help most doctors know that the best way to learn something of diagnosis of a patient is talk to the spouse can be very very helpful so how should I be looking at a portfolio is it is it too narrow to say I I've got some money that I'm investing are there other considerations that I should take into account well I think so for an example are you earning an income if you're earning an income I'd give you an example I teach a course on successful investing at the Yale School of Management and 75 students show up and the first assignment is what will your portfolio's asset mix be at thirty fifty and seventy and the answers come back overwhelming because they all check with the internet and see what's the answer thirty percent in bonds at thirty fifty percent at fifty and seventy percent at seventeen that's got to be wrong they said no no it what we were told fine you were told but do you do anything else because you were told no okay let's get back what have you got and it's the total this is when I come to what I urge them to think about always is the total portfolio so for an example at my age Social Security is part of that total portfolio well that's a very steady amount of money it's a lot like a bond in terms of what it means to me for an investment pointers may be able to think but that is part of my portfolio as a whole but it's a fixed income type of characteristic okay wife and I own our own home well that's part of your investment portfolio what's the return on all none it's you basically keep up with inflation and that's about it okay that's a stable asset isn't it so if the market goes up and down the value of the house changed now $90 stays pretty constant day in day out okay so it'll rise enough to basically cover the cost of owning the home and fixing it up from time job yeah that's about it okay what else have you got well I've got my investments and my wife's got her investments we could include those should we lump them together yeah I think you probably would that be very sensible what else well my wife's got an earned income and I have an earned income but your age you're still learning an income it's because I love doing the work and people are glad to pay me for it yeah I'm still actually very much enjoy it okay so you want to include all those different component parts absolutely absolutely well what how big is the investment part of that total portfolio not all that big it's a whole different way to think about our portfolio in a much broader context oh boy yes because if you don't think about the context you know you're doing yourself from putting the blinkers on and limiting what you could have thought about and it causes people to say well then why would I want to have that much involved in bond investments and I think that's a really great question I think everybody would be asked that question you go back to the Yale model the Yale model starts by going to fundamental questions and every single characteristic of behavior is it really the right thing to be doing at Yale that's what we should be asking us I'll be doing that so so we're all unique and and that's really important are there any common elements you talked about indexing is that something that should be pervasive for for most investors oh I think so but let's just be realistic if you read this morning's Wall Street Journal Burton Malkiel has a nice article in which he reports the data that over the last 15 years 90% of actively managed mutual funds have underperformed the index and I can take one more and say you could never figure out in advance which of those 10% that are going to do better I think you could have a little bit if you spent as much time as I spent in the investments world and you knew as much as I did about individual organizations I think there are some that are so fundamentally superior in the way in which their organisation is designed I take the capital group that represent the American Funds they are really different and there are some other organizations that others would say well I think you ought to include those fine but you know let's be fair I got 50 years head start on that question and I've studied that organization very carefully and I know a lot about the way it works and why and I understand their values and their focus and one of the main characteristics that nobody pays any attention to it they understand that risk is really important so they manage risk so that their investors have less risk as well as more return it's a nice combination but very hard to pick out very many more are there any other things that I should be thinking about as an individual in terms of pursuing my particular portfolio that that's going to be right for me well let's get one thing really settled if somebody said to you look the data is very clear that an 80% of the alternatives don't work out and it's very hard to choose who's in the 10% it does work out and even those don't succeed by much so that's not a game worth playing that's a huge freedom to be able to say you know I can relax on that I can accept the market rate of return at the market level of the risk knowing it'll happen that way week after week year after year decade after decade yes you can and how do I do that low-cost indexing fun that's step one solves the big operational problem you still got the question of what's the right structure of a portfolio for you given all the different characteristics we talked about before and so it's back to the context again and the context is you and that's unique and therefore what's the right investing program is something you've still got to still have to work on you still need to concentrate on but the great thing about indexing is it takes the hardest most complicated part where you really can't figure out most likely and puts it aside and said rest assured you're gonna do very well now you can concentrate on what only you can do which is figure out who you are and only you can do which is what are your values what are you trying to accomplish so you and I might have different allocation of asset I would hope so but indexing is the way we both should go yeah excellent charlie it's clear to see why you've been referred to as the wisest person on Wall Street you have continued to provide us with all kinds of insights and I want to thank you for taking the time to join the promise to do not the wisest but the luckiest because I in an unbelievably privileged position to watch what's going on through the eyes of some of the best investors in the world it just happened but I've been lucky and the reason I wrote the book they said if I've been that lucky I don't think it would be anywhere near appropriate for me to keep that knowledge to myself I should share it with others well we're glad you did Thanks thank you very much

Channel: MIT Laboratory for Financial Engineering

Views: 21,566

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Id: FvE3djVyGjU

Length: 47min 50sec (2870 seconds)

Published: Thu Sep 07 2017