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00:00JOINING US IS THE ONE AND ONLY JOB GLOBAL. -- JACOBO WILL. -- JACK BOGLE. THE NUMBERS, WHEN IT COMES TO INVESTMENTS ARE STAGGERING. ACTIVE FUNDS HAVE SEEN $600 BILLION IN OUTFLOWS. BILL ACKMAN RECENTLY BROKE -- RECENTLY REFERRED TO AN INDEX BUBBLE. WHAT CAUGHT YOU BY SURPRISE? JACK: I GUESS ITS STRENGTH. I'M DISAPPOINTED HOW LONG IT TOOK. 40 YEARS IS A LONG TIME. IT TOOK UNTIL THE MIDDLE 90'S. WE STARTED IN 1975. MIDDLE 90'S UNTIL INDEXING CAUGHT ON, THEN IT CAUGHT ON WITH A FLOURISH AND DOMINATES THE INDUSTRY. THE INDUSTRY IS IN NEED OF CREATIVE DISTRACTION FOR DESTROYING OLD IDEAS AND MAKING LIFE DIFFICULT FOR ASSET MONEY MANAGERS WITH HIGH COST. ACTIVE MONEY MANAGERS AT LOW COST CAN DO A LITTLE BETTER THAN THAT. MATT: THERE HAS BEEN CRITICISM IN PART BECAUSE OF THAT SUCCESS. IN PART, AN ANALYST WROTE A NOTE SAYING INDEX INVESTING IS WORSE THAN MARXISM. [LAUGHTER] MATT: I AM SURE YOU HAVE HEARD THESE CRITICISMS BEFORE. INDEX INVESTING DOES NOT PARTICIPATE IN THE PRICE SETTING MECHANISM. HOW DO YOU FEEL ABOUT THAT ACCUSATION? JACK: WELL -- [LAUGHTER] A SILLY ATTEMPT TO GET ACROSS AN ARGUMENT THAT IS TERRIBLY FLAWED. THE MARXIST ARTICLE, IF YOU WILL , SAYS ANY FIELD OF ENDEAVOR THAT ATTRACTS VALUE FROM SOCIETY IS DOOMED TO FAIL. INDEXING IN GENERAL SHOULD CREATE A MUTUAL FUND INDUSTRY ADDING HUGE AMOUNTS OF VALUE TO OUR SOCIETY, TO INVESTORS. IF THEY DO NOT UNDERSTAND THAT, I'M NOT SURE WHAT THEY DO UNDERSTAND. IT IS A FUNNY ARTICLE. IT IS LONG, DETAILED, I'M NOT SURE HOW MANY READERS COULD UNDERSTAND ALL OF THOSE FORMULAS PRINTED PAGE AFTER PAGE. THE COMPARISON WITH THE FINANCIAL BUSINESS TO THE MINING INDUSTRY STRUCK ME AS ABSURD, UNTIL I REALIZE THAT THEY ARE BOTH EXTRACTED INDUSTRIES. THE MINING INDUSTRIES TAKING GOLD AND COAL AND THE FINANCIAL INDUSTRY EXTRACTING VALUE FROM THE CLIENTS IT SERVES. SCARLET: WE KNOW THE RISE OF PASSIVE INVESTING IS A THREAT TO COMPANY SPECIFIC BOTTOM OF RESEARCH. DOES IT PROVIDE VALUE, WHAT IS IT? HOW SHOULD THEY ADAPT TO THE NEW WORLD? JACK: YOU ARE RIGHT. BELL BY SIDE RESEARCH, IT DOES NOT HAVE THE BIAS OF SOUTH SIDE RESEARCH, CREATES EFFICIENT MARKETS. THE ISSUE IS AT WHAT POINT IS INDEXING MAKING THE MARKET LESS EFFICIENT? THE REALITY IS THAT YOU COULD GET RIGHT NOW, INDEXING IS 30% OF THE TOTAL MARKET. YOU COULD GET 50% OR 60% BEFORE ANYTHING WOULD BE NOTICED. THE INDEX MOVES A CERTAIN PORTION OF THE MARKET FOR TRADING ACTIVITY. 90% OR 95%, IT MIGHT MAKE IT EASIER FOR ACTIVE MANAGERS TO WIN. OR, SO IT IS ALLEGED. WHEN THE MARKET IS LESS EFFICIENT, IT IS EASIER FOR THE GOOD GUYS TO WIN AND FOR THE BAD GUYS TO LOSE. HAVE TO BALANCE EACH OTHER OUT. I FALL BACK ON THE SIMPLE MATHEMATICS. IT IS NOT SEEM TO HAVE DIRE EFFECTS SO FAR. THE REALITY IS THAT YEAR AFTER YEAR, IN TERMS OF PERFORMANCE, INVESTMENT RETURNS, INDEXING OUTPACES ACTIVE MANAGERS. 8% FOR THE S&P 500, 6% FOR THE AVERAGE LARGE-CAP GROWTH FUND. THAT IS HUGE. 6% COMPARED TO 8%. IT HAS TO DO WITH TAKING COST OUT OF THE EQUATION. THOSE COSTS ARE FUND EXPENSE RATIOS AND CLUSTER FUND TAKEOVERS. WHEN YOU DON'T KNOW HOW MUCH THAT IS, YOU KNOW IT IS LARGE, BUT IF YOU TAKE THOSE TWO NUMBERS TOGETHER YOU WILL TAKE 2%. 2% SHOULD BE THE MARGIN BY WHICH AND S&P 500 FUND READS THE AVERAGE LARGE-CAP FUND. SCARLET: FOR ACTIVE FUNDS, $.99 DROPPING TO $.70 TODAY. MATT: A STORY WAS WRITTEN ABOUT THE VANGUARD AFFECT A COUPLE OF WEEKS AGO. HE ESTIMATES THAT YOU AND VANGUARD HAVE SAVED INVESTORS ABOUT $1 TRILLION OVER THE LAST FOUR DECADES. DO YOU RECKON THAT THAT IS A FAIR CALCULATION? JACK: I THINK THAT IT MAY BE UNDERSTATED. THEY COMPARE OUR EXPENSE RATIOS TO THE AVERAGE OF OUR COMPETITORS. THE FACT THAT WE ARE NOT TRADING , A HUGE COST SAVING, BUT THEY DO NOT TAKE THE SAVINGS EACH YEAR AND ENTER RETURN ON THE ACCUMULATED SAVINGS, THE COST OF CAPITAL. IF YOU PUT A RETURN ON THE MONEY THAT WE SAVE INVESTORS EVERY YEAR OVER 20 YEARS , YOU WILL FIND A HUGE STAGGERING NUMBER. WHETHER ONE TRILLION IS THE RIGHT NUMBER OR 1 TRILLION AND A HALF, I WOULD NOT KNOW, BUT IT IS VERY BIG AND GOOD FOR THE INVESTOR. MATT: LET ME GET BACK TO A POINT YOU MADE EARLIER WHERE YOU SAY HASSAN INVESTING, -- WERE YOU SAY PASSIVE INVESTING INVESTING IS PART OF THE MARKET. WHAT ABOUT INDIVIDUAL INVESTORS? IS THERE A PLACE FOR ACTIVE INVESTING IN SOME PORTION OF REGULAR INVESTORS' RETIREMENT SAVINGS OR FUNDS? JACK: FOR THE INDIVIDUAL INVESTOR TRADING STOCKS IS CONDEMNED FINALLY TO LOSE. HE SHOULDERS THE EMOTIONS OF THE MARKET. HE HAS A MARKETPLACE THAT IS PROBABLY MORE INFORMED THAN THE TYPICAL INVESTOR. I DO NOT SEE THAT THE INDIVIDUAL CAN DO VERY MUCH THAT WILL MAKE HIM ANY BETTER OR WORSE. THERE IS, HOWEVER, A GAMBLING EFFECT. INVESTORS LOVE TO GAMBLE AND PLAY THE LOTTERY. I -- MY OWN BELIEF IS, I DO NOT DO THIS MYSELF I WOULD ADD, BUT HAVE 95% OF YOUR MONEY IN THE LOW RISK SAFE ACCOUNT, LONG-TERM , REAL MONEY, AND UP TO 5% ON THE FUNNY MONEY ACCOUNT. DO IT YOU WANT WITH THE 5% AND YOU WILL BE FINE. EVERYONE SIT A WHILE, EVERY FIVE YEARS, LOOK HOW YOU ARE DOING WITH THAT 5%. IF IT IS NOT DOING AS WELL AS THE REMAINDER OF YOUR REPORT OLIO, THE SERIOUS -- THE REMAINDER OF YOUR PORTFOLIO, THE REAL MONEY ACCOUNT, YOU WOULD QUESTION IF THAT IS A STRATEGY TO KEEP FOLLOWING. SCARLET: TALK A LITTLE BIT ABOUT THE KINDS OF RISKS PASSIVE INVESTING HAS CREATED. IT HAS CUT THE COST OF INVESTING AND DEMOCRATIZED THE FINANCIAL MARKETS, BUT SOME ARGUE IT CREATED INCREASED CORRELATION WITHIN THE STOCK MARKET, BETWEEN STOCKS AND OTHER ASSET CLASSES. WHAT DO YOU THINK? JACK: I'M DOUBTFUL TO HER DO CAN PROVE A LOT OF THINGS WITH STATISTICS THAT ARE NOT TRUE. I AM FROM MISSOURI ON THE FACT THAT THESE EFFECTS EXIST. I'VE NEVER SEEN DOCUMENTATION THAT ESTABLISHES THAT TO MY SATISFACTION. I'M A TOUGH CRITIC, BUT I DO NOT THINK IT IS A GOOD IDEA. I WOULD ADD, I DO NOT KNOW LESS CORRELATION OR MORE CORRELATION AMONG THE STOCKS IN THE MARKET IS GOOD OR BAD. I'M NOT SURE IT MAKES MUCH DIFFERENCE. MATT: WHAT YOU THINK ABOUT WHAT WE ARE SEEING? BONDS AND STOCKS ARE DOWN. THIS IS THE CORRELATION WE HAVE SEEN A LOT, EVEN MORE IN ASSET CLASSES. EVERYTHING SEEMS TO BE MOVING IN THE SAME DIRECTION. YOU WOULD NORMALLY THINK THERE IS A FLIGHT TO QUALITY, PEOPLE ARE PILING INTO THE SAFETY OF U.S. TREASURIES. WHY DOESN'T THAT WORK ANYMORE? JACK: THAT IS A GOOD QUESTION. I'M NOT SURE I AM QUALIFIED TO ANSWER IT, TO BE HONEST. NEGATIVE INTEREST RATES, WHICH WE SEE AROUND THE WORLD, NOT IN THE U.S., SEEM TO MAKE NO SENSE AT ALL. THAT CANNOT BE A PERMANENT CONDITION. I DO NOT THINK THE CORRELATION BETWEEN STOCKS AND BONDS IS MEANINGFUL. THE MARKET DOES PECULIAR THINGS FOR SURE TIMES. DEEP DOWN, I BELIEVE THIS IS JUST ONE MORE OF THEM. SCARLET: LONGER-TERM, WE HAVE SEEN MODEST RETURNS FOR A COUPLE OF YEARS. WHAT ARE YOU TELLING PEOPLE THAT NEED TO PUT KIDS THROUGH COLLEGE AND NEED TO FUND THEIR RETIREMENT? HOW DO THEY PLAN AHEAD WITH FINANCIAL BANKS SO AGGRESSIVELY EASING? JACK: I HAVE REASONABLE EXPECTATIONS -- A REASONABLE EXPECTATIONS FORMULA I HAVE USED FOR 25 YEARS AND IT HAS WORKED ALMOST PERFECTLY. THE REASONABLE EXPECTATIONS HAS BEEN ALMOST EXACTLY THE SAME AS RETURNS DELIVERED BY THE S&P 500. IT IS A VERY SIMPLE SYSTEM. YOU HAVE THE DIVIDEND YIELD THAT IS 2% GOING BACK A LONG TIME IT WAS 4% OR 5%. THAT IS A LAW SUGGESTING NO RETURNS IN THE FUTURE. EARNINGS GROWTH IS 5%, I THINK THAT WILL BE TOUGH IN THE FUTURE. MAYBE WE CAN DO 4%. THE FIRST TWO ARE WHAT I CALL INVESTMENT DEBT ASPECTS OF THE INVESTMENT RETURN. THE SECOND IS SPECULAR RETURN. WHAT WILL PEOPLE SAY FOR -- WHAT WILL PEOPLE PAY FOR $1 WORTH OF EARNINGS? HISTORICALLY, 16 TIMES EARNINGS. TODAY IT IS 24. I DO NOT THANK YOU WILL GET ANYMORE MILEAGE OUT OF A RISING PRICE EARNINGS MULTIPLE. YOU ARE LOOKING AT LOWER RETURNS IN THE STOCK MARKET UP TO 4% TO 6% BEFORE COSTS ARE TAKEN OUT . THE TYPICAL MUTUAL FUND INVESTOR COULD GET AS LITTLE AS 2% PER YEAR. HE WANTS TO BE VERY CAREFUL FOR LOWER RETURN MARKETS. MATT: YOU DO NOT SEE ANY MORE MULTIPLE EXPANSION BOOSTING STOCK , AND, I'M ASSUMING FROM WHAT I HAVE READ, YOU DO NOT SEE A PICKUP IN EARNINGS EITHER? THE U.S. CORPORATE EARNINGS SITUATION IS NOT TO BE VIEWED OPTIMISTICALLY FROM YOUR POINT OF VIEW? JACK: I CANNOT FORECAST THE FUTURE. I CAN MAKE JUDGMENTS, REASONABLE EXPECTATIONS. IT SEEMS THE HANDWRITING IS ON THE WALL FOR LOWER RETURNS. IT IS CERTAINLY ON THE WALL FOR LOWER PRICE EARNINGS MULTIPLES. HAVING SAID THAT, THE MARKET CAN GO INTO A LUNACY PHASE AND STOCKS AT 40% EARNINGS AT THE HIGH. I CANNOT SAY THAT WILL NOT HAPPEN. I GUESS THAT ONE WOULD SAY YOU DO NOT WANT TO BE NEAR THE STOCK MARKET WHEN IT DOES. THERE IS NO MORE ROOM. MATT: WHY WILL NOT CORPORATE EARNINGS PICKUP? THE LABOR MARKET IS VASTLY IMPROVED. AROUND THE WORLD IT IS IMPROVING. THE CONSUMER SEEMS STRONG AND READY TO SPEND. JACK: WELL, MOST OF THE OUTLOOK, PEOPLE PREDICT THE OUTLOOK. FOR THE ECONOMY, LOOKING AT 2% TO 3%, AT THE MOST 2.5% FOR GDP GROWTH. GDP GROWTH HAS BEEN AT 96% -- CORPORATE EARNINGS HAVE A 96% CORRELATION WITH GDP GROWTH. A HIGH CORRELATION. CORPORATIONS MAKE MONEY WHEN THE ECONOMY IS GOOD HIM A LESS MONEY WHEN THE ECONOMY IS GROWING MORE SLOWLY. I DO NOT SEE THE CASE FOR SUBSTANTIAL GDP. IT WOULD BE OK, BUT HARDLY SENSATIONAL. IT WILL BE A TOUGH SLOPE TO GET TO 3% GDP. SCARLET: YOU MENTIONED NEGATIVE INTEREST RATES MAKE NO SENSE. I KNOW YOU LIKE TO INVEST BASED ON RISKS YOU UNDERSTAND. WHICH OF TODAY'S RISKS, IN THE U.S. OR OUTSIDE THE U.S., DO YOU STRUGGLE TO GET YOUR HEAD AROUND? JACK: THE MOST OBVIOUS ONE IS THE POLITICAL SITUATION IN THE UNITED STATES OF AMERICA. I FIND IT DEEPLY WORRISOME, UNPREDICTABLE, UNFATHOMABLE ABOUT WHAT MIGHT HAPPEN COME ELECTION DAY AND WHAT THE CONSEQUENCES MIGHT THE. -- MIGHT BE. THE WORLD ECONOMY IS NOT DOING AS WELL AS THE U.S. ECONOMY, AND I DO NOT SEE THAT EUROPE AND JAPAN, MAY BE THE EMERGING MARKETS WILL DO BETTER, BUT I DO NOT THINK EUROPE AND JAPAN WILL BE ABLE TO GROW AS FAST AS WE DO. THOSE ARE RISKS. THERE IS ALWAYS THE RISK OF NUCLEAR WAR GET A VIEW NOT THINK IT IS A LIKELY RISK, BUT WE LIVE IN A VERY FRAGILE WORLD. SOMEONE'S FINGER ON THE NUCLEAR BUTTON, IN MOSCOW OR WASHINGTON, D.C., IS SOMETHING I'M NO ABILITY TO VERDICT. I HOPE THAT SAME HEADS WILL PREVAIL, BUT YOU CANNOT BE SURE. THERE ARE A LOT MORE. GLOBAL WARMING SEEMS TO BE ACCELERATING, IT CERTAINLY IS IN PHILADELPHIA TODAY. THAT WILL BE A BIG PROBLEM, A COSTLY PROBLEM. IF IT CONTINUES IN THIS DIRECTION. THERE ARE THOSE THAT FEEL IT WILL COME ON US IN A SERIOUS WAY MORE QUICK WAY THAN ANYONE ANTICIPATED. MATT: WHAT ABOUT MARKET RISK? OVER YOUR CAREER WE HAVE SEEN SO MANY INCREDIBLE CHANGES, SOME GOOD, SOME NOT SO MUCH. THERE HAS BEEN A RISE IN THE USE OF ETFS, WHAT DO YOU THINK ? AND THE USE OF COMPUTER ALGORITHMS AND ROBO ADVISORS, WHICH I WOULD GUESS WOULD LEAD TO MORE INDEX INVESTING OR PASSIVE INVESTING. HOW DO YOU VIEW THAT STUFF? JACK: ROBO ADVISORS ALMOST UNIVERSALLY USE INDEX FUNDS AND VANGUARD INDEX FUNDS ARE THEY'RE NOT MAKING BIG BETS ON MARKET SECTORS OR INDIVIDUAL FOREIGN COUNTRIES. THEY ARE BASICALLY GOING WITH THE TOTAL MARKET AS A PART OF THE STOCK ALLOCATION. I THINK THAT IS VERY WISE. THE ETF THING, EVERY DAY THE STANDARD 500 ETF IS THE MOST WIDELY TRADED, TURNING OVER 4000% A YEAR. I AM THE PERSON THAT THINKS A 5% TURNOVER IS PUSHING THE ENVELOPE. ETF'S ARE HEAVILY TRADED. THEY HAVE LOTS OF PERFECTLY GOOD USES. ETF IS DOMINATED BY TRADERS. IN THE LONG RUN, TRADERS ARE A GIFT TO WALL STREET, AND BY DEFINITION, NOT A GIFT TO INVESTORS DOING THE TRADING. SCARLET: WITH THE RISE OF SOFT BETA AND FASTER FORM ETF'S, WE TALKED ABOUT THE VANGUARD EFFECT AT WORK. WHAT WOULD YOU TELL HEDGE FUNDS THAT CHARGE HIGH FEES? WHAT IS COMING TO THEM IN THE FUTURE? JACK: WHAT HAS HAPPENED TO HEDGE FUNDS, DETERIORATING RETURNS IS A PRODUCT OF THE FACT THERE ARE SMART PEOPLE RUNNING THESE THINGS. I MENTIONED ONE OF THE LEADERS IN THE FIELD, AQR , BUT THERE ARE MORE OF THEM. THERE IS ONLY SO MUCH UNDERVALUED SECURITY IN THE MARKET, PRICE DISCOVERY TO TAKE PLACE. ECONOMICALLY, THE MORE PARTICIPANTS IN THE HEDGE FUND AREA, THE MORE DIFFICULT TO DIFFERENTIATE YOURSELF IN A POSITIVE WAY. I THINK THAT HEDGE FUNDS, I WILL SAY THIS CLEARLY, NO PLACE IN THE PORTFOLIOS OF INDIVIDUAL INVESTORS. THEY ARE TOO UNPREDICTABLE. THE SPREADS BETWEEN THE BEST AND WORST, IN THE LAST THREE YEARS, MAYBE, 100 OR 200 PERCENTAGE

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Vanguard's Jack Bogle on Indexing, Negative Rates

Mutual fund sage and founder of the Vanguard Group Jack Bogle hits back at critics of indexing, the practice of organizing one's portfolio to match an index. Bogle also discusses negative interest rates, the use of ETFs, and what he views as the biggest market risks. He speaks with Bloomberg's Matt Miller and Scarlet Fu on "Bloomberg Markets." (Source: Bloomberg)

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