The transcript from this week’s, MiB: Jack Brennan, Vanguard Group former CEO & Chairman, is below.
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VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: This week on the podcast, I have an extra, extra special guest. It’s the return of Jack Brennan, he is the former CEO and chairman of the Vanguard Group and what can I tell you? This is just tour de force about rational investing strategies, behavior psychology.
There are a few people in the world who have Brennan’s depth of experience and perspective, not just because he worked with Jack Bogle for dozens of years and was Bogle’s handpicked successor to run the Vanguard Group, but he’s done a variety of other things. He’s on all sorts of other boards. He sees the world of investing and business and finance from a 360 degree perspective.
I find him not only just fascinating and intelligent and sincere, but really one of the few people who has that full view of everything, his perspectives, his opinions, are very well-informed and really matter a great deal.
I found this to be a fascinating conversation and I think you will also.
So with no further ado, the former chairman and CEO of the Vanguard Group, Jack Brennan.
VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest is Jack Brennan. He was the CEO and chairman of the Vanguard Group from 1996 to 2008. He is currently chairman of Notre Dame’s Board of Trustees as well as being on a variety of other boards.
He is the author of a new book “More Straight Talk on Investing, Lessons for a Lifetime.” Jack Brennan, welcome back to Bloomberg.
JACK BRENNAN, CHAIRMAN OF THE BOARD OF TRUSTEES, NOTRE DAME: Great to be with you, Barry.
RITHOLTZ: Good to have you back. I recall our last conversation was quite fascinating a couple of years ago. But for people who may have missed it, let’s just spend a few minutes going over your history. You joined Vanguard in 1982 serving as the company’s president alongside Jack Bogle, the founder and CEO of Vanguard.
Tell us a little bit what was like in the 80s and what was like working with a legend like Jack Bogle?
BRENNAN: Well, it is a gift to be hired by Jack Bogle and to join Vanguard when I did. Vanguard was a quite small place, $2.4 billion in assets under management. The industry as you might recall back in 1982 was driven mostly by money market fund, you know, Red Sox haven’t done much for a long time, bonds had been terrible because we’re in the stagflation, you’re coming out of it. But the chance to work side-by-side with someone like Jack who had been in the business since the day he graduated from Princeton in 1951 was extraordinary.
You know, we had lunch together nearly every day when I was over 13 plus years. I learned a ton of stuff from him in so many ways as did the whole team of us – we are a part of the early days of the growth phase of Vanguard from 1982 as the market turned around and it turned to be a pretty good business.
We had a lot of fun, with a lot of business challenges, many of which were challenges of success, how do you keep a place together as you grow at 100 percent some years, and that you know, 20 percent, 30 percent, 40 percent compounded for all those years.
We also went through on a personal side, you know, Jack had a lot of health challenges and I tried to be helpful with and obviously lived with him through those. I had some on my family side, and those kinds of things bond you as well, Barry, in a way, it’s different and conventional just to business relationships and was really another shared experience.
So you get lucky some times and joining Vanguard, working with Jack and for Jack was tremendous. I was thinking about that the other day actually, just a couple of years ago, we got – Jack passed away and we had a celebration of life for him at Vanguard and was privileged to kick it off. He headed four things that are lessons actually maybe for your listeners that really, you know, you think about what Vanguard is today, it was not that when Jack launched it in 1975, but four things were consistent and hopefully are very much still a part of the company.
And one was just his dedication to the mission of Vanguard, those who followed Jack. He was continually on point about client, client, client.
The second is passion for competitive success. You know, nobody likes to fight more than Jack, we would pick one now and then to try to get publicity for us and things that focused on wanting to win, hugely, hugely valuable.
The third thing that was remarkable really to watch and learn from the power of communication and you know, just consistency and continual — continually promoting and a sense to what the message for the company was, powerful force.
One last thing, focus, you know, we have people come to us, Barry, continually saying issue credit cards, do mortgages, do this, and Jack would always come back and say that we do one thing pretty well, we manage packaged product in the form of mutual funds, let’s just go find people to buy them.
RITHOLTZ: So when Bogle finally stepped down. You are his hand-picked successor. Did you feel the weight of that transition, or was he still not quite the legend he eventually became and it didn’t have the same gravitas that perhaps it does today.
BRENNAN: You know, in some ways not so much and in some ways, certainly, you feel the weight of it.
Since the not so much was, you know, we have just been hand in glove together for 13 years, I was on the board for nine or something like that, the president for seven or eight, and you know, most of the team that led the company I either hired or promoted and mentored along the way.
So the internal aspects of change weren’t very great in that sense and so it was incredibly smooth and frankly when I was made the president in 1989, the board – he had announced that I would take his place which was a little weird but I think probably helpful in some ways internally in that regard.
The other part of it is, you know, Jack had been the CEO from 75 to 95 when this was announced and I’m the new guy and some slice of the constituencies and you know, in a sense, you had to prove yourself to people who knew Jack as the face of the company and we are very different, different ideas around that role.
But you feel the weight of it, and you know, I don’t know any CEO who irrespective of you know his or her tenure at a company who, the day they become the CEO, they don’t feel the weight of it, it’s a different — it’s different on day one than it was on day minus one when you become CEO.
And that was a surprise to me somewhat, I have to say I didn’t expect it and I felt it and I counsel new CEOs continually as they are, you know, moving into jobs that they will feel it and 100 percent of the people say, you are right, I get that.
RITHOLTZ: Really interesting. I love this quote you had in Business Week where you said “Being famous was never on my agenda” and you tell the story you coaching your son’s soccer team and another player’s mom comes up to you and says “I didn’t realize you were that Jack Brennan”, she thought you were a gym teacher.
RITHOLTZ: What was that transition like into the public eye?
BRENNAN: That was the hardest part of it, because it’s just not me.
I love having tons of responsibility at Vanguard and having nobody know my name. I didn’t think I was a gym teacher when I was coaching, and you take the job, you have to make that change and I’m a big believer that being the leader’s notoriety enough and that any credit for stuff that happens positively in an organization should go to the team, any blame that something that goes awry, should you should accept that as a leader.
And so it was a challenge and an interesting one, particularly because you will call, you know, the fund industry was kind of on the sidelines in finance if you will, when I started out there and then moved progressively, but by ‘95, ’96, we were a very prominent part of the business and so with all of industry and in the end, company responsibilities, you really do change and adapt and it’s a growth opportunity for anybody who falls into that role.
I think particularly challenging for someone like me who’s anonymity is something that I highly prize which may seem like an odd comment is I do this thing that – I do this interview with you but it’s very much real.
That was — I would say hands down the hardest change for me as I took over the – as the CEO of the company.
RITHOLTZ: That’s the beauty of radio, nobody knows what you look like.
RITHOLTZ: So two questions about your leadership period at Vanguard. Tell us what you are most proud of from that period. And if you have a mulligan, if you can have a do over for one thing, what would that be.
BRENNAN: That would be the most prodded question all the time, Barry, and I think of three things that matter. First and foremost is the team that you help put together over time and to be in a rapidly growing company where you know the team almost can’t grow quickly enough to keep up with the challenges in the company.
But you know, from top to bottom, we are able to attract and help build great careers for people who had to sign to this quirky mission in a quirky place where you’re not a public company, you are not private. You are owned by your mutual shareholders, but maintaining and enhancing the commitment to that — to our mission and the intense competitive edge in and zeal in the face of, you know, what in many ways is remarkable success.
That is a thing that I look back and I look today at Vanguard and see it there and really proud of that. So tangibly, the millions and billions and billions of incremental rewards, you deliver to the shareholders because of our structure and because our funds perform well.
Critically important part maps which are, therefore that’s why you put your shoes on every day, probably last thing I would like to highlight is the culture which you would think would get diluted as you grew by a hundred and then a thousand times would get diluted.
I think the culture got stronger progressively and continues to get stronger around again the singular focus on the client and then even more important in many ways, always doing it the right way. And so I look at that and say that is a template if somebody said, you will be around a long time, you will feel this good about those three things, high on my list of things.
For the mulligan, I might be a roving – a few roving mulligans, right? In some ways, I once had a relatively new person – an officer at Vanguard, I think she was trying to insult me and I thought she was complementing me. She said I live in a perpetual state of dissatisfaction. Sugar
BRENNAN: And I took it as a complement. I could give you a really long list but I will give you one thing that I look back and say we had it right and didn’t do it right, if you will, and that is advice and support for the advice community.
You know, Vanguard today has a burgeoning advice business, a great product at a great price and we started in the advice business 25 years ago, but I wasn’t aggressive and I wasn’t aggressive enough in saying we should really build this out in a form and fashion. And then as a complement, be even more aggressive in supporting the advisor community.
There was a legacy there, we used to be a load of fun group, we became no-load so on but it was clear to us that advice was going to be a crucial part of the investing future, very importantly so and if I look back and say if there’s one thing I would have spent a lot more money put a lot more energy behind, it is that, and I’m really glad to see the company is doing it on both sides of that, by the way, delivering advice and supporting advice providers, it’s a core, a very core part of Vanguard today.
I wish we had been much more advanced during my time in the company.
RITHOLTZ: Really interesting.
Let’s talk a little bit about your new book, by the way, am I reading this right? The first book was “Straight Talk on Investing” correct?
BRENNAN: It was.
RITHOLTZ: Because I read that one, you know, it’s got to be five years ago when we did our first interview when I plowed through whatever notes I had from that.
Is this an update or is this a brand-new book?
BRENNAN: It’s a combination, it’s one of the great lucks – redoing and doing another book is, the core of the book really hasn’t changed actually, and then there is lots of you think about this book published in 2002, so you’ve got the GFC, you’ve got the…
BRENNAN: You know, last year, you get 20 years almost to say how the aftermath of the dotcom bubble with GFC and what we have been through, and you say what we wrote then would stand the test of time, it’s actually – rare (ph) these are enhanced by that test time and then there are some other new stuff that we could talk about it, but it is the advent of Ritholtz advisers and Vanguard’s advisory services, radical declining cost of investing in 20 years, it’s stunning and some other stuff that is important.
So it’s a combination of new and reaffirmation of what was a…
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RITHOLTZ: While some of the basics from the other book is pretty timeless, homework, good habits, no fads, stay — to continue to learn. I mean, that’s pretty straight talk as it gets, so tell us what motivated that approach?
BRENNAN: I appreciate the term “Straight Talk” I had of my colleagues at Vanguard the other day ask me “Do I enjoy being boring?” and with this advise, but you know what motivates it is this is the time-tested way serious money gets invested successfully.
And that that might be an endowment at a great university. It may be a pension fund, and this is really targeted at people who were their own personal financial entrepreneurs with their own assets and they can get help from advisers, they can do it themselves, whatever.
But if you look back over decades and decades, Barry, in some ways, a simple approach to investing as you just highlighted around homework, good habits, avoiding fads, is the proven strategy and the problem is it’s always challenged right by the new thing, and so you know, we found — we find that it’s important to reaffirm these, test them (ph) by the way and unlimited amounts of data as you know to look and test them.
But you come back to these core principles that define success strategies for any of us whether it’s an institutional investor or an individual. So that is the motivation of it and you know, for me personally, I had the privilege of knowing Walter Morgan, who founded Wellington Fund in 1929.
So I’ve had live tutorial from Mr. Morgan to Jack to now, I’m the old guy. And I have hired tens of advisors and advisory firms, have observed millions of investors and you come back to core character traits that define success as you know.
And in the end, there are two character traits that matter, one is humility and the other is discipline and then there’s some practices that matter. And if you find that package in itself or in your advisor, or in the firm you hired to manage assets for you, you are going to be successful.
And if you don’t, the odds are you will not, and you will look jealously at people who follow these old school practices and old school behaviors and have won the game.
RITHOLTZ: Really interesting. Let’s stick with the idea of character such as humility and discipline and just ask a simple question, why are so many investors quote “their own worst enemy.”unquote?
BRENNAN: You know, one word, it’s emotions. Right? And whether it’s fear or greed, whether it’s competitive juices that your sister in law made a killing in some stock, whether it’s overconfidence, whether it’s an institution saying I got to hustle or I’m going to get fired by institutional clients, it’s emotion is an incredible headwind to success of building and maintain financial security and through the markets.
The story that is played out again and again and again over time, and you know, so need to understand that simple, I will be my own worst enemy unless I take emotion out of the equation, hard to do, it’s easier with experience but that is the simple answer to it, Barry.
RITHOLTZ: Let’s stick with the idea of emotion as a valid factor and I have to ask you one of the things you write about. People should be more selective about the financial content they consume. Explain what you mean by that?
BRENNAN: You know, one of the best things that has happened in my career since the early 80’s today is the ability for individuals in particular but all of who learned, whether in the early days, there was Money Magazine and today it’s just obviously the ubiquity of information through online media. It is so different than it was a long time ago.
The downside to that, it’s like everything, too much of a good thing is a bad thing.
BRENNAN: And so there is too much information, too readily available, too broadly covered that it is a distraction and distraction will lead to other emotions, Barry, and that is I think, the core challenge and why people really need to say I find certain writers on Bloomberg valuable to me and I’m going to follow them because they provide me with information I find valuable is an investor.
But zigging and zagging from this hot topic to that hot topic or this influencer to that, you know, prognosticator is just damaging to your financial well-being. It is proven to be, and I suspect it always will be. Because this isn’t a game, and it’s not how the Red Sox do last night, right? Not that it actually matters year to their chances to make the playoffs. But what happened in the markets today matters to almost nobody who you and I know because they have long term time horizons, right?
And they are not traders managing the book at a Wall Street firm, they are people thinking about 10, and 20 and 40 years from now. So what happens today is insignificant.
RITHOLTZ: So let’s continue with that thought, sometimes bear markets come along and that seems to be what drives a lot of the sort of hair on fire hand waving in a lot of the media.
How should people think about bear markets. How should they prepare for one and how should they leave during a bear market?
BRENNAN: So, in “More Straight Talk” we have a little chapter on bear markets for a reason and it’s because they were an inevitable part of investing if you’re investing over career and a 401(k) plan or over a lifetime.
So when you recognize they’re going to happen and then your question is spot on, you say so what should we do? Well one you should on a strategic basis, know what your risk tolerance is and be prepared for and test that risk tolerance against your portfolio structure diversification and your balance to say am I going to be able to sleep at night, the market dropped 20 percent or 30 percent. Fair question, and you should know it.
And by the way, if you have only been investing in this century, you have had a chance to test that, how did you think — what you think about in October of 2008, what did you think about it in March of 2020? Could you not sleep? Et cetera, so you understand their reality. You prepare structurally in your portfolio and importantly in your mental preparation, am I going to react through my going so that in over my time horizon, this is an inevitable thing, but it is — I’m not going to do anything about it, and the answer for most people is do nothing in a bear market, it really is, because most people have a long term time horizon that was – talked to Tim Buckley who is CEO of Vanguard the other day, and he said they calculated that by not panicking, Vanguard investors saved $1 trillion.
BRENNAN: And so — and the different, the important thing to get back your question on which consume from an educational standpoint or information standpoint.
When I started t Vanguard, the activity level with small changes and the stock and bond market was frenetic, today, Vanguard is just a microcosm of the market more broadly.
Serious people generally don’t panic and you don’t see that, but at Vanguard, I assume it’s true at a Fidelity and a T Rowe Price that you don’t see panic where before they had a chance to get experience and educated, my generation of Baby Boomers would react.
So do nothing should be your default option during a bear market, and if you can dollar cost average down, even better.
BRENNAN: But don’t panic.
RITHOLTZ: Makes a whole lot of sense. So you wrote the first version of the book, about 20 years ago. What made you think, hey, now’s the time to update this. Why bring it into the modern era and who are you hoping actually reads it?
BRENNAN: So with respect to the why now? A few things, I have been asked a lot over the years which is do we have a version of this and frankly, the environment is what pops it in, and if you take out last March, we’re in an 11 year bull markets, the headlines are you read the headline about investing and its speculation is very prominent .
Again, the headlines are somebody made a lot of money on GameStop and read a lot about those who got killed, and so on so forth. Trading is the new thing, I saw an ad on TV, you can start a trading account at one firm with as little as five dollars.
I almost fell out of my chair. So it was catalyst to say, you know what, it feels a lot like when I started writing the first book was strict after the NASDAQ bubble but lots of lessons are found there. And this one felt like it felt like a good time to do it so I literally started right around frankly when you made a quite question (ph) call that said. Don’t assume the bull market is over because of the pandemic, it’s right around then you started working on this.
The very important part of it, frankly, is much have changed importantly that has made this to be a fantastic time to be an investor, you know to give you just — to give you two examples. One, the advent of – the variety of advice choices today at different price points is staggering. It’s fantastic. You can buy a robo advice, you get advice from a robo advisor robo advisor plus a human being, or you can have a wealth manager in a family office and everything in between. But it’s all much lower cost than it was 20 years ago.
And frankly, there is this whole cohort of people, baby groomers who really my own view is need to make a conscious decision to do it yourself in retirement or find an advisor.
And today, you can do that in a variety of ways, it is fantastic, we provide advice in the book about how to do that best.
The second thing is, 20 years ago, Vanguard was a bit of an anomaly around cost and we preached it and it was a very important part of the culture.
But if you look at the cost of investing, the total cost of ownership if you will for individuals today and how it has changed in 20 years, it frees you up with lots of different ways you can think about investing, obviously the UTFs and how important they are, how low cost or tax efficient.
So lots had changed. The market said its pretty frenzied, and in fact, not the markets necessarily, but the chatter around the market. So it sounds like a good time to do it. First book I wrote in the foreword so I was writing it for my kids who were in their late teens early 20s and I hope that they and their cohorts would get something from this.
The interesting part is how many people now my age who sais this is just what I needed because it helps me think about my future in a different stage in life, frankly, I hope it’s the same cadre that get some value out of this book as well. People who were emerging investors and then people who look on a veteran and say let’s go back – let me go back and test how I think about things against this template.
Not saying that this is true. This is my experience based on lots of exposure to people, but I hope it is going to – it’s both those cohorts, the last book that we, we still get requests from people in other countries to translate the first book.
BRENNAN: And so we deferred them a bit and we will get them to translate this one.
RITHOLTZ: Let’s talk a little bit about some of the lessons you’ve learned, as it applied to 2020, which was clearly a crazy year between the rise of Robin Hood and GameStop and all sorts of manias, what you make of the rise of the retail investors? Have they learned the wrong lessons in 2020 or is this just board gambling and when things go back to normal, their investment posture will go back to normal.
BRENNAN: So my own view is it’s just another cycle. You know that has, it’s no different than when discount brokerage came in the late 80s and we had a bull market and (inaudible) trade cheaply now. You know, it was the dotcom phenomenon at the end of the 20th century. It was House Lifting (ph) right, you were tall in 2006, 2007, so all of these things are high profile, I would call them fads, not substantive in terms of fundamental changes in the way people should think about or you know, will think about once they get to — once they realize that investing is not a game.
Trading is not investing. There’s a business called trading, but it is nothing to do with investing in that sense.
So I think it’s cyclical, you know, it makes great headlines, it inevitably makes for great hard lessons learned from people and you know my hope, frankly is that people aren’t doing this headline making stuff with serious money to be blunt, Barry, I think it – you know, somebody wants to play around at the edges and trading stocks, trading bitcoin, do whatever they want to do, that’s fine, but serious money needs to be treated seriously and again for any of us, as individuals, the idea that we’re going to trade our way to wealth is a fool’s errand.
RITHOLTZ: Pretty sharp observation. I never imagined for a minute that eight dollar trading was some sort of a speed bump, but it seems like once these apps went to free, suddenly everybody and their brother became a day trader, how much of this behavior is caused by free and what does it mean to the young people who are starting out with trading as entertainment?
BRENNAN: Well, that is the interesting tracheology (ph). Is it entertainment or is it a test bed, right? And as long as you think of it as entertainment, you know, I guess it’s no different than slot machines or going to a casino, but it is not investing.
And again I think the question is how and when do you learn that lesson? All right. And free is absolutely is one of things that adepts this, no question. But listen. Momentum is another part of it and you know in a sense, everybody’s smart momentum market. If you’re in the right sectors, but momentum investing is never proven to be a long-term viable strategy, right? Substantive value is how people make money.
So you know, I actually don’t worry much about it. It’s a classic place where I tune out the noise, looking at the headlines, reading it, and again, I think as long as using your term, it’s packaged as entertainment, it is what it is.
You certainly hope that people won’t put trading accounts in the 401(k) plans where most young people will do their first investing, right?
As long as those plans stay in a sensible mode, I think you are going to segregate investment and financial security from entertainment and high profile trading.
RITHOLTZ: Interesting. So let me wax philosophical with you a moment, one of the chapters of the book you urge investors to define enough for themselves. Explain your thinking on that and why do investors need to understand the concept of enough?
BRENNAN: It’s such an important concept because it will determine how much risk you want to or can take in your investment portfolio. And again, not defining and outplays out tragically in so many different ways. Either somebody thinks I’ve done really well or I can do even better and it’s an inappropriate time or inappropriately executed and they wake up saying, boy, if I had $1 million and that’s what I needed, perhaps I should’ve been far more conservative.
Just take that as an example because $1 million is going to serve me well for the rest of my life, but instead, you double down and you end up with half a million.
Bad decisions, right?
Alternatively, somebody say I have $1 million and my time horizon is perpetual because I’m going to my estate is going to go to charity, you know, you have enough in bucket A, bucket B can be a more aggressive portfolio than somebody might recommend if you were a certain age.
You know, a 529 plan accounts are a great example of this where you accumulate money up to a point in time and then the glide path takes it down to very conservative positioning when the kid turns 18. Because you know there is a kind of certainly you are going to need that money.
So I think that is a metaphor for the way all of us whether an institution or an individual should think about assets and how those assets, what those assets need to fund for us and you know, you have seen some universities make the mistake of being overly aggressive even when they were particularly well endowed, paying a big price and then playing catch up, and that is a shame.
That is a shame because that is real money affecting real student’s ability to go to a university. So I learned this from a wise older gentleman, many, many years ago and I continue to talk to people about it.
And it’s a question you should ask yourself regularly because enough may change, it may be greater or less than you thought it was at a different point in time but it’s the perfect time to then reassess your ability to take risk or your willingness to take risks.
RITHOLTZ: It’s funny because I know the book was written last year but as I was reading that chapter and crossing the headlines was the news about the highly leveraged Archegos hedge fund, I’m sure I’m pronouncing that wrong, Archegos, who has $20 billion of personal wealth and leverages it to the hilt — to the point where they lose that.
It’s just an astonishing lesson for people that there has to be a line when you say okay I’m good, I may play with a little bit of money here, but I’m going to pull this $20 billion off the table because it would be horrible if it went to zero in two days, which is what happened.
BRENNAN: It’s absolutely true, and that is as good an example as you can find annual somebody will counter with so-and-so double down and they had twice as much money but that is a bad risk reward trade, but it happens a lot. It happens a lot.
You see it with sophisticated pools of capital who makes similar mistakes in endowed places and it’s why again, it’s a one word investment governor, if you will, it’s that word, enough, and again that you think you have enough then you take it — you make it conscious decision on which fork you want to take in the road.
RITHOLTZ: Yes, the regret is minimization framework is more important than how much alpha you are generating in any given quarter to say the least.
BRENNAN: That is one of the other right? There is a chapter in the book called “I’m in Boca” and the very short story is (inaudible) like from the Wall Street Journal was in Boca as the budget people whether they are marked – whether their investment portfolio had outperformed the market or not and some said yes, some said no, but the guy he remembers most is the guy who says “Why do I care? I’m in Boca”.
RITHOLTZ: Right, classic. Absolutely classic.
BRENNAN: That is very smart because the only benchmarking any one of us has is our goals and objectives, right? How we did against the S&P and how we did against you know, how Harvard did against Yale and their endowment turns into a headline every year to develop different financial situation.
So what is Harvard’s broker and what is Yale’s broker is much more important than how they are going to get a person reach out (ph) and that is a critical part of this.
RITHOLTZ: Absolutely true. So let’s talk a little bit about what’s going on in the industry today and I have to begin with some of the attacks we’ve seen recently on indexing, that it’s Marxist, that it’s un-American that it needs an antitrust violation. What you think of some of these sort of wacky esoteric attacks on basic passive investing?
BRENNAN: Well, first it’s a (inaudible) founded, just put it that way, you know, similar – some of them are the same as came out when AT&T ran the first index fund in 1970 or 1969 and when we came out the first index mutual funds, it’s un-American, it’s Marxist, et cetera. So you know, the data is data. To say that it is anything but a highly successful investment strategy is just plain incorrect. So and then the idea that now is the time to be active, meaning high-cost, active is flawed.
So the sort of investment arguments are just repeating what has been repeated continually over the country at this stage. You know, some of the other academic-ish arguments are just as ill-founded. The antitrust idea that there’s too much concentration in voting and so on and so forth. Again, I strongly held view, not having anything to do with my former role at Vanguard that the day the index funds own half the stock in companies and there will be more providers in that half of the stock ownership, it’s going to be a great day for the markets because CEOs will have and companies will have permanent shareholders who will be interested in strategy not the next two week sales booking.
I think it will free companies up to think long-term in a way that they aren’t totally able to do today right?
And so to me, somehow promoting a myth that indexing is anticompetitive or indexing is bad for markets or indexing is a bad investment strategy is just flawed logic and wishful thinking.
RITHOLTZ: The critics don’t say it’s a bad investing strategy because the data overwhelms them so that they’re forced to fall back to things like voting rights or antitrust. If it was a bad investing strategy, I think the market would resolve that.
But I’m kind of intrigued about your point of 50 percent.
Are you suggesting once half of the ownership of US public companies are held by indexes, company management are then free to focus on the long-term instead of the next quarter’s earnings?
BRENNAN: That will be my perspective, yes, actually because you know Wall Street does great research but they get paid for activity. And what you want as the owner of a – if you are permanent owner of a company, if you want companies to build great business, not facilitate activity. And so if you can have, there will always be people buying and selling your stock, there will be plenty of transparency and liquidity and market clearing exercises to value the company.
But the idea that I can talk to seven or eight or nine permanent shareholders if you will about strategic choices, whether it is in a crisis like a year ago or it’s long term, I think will give management — good – the best management even more confident — confidence to think long-term.
I think it’s a very important thing and you look at your controlled companies or you look at private equity backed companies, you know, depending on the structure and private companies, you know, they can behave differently. And sometimes you got the margins and but sometimes it’s core strategic choices that they can make. And so, I believe they will, the markets will be advantaged by companies being able to think in a way where today, there’s just so much noise in the system for them.
RITHOLTZ: So that we switch gears on you and ask you about the classic 60/40 portfolio, we’re now seeing the lowest yield we’ve ever seen on that mix of stocks and bonds of — what do you make of that and are there any viable alternatives to traditional fixed income investing?
BRENNAN: So you know, I think 60/40 is challenged, Barry, right now as a matter of strategy because of (inaudible) in yields, but it’s likely to be in your view, positive correlation to stocks at these low levels, right?
And so I encourage we encourage people in the book to think hard about alternative, the last chapter in this book is called “Where Did My Income Go?” You know, your income from short-term cash reserves is down 98 percent for five years for intermediate for 10 year treasury is down 60 percent or 70 percent over that same period.
And so you come back in and I think it’s important for investors to take a step back and say if I’ve got a time horizon of some duration, not next week or next year, or four or five years from now, you know there are fabulous company and portfolio of companies that yield the same as a 10 year treasury, and I would I — should I be willing to take equity, more equity risk, get the same income with a call option on growth by upping my equity exposure today because for the foreseeable future, the traditional role of bonds is going to be unlikely to play out the way it has over very long periods of time and the question is when do we get out of this very low yield period?
I don’t see many very viable options alternative to traditional fixed income assets, frankly, you know, certainly not high yield bonds which is a misnomer today, you know, you play it through, you know, there are segments of the equity markets whether it is tweaks (ph) or something else that offer a good deal. But it feels strange to say in the midst of a long bull market, but my own sense is that people with any kind of time horizon should be thinking about income being generated by stocks.
Because, you know, over time, the dividend growth of diversified portfolio stocks are out – far outpace inflation. And if all you get is that income growth, you have done well, if you get capital growth to go – it’s a good trait to take that incremental equity risk today because of the unique period of time, we’re really going to go – you know, if you look back, it’s a 700 year bull market in (inaudible). If you look at some charts from England.
BRENNAN: It’s about that, and it’s a 70 year bull market in the United States and so fixed income don’t look very attractive.
RITHOLTZ: Right. I think we reached the same conclusion you did if you are young enough, 70/30 or 80/20 makes much more sense than 60/40, but the caveat is hey if you’re in your 60s with you’re a few years away from retirement, that additional risk isn’t worth the additional return because as we seal to regulate 30 percent, 40 percent, 50 percent corrections, you know those hundred year floods come along every 10 years. We probably need to rename the hundred year flood.
BRENNAN: Yes it’s true, but the one factor you don’t have in that equation is what are you drawing off your assets, okay? And so the best thing you can do is draw as little as possible from your asset that allows you to take more risk with your assets.
RITHOLTZ: Makes sense.
And so that – when people ask me for my best financial advise, I say live below your means.
They want something sophisticated, that’s what I give them, and I think it is very important today to say you know that four percent or five percent draw is too much likely from a retirement portfolio. Can you live on three? And if you can’t live on three, you can probably take some more capital risk to make those assets grow and endure in real terms for the longer-term.
RITHOLTZ: Especially given a longer lifespan sets another factor.
BRENNAN: Exactly, I think I have – I’m – I will be 67 in a couple of months, I think I have a 30 year time horizon.
RITHOLTZ: Wow, that is pretty amazing.
BRENNAN: My family’s legacy is pretty good longevity but that is the way I think about things. And I think most people, at 67 should be thinking 20 years as a long time, that’s a long time.
But if you’re spending — the extent — the outgo part of this is correct, is a critical part for an individual, it’s also a critical part for institutions, a critical part of institutions.
RITHOLTZ: Lower your expectations and then live within those.
RITHOLTZ: We are talking about yields, let’s look at the flipside of that, what do you make of all the inflation chatter these days, do you think that’s a viable risk to portfolios and how much of this is just transitory noise?
BRENNAN: So I have to say I am a child of inflation, I came out of college 1976 in stagflation, lived through the next five or six years before Chairman Volker, you know, took it on, so I actually have s ort of inherent worry about it. And I do think it’s real. I think you know I don’t believe in modern monetary theory. I think the question of how much money you can pump into the system is a really important one and I don’t think we are going back to the late 60s early and late 70s early 80s from an inflation standpoint.
But, we had 30 years of minimal inflation and I think the noise for me is valuable because even if it proves to be wrong, it educates people to think about it, but I talk — I counsel people to factor some inflation into their own financial planning in a way that we have experienced in 30 years, I hope I’m wrong, but my economics training tells me be wary of too much liquidity in the system and the pressure on prices and whether globalization can offset it again like it has in the past, whether technology can offset it, a fair question, but I would worry more about it for the next 15 years than it’s been relevant in the prior 15 years.
RITHOLTZ: Quite interesting. Let us talk a little bit about what’s going on in the industry in general. We saw a massive purchase pretty recently Schwab took over TD Ameritrade. That’s had a big impact on the industry, we have seen a variety of other mergers and acquisitions between big companies and smaller fintechs, between other big companies. What are your thoughts on these, especially given Vanguard’s history of not really playing in those wars?
BRENNAN: So listen, one of the great assets to the investing public in my view is the tremendous sense of competition through all segments of our business, right?
And if you just look overtime whether it’s the active management business, the brokerage business, the advise business, inherent entrepreneurism creates new competitors whether they are fintechs or whether it’s your firm seven years ago in the advise space.
You know, Schwab and Ameritrade came together, big impact on the financial advisor, community scale for the firm, but you know, in the grand scheme of things, none of us is that big a player, interestingly, when you think about it.
BRENNAN: So I think we will continue to watch, we will see certain areas where scale really matters a lot, you know, index fund management, very important in that regard, but there will be continual growth in boutique advisory firms, boutique investment management firms. And I think that is one of the great parts of the business is the dynamism of the business just forces every firm in an entrenched position to get better.
And so whenever I see deals like that happen, I think it’s good for the investing public at the end of the day. I do think that, you know, obviously I’m a huge fan of Vanguard, organic growth is always better than (inaudible) growth and as you do it culturally, you don’t have integration challenges and so to see what Vanguard has accomplished, I think it’s attributed in the market says we like that that strategy, means something appropriate couldn’t be bolted on to the firm, but you know, so there will be different ways of building businesses in the business but sort of generically, my own view is it’s all good because nobody in this space should be worried about monopoly power.
It’s just – there isn’t anybody with enough oomph in this relatively fragmented business to create monopoly power, so it just enhances competition.
RITHOLTZ: So let’s talk about the small boutiques that are out there. You joined the board of Rockefeller Capital Management. Even though the company itself has been around a while. Obviously a very different animal than the giant Vanguard Group. What motivated you to work with a smaller firm in what’s that experience like compared to you know, the behemoth that’s Vanguard Group.
BRENNAN: Well, and it’s been a great experience, let me just say that right off the bat, Rockefeller Family has been a tremendous part of this three-year journey, Viking, the backing firm has – Greg Fleming has put together tremendous leadership team deeply focused on providing advice to high net worth families, and very much and is complementary in some ways to the way Vanguard does its business.
And so they’re very focused on doing one thing, while providing advice, Rockefeller Asset Management provides a niche specialist in ESG investing and the family office in the private wealth management business at Rockefeller deeply focused on their, in a sense, small niches. But they want to be as deep as anyone as expert as anyone in those channels.
So it’s been a lot of fun, tremendous to watch, a great lead this business and the kind of people you attract the clients who have generally much larger brokerage house based advisory business to come to Rockefeller Capital and that parchment is a terrific success story, thoroughly enjoyed it frankly because it very different than where I spent my professional life at Vanguard prior to that.
So it’s fun to watch and more to come./
RITHOLTZ: And let us talk about another board, you are the chairman of Notre Dame’s Board of Trustees. What’s that experience like and how involved are you with the Notre Dame endowment?
BRENNAN: So when I first came on the board, I went on the investment committee as you might imagine and we had a tremendously successful endowment management operation there and Scott Malpass led it for 30-ish years, Mike Donovan now runs it today I would say, and the record has been outstanding over time, because they follow the principles of patience and research and so on.
So that as a gratifying way to get to know Notre Dame. Being the board chair is a tremendous honor, they have an outstanding leadership team, top to bottom, through you know, lots of challenging times, the pandemic, this has been its biggest challenge for higher education as anything in this century really in many ways.
We decided to be open with in-person classes, we decided last May, made it happen. Delivered 85 percent of our classes in-person, invited all students back to campus for both semesters. So it’s been tremendously gratifying. You know, my kids are all Notre Dame grads. So it’s a privilege to serve the placement affected our family so positively. But it’s been a great experience, frankly to learn of other businesses as well as try to bring some capabilities as does our board, we have a wonderful Board of Trustees with diverse backgrounds and diverse experiences.
So you see the value of that outside view from the Board of Trustees, but the board chair, you are more deeply involved in learning a lot about what is a critically important business of this country, and a very successful Internet business in Notre Dame.
So it’s been one of the highlights of my professional career, frankly.
RITHOLTZ: Quite interesting, I know we only have you…
BRENNAN: And we made the football playoffs which is always a good thing.
RITHOLTZ: That’s right, and actually did a pretty good job of maintaining a healthy team and staff in a period where a lot of colleges were having a hard time not having half the team catch COVID.
BRENNAN: Well, you see these student athletes and across the board, and we’ve had very good results but it tells you a lot about the character of the kids and coaches.
You know, our coaches at Notre Dame, they will tell you first and foremost, they are educators.
BRENNAN: They want to win in the field but they are educators and they tried to build strong cultures in their program and from the top-down, our Athletic Director Jack Swarbrick is a good big component of culture.
And I watched these kids, what they sacrificed, they sacrificed being a college kind at some level right to avoid getting Covid and across the board with our team, it’s been a great outcome. So never been proud of the student athletes, the coaches and the people involved in athletics, but the student body broadly as well, the way they handled adversity.
You know, sometimes college kids get a bad rap. They don’t deserve it. They are tremendous young people and just proud to be able to try to help them a little bit in a role like being a trustee or a board chair.
RITHOLTZ: So I only have you for a few more minutes. Let me jump to my favorite questions that I ask will my guess starting with what are you streaming these days? Give us your favorite Netflix or Amazon Prime shows or what podcasts you are listening to?
BRENNAN: Well, we seem to have become – my wife and I seem to become tremendous fans of British Talk Shows, you know, things like “DCI Banks”, “Endeavor”, or “Prime Suspect”, so that –if you look at our Amazon or Netflix account, you see a lot of those podcasts, no kidding, and apologize for this, “Masters in Business” is one that is a regular weekly listen, I have to say thank you for doing it.
“Freakonomics” is another one I find very interesting. It gives you a different point of view that you cannot live without, wait don’t tell me which is not as good without the audience, but it’s still a great way to spend a – I usually, I listen to it Sunday — Saturday afternoon after it’s on the radio on Saturday morning where I am.
But a lot more TV watching during the pandemic than it has been in the prior 40 years of our marriage, I can assure you.
RITHOLTZ: I’m glad to hear that the only one suffering through an excessive television and thank you for the kind words about the show.
Let’s talk a little bit about mentors who else shape your career?
BRENNAN: Talk about Jack obviously, that was a great privilege to work with him and learned a ton from him. I had the great fortune of having a father who is one of the great American success stories, you know, his father was a ditch digger and got a good job as a janitor and he ended up as the chairman and CEO and built a great bank in Boston, started as a mutual company and became a public company.
And you know, in snow days, you get the day off, he would say, come on, get in the car, we are going to the office. Not that I grew up in Boston and he would stand at the front door and greet everybody who made it in on a snow day to the bank and them for coming.
BRENNAN: It’s those kind of lessons that you can’t make out so that that was 60 something I get the 50 something year mentorship that was tremendous and I would just – you know, my first boss out of college, Bill McKenna, and (inaudible) for savings, a similar story actually, I have a very blue collared background for the president of a bank, and he taught me what it was like to be a businessman at 21 years old, and he — hard feedback. Great feedback. I still consider him a great friend 45years later.
So how good is that? And there are tons of others, but those three, I always think about how they affected my life at different periods of time but (inaudible) and you do it, I hope I have been able to try to pay it back a little bit by mentoring some other people and the hope somebody names you somewhere along the way.
RITHOLTZ: Tell us about some of your favorite books, what are you reading right now ?
BRENNAN: Well, I love historical biographies, funny, my wife read fiction all the time and I haven’t read a fiction book in 20 years. So I love historical biographies, I feel like it fills in the gaps of what I didn’t learn – didn’t learn in high school or college. So I always love – and I love leaders, interesting leaders, you know, Doris Kearns Goodwin’s book, “Bully Pulpit” about Teddy Roosevelt to “The Splendid and the Vile” about Churchill right now, I am reading a long biography by Andrew Roberts about Napoleon and learning ton what an unbelievable — what an unbelievable life that is much more so than I ever knew.
So I find those as (inaudible) you learn about an interesting person, you also learn about the history but you got to pepper them with some other things, one that I read recently that is great is called “The World Beneath Our Feet” and it is about the race to climb Mt Everest and you to learn about geopolitical issues that I probably don’t read enough for fun, I read to try to fill in the holes in my knowledge base more than anything, but there is nothing better than sit down for two hours with a great book, is there?
RITHOLTZ: No, not at all.
What sort of advice would you give to a recent college grad who is interested in a career in investment management or investment advisory?
BRENNAN: Do it.
It’s a great profession. It really is a great profession, you know, our business is one that’s so interesting because it changes every minute, every hour every day, there is something in the newspaper that is going to affect your business and your clients, so for me, I don’t think enough people go into investment advisory frankly, and I hope more and more will because there is a big demand for it. It is very gratifying, it is constantly changing as I said, and you can you can really do well for yourself while doing good for your clients. That is a great combo.
Last piece, I always tell people, find a great firm.
Find a great firm and if you’re lucky enough, find a great mentor and a great firm to help you accelerate your learning as you move along. So I’m very bullish on the industry I was in, I’m very bullish in the industry you are in. I think they each have tremendous psychic gratifications as well as financial rewards for people.
So I’m pitching them all the time to people.
RITHOLTZ: Really interesting. And our final question, what do you know about the world of investing today that you wish you knew 30 or 40 years ago when you were first getting started?
BRENNAN: You know, in a sense, I think I knew that to produce differentiated results, you really had to be very different from the market. But obviously know that a lot more soundly today, the statistics, but more valuably the experience and one of my sons runs a long only investment firm and his diversified fund has 14 stocks and his non diversified fund is nine.
BRENNAN: And I wouldn’t have him invest, not that he asked me but I wouldn’t have him invest in any other way because otherwise if he is going to give you a beta of 97 and R squared of 98, by our total stock market f*****.
BRENNAN: And a differentiation between being willing to be wrong and take risk is the only way you’re going to deliver results that are differentiated and valuable to people because the alternative is not hypothetical any longer. The alternative, you can invest anyway you want in an indexed portfolio, so that– it’s an affirmation of what I learned early in my career from some tremendously successful portfolio managers. But I wish I was as sure of this 30 years ago as I am today.
RITHOLTZ: Quite fascinating. Jack, thank you for being so generous with your time. We have been speaking to Jack Brennan. He is the former CEO and chairman of investing giant, The Vanguard Group.
If you enjoy this conversation, well, be sure and check out any of our previous 400 such discussions, you could find those in iTunes, Spotify, wherever you feed your podcast fix. We love you comments, feedback and suggestions. Write to us at firstname.lastname@example.org, sign up for my Daily Reads at Ritholtz.com, check out my weekly column at Bloomberg.com/opinion. You can follow me on Twitter @Ritholtz.
I would be remiss if I did not think a crack team that helps put this conversation together each week. Tim Haro is my audio engineer. Atika Valbrun is my project manager. Michael Boyle is my producer. Michael Batnick is my head of research. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.