Vanguard’s Bogle Still Knows Best

On this episode of The Long View podcast, Bob Pisani, senior markets correspondent for CNBC, discusses groupthink on Wall Street, where investors should look for information, and his thoughts on pivotal figures in financial history.

Here are a few excerpts from Pisani’s conversation with Morningstar’s Christine Benz and Jeff Ptak:

Where to Find Information You Can Trust

Ptak: You mentioned that one of your biggest challenges as stocks and market correspondents at CNBC was figuring out where to go for information and which resources to trust. In the book you talk about how the information is coming at you from every which way every day and dealing with information overload is a challenge that confronts individual investors too, just as it does you. How did you approach that challenge?

Pisani: Well, I cover—I have a number of things in my portfolio. I’m Senior Stocks Correspondent. So, my broad brush is to cover the stock market and what’s going on. But I also cover IPOs and exchange-traded funds and a little of market structure—what’s going on, what is the SEC saying about how the markets are doing. But for me, one of the big things is finding sources that you can trust. Now, I’ve been doing this a long time, more than 30 years. So, what happens is, you find people whose opinion you trust. The most important source, and I talk about this in the book, is somebody who knows what they’re talking about, number one, and number two, can give you an honest opinion, and that’s not necessarily the same thing. This is Wall Street, and everybody talks their book on Wall Street, meaning everybody has an opinion, everybody is – you’re bullish on technology stocks, so you’re going to talk a lot about technology stocks. You got to talk your book. And it’s very important to find people whose opinion you trust.

I remember about five years ago I found my 1999 contact list. I don’t know why I saved it, but I found it, and it had 500 people on it. I can’t believe I was talking to 500 people in 1999, but there it was, staring me right in the face. I don’t talk to 500 people anymore. I probably on a regular basis talk to about 100 people. I don’t need to talk to five oil analysts. I need to talk to two oil analysts may be whose opinions I really trust and respect, and I know that I have talked with them for years, and I trust what they’re telling me. So, that’s kind of the most important thing, is finding people whose opinions that you trust.

The other thing is being very careful about your biases. This is something I talk about in the book as well about behavioral economics that you often have unconscious biases and the people that you talk to have unconscious biases, we do, all of us do, and sort of being able to understand what some of those biases are, and I list a lot of them in the book and describe how they can influence what you do and the people that you talk to. So, there’s not one easy thing to look for. It’s sort of an art form learning how to find sources whose opinions you respect and who give you an honest opinion.

Back to Bogle

Benz: So, for individual investors who are engaged in this struggle where they have all this information coming at them, do you have any guidance for them on sort of figuring out who they should listen to for market perspective?

Pisani: First off, if I was a young investor right now, I would stick with the advice that I learned 30 years ago, starting with meeting Jack Bogle in the mid-1990s. There’s a chapter in the book about how I met him and what he said to me at the time. But I would encourage young investors to stay with the core of very broadly diversified index funds. And one of the things Bogle was very good at was he recognized that it’s boring doing that. And most people have a hard time sticking to that. I did. And so, the standard advice these days was kind of evolved out of what Bogle was talking about in the 90s was, okay, have a broadly diversified set of index funds and then take 10% of your money and play around the edges. Everyone thinks they’re a great investor and can outperform the market. Go ahead and do that. Bogle used to laugh at people who did that. He said, go ahead, try doing that, but you’re going to find in the long run, if you honestly look at the costs and the time it’s taking you to do this, you’re not going to be outperforming the market, most of you. But that’s what I would do.

Part of the problem you have today is the landscape, the media landscape is not just splintering. That happened 10 years ago, where all of a sudden there was an explosion of media outlets. The media landscape today is shattering. It’s past splintering. We literally don’t know how many podcasts there are, but it’s in the millions. Every analyst and strategist not only now writes a newsletter, they have a podcast, and everyone is out with their own opinions. So, it’s a real cacophony of voices to make it fairly difficult to figure out what you should be doing. I keep emphasizing going back to core principles of investing, and you’re not going to go wrong. You’ll never go wrong if you stick with those core principles. Broadly diversified index funds take 10%, play around the edges. That will satisfy Bogle called it scratching the itch to go ahead and do something else. These are time tested pieces of advice, and I don’t see any reason why anyone to change that.

Scratch the Trading Itch

Ptak: Is that how you invest, sort of, emphasizing broadly diversified index funds and then maybe you have a little pot of money that you play around with to scratch that itch like you mentioned?

Pisani: I do something that I don’t see anybody do in this book. I talk about what I own. And it is astonishing to me how many times people are talking about, oh, this is what I’m recommending, this is what I think, and nobody ever asks, well, what do you own? And it’s amazing, nobody ever asked me that. When people stop me on the street or say something, they want to say hi, they always ask—the typical question is, so what do you think the markets? And they usually mean, what do I think of the markets three to six months from now? They want a short-term or intermediate-term perspective on the markets. A few people will ask me questions about the mechanics of the TV business, like you just asked, like, how do I decide what to say? How do I decide what news is or what are the producers say in my ear while I’m standing there? So, part of the mechanics of television. But almost nobody ever asked me what do I own. And it’s amazing to me, considering, that’s the most important thing. Gee, they put your face on TV for 30 years, so what do you own?

And I described in the book in a chapter my investing voyage, I call it. Travels, beginning in 1993 when I opened my 401(k) General Electric, which owned NBC at the time and all the way through meeting Jack Bogle in 1997 and how that influenced me, how I opened the Vanguard account for my wife and what she bought in 1997. I actually found out, we got numbers and described some of the things that I did and closed the chapter with talking about what I actually own. And whenever I tell people what I own – and you put it on an index card – people look at me and say, this is it? This is what you own? They’re always surprised and a little disappointed. Like, oh, we thought you’d be like having like the secret Illuminati investing, like you own leverage and inverse Malaysian bonds or something like that. You own the S&P 500 index fund, you own small cap value index fund, you own a midcap index fund, you own an international, broad international diversified fund? Yeah, that’s exactly what I’ve been saying for years. I actually do it. And I tell people what I actually owned. And like I said, people are always disappointed. But actually, all I’m being a Jack Bogle disciple for all these years I’ve been saying this and please don’t be surprised.

But I do point out some of the stupid investing decisions I made, including a real whopper, which is putting too much money in your own company. I was a very, very big believer in General Electric in the early 90s. I was very close to Jack Welch, the CEO. He was like a corporate God, and it is very hard to describe the influence that man had on my generation and particularly the corporate leadership in America. And I swallowed that hook line and sinker and bought very, very aggressively. General Electric Stock was the only stock I could own. I’m not allowed to own individual stocks or bonds, only mutual funds and ETFs, but I could own GE and boy, did I that aggressively, and that was a major mistake. And you guys, both of you know this, of course, do not put too much money in your own company stock. There’s no hard and fast rule, but certainly 10% is a warning sign. And at one point, I went back to the records that I have remaining in my file and at one point in 1999 I was shocked to see I had 50% of my 401(k) in GE stock. That was a disaster, and you all know what happened to GE stock a couple of years after that. And I described why I did that, which did not make sense, why I held onto it too long as well, which also didn’t make sense, another investing mistake.

And I talk about these behavioral economics mistakes that I myself made. I knew you should not be owning that much of your own company stock. I can’t go out and say, oh, I just found out 20 years later. I knew this. I knew that when the losses started piling up a few years after 2000 that I should probably have cut my losses. I did not, and I have a whole chapter about the biases that you have, including overconfidence being a major bias, in this case, overconfidence in my company that made me do that even when I knew. And this is how powerful irrational impulses can be and behavioral economics recognizes that. It studies this. So, I myself also a victim of irrational exuberance, you might call it, and describe that whole investing voyage. It was very, very painful chapter for me to write, frankly, but I felt it was really necessary to tell people honestly what was going on.

Don’t Overinvest in Celebrity Stocks

Benz: Right. And I wanted to ask about that. So, you mentioned that you learned the importance of not over-investing in company stock, employer stock. What about that sort of rockstar CEO type thing? What have you learned about that phenomenon over the years and what should people keep in mind, whether it’s Cathie Wood running her fund or whatever the case maybe, how should people approach those sort of larger-than-life investment related celebrities?

Pisani: Right. Well, there’s a whole chapter in the book on behavioral economics and recognizing biases in the way that you invest, and I list 20, 25 of them. This is very well studied. But principally, one of the main problems is simply overconfidence is a bias. I had way too much confidence that somehow Jack Welch was going to keep going forever. I had way too much belief that somehow the world was going to pay a huge premium for conglomerates, which is what General Electric was in 2000. It owned multiple businesses. NBC was only a little tiny part of a gigantic company that made light bulbs and jet turbines and also had a big financial arm. So, overconfidence—the belief that somehow the future was going to look exactly like the past. And none of that was true.

What happened, of course, with Jack Welch retired, his attempt to buy Honeywell failed in 2000. The predecessor encountered enormous problems because after 2000 but multiple they were willing to give General Electric for being a conglomerate dropped dramatically and there was no way to foresee that. The only way you deal with these is you accept the fact that there are aspects of the future that are unknowable, and we can talk about that if you want and why that is, but diversification protects against unknowability, essentially, and that’s the key to this whole thing.

And on a couple of levels, I failed to do that at a very critical moment in 2000 when diversity would have been very, very important for me. So, the same with Cathie Wood. Listen, Cathie Wood’s fundamental insight is correct. Disruptive technology changes the world. If you look at what really matters in the S&P 500 throughout its 100-year history, and it’s coming up on 100 years if you pick 1926 as its founding, you’ll find that at any one time, there’s only a few companies that really matter, that are really moving the index around. Most of the others ae just languishing down there in the bottom and that’s because companies come and go and so do asset managers and so do people with various opinions. Cathie Wood’s fundamental insight is obviously correct. Disruptive technology changes the world. The question is, what’s the price we’re willing to pay for this disruptive technology. And she came along exactly at a moment of very high, I like using this word, irrational exuberance, where we drove the prices of these companies, particularly companies that make little or no money to stupid valuations and the Fed started withdrawing liquidity or threatening to do that and raising interest rates. The relative valuations of these companies went down, and it wasn’t a mystery. This has happened many times in the past. It happened in the dotcom bust too. So, here you have another example where people had unfettered optimism in the company and an individual person. This also exists as well with erratic crowd as well. I welcome all the young people who are out there. But I caution everyone against thinking that there are gurus out there that can lead you to the promised land. The history indicates that that is not the case. So, you can still believe in investing, still believe in broad principles like Cathie Wood stands for, just be very, very careful about putting way too much of your investing eggs in one basket.