My Interview with Burton Malkiel (That You Will Never Hear)

0:00Tyler Gardner:The cost of being right early in markets is often indistinguishable from the cost of being wrong. This is the trap that catches even sophisticated investors.

0:14Burton Malkiel:Hello friends, this is Tyler Gardner welcoming you to another episode of your Money Guide on the Side,

0:20Tyler Gardner:where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

0:38Burton Malkiel:Quick note before we get into it. May's pre-order incentive for my book, Real Wealth, is now live. When you pre-order this month, I'm sending you two chapters that didn't make the final cut. Chapters I genuinely love and wish I could have kept, delivered digitally in early June. Pre-ordering also locks you in for every monthly incentive between now and the December 1st release. Go to tylergardner.com slash book, click the button that says claim my bonuses, upload your receipt, takes two minutes, and you're in.

1:07Tyler Gardner:Now, on with the show. I want to tell you about the worst thing that happened to me last week. I know, great transition. Last Thursday, I had the opportunity to sit down on Zoom with one of the most influential and important figures in the history of personal finance, a man who in 1973 wrote a book that changed the way ordinary people think about money. A man who has been right, almost maddeningly right, through Black Monday, the dot-com crash, 2008, COVID, and every single moment in between when someone in an expensive suit on television was absolutely certain the old rules no longer applied.

1:53Tyler Gardner:I had an hour with Dr. Burton Malkiel, the author of A Random Walk Down Wall Street. We talked about fear and behavior and what retirement actually means when you're 93 years old and still intellectually curious and still showing up. We talked about Jack Bogle. We talked about whether financial education even works. We talked about irrational exuberance and why acting on Alan Greenspan's 1996 speech would have cost you years of some of the best returns in stock market history. It was one of the best conversations I have ever had about money. And then, before hitting stop recording on Zoom, I ended the meeting and exited Zoom.

2:41Tyler Gardner:Apparently, that means the recording is gone forever. Don't worry, I've already contacted Zoom support. It is gone. So after sulking in a corner for seven days, I decided to pick my head up, reconstruct what I could from memory, and give you the best of the conversation. Because Burton Malkiel gave me an hour of his time and I am not letting that disappear just because I am, apparently, a person who cannot operate basic software. But here's what I realized while I was sitting with the loss of that recording. The reason that conversation mattered so much to me, the reason I was nervous going into it in a way I almost never am before an interview, isn't just that Burton Malkiel is brilliant, or that a random walk down Wall Street is now in its 13th edition, or even that we share a publisher, which still feels slightly unreal to me as a former high school English teacher from Vermont, it's that Malkiel is one of the central characters in one of the most important and underappreciated stories in the history of personal finance.

3:48Tyler Gardner:A story about a dangerous idea, a story about the people who did the math first, the people who tried to build the thing and nearly failed, and the industry that spent decades trying to bury all of it. So that's what today's episode is. Deviating from my traditional form, I'm going to tell you a story, the full story, the economists, the academics, the traders, the fund that got called un-American. And as we go, I'm going to do my best to weave in the pieces I remember from my conversation with Malkiel to add firsthand credibility and depth of experience. The things he said about fear and behavior and concentration and what it actually means to stay the course, they're going to land differently, I think, when you hear them inside the history they helped shape.

4:43Tyler Gardner:The story starts with a man named Jack Bogle and an idea that Wall Street spent decades trying to kill. The idea? That the average investor would be better off buying the entire market at the lowest possible cost and then doing absolutely nothing. Buy everything, pay almost nothing, do nothing. The industry that tried to kill that idea now manages over$30 trillion in index funds. And as always, a familiar ask. If you found this podcast helpful in any way, please consider leaving a review on Apple or Spotify as it helps the show grow, and it helps me know that I'm not just telling stories about index funds to my sleeping bloodhounds.

5:32Tyler Gardner:Chapter 1. The World Before Index Funds. To understand why index funds were so controversial, you have to understand what the world looked like before them. In the 1950s and 1960s, the American economy is booming. The stock market is climbing. And Wall Street, the actual physical geographic Wall Street, is doing what Wall Street has always done, positioning itself as the essential middleman between you and your money. Here's how investing works in this world. You have money you want to invest. You can't really do it yourself. The information gap between you and a professional is enormous. The transaction costs are steep, and frankly, nobody's told you that you could.

6:24Tyler Gardner:So you hire a mutual fund manager, a professional, someone who went to the right schools, shook the right hands, pretended to read the right books, and who has access to the trading floors and the earnings calls and the back-channel relationships with corporate executives. You pay this person handsomely for their expertise. They charge you an annual fee. Often 1-2 % of everything you have with them every single year, regardless of performance. Beyond that, they charge you massive transaction fees for every single trade. And in exchange, there is an unwritten promise that they will do better than the market.

7:06Tyler Gardner:This is the entire value proposition of active management. I am smart enough and connected enough to identify the stocks that will outperform. you cannot do this yourself, pay me. And people did for decades because there was no alternative and because the pitch was emotionally compelling. You want someone smart on your side. You want someone fighting for you. You want to believe that expertise translates into performance. This is where I want you all doing your best Matthew McConaughey chest beating impression,

7:40Burton Malkiel:where he tells an aspiring Jordan Belfort that it's all a scam, but it's a scam that continues to make the professionals on Wall Street filthy rich.

7:49Tyler Gardner:The problem, and it is a problem that a handful of very smart, very contrarian people started noticing in the 1950s, is that it simply wasn't true. The experts, on average, were not beating the market. Not before fees, and certainly not after them.

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9:40Burton Malkiel:This episode is brought to you by Gelt. Tax day has come and gone. But quick question, How did your CPA treat you this tax season? Did they reach out proactively, walk you through your options, and make you feel like a priority? Or did you hear from them in mid-March, feel rushed, and wonder afterward if you left money on the table? That second experience is not normal. You just haven't experienced what a great CPA can do yet. A great CPA is a year-round partner, not a once-a-year fire drill. And Q2 is the best time to make a switch. Your new CPA has bandwidth, your numbers are fresh, and there's a full year ahead to make moves that matter.

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11:02Burton Malkiel:That's J-O-I-N-G-E-L-T dot com slash Tyler.

11:08Tyler Gardner:Chapter 2. The Academics Who Finally Did the Math. The first person you need to know is a man named Harry Markowitz. 1952. Markowitz is a 25-year-old graduate student at the University of Chicago. He publishes a paper called Portfolio Selection in the Journal of Finance. It is 12 pages long. it will go on to win him a nobel prize the core insight of the paper is this the return of an individual stock is not the only thing that matters what matters is how that stock behaves relative to everything else in your portfolio diversification spreading your money across many assets reduces risk without necessarily reducing return because different assets go up and down at different times.

12:01Tyler Gardner:This is known as correlation, and the volatility of your portfolio is not the sum of the volatility of its parts. This sounds obvious now, but in 1952, it was revolutionary, and it had an uncomfortable implication. If diversification is good, and more diversification is better than the logical endpoint is owning everything. But Markowitz was a theorist. He built the model. He didn't build the fund. The next person you need to know is Paul Samuelson. Samuelson was at MIT. He was arguably the most influential American economist of the 20th century, the man who wrote the textbook that trained an entire generation of economists.

12:51Tyler Gardner:In 1974, he published a paper called Challenge to Judgment, and in it, he said something that landed in the investment management industry like a grenade. He said, show me the evidence that professional active managers beat the market consistently over time, because I've been looking for it and I cannot find it. He wasn't polite about it. He compared active management to alchemy. He said the burden of proof should fall on the people claiming they can beat the market, not on the skeptics. And he ended the paper with something remarkable, a direct challenge to anyone out there with the institutional courage to actually build an index fund for ordinary investors.

13:40Tyler Gardner:Nobody took him up on it at first. The third person you need to know is Eugene Fama. Fama, also at Chicago, published his efficient market hypothesis in 1970. His core claim, asset prices reflect all available information at all times, which means you cannot consistently beat the market by analyzing information, because the information is already in the price. By the time you read the earnings report, 10 ,000 other people have already read it and traded on it. This is the academic foundation underneath index investing. If prices are already right, or right enough most of the time, then the whole enterprise of stock picking is roughly equivalent to a very expensive coin flip.

14:33Tyler Gardner:Now, I want to be honest with you here. The efficient market hypothesis is not universally accepted. There are serious economists who push back on the strong a form of it. This is one of the first gems I took away from my conversation with Burton Malkiel. After asking him how he had first developed his conviction in efficient market theory, in other words that the market is always right, he paused me. He said he wanted to correct a part of my research. He clarified that he believes the market is actually always wrong. The problem, problem, you just don't know in which direction it's going to be right, which is not quite the same thing as saying prices are always right.

15:19Tyler Gardner:But here's what even the critics agree on. Consistently exploiting market inefficiencies after fees over long periods of time is extraordinarily difficult. Difficult enough that most professional managers fail to do it, and that's the point. Chapter 3. The First Index Fund and How It Nearly Died Here's where the story gets interesting, and a little painful, and honestly, pretty inspiring. It's 1971. A group of researchers at Wells Fargo, not academics, but practitioners, built the First Institutional Index Fund. It tracked an equal-weighted index of stocks listed on the New York Stock Exchange.

16:03Tyler Gardner:It was designed for large pension funds. It was, in the language of the time, theoretical and mechanical. It wasn't available to regular people, but it existed. The concept was being tested. Then came 1974, the year everything nearly fell apart. 1974 was one of the worst years for the stock market in American history. The oil embargo, stagflation, the S &P 500 fell nearly 48 % from its 1973 peak. If you had any money in the market, you watched it get cut almost in half. The conventional wisdom, which is rarely wise and almost never conventional in any meaningful sense, held that this was exactly why you needed a professional.

16:52Tyler Gardner:Because a professional would have seen this coming. A professional would have gotten out. But they didn't get out. Almost none of them did. But that's not what people were saying in 1974. Enter one of our main characters, John Clifton Bogle, known to his friends lovingly as Jack. Bogle was running a mutual fund company called Wellington Management. He had just been fired. Fired from the company he had largely built. After a disastrous merger he had engineered with a go-go growth fund in the late 1960s. The timing was terrible. The fund blew up. The partners forced him out. But as part of the separation agreement, he retained control over the fund's board of directors.

17:40Tyler Gardner:And rather than go quietly, he used that control to start something new. He called it Vanguard, named after a British naval flagship, Admiral Nelson's ship at the Battle of the Nile. And the first thing he wanted to build was an index fund for ordinary investors. Vanguard launched the first index investment trust in August of 1976. It tracked the S &P 500. The expense ratio, the annual fee to be invested in that fund, was 0.2%, a fraction of what active managers were or are charging. The plan was to raise$150 million in the initial public offering. They raised$11.3 million. The underwriters were furious.

18:30Tyler Gardner:Some of them called it a sure failure. The financial press called it Bogle's folly. Fidelity, Vanguard's primary competitor, took out ads with the tagline, who wants to be average? A senior Fidelity executive reportedly called the idea un-American. The argument was that indexing meant settling. It meant giving up. It meant accepting mediocrity when American ingenuity could do better. I want you to sit with that framing for a second, because honestly, it's evil genius. Owning every company in the American economy, every single one, was being sold as settling, as giving up, as un-American. And the people calling it un-American were the very people charging you 1 % to 2 % a year to pick stocks for you, and on average, losing to the market they were supposed to beat.

19:29Tyler Gardner:Sound familiar? It should, because this nonsense narrative continues to this day. The fund struggled for years. Investors simply weren't interested in being average. The concept was too abstract, too counterintuitive, too boring. You're telling me I should just own everything and not try to beat anything? Where's the excitement in that? By 1980, the first index investment trust had less than$100 million in assets. This, for context, is not a lot of money for a mutual fund. It barely existed.

20:06Burton Malkiel:This episode is brought to you by Element. My sister is a marathoner who treats Element like a food group. When I told her I was partnering with them, she called for 17 minutes. The first 10 were enthusiasm. The last 7 were logistics about how many boxes I could get her and how quickly. I've also mysteriously been reconnecting with old cycling friends. Years of radio silence, and now my phone is buzzing. Genuinely touching, but each call ends the same way. So, what's this Element situation exactly? Followed by an unprompted shipping address. Anyway, some actual news. For salt monsters like me, my sister, and my cycling crew, it's outstanding news.

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21:32Burton Malkiel:That's drinklmnt.com slash Tyler. This episode is brought to you by Facet. I want to read you two messages I get every single week. First one, Tyler, I'm retiring in two years with about a million dollars saved. What should I be investing in right now? Second one, should I take social security at 62 or wait until 70? I genuinely don't know what to do. And I want to help. That's why I do what I do. But those questions will never have a universal answer. They only have your answer. And your answer depends on your health, your other income sources, your tax situation, your spouse, your timeline, and about 40 other variables I cannot responsibly address to a general audience of over 4 million people.

22:20Burton Malkiel:Those questions deserve a real answer from a real professional, not a guy on the internet speaking generally. A CFP who sits down with your actual numbers and builds a plan that is specifically yours. That is exactly what FACET does. CFP professionals, flat annual membership fees, not a percentage of your assets, not a commission, none of the fee structures I've spent years telling you to avoid. Your social security question, your million dollars, your plan. If retirement is close enough that the stakes feel real, this is the conversation worth having today. Facet helps you bring your whole financial life together.

22:57Burton Malkiel:Social Security, Medicare, long-term care, Roth conversions, RMDs, all of it. So head to facet.com slash Tyler and see how their team can help you answer the questions you're already asking. That's facet.com slash Tyler. Facet is an SEC-registered investment advisor. This is not advice. All opinions are my own and not a guarantee of a similar outcome. I'm not a member of Facet. I have an incentive to endorse FACET as I have an ongoing fee-based contract for cash compensation, as well as a percentage of equity in FACET based on this endorsement.

23:31Tyler Gardner:Chapter 4. The Wilderness Years Here's something I find almost unbearably interesting about this story. Between 1976 and the mid-1980s, the evidence kept coming in. Study after study, paper after paper, decade after decade of returns data, all pointing in the same direction. Active managers, in aggregate, do not beat the market. After fees, the average active fund underperforms the index it's trying to beat by roughly the amount of its fees, which makes perfect sense. The market is, by definition, what you get if you add up all of the investors. If the average investor gets market returns, and active managers are investors, then active managers as a group get market returns minus their fees, which means active managers as a group underperform by exactly the amount they charge.

24:30Tyler Gardner:This is not a controversial statement, and to the academics, it never has been. It is basic arithmetic. But arithmetic, it turns out, is not always persuasive, especially when the people it's working against are the ones with the money, the marketing budgets, and the television time. The mutual fund industry in the 1980s was an extraordinary machine for generating fees. The actively managed fund business was printing money for the managers. The sales commissions alone, called loads, could run to 8 % of your initial investment.

25:10Burton Malkiel:8 % off the top before a single stock was purchased, before a single return was generated before you had even technically started investing. And the pitch kept working.

25:23Tyler Gardner:Because when the market was going up, as it did for most of the 1980s, every fund was making money. And when every fund is making money, it's very hard to convince someone that the fees they're paying are eating those returns. Because the gains feel real. The costs feel abstract. In fact, Burton Malkiel was writing and teaching throughout all of this. A random walk down Wall Street went through edition after edition. Each one updated the data. Each one said the same thing. The evidence is here. The math is clear. Buy an index fund. Make more money. Think about that. The moments when index investing is easiest to accept intellectually are the exact moments when it's also hardest to argue for emotionally.

26:11Because when everything's going up, nobody wants to hear,