2015

When introduced in 1908 at a base price of roughly eight hundred and fifty dollars, the Model T was thoroughly modern for its day, with a four-cylinder engine, a relatively light chassis, and rugged construction suited to the bad roads of the period. The Henry Ford museum's account emphasizes that the car's relentless drive toward increasing production and decreasing cost led directly to the creation of the moving assembly line by the end of 1913, an innovation the museum judges to have been as important as the Model T itself. By October 1922 a new Model T could be had for under three hundred dollars and Ford held roughly half of the American car market. By the time production ended in 1927, Model Ts were being assembled in nineteen other countries, including Argentina, Australia, and across Europe, a distribution footprint no rival automaker matched.

On June 30, 1927, Henry Ford released a signed letter apologizing for dozens of antisemitic articles that had appeared in his newspaper, The Dearborn Independent, between 1920 and 1925, and that had been re-published in pamphlets under the title The International Jew: The World's Foremost Problem. The Reform Judaism account, drawing on the American Jewish Archives, records that the apology was written in direct reaction to a libel charge brought by Aaron Sapiro, a California attorney who had been personally named and attacked in one of the Independent articles. Sapiro's was the only libel suit to reach court. The trial garnered intense publicity under headlines such as THE JEWS TRY FORD, and Ford's signed apology closed the case. The apology was accepted by leading American Jewish figures as a manly amende, though the underlying pamphlets continued to circulate abroad for decades.

A widely circulated Medium post by the writer fergserg reconstructs Stanley Druckenmiller's January 2015 talk at the Lost Tree Club, a frequently cited appearance that the investor himself treats as the cleanest summary of his process. The post opens with a line that has become a Druckenmiller signature, that the reason institutions send eighteen-year-olds to war is the same reason a young trader should take risk: at that age one is too dumb, too young, and too inexperienced not to charge. The piece uses the line to set up Druckenmiller's broader argument, that risk appetite is a function of age and circumstance, and that the same instinct that drives a young analyst to lean into a position is the one that a senior investor has to discipline against. The piece is widely shared among investors and analysts looking for a serious articulation of the principles at stake in the broader debate over how institutional money should be deployed. The Medium recap walks through Druckenmiller's account of how his track record was built. He told the Lost Tree Club audience that his first decade at Duquesne benefited from a willingness to bet size when conviction was high, and that the avoidance of large losses, not the frequency of being right, was the central reason his compounded return matched the great investors of the era. He framed liquidity as the most underpriced input in portfolio construction, noting that the moment he stopped being able to exit a position without moving the market was the moment the position had to be cut. The post emphasises how often Druckenmiller returned to the theme of capacity, since his track record was produced at a scale that allowed exit without catastrophic slippage. The article is widely used as a teaching document in business-school courses on the subject and in wealth-management training programmes that draw on the published record of the investor. The piece closes with Druckenmiller's reflection on philanthropy and on why he eventually chose to give the bulk of his wealth away. He told the audience that he gives for what he called selfish reasons, that he loves taking the money he has made and using it to change outcomes for people who have not had his opportunities. The Medium post is one of the few extended secondary reconstructions of the Lost Tree Club talk and is widely shared among value and macro investors as a free teaching document. The fergserg recap has become a citation in its own right, used by writers who do not have access to the original transcript and who want a reliable summary of the talk's core arguments. The piece is paired in the secondary literature with the original source documents and with the broader coverage of the subject in the financial press and the academic literature that followed.

5/4/2015 The Mutual Fund Industry Today: “Conflicts, Conflicts Everywhere”* John C. Bogle United States Securities And Exchange Commission Asset Management Unit April 28, 2015 *Title of a speech by Julie Riewe, Co-Chief of Asset Management Unit, Division of Enforcement NOTE: The views I express in this speech and the visuals that follow are my own and do not necessarily reflect the views of Vanguard’s present management. 2. 740B 1,000 10,000 1951 1960 1970 1980 1990 2000 2015 Equity Bond Money Market Balanced $ A Tiny Industry Grows into a Behemoth TOTAL ASSETS March 2015 $9.9T 3.7T 2.5T $16.9T TOTAL TOTAL ASSETS December 1951 Equity $2.45B Balanced 680M TOTAL $3.13B Annual Growth Rate 1951-2015: 15% 3. Mutual Fund Industry Leaders: Then and Now Rank 1951 Fund Name Total Assets* (Millions) 2015 Manage r Name Total Assets (Billions) 1 M.I.T. $472 Vanguard $2,988 2 Inve stors Mutual 365 Fide lity 1,615 3 Keystone Funds 213 BlackRock 1,230 4 Tri-Continental 209 American Funds 1,216 5 Affiliate d Funds 209 JPMorgan Funds 519 6 Wellington Fund 194 State Stree t 497 7 Dividend Shares 186 T Rowe Price 493 8 Fundamental Investors 179 Franklin Templeton 480 9 State Street Investment 106 PIMCO 375 10 Boston Fund 106 Fede rated 272 Total $2,239 Total $9,686 Percentage of Industry 72% Percentage of Industry 57% Total industry assets: $3.1 billion. Total industry assets: $16.9 trillion *Includes associated funds. 4.

“Putting Investors First” Remarks by John C. Bogle Founder and former Chairman, The Vanguard Group before the CFA Society of Philadelphia Endowment & Foundation Event Philadelphia, PA June 4, 2015 I love the theme of the CFA Institute campaign for May 2015: “Putting Investors First.” But I believe that such a campaign should be, well, eternal. For it is in those three little words—putting investors first—that we find the fundamental justification for our profession of investment management, our investment strategies, our securities analysis, and our financial planning. And yes, “putting investors first” is at last gaining momentum in the evolution of our nation’s financial system. That phrase is simply another way of stating the core principle of my own campaign to establish a federal standard of fiduciary duty, the duty of everyone who touches “other people’s money” (OPM) to place the interests of our clients above our own interests. The idea of fiduciary duty is simple enough, and, I think unarguable. (How many members of our profession would want to operate under the mantra: “We put our clients’ interests second, but it’s close.”?) But the implementation of this simple idea has proven fraught with challenges. Ferocious opposition exists. Even worse, to the extent that reluctant acceptance exists, it pays little more than lip service to the fiduciary principle. The reality of the U.S. investment system is that it has rarely been dominated by this principle.

Wang did not attend university; he began his career in print and dyeing factories in Shunde, Guangdong, a manufacturing hub with easy river access to Hong Kong, where factories needed to get samples to Hong Kong-based buyers quickly -- a logistical need that led to SF Express's founding in the early 1990s.

The Yale Alumni Magazine's interview 'David Swensen's guide to sleeping soundly' captures the paradox at the heart of Swensen's public posture: the man who built the most successful institutional endowment in modern history by making large, illiquid, alternative-asset bets also tells individual investors to avoid active management entirely and to use low-cost index funds. The interview explains this apparent contradiction by distinguishing between institutional investors who have the staff and resources to evaluate alternative managers, and individual investors who do not. Swensen's argument, as paraphrased in the article, is that the alternative-asset premium exists and is real, but it accrues only to institutions that can both identify top-quartile managers and access their partnerships. Individual investors, by contrast, are systematically sold the high-fee median alternative products whose returns net of fees are unattractive. The honest advice, in Swensen's framing, is for individuals to focus on what they can control - asset allocation across low-cost index funds - rather than to chase the alternative-asset premium through retail vehicles that capture the fees without delivering the underlying returns. The interview also explains Swensen's preference for index funds over active management in the public-equity and fixed-income spaces. He argued in the article that the after-fee return on active management in efficient markets is structurally negative - the aggregate return on active management must net to the market return minus fees, by definition. Individual investors who index capture the market return at minimal cost, which over a long horizon compounds to a larger terminal value than the median active-management outcome. The interview framed this as the discipline of recognizing what one's structural advantage is - and is not.

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January 2016 Dear Fellow Investor, This is the sixth annual letter to owners of the Fundsmith Equity Fund (‘Fund’). The table below shows performance figures for the last calendar year and the cumulative and annualised performance since inception on 1st November 2010 compared with various benchmarks. % Total Return 1st Jan to Inception to 31st Dec 2015 31st Dec 2015 Cumulative Annualised Fundsmith Equity Fund1 +15.7 +131.4 +17.6 Equities2 +4.9 +64.3 +10.1 UK Bonds3 +1.0 +24.3 +4.3 Cash4 +0.0 +3.5 +0.7 1T Class Acc shares, net of fees, priced at noon UK time. 2MSCI World Index, £ net, priced at close of business US time. 3Bloomberg/EFFAS Bond Indices UK Govt 5-10 yr. 43 Month £ LIBOR Interest Rate. 1,3,4Source: Bloomberg 2Source: www.msci.com The table shows the performance of the T Class Accumulation shares which rose by 15.7% in 2015 and compares that with 4.9% for the MSCI World Index in Sterling with dividends reinvested. The Fund therefore outperformed the market in 2015 by 10.8%, its fifth consecutive year of outperformance, which is ironic given that outperforming the market in any given reporting period is not what we are seeking to achieve. However, we realise that many or indeed most of our investors do not use the MSCI World Index as the natural benchmark for their investments.

Liu Yongxing and his three siblings (Liu Yongyan, Chen Yuxin, and Liu Yonghao) started as farm workers of low social standing due to their family's designation as wealthy landlords before the Cultural Revolution; in the late 1970s, they founded an electronics company that had to close soon after because such ventures were regarded as 'too capitalistic' at the time.

Wei Jianjun was born in Baoding, Hebei, China in 1964, where Great Wall Motor is headquartered and where he still resides.

At the 2015 Daily Journal meeting, Munger described the company's pivot from print legal journalism to court-automation software as the equivalent of trying to climb Half Dome in Yosemite with one arm and one leg. The franchise had been a wonderful business - a monopoly on prompt appellate court decisions, year after year of price increases. Then the internet came along and destroyed the position. Daily Journal's circulation went way down, and the publishing business shrank with it. The decision to replace the dying newspaper with software sold to courts and government agencies was, Munger said, probably not a terribly good decision at the time. They tried it anyway. A great boom in foreclosure notices temporarily flooded Daily Journal with revenue, and the company used that transient cash to build the software business partly by purchase and partly by self-development. The odds were against them, Munger admitted. He used the rock-climbing term five-eleven to describe what they were attempting - a route that is not really possible, but that occasionally somebody does climb. He told shareholders that for some strange reason Daily Journal was now about halfway up Half Dome with its one arm and one leg. Software revenues had crossed the level of the traditional business. He was candid that the cost had been heavy and would continue to be heavy, but said he thought about the spend the way Jeff Bezos does: there is no point in being rich if you don't use it to compete effectively. He closed by saying that the kind of business they were building was so hard that competitors like Microsoft hated it. That difficulty, in Munger's calculus, was the only reason the opportunity existed at all.

Chenault opened the Q4 2015 review by reporting full-year revenues net of interest expense of $32.7 billion and earnings per share of $5.64, both up on a constant-currency basis. Management told the call that the proprietary consumer and small-business network had grown both billings and Card Member loans in the mid-teens year over year, and that the renewal of the Costco co-brand portfolio to Citigroup and Visa had been the most consequential strategic decision of the year, framed as a willingness to walk away from a portfolio whose unit economics did not clear the Company's return-on-equity hurdles. CFO Jeff Campbell walked analysts through the $400 million pre-tax restructuring charge taken in the quarter, which had accelerated the Company's transition to digital-first service and marketing. He flagged that more than seventy percent of new accounts were being acquired through digital channels, that mobile was now the largest customer-service channel and that the underlying technology cost-to-serve would compress materially over the following two years. On the Q&A, analysts pressed on whether the Costco decision would produce a multi-year overhang on revenue growth. Chenault defended the decision, arguing that the renewal terms being offered by Costco would have destroyed the marginal economics of the portfolio and that the underlying premium proprietary franchise was growing fast enough to absorb the volume loss. He also signalled that the loss of the JetBlue co-brand to Barclays reflected similar discipline around the minimum acceptable return on the deployed capital in co-brand. The call closed with management reaffirming the long-term algorithm of mid-teens earnings growth, anchored on the durability of the premium proprietary spend franchise, and signalling that 2016 would be a transition year affected by the Costco exit before the proprietary growth re-accelerated in 2017.

At the November 2015 New York Times DealBook Conference, Stanley Druckenmiller sat for a conversation billed as The Other Investors' Perspective, an on-stage interview with Andrew Ross Sorkin that drew on lessons from four decades of macro investing. He used the stage to talk about the durability of his process rather than any single current trade, telling the audience that he had survived because he had never confused forecasting with position sizing and never confused activity with alpha. He emphasised that his goal had always been to compound capital without significant drawdowns, since the mathematics of recovery from a fifty percent loss are punishing. The session is one of the few on-camera long-form interviews he granted during a year in which he had already given the Lost Tree Club talk. The piece is paired in the secondary literature with the original source documents and with the broader coverage of the subject in the financial press and the academic literature that followed. He told Sorkin that the most important question an investor can ask before adding to a winning position is whether the marginal dollar of exposure increases the probability of ruin. He described how, earlier in his career, the temptation to lever up gains had cost him dearly, and that he had restructured Duquesne so that no single trade could threaten the franchise. He reiterated a refrain that recurs across his public remarks: there is a time to be aggressive and a time to be patient, and recognising which environment one is in is itself a skill. He pointed to central bank divergence in late 2015 as a regime that rewarded patience, since the Federal Reserve was on the cusp of tightening while Europe and Japan were still easing. The article is one of the few extended on-record discussions of the topic at the time of its publication and is used as a reference document by writers covering the broader institutional investment industry. On the question of when to step away, Druckenmiller was unusually introspective. He told the DealBook audience that he had thought about closing Duquesne more than once during the prior decade and that the trigger was never performance alone but a feeling that the size of his book had begun to constrain the opportunities he could take. He would, five years later, walk that talk by shuttering the client fund and converting the operation into a family office. The 2015 conference remarks are often cited as the public beginning of his decision to give up external capital, and as a candid articulation of how a discretionary macro investor thinks about scale, capacity, and the legacy of a long track record that has begun to constrain the next chapter of the firm. The piece is widely cited in the literature on the topic as a case study in how the principles at stake interact with the broader institutional context and the operational architecture of the office.

Last week the transcript of a talk Stanley Druckenmiller gave went a little viral on #financetwitter. (http://covestreetcapital.com/Blog/wp-content/uploads/2015/03/Druckenmiller-_Speech.pdf) Only problem- it's been traveling around in the form of an image PDF, making it hard to cut + paste or search for your favorite quotes. So I ran it through a couple programs, and bleepblorp, a text transcript is below.

Kiplinger’s journalist Daren Fonda asked: “Why would all those Bogleheads come all the way to Valley Forge when they must know exactly what you’ll tell them?” My Response: When Pope Francis made his resent visit to the United States, everyone also knew what he would speak about: the importance of faith; keeping families strong; caring for those less fortunate; religious liberty; environmental issues. And yet wherever he went, tens of thousands— even hundreds of thousands—came to hear him speak. Perhaps we don’t expect our leaders to say something new whenever they speak. We want them to reinforce the truth—to speak from the heart about the things they care about. We do not seek novelty in our leaders, but knowledge, conviction, passion, integrity, common sense, and some fun. These are the things that I will try to deliver during these next few days. *** Of course, I’m no Pope, even though one of our veteran crew members thought that the analogy was fair: Note from a Veteran Vanguard Crew Member: YOU are Vanguard’s Pope. Your heart and soul has always been with Vanguard. No one knows what the future holds, but as long as you stay the course we here at Vanguard will strive to follow in your footsteps to keep Vanguard the best in the world. YOU are Vanguard’s Shepherd—past, present, and future—and may you always feel the presence of God with you! WHATEVER THE CASE, I’M STILL HERE . . .

Asked repeatedly to describe his method, Icahn has given a consistent answer across decades: find companies trading below the value a competent owner would realize, buy enough to be heard, and be willing to endure years of litigation and ridicule to force the change. He describes most boards as self-perpetuating and says the activist's real product is the credible threat of a proxy contest.

In 1982, the four siblings pooled 1,000 RMB to start the 'Hope Group,' raising quail and hatching chickens in Sichuan province, and established the Hope Research Center for animal feeds in 1986.

Wang moved to Hong Kong with his family at age 7 and attended primary and secondary school there before returning to work in Guangdong's manufacturing sector.

5/4/2015 9. 1951 1960 1970 1980 1990 2000 2013 % Then, Long-Term Shareholders, Now . . . ? Equity Fund Redemption Rates Source: Investment Company Institute Redemptions and Exchanges Out as a Percentage of Average Net Assets 6% 24% 73%, 1987 39%, 2000-2002 25% 10. 1985 1995 2005 2013 International Funds U.S. Funds % Market Timing in International Funds Redemption Rates U.S. and International Equity Funds 11. Challenges Faced by Investors in Active Funds 1. High Costs—2% annual cost = 63% of the 50-year return on stocks. 2. Critical erosion (60%+) of dividend income. 3. Giant Size—Mutual funds own 33% of U.S. equities. “A fat wallet … enemy of superior returns.” 4. High Turnover—130% of assets (purchases and sales). 5. Marketing—“We make what will sell.” Fund failure rate 50% per decade. 6. Investor (and salesman) focus on past returns. 7. Outside ownership of managers (39 of top 50). RESULT: Stewardship descends, salesmanship ascends 12. 1,000 10,000 S&P 500 MIT 0.00 0.50 1.00 1.50 1924 1940 1950 1960 1970 1980 1990 2000 2014 Growth of $1—1924-2014 Relative Return: MIT / S&P 500: -61% 0.39 $13.69 Annual Return +10.3% +9.1% Do Costs Matter? A Powerful Example $ R2 = 0.95 $10.99

Icahn has acknowledged that his concentrated, confrontational style produces large drawdowns and that many of his positions work slowly or not at all, but argues that the few enormous wins — where a company restructures and the stock re-rates — carry the record. He frames this as explicit asymmetry: accept a high error rate in exchange for uncapped payoffs on the winners.

Despite the Empty Chair. Ouch! Bloomberg Markets, April 2015 Forbes, June 2015 LET’S FIX THIS IMPRESSION . . . Still in the Empty Chair. Yes! Photoshopped by a Vanguard client, September 2015 NOW LET’S GET TO THE PAST YEAR . . . A Year in My Life … I. Books and Papers • Wiley Investment Classics: Two more books with new introductions – Bogle on Mutual Funds: New Perspectives for the Intelligent Investor – John Bogle on Investing: The First 50 Years • A Book Chapter: Adam Smith: His Life, Thought, and Legacy (Princeton University Press, forthcoming) • Articles in Professional Journals – Journal of Portfolio Management – Financial Analysts Journal START WITH THE CLASSICS . . .

If you want *just the text,* and not this surrounding web page, click "Raw" in the corner above. While there may be some errors in this conversion, the original transcript also has some uninintelligible notes, so check the original PDF above before submitting corrections. Stanley Druckenmiller Lost Tree Club 1—18—15 D = Don; SR = Sam Reeves; KL = Ken Langone;

Munger used the 2015 meeting to draw an explicitly Darwinian picture of corporate mortality. The room was watching one business die while the company tried to replace it with another. Most of the other newspaper companies that had tried to do the same thing had failed. Some of them had bought other businesses - television stations, for instance - with the profits they had, but most of the ones that simply tried to take their newspaper and transform it into something else had failed. That, Munger said, is the common result. The lesson was that technological change is one of the hardest things to cope with, which is why so many incumbents fail at it. He reached for three exhibits. Kodak had owned the world in silver-based photography, was the dominant company on the planet, the second most important trademark in the world, with armies of PhD chemists who knew more about silver-based photography than anybody. It had been a fabulous business right through the Great Depression - a total widow-and-orphan stock. And then it wiped out its shareholders with technological change. General Motors had been the most important automobile company in the world when Munger was young - number two was not close - and it too wiped out its shareholders. IBM had gone from butchers' scales to dominating the early computer market, and when the next evolution came along it failed a lot. Munger said Bill Gates had told him it happens again and again and again when the technology changes enough. The age of Daily Journal's board - the youngest director was 60 and Munger, the chairman, was 91 - only underlined the absurdity of attempting a Half Dome pivot. He told the room, with characteristic understatement, that he didn't understand computing. But he was doing it anyway, because the alternative was to accept the slow death of the print franchise.

Chris Anderson: You were something of a mathematical phenom. You had already taught at Harvard and MIT at a young age. Jim Simons: Well the NSA -- that's the National Security Agency -- They had an operation at Princeton, where they hired mathematicians to attack secret codes and stuff like that. because you could do half your time at your own mathematics,

Those of you who are based in the UK and look to the FTSE 100 Index as the natural yardstick for measuring your investments and/or who hold funds which are benchmarked to the FTSE 100 Index and often hug it will have had a much worse experience than the performance of the MSCI World Index. The FTSE 100 Index was down -4.9% in 2015 and the total return including dividends reinvested was still negative at -1.0%. Similarly, for US dollar investors, the S&P 500 finished the year down -0.7% and only delivered a return of +1.4% with dividends reinvested.

The Yale Alumni Magazine interview described the operational discipline Swensen brought to managing the Yale Investments Office. The office maintains a large professional staff with deep sectoral expertise, evaluates and re-underwrites its external managers continuously, and operates with the long-tenured investment committee that allows capital to be committed through multiple cycles. Swensen argued in the interview that the institutional infrastructure is a precondition for the alternative-asset allocation - without it, the office would be allocating to high-fee median managers and would not capture the illiquidity premium that justifies the asset class. The interview also described the cultural features of the office. Swensen paid his staff below market for the asset-management industry and framed the lower compensation as a feature rather than a bug - it filtered for staff motivated by the institutional mission rather than by short-cycle compensation, and it supported the long-tenure culture that allows the office to maintain its relationships with external managers over decades. The interview noted that the staff's compensation structure aligns them with the long-term performance of the endowment rather than with the year-to-year mark-to-market gains that drive most asset-management compensation. The interview closed on Swensen's view of the governance costs of the model. He was clear in the article that the office's success was not transferable to institutions without the staff, the access, and the governance to maintain the discipline across multiple cycles. The honest version of the endowment model, as Swensen described it in the Yale Alumni Magazine piece, requires both the institutional will to commit capital through downturns and the staff capacity to evaluate the underlying partnerships. Without those, the model produces high fees and mediocre returns.

But today, it has become a matter of enlightened self-interest to fully honor this lofty standard. ________________ The opinions expressed in this speech do not necessarily represent the views of Vanguard’s present management.

In later years Icahn extended his corporate arguments to macro warnings about credit markets and what he called euphoria in high-yield debt, publishing a series of public letters and video statements in 2015-2016 cautioning that illiquid index products had made corporate bonds falsely cheap to trade. Whatever the eventual verdict on those calls, they showed the same instinct that defined his stock campaigns: distrust consensus, and position against it loudly enough to be forced to defend the position.

D: Good evening, ladies and gentlemen, fellow members, and guests. I'm Don [unint.], and Joyce and I are chairing the 2015 version of the forum, and we're so happy to have such a great turnout. We're delighted to have Stan Druckenmiller and his wife, Fiona here this evening. And I’m going to just give you a little bit of oversight of two gentlemen who are great sponsors of the forum, Sam Reeves and Ken Langone. They're co—sponsors of Stanley Druckenmiller, and they've been just terrific through the years.

Challenges in Finance Let me now turn to three current challenges in finance. First, the underlying reality of our current market system. Almost all industry leaders, academics, and regulators agree that the fundamental purpose of our financial markets is to raise capital for companies that create jobs, build organizations, and manufacture products or provide services, with growing efficiency and with lower costs to consumers. Capital formation, as this process is known, is largely represented by the raising of equity capital for new and existing companies. In recent years, total public stock issuance (IPOs, etc.) has averaged some $250 billion annually. On the other hand, during the same period, the annual volume of stock trading has averaged $35 trillion. Thus, capital formation has represented just 7/10ths of 1% of the activities of our financial system, trading activity 99.3%. And much of that trading, to state what must be obvious, has nothing to do with long-term investment. In fact, much of that frenzied activity is merely short-term speculation. Our challenge is to return long-term investing to its starring role in the financial movie, not merely as a co-star or in a cameo role, nor as a mere extra. Second, consider the recent proposal by the Department of Labor to apply an explicit standard of fiduciary duty to those providing investment advice to individuals in retirement plans, notably IRAs and 401(k) thrift plans.

Munger returned at the 2015 meeting to his critique of activist investors, sharpening the point with the Icahn reference. He opened by conceding that he had never liked the pomposity of the old system, in which the board of directors was absolutely permanent and did as it pleased. But what usually happened to him, he said, was that he liked the new system even less. The civilization in which the people getting richest are a bunch of folks who buy a block of shares and howl for change that helps the shareholders no matter what, he said, could not be a great way to run a civilization. He again granted that Carl Icahn is a very able man. He repeated it for emphasis. And then he delivered the conclusion flatly: he should not be running the world. The audience laughed, but Munger meant the point structurally. An economy that channels its best returns to short-horizon pressure tactics rather than to long-horizon stewardship ends up with a system that misallocates capital. The price signal gets hijacked by the people whose business model depends on forcing near-term payouts. The Daily Journal shareholders, he implied, were getting the opposite of the Icahn model. They were getting a 91-year-old chairman with a one-arm-one-leg pivot, no fees, no expenses, no howling. That was the Berkshire-style governance template applied to a small publisher: smart, rich, long-horizon capitalists who think like owners rather than advisers. He was telling the room that governance, not strategy, is the first decision a company gets right.

SF Holding founder Wang Wei was separately appointed as a non-executive director to the board of J&T Global Express, a rival logistics company, according to reporting cited in search results (not independently fetched in full in this pass).

2015 was also the fifth anniversary for our Fund and so maybe a good moment to pause and reflect on the longer term performance. As well as outperforming the market with a compound return of +17.6% against +10.1% for the MSCI World Index, our Fund was the third best performing fund out of 203 in the Investment Association’s Global Sector. Why only third, you might ask? The two funds which performed better than ours are specialist healthcare funds which have benefited from the extraordinary boom in takeovers within the biotech sector in recent years. That won’t last indefinitely, at which point anyone who has benefited from investment in those companies and funds needs to find the next hot sector if that is their investment strategy. This is a game we profess no skill at and therefore will not be playing. This skill also seems to elude most other investors but that does not seem to stop them trying. 2015 was not a particularly bullish year for equity markets which were held back by the slowdown in China, setbacks in other Emerging Markets and the move on from the end of quantitative easing in America to the first rise in interest rates by the Federal Reserve (‘the Fed’) in nearly ten years. After all that the S&P 500 Index was down by -0.7% for the year. Trillions of pixels have been expended on the likely impact of this increase in interest rates and I do not intend to add much, if anything, to the debate. However, one aspect may be worth commenting upon.

In 1995, the Hope Group was split into four separate companies among the siblings: West Hope Group (Chen Yuxin), New Hope Group (Liu Yonghao), Continental Hope Group (Liu Yongyan), while Liu Yongxing retained part of the original business and built it into East Hope Group, active in agribusiness, chemicals, and non-ferrous metals.

The Yale Alumni Magazine interview also captured Swensen's view of the role of patience in long-horizon investing. He argued in the article that the most important operational practice is the discipline to maintain the strategic asset allocation through market cycles, including the cycles that produce large mark-to-market drawdowns. The interview cited both the 2008 financial crisis and the 2020 COVID crash as episodes in which the office maintained its commitments to private market partnerships and did not adjust the strategic allocation in response to public market volatility. Swensen's argument, paraphrased in the article, was that the long-horizon investor's structural advantage is precisely the willingness to hold positions through cycles that shorter-horizon investors cannot stomach. The illiquidity premium, the equity-risk premium, and the persistence of top-quartile manager returns are all premiums that accrue to whoever is willing to hold through the cycles. The discipline to maintain the allocation through drawdowns is what allows the institution to harvest these premiums - and the discipline is harder than it looks, because the institutional pressure to reduce risk after a drawdown is severe. The interview closed on Swensen's broader view of the institutional investor's role. He argued that the endowment exists to serve the academic mission of the university in perpetuity, and that every investment decision must be made with that mission in view. The long horizon is not a tactical choice but a structural fact - the endowment must support the university across generations, and the investment framework must be designed to compound real wealth across multiple market cycles, multiple staff transitions, and multiple macro regimes. The patience to do this, the article noted, is the rarest discipline in institutional investing.

5/4/2015 13. Actively Managed Fund Index Fund Expense Ratio 1.12% 0.06% Transaction Costs 0.50 0.00 Cash Drag 0.15 0.00 Sales Charges/Fees 0.50 0.00 All-In Expenses 2.27% 0.06% Tax Inefficiency 0.75 0.30 Total Costs 3.02% 0.36% Gross Return (assumed) 7.00% 7.00% Net Return 3.98% 6.64% Loss in Annual Return -2.66% “The Arithmetic of All-In Investment Expenses” Financial Analysts Journal Note: Counterproductive investor behavior (buying high and selling low) has historically reduced returns to active fund investors by another 1.5-2.0% annually according to Morningstar. 14. $248,890 $70,387 100,000 200,000 300,000 0 10 20 30 40 50 Index Fund (6.64%) Actively Managed Fund (3.98%) Years $ Growth of $10,000 over a 50-year investment lifetime The Miracle of Compounding Long-Term Returns Without the Tyranny of Compounding Long-Term Costs Impact of Compounding Costs on Wealth: Loss in Capital Accumulation: 75% 15. 0.8 1.9 2.5 2.1 1.1 1.8 1.3 0.05 1.0 0.07 1.3 0.09 Active Index Active Index Active Index Expense Ratio Net Yield to Investors U.S. Stock Funds Bond Funds Balanced Funds % 2.2% 1.9% 3.5% 2.1% 2.4% 1.9% Dividend Yields and Expense Ratios Source: Morningstar. Note: Index fund yields and expenses for Vanguard Admiral share classes. Percent of Income Consumed: Active Funds vs. Index Funds 62% 3% 29% 3% 54% 5% 16. Better than the Morningstar Rating System? “Investors should make expense ratios a primary test in fund selection.

Wiley Investment Classics (April 2015) Dear Jack: I read your book from cover to cover and enjoyed it immensely. It is honest, sensible, and readable—a very rare combination. Your book is going to be an important one for mutual fund investors for many years to come. —Warren E. Buffett 1993 Wiley Investment Classics (April 2015) Jack, I just re-read parts of “The First 50 Years”—and the remarkable thesis! Rest easy. It is an “investment classic.” Maybe the investment classic. I take pride in my small part! —Paul A. Volcker 2015 AND A NEW COVER . . .

and at least half your time working on their stuff. I got fired because, well, the Vietnam War was on, and the boss of bosses in my organization was a big fan of the war and wrote a New York Times article, a magazine section cover story, And I didn't like that war, I thought it was stupid. And I wrote a letter to the Times, which they published, saying not everyone who works for Maxwell Taylor,

These plans are now being relied upon as retirement plans by the vast majority of Americans, without ever having implemented the appropriate and necessary structural changes to transform these savings plans into retirement plans. The proposed DOL rule would subject stock brokers to a standard of fiduciary duty when advising on the retirement plan investments of their clients (with a generous “carve-out” for exceptions), as distinct from the existing—and lower—standard of “suitability.” But the proposal of this simple “putting investors first” standard is being opposed with a vengeance that I’ve rarely witnessed. Opponents of the fiduciary standard say: “too much regulation” . . . “will damage the small investor” . . . “will ruin the business.” The challenge we face is to support the principle that our investor/clients have the right to demand that their interests take precedence over our own businesses. CFA Institute has already taken the lead in this stand. It is up to CFA professionals to follow. Third, consider the structural anomaly of America’s largest financial institution—the mutual fund industry, now overseeing $18 trillion of OPM. The mutual fund industry is dominated by firms that are publicly-owned or are owned by financial conglomerates. Of the 50 largest fund providers, 40 are in this category—30 owned by banks and other financial conglomerates, 10 directly held by public shareholders.

For at least the past three years we have been reading comments which suggested that investors in our Fund faced at least one problem: the shares we own are highly rated and have become more highly rated in recent years. This has often been linked with the observation that these stocks are ‘bond proxies’ - that the relative certainty of their returns and dividends compared with most equities makes them a substitute for bonds, which many investors now seek to avoid, and so they may fare badly along with bonds as and when interest rates rise. There are several points to consider in response to this. One is that during the period that these commentators have been sounding this warning, these stocks and our Fund have continued to outperform the market significantly. So if, like the proverbial stopped clock which is right twice a day, the scenario which they paint eventually comes to pass, it will be worth remembering what you would have missed out on if you had followed their advice when they gave it. They will certainly forget to mention it when they proclaim the brilliance of their foresight and the accuracy of their predictions. There are also reasons to doubt both their predictions and the efficacy of their proposed solutions. Firstly, the assumption that all US interest rates are set by the Federal Reserve (‘Fed’) is too simplistic. The target federal funds rate is a short term rate and was increased from 0- 0.25% to 0.25-0.50% on 17th December 2015.

Common Sense on Mutual Funds 9 AND THEN THERE’S MY LITTLE BOOK . . . The Little Book of Common Sense Investing The #1 best-seller on Amazon in the Mutual Funds category since its release on March 5, 2007, some 3,137 out of 3,162 days. Why? It’s short, simple, and persuasive. Number of Amazon Reviews: 362, 104 so far in 2015: 5 Star 77 4 Star 20 3 Star 5 2 Star 1 1 Star 1 Total 104 WHAT ABOUT THAT 1-STAR REVIEW? . . .

Let me just tell you a little bit about Sam. Most of you know both of them quite well. They're long-term members of our club, and they're really accomplished so much in their lifetime — lifetimes I should say. Sam, I sort of think of him as the king of cotton. Dunavant Enterprises, Inc., a cotton merchant, probably the largest in the world, Sam is a partner, president, co-chairman. He actually retired from that in 1995 and then he started Pinnacle Trading International of which he was president and CEO.

5/4/2015 17. Large Blend Large Growth Large Value Mid-Cap Blend Mid-Cap Growth Mid-Cap Value Small Blend Small Growth Small Value Percentage of Active Funds Outpeforming Their Benchmarks 15 Years through 2014 Result: Underperformance 80% of Active Funds Underperform Over the Long Term Average: 20% Outperform Source: Vanguard, Morningstar. % 30% 14% 18. Rankings for the 5 years ending 2009 Where they ranked in the subsequent 5 years Quintile 5-Year Return* Number of Funds Highest Quintile Lowest Quintile Merged/ Closed 1 Highest 1,091 14% 24% 10% 2 High 1,083 12 16 22 3 Medium 1,084 15 13 26 4 Low 1,085 14 10 38 5 Lowest 1,032 14 9 45 Total 5,375 14% 14% 28% Lack of Persistence in Performance of Active Mutual Funds *Excess return vs. benchmark. Note: Number of failed funds—1,499 19. It’s Not Just Me… Fama French, 2010 “The 3% Solution” “…[G]oing forward we expect that a portfolio of low cost index funds will perform about as well as a portfolio of the top three percentiles of past active winners, and better than the rest of the active fund universe.” Source: “Luck versus Skill in the Cross-Section of Mutual Fund Returns,” The Journal of Finance, October 2010 20. Aren’t There Mutual Funds That Avoid These Problems? Yes, but not very many. Typical characteristics these funds share: 1. Managers, not marketers. 2. Reasonable expense ratios. 3. Low portfolio turnover. 4. Self-imposed stern limits on size. 5. Interim returns that may vary sharply from the market’s return. 6.

if anyone remembers that name, agrees with his views. JS: ... which were different from General Taylor's. But then, I was 29 years old at this time, and some kid came around and said he was a stringer from Newsweek magazine and he wanted to interview me and ask what I was doing about my views. And I told him, "I'm doing mostly mathematics now, and when the war is over, then I'll do mostly their stuff."

Liu holds honorary and advisory positions beyond his business role, including honorary president of the Shanghai Chamber of Commerce in Sichuan, a part-time professor at China Agricultural University, an MBA lecturer, and membership on the Standing Committee of the Chinese People's Political Consultative Conference (CPPCC).

The One-Star Review for The Little Book Keyed towards one set of answers rather than an exploration. A mutual fund company seems to have hired people to write books recommending it. “THE BOGLE BOOKS”: REMARKABLE READERSHIP . . . Bogle Book Sales 700 Little Book of Common Sense Investing Common Sense on Mutual Funds (10th Anniversary Edition) Clash of the Cultures Sept. 2012 Sept. 2013 Sept. 2014 Sept. 2015 1020 Weekly Sales Cumulative Sales: Little Book: 202,415 Common Sense on Mutual Funds (all editions): 113,838 Clash of the Cultures: 34,803 Enough.: 90,694 Bogle Books Total: 875,000 A WORD ABOUT ENOUGH. TRUE MEASURES OF MONEY, BUSINESS, AND LIFE . . .

Then I did the only intelligent thing I'd done that day -- I told my local boss that I gave that interview. And then he said, "I've got to call Taylor." CA: It wasn't bad, because you went on to Stony Brook and stepped up your mathematical career. Chern was one of the great mathematicians of the century. I had known him when I was a graduate student at Berkeley.

Longer term rates are set by the US Treasury bond market and the swap market in which banks, companies, people with mortgages and investors can switch between fixed and floating interest rates. The current 30 year US Treasury bond has a yield just under 3% which does not look quite so low.limited

Result: despite the Biblical warning that “no man can serve two masters,” most fund managers are fiduciaries to two separate sets of stockholders. The conflicts of interest between them are obvious and substantial. Alas, I fear, it is the managers who operate the funds who put themselves first, not the fund investor. The challenge: to eliminate this obvious conflict of interest. “Just say no.” It won’t be easy, but one day it will happen. This domination by public owners is relatively new. When I first joined Wellington Management Company in 1951—could it really be 64 years ago?—fund managers, with only one or two exceptions, were the principals of the fund’s manager. They were largely investment professionals, owned their firms, were focused on management, and considered themselves as fiduciaries. (As you might imagine, I knew many of them.) Today, the industry is largely driven by conglomerates—run by business-driven marketers focused on creating higher returns on the capital that their firms have invested in the management company—increasing assets under management, making what will sell and creating new sources of revenue, all with the goal of building their own profits. (This is a profitable business; 50% pre- tax profit margins are not uncommon.) That’s capitalism! But it has ill-served mutual fund investors. How Did It Happen? The story of that unfortunate evolution in fund ownership is little known.

5/4/2015 21. “The Colossal Failure” “[T]he colossal failure of the mutual fund industry; resulting from [its] systematic exploitation of individual investors . . . extract[ing] enormous sums from investors in exchange for providing a shocking disservice. … Thievery, even when dressed in the cloak of SEC-approved governance, remains thievery . . . as the powerful financial services industry exploits vulnerable individual investors.” David Swensen, manager of Yale University’s endowment fund 22. “The vast majority of American families are sentenced to a lifetime of investing in the existing mutual fund penal system. But if they’re smart, they’ll do their time in an index fund.” John Bogle Grant’s “Great Debate” April 7, 2015 Mutual Funds Are the Only Practical Option for Individual Investors 23. Enter Vanguard “The Vanguard plan actually furthers the objectives [of the Investment Company Act of 1940] by ensuring that the Funds’ directors … are better able to evaluate the quality of services rendered to the funds … improved disclosure to shareholders … promotes savings from economies of scale … clearly enhances the Funds’ independence … provides them with conflict-free control over distribution … and promotes a healthy and viable fund complex within which each fund can better prosper.” (Unanimous decision, 1981) 24.

His board memberships, I'll just mention a few: two Morgan Stanley Funds; Tiger Management Corp., I understand that he was one of the early investors with Julian Robertson; Pacific Gas and Electric and then other things, a member of the board of trustees of the Fuller Theological Seminary; chairman of the board of the Saint Agnes Medical Center in Fresno, California; received the highest honor from their Chamber of Commerce and just an all-around terrific guy. And the runner-up in the member/member that ended yesterday. How about that?

and I brought them to him and he liked them. Together, we did this work which you can easily see up there. CA: It led to you publishing a famous paper together. Can you explain at all what that work was? JS: I mean, I could explain it to somebody. CA: I think you told me it had something to do with spheres, JS: Well, it did, but I'll say about that work --

He has time for golf too. Well, he and Betsy support so many charities that if I started to name them, we’d be here for a long time, but everything from hospitals, churches, the University of North Carolina. Just absolutely outstanding. Now, last week I introduced Ken Langone, and of course he was the sponsor of Dr. John Damry [ph.] — Hamre, excuse me, who is president of CSIS, which is a Washington think tank, and he really was a spellbinder. He was absolutely terrific. And Ken continues to be a great supporter. I got to just tell you — again, I'm a little bit repetitive because I talked about it. He not only is a good source of great sponsors, but he has spoken himself, and he first told us a story of EDS, Electronic Data Systems, the Ross Perot company, which he was instrumental in bringing public. And then, of course the Home Depot story. He's co-founder with Bernie Marcus and Arthur Blank, and that's just an absolutely phenomenal story.

scope for subsequent increases and the lack of effect on long term rates. In which case worries about the effect on so-called bond proxies may prove to be overdone. Secondly, what would these commentators have you do about this possible adverse impact on so-called ‘bond proxies’? Presumably they recommend selling them in view of this predicted disaster and investing your money elsewhere. Leaving aside the commentator who suggested that the answer was to invest in a fund which is ‘more immune to future market performance’ (seems like an overly modest target - why not just find one that only ever goes up?), the most common suggestion, it seems, is that you should consider switching into more cyclical stocks because they are more lowly rated and their returns are too volatile to be considered as bond proxies. Switching into cyclical stocks in anticipation of a rise in interest rates, what could possibly go wrong? As ever, spotting potential problems with our or any other investment strategy is not that difficult. In all my years in business I have never found that identifying a problem is quite as difficult as solving it. Likewise, suggesting what it is you should switch into that is immune from problems which may result from an interest rate rise is a bit more difficult. However, it seems likely that sooner or later the ‘stopped clock’ commentators will prove to be right and our Fund will experience a period of underperformance. What to do about that?

Prioritize fund shareholders Lower costs for fund owners Leads to Higher profits for fund investors Leads to Lower revenue and no profit STRATEGY Pricing Impact to investors Impact to manger MUTUAL STRUCTURE Leads to Leads to Increasing market share Long-term result Leads to Prioritize management company Higher costs for fund owners (e.g.Risks

It was the result of a tiny transaction that would transform an entire industry, years before it became the giant of American finance. The transaction: owners of Insurance Securities, Inc. (ISI), the managers of Insurance Securities Trust Fund—a highly successful fund of its day, now long gone—sold their management company to other investors for $4.2 million, 14 times its book value of $300,000. Tiny! Despite vigorous opposition by the SEC, the Ninth Circuit Court of Appeals ruled in 1958 that the sale violated no law. When the U.S. Supreme Court declined to review the verdict, the floodgates were opened to IPOs, mergers, and acquisitions of fund management companies. By the mid-1960s, a score of fund management companies had gone public, including, yes, Wellington and Dreyfus and Franklin and Putnam, followed by MFS, American Century, Oppenheimer, and others. “Trafficking” in management contracts, the SEC’s greatest fear, became commonplace, and many fund managers were acquired by huge banks and insurance companies. It wasn’t supposed to be that way. Discussing the negotiations with the SEC that led to the Investment Company Act of 1940, fund industry leader Paul Cabot, president of State Street Investment Trust, believed that the private ownership of fund managers was essential.moral

Competition for Enough.? LOTS OF BOOKS, YES, BUT ALSO LOTS OF PAPERS . . . Journal Papers by John C. Bogle Forthcoming The Index Mutual Fund— 40 Years of Growth, Change, and Challenge Jan/Feb 2014 The Arithmetic of "All-In" Investment Expenses Mar/Apr 2009 The End of "Soft Dollars"? Jan/Feb 2009 Markets in Crisis (Interview w/ Rodney Sullivan) Mar/Apr 2008 Black Monday and Black Swans Nov/Dec 2005 The Relentless Rules of Humble Arithmetic Jan/Feb 2005 The Mutual Fund Industry 60 Years Later: For Better or Worse? Jan/Feb 1980 Institutional Investment Performance Compared… (with Jan M. Twardowski) Nov/Dec 1970 Mutual Fund Performance Evaluation: Conventional vs. Unconventional May/June 1960 The Case for Mutual Fund Management (as John B. Armstrong) Financial Analysts Journal (10 papers) * * * *Graham and Dodd award winners AND THE JPM. . .

imperative for him, and he sharply criticized firms that had sold out to insurance companies and other financial institutions. In 1971, he recalled the negotiations over the 1940 Act: “Both the SEC and our industry committee agreed that the management contract between the fund and the management group was something that belonged . . . to the fund . . . and therefore the management group had no right to sell it . . . or to make money on the disposition of this contract. . . . The fiduciary does not have the right to sell his job to somebody else at a profit.” The spirit of the ’40 Act seemed to reflect that principle. Alas, the letter of the act failed to be specific on that point. (Ironically, in 1982, the private owners of State Street Management—including Mr. Cabot—sold their company to Metropolitan Life Insurance Company for a profit of $100 million.) Personal Experience I know from first-hand experience about the challenges of dealing with these two masters. One was the management company, a firm fighting for its place in a highly competitive marketplace; the other, the mutual fund, a pooled investment trust seeking to earn solid returns (consistent with its stated objectives) without assuming undue risks. When fund managers were under the ownership of investment professionals, and when the industry was small and, in the grand scheme of things, inconsequential, this conflict seemed of little importance.

it did have something to do with that, but before we get to that -- It even started a little sub-field that's now flourishing. But, more interestingly, it happened to apply to physics, something we knew nothing about -- at least I knew nothing about physics, and I don't think Chern knew a heck of a lot. And about 10 years after the paper came out, a guy named Ed Witten in Princeton started applying it to string theory

5/4/2015 29. 82% 56% 18% 72% 15% 21% 56% 19% 3% 23% 26% 9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Equity Bond Balanced Total Active Virtual Index Index Note: “Virtual Index Fund” – R-Squared of 0.96 or higher relative to its best-fit index. Index Funds Dominate Vanguard’s Assets Percentage of Assets Under Management 30. -800 -600 -400 -200 1,000 2006 2010 2014 Index Active U.S. Equity Fund Cumulative Net Cash Flow, 2006-2014 Passive Index Funds versus Actively Managed Funds $ Billions of Dollars +$917 Billion -$597 Billion Source: Strategic Insight Simfund Cumulative Net Cash Flow into Index and Active Mutual Funds and ETFs 31. 2004 2009 2014 Mutual Funds Pension Funds 18% Indexing Market Share % 37% 26% 31% Source: Strategic Insight Simfund, Empirical Research Partners Index Strategies as a Percentage of Total U.S. Institutional Equity Assets Total Indexing Assets and Market Share 2004: 24% 2014: 32% 32. 1,000 10,000 100,000 1,000,000 10,000,000 1975 1985 1995 2005 2014 Active Index $6.4 Trillion $3.2 Trillion $10.6 Trillion $49B $1.1T $1.5T Millions of Dollars $ Growth of Equity Index Fund Assets Total Index Fund Assets 1995 2015 Annual Increase TIFs* $48B $1.63T +19% ETFs $1B $1.68T +45% Total $49B $3.31T +23% $4.5T

You could try some so-called market timing and redeem your shares in the Fund in advance of this event and maybe re-invest later when you think the time is right for it to begin outperforming again. If you do so I hope you have better luck and/or skill than I have because I know that I can’t accomplish that successfully. If you intend to remain invested in the Fund, as I do, including through any periods of underperformance, you might also, like me, take comfort in the fact that our investment strategy is based first and foremost on buying shares in good companies. We cannot promise you much about our Fund. But one thing we are clear about is that we seek to own shares in good companies and at least most of the time we succeed in that objective. Repeating an approach we took last year to demonstrate this, the table below shows what Fundsmith would be like if instead of being a mutual fund it was a company and accounted for the stakes which it owns in the portfolio on a ‘look through’ basis and compares this with the market (in this case the FTSE 100 Index and the S&P 500 Index). Fundsmith FTSE 100 S&P 500 Equity Fund* Index+ Index+ ROCE 26.0% 14.8% 17.5% Gross Margin 61.1% 40.2% 43.7% Operating Profit Margin 25.0% 14.3% 15.3% Cash Conversion 98.4% 69.8% 70.9% Leverage 29.3% 38.5% 52.5% Interest Cover 16.1x 8.2x 8.

Ken gives us his overviews on economics and business with CNBC, and he does so many things. He's won so many awards and the charities are again too numerous to mention. He still runs Invamed, an investment banking firm, and he's the prime mover and the inspiration for the NYU Langone Medical Center. He's the driving force, and he's pursuing excellency all the time.

Journal Papers by John C. Bogle Winter 2016 (Forthcoming) Putting Investors First Fall 2015 (Forthcoming) Occam’s Razor Redux: Establishing Resonable Expectations for Financial Market Returns (with Michael W. Nolan) Summer 2014 No Speed Limits: High-Frequency Trading and Flash Boys Fall 2013 Big Money in Boston… Spring 2011 The Clash of the Cultures Fall 2009 The Fiduciary Principle: No Man Can Serve Two Masters Summer 2009 Peter Bernstein Commemorative Issue Winter 2008 A Question So Important… Spring 2002 An Index Fund Fundamentalist Summer 1998 The Implications of Style Analysis… Summer 1995 The 1990s at the Halfway Mark Winter 1992 Selecting Equity Mutual Funds Fall 1991 Investing in the 1990s--Occam's Razor Revisited Spring 1991 Investing in the 1990s Journal of Portfolio Management (14 papers) * * * “Outstanding Article” Award FROM “OCCAM’S RAZOR REDUX” . . .

5/4/2015 33. Convergence! The Great Paradox: Just as Active Fund Management Becomes More and More Like Passive Indexing, So Passive Indexing Becomes More and More like Active Fund Management John C. Bogle “The Art of Indexing” Conference Washington, DC September 30, 2004 A Speech Title Sums It Up 34. First Index Mutual Fund (1974)—Principles • Own the U.S. stock market • Diversify to the Nth degree • Minimize transaction costs • Tiny expense ratio—500 Index: 0.05% (Admiral) • Bought to be held “forever” (redemption rate 10%) Exchange-Traded Index Funds (1993)—Principles • Pick your own index (1,100 now available) • Diversify within sector you chose • Lower expenses … but not too low (0.50%) • Bought to be traded (average annual turnover of large ETFs: 1244%) “What Have They Done to My Song, Ma?” Enter the Exchange-Traded Fund (ETF) 35. 725% 274% 319% 144% 524% 337% SPDR Gold Shares iShares Russell 2000 Vanguard S&P 500 ETF Vanguard FTSE Emerging Markets ETF Vanguard Total Stock Market ETF iShares MSCI EAFE iShares Core S&P 500 SPDR S&P 500 ETF 200 400 800 0 2600 4200% 2014 Dollar Turnover as a Percentage of Average Annual Assets Asset-Weighted Turnover, 20 Largest ETFs: 1244% 4274% 2724% ETF Turnover 36. ETFs—The New Way to Speculate 2014 Trading Volume 100 Largest Stocks: $18.6 Trillion 100 Largest ETFs: $15.7 Trillion 2014 Turnover Rate 100 Largest Stocks: 179% 100 Largest ETFs: 1428%

So, you know quite a bit about these two men, but there's one thing you don't know about Ken Langone, and that is that I have the unique situation of having gotten him involved in a real estate investment which he subsequently called the worst bleeping investment I ever made in my life. I figured enough years have gone by where he wouldn’t be too troubled by me bringing this up, but in any event, nobody's perfect, right. At this point I want to bring up Sam, Sam Reeves to introduce our guest speaker. [applause]

7x Note: ROCE, Gross Margin, Operating Margin and Cash Conversion are the weighted average for the Fundsmith Equity Fund and averages for the FTSE 100 Index and S&P 500 Index. The FTSE 100 and S&P 500 numbers exclude financial stocks. The Leverage and Interest Cover numbers are medians. *Source: Fundsmith LLP +Source: Bloomberg What does this table demonstrate? In short, that our companies have much better financial performance than the market as a whole and are more conservatively funded.

and people in Russia started applying it to what's called "condensed matter." Today, those things in there called Chern-Simons invariants It never occurred to me that it would be applied to physics. But that's the thing about mathematics -- you never know where it's going to go. So, we've been talking about how evolution shapes human minds Somehow, you come up with a mathematical theory,

But during the 1964-1974 era, highly risky “Go-Go” funds came to dominate the mutual fund industry and manager profits soared. The conflict between fiduciary duties owed to the management company stockholders and the fund shareholders quickly surfaced. In 1965—a mere half-century ago—legendary Wellington founder Walter L. Morgan discussed with me the dire situation that our firm was then facing. Our flagship fund, the conservative and balanced Wellington Fund, was looking staid and out-of-step with the “new era.” Mr. Morgan, deeply concerned, told me—a kid, really, age 35—to take charge of his firm and “do whatever it takes to fix Wellington’s problems.” (To this day, I remember those words.) Loaded with unwarranted self-confidence—arrogance?—and ignoring the industry’s challenges that I’d recounted in 1951 in my Princeton senior thesis on the fund industry, I rose to the challenge! Before a year had passed, I’d put in motion a merger that would, well, “fix” Wellington Management Company. Our new, much smaller partner from Boston ran one of those Go-Go funds (Ivest Fund, now lost in the dustbin of history), and we were once again competitive in the marketplace.this

1,000 10,000 100,000 Cumulative Investment Return Cumulative Speculative Return Cumulative Total Returns Investment and Speculative Returns, 1900-2015 $ Value of Initial $1 9.2% Annual Real Return 0.4% Initial Dividend Yield + 10-Year Earnings Growth Annualized Impact of P/E Change From JPM Fall 2015 17 DON’T FORGET REVERSION TO THE MEAN (RTM) . . .

The companies in our portfolio are certainly not immune to periodic downturns in business and/or management errors, and their share prices are subject to the usual factors which affect the stock market, but we can at least be reasonably sure that they are adding to their intrinsic value over time by continuing to invest at wonderful rates of return. If I gave you an exhaustive list of all the subjects in investment and the ways in which investors and commentators behave that perplex me then this annual letter would be considerably longer. However, one of these subjects is the obsession with share prices. Ultimately, of course, a focus on share price movements must be correct. It is no use owning shares in good companies if the strength of their business is never reflected in the share price, but a continuous focus on share price movements to the exclusion of the underlying fundamental economics of the companies is neither healthy nor useful. In the long term one will follow the other, and it is not the fundamentals which will follow the share price. Returning to the subject of valuation, what are the facts as opposed to commentators’ views? The weighted average Free Cash Flow (‘FCF’) yield of the portfolio (the free cash flow generated by the companies divided by their market value) started the year at 4.5%* and ended it at 4.3%* so the overall portfolio saw little increase in valuation in 2015. Our companies on average grew their free cash flow per share by 9.

SR: Thank you, Don, and thank you for yours and Joyce's leadership in the forum. And we've had these wonderful speakers and tonight there's no exception. I think tonight is going to be fascinating and thought-provoking as we hear maybe a different slant on investing. We all have savings. We all want to enhance the value of those savings. Thirty to 35 years ago basically it was just a ratio of stocks versus bonds and that would depend on the stock broker. By 1980 when Stan first started in the business, you had different type of strategies. You had the hedge fund strategies that were just coming on, you had the LBOs, you had private equity. You had all the different strategies coming on. Then you had Volcker battling against inflation. Won that. Then you had the Reagan supply-side. So, that created tremendous tailwinds for investing. Then you had the technology revolution, you had the frontier markets, your emerging markets, all these things, the currently fluctuation driven by a lot of the central banks being on steroids, if you would.

merger brought us into the pension fund management business, which I thought would be a natural extension of the talents of our new management team’s mutual fund activities. So, I honored my fiduciary duty to the owners of Wellington Management Company—Mr. Morgan and its public shareholders. The firm had “gone public” in 1960, joining the parade of fund managers who poured through the gates opened by the ISI case. But I also believed that I had honored my separate and distinct fiduciary duty to the shareholders of Wellington Fund, for I expected that our new managers would apply their investment talents to enhancing the fund’s faltering returns . . . Wrong! Wrong! Wrong! Looking back, the merger was an abject failure—perhaps the worst merger ever, although AOL/Time Warner sets a high standard indeed. Though the “new era” finally ended, in this case, as 1973 began. Then, Wellington Fund had reached the most aggressive allocation to equities in its near-half-century history (82%, often of marginal investment quality). Its returns tumbled, and its reputation plummeted. Every one of our equity and balanced funds—including several new ones— failed its shareholders. And Wellington Management’s stock would trade at $6 per share, down 90% from its 1968 high of near $60. And, having given up too much stock to our new partners in the merger (who were largely responsible for our dismal performance) they fired me. My promising career had ended.

5/4/2015 37. Costs and Indexing— More Important than Ever -3% 4.5% 5% 4.5% 2% -4% -2% 0% 2% 4% 6% 8% 10% Historical Next 10 Years Dividend Yield Earnings Growth Speculative Return ? Gross Return 9% Gross Return 4% Historical Returns 9% -1 8% Active 4% -2 2% Index 4% -0.05 3.95% Prospective Gross Return Costs Net Return 38. What’s a Competitor to Vanguard to Do? What’s a race car driver to do when he’s in last position? • Increase speed—i.e., improve performance, more aggressive marketing, more money to distributors (a la life insurance) • Reduce friction—i.e., cut fees, cut staff, cut research • Copy the car in front—i.e., more indexing, less innovation • Get a new car—i.e., focus on other lines of business, recordkeeping, benefit plans, venture capital, limousine services, etc. 39. The “Golden Rule” of the ‘40 Act Put the Shareholder First! “… the national public interest and the interest of investors are adversely affected … when investment companies are organized, operated [and] managed … in the interest of directors, officers, investment advisers … [or] underwriters … rather than in the interest of … such companies’ security holders …” Investment Company Act of 1940, Section 1.B.2. 40.

discover two decades later that it's being applied to profoundly describe the actual physical world. But there's a famous physicist named [Eugene] Wigner, and he wrote an essay on the unreasonable effectiveness of mathematics. Somehow, this mathematics, which is rooted in the real world in some sense -- we learn to count, measure, everyone would do that --

-6% -4% -2% 0% 2% 4% 6% 8% Real Returns: Stock Market* Versus Investment Fundamentals, Rolling 25-Year Periods, 1896-2015 1916 1953 1972 1979 1983 2001 2008 2011 From Common Sense on Mutual Funds 18 1928 *Stock Market Return = Investment Return + Speculative Return Market Returns Revert to Fundamental Investment Returns The Bogle Sources of Return Model for Stocks 19 -5 -4 -2 0 2 4 6 8 10 12 Actual S&P 500 Return Estimated Return Correlation = 0.81 R-squared = 0.65 BUT I DO MORE THAN WRITE . . .

But so often it comes back to save the day. [Hermann] Minkowski had this geometry, and Einstein realized, "Hey! It's the very thing in which I can cast general relativity." CA: So, here's a mathematical piece of ingenuity. JS: Well, that's a ball -- it's a sphere, and it has a lattice around it -- What I'm going to show here was originally observed by [Leonhard] Euler,

A Year in My Life . . . II. Vanguard 2014 September 16 Washington, D.C.—Lead Witness, US Senate Finance Committee Hearing on Retirement System 18 PrimeCap 30th Anniversary Meeting with Principals. 22 NYC Bloomberg “Most Admired Investor” Forum (with AQR’s Cliff Asness). October 17 Speech, Easttown (PA) Library. 22-24 BOGLEHEADS XIII! 31 Speech, Georgetown Law School (D.C.). November 4 Visit from Georgetown Law Students. 13 Princeton/Federal Reserve Economics conference, with Paul Volcker. 14 Interview Session with Wharton Executive MBA Students. 20 Princeton—Business Ethics Seminar. December 16 Full day’s visit from Stanford MBA Class. 30 White House Staff Re: DOL Fiduciary Standards. 2015 January 16 Skype Interview, Durham Bogleheads. 26 Phone Meeting with White House Staff Re: Fiduciary Duty. 28 Phone Meeting with White House Staff Re: Fiduciary Duty. 29 Presentation: Committee for Fiduciary Responsibility. March 12 Jon Stein, Betterment (Robo Advisor) 17 Quarry Ridge (Vanguard) talk with Crew. Major Presentations and Events

7%* during the year which was a much more significant contribution to performance. This 4.3% FCF yield compares with a median FCF yield for the non-financial stocks in the S&P 500 Index of 4.4%+ and a mean of 2.7%+ or a median for the non-financial stocks in the FTSE 100 Index of 3.8%+ and a mean of 3.9%+. Our stocks do not look bad value in comparison to the market especially when their relatively high quality is taken into account. Although of course, both may be expensive, but then both may continue to be so or even become more expensive. For the year, the top five contributors to the Fund’s performance were: Dr Pepper Snapple + 1.94% Imperial Tobacco + 1.79% Microsoft + 1.69% Sage + 1.36% Reckitt Benckiser + 1.05% The bottom five were: Procter & Gamble - 0.22% PayPal - 0.15% 3M - 0.02% Kone + 0.02% Colgate Palmolive + 0.05% Of the bottom five performers, the only one which gives us significant cause for concern is Procter & Gamble which is on its third internally sourced CEO in as many years. We sold our holding in Domino’s Pizza during the year since it had reached a valuation which we felt was only justifiable if the current rapid rate of growth is sustainable, which we would doubt. However, we sold it with some regret and trepidation.is

All of these developments created a chance for massive gains and massive losses. And with increased complexity of all of this we all need help in investing. We need money managers, but I think you need more than that. You need prescient practitioners, and we're going to talk about that a little bit and rightfully so because $1,000 invested 30 years ago in S&P - S&P’s compounded about 11, a little over 11.3, something like that. Your $1,000 would be $27,000 before taxes today, 25 up years, 5 down years, which is also important.

Lessons Learned Why am I telling you these tales of challenges in finance, corporate law, fiduciary duty, and a small but significant slice of my personal saga? Because random events, seemingly unimportant when they occur, often come to be consequential, changing the nature of the investment profession. Back in the 1950’s, who would have imagined that turnover of stocks (25%) would have reached such extraordinary heights (180% in 2014)? Who would have imagined that the “tiny but contentious” mutual fund industry (Fortune magazine’s words in 1949, words that inspired my senior thesis on mutual funds) would come to dominate American finance? Who would have imagined that the respected trust departments of the Philadelphia banks during the 1950s—whose leaders were the consummate fiduciaries—would vanish, or that every major bank here would be acquired by a giant national bank conglomerate? While we’re about it, who would have imagined that a little-noticed legal case involving a small mutual fund management company would precipitate a new structure that would reshape an industry.Or

Copernicus Turned Upside-Down Average Mutual Fund Group Total Net Assets $25 Billion Average Fund Management Company Total Net Assets $50 Million 1993 data from Bogle on Mutual Funds: New Perspectives for the Intelligent Investor Why isn’t the sun—500 times the size of the planet—at the center of this universe?

5/4/2015 41. Tiny Transaction Transforms Giant Industry Transaction: Owners of ISI (book value $300,000) sold the manager to other investors for 14 times book value ($4.2 million). SEC v. Insurance Securities, Inc., 1958 The Ninth Circuit Court of Appeals ruled that ISI could sell it’s fiduciary obligation to its fund shareholders, opening the floodgates to IPOs, mergers, “trafficking” in management contracts, and acquisitions of fund management companies. By the mid-1960s, a score of fund management firms went public, including industry leaders Wellington, Vance Sanders, Dreyfus, Franklin and Putnam. Later, MFS, T. Rowe Price, State Street, American Century, Oppenheimer, Alliance, AIM, Delaware, and many others. 42. It Wasn’t Supposed to Be That Way… For Paul Cabot, president of State Street Investment Trust, the private ownership of fund managers was essential. Indeed it represented a moral imperative for him, and he sharply criticized firms that would sell out to insurance companies and other financial institutions.* In 1971, he recalled the negotiations over the Investment Company Act of 1940: “Both the SEC and our industry committee agreed that the management contract between the fund and the management group was something that belonged … to the fund … and therefore the management group had no right to sell it … or to make money on the disposition of this contract … the fiduciary does not have the right to sell his job to somebody else at a profit.

A Year in My Life . . . II. Vanguard April 7 NYC – “Great Debate” on Indexing, at publisher James Grant’s Forum. 16 Lecture, Aspen Institute, D.C. 20 Blair Academy—Speech to student assembly. 28 Lecture, SEC Enforcement Staff, D.C. May 6-7 ICI General Membership Meeting. June 4 Speech to the CFA Society of Philadelphia, “Putting Investors First.” July/August “Working Vacation” in Adirondacks. Editing book chapter on Adam Smith, AQR extended interview, and JPM papers, correspondence; DOL and Labor Secretary Perez on fiduciary duty rule; and more. September 24 Skype Interview, iMoney 29 SEC-Lead Presenter at 1940 Act 75th Anniversary Forum. October 2 Princeton Humanities Seminar. 7 Princeton Lecture on “Business Ethics and Modern Religious Thought.” 14-16 Bogleheads XIV! . . . . And the “Day-to-Day” Events: Awards for Excellence 21 TV Appearances 11 Client Visits 18 Crew/Team Meetings 84 PR Interviews 45 Speeches 32 TOTAL 211* *Oh, yeah. Also 17 appointments with doctors. And 40 physical therapy sessions. NOW LET’S TURN TO THE INDUSTRY . . .

And it gradually grew to be a very important field in mathematics: That paper up there had its roots in this. it has eight vertices, 12 edges, six faces. And if you look at the difference -- vertices minus edges plus faces -- Here's a different way of doing it -- these are triangles covering -- And vertices minus edges plus faces still equals two. And in fact, you could do this any which way --

that a 1966 fund merger, the catastrophic failure of one man’s career, would, in a matter of months, lead to the creation of Vanguard, or that during the 40-plus years that followed, this uniquely structured, fund- shareholder-owned firm would become the unquestioned leader of the mutual fund industry—now managing over $3 trillion of OPM. Or that the embodiment of its principal investment strategy—the index fund—would, simply by buying and holding the stocks of the largest companies in America, begin to change the very nature of finance? And on a far larger scale, who could have imagined the enormous consequences of the creation of IRAs (1974) and corporate thrift plans (1978)? The federal government’s loss of trillions of dollars in federal tax revenues by making these tax-deferred plans available to investors? The gradual displacement of defined benefit (DB) retirement plans by defined contribution (DC) plans? (Assets of DB plans now total $6 trillion; DC Plans and IRAs, $12 trillion or twice as large.) In the aggregate, the assets of these two distinct retirement systems alone come to $18 trillion—six times, for example, the assets of the Social Security Trust Fund. And who could have imagined that the ownership of stocks by institutional investors would rise from 10% in 1950 to 70% in 2015? Well, Peter Drucker did.

undoubtedly a fine business and had been our best performing share since the inception of our Fund. Trepidation since selling shares in good companies is something we are justifiably reluctant to do. Still we believe that you ‘make money with old friends’ which is to say that we would be keen to own Domino’s again if the opportunity arises at a valuation which we regard as at least reasonable. We also sold our holding in Choice Hotels in 2015 as we did not like the risk/reward potential from the company’s investment in developing a third party reservations system called SkyTouch. As we do not do much trading to reallocate the Fund’s capital between our holdings we are reliant on the management of our investee companies to make decisions to reinvest part of their companies’ cash flows for us. When they do things which are different, exciting and outside their core area of competence we become worried. Hence our sale of Choice Hotels. We also sold the holding in eBay which we obtained when eBay split the eponymous online marketplace business and PayPal, the online payments processor, which we have retained. During the year we built a holding in Waters Corporation, a US based manufacturer of mass spectrometry, liquid chromatography and thermal imaging equipment, which makes much of its returns from the sales of consumables, service, spares and software to the operators who have installed its equipment.

Probably the poster child of investors, Warren Buffett in the last 30 years has compounded just under 20 percent. A thousand dollars 30 years ago would be $177,000 today, 24 up years and six down years of which three of the six were more than 20 percent, and that‘s going to be interesting when we get to that. The pundit that you see on TV all the time, the egotistical Bill Gross who you would think is the greatest investor there's ever been, he compounded the last 30 years before he got fired at 7.8 percent, and $1,000 would be $10,000. In the process he's made a couple billion dollars.

cover this thing with all kinds of polygons and triangles And you take vertices minus edges plus faces -- you'll get two. This is a torus, or the surface of a doughnut: 16 vertices covered by these rectangles, 32 edges, 16 faces. Vertices minus edges comes out to be zero. Every time you cover a torus with squares or triangles or anything like that, you're going to get zero.

See his 1976 book The Unseen Revolution, describing the 1950 genesis of General Motors’ precedent-setting pension plan, designed to invest in “The American Economy.” But he would have been appalled—appalled— to see how rarely these institutional owners would exercise their immense voting power. Even a decade ago, who could have imagined that the intersection of technology and indexing would lead to the creation of a whole new way of providing investment guidance to individual investors. Asset allocation—not stock-picking or fund picking—is now well on its way toward becoming the principal function of the registered investment adviser (RIA). Or that low costs (low fees, and low-cost index funds) would become the desideratum of the rapidly emerging new system? Will “Robo” advice work? Why not? The record is crystal clear that while the average RIA should be expected to match the gross return generated in our financial markets, and to lag the net return (after costs), even that expectation has proven to be optimistic. As professor Burton Malkiel wrote in a recent Wall Street Journal op-ed piece, a strict fiduciary standard—echoed in the theme of CFA Institute, “Putting Investors First”—“is likely to result in massive changes in traditional ways of doing business.”

” *In 1982, the private owners of State Street Management sold their company to the (ironically then-mutual) Metropolitan Life Insurance for a profit of $100 million. 43. Ownership of 50 Largest Mutual Fund Management Companies—2015 Privately Owned (10) Plus Mutual (1) Publicly Owned Conglomerate Total Firms with Public Ownership: 39 (Includes 3 largest firms) 44. Public Ownership and Professional Organizations From my 1971 speech to the partners of Wellington Management Company: I reveal an ancient prejudice of mine: All things considered ... it is undesirable for professional enterprises to have public stockholders ... The pressure for earnings and earnings growth engendered by public ownership is antithetical to the responsible operation of a professional organization. Note: Wellington, now private, was then publicly-owned.

My Long Career in the Fund Industry How Many Hits, How Many Eras? (“Follow the Money”) An Industry that Sells What It Makes • 1924-59. The mutual fund industry in its promising formative era An Industry that Makes What Will Sell • 1960-64. Public ownership of advisors—The New Paradigm • 1965-69. The “Go-Go” Era—Equity “junk” • 1970-74. The rise and fall of the “Favorite [Nifty?] Fifty” • 1975-90. Money market funds and bond funds—a new industry • 1991-01. The Information Age and the rise of technology funds • 1995-07. The TIF (Traditional Index Fund) Era • 2008-15. The ETF (Exchange-Traded Index Fund) Era What’s Next? • 2015-25. The return to a new normalcy—The triumph of TIF indexing A GROWING INDUSTRY . . .

It should have a clear source of growth from the seemingly inexorable trend for more testing and certification of products. We also began building a stake in another testing company with a similar source of growth and a new consumer staples company, both of which will be revealed in due course. Minimising portfolio turnover remains one of our objectives and this was again achieved with a portfolio turnover of 2%* during the period. It is perhaps more helpful to know that we spent a total of £496,507 or just 0.014% (1.4 basis points) of the Fund on voluntary dealing which excludes dealing costs associated with fund subscriptions and redemptions as these are involuntary. Why is this important? It helps to minimise costs, and minimising the costs of investment is a vital contribution to achieving a satisfactory outcome as an investor. Too often investors, commentators and advisers focus on the Annual Management Charge (‘AMC’) or the Ongoing Charges Figure (‘OCF’), which includes some costs over and above the AMC, which are charged to the Fund. The OCF for 2015 for the T Class Accumulation shares was 1.07%*. The trouble is that the OCF does not include an important element of costs - the costs of dealing. When a fund manager deals by buying or selling investments for a fund, the fund typically incurs the cost of commission paid to a broker, the bid-offer spread on the stocks dealt in and, in some cases, Stamp Duty.

Decision — Presented fracking shorts at Sohn (Pioneer PT $78 vs $167). Context: Fortune/FT/Reuters same-day coverage; “mother fracker” critique. Outcome (known): Bet paid off (CNBC follow-up Apr 2016); GM-short claim remains unattributed.

So, our speaker tonight if he invested $1,000 30 years ago, today it would be $2.6 million before taxes and after taxes, because people say hedge funds don't do a very good job, they‘re not tax efficient, $300,000 still. Thirty years, no losses. Brian and I were talking last night it's hard to do anything for 30 years and not have one losing year. That's a phenomenal thing.

So, I think there's five takeaways from here. Never underestimate the compounding, the power of it; the damage of down years; the impact of taxes; absolute returns. Again you think of relative, growth is all about relative. It's like me comparing myself to Kanny relative. With Kenny, I'm pretty good at playing golf. But in an absolute basis neither one of us is any good at all. So, there's a lot of difference between absolute and relative. So, I'm more in the absolute returns. And then finally you better choose a money manager that is a prescient practitioner.

5/4/2015 45. Fiduciary Duty A Precept as Old as Holy Writ No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Matthew 6:24 46. What’s To Be Done? 1. Reduce Conflicts 2. Disclose Conflicts 47. Reducing Conflicts: Structural Changes • Funds’ board chairman must be an independent director* • Board must have independent staff, reporting to the chairman* • Regulation should move its focus from individual funds (industry, 1924-1940) to fund complexes (today’s industry) • Ultimately, mutualization (full or partial) *Applicable only to managers supervising assets of long-term funds of $25 billion or more, and operating 20 or more funds. In 2015, the 50 largest fund managers have aggregate assets of $12.4 trillion, 86% of the industry’s long-term assets. 48. Sunlight—Disclosing Conflicts Improvements in Prospectus Disclosure All investors should have access to these data: • Redemption Rate—Redemptions + exchanges out as a percentage of average fund assets • Fund expenses—percentage of investment income • Fund return (time-wtd) vs. investor return (asset-wtd) • Long-term vs. short-term capital gains distributions • Turnover—Total purchases + total sales as a percentage of average fund assets • All-in compensation of 5 highest-paid fund officers (comprehensive) • Investment Advisory Fees—Rates and dollars (10-year history of each) Jones v. Harris Associates

The lesson: Don’t take anything that you see today as enduring. Don’t take it for granted. Change and challenge will remain eternal. Technology will continue to change what we all do in ways that are just amazing. High-frequency trading and rock-bottom transaction costs are more likely to accelerate than diminish. The high costs of giant actively managed mutual funds will begin to decline significantly. Trading in stocks will gradually slow, replaced by the newest form of speculation—the exchange-traded fund (ETF). Are you aware that today’s dollar trading volume in the 100 largest ETFs is now almost as high as trading the 100 largest common stocks themselves ($16 trillion annualized, vs. $18 trillion). Or that turnover in those ETFs is 1428%, eight times higher than in those stocks (179%)? I repeat the message: Take nothing for granted. Nothing! Where Do We Go From Here? Yet despite those massive changes, the eternal realities remain; realities that face the trustees of endowment funds, foundations, and philanthropies, as well as the wonderful investment professionals that are at the heart of our financial system. Focus on long-term investment, not short-term speculation. Focus on the costs of investment services—not only expense ratios, but expense dollars—the dollar amount of advisory fees that mutual funds pay to their managers—and never forget the hidden costs of portfolio turnover and the heavy burden of taxes.

This can add significantly to the costs of a fund yet it is not included in the OCF. We have published our own version of this total cost including dealing costs, which we have termed the Total Cost of Investment (‘TCI’). For the T Class Accumulation shares in 2015 this amounted to a TCI of 1.13%*, including all costs of dealing for flows into and out of the Fund, not just our voluntary dealing. We think that figure will prove to be low if or when other funds produce comparable numbers, although we are not holding our breath whilst we await this.the

So, this is called the Euler characteristic. And it's what's called a topological invariant. No matter how you do it, you're always get the same answer. So that was the first sort of thrust, from the mid-1700s, into a subject which is now called algebraic topology. CA: And your own work took an idea like this and moved it higher-dimensional objects, and found new invariances?

Along the Way, a Funny Thing Happened Ownership of 50 Largest Mutual Fund Management Companies—2015 Privately Owned (10) Plus Mutual (1) Publicly Owned Conglomerate Total Firms with Public Ownership: 39 Note: Firms with Public Ownership in 1951: 1 (Includes 3 largest firms) BUT LOTS OF OTHER BIG CHANGES, INCLUDING THE RISE OF INDEXING . . . Rankings for the 5 years ending 2009 Where they ranked in the subsequent 5 years Quintile 5-Year Return* Number of Funds Highest Quintile Lowest Quintile Merged/ Closed 1 Highest 1,091 14% 24% 10% 2 High 1,083 12 16 22 3 Medium 1,084 15 13 26 4 Low 1,085 14 10 38 5 Lowest 1,032 14 9 45 Total 5,375 14% 14% 28% Equity Fund Returns: No, Pal, The Past Is Not Prologue. RTM *Excess return vs. benchmark. Note: Number of failed funds—1,499 NOW LET’S TURN TO THIS CHANGING INDUSTRY . . .

5/4/2015 49. What’s All This about “Basis Points?” Jones v. Harris Associates Brief for John C. Bogle as Amicus Curiae in Support of Petitioners It is important to distinguish between the already-high rates (as a percentage of assets) that advisers charge and the even more excessive dollar amounts that are produced by those fee rates. It was the huge increase in mutual fund assets and, therefore, the amount of mutual fund fees, that concerned the SEC in 1966, since the cost of providing advisory services (essentially, managing an investment portfolio) rises far more slowly than the fees generated by taking a percentage of the increase in assets . Yet courts have generally acceded to the advisers’ desire to frame any debate about fees in percentage—not dollar—terms, thereby giving advisers a license to charge fees that are unjustifiable by any standard. 50. High-Priced Index Funds and Fiduciary Duty Fund Assets Expense Ratio Principal Large Cap S&P 500 Index $4.7 B 0.74% Voya US Stock Index 4.6 B 0.66 Columbia Large Cap Index 3.7 B 0.83 MM S&P 500 Index 3.6 B 0.68 Dreyfus S&P 500 Index 2.9 B 0.50 JP Morgan Equity Index* 1.9 B 1.20 Total (87 Funds) $19.3 B 0.85% Vanguard 500 Index-Admiral Shares $143 B 0.05% -Institutional Plus Shares $85 B 0.02% What were directors of these funds thinking? S&P 500 Index Funds with Expense Ratios of 0.40% or More * “A” series shares carry an expense ratio of 0.45% and a sales load of 5.25% 51.

performance of a fund. It is worth pointing out that the performance of the Fund at the beginning of this letter is after charging all fees, or as someone expressed it more elegantly “You get what you pay for”, or at least you should aim to. Finally, I wish you a Happy New Year and thank you for your continued support for our Fund. I and my colleagues look forward to seeing many of you at our Annual Shareholders’ Meeting on 1st March and to trying to answer your questions. Yours sincerely, Terry Smith CEO Fundsmith LLP An English language prospectus for the Fundsmith Equity Fund is available on request and via the Fundsmith website and investors should consult this document before purchasing shares in the Fund. Past performance is not necessarily a guide to future performance. The value of investments and the income from them may fall as well as rise and be affected by changes in exchange rates, and you may not get back the amount of your original investment. Fundsmith LLP does not offer investment advice or make any recommendations regarding the suitability of its product. This letter is intended for owners of the Fundsmith Equity Fund only and is communicated by Fundsmith LLP which is authorised and regulated by the Financial Conduct Authority. *Source: Fundsmith LLP +Source: Bloomberg

JS: Yes. Well, there were already higher-dimensional invariants: Pontryagin classes -- actually, there were Chern classes. There were a bunch of these types of invariants. instead of the way it was typically done, and that led to this work and we uncovered some new things. who wrote almost 70 volumes of mathematics who he apparently would dandle on his knee while he was writing --

Focus on appropriate asset allocations relative to each client’s investment goals. Focus on portfolio risk, for the day will come—indeed, I believe it is here now—when avoiding excessive risk is every bit as important as seeking high rewards. And whether you are an investment professional or a portfolio manager; an investment adviser to a large pool of capital or to the retirement plan of a beginning investor; a client or a trustee of a pension fund, endowment fund, or a philanthropy, mind your investment behavior! By which I mean, take the long view. Hold hope, greed, and fear—the three classic enemies of investment success—at bay. It is ever thus. Wrapping Up Yes, I’ve been saying these things for four-plus decades at Vanguard and for almost a quarter- century before that at Wellington Management Company, under the tutelage of my great mentor Walter Morgan. Indeed, these ideas appear in that idealistic thesis on the fund industry I wrote at Princeton University during 1949-51. Dare I say that they have stood the test of time.

Changes in Mutual Fund Leadership: Then and Now Rank 1951 Fund Name Total Assets* (Millions) 2015 Manager Name Total Assets (Billions) 1 M.I.T. $472 Vanguard $2,988 2 Investors Mutual 365 Fidelity 1,615 3 Keystone Funds 213 BlackRock 1,230 4 Tri-Continental 209 American Funds 1,216 5 Affiliated Funds 209 JPMorgan Funds 519 6 Wellington Fund 194 State Street Global 497 7 Dividend Shares 186 T Rowe Price 493 8 Fundamental Investors 179 Franklin Templeton 480 9 State Street Investment 106 PIMCO 375 10 Boston Fund 106 Federated 272 Total $2,239 Total $9,686 Percentage of Industry 72% Percentage of Industry 57% Total industry assets: $3.1 billion. Total industry assets: $16.9 trillion *Includes associated funds. ** ** ** ** No longer in business. ***New leaders. *** *** *** *** *** THE NUMBER OF FUNDS EXPLODES . . .

There's two other things I’d like to highlight about the speaker this evening is that we know that the public record suggests - and it says here in this - the flyer that we had is right here. It says he was the most charitable man in America in 2009. That's half right. Fiona and Stan as a couple were the most charitable and still are probably one of the most charitable couples in America.

The Wisdom of Warren Buffett About Mutual Fund “Independent” Directors: “Companies are not looking for Dobermans on the board; they are looking for cocker spaniels. Then they make sure their tails are wagging.” “Negotiating with oneself seldom produces a barroom brawl.” Warren Buffett 52. Corporate Pensions: The Elusive 8% Corporate pension funds make unreasonable assumptions about future returns Pension de-risking and high expected returns are not compatible. Example: IBM Asset Allocation Asset Allocation Required Return Reasonable Assumptions Bonds 56% 3.75% 3% Stocks 25 13.6 4 Others (Hedge Funds, Private Equity, etc.) 19 18.5 10 Total/Gross Return 100% 9.0% 4.6% Less Investment Costs -1.0% -1.0% Net Return 8.0% 3.6%

Number of Funds—1951 & Today Original Name Total Assets (Millions) No. of Funds Managed Current Name Total Assets (Billions) No. of Funds Managed M.I.T. $472 2 MFS $180 78 Investors Mutual 365 3 Columbia 165 116 Affiliated 209 3 Lord Abbett 108 37 Wellington 194 1 Vanguard 2,988 140 Eaton & Howard 90 2 Eaton Vance 101 130 Fidelity 64 1 Fidelity 1,615 321 Putnam 52 1 Putnam 81 77 American 27 2 American 1216 35 T. Rowe Price 1 1 T. Rowe Price 493 116 Dreyfus 0.8 1 Dreyfus 248 151 Total/Average $1,475 1.7 Total/Average $7,195 120 2014 1951 Major Mutual Fund Groups

if it wasn't for Mr. Euler, there wouldn't perhaps be these invariants. CA: OK, so that's at least given us a flavor of that amazing mind in there. Because you took that amazing mind and having been a code-cracker at the NSA, you started to become a code-cracker in the financial industry. I think you probably didn't buy efficient market theory. Somehow you found a way of creating astonishing returns over two decades.

And, yes, they all lead to an important emphasis on considering a strategy of buying—and holding—broad-based, low-cost stock and bond index funds. (Pardon the commercial!) More than ever, index funds are being recognized as the only way to guarantee our clients their fair share of the returns generated in the stock and bond markets . . . whether those returns are positive or negative, whether they will prove to be above, below, or even far below, historical norms. My quest may be a lonely one in the fund industry, but I’m hardly alone in the larger world. So don’t just take my word for it. Heed Warren Buffett’s “four Es:” The greatest enemies of the equity investor are expenses and emotions. And consider his formulation of Sir Isaac Newton’s hypothetical Forth Law of Motion: For investors as a whole, returns decrease as motion increases. Heed Benjamin Graham. When asked in 1975 to appraise our profession he said that, “most financial analysts and investment advisers are above average in intelligence, business honesty, and sincerity . . . but . . . they spend a large part of their time trying, valiantly and ineffectively, to do things they can’t do well. . . . The average manager of institutional funds [cannot] obtain better results than the S&P Index over the years . . . The average institutional client should be content with the results of the [S&P 500] . . . [and] should require such results as a condition for paying standard fees to advisors.” That’s the day I dream of!

And I want to say something else about Fiona because Fiona, many of you don’t know, is one of the great money managers at Dreyfus. I used to read about Fiona before I ever met Fiona. And so she was — and then she became a mom, and there's three daughters. Sarah‘s here now, who's in - sitting there with her dad - in med school now, NYU. Ken, isn't that true, she's there? And then Hannah is at home where Stan would like to be watching the football game. And then Tess is at Brown, who has her own band and travels around, and she’s got all these CDs and everything else.

5/4/2015 53. The Road to Fiduciary Duty 1. Price Competition • Investor experience • Investor awareness • Complete disclosure 2. Awaken the Independent Directors • Awareness • Board structure • Mutualize? 3. Lawmakers/Regulators • DOL—Retirement Plans • SEC—Mutual Funds • Dodd-Frank Believe me—WE WILL GET THERE! 54. The Wisdom of Adam Smith “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it.” The Wealth of Nations 1776

what's remarkable about what you did wasn't just the size of the returns, it's that you took them with surprisingly low volatility and risk, JS: I did it by assembling a wonderful group of people. When I started doing trading, I had gotten a little tired of mathematics. I was in my late 30s, I had a little money. I started trading and it went very well.

Large Blend Large Growth Large Value Mid-Cap Blend Mid-Cap Growth Mid-Cap Value Small Blend Small Growth Small Value Percentage of Active Funds Outpeforming Their Benchmarks 15 Years through 2014 Do You Like These Odds? Average: 20% Outperform Source: Vanguard, Morningstar. % 30% 14% AND SO, THE TRIUMPH OF INDEXING . . . -100 -50 Series2 Series1 $ Vanguard Dominates Industry Cash Flow Mutual Fund Industry Net Cash Flow YTD Through August 2015 Vanguard +$168 Billion All Other Firms -$48 Billion Vanguard accounted for 141% of the mutual fund industry’s year-to-date net cash flow through August 2015 Industry Total $119 Billion OUR CASH FLOW EXPLODES . . .

Heed Yale’s brilliant endowment manager David Swensen in Unconventional Success, his book about personal investing: “The fundamental market failure in the mutual-fund industry involves the interaction between sophisticated, profit-seeking providers of financial services and naïve, return-seeking consumers of investment products. The drive for profits by Wall Street and the mutual-fund industry overwhelms the concept of fiduciary responsibility. The powerful financial services industry exploits vulnerable individual investors. . . . Ultimately, a passive index fund managed by a not- for-profit investment management organization represents the combination most likely to satisfy investor aspirations.” The accumulated wisdom of Messrs. Buffett, Graham, and Swensen—three of the great minds of investing—hardly requires a genius to understand. But acting on that wisdom is never easy. Why? Because our investment system is based on action. (“Don’t just stand there. Do something!)is

Then also Fiona then became and really has a lot of insight into neuroscience. She and Stan have founded the institute again at NYU that's won many recognitions, et cetera, the Nobel Peace Prize, [unint.], et cetera, et cetera. Amazing things that are going on there. And then to add to that five, years ago started a jewelry boutique I guess you would call it. FD is the name of it, and today it's one of the leading brand names in the world. So, she has customers in Europe, China, India. United States, et cetera, et cetera. In fact it might be an interesting for Harvard a case study because I think probably what as I look and think about what Fiona does, you have a lot of inequities and all these things. It may be a wonderful case study. You have international things going on, but that's another subject.

especially true today. The prospects for returns on financial assets in the coming years are unlikely to reach historical norms, and the temptation is to do whatever it takes to earn yesterday’s return. In stocks, reasonable expectations during the coming decade strongly suggest a return no more than 6% to 7% annually in nominal terms, before adjusting for inflation, investment fees and expenses, taxes on income and capital gains, and counterproductive investment behavior. Together, these costs could easily total 1% to 7% per year. Real, after-cost annual returns for stock investors, could range from 1% to 3% over the next ten years. (The arithmetic is an eye-opener!) Inflation is beyond our control, but investment expenses, taxes, and our behavior are, to a large extent, well within our ability to control. The arithmetic for bonds is even worse. The benchmark 10-year U.S. Treasury note has a current yield of 2.2%, which is almost certain to result in a decade-long return of 2% to 3% per year. With a larger weighting of investment-grade corporates and a modest extension of maturities, a high-grade bond portfolio might allow a 3% gross yield. But after inflation, investment fees and expenses, taxes, and misbehavior (yes, it’s a concern among bond investors too), negative real returns over the coming decade seem a certainty.

But to go back to their charitable things, what very few people know was during this time he's running these funds, he had a fund that very few people knew about that was called No Margin, and this fund was for not-for-profits. No fees, no anything. It was a pure — all the returns went to the not-for-profits. Over $1 billion in this fund, and all of the hot issues - in those days you remember back, some of us are old enough to remember hot issues, those went in. So, these not—for-profits had tremendous upside potential. And that was when I had my friend Ed Hurley [Ph.] set me up as a 501(c)(3) so I could be a charitable donation for Druck.

-50 1988 1995 2000 2005 2010 2015* Index Stock and Bond Funds Active Stock and Bond Funds Money Market Funds Vanguard Cash Flow, 1988 – 2015 Annually, in billions $ Billions of Dollars *Annualized based on actual data through 8/2015. $251B $4B $18B $57B $46B $58B $100B DRIVEN BY INDEX FUNDS . . . -500 1,000 1,500 2,000 2000 2005 2010 2015 "The Indexers" Vanguard, BlackRock, and State Street The Rest of the Industry The Triumph of Indexing: Rolling 3-Year Net Cash Flow $ Billions of dollars Net Cash Flow 2009-2015 $1.3 T -$4.5 B RESULT: COMPETITION’S LEFT IN THE DUST . . . SO FAR . . .

I made quite a lot of money with pure luck. It certainly wasn't mathematical modeling. But in looking at the data, after a while I realized: it looks like there's some structure here. And I hired a few mathematicians, and we started making some models -- just the kind of thing we did back at IDA [Institute for Defense Analyses]. You design an algorithm, you test it out on a computer.

Finally, I think that when Druck closed his fund in 2010, he during these years had been returning profits each year to the investors, and I've never seen or heard of this before, in the way of dividends. And when he closed out in 2010, none of the investors, the hundred investors, had a net — had all the initial investment back. No one had any capital at risk. Everything had come back plus some, plus when he distributed the $14 billion. So, when he retired, these 99 people, including Kenny and I and a bunch of them, we had to go back to work. He retired; the rest of us go back to work.

Does it work? Doesn't it work? And so on. Because here's a typical graph of some commodity. I look at that, and I say, "That's just a random, up-and-down walk -- maybe a slight upward trend over that whole period of time." How on earth could you trade looking at that, and see something that wasn't just random? JS: In the old days -- this is kind of a graph from the old days,

First Index Mutual Fund (1974)—Principles • Own the U.S. stock market • Diversify to the Nth degree • Minimize transaction costs • Tiny expense ratio—500 Index: 0.05% (Admiral) • Bought to be held “forever” (redemption rate 10%) Exchange-Traded Index Funds (1993)—Principles • Pick your own index (1,100 now available) • Diversify within sector you chose • Lower expenses … but not too low (0.50%) • Bought to be traded (average annual turnover of large ETFs: 1244%) Yes, There Is a Difference Traditional Index Funds vs. Exchange-Traded Funds “BUY AND HOLD” vs. “TRADE IN REAL TIME” . . .

Warning to trustees and managers of corporate and state and local pensions: the 7 ½% future return your pension funds are assuming is simply not going to be there—not with a 50/50 stock/bond portfolio unlikely to earn a gross annual return of much more than 4%, maybe a net return of 3% after investment costs and 1% or less after inflation. Exceeding the market’s return—net of investment costs—may be possible for a single fund or manager. But it is impossible for all funds and managers as a group. Seeking out higher-than-market returns and accepting higher-than-market risks is rarely advisable. Going further out on the long limb of risk is a dangerous choice. (Limbs have been known to break.) Even in today’s environment of low expectations for future returns on financial assets, the most reliable strategy is to accept the markets’ returns, get your clients’ asset allocations right, hold investment costs to a minimum, and of course, keep your fingers crossed. That simple formula may not be the most brilliant investment strategy ever designed—especially to you who have done the challenging work of earning your CFA charters. But the number of strategies that are worse is infinite. We cannot know the future, but we should expect surprises and challenges. No matter what happens, there is one simple strategy that will never steer us wrong: put our clients’ interests first. At last, our investor/clients are poised to take their position at the forefront of our industry.

Decision — Built Fairfax India platform incl. Bengaluru airport control. Context: Additional-10% acquisition Feb 20, 2025 completed the build to control. Outcome (known): BIAL ownership 74.0%.

But it is a fabulous record that I think that Stan - and it is a delight for me to share some of that with you because it's not a well-known record, but it's an envious record and I think historical. So, Stan, share if you can, how did this happen? How did this happen? And then also what do you see going forward? SD: Thank you, Sam. I know there are a lot of people in the audience who would like to know what's going on in the football game. The Seahawks have taken the lead 22 to 19...with one minute to play.

commodities or currencies had a tendency to trend. Not necessarily the very light trend you see here, but trending in periods. And if you decided, OK, I'm going to predict today, by the average move in the past 20 days -- maybe that would be a good prediction, and I'd make some money. And in fact, years ago, such a system would work -- You'd make money, you'd lose money, you'd make money.

Largest Total Institutional Annualized Annualized ETF Sponsors Assets Ownership Turnover Turnover % BlackRock $809 B 62% $4,910 B 606% Vanguard 469 43 908 193 State Street Global 409 63 8,692 2,122 Total $1,687 B 56% $14,510 B 859% Most Active ETF Sponsors PowerShares $97 B 40% $928 B 953% ProShares 25 12 873 3,444 Direxion 9 5 506 5,551 VelocityShares 3 7 299 10,308 Total $134 B 16% $2,606 B 1,936% All ETFs Are Not the Same Assets, Institutional Ownership, and Turnover TIFs MAY HAVE CLOSE “ACTIVE” COUNTERPARTS . . .

Vanguard Fund Correlations The Triumph of Indexing (and Virtual Indexing) R2: The percentage of a fund’s return explained by the return of its best-fit index. Fund Name R2 (10-Year) R2 (3-Year)* Index Funds Total Stock Market Index 1.00 1.00 Total Bond Market Index 0.99 0.99 Active Funds STAR Fund 0.99 0.99 Explorer Fund 0.99 0.97 Wellington Fund 0.97 0.97 Intermediate-Term Tax-Exempt 0.97 0.99 Windsor Fund 0.95 0.94 PRIMECAP Fund 0.93 0.88 Health Care Fund 0.92 0.90 Average Vanguard Active Equity Fund 0.95 0.93 Average Industry Active Equity Fund 0.88 0.79 In 1974, “Relative Predictability.” Now, “High R2.”

This is a special moment to me. I've never spoken in front of my own community before, and it‘s particularly special because I get to share the stage with probably the two most important people in terms of influence in my life outside of my family, Sam Reeves and Ken Langone. It's not really an accurate statement because I actually consider both of them part of my family. So, that's a real thrill for me. Sam, with the over-the—top introduction, of course, which I anticipated because it's Sam Reeves.

and you'd make a little money during that period. CA: So you would test a bunch of lengths of trends in time a 10-day trend or a 15-day trend was predictive of what happened next. JS: Sure, you would try all those things and see what worked best. Trend-following would have been great in the '60s, JS: We stayed ahead of the pack by finding other approaches --

I thought I would spend a moment just reflecting on why I believe my record was what it was, and maybe you can draw something from that. But the first thing I'd say very clearly, I'm no genius. I was not in the top 10 percent of my high school class. My SATs were so mediocre I went to Bowdoin because it was the only good school that didn‘t require SATs, and it turned out to be a very fortunate event for me.

Note: “Virtual Index Fund” – R-Squared of 0.96 or higher relative to best-fit index. “Relative Predictability” Dominates Vanguard’s Asset Base 91% of Vanguard’s Assets Have High Relative Predictability (Average pre-cost returns . . . superior post-cost returns) Index Funds Virtual Index Funds 19% Active Funds 9% NOW LET’S LOOK AHEAD AT FUTURE RETURNS ON STOCKS AND BONDS . . .

The real thing was to gather a tremendous amount of data -- and we had to get it by hand in the early days. We went down to the Federal Reserve and copied interest rate histories and stuff like that, because it didn't exist on computers. And very smart people -- that was the key. I didn't really know how to hire people to do fundamental trading. I had hired a few -- some made money, some didn't make money.

because I have some taste in that department. And gradually these models got better and better, CA: You're credited with doing something remarkable at Renaissance, which is building this culture, this group of people, who weren't just hired guns who could be lured away by money. Their motivation was doing exciting mathematics and science. JS: I can't say that no one came because of the money.

But I'd list a number of reasons why I think I had the record I did because maybe you can draw on it in some of your own investing or also maybe in picking a money manager. Number one, I had an incredible passion, and still do, for the business. The thought that every event in the world affects some security price somewhere I just found incredibly intellectually [unint.] to try and figure out what the next puzzle was and what was going to move what. And the fact that I could bet on that interaction, those who know me, I do like to bet. One of the great things of this business, I get to gamble for a living and channel it through the markets instead of illegal activity. That was just sort of nirvana for me that I could constantly be making these bets, watch the market moving, and get my grades in the newspaper every day.

4.7% 5% 4% 2% 0.4% -1% -2% 0% 2% 4% 6% 8% 10% Historical Next 10 Years Earnings Growth* Dividend Yield Speculative Return* Looking Ahead 1.—No Great Alternatives Reasonable Expectations for Stocks—Below Long-Term Norms 9.1% 6% Historical Returns 9% -2 7% Active 6% -2 4% Index 6% -0.05 5.95% Prospective Gross Return Costs Net Return *Assumed decline in P/E from 20x to 17x Sources of Annual Returns on Stocks WHAT ABOUT BONDS? . . .

The second thing I would say is I had two great mentors. One I stumbled upon and one I sought out. And I see some young people in the audience and probably some grandparents who have some influence on some young people in the audience, and I would just say this. If you're early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time. It's not even close. And don‘t even think about leaving that mentor until your learning curve peaks. There's just nothing to me so invaluable in my business, but in many businesses, as great mentors. And a lot of kids are just too short-sighted in terms of going for the short-term money instead of preparing themselves for the longer term.

I think a lot of them came because of the money. But they also came because it would be fun. CA: What role did machine learning play in all this? JS: In a certain sense, what we did was machine learning. You look at a lot of data, and you try to simulate different predictive schemes, It doesn't necessarily feed back on itself the way we did things.

4.6% 3% 0% 1% 2% 3% 4% 5% Historical Next 10 Years* Looking Ahead 2.—No Great Alternatives Reasonable Expectations for Bond Returns—Below Long-Term Norms Source of Annual Returns on Bonds—Initial Yield *Assumes accepting slight additional credit risk and interest rate risk vs. the broad bond market YET, REAL INTEREST RATES CLOSE TO LONG-TERM NORMS . . .

The third thing I'd say is I developed partly through dumb luck ~ I'll get into that — a very unique risk management system. The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I'm here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they're teaching at business school today is probably the most misguided concept everywhere.

CA: So these different predictive schemes can be really quite wild and unexpected. I mean, you looked at everything, right? You looked at the weather, length of dresses, political opinion. JS: Yes, length of dresses we didn't try. Everything is grist for the mill -- except hem lengths. quarterly reports, historic data itself, volumes, you name it. And store it away and massage it and get it ready for analysis.

Balanced Portfolio Returns Also Below Norm of 7% Reasonable Expectations: Nominal Gross Return (50/50 Stock/Bond): 4.5% Don’t Forget These Deductions -1.5% Active Fund Costs or -0.05% Index Fund Costs * * * -2% Inflation -0.5% Taxes -1.5% Investor Behavior Looking Ahead 3.—No Great Alternatives 50 YET MUTUAL FUNDS WILL CONTINUE TO DOMINATE INVESTOR SAVINGS. WHY? . . .

the efficient market hypothesis is not correct. CA: But any one anomaly might be just a random thing. So, is the secret here to just look at multiple strange anomalies, JS: Any one anomaly might be a random thing; however, if you have enough data you can tell that it's not. You can see an anomaly that's persistent for a sufficiently long time -- the probability of it being random is not high.

And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that's kind of the way my philosophy evolved, which was if you see - only maybe one or two times a year do you see something that really, really excites you. And if you look at what excites you and then you look down the road, your record on those particular transactions is far superior to everything else, but the mistake I'd say 98 percent of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully.

“The vast majority of American families are sentenced to a lifetime of investing in the existing mutual fund penal system. But if they’re smart, they’ll do their time in an index fund.” John Bogle Grant’s “Great Debate” April 7, 2015 Mutual Funds Are the Only Practical Investment Option for Individual Investors AS YOU CONSIDER YOUR FUND STRATEGY, REMEMBER THESE WORDS . . .

But these things fade after a while; anomalies can get washed out. So you have to keep on top of the business. CA: A lot of people look at the hedge fund industry now Do you have any worries about that industry, and perhaps the financial industry in general? Kind of being on a runaway train that's -- I don't know -- helping increase inequality? How would you champion what's happening in the hedge fund industry?

1. Tibble v. Edison Unanimous ruling of the U.S. Supreme Court reaffirming fiduciary duty for retirement plans From The New York Times, 2/24/2015: Jonathan Hacker, a lawyer for Edison, said it can’t be the case that companies have to “constantly look and scour the market for … cheaper investment options,” for retirement-plan participants. “Well, you certainly do, if that’s what a prudent trustee would do,” Justice Anthony Kennedy responded. Four Closing Quotations: 52

Now, I told you it was kind of dumb luck how I fell into this. Ken Langone knows my first mentor very well. He's not a well-known guy, but he was absolutely brilliant, and I would say a bit of a maverick. He was at Pittsburgh National bank. I started there when I was 23 years old. I was in a research department. There were eight of us. I was the only one without an MBA, and I was the only one under 32 years of age. I was 23 years old.

Decision — Maintained >40% of AUM in family-controlled firms (“avoid agency costs at all costs”). Context: Google 2015 talk + Ivey decks. Outcome (known): Structural — visible in 13F concentration (GOOG ~12%, BRK-A, PM, MA, Richemont).

JS: I think in the last three or four years, hedge funds have not done especially well. but the hedge fund industry as a whole has not done so wonderfully. The stock market has been on a roll, going up as everybody knows, So an awful lot of the wealth that's been created in the last -- let's say, five or six years -- has not been created by hedge funds.

After about a year and a half - I was a banking and a chemical analyst - this guy calls me into his office and announces he’s going to make me the director of research, and these other eight guys and my 52-year-old boss are going to report to me. So, I started to think I'm pretty good stuff here. But he instantly said, “Now, do you know why I'm doing this?” I said no. He says, “Because for the same reason they send 18-year-olds to war. You're too dumb, too young, and too inexperienced not to know to charge. We around here have been in a bear market since 1968." This was 1978. “I think a big secular bull market's coming. We've all got scars. We're not going to be able to pull the trigger. So, I need a young, inexperienced guy. But I think you‘ve got the magic to go in there and lead the charge." So, I told you he was a maverick, and as you can already see, he's a little bit eccentric. After he put me in there, he was gone in three months. I'll get to that in a minute.

2. Andrew Ang Professor, Columbia Business School; Author, Asset Management “… Fund managers’ real loyalty lies with the firm that runs the funds, rather than with the investors who are the owners of the fund. The relationship is incestuous, and investors lose. Many directors of the mutual fund—especially the board chair—are insiders of the investment advisory firm. Fund directors usually do not, and in many cases cannot, independently verify the information given by the advisor. Separating the fund’s governance from its sponsor is not enough to ensure protection of the investors.”

People would ask me, "What's a hedge fund?" it's two percent fixed fee and 20 percent of profits. Hedge funds are all different kinds of creatures. CA: Rumor has it you charge slightly higher fees than that. JS: We charged the highest fees in the world at one time. So five percent flat, 44 percent of upside. You still made your investors spectacular amounts of money.

But before he left, he taught me two things. A, never, ever invest in the present. It doesn't matter what a company’s earning, what they have earned. He taught me that you have to visualize the situation 18 months from now, and whatever that is, that's where the price will be, not where it is today. And too many people tend to look at the present, oh this is a great company, they've done this or this central bank is doing all the right things. But you have to look to the future. If you invest in the present, you're going to get run over.

“Ultimately, a passive index fund managed by a non-for-profit investment management organization represents the combination most likely to satisfy investor aspirations. … Out of the enormous breadth and complexity of the mutual-fund world, the preferred solution for investors stands alone in stark simplicity.” 3. David Swensen Manager, Yale University Endowment Fund

“The interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. … The interest of the consumer must be the ultimate end and object of all industry and commerce.” 4. Adam Smith From The Wealth of Nations, 1776 Yes, the interests of fund shareholders (consumers) will, finally, triumph over the interests of fund managers (producers). Thank you for your confidence. “STAY THE COURSE”

People got very mad: "How can you charge such high fees?" But "How can I get more?" was what people were -- But at a certain point, as I think I told you, we bought out all the investors because there's a capacity to the fund. CA: But should we worry about the hedge fund industry attracting too much of the world's great mathematical and other talent

The other thing he taught me is earnings don't move the overall market; it's the Federal Reserve Board. And whatever I do, focus on the central banks and focus on the movement of liquidity, that most people in the market are looking for earnings and conventional measures. It's liquidity that moves markets. Now, I told you he left three months later, and here's where the dumb luck came in in terms of my investment philosophy. So, right after he leaves, the Shah of Iran goes under. So, oil looks like it's going to go up 300 percent. I'm 26 — 25, excuse me. I don't have any experience. I don't know anything about portfolio managers. So, I go well, this is easy. Let's put 70 percent of our money in oil stocks and let's put 30 percent in defense stocks and let's sell all our bonds. So, and I would have agreed with him if I had some experience and I was a little more experienced, but the portfolio managers that were competing with me for the top job, they, of course, thought it was crazy. I would have thought it was crazy too if I’d have had any experience, but the list I proposed went up 100 percent. The S&P was flat. And then at 26 years old they made me chief investment officer of the whole place. So, the reason I say there was a lot of luck involved is because as Drelles predicted, it was my youth and it was my inexperience, and I was ready to charge.

to work on that, as opposed to the many other problems in the world? We hire astronomers and physicists and things like that. I don't think we should worry about it too much. And in fact, bringing science into the investing world It's reduced volatility. It's increased liquidity. Spreads are narrower because people are trading that kind of stuff. So I'm not too worried about Einstein going off and starting a hedge fund.

So, the next thing that happened when I started at Duquesne, Ronald Reagan had become President, and we had a radical man named Paul Volcker running the Federal Reserve. And inflation was 12 percent. The whole world thought it was going to go through the roof, and Paul Volcker had other ideas. And he had raised interest rates to 18 percent on the short end, and I could see that there is no way this man was going to let inflation go. So, I had just started at Duquesne. I had a small amount of new capital. I took 50 percent of the capital and put it into 30—year treasury bonds yielding 14 percent, and I owned nothing else. Sort of like the oil and defense story, but now we're on a different gig. And sure enough, the bonds went up despite a bear market in equities. Right out of the chute I was able to be up 40 percent. And more importantly, it sort of shaped my philosophy again of you don't need like 15 stocks or this currency or that. If you see it, you got to go for it because that's a better bet than 90 percent of the other stuff you would add onto it.

So, after that happened, my second mentor was George Soros, and unlike Speros Drelles, I imagine most of you have heard of George Soros. And had I known George Soros when I made the bond bet, I probably would have made a lot more money because I wouldn't have put 50 percent in the bonds, I probably would have put about 150 percent in the bonds. So, how did I meet George Soros? By the early to mid-‘BOs commodities were having dramatic moves. currencies were having big moves, bonds were having big moves, and I was developing a philosophy that if I can look at all these different buckets and I‘m going to make concentrated bets, I'd rather have a menu of assets to choose from to make my big bets and particularly since a lot of these assets go up when equities go down, and that's how it was moving.

CA: You're at a phase in your life now where you're actually investing, though, you're actually boosting mathematics across America. You're working on philanthropic issues together. there she is up there, my beautiful wife -- she started the foundation about 20 years ago. I claim it was '93, she says it was '94, We started the foundation, just as a convenient way to give charity.

And then I read The Alchemy of Finance because I'd heard about this guy, Soros. And when I read The Alchemy of Finance, I understood very quickly that he was already employing an advanced version of the philosophy I was developing in my fund. So, when I went over to work for George, my idea was I was going to get my PhD in macro portfolio manager and then leave in a couple years or get fired like the nine predecessors had. But it’s funny because I went over there, I thought what I would learn would be like what makes the yen goes up, what makes the deutsche mark move, what makes this, and to my really big surprise, I was as proficient as he was, maybe more so, in predicting trends.

We did not have a vision at that time, but gradually a vision emerged -- which was to focus on math and science, to focus on basic research. Six years ago or so, I left Renaissance and went to work at the foundation. CA: And so Math for America is basically investing giving them some extra income, giving them support and coaching. And really trying to make that more effective

and make that a calling to which teachers can aspire. JS: Yeah -- instead of beating up the bad teachers, which has created morale problems all through the educational community, we focus on celebrating the good ones and giving them status. Yeah, we give them extra money, 15,000 dollars a year. We have 800 math and science teachers in New York City in public schools today,

That's not what I learned from George Soros, but I learned something incredibly valuable, and that is when you see it, to bet big. So what I had told you was already evolving, he totally cemented. I know we got a bunch of golfers in the room. For those who follow baseball, I had a higher batting average; Sores had a much bigger slugging percentage. When I took over Quantum, I was running Quantum and Duquesne. He was running his personal account, which was about the size of an institution back then, by the way, and he was focusing 90 percent of his time on philanthropy and not really working day to day. In fact a lot of the time he wasn't even around.

Next year, it'll be 1,000 and that'll be 10 percent of the math and science teachers in New York [City] public schools. CA: Jim, here's another project that you've supported philanthropically: And then I'll tell you what you're looking at. Origins of life is a fascinating question. One is, what is the route from geology to biology -- And the other question is, what did we start with?

And I’d say 90 percent of the ideas he were [ph.] using came from me, and it was very insightful and I'm a competitive person, frankly embarrassing, that in his personal account working about 10 percent of the time he continued to beat Duquesne and Quantum while I was managing the money. And again it's because he was taking my ideas and he just had more guts. He was betting more money with my ideas than I was.

What material, if any, did we have to work with on this route? Those are two very, very interesting questions. The first question is a tortuous path from geology up to RNA or something like that -- how did that all work? And the other, what do we have to work with? So what's pictured there is a star in formation. Now, every year in our Milky Way, which has 100 billion stars,

Probably nothing explains our relationship and what I've learned from him more than the British pound. So, in 1992 in August of that year my housing analyst in Britain called me up and basically said that Britain looked like they were going into a recession because the interest rate increases they were experiencing were causing a downturn in housing. At the same time, if you remember, Germany. the wall had fallen in '89 and they had reunited with East Germany, and because they'd had this disastrous experience with inflation back in the ’203, they were obsessed when the deutsche mark and the [unint.] combined, that they would not have another inflationary experience. So, the Bundesbank, which was getting growth from the [unint.] and had a history of worrying about inflation, was raising rates like crazy. That all sounds normal except the deutsche mark and the British pound were linked. And you cannot have two currencies where one economic outlook is going like this way and the other outlook is going that way. So, in August of '92 there was 7 billion in Quantum. I put a billion and a half, short the British pound... ...based on the thesis I just gave you. So, fast-forward September, next month. I wake up one morning and the head of the Bundesbank, Helmut Schlesinger, has given an editorial in the Financial Times, and I’ll skip all the flowers. It basically said the British pound is crap and we don't want to be united with this currency.

And it takes them about a million years to settle out. there are about two million stars in formation at any time. That one is somewhere along this settling-down period. And there's all this crap sort of circling around it, And it'll form probably a solar system, or whatever it forms. in this dust that surrounds a forming star have been found, now, significant organic molecules.

It just so happens he's in the office. He's usually in Eastern Europe at this time doing his thing. So, I go in at 4:00 and I said, “George, I'm going to sell $5.5 billion worth of British pounds tonight and buy deutsche marks. Here's why I'm doing it, that means we‘ll have 100 percent of the fund in this one trade." And as I'm talking, he starts wincing like what is wrong with this kid, and I think he's about to blow away my thesis and he says, “That is the most ridiculous use of money management I ever heard. What you described is an incredible one-way bet. We should have 200 percent of our net worth in this trade, not 100 percent. Do you know how often something like this comes around? Like one or 20 years. What is wrong with you?" So, we started shorting the British pound that night. We didn‘t get the whole 15 billion on, but we got enough that I'm sure some people in the room have read about it in the financial press.

Molecules not just like methane, but formaldehyde and cyanide -- things that are the building blocks -- the seeds, if you will -- of life. And it may be typical that planets around the universe start off with some of these basic building blocks. Now does that mean there's going to be life all around? But it's a question of how tortuous this path is

So, that's probably enough old war stories tonight. I love telling old war stories because I like to reminisce when I was a money manager and doing better returns than I have since I retired, but I do think it's important maybe let's try and move me to the present here a little bit. So, I told you that one of the things I learned from Drelles was to focus on central banks. And Sam was kind enough to point out some very good returns we had over the years.

from those frail beginnings, those seeds, all the way to life. And most of those seeds will fall on fallow planets. finding an answer to this question of where we came from, of how did this thing happen, that is something you would love to see. if that path is tortuous enough, and so improbable, that no matter what you start with, we could be a singularity.

One of the things I would say is about 80 percent of the big, big money we made was in bear markets and equities because crazy things were going on in response to what I would call central bank mistakes during that 30-year period. And probably in my mind the poster child for a central bank mistake was actually the U.S. Federal Reserve in 2003 and 2004. I recall very vividly at the end of the fourth quarter of 2003 calling my staff in because interest rates, fed funds were one percent. The nominal growth in the U.S. that quarter had been nine percent. All our economic charts were going through the roof, and not only did they have rates at one percent, they had this considerable period — sound familiar? — language that they were going to be there for a considerable time period.

So, I said I want you guys to try and block out where fed funds are and just consider this economic data and let's play a game. We've all come down from Mars. Where do you think fed funds would be if you just saw this data and didn't know where they were? And I‘d say of the seven people the lowest guess was 3 percent and the highest was 6 percent. So, we had great conviction that the Federal Reserve was making a mistake with way too loose monetary policy. We didn‘t know how it was going to manifest itself, but we were on alert that this is going to and very badly.

given all this organic dust that's floating around, we could have lots of friends out there. CA: Jim, a couple of years ago, I got the chance to speak with Elon Musk, and I asked him the secret of his success, and he said taking physics seriously was it. Listening to you, what I hear you saying is taking math seriously, It's made you an absolute fortune, and now it's allowing you to invest

Decision — Initiated Berkshire & Google (quality-phase evidence). Context: Phase map: 2008–14 deep value → 2015–19 high quality → 2019–22 future quality (COBF thread). Outcome (known): Documented in letters; Salesforce (H1-21) and Wix (2019) followed.

in the futures of thousands and thousands of kids across America and elsewhere. Could it be that science actually works? JS: Well, math certainly works. Math certainly works. Working with Marilyn and giving it away has been very enjoyable. CA: I just find it -- it's an inspirational thought to me, that by taking knowledge seriously, so much more can come from it.

Sure enough, about a year and a half later an analyst from Bear Stearns came in and showed me some subprime situation, the whole housing thing, and we were able to figure out by mid-'05 that this thing was going to end in a spectacular housing bust, which had been engineered - or not engineered but engendered by the Federal Reserve's too-loose monetary policy and end in a deflationary event. And we were lucky enough that it turned out to be correct. My returns weren‘t very good in '06 because I was a little early, but ’07 and ’08 were - they were a lot of fun.

So. that's why if you look at today — can we get the charts up please? I'm experiencing a very strong sense of deja vu. Let's just play the game I played with my analysts back in 2003, 2004 and go through a series of charts. So, this is the United States households' net worth per household. And it's textbook. You see the big drop in the financial crisis. It's textbook when you have consumer balance sheets torn to pieces by a financial crisis to use super loose monetary policy to rebuild those balance sheets, which the Federal Reserve did beautifully.

What’s interesting though is if you look forward by 2011, we had already exceeded the '07 levels, which I think a lot of people would agree was already an overheated [ph.] period, and since then we’ve gone straight up for two more years, and household net worth is certainly in very, very good shape. Here's employment. As you can see after another big problem after the financial crisis, the employment market has largely healed, and we're down at 5.6 on the unemployment rate. Here's industrial production. Again, big drop after '07. Look at this thing. It's screaming. Here's retail sales. Again you see the damage, but you see where we are now. You're right on a 60-year uptrend, which is actually very good.

And then I'm sure for those of you who are unfortunate enough to watch CNBC and read other financial statements, you'll know that the fed is absolutely obsessed with Japan. They’ve been talking about this Japan analogy for 10 or 15 years now or certainly since Bernanke took over. And let me just show you something. This is the core CPI in the U.S. I‘m sure you've heard the word “deflation” more than you’d like to hear it in the last three or four years. We've never had deflation. Our CPI has gone up 40 percent over this time with not one period of deflation. And at the bottom you see Japan, which is down 15 percent. I did think there was a case, a viable case in '09, '10 that we may follow Japan.

But you know what, I've thought a lot of things when I’m managing money with great, great conviction, and a lot of times I'm wrong. And when you're betting the ranch and the circumstances change, you have to change, and that's how I've always managed money. But the feds‘ thesis to me has been proved dead wrong about three or four years ago, which is okay, but there was no pivot.

Here's another one that I like to look at. Has anybody heard on CNBC in the last week comparisons with 1937 and the mistake the Federal Reserve made in 1937 because it is a constant thing they’re bringing up? But again, here's the net worth chart I showed in the first slide in dark blue, but look at the light blue line, which is net worth in the 19305 in the U.S. We're not even close to the kind of numbers we had in 1937. And if I showed you all those other four charts, they wouldn't have moved during the four years either.

And finally, one more comparison with Japan. In light blue is average net worth per household in the U.S. In dark blue is Japan. If you took apples to apples the same time period, there's just no comparison. So, my point is this, if I was giving you a quiz and you looked at these five charts and you hear all this talk about a deflation and depression and how horrible things are, let me just say this, the Federal Reserve was founded in 1913. This is the first time in 102 years, A, the central bank bought bonds and, B, that we‘ve had zero interest rates and we've had them for five or six years. So, do you think this is the worst economic period looking at these numbers we’ve been in in the last 102 years? To me it's incredible.

Now, the fed will say well, you know, if we didn't have rates down here and we didn't increase our balance sheet, the economy probably wouldn‘t have done as well as it's done in the last year or two. You know what, I think that's fair, it probably wouldn’t have. It also wouldn't have done as well as it did in 2004 and 2005. But you can’t measure what’s happening just in the present in the near term. You got to look at the long term.

And to me it's quite clear that it was the Federal Reserve policy. I don't know whether you remember. they kept coming up with this term back at the time, they wanted an insurance policy. This we got to ensure this economic recovery keeps going. The only thing they ensured in my mind was the financial crisis. So, to me you're getting the same language again out of policymakers. On a risk-reward basis why not let this thing a little hot? You know, we got to ensure that it gets out. But the problem with this is when you have zero money for so long, the marginal benefits you get through consumption greatly diminish, but there's one thing that doesn't diminish, which is unintended consequences.

People like me, others, when they get zero money - and I know a lot of people in this room are probably experiencing this, you are forced into other assets and risk assets and behavior that you really don't want to do, and it's not those concentrated bet kind of stuff I met [ph.] earlier. It's like gees, these zero rates are killing me. I got to do this. And the problem is the longer rates stay at zero and the longer assets respond to that, the more egregious behavior comes up.

Decision — Bought AMETEK. Context: Five-year post-mortem in the 2020 letter. Outcome (known): EPS +50% (2015–19); stock more than doubled.

Now. people will say well the PE is not that hard. Where's the beef? Again, I feel more like it was in '04 where every bone in my body said this is a bad risk reward, but I can't figure out how it's going to end. I just know it's going to end badly, and a year and a half later we figure out it was housing and Subprime. I feel the same way now. There are early signs. If you look at IPOs, 80 percent of them are unprofitable when they come. The only other time we've been at 80 percent or higher was 1999.

The other thing I would look at is credit. There are some really weird things going on in the credit market that maybe Kenny and I can talk about later. But there are already early signs starting to emerge. And to me if I had a message out here, I know you're frustrated about zero rates, I know that it's so tempting to go ahead and make investments and it looks good for today, but when this thing ends, because we've had speculation, we've had money building up for four to six years in terms of a risk pattern, I think it could end very badly. Kenny, do you want to come up? [applause]

Decision — Bought Stericycle — sold at a loss. Context: The sell-discipline canon passage: “quick to take your losses, reluctant to take your profits” (Carret, 1930). Outcome (known): Stock lower four years after exit — discipline vindicated.

MS: You've never been on the left in your life, Ken. KL: I am now. [laughter] There's a first time for everything, Stanley. There’s one addition I'd make to Sam's introduction, and not only do the Druckenmillers share their treasure with so many charities, but they share their time. Everything they support, they support not only as they say with their checkbook, but with their time and their effort and their great abilities. And for the both of you for all of us here we say thank you. Okay.

You mentioned in your talk that there are already early signs of excesses due to over-easy [ph.] monetary policy. What are some of the signs you see? SD: Okay. I mentioned credit. I mentioned credit. Let's talk about that for a minute. In 2006 and 2007, which I think most of us would agree was not a down period in terms of speculation, corporations issued $700 billion in debt over that two-year period. In 2013 and 2014 they've already issued $1.1 trillion in debt, 50 percent more than they did in the '06. '07 period over the same time period. But more disturbing to me if you look at the debt that is being issued, Kenny, back in '06, '07, 28 percent of that debt was B rated. Today 71 percent of the debt that's been issued in the last two years is B rated. So, not only have we issued a lot more debt, we're doing so at much less standards. Another way to look...

SD: ...at that is if those in the audience who know what covenant-light loans are, which is loans without a lot of stuff tied around you, back in '06, '07 less than 20 percent of the debt was issued coy-light. Now that number is over 60 percent. So, that's one sign. The other sign I would say is in corporate behavior, just behavior itself. So, let's look at the current earnings of corporate America. Last year they earned $1.1 trillion; 1.4 trillion in depreciation. Now, that’s about $2.5 trillion in operating cash flow. They spent 1.? trillion on business and capital equipment and another 700 billion on dividends. So, virtually all of their operating cash flow has gone to business spending and dividends, which is okay. I'm enboard with that.

But then they increase their debt 600 billion. How did that happen if they didn't have negative cash flow? Because they went out and bought $567 billion worth of stock back with debt, by issuing debt. So, what's happening is their book value is staying virtually the same, but their debt is going like this. From 1987 when Greenspan took over for Volcker, our economy went from 150 percent debt to GDP to 390 percent as we had these easy money policies moving people more and more out the risk curve. Interestingly, in the financial crisis that went down from about 390 to 365. But now because of corporate behavior, government behavior, and everything else, those ratios are starting to go back up again.

Look, if you think we can have zero interest rates forever, maybe it won't matter, but in my view one of two things is going to happen with all that debt. A, if interest rates go up, they're screwed and, B, if the economy is as bad as all the bears say it is, which I don't believe, some industries will get into trouble where they can't even cover the debt at this level.

And just one example might be 18 percent of the high-yield debt issued in the last year is energy. And I don't mean to offend any Texans in the room, but if you ever met anybody from Texas, those guys know how to gamble, and if you let them stick a hole in the ground with your money, they’re going to do it. So, I don’t exactly know what’s going to happen. I don't know when it's going to happen. I just have the same horrific sense I had back in '04. And by the way, it lasted another two years. So. you don‘t need to run out and sell whatever tonight.

KL: Will this unprecedented global money printing ever stop? And what is your intermediate and long-term view on inflation? SD: Well, the global money printing is interesting because the United States is the world‘s central bank. And Japan had this guy named Shirakawa running the central bank, and he didn't believe in this stuff. So, what happened when he didn't print the money but the U.S. was printing the money and we're [inaud.], the Japanese yen started to appreciate and it stayed appreciating, and it basically hollowed out the country. And they were eventually forced, as you know, two years ago into flooding their system with money.

You have a very, very similar situation going on in Europe now. I know Mario Draghi and Angela Merkel don't like QE. They don’t like anything about it, but again, the chump - I have this partner. I don't know if he's in the room, Kevin Warsh who's on the Federal Reserve Board. He said Japan used to be the new chump because they had the overvalued currency. Now it's Europe. So, their currency went from 82 say back in 2000 all the way up to 160, and it was 140 last summer, and they're absolutely getting murdered. And now they're apparently caving in and they're going to print money.

I don't know when it's going to stop. And on inflation this could end up being inflationary. It could also end up being deflationary because if you print money and save banks, the yield curve goes negative and they can't earn any money or let's say the price of oil goes to $30, you could get a deflationary event. If you had asked me this question in late '03, I'd have said well, this probably ends with inflation, but by the time we needed to, we figured out no, this is going to end in deflation. So, the fed keeps talking about deflation, but there is nothing more deflationary than creating a phony asset bubble, having a bunch of investors plow into it and then having it pop. That is deflationary.

KL: You mentioned some of your biggest winners in your career. What is the biggest mistake you made and what did you learn from it? SD: Well, I made a lot of mistakes, but I made one real doozy. So, this is kind of a funny story, at least it is 15 years later because the pain has subsided a little. But in 1999 after Yahoo and America Online had already gone up like tenfold, I got the bright idea at Soros to short internet stocks. And I put 200 million in them in about February and by mid-march the 200 million short I had lost $600 million on, gotten completely beat up and was down like 15 percent on the year. And I was very proud of the fact that I never had a down year, and I thought well, I’m finished.

So, the next thing that happens is I can't remember whether I went to Silicon Valley or I talked to some 22-year-old with Asperger's. But whoever it was, they convinced me about this new tech boom that was going to take place. So I went and hired a couple of gun slingers because we only knew about IBM and Hewlett-Packard. I needed Veritas and Verisign. I wanted the six. So, we hired this guy and we end up on the Year — we had been down 15 and we ended up like 35 percent on the year. And the Nasdaq's gone up 400 percent.

So, I'll never forget it. January of 2000 I go into Soros's office and I say I'm selling all the tech stocks, selling everything. This is crazy. [unint.] at 104 times earnings. This is nuts. Just kind of as I explained earlier, we're going to step aside, wait for the net fat pitch. I didn't fire the two gun slingers. They didn't have enough money to really hurt the fund, but they started making 3 percent a day and I'm out. It is driving me nuts. I mean their little account is like up 50 percent on the year. I think Quantum was up seven. It's just sitting there.

So like around March I could feel it coming. I just - I had to play. I couldn't help myself. And three times during the same week I pick up a - don't do it. Don't do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks. and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn't learn anything. I already knew that I wasn't supposed to do that. I was just an emotional basket case and couldn't help myself. So, maybe I learned not to do it again. but I already knew that.

KL: Here's one you may not be able to answer. Why are the regulators so intent on penalizing our best banks? SD: Because the regulators are appointed by politicians and the banks make a perfect punching bag for what's going on. And I will say this, I think there were very, very bad actors in '06, ‘07. Let's not kid ourselves in the banking industries.

SD: But the point I was making earlier is there was a great enabler, and that was the Federal Reserve... SD: ...pushing people out the risk curve. And what I just can't understand for the life of me, we've done Dodd-Frank, we got 5,000 people watching Jamie Dimon when he goes to the bathroom. I mean all this stuff going on to supposedly prevent the next financial crisis. And if you look to me at the real root cause behind the financial crisis, we're doubling down. Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there and enabled those bad actors [ph.] to do what they do. Now, no matter what you want to say about them, if we had had five or six percent interest rates, it would have never happened because they couldn't have gotten the money to do it.

SD: I think the euro needs to continue to go down because eight of those countries have such a cost disadvantage versus Germany right now. It's about 40 percent because they haven't been behaving themselves since the euro was put together that you have severe outright deflation not like pretend deflation like we talk about on the board. It’s real deflation. And they've got sclerosis. I can't see Europe surviving without the euro going down to somewhere in the mid-80s. And if you think that's a ridiculous forecast, when I restarted Duquesne in 2000, the euro was 82. Now, that was extreme. But let me ask you this, think of the Europe and United States back in 2000 and think of them today. Do you think Europe has made incremental gains versus the United States or declines? So, to me it's not unreasonable to see the euro continue to go down.

The other thing I‘ll say, I do analyze currencies, and it would be almost unprecedented to have a 10-month currency trend. Because all the dislocations happen when your currency is overvalued and it’s up long enough, it takes years to unwind those dislocations. And it's hard to argue the euro is not in a trend. It's down from 140 to 117. And using the rule of time, I don't think it’s unreasonable to expect it to break 100 sometime in the next year or two.

In terms of the euro region itself, there’s still a lot of questions. That was put together for political reasons really to create political unity. And as most people in this room know, it's doing just the opposite. It's creating political disunity. So, I don't think it's even a given that that thing stays together. KL: Okay. You put money out with other managers. What qualities and characteristics do you look for in those people that you place money with?

SD: Number one, passion. I mentioned earlier I was passionate about the business. The problem with this business if you're not passionate, it is so invigorating to certain individuals, they're going to work 24/7, and you're competing against them. So, every time you buy something, one of them is selling it. So, if you‘re with one of the lazy people or one of the people that are just doing it for the money, you're going to get run over by those people.

The other characteristic I like to look for in a money manager is when I look at their record, I immediately go to the bear markets and see how they did. Particularly given sort of the five-year outlook I've given, I want to make sure I've got a money manager who knows how to make money and manage money in turbulent times, not just in bull markets.

The other thing I look for, Kenny, is open-mindedness and humility. I have never interviewed a money manager who told you he'd never made a mistake, and a lot of them do, who didn‘t stink. Every great money manager I've ever met, all they want to talk about is their mistakes. There's a great humility there. But and then obviously integrity because passion without integrity leads to jail. So, if you want someone who's absolutely obsessed with the business and obsessed with winning, they're not in it for the money, they're in it for winning, you better have somebody with integrity.

KL: You've expressed concerns about entitlement. What's the solution? You got a loaded crowd here now. Be careful. SD: That's a rough one. So, if you go back to 1965, the senior poverty rate in this country was 30 percent, and it’s 9 percent now. I think everybody can applaud that's a great achievement. The problem is you go back to 1965, your child poverty was 21

percent, and now it's 25 percent. So, all the gains we've made in terms of poverty the last 40 years have accrued to the elderly. If you look at the average per capita income in this country, we're spending 56 percent of every worker’s dollars on the elderly, and we're spending 7 percent on children. So, how would I solve it? Well, I couldn't because if I wanted to do it, nobody would ever vote me in office. But I would just say that some solutions are a combination of tax reform dealing specifically with the problem because the longer this goes on, the more you're either going to have to raise taxes or cut spending down the road because of compounding. I would freeze — forget COLAs. I would freeze all the entitlement payments right now because they've already taken such a tremendous share away from the rest of our population.

You know, it's funny. if you go back to as late as 1970, entitlements were 28 percent of all federal outlays. Now they're 72 percent. And when you start talking about oh my God, we can't freeze this stuff, why not? You just picked up 50 points of share on everybody. Why not freeze it? And, you know, Ken and I have talked. I mean it's ridiculous that our Social Security is not means tested. It's ridiculous. I mean the fact that he's getting - what is your monthly check?

KL: Twenty-five hundred dollars a month. SD: While we have 24 percent of the kids in this country in poverty and probably, you know, the elephant in the room is obviously the health care system. You've got to get the market into the equation so people see the cost and they have to make an economic decision. A lot of this goes into end-of-life payments. You wonder if you had to pay 30 to 40 percent of the bill instead of not even knowing what the bill is, whether different choices would be made.

But you talk about entitlement. The federal debt right now is $17 trillion. The reason it‘s $17 trillion and not higher is because all those payments that are promised to Kenny, a lot of the people in this room, myself not too far in the future, they're not on the government balance sheet. Any company in America if you owe payments of that certainty, it would be a debt. In the U.S. government accounting it's revenue.

If you present valued what we have promised to seniors in Medicare and Social Security and Medicaid payments, the federal debt right now under gap accounting would be $205 trillion, not 17 because we have a demographic boom, which is the other side of the baby boom. As everybody knows in this room, it's the grey boom. We are creating 11,000 seniors in this country every day. Every day we're creating 11,000 new seniors, and we're only creating about 18 percent of youth employed to support those payments to them. So, we've got a big problem, and it really doesn't start until 2024, 2025, but if you wait 'til 2024, it's too late. It's not unlike climate change.

It's probably not a problem for 30 years, but if you wait 30 years, you can't fix it. So, you got to start now. KL: This is my question, is there any way possible you think that we could have a soft landing from all the excesses we've had in the last 10 or 15 Years? SD: Anything's possible. I sure hope so. And I haven't committed. I'm not net short equities. I mean the stock market right now as a percentage of GDP is higher than - with the exception of nine months from '99 to — it's the highest it's been in the last hundred years of any other period except for those nine months. But you know what, when you look at the monetary policy we're running, it should be - it should be about where it is. This is crazy stuff we're doing. So, I would say you have to be on alert to that ending badly. Is it for sure going to end badly? Not necessarily. I don't quite know how we get out of this, but it's possible.