January "Bogleheads on Investing" podcast with Gus Sauter now available

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January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Rick Ferri » Mon Jan 07, 2019 10:55 pm

You will enjoy this special podcast with Gus Sauter, former Director and Chief Investment Officer of the Vanguard Group. Gus led the Quantitative Investing Group since joining Vanguard and head investment manager of Vanguard index funds from 1987 through 2003. He is also the creator of Vanguard's exchange-traded funds.

Listen now: Bogleheads on Investing with guest Gus Sauter, hosted by Rick Ferri

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Last edited by Rick Ferri on Tue Jan 08, 2019 3:56 pm, edited 1 time in total.
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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by ReformedSpender » Tue Jan 08, 2019 5:53 am

Great interview, thank you Rick!

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Rick Ferri » Tue Jan 08, 2019 10:02 am

Bumped up.
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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by duplin county » Tue Jan 08, 2019 10:16 am

Great interview. I feel Gus did not address Fidelity offering zero amount requirement for initial investing while
Vanguard requires $3000 to start.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Riprap » Tue Jan 08, 2019 10:21 am

Nice interview.

Thanks for asking about the concentration of proxy votes among a few institutional firms issue. :beer

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Rick Ferri » Tue Jan 08, 2019 10:44 am

duplin county wrote:
Tue Jan 08, 2019 10:16 am
Great interview. I feel Gus did not address Fidelity offering zero amount requirement for initial investing while Vanguard requires $3000 to start.
I'm speculating he would answer that Vanguard ETFs do not have minimums.
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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by goingup » Tue Jan 08, 2019 1:31 pm

That was such an interesting interview. Hired at Vanguard in 1987 (after interviewing with Jack Bogle who hired Gus despite the fact he showed up for the interview in basketball shoes--funny story), Gus was very involved in building out the index fund lineup beyond just the 500 Index.

Interesting, too, to hear him talk about why ETFs were created at Vanguard, and the unique share-class patent they hold. I learned a lot. Rick did a fantastic job interviewing him.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Rick Ferri » Tue Jan 08, 2019 7:26 pm

We could have gone on for a couple more hours!

One question that had to be cut due to a time constraint was Gus's view of high frequency trading. He is for it. We both agreed that while HFT may make your blood boil, the algos do make the market more liquid and only get fractions of a penny on each share traded. That was a LOT better than 20 years ago when the old market system cost at least 1/8 and often 1/4 per share for liquidity.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by cody69 » Tue Jan 08, 2019 7:32 pm

Listened in the car driving home today... really enjoyed Rick!
Found Gus's comments on home bias very interesting.
Gus is a great communicator... clearly he's had lots of practice... and it shows nicely!

Great job as always Rick. You're on a roll... keep up the momentum!

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Stinky » Tue Jan 08, 2019 7:39 pm

Rick Ferri wrote:
Tue Jan 08, 2019 7:26 pm
We could have gone on for a couple more hours!

One question that had to be cut due to a time constraint was Gus's view of high frequency trading. He is for it. We both agreed that while HFT may make your blood boil, the algos do make the market more liquid and only get fractions of a penny on each share traded. That was a LOT better than 20 years ago when the old market system cost at least 1/8 and often 1/4 per share for liquidity.

Rick Ferri
I agree with others - great podcast.

If you have others like Gus where there’s more material than a one hour podcast, you could consider making a single interview into a two-parter. I would have enjoyed another full hour of you and Gus.
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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by whodidntante » Tue Jan 08, 2019 10:25 pm

Good podcast. Except you didn't ask my question. :twisted:

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Rick Ferri » Wed Jan 09, 2019 6:03 am

whodidntante wrote:
Tue Jan 08, 2019 10:25 pm
Good podcast. Except you didn't ask my question. :twisted:
Your questions was:

"Ask him why Vanguard created the S&P 600 value index fund VIOV and the new factor funds (VFMF, VFVA, etc.) and then put them in the dungeon of the website and barely marketed them. Were they made to suit a particular institutional investor?"

I did not ask this question because Gus retired from Vanguard years before the factor funds came out and had not part of their creation. The methodology didn't even exist. As for the S&P 600 fund, it was my understanding Vanguard was trying to create a lower cost version of IJS. The fund didn't catch on because they were late to the game. IJS had far more assets and was the established leader.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by donaldfair71 » Wed Jan 09, 2019 7:59 am

I particularly liked Gus's discussion that, if I was as long time investor in Fidelity's other total market funds, and they rolled out the zero-cost funds, I probably should be a little upset because they could have made different share classes of the same funds and created no tax liability in taxable accounts. But by creating new funds altogether, a move to these from their other funds creates a taxable event.

I hadn't thought about this. There's no downside to them creating different classes, but there is real upside to investors.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by whodidntante » Wed Jan 09, 2019 9:31 am

Rick Ferri wrote:
Wed Jan 09, 2019 6:03 am
whodidntante wrote:
Tue Jan 08, 2019 10:25 pm
Good podcast. Except you didn't ask my question. :twisted:
Your questions was:

"Ask him why Vanguard created the S&P 600 value index fund VIOV and the new factor funds (VFMF, VFVA, etc.) and then put them in the dungeon of the website and barely marketed them. Were they made to suit a particular institutional investor?"

I did not ask this question because Gus retired from Vanguard years before the factor funds came out and had not part of their creation. The methodology didn't even exist. As for the S&P 600 fund, it was my understanding Vanguard was trying to create a lower cost version of IJS. The fund didn't catch on because they were late to the game. IJS had far more assets and was the established leader.

Rick Ferri
Thanks for your insight.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by travelogue » Wed Jan 09, 2019 10:12 pm

Echoing the other comments -- great interview. Really down to earth and non-dogmatic guy. I thought his take on factors (like value) and their shelf-lives before they're arbitraged away was particularly thought provoking.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Rick Ferri » Thu Jan 10, 2019 10:07 am

travelogue wrote:
Wed Jan 09, 2019 10:12 pm
Echoing the other comments -- great interview. Really down to earth and non-dogmatic guy. I thought his take on factors (like value) and their shelf-lives before they're arbitraged away was particularly thought provoking.
In a sense, Gus was saying that factor premiums are arbitraged away to the extent they are due to investor behavior rather than risk. That's may explain the disappearance of the small-cap premium after research in the 1980s discovered the premium, and may also explain diminishing returns to other factors in the past 10 years. Once a statistically significant factor has been discovered and is published, its "option expiration" date begins.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by corysold » Thu Jan 10, 2019 10:17 am

Just wondering if there is a reason you limit the episodes to roughly an hour. Is that on your end or the guests?

Great job with these, I've enjoyed them all.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by ICH » Thu Jan 10, 2019 10:23 am

Thank you.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Rick Ferri » Thu Jan 10, 2019 10:29 am

Both. I'll record more than an hour and then cut one or two questions that either the guest didn't know or the answer didn't really fit the rest of the interview or may have violated some legal or compliance rule. The question I cut after the interview with Gus was his views on High Frequency Trading, which got quite technical and didn't fit with the rest of the interview. Plus we were 10 minutes over, so it worked out. For the record, he sees HFT as a net positive for investors because the HFT firms do provide liquidity at a very cheap price.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by privatefarmer » Thu Jan 10, 2019 12:06 pm

Thanks Rick, excellent podcast. I really appreciate his injsght into smart beta. I find over time I have completely come to the same conclusions as you and Gus. Please keep the podcasts coming!

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by bikechuck » Thu Jan 10, 2019 3:49 pm

Rick, I have been enjoying and learning from this series of podcasts. I think that targeting an hour or so for this type of programming was a good choice.

Thank you for your efforts to date and I will continue to tune in going forward.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by mmnj » Thu Jan 10, 2019 4:39 pm

Rick Ferri wrote:
Thu Jan 10, 2019 10:07 am
travelogue wrote:
Wed Jan 09, 2019 10:12 pm
Echoing the other comments -- great interview. Really down to earth and non-dogmatic guy. I thought his take on factors (like value) and their shelf-lives before they're arbitraged away was particularly thought provoking.
In a sense, Gus was saying that factor premiums are arbitraged away to the extent they are due to investor behavior rather than risk. That's may explain the disappearance of the small-cap premium after research in the 1980s discovered the premium, and may also explain diminishing returns to other factors in the past 10 years. Once a statistically significant factor has been discovered and is published, its "option expiration" date begins.

Rick Ferri
Rick,
Can you please explain what "arbitraged away" means? I heard it on the podcast and also see it in your response above, but I still don't understand it :oops:
Great Podcast! Thanks for your time and effort.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by travelogue » Thu Jan 10, 2019 5:01 pm

Rick can probably give a better and more accurate answer, but I think the gist is that once a factor exploiting a market inefficiency or other anomaly is discovered and generally dissemenated it will be employed by market participants to the point that it will no longer be effective and will disappear. This occurs because once the anomaly becomes known the market will adjust to reflect that knowledge and the “inefficiency” (leading to the mispricing some participants had been taking advantage of) will be arbitraged away. You won’t be able to get a price advantage because the other side of the trade will know about the potential mispricing as well and will adjust accordingly.

It seems to me there are still opportunities for taking advantage of mispricing where participants are, in essence, playing different games. For example, a big fund manager might need to try and avoid several down quarters, while an individual investor with a reasonably long time horizon is only playing against her own mental fortitude rather than a boss and the need to keep AUM outflows from making the big fund unprofitable. The individual investor beholden only to herself and her own time horizon can exploit the possible inefficiencies and forced mispricing caused by near-term pressures on their professional counterparts.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by 1210sda » Thu Jan 10, 2019 5:52 pm

Great interview. Thanks Rick.

Particularly liked Gus' comment that Vanguard's indexing is based more on "Sharpe Math" than on EMH.

Also interesting was hearing that Gus feels an investor should have a home country bias.

1210

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Rick Ferri » Thu Jan 10, 2019 6:15 pm

mmnj wrote:
Thu Jan 10, 2019 4:39 pm
Rick,
Can you please explain what "arbitraged away" means? I heard it on the podcast and also see it in your response above, but I still don't understand it :oops:
Great Podcast! Thanks for your time and effort.
It means investment companies start exploiting the price difference until overcrowding takes away the benefit. Too many factor funds, too easy to buy factor funds, too much money chasing factor funds means not more factor premium.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by livesoft » Thu Jan 10, 2019 6:23 pm

So will behavioral finance knowledge be arbitraged away as well? Or will folks knowledgeable about such issues still be able to take advantage of others?
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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Rick Ferri » Thu Jan 10, 2019 7:48 pm

Those with knowledge will retire and others without knowledge will take over, so the cycle will repeat.

I'm speculating, of course, but it SOUNDS logical. :D

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by livesoft » Thu Jan 10, 2019 7:51 pm

Yes, that does sound logical. Thanks! :)
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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by travelogue » Thu Jan 10, 2019 9:58 pm

livesoft wrote:
Thu Jan 10, 2019 6:23 pm
So will behavioral finance knowledge be arbitraged away as well? Or will folks knowledgeable about such issues still be able to take advantage of others?
Well, those who learn from Rick's work (and all those he's built upon), this forum, Jack Bogle, etc. will reduce (but not eliminate) their cognitive biases and human foibles.

I think there will likely always be opportunities to take advantage of behavioral finance. Thaler, Kahneman, Tversky, and others (plus our observations of market overreactions in both directions) show cognitive bias is well alive and kicking. Look at crypto and the low vol trade, e.g. Manias, bubbles, panics, recency bias -- all still present. Plus we've got the robots (algos and flash trading) to help us magnify (rather than eliminate) these traits.

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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by hdas » Fri Jan 11, 2019 2:00 pm

Rick Ferri wrote:
Mon Jan 07, 2019 10:55 pm
You will enjoy this special podcast with Gus Sauter, former Director and Chief Investment Officer of the Vanguard Group. Gus led the Quantitative Investing Group since joining Vanguard and head investment manager of Vanguard index funds from 1987 through 2003. He is also the creator of Vanguard's exchange-traded funds.

Listen now: Bogleheads on Investing with guest Gus Sauter, hosted by Rick Ferri

Rick Ferri
Good Guest!. You should try to finish all these interviews with a question in the spirit of the talebian skin in the game, i.e. How are you investing today? or What's on your portfolio ?. Even more interesting, the question could include something along the lines of: What do you hold in your portfolio that is outside of the orthodox advice?

Cheers :greedy
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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by livesoft » Fri Jan 11, 2019 2:25 pm

travelogue wrote:
Thu Jan 10, 2019 9:58 pm
[...]
I think there will likely always be opportunities to take advantage of behavioral finance. Thaler, Kahneman, Tversky, and others (plus our observations of market overreactions in both directions) show cognitive bias is well alive and kicking. [...]
Didn't Thaler advise on a fund that was based on some tenets of behavioral finance? Didn't the fund do very very poorly? :twisted:
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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by hdas » Fri Jan 11, 2019 2:37 pm

livesoft wrote:
Fri Jan 11, 2019 2:25 pm
travelogue wrote:
Thu Jan 10, 2019 9:58 pm
[...]
I think there will likely always be opportunities to take advantage of behavioral finance. Thaler, Kahneman, Tversky, and others (plus our observations of market overreactions in both directions) show cognitive bias is well alive and kicking. [...]
Didn't Thaler advise on a fund that was based on some tenets of behavioral finance? Didn't the fund do very very poorly? :twisted:
Not true. The funds have been doing ok.
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Re: January "Bogleheads on Investing" podcast with Gus Sauter now available

Post by Horton » Sat Jan 12, 2019 9:28 am

Echoing other comments above, I thought this was a really good episode. I particularly enjoyed Gus’s comments on how he got into the industry and what he’s doing now that he’s retired. These personal anecdotes help the listener get a sense for his personality.

I also enjoyed the reference to Sharpe’s arithmetic, the comments on low cost investing (rather than active vs passive exclusively), and the back story on how Vanguard launched the ETFs.

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