Ben Stein, the actor, author and television commentator, is
wild about indexing and ETFs. Stein, who is speaking at
IndexUniverse.com's "Inside ETFs Conference" in February, said he
can't figure out why anyone would invest in any other way.
Believing they can beat the market is the biggest mistake most
investors make, he said.
Stein also told IndexUniverse.com Managing Editor
Olivier Ludwig that alternative investments are one part of his
asset allocation plan he regrets not having paid more attention
to, and called cash the most spectacular alternative investment
Everyone says you love ETFs.
I do love ETFs. I'm not a big stock picker, and I think, generally
speaking, you do better with an index. I've been boosting indexes
ever since I read John Bogle long ago talking about what a great
idea index investing was. I totally believed him, and have found it
to be true in my own life.
You don't worry about the things Bogle worries about, in terms of
people using ETFs irresponsibly and trading them excessively?
You can use any investment irresponsibly, and if you have broad
enough ETFs-I don't favor narrow ones-things can hardly go wrong.
You will outperform individual stock pickers, you will outperform
the people on TV who are waving their arms around saying they're
going to outperform you. You'll outperform just about everyone.
Every few years, some active stock pickers will outperform you, but
in general, you'll outperform everyone else.
Apart from the passive vs. active debate you're wading into, what
else about ETFs is worth recommending to investors?
Their low prices, and they can give you both breadth and focus. For
example, they are a brilliant way to invest in countries and in
certain industries and sectors. But I generally like broad ETFs-the
broader the better. I don't want to claim any expertise in picking
stocks. When I was a younger man, I seemed to have some sort of
gift for it, but I don't seem to have that gift anymore. So I'd
much rather go with ETFs, the broader the better. I sort of don't
understand why anyone would go any other way.
Which country ETFs do you favor?
I've had good luck with the Canadian one [(iShares MSCI Canada
Index Fund (NYSEArca:EWC)]. And for a while I was doing really well
with the Australian one [iShares MSCI Australia Index Fund
(NYSEArca:EWA)]. But not anymore. I've done well with Eastern
European ones too, though not quite as well anymore. I've had
dozens and dozens of ETFs. When you see an ad for the many
varieties of ETFs and you wonder who on earth could be buying
those, the answer is Ben Stein.
What about sectors?
I do some sectors in terms of natural resources, and especially
energy-related natural resources. And for a while we all know those
did spectacularly well; then they had a dramatic correction, and
now they're doing really well again. But again, the bulk of my
savings is in diversified indexes. The only active picks I have are
Berkshire Hathaway and some companies that pay a fantastically good
What about the active ETFs? Are you a believer that's going
somewhere, or is that a nonstarter?
More power to them, but I'm not following them. I probably should
look into that more. But Mr. Bogle completely sold me on passive
investing a number of years ago, and I've been happy that he
Some of these country picks you've talked about-Canada,
Australia-sound like sublimated China stories. They're commodity
economies fueling growth in places like China.
Yes, and I have some China too. I also had Russia. But I got out of
Russia because the political situation in Russia seems like it's
reverting back to dictatorship. I didn't want to be involved in
And how does China differ from that?
China doesn't make any bones about it being a dictatorship, whereas
Russia pretends to be something else. When you buy China, you know
you're getting something that's run by a Communist dictatorship.
Russia claims to be something else that it's not.
What about India?
That is something that I have completely missed the boat on, except
for the fact that I have some very large-scale, very widely
diversified, less-developed country ETFs. So that would include
India. I should have more India. I just did not see India becoming
the powerhouse it has become. That was a mistake.
I'm guessing it's not too late.
I don't think it's too late either, and I'm glad you brought that
up, because my next call will probably be to my broker to send me
some data on India.
How much of an allocation do you think is appropriate for the
I wouldn't allocate more than 15 or 20 percent at most-not because
they're not great and that the growth isn't there, but because
there's political instability throughout the region. But if you're
80, you should probably just be in cash or in short-term bonds.
What are some of the biggest mistakes investors make?
I think the biggest mistake you can make -unless you are one of the
most skillful of stock picker investors like Warren E. Buffett-is
to think you are going to outperform the indexes. For the enormous
mass of investors, just going with the indexes is the way to
When you look at Buffett closely, he's a buy-and-hold investor, and
that's one of the tenets of passive investing.
Yes, and by this point, he runs an index fund. He has so many
different companies that he owns or owns very large parts of.
Any other big mistakes investors make?
Well, one of the mistakes I've made is having been too sanguine
about the market itself and not diversified enough into alternative
investments, of which the most spectacular is cash. If it's cash in
a CD or if it's cash in a money market fund from one of the big
brokerages, it cannot lose its value. It's a very smart alternative
investment, and I wish I had had more of it.
The desirable amount of cash is at least 15 percent-at any age,
and would get to be closer to 25 percent as you pass 60. And I
think these allocations should be constant, no matter what the
state of the U.S. economy.
That flies in the face of brokerage industry orthodoxy that
equities are better than cash or bonds to achieve returns over the
long term that beat inflation.
Well, we haven't had much inflation lately, but if we do, and you
have bonds, especially medium- or long-term bonds, you'll really
get creamed. I'm an old guy, and I can remember the days of the
double-digit inflation in the '70s and early '80s when bonds were
just getting murdered day after day. Every day, the bond market
floor would be littered with the dead and dying.
But if you jumped in when all the killing was finished, then you
did quite well, didn't you?
But you never know when it's finished. Nobody is ever smart enough
to know when it's finished. Who possibly would have guessed that
March 9, 2009 was the bottom, and that from then on, you were going
to enjoy close to 90 percent recovery. Nobody could have guessed
that. Nobody knows where the bottom is and nobody knows where the
On that note, who knows that there's not going to be another swoon?
You hear guys like Jeremy Grantham say that figuring out fair value
has been distorted by the Fed's quantitative easing.
Well, the quantitative easing does not seem to have had the effect
that it was supposed to have. It's quite the contrary. People are
hedging against inflation instead of lending more. We desperately
need easier credit, especially in home finance. In fact, mortgage
rates have just skyrocketed in the last several months. And it
still causes brain damage trying to get a mortgage. The banks say
they're willing to lend, but to get a loan, you put your life in
your hands in terms of what the banks require of you.
So, prognosticate a bit:What is your outlook?
I'm not a good prognosticator, but we're certainly in a recovery.
But will it last? Will there be some new crisis in Europe that will
cause the market to crash? Will spending restraints by the federal
government cause some sort of unwelcome change on the demand side?
We don't know these things, and that's why it's important to be
extremely diversified, both around the globe and in terms of having
cash and very, very short-term bonds.
So what are we living through now? It almost seems like a very mild
form of the 1930s combined with the inflationary pressures of the
Realistically speaking, the situation we're in now is not even
remotely close to the situation of the '30s. In the '30s, at one
point, we had roughly 25 percent unemployment. And those were in
the days when most families had only one breadwinner, no meaningful
unemployment compensation and no federally insured savings
accounts. So if that breadwinner lost his job, it was really a
disaster. Right now, we have 9.4 percent unemployment; it's been as
high as 9.8 percent, but it's not even close to being comparable
with the amount of suffering we had in the Great Depression.
But, having said that, I remember thinking after Lehman declared
bankruptcy that there's no bottom here. Had Bank of America not
stepped in and rescued Merrill Lynch, or had Mr. Paulson suddenly
not come to his senses and instituted TARP, the disaster could have
been on an unprecedented scale. People were terrified.
What about the employment situation?
It's still too high. Unemployment is always a lagging indicator;
it's always one of the last to recover. Employers lay off and find
they can do quite well without the workers and they work around the
shortage of labor in their factory or shop. And only when demand
really increases will unemployment fall in a big way. Demand has
increased, but nowhere near the level that is needed to make a
meaningful dent in unemployment.
I will say that I used to dismiss anecdotal evidence as being
meaningless, but I no longer do. And what I see around many of the
shops in Southern California is a lot signs up looking for new
employees. Maybe people won't be employed at the level they'd like
to be, but there are jobs out there.
So you're cautiously optimistic that some corner may have been
Yes, I think we have turned the corner, barring some new calamity
in Europe or some political instability in the U.S. or some totally
hare-brained idea like drastic cuts in the budget. But it's going
to be a very long, slow, slippery corner.
You seem to be optimistic about the United States in general.
Well, China is clearly going to be the dominant industrial power of
century. But we still have a very large multiple of per capita GDP
of China. And we still have a very pleasant way of life for most
All the prognostication of doom and gloom for America has turned
out to be wrong. I've heard so many:that Europe would overtake us;
that Japan would overtake us; that Russia would overtake us. It
Maybe it will happen with the Chinese, but it doesn't matter
that China will become the No. 1 industrial power in the world.
Even on a per capita basis, we have a much better life, and even if
they get to have the highest per capita GDP in the world, it
doesn't mean we will be poorer. It means we will be richer because
they'll be more able to buy our products.
I'd say, generally speaking, people who have bet against the
long-run future of America have cause to regret it.
You clearly don't share the doom and gloom of Peter Schiff?
Not at all. Peter Schiff made a really good call about the finance
sector. He and I debated about that, and he was far more
pessimistic than I was before the crash. He turned out to be right,
and I turned out to be wrong, and God bless him for it.
But he also predicted that we were going to have mega-inflation
like Weimar Germany, and that turned out to be totally wrong. He
also said in early '09 and late in '08 to sell all your stocks and
go entirely into cash and gold, and that turned out to be wildly
So how is Ben Bernanke going to get out from the extraordinary
situation he's in and help the U.S. economy get back on its
I think that he and the people at the Treasury Department saved the
day with the TARP plan, but I don't think he's going to get us out
now. I think what's going to get us out is the ingenuity and the
cleverness and agility of the American businessman and the American
What I see is that even with all our problems, we're still
wildly prosperous. Times are nowhere near as good as they were 2
1/2 or three years ago, but this is still a very wonderful place.
The living here compared to any other place at any other time in
history is awfully good.
Are you planning any books?
My colleague Phil DeMuth and I have written a number of books on
the economy, and we have a new one coming out in April, "The Little
Book of Alternative Investments." We go into an awful lot of new
things but, even if they put us in prison and give us truth serum,
we'd still say go with indexing and go with the broadest possible
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