Ben Stein: In Love With ETFs—And Cash

January 12, 2011

Invest with ETFs, but don’t forget that cash is a ‘spectacular’ alternative investment, Ben Stein says.

Ben Stein, the actor, author and television commentator, is wild about indexing and ETFs. Stein, who is speaking at'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 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 of all.

Ludwig: Everyone says you love ETFs.

Stein: 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.

Ludwig: You don’t worry about the things Bogle worries about, in terms of people using ETFs irresponsibly and trading them excessively?

Stein: 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.

Ludwig: Apart from the passive vs. active debate you’re wading into, what else about ETFs is worth recommending to investors?

Stein: 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.

Ludwig: Which country ETFs do you favor?

Stein: 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.

Ludwig: What about sectors?

Stein: 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 dividend.

Ludwig: What about the active ETFs? Are you a believer that’s going somewhere, or is that a nonstarter?

Stein: 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 did.



Ludwig: 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.

Stein: 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 that.

Ludwig: And how does China differ from that?

Stein: 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.

Ludwig: What about India?

Stein: 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.

Ludwig: I’m guessing it’s not too late.

Stein: 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.

Ludwig: How much of an allocation do you think is appropriate for the emerging markets?

Stein: 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.

Ludwig: What are some of the biggest mistakes investors make?

Stein: 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 go.

Ludwig: When you look at Buffett closely, he’s a buy-and-hold investor, and that’s one of the tenets of passive investing.

Stein: 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.

Ludwig: Any other big mistakes investors make?

Stein: 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.

Ludwig: 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.

Stein: 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.



Ludwig: But if you jumped in when all the killing was finished, then you did quite well, didn’t you?

Stein: 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 top is.

Ludwig: 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.

Stein: 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.

Ludwig: So, prognosticate a bit: What is your outlook?

Stein: 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.

Ludwig: 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 1970s.

Stein: 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.

Ludwig: What about the employment situation?

Stein: 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.



Ludwig: So you’re cautiously optimistic that some corner may have been turned?

Stein: 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.

Ludwig: You seem to be optimistic about the United States in general.

Stein: Well, China is clearly going to be the dominant industrial power of the 21st 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 middle-class Americans.

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 never happened.

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.

Ludwig: You clearly don’t share the doom and gloom of Peter Schiff?

Stein: 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 wrong.

Ludwig: 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 feet?

Stein: 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 worker.

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.

Ludwig: Are you planning any books?

Stein: 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 ETFs.


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