John Rekenthaler: ‘The House Is With You When You’re Investing’

Summary

Episode Summary: John Rekenthaler on "The Long View" Podcast

Podcast Information:

• Title: The Long View
• Host/Author: Morningstar
• Episode: John Rekenthaler: ‘The House Is With You When You’re Investing’
• Release Date: January 28, 2025

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1. Introduction: Celebrating John's Legacy at Morningstar

Timestamp: [00:33] - [01:28]

Christine Benz welcomes listeners to "The Long View" and introduces John Rekenthaler, a Morningstar colleague celebrating his retirement after 36 years with the company. John joined Morningstar in 1988 as one of its early hires, initially working as a mutual fund analyst. Over the years, he ascended to the position of Vice President of Research, contributing significantly to foundational methodologies such as the star rating and style box. John is also renowned for authoring the popular "Recon Toller Report" investment column on Morningstar.com.

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2. Transitioning into Retirement

Timestamp: [01:26] - [06:58]

John shares his plans post-retirement, emphasizing that he intends to continue writing, both for Morningstar and on his forthcoming blog, likely hosted on Substack. His new blog will explore broader topics beyond investments, maintaining his investigative approach of questioning common perceptions and analyzing data to uncover truths.

He reflects on the feedback from his farewell column, describing it as "touching" and likening it to hearing his own eulogies. A significant portion of the feedback highlighted how his exploratory writing had been beneficial to investors, helping them succeed in their investment processes. John humorously notes his own minimal change in routine, joking about not having fully "started retirement" yet.

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3. Decision-Making Style and Career Beginnings

Timestamp: [08:01] - [15:33]

Christine Benz probes into John’s swift decision to retire, which he likens to making major life choices impulsively. John recounts a personal anecdote about moving from Chicago to New York City in a matter of days, demonstrating his and his wife's tendency to make big decisions quickly.

He elaborates on how he stumbled into Morningstar during the stock market crash of 1987. Originally employed as a technical writer, John was laid off due to the economic downturn. However, Morningstar, led by the optimistic Joe Mansueto, was hiring despite the market conditions. John describes his enthusiasm and readiness to contribute, contrasting Morningstar’s growth-oriented mindset with his previous employer's stagnant environment.

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4. Early Challenges and Learning the Fund Industry

Timestamp: [15:33] - [21:39]

John discusses the initial hurdles of working at Morningstar without a background in investing. He delved into understanding mutual funds by reading prospectuses, shareholder reports, and financial publications like the Wall Street Journal and Barron's. John credits his colleagues, especially Don Phillips and Joe Mansueto, for providing mentorship and knowledge.

He reflects on the high turnover rate in Morningstar’s early years, attributing it to the challenges of managing a growing team in a startup environment. John candidly admits to micromanaging employees in his early managerial roles but expresses gratitude for maintaining lasting relationships with former team members.

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5. Evolution of the Mutual Fund Industry

Timestamp: [22:06] - [25:02]

Christine Benz invites John to set the stage for the mutual fund industry when he began his career. John describes the late 1980s as a "Wild West" era for mutual funds, marked by high fees, diverse fund offerings, and dominant brokerage-sponsored funds. He contrasts this with today’s mature market, emphasizing the shift towards low-cost index funds and the dominance of giants like Vanguard and BlackRock.

John reminisces about the gimmicky funds of the past, such as option-writing government bond funds and market-timing funds designed to dodge crashes. He critiques these early funds for their lack of transparency and sustainability, noting that many did not survive long-term due to poor performance and investor mistrust.

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6. Developing Morningstar’s Foundational Methodologies

Timestamp: [30:05] - [35:44]

John delves into the creation of Morningstar’s star rating and style box systems. Initially, the star rating compared all funds within broad asset classes, incorporating risk-adjusted returns—a pioneering approach at the time. However, John and Don Phillips realized the need for more granular categorization to provide meaningful comparisons. This led to the development of a nine-box style grid that systematically classified funds based on size and investment style, moving away from ad hoc, manager-described categories.

The star rating system evolved to assess funds within these refined categories, enhancing its utility for investors by allowing more accurate, risk-adjusted comparisons. John highlights the importance of systematic methodology over subjective assessments in building reliable investment tools.

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7. Predicting the Rise of Indexing

Timestamp: [35:44] - [39:31]

John recounts his early prediction about the growth of index investing. In 1994, he anticipated that indexing could capture up to 30% of mutual fund assets—a projection far exceeding the then-current 1-2% market share. He noted Vanguard’s unique position, driven by Jack Bogle’s low-cost indexing philosophy, which contrasted sharply with other fund companies focused on active management and higher fees.

Despite initial resistance from the fund industry, John’s prediction materialized as index funds gained popularity, validated by their performance during market downturns, such as the 2008 financial crisis. He underscores that low costs, rather than indexing per se, became the critical factor driving investor preference towards index funds.

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8. Investing vs. Gambling: The House Is With You

Timestamp: [39:38] - [43:29]

John articulates a fundamental distinction between investing and gambling, emphasizing that "the house is with you when you're investing" ([39:59]). He explains that, unlike gambling where the odds are permanently in favor of the house, investing in equities historically outperforms inflation over the long term, especially in healthy economies like the United States.

He cautions against the allure of speculative investments like cryptocurrencies, which lack underlying economic value, contrasting them with stocks backed by real businesses that generate free cash flow and grow. John acknowledges short-term market sentiments but maintains confidence in the long-term resilience and growth potential of equities. He humorously notes his limited market timing efforts, restricting them to minor portfolio adjustments.

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9. Applying Retirement Income Strategies Personally

Timestamp: [43:40] - [45:04]

When asked about applying retirement income research to his own finances, John references Morningstar’s paper advocating a 4% safe withdrawal rate. He explains that by adhering to a lower withdrawal rate of under 3%, he can afford to maintain a more equity-heavy portfolio, balancing his spending needs with investment risk tolerance. This strategic approach aligns with Morningstar's research, emphasizing personalized financial planning based on individual circumstances.

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10. Influential Writers and Continued Learning

Timestamp: [45:16] - [46:09]

John shares his favorite investment and non-investment writers who influence his thinking. He mentions Matt Levine from Bloomberg, James Macintosh from the Wall Street Journal, Greg Ip, Jason Zweig, and Bill Bernstein as key sources. Additionally, John appreciates literary classics like Shakespeare, highlighting the importance of diversified knowledge and continuous learning beyond the financial sphere.

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11. Closing Remarks: Continuing the Journey

Timestamp: [46:09] - [46:23]

Christine Benz concludes the interview by expressing gratitude for John's contributions and reiterating that this is not a final goodbye. John reciprocates the thanks, acknowledging the effort the hosts put into preparing the discussion. The episode wraps up with standard podcast farewells, encouraging listeners to subscribe and engage with the show.

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Notable Quotes:

• John Rekenthaler [01:43]: "Is it true? I think that's kind of the heart of what I've done in my work."

• John Rekenthaler [04:48]: "People felt, rightly or wrongly, they tended to feel that I had been helpful to them, very helpful to them in their investment process and helped them to be more successful."

• John Rekenthaler [39:59]: "The house is with you when you're investing."

• John Rekenthaler [36:05]: "I have to rephrase that and say what they really started to believe in is whether you index or don't index. Make sure it's cheap, always have the costs working for you."

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Conclusion:

John Rekenthaler's retirement episode on "The Long View" offers a profound reflection on his enduring impact at Morningstar, the evolution of the mutual fund industry, and his insights into successful investing. His emphasis on systematic investment analysis, the rise of index funds, and the fundamental difference between investing and gambling provide valuable lessons for both novice and seasoned investors. As John transitions into his next chapter, his legacy of rigorous, data-driven financial analysis continues to resonate within the Morningstar community and beyond.

Transcript

[Jackson Financial]

At Jackson, we've created a digital retirement planning experience with you in mind. Visit Jackson.com to explore our easy to understand resources and user friendly tools that are designed to enable financial professionals and clients to plan a path to financial freedom. Jackson is short for Jackson Financial, Inc. Jackson National Life Insurance Company, Lansing, Michigan and Jackson National Life Insurance Company of New York, Purchase, New York. Please stay tuned for important disclosure information at the conclusion of this episode.

[Christine Benz]

Hi and welcome to the lawnview. I'm Christine Benz, Director of personal Finance and Retirement Planning for Morningstar.

[Dan Lefkovitz]

And I'm Dan Lefkovitz, strategist for Morningstar Indexes.

[Christine Benz]

Our guest this week is our colleague John Recentaler. John is retiring from Morningstar after 36 years. He was one of Morningstar's early hires. Joe Mansueto and Don Phillips brought John on as a mutual fund analyst in 1988, and he rose to be the company's vice president of research. He worked on many of Morningstar's foundational methodologies, including the star rating and style box, and helped launch the retirement business. But he's best known as author of the Recon Toller Report, an investment column on Morningstar.com that has become one of the most popular and widely cited in investing and personal finance. John holds a BA from the University of Pennsylvania and an MBA from the University of Chicago. John, welcome back to the Longview.

[John Recentaler]

Good to be here, Christine.

[Christine Benz]

It's good to have you here. So you have announced your retirement. You've officially retired. Your last column was called Farewell for Now. So it's not your last column. Maybe talk about your thoughts about transitioning into retirement.

[John Recentaler]

Yeah, I will be writing future columns for Morningstar and keeping my Morningstar email address. So if anybody wants to reach me. John.recentalerningstar.com had that email address a long time, since when the Internet was invented. Just about. And really I'm not planning on doing a lot different than what I'm doing now, except for the pay part. I'm going to continue to write. In fact, I'm going to start a blog where it's going to be quite similar to what I have done in my column and will occasionally do in articles going forward for Morningstar, which is I'll ask a question. People will there's a common perception of something, people say this or people believe this. Is it true? I think that's kind of the heart of what I've done in my work is just is it true? And run the data and run the numbers and try to be grounded in what the reality is, and sometimes what people say is mostly true, largely true, and sometimes not very much. So I'm just going to do that for a blog of my own, which I can't give any information about yet. I haven't started, but I think it'll be on substack, just on broader topics than only investments, but it'll be the same sort of thing. I can give you a hint. The first topic I've been looking at and thinking about is on issues of violent death. Of course, people think of somebody getting pushed into a subway, which is such a very, very, very, very small portion of the possibilities, or the percentage of time that people die unexpectedly, sort of violent deaths or unexpected deaths, accidental deaths, whether it's from overdose or traffic fatality or this or that. So just kind of running through the numbers and get a sense of how common are these things and other things that are more common, which there are, that you really don't think about and talk about much. So it's that sort of thing, trying to, in some cases deflate misperceptions and in other cases increase perceptions of what really is out there. So trying to shine a light, which is what Morningstar's always done. Right. I mean, that's what we've been about.

[Christine Benz]

But it sounds like you'll be broadening your purview.

[John Recentaler]

Definitely. Broadening. Well, yeah. I mean, I can't publish that article on morningstar.com it's not that Morningstar has anything against such articles, but it's not directly. That one's not really relevant to investing issues. And I would be writing on economics more than I have been. I've done a little bit of that at Morningstar, but in general, the economics, again, has to be generally pretty connected directly with investment issues, as opposed to. One of the questions I've been noodling over and I saw some research on, is what was the effect of NAFTA on lower income workers in the United States? There was a lot of talk at the time about this would drive out jobs, did it drive out jobs, so that sort of thing. These are topics that interest me. But again, NAFTA's effect on lower income workers is probably not a Morningstar.com, it's hard to figure out how to turn that into an investment idea.

[Dan Lefkovitz]

Yeah. Yeah. And we understand you've received one or two pieces of feedback from your farewell column. Can you talk about some of the messages you've received?

[John Recentaler]

It was really touching. My wife called it the Eulogies, but I didn't have it Was like the Mark Twain. Isn't it the Mark Twain episode where he shows up and hears his Tom Sawyer. OG Finn or one of those. He hears his own. I think it's Tom Sawyer. Anyway, he hears his eulogies. That's kind of what I felt like. It's like I didn't have to die. It's nice, but you can't pull that trick too often.

[Dan Lefkovitz]

You get one shot.

[John Recentaler]

I think the number of letters will start declining if I keep doing farewells and asking for more. Nice letters. They were very nice. But there were a couple of themes that came out of them. One is that although I don't think I particularly write with the intent of being directly useful, I talked about. I need to connect with investment topics. But Christine, your work is. I've got it right here. Is really very directed. What to do with your Roth ira? What to do with. It's very clear the benefit to investors of that. Mine's a more exploratory often. But people felt, rightly or wrongly, I mean, they tended to feel that I had been helpful to them, very helpful to them in their investment process and helped them to be more successful. So that was very heartening to hear because I want readers to profit and do well. But I have to confess again, I'm doing my articles with topics that interest me. The other thing I heard, which was also very heartening was retirement. Oh, man, it's the best. I've been retired 17 years. I gotta tell you, this is the best gig I've ever had. Now it's a selected audience. This is not a. If this were a poll, the poll would get thrown out for being skewed because I'm hearing from people who have paid attention to investing, they paid attention to their finances. I didn't have anybody write to me talking about having problems with their finances. So obviously that's a huge. A huge comfort in retirement. And I presume that most of them had good physical health too. So when you have those two things, it's quite different than being in retirement without either one of them. But people just. They like it. I mean. I mean, I'm two weeks in and I've been pretty busy. I can't really say I've truly started retirement yet, except for the not getting paid part.

[Dan Lefkovitz]

And you heard from some financial advisors in addition to individuals.

[John Recentaler]

One of the things that also I had always thought of my audience, I knew I have some advisors that I hear from with my article, but the vast majority were do it yourself investors, like the Boglehead type Crowd, not necessarily Bogleheads, but similar sorts of people. But I heard from a lot of financial advisors and I realized again, talk about skewed samples. My normal sample advisors are reading my material and yours, Christine, I'm sure, and others that we're doing, but they're busy. They've got practices to maintain and clients and so forth. So they're not necessarily dropping a note in the same way that a do it yourself investor, particularly retired one, might have a little more time to do so. Yeah. About a quarter of the letters I got were from people in the business. So that was a learning experience for me and a lesson. Right. Because I'm always talking about perceptions versus misperceptions. And if you would have asked me, I would have given you the wrong answer. And I realized I had not really thought through the issue very well.

[Christine Benz]

John, you said that you made the decision to retire really kind of quickly. That it was a Saturday night.

[John Recentaler]

Saturday night, yeah.

[Christine Benz]

And you, you were not relishing the idea of writing your column the next day. And you said that you've had a habit of making big decisions fairly quickly. Can you talk about that?

[John Recentaler]

Yeah. This is not the kind of advice to give to other people.

[Christine Benz]

Maybe it is not, as I say.

[Dan Lefkovitz]

Not as I do.

[Christine Benz]

It's intriguing to me.

[John Recentaler]

Yeah. My wife and I, we tend to make big decisions on impulse. We moved a year and a half ago from Chicago where she had lived in Chicago area her whole life. She was born and raised, lived entire life in Chicago. I moved here in 1985 and had been from 1985 to 2023 in Chicago. And we were empty nesters. And her mom was about to pass. And so we had been in the area and part with that, but our kid was gone. Like, where should we go? And about two, three days we said, oh, let's go to move to New York city. And about six weeks later, we had made three trips to New York, looked at like 30 places, put in a bid and bought a place. So we live now in the Upper west side of Manhattan. We enjoy the city living and that's our forever place. Well, it's faster than that because that took us three days to get there. The Morningstar one was about 30 seconds. I was like, wait, no, I don't want to get. Because Sunday, Monday was my publication schedule to file on Monday night. I was like, Sunday's coming tomorrow. I don't really feel like doing it. And. And then it just kind of clearly I had been thinking about these things in the back of my mind. For a long time. And we had talked a little bit informally and, like, what would you do? And that sort of thing. It just all clicked into place, and I said, no, you know, it's time. I'm ready. And I feel really ready. I mean, I'm definitely planning on keeping busy. You've heard me talking about that. But it just felt like it was time for me to continue writing, but broaden the kind of things. Write more on my schedule for what I want to do and just go in a slightly different direction. It was an easy decision, but, yeah, that's how I tend to do things. And then we'll stew with a little stuff. Don't sweat the little stuff. And we'll debate that for a long time.

[Dan Lefkovitz]

It sounds like you'll be doing things on your terms, which is what retirement's about.

[John Recentaler]

I don't say I've ever regretted these kinds of big decisions. I don't feel like if I spent more time on them, I'd get to a better place. But that's. It's personal. Other people might want to map this all out. I've got readers who are engineers, and I know how they work. They probably put a spreadsheet with pros and cons and scoring system and all that kind of thing, and that's fine, too. I'm more intuitive in terms of my work. I tend to be. I have kind of intuitive or a hypothesis, and I don't have any process for coming up with ideas for what I would write about. People send me ideas sometimes I take. I love it. Please feel free, listeners, to send me ideas about things, because I do, but I just stumble across them. And then once I come across a hypothesis, I'm actually pretty. Then I'm pretty organized and rigorous. Then I move from left brain to right brain, right brain to left brain, whatever, the other side of the brain. And that I'm actually quite structured on, but I'm not structured in getting to that point.

[Dan Lefkovitz]

Yeah. Well, we thought it'd be cool to hear about your origin story, how you came to Morningstar in the first place and how your career and how the company has evolved. So maybe you can talk about 1988.

[John Recentaler]

Yeah, I've been talking about accidents. Right. Or, I guess, things going in a different direction than you might expect. And certainly my arrival at Morningstar was because I ended up at Morningstar, an investment research company, because of the stock market crash of 1987. You'd think that's when you would lose your investment research job after the stock market crash. But I was working in a different field. I'd been hired only in August 1987. It was my first real job. I had gone to grad school in English and left and was sort of bouncing around working temp jobs. And I got a job as a technical writer in a manufacturing field. It was not the sort of thing that one was going to have a career on, but I was happy to at least start there. And I started in August 1987. October 19th. The stock market dropped 22%. And it was a very shocking event at the time. 22% in a single day. Widespread belief that this was 1929 all over again. In fact, the Wall Street Journal and the papers kept printing graphs showing, overlaying the 1929, October, 1929, both in October with 1987 and how similar they were. And the guy who'd hired me for his small family business panicked and laid me off in mid December because he was worried that the recession was coming. And ironically, Morningstar, as an investment research firm, seemed to be the only place that was hiring at the time, because Joe Mansueto, its founder, is. Joe never believes the depression is coming or a recession is coming. If you've ever met a more optimistic person, good luck to you. But I never have. So Joe's like, we're going to be growing. I need people. And I knew somebody, Don Phillips, who worked at Morningstar. We'd been in school together, and so, you know, one thing led to another. So I showed up at Morningstar as eager and grateful as any starting employee could be. A former English major in grad school, dropout without a job, so happy to be getting paid on a job. And I was ready to run through a brick wall for that company. And the company came back and then some. A lot more. What I gave to it, it sounds.

[Dan Lefkovitz]

Like, unlike Don, you did not really. You hadn't grown up with investing.

[John Recentaler]

Right? Yeah, yeah. That was the other aspect. Don ended up at Morningstar by. Well, I suppose I did by choice. But Don's situation was different. Don had studied economics as an undergrad. He came from a family that was investors. His father had been CEO of a company. He had actually been at a job offer from a major consulting firm for exactly double what Morningstar paid him. And he chose not to take that job and work for this company that when Don joined, it was about eight people or something that nobody had ever heard of at half the salary was zero benefit. I mean, zero benefits, nothing. Because he believed in the vision of it. And he had a startup mentality so Don came in and Don set the tone. Because Don knew about investments, I didn't know about investments. And it's not like I started immediately writing about investments. I had to learn about the business. So I was going through prospectuses and shareholder reports and reading through them and entering data. And I was a data entry person, but absorbing and reading the Wall Street Journal and reading Barron's and reading Berkshire Hathaway reports. And I was fortunate to be able to talk to Don, talk to Joe. Joe had been a former equity analyst and was trained in this. So I had great sources around me as well to supplement what I was reading. And it was a bootstrap organization as any small. I did everything but program. I didn't program. But you do everything else and you hope it works. And it did work.

[Christine Benz]

You've said that even though you didn't have an appreciation for investing when you started, you did appreciate that Joe was approaching things differently. Can you talk about that? Like the difference with him and your previous.

[John Recentaler]

My number one advice would be, and this is the one thing I did know. There were so many things I did not know. But I realized very quickly, the previous place where I'd worked was a family business that had about 20 people working. They're about the same size as Morningstar, but they had 20 people working there 10 years before, and I bet they had 20 people working there 10 Years after. It was a place where the owner was doing very well, had a very large house and golf membership. The rest of us, you know, we were getting paid, but there was never any real chance of great growth or moving up. And the extent that you were going to advance in the organization probably meant somebody was going to leave or retire. And I joined and Joe was like 30 years old. He's putting every. He was just living in a one bedroom apartment, putting every penny back into his. Not, not some big mansion, no golf club, none of that stuff. Putting every penny back into the company. And very quickly I did realize, wow, that's different, because he's trying to grow this thing. And if we go from a million dollars in business, which we were doing, to 2 million to 3 million, whatever, and we're not gonna be 18 people, we'll be 30 people, we'll be 40 people, we'll be 50. Well, I'm number 18. If I keep my nose clean and work hard, I'm senior to those people, I may get promoted and there's more money to go around and there's more responsibility to go around and just the energy, the energy And I was a young. I was 20, just turned 27. I was 27 and one week old when I started. And I was right, the media. So just the energy of the youth was. The previous company where I'd been at the average age was probably 45 or something like that. Nothing against companies with average age of 45. We're tending to get there now.

[Christine Benz]

We are.

[John Recentaler]

I'm a little north of that myself these days.

[Dan Lefkovitz]

After you retire, it'll bring down the average.

[John Recentaler]

Let's just say it was a great place, great environment for me at the time. The other thing to mention though is, although I give that advice, find a growth situation. Growth situations are hard. But we had 50% turnover of employees for the first few years. I was at morning. So literally 18 people. Nine would be around 12 months later. And then. So you're always hiring and if you're growing, you need to hire even more than nine. It's hard. It's hard because things are changing and people, a lot of people don't like change. It's uncomfortable. Everybody's learning on the job, so it doesn't necessarily mean you're good at that, particularly management. We're all learning how to be managers as more people come in and teachers and managing and teaching well is not. It's an acquired skill in most cases. So I look back and I mean, if you were to ask me, you know, what are your regrets? What did you do worse on the job? It clearly would be as a early manager, micromanaging employees and just being annoying. You know, it just. I'm always grateful and surprised that people I managed back in the day actually still talk to me. I thank them for that. They're more gracious maybe than I might have been.

[Dan Lefkovitz]

So you talked about that data entry job and then you were a mutual fund analyst. So you were calling portfolio. Portfolio managers in the hope of writing something useful to investors about their funds. But talk about that experience of just dollars but dialing, trying to reach those portfolio managers and getting something out of them.

[John Recentaler]

Yeah, it was pre email, so you were just calling. And sometimes the organization would have some sort of barrier up or fence up to protect the portfolio managers. And you'd have to work through that department. And you explain, I work for Morningstar. They've never heard of Morningstar. Well, we're Morningstar. We provide the data for Business Week. That was our big early coup, is that Business Week was the one. There were a lot of publications, the Journal and Barron's and Money magazine and Fortune and Forbes and many others. But BusinessWeek was the one where we had to contract to send the data. So we'd say, well, we send the data to BusinessWeek, they hear the word Business Week, they might think we might actually be worth talking to. And that tended to work pretty well. But often you just reach the portfolio manager, and it would be their phone on their desk, and they'd just be getting calls from traders all day, and you weren't a trader, and they'd be, what the who the heck are you? Or other words they would use. Sometimes it can be a. Yeah, it can be that kind of industry with the language sometimes. But, you know, after a little while, almost everybody started to comply and they realized the word started getting out. And people would say, what's the Morningstar report say in your fund? And people would start referencing us, and we started getting quoted a lot in the financial press. And so once the Morningstar name became well circulated, I don't think all the portfolio managers, for the most part, the portfolio managers are pretty good about it. Clearly, not all of them wanted to talk to us, but their marketing department would say, you should.

[Dan Lefkovitz]

Yeah.

[John Recentaler]

So we went in A couple of years from when I started, it was still iffy whether somebody would talk to you. But two, three years later, it was pretty much a routine thing. It was hard for people. I can't blame them, because when we started mutual funds, like, there were a lot of mutual fund data out there, and you can see total returns, but people weren't writing, you know, we're doing. We were effectively writing, like, you know, critical reviews, like a movie review of them. Right. It's hard if you're saying something that's critical of the fund. This is their whole work that's going into this. And you're saying, well, we don't think this fund is very good, or maybe it's not the best, or you could buy another fund or something like that. So it took a while for some people to realize that was kind of part of the job. You were in the public eye. If you were a mutual fund portfolio manager, which most other portfolio managers weren't in the public eye if you're running institutional money and so forth, you had other pressures, but you didn't have people out there in public saying, oh, this isn't. You know, this fund is really struggling, or made bad decisions. So, again, I think all things being equal, they were pretty gracious as well, given, you know, we had the easy job. We're the critics, we're the nitpickers. As you know, they had to create something, as someone once, you know, told me, he said, it's a lot easier to criticize than it is to create. They were the creators.

[Jackson Financial]

At Jackson, we've created a digital retirement planning experience with you in mind. Visit Jackson.com to explore our easy to understand resources and user friendly tools that are designed to enable financial professionals and clients to plan a path to financial freedom. Jackson is short for Jackson Financial, Inc. Jackson National Life Insurance Company, Lansing, Michigan. And Jackson National Life Insurance Company of New York, Purchase, New York.

[Christine Benz]

Maybe you can talk about how the fund industry was situated when you started. You know, there were a lot of funds cropping up, being introduced. Active management was the kind of the standard.

[John Recentaler]

That's right.

[Christine Benz]

And fees were much higher than they are today. But maybe you can set the stage for what the fund industry looked like.

[John Recentaler]

The industry was quite different. Now it's a fully mature industry with Giant Vanguard, BlackRock, State Street, Fidelity, a few giant names with a lot of index funds. And all the funds that sell these days are low cost. Back in the day, it was a lot more Wild West. I mean, I started in 1988, really. The modern fund industry started in 1984, say. I mean, the industry had almost died during the 1970s because stock and bond returns were so bad. It was just the invention of the money market fund that really kept a lot of these. There was more money in money market funds than there were in the stock and bond funds for a while. But the stock market starting and bond market starting in 1982 started their 1980s rally and money started to come into the industry in the mid-80s and it was just booming. So our timing was very good in terms of getting in there when the fund industry kicked off. But it was a lot of companies throwing stuff against the wall trying to figure out what stuck. So a lot of gimmicky funds. I mean, we see that somewhat in the ETF marketplace today. But a big difference was that the brokerage firms thought that having the distribution, having the brokers, that was the key to success, was having a closed system. So you had Prudential Bage funds, you had Paine Weber funds, you had Dean Witter funds, you had Merrill lynch funds, you had Cheers and Lehman funds. These were all bigger than. I mean, Vanguard wasn't a top 10 fund company at the time. So these load funds, that was the terminology back in the day, brokers sold. So you could never buy a Dean Witter fund unless it was through a Dean Witter advisor. But on the flip side of that was the Dean Witter Advisors were supposed to only sell Dean Witter funds. Now, that model didn't turn out well in the end because a lot of those funds weren't very good. Customers felt they were being fed something rather than the best of the industry. It wasn't a customer friendly model. And then you had a lot of small boutique firms without that distribution on the side, just hoping they were like lottery tickets. I mean, $5 million funds run by somebody out of their garage. And if they get three years of really good returns in a row, maybe they'll get noticed. Those people will talk to you, I guarantee you. One of the stories I tell is calling a guy and his wife picked up the phone and said, bernie's in the. He's mowing the lawn right now. And then you hear, Bernie, it's Morningstar.

[Christine Benz]

Did Bernie come in?

[John Recentaler]

Oh, Bernie came in. Bernie came in. So, yeah, you don't get too much of that these days.

[Dan Lefkovitz]

I'm curious, what were some of the gimmicks that you saw early in your career?

[John Recentaler]

Well, some of them are eternal, like we had when I started at Morningstar. The biggest mutual funds in the US then probably the world, were government bond funds that wrote options against the government. So they would sell options, call options on bonds, and they would distribute the proceeds from those options as yield. Technically it was not income, that's short term capital gains. But it was like you're getting a government guaranteed security. You used to be able to say government guarantee. You can't say that anymore because as we know, we learned a lot in 2022, bonds can go down and lose price. People were shocked when they did. So there were a lot of option writing government bonds. And now that's back in. You've got all kinds of funds citing their income these days, writing options and doing these again. They're in the ETFs now rather than mutual funds. And they're kind of equally misunderstood. At least they're lower cost today. Those funds tended to have 1 1/2% expense ratios on a government bond fund. There were a lot of market timing funds, especially after 1987, because after the crash, everyone wants to dodge the next crash, but you're not going to have a next crash, probably. And by the time the next crash happens, all those crash dodging funds have disappeared because they did poorly. So that's another ironic market timing meaning.

[Dan Lefkovitz]

Like a tactical allocation.

[John Recentaler]

Oh, market timing, yeah. But more than just a not tactical allocation in the sense of I'm 60% stocks, maybe I'll change to 50, like I'm 0% stocks, I'm going to go to 100 or I'm 100, I'm going to go to 0. So yeah, and funds that can dodge the crash and then people publishing studies, these five or seven funds managed to get out in October 1987 and dodged the crash. Yeah, they dodged the next 11 crashes that didn't exist. So they all trailed the market. And it was a long time until there was a real crash. It wasn't really until the 2000, 2002 technology. It wasn't until 13 years later that there was something to dodge it. By then none of them existed. I developed a distaste for market timing and tax allocation funds that has really not changed to this day. And I haven't had much reason to change my. I will change my opinion if the facts convince me, but they have not. Oh, there were others. There was something called short term multi market income fund. How's that for a name? And they would buy high yielding European currencies, this is before the euro. So they would buy like the Italian lira or the Greek was a drachma currency and they would sell the deutsche mark, sell the low yielding and see that would give you a spread. And as long as the currencies and the currencies were supposed to converge because there was an exchange rate mechanism that was going to create the euro and it was all they tell you why it was the perfect safe trade and then it fell apart. The exchange rate mechanism didn't work and actually the lower yielding currencies went the opposite direction and lost relative to the high yield. So the stuff that you were long on outperformed the stuff you were shorting. And then all of a sudden these things that were sold as cash alternatives lost like 8 or 10% in about six weeks and everybody redeemed them and blah blah, blah. So this is the history of complex funds that aren't well explained. And I knew that this is early in my career. This is pretty complicated stuff. These short term multi market income funds with these long, these currencies, short, these currencies change rate mechanism. And I knew that there was more possibility of danger than any of the portfolio managers would let on. But nobody really told me when I would interview the portfolio managers. And that was another lesson from me too. And I think it wasn't always just trying to deceive me is because they didn't see the possibilities either. People tend to in the field that they're working in, they're believers. They were believers and it was hard for them to confront the possibility that their beliefs might work in a different direction. So that also was a lot of early lessons about understanding psychology and understanding. Most of the time, when people are deceiving you, they're deceiving themselves as well. I mean, sometimes there are definitely people out there that are just out there to sell something, but it's not always so. If you want to be a good investment analyst or just an analyst in general, you need to understand how psychology plays into how people think about risks. And I always thought that the most valuable service that we do for people is to explain the risks in funds, because we can't predict the futures. But if we can show them the possibilities, what kinds of factors these funds might be susceptible for, what are the dangers? In some cases, this fund doesn't face these particular dangers. I always felt my role was to let people, if they understand the possibilities and feel well informed, you're much less likely to make an emotional decision, make a more rational decision. I think that's our role. Maybe there's someone here who can predict where the markets are going, but I haven't been so good at that. Yeah, I've got a 50% track record.

[Dan Lefkovitz]

You also worked on some of Morningstar's foundational quantitative methodologies, like the star rating and the style box, and you helped develop the category system for funds. Can you talk about kind of how that development went and evolved and sort of the philosophy behind it?

[John Recentaler]

That was fun because we were early. And when you're early, you don't have to worry too much about being better than somebody else. All you have to do is be better than what exists before. And if nothing exists before, hey, you're doing a great job almost no matter what you come up with. Like the Morningstar style box, for example. We were actually, when I say we, Don Phillips and I really worked on that together. We weren't the first, we were the second in that the institutional consultants had already come up with something that a four corner style box in the 1980s that they started to use to describe investments when they were talking about how portfolio managers invest. There was an appreciation starting about late 70s, 1980, that small companies and large companies could perform differently and value stocks and growth stocks. And there started to be those distinctions made, like in the academic literature and such. So 1980s, it goes from the academic literature to the institutional consultants. And they had this four corner. It was a fund, large growth, large value, small growth, small value. And Don and I were, what the heck? Where's the S&P? 500 fit. Where's the market fit? It's not value, it's not growth. Where's the middle ground? Most of the funds aren't really those that doesn't work. We need a value, we need growth. But we need something in the middle to describe funds that kind of do both and the same thing. There's large and there's small. But what about the mid cap? So we took that four corner initial style box that was in institutional marketplace, took it to the retail or the, the broad marketplace as a nine grid box. And we also changed things because they were doing it a bit ad hoc. They weren't running all the portfolio. We were running the portfolios through this big computer process and assigning all these things. So it was very systematic, whereas it had been ad hoc and more by manager description. The consultants weren't taking all the portfolios and running them through. I can't recall whether they were kind of assigning these boxes based on what the manager said or just from eyeballing the portfolios. But it wasn't done in a systematic way. So we expanded and systematized, that's the word, an idea that had already been there. It was still early enough where all we had to do was go from step one to step two and we didn't have to go from step 11 to step 12 or so. And the business has matured a lot since then, which is good for everybody, good for investors. But it's harder to, to innovate in a meaningful way, in a way that really makes a mark that we were able to do back in the early days.

[Dan Lefkovitz]

And the evolution of the star rating, my understanding is when it started out, it was done at the broad asset class level.

[John Recentaler]

Yeah, when we started off, we rated all US stock funds against each other. All international stock funds, municipal bond funds and taxable bond funds. There was some value in doing that. The benefit of the star rating was that it was the first fund evaluation that incorporated risk. Everything else was just total return only. So you'd see lists and it would always be the highest returning funds. These were risk adjusted. This was the again the academic ideas you need to risk adjust returns. And we had a competitor who said, well, you can't spend risk. So his firm didn't do risk adjusted returns. But you do need to risk adjust returns. There's a reason why people are willing to accept lower returns on risk short term or intermediate term notes that are guaranteed by the government than owning AI stocks. So risk does matter. So when the star rating came out just by having A risk adjusted return. And telling people this is the most important way to look at funds. That was a step forward. But the problem was the groups were too large. And we realized after a while, wait a moment. If large growth stocks, the big technology stocks, have a nice five year run, all the five star funds are going to be the big technology funds. We don't really want to be in the business of telling people these are all the best funds. There's an underlying factor that we're missing in our ratings, and we want to sort at least the major factors out. So then we switched after a few years to doing the star rating based on the investment categories. And to do the star rating based on the investment categories, you had to get the categories right, which meant a big change because we had. When I joined Morningstar, as with everyone else, we were grouping funds according to their self descriptions. So a fund would say, I'm an aggressive growth fund, I'm an equity income fund. I guess funds don't talk, but their marketing people do. And we said, well, if we're going to give star ratings according to their categories or their groupings, it didn't matter. When we were doing a star rating over all, we could figure out this is a US Stock fund. But when we, if we're going to do star ratings over these more discrete smaller groups, we had to get the groups right. And that's when we started running all the portfolios through our machine and then just assigning them. So it could be a case where the fund would say, this is a large growth fund. And we'd say, yeah, well, you say you're a large growth fund. We don't call you a large growth fund. We're just going to say you're a mid cap growth fund or a mid cap blend fund, which didn't necessarily please them, but that was the better way of doing it. So that's what happened. At the same time, we changed the star rating system and had it applied to smaller groups where the funds were relatively homogenous and at the same time made it so that we were creating better groups.

[Christine Benz]

I wanted to ask about the growth of indexing, which is a phenomenon that you've certainly observed over your career.

[John Recentaler]

Oh, yes.

[Christine Benz]

So you made a prediction fairly early on about the indexing's eventual success. Or you said that indexing was going to be larger than people grasped at the time. Can you talk about that and what made you think that?

[John Recentaler]

Yeah, well, we talked about impulse.

[Christine Benz]

Yeah.

[John Recentaler]

So I think it was 1994. I got a call from Money magazine. And at the time, US indexing was 1 or 2% maybe of all mutual fund assets. And they said, well, how large can that become in mutual funds? How much can it grow to? And I'd seen that with institutional investors. US equity assets by then were up to about 30% indexing again, the institutions, it goes from academics, academics already said you should be indexing to institutions. So just off the cuff I said, well, it could be 30%. So that showed up as a big pull quote in Money. And then my picture's there. Regan Dollar says indexing could be as much as 30 when it was like 2%. What the heck is this guy?

[Christine Benz]

It took a while, but Jack Bogle liked it.

[John Recentaler]

Of course we're 50%. And I also wrote around that time and this was when Vanguard had just cracked the top 10, but wasn't anywhere near the fund company. I wrote about it. I said, Vanguard is the only true brand, distinctive brand in the fund industry because everybody else is trying to say I'm the best in. These are good companies. But everyone else, Fidelity, Janus, whatever they were all competing for. We have the smartest managers, we do the most T. Rowe Price, we do the most research, we uncover the most, we turn over the most stones. And Vanguard was the only company out there. Well, DFA was for financial advisors and so niche, but the general retail saying, no, no, yeah, we have that stuff, but we're about low, low cost consistency. Just the whole Jack Bogle indexing message and it was just so distinctive. So I did predict there as well. It was right at that time. I didn't quite directly say Vanguard's going to become the largest fund company, but at least I hinted at it. But I shouldn't talk all. There's plenty of stuff that I did not have. Plenty like the market timers. I have plenty of predictions that never did occur. But that one I thought was the success of indexing seemed to me pretty clear. But the problem is a lot of people didn't see it because the vast majority of the fund industry, they viewed indexing as they didn't want to index. It was cannibalization. They'd put out funds that would charge a lot less. And so you had this huge amount of voices with the self interest, which is a combination of sometimes trying to deceive you and sometimes deceiving themselves about why indexing could not succeed or all the different environments or how it was overrated and that turned out to be wrong. But it was a long time learning that lesson. I mean, all the way through 2008 they were saying, well, the next time a big crash happens, you'll see these fully invested index hammer and the active managers will succeed. In 2008, the stocks were down 35%, 37 whatever the market was, and active funds pretty much matched the index. It's not like the index dodged it, but they didn't do better. And that's when pretty much the public stopped believing. Of course there are exceptions, but again, as a general principle at least they. I should rephrase that and say what they really started to believe in is whether you index or don't index. Make sure it's cheap, always have the costs working for you. Because as Jack Bogle himself said, when you say talk about low cost indexing, he's like, low cost is the most important part of that, not the indexing part.

[Dan Lefkovitz]

Vanguard has plenty of active high cost.

[John Recentaler]

Indexing is not a good solution.

[Dan Lefkovitz]

The topic of your last column was sort of the triumph of equities, or especially US triumph of the optimist. Triumph of the optimist, right.

[John Recentaler]

I didn't use that phrase.

[Dan Lefkovitz]

But yes, despite these periodic crashes, including the one that started your career, the returns have just been phenomenal over the long term. You talked about why investing is not like gambling. Can you talk a little bit about that and where that.

[John Recentaler]

Well, sure, I think most people know that in gambling, the house, the odds are. This is pretty trivial stuff. But it's useful for people to remember this. And the people who really keep this in their head are the ones who are writing to me who've been successful. The house is with you when you're investing. Over time, equities, they make more money than inflation. The United States has been particularly successful. But you look at other countries, that's true. As long as the countries have relatively healthy economies and they don't have complete political disaster and so forth. Equities make money than inflation over time, meaning you're making money in real terms over time. So the longer you're in and the more money you have, likelier, the better off that you'll be. And it's just, it's tried, but it's true. And people still get distracted. You know, I can see, you know, bitcoin has done so well and people attempted to buy bitcoin instead and maybe they'll do better than with stocks, but bitcoin has no, there's no underlying economic, there's no cash associated with it or not just bitcoin, any crypto, they're never going to pay you cash. The Only time you get a value out of that is if someone pays you more. Well, with stocks, it's different. I mean, if you look at Morningstar, when I started at the company, while our free cash flow was zero because Joe was running at break even but doing a million in sales. And when the company went public, I think I don't know what it was. Maybe we're doing five, pretty much still break even, but maybe five million. And in free cash flow. Now the company's $600 million in annual free cash flow. I mean, that's not a Mirage, right? That's $600 million or so that it's just throwing off. And it's just an example. That's just the one that's close to home. And I suppose I should put in my compliance thing. I'm not selling Morningstar stock or anything like that. You can add that or Berkshire Hathaway or just all these companies that. These are real businesses and they grow their businesses. And if the managers were to choose to just distribute these monies as dividends, you could have a big fat yield. And there's fundamental reality to this. And that's, again, what I've tried to convey to people. Stocks are not gambling in the long term. I mean, there's no sure thing, but it's a sensible risk that you're taking with a high likelihood of a payoff. It's not just hoping you get lucky, it's really just hoping you don't get unlucky, because the normal treatment is you're going to do well. Now, that said, our CEO, Kunal today was talking about looking into 2025, that the stock market has been feeling a little rich and giddy, and I do think it's a little giddy. So I felt a little bit when I was writing that farewell for now call and being optimistic, my timing might be slightly off in the short term. I'm a little nervous about what's happening. You can all use the term animal spirits out there. There's a lot of happiness going on in the market. It's a risk on kind of mindset. But that doesn't change the validity of my message. I believe over the longer term. But if you lose money in 2025, Don, I warned you right now that might happen.

[Dan Lefkovitz]

So you're moving to cash, one of those market timing managers?

[John Recentaler]

No, no, no. But there are times on the margins of my portfolio where I have a little more cash, a little less, and this is a little more time. Just on the margins, though, nobody can resist the Temptation, at least I can't. But I certainly can resist the temptation to do anything more than a couple of percent of the portfolio.

[Christine Benz]

I'm curious, John, we've worked on some retirement income research together. Are you planning to apply any of that to your own plan in retirement?

[John Recentaler]

I think about it, our paper, we tend to come up with, I mean, last year we said 4% is a safe withdrawal, Right? Is it safe withdrawal? Right. And there are various assumptions that are in there. A 30 year time horizon and it's an inflexible spending pattern. So you can improve that, as our paper shows, in various ways, by being more flexible and so forth. But I tend to think of that 4% number which we arrived at through calculations. It wasn't just a rule. It happens to match up with the old rule of thumb as something to try to stay under. And I'm definitely under that in terms of my spending pattern. So, yes, I'm not using every lesson of the paper because it doesn't apply. It depends on personal circumstances and so forth. Now, in my case, since I'm quite a bit under the 4%, if you look through our paper, it will show that's the highest number you should take out if you want to be able to have a high success rate or so forth. But if you're taking out a lower percentage, as I am, it's under 3%, you can afford to own more equities than the portfolio that our paper tends to recommend. You can take on more risk in your portfolio because you're taking less money out during the downturns. It does tie in with my strategy because I'm pretty equity heavy for somebody in my position, but I can afford to do so given my spending rates.

[Dan Lefkovitz]

Maybe we've got time for one more. I think for both Christina and me, you've always been a must read. Who are must reads for you? Who are the investment writers or writers outside of investing that you, you tend to come back to?

[John Recentaler]

Ah, that is a good question. Well, I think most of us in the industry tend to read Matt Levine from Bloomberg. He's sort of an insider thing. James Macintosh from the Wall Street Journal and Greg IP write great kind of more economic columns and so forth. Of course, I'd be remiss in not mentioning every writer at Morningstar as well. So those will be the investment.

[Christine Benz]

Jason Zweig, probably.

[John Recentaler]

Jason Zweig, of course. Yeah, good mention. Sorry, Jason. Bill Bernstein, the blogger and also book writer, mutual friend of ours. So there are a lot of sources out there, but those are some that pop to mind. And since I will return to my roots and say, don't forget Mr. Shakespeare. He won't teach you much about investing, but he can withstand many rereadings and I still do.

[Christine Benz]

Well John, this is not goodbye. We will be hearing from you and in touch with you. But thank you so much for taking time out of your early retirement to sit down with Dan and me today.

[John Recentaler]

Well, thank you guys for doing all the work and preparing the questions I just had to sit here and answer.

[Dan Lefkovitz]

Thanks John. Farewell for now.

[John Recentaler]

Thank you.

[Christine Benz]

Thank you for joining us on the Longview. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts, you can follow me on social media, hristinebenz on X oristinebenz on.

[Dan Lefkovitz]

LinkedIn and Dan Lefkovitz on LinkedIn.

[Christine Benz]

George Cassidy is our engineer for the podcast and Cary Gretchik produces the show Notes each week by finally, we'd love to get your feedback. If you have a comment or a guest idea, please email [e-mail] until next time. Thanks for joining us.

[Jackson Financial]

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