1 00:00:06,000 --> 00:00:08,039 Speaker 1: Welcome to Fearing Greed Q and A where we ask 2 00:00:08,080 --> 00:00:11,720 Speaker 1: and answer questions about business, investing, economics, politics and more. 3 00:00:11,800 --> 00:00:15,040 Speaker 1: I'm Sean Aylmer today a very special guest. David Booth 4 00:00:15,320 --> 00:00:18,079 Speaker 1: helped create one of the world's first index funds in 5 00:00:18,079 --> 00:00:21,840 Speaker 1: the nineteen seventies before launching Dimensional Fund Advisors in the 6 00:00:21,920 --> 00:00:25,919 Speaker 1: early eighties. Since then, Dimensional has become a global giant 7 00:00:26,200 --> 00:00:30,440 Speaker 1: about one point four trillion dollars under management. That's oussie 8 00:00:30,440 --> 00:00:33,920 Speaker 1: dollars nine hundred and fifteen billion US dollars, including on 9 00:00:34,000 --> 00:00:36,760 Speaker 1: behalf of a couple of Australia's big super funds. Last week, 10 00:00:36,760 --> 00:00:40,440 Speaker 1: a film telling David's story launched here in Australia. Tune 11 00:00:40,440 --> 00:00:43,320 Speaker 1: Out the Noise is a documentary by Academy Award winning 12 00:00:43,400 --> 00:00:46,400 Speaker 1: director Errol Morris. It's available now on YouTube, already been 13 00:00:46,440 --> 00:00:48,640 Speaker 1: viewed more than twenty seven million times, not bad in 14 00:00:48,680 --> 00:00:51,000 Speaker 1: the first week or two. It's an incredible story about 15 00:00:51,080 --> 00:00:54,760 Speaker 1: David's remarkable career, but also about the rise of index investing, 16 00:00:55,000 --> 00:00:58,000 Speaker 1: which has now become central to so many investment strategies. 17 00:00:58,080 --> 00:01:01,800 Speaker 1: David Booth is he founder and chair of Dimensional Fund Advisor, 18 00:01:02,080 --> 00:01:04,880 Speaker 1: and he joins me this morning from Austin, Texas stated, 19 00:01:04,920 --> 00:01:05,800 Speaker 1: welcome to fear and greed. 20 00:01:06,120 --> 00:01:06,960 Speaker 2: Thanks for having me. 21 00:01:07,319 --> 00:01:10,800 Speaker 1: What were those early days like in index investing? Like, 22 00:01:10,920 --> 00:01:12,520 Speaker 1: how did you come up with the idea? 23 00:01:13,520 --> 00:01:17,639 Speaker 2: Well, I mean it traces back to the first major 24 00:01:18,200 --> 00:01:23,720 Speaker 2: review of the performance of professionally managed portfolios by Michael 25 00:01:23,840 --> 00:01:27,680 Speaker 2: Jensen in the mid sixties. And they've been doing these 26 00:01:27,720 --> 00:01:31,440 Speaker 2: studies now for you know, sixty years, and they always 27 00:01:31,680 --> 00:01:34,959 Speaker 2: show the same thing that professional money managers trying now 28 00:01:35,040 --> 00:01:39,680 Speaker 2: guess the market. They're not worth the cost, they don't 29 00:01:39,720 --> 00:01:43,959 Speaker 2: add any value. In fact, after Fezer considered, they subtract value. 30 00:01:44,280 --> 00:01:46,920 Speaker 2: And that was quite a shock. You know, before nineteen 31 00:01:47,000 --> 00:01:51,920 Speaker 2: sixty people, academic researchers, they didn't have the data, They 32 00:01:51,920 --> 00:01:57,600 Speaker 2: couldn't analyze the performance of professional money managers and all 33 00:01:57,720 --> 00:02:02,720 Speaker 2: the claims that the sales witches they were used. So 34 00:02:02,920 --> 00:02:06,320 Speaker 2: for the first time they could really examine real, live 35 00:02:06,800 --> 00:02:11,280 Speaker 2: data and the results were well disappointing, I guess you 36 00:02:11,320 --> 00:02:13,640 Speaker 2: would say. Yes. So people said, well, guys, should you 37 00:02:14,120 --> 00:02:16,720 Speaker 2: if I can't my I can't beat the market, what 38 00:02:16,760 --> 00:02:18,960 Speaker 2: am I supposed to do? They said, well, you know, 39 00:02:19,080 --> 00:02:22,959 Speaker 2: you can buy the market. And that was one way 40 00:02:22,960 --> 00:02:26,880 Speaker 2: of buying the market is an index fun which was 41 00:02:26,960 --> 00:02:29,080 Speaker 2: it was slow going at first, but eventually it really 42 00:02:29,080 --> 00:02:32,399 Speaker 2: took off. And that's really you know, kind of the 43 00:02:32,600 --> 00:02:36,639 Speaker 2: underpinnings of the two largest money managers and the world, 44 00:02:37,240 --> 00:02:39,600 Speaker 2: Vanguard and black Rock black Rock. 45 00:02:39,680 --> 00:02:42,040 Speaker 1: Yeah, what I find interesting. I mean, some of that 46 00:02:42,080 --> 00:02:44,840 Speaker 1: early work showed that over the long term returns and 47 00:02:44,880 --> 00:02:47,000 Speaker 1: the s P five hundred was not that far off 48 00:02:47,000 --> 00:02:51,200 Speaker 1: ten percent, right, which must have astounded people, and a 49 00:02:51,240 --> 00:02:55,200 Speaker 1: couple of questions he has that continued through to today 50 00:02:56,440 --> 00:03:01,280 Speaker 1: and people are passively in active passive bok about there 51 00:03:02,120 --> 00:03:04,040 Speaker 1: and just explain how that works. 52 00:03:04,639 --> 00:03:07,560 Speaker 2: Okay, Well, yeah, in fact, the results have even been 53 00:03:07,600 --> 00:03:10,600 Speaker 2: better the last fifty years, which is if you've ever 54 00:03:10,680 --> 00:03:17,040 Speaker 2: studied economic history, the idea of some research finding in 55 00:03:17,120 --> 00:03:20,560 Speaker 2: one data set ever repeating itself in the next data 56 00:03:20,600 --> 00:03:24,520 Speaker 2: set is very rare, and so it's really you know, 57 00:03:24,560 --> 00:03:26,639 Speaker 2: I think it's been more like eleven percent since the 58 00:03:26,680 --> 00:03:32,360 Speaker 2: first index was created. So that of course explains a 59 00:03:32,400 --> 00:03:36,160 Speaker 2: lot of the excitement about indexing. If you get a say, 60 00:03:36,160 --> 00:03:39,920 Speaker 2: a ten percent return, your money doubles about every seven years, 61 00:03:40,680 --> 00:03:43,600 Speaker 2: and if you let's say, have a forty two year 62 00:03:43,680 --> 00:03:49,080 Speaker 2: horizon that's six seven year periods, so you know a 63 00:03:49,160 --> 00:03:52,720 Speaker 2: dollar would grow to sixty four dollars. So if you're 64 00:03:52,760 --> 00:03:56,040 Speaker 2: truly a long term horizon, you know, the magic of 65 00:03:56,120 --> 00:03:59,240 Speaker 2: compounding is the real deal. I mean, it is the 66 00:03:59,320 --> 00:04:02,480 Speaker 2: way to provide for retirement or whatever. 67 00:04:02,880 --> 00:04:05,960 Speaker 1: But it's all passive investing the sign No it's not. 68 00:04:06,040 --> 00:04:10,920 Speaker 2: I mean, it's a strict index fund has basically a 69 00:04:11,000 --> 00:04:14,440 Speaker 2: lot of decision making taken away from from the manager. 70 00:04:14,920 --> 00:04:17,800 Speaker 2: You know, it relies on somebody else to create an 71 00:04:17,880 --> 00:04:21,800 Speaker 2: index and standard and pors. For example, it's a committee 72 00:04:21,800 --> 00:04:25,080 Speaker 2: and they sit around inside which stocks they want to 73 00:04:25,120 --> 00:04:28,400 Speaker 2: pick for the index and so forth. So it's a 74 00:04:28,440 --> 00:04:32,919 Speaker 2: form of stock picking. There's not much turnover fortunately. But 75 00:04:33,200 --> 00:04:37,240 Speaker 2: the big problem is when a new stock comes into 76 00:04:37,279 --> 00:04:40,919 Speaker 2: an index, an index fund manager, if it wants to 77 00:04:40,960 --> 00:04:45,960 Speaker 2: track perfectly, has to buy that stock that day. At 78 00:04:45,960 --> 00:04:50,719 Speaker 2: the same time, everybody else that's managing an SMP index 79 00:04:50,800 --> 00:04:54,880 Speaker 2: fund wants to buy the same stock. So when we 80 00:04:54,880 --> 00:04:57,520 Speaker 2: were found, we go, hey, we know where we don't 81 00:04:57,520 --> 00:05:02,279 Speaker 2: think that's particularly clever. Maybe if we developed some skills 82 00:05:02,320 --> 00:05:05,520 Speaker 2: and trading and paying attention to what you might think 83 00:05:05,520 --> 00:05:08,320 Speaker 2: of as market mechanisms. There are ways of adding a 84 00:05:08,320 --> 00:05:11,640 Speaker 2: little bit of value here and there, And that's what 85 00:05:11,720 --> 00:05:16,400 Speaker 2: we did, and over time, these small increments out up 86 00:05:16,440 --> 00:05:20,480 Speaker 2: when you take the magic of compounding over decades. 87 00:05:21,600 --> 00:05:24,799 Speaker 1: One of the things I found interesting was the sixties 88 00:05:24,800 --> 00:05:27,120 Speaker 1: and seventies where a lot of your work began. David. 89 00:05:27,760 --> 00:05:29,760 Speaker 1: It was a time of computing. It was kind of 90 00:05:29,800 --> 00:05:33,480 Speaker 1: the computer revolution for one of a better phrase, and 91 00:05:34,200 --> 00:05:35,599 Speaker 1: you and I'll come to the film in a moment, 92 00:05:35,680 --> 00:05:38,560 Speaker 1: the individuals in the film. But I wonder now with AI, 93 00:05:39,440 --> 00:05:42,440 Speaker 1: whether the same rules are going to apply. Is there 94 00:05:42,480 --> 00:05:45,880 Speaker 1: a paradigm shift around about now at some point around 95 00:05:45,880 --> 00:05:48,840 Speaker 1: about now, just like there was in the sixties and seventies. 96 00:05:49,080 --> 00:05:50,200 Speaker 1: Do you think or not? 97 00:05:50,320 --> 00:05:54,280 Speaker 2: Well, it's similar in a way. Let let me just review. Basically, 98 00:05:54,320 --> 00:05:56,640 Speaker 2: what the evidence showed is that the market does a 99 00:05:56,640 --> 00:06:00,240 Speaker 2: pretty good job of setting prices. In fact, it does 100 00:06:00,279 --> 00:06:03,000 Speaker 2: such a good job that professional money managers trying to 101 00:06:03,000 --> 00:06:07,080 Speaker 2: outguess the market end up doing worse after fees are considered. 102 00:06:07,600 --> 00:06:10,360 Speaker 2: So the market, you know, can e or take a 103 00:06:10,400 --> 00:06:16,080 Speaker 2: bit the best assumptions reflects all available information. That's the 104 00:06:16,120 --> 00:06:20,360 Speaker 2: efficient market hypothesis of Gene Farmer, and that which won 105 00:06:20,440 --> 00:06:25,960 Speaker 2: him his Nobel Prize in twenty thirteen. So with AI, 106 00:06:26,279 --> 00:06:29,960 Speaker 2: which presumably even has access to more databases, the market, 107 00:06:30,160 --> 00:06:33,760 Speaker 2: in my view, will become even even more difficult to beat. 108 00:06:34,480 --> 00:06:37,479 Speaker 2: The prices will even be better and better all the 109 00:06:37,520 --> 00:06:39,960 Speaker 2: time using more and more information. 110 00:06:41,480 --> 00:06:43,919 Speaker 1: Far bait for me to question anything you've done, David. 111 00:06:43,960 --> 00:06:46,920 Speaker 1: But the part of the efficient market hypothesis which I 112 00:06:46,960 --> 00:06:52,400 Speaker 1: sometimes struggle with myself is non financial risk. So I 113 00:06:52,520 --> 00:06:57,320 Speaker 1: get that efficient markets price everything more or less correctly 114 00:06:57,400 --> 00:06:59,840 Speaker 1: in the long term, but sometimes I do struggle with 115 00:06:59,880 --> 00:07:02,440 Speaker 1: no financial risk, of which there's been a lot in Australia, 116 00:07:02,480 --> 00:07:05,640 Speaker 1: a lot of governmance issues over recent times, which can 117 00:07:05,680 --> 00:07:07,760 Speaker 1: totally hurt your holding in a stock. 118 00:07:08,839 --> 00:07:13,280 Speaker 2: Well. I mean, you know, the government's government actions can 119 00:07:13,720 --> 00:07:18,680 Speaker 2: cause distortions in the market. Yeah, Unfortunately, those distortions sort 120 00:07:18,680 --> 00:07:21,560 Speaker 2: of predict when they're going to occur to extent they're predictable. 121 00:07:21,880 --> 00:07:23,880 Speaker 2: You know, you would think that the prey would be 122 00:07:24,520 --> 00:07:29,880 Speaker 2: big tender the prices fairly quickly. But I think that 123 00:07:29,920 --> 00:07:32,400 Speaker 2: the problem is that, you know, government, the effects of 124 00:07:32,480 --> 00:07:37,559 Speaker 2: government actions are kind of unpredictable. But that just makes 125 00:07:37,880 --> 00:07:41,480 Speaker 2: stock prices more unpredictable, which so that's that's a that's 126 00:07:41,480 --> 00:07:42,640 Speaker 2: a when for my sign reason. 127 00:07:42,720 --> 00:07:46,880 Speaker 1: Yeah yeah, yeah, yeah. Look, the film is fantastic, as 128 00:07:46,880 --> 00:07:49,680 Speaker 1: I mentioned, and don't take this the wrong way, but 129 00:07:49,920 --> 00:07:52,720 Speaker 1: what I found remarkable is the four or five main 130 00:07:52,840 --> 00:07:56,640 Speaker 1: characters in it, including yourself, are really ordinary people. I mean, 131 00:07:56,640 --> 00:08:00,800 Speaker 1: you're a shoe salesman, who you know, since the masters 132 00:08:00,800 --> 00:08:03,880 Speaker 1: of the Finance universe are all very ordinary, and that's 133 00:08:03,880 --> 00:08:04,880 Speaker 1: almost reassuring. 134 00:08:05,560 --> 00:08:09,200 Speaker 2: Well, no, I think you're right. In fact, one of 135 00:08:08,000 --> 00:08:14,360 Speaker 2: the things I'm really happy about is that for years 136 00:08:14,400 --> 00:08:17,600 Speaker 2: I've tried to describe how exciting it was to be 137 00:08:17,640 --> 00:08:20,840 Speaker 2: at the University of Chicago and in the late sixties 138 00:08:20,880 --> 00:08:23,840 Speaker 2: and early seventies and all these people that none of 139 00:08:23,920 --> 00:08:27,960 Speaker 2: them have gotten Nobel Prizes at the time, and subsequently, 140 00:08:28,560 --> 00:08:31,360 Speaker 2: you know, the University of Chicago's going to dominate it 141 00:08:32,920 --> 00:08:37,400 Speaker 2: Nobel Prize in economics. So these ideas were so exciting 142 00:08:37,559 --> 00:08:42,160 Speaker 2: you knew it just had to be true. And now 143 00:08:42,200 --> 00:08:46,120 Speaker 2: we have, let's say, fifty years later, fifty five, we've 144 00:08:46,120 --> 00:08:49,960 Speaker 2: had all this experience. So these ideas have lasted because 145 00:08:49,960 --> 00:08:55,559 Speaker 2: they've worked. I mean, it's here again in the field 146 00:08:55,559 --> 00:08:59,280 Speaker 2: of economics that happened so rarely that you identify something 147 00:08:59,280 --> 00:09:02,319 Speaker 2: as likely to be true and then it turns out 148 00:09:02,360 --> 00:09:05,280 Speaker 2: to show up in the next data set. Remarkable. 149 00:09:05,400 --> 00:09:08,640 Speaker 1: Yeah, what are you most proud of? And for those 150 00:09:08,640 --> 00:09:11,760 Speaker 1: listeners who don't know, Dive's name adorns the University of 151 00:09:11,800 --> 00:09:15,199 Speaker 1: Chicago Business School, I'm guessing that's not your proudest moment. 152 00:09:15,240 --> 00:09:18,120 Speaker 1: But what's your legacy? What is it that you think 153 00:09:18,160 --> 00:09:20,319 Speaker 1: that you've done. That's the difference. 154 00:09:21,280 --> 00:09:27,400 Speaker 2: Well, actually it's not just me by myself, but what 155 00:09:27,480 --> 00:09:29,320 Speaker 2: I'm really proud of has been part of that movement 156 00:09:29,360 --> 00:09:34,800 Speaker 2: over time to give better or much better investment experience, 157 00:09:35,200 --> 00:09:39,720 Speaker 2: a democratization of investing. You know, fees have come way 158 00:09:39,840 --> 00:09:42,160 Speaker 2: down from where they were when I got in the 159 00:09:42,240 --> 00:09:48,000 Speaker 2: business in nineteen seventy one, and portfolios are much better diversified, 160 00:09:48,320 --> 00:09:53,120 Speaker 2: so people there's no reason for people to pay outrageous 161 00:09:53,160 --> 00:09:58,240 Speaker 2: fees for subpar performance. And that's so I'm proud to 162 00:09:58,280 --> 00:09:59,960 Speaker 2: be part of that of that movement. 163 00:10:00,480 --> 00:10:01,760 Speaker 1: I was going to wind up, but I can't not 164 00:10:01,800 --> 00:10:03,960 Speaker 1: actually just mention Morrean Buffett, and he could be talking 165 00:10:03,960 --> 00:10:05,680 Speaker 1: a lot about him at the moment. He's about to 166 00:10:05,840 --> 00:10:09,040 Speaker 1: retire from Berkshire Hathaway. Is he an exception to the 167 00:10:09,120 --> 00:10:11,360 Speaker 1: rule because he's a top picker. He has made it 168 00:10:11,480 --> 00:10:16,720 Speaker 1: living out of picking equities. But that's against what you're saying. 169 00:10:17,200 --> 00:10:20,160 Speaker 2: Well, and it could be he could be the exception, 170 00:10:20,840 --> 00:10:24,080 Speaker 2: you know. You see the problem is if you have 171 00:10:24,200 --> 00:10:26,480 Speaker 2: all the thousands of money managers that are out there, 172 00:10:26,960 --> 00:10:29,480 Speaker 2: you know, just by sheer luck, a few of them 173 00:10:29,520 --> 00:10:33,640 Speaker 2: are going to have exceptional one returns. It turns out 174 00:10:34,000 --> 00:10:36,959 Speaker 2: the number that have exceptional returns are fewer than you 175 00:10:37,120 --> 00:10:40,880 Speaker 2: would expect by chance. So we can't tell you that 176 00:10:40,960 --> 00:10:44,920 Speaker 2: somebody had great performance. You know, we can't say it 177 00:10:44,960 --> 00:10:49,080 Speaker 2: wasn't skill. I can't say it wasn't luck either, So 178 00:10:49,600 --> 00:10:53,640 Speaker 2: that's a difficulty. I'm happy to give Warren his due 179 00:10:53,640 --> 00:10:55,480 Speaker 2: and say, Okay, maybe he may have been the exception, 180 00:10:56,120 --> 00:11:00,000 Speaker 2: and there may be others, you know, efficient market hypothesis. 181 00:11:00,200 --> 00:11:03,160 Speaker 2: It's just you didn't think of it as being a model, 182 00:11:03,559 --> 00:11:07,080 Speaker 2: and like all models, it doesn't explain everything. But I 183 00:11:07,120 --> 00:11:12,480 Speaker 2: do think for the average person, if there's no evidence 184 00:11:12,520 --> 00:11:14,559 Speaker 2: the pros can beat the market, why do you think 185 00:11:14,600 --> 00:11:15,560 Speaker 2: you can beat the market? 186 00:11:16,080 --> 00:11:18,240 Speaker 1: Yeah, totally agree, David. Thank you very much for talking 187 00:11:18,280 --> 00:11:20,400 Speaker 1: to Fear and Greed Q and a well good I 188 00:11:20,520 --> 00:11:22,920 Speaker 1: enjoy it. That was David Booth, founder and Chairman of 189 00:11:23,000 --> 00:11:26,600 Speaker 1: Dimensional Fund Advisor, and the film is called Tune Out 190 00:11:26,640 --> 00:11:29,120 Speaker 1: the Noise. Tune Out the Noise. It is well worth 191 00:11:29,240 --> 00:11:31,880 Speaker 1: a watch you and get it on YouTube. I'm Seanoma 192 00:11:31,960 --> 00:11:33,640 Speaker 1: and this is Fearing Greed Q and a