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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in

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Speaker 1: Business with Barry Ritholts on Bloomberg Radio.

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Speaker 2: This week on the podcast, I have an extra special

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Speaker 2: guest returning for the first time in a few years,

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Speaker 2: John Montgomery. He is the founder of Bridgeway Capital, established

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Speaker 2: in nineteen ninety three, and the firm is really a

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Speaker 2: very interesting mix of quantitative, value based and factor based investing.

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Speaker 2: It's really none and all of the above. It's a

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Speaker 2: little more nuanced and sophisticated than that. The firm first

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Speaker 2: came to my attention because I was kind of intrigued

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Speaker 2: by the idea of donating half their profits to charity.

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Speaker 2: That's unusual in the world of finance. In addition, they've

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Speaker 2: put up some really impressed of numbers over the past

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Speaker 2: thirty years, which has given them the opportunity to donate

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Speaker 2: tens of millions of dollars to their favorite organizations. I

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Speaker 2: thought this conversation was fascinating and I think you will

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Speaker 2: also with no further ado Ridgeway Capitals.

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Speaker 3: John Montgomery, Thanks Berry, it's great to be here.

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Speaker 2: It's great to see you. Let's for people who may

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Speaker 2: not be familiar with the firm, and your background. Let's

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Speaker 2: start with how your interesting and unusual career BS and engineering,

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Speaker 2: BA in philosophy from Swarthmore. Then you get a graduate

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Speaker 2: degree from MIT and you go to Harvard Business School.

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Speaker 2: What was the career plan?

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Speaker 3: Their career plan originally was urban development and transportation, So

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Speaker 3: that was my first career, was working with various bus

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Speaker 3: and transportation companies to improve the quality of life in

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Speaker 3: the cities. People ask how does that relate to investing,

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Speaker 3: and I say, well, they're both service industries. They're both

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Speaker 3: people intensive, and those are the elements that I love.

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Speaker 2: And I got to imagine there's a ton of data

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Speaker 2: analytics and optimization thinking that goes into both.

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Speaker 3: That's true. I like the intersection of people and analysis,

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Speaker 3: and both industries give a lot of opportunity that I

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Speaker 3: love serving people. They're both service industries, so I'm a

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Speaker 3: happy camper.

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Speaker 2: That makes a lot of sense. You were pretty early

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Speaker 2: to computer modeling and statistical methods as a research engineer

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Speaker 2: at MCT. This is the late nineteen seventies. That sort

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Speaker 2: of data analytics wasn't really well understood back then. How

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Speaker 2: did that background help when it comes to modeling portfolios

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Speaker 2: or applying those methods of statistical analysis to invest in.

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Speaker 3: Well, the statistical side definitely comes from my degree and

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Speaker 3: then work as a project manager at MIT, So you're right,

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Speaker 3: late seventies till nineteen eighty. The investment piece of that

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Speaker 3: didn't come tell business school about three four years later,

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Speaker 3: And that was kind of you could say, by chance

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Speaker 3: or on a lark. I thought, well, you know, there's

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Speaker 3: an opportunity cost of stepping out of your career where

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Speaker 3: you have a paycheck to go back to business school

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Speaker 3: full time, which I did, and thought, while I'm here,

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Speaker 3: I'll take a few investing courses and see if I

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Speaker 3: can use those to earn back the opportunity cost of

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Speaker 3: going to business school for two years.

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Speaker 2: So from transportation to finance. That sounds almost but not

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Speaker 2: quite purposeful. Is that Is that a fair description?

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Speaker 3: I think that's a very accurate description. So, and actually

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Speaker 3: didn't leave the transportation field immediately after business school. I

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Speaker 3: was in an investing course and we're doing a case study.

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Speaker 3: Professor ends the class and asks the question, who here

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Speaker 3: thinks that they'll be able to outperform post leaving Harvard

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Speaker 3: Business School this track record? And eighty percent of the

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Speaker 3: hands go up in the room. I'm not one of them,

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Speaker 3: by the way.

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Speaker 2: So the whole class from Lake wobegone everybody's average.

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Speaker 3: Yes, yes, exactly, I mean, and I immediately got the

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Speaker 3: eighty twenty rules. Wait a minute, this can't be And

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Speaker 3: if this is a microcosm and the methods that we

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Speaker 3: were using to think about the markets and valuation in

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Speaker 3: net present value kind of cfa classic kind of analysis.

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Speaker 3: If this is a microcosm of Wall Street in five years,

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Speaker 3: which probably it is, then quantitative methods should give you

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Speaker 3: a leg up on the competition for a lot lower costs.

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Speaker 2: So you've previously discussed the epiphany you had at Harvard

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Speaker 2: Business School. Is that the epiphany or was it something.

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Speaker 3: Else that was a major piece of it. I would

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Speaker 3: say the primary insights were behavioral finance ones we would

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Speaker 3: call like I didn't. I'd never heard the word behavioral

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Speaker 3: finance at the time.

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Speaker 2: At that as a phrase didn't exist for another twenty

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Speaker 2: five years.

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Speaker 3: Probably not you know, you see you watch. I've once

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Speaker 3: had a boss who said, this guy has enough sheep

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Speaker 3: skins to skin a sheep. But if I ever did

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Speaker 3: go back to school, the next degree I would love

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Speaker 3: to have is in psychology, because I really there's so

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Speaker 3: much there, and especially the intersection of psychology and money.

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Speaker 2: When do you finish up at HBS. What year was that?

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Speaker 3: Nineteen eighty five?

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Speaker 2: All right, so what do you do between that and

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Speaker 2: nineteen ninety three when you launch Bridgeway?

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Speaker 3: So the first thing I did was investing as a hobby.

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Speaker 3: So that was my advocation for the next six years,

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Speaker 3: and my personal track record in investing was about twice

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Speaker 3: the market for those periods, right in a good period.

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Speaker 2: Scalable or kind of one off, little aberrational.

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Speaker 3: No fine, reasonably scalable, reasonably scalable, I would say enough

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Speaker 3: that after six years, I had the thought of making

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Speaker 3: my avocation my next career and did something that was

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Speaker 3: modeled to me by the mayor of Houston, my hometown

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Speaker 3: at the time, and that is to take a year

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Speaker 3: off between careers. He'd actually had four careers in his

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Speaker 3: life in different fields, and every time he switched, he

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Speaker 3: took a year off just to study the heck out

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Speaker 3: of the next step. So that's when I really studied

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Speaker 3: deeply the research why what I'd been doing was working

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Speaker 3: more about when it might not and riding a business

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Speaker 3: plan for Bridgeway.

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Speaker 2: That's pretty fascinating. I took a year off between college

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Speaker 2: and grad school, but I had no idea I was

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Speaker 2: actually doing what you advocate, or with the Mayor of

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Speaker 2: Houston advocates. I just was kind of lost and not

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Speaker 2: sure what to do next, and spent a year thinking

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Speaker 2: about it before pulling the trigger on law school. But

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Speaker 2: your hometown is Houston. The firm is still locating in

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Speaker 2: Yuston right since nineteen ninety three, that's when you launched.

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Speaker 2: Where you launched. From the very beginning, you said something

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Speaker 2: kind of unusual about the firm. We want to donate

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Speaker 2: half of our profits to nonprofit organizations. Tell us where

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Speaker 2: that idea came from. It's fairly unusual either in finance,

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Speaker 2: and I've been to Houston. That's a kind of unusual

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Speaker 2: idea in Houston as well.

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Speaker 3: That's true. If I gather around, you know, just random

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Speaker 3: business people in Houston and say that we donate half

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Speaker 3: our profits, I have to say I get some very

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Speaker 3: puzzled looks around the room. Not so much from other

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Speaker 3: purpose driven people in different fields, though, But yes, it's different.

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Speaker 3: Where did that come from? You know, we think things

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Speaker 3: come from one place, but usually there are a lot

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Speaker 3: of forces at Bay. So I would look back to

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Speaker 3: my father, who was a businessman and CEO of an

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Speaker 3: oil exploration firm, and believe that business was a way

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Speaker 3: to change the world and engage. My mother was what

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Speaker 3: I would think of as almost a professional volunteer, so

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Speaker 3: giving back to the community. And this was in a

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Speaker 3: time when the War on Poverty, you know, was the

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Speaker 3: slogan at the time. So I was hugely influenced by

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Speaker 3: both of my parents. But I would say also a

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Speaker 3: conversation with my wife on the very first conversation of

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Speaker 3: starting Bridgeway, and it went something like this, let me

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Speaker 3: get this straight, John, You're thinking of leaving the transportation

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Speaker 3: industry where you have a lot of experience and a

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Speaker 3: w two to start a company in an industry you've

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Speaker 3: never worked with, no initial guarantees, no guarantees on the

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Speaker 3: money side. And I said, yes, we talked that through.

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Speaker 3: I have to say, I'm married to an extraordinary woman.

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Speaker 3: I didn't realize at that age of thirty seven how

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Speaker 3: extraordinary she was. But she believes in supporting people who

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Speaker 3: have a dream and she did that for me in

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Speaker 3: for Bridgeway, So she was all in. She had two questions.

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Speaker 2: Yeah.

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Speaker 3: Question one, can we still send our daughters to college?

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Speaker 3: That was like, I should have paid more attention to

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Speaker 3: that question because my budget, my business plan was fifty

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Speaker 3: percent of our net worth. Before it was all said

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Speaker 3: and done, it was one hundred and fifty percent of

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Speaker 3: our net worth. Right, so it took three years to

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Speaker 3: break even when my business plan had it at one.

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Speaker 3: The second question was do I have to go to

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Speaker 3: cocktail parties? Why would she not her cup of tea?

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Speaker 2: No? But I mean, why would she imagine? Launching of

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Speaker 2: funds is going to require your spat Just like.

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Speaker 3: She grew up in Washington, DC around academicians and government people,

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Speaker 3: and her view of business was you have to go

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Speaker 3: to cocktail parties and schmooz with people. Right, that makes sense,

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Speaker 3: And having taken a course of negotiation at Harvard Business School,

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Speaker 3: I immediately recognized the opportunity and said, dear not if

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Speaker 3: you don't want to. So she only comes when she

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Speaker 3: when she desires to come wherever I am. But she's

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Speaker 3: an amazing soulmate and supporter of everything Bridgeway.

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Speaker 2: That's fantastic. So you've been donating half your profits to

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Speaker 2: these different organizations over thirty years? Is that right?

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Speaker 3: Thirty one years?

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Speaker 2: So how much have you guys donated? What are the

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Speaker 2: organizations you support? What's been the response in the community

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Speaker 2: over the decades.

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Speaker 3: We don't give exact numbers. We're privately held firms. Since

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Speaker 3: we donate half, we don't report our profits specifically either,

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Speaker 3: but I'll just say it's tens of millions. Okay, over

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Speaker 3: you know what substantial amount of substantial amount of capital.

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Speaker 3: The bullseye of our giving is our own affiliated Bridgeway Foundation.

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Speaker 3: This is an extraordinary organization led by a powerhouse of

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Speaker 3: a woman, Shannon Davis. Our mission statement focuses on ending

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Speaker 3: genocide and prevent any war atrocities, of which there are

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Speaker 3: too many opportunities in the world today. So that's the

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Speaker 3: crosshairs of our Let me.

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Speaker 2: Interrupt you right here. So, so I know you have

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Speaker 2: very quantitative leanings. How do you measure how successful you

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Speaker 2: are in stopping genocides? Just generally speaking, it's hard to

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Speaker 2: measure something that doesn't happen, so you're always engaging in

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Speaker 2: counter factuals. But how do you know if you've moved

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Speaker 2: the needle?

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Speaker 3: It's probably no easier, no more difficult than things that

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Speaker 3: we do on the investment side and in the stock market,

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Speaker 3: there's time series analysis. We actually hired an outside firm

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Speaker 3: to come in and review the record of what we

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Speaker 3: had done in our first engagement with an organization called

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Speaker 3: the Lord's Resistance Army. And if you want more details,

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Speaker 3: there's a book called to Stop a Warlord that Shannon

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Speaker 3: Davis wrote. I never thought we'd be able to tell

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Speaker 3: the story at that level because you don't want to

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Speaker 3: put at risk the people that are on the ground

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Speaker 3: doing the real work. However, she found a way to

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Speaker 3: do that and protect them, and so there's a book

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Speaker 3: that goes into a lot of detail on that. But

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Speaker 3: people think there's not a way to measure there is,

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Speaker 3: and you're right, being a quantitative statistical guy, you can

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Speaker 3: bet that that comes up on the table frequently.

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Speaker 2: Huh. Really really fascinating. What's been the response from the community.

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Speaker 3: The smallest in community is the Bridgeway community. So that's

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Speaker 3: the twenty eight people at Bridgeway we call partners. Right

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Speaker 3: they sign on for this work because it's in the

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Speaker 3: mission statement. You don't not know about it coming in

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Speaker 3: and you don't come if this isn't from day one

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Speaker 3: and that's that's everything. The community of Houston, I would

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Speaker 3: say less so, but it's kind of it's specific to individuals.

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Speaker 3: So every once in a while you get somebody's like unbelievable,

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Speaker 3: that's amazing and cannot come huh that level. We have

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Speaker 3: partnered with other organizations, one of those being Howard Buffett,

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Speaker 3: Warren Buffett's son that does substantial philanthropic work.

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Speaker 2: Is he in Texas?

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Speaker 3: No, No, he's in Nebraska, But we have partnered with

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Speaker 3: him and work in the Ukraine. Worked in the first

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Speaker 3: year of getting generators in for obvious reasons and getting

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Speaker 3: the grain out for obvious reasons. I tell people at Bridgeway,

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Speaker 3: we don't know squat about farming, but Howard Buffett does.

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Speaker 3: And the third thing is documenting war crimes, and that's

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Speaker 3: actually something that Bridgeway Foundation knows a lot.

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Speaker 2: About documenting war crimes. Documenting and what do you do?

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Speaker 2: Does this then go to the Hague to the UN

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Speaker 2: What do you do with once you've documented and it

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Speaker 2: should be fairly substantial in Ukraine, considering the Russians have

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Speaker 2: been bombing civilian hospital, schools, infrastructure, apartment buildings, it looks horrific.

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Speaker 2: What do you do with all of that information once

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Speaker 2: you've documented a warp rhyme in Ukraine.

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Speaker 3: So it depends on what national or international jurisdiction engages.

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Speaker 3: So optimally you like to keep it at the country

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Speaker 3: level if possible. The International Criminal Court is the other

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Speaker 3: place that you can take a case that's in the Hague.

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Speaker 2: That is in the Okay. So that's what I was

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Speaker 2: really thinking about. Do they take these on as individual

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Speaker 2: cases or are they kind of you know, it seems

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Speaker 2: like the UN is sort of paralyzed because of you

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Speaker 2: just have one voting member say no and that that's

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Speaker 2: that at the end.

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Speaker 3: One of the indicities of the International Criminal Court was

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Speaker 3: Dominique Angwin, who was a general in the Lord's Resistance

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Speaker 3: Army the first conflict that I mentioned earlier, and we

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Speaker 3: played a major role in getting him to the Hague

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Speaker 3: to stand trial for justice. So win for justice and

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Speaker 3: then and as a deterrent by the way to kind

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Speaker 3: of thugs of the world that think they can get

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Speaker 3: away with war atrocities.

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Speaker 2: What one would hope what happens when you have somebody

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Speaker 2: like Putin who's kind of hard to reach and is Wisconsin, Moscow,

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Speaker 2: and you know, how many hundreds of thousands of people

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Speaker 2: have been killed, civilians, non combatants killed in the Ukraine.

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Speaker 2: How do you reach someone?

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Speaker 3: I would say one step at a time, and then

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Speaker 3: you know, it's a lot of hard work slugging through

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Speaker 3: and then occasionally you just need a stroke of good

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Speaker 3: luck for something going the right way. Typically it takes

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Speaker 3: more time. You know. They say the arc of justice

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Speaker 3: gets there, but it's slow. That's not an exact quote,

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Speaker 3: but that's my Martin Luther King summary of it.

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Speaker 2: Yes, sure, so we'll come back to this because this

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Speaker 2: is really fascinating. I had no idea you were so

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Speaker 2: international in the philanthropic sphere. But we'll definitely circle back

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Speaker 2: to that. Let's start talking a little bit about that

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Speaker 2: track record. You have a couple of mutual funds, a

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Speaker 2: couple of ETFs. I'm assuming you're running other stuff as

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Speaker 2: a either separately managed accounts or a separate what have you.

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Speaker 2: I know, one of your funds since inception has outperformed

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Speaker 2: the market by about one hundred basis points, and the

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Speaker 2: other I don't know if it's still a mutual fund.

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Speaker 2: I know it started as a mutual fund is now

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Speaker 2: about three hundred basis points over market returns. Tell us

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Speaker 2: about the mutual funds and ETFs you run on behalf

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Speaker 2: of Bridgeways clients.

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Speaker 3: Yes, so let me talk about the strategies. One you

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Speaker 3: referred to as aggressive investors, and as the name would indicate,

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Speaker 3: it has high beta, very well high beta, but very

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Speaker 3: high exposure to the factors that we want that we

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Speaker 3: believe in, so.

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Speaker 2: High active share. And when you say factors, very high active.

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Speaker 2: So you know I should have mentioned this earlier. What

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Speaker 2: a lot of people call smart beta, You guys were

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Speaker 2: doing long before anyone had a name on it. You've

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Speaker 2: been doing smart beta, You've been doing factor investing a

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Speaker 2: long time. Tell us a little bit about the sort

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Speaker 2: of factor investing that drives Bridgeways returns.

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Speaker 3: Well, these are factors that we believe in. First of all,

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Speaker 3: some of my co portfolio managers will bristle if you

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Speaker 3: refer to us as a factor based firm. I owned

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Speaker 3: that a little bit more. But it's a fair point

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Speaker 3: in the sense of being systematic, statistically driven over long

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Speaker 3: periods of time. But there are human elements, Like if

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Speaker 3: there were no human element, everybody would be operating the

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Speaker 3: identical strategy out there. So yes, we believe in value.

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Speaker 3: We have our own proprietary mix of metrics and we

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Speaker 3: can show statistically based on data over decades why we

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Speaker 3: do that.

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Speaker 2: So let me stop you before you go on to

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Speaker 2: the next one. When most people hear value, they immediately think,

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Speaker 2: you know, low PE, low price to book ratio. Your

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Speaker 2: approach to value, I know, is a little more sophisticated

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Speaker 2: than that. Put some flesh on the bones. Tell us

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Speaker 2: about Bridgeways value approach.

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Speaker 3: So we believe in value, quality, and sentiment, or the

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Speaker 3: three primary legs of the stool. Within that, one of

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Speaker 3: the things that we've done for a long period of

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Speaker 3: time is mix different measures. So and why do we

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Speaker 3: do that. It's because it gives you a more stable

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Speaker 3: return stream over time. So if it's academically, you know,

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Speaker 3: paper when I was in business school came out FAMA

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Speaker 3: French and.

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Speaker 2: The value factory model factor.

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Speaker 3: Yeah, and the three factor then was price to book

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Speaker 3: And it's a metric, but we could show statistically that

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Speaker 3: if you match it with things like PE, with things

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Speaker 3: like price to sales, which has its own part. Think

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Speaker 3: through the balance sheet and the income statement, different ways

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Speaker 3: to measure value. That putting them together in a efficient

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Speaker 3: way gives you a steadier stream of returns into the future.

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Speaker 3: So that's why we do that. There's a very interesting

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Speaker 3: output of that though, that comes. So I was at

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Speaker 3: a conference I don't know, I'm going to say, maybe

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Speaker 3: twelve years ago or so, paper presented by NOV marks

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Speaker 3: on quality, and he's presently like everybody's excited. I'm excited.

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Speaker 3: We go back in. The first thing we all always

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Speaker 3: try and to is replicate the work if it's new.

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Speaker 3: So we replicated the work we put it into see

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Speaker 3: could it help our models, and the answer was no.

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Speaker 3: Do you know why the reason was no?

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Speaker 2: Because you already had quality.

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Speaker 3: And inadvertently we had already included quality in the process.

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Speaker 3: Because that doesn't ultimately.

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Speaker 2: That doesn't surprise me because you're you're talking about different metrics,

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Speaker 2: and when I think about value, and I also think

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Speaker 2: about value traps, and I know you cannot generate the

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Speaker 2: numbers you have if you're constantly buying stuff that's cheap

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Speaker 2: but low quality, high debt, all these other issues that

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Speaker 2: come up. Eventually, those things have to underperform. So I

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Speaker 2: kind of had the sense that you guys have quality

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Speaker 2: exposure just by your long term track record. So you

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Speaker 2: reproduce Novi's work. Where do you go from there?

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Speaker 3: There's always a next step, Barry. If I take a

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Speaker 3: look at just three of our strategies currently, it gives

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Speaker 3: you a feel for the breadth of what we do.

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Speaker 3: So one would be our small value strategy and you

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Speaker 3: might think small value. That seems pretty plain. Vanilla mentioned

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Speaker 3: the research on value that we've done. We try and

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Speaker 3: incorporate some things and how you incorporate them into the

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Speaker 3: portfolio construction where you constrain and where you don't like

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Speaker 3: how much are you willing to take on of sector risk?

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Speaker 3: But our OMNI small value strategy is a strategy that

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Speaker 3: we designed specifically for the purposes of an organization called

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Speaker 3: Buckingham or BAM. Then now it's now called Focus Partner's Wealth,

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Speaker 3: great friends of ours and our small value OMNIE small

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Speaker 3: value fits into their allocation in a way that's efficient

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Speaker 3: for their portfolio construction. Now, what's Bridgeways advantage. It's our

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Speaker 3: size and this is something that's true across all of

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Speaker 3: our strategies currently. We have a huge leg up being

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Speaker 3: a smaller organization. Several reasons think of the OMNI small

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Speaker 3: value because we're smaller and we don't have hundreds of

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Speaker 3: billions under management, we can go deeper on small deeper

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Speaker 3: to a degree. Our benchmark is still the Rustle two

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Speaker 3: thousand value index, but our strategy is x real estate

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Speaker 3: and utilities because our partners focus Wealth Partners has separate

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Speaker 3: strategies for that, so we don't duplicate that. And so

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Speaker 3: that's an example of the kind of research that we do.

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Speaker 3: How does that affect the reterms? Is that a good

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Speaker 3: idea to do? But Bridgeway's own small size means that

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Speaker 3: we don't have well, it means several things. Really. Number one,

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Speaker 3: it means our transaction costs are less, which, based on

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Speaker 3: your career, you know exactly the importance of that. So

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Speaker 3: if you're a trader and I give you an order

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Speaker 3: on a particular stock ticker symbol and say go buy

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Speaker 3: me a thousand shares of that, and your job is

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Speaker 3: to get this completed at the best price possible. However

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Speaker 3: you want to measure it, and I give you one

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Speaker 3: ticket for one thousand shares and another ticket for fifty

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Speaker 3: thousand shares, but I'm going to hold you accountable to

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Speaker 3: the same price. Which one do you want?

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Speaker 2: Well? From back in the day, when it was five

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Speaker 2: cents a share, you wanted the fifty thousand share order,

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Speaker 2: but that's not how you're getting paid. Well, the thousand

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Speaker 2: share orders much easier to get done at a good price. Yes,

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Speaker 2: fifty thousand shares, especially a small cap, you may move

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Speaker 2: the price up. You're certainly not just absolutely lifting the

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Speaker 2: offer and walking away with fifty absolute shares.

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Speaker 3: So for the investor, you want the smaller one that

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Speaker 3: gets done more quickly. If you can get it done

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Speaker 3: more quickly, it's more favorable price. You're less likely to

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Speaker 3: move the price of the security in an unfavorable way.

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Speaker 3: And that same thousand shares will make a more meaningful

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Speaker 3: contribution to a smaller shop than to a larger shop.

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Speaker 3: Same number of shares is just going to be you know,

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Speaker 3: point zero zero one in the portfolio. Why even waste

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Speaker 3: your time at Bridgeway. It's more meaningful. That's a big deal.

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Speaker 3: And the last part is something that very few people

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Speaker 3: I hear talking about, and that's that our effective universe

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Speaker 3: is a larger universe. So that gets into our next

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Speaker 3: strategy that I'd like to highlight, which is our global opportunities.

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Speaker 3: This is a long short strategy. It's glows.

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Speaker 2: This is the one that's one hundred percent long one

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Speaker 2: hundred percent short. Yes, so less correlation to the market.

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Speaker 2: Volatility doesn't matter. If anything, volatility could actually help return

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Speaker 2: can So no guarantees, but it could.

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Speaker 3: Jacob Pejorni, who who led the research for a two

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Speaker 3: year period, resulted in three peer reviewed articles, which for

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Speaker 3: firm our size is an astonishing achievement. He likes to say,

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Speaker 3: market agnostic. This is long short. The success for us

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Speaker 3: is defined as if you know the direction of the

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Speaker 3: market tells you nothing about the direction of the returns

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Speaker 3: of this strategy.

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Speaker 2: Well, if you long short, you should have half the

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Speaker 2: volatility of long only.

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Speaker 3: Right, that's pretty much right in line with our target. Okay,

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Speaker 3: so volatility.

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Speaker 2: Is this an absolute return strategy? It is. The assumption

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Speaker 2: is you're picking stocks that you think you're going to

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Speaker 2: do well, and you're also looking for stocks to short

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Speaker 2: that you think you're going to do poorly, and we'll

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Speaker 2: do especially poorly. In a draw down, how's that working out?

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Speaker 3: It's working out well. This is a big deal in

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Speaker 3: terms of the design. A paper that caught my attention

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Speaker 3: was following two thousand and eight, and this paper took

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Speaker 3: a look at all hedge funds that reported to be

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Speaker 3: market neutral, and the bottom line was, most of the

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Speaker 3: time they did a pretty good job, but when you

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Speaker 3: really needed it, in a downturn of two thousand and eight,

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Speaker 3: the beta was zero point four, so about forty percent

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Speaker 3: of the downside. Well, it's like, okay, that's cushion, but

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Speaker 3: it's not zero. It's not zero, it's not a it's

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Speaker 3: neither an anti gravity fund, nor do you expect not

437
00:25:22,880 --> 00:25:26,840
Speaker 3: to be hurt. We've done research on the competition as well,

438
00:25:26,880 --> 00:25:30,440
Speaker 3: and this is fascinating and also just over the last week,

439
00:25:30,560 --> 00:25:33,800
Speaker 3: so we're now, you know, on two days that get

440
00:25:33,880 --> 00:25:37,560
Speaker 3: us close to twenty percent. That's enough to you know,

441
00:25:38,320 --> 00:25:40,640
Speaker 3: run your numbers and see how did they do. Our

442
00:25:40,800 --> 00:25:45,359
Speaker 3: closest competitors to global opportunities have done a much better

443
00:25:45,440 --> 00:25:49,680
Speaker 3: job than quote market neutral funds did back in two

444
00:25:49,720 --> 00:25:52,760
Speaker 3: thousand and eight. All of them within a percent of zero. Well,

445
00:25:53,000 --> 00:25:55,840
Speaker 3: one of them was two percent negative. But out of

446
00:25:55,880 --> 00:26:00,440
Speaker 3: seven strategies that I looked at just earlier today, I

447
00:26:00,440 --> 00:26:02,160
Speaker 3: would say doing a better job.

448
00:26:03,119 --> 00:26:07,159
Speaker 2: I think it was Cliff Astness at AQR had a

449
00:26:07,200 --> 00:26:11,600
Speaker 2: paper out our hedge funds really hedged and Unfortunately, the

450
00:26:11,680 --> 00:26:14,399
Speaker 2: conclusion for a lot of them were not very much.

451
00:26:14,920 --> 00:26:17,680
Speaker 2: And that sounds like it's very consistent with the research

452
00:26:17,800 --> 00:26:18,240
Speaker 2: you guys.

453
00:26:18,640 --> 00:26:22,720
Speaker 3: Well, we specifically designed this not to have the two

454
00:26:22,720 --> 00:26:25,920
Speaker 3: thousand and eight problem identified. But there are a couple

455
00:26:25,960 --> 00:26:27,879
Speaker 3: more areas that we have a huge leg up on

456
00:26:27,920 --> 00:26:31,360
Speaker 3: the competition with a strategy number one. Again, getting back

457
00:26:31,359 --> 00:26:34,560
Speaker 3: to our small size, our universe of stocks is so

458
00:26:34,640 --> 00:26:35,280
Speaker 3: much larger.

459
00:26:35,840 --> 00:26:38,280
Speaker 2: That's both domestic and international.

460
00:26:37,920 --> 00:26:42,120
Speaker 3: Yes, and especially internationally. That's because out of the nine

461
00:26:42,119 --> 00:26:47,480
Speaker 3: thousand or so stocks, significant majority, probably our bigger competitors

462
00:26:47,560 --> 00:26:49,800
Speaker 3: simply can establish a meaningful.

463
00:26:50,080 --> 00:26:53,160
Speaker 2: Position in a competitive advantage.

464
00:26:53,280 --> 00:26:54,280
Speaker 3: Oh it's and it's big.

465
00:26:54,359 --> 00:26:54,520
Speaker 2: Well.

466
00:26:54,560 --> 00:26:56,960
Speaker 3: And by the way, those are the ones that are

467
00:26:57,440 --> 00:27:01,200
Speaker 3: less liquid, less efficient that you are likely to win

468
00:27:01,400 --> 00:27:03,160
Speaker 3: with active management. Huh.

469
00:27:03,800 --> 00:27:08,479
Speaker 2: Really interesting. So we talked earlier about donating tens of

470
00:27:08,480 --> 00:27:11,160
Speaker 2: millions of dollars half of the profits of the firm

471
00:27:11,600 --> 00:27:17,800
Speaker 2: to charity. How does that affect how you recruit employees,

472
00:27:17,840 --> 00:27:21,080
Speaker 2: how you develop a compensation structure. Tell us a little

473
00:27:21,119 --> 00:27:24,719
Speaker 2: bit about the impact of that on running an asset

474
00:27:24,760 --> 00:27:25,640
Speaker 2: management business.

475
00:27:25,920 --> 00:27:29,159
Speaker 3: Sometimes I get into conversation with a prospective client and

476
00:27:29,200 --> 00:27:32,000
Speaker 3: you might hear something like, you know, it sounds like

477
00:27:32,040 --> 00:27:35,439
Speaker 3: you're good guys. You know, you're philanthropically geared and you

478
00:27:35,480 --> 00:27:37,560
Speaker 3: get awards. Is a great place to work. But all

479
00:27:37,560 --> 00:27:39,439
Speaker 3: of that, like, put that aside. I just want to

480
00:27:39,440 --> 00:27:42,879
Speaker 3: talk about the investments. And what I would say is

481
00:27:43,160 --> 00:27:47,520
Speaker 3: culture is everything. It's the housing within which we do

482
00:27:47,640 --> 00:27:49,520
Speaker 3: what we do. So it's very important, and you can

483
00:27:49,560 --> 00:27:54,480
Speaker 3: measure that in some statistical ways like turnover. I would say,

484
00:27:54,520 --> 00:27:59,200
Speaker 3: there are proxies for commitment at Bridgeway and then returns

485
00:27:59,200 --> 00:28:01,760
Speaker 3: of the strategies. Why would you think that's independent of

486
00:28:01,800 --> 00:28:03,120
Speaker 3: the culture that you've built up.

487
00:28:03,640 --> 00:28:07,919
Speaker 2: You also have an internal rule the highest paid employee

488
00:28:08,040 --> 00:28:10,840
Speaker 2: earns no more than seven times the lowest paid employee.

489
00:28:10,920 --> 00:28:11,440
Speaker 2: Is that right?

490
00:28:12,040 --> 00:28:15,240
Speaker 3: So statistically that's probably true. We don't measure it that way.

491
00:28:15,280 --> 00:28:18,359
Speaker 3: There's a new statistic that came out from the sec

492
00:28:18,640 --> 00:28:21,000
Speaker 3: required of public companies and those are some of the

493
00:28:21,040 --> 00:28:24,480
Speaker 3: metrics that we look at currently. Some people think it's like, oh,

494
00:28:24,520 --> 00:28:27,360
Speaker 3: so you underpay. That is absolutely not the intent. It's

495
00:28:27,480 --> 00:28:30,120
Speaker 3: just not to pay outrageous salaries on the top. And

496
00:28:30,200 --> 00:28:33,199
Speaker 3: so you know, if you want to make azill the

497
00:28:33,280 --> 00:28:36,040
Speaker 3: most money that you can make in our industry, you

498
00:28:36,040 --> 00:28:38,360
Speaker 3: probably wouldn't come to Bridgeway if you want to make

499
00:28:38,360 --> 00:28:42,840
Speaker 3: an absolute livable wage and if you invest, save and invest,

500
00:28:42,920 --> 00:28:47,760
Speaker 3: you should do very well over a full career. Then

501
00:28:48,720 --> 00:28:53,240
Speaker 3: then we're purpose driven firm and we ascribe to Daniel

502
00:28:53,280 --> 00:28:58,240
Speaker 3: Pink's what really motivates people is not money, but it's purpose,

503
00:28:58,440 --> 00:29:03,120
Speaker 3: which we have in strong Suit. It's autonomy and it's mastery.

504
00:29:03,280 --> 00:29:06,680
Speaker 3: So we really invest in our people by way of mastery,

505
00:29:06,920 --> 00:29:10,760
Speaker 3: give them opportunities for learning and growth, invest by way

506
00:29:10,800 --> 00:29:15,960
Speaker 3: of mentoring as well, and then the autonomy piece we're

507
00:29:16,200 --> 00:29:19,000
Speaker 3: trying to continually up our game with in a system

508
00:29:19,000 --> 00:29:22,640
Speaker 3: of structure called traction or entrepreneurial operating system.

509
00:29:23,880 --> 00:29:29,600
Speaker 2: And the firm's culture also emphasizes accountability. Tell us about

510
00:29:29,600 --> 00:29:31,600
Speaker 2: the Firewood Group. What does that do?

511
00:29:33,160 --> 00:29:37,080
Speaker 3: Okay? So the Firewood Group is a personal accountability group

512
00:29:37,080 --> 00:29:40,680
Speaker 3: that's not inside Bridgeway. And what happened is in nineteen

513
00:29:40,760 --> 00:29:42,240
Speaker 3: ninety eight a friend of mine came to me and

514
00:29:42,240 --> 00:29:44,040
Speaker 3: he said, so, I want you to be on the

515
00:29:44,040 --> 00:29:46,880
Speaker 3: board of directors. And he worked for a publicly held firm.

516
00:29:46,920 --> 00:29:49,440
Speaker 3: But he was like, Charlie, I like, you're not in

517
00:29:49,480 --> 00:29:51,560
Speaker 3: a position to ask me on that board, and I

518
00:29:51,600 --> 00:29:54,080
Speaker 3: don't know squad about that industry And he said, no, no,

519
00:29:54,120 --> 00:29:59,240
Speaker 3: not the company board, the board of directors of my life.

520
00:29:59,320 --> 00:30:01,160
Speaker 3: And he said, well, what does that look like? You

521
00:30:01,240 --> 00:30:06,080
Speaker 3: never heard of that. Out of that came the following observation.

522
00:30:06,680 --> 00:30:09,200
Speaker 3: We were each members of groups that were great at

523
00:30:09,240 --> 00:30:12,760
Speaker 3: support but lousy it accountability, and we both knew we

524
00:30:12,800 --> 00:30:16,680
Speaker 3: needed accountability. So we formed this group specifically around the

525
00:30:16,720 --> 00:30:20,320
Speaker 3: concept of accountability. And just to give you a very

526
00:30:20,320 --> 00:30:23,200
Speaker 3: specific example, I had a life goal of ending genocide.

527
00:30:24,360 --> 00:30:27,920
Speaker 3: This group starts, and you know, I'm sharing life goals like, well,

528
00:30:28,000 --> 00:30:29,880
Speaker 3: you've made great progress on this one and this one,

529
00:30:29,920 --> 00:30:31,560
Speaker 3: but we don't. We think it's time for you to

530
00:30:31,560 --> 00:30:34,200
Speaker 3: actually turn the ignition on on this one. Out of

531
00:30:34,240 --> 00:30:37,440
Speaker 3: that conversation, we turned the ignition on on our foundation

532
00:30:37,600 --> 00:30:42,920
Speaker 3: and everything that you see that Shannon Davis is doing

533
00:30:43,040 --> 00:30:44,520
Speaker 3: along with our partners.

534
00:30:44,880 --> 00:30:48,760
Speaker 2: That's really fascinating. And I would assume if the founder

535
00:30:48,800 --> 00:30:53,360
Speaker 2: and CEO has that degree of accountability in his personal life,

536
00:30:54,000 --> 00:30:57,280
Speaker 2: how does that then affect the culture of the organization.

537
00:30:58,360 --> 00:31:01,800
Speaker 2: How do you bring your work ethic and your sense

538
00:31:01,800 --> 00:31:03,800
Speaker 2: of accountability into the office.

539
00:31:04,480 --> 00:31:07,040
Speaker 3: Well, I like to think that I modeled it. Number one.

540
00:31:07,160 --> 00:31:10,880
Speaker 3: Number two, we attract people for whom that's an exciting concept.

541
00:31:11,360 --> 00:31:13,800
Speaker 3: And number three, then you've got to actually live it out.

542
00:31:14,280 --> 00:31:18,560
Speaker 3: And that's where aspects of this structure that I call

543
00:31:18,640 --> 00:31:22,240
Speaker 3: traction or some people call entrepreneurial operating system come into play.

544
00:31:22,520 --> 00:31:25,880
Speaker 3: There's an annual goal setting process and most companies have that,

545
00:31:26,520 --> 00:31:29,360
Speaker 3: the ninety day goals that they refer to as rocks.

546
00:31:29,520 --> 00:31:33,040
Speaker 3: There's a very high level of commitment toward It's like

547
00:31:33,520 --> 00:31:35,160
Speaker 3: when you take on that I'm going to do this

548
00:31:35,200 --> 00:31:37,600
Speaker 3: in the next ninety days, everybody is looking at its

549
00:31:37,680 --> 00:31:40,800
Speaker 3: very high profile. It's online. We have to report to

550
00:31:41,080 --> 00:31:45,200
Speaker 3: all of the partners the leadership team's experience, and then

551
00:31:45,400 --> 00:31:48,680
Speaker 3: every partner at Bridgeway, that's every person that has a

552
00:31:48,880 --> 00:31:51,560
Speaker 3: long term commitment to and front Bridgeway, has to do

553
00:31:51,600 --> 00:31:52,240
Speaker 3: the same thing.

554
00:31:52,960 --> 00:31:55,560
Speaker 2: So when I talk about accountability, one of the things

555
00:31:55,600 --> 00:32:01,120
Speaker 2: I was thinking about is the company's annual report where

556
00:32:01,400 --> 00:32:04,680
Speaker 2: you guys kind of own your biggest mistakes, tell us

557
00:32:04,720 --> 00:32:06,160
Speaker 2: about that.

558
00:32:06,160 --> 00:32:08,480
Speaker 3: That's something we started, I don't know, maybe a year

559
00:32:09,000 --> 00:32:14,600
Speaker 3: four or five, and it comes around accountability. The normal

560
00:32:14,600 --> 00:32:17,720
Speaker 3: thing is this in business or in government or academy

561
00:32:17,840 --> 00:32:21,400
Speaker 3: or journalism anywhere. You know you want to learn from

562
00:32:21,400 --> 00:32:23,760
Speaker 3: your mistakes, but you don't want to own them too publicly,

563
00:32:24,080 --> 00:32:27,520
Speaker 3: right it doesn't feel good. People might ask the wrong question.

564
00:32:27,800 --> 00:32:31,080
Speaker 3: We had a lawyer member of our board of directors

565
00:32:31,120 --> 00:32:32,880
Speaker 3: at the time that said, you do realize you're like

566
00:32:32,960 --> 00:32:35,800
Speaker 3: putting on a silver platter something that people could sue

567
00:32:35,880 --> 00:32:39,080
Speaker 3: you over. And my answer to that is like, yeah,

568
00:32:39,160 --> 00:32:41,560
Speaker 3: I get that, that's true, but you can't cut it

569
00:32:41,600 --> 00:32:44,880
Speaker 3: both ways. You either have to own your mistakes, get

570
00:32:44,920 --> 00:32:47,080
Speaker 3: them out in the open, learn from them and make

571
00:32:47,120 --> 00:32:49,480
Speaker 3: sure you don't repeat them, or you sweep them in

572
00:32:49,600 --> 00:32:51,800
Speaker 3: under a rug. And you just can't do both, and

573
00:32:51,840 --> 00:32:56,080
Speaker 3: I choose the former. Our shareholders are investors, our clients

574
00:32:56,840 --> 00:32:59,960
Speaker 3: are our boss. We have a fiduciary duty to them.

575
00:33:00,040 --> 00:33:03,280
Speaker 3: And I had one an early client say, you do realize,

576
00:33:03,280 --> 00:33:07,360
Speaker 3: like I'm your boss and there's accountability there. I should

577
00:33:07,360 --> 00:33:10,160
Speaker 3: know what's really going on. And I'm like, I can't

578
00:33:10,280 --> 00:33:13,360
Speaker 3: argue with that. That is a brilliant statement. This woman,

579
00:33:13,360 --> 00:33:15,760
Speaker 3: by the way, didn't have a high school degree, and

580
00:33:15,800 --> 00:33:17,680
Speaker 3: I learned so much from her.

581
00:33:18,160 --> 00:33:21,760
Speaker 2: Huh, really really fascinating. So let's talk a little bit

582
00:33:21,800 --> 00:33:25,440
Speaker 2: about what's going on in the marketplace. There has been

583
00:33:25,680 --> 00:33:29,720
Speaker 2: a shift over the past twenty thirty years too passive

584
00:33:29,840 --> 00:33:36,280
Speaker 2: from active, especially from expensive underperforming active. I don't put

585
00:33:36,320 --> 00:33:39,840
Speaker 2: you guys in that category. You've done well, your fees

586
00:33:39,920 --> 00:33:42,440
Speaker 2: are are kind of middle of the road. How you

587
00:33:42,840 --> 00:33:45,640
Speaker 2: navigating what's going on in the marketplace?

588
00:33:46,040 --> 00:33:49,080
Speaker 3: A few things that I can point to. Number one

589
00:33:49,160 --> 00:33:51,800
Speaker 3: is you always have to keep working to stay ahead

590
00:33:51,840 --> 00:33:54,920
Speaker 3: of the game and adding value, and that's the research part.

591
00:33:55,640 --> 00:33:58,400
Speaker 3: So we like to say small incremental improvements, but it

592
00:33:58,440 --> 00:34:03,400
Speaker 3: never stops. Number two, we were an early adapter of

593
00:34:04,120 --> 00:34:09,359
Speaker 3: moving some mutual funds converting them into ETFs, so we've

594
00:34:09,400 --> 00:34:12,480
Speaker 3: done that. That was painful because it's costly. Out the

595
00:34:12,520 --> 00:34:15,560
Speaker 3: other side, it's been helpful for the after tax return

596
00:34:15,760 --> 00:34:20,480
Speaker 3: of the shareholders, so big plus there. And those strategies

597
00:34:20,480 --> 00:34:23,280
Speaker 3: are both in positive flows, so good for the advisor

598
00:34:23,680 --> 00:34:26,520
Speaker 3: as well. And the last one is, you know, don't

599
00:34:26,520 --> 00:34:29,200
Speaker 3: make indexing and passive the enemy. What can you learn

600
00:34:29,200 --> 00:34:32,919
Speaker 3: from them? So Bridgeway actually came to market with our

601
00:34:33,680 --> 00:34:36,960
Speaker 3: blue chip strategy. To really be an index fund, you

602
00:34:37,000 --> 00:34:40,480
Speaker 3: have to have somebody else calculating it, and there are

603
00:34:40,480 --> 00:34:43,840
Speaker 3: all rules, and we decided we weren't willing to do that.

604
00:34:43,880 --> 00:34:46,400
Speaker 3: We just wouldn't call it an index fund anymore. But

605
00:34:46,480 --> 00:34:51,799
Speaker 3: it's a megacap strategy that gets off of what I

606
00:34:51,840 --> 00:34:56,080
Speaker 3: think of as the inefficient market cap waiting portfolio construction

607
00:34:56,200 --> 00:34:59,040
Speaker 3: of almost every index fund, not absolutely all of them,

608
00:34:59,040 --> 00:35:02,560
Speaker 3: but we have more than a quarter century real time

609
00:35:02,719 --> 00:35:04,920
Speaker 3: data like this has been a mutual fund. Now it's

610
00:35:04,920 --> 00:35:08,600
Speaker 3: an ETF converted. You can look at that track record

611
00:35:08,640 --> 00:35:11,520
Speaker 3: and draw your own conclusions. But I like to say

612
00:35:11,600 --> 00:35:14,560
Speaker 3: market cap weighting is like a momentum strategy that you

613
00:35:14,719 --> 00:35:17,600
Speaker 3: never rebalance, so you ride the wave up and then

614
00:35:17,640 --> 00:35:20,160
Speaker 3: you write it down, and that's just not very efficient.

615
00:35:20,200 --> 00:35:25,279
Speaker 3: That leads to more volatility. This strategy, on average, has

616
00:35:25,800 --> 00:35:29,279
Speaker 3: different ways to measure it. Beta standard deviation draw down

617
00:35:29,800 --> 00:35:33,600
Speaker 3: of very roughly five percent less than a market cap

618
00:35:33,640 --> 00:35:38,000
Speaker 3: weighted index of a broad index like the S and

619
00:35:38,080 --> 00:35:42,040
Speaker 3: P five hundred, So a little bit less risk, we believe,

620
00:35:42,400 --> 00:35:44,880
Speaker 3: not in every market environment. But you can measure it

621
00:35:44,960 --> 00:35:48,359
Speaker 3: over the long term in last decade for example, and

622
00:35:48,400 --> 00:35:51,200
Speaker 3: then a little bit more return. And why is that

623
00:35:51,640 --> 00:35:54,640
Speaker 3: it's roughly equal weighted, which means you're always investing a

624
00:35:54,719 --> 00:35:58,279
Speaker 3: little bit more in what's done poorly and harvesting a

625
00:35:58,320 --> 00:36:02,279
Speaker 3: little bit from what's done really well. That's bilos sell high.

626
00:36:02,520 --> 00:36:04,640
Speaker 3: Isn't that a basic investing principle?

627
00:36:05,760 --> 00:36:06,120
Speaker 1: That's just.

628
00:36:07,760 --> 00:36:10,000
Speaker 2: That sort of rebalancing is one of the few free

629
00:36:10,040 --> 00:36:14,760
Speaker 2: launches in finance. So if you're not doing market cap waiting,

630
00:36:15,360 --> 00:36:18,520
Speaker 2: and you're talking about blue chip companies, how you're waiting

631
00:36:18,520 --> 00:36:19,279
Speaker 2: the portfolio.

632
00:36:19,800 --> 00:36:23,240
Speaker 3: So we look at the top thirty five thirty six companies,

633
00:36:23,280 --> 00:36:26,360
Speaker 3: We make sure that we've got industry representation at the

634
00:36:26,360 --> 00:36:30,839
Speaker 3: time of recomposition, and then we're rebalancing quarterly and reinvesting

635
00:36:30,840 --> 00:36:34,280
Speaker 3: dividends along the way, and I'll say roughly equal weighting,

636
00:36:35,320 --> 00:36:40,400
Speaker 3: so there's some cushion on harvesting from the top. It

637
00:36:40,440 --> 00:36:43,479
Speaker 3: can go up. Our rule of thumb is about four

638
00:36:43,520 --> 00:36:46,160
Speaker 3: percent is the maximum weight and a strategy. So if

639
00:36:46,680 --> 00:36:51,839
Speaker 3: Apple or Microsoft or somebody else is eight percent of

640
00:36:52,520 --> 00:36:55,719
Speaker 3: an underlying market cap weighted US index, we're going to

641
00:36:55,760 --> 00:36:57,719
Speaker 3: be half of that. But it gives you a more

642
00:36:57,760 --> 00:37:01,520
Speaker 3: diversified fund in me a cap stocks, which gives you

643
00:37:02,200 --> 00:37:06,640
Speaker 3: some of the downside protection and some of the risk characteristic.

644
00:37:06,160 --> 00:37:08,520
Speaker 2: Well, as we've seen in year to date in twenty

645
00:37:08,600 --> 00:37:12,800
Speaker 2: twenty five, the mag seven have become the lag seven. Yes,

646
00:37:12,920 --> 00:37:16,400
Speaker 2: so not being full market cap weight certainly had to

647
00:37:16,400 --> 00:37:20,839
Speaker 2: have a positive impact on returns. What happens when those

648
00:37:20,880 --> 00:37:24,600
Speaker 2: stocks are doing great? How comfortable do you feel if

649
00:37:24,640 --> 00:37:29,200
Speaker 2: you're not full market weight of in Nvidia, Apple, Amazon, Microsoft,

650
00:37:29,320 --> 00:37:31,040
Speaker 2: as as they're going higher and higher.

651
00:37:31,120 --> 00:37:33,920
Speaker 3: That's the discipline of any investment process in the design.

652
00:37:34,040 --> 00:37:37,520
Speaker 3: So know the design of what you're investing in, know

653
00:37:37,680 --> 00:37:40,200
Speaker 3: when it's likely to outperform and when it's not, and

654
00:37:40,239 --> 00:37:44,080
Speaker 3: then you need to be comfortable with those numbers. But

655
00:37:44,200 --> 00:37:46,560
Speaker 3: in that strategy you pointed out exactly when it would

656
00:37:46,600 --> 00:37:49,759
Speaker 3: you know, underperform when the top seven you know, and

657
00:37:50,000 --> 00:37:53,160
Speaker 3: you know there're the nifty fifty back in the well.

658
00:37:53,280 --> 00:37:55,680
Speaker 2: You and I remember the nifty to fifty in the sixties.

659
00:37:55,800 --> 00:37:59,719
Speaker 2: Half our listeners are unfamiliar with them. But people talk

660
00:37:59,760 --> 00:38:04,000
Speaker 2: about out the Magnificent seven like it's something new. Yes,

661
00:38:04,080 --> 00:38:06,800
Speaker 2: it's fifty sixty years old. We have the same sort

662
00:38:06,840 --> 00:38:12,000
Speaker 2: of top heavy market happen when everybody clamoring into the

663
00:38:12,040 --> 00:38:16,719
Speaker 2: same sort of blue chips. Yes, being weighted on a

664
00:38:16,840 --> 00:38:21,120
Speaker 2: non capitalization basis, having other elements drive the waiting, how

665
00:38:21,120 --> 00:38:22,600
Speaker 2: do you manage around that?

666
00:38:23,040 --> 00:38:28,640
Speaker 3: As a disciplined investment shop. We have everything documented in detail.

667
00:38:28,880 --> 00:38:32,080
Speaker 3: So there are four portfolio managers on every strategy at Bridgeway.

668
00:38:32,160 --> 00:38:34,719
Speaker 3: In theory, any one of the four can step in

669
00:38:34,800 --> 00:38:37,520
Speaker 3: and do that job, one because they're trained to do so,

670
00:38:37,600 --> 00:38:40,799
Speaker 3: but two because they have documentation of how to do it.

671
00:38:41,440 --> 00:38:44,280
Speaker 3: In this case blue Chip, I mentioned there's a quarterly

672
00:38:44,320 --> 00:38:49,080
Speaker 3: rebalancing process. There's instructions exactly how you rebalance, how you

673
00:38:49,160 --> 00:38:52,080
Speaker 3: take care of unusual situations, which might be a merger,

674
00:38:52,400 --> 00:38:56,000
Speaker 3: an acquisition, a spin off. Now a company and you

675
00:38:56,120 --> 00:38:58,480
Speaker 3: in the portfolio is no longer one of the top

676
00:38:59,560 --> 00:39:02,400
Speaker 3: thirty five, thirty six by size, so what do you

677
00:39:02,440 --> 00:39:04,960
Speaker 3: do about that? So those are the kinds of exceptions

678
00:39:05,000 --> 00:39:09,200
Speaker 3: that you document, and otherwise it's fairly straightforward.

679
00:39:09,600 --> 00:39:13,640
Speaker 2: What you're describing sounds like a very systematic process to

680
00:39:13,640 --> 00:39:17,919
Speaker 2: evaluate securities and build a portfolio. Tell us a little

681
00:39:17,920 --> 00:39:20,600
Speaker 2: bit about the things that go into that system.

682
00:39:21,760 --> 00:39:24,920
Speaker 3: Let me shift gears back to global opportunities, which is

683
00:39:25,520 --> 00:39:27,680
Speaker 3: which gives you more the full breadth of how we

684
00:39:27,719 --> 00:39:30,520
Speaker 3: do what we do with respect to stock selection and

685
00:39:30,560 --> 00:39:34,000
Speaker 3: portfolio construction. The stock selection side, as I mentioned, you're

686
00:39:34,040 --> 00:39:39,560
Speaker 3: combining factors of value, quality, and sentiment. However, that's within

687
00:39:39,640 --> 00:39:44,320
Speaker 3: a framework of intangible capital intensity. And what that's intangible

688
00:39:44,560 --> 00:39:48,760
Speaker 3: capital intensity? Yes, so are these things like intellectual property,

689
00:39:48,880 --> 00:39:53,279
Speaker 3: patents excesses exactly? Okay, So high intangible capital would be

690
00:39:53,360 --> 00:39:56,960
Speaker 3: exactly the things you mentioned research and development. If you

691
00:39:57,080 --> 00:39:59,640
Speaker 3: rank them by industry, things that flow to the top

692
00:39:59,680 --> 00:40:05,000
Speaker 3: would be the pharmaceuticals, AI software things at the other

693
00:40:05,080 --> 00:40:09,879
Speaker 3: end of the spectrum would be things like manufacturing, transportation utilities.

694
00:40:10,520 --> 00:40:13,600
Speaker 3: So you think of old economy stocks and new economy

695
00:40:13,600 --> 00:40:16,279
Speaker 3: stocks as another way to think about them. But we're

696
00:40:16,320 --> 00:40:21,759
Speaker 3: measuring literally ranking these according to intangible capital intensity. The

697
00:40:21,920 --> 00:40:25,640
Speaker 3: high in tangible capital intensity ones don't work real well

698
00:40:25,640 --> 00:40:29,880
Speaker 3: with the classic measures of value. For example, what we

699
00:40:29,960 --> 00:40:33,960
Speaker 3: found is that sentiment is a stronger predictor of future

700
00:40:34,120 --> 00:40:37,759
Speaker 3: returns for those so we don't only use centiment. We're

701
00:40:37,760 --> 00:40:40,239
Speaker 3: always using the combination, but we're going to overweight the

702
00:40:40,239 --> 00:40:44,440
Speaker 3: sentiment part of that. So we have these three categories

703
00:40:44,440 --> 00:40:48,120
Speaker 3: of factors underneath, which, as I mentioned before, multiple ones

704
00:40:48,440 --> 00:40:52,360
Speaker 3: in the framework of intangible capital intensity, which is original

705
00:40:52,400 --> 00:40:55,480
Speaker 3: research that Bridgeway did over a couple of year period

706
00:40:55,520 --> 00:40:59,200
Speaker 3: and published papers on. That's the overall framework. Then you've

707
00:40:59,200 --> 00:41:02,600
Speaker 3: got in this particular strategy, it's global, and we like

708
00:41:02,680 --> 00:41:06,239
Speaker 3: to be neutral exposure on things that we don't care

709
00:41:06,239 --> 00:41:09,000
Speaker 3: about or aren't in the design, and positive on the

710
00:41:09,000 --> 00:41:10,600
Speaker 3: ones that we do. So what do we not care

711
00:41:10,640 --> 00:41:13,960
Speaker 3: about sectors? So we're always trying to move back to

712
00:41:14,080 --> 00:41:17,240
Speaker 3: it to be sector neutral, which means the same dollars

713
00:41:17,960 --> 00:41:20,360
Speaker 3: on the long side as you have on the short side.

714
00:41:20,560 --> 00:41:27,120
Speaker 3: Similarly with sectors, sectors, countries, certain factors. Book value, for example,

715
00:41:27,120 --> 00:41:29,520
Speaker 3: as a classic one. Don't like that one as much.

716
00:41:30,440 --> 00:41:33,399
Speaker 3: It's problematic for reasons that we relate well.

717
00:41:33,400 --> 00:41:37,640
Speaker 2: Book value doesn't really it tends to measure physical plants exactly,

718
00:41:37,600 --> 00:41:40,360
Speaker 2: and so it much more heavily and IP kind of

719
00:41:40,400 --> 00:41:42,000
Speaker 2: gets the short shrift there.

720
00:41:41,800 --> 00:41:45,040
Speaker 3: Yes, exactly. So what that means is the industries that

721
00:41:45,080 --> 00:41:48,759
Speaker 3: are on the low capital intensative part of the spectrum

722
00:41:49,080 --> 00:41:52,120
Speaker 3: tend to do fine with the classical measures of value.

723
00:41:53,000 --> 00:41:55,440
Speaker 3: So you can see you put all that together, you

724
00:41:55,600 --> 00:41:59,360
Speaker 3: constrain the portfolio according to certain things that you don't

725
00:41:59,400 --> 00:42:02,319
Speaker 3: want it to be exposed to. People come and say, oh,

726
00:42:02,360 --> 00:42:05,040
Speaker 3: global opportunities, that's got China. I don't want any China.

727
00:42:05,160 --> 00:42:06,960
Speaker 3: Well at any one point in time, we might be

728
00:42:07,560 --> 00:42:11,720
Speaker 3: a percent or possibly even too positive exposure to China

729
00:42:11,880 --> 00:42:15,600
Speaker 3: or negative exposure to China. On average, we're targeting that

730
00:42:15,880 --> 00:42:18,640
Speaker 3: zero percent, so you're not going to get any value

731
00:42:18,680 --> 00:42:21,719
Speaker 3: add over the long term. Shouldn't be coming from the

732
00:42:21,800 --> 00:42:24,840
Speaker 3: actual country or the sector. It should be the specific

733
00:42:24,880 --> 00:42:28,839
Speaker 3: factors that we're trying to give exposures to, and that

734
00:42:29,000 --> 00:42:33,239
Speaker 3: leads to a much steadier stream of returns.

735
00:42:33,560 --> 00:42:37,640
Speaker 2: That's really intriguing. So I've always kind of thought of

736
00:42:37,680 --> 00:42:40,400
Speaker 2: you as sort of a factor shop, sort of a

737
00:42:40,480 --> 00:42:44,120
Speaker 2: value shop, sort of a quand shop, a little bit

738
00:42:44,120 --> 00:42:47,600
Speaker 2: of everything. Is that a fair Is that a fair description?

739
00:42:47,880 --> 00:42:51,680
Speaker 2: I don't want to overgeneralize, but you guys do a

740
00:42:51,760 --> 00:42:53,080
Speaker 2: little bit of a lot of things.

741
00:42:53,200 --> 00:42:56,120
Speaker 3: Yes, I would say that that's true. The one thing

742
00:42:56,160 --> 00:42:58,160
Speaker 3: that you left out, which is the hard piece and

743
00:42:58,200 --> 00:43:03,120
Speaker 3: a significant part of our time, is qualifying the data.

744
00:43:03,160 --> 00:43:06,080
Speaker 3: Cleaning the data, especially on the global side. Data is

745
00:43:06,120 --> 00:43:08,760
Speaker 3: cleaner in the large caps on the US side, for sure.

746
00:43:09,040 --> 00:43:12,960
Speaker 3: And also the model assumptions. There's certain assumptions built into

747
00:43:13,000 --> 00:43:16,120
Speaker 3: the model. You get a strong pick. Are the reasons

748
00:43:16,160 --> 00:43:19,320
Speaker 3: that those picks of a model come to the surface,

749
00:43:20,280 --> 00:43:23,080
Speaker 3: ones that really hold true in the marketplace. Is there

750
00:43:23,120 --> 00:43:26,560
Speaker 3: something that you don't know, for example, regulations that have

751
00:43:26,680 --> 00:43:29,239
Speaker 3: just come out in a country that are going to

752
00:43:29,360 --> 00:43:34,320
Speaker 3: change the earnings and financial characteristics that you care about

753
00:43:35,280 --> 00:43:38,120
Speaker 3: with a particular model. So that's part of the work

754
00:43:38,200 --> 00:43:41,800
Speaker 3: and the scrubbing, and you know, that's why we chafe

755
00:43:41,800 --> 00:43:44,920
Speaker 3: a little bit when people say, oh, you're just a

756
00:43:44,960 --> 00:43:46,400
Speaker 3: smart beta shop.

757
00:43:47,040 --> 00:43:50,000
Speaker 2: Clearly there's a lot more going on than just smart beta.

758
00:43:50,080 --> 00:43:52,160
Speaker 2: All right, I only have you for a limited amount

759
00:43:52,200 --> 00:43:56,000
Speaker 2: of time, so let's jump to our favorite questions we

760
00:43:56,160 --> 00:43:59,359
Speaker 2: ask all of our guests, starting with what's been keeping

761
00:43:59,440 --> 00:44:02,160
Speaker 2: you entertained these days? What are you watching or listening to?

762
00:44:02,680 --> 00:44:06,280
Speaker 3: One of my favorite recent ones was actually a South

763
00:44:06,440 --> 00:44:14,040
Speaker 3: Korean series called The Extraordinary Attorney Wu, and it's a

764
00:44:14,239 --> 00:44:19,160
Speaker 3: fascinating study about a woman who's an adult autistic, brilliant

765
00:44:19,680 --> 00:44:23,239
Speaker 3: person in a law firm in South Korea and her

766
00:44:23,320 --> 00:44:28,719
Speaker 3: experiences navigating a non autistic world and the adjustments that

767
00:44:28,760 --> 00:44:31,759
Speaker 3: people do and don't try and make assumptions that people make.

768
00:44:32,880 --> 00:44:34,520
Speaker 3: You know, you might think that has nothing to do

769
00:44:34,600 --> 00:44:38,560
Speaker 3: with investing, But the assumptions side and the statistic side,

770
00:44:38,600 --> 00:44:42,920
Speaker 3: and then the human interaction side, and the behavioral side

771
00:44:43,000 --> 00:44:46,400
Speaker 3: is all right there. That's one of my top recently.

772
00:44:46,120 --> 00:44:49,680
Speaker 2: Really really interesting. Let's talk about mentors who helped to

773
00:44:49,840 --> 00:44:51,000
Speaker 2: shape your career.

774
00:44:51,560 --> 00:44:55,520
Speaker 3: Several had a mentor that passed away last year, Henry

775
00:44:55,520 --> 00:45:01,520
Speaker 3: GROPPI SoundBite from him was respect all people, all the time,

776
00:45:02,320 --> 00:45:06,040
Speaker 3: no exceptions. And it's that last piece that's really challenging.

777
00:45:07,080 --> 00:45:09,240
Speaker 3: So I'm going to put him as a top mentor.

778
00:45:09,440 --> 00:45:14,560
Speaker 3: Had some at MIT advisors there who taught me never

779
00:45:14,640 --> 00:45:17,400
Speaker 3: come to my office just bringing problems. Always try and

780
00:45:17,400 --> 00:45:22,279
Speaker 3: bring solutions when you can. People that have engaged on

781
00:45:22,280 --> 00:45:25,640
Speaker 3: a human level within these that didn't have to. Some

782
00:45:25,719 --> 00:45:28,800
Speaker 3: of the better things that I've learned Jack Bogel, certainly

783
00:45:28,840 --> 00:45:32,799
Speaker 3: on the cost and structure side, a little gritty, which

784
00:45:32,840 --> 00:45:34,200
Speaker 3: is I like, I think that's fun.

785
00:45:35,000 --> 00:45:38,720
Speaker 2: Those are some of momentors really interesting. Let's talk books.

786
00:45:38,800 --> 00:45:40,720
Speaker 2: What are some of your favorites? What are you reading

787
00:45:40,800 --> 00:45:41,280
Speaker 2: right now?

788
00:45:41,880 --> 00:45:45,360
Speaker 3: Right now, I'm reading two books. One is called People

789
00:45:46,320 --> 00:45:51,200
Speaker 3: Dare to Build an Intentional Culture. So you can imagine

790
00:45:51,200 --> 00:45:54,040
Speaker 3: why that would be attracted to me. Chapter two of

791
00:45:54,040 --> 00:45:56,640
Speaker 3: that book is about love. We don't tend to use

792
00:45:56,680 --> 00:45:59,600
Speaker 3: the word love. And workplace they say, well, and more

793
00:45:59,600 --> 00:46:05,960
Speaker 3: accepted word might be genuine caring, and so we think

794
00:46:06,000 --> 00:46:08,560
Speaker 3: a lot about that. We play the Simon Senek game

795
00:46:08,640 --> 00:46:11,719
Speaker 3: of why is why is that important? And underneath that,

796
00:46:11,800 --> 00:46:13,680
Speaker 3: why is that important? If you play that game at

797
00:46:13,719 --> 00:46:16,120
Speaker 3: Bridgeway of why you're doing what you're doing and get

798
00:46:16,120 --> 00:46:20,920
Speaker 3: to a core value, caring frequently comes out among different people,

799
00:46:21,040 --> 00:46:25,640
Speaker 3: board members, partners at Bridgeway. The other book is Jason

800
00:46:25,640 --> 00:46:30,399
Speaker 3: Swig's recent update on The Intelligent Investor. I'm halfway through

801
00:46:30,440 --> 00:46:32,719
Speaker 3: that one. It's it's a thick read because it's really

802
00:46:32,719 --> 00:46:35,520
Speaker 3: two books. It's in Benjamin Graham's book and it's Jason

803
00:46:35,520 --> 00:46:39,919
Speaker 3: Swigg's commentary on it. It's great and not too long ago.

804
00:46:39,960 --> 00:46:43,680
Speaker 2: I saw you mentioned, was it Dan Arawle's The Truth

805
00:46:43,719 --> 00:46:45,080
Speaker 2: About Dishonesty? Yes?

806
00:46:45,160 --> 00:46:47,759
Speaker 3: Right, that's one of my favorite. It might be it

807
00:46:47,840 --> 00:46:51,200
Speaker 3: might be a decade old now, but wonderful book on

808
00:46:52,000 --> 00:46:56,239
Speaker 3: humility in statistics and in non statistics.

809
00:46:56,800 --> 00:47:00,359
Speaker 2: And our final two questions, what sort of advice would

810
00:47:00,400 --> 00:47:03,799
Speaker 2: you give to a recent college grad interested in a

811
00:47:03,880 --> 00:47:06,360
Speaker 2: career in either investing or finance.

812
00:47:06,800 --> 00:47:10,640
Speaker 3: I actually had this opportunity just yesterday. It was somebody.

813
00:47:10,680 --> 00:47:12,520
Speaker 3: I'm going to guess he was about twenty five years

814
00:47:12,560 --> 00:47:17,160
Speaker 3: old and early stage in his career. And my advice is,

815
00:47:17,600 --> 00:47:21,640
Speaker 3: people scare you away when it's a declining industry or

816
00:47:21,680 --> 00:47:25,040
Speaker 3: not declining, but where feet pressure is increasing. So the

817
00:47:25,080 --> 00:47:28,960
Speaker 3: feed pressure has been very strong, different ways to measure it.

818
00:47:29,000 --> 00:47:32,040
Speaker 3: But you know, fees are less than half of what

819
00:47:32,080 --> 00:47:35,160
Speaker 3: they were a dozen years back, and that scares a

820
00:47:35,160 --> 00:47:38,560
Speaker 3: lot of people away. Within that, there's a lot of change,

821
00:47:38,840 --> 00:47:42,720
Speaker 3: and within the change there are strategic opportunities. And because

822
00:47:42,719 --> 00:47:45,280
Speaker 3: it doesn't attract as many people think supply and demand,

823
00:47:45,360 --> 00:47:48,040
Speaker 3: there are great they're kind of even bigger than normal

824
00:47:48,080 --> 00:47:51,480
Speaker 3: mature company opportunities and not as many people coming in.

825
00:47:51,600 --> 00:47:53,640
Speaker 3: You can make a big difference in that environment. I

826
00:47:53,680 --> 00:47:56,319
Speaker 3: think it's fun and fascinating. I would definitely choose this

827
00:47:56,800 --> 00:47:58,760
Speaker 3: as a career if I were doing it all over again.

828
00:47:59,280 --> 00:48:01,920
Speaker 2: And our final question, what do you know about the

829
00:48:01,960 --> 00:48:05,160
Speaker 2: world of investing today that would have been useful back

830
00:48:05,200 --> 00:48:08,720
Speaker 2: in nineteen ninety three when you were first launching the firm.

831
00:48:09,280 --> 00:48:12,280
Speaker 3: Wow, I was a contrarian by nature, but I didn't

832
00:48:12,400 --> 00:48:19,440
Speaker 3: understand the dynamics of chasing hot returns and panicking and downturns.

833
00:48:20,320 --> 00:48:24,719
Speaker 3: Understanding that dynamic better would have helped, not because not

834
00:48:24,800 --> 00:48:30,040
Speaker 3: personally but professionally. It would have given some good insights

835
00:48:30,480 --> 00:48:35,120
Speaker 3: for the individual investor. I would say, build your portfolio

836
00:48:35,719 --> 00:48:39,719
Speaker 3: and learn how to not pay attention in the downturns.

837
00:48:39,760 --> 00:48:41,880
Speaker 3: If it's long term money. And by the way, if

838
00:48:41,880 --> 00:48:43,239
Speaker 3: it's not long term money, you shouldn't have it in

839
00:48:43,280 --> 00:48:45,920
Speaker 3: the stock market. So it's assuming it is long term money.

840
00:48:46,360 --> 00:48:48,520
Speaker 3: The only price you really care about is the last

841
00:48:48,520 --> 00:48:51,040
Speaker 3: price when you want to take the money out, and

842
00:48:51,040 --> 00:48:54,040
Speaker 3: that wasn't last week or this week. Ever, whether it's

843
00:48:54,120 --> 00:48:57,360
Speaker 3: up or down, there's volatility in between. All those numbers

844
00:48:57,400 --> 00:48:59,759
Speaker 3: are irrelevant. All you need to know is the last

845
00:48:59,760 --> 00:49:01,680
Speaker 3: one the first day. You're going to know that number

846
00:49:01,920 --> 00:49:04,480
Speaker 3: his years in the future when you're actually gonna need it.

847
00:49:04,560 --> 00:49:08,919
Speaker 2: Huh, Absolutely fascinating. We have been speaking with John Montgomery,

848
00:49:09,400 --> 00:49:13,919
Speaker 2: founder of Bridgeway Capital. If you enjoy this conversation, well,

849
00:49:14,000 --> 00:49:16,879
Speaker 2: be sure and check out any of the previous five

850
00:49:16,960 --> 00:49:19,800
Speaker 2: hundred or so we've done over the past ten years.

851
00:49:20,239 --> 00:49:24,800
Speaker 2: You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever

852
00:49:24,880 --> 00:49:29,080
Speaker 2: you find your favorite podcast. Check out my new book

853
00:49:29,320 --> 00:49:34,120
Speaker 2: How Not to Invest. The Ideas, numbers and behavior that

854
00:49:34,239 --> 00:49:37,520
Speaker 2: destroys wealth and how to avoid them, how not to

855
00:49:37,600 --> 00:49:41,239
Speaker 2: invest wherever you get your favorite books. I would be

856
00:49:41,320 --> 00:49:43,200
Speaker 2: remiss if I did not thank the correct team that

857
00:49:43,280 --> 00:49:47,560
Speaker 2: helps put these conversations together each week. My audio engineer

858
00:49:47,640 --> 00:49:51,839
Speaker 2: is Sam Danziger. Sean Russo is my researcher. Ana Luke

859
00:49:51,960 --> 00:49:56,160
Speaker 2: is my producer. I'm Barry Ritolfs. You've been listening to

860
00:49:56,320 --> 00:50:03,080
Speaker 2: Masters in Business on Bloomberg Radio