WEBVTT - Factor-based Investing with John Montgomery 0:00:02.600 --> 0:00:11.920 Bloomberg Audio Studios, Podcasts, radio news. This is Masters in 0:00:12.000 --> 0:00:15.520 Business with Barry Ritholts on Bloomberg Radio. 0:00:16.600 --> 0:00:19.440 This week on the podcast, I have an extra special 0:00:19.480 --> 0:00:22.400 guest returning for the first time in a few years, 0:00:22.800 --> 0:00:26.759 John Montgomery. He is the founder of Bridgeway Capital, established 0:00:26.800 --> 0:00:29.159 in nineteen ninety three, and the firm is really a 0:00:29.320 --> 0:00:35.560 very interesting mix of quantitative, value based and factor based investing. 0:00:36.040 --> 0:00:38.640 It's really none and all of the above. It's a 0:00:38.680 --> 0:00:43.920 little more nuanced and sophisticated than that. The firm first 0:00:43.960 --> 0:00:47.240 came to my attention because I was kind of intrigued 0:00:47.320 --> 0:00:52.599 by the idea of donating half their profits to charity. 0:00:53.280 --> 0:00:58.440 That's unusual in the world of finance. In addition, they've 0:00:58.440 --> 0:01:01.800 put up some really impressed of numbers over the past 0:01:01.840 --> 0:01:05.400 thirty years, which has given them the opportunity to donate 0:01:05.440 --> 0:01:09.080 tens of millions of dollars to their favorite organizations. I 0:01:09.200 --> 0:01:12.680 thought this conversation was fascinating and I think you will 0:01:12.720 --> 0:01:16.320 also with no further ado Ridgeway Capitals. 0:01:16.640 --> 0:01:19.440 John Montgomery, Thanks Berry, it's great to be here. 0:01:19.680 --> 0:01:22.039 It's great to see you. Let's for people who may 0:01:22.040 --> 0:01:25.360 not be familiar with the firm, and your background. Let's 0:01:25.440 --> 0:01:31.080 start with how your interesting and unusual career BS and engineering, 0:01:31.319 --> 0:01:35.560 BA in philosophy from Swarthmore. Then you get a graduate 0:01:35.600 --> 0:01:39.440 degree from MIT and you go to Harvard Business School. 0:01:40.360 --> 0:01:41.560 What was the career plan? 0:01:42.600 --> 0:01:47.600 Their career plan originally was urban development and transportation, So 0:01:47.680 --> 0:01:52.600 that was my first career, was working with various bus 0:01:52.600 --> 0:01:55.720 and transportation companies to improve the quality of life in 0:01:55.720 --> 0:01:59.480 the cities. People ask how does that relate to investing, 0:01:59.560 --> 0:02:02.720 and I say, well, they're both service industries. They're both 0:02:02.800 --> 0:02:06.560 people intensive, and those are the elements that I love. 0:02:06.960 --> 0:02:10.280 And I got to imagine there's a ton of data 0:02:10.320 --> 0:02:14.720 analytics and optimization thinking that goes into both. 0:02:14.840 --> 0:02:19.079 That's true. I like the intersection of people and analysis, 0:02:19.160 --> 0:02:22.600 and both industries give a lot of opportunity that I 0:02:22.639 --> 0:02:25.959 love serving people. They're both service industries, so I'm a 0:02:26.000 --> 0:02:26.640 happy camper. 0:02:26.919 --> 0:02:30.160 That makes a lot of sense. You were pretty early 0:02:30.240 --> 0:02:34.720 to computer modeling and statistical methods as a research engineer 0:02:34.760 --> 0:02:38.360 at MCT. This is the late nineteen seventies. That sort 0:02:38.400 --> 0:02:43.919 of data analytics wasn't really well understood back then. How 0:02:43.960 --> 0:02:48.359 did that background help when it comes to modeling portfolios 0:02:48.480 --> 0:02:52.359 or applying those methods of statistical analysis to invest in. 0:02:52.800 --> 0:02:55.920 Well, the statistical side definitely comes from my degree and 0:02:55.960 --> 0:03:00.800 then work as a project manager at MIT, So you're right, 0:03:00.880 --> 0:03:05.079 late seventies till nineteen eighty. The investment piece of that 0:03:05.120 --> 0:03:10.120 didn't come tell business school about three four years later, 0:03:10.800 --> 0:03:13.919 And that was kind of you could say, by chance 0:03:14.000 --> 0:03:16.359 or on a lark. I thought, well, you know, there's 0:03:16.360 --> 0:03:19.040 an opportunity cost of stepping out of your career where 0:03:19.040 --> 0:03:22.440 you have a paycheck to go back to business school 0:03:22.480 --> 0:03:24.919 full time, which I did, and thought, while I'm here, 0:03:24.960 --> 0:03:28.080 I'll take a few investing courses and see if I 0:03:28.160 --> 0:03:31.040 can use those to earn back the opportunity cost of 0:03:31.080 --> 0:03:32.600 going to business school for two years. 0:03:32.680 --> 0:03:37.680 So from transportation to finance. That sounds almost but not 0:03:37.800 --> 0:03:40.240 quite purposeful. Is that Is that a fair description? 0:03:40.480 --> 0:03:43.840 I think that's a very accurate description. So, and actually 0:03:43.840 --> 0:03:48.520 didn't leave the transportation field immediately after business school. I 0:03:48.560 --> 0:03:51.960 was in an investing course and we're doing a case study. 0:03:52.480 --> 0:03:56.720 Professor ends the class and asks the question, who here 0:03:56.880 --> 0:04:01.440 thinks that they'll be able to outperform post leaving Harvard 0:04:01.480 --> 0:04:05.560 Business School this track record? And eighty percent of the 0:04:05.600 --> 0:04:08.440 hands go up in the room. I'm not one of them, 0:04:08.480 --> 0:04:09.120 by the way. 0:04:09.840 --> 0:04:13.760 So the whole class from Lake wobegone everybody's average. 0:04:13.160 --> 0:04:16.200 Yes, yes, exactly, I mean, and I immediately got the 0:04:16.240 --> 0:04:19.039 eighty twenty rules. Wait a minute, this can't be And 0:04:19.279 --> 0:04:22.400 if this is a microcosm and the methods that we 0:04:22.400 --> 0:04:26.000 were using to think about the markets and valuation in 0:04:26.600 --> 0:04:30.360 net present value kind of cfa classic kind of analysis. 0:04:30.360 --> 0:04:32.920 If this is a microcosm of Wall Street in five years, 0:04:32.920 --> 0:04:36.440 which probably it is, then quantitative methods should give you 0:04:36.600 --> 0:04:39.799 a leg up on the competition for a lot lower costs. 0:04:40.320 --> 0:04:44.200 So you've previously discussed the epiphany you had at Harvard 0:04:44.200 --> 0:04:47.320 Business School. Is that the epiphany or was it something. 0:04:47.040 --> 0:04:50.159 Else that was a major piece of it. I would 0:04:50.200 --> 0:04:54.080 say the primary insights were behavioral finance ones we would 0:04:54.120 --> 0:04:56.839 call like I didn't. I'd never heard the word behavioral 0:04:57.000 --> 0:04:58.240 finance at the time. 0:04:58.160 --> 0:05:00.719 At that as a phrase didn't exist for another twenty 0:05:00.720 --> 0:05:01.239 five years. 0:05:01.240 --> 0:05:05.080 Probably not you know, you see you watch. I've once 0:05:05.120 --> 0:05:07.760 had a boss who said, this guy has enough sheep 0:05:07.800 --> 0:05:10.400 skins to skin a sheep. But if I ever did 0:05:10.440 --> 0:05:12.360 go back to school, the next degree I would love 0:05:12.400 --> 0:05:14.599 to have is in psychology, because I really there's so 0:05:14.720 --> 0:05:18.520 much there, and especially the intersection of psychology and money. 0:05:18.839 --> 0:05:22.680 When do you finish up at HBS. What year was that? 0:05:23.040 --> 0:05:24.040 Nineteen eighty five? 0:05:24.400 --> 0:05:26.560 All right, so what do you do between that and 0:05:26.720 --> 0:05:29.120 nineteen ninety three when you launch Bridgeway? 0:05:29.880 --> 0:05:32.400 So the first thing I did was investing as a hobby. 0:05:32.560 --> 0:05:36.279 So that was my advocation for the next six years, 0:05:37.200 --> 0:05:41.240 and my personal track record in investing was about twice 0:05:41.240 --> 0:05:44.720 the market for those periods, right in a good period. 0:05:44.600 --> 0:05:49.080 Scalable or kind of one off, little aberrational. 0:05:48.640 --> 0:05:53.280 No fine, reasonably scalable, reasonably scalable, I would say enough 0:05:53.320 --> 0:05:55.960 that after six years, I had the thought of making 0:05:55.960 --> 0:06:00.520 my avocation my next career and did something that was 0:06:01.279 --> 0:06:04.279 modeled to me by the mayor of Houston, my hometown 0:06:04.400 --> 0:06:06.279 at the time, and that is to take a year 0:06:06.360 --> 0:06:09.920 off between careers. He'd actually had four careers in his 0:06:09.960 --> 0:06:12.640 life in different fields, and every time he switched, he 0:06:12.680 --> 0:06:16.039 took a year off just to study the heck out 0:06:16.040 --> 0:06:18.640 of the next step. So that's when I really studied 0:06:19.360 --> 0:06:23.560 deeply the research why what I'd been doing was working 0:06:23.640 --> 0:06:27.080 more about when it might not and riding a business 0:06:27.080 --> 0:06:27.839 plan for Bridgeway. 0:06:28.320 --> 0:06:31.600 That's pretty fascinating. I took a year off between college 0:06:32.160 --> 0:06:34.560 and grad school, but I had no idea I was 0:06:34.600 --> 0:06:39.680 actually doing what you advocate, or with the Mayor of 0:06:39.720 --> 0:06:42.600 Houston advocates. I just was kind of lost and not 0:06:42.640 --> 0:06:46.040 sure what to do next, and spent a year thinking 0:06:46.080 --> 0:06:50.080 about it before pulling the trigger on law school. But 0:06:50.800 --> 0:06:54.039 your hometown is Houston. The firm is still locating in 0:06:54.120 --> 0:06:57.680 Yuston right since nineteen ninety three, that's when you launched. 0:06:58.040 --> 0:07:03.240 Where you launched. From the very beginning, you said something 0:07:03.360 --> 0:07:07.479 kind of unusual about the firm. We want to donate 0:07:07.600 --> 0:07:12.680 half of our profits to nonprofit organizations. Tell us where 0:07:12.840 --> 0:07:18.680 that idea came from. It's fairly unusual either in finance, 0:07:18.800 --> 0:07:21.480 and I've been to Houston. That's a kind of unusual 0:07:21.560 --> 0:07:22.800 idea in Houston as well. 0:07:23.800 --> 0:07:27.040 That's true. If I gather around, you know, just random 0:07:27.080 --> 0:07:30.280 business people in Houston and say that we donate half 0:07:30.280 --> 0:07:32.640 our profits, I have to say I get some very 0:07:32.640 --> 0:07:36.480 puzzled looks around the room. Not so much from other 0:07:36.560 --> 0:07:42.200 purpose driven people in different fields, though, But yes, it's different. 0:07:42.520 --> 0:07:45.560 Where did that come from? You know, we think things 0:07:45.600 --> 0:07:47.800 come from one place, but usually there are a lot 0:07:47.800 --> 0:07:50.480 of forces at Bay. So I would look back to 0:07:50.640 --> 0:07:53.520 my father, who was a businessman and CEO of an 0:07:53.560 --> 0:07:56.720 oil exploration firm, and believe that business was a way 0:07:56.760 --> 0:08:00.680 to change the world and engage. My mother was what 0:08:00.720 --> 0:08:03.960 I would think of as almost a professional volunteer, so 0:08:04.120 --> 0:08:07.040 giving back to the community. And this was in a 0:08:07.120 --> 0:08:09.800 time when the War on Poverty, you know, was the 0:08:09.840 --> 0:08:12.920 slogan at the time. So I was hugely influenced by 0:08:12.920 --> 0:08:15.600 both of my parents. But I would say also a 0:08:15.640 --> 0:08:20.400 conversation with my wife on the very first conversation of 0:08:21.360 --> 0:08:25.280 starting Bridgeway, and it went something like this, let me 0:08:25.320 --> 0:08:29.720 get this straight, John, You're thinking of leaving the transportation 0:08:29.840 --> 0:08:32.920 industry where you have a lot of experience and a 0:08:33.080 --> 0:08:36.880 w two to start a company in an industry you've 0:08:36.920 --> 0:08:43.320 never worked with, no initial guarantees, no guarantees on the 0:08:43.360 --> 0:08:46.400 money side. And I said, yes, we talked that through. 0:08:46.840 --> 0:08:49.679 I have to say, I'm married to an extraordinary woman. 0:08:50.080 --> 0:08:53.000 I didn't realize at that age of thirty seven how 0:08:53.040 --> 0:08:56.559 extraordinary she was. But she believes in supporting people who 0:08:56.559 --> 0:09:00.160 have a dream and she did that for me in 0:09:00.160 --> 0:09:03.840 for Bridgeway, So she was all in. She had two questions. 0:09:04.240 --> 0:09:04.440 Yeah. 0:09:04.600 --> 0:09:07.600 Question one, can we still send our daughters to college? 0:09:09.440 --> 0:09:12.280 That was like, I should have paid more attention to 0:09:12.320 --> 0:09:16.640 that question because my budget, my business plan was fifty 0:09:16.679 --> 0:09:19.720 percent of our net worth. Before it was all said 0:09:19.760 --> 0:09:21.480 and done, it was one hundred and fifty percent of 0:09:21.480 --> 0:09:24.840 our net worth. Right, so it took three years to 0:09:24.840 --> 0:09:27.440 break even when my business plan had it at one. 0:09:28.240 --> 0:09:31.240 The second question was do I have to go to 0:09:31.360 --> 0:09:35.680 cocktail parties? Why would she not her cup of tea? 0:09:35.880 --> 0:09:38.560 No? But I mean, why would she imagine? Launching of 0:09:38.679 --> 0:09:42.360 funds is going to require your spat Just like. 0:09:42.440 --> 0:09:46.679 She grew up in Washington, DC around academicians and government people, 0:09:46.720 --> 0:09:48.720 and her view of business was you have to go 0:09:48.760 --> 0:09:51.920 to cocktail parties and schmooz with people. Right, that makes sense, 0:09:52.480 --> 0:09:56.000 And having taken a course of negotiation at Harvard Business School, 0:09:56.040 --> 0:09:59.679 I immediately recognized the opportunity and said, dear not if 0:09:59.679 --> 0:10:03.040 you don't want to. So she only comes when she 0:10:03.360 --> 0:10:06.400 when she desires to come wherever I am. But she's 0:10:06.440 --> 0:10:10.600 an amazing soulmate and supporter of everything Bridgeway. 0:10:10.840 --> 0:10:15.600 That's fantastic. So you've been donating half your profits to 0:10:15.679 --> 0:10:19.360 these different organizations over thirty years? Is that right? 0:10:19.520 --> 0:10:20.240 Thirty one years? 0:10:20.360 --> 0:10:23.080 So how much have you guys donated? What are the 0:10:23.200 --> 0:10:26.920 organizations you support? What's been the response in the community 0:10:27.720 --> 0:10:28.560 over the decades. 0:10:28.679 --> 0:10:31.360 We don't give exact numbers. We're privately held firms. Since 0:10:31.400 --> 0:10:35.319 we donate half, we don't report our profits specifically either, 0:10:35.360 --> 0:10:37.760 but I'll just say it's tens of millions. Okay, over 0:10:38.480 --> 0:10:42.240 you know what substantial amount of substantial amount of capital. 0:10:42.720 --> 0:10:47.319 The bullseye of our giving is our own affiliated Bridgeway Foundation. 0:10:48.360 --> 0:10:53.040 This is an extraordinary organization led by a powerhouse of 0:10:53.080 --> 0:10:58.840 a woman, Shannon Davis. Our mission statement focuses on ending 0:10:58.880 --> 0:11:02.120 genocide and prevent any war atrocities, of which there are 0:11:02.120 --> 0:11:06.120 too many opportunities in the world today. So that's the 0:11:06.160 --> 0:11:08.480 crosshairs of our Let me. 0:11:08.400 --> 0:11:10.600 Interrupt you right here. So, so I know you have 0:11:10.840 --> 0:11:16.880 very quantitative leanings. How do you measure how successful you 0:11:16.920 --> 0:11:22.840 are in stopping genocides? Just generally speaking, it's hard to 0:11:22.880 --> 0:11:26.960 measure something that doesn't happen, so you're always engaging in 0:11:27.000 --> 0:11:30.120 counter factuals. But how do you know if you've moved 0:11:30.160 --> 0:11:30.640 the needle? 0:11:31.320 --> 0:11:34.120 It's probably no easier, no more difficult than things that 0:11:34.160 --> 0:11:36.959 we do on the investment side and in the stock market, 0:11:37.440 --> 0:11:41.800 there's time series analysis. We actually hired an outside firm 0:11:41.920 --> 0:11:45.120 to come in and review the record of what we 0:11:45.160 --> 0:11:49.240 had done in our first engagement with an organization called 0:11:49.280 --> 0:11:51.960 the Lord's Resistance Army. And if you want more details, 0:11:51.960 --> 0:11:55.360 there's a book called to Stop a Warlord that Shannon 0:11:55.480 --> 0:11:58.160 Davis wrote. I never thought we'd be able to tell 0:11:58.160 --> 0:12:00.040 the story at that level because you don't want to 0:12:00.040 --> 0:12:02.360 put at risk the people that are on the ground 0:12:02.600 --> 0:12:07.320 doing the real work. However, she found a way to 0:12:07.360 --> 0:12:09.920 do that and protect them, and so there's a book 0:12:09.960 --> 0:12:12.240 that goes into a lot of detail on that. But 0:12:12.559 --> 0:12:15.000 people think there's not a way to measure there is, 0:12:15.640 --> 0:12:19.360 and you're right, being a quantitative statistical guy, you can 0:12:19.400 --> 0:12:21.960 bet that that comes up on the table frequently. 0:12:22.040 --> 0:12:26.080 Huh. Really really fascinating. What's been the response from the community. 0:12:26.280 --> 0:12:29.400 The smallest in community is the Bridgeway community. So that's 0:12:29.400 --> 0:12:32.080 the twenty eight people at Bridgeway we call partners. Right 0:12:32.640 --> 0:12:35.280 they sign on for this work because it's in the 0:12:35.280 --> 0:12:37.560 mission statement. You don't not know about it coming in 0:12:37.640 --> 0:12:41.679 and you don't come if this isn't from day one 0:12:41.760 --> 0:12:46.120 and that's that's everything. The community of Houston, I would 0:12:46.160 --> 0:12:50.520 say less so, but it's kind of it's specific to individuals. 0:12:50.800 --> 0:12:54.120 So every once in a while you get somebody's like unbelievable, 0:12:54.240 --> 0:12:58.559 that's amazing and cannot come huh that level. We have 0:12:59.000 --> 0:13:03.760 partnered with other organizations, one of those being Howard Buffett, 0:13:03.920 --> 0:13:07.440 Warren Buffett's son that does substantial philanthropic work. 0:13:07.520 --> 0:13:08.680 Is he in Texas? 0:13:08.840 --> 0:13:12.680 No, No, he's in Nebraska, But we have partnered with 0:13:12.760 --> 0:13:15.720 him and work in the Ukraine. Worked in the first 0:13:15.800 --> 0:13:19.280 year of getting generators in for obvious reasons and getting 0:13:19.280 --> 0:13:22.800 the grain out for obvious reasons. I tell people at Bridgeway, 0:13:22.840 --> 0:13:26.080 we don't know squat about farming, but Howard Buffett does. 0:13:27.160 --> 0:13:30.080 And the third thing is documenting war crimes, and that's 0:13:30.120 --> 0:13:33.120 actually something that Bridgeway Foundation knows a lot. 0:13:32.960 --> 0:13:37.240 About documenting war crimes. Documenting and what do you do? 0:13:37.240 --> 0:13:39.280 Does this then go to the Hague to the UN 0:13:39.360 --> 0:13:42.080 What do you do with once you've documented and it 0:13:42.120 --> 0:13:47.040 should be fairly substantial in Ukraine, considering the Russians have 0:13:47.200 --> 0:13:55.120 been bombing civilian hospital, schools, infrastructure, apartment buildings, it looks horrific. 0:13:55.760 --> 0:13:59.080 What do you do with all of that information once 0:13:59.120 --> 0:14:01.360 you've documented a warp rhyme in Ukraine. 0:14:01.559 --> 0:14:07.080 So it depends on what national or international jurisdiction engages. 0:14:07.360 --> 0:14:10.400 So optimally you like to keep it at the country 0:14:10.480 --> 0:14:14.320 level if possible. The International Criminal Court is the other 0:14:14.600 --> 0:14:17.880 place that you can take a case that's in the Hague. 0:14:17.600 --> 0:14:20.080 That is in the Okay. So that's what I was 0:14:20.520 --> 0:14:23.880 really thinking about. Do they take these on as individual 0:14:23.920 --> 0:14:26.440 cases or are they kind of you know, it seems 0:14:26.480 --> 0:14:29.640 like the UN is sort of paralyzed because of you 0:14:29.800 --> 0:14:32.240 just have one voting member say no and that that's 0:14:32.320 --> 0:14:33.040 that at the end. 0:14:33.160 --> 0:14:35.920 One of the indicities of the International Criminal Court was 0:14:36.080 --> 0:14:40.400 Dominique Angwin, who was a general in the Lord's Resistance 0:14:40.520 --> 0:14:45.040 Army the first conflict that I mentioned earlier, and we 0:14:45.160 --> 0:14:47.960 played a major role in getting him to the Hague 0:14:48.000 --> 0:14:51.640 to stand trial for justice. So win for justice and 0:14:51.680 --> 0:14:54.200 then and as a deterrent by the way to kind 0:14:54.240 --> 0:14:56.000 of thugs of the world that think they can get 0:14:56.000 --> 0:14:57.320 away with war atrocities. 0:14:57.400 --> 0:15:01.920 What one would hope what happens when you have somebody 0:15:02.040 --> 0:15:06.560 like Putin who's kind of hard to reach and is Wisconsin, Moscow, 0:15:06.680 --> 0:15:09.480 and you know, how many hundreds of thousands of people 0:15:09.520 --> 0:15:14.640 have been killed, civilians, non combatants killed in the Ukraine. 0:15:15.440 --> 0:15:16.360 How do you reach someone? 0:15:16.680 --> 0:15:19.520 I would say one step at a time, and then 0:15:19.840 --> 0:15:21.960 you know, it's a lot of hard work slugging through 0:15:22.000 --> 0:15:23.800 and then occasionally you just need a stroke of good 0:15:23.880 --> 0:15:27.640 luck for something going the right way. Typically it takes 0:15:27.680 --> 0:15:30.560 more time. You know. They say the arc of justice 0:15:31.200 --> 0:15:33.480 gets there, but it's slow. That's not an exact quote, 0:15:33.560 --> 0:15:37.880 but that's my Martin Luther King summary of it. 0:15:37.960 --> 0:15:40.880 Yes, sure, so we'll come back to this because this 0:15:41.000 --> 0:15:44.080 is really fascinating. I had no idea you were so 0:15:44.320 --> 0:15:49.160 international in the philanthropic sphere. But we'll definitely circle back 0:15:49.200 --> 0:15:53.440 to that. Let's start talking a little bit about that 0:15:53.600 --> 0:15:56.480 track record. You have a couple of mutual funds, a 0:15:56.520 --> 0:16:00.240 couple of ETFs. I'm assuming you're running other stuff as 0:16:00.280 --> 0:16:04.640 a either separately managed accounts or a separate what have you. 0:16:04.880 --> 0:16:08.720 I know, one of your funds since inception has outperformed 0:16:08.760 --> 0:16:12.120 the market by about one hundred basis points, and the 0:16:12.320 --> 0:16:14.760 other I don't know if it's still a mutual fund. 0:16:14.800 --> 0:16:17.560 I know it started as a mutual fund is now 0:16:17.960 --> 0:16:21.760 about three hundred basis points over market returns. Tell us 0:16:21.760 --> 0:16:24.680 about the mutual funds and ETFs you run on behalf 0:16:24.760 --> 0:16:26.240 of Bridgeways clients. 0:16:26.360 --> 0:16:29.400 Yes, so let me talk about the strategies. One you 0:16:29.480 --> 0:16:33.880 referred to as aggressive investors, and as the name would indicate, 0:16:34.360 --> 0:16:37.720 it has high beta, very well high beta, but very 0:16:37.800 --> 0:16:42.080 high exposure to the factors that we want that we 0:16:42.160 --> 0:16:42.960 believe in, so. 0:16:43.080 --> 0:16:46.280 High active share. And when you say factors, very high active. 0:16:46.320 --> 0:16:48.840 So you know I should have mentioned this earlier. What 0:16:49.320 --> 0:16:52.200 a lot of people call smart beta, You guys were 0:16:52.240 --> 0:16:55.440 doing long before anyone had a name on it. You've 0:16:55.440 --> 0:16:58.600 been doing smart beta, You've been doing factor investing a 0:16:58.600 --> 0:17:00.920 long time. Tell us a little bit about the sort 0:17:00.960 --> 0:17:03.800 of factor investing that drives Bridgeways returns. 0:17:04.480 --> 0:17:06.840 Well, these are factors that we believe in. First of all, 0:17:08.680 --> 0:17:12.199 some of my co portfolio managers will bristle if you 0:17:12.359 --> 0:17:15.640 refer to us as a factor based firm. I owned 0:17:15.680 --> 0:17:17.960 that a little bit more. But it's a fair point 0:17:18.119 --> 0:17:22.040 in the sense of being systematic, statistically driven over long 0:17:22.080 --> 0:17:26.600 periods of time. But there are human elements, Like if 0:17:26.600 --> 0:17:29.600 there were no human element, everybody would be operating the 0:17:29.680 --> 0:17:33.560 identical strategy out there. So yes, we believe in value. 0:17:33.880 --> 0:17:37.359 We have our own proprietary mix of metrics and we 0:17:37.400 --> 0:17:41.119 can show statistically based on data over decades why we 0:17:41.160 --> 0:17:41.479 do that. 0:17:41.680 --> 0:17:43.760 So let me stop you before you go on to 0:17:43.840 --> 0:17:48.400 the next one. When most people hear value, they immediately think, 0:17:49.040 --> 0:17:53.320 you know, low PE, low price to book ratio. Your 0:17:53.359 --> 0:17:55.960 approach to value, I know, is a little more sophisticated 0:17:56.000 --> 0:17:58.960 than that. Put some flesh on the bones. Tell us 0:17:58.960 --> 0:18:01.800 about Bridgeways value approach. 0:18:02.400 --> 0:18:06.600 So we believe in value, quality, and sentiment, or the 0:18:06.640 --> 0:18:10.199 three primary legs of the stool. Within that, one of 0:18:10.200 --> 0:18:11.919 the things that we've done for a long period of 0:18:11.920 --> 0:18:16.320 time is mix different measures. So and why do we 0:18:16.359 --> 0:18:18.760 do that. It's because it gives you a more stable 0:18:19.560 --> 0:18:23.679 return stream over time. So if it's academically, you know, 0:18:23.800 --> 0:18:27.119 paper when I was in business school came out FAMA 0:18:27.240 --> 0:18:28.040 French and. 0:18:28.080 --> 0:18:30.000 The value factory model factor. 0:18:30.200 --> 0:18:34.000 Yeah, and the three factor then was price to book 0:18:35.000 --> 0:18:38.879 And it's a metric, but we could show statistically that 0:18:38.960 --> 0:18:42.680 if you match it with things like PE, with things 0:18:42.760 --> 0:18:46.000 like price to sales, which has its own part. Think 0:18:46.080 --> 0:18:48.960 through the balance sheet and the income statement, different ways 0:18:49.000 --> 0:18:53.919 to measure value. That putting them together in a efficient 0:18:54.000 --> 0:18:58.640 way gives you a steadier stream of returns into the future. 0:18:59.040 --> 0:19:01.320 So that's why we do that. There's a very interesting 0:19:02.240 --> 0:19:04.679 output of that though, that comes. So I was at 0:19:04.680 --> 0:19:07.960 a conference I don't know, I'm going to say, maybe 0:19:08.000 --> 0:19:11.680 twelve years ago or so, paper presented by NOV marks 0:19:11.720 --> 0:19:16.720 on quality, and he's presently like everybody's excited. I'm excited. 0:19:16.760 --> 0:19:18.440 We go back in. The first thing we all always 0:19:18.480 --> 0:19:20.560 try and to is replicate the work if it's new. 0:19:21.160 --> 0:19:25.160 So we replicated the work we put it into see 0:19:25.200 --> 0:19:27.720 could it help our models, and the answer was no. 0:19:28.000 --> 0:19:29.119 Do you know why the reason was no? 0:19:29.359 --> 0:19:31.879 Because you already had quality. 0:19:31.560 --> 0:19:36.120 And inadvertently we had already included quality in the process. 0:19:36.240 --> 0:19:37.800 Because that doesn't ultimately. 0:19:37.440 --> 0:19:42.320 That doesn't surprise me because you're you're talking about different metrics, 0:19:42.720 --> 0:19:45.280 and when I think about value, and I also think 0:19:45.280 --> 0:19:48.600 about value traps, and I know you cannot generate the 0:19:48.680 --> 0:19:52.399 numbers you have if you're constantly buying stuff that's cheap 0:19:52.880 --> 0:19:56.560 but low quality, high debt, all these other issues that 0:19:56.600 --> 0:20:01.119 come up. Eventually, those things have to underperform. So I 0:20:01.240 --> 0:20:04.640 kind of had the sense that you guys have quality 0:20:04.680 --> 0:20:08.159 exposure just by your long term track record. So you 0:20:08.240 --> 0:20:11.800 reproduce Novi's work. Where do you go from there? 0:20:12.000 --> 0:20:14.199 There's always a next step, Barry. If I take a 0:20:14.240 --> 0:20:18.280 look at just three of our strategies currently, it gives 0:20:18.320 --> 0:20:20.400 you a feel for the breadth of what we do. 0:20:20.480 --> 0:20:24.119 So one would be our small value strategy and you 0:20:24.200 --> 0:20:27.720 might think small value. That seems pretty plain. Vanilla mentioned 0:20:27.760 --> 0:20:30.919 the research on value that we've done. We try and 0:20:30.960 --> 0:20:34.080 incorporate some things and how you incorporate them into the 0:20:34.080 --> 0:20:38.040 portfolio construction where you constrain and where you don't like 0:20:38.080 --> 0:20:40.960 how much are you willing to take on of sector risk? 0:20:41.640 --> 0:20:45.239 But our OMNI small value strategy is a strategy that 0:20:45.280 --> 0:20:49.880 we designed specifically for the purposes of an organization called 0:20:49.920 --> 0:20:55.879 Buckingham or BAM. Then now it's now called Focus Partner's Wealth, 0:20:56.680 --> 0:21:00.280 great friends of ours and our small value OMNIE small 0:21:00.359 --> 0:21:04.600 value fits into their allocation in a way that's efficient 0:21:04.720 --> 0:21:08.800 for their portfolio construction. Now, what's Bridgeways advantage. It's our 0:21:08.880 --> 0:21:12.320 size and this is something that's true across all of 0:21:12.320 --> 0:21:16.200 our strategies currently. We have a huge leg up being 0:21:16.200 --> 0:21:20.560 a smaller organization. Several reasons think of the OMNI small 0:21:20.640 --> 0:21:23.879 value because we're smaller and we don't have hundreds of 0:21:23.920 --> 0:21:28.640 billions under management, we can go deeper on small deeper 0:21:28.880 --> 0:21:31.439 to a degree. Our benchmark is still the Rustle two 0:21:31.480 --> 0:21:36.720 thousand value index, but our strategy is x real estate 0:21:36.760 --> 0:21:43.240 and utilities because our partners focus Wealth Partners has separate 0:21:43.480 --> 0:21:46.879 strategies for that, so we don't duplicate that. And so 0:21:47.000 --> 0:21:49.240 that's an example of the kind of research that we do. 0:21:49.280 --> 0:21:52.360 How does that affect the reterms? Is that a good 0:21:52.400 --> 0:21:56.720 idea to do? But Bridgeway's own small size means that 0:21:57.280 --> 0:22:00.800 we don't have well, it means several things. Really. Number one, 0:22:01.280 --> 0:22:04.959 it means our transaction costs are less, which, based on 0:22:05.040 --> 0:22:08.480 your career, you know exactly the importance of that. So 0:22:08.520 --> 0:22:11.440 if you're a trader and I give you an order 0:22:11.480 --> 0:22:14.480 on a particular stock ticker symbol and say go buy 0:22:14.520 --> 0:22:18.639 me a thousand shares of that, and your job is 0:22:18.680 --> 0:22:21.120 to get this completed at the best price possible. However 0:22:21.119 --> 0:22:23.120 you want to measure it, and I give you one 0:22:23.160 --> 0:22:27.320 ticket for one thousand shares and another ticket for fifty 0:22:27.359 --> 0:22:29.560 thousand shares, but I'm going to hold you accountable to 0:22:29.600 --> 0:22:32.320 the same price. Which one do you want? 0:22:33.040 --> 0:22:35.160 Well? From back in the day, when it was five 0:22:35.200 --> 0:22:38.120 cents a share, you wanted the fifty thousand share order, 0:22:38.160 --> 0:22:41.480 but that's not how you're getting paid. Well, the thousand 0:22:41.480 --> 0:22:44.639 share orders much easier to get done at a good price. Yes, 0:22:44.800 --> 0:22:48.600 fifty thousand shares, especially a small cap, you may move 0:22:48.640 --> 0:22:51.399 the price up. You're certainly not just absolutely lifting the 0:22:51.480 --> 0:22:54.080 offer and walking away with fifty absolute shares. 0:22:54.280 --> 0:22:57.240 So for the investor, you want the smaller one that 0:22:57.280 --> 0:22:59.120 gets done more quickly. If you can get it done 0:22:59.119 --> 0:23:03.560 more quickly, it's more favorable price. You're less likely to 0:23:03.600 --> 0:23:06.680 move the price of the security in an unfavorable way. 0:23:07.320 --> 0:23:12.840 And that same thousand shares will make a more meaningful 0:23:12.920 --> 0:23:15.760 contribution to a smaller shop than to a larger shop. 0:23:15.920 --> 0:23:17.959 Same number of shares is just going to be you know, 0:23:18.000 --> 0:23:20.560 point zero zero one in the portfolio. Why even waste 0:23:20.560 --> 0:23:24.160 your time at Bridgeway. It's more meaningful. That's a big deal. 0:23:24.200 --> 0:23:26.720