WEBVTT - MIB Live (Replay) with Eugene Fama and David Booth 0:00:02.200 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Boomberg Radio. 0:00:07.120 --> 0:00:09.760 This week. I was privileged to travel to the University 0:00:09.760 --> 0:00:12.799 of Chicago to the Booth School of Business, where I 0:00:12.880 --> 0:00:16.560 got to sit down with Eugene Fama, Nobel Laureate, Chicago 0:00:16.600 --> 0:00:21.680 Booth School of Business UM, founder of the Efficient Market hypothesis, 0:00:22.040 --> 0:00:27.160 creator of effectively the three, five and seven UH Fama 0:00:27.200 --> 0:00:32.280 French factor model, basically the father of modern finance. I 0:00:32.280 --> 0:00:36.000 don't know how else to describe him, along with his 0:00:36.640 --> 0:00:41.440 best student, David Booth, co founder of Dimensional Funds, the 0:00:41.560 --> 0:00:44.480 person that the Booth School of Business is named after. 0:00:45.680 --> 0:00:47.920 What can I tell you? I flew out to Chicago. 0:00:48.720 --> 0:00:52.760 UH basically went to the Booth School of Business at 0:00:52.760 --> 0:00:57.760 the University of Chicago where they were celebrating this relationship 0:00:57.920 --> 0:01:02.760 that both Fama and Booth have had for literally fifty years. 0:01:03.240 --> 0:01:05.080 I got to sit down with the two of them 0:01:05.120 --> 0:01:07.679 for an hour in front of about five people in 0:01:07.720 --> 0:01:10.839 the audience, including a lot of students from the Boost 0:01:10.840 --> 0:01:14.400 School as well as other notables who were in attendance. 0:01:15.040 --> 0:01:19.080 And Fama is notoriously press shy. He does not do 0:01:19.160 --> 0:01:23.800 a whole lot of UM interviews with the media. This 0:01:23.959 --> 0:01:27.280 was just a delight. I can't begin to say how 0:01:27.480 --> 0:01:31.760 just awesome he was. He's a provocateur. He likes to 0:01:31.840 --> 0:01:35.280 say things that are very much, um contrarian. He's a 0:01:35.319 --> 0:01:38.360 little bit you know, if Farma was on Twitter, he 0:01:38.400 --> 0:01:41.560 would be a troll. He loves to tweak people, especially 0:01:41.959 --> 0:01:45.759 his buddy and fellow Nobel laureate Richard Taylor. Uh. He 0:01:45.920 --> 0:01:50.840 was busting his jobs about behavioral finance, basically saying it's 0:01:50.880 --> 0:01:54.160 all just pushed back to the efficient market hypothesis. Uh. 0:01:54.280 --> 0:01:56.960 David Booth, also very insightful, had a lot of things 0:01:56.960 --> 0:02:00.200 to say. There's obviously a tremendous amount of respect at 0:02:00.520 --> 0:02:03.840 between the two of these guys. I could babble about 0:02:04.000 --> 0:02:07.640 my experience in Chicago for hours, but rather than do that, 0:02:08.200 --> 0:02:12.760 why not just say my conversation with Eugene Vama and 0:02:12.880 --> 0:02:16.799 David Booth. There is so much material to cover. We're 0:02:16.800 --> 0:02:19.600 gonna keep this to about four hours. We'll take a 0:02:19.600 --> 0:02:24.280 break for dinner, and then we'll finish up before midnight. Um. 0:02:24.320 --> 0:02:28.000 So I really don't have to introduce either of these gentlemen, 0:02:28.040 --> 0:02:30.640 but let me just put a little more flesh on 0:02:30.680 --> 0:02:35.160 the bones of what what the Dean started with. Obviously, 0:02:35.280 --> 0:02:39.160 Jean is best known for not only the efficient market hypothesis, 0:02:39.200 --> 0:02:43.360 but his research on portfolio theory, asset pricing, the Fama 0:02:43.400 --> 0:02:49.079 French factor models. He is recipient of the Nobel Prize 0:02:49.080 --> 0:02:53.040 in in Economics, and I like the sentence that the 0:02:53.080 --> 0:02:57.360 Nobel group used quote for stuff for his work showing 0:02:57.440 --> 0:03:01.000 quote stock price movements are impossible to predict in the 0:03:01.080 --> 0:03:05.320 short term and that new information effects prices almost immediately, 0:03:05.720 --> 0:03:10.560 which means markets are efficient. David co founded Dimensional with 0:03:10.639 --> 0:03:15.840 another University of Chicago alum, Rex Sinquefeld in one The 0:03:15.919 --> 0:03:20.200 firm now employees four hundred people who helped manage five 0:03:20.280 --> 0:03:24.239 hundred and seventy nine billion dollars over the twenty years 0:03:24.440 --> 0:03:29.480 ending in twenty eighteen. Eight of dimensionals equity and fixed 0:03:29.520 --> 0:03:33.760 income funds beat their benchmark the rest of the industry 0:03:34.120 --> 0:03:37.800 just seventeen and that's based on much of the work 0:03:38.160 --> 0:03:42.920 that Professor Fama did. So so let's jump into the 0:03:43.080 --> 0:03:46.520 history um of both Gene and David and see where 0:03:46.560 --> 0:03:50.560 it goes. Jeane, during your last I feel weird calling 0:03:50.560 --> 0:03:54.600 you Gene. It really should be Professor Farma, shouldn't it Um? 0:03:54.720 --> 0:03:58.120 During your last year toughs. You worked for Professor Harry 0:03:58.280 --> 0:04:02.760 Ernst who had a light gig running a stock market 0:04:02.960 --> 0:04:07.680 forecasting service, and you did research for him. What sort 0:04:07.680 --> 0:04:11.920 of work did you do with this stock forecasting research? 0:04:12.680 --> 0:04:16.960 I was devising schemes to beat the market, and how 0:04:16.960 --> 0:04:20.560 did that work out? Worked out fine? And on the 0:04:20.640 --> 0:04:23.800 data that I fitted to didn't work out fine on 0:04:23.839 --> 0:04:26.599 the whole load sample never did So that was a 0:04:26.720 --> 0:04:30.400 lesson that data judging continn of things that aren't really there. 0:04:31.080 --> 0:04:35.200 And how did that research into forecasting the stock market 0:04:35.320 --> 0:04:39.000 impact your thinking about whether or not the market could 0:04:39.000 --> 0:04:44.080 be be well? When I came here to Chicago, uh, 0:04:44.920 --> 0:04:49.200 research on asset prices had again to get going in 0:04:49.360 --> 0:04:52.960 really serious way, and many people were interested in the 0:04:53.080 --> 0:04:57.480 question of how well stock prices adjusted to new information. 0:04:57.800 --> 0:05:01.760 Put in context, they always say it started because of computers. 0:05:02.520 --> 0:05:07.400 Before really didn't have a serious computer too do data 0:05:07.400 --> 0:05:11.960 analysis on. And with the coming of computers, statisticians economists 0:05:11.960 --> 0:05:15.080 were they had a new toy too to play with 0:05:15.160 --> 0:05:18.720 and stock stock prices were easily available, so that was 0:05:18.760 --> 0:05:21.240 one of the first things they started to study. And 0:05:21.240 --> 0:05:24.359 then immediately the economists said, well, how do we expect 0:05:24.400 --> 0:05:27.800 prices to behave if the world was working properly, in 0:05:27.800 --> 0:05:31.240 other words, if markets were efficient. They weren't using that term, 0:05:31.320 --> 0:05:33.920 but that's what they were after, and they were all 0:05:34.040 --> 0:05:39.760 kinds of theories proposed. They had lots of shortcomings to them, 0:05:39.800 --> 0:05:42.440 and a little bit of time we came to the 0:05:42.520 --> 0:05:47.120 efficient market hypothesis. And you were in your senior year Toughs. 0:05:47.160 --> 0:05:50.160 You had applied here, but you never heard back from 0:05:50.160 --> 0:05:53.680 the school. Is this an urban legend or is this true? 0:05:54.160 --> 0:05:58.919 So what happened? I called? I called in uh the 0:05:59.000 --> 0:06:03.240 Dina students toff at Keff answered, that wouldn't happen today. 0:06:03.560 --> 0:06:05.840 The school is so much bigger. The dean students doesn't 0:06:05.839 --> 0:06:10.120 even have a telephone. Way too important for that. So 0:06:10.200 --> 0:06:12.000 he answered the phone. We chatted for a while and 0:06:12.040 --> 0:06:13.680 he said, well, I hate to tell you, but we 0:06:13.839 --> 0:06:16.480 don't have any record of your application. So what kind 0:06:16.480 --> 0:06:18.719 of grades do you have at Toughs? And I said 0:06:18.760 --> 0:06:21.440 pretty much a lazy. He said, well, we have a 0:06:21.480 --> 0:06:25.599 scholarship for someone from Toughs. Do you want it? And 0:06:25.640 --> 0:06:27.520 then that's how that's how I ended up at the 0:06:27.560 --> 0:06:31.479 University of Chicago. So so you come here as a 0:06:31.520 --> 0:06:35.559 student you're you're finishing your work. Eventually, Martin Miller says 0:06:35.600 --> 0:06:37.640 to you, Hey, do you want to stick around and 0:06:37.720 --> 0:06:40.480 keep doing the sort of research you're doing? Is that 0:06:40.520 --> 0:06:45.279 how you became a professor here? Yeah? I was. I 0:06:45.360 --> 0:06:49.960 had offers that some other places, um, but lots of 0:06:50.000 --> 0:06:52.160 the places turned me down. They said it was to Chicago. 0:06:54.040 --> 0:07:00.599 I don't know what that meant actually, but but uh, 0:07:00.960 --> 0:07:03.800 it was very rare to hire somebody from your ound 0:07:03.800 --> 0:07:07.480 PhD program onto the faculty. They're only gonna one or 0:07:07.520 --> 0:07:12.000 two before there. So, David, you had a somewhat different experience. 0:07:12.080 --> 0:07:13.880 You grow up in Kansas, you get a b a 0:07:13.960 --> 0:07:17.400 in economics and a master's from the University of Kansas. 0:07:17.880 --> 0:07:21.120 What made you decide to come to Chicago. Well, I 0:07:21.160 --> 0:07:25.480 did a little bit of reading um in finance um 0:07:25.760 --> 0:07:30.560 and um my had a finance professor there that gotten 0:07:30.600 --> 0:07:36.480 his PhD here, and he said, finances exploding really emerging 0:07:36.520 --> 0:07:40.280 as an academic discipline. It's really one of the the 0:07:40.320 --> 0:07:44.680 epicenters is clearly Chicago. And so I thought, well, I, God, 0:07:44.680 --> 0:07:47.120 I should be fun, maybe be a professor. So I 0:07:47.160 --> 0:07:52.520 applied here. Uh. Um, Yeah, I started to stay, took 0:07:52.600 --> 0:07:55.920 jeans class my very first class, and is was the 0:07:56.000 --> 0:08:00.240 Dean Correct? Was that literally fifty years ago? Fifty years 0:08:00.240 --> 0:08:04.720 ago this fall? It was. Yeah, it was the first 0:08:04.800 --> 0:08:07.840 year that Chicago had a football team in thirty four years. 0:08:09.960 --> 0:08:13.840 And you had written about your experience taking a class 0:08:13.880 --> 0:08:18.840 with Gene. You called it um life changing and transformative. 0:08:19.680 --> 0:08:22.520 In what ways was it life changing? Well? Life changing 0:08:24.200 --> 0:08:26.640 led to a career. I mean, I can't have much 0:08:26.640 --> 0:08:30.840 of a bigger change than that, but it's um life changing. 0:08:30.840 --> 0:08:35.120 And then I think everybody here probably UM, I would 0:08:35.160 --> 0:08:38.920 like to think of themselves UM having a public purpose. 0:08:39.280 --> 0:08:40.719 At the end of it all, when you get to 0:08:40.720 --> 0:08:43.440 be my age, you want to look back and I 0:08:43.440 --> 0:08:46.240 think somehow the world was better off for your having 0:08:46.240 --> 0:08:50.320 been here. And so these ideas that were coming out, 0:08:51.160 --> 0:08:55.520 you know, the essence of efficient markets, it was already 0:08:55.520 --> 0:08:59.520 well developed. He had already coined the term UM. And 0:08:59.559 --> 0:09:01.600 you just said, this is enormously useful. If you look 0:09:01.920 --> 0:09:05.600 at the way money was managed fifty years ago, people 0:09:05.600 --> 0:09:08.160 are getting ripped off. I mean, fees were way too high. 0:09:08.520 --> 0:09:11.480 You know, the commissions were fixed by the government, uh 0:09:11.600 --> 0:09:14.480 at about ten times what they are today, and uh 0:09:14.800 --> 0:09:19.280 we forth it's free today. So it's a lot more 0:09:19.320 --> 0:09:23.480 than ten x yeah. Yeah, yeah, So it's um. I 0:09:23.520 --> 0:09:27.080 think there was a spirit of that we can improve 0:09:27.160 --> 0:09:30.480 people's lives, you know, a real purpose to all of this. 0:09:31.640 --> 0:09:36.960 Gene um more on the research side, and I've thought 0:09:37.440 --> 0:09:39.960 my role in all this would be more on the 0:09:40.040 --> 0:09:44.359 application of the ideas. So you become Jane's teaching assistant. 0:09:44.920 --> 0:09:48.720 How did that come about? I always I always picked 0:09:48.720 --> 0:09:51.960 the student in the class in the previous year to 0:09:52.000 --> 0:09:55.440 be the teachers good student. It's the best of the class. 0:09:57.040 --> 0:10:02.319 You don't have to laugh at that. I mean, so 0:10:02.800 --> 0:10:07.200 best student, professor Farmers teaching assistant. Why not a career 0:10:07.200 --> 0:10:11.520 in academia. Well, first off, I realized I could never 0:10:11.600 --> 0:10:14.560 compete with gene I mean when you're at the top 0:10:14.559 --> 0:10:19.280 of the mountain. Um. But it's really something. It caused 0:10:19.280 --> 0:10:22.280 me to reflect and you know, really internally and what 0:10:22.280 --> 0:10:27.400 what am I about? What do I enjoy? And I 0:10:27.400 --> 0:10:29.240 I just saw this as a great opportunity to go 0:10:29.240 --> 0:10:32.800 out to apply all these ideas people were developing. Every 0:10:32.920 --> 0:10:35.240 new paper coming out was a landmark paper. It was 0:10:35.559 --> 0:10:38.360 it was all brand new stuff, and uh, none of 0:10:38.440 --> 0:10:40.960 them was being applied. So we're gonna come back to 0:10:41.040 --> 0:10:45.120 the application very shortly. But you mentioned that all these 0:10:45.160 --> 0:10:50.440 new ground baking, groundbreaking papers were coming out. Professor Farmer, 0:10:50.559 --> 0:10:55.120 your doctoral thesis in four was the behavior of stock 0:10:55.200 --> 0:10:59.520 market prices, And this sentence jumps right off the page 0:11:00.200 --> 0:11:04.719 quote chart reading, though perhaps an interesting pastime, is of 0:11:04.800 --> 0:11:08.400 no real value to the stock market investor. So this 0:11:08.440 --> 0:11:12.160 gets published in the Journal of Business in nine. What 0:11:12.280 --> 0:11:15.439 sort of pushback do you get to the general concept 0:11:15.520 --> 0:11:21.600 that UM charts are of no use past market walk 0:11:21.720 --> 0:11:25.600 is of no future predictability to what happens going forward. 0:11:25.920 --> 0:11:27.440 You got a lot of a lot of pushback from 0:11:27.520 --> 0:11:31.560 the professionals. The academics looked at the data, looked at 0:11:31.640 --> 0:11:34.960 what people were saying, what they were showing, and adopted 0:11:35.000 --> 0:11:37.560 it right away. I mean, there was no prospect among 0:11:37.600 --> 0:11:40.520 the academics. Really, it's really the beginning of I mean, 0:11:40.640 --> 0:11:44.480 if you had to summarize really impact of all this 0:11:44.640 --> 0:11:48.240 is UM what was going on in Chicago then really 0:11:48.320 --> 0:11:53.240 changed the way people think about investing. And that's really 0:11:53.280 --> 0:11:56.160 been the theme, and Jen has changed the way people 0:11:56.240 --> 0:11:59.360 think about investing more than that's that's the pre and 0:11:59.480 --> 0:12:03.280 post law line, pre FAMA and post Fauma there's a 0:12:03.520 --> 0:12:12.360 ce change. I don't like the postframa business meaning meaning 0:12:12.720 --> 0:12:18.440 post publication of your way. So we not only have 0:12:18.600 --> 0:12:22.160 your doctoral thesis, we have the efficient market paper. We 0:12:22.240 --> 0:12:25.319 have the FAMA French three factor paper. There are a 0:12:25.440 --> 0:12:30.640 number of very very influential papers that David, if I'm 0:12:30.640 --> 0:12:34.840 hearing you correctly, you're saying that changed the firmaments of 0:12:34.880 --> 0:12:38.319 finance forever, changing it forever and for the better. I mean, 0:12:38.360 --> 0:12:44.880 I get particularly, and there's among students there's this kind 0:12:44.920 --> 0:12:49.200 of antipathy towards finance and economics, you know, and they 0:12:49.200 --> 0:12:54.320 don't realize how much UH finance has changed for the better. 0:12:54.480 --> 0:12:58.480 People's lives have been improved by these ideas in this research, 0:12:58.880 --> 0:13:03.320 lower fees, better of risk control, and so forth. So 0:13:03.320 --> 0:13:07.559 so let's let's compare then and now a little more specifically, 0:13:08.000 --> 0:13:11.680 and we'll start by talking efficient markets. Back in the 0:13:11.800 --> 0:13:16.160 days when active managers were dominant, inefficiencies could still be 0:13:16.280 --> 0:13:21.480 easily found, as could to percent fees. Professionals didn't believe 0:13:21.600 --> 0:13:24.920 markets were efficient. They thought they were kind of sort 0:13:24.960 --> 0:13:28.720 of eventually efficient. I doubt many of them would say 0:13:28.760 --> 0:13:32.240 that today, what do you think has changed to bring 0:13:32.360 --> 0:13:36.040 so many people over to the efficient market theory, well, 0:13:37.280 --> 0:13:41.920 the accumulation of of performance evidence. So back then there 0:13:42.040 --> 0:13:46.280 wasn't there was no real evidence on how these people did. Uh. 0:13:46.320 --> 0:13:49.360 And one of the first papers was like Jensen's thesis, 0:13:49.640 --> 0:13:54.400 which studied new toral funds for the previous twenty five 0:13:54.480 --> 0:14:00.240 years and so that basically they weren't beating the market. Uh. 0:13:59.280 --> 0:14:03.400 And now we know on hindsight that in fact that 0:14:03.480 --> 0:14:07.320 has to be true that active management is a zero 0:14:07.400 --> 0:14:11.559 sum game before cost because they don't they can't win 0:14:11.640 --> 0:14:14.760 from the passive managers because the passive people hold cap 0:14:14.800 --> 0:14:18.240 weight portfolios. They don't, they don't overweight and underweight in 0:14:18.360 --> 0:14:21.640 response to what the active people do. So if there's 0:14:21.800 --> 0:14:24.440 anybody underweighting and overweighting, there has to be another active 0:14:24.480 --> 0:14:28.160 manager on the other side doing the opposite, which means 0:14:28.160 --> 0:14:31.400 if one wins, the other loses some of those is 0:14:31.480 --> 0:14:40.040 zero before costs arithmetic of active management. He calls it 0:14:40.040 --> 0:14:43.120 the arithmetic because it is arithmetic. It's not a proposition. 0:14:43.640 --> 0:14:45.760 It has to be true for everyone, or there's an 0:14:45.760 --> 0:14:50.800 offsetting loose. So what about technology, how does that impact 0:14:51.280 --> 0:14:55.960 how fast information makes its way into prices? It should 0:14:56.080 --> 0:15:01.680 make it better, Uh, but you know, truth is, prices 0:15:01.680 --> 0:15:06.360 are so volatile. Markets have always looked really efficient. They 0:15:06.400 --> 0:15:09.360 don't look anymore efficient than they and they ever have 0:15:09.800 --> 0:15:13.880 with the introduction of all the technology. So if information 0:15:13.960 --> 0:15:17.640 is spread much more quickly now than it was fifty 0:15:17.680 --> 0:15:20.000 years ago because you have so many sources and they're 0:15:20.040 --> 0:15:23.480 so quick, but you can't really see in the data 0:15:23.880 --> 0:15:27.040 that that's had a quantum effect on the adjustment of 0:15:27.080 --> 0:15:31.080 crisis to information. So we may not be able to 0:15:31.080 --> 0:15:33.920 see it explicitly in the data. But when we look 0:15:34.080 --> 0:15:38.080 at things like hedge fund performance, they did very well 0:15:38.120 --> 0:15:42.840 before the financial crisis, since then not as well. We 0:15:42.920 --> 0:15:47.160 look at the money flows away from expensive active towards 0:15:47.240 --> 0:15:52.160 inexpensive passive, it sounds like lots of investors are voting 0:15:52.200 --> 0:15:55.080 with their dollars that, hey, the market is efficient and 0:15:55.160 --> 0:15:59.600 we can't beat it. Doesn't it seem like technology is 0:15:59.680 --> 0:16:02.920 dry having some of that Because there used to be 0:16:03.000 --> 0:16:07.920 information asymmetries. There used to be inefficiencies that a savvy 0:16:08.000 --> 0:16:10.680 manager might have been able to find. It sounds like 0:16:10.720 --> 0:16:14.960 it's even harder to find those inefficiencies today than thirty 0:16:15.040 --> 0:16:18.880 years ago. Um, Hey, you have better information than I 0:16:18.960 --> 0:16:23.440 do because you're saying, so it's always looked, it's always 0:16:23.440 --> 0:16:27.400 been that, it's always been zero sum game. I've been 0:16:27.440 --> 0:16:30.440 in the business now almost fifty years, and every year 0:16:30.520 --> 0:16:33.760 people say, next year is gonna be the stockpickers stockpickers market? 0:16:34.200 --> 0:16:39.400 Well Gene saying is it's arithmetically impossible. So so let's 0:16:39.440 --> 0:16:43.800 talk a little bit about index funds. Gene. You introduced 0:16:43.880 --> 0:16:47.560 David when he is finishing his NBA and wants to 0:16:47.560 --> 0:16:50.840 go out into the world of work, to John McGowan 0:16:50.920 --> 0:16:54.240 over at Wells Fargo, where they were developing as an 0:16:54.280 --> 0:16:59.480 institutional product, the first index fund. What made you think 0:16:59.520 --> 0:17:04.040 that that was a good fit for for David mac mcclown, 0:17:05.000 --> 0:17:07.840 who was in charge of the Wells Fargo unit, came 0:17:07.880 --> 0:17:10.119 to well the seminars we did here for business people, 0:17:10.320 --> 0:17:12.720 we didn't twice a year, the Center for Research and 0:17:12.760 --> 0:17:16.879 Security Prices were in seminars for interested business people and 0:17:16.960 --> 0:17:20.800 Mac came to all of them and he seemed very 0:17:22.359 --> 0:17:26.000 you know, into the new stuff. And so when it 0:17:26.080 --> 0:17:27.840 came down the David said, I see what you do, 0:17:27.880 --> 0:17:31.200 but I don't want to do it as an academic. 0:17:32.280 --> 0:17:34.200 So I called Mac and said, I have a really 0:17:34.240 --> 0:17:36.680 good student here if you've got a place him and 0:17:36.720 --> 0:17:40.080 he did. So what was your experience like it? Wells 0:17:40.119 --> 0:17:42.479 Fargo working on that index one, Well, there was a 0:17:42.560 --> 0:17:48.480 terrific experience, great exposure. I learned the importance of a 0:17:49.359 --> 0:17:55.400 client work. I mean investment businesses part technology or investment science, 0:17:55.640 --> 0:18:00.680 and it's part client work. And as I've told Jean, 0:18:00.760 --> 0:18:03.479 you know, I studied finance for two years, I've been 0:18:03.520 --> 0:18:08.960 studying client work at the last you know. And that 0:18:09.119 --> 0:18:15.679 was we uh, we were so naive about dealing with 0:18:15.760 --> 0:18:18.159 clients and what they would be interested in, and we 0:18:18.160 --> 0:18:24.080 were so pumped up, jazzed up about the ideas. Somehow, um, 0:18:24.160 --> 0:18:28.240 we missed the mark and actually my group got it 0:18:28.400 --> 0:18:32.000 was unsuccessful, we got shut down, but they were um, 0:18:32.119 --> 0:18:34.199 the other parts of the bank kept it going. And 0:18:34.240 --> 0:18:39.720 now that little project we started end up as through 0:18:39.800 --> 0:18:42.800 various hands, is now a big part of black Rock. 0:18:43.280 --> 0:18:45.760 So so let's that's right. It eventually ended up going 0:18:45.800 --> 0:18:48.080 to Barclays and then black Rock bis them and now 0:18:48.119 --> 0:18:51.399 I shares I think they're coming up on six or 0:18:51.440 --> 0:18:55.520 seven trillion dollars not to not too shabby. Um, but 0:18:55.680 --> 0:19:00.080 let's talk about the application of genes theories to the 0:19:00.119 --> 0:19:04.879 practice of working with clients post Wells far ago. You 0:19:05.000 --> 0:19:09.600 decide to open the small microcap fund out of your 0:19:09.840 --> 0:19:13.600 second bedroom in an apartment in Brooklyn. Tell us how 0:19:13.600 --> 0:19:18.320 you applied Professor Farmers research to that microcap fund. Well, 0:19:18.359 --> 0:19:22.280 the first thing is, UM, we decided UM not to 0:19:22.400 --> 0:19:26.640 have UH around the portfolio like an index fund, even 0:19:26.640 --> 0:19:29.440 though at first we call it an index fund because 0:19:29.440 --> 0:19:32.720 it's very similar to indexing. With the final step being 0:19:33.240 --> 0:19:38.359 UM that we don't trade UH market on clothes like 0:19:38.400 --> 0:19:41.560 many index funds do. UM. And what that means is 0:19:42.119 --> 0:19:45.600 we were we would be trading stocks throughout the day. Well, 0:19:45.640 --> 0:19:49.720 that created a lot of skepticism, particularly among academics, because 0:19:49.720 --> 0:19:52.280 you're going to the marketplace. You know, you don't have 0:19:52.600 --> 0:19:56.760 any undiscounted information. People on the other side of your trade, 0:19:56.880 --> 0:19:59.760 largely institutions, think they know a lot about the stock. 0:20:00.200 --> 0:20:02.240 You know, why won't they just rip your eyes out 0:20:02.240 --> 0:20:07.879 when you're trading. That's a that's a quite legitimate question. Uh. Well, 0:20:07.920 --> 0:20:09.200 I mean that the answer is there a lot of 0:20:09.200 --> 0:20:11.800 things you can do to use the energy of markets 0:20:11.800 --> 0:20:14.920 and the power of markets to your advantage. It turns out, 0:20:15.119 --> 0:20:19.800 for example, if we want to buy a stock. Let's say, um, 0:20:20.000 --> 0:20:23.439 they have an institution wants to sell it. Their anxiety 0:20:23.520 --> 0:20:26.320 is greater than ours, so we can use that their 0:20:27.040 --> 0:20:30.400 interest in trying to do a quick trade to our 0:20:30.440 --> 0:20:35.480 advantage and protect ourselves. And there's you know, plenty of 0:20:35.600 --> 0:20:38.359 information now floating out about the stock that you can 0:20:38.440 --> 0:20:41.120 use to protect yourself. But that wasn't known back then. 0:20:41.359 --> 0:20:44.240 It was just we had a belief in markets, belief 0:20:44.280 --> 0:20:47.880 and and how they work based on what we studied 0:20:47.920 --> 0:20:50.720 here and said, look, we think we can go out 0:20:50.840 --> 0:20:54.680 and trade these stocks and not uh not get killed 0:20:55.320 --> 0:20:59.280 that there were two pieces done here and it's most 0:20:59.280 --> 0:21:03.600 stuck turns and most of the academics said, well, it 0:21:03.640 --> 0:21:07.600 looks good in terms of the crisp historical data, but 0:21:07.800 --> 0:21:09.679 in fact, if you try to trade it, you're going 0:21:09.760 --> 0:21:13.520 to get swamped by trading costs. Uh. And that was 0:21:13.560 --> 0:21:16.840 the so called market micro struct just stuff. And then 0:21:16.920 --> 0:21:20.000 we figured out what we found out what dimensional was, No, 0:21:20.160 --> 0:21:22.880 he really didn't have to pay those big bit ast 0:21:22.880 --> 0:21:25.320 spreads that you were seeing. You could go fewer, was 0:21:25.359 --> 0:21:28.479 patient trader. You could do better with the prices, so 0:21:28.520 --> 0:21:33.120 we could deliver this small stuff premium. But previous to that, 0:21:33.520 --> 0:21:38.840 people weren't believes what the academics learned was the market 0:21:38.840 --> 0:21:44.560 micro structure stuff was garbage. Basically they didn't really understand. Interesting. Um, 0:21:45.520 --> 0:21:47.679 what we learned about clients along the way, which was 0:21:48.080 --> 0:21:54.040 seeing in our initial clients were all large, largest pension funds, 0:21:54.080 --> 0:21:58.160 essentially insurance companies around the world, and they weren't hopening 0:21:58.160 --> 0:22:02.480 the stocks of small companies. So really the pitch we 0:22:02.520 --> 0:22:05.560 got into all this stuff, but we hadn't even easier argument, 0:22:05.600 --> 0:22:08.200 which was, look, you ought to hold stocks of large 0:22:08.200 --> 0:22:11.400 companies and small, and you're not holding small, so we'll 0:22:11.440 --> 0:22:14.600 get you access to small. So that was the really 0:22:14.600 --> 0:22:17.199 the sales pitch that put us on the map. And 0:22:17.320 --> 0:22:20.840 so that sales pitch starts to take off and dimensional 0:22:20.960 --> 0:22:23.960 operating out of your apartment gets bigger. There's kind of 0:22:23.960 --> 0:22:27.560 an urgent urban legend that you called New York Telephone 0:22:27.600 --> 0:22:30.840 to have them add six phone lines and they refused. 0:22:30.840 --> 0:22:33.640 They thought you were running a bookie joy. Is that 0:22:33.680 --> 0:22:36.439 remotely true? Yeah, this was about the kind of at 0:22:36.520 --> 0:22:40.720 the bottom of Brooklyn Heights, uh, bottom of its history. 0:22:40.720 --> 0:22:46.199 It's so we started on a shoe string and we 0:22:46.280 --> 0:22:49.119 ran the portfolio. Was the first portfolio manager running out 0:22:49.119 --> 0:22:51.920 of my spare bedroom. So I knew we needed more 0:22:51.960 --> 0:22:56.920 phone lights. So I called up New York Telephone, which 0:22:56.920 --> 0:22:59.840 was a telephone company at the time. So the need, 0:23:00.160 --> 0:23:03.200 you know, uh some telephone lines and I know six 0:23:03.320 --> 0:23:06.200 or eight or whatever, and they thought it was a bookie, 0:23:06.200 --> 0:23:08.040 so they wouldn't give me the lines. So I had 0:23:08.040 --> 0:23:09.800 to call up the Treasure of New York tell say, 0:23:10.880 --> 0:23:12.879 can you send some people down here and give me 0:23:12.920 --> 0:23:16.440 some telephone lines. And they went around the whole block 0:23:16.520 --> 0:23:20.439 and found that there were six lines available available and 0:23:20.480 --> 0:23:24.480 the whole block that based on their equipment, and they said, okay, 0:23:24.480 --> 0:23:26.720 you can have those six lines. And that's how we 0:23:26.760 --> 0:23:31.679 got started. And the punch line is he becomes a client. Yeah, yeah, right, 0:23:31.800 --> 0:23:33.520 New York that was a clickly became a clie down. 0:23:34.359 --> 0:23:38.480 So so from from day one, Gene is a board 0:23:38.520 --> 0:23:41.920 member of Dimensional Funds. From the day it launches, well 0:23:42.359 --> 0:23:45.639 even before I mean, we have the idea to start 0:23:45.640 --> 0:23:50.280 the firm. Uh uh. My first call it was to 0:23:50.359 --> 0:23:53.720 Gene say, look, you know, it's been ten years since 0:23:53.760 --> 0:23:57.320 I was in school. We uh, there's been a lot 0:23:57.359 --> 0:23:59.760 of research, you know, we we needed we needed to 0:24:00.000 --> 0:24:04.000 have access to you know, new research and thinking. And 0:24:04.320 --> 0:24:06.320 would you be on the you know, one of the 0:24:06.359 --> 0:24:10.439 founders and and uh and and be our list you know, 0:24:10.440 --> 0:24:13.760 our our eyes in terms of research. And he agreed 0:24:13.800 --> 0:24:16.520 to do that right away. Who else did you recruit 0:24:16.760 --> 0:24:20.439 from GSP? Well, eventually we found out we had to 0:24:20.480 --> 0:24:22.960 have We wanted to create a mutual fund, and a 0:24:23.080 --> 0:24:26.720 mutual fund has to have an independent board of directors. 0:24:27.320 --> 0:24:30.280 So Rex and I went over the Business School, walked 0:24:30.280 --> 0:24:33.600 into Martin Miller's office. They still teach mollarble deiply on 0:24:33.680 --> 0:24:38.080 the theaters, don't take Yeah, okay, Uh. So Martin was there. 0:24:38.119 --> 0:24:40.520 We said to you know, he added a YadA small 0:24:40.600 --> 0:24:44.320 company fund need independent directors and um and said, oh sure. 0:24:44.880 --> 0:24:47.680 And I walked out the door and down the hall 0:24:47.760 --> 0:24:49.840 and Myron Schulz was coming out of his office. I 0:24:49.920 --> 0:24:56.679 gol Myron, he had the YadA. See Gene's point. Business 0:24:56.680 --> 0:24:59.000 school was a lot smaller then, and having been to 0:24:59.000 --> 0:25:01.720 the pH d program, I got to know the faculty 0:25:01.920 --> 0:25:06.639 pretty well. So Myron uh agreed to join, and so 0:25:06.680 --> 0:25:09.840 on and so forth. So in fact, until recently, all 0:25:09.880 --> 0:25:13.640 the independent directors of the mutual fund, our mutual fund 0:25:13.720 --> 0:25:18.480 be Uh have taught at Chicago, so his his business partner, 0:25:18.520 --> 0:25:21.919 Reck Singfield, was in my class as well. He was 0:25:21.960 --> 0:25:24.200 really the first one to put out an index one, 0:25:24.320 --> 0:25:31.479 wasn't he? No, No, it was but but Rex. Actually 0:25:31.640 --> 0:25:33.640 that was when I was his teaching consistent. He took 0:25:34.240 --> 0:25:38.879 uh jeans class. And Rex was always uh one of 0:25:38.960 --> 0:25:41.520 these pain in the neck as a teaching consistant students 0:25:41.680 --> 0:25:46.240 because he was interested in everything you know. I'm so Jean. 0:25:46.600 --> 0:25:50.600 You moved pretty easily back and forth between academic theory 0:25:51.200 --> 0:25:57.359 and real world application of theories. Not a lot of 0:25:57.359 --> 0:26:00.119 people were able to bridge that gap between academics. Well 0:26:00.160 --> 0:26:02.080