1 00:00:03,240 --> 00:00:07,560 Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio. 2 00:00:08,640 --> 00:00:11,920 Speaker 1: Welcome to the podcast. This is Barry Ridholts. And again 3 00:00:12,119 --> 00:00:14,960 Speaker 1: I know I say this every week. We have a 4 00:00:15,040 --> 00:00:18,160 Speaker 1: very special guest this week, but this week we really 5 00:00:18,760 --> 00:00:21,560 Speaker 1: have a very special guest. His name is David Booth. 6 00:00:22,239 --> 00:00:27,160 Speaker 1: He is the founder and chairman of Dimensional Funds. They 7 00:00:27,280 --> 00:00:30,280 Speaker 1: run a couple of shekels over four hundred billion dollars. 8 00:00:30,760 --> 00:00:35,360 Speaker 1: You may recognize the name Booth courtesy of the Chicago 9 00:00:35,479 --> 00:00:38,479 Speaker 1: Graduate School of Business also known as the David S. 10 00:00:38,520 --> 00:00:43,120 Speaker 1: Booth School of Business, David Booth the Booth School at Chicago. UH. 11 00:00:43,240 --> 00:00:47,600 Speaker 1: David made a fairly tremendous gift to the Booth School 12 00:00:48,240 --> 00:00:51,760 Speaker 1: of At the time, it was valued at three hundred 13 00:00:51,800 --> 00:00:54,680 Speaker 1: million dollars, but considering it was a mix of cash 14 00:00:54,720 --> 00:00:57,360 Speaker 1: and stock spread out over a number of years, it 15 00:00:57,440 --> 00:01:00,160 Speaker 1: might even be worth closer to half a billion, is 16 00:01:00,200 --> 00:01:04,400 Speaker 1: my back of the envelope guess, based on the assets 17 00:01:04,440 --> 00:01:08,520 Speaker 1: under management in Chicago. I mean at Dimensional what that 18 00:01:08,560 --> 00:01:12,960 Speaker 1: means to the Chicago school and um, it's it's really 19 00:01:13,120 --> 00:01:18,880 Speaker 1: worked out tremendously well. David really credits Chicago for all 20 00:01:18,920 --> 00:01:22,480 Speaker 1: of the success he's had in his career. Dimensional is 21 00:01:22,560 --> 00:01:27,320 Speaker 1: just a monster uh fund. They've done really well, starting 22 00:01:27,319 --> 00:01:33,720 Speaker 1: out with literally zero dollars in there, now coming up 23 00:01:33,760 --> 00:01:37,040 Speaker 1: on half a trillion dollars. They don't sell directly to 24 00:01:37,080 --> 00:01:39,720 Speaker 1: the public. About a little less than half of what 25 00:01:39,760 --> 00:01:43,800 Speaker 1: they do is institutional. The other half is sold through 26 00:01:43,840 --> 00:01:48,040 Speaker 1: financial advisors. In full disclosure, my office is the Dimensional shop. 27 00:01:48,160 --> 00:01:51,160 Speaker 1: We've we've been using them as part of our core 28 00:01:51,240 --> 00:01:54,560 Speaker 1: portfolios and and we've been really happy with them both 29 00:01:54,680 --> 00:01:59,560 Speaker 1: as a service provider and the performance of the funds. 30 00:02:00,080 --> 00:02:02,760 Speaker 1: I think you'll find David is really a fascinating guy. 31 00:02:02,800 --> 00:02:05,440 Speaker 1: He doesn't usually do these sorts of interviews. He's more 32 00:02:05,440 --> 00:02:08,360 Speaker 1: of a print guy. So it was really interesting to 33 00:02:08,480 --> 00:02:13,959 Speaker 1: hear him unedited, unvarnished in his own words, very very 34 00:02:14,040 --> 00:02:18,120 Speaker 1: savvy and individual and when you look at at the success, 35 00:02:18,160 --> 00:02:20,680 Speaker 1: when you look at what he's built over the years, 36 00:02:20,720 --> 00:02:24,440 Speaker 1: it's really quite amazing. So rather than have me babbyl 37 00:02:24,520 --> 00:02:27,080 Speaker 1: on and on with no further ado, here is my 38 00:02:27,200 --> 00:02:34,680 Speaker 1: conversation with David Booth. This is Masters in Business with 39 00:02:34,760 --> 00:02:39,760 Speaker 1: Barry Ridholds on Bloomberg Radio Today. My special guest is 40 00:02:39,919 --> 00:02:45,280 Speaker 1: David Booth. David is the founder, chairman and co CEO 41 00:02:45,960 --> 00:02:50,040 Speaker 1: of Dimensional Funds and asset management firm running over four 42 00:02:50,120 --> 00:02:53,760 Speaker 1: hundred billion dollars. Little background about David. He got his 43 00:02:54,400 --> 00:02:58,800 Speaker 1: degree in economics in n at Kansas, where he also 44 00:02:59,360 --> 00:03:02,280 Speaker 1: got a master was in business the following year, and 45 00:03:02,320 --> 00:03:05,320 Speaker 1: then ended up going to the University of Chicago for 46 00:03:05,400 --> 00:03:09,280 Speaker 1: his m b a. In nineteen seventy one. As of now, 47 00:03:09,320 --> 00:03:12,359 Speaker 1: the University of Chicago is known as the David Booth 48 00:03:12,360 --> 00:03:16,919 Speaker 1: Graduate School of Business, following a major endowment made. Um, 49 00:03:17,120 --> 00:03:18,880 Speaker 1: I should really call you doctor Booth, but I know 50 00:03:18,919 --> 00:03:24,760 Speaker 1: that I don't have the the official Well, David, welcome 51 00:03:24,760 --> 00:03:26,359 Speaker 1: to the show. Well, thank you very much, glad to 52 00:03:26,400 --> 00:03:28,800 Speaker 1: be here. Um, so let's talk a little bit about 53 00:03:28,840 --> 00:03:33,720 Speaker 1: your your background. In your your from Kansas, did you 54 00:03:33,760 --> 00:03:36,400 Speaker 1: have and you and you obviously focused on business and 55 00:03:36,400 --> 00:03:38,960 Speaker 1: got your masters in business. Did you ever have any 56 00:03:39,000 --> 00:03:41,800 Speaker 1: plans on going into the world of investment before your 57 00:03:41,920 --> 00:03:44,360 Speaker 1: m b A. Uh No, Actually I went to I 58 00:03:44,360 --> 00:03:47,880 Speaker 1: went to Chicago, I went into the PhD program. Uh. 59 00:03:48,280 --> 00:03:50,480 Speaker 1: I went there with the idea of becoming a professor 60 00:03:50,680 --> 00:03:53,560 Speaker 1: eventually going back to Kansas, went back to Kansas and teaching. 61 00:03:54,240 --> 00:03:57,760 Speaker 1: So how on Earth. Did you make that pivot from 62 00:03:57,800 --> 00:04:02,040 Speaker 1: being a professor to running a very large and successful 63 00:04:02,120 --> 00:04:06,400 Speaker 1: investment firm. Well, my um, Um, how it came about 64 00:04:06,480 --> 00:04:09,040 Speaker 1: was in my second year in the program, I was 65 00:04:09,080 --> 00:04:13,560 Speaker 1: working for Jane Fama, the Nobel laureate famous for developing 66 00:04:13,560 --> 00:04:18,600 Speaker 1: the efficient market hypothesis, and it was a phenomenally great experience. 67 00:04:18,600 --> 00:04:23,760 Speaker 1: But I I realized I didn't, Um, yeah, I no 68 00:04:23,800 --> 00:04:26,640 Speaker 1: longer want to be a professor. And as he tells 69 00:04:26,680 --> 00:04:29,880 Speaker 1: the story, UM, I walked into his office one day 70 00:04:29,920 --> 00:04:32,479 Speaker 1: and said, I know what you do, and I don't 71 00:04:32,520 --> 00:04:35,200 Speaker 1: want to do it. Now. Why is that? I've read 72 00:04:35,240 --> 00:04:40,200 Speaker 1: you said that he's the smartest, most intuitive, most competitive 73 00:04:40,279 --> 00:04:42,840 Speaker 1: person you met at the time, Right, and you didn't 74 00:04:42,839 --> 00:04:45,240 Speaker 1: want to enter field where you're up against the hundreds 75 00:04:45,240 --> 00:04:47,520 Speaker 1: of guys like that. Well, I think it's not more 76 00:04:47,600 --> 00:04:50,479 Speaker 1: than that. It's Um, I love the competition because you know, 77 00:04:50,560 --> 00:04:53,279 Speaker 1: we chose to go into money meagument business, which is 78 00:04:53,360 --> 00:04:56,760 Speaker 1: highly competitive. So it's not so much about the competition 79 00:04:56,920 --> 00:04:59,920 Speaker 1: is as it is that, Uh, I'm not very good 80 00:05:00,080 --> 00:05:05,040 Speaker 1: at studying something for years in order to really come 81 00:05:05,080 --> 00:05:11,240 Speaker 1: out with these great research um projects. Uh, you know 82 00:05:11,400 --> 00:05:14,680 Speaker 1: that it requires and an ability to sit there and 83 00:05:14,680 --> 00:05:19,520 Speaker 1: study for years on end the same subject. And I 84 00:05:19,560 --> 00:05:22,200 Speaker 1: realized I didn't have that, So you didn't want to 85 00:05:22,240 --> 00:05:24,880 Speaker 1: just focus on that one niche and and do that 86 00:05:24,920 --> 00:05:28,200 Speaker 1: deep dive. Let's talk a little bit about UM. You 87 00:05:28,240 --> 00:05:31,719 Speaker 1: mentioned the course you took with Fama was life changing. 88 00:05:32,880 --> 00:05:35,040 Speaker 1: Is that that's not an exaggeration, is it? No, it's 89 00:05:35,040 --> 00:05:38,560 Speaker 1: not an exaggeration at all. I mean, I'm was twenty 90 00:05:38,560 --> 00:05:42,200 Speaker 1: two year old, never grew up in a very modest 91 00:05:42,240 --> 00:05:46,839 Speaker 1: household like most people of the time, and um, the 92 00:05:47,200 --> 00:05:51,040 Speaker 1: my first course in investing was was taught by Jeane Fama, 93 00:05:51,360 --> 00:05:55,120 Speaker 1: and it all made sense to me. It Uh, it 94 00:05:55,160 --> 00:05:58,680 Speaker 1: wasn't until later I found out almost nobody else believed that, uh, 95 00:05:58,760 --> 00:06:01,000 Speaker 1: you know what he was teaching. But so I really was. 96 00:06:01,880 --> 00:06:04,200 Speaker 1: It was transformative to me, and it was a period 97 00:06:04,240 --> 00:06:08,120 Speaker 1: of time that was really transformative for the field of finance. 98 00:06:08,760 --> 00:06:13,080 Speaker 1: The field of finance really I went through with their 99 00:06:13,360 --> 00:06:15,800 Speaker 1: score of years from the mid fifties of the mid 100 00:06:15,839 --> 00:06:20,400 Speaker 1: seventies were it kind of really went from a nothing 101 00:06:20,720 --> 00:06:24,840 Speaker 1: field to a true academic discipline with models and theories 102 00:06:24,839 --> 00:06:28,920 Speaker 1: and good research. So let's talk about UM. Some time 103 00:06:29,000 --> 00:06:31,720 Speaker 1: after you left, uh, I was gonna call it booth, 104 00:06:31,760 --> 00:06:36,599 Speaker 1: but I guess I really can't. Um mc McCowen hired 105 00:06:36,640 --> 00:06:42,599 Speaker 1: you at Will's Fargo, where pretty much he created what 106 00:06:42,680 --> 00:06:46,080 Speaker 1: was the first practical index fund. Tell us about your 107 00:06:46,080 --> 00:06:49,240 Speaker 1: experience working with McAllen. Okay, Well, I'll start with a 108 00:06:49,240 --> 00:06:52,159 Speaker 1: connection first. So when I talked to FOM and said 109 00:06:52,160 --> 00:06:54,159 Speaker 1: I wanted to leave the program, he called up Mac 110 00:06:54,320 --> 00:06:58,680 Speaker 1: and UH said, because Mac could, I always wanted to 111 00:06:58,720 --> 00:07:01,839 Speaker 1: hire one of his students, and so uh Uh and 112 00:07:01,920 --> 00:07:05,159 Speaker 1: Mac wanted to come out with a what was seemingly 113 00:07:05,160 --> 00:07:09,280 Speaker 1: crazy idea at the time, of an index fund, and 114 00:07:08,360 --> 00:07:10,520 Speaker 1: UH and he and I hit it off, and we 115 00:07:10,560 --> 00:07:15,200 Speaker 1: went out and UH and UH started the first index 116 00:07:15,240 --> 00:07:19,120 Speaker 1: funded in nine mostly for institutions that it was only 117 00:07:19,160 --> 00:07:23,360 Speaker 1: institutional in And we really didn't funny enough. We weren't 118 00:07:24,160 --> 00:07:28,800 Speaker 1: successful enough or quickly enough. So eventually the Wells Fargo 119 00:07:28,840 --> 00:07:31,680 Speaker 1: shut down our group and UH not a great decision. 120 00:07:31,680 --> 00:07:34,840 Speaker 1: They're not a great decision. Well, it continued on. It 121 00:07:34,840 --> 00:07:36,440 Speaker 1: turned out to be good for them because the Trust 122 00:07:36,440 --> 00:07:38,920 Speaker 1: Department then picked it up then to try. After a 123 00:07:39,000 --> 00:07:43,080 Speaker 1: number of years, Wells Fargo UH sold half the business 124 00:07:43,080 --> 00:07:45,520 Speaker 1: to Nico and then the whole business to Nico, and 125 00:07:45,520 --> 00:07:52,440 Speaker 1: then Nico sold it to Barclays and then Solid Black Rocks. Yeah. Yeah, 126 00:07:52,480 --> 00:07:55,680 Speaker 1: So what was the I recall reading Samsonite Luggage was 127 00:07:55,840 --> 00:07:59,280 Speaker 1: somehow involved in the original index fund. What what was 128 00:07:59,320 --> 00:08:04,920 Speaker 1: their relationship there? Well, they called the University of Chicago 129 00:08:04,960 --> 00:08:07,400 Speaker 1: and a professor there, Jim Laurian, said, who's it trying 130 00:08:07,400 --> 00:08:10,480 Speaker 1: to apply these ideas? And Laurie said, well, well, as 131 00:08:10,480 --> 00:08:13,200 Speaker 1: Fargo this group out there. So so Samson I called 132 00:08:13,240 --> 00:08:16,560 Speaker 1: us up and said if this makes a lot of sense, uh, 133 00:08:16,560 --> 00:08:18,720 Speaker 1: why don't we go with it? So that was for 134 00:08:18,760 --> 00:08:24,360 Speaker 1: their pension pension. Really the first a practical index one 135 00:08:24,440 --> 00:08:27,120 Speaker 1: was it just the SMB or what was the index 136 00:08:27,160 --> 00:08:31,080 Speaker 1: based on? It was an equally equally waited index Fonte, Yeah, 137 00:08:31,120 --> 00:08:33,599 Speaker 1: it was kind of That's interesting. Well, you have to 138 00:08:33,880 --> 00:08:37,479 Speaker 1: it's a product of the times, you know, and the 139 00:08:37,559 --> 00:08:41,880 Speaker 1: early seventies. Uh, the people promised all kinds of wild 140 00:08:42,720 --> 00:08:48,120 Speaker 1: performance objectives and and so you're always trying to figure 141 00:08:48,160 --> 00:08:50,920 Speaker 1: out how can you we're using come from the passive 142 00:08:50,960 --> 00:08:54,480 Speaker 1: side of things, how can you create something that has 143 00:08:54,559 --> 00:08:59,560 Speaker 1: a chance of beating the market and by holding equally 144 00:08:59,600 --> 00:09:03,240 Speaker 1: weighted securities instead of the SMP five hundred, which is 145 00:09:04,160 --> 00:09:11,280 Speaker 1: market that that got more the smaller companies and greater 146 00:09:11,280 --> 00:09:14,440 Speaker 1: emphasis to hire beta stock. So and the old joke 147 00:09:14,640 --> 00:09:18,320 Speaker 1: is that the mad desk for alpha often leaves not 148 00:09:18,400 --> 00:09:20,839 Speaker 1: only no alpha, but no beta. Yeah, there you go. 149 00:09:22,040 --> 00:09:24,439 Speaker 1: I'm Barry rid Hult. You're listening to Masters in Business 150 00:09:24,480 --> 00:09:27,520 Speaker 1: on Bloomberg Radio. My special guest today is David Booth. 151 00:09:28,000 --> 00:09:32,160 Speaker 1: He is the co CEO and chairman of Dimensional Fund Advisors, 152 00:09:32,240 --> 00:09:36,160 Speaker 1: a four hundred billion asset management business. And and before 153 00:09:36,160 --> 00:09:39,800 Speaker 1: the break we were talking about, UM, how you founded 154 00:09:39,840 --> 00:09:44,559 Speaker 1: the company, and the company legend is this was begun 155 00:09:44,679 --> 00:09:47,760 Speaker 1: in a brown stone in Brooklyn. Well, that's right, it was. 156 00:09:48,720 --> 00:09:52,720 Speaker 1: I wouldn't say that the idea was destined for success, 157 00:09:52,720 --> 00:09:55,920 Speaker 1: and necessarily it wasn't pretty determined that it will be successful. 158 00:09:56,000 --> 00:10:00,960 Speaker 1: The act the idea we started with was a small company. UH, 159 00:10:01,040 --> 00:10:06,200 Speaker 1: index linked type portfolio. UM. I say index linked type 160 00:10:06,480 --> 00:10:10,240 Speaker 1: because there were no small cap indices, so it's hard 161 00:10:10,320 --> 00:10:12,200 Speaker 1: to was index fund if there's no indices. This was 162 00:10:12,240 --> 00:10:19,079 Speaker 1: pre Russell two thousands around all right, And what's the 163 00:10:19,160 --> 00:10:21,320 Speaker 1: story with the phone company not giving you phone lines? 164 00:10:21,360 --> 00:10:24,760 Speaker 1: They thought you were running a bookie joiners. Well, the 165 00:10:24,800 --> 00:10:27,720 Speaker 1: world wasn't quite ready for a money management firm in 166 00:10:27,720 --> 00:10:32,160 Speaker 1: Brooklyn at the time, back before it became fashionable. Um. 167 00:10:33,120 --> 00:10:37,760 Speaker 1: And so we started with the idea that, uh, there's 168 00:10:37,760 --> 00:10:40,080 Speaker 1: a simple proposition that we went in and talked to 169 00:10:40,120 --> 00:10:44,440 Speaker 1: big institutions about. It was that informing an equity portfolio, 170 00:10:45,080 --> 00:10:47,600 Speaker 1: you ought to have stocks of large companies and small companies. 171 00:10:48,200 --> 00:10:50,680 Speaker 1: He should invest all your money just in large I 172 00:10:50,720 --> 00:10:54,400 Speaker 1: mean makes sense, and it makes sense. Uh. So that 173 00:10:54,480 --> 00:10:58,360 Speaker 1: was the proposition. I'll observe. We didn't have a track record. 174 00:10:58,480 --> 00:11:02,160 Speaker 1: Actually nobody did, because institutions weren't holding the stocks of 175 00:11:02,200 --> 00:11:06,480 Speaker 1: smaller companies in any great proportion. About the only small 176 00:11:06,679 --> 00:11:10,240 Speaker 1: companies stocks they were holding, or stocks of companies that 177 00:11:10,280 --> 00:11:13,840 Speaker 1: once have been big companies. Uh and so so they 178 00:11:13,840 --> 00:11:16,520 Speaker 1: had the odds and the small company exposure. But this 179 00:11:16,559 --> 00:11:20,920 Speaker 1: was the first systematic way of accessing a small cap universe. 180 00:11:21,400 --> 00:11:24,360 Speaker 1: And these were really relative to what the typical pension 181 00:11:24,400 --> 00:11:27,480 Speaker 1: funds or mutual fund was holding. These were really microcaps. 182 00:11:27,760 --> 00:11:32,400 Speaker 1: These were my Yeah, these were um, very small companies. 183 00:11:32,559 --> 00:11:36,679 Speaker 1: But it would you know, it's roughly about uh six 184 00:11:37,200 --> 00:11:40,280 Speaker 1: of the total stocks and that are publicly traded but 185 00:11:40,480 --> 00:11:44,200 Speaker 1: inaggregate they only represent about, you know, five percent of 186 00:11:44,240 --> 00:11:47,840 Speaker 1: the market. Did you run into any special challenges trying 187 00:11:47,880 --> 00:11:52,160 Speaker 1: to either trade these things, find coverage on these companies, 188 00:11:52,400 --> 00:11:55,800 Speaker 1: or the whole idea of microcaps the big pension funds. 189 00:11:55,840 --> 00:11:59,280 Speaker 1: How was it received well? It was received well, but 190 00:11:59,320 --> 00:12:02,680 Speaker 1: there was a lot of opticism. Uh, first off, we 191 00:12:02,720 --> 00:12:05,880 Speaker 1: didn't have a track record, even though nobody did. Ours 192 00:12:05,920 --> 00:12:09,560 Speaker 1: our first portfolio manager and actually I've never managed money before, 193 00:12:09,920 --> 00:12:12,960 Speaker 1: and uh so there were uh the reason but the 194 00:12:12,960 --> 00:12:16,920 Speaker 1: big skepticism was about the trading, the execution that you're 195 00:12:16,960 --> 00:12:21,400 Speaker 1: talking about big wide spreads, big spreads, and we are 196 00:12:21,400 --> 00:12:23,680 Speaker 1: going to the marketplace because we come from the efficient 197 00:12:23,720 --> 00:12:26,800 Speaker 1: market side of things, we come to the marketplace knowing 198 00:12:26,880 --> 00:12:30,680 Speaker 1: we don't have any special information about the company who 199 00:12:30,679 --> 00:12:35,360 Speaker 1: were trading with, largely with institutional investors that think they 200 00:12:35,360 --> 00:12:39,760 Speaker 1: do have special information. So the question and leading academics, 201 00:12:39,960 --> 00:12:42,600 Speaker 1: uh were you know, brought this up. You know, why 202 00:12:42,640 --> 00:12:45,240 Speaker 1: won't you just get skinned going in and trading with 203 00:12:45,280 --> 00:12:49,520 Speaker 1: people that are much more knowledgeable about the companies that 204 00:12:49,559 --> 00:12:52,520 Speaker 1: you're investing in. So so what's the answer to that question? Well, 205 00:12:52,559 --> 00:12:55,960 Speaker 1: we turned what was the problem into kind of an advantage. Uh, 206 00:12:56,160 --> 00:12:59,440 Speaker 1: people that think they have the discounted information realized that 207 00:12:59,520 --> 00:13:03,360 Speaker 1: whatever chill insights they have will not be lasting for long, 208 00:13:03,880 --> 00:13:07,280 Speaker 1: and so there's an anxiety to trade, and that's what 209 00:13:07,400 --> 00:13:12,000 Speaker 1: we worked on. We approached the marketplace basically waiting for 210 00:13:12,480 --> 00:13:16,880 Speaker 1: sellers wanting to come to us. So so you're saying 211 00:13:16,920 --> 00:13:21,600 Speaker 1: patients is actually a virtue for investors. Absolutely, patients and flexibility, 212 00:13:22,320 --> 00:13:25,800 Speaker 1: so uh, and coming to the marketplace, if you can 213 00:13:25,920 --> 00:13:28,960 Speaker 1: get the other person to move first, then uh you 214 00:13:28,960 --> 00:13:32,079 Speaker 1: can Uh you win that particular trade and win that trade. 215 00:13:32,160 --> 00:13:35,600 Speaker 1: We're speaking with David Booth, Coco and chairman of Dimensional Funds. 216 00:13:35,920 --> 00:13:39,560 Speaker 1: Let's talk a little bit about your explosive growth since 217 00:13:40,880 --> 00:13:44,240 Speaker 1: I know in hindsight it looks like a long, gradual process, 218 00:13:44,280 --> 00:13:46,360 Speaker 1: but when you look at some of these numbers. So 219 00:13:46,360 --> 00:13:50,040 Speaker 1: so when you launched the firm in one you essentially 220 00:13:50,120 --> 00:13:53,240 Speaker 1: launched with zero assets, zero assets, right, I began with nothing. 221 00:13:53,520 --> 00:13:55,640 Speaker 1: How long did it take before you were at a 222 00:13:55,720 --> 00:13:59,760 Speaker 1: hundred million dollars? Oh, it was about Well, it took 223 00:13:59,840 --> 00:14:02,320 Speaker 1: us about nine months to get registered with all the 224 00:14:03,080 --> 00:14:05,800 Speaker 1: and come out with it. And the first year I 225 00:14:05,840 --> 00:14:09,880 Speaker 1: think we had something like eighty millions. So it was 226 00:14:10,200 --> 00:14:11,880 Speaker 1: it was about a year and a half, right, I 227 00:14:11,920 --> 00:14:14,240 Speaker 1: go to get und millions. So so here's the numbers 228 00:14:14,280 --> 00:14:16,720 Speaker 1: I came up with, and I tried to look at 229 00:14:16,760 --> 00:14:19,400 Speaker 1: it by decade. So by the time you finished your 230 00:14:19,400 --> 00:14:24,160 Speaker 1: first decade, were up to four billion. By right in 231 00:14:24,200 --> 00:14:27,960 Speaker 1: the peak of the boom, you're thirty billion. Two thousand 232 00:14:27,960 --> 00:14:30,320 Speaker 1: and nine, you're at a hundred and twenty four billion, 233 00:14:30,880 --> 00:14:34,880 Speaker 1: and then around was a little over two hundred billion 234 00:14:35,240 --> 00:14:38,320 Speaker 1: and four hundred billion. Today when you look back at 235 00:14:38,360 --> 00:14:41,640 Speaker 1: the past, you know, forty years, that's the thirty years. 236 00:14:42,000 --> 00:14:46,680 Speaker 1: That's an amazing run of of acid accumulation. Well, it's 237 00:14:47,440 --> 00:14:51,880 Speaker 1: obviously been very fortunate. I think, um, a lot of 238 00:14:51,880 --> 00:14:54,760 Speaker 1: the reason for it is this notion of indexing, and 239 00:14:54,760 --> 00:14:57,040 Speaker 1: and I'm a fan of index and we don't exactly 240 00:14:57,280 --> 00:15:01,480 Speaker 1: do indexing, but indexing is worked very well, and the 241 00:15:01,520 --> 00:15:06,200 Speaker 1: principles of indexing are such that people can stay with it. 242 00:15:06,720 --> 00:15:10,240 Speaker 1: Uh So the idea is that we attract new clients 243 00:15:10,280 --> 00:15:14,720 Speaker 1: coming in, and um, a few clients leave. So let's 244 00:15:14,760 --> 00:15:17,320 Speaker 1: let's describe what you mean by indexing. So there's not 245 00:15:17,880 --> 00:15:21,240 Speaker 1: individual stock picking. I like this management. I like that product. 246 00:15:21,560 --> 00:15:25,000 Speaker 1: It's We're gonna buy a group of stocks with these characteristics, 247 00:15:25,600 --> 00:15:28,440 Speaker 1: and there's no market timing. You're long and fully invested. 248 00:15:28,480 --> 00:15:31,440 Speaker 1: There's no I feel that a ten percent correction is coming, 249 00:15:31,440 --> 00:15:33,480 Speaker 1: so I'm gonna move to the side and pay some 250 00:15:33,480 --> 00:15:36,640 Speaker 1: big taxes. Is none of that. So so you're you're 251 00:15:36,760 --> 00:15:42,280 Speaker 1: essentially about long term broad ownership of equities. Right. The 252 00:15:42,400 --> 00:15:45,640 Speaker 1: key to investing, uh, Well, the first key to investing 253 00:15:45,760 --> 00:15:48,680 Speaker 1: is find a philosophy that you can stick with through 254 00:15:48,720 --> 00:15:52,360 Speaker 1: thick and thin. The reason are const One of the 255 00:15:52,360 --> 00:15:55,680 Speaker 1: reasons they've been so successful, in addition to the we've 256 00:15:55,680 --> 00:15:58,440 Speaker 1: been able to have a performance advantage over index funds. 257 00:15:58,440 --> 00:16:00,480 Speaker 1: But the other main reason they've been they've had a 258 00:16:00,520 --> 00:16:04,880 Speaker 1: good experiences. They were able to stick with the UH 259 00:16:05,000 --> 00:16:09,400 Speaker 1: investment philosophy through that very difficult two thousand seven two 260 00:16:09,400 --> 00:16:14,640 Speaker 1: thousand nine period. We we notice just watching the world 261 00:16:14,640 --> 00:16:19,040 Speaker 1: of investing that the retail investor has a tendency too. 262 00:16:19,200 --> 00:16:21,560 Speaker 1: We call it the flavor of the month. Oh this 263 00:16:21,600 --> 00:16:23,600 Speaker 1: fund manager is doing well this month. Oh look at 264 00:16:23,600 --> 00:16:26,960 Speaker 1: this sector. You clearly you have no interest in that, 265 00:16:27,000 --> 00:16:28,640 Speaker 1: So no innest and that sort of thing. You know. 266 00:16:28,720 --> 00:16:31,600 Speaker 1: There there's been something like seven or billion dollars of 267 00:16:31,640 --> 00:16:36,200 Speaker 1: outflows from US equity mutual funds over the last uh 268 00:16:36,240 --> 00:16:38,000 Speaker 1: since the peak of the market in two thousand and seven. 269 00:16:38,440 --> 00:16:42,040 Speaker 1: That's that's a huge outflow. Yeah, we're every year we've 270 00:16:42,080 --> 00:16:47,520 Speaker 1: had positive flows because people can understand the process. They 271 00:16:47,560 --> 00:16:51,000 Speaker 1: realize basically we're we go up and down with the markets, 272 00:16:51,360 --> 00:16:53,160 Speaker 1: and it shouldn't come as a surprise at every now 273 00:16:53,160 --> 00:16:55,920 Speaker 1: and then there's a down market in the last thirty 274 00:16:55,960 --> 00:17:00,400 Speaker 1: seconds we have. How is the firm managing this phenomenal growth? 275 00:17:00,440 --> 00:17:04,320 Speaker 1: What's your secret to staying true to your your principles 276 00:17:04,640 --> 00:17:07,120 Speaker 1: when money is just flowing in the doors like that, Well, 277 00:17:07,200 --> 00:17:12,000 Speaker 1: it's it's operating extremely efficiently efficiently. I'm Barry Ritult. You're 278 00:17:12,040 --> 00:17:15,040 Speaker 1: listening to Masters in Business on Bloomberg Radio. My special 279 00:17:15,080 --> 00:17:18,840 Speaker 1: guest today is David Booth. He is the chairman and 280 00:17:19,000 --> 00:17:23,359 Speaker 1: co CEO of Dimensional Funds Advisors. And let's talk a 281 00:17:23,400 --> 00:17:26,560 Speaker 1: little bit about this quote from mc McGowan, who you 282 00:17:26,600 --> 00:17:29,480 Speaker 1: worked with earlier in your career. We were talking about 283 00:17:29,520 --> 00:17:33,639 Speaker 1: that before at Wells Fargo. McGowan said, it's all thanks 284 00:17:33,680 --> 00:17:37,800 Speaker 1: to Jim Laurie, Gene Farma and Martin Miller. What does 285 00:17:37,840 --> 00:17:42,560 Speaker 1: that mean, well, these are the key people and and 286 00:17:42,560 --> 00:17:45,640 Speaker 1: and developing the finance department of the University of Chicago. 287 00:17:46,160 --> 00:17:50,479 Speaker 1: Going back to the mid fifties, Jim Laurie was an 288 00:17:50,520 --> 00:17:53,720 Speaker 1: associate dean or assistant team of the Business School, and 289 00:17:53,760 --> 00:17:58,000 Speaker 1: he realized that the field of finance was changing rapidly 290 00:17:58,400 --> 00:18:00,680 Speaker 1: and they needed to bring in some of these new 291 00:18:00,760 --> 00:18:06,879 Speaker 1: young hot turks two h power up the school and 292 00:18:07,040 --> 00:18:12,280 Speaker 1: the first personally brought in was Merton Miller. UM. Merton 293 00:18:12,359 --> 00:18:15,679 Speaker 1: Miller eventually got his Nobel Prize for his work on 294 00:18:15,760 --> 00:18:21,119 Speaker 1: capital structure cost capital H and one of Merton Miller's 295 00:18:21,080 --> 00:18:25,600 Speaker 1: students was Gene Fama. And Gene's he mentioned they got 296 00:18:25,640 --> 00:18:30,359 Speaker 1: his Nobel Prize for his work and market efficiency. Ah. 297 00:18:30,480 --> 00:18:35,640 Speaker 1: So they were the uh. They really not only helped 298 00:18:35,680 --> 00:18:41,280 Speaker 1: determine the um the path that Chicago took, but they 299 00:18:41,320 --> 00:18:46,199 Speaker 1: also Miller and Fama really set the established the culture 300 00:18:46,200 --> 00:18:51,320 Speaker 1: of the place, UH, which is been an amazing, amazingly 301 00:18:51,400 --> 00:18:56,639 Speaker 1: productive school for economics and finance over the last you know, 302 00:18:56,720 --> 00:19:01,800 Speaker 1: forty years. Who else were your early mentors, Well, I 303 00:19:01,840 --> 00:19:06,000 Speaker 1: mean the UH may you have to go back to 304 00:19:06,080 --> 00:19:09,040 Speaker 1: before business school, I guess for mentors, big mentors are 305 00:19:09,160 --> 00:19:16,320 Speaker 1: are Fama and McQuown. You know they Fama, um, you know, 306 00:19:16,600 --> 00:19:19,639 Speaker 1: taught me all the basics of investing, and they and 307 00:19:19,760 --> 00:19:24,320 Speaker 1: gave me the capability of reading, you know, uh, academic 308 00:19:24,560 --> 00:19:27,600 Speaker 1: research even today. And do you still read a lot 309 00:19:27,600 --> 00:19:30,359 Speaker 1: of academic research today? I wouldn't say a lot. I 310 00:19:30,600 --> 00:19:34,000 Speaker 1: kind of cheat a bit. I wait for Fama or 311 00:19:34,160 --> 00:19:37,840 Speaker 1: Ken French or Bob Marton to pass along what they 312 00:19:37,840 --> 00:19:41,159 Speaker 1: think is good research, and then I cherry pick. You 313 00:19:41,200 --> 00:19:45,160 Speaker 1: could do worse with those three as curators. Yeah. So, 314 00:19:45,160 --> 00:19:50,600 Speaker 1: so you were also Eugene Farmer's assistant research assistant. What 315 00:19:51,000 --> 00:19:53,120 Speaker 1: was it like working with him? Well, it was amazing. 316 00:19:53,359 --> 00:19:58,120 Speaker 1: First off, he's uh uh still you know, just works 317 00:19:58,160 --> 00:20:02,040 Speaker 1: incredibly hard seven days really. Yeah. In fact, there's a 318 00:20:02,440 --> 00:20:06,359 Speaker 1: one of my favorite stories is uh uh about Fama 319 00:20:06,400 --> 00:20:10,440 Speaker 1: and his colleague Ken French. Over the last thirty years 320 00:20:10,480 --> 00:20:15,160 Speaker 1: or so, uh, Fama and French have collaborated on numerous 321 00:20:15,240 --> 00:20:18,480 Speaker 1: landmark papers, and they're worked together all the time. Ken's 322 00:20:18,520 --> 00:20:23,200 Speaker 1: and at Dartmouth Tough School Business and and uh Jeans 323 00:20:23,200 --> 00:20:27,359 Speaker 1: at Chicago. So one day they're they're they're having a 324 00:20:27,440 --> 00:20:31,760 Speaker 1: conversation and Jean notices that Ken is not being too responsive. 325 00:20:32,280 --> 00:20:35,800 Speaker 1: So he says, well, Ken, what's going on today? And 326 00:20:35,880 --> 00:20:40,840 Speaker 1: Ken says, Jean, it's Christmas. I mean he's Uh, it's 327 00:20:40,920 --> 00:20:43,760 Speaker 1: a work like that that, uh, you know as as 328 00:20:44,000 --> 00:20:47,359 Speaker 1: enabled those guys to succeed. So so as long as 329 00:20:47,400 --> 00:20:50,040 Speaker 1: you bring up Ken French, let's talk about the French 330 00:20:50,119 --> 00:20:54,479 Speaker 1: FAMA or the Fama French three factor model. Why was 331 00:20:54,520 --> 00:20:57,440 Speaker 1: that such a breakthrough? And and for listeners who may 332 00:20:57,480 --> 00:21:00,320 Speaker 1: not be familiar with it, it's essentially the kind sept 333 00:21:00,359 --> 00:21:04,560 Speaker 1: of looking at market beta plus the small cap premium 334 00:21:04,880 --> 00:21:09,440 Speaker 1: plus the advantage one gets by valuing value stocks over other, 335 00:21:09,800 --> 00:21:13,400 Speaker 1: let's say, more expensive stocks. Um, why was that such 336 00:21:13,440 --> 00:21:19,000 Speaker 1: a huge breakthrough? Well, um, you know investing inequities. Um, 337 00:21:19,040 --> 00:21:22,080 Speaker 1: you know, there involves many different types of risks that 338 00:21:22,520 --> 00:21:24,840 Speaker 1: most of which will ever be able to identify exactly. 339 00:21:24,880 --> 00:21:28,760 Speaker 1: But uh, a lot of many different kinds of risk. Well. Uh, 340 00:21:28,800 --> 00:21:31,600 Speaker 1: the model until Farmer French came along, the model that 341 00:21:31,880 --> 00:21:35,320 Speaker 1: all eating academics used to do research was just a 342 00:21:35,359 --> 00:21:41,160 Speaker 1: single factor model beta. And it was a great model, 343 00:21:41,240 --> 00:21:44,480 Speaker 1: elegant theory. It had one drawback and that it never 344 00:21:44,520 --> 00:21:49,160 Speaker 1: described reality. So they could and we have a saying 345 00:21:49,200 --> 00:21:51,520 Speaker 1: that you know, if you torture the data enough, you 346 00:21:51,520 --> 00:21:54,560 Speaker 1: can get it confess to anything. But as much as 347 00:21:54,760 --> 00:21:59,040 Speaker 1: uh they tortured the data they could could they could 348 00:21:59,040 --> 00:22:02,879 Speaker 1: never get I beta stocks that have systematically have higher 349 00:22:03,280 --> 00:22:07,320 Speaker 1: average returns than low beta stocks. So this what Foman 350 00:22:07,359 --> 00:22:09,919 Speaker 1: French did was actually pull together a lot of research 351 00:22:09,960 --> 00:22:12,480 Speaker 1: have been going on over about a twenty year period, 352 00:22:12,640 --> 00:22:16,479 Speaker 1: and UM concluded that they have a simple three factor 353 00:22:16,520 --> 00:22:19,000 Speaker 1: model instead of one that seemed and that did a 354 00:22:19,080 --> 00:22:23,920 Speaker 1: much better job of of describing, you know, why one 355 00:22:23,960 --> 00:22:26,879 Speaker 1: portfolio as a higher average returned than another. So in 356 00:22:26,920 --> 00:22:30,680 Speaker 1: the last thirty seconds we have in this segment, everybody 357 00:22:30,720 --> 00:22:33,960 Speaker 1: now understands the small capt premium, the value premium. Why 358 00:22:34,080 --> 00:22:38,000 Speaker 1: haven't these been arbitraged away? Why do they still persist? Well, 359 00:22:37,840 --> 00:22:40,120 Speaker 1: we think of these as being risk premium, and we've 360 00:22:40,160 --> 00:22:42,399 Speaker 1: known for years that stocks have higher average returns than 361 00:22:42,800 --> 00:22:45,879 Speaker 1: the money market funds on average, but that and that 362 00:22:45,960 --> 00:22:49,680 Speaker 1: hasn't caused the premium to disappear. I'm Barry, which helps 363 00:22:49,720 --> 00:22:52,359 Speaker 1: you listening to Masters in Business on Bloomberg Radio. My 364 00:22:52,440 --> 00:22:54,760 Speaker 1: special guest today and I know I say that every week, 365 00:22:54,760 --> 00:22:57,520 Speaker 1: but I really mean it. My special guest this week 366 00:22:57,640 --> 00:23:00,639 Speaker 1: is David Booth. He is the founder, chair in and 367 00:23:00,840 --> 00:23:05,680 Speaker 1: co CEO of Dimensional Fund Advisors with about four billion 368 00:23:05,720 --> 00:23:09,080 Speaker 1: in asset under management. Let's talk a little bit about 369 00:23:09,119 --> 00:23:11,960 Speaker 1: the rise of indexing. You you hinted at that in 370 00:23:12,000 --> 00:23:17,080 Speaker 1: the last segment, but this is really very very significant. UM, 371 00:23:17,160 --> 00:23:19,080 Speaker 1: let's begin with what you guys do it. I know 372 00:23:19,119 --> 00:23:20,840 Speaker 1: you don't love d f A, but I always hear 373 00:23:20,960 --> 00:23:24,159 Speaker 1: d f A as opposed to dimensional people. That's the 374 00:23:24,440 --> 00:23:29,960 Speaker 1: shorthand people use. What does dimensional funds do with their 375 00:23:30,000 --> 00:23:35,320 Speaker 1: indexing that's so significantly different from the typical plane vanilla 376 00:23:35,400 --> 00:23:38,879 Speaker 1: market cap weighted index. Well, the underlying premise of of 377 00:23:38,960 --> 00:23:43,359 Speaker 1: the firm around around which we started is that indexing 378 00:23:43,520 --> 00:23:46,720 Speaker 1: is UH is terrific and I think people benefit a 379 00:23:46,760 --> 00:23:52,760 Speaker 1: lot buy it. It's also a relatively mechanical strategy. If 380 00:23:53,200 --> 00:23:54,840 Speaker 1: if a stock goes out of an index, you have 381 00:23:54,880 --> 00:23:58,399 Speaker 1: to sell it. If if a stock comes into an index, 382 00:23:58,480 --> 00:24:00,400 Speaker 1: you have to buy it, and you have to buy 383 00:24:00,440 --> 00:24:04,119 Speaker 1: it on the days it comes and goes. So that's UH. 384 00:24:04,840 --> 00:24:07,800 Speaker 1: That never appealed to us because we thought that mechanical 385 00:24:07,840 --> 00:24:13,080 Speaker 1: approaches UH in terms of generating trading costs, it makes 386 00:24:13,080 --> 00:24:15,919 Speaker 1: them very expensive to trade. You know when you have 387 00:24:15,960 --> 00:24:20,120 Speaker 1: to trade relatively mechanically. And so what about the dimensions 388 00:24:20,119 --> 00:24:22,800 Speaker 1: When we talk about demend dimensional, we're really talking about 389 00:24:22,800 --> 00:24:28,399 Speaker 1: dimensions which began with small small cap then added value. 390 00:24:28,520 --> 00:24:30,919 Speaker 1: What does the dimensions due to the return of of 391 00:24:30,960 --> 00:24:34,119 Speaker 1: the index? Well there there. The notion of dimensionality is 392 00:24:34,160 --> 00:24:39,400 Speaker 1: that there are some factors that can uh uh lead 393 00:24:39,440 --> 00:24:41,920 Speaker 1: to higher average returns in the market than just buying 394 00:24:41,920 --> 00:24:45,879 Speaker 1: the overall market. If you start with an index fund 395 00:24:46,680 --> 00:24:49,800 Speaker 1: and you decide, well, why don't I give a little 396 00:24:49,840 --> 00:24:53,080 Speaker 1: great greater weight to the smaller companies, and why don't 397 00:24:53,119 --> 00:24:56,040 Speaker 1: I give a little bit of greater weight to the 398 00:24:56,080 --> 00:25:01,119 Speaker 1: lower price stocks, uh with correspondingly, us wait to higher 399 00:25:01,160 --> 00:25:04,320 Speaker 1: price stocks and bigger companies. That's a really that's the 400 00:25:04,359 --> 00:25:08,200 Speaker 1: notion of dimensionality. It's just it's not if you think 401 00:25:08,200 --> 00:25:11,600 Speaker 1: of portfolio management as being a function of of two things, 402 00:25:11,880 --> 00:25:15,960 Speaker 1: stock selection and then uh, how much you wait each 403 00:25:16,160 --> 00:25:20,800 Speaker 1: stock in a portfolio. Stock selection, we really don't spend 404 00:25:20,880 --> 00:25:23,720 Speaker 1: much time on. That's we hold nearly all the stocks 405 00:25:24,119 --> 00:25:27,119 Speaker 1: in an index, but we hold the stocks in different 406 00:25:27,119 --> 00:25:30,520 Speaker 1: proportions than they represent in an index fund. And And 407 00:25:30,600 --> 00:25:32,840 Speaker 1: to put that into a little context, as to what 408 00:25:33,000 --> 00:25:35,600 Speaker 1: that does to the performance. I'm going to quote an 409 00:25:35,680 --> 00:25:40,240 Speaker 1: article from not too long ago in barrens of d 410 00:25:40,320 --> 00:25:43,040 Speaker 1: f A funds have beaten their category benchmarks over the 411 00:25:43,080 --> 00:25:47,440 Speaker 1: past fifteen years. Of dimensional funds have been in over 412 00:25:47,440 --> 00:25:49,960 Speaker 1: the past five years. That's a heck of a great 413 00:25:49,960 --> 00:25:52,440 Speaker 1: track record, isn't it. Yeah, it's really kind of startling 414 00:25:52,480 --> 00:25:56,399 Speaker 1: it When we first, uh we started you know with 415 00:25:56,640 --> 00:25:59,640 Speaker 1: so primitively I guess so, you know, with a out 416 00:25:59,680 --> 00:26:02,639 Speaker 1: of the ms Stone in Brooklyn that and it never 417 00:26:02,640 --> 00:26:06,160 Speaker 1: occurred to us that we could actually outperform an index. 418 00:26:06,520 --> 00:26:09,199 Speaker 1: We thought, because of trading costs, that would always have 419 00:26:09,240 --> 00:26:12,760 Speaker 1: a certain lag and so we we worked really hard 420 00:26:12,840 --> 00:26:16,200 Speaker 1: to try to do what we thought was minimizing that 421 00:26:16,200 --> 00:26:20,240 Speaker 1: that that that dragon performance. It turns out we exceeded 422 00:26:20,280 --> 00:26:23,959 Speaker 1: expectations and we actually uh started adding value over index one. 423 00:26:24,080 --> 00:26:26,320 Speaker 1: So actually, let's talk about that a little bit. Because 424 00:26:26,400 --> 00:26:32,160 Speaker 1: you guys have a very sophisticated way of trading. Um, 425 00:26:32,200 --> 00:26:35,760 Speaker 1: you're very methodical, you're very opportunistic. We talked earlier and 426 00:26:35,800 --> 00:26:40,200 Speaker 1: said you're especially patient. Uh, there's an emphasis towards taff 427 00:26:40,200 --> 00:26:44,119 Speaker 1: sufficiency and an emphasis towards low expenses. How did you 428 00:26:44,200 --> 00:26:49,760 Speaker 1: create that trading methodology and what impact does it have. Well, 429 00:26:49,800 --> 00:26:52,560 Speaker 1: the way we traded it was we just recognized, look 430 00:26:52,880 --> 00:26:56,520 Speaker 1: a marketplaces where buyers and sellers come together and they 431 00:26:56,560 --> 00:26:58,080 Speaker 1: both have to feel like they got a good deal 432 00:26:58,160 --> 00:27:02,160 Speaker 1: or they don't trade well. Um on the other side 433 00:27:02,160 --> 00:27:06,960 Speaker 1: of our trades typically are institutional investors that are they 434 00:27:07,080 --> 00:27:10,920 Speaker 1: have an idea for change. You know, it's either buy 435 00:27:10,960 --> 00:27:13,399 Speaker 1: this or sell that, whatever it is that they've decided 436 00:27:13,440 --> 00:27:16,720 Speaker 1: to do, and whatever their decision is, they realize the 437 00:27:16,760 --> 00:27:20,960 Speaker 1: benefit of that is really really short lived. So as 438 00:27:20,960 --> 00:27:23,040 Speaker 1: we go to the marketplace and we look at you know, 439 00:27:23,080 --> 00:27:27,480 Speaker 1: the bid ask spread, you know the that's really kind 440 00:27:27,480 --> 00:27:30,399 Speaker 1: of a lot of people's measure of trading costs, the 441 00:27:30,440 --> 00:27:34,040 Speaker 1: bid ask spread. Uh, what we realize is if we 442 00:27:34,080 --> 00:27:36,720 Speaker 1: could get the other side to act first, we could 443 00:27:36,720 --> 00:27:40,560 Speaker 1: trade closer to the bid in today's terms and stock 444 00:27:40,600 --> 00:27:44,000 Speaker 1: maybe trading ten dollars to ten dollars and two cents 445 00:27:44,080 --> 00:27:46,639 Speaker 1: or whatever. It makes a It makes a difference if 446 00:27:46,680 --> 00:27:48,800 Speaker 1: you can buy it at ten dollars or versus ten 447 00:27:48,840 --> 00:27:51,720 Speaker 1: dollars and two cents. So that was that was the 448 00:27:51,800 --> 00:27:53,879 Speaker 1: thing that went into it. And since you guys are 449 00:27:53,920 --> 00:27:57,840 Speaker 1: such long term holders and their short term traders. You 450 00:27:57,840 --> 00:28:00,280 Speaker 1: could afford to be patient. They can't. They right to 451 00:28:00,400 --> 00:28:02,520 Speaker 1: hit the bid while you can wait. And it's a 452 00:28:02,560 --> 00:28:04,880 Speaker 1: win win deal. It's not like we're ripping their eyes out. 453 00:28:04,960 --> 00:28:09,320 Speaker 1: It's they they they want They want immediacy in trading 454 00:28:09,359 --> 00:28:11,960 Speaker 1: and are willing to pay for it, and we, in essence, 455 00:28:11,960 --> 00:28:14,640 Speaker 1: are providing a service to them by if they're wanting 456 00:28:14,680 --> 00:28:17,240 Speaker 1: to sell something, we take it off their hands, you know, 457 00:28:17,600 --> 00:28:19,640 Speaker 1: we take it down a couple of cents. They think 458 00:28:19,640 --> 00:28:22,200 Speaker 1: it's it's well worth it, and it makes over the 459 00:28:22,400 --> 00:28:24,600 Speaker 1: for a long term investor like us, it makes a 460 00:28:25,160 --> 00:28:28,080 Speaker 1: huge difference over the long haul. We're speaking with David 461 00:28:28,119 --> 00:28:31,520 Speaker 1: Booth of Dimensional Fund Advisors, So let's talk a little 462 00:28:31,520 --> 00:28:37,280 Speaker 1: bit about how successful indexing has become. Why is this 463 00:28:37,400 --> 00:28:45,200 Speaker 1: something that seemingly has taken the public so long to discover? Well, Uh, 464 00:28:45,480 --> 00:28:48,960 Speaker 1: I think that the idea behind indexing is not intuitively 465 00:28:49,000 --> 00:28:54,640 Speaker 1: obvious to people at first. UH. Most people approach investing 466 00:28:55,040 --> 00:28:58,360 Speaker 1: the way they approach business in general. The idea that 467 00:28:58,400 --> 00:29:02,480 Speaker 1: if you're smarter and harder, and you know, you ought 468 00:29:02,520 --> 00:29:05,560 Speaker 1: to be able to do better than than somebody else. Uh, 469 00:29:05,600 --> 00:29:10,640 Speaker 1: And that's just not true of of investing in public markets. 470 00:29:11,440 --> 00:29:14,320 Speaker 1: When you buy a publicly traded stock, you're buying a 471 00:29:14,320 --> 00:29:20,360 Speaker 1: piece of paper, and and the investing in the public 472 00:29:20,360 --> 00:29:24,440 Speaker 1: markets is a zero sum game about whatever the around uh, 473 00:29:24,480 --> 00:29:27,320 Speaker 1: whatever the market does. So if one investor has a 474 00:29:27,400 --> 00:29:30,600 Speaker 1: higher average return than the market, another investor has to 475 00:29:30,640 --> 00:29:33,840 Speaker 1: have a return less than the market. It's just simple arithmetic. 476 00:29:34,280 --> 00:29:37,240 Speaker 1: Then you work in a little friction from trading costs 477 00:29:37,080 --> 00:29:40,840 Speaker 1: and from fees and commissions, and you probably end up 478 00:29:40,880 --> 00:29:44,600 Speaker 1: with a significantly lower a number of people on the 479 00:29:44,640 --> 00:29:48,680 Speaker 1: below beta side, greater number of people making less. So 480 00:29:48,720 --> 00:29:50,840 Speaker 1: it's worse than a zero sum it's worse than zero 481 00:29:50,880 --> 00:29:53,840 Speaker 1: sum game. Yeah, but it's really hard. When you see 482 00:29:53,920 --> 00:29:58,360 Speaker 1: somebody with a great track record, it's tempting to say, look, 483 00:29:58,440 --> 00:30:01,280 Speaker 1: I think this manager you know, as a chance of 484 00:30:01,560 --> 00:30:04,520 Speaker 1: consistently beating the market. I mean, or stated differently, if 485 00:30:04,520 --> 00:30:08,000 Speaker 1: you're gonna invest with something you know, you probably won't 486 00:30:08,000 --> 00:30:10,680 Speaker 1: pick somebody has a poor track record. You're likely to 487 00:30:10,680 --> 00:30:15,280 Speaker 1: pick somebody with a good track record. Unfortunately, as his 488 00:30:15,720 --> 00:30:18,880 Speaker 1: research has shown, the number of people with good track 489 00:30:18,960 --> 00:30:23,160 Speaker 1: records are fewer than you'd expect by chance, just randomly 490 00:30:23,200 --> 00:30:26,240 Speaker 1: we would expect more investors to have a good track 491 00:30:26,280 --> 00:30:30,959 Speaker 1: record than than than there are, and so as a result, 492 00:30:31,000 --> 00:30:34,560 Speaker 1: you can't there's no way of telling that personally good tracker, 493 00:30:35,160 --> 00:30:38,160 Speaker 1: good track record, got it by luck or by skill. 494 00:30:38,840 --> 00:30:41,880 Speaker 1: And then there's the issue of what happens when suddenly 495 00:30:42,040 --> 00:30:46,160 Speaker 1: everybody piles into that one segment because this person is 496 00:30:46,160 --> 00:30:49,160 Speaker 1: on the cover of some magazine. And then what we 497 00:30:49,280 --> 00:30:52,520 Speaker 1: invariably see this in four oh one case where people 498 00:30:52,520 --> 00:30:55,320 Speaker 1: are just flavor of the month whoever's not at that quarter, 499 00:30:55,920 --> 00:30:59,560 Speaker 1: and usually it's because some segment has done really well 500 00:31:00,000 --> 00:31:03,200 Speaker 1: and it's about to stop doing really well well. People 501 00:31:03,240 --> 00:31:05,120 Speaker 1: have a tendency to, as we say, skate to where 502 00:31:05,120 --> 00:31:09,000 Speaker 1: the puck was. That's right, not to The famous quote 503 00:31:09,040 --> 00:31:10,680 Speaker 1: is skates where the puck is going to be, not 504 00:31:10,800 --> 00:31:13,360 Speaker 1: to where where it is. Now, let let me mix 505 00:31:13,360 --> 00:31:15,959 Speaker 1: this up a little bit with you and talk about 506 00:31:16,080 --> 00:31:20,080 Speaker 1: something in general about mutual funds that I've always complained 507 00:31:20,120 --> 00:31:24,800 Speaker 1: about the lack of involvement in in corporate governance on 508 00:31:24,840 --> 00:31:28,880 Speaker 1: behalf of their shareholders. You guys recently started doing something 509 00:31:28,960 --> 00:31:31,960 Speaker 1: or I don't know how recently. This is sending warning 510 00:31:32,040 --> 00:31:36,200 Speaker 1: letters to companies who's um stock you own and whose 511 00:31:36,240 --> 00:31:40,760 Speaker 1: management is debating, uh putting in a poison pill into place. 512 00:31:41,280 --> 00:31:43,440 Speaker 1: Tell us about that, Well, we think it's very important 513 00:31:43,480 --> 00:31:47,040 Speaker 1: to uh work hard for shareholder rights. UM. You know, 514 00:31:47,280 --> 00:31:51,200 Speaker 1: our capitalist system requires monitoring, you know, it's uh and 515 00:31:52,400 --> 00:31:56,560 Speaker 1: being an investor and part owner of a of a 516 00:31:56,600 --> 00:32:00,040 Speaker 1: company through our clients, UH, we think it's important to 517 00:32:00,120 --> 00:32:04,320 Speaker 1: do that monitoring and stand up for shareholder rights. Professor's 518 00:32:04,320 --> 00:32:06,520 Speaker 1: fam and French are very active and this this part 519 00:32:06,520 --> 00:32:10,320 Speaker 1: of the business. We take it very seriously. UM, you 520 00:32:10,320 --> 00:32:12,520 Speaker 1: know we have and what we did recently was we 521 00:32:12,520 --> 00:32:16,320 Speaker 1: sent a letter two the companies we invest in, which 522 00:32:16,320 --> 00:32:20,760 Speaker 1: is basically every public stait company, and said, these are 523 00:32:20,760 --> 00:32:26,360 Speaker 1: the principles that we along which we vote and you're 524 00:32:26,400 --> 00:32:29,400 Speaker 1: actually voting your proxies because you know, you look back 525 00:32:29,400 --> 00:32:32,920 Speaker 1: over the past few decades, mutual funds were notorious for 526 00:32:33,520 --> 00:32:37,600 Speaker 1: hands off relationship and they really are the ones who 527 00:32:37,600 --> 00:32:41,200 Speaker 1: own most of the shares on behalf of their their shareholders. Yeah, 528 00:32:41,240 --> 00:32:43,719 Speaker 1: we just had one a case where a company was 529 00:32:44,560 --> 00:32:48,480 Speaker 1: UM had a hostile bid another company was going to 530 00:32:48,520 --> 00:32:51,680 Speaker 1: take it over, so they decided that they were going 531 00:32:51,720 --> 00:32:54,360 Speaker 1: to put in a poison pill and uh, and a 532 00:32:54,440 --> 00:32:57,720 Speaker 1: staggered board. And this was about the time that their 533 00:32:57,840 --> 00:33:01,160 Speaker 1: annual shareholder meeting was coming up, and we told them 534 00:33:01,280 --> 00:33:05,480 Speaker 1: we would vote against them. Well, our policy is we 535 00:33:05,880 --> 00:33:09,240 Speaker 1: would vote against the directors in that case, and we 536 00:33:09,320 --> 00:33:12,040 Speaker 1: look to see where those directors are directors and other companies, 537 00:33:12,040 --> 00:33:14,400 Speaker 1: and we vote against against them. There crust the board, 538 00:33:14,560 --> 00:33:17,640 Speaker 1: the whole wherever they So, how do you guys have 539 00:33:17,720 --> 00:33:22,000 Speaker 1: any view on executive compensation? We keep seeing stories about 540 00:33:22,000 --> 00:33:28,600 Speaker 1: these CEOs and CFOs for public companies, tremendous, tremendous compensation packages. Yeah, 541 00:33:28,680 --> 00:33:31,280 Speaker 1: it's it's a really complex area. We know we don't 542 00:33:31,280 --> 00:33:35,000 Speaker 1: have uh. We like to make our decisions based on 543 00:33:35,080 --> 00:33:38,960 Speaker 1: good and perical research. There's abundant evidence that poison pills 544 00:33:39,000 --> 00:33:43,080 Speaker 1: are bad. Um in general, there are some net operating 545 00:33:43,080 --> 00:33:46,480 Speaker 1: a lost poison pills, but the typical poison pill is 546 00:33:46,560 --> 00:33:49,440 Speaker 1: bad for shareholders, so that's why we vote against it. 547 00:33:50,320 --> 00:33:52,520 Speaker 1: Thank you so much, David for being so generous with 548 00:33:52,600 --> 00:33:56,160 Speaker 1: your time. If you've enjoyed this conversation, please check out 549 00:33:56,280 --> 00:34:00,760 Speaker 1: the rest of our discussion. You can find that on Apple, iTunes, SoundCloud, 550 00:34:00,800 --> 00:34:04,320 Speaker 1: and of course Bloomberg dot com. Check out my daily 551 00:34:04,440 --> 00:34:08,480 Speaker 1: column on Bloomberg view dot com. Follow me on Twitter 552 00:34:08,760 --> 00:34:11,520 Speaker 1: at rid Halts. I'm Barry rid Haults. You're listening to 553 00:34:11,600 --> 00:34:15,560 Speaker 1: Masters in Business on Bloomberg Radio. Welcome back to the 554 00:34:15,640 --> 00:34:18,359 Speaker 1: podcast portion of the show. This is where I take 555 00:34:18,400 --> 00:34:23,319 Speaker 1: off the headphones and not worry about I love this 556 00:34:23,400 --> 00:34:26,760 Speaker 1: like cinema verite. You can hear the headphones come off, 557 00:34:26,800 --> 00:34:29,879 Speaker 1: you can hear the papers rattling. Um. But this part 558 00:34:29,920 --> 00:34:33,680 Speaker 1: is where we kinda get a little less formal. Don't 559 00:34:33,719 --> 00:34:37,560 Speaker 1: worry about the radio length segments, which are always an 560 00:34:37,600 --> 00:34:41,000 Speaker 1: annoying interruption, and just let the tape recorder role and 561 00:34:41,040 --> 00:34:44,120 Speaker 1: have a little fun. Um. I have so many questions 562 00:34:44,160 --> 00:34:46,920 Speaker 1: to ask you. You're not gonna get back to Austin 563 00:34:47,000 --> 00:34:49,440 Speaker 1: for for days if I go through everything. So I'm 564 00:34:49,480 --> 00:34:52,800 Speaker 1: really going to focus on on really the most important 565 00:34:52,840 --> 00:34:56,719 Speaker 1: ones because I've been looking forward to chatting with you 566 00:34:57,280 --> 00:35:00,960 Speaker 1: for so long. Let's let's start with one about Dimensional 567 00:35:01,000 --> 00:35:06,719 Speaker 1: When when you began, um, it was purely an institutional business, 568 00:35:06,800 --> 00:35:11,200 Speaker 1: wasn't it. That's how did your relationship with financial advisors 569 00:35:11,239 --> 00:35:14,320 Speaker 1: come about? Hunt tells me there's actually a good story 570 00:35:14,360 --> 00:35:19,160 Speaker 1: behind this. Well, it's um. Sometimes when people achieve a 571 00:35:19,200 --> 00:35:23,480 Speaker 1: bit of success. Uh. People assumed that it was it 572 00:35:23,600 --> 00:35:28,720 Speaker 1: was planned. This was one of these uh fortunate pieces 573 00:35:28,719 --> 00:35:31,120 Speaker 1: of good luck that happened to us. Nothing wrong with 574 00:35:31,120 --> 00:35:38,000 Speaker 1: a little sendipity again, right. What happened was by nine, Uh, 575 00:35:38,160 --> 00:35:40,880 Speaker 1: we've gotten up to about four or five day dollars 576 00:35:40,880 --> 00:35:45,760 Speaker 1: in our management and we thought we were smoking and 577 00:35:45,760 --> 00:35:48,120 Speaker 1: and so you were one percent of the shot size 578 00:35:48,120 --> 00:35:51,120 Speaker 1: of the company today and you thought, we've made it. 579 00:35:51,320 --> 00:35:55,759 Speaker 1: We've made it. So we had an advisor, there was 580 00:35:55,760 --> 00:35:59,279 Speaker 1: an advisor in Sacramento approached us and said, what's his name, 581 00:35:59,440 --> 00:36:01,680 Speaker 1: Dan Wheeler, Dan Weel because people love to hear the 582 00:36:01,800 --> 00:36:04,239 Speaker 1: name on the race. Dan, if you're listening, this is 583 00:36:04,280 --> 00:36:07,440 Speaker 1: about you. Yeah, no, it was. So Dan approaches with 584 00:36:07,480 --> 00:36:10,720 Speaker 1: the idea getting of getting access to our funds because 585 00:36:10,719 --> 00:36:16,120 Speaker 1: they're low cost and there their price for institutions. And 586 00:36:16,160 --> 00:36:18,640 Speaker 1: we said, well, you know, we don't know about that 587 00:36:19,719 --> 00:36:22,319 Speaker 1: because we've heard about individuals and how they get in 588 00:36:22,320 --> 00:36:24,200 Speaker 1: and out of the market and flavor of the month, 589 00:36:24,239 --> 00:36:28,440 Speaker 1: flavor of the month and all of that and that really, um, 590 00:36:28,480 --> 00:36:30,120 Speaker 1: it wasn't the kind of our thing. And he said, 591 00:36:30,120 --> 00:36:33,360 Speaker 1: oh no, no, no, no no he he he didn't he 592 00:36:33,400 --> 00:36:35,640 Speaker 1: didn't do that. Sort of thing. So he said, okay, 593 00:36:35,640 --> 00:36:38,560 Speaker 1: well we'll give you, we'll try it, and uh but 594 00:36:38,600 --> 00:36:41,080 Speaker 1: if we find that you're trading a lot of of 595 00:36:41,080 --> 00:36:43,799 Speaker 1: our funds, then we're gonna get rid of you. Done 596 00:36:44,040 --> 00:36:48,000 Speaker 1: so he said, okay, Well a year went by. Next 597 00:36:48,120 --> 00:36:50,520 Speaker 1: year he comes back, he goes, hey, look, I think, 598 00:36:50,680 --> 00:36:53,440 Speaker 1: uh there's a business in this. There's a number of 599 00:36:53,440 --> 00:36:56,120 Speaker 1: advive talked to a lot of advisors. They're very interested 600 00:36:56,520 --> 00:36:59,359 Speaker 1: in getting access to your funds. And once again we said, 601 00:36:59,400 --> 00:37:02,080 Speaker 1: well that's ok, but we we need to talk to 602 00:37:02,160 --> 00:37:05,200 Speaker 1: him first. We need to be convinced that they're like you, 603 00:37:05,440 --> 00:37:10,000 Speaker 1: that they won't be just trading willy nilly. And and 604 00:37:10,080 --> 00:37:13,560 Speaker 1: so year two, how many people does he bring in, 605 00:37:13,719 --> 00:37:17,680 Speaker 1: as you know, the next group of financial advisors. Well 606 00:37:17,719 --> 00:37:20,000 Speaker 1: it was enough. It was a small enough group. We 607 00:37:20,000 --> 00:37:21,680 Speaker 1: can all sit around the table. Let me put it 608 00:37:21,719 --> 00:37:24,319 Speaker 1: that way. I think they're ten or twelve advisors. And 609 00:37:24,640 --> 00:37:28,800 Speaker 1: so when did this um take off as an actual 610 00:37:28,880 --> 00:37:32,799 Speaker 1: business within dimensional funds? Well, it, uh, it picked up. 611 00:37:32,960 --> 00:37:35,680 Speaker 1: It picked up his team pretty quickly. Uh it wasn't 612 00:37:35,800 --> 00:37:38,080 Speaker 1: you overnight by any means, but you know, it's been 613 00:37:38,120 --> 00:37:43,239 Speaker 1: twenty five years and uh, twenty six years and it's uh, 614 00:37:43,520 --> 00:37:47,080 Speaker 1: it's um, yeah, just kind of taking a life on 615 00:37:47,120 --> 00:37:51,000 Speaker 1: his own. It's uh. Gentleman's name was Dan, Dan Wheeler, 616 00:37:51,080 --> 00:37:54,320 Speaker 1: Dan Wheeler. And what's your relationship with with Dan? Now? 617 00:37:54,320 --> 00:37:57,799 Speaker 1: Well Dan retired a couple of years ago. We you know, 618 00:37:57,880 --> 00:37:59,880 Speaker 1: what's one of the problems we're facing now is that 619 00:38:00,200 --> 00:38:02,360 Speaker 1: all these people have been good friends over the years. 620 00:38:02,840 --> 00:38:07,600 Speaker 1: We're all getting a little older. You know, Um, he 621 00:38:07,719 --> 00:38:09,960 Speaker 1: did he work directly with with you guys that he 622 00:38:10,000 --> 00:38:14,680 Speaker 1: worked for you or was he just he uh worked 623 00:38:14,719 --> 00:38:19,000 Speaker 1: with us and built the business up? And you know it? 624 00:38:19,400 --> 00:38:22,200 Speaker 1: What it is is that the difference in approach between 625 00:38:22,280 --> 00:38:25,960 Speaker 1: us and then most firms is, Um, we built a 626 00:38:25,960 --> 00:38:28,719 Speaker 1: firm around a set of ideas there's notion market efficiency 627 00:38:28,760 --> 00:38:32,880 Speaker 1: and uh, and developed our investment philosophy has has the 628 00:38:32,920 --> 00:38:41,120 Speaker 1: empirical research and entero dimensions evolved. So um what Uh 629 00:38:41,400 --> 00:38:45,680 Speaker 1: we kind of wait for advisors to that share that 630 00:38:45,719 --> 00:38:48,919 Speaker 1: opinion and then those those ideas we wait for them 631 00:38:48,920 --> 00:38:52,239 Speaker 1: to contact us. Really because it's very difficult if you 632 00:38:52,400 --> 00:38:55,000 Speaker 1: go out to all the advisors out there, it's you know, 633 00:38:55,040 --> 00:38:57,800 Speaker 1: it's a difficult to find out which ones in advance 634 00:38:57,840 --> 00:39:00,239 Speaker 1: would be interested in hearing this kind of story, so 635 00:39:00,760 --> 00:39:02,480 Speaker 1: we kind of wait until they're ready to hear the 636 00:39:02,520 --> 00:39:05,840 Speaker 1: story before we talk to him. How many advisors do 637 00:39:05,880 --> 00:39:11,879 Speaker 1: you work with? Now? They're about um three thousand advisory 638 00:39:11,920 --> 00:39:16,120 Speaker 1: firms and now some firms have a lot of advisors, 639 00:39:16,120 --> 00:39:20,120 Speaker 1: some just a one person advisory shop. What percentage of 640 00:39:20,120 --> 00:39:23,920 Speaker 1: of the four billion are the advisors actually working with? 641 00:39:24,040 --> 00:39:27,799 Speaker 1: They're about our business now? Really? Yeah, talk about so 642 00:39:27,960 --> 00:39:32,120 Speaker 1: really you guys tacked to a different direction and became 643 00:39:32,480 --> 00:39:35,600 Speaker 1: the majority of your A. U. M. Well, part of 644 00:39:35,640 --> 00:39:38,760 Speaker 1: it is um that the institutional business when we started 645 00:39:38,920 --> 00:39:44,279 Speaker 1: was our our clients were the large defined benefit plan. Uh. 646 00:39:44,440 --> 00:39:47,279 Speaker 1: Well those have been systematically shut down over the years. 647 00:39:47,760 --> 00:39:51,640 Speaker 1: That isn't make a business as it once was, and 648 00:39:52,120 --> 00:39:54,480 Speaker 1: you know, more of it's coming into the individual market. 649 00:39:55,440 --> 00:39:58,520 Speaker 1: So let's talk a little bit about UM. Let's look 650 00:39:58,520 --> 00:40:00,560 Speaker 1: a little bit about you. You run a four hundred 651 00:40:00,760 --> 00:40:04,320 Speaker 1: billion dollar farm. You're the chairman and the co CEO. 652 00:40:05,200 --> 00:40:08,280 Speaker 1: What's a day in the life of David Booth Like, Well, 653 00:40:08,360 --> 00:40:10,640 Speaker 1: it's uh, it's a it's a really a lot of fun. 654 00:40:10,960 --> 00:40:14,239 Speaker 1: I think the culture of the firm is that, you know, 655 00:40:14,320 --> 00:40:17,520 Speaker 1: people have a spirit that we can we can change things, 656 00:40:19,000 --> 00:40:22,839 Speaker 1: and so it's a lot of client work. It can 657 00:40:22,880 --> 00:40:25,440 Speaker 1: be there can be any one of the beauties is 658 00:40:25,480 --> 00:40:28,359 Speaker 1: every day is different than there can be problems like, uh, 659 00:40:30,320 --> 00:40:34,200 Speaker 1: you know Argentina shuts down, you know, Capital Control shuts 660 00:40:34,880 --> 00:40:38,160 Speaker 1: closes the market, or it could be uh some sort 661 00:40:38,200 --> 00:40:41,080 Speaker 1: of trade error or something. There's always some kind of concerns. 662 00:40:41,719 --> 00:40:43,920 Speaker 1: But the fund is really working with the clients and 663 00:40:44,920 --> 00:40:50,560 Speaker 1: you know, ultimately we're working with individuals. And the enthusiasm 664 00:40:50,600 --> 00:40:52,919 Speaker 1: comes from taking these new ideas around which we built 665 00:40:52,920 --> 00:40:57,160 Speaker 1: a firm and seeing the light go on for people 666 00:40:57,160 --> 00:41:01,000 Speaker 1: as they come in and say that aha moment, that's uh, 667 00:41:01,120 --> 00:41:04,080 Speaker 1: that's the excitement in the business. Uh, people go, I 668 00:41:04,120 --> 00:41:07,400 Speaker 1: get it now. So so let's talk about a decidedly 669 00:41:07,520 --> 00:41:12,080 Speaker 1: not a moment. You guys did fairly well throughout the 670 00:41:12,080 --> 00:41:16,080 Speaker 1: financial crisis. What was it like running an asset management 671 00:41:16,120 --> 00:41:20,480 Speaker 1: firm when you know, the markets get she lacked and 672 00:41:20,880 --> 00:41:24,720 Speaker 1: people are panicking. Well, it's it's very stressful. Obviously, Um, 673 00:41:25,280 --> 00:41:28,080 Speaker 1: we're not immune distress. Sometimes people say, well you're because 674 00:41:28,080 --> 00:41:29,839 Speaker 1: you're not trying to time the markets. You don't care. 675 00:41:30,040 --> 00:41:32,920 Speaker 1: I mean, we care just that there's not and we 676 00:41:32,960 --> 00:41:35,359 Speaker 1: don't We're not a control the markets. Did you see 677 00:41:35,360 --> 00:41:36,880 Speaker 1: a lot of outflows? Did you get a lot of 678 00:41:36,880 --> 00:41:39,839 Speaker 1: panicked calls? How? How did that? What was the day 679 00:41:39,840 --> 00:41:41,920 Speaker 1: to day like when you were in the midst of 680 00:41:41,920 --> 00:41:45,200 Speaker 1: oh eight oh nine. Well, the distinct, distinguishing characteristic is 681 00:41:45,239 --> 00:41:49,800 Speaker 1: that our clients stayed the course when there were massive 682 00:41:50,120 --> 00:41:54,400 Speaker 1: flows out of equity funds across the industry. We were 683 00:41:54,440 --> 00:41:57,600 Speaker 1: one of the few firms that actually had positive flows 684 00:41:57,640 --> 00:42:00,600 Speaker 1: every year, positive flows through oh seven, no eight or not. 685 00:42:01,800 --> 00:42:04,560 Speaker 1: And that explains why over the past five years you've 686 00:42:04,800 --> 00:42:08,640 Speaker 1: doubled in uh in size in terms of so this 687 00:42:09,200 --> 00:42:12,840 Speaker 1: in hindsight, I don't mean this as a positive because 688 00:42:12,840 --> 00:42:16,400 Speaker 1: everybody wishes it never happened, But net net you guys 689 00:42:16,520 --> 00:42:20,239 Speaker 1: came out fairly well after the crisis. Yeah, well you 690 00:42:20,280 --> 00:42:22,880 Speaker 1: could see the benefit of having a story about equilibrium, 691 00:42:22,920 --> 00:42:26,239 Speaker 1: which is what we believe. You know, sometimes people would 692 00:42:26,280 --> 00:42:28,840 Speaker 1: panic and go, gosh, you have markets are efficient? You know, 693 00:42:29,280 --> 00:42:33,000 Speaker 1: why are they down? And and the answer is that 694 00:42:33,440 --> 00:42:36,279 Speaker 1: markets are efficient. They're not perfect. You know, markets have 695 00:42:36,400 --> 00:42:38,880 Speaker 1: always gone up and down, and they'll continue to go 696 00:42:38,960 --> 00:42:41,759 Speaker 1: up and down. That's why you have a positive expected 697 00:42:42,280 --> 00:42:45,160 Speaker 1: outcome from investing in stocks people. You know, you have 698 00:42:45,200 --> 00:42:47,840 Speaker 1: to have a positive expected outcome where people wouldn't invest 699 00:42:47,840 --> 00:42:52,120 Speaker 1: in stocks. So it was we had great traction just 700 00:42:52,160 --> 00:42:54,920 Speaker 1: going to reviewing the basics with people when they come 701 00:42:54,960 --> 00:42:58,120 Speaker 1: in totally stressed out. Would say, hey, look, markets are 702 00:42:58,120 --> 00:43:01,080 Speaker 1: where buyers and sellers come together. They both have to 703 00:43:01,360 --> 00:43:04,920 Speaker 1: in a voluntary transaction. They both have to have I 704 00:43:04,920 --> 00:43:07,880 Speaker 1: feel like they got a good deal or they don't trade. Now, 705 00:43:07,920 --> 00:43:09,720 Speaker 1: if you look at the market, what's going on now, 706 00:43:10,520 --> 00:43:13,640 Speaker 1: they're trading. Volumes are huge, So a lot of buyers 707 00:43:13,680 --> 00:43:16,880 Speaker 1: coming into the market. Now, as to whether it's voluntary 708 00:43:17,000 --> 00:43:20,920 Speaker 1: or not, I think there are a lot of voluntary uh, 709 00:43:21,560 --> 00:43:24,320 Speaker 1: the buyers, but there are a lot of forced sellers, 710 00:43:24,360 --> 00:43:28,399 Speaker 1: people who have margin calls and whatnot. So, without being 711 00:43:28,440 --> 00:43:30,920 Speaker 1: a market forecaster, I did this video in late two 712 00:43:30,960 --> 00:43:33,680 Speaker 1: thousand and eight, beginning of two thousand nine. It turns 713 00:43:33,719 --> 00:43:36,000 Speaker 1: out it it was right pretty close to the bottom 714 00:43:36,000 --> 00:43:39,480 Speaker 1: of the market. Um. But it wasn't about timing at all. 715 00:43:39,560 --> 00:43:42,640 Speaker 1: It was about explaining how markets work and just reviewing that. 716 00:43:43,080 --> 00:43:45,960 Speaker 1: And you say, look, Warren Buffett's out there buying after 717 00:43:46,000 --> 00:43:50,000 Speaker 1: he had a number of transactions he reported at this time. 718 00:43:50,040 --> 00:43:53,120 Speaker 1: So and isn't too bad. This tracker is not too bad. 719 00:43:53,400 --> 00:43:55,120 Speaker 1: So he said, if we had to make a guess, 720 00:43:55,120 --> 00:43:57,239 Speaker 1: if anything, probably the buyers are getting too good a 721 00:43:57,280 --> 00:44:02,920 Speaker 1: deal now. And you know, I've watched my mouth out 722 00:44:02,920 --> 00:44:05,960 Speaker 1: with soap. I really said that they got it was 723 00:44:05,960 --> 00:44:08,560 Speaker 1: inefficiently priced, but they got a good deal of buyers. 724 00:44:08,960 --> 00:44:13,640 Speaker 1: Because you look at the tepid recovery since the recession 725 00:44:13,680 --> 00:44:16,840 Speaker 1: over six years ago, stock market has done great and 726 00:44:16,880 --> 00:44:21,040 Speaker 1: their recovery has been relatively modest. So you might ask 727 00:44:21,080 --> 00:44:23,960 Speaker 1: yourself why how would that happen? Well, I think prices 728 00:44:24,719 --> 00:44:28,279 Speaker 1: got to really attractive levels so it didn't take much 729 00:44:28,280 --> 00:44:31,160 Speaker 1: of a recovery to have them pop back up. So so, 730 00:44:31,200 --> 00:44:33,799 Speaker 1: in other words, markets are efficient, but people may not 731 00:44:33,880 --> 00:44:37,839 Speaker 1: be the most efficient, the most rational sellers when emotions 732 00:44:37,960 --> 00:44:42,000 Speaker 1: reared head. Absolutely. We have an advisor who says, I 733 00:44:42,080 --> 00:44:46,040 Speaker 1: don't have people with investment problems. I've got investments with 734 00:44:46,080 --> 00:44:49,759 Speaker 1: people problems. That's perfect. That really that really makes UM 735 00:44:49,920 --> 00:44:52,160 Speaker 1: sums it up perfectly. You know who I've been meaning 736 00:44:52,200 --> 00:44:56,200 Speaker 1: to ask you about, and I actually skipped over it earlier. 737 00:44:57,120 --> 00:45:00,680 Speaker 1: Is UM one of the earliest people you were working with? 738 00:45:01,360 --> 00:45:04,960 Speaker 1: Um when you begin how did you meet. I want 739 00:45:04,960 --> 00:45:11,279 Speaker 1: to pronounce his name correctly, Rex Sinquifield Um. He and 740 00:45:11,280 --> 00:45:14,319 Speaker 1: I were classmates of business school. Actually my second year 741 00:45:14,360 --> 00:45:17,880 Speaker 1: in the program at Chicago, I was a teaching assistant 742 00:45:17,880 --> 00:45:23,680 Speaker 1: for FAMA and Rex took Fauma's course and so um 743 00:45:24,880 --> 00:45:28,000 Speaker 1: I can great at his papers. But on Fridays we 744 00:45:28,040 --> 00:45:32,600 Speaker 1: would have a Q and A with a teaching assistance 745 00:45:33,440 --> 00:45:37,080 Speaker 1: and Rex always showed up. He was a zealot over 746 00:45:37,520 --> 00:45:42,839 Speaker 1: you know, really a scholar, and so he after he 747 00:45:42,880 --> 00:45:46,800 Speaker 1: graduated from from Chicago with his NBA, he went to 748 00:45:46,840 --> 00:45:50,040 Speaker 1: work for American National in Chicago and there he developed 749 00:45:50,040 --> 00:45:54,880 Speaker 1: the first SMP five index Farmah, so so you launch 750 00:45:55,120 --> 00:45:58,279 Speaker 1: d f A in Brooklyn. You reach out to Rex 751 00:45:58,520 --> 00:46:00,759 Speaker 1: at a certain point. Yeah, he had got wind of 752 00:46:00,800 --> 00:46:05,120 Speaker 1: what we were doing and we just started. We were 753 00:46:06,239 --> 00:46:08,319 Speaker 1: very far along at all, and he said he had 754 00:46:08,360 --> 00:46:12,000 Speaker 1: been thinking about doing something similar on his own. So 755 00:46:12,080 --> 00:46:15,080 Speaker 1: we said, well, look, uh, why don't we do this together? 756 00:46:15,680 --> 00:46:20,200 Speaker 1: So it was yourself Rex, who else was one of 757 00:46:20,239 --> 00:46:23,759 Speaker 1: the early co founders. Well, we had a number of 758 00:46:24,440 --> 00:46:28,280 Speaker 1: several colleagues I'd worked with in my assistant from before. 759 00:46:29,360 --> 00:46:31,840 Speaker 1: There's a couple of key people as well. And actually 760 00:46:31,840 --> 00:46:33,919 Speaker 1: a part of the story of the firm is really 761 00:46:34,320 --> 00:46:40,439 Speaker 1: all the outside directors we had, which are academics, well, 762 00:46:40,480 --> 00:46:42,440 Speaker 1: not all of them are academics, because I have a 763 00:46:42,440 --> 00:46:45,200 Speaker 1: little further down my list to ask you about your 764 00:46:45,200 --> 00:46:53,160 Speaker 1: relationship with one of my favorite nicks, former Senator Bill Bradley. Okay, well, um, 765 00:46:53,200 --> 00:46:57,680 Speaker 1: you know, we've been working with Senator Bradley about five years. Um, 766 00:46:57,719 --> 00:47:02,719 Speaker 1: he's uh, uh, you have been a terrific you know. Addition, uh, 767 00:47:02,800 --> 00:47:06,480 Speaker 1: he's works on a consoling basis, he's not uh is 768 00:47:06,520 --> 00:47:08,840 Speaker 1: he a director or just well, he's a you know, 769 00:47:08,840 --> 00:47:14,680 Speaker 1: an outside advisor, and he's yeah, deeply concerned about retirement 770 00:47:14,680 --> 00:47:18,239 Speaker 1: income for people. And we've been doing a lot of 771 00:47:18,280 --> 00:47:24,200 Speaker 1: work head headed by Bob Martin on helping people think 772 00:47:24,239 --> 00:47:28,440 Speaker 1: through and prepare for retirement. And uh, there's a budding, 773 00:47:28,760 --> 00:47:32,640 Speaker 1: a bit of a budding retirement crisis. The the average 774 00:47:32,640 --> 00:47:37,839 Speaker 1: baby boomer does not have enough money saved for their retirement. Now, 775 00:47:37,840 --> 00:47:40,719 Speaker 1: they don't end there and there's not there. They're not 776 00:47:40,760 --> 00:47:43,160 Speaker 1: short by a little, they're short by a lot. So 777 00:47:43,480 --> 00:47:47,279 Speaker 1: what's gonna end up happening twenty years? Hence, when I 778 00:47:47,280 --> 00:47:49,800 Speaker 1: think the number is something like forty or sixty thousand 779 00:47:49,800 --> 00:47:53,520 Speaker 1: boomers a day are retiring over the next ten years. 780 00:47:53,640 --> 00:47:56,640 Speaker 1: Is that about right? And that sounds that sounds right, 781 00:47:56,719 --> 00:48:00,200 Speaker 1: and it's um It's just, you know, it's a huge crisis. 782 00:48:00,000 --> 00:48:05,480 Speaker 1: It's hard to make up if somebody's close to retirement 783 00:48:05,560 --> 00:48:08,160 Speaker 1: and and hasn't saved enough, it's it's hard to save 784 00:48:08,200 --> 00:48:10,759 Speaker 1: a lot in just a few years. The important thing 785 00:48:10,840 --> 00:48:13,920 Speaker 1: is to train people and think about retirement over there 786 00:48:14,239 --> 00:48:17,799 Speaker 1: over their lifetime. We have a friend Patrick O'Shaughnessy who 787 00:48:17,800 --> 00:48:20,880 Speaker 1: wrote a book called Millennial Money and basically says, the 788 00:48:20,960 --> 00:48:25,319 Speaker 1: advantage that twentysomethings have is they have a fifty year 789 00:48:25,400 --> 00:48:28,480 Speaker 1: runway to save and the advantage of compounding is enormous. 790 00:48:28,760 --> 00:48:30,959 Speaker 1: You will never again in your life have that much 791 00:48:30,960 --> 00:48:35,319 Speaker 1: of a runway. And most people look, I think I'm 792 00:48:35,360 --> 00:48:39,120 Speaker 1: pretty typical. I was interested investing for many years, but 793 00:48:39,160 --> 00:48:42,200 Speaker 1: I never really got serious until my late thirties. It 794 00:48:42,280 --> 00:48:46,239 Speaker 1: didn't hurt to be earning a little more, but you know, 795 00:48:46,320 --> 00:48:49,680 Speaker 1: you think about what that twenty years of compounding could 796 00:48:49,680 --> 00:48:51,880 Speaker 1: have done. Even a little bit would have made a 797 00:48:51,960 --> 00:48:55,120 Speaker 1: huge difference totally. It's so the magic of compounding is 798 00:48:55,480 --> 00:49:00,120 Speaker 1: one of the most important aspects of investing. So we 799 00:49:00,200 --> 00:49:04,960 Speaker 1: talked about your trading strategy, and we talked about, um, 800 00:49:05,040 --> 00:49:09,160 Speaker 1: what was like running running the firm. Someone said to 801 00:49:09,200 --> 00:49:12,279 Speaker 1: me that, and I want you to clarify this. You 802 00:49:12,280 --> 00:49:16,480 Speaker 1: guys are effectively market makers for fourteen thousand stocks. I 803 00:49:16,520 --> 00:49:20,560 Speaker 1: think that's somewhat of an overstatement. You're not truly market makers. 804 00:49:20,600 --> 00:49:24,799 Speaker 1: You're you're just providing liquidly by by offering slightly better 805 00:49:24,840 --> 00:49:27,200 Speaker 1: prices than the bid. Is that is that a fair 806 00:49:27,200 --> 00:49:29,000 Speaker 1: way to describe it. Yeah, we tried to trade as 807 00:49:29,000 --> 00:49:31,480 Speaker 1: close to the bid as we can. Um, if we 808 00:49:31,520 --> 00:49:34,360 Speaker 1: were a market maker, we would be actively trading every day. 809 00:49:34,400 --> 00:49:36,600 Speaker 1: I mean, one of the one of the principles we 810 00:49:36,640 --> 00:49:38,680 Speaker 1: have is we don't want to see much turnover in 811 00:49:38,719 --> 00:49:42,360 Speaker 1: the portfolios. Uh. The best way to save on trading 812 00:49:42,400 --> 00:49:45,720 Speaker 1: costs is not trade very often. Uh. And then uh, 813 00:49:45,920 --> 00:49:49,200 Speaker 1: my colleague says, the solution to high frequency trading is 814 00:49:49,239 --> 00:49:52,640 Speaker 1: low frequency trade. There, Well, you know these high frequency 815 00:49:52,640 --> 00:49:55,040 Speaker 1: traders are out there, and that you know. I'm we 816 00:49:55,080 --> 00:50:00,839 Speaker 1: don't do high frequency trading. I uh, Uh. As long 817 00:50:00,920 --> 00:50:03,640 Speaker 1: as everybody has access to the same information, I don't 818 00:50:03,640 --> 00:50:07,919 Speaker 1: have a problem with high frequency trading. So let's talk 819 00:50:07,920 --> 00:50:11,880 Speaker 1: a little bit about your co CEO, Eduardo Rappetto. What's 820 00:50:11,920 --> 00:50:15,799 Speaker 1: his role? How has he influenced the growth at Dimensional Funds. Well, 821 00:50:15,800 --> 00:50:20,799 Speaker 1: he's been he's been spectacular. Edwardo's background was he got 822 00:50:20,800 --> 00:50:24,680 Speaker 1: his pH d and uh some form of aeronautical engineering 823 00:50:24,680 --> 00:50:27,480 Speaker 1: at Caltech. Uh. He's explained it to me, but I 824 00:50:27,480 --> 00:50:31,960 Speaker 1: don't uh it goes beyond. I can make paper airplanes 825 00:50:31,960 --> 00:50:35,080 Speaker 1: and that's about it. But anyway, he got tired of 826 00:50:36,400 --> 00:50:40,600 Speaker 1: um uh of that area, and I thought about doing 827 00:50:40,840 --> 00:50:45,960 Speaker 1: uh finance, and he approached us. He joined our research team. 828 00:50:46,080 --> 00:50:49,640 Speaker 1: It turns out academic research and finance is very similar 829 00:50:49,680 --> 00:50:54,000 Speaker 1: to the academic We do academic research and and there 830 00:50:54,000 --> 00:50:56,920 Speaker 1: a nautical engineering. It's uh, you know research, there's some 831 00:50:57,120 --> 00:50:59,920 Speaker 1: general principles you following a lot of the same man 832 00:51:00,160 --> 00:51:04,279 Speaker 1: and so forth. So he uh and being as bright, 833 00:51:04,320 --> 00:51:07,000 Speaker 1: he'sn't phenomenally bright, and he picked up what he needed 834 00:51:07,000 --> 00:51:09,680 Speaker 1: to learn about finance, uh in a very short period 835 00:51:09,680 --> 00:51:12,480 Speaker 1: of time. And so what's so you guys are co 836 00:51:12,640 --> 00:51:15,600 Speaker 1: C E O S which is somewhat of a unusual 837 00:51:15,680 --> 00:51:20,520 Speaker 1: arrangement in finance. How do you guys divide the responsibilities? Well, 838 00:51:20,600 --> 00:51:22,640 Speaker 1: he he does the work and I take the credit. 839 00:51:22,840 --> 00:51:25,160 Speaker 1: That's basically the way it works. I have to I 840 00:51:25,200 --> 00:51:26,920 Speaker 1: have to see if I can get that done in 841 00:51:27,280 --> 00:51:30,160 Speaker 1: my own my own office. So you would you say 842 00:51:30,200 --> 00:51:33,960 Speaker 1: he's more operations and you're really more strategic or well, 843 00:51:34,000 --> 00:51:37,279 Speaker 1: I would say he's more hands on. I've tried to 844 00:51:37,320 --> 00:51:41,360 Speaker 1: get out of day to day management. Um and uh. 845 00:51:41,440 --> 00:51:43,840 Speaker 1: And we have a you know, a huge bench, a 846 00:51:43,880 --> 00:51:46,799 Speaker 1: lot of depth in the firm and uh, it's you 847 00:51:46,840 --> 00:51:49,480 Speaker 1: need to make that generational transfer. It's really important in 848 00:51:49,560 --> 00:51:53,440 Speaker 1: running a business that that you, you know, hand off 849 00:51:53,719 --> 00:51:57,640 Speaker 1: and so ed Ward O had you know, heads up 850 00:51:57,680 --> 00:52:02,680 Speaker 1: the next generation and you know of brilliant, hard working 851 00:52:02,719 --> 00:52:06,439 Speaker 1: people that that's nice to have that sort of deep 852 00:52:06,480 --> 00:52:08,799 Speaker 1: bench behind you. Let's let's talk a little bit about 853 00:52:08,800 --> 00:52:12,920 Speaker 1: the research paper you did with gene Farma Diversification, Returns 854 00:52:12,960 --> 00:52:16,040 Speaker 1: and Asset Management. I want a Graham and Dot award. 855 00:52:16,040 --> 00:52:20,920 Speaker 1: Didn't it back in r not too bad? So what 856 00:52:21,160 --> 00:52:24,319 Speaker 1: motivated you to say to your OPE professor, Hey, let's 857 00:52:24,360 --> 00:52:28,160 Speaker 1: do a paper. Well it Uh, you know what you know, 858 00:52:28,239 --> 00:52:33,560 Speaker 1: basically one of the biggest principles we have at the 859 00:52:33,560 --> 00:52:38,560 Speaker 1: firm is diversification. As your buddy, you know, and it's 860 00:52:38,600 --> 00:52:42,400 Speaker 1: difficult for people to see the benefit diversification, you know 861 00:52:42,480 --> 00:52:45,960 Speaker 1: what you know? Uh? On TV sometimes they say if 862 00:52:45,960 --> 00:52:49,480 Speaker 1: you have five stocks, you know you're diversified. You know. Uh, yes, 863 00:52:49,520 --> 00:52:52,600 Speaker 1: you have five large cap tech stocks perfectly, that's it. 864 00:52:52,680 --> 00:52:54,960 Speaker 1: You don't need anything else. And so people need to 865 00:52:55,000 --> 00:52:58,439 Speaker 1: help thinking through uh, you know the importance of diversification. 866 00:52:58,520 --> 00:53:02,560 Speaker 1: That's really what that paper was about, is measuring, uh, 867 00:53:02,600 --> 00:53:05,920 Speaker 1: how much your compound return. We we've talked about compounding. 868 00:53:06,280 --> 00:53:10,960 Speaker 1: How much your compound return has improved over time through diversification. 869 00:53:11,600 --> 00:53:15,759 Speaker 1: So there's diversification and there's rebalancing. Pretty close to a 870 00:53:15,760 --> 00:53:18,480 Speaker 1: free lunch. If I would say that anything is a 871 00:53:18,480 --> 00:53:21,840 Speaker 1: free lunch on on Wall Street, that's that's the closest 872 00:53:21,880 --> 00:53:25,759 Speaker 1: that that would be the first that would be the candidate, right, 873 00:53:25,840 --> 00:53:28,399 Speaker 1: doesn't caution anything, You're not taking additional risk or whatever 874 00:53:28,480 --> 00:53:32,160 Speaker 1: cost is tiny, and you basically over a period of 875 00:53:32,200 --> 00:53:35,840 Speaker 1: decades compound and extra let's call it hundred basis points. 876 00:53:35,880 --> 00:53:37,680 Speaker 1: Is that is that a fair assessment? Yeah, that'd be 877 00:53:37,880 --> 00:53:39,839 Speaker 1: that probably a little high, but it's pretty close to that. 878 00:53:39,920 --> 00:53:42,919 Speaker 1: And a hundred basis points, uh, over the long haul 879 00:53:43,239 --> 00:53:45,840 Speaker 1: can make a huge difference, right, especially with no additional 880 00:53:45,920 --> 00:53:50,640 Speaker 1: risk and the minimus costs. Um. So let's let's continue 881 00:53:50,640 --> 00:53:57,280 Speaker 1: along along those same lines. Um. You guys first started 882 00:53:57,280 --> 00:53:59,800 Speaker 1: with dimensions we mentioned earlier, it was there was beta 883 00:54:00,000 --> 00:54:03,360 Speaker 1: plus small cap, and then after small cap was value. 884 00:54:03,880 --> 00:54:07,439 Speaker 1: What other dimensions might potentially be coming down the pike. Well, 885 00:54:07,480 --> 00:54:12,080 Speaker 1: we've been doing a lot of work with UH, a 886 00:54:12,120 --> 00:54:16,520 Speaker 1: couple of measures on profitability, and it turns out that 887 00:54:16,600 --> 00:54:22,000 Speaker 1: adds UH quite a bit. UH and and reinvestment or 888 00:54:22,040 --> 00:54:25,240 Speaker 1: investment company investment. So there's always a lot of research 889 00:54:25,320 --> 00:54:27,919 Speaker 1: coming along. It takes it seems like it takes about 890 00:54:27,920 --> 00:54:31,520 Speaker 1: every ten years for a new idea to come along. 891 00:54:31,840 --> 00:54:33,600 Speaker 1: So so let's look at each of those. So we'll 892 00:54:33,600 --> 00:54:39,440 Speaker 1: start with profitability. Pretty intuitive. The more profitable company is 893 00:54:39,440 --> 00:54:41,759 Speaker 1: is it straight up profits or is it change? Is 894 00:54:41,840 --> 00:54:44,560 Speaker 1: a growth of profits? It's it's a it's a it's 895 00:54:44,560 --> 00:54:48,640 Speaker 1: a measure of profitability. The what And you're right, people, 896 00:54:48,800 --> 00:54:51,359 Speaker 1: I think that's intuitive of the you have to throw 897 00:54:51,400 --> 00:54:56,160 Speaker 1: in the caveat though, which is uh, gosh, it seems 898 00:54:56,160 --> 00:54:58,440 Speaker 1: like common sense. Why would I get paid more if 899 00:54:58,440 --> 00:55:00,759 Speaker 1: a company's more profitable? Seems like that its lower risk, 900 00:55:01,160 --> 00:55:04,239 Speaker 1: and that's not really, that's not really what's going on. 901 00:55:04,920 --> 00:55:06,719 Speaker 1: What's going on as you say, Look, suppose I have 902 00:55:06,760 --> 00:55:10,680 Speaker 1: two stocks and and they're selling at the same price, 903 00:55:10,680 --> 00:55:13,360 Speaker 1: but they have the same kind of characteristics wanted, and 904 00:55:13,480 --> 00:55:16,000 Speaker 1: one of them has a greater profitability measure. How do 905 00:55:16,040 --> 00:55:21,160 Speaker 1: you explain uh, uh that it's they're selling at the 906 00:55:21,200 --> 00:55:24,560 Speaker 1: same you know, the same price. Well, that the earnings 907 00:55:24,640 --> 00:55:28,080 Speaker 1: must be risk here, So it's, uh, there's something about 908 00:55:28,120 --> 00:55:30,839 Speaker 1: that company that's risk here. That's the thought process. That's 909 00:55:30,840 --> 00:55:33,560 Speaker 1: a thought process where you can make well, you're saying 910 00:55:33,600 --> 00:55:36,920 Speaker 1: that's wrong what I'm saying, that's uh, that's right if 911 00:55:36,960 --> 00:55:42,360 Speaker 1: you um by, It's just it's just another way of 912 00:55:42,640 --> 00:55:46,400 Speaker 1: getting at this notion of risk. If too, there are 913 00:55:46,440 --> 00:55:51,120 Speaker 1: stated differently. If two companies have the same expected cash flows, 914 00:55:51,160 --> 00:55:55,000 Speaker 1: the ones that's uh, that's that's less certain will sell 915 00:55:55,040 --> 00:55:58,040 Speaker 1: attle lower price. And what was the other dimension, the 916 00:55:58,080 --> 00:56:00,719 Speaker 1: other new dimension you said you were just investment. It 917 00:56:00,719 --> 00:56:03,600 Speaker 1: turns out reinvestment is that R and D or is 918 00:56:03,640 --> 00:56:06,120 Speaker 1: that share buy backs and dividing. It can be all 919 00:56:06,120 --> 00:56:10,400 Speaker 1: the people that companies, the companies that have the lowest 920 00:56:10,440 --> 00:56:15,680 Speaker 1: return are those that have uh, small companies that have 921 00:56:16,560 --> 00:56:20,279 Speaker 1: UM that are selling at high prices, that have low 922 00:56:20,280 --> 00:56:23,239 Speaker 1: profitability measure and invest a lot of money. That's uh, 923 00:56:23,800 --> 00:56:28,200 Speaker 1: those are the low profitability and are investing a lot 924 00:56:28,239 --> 00:56:31,360 Speaker 1: of it. And those that's another dimension that actually just 925 00:56:31,440 --> 00:56:34,080 Speaker 1: fairly well, well, we don't know. That's the ones that 926 00:56:35,040 --> 00:56:36,920 Speaker 1: they're Okay, let me get the ones that are not 927 00:56:37,040 --> 00:56:40,759 Speaker 1: profitable and they're investing a lot their returns that turn 928 00:56:40,800 --> 00:56:43,840 Speaker 1: out to be horrible. It's okay, hemage in cash and 929 00:56:43,840 --> 00:56:46,000 Speaker 1: they're not making Yeah, yeah, that's that's about one percent 930 00:56:46,040 --> 00:56:48,320 Speaker 1: of the markets. And so even though we're not stock 931 00:56:48,400 --> 00:56:51,919 Speaker 1: pickers where there's their behavior is so unusual that we've 932 00:56:51,960 --> 00:56:54,880 Speaker 1: chosen not to invest in those. Uh so you're just 933 00:56:54,920 --> 00:56:57,359 Speaker 1: screening them out as low quality and you want nothing 934 00:56:57,360 --> 00:57:00,320 Speaker 1: to do with that, right, And then the reinvest aessement? 935 00:57:00,520 --> 00:57:07,680 Speaker 1: How do you define reinvestments? UM? Just the normal UM 936 00:57:07,800 --> 00:57:12,640 Speaker 1: R and D or it's everything all right, So let's 937 00:57:12,719 --> 00:57:14,800 Speaker 1: let's go back a little bit to the University of Chicago. 938 00:57:14,880 --> 00:57:17,040 Speaker 1: Because that was such a short segment, I didn't get 939 00:57:17,040 --> 00:57:20,520 Speaker 1: a chance to answer you some questions. So the Booth 940 00:57:20,600 --> 00:57:24,920 Speaker 1: School was was named. You made an unrestricted grant to 941 00:57:24,960 --> 00:57:28,080 Speaker 1: them and At the time it was worth about three 942 00:57:28,440 --> 00:57:31,160 Speaker 1: million dollars, but I suspect it was worth more because 943 00:57:31,600 --> 00:57:34,280 Speaker 1: the structure of the deal was really kind of interesting. 944 00:57:34,320 --> 00:57:37,800 Speaker 1: It was it was cash and a what was described 945 00:57:37,840 --> 00:57:42,600 Speaker 1: as a considerable share of stock and mentional holdings, which 946 00:57:42,840 --> 00:57:48,920 Speaker 1: is what owns um dimensional funds, and that has to 947 00:57:48,960 --> 00:57:53,680 Speaker 1: be worth significantly more money today. Then when that that 948 00:57:54,480 --> 00:57:58,800 Speaker 1: grant was made, what was the thinking behind that structure. Well, 949 00:57:58,840 --> 00:58:02,640 Speaker 1: the structure was I I owed the university a lot. 950 00:58:03,240 --> 00:58:05,840 Speaker 1: Uh you credit them with you are You've said this 951 00:58:05,880 --> 00:58:09,160 Speaker 1: in many interviews. You credit them with opening your eyes, 952 00:58:09,280 --> 00:58:12,800 Speaker 1: changing your life, responsible for your success. I mean these 953 00:58:12,840 --> 00:58:14,800 Speaker 1: are your words. Yeah right, No, No, They've been a 954 00:58:14,800 --> 00:58:17,560 Speaker 1: partner every step along the way, you know, working with 955 00:58:17,600 --> 00:58:20,560 Speaker 1: Fall And then when we started the firm, Fama joined 956 00:58:20,640 --> 00:58:24,040 Speaker 1: us as a director right away and founding shareholder. Then 957 00:58:24,080 --> 00:58:28,000 Speaker 1: we went to uh, we had we created this mutual fund. 958 00:58:28,360 --> 00:58:32,720 Speaker 1: Mutual fund has to have an independent board of directors. Uh, 959 00:58:32,880 --> 00:58:36,440 Speaker 1: those are all there. All of our independent directors either 960 00:58:36,760 --> 00:58:40,280 Speaker 1: teach at Chicago or half taught at Chicago. And when 961 00:58:40,280 --> 00:58:43,720 Speaker 1: we started this was incredibly important because you know, we're 962 00:58:43,800 --> 00:58:47,640 Speaker 1: operating out of my brownstone in Brooklyn, and and without 963 00:58:47,640 --> 00:58:50,480 Speaker 1: a track record. So people sometimes ask how did you 964 00:58:50,480 --> 00:58:54,040 Speaker 1: get those first clients? And I think we had I 965 00:58:54,080 --> 00:58:56,400 Speaker 1: think we were reasonably persuasive, But I think a lot 966 00:58:56,440 --> 00:58:59,000 Speaker 1: of it has to do with this association and we 967 00:58:59,560 --> 00:59:03,200 Speaker 1: the people could see all these people, you know, farm Shoals, 968 00:59:03,720 --> 00:59:06,560 Speaker 1: uh Miller, you know, it's an you know it's uh, 969 00:59:07,040 --> 00:59:09,240 Speaker 1: that's right, Roder Ribertson, it's another one of your outside 970 00:59:09,240 --> 00:59:12,040 Speaker 1: of it. So that's a tremendous amount of credibility between 971 00:59:12,640 --> 00:59:17,000 Speaker 1: between the the nobel laureates and and everybody else. So 972 00:59:17,000 --> 00:59:20,560 Speaker 1: so I owed him, and so the questions now structuring 973 00:59:20,600 --> 00:59:24,000 Speaker 1: the deal then, Uh, I was long. I had a 974 00:59:24,120 --> 00:59:27,680 Speaker 1: huge debt and a little cash because we hadn't really 975 00:59:28,920 --> 00:59:30,600 Speaker 1: you know, it took a long time to get get 976 00:59:30,640 --> 00:59:34,640 Speaker 1: to get profitability. So it's basically cut him in on 977 00:59:34,680 --> 00:59:38,080 Speaker 1: an income stream, you know, uh, give him the income 978 00:59:38,080 --> 00:59:41,920 Speaker 1: on on on some shares going forward, rather than I 979 00:59:41,920 --> 00:59:44,880 Speaker 1: didn't write him a check for one big momp sum. 980 00:59:44,880 --> 00:59:47,760 Speaker 1: It's uh, so they'll have it earned out as you described. 981 00:59:48,160 --> 00:59:51,240 Speaker 1: And it's you know, in terms of the valuation, I 982 00:59:51,280 --> 00:59:53,160 Speaker 1: never got involved in the valuation to begin with. I 983 00:59:53,200 --> 00:59:55,280 Speaker 1: don't want to get involved in it now it is. 984 00:59:55,600 --> 00:59:58,480 Speaker 1: This is what it is. There's a phrase I read 985 00:59:58,800 --> 01:00:05,200 Speaker 1: about UM Chicago and and you described yourself. I'm looking 986 01:00:05,240 --> 01:00:11,120 Speaker 1: in my notes as someone someone described Dimensional Funds as 987 01:00:11,760 --> 01:00:16,440 Speaker 1: the applied brain trust of the Chicago School. Is that 988 01:00:16,480 --> 01:00:20,480 Speaker 1: a fair statement? Well, we've we've Yeah, we are about 989 01:00:20,520 --> 01:00:24,040 Speaker 1: implementation and really the application of the ideas. That is 990 01:00:24,080 --> 01:00:27,120 Speaker 1: what the firm is about. And I can maybe it 991 01:00:27,120 --> 01:00:28,880 Speaker 1: were stated a bit to say we were applying the 992 01:00:28,880 --> 01:00:32,760 Speaker 1: brain power. I mean, there's well, I guess it's not 993 01:00:32,800 --> 01:00:35,760 Speaker 1: too much of an overstatement. But how about applied think 994 01:00:35,800 --> 01:00:40,120 Speaker 1: tank from the University of Chicago. Okay, there we go. Yeah, 995 01:00:40,240 --> 01:00:43,680 Speaker 1: it's I think the important thing is we build a 996 01:00:43,680 --> 01:00:45,800 Speaker 1: firm around a set of ideas. Most of those ideas 997 01:00:45,800 --> 01:00:49,680 Speaker 1: were deal out and leading business schools, and and that's 998 01:00:49,680 --> 01:00:52,000 Speaker 1: what we ask our clients to do is share you 999 01:00:52,000 --> 01:00:54,560 Speaker 1: know that, uh, share are those ideas, that point of 1000 01:00:54,640 --> 01:00:58,880 Speaker 1: view and we can all work together. You mentioned Jim 1001 01:00:58,960 --> 01:01:04,320 Speaker 1: Lourie earlier. He developed the Chicago Center for Research and 1002 01:01:04,360 --> 01:01:08,000 Speaker 1: Security Prices with Lawrence Fisher or some people just call 1003 01:01:08,080 --> 01:01:11,240 Speaker 1: that CRISP for it's uh, how significant is that? It's 1004 01:01:11,240 --> 01:01:14,760 Speaker 1: amazing when you go to do some research and you 1005 01:01:14,760 --> 01:01:18,520 Speaker 1: you look for certain data. That's an amazing database. It 1006 01:01:18,600 --> 01:01:21,440 Speaker 1: is the only reasse is the research quality database that 1007 01:01:22,400 --> 01:01:26,640 Speaker 1: uh nearly all academics you who's in doing research, and 1008 01:01:26,880 --> 01:01:33,760 Speaker 1: its significance cannot be overstated. Because let's go back, uh 1009 01:01:33,920 --> 01:01:39,160 Speaker 1: to nineteen if you went around and asked people, what's 1010 01:01:39,160 --> 01:01:41,920 Speaker 1: been the historical rate of return on stocks? But what 1011 01:01:42,080 --> 01:01:44,200 Speaker 1: he knew? You know, all kinds of wild guests and 1012 01:01:44,240 --> 01:01:46,959 Speaker 1: some people get a zero. Some people say fifteen percent 1013 01:01:47,040 --> 01:01:52,360 Speaker 1: a year. I don't know what that is, but we 1014 01:01:52,360 --> 01:01:56,400 Speaker 1: could kill that. Um okay, that was That was an 1015 01:01:56,400 --> 01:02:00,200 Speaker 1: odd interruption that wasn't for us. Um let me if 1016 01:02:00,240 --> 01:02:05,600 Speaker 1: I can kill that. You're gonna pause this second? Is 1017 01:02:05,600 --> 01:02:11,080 Speaker 1: that this there? You go? Okay, I got it. It 1018 01:02:11,160 --> 01:02:14,080 Speaker 1: was It was one of the headphones started squawking at us. 1019 01:02:14,120 --> 01:02:19,680 Speaker 1: That's funny. That's never happened before. Um okay, because I'm 1020 01:02:19,680 --> 01:02:28,280 Speaker 1: not fine? No, so oh you know what I just did. 1021 01:02:28,360 --> 01:02:34,040 Speaker 1: I just turned on the phone again. Glad, This isn't live. Yeah, right, Charlie, 1022 01:02:34,040 --> 01:02:37,040 Speaker 1: you're gonna edit that out? And where wire we we're 1023 01:02:37,080 --> 01:02:41,520 Speaker 1: talking about Crisp Crisp. Yeah, let's go back to three. 1024 01:02:41,560 --> 01:02:45,880 Speaker 1: Have you asked people, um, what's been the long term 1025 01:02:45,920 --> 01:02:48,680 Speaker 1: performance of stocks the stock market? You know, what's been 1026 01:02:48,680 --> 01:02:51,560 Speaker 1: the rate of return? Nobody had a clue because nobody 1027 01:02:51,600 --> 01:02:56,000 Speaker 1: never collected the data. That's amazing that people did not 1028 01:02:56,280 --> 01:02:59,960 Speaker 1: know what the returns of the market, right. So Chris 1029 01:03:00,120 --> 01:03:04,800 Speaker 1: Uh did this study and found that I think for 1030 01:03:04,840 --> 01:03:08,240 Speaker 1: the period in long term performance has been like nine 1031 01:03:08,280 --> 01:03:11,720 Speaker 1: point three percent per year. And it's been it's been 1032 01:03:12,440 --> 01:03:17,200 Speaker 1: amazingly Uh, it's been about that in the years since 1033 01:03:17,240 --> 01:03:22,120 Speaker 1: sixty three, which is very unusual in economics to have 1034 01:03:22,720 --> 01:03:25,920 Speaker 1: something that I worked in one data set that shows 1035 01:03:26,000 --> 01:03:28,840 Speaker 1: up again very similarly in the next data set. It 1036 01:03:28,840 --> 01:03:33,800 Speaker 1: almost never happens. So so it's pretty consistent. And clearly 1037 01:03:33,840 --> 01:03:37,120 Speaker 1: it's a function of a number of factors that apparently 1038 01:03:37,960 --> 01:03:41,800 Speaker 1: um are are not changing. Well, that's right, and so 1039 01:03:42,760 --> 01:03:45,920 Speaker 1: and there was never back in those days, there wasn't 1040 01:03:46,720 --> 01:03:50,160 Speaker 1: a standard way of measuring your time weighted rate to 1041 01:03:50,240 --> 01:03:54,000 Speaker 1: return in other words, of you start with, you know, 1042 01:03:56,040 --> 01:03:59,520 Speaker 1: a certain investment, and then over the years you add 1043 01:03:59,680 --> 01:04:02,560 Speaker 1: and you had more money to it, take money out, whatever, 1044 01:04:02,840 --> 01:04:04,480 Speaker 1: and then he end up with a certain amount of money. 1045 01:04:04,760 --> 01:04:08,480 Speaker 1: The question is how calculating that rate of return adjusting 1046 01:04:08,520 --> 01:04:11,600 Speaker 1: for the flows is very complicated, and so that's one 1047 01:04:11,600 --> 01:04:13,600 Speaker 1: of the things that had to come. They had to 1048 01:04:13,640 --> 01:04:18,360 Speaker 1: be created. And so in nineteen sixty three, for example, 1049 01:04:18,400 --> 01:04:21,120 Speaker 1: there were no really there were no consulting firms that 1050 01:04:21,520 --> 01:04:24,080 Speaker 1: dealt in the business because there was no there was 1051 01:04:24,120 --> 01:04:27,400 Speaker 1: no standard way of measuring performance and doing performance measurement. 1052 01:04:27,720 --> 01:04:31,240 Speaker 1: So that's an industry that's just you know, exploded, uh 1053 01:04:31,320 --> 01:04:34,400 Speaker 1: in the last fifty years. That that's really amazing that 1054 01:04:34,880 --> 01:04:36,800 Speaker 1: we could call those the good old days, of the 1055 01:04:36,800 --> 01:04:39,840 Speaker 1: good old bad days. I can't imagine that they're just 1056 01:04:39,920 --> 01:04:44,600 Speaker 1: simply wasn't a history of of data. It's that's amazing. 1057 01:04:45,360 --> 01:04:47,560 Speaker 1: So so what does that mean for people like you know, 1058 01:04:47,640 --> 01:04:51,640 Speaker 1: Jeremy Siegill Stocks for the long run? When that came out, 1059 01:04:51,720 --> 01:04:54,280 Speaker 1: CRISP had already been around for a while, right, So 1060 01:04:54,280 --> 01:04:56,880 Speaker 1: so he's basically building on the work that that they 1061 01:04:56,960 --> 01:05:00,400 Speaker 1: had originally put together, right, and he he found data 1062 01:05:00,520 --> 01:05:06,200 Speaker 1: going back even even longer. But it's you know, if 1063 01:05:06,240 --> 01:05:08,040 Speaker 1: you ignore the history, you're doomed to relive it, I 1064 01:05:08,040 --> 01:05:11,400 Speaker 1: guess for sure. So I keep hearing people talk about 1065 01:05:11,880 --> 01:05:15,960 Speaker 1: we're in a low expected return environment. Stocks have had 1066 01:05:16,000 --> 01:05:18,520 Speaker 1: a great run bonds have had a great run, but 1067 01:05:18,600 --> 01:05:22,800 Speaker 1: everybody should throttle back their their expectations going forward. What 1068 01:05:22,800 --> 01:05:25,440 Speaker 1: what are your thoughts on that? Well, there's some loose 1069 01:05:25,480 --> 01:05:28,400 Speaker 1: evidence that there's a relation between let's say the overall 1070 01:05:28,640 --> 01:05:31,320 Speaker 1: price earnings on the market and and sous going returns. 1071 01:05:32,120 --> 01:05:36,760 Speaker 1: Have an interesting story of that. So the so I 1072 01:05:36,760 --> 01:05:41,360 Speaker 1: fam infringe to this research and ad at UH and 1073 01:05:41,800 --> 01:05:45,360 Speaker 1: their their their draft at the research um. We talked 1074 01:05:45,360 --> 01:05:48,760 Speaker 1: about in one of our board meetings that when dividend 1075 01:05:48,880 --> 01:05:52,320 Speaker 1: yields or lower price dividents are high, you know, uh 1076 01:05:53,000 --> 01:05:56,840 Speaker 1: if if valuation ratios are high, the expected returns are 1077 01:05:56,880 --> 01:05:59,520 Speaker 1: low in the market. So this was meeting we had 1078 01:05:59,520 --> 01:06:03,320 Speaker 1: in September of eighty seven. So I said to Genevama, so, well, 1079 01:06:03,480 --> 01:06:06,960 Speaker 1: does this mean we should At that time the evaluations 1080 01:06:07,320 --> 01:06:09,560 Speaker 1: were high. I said, does this mean we should do something? 1081 01:06:09,800 --> 01:06:12,440 Speaker 1: He said, oh no, no, all the variance around that 1082 01:06:12,480 --> 01:06:15,560 Speaker 1: is so high you don't really have any information. Uh. 1083 01:06:15,960 --> 01:06:20,200 Speaker 1: The next month was a crash of what's in the 1084 01:06:20,280 --> 01:06:25,120 Speaker 1: day between friends. Yeah, so he got he mistaken for 1085 01:06:25,200 --> 01:06:28,080 Speaker 1: being a market timer when he obviously wasn't trying to 1086 01:06:28,120 --> 01:06:30,280 Speaker 1: say that at all. Now, when he says the variance 1087 01:06:30,360 --> 01:06:32,560 Speaker 1: is so large. Is he just saying this is such 1088 01:06:32,600 --> 01:06:36,240 Speaker 1: a noisy series that we can't derive any information, right, 1089 01:06:36,560 --> 01:06:39,160 Speaker 1: That's it. So we know that higher PE is a 1090 01:06:39,160 --> 01:06:42,640 Speaker 1: little price here, and lower P and other metrics are 1091 01:06:42,840 --> 01:06:45,400 Speaker 1: less expensive. But there's only so much we could do 1092 01:06:45,440 --> 01:06:46,640 Speaker 1: with this. There's much much you can do with it. 1093 01:06:46,680 --> 01:06:49,680 Speaker 1: And you know, people frequently also ask a related question, 1094 01:06:49,720 --> 01:06:52,320 Speaker 1: which is, gosh, we're kind of at a peak in 1095 01:06:52,360 --> 01:06:54,720 Speaker 1: the market. Is this really a time to get in 1096 01:06:54,760 --> 01:06:59,640 Speaker 1: because we're all time high and you know, you would 1097 01:06:59,680 --> 01:07:01,600 Speaker 1: expect to be at all time high. I mean, that's 1098 01:07:01,600 --> 01:07:04,760 Speaker 1: just the kind of way markets work, something like I 1099 01:07:04,760 --> 01:07:08,320 Speaker 1: don't know, some big fraction. Most of the month ends, uh, 1100 01:07:08,560 --> 01:07:12,920 Speaker 1: historically have been at at historical highs. I did a 1101 01:07:12,960 --> 01:07:15,640 Speaker 1: column not too long ago. Yeah, I want to say 1102 01:07:15,640 --> 01:07:20,520 Speaker 1: in ten we started with the SMP five and the 1103 01:07:20,600 --> 01:07:24,560 Speaker 1: Dow got over the pre crisis highs, and people started 1104 01:07:24,560 --> 01:07:27,920 Speaker 1: writing articles that, oh, markets at a new high, it's toppy, 1105 01:07:28,000 --> 01:07:30,280 Speaker 1: it's dangerous. So we went back and looked at the data. 1106 01:07:30,560 --> 01:07:33,360 Speaker 1: It turns out that market is at or near highs 1107 01:07:34,080 --> 01:07:36,720 Speaker 1: much of the time, unless you're in a bear market 1108 01:07:36,800 --> 01:07:39,440 Speaker 1: where you're you know, the Dowd kissed a thousand and 1109 01:07:39,480 --> 01:07:42,440 Speaker 1: sixty six didn't get over it to lady two. But 1110 01:07:42,560 --> 01:07:46,080 Speaker 1: from eighty two to two thousand, you're you're making a 1111 01:07:46,120 --> 01:07:48,880 Speaker 1: series of fresh eyes every year. You know. We we 1112 01:07:48,960 --> 01:07:53,840 Speaker 1: talked about earlier about one unfortunate circumstance the person that 1113 01:07:53,880 --> 01:07:55,880 Speaker 1: got out at the bottom of the market when the 1114 01:07:55,880 --> 01:07:58,440 Speaker 1: money market funes now can't get back in. And the 1115 01:07:58,440 --> 01:08:01,960 Speaker 1: other there's a similar kind of related to person, the 1116 01:08:02,040 --> 01:08:04,520 Speaker 1: person that wants to invest. It's gonna wait for a 1117 01:08:04,560 --> 01:08:08,560 Speaker 1: crash before getting in and the market takes off now 1118 01:08:08,600 --> 01:08:11,840 Speaker 1: they go, well the trains are you left the station now? Now? 1119 01:08:12,360 --> 01:08:16,720 Speaker 1: So they they never seemed to uh get caught up. 1120 01:08:16,760 --> 01:08:20,640 Speaker 1: And that's emphasizes once again the importance of having a 1121 01:08:20,760 --> 01:08:25,360 Speaker 1: particular investment philosophy, usually translating into an asset mix, an 1122 01:08:25,400 --> 01:08:29,680 Speaker 1: asset allocation, and sticking with it. The psychology we hear 1123 01:08:29,720 --> 01:08:32,400 Speaker 1: from people with that is, look, I miss so much 1124 01:08:32,439 --> 01:08:35,400 Speaker 1: of this run. If I put my money to work now, 1125 01:08:35,439 --> 01:08:39,000 Speaker 1: I'll feel doubly stupid if the next day the market crashes. 1126 01:08:39,080 --> 01:08:43,000 Speaker 1: There there's almost this risk aversion like their investment is 1127 01:08:43,000 --> 01:08:45,760 Speaker 1: going to crash in the market. Well, there is kind 1128 01:08:45,760 --> 01:08:48,720 Speaker 1: of Murphy's law and translated into investing, which is, uh, 1129 01:08:49,240 --> 01:08:51,400 Speaker 1: you know, whenever I put the money and that's the 1130 01:08:51,520 --> 01:08:53,120 Speaker 1: that's going to be the peak of the market. As 1131 01:08:53,120 --> 01:08:56,400 Speaker 1: so break it up into four pieces and spreading and 1132 01:08:56,439 --> 01:08:57,720 Speaker 1: you don't have to worry about You don't have to 1133 01:08:57,720 --> 01:09:02,040 Speaker 1: worry what you want to do. I think talking to 1134 01:09:02,080 --> 01:09:06,320 Speaker 1: people for years is UH. And I counsel people you 1135 01:09:06,320 --> 01:09:08,200 Speaker 1: want to invest in a way and you can kind 1136 01:09:08,200 --> 01:09:10,960 Speaker 1: of relax. Markets are going to go up and down, 1137 01:09:12,400 --> 01:09:15,160 Speaker 1: that's what they do, and you shouldn't invest more in 1138 01:09:15,160 --> 01:09:18,479 Speaker 1: the market than you can. UH. Then you can accept 1139 01:09:18,680 --> 01:09:22,000 Speaker 1: and uh and just ride those ups and downs. That's 1140 01:09:22,400 --> 01:09:24,479 Speaker 1: the natural order of things. And over the long haul 1141 01:09:24,720 --> 01:09:26,840 Speaker 1: you're probably gonna be Okay, what what was the great 1142 01:09:26,920 --> 01:09:31,040 Speaker 1: JP Morgan quote? Markets will fluctuates, asking Congress where where's 1143 01:09:31,080 --> 01:09:35,360 Speaker 1: the market go? Markets will fluctuate, which is which I 1144 01:09:35,400 --> 01:09:39,240 Speaker 1: think is is a fair statement. Well, but speaking fairness 1145 01:09:39,360 --> 01:09:41,280 Speaker 1: is actually one of the things that needs to be 1146 01:09:41,320 --> 01:09:45,320 Speaker 1: emphasized a bit more in terms of what well this 1147 01:09:45,360 --> 01:09:48,400 Speaker 1: whole notion of fishing markets or equilibrium point of view 1148 01:09:48,400 --> 01:09:53,120 Speaker 1: of investing, it says that, um, if you take the 1149 01:09:53,160 --> 01:09:57,880 Speaker 1: profacial investor versus the average joe. They have the same 1150 01:09:57,920 --> 01:10:01,680 Speaker 1: expected outcome UH orient trading costs. I mean, maybe the 1151 01:10:01,720 --> 01:10:05,719 Speaker 1: institution can trade cheaper on it, but ignoring the costs, 1152 01:10:06,280 --> 01:10:11,200 Speaker 1: UH expected outcome UH for each is the same. That's 1153 01:10:11,240 --> 01:10:13,639 Speaker 1: about as fair as it life gets. In other words, 1154 01:10:14,280 --> 01:10:17,160 Speaker 1: it's not the case that the average Joe going in 1155 01:10:17,479 --> 01:10:21,439 Speaker 1: to invest or Jane, I don't uh, the average family 1156 01:10:23,160 --> 01:10:26,719 Speaker 1: has UH is not getting ripped off by the professional investor. 1157 01:10:27,120 --> 01:10:29,599 Speaker 1: I think that's really cool. That's one of the it's 1158 01:10:29,600 --> 01:10:32,960 Speaker 1: one of the implications. And that's why I think those 1159 01:10:32,960 --> 01:10:35,720 Speaker 1: of us to share this point of view, you know, 1160 01:10:35,760 --> 01:10:39,360 Speaker 1: I feel this kind of missionary zeal to spread the 1161 01:10:39,400 --> 01:10:43,200 Speaker 1: word that. There's been a number of discussions, a number 1162 01:10:43,240 --> 01:10:47,440 Speaker 1: of people have said, you know, individuals actually have an advantage. 1163 01:10:47,920 --> 01:10:49,880 Speaker 1: An individual doesn't have someone at the end of the 1164 01:10:49,960 --> 01:10:52,439 Speaker 1: quarter or these days the end of the month saying 1165 01:10:52,439 --> 01:10:54,519 Speaker 1: how'd you do? Why am I into performing the benchmark? 1166 01:10:54,560 --> 01:10:57,240 Speaker 1: Why an't you doing better? An individual can ride the 1167 01:10:57,320 --> 01:11:00,479 Speaker 1: ups and downs without somebody breathing down their neck. Well 1168 01:11:00,479 --> 01:11:05,920 Speaker 1: they can, but they don't. Yeah, I mean, uh, you know, 1169 01:11:06,040 --> 01:11:08,600 Speaker 1: it's um. One way to think about the market is 1170 01:11:08,960 --> 01:11:12,400 Speaker 1: just kind of and and the role of indexing. It's 1171 01:11:12,439 --> 01:11:17,559 Speaker 1: just simple arithmetic um index funds by a slice of 1172 01:11:17,560 --> 01:11:22,280 Speaker 1: the whole market. Uh, you know. And so since they 1173 01:11:22,320 --> 01:11:25,720 Speaker 1: buy just a slice of the market, then the non 1174 01:11:25,760 --> 01:11:28,280 Speaker 1: index portion, i mean, the active portion, has got to 1175 01:11:28,320 --> 01:11:31,360 Speaker 1: be buying a slice of the market because it's got 1176 01:11:31,360 --> 01:11:33,920 Speaker 1: to add up to the market. So by simple arithmetic, 1177 01:11:34,240 --> 01:11:37,160 Speaker 1: you know, the the active people are trading with themselves 1178 01:11:37,360 --> 01:11:39,720 Speaker 1: largely trading with each other more or less. Yeah, so 1179 01:11:39,720 --> 01:11:42,840 Speaker 1: it's a zero sum game and minus the costs. So 1180 01:11:43,080 --> 01:11:47,120 Speaker 1: so you mentioned diversification. What else should investors be thinking 1181 01:11:47,120 --> 01:11:52,040 Speaker 1: about things like asset allocation, stocks and and bonds as 1182 01:11:52,080 --> 01:11:56,720 Speaker 1: well as valuation? How how should they contextualize that? Well, 1183 01:11:56,760 --> 01:11:59,439 Speaker 1: I think first off they need to figure out it 1184 01:11:59,520 --> 01:12:02,440 Speaker 1: sounds some well, but what's the objective here? Is a retirement? 1185 01:12:02,640 --> 01:12:07,040 Speaker 1: Are you saving for uh, college or house? What? What is? 1186 01:12:07,400 --> 01:12:09,479 Speaker 1: And each of those he would manage the money is 1187 01:12:09,479 --> 01:12:12,840 Speaker 1: a little bit differently depending on what the objective is. 1188 01:12:13,000 --> 01:12:14,559 Speaker 1: That would be your tilt. So it's a little more 1189 01:12:14,600 --> 01:12:17,519 Speaker 1: stop or a little yeah, right, But it is about 1190 01:12:17,560 --> 01:12:21,280 Speaker 1: the an asset allocation and and and risk and and uh. 1191 01:12:22,040 --> 01:12:25,280 Speaker 1: And in the case of retirement, it's about maintaining a 1192 01:12:25,320 --> 01:12:31,360 Speaker 1: standard of living in retirement UH and UM. Having an 1193 01:12:31,360 --> 01:12:34,920 Speaker 1: objective of I want a certain retire income in retirement 1194 01:12:35,040 --> 01:12:40,280 Speaker 1: adjusted for inflation lead you to manage money a little 1195 01:12:40,320 --> 01:12:44,280 Speaker 1: differently than UH, than the typical firm, firm or person 1196 01:12:45,000 --> 01:12:48,799 Speaker 1: just seeking to maximize wealth. You know, you talked earlier 1197 01:12:48,840 --> 01:12:54,400 Speaker 1: about the upcoming retirement crisis we're gonna be facing. And 1198 01:12:54,400 --> 01:12:57,599 Speaker 1: I'm trying to remember the name of Charlie Ellis's book 1199 01:12:58,479 --> 01:13:03,960 Speaker 1: which was about that, just that subject, UM, which is, 1200 01:13:04,160 --> 01:13:06,040 Speaker 1: we have a day of reckoning coming and no one 1201 01:13:06,080 --> 01:13:09,280 Speaker 1: really seems to be prepared for it. And the math 1202 01:13:09,439 --> 01:13:13,040 Speaker 1: is pretty clear most Americans are not going to be 1203 01:13:13,080 --> 01:13:18,839 Speaker 1: able to afford a comfortable retirement without some radical change 1204 01:13:18,960 --> 01:13:22,640 Speaker 1: in their spending and saving behaviors. Yeah. I think I 1205 01:13:22,680 --> 01:13:25,400 Speaker 1: haven't checked out recently, but I think you can buy 1206 01:13:25,400 --> 01:13:28,400 Speaker 1: a real annuity has about a five percent yield and 1207 01:13:29,120 --> 01:13:32,400 Speaker 1: buy real annuity meaning that as long as you live it, 1208 01:13:32,640 --> 01:13:36,920 Speaker 1: it pays you that five percent adjusted for UH, you know, 1209 01:13:37,080 --> 01:13:42,320 Speaker 1: adjusted for inflation. Five. Yeah, and UM, so that means 1210 01:13:42,360 --> 01:13:45,120 Speaker 1: I mean, it's a simple math. You figure out how 1211 01:13:45,200 --> 01:13:47,840 Speaker 1: much you want to have multiplied by twenty and and 1212 01:13:47,880 --> 01:13:50,400 Speaker 1: that's what how much, that's how much you need, So 1213 01:13:50,560 --> 01:13:53,080 Speaker 1: let's go. We've talked a little bit about corporate governance 1214 01:13:53,200 --> 01:13:59,680 Speaker 1: earlier about poison pill adaptation. Um. There's some some agitation 1215 01:13:59,720 --> 01:14:03,120 Speaker 1: out of the SEC and and d C about the 1216 01:14:03,160 --> 01:14:10,360 Speaker 1: post financial crisis cities systatic systemically important financial institutions. How 1217 01:14:10,400 --> 01:14:13,960 Speaker 1: on earth did mutual funds which had nothing whatsoever to 1218 01:14:14,000 --> 01:14:17,479 Speaker 1: do with the last any of the last crisis either oh, 1219 01:14:17,520 --> 01:14:20,799 Speaker 1: seven oh eight or two thousand or I don't remember 1220 01:14:20,800 --> 01:14:23,200 Speaker 1: if mutual for other than the mutual fund timing scandal, 1221 01:14:23,240 --> 01:14:27,080 Speaker 1: which really had nothing to do with them being systemic. Um, 1222 01:14:27,600 --> 01:14:29,920 Speaker 1: How did how did mutual funds get dragged in? And 1223 01:14:30,240 --> 01:14:33,040 Speaker 1: what do you guys doing about this in terms of 1224 01:14:33,040 --> 01:14:38,200 Speaker 1: of that regulatory Can I call it overreach? Yeah you can? Okay, Yeah, 1225 01:14:39,400 --> 01:14:43,360 Speaker 1: it's um. Um. Somehow in the it seems like in 1226 01:14:43,439 --> 01:14:46,880 Speaker 1: rein the press one would I think that part of 1227 01:14:46,920 --> 01:14:50,080 Speaker 1: the reason we had a financial crisis was that we 1228 01:14:50,120 --> 01:14:54,280 Speaker 1: didn't have enough regulation or regular If there's any are 1229 01:14:54,840 --> 01:14:58,120 Speaker 1: any institution that are heavily regulated as banks and insurance companies, 1230 01:14:58,680 --> 01:15:01,559 Speaker 1: it's insurance. Other than a I G, which was kind 1231 01:15:01,560 --> 01:15:04,599 Speaker 1: of a unique creature. The rest of the insurance industry 1232 01:15:04,640 --> 01:15:07,280 Speaker 1: had nothing to do with this. And I'm a critic 1233 01:15:07,320 --> 01:15:09,800 Speaker 1: of hedge funds. They cost too much, most of them 1234 01:15:09,840 --> 01:15:13,080 Speaker 1: don't deliver on what they promised. But hedge funds didn't 1235 01:15:13,120 --> 01:15:15,640 Speaker 1: have a whole lot to do with this crisis either. 1236 01:15:15,760 --> 01:15:18,520 Speaker 1: But of all the entities in the world to finance, 1237 01:15:19,320 --> 01:15:22,719 Speaker 1: mutual funds were bystanders, they were observers. They had nothing 1238 01:15:22,720 --> 01:15:24,400 Speaker 1: to do with this. And there's no evidence that there 1239 01:15:24,439 --> 01:15:27,720 Speaker 1: was any kind of panic and it was that. No, 1240 01:15:27,800 --> 01:15:33,320 Speaker 1: I didn't, it's um, but there is there is a 1241 01:15:33,439 --> 01:15:37,160 Speaker 1: theory that we need to have a lot more regulation. 1242 01:15:37,200 --> 01:15:41,320 Speaker 1: I don't know why, but the mutual fund you know, 1243 01:15:41,360 --> 01:15:43,640 Speaker 1: the money sitting in a in a the assets are 1244 01:15:43,640 --> 01:15:48,280 Speaker 1: in a vault somewhere, but we're running off with them. Um. 1245 01:15:48,920 --> 01:15:52,719 Speaker 1: And I think they kind of helped prevent a bigger panic. 1246 01:15:53,080 --> 01:15:55,080 Speaker 1: You know, back in two thousand and eight, two thousand nine, 1247 01:15:55,080 --> 01:15:59,880 Speaker 1: if you recall those the the anxiety that was stress 1248 01:16:00,160 --> 01:16:03,599 Speaker 1: people were experiencing them, you know, that's uh. We were 1249 01:16:03,600 --> 01:16:06,640 Speaker 1: worried that people would panic and you know, rush for 1250 01:16:06,640 --> 01:16:08,760 Speaker 1: the door all at the same time. And it just 1251 01:16:08,760 --> 01:16:12,639 Speaker 1: didn't happen with mutual funds. It happened with people's individual moneys. 1252 01:16:12,640 --> 01:16:15,880 Speaker 1: But it didn't happen with h didn't happen with mutual funds, 1253 01:16:16,439 --> 01:16:20,599 Speaker 1: and especially you guys. You guys are notorious for having 1254 01:16:21,479 --> 01:16:27,200 Speaker 1: very long perspective and your financial advisors. Full disclosure, we 1255 01:16:27,320 --> 01:16:31,200 Speaker 1: own dimensional funds in in my office. But you know, 1256 01:16:31,400 --> 01:16:34,000 Speaker 1: we watched, we went through that whole training process. We 1257 01:16:34,040 --> 01:16:37,599 Speaker 1: know how you guys operate. It made us think that 1258 01:16:37,760 --> 01:16:41,360 Speaker 1: other advisors is always that sort of game of chicken. Well, 1259 01:16:41,360 --> 01:16:43,040 Speaker 1: I don't want to sell, but I gotta sell before 1260 01:16:43,080 --> 01:16:46,840 Speaker 1: that guy. You don't have that situation, no, don't. I 1261 01:16:46,880 --> 01:16:49,160 Speaker 1: think a lot a lot of it stems from the 1262 01:16:49,160 --> 01:16:53,439 Speaker 1: fact that there was, you know, one or two money 1263 01:16:53,479 --> 01:16:55,439 Speaker 1: market funds that had to break the bus. Sure, and 1264 01:16:55,479 --> 01:16:59,880 Speaker 1: that's what this is all about. They go, Okay, that's 1265 01:17:00,080 --> 01:17:03,720 Speaker 1: those are really that's really banking the Skuy's money market fund. 1266 01:17:03,960 --> 01:17:06,599 Speaker 1: And keep in mind, for tax reasons, they're always quoted 1267 01:17:06,640 --> 01:17:09,639 Speaker 1: as a dollar, whether we know it fluctuates up and down, 1268 01:17:10,120 --> 01:17:14,559 Speaker 1: so that's should be a relatively simple thing to fix. 1269 01:17:15,200 --> 01:17:17,920 Speaker 1: There's no such thing as risk free return, but that's 1270 01:17:18,160 --> 01:17:21,360 Speaker 1: what they were promising. I don't know why taxpayers are 1271 01:17:21,400 --> 01:17:26,320 Speaker 1: suddenly on the hook for backing people's risk investments. In 1272 01:17:26,400 --> 01:17:28,439 Speaker 1: money market. Hey, you could park your money in short 1273 01:17:28,520 --> 01:17:32,760 Speaker 1: term treasuries if you want risk free, low returns. So 1274 01:17:32,840 --> 01:17:35,240 Speaker 1: you think that, let me, yeah, I know, I mean 1275 01:17:35,280 --> 01:17:40,240 Speaker 1: I I'm on the same same So so you're about 1276 01:17:40,280 --> 01:17:43,600 Speaker 1: to say something about well, risk I mean that's that's Um, 1277 01:17:43,640 --> 01:17:48,720 Speaker 1: it's important as as ties into retirement. Uh, there's a 1278 01:17:48,760 --> 01:17:53,000 Speaker 1: retirement discussion. Treasury bills are riskless in the sense that 1279 01:17:53,240 --> 01:17:56,519 Speaker 1: there's really you're gonna get paid, and if it's short term, 1280 01:17:56,560 --> 01:18:01,400 Speaker 1: there's not much price risk. They are extremely risky when 1281 01:18:01,439 --> 01:18:06,240 Speaker 1: you think about a person retiring because uh, you know, um, 1282 01:18:06,280 --> 01:18:10,479 Speaker 1: and an example would be somebody retired twenty years ago. 1283 01:18:10,760 --> 01:18:13,960 Speaker 1: We probably got a five percent yield and they bought bonds. Now, 1284 01:18:14,280 --> 01:18:17,320 Speaker 1: whatever they're getting dependent on which bondy by you know, 1285 01:18:17,360 --> 01:18:20,880 Speaker 1: one too, maybe three. You have to reinvestment. And the 1286 01:18:21,040 --> 01:18:23,320 Speaker 1: risk is if you're getting a higher yield, you're also 1287 01:18:23,320 --> 01:18:26,360 Speaker 1: getting higher inflation. So there's a real risk that the 1288 01:18:26,479 --> 01:18:28,840 Speaker 1: value of your assets are going to be worth less. Right, 1289 01:18:28,880 --> 01:18:32,280 Speaker 1: So it's for a retired person, they can be actually 1290 01:18:32,560 --> 01:18:37,120 Speaker 1: pretty risky, which all points back to how underinvested much 1291 01:18:37,160 --> 01:18:42,280 Speaker 1: of America is in their own own retime. So this 1292 01:18:42,280 --> 01:18:44,840 Speaker 1: this leads to a couple of of questions that are 1293 01:18:44,880 --> 01:18:48,880 Speaker 1: on my list. What is hurting investors today? What are 1294 01:18:48,880 --> 01:18:56,040 Speaker 1: they doing that's getting in their own way? Well, I think, um, 1295 01:18:56,080 --> 01:18:58,400 Speaker 1: I haven't done. This is not science at all, but 1296 01:18:58,439 --> 01:19:00,800 Speaker 1: I think one of the concerns that I have is 1297 01:19:00,840 --> 01:19:04,679 Speaker 1: that people are desperate for yield and they look at 1298 01:19:05,160 --> 01:19:09,120 Speaker 1: at money market funds and basically a zero return. I mean, 1299 01:19:09,520 --> 01:19:13,240 Speaker 1: you know, uh, and they go, I gotta, I gotta, 1300 01:19:13,560 --> 01:19:15,599 Speaker 1: I gotta do something. I get a better yield than 1301 01:19:15,640 --> 01:19:18,519 Speaker 1: that you get on Greek bonds today, if that's what 1302 01:19:18,560 --> 01:19:21,160 Speaker 1: you really look. Yeah, so there we go. There we 1303 01:19:21,160 --> 01:19:24,599 Speaker 1: have a bracketed somewhere between treasury bills and Greek So 1304 01:19:24,720 --> 01:19:27,479 Speaker 1: people forget about the risk and they chase yield, and 1305 01:19:27,560 --> 01:19:31,080 Speaker 1: that leads to disaster. And you know, inflation, you know 1306 01:19:31,120 --> 01:19:35,080 Speaker 1: it's probably real interest rates are negative two you know, 1307 01:19:35,800 --> 01:19:40,280 Speaker 1: uh something like that, but meaning that we're zero and 1308 01:19:40,360 --> 01:19:44,360 Speaker 1: you throw in two percent. So once you get once 1309 01:19:44,400 --> 01:19:47,519 Speaker 1: you adjust that, you're you're really negative. Yeah. And when 1310 01:19:47,520 --> 01:19:51,320 Speaker 1: we started firm, I think interest rates were like fift 1311 01:19:51,800 --> 01:19:54,479 Speaker 1: and eighty one and inflation was like eighteen percent, so 1312 01:19:54,720 --> 01:19:57,760 Speaker 1: you have negative three percent. So yeah, so it's better. 1313 01:19:57,840 --> 01:20:00,080 Speaker 1: I mean, it's uh, the difference is, you know, no 1314 01:20:00,120 --> 01:20:03,320 Speaker 1: longer have bonds risk free rate to return at least 1315 01:20:03,400 --> 01:20:07,559 Speaker 1: nominally competing with equities. So that, to me, that explains 1316 01:20:07,600 --> 01:20:11,120 Speaker 1: a big chunk of why we have such elevated prices 1317 01:20:11,160 --> 01:20:16,280 Speaker 1: and equities. Yeah, so I think people are um maybe two. 1318 01:20:16,360 --> 01:20:19,280 Speaker 1: Maybe there's I haven't looked, I haven't seen any studies, 1319 01:20:19,320 --> 01:20:21,960 Speaker 1: but I'd be worried that people might be invested in 1320 01:20:21,960 --> 01:20:26,640 Speaker 1: too much inequities because of you know, the if you 1321 01:20:26,640 --> 01:20:28,840 Speaker 1: look at the dividend, yield's higher than the interest rate, 1322 01:20:28,880 --> 01:20:32,559 Speaker 1: which makes it seem like a free lunch. Well, we've 1323 01:20:32,600 --> 01:20:35,880 Speaker 1: seen a lot of people take assets that otherwise, under 1324 01:20:35,920 --> 01:20:38,479 Speaker 1: normal circumstances would have found that way to fixed income, 1325 01:20:38,920 --> 01:20:40,879 Speaker 1: and they say, let me just put into a dividend 1326 01:20:40,920 --> 01:20:43,840 Speaker 1: portfolio and I'll get my coupon and if this goes 1327 01:20:43,920 --> 01:20:46,840 Speaker 1: up and down, I don't worry about it. Some risk 1328 01:20:46,880 --> 01:20:49,160 Speaker 1: in that as well. Yeah, that's right. As long as 1329 01:20:49,160 --> 01:20:51,200 Speaker 1: the company is paying the dividends, you're okay. But you know, 1330 01:20:51,320 --> 01:20:56,320 Speaker 1: let's most of them don't pay dividends in so let's 1331 01:20:56,360 --> 01:21:00,400 Speaker 1: talk a little bit about um your perspectives. You've had 1332 01:21:00,439 --> 01:21:04,920 Speaker 1: a thirty plus year window since you launched dimensional Funds 1333 01:21:04,920 --> 01:21:08,639 Speaker 1: in eighty one. We're coming up on your thirty fifth anniversary. Yeah, 1334 01:21:08,680 --> 01:21:13,280 Speaker 1: next year. That's amazing. So what has changed, um, in 1335 01:21:13,360 --> 01:21:17,200 Speaker 1: your perspective? What what has changed in the industry and 1336 01:21:17,240 --> 01:21:22,519 Speaker 1: how has dimensional Funds changed along the way? Well, UM, 1337 01:21:23,120 --> 01:21:25,640 Speaker 1: I would say a couple of things. First off, we 1338 01:21:25,720 --> 01:21:29,240 Speaker 1: understand a lot more about what causes returns or where 1339 01:21:29,320 --> 01:21:34,759 Speaker 1: returns come from in this dimensionality, um. And the second 1340 01:21:34,800 --> 01:21:37,840 Speaker 1: aspect though, is really this movement towards indexing, you know, 1341 01:21:37,880 --> 01:21:41,439 Speaker 1: the ideas that were started in the academic world in 1342 01:21:41,439 --> 01:21:44,519 Speaker 1: the sixties that led to the creation of index funds 1343 01:21:44,560 --> 01:21:47,920 Speaker 1: in the seventies, you know, has really gained traction over 1344 01:21:47,960 --> 01:21:51,240 Speaker 1: there since the eighties. And it's really uh uh you know, 1345 01:21:51,240 --> 01:21:56,520 Speaker 1: I'm surprised it hasn't gotten you know, you know, more assets. 1346 01:21:56,560 --> 01:21:59,200 Speaker 1: It's amazing that it's taken half a century for something 1347 01:21:59,240 --> 01:22:01,960 Speaker 1: that a heres to be obvious to really have gotten on. 1348 01:22:02,320 --> 01:22:05,400 Speaker 1: Which leads to the next question, how much room is 1349 01:22:05,439 --> 01:22:09,040 Speaker 1: there for indexing to grow? What? What? It's not especially 1350 01:22:09,160 --> 01:22:12,519 Speaker 1: huge today, but how big is too big? Well, we 1351 01:22:12,560 --> 01:22:15,400 Speaker 1: don't know that, I mean at some point if but 1352 01:22:15,479 --> 01:22:19,040 Speaker 1: in general, index funds just take a provide of slice 1353 01:22:19,040 --> 01:22:23,320 Speaker 1: on everything, and so they're about they're the most neutral 1354 01:22:23,360 --> 01:22:26,519 Speaker 1: strategy out there as opposed to you know, somebody wanting 1355 01:22:26,560 --> 01:22:30,120 Speaker 1: growth or income or whatever they object. All of those 1356 01:22:30,600 --> 01:22:33,479 Speaker 1: slants that cause you to get away from the market 1357 01:22:33,680 --> 01:22:39,519 Speaker 1: have capacity constraints. But your your basic market index fund UH, 1358 01:22:40,200 --> 01:22:43,360 Speaker 1: you know, UH should be pretty neutral, could absorb kind 1359 01:22:43,400 --> 01:22:47,120 Speaker 1: of an untold amounts, lots of upside and and no 1360 01:22:47,760 --> 01:22:52,000 Speaker 1: ceiling anytime soon. Right, So here we are, we're six 1361 01:22:52,080 --> 01:22:56,280 Speaker 1: years into this bull market. There's plenty of skepticism out there. 1362 01:22:57,160 --> 01:23:00,720 Speaker 1: Why no euphoria? Why has the investing public I don't 1363 01:23:00,760 --> 01:23:04,520 Speaker 1: want to say shunned, but clearly they haven't jumped aboard 1364 01:23:05,000 --> 01:23:07,599 Speaker 1: this bull market the way they did in the nineteen nineties, 1365 01:23:08,240 --> 01:23:11,280 Speaker 1: well even the nineteen nineties. Uh, I don't know if 1366 01:23:11,320 --> 01:23:12,920 Speaker 1: they really jumped on or not. It seems to me 1367 01:23:13,000 --> 01:23:14,760 Speaker 1: like I've been in the business four or four years 1368 01:23:14,840 --> 01:23:20,320 Speaker 1: or whatever, I think, UH people are always there's always kept. 1369 01:23:20,479 --> 01:23:24,160 Speaker 1: People are always nervous. I mean that's good, which is good, 1370 01:23:24,560 --> 01:23:28,599 Speaker 1: you know, that's ah UM and markets being what they are, 1371 01:23:28,680 --> 01:23:32,559 Speaker 1: it seems like UH, prices over the long haul gets 1372 01:23:32,560 --> 01:23:35,240 Speaker 1: set fairly and people have a reasonable return of a 1373 01:23:35,520 --> 01:23:38,080 Speaker 1: if they stick with it. Not so, so let me 1374 01:23:38,320 --> 01:23:41,680 Speaker 1: go to now to my favorite three questions. These are 1375 01:23:41,720 --> 01:23:43,920 Speaker 1: the three that I ask all of my guests, and 1376 01:23:43,920 --> 01:23:48,519 Speaker 1: and the the answers are always so instructive. Someone coming 1377 01:23:48,520 --> 01:23:51,599 Speaker 1: out of we're not too far from graduation weekend all 1378 01:23:51,640 --> 01:23:55,360 Speaker 1: across the country, someone graduating college today, what sort of 1379 01:23:55,400 --> 01:23:59,200 Speaker 1: advice would you give them about their career and about 1380 01:23:59,280 --> 01:24:02,960 Speaker 1: their approach to investment. Well, a career, I'd say, follow 1381 01:24:03,000 --> 01:24:04,640 Speaker 1: your passion. I don't think I have any great new 1382 01:24:04,680 --> 01:24:08,519 Speaker 1: insights that you know, it's the standard bromides. I think 1383 01:24:09,320 --> 01:24:11,559 Speaker 1: in terms of investing, the key to investing is save 1384 01:24:11,640 --> 01:24:17,200 Speaker 1: a lot there you go, So start early and uh, 1385 01:24:18,000 --> 01:24:21,400 Speaker 1: you know through the the benefits of compounding over the 1386 01:24:21,439 --> 01:24:26,439 Speaker 1: long haul. Uh, it's a powerful force. Next question is 1387 01:24:26,640 --> 01:24:29,879 Speaker 1: you said you've been in the industry for forty four years. 1388 01:24:30,520 --> 01:24:33,920 Speaker 1: We talked about what you saw change over that time period. 1389 01:24:34,000 --> 01:24:36,600 Speaker 1: So let me change this question up. What changes do 1390 01:24:36,640 --> 01:24:40,920 Speaker 1: you think are coming over the next forty four years. Well, 1391 01:24:40,960 --> 01:24:43,639 Speaker 1: I think a couple of the trends that we see 1392 01:24:43,680 --> 01:24:49,960 Speaker 1: now we will continue. One is globalization. People. When I 1393 01:24:50,080 --> 01:24:52,439 Speaker 1: started in the business, it was we had the interest 1394 01:24:52,479 --> 01:24:56,120 Speaker 1: equalization tax. Another thing, it was very difficult to invest international, 1395 01:24:56,800 --> 01:25:01,280 Speaker 1: So I think that's changing, which is which is good. Um. 1396 01:25:01,400 --> 01:25:06,040 Speaker 1: The other is, uh is I think a very positive trend, 1397 01:25:06,080 --> 01:25:09,640 Speaker 1: which is a lot of the administrative costs and transaction 1398 01:25:09,720 --> 01:25:13,559 Speaker 1: costs are really coming down a lot. Kind of it's 1399 01:25:13,600 --> 01:25:16,880 Speaker 1: related to technology, so I'm sure. So I think the 1400 01:25:16,960 --> 01:25:19,719 Speaker 1: costs of investing are coming down, and I think that's 1401 01:25:19,880 --> 01:25:23,120 Speaker 1: uh more than just move it to indexing. But I 1402 01:25:23,120 --> 01:25:25,800 Speaker 1: think in general costs are coming down. So I think 1403 01:25:25,840 --> 01:25:30,120 Speaker 1: it's you know, you know, very encouraging. And then my 1404 01:25:30,240 --> 01:25:33,439 Speaker 1: last question, and this may um, you may be the 1405 01:25:33,439 --> 01:25:35,599 Speaker 1: only person this question doesn't apply to, but I'm gonna 1406 01:25:35,600 --> 01:25:39,040 Speaker 1: ask it anyway. What do you know about investing today 1407 01:25:39,160 --> 01:25:41,720 Speaker 1: that you wish you knew when you began forty four 1408 01:25:41,800 --> 01:25:44,840 Speaker 1: years ago? Well, and by the way, the reason I 1409 01:25:44,960 --> 01:25:47,400 Speaker 1: say it may not apply to you is you began 1410 01:25:48,120 --> 01:25:51,040 Speaker 1: with an idea that most people don't discover it til 1411 01:25:51,040 --> 01:25:53,439 Speaker 1: way late. So no, I mean that part of investing 1412 01:25:53,560 --> 01:25:59,240 Speaker 1: is what I wish I I UM new back then, 1413 01:26:00,080 --> 01:26:06,200 Speaker 1: is that what investing is about is as an overall experience. 1414 01:26:06,640 --> 01:26:10,040 Speaker 1: It's not just the science. Sure, you want good returns 1415 01:26:10,080 --> 01:26:13,040 Speaker 1: and that's but when it started out, I think I thought, 1416 01:26:13,160 --> 01:26:14,920 Speaker 1: if you can give people good returns, that's all you 1417 01:26:14,960 --> 01:26:19,360 Speaker 1: need to worry about. But it's also you're dealing with 1418 01:26:19,400 --> 01:26:23,559 Speaker 1: people and helping them get through difficult times like two 1419 01:26:23,560 --> 01:26:26,080 Speaker 1: thousand and two thousand nine and come out the other 1420 01:26:26,160 --> 01:26:30,120 Speaker 1: side with a with a consistent investment approach. I wish 1421 01:26:30,240 --> 01:26:34,080 Speaker 1: I knew you know that that was That's really uh, 1422 01:26:34,160 --> 01:26:37,200 Speaker 1: that's what it's really all about. It's the philosophy and 1423 01:26:37,240 --> 01:26:40,240 Speaker 1: a consistent approach so people can feel they need to 1424 01:26:40,400 --> 01:26:42,200 Speaker 1: not only have good returns, they need to feel good 1425 01:26:43,479 --> 01:26:46,479 Speaker 1: and not beat so stressed out and they don't you 1426 01:26:46,520 --> 01:26:49,400 Speaker 1: know that. I wish I had figured that out earlier 1427 01:26:49,439 --> 01:26:52,439 Speaker 1: on David, thank you so much for being so generous 1428 01:26:52,439 --> 01:26:55,640 Speaker 1: with your time. This was really a fascinating um discussion 1429 01:26:55,640 --> 01:26:59,240 Speaker 1: and I appreciate you spending so much time with us. Okay, well, 1430 01:26:59,240 --> 01:27:01,760 Speaker 1: thank you very much. You've been listening to Masters in 1431 01:27:01,800 --> 01:27:04,960 Speaker 1: Business on Bloomberg Radio with Barry Ridholts. We've been speaking 1432 01:27:05,000 --> 01:27:08,839 Speaker 1: with David Booth. He's the founder, chairman and co CEO 1433 01:27:09,520 --> 01:27:11,880 Speaker 1: of Dimensional Funds. David, if they want to find some 1434 01:27:12,000 --> 01:27:15,559 Speaker 1: of your research, will learn more about Dimensional funds. Where 1435 01:27:15,600 --> 01:27:18,080 Speaker 1: would they go on our website? You know it under 1436 01:27:18,720 --> 01:27:22,840 Speaker 1: dimensional dot Com or Dimensional fund Advisors. There you have it. 1437 01:27:22,960 --> 01:27:25,680 Speaker 1: I want to thank Mike Batnick for his help with research, 1438 01:27:26,000 --> 01:27:29,160 Speaker 1: Charlie Vollmer as my engineer, and thank you Sarah for 1439 01:27:29,240 --> 01:27:31,920 Speaker 1: recording this. I'm Barry Ridhults. You've been listening to Masters 1440 01:27:31,960 --> 01:27:33,759 Speaker 1: in Business. I'm Bloomberg Radio