Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: Welcome to the podcast. This is Barry Ridholts. And again
Speaker 1: I know I say this every week. We have a
Speaker 1: very special guest this week, but this week we really
Speaker 1: have a very special guest. His name is David Booth.
Speaker 1: He is the founder and chairman of Dimensional Funds. They
Speaker 1: run a couple of shekels over four hundred billion dollars.
Speaker 1: You may recognize the name Booth courtesy of the Chicago
Speaker 1: Graduate School of Business also known as the David S.
Speaker 1: Booth School of Business, David Booth the Booth School at Chicago. UH.
Speaker 1: David made a fairly tremendous gift to the Booth School
Speaker 1: of At the time, it was valued at three hundred
Speaker 1: million dollars, but considering it was a mix of cash
Speaker 1: and stock spread out over a number of years, it
Speaker 1: might even be worth closer to half a billion, is
Speaker 1: my back of the envelope guess, based on the assets
Speaker 1: under management in Chicago. I mean at Dimensional what that
Speaker 1: means to the Chicago school and um, it's it's really
Speaker 1: worked out tremendously well. David really credits Chicago for all
Speaker 1: of the success he's had in his career. Dimensional is
Speaker 1: just a monster uh fund. They've done really well, starting
Speaker 1: out with literally zero dollars in there, now coming up
Speaker 1: on half a trillion dollars. They don't sell directly to
Speaker 1: the public. About a little less than half of what
Speaker 1: they do is institutional. The other half is sold through
Speaker 1: financial advisors. In full disclosure, my office is the Dimensional shop.
Speaker 1: We've we've been using them as part of our core
Speaker 1: portfolios and and we've been really happy with them both
Speaker 1: as a service provider and the performance of the funds.
Speaker 1: I think you'll find David is really a fascinating guy.
Speaker 1: He doesn't usually do these sorts of interviews. He's more
Speaker 1: of a print guy. So it was really interesting to
Speaker 1: hear him unedited, unvarnished in his own words, very very
Speaker 1: savvy and individual and when you look at at the success,
Speaker 1: when you look at what he's built over the years,
Speaker 1: it's really quite amazing. So rather than have me babbyl
Speaker 1: on and on with no further ado, here is my
Speaker 1: conversation with David Booth. This is Masters in Business with
Speaker 1: Barry Ridholds on Bloomberg Radio Today. My special guest is
Speaker 1: David Booth. David is the founder, chairman and co CEO
Speaker 1: of Dimensional Funds and asset management firm running over four
Speaker 1: hundred billion dollars. Little background about David. He got his
Speaker 1: degree in economics in n at Kansas, where he also
Speaker 1: got a master was in business the following year, and
Speaker 1: then ended up going to the University of Chicago for
Speaker 1: his m b a. In nineteen seventy one. As of now,
Speaker 1: the University of Chicago is known as the David Booth
Speaker 1: Graduate School of Business, following a major endowment made. Um,
Speaker 1: I should really call you doctor Booth, but I know
Speaker 1: that I don't have the the official Well, David, welcome
Speaker 1: to the show. Well, thank you very much, glad to
Speaker 1: be here. Um, so let's talk a little bit about
Speaker 1: your your background. In your your from Kansas, did you
Speaker 1: have and you and you obviously focused on business and
Speaker 1: got your masters in business. Did you ever have any
Speaker 1: plans on going into the world of investment before your
Speaker 1: m b A. Uh No, Actually I went to I
Speaker 1: went to Chicago, I went into the PhD program. Uh.
Speaker 1: I went there with the idea of becoming a professor
Speaker 1: eventually going back to Kansas, went back to Kansas and teaching.
Speaker 1: So how on Earth. Did you make that pivot from
Speaker 1: being a professor to running a very large and successful
Speaker 1: investment firm. Well, my um, Um, how it came about
Speaker 1: was in my second year in the program, I was
Speaker 1: working for Jane Fama, the Nobel laureate famous for developing
Speaker 1: the efficient market hypothesis, and it was a phenomenally great experience.
Speaker 1: But I I realized I didn't, Um, yeah, I no
Speaker 1: longer want to be a professor. And as he tells
Speaker 1: the story, UM, I walked into his office one day
Speaker 1: and said, I know what you do, and I don't
Speaker 1: want to do it. Now. Why is that? I've read
Speaker 1: you said that he's the smartest, most intuitive, most competitive
Speaker 1: person you met at the time, Right, and you didn't
Speaker 1: want to enter field where you're up against the hundreds
Speaker 1: of guys like that. Well, I think it's not more
Speaker 1: than that. It's Um, I love the competition because you know,
Speaker 1: we chose to go into money meagument business, which is
Speaker 1: highly competitive. So it's not so much about the competition
Speaker 1: is as it is that, Uh, I'm not very good
Speaker 1: at studying something for years in order to really come
Speaker 1: out with these great research um projects. Uh, you know
Speaker 1: that it requires and an ability to sit there and
Speaker 1: study for years on end the same subject. And I
Speaker 1: realized I didn't have that, So you didn't want to
Speaker 1: just focus on that one niche and and do that
Speaker 1: deep dive. Let's talk a little bit about UM. You
Speaker 1: mentioned the course you took with Fama was life changing.
Speaker 1: Is that that's not an exaggeration, is it? No, it's
Speaker 1: not an exaggeration at all. I mean, I'm was twenty
Speaker 1: two year old, never grew up in a very modest
Speaker 1: household like most people of the time, and um, the
Speaker 1: my first course in investing was was taught by Jeane Fama,
Speaker 1: and it all made sense to me. It Uh, it
Speaker 1: wasn't until later I found out almost nobody else believed that, uh,
Speaker 1: you know what he was teaching. But so I really was.
Speaker 1: It was transformative to me, and it was a period
Speaker 1: of time that was really transformative for the field of finance.
Speaker 1: The field of finance really I went through with their
Speaker 1: score of years from the mid fifties of the mid
Speaker 1: seventies were it kind of really went from a nothing
Speaker 1: field to a true academic discipline with models and theories
Speaker 1: and good research. So let's talk about UM. Some time
Speaker 1: after you left, uh, I was gonna call it booth,
Speaker 1: but I guess I really can't. Um mc McCowen hired
Speaker 1: you at Will's Fargo, where pretty much he created what
Speaker 1: was the first practical index fund. Tell us about your
Speaker 1: experience working with McAllen. Okay, Well, I'll start with a
Speaker 1: connection first. So when I talked to FOM and said
Speaker 1: I wanted to leave the program, he called up Mac
Speaker 1: and UH said, because Mac could, I always wanted to
Speaker 1: hire one of his students, and so uh Uh and
Speaker 1: Mac wanted to come out with a what was seemingly
Speaker 1: crazy idea at the time, of an index fund, and
Speaker 1: UH and he and I hit it off, and we
Speaker 1: went out and UH and UH started the first index
Speaker 1: funded in nine mostly for institutions that it was only
Speaker 1: institutional in And we really didn't funny enough. We weren't
Speaker 1: successful enough or quickly enough. So eventually the Wells Fargo
Speaker 1: shut down our group and UH not a great decision.
Speaker 1: They're not a great decision. Well, it continued on. It
Speaker 1: turned out to be good for them because the Trust
Speaker 1: Department then picked it up then to try. After a
Speaker 1: number of years, Wells Fargo UH sold half the business
Speaker 1: to Nico and then the whole business to Nico, and
Speaker 1: then Nico sold it to Barclays and then Solid Black Rocks. Yeah. Yeah,
Speaker 1: So what was the I recall reading Samsonite Luggage was
Speaker 1: somehow involved in the original index fund. What what was
Speaker 1: their relationship there? Well, they called the University of Chicago
Speaker 1: and a professor there, Jim Laurian, said, who's it trying
Speaker 1: to apply these ideas? And Laurie said, well, well, as
Speaker 1: Fargo this group out there. So so Samson I called
Speaker 1: us up and said if this makes a lot of sense, uh,
Speaker 1: why don't we go with it? So that was for
Speaker 1: their pension pension. Really the first a practical index one
Speaker 1: was it just the SMB or what was the index
Speaker 1: based on? It was an equally equally waited index Fonte, Yeah,
Speaker 1: it was kind of That's interesting. Well, you have to
Speaker 1: it's a product of the times, you know, and the
Speaker 1: early seventies. Uh, the people promised all kinds of wild
Speaker 1: performance objectives and and so you're always trying to figure
Speaker 1: out how can you we're using come from the passive
Speaker 1: side of things, how can you create something that has
Speaker 1: a chance of beating the market and by holding equally
Speaker 1: weighted securities instead of the SMP five hundred, which is
Speaker 1: market that that got more the smaller companies and greater
Speaker 1: emphasis to hire beta stock. So and the old joke
Speaker 1: is that the mad desk for alpha often leaves not
Speaker 1: only no alpha, but no beta. Yeah, there you go.
Speaker 1: I'm Barry rid Hult. You're listening to Masters in Business
Speaker 1: on Bloomberg Radio. My special guest today is David Booth.
Speaker 1: He is the co CEO and chairman of Dimensional Fund Advisors,
Speaker 1: a four hundred billion asset management business. And and before
Speaker 1: the break we were talking about, UM, how you founded
Speaker 1: the company, and the company legend is this was begun
Speaker 1: in a brown stone in Brooklyn. Well, that's right, it was.
Speaker 1: I wouldn't say that the idea was destined for success,
Speaker 1: and necessarily it wasn't pretty determined that it will be successful.
Speaker 1: The act the idea we started with was a small company. UH,
Speaker 1: index linked type portfolio. UM. I say index linked type
Speaker 1: because there were no small cap indices, so it's hard
Speaker 1: to was index fund if there's no indices. This was
Speaker 1: pre Russell two thousands around all right, And what's the
Speaker 1: story with the phone company not giving you phone lines?
Speaker 1: They thought you were running a bookie joiners. Well, the
Speaker 1: world wasn't quite ready for a money management firm in
Speaker 1: Brooklyn at the time, back before it became fashionable. Um.
Speaker 1: And so we started with the idea that, uh, there's
Speaker 1: a simple proposition that we went in and talked to
Speaker 1: big institutions about. It was that informing an equity portfolio,
Speaker 1: you ought to have stocks of large companies and small companies.
Speaker 1: He should invest all your money just in large I
Speaker 1: mean makes sense, and it makes sense. Uh. So that
Speaker 1: was the proposition. I'll observe. We didn't have a track record.
Speaker 1: Actually nobody did, because institutions weren't holding the stocks of
Speaker 1: smaller companies in any great proportion. About the only small
Speaker 1: companies stocks they were holding, or stocks of companies that
Speaker 1: once have been big companies. Uh and so so they
Speaker 1: had the odds and the small company exposure. But this
Speaker 1: was the first systematic way of accessing a small cap universe.
Speaker 1: And these were really relative to what the typical pension
Speaker 1: funds or mutual fund was holding. These were really microcaps.
Speaker 1: These were my Yeah, these were um, very small companies.
Speaker 1: But it would you know, it's roughly about uh six
Speaker 1: of the total stocks and that are publicly traded but
Speaker 1: inaggregate they only represent about, you know, five percent of
Speaker 1: the market. Did you run into any special challenges trying
Speaker 1: to either trade these things, find coverage on these companies,
Speaker 1: or the whole idea of microcaps the big pension funds.
Speaker 1: How was it received well? It was received well, but
Speaker 1: there was a lot of opticism. Uh, first off, we
Speaker 1: didn't have a track record, even though nobody did. Ours
Speaker 1: our first portfolio manager and actually I've never managed money before,
Speaker 1: and uh so there were uh the reason but the
Speaker 1: big skepticism was about the trading, the execution that you're
Speaker 1: talking about big wide spreads, big spreads, and we are
Speaker 1: going to the marketplace because we come from the efficient
Speaker 1: market side of things, we come to the marketplace knowing
Speaker 1: we don't have any special information about the company who
Speaker 1: were trading with, largely with institutional investors that think they
Speaker 1: do have special information. So the question and leading academics,
Speaker 1: uh were you know, brought this up. You know, why
Speaker 1: won't you just get skinned going in and trading with
Speaker 1: people that are much more knowledgeable about the companies that
Speaker 1: you're investing in. So so what's the answer to that question? Well,
Speaker 1: we turned what was the problem into kind of an advantage. Uh,
Speaker 1: people that think they have the discounted information realized that
Speaker 1: whatever chill insights they have will not be lasting for long,
Speaker 1: and so there's an anxiety to trade, and that's what
Speaker 1: we worked on. We approached the marketplace basically waiting for
Speaker 1: sellers wanting to come to us. So so you're saying
Speaker 1: patients is actually a virtue for investors. Absolutely, patients and flexibility,
Speaker 1: so uh, and coming to the marketplace, if you can
Speaker 1: get the other person to move first, then uh you
Speaker 1: can Uh you win that particular trade and win that trade.
Speaker 1: We're speaking with David Booth, Coco and chairman of Dimensional Funds.
Speaker 1: Let's talk a little bit about your explosive growth since
Speaker 1: I know in hindsight it looks like a long, gradual process,
Speaker 1: but when you look at some of these numbers. So
Speaker 1: so when you launched the firm in one you essentially
Speaker 1: launched with zero assets, zero assets, right, I began with nothing.
Speaker 1: How long did it take before you were at a
Speaker 1: hundred million dollars? Oh, it was about Well, it took
Speaker 1: us about nine months to get registered with all the
Speaker 1: and come out with it. And the first year I
Speaker 1: think we had something like eighty millions. So it was
Speaker 1: it was about a year and a half, right, I
Speaker 1: go to get und millions. So so here's the numbers
Speaker 1: I came up with, and I tried to look at
Speaker 1: it by decade. So by the time you finished your
Speaker 1: first decade, were up to four billion. By right in
Speaker 1: the peak of the boom, you're thirty billion. Two thousand
Speaker 1: and nine, you're at a hundred and twenty four billion,
Speaker 1: and then around was a little over two hundred billion
Speaker 1: and four hundred billion. Today when you look back at
Speaker 1: the past, you know, forty years, that's the thirty years.
Speaker 1: That's an amazing run of of acid accumulation. Well, it's
Speaker 1: obviously been very fortunate. I think, um, a lot of
Speaker 1: the reason for it is this notion of indexing, and
Speaker 1: and I'm a fan of index and we don't exactly
Speaker 1: do indexing, but indexing is worked very well, and the
Speaker 1: principles of indexing are such that people can stay with it.
Speaker 1: Uh So the idea is that we attract new clients
Speaker 1: coming in, and um, a few clients leave. So let's
Speaker 1: let's describe what you mean by indexing. So there's not
Speaker 1: individual stock picking. I like this management. I like that product.
Speaker 1: It's We're gonna buy a group of stocks with these characteristics,
Speaker 1: and there's no market timing. You're long and fully invested.
Speaker 1: There's no I feel that a ten percent correction is coming,
Speaker 1: so I'm gonna move to the side and pay some
Speaker 1: big taxes. Is none of that. So so you're you're
Speaker 1: essentially about long term broad ownership of equities. Right. The
Speaker 1: key to investing, uh, Well, the first key to investing
Speaker 1: is find a philosophy that you can stick with through
Speaker 1: thick and thin. The reason are const One of the
Speaker 1: reasons they've been so successful, in addition to the we've
Speaker 1: been able to have a performance advantage over index funds.
Speaker 1: But the other main reason they've been they've had a
Speaker 1: good experiences. They were able to stick with the UH
Speaker 1: investment philosophy through that very difficult two thousand seven two
Speaker 1: thousand nine period. We we notice just watching the world
Speaker 1: of investing that the retail investor has a tendency too.
Speaker 1: We call it the flavor of the month. Oh this
Speaker 1: fund manager is doing well this month. Oh look at
Speaker 1: this sector. You clearly you have no interest in that,
Speaker 1: So no innest and that sort of thing. You know.
Speaker 1: There there's been something like seven or billion dollars of
Speaker 1: outflows from US equity mutual funds over the last uh
Speaker 1: since the peak of the market in two thousand and seven.
Speaker 1: That's that's a huge outflow. Yeah, we're every year we've
Speaker 1: had positive flows because people can understand the process. They
Speaker 1: realize basically we're we go up and down with the markets,
Speaker 1: and it shouldn't come as a surprise at every now
Speaker 1: and then there's a down market in the last thirty
Speaker 1: seconds we have. How is the firm managing this phenomenal growth?
Speaker 1: What's your secret to staying true to your your principles
Speaker 1: when money is just flowing in the doors like that, Well,
Speaker 1: it's it's operating extremely efficiently efficiently. I'm Barry Ritult. You're
Speaker 1: listening to Masters in Business on Bloomberg Radio. My special
Speaker 1: guest today is David Booth. He is the chairman and
Speaker 1: co CEO of Dimensional Funds Advisors. And let's talk a
Speaker 1: little bit about this quote from mc McGowan, who you
Speaker 1: worked with earlier in your career. We were talking about
Speaker 1: that before at Wells Fargo. McGowan said, it's all thanks
Speaker 1: to Jim Laurie, Gene Farma and Martin Miller. What does
Speaker 1: that mean, well, these are the key people and and
Speaker 1: and developing the finance department of the University of Chicago.
Speaker 1: Going back to the mid fifties, Jim Laurie was an
Speaker 1: associate dean or assistant team of the Business School, and
Speaker 1: he realized that the field of finance was changing rapidly
Speaker 1: and they needed to bring in some of these new
Speaker 1: young hot turks two h power up the school and
Speaker 1: the first personally brought in was Merton Miller. UM. Merton
Speaker 1: Miller eventually got his Nobel Prize for his work on
Speaker 1: capital structure cost capital H and one of Merton Miller's
Speaker 1: students was Gene Fama. And Gene's he mentioned they got
Speaker 1: his Nobel Prize for his work and market efficiency. Ah.
Speaker 1: So they were the uh. They really not only helped
Speaker 1: determine the um the path that Chicago took, but they
Speaker 1: also Miller and Fama really set the established the culture
Speaker 1: of the place, UH, which is been an amazing, amazingly
Speaker 1: productive school for economics and finance over the last you know,
Speaker 1: forty years. Who else were your early mentors, Well, I
Speaker 1: mean the UH may you have to go back to
Speaker 1: before business school, I guess for mentors, big mentors are
Speaker 1: are Fama and McQuown. You know they Fama, um, you know,
Speaker 1: taught me all the basics of investing, and they and
Speaker 1: gave me the capability of reading, you know, uh, academic
Speaker 1: research even today. And do you still read a lot
Speaker 1: of academic research today? I wouldn't say a lot. I
Speaker 1: kind of cheat a bit. I wait for Fama or
Speaker 1: Ken French or Bob Marton to pass along what they
Speaker 1: think is good research, and then I cherry pick. You
Speaker 1: could do worse with those three as curators. Yeah. So,
Speaker 1: so you were also Eugene Farmer's assistant research assistant. What
Speaker 1: was it like working with him? Well, it was amazing.
Speaker 1: First off, he's uh uh still you know, just works
Speaker 1: incredibly hard seven days really. Yeah. In fact, there's a
Speaker 1: one of my favorite stories is uh uh about Fama
Speaker 1: and his colleague Ken French. Over the last thirty years
Speaker 1: or so, uh, Fama and French have collaborated on numerous
Speaker 1: landmark papers, and they're worked together all the time. Ken's
Speaker 1: and at Dartmouth Tough School Business and and uh Jeans
Speaker 1: at Chicago. So one day they're they're they're having a
Speaker 1: conversation and Jean notices that Ken is not being too responsive.
Speaker 1: So he says, well, Ken, what's going on today? And
Speaker 1: Ken says, Jean, it's Christmas. I mean he's Uh, it's
Speaker 1: a work like that that, uh, you know as as
Speaker 1: enabled those guys to succeed. So so as long as
Speaker 1: you bring up Ken French, let's talk about the French
Speaker 1: FAMA or the Fama French three factor model. Why was
Speaker 1: that such a breakthrough? And and for listeners who may
Speaker 1: not be familiar with it, it's essentially the kind sept
Speaker 1: of looking at market beta plus the small cap premium
Speaker 1: plus the advantage one gets by valuing value stocks over other,
Speaker 1: let's say, more expensive stocks. Um, why was that such
Speaker 1: a huge breakthrough? Well, um, you know investing inequities. Um,
Speaker 1: you know, there involves many different types of risks that
Speaker 1: most of which will ever be able to identify exactly.
Speaker 1: But uh, a lot of many different kinds of risk. Well. Uh,
Speaker 1: the model until Farmer French came along, the model that
Speaker 1: all eating academics used to do research was just a
Speaker 1: single factor model beta. And it was a great model,
Speaker 1: elegant theory. It had one drawback and that it never
Speaker 1: described reality. So they could and we have a saying
Speaker 1: that you know, if you torture the data enough, you
Speaker 1: can get it confess to anything. But as much as
Speaker 1: uh they tortured the data they could could they could
Speaker 1: never get I beta stocks that have systematically have higher
Speaker 1: average returns than low beta stocks. So this what Foman
Speaker 1: French did was actually pull together a lot of research
Speaker 1: have been going on over about a twenty year period,
Speaker 1: and UM concluded that they have a simple three factor
Speaker 1: model instead of one that seemed and that did a
Speaker 1: much better job of of describing, you know, why one
Speaker 1: portfolio as a higher average returned than another. So in
Speaker 1: the last thirty seconds we have in this segment, everybody
Speaker 1: now understands the small capt premium, the value premium. Why
Speaker 1: haven't these been arbitraged away? Why do they still persist? Well,
Speaker 1: we think of these as being risk premium, and we've
Speaker 1: known for years that stocks have higher average returns than
Speaker 1: the money market funds on average, but that and that
Speaker 1: hasn't caused the premium to disappear. I'm Barry, which helps
Speaker 1: you listening to Masters in Business on Bloomberg Radio. My
Speaker 1: special guest today and I know I say that every week,
Speaker 1: but I really mean it. My special guest this week
Speaker 1: is David Booth. He is the founder, chair in and
Speaker 1: co CEO of Dimensional Fund Advisors with about four billion
Speaker 1: in asset under management. Let's talk a little bit about
Speaker 1: the rise of indexing. You you hinted at that in
Speaker 1: the last segment, but this is really very very significant. UM,
Speaker 1: let's begin with what you guys do it. I know
Speaker 1: you don't love d f A, but I always hear
Speaker 1: d f A as opposed to dimensional people. That's the
Speaker 1: shorthand people use. What does dimensional funds do with their
Speaker 1: indexing that's so significantly different from the typical plane vanilla
Speaker 1: market cap weighted index. Well, the underlying premise of of
Speaker 1: the firm around around which we started is that indexing
Speaker 1: is UH is terrific and I think people benefit a
Speaker 1: lot buy it. It's also a relatively mechanical strategy. If
Speaker 1: if a stock goes out of an index, you have
Speaker 1: to sell it. If if a stock comes into an index,
Speaker 1: you have to buy it, and you have to buy
Speaker 1: it on the days it comes and goes. So that's UH.
Speaker 1: That never appealed to us because we thought that mechanical
Speaker 1: approaches UH in terms of generating trading costs, it makes
Speaker 1: them very expensive to trade. You know when you have
Speaker 1: to trade relatively mechanically. And so what about the dimensions
Speaker 1: When we talk about demend dimensional, we're really talking about
Speaker 1: dimensions which began with small small cap then added value.
Speaker 1: What does the dimensions due to the return of of
Speaker 1: the index? Well there there. The notion of dimensionality is
Speaker 1: that there are some factors that can uh uh lead
Speaker 1: to higher average returns in the market than just buying
Speaker 1: the overall market. If you start with an index fund
Speaker 1: and you decide, well, why don't I give a little
Speaker 1: great greater weight to the smaller companies, and why don't
Speaker 1: I give a little bit of greater weight to the
Speaker 1: lower price stocks, uh with correspondingly, us wait to higher
Speaker 1: price stocks and bigger companies. That's a really that's the
Speaker 1: notion of dimensionality. It's just it's not if you think
Speaker 1: of portfolio management as being a function of of two things,
Speaker 1: stock selection and then uh, how much you wait each
Speaker 1: stock in a portfolio. Stock selection, we really don't spend
Speaker 1: much time on. That's we hold nearly all the stocks
Speaker 1: in an index, but we hold the stocks in different
Speaker 1: proportions than they represent in an index fund. And And
Speaker 1: to put that into a little context, as to what
Speaker 1: that does to the performance. I'm going to quote an
Speaker 1: article from not too long ago in barrens of d
Speaker 1: f A funds have beaten their category benchmarks over the
Speaker 1: past fifteen years. Of dimensional funds have been in over
Speaker 1: the past five years. That's a heck of a great
Speaker 1: track record, isn't it. Yeah, it's really kind of startling
Speaker 1: it When we first, uh we started you know with
Speaker 1: so primitively I guess so, you know, with a out
Speaker 1: of the ms Stone in Brooklyn that and it never
Speaker 1: occurred to us that we could actually outperform an index.
Speaker 1: We thought, because of trading costs, that would always have
Speaker 1: a certain lag and so we we worked really hard
Speaker 1: to try to do what we thought was minimizing that
Speaker 1: that that that dragon performance. It turns out we exceeded
Speaker 1: expectations and we actually uh started adding value over index one.
Speaker 1: So actually, let's talk about that a little bit. Because
Speaker 1: you guys have a very sophisticated way of trading. Um,
Speaker 1: you're very methodical, you're very opportunistic. We talked earlier and
Speaker 1: said you're especially patient. Uh, there's an emphasis towards taff
Speaker 1: sufficiency and an emphasis towards low expenses. How did you
Speaker 1: create that trading methodology and what impact does it have. Well,
Speaker 1: the way we traded it was we just recognized, look
Speaker 1: a marketplaces where buyers and sellers come together and they
Speaker 1: both have to feel like they got a good deal
Speaker 1: or they don't trade well. Um on the other side
Speaker 1: of our trades typically are institutional investors that are they
Speaker 1: have an idea for change. You know, it's either buy
Speaker 1: this or sell that, whatever it is that they've decided
Speaker 1: to do, and whatever their decision is, they realize the
Speaker 1: benefit of that is really really short lived. So as
Speaker 1: we go to the marketplace and we look at you know,
Speaker 1: the bid ask spread, you know the that's really kind
Speaker 1: of a lot of people's measure of trading costs, the
Speaker 1: bid ask spread. Uh, what we realize is if we
Speaker 1: could get the other side to act first, we could
Speaker 1: trade closer to the bid in today's terms and stock
Speaker 1: maybe trading ten dollars to ten dollars and two cents
Speaker 1: or whatever. It makes a It makes a difference if
Speaker 1: you can buy it at ten dollars or versus ten
Speaker 1: dollars and two cents. So that was that was the
Speaker 1: thing that went into it. And since you guys are
Speaker 1: such long term holders and their short term traders. You
Speaker 1: could afford to be patient. They can't. They right to
Speaker 1: hit the bid while you can wait. And it's a
Speaker 1: win win deal. It's not like we're ripping their eyes out.
Speaker 1: It's they they they want They want immediacy in trading
Speaker 1: and are willing to pay for it, and we, in essence,
Speaker 1: are providing a service to them by if they're wanting
Speaker 1: to sell something, we take it off their hands, you know,
Speaker 1: we take it down a couple of cents. They think
Speaker 1: it's it's well worth it, and it makes over the
Speaker 1: for a long term investor like us, it makes a
Speaker 1: huge difference over the long haul. We're speaking with David
Speaker 1: Booth of Dimensional Fund Advisors, So let's talk a little
Speaker 1: bit about how successful indexing has become. Why is this
Speaker 1: something that seemingly has taken the public so long to discover? Well, Uh,
Speaker 1: I think that the idea behind indexing is not intuitively
Speaker 1: obvious to people at first. UH. Most people approach investing
Speaker 1: the way they approach business in general. The idea that
Speaker 1: if you're smarter and harder, and you know, you ought
Speaker 1: to be able to do better than than somebody else. Uh,
Speaker 1: And that's just not true of of investing in public markets.
Speaker 1: When you buy a publicly traded stock, you're buying a
Speaker 1: piece of paper, and and the investing in the public
Speaker 1: markets is a zero sum game about whatever the around uh,
Speaker 1: whatever the market does. So if one investor has a
Speaker 1: higher average return than the market, another investor has to
Speaker 1: have a return less than the market. It's just simple arithmetic.
Speaker 1: Then you work in a little friction from trading costs
Speaker 1: and from fees and commissions, and you probably end up
Speaker 1: with a significantly lower a number of people on the
Speaker 1: below beta side, greater number of people making less. So
Speaker 1: it's worse than a zero sum it's worse than zero
Speaker 1: sum game. Yeah, but it's really hard. When you see
Speaker 1: somebody with a great track record, it's tempting to say, look,
Speaker 1: I think this manager you know, as a chance of
Speaker 1: consistently beating the market. I mean, or stated differently, if
Speaker 1: you're gonna invest with something you know, you probably won't
Speaker 1: pick somebody has a poor track record. You're likely to
Speaker 1: pick somebody with a good track record. Unfortunately, as his
Speaker 1: research has shown, the number of people with good track
Speaker 1: records are fewer than you'd expect by chance, just randomly
Speaker 1: we would expect more investors to have a good track
Speaker 1: record than than than there are, and so as a result,
Speaker 1: you can't there's no way of telling that personally good tracker,
Speaker 1: good track record, got it by luck or by skill.
Speaker 1: And then there's the issue of what happens when suddenly
Speaker 1: everybody piles into that one segment because this person is
Speaker 1: on the cover of some magazine. And then what we
Speaker 1: invariably see this in four oh one case where people
Speaker 1: are just flavor of the month whoever's not at that quarter,
Speaker 1: and usually it's because some segment has done really well
Speaker 1: and it's about to stop doing really well well. People
Speaker 1: have a tendency to, as we say, skate to where
Speaker 1: the puck was. That's right, not to The famous quote
Speaker 1: is skates where the puck is going to be, not
Speaker 1: to where where it is. Now, let let me mix
Speaker 1: this up a little bit with you and talk about
Speaker 1: something in general about mutual funds that I've always complained
Speaker 1: about the lack of involvement in in corporate governance on
Speaker 1: behalf of their shareholders. You guys recently started doing something
Speaker 1: or I don't know how recently. This is sending warning
Speaker 1: letters to companies who's um stock you own and whose
Speaker 1: management is debating, uh putting in a poison pill into place.
Speaker 1: Tell us about that, Well, we think it's very important
Speaker 1: to uh work hard for shareholder rights. UM. You know,
Speaker 1: our capitalist system requires monitoring, you know, it's uh and
Speaker 1: being an investor and part owner of a of a
Speaker 1: company through our clients, UH, we think it's important to
Speaker 1: do that monitoring and stand up for shareholder rights. Professor's
Speaker 1: fam and French are very active and this this part
Speaker 1: of the business. We take it very seriously. UM, you
Speaker 1: know we have and what we did recently was we
Speaker 1: sent a letter two the companies we invest in, which
Speaker 1: is basically every public stait company, and said, these are
Speaker 1: the principles that we along which we vote and you're
Speaker 1: actually voting your proxies because you know, you look back
Speaker 1: over the past few decades, mutual funds were notorious for
Speaker 1: hands off relationship and they really are the ones who
Speaker 1: own most of the shares on behalf of their their shareholders. Yeah,
Speaker 1: we just had one a case where a company was
Speaker 1: UM had a hostile bid another company was going to
Speaker 1: take it over, so they decided that they were going
Speaker 1: to put in a poison pill and uh, and a
Speaker 1: staggered board. And this was about the time that their
Speaker 1: annual shareholder meeting was coming up, and we told them
Speaker 1: we would vote against them. Well, our policy is we
Speaker 1: would vote against the directors in that case, and we
Speaker 1: look to see where those directors are directors and other companies,
Speaker 1: and we vote against against them. There crust the board,
Speaker 1: the whole wherever they So, how do you guys have
Speaker 1: any view on executive compensation? We keep seeing stories about
Speaker 1: these CEOs and CFOs for public companies, tremendous, tremendous compensation packages. Yeah,
Speaker 1: it's it's a really complex area. We know we don't
Speaker 1: have uh. We like to make our decisions based on
Speaker 1: good and perical research. There's abundant evidence that poison pills
Speaker 1: are bad. Um in general, there are some net operating
Speaker 1: a lost poison pills, but the typical poison pill is
Speaker 1: bad for shareholders, so that's why we vote against it.
Speaker 1: Thank you so much, David for being so generous with
Speaker 1: your time. If you've enjoyed this conversation, please check out
Speaker 1: the rest of our discussion. You can find that on Apple, iTunes, SoundCloud,
Speaker 1: and of course Bloomberg dot com. Check out my daily
Speaker 1: column on Bloomberg view dot com. Follow me on Twitter
Speaker 1: at rid Halts. I'm Barry rid Haults. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio. Welcome back to the
Speaker 1: podcast portion of the show. This is where I take
Speaker 1: off the headphones and not worry about I love this
Speaker 1: like cinema verite. You can hear the headphones come off,
Speaker 1: you can hear the papers rattling. Um. But this part
Speaker 1: is where we kinda get a little less formal. Don't
Speaker 1: worry about the radio length segments, which are always an
Speaker 1: annoying interruption, and just let the tape recorder role and
Speaker 1: have a little fun. Um. I have so many questions
Speaker 1: to ask you. You're not gonna get back to Austin
Speaker 1: for for days if I go through everything. So I'm
Speaker 1: really going to focus on on really the most important
Speaker 1: ones because I've been looking forward to chatting with you
Speaker 1: for so long. Let's let's start with one about Dimensional
Speaker 1: When when you began, um, it was purely an institutional business,
Speaker 1: wasn't it. That's how did your relationship with financial advisors
Speaker 1: come about? Hunt tells me there's actually a good story
Speaker 1: behind this. Well, it's um. Sometimes when people achieve a
Speaker 1: bit of success. Uh. People assumed that it was it
Speaker 1: was planned. This was one of these uh fortunate pieces
Speaker 1: of good luck that happened to us. Nothing wrong with
Speaker 1: a little sendipity again, right. What happened was by nine, Uh,
Speaker 1: we've gotten up to about four or five day dollars
Speaker 1: in our management and we thought we were smoking and
Speaker 1: and so you were one percent of the shot size
Speaker 1: of the company today and you thought, we've made it.
Speaker 1: We've made it. So we had an advisor, there was
Speaker 1: an advisor in Sacramento approached us and said, what's his name,
Speaker 1: Dan Wheeler, Dan Weel because people love to hear the
Speaker 1: name on the race. Dan, if you're listening, this is
Speaker 1: about you. Yeah, no, it was. So Dan approaches with
Speaker 1: the idea getting of getting access to our funds because
Speaker 1: they're low cost and there their price for institutions. And
Speaker 1: we said, well, you know, we don't know about that
Speaker 1: because we've heard about individuals and how they get in
Speaker 1: and out of the market and flavor of the month,
Speaker 1: flavor of the month and all of that and that really, um,
Speaker 1: it wasn't the kind of our thing. And he said,
Speaker 1: oh no, no, no, no no he he he didn't he
Speaker 1: didn't do that. Sort of thing. So he said, okay,
Speaker 1: well we'll give you, we'll try it, and uh but
Speaker 1: if we find that you're trading a lot of of
Speaker 1: our funds, then we're gonna get rid of you. Done
Speaker 1: so he said, okay, Well a year went by. Next
Speaker 1: year he comes back, he goes, hey, look, I think,
Speaker 1: uh there's a business in this. There's a number of
Speaker 1: advive talked to a lot of advisors. They're very interested
Speaker 1: in getting access to your funds. And once again we said,
Speaker 1: well that's ok, but we we need to talk to
Speaker 1: him first. We need to be convinced that they're like you,
Speaker 1: that they won't be just trading willy nilly. And and
Speaker 1: so year two, how many people does he bring in,
Speaker 1: as you know, the next group of financial advisors. Well
Speaker 1: it was enough. It was a small enough group. We
Speaker 1: can all sit around the table. Let me put it
Speaker 1: that way. I think they're ten or twelve advisors. And
Speaker 1: so when did this um take off as an actual
Speaker 1: business within dimensional funds? Well, it, uh, it picked up.
Speaker 1: It picked up his team pretty quickly. Uh it wasn't
Speaker 1: you overnight by any means, but you know, it's been
Speaker 1: twenty five years and uh, twenty six years and it's uh,
Speaker 1: it's um, yeah, just kind of taking a life on
Speaker 1: his own. It's uh. Gentleman's name was Dan, Dan Wheeler,
Speaker 1: Dan Wheeler. And what's your relationship with with Dan? Now?
Speaker 1: Well Dan retired a couple of years ago. We you know,
Speaker 1: what's one of the problems we're facing now is that
Speaker 1: all these people have been good friends over the years.
Speaker 1: We're all getting a little older. You know, Um, he
Speaker 1: did he work directly with with you guys that he
Speaker 1: worked for you or was he just he uh worked
Speaker 1: with us and built the business up? And you know it?
Speaker 1: What it is is that the difference in approach between
Speaker 1: us and then most firms is, Um, we built a
Speaker 1: firm around a set of ideas there's notion market efficiency
Speaker 1: and uh, and developed our investment philosophy has has the
Speaker 1: empirical research and entero dimensions evolved. So um what Uh
Speaker 1: we kind of wait for advisors to that share that
Speaker 1: opinion and then those those ideas we wait for them
Speaker 1: to contact us. Really because it's very difficult if you
Speaker 1: go out to all the advisors out there, it's you know,
Speaker 1: it's a difficult to find out which ones in advance
Speaker 1: would be interested in hearing this kind of story, so
Speaker 1: we kind of wait until they're ready to hear the
Speaker 1: story before we talk to him. How many advisors do
Speaker 1: you work with? Now? They're about um three thousand advisory
Speaker 1: firms and now some firms have a lot of advisors,
Speaker 1: some just a one person advisory shop. What percentage of
Speaker 1: of the four billion are the advisors actually working with?
Speaker 1: They're about our business now? Really? Yeah, talk about so
Speaker 1: really you guys tacked to a different direction and became
Speaker 1: the majority of your A. U. M. Well, part of
Speaker 1: it is um that the institutional business when we started
Speaker 1: was our our clients were the large defined benefit plan. Uh.
Speaker 1: Well those have been systematically shut down over the years.
Speaker 1: That isn't make a business as it once was, and
Speaker 1: you know, more of it's coming into the individual market.
Speaker 1: So let's talk a little bit about UM. Let's look
Speaker 1: a little bit about you. You run a four hundred
Speaker 1: billion dollar farm. You're the chairman and the co CEO.
Speaker 1: What's a day in the life of David Booth Like, Well,
Speaker 1: it's uh, it's a it's a really a lot of fun.
Speaker 1: I think the culture of the firm is that, you know,
Speaker 1: people have a spirit that we can we can change things,
Speaker 1: and so it's a lot of client work. It can
Speaker 1: be there can be any one of the beauties is
Speaker 1: every day is different than there can be problems like, uh,
Speaker 1: you know Argentina shuts down, you know, Capital Control shuts
Speaker 1: closes the market, or it could be uh some sort
Speaker 1: of trade error or something. There's always some kind of concerns.
Speaker 1: But the fund is really working with the clients and
Speaker 1: you know, ultimately we're working with individuals. And the enthusiasm
Speaker 1: comes from taking these new ideas around which we built
Speaker 1: a firm and seeing the light go on for people
Speaker 1: as they come in and say that aha moment, that's uh,
Speaker 1: that's the excitement in the business. Uh, people go, I
Speaker 1: get it now. So so let's talk about a decidedly
Speaker 1: not a moment. You guys did fairly well throughout the
Speaker 1: financial crisis. What was it like running an asset management
Speaker 1: firm when you know, the markets get she lacked and
Speaker 1: people are panicking. Well, it's it's very stressful. Obviously, Um,
Speaker 1: we're not immune distress. Sometimes people say, well you're because
Speaker 1: you're not trying to time the markets. You don't care.
Speaker 1: I mean, we care just that there's not and we
Speaker 1: don't We're not a control the markets. Did you see
Speaker 1: a lot of outflows? Did you get a lot of
Speaker 1: panicked calls? How? How did that? What was the day
Speaker 1: to day like when you were in the midst of
Speaker 1: oh eight oh nine. Well, the distinct, distinguishing characteristic is
Speaker 1: that our clients stayed the course when there were massive
Speaker 1: flows out of equity funds across the industry. We were
Speaker 1: one of the few firms that actually had positive flows
Speaker 1: every year, positive flows through oh seven, no eight or not.
Speaker 1: And that explains why over the past five years you've
Speaker 1: doubled in uh in size in terms of so this
Speaker 1: in hindsight, I don't mean this as a positive because
Speaker 1: everybody wishes it never happened, But net net you guys
Speaker 1: came out fairly well after the crisis. Yeah, well you
Speaker 1: could see the benefit of having a story about equilibrium,
Speaker 1: which is what we believe. You know, sometimes people would
Speaker 1: panic and go, gosh, you have markets are efficient? You know,
Speaker 1: why are they down? And and the answer is that
Speaker 1: markets are efficient. They're not perfect. You know, markets have
Speaker 1: always gone up and down, and they'll continue to go
Speaker 1: up and down. That's why you have a positive expected
Speaker 1: outcome from investing in stocks people. You know, you have
Speaker 1: to have a positive expected outcome where people wouldn't invest
Speaker 1: in stocks. So it was we had great traction just
Speaker 1: going to reviewing the basics with people when they come
Speaker 1: in totally stressed out. Would say, hey, look, markets are
Speaker 1: where buyers and sellers come together. They both have to
Speaker 1: in a voluntary transaction. They both have to have I
Speaker 1: feel like they got a good deal or they don't trade. Now,
Speaker 1: if you look at the market, what's going on now,
Speaker 1: they're trading. Volumes are huge, So a lot of buyers
Speaker 1: coming into the market. Now, as to whether it's voluntary
Speaker 1: or not, I think there are a lot of voluntary uh,
Speaker 1: the buyers, but there are a lot of forced sellers,
Speaker 1: people who have margin calls and whatnot. So, without being
Speaker 1: a market forecaster, I did this video in late two
Speaker 1: thousand and eight, beginning of two thousand nine. It turns
Speaker 1: out it it was right pretty close to the bottom
Speaker 1: of the market. Um. But it wasn't about timing at all.
Speaker 1: It was about explaining how markets work and just reviewing that.
Speaker 1: And you say, look, Warren Buffett's out there buying after
Speaker 1: he had a number of transactions he reported at this time.
Speaker 1: So and isn't too bad. This tracker is not too bad.
Speaker 1: So he said, if we had to make a guess,
Speaker 1: if anything, probably the buyers are getting too good a
Speaker 1: deal now. And you know, I've watched my mouth out
Speaker 1: with soap. I really said that they got it was
Speaker 1: inefficiently priced, but they got a good deal of buyers.
Speaker 1: Because you look at the tepid recovery since the recession
Speaker 1: over six years ago, stock market has done great and
Speaker 1: their recovery has been relatively modest. So you might ask
Speaker 1: yourself why how would that happen? Well, I think prices
Speaker 1: got to really attractive levels so it didn't take much
Speaker 1: of a recovery to have them pop back up. So so,
Speaker 1: in other words, markets are efficient, but people may not
Speaker 1: be the most efficient, the most rational sellers when emotions
Speaker 1: reared head. Absolutely. We have an advisor who says, I
Speaker 1: don't have people with investment problems. I've got investments with
Speaker 1: people problems. That's perfect. That really that really makes UM
Speaker 1: sums it up perfectly. You know who I've been meaning
Speaker 1: to ask you about, and I actually skipped over it earlier.
Speaker 1: Is UM one of the earliest people you were working with?
Speaker 1: Um when you begin how did you meet. I want
Speaker 1: to pronounce his name correctly, Rex Sinquifield Um. He and
Speaker 1: I were classmates of business school. Actually my second year
Speaker 1: in the program at Chicago, I was a teaching assistant
Speaker 1: for FAMA and Rex took Fauma's course and so um
Speaker 1: I can great at his papers. But on Fridays we
Speaker 1: would have a Q and A with a teaching assistance
Speaker 1: and Rex always showed up. He was a zealot over
Speaker 1: you know, really a scholar, and so he after he
Speaker 1: graduated from from Chicago with his NBA, he went to
Speaker 1: work for American National in Chicago and there he developed
Speaker 1: the first SMP five index Farmah, so so you launch
Speaker 1: d f A in Brooklyn. You reach out to Rex
Speaker 1: at a certain point. Yeah, he had got wind of
Speaker 1: what we were doing and we just started. We were
Speaker 1: very far along at all, and he said he had
Speaker 1: been thinking about doing something similar on his own. So
Speaker 1: we said, well, look, uh, why don't we do this together?
Speaker 1: So it was yourself Rex, who else was one of
Speaker 1: the early co founders. Well, we had a number of
Speaker 1: several colleagues I'd worked with in my assistant from before.
Speaker 1: There's a couple of key people as well. And actually
Speaker 1: a part of the story of the firm is really
Speaker 1: all the outside directors we had, which are academics, well,
Speaker 1: not all of them are academics, because I have a
Speaker 1: little further down my list to ask you about your
Speaker 1: relationship with one of my favorite nicks, former Senator Bill Bradley. Okay, well, um,
Speaker 1: you know, we've been working with Senator Bradley about five years. Um,
Speaker 1: he's uh, uh, you have been a terrific you know. Addition, uh,
Speaker 1: he's works on a consoling basis, he's not uh is
Speaker 1: he a director or just well, he's a you know,
Speaker 1: an outside advisor, and he's yeah, deeply concerned about retirement
Speaker 1: income for people. And we've been doing a lot of
Speaker 1: work head headed by Bob Martin on helping people think
Speaker 1: through and prepare for retirement. And uh, there's a budding,
Speaker 1: a bit of a budding retirement crisis. The the average
Speaker 1: baby boomer does not have enough money saved for their retirement. Now,
Speaker 1: they don't end there and there's not there. They're not
Speaker 1: short by a little, they're short by a lot. So
Speaker 1: what's gonna end up happening twenty years? Hence, when I
Speaker 1: think the number is something like forty or sixty thousand
Speaker 1: boomers a day are retiring over the next ten years.
Speaker 1: Is that about right? And that sounds that sounds right,
Speaker 1: and it's um It's just, you know, it's a huge crisis.
Speaker 1: It's hard to make up if somebody's close to retirement
Speaker 1: and and hasn't saved enough, it's it's hard to save
Speaker 1: a lot in just a few years. The important thing
Speaker 1: is to train people and think about retirement over there
Speaker 1: over their lifetime. We have a friend Patrick O'Shaughnessy who
Speaker 1: wrote a book called Millennial Money and basically says, the
Speaker 1: advantage that twentysomethings have is they have a fifty year
Speaker 1: runway to save and the advantage of compounding is enormous.
Speaker 1: You will never again in your life have that much
Speaker 1: of a runway. And most people look, I think I'm
Speaker 1: pretty typical. I was interested investing for many years, but
Speaker 1: I never really got serious until my late thirties. It
Speaker 1: didn't hurt to be earning a little more, but you know,
Speaker 1: you think about what that twenty years of compounding could
Speaker 1: have done. Even a little bit would have made a
Speaker 1: huge difference totally. It's so the magic of compounding is
Speaker 1: one of the most important aspects of investing. So we
Speaker 1: talked about your trading strategy, and we talked about, um,
Speaker 1: what was like running running the firm. Someone said to
Speaker 1: me that, and I want you to clarify this. You
Speaker 1: guys are effectively market makers for fourteen thousand stocks. I
Speaker 1: think that's somewhat of an overstatement. You're not truly market makers.
Speaker 1: You're you're just providing liquidly by by offering slightly better
Speaker 1: prices than the bid. Is that is that a fair
Speaker 1: way to describe it. Yeah, we tried to trade as
Speaker 1: close to the bid as we can. Um, if we
Speaker 1: were a market maker, we would be actively trading every day.
Speaker 1: I mean, one of the one of the principles we
Speaker 1: have is we don't want to see much turnover in
Speaker 1: the portfolios. Uh. The best way to save on trading
Speaker 1: costs is not trade very often. Uh. And then uh,
Speaker 1: my colleague says, the solution to high frequency trading is
Speaker 1: low frequency trade. There, Well, you know these high frequency
Speaker 1: traders are out there, and that you know. I'm we
Speaker 1: don't do high frequency trading. I uh, Uh. As long
Speaker 1: as everybody has access to the same information, I don't
Speaker 1: have a problem with high frequency trading. So let's talk
Speaker 1: a little bit about your co CEO, Eduardo Rappetto. What's
Speaker 1: his role? How has he influenced the growth at Dimensional Funds. Well,
Speaker 1: he's been he's been spectacular. Edwardo's background was he got
Speaker 1: his pH d and uh some form of aeronautical engineering
Speaker 1: at Caltech. Uh. He's explained it to me, but I
Speaker 1: don't uh it goes beyond. I can make paper airplanes
Speaker 1: and that's about it. But anyway, he got tired of
Speaker 1: um uh of that area, and I thought about doing
Speaker 1: uh finance, and he approached us. He joined our research team.
Speaker 1: It turns out academic research and finance is very similar
Speaker 1: to the academic We do academic research and and there
Speaker 1: a nautical engineering. It's uh, you know research, there's some
Speaker 1: general principles you following a lot of the same man
Speaker 1: and so forth. So he uh and being as bright,
Speaker 1: he'sn't phenomenally bright, and he picked up what he needed
Speaker 1: to learn about finance, uh in a very short period
Speaker 1: of time. And so what's so you guys are co
Speaker 1: C E O S which is somewhat of a unusual
Speaker 1: arrangement in finance. How do you guys divide the responsibilities? Well,
Speaker 1: he he does the work and I take the credit.
Speaker 1: That's basically the way it works. I have to I
Speaker 1: have to see if I can get that done in
Speaker 1: my own my own office. So you would you say
Speaker 1: he's more operations and you're really more strategic or well,
Speaker 1: I would say he's more hands on. I've tried to
Speaker 1: get out of day to day management. Um and uh.
Speaker 1: And we have a you know, a huge bench, a
Speaker 1: lot of depth in the firm and uh, it's you
Speaker 1: need to make that generational transfer. It's really important in
Speaker 1: running a business that that you, you know, hand off
Speaker 1: and so ed Ward O had you know, heads up
Speaker 1: the next generation and you know of brilliant, hard working
Speaker 1: people that that's nice to have that sort of deep
Speaker 1: bench behind you. Let's let's talk a little bit about
Speaker 1: the research paper you did with gene Farma Diversification, Returns
Speaker 1: and Asset Management. I want a Graham and Dot award.
Speaker 1: Didn't it back in r not too bad? So what
Speaker 1: motivated you to say to your OPE professor, Hey, let's
Speaker 1: do a paper. Well it Uh, you know what you know,
Speaker 1: basically one of the biggest principles we have at the
Speaker 1: firm is diversification. As your buddy, you know, and it's
Speaker 1: difficult for people to see the benefit diversification, you know
Speaker 1: what you know? Uh? On TV sometimes they say if
Speaker 1: you have five stocks, you know you're diversified. You know. Uh, yes,
Speaker 1: you have five large cap tech stocks perfectly, that's it.
Speaker 1: You don't need anything else. And so people need to
Speaker 1: help thinking through uh, you know the importance of diversification.
Speaker 1: That's really what that paper was about, is measuring, uh,
Speaker 1: how much your compound return. We we've talked about compounding.
Speaker 1: How much your compound return has improved over time through diversification.
Speaker 1: So there's diversification and there's rebalancing. Pretty close to a
Speaker 1: free lunch. If I would say that anything is a
Speaker 1: free lunch on on Wall Street, that's that's the closest
Speaker 1: that that would be the first that would be the candidate, right,
Speaker 1: doesn't caution anything, You're not taking additional risk or whatever
Speaker 1: cost is tiny, and you basically over a period of
Speaker 1: decades compound and extra let's call it hundred basis points.
Speaker 1: Is that is that a fair assessment? Yeah, that'd be
Speaker 1: that probably a little high, but it's pretty close to that.
Speaker 1: And a hundred basis points, uh, over the long haul
Speaker 1: can make a huge difference, right, especially with no additional
Speaker 1: risk and the minimus costs. Um. So let's let's continue
Speaker 1: along along those same lines. Um. You guys first started
Speaker 1: with dimensions we mentioned earlier, it was there was beta
Speaker 1: plus small cap, and then after small cap was value.
Speaker 1: What other dimensions might potentially be coming down the pike. Well,
Speaker 1: we've been doing a lot of work with UH, a
Speaker 1: couple of measures on profitability, and it turns out that
Speaker 1: adds UH quite a bit. UH and and reinvestment or
Speaker 1: investment company investment. So there's always a lot of research
Speaker 1: coming along. It takes it seems like it takes about
Speaker 1: every ten years for a new idea to come along.
Speaker 1: So so let's look at each of those. So we'll
Speaker 1: start with profitability. Pretty intuitive. The more profitable company is
Speaker 1: is it straight up profits or is it change? Is
Speaker 1: a growth of profits? It's it's a it's a it's
Speaker 1: a measure of profitability. The what And you're right, people,
Speaker 1: I think that's intuitive of the you have to throw
Speaker 1: in the caveat though, which is uh, gosh, it seems
Speaker 1: like common sense. Why would I get paid more if
Speaker 1: a company's more profitable? Seems like that its lower risk,
Speaker 1: and that's not really, that's not really what's going on.
Speaker 1: What's going on as you say, Look, suppose I have
Speaker 1: two stocks and and they're selling at the same price,
Speaker 1: but they have the same kind of characteristics wanted, and
Speaker 1: one of them has a greater profitability measure. How do
Speaker 1: you explain uh, uh that it's they're selling at the
Speaker 1: same you know, the same price. Well, that the earnings
Speaker 1: must be risk here, So it's, uh, there's something about
Speaker 1: that company that's risk here. That's the thought process. That's
Speaker 1: a thought process where you can make well, you're saying
Speaker 1: that's wrong what I'm saying, that's uh, that's right if
Speaker 1: you um by, It's just it's just another way of
Speaker 1: getting at this notion of risk. If too, there are
Speaker 1: stated differently. If two companies have the same expected cash flows,
Speaker 1: the ones that's uh, that's that's less certain will sell
Speaker 1: attle lower price. And what was the other dimension, the
Speaker 1: other new dimension you said you were just investment. It
Speaker 1: turns out reinvestment is that R and D or is
Speaker 1: that share buy backs and dividing. It can be all
Speaker 1: the people that companies, the companies that have the lowest
Speaker 1: return are those that have uh, small companies that have
Speaker 1: UM that are selling at high prices, that have low
Speaker 1: profitability measure and invest a lot of money. That's uh,
Speaker 1: those are the low profitability and are investing a lot
Speaker 1: of it. And those that's another dimension that actually just
Speaker 1: fairly well, well, we don't know. That's the ones that
Speaker 1: they're Okay, let me get the ones that are not
Speaker 1: profitable and they're investing a lot their returns that turn
Speaker 1: out to be horrible. It's okay, hemage in cash and
Speaker 1: they're not making Yeah, yeah, that's that's about one percent
Speaker 1: of the markets. And so even though we're not stock
Speaker 1: pickers where there's their behavior is so unusual that we've
Speaker 1: chosen not to invest in those. Uh so you're just
Speaker 1: screening them out as low quality and you want nothing
Speaker 1: to do with that, right, And then the reinvest aessement?
Speaker 1: How do you define reinvestments? UM? Just the normal UM
Speaker 1: R and D or it's everything all right, So let's
Speaker 1: let's go back a little bit to the University of Chicago.
Speaker 1: Because that was such a short segment, I didn't get
Speaker 1: a chance to answer you some questions. So the Booth
Speaker 1: School was was named. You made an unrestricted grant to
Speaker 1: them and At the time it was worth about three
Speaker 1: million dollars, but I suspect it was worth more because
Speaker 1: the structure of the deal was really kind of interesting.
Speaker 1: It was it was cash and a what was described
Speaker 1: as a considerable share of stock and mentional holdings, which
Speaker 1: is what owns um dimensional funds, and that has to
Speaker 1: be worth significantly more money today. Then when that that
Speaker 1: grant was made, what was the thinking behind that structure. Well,
Speaker 1: the structure was I I owed the university a lot.
Speaker 1: Uh you credit them with you are You've said this
Speaker 1: in many interviews. You credit them with opening your eyes,
Speaker 1: changing your life, responsible for your success. I mean these
Speaker 1: are your words. Yeah right, No, No, They've been a
Speaker 1: partner every step along the way, you know, working with
Speaker 1: Fall And then when we started the firm, Fama joined
Speaker 1: us as a director right away and founding shareholder. Then
Speaker 1: we went to uh, we had we created this mutual fund.
Speaker 1: Mutual fund has to have an independent board of directors. Uh,
Speaker 1: those are all there. All of our independent directors either
Speaker 1: teach at Chicago or half taught at Chicago. And when
Speaker 1: we started this was incredibly important because you know, we're
Speaker 1: operating out of my brownstone in Brooklyn, and and without
Speaker 1: a track record. So people sometimes ask how did you
Speaker 1: get those first clients? And I think we had I
Speaker 1: think we were reasonably persuasive, But I think a lot
Speaker 1: of it has to do with this association and we
Speaker 1: the people could see all these people, you know, farm Shoals,
Speaker 1: uh Miller, you know, it's an you know it's uh,
Speaker 1: that's right, Roder Ribertson, it's another one of your outside
Speaker 1: of it. So that's a tremendous amount of credibility between
Speaker 1: between the the nobel laureates and and everybody else. So
Speaker 1: so I owed him, and so the questions now structuring
Speaker 1: the deal then, Uh, I was long. I had a
Speaker 1: huge debt and a little cash because we hadn't really
Speaker 1: you know, it took a long time to get get
Speaker 1: to get profitability. So it's basically cut him in on
Speaker 1: an income stream, you know, uh, give him the income
Speaker 1: on on on some shares going forward, rather than I
Speaker 1: didn't write him a check for one big momp sum.
Speaker 1: It's uh, so they'll have it earned out as you described.
Speaker 1: And it's you know, in terms of the valuation, I
Speaker 1: never got involved in the valuation to begin with. I
Speaker 1: don't want to get involved in it now it is.
Speaker 1: This is what it is. There's a phrase I read
Speaker 1: about UM Chicago and and you described yourself. I'm looking
Speaker 1: in my notes as someone someone described Dimensional Funds as
Speaker 1: the applied brain trust of the Chicago School. Is that
Speaker 1: a fair statement? Well, we've we've Yeah, we are about
Speaker 1: implementation and really the application of the ideas. That is
Speaker 1: what the firm is about. And I can maybe it
Speaker 1: were stated a bit to say we were applying the
Speaker 1: brain power. I mean, there's well, I guess it's not
Speaker 1: too much of an overstatement. But how about applied think
Speaker 1: tank from the University of Chicago. Okay, there we go. Yeah,
Speaker 1: it's I think the important thing is we build a
Speaker 1: firm around a set of ideas. Most of those ideas
Speaker 1: were deal out and leading business schools, and and that's
Speaker 1: what we ask our clients to do is share you
Speaker 1: know that, uh, share are those ideas, that point of
Speaker 1: view and we can all work together. You mentioned Jim
Speaker 1: Lourie earlier. He developed the Chicago Center for Research and
Speaker 1: Security Prices with Lawrence Fisher or some people just call
Speaker 1: that CRISP for it's uh, how significant is that? It's
Speaker 1: amazing when you go to do some research and you
Speaker 1: you look for certain data. That's an amazing database. It
Speaker 1: is the only reasse is the research quality database that
Speaker 1: uh nearly all academics you who's in doing research, and
Speaker 1: its significance cannot be overstated. Because let's go back, uh
Speaker 1: to nineteen if you went around and asked people, what's
Speaker 1: been the historical rate of return on stocks? But what
Speaker 1: he knew? You know, all kinds of wild guests and
Speaker 1: some people get a zero. Some people say fifteen percent
Speaker 1: a year. I don't know what that is, but we
Speaker 1: could kill that. Um okay, that was That was an
Speaker 1: odd interruption that wasn't for us. Um let me if
Speaker 1: I can kill that. You're gonna pause this second? Is
Speaker 1: that this there? You go? Okay, I got it. It
Speaker 1: was It was one of the headphones started squawking at us.
Speaker 1: That's funny. That's never happened before. Um okay, because I'm
Speaker 1: not fine? No, so oh you know what I just did.
Speaker 1: I just turned on the phone again. Glad, This isn't live. Yeah, right, Charlie,
Speaker 1: you're gonna edit that out? And where wire we we're
Speaker 1: talking about Crisp Crisp. Yeah, let's go back to three.
Speaker 1: Have you asked people, um, what's been the long term
Speaker 1: performance of stocks the stock market? You know, what's been
Speaker 1: the rate of return? Nobody had a clue because nobody
Speaker 1: never collected the data. That's amazing that people did not
Speaker 1: know what the returns of the market, right. So Chris
Speaker 1: Uh did this study and found that I think for
Speaker 1: the period in long term performance has been like nine
Speaker 1: point three percent per year. And it's been it's been
Speaker 1: amazingly Uh, it's been about that in the years since
Speaker 1: sixty three, which is very unusual in economics to have
Speaker 1: something that I worked in one data set that shows
Speaker 1: up again very similarly in the next data set. It
Speaker 1: almost never happens. So so it's pretty consistent. And clearly
Speaker 1: it's a function of a number of factors that apparently
Speaker 1: um are are not changing. Well, that's right, and so
Speaker 1: and there was never back in those days, there wasn't
Speaker 1: a standard way of measuring your time weighted rate to
Speaker 1: return in other words, of you start with, you know,
Speaker 1: a certain investment, and then over the years you add
Speaker 1: and you had more money to it, take money out, whatever,
Speaker 1: and then he end up with a certain amount of money.
Speaker 1: The question is how calculating that rate of return adjusting
Speaker 1: for the flows is very complicated, and so that's one
Speaker 1: of the things that had to come. They had to
Speaker 1: be created. And so in nineteen sixty three, for example,
Speaker 1: there were no really there were no consulting firms that
Speaker 1: dealt in the business because there was no there was
Speaker 1: no standard way of measuring performance and doing performance measurement.
Speaker 1: So that's an industry that's just you know, exploded, uh
Speaker 1: in the last fifty years. That that's really amazing that
Speaker 1: we could call those the good old days, of the
Speaker 1: good old bad days. I can't imagine that they're just
Speaker 1: simply wasn't a history of of data. It's that's amazing.
Speaker 1: So so what does that mean for people like you know,
Speaker 1: Jeremy Siegill Stocks for the long run? When that came out,
Speaker 1: CRISP had already been around for a while, right, So
Speaker 1: so he's basically building on the work that that they
Speaker 1: had originally put together, right, and he he found data
Speaker 1: going back even even longer. But it's you know, if
Speaker 1: you ignore the history, you're doomed to relive it, I
Speaker 1: guess for sure. So I keep hearing people talk about
Speaker 1: we're in a low expected return environment. Stocks have had
Speaker 1: a great run bonds have had a great run, but
Speaker 1: everybody should throttle back their their expectations going forward. What
Speaker 1: what are your thoughts on that? Well, there's some loose
Speaker 1: evidence that there's a relation between let's say the overall
Speaker 1: price earnings on the market and and sous going returns.
Speaker 1: Have an interesting story of that. So the so I
Speaker 1: fam infringe to this research and ad at UH and
Speaker 1: their their their draft at the research um. We talked
Speaker 1: about in one of our board meetings that when dividend
Speaker 1: yields or lower price dividents are high, you know, uh
Speaker 1: if if valuation ratios are high, the expected returns are
Speaker 1: low in the market. So this was meeting we had
Speaker 1: in September of eighty seven. So I said to Genevama, so, well,
Speaker 1: does this mean we should At that time the evaluations
Speaker 1: were high. I said, does this mean we should do something?
Speaker 1: He said, oh no, no, all the variance around that
Speaker 1: is so high you don't really have any information. Uh.
Speaker 1: The next month was a crash of what's in the
Speaker 1: day between friends. Yeah, so he got he mistaken for
Speaker 1: being a market timer when he obviously wasn't trying to
Speaker 1: say that at all. Now, when he says the variance
Speaker 1: is so large. Is he just saying this is such
Speaker 1: a noisy series that we can't derive any information, right,
Speaker 1: That's it. So we know that higher PE is a
Speaker 1: little price here, and lower P and other metrics are
Speaker 1: less expensive. But there's only so much we could do
Speaker 1: with this. There's much much you can do with it.
Speaker 1: And you know, people frequently also ask a related question,
Speaker 1: which is, gosh, we're kind of at a peak in
Speaker 1: the market. Is this really a time to get in
Speaker 1: because we're all time high and you know, you would
Speaker 1: expect to be at all time high. I mean, that's
Speaker 1: just the kind of way markets work, something like I
Speaker 1: don't know, some big fraction. Most of the month ends, uh,
Speaker 1: historically have been at at historical highs. I did a
Speaker 1: column not too long ago. Yeah, I want to say
Speaker 1: in ten we started with the SMP five and the
Speaker 1: Dow got over the pre crisis highs, and people started
Speaker 1: writing articles that, oh, markets at a new high, it's toppy,
Speaker 1: it's dangerous. So we went back and looked at the data.
Speaker 1: It turns out that market is at or near highs
Speaker 1: much of the time, unless you're in a bear market
Speaker 1: where you're you know, the Dowd kissed a thousand and
Speaker 1: sixty six didn't get over it to lady two. But
Speaker 1: from eighty two to two thousand, you're you're making a
Speaker 1: series of fresh eyes every year. You know. We we
Speaker 1: talked about earlier about one unfortunate circumstance the person that
Speaker 1: got out at the bottom of the market when the
Speaker 1: money market funes now can't get back in. And the
Speaker 1: other there's a similar kind of related to person, the
Speaker 1: person that wants to invest. It's gonna wait for a
Speaker 1: crash before getting in and the market takes off now
Speaker 1: they go, well the trains are you left the station now? Now?
Speaker 1: So they they never seemed to uh get caught up.
Speaker 1: And that's emphasizes once again the importance of having a
Speaker 1: particular investment philosophy, usually translating into an asset mix, an
Speaker 1: asset allocation, and sticking with it. The psychology we hear
Speaker 1: from people with that is, look, I miss so much
Speaker 1: of this run. If I put my money to work now,
Speaker 1: I'll feel doubly stupid if the next day the market crashes.
Speaker 1: There there's almost this risk aversion like their investment is
Speaker 1: going to crash in the market. Well, there is kind
Speaker 1: of Murphy's law and translated into investing, which is, uh,
Speaker 1: you know, whenever I put the money and that's the
Speaker 1: that's going to be the peak of the market. As
Speaker 1: so break it up into four pieces and spreading and
Speaker 1: you don't have to worry about You don't have to
Speaker 1: worry what you want to do. I think talking to
Speaker 1: people for years is UH. And I counsel people you
Speaker 1: want to invest in a way and you can kind
Speaker 1: of relax. Markets are going to go up and down,
Speaker 1: that's what they do, and you shouldn't invest more in
Speaker 1: the market than you can. UH. Then you can accept
Speaker 1: and uh and just ride those ups and downs. That's
Speaker 1: the natural order of things. And over the long haul
Speaker 1: you're probably gonna be Okay, what what was the great
Speaker 1: JP Morgan quote? Markets will fluctuates, asking Congress where where's
Speaker 1: the market go? Markets will fluctuate, which is which I
Speaker 1: think is is a fair statement. Well, but speaking fairness
Speaker 1: is actually one of the things that needs to be
Speaker 1: emphasized a bit more in terms of what well this
Speaker 1: whole notion of fishing markets or equilibrium point of view
Speaker 1: of investing, it says that, um, if you take the
Speaker 1: profacial investor versus the average joe. They have the same
Speaker 1: expected outcome UH orient trading costs. I mean, maybe the
Speaker 1: institution can trade cheaper on it, but ignoring the costs,
Speaker 1: UH expected outcome UH for each is the same. That's
Speaker 1: about as fair as it life gets. In other words,
Speaker 1: it's not the case that the average Joe going in
Speaker 1: to invest or Jane, I don't uh, the average family
Speaker 1: has UH is not getting ripped off by the professional investor.
Speaker 1: I think that's really cool. That's one of the it's
Speaker 1: one of the implications. And that's why I think those
Speaker 1: of us to share this point of view, you know,
Speaker 1: I feel this kind of missionary zeal to spread the
Speaker 1: word that. There's been a number of discussions, a number
Speaker 1: of people have said, you know, individuals actually have an advantage.
Speaker 1: An individual doesn't have someone at the end of the
Speaker 1: quarter or these days the end of the month saying
Speaker 1: how'd you do? Why am I into performing the benchmark?
Speaker 1: Why an't you doing better? An individual can ride the
Speaker 1: ups and downs without somebody breathing down their neck. Well
Speaker 1: they can, but they don't. Yeah, I mean, uh, you know,
Speaker 1: it's um. One way to think about the market is
Speaker 1: just kind of and and the role of indexing. It's
Speaker 1: just simple arithmetic um index funds by a slice of
Speaker 1: the whole market. Uh, you know. And so since they
Speaker 1: buy just a slice of the market, then the non
Speaker 1: index portion, i mean, the active portion, has got to
Speaker 1: be buying a slice of the market because it's got
Speaker 1: to add up to the market. So by simple arithmetic,
Speaker 1: you know, the the active people are trading with themselves
Speaker 1: largely trading with each other more or less. Yeah, so
Speaker 1: it's a zero sum game and minus the costs. So
Speaker 1: so you mentioned diversification. What else should investors be thinking
Speaker 1: about things like asset allocation, stocks and and bonds as
Speaker 1: well as valuation? How how should they contextualize that? Well,
Speaker 1: I think first off they need to figure out it
Speaker 1: sounds some well, but what's the objective here? Is a retirement?
Speaker 1: Are you saving for uh, college or house? What? What is?
Speaker 1: And each of those he would manage the money is
Speaker 1: a little bit differently depending on what the objective is.
Speaker 1: That would be your tilt. So it's a little more
Speaker 1: stop or a little yeah, right, But it is about
Speaker 1: the an asset allocation and and and risk and and uh.
Speaker 1: And in the case of retirement, it's about maintaining a
Speaker 1: standard of living in retirement UH and UM. Having an
Speaker 1: objective of I want a certain retire income in retirement
Speaker 1: adjusted for inflation lead you to manage money a little
Speaker 1: differently than UH, than the typical firm, firm or person
Speaker 1: just seeking to maximize wealth. You know, you talked earlier
Speaker 1: about the upcoming retirement crisis we're gonna be facing. And
Speaker 1: I'm trying to remember the name of Charlie Ellis's book
Speaker 1: which was about that, just that subject, UM, which is,
Speaker 1: we have a day of reckoning coming and no one
Speaker 1: really seems to be prepared for it. And the math
Speaker 1: is pretty clear most Americans are not going to be
Speaker 1: able to afford a comfortable retirement without some radical change
Speaker 1: in their spending and saving behaviors. Yeah. I think I
Speaker 1: haven't checked out recently, but I think you can buy
Speaker 1: a real annuity has about a five percent yield and
Speaker 1: buy real annuity meaning that as long as you live it,
Speaker 1: it pays you that five percent adjusted for UH, you know,
Speaker 1: adjusted for inflation. Five. Yeah, and UM, so that means
Speaker 1: I mean, it's a simple math. You figure out how
Speaker 1: much you want to have multiplied by twenty and and
Speaker 1: that's what how much, that's how much you need, So
Speaker 1: let's go. We've talked a little bit about corporate governance
Speaker 1: earlier about poison pill adaptation. Um. There's some some agitation
Speaker 1: out of the SEC and and d C about the
Speaker 1: post financial crisis cities systatic systemically important financial institutions. How
Speaker 1: on earth did mutual funds which had nothing whatsoever to
Speaker 1: do with the last any of the last crisis either oh,
Speaker 1: seven oh eight or two thousand or I don't remember
Speaker 1: if mutual for other than the mutual fund timing scandal,
Speaker 1: which really had nothing to do with them being systemic. Um,
Speaker 1: How did how did mutual funds get dragged in? And
Speaker 1: what do you guys doing about this in terms of
Speaker 1: of that regulatory Can I call it overreach? Yeah you can? Okay, Yeah,
Speaker 1: it's um. Um. Somehow in the it seems like in
Speaker 1: rein the press one would I think that part of
Speaker 1: the reason we had a financial crisis was that we
Speaker 1: didn't have enough regulation or regular If there's any are
Speaker 1: any institution that are heavily regulated as banks and insurance companies,
Speaker 1: it's insurance. Other than a I G, which was kind
Speaker 1: of a unique creature. The rest of the insurance industry
Speaker 1: had nothing to do with this. And I'm a critic
Speaker 1: of hedge funds. They cost too much, most of them
Speaker 1: don't deliver on what they promised. But hedge funds didn't
Speaker 1: have a whole lot to do with this crisis either.
Speaker 1: But of all the entities in the world to finance,
Speaker 1: mutual funds were bystanders, they were observers. They had nothing
Speaker 1: to do with this. And there's no evidence that there
Speaker 1: was any kind of panic and it was that. No,
Speaker 1: I didn't, it's um, but there is there is a
Speaker 1: theory that we need to have a lot more regulation.
Speaker 1: I don't know why, but the mutual fund you know,
Speaker 1: the money sitting in a in a the assets are
Speaker 1: in a vault somewhere, but we're running off with them. Um.
Speaker 1: And I think they kind of helped prevent a bigger panic.
Speaker 1: You know, back in two thousand and eight, two thousand nine,
Speaker 1: if you recall those the the anxiety that was stress
Speaker 1: people were experiencing them, you know, that's uh. We were
Speaker 1: worried that people would panic and you know, rush for
Speaker 1: the door all at the same time. And it just
Speaker 1: didn't happen with mutual funds. It happened with people's individual moneys.
Speaker 1: But it didn't happen with h didn't happen with mutual funds,
Speaker 1: and especially you guys. You guys are notorious for having
Speaker 1: very long perspective and your financial advisors. Full disclosure, we
Speaker 1: own dimensional funds in in my office. But you know,
Speaker 1: we watched, we went through that whole training process. We
Speaker 1: know how you guys operate. It made us think that
Speaker 1: other advisors is always that sort of game of chicken. Well,
Speaker 1: I don't want to sell, but I gotta sell before
Speaker 1: that guy. You don't have that situation, no, don't. I
Speaker 1: think a lot a lot of it stems from the
Speaker 1: fact that there was, you know, one or two money
Speaker 1: market funds that had to break the bus. Sure, and
Speaker 1: that's what this is all about. They go, Okay, that's
Speaker 1: those are really that's really banking the Skuy's money market fund.
Speaker 1: And keep in mind, for tax reasons, they're always quoted
Speaker 1: as a dollar, whether we know it fluctuates up and down,
Speaker 1: so that's should be a relatively simple thing to fix.
Speaker 1: There's no such thing as risk free return, but that's
Speaker 1: what they were promising. I don't know why taxpayers are
Speaker 1: suddenly on the hook for backing people's risk investments. In
Speaker 1: money market. Hey, you could park your money in short
Speaker 1: term treasuries if you want risk free, low returns. So
Speaker 1: you think that, let me, yeah, I know, I mean
Speaker 1: I I'm on the same same So so you're about
Speaker 1: to say something about well, risk I mean that's that's Um,
Speaker 1: it's important as as ties into retirement. Uh, there's a
Speaker 1: retirement discussion. Treasury bills are riskless in the sense that
Speaker 1: there's really you're gonna get paid, and if it's short term,
Speaker 1: there's not much price risk. They are extremely risky when
Speaker 1: you think about a person retiring because uh, you know, um,
Speaker 1: and an example would be somebody retired twenty years ago.
Speaker 1: We probably got a five percent yield and they bought bonds. Now,
Speaker 1: whatever they're getting dependent on which bondy by you know,
Speaker 1: one too, maybe three. You have to reinvestment. And the
Speaker 1: risk is if you're getting a higher yield, you're also
Speaker 1: getting higher inflation. So there's a real risk that the
Speaker 1: value of your assets are going to be worth less. Right,
Speaker 1: So it's for a retired person, they can be actually
Speaker 1: pretty risky, which all points back to how underinvested much
Speaker 1: of America is in their own own retime. So this
Speaker 1: this leads to a couple of of questions that are
Speaker 1: on my list. What is hurting investors today? What are
Speaker 1: they doing that's getting in their own way? Well, I think, um,
Speaker 1: I haven't done. This is not science at all, but
Speaker 1: I think one of the concerns that I have is
Speaker 1: that people are desperate for yield and they look at
Speaker 1: at money market funds and basically a zero return. I mean,
Speaker 1: you know, uh, and they go, I gotta, I gotta,
Speaker 1: I gotta do something. I get a better yield than
Speaker 1: that you get on Greek bonds today, if that's what
Speaker 1: you really look. Yeah, so there we go. There we
Speaker 1: have a bracketed somewhere between treasury bills and Greek So
Speaker 1: people forget about the risk and they chase yield, and
Speaker 1: that leads to disaster. And you know, inflation, you know
Speaker 1: it's probably real interest rates are negative two you know,
Speaker 1: uh something like that, but meaning that we're zero and
Speaker 1: you throw in two percent. So once you get once
Speaker 1: you adjust that, you're you're really negative. Yeah. And when
Speaker 1: we started firm, I think interest rates were like fift
Speaker 1: and eighty one and inflation was like eighteen percent, so
Speaker 1: you have negative three percent. So yeah, so it's better.
Speaker 1: I mean, it's uh, the difference is, you know, no
Speaker 1: longer have bonds risk free rate to return at least
Speaker 1: nominally competing with equities. So that, to me, that explains
Speaker 1: a big chunk of why we have such elevated prices
Speaker 1: and equities. Yeah, so I think people are um maybe two.
Speaker 1: Maybe there's I haven't looked, I haven't seen any studies,
Speaker 1: but I'd be worried that people might be invested in
Speaker 1: too much inequities because of you know, the if you
Speaker 1: look at the dividend, yield's higher than the interest rate,
Speaker 1: which makes it seem like a free lunch. Well, we've
Speaker 1: seen a lot of people take assets that otherwise, under
Speaker 1: normal circumstances would have found that way to fixed income,
Speaker 1: and they say, let me just put into a dividend
Speaker 1: portfolio and I'll get my coupon and if this goes
Speaker 1: up and down, I don't worry about it. Some risk
Speaker 1: in that as well. Yeah, that's right. As long as
Speaker 1: the company is paying the dividends, you're okay. But you know,
Speaker 1: let's most of them don't pay dividends in so let's
Speaker 1: talk a little bit about um your perspectives. You've had
Speaker 1: a thirty plus year window since you launched dimensional Funds
Speaker 1: in eighty one. We're coming up on your thirty fifth anniversary. Yeah,
Speaker 1: next year. That's amazing. So what has changed, um, in
Speaker 1: your perspective? What what has changed in the industry and
Speaker 1: how has dimensional Funds changed along the way? Well, UM,
Speaker 1: I would say a couple of things. First off, we
Speaker 1: understand a lot more about what causes returns or where
Speaker 1: returns come from in this dimensionality, um. And the second
Speaker 1: aspect though, is really this movement towards indexing, you know,
Speaker 1: the ideas that were started in the academic world in
Speaker 1: the sixties that led to the creation of index funds
Speaker 1: in the seventies, you know, has really gained traction over
Speaker 1: there since the eighties. And it's really uh uh you know,
Speaker 1: I'm surprised it hasn't gotten you know, you know, more assets.
Speaker 1: It's amazing that it's taken half a century for something
Speaker 1: that a heres to be obvious to really have gotten on.
Speaker 1: Which leads to the next question, how much room is
Speaker 1: there for indexing to grow? What? What? It's not especially
Speaker 1: huge today, but how big is too big? Well, we
Speaker 1: don't know that, I mean at some point if but
Speaker 1: in general, index funds just take a provide of slice
Speaker 1: on everything, and so they're about they're the most neutral
Speaker 1: strategy out there as opposed to you know, somebody wanting
Speaker 1: growth or income or whatever they object. All of those
Speaker 1: slants that cause you to get away from the market
Speaker 1: have capacity constraints. But your your basic market index fund UH,
Speaker 1: you know, UH should be pretty neutral, could absorb kind
Speaker 1: of an untold amounts, lots of upside and and no
Speaker 1: ceiling anytime soon. Right, So here we are, we're six
Speaker 1: years into this bull market. There's plenty of skepticism out there.
Speaker 1: Why no euphoria? Why has the investing public I don't
Speaker 1: want to say shunned, but clearly they haven't jumped aboard
Speaker 1: this bull market the way they did in the nineteen nineties,
Speaker 1: well even the nineteen nineties. Uh, I don't know if
Speaker 1: they really jumped on or not. It seems to me
Speaker 1: like I've been in the business four or four years
Speaker 1: or whatever, I think, UH people are always there's always kept.
Speaker 1: People are always nervous. I mean that's good, which is good,
Speaker 1: you know, that's ah UM and markets being what they are,
Speaker 1: it seems like UH, prices over the long haul gets
Speaker 1: set fairly and people have a reasonable return of a
Speaker 1: if they stick with it. Not so, so let me
Speaker 1: go to now to my favorite three questions. These are
Speaker 1: the three that I ask all of my guests, and
Speaker 1: and the the answers are always so instructive. Someone coming
Speaker 1: out of we're not too far from graduation weekend all
Speaker 1: across the country, someone graduating college today, what sort of
Speaker 1: advice would you give them about their career and about
Speaker 1: their approach to investment. Well, a career, I'd say, follow
Speaker 1: your passion. I don't think I have any great new
Speaker 1: insights that you know, it's the standard bromides. I think
Speaker 1: in terms of investing, the key to investing is save
Speaker 1: a lot there you go, So start early and uh,
Speaker 1: you know through the the benefits of compounding over the
Speaker 1: long haul. Uh, it's a powerful force. Next question is
Speaker 1: you said you've been in the industry for forty four years.
Speaker 1: We talked about what you saw change over that time period.
Speaker 1: So let me change this question up. What changes do
Speaker 1: you think are coming over the next forty four years. Well,
Speaker 1: I think a couple of the trends that we see
Speaker 1: now we will continue. One is globalization. People. When I
Speaker 1: started in the business, it was we had the interest
Speaker 1: equalization tax. Another thing, it was very difficult to invest international,
Speaker 1: So I think that's changing, which is which is good. Um.
Speaker 1: The other is, uh is I think a very positive trend,
Speaker 1: which is a lot of the administrative costs and transaction
Speaker 1: costs are really coming down a lot. Kind of it's
Speaker 1: related to technology, so I'm sure. So I think the
Speaker 1: costs of investing are coming down, and I think that's
Speaker 1: uh more than just move it to indexing. But I
Speaker 1: think in general costs are coming down. So I think
Speaker 1: it's you know, you know, very encouraging. And then my
Speaker 1: last question, and this may um, you may be the
Speaker 1: only person this question doesn't apply to, but I'm gonna
Speaker 1: ask it anyway. What do you know about investing today
Speaker 1: that you wish you knew when you began forty four
Speaker 1: years ago? Well, and by the way, the reason I
Speaker 1: say it may not apply to you is you began
Speaker 1: with an idea that most people don't discover it til
Speaker 1: way late. So no, I mean that part of investing
Speaker 1: is what I wish I I UM new back then,
Speaker 1: is that what investing is about is as an overall experience.
Speaker 1: It's not just the science. Sure, you want good returns
Speaker 1: and that's but when it started out, I think I thought,
Speaker 1: if you can give people good returns, that's all you
Speaker 1: need to worry about. But it's also you're dealing with
Speaker 1: people and helping them get through difficult times like two
Speaker 1: thousand and two thousand nine and come out the other
Speaker 1: side with a with a consistent investment approach. I wish
Speaker 1: I knew you know that that was That's really uh,
Speaker 1: that's what it's really all about. It's the philosophy and
Speaker 1: a consistent approach so people can feel they need to
Speaker 1: not only have good returns, they need to feel good
Speaker 1: and not beat so stressed out and they don't you
Speaker 1: know that. I wish I had figured that out earlier
Speaker 1: on David, thank you so much for being so generous
Speaker 1: with your time. This was really a fascinating um discussion
Speaker 1: and I appreciate you spending so much time with us. Okay, well,
Speaker 1: thank you very much. You've been listening to Masters in
Speaker 1: Business on Bloomberg Radio with Barry Ridholts. We've been speaking
Speaker 1: with David Booth. He's the founder, chairman and co CEO
Speaker 1: of Dimensional Funds. David, if they want to find some
Speaker 1: of your research, will learn more about Dimensional funds. Where
Speaker 1: would they go on our website? You know it under
Speaker 1: dimensional dot Com or Dimensional fund Advisors. There you have it.
Speaker 1: I want to thank Mike Batnick for his help with research,
Speaker 1: Charlie Vollmer as my engineer, and thank you Sarah for
Speaker 1: recording this. I'm Barry Ridhults. You've been listening to Masters
Speaker 1: in Business. I'm Bloomberg Radio