WEBVTT - Bridgeway's John Montgomery Gives Away Half of Its Profits 0:00:02.240 --> 0:00:06.439 This is Master's in Business with very Ridholts on Bloomberg 0:00:06.519 --> 0:00:12.400 Radio this weekend. On the podcast, I have a fascinating 0:00:12.480 --> 0:00:15.080 guest and I think you'll really enjoy listening to him. 0:00:15.240 --> 0:00:19.960 His name is John Montgomery. He is a former UH 0:00:20.320 --> 0:00:27.319 civil engineer slash transportation engineer who decided to take his 0:00:27.440 --> 0:00:31.840 love of quantitative mathematics and apply it in the world 0:00:32.720 --> 0:00:37.640 of investing. If that isn't somewhat unusual enough of a background, 0:00:37.760 --> 0:00:41.200 he managed to put together not only a firm that's 0:00:41.240 --> 0:00:44.479 running eight and a half billion dollars, but a very 0:00:44.560 --> 0:00:50.160 unusual firm with as you'll hear, some very unusual qualifications, 0:00:50.200 --> 0:00:54.400 including the fact that Bridgeway gives away half of their 0:00:54.440 --> 0:01:00.280 profits to various charitable organizations every year. He also has 0:01:00.320 --> 0:01:04.600 some internal rules about um how much he can be 0:01:04.640 --> 0:01:09.560 compensated relative to the lowest compensated person in the firm. 0:01:09.600 --> 0:01:13.720 You know, thirty years ago, the CEO to factory floor 0:01:14.319 --> 0:01:17.839 ratio is something about five to one. UH it's now 0:01:17.880 --> 0:01:20.360 somewhere depending on whose numbers you use, two hundred and 0:01:20.400 --> 0:01:25.240 fifty to four hundred to one. At Bridgeway, the highest 0:01:25.240 --> 0:01:27.840 paid person and lowest paid person, it's a seven to 0:01:27.880 --> 0:01:32.880 one ratio that is really quite unusual. Their goals and 0:01:33.000 --> 0:01:36.600 focus and client customer service are just not what you 0:01:36.760 --> 0:01:41.640 typically here on Wall Street. And there their evidence base, 0:01:41.720 --> 0:01:45.480 their data driven. I think that they are not the 0:01:45.600 --> 0:01:47.720 usual farm. And that's why I wanted to have John 0:01:47.720 --> 0:01:51.440 on the show because his story and Bridgeway story is 0:01:51.480 --> 0:01:55.480 somewhat unique and kind of fascinating. So, with no further ado, 0:01:55.880 --> 0:02:04.040 my conversation with Bridgeways John Montgomery. My special guest today 0:02:04.280 --> 0:02:09.400 is John Montgomery. He is the founder of Bridgeway Capital Management, 0:02:09.760 --> 0:02:13.200 an asset management firm which is running eight point four 0:02:13.760 --> 0:02:17.639 billion dollars. Bridgeway is unique in a number of ways, 0:02:17.960 --> 0:02:23.200 perhaps most notably, the firm donates fifty of its profits 0:02:23.440 --> 0:02:29.000 to nonprofit organizations each year. John Montgomery, Welcome to Bloomberg. 0:02:29.120 --> 0:02:31.400 It's an honor to be here, Barry. So you have 0:02:31.520 --> 0:02:34.720 a really interesting background, and before we get to the 0:02:34.800 --> 0:02:37.760 asset management side, I have to talk a little bit 0:02:37.760 --> 0:02:43.240 about your education, which is someone unusual for someone running 0:02:43.240 --> 0:02:47.360 an asset management firm. Undergraduate, You're at swarth Mar and 0:02:47.440 --> 0:02:51.880 what are you studying there? Philosophy and engineering, okay, which 0:02:51.919 --> 0:02:55.520 is a good combination of things. A little left brain, 0:02:55.639 --> 0:02:58.680 right brain. It kind of works. And then you end 0:02:58.760 --> 0:03:00.920 up going to M I T and Harvard. What do 0:03:00.960 --> 0:03:04.919 you study there? Engineering at M I T. So that's 0:03:04.919 --> 0:03:08.040 where I had my background in statistics and quantitative modeling, 0:03:08.360 --> 0:03:12.800 and at Harvard I study business. And so you come 0:03:12.840 --> 0:03:18.359 out of that world essentially working in transportation engineering. That's right. 0:03:18.520 --> 0:03:21.200 That was my first career. But while you were at 0:03:21.280 --> 0:03:24.280 Harvard Business School, you you have written about and told 0:03:24.320 --> 0:03:28.080 the story of a for lack of a better word, 0:03:28.160 --> 0:03:32.160 and epiphany that you had there. Tell us about that. Well, 0:03:32.160 --> 0:03:36.160 I call it my my first behavioral finance insight. This 0:03:36.280 --> 0:03:40.160 was in UH and it was very early on in 0:03:40.200 --> 0:03:43.520 behavioral finance, so I didn't even know the field existed. UM, 0:03:43.600 --> 0:03:47.360 But I was at Harvard Business School really to um 0:03:47.640 --> 0:03:51.840 learn more fill in gaps in my knowledge base about 0:03:51.880 --> 0:03:55.160 business and specifically in transportation. I didn't have any idea 0:03:55.200 --> 0:03:57.200 at that point that I would go into finance, but 0:03:57.240 --> 0:04:00.360 I thought, while I'm at Harvard, I'll take a few 0:04:00.440 --> 0:04:04.040 investing courses and maybe turned back the opportunity cost of 0:04:04.560 --> 0:04:06.920 taking two years out of your life after you were 0:04:06.920 --> 0:04:11.000 already UM had some jobs. So did that. My grades 0:04:11.040 --> 0:04:13.560 said that I should have gone to Wall Street. Those 0:04:13.560 --> 0:04:16.600 were among my best grades in business school. But I 0:04:16.640 --> 0:04:20.040 was in one particular class one day where we were 0:04:20.080 --> 0:04:25.080 studying a quantitative method of investing, and I found that fascinating. 0:04:25.520 --> 0:04:27.719 And at the end of the class, the professor steps 0:04:27.760 --> 0:04:30.320 back from the blackboard and he kind of tugs on 0:04:30.400 --> 0:04:33.440 his beard and he says, so, who among the people 0:04:33.480 --> 0:04:35.480 in this class think that when you get out of 0:04:35.520 --> 0:04:38.880 school here and probably go to Wall Street, that you'll 0:04:38.920 --> 0:04:41.720 be beating this record? Well, this was a pretty fine record. 0:04:41.839 --> 0:04:43.680 It wasn't just beating the market. It was it was 0:04:43.720 --> 0:04:46.840 doing quite well in the hands and the class go up, 0:04:47.040 --> 0:04:49.839 and the immediate thought that I had was the twenty 0:04:49.960 --> 0:04:53.600 rule of the people think they can beat the market, 0:04:53.680 --> 0:04:56.159 but it's probably the other way around, and it's probably 0:04:56.279 --> 0:04:59.960 at that point not the UM that had the discipline 0:05:00.279 --> 0:05:02.600 to do it. And if you think about UM, you know, 0:05:03.200 --> 0:05:07.080 a top tier business school with very bright people. What 0:05:07.279 --> 0:05:09.600 has worked for them getting them to a certain place 0:05:09.640 --> 0:05:12.360 in life doesn't always work in investments. As a matter 0:05:12.360 --> 0:05:14.840 of fact, some of the dynamics of that works against you. 0:05:15.279 --> 0:05:18.599 Michael Mobus uncles that the paradox of skill, when you 0:05:18.680 --> 0:05:23.520 have an entire marketplace filled with very smart, very competitive people, 0:05:23.960 --> 0:05:26.520 they all kind of cancel each other out. Yes, So 0:05:26.640 --> 0:05:29.479 part of the dynamics of that that I thought was, Uh, 0:05:29.560 --> 0:05:32.120 if this is a microcosm of Wall Street five years 0:05:32.120 --> 0:05:35.960 from now, then using quantitative methods should help get you 0:05:36.040 --> 0:05:39.720 on the other side of that investment, which should have 0:05:39.839 --> 0:05:43.480 some benefits of efficiency and cost and some other things. 0:05:43.480 --> 0:05:46.200 So that that was just a seed planet for what 0:05:46.240 --> 0:05:50.960 would become Bridgeway uh some decade later. So that's still 0:05:51.000 --> 0:05:54.480 a pretty significant insight to look around a room full 0:05:54.520 --> 0:05:58.320 of really smart people and say, like Laby Lake will 0:05:58.400 --> 0:06:01.400 be gone, where all the children are above average, how 0:06:01.480 --> 0:06:04.400 is it possible that of the room thinks they're going 0:06:04.480 --> 0:06:07.200 to beat the market. If you want to see the 0:06:07.240 --> 0:06:10.120 same numbers come up, ask a room next time you're 0:06:10.120 --> 0:06:12.719 speaking in front of a group of people. Ask everyone 0:06:12.800 --> 0:06:15.520 in the room how many of them are above average drivers? 0:06:15.839 --> 0:06:18.080 And it's the same number. Eight in the hands go 0:06:18.120 --> 0:06:20.400 off And if you've been on the roads, you know 0:06:20.520 --> 0:06:23.440 that everybody seems to be below out. So Barry, my 0:06:23.520 --> 0:06:26.200 answer to that question, usually it's a humble was like, no, 0:06:26.320 --> 0:06:29.239 I'm not. Probably i'm not. And in business school I 0:06:29.279 --> 0:06:31.120 didn't think I was going to be in the top 0:06:31.160 --> 0:06:34.120 half of the class. But with respect to driving, I've 0:06:34.160 --> 0:06:37.000 never had a chargeable accident um and I've never had 0:06:37.000 --> 0:06:40.240 a moving traffic violation and never had a moving traffic 0:06:42.600 --> 0:06:45.080 So I always go back to the statistics, the logic, 0:06:45.120 --> 0:06:48.080 the data, the evidence. Evidence based investing is what we do. 0:06:48.120 --> 0:06:50.440 And and so that's a knee jerk reaction for me 0:06:50.600 --> 0:06:51.880 is like, well, let's just take a look at the 0:06:51.960 --> 0:06:54.719 numbers and see what So if you believe in mean regression, 0:06:55.120 --> 0:06:57.120 that would suggest you might be due for it, so 0:06:57.279 --> 0:06:59.760 that that could be true as well. And so you 0:06:59.760 --> 0:07:02.880 want differentiate when things do and don't regress to the 0:07:02.920 --> 0:07:06.040 main is their skill or just luck and driving this 0:07:06.920 --> 0:07:11.880 like investing, there's certainly both the and and like sports 0:07:12.120 --> 0:07:15.400 where you need a certain amount of skill to make 0:07:15.440 --> 0:07:18.320 it to the major leagues, but at that level where 0:07:18.600 --> 0:07:22.400 everybody is so skillful, luck becomes even more important. So 0:07:22.480 --> 0:07:26.480 how did you go from transportation engineering as a career 0:07:27.120 --> 0:07:30.520 to turning around and saying, Gee, that epiphany at Harvard 0:07:30.520 --> 0:07:34.280 Business School is something I really want to pursue. First 0:07:34.280 --> 0:07:37.440 of all, transportation is a service industry. I love service industries, 0:07:37.480 --> 0:07:42.520 and anytime anytime I'm experienced service that's uh subpar, I 0:07:42.560 --> 0:07:45.560 think there's a market opportunity there, whether it's a restaurant, 0:07:45.600 --> 0:07:48.280 a hotel, anywhere. Like if you're just doing a lousy 0:07:48.360 --> 0:07:52.960 job providing service, you're inviting competition. In UM. So I 0:07:53.080 --> 0:07:56.320 was in the transportation service industry, but I was also 0:07:56.360 --> 0:07:58.600 an investor in a couple of mutual funds setting up 0:07:58.600 --> 0:08:01.080 an I RA and think and like, you should be 0:08:01.120 --> 0:08:03.280 able to do better than this, not just the investment, 0:08:03.600 --> 0:08:06.800 the whole promin side, but the communications well you know 0:08:06.840 --> 0:08:09.360 the talked about just I had a dozen ideas for 0:08:09.440 --> 0:08:13.120 how you could um improve that industry. So UM at 0:08:13.160 --> 0:08:17.080 the time, I have an entrepreneurial spirit and hit a 0:08:17.080 --> 0:08:20.920 certain roadblock wall you could say, professionally in the transportation 0:08:21.360 --> 0:08:25.840 industry where I was trying to bring private sector incentives 0:08:26.160 --> 0:08:29.040 UM and some insights I had about how to reorganize 0:08:29.600 --> 0:08:34.040 city urban transportation bus systems in particular, took that to 0:08:34.080 --> 0:08:37.240 a certain level and UM and and then it was 0:08:37.280 --> 0:08:39.560 clear it wasn't gonna happen. The wall problem. I hit 0:08:39.600 --> 0:08:43.520 the wall. This was an opportunity to transition and do 0:08:43.640 --> 0:08:45.800 something that I've been doing as a hobby let's talk 0:08:45.800 --> 0:08:48.240 a little bit about some current trends and as we 0:08:48.280 --> 0:08:52.200 ease into quantitative investing, what you've been doing for a 0:08:52.240 --> 0:08:57.600 long time is essentially factor investing, which really today goes 0:08:57.679 --> 0:09:02.400 under the branding name smart Beta. Yes, so the first 0:09:02.520 --> 0:09:05.360 question is how did you manage to find your way 0:09:05.520 --> 0:09:08.640 into that methodology and what do you think of the 0:09:10.000 --> 0:09:12.439 rise of smart beta today. Well, first of all, the 0:09:12.720 --> 0:09:16.720 name smart beta kind of revels my feathers. Sum so, uh, 0:09:16.760 --> 0:09:20.840 you know, it's data. It's there's nothing human or or 0:09:21.000 --> 0:09:24.079 or um. There's nothing smart or beta about it. Well 0:09:24.120 --> 0:09:27.160 maybe beta, you can you can argue beta or alpha 0:09:27.360 --> 0:09:29.600 or you know, a different system of looking at it. 0:09:30.080 --> 0:09:32.440 But the smart part sounds to me like a bunch 0:09:32.480 --> 0:09:35.079 of guys in a room of marketing trying to figure 0:09:35.080 --> 0:09:37.720 out how to sell something. It's good branding, and I 0:09:37.760 --> 0:09:40.880 think everybody and there's and there's nothing wrong with branding, 0:09:40.920 --> 0:09:43.040 but um, you know, we want to we we go 0:09:43.120 --> 0:09:45.679 first to the substance of it. So well, first of all, 0:09:45.720 --> 0:09:48.480 we didn't call it factor investing twenty five years ago, 0:09:48.679 --> 0:09:52.600 but absolutely applying quantitative methods to the process of investing 0:09:52.840 --> 0:09:55.480 and then figuring out as many different ways to apply 0:09:56.160 --> 0:09:59.960 numerical methods as possible. So that's not just the deciding 0:10:00.080 --> 0:10:03.160 which stocks to stay away from and which you're adding 0:10:03.200 --> 0:10:06.800 to a portfolio to UM produce a certain design and 0:10:07.200 --> 0:10:10.080 results that you're going for. But it's also think things 0:10:10.200 --> 0:10:15.120 like transaction cost managing every other aspects of cost. UM 0:10:15.160 --> 0:10:18.440 the business side, strategy side, we like UM what we 0:10:18.480 --> 0:10:23.280 call evidence based worldview at Bridgeway. So if you're using 0:10:23.360 --> 0:10:29.600 quantitative methods for what we now call factor investing Fama, French, etcetera. UM, 0:10:29.640 --> 0:10:33.240 were you ever playing with the idea of individual stock 0:10:33.280 --> 0:10:37.600 picking or was it always a mathematical screen. We don't. 0:10:37.800 --> 0:10:41.240 We don't purchase individual stocks. We buy groups of stocks. 0:10:41.080 --> 0:10:45.000 And so that is key to UM factor based investing 0:10:45.080 --> 0:10:49.640 in an evidence based worldview. And so that leads to 0:10:49.720 --> 0:10:53.160 the important question, what is it that drive stock performance 0:10:53.280 --> 0:10:57.640 over the long term? So the stock market has to 0:10:57.679 --> 0:11:01.160 follow the economy long term. UM. The problem is in 0:11:01.160 --> 0:11:04.280 the short term it absolutely doesn't. There are two things 0:11:04.320 --> 0:11:07.640 we think that drive returns. One is risks. So in 0:11:07.679 --> 0:11:10.520 the beginning twenty five years ago, definitely had a risk 0:11:10.559 --> 0:11:14.479 based worldview, and and Eugene Fama was a major contributor 0:11:14.520 --> 0:11:17.680 to my thinking on that. Uh. I took a year 0:11:17.679 --> 0:11:20.520 and a half off before founding Bridgeway to do research 0:11:20.920 --> 0:11:24.480 on the quantitative methods I've been using individually, writing a 0:11:24.480 --> 0:11:29.600 big business plan for Bridgeway and and learning more. UH 0:11:29.760 --> 0:11:32.200 the the let me let me interrupt you there, because 0:11:32.240 --> 0:11:35.720 I find that fascinating. You're you're working in a field, 0:11:35.840 --> 0:11:39.560 you're fairly well compensated, but you hit the wall and 0:11:39.640 --> 0:11:42.200 you instead of saying I'm going to just switch jobs 0:11:42.600 --> 0:11:45.400 or even switch careers, you say I'm going to take 0:11:45.440 --> 0:11:47.840 a year off and think about what i want the 0:11:48.000 --> 0:11:51.520 next phase of my life to be. Is that a 0:11:51.600 --> 0:11:53.800 fair descript That's right? And I had I had a 0:11:53.840 --> 0:11:56.000 model for that. There was a mayor of Houston, Bob 0:11:56.120 --> 0:11:58.880 Lanier at the time, who had four different careers and 0:11:58.880 --> 0:12:01.000 every time he switched to ears, he took a year 0:12:01.040 --> 0:12:03.360 off to study the heck out of the next thing 0:12:03.920 --> 0:12:06.000 that he was doing, and he's very thoughtful about it. 0:12:06.000 --> 0:12:09.160 And I thought that was a fascinating idea. UM Let 0:12:09.200 --> 0:12:13.360 the record reflect that the guests used the word fascinating 0:12:13.440 --> 0:12:17.520 multiple times before I did. I always get emails making 0:12:17.559 --> 0:12:21.640 fun of my over alliance on the word fascinating. But 0:12:21.840 --> 0:12:24.840 I find things fascinating, as do you. So I'm glad 0:12:24.880 --> 0:12:28.400 you you brought that up. UM. So that's pretty interesting. 0:12:28.440 --> 0:12:32.920 Four separate careers, and you based this decision making on 0:12:33.280 --> 0:12:36.200 that model. That's correct. And so when you spent the 0:12:36.280 --> 0:12:41.280 year researching quantitative finance and running an asset management firm, 0:12:41.760 --> 0:12:44.120 where did that lead you? How that was? That was? 0:12:44.200 --> 0:12:47.080 That period was when Family French published their seminal paper 0:12:47.720 --> 0:12:50.360 on value and building. So so we had, you know, 0:12:50.440 --> 0:12:54.719 early nineteen eighties, uh small the small size effect. It 0:12:54.760 --> 0:12:57.559 had been around why and I was fascinating premium, it's 0:12:57.559 --> 0:13:01.640 absolutely but the value part was really resonated with me. 0:13:02.000 --> 0:13:05.400 The thought, you know, I'm buying a refrigerator. It's one 0:13:05.440 --> 0:13:08.840 place or another place, and if it's basically the same refrigerator, 0:13:08.840 --> 0:13:11.280 there's some way to figure out that they're comparable. I'm 0:13:11.280 --> 0:13:14.120 gonna go for the lower price. That just resonated with 0:13:14.160 --> 0:13:16.960 me and made sense that that would work. And there 0:13:17.000 --> 0:13:20.920 was a risk based world UM framework for that that 0:13:20.960 --> 0:13:24.560 I really bought into. And it wasn't until probably fifteen 0:13:24.720 --> 0:13:28.880 ten ten fifteen years later that I started reading more 0:13:29.080 --> 0:13:31.680 and thinking about the behavioral insights, and there was one 0:13:31.760 --> 0:13:34.679 factor that really put me over the top on that. 0:13:35.240 --> 0:13:38.280 Explain that's the low volatility factor. So if you think, 0:13:38.320 --> 0:13:41.400 if you have a risk based worldview and you think, okay, 0:13:41.480 --> 0:13:46.040 value stocks are more volatile in some sense, they're riskier, um, 0:13:46.320 --> 0:13:49.120 so they should liquid less, go through the number of 0:13:49.160 --> 0:13:51.720 things they should do, you know, as a group better 0:13:51.880 --> 0:13:55.320 in the long term size, same thing. If you've got 0:13:55.360 --> 0:14:00.480 fewer products, uh, less diversification, less act access to the 0:14:00.520 --> 0:14:04.160 capital markets, that's more risk absolutely, and then it makes 0:14:04.160 --> 0:14:06.439 sense that you would have higher returns over the long 0:14:06.559 --> 0:14:11.400 term with that. But the but the low volatility factor 0:14:12.040 --> 0:14:15.239 turns that on its head, and and what was remarkable 0:14:15.240 --> 0:14:17.360 to me was that it wasn't a bigger problem for 0:14:17.440 --> 0:14:21.800 more people that the low volatility stocks did better in 0:14:21.840 --> 0:14:25.160 the long terming wait a minute. We talk about measuring risk, 0:14:25.280 --> 0:14:27.400 and we can go into a lot of detail on 0:14:27.400 --> 0:14:30.040 what's risk, but most common way to measure risk and 0:14:30.080 --> 0:14:34.920 academia standard deviation of returns, specifically measuring the exact same way. 0:14:35.000 --> 0:14:39.480 The low volatility is less risk by definition and should 0:14:39.480 --> 0:14:41.880 do less well over the long term. But the reverse 0:14:41.960 --> 0:14:45.520 is true. Why is that you can't In my mind, 0:14:45.560 --> 0:14:48.200 it was just a complete short circuit that those two 0:14:48.280 --> 0:14:51.040 things don't go together. If that's true, something else must 0:14:51.080 --> 0:14:54.280 be driving these stocks. What is that? And I think 0:14:54.280 --> 0:14:58.320 that's behavioral finance. So a lot of people focus on 0:14:58.360 --> 0:15:01.240 the models, but they don't pay that close attention to 0:15:01.280 --> 0:15:07.160 the execution of these models. How can you take advantage 0:15:07.320 --> 0:15:12.840 of of ability to execute, ability to perform versus just 0:15:13.120 --> 0:15:16.320 the plain old algorithm. Well, the first of all, the 0:15:16.360 --> 0:15:19.720 algorithms are built by people, so there's a very strong 0:15:19.840 --> 0:15:22.760 human component to that. And the models are only as 0:15:22.800 --> 0:15:25.800 good as the modeling process that you've got, So that 0:15:25.800 --> 0:15:29.080 would be um where I start. I think there are 0:15:29.160 --> 0:15:32.760 huge advantages to machines being able to process huge amounts 0:15:32.760 --> 0:15:36.840 of data. So that's the key advantage there. And we're 0:15:36.920 --> 0:15:41.320 learning more all the time about technology and artificial intelligence 0:15:41.360 --> 0:15:44.360 and where that might go. Let's talk a little bit 0:15:44.400 --> 0:15:49.200 about your corporate culture, and I find some things about 0:15:49.200 --> 0:15:53.240 Bridgeway quite fascinating. First, eight and a half billion dollars 0:15:53.320 --> 0:15:56.960 is a nice chunk of money. You're somewhat under the radar. 0:15:57.120 --> 0:16:01.440 Is that a conscious decision or is that just happenstance 0:16:01.480 --> 0:16:05.120 of being in Houston? I would say both. Early on, 0:16:05.280 --> 0:16:08.680 we had some thought of being about substance and not fluff, 0:16:08.960 --> 0:16:12.400 and that has continued in our culture and worldview and 0:16:12.600 --> 0:16:18.000 obviously the other giants issue. It's unusual to see a 0:16:18.080 --> 0:16:22.440 finance company that gives away half their profits to charity 0:16:22.480 --> 0:16:24.880 each year. Tell us a little bit about how that 0:16:24.960 --> 0:16:28.480 came about and uh, how you execute on that well, Barry, 0:16:28.480 --> 0:16:31.240 I'd say naivete has worked pretty well for me in life. 0:16:31.520 --> 0:16:34.720 So I got married at twenty one. That's not the 0:16:34.800 --> 0:16:38.480 statistics on that are not great. Um. Uh, statistic would 0:16:38.520 --> 0:16:41.320 say wait a while, get more life experience. But it 0:16:41.360 --> 0:16:44.360 was awesome for me. I'm married to um, the love 0:16:44.360 --> 0:16:47.280 of my dreams for forty years now. Just celebrated to 0:16:47.320 --> 0:16:51.920 fort anniversary. I think you just celebrated, um, So that's 0:16:51.960 --> 0:16:55.760 worked out great. Also, when I was founding Bridgeway, we 0:16:55.960 --> 0:16:59.480 we had some concern my wife and I about if 0:16:59.520 --> 0:17:04.000 professorly we were successful as I had been over the 0:17:04.040 --> 0:17:06.840 prior six years individually with the model that I had. 0:17:06.920 --> 0:17:08.840 This is a quantitative model, so you didn't have to 0:17:08.920 --> 0:17:11.200 hire an army of analysts, so it was a low 0:17:11.240 --> 0:17:15.520 cost strategy aspects that of modeling that we had worked 0:17:15.520 --> 0:17:18.359 with for some time. Then it should be a cash 0:17:18.359 --> 0:17:21.840 cow in the investment advisory business. There's no accounts receivable. 0:17:21.880 --> 0:17:25.399 There's no accounts because people you manage money, you have 0:17:25.440 --> 0:17:29.879 their money. There's no inventory except computers, which are actually 0:17:29.920 --> 0:17:33.440 pretty cheap these days. There's no It's an amazing cash 0:17:33.480 --> 0:17:35.399 cow business. And we thought, so what would you do 0:17:35.480 --> 0:17:38.840 with those resources? And we actually had some concern twenty 0:17:38.840 --> 0:17:40.919 five years ago that that could be a problem in 0:17:41.000 --> 0:17:44.080 raising kids and the environment within which we raised more 0:17:44.080 --> 0:17:46.119 money is not always good in spite of the fact 0:17:46.200 --> 0:17:49.440 what we do for living is is managed money. So 0:17:49.880 --> 0:17:52.800 we thought, had the naive thought of giving half away, 0:17:52.840 --> 0:17:57.439 there'd be less around. Interestingly, about ten years into the 0:17:57.520 --> 0:18:01.199 process of of Bridgeway capital manage I had the thought, well, 0:18:01.280 --> 0:18:03.880 that didn't work out at all. The money that's left 0:18:03.960 --> 0:18:06.280 when you're that generous and you build it in the 0:18:06.320 --> 0:18:09.160 fabric of a company and you are able to hire 0:18:09.520 --> 0:18:13.359 and retain inspired people, the benefits of that to the 0:18:13.359 --> 0:18:15.719 company far outweigh the half that you give away. So 0:18:15.760 --> 0:18:18.600 we actually that was a bust. I figured out at 0:18:18.680 --> 0:18:20.760 ten years is much more powerful when you have a 0:18:20.800 --> 0:18:24.240 generous spirit. So, in other words, giving away money ended 0:18:24.320 --> 0:18:26.879 up generating too much in return for yourself. Is that 0:18:27.040 --> 0:18:29.840 is that what I'm hearing too much? You know? Okay, 0:18:29.920 --> 0:18:32.879 So the expect more than expected for sure, and you 0:18:32.960 --> 0:18:37.240 also do something else that's kind of unusual. Your compensation 0:18:37.480 --> 0:18:42.600 as chairman is limited to seven x the lowest paid employee. 0:18:42.640 --> 0:18:44.840 Am I getting that correct? So we now talk about 0:18:44.880 --> 0:18:48.280 that is our stewardship imperative. So if you're a new 0:18:48.320 --> 0:18:51.639 person coming into Bridgeway, of the conversation goes something along 0:18:51.680 --> 0:18:54.679 these lines. One, We're here to make a difference in 0:18:54.720 --> 0:18:57.920 the world. And that's that's really cool about for our 0:18:58.000 --> 0:19:01.119 clients first, because that's why we're here for our fellow 0:19:01.280 --> 0:19:04.240 partners each other. And that's partners is the word we 0:19:04.320 --> 0:19:06.439 use for all the staff um with a full time 0:19:06.560 --> 0:19:09.840 and long term commitment at Bridgeway and also the communities 0:19:09.840 --> 0:19:13.080 that we live in. However, we expect everybody to engage 0:19:13.080 --> 0:19:15.680 in that. And and if you look back over forty 0:19:15.760 --> 0:19:18.240 years of compensation in the US, it's pretty clear to 0:19:18.280 --> 0:19:19.960 me that things have gotten out of hand at the 0:19:20.000 --> 0:19:22.239 top end. I just didn't want to get caught up 0:19:22.280 --> 0:19:25.600 in that. It Bridgeway and actually it's a pretty great 0:19:25.640 --> 0:19:28.719 screening tool for if you if you put at one 0:19:28.800 --> 0:19:31.720 end of the spectrum, greed and a lot of things 0:19:31.760 --> 0:19:34.800 that the finance industry is criticized for. And at the 0:19:34.800 --> 0:19:38.000 other hand, generosity and making a difference in life at 0:19:38.000 --> 0:19:40.119 the other end of the spectrum. It's pretty great to 0:19:40.119 --> 0:19:41.760 be able to say, if you want to make seven 0:19:41.800 --> 0:19:45.359 figures and you're about generating you know, personal wealth at 0:19:45.359 --> 0:19:47.159 the high end, you won't come to Bridgeway like there 0:19:47.160 --> 0:19:48.720 are other places to do that. We don't make any 0:19:48.800 --> 0:19:52.359 value judgments about that. We just think that life is 0:19:52.359 --> 0:19:56.359 about um more and if you take that attitude in worldview, 0:19:56.480 --> 0:20:01.080 it's incredibly powerful. You also have a requirement that all 0:20:01.160 --> 0:20:05.680 the staff members are shareholders in Bridgeway and they are 0:20:05.880 --> 0:20:11.000 unable to make investments outside of the firm. UH. Does 0:20:11.040 --> 0:20:14.480 that include the firm's investment portfolios? How do you? How 0:20:14.520 --> 0:20:17.000 do you manage that? So two things. One, we have 0:20:17.040 --> 0:20:20.480 what we call a partner stock ownership, which is typically 0:20:20.520 --> 0:20:23.880 referred to as an esop so UM all the UH 0:20:24.240 --> 0:20:30.119 full time UH people at Bridgeway. UH currently about of 0:20:30.160 --> 0:20:33.160 your W two goes to buy stock in the advisory firm. 0:20:33.200 --> 0:20:35.480 And that's across the board. That's not typically a firm 0:20:35.480 --> 0:20:38.960 our size. The top five people or so would have stock. Uh. 0:20:38.960 --> 0:20:42.680 This is broadly based across the full spectrum of salaries. 0:20:43.160 --> 0:20:45.720 Some people thinks like, oh, so you have an ownership culture. 0:20:45.840 --> 0:20:48.800 We say, yeah, they're aspects of that. So yes, you 0:20:48.840 --> 0:20:51.720 want to you know, treat costs as you know your 0:20:51.800 --> 0:20:54.600 cost and but we we like to focus on the 0:20:54.640 --> 0:20:58.840 stewardship aspect of that. There's a there's an asset resources 0:20:58.840 --> 0:21:02.720 that we've been entrusted with on behalf of our clients, 0:21:03.240 --> 0:21:05.880 on behalf of the public good. When you talk about 0:21:05.880 --> 0:21:08.520 the foundation, we want to do an excellent job with that. 0:21:08.520 --> 0:21:12.040 That's the focus um and we think that comes back 0:21:12.080 --> 0:21:16.119 in in multiple ways. Let's talk a little bit about 0:21:16.200 --> 0:21:20.840 the modern world of investing. We see index funds taking 0:21:20.880 --> 0:21:27.560 assets from active managers. You're experiencing the opposite. You're seeing inflows. 0:21:28.400 --> 0:21:32.399 What are you doing to attract assets when most non 0:21:32.520 --> 0:21:37.280 index funds are seeing outflows. Well, certainly we're experiencing that 0:21:37.320 --> 0:21:39.639 in some places at Bridgeway. First of all, we do 0:21:39.720 --> 0:21:42.600 have our own proprietary index fund. It's it's non market 0:21:42.600 --> 0:21:45.920 cap weighted, has some really cool I'm an engineer by back, 0:21:46.119 --> 0:21:49.080 really cool design features that we've executed. We just celebrated 0:21:49.080 --> 0:21:53.920 twenty years. What makes that index unique and what led 0:21:53.960 --> 0:21:58.720 you away from cap waiting research research is what we 0:21:58.920 --> 0:22:02.680 live and breathe and do for living on the investment team, 0:22:02.960 --> 0:22:06.199 market cap weighted index. The more stock goes up, the 0:22:06.200 --> 0:22:08.920 more money you throw at it. That's a momentum strategy. 0:22:08.920 --> 0:22:11.000 There's nothing wrong with momentum. It works of the long 0:22:11.080 --> 0:22:14.400 term except well that's true. But but the main thing 0:22:14.440 --> 0:22:16.359 is you have to you have to you have to 0:22:16.440 --> 0:22:19.560 sell it over relatively short period of time, probably you know, 0:22:19.600 --> 0:22:21.879 somewhere between three months and twelve months. If you just 0:22:21.920 --> 0:22:23.840 hold on forever, then it goes up and then when 0:22:23.840 --> 0:22:27.120 it falls, you go down. That's a very inefficient structure. 0:22:27.520 --> 0:22:29.680 So with that insight, we went back and said, okay, 0:22:29.760 --> 0:22:31.960 is there is there a different structure. We studied a 0:22:32.040 --> 0:22:34.680 number of them. This was you know, twenty plus years 0:22:34.680 --> 0:22:38.439 ago now, UH and a very basic equal what we 0:22:38.480 --> 0:22:43.760 call roughly equal waiting strategy. UH has some really cool 0:22:44.000 --> 0:22:49.600 risk statistics. So over the entire time frame since inception, UM, 0:22:49.640 --> 0:22:52.879 you know, call it kind of flat between our fund 0:22:53.280 --> 0:22:56.280 our strategy in the Blue Ship thirty five area and 0:22:56.800 --> 0:23:01.200 SMP five fund. But the risk characteristic are really cool 0:23:01.880 --> 0:23:06.359 at that the ten worst downturn quarters of the SMP 0:23:06.480 --> 0:23:09.480 five hundred we've out we've provided cushion and nine of 0:23:09.480 --> 0:23:11.840 those So there's something special going on. And I think 0:23:11.840 --> 0:23:15.919 that relates right back to momentums with no hold period. 0:23:16.000 --> 0:23:19.000 Just spinning it out is not a great strategy. That's 0:23:19.040 --> 0:23:21.359 what a market cap waiting is. So you have to 0:23:21.359 --> 0:23:23.920 be really careful about when you use market cap waiting 0:23:24.000 --> 0:23:26.879