Tune Out the Noise | Documentary Film

early on we started doing a few videos who was we dimensional I didn't think the camera

was running I told him I put myself through college selling shoes I was a commissioned

salesman there was a huge incentive to make a sale but when I went home at night I wanted to feel good about myself women would ask how did this youe

look on them and I would tell them I don't think that's your best look I mean you don't have to say oh give me a break that's awful no you learn how to

say it you know nicely people when they get out of school they think that you have to shade things you have to lie you okay you have

to lie my experience has been just the opposite and I learned that from selling shoes it's influenced my whole

career particularly at dimensional it's this belief system that we have about how markets work and how investing

Works before the 1960s that point of view was never expressed anywhere total paradigm shift and the way we approach finance and

investing if you look at leading academics one of the overwhelming characteristics is is a Pursuit Of Truth being honest with what you know and what you don't

know if you look at Financial pages and listen to financial news every day everything is chaotic there's nothing systematic going

[Music] on there is an underlying order to all this chaos the market is a big information processing machine if you're going to

beat the market you got to be faster than than everybody else in the market try to out guess the market is more like gambling it's not

[Music] investing instead of pulling your hair out and watching financial news all day long tune out the noise instead of out guessing the market

let me make all these thousands or millions of people that are investing let them work for me I'm just going to sit back and let them duke it out market prices have to be set in a

way that induces people to come in to want to invest that's all it's going on in the [Music]

market that sounds so simplistic but it can't be any other way I was born at a very young

age my father died when I was five he had a ruptured aorta and he died on the table in April

of 1950 and I remember standing in the bedroom across the bed from him and I had these winter pajamas on and I said Daddy are you going to die and he said

no I'm not but he died that [Music] night my mother decided she couldn't handle us so 2 years later we went into

the same Aran AG in St Louis we had 30 German nuns from Hitler's Germany and they ran the

place and we didn't screw around so there were four children yeah I two older sisters and in order just to save everything she had to put you in an

orphanage right she had to it was the right decision we didn't appreciate it at the time but I've grown up and learned to appreciate it

graduated from high school and went to a Catholic Seminary for 3 years went to St Louis University graduated from there with majors in

philosophy and finance and I worked for about 10 months got drafted was in the Army for one year 9 months and 11 days this is the time of

Vietnam this is the time of Vietnam this is 1970 my vision was so bad they said you can't go into combat unless you specifically

wave this restriction and your eyes are so bad we're not going to ask you to I ended up in the Finance

Corp then went back to St Louis work that summer and then went off to Chicago that fall one of the first courses I took was

Martin Miller's course in eon economics in his first class he explained this notion of efficient markets I remember sitting there

thinking this has got to be true this is the organizing principle for all of the market

data this makes everything make [Music] sense David and I both knew it we hadn't gone to Chicago then we wouldn't be here

today we're in the right place at the right time when you were in Kansas did you know that you were going to go into Finance I wanted to major in

everything every course I took I loved eventually settled on economics and math got my ba and 1968 at the height of

the Vietnam War I had no long-term plan cuz I was assuming that when I graduated I would get [Music] drafted did you know people who were

drafted and sent to Vietnam yeah I get Tey I get too far into [Music]

this I graduated from high school in ' 64 for a lot of kids went into the armed services right out of high school cuz that's the only way they could afford to

go to college and some of them didn't come back when I got out of college I got another student

affirm which was great except hadn't applied any graduate school for anything the following Monday is enrollment week at the University of Kansas so I I hustle up to Kansas

Thursday I applied to the business school I get accepted on Friday and on Monday I enrolled and I took this Finance

course zowi I think I want to be a professor I decided to apply to the PHD program at the University of Chicago by that time the draft board had

figured out their mistake and they were hot after me dday comes draft day this enormous

Hall packed with people then you come to a chief medical officer thumbs up or thumbs down you're in or you're out and goes you know if

I'd rejected you what were you going to do I said I'd been accepted to the PHD program at the University of Chicago he says I've decided to reject you for a

year so he scratches out the approval circles me and signs it gives me back my folder that is a life-changing

moment packed up my car and drove to Chicago first class first day was F's class I hadn't really thought about

financial Theory before the way if I went through it it all made sense to me it wasn't until later I found out that nobody believed that stuff the real world was challenged by

that way of thinking but it all made total sense in 1969 none of these professors had received a

Nobel but half a dozen of them or so became Nobel laurates these are legends and they were just floating around the

[Music] department at toughs I had been a French major I got sick of French why'd you get sick of French well

I mean how many times can you hash over voler there was nothing new in it I took economics course and I loved it and I was pretty good at it my

professors were reading my exams to the class so I applied to the University of Chicago and I didn't hear from them

finally I called it was like April the DEA students answered he said well I I tell you the bad news is I don't have a record of your application what kind of

grades do you have and I said all A's he says okay we have a scholarship for somebody from T do you want it so that's how I came to the University of

Chicago My Generation came along at the right time data was starting to be generated it was like shooting fish in a

barrel nobody had touched the data so whatever you did was new [Music] but this idea that the information about

the market is contained in the market where did that come from I coined the term a lot of people

at the time started testing whether prices moved randomly well the returns were predictable didn't look like they were

predictable and I kind of codified the whole thing into a theory efficient markets is basically the statement markets

work prices are [Music] right the nut to crack was you couldn't really test whether the prices were right unless you told me what right

meant what was risk and what was expected returns [Music] but did you realize that you were

challenging how investing was done oh absolutely that was fun I was a poor kid from Malden

so it was fun to challenge the big guys if you go back to the early 60s to Investment Management it was all active people were all trying to beat the market all

claiming they could beat the market but no evidence was ever presented they didn't know how to attack what we were showing with the data they

were just claiming they were the ones that could pick the stocks now testing it's not that easy because you have to be able to distinguish between luck and skill if I

take all the active manages some of them are going to look good on a purely luck basis and some of them are going to look bad purely on a luck

basis but if you look after fees and expenses then they're awful you may have driven a stake into

its heart but that model persists does it not it's easy to explain they think that

there must be people with special skills in investing and to defeat such a mindset you show the data you let him do it and then you show the

data and the data tells us probably your results were random there's a lot of Randomness in

life I was very interested in finance I wanted to go to the University Chicago they wanted someone to be a comp computer

programmer I said I know nothing about computers and they said well don't worry about it you're the number seven computer programmer for the summer she'll pick it up from others I arrived

in the office the first day no other programmers showed up result of all this was the most fantastic happen

stance The Faculty would come in and ask me to do research for them [Music] if I would be able to achieve results

for them their eyes would light up they would be just ecstatic at the end of the summer when they said would you like a scholarship to go into the PHD program I

don't know whether it was because of the ideas that I gave them along the way or because they needed a computer programmer and the six that were before me never showed

up I really became enamored with trying to understand understand Financial [Music] economics I spent many hours in the

library reading books on finance to try to understand how to Value things the

great breakthrough really came in 1952 when marowitz had the big bang of Finance risk was so under fine you bought stocks they look riskier

than bonds and marwitz made it into an economic theory he showed what risk was

important the risk of your portfolio it wasn't the individual components but it was the portfolio

itself those risks which were diversifiable were not [Music] important I was 8 years old I created

the RCM Savings of dollars and cents company which was my personal bank that I then got families and friends to put money in the bank and I would go down and deposit it and pay them a lower

interest rate some kids could learn batting averages I did that too I knew every single symbol on the change because there was no quotron or [Music]

anything I bought my first share of stock when I was 10 it was General Motors by the time I was in college I was trading convertible bonds and then

when I went to grad school at Caltech markets open in New York at 9:30 in the morning in California at 6:30 so I would be up at trading for a couple of hours before going to

[Music] class I learned a lot from being in markets I thought I knew what I was doing I didn't but I never thought of it

as a day job you know I thought of it as you know after hours sort of thing you know 6:30 in the morning if you start to look at this you realize it was not an ordained path I don't know where I would ended up but I wouldn't want to roll the

dice and try [Music] again first of all Finance is a

science but it wasn't always science believe it or not there was no data well you can't have a science to test it without data

I would Mark the beginning of finances and science with Harry martz's work on portfolio selection in 1952 and then into the 60s we had the

Chicago center for research and security prices Jim Lori and Larry fiser

collected every single stock return on every stock I the York Stock since 1926 never been

done there was no real data from the markets how was the data collected in the early years painstaking going Hand by hand pecking

every number and then cleaning it up making sure you didn't copy it wrong I mean God bless them now they didn't really have a theory to

put the data to you have to have hypothesis and theory you have to have the data to test it this in case you had all the data so what did they do if you just

bought a typical stock in 1926 and you went through the Roaring 20s and the Great Depression in World War II and the postwar this and the Korean thing and blah blah blah blah blah all the way to

the 1960s what would that have earned the number they came up with on average was 99.3% return per

year that was one of the most shocking numbers to come out in financial management no trust Department had earned

99.3% for their clients in fact there were a bunch of articles where professors put the Wall Street Journal on a wall throw darts and

then see whether that stock how well it did against professionally manage [Music] money it was based on some work done by

Michael Jansen the University of Chicago he concluded that Professional Management wasn't worth the [Music]

cost I'm so deeply wetted in in the notion of markets and how they work can't understand how anybody would think anything differently but conventional wisdom at the time was find a right

person that works really hard that has great access to all kinds of information and that person can surely do better than the [Music]

market that relies on a faulty assumption about how markets work it says markets don't process information very

well that is so naive I can't stand [Music] it I was from the suburbs of

Chicago my family was the heating and the air conditioning business had I been more mechanically inclined I would have been in that

business you failed at air conditioning yeah I really did and so I decided to get a PhD at the University of

Chicago that's where the center for research and security prices was crisp had all the data it was there sitting there ready for us to

use and they had the theories we were armed with so much knowledge we knew things that the people on Wall Street didn't

know Rex and I tried to measure these risk premiums once we recognize that markets were efficient where do you get the extra return well really came mostly

from taking risk but what we didn't really have at the time was a measure of this that's one of the things that Rex

and I did with our stocks bonds bills and inflation work if you invest a dollar in the S&P 500 in

1926 reinvest all the dividends let it ride and at the end of 2021 it's actually grown to over

$144,000 105% is an exposive number because it turns out you double your money in every seven years or so that's

really how you do get rich

[Music]

let's talk about reality versus models it can be a quantitative model or it could just be your point of view

whatever it is it doesn't explain [Music] everything if a model explained everything you wouldn't call it a model

you'd call it [Music] reality models are abstractions from reality you're simplifying the world so you can understand it if it were true it

would be reality and reality is just too confuse using to keep straight in our [Music]

head I get in my car and my model is when I turn the key the car will start the model's not perfect it's an abstraction from

reality I live in New Hampshire I know when it's minus 30° it doesn't start with probability

one and often it doesn't start at all so there's lots of things that are wrong with my model but it's a perfectly useful model most of the time so I fully

expect when I turn the ignition it's going to start sometimes I'm surprised and what I always challenge my

students is when they think they see a pattern in stock returns or in bond returns Financial assets anyway

their normal expectation should be that pattern happened just by chance it's not a trading opportunity

start with that as the default and then you have to convince yourself otherwise what looks to be real probably just happened by

chance but aren't we slaves to seeing patterns everywhere you look in a snowbank and you see a face you look up in a cloud and there's

a sailboat I always blame it on Evolution imagine our ancestors were on the Savanah somebody looks over behind

that bush it looks like there's a lion and there's two choices you can say yeah that's a lion let's get the heck

out of here or you can say well that pattern's not real it's just a mirage in the leaves and you just hang around whose genes

reproduce you get rewarded for not ignoring the pattern that's actually there and sometimes that makes you make a mistake and see a pattern that isn't actually

[Music] there farmer said said I'd compare stock Pickers to astrologers but I don't want to bad

mouth astrologers what's he talking about Candlestick charts dogs of the

Dow various schemes to predict stock prices meaningless patterns that reflect no underlying

[Music] reality it reminds me of what happened in astronomy at the end of the 16th

century new stars in the supposedly unchanging Heavens the decline of astrology

more accurate scientific instruments providing data it

transformed our entire idea of the universe much like data and computers

transformed our idea of Finance in the middle of the 20th century [Music] when I was at Harvard Business School 59

to 61 there was not a single computer not one I got mixed up in computers CU I went across the river to Mi why' you do

that serendipity I was interested in data the rest is

[Music] history why is this interest in data you know I've often wondered about

[Music] that I grew up in Sandwich Illinois [Music] 70 Mi west of

Chicago farming is a numbers game how many stocks of corn are in a row and how many rows of corn can you get in a field I grew up with numbers

City Boys didn't have [Music]

that when I was working in New York in Investment Banking I was busing around on nights

and weekends with chair price d data updating it correcting it every maybe two or 3 weeks or

so we would add another month of data trying to develop a model that would predict future prices

[Music] this fellow responsible for the data

center said to me one day what are you doing it wasn't exactly secret so I told him some things well the next thing I know he asked me if I would make a

presentation about data analysis in the audience was the chairman of Wells Fargo Ransom cook he comes up to me afterwards and he says

I want you to come to work for me as soon as possible talk to my wife we drove to San Francisco in my 59 Corvette I wish I still had

it I went to work for a ransom we had 12 Consultants all academics six of those academics have won Nobel

prizes six I don't think there was any other bank CEO that was spending

remotely that amount of money on far out [Music]

stuff the first thing we discovered 100 out of 100 portfolio underperformed the SNP one pension fund portfolio was $400

million was invested in 20 stocks 20 they were grossly under

Diversified no one knew what a return was how to measure it Jim Lori built the center for research and security

prices Lori would invite institutions to seminar that he

held M mown came as well as a bunch of pioneers from the investment World mcquown asked me if I would come to

Wells Fargo in San Francisco where he was working in his management science department give an evaluation of their progress so I went there and listened to

their management science group realized that they had built this wonderful machine that could make cookies but they had no

do they never thought about the fact that they needed inputs to make the cookies they also had no clients my thinking was based on work obviously

from Jean pharmer and then Mike Jensen found that mutual funds didn't seem to outperform the market it's very hard to beat the

market why don't you use the market information use the prices believe in prices as being unbiased estimates of

reality create a portfolio which is low cost and give you systematic exposure I wrote this up and thought of it as a passive

strategy are you the first person to do this I think I was now every great idea has a thousand fathers and all my bad ideas were always

[Music] mine the aha moment was realizing I didn't want to be in the PHD program so I walked walked into F's office the next

morning and said Jane I'm out of here I want to go apply the ideas I started in September of 71 for Wells Fargo in San

Francisco that was the month they started their first indexed portfolio at this point in history there are no index funds the term Index Fund wasn't even

used is there an alternative to this game aame of trying to out guess the market buy stocks that are undervalued and sell stocks that are overvalued get

in the market before it goes up and get out before it goes down yeah you can buy the market the next thing you know we were

offering the S&P 500 to our pension clients and we wanted to sell it to the retail Market but we were frozen out of that

business by glass steagle created in 1933 to separate commercial from Investment

Banking the investment Banks could deal in share prices and shares and so forth the banks could deal in trusts but never the twain shall

[Music] meet we made a deal with Jack Bogle they were interested in starting an S&P fund

I asked the chairman of Wells Fargo what we should do with our data and our analysis he says give it to him give it to him he created Vanguard and away they

went right isn't this unusually generous exceedingly [Music]

generous I had interviewed the five largest banks in Chicago the major banks in New York and California and I told all of them about

efficient markets I explained to the interviewers how markets work and I want to work in a place where I can apply this these people figuratively tapped me

on the head and said no son that's not how it works and I got rejection letters from all of them all except One Bank in

Chicago American National bank I remember saying to one of the secretaries her name was Cindy Moody I said Cindy this is all none of

it's true and then after being there six or seven months I wrote a memo saying we need to start a new

fund an S&P 500 Index Fund we took an existing portfolio of $30 million we just told our clients that the purpose of this fund is the

same growth we're going to go about it a different way everybody stayed no one objected no one even asked questions then we started attracting

more clients and by the end of 74 we had about $200 million under management from that point on we started bringing in about a billion dollars a

year a billion with a be a year the enemies of index funds were everywhere all the active managers and stock Pickers were out to get

us these guys are communist it's just not the American system you just settle for the average actually it is the American system and the average is a lot better than the average of all other

money managers they're settling from below average we're not going to by 1981 when we started dimensional a lot of people had moved to

indexing but people weren't investing in the stocks of smaller companies we're the first people to treat small cap stocks as a separate asset

category the idea was you ought to have large and small stocks why would you invest only in large we didn't even have data but we had an overwhelming

logic by sheer luck a student at the University of Chicago had done his PhD dissertation on exactly what we were talking about the smallest 20% of

companies on the New York outperformed the S&P 500 Index Fund by quite a bit and no one had noticed this before no one had noticed it

[Music] no despite the hundreds of people going through Chicago every year very

few emerge as pure efficient market Fanatics like David and I did we said this is just absolutely true we're going to devote Our Lives to it we

understand the theory we understand the statistical issues involved and that gave us a big leg up David said he's thinking of starting something I said yeah I'm thinking of a new product too

and we described it and he said let's merge that was [Music]

it David said he wanted to start a company and would I like to be involved he put me on the board right away is this unusual for an academic to

be involved in a real World Enterprise well it was for me anytime I had done that in the past it didn't work out because being an academic I don't

like people to tell me what to do so we began talking about starting a company we just decided we were going to do it our

way we concluded that there was a market for it it worked are you surprised of course

not data doesn't lie [Music]

I have a Brother's 10 years younger than I am and he was still living with me when we decided to start the firm we didn't have enough money to rent

office space World Headquarters was my apartment kicked my brother out and used his bedroom as a trading

room stained doors on top of file cabinets those were the Des s that kind of thing you kicked your brother out it was all right he had a good job by then we started the mutual fund and it

had to have an independent board of directors so Rex SFI and I went over to the business

[Music] school mertin Miller was in that day say meron would like to have you be a director he said okay then we went down

the hall myON scholes was coming out of his [Music] office I was walking to The Faculty Club and he ran up to me and said myON would

you be willing to be an outside board member I said how much is the fee says we have no money at this time there's no board

fees I thought it was an experiment I was skeptical that it was going to succeed I didn't know if you buy small

Securities how large could you be may be easy to buy but then when you went to sell who would you be able to sell it to I was skeptical that

investors would have the patience to want to do this I did not know why smaller Securities tended to outperform larger

[Music] Securities then I realized over time there was more to it than that in order to buy micro caps the

traditional way they would hire a money manager who would come in and say I'll pick the good ones and avoid the bad ones total nonsense there is no way

anybody can distinguish a good one from a bad one ahead of time the stock market is simply too informationally

efficient everything is fairly priced so forget about the stock picker they aren't going to do you any good and they're going to charge you normous fees and they can't buy enough stocks for you

to be confident that you're buying the class we'll start off with 3,000 Securities you could be confident you are buying a small cap class but we were the only manager in the country that

could say that and that was a big selling point [Music] people say what kind of art do you like to

collect what I discovered was that it's very similar to my view of economics and investing I like simple ideas well

executed my view of life is there's no evidence that complexity adds a lot of value so I have a tendency to go towards

somewhat minimal [Music] ideas I got

these two 40t high curves white one color each weighs 20,000 lb and just marvel with the impact it

[Music] has TI in a bit with our way we invest these details are important GRE singfield and I sat down and we were in total

agreement we don't want to manage this like an index fund instead of doing things mechanically we developed protocols that are sensible well thought

out and now we have 39 and a half years of that small Cap Fund that we started we have shown a value over indexing if you want to talk about an

theoretical support for it it's really Bob meron and Myon sh's option pricing models flexibility has

value and thinking about a portfolio one can think about buying insurance to ensure the downside or you can think about holding more cash and

less equities a third way to ensure it is really to diversify completely I became very interested in the insurance component of options

thinking about ways in which options could be used the more uncertain you are the more you want to potentially buy insurance conversely if you're very certain about something

you don't really want to buy insurance there's no need to uncertainty and risk are essential parts of investment essential parts of everything in life

very very important to investment yes was working on the Wells Fargo projects with fiser black we ended up with the differential equation which

describe how the option price would change by a function of time and risk called the black shols model

[Music] myON told me what they did I said this can't be right let me look at

[Music] it I had developed a sarcastic calculus which allowed me to not look at expected

values but actually to model every possible sample path individually [Music] everything that could happen not what

you expect to happen not what happens on average but every single path that stock or security could possibly do now it's

only going to take one path in the end but I can analyze all the paths what that allowed me to do is to actually see

in the mathematics every single possible path it takes so if it goes to the left it goes to the right it goes up it goes down I can control it just

like that's what it allowed me to do [Music] mathematically now we come to the punchline when I put it in my machine

and looked at it I said wow I went back to myON I said myON you're right you and fish sure right it it works but for the wrong

reason that changed the whole nature of Finance talking about trillions of dollar is here right [Music]

correct shouldn't you have gotten a piece of this action Texas Instruments had a calculator only did the black sches

model I got upset with that because they were using our technology without giving us a nickel I phoned Texas Instruments they said no given that you

would publish the paper and at the time publishing was not patentable or not copyrightable there's no royalties I said can you give me a calculator and they say no we wouldn't give you a

calculator so I never even got a calculator out of this they refused to give you a calculator they refused to give me a calculator

right how did you become involved with dimensional they had to hire someone to do the work the company was small I had another job I was doing their computer

stuff at night David decided that I should join the firm I decided that I didn't want to work firm with my husband but David one of the best

salesman in the country right they hired me to manage the portfolios and they went out and sold up a [Music]

storm somebody had to run trading first thing was figuring out if you have a certain amount of money how you should spend that money given you're

trying to get a passive Index Fund 3,000 Securities obviously you can't buy every security because you don't have enough money had to do some type of stratified

random sampling no one had written any software so non-computer people could play with that they didn't

[Music] exist see write programs that allowed us to do millions of Trades with very little

Manpower you had to go and find a programmer and and people didn't know how to program them I I mean I taught myself asembly in college cuz I was

broke guy asked if like a computer program I'd never even seen a computer but had had a dime in my pocket and I needed a job wasn't that I was smarter than

anybody else it was really new my family calls me a data freak what's the difference between a data freak and a data dog a freak thinks

it's fun don't you think tabbing 100 million records would be fun no I don't other people did crossword

puzzles I do statistics when did you meet Rex I was doing Judo at the time Rex decided to join the Judo Club

cuz he wanted to meet me did you ever beat him in Judo oh yeah I was just better than he was I'm

sorry were you ever beaten up by your wife no but I was beaten up by quite a few people I remember the first open

tournament I went to my first opponent was a full black belt that match lasted 16 seconds and I went to my instructor

and I said Ike what did he use on me he said he used your favorite throw marote siag I said I didn't even recognize it

[Music] the first thing I did for dimensional was I gave a talk to a

client and dimensional at the time was trying to raise money for a new fund to invest in Japanese

stocks and I had a paper with Jim petura where Japanese stock prices too high

[Music] they're trying to sell a Japanese

fund and they said this is the best paper we know of about Japanese stocks we think you should hear it and they paid me to go and tell this potential

client why they might not want to invest in Japanese stocks isn't that crazy I loved it I've been working with them ever

since so wait a second what happened with this client who was going to invest in Japanese funds they did original investor or one of the early investors

in the Japanese [Music] fund you were so powerful in your argument of why these stocks were

overpriced that they invested there's always some ambiguity isn't that ademic apparently they glommed onto the ambiguity rather than the central message what they were

buying was diversification not a high expected return [Music] story F was amazed I came up with a term dimensional

A Stroke of Luck small cap stocks behave differently than large cap stocks they don't go up and down together they signal a different

dimension F and French had done a paper that turned out to be a classic called the cross-section of expected [Music] returns which led to the creation of our

value strategies they showed that the value stocks the low price to book stocks had higher average returns in high price stocks the growth

stocks you take any stock the lower the price you pay for it the better your eventual return the trick is what do you mean by low price it's low price relative to

[Music] something if you go back to the 60s there was no coherent way to think

about constructing portfolios what we have done over the last 30 or 40 years is develop a

framework if you go back and look at mutual fund classification income funds High expected growth

funds they were names that didn't translate to anything meaningful to anybody but the people who made up the names I was studying Finance as a PhD

student and the names never meant anything to me Jean and I said there is are these two other dimensions that really do

matter one is size and one is value versus growth with those two Dimensions people started framing their

portfolio in a much more constructive way this is a large growth portfolio this is a small value portfolio and those two portfolios are going to

behave very differently what's happened through time is we've added other dimensions that are still systematic that describe patterns in

expected return and patterns in realized returns is it astronomy versus astrology it's astronomy with a really good

telescope versus astronomy with with the best we had was our naked eye it's just a blob out there versus now I have very

precise description and the description continues to get better as we develop better and better [Music]

tools the leap that you have to make from the hard Sciences to the social sciences you come from a field where you

can run an experiment over and over again the equations actually have predictions that are pretty close to what actually happens when you go to

finance you have similar sorts of tools but the inputs come with a lot more noise therefore the outputs have a lot more noise the way that you will apply those techniques are actually different

when it comes to finance them engineering my mom and dad worked in a laboratory Ireland is a great place to be a kid in the'80s probably not such a great place to be an adult trying to raise

kids unemployment was like 20% taxes were super high that was always there when I was 16 I went to college to do theoretical physics and then when I started dimensional I

got a passion for finance but I didn't have a lot of background in it I had some great teachers here at dienal Jean fmer Ken French Bob meron myON sches

David Booth jeie ran the portfolio management and Trading Group for many many years had a very good command of everything

that was under her purview this was when we were in Santa Monica she found where I was sitting said I want to have a conversation with you when I didn't really know exactly

who Genie was might only been at the firm about a week she said when you do a PhD you learn more and more about less and less

until eventually you know everything about nothing in MBA you learn less and less about more and more until eventually you know nothing about everything and she says I have an MBA and a PhD so I know everything about

everything you just have a PhD I've heard you were a very tough manager thought I was being helpful okay originally when we were really small

someone would sit across the desk for me for 3 to six months and I would teach them then we got

big and I couldn't sit across the [Music] desk so i' have them come in and we would talk and I would make sure they

understood everything for me I was being nice right I thought it was being nice when I

started thinking about Finance I had this notion that that all you needed to do was get a better set of equations and that would allow you to

out guess the market and out guess others could you use artificial intelligence could you use Big Data all of these types of

things that you can't out guess market prices markets are looking to the Future they may be learning from the past but they're looking to the Future nobody knows what the future holds with any

degree of certainty markets are trying to take the consensus view of what the future holds and set prices to such a level that it

reflects their view they're doing that day in day out every second of the day and so it's probably good that you have people with different views of the

future because there's no one right view about something that you can't predict [Music]

I was born in Bulgaria and I studied there until I finished high school I came to the states to study at

darou College when I shared with them my desire to pursue PhD in finance they suggested that I start working for Ken

French when I walked in Ken said well Gan and I have never used research assistance but okay we'll give it a

try can you separate signal from noise it's tough when we look at something that could be a signal does it show up in different

markets around the globe does it show up in different time periods if the answers to all of the above is yes yes yes we start thinking about turnover trading costs all the

things that can actually make a paper profit disappear in the real [Music] world many people underestimate the noise in financial

markets markets are unpredictable hopefully more people understand and appreciate the magnitude of uncertainty in financial markets and as a result changed their way of

investing I have two or three aha moments in my life first one was trying to make this decision between Stanford and Cal

Berkeley as a kid growing up I was enamored with Stanford I thought I wanted to go be a student athlete [Music] there I took a weekend visit to Stanford

didn't like the coach decided to commit to Cal about 3 weeks later the Stanford coach got fired and a new coach came in gave me a call and said hey we'd love to

have you come to Stanford I went outside took my basketball and I started to go out and shoot I thought to myself I'm going to go to

Stanford my mom came out about 5 minutes later and she said you know Dave I heard your conversation you gave your word to Cal I'd be very disappointed if you changed

your mind now this is from the most moral ethical person I [Music] know I called the Stanford coach up and I said I was going to go to Cal you made

your mother happy which is the most important thing in life Butler knocks it down finished my basketball career then

I got a call from the big Investment Bank in New York and they said that they had a job for me and that was really the start of my business career I had about a three-year run

there at the bank had a number of other aha moments that push me towards dimensional I had a broker all named Tom that broker

would look into the crystal ball and tell me about the future say I think the Market's going to go this direction lock into some basic human

emotions fear and greed that's what investment advice in those days was built around was transaction and activity in 1994

Tom my broker called me up and said there's a stock called Boston chicken there's going to be a great earnings report next week so I put all my chips on the table

about 80% of my net worth a week later the earnings report came and I opened up the Wall Street Journal scrolled down to B Boston chicken and I just lost half my net

worth I said Tom what happened and he said I'm sorry it just didn't work out the way we expected it to work out that was the business of financial

advice is built on the premise of looking outward into the future and none of us can predict the future when Tom said he was sorry how

sorry do you think he was I don't think he was that sorry it's very difficult to be in a business where you have to say sorry as often as a transacting broker

did in those days I made a decision I was going to get out of financial services and become a basketball coach and a teacher back in

California by luck or by chance I was sitting on the desk in New York reading the Wall Street Journal and there was a small ad 17th page bottom right hand

corner money manager Santa Monica California and for me I'm a California Kid I I like those three words Santa Monica California I got in the elevator went up

to the 11th floor and Dan wheeler was there to greet me and David Booth chairman founder of dimensional walked up to the elevator

area David said to Dan he said I've got another meeting I've got to go to would you mind taking mertin to lunch with you and so there I was on my first interview

with Nobel Prize winner mert Miller the most modest wonderful person that you'd ever meet I remember him saying three things

that stuck with me forever one was Markus work two cost matter and three diversification as your

buddy even to this day if you can just keep those three tenants in your mind you're going to be better than anybody else out there as [Music]

investors if you look back where we were 30 years ago 10% commissions on transactions and where we are today

which is holistic wealth management done at well below 1% we've come a long long long way I was 32 years old I had a very

large windfall for my age I literally had no knowledge of the proper way to invest I was cold called from a

broker over many many years he bought this and sold that he was in this huge office tower downtown San Francisco

how could they not know what's best for me somebody asked me have you ever benchmarked your returns no I don't really know how to do that well you could literally go on and

draw the chart of the growth of the S&P 500 and then you can look at your portfolio and I started looking at these gaps and I'm going what the heck had he

invested in a portfolio of index funds over this 12 or 13 years I would have ended up with 30 million more

dollars I was literally floored shocked astounded and even angry when I figured out that all of this stock selection and

Market timing was all a bunch of nonsense this industry is designed to get people to trade if they're not Trading

they're not making money I wrote a 20page letter with charts and graphs to this guy said I'm sorry I'm moving my

money to a passive investment strategy and I really don't need you anymore he did not put up an argument all the passive investing had

this academic evidence associated with it there were academics telling you this and in fact they were Nobel Prize winners wait a minute that carries so much more

weight I had been in the pharmacy industry we read medical journals I could see we've got evidence-based

peer-reviewed data here from which you can draw your conclusions that was is definitely an

epiphany for

[Music] me we know what active funds are those

are the guys trying to beat Wall Street then we got your index funds you got Vanguard it's a great organization but when you buy an index fund you're going

to get the market return less the fees then there's this company DFA and what they did is they took research back about 80 or 90 years and found out that

if you tilt an index and try to capture something small companies and value companies have you're going to get a better return in the long run over an

[Music] index and there could be four or five years where nothing happens [Music]

this is a long-term investment and if you stick with it you get low cost you get tax efficiency and we can capture these additional incremental

[Music] returns many years ago people really didn't know the long-term returns of

stocks bonds and treasuries and you think about that your head explodes we just had theories and what returns

were information tells you where you can make money and where risk is and then you get the internet people can access data now

there's bad parts of it and there's good parts of it we can look at the Robin Hood phenomenon someone can invest $50 and be in the market I still think decent portion of

the population do need advisors to keep them focus and not buy AMC or GameStop because that's what someone told them in an Reddit chat room that's not the kind

of advice that's valuable the old Boiler Room which was illegal where people would pump up stocks has been been replaced by the

internet there's going to be some bad falls out there and maybe the consequence of that when there's a Day of Reckoning is those people will

realize yes you can participate in markets but there's a rational way to do [Music] it most people if they go home at night and their kid ask them what do they do

they'd like to say what they do is making a difference in society as a whole it's not just making money but it is being able to move the world a little

bit forward I remember talking to an adviser and he said not many professions have

access to something so intimate as people's dreams and that's what I have some gu dream is to get a cabin in

[Music] Colorado other people's dream is to buy a piece of art other people's dream is to just be

able to send your kids to college they're all legitimate dreams they all come back to how they've invested their money there's a group of us that been

hanging around together for 50 years we are at the [Music] Forefront people are having a much better investment experience now than

they did 50 years ago costs are lower better diversification better risk controls it's pretty cool to see how that all happened all this great work that changed everything it's a relatively

small group of people these are the people that changed the world then go out and have dinner together

[Music] remember Finance is about risk if you took away risk as an

abstraction the whole subject could be taught in the afternoon it's the time value of money and the only security you need is an overnight treasury bill and there's no difference between stocks and bonds or anything else because

everything's certain it's all about [Music] risk people started developing models that said there can be multiple

dimensions of risk not just one so you may be considered what kinds of uncertainty that you're trying to hedge

against and those models were formalized in the 70s they were kind of sloppily implemented in the '90s I'm saying sloppily because

they had a role in that you haven't really nail down what these extra sources of risk really are that's kind of the name of the game we don't really know how to go further

with [Music] them new data new data well I don't know if you don't know the question you don't

know the data you need to answer it you know maybe the data would suggest the the question but in that case you know I have to see the I don't know what kind

of date I'm looking for we're not making Quantum jumps the way we did in the [Music] 70s somebody has to come up with a new

burst forward [Music] I hope it happens in my lifetime but we'll see we spent a lot of time

talking about what's happened the last 60 years in the revolution in finance and it's really bed to a democratization of investing that's on the plus side of

The Ledger on the negative side of The Ledger it's only a teeny tiny number of people that really believe this stuff

someday we're going to be able to talk to the average person and have them walk away saying gosh that's sensible that must be the way the world

Works we've done the heavy lifting index funds are accepted what we do has been accepted next will be all the cool stuff you can do once you accept that notion

that markets do a pretty good job of pricing then there's a whole set of tools we can develop to personalize investing more and

more what investing is about is dealing with uncertainty people want to shrink away from uncertainty and it's uncertainty that really creates opportunity what would

the world be like if there were no uncertainty I mean pretty dull people think they have to predict the future saying this is what will happen

when in reality what they need to focus more on is what can happen you can't predict the market and that's okay

[Music] fundamentally what this whole process relies on is the idea that people want to improve their lot in life they want

to improve the lives of their families there's a lot of hope we didn't set out to be the biggest money management

firm it's not about being big it's doing things the right way [Music] [Music]

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