Bridgeway's John Montgomery Gives Away Half of Its Profits

of investing. If that isn't somewhat unusual enough of a background, he managed to put together not only a firm that's running eight and a half billion dollars, but a very unusual firm with as you'll hear, some very unusual qualifications, including the fact that Bridgeway gives away half of their profits to various charitable organizations every year. He also has some internal rules about um how much he can be compensated relative to the lowest compensated person in the firm.

You know, thirty years ago, the CEO to factory floor ratio is something about five to one. UH it's now somewhere depending on whose numbers you use, two hundred and fifty to four hundred to one. At Bridgeway, the highest paid person and lowest paid person, it's a seven to one ratio that is really quite unusual. Their goals and focus and client customer service are just not what you typically here on Wall Street. And there their evidence base, their data driven. I think that they are not the

usual farm. And that's why I wanted to have John on the show because his story and Bridgeway story is somewhat unique and kind of fascinating. So, with no further ado, my conversation with Bridgeways John Montgomery. My special guest today is John Montgomery. He is the founder of Bridgeway Capital Management, an asset management firm which is running eight point four billion dollars. Bridgeway is unique in a number of ways, perhaps most notably, the firm donates fifty of its profits

to nonprofit organizations each year. John Montgomery, Welcome to Bloomberg. It's an honor to be here, Barry. So you have a really interesting background, and before we get to the asset management side, I have to talk a little bit about your education, which is someone unusual for someone running an asset management firm. Undergraduate, You're at swarth Mar and what are you studying there? Philosophy and engineering, okay, which is a good combination of things. A little left brain,

right brain. It kind of works. And then you end up going to M I T and Harvard. What do you study there? Engineering at M I T. So that's where I had my background in statistics and quantitative modeling, and at Harvard I study business. And so you come out of that world essentially working in transportation engineering. That's right. That was my first career. But while you were at Harvard Business School, you you have written about and told the story of a for lack of a better word,

and epiphany that you had there. Tell us about that. Well, I call it my my first behavioral finance insight. This was in UH and it was very early on in behavioral finance, so I didn't even know the field existed. UM, But I was at Harvard Business School really to um learn more fill in gaps in my knowledge base about

business and specifically in transportation. I didn't have any idea at that point that I would go into finance, but I thought, while I'm at Harvard, I'll take a few investing courses and maybe turned back the opportunity cost of taking two years out of your life after you were already UM had some jobs. So did that. My grades said that I should have gone to Wall Street. Those

were among my best grades in business school. But I was in one particular class one day where we were studying a quantitative method of investing, and I found that fascinating. And at the end of the class, the professor steps back from the blackboard and he kind of tugs on his beard and he says, so, who among the people in this class think that when you get out of school here and probably go to Wall Street, that you'll be beating this record? Well, this was a pretty fine record.

It wasn't just beating the market. It was it was doing quite well in the hands and the class go up, and the immediate thought that I had was the twenty rule of the people think they can beat the market, but it's probably the other way around, and it's probably at that point not the UM that had the discipline to do it. And if you think about UM, you know, a top tier business school with very bright people. What has worked for them getting them to a certain place

in life doesn't always work in investments. As a matter of fact, some of the dynamics of that works against you. Michael Mobus uncles that the paradox of skill, when you have an entire marketplace filled with very smart, very competitive people,

they all kind of cancel each other out. Yes, So part of the dynamics of that that I thought was, Uh, if this is a microcosm of Wall Street five years from now, then using quantitative methods should help get you on the other side of that investment, which should have some benefits of efficiency and cost and some other things. So that that was just a seed planet for what

would become Bridgeway uh some decade later. So that's still a pretty significant insight to look around a room full of really smart people and say, like Laby Lake will be gone, where all the children are above average, how is it possible that of the room thinks they're going to beat the market. If you want to see the same numbers come up, ask a room next time you're speaking in front of a group of people. Ask everyone in the room how many of them are above average drivers?

And it's the same number. Eight in the hands go off And if you've been on the roads, you know that everybody seems to be below out. So Barry, my answer to that question, usually it's a humble was like, no, I'm not. Probably i'm not. And in business school I didn't think I was going to be in the top

half of the class. But with respect to driving, I've never had a chargeable accident um and I've never had a moving traffic violation and never had a moving traffic So I always go back to the statistics, the logic, the data, the evidence. Evidence based investing is what we do. And and so that's a knee jerk reaction for me is like, well, let's just take a look at the numbers and see what So if you believe in mean regression, that would suggest you might be due for it, so

that that could be true as well. And so you want differentiate when things do and don't regress to the main is their skill or just luck and driving this like investing, there's certainly both the and and like sports where you need a certain amount of skill to make it to the major leagues, but at that level where everybody is so skillful, luck becomes even more important. So how did you go from transportation engineering as a career to turning around and saying, Gee, that epiphany at Harvard

Business School is something I really want to pursue. First of all, transportation is a service industry. I love service industries, and anytime anytime I'm experienced service that's uh subpar, I think there's a market opportunity there, whether it's a restaurant, a hotel, anywhere. Like if you're just doing a lousy

job providing service, you're inviting competition. In UM. So I was in the transportation service industry, but I was also an investor in a couple of mutual funds setting up an I RA and think and like, you should be able to do better than this, not just the investment, the whole promin side, but the communications well you know the talked about just I had a dozen ideas for

how you could um improve that industry. So UM at the time, I have an entrepreneurial spirit and hit a certain roadblock wall you could say, professionally in the transportation industry where I was trying to bring private sector incentives UM and some insights I had about how to reorganize city urban transportation bus systems in particular, took that to a certain level and UM and and then it was clear it wasn't gonna happen. The wall problem. I hit

the wall. This was an opportunity to transition and do something that I've been doing as a hobby let's talk a little bit about some current trends and as we ease into quantitative investing, what you've been doing for a long time is essentially factor investing, which really today goes under the branding name smart Beta. Yes, so the first question is how did you manage to find your way into that methodology and what do you think of the rise of smart beta today. Well, first of all, the

name smart beta kind of revels my feathers. Sum so, uh, you know, it's data. It's there's nothing human or or or um. There's nothing smart or beta about it. Well maybe beta, you can you can argue beta or alpha or you know, a different system of looking at it. But the smart part sounds to me like a bunch of guys in a room of marketing trying to figure

out how to sell something. It's good branding, and I think everybody and there's and there's nothing wrong with branding, but um, you know, we want to we we go first to the substance of it. So well, first of all, we didn't call it factor investing twenty five years ago, but absolutely applying quantitative methods to the process of investing and then figuring out as many different ways to apply

numerical methods as possible. So that's not just the deciding which stocks to stay away from and which you're adding to a portfolio to UM produce a certain design and results that you're going for. But it's also think things like transaction cost managing every other aspects of cost. UM the business side, strategy side, we like UM what we call evidence based worldview at Bridgeway. So if you're using

quantitative methods for what we now call factor investing Fama, French, etcetera. UM, were you ever playing with the idea of individual stock picking or was it always a mathematical screen. We don't. We don't purchase individual stocks. We buy groups of stocks. And so that is key to UM factor based investing in an evidence based worldview. And so that leads to the important question, what is it that drive stock performance over the long term? So the stock market has to

follow the economy long term. UM. The problem is in the short term it absolutely doesn't. There are two things we think that drive returns. One is risks. So in the beginning twenty five years ago, definitely had a risk based worldview, and and Eugene Fama was a major contributor to my thinking on that. Uh. I took a year and a half off before founding Bridgeway to do research on the quantitative methods I've been using individually, writing a

big business plan for Bridgeway and and learning more. UH the the let me let me interrupt you there, because I find that fascinating. You're you're working in a field, you're fairly well compensated, but you hit the wall and you instead of saying I'm going to just switch jobs or even switch careers, you say I'm going to take a year off and think about what i want the next phase of my life to be. Is that a fair descript That's right? And I had I had a

model for that. There was a mayor of Houston, Bob Lanier at the time, who had four different careers and every time he switched to ears, he took a year off to study the heck out of the next thing that he was doing, and he's very thoughtful about it. And I thought that was a fascinating idea. UM Let the record reflect that the guests used the word fascinating multiple times before I did. I always get emails making fun of my over alliance on the word fascinating. But

I find things fascinating, as do you. So I'm glad you you brought that up. UM. So that's pretty interesting. Four separate careers, and you based this decision making on that model. That's correct. And so when you spent the year researching quantitative finance and running an asset management firm, where did that lead you? How that was? That was? That period was when Family French published their seminal paper on value and building. So so we had, you know,

early nineteen eighties, uh small the small size effect. It had been around why and I was fascinating premium, it's absolutely but the value part was really resonated with me. The thought, you know, I'm buying a refrigerator. It's one place or another place, and if it's basically the same refrigerator, there's some way to figure out that they're comparable. I'm gonna go for the lower price. That just resonated with

me and made sense that that would work. And there was a risk based world UM framework for that that I really bought into. And it wasn't until probably fifteen ten ten fifteen years later that I started reading more and thinking about the behavioral insights, and there was one factor that really put me over the top on that.

Explain that's the low volatility factor. So if you think, if you have a risk based worldview and you think, okay, value stocks are more volatile in some sense, they're riskier, um, so they should liquid less, go through the number of things they should do, you know, as a group better

in the long term size, same thing. If you've got fewer products, uh, less diversification, less act access to the capital markets, that's more risk absolutely, and then it makes sense that you would have higher returns over the long term with that. But the but the low volatility factor turns that on its head, and and what was remarkable to me was that it wasn't a bigger problem for more people that the low volatility stocks did better in

the long terming wait a minute. We talk about measuring risk, and we can go into a lot of detail on what's risk, but most common way to measure risk and academia standard deviation of returns, specifically measuring the exact same way. The low volatility is less risk by definition and should do less well over the long term. But the reverse is true. Why is that you can't In my mind, it was just a complete short circuit that those two things don't go together. If that's true, something else must

be driving these stocks. What is that? And I think that's behavioral finance. So a lot of people focus on the models, but they don't pay that close attention to the execution of these models. How can you take advantage of of ability to execute, ability to perform versus just the plain old algorithm. Well, the first of all, the algorithms are built by people, so there's a very strong human component to that. And the models are only as good as the modeling process that you've got, So that

would be um where I start. I think there are huge advantages to machines being able to process huge amounts of data. So that's the key advantage there. And we're learning more all the time about technology and artificial intelligence and where that might go. Let's talk a little bit about your corporate culture, and I find some things about Bridgeway quite fascinating. First, eight and a half billion dollars is a nice chunk of money. You're somewhat under the radar.

Is that a conscious decision or is that just happenstance of being in Houston? I would say both. Early on, we had some thought of being about substance and not fluff, and that has continued in our culture and worldview and obviously the other giants issue. It's unusual to see a finance company that gives away half their profits to charity each year. Tell us a little bit about how that came about and uh, how you execute on that well, Barry, I'd say naivete has worked pretty well for me in life.

So I got married at twenty one. That's not the statistics on that are not great. Um. Uh, statistic would say wait a while, get more life experience. But it was awesome for me. I'm married to um, the love of my dreams for forty years now. Just celebrated to fort anniversary. I think you just celebrated, um, So that's

worked out great. Also, when I was founding Bridgeway, we we had some concern my wife and I about if professorly we were successful as I had been over the prior six years individually with the model that I had. This is a quantitative model, so you didn't have to hire an army of analysts, so it was a low cost strategy aspects that of modeling that we had worked with for some time. Then it should be a cash cow in the investment advisory business. There's no accounts receivable.

There's no accounts because people you manage money, you have their money. There's no inventory except computers, which are actually pretty cheap these days. There's no It's an amazing cash cow business. And we thought, so what would you do with those resources? And we actually had some concern twenty five years ago that that could be a problem in raising kids and the environment within which we raised more money is not always good in spite of the fact

what we do for living is is managed money. So we thought, had the naive thought of giving half away, there'd be less around. Interestingly, about ten years into the process of of Bridgeway capital manage I had the thought, well, that didn't work out at all. The money that's left when you're that generous and you build it in the fabric of a company and you are able to hire and retain inspired people, the benefits of that to the company far outweigh the half that you give away. So

we actually that was a bust. I figured out at ten years is much more powerful when you have a generous spirit. So, in other words, giving away money ended up generating too much in return for yourself. Is that is that what I'm hearing too much? You know? Okay, So the expect more than expected for sure, and you also do something else that's kind of unusual. Your compensation as chairman is limited to seven x the lowest paid employee. Am I getting that correct? So we now talk about

that is our stewardship imperative. So if you're a new person coming into Bridgeway, of the conversation goes something along these lines. One, We're here to make a difference in the world. And that's that's really cool about for our clients first, because that's why we're here for our fellow partners each other. And that's partners is the word we use for all the staff um with a full time and long term commitment at Bridgeway and also the communities

that we live in. However, we expect everybody to engage in that. And and if you look back over forty years of compensation in the US, it's pretty clear to me that things have gotten out of hand at the top end. I just didn't want to get caught up in that. It Bridgeway and actually it's a pretty great screening tool for if you if you put at one end of the spectrum, greed and a lot of things

that the finance industry is criticized for. And at the other hand, generosity and making a difference in life at the other end of the spectrum. It's pretty great to be able to say, if you want to make seven figures and you're about generating you know, personal wealth at the high end, you won't come to Bridgeway like there are other places to do that. We don't make any value judgments about that. We just think that life is about um more and if you take that attitude in worldview,

it's incredibly powerful. You also have a requirement that all the staff members are shareholders in Bridgeway and they are unable to make investments outside of the firm. UH. Does that include the firm's investment portfolios? How do you? How do you manage that? So two things. One, we have what we call a partner stock ownership, which is typically referred to as an esop so UM all the UH full time UH people at Bridgeway. UH currently about of your W two goes to buy stock in the advisory firm.

And that's across the board. That's not typically a firm our size. The top five people or so would have stock. Uh. This is broadly based across the full spectrum of salaries. Some people thinks like, oh, so you have an ownership culture. We say, yeah, they're aspects of that. So yes, you want to you know, treat costs as you know your cost and but we we like to focus on the stewardship aspect of that. There's a there's an asset resources that we've been entrusted with on behalf of our clients,

on behalf of the public good. When you talk about the foundation, we want to do an excellent job with that. That's the focus um and we think that comes back in in multiple ways. Let's talk a little bit about the modern world of investing. We see index funds taking assets from active managers. You're experiencing the opposite. You're seeing inflows. What are you doing to attract assets when most non index funds are seeing outflows. Well, certainly we're experiencing that

in some places at Bridgeway. First of all, we do have our own proprietary index fund. It's it's non market cap weighted, has some really cool I'm an engineer by back, really cool design features that we've executed. We just celebrated twenty years. What makes that index unique and what led you away from cap waiting research research is what we live and breathe and do for living on the investment team, market cap weighted index. The more stock goes up, the

more money you throw at it. That's a momentum strategy. There's nothing wrong with momentum. It works of the long term except well that's true. But but the main thing is you have to you have to you have to sell it over relatively short period of time, probably you know, somewhere between three months and twelve months. If you just hold on forever, then it goes up and then when it falls, you go down. That's a very inefficient structure. So with that insight, we went back and said, okay,

is there is there a different structure. We studied a number of them. This was you know, twenty plus years ago now, UH and a very basic equal what we call roughly equal waiting strategy. UH has some really cool risk statistics. So over the entire time frame since inception, UM, you know, call it kind of flat between our fund our strategy in the Blue Ship thirty five area and

SMP five fund. But the risk characteristic are really cool at that the ten worst downturn quarters of the SMP five hundred we've out we've provided cushion and nine of those So there's something special going on. And I think that relates right back to momentums with no hold period. Just spinning it out is not a great strategy. That's what a market cap waiting is. So you have to be really careful about when you use market cap waiting and when you don't. So you're you're evidence based. You

crunch a lot of data. The data typically suggests that when markets are enjoying a high valuation, your future expected returns are likely to be lower. How do you perceive, uh, the current environment? Is that a fair statement? Or or am I overstating it? So if the question is do I think the market is expensive, the answers yes, how expensive depends on how you measure it. But the second question relates like okay, like statistically you can measure this

based on history that is more more expensive. So does that mean we should get out of the market? Should we time that somehow? And that's a very very different question with with with an answer that takes you into a buy and hold strategy on the market overall in other words, your your expectation is the odds are strongly against us. It's not only strongly, it's incredibly strongly against you.

This goes back to that year and a half that I took off in in nine into ninety three doing research where I actually went back and studied the Great Depression. So like, if you want a granddaddy of downturns and you want to understand if you're studying risk, which is what I was doing, you go back to that period. Some people say, like John, you know, like the FED didn't even exist in his current form, why would you go back to the nineteen thirties. My answer to that

is the specifics of risk have changed. Nuclear bonds didn't exist in the nineteen thirties, so obviously that's a very different risk. But the nature of risk itself has been around a long time. You can learn a lot, and I convinced myself from that a couple of things out of that exercise. One is, be prepared for the downturn. They will happen. It's not it's inevitable and and its behavioral. It's not just based on how expensive, uh the market is.

Number Two, it's incredibly difficult to time that, and and we've done all this research on a lot of different ways systems that people have done that. It's just very difficult to do. There's certain things you can reduce risk on, like I mentioned the the market cap waiting in large cap stocks UM. But the second thing I learned from that is about leverage so UM. Some of my quant competitors use a very significant amount of leverage and long

short strategies. I won't say that, you know that's a complete You know that in all circumstances that's a bad idea, but you should be very, very very careful. The Dow Jones Industrial Average and the Great Depression fell eight s. You can't say it can't happen. It has happened. That's one thing about statistics is it's like, oh, that will never Well, of course it can happen. It has already happened.

If you've got debt on top of you know, buying stocks, it doesn't take much debt to completely blow you out, to cash you out, like you're out of investing. People forget how how recently we've seen a near crash. Everybody says, well, twenty nine is so long ago. The NASDAC in two thousand fell almost as much as the Dad Jones did in twenty nine. It was I think it's just a hair under eight percent of memory serves. So it's not like it's a hundred years ago. It's a decade and

a half ago we experienced something very very similar. Yes, So let's that brings us obviously to the behavioral side. And you said something that I found quite fascinating. One. The first part of it is the importance of behavior to successful investing, but the second half was really interesting. You said, it's been twenty five years of trying to help investors manage their behavior, and it sometimes feels like

it's a losing battle. Yes, tell us about that. So, um, so this is probably my biggest source spot professionally in the investment uh, you know, the investment industry, in the service that we've provided, the place where we're still living, uh, the film. We have not solved the problem with what I refer to as the behavior gap. The behavior gap coined I believe by Carl Richards as a description of, um, the natural tendency of human beings uh to uh buy

more when things are going up. Call it greed or just wanting to get on the bandwagon. So it's chasing hot returns. Uh. And on the downside, UH, fear when things go poorly, when the stock market goes down, it predictably, and it is so broad based, uh that people are going to panic and and what do you do? You get out? And they are all different versions of this. It's but so it's another version of marketing timing. It's it's behaviorally based. Um. And let me let me, let

me give you a real world example of this. At Bridgeway, I looked at statistics on just before coming in updated on one of our more aggressive strategies over the last fifteen years. According to morning Star, the returns to investors of this fund is the average in return is about two thirds of the total return. So we've produced what I think is very attractive fifteen year track record. The timing of when people get get in and get out,

they're chasing hot returns. They panic, you know in oh A. The net of all that over the last fifteen years is the average January return is one third less. Like from that standpoint, think like a third of the value that we've created and that the economy has created gets washed down the toilet by when people are in and out. It's worse than that though. Think of that number one third.

If you take an investing rising of thirty years, like you're saving for retirement, when you're forty thirty years later, the amount of money that you've got is one third, two thirds less one third of what it would be had you just used to buy and hold stuff that alone. So so the emotional side of the behavior is that people underperform their own holdings. And then you add to that the insult of you add insult to injury by the loss of compounding of that over the long haul.

And this is not this is not just true of individual investors. It's true in a very broad sense of institutional investors as well. And the study I like to cite on that is a study that was done of pension fund performers, and they took a look at the three year forward returns of managers that were fired versus the ones that they hired to replace them. And what do you think happen? I'm assuming the activity ends up

costing them more than have they done nothing. Well, it not only costs them more if their transaction costs, but the actual perform of those two players is flipped based on what you would think the fired manager does better, because there by you know they're being fired at if they have a solid process, and if they're doing you know, screw stuff, that's one thing, but they have a solid process, is just out of favor. That's the time to be buying, not selling. It's upside down. I have a buddy who's

a fairly well known household name. He's a hedge fund manager and a value investor, and he says all the time he could tell when an underperforming investment is about to pay off. First the phone starts to ring, and then the emails come, and then ultimately clients start pulling

money out. And usually it's at the moment when this underperforming value approach is about to take off, and it's it's been a it's been an interesting observation, just like the pension funds firing people at the nature of their cycle. I'm most comfortable when everyone else is ringing the hands As an investor, that's just my my personal makeup. That doesn't mean, however, that I should take that information and try and time the market. That would be the wrong conclusion.

Just just holding through the downturns here's the here's another great I mean you think Bilo said, all right, everybody knows that most people will say they're doing that, and then you go back and track their actual numbers, they're not doing them. Most behavioral thing is much much stronger. It's much easier said than done. Actually doing it requires you to be comfortable when everybody is miserable and and and we haven't solved that problem. Like I can show

you statistically, this is a problem at Bridgeway. By the way, it's it's true of the index or still you can look at Vanguard's, you know, biggest index fund. They've got this problem as well. We've as an industry, we have got to work on this and solve it. And I think that's the next frontier. We have been speaking with John Montgomery. He is the chairman and chief investment Officer

of Bridgeway Capital Management. If you enjoy this conversation, be sure and stick around for the podcast extras, where we continue to chat about all things investing. Check out my daily column on Bloomberg View dot com. You can follow me on Twitter at rid Halts. We love your comments, feedback and suggestions. Email us at m IB podcast at Bloomberg dot Net. I'm Barry rich Halts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. John.

Thank you so much for doing this. I really appreciate um all of your time. There are so many questions we didn't get to Before I get to my favorite standard questions, there's a bunch of things I have to go back and and ask you about. Course, we blew through them so quickly. We talked earlier about the behavior gap. I have to ask you a question about that. Now. Are you hearing from clients? Are you're getting emails and phone calls? Given the supposed nosebleed valuation of the US markets,

we get questions, but I don't. I don't. I wouldn't say it's it's overwhelming in previous that leads to the quantitative evidence question. And you've been doing this long enough. In previous market peaks, let's call it late oh seven or late were you getting the same sorts of inquiries? Did you? Was there anything to be learned by client expressions of fear or they're usually greedier at the top than fearful. Well, the main thing is it's always easy to know what the top was after the fact, uh

in the middle of it. Uh like take us back to remember the period very clearly in I thought, oh, gee, this is really really expensive, Like we're really getting outside the sweet spot of how how cheap or reasonable even the market is. I don't like that. If I had acted on that inside, and I wasn't wrong along with other people, I wasn't wrong on that. Had I done that, we would have missed one of the best years in

the stock market the following year. Absolutely, just because things are expensive doesn't mean that they won't get more expensive and that you should hold through that period. I remember in nineties was when Louis Rukaser's elves first kind of turn barished because they I remember the phrase the market is now fully valued, as if that is significant, Like markets go to fair value and then stop and that that doesn't seem to happen. Sometimes they do, and at

some point they will. You just don't know when it's gonna be so on your firm brochure, there's a line um that I have to ask you about putting investors long term interest first is a whole mo of our firm's unique culture. Tell us what that means, what is putting investors first mean it means sometimes you can make more money for yourself and you shouldn't say that. Again sometimetimes you can make more of money for yourself than your client, and you shouldn't because we have a fiduciary

duty that should come first. That's what fiduciary duty is. And by the way, that this is the financial services industry, like some of this is law built into the forty Act, right, However, it's true of any industry like this should always be the case. I have a friend that says business is a platform for community and service. That's a good way to think about capitalism and what we're trying to do.

Putting our customer first should be how we wake up in the morning, like that's that's what they pay us to do, and it's and it's a beautiful thing to be able to do that and to create wealth and opportunities and employment and services and goods that people value

and need and want. So two and with gated withdrawals, not a big fan, not a big and uh soft dollars would be you know the an example from day one where you know, in the early days of Bridgeway, we could have paid for our Bloomberg terminals with soft dollars and you know, like that would have flowed straight through to our blind Frankly, it was a big deal, and we just said, no, it's not the right thing

to do because this is really our customers money. It's it's it's their money, and it's a it's a poor structure that leads to poor decisions. We just don't think we should have anything to do with it. That was twenty five years ago. We've never paid uh soft dollar commissions for research and terminals and the other things that you can do. So let's talk about your annual report. I've been reading Warren Buffett's most recent annual report and some of the ones from the two thousands. You've been

doing an annual report for quite a while. Tell me about quote the worst thing of the fiscal year. What

is that? Well, you know, I like to think that we listened to our our investors um and I had an investor conversation that wins something like this, you know, like, so I'm the like this in the forty Act fun I'm I'm the shareholder, I'm the customer, and you're the manager and you work for me, and I think that I have the right to know like the bad stuff like most you know, here's the shareholder letter, all this great stuff we did and look at this and yes,

and he said, spare me the accolades. Tell me what you guys messed up. I just I like, think about it. You have a boss. Your boss wants to know the stuff that's good, but also the stuff that's bad. I just couldn't get around that logic. And I thought, you know, there's just gotta be some way to do. So we brainstorm that this was probably coming up on twenty years.

It wasn't the very beginning bridgeway, but it wasn't too long after that, and we thought, well, we're just gonna put in our annual report the worst thing that happened in the year. We'll just you know, own up to it. Our law this by this drives lawyer's nuts. It's like admitting a liability. It's like you're putting on a silver platter stuff for people to see you everything. But built into that is otherwise is the implication that we're flawless.

We never made any mistakes. It's not only that, but you can't learn from the mistakes if you don't get them out in the open and on the table. That's the bottom line, and we are absolutely committed to learning from mistakes. We have this ball called the Mistakes Ball that we passed to the newest partner coming into Bridgeway. So whoever is the latest one has got it. And it's on the ball it says it's a baseball, and

on the ball it says mistakes are the jewels. We expect new people coming in and by the way, old people that have been there at Bridgeway for some time to make mistakes. If you're not making some mistakes, then then you're not going to achieve the mission that we've got in the world. That that's that's fascinating. Not to confuse Bridgeway with Bridgewater. Yes, many years ago I had read something that Dalhio had written, so actually I had

I was complaining about things in in the media. I won't mention the outlet that were just wrong, and they were consistently wrong, and every time I brought it to their attention, they refuse to acknowledge. It very simply had to do with um annual home monthly home sales. And there's a pattern very clearly the due to weather or whatever home sales start out pretty weak in the beginning of the year, they start to the spring is where

it kicks up. And every year April is better than March, June is better than April, August is better, you know, peaks around July August, and then it fades and and people were saying, oh, look, you can't look at it month a month. You have to look at it July oh nine to July eight, not oh, look, July is better than June. And I couldn't get these people to understand the math. And I was whining about it, and and somebody emailed me and said, well, it's it's good

that you're bringing these errors to their attention. What are you doing about your own mistakes? And I said, that's a fair criticism. And every year I started publishing my own mea culpers Here's what I got wrong, and here's what I learned from it. What the person had sent me was something that Dahlio had written about, which was exactly what you just described, which is you have to make mistakes and learn from them, otherwise you never improve.

We're all going to make mistakes, it's a given, yes, But the lawyers give you grief about it. Well, not in in fairness like our lawyers are at the the high end, Like we're still doing it like without a conversation. Uh, we're doing it. Um. But this is also human nature. It's not just lawyers. I'm putting them on the hotspot. Uh. There we all you know, we all tend towards being defensive and like it hurts, so you walk away from

you know, the stuff that hurts. But if you want to improve and grow and be really great, and I'm an engineer, so I think of continual small improvements, Um, then you've got that's that's like, that's your fadder. That's where you can really learn from and grow. There's there's one other principle that relates to this I just want

to mention, and that's diversity. So we all know you don't want to hire a bunch of yes people, right, but there's tremendous psychological pressure to hire people that look and and feel and think just like you. And there's all this you know with the media, there's all this research and and and people are thinking about it with with respective news stuff. That's what it's who you know, and it's also who you feel most comfortable with. If you're in finance, you want to associate with your people,

your stuff, with people whom you trust. Who do you trust? Trust people that look just like you. That is a formula for disaster. So under our servant Leadership program at Bridgeway, part of what we're trying to do is hire people intentionally that don't agree with us, people who have a different view into things. The cool thing about that is, like this is, you know, diversity of ideas and frame.

If you look at the what people look towards as the physical diversity around gender, um, rays um, you know, skin color, We've got more diversity there as well at Bridgeway than the vast majority of our competitors. I'm proud of that. It's not something we set out to do. On my team of eight people at Bridgeway, I'm the only uh male WASP on the team. And again there's there's no rule that you know that that has to

be case. We're not you know, we don't have quotas or anything like that, but we're looking for diversity of viewpoint and opinion and people that don't agree with us. And and I have some people just like do you know that this other team member doesn't agree with you on X Y is you know, like yes, and that's a good thing. That's what. That's how you have different ideas and helps you, uh get out of your own silo and and moves you forward. Tell us about the

Jam accountability group. Okay, So, um, I have an amazing support network in my life in general. So you can start with my ninety four year old mom. I'm her baby still at you know, age sixty one. Um, friends, Uh, that is that is Uh, you have to work on that because my father's my father passed away at nearly my age. So you know, I try and lean towards really taking care of myself. Um. But part of part of a great support network for me over the last

eighteen years has been a group called Firewood. Uh. And it's an accountability group. And and it started when a friend of mine called me up and said, so I want you to be on my board. And like, Charlie, what board are you talking about? Like he worked for ex son and he wasn't in a position to invite me son at the time. Uh. And he said, well, no, the board of directors of my life. And I said, well, what's that? What does that look like? So he kind

of got me into the conversation. Um, if I examined my life, I had a lot of areas of support, very little accountability. So this group is one that still needs, eighteen years later, um about once a month every three four weeks, with the specific purpose of holding each other accountable to what our life dreams and goals and milestones are. So if you take on homework, people will suggest homework.

If you take that on which we document, you come back the next meeting, you you better have done your homework or you know, like you're gonna be actually held accountable for that. Um. And I think it's just I know I need that in my life, bottles. And I don't know that everybody needs that. I think probably to do, but I know that I need it in my life to stay on track or I just I'm gonna get off track or procrastinator, all the kinds of things that

come up that that's really fascinating. And and before I get to my standard questions, I have two last things I have to ask you about. One is how you track your time, and the second is your trip to Africa. So I'll let you pick, okay, whichever one you want. Well, Tracking my time is something I do about every year and a half uh cycle, just to see am I am I spending the resource of my time? How I say? Does it line up with my life goals? And when

I say it's most important? You can do the same thing, by the way, with your check book if you you know you want to, you want a litmus test of are you actually living the life that you intend to? And say you are? Those are two views in so how I spend my time is is something i'm you know, I'm a quant so but but but with my checkbook, I could export it to Quicken or am X or whatever and it will give me a breakdown. Y, you spend this much on t n A and this much

on you know down the list. How do you physically track your time? Yea, I wish they were a mint dot com for you know, my time because it's a real pain to do. I do it in a spreadsheet like it's kind of fifteen. You update that every day for for a three month period, so we have quarterly for a three month period. Every year and a half or so. I do that to get accounting of how am I really spending my time and is it in line with what I want and what can I learn

from that? I mean, it's like, what are the takeaway? Do you find that? Oh gee, I'm spending a lot of time doing this and I didn't realize it. Yes, I would imagine if people actually did that, they would say, I watch how much TV? I think it would be shocking. I watched very little TV. And that's that's one reason. You know, I taped some things, so I watched it kind of on my schedule. Did the time tracking lead

to last TV? It reinforced it very strongly. Yes. And then tell us tell us about the trip to Africa. So this was in June of this year. Uh and a dream we'd had for a while of taking seven partners at Bridgeway. So this is out of thirty people, we took seven of the members of our firm to um Rwanda as a base and then Eastern Congo. Eastern Congo. Well, let me back up a little bit. We give half of our profits away. The core mission of Bridgeway is peacemaking, reckons,

afiliation and ending genocide. We have a focus area which is sub Sahara Africa are least Our last conflict we worked on was um the l r A, the Lord's Resistance Army, which you may remember from the Cony video

and uh everything that came about from that. But this was the longest running conflict in Africa, and we engaged with partners on the ground in Africa to try and reduce the violence there, which we got an independent assessment that said, yes, between depending on how you measure it, for six year period, UH, decrease the violence around this conflict. So ahead, like you actually can make a difference, move

the needle on this stuff. Um. We're in Congo on this last trip to just bring partners in to see you know, the arian kinds of things and potential partners were working with. This is the area of the highest incidents of rape as a weapon of war in the world. So that hits my radar screen. A life goal of mine is ending on aside. This is a stepping stone toward that, um and UH. And it was sharing that Uh that was led not by me but by Shannon Davis,

are our head of our foundation. Is amazing, amazing, passionate, engaged, creative. UM woman who's who's got our mission written all of her heart and and and her actions. Wow, that that's quite astonishing. Would you would you recommend people visit that part of the world? What? What is that? Actually? That experience actually like so, um, Rwanda is an easy place to go. There's a genocide there, you know, in it's been some time. What's happened in that country is inspiring

and amazing. Uh, So definitely recommend that. I wouldn't go into the specific areas that we did unless you were with people that really know what they're doing. But the inspiration that comes from that, the coming back to the US and knowing where you fit into the world is worth It's it's just worth its weight in gold. Wow. That that that's really um inspiring. Let's uh, let's jump to our standard questions that we ask all our guests in our last twenty minutes or so. UM, tell me

something important about your background that most people are unaware of. Okay, my father was the president of an oil exploration firm. From him, I learned, UH, risk management, because you don't survive in the exploration business, especially when he was doing it without a real strong controls around risk management. Also, integrity is the number one business business value. I learned that from him. Uh, And we spend that out in a lot of different ways at Bridgeway from my mom.

My mom was a soldier in the War on Poverty in the nineteen sixties. I was a young kid at the time, and she kind of like I was her fourth child. They were all in school, and she kind of put me under her arm and and go out doing volunteer work. Um. I remember a daycare center, you know that I volunteered with along with her. She did a number of things across um, racial, gender, other other

boundaries lines. So I learned from her, if something's wrong, like you don't have to live with it, step across that line, makes something happen, makes something happen, move the needle. Um. She was a great model, is still at ninety four an amazing model of that. Uh. Some early mentors tell us about who your early mentors were. I have learned something from every boss I've ever worked for. So the very first boss I was a paper boy at age eleven.

But my first boss um was at Baskin Robbins, this guy from Argentina who was just a great entrepreneur and great with kids. Uh. And and what I learned from him was getting the hard stuff on the table and dealing with it in a constructive, not oppressive way. That's the principle I've used everywhere the rest of my life, and I'm thankful for him teaching me that. More recently, I would say last night, I was at dinner with Ruth Messenger, who is the UM. I'm a big believer

in mentoring, and she's been a mentor for some time. Uh. She's fifteen years older than me, so she's like a window into what I need to be paying attention to in the decades head very bright, boots on the ground, committed, believes things that can can change. And she was the last head of the American Jewish World Service. And I've loved studying how she does what she does and mixing it up with her. So tell us about some investors

that impacted your approach. Who who's influenced you over the years You've you've mentioned Eugene Fama, Yes, who who's affected the way you look at at investing? So Eugene family would be one. As in terms of a framework for risks. Prior to that, Jack Bogel around costs um Um, I love managing costs down uh, and he's a great model for that. UM. Jeremy Stiegel stocks for the long run, so staying in a diversified way uh in stocks as as the growth engine over decades, not months and years.

And then probably um, Daniel Kahneman on the behavioral finance side, I'd say he was the you know, one of the fathers of behavioral finance. And that opened up my eyes. Um, let's talk about books. This is everybody's favorite question. Uh fiction, non fiction, classics, recent stuff. Tell us, tell us what you're reading and enjoy it. Um. So I'll give you three titles. One is the Bible, so great, uh, mapping for life in general, but especially finance. There's a lot

written in the Bible about finance. The thing I mentioned about, you know, borrowing, for example, is but that's tying, and you're doing five x tie things, so you're over and above. Yeah, I've got a friend who says tie thing is a bad deal. Uh. Like, if if you're all in, you're all in. That's a hundred percent. So whether you're spending it, you know, on you know, uh something, you know, going out for dinner tonight or not, you still need to be all in. So I think that's an interesting way

of thinking about that issue. And then that's before we get to the issue of the debt jubilee where there's forgiveness of debt is at every seven seven years. Uh. So that that's a fascinating uh. It is topic. It

is and we should think seriously about that. So maybe maybe not literally because I think you know, our large banks and small banks too might have a problem with that bond hole, but not thinking about what underlies that and showing up as generous and not um holding holding something over other people in a way that's disempowering it. We should spend a lot of time on that, and you should do that if you're a bank in my in my opinion, two other books titles Daring Greatly, which

is about shame and guilt. Daring Greatly, Yes, Burnet Brown's book based on ten years of her research, which is fascinating, like as a research guy at the research itself is just fascinating. But the topic is about shame and guilt in our culture and what you can do about it. And I highly recommend the book. And the last one would be, um, uh, The Honest Truth about Dishonesty. So this is uh, this is a book that gets into anybody that's in science or research should read some chapters

of this book that deal with that. We all think that because we're doing numbers and statistics that were objective. This book would say not so much. Your biases come out. You're human, like we are just as human, and if you think that you don't have that problem, it's going to creep in more not less. So as a research team, like we live and breathe this stuff is like, how do we hold ourselves accountable to not letting our natural biases come in? So we have a we have something

we call confessing our biases. So sometimes we'll come in with an insight, but it starts with I need to confess, you know, a bias. And it's like I'm a contrarian. So like I would come was like, guys, I'm I love you know, this is a contrarian situation. Of course I'm gonna love it, right, That doesn't mean it's the right thing to do. So since you've started managing money on a quantitative basis, what has changed? Oh, so we're talking about UH, you know, twenty four or thirty years,

depending on when you want to start counting. Bridgeways UH celebrating its twenty fifth anniversary next year. In that time frame, certainly UM passive UM and indexing has really taken off. That has very significantly reduced costs. That's good, not bad UM for investors. More attention to tax efficiency, which I think and will continue to grow. Technology. So in this period, the Internet came in, which just transformed research and how

you do it. It's been a really wonderful thing. Robo advisors would be, you know, part of the technology part, and there's some good things about that. There are also some bad things about some of these technology things that the top of the list would be if you make it easier for somebody to day trade, that's how actually a bad thing. I agree. I agree with with Jack bogel Um on that point. We should be worried about being able to day trade UM E T S and

the implications of that. So those are some of the things that have changed in in my investing. So UM along the lines of your annual fiscal disaster or annual fiscal confession. Shouldn't say disaster, Uh, tell us about a time you failed and what you learned from the experience. Oh wow, so UM. You know, we've had a lot of different categories. We've had compliance um uh failure at

least disappointment. Um to the to the tune that we said we want to become a top quartile player in compliance, and my compliance officer says, John, you can't say that because like how do you measure that? And like, you know, what's the accountability on that. That's a great point. That's an example of somebody coming in with a different view um on that. But we knew we had to up our game. We spent a lot of resources to make

that true. The source of some of that, if I hold a mirror up was I was really cheap in the early years of Bridgeway. Um. I didn't want to I didn't want to outsource anything that I didn't understand myself, and I was new to the industry. So we were on transfer agent, we were on pricing agent. We programmed our own software and stuff that people just don't do. Learned a lot out of that, probably held onto too long, uh low cost in favor of getting more help in

so we've changed that. That's be an example that was from you know, the early years of Bridgeway that that's really interesting. So you mentioned um uh physical fitness. What do you do to stay fit? What do you do to stay mentally sharp outside of the office. So I ran four miles with our president this morning in Central Park. I'm visiting New York City today to be here with you, and that's one of my favorite places to run. So a typical week for me would be uh to two

days running a short run in the long run. So I ran six miles last Sunday. Uh today, the four mile is the short run. That's that's my short Yeah. Three, keep going. Um. Actually ran my first marathon ever. I only run one last year. UM. That was a life goal that I set at Um. How was the experience? I have to ask, because I'm I always remind people, you know, the first guy who ran a marathon drops. That is true. That is absolutely true. A very different

lesson from that than you did well. Training is key, Okay, So excellent training. Um and and and they're I mean they're great life lessons in that too, that to run a marathon successfully and do it well and not hurt yourself. If you can do that, if you have the discipline and you get the right like though, you can apply that to any career. UM. So I like that. Two days a week would be pilates and two weeks, two days a week would be UM weightlifting, and I usually

try and mix it up with a swim. So I was going to say, it's always something different. Yeah, Like I like frustrating on that, UM, but I like research and so that's the source of some of that. And now and now our two favorite questions that I ask all our guests. Uh, So millennial or recent college grad comes to you and says, I'm interested in going into quantitative finance as a career, what sort of advice would you give them? Well, Uh, first of all, I'd say, um,

it's a great industry, great opportunities. Um, people are shying away from it right now, which means the opportunities are bigger, extreme competition. So those would be those would be the things that I you know, uh, you know, overlay somebody that's thinking about getting in as as far as overall advice. And by the way, in my family of origin, advice is the language of love, like if we're not if you if a fan leamers not giving you advice, like

it's something wrong. So I love advice. The bigger picture advice with millennial would be, UM, save aggressively, UM be generous with the results of that UM and have big life goals, pursue them relentlessly within the framework of a balanced life. And our final question, what is it that you know about investing today that you wish you knew thirty years ago? Definitely the behavior gap that we talked about, the cycle of people, you know, chasing hot returns and

panicking on the downturn. UM. We're doing a better job with this, slowly, gradually. We have a partnership UM with two strategies with the BAM Alliance. I think they do a superior job of this, and so we're learning from them, but we've got to do a better job. So UM, I wish that I had known the dynamics of that thirty years ago, maybe we'd be farther along with you know, solution UH and a more effective one. We've been speaking with John Montgomery. He is the founder, chairman and chief

investment officer at Bridgeway Capital Management. If you enjoy this conversation, look up or down an inch on Apple iTunes and you can see any of the other hundred and fifty or so such conversations that we've had over the previous three years. We appreciate and enjoy your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I would be remiss if I did not thank my ACE team who helped put this podcast together.

Each week, Medina Parwanna is our audio producer and engineer. Taylor Riggs is our booker slash producer. Michael Batnick is our head of research. I've Barry Ridhoults. You're listening to Masters in Business on Bloomberg Radio t T take TAMPED into the