MIB Live (Replay) with Eugene Fama and David Booth

French factor model, basically the father of modern finance. I don't know how else to describe him, along with his best student, David Booth, co founder of Dimensional Funds, the person that the Booth School of Business is named after. What can I tell you? I flew out to Chicago. UH basically went to the Booth School of Business at the University of Chicago where they were celebrating this relationship that both Fama and Booth have had for literally fifty years.

I got to sit down with the two of them for an hour in front of about five people in the audience, including a lot of students from the Boost School as well as other notables who were in attendance. And Fama is notoriously press shy. He does not do a whole lot of UM interviews with the media. This was just a delight. I can't begin to say how just awesome he was. He's a provocateur. He likes to say things that are very much, um contrarian. He's a little bit you know, if Farma was on Twitter, he

would be a troll. He loves to tweak people, especially his buddy and fellow Nobel laureate Richard Taylor. Uh. He was busting his jobs about behavioral finance, basically saying it's all just pushed back to the efficient market hypothesis. Uh. David Booth, also very insightful, had a lot of things to say. There's obviously a tremendous amount of respect at

between the two of these guys. I could babble about my experience in Chicago for hours, but rather than do that, why not just say my conversation with Eugene Vama and David Booth. There is so much material to cover. We're gonna keep this to about four hours. We'll take a break for dinner, and then we'll finish up before midnight. Um. So I really don't have to introduce either of these gentlemen, but let me just put a little more flesh on

the bones of what what the Dean started with. Obviously, Jean is best known for not only the efficient market hypothesis, but his research on portfolio theory, asset pricing, the Fama French factor models. He is recipient of the Nobel Prize in in Economics, and I like the sentence that the Nobel group used quote for stuff for his work showing quote stock price movements are impossible to predict in the short term and that new information effects prices almost immediately,

which means markets are efficient. David co founded Dimensional with another University of Chicago alum, Rex Sinquefeld in one The firm now employees four hundred people who helped manage five hundred and seventy nine billion dollars over the twenty years ending in twenty eighteen. Eight of dimensionals equity and fixed income funds beat their benchmark the rest of the industry just seventeen and that's based on much of the work

that Professor Fama did. So so let's jump into the history um of both Gene and David and see where it goes. Jeane, during your last I feel weird calling you Gene. It really should be Professor Farma, shouldn't it Um? During your last year toughs. You worked for Professor Harry Ernst who had a light gig running a stock market forecasting service, and you did research for him. What sort of work did you do with this stock forecasting research? I was devising schemes to beat the market, and how

did that work out? Worked out fine? And on the data that I fitted to didn't work out fine on the whole load sample never did So that was a lesson that data judging continn of things that aren't really there. And how did that research into forecasting the stock market impact your thinking about whether or not the market could

be be well? When I came here to Chicago, uh, research on asset prices had again to get going in really serious way, and many people were interested in the question of how well stock prices adjusted to new information. Put in context, they always say it started because of computers. Before really didn't have a serious computer too do data

analysis on. And with the coming of computers, statisticians economists were they had a new toy too to play with and stock stock prices were easily available, so that was one of the first things they started to study. And then immediately the economists said, well, how do we expect prices to behave if the world was working properly, in other words, if markets were efficient. They weren't using that term, but that's what they were after, and they were all

kinds of theories proposed. They had lots of shortcomings to them, and a little bit of time we came to the efficient market hypothesis. And you were in your senior year Toughs. You had applied here, but you never heard back from the school. Is this an urban legend or is this true? So what happened? I called? I called in uh the Dina students toff at Keff answered, that wouldn't happen today. The school is so much bigger. The dean students doesn't

even have a telephone. Way too important for that. So he answered the phone. We chatted for a while and he said, well, I hate to tell you, but we don't have any record of your application. So what kind of grades do you have at Toughs? And I said pretty much a lazy. He said, well, we have a scholarship for someone from Toughs. Do you want it? And then that's how that's how I ended up at the University of Chicago. So so you come here as a

student you're you're finishing your work. Eventually, Martin Miller says to you, Hey, do you want to stick around and keep doing the sort of research you're doing? Is that how you became a professor here? Yeah? I was. I had offers that some other places, um, but lots of the places turned me down. They said it was to Chicago. I don't know what that meant actually, but but uh, it was very rare to hire somebody from your ound PhD program onto the faculty. They're only gonna one or

two before there. So, David, you had a somewhat different experience. You grow up in Kansas, you get a b a in economics and a master's from the University of Kansas. What made you decide to come to Chicago. Well, I did a little bit of reading um in finance um and um my had a finance professor there that gotten his PhD here, and he said, finances exploding really emerging as an academic discipline. It's really one of the the epicenters is clearly Chicago. And so I thought, well, I, God,

I should be fun, maybe be a professor. So I applied here. Uh. Um, Yeah, I started to stay, took jeans class my very first class, and is was the Dean Correct? Was that literally fifty years ago? Fifty years ago this fall? It was. Yeah, it was the first year that Chicago had a football team in thirty four years. And you had written about your experience taking a class with Gene. You called it um life changing and transformative. In what ways was it life changing? Well? Life changing

led to a career. I mean, I can't have much of a bigger change than that, but it's um life changing. And then I think everybody here probably UM, I would like to think of themselves UM having a public purpose. At the end of it all, when you get to be my age, you want to look back and I think somehow the world was better off for your having been here. And so these ideas that were coming out, you know, the essence of efficient markets, it was already

well developed. He had already coined the term UM. And you just said, this is enormously useful. If you look at the way money was managed fifty years ago, people are getting ripped off. I mean, fees were way too high. You know, the commissions were fixed by the government, uh at about ten times what they are today, and uh we forth it's free today. So it's a lot more

than ten x yeah. Yeah, yeah, So it's um. I think there was a spirit of that we can improve people's lives, you know, a real purpose to all of this. Gene um more on the research side, and I've thought my role in all this would be more on the application of the ideas. So you become Jane's teaching assistant. How did that come about? I always I always picked the student in the class in the previous year to be the teachers good student. It's the best of the class.

You don't have to laugh at that. I mean, so best student, professor Farmers teaching assistant. Why not a career in academia. Well, first off, I realized I could never compete with gene I mean when you're at the top of the mountain. Um. But it's really something. It caused me to reflect and you know, really internally and what what am I about? What do I enjoy? And I I just saw this as a great opportunity to go out to apply all these ideas people were developing. Every

new paper coming out was a landmark paper. It was it was all brand new stuff, and uh, none of them was being applied. So we're gonna come back to the application very shortly. But you mentioned that all these new ground baking, groundbreaking papers were coming out. Professor Farmer, your doctoral thesis in four was the behavior of stock market prices, And this sentence jumps right off the page quote chart reading, though perhaps an interesting pastime, is of

no real value to the stock market investor. So this gets published in the Journal of Business in nine. What sort of pushback do you get to the general concept that UM charts are of no use past market walk is of no future predictability to what happens going forward. You got a lot of a lot of pushback from the professionals. The academics looked at the data, looked at what people were saying, what they were showing, and adopted it right away. I mean, there was no prospect among

the academics. Really, it's really the beginning of I mean, if you had to summarize really impact of all this is UM what was going on in Chicago then really changed the way people think about investing. And that's really been the theme, and Jen has changed the way people think about investing more than that's that's the pre and post law line, pre FAMA and post Fauma there's a ce change. I don't like the postframa business meaning meaning post publication of your way. So we not only have

your doctoral thesis, we have the efficient market paper. We have the FAMA French three factor paper. There are a number of very very influential papers that David, if I'm hearing you correctly, you're saying that changed the firmaments of finance forever, changing it forever and for the better. I mean, I get particularly, and there's among students there's this kind of antipathy towards finance and economics, you know, and they don't realize how much UH finance has changed for the better.

People's lives have been improved by these ideas in this research, lower fees, better of risk control, and so forth. So so let's let's compare then and now a little more specifically, and we'll start by talking efficient markets. Back in the days when active managers were dominant, inefficiencies could still be easily found, as could to percent fees. Professionals didn't believe markets were efficient. They thought they were kind of sort

of eventually efficient. I doubt many of them would say that today, what do you think has changed to bring so many people over to the efficient market theory, well, the accumulation of of performance evidence. So back then there wasn't there was no real evidence on how these people did. Uh. And one of the first papers was like Jensen's thesis, which studied new toral funds for the previous twenty five

years and so that basically they weren't beating the market. Uh. And now we know on hindsight that in fact that has to be true that active management is a zero sum game before cost because they don't they can't win from the passive managers because the passive people hold cap weight portfolios. They don't, they don't overweight and underweight in

response to what the active people do. So if there's anybody underweighting and overweighting, there has to be another active manager on the other side doing the opposite, which means if one wins, the other loses some of those is zero before costs arithmetic of active management. He calls it the arithmetic because it is arithmetic. It's not a proposition. It has to be true for everyone, or there's an offsetting loose. So what about technology, how does that impact

how fast information makes its way into prices? It should make it better, Uh, but you know, truth is, prices are so volatile. Markets have always looked really efficient. They don't look anymore efficient than they and they ever have

with the introduction of all the technology. So if information is spread much more quickly now than it was fifty years ago because you have so many sources and they're so quick, but you can't really see in the data that that's had a quantum effect on the adjustment of crisis to information. So we may not be able to see it explicitly in the data. But when we look at things like hedge fund performance, they did very well

before the financial crisis, since then not as well. We look at the money flows away from expensive active towards inexpensive passive, it sounds like lots of investors are voting with their dollars that, hey, the market is efficient and we can't beat it. Doesn't it seem like technology is dry having some of that Because there used to be information asymmetries. There used to be inefficiencies that a savvy

manager might have been able to find. It sounds like it's even harder to find those inefficiencies today than thirty years ago. Um, Hey, you have better information than I do because you're saying, so it's always looked, it's always been that, it's always been zero sum game. I've been in the business now almost fifty years, and every year people say, next year is gonna be the stockpickers stockpickers market? Well Gene saying is it's arithmetically impossible. So so let's

talk a little bit about index funds. Gene. You introduced David when he is finishing his NBA and wants to go out into the world of work, to John McGowan over at Wells Fargo, where they were developing as an

institutional product, the first index fund. What made you think that that was a good fit for for David mac mcclown, who was in charge of the Wells Fargo unit, came to well the seminars we did here for business people, we didn't twice a year, the Center for Research and Security Prices were in seminars for interested business people and Mac came to all of them and he seemed very

you know, into the new stuff. And so when it came down the David said, I see what you do, but I don't want to do it as an academic. So I called Mac and said, I have a really good student here if you've got a place him and he did. So what was your experience like it? Wells Fargo working on that index one, Well, there was a terrific experience, great exposure. I learned the importance of a client work. I mean investment businesses part technology or investment science,

and it's part client work. And as I've told Jean, you know, I studied finance for two years, I've been studying client work at the last you know. And that was we uh, we were so naive about dealing with clients and what they would be interested in, and we were so pumped up, jazzed up about the ideas. Somehow, um, we missed the mark and actually my group got it was unsuccessful, we got shut down, but they were um,

the other parts of the bank kept it going. And now that little project we started end up as through various hands, is now a big part of black Rock. So so let's that's right. It eventually ended up going to Barclays and then black Rock bis them and now I shares I think they're coming up on six or seven trillion dollars not to not too shabby. Um, but let's talk about the application of genes theories to the

practice of working with clients post Wells far ago. You decide to open the small microcap fund out of your second bedroom in an apartment in Brooklyn. Tell us how you applied Professor Farmers research to that microcap fund. Well, the first thing is, UM, we decided UM not to have UH around the portfolio like an index fund, even though at first we call it an index fund because it's very similar to indexing. With the final step being UM that we don't trade UH market on clothes like

many index funds do. UM. And what that means is we were we would be trading stocks throughout the day. Well, that created a lot of skepticism, particularly among academics, because you're going to the marketplace. You know, you don't have any undiscounted information. People on the other side of your trade, largely institutions, think they know a lot about the stock. You know, why won't they just rip your eyes out

when you're trading. That's a that's a quite legitimate question. Uh. Well, I mean that the answer is there a lot of things you can do to use the energy of markets and the power of markets to your advantage. It turns out, for example, if we want to buy a stock. Let's say, um, they have an institution wants to sell it. Their anxiety is greater than ours, so we can use that their interest in trying to do a quick trade to our

advantage and protect ourselves. And there's you know, plenty of information now floating out about the stock that you can use to protect yourself. But that wasn't known back then.

It was just we had a belief in markets, belief and and how they work based on what we studied here and said, look, we think we can go out and trade these stocks and not uh not get killed that there were two pieces done here and it's most stuck turns and most of the academics said, well, it looks good in terms of the crisp historical data, but in fact, if you try to trade it, you're going to get swamped by trading costs. Uh. And that was

the so called market micro struct just stuff. And then we figured out what we found out what dimensional was, No, he really didn't have to pay those big bit ast spreads that you were seeing. You could go fewer, was patient trader. You could do better with the prices, so we could deliver this small stuff premium. But previous to that, people weren't believes what the academics learned was the market

micro structure stuff was garbage. Basically they didn't really understand. Interesting. Um, what we learned about clients along the way, which was seeing in our initial clients were all large, largest pension funds, essentially insurance companies around the world, and they weren't hopening

the stocks of small companies. So really the pitch we got into all this stuff, but we hadn't even easier argument, which was, look, you ought to hold stocks of large companies and small, and you're not holding small, so we'll get you access to small. So that was the really the sales pitch that put us on the map. And so that sales pitch starts to take off and dimensional

operating out of your apartment gets bigger. There's kind of an urgent urban legend that you called New York Telephone to have them add six phone lines and they refused. They thought you were running a bookie joy. Is that remotely true? Yeah, this was about the kind of at the bottom of Brooklyn Heights, uh, bottom of its history. It's so we started on a shoe string and we ran the portfolio. Was the first portfolio manager running out of my spare bedroom. So I knew we needed more

phone lights. So I called up New York Telephone, which was a telephone company at the time. So the need, you know, uh some telephone lines and I know six or eight or whatever, and they thought it was a bookie, so they wouldn't give me the lines. So I had to call up the Treasure of New York tell say, can you send some people down here and give me

some telephone lines. And they went around the whole block and found that there were six lines available available and the whole block that based on their equipment, and they said, okay, you can have those six lines. And that's how we got started. And the punch line is he becomes a client. Yeah, yeah, right, New York that was a clickly became a clie down. So so from from day one, Gene is a board

member of Dimensional Funds. From the day it launches, well even before I mean, we have the idea to start the firm. Uh uh. My first call it was to Gene say, look, you know, it's been ten years since I was in school. We uh, there's been a lot of research, you know, we we needed we needed to have access to you know, new research and thinking. And would you be on the you know, one of the founders and and uh and and be our list you know, our our eyes in terms of research. And he agreed

to do that right away. Who else did you recruit from GSP? Well, eventually we found out we had to have We wanted to create a mutual fund, and a mutual fund has to have an independent board of directors. So Rex and I went over the Business School, walked into Martin Miller's office. They still teach mollarble deiply on the theaters, don't take Yeah, okay, Uh. So Martin was there. We said to you know, he added a YadA small company fund need independent directors and um and said, oh sure.

And I walked out the door and down the hall and Myron Schulz was coming out of his office. I gol Myron, he had the YadA. See Gene's point. Business school was a lot smaller then, and having been to the pH d program, I got to know the faculty pretty well. So Myron uh agreed to join, and so on and so forth. So in fact, until recently, all the independent directors of the mutual fund, our mutual fund be Uh have taught at Chicago, so his his business partner,

Reck Singfield, was in my class as well. He was really the first one to put out an index one, wasn't he? No, No, it was but but Rex. Actually that was when I was his teaching consistent. He took uh jeans class. And Rex was always uh one of these pain in the neck as a teaching consistant students because he was interested in everything you know. I'm so Jean. You moved pretty easily back and forth between academic theory and real world application of theories. Not a lot of

people were able to bridge that gap between academics. Well I hadn't. I hadn't been able to bridge it either until Dimentcino came along. But here it is. It's forty years later, and you seem to continue to be right because he Uh. The reason they couldn't just because one, it's hard to shut me up. I don't take a party line too too too easily. And he didn't. Ever, He and Rex never said would you please do this? What they said was, you do what you do and we'll figure out if we can use any of it.

And that fits in with the way I work so frequently he would come in and say, look, get get ready to make a presentation for our clients. They go, you know, I don't know what your clients are gonna want to hear this. I go, look, Jane, you know, say what's on your mind. It's been controls my department, you know. And that seems to have worked out. So what was your involvement with the investment committee in the early days of dimensional um? Were you participating actively in it?

Were you managing it? What were you doing? Well? I was doing this back and forth with the research stuff. But then they started a fixed income fund based on fixed income research they had done in the seventies, and they said, do you want to come in and trade it for a day? And I said, sure, I remember traded anything. So I went in. I know how much money did we? Here were ten million dollars from somebody and I managed to buy twenty million dollars of bonds

and that was a big problem. Actually, so waitwa, Gene Fama day trader. I just want to make sure that that was the last day. But I couldn't see the problem, that's right. Um, So you introduce the Fama French paper on value dimensional funds, introduce as a US large value and you are small value. In ninety three on another farm of French paper leads to international value coming out in that paper won a Graham and Dot Award of Excellence.

Was there anyone else trying to apply this sort of academic research to either investing theory or the creation of investable products on the market? There they're always kind of um. Departments of big banks and people were kind of playing around with it. But we were the only ones willing to stand up and say, um, this is what we believe and this is what we think you ought to do. Um. Now they're we have all the quant managers out there. We got tons of people uh uh out there, you know,

trying to apply the same data. And back then we basically were at In fact, I often go around and show people thirty year track record on the various funds UM and I go, you know, we had a lot of competition back then, but they don't seem nobody seems to have a thirty year track record. They did not survive long enough to So let me fast forward, um

a couple of decades to the mid two thousand's. In two thousand and eight, David Booth made the largest donation ever given to a business school, which has been called a transformational gift. Tell us about your thinking. What made you decide in the middle of the financial crisis to say, I know, I want to make a donation to my alma mater. Well, it was I'm kind of ties into

the story I was talking about earlier. I mean, what, Uh, it got to be the stage where it was time to pay back, and um, I mean I wouldn't been anywhere without Chicago. So I said, I wanted to give a big chunk of what I have and uh, um, this was a mix of stocks and cash, Is that correct? And it was actually, Um, I didn't have a lot

of cash at that time. It was because we just recently started to accumulate the money big enough to but I had stock in the firm, and so I gave him basically ownership of a big chunk of the of the stock that I had, and they were willing to take a bit on that. And it turned up to be a convet and that that comes with a dividend which continues to pay its way to uh to booth. Were you at all concerned that you were right in the middle of a financial crisis giving ownership of a

financial firm. A lot of firms did not make it through the financial crisis. Yeah, maybe it ties in with the earlier question about what I learned from here about markets and how they work, and you have to kind of keep in the depth of the financial crisis. It kind of had to keep reminding people. You know, markets are where buyers and sellers come together and in a voluntary transaction, both sides of a trade have to feel like they have a good they got a deal, or

they don't trade. They don't trade. So you know, there's a lot of trading volume activity and a lot of well known investors investing, and it's just you know, one of those UM. It was comfortable those markets were functioning the way they ought to function. Sometimes they go up, sometimes they go down. Gene, how did David's gift impact the Graduate School of Business? Huh, it was. It was a big lot of cash flow that was not there beforehand,

so it gave rise to lots of research centers. I think you made everybody feel as if the future is more or less assured. UM and the university also got a pretty good take out of itself, as they always do, so David, you tell a charming story about sitting with the dean and you It wasn't your intention for this originally to be a naming gift. They seem to have brought that up to you. Can you you right know?

I said I wanted for the reasons I outlined, I wanted to make a gift a big part of what I have, um, and so this is what I want to do. And the Dean, Ted Snyder at the time, said we were looking to have a naming gift from the business School. This is a lot better deal than that what we're looking for, So we'll name the school after you. Okay, whatever you know. So since then the school has continued to grow in in both reputation and

number of students and the offerings here. Um. And then fast forward, uh, five years after that, Jane gets a phone call from Sweden. Let's talk a little bit about that. What was your experience like, Uh, did the phone call manage to reach you? Tell us? Tell us what that was like? Well, they think they call it early the morning Stockholm time, which is really really in the in here. It thinks about five or six o'clock. So I don't know. You never expect to get it, because a lot of

people could qualify to to get it when you get it. Somehow, Pete they the people he somehow had I guess or whatever. I don't know why, because they were newspaper people at my door ten minutes later after after the call and they wanted to come in my house. I said, no way, you're class. Well, I had a class that morning, and you don't. You don't get a special dispensation when you could. But I had never missed the class in all the

years I've been teaching in fifty years. Yeah, I wasn't gonna start now, so when I wasn't gonna let anybody in because the kids in the class were paying a lot of money to take that course, So no way I wanted people from the outside disturbing it. So, David, you ended up going to Stockholme with Jeane. What what

was that experience like? Um, well, of course, being Chicago trained, I've been to the ceremony before with when when Myron and Bob Martin got there Nobel, So you know it's you're kind of used to this of you so third times of charm. Yeah, so the uh so, I I said to Jane, give me a night, uh to organize something special. So I talked to Abba has a museum in Stockholm that they just opened, and I talked them

into running me out the museum for the evening. So Jeane, you know, he has four kids and that time about eight grandkids and they're all u big music fans and so the Abbe Museum has a lot of u um um things you can do to have fun and um. One of them is a big stage with a scrim on it and with four Abba musicians singing with a microphone right in the middle, and so you it looks like you're singing with them. And so I looked, so this went on. They were the kids, The kids went wild.

I looked over Jeane like and Sally, and I could see that they were they were having fun. So it made it special for me. So the whole thing some people have described as surreal. What was your the day of the day after So they had a big event here of the school, really big event, I mean news and everything. The circles around the building, we're all full

of students um. And the next day the Nobel people have a camera committee there following me across the Harper Center, the big hum in the middle, and students are working on on the sides, and we worked down the middle. Nobody looks up. So we get to the other side, and the television guy says, nobody looked up when I said, this is the University of Chicago. If they had to look up every time I nobil fries when I walked right,

get nothing done. And and to show you how true that is, David Booth and Gene and I get an elevator on four to come down here, and a student gets in wearing headphones, turns around, doesn't say a word to either of you, and the four of us wrote down in silence. He was completely oblivious to who was in the elevator with him. So I'm always fascinated by that sort of stuff. So so let's let's talk a little bit about um some other things that you've written about,

and the two of you have applied. One of the quotes of Professor Farmers that I enjoy is quote, why is anyone even reading Wall Street Research? Unquote? So I have to ask you, why do people read Wall Street Research? I don't know. It's it's businessman's pornography, basically business based pornography. It's not the real thing. It's not the real thing. Okay. Um, so let's talk a little bit about value. I'm gonna

try and realist. Let's talk about value and growth. Value has a tendency to go through these longer periods where growth is beating it. And over the past decade it's been if you weren't in big cap us growth, um, you were underperforming. Everything has been um the SMP five hundred. When we look at emerging markets, we look at small cap, we look at value. Heaven forbid, you're an emerging market

small cap value. It's been terrible. What sort of lessons should investors take from this extended period of growth growth beating value? Well, the question they want to ask is as value dead? Okay, let's Kennan. I actually were reading a paper on this at the moment. But the bottom line is there's so much volatility in these premiums that you can't tell if the premium is teamed or not. It may have changed, it may not. You just can't

tell us. Let's see a wholl within the range of chance experience that the poor return experiences well within the range of chance over the time that's that it's occurred. So you really can't say anything. So so there have been other periods of time where value is done poorly. I remember hearing in this value investor was washed up, this guy named Warren Buffett. He doesn't know what he's doing. And typically when you hear that, it's usually at the ends,

towards the end of that period of underperformance. Um, you're suggesting we won't know for some period of time if the value premium is gone or if it's just a regular cyclical underperformance. I don't think there are real cycles to it. I think it's just kind of random that go through good in bed periods, and you know, you can't recognize them except that from the fact you can't

really predict them. Uh, we've we've tried tests, we've tried predictive tests, and they have marginal nothing worth even focusing focusing on. So basically is stuck with the volatility of equity returns. They don't allow to say very much about what's happened to expected returns going forward. And and David, what we've seen a huge proliferation of various factor funds, not just the three factor, of the five factor, of the seven factor model. They're now hundreds identified. What does

this mean for investors? Has has the proliferation of all these new factors been good for investors or is it a non event? Well, I mean I think on balance um UM has been overstated and whatever whatever it is the you know, I think UM researchers identified, you know, factors that seem to explain differences in average returns. But there can't be hundreds of factor I mean, they got it, They're probably at the end of the day, they're probably

a few factors. Uh and Gene and ken. One of the things they try to do is instead of trying to identify more and more factors, just take the researchers out there and can shrink it down to simpler, you know, more factors that matter, factors that matter, well, lots of lots of these things that just different manifestations of the same thing. Give us an example. So value can be very measured in many different ways. I can use the book to market ratio you need to catch full at

the price. They can use lots of different variables, so I identify what is basically this same thing. Uh. And there are thousands of finance professors out there who all want to get ten here um they have the publish to do that. So they're all just kind of searching through the data finding stuff that maybe there only on a chance basis that won't be there out of sample. So there's lots of work being done and it remains to be done on what we call robust this. How

does this stand up when I have new data? So we we've always been into robustness in the sense that when we found it in the ninety two paper, we went back and collected the data back to that data started in the sixty three We then went back and collected the data back to to look out a sample, and then we looked at the international leader to look

at a sample, and so pretty much the same thing everywhere. Um, now we've had a bad period of this, but relative to all of that, it doesn't look that doesn't look that serious. And I have to ask you a question about behavioral economics. Um, we're here in Chicago, where we could short of call at the birthplace of behavioral finance. What do you think about that area and what's your

involvement with it. Well, my good friend Richard Taylor, who is the king of the behavioral finance people and another Nobel law that no one I teach them and say I'm the most important person in behavioral finance. Are because most of the behavioral finance is just the criticism of official markets. So without me, what have they got? And and you and and Dick Taylor are golf parts are so do you argue across eighteen holes or you know?

The reality is we agree on the facts, we disagree on the interpretation um For example, he thinks the value premium is the result of people's misperceptions of what accounting information and other information looks like. That it's all based

on misinterpretation of information. Now, if you believe that, then you think it should go away, because it's possible to teach people that they have these these biases are professional managers should be able to get past them, but they still have emotional reactions that sometimes they can't get that. That's the thing about behavior lea going elements. What their studies seem to show is people don't learn from experience. If you're stupidly, repeatedly stupid, you don't learn. And most

people are stupid. I mean, that's that's the provisation. Someone has to be on the wrong side of that trade. You said it's a zero sum, right, So so you guys agree more than you than you might realize the fact, but not the interpretation. But there is no behavioral finance. Wait say that again. There is no behavioral finance. There's no it's all just a criticism of official markets really with no evidence. Is dick here? I think he would

disagree with that. So that's not so sure because when when I put the challenge to him twenty years ago, I wrote a paper that said, Okay, now you've been criticizing us for the last whatever, it's time for you to come up with a theory that we can actually test and see if it works or not. And what was response? We're still waiting. Actually you presented that paper at a at U c L A at Gene walks in and says, all the way over, I was thinking about breaking my leg or something. So I can catch

some sympathy here. And to be fair, when Taylor won the Nobel Prize, he admitted his plan was to spend the money as irrationally as possible. So even he even he agrees with you on that. UM, I wanted to ask about, uh, some of your comments on Beta. You said beta is dead. Do you still believe beta is dead. Well, the evidence basically says that the relation between averaging tune and beta it's too flat to be explained by the capitalistic pricing model. That's a real shame because that model

is so simple. Um, if it were true, it would really be like life, a lot simpler in many ways. But it just has never worked very well. All right, So what we're gonna do now? I have more, many more questions. But this thing is lighting up, and we have questions from the audience. So I'm gonna I'm gonna ask a few from this and see, uh see where we go from here. Um, let's talk about your views on the future of active management. Where do you see

the industry going in ten years? And this is for both of you, active management active management, Well, it's been shrinking really slowly. So when Kenn did his American Finance Association Presidents did his president speech, what he's what he said was one of the things he said was we've gone from zero to and I think it was about forty years at that time, maybe a little more, and since then we've gone to like I think it's up

to thirty or forty. Now that's passively man. So that's permeated very slowly through the profess Yeah, what where it will go from me? Or we'll see and and some people have made the argument you have to separate active from expensive locost active is attractive. Obviously this is a key tenant at dimensional funds. How much of the move away from active has really been away from expensive I

think a big part of it. And in fact that a lot of the move to indexing is through e t f s and a lot of the a lot of that is just a new version of active management. Um or managers say, look, I don't think I can pick individual stocks, but I can tell them sectors of the market, So let me buy buy E t f s. So it's really kind of confusing as to uh, you

know what the trend has been in active management. But I I think active managers are resourceful and always compe with new ideas of trying to entice people with magic with magic. So the pushback against um efficient market we always see this argument. Berkshire Hathaway had strong returns in its early years as the result of Warren Buffett's skill and security selection. How given Professor Farmer's comments and market efficiency,

how can this early success be explained. So you take you have probably a hundred thousand people picking stocks right right over a period of time, then you pick out the one who does the best and impute that to skill. The problem is, if I have a hundred thousand people picking, what's the probability that one of them will look extraordinary? Purely on a chance basis, You'll you'll always have some outliers that look, you'll get a big old layer in

that in that experiment. But that's the way that the newspaper accounts run. They take after, they look after the fact, and they pick out the winners. So every year, for example, they pick out the best performers of the last five ten years, and you look at the following period. No, no, no correlation between past the tay and and in fact we've seen the morning store manager of the year tends to significantly out before underperform in the decade once they

win manager of the decade. But that would surprise me too, I would think they'd just be random. No, no persistency, In fact, negative persistency. We've had the sas in that subductative. How much persistence is there in performance? The answer is

basically zero. Zero, and I have to the best predictor of future performance is FeAs and expenses that you know, it's ironic that came out of morning Star, that did a big study and they sell their morning Star rating and it turned out ignore everything else, just picked the cheapest fun pretty pretty astonishing, right, Well, they come up. I think they came out and said came out and said there's no relation between between future performance and the

way we ran things. There's another question if it comes out to that, so so um. One one of the questions that is asked by the room. If the mark it becomes truly efficient one day, what happens to all the management farms? That question assumes that markets aren't truly efficient today. How do you respond to that? What's the evidence? No, I mean I don't think it's I think all of

it is wrong. So it's different. There will still be a management business, you just will have very little active in it, so that you have to have some active investors to make price prices efficient. The problem is you don't expect them to be professional managers because the logic of being a good investor is that you should get their returns if you don't hand them back to other people,

you take them back and higher fees. You know, that's the human capital activity is picking stocks or whatever investment management. So if you have real skill, you should be charging, you should go all the retention should go to you, Naz your clients. And and this is for both of you. What sort of opportunity for out performance do you see in private markets given that in for nation, in that space is so much more opaque than in public markets.

The problem is there are lots of good people studying that, but they hamstrung by the lack of good data on people who live in people who die the fund. You know, the managers who live in what self reported. It's not like so you get you get it. You get a very kind of biased set of data on that. But you know, it's kind of depends on what into that business you go to. If you're looking at managers who actually run the companies that they buy, they may actually

be able to add value, but it's management value. It's not stuck picking value. If they you're picking companies that have a good idea but a fully run probably you can have a lot of value added in that case. But again, if you go to the guy's doing it. That's the that's the downside of it. They're the ones who take all the profits out of it. Well, that's that's the logic of human capital, right right. And we didn't get to a question before I have to ask

about bubbles. And this goes back to be okay, So I don't know how to bleep out the word bubbles. But what do you mean by okay? So folks like Failor and Chiller would describe a bubble as a period of excessive market enthusiasm that leads prices to far outstrip their fundamental valuation. What's the testable proposition here, though, I don't know, can you Well, the way I interpret it is you must be able to predict the end of it. Bubbles,

it would be something with a predictable ending. So it has to be measurable by a predefined set of parameters, and you should be able to identify the end of it. So if we were to say every time that fails the test, I mean, I mean you can't. People can't identify bubbles that way until after the fact. After the fact, it's it's easy. But this is famous theory around about you know, the early origins of market efficiency, which home

work working, went into the faculty lounge at Stanford. He was agriculturally uh prices, and he showed them chats of of of prices, and he said, these were chats of commodity prices, and he wanted to not see if they could identify bubbles and the prices, and every to a man, they all could. There were no women. To a man, they all could. The problem was what he was showing them was accumulative random numbers, as those just generated uh stuff.

So that the message there's people see bubbles where there are now h. So here's a here's a really broad question. Given the societal angst of people attacking the value of a business education, what is your belief in the value of this education booth and how should we communicate this better to society? Well, I think it's it's incredibly valuable to society, um, because if we are going to make lives better for people, part of the answer has to

come from better and safer financial products. And just that's the reality. And that's been the history. I mean, it's like I say, I look back on my career and uh working with Gene and you know, we've been part of the movement towards lower fees and better controls. So I can find it irritating when somebody says, really, the only advanced the last fifty years has been the A T M. You know. Uh it's uh qu yeah, live,

we've live based all this work live, We've improved lives. Uh, and there and other people with sharing the I s we're not the only one. But I mean, I don't think it gets much better than that. And uh so I would hate to have people, um not to get into business or particularly financial services. You can have a good career in financial services and at the end of it you can look back on it and take pride in what you've accomplished. It's as simple as that. So

so that leads to the next question. What keeps both of you working? Neither of you have to work, Why do both of you still get up and go to the office each day. It's fun, it's fun challenging, it's important. I mean, it's exciting to see the retired people living better as a result of these ideas, or better able to send their kids to colleagues or whatever. I mean, these are These are not you know, ideas that have no importance. I mean, these are you know that's you

can get behind that kind of idea. You get a lot of satisfaction out of coming up with stuff people haven't seen before. I have been recognized, and we have time for one last question, and I'm going to go with something about, um, what do you think the future of Chicago Booth looks like? What is next in store for the school? And this is for both of you. Well, I can tell you that. So I've been on the

faculty since nineteen sixty three, students since nineteen sixty. In the sixties, basically there was a pretty good economics group. There was a developing finance group, and that was it. I mean, there's the school's junk. Well, but look that was not unique to us. So I remember when I was recruiting as a student, UM in college not from here. The people recruiting said, why do you want to go to a business school? They don't teach you anything, we

don't pay anything for what they what they do. And that was too at that time. I think, and what's happened through time is not just finance, but every other area has been academically made more become more successful. So marketing, accounting, statistics was always pretty good, but it was never part of of of business schools. So now we have really front rank faculty and every single discipline. The school is so high, high level, competitive on the faculty side, on

the research side. But it's just there's no relation to what it was fifty years ago. It's a totally different professional place. On the students side, I think there was a challenge, and I've been complaining about it for a long time. Students don't work as hard as they did in the old days. I've heard this is a very very difficult school to work your way through. Well, but the reality is we keep track of hours work per per per class out of class. When I started teaching,

everybody was around fifteen per class. That number has dropped dramatically through time. I bet this room would disagree with that. No, no, no, no, we have the statistics. It's not it's not it's not a guess. And and David, what do you see as the next decade holding for the Booth School? Well, I'm not really in a position there. I mean, wow, I just gave him some money. I figured they can figure that stuff out. If I had to figure that out as well, I mean that would be a real hero.

You know, I I'm just um, I'm not. I don't know where it's gonna go, but wherever it goes is going to be important. And and that's the perfect spot to end. Ladies and gentlemen, please say thank you to Professor Gene Fama and David Booth. That's my conversation with David Booth and Gene Fama. If you enjoyed that, we'll go to Apple iTunes, look up an inch or down an inch, and you could see any of the nearly three d conversations we've had over the past five years.

We love your comments, feedback and suggestions right to us at m IB podcast at bloom Berg dot net. Be sure and give us a review at Apple iTunes. Sign up from my daily reads at rit Halts dot com, follow me on Twitter at rit Halts. I would be remiss if I did not thank the crack staff that helps us put these conversations together this week and this week was an unusual expedition. We all had to slip out to Chicago. The folks at the University of Chicago

were great. They did a really great job in setting things up so that we could both videotape and audio record this. Michael Boyle is my producer, and he was on hand there along with a few other folks from Bloomberg that really made everything go very smoothly. Charlie Volmer is my audio engineer who helped cut this monstrosity together. Atica val Broun is our project manager. Michael Batnick is

my head of research. I'm Barry rit Halts. You've been listening to Masters in Business on Bloomberg Radio.