Roger Ibbotson Discusses the History of Finance (Podcast)

a million things. He really was instrumental in the development and expansion of CRISP, which is the giant stock database UM originally out of the University of Chicago, Ibbotson associates. He's on the board of advisors at Dimensional Funds. His curriculum vitae is his pages and pages long. He was extremely generous with his time and shared all sorts of

oscinating things with us. If you are at all a stock market wank, if you're at all interested in why some stocks go up and others don't, then you're going to find this conversation to be absolutely fascinating. So, with no further ado, my conversation with Yale Universities Roger Ibbotson this week I have an extra special guest. His name is Roger Ibbotson. He is a professor at the Yale School of Management, where he is Professor of Practice Emeritus

of Finance. He is also the founder and chairman of Ibbertson Associates, which was sold not too long ago to Morning Star. He is on the board of directors of Dimensional Fund Advisors. He is the chairman and CEO of Zebra Capital Management uh an equity investment and hedge fund manager. He has also taught for many years and served as executive director for the Center for Research and Security Prices

better known as CRISP. He's the author of numerous books, including Investment Markets, Gaining the Performance Advantage and Global Investing, The Professionals Guide to the World of Capital Markets. Roger Ibbotson, Welcome to Bloomberg. Great to be here. I've been looking forward to having this conversation with you for a long long time. I've certainly been familiar with Ibbotson Associates since you founded them back in nine But let's go back to your days when you got your PhD from Chicago.

What was the state of the world in finance, like when when you first entered the markets, Well, you know, it was really things were happening at the University of Chicago, and ultimately many of the people there got Nobel prizes. But what went on So, but if you just take take us back a few years before that, uh, finance really hadn't developed as a as an academic step tacos security analyst or how to pick a stock or something like that. And then and then we started really developing

a whole theory of how finance works. And I gotta say I had I had great people to work with. Their. My chairman of my committee when I wrote my dissertation was Eugene Fama. He want to know about prize. I had him my committee. Uh, Martin Miller, he wanted to know about prize. Myron Shows want to know about prize. Fischer Black he you know, you have to be alive to win a know about prize. And unfortunately he died before that, but he certainly would have. So it was

really a tremendous group to people to work with. That's a Yankees murderous row of Nobel laureates there. Yes, uh so, yeah, it was. It was a wonderful time going on. So actually all the so many different discoveries were taking place you mentioned that the study of finance really hadn't developed, um academically as as much as it has since. Tell us about the Center for Research in Security Prices for CRISP. How did that come about and what was your involvement?

So the Center for Research and Security Prices we called CRISP c RSP. Well, CRISP was really set up by James Lourie and Larry Fisher, and they were collecting data on on the stock market returns. And their data started in and now you see a lot of things started in. So they were collecting this data and um, that's what started the center. Uh. And I gotta say, um, they once they published this data, uh, they never kept it

quite up to date. But once they published it was people were so interested because they had no idea what actually had happened in the stock market. They didn't actually have any sense for how stock market returns were like. In fact, they kind of remember the thirties and how terrible it was and so forth, and they knew things were better lately, but but they still didn't really aized the high returns and actually had happened in the stock market.

That's quite fascinating. So when you say this was not much of an academic study. Are you really referring to the fact that previous to the creation of CRISP, there wasn't a whole lot of data that could be analyzed, at least not consistent data in a in anything approaching a um well structured way. Yeah, Chris really put the data on the map. And then and when I got my phdre the PhD there. But I actually stayed on as a professor, and and when I stayed on, I

became the executive director of CRISP. So I wasn't, I guess, helping to put the data together. And uh, it was really not only the University of Chicago that was using that data, but all the other universities were really using that data. So this suddenly, suddenly finance became an empirical subject that people people could study. That's the word I was hunting for. It had no empiricism previous. This was

what years did you begin with CRISP. Well, I I got there as a student in nineteen sixty eight and became a faculty member in nineteen seventy four, and I guess I became executive director. I don't remember a few years after that of the center. But I was always involved with Chris from the start because I was always interested in data. And in fact, um, well I got a I got a job while I was getting my PhD in the investment office of the university, and I

came out the endowment right right. I was a consultant to the office and one of the things they asked me as a consultant was what do we do with his bond portfolio? And I said, well, I can manage that, And so they actually has a PhD student. I was

actually managing the University of Chicago bond portfolio. And how large was that at the time, Well, these numbers were not large in today's time to take a couple of a couple of hundred million, you know, but still a PhD student is like, okay, congratulations, you're running a few hundred million dollars. That's out nothing, especially in the late sixties. Yeah, it was. It was a great thing to do. And and and it gets back to what you were talking

about when people. Once I was running the bond portfolio, people would ask me when are Fisher and Lorie are gonna update their study? Because first the first day that came out and went from to nineteen sixty, and then it was the nineteen to nineteen sixty five and then nineteen but this was seventy to seventy three, and people were asking when we want to see the updated data,

and I would ask. I would ask Larry Fisher when it's gonna get updated, and Larry would give me a date, but the date would go by and it wouldn't get done.

And and so this is when I really took the ball by our hands, and I worked with Rex Sinkfield, who was a student of mine at the time, and we decided to put this put data that literally all the UM we used a certainly to the Center for Research for but we put some quicker data together to get a sense of what something up to date actually and and we brought it up to date actually through

seventy six at the time. So that brings us to which not coincidentally, is when you launch Ibbanson Associates, tell us about what motivated you to go out and hang your own Shingle well West stock spons bills in inflation. I was an assistant professor and we're just we had just published stock spons Bills and inflation um first as a couple of journal articles and what one which was on the past and want to actually predicted the future, UM long term, but then also as a monograph from

the cf A Institute. And every everybody was so interested that, UM I was. I was getting inundated with letters coming in CEOs asking me for information and and response of this this question and that question. And and I was at A. I barely had a secretary. I had a part of a secretary. And I didn't know what to do with all these letters from the c I O S, c E O S and c I os and and so forth. So I started hiring a couple of people

to help me out with this. And that's what that's what it caused me to actually started ivots and Associates. I had plenty of business at the start because somebody people were actually requesting things from me. You sold Davidson Associates, UH and Advisers to morning Star back in two thousand and six, pretty good timing before the tide went out in O eight oh nine. Um, what was that process? Like, they're a pretty big shop, morning Star. How did that

transaction go? Well? In two thousand and six. By that time, I was already at Yale Yale School of Management as a professor in practice there. But in two thousand and six, uh, the UM we had a hundred and fifty people and invots and associates with offices in Chicago, New York and Tokyo. Actually um, but still we were very small compared to morning Star also in Chicago, right, don't they They They

were very far. They were just we were like two firms that were somewhat similar that were only a couple of blocks away from each other. That that's a pretty natural fit that the large morning Star will acquire the smaller Ibbotson in the same hometown. Actually, I gotta say that we we were around first because I remember when Joe Mansueto and then I in eighties but came to a few of our UM holiday parties and things like that, and um. But he but I gotta say, you have

to give Joe Massuado credit. Morning Star really took off and grew. We were growing fast too, but nothing like they were. You focused on data about markets generally. They focused specifically on mutual funds, and that became a giant growth area for them, especially with the Ariskle laws in four oh one K coming up in in the early seventies. Well, everybody was in the arrested was more um yeah, four one case really started developing in the really in nineteenes.

First it was those defined men define benefit pension plans, the dB plans, and uh we worked with them to something stanton. But Marty Sarra actually picked the retail end of it with a four OK market and the mutual funds yes and so um. But we were too very fast growing firms that were alongside each other for a couple of decades in Chicago before they actually brought us out.

Quite intriguing. Uh, let's talk a little bit about CRISP and and we mentioned earlier you worked on the nineteen twenty six to present database of of stock market returns, but not too long ago a new historical database was added for the New York Stock Exchange, going back to eighteen fifteen, straight up to the original sixth date. What did you learn from that database about equity returns and

about volatility? Well, you know, first of all, we uh we had to collect hand collect all that data back to UM. What do you mean hand collect? Well, it was it was in the Yale Bayneke Library where you had a look at micro fich and old newspapers of the New York Shipping and Commercial Chronicle, and it was mostly about which ships are coming in to the harbor, but they also listed to New York stock market prices. So, so how do you error check that to make sure

that nobody makes a transcription error? That sounds like, you know, a century of data. It's really easy to make a mistake with that. Well it it is, uh, And I'm not saying there's no possible mistakes in there because it had to be hand collected. But there aren't that many companies in the early days either. So if we're not talking about the the three thousand stock that we might be talking about today, we're talking about, you know, less less than a hundred stocks over most of this period.

Quite quite fascinating. Um, so what did you learn about equity returns and volatility? Well, you know that data in the nineteen eighteen nineties eight hundreds was kind of unusual because stocks tending to be issued around a hundred. It almost looked like you were looking at bond data because everything is trading at par or a little above. Well, yeah,

they were trading. They may trade in the range of fifty to two hundreds or something, but they kind of looked like bonds, and we had to keep on investigating further and further to find out where are these these These are stocks, aren't they? You know? And they were, of course stocks, but they but they looked like bonds.

They weren't that volatile. They weren't. Of course, the trading wasn't anything like the trading not a lot of volume and trade by appointment only or did they actually that was on the there was the the course of button uh button would agreement, you know, they were traded on on the curb and then uh then eventually inside. But so they were continuously traded but not uh and and and even the volume wasn't even recorded at that time, you know, but we did get the last prices. That's

quite fascinating. So, you know, CRISP is very often associated with factor based investing and equity risk premium UM. What can you tell us about that? What What do we know today about the equity ris premium that we didn't know in the pre CRISP days back in UH The theory was developing in the nineteen sixties, especially with the UH and the nineteen fifties and sixties we had the Harry Marco Wits came out with his portfolio theory in

in NFT two. It was at the University of Chicago. Actually, and I gotta say it's kind of interesting because at the first I didn't even Milton Freedman was reluctant to give Harry Marco it's a PhD for this because he wasn't sure this was economics. Okay, so you you've just lowered my estimation to Milton Freeman a notch. How do you not, Well, my hindsight biases Harry Marco. It's of course you give him a PhD. But I guess that's

just hindsight bias, isn't it. Yeah, well, of course, now, of course Harry has a Nobel Prize too, and so so. And then we had the Capital Esta pricing models coming along and in the ve with Bill Sharp and and John Lettner and by the way, Harry Mark WIT's until Sharp there's still around today. We can talk to them, and so sure Sharp is out in um northern California. And where's Mark Wits these days? He's in southern southern California. So at the University of Chicago, when you get an

office as a faculty member. Do they give you like a key to the office and a Nobel prize? How does that work? Everybody in that faculty has that. That's a lot of jewelry in that in that uh faculty department. Well, actually, Bill Sharp wasn't ever at the university see Chicago, So um, not every Nobel Prize went to the University of Chicago. People. But you've you've named seven or eight of not counting bills, if you've gone through a whole bunch of them. Um,

what was it like working with that crew? That is some amazing list of advisors. Well, we did know, we did recognize that things were going on, that this was this was a special place. We we could see that. I mean, it wasn't like we were surprised afterwards or something. I guess we're surprised about the Nobel Prizes perhaps, but we weren't surprised that we were the center of thought leadership at that time. And and uh, one of the

things we were theoretically understanding is risk premiums. So not not only in the stock byer where there's an equity ris primum, but also in the bottom market where there's an interest rate or I and risk premium that long bonds have higher yields and short bonds, and and then there's a default premium, the fact that that if you buy lower grade bonds, they tend to have higher certain higher yields, but even higher returns and higher grade bonds.

So you had all these different, uh, different risk premiums. And that's what caused me to put this stocks, bonds, bills, and inflation together, this data because it was really the purpose of seeing what are what were the historical payoffs of stocks versus bonds, stocks versus treasury bills, bonds versus treasury bills, Treasury bills versus inflation, uh, the bonds that could default versus treasury bonds. All these things were risk premiums.

And the purpose originally was to measure these risk premiums and see how they had done historically because we had the theory, yes, and it did that. Of course, they had great payoffs. And and that's part of the reason why it became so well known so fast, because everybody could now see the numbers of the kinds of things that we kind of knew were there, but we hadn't seen the numbers. You could quantify risk and apply it

to future expected returns. Well, that's the other thing. These were historical, but we were other paper we had, uh, this is with Ibbotson and sink Field. The other paper we had back in nineteen was a projection of what would happen and how how you could go out the next twenty five years using the last fifty years to extrapolate out into the next twenty five years. And we're not literally just extrapolating just the pure numbers, but we're

extrapolating the wrist premiums. And those wrist premiums were extrapolated out to come up with these forecasts, which actually turned out to be almost on the money forecasting what would happen and by the year two thousand, so, of those four stocks, bonds, bills, and inflation, which do you find is the easiest to forecast? And which is the hardest? Well, the easiest, well, the hardest to forecast is always the stock market because there's so much volatility, there's so much noise.

It's a scary place to be. That's why it has that equity risky And and what which is the easiest to forecast? Actually it would be the UM I would say in a derivative form, it would be the real kind of the real interest rate, the difference between inflation and treasury bills. But of course treasury bills, treasure bills are mostly moving. Uh, the yields are and and bond yields in general are mostly higher or lower because of

the expected inflation. So when you're in high inflationary periods, you have high bond yields, and when you're in low inflationary periods, you have low bond yields. Like we have very low bond yields today, but we have very low inflation. So a very large part of a body yield is the expected inflation. And so uh, if you we know at every point in time what the inflation is, and that's usually a pretty good indication of what the expected

inflation is going to be. As you go further out, you can you can't forecast it quite as well, but at least in the near term, have a pretty good idea of what expected inflation will be, and and therefore you have a pretty good idea of what what what these yields and bonds are going to be. So you're the perfect person to ask a question about that. We've been debating internally in the office is and back and forth as too. Should stocks have a higher valuation these

days for a variety of reasons. But I'm gonna ask it um differently. It costs nothing to trade today, It's practically free. You could buy mutual funds or ETFs for practically nothing. When you look at the historical returns and let's call equity with dividends reinvested um, you're paying a lot more for a portfolio. You're paying more for transactions. This was go back before discount brokerage. It was not cheap to buy yourself something. How does that figure into

historical returns or on? In a large enough portfolio, even those higher prices aren't all that relevant. Well, it may mean that the valuations should be higher because because the trading costs are not as high anything. That's and I've certainly studied liquidity. Risk is one one big consideration, but liquidity is probably the second most important. Yes, the more liquid something is, the more valuable it is. The less liquid,

the less valuable it is. And but but the counter this course is that that something that's less liquid might have a lower valuation but a higher expected return. Very very very interest them. So you are currently a professor at Yale. You spent time at the University of Chicago. Let's talk a little bit about academia and the real world. And you've moved pretty comfortably back and forth between the two. What is the difference between how ideas get applied in

the business world. I probably shouldn't call it the real world, but the business world versus the scholarly application of ideas UM at a place like Chicago or Yale. Well, you know,

there used to be a big gap of time. I remember like studying, as an example, duration on bonds, where the devoted duration was developed around and and I. And I was managing a bond portfolio for the University of Chicago at the time, and and um I was using duration, and I could figure out with duration, you could figure out easily in your head how much if yield changed,

how's the price of a bond would change? And but nobody knew that in the nineteen seventies, Yes, and and I gave a talk on that, I remember, and and it drew a large crowd. But it wasn't new new material. It was merely uh stating something that was known, I guess academically, but not known in the business world of the real world, and so giant arbitrage opportunities. We're talking about thirty forty years of delay before something kind of caught on. And even though it's a very simple concept.

So uh, I think that that time though, has dramatically shrunk. Now there is a connection, UM, all my life, I guess I've been trying to break that connection down. In fact, the title I have you've read these long titles that I have at at Yale University as a professor in in the Practice of Finance. Uh, that is a that is a title that actually is is a professor rank but not not tenured. But it allows me to have

business activities on the side. And so ordinarily your constraint as a professor, you can't do a lot of business activities on the side, but with this title I can, and and I guess I in the end, I'd not tenured, so I don't go to the committee meetings, and as many as many as the committee meetings anyway, I still have to go. So you're you're identifying that effectively that

bonds are misspriced relative to changes in interest rates. Was there an investment opportunity to to um arbitrage those prices relative to where they're supposed to be. This was a course in the nineteen seventies, so not not today. I don't think you find these kind of possibilities, but you did find distortions in in the nineteen seventies, and so

it was one of the things I did. Now, of course, the bond market is dramatically changed, much more efficient than it was back then, and all the markets have become much more efficient since they were back then, because when something has discovered, it gets the financial literature is not something that just academics rate, it's something that that the business world reads. And so now there are things are almost immediately implemented. There's I don't know what the leg

would be between. It wouldn't even be five years, uh between what's discovered and was actually goes into practice. Ed Thorpe wrote about um the arbitrage opportunity between equities and warrants, and nobody was tracking them. There was a joint gap, and that also took a good couple of years before everybody else got on. And for a while it was

easy money. And then that arbitrage went away, and it particularly went away with the black shows options model which could price everything very accurately, from warrants to options to any derivative relative to the underlying Yes, and and I you know, I wasn't in at the University of Chicago with Fisher Black and Myron Shows there right after they

developed it, and and before they published it. I said to them, why don't Yes, and I suggested that, And actually I had, I had actually bought a seat on the cbo E had a seat on cbo E. And I, um, I didn't go down there myself to trade, I said, a trader down there, But but I wanted I was trading at it. So I was trading on that, uh for a while, using their model, using their model after

it was published. It didn't matter that it was published, because at first the Black Shows model, with all its long normal distributions and continuous time, was complicated enough that you could hand it out on a piece of paper to people nobody would get it right. But what did happen, uh, not long after I started trading these was people figured it out well more than that Black and So's Fisher Black Um put it up in the members lounge of the a computer system in the cbo E. So my

game was over. Well, let's talk a little bit about your game and in the real world as opposed to or in the asset management world, as opposed to the theoretical academic world. Maybe that's a better way to describe it. Your chairman and chief investment officer of Zebra Capital Management, what do you do with Zebra? What sort of strategies do you invest in? And how do you take the academic theories that you work on and apply it to actual management of assets and capital. We have a new monograph.

I have a new monograph with the c f A Institute at UM. It's called Popularity, a Bridge between Classical and Behavioral Finance. And this this monograph is co authored with Tom Azerich and Paul Kaplan and James Song. They are all three authors from morning Star and myself. But it's on popularity and really popularity is the main concept, the principle that we manage the money at Zebra Capital. Popularity. It comes down to something you can kind of easily understand.

And of course you can get a copy of the monograph. It's not expensive. You can buy it on Amazon for twenty two dollars I think, and you can get it downloaded for free. I think the I c f A institute. So see if they institute dot org here it is perhaps you have to be a member. I have to be a um A see if a member in some form to to get the access to it. But it's free for the members membership anyway. So so when you talk about popularity, what does that mean in actual tone

arms of of investment? How do you apply popularity to deploying capital? So a anything that is popular tends to have a higher price. Anything that is unpopular tends to have a lower price. So I think of two two assets that have the same cash flows, but one of them is popular, that will be more expensive than one that's unpopular. That's right. So are you long the unpopular, short the popular or how do you how do you do that trade? You're ready, You're ready to go here? Okay,

it makes sense. So it's a hedge position, and you're even if they both go up, the theory is the cheaper one will go up more than the expensive one UM or vice versa. If they both go down, the cheaper one will go down less than the expensive one. UM And you do this across how many different asset classes? Is just equities not no bonds, no bills. At Zaber Capital,

we just do it with equities. But the concept applies to anything, and and and and it's really getting to people to think differently about capital markets because, for example, in the capitalistic pricing model, it's systematic risk or beta risk that's that's unpopular. And therefore any any stock that has high systematic risk high beta risk is supposed to have a higher expected return according to the capitalized pricing model. But I sense you disagree with that. I don't necessarily

disagree with that. But that's only one aspect of popularity. Risk is unpopular. But there are a lot of other things that are popular or unpopular, and one of them we've already talked about um I talked about in an earlier episode. Here we I talked about liquidity. Yes, so liquidity is popular. Pay do you pay a premium for more liquid stocks than in liquid stocks, or said differently, do you get a discount for in liquid stocks? Yes?

And and of course it's also obviously true in other markets, and you can see it more directly in the bond market, for example, or at the most extreme case, think of the treasury yield. There's an on the run treasury yield where you buy the most liquid liquid security with a certain maturity, and then there's an off the run and there's a there's a spread out between those of ten or twenty basis points between the on the run and the off the run yields. So it's just a matter

of one being more liquid than the other. And we're not talking about much difference here. The on the run things maybe trading every minute, every few seconds, even whereas the off the run might be trading every few minutes. You know, but even small amounts of liquidity might might make differences in how you get into differences of expected return.

So is that one element of the thinking that goes into the portfolio or do you similarly create paired trades with the liquid versus in the liquid stock you're buying something at a discount and pit and shorting something at a premium. And I don't want to ask you to give away all your secrets, but I'm trying to get a handle on on how you use these different aspects

of popularity. Well, they're not paired because we're just a whole bundle of UH stocks on alongside that are that are less popular and UH how bundle of another stocks of stocks that are more popular. But there are many different dimensions to be popular. We've already mentioned too, and

that's the capitalist surprise. Amodel really focused on that first one, risk and and the whole financial literature has so much focused on risk UM too much focus well, perhaps because there are other aspects of things that are popular and unpopular. So we mentioned valuation, we mentioned capem, we mentioned liquidly. What other elements UM do you consider when when looking at your popular this is unpopular. Let's not hold pairs

but pools of lungs and shorts. So the monograph that we're talking about says popularity a bridge between classical and behavioral finance. So some of the behavioral factors come up also, how do they apply? So let me give you one more though classical. I guess if I had a name three major the three big classical UH considerations. One of them misrisk and it might be systematic, but it can have all different dimensions of different types of risk. Another

one is liquidity. Another one is taxation. Some securities are tax differently than others, so different tax treatments between different types of UM passed through holdings. What is the third one, tax treatment. At the most extreme you can see it with if you want to see it directly, would be compare a municipal bond to say a corporate bond of the same default and maturity characteristics. The municipal bond is going to have a lower yield, but it's going to

have that's because it's popular. It has better tax treatment. MLPs are treated differently than regular equities according to the taxman, and that changes how you perceive them in the overall portfolio. Similar Tommuni bonds, which were also treated differently. A lower yield effectively net of taxes, turns out to be comparable to a non municipal bond. So things that are unpopular like MLPs are gonna be priced more attractively quite quite fascinating.

So that's just on the on the classical side. But then you have the behavioral side. And on the behavioral side you have things like one of the things we tested in this monograph were brands uh brand value the companies, and there are there's different ranking systems of how valuable different bands are, but the companies that have the highest brand value, you might imagine those are the companies you would like in your portfolio, right, No, it would be

the opposite. I know where you're going. I'm cheating because I know where you're going. But perfect example in in the beginning of the year, Apple was one of the time it was either one or two in the brand ranking down since then. And I don't know how far down the list of unpopular brands you go. Um, but I would imagine there's a line that in the sand where you say, on a list of five hundred, below this number, these unpopular brands start to become attractive. So

first question on that is where is that line? How how unpopular is something you have to get before it becomes attractive. It's always relative. I mean you wouldn't you want to short the most popular names, uh, the most popular brands and and really the unpopular brands. You don't have to go after the brands that are in some sort of scandal or anything. But I meanly, most these brands you've never heard of, you know, they're not they're

not well known brands. So not ge that's run into hard times, but some entity that just seems to have fallen out of favor, yes, or just or just overlooked. Things that are overlooked the stocks that are overlooked around popular stocks that are in the news all the time are the popular stocks, sure now, um and and the value effect is related to this because, uh stocks, you know,

value over the long term outperforms growth. But the value companies, when you look at those things, those are not great companies, whereas the growth companies are the companies that are really much more exciting, much better companies. But there's a difference between buying a great company and buying a great stock. The great stocks are not the great companies the great stocks. In fact, it's easier to fix a company that has something wrong with that than to improve a company that's

everything is going great but just isn't popular. Well, well, the ones that are great, they're they're too popular. That's their problems. So give us one more behavioral measure to consider with popularity. Well, another one we measured was reputation value. Well, I'll give you another one that's a little more different. Is tail risk. Any any stock that has actually gone through a h a tail event, a negative event that's

called in its history recent history, last five ten years. Uh. So let's talk about BP and the Gulf of Mexico. We're Boeing and the seven thirty seven max. Uh, those are kind of tail events. What does that tell you about how you would expect the stock to do going forward? Are they is a stock like Boeing post seven seven issue become attractive because of that tail event? It can and not necessarily the next month or so, But people are going to remember that tale for a long time.

They're gonna remember that bad event, and and it's gonna be the reputation is somewhat permanently damaged. Uh. But what we have actually studied this uh with one of my co authors that I named James Schong here or we looked at tail risk and it turns out that future tail risk is not so related to past tail events. Huh. That's interesting. So it's something really went wrong, say Boeing.

They eventually fix it and get back on track with a lower reputation, but they're not necessarily prone to have another tail event. Quite fascinating. We were talking earlier about the difference between academia and real world application of ideas into actual investments and trades. How often you come across an idea that looks great on paper but just doesn't work. Can't be implemented UM in a real portfolio. The problem with real portfolios is, as they have a lot of trading,

they may have trading costs. A lot of the very best ideas have high trading costs, and and most of us are not in a position to actually implement these and get rid of rid of those trading costs. There's another another problem, though, and that is that the kinds of things that have worked in the past, you look at it, you do some back testing, and you discover

things in the past. Uh, those sorts of things, once they're discovered and known, tend to be heavily invested in get popular actually, and once they get popular, they get priced out out of the out of contention, and and they don't have the same sort of payoffs. So so it's uh no longer as easy to translate all these ideas that come out of academics and actually make a lot of money from them. Quite quite interesting. Um. One of the big topics these days is index funds and

the move away from active towards passive. Where do you find yourself in terms of Some people seem to think the flow into index funds is distorting the market, or at least hurting price discovery. What are we index in the US? What's the impact of that? The I don't actually think it's hurting markets. Actually, the index has come in so many different forms. You can buy a whole index on say the Russell three thousand or the SP five.

But you can also buy indexes in different forms and e t fs and and even mutual funds on by a specific industry, or by value stocks, or by small cap stocks, or buy a particular type of stock. So it's if it's really taking you're actually taking a bat when you actually buy that type of stock. If you if you thought, for example, that that oil or energy was going to do poorly in the future. In the old days, you'd have to how do I translate under

which stocks to avoid and so forth. It's much easier to express the trade today, Yes, and that makes it markets more efficient because if we can target our opinions into a trade directly, rather than trying to mix it in with some stocks that that are really noisy and not so related to that trade. Uh, it makes it very hard to accomplish. So one of the things I keep hearing from you is it was much easier back then.

It's more efficient today. Is this part of the reason why so many active managers seem to be unable to keep up with their benchmark? Have the markets become that efficient? By definition? Though, the market is a zero sum game before costs, in the sense that if if you're going to beat the market, I have to do worse than the market, or we have to sum up to the market collectively, and that's before costs, and after costs, Uh, we're gonna on average do a little bit worse than

the market. So this isn't really efficient capital markets. This is just a mathematical identity. It's called a zero sum game, and in this case the zero relative sum game because it's relative to the market, so we could we never could collectively on average beat the market. We always had to have most of us, um actually do a little bit worse than the market about average. So it's not like Lake Wobegone, where um, all the children are above average.

It doesn't work that way. Well, that's that's a good analogy, because that's what keeps the market going. We all think we're above average, and if we often this is behavioral course. But but if we all think we're above average, then then of course we can We're all willing to play the game, even though some of us are clearly not above average, and by definition all of us can be above average. My my favorite question, anytime I'm at a conference and presenting somewhere, I always ask a room full

of people, how many of you are above average? Drivers? Just about every hand in the room goes up, and my response is always, I've been on the road with you, folks, some of you are wrong, because clearly we can all be above average. So let's talk a little bit about um. What What was discussed in Forward Thinker, which was something you wrote for Wealth Manager back in December eight You talked about the financial system being restructured UH following the

financial crisis. Have we sufficiently restructured the system to avoid the next crisis? Or did we simply restructured enough to avoid a repeat of the last crisis. It would be mostly a repeat of the last crisis. Restructuring primarily involves having UH less leverage and and and actually we're also worried about counterparty risk. And of course some of that counterparty risk has been been fixed. We're getting more leverage back into the system probably now. Truly it's creeping back

in Yeah, so I don't. I don't see these were as any permanent fixes. And of course anytime you regulate markets, you also add a lot of incumbrances to the way to the way the markets work. So it's both good and bad here that it's um where I don't see a uh, financial crisis coming soon. Most recessions, by the way, um, most drops in the market are not really a financial crisis crisis. But the one in two thousand and eight was like like the tech public crash in in two

thousands or two thousand and two. Financial crisis wasn't to do with finance. It's just technology, right right, Speaking of behavior, excess sentiment had gotten so enthusiastic, people decided evaluation doesn't matter. You could pay any price for these things nifty fifty like it will all work out, except when eventually doesn't. So clearly not a financial crisis. Seven. How do you describe that not a financial crisis, really a plumbing and

structural issue. Well, it was a financial crisis, it's just that it only lasted about a week, so not much. That's not much of a crisis. And I think back to seventy four, so just a deep recession not a financial crisis. The fifties predate me, but when you read the history books those late fifties early sixties recessions, they don't seem like you have to go all the way back to what ninety nine for a previous financial crisis.

Nineties were financial crisis. So we had the big one, then we had the smaller one, and are the limited one in seven and we had a potentially severe financial crisis, said oh eight, and we got through it, which was um, very fortunate, but it was the potential financial real breakdown of financial markets. So that leads to the next question.

People have been some people, especially people on the bond side of the universe, have been very critical about how the FED intervened in the markets, and they've continued to be critical about low rates being as low as they've been, causing risk assets to rise. What are your thoughts on the job the FED did during the financial crisis, and um, how do you think the FED has done since then? I think during the financial crisis, the FED really had

to do some special things that they hadn't done. Had to buil up their balance sheet, which they had really never done before. Used to be the FED was just raising and lowering the uh, the interest rate, and um that was not that didn't do anything after you got down to zero interest or so they then had to build up their balance sheets. So I think they Fed UH did a great job, in my opinion, in helping to avoid that another great suppression, a real catastrophe. Definitely,

you think it could have been. I think people have forgotten. It's been a decade and they've already forgotten. Were we on the precipice of another depression similar to the nine and the nineties. We were on the precipice of a financial breakdown. I don't know that it would cause a depression, but it would cause a lot of chaos and certainly, um, I'm not clear what it would cause, you know, but we were definitely on the precipice of that financial breakdown,

which could have been very severe. I As far as what the FED has done since then, well I think they could have. We were now ten years later and we haven't. Were now interest rates less than the window the FED window. They're really only charging less than three

at this point. UH. One of the one of the levels the FED has to protect against recessions is the lower the rate we can't lower the rate if we never royals it, and so I think they could have done much more, but they were very reluctant to raise rates over this long recovery, which has been now very long tenure recovery. And so we still don't have normalized interest rates, and the FED is are they behind the curve or have they just not gotten us to a

place that resembles neutral? Yet the rates are still low, and and although they are finally reducing the balance sheet of the FAT, it's still a big balance sheet. So they don't have the same firepower going into any new activity that happens that we had back in oh eight. Quite interesting, So let's talk a little bit about annuities um which are somewhat controversial to some people. I don't

know if that's really the right descriptor of it. You wrote not too long ago, investors should consider indexed anuities as bond substitutes. Explain what those are and how would that operate in a in a portfolio. Well, let me first explain why we might need a bond substitute. Uh, if you bonds today at least treasure yields are below three percent the tenure I looked lass. I looked recently, the tenure was definitely below three percent. And and uh, a return on a bond is the yield plus or

minus a capital gainer loss. If yields rise, you have a capital loss on bonds. And I mentioned duration at an earlier time. The essentially, if he yields rise one percent and the duration is ten on a bond, you're you lose ten on that bond. So there was a

potential for actually bonds that have negative returns in the future. Uh, if you look at the history of all these yields, we from the fourties on we had very low yields that rose and one they were double digits, and but since then they've been straight down thirty three years of falling interest rates. And that meant really good returns because not only did you get those high yields that you started with, but then you've got these capital gains. That's

probably not going to happen going forward. Here we're gonna have a low yield and a potential capital loss. So I wanted to see what else so you could you could we could have that would be an alternative to that. Sure, so short of going back too and building a bond portfolio. How how so how would an index the nuity work? What is what's in? What's in? Because in the nuity is just a rapper, right and for the most part tax deferred. UM, how do index in what he's worked?

And index I their insurance products? And UH, and I have to say that UM Zebra Capital has indexes, actually a co branded index with the New York Sack Exchange and UH that index is actually used by an insurance company to UH in creating a accumulation annuity. I'll mention here so so I I have some in set up here to Actually so you're talking your book, but you're the expert in this space. So we've we know that you take your academic theory and apply it in practical

and then here's a perfect example of it. So what is that annuity holds? And aren't we kind of doing a little bit of UM magic taking something and creating a UM a yield that doesn't have the same parameters of a bond. What is that metamorphosis there? So the what what's happening as we take the index? Actually the insurance company takes this index and it it ensures the downside essentially, so it doesn't actually by buying, buying options

and so forth. So what what it means is that a an actual person then can buy a annuity and index annuity that they get a participation in. Our index is an equity index that has the bonds in it, and it's risk control to have a five percent volatility, but they can buy that index with that with that five percent volatility, the insurance company ensures it so that you get equity participation, but you don't lose any money. So this isn't We're not taking lead and turning it

into gold. This is essentially a hedged um equity product that behaves like a bond. Is that a fair way to describe it. It has roughly the same returns as a bond on average, but it doesn't have any losses that the losses are insured and uh and essentially you have equity participation on the upside, not full equity participation. It's not a substitute for stocks. It's a substitute for

bonds that doesn't ever lose money. So it's a dividend yield plus whatever capital appreciation you get minus the cost of of hedging against the downside. You get the capital

appreciation and um and a participation in the equity market. Uh, and of course UH, no losses on the downside of That's what by having less than participation in the equity market and by getting the capital appreciation, uh, you are be able to the insurance company to be able to use that to have ensured the downside so that there are no losses. So you end up with a distribution of returns that is is maybe roughly comptable in terms of returns to a bond market, but has upside but

not downside. Quite fascinating. You're a Chicago guy. You worked with Gene Fama. There are a number of factors that just keep getting discovered. Last count it was excess of four hundred, maybe even more than that. What do you think about all these different factors in the textbooks and

and how does that work in the real world. Well, these say four hundred factors, there are a lot of them are correlated with each other, so there's not really four hundred, but but there's still many of them, you know. And the way to evaluate it has to do with our monograph again, popularity, Because in order for a a factor to really pay off and forward from over the long term, in anyway, it has to be unpopular in some sense unpopular. So the popular ones are valuation, quality,

momentum um. Uh, those are probably the four most popular ones I can think of. You want to go further on the list and find ones that are either overlooked or or unpopular. Well, for example, liquidity is something that's inherently popular, and less liquarity is inherently less popular. So if you have a factor based on liquarity, that's likely to pay off. If you have a factor based on risk, they're often likely to pay off because risk is always going to be unpopular and less risk is always will

be more popular. If you have factors based on um, it could be quality, it could be any of these sort of things. It could be value, value based. Essentially, if value companies are distressed companies that we don't like, they value premium might be unpopular, I guess. So that's that's the rationale why you might have a value premium because if people if they're the type of companies that we don't like, then then they're going to be relatively

less demand for them. They're going to be unpopular. But that means that less demand means that they're gonna have higher expected returns. So so here we are in value has gotten its butt kicked over the past decade by growth. Um, I'm gonna take that. I'm gonna interpret what you're saying as implying valuate value as a factor is less popular, but value should expect better returns going forward, or value should have a higher expected return going forward versus the

more popular growth. Yes, I think it does, especially now that we've had this bad period, because once, once, after value does so well, everybody gets excited and stays saying, well, I should be buying value stocks instead of growth stocks. So the question you always have to ask yourself this question,

that's what this monograph is all about. I can help but point out that a number of famous and infamous hedge fund managers over the past decade, all of whom kind of came to the public's attention eight, ten, twelve years ago. The more popular they got and the more capital they got, the worst their performance seems to be. Is this the same sort of issue where suddenly popularity just exceeds their ability to manage that capital, or is there something about, hey, that's way late in the cycle

by the time it gets popular. It's just too late. Well, it's probably both of that that. Certainly, when they get a lot of money that their particular idea, they put a lot of money behind it, they're putting too much money behind it, and then and then they're moving the price themselves, and then that makes it overvalued and then too popular in our words, So too popular could be overvalued, too popular could be just classical uh types of things

like risk, opic quality, um, uh popular. But popularity is the thing that ties everything together. That's why I guess I'm so excited about uh our new uh, our new monograph here, uh, because it's not only it ties all these premiums together that people are talking about, say the four premiums and which ones might work. And it also ties in the link because we were evolving into behavioral finance and classical finances being different fields to some extent,

this ties them back together again. So I'm really I'm really excited about the whole approach here, and I'll I'll include a link to that white paper on the right of about this so people can find it. We have been speaking with Roger Ibbotson, Professor of Finance at the Yale School of Management and Chairman of Ibbotson associates, as well as chairman and ce IO of Zebrook Capital Management.

If you enjoy this conversation, we'll be sure and check out the podcast That Straus, where we keep the tape rolling and continue discussing all things factor and popularity related. You can find that at iTunes, Overcast, Stitcher, Bloomberg dot com, wherever final podcasts are found. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Check out my daily column on Bloomberg dot com slash Opinion. Follow me on Twitter at Hults.

I'm Barry Rihults. You're listening to Master's in Business on Bloomberg Radio. Welcome to the podcast, Roger, Thank you so much. I don't know what's called you, Professor Edwardson, Roger, what's your preferred uh, well with a person like you, Berry is I'll call you Berry. You should call me Roger. I feel like I'm I'm definitely uh punching above my weight in this conversation. Um, but this has been just

really fantastic stuff. I know I've been following your career and your research and writings for um my whole career in finance, and I've been very much looking forward UM to this conversation. So let's jump to our favorite questions. I asked these of all our guests, and some of some of these UM are especially resonant for for different listeners.

Let's start with UM. I used to ask this question just as a sound check for the UM Audio Engineer, and the answers were so fascinating that I've started asking all the guests this question. So, what was the first car you ever owned? Year, make and model. Well, it was the nine six one Plymouth Valiant light blue, and I was a junior, I guess, just a starting senior in college at Purdue. And I really love that car.

I gotta say it look kind of a sporty looking car, and so it was a really do a four door it was. It was a four door car, but it was still a very very sporty looking car and it was great fun, although unfortunately I didn't get to keep it that long. I kind of remember the Valiant. I'm trying to remember if that was like a Dodge Dart, similar shape, sort of a big long hood and a big long No, it's actually a little bit smaller than that. Very smart sporty looking, all right, wasn't like that back

in the day when Plymouth made some pretty substantial sports cars. Yeah, they didn't make the sports cars. But unfortunately that car, uh my first job after I got my m b A. So I had that car for three years, a senior year and then two years as an NBA student. Um, but I worked on a cattle ranch, actually my first job in Nevada. Huh. So I was gonna ask my next question is what is the most important thing we

don't know about Roder Ribertson? But before I get to that, how do you go from the University of Chicago, an NBA in finance to a cattle ranch. Well, I thought I had an offer, so I took it that I thought it looked like a good opportunity to do something really great and but but I was out of my element. I was fired at the end of the summer. So you weren't trading cattle futures. You were actually on a horse within a ranch. Well, it was more like trucks

and planes. But you're let me tell you, a car does not last on a cattle ranch very long because they're all dirt roads and the car was just covered with thick with dust and every and every bump and so forth, the transmission went out and all the things. So that was the my card. Uh had that kind of ending life there. And and I didn't work out either at the cattle ranch, and so I actually uh ended that job and put it on my resume as

a summer job. That's pretty that's pretty hilarious. So I given that I'm reluctant to ask the next question, but what's the most important thing people don't know about? Roger Robertson, I would actually say, though I'll take it all the way to the present, sure that I'm not you know, I've always been working in finance all these years, but I'm actually very interested in um long term data and

time over time and so forth. And I'm getting very interested and I might be writing at least researching whether or right on the subject of of long history going far forward and forward and back. Essentially. Uh, perhaps I've been starting with the Big Bang and and and then really for more predictive purposes though, and and long term kind of predictions and what's going to happen to to humanity and so forth. So that's that's one of the things you'll have to interview me a couple of years later.

Times out. You're absolutely welcome back. We'd love to talk about that. So tell us about And I'm afraid to even ask this question, but i have to because I know who's coming up in the answer. Who were your early mentors? Oh? I it is the It is the University of Chicago, people with uh, the Farmer, Merton, Marco Wits who else is on that run? Well as Byron Shows and Fisher Black and yeah, and Merton Miller and Jane Farmer. There are all my early mentors. Yes, that

that's that's an incredible lineup. What about investors? What investors influence the way you think about taking theory and applying it in the real world. You know, I they weren't literally investors, because I have to say that, uh, getting grounded in efficient capital market theory UH gives you a whole approach to investing. And and it's stead of starting out with imagining that every stock you imagine is is

unrelated to the price in some way. If you start out with the fact that if you know nothing about a company or or a security, it's the prices the kind of the best guess of what its value is. And so that's such a dramatic approach, even if you're looking for inefficience for the market, it's such an uh changes your whole way of approaching everything and thinking about everything because you instead of well, for example, as a portfolio manager, you could do nothing and you might do fine.

You know, it's you don't have to literally trade every day to make things work. It's a matter of of you only want to trade when you really do have the edge that you're actually going to add value. So one of the things I always think about and I've managed companies and I've managed stocks, and I think um stocks in some way manage themselves. People. Well, if you start out from the belief that the prices of fair estimation of the value that should really take care of itself.

That's right. That's that's the key. I mean, once you sort of know that your stocks are managing themselves, but then you try to improve on that. But man your people don't manage themselves, that's right. So it's much harder to manage people than it is to manage stocks once you understand this principle. If you don't understand that principle, though, managing stock markets. You've got hundreds of thousands of stocks.

You've got hundreds, hundreds or thousands or whatever. You've got all these stocks, and you're trying to think out it's just one over valued or undervalued. If you have to attack it that way, you can quickly get overwhelmed into the situation. So it's just a principle that so much simplifies the process. Starting with the assumption that, hey, most stocks gonna be more or less priced relative to their value. It's a good starting place. Um, all right, let's get

to everybody's favorite question. UM, I get emails about this all the time. Tell us some of your favorite books. Well, but by the way, I will include your books when we when this goes live, I will include a list of all your published books. So tell us some of the favorite books that you've read of other authors. Yeah, I want to say, of course, I'm not going to promote my own books. I always love my own books.

I guess who does it? What does But because I've been looking at long term things, I've been you know, are you're gonna go go ahead? Let's see for for example, UM, there's this, Uh, you've o Harari who's been writing and sapiens and then the predicting the future on that and reading that like I've been reading like Steven Pinker's Huh. I think it's called Our Better Angels, that our angels of our nature. Yes, about how how how we're changing over time and so forth, and how we're less violent

and so forth. Uh. David Christian is an author and he's Australian. Well it's not really Australia, and he's been all over the world, but he's I think he's teaching in Australia at this point, but he he's he's written a book and done a lot of uh of course, uh electronic courses on on big History, which is looking at history from the start all the way out into

the future. Is that the name of the book Big History? Well, he has a book that's his most storole book is Maps in Time from about ten ten, fifteen years ago. Do you have any other books you want to mention because I'm gonna circle back to something you said earlier. Well, I could name many kids like this subject when I'm just just just finished was Yeah. Johan uh Norberg out of Sweden wrote a book on progress and how how we're getting better off and lots of different dimensions and

so forth. So these are all subjects that are of interest to me. I don't think it's all good news though, of course, uh because at Yale, for example, the recent Nobel Prize winner um Um Bill Northouse uh really worked on pollution and so forth, and how global warming and so forth. So lots of other things are going on. I'm not saying it's all good news. I'm I'm interested in the overall effect though, and trying to understand this. So I'm I am interested in long term history, and

I'm always interested in long term forecasting. I'm fascinated by the two Harari books because Sapiens is so interesting and while some of it's got a little bit of negative cast, generally speaking, it's the history of progress, even though along the way he kind of annotates it with all these, yeah, well farms and cities or where diseases began, and but

it's not a completely bleak picture. The Homo Dais book is a little more negative looking forward than Sapiens, sort of had this wide eyed wonder to it, and which did not come across at Home of Dais. I'm curious as to your your take on the two books. Well, I sense what you're saying, and and I must say, humans I've been a remarkable species. And I'm always just amazed at the fact that that we we actually can understand the start of the universe, and we can understand

we maybe we do, We're not sure we do yet. Well, we know a lot about it. It's some amazing a lot about it. And we also know I mean, that's how they got the Higgs, Boston fixtion and all that kind of thing. They can predict these sort of things. And we also know something about the scale of the universe,

which is astonishing. And this is all happened in the last three or four hundred years, you know, since since uh Copernicus and Kepler and Galileo and so forth, these things, Uh, we went from nowhere thinking the Earth was the center of everything to actually understanding everything that's at the macro level, but the micro level. We also understand how of course Adams and electrons and and courts and d n A

and and so forth. So our um, our species has just uh may has amazing accomplishments and and and but I don't know where. So you have to wonder, then, given all this huge acceleration of knowledge and and actually collection of knowledge that just keeps building on itself. Where does that go, especially especially the past fifty years. We're in a golden age of physics, I mean the past fifty years and in the past decade, quite quite astonishing the sort of progress we've made. All that said, the

Big Bang theory is still a very preliminary theory. We don't understand the whole inflationary expansion that took place. We still don't understand if we're measuring the universe right, how much dark matter is out there? What are we missing when we not say why are galaxies accelerating away from each other no matter what direction you look. I'm fascinated by that. I like you are. I share um, just

a genuine astonishment about that. I'm also there was a book that came out about a decade ago um that you might appreciate if you're if you're working away forward from the Big Bang, called the rare Earth thesis, which basically says, well, life is probably common in the galaxy because in the universe, because every galaxy has all the

build fundamental building blocks hydrogen, carbon, oxygen, nitrogen, etcetera. But intelligent life is really, really rare, and it's a whole series of incredibly unused usual events that lead to a planet like this that's stable enough for for billions of years, for long enough for intelligent, technologically advanced life to um develop. And I'm I'm just intrigued by that sort of circling back to the original pre enlightenment. Oh no, no, it's

just humans. The rest of the universe doesn't doesn't matter. The whole universe was just created by God for us. And maybe there's actually some for completely different reasons, theoretical basis for that um thesis from a physics approach, But but I digress far off. It's not the best written book, but it's a fascinating concept if you if you're enjoying all the modern astrophysics work, and I'm sure you've you've come across Brian Green and his string theory work and

other stuff. I'm endlessly fascinated by that. I'm just intrigued by that stuff. So one of the great things about being a professor, uh is is uh you get to study whatever you want and and you you share this fascination with me with this, And now I really can kind of work on this now you see. So do you ever pick up the phone at Yale and say, oh, so and so is in the astrophysics department, let me get him on the phone. And you have access to all these folks who can who can steer you in

certain directions. I'm starting to do that. I hadn't been doing that, you know, because I've more had been pretty focused over the as you said, I've have a broad breath breath of activities here, but but they hadn't gotten

into this sort of thing. Now I'm getting into all the other arms of the university, and uh, I find it really exciting to uh to see, really I'm applying the kind of things I've always done because I always was interested in history and data and I've always taking it to the next level and always interested in making projections and and so forth. And now I'm just trying

to broaden this out. So so this is, uh, this a great I guess at this point I would say it's a hobby, but but it but it trying to make it into I don't think I'll make money from this car. Well, it's tough to do that. So so it makes me want to ask you the question universal entropy and we eventually just going to dissipate or the big crunch and all starts over again. You really do want the big question, you know, I I come prepared

while the uh, of course entropy eventually dissipates everything. But but one of the things that the universe is built on is complexity. And even though you have this overall entropy going on, which is spreading everything out and dissipating, you have gravity has been one of the big things, pulling things, pulling parts of things together. So at the same time everything is dissipating. Obviously we are we are getting more and more complex, and that's certainly humans are

an example of that. So the word own is getting more complex, not less complex, despite this, despite the second law thermodynamics. So I'm fascinated by the concept and I wish I can remember where I read it that and this will be the last astrophysics part of our conversation. The idea that nothingness is inherently unstable, and the Big

Bang comes around that you can't have nothingness forever. Nothingness eventually just explodes into something else because if it's inherent instability, and that's a little mind blowing to me us humans can barely conceptualize it. But it's a fascinating concept. Where how does the universe come out of nothingness? And the answer is, well, maybe nothingness just is so unstable that it has no choice but to create a universe. I'm I'm fascinated by that. So in my case, I'm going

to limit this a little more. You're gonna keep it limited to just the universe. Well, I mean I might look at the next hundred years or the next thousand days or something like that, so uh, the instead of uh or maybe mainly our planet, you know, instead of the whole universe and so forth. So, but but they're all related. I mean, it's certainly having some understanding of the big picture helps you, helps you understand still the

very big picture quite interesting. So let me move forward away from the universe and ask you this, tell us about a time you failed and what you learned from the experience. You know, I failed quite a bit in my early days, and uh my my father was in the heating and air conditioning business, and had I been more mechanically inclined, you would have gone into that field. Yes, that's certainly goodness, you weren't because we we need you

here in finance doing what you're doing. And and then even even when I, UM, so, when I went to college, my father to take engineering because the corporate presidents are mostly engineers. That was true after World War Two, but it's not true today. Um. And so I took engineering, but I really couldn't handle all the hands on stuff of even engineering, and and so I got into math and physics as my major. But then I but even so,

I needed to be something more abstract. But when I got to math, it got too abstract from me and I couldn't even handle that. And and so I had to find a niche and finance. Finance is actually the perfect niche. It's it's kind of abstract, but it's not as abstract as as abstract. Um it's I I actually try to make something like abstract things practical. That's been my key. I guess that that that piece in between the fully abstract and the practical and blend them together.

That's your sweet spot, right in the middle between the between the two of them. So what do you do for fun and when you're not contemplating, uh, the universe? What? What? What does Roger Ribintson do to keep himself entertained, Well, I mean I have a family, and so I have two sons here in Brooklyn, and um, it's great to get together with them. Of course I exercise and all that, and and um like hiking and all that. But but to me, the most fun and even connects my family

and everything is the world of ideas. I mean, and that's what's so great about being a professor. Uh, you essentially are told do what you want. Um, you have to come out with something once in a while, but do whatever you want every once in a while. Educate the kids if you can. But also I actually do love teaching too, So the teaching is really exciting to me and stimulating. So it's a it's a it's a great combination. So so I thought that I'm a workaholic,

because I'm really not a workaholic. But it's about the most fun you could have. And even when I talked to my sons, for example, and uh, it's all we're talking about economics all the time, and it's an exciting area and not only just economics about but about um, the universe or whatever, you know, talking about all these ideas. So the world of ideas is really fun. Quite quite

um quite charming. Um. So you mentioned teaching. If a millennial or a recent college grad came to you and asked for career advice about the world of finance, what sort of advice would you give them, Well, it starts with follow your passion and follow your interests. Of course, don't just try to maximize money here the um and if if they they're gonna be likely successful if they are following their passion, so so that that's definitely what

I would tell them to do. Uh. Fortunately, finance is a pretty well paid profession, so most people end up doing reasonably well. And uh that maybe that's not I'm glad that happens, because I guess at all worked out great for me. So and and and our final question, what is it that you know about the world of investing today that you wish you knew forty years ago when you were coming out of your NBA program and

just getting started. And that question I'm not going to really answer the way you asked it, because in fact I did know, uh, And the whole idea of coming out of understanding what equilibrium is and how prices are formed and our version and how starting with market efficiency and so forth. That really changed my life and how I approach everything and made everything easier. So you were fortunate to figure out at the beginning of your career what a lot of people don't figure out until towards

the end of their career. Yes, so it's not like I don't I don't know what to tell you about what I didn't know, because I actually did know these important concepts and they actually had wonderful I watched a wonderful impact on me. Well, that's quite fascinating. Roger Ibbotson, thank you so much for being so generous with your time.

We have been speaking with Roger Ibbotson. He is a Professor uh in the Practice Emeritus of Finance at the Yale School of Management, as well as founder and chairman of Ibbotson Associates and chairman and chief investment officer of Zebra Capital Management. We love your comments, feedback and suggestions. Be sure and write to us at m IB podcast at Bloomberg dot net. Check out some of the other two hundred and forty eight such previous conversations that we've had.

If you look up an inch or down an Inch on Apple, iTunes, Stitcher, Overcast, Bloomberg dot com, wherever final podcasts are sold, you can see the rest of all of our previous com stations. I would be remiss if I did not thank the crack staff that helps put this podcast together each week. Um Medina Parwana is my producer slash audio engineer. Taylor Riggs is our booker. Attica val Bron is our project manager. Michael bat Nick is

our head of research. I have to thank Charlie Palett this week for giving us his desk and his UH recording studio because of my snaff who with daylight, savings time and the UK. I'm Barry Retults. You've been listening to Masters in Business on Bloomberg Radio