I know I abuse the phrase, but this week, I have two EXTRA SPECIAL guests: Eugene Fama and David Booth. Fama is the winner of the 2013 Nobel in Economics, Booth os the cofounder of Dimensional Funds.
Gene Fama is, of course, best known for the efficient-market hypothesis, as well as his research on portfolio theory, asset pricing, and the Fama-French factor models. He won the Nobel prize in 2013 (with Robert Shiller and Lars Peter Hansen) for his work showing that “stock price movements are impossible to predict in the short-term and that new information affects prices almost immediately, which means that the market is efficient.”
David G. Booth co-founded Dimensional Funds Advisors with another University of Chicago alum, Rex Sinquefield in 1981. The firm employs 1400 people who help it to manage 579 billion dollars. Over the 20 years ending in 2018, 85% of Dimensional’s equity and fixed income funds beat their benchmarks; the rest of the industry? 17%
In the midst of the GFC, David made a “transformational gift” to the school that now bears his name. The $300 million in stock and cash given to the University of Chicago Graduate School of Business was the largest donation ever given to a business school.
I always come to each MIB wildly over-prepared, and if you want to see a sample of questions I plan to ask, they are after the jump below.
Should be lots of fun! Check it out…
“During your last year at Tufts, you worked for professor Harry Ernst – who had a side gig running a stock market forecasting service…? What sort of work did you do for him?
Urban Legend you had applied to Chicago Business School but never heard back from them. Tell us how you got into UofC from Tufts?
Eventually Merton Miller says to you “stick around, keep doing your research”
How were you exploring: “The relation between risk and expected return and its implications for portfolio management”
David Booth grew up in Kansas, received a B.A. in economics in 1968 and an M.S. in business in 1969 from the University of Kansas. What nmade you decide to come to Chicago?
“What was your experience taking a class with Gene Fama 50 years ago?
You eventually become his Teaching Assistant – why not a career in academia?
Your Doctoral Thesis (1964) “The Behavior of Stock-Market Prices” QUOTE: “Chart reading, though perhaps an interesting pastime, is of no real value to the stock market investor.” What was the response when published Journal of Business 1965 ?
What about EMH or the Fama-French 3 Factor Model? Was there any response from Wall Street to that ground-breaking research?
What was investing like before Gene Fama’s research? How did Gene changed people’s perspectives? Did it change the way they invested?
Let’s talk efficient markets. Back in the days when active managers were dominant and inefficiencies could still be easily found — as could 2% fees — professionals described markets as Kinda/Sorta/Eventually Efficient. I doubt they would say that today – What has changed? Does tech make prices reflect newly revealed information even faster?
Fama Booth 50-Year Relationship
DAVID First Course taken on investing was with Fama and it was “Life Changing” + Transformative
GENE: How was David as a student? Teaching assistant?
DAVID, you said: “The University of Chicago basically plucked me out of Kansas and put me on this trajectory …Sometimes I wonder, why me?” Did you still wonder that?
When did you realize you did not want to be an academic?
Lets discuss the practical application of theory:
David, You begin in a Brooklyn apartment applying factor theory, by running a micro-cap fund. How you applied Gene’s research to that fund.
What information sets are factored in price trend?
1993 Which led you to the conclusion “Beta is dead” ? Given how giant Blackrock & Vanguard Group are today – about 12 trillion between them 2/3rds of which is passive, can we still say “Beta is dead” ?
How did the work of Benoit Mandelbrot affect your research?
David Booth recognized how Fama’s ideas impacted how people invested
Bridged the academics of Fama with the practical investments of DFA
What was Wall Street’s reaction to Fama’s work?
Value has underperformed Growth for the past decade. What sort of lesson should investors take from that?
Lots of work around behavioral economics — what do you think about that area?
“Why am I even reading Wall St research?”
Does the nature of how value is measured and processed in the market change over time?
What are some of the plausible arguments for why value investing has underperformed?