The transcript from this week’s MIB: Roger Ibbotson of Yale, Ibbotson Associates, and Zebra Capital, is below.
You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast, and Stitcher. Our earlier podcasts can all be found at iTunes, Stitcher, Overcast, and Bloomberg.
ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, wow, what a delightful conversation I had with Roger Ibbotson. If you don’t know who he is, well, you need to become a little more familiar with financial histories, he is one of the founding fathers about modern thoughts on asset allocation, portfolio, management valuation factor, go down the list of a million things, he really was instrumental in the development and expansion of CRSP which is the joint stock database originally out of the University of Chicago.
Davidson Associates, he’s on the board of advisors at Dimensional Funds, his curriculum vitae as his pages and pages long, he was extremely generous with his time and shared all sorts of fascinating things with us.
If you are at all a stock market wonk, if you are at all interested in why some stocks go up and others don’t, then you are to find this conversation to be absolutely fascinating. So with no further ado, my conversation with Yale University’s 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 Ibbotson Associates which was sold not too long ago to Morningstar, he is on the Board of Directors of Dimensional Fund Advisors, he is the chairman and CIO of Zebra Capital Management, an equity investment and hedge fund manager, he has also taught all for many years and served as executive director for the Center for Research in Security Prices better known as CRSP.
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.
ROGER IBBOTSON, PROFESSOR IN THE PRACTICE EMERITUS OF FINANCE, YALE SCHOOL OF MANAGEMENT: Great to be here.
RITHOLTZ: I’ve been looking forward to having this conversation with you for a long, long time, I’ve certainly been familiar with Ibbotson and Associates, since you founded them back in 1977, 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 you first entered the markets?
IBBOTSON: Well, you know, it was really, things were happening at the University of Chicago and ultimately many of the people that got Nobel Prizes for what went on, so but if you just take us back a few years before that, finance really hadn’t developed as an academic subject or as a security analyst or how to pick a stock or something like that.
And then we started really developing a whole theory of how finance works, and I got to say I had great people to work with there, my chairman of my committee when I wrote my dissertation was Eugene Fama, he won a Nobel Prize, I had on my committee, Merton Miller, he won a Nobel Prize, at Myron Scholes won a Nobel Prize, Fischer Black, you have to be alive to win a Nobel Prize, unfortunately, he died before that but he certainly would have, so it was really a tremendous group of people to work with.
That’s a 1926 Yankees murderers row of Nobel Laureates there.
IBBOTSON: Yes. So yes, it was a wonderful time going on, so actually all the – so many different discoveries were taking place.
RITHOLTZ: You mentioned that the study of finance really hadn’t developed academically as much as it has since, tell us about the Center for Research in Security Prices for CRSP, how did that come about and what was your involvement?
IBBOTSON: So the Center for Research in Security Prices, we call it CRSP — C, R, S, P, while CRSP was really set up by James Lorie and Larry Fisher and they were collecting data on the stock market returns, and the data started 1926 and now you see a lot of things start in 1926, so they were collecting this data and that’s what started the center and I got to say that once they published this data, 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 would had happened in the stock market, they didn’t actually have any sense for what how stock market returns were like.
In fact, I kind of remember the 30s and how terrible it was and so forth and they knew things were better lately, but they still did realize the high returns that actually had happened in the stock market.
RITHOLTZ: 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 anything approaching a well structured way?
IBBOTSON: Yes, CRSP really put the data on the map and then when I got my PhD or the PhD there but actually stayed on as a professor, and when I stayed on, I became the Executive Director of CRSP. So I was and I guess helping to put the data together and it was really not only the University of Chicago that was using the data but all the other universities were really using that data.
So this suddenly finance became an empirical subject that people could study.
RITHOLTZ: That’s the word I was hunting for, it had no empiricism previous, this was — what years did you begin with the CRSP?
IBBOTSON: Well, I got there as a student in 1968 and became a faculty member in 1974 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 CRSP from the start because I was always interested in data and in fact, I get a job while I was getting my PhD in the investment office of the University.
RITHOLTZ: The endowment in other words.
IBBOTSON: The endowment 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 had a PhD student that was actually managing the University of Chicago bond portfolio.
RITHOLTZ: And how large was that at the time?
IBBOTSON: Well, these numbers were not large in today’s time, a couple of hundred million you know.
RITHOLTZ: But still, a PhD student is like “Okay, congratulations, you’re running a few hundred million dollars.” That’s not nothing especially in the late 60s.
IBBOTSON: Yes, and it was a great thing to do and it gets back to what you’re talking about when people – once I was running the bond portfolio, people would ask me “When are Fisher and Lorrie going to update the study?” Because the first data came out from 1926 to 1960 and then it was the 1926 to 1965, and then 1968 but this was ’72, ’73 and people were asking “When do I see the updated data?” and I would ask Larry Fisher when it’s going to get updated and Larry would give me a date but the date would go by and it wouldn’t get done and so this is what I really took the ball by our hands, I worked with Rex Sinquefield who was a …
RITHOLTZ: Oh sure.
IBBOTSON: A student of mine at the time and we decided to put this — put data that literally all the — we used the Center for Research prices but we put up some quicker data together to get a sense of what – something up-to-date actually and where we brought it up to date actually through 1976 at the time.
RITHOLTZ: So that brings us to 1977 which not coincidentally is when you launched Ibbotson Associates, tells about what motivated you to go out and hang your own shingle?
IBBOTSON: Well, it was “Stocks, Bonds, Bills and Inflation”, I was an assistant professor and we’re just — we had just published “Stocks, Bonds, Bills and Inflation” first as a couple of journal articles and one which is on the bathroom (ph) actually predicted n the future long-term ,but then also as a monograph from the CFA Institute and everybody was so interested that I was getting inundated with letters coming in CEOs asking me for information and response of this question that question and I was at a — I barely had a secretary, had a part of a secretary and I didn’t know what to do with all these letters from these CIOs, CEOs and CIOs and so forth.
So I started hiring a couple of people to help me out with this and that’s what caused me to actually start the consulting – I had plenty of business at the start because so many people are actually requesting things from me.
RITHOLTZ: You sold Ibbotson Associates and Advisers to Morningstar back in 2006, pretty good timing before the tide went out in ’08, ’09, what was that process like? They’re a pretty big shop, Morningstar, how did that transaction go?
IBBOTSON: Well in 2006, by that time, I was already at Yale School of Management as a professor in practice there, but in 2006, we had 150 people at Ibbotson Associates Offices in Chicago and New York and Tokyo actually, but still we were very small compared to Morningstar.
RITHOLTZ: Yes, they’re giant also in Chicago, right? Aren’t they…
IBBOTSON: They weren’t very far, they were just – we were like two firms that were somewhat similar that were only a couple blocks away from each other.
RITHOLTZ: That’s a pretty natural fit that the large Morningstar will acquire the smaller Ibbotson in the same hometown.
IBBOTSON: Well, actually, I got to say that we were around first because I remember when Joe Mansueto in the 1980s came to a few of our holiday parties and things like that and but I got to say, you have to give Joe Mansueto credit, Morningstar really took off and grew, we were going fast too, but nothing like they were like.
RITHOLTZ: Well, you focused on data about markets generally, they focus specifically on mutual funds and that became a giant growth area for them especially with the ERISA laws and 401(k) coming up in the early ’70s.
IBBOTSON: Well, everybody was – ERISA was more, yes 401(k) really start developing and that really in the 1980s, first thing was a defined venture — defined-benefit pension plans, the DB plans and we worked with them to some extent but Morningstar actually picked the retail end of it with a 401(k) market and the mutual funds, yes.
IBBOTSON: And so, but we are two very fast growing firms that were alongside each other for a couple decades in Chicago before they actually bought us out.
RITHOLTZ: Quite intriguing, let’s talk a little bit about CRSP and we mentioned earlier you worked on the 1926 to present database of stock market returns, but not too long ago, a new historical database was added for the New York Stock Exchange going back to 1815 straight up to the original 1926 date. What did you learn from that database about equity returns and about volatility?