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Bridgeway's John Montgomery Gives Away Half of Its Profits · Masters in Business

0:02
Speaker 1: This is Master's in Business with very Ridholts on Bloomberg
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Speaker 1: Radio this weekend. On the podcast, I have a fascinating
0:12
Speaker 1: guest and I think you'll really enjoy listening to him.
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Speaker 1: His name is John Montgomery. He is a former UH
0:20
Speaker 1: civil engineer slash transportation engineer who decided to take his
0:27
Speaker 1: love of quantitative mathematics and apply it in the world
0:32
Speaker 1: of investing. If that isn't somewhat unusual enough of a background,
0:37
Speaker 1: he managed to put together not only a firm that's
0:41
Speaker 1: running eight and a half billion dollars, but a very
0:44
Speaker 1: unusual firm with as you'll hear, some very unusual qualifications,
0:50
Speaker 1: including the fact that Bridgeway gives away half of their
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Speaker 1: profits to various charitable organizations every year. He also has
1:00
Speaker 1: some internal rules about um how much he can be
1:04
Speaker 1: compensated relative to the lowest compensated person in the firm.
1:09
Speaker 1: You know, thirty years ago, the CEO to factory floor
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Speaker 1: ratio is something about five to one. UH it's now
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Speaker 1: somewhere depending on whose numbers you use, two hundred and
1:20
Speaker 1: fifty to four hundred to one. At Bridgeway, the highest
1:25
Speaker 1: paid person and lowest paid person, it's a seven to
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Speaker 1: one ratio that is really quite unusual. Their goals and
1:33
Speaker 1: focus and client customer service are just not what you
1:36
Speaker 1: typically here on Wall Street. And there their evidence base,
1:41
Speaker 1: their data driven. I think that they are not the
1:45
Speaker 1: usual farm. And that's why I wanted to have John
1:47
Speaker 1: on the show because his story and Bridgeway story is
1:51
Speaker 1: somewhat unique and kind of fascinating. So, with no further ado,
1:55
Speaker 1: my conversation with Bridgeways John Montgomery. My special guest today
2:04
Speaker 1: is John Montgomery. He is the founder of Bridgeway Capital Management,
2:09
Speaker 1: an asset management firm which is running eight point four
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Speaker 1: billion dollars. Bridgeway is unique in a number of ways,
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Speaker 1: perhaps most notably, the firm donates fifty of its profits
2:23
Speaker 1: to nonprofit organizations each year. John Montgomery, Welcome to Bloomberg.
2:29
Speaker 1: It's an honor to be here, Barry. So you have
2:31
Speaker 1: a really interesting background, and before we get to the
2:34
Speaker 1: asset management side, I have to talk a little bit
2:37
Speaker 1: about your education, which is someone unusual for someone running
2:43
Speaker 1: an asset management firm. Undergraduate, You're at swarth Mar and
2:47
Speaker 1: what are you studying there? Philosophy and engineering, okay, which
2:51
Speaker 1: is a good combination of things. A little left brain,
2:55
Speaker 1: right brain. It kind of works. And then you end
2:58
Speaker 1: up going to M I T and Harvard. What do
3:00
Speaker 1: you study there? Engineering at M I T. So that's
3:04
Speaker 1: where I had my background in statistics and quantitative modeling,
3:08
Speaker 1: and at Harvard I study business. And so you come
3:12
Speaker 1: out of that world essentially working in transportation engineering. That's right.
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Speaker 1: That was my first career. But while you were at
3:21
Speaker 1: Harvard Business School, you you have written about and told
3:24
Speaker 1: the story of a for lack of a better word,
3:28
Speaker 1: and epiphany that you had there. Tell us about that. Well,
3:32
Speaker 1: I call it my my first behavioral finance insight. This
3:36
Speaker 1: was in UH and it was very early on in
3:40
Speaker 1: behavioral finance, so I didn't even know the field existed. UM,
3:43
Speaker 1: But I was at Harvard Business School really to um
3:47
Speaker 1: learn more fill in gaps in my knowledge base about
3:51
Speaker 1: business and specifically in transportation. I didn't have any idea
3:55
Speaker 1: at that point that I would go into finance, but
3:57
Speaker 1: I thought, while I'm at Harvard, I'll take a few
4:00
Speaker 1: investing courses and maybe turned back the opportunity cost of
4:04
Speaker 1: taking two years out of your life after you were
4:06
Speaker 1: already UM had some jobs. So did that. My grades
4:11
Speaker 1: said that I should have gone to Wall Street. Those
4:13
Speaker 1: were among my best grades in business school. But I
4:16
Speaker 1: was in one particular class one day where we were
4:20
Speaker 1: studying a quantitative method of investing, and I found that fascinating.
4:25
Speaker 1: And at the end of the class, the professor steps
4:27
Speaker 1: back from the blackboard and he kind of tugs on
4:30
Speaker 1: his beard and he says, so, who among the people
4:33
Speaker 1: in this class think that when you get out of
4:35
Speaker 1: school here and probably go to Wall Street, that you'll
4:38
Speaker 1: be beating this record? Well, this was a pretty fine record.
4:41
Speaker 1: It wasn't just beating the market. It was it was
4:43
Speaker 1: doing quite well in the hands and the class go up,
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Speaker 1: and the immediate thought that I had was the twenty
4:49
Speaker 1: rule of the people think they can beat the market,
4:53
Speaker 1: but it's probably the other way around, and it's probably
4:56
Speaker 1: at that point not the UM that had the discipline
5:00
Speaker 1: to do it. And if you think about UM, you know,
5:03
Speaker 1: a top tier business school with very bright people. What
5:07
Speaker 1: has worked for them getting them to a certain place
5:09
Speaker 1: in life doesn't always work in investments. As a matter
5:12
Speaker 1: of fact, some of the dynamics of that works against you.
5:15
Speaker 1: Michael Mobus uncles that the paradox of skill, when you
5:18
Speaker 1: have an entire marketplace filled with very smart, very competitive people,
5:23
Speaker 1: they all kind of cancel each other out. Yes, So
5:26
Speaker 1: part of the dynamics of that that I thought was, Uh,
5:29
Speaker 1: if this is a microcosm of Wall Street five years
5:32
Speaker 1: from now, then using quantitative methods should help get you
5:36
Speaker 1: on the other side of that investment, which should have
5:39
Speaker 1: some benefits of efficiency and cost and some other things.
5:43
Speaker 1: So that that was just a seed planet for what
5:46
Speaker 1: would become Bridgeway uh some decade later. So that's still
5:51
Speaker 1: a pretty significant insight to look around a room full
5:54
Speaker 1: of really smart people and say, like Laby Lake will
5:58
Speaker 1: be gone, where all the children are above average, how
6:01
Speaker 1: is it possible that of the room thinks they're going
6:04
Speaker 1: to beat the market. If you want to see the
6:07
Speaker 1: same numbers come up, ask a room next time you're
6:10
Speaker 1: speaking in front of a group of people. Ask everyone
6:12
Speaker 1: in the room how many of them are above average drivers?
6:15
Speaker 1: And it's the same number. Eight in the hands go
6:18
Speaker 1: off And if you've been on the roads, you know
6:20
Speaker 1: that everybody seems to be below out. So Barry, my
6:23
Speaker 1: answer to that question, usually it's a humble was like, no,
6:26
Speaker 1: I'm not. Probably i'm not. And in business school I
6:29
Speaker 1: didn't think I was going to be in the top
6:31
Speaker 1: half of the class. But with respect to driving, I've
6:34
Speaker 1: never had a chargeable accident um and I've never had
6:37
Speaker 1: a moving traffic violation and never had a moving traffic
6:42
Speaker 1: So I always go back to the statistics, the logic,
6:45
Speaker 1: the data, the evidence. Evidence based investing is what we do.
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Speaker 1: And and so that's a knee jerk reaction for me
6:50
Speaker 1: is like, well, let's just take a look at the
6:51
Speaker 1: numbers and see what So if you believe in mean regression,
6:55
Speaker 1: that would suggest you might be due for it, so
6:57
Speaker 1: that that could be true as well. And so you
6:59
Speaker 1: want differentiate when things do and don't regress to the
7:02
Speaker 1: main is their skill or just luck and driving this
7:06
Speaker 1: like investing, there's certainly both the and and like sports
7:12
Speaker 1: where you need a certain amount of skill to make
7:15
Speaker 1: it to the major leagues, but at that level where
7:18
Speaker 1: everybody is so skillful, luck becomes even more important. So
7:22
Speaker 1: how did you go from transportation engineering as a career
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Speaker 1: to turning around and saying, Gee, that epiphany at Harvard
7:30
Speaker 1: Business School is something I really want to pursue. First
7:34
Speaker 1: of all, transportation is a service industry. I love service industries,
7:37
Speaker 1: and anytime anytime I'm experienced service that's uh subpar, I
7:42
Speaker 1: think there's a market opportunity there, whether it's a restaurant,
7:45
Speaker 1: a hotel, anywhere. Like if you're just doing a lousy
7:48
Speaker 1: job providing service, you're inviting competition. In UM. So I
7:53
Speaker 1: was in the transportation service industry, but I was also
7:56
Speaker 1: an investor in a couple of mutual funds setting up
7:58
Speaker 1: an I RA and think and like, you should be
8:01
Speaker 1: able to do better than this, not just the investment,
8:03
Speaker 1: the whole promin side, but the communications well you know
8:06
Speaker 1: the talked about just I had a dozen ideas for
8:09
Speaker 1: how you could um improve that industry. So UM at
8:13
Speaker 1: the time, I have an entrepreneurial spirit and hit a
8:17
Speaker 1: certain roadblock wall you could say, professionally in the transportation
8:21
Speaker 1: industry where I was trying to bring private sector incentives
8:26
Speaker 1: UM and some insights I had about how to reorganize
8:29
Speaker 1: city urban transportation bus systems in particular, took that to
8:34
Speaker 1: a certain level and UM and and then it was
8:37
Speaker 1: clear it wasn't gonna happen. The wall problem. I hit
8:39
Speaker 1: the wall. This was an opportunity to transition and do
8:43
Speaker 1: something that I've been doing as a hobby let's talk
8:45
Speaker 1: a little bit about some current trends and as we
8:48
Speaker 1: ease into quantitative investing, what you've been doing for a
8:52
Speaker 1: long time is essentially factor investing, which really today goes
8:57
Speaker 1: under the branding name smart Beta. Yes, so the first
9:02
Speaker 1: question is how did you manage to find your way
9:05
Speaker 1: into that methodology and what do you think of the
9:10
Speaker 1: rise of smart beta today. Well, first of all, the
9:12
Speaker 1: name smart beta kind of revels my feathers. Sum so, uh,
9:16
Speaker 1: you know, it's data. It's there's nothing human or or
9:21
Speaker 1: or um. There's nothing smart or beta about it. Well
9:24
Speaker 1: maybe beta, you can you can argue beta or alpha
9:27
Speaker 1: or you know, a different system of looking at it.
9:30
Speaker 1: But the smart part sounds to me like a bunch
9:32
Speaker 1: of guys in a room of marketing trying to figure
9:35
Speaker 1: out how to sell something. It's good branding, and I
9:37
Speaker 1: think everybody and there's and there's nothing wrong with branding,
9:40
Speaker 1: but um, you know, we want to we we go
9:43
Speaker 1: first to the substance of it. So well, first of all,
9:45
Speaker 1: we didn't call it factor investing twenty five years ago,
9:48
Speaker 1: but absolutely applying quantitative methods to the process of investing
9:52
Speaker 1: and then figuring out as many different ways to apply
9:56
Speaker 1: numerical methods as possible. So that's not just the deciding
10:00
Speaker 1: which stocks to stay away from and which you're adding
10:03
Speaker 1: to a portfolio to UM produce a certain design and
10:07
Speaker 1: results that you're going for. But it's also think things
10:10
Speaker 1: like transaction cost managing every other aspects of cost. UM
10:15
Speaker 1: the business side, strategy side, we like UM what we
10:18
Speaker 1: call evidence based worldview at Bridgeway. So if you're using
10:23
Speaker 1: quantitative methods for what we now call factor investing Fama, French, etcetera. UM,
10:29
Speaker 1: were you ever playing with the idea of individual stock
10:33
Speaker 1: picking or was it always a mathematical screen. We don't.
10:37
Speaker 1: We don't purchase individual stocks. We buy groups of stocks.
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Speaker 1: And so that is key to UM factor based investing
10:45
Speaker 1: in an evidence based worldview. And so that leads to
10:49
Speaker 1: the important question, what is it that drive stock performance
10:53
Speaker 1: over the long term? So the stock market has to
10:57
Speaker 1: follow the economy long term. UM. The problem is in
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Speaker 1: the short term it absolutely doesn't. There are two things
11:04
Speaker 1: we think that drive returns. One is risks. So in
11:07
Speaker 1: the beginning twenty five years ago, definitely had a risk
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Speaker 1: based worldview, and and Eugene Fama was a major contributor
11:14
Speaker 1: to my thinking on that. Uh. I took a year
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Speaker 1: and a half off before founding Bridgeway to do research
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Speaker 1: on the quantitative methods I've been using individually, writing a
11:24
Speaker 1: big business plan for Bridgeway and and learning more. UH
11:29
Speaker 1: the the let me let me interrupt you there, because
11:32
Speaker 1: I find that fascinating. You're you're working in a field,
11:35
Speaker 1: you're fairly well compensated, but you hit the wall and
11:39
Speaker 1: you instead of saying I'm going to just switch jobs
11:42
Speaker 1: or even switch careers, you say I'm going to take
11:45
Speaker 1: a year off and think about what i want the
11:48
Speaker 1: next phase of my life to be. Is that a
11:51
Speaker 1: fair descript That's right? And I had I had a
11:53
Speaker 1: model for that. There was a mayor of Houston, Bob
11:56
Speaker 1: Lanier at the time, who had four different careers and
11:58
Speaker 1: every time he switched to ears, he took a year
12:01
Speaker 1: off to study the heck out of the next thing
12:03
Speaker 1: that he was doing, and he's very thoughtful about it.
12:06
Speaker 1: And I thought that was a fascinating idea. UM Let
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Speaker 1: the record reflect that the guests used the word fascinating
12:13
Speaker 1: multiple times before I did. I always get emails making
12:17
Speaker 1: fun of my over alliance on the word fascinating. But
12:21
Speaker 1: I find things fascinating, as do you. So I'm glad
12:24
Speaker 1: you you brought that up. UM. So that's pretty interesting.
12:28
Speaker 1: Four separate careers, and you based this decision making on
12:33
Speaker 1: that model. That's correct. And so when you spent the
12:36
Speaker 1: year researching quantitative finance and running an asset management firm,
12:41
Speaker 1: where did that lead you? How that was? That was?
12:44
Speaker 1: That period was when Family French published their seminal paper
12:47
Speaker 1: on value and building. So so we had, you know,
12:50
Speaker 1: early nineteen eighties, uh small the small size effect. It
12:54
Speaker 1: had been around why and I was fascinating premium, it's
12:57
Speaker 1: absolutely but the value part was really resonated with me.
13:02
Speaker 1: The thought, you know, I'm buying a refrigerator. It's one
13:05
Speaker 1: place or another place, and if it's basically the same refrigerator,
13:08
Speaker 1: there's some way to figure out that they're comparable. I'm
13:11
Speaker 1: gonna go for the lower price. That just resonated with
13:14
Speaker 1: me and made sense that that would work. And there
13:17
Speaker 1: was a risk based world UM framework for that that
13:20
Speaker 1: I really bought into. And it wasn't until probably fifteen
13:24
Speaker 1: ten ten fifteen years later that I started reading more
13:29
Speaker 1: and thinking about the behavioral insights, and there was one
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Speaker 1: factor that really put me over the top on that.
13:35
Speaker 1: Explain that's the low volatility factor. So if you think,
13:38
Speaker 1: if you have a risk based worldview and you think, okay,
13:41
Speaker 1: value stocks are more volatile in some sense, they're riskier, um,
13:46
Speaker 1: so they should liquid less, go through the number of
13:49
Speaker 1: things they should do, you know, as a group better
13:51
Speaker 1: in the long term size, same thing. If you've got
13:55
Speaker 1: fewer products, uh, less diversification, less act access to the
14:00
Speaker 1: capital markets, that's more risk absolutely, and then it makes
14:04
Speaker 1: sense that you would have higher returns over the long
14:06
Speaker 1: term with that. But the but the low volatility factor
14:12
Speaker 1: turns that on its head, and and what was remarkable
14:15
Speaker 1: to me was that it wasn't a bigger problem for
14:17
Speaker 1: more people that the low volatility stocks did better in
14:21
Speaker 1: the long terming wait a minute. We talk about measuring risk,
14:25
Speaker 1: and we can go into a lot of detail on
14:27
Speaker 1: what's risk, but most common way to measure risk and
14:30
Speaker 1: academia standard deviation of returns, specifically measuring the exact same way.
14:35
Speaker 1: The low volatility is less risk by definition and should
14:39
Speaker 1: do less well over the long term. But the reverse
14:41
Speaker 1: is true. Why is that you can't In my mind,
14:45
Speaker 1: it was just a complete short circuit that those two
14:48
Speaker 1: things don't go together. If that's true, something else must
14:51
Speaker 1: be driving these stocks. What is that? And I think
14:54
Speaker 1: that's behavioral finance. So a lot of people focus on
14:58
Speaker 1: the models, but they don't pay that close attention to
15:01
Speaker 1: the execution of these models. How can you take advantage
15:07
Speaker 1: of of ability to execute, ability to perform versus just
15:13
Speaker 1: the plain old algorithm. Well, the first of all, the
15:16
Speaker 1: algorithms are built by people, so there's a very strong
15:19
Speaker 1: human component to that. And the models are only as
15:22
Speaker 1: good as the modeling process that you've got, So that
15:25
Speaker 1: would be um where I start. I think there are
15:29
Speaker 1: huge advantages to machines being able to process huge amounts
15:32
Speaker 1: of data. So that's the key advantage there. And we're
15:36
Speaker 1: learning more all the time about technology and artificial intelligence
15:41
Speaker 1: and where that might go. Let's talk a little bit
15:44
Speaker 1: about your corporate culture, and I find some things about
15:49
Speaker 1: Bridgeway quite fascinating. First, eight and a half billion dollars
15:53
Speaker 1: is a nice chunk of money. You're somewhat under the radar.
15:57
Speaker 1: Is that a conscious decision or is that just happenstance
16:01
Speaker 1: of being in Houston? I would say both. Early on,
16:05
Speaker 1: we had some thought of being about substance and not fluff,
16:08
Speaker 1: and that has continued in our culture and worldview and
16:12
Speaker 1: obviously the other giants issue. It's unusual to see a
16:18
Speaker 1: finance company that gives away half their profits to charity
16:22
Speaker 1: each year. Tell us a little bit about how that
16:24
Speaker 1: came about and uh, how you execute on that well, Barry,
16:28
Speaker 1: I'd say naivete has worked pretty well for me in life.
16:31
Speaker 1: So I got married at twenty one. That's not the
16:34
Speaker 1: statistics on that are not great. Um. Uh, statistic would
16:38
Speaker 1: say wait a while, get more life experience. But it
16:41
Speaker 1: was awesome for me. I'm married to um, the love
16:44
Speaker 1: of my dreams for forty years now. Just celebrated to
16:47
Speaker 1: fort anniversary. I think you just celebrated, um, So that's
16:51
Speaker 1: worked out great. Also, when I was founding Bridgeway, we
16:55
Speaker 1: we had some concern my wife and I about if
16:59
Speaker 1: professorly we were successful as I had been over the
17:04
Speaker 1: prior six years individually with the model that I had.
17:06
Speaker 1: This is a quantitative model, so you didn't have to
17:08
Speaker 1: hire an army of analysts, so it was a low
17:11
Speaker 1: cost strategy aspects that of modeling that we had worked
17:15
Speaker 1: with for some time. Then it should be a cash
17:18
Speaker 1: cow in the investment advisory business. There's no accounts receivable.
17:21
Speaker 1: There's no accounts because people you manage money, you have
17:25
Speaker 1: their money. There's no inventory except computers, which are actually
17:29
Speaker 1: pretty cheap these days. There's no It's an amazing cash
17:33
Speaker 1: cow business. And we thought, so what would you do
17:35
Speaker 1: with those resources? And we actually had some concern twenty
17:38
Speaker 1: five years ago that that could be a problem in
17:41
Speaker 1: raising kids and the environment within which we raised more
17:44
Speaker 1: money is not always good in spite of the fact
17:46
Speaker 1: what we do for living is is managed money. So
17:49
Speaker 1: we thought, had the naive thought of giving half away,
17:52
Speaker 1: there'd be less around. Interestingly, about ten years into the
17:57
Speaker 1: process of of Bridgeway capital manage I had the thought, well,
18:01
Speaker 1: that didn't work out at all. The money that's left
18:03
Speaker 1: when you're that generous and you build it in the
18:06
Speaker 1: fabric of a company and you are able to hire
18:09
Speaker 1: and retain inspired people, the benefits of that to the
18:13
Speaker 1: company far outweigh the half that you give away. So
18:15
Speaker 1: we actually that was a bust. I figured out at
18:18
Speaker 1: ten years is much more powerful when you have a
18:20
Speaker 1: generous spirit. So, in other words, giving away money ended
18:24
Speaker 1: up generating too much in return for yourself. Is that
18:27
Speaker 1: is that what I'm hearing too much? You know? Okay,
18:29
Speaker 1: So the expect more than expected for sure, and you
18:32
Speaker 1: also do something else that's kind of unusual. Your compensation
18:37
Speaker 1: as chairman is limited to seven x the lowest paid employee.
18:42
Speaker 1: Am I getting that correct? So we now talk about
18:44
Speaker 1: that is our stewardship imperative. So if you're a new
18:48
Speaker 1: person coming into Bridgeway, of the conversation goes something along
18:51
Speaker 1: these lines. One, We're here to make a difference in
18:54
Speaker 1: the world. And that's that's really cool about for our
18:58
Speaker 1: clients first, because that's why we're here for our fellow
19:01
Speaker 1: partners each other. And that's partners is the word we
19:04
Speaker 1: use for all the staff um with a full time
19:06
Speaker 1: and long term commitment at Bridgeway and also the communities
19:09
Speaker 1: that we live in. However, we expect everybody to engage
19:13
Speaker 1: in that. And and if you look back over forty
19:15
Speaker 1: years of compensation in the US, it's pretty clear to
19:18
Speaker 1: me that things have gotten out of hand at the
19:20
Speaker 1: top end. I just didn't want to get caught up
19:22
Speaker 1: in that. It Bridgeway and actually it's a pretty great
19:25
Speaker 1: screening tool for if you if you put at one
19:28
Speaker 1: end of the spectrum, greed and a lot of things
19:31
Speaker 1: that the finance industry is criticized for. And at the
19:34
Speaker 1: other hand, generosity and making a difference in life at
19:38
Speaker 1: the other end of the spectrum. It's pretty great to
19:40
Speaker 1: be able to say, if you want to make seven
19:41
Speaker 1: figures and you're about generating you know, personal wealth at
19:45
Speaker 1: the high end, you won't come to Bridgeway like there
19:47
Speaker 1: are other places to do that. We don't make any
19:48
Speaker 1: value judgments about that. We just think that life is
19:52
Speaker 1: about um more and if you take that attitude in worldview,
19:56
Speaker 1: it's incredibly powerful. You also have a requirement that all
20:01
Speaker 1: the staff members are shareholders in Bridgeway and they are
20:05
Speaker 1: unable to make investments outside of the firm. UH. Does
20:11
Speaker 1: that include the firm's investment portfolios? How do you? How
20:14
Speaker 1: do you manage that? So two things. One, we have
20:17
Speaker 1: what we call a partner stock ownership, which is typically
20:20
Speaker 1: referred to as an esop so UM all the UH
20:24
Speaker 1: full time UH people at Bridgeway. UH currently about of
20:30
Speaker 1: your W two goes to buy stock in the advisory firm.
20:33
Speaker 1: And that's across the board. That's not typically a firm
20:35
Speaker 1: our size. The top five people or so would have stock. Uh.
20:38
Speaker 1: This is broadly based across the full spectrum of salaries.
20:43
Speaker 1: Some people thinks like, oh, so you have an ownership culture.
20:45
Speaker 1: We say, yeah, they're aspects of that. So yes, you
20:48
Speaker 1: want to you know, treat costs as you know your
20:51
Speaker 1: cost and but we we like to focus on the
20:54
Speaker 1: stewardship aspect of that. There's a there's an asset resources
20:58
Speaker 1: that we've been entrusted with on behalf of our clients,
21:03
Speaker 1: on behalf of the public good. When you talk about
21:05
Speaker 1: the foundation, we want to do an excellent job with that.
21:08
Speaker 1: That's the focus um and we think that comes back
21:12
Speaker 1: in in multiple ways. Let's talk a little bit about
21:16
Speaker 1: the modern world of investing. We see index funds taking
21:20
Speaker 1: assets from active managers. You're experiencing the opposite. You're seeing inflows.
21:28
Speaker 1: What are you doing to attract assets when most non
21:32
Speaker 1: index funds are seeing outflows. Well, certainly we're experiencing that
21:37
Speaker 1: in some places at Bridgeway. First of all, we do
21:39
Speaker 1: have our own proprietary index fund. It's it's non market
21:42
Speaker 1: cap weighted, has some really cool I'm an engineer by back,
21:46
Speaker 1: really cool design features that we've executed. We just celebrated
21:49
Speaker 1: twenty years. What makes that index unique and what led
21:53
Speaker 1: you away from cap waiting research research is what we
21:58
Speaker 1: live and breathe and do for living on the investment team,
22:02
Speaker 1: market cap weighted index. The more stock goes up, the
22:06
Speaker 1: more money you throw at it. That's a momentum strategy.
22:08
Speaker 1: There's nothing wrong with momentum. It works of the long
22:11
Speaker 1: term except well that's true. But but the main thing
22:14
Speaker 1: is you have to you have to you have to
22:16
Speaker 1: sell it over relatively short period of time, probably you know,
22:19
Speaker 1: somewhere between three months and twelve months. If you just
22:21
Speaker 1: hold on forever, then it goes up and then when
22:23
Speaker 1: it falls, you go down. That's a very inefficient structure.
22:27
Speaker 1: So with that insight, we went back and said, okay,
22:29
Speaker 1: is there is there a different structure. We studied a
22:32
Speaker 1: number of them. This was you know, twenty plus years
22:34
Speaker 1: ago now, UH and a very basic equal what we
22:38
Speaker 1: call roughly equal waiting strategy. UH has some really cool
22:44
Speaker 1: risk statistics. So over the entire time frame since inception, UM,
22:49
Speaker 1: you know, call it kind of flat between our fund
22:53
Speaker 1: our strategy in the Blue Ship thirty five area and
22:56
Speaker 1: SMP five fund. But the risk characteristic are really cool
23:01
Speaker 1: at that the ten worst downturn quarters of the SMP
23:06
Speaker 1: five hundred we've out we've provided cushion and nine of
23:09
Speaker 1: those So there's something special going on. And I think
23:11
Speaker 1: that relates right back to momentums with no hold period.
23:16
Speaker 1: Just spinning it out is not a great strategy. That's
23:19
Speaker 1: what a market cap waiting is. So you have to
23:21
Speaker 1: be really careful about when you use market cap waiting
23:24
Speaker 1: and when you don't. So you're you're evidence based. You
23:26
Speaker 1: crunch a lot of data. The data typically suggests that
23:30
Speaker 1: when markets are enjoying a high valuation, your future expected
23:36
Speaker 1: returns are likely to be lower. How do you perceive, uh,
23:41
Speaker 1: the current environment? Is that a fair statement? Or or
23:44
Speaker 1: am I overstating it? So if the question is do
23:46
Speaker 1: I think the market is expensive, the answers yes, how
23:50
Speaker 1: expensive depends on how you measure it. But the second
23:53
Speaker 1: question relates like okay, like statistically you can measure this
23:56
Speaker 1: based on history that is more more expensive. So does
23:59
Speaker 1: that mean we should get out of the market? Should
24:01
Speaker 1: we time that somehow? And that's a very very different
24:04
Speaker 1: question with with with an answer that takes you into
24:08
Speaker 1: a buy and hold strategy on the market overall in
24:11
Speaker 1: other words, your your expectation is the odds are strongly
24:14
Speaker 1: against us. It's not only strongly, it's incredibly strongly against you.
24:19
Speaker 1: This goes back to that year and a half that
24:21
Speaker 1: I took off in in nine into ninety three doing
24:25
Speaker 1: research where I actually went back and studied the Great Depression.
24:28
Speaker 1: So like, if you want a granddaddy of downturns and
24:31
Speaker 1: you want to understand if you're studying risk, which is
24:33
Speaker 1: what I was doing, you go back to that period.
24:35
Speaker 1: Some people say, like John, you know, like the FED
24:37
Speaker 1: didn't even exist in his current form, why would you
24:40
Speaker 1: go back to the nineteen thirties. My answer to that
24:43
Speaker 1: is the specifics of risk have changed. Nuclear bonds didn't
24:46
Speaker 1: exist in the nineteen thirties, so obviously that's a very
24:49
Speaker 1: different risk. But the nature of risk itself has been
24:51
Speaker 1: around a long time. You can learn a lot, and
24:54
Speaker 1: I convinced myself from that a couple of things out
24:57
Speaker 1: of that exercise. One is, be prepared for the downturn.
25:00
Speaker 1: They will happen. It's not it's inevitable and and its behavioral.
25:03
Speaker 1: It's not just based on how expensive, uh the market is.
25:08
Speaker 1: Number Two, it's incredibly difficult to time that, and and
25:12
Speaker 1: we've done all this research on a lot of different
25:14
Speaker 1: ways systems that people have done that. It's just very
25:19
Speaker 1: difficult to do. There's certain things you can reduce risk on,
25:23
Speaker 1: like I mentioned the the market cap waiting in large
25:27
Speaker 1: cap stocks UM. But the second thing I learned from
25:30
Speaker 1: that is about leverage so UM. Some of my quant
25:34
Speaker 1: competitors use a very significant amount of leverage and long
25:38
Speaker 1: short strategies. I won't say that, you know that's a
25:40
Speaker 1: complete You know that in all circumstances that's a bad idea,
25:43
Speaker 1: but you should be very, very very careful. The Dow
25:46
Speaker 1: Jones Industrial Average and the Great Depression fell eight s.
25:50
Speaker 1: You can't say it can't happen. It has happened. That's
25:53
Speaker 1: one thing about statistics is it's like, oh, that will
25:55
Speaker 1: never Well, of course it can happen. It has already happened.
26:00
Speaker 1: If you've got debt on top of you know, buying stocks,
26:03
Speaker 1: it doesn't take much debt to completely blow you out,
26:06
Speaker 1: to cash you out, like you're out of investing. People
26:09
Speaker 1: forget how how recently we've seen a near crash. Everybody says, well,
26:17
Speaker 1: twenty nine is so long ago. The NASDAC in two
26:20
Speaker 1: thousand fell almost as much as the Dad Jones did
26:24
Speaker 1: in twenty nine. It was I think it's just a
26:27
Speaker 1: hair under eight percent of memory serves. So it's not
26:31
Speaker 1: like it's a hundred years ago. It's a decade and
26:34
Speaker 1: a half ago we experienced something very very similar. Yes,
26:38
Speaker 1: So let's that brings us obviously to the behavioral side.
26:42
Speaker 1: And you said something that I found quite fascinating. One.
26:47
Speaker 1: The first part of it is the importance of behavior
26:50
Speaker 1: to successful investing, but the second half was really interesting.
26:55
Speaker 1: You said, it's been twenty five years of trying to
26:59
Speaker 1: help investors manage their behavior, and it sometimes feels like
27:04
Speaker 1: it's a losing battle. Yes, tell us about that. So, um,
27:09
Speaker 1: so this is probably my biggest source spot professionally in
27:13
Speaker 1: the investment uh, you know, the investment industry, in the
27:17
Speaker 1: service that we've provided, the place where we're still living, uh,
27:22
Speaker 1: the film. We have not solved the problem with what
27:24
Speaker 1: I refer to as the behavior gap. The behavior gap
27:26
Speaker 1: coined I believe by Carl Richards as a description of, um,
27:31
Speaker 1: the natural tendency of human beings uh to uh buy
27:36
Speaker 1: more when things are going up. Call it greed or
27:40
Speaker 1: just wanting to get on the bandwagon. So it's chasing
27:44
Speaker 1: hot returns. Uh. And on the downside, UH, fear when
27:49
Speaker 1: things go poorly, when the stock market goes down, it predictably,
27:53
Speaker 1: and it is so broad based, uh that people are
27:57
Speaker 1: going to panic and and what do you do? You
27:59
Speaker 1: get out? And they are all different versions of this.
28:01
Speaker 1: It's but so it's another version of marketing timing. It's
28:04
Speaker 1: it's behaviorally based. Um. And let me let me, let
28:08
Speaker 1: me give you a real world example of this. At Bridgeway,
28:10
Speaker 1: I looked at statistics on just before coming in updated
28:14
Speaker 1: on one of our more aggressive strategies over the last
28:17
Speaker 1: fifteen years. According to morning Star, the returns to investors
28:21
Speaker 1: of this fund is the average in return is about
28:24
Speaker 1: two thirds of the total return. So we've produced what
28:29
Speaker 1: I think is very attractive fifteen year track record. The
28:32
Speaker 1: timing of when people get get in and get out,
28:35
Speaker 1: they're chasing hot returns. They panic, you know in oh A.
28:38
Speaker 1: The net of all that over the last fifteen years
28:40
Speaker 1: is the average January return is one third less. Like
28:45
Speaker 1: from that standpoint, think like a third of the value
28:47
Speaker 1: that we've created and that the economy has created gets
28:51
Speaker 1: washed down the toilet by when people are in and out.
28:54
Speaker 1: It's worse than that though. Think of that number one third.
28:57
Speaker 1: If you take an investing rising of thirty years, like
29:01
Speaker 1: you're saving for retirement, when you're forty thirty years later,
29:05
Speaker 1: the amount of money that you've got is one third,
29:08
Speaker 1: two thirds less one third of what it would be
29:11
Speaker 1: had you just used to buy and hold stuff that alone.
29:14
Speaker 1: So so the emotional side of the behavior is that
29:18
Speaker 1: people underperform their own holdings. And then you add to
29:23
Speaker 1: that the insult of you add insult to injury by
29:26
Speaker 1: the loss of compounding of that over the long haul.
29:29
Speaker 1: And this is not this is not just true of
29:31
Speaker 1: individual investors. It's true in a very broad sense of
29:34
Speaker 1: institutional investors as well. And the study I like to
29:38
Speaker 1: cite on that is a study that was done of
29:40
Speaker 1: pension fund performers, and they took a look at the
29:43
Speaker 1: three year forward returns of managers that were fired versus
29:47
Speaker 1: the ones that they hired to replace them. And what
29:50
Speaker 1: do you think happen? I'm assuming the activity ends up
29:53
Speaker 1: costing them more than have they done nothing. Well, it
29:56
Speaker 1: not only costs them more if their transaction costs, but
29:58
Speaker 1: the actual perform of those two players is flipped based
30:02
Speaker 1: on what you would think the fired manager does better,
30:05
Speaker 1: because there by you know they're being fired at if
30:09
Speaker 1: they have a solid process, and if they're doing you know,
30:11
Speaker 1: screw stuff, that's one thing, but they have a solid process,
30:14
Speaker 1: is just out of favor. That's the time to be buying,
30:16
Speaker 1: not selling. It's upside down. I have a buddy who's
30:20
Speaker 1: a fairly well known household name. He's a hedge fund
30:23
Speaker 1: manager and a value investor, and he says all the
30:27
Speaker 1: time he could tell when an underperforming investment is about
30:31
Speaker 1: to pay off. First the phone starts to ring, and
30:34
Speaker 1: then the emails come, and then ultimately clients start pulling
30:38
Speaker 1: money out. And usually it's at the moment when this
30:44
Speaker 1: underperforming value approach is about to take off, and it's
30:48
Speaker 1: it's been a it's been an interesting observation, just like
30:52
Speaker 1: the pension funds firing people at the nature of their cycle.
30:57
Speaker 1: I'm most comfortable when everyone else is ringing the hands
31:00
Speaker 1: As an investor, that's just my my personal makeup. That
31:03
Speaker 1: doesn't mean, however, that I should take that information and
31:06
Speaker 1: try and time the market. That would be the wrong conclusion.
31:09
Speaker 1: Just just holding through the downturns here's the here's another
31:14
Speaker 1: great I mean you think Bilo said, all right, everybody
31:17
Speaker 1: knows that most people will say they're doing that, and
31:20
Speaker 1: then you go back and track their actual numbers, they're
31:22
Speaker 1: not doing them. Most behavioral thing is much much stronger.
31:26
Speaker 1: It's much easier said than done. Actually doing it requires
31:29
Speaker 1: you to be comfortable when everybody is miserable and and
31:33
Speaker 1: and we haven't solved that problem. Like I can show
31:35
Speaker 1: you statistically, this is a problem at Bridgeway. By the way,
31:38
Speaker 1: it's it's true of the index or still you can
31:40
Speaker 1: look at Vanguard's, you know, biggest index fund. They've got
31:43
Speaker 1: this problem as well. We've as an industry, we have
31:46
Speaker 1: got to work on this and solve it. And I
31:48
Speaker 1: think that's the next frontier. We have been speaking with
31:51
Speaker 1: John Montgomery. He is the chairman and chief investment Officer
31:55
Speaker 1: of Bridgeway Capital Management. If you enjoy this conversation, be
31:59
Speaker 1: sure and stick around for the podcast extras, where we
32:02
Speaker 1: continue to chat about all things investing. Check out my
32:06
Speaker 1: daily column on Bloomberg View dot com. You can follow
32:09
Speaker 1: me on Twitter at rid Halts. We love your comments,
32:14
Speaker 1: feedback and suggestions. Email us at m IB podcast at
32:19
Speaker 1: Bloomberg dot Net. I'm Barry rich Halts. You're listening to
32:22
Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast. John.
32:40
Speaker 1: Thank you so much for doing this. I really appreciate
32:43
Speaker 1: um all of your time. There are so many questions
32:45
Speaker 1: we didn't get to Before I get to my favorite
32:49
Speaker 1: standard questions, there's a bunch of things I have to
32:53
Speaker 1: go back and and ask you about. Course, we blew
32:56
Speaker 1: through them so quickly. We talked earlier about the behavior gap.
33:00
Speaker 1: I have to ask you a question about that. Now.
33:03
Speaker 1: Are you hearing from clients? Are you're getting emails and
33:06
Speaker 1: phone calls? Given the supposed nosebleed valuation of the US markets,
33:11
Speaker 1: we get questions, but I don't. I don't. I wouldn't
33:13
Speaker 1: say it's it's overwhelming in previous that leads to the
33:19
Speaker 1: quantitative evidence question. And you've been doing this long enough.
33:24
Speaker 1: In previous market peaks, let's call it late oh seven
33:28
Speaker 1: or late were you getting the same sorts of inquiries?
33:33
Speaker 1: Did you? Was there anything to be learned by client
33:37
Speaker 1: expressions of fear or they're usually greedier at the top
33:42
Speaker 1: than fearful. Well, the main thing is it's always easy
33:46
Speaker 1: to know what the top was after the fact, uh
33:49
Speaker 1: in the middle of it. Uh like take us back
33:53
Speaker 1: to remember the period very clearly in I thought, oh, gee,
33:59
Speaker 1: this is really really expensive, Like we're really getting outside
34:03
Speaker 1: the sweet spot of how how cheap or reasonable even
34:08
Speaker 1: the market is. I don't like that. If I had
34:11
Speaker 1: acted on that inside, and I wasn't wrong along with
34:13
Speaker 1: other people, I wasn't wrong on that. Had I done that,
34:16
Speaker 1: we would have missed one of the best years in
34:17
Speaker 1: the stock market the following year. Absolutely, just because things
34:21
Speaker 1: are expensive doesn't mean that they won't get more expensive
34:24
Speaker 1: and that you should hold through that period. I remember
34:27
Speaker 1: in nineties was when Louis Rukaser's elves first kind of
34:32
Speaker 1: turn barished because they I remember the phrase the market
34:38
Speaker 1: is now fully valued, as if that is significant, Like
34:42
Speaker 1: markets go to fair value and then stop and that
34:45
Speaker 1: that doesn't seem to happen. Sometimes they do, and at
34:48
Speaker 1: some point they will. You just don't know when it's
34:50
Speaker 1: gonna be so on your firm brochure, there's a line
34:54
Speaker 1: um that I have to ask you about putting investors
34:57
Speaker 1: long term interest first is a whole mo of our
35:00
Speaker 1: firm's unique culture. Tell us what that means, what is
35:03
Speaker 1: putting investors first mean it means sometimes you can make
35:07
Speaker 1: more money for yourself and you shouldn't say that. Again
35:10
Speaker 1: sometimetimes you can make more of money for yourself than
35:13
Speaker 1: your client, and you shouldn't because we have a fiduciary
35:16
Speaker 1: duty that should come first. That's what fiduciary duty is.
35:19
Speaker 1: And by the way, that this is the financial services industry,
35:22
Speaker 1: like some of this is law built into the forty Act, right, However,
35:26
Speaker 1: it's true of any industry like this should always be
35:28
Speaker 1: the case. I have a friend that says business is
35:31
Speaker 1: a platform for community and service. That's a good way
35:34
Speaker 1: to think about capitalism and what we're trying to do.
35:37
Speaker 1: Putting our customer first should be how we wake up
35:40
Speaker 1: in the morning, like that's that's what they pay us
35:42
Speaker 1: to do, and it's and it's a beautiful thing to
35:46
Speaker 1: be able to do that and to create wealth and
35:48
Speaker 1: opportunities and employment and services and goods that people value
35:53
Speaker 1: and need and want. So two and with gated withdrawals,
35:58
Speaker 1: not a big fan, not a big and uh soft
36:01
Speaker 1: dollars would be you know the an example from day
36:04
Speaker 1: one where you know, in the early days of Bridgeway,
36:06
Speaker 1: we could have paid for our Bloomberg terminals with soft
36:10
Speaker 1: dollars and you know, like that would have flowed straight
36:13
Speaker 1: through to our blind Frankly, it was a big deal,
36:15
Speaker 1: and we just said, no, it's not the right thing
36:17
Speaker 1: to do because this is really our customers money. It's
36:20
Speaker 1: it's it's their money, and it's a it's a poor
36:23
Speaker 1: structure that leads to poor decisions. We just don't think
36:26
Speaker 1: we should have anything to do with it. That was
36:28
Speaker 1: twenty five years ago. We've never paid uh soft dollar
36:31
Speaker 1: commissions for research and terminals and the other things that
36:34
Speaker 1: you can do. So let's talk about your annual report.
36:37
Speaker 1: I've been reading Warren Buffett's most recent annual report and
36:41
Speaker 1: some of the ones from the two thousands. You've been
36:44
Speaker 1: doing an annual report for quite a while. Tell me
36:48
Speaker 1: about quote the worst thing of the fiscal year. What
36:53
Speaker 1: is that? Well, you know, I like to think that
36:57
Speaker 1: we listened to our our investors um and I had
37:02
Speaker 1: an investor conversation that wins something like this, you know, like,
37:06
Speaker 1: so I'm the like this in the forty Act fun
37:09
Speaker 1: I'm I'm the shareholder, I'm the customer, and you're the
37:13
Speaker 1: manager and you work for me, and I think that
37:18
Speaker 1: I have the right to know like the bad stuff
37:20
Speaker 1: like most you know, here's the shareholder letter, all this
37:23
Speaker 1: great stuff we did and look at this and yes,
37:27
Speaker 1: and he said, spare me the accolades. Tell me what
37:29
Speaker 1: you guys messed up. I just I like, think about it.
37:33
Speaker 1: You have a boss. Your boss wants to know the
37:35
Speaker 1: stuff that's good, but also the stuff that's bad. I
37:38
Speaker 1: just couldn't get around that logic. And I thought, you know,
37:41
Speaker 1: there's just gotta be some way to do. So we
37:43
Speaker 1: brainstorm that this was probably coming up on twenty years.
37:47
Speaker 1: It wasn't the very beginning bridgeway, but it wasn't too
37:49
Speaker 1: long after that, and we thought, well, we're just gonna
37:51
Speaker 1: put in our annual report the worst thing that happened
37:54
Speaker 1: in the year. We'll just you know, own up to it.
37:56
Speaker 1: Our law this by this drives lawyer's nuts. It's like
38:01
Speaker 1: admitting a liability. It's like you're putting on a silver
38:04
Speaker 1: platter stuff for people to see you everything. But built
38:07
Speaker 1: into that is otherwise is the implication that we're flawless.
38:11
Speaker 1: We never made any mistakes. It's not only that, but
38:13
Speaker 1: you can't learn from the mistakes if you don't get
38:16
Speaker 1: them out in the open and on the table. That's
38:18
Speaker 1: the bottom line, and we are absolutely committed to learning
38:21
Speaker 1: from mistakes. We have this ball called the Mistakes Ball
38:23
Speaker 1: that we passed to the newest partner coming into Bridgeway.
38:26
Speaker 1: So whoever is the latest one has got it. And
38:28
Speaker 1: it's on the ball it says it's a baseball, and
38:30
Speaker 1: on the ball it says mistakes are the jewels. We
38:33
Speaker 1: expect new people coming in and by the way, old
38:36
Speaker 1: people that have been there at Bridgeway for some time
38:38
Speaker 1: to make mistakes. If you're not making some mistakes, then
38:42
Speaker 1: then you're not going to achieve the mission that we've
38:44
Speaker 1: got in the world. That that's that's fascinating. Not to
38:48
Speaker 1: confuse Bridgeway with Bridgewater. Yes, many years ago I had
38:53
Speaker 1: read something that Dalhio had written, so actually I had
38:57
Speaker 1: I was complaining about things in in the media. I
39:02
Speaker 1: won't mention the outlet that were just wrong, and they
39:05
Speaker 1: were consistently wrong, and every time I brought it to
39:08
Speaker 1: their attention, they refuse to acknowledge. It very simply had
39:14
Speaker 1: to do with um annual home monthly home sales. And
39:19
Speaker 1: there's a pattern very clearly the due to weather or
39:23
Speaker 1: whatever home sales start out pretty weak in the beginning
39:25
Speaker 1: of the year, they start to the spring is where
39:28
Speaker 1: it kicks up. And every year April is better than March,
39:31
Speaker 1: June is better than April, August is better, you know,
39:34
Speaker 1: peaks around July August, and then it fades and and
39:37
Speaker 1: people were saying, oh, look, you can't look at it
39:40
Speaker 1: month a month. You have to look at it July
39:43
Speaker 1: oh nine to July eight, not oh, look, July is
39:46
Speaker 1: better than June. And I couldn't get these people to
39:48
Speaker 1: understand the math. And I was whining about it, and
39:52
Speaker 1: and somebody emailed me and said, well, it's it's good
39:55
Speaker 1: that you're bringing these errors to their attention. What are
39:58
Speaker 1: you doing about your own mistakes? And I said, that's
40:02
Speaker 1: a fair criticism. And every year I started publishing my
40:06
Speaker 1: own mea culpers Here's what I got wrong, and here's
40:10
Speaker 1: what I learned from it. What the person had sent
40:12
Speaker 1: me was something that Dahlio had written about, which was
40:15
Speaker 1: exactly what you just described, which is you have to
40:19
Speaker 1: make mistakes and learn from them, otherwise you never improve.
40:23
Speaker 1: We're all going to make mistakes, it's a given, yes,
40:26
Speaker 1: But the lawyers give you grief about it. Well, not
40:30
Speaker 1: in in fairness like our lawyers are at the the
40:33
Speaker 1: high end, Like we're still doing it like without a conversation. Uh,
40:36
Speaker 1: we're doing it. Um. But this is also human nature.
40:40
Speaker 1: It's not just lawyers. I'm putting them on the hotspot. Uh.
40:43
Speaker 1: There we all you know, we all tend towards being
40:46
Speaker 1: defensive and like it hurts, so you walk away from
40:50
Speaker 1: you know, the stuff that hurts. But if you want
40:53
Speaker 1: to improve and grow and be really great, and I'm
40:56
Speaker 1: an engineer, so I think of continual small improvements, Um,
41:00
Speaker 1: then you've got that's that's like, that's your fadder. That's
41:03
Speaker 1: where you can really learn from and grow. There's there's
41:06
Speaker 1: one other principle that relates to this I just want
41:08
Speaker 1: to mention, and that's diversity. So we all know you
41:10
Speaker 1: don't want to hire a bunch of yes people, right,
41:13
Speaker 1: but there's tremendous psychological pressure to hire people that look
41:18
Speaker 1: and and feel and think just like you. And there's
41:21
Speaker 1: all this you know with the media, there's all this
41:23
Speaker 1: research and and and people are thinking about it with
41:27
Speaker 1: with respective news stuff. That's what it's who you know,
41:30
Speaker 1: and it's also who you feel most comfortable with. If
41:32
Speaker 1: you're in finance, you want to associate with your people,
41:36
Speaker 1: your stuff, with people whom you trust. Who do you trust?
41:38
Speaker 1: Trust people that look just like you. That is a
41:41
Speaker 1: formula for disaster. So under our servant Leadership program at Bridgeway,
41:46
Speaker 1: part of what we're trying to do is hire people
41:48
Speaker 1: intentionally that don't agree with us, people who have a
41:52
Speaker 1: different view into things. The cool thing about that is,
41:55
Speaker 1: like this is, you know, diversity of ideas and frame.
41:58
Speaker 1: If you look at the what people look towards as
42:01
Speaker 1: the physical diversity around gender, um, rays um, you know,
42:07
Speaker 1: skin color, We've got more diversity there as well at
42:09
Speaker 1: Bridgeway than the vast majority of our competitors. I'm proud
42:12
Speaker 1: of that. It's not something we set out to do.
42:15
Speaker 1: On my team of eight people at Bridgeway, I'm the
42:19
Speaker 1: only uh male WASP on the team. And again there's
42:25
Speaker 1: there's no rule that you know that that has to
42:28
Speaker 1: be case. We're not you know, we don't have quotas
42:30
Speaker 1: or anything like that, but we're looking for diversity of
42:33
Speaker 1: viewpoint and opinion and people that don't agree with us.
42:36
Speaker 1: And and I have some people just like do you
42:38
Speaker 1: know that this other team member doesn't agree with you
42:41
Speaker 1: on X Y is you know, like yes, and that's
42:43
Speaker 1: a good thing. That's what. That's how you have different
42:46
Speaker 1: ideas and helps you, uh get out of your own
42:49
Speaker 1: silo and and moves you forward. Tell us about the
42:52
Speaker 1: Jam accountability group. Okay, So, um, I have an amazing
43:00
Speaker 1: support network in my life in general. So you can
43:02
Speaker 1: start with my ninety four year old mom. I'm her
43:05
Speaker 1: baby still at you know, age sixty one. Um, friends, Uh,
43:12
Speaker 1: that is that is Uh, you have to work on
43:14
Speaker 1: that because my father's my father passed away at nearly
43:16
Speaker 1: my age. So you know, I try and lean towards
43:19
Speaker 1: really taking care of myself. Um. But part of part
43:23
Speaker 1: of a great support network for me over the last
43:26
Speaker 1: eighteen years has been a group called Firewood. Uh. And
43:30
Speaker 1: it's an accountability group. And and it started when a
43:33
Speaker 1: friend of mine called me up and said, so I
43:36
Speaker 1: want you to be on my board. And like, Charlie,
43:39
Speaker 1: what board are you talking about? Like he worked for
43:41
Speaker 1: ex son and he wasn't in a position to invite
43:42
Speaker 1: me son at the time. Uh. And he said, well, no,
43:46
Speaker 1: the board of directors of my life. And I said, well,
43:49
Speaker 1: what's that? What does that look like? So he kind
43:51
Speaker 1: of got me into the conversation. Um, if I examined
43:55
Speaker 1: my life, I had a lot of areas of support,
43:58
Speaker 1: very little accountability. So this group is one that still needs,
44:01
Speaker 1: eighteen years later, um about once a month every three
44:05
Speaker 1: four weeks, with the specific purpose of holding each other
44:09
Speaker 1: accountable to what our life dreams and goals and milestones are.
44:14
Speaker 1: So if you take on homework, people will suggest homework.
44:18
Speaker 1: If you take that on which we document, you come
44:20
Speaker 1: back the next meeting, you you better have done your
44:23
Speaker 1: homework or you know, like you're gonna be actually held
44:26
Speaker 1: accountable for that. Um. And I think it's just I
44:30
Speaker 1: know I need that in my life, bottles. And I
44:32
Speaker 1: don't know that everybody needs that. I think probably to do,
44:34
Speaker 1: but I know that I need it in my life
44:36
Speaker 1: to stay on track or I just I'm gonna get
44:38
Speaker 1: off track or procrastinator, all the kinds of things that
44:41
Speaker 1: come up that that's really fascinating. And and before I
44:45
Speaker 1: get to my standard questions, I have two last things
44:49
Speaker 1: I have to ask you about. One is how you
44:52
Speaker 1: track your time, and the second is your trip to Africa.
44:57
Speaker 1: So I'll let you pick, okay, whichever one you want. Well,
45:00
Speaker 1: Tracking my time is something I do about every year
45:03
Speaker 1: and a half uh cycle, just to see am I
45:06
Speaker 1: am I spending the resource of my time? How I say?
45:09
Speaker 1: Does it line up with my life goals? And when
45:10
Speaker 1: I say it's most important? You can do the same thing,
45:12
Speaker 1: by the way, with your check book if you you
45:14
Speaker 1: know you want to, you want a litmus test of
45:16
Speaker 1: are you actually living the life that you intend to?
45:18
Speaker 1: And say you are? Those are two views in so
45:21
Speaker 1: how I spend my time is is something i'm you know,
45:23
Speaker 1: I'm a quant so but but but with my checkbook,
45:27
Speaker 1: I could export it to Quicken or am X or
45:29
Speaker 1: whatever and it will give me a breakdown. Y, you
45:32
Speaker 1: spend this much on t n A and this much
45:35
Speaker 1: on you know down the list. How do you physically
45:37
Speaker 1: track your time? Yea, I wish they were a mint
45:41
Speaker 1: dot com for you know, my time because it's a
45:44
Speaker 1: real pain to do. I do it in a spreadsheet
45:47
Speaker 1: like it's kind of fifteen. You update that every day
45:50
Speaker 1: for for a three month period, so we have quarterly
45:53
Speaker 1: for a three month period. Every year and a half
45:55
Speaker 1: or so. I do that to get accounting of how
45:58
Speaker 1: am I really spending my time and is it in
46:00
Speaker 1: line with what I want and what can I learn
46:02
Speaker 1: from that? I mean, it's like, what are the takeaway?
46:04
Speaker 1: Do you find that? Oh gee, I'm spending a lot
46:06
Speaker 1: of time doing this and I didn't realize it. Yes,
46:09
Speaker 1: I would imagine if people actually did that, they would say,
46:12
Speaker 1: I watch how much TV? I think it would be shocking.
46:15
Speaker 1: I watched very little TV. And that's that's one reason.
46:19
Speaker 1: You know, I taped some things, so I watched it
46:21
Speaker 1: kind of on my schedule. Did the time tracking lead
46:24
Speaker 1: to last TV? It reinforced it very strongly. Yes. And
46:28
Speaker 1: then tell us tell us about the trip to Africa.
46:31
Speaker 1: So this was in June of this year. Uh and
46:34
Speaker 1: a dream we'd had for a while of taking seven
46:37
Speaker 1: partners at Bridgeway. So this is out of thirty people,
46:41
Speaker 1: we took seven of the members of our firm to
46:46
Speaker 1: um Rwanda as a base and then Eastern Congo. Eastern Congo. Well,
46:52
Speaker 1: let me back up a little bit. We give half
46:54
Speaker 1: of our profits away. The core mission of Bridgeway is peacemaking, reckons,
47:00
Speaker 1: afiliation and ending genocide. We have a focus area which
47:03
Speaker 1: is sub Sahara Africa are least Our last conflict we
47:06
Speaker 1: worked on was um the l r A, the Lord's
47:10
Speaker 1: Resistance Army, which you may remember from the Cony video
47:14
Speaker 1: and uh everything that came about from that. But this
47:20
Speaker 1: was the longest running conflict in Africa, and we engaged
47:23
Speaker 1: with partners on the ground in Africa to try and
47:25
Speaker 1: reduce the violence there, which we got an independent assessment
47:28
Speaker 1: that said, yes, between depending on how you measure it,
47:32
Speaker 1: for six year period, UH, decrease the violence around this conflict.
47:37
Speaker 1: So ahead, like you actually can make a difference, move
47:40
Speaker 1: the needle on this stuff. Um. We're in Congo on
47:43
Speaker 1: this last trip to just bring partners in to see
47:48
Speaker 1: you know, the arian kinds of things and potential partners
47:51
Speaker 1: were working with. This is the area of the highest
47:53
Speaker 1: incidents of rape as a weapon of war in the world.
47:56
Speaker 1: So that hits my radar screen. A life goal of
47:59
Speaker 1: mine is ending on aside. This is a stepping stone
48:02
Speaker 1: toward that, um and UH. And it was sharing that
48:06
Speaker 1: Uh that was led not by me but by Shannon Davis,
48:09
Speaker 1: are our head of our foundation. Is amazing, amazing, passionate, engaged, creative.
48:16
Speaker 1: UM woman who's who's got our mission written all of
48:20
Speaker 1: her heart and and and her actions. Wow, that that's
48:24
Speaker 1: quite astonishing. Would you would you recommend people visit that
48:30
Speaker 1: part of the world? What? What is that? Actually? That
48:33
Speaker 1: experience actually like so, um, Rwanda is an easy place
48:38
Speaker 1: to go. There's a genocide there, you know, in it's
48:41
Speaker 1: been some time. What's happened in that country is inspiring
48:44
Speaker 1: and amazing. Uh, So definitely recommend that. I wouldn't go
48:47
Speaker 1: into the specific areas that we did unless you were
48:49
Speaker 1: with people that really know what they're doing. But the
48:52
Speaker 1: inspiration that comes from that, the coming back to the
48:55
Speaker 1: US and knowing where you fit into the world is
48:57
Speaker 1: worth It's it's just worth its weight in gold. Wow.
49:01
Speaker 1: That that that's really um inspiring. Let's uh, let's jump
49:05
Speaker 1: to our standard questions that we ask all our guests
49:08
Speaker 1: in our last twenty minutes or so. UM, tell me
49:12
Speaker 1: something important about your background that most people are unaware of. Okay,
49:17
Speaker 1: my father was the president of an oil exploration firm.
49:21
Speaker 1: From him, I learned, UH, risk management, because you don't
49:25
Speaker 1: survive in the exploration business, especially when he was doing
49:29
Speaker 1: it without a real strong controls around risk management. Also,
49:35
Speaker 1: integrity is the number one business business value. I learned
49:38
Speaker 1: that from him. Uh, And we spend that out in
49:40
Speaker 1: a lot of different ways at Bridgeway from my mom.
49:44
Speaker 1: My mom was a soldier in the War on Poverty
49:47
Speaker 1: in the nineteen sixties. I was a young kid at
49:49
Speaker 1: the time, and she kind of like I was her
49:51
Speaker 1: fourth child. They were all in school, and she kind
49:53
Speaker 1: of put me under her arm and and go out
49:55
Speaker 1: doing volunteer work. Um. I remember a daycare center, you
49:58
Speaker 1: know that I volunteered with along with her. She did
50:02
Speaker 1: a number of things across um, racial, gender, other other
50:08
Speaker 1: boundaries lines. So I learned from her, if something's wrong,
50:12
Speaker 1: like you don't have to live with it, step across
50:14
Speaker 1: that line, makes something happen, makes something happen, move the needle. Um.
50:19
Speaker 1: She was a great model, is still at ninety four
50:22
Speaker 1: an amazing model of that. Uh. Some early mentors tell
50:27
Speaker 1: us about who your early mentors were. I have learned
50:30
Speaker 1: something from every boss I've ever worked for. So the
50:32
Speaker 1: very first boss I was a paper boy at age eleven.
50:35
Speaker 1: But my first boss um was at Baskin Robbins, this
50:38
Speaker 1: guy from Argentina who was just a great entrepreneur and
50:42
Speaker 1: great with kids. Uh. And and what I learned from
50:45
Speaker 1: him was getting the hard stuff on the table and
50:48
Speaker 1: dealing with it in a constructive, not oppressive way. That's
50:52
Speaker 1: the principle I've used everywhere the rest of my life,
50:55
Speaker 1: and I'm thankful for him teaching me that. More recently,
50:58
Speaker 1: I would say last night, I was at dinner with
51:01
Speaker 1: Ruth Messenger, who is the UM. I'm a big believer
51:04
Speaker 1: in mentoring, and she's been a mentor for some time. Uh.
51:09
Speaker 1: She's fifteen years older than me, so she's like a
51:12
Speaker 1: window into what I need to be paying attention to
51:15
Speaker 1: in the decades head very bright, boots on the ground, committed,
51:22
Speaker 1: believes things that can can change. And she was the
51:24
Speaker 1: last head of the American Jewish World Service. And I've
51:27
Speaker 1: loved studying how she does what she does and mixing
51:30
Speaker 1: it up with her. So tell us about some investors
51:33
Speaker 1: that impacted your approach. Who who's influenced you over the
51:37
Speaker 1: years You've you've mentioned Eugene Fama, Yes, who who's affected
51:42
Speaker 1: the way you look at at investing? So Eugene family
51:45
Speaker 1: would be one. As in terms of a framework for risks.
51:48
Speaker 1: Prior to that, Jack Bogel around costs um Um, I
51:52
Speaker 1: love managing costs down uh, and he's a great model
51:56
Speaker 1: for that. UM. Jeremy Stiegel stocks for the long run,
51:59
Speaker 1: so staying in a diversified way uh in stocks as
52:03
Speaker 1: as the growth engine over decades, not months and years.
52:07
Speaker 1: And then probably um, Daniel Kahneman on the behavioral finance side,
52:12
Speaker 1: I'd say he was the you know, one of the
52:14
Speaker 1: fathers of behavioral finance. And that opened up my eyes. Um,
52:18
Speaker 1: let's talk about books. This is everybody's favorite question. Uh fiction,
52:23
Speaker 1: non fiction, classics, recent stuff. Tell us, tell us what
52:27
Speaker 1: you're reading and enjoy it. Um. So I'll give you
52:30
Speaker 1: three titles. One is the Bible, so great, uh, mapping
52:34
Speaker 1: for life in general, but especially finance. There's a lot
52:37
Speaker 1: written in the Bible about finance. The thing I mentioned about,
52:42
Speaker 1: you know, borrowing, for example, is but that's tying, and
52:45
Speaker 1: you're doing five x tie things, so you're over and above. Yeah,
52:50
Speaker 1: I've got a friend who says tie thing is a
52:52
Speaker 1: bad deal. Uh. Like, if if you're all in, you're
52:55
Speaker 1: all in. That's a hundred percent. So whether you're spending it,
52:58
Speaker 1: you know, on you know, uh something, you know, going
53:01
Speaker 1: out for dinner tonight or not, you still need to
53:03
Speaker 1: be all in. So I think that's an interesting way
53:05
Speaker 1: of thinking about that issue. And then that's before we
53:08
Speaker 1: get to the issue of the debt jubilee where there's
53:11
Speaker 1: forgiveness of debt is at every seven seven years. Uh.
53:14
Speaker 1: So that that's a fascinating uh. It is topic. It
53:19
Speaker 1: is and we should think seriously about that. So maybe
53:23
Speaker 1: maybe not literally because I think you know, our large
53:26
Speaker 1: banks and small banks too might have a problem with
53:28
Speaker 1: that bond hole, but not thinking about what underlies that
53:31
Speaker 1: and showing up as generous and not um holding holding
53:36
Speaker 1: something over other people in a way that's disempowering it.
53:40
Speaker 1: We should spend a lot of time on that, and
53:42
Speaker 1: you should do that if you're a bank in my
53:44
Speaker 1: in my opinion, two other books titles Daring Greatly, which
53:47
Speaker 1: is about shame and guilt. Daring Greatly, Yes, Burnet Brown's
53:53
Speaker 1: book based on ten years of her research, which is fascinating,
53:57
Speaker 1: like as a research guy at the research itself is
54:00
Speaker 1: just fascinating. But the topic is about shame and guilt
54:03
Speaker 1: in our culture and what you can do about it.
54:05
Speaker 1: And I highly recommend the book. And the last one
54:07
Speaker 1: would be, um, uh, The Honest Truth about Dishonesty. So
54:13
Speaker 1: this is uh, this is a book that gets into
54:17
Speaker 1: anybody that's in science or research should read some chapters
54:21
Speaker 1: of this book that deal with that. We all think
54:23
Speaker 1: that because we're doing numbers and statistics that were objective.
54:26
Speaker 1: This book would say not so much. Your biases come out.
54:31
Speaker 1: You're human, like we are just as human, and if
54:34
Speaker 1: you think that you don't have that problem, it's going
54:36
Speaker 1: to creep in more not less. So as a research team,
54:40
Speaker 1: like we live and breathe this stuff is like, how
54:42
Speaker 1: do we hold ourselves accountable to not letting our natural
54:45
Speaker 1: biases come in? So we have a we have something
54:48
Speaker 1: we call confessing our biases. So sometimes we'll come in
54:51
Speaker 1: with an insight, but it starts with I need to confess,
54:54
Speaker 1: you know, a bias. And it's like I'm a contrarian.
54:56
Speaker 1: So like I would come was like, guys, I'm I
54:59
Speaker 1: love you know, this is a contrarian situation. Of course
55:01
Speaker 1: I'm gonna love it, right, That doesn't mean it's the
55:04
Speaker 1: right thing to do. So since you've started managing money
55:07
Speaker 1: on a quantitative basis, what has changed? Oh, so we're
55:13
Speaker 1: talking about UH, you know, twenty four or thirty years,
55:16
Speaker 1: depending on when you want to start counting. Bridgeways UH
55:19
Speaker 1: celebrating its twenty fifth anniversary next year. In that time frame,
55:23
Speaker 1: certainly UM passive UM and indexing has really taken off.
55:29
Speaker 1: That has very significantly reduced costs. That's good, not bad
55:33
Speaker 1: UM for investors. More attention to tax efficiency, which I
55:37
Speaker 1: think and will continue to grow. Technology. So in this period,
55:41
Speaker 1: the Internet came in, which just transformed research and how
55:45
Speaker 1: you do it. It's been a really wonderful thing. Robo
55:47
Speaker 1: advisors would be, you know, part of the technology part,
55:51
Speaker 1: and there's some good things about that. There are also
55:53
Speaker 1: some bad things about some of these technology things that
55:55
Speaker 1: the top of the list would be if you make
55:57
Speaker 1: it easier for somebody to day trade, that's how actually
56:00
Speaker 1: a bad thing. I agree. I agree with with Jack
56:03
Speaker 1: bogel Um on that point. We should be worried about
56:05
Speaker 1: being able to day trade UM E T S and
56:08
Speaker 1: the implications of that. So those are some of the
56:11
Speaker 1: things that have changed in in my investing. So UM
56:15
Speaker 1: along the lines of your annual fiscal disaster or annual
56:20
Speaker 1: fiscal confession. Shouldn't say disaster, Uh, tell us about a
56:24
Speaker 1: time you failed and what you learned from the experience.
56:29
Speaker 1: Oh wow, so UM. You know, we've had a lot
56:33
Speaker 1: of different categories. We've had compliance um uh failure at
56:39
Speaker 1: least disappointment. Um to the to the tune that we
56:43
Speaker 1: said we want to become a top quartile player in compliance,
56:47
Speaker 1: and my compliance officer says, John, you can't say that
56:49
Speaker 1: because like how do you measure that? And like, you know,
56:52
Speaker 1: what's the accountability on that. That's a great point. That's
56:55
Speaker 1: an example of somebody coming in with a different view
56:58
Speaker 1: um on that. But we knew we had to up
57:00
Speaker 1: our game. We spent a lot of resources to make
57:03
Speaker 1: that true. The source of some of that, if I
57:06
Speaker 1: hold a mirror up was I was really cheap in
57:08
Speaker 1: the early years of Bridgeway. Um. I didn't want to
57:12
Speaker 1: I didn't want to outsource anything that I didn't understand myself,
57:16
Speaker 1: and I was new to the industry. So we were
57:17
Speaker 1: on transfer agent, we were on pricing agent. We programmed
57:21
Speaker 1: our own software and stuff that people just don't do.
57:24
Speaker 1: Learned a lot out of that, probably held onto too long,
57:28
Speaker 1: uh low cost in favor of getting more help in
57:31
Speaker 1: so we've changed that. That's be an example that was
57:33
Speaker 1: from you know, the early years of Bridgeway that that's
57:36
Speaker 1: really interesting. So you mentioned um uh physical fitness. What
57:40
Speaker 1: do you do to stay fit? What do you do
57:42
Speaker 1: to stay mentally sharp outside of the office. So I
57:47
Speaker 1: ran four miles with our president this morning in Central Park.
57:50
Speaker 1: I'm visiting New York City today to be here with you,
57:53
Speaker 1: and that's one of my favorite places to run. So
57:56
Speaker 1: a typical week for me would be uh to two
57:59
Speaker 1: days running a short run in the long run. So
58:01
Speaker 1: I ran six miles last Sunday. Uh today, the four
58:05
Speaker 1: mile is the short run. That's that's my short Yeah. Three,
58:10
Speaker 1: keep going. Um. Actually ran my first marathon ever. I
58:14
Speaker 1: only run one last year. UM. That was a life
58:16
Speaker 1: goal that I set at Um. How was the experience?
58:21
Speaker 1: I have to ask, because I'm I always remind people,
58:24
Speaker 1: you know, the first guy who ran a marathon drops.
58:27
Speaker 1: That is true. That is absolutely true. A very different
58:30
Speaker 1: lesson from that than you did well. Training is key, Okay,
58:35
Speaker 1: So excellent training. Um and and and they're I mean
58:40
Speaker 1: they're great life lessons in that too, that to run
58:43
Speaker 1: a marathon successfully and do it well and not hurt yourself.
58:46
Speaker 1: If you can do that, if you have the discipline
58:48
Speaker 1: and you get the right like though, you can apply
58:51
Speaker 1: that to any career. UM. So I like that. Two
58:55
Speaker 1: days a week would be pilates and two weeks, two
58:58
Speaker 1: days a week would be UM weightlifting, and I usually
59:02
Speaker 1: try and mix it up with a swim. So I
59:04
Speaker 1: was going to say, it's always something different. Yeah, Like
59:06
Speaker 1: I like frustrating on that, UM, but I like research
59:10
Speaker 1: and so that's the source of some of that. And
59:13
Speaker 1: now and now our two favorite questions that I ask
59:15
Speaker 1: all our guests. Uh, So millennial or recent college grad
59:20
Speaker 1: comes to you and says, I'm interested in going into
59:24
Speaker 1: quantitative finance as a career, what sort of advice would
59:27
Speaker 1: you give them? Well, Uh, first of all, I'd say, um,
59:35
Speaker 1: it's a great industry, great opportunities. Um, people are shying
59:39
Speaker 1: away from it right now, which means the opportunities are bigger,
59:42
Speaker 1: extreme competition. So those would be those would be the
59:46
Speaker 1: things that I you know, uh, you know, overlay somebody
59:51
Speaker 1: that's thinking about getting in as as far as overall advice.
59:53
Speaker 1: And by the way, in my family of origin, advice
59:56
Speaker 1: is the language of love, like if we're not if
59:59
Speaker 1: you if a fan leamers not giving you advice, like
1:00:01
Speaker 1: it's something wrong. So I love advice. The bigger picture
1:00:05
Speaker 1: advice with millennial would be, UM, save aggressively, UM be
1:00:09
Speaker 1: generous with the results of that UM and have big
1:00:14
Speaker 1: life goals, pursue them relentlessly within the framework of a
1:00:18
Speaker 1: balanced life. And our final question, what is it that
1:00:22
Speaker 1: you know about investing today that you wish you knew
1:00:26
Speaker 1: thirty years ago? Definitely the behavior gap that we talked about,
1:00:30
Speaker 1: the cycle of people, you know, chasing hot returns and
1:00:33
Speaker 1: panicking on the downturn. UM. We're doing a better job
1:00:37
Speaker 1: with this, slowly, gradually. We have a partnership UM with
1:00:44
Speaker 1: two strategies with the BAM Alliance. I think they do
1:00:48
Speaker 1: a superior job of this, and so we're learning from them,
1:00:51
Speaker 1: but we've got to do a better job. So UM,
1:00:55
Speaker 1: I wish that I had known the dynamics of that
1:00:57
Speaker 1: thirty years ago, maybe we'd be farther along with you know,
1:01:00
Speaker 1: solution UH and a more effective one. We've been speaking
1:01:04
Speaker 1: with John Montgomery. He is the founder, chairman and chief
1:01:07
Speaker 1: investment officer at Bridgeway Capital Management. If you enjoy this conversation,
1:01:14
Speaker 1: look up or down an inch on Apple iTunes and
1:01:16
Speaker 1: you can see any of the other hundred and fifty
1:01:19
Speaker 1: or so such conversations that we've had over the previous
1:01:23
Speaker 1: three years. We appreciate and enjoy your comments, feedback and
1:01:28
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
1:01:34
Speaker 1: dot net. I would be remiss if I did not
1:01:37
Speaker 1: thank my ACE team who helped put this podcast together.
1:01:41
Speaker 1: Each week, Medina Parwanna is our audio producer and engineer.
1:01:47
Speaker 1: Taylor Riggs is our booker slash producer. Michael Batnick is
1:01:51
Speaker 1: our head of research. I've Barry Ridhoults. You're listening to
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Speaker 1: Masters in Business on Bloomberg Radio t T take TAMPED
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Speaker 1: into the