The Purposeful Investor

The Evolution of Finance and Systematic Investing

• Aden Wilkins & David Andrew • Season 3 • Episode 2

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This is one of our most important episodes - ever!

Predictions feel powerful until they're not.

We pull back the curtain on what actually drives long-term investment returns and explore how a systematic, evidence-led approach can help you capture the returns you are owed while avoiding costly traps.

Aden and David sit down with Bhanu Singh, CEO of Dimensional Fund Advisors Australia, to trace the real story of modern investing: from Harry Markowitz’s portfolio theory and the birth of clean market data at CRSP to Eugene Fama’s insight that prices embed information. Bhanu explains how research moved beyond CAPM to the Fama-French model, why small and value stocks have higher expected returns, and how profitability adds a sharper lens to selecting resilient companies. The message is clear and practical: start with the global market portfolio, then tilt deliberately toward proven drivers of returns, all while staying diversified and cost aware.

We also examine the strengths and limits of index funds. Lower fees and broad exposure are wins, but rigid rules can force trades at bad moments. Along the way, we cut through media noise, address behaviour gaps that derail investors, and highlight how better implementation turns good research into better outcomes.

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The Purposeful Investor Podcast is a public service provided for Australian investors wanting to make smart decisions with their money, avoid costly mistakes, look after the people they care about, and, have a great life!

We draw on over 30 years of experience from David Andrew and the Capital Partners team.

For more information on Capital Partners' award winning team, visit capital-partners.com.au.

Have a question? Email us ask@capital-partners.com.au.

This episode provides general advice only. We do not consider your personal circumstances when we share this information. Always refer to your financial adviser for advice about your personal circumstances.

Capital Partners Consulting Pty Ltd AFSL 227148 trading as Capital Partners Private Wealth Advisers ABN 27 086 670 788.

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Aden:

Hello and welcome to the Purposeful Investor Podcast. I'm your host, Aiden Wilkins. Join us as we delve into what it takes to make smart financial decisions. Provide for the people you care about, and uncover what it means to be living your best life. Follow and subscribe so you never miss an episode. Thanks for joining us on another episode of the Purposeful Investor Podcast. I'm joined here in the studio today by Capital Partners founder David Andrew. David, welcome.

SPEAKER_02:

Thanks, Aiden. Always good to be here.

Aden:

And we've got a very special guest on the western side of the country. We have got the CEO of Dimensional Fund Advisors Australia, Barno Singh. Barno, welcome to the podcast. Thanks for having me. Looking forward to it. So as a little bit of a frame up, I think when a lot of people hear the term investment or how should I be investing my money, there is a raft of different ways that you could be thinking about it. And today we're going to be looking at our approach at Capital Partners, which is a very systematic, evidence-based approach. And we're going to go through some of the Nobel Prize-winning research that sits behind it and actually sort of understand what that journey's been and why we're so clear on that approach. As our listeners always know, we like to start off with our little win of the week. That can be something personal or professional that you can reflect back on in last week. That was a little win. So, David, why don't you start us off with your little win?

SPEAKER_02:

Yeah, well, mine's personal, and um our regular listeners will know that Robin and I are building a house, and I'm pleased to report that we're getting very close. Um, but for the last five weeks, we had to move out of our rental property. So we've been living out of a suitcase out of the back of the car, sort of commuting between our place at Yelling Up and Airbnbs and even the OBH, which is quite an experience. The OBH is like a 1960s hotel that hasn't been painted since the day it was built.

Aden:

An institution. And it's an institution, yeah.

SPEAKER_02:

A country person's pub. And um anyway, we've always had this tradition of having family dinner on a Monday night, and we have them out of house. And so our son Jeremy said, Oh, don't worry about that, come to my place. And so, and then Lockie, our elder son, said, Oh, no, no, don't worry about it, come to our place. So we've been rotating around the boys' houses and and having family dinner at their place, and it's just been really nice. It's been a different dynamic, and there's a there's a new partner on the scene, which is nice, and yeah, so it's been cool.

SPEAKER_00:

Love it. What about you, Barno? What's your little win of the week? Uh, mine's personal as well. I've been having this sort of issue in my right shoulder for a long time. I don't know what I did, but I injured it at some point and it's gotten worse.

SPEAKER_02:

It's all those all those weights you lift.

SPEAKER_00:

I uh trying, trying. But I think that contributed because I didn't stop lifting them after the injury. And finally, I was told I had needed to have surgery. So I finally got that done last week. So I'm in a bit of a pain. So if I do some funny things, that's why I'm doing it, because my right shoulder is a bit stiff. Uh, but it was I'm looking forward to getting to a point where there's no pain in the right shoulder, which would be really nice. Good.

Aden:

So I'm glad I got it done. Yep, good view. Yeah. Nice. So my little win is a little bit of a strange one. So I'm currently in the process of moving house and also setting up furniture. Um, but I've set up a few sort of bed frames and TV cabinets, the ones where there's about 70 different instructions. Very painful to go through, but it's actually been nice when you do them because your soul focus is just on doing one thing. There's nothing taking your attention away, and you have a bit of a sense of accomplishment once you've finished it. So you're working with your hands. Yeah, exactly. Yeah.

SPEAKER_02:

So my dad was a tradie and ended up in a very senior management role, but he always used to howl with laughter, you know, at all us university graduates in the family that, you know, Christmas time would come around and there'd be a kid's bike that has to be assembled. And he'd just set himself up in the corner in a comfortable chair with a drink and watch us try to put this bike. How many university graduates do you need to put a bike together? And it's like it can't be that hard. You've got to be joking. Yeah, yeah, yeah.

Aden:

Yeah. No, I think I've done I've done reasonably well for someone who's got a white collar. So it's not.

SPEAKER_02:

So very practical aid and sure. I'm sure it's been a trait.

unknown:

Yeah.

Aden:

Uh so before we dive into the content, Barno, I thought it'd be useful for you to give a little bit of an overview of your career journey. So you're the CEO of Dimensional Australia, um, in charge of what, over a tr trillion dollars globally.

SPEAKER_00:

Yeah.

Aden:

Um, so yeah. So so why don't you take us back to what that journey's been? So so even from university days, I know you studied at UCLA and the University of Chicago, but yeah, what's that journey been?

SPEAKER_00:

Um, I think if I had to summarize it, there's a lot of uh randomness in that journey. So if you went back to UCLA days uh and said, Bonnie, you're gonna be living in Australia for a big chunk of your life and working in Australia. I would have struggled to even sort of comprehend that, let alone imagine it, right? So um I grew up in India, I was born in India, I was 14 when I moved to US. Um, my dad moved, had moved a bit earlier, so the family followed him. Uh, had the fortunate um accident of moving to Los Angeles, really sort of nice part of LA. Uh, that's another random thing. If I was part of the LA Unified School District, it might have turned out very differently than the Glendale one I went to. So, you know, this little random things. So I went to high school there, got lucky, was lucky to get into UCLA for undergrad. Had no idea what I was gonna do. My family's full of engineers and army people. So I was like, I'll go be an engineer. At some point, I called my two uncles who are both engineers, my mom's brothers, and I said, uh, what is it like to be an engineer? They both said, don't do engineering. So I was like, okay, well, that's not good. I had already been there a year taking a bunch of math classes because I didn't know what else to do. Yeah. Took math and programming classes because it sounded interesting. Uh, then decided after two years of sort of reflection of roaming around UCLA, because it's a massive campus. They offer all kinds of things. I decided to do um economics and finance and business uh type uh classes, lots of stats and economic theory. Um, still didn't know what I wanted to work or do as a profession. Um, and then I was actually done with my degree in three years. In in the US, it's typically four years, not three. So I was done in three. I was like, I don't want to graduate.

Aden:

Too much fun. Too much fun.

SPEAKER_00:

Not the real world, yeah. And this is where nothing against accountants, but I sort of said, I'll do accounting. I picked up an accounting minor, which was basically spent my senior year doing accounting classes. Pretty handy in my job today. Yeah. But wasn't fun back then. Anyway, I sort of said, I don't know what else to do. I'll just go be an accountant. And so I graduated, um, started working at a small audit shop. Um and I was doing audit for for their biggest client. I was the newest graduate and they gave me their biggest client. So it was like, go for it. And I was like, uh, I realized very quickly that wasn't for me. Um, and just started looking out frantically. It was a pretty actually pretty, now that I think about it, pretty stressful time for me. Because it's like, here I am, I've just gone through university. I have no idea what I'm gonna do. I don't like what I'm doing. Oh my God, my life is over, right? That was there's a lot of pressure.

SPEAKER_02:

I think a lot of kids think that.

SPEAKER_00:

Yeah, yeah. It was pretty tough. And and I remember, like, you know, I was the job was paying the bills, but I didn't want to be there. I knew I didn't want to be there. Um, and then randomness again. Uh at the time, I had a roommate who had applied for a job at Dimensional, and she had gotten the job. And then she said, Oh, you know what? And she was telling me about it at one Friday evening or whatever, that I got this job. And I thought, sounds interesting. She said, Well, they have another opening if you want to apply. And she was pretty clever. She says, Give me your resume, I'll refer you. Because then she gets the referral fee for it. I'm like, sure, I'll give you a resume. So I sent the resume, and after like 20 interviews, I got the job of uh what we used to call back then trading assistant on the deck.

SPEAKER_02:

What is a trading assistant?

SPEAKER_00:

So back then, a lot of it was you're basically at the bottom of the ladder, and and we uh a big part of my job was calling up brokers every morning and making sure that all the trades we had done actually settled. So we used to send our data to a central place, they would send their data, and inevitably somebody put a wrong commission rate, wrong price, and the things would fail. They had to match. So every morning I would pull up this DTC report, which was pages thick, and find out where the exceptions were and start calling people and saying, hey, fix this, send it again so it can settle. But then pretty soon I had one of the things in my career that I've been very fortunate about is I've had some excellent mentors. Maybe I seek them out, maybe I've been just lucky, whatever. And immediately Ryan Wiley, who's our now head of trading globally, was had been a trader for about a year. And I just went to him saying, like, what else can I do? And he was like, Oh, this kid knows how to program. And he's like, I don't want to do this stuff anymore because I'm trading. So he just started handing me a bunch of stuff and did a great job guiding me through it. And so I pretty quickly shifted from doing that desk work, the operational work, to essentially working on projects for the trading team, building tools, programming tools. Um, you know, wrote some ways to automate commission analysis and reports and built a pre-trade compliance system so we could send our trades through to check to make sure they were okay before they went out to the market. And just learned a ton. Um and then became a trader. Did about two and a half, three years of trading US equities. Worked with Aussies a little bit back then because we were working on some algorithms for trading that were testing worldwide. And I was I was I worked with the Aussie team a little bit. Um and then I frankly got a bit bored. I thought this was great, but I want to um do something else. I want to learn about the business. Because remember, I actually didn't know anything about asset management until I joined. And even then I knew trading, but I didn't know a lot of the financial sort of science underpinnings, the research, all those things that is why what we do uh the way we do it. And so I thought, okay, I need to learn all that before I can commit to a career in asset management, particularly one-out dimensional, which is fairly unique compared to the rest of the industry. I can't just say this is my, this is gonna be my lot in life before I actually know what it is. So I quit. I went to the University of Chicago to get my MBA right when GFC happened. So I got lucky I was not working when GFC happened. I could learn a lot without being anxious about my job. Um, had the most wonderful two years at Chicago. Um, pharma was still teaching. Um, Maskowitz, pastor. Okay, stop.

SPEAKER_02:

Stop, stop, stop. Yeah. So so our listeners don't understand the significance of Chicago as the epicenter of finance research in the world. So just give us a bit more.

SPEAKER_00:

So what we call finance research, or maybe like asset pricing is another word for it. How do we know what something is worth, particularly things like stocks and bonds and derivatives? A lot of that just didn't exist until about the 60s and 50s because there was no data. There was no digital data that you could analyze. Uh, and a lot of that initial work was done at Chicago. And a big part of that, in some ways, where it really started was uh Harry Markowitz. He did the first paper where he talked about how should you think about a portfolio's risk and return. And he said, it's not your individual stocks, it's how that stock contributes to the portfolio that matters. So he had this concept of thinking looking at things at the portfolio level, which we take for granted today. Of course, but nobody had thought about it. So he did the first framework on how to think about investment returns and risk at the portfolio level, which is groundbreaking, and he won a Nobel Prize for that. Um, and then right alongside there was work done by Jim Lowry and some of the others around building a database of security prices. Once again, we can just pull up data now on stock prices minute by minute, second by second, anyway.

SPEAKER_02:

On the internet.

SPEAKER_00:

Back then there was nothing, literally nothing. So they hand collected data going back to the 20s in the US, line by line, corrected it. But on paper. From paper, multiple people doing it and recorded it in a digital form. They fixed for things like survivorship bias, which means if stocks go to zero, they kind of drop out of the data. You have to account for that. Otherwise, the analysis you're doing is not right. So they went through all that. They built this painstakingly built amazing. And out of that came the Center for Research and Security Prices, CRISP, which is still around. It is still the gold standard in a lot of ways for securities data. And then all of a sudden, computers came along, and that was there. All of a sudden, this whole new field was born. Previously it was theory, very little data. Uh, and then right alongside was a gentleman by the name of Gene Fama, who is known as father of modern finance. He was doing a lot of research on how security prices behave and how good are markets at incorporating information. Can prices provide us with information about returns? And so he wrote this thesis essentially around this idea of efficient markets, which is to say markets do a remarkable job of pricing in information, and we can use that information in the form of prices that we see every day. Um, so that's going on. So all of this is happening in a very short amount of time, and absolute epicenter of all this is Chicago, University of Chicago. Um, still I think so. What was it like to be there? Well, for me, it was it's you know, it's obviously um yeah, it's it's just remarkable. I'd love to go there. You should visit. Uh the campus is amazing. Uh Harper Center, it's this sort of amazingly modern building where the business school is housed. Back then, obviously, it was sort of more older building, traditional University of Chicago. It's kind of spread out. But now it's this this amazing one place where, you know, classes are there, professors sit on the second floor, and to go there and just be part of this community for a couple of years um is just mind-boggling. So I was lucky um, because going back to it, my goal for getting an MBA was to understand the financial theory, because I didn't study it in undergrad, um, and really convince myself that that's what I wanted to do. Um, I thought I owed it to myself before I built a career in that space. And it was it was amazing. Amazing. It was amazing.

SPEAKER_02:

I I had the pleasure of meeting Harry Markowitz. Oh, right. He died last year. Yeah, yeah, he died recently, yeah. And also Eugene Farmer, yeah, and Ken French and and a few others. And um these guys are Nobel Prize laureates, and they're people that I just put on a pedestal.

SPEAKER_01:

Yeah.

SPEAKER_02:

So A to meet them is an amazing honor.

SPEAKER_01:

Yeah.

SPEAKER_02:

But the thing that struck me by meeting them is that they're so humble. Oh yeah. Yeah, yeah. So what was it like to be their student?

SPEAKER_00:

Uh hard.

SPEAKER_02:

Are they demanding?

SPEAKER_00:

They're demanding. Um, they're exacting, uh, they don't coddle you. You know, MBAs are sometimes seen as like a bit soft because you know you don't really get bad grades in MBAs and all that kind of stuff. But it was pretty clear at Chicago that Gene will fail you. You got the grade you got. There was no coddling at all. Like Chicago generally is that way, but Gene will fail you if you don't do the work. And he was pretty exacting. There was tons of reading every week. Homeworks, Gene's homeworks are infamous, right? So he gives you these assignments every week. And he will scrutinize every single word, his trading assistance. It's like if you put something in there that's his teaching assistance, if it's like kind of vague in how you're answering the question, it'll be a little circle in there saying, explain, be specific. Don't sort of BS, you know, make it very clear what you mean by this statement. That was the strangest sort of experience. Um, but then John Cochran was there, he taught asset pricing classes, and Maskowitz taught empirical asset pricing. Um, they're just phenomenal. I mean, I spent a lot of time in feature center basement programming and everything and doing homework, but I I just learned a ton. It opened up my mind after many. So it was amazing. I I loved it. Uh, and I think it it I I did the work to then build the conviction in this way of investing before I came back to it. Uh and I think I really uh in hindsight, it was a great thing for me to do.

SPEAKER_02:

Um and it strikes me that uh a lot of what Barnu has been talking about is all these, I guess, pleasant random events that have happened to you in your life, you know, moving to America, then getting to the right school and going to the right university and picking classes. And it's a bit like Steve Jobs' commencement speech at Stanford, where he talks about don't try and join the dots in advance. You can only don't try and join the dots ex ante, you can only join dots x post, i.e., with the benefit of hindsight. And that's been the story of your life, really.

SPEAKER_00:

Yeah, I mean, even the decision to come to Australia was a bit random. I don't know what got into me. A lot of my classmates were uh international students, ex US, Europe, Asia, whatever. For some reason, I've woke up one day and said, I'm gonna go work somewhere else for a few years, because I've met all these wonderful people who are not from America. And Dimensional has a lot of people who didn't weren't born and raised in America, as pretty senior people at the firm. I just said, look, let's just go work somewhere else for a few years. That's a pretty random decision to make. I still can't explain to you why. And I just thought I'll go do a stint. And I so I called my old um boss, Henry Gray, who was the head of trading at the time, and I said, Henry, uh, I have a job, but I would like to explore coming back to Dimensional, because I had quit when I left to Port Booth. He goes, Oh, I'd love to have you. Um, what do you want to do? I said, I want to do portfolio management, not trading anymore, because I find it a bit for my liking, it's a bit more um what I want to do. And I want to do it somewhere else than US. And he said, Okay, let me come back to you. He didn't say, Where do you want to go? I said, London, because I'd spent the summer in London studying. He said, Well, that's fine. You can go to London, but we need people in Sydney. So if you would be willing to go for a few years to Sydney, I think that'd be great. I'm sitting there going, like, that's a pretty big decision to make. But I was like, eh, Americans don't really go to Australia. It's pretty far away from the US. I'll go there. I can always go to London, you know, later. It'll always be there. It'll always be there. But you know, here we are 15 years later. So I moved on to Sydney just a bit randomly. And um, it's turned out to be probably one of the bigger decisions of my life, but it was a bit of a whim. And you're right, you can't ex-hante, I had no idea the impact it would have. Exposed. Oof, big decision. But that's life. Cool.

Aden:

So so we talked quite a bit there about the academic research and and how all that's been born out of that. So if we don't mind rewinding backwards, like what's the counter to that? So, what brought about that academic research and why why is that so important in terms of how investment markets have evolved evolved over time?

SPEAKER_00:

I mean, that's a good question. Because markets have been around since a lot earlier than 1950s. I think it was the data that was missing. There was all this theory around how stock prices behave. Um, there's theories around how they're quite random and it's hard to get, but nobody had data to test it. So it was really the advent of the data and the computing power that came along. Even though it was on those punch cards that we had to kind of feed into the machine. Palmer talks about those. Um but one of the remarkable things they did with that CRISP data was they went back and said, what has the return been on stocks in the data that we've just collected over time? And the number they came up with something like 9.5%. And that was a remarkable number because the long-term return in stock per annum.

SPEAKER_02:

Per annum.

SPEAKER_00:

Based on the data. Yeah, 9.5%. Yeah. And it had Great Depression in it, World War I in it, World War II in it, and all of that stuff. And it was a remarkable number because nobody was earning anywhere near 9.5% in their brokerage accounts, or even the big pension plans in the US were not getting nine and a half percent. And all of a sudden it was like, wait a minute, this is not right. Something is wrong here. But then that's what was happening. People were analyzing the data to say, what should you get as a market return? And then the next step was to say, well, okay, why do stock prices behave the way they do? Do we learn something about how returns behave? And that just kicked off that whole field. Um, but it's remarkable that it all happened in a very small part of the world, which was Bob Murden will tell you MIT was doing some work as well. He was there, it was not in Chicago at the time. So, but a relatively small number of people drove this, which is fascinating.

SPEAKER_02:

So in 1992, um Eugene Farmer and Ken French published the dimensions of stock return.

SPEAKER_00:

Yeah, cross-section of stock return.

SPEAKER_02:

And that that was a pretty seminal minority.

SPEAKER_00:

Yeah, I I think it's still the if it was not now, but very recently it was the highest cited paper in finance because everybody follows that framework. So give you a bit of background there. So I talked about the return on stocks in general. Then came along work by um uh work by uh Black around uh Cap Em model, which is to say, well, why, what should we expect to earn from a particular stock? And what the groundbreaking research there was to say, as a conceptual framework, it's how that stock moves alongside the market portfolio. So what's the variance vis-a-vis the market portfolio is what the risk is. Once again, it's that Markovitz framework of portfolio level. Single stock doesn't matter. What does it do to your portfolio if that's what matters? And that should determine the risk of that stock and the return and there's a conceptual framework.

SPEAKER_02:

And some of our listeners might have heard of market beta. Yeah.

SPEAKER_00:

And that's where that can be. That's the cap and beta. That's the capital asset pricing model beta. Yeah. And um, so that was the first step into. So the outcome of that is higher beta stocks should have higher returns, lower beta stocks should have lower returns. A very simple framework. It has lots of assumptions. But it's a big step forward because all of a sudden you can look at a manager's return and say, I know what your beta is now. Have you given me the return commensurate with that beta? And then out of that started, things started happening where people were finding things that if you build portfolios along those dimensions, like leverage or value or size of a company, that the beta wasn't explaining the returns. There was something else going on. So they call these anomalies. They call them capam anomalies. So if I build a portfolio on price to earning ratios or leverage or price to book or price to market cap, price time shares outstanding. I can build portfolios where the betas are all the same, but the returns are quite different. So beta is not explaining everything. So all of a sudden you have a problem, the model doesn't work. So Pharma and French did this groundbreaking work where they collected all these anomalies. If you talk to Pharma, he's like, I thought they were all just, you know, bad, bad research, because you know, clearly CapEm should be fine. They actually wrote a paper defending CapEm, saying it's fine. But then this is the remarkable part about academic research when done right. When the data tells you you're wrong or you it's different than what you thought it was going to be, you follow the evidence, right? As opposed to saying, I have a belief. And it so they did the work and they put all these anomalies together, and they realized that yes, they were doing something that the CAPEM couldn't explain. And out of that fell these two more things that explain returns for equities. So it was not just the market beta that was still important, but on top of that, it was what we call your value loading. Think of it as how cheap the stock is, or uh relatively speaking, uh, what's the relative price of a stock compared to other stocks? So if it's lower relative price, it's going to do better. And then the other one was the size, which was also related to price. So basically, if smaller stocks. Yes, smaller stocks do better than large cap stocks. And that falls right in line with prices tell you something about returns. So that was nice. But the big impact for that paper, of that paper, in my opinion, was that all of a sudden you had a framework to think about returns. You had a map of returns. Before it was all just a jumble, you know, you had beta kind of telling you something, but it didn't really work very well. But all of a sudden, you could start building a bit of a map of returns saying, I know small caps do better than large caps, I know value does better than growth, I know market beta is important. So if I get my beta right and then put a bit more money into small caps and a bit more into value, I should be able to do better than the market. And then all of a sudden, everything was being funneled through that framework. We had categories show up. We have small cap funds now, we have value funds, we have growth funds, small value, small growth. That's all PharmaFrench's work, right? And all of a sudden, that was the golden test for any new paper to say if you found something, can it be explained by the PharmaFrench three-factor model? And if it can be, then it's not worth looking at. You got to find something beyond that. And then we found other things like profitability, momentum. But that just moved the needle so dramatically. And we launched funds around it. We have uh value funds out of that work, um, and more recently, profitability funds. So it was just such a phenomenal leap in my book. Um and there, and Fama will tell you his, I think their seminal power was, they actually analyzed it so rigorously and so well, they defined the framework so well. It's very difficult to look at that and not agree with it. Yeah.

Aden:

So I liked how you framed up there as well, saying that you're you're almost trusting the data in the framework rather than even as a researcher, as a fund manager, backing your own opinion or really holding staunch on how you think the market's gonna go. Yeah. So I don't want to put um different ways of investing into buckets, but that is essentially how what we do as an industry. Yeah. So can you sort of contrast that really evidence databased framework against maybe some fund managers who really stick to what they believe or think is gonna happen?

SPEAKER_00:

Yeah, look, belief is important. So I I I would caution against um when you say evidence, right? That's an interesting phrase that we I I understand where you're coming from, but who's evidence? Yeah. What does what does it mean? Because if it's just data, unfortunately, we can torture the data to say whatever we want it to say. There's a lot of assumptions in there. You will never see a bad simulation.

Aden:

Yeah, yeah, yeah. Or a bad model. Or a bad model. Yeah.

SPEAKER_00:

All the bad ones have been thrown away. The good ones is what's being shown to you. Yeah. Yeah. So you can run enough reps now. My iPhone's got more computing power than what they had in the 60s and 70s on mainframes.

SPEAKER_02:

Yeah. Your computer's got more computing power than Apollo 11.

SPEAKER_00:

Yeah, exactly. So it's very easy to make the data say whatever you want it to. And you do see a lot of that happening in the industry and in academia, where these papers are being written, where you try to replicate the results, yeah. And you start running into all these problems because they made very, very peculiar assumptions, used only a certain type of data. So, what you have to do is you have to come up with a belief set, a theory to say what do you expect to see, and then do the empirical work properly to see if it supports it. Uh, so I'll give an example of what's the belief set? Yeah. Um, that's where a lot of the work Pharma did around markets, being very good at uh processing information and spitting that out in the form of a price is relevant. So prices should have a lot of information. So, in our view, what drives returns are prices and cash flows. So, all is equal, if you can figure out a way to pay less for an investment, you should get a higher return. All is equal, if you get figure out a way to get more cash flows for the same unit of price, you should get a return. Pretty intuitive. And I think pretty robust. I would argue that's been going on since as long as prices and trading exists, that framework is very helpful. Now, the key is then figuring out, well, what do you mean by price? And there we are, this is fundamentally where dimension is different from everybody else. Our view is your best price is actual market price. Other managers will go out there and say, we're going to try to figure out our own price. I'm going to do a bunch of work, various different, could be quantitative, could be data-driven, could be gut feel, technical analysis, calling up the management, running extravagant models, whatever. It doesn't really matter what you do. The belief there is I have a better price than the market price. And based on that, I'm going to. Our view is market price is the best price, is the best place to start. So that's one.

SPEAKER_02:

And that plays out. Um some of our clients will have seen broker reports where they they issue a broker report and they say, okay, the current price is$2.46, but we think it should be$3. Yeah.$3.20. Yeah. And for whatever reason.

SPEAKER_00:

You know, more power too than. But I think what the evidence you see is that that doesn't really work very well. Uh, and that's evidence around fund manager performance and and their ability to consistently beat benchmarks over the long term. It's not easy to beat the market. Over a trillion plus dollars USD trade hands every day in equity markets.

SPEAKER_02:

Well, a trillion dollars moving. I guess a lot of people are going to be able to do that. You've got a lot of trades, a lot of opinions being placed on do I buy, do I sell based on that price? And so when you decide to create your own view of a stock price that's not the market price, you're betting against a lot of market participants.

SPEAKER_00:

Yeah, or you're saying you know something they don't know. Yeah. Right. Which is.

SPEAKER_02:

And that's really the core of really the practical reality of efficient market theory is that it doesn't mean prices are right. Yep. It absolutely doesn't mean prices are right, but it means that the prices have been based on by by all the participants based on the available information. Yeah, and tomorrow the information will change.

SPEAKER_00:

Will change and they will react. Yeah. Because other pieces people don't think about is the prices are forward-looking, right? So investors, when they decide to trade at a particular price, they're setting the price so that they earn an expected return that they want, right? So if a stock is trading at 20 bucks and you think that's too expensive, you're not going to buy it, right? Maybe when it drops to 15 and they go, okay, now it's cheap enough that I'm earning a higher return. Hopefully nothing else changes there. And then you buy it. By doing that trade, you're telling the market that at$15, it's giving you the return that you think you should earn from it. And by the way, people always forget there's this idea in my people make these statements that imply that there's only one person in the trade. So if you think at 15 it's a good buy, somebody's selling it to you. Where they think it's not a good buy, it's a sell. It's always buys and sellers. Exactly. There's two people agreeing on a price, they most of the time will have different opinions on where that price is going.

SPEAKER_02:

Do you know what though? This cracks me up. Every time there's a um, every time there's a market sell-off on ABC News, someone in that finance section will say, Yeah, wait for it, there were more sellers than buyers today.

SPEAKER_00:

Yeah. That is impossible. Yeah. There might be more people looking to sell these. Exactly. But when they thought it was a bad idea to hold that stock, somebody thought it was a good idea to hold that stock. So I think just keep that in mind. So prices have a lot of information. That's one sort of the bedrock of how you think about returns. Then the other that you care about is cash flows. So you want, because as when you buy a stock or a bond, you're basically buying a right to those cash flows. And the higher the cash flows, the higher your return, holding price equal. So you need a good estimate of cash flows going forward. And there we look at something like operating profitability of a company. It's basically sort of high-level numbers on income statement, not the sort of accounting version, really high. But all the different metrics produce results. But you the key ends up being what's your right metric? But profitability in general. Higher the profitability, higher the future cash flows, higher your return, all is equal. So now you have that framework. Then you start doing the data work to say, let me try this profitability metric, let me try this value metric, this size metric. But you got to be careful because I can always find a 10-year period, five-year period where all of them look good or all of them look bad, and vice versa. You can go around in circles forever. So what you want to do to avoid data mining is you want to test all the data you have. Because the more data you can test, the more robust you're finding. We look at um as far back as the data goes, we look at different markets. So if it only works in Japan and nowhere else, it's probably a bit of a fluke. So you want to see it working in different markets, you want to see it working in different time periods, you want to see it working using different metrics. You might end up picking one because that's the one that makes sense from a portfolio management perspective. But if your entire results are dependent on picking an obscure, very tightly defined 16 adjustments to the metric, and as soon as you unwind some of them, it goes away. Problem, right? And then the last part is can I actually use it in a portfolio? So are the return differences that I'm picking up meaningful enough to actually put it in a portfolio? Can I pick it up in a well-diversified portfolio? Because if it's gonna be delivered by 10 stocks, you know, what how much money can you really put in 10 stocks? And how much turnover are you gonna get? So one of the things I dimensional, I think, does very differently is when we're doing academic research, asset pricing research, we have very much an implementation lens on. We're like, this is interesting, but I'm not looking to get published in a journal or get tenure at a university. I'm looking to see if it's gonna make my portfolio better, right? And that's ultimately why it would be useful to us. But that skill set of taking an academic paper or some asset pricing research and translating it into here's what it's gonna do for your fund, for your portfolio, for your investors, that is a pretty unique skill set. And we've been doing it for 45 years.

SPEAKER_02:

So on that point, how did all of this academic research then get translated into an organization that commercialized it?

SPEAKER_00:

Um, I think so. David and Rex, the co-founders of Dimensional, were both pharma students. That was another good happenstance. They happened to be around the same time learning from Pharma. And if you talk to both of them, they'll tell you they had this aha moments sitting in Pharma's class. And they both had this absolute conviction that this has to be the way it works. And then they had the courage to go out and say, we're gonna actually try to apply it rather than just leave it in the classroom, then go start picking stocks, which is what most people do. Um when I was going through Booth, the side story, I was uh sitting around taking these classes. So Fama's class, Toby, and Cochrane, there were only a handful of MBS students in there. And we're the same 20 people in each class. We became good friends over the course of those courses. Um, otherwise, there were PhD students in there. But the vast majority of people were still taking sort of valuation 101 stock picking type classes, and they go out and work in the traditional sense. And I just used to think about like, why you at Chicago? Here's this Mecca of, you know, fish and markets and all, and yet you're gonna go out and do the standard thing. So I think it's not an easy thing to go against the norm and try to do something different. I think that's why the story is remarkable. That here's late 70s, 60s, earlier late 60s, early 70s. Wow. And so what did they do? What did you think? David ended up working uh for Mac McCown and Wells Fargo in San Francisco, where there was almost like this thinking institute that the CEO of Wells Fargo created. Um, who was he was remarkably forward-looking. And he got Mac there, and Mac brought in all these people to work in his sort of uh mathematics think tank. And they were just working out problems, and they essentially put together the plan for the index fund, first index fund. Invented the index? Yeah, Rex was at someone had to invent the well, Rex was at a bank in Chicago, and he independently arrived at the same area. They launched an index portfolio for a large pension client. And I think the number is something like four or five of those people that worked for Mac went on to win Nobel Prizes.

SPEAKER_02:

Wow.

SPEAKER_00:

It's something, it's a remarkable number. Um so David was there, uh, Scholes was there at times, there were others. And I think um so David did that for a few years, Rex did that, and then they thought, let's go do our own thing. And then they connected and they ended up finding dimensional in '81, uh, started dimensional. And they um and the other piece that came out of that was their, there were sort of their doers, you know, they're investors at heart. So when this started the fund, their thesis was that most investors own large stocks. Large institutional clients don't have exposure to small cap stock. Because it's hard. It's hard to put real money in their back. This is 81 we're talking about, right? But it's still hard.

SPEAKER_02:

It's still hard. You know, liquidity is different. Very different.

SPEAKER_00:

You know, trading small caps is a whole different ballgame. You can pay a lot of money. Absolutely. Absolutely. Um but back then it was even more diabolically hard. So they really had to pay attention to the implementation piece. Otherwise, they wouldn't be able to run this portfolio. And the way that David David tells the story is remarkable. Him and Rex just went to Chicago because in the US, when you set up a mutual fund uh trust equivalent, you need an independent sort of board of directors separately for the trust. So they had to go find people to sit on this board, right? They didn't know anyone. So they just went to the University of Chicago and started walking down up and down the hallway, saying, you know, Myron Schulz was there, Martin Millers was there, uh, was Fama, Ken. They just walked around going, hey, do you want to be on this board? And Fama joined the actual company, not that board, but he was involved from that perspective. He was head of research for a while. Ken followed him on that in that role. So all these like remarkable future Nobel Prize winners just ended up being on the board of the of the mutual fund. And David likes to remind us that they were, they became directors before they won their Nobel Prize. So we didn't go chasing people for name value. Yeah. They were just really good researchers that David and Rex knew very well and respected them, and they thought they would bring the rigor to this process. And um, so that's how eventually it got started. So 1983. 81. 81, microcap portfolio. 1983 fixed income portfolio. Yeah.

SPEAKER_02:

And 2025, 1.4 trillion Australian dollars. Remarkable. Amazing. Yeah.

Aden:

Just on that, so you mentioned um the creation of the first index fund there. Yeah. And I'm sure a lot of our listeners probably know what an index fund is. Yeah. It's essentially where you're trying to replicate the return of a specific indice. Yeah. You wrote a really good piece in the Australian Financial Review about a year ago, sort of um outlining some of the limitations with that approach, which I think most people wouldn't really be aware of. But could you talk to a couple of those?

SPEAKER_00:

Yeah, absolutely. I I think um so one of the the background to this is that index investing, and index is an unclear word, and I'll get into why, but index investing has seen a lot of growth recently. Um and I think what that usually means to people is that there's um a rules-based paper portfolio, i.e. the index, and you build a portfolio to basically track it very mechanically, rigidly. Now, a lot of those rules sometimes are just arbitrary. And for example, a big one I'll tell you simply, depending on which index you pick, FTSE or MSEI, Korea is either a developed country or an emerging country. One index provider decided it was emerging, other one decided it wasn't. It probably belongs in your portfolio regardless. But just because you pick one index over another, you include or exclude a massive economy. Yeah. Yeah. Right. Yeah. It's hard, you know. So there's a that's a high level. Then there's all these little things like how much weight should get quantas get um in a MSCI world. Well, if you're an Australian, you should be able to hold everything in quantas. Or if you're a foreigner, the float available to you is different than an Australian. But that's what MSCI world does. But it doesn't make an adjustment to say if you're an Aussie, you don't have any restrictions on holding an airline stock. So you should have a different number available to you. But when you're running portfolios, you do that. So it's just think of it as a rules-based system where a lot of the rules are arbitrary. And just to drive it home, I'll give you another example. If you look at the SP 500 index fund, it's a very well-known index, probably the most tracked index in the world. Top 500 company in America. What you would think is the definition. Right. But if I said, what was the size or what was the ranking of Tesla? Everybody knows Tesla. Yeah. What was the ranking of that stock in terms of its size in American exchanges or listed securities when it was added to SP 500? Your answer should be 500. It was a small company, it became big, and when it hit 500 or somewhere around there, it joined then. It was the sixth largest company in America when it was added to SP 500.

SPEAKER_02:

So tell our listeners why that happened.

SPEAKER_00:

So that shouldn't happen. A couple of things. One is initially the rules basically said you need a certain amount of profits quarter over quarter before you add it to SP 500.

SPEAKER_02:

I remember that.

SPEAKER_00:

You know, that's fine. Once again, a bit of an arbitrary rule. So because you can analyze the profits, you can analyze the price, you can analyze the price to pick ratio, and you can determine its expected returns and buy or hold it in your portfolio. Investors can determine that from a return basis. But SP 500 has a rule. So anyway, so that happened. So that kept it out for a while. And then once it hits those profit targets, then it's literally a secret committee that decides when it gets added or not. And there's not a lot of transparency around it. And Tesla is not a loan case. We call it the waiting room. There's all these stocks that were added to SP 500 when they were well above Trevor Burrus.

SPEAKER_02:

And that's because they only adjust the index every six months. Yes. So that's one. So they don't account for all the growth in stocks over that.

SPEAKER_00:

So it's mechanical, it's rigid.

SPEAKER_02:

It's you know restrictive. That's got to be costing investors a lot of money. Absolutely.

SPEAKER_00:

I mean Tesla went from 500 to 6. And if you held just an SP 5, you didn't own it. And you missed that run, right?

SPEAKER_02:

So um that's a real that's a real shortcut.

SPEAKER_00:

Absolutely. Rules are fine, but they should make sense. You know, to us in investing, flexibility is really valuable. You never want to show up to the markets and trade when you don't have to. Nobody should be holding a gun saying you have to buy or sell now. If you find yourself in that situation, you've sort of lost the game a little bit. And indices tend to get very rigid and mechanical. So that's one. The other piece is when it does get added to the index, it's broadcasted well in advance. So Tesla and is being added, you get two weeks' notice. By the way, everybody knew that it should be part of it. And what then happens is there's a lot of managers tracking that index. And their sole purpose as index managers is to get the same price as the index price, which is the closing price on the day the stock is added to the index. So they're going to trade as close to the end of the day as possible because they don't want to get it cheaper or more expensive because then all of a sudden they look different than the index. So basically, you're telling the whole world that you need to buy sometimes billions of dollars worth of a stock within a three to four minute window.

SPEAKER_02:

So the price has to be artificially inflated.

SPEAKER_00:

Well, what does the rest of the market do? They build up an inventory of that stock. And then sell it. And in doing so, they push up the price and then they wait there in that three to four minute window at the closing auction and say, well, if you need it, you have to buy it at this price. And the price runs up. And once that pressure to buy is gone, the next day it drops. And if you're an index investor, you don't see any of it. Because what was the closing price of the index? That. And that's what the manager got. Happy days. You told me to track the index, I tracked the index. But that's what I was hired to do. Happy days. Meanwhile, you did this, you bought hair, and the price dropped, and you left that money on the table. Yeah. So once again, it's it's introducing mechanical rebalancing, rigidity when flexibility is really important. And you want to maintain flexibility as much as possible. So there's, you know, we have a rules-based process. We systematic means you follow rules, but there are rules designed to maximize returns and minimize costs, with common sense, with a heavy dollop of common sense, rather than saying I'm just going to mechanically do this because that's what the index told me to do. Yeah. Yeah.

Aden:

So um, and I think I think the the point I like you mentioned there is like index can mean so many different things to so many people. And I think for people who might be trying to do it themselves, investors, you quite often hear, oh yeah, I've just bought an ETSF that tracks this index. It's like, what does it hold in it? Is it the ASX 200? Is it the S B 500, or is it like a really concentrated Australian banks index?

SPEAKER_02:

Okay, it's a great example. I would say to you guys, I just bought an index fund. Yeah. Now that could mean the ASX 300, the ASX 200, it could mean the ASX 50, it could mean the ASX 20, it could mean just the banks.

SPEAKER_00:

Yeah. So Or it could mean a triple-levered portfolio of crypto stocks in emerging markets. It could. It could. It could. I probably didn't buy that. Yeah. But it could. But so I think that you make a very good point, Ed, because often there's this perception, hey, ETF tracks and index must be safe.

Aden:

Yeah.

SPEAKER_00:

And index equals passive. Yeah. A stock, a portfolio of top 20 stocks is not passive. That's a very big bet you're making to say I only want the top 20 stocks, not anything else. You're excluding a big chunk of the market. So that's that's amazing how often I run into that. That index should be fine. Yeah.

SPEAKER_02:

So what's important then is coming back to the theme of our chat today is the whole idea of systematic investing. Let's just dig a little bit into the high level of why a systematic portfolio might be different to an index portfolio. Because you're your, you know, a systematic approach is always going to start with the market.

SPEAKER_01:

Yes. Yes.

SPEAKER_00:

Yeah. Yeah, you're absolutely right. And we think the market portfolio is a very good place to start because it not only reflects the previously we were talking about in terms of the prices collect that information and you can use it, but it also reflects the collective quote-unquote wisdom of all the investors in the world and how they've allocated their capital. The fact that Australia is 3% of the global markets is a decision that the global investor set has made to say, this is how much money you're going to put into Australia, and therefore it's 3%. So you not only do you get, you know, really well-diversified set of stocks in one portfolio, you get market prices, which drive that weight. You also get country weights out of it, you get sector weights out of it. You start with that, and then you say, why should I look different than that portfolio? Or is a good reason to look different? And there's a couple of things that fall into that bucket. First one is you want better returns. So do I know anything about returns that will allow me to look different than the market portfolio and get better returns? And that's where some of the work around small caps do better than large caps, value stocks do better than growth stocks, high profitability stocks do better than low profitability stocks, momentum, a few other signals. That those things basically allow you to build a map of expected returns. And then depending on how much appetite you have for looking different in the market, you can start moving your portfolio away from market weights towards putting a bit more in small, a bit more in value, a bit more in prof. And that increases your expected return. It also comes with returnover, you know, things you have to do to keep focused on those premiums that deliver the returns. But that's one reason. Other one, maybe you're incorporating some preferences. Sustainability is a good example of that. I don't want any tobacco stocks in my portfolio. I'll exclude them because I really care about that above and beyond the return space. Right? That's fine. Fossil fuels is fine. Fossil fuels, uh, socially unacceptable things, child labor, whatever. Um, the interesting thing there is it it depends on who you talk to, what they care about. But there's a whole body of research. Like Merton wrote the paper in 74 around intertemporal CapM, which basically talks about like investors care about different things. You know, what they determine to be important is risk and returns, but good luck defining risk, because it depends on risk for you, might be very different than me, than to you. And therefore, they will build portfolios that hedge that risk. And that portfolio is going to look different for you than it, my portfolio, than his portfolio. So the point is that there's various ways to build this. Uh, but the idea once again is start with the market. Now, why do you want to look different? And what do you know that allows you to look different? If so, if my return estimates or my my idea about what drives returns are bogus, then I'm just creating noise by looking different than the market portfolio. Um, so you know that that's the important bit there. And that's where a systematic portfolio is going to very deliberately, in a very rules-based way, look different than the market portfolio in pursuit of returns or in pursuit of things like sustainability. And like that, think of that as a toolkit that materializes in different portfolios and different strategies. So you can build just a value portfolio, just a small cap portfolio, or you can build one where it does small value, profitability, momentum, everything in one place. So it's a good one-stop shop to start with. So, uh, and same thing on the bonds. So it's it's a very, very robust framework to think about. I start here and then I move away, as opposed to I have this great idea on one stock.

SPEAKER_04:

Yeah.

SPEAKER_00:

And that's my starting point. Yeah. And then I'm gonna start maybe diversify away from that, add a few more good ideas in there. My view is start on this side where you have the most well-diversified portfolio with all the market knowledge, and then find reasons to move away from it.

SPEAKER_01:

Yeah.

SPEAKER_02:

I think um my experience, Bano, is that a lot of people forget what the stock market is.

SPEAKER_01:

Yeah.

SPEAKER_02:

I think it's really, really risky.

SPEAKER_01:

Yeah.

SPEAKER_02:

And um and I think the newspapers really fuel by this. They throw fuel on that fire terribly. And um really when you think about it, what the market is is a is a is a is a it's an they call it a stock exchange for that reason. It's a place where we get to trade a piece of a company.

SPEAKER_01:

Yeah.

SPEAKER_02:

And I love the idea that when we invest in the stock market, really what we're doing is backing human ingenuity.

SPEAKER_01:

Yeah.

SPEAKER_02:

We're providing capital. Yeah, we're providing the capital for companies to go and do things. Now, some of those companies will be really conservative and be I don't know, making Toyotas. Yeah. That's a pretty conservative company. And then there will be other companies that are doing AI and all sorts of and biomedical and all sorts of incredible things. At the end of the day, you're you're backing human ingenuity.

SPEAKER_01:

Yeah, yeah.

SPEAKER_02:

And there seems to be a premium of around, you know, nine, nine and a half percent per annum since 1926 or whatever. Yeah, and that's absolutely that is the average absolute return, including inflation, yes, um, for having provided the capital to fund that human story, yeah, human ingenuity.

SPEAKER_00:

I really think it's that simple. It's capitalism 101, right? Yeah. And why would you give your capital to somebody if you're not gonna get a return for it? Yeah. And so David likes to talk about how you're owed that return. Yeah. So at minimum, you should pick up that return, which is the market. And if you can do better than that, based on all the stuff we've learned since the 50s, 60s around this systematic investing, and that's even better. But a lot of people don't even earn the market return because they get swayed by the media. Like I was flicking through FR this morning just on my phone, and nothing against them, but every other article was these are the stocks you should buy, these stocks you should sell, top fundy ideas for this, top fundy. Yeah.

SPEAKER_02:

You and I talk a bit about incentives. Yeah. And what is the incentive of the Australian Financial Review? It's to sell newspapers and sell subscriptions.

SPEAKER_00:

Well, yeah, media's view is that, you know, something interesting, something to talk about. Yeah. And and but unfortunately, I don't know, I don't think it's deliberate, but unfortunately, that leads to a lot of probably unnecessary trading that most people don't need to do.

SPEAKER_02:

It's a bit like diet fans. I remember years ago Weston Wellington came up with this idea of you know the the the media diet, the diet magazine where they say, you know, the Jennifer Anniston diet, next month it's the you know, the Taylor Swift diet, when in fact what they should be publishing is exercise every day. Eat less. Eat less and you know, just be consistent. Get nine hours, eight hours of sleep. And get a get get lots of sleep and drink lots of water. Yeah. But that doesn't sell newspapers. No, that does not sell newspapers.

SPEAKER_00:

I think we our industry, unfortunately, is very good at kind of creating anxiety or fear or greed or fear of missing out. That leads to um probably people looking for a shortcut and unfortunately doesn't serve them, right? But I'm also like, you know, you you've you've been around a long time in this industry, and and in a lot of ways, um, there has been a revolution in some sense as well, where people access investments in a much more cost-efficient way today. The options available to them are remarkable compared to what they were 20, 30 years ago. Like some of the fees people were paying.

SPEAKER_02:

When I started back in Australia in 1994, I was working for a small funds management company called Tyndall. And they were a deep value fund manager, and the prospectus for this, they had a their investment methodology was called comparative value analysis. Yeah. And um the the cost of the investment was 2.25%.

SPEAKER_00:

Right. Right? And that's before platform fees and all that other stuff. Yeah. And that's not that long ago. Yeah, that's what I mean. 94% is not that long ago. And you're probably before you get started, you're about 3-4% behind already. Exactly. And today. That same investment today would less than 1% plus platform. Exactly. So it's in some ways, I'm also pretty hopeful. Like, and Australia is great because of a superannuation system. You know, one of the biggest problems is getting people to save. At least we get a leg up that people are being essentially forced to save.

SPEAKER_02:

A big nudge.

SPEAKER_00:

Yes. And then if as long as they can go into, you know, some good, well-diversified, low-cost investments, um, they're much better off than not saving at all. Right. So it's, I'm trying to find the positive angle here as well. Yeah. Um, but remarkably, just given all the recent stuff in the news, there still continues to be unfortunately some very poor investment sort of offerings and unfortunately decisions being made on those offerings.

SPEAKER_02:

And and you know, it's money always attracts bees to the honey pot.

SPEAKER_01:

Yeah.

SPEAKER_02:

And um, you know, with the recent guardian and and shield um issues, it also attracts fraudsters.

SPEAKER_00:

Yeah. That's unfortunately there's money involved, and it's unfortunately our industry where. So I think um, yeah, just cutting through that a little bit and um being a bit skeptical of the the latest whiz bank, I'm gonna make you rich in two years kind of strategy. Yeah. And that's where advice comes in, in my opinion, yeah, is is crucial.

SPEAKER_02:

And look, I'm glad we're doing this over two episodes because you know what what you've shared with us today is just this really extraordinary journey of research from no knowledge much at all, other than stockbrokers saying buy these stocks to actually having a basis to make some rational decisions around our money. Um, and then the evolution of you know, financial research, and then the commercialization of that, yeah, of that into index funds and systematic strategies with dimensionals. Quite quite a remarkable story.

SPEAKER_00:

Yeah. If I can make a plug of um Errol Morris' documentary, that you know, you would have seen that. Oh, Tune Out the Noise. Yeah, Tune Out the Noise. It's on YouTube now. You can just go and watch it and just type in Tune Out the Noise. And it's a documentary uh by um Academy Award-winning director named Errol Morris about this time in history, about the 50s and 60s, when a lot of this research was happening at uh Chicago. And and we worked with him on this, and and but it's his documentary. He he had full control over it. There's a few dimensional people in there, and some of the academics I've mentioned. It's a remarkable story. It's a brilliant documentary, and it's about an hour or so long. So I'll put the link to that.

SPEAKER_02:

We'll put the link to that in the podcast.

SPEAKER_00:

And it gets into a lot more detail, and it's probably much better told than I've described, but it it really brings home the point that a bunch of guys from Midwest of America who were not part of the, you know, the Wall Street crowd basically appended the whole system. And we're just kind of sort of coming to terms with that because uh, you know, it's remarkable. Few people just wanted to do things their own way and thought that was the right way to do it, and they just went and did it.

SPEAKER_02:

And what's interesting, I I hear the narrative all the time with active fund managers in Australia. They're actually really angry at index funds.

SPEAKER_01:

Yeah.

SPEAKER_02:

And people like you dimensional, because you've made their jobs so much harder.

SPEAKER_00:

I think it's difficult to argue against those things because uh it anytime somebody tells me about them, just go look at the data. The data says that what you're doing is not working. And and David tells a story when when index funds came along early days, you're called unpatriotic. Because you you're settling for the average, you're not trying to be that's un-American, right? You know, so but you can't beat the market.

SPEAKER_02:

It's a zero-sum game. Well, you can you can take risks to do that. For every person who beats the market. There has to be someone who wouldn't beat the market.

SPEAKER_00:

Yeah, why would you settle for um you know just the market? Well, it's probably one of the best outcomes. 50-50 odds.

SPEAKER_02:

I'm not sure.

SPEAKER_00:

I'm not sure I'd punt on a 50%. That's what they were so they've tried everything to say, why would you settle for the market? You know, blah, blah, blah. But it's it's a remarkable story.

Aden:

And I think that's that's probably a good note to close on. I think as an advisor, the the thing that gives me the most reassurance and this systematic um approach is that it works. It's as simple as that. When you're looking after clients' critical capital, you want something that works. Absolutely. Um and I think that's it's been really interesting to actually unpack what that journey's been and also contrast some of the different styles and essentially how we got to the place we got to today.

SPEAKER_02:

Absolutely. Yeah, I've been doing this for nearly 30 years, um, Aiden, and most of that time has been using systematic portfolio management principles, much of which has been done by Dimensional. And I love to tell people that the biggest benefit to me as an advisor is I've never had to say sorry to a client. I've never had to say sorry that your money's gone. Ever. And I don't think I ever will have to. And as an advisor, When you you have to go to sleep at night worrying about you know two point five billion dollars worth of other people's money, not having to say sorry is a very powerful starting catchment.

Aden:

So as our listeners know, we love it when you leave feedback for the podcast. So please send through any questions. Um, even if you've got any specifics around what's actually in the research like we talked about, we will have a link to um tune out the noise in the show notes. So anyone who's keen to give that a watch will include it. Arno, David, thanks for joining me. Pleasure. Thanks for joining us on the Purposeful Investor Podcast. We love being able to share our insight and guidance. If you've enjoyed today's episode, make sure that you subscribe, leave a review, and share it with someone in your community. We encourage all of our listeners to share their questions and ideas that they would like to know more on. You can contact us at ask at capital partners.com.au. All information in this podcast is general in nature and does not take into account your personal situation or circumstances. Capital Partners Private Wealth operates under the Australian Financial Services Licence 227-148. Thanks and see you next time.

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Aden Wilkins

Host
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David Andrew

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