Tune Out the Noise | Documentary Film

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Academy Award-winning filmmaker Errol Morris (The Fog of War, The Thin Blue Line) turns his lens to an unlikely cast of upstarts who transformed the investment landscape in the documentary Tune Out the Noise. The film chronicles a group of academics at the University of Chicago in the 1960s whose groundbreaking research challenged Wall Street’s status quo and was used by firms like Dimensional Fund Advisors to disrupt traditional methods of investing, ultimately reshaping the way the world views markets.  Many of the prominent academic and financial leaders featured in Tune Out the Noise were instrumental in developing and applying research that showed how rules-based, broadly diversified portfolios could lower barriers to entry and reduce costs for investors. This new approach, which stood in stark contrast to the stock-picking and performance-chasing tactics that predominated, led to the invention of index funds, the founding of Dimensional, and the evolution of client-focused advice. The result was a revolution in finance that helped usher in a new era for investors. Shot in Morris’s iconic style, Tune Out the Noise unfolds through revealing interviews with Nobel Prize-winning economists who have long-standing ties to Dimensional, including Eugene Fama, Robert Merton, and Myron Scholes. The film also features Dartmouth professor Ken French, who has co-authored numerous research papers with Fama, along with Dimensional founders David Booth and Rex Sinquefield, indexing pioneer Mac McQuown, former US Senator Bill Bradley, and many others. #TuneOutTheNoiseFilm Connect with us: Watch and subscribe to the Dimensional YouTube channel: https://www.youtube.com/channel/UCcd9t53faf29RPenKlKLa5A Follow us on LinkedIn: https://www.linkedin.com/company/dimensional-fund-advisors/ Visit us: https://www.dimensional.com/film https://www.dimensional.com/ Timestamps: 03:39 - Midwestern Upbringing 10:04 - Birth of Modern Finance 29:09 - Birth of the Index Fund 39:25 - A New Dimension of Investing 59:42 - A More Powerful Telescope 01:05:31 - Redefining Investment Advice 01:17:14 - Changing the World For CA Audience: You have the opportunity to earn CE credit for viewing the film. Please find the exam here. https://cecorner.ca/lesson/tune-out-the-noise-60-minute-version

Dimensional Fund Advisors

1:28:12

2025-03-05

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Early on, we started doing a few videos.

[bright music]

-[Errol] Who was we? -[Booth] Dimensional.

I didn't think the camera was running.

I told them I put myself through college selling shoes.

I was a commissioned salesman.

There was a huge incentive to make a sale.

But when I went home at night,

I wanted to feel good about myself.

[bright music continues]

Women would ask, how did this shoe look on 'em?

And I would tell them,

"I don't think that's your best look."

I mean, you don't have to say,

"Oh, give me a break. That's awful."

No, you learn how to say it, you know, nicely.

People, when they get out of school,

they think that you have to shade things.

[Errol] You have to lie.

Yeah, OK, you have to lie. [laughs]

My experience has been just the opposite

and I learned that from selling shoes.

[bright music continues]

It's influenced my whole career,

particularly at Dimensional.

It's this belief system that we have

about how markets work and how investing works.

Before the 1960s, that point of view

was never expressed anywhere.

Total paradigm shift

in the way we approach finance and investing.

If you look at leading academics,

one of the overwhelming characteristics

is the pursuit of truth.

Being honest with what you know and what you don't know.

If you look at financial pages

and listen to financial news every day,

everything is chaotic.

There's nothing systematic going on.

[group chattering indistinctly]

[dramatic music]

[text whooshing]

There is an underlying order to all this chaos.

The market is a big information processing machine.

If you're gonna beat the market, you gotta be faster

than everybody else in the market.

[bright music]

Trying to outguess the market is more like gambling.

It's not investing.

[gentle bright music]

Instead of pulling your hair out

and watching financial news all day long,

tune out the noise.

Instead of outguessing the market,

let me make all these thousands or millions

of people that are investing, let them work for me.

[bright music]

I'm just gonna sit back and let them duke it out.

[dramatic music]

Market prices have to be set in a way

that induces people to come in to want to invest.

That's all that's going on in the market.

That sounds so simplistic,

but it can't be any other way.

[birds chirping]

[dramatic ominous music]

[gentle dramatic music]

[Rex] I was orphaned at a very young age.

My father died when I was five.

He had a ruptured aorta.

He died on the table in April of 1950

and I remember standing in the bedroom

across the bed from him,

and I had these winter pajamas on,

and I said, "Daddy, are you going to die?"

And he said, "No, I'm not."

But he died that night.

[somber music]

My mother decided she couldn't handle us,

so two years later we went

into the same orphanage in St. Louis.

We had 30 German nuns from Hitler's Germany

and they ran the place

and we didn't screw around.

[Errol] So there were four children?

[Rex] Yeah, I had two older sisters.

[Errol] And in order just to save everything,

she had to put you in an orphanage?

Right, she had to.

It was the right decision.

We didn't appreciate it at the time,

but I've grown up and learned to appreciate it.

[solemn music]

Graduated from high school

and went to a Catholic seminary for three years.

Went to St. Louis University,

graduated from there with majors

in philosophy and finance.

And I worked for about 10 months,

got drafted, was in the Army

for one year, nine months and 11 days.

[Errol] This is at the time of Vietnam?

[Rex] This was the time of Vietnam. This is 1970.

My vision was so bad,

they said, "You can't go into combat

unless you specifically waive this restriction.

And your eyes are so bad, we're not going to ask you to."

I ended up in the Finance Corps,

then went back to St. Louis, worked that summer,

and then went off to Chicago that fall.

One of the first courses I took

was Merton Miller's course in economics.

In his first class,

he explained this notion of efficient markets.

I remember sitting there thinking,

"This has got to be true."

[dramatic music]

[Rex] This is the organizing principle

for all of the market data.

This makes everything make sense.

[dramatic ominous music]

David and I both knew it.

If we hadn't gone to Chicago then,

we wouldn't be here today.

We were in the right place at the right time.

[gentle dramatic music]

[Errol] When you were in Kansas,

did you know that you were going to go into finance?

[Booth] I wanted to major in everything.

Every course I took, I loved.

Eventually settled on economics and math.

Got my BA in 1968 at the height of the Vietnam War.

I had no long-term plan 'cause I was assuming

that when I graduated, I would get drafted.

[soldier] Forward, march!

[Errol] Did you know people who were drafted

and sent to Vietnam?

Yeah, I get teary-eyed if I get too far into this.

[gentle dramatic music]

I graduated from high school in '64.

A lot of kids went into the armed services

right out of high school 'cause that's the only way

they could afford to go to college,

and some of them didn't come back.

When I got out of college, I got another student deferment

which was great, except I hadn't applied

to any graduate school for anything. [laughs]

The following Monday is enrollment week

at the University of Kansas,

so I hustled up to Kansas.

Thursday, I apply to the business school.

I get accepted on Friday, and on Monday I enrolled.

And I took this finance course.

Zowie, I think I wanna be a professor.

I decided to apply to the PhD program

at the University of Chicago.

By that time, the draft board had figured out their mistake

and they were hot after me.

D-Day comes. Draft day.

There's an enormous hall, packed with people.

[gentle dramatic music continues]

Then you come to a chief medical officer.

Thumbs up or thumbs down, you're in or you're out.

And he goes, "You know, if I'd rejected you,

what were you going to do?"

I said, "I've been accepted to the PhD program

at the University of Chicago."

[gentle dramatic music continues]

He says, "I've decided to reject you for a year."

So he scratches out the approval,

circles me and signs it,

gives me back my folder.

That is a life-changing moment.

Packed up my car and drove to Chicago.

First class, first day, was Fama's class.

I hadn't really thought about financial theory before.

The way Fama went through it, it all made sense to me.

It wasn't till later I found out

that nobody believed that stuff. [laughs]

The real world was challenged by that way of thinking,

but it all made total sense.

In 1969, none of these professors

had received a Nobel,

but half a dozen 'em or so became Nobel Laureates.

These are legends,

and they were just floating around the finance department.

[dramatic ominous music]

[soft dramatic music]

[Eugene] At Tufts, I had been a French major.

I got sick of French.

[Errol] Why'd you get sick of French?

Well, I mean, how many times can you hash over Voltaire?

There was nothing new in it.

I took an economics course

and I loved it and I was pretty good at it.

My professors were reading my exams to the class, so...

I applied to the University of Chicago

and I didn't hear from them.

Finally, I called.

It was, like, April.

The dean of students answered.

He said, "Well, I'll tell you the bad news is,

I don't have a record of your application.

What kind of grades do you have?"

And I said, "All A's."

He says, "OK, we have a scholarship

for somebody from Tufts, do you want it?"

[gentle dramatic music]

So that's how I came to the University of Chicago.

My generation came along at the right time.

Data was starting to be generated.

It was like shooting fish in a barrel.

Nobody had touched the data,

so whatever you did was new.

[gentle bright music]

[Errol] But this idea that the information

about the market is contained in the market,

where did that come from?

[Eugene] I coined the term.

A lot of people at the time

started testing whether prices moved randomly.

Whether returns were predictable.

It didn't look like they were predictable.

And I kinda codified the whole thing into a theory.

Efficient markets is basically the statement,

markets work, prices are right.

[gentle dramatic music]

The nut to crack was,

you couldn't really test whether prices were right,

unless you told me what right meant,

what was risk, and what was expected returns.

[dramatic music]

[Errol] But did you realize

that you were challenging how investing was done?

Oh, absolutely. That was fun. [laughs]

I was a poor kid from Malden,

so it was fun to challenge the big guys.

[gentle dramatic music]

If you go back to the early '60s,

to investment management, it was all acting.

People were all trying to beat the market,

all claiming they could beat the market,

but no evidence was ever presented.

They didn't know how to attack

what we were showing with the data.

They were just claiming they were the ones

that could pick the stocks.

Now testing, it's not that easy,

because you have to be able to distinguish

between luck and skill.

If I take all the active managers,

some of them are gonna look good

on a purely luck basis,

and some of them are gonna look bad

purely on a luck basis.

But if you look after fees and expenses,

then they're awful.

[Errol] You may have driven a stake into its heart...

but that model persists, does it not?

-[stake squelches] -[actor groans]

[Eugene] It's easy to explain.

They think that there must be people

with special skills in investing.

[Errol] And to defeat such a mindset?

You show the data. [laughs]

You let 'em do it and then you show the data.

[Errol] And the data tells us?

[Eugene] Probably our results were random.

[gentle upbeat music]

[Myron] There's a lot of randomness in life.

I was very interested in finance.

I wanted to go to the University of Chicago.

They wanted someone to be a computer programmer.

I said, "I know nothing about computers."

And they said, "Well, don't worry about it.

You're the number seven computer programmer for the summer,

so you'll pick it up from others."

I arrived in the office the first day,

no other programmers showed up.

Result of all this was the most fantastic happenstance.

The faculty would come in

and ask me to do research for them...

and if I would be able to achieve results for them,

their eyes would light up.

They would be just ecstatic.

The end of the summer, when they said,

"Would you like a scholarship

to go into the PhD program?"

I don't know whether it was because of the ideas

that I gave them along the way,

or because they needed a computer programmer.

The six that were before me never showed up.

I really became enamored

with trying to understand financial economics.

[gentle bright music]

I spent many hours in the library

reading books on finance

to try to understand how to value things.

The great breakthrough really came in 1952

when Markowitz had the big bang of finance.

Risk was so undefined.

You bought stocks, they looked riskier than bonds,

and Markowitz made it into an economic theory.

He showed what risk was important,

the risk of your portfolio.

It wasn't the individual components,

it was the portfolio itself.

Those risks which were diversifiable,

were not important.

[gentle bright music continues]

[soft dramatic music]

I was eight years old

and I created the RCM Savings of Dollars and Cents Company,

which as my personal bank

that I then got families and friends

to put money in the bank

and I would go down and deposit it

and pay them a lower interest rate.

Some kids could learn batting averages. I did that too.

I knew every single symbol on the exchange,

because there was no Quotrons or anything.

[bright music]

I bought my first share of stock when I was 10.

It was General Motors.

By the time I was in college,

I was trading convertible bonds.

And then when I went to grad school at CalTech,

markets opened in New York at 9:30 in the morning,

and in California it's 6:30.

So I'd be up and trading for a couple of hours

before going to class.

[bright music continues]

I learned a lot from being in markets.

I thought I knew what I was doing. I didn't.

But I never thought of it as a day job.

You know, I thought of this as, you know,

after-hours sort of thing, you know, 6:30 in the morning.

If you start to look at this

you realize it was not an ordained path.

I don't know where I would've ended up,

but I wouldn't wanna roll the dice and try again.

[bright music continues]

First of all, finance is a science,

but it wasn't always science.

Believe it or not, there was no data.

Well, you can't have a science and test it without data.

I would mark the beginning of finance as a science

with Harry Markowitz's work on portfolio selection in 1952.

[audience applauding]

And then into the '60s,

we had the Chicago Center for Research and Security Prices.

Jim Lorie and Larry Fisher collected

every single stock return

on every stock at the New York Stock Exchange since 1926.

Never been done.

There was no real data from the markets.

[Errol] How was the data collected in the early years?

Painstakingly.

Going hand-by-hand, picking every number

and then cleaning it up,

making sure you didn't copy it wrong.

I mean, God bless them.

[gentle dramatic music]

Now, they didn't really have a theory to put the data to.

You have to have hypothesis and theory,

you have to have the data to test it.

This is the case you had all the data.

So, what did they do?

If you just bought a typical stock in 1926,

and you went through the Roaring '20s

and the Great Depression and World War II

and the post-war this, and the Korean thing,

and blah, blah, blah, blah, all the way to the 1960s,

what would that have earned?

The number they came up with, on average,

was 9.3% return per year.

That was one of the most shocking numbers

to come out in financial management.

[tense thoughtful music]

No trust department had earned 9.3%

for their clients.

In fact, there were a bunch of articles

where professors put the Wall Street Journal on a wall,

throw darts, and then see whether that stock,

how well it did against professionally managed money.

[Booth] It was based on some work done by Michael Jensen

at the University of Chicago.

He concluded that professional management

wasn't worth the cost.

I'm so deeply wedded in the notion of markets

and how they work, can't understand how anybody

would think anything differently.

But conventional wisdom at the time was,

find the right person that works really hard,

that has great access to all kinds of information,

and that person can surely do better than the market.

[gentle pensive music]

That relies on a faulty assumption

about how markets work.

It says, "Markets don't process information very well."

That's just so naive, I can't stand it.

[birds chirping]

[Roger] I grew up in the suburbs of Chicago.

My family was in the heating

and the air conditioning business.

Had I have been more mechanically inclined,

I would have been in that business.

[Errol] You failed at air conditioning?

[laughs] Yeah, I really did.

So I decided to get a PhD at the University of Chicago.

That's where the Center for Research

and Security Prices was.

[Errol] CRSP.

[Roger] Had all the data,

it was just sitting there ready for us to use.

And they had the theories.

We were armed with so much knowledge,

we knew things that the people on Wall Street didn't know.

[traders chattering]

Rex and I tried to measure these risk premiums.

Once you recognize that markets were efficient,

where do you get the extra return?

Well, it really came mostly from taking a risk.

[waves crashing]

But what we didn't really have at the time

was a measure of this.

[thunder crashing]

That's one of the things that Rex and I did

with our Stocks, Bonds, Bills, and Inflation work.

If you invested a dollar in the S&P 500 in 1926,

reinvested all the dividends...

[bag of money whooshing]

...let it ride,

at the end of 2021, it's actually grown to over $14,000.

Ten-and-a-half percent is an explosive number

because it turns out you double your money

in every seven years or so.

That's really how you do get rich.

[lively thoughtful music]

[birds chirping]

[Kenneth] Let's talk about reality versus models.

It can be a quantitative model,

or it could just be your point of view.

Whatever it is, it doesn't explain everything.

[lively thoughtful music continues]

If a model explained everything,

you wouldn't call it a model, you'd call it reality.

Models are abstractions from reality.

You're simplifying the world so you can understand it.

If it were true, it would be reality,

and reality is just too confusing

to keep straight in our head.

[car engine revving]

I get in my car, and my model is,

when I turn the key, the car will start.

[car engine revving]

The model's not perfect, it's an abstraction from reality.

I live in New Hampshire.

I know when it's minus 30 degrees,

it doesn't start with probability, one,

and often it doesn't start at all.

So, there's lots of things that are wrong with my model,

but it's a perfectly useful model most of the time.

So, I fully expect, when I turn the ignition,

it's gonna start.

Sometimes I'm surprised.

And what I always challenge my students is,

when they think they see a pattern in stock returns,

or in bond returns, financial assets, anywhere,

their normal expectation

should be that pattern happened just by chance.

[radio waves whirring]

It's not a trading opportunity.

Start with that as the default,

and then you have to convince yourself otherwise.

What looks to be real probably just happened by chance.

[gentle thoughtful music]

[Errol] But aren't we slaves

to seeing patterns everywhere?

[Kenneth] You look in a snowbank and you see a face.

[wind whistles]

You look up in a cloud and there's a sailboat.

I always blame it on evolution.

Imagine our ancestors were on the savanna.

Somebody looks over,

behind that bush it looks like there's a lion.

And there's two choices, you can say, "Yeah, that's a lion,

let's get the heck out of here,"

or you can say, "Well, that pattern's not real.

It's just a mirage in the leaves,"

and you just hang around.

-Whose genes reproduce? -[Errol laughs]

You get rewarded for not ignoring the pattern

that's actually there,

and sometimes that makes you make a mistake

and see a pattern that isn't actually there.

[upbeat thoughtful music]

[Errol] Fama said,

"I'd compare stock pickers to astrologers.

But I don't want to bad-mouth astrologers."

What's he talking about?

Candlestick charts.

-Dogs of the Dow. -[dog barks]

Various schemes to predict stock prices.

Meaningless patterns that reflect no underlying reality.

[upbeat thoughtful music continues]

It reminds me of what happened in astronomy

at the end of the 16th century.

[map pulses]

New stars in the supposedly unchanging heavens.

The decline of astrology.

More accurate scientific instruments providing data.

They transformed our entire idea of the universe,

much like data and computers transformed our idea

of finance in the middle of the 20th century.

[computer printer whirring]

[dramatic ominous music]

[Mac] When I was at Harvard Business School,

'59 to '61, there was not a single computer, not one.

I got mixed up in computers

'cause I went across the river to MIT.

[Errol] Why'd you do that?

Serendipity.

[bright thoughtful music]

I was interested in data.

The rest is history.

[Errol] Why this interest in data?

You know, I've often wondered about that.

I grew up in Sandwich, Illinois,

70 miles west of Chicago.

Farming is a numbers game.

How many stalks of corn are in a row?

And how many rows of corn can you get in a field?

I grew up with numbers.

City boys didn't have that.

[bright thoughtful music continues]

When I was working in New York in investment banking,

I was fussing around on nights and weekends

with share price data,

updating it, correcting it.

Every, maybe, two or three weeks or so,

we would add another month of data,

trying to develop a model that would predict future prices.

[telescope whirring]

This fellow responsible for the data center

said to me one day, "What are you doing?"

It wasn't exactly secret, so I told him some things.

Well, the next thing I know,

he asked me if I would make a presentation

about data analysis.

In the audience was the chairman of Wells Fargo,

Ransom Cook.

He comes up to me afterwards

and he says, "I want you to come to work for me

as soon as possible."

[car engine revving]

Talked to my wife.

We drove to San Francisco in my '59 Corvette.

[light pensive music]

I wish I still had it.

And I went to work for Ransom.

We had 12 consultants, all academics.

Six of those academics have won Nobel Prizes.

Six.

I don't think there was any other bank CEO

that was spending remotely that amount of money

on far-out stuff.

The first thing that we discovered,

100 out of 100 portfolios underperformed the S&P.

One pension fund portfolio was $400 million,

was invested in 20 stocks.

Twenty.

They were grossly underdiversified.

[Myron] No one knew what a return was, how to measure it.

Jim Lorie built the Center for Research and Security Prices.

Lorie would invite institutions to a seminar that he held.

Mac McQuown came,

as well as a bunch of pioneers from the investment world.

McQuown asked me if I would come

to Wells Fargo in San Francisco,

where he was working in his management science department,

give an evaluation of their progress.

So I went there

and listened to their management science group.

Realized that they had built this wonderful machine

that could make cookies, but they had no dough.

They never thought about the fact

that they needed inputs to make the cookies.

They also had no clients.

My thinking was based on work, obviously, from Gene Fama.

And then Mike Jensen found that mutual funds

didn't seem to outperform the market.

It's very hard to beat the market.

Why don't you use the market information, use the prices,

believe in prices as being unbiased estimates of reality?

Create a portfolio which is low-cost

and will give you systematic exposure.

I wrote this up and thought of it as a passive strategy.

[Errol] Are you the first person to do this?

I think I was.

Now, every great idea has 1,000 fathers,

and all my bad ideas were always mine.

[light gentle music]

[Booth] The "aha" moment was realizing

I didn't want to be in the PhD program.

So I walked into Fama's office the next morning

and said, "Gene, I'm out of here.

I wanna go apply the ideas."

I started in September of '71

for Wells Fargo in San Francisco.

That was the month they started their first indexed portfolio.

[Errol] At this point in history,

there are no index funds.

The term "index fund" wasn't even used.

These are an alternative to this game

of trying to outguess the market.

Buy stocks that are undervalued

and sell stocks that are overvalued.

Get in the market before it goes up,

and get out before it goes down.

Yeah, you can buy the market.

[Mac] The next thing you know,

we were offering the S&P 500 to our pension clients.

And we wanted to sell it to the retail market,

but we were frozen out of that business by Glass-Steagall.

Created in 1933 to separate commercial

from investment banking.

The investment banks could deal in share prices

and shares, and so forth.

The banks could deal in trusts,

but never the twain shall meet.

[gentle music]

We made a deal with Jack Bogle.

They were interested in starting an S&P fund.

I asked the chairman of Wells Fargo

what we should do with our data and our analysis.

He says, "Give it to him."

"Give it to him."

He created Vanguard, and away they went, right?

[Errol] Isn't this unusually generous?

[Mac] Exceedingly generous.

[Rex] I interviewed the five largest banks in Chicago,

the major banks in New York and California.

I told all of them about efficient markets.

I explained to the interviewers

how markets work and I want to work in a place

where I can apply this.

These people, figuratively, tapped me on the head and said,

"No, son, that's not how it works."

And I got rejection letters from all of them,

all except one bank in Chicago,

American National Bank.

And I remember saying to one of the secretaries,

her name was Cindy Moody,

I said, "Cindy, this is all bullshit.

None of it's true."

And then after being there six or seven months,

I wrote a memo saying, we need to start a new fund.

An S&P 500 index fund.

We took an existing portfolio of $30 million.

We just told our clients that the purpose

of this fund is the same, growth.

We're gonna go about it a different way.

Everybody stayed.

No one objected.

No one even asked questions.

Then we started attracting more clients,

and by the end of '74,

we had about $200 million under management.

From that point on, we started bringing in

about a billion dollars a year.

A billion with a B. A year.

The enemies of index funds were everywhere.

All the active managers

and stock pickers were out to get us.

"You guys are communist.

This is not the American system.

You just settle for the average."

Actually, it is the American system,

and the average is a lot better

than the average of all other money managers.

They're settling from below average, we're not going to.

[gentle music]

[Booth] By 1981 when we started Dimensional,

a lot of people had moved to indexing.

But people weren't investing in the stocks

of smaller companies.

We were the first people to treat small cap stocks

as a separate asset category.

The idea was: you ought to have large and small stocks,

why would you want to invest only in large?

We didn't even have data, but we had an overwhelming logic.

By pure luck, a student at the University of Chicago

had done his PhD dissertation

on exactly what we were talking about.

The smallest 20% of companies on the New York outperformed

the S&P 500 index funds by quite a bit.

[Errol] And no one had noticed this before?

[Booth] No one had noticed it, no.

[gentle music]

[Rex] Despite the hundreds of people going

through Chicago every year,

very few...

emerge as pure efficient market fanatics

like David and I did.

We said, "This is just absolutely true,

we're gonna devote our lives to it.

We understand the theory,

we understand the statistical issues involved."

And that gave us a big leg up.

David said he's thinking of starting something,

I said, "Yeah, I'm thinking of a new product, too."

And we described it, and he said, "Let's merge."

That was it.

[gentle music continues]

[Eugene] David said he wanted to start a company,

and would I like to be involved.

He put me on the board right away.

[Errol] Is this unusual for an academic

to be individual in a real-world enterprise?

[laughs] Well, it was for me.

Any time I had done that in the past,

it didn't work out because being an academic,

I don't like people who tell me what to do, so...

[Mac] We began talking about starting a company.

We just decided we were gonna do it our way.

We concluded that there was a market for it.

It worked.

[Errol] Were you surprised?

Of course not.

Data doesn't lie.

[bird squawking]

[gentle music]

[Booth] I have a brother that's 10 years younger than I am.

He was still living with me

when we decided to start the firm.

We didn't have enough money to rent office space.

World headquarters was my apartment.

Kicked my brother out and used his bedroom

as a trading room.

Stained doors on top of filing cabinets,

those were the desks. That kind of thing.

[Errol] You kicked your brother out?

It was all right. He had a good job by then.

We started the mutual fund

and it had to have an independent board of directors,

so Rex Sinquefield and I went over to the business school.

[gentle music continues]

Merton Miller was in that day.

Said, "Merton, we'd like to have you be a director."

He said, "OK."

Then went down the hall.

Myron Scholes was coming out of his office.

I was walking to the faculty club,

and he ran up to me and said,

"Myron, would you be willing to be an outside board member?"

I said, "How much is the fee?"

He says, "We have no money at this time.

There's no board fees."

I thought it was an experiment.

I was skeptical that it was gonna succeed.

I didn't know if you buy small securities,

how large could you be?

May be easy to buy, but then when you went to sell,

who will you be able to sell it to?

I was skeptical that investors would have

the patience to want to do this.

I did not know why smaller securities tended

to outperform larger securities.

Then I realized, over time, there was more to it than that.

In order to buy micro caps the traditional way,

they would hire a money manager who would come in and say,

"I'll pick the good ones and avoid the bad ones."

Total nonsense.

There is no way anybody can distinguish

a good one from a bad one ahead of time.

The stock market is simply too informationally efficient.

Everything is fairly priced.

So forget about the stock picker.

They aren't gonna do you any good,

and they're gonna charge enormous fees.

And they can't buy enough stocks

for you to be confident that you're buying the class.

We'll start off with 3,000 securities,

you can be confident you are buying a small cap class.

But we were the only manager in the country

that could say that.

And that was a big selling point.

[gentle music]

[Booth] People say, "What kind of art do you like to collect?"

And what I discovered was that it's very similar

to my view of economics and investing.

I like simple ideas well-executed.

[goat bleating]

[Booth] My view of life is,

there's no evidence that complexity adds a lot of value.

[goat bleating]

So I have a tendency to go towards somewhat minimal ideas.

[gentle music]

I got these two 40-foot-high curves,

white, one color.

Each weighs 20,000 pounds. [chuckles]

And I just marvel at the impact it has.

Ties in a bit with the way we invest.

These details are important.

[gentle music continues]

Rex Sinquefield and I sat down,

and we were in total agreement.

We don't want to manage this like an index fund.

Instead of doing things mechanically,

we developed protocols that are sensible

and well-thought-out.

And now we have thirty-nine-and-a-half years

of that small cap fund that we started.

We have shown the value over indexing.

[printers whirring]

If you want to talk about theoretical support for it,

it's really Bob Merton

and Myron Scholes's option pricing models.

[audience cheering]

Flexibility has value.

In thinking about a portfolio,

one can think about buying insurance

to insure the down side,

or you can think about holding more cash and less equities.

A third way to insure it is really to diversify completely.

I became very interested

in the insurance component of options,

thinking about ways in which options could be used.

The more uncertain you are,

the more you want to potentially buy insurance.

Conversely, if you're very certain about something,

you don't really want to buy insurance, there's no need to.

[Errol] Uncertainty and risk are essential

parts of investment.

Essential parts of everything in life.

Very, very important to investment, yes.

With working on the Wells Fargo projects with Fischer Black,

we ended up with a differential equation

which described how the option price would change

by a function of time

and risk called the Black-Scholes model.

[gentle music]

[Robert] Myron told me what they did.

I said, "This can't be right.

Let me look at it."

I had developed a stochastic calculus which allowed me

to not look at expected values,

but actually to model every possible

sample path individually.

[gentle music continues]

Everything that could happen,

not what you'd expect to happen,

not what happens on average,

but every single path

that stock or security could possibly do.

Now, it's only gonna take one path in the end.

But I can analyze all the paths.

What allowed me to do is to actually see

in the mathematics every single possible path it takes.

So if it goes to the left, it goes to the right, it goes up,

it goes down, I can control it, just like...

[car whirring]

That's what it allowed me to do mathematically.

[gentle music continues]

Now, we come to the punchline.

When I put it in my machine and looked at it, I said, "Wow."

I went back to Myron,

I said, "Myron, you're right, you and Fischer are right.

It works. But for the wrong reason."

[gentle music continues]

[Myron] That changed the whole nature of finance.

[Errol] Talking about trillions of dollars here, right?

[Myron] Correct.

[Errol] Shouldn't you have gotten a piece of this action?

[Myron] Texas Instruments had a calculator,

only did the Black-Scholes model.

I got upset with that 'cause they were using

our technology without giving us a nickel.

I phoned Texas Instruments.

They said, "No, given that you had published the paper,"

and at the time publishing was not patentable

or not copyrightable, there's no royalties."

I said, "Can you give me a calculator?"

And they say, "No, we couldn't give you a calculator."

So I never even got a calculator out of this.

[Errol] They refused to give you a calculator?

[Myron] They refused to give me a calculator, right.

[ominous music]

[Errol] How did you become involved with Dimensional?

They had to hire someone to do the work.

The company was small. I had another job.

I was doing their computer stuff at night.

[gentle music]

David decided that I should join the firm.

I decided that I didn't want to work for my husband.

But David's one of the best salesman in the country, right?

They hired me to manage the portfolios,

and they went out and sold up a storm.

Somebody had to run trading.

First thing was figuring out,

if you have a certain amount of money,

how you should spend that money,

given you're trying to get

a passive index fund of 3,000 securities.

Obviously, you can't buy every security

'cause you don't have enough money.

Had to do some type of stratified random sampling.

Nobody had written any software

so non-computer people could play with data.

It didn't exist.

To write programs that allowed us

to do millions of trades with very little manpower,

you had to go and find a programmer

and people didn't know how to program then.

I mean, I taught myself assembly in college

'cause I was broke.

Guy asked if I could computer program.

I'd never even seen a computer,

but I had a dime in my pocket, and I needed a job.

Wasn't that I was smarter than anybody else.

It was really new.

My family calls me a data freak.

[Errol] What's the difference between a data freak

and a data dog?

A freak thinks it's fun.

[chuckles]

Don't you think cabbing 100 million records would be fun?

-[Errol] No! -[laughs]

I don't.

Other people did crossword puzzles, I did statistics.

[Errol] When did you meet Rex?

[Jeanne] I was doing judo at the time.

Rex decided to join the judo club

'cause he wanted to meet me.

[Errol] Did you ever beat him in judo?

[Jeanne] Oh, yeah.

I was just better than he was. I'm sorry.

[Errol] Were you ever beaten up by your wife?

No, but I was beaten up by quite a few people.

[chuckles]

I remember the first open tournament I went to,

my first opponent was a full black belt.

That match lasted 16 seconds.

I went to my instructor, and I said,

"Ike, what did he use on me?"

He said, "He used your favorite throw, morote-seoi-nage.

I said, "I didn't even recognize it."

[gentle music]

The first thing I did for Dimensional was

I gave a talk to a client.

And Dimensional at the time was trying to raise money

for a new fund to invest in Japanese stocks.

And I had a paper with Jim Poterba,

Were Japanese Stock Prices Too High?

[gentle music continues]

They're trying to sell a Japanese fund, and they said,

"This is the best paper we know of about Japanese stocks,

we think you should hear it."

And they paid me to go and tell this potential client

why they might not want to invest in Japanese stocks.

[Errol] Isn't that crazy?

I loved it. I've been working them ever since.

[Errol] So wait a second. What happened with this client

who was going to invest in Japanese funds?

They did.

Original investor or one of the early investors

in the Japanese fund.

[Errol] You were so powerful in your argument

of why these stocks were overpriced that they invested?

There's always some ambiguity as an academic.

Apparently, they glommed onto the ambiguity

rather than the central message.

What they were buying was diversification,

not a high expected return story.

[gentle music]

[Booth] Fama was amazed I came up with the term "Dimensional".

A stroke of luck.

Small cap stocks behave differently

than large cap stocks.

They don't go up and down together.

They signal in different dimension.

[gentle music]

Fama and French had done a paper

that turned out to be a classic

called The Cross-Section of Expected Returns.

Which led to the creation of our value strategies.

They showed that the value stocks,

the low price to book stocks,

had higher average returns than high price stocks,

the growth stocks.

You take any stock, the lower the price you pay for it,

the better your eventual return.

The trick is, what do you mean by low price?

It's low price relative to something.

[uplifting music]

If you go back to the '60s, there was no coherent way

to think about constructing portfolios.

What we have done over the last 30 or 40 years

is develop a framework.

If you go back and look at mutual fund classification,

income funds, high-expected growth funds,

they were names that didn't translate to anything meaningful

to anybody but the people who made up the names.

I was studying finance as a PhD student,

and the names never meant anything to them.

Gene and I said there are these two other dimensions

that really do matter.

One is size and one is value versus growth.

With those two dimensions,

people started framing their portfolio

in a much more constructive way.

This is a large growth portfolio.

This is a small value portfolio.

And those two portfolios are gonna behave very differently.

What's happened through time

is we've added other dimensions that are still systematic

that describe patterns in expected return

and patterns in realized returns.

[Errol] Is it astronomy versus astrology?

[Kenneth] It's astronomy with a really good telescope

versus astronomy with the best we had was our naked eye.

It's just a blob out there

versus now I have very precise description,

and the description continues to get better

as we develop better and better tools.

[serious music]

[Gerard] The leap that you have to make

from the hard sciences to the social sciences,

you come from a field

where you can run an experiment over and over again.

The equations actually have predictions

that are pretty close to what actually happens.

When you go to finance, you have similar sorts of tools,

but the inputs come with a lot more noise.

Therefore, the outputs have a lot more noise.

The way that you will apply those techniques

are actually different when it comes to finance

than engineering.

[bell dinging]

My mom and dad worked in the laboratory.

Ireland, it's a great place to be a kid in the '80s,

probably not such a great place to be an adult

trying to raise kids.

Unemployment was like 20%.

Taxes were super high, that was always there.

When I was 16,

I went to college to do theoretical physics.

And then when I started Dimensional,

I got a passion for finance,

but I didn't have a lot of background in it.

I had some great teachers here at Dimensional,

Gene Fama, Ken French,

Bob Merton, Myron Scholes, David Booth.

Jeanie ran the portfolio management and trading group

for many, many years,

had a very good command

of everything that was under her purview.

This was when we were in Santa Monica.

She found where I was sitting,

said, "I wanna have a conversation with you,"

when I didn't really know exactly who Jeanie was.

I'd only been at the firm about a week.

She said, "When you do a PhD,

you learn more and more about less and less

until eventually you know everything about nothing.

An MBA, you learn less and less about more and more

until eventually you know nothing about everything."

And she says, "I have an MBA and a PhD,

so I know everything about everything,

you just have a PhD."

[Errol] So I've heard you were a very tough manager.

[chuckles]

I thought I was being helpful, OK?

Originally, when we were really small,

someone would sit across the desk for me

for three to six months, and I would teach them.

But then we got big, and I couldn't sit across the desk,

so I'd have them come in and we would talk,

and I would make sure they understood everything.

For me, I was being nice, right?

I thought it was being nice.

[serious music]

[Gerard] When I started thinking about finance,

I had this notion that all you needed to do

was get a better set of equations

and that would allow you to out-guess the market

and out-guess others.

Could you use artificial intelligence?

Could you use big data?

All of these types of things.

But you can't outguess market prices.

Markets are looking to the future.

They may be learning from the past,

but they're looking to the future.

Nobody knows what the future holds

with any degree of certainty.

Markets are trying to take the consensus view

of what the future holds

and set prices to such a level that it reflects their view.

They're doing that day in, day out, every second of the day.

And so it's probably good

that you have people with different views of the future

because there's no one right view

about something that you can't predict.

[Savina] I was born in Bulgaria,

and I studied there until I finished high school.

I came to the States to study at Dartmouth College.

When I shared with them my desire to pursue PhD in finance,

they suggested that I start working for Ken French.

When I walked in, Ken said,

"Well, Gene and I have never used research assistance,

but OK, we'll give it a try." [laughing]

[Errol] How do you separate signal from noise?

[Savina] It's tough.

When we look at something that could be a signal,

does it show up in different markets around the globe?

Does it show up in different time periods?

If the answers to all of the above is yes, yes, yes,

we start thinking about turnover,

trading costs, all the things

that can actually make a paper profit

disappear in the real world.

Many people underestimate the noise in financial markets.

Markets are unpredictable.

Hopefully, more people understand and appreciate

the magnitude of uncertainty in financial markets,

and as a result, change their way of investing.

[Butler] I have two or three "aha" moments in my life.

First one was trying to make this decision

between Stanford and Cal Berkeley.

As a kid growing up, I was enamored with Stanford.

I thought I wanted to go be a student athlete there.

I took a weekend visit to Stanford,

didn't like the coach,

decided to commit to Cal.

About three weeks later,

the Stanford coach got fired and a new coach came in,

gave me a call and said,

"Hey, we'd love to have you come to Stanford."

I went outside, took my basketball,

and I started to go out and shoot.

And I thought to myself, "I'm gonna go to Stanford."

My mom came out about five minutes later

and she said, you know, "Dave, I heard your conversation.

You gave your word to Cal.

I'd be very disappointed if you changed your mind now."

This is from the most moral, ethical person I know.

I called the Stanford coach up

and I said I was gonna go to Cal.

[Errol] You made your mother happy.

Which is the most important thing in life. [laughing]

[announcer] ...but Butler knocks it down.

[Butler] Finished my basketball career.

Then I got a call from the big investment bank in New York

and they said that they had a job for me,

and that was really the start of my business career.

I had about a three-year run there at the bank,

had a number of other "aha" moments

that pushed me towards Dimensional.

I had a broker named Tom,

that broker would look into the crystal ball

and tell me about the future,

say, "I think the market's gonna go this direction."

Walk into some basic human emotions, fear and greed.

That's what investment advice in those days was built around

was transaction and activity.

In 1994, Tom, my broker, called me up and said,

"There's a stock called Boston Chicken.

There's gonna be a great earnings report next week."

So I put all my chips on the table,

about 80% of my net worth.

A week later, the earnings report came,

and I opened up The Wall Street Journal,

scrolled down to B, Boston Chicken,

and I just lost half my net worth,

and I said, "Tom, what happened?"

And he said, "I'm sorry, it just didn't work out

the way we expected it to work out."

That was the business of financial advice.

It's built on the premise

of looking outward into the future,

and none of us can predict the future.

[Errol] When Tom said he was sorry,

how sorry do you think he was?

I don't think he was that sorry.

It's very difficult to be in a business

where you have to say sorry

as often as a transacting broker did in those days.

I made a decision, I was gonna get out of financial services

and become a basketball coach

and a teacher back in California.

By luck or by chance,

I was sitting on the desk in New York,

reading The Wall Street Journal,

and there was a small ad, 17th page,

bottom right hand corner,

"Money manager, Santa Monica, California,"

and for me, I'm a California kid,

I like those three words, "Santa Monica, California."

I got in the elevator, went up to the 11th floor,

and Dan Wheeler was there to greet me,

and David Booth, Chairman, founder of Dimensional,

walked up to the elevator area.

David said to Dan, he said,

"I've got another meeting I've gotta go to.

Would you mind taking Merton to lunch with you?"

And so there I was on my first interview

with Nobel Prize winner, Merton Miller,

the most modest, wonderful person that you'd ever meet.

But I remember him saying three things

that stuck with me forever.

One was, markets work, two, costs matter,

and three, diversification is your buddy.

Even to this day,

if you can just keep those three tenants in your mind,

you're gonna be better

than anybody else out there as investors.

[gentle music]

If you look back where we were 30 years ago,

ten percent commissions on transactions,

and where we are today,

which is holistic wealth management done it well below one percent,

we've come a long, long, long way.

[birds chirping]

[gentle music]

[Mark] I was 32 years old.

I had a very large windfall for my age.

I literally had no knowledge of the proper way to invest.

I was cold called from a broker.

Over many, many years, he bought this and sold that.

He was in this huge office tower, downtown San Francisco.

How could they not know what's best for me?

[gloomy music]

Somebody asked me, "Have you ever benchmarked your returns?"

No, I don't really know how to do that.

Well, you could literally go on and draw the chart

of the growth of the S&P 500

and then you can look at your portfolio.

And I started looking at these gaps

and I'm going, "What the heck?"

Had he invested in a portfolio

of index funds over this 12 or 13 years,

I would've ended up with 30 million more dollars.

I was literally floored, shocked, astounded,

and even angry when I figured out

that all of this stock selection

and market timing was all a bunch of nonsense.

This industry is designed to get people to trade.

If they're not trading, they're not making money.

I wrote a 20-page letter

with charts and graphs to this guy said, "I'm sorry,

I'm moving my money to a passive investment strategy

and I really don't need you anymore."

He did not put up an argument.

[gentle music]

All the passive investing had this academic evidence

associated with it.

There were academics telling you this

and in fact, there were Nobel Prize winners.

Wait a minute, that carries so much more weight.

I had been in the pharmacy industry,

we read medical journals.

I could see we've got evidence-based,

peer-reviewed data here

from which you can draw your conclusions.

That was definitely an epiphany for me.

[lively music]

[Norm] We know what active funds are.

Those are the guys trying to beat Wall Street.

Then we got your index funds, you got Vanguard,

it's a great organization, but when you buy an index fund,

you're gonna get the market return, less the fees.

[upbeat music]

Then there's this company, DFA.

And what they did, is they took research back

about 80 or 90 years and found out that if you tilt an index

and try to capture something small companies

and value companies have, you're gonna get a better return

in the long run over an index.

[upbeat music]

And there could be four or five years where nothing happens.

This is a long-term investment, and if you stick with it,

you get low cost, you get tax efficiency,

and we can capture these additional incremental returns.

[lively music]

Many years ago, people really didn't know

the long-term returns of stocks, bonds, and treasuries.

And you think about that, your head explodes.

[ceramic shatters]

[lively music]

We just had theories in what returns were.

Information tells you where you can make money

and where risk is.

And then you get the internet.

People can access data.

Now there's bad parts of it and there's good parts of it.

We can look at the Robinhood phenomenon.

Someone can invest $50 and be in the market.

I still think decent portion of population

do need advisors to keep them focused

and not buy AMC or GameStop

because that's what someone told them

in a Reddit chat room.

That's not the kind of advice that's valuable.

[lively music]

The old boiler room,

which was illegal, where people would pump up stocks,

has been replaced by the internet.

There's gonna be some bad falls out there

and maybe the consequence of that

when there's a day of reckoning is those people

will realize, yes you can participate in markets

but there's a rational way to do it.

[lively music]

[Bill] Most people, if they go home at night

and their kid asks them what do they do,

they'd like to say what they do is making a difference

in society as a whole.

It's not just making money

but it is being able to move the world a little bit forward.

I remember talking to an advisor and he said,

"Not many professions have access to something

so intimate as people's dreams."

And that's what I have.

[lively music]

Some guy's dream is to get a cabin in Colorado.

Other people's dream is to buy a piece of art.

And other people's dream is to just be able

to send their kids to college.

[lively music]

They're all legitimate dreams.

[lively music continues]

They all come back to how they've invested their money.

[dramatic music]

[Booth] There's a group of us

that have been hanging around together for 50 years.

We were at the forefront.

People are having a much better investment experience now

than they did 50 years ago.

Costs are lower, better diversification,

better risk controls.

It's pretty cool to see how that all happened.

All this great work that changed everything.

It's a relatively small group of people.

These are the people that change the world.

Then go out and have dinner together.

[bright music]

[Robert] Remember, finance is about risk.

If you took away risk as an abstraction,

the whole subject could be taught in an afternoon.

It's the time value of money.

And the only security you need is an overnight treasury bill

and there's no difference between stocks and bonds

or anything else 'cause everything's certain.

It's all about risk.

[bright music]

[Eugene] People started developing models that said

there can be multiple dimensions of risk,

not just one.

So you may be considered what kinds of uncertainty

that you're trying to hedge against.

And those models were formalized in the '70s,

they were kind of sloppily implemented in the '90s.

I'm saying sloppily because they had a role in that.

They haven't really nailed down

what these extra sources of risk really are.

That's kind of the name of the game.

We don't really know how to go further with them.

[bright music]

[Errol] New data?

[Eugene] New data, well, I don't know.

If you don't know the question you don't know the data,

you need to answer it, you know. [chuckles]

Maybe the data would suggest the... the question

but in that case, you know, I have to see,

I don't know what kind of data I'm looking for.

We're not making quantum jumps

the way we did in the '70s.

[mysterious music]

Somebody has to come up with a new burst forward.

[mysterious music]

I hope it happens in my lifetime, but...

[chuckles]

...we'll see.

[Booth] We spent a lot of time talking

about what's happened the last 60 years

and the revolution in finance.

And it's really led to a democratization of investing.

That's on the plus side of the ledger.

On the negative side of the ledger,

it's only a teeny tiny number of people

that really believe this stuff.

Someday, we're gonna be able to talk to the average person

and have them walk away saying, "Gosh, that's sensible.

That must be the way the world works."

We've done the heavy lifting, index funds are accepted.

What we do has been accepted.

Next, will be all the cool stuff you can do

once you accept that notion that markets

do a pretty good job of pricing

then there's a whole set of tools we can develop

to personalize investing more and more.

What investing is about is dealing with uncertainty.

People wanna shrink away from uncertainty.

And it's uncertainty that really creates opportunity.

What would the world be like if there were no uncertainty?

I mean, pretty dull.

[gentle music]

People think they have to predict the future,

say, "This is what will happen."

When in reality, what they need to focus more on

is what can happen.

You can't predict the market and that's OK.

Fundamentally, what this whole process relies on is the idea

that people wanna improve their lot in life.

They wanna improve the lives of their families.

There's a lot of hope.

We didn't set out to be the biggest money management firm.

It's not about being big,

it's doing things the right way.

[gentle music]

[gentle music continues]

[gentle music plays]

[music fades]

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