Boy, it’s much more difficult to start today than when I started. When I started there was nothing in finance. It was literally nothing. So, anything that you did was new. It was easy. It was like shooting fish in a barrel. Professor Fama is a pioneer in the trend of applying empirical and scientific rigor to the field of investment management. I was really the first big user of computers in finance. They would suggest something, and I would come back the next day and have it done. I’m wondering how I could do that? When computers came along, I mean you knew if your program was right the numbers were right. You’d have to do it again so that was like an opening of the world to statisticians and that’s really how stock prices and an efficient market started. Statisticians and economists were released from the burdens of these calculators. They could process data in ways they couldn’t do it before. What’s the most easily available data stock prices? The ultimate goal is to learn something from the data so it’s not whether or not your model looks better or worse, it’s whether and going through the process you learn something from the data that is in fact true. I mean it reproduces in other data and that’s kind of been an organizing philosophy of my approach to empirical research you know for the whole 50 years of my career. Fama’s groundbreaking work inspired the founding of Dimensional. He has written two books and published more than 100 articles in academic journals. His work has been cited more than 11,000 times. The reactions of academics you know they’ve been pretty supportive has been somewhat to put it mildly more reticence among the applied people and financing the wall street basically because it says they don’t do very much. They don’t like that they charge high fees for not doing very much. Another example of beating something to death is the farmer French 92 paper which started all of this value growth business or at least was the most influential paper in that. When we wrote that paper, we didn’t think it would be published because there was nothing in it that was strictly new. We were just putting together stuff that people had done and said. When you look at all of this together, the story is just too strong. The old model is no good. We need a new model and for whatever reason, maybe it was because the model we were throwing down was one that I had helped to build up. So, if there are smart active managers making money, they have to be making money at the expense of poor active managers because passive managers are out of the game. They don’t respond to the accident of active managers. Now that’s not a hypothesis, that’s arithmetic. That has to be true every point in time. It has to be true. It’s the most fundamental proposition about active management you can have. Bill Sharp. Because at the arithmetic of active management just to emphasize it, it’s not hypothesis, it’s arithmetic and it’s the toughest concept to get people to solve. It’s like you can’t get them to swallow that one plus one is two. It’s mind-boggling.
Gene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.
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