Episode #441: Marlena Lee, DFA – Value, Fama & Weathering Bear Markets
Guest: Marlena Lee is the Global Head of Investment Solutions for Dimensional Fund Advisors. Lee worked as a teaching assistant for Nobel laureate Eugene Fama and earned a PhD in finance and an MBA from the Chicago Booth School of Business.
Date Recorded: 8/24/2022 | Run-Time: 57:42
Summary: In today’s episode, we start by hearing what it was like to be a TA under the legendary Gene Fama. Marlena gives he thoughts on the state of value investing, the mentality needed to navigate bear markets, and applying factors to fixed income. As we wind down, Marlena touches on DFA’s entrance into the ETF space and their plans for future launches.
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Links from the Episode:
- 1:31 – Intro
- 2:20 – Welcome Marlena to the show; Dimensional Insights (Three Crucial Lessons for Weathering the Stock Market’s Storm)
- 6:21 – Optimizing safe money
- 8:57 – Lessons from working with Eugene Fama
- 11:47 – Marlena’s current role at DFA
- 13:59 – The ongoing case for value investing
- 25:55 – Marlena’s thoughts on global investing and emerging markets
- 32:44 – Marlena’s advice on how to find a financial advisor (link)
- 39:17 – Differentiating between a good stock and a good company
- 43:30 – Picture on dividing beanie babies in court (link)
- 43:57 – DFA’s philosophy for launching some ETF products
- 48:45 – Marlena’s take in fixed income investing (link)
- 53:38 – Marlena’s most memorable investment
- 54:47 – Learn more about Marlena; dimensional.com
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Meb: What’s up y’all? We got an awesome show for you today. Our guest is Marlena Lee, the global head of investment solutions for Dimensional Fund Advisors, which manages over 600 billion. And today’s episode, we start by hearing what it was like to be a TA under the legendary, Gene Fama. Marlena gives her thoughts on the state of value investing, the mentality needed to navigate bear markets, and applying factors to fixed income. As we wind down, Marlena touches on DFAs entrance into the ETF space and the plans for future launches.
Now, before we get into the episode, I have a favor to ask. We have some huge episodes coming up with the likes of Kyle Bass, David Rubenstein. So, send the podcast to one person you think needs to learn about “The Meb Faber Show.” They’ll be glad they did. Please, enjoy this episode with DFA’s Marlena Lee. Marlena, welcome to the show.
Marlena: It’s great to be here, Meb.
Meb: Where do we find you for the people listening on audio?
Marlena: I am here at Dimensional at the Austin offices, Austin, Texas.
Meb: There’s many, many, many topics we could probably get into. I thought we would begin with your most recent piece. So, you write over on dimensional.com on occasion, and you had one recently this summer, you’re not doing a sabbatical like everyone else taking the summer off. You’re doing a little work called “Three Lessons for Weathering the Stock Market Storm.”
You know, it’s been a while since we’ve had a bear market, we’ve had a few of these little kind of jiggles over the past decade. But usually, they’ve kind of resulted in all-time highs. So, talk to me a little bit about this piece. What are some of the lessons to learn here?
Marlena: What we are certainly seeing is this is a volatile, uncertain time in markets. I actually thought it would’ve come during the pandemic, but the pandemic seemed like it was on a tear. And it was just this geopolitical unrest plus inflation. And we saw markets react a way you would expect them to, they were incorporating all of that information. And it resulted in prices falling. Of course, prices falling, we think means an opportunity for higher expected returns.
So, trying to help people find that silver lining, whether it’s in the data or just philosophically that when you see market volatility, that’s a good sign that markets are working the way they should. They’re incorporating this new information, they’re incorporating that uncertainty. And we really encourage clients to lean into that uncertainty because that uncertainty is exactly why you should expect positive returns, right?
If there were no uncertainty then what’s your return? It’s the return on cash, right? Or on T bills. And we know that we want higher returns than that. And that’s why you have to bear some risk and some uncertainty. So, being able to fortitude yourself and lean into that uncertainty is how you reap higher expected returns.
And also just having a philosophy that markets are going to do a good job of pricing in all of the information means. And we see this just because there’s a 20% decline in markets. You know, we’re in a bear market, that that means that forward-looking returns. Or if you stay invested as of now into the future, that you’re going to have negative returns. There’s just not that type of predictability in returns. So, people, if you already bore the downturn, you might as well stick around for that positive expected return.
I think it was especially painful because we saw a decline in bonds as well. And it was, you know, that first quarter was the worst quarter, depending on which index you use. The second quarter was the second worst quarter. So, you kind of combine those two into… I would say, our fixed income investors were, I think, surprised by how negative their fixed income was returning at the exact same time their equities were returning negative returns as well.
But there, the silver lining is, this is the first time in a very long time we’ve seen positive real yields. And for someone who’s investing for decades, that positive real yield is going to be so much more important for building a lasting retirement portfolio, even accounting for that initial shock to their portfolio.
So, those are some of the both theoretical and data bits that we’ve been trying to push out there to make people feel good enough about the volatility that they stay disciplined and they stay invested. Because we know what the return on cash is right now. It’s not good.
Meb: I actually did a poll on Twitter this week, where I asked people a bunch of questions. I love to do polls, but one of which was, what does your savings account yield? And I have no idea was one of the answer boxes, which is a very high percentage, right? And then it was like zero to 50, 50 to a 100 over a 100. Anyway, I think most people don’t even know, but assume it’s zero. But yes, it’s not much, but it’s nice to see yields in the positive territory.
That weird period we had, where yields were negative, not here, but in many places in the world. Very odd time. What I like about, you know, the chart, the long-term S&P chart is when it’s a long chart and you zoom out prior yes, Ralph Acampora, painted one on his barn, you know, the really long S&P chart.
One of my favorite studies, or graphs, tables, it shows the hundred crisis events of the past 120 years, right, where people were worried about, what’s happening today, what’s happening. And you always forget, right? Five years from now, you don’t even remember. I don’t even remember what I had for lunch yesterday. So, these crisis events, when you zoom out, you’re like, “Oh, well, you know, this is the point.” But then you zoom in, and then that’s when it’s super scary, super crazy.
And the media seemingly is always, there’s never, like, positive news when it comes to geopolitics and stocks, I feel like it’s always noise and negative. So, that long-term perspective is important, I think. We needed like tattooed on our forehead, but it’s hard to align.
Marlena: And by the way, I didn’t fill out that poll, but I would be in the “I don’t know” bucket.
Meb: Yeah. Well, you know, this is a whole separate topic of discussion. But it’s interesting as we think about, you know, your safe money, what do we do with it? How do we optimize it? You know, a lot of people… I was laughing the other day, it was like, I have a Bank of America checking account, and they’re like, “You are a super preferred reward customer. Like, we’re increasing your yield from 0.01% to 0.005%.” It’s like laughable. I was like, “Are you guys joking right now? Come on.” Anyway.
Marlena: Oh, we’ll have to chat after. Because I’m pretty sure mine is in the one point something.
Meb: Yeah. I love to give the robos, a lot of flack, but also compliments when it’s due. And you know, one of the things I think the robo advisors do well is optimizing of cash yields, so Betterment, Wealthfronts of the world. Other shops have done it very poorly. Schwab just got fined almost $200 million for… They’re optimizing the cash balances for themselves, not the clients.
So, anyway, they make a difference over time. Anyway, sorry. Little rant. Get started under Gene Fama, right? What was that experience like? Did you play tennis with him? I love him from afar. I’ve never met him, but I would love to. He seems like an awesome dude.
Marlena: He is a very awesome dude, even though I will never describe it that way to his face. So, yes, I came to Dimensional via Chicago, and specifically professor Fama. Took his first-year PhD class as a bright-eyed, new learning investments for pretty much at the very start. You know, I went to Chicago right out of undergrad and became his teaching assistant. He was on my dissertation committee.
So, we worked a bit together when I was a grad student there. And towards the end, just, I don’t know academics wasn’t for me. So, I told him the rest of my committee, and he’s the one who set me up with Dimensional. But working for him, I’ll tell you one story. He’s very formal as a professor. He’s a excellent, excellent professor. To this day, I think he is one of the standout professors that I think of.
And just in terms of now in my role, I sometimes do some training type of events. I always try to emulate him. And he would be very formal in his class. So, I would be Miss Lee and he, of course, was Professor Fama. But then once you’re not in the class, everyone transitions to calling him Gene. And that whole first year, I felt uncomfortable calling him Gene.
So, I started off with all of my emails to him as his teaching assistant. So, there were many with, “Please find attached to…” And he didn’t give any clues. He would sign all his emails EFF. I’m like, “Come on. Do you want me to call you professor Fama or Gene?” So, he’s certainly intimidating. He’s one of the giants in finance, but it was amazing to learn from him, to watch him.
I think one of the biggest takeaways I’ve learned from him and I’ve carried through my career is he will say some of those really early influential papers around the three-factor model. He said, “You know, I didn’t even think that this was going to go anywhere because we were just summarizing previous results and we just packaged it and marketed it better.”
He actually used the term marketing, even though he read it, you probably wouldn’t think of it as marketing. But it was academic marketing. But he never underestimated the power of clear and concise communication. And that is something that I’ve always strived for.
Meb: Our world is so filled with jargon. And it’s particularly, you know, you read some of these academic papers, and you’re like, “Oh my goodness, gracious.” Like, I need the, like, too long. Didn’t read version now. I think the world is kind of coming around to that belief, but they’re so opaque. But, yeah, I think that’s important.
Meb: All right. So, you work for Gene, I’m going to call him Gene. I don’t know him. And Dimensional very much has philosophy rhymes. I don’t know the right word to say it.
Marlena: Rhyme? I have not heard that description.
Meb: Rhymes with kind of Gene and his school of thought. But give us a little overview, what do you do at Dimensional? And we’ll dig into some of the research topics you’ve written about and go from there.
Marlena: Yeah, sure. So, yeah. Right now I run a team called Investment Solutions where we kind of sit at the intersection of our clients and the investment teams. Like, we really try and translate what’s happening on the investment side. Really compelling, timely, ways that help our clients communicate then to their constituents. And that might mean doing things like this, it might mean writing more of those short timely pieces, not really long research pieces, it might mean analytics.
So, understanding, hey, here’s how the portfolio’s performed. Or here’s some of the trade-offs to think about when forming a portfolio. So, lots of different aspects of communicating investments to our clients to help them make better decisions. So, that’s what the team does today. Most of my career at Dimensional though I was in the research team. And so that’s kind of the Chicago blood, right?
And it’s been diluting and diluting slowly over time as I’ve gone more and more into leaning into how to communicate these things, because I feel just absolutely passionate that these ideas that come from academia, they can sound intimidating and complex, but they don’t need to. The message is that investing doesn’t need to be scary. That I think is really important for everyone to know and understand.
Meb: So, trying to communicate some of these ideas, let’s start with value. You know, value is one that has been around, certainly, since the time of Ben Graham and before, but Dimensional really put a stamp on the investing world. I don’t know what you guys are managing now. But last I checked, it was a lot and the hundreds of billions.
Marlena: Well, you hover around $600 billion.
Meb: You can round up and just say trillion now. So, that’s like… I love to round anytime, it benefits me. So, on the way to a trillion. And so you guys really put a stamp on the world with how to think about certain… I don’t know what the party line on how you call it, factors, tilts, exposures, whatever it may be. But value is certainly one.
So, maybe talk a little bit about the ongoing case for value, and particularly today. You know, for a long time, there’s a lot of people and friends that have been moaning about value for anytime the S&P is romping and stomping for a decade. How do you guys think about it? How do you talk about it?
Marlena: Value’s low price. Let’s unpack that one a little bit. Okay. And I’m going to get a little jargony, but then I’m going to come back up. So, I mean, prices are discounted expected future cash flows. Like, they teach that in pretty much every single MBA program, I hope. And I don’t think anyone disagrees with that. That’s true of a stock. It’s true of a bond. It’s true of a house. Well, you know, rental property, maybe.
So, there are two components to that, right? Like, what we want to talk about is expect a return, but we can’t look up the expected return on Bloomberg terminal. We can look up prices. We can look up dividends but turns out dividends is a really crappy measure for this. So, you can look up proxies for it, like, cash flows or other earnings types of variables. But then if you have a low price, it has to mean that those expected feature cash flows were discounted heavily, i.e., your expected return is higher if you pay a lower price.
The flip side of that is other things that we target in the portfolios, like profitability. So, higher profitability also indicates a higher discount rate, higher expected returns. Now, that’s the finance version of it. Let’s just try and put it more in layman’s terms.
If you’re buying anything, you want to get a good deal. And the way you get a good deal is you really happy about the price you paid for what you got. So, it’s not actually technically, like, let’s just buy all of the lowest price stuff. You also want to consider what you’re getting for it. But the combination of those two things is what you’re looking for, right? You want to look for a low price relative to what you’re getting, and that’s value investing. And it’s true when I go shopping, when I buy shoes or a purse.
Meb: Well, you know, it’s funny because you mentioned a couple things. I love your comment about dividends because I’m usually the face and get just absolutely bashed for my takes on dividends on Twitter and elsewhere. But why do you think the mindset when it comes to stocks is different than other sort of valuation cash flowing ideas? So, let’s give a couple examples.
You know, people, when they’re buying a house, they’ll spend, well, maybe not now, but normally, they’ll spend an enormous amount of time thinking about it, the prices, the cost, everything involved. Same thing with the rental property, same thing with even a TV, they buy. Stocks, it’s like the brain sort of misfires. I mean, there’s a quote that I love, “Stocks are the only business idea where when everything goes on sale, everyone runs out of the store.”
It’s like when you see the prices come down, people become less interested almost, in many cases, when people like flies, just getting attracted to the price going up. Why do you think that is? Do you think that’s just innate human nature? What’s going on?
Marlena: I think it’s two things. I think we see it. Like, you see the prices, you get to look up your account values. You hear it on the news. So, even if you’re trying to not pay attention, everyone’s going to look at what’s happening to their retirement savings during these times. And I also think you combine that with the pain felt when you actually get to observe how much in dollars you lost and thinking about… Like, we just so quickly translate that to, that could have bought me X, Y, Z, that I think makes it just really…it hits in a different way than other types of investments, right?
I think that that’s where some of the attraction to investments that are where you don’t see that price volatility. I don’t know. I think some people just like that better because they don’t have to deal with the emotional ride.
Now, if you just adapt, this is where I think it’s really important to either have someone like an advisor to help you deal with your emotions and to remind you that this is totally normal, you are still on your path over a long horizon, you’ll be fine. You know, just to help them cope with those emotions, I think, is really important. But no, I’m with you.
I think it’s really hard for people to deal with the emotions that come with investing in inequities. And I also think a piece of this is, is a lack of confidence. So, there’s also a bit of this, which is… So, a Dimensional investor is one where they kind of think, okay, I’m going to be well diversified, I’m going to invest for the long run. I’m not going to change my portfolio a lot, and I’m just going to stick with it. And that brings, I think, a different type of peace of mind than someone who’s saying, “I need to figure out also which sector, which stock, which country I need to be in right now to take advantage of the trends in the market.”
And I think that overlays another just layer of angst, where it’s also it feels like that, yes, I took a hit, but also I need to figure out what my next move is. And that’s really hard to do, or at least that’s our view that that’s really hard to do.
Meb: How do you think about something like value, which obviously we love, but goes through these periods of struggle of outperformance, of underperformance? You had a quote, at one point. So, the companies you want to work for aren’t necessarily the same ones you want to invest in, as we’re talking about, perhaps the value premium. But I was joking on Twitter the other day about one of the reasons value works is a quant. You know, you look down on your portfolio sheet of names. You’re like, “Oh, gross. I can’t believe we owned that. Like, that stock is in there.”
When you talk to advisors and investors about some of the factors, like value or profitability, but go through good times and bad times under that same mindset, like, how do you say, “Look, this is something we still think works.” And is there a way you assess it and say, “Well, maybe actually this may not work so much anymore?” Price-to-book famously has kind of gotten a lot of inbounds from the academic community on how it’s changed, how it hasn’t changed. It’s so useful. How do you talk about that?
Marlena: Well, first we do a lot of research on all of the different measures of value to make sure that we’re still comfortable with the way we’re doing it. So, there were a lot of questions in there. Let me address the how to measure value one, and then we’ll come back to the okay, how do we get people to stick with value after it’s underperformed for a whole decade?
So, in terms of different measures, like early on, it was okay, well, should you use other measures? So, here at Dimensional, we use price-to-book. By the way, we haven’t always used just price-to-book. We’ve also combined it with, you know, price-to-cash flows, price-to-earnings in certain ways. So, it’s not that we have like a special affinity to one measure over another. It’s just a question of which one’s going to work best.
But the reason we like book is because it’s stable, and it doesn’t introduce turnover into the portfolios or additional turnover into the portfolios. So, what we also found, though, is that… But if you’re going to use price-to-cash flows or price-to-earnings, actually, what you’re picking up is some profitability. Because, by its nature, you have income variable in there. So, we actually incorporated profitability directly.
So, we believe the combination of price-to-book with profitability, captures a lot of what people are capturing with these multiple metrics. And when you went into this past decade, minus, let’s just say the last year, where values major comeback. But when you went through that period of value underperformance, and some of these other measures did better than price-to-book, over that period of time, you also saw profitability, really helping in strategies.
So, what we see is that the direct consideration of profitability we think is better.
So, it’s just a question of, like, okay, we use multiple metrics, people suggest multiple metrics might help. For us, it’s just a question of, we think that actually using a distinguished or different way of getting to your view of expected returns gives you more information than just using a whole bunch of value metrics. Now, that’s not the only criticism.
The other criticism is book. Like, is book just a stale variable? And some of that has to do with intangibles. So, intangibles, of course, are things that you can’t really measure very well. There are ways that they can be measured. So, for example, when Disney took over Lucasfilm, like that intangible asset of the “Star Wars,” I don’t know, what do you call that franchise mega brand? It wasn’t a plant. It wasn’t land. It wasn’t intangible and it was priced and it was a significant price. And that gets incorporated into book values through a pricing mechanism called on acquisition.
So, when people say, “Hey, intangibles are growing now because we’re a technology-driven service-oriented economy.” We have no doubts about that. But actually the amount of intangible assets through things, like Goodwill, are increasing in book values. By the way, I don’t know the level of accounting background for your audience. So, people can just fast forward through the section if they don’t like Goodwill stuff.
Meb: No, they like the deeper, the nerdier we go, the better.
Marlena: Okay. We can nerd out here. So, we have seen it increasing, but there have been some academic studies. In fact, one from my buddy over at Wharton, Luke Taylor, and his co-authors that tried to estimate the value of intangible assets. Now, this is a very noisy way of going about it. But when you replicate that, you have to trade-off. Okay, yeah. Ideally, we would love a measure of all of the intangible assets incorporate into book. But by estimating them, we’re also introducing a whole bunch of noise.
So, how do you think about that trade-off? It turns out it’s kind of a wash. And what you end up seeing, if you do try and account for intangibles is it’s mostly changing your sector bets. So, to the extent that it’s more of a sector story, you can address that directly as opposed to introducing a whole bunch of noise into your process.
So, let’s just to summarize. We’ve looked at it from every single which way you possibly can. And here we do use a whole host of variables, but we haven’t found much value in incorporating a bunch of value measures. So, that whole spiel is part of what we talk to clients about when they’re asking about value underperformance because they’re wondering if we’re doing something wrong in terms of how to capture the value premium. Of course, when we see the premium, we do capture it.
It’s hard to get people to really stick with an underperforming premium when it’s going on for a decade. And you go back to the same principles, you go back to the same data. They’ve heard it so many times. But what I can say is that we had a lot of clients that stuck with it, and they were certainly rewarded this past year.
Meb: I think the inflection point came in 2020. Again, this is crystal ball forecasting Meb, but it feels like this could be a better part of a decade. I think given the value spreads, we’ll see how that plays out, who knows they could always spread out to even larger, cheap versus expensive. But part of the thing when I talk to people, too, is I also say, look, part of the reason value works.
Everyone always focuses on the selection side. Hey, you’re buying these cheap things, why is that good? Why is that bad? I almost view it in my head as like a Venn diagram is like, okay, well, here’s price-to-book, here’s profitability. Maybe this puts you in the same place as whatever it was, you were talking about cash flow, etc. But the whole point is you end up over here, and you’re avoiding the super expensive.
Now, that discussion, which historically has been a horrific place to invest, right? It’s hard to short it, but it’s a terrible place for your long-only assets. And so I think people are coming around to that realization. Certainly, over the last year, you look around, you see a lot of stocks down 60%, 80%, 90%, a lot of specs down the same amount, etc. But that’s the natural ebb and flow of markets, right?
You have those periods where those stocks rip up and rip your face off and do amazing for a long time. And here we are. So, as you were talking about that, I was like, almost, this is a perfect description about foreign investing, trying to talk to a client where something’s underperformed for a decade. I was like, “You just described foreign X U.S. stocks, emerging market stocks,” which have been, man, it’s got to be one of the longest periods ever for foreign stinking it up versus U.S.
How do you frame that discussion? Are you guys global investors? Are you U.S.-only?
Marlena: Oh, yeah.
Meb: I know the answer to some of these. I just want to hear you say it. All right. Well, talk about that because that’s something that people, particularly when the U.S. was kind of at its peak all-time high, angry is the wrong word, but just kind of discussed about emerging markets. And you look at Europe, it seemingly as endless what’s going on. How do you talk to people about global investing?
Marlena: Here’s what we heard from our clients, over that course of that really difficult decade, is this is the toughest time for them because it looks like their clients could just buy the S&P, or just the fang stocks and do so much better than their globally diversified value-tilted portfolios. And that was true for a very long time.
And we would still say, “Hey, I mean, the analogy was getting old, but the U.S. doesn’t always outperform.” And just the decade prior, the U.S. was one of the worst performing markets over the decade. And markets outside of the U.S. is where you found positive returns. Of course, that data is, it gets stale. But I think the idea of, it’s hard to know where your returns will come from. And it’s not obvious that anyone can country rotate in a really successful way.
So, if you can’t pick them, then you should hold them all. And that I think resonates with clients. Of course, we do see clients all around the world with some level of home bias because they’re in constituents inevitably can compare them to their home market.
So, here for a U.S. investor, it’s like, “Well, why am I underperforming the S&P?” It’s just the S&P 500 it’s not the right benchmark for a global portfolio, but they’re still going to do it because that’s what they hear about. And that’s what they see on when they log into their custodian accounts. So, there’s a little bit of home bias, I think for that.
For us, it’s always, you have to diversify, you know, I hate to say it, but it’s one of the only free lunches in investing. So, that I think is just a drum that we keep beating the extra flavor on it. Of course, is the dollar is incredibly strong. How will that hurt emerging market economies? What about all of this geopolitical uncertainty? And for us, it’s, well, yes, but all of those things are already priced.
So, it’s not clear that the dollar will become stronger. And therefore, that currency return part of their international portfolios will suffer. That’s not clear. There’s no evidence that currency movements are predictable. We know the level is high. We also know that GDP growth doesn’t correlate super well with returns.
And while that sounds a little funny, I think it makes a lot of sense because it just says, “Hey, prices already reacted.” If you look at returns through recession, so at the start of a recession, over the course of the next two years, two-thirds of the time about, it’s positive returns, which is what you get from the, you know, just regular returns.
So, we don’t think that returns are divorced from the underlying prospects of these companies. They are. It’s just, people have the timing of it backwards. It’s prices move first. And then you see the earnings or you see the GDP growth. And by then, it’s too late. You’re already bored in your past returns.
Meb: That’s one that surprises a lot of people, I think about the GDP. But thinking about markets and efficiency, I think it’s a lot of the variables when you start to get to the macro level, often end up backwards of what people expect, as far as economics, right? Like, you look at something and… I mean, even going back to something as simple as factors as beta, but a lot of people it’s like, no, not only was it not the way you thought it was, it’s like 180 degrees opposite of what you think it is.
But that’s what makes prediction and forecasting so challenging, I think for everyone, I was going to say just for professionals, but for everyone who tries to do it.
Marlena: And I would say, … to do it. If you can’t do it, then just hold everything.
Meb: Yeah. People resist that idea, though. For some unknown reason, they love their home country bias everywhere. But as you can see, and my example is always, I say on Twitter and elsewhere, I say, “Well, why don’t you just go put all your money in Japan, or the UK, or Australia?” And people say, “That’s crazy. Why would you do that?” I said, “Well, it’s the same mindset as put all your money in stocks from Ohio. Let’s just do that instead.” And everyone’s like, well, “No, that’s stupid, Meb. Stop being dramatic.”
Marlena: Meb, I’m going to use that.
Meb: Yeah. I got a lot more of those. They fall in deaf ears though. And so how do you think about putting it all together for people? How does kind of Dimensional talk about it? How do you talk about it? How do you personally do it, all these things? When you’re trying to put all these soup ingredients, all these pieces of pizza ingredients into a final pie for assets, how do you guys kind of think about that sort of recipe?
Marlena: Yeah. Well, if whoever’s listening is an investor, you know, I absolutely recommend that they go find an advisor. And I think that a lot of people think that advisors are really expensive. And for the Uber wealthy, there are those, and then there are lots of other types of advisors.
So, I think that while people can put together a portfolio just fine, having someone coach you and keep you disciplined when…you know, we were just talking about it when you go through a rough patch, and it’s just like, “I can’t do it. I’m going to jump,” to help you keep the course. So, we think that that’s really important.
Number one, I have an advisor, I tell them I want to do my own portfolio, but they help me with all sorts of other things.
Meb: Here’s a hard, I think, challenge for a lot of people, it’s like finding a doctor. What’s the best practice do you think? And is there a good solution on how do people find one? I mean, usually, it’s just like word of mouth. I’m going to go interview a couple, chat them up, recommendations of friends.
Are there any other resources or best process for how to think about it? Because I did a poll, again, my favorite thing to do. And 80% of respondents said they did not have an advisor. So, most don’t.
Marlena: Yeah. I love that poll. Because I have also been saying that this is why I started with people who also just need access to good information. Because a lot of the information I would say is not so good. If you just listen to financial media or Google, what’s a good stock? There’s all sorts of stuff out there. So, if people aren’t ready, then just have a really well-diversified portfolio and kind of leave it alone. So, don’t tinker with it too much.
One analogy I’m going to borrow is investing a lot, like a bar of soap. The more you touch it, the less you have. And I definitely think that that’s true. So, if someone’s early in their career, just starting to save, you know, don’t really have a complicated tax situation, beneficiaries to think about, you know, they’re just investing… I think early on, it’s far more important to just develop a habit of saving.
And then just invest in something that’s going to be low cost, incredibly well diversified. And when I say, well diversified, I mean thousands. The global stock market has over 10,000 secs.
Meb: I was going to say, you could say tens of thousands. That’s okay. I agree with you. I mean, we often say, as professionals, you and I could probably debate for the next two hours, like, the final 5% on how we run these factors, the screens, the implementation, the portfolio sizing, the position sizing, buy, sell rules, all that stuff.
But often I’m like, we always skip over the first 90%. That’s probably the vast majority of the pyramid, which is how much you decide to save and invest in the first place and how early, usually trumps all the other decisions. Like, it’s not even close. That’s hard to tell, you know, a 20-year-old to save and not go out with friends or go to spring break or whatever, buy a new car. But it matters.
Marlena: As soon as I started working, my mom started a IRA for me. And that’s something that I would suggest for parents. You know, it’s you can start these savings accounts for your kids, and then they can start learning what investing is about. I think it’s a discipline, it’s a habit. It’s just like exercise, or eating healthy. You just have to do it, it’s just part of what you do.
And if you have that mentality, it makes it a lot easier. You don’t even think about it, you just remove it, you never see it. And so there’s all sorts of behavioral studies on this of, like, nudge and just…you just got to do it. And yes, you’re right, the earlier how much you save and avoiding really costly mistakes.
So, getting out, you know, investing in something that’s really concentrated that goes kaput, those are the kinds of things that are really hard to recover from.
Meb: Yeah. So, get started, get going, put your money to work. As your parent, like you mentioned, amazing idea. Get your children involved early. But how do you go about finding an advisor? I don’t have one. I should probably have one, whether it’s per hour, whether it’s full-time. Do you have any good advice on that, as you talk to these advisors? Like, is it just kind of feeling your way through the forest?
Marlena: I think referrals are certainly one way to go, ask your friends. But I think it’s important to make sure that you have one that you feel gets you, is listening to you. This would be a very Dimensional perspective, but do they think that their value add is to help you get to your financial goals and really listens to you to understand what those are? Or do they think that their job is to pick stocks for you?
Because there are two types of advisors out there, and I think it’s much more veering towards, let’s make sure that we have a holistic view. I would say, at the leading edge of advisors, they’re thinking about a very holistic view to financial wellness, thinking about how it impacts your entire life. You have to have trust. This is someone that you should feel like you can share, like all of your intimate stuff, because this is your life savings. And these are your hopes and dreams.
So, we have some fantastic advisors that we work with. And you will not really hear them talk and lead with, “Well, here’s how we’re going to invest your portfolio.” It’s just, we’re going to trust the market. It’s going to be well-diversified. We’re not going to touch it, we’re not going to mess with it a ton. We’re going to be very tax efficient, cost-sensitive. But really what it’s about is understanding the client, their goals, helping them understand their portfolios and how that portfolio is meant to get them to their goals. That, I think, is key to finding a good advisor.
Meb: Yeah. Money is such a taboo subject. And there’s so many emotions inherited with that. Whether it’s just from childhood, whether it’s from society, all that stuff packaged in with money and the topic, it can be really hard. So, yeah, having a good fiduciary or steward, I think, is huge for most people.
Marlena: Meb, I do think that changing though. I think it’s changing just like younger folks are more comfortable to… Like, I talk about… Well, I’m way transparent, probably too transparent to the people around me. But it feels like people are a lot more comfortable talking about other taboo things like mental health. And it does seem like financial wellness and money is, like, the wall is starting to crumble.
And I think that that’s a good thing because it doesn’t need to be complicated, but there is a lot of incentive, I think, to attract assets into what’s the latest fad. And some of these fads are terrible. I don’t understand some of these things. Oh, you’re going to goad me up, like, single-stocks ETFs.
Meb: There’s a phrase we like to use, you know, in the venture capital community, venture capitalists love to talk about product market fit, right? You have a product, I was going to say Peloton, maybe not the best example right now. But it’s very clear when something works, it’s magical, it grows a company. Everyone loves it. It’s crazy that… Like, wheels on suitcase, it’s like how did that not exist before?
But in the investing world, I think, there’s also there’s product advisor fit. So, for example, there’s products that are aimed specifically at advisors instead of individuals, right? But there’s also product, like product gambler fit. You know, it’s like, “Hey, we know this is not going to benefit you as an investor, but we know you also would like some dynamite or some craps table. So, we’re going to build a better craps table that lets you…”
I mean, look, there’s infinite menu of options that are already available for people to do that today, whether it’s trading a hundred to one currencies FX, whether it’s trading futures, micro caps, penny stocks, options, on and on. There’s a limitless menu, but the issuers keep adding to it every day.
And so we often say to people, I say, “Look, you know, bucket your companies into kind of two Venn diagrams.” And there’s the ones who, in general, act like they have a fiduciary responsibility. And usually, those are the ones I think that say, “How little can we charge for this and still run a business and operate?”
And on the flip side, there’s what products can we put out and how can we charge as much as possible and get away with it. And there’s not a lot of overlapped really in my mind. So, anyway, that was my spiel. Sorry.
Marlena: I like the spiel. I was going to add one more bubble to your Venn diagram, which is this stuff that, I think, people also need to distinguish between companies or investments that make stuff and the other stuff that doesn’t. So, now I’m going into cryptocurrencies and NFTs, and there are a certain set of, some might call them assets that the entire game is, is someone going to be willing to pay more in the future?
And for that, there’s no reason why it should… Outside of that, I call a hope, but wish that someone’s going to pay more.
Meb: Speculation. You know, you see this a lot with collectibles and areas like that. And one of my books, I was talking about what Steve Cohen paid for that shark sculpture. And I was like, look, God bless him. You know, if you can buy this and then sell it for tens of millions more someone else wants this rotting, shark, like good for you. But to me, that’s not generating cash flow. So, it’s just a different game. You know, it’s not owning a business, it’s owning a collectible or a speculation.
Marlena: I’m going to date myself. But I worked in a toy store during the Beanie Baby craze, so I used the Beanie Babies as my analogy.
Meb: There’s a great picture on Twitter that floats around every once while, we’ll add it to the show note links, but it’s a couple going through a divorce and they’re dividing the Beanie Babies in court, right? So, they’re doing a draft on much of who gets what Beanie Babies. And it’s such a great picture.
Marlena: That was great.
Meb: Yeah. It should be easier to divide your NFTs, listeners, when you get divorced because it’s digital. That makes for the argument for crypto a little better than Beanie Babies. Let’s talk about a couple more things. We kind of bounce all over the place, you know, Dimensional famously, as we’re talking about ETFs a little late to the game, but, you know, a Dimensional usually shows up and they do so thoughtfully with a lot of heft and weight behind their ideas.
What are you guys thinking about there? Are you planning on launching a bunch of ideas? Is it going to be kind of just like a, hey, we’re going to launch some products that are complementary or replacements? How do you think about that whole ETF, mutual fund, SMA, customization, all of that whole universe of what products people want?
Marlena: Well, maybe I should take a quick step back to say that, you know, our mutual fund business is over 40 years, right? The ETF business, yes. Not as long, but we inserted all of that kind of engine, the Dimensional investment engine into the ETF. So, actually, that’s why it took us so long is that we were waiting for, well, we weren’t waiting, but it took the ETF role. So, 60/11 for us to be able to do that and feel like we were delivering a true Dimensional product within an ETF wrapper. So, it took that.
And then same thing in the SMAs space, we felt very strongly that we needed to have a true dimensional solution in that. So, technology evolves, where we can now deliver that at very reasonable account size. So, across the board, it’s all Dimensional, our approach, the research, daily portfolio management, really flexible approach to trading, so we’re not paying a lot of costs in trading. All of those things are things that are embedded across.
So, our thought was if clients have any kind of preference in terms of how they want to access Dimensional investing, which to us is really true, is what we’re really offering. Then let’s try and give our clients as much choice as they’d like, right? Some prefer mutual funds, some prefer ETFs. In certain cases, they might want in SMA. So, if we don’t have to cut corners, we don’t have to shortchange any part of our process, then let’s give our clients choice.
So, having said that, what we see with the ETFs is yes, slate. But certainly, have had a very successful build of our ETF business. We’re at 24 ETFs now over 60 billion. I think we’re the top number one active ETF issuer and top 10 overall.
Meb: Well, welcome to the party.
Marlena: Thanks. So, when it comes to future ETFs, or what we’re thinking, we’re thinking we will kind of go where our clients ask us to go. So, far, we do have another four on the way in the fourth quarter. So, those are going to be four sustainability ETFs. And then kind of go from there. We’re just listening to our clients. A lot of them are similar to a mutual fund. Some of them are brand new. So, we have an emerging market’s high profitability ETF, but we don’t have a mutual fund. And our clients have been telling us, we always have meetings. It’s like, “When are you going to launch these ETFs?”
So, what we are seeing is that clients who prefer ETFs, some of them, they’re just waiting for a Dimensional solution in a particular sleeve. And we’re getting a lot of that feedback. And that right now is guiding a lot of our decision-making around which ETFs to launch in the future. I fully expect that we’ll have kind of a complete ETF lineup that stands alongside our mutual fund lineup.
Meb: I was going to say, you listen to clients except when they request single-stock ETFs. And you’re like, “No, hell, nah. Hell, nah. Y’all, we’re not doing that.” But you probably don’t. You know, education and writing and research has long been a hallmark of Dimensional. You guys put out some of my favorite charts and visuals, which, for me, I’m a visual learner. So I’m all about the charts, and tables, and graphs, and everything else.
What are you thinking about? What are you excited about? What are you worried about?
Marlena: I don’t have that many worries when it comes to investing. To me, Dimensional’s investment philosophy is so freeing because I’m not super worried about what’s happening in markets. A lot of it is more, how do we make sure that our clients and their clients are not freaking out about markets? So, that is so freeing. And then it’s mostly trying to come up with cool visuals, and analogies, and stories.
Meb: I’m going to write about bond factors. You’re like, I’m not worried about anything. This gives me opportunity to write. By the way, how do you guys think about bonds? Bonds, I feel like, for most people, they just say, “You know what, I’m just going to stuff this in the 10 year or the ag.” And that’s the extent of it. Maybe I’ll throw in some corporates. If I’m crazy, I’ll put in some emerging market debt.
But how do you guys think about bonds? Do you think about bonds… I know you wrote a couple pieces about bonds factors. What’s your approach? How do you think about fixed income, which, for the longest period was a sort of a no income portfolio. But how do you guys think about it?
Marlena: Well, we think about it the same way we think about equities, which is there’s information in the price. But in this case, you get to see the price. Well, you actually get to see that discount rate, it’s the yield. And you also get to see what the market thinks the future discount rate is going to be because you have a whole yield curve. So, it gives you so much more information about expected returns and risks than you have in the equity market.
So, for systematic value type of investor… I mean, man, the things you can do in fixed income are just so much cooler, I think than what you can do in equities. I would love to be able to say, you know, I think the value premium is a lot higher. I mean, I kind of believe it, but I can’t really prove it to you with data that the value premium is higher today because of the value spreads are still ginormous, that’s a technical word.
But in fixed income, you can actually estimate that and show that, yeah, during times when yield curves look like this or that, or spreads are wide, that that tells you about how you should position your fixed income portfolio. That’s cool.
Meb: What does it say? Give us the insight.
Marlena: Well, yield curves are kind of flat, but it’s saying… I mean, everyone’s concerned about inflation, right? It’s saying that the market expects inflation come down, that the fed will do its thing. And if you look at break-even rates, they are within what I would consider normal historical ranges, right? Like, I think the five-year break, even I didn’t check today but has been hovering just north of three.
So, you can actually make forecasts in the fixed income market, where it’s, you know, here’s what the market is forecasting. Or you can forecast, okay, when the market is forecasting that the fed is going to do X, Y, Z. So, just the information there is so much more precise than what are people pricing in equity markets. That’s a lot.
You know, people tell stories, for sure, but you also see the stories contradict itself sometimes on the same day. It’s really cool. I’d say the fixed income, I understand how… Actually, I don’t understand. I know that a lot of people think that fixed income is way more complicated than equities. I think that fixed income is a lot less complicated because you get to see the prices.
Meb: We did an old study, and I’m trying to think where it is. And I’m trying to recall it while on air. But basically, it was like looking at the yield curve and thinking about how to tactically move around your fixed income exposure. And basically, at a very wide yield curve spread, you wanted to be out on the longer duration on the flat, you wanted to be closer to the short.
The problem with some of those ideas is, why do you have the government bonds in the first place there? And what’s their role? And how do they affect the portfolio? And you start to shift around from… I mean, I think zero coupon bonds right now are in like a 40% drawdown or something, or 50% drawdown, right?
So, if you theoretically were, “Hey, I’m using this government bond portion to be my stability, my low volatility.” And all of a sudden we were messing around with 30s and zeros. It may not fit that bill. But historically, it added, I think it was like a percent or percent and a half. I’ll dig it up, listeners, see if I can find it.
Marlena: I mean, if someone wants something really stable, we would say, just shorten up your duration and say, high quality. You don’t necessarily need to be only in govs. But kind of similar on the equity side, even though we’re value-focused, you know, we would still say, growth. Stocks should belong in everyone’s portfolio. It’s part of the market just underweight it if it has lower expected returns. Kind of similar in the fixed income market, you just want diversification.
Meb: Yeah. Buy a bunch of emerging market debt. That’s the part that, I think, most people… That’s a hard one, particularly today. When you were at school, Gene Fama, I believe and you can correct me. Did you cross-pass with another fellow podcast alum, Wes Grey?
Marlena: Yes, I did.
Meb: He have hair back then because he doesn’t now.
Marlena: I believe he did. Yeah. He was writing a hedge fund back then. I elected not to invest.
Meb: Yeah. It’s smart. You say Wes, however, I will invest in your ETF business or white label business. We found the right product-market fit there. We love West. Marlena, we always ask investors what’s been their most memorable investment. Anything come to mind for you, good bad, in between?
Marlena: Yeah. Now, I’m going to share too much. I mean, my best investment is probably right before the pandemic, we decided to buy a ski condo and snow mess.
Marlena: And it looked like it was going to be a real bad investment when we couldn’t rent it out and we just had to carry it during the beginning of pandemic but turns out that a lot of people wanted to buy stuff in the mountains. So, it’s been one of the better investments. So, probably not what you were expecting.
Meb: Are you a skier, or border?
Marlena: Oh, I’m a skier.
Meb: Good as well. I was actually supposed to ski Snowmass this year and we got a lot of crew in Colorado. So, we were at Winter Park and on the Ikon Pass, who’s been a prior podcast sponsor. Ikon, if you’re listening, we’ve got to re-up this year. But I’ve skied Aspen in the Highlands. But I think never Snowmass, on the to-do list, maybe 2023. You give us the friends and family rental rate, we’ll talk about this later for …
Marlena: I’ll send you the link to the condo.
Meb: Yeah. Cool. Marlena, where do people find out more if they want to follow your writing, they want to learn more about the things we didn’t talk about today that you’re writing about. Where do they go?
Meb: Perfect. We’ll add it to the show note links, listeners. And Marlena, thank you so much for joining us today.
Marlena: It was a pleasure to be here.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at email@example.com. We love to read the reviews. Please review us on iTunes. And subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.