Michael Lewis: D.F.A. Rules!

You can’t buy better publicity than this: Writer Michael Lewis in Portfolio on why Santa Monica fund manager Dimensional Fund Advisors rules.

The day I arrive at D.F.A.’s offices, I find 150 financial advisers in a glass box, waiting to be educated in a seminar that lays out the D.F.A. way. The coffee and pastries are free, the men and women wear suits, and the conference room has the antiseptic feel of any other 21st-century firm. But the atmosphere is entirely different from Wall Street. There’s no chitchat about the market, even though it has been bouncing around wildly. Instead, two speakers discuss how, knowing what we now know, anyone could present himself as a stock-picking guru. “If you put a thousand people in barrels and push them over Niagara Falls,” one of them says, “some of them will survive. And if you take those guys and push them over again, some of them will survive. And they’ll write books about how to survive being pushed over Niagara Falls in a barrel.”

The other speaker paces back and forth in the well at the front of the room. “Have you seen the show Mad Money?” he says. “It’s repulsive.”


  1. That’s a fantastic analogy, the barrels over Niagara Falls. And then after telling you how to survive, they’ll sell you one of their patented barrels :-)

  2. franklin stubbs says:

    “In a perfect world, there wouldn’t be any stockbrokers,” [Blaine Lourd] says. “There wouldn’t be any mutual fund managers.”
    This is why I can’t take EMT zealots seriously. The theory is inherently self-contradictory.
    Supposedly it’s a waste of time to pick stocks because the markets are too efficient. And yet, the stock picking efforts of professionals are the very source of this putative perfect efficiency.
    When Blaine Lourd et al essentially say we’d be better off with no active investment decisions being made, they show blatant ignorance as to where the market’s efficiency is supposed to come from. (Maybe it magically appears from the nebulous ether? And who are these perfect investors who beat all others to the punch, yet don’t actually exist? Are they like sprites or fairies or something?)
    DFA sounds like an academic cult with its own particular brand of racket. Call it the anti-racket racket. Their gospel only works because a large contingent of active investors continues to try and make rational decisions. If everyone invested passively — i.e. with DFA and their ilk — the markets would stop making sense.
    My real problem with EMT is that it’s a sham. At heart, the contradiction makes it a sham. You can’t uphold the idea of efficiency without adequately explaining where it comes from, and then turn around and mock that source of efficiency in the first place. At least, you can’t do it without being obtuse. EMT isn’t elegant at all… it’s an ugly, arrogant, hamfisted mess. It only appears elegant to those who are willing to ignore the elephant in the room, namely, the fact that the central assertions of the theory are self-defeating.
    DFA et al are piggybackers. Without active, rational decisions to guide capital allocation, there would be no free market for them to passively catch a ride on. The notion of a perfect anything is an academic holdover.
    Indexers may be doing their clients a service, sure, but when they pretend to have the holy grail and belittle all implementations of rational decision making, they just sound like pompous asses to anyone with a sufficient grasp of subtlety.
    In sum, Blaine Lourd can kiss my ass. There, I’m done.

  3. franklin stubbs says:

    p.s. for the record, I am neither a fund manager nor a stockbroker.