Factor-based Investing with John Montgomery

Barry speaks with John Montgomery, President, CEO, Founder and Portfolio Manager of Bridgeway Capital Management. His responsibilities include the firm’s strategic direction, investment management and risk oversight, portfolio management, and mentoring. John holds a Bachelor of Science in Engineering, a BA in Philosophy from Swarthmore College, and graduate degrees from MIT and Harvard Business School. Later, as a student at Harvard, he investigated methods to apply modeling to portfolio management and began applying these methods to his own investments in 1985. John left the transportation industry in 1991 to perform full-time research on his investment models prior to launching Bridgeway in 1993. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 1:10Speaker 02

  This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 1:16Barry Ritholtz?

  This week on the podcast, I have an extra special guest, returning for the first time in a few years, John Montgomery. He is the founder of Bridgeway Capital, established in 1993, and the firm is really a very interesting mix of quantitative, value-based and factor-based investing. It's really none and all of the above. It's a little more nuanced and sophisticated than that. The firm first came to my attention because I was kind of intrigued by the idea of donating half their profits to charity. That's unusual in the world of finance.

• 1:57Barry Ritholtz?

  In addition, they've put up some really impressive numbers over the past 30 years, which has given them the opportunity to donate tens of millions of dollars to their favorite organizations. I thought this conversation was fascinating, and I think you will also. With no further ado, Bridgeway Capital's John Montgomery.

• 2:18Speaker 04

  Thanks Barry, it's great to be here.

• 2:19Barry Ritholtz?

  It's great to see you. For people who may not be familiar with the firm and your background, let's start with your interesting and unusual career. BS in engineering, BA in philosophy from Swarthmore, then you get a graduate degree from MIT and you go to Harvard Business School. What was the career plan?

• 2:41Speaker 04

  The career plan originally was urban development and transportation. So that was my first career, was working with various bus and transportation companies to improve the quality of life in the cities. People ask, how does that relate to investing? And I say, well, they're both service industries. They're both people intensive and those are the elements that I love.

• 3:06Barry Ritholtz?

  And I gotta imagine, there's a ton of data analytics and optimization thinking that goes into both.

• 3:15Speaker 04

  That's true. I like the intersection of people and analysis and both industries give a lot of opportunity. I love serving people. They're both service industries. So I'm a happy camper.

• 3:26Barry Ritholtz?

  That makes a lot of sense. You were pretty early to computer modeling and statistical methods as a research engineer at MIT. This is the late 1970s. That sort of data analytics wasn't really well understood back then. How did that background help when it comes to modeling portfolios or applying those methods of statistical analysis to investing?

• 3:52Speaker 04

  Well, the statistical side definitely comes from my degree and then work as a project manager at MIT. So you're right, late 70s till 1980. The investment piece of that didn't come till business school about three, four years later. And that was kind of, you could say by chance or on a lark. I thought, well, you know, there's an opportunity cost of stepping out of your career where you have a paycheck to go back to business school full-time, which I did. And thought, while I'm here, I'll take a few investing courses and see if I Can use those to earn back the opportunity cost of going to business school for two years.

• 4:32Barry Ritholtz?

  So from transportation to finance, that sounds almost but not quite purposeful. Is that, is that a fair description?

• 4:40Speaker 04

  I think that's a very accurate description. So, and, and actually didn't leave the transportation field immediately after business school. I was in an investing course and we're doing a case study. Professor ends the class and asks the question, who here thinks that they'll be able to outperform post leaving Harvard Business School, this track record? And 80% of the hands go up in the room. I'm not one of them, by the way.

• 5:10Barry Ritholtz?

  So the whole class from Lake Wobegon, everybody's above average?

• 5:13Speaker 04

  Yes, yes, exactly. I mean, and I immediately got the 80/20 rule. It's like, wait a minute, this can't be. And if this is a microcosm and the methods that we were using to think about the markets and valuation and net present value, kind of CFA classic kind of analysis. If this is a microcosm of Wall Street in five years, which probably it is, then quantitative methods should give you a leg up on the competition for a lot lower cost.

• 5:40Barry Ritholtz?

  So you've previously discussed the epiphany you had at Harvard Business School. Is that the epiphany or was it something else?

• 5:48Speaker 04

  That was a major piece of it. I would say the, the primary insights were behavioral finance ones, we would call. Like I didn't, I'd never heard the word behavioral finance at the time.

• 5:58Barry Ritholtz?

  That as a phrase didn't exist for another 25 years.

• 6:01Speaker 04

  Probably not. You know, you see, you watch, I once had a boss who said, this guy has enough sheep skins to skin a sheep. But if I ever did go back to school, the next degree I would love to have is in psychology. Cause I think there's so much there and especially the intersection of psychology and money.

• 6:19Barry Ritholtz?

  When, when did you finish up at HBS? What, when, what year was that?

• 6:23Speaker 04

  1985.

• 6:24Barry Ritholtz?

  All right. So what do you do between that and 1993, when you launched Bridgway?

• 6:29Speaker 04

  So the first thing I did was investing as a hobby. So that was my avocation for the next six years. And my personal track record in investing was about twice the market for those periods in a, in a good period.

• 6:44Barry Ritholtz?

  Scalable or kind of one off little aberrational findings?

• 6:49Speaker 04

  Reasonably scalable, reasonably scalable, I would say. Enough that after six years, I had the thought of making my avocation my next career and did something that was modeled to me by the mayor of Houston, my hometown at the time, and that is to take a year off between careers. He'd actually had four careers in his life in different fields, and every time he switched, he took a year off just to study the heck out of the next step. So that's when I really studied deeply the research, why what I'd been doing was working, more about when it might not, and writing a business plan for Bridgeway.

• 7:28Barry Ritholtz?

  That's pretty fascinating. I took a year off between college and grad school, but I had no idea I was actually doing what you advocate, or what the mayor of Houston advocates. I just was kind of lost and not sure what to do next, and spent a year thinking about it before pulling the trigger on law school. But your hometown is Houston, the firm is still located in Houston, right?

• 7:55Speaker 04

  Yes.

• 7:55Barry Ritholtz?

  Since 1993, that's when you launched, where you launched. And from the very beginning, you said something kind of unusual about the firm. We want to donate half of our profits to nonprofit organizations. Tell us where that idea came from. It's fairly unusual, either in finance, and I've been to Houston, that's a kind of unusual idea in Houston as well.

• 8:23Speaker 04

  That's true. If I gather around, you know, just random business people in Houston and say that we donate half our profits, I have to say I get some very puzzled looks around the room. Not so much from other purpose-driven people in different fields, though. But yes, it's different. Where did that come from? You know, we think things come from one place, but usually there are a lot of forces at bay. So I would look back to my father, who was a businessman and CEO of an oil exploration firm, and believed that business was a way to change the world and engage.

• 8:58Barry Ritholtz?

  Sure.

• 8:59Speaker 04

  My mother was what I would think of as almost a prof- Professional volunteer, so giving back to the community. And this was in a time when the war on poverty, you know, was the slogan at the time. So I was hugely influenced by both of my parents. But I would say also a conversation with my wife on the very first conversation of starting Bridgeway. And it went something like this. Let me get this straight, John. You're thinking of leaving the transportation industry where you have a lot of experience and a W two to start a company in an industry you've never worked with no, no initial.

• 9:40Barry Ritholtz?

  No guarantees.

• 9:42Speaker 04

  No guarantees on the, on the money side. And I said, yes, we talked that through. I, I have to say, I'm married to an extraordinary woman. I didn't realize at that age of 37, how extraordinary she was. But she believes in supporting people who have a dream. And she did that for me and for Bridgeway. So she was all in. She had two questions.

• 10:04Barry Ritholtz?

  Yeah.

• 10:05Speaker 04

  Question one, can we still send our, our daughters to college? That was like, I should have paid more attention to that question because my budget, my business plan was 50% of our net worth. Before it was all said and done, it was 150% of our net worth.

• 10:22Barry Ritholtz?

  Right.

• 10:23Speaker 04

  So it took three years to break even when my business plan had it at one. The second question was, do I have to go to cocktail parties?

• 10:33Barry Ritholtz?

  Why, why would she?

• 10:34Speaker 04

  Not her cup of tea.

• 10:36Barry Ritholtz?

  No, but I mean, why would she imagine launching a fund is going to require your spouse, just like that sort of.

• 10:42Speaker 04

  She grew up in Washington DC around academicians and government people. And her, her view of business was you have to go to cocktail parties and schmooze with people.

• 10:51Barry Ritholtz?

  Right, that makes sense.

• 10:52Speaker 04

  And having taken a course in negotiation at Harvard Business School, I immediately recognized the opportunity and said, dear, not if you don't want to. So she only comes when she, when she desires to come wherever I am, but she's an amazing soulmate and supporter of everything Bridgeway.

• 11:11Barry Ritholtz?

  That's fantastic. So, so you've been donating half your profits to these different organizations. Over 30 years, is that right?

• 11:19Speaker 04

  Thirty-one years.

• 11:20Barry Ritholtz?

  So, how much have you guys donated? What are the organizations you support? What, what's been the response in the community?

• 11:27Speaker 04

  Over the decades, we don't give the exact numbers. We're a privately held firm. Since we donate half, we don't report our profits specifically either, but I'll just say it's tens of millions.

• 11:37Barry Ritholtz?

  Okay.

• 11:37Speaker 04

  Over, you know, what's

• 11:39Barry Ritholtz?

  Substantial amount of capital.

• 11:40Speaker 04

  Substantial amount of capital. The bullseye of our giving is our own affiliated Bridgeway Foundation. This is an extraordinary organization led by a powerhouse of a woman, Shannon Davis. Our mission statement focuses on ending genocide and preventing war atrocities, of which there are too many opportunities in the world today. So that's the, that's the crosshairs of our

• 12:08Barry Ritholtz?

  Let me interrupt you right here, because I know you have very quantitative leanings. How do you measure how successful you are in stopping genocides? Just generally speaking, it's hard to measure something that doesn't happen. So you're always engaging in counterfactuals, but how do you know if you've moved the needle?

• 12:31Speaker 04

  It's probably no easier, no more difficult than things that we do on the investment side and in the stock market. There's time series analysis. We actually hired an outside firm to come in and review the record of what we had done in our first engagement with an organization called the Lord's Resistance Army. And if you want more details, there's a book called To Stop a Warlord that Shannon Davis wrote. I never thought we'd be able to tell the story at that level because you don't want to put at risk the people that are on the ground doing the, the real work. However, she found a way to do that and protect them. And so there's a book that goes into a lot of detail on that. But people think there's not a way to measure. There

• 13:14Speaker 04

  is. And you're right, being a quantitative statistical guy, you can bet that that comes up on the table frequently.

• 13:22Barry Ritholtz?

  Huh. Really, really fascinating. What's been the response from the community?

• 13:26Speaker 04

  The smallest in community is the Bridgeway community. So that's the 28 people at Bridgeway we call partners.

• 13:32Barry Ritholtz?

  Right.

• 13:33Speaker 04

  They sign on for this work because it's in the mission statement. You don't not know about it coming in and you don't come if this isn't

• 13:39Barry Ritholtz?

  Right.

• 13:40Speaker 04

  worthy of a life calling.

• 13:41Barry Ritholtz?

  You get buy-in from day one.

• 13:42Speaker 04

  And that's, that's everything. The community of Houston, I would say, less so, but it's specific to individuals. So every once in a while, you get somebody who's like, unbelievable, that's amazing, and cannot come.

• 13:56Barry Ritholtz?

  Huh.

• 13:57Speaker 04

  That level. We have partnered with other organizations, one of those being Howard Buffett, Warren Buffett's son, that does substantial philanthropic work.

• 14:07Barry Ritholtz?

  Is he in Texas?

• 14:08Speaker 04

  No, no, he's in Nebraska.

• 14:10Barry Ritholtz?

  Uh huh.

• 14:11Speaker 04

  But we have partnered with him and work in the Ukraine. Worked in the first year of getting generators in for obvious reasons and getting the grain out for obvious reasons. I tell people at Bridgeway, we don't know squat about farming, but Howard Buffett does. And the third thing is documenting war crimes. And that's actually something that Bridgeway Foundation knows a lot about.

• 14:33Barry Ritholtz?

  Documenting war crimes?

• 14:35Speaker 04

  Documenting.

• 14:36Barry Ritholtz?

  And what do you, do we, does this then go to the Hague, to the UN? What do you do with, once you've documented, and it should be fairly substantial in Ukraine, considering the Russians have been bombing civilian hospitals, schools, infrastructure, apartment buildings, it looks horrific. What do you do with all of that information, once you've documented a war crime in Ukraine?

• 15:01Speaker 04

  So it depends on what national or international jurisdiction engages. So optimally, you like to keep it at the country level if possible. The International Criminal Court is the other. That's in the Hague.

• 15:17Barry Ritholtz?

  That is in the Hague. Okay, so that's what I was really thinking about. Do they take these on as individual cases? Or are they kinda, you know, it seems like the UN is sort of paralyzed because of you just have one voting member saying no, and that's that at the...

• 15:33Speaker 04

  One of the indictees of the International Criminal Court was Dominique Angwen, who was a general in the Lord's Resistance Army, the first conflict that I mentioned earlier. And we played a major role in getting him to the Hague to stand trial for justice. So win for justice.

• 15:51Barry Ritholtz?

  And then...

• 15:52Speaker 04

  And is a deterrent, by the way, to thugs of the world that think they can get away with war atrocities.

• 15:57Barry Ritholtz?

  What one would hope. What happens when you have somebody like Putin, who's kinda hard to reach and is ensconced in Moscow, and you know how many hundreds of thousands of people have been killed? Civilians, noncombatants, killed in the Ukraine. How do you reach someone like that?

• 16:16Speaker 04

  I would say one step at a time. And then, you know, it's a lot of hard work slugging through, and then occasionally you just need a stroke of good luck for something going the right way. Typically, it takes more time. You know, they say the arc of justice gets there, but it's slow. That's not an exact quote, but that's my...

• 16:35Barry Ritholtz?

  Martin Luther King.

• 16:37Speaker 04

  Summary of it, yes.

• 16:38Barry Ritholtz?

  Sure. So we'll come back to this because this is really fascinating. I had no idea you were so international in the philanthropic sphere, but we'll definitely circle back to that.

• 17:21Speaker 02

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• 18:03Speaker 02

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• 18:44Barry Ritholtz?

  Let's start talking a little bit about that track record. You have a couple of mutual funds, a couple of ETFs. I'm assuming you're running other stuff as a either separately managed accounts or a separate what have you. I know one of your funds, since inception, has outperformed the market by about 100 basis points. And the other, I don't know if it's still a mutual fund, I know it started as a mutual fund, is now about 300 basis points over market returns. Tell us about the mutual funds and ETFs you run on behalf of Bridgeway's clients.

• 19:21Speaker 04

  Yes, so let me, let me talk about the strategies. One you referred to is aggressive investors, and as the name would indicate, it has-

• 19:29Barry Ritholtz?

  High beta.

• 19:31Speaker 04

  Well, high beta, but very high exposure to the factors that we want, that we believe in.

• 19:37Barry Ritholtz?

  So, high active share, and when you say factors?

• 19:40Speaker 04

  Yes, very high active share.

• 19:41Barry Ritholtz?

  So, you know, I should have mentioned this earlier. What a lot of people call smart beta, you guys were doing, long before anyone had a name on it. You've been doing smart beta, you've been doing factor investing a long time. Tell us a little bit about the sort of factor investing that drives Bridgeway's returns.

• 19:58Speaker 04

  Well, these are factors that we believe in. First of all, my, some of my co-portfolio managers will bristle if you refer to us as a factor-based firm. I own that a little bit more, but it's a fair point in the sense of being systematic, statistically-driven over long periods of time. But there are human elements. Like, if there were no human element, everybody would be operating the identical strategy out there. So, yes, we believe in value. We have our own proprietary mix of metrics, and we can show statistically, based on data over decades, why we do that.

• 20:36Barry Ritholtz?

  So, let me stop you before you go on to the next one. When most people hear value, they immediately think, you know, low P E, low price-to-book ratio. Your approach to value, I know, is a little more sophisticated than that. Put some flesh on the bones. Tell us about Bridgeway's value approach.

• 20:57Speaker 04

  So, we believe in value, quality, and sentiment are the three primary legs of the stool. Within that, one of the things that we've done for a long period of time is mix different measures. So, and why do we do that? It's because it gives you a more stable return stream over time. So, academically, you know, a paper when I was in business school came out, Fama-French, and value has...

• 21:23Barry Ritholtz?

  The three-factor model, the five-factor model, and then...

• 21:25Speaker 04

  Yes, and the three-factor then was price-to-book.

• 21:29Speaker 04

  And it's a metric, but we could show statistically that if you match it with things like PE, with things like price to sales, which has its own part, think through the balance sheet and the income statement, different ways to measure value, that putting them together in a efficient way gives you a steadier stream of returns into the future. So that's why we do that. There's a very interesting output of that, though, that comes. So I was at a conference, I don't know, I'm going to say maybe 12 years ago or so, paper presented by Novi Marks on quality. And he's like, everybody's excited. I'm excited. We go back and the first thing we all always try and do is replicate the work if it's

• 22:14Speaker 04

  new. So we replicated the work. We put it into see, could it help our models? And the answer was no. Do you know why the reason was no?

• 22:24Barry Ritholtz?

  Because you already had quality represented.

• 22:26Speaker 04

  Inadvertently, we had already included quality in the process because of the multi-metric.

• 22:32Barry Ritholtz?

  That doesn't surprise me because you're talking about different metrics. And when I think about value, and I also think about value traps, and I know you cannot generate the numbers you have if you're constantly buying stuff that's cheap, but low quality, high debt, all these other issues that come up, eventually, those things have to underperform. So I kind of had the sense that you guys have quality exposure just by your long-term track record. So you reproduce Novi's work. Where do you go from there?

• 23:06Speaker 04

  There's always a next step, Barry. If I take a look at just three of our strategies currently, it gives you a feel for the breadth of what we do. So one would be our small value strategy. And you might think, small value, that seems pretty plain vanilla. Mention the research on value that we've done. We try and incorporate some things and how you incorporate them into the portfolio construction, where you constrain and where you don't, like how much are you willing to take on of sector risk? But our omni-small value strategy is a strategy that we designed specifically for the purposes of an organization called Buckingham or BAM. Then it's now called Focus Partners Wealth.

• 23:51Speaker 04

  Great friends of ours and our small value, omni-small value fits into their allocation in a way that's efficient for their portfolio construction. Now, what's Bridgeway's advantage? It's our size. And this is something that's true across all of our strategies currently. We have a huge leg up being a smaller organization. Several reasons. Think of the omni-small value. Because we're smaller and we don't have hundreds of billions under management, we can go deeper on small.

• 24:22Barry Ritholtz?

  You go micro-cap?

• 24:23Speaker 04

  To a degree. Our benchmark is still the Russell 2000 Value Index. But our strategy is ex-real estate and utilities because our partners, Focus Wealth Partners, has separate strategies for that. So, we don't duplicate that. And so, that's an example of the kind of research that we do. How does that affect the returns? Is that a good idea to do? But Bridgeway's own small size means that we don't have, well, it means several things, really. Number one, it means our transaction costs are less, which, based on your career, you know exactly the importance of that. So, if you're a trader and I give you an order on a particular stock ticker symbol

• 25:08Speaker 04

  and say, "Go buy me 1,000 shares of that." And your job is to get this completed at the best price possible, however you want to measure it. And I give you one ticket for 1,000 shares and another ticket for 50,000 shares, but I'm going to hold you accountable to the same price.

• 25:25Barry Ritholtz?

  Right.

• 25:26Speaker 04

  Which one do you want?

• 25:27Barry Ritholtz?

  Well, from back in the day when it was 5 cents a share, you wanted the 50,000-share order. But if you're, that's not how you're getting paid. Well, the 1,000-share order is much easier to get done at a good price. 50,000 shares, especially a small cap, you may move the price up. You're certainly not just lifting the offer and walking away with 50,000 shares.

• 25:48Speaker 04

  Absolutely. So, for the investor, you want the smaller one that gets done more quickly. If he can get it done more quickly, it's likely at a more favorable price. You're less likely to move the price of the security in an unfavorable way. And that same 1,000 shares...

• 26:05Speaker 04

  Will make a more meaningful contribution to a smaller shop than to a larger shop. Same number of shares is just going to be, you know, point 001 of the portfolio. Why even waste your time? At Bridgeway, it's more meaningful. That's a big deal. And the last part is something that very few people I hear talking about. And that's that our effective universe is a larger universe. So that that gets into our next strategy that I'd like to highlight, which is our global opportunities. This is a long short strategy. It's global.

• 26:35Barry Ritholtz?

  This is the one that's 100% long, 100% short.

• 26:38Speaker 04

  Yes.

• 26:38Barry Ritholtz?

  So less correlation to the market. Volatility doesn't matter. If anything, volatility could actually help returns.

• 26:46Speaker 04

  Can. So.

• 26:48Barry Ritholtz?

  No guarantees, but it could.

• 26:50Speaker 04

  Jacob Pajorni, who who led the research for a two-year period that resulted in three peer-reviewed articles, which for a firm our size is an astonishing achievement. He likes to say market agnostic. So long short, the success for us is defined as if you know the direction of the market tells you nothing about the direction of this, of the returns of this strategy.

• 27:16Barry Ritholtz?

  Well, if you're long short, you should have half the volatility of long only, right? Is that a fair?

• 27:21Speaker 04

  That's that's pretty much right in line with our target.

• 27:23Barry Ritholtz?

  Okay. So is this an absolute return strategy?

• 27:27Speaker 04

  It is.

• 27:28Barry Ritholtz?

  The assumption is you're picking stocks that you think are going to do well. And you're also looking for stocks to short that you think you're going to do poorly and will do especially poorly in a drawdown. How's that working out?

• 27:42Speaker 04

  It's working out well. This is a big deal in terms of the design. A paper that caught my attention was following 2008. And this paper took a look at all hedge funds that reported to be market neutral. And the bottom line was most of the time they did a pretty good job. But when you really needed it in a downturn of 2008, the beta was point four. So about 40% of the downside. Well, it's like, okay, that's cushion, but it's not, it's not zero. It's not a, it's neither an anti. Gravity fund nor do you expect not to be hurt. We've done research on the competition as well, and this is fascinating.

• 28:23Speaker 04

  And also just over the last week, so we're now, you know, on two days that get us close to 20%. That's enough to, you know, run your numbers and see how did they do. Our closest competitors to global opportunities have done a much better job than quote market neutral funds did back in 2008. All of them within a percent of zero, one of them was 2% negative, but out of seven strategies that I looked at just earlier today. I would say doing a better job.

• 28:57Barry Ritholtz?

  I think it was Cliff Astness at AQR had a paper out, our hedge funds really hedged. And unfortunately, the conclusion for a lot of them were not very much. And that sounds like it's very consistent with the research you guys.

• 29:13Speaker 04

  Well, we specifically designed this not to have the 2008 problem identified. But there are a couple more areas that we have a huge leg up on the competition with the strategy. Number one, again, getting back to our small size, our universe of stocks is so much larger.

• 29:30Barry Ritholtz?

  That's both domestic and international.

• 29:32Speaker 04

  Yes, and especially internationally. That's because out of the 9,000 or so stocks, significant majority probably our bigger competitors simply can't establish a meaningful position in.

• 29:45Barry Ritholtz?

  So there's a competitive advantage.

• 29:47Speaker 04

  Oh, it's and it's big. And by the way, those are the ones that are less liquid, less efficient, that you're likely to win with active management.

• 29:57Barry Ritholtz?

  Huh, really, really interesting.

• 30:01Speaker 02

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty. Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs. And hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 30:44Speaker 02

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 31:23Barry Ritholtz?

  So we talked earlier about donating tens of millions of dollars, half of the profits of the firm, to charity. How does that affect how you recruit employees? How you develop a compensation structure? Tell us a little bit about the impact of that on running an asset management business.

• 31:44Speaker 04

  Sometimes I get into conversation with a prospective client, and you might hear something like, you know, "It sounds like you're good guys. You're philanthropically geared, and you get awards is a great place to work." But all of that, like, put that aside. I just want to talk about the investments. And what I would say is, culture is everything. It's the housing within which we do what we do. So it's very important. And you can measure that in some statistical ways, like turnover. I would say there are proxies for commitment at Bridgeway. And then, you know, returns of the strategies. Why would you think that's independent of the culture that you've built up?

• 32:22Barry Ritholtz?

  You also have an internal rule, the highest paid employee earns no more than seven times the lowest paid employee, is that right?

• 32:30Speaker 04

  So statistically, that's probably true. We don't measure it that way. There's a new statistic that came out from the SEC required of public companies, and those are some of the metrics that we look at currently. Some people think it's like, oh, so you underpay. That is absolutely not the intent. It's just not to pay outrageous salaries on the top. And so if you, you know, if you want to make a gazillion, the most money that you can make in our industry, you probably wouldn't come to Bridgeway. If you want to make an absolute livable wage, and if you invest, save and invest, you should be, do very well over a full career, then, then we're a purpose-driven firm, and we ascribe

• 33:10Speaker 04

  to Daniel Pink's, what really motivates people is not money, but it's purpose, which we have in strong suit, it's autonomy, and it's mastery. So we really invest in our people by way of mastery, give them opportunities for learning and growth, invest by way of mentoring as well. And then the autonomy piece, we're trying to continually up our game with in a system and structure called traction, or entrepreneurial operating system.

• 33:42Barry Ritholtz?

  And the firm's culture also emphasizes accountability. Tell us about the Firewood Group. What, what does that do?

• 33:51Speaker 04

  Okay, so the Firewood Group is a personal accountability group. That's not inside Bridgeway. And what happened is in 1998, a friend of mine came to me and he said, so I want you to be on the board of directors. And he worked for a publicly held firm, but he was like, Charlie, I'm like, you're not in a position to ask me on your, that board, and I don't know squat about that industry. And he said, no, no, not, not the company board, the board of directors of my life. And I said, well, what does, what does that look like? I've never heard of that. Out of that came the following observation. We were each members of groups that were great at support, but lousy at accountability. And we both knew we needed accountability. So we formed this group specifically around

• 34:35Speaker 04

  the concept of accountability. And just to give you a very specific example, I had a life goal of ending genocide. This group starts and, you know, I'm sharing life goals like, well, you've made great progress on this one and this one, but we don't, we think it's time for you to actually turn the ignition on, on this one. Out of that conversation, we turned the ignition on, on our foundation and everything that you see that Shannon Davis is, is doing along with our partners.

• 35:03Barry Ritholtz?

  That's really fascinating, and I would assume if the founder and CEO has that degree of accountability in his personal life, how does that then affect the culture of the organization? How do you bring your work ethic and your sense of accountability into the office?

• 35:22Speaker 04

  Well, I like to think that I model it, number one. Number two, we attract people for whom that's an exciting concept. And number three, then you got to actually live it out. And that's where aspects of this structure that I call traction, or some people call entrepreneurial operating system, come into play. There's an annual goal setting process, and most companies have that. The 90-day goals that they refer to as rocks, there's a very high level of commitment toward. It's like when you, when you take on that I'm going to do this in the next 90 days, everybody's looking at it, it's very high profile, it's online. We have to report to the, all of the partners, the leadership team's experience, and then

• 36:04Speaker 04

  every partner at Bridgeway, that's every person that has a long-term commitment to and from Bridgeway, has to do the same thing.

• 36:11Barry Ritholtz?

  So when I, when I talk about accountability, one of the things I was thinking about is the company's annual report where you guys kind of own your biggest mistakes. Tell us about that.

• 36:24Speaker 04

  That's something we started, I don't know, maybe a year, four or five, and it comes around accountability. The normal thing is this, in business, or in government, or academia, or journalism, anywhere, you, you know, you want to learn from your mistakes, but you don't want to own them too publicly, right? It doesn't feel good, people might ask the wrong question. We had a lawyer, a member of our board of directors at the time, that said, you do realize you're like putting on a silver platter, something that people could sue you over. And my answer to that is like, yeah, I get that that's true, but you can't cut it both ways. You either have to own your mistakes, get them out in the open, learn from them, and make sure you don't repeat them, or you sweep them in under a rug. And you just

• 37:09Speaker 04

  can't do both, and I choose the former. Our shareholders, our investors, our clients, are our boss. We have a fiduciary duty to them. And I had one, an early client say, you do realize like, I'm your boss, and you, there's accountability there. I should know what's really going on. And like, I can't argue with that. That is a brilliant statement. This woman, by the way, didn't have a high school degree, and I learned so much from her.

• 37:37Barry Ritholtz?

  Huh. Really, really fascinating. So let's talk a little bit about what's going on in the marketplace. There has been a shift over the past 20, 30 years, to passive, from active, especially from expensive, underperforming active. I don't put you guys in that category. You've done well. Your fees are kind of middle of the road. How are you navigating what's going on in the marketplace?

• 38:04Speaker 04

  A few things that I can point to. Number one is you always have to keep working to stay ahead of the game and adding value, and that's, that's the research part. So we like to say, small incremental improvements, but it never stops. Number two, we were an early adopter of moving some mutual funds, converting them into ETFs. So we've done that. That was painful because it's costly. Out the other side, it's been helpful for the after-tax return of shareholders. So big plus there. And those strategies are both in positive flows. So good for the advisor as well. And the last one is, you know, don't make indexing and passive the enemy. What can you learn from them? So Bridgeway

• 38:49Speaker 04

  actually came to market with our blue chip strategy. To really be an index fund, you have to have somebody else calculating it.

• 38:57Barry Ritholtz?

  Right, right.

• 38:58Speaker 04

  And there are all rules, and we decided we weren't willing to do that. We just wouldn't call it an index fund anymore. A mega cap strategy that gets off of what I think of as the inefficient market cap weighting portfolio construction of almost every index fund, not absolutely all of them, but all of them. We have more than a quarter century real time data, like this has been a mutual fund, now it's an ETF converted. You can look at that track record and draw your own conclusions. But I like to say market cap weighting is like a momentum strategy that you never rebalance.

• 39:34Barry Ritholtz?

  Right.

• 39:34Speaker 04

  So you ride the wave up and then you write it down and that's just not very efficient. That leads to more volatility. This strategy on average has different ways to measure it, beta, standard deviation, draw down of very roughly 5% less than a market cap weighted index of a broad index like the S and P 500. So a little bit less risk, we believe, not in every market environment, but you can measure it over the long term in last decade, for example. And then a little bit more return. And why is that? It's roughly equal weighted, which means you're always investing a little bit more in what's done poorly and harvesting a little bit from what's done really well.

• 40:19Speaker 04

  That's buy low, sell high. Isn't that a basic investing principle?

• 40:23Barry Ritholtz?

  Sure. And supposedly that sort of rebalancing is one of the few free lunches in finance. So, so if you're not doing market cap weighting and you're talking about blue chip companies, how are you weighting the portfolio?

• 40:38Speaker 04

  So we look at the top 35, 36 companies. We make sure that we've got industry representation at the time of recomposition and then we're rebalancing quarterly and reinvesting dividends along the way. And I'll say roughly equal weighting. So there's some cushion on harvesting from the top. It can go up. Our, our rule of thumb is about 4% is the maximum weight in a strategy. So if Apple or Microsoft or somebody else is 8% of an underlying market cap weighted US index, we're going to be half of that. But it gives you a more diversified fund in mega cap stocks, which gives you some of the downside

• 41:22Speaker 04

  protection and some of the risk characteristics.

• 41:24Barry Ritholtz?

  Well, well, as we've seen in year to date in 2025, the the mag seven have become the lag seven.

• 41:31Speaker 04

  Yes.

• 41:31Barry Ritholtz?

  So not being full market cap weight certainly had have a positive impact on on returns. What happens when those stocks are doing great? How comfortable do you feel if you're not full market weight of Nvidia, Apple, Amazon, Microsoft as as they're going higher and higher?

• 41:49Speaker 04

  That's the discipline of any investment process and the design. So know the design of what you're investing in. Know when it's likely to outperform and when it's not. And then you need to be comfortable with those numbers. But in that strategy, you pointed out exactly when it would, you know, underperform, when the top seven, you know, and the other the nifty fifty back in the

• 42:11Barry Ritholtz?

  Well, you and I remember the nifty fifty in the sixties. Half our our listeners are unfamiliar with them, but people talk about the magnificent seven like it's something new.

• 42:22Speaker 04

  Yes.

• 42:22Barry Ritholtz?

  It's fifty, sixty years old. We had the same sort of

• 42:26Speaker 04

  Yes.

• 42:26Barry Ritholtz?

  top heavy market happen when everybody clamored into the same sort of blue chips.

• 42:32Speaker 04

  Yes.

• 42:33Barry Ritholtz?

  Being weighted on a non capitalization basis, having other elements drive the weighting. How do you manage around that?

• 42:41Speaker 04

  As a disciplined investment shop, we have everything documented in detail. So there are four portfolio managers on every strategy at Bridgeway. In theory, any one of the four can step in and do that job. One, because they're trained to do so, but two, because they have documentation of how to do it. In this case, blue chip. I mentioned there's a quarterly rebalancing process. There's instructions exactly how you rebalance, how you take care of unusual situations, which might be a merger, an acquisition, a spin off. Now, a company in you own a portfolio is no longer one of the top thirty five, thirty six by size. So what do you do about that? So those are the kinds of exceptions that you document.

• 43:25Speaker 04

  And otherwise, it's fairly straightforward.

• 43:28Barry Ritholtz?

  What what you're describing sounds like a very systematic process to evaluate securities and and build a portfolio. Tell us a little bit about the things that go into that system.

• 43:40Speaker 04

  Let me shift gears back to global opportunities.

• 43:43Barry Ritholtz?

  Sure.

• 43:43Speaker 04

  Which gives you more the full breadth of how we do what we do with respect to stock selection and portfolio construction. The stock selection side, as I mentioned, you're combining factors of value, quality, and sentiment. However, that's within a framework of intangible capital intensity.

• 44:01Barry Ritholtz?

  Intangible capital intensity. So are these things like intellectual property, patents?

• 44:08Speaker 04

  Exactly.

• 44:09Barry Ritholtz?

  Exactly.

• 44:09Speaker 04

  Okay. So high intangible capital would be exactly the things you mentioned. Research and development. If you rank them by industry, things that float to the top would be pharmaceuticals, AI, software. Things at the other end of the spectrum would be things like manufacturing, transportation, utilities. So you think of old economy stocks and new economy stocks is another way to think about them, but we're measuring, literally ranking these according to intangible capital intensity. The high intangible capital intensity ones don't work real well with the classic measures of value, for example. What we found is that sentiment is a stronger predictor of future returns for those.

• 44:54Speaker 04

  So we don't only use sentiment. We're always using the combination, but we're going to overweight the sentiment part of that. So we have these three categories of factors underneath which, as I mentioned before, multiple ones in the framework of intangible capital intensity, which is original research that Bridgeway did over a couple of year period and published papers on. That's the overall framework. Then you've got, in this particular strategy, it's global and we like to be neutral exposure on things that we don't care about or aren't in the design and positive on the ones that we do. So what do we not care about? Sectors. So we're always trying to move back to be sector neutral, which means the same dollars on the long side as you have on the short side.

• 45:39Speaker 04

  Similarly with sectors. Sectors, countries, certain factors. Book value, for example, is a classic one. Don't like that one as much. It's probably. Dramatic for reasons that relate.

• 45:51Barry Ritholtz?

  Well, book value doesn't real, it tends to measure physical plants, equipment.

• 45:56Speaker 04

  Exactly.

• 45:57Barry Ritholtz?

  Much more heavily and IP kind of gets the short shrift there.

• 46:00Speaker 04

  Yes, exactly. So what that means is the industries that are on the low capital intensive part of the spectrum tend to do fine with the classical measures of value. So you can see, you put all that together, you constrain the portfolio according to certain things that you don't want it to be exposed to. People come and say, oh, global opportunities, that's got China, I don't want any China. Well, at any one point in time, we might be a percent or possibly even two positive exposure to China or negative exposure to China. On average, we're targeting that zero percent. So you're not going to get any value add over the long term, shouldn't be coming from the actual country or the sector.

• 46:42Speaker 04

  It should be the specific factors that we're trying to give exposures to, and that leads to a much steadier stream of returns.

• 46:52Barry Ritholtz?

  That's really intriguing. So I've always kind of thought of you as sort of a factor shop, sort of a value shop, sort of a quant shop, a little bit of everything. Is that a fair, is that a fair description? I don't want to overgeneralize, but you guys do a little bit of a lot of things.

• 47:11Speaker 04

  Yes, I would say that that's true. The one thing that you left out, which is the hard piece and a significant part of our time, is qualifying the data, cleaning the data, especially on the global side. Data's cleaner in the large caps on the US side.

• 47:27Barry Ritholtz?

  For sure.

• 47:28Speaker 04

  And also, the model assumptions, there's certain assumptions built into the model, you get a strong pick, are the reasons that those picks of a model come to the surface, ones that really hold true in the marketplace. Is there something that you don't know? For example, regulations that have just come out in a, in a country that are going to change the earnings and, and financial characteristics that you care about with a particular model. So that's part of the work and the scrubbing and, and, you know, that's why. We chafe a little bit when people say, oh, you're just a smart beta shop.

• 48:05Barry Ritholtz?

  Clearly, there's a lot more going on than just smart beta. All right, I only have you for a limited amount of time, so let's jump to our favorite questions. We ask all of our guests, starting with, what's been keeping you entertained these days? What are you watching or listening to?

• 48:21Speaker 04

  One of my favorite recent ones was actually a South Korean series called The Extraordinary Attorney Woo.

• 48:32Speaker 04

  And it's a fascinating study about a woman who's an adult autistic, brilliant person in a law firm in South Korea and her experiences navigating a non-autistic world. And the adjustments that people do and don't try and make, assumptions that people make. You know, you might think that has nothing to do with investing, but the assumptions side and the statistics side and then the human interaction side and the behavioral side is all right there. That's one of my top recent ones.

• 49:05Barry Ritholtz?

  Really interesting. Let's talk about mentors who helped to shape your career.

• 49:10Speaker 04

  Several. Had a mentor that passed away last year, Henry Groppi. Soundbite from him was, respect all people, all the time, no exceptions. And it's that last piece that's really challenging. So I'm going to put him as a top mentor. Had some in MIT advisors there who taught me, never come to my office, just bringing problems. Always try and bring solutions when you can. People that have engaged on a human level within these that didn't have to. Some of the better things that I've learned. Jack Bogle, certainly on the cost and structure side, a little gritty, which is, I like. I think that's fun. Those are some of my mentors.

• 49:55Barry Ritholtz?

  Really interesting. Let's talk books. What are some of your favorites? What are you reading right now?

• 50:00Speaker 04

  Right now, I'm reading two books. One is called People Dare to Build an Intentional Culture. So you can imagine why that would be attractive to me. Chapter two of that book is about love. We don't tend to use the word love in workplace. They say, well, a more acceptable word might be genuine caring.

• 50:23Speaker 04

  And so, we think a lot about that. We play the Simon Sinek game of why is that important? And underneath that, why is that important? If you play that game at Bridgeway of why you're doing what you're doing and get to a core value, caring frequently comes out among different people, board members, partners at Bridgeway. The other book is Jason Swig's recent update on the intelligent investor. I'm halfway through that one. It's a thick read because it's really two books. It's Benjamin Graham's book and it's Jason Swig's commentary on it. It's great.

• 50:57Barry Ritholtz?

  And not too long ago, I saw you mention, was it Dan Arlie's, The Truth About Dishonesty?

• 51:03Speaker 04

  Yes, that's one of my favorite. It might be a decade old now, but wonderful book on humility in statistics and in non-statistics.

• 51:15Barry Ritholtz?

  And our final two questions. What sort of advice would you give to a recent college grad interested in a career in either investing or finance?

• 51:25Speaker 04

  I actually had this opportunity just yesterday. It was somebody, I'm going to guess he was about 25 years old and early stage in his career. And my advice is, people scare you away when it's a declining industry, or not declining, but where fee pressure is increasing. So, the fee pressure has been very strong, different ways to measure it. But, you know, fees are less than half of what they were a dozen years back. And that scares a lot of people away. Within that, there's a lot of change. And within the change, there are strategic opportunities. And because it doesn't attract as many people, think supply and demand, there are great, they're kind of even bigger than normal mature company

• 52:07Speaker 04

  opportunities. And not as many people coming in, you can make a big difference in that environment. I think it's fun and fascinating. I would definitely choose this as a career if I were doing it all over again.

• 52:17Barry Ritholtz?

  And our final question. What do you know about the world of investing today that would have been useful back in 1993 when you were first launching the firm?

• 52:27Speaker 04

  Wow. I was a contrarian by nature, but I didn't understand the dynamics of chasing hot returns and panicking in downturns.

• 52:39Speaker 04

  Understanding that dynamic better would have helped, not because, not personally, but professionally. It would have given some good insights for the individual investor. I would say, build your portfolio and learn how to not pay attention in the downturns. If it's long-term money, and by the way, if it's not long-term money, you shouldn't have it in the stock market. So it's assuming it is long-term money. The only price you really care about is the last price when you want to take the money out. And that wasn't last week or this week, ever, whether it's up or down. There's volatility in between. All those numbers are irrelevant. All you need to know is the last one and the first day you're going to know that number is years in the future when you're actually going to need it.

• 53:23Barry Ritholtz?

  Absolutely fascinating. We have been speaking with John Montgomery, founder of Bridgeway Capital. If you enjoyed this conversation, well, be sure and check out any of the previous 500 or so we've done over the past 10 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. Check out my new book, How Not to Invest: The Ideas, Numbers, and Behavior That Destroys Wealth and How to Avoid Them. How Not to Invest, wherever you get your favorite books. I would be remiss if I did not thank the crack team that helps put these conversations together each week. My audio engineer is Sam Danziger.

• 54:08Barry Ritholtz?

  Sean Russo is my researcher, and Luke is my producer. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

• 54:26Speaker 05

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