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Gerard O’Reilly

lines on the record: 80
first: 2022-05-20
most recent: 2022-05-20
sittings or episodes: 1
sources: podcast

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“And that has the power to predict future profitability firms that have grown their profits more quickly than other firms may continue to grow their profits more quickly than other firms, then if that explains momentum, then you start to get momentum back into that field of differences in discount rates. And then that becomes a much more easy story to understand in the sense that firm characteristics are much more straightforward to predict than future prices. Well-run firms tend to remain well-run firms for some period of time. But given that they're well-run firms, when you think about the price that's set in the stock market, that's the aggregate view of what expected return people require to hold that investment. So they already understand it's a well-run firm. And so we think that it's priced fairly given all that information. So it may have information about how well run that firm has been.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“It's been tested. I mean, academics have looked at overreaction, underreaction, and why is there a continuation in returns? There's an interesting area of research going on right now. Professor Novi Marx had one of the kind of first, well, not one of the first, but kind of, I would say, an instrumental paper on this recently that looks at profitability growth. So how have a firm's profits grown or declined over the past three months to a year? And does that explain the returns pattern that you see related to momentum? And that seems like a promising area of research. If there is a lot of explanatory power”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“But if it's not there in the future, we don't want to have incurred unnecessary costs on behalf of investors pursuing something that we don't know why it exists in the data to begin with.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“A lot of earnings or has to issue a lot of debt or has to issue a lot of stock in order to drive those profits going forward. Well, that leaves fewer cash flows for investors. So that also tells you something about expected cash flows. So when you talk size, value, profitability, or quality and investment, they're all telling you something about expected cash flows or the prices people are willing to pay. It's a discount rate effect. Momentum is the outlier. There's no equally simple, compelling story that lets you know why should you expect that firms that have outperformed the market in the past three to 12 months that continue to outperform the market in the next three to 12 months and vice versa. But it's there loud and clear in the historical data. And so the question we ask ourselves is how do we use that information with as low opportunity cost as possible? Because we don't know why it's there. So we don't know if it will be there in the future.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Relative to who has high price today. So there's firms in the marketplace. Some of them will trade at low prices, some of them will trade at high prices. You need to scale price, normalize price to be able to make that determination. When you say quality, quality often comes down to profitability. And what we know from the historical data is the firms that have the highest profits or the highest profitability, so profits divided by assets or profits divided by book value in the marketplace tend to continue to have that high profitability over the next year, two, three, four, five years. But what do those profits lead to? Those profits lead to client cash flows or investor cash flows, I should say. The higher the profits, the more cash flows investors can expect to get from their investments. So it's telling you something about expected cash flows from that investment in the future. I say investment because asset growth, let's imagine a company has to retain”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“I would add probably investment and a proxy for investment is how a firm is growing their assets over time. And when you think about all of the ones that you just listed, Barry, all of them bar momentum have something in common. And what's that that they have in common? They're basically picking up differences in discount rates that the market has applied to different investment opportunities. So when you think about something like value, you're taking price and you're dividing it by some company fundamental, so some fundamental measure of firm size. And you're saying, why do you want to do that? Because you want to see who has low price today.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“That you can think about that kind of encompass most of the hundreds of factors that you see out there. And I think that if you have coverage of those six, current prices, current balance sheet items, current income statement items, and then how each one of those have changed in recent past, you have pretty broad coverage of all the various different factor literature that's available. And that's what we do at Dimensional.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“But you don't need all 20 or 30 or 40 when you're managing a strategy, but you can get insights from the different factors on how to manage a strategy effectively. And so what I mean by that is if you think about what data are available, you have security prices, you have data from income statements, so things like income or profits or revenues or expenses, and you have data from balance sheets, assets and liabilities. They're the broadly the data that are available to go test. And when you look at all of those factor models, their variance on a theme. They're either looking at current values of those variables, whether it's current income or current price-to-book ratios or price-earnings ratios, or they're looking at how they've changed, how to have prices changed over the past number of months, how have assets grown over the past number of months, how has profitability changed over the past number of months. So there's three data sources, and people do two things with them. So there's actually really kind of...”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Then, to your point, lots of factors have been added if you look at Fama French's or even Ken's website now. You'll see a profitability factor. You'll see an investment factor. You'll see momentum factors. You'll see all different types of factors. And as I mentioned earlier, factors are really great to help you organize the historical data. But you don't want to get kind of too stary-eyed about the latest factor model. I kind of view a lot of the academic research over the past 30 years as doing variance on a theme. And so it's not that kind of aha brand new discovery, but it refines your understanding of existing factors. So there's probably 20 or 30 or 40 different value factors out there.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so you know, when you go to the 80s, there was a lot of empirical evidence being uncovered that the prevailing model from the 60s and the 70s, the capital asset pricing model, didn't explain the data very well. So when you looked at it, it was a beautiful model. It was very intuitive, but it didn't explain the data all that well. And so Ken and Gene in the early 90s started to organize all the data to say, can we put some of these observations in one kind of unified viewpoint of the historical data? And from that exercise came a better model in the sense that it could explain the returns that you saw among stocks far better than the capital asset pricing model. So explain more of the returns, more of the variation that you saw on the returns across stocks. And so subsequently came the three-factor model.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Is yeah, small cap investing makes sense, but you're going to get killed on trading costs. And so then you have this kind of environment where there wasn't an index, it wasn't a household name to your point, small capstocks as an asset category. So you kind of have a blank canvas. If I, knowing everything that I know, what's the right way to build a small cap strategy that hopefully then will be efficient and won't suffer too greatly from trading costs and implementing and investing client flows? So I think that it was in some respects a very big advantage starting with that blank canvas of how do you design the best portfolio you know how with as few constraints as possible because you weren't worried about an index and then subsequently Russell had the Russell 2000 and then of course in the 90s value versus growth became well established asset categories and so asset categories have been added over time”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, if you go back even further, so dimension was founded in 81, but if you go back a decade earlier, and I'll focus on David a little bit and his work with Mac McQuown, who was at Wells Fargo at the time, and he's a director of the firm. And so David and Mac were working on indexes. So in the very early 70s, they mac's team with David created the first index fund. It wasn't for retail, it was for an institutional client, and it was based on US large cap stocks. So he was very familiar with index-based approaches. Then David subsequently left and worked at AG Becker for a while, understood more about what clients were interested in, looking for required. And so there wasn't a Russell 2000 available when he was building the firm. So there wasn't an index to attach the strategy to. The other thing that was kind of feedback from academia.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Something here that makes sense or not make sense from an academic perspective. And then how do I build a good, robust solution to address that client need? And then, of course, in the 90s, you had the three-factor model come along. And then in the mid-90s, you had momentum come along. And in the 2000s, you had things like profitability and investment come along. So you had lots of different factors uncovered over time. But the way that we look on each one of those is their models. They give us insights from the data, how do you use that to build robust portfolios. And I would say that's been kind of part of our heritage for 40 years. How do we build portfolios that can target these premiums but be robust regardless of the market environment? And we've been through many different market crises with a broad range of investment strategies that have come out quite well the other side.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“The founding was to, I would say, address an institutional need that David had identified, which was there weren't many systematic strategies that targeted the returns of small cap stocks. And he found that that was a hole in many institutional investor portfolios. And along the same time, because David has done his MBA at the University of Chicago, now Booth School of Business Around that same time, there was evidence coming out that smaller cap stocks also had higher average returns historically and reasons promoted about why that would be higher expected returns going forward. And so around that time was kind of when those factor models were developing. So it started with the client need and then it was, well, let me go to the academics and understand what are the research around this client need. Am I going to do...”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I guess there's a couple of salient points there. One is factor research in itself. And we talked a little bit earlier on about models and what they're useful for and how you draw inferences from them. I really look on factor models as way to organize historical data so you can try to understand better what really drove differences in returns across different groups of securities, different groups of stocks, different group of bonds. And from those you can glean very important insights about the drivers of expected returns, the drivers of differences in risk across different asset categories. And so I think that's the important aspect of factor models. When you put then dimensional and its founding in context of kind of a burgeoning field in the 80s and into the 90s when more and more factor models were being developed and tested and so on.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Four come straight to me. Four go straight to him. And then the five in the middle kind of go to both of us, either through the COO. We have COO Lisa Dalmer, or directly like legal and compliance come to both of us directly. And that way it's just worked well. We've been very pleased with what we've been able to accomplish over the past five years working together.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“But also, what I found is that as you get promotions, and this is a little bit facetious, but you tend to become, at least if you judge it by the input that you get from your peers, smarter and funnier in that the input that you get from your peers becomes less informationally rich. But when you have a true peer like Dave and I are true peers, anything goes, we can have robust, open, honest conversations. And with David as well, which really solved a pressure test things before we have to go and talk about them with the rest of the firm. And that really, you know, I always think iron sharpens iron that you have to have people who you can spar with on a daily basis, test your ideas. They'll push you, you'll push them so that you can improve every day. So it's worked very, very well. We do a divide and conquer. We have 13 global departments at Dimensional.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“And each other's ideas, and then they have maybe complementary skill sets. And so the way that Dave and I have worked in that job together, I think has been much more so my preference. I much prefer to have done it with him than without him because you can do some dividing and conquering.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Forward to help your clients succeed. And when you have all three of those, I think good things can happen. And I was fortunate that had a little bit of each one of those when I came to Dimensional. And Dimensional has been a growing firm for many, many decades. And when I came in 2004, we had about 50 billion under management. And that grew rapidly. So there was a lot of opportunities for those folks that were willing to step up. And so I consider myself fortunate and very happy by how that's turned out because I've had a blast doing it and it's been rewarding. Then in terms of the co-CIOs and co-CEOs, we do a lot of cos. We have co's of different department heads. From my particular case, Dave Butler is the other co-CEO. And it tends to work well when you have people who number one get along well with each other. They respect each other.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so let me start with the latter. How do you advance? And my viewpoint on success is there's a combination of three things. And I'm not sure which one is most important, but they probably all are equally important at different stages. One is a little bit of luck, a little bit of luck in the things that you've learned up to that point in time when the opportunity comes. A little bit of luck, for example, finding dimensional was well suited to the way that I thought about the world. Then there's some talent. Do you have the right skill set that will be helpful in that particular organization? And it turns out that a quantitative analytical type skill set was very helpful for an organization like dimensional and our clients. And then hard work. Are you willing to do whatever it takes to complete projects, to move the ball forward?”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“100%, and it's an important philosophy to embrace when you're working in the field of finance, because ultimately what you're doing is you're investing money on behalf of others. It's their life savings often. So it's what they've made sacrifice to put together so they can afford a better retirement or something that's important to them and their future. And if you ever believe that the model is reality, you're probably going to build non-robust solutions and do them a disservice. So having a healthy skepticism around all models and basically all data sources that you see is important because it leads you to, well, what if I'm wrong? Do I still have a good solution even if this model turns out to be incorrect? And I think that's a good way of looking at the world.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that's a good way to put it, a nice, precise way to put it, is that the underlying drivers don't change. But our perception changes, and it's an interesting observation because our perceptions change because the models that we use to explain and understand those underlying drivers evolve over time. All models are incomplete. None of them are true. None of them are perfect descriptions of reality. And that's true of physics and it's true of finance. But you can improve those models over time. You can improve the data that you can collect over time. And that enhances your understanding over time.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“A kind of a common truth in both, which is that in finance and in investing, people demand return for bearing uncertainty. That doesn't change through time. But how you go about implementing that can change through time because the laws are changing.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“The question correctly How do I ask the right question? Because that's as important as trying to solve the problem. You have to set it up in the right way. And that's true whether it's in mathematics or physics or engineering or it's in finance. Then how do I gather data to help me address and find the answer to this question? And that's true of both fields. And then how do I interpret the data? What are the tools and the models that I can use such that I'm going to be able to organize these data in such a way to draw inferences about how I want to act going forward? And that's true of both mathematics, physics, engineering, and finance. I think the big differences are the laws of physics tend not to change over time, but the laws of that governance can change through time. There are many repeatable experiments in physics. There are no repeatable experiments in finance.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Finance, but you want to be able to live something for your clients in shorter timeframes than that. When you think about engineering or mathematics or physics, and then how do those skill sets translate over to finance? Well, again, it's all about problem solving. And what you're looking for is how do I know?”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Work in academia, you know, you're always trying to solve a problem. You're looking for interesting problems to solve that haven't really been tackled before or an aspect that you're working on hasn't been tackled before. And you're seeing, well, can I bring something new to the table, something innovative? And that's incredibly rewarding and incredibly interesting. Working in finance is no different. You're looking for new problems to solve. Those problems are largely driven by what it is your clients are looking for, what types of investment solutions do they require to solve the investment problems that they have. And then you're coming up with innovative ways to solve those problems. So in that respect, there's a lot of similarities. The timescale and the timeframes are a little bit tighter and faster when it comes to finance than in academia may be multi-years. And there's multi-year projects that happen in”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“It's always intimidating when you start off working with somebody who's very, very talented and you're getting to know them for the first time. But it's a privilege and it's great fun because those folks have worked incredibly hard to hone their craft, hone their skills. And when you think about Ken or Gene or Bob or Myron, any of those folks, they're very, very generous with their time. And so they're willing to teach because they're in academia. And if you're willing to work hard, they're willing to put the time and effort into you. So I started off with no background in finance and got to learn finance from some of the most amazing minds in the field. So it was just, it was great.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I was looking around a friend of mine was working for dimensional, knew that person at Caltech. And that person was talking about dimensional, has all these great academic connections. They really take finance from a scientific perspective, went down, checked it out, and said, well, this sounds interesting. I really want to give this a shot for a period of time.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I wanted to learn some more about finance number one. I hadn't taken a finance course ever in my life before joining Dimensional, and Dimensional was the firm that I joined straight out of college. Also, the academic path wasn't one that appealed to me. I really enjoyed grad school, but I preferred to tackle something that was, I would say, more the here and now, where your projects that you're working on have impact very quickly on the end customer, the end consumer. And then also where on the engineering side, you mentioned in the US, well, I'm not a US citizen, so it's hard for non-US citizen to work in the aeronautics field here in the US because it largely requires security clearance.”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source
“I've always liked mathematics as an undergrad in Ireland studied mathematics and physics and so on extensively and was thinking about what to do next and said well Caltech does a lot of great stuff in fluid mechanics in particular in aeronautics and so I didn't have a specific set of career plans I just know that's the subject that I wanted to study and that I enjoyed so I set off for Caltech and really enjoyed my time there working on various different projects, mainly theoretical in nature but very mathematically oriented”
2022-05-20 · Masters in Business · Gerard O’Reilly on Academic Research and Stocks · IDENTIFIED FROM THE TRANSCRIPT · source