By Andy Serwer
I'm on the phone with Eugene Fama, 87, the University of Chicago economics professor and Nobel laureate, and I think I'm testing his patience.
"What do you think about the S&P 500 and tech stock valuations?" I ask.
"I don't follow it," Fama replies. "I don't play those games; I don't even understand the question you're asking."
"Well, the S&P 500 is very skewed to, say, 10 stocks that now account for over 30% of the index's value. Is that a problem?"
"No, that's the investing world. That's what it is."
"Do you have an opinion on whether the market's overvalued or not?"
"Nooooo," Fama gently chides me. "Nobody knows that."
And so there you have it, folks. The best market analysis you'll ever get, direct from Chicago and a man they call the father of modern finance.
With apologies to Harvard University, the Wharton School of the University of Pennsylvania, Stanford University, and beyond, no business school in the world holds a candle to Gene Fama, his colleagues, and the University of Chicago Booth School of Business. Yes, Harvard has had the management gurus (Porter! Christensen!), Wharton has the alumni (Elon! Trump!), and Stanford has the whole of Silicon Valley, but when it comes to affecting financial markets, the University of Chicago is untouchable.
Since Sweden's central bank, Sveriges Riksbank, established the first Nobel Prize in economics in 1968, 10 Chicago Booth faculty members have won the award, more than any other university, with four of them on the faculty today. As impressive as that is, it actually undersells the school's import. Simply put, Booth is the cradle of today's capital markets.
Through the groundbreaking work, first and foremost of Fama -- a graduate of the program and one of the laureates teaching today -- along with fellow Nobelites Myron Scholes, Merton Miller, and Doug Diamond, and other leading lights like Fischer Black and Ken French, they created the framework for modeling risk and pricing securities. Their work underpins the valuation of the $163 trillion global equity market.
Other economists have made strong contributions in finance, including William Sharpe, Harry Markowitz, Michael Jensen, Franco Modigliani, and Robert Merton, some of whom had strong ties to Booth, but no single university had anywhere near the collection of stars as Chicago.
It was Fama who birthed "the efficient markets hypothesis" (his term) in a 1965 paper delivered at the university entitled "Random Walks in Stock-Market Prices." (Princeton University economist Burton Malkiel's book A Random Walk Down Wall Street came out in 1973.) From that work sprung indexing and passive investing, very much in the news these days, given the mega-weighting of the Magnificent Seven, as well as the move to accelerate the inclusion of SpaceX and perhaps the artificial-intelligence giants into indexes.
These issues are top of mind at a commercial offshoot of the school, Dimensional Fund Advisors, or DFA, which runs some $1 trillion in "systematically active" funds and was co-founded by graduates David Booth and Rex Sinquefield. The growth of DFA and indexing, aided and abetted by these Nobel laureates, is a surprisingly cool story that you can read about in a new book by Booth, Stay Calm: Learn to Embrace Uncertainty in Investing and Life.
A billionaire several times over and now chairman of DFA, Booth, 79, came from modest means in the farm town of Garnett, Kan. ("When I was born, my dad had to borrow cash from a cousin to pay the hospital bill before he could bring my mom and me back home.") His book is half great American success story and half little-known stock market history.
The best part is about the Chicago brainiacs -- professors and classmates -- their groundbreaking discoveries matching their idiosyncrasies. Exhibit A: Fischer Black loved a 24-hour diner on the edge of San Francisco's Tenderloin called Pam Pam, where he always ordered a "baked potato burger," a spud stuffed with chopped meat, slathered with cheese, and a side of onions.
Don't conflate Fama and his merry band of economists at the business school with the Chicago School of Economics, practitioners in the university's economics department led by another Nobel laureate, Milton Friedman. Booth tells the story of having to write a paper for Friedman's class, which didn't go well.
He and his classmate Roger Ibbotson (later a finance professor at Yale University and co-author with Sinquefield of the classic Stocks, Bonds, Bills, and Inflation: Historical Returns) presented the paper together, Booth writes, "The economics department and the business school were competitive with each other, both then and now, and we were the only people from the business school in Friedman's class. [Friedman] didn't throw up a big argument, just a curt rejection."
Earlier this week, I Zoomed with Booth from Austin, Texas, where DFA is based (it left California in 2008), and asked him about rule changes allowing SpaceX to be inserted into indexes more quickly.
"Gee, I think you're hitting on a bigger problem," Booth says. "Say you don't like active management and go to an index. Well, somebody's managing that portfolio, which isn't the fund manager, it's the index provider. If the index provider changes the index, the fund has to change, so index funds are really trading desks. [Index providers] are sensible people, but they're not fiduciaries looking out after me. They're looking out after them. If you take three zeros off the market cap of SpaceX, we wouldn't be having this conversation. It doesn't make them bad, but people need to realize what's going on."
Booth started up DFA in his Brooklyn Heights, N.Y., brownstone in 1981, after forays in indexing at Wells Fargo and A.G. Becker. Significantly, it isn't a pure-play index shop. Booth believes in using "factors," or specific investment attributes, to improve the performance of an index. As for the name "Dimensional," Booth says, "back in 1981 people still weren't persuaded about indexing. Small stocks behaved kind of like in a different dimension, so how about 'dimensional?' "
Is there too much indexing, I ask?
"The problem with indexing is that a true market portfolio doesn't exist, " Booth says. "Is a cap-weighted index of all stocks a reasonable proxy? Maybe. If you don't have the data, how would you know? When you start thinking about diversification and holding too much of anything, you have to use common sense. Does it make sense that a portfolio is 40% in seven or eight stocks? Some people go, 'Yeah, that's the future.' OK, knock yourself out. We are biased toward lower-priced value stocks. We hold the Magnificent Seven; we just don't hold them in the proportion they represent in the total stock market index."
Though DFA started by focusing on small stocks, which Booth believed were undervalued relative to larger stocks (one of the firm's core factors), it broadened out to become, in part, an institutional parallel universe to Vanguard's retail fund business, which maybe isn't a coincidence.
"At Wells in the early 1970s, Mac McQuown and I wanted to do a retail S&P 500 fund. But Glass-Steagall [regulations] didn't allow it," says Booth. "We got wind Jack Bogle wanted to do one, so we said to the chairman of Wells, 'What should we do?' He goes, 'Give him all your research.' I don't know if we helped him or not, but we gave him all of our background research on doing an S&P fund." Later, Booth hired Bogle's firm, Vanguard, to do its administrative work.
Indexing's growth has been meteoric. In 1993, actively managed funds had some $1.3 trillion of assets, over 53 times more than passive index funds, according to Morningstar. As of the end of May, passive mutual funds and exchange-traded funds had $22 trillion, compared with $17.3 trillion for active funds. Which makes sense. S&P Global research found that over the past 15 years, 89.9% of all actively managed mutual funds underperformed the S&P 500 index. And DFA has ridden the wave it helped create. It may please you to know that along the way, Booth's teachers -- Fama, Miller, Scholes, and Diamond -- as well as Merton (an interloper from the Massachusetts Institute of Technology closely tied to the Chicagoans) have all worked with DFA in various capacities.
A few years ago, DFA commissioned filmmaker Errol Morris ( The Fog of War and The Thin Blue Line) to make a documentary about the firm. Since its release last year, it has garnered 31 million views. Not bad for a movie about indexing.
DFA has its critics and foibles. One of its core biases is that value stocks outperform growth stocks, which of course they haven't for over a decade. Also until 2020, for retail investors to buy DFA's funds they had to go through fee-charging advisors, which would seem to violate the code of indexing. DFA has subsequently introduced a number of ETFs, which can be bought and sold directly by the public.
And in case you're wondering, yes, the Booth School is named for David Booth after he gave it $300 million in 2008. Booth, whose philanthropy comes in various flavors, has also given $300 million to the University of Kansas (his undergraduate alma mater) athletics department, and millions to fund a rare-book collection and a giant telescope. He's on the board of the Museum of Modern Art in New York and received its David Rockefeller Award, given to an "individual from the business community who exemplifies enlightened generosity."
Booth is still keenly interested in markets, too. Is he worried about the market's valuation?
"No. I've been conditioned, but it's taken years," he says. "You can't control markets. They do a pretty good job of setting prices, so I trust the markets more than I trust me. I have hunches all the time, but I'm no better than 50/50 on them. You can't avoid hunches, I just condition myself not to trade on them."
Do any active managers consistently beat the market? "There are too few of them, and we can't separate skill from luck," Booth says.
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June 19, 2026 21:32 ET (01:32 GMT)
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