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You Can Learn From a Quiet Trading Floor

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I recently visited the headquarters of Dimensional Fund Advisors, in Austin, Texas. According to its website, Dimensional had almost $214 billion in assets under management as of December 31, 2011.

If your image of a trading floor was formed by watching commodities traders huddled together and screaming prices, you would be disappointed by this experience. The entire floor was eerily quiet. I was there for over an hour and never heard the telephone ring. There was no conversation between the traders who seemed very relaxed at their desks, focusing intently on six monitors attached to their computers. I was told that portfolio managers have an average of 13 years experience and traders have an average of 12 years experience. Turnover is very low.

Most of the traders have M.B.A's. This is not surprising since Dimensional is known to base its investing on sound, academic principles. Its Investment Policy Committee includes two of the most famous names in finance, Kenneth R. French, a Professor at the Tuck School of Business at Dartmouth and Eugene F. Fama, a Professor of the Booth School of Business at the University of of Chicago. The third member of this committee is no slouch either. Robert C. Merton is a Nobel Laureate, who is a Professor at the Sloan School of Management at MIT. The firm also retains academic consultants and Directors from Stanford, Yale and Arizona State University.

Fama's long affiliation with the Booth School of Business has an interesting history. David Booth, a co-founder of Dimensional, is a 1971 graduate of the school. Fama was one of his professors. In 2008, Booth donated $300 million to the University, which renamed its school "the University of Chicago Booth School of Business."

Dimensional's core investing beliefs don't require any yelling or frantic activity on its trading floor. It believes securities prices are fair and reflect the expectations of all market participants. Its traders are relieved of the responsibility for finding "mispriced" stocks. Instead, they seek to execute trades efficiently.

Dimensional focuses on diversification to reduce uncertainty and control risk. Its traders strive to capture desired premiums using continuous rebalancing and low turnover.

Dimesional's fundamental premise is that over 96 percent of the variation in returns is due to risk factor exposure (market, size and value/growth). It does not attempt to pick stock "winners" or to time the markets. In fact, it believes that traditional portfolio managers who engage in these activities actually subtract value. You can find more information about Dimensional funds here.

When I told an investor friend about my experience, he had this observation: "If Dimensional is right, then the way most of the securities industry, including my broker, is telling me to invest, is wrong."

Precisely.

Full disclosure: I am affiliated with Index Funds Advisors and recommend funds managed by Dimensional to my clients. Neither I nor IFA receives any compensation, directly or otherwise, from Dimensional.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of "The Smartest Investment Book You'll Ever Read," "The Smartest 401(k) Book You'll Ever Read," "The Smartest Retirement Book You'll Ever Read" and "The Smartest Portfolio You'll Ever Own." His new book is "The Smartest Money Book You'll Ever Read." The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.