“Tune Out the Noise”: A Film about Index Funds and Dimensional Fund Advisors (DFA)

The film Tune Out the Noise is a documentary by Academy Award–winning director Errol Morris about the rise of academic finance, the computer analysis of market data, index funds, and the founding of Dimensional Fund Advisors (DFA). It appears that DFA commissioned this film, so it obviously will support their specific type of investing, but it should also explain the reasoning behind low-cost index funds and why high-expense active funds have been steadily losing market share over time.

Until 1/31, you can watch the film for free at film.dimensional.com/podcast with access code RATIONAL. They ask for name and e-mail, but don’t verify. This is offered through the Rational Reminder podcast, and you may also find interesting their interview with Errol Morris.

I learned about this through Paul Merriman’s newsletter:

Trust in the future of an investment may be the most important reason for most investors to stay the course for the long term. I formed a lasting trust in the academic work of Drs. Fama and French when I attended a 3 day workshop at Dimensional Fund Advisors in 1994.

That trust led our firm to use the DFA funds since the mid 90s. While I believe there are a lot of people who find our long term studies helpful, I’m not sure that all of those people understand that almost all of our studies, that go back to 1928, are based on the data from the academics who are associated with DFA. If you don’t already have a sense of trust about the source of our data, I think you will feel better if you watch the new documentary, “Turn Off the Noise.”

Here is a summary blurb about the film:

Tune Out the Noise is a documentary film about a group of unlikely upstarts who crossed paths at the University of Chicago in the middle of the 20th century, just as computers were first being used to analyze data. That serendipitous, monumental shift enabled them to develop, and then apply, research that turned Wall Street upside down, from its ineffectual investing methods to how those were sold to the public.

It’s a story about how finance became a science and challenged the traditional methods of investing. That, in turn, led to the invention of index funds, the founding of Dimensional Fund Advisors—an investment firm dedicated to implementing the science—and the evolution of client-focused financial advice. These advances have benefited generations of investors.

I am currently in the middle of watching the film (trying to finish before the free access ends), and it does have a very nice production quality while showing the backstory of many famous financial academics. It’s kind of nice to put a face with the names. I personally only invest a small portion of my portfolio into DFA and DFA-style funds (Avantis was started by former DFA executives), but I will watch the rest with an open mind and hope to learn some useful history.

Added after finishing the entire film: The film goes from the basic discoveries of efficient markets, the value of diversification, and the idea that a low-cost broad fund outperformed nearly all big investment trusts back then. It’s important to know that DFA takes the academic “backtesting” further than Vanguard. I enjoyed the history of CRSP and how all these data nerds got together. They did pretty much gloss over Vanguard with “Wells Fargo just handed the retail index fund concept to Bogle on a FREE silver platter”.

Vanguard is more about the big stuff. Diversification from holding the entire market and thousands of stocks, not just 100 or less. Lower expense ratio costs. Lower trading costs. Lower costs from not attempting and failing at market timing or chasing recent performance. But it’s all an algorithm of some sort, based on looking back at the historical data. The S&P 500 is an algorithm, just a simpler one that works well at a 0.05% expense ratio.

DFA is a more actively managed algorithm, but still keeps the broad diversification and lower expenses (they are still lowest quartile in expenses). They also focus on the Fama/French academically-found factors like size, value, quality. Again, historically small value stocks have outperformed on average for long periods of time. Will they keep doing so? I don’t know.

Is the DFA method better? Is the the DFA higher-return possibility worth more than the higher expenses they charge? In the past, you could only go through a financial advisor, which added yet another layer of fees, so my answer was an easier “no”. But DFA and Avantis have finally released ETFs which anyone can buy, and I have as a bet on about 10% of my portfolio (the part that bets on size and value anyway). I don’t bet the whole farm on it. I think lower costs and market-cap weighting are much more reliable. But if you want to know why, the film gives you an idea. Is it a commercial for DFA? Sure. But a documentary about index funds would also serve as a commercial for Vanguard, no?