Booth: One of the good things about the business school is
the people. One fellow student, Rex Sinquefield, ’72, and I
became friends and eventually partners—he retired a couple
years ago. We worked together for 24 years with a shared view
of markets and how to create a business. By 1981, when we
started the firm, all the index funds that were available were
index funds invested in stocks of larger companies. So we
decided to create a fund that would invest in stocks of smaller
companies. The first problem that arises when you start to
think about smaller companies, rather than larger companies,
is the cost of execution, the friction cost. Maybe if you
put the institutional quantities of money into working small
companies, it’s easy to move prices around. So we decided
not to try to slavishly track the performance of an index. We decided to do the best job of execution that we knew how
to do, which involved reducing trading costs and protecting
ourselves against adverse selection.
If you’re an efficient markets person you realize that you can’t
outguess the market, but there is undiscounted information out
there and you just have to protect yourself against the adverse
selection. So we went down a different path.
Snyder: That immediately gets you away from the pure model.
Booth: Right. We said there’s a cost to tracking. It isn’t free. For
example, in the small cap area, the way small cap index funds
came to be traded was by trading baskets of stock at the closing
price. You call up a broker and say I want the closing price on this basket of stocks. And it occurred to us that maybe if you
want that guarantee of a closing price, that might be fairly
expensive. So we uniquely went to a different path. Even after 27
years, there’s still some degree of difficulty in labeling because
people say, if you don’t think you can outguess the market, then
you won’t. But, nevertheless, approaching markets in a sensible
sort of way and having a healthy regard for markets, we were
able to add significant value, which is why we have a business
and why we we’re able to give gifts to the business school.
Snyder: It’s such a great story.
Booth: Yeah. It just turned out to be very useful, very valuable,
and it ties to the idea of research and why you want a research
university, where you explore things, you know, but if it hadn’t
been working we would have had to go in a different direction.
We’re empiricists. We look at the data. It took 10 years to persuade
ourselves that we were actually adding value—at first we
thought it was random good luck. Then we realized it was too
much value added. And it took us about 20 years to develop a
story around it.
Snyder: I’d like to mention one other thing: I can’t think of a
better person to name the school. It’s the perfect gift in terms
of endowment and flexibility. It’s affirmation. It gives us an opportunity to work on the brand name gap we have versus our
Chicago has a great brand, and we’ve had a lot of improvements
in our brand name capital and a lot of momentum. I believe that
if you perform well, recognition and support follow—and I think
the performance of the school is really strong. But the fact is
that our brand is uneven in terms of sector and geography, and
this is a great opportunity for us to make a major push forward
on that dimension.
I appreciate how you frame this gift. Some people would want
to make this sound like the biggest deal of all time, but you join
me in saying it’s a step, and inviting others to join in. So, together
we devise a matching process where other people say, I’ll be able
to get a named endowment at the University of Chicago Booth
School of Business and take advantage of your gift to do that, that
will help us further leverage your gift toward the overall objective
of the school and get more people on this winning team.
Booth: I don’t want to step on your line there, but I’m chuckling
because it gives me a chance to use the following phrase: I think
a gift is necessary, but not sufficient, as they used to say in the
Snyder: I agree.