Mark Hebner can safely be described as one of the pioneers of evidence-based investing. Mark is the founder and President of Index Fund Advisors, based in California, and is a respected speaker, news contributor and investment educator. He says his life mission is to “change the way the world invests by replacing speculation with an education”.
Mark and I have just produced a documentary based on his book, Index Funds: A 12-Step Recovery Program for Active Investors, which we’re going to be featuring on The Evidence-Based Investor in the coming weeks.
In this interview Mark discusses his career, his opinions on active management and why having a disciplined, rules-based approach to investing is so important.
You were a very successful businessman before moving into wealth management. How did that career change come about?
Back in 1998 I was approached by a friend who was confused about investing and needed help. Before providing her with advice I wanted to carefully study all aspects of investing beyond what I’d learned in my MBA programme. After reading several books and analysing the evidence, I was astounded by the research negating the investing strategies of virtually the entire financial services industry. I then decided there was a new business opportunity for an independent fiduciary adviser who avoided forecasting and adhered to a passive investment strategy.
Passive is counter-intuitive and it can take a while for investors to understand the rationale. Presumably it’s become easier to persuade people that it’s the way to go?
Yes, that’s right. Investors are far more receptive to using index funds today than just a few years ago. I think this is a combination of having so many books and academic papers on the subject, the substantial evidence presented in video content on the internet, and the multiple endorsements by Nobel Laureates and well-respected investors such as Peter Lynch, Warren Buffett, Charles Schwab and Bill Gross.
You’re a big fan of Dimensional Fund Advisors. Why’s that?
I admire their reliance on empirical research in the design of all of their investment strategies. My perception of DFA is also one of high integrity and ethics at all levels of management.
You exclusively use DFA funds and you refer to them as index funds. Dimensional doesn’t tend to use that term, so why are you more relaxed about it?
For me, you can define an index fund as a mutual fund or exchange-traded fund with specific rules of construction that are adhered to regardless of market conditions. Dimensional has one of the most complete series of global indexes, designed and maintained by some of the most respected academics in financial economics, including the 2013 Nobel Laureate Eugene Fama. Their indexes are founded on the database of The Center for Research in Securities Prices (CRSP) at the Chicago Booth School of Business, which is is the leading provider of historical stock market data to more than 500 institutions around the world. It’s definitely fair, in my view, to refer to DFA funds as index funds.
Your book is called Index Funds: A 12-Step Recovery Program for Active Investors. That implies that active investors are, in a sense, addicted to investing that way. Isn’t that an exaggeration?
No, it’s not. Obsessively playing the stock market is recognised by Gamblers Anonymous as a form of gambling addiction. The clinical psychologist Paul Good developed a set of warning signs that may reveal whether an active investor is actually a compulsive gambler in disguise. Among them are a preoccupation with the financial media, borrowing to speculate, an inability to control trading activity, and throwing good money after bad in order to break even.
There are lots of similarities between gambling and stock market addiction. In Your Money & Your Brain, the financial writer Jason Zweig details evidence of the release of addiction-related dopamine in our brains when we anticipate big wins on the stock market. The Harvard neuro-economist Hans Breiter has also identified a striking similarity between the brain’s reaction to cocaine and the prediction of financial rewards.
But there are differences too. For example, the head of the Gambling Disorders Clinic at Columbia University, Dr Carlos Blanco, says that while pathological gambling tends to affect people in their late teens and early 20s, people who are addicted to speculating on the stock market are commonly in their 30s and 40s.
Many of your clients are very wealthy individuals. Do they have less of a problem with these sorts of behaviours?
Actually no. They too struggle with managing their emotions. A study by Barclays found that 41% of high net worth investors wished they had more self-control over their investing decisions. The study looked at returns over a ten-year period and found that emotional trading typically costs an investor about 20% in returns over that period. Investors who prevented themselves from over-trading through specific strategies, such as minimising time spent checking their portfolios, were on average 12% wealthier than those who didn’t use self-control mechanisms.
There’s a whole range of behavioural biases which cause investors to believe they have control in areas where they actually have little or none. That’s why it’s so important to have a disciplined, rules-based approach to investing.
There’s an impressive amount of educational content on the Index Fund Advisors website. Why’s that?
For investors to stop speculating and start investing, they need to be presented with the evidence. That’s what we’ve done with our videos and articles. I made it my mission to present the evidence better than anyone else in the world.
I’ve recently worked with you on a 12-part documentary based on your book. What was your motivation in making the film?
I wanted to do the documentary to make the evidence against active investing more accessible to a broader audience around the world. I also wanted to show people the proper way to invest. We’re going to be releasing it very soon and we plan to make it available on as many streaming services as we can, and also on DVD.
You’ve achieved so much in your life so far. What are your goals now?
My goals now are to get investors around the globe to invest and relax, and to stop wasting their money and time on active investing.