Financial Theory in Practice: Gaining Insight from Models with Marlena Lee (EP.79)

Today on the show we welcome the Head of Investment Solutions at Dimensional Fund Advisors, Marlena Lee. Marlena has a Ph.D. from the University of Chicago where she served as the TA to Eugene F. Fama. She has been at Dimensional for 11 years where a big part of her role is communicating what their research team is doing for the advisors and clients who are using their products. In this fascinating episode, we discuss and define models, factors, and the importance of understanding the risks involved with any investment decision. We talk about the many different reasons why stocks have different returns, and what the research says about underperformance and our expectation of positive premiums. Marlena has some interesting perspectives on whether risk or behavior drives higher returns, and shares some of her biggest lessons gained from working with Eugene Fama, and Dimensional Fund Advisors.

Key Points from This Episode:

• The uses and limitations of models when making investment decisions. [0:02:30.0]
• Understanding the concept of ‘factors’ and why the word is evolving. [0:04:35.0]
• Why Dimensional doesn’t combine Price-to-Book with price sales and cashflows. [0:13:10.0]
• Marlena’s thoughts on whether risk or behavior drives higher returns. [0:15:15.0]
• The theoretical rationale for why we expect the value premium to be positive. [0:21:00.0]
• The role of company size in identifying differences in expected returns. [0:25:10.0]
• The split between dividend income and capital gains: What is the trade-off? [0:27:40.0]
• How to choose which Factor Model to use for your investing decisions. [0:31:15.0]
• The good arguments for owning bonds in your portfolio as a young investor. [0:35:00.0]
• Risk factors and equities when it comes to fixed-income and bonds versus stocks. [0:38:00.0]
• Questions investors should be asking about fees, risk, and portfolio worth. [0:41:48.0]
• Evidence that investors can use Yield Curve Inversions to time the market. [0:43:33.0]
• Marlena shares her most fascinating research topics and economic debates. [0:43:33.0]
• Marlena shares her biggest lessons gained from working with Eugene Fama. [0:48:13.0]