An Integrated Advisor Network firm

That's Not the Beer Talking

“You have no respect for cognitive reverie, you know that?” At the time I saw the movie, A Beautiful Mind, I had no idea what ‘reverie’ meant. However, when John Nash’s roommate retorted, “Yes, but…I have enormous respect for…beer,” I got that. And so did the John Nash character, because it drew him out of his daydreaming and toward the pub as he muttered, “I have respect for beer. I have respect for beer.”

My dad had enough respect for beer to make brewing it one of his hobbies. And like everything he did, he took the time and effort to become very good at it. He not only studied and experimented, but he also sought out experts. One such expert was in the process of turning his hobby into a small business. When my Dad found him, he was making beer in plastic buckets in a blue metal warehouse in my home town of Chico. Almost 40 years later that small brewery is still in business. You may have heard of it - it is called Sierra Nevada Brewery.

Public domain

According to their website, Sierra Nevada beer was built on “…plenty of passion” and a commitment “…to pushing the boundaries of craft beer.” Within a year of the founding of Sierra Nevada, another firm was founded with a similar passion and commitment to pushing boundaries. You may not have heard of it - it’s called Dimensional Fund Advisors (DFA).

Last October, Wall Street Journal columnist Jason Zweig pointed out that DFA is “the fastest growing major mutual fund company in the U.S… [and it is] the sixth-largest…” Nevertheless the “…firm remains all but unknown to the general public…” Sometimes I joke that DFA’s unofficial motto is, “We’re the largest mutual fund company that no one has ever heard of - and we want to keep it that way. “

Their apparent aversion to marketing seems to extend to their recruitment of advisors as well. Unlike other mutual funds that are always recruiting advisers, DFA makes advisers find them. And once you find them, Zweig points out, they “…set up a daunting steeplechase that advisers still must hurdle before they can market their funds.” So, when I found them 25 years ago, I had to prove I was committed to and passionate about their “…bedrock belief,” as articulated by Zweig, “that active management practiced by traditional stock pickers is futile, if not an absurdity.” Based on this core belief and the fact that DFA’s founders are pioneers of index funds, one would expect them to be strict passive indexers. But, that’s not so. They realized there were ways to “...achieve better returns than plain index funds deliver.”

I don’t know how the founders of DFA came up with that cognitive reverie about returns, but I do know from the work of psychologist Jonathan Schooler that it wasn’t from combining respect for cognitive reverie with respect for beer. As I learned from the book Imagine: How Creativity Works, the type of daydreaming required for inspirational insights involves disciplined mind wandering. And while drinking beer “…induces a particularly intense state of mind wandering…” it’s not very disciplined because you become less aware of what you’re thinking. In other words, “You might solve a problem while drunk, but you probably won’t notice it.” So, it wasn’t beer that inspired them but, as they told Barron’s, it was the desire “…to apply the ideas” of Gene Fama at the Booth Chicago School of Business. Ideas that a press release from the school says, “…push forward the boundaries of research in finance.”

As I now know, cognitive reverie is thoughtful daydreaming that leads to profound insights. And it is these creative ideas that turn passion and a commitment to pushing boundaries, at Sierra Nevada and DFA, into great products for their clients. So, I drink Sierra Nevada Pale Ale. But more importantly, I recommend DFA funds because I have enormous respect for DFA. And that’s not the beer talking.