Photograph by Whitney Curtis

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Rex, 7, took in the high ceiling, the gleaming floors, the narrow Gothic windows of the German St. Vincent Orphan Home. He and his 4-year-old brother had come here before, to visit. To prepare. Now his mother, eyes overbright with tears, hugged them goodbye, and a nun took them firmly by the hand and led them to a playroom. Rex put his well-used softball in his new locker, and that night, he went to sleep in a big dorm room, its narrow beds in neat rows, with a curtained cubicle at the end where one of the sisters slept. The next morning, he woke up and choked back the first tears of homesickness.

Two years earlier, in 1950, Rex’s father had come home coughing. Rex had asked gravely, “Are you going to die?” Mustering a grin, his father said, “Of course not!”

But he did die, of an aortic aneurysm.

Rex’s mother was devastated, both emotionally and financially. She could manage to keep Rex’s older sisters, who were now in high school, but the two little boys would be living at St. Vincent’s until high school. There, propelled by the German nuns’ famous discipline, Rex would study hard, do daily chores in the bakery and on the school’s farm, gulp down the lump in his throat after every family visit. For fun, he’d crack constant jokes, play every sport and tackle life with a tenacity that startled even the sisters.

And they didn’t startle easily.

Once, desperate to listen to his beloved Cardinals games, he snuck a portable radio into the dorm and slid it under his pillow, turning the volume way down. Instantly, a voice issued from the cubicle: “Rex, turn that radio off!”

Every day before lunch, they all lined up and recited the Angelus. Once Rex whispered something to the boy standing next to him. “Sr. Irmingarda came round with a stick like a banister upright and whacked me on the butt,” he recalls. “It stung, my eyes teared up and I said, ‘Ha ha, your stupid old stick broke.’”

Still, he thrived under the discipline, working hard and raising just enough Cain to amuse his elders. And after six years, he went home. His mom was again stable—a generous uncle had sent money regularly, and she was working as a secretary. Rex enrolled at Bishop DuBourg High School and started cramming: “They grouped you in these tight clusters of people, all really smart and highly motivated,” he says. “Competition does wonders.”

He dated just a bit, secretly sure he was going to become a priest.

But when Rex Sinquefield entered seminary the following year, he already owned $200 worth of Great Northern Paper stock.

“My mother was always fascinated with the stock market,” he explains, “even though she had very little money. So even in seminary, I watched the market.”

Three years later, for reasons he still can’t articulate, he left the seminary. At Saint Louis University, he majored in philosophy and business, where he shone. His professors urged him to apply to the University of Chicago Graduate School of Business.

He did—but was thwarted by the Vietnam War. He wound up a “high-end gopher” in the finance corps at Fort Riley. “The mission of Fort Riley is to prevent Indian attacks,” he says dryly, “and in the time I was there, there was not one attack.” He dealt with top-secret records and found it “easy, boring, safe and a terrible waste of manpower.” He learned judo to pass the time.

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REX EST QUI METUIT NIHIL.
A king is he who fears nothing.

In the 1950s, everybody knew that the way to make a killing on the market was to pick a handful of winners.

By the late ’60s, neoclassical economists and finance profs at the University of Chicago GSB were saying just the opposite.

Stock prices rose and fell in random patterns, they pointed out; future prices couldn’t be predicted, so there was no point actively managing a stock portfolio. You’d do better to diversify—and trust the market.

Dispassionate ivory-tower theories were lost on the hunch-players and obsessive analysts trading down below. They were the bookies, urging the gamble—and the lure was too strong to resist.

But in 1970, a new MBA student, Rex Sinquefield, showed up at the GSB. He, too, was eager to learn magic stock-picking formulas and make a bundle. Then he took macroeconomics from future Nobelist Merton Miller, who described the intrinsic efficiency of the world’s stock and bond markets.

“It has got to be true,” thought Sinquefield, startled. “This is the only thing that creates order in the universe, in the markets.” Next he took a finance class from Eugene Fama, who again emphasized efficiency: Markets capture new information instantly and incorporate it into their prices, Fama said, so unless you have illegal insider information, there’s no way to “beat” them. Instead, mimic the market with a portfolio so broad, you’re insulated from individual stocks’ volatility.

Sinquefield listened to Fama’s coolly logical lectures and felt his old assumptions spin about 180 degrees—then click into place. He finished his MBA, took a job at American National Bank of Chicago and put his professors’ ideas into practice, developing, in 1973, the very first S&P 500 passively managed index fund. “Index” because its portfolio was selected to perfectly mimic, not beat, the larger market. “Passive” because he didn’t handpick and continually buy and sell; he chose for certain variables and then held steady.

There’s a bit of contradictory lore about Sinquefield’s “first”: Some say John McQuown at Wells Fargo beat him to it. “There’s no doubt who started the first market-weighted index fund in the galaxy,” Sinquefield says firmly. “That was me.” McQuown’s 1971 attempt, for a Samsonite pension fund, was unwieldy; his fix came after Sinquefield’s coup.

“I think it’s a tie,” chuckles Fama.

Next, Sinquefield partnered with Roger Ibbotson, one of his U. Chicago teaching assistants. Starting with a database at their alma mater that listed stock results from 1926 to 1964, they rolled up their sleeves and began to gather fresh numbers, bringing the original database up to 1975 and adding risk and return data for government bonds, Treasury bills and inflation. This made it possible, for the first time, to compare various markets’ performance over time—and do long-range forecasts. “We said the stock market would outperform the bond market and hit 10,000 by 2000,” Ibbotson recalls, “and it did.” (“It’s not above that now,” he adds wryly, “but it did.”)

Published in 1976, Sinquefield and Ibbotson’s Stocks, Bonds, Bills and Inflation showed that, over time, stocks had outperformed less risky government securities. The book was the second most frequently cited source in investment research for the next 15 years. And it changed the way much of America—especially large institutions—invested its money. Today, Sinquefield says, about 40 percent of all institutional assets are in index funds.

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ERGO SUM REX GLORIAE.
I am a king of renown.

Sinquefield also stayed in touch with another U. Chicago TA, David Booth, who was forging his own path into index funds. Their academic bent made the financial establishment nervous, so in 1981, they co-founded their own company, Dimensional Fund Advisors in Santa Monica, Calif., and started the first passive fund focused on small (microcap) companies customarily ignored in large institutional portfolios. Future Nobelists piled onto DFA’s board, eager to see their theories finally executed.

DFA’s computer models are sophisticated, its clients mainly institutions—state pension funds and the like, with portfolios big enough to be truly diversified ($2 million per fund minimum, in at least six to 10 funds). Individuals can enter DFA funds through carefully vetted investment advisors, the largest being Buckingham Asset Management and its Advisor Services, here in St. Louis. “You go through a process to be approved, because they want to make sure you will adhere to the buy-and-hold strategy,” principal Ed Goldberg tells me. DFA doesn’t want any erratic selling and buying, because “hot money moving in and out of the market” can introduce “noise,” evaporate liquidity and throw off estimated returns.

Three factors matter a lot to DFA: market (over time, stocks have outperformed fixed-income investments); size (over time, small-company stocks, which are riskier and therefore cheaper, have outperformed large-company stocks); and price (over time, lower-priced “value” stocks have outperformed higher-priced “growth” stocks).

The key phrase is “over time”; even today’s losses, which DFA funds are suffering right along with everybody else, can eventually be recouped. This is a strategy for patient, disciplined investors, not impulsive or greedy ones. “DFA did pretty well in the early 2000s, after the tech bubble burst,” notes Ohad Kadan, associate professor of finance at Washington University. “The strategy is not working well recently—but it’s dangerous to make inferences from one year.”

Especially this year—when free-market fundamentalism has been blamed for global economic woes—Booth, who remained as DFA’s CEO when Sinquefield retired in 2005, wishes his partner were still around to distill the current craziness for their clients: “He’s great at formulating problems, and taking his Jesuit training and being persuasive with it.”

“He’s very good at telling a story to institutional investors,” agrees Fama, who joined DFA as director of research but still holds a distinguished professorship at the Graduate School of—

“Wrong,” he interrupts. “It’s not the GSB anymore.”

“But your email goes to chicagogsb,” I protest inanely.

“It got a new name last Friday,” he says. “As of November 6, 2008, it is the Booth School of Business. There was a $300 million gift.”

Sinquefield’s given to the University of Chicago, too—even endowed a chair in Fama’s name. But when David Booth’s gift, the largest in any business school’s history, was announced, his longtime partner was here in Missouri, using his profits to push free-market public policy.

“Now he’s going to cure Missouri’s problems,” chuckles Fama. “Shows you how naive he is—he thinks they are going to drop the state taxes!” He sobers. “It always looked like Milton Friedman was tilting at windmills, too. But his ideas caught on.”

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