A Conversation with Dimensional’s David Booth

There are so many familiar voices clamoring to be heard on the subject of investing. While there are a few well-known individuals worth heeding, the most popular talking heads usually remind us of this Gotcha the Cockatoo video, gone viral. You may not be able to take your ears off of them, but what on earth are they saying?  

Then there is David Booth, chairman, co-CEO and a founder of Dimensional Fund Advisors, as well as the namesake behind the University of Chicago’s Booth School of Business. Even those who hold Dimensional funds or have attended his namesake alma mater may not be able to tell you very much about him. A relatively private man, Booth seems more likely to be found operating the proverbial stage curtains than performing in front of them.  

That is why it was a particular treat to listen to a recent Masters in Business podcast of Barry Ritholtz interviewing Booth. “Gotcha the Cockatoo” is mighty entertaining, but if you’d like to listen to some words that make sense, we encourage you to check out the Booth-Ritholtz podcast for yourself. To get you started, here are some of our favorite quotes from the conversation.

On investor discipline:

“The principles of indexing are such that people can stay with it. So the idea is that we attract new clients coming in, and few clients leave.”

“The first key to investing is, find a philosophy you can stick with through thick and thin.”

“I counsel people: You want to invest in a way that you can kind of relax. Markets are going to go up and down. That’s what they do. And you shouldn’t invest more in the market than you can accept, and just ride those ups and downs as the natural order of things and … you’re probably going to be okay.”

On Dimensional’s trading strategies (“long-term holders versus short-term traders”):

“The best way to save on trading costs is [to] not trade very often.”

“There’s an anxiety to trade. And that’s what we worked on. We approached the marketplace, basically waiting for sellers wanting to come to us. … In coming to the marketplace, if you can get the other person to move first, then you can win that trade.”

“It’s a win-win deal. It’s not like we’re ripping their eyes out. They want immediacy in trading and are willing to pay for it. And we in essence are providing a service for them by – if they’re wanting to sell something – we take it off their hands. We take it down a couple cents. They think it’s well worth it and for a long-term investor like us, it makes a huge difference over the long haul.”

On market efficiency:

“The difference in approach between us and most firms is, we built a firm around a set of ideas – this notion of market efficiency – and developed our investment philosophy as empirical research into dimensions evolved.”

“The idea is not intuitively obvious to people at first. Most people approach investing like business – if you’re smarter and work harder, you should be able to outperform others. That’s just not true. When you invest, you’re investing in a piece of paper in a zero-sum game. For one to win, another has to lose. That’s just simple arithmetic.”

“There’s been something like $700 billion of outflows from US equity mutual funds since the peak of the market in 2007. That’s a huge outflow. Yet every year, [Dimensional has] had positive flows because people can understand the process. They realize basically, we go up and down with the markets, and it shouldn’t come as a surprise [that] every now and then there’s a down market.”

On investor interests:

“We think it’s very important to work hard for shareholder rights. Our capitalist system requires monitoring. Being an investor and part owner of a company through our clients, we think it’s important to do that monitoring and stand up for shareholder rights. Professors Fama and French are very active in this part of the business. We take it very seriously.”

“Fairness is actually one of the things that needs to be emphasized a bit more. In terms of this whole notion of efficient markets or equilibrium point of view of investing, it says that, if you take the professional investor versus the average Joe, they have the same expected outcome, ignoring trading costs. … That’s about as fair as life gets. … And that’s why those of us that share this point of view feel this kind of missionary zeal to spread the word.”

On the firm’s culture:

“The fun is really working with the clients, and ultimately, we’re working with individuals. The enthusiasm comes from taking these new ideas around which we built the firm, and seeing the light go on for people as they come in and [have] that ‘Ah-ha’ moment. That’s the excitement in the business. To [see people] be able to go, ‘I get it now.’”

“I think the important thing is, we’ve built a firm around a set of ideas. Most of those ideas were developed at leading business schools. And that’s what we ask our clients to do, is share those ideas – that point of view – and we can all work together.”

On life’s lessons:

“What investing is about is an overall experience. It’s not just the science. Sure, you want good returns … but when it started out, I think I thought, if you give people good returns, that’s all you need to worry about. But … you’re dealing with people, and helping them get through difficult times like 2008–2009, and come out the other side with a consistent investment approach. I wish I knew that that’s what it’s really all about. … [People] need to not only have good returns, they need to feel good, and not be so stressed out. I wish I had figured that out earlier on.”

To hear more of Booth’s ideas, check out the Masters in Business podcast here

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  1. […] podcast here. Many thanks to Haden Werhan, CPA/PFS of Thomas Wirig Doll for giving us permission to reprint his post for your reading […]

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