The DFA chairman and co-founder reflects on the Tune Out the Noise documentary and the revolution in modern finance.
Our guest on the podcast today is David Booth. He’s the Chairman of Dimensional Fund Advisors, a firm he founded in 1981. David led Dimensional as CEO and later Co-CEO until 2017, when he stepped back from the daily management of the firm. David helped create one of the world’s first index funds in the 1970s and launched the first passively managed small-company strategy in the early 1980s. He received a bachelor’s degree in economics in 1968 and a master’s degree in business in 1969 from the University of Kansas. In 1971, he received an MBA from the University of Chicago. Over the years, David has been a benefactor to both schools, and the University of Chicago Booth School of Business is named in David’s honor. David, welcome to The Long View.
“Stocks, Bonds, Bills and Inflation: Year-by-Year Historical Returns (1926-1974),” by Roger Ibbotson and Rex Siquefield, The Journal of Business, January 1976.
“The Cross-Section of Expected Stock Returns,” by Eugene Fama and Kenneth French, jstor.org, June 1992.
“Why Investors Missed Out on 15% of Total Fund Returns,” by Jeffrey Ptak, Morningstar.com, Aug. 15, 2024.
“Everything You Need to Know About ‘MADOFF: The Monster of Wall Street,’” by Ingrid Ostby, netflix.com, Jan. 4, 2023.
“DFA vs. Vanguard,” The Rational Reminder podcast, Episode 351, youtube.com.
“PHOTOS: A Look Inside the Booth Estate,” Austin American-Statesman, Feb. 13, 2020.
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Christine Benz: Hi and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar.
Benz: Our guest on the podcast today is David Booth. He’s the Chairman of Dimensional Fund Advisors, a firm he founded in 1981. David led Dimensional as CEO and later Co-CEO until 2017, when he stepped back from the daily management of the firm. David helped create one of the world’s first index funds in the 1970s and launched the first passively managed small-company strategy in the early 1980s. He received a bachelor’s degree in economics in 1968 and a master’s degree in business in 1969 from the University of Kansas. In 1971, he received an MBA from the University of Chicago. Over the years, David has been a benefactor to both schools, and the University of Chicago Booth School of Business is named in David’s honor. David, welcome to The Long View.
David Booth: Well, thank you. Thanks for having me.
Benz: Well, thanks so much for being here. We want to start by discussing this film that Errol Morris created called Tune Out the Noise. Maybe you can talk about Dimensional’s collaboration with Errol Morris on that film. How did it come about?
Booth: Well, we have a big interest here in helping people learn more about how markets work. Our view is if we can help people understand better how markets work, they’ll be in a better position to come up with sensible investment solutions that they can live with over the long haul. And if they can do that, they’ll benefit from the magic of compounding over time. So anyway, we approached Errol, because he’s one of the great communicators, and talked about doing something together. And he got inspired. He had a very little investment background, but he’s done these incredible documentaries like Fog of War and Thin Blue Line. And somehow he got really hooked on the idea of doing a film together. And he ends up drawing a parallel between what’s gone on in the investment space over the last 60 years with what went on in the 16th and 17th century in astronomy. And he’s the first person that I’ve known that saw that connection. And it was really well done.
Arnott: Were there any other aspects of the story that seemed to intrigue him the most?
Booth: Well, I’m situated on a nice property, and I’ve been able to accumulate a lot of outdoor sculptures. And where we did the interviews with Errol was in my barn on the property. And during breaks, he would walk around on the property looking at the sculptures and go, wow. So in the movie, you’ll see a lot of art and pictures, which added a certain character to the movie, I think, that I wouldn’t have thought about anyway.
Benz: Yeah, Amy and I enjoyed that aspect of the film. And I wanted to ask you, you make the point in the film that your preferences in investing kind of align with your preferences in the type of art that you like and collect. Can you talk about that?
Booth: I kind of gravitate toward what they call minimal art. And one of the things that’s fascinating, particularly when you talk about big sculptures, this minimal art, sometimes people look at it and they go, well, I could have done that. Well, you couldn’t have. Particularly in big sculptures, an incredible amount of work and structural thought that goes into it. And implementing the last little bit of art, the little detail, the little flourish that makes all the difference between great art and not-so-great art. And investing is the same way—you come up with the best ideas, the best science, which I think that’s our background. And then you still have to implement it—the details, the flourish, on the implementation side that makes all the difference.
Arnott: So the film really focuses on the revolution in finance that took place in the late 1960s and 1970s. And many of the people who were involved in the development in modern finance and Dimensional’s history are now getting a bit older. Was that part of the motivation for the film to document and commemorate their contributions while they’re still here to talk about them?
Booth: Yeah, we lost Merton Miller in 2008. He was a Nobel laureate and longtime supporter of the firm. He was kind of our main independent director for a long time. And everybody loved Merton. And we don’t have any film of him. We don’t have any photographs really. So we thought it was time to tell the story. And Errol does a great job of making these people look human. You don’t think of it. You wonder what a Nobel Prize winner in economics would say about something this or that or whatever. You’re curious. And you find out that most of these people that changed the world came from pretty modest backgrounds. And I think people find that very interesting as well.
Benz: Yeah, that was one thing I noticed—Eugene Fama noted in the film that he rather liked proving that active management didn’t really add value. He felt like kind of an outsider in the world of finance. Did you feel similarly as you approached investing? Was it a little bit fun when you discovered that active management really hadn’t added much and in fact had subtracted quite a lot for investors over the years?
Booth: Well, I was basically a blank slate. I went to the University of Chicago in 1969 and knew nothing about investing and really wasn’t all that focused on investing. But my very first course was a course taught by Fama and that just changed everything. It all tied together so beautifully, the theory and the empirical work. And, I had a hard time understanding how anybody would think anything differently than what Gene taught. I mean, that was my problem. I guess I was surprised at really about the democratization of investing. One of the implications of Gene’s efficient-market hypothesis is that everybody can have a good experience because everybody can buy the market. The market represents the aggregate performance of everybody in the market minus whatever fees they pay. So that’s pretty cool and uplifting. And looking at stocks and let’s say they have about a 10% return a year over a long period of time, that’s a perfectly good return for people in most cases. And it’s also, on the other side of the coin, a reasonable cost of capital for companies issuing capital. So the implication of all this is that markets seem, at least in the US, seem to work the way you would hope they would.
Arnott: It seems kind of serendipitous that you ended up at the University of Chicago, which turned out to be the epicenter of this huge revolution in finance. How did you decide to go there or identify the University of Chicago as a place that you wanted to pursue your Ph.D.?
Booth: Well, I’d gone to the University of Kansas and actually was getting my master’s there when I had to take a finance course. And along the way, I read Fama’s Ph.D. dissertation. And it turns out that my professor had just gotten his Ph.D. from the University of Chicago. And that’s all he wanted to talk about. And so I decided, I thought I wanted to be a professor, and so I applied to Chicago. And with the help of my professor at Kansas, Frank Riley, I went to Chicago. So the serendipity came before me. It was getting people like Merton Miller and Eugene Fama and Myron Scholes and all the, I don’t want to try to be exhaustive, those are few of the names. They were already there, and my part was pretty easy. I go, wow, those people are amazing. I can’t believe I can go study with them. So that’s how it came about.
Benz: I liked your story about showing up for the draft. You said they were hot on your heels or something like that. And you already had kind of these plans to enter the Ph.D. program at the U of C. Can you talk about that? Because you talk about serendipity there. And I noticed that several people talked about the role of serendipity and the way things played out.
Booth: Well, first off, I think it’s amazing how much of the big things that happen in life are somehow connected to serendipity. Usually the great ideas start as small ideas, and you build on them. And my particular case, in the fall of 1969, the Vietnam War was raging and the army, the various parts of the armed services were really aggressive and getting people drafted. And I was working in New York for Exxon. And my draft notice came in and in New York, they Scotch tape a subway token onto your draft notice, which I thought was humorous. Anyway, I show up for the draft. And I get processed through and I called home, said I had been drafted into the army and went back after lunch.
And this is where serendipity comes in. As I’m walking through the halls of the induction center, coming the other direction was the chief medical officer who had processed me through in the morning. And I’d negotiated with him quite a while. So he recognized me, we struck up a conversation. And he said, “You know, what were you going to do if I hadn’t drafted you?” I said, “Well, I was going to go to the University of Chicago and into a PhD program.” He said, “Let me see your file one more time.” So I handed it to him. He goes, “I’ve decided to reject you for a year.” That was it. So I got out there as fast as I could, went to Chicago, and the next month they put in the draft lottery. I drew a huge number. So I knew I was never going to get drafted. I mean, you speak of serendipity—by November I was in a much different spot than I thought it would be at the beginning of October.
Arnott: People who aren’t as steeped in the development of passive investing might not be as familiar with the contributions of Mac McQuown, who passed away late last year. Can you talk about how you came to know him and what his contributions were to indexing as we know it today?
Booth: Yeah, and he was an amazing guy, and really important in the development of investing. So my second year at Chicago, I was working for Eugene Fama as a research assistant. And I decided I didn’t want to be a professor. And I talked to Gene and he goes, OK, well, I’ll call up Mac McQuown for you. Mac ran a think tank at Wells Fargo called the Management Sciences Department. And he was trying to play all the great new science that was coming out in a way that almost nobody else was trying to do it. And along the way he used a lot of the main academics that were involved in this change, one of them being Gene. And the fact that the consultants that Mac used, six of them went on to become Nobel laureates. So it was a pretty heady atmosphere. And I was excited to join. And Mac, of course, was larger than life himself, very urbane and sophisticated. But he ran an highly talented group. And that’s what appealed to me—as they teach you in school about comparative advantage, my comparative advantage wasn’t in developing the next great academic idea. I felt my comparative advantage was in trying to apply the ideas. And Mac was willing to apply the ideas.
And so I went to work for him at Wells. The month that the first index-linked portfolio went live, it was an account for Samsonite. And Mac had also led the way to get the trust department at the bank to offer the first S&P 500 indexed portfolio. I don’t know if it was the first one that actually went live, but they were the first to offer one. And it was slow going at first. It’s quite a shock when you tell people, look, the way you’ve been approaching investing is all wrong. Doesn’t make any sense. There are things you can do to improve your investment results that tie into how to make life better overall, that it comes from this new way of thinking passive management. The implication of passive management is fees are much lower, and you get better-structured portfolios. So individuals today are much better off investing today because the fees are lower, and the portfolio designs are better. And now we have Morningstar. I didn’t have that back in 1971 either.
Benz: So, Vanguard founder Jack Bogle receives just a passing mention in the film. Can you talk about what you view as his key contributions to the popularization of index-based strategies?
Booth: Well, he played a critical role. At Wells we were working with institutional investors—big pension funds, and insurance companies, and so forth. And because of what was enforced at the time, Glass-Steagall, they couldn’t really sell to individual investors. So that was Bogle’s idea to create a mutual fund company that would provide people with access to an S&P index fund. And it was real slow going for him at first as well. I remember going to his offices and he would tell me how much money was coming in and he was pleased. It was typically a few hundred thousand or a few million every day. And he stayed the course and turned it into having a huge impact on the mutual fund industry. And as a side note, when we decided to start Dimensional, I went down to Valley Forge to talk to Jack about doing all the administrative work for the fund. As a portfolio manager, once you decide to buy and sell whatever you are going to do, then that’s when really all the work starts. You got to come in and verify that the trade you thought you made was what the broker on the other side thought the trade was and so forth.
So the incredible number of administrative issues. So I said to Jack, hey, why don’t you do all that stuff? We’ll do the trading—and it seems strange today—but we’ll fax down what our trades were for the day. From that point on, you do the managing of the fund, for a fee. And I don’t know why he did it, but he said, OK, and so that’s how we got started when the mutual fund business, with Jack’s help. And after a few years, they decided they didn’t want to do it anymore, which is fine. But by that time we’d learned how to run a mutual fund. And years went by and one of the things I feel good about was shortly before he died, I happened to run into him at a conference, and I pulled him over, bought him a cup of coffee. And I said, “Look, Jack, I just want to say thank you. I don’t know what we would have done had you not been there. We probably would have figured out something, but you made everything much easier for us. So thank you.” And he passed away not long after.
Arnott: That’s, great. That’s another kind of serendipitous event is that you were able to touch base with him shortly before he died. One of the key messages in the film is just how painstaking the pursuit of truth in finance was in the early days. And you had computers just being developed and the data was very limited and often hand-curated. You had the CRISP database just being put together in the 1960s at the University of Chicago. Can you talk about some of the challenges that the original efficient-market pioneers were confronting back then?
Booth: Well, you hit on it. Data and computers, before 1960, computers weren’t big enough. And until the University of Chicago created their first research-quality database. And I think it came out in 1963. It was really the Dark Ages of investing. People could claim anything they wanted to claim about investing. And without the ability to test it, it was all kind of meaningless. So that changed with the data. And you’re right, you mentioned, Fama’s Ph.D. dissertation, for example, used data that he had hand collected. So it was just a different world then. And as Eugene Fama says, for him, it was like shooting fish in a barrel. Once you have the data in the computers, and the work hadn’t been done before, everything you did was new and exciting and different. So it was really just an incredibly stimulating time, particularly at the University of Chicago. You look over the last 50 years or so, all the Nobel laureates and economics that came from Chicago. A lot of them were there back then. Incredible, incredible buzz, and really at the end of the day, being overly simplistic, it was about data. Without data, you can’t have a science because you need to be able to test out hypotheses and so forth. And so with data, all of a sudden, this science got kick-started.
Benz: We wanted to talk about Rex Sinquefield with whom you co-founded Dimensional. You were both efficient-markets true believers. And you had both conceived of similar products and firms. What made you think you’d work well together and how did you two divide up your responsibilities when you were launching the firm?
Booth: Well, Rex and I met at Chicago. It was my second year there. It was his first year, and Fama arranged for Roger Ibbotson and Stan Smith and me to hold a question-and-answer session on Fridays for any student that wanted to come in and talk about Fama’s class. Well, one person that always showed up was Rex. He was one of these overachieving guys that you admired as a fellow student, but as a teaching assistant, he was, he took a lot of time. So anyway, we developed this friendship. And he developed the friendship with Roger Ibbotson as well. In fact, the Ibbotson and Sinquefield studies on the performance of stocks, bonds, and bills was legendary and really important to people in the 1980s to learn more about how markets work. Anyway, when we decided to start Dimensional, Rex gave me a call, he’d taken American National Bank in Chicago from being a sleepy little trust department to be one of the country’s 25 largest trust departments. And he was interested in doing something different, something that lined up perfectly with what we wanted to do, which was to come out with a fund that invested just in stocks of small companies.
At that time, institutional investors, which were our first clients, they only invested in stocks of large companies because if you were stuck with active management, then most of your alternatives were pretty small firms because active managers couldn’t invest that much money in small-cap stocks. So this was an idea that was, it was like pouring water on a dry sponge or something, the idea just clicked immediately. And Rex was our chief investment officer, and I was our CEO. And so I focused more on the business side, and he focused more on the investment side. Although I was our first portfolio manager. So back in those days when you have a firm of six or eight people, everybody did everything, so it wasn’t like today.
Arnott: Jeanne Sinquefield is another seminal and probably less well-known figure in the development of Dimensional. Can you talk about some of her contributions?
Booth: Yeah, Jeanne Sinquefield, who was Rex’s wife, played a key role in the progress of the firm. She had a PhD in demography and an MBA from Chicago. In fact, Fama, I think said one time, said he thought between Rex, Jeanne and me, maybe Jeanne was the best student. Anyway, as we started getting off the ground, we needed all kinds of help. And Jeanne was helping Rex out at night, doing some programming. She had a quantitative and systems background, and I persuaded her to join the firm and really hit up our operations activities. For about 24 years, she ran portfolio management and various operations reported up to her. And she ran the firm while Rex and I were on the road, talking to clients and prospects.
Benz: So, Dimensional has never offered capitalization index funds as Vanguard and BlackRock and others have. Can you discuss the decision to style Dimensional’s products with tilts toward small cap and value?
Booth: So we had a number of breakthroughs that helped us get going. Early on, Fama pointed me to a dissertation done by Ralph Bonds at the University of Chicago, which examined the relation between company size and investment return. And we use that; that was a breakthrough. So we have the data then, based on his work, of the performance of small companies. And that pledged to create the small company, our small-company fund, we call it the microcap portfolio now. And this had 43 years of history. And it was really the first, now about 40 years later, 30 years later, all of a sudden, there was a term for that, which was a factor-based fund. So we had inadvertently created the first factor-based fund. And that really kind of went big time in 1992 with a publication of some research by Eugene Fama and Ken French. They called this cross-section of expected returns, if anybody wants to look that up.
Anyway, it said, it looks like, a risk is kind of a multidimensional story. This is an empirical model. But it was based on theory developed a couple of decades earlier by Bob Merton. The unfortunate thing about Merton’s theory was it was so complicated. It took people a long time to understand it. Fama himself said it took several years for him to understand it. So it was a great theory, with no empirical model to support it. And then in ’92, Fama and French provided that support. And one of the implications was that low-price stocks seemed to be a different dimension than high-price stocks—value stocks versus growth stocks. And that led to the creation of our value strategies. So now we had two dimensions we focused on, the small and value. And then eventually we decided we needed to offer somebody the ability to manage their whole equity portfolio, which led to the creation of our core funds. Our core funds are basically market portfolios. But they differ from a market portfolio like a Russell 3000. And that instead of holding those 3,000 names on a strictly capitalization-weighted basis, we held more in small-cap stocks and more in value stocks than they represented in the overall market index.
Arnott: So there was a long period of time when both small-cap stocks and value stocks fell behind with large growth having a pretty big performance advantage. Do you think that people who look at that period of underperformance are skeptical about small value? Is that just recency bias or has there something fundamentally changed in the market that’s made it more difficult for small and value?
Booth: It’s too early to conclude that I think. All of these ideas, for example, I think almost everybody listening would think that stocks have higher returns than money market funds over the long haul. All, that’s true. But to quantify that with meaningful results, it usually takes 20 or 30 years to statistically validate that idea that we already believe. Whatever conclusions you get from the research, and by now we’ve had 60 years of research using the CRISP data, your first instincts are to be skeptical anyway. But if you have a well-constructed story, and that was kind of the key of Merton-Fama-French work, is we had a sensible story for why small and value or should be considered separate dimensions. Now, that being said, I do have to tell you that our first few years, all we had was a US small-cap strategy. And we happened to start at the worst nine-year run for small stocks relative to large stocks. And we learned something from that, which was if you have a sensible idea, supported by great research, then if you have really a sensible story, people aren’t as hung up on the most recent performance.
Now, clearly want to pay attention to what’s going on and so forth, but we continue to update that kind of research. And so, in our core portfolios, we do have large stocks and growth stocks in it, as well as small and value. It’s just a question of overall portfolio structure and coming up with the best solution that you come up with. And there’d be a long period of time when those results were disappointing. But what we’ve learned is if you have a sensible enough story for why you’re doing what you’re doing, and also if you deliver on—if you do what you said you were going to do, then people are likely to stay with you over time. That contrasts sharply with the old active management, which is, invest with me, I’m a genius. And then we go through difficult times, people go, I’m not so sure you’re that genius I thought you were. But so we base our strategies on what we think to be the dimensions of returns. And these dimensions are well documented. So, we enjoy the good times and our clients seem to be able to stick with us during the tough times. Frequently, as a manager, when your results are disappointing, you call up clients and try to explain what’s going on. Well, they’re long-term clients frequently say, “You don’t need to talk to me. I know what you’re going to say, and I believe it, so I’m OK. Go talk to some of your other clients.” So I think that’s kind of unique in the industry.
Benz: So Dimensional’s funds had historically only been available to financial advisors and institutions. And I think that was kind of the rationale there that you would be able to inculcate those folks in your overall philosophy. Can you expound on that a little bit?
Booth: Yeah, at first we only had large institutional clients, partly because we were a small firm, and we had no expertise in selling to the public. And that all changed in 1989 with an advisor up in Sacramento named Dan Wheeler. He said, look, I’d like to have access to your funds. And you could see why. Our clients are institutional clients, so our fees were really low. Institutions aren’t going to pay high fees for anything, which is appropriate. So we said, OK, we’ll give you access to those funds. But we’ll monitor you. Which we did, and a year later, he came back, and he did what he said he was going to do and behaved sensibly. So he said, I think there’s a business in this. And that really excited us because if we’re really going to help people long term, we’re going to help the average investor. The big institutional investor, we can help, but we don’t help them as much as we help this smaller investor, because we have institutionally priced funds. And that’s really kind of been the direction of the firm. Now, more of our assets come in through financial advisors, than come through our big institutions.
We chose to work with fee-only financial advisors. The history of the mutual fund industry is funds getting started as load funds. But we didn’t want to do that because of potential conflicts of interest. Not that selling loads is inherently bad, but it creates the wrong incentives; there’s no need to, and no need to do that. So, but we didn’t know anything about selling retail and that’s very expensive. And so we started working with fee-only advisors. And even there we insisted that they come into one of our two-day seminars to get trained on how well we believed. And then we even had them develop a business plan, how they planned on using us. And if everything connected, then we gave them access to our funds. It sounds like we were trying to be tough or something. But it was really quite the opposite. Once you do get a client, you want to stand up for their interests, and you don’t want a lot of people coming in and getting out. And so we handled that by making sure people understood exactly what we’re doing.
And we do monitor trading activity, but we really haven’t had a problem with it in 43 years now. In fact, it’s just the opposite. By co-mingling, you do get the benefit of scale. And so we kind of stumbled and we talked about serendipity. This was serendipity once again. Dan Wheeler calling us. We had no plans to sell retail. But going forward, we really are excited about working with advisors. And then a breakthrough a few years ago came when we started offering ETFs—we were able to convert a number of our regular mutual funds over to ETFs. And right now that’s created a lot of interest and excitement. The ETF world has exploded. And I think it’ll continue to advance. Although I think the SEC is thinking about changing some rules around, it’ll take away some of the advantages of ETFs. But either way, whether it’s ETF or mutual funds, we want to be there for our clients. Whichever one works best for them, we’re happy to give them access.
Arnott: So related to ETFs, when we were preparing for this podcast, we ran some quick data looking at dollar-weighted returns for Dimensional’s funds, which account for the timing of inflows and outflows. And it looks like as a group, Dimensional funds have fared pretty well in that regard, and that shareholders typically aren’t trading excessively. And because of that, they’ve been able to keep a large portion of their funds’ total returns. Are you concerned that with the ETF format that people might be more apt to trade actively and end up hurting their results?
Booth: Yeah, it’s a concern. Like I say, it’s something we monitor. By now, though, we’ve had the good fortune of having huge funds. So on any given day, there are a lot of people coming in, a lot of people going out, and we don’t have much problem with the net flows. But it’s something we monitor. A concern I have about ETFs is just that what you bring up is that are people buying ETFs for the right reason? And I just observed that there’s been an explosion in the growth of indexing over the last 30 years. And if people were buying index funds because they didn’t think they could time market, then it seems like common sense to me is that trading volumes would have declined a lot. If now indexing is half of the world, you would think maybe trading would be half as great, but it’s even greater than it was before. So it’s grown. So it says to me that a lot of people buying index funds are trading them. Like a lot of technologies, indexing can be used for good or for bad. I think the sales pitch sometimes to investors is, “OK, I can’t pick stocks, but I can time markets. And so we’ll put you into a bunch of index funds and we’ll get out of those before they climb and get back into them before they take off.” It’s the same sort of nonsense that we railed against with stock-picking. So there are likely to be some good studies about that. That sounds like a good research project for somebody.
Arnott: Yeah, I think Jeff Ptak at Morningstar actually did look at dollar-rated returns for index funds and found that especially on the ETF side that there is some evidence that people are trading actively and ending up with lower returns.
Booth: Yeah, right. People just don’t want to believe. It’s human behavior. And Danny Kahneman, who’s a Nobel Laureate, said it’s unrealistic to think people would think anything differently, given the huge amount of advertising for actively managed funds and so forth. But people just think that if they work harder or are smarter than the guy next to them, that somehow, they’ll pick stocks better than that person. There’s no evidence of that.
Arnott: In the film, you talk about how as human beings, we tend to look for patterns and find them even if there isn’t really a pattern, which can be an obstacle when it comes to investing.
Booth: Yeah, as Ken French pointed out in the movie, it may be key to survival. If you make a guess as to what that thing is behind a tree—so thinking that it might be a lion and getting out of there may be a part of self-protection that you need, but it doesn’t seem to help you in picking stocks.
Arnott: Right.
Booth: So I think what people need to spend more time in is connecting what’s going on in their personal life with what’s going on in their investment life. People want to talk about what do you think the market’s going to do? Well, I don’t know. I can’t predict that. But what’s going on in your personal life? Are you getting ready to retire? Or if we have a recession, will you lose your job? These are things that are worth thinking about and maybe it causes you to adjust your portfolio around. So we’re not suggesting that people just invest in something and forget about it. Pay attention to what’s going on, but don’t try to waste your time timing short-term moves in the market. Now I’m beginning to lecture. I’m sorry about that.
Arnott: No, that’s OK. I think it’s worth repeating and it can definitely be challenging to stay focused on your own goals and your own financial situation when there’s so much going on externally. Toward the end of the film, you seem almost regretful that it’s only a teeny tiny percentage of the population that actually believes this stuff or this approach to investing. But would you count the uptake of traditional index funds as sort of a victory in your column, even if it’s not exactly how you’d like to see people invest?
Booth: Well, in there somewhere is something to celebrate. But the overall effect is that we’ve had an explosion of index funds, and it has been associated with a rise in trading volume, that takes away some of the buzz. That’s why I think there’s only really a small fraction of people actually really still believe this stuff. And the reason I guess it’s disappointing to me is I’ve worked pretty hard on this, trying to live the message the last 53 years. I don’t have 53 more to put into it. So I hope people wake up sooner rather than later.
Arnott: So one thing Eugene Fama says in the film is that we’re really not making the same type of quantum leaps in finance that were made back in the 1970s. Do you see any promising areas in academic finance now? Or is there any research that you think is interesting for future academics?
Booth: Well, we’ve built an incredible research team here. We relied heavily on Fama and French to build up our research capability. And our research team would be a very good finance faculty almost anywhere. And it’s hard to get into a lot of the things we’re working on now while they’re getting pretty boring. But in terms of research, things seem to be getting better and better over time. Fama points out, there are lot of good people doing great research now. Back when he started out, you could get all the important people in a room together, which is what we did at Wells Fargo. We’d have a seminar once a year and invite all the key people doing research in this area. And we could then sit down and present papers to each other and have dinner together and then we’d go home.
You can’t do that anymore. There’s just too much good stuff. I think what Fama is really kind of alluding to though is, look, it’s unlikely that we’ll have the second revolution anywhere comparable to the first revolution, which was the idea of going from saying, look, the way you think about investing is just wrong. That’s a huge revelation. And I can’t imagine there’ll be anything that’ll come in and shock people, because it’s a good example of how you would hope markets work and why you think they work, which is, look, if you have enough transparency, if everybody has access to similar data and you have enough trading volume and you have an adequate rule of law, it’s hard to believe that markets wouldn’t be officially priced. The only way that would happen would be if some segments of the population have, and we see this with insider trading, for example, that insiders do a pretty good job of trading. OK, that’s why we outlawed insider trading. And so, yeah, there’s going to be improvements in the future. And just like right now, when I tell people how I ran the portfolio when we first started, oh man, that is so primitive. And it was, but it was cutting edge at the time, and so I imagine 40 years from now, people will look back at what we are doing now and go, pretty good, but really primitive.
Arnott: So I’m curious when you first had the idea for making a film about Dimensional, were you inspired by any other films or do you have a favorite film about money and investing?
Booth: I really don’t. I think those kinds of films are largely dominated by people trying to sell you something, getting you to trade. But I did like the Madoff documentary. Here’s a guy, total fraud, that he went down to the SEC twice and explained exactly what he was doing. And they go, OK. So I think that was pretty funny. It’s sad. It’s one of those things you laugh at because it’s so bad.
Arnott: But it’s striking how he claimed to have this amazing performance record, and nobody really questioned it.
Booth: Well, that’s right. Evidently, our portfolio team said he made a sales call on us one time. And they just looked at it and they go, this can’t be true. It’s too good to be true. But it ties in with human behavior again. I think a lot of people realize that there’s probably some hanky-panky going on there. But as long as they were making the return, they didn’t want to say anything. So honesty is still always the best policy.
Arnott: Well, Christine mentioned some of the amazing sculptures that are shown in the film earlier. And I’m curious, you’re a very avid art collector. I’m curious about when you first started getting interested in art.
Booth: Well, I think my interest in art probably kind of paralleled my interest as my income went up. I remember my first apartment out of school, I had this great poster from MoMA, a Mondrian painting/poster of that, plastic wrap on it, whatever. It takes two things. It takes an interest in the art, and it takes the ability to afford it. So as you get older, you’re better able to afford those kinds of things. And I will say that you hear all the time, you can’t take it with you. Well, that’s true. One way you can enjoy your money is through art. I didn’t buy the art because I thought it was a good investment. I bought it because I liked it.
Arnott: So I think that’s another important message is that money isn’t just strictly functional, to support your basic needs, but you can use money to really appreciate life and support different causes that you believe in.
Booth: Yeah. And that’s the side benefit. Sometimes I worry about the other side. My parents never had any money. And I thought they were worth a lot. They were fantastic parents, just no money. So you don’t want to overstate the benefit of money that you can collect art. They went through the Great Depression and World War II, so they didn’t have the opportunity. They just made that opportunity happen for me.
Arnott: So for our last question, I wanted to ask what would you like your legacy to be?
Booth: Well, hopefully, I did the best I could. I hopefully kind of helped this movement toward passive management come alive. I feel a little good about that. I really get a kick out of having people come up to me at a conference or whatever and say—this has happened a few times: “I get a pension fund,” or “My 401(k) is invested in your funds. I just want to say thank you.” So hopefully, I guess I want my legacy to be that people come up to my kids and say thanks what your dad did for me.
Arnott: Well, thank you so much, David. This has been a great conversation, and I really enjoyed the film. I think you don’t have to be a finance geek to enjoy watching it. I think it’s accessible to a much broader audience, and it’s really not just the story of finance, but the story of a group of people getting together and pursuing their goals.
Booth: Well, it seems to have. One final comment: It seems to have excited people. We put the movie up on YouTube about two weeks ago and we have basically 3 million views already. So these ideas can be exciting to people if they pursue them.
Arnott: Yeah, I think they are. And thank you again. This has been great.
Booth: Thank you.
Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow me on social media @Christine_Benz on X or at Christine Benz on LinkedIn.
Arnott: And at Amy Arnott on LinkedIn.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week. Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com. Until next time, thanks for joining us.
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