I recently interviewed Dimensional Co-Founder David Booth on my podcast, Thirty Minute Mentors. Here is a transcript of our interview:
Adam: Our guest today helped transform the world of investing. David Booth is the co-founder of Dimensional Fund Advisors with $777 billion in assets under management as of the end of last year. David and Dimensional are featured in the new documentary, Tune Out the Noise. David, thank you for joining us. I look forward to this. Thank you. I’m looking forward to it. You grew up in Lawrence, Kansas, and you stuck around to attend the University of Kansas for college and for grad school. You’re a huge Jayhawk fan, huge supporter of the basketball program and of the university in general. You then went to the University of Chicago for business school. The business school is named after you. You went there to get your PhD, you wound up getting your MBA. Can you take listeners back to your early days? What early experiences and lessons shaped your worldview and shaped the trajectory of your success?
David: I guess immediate response to two parts. One, my parents and second part, a couple of teachers or professors along the way just made a huge difference and kind of paved the way for me. I think I’ve been a pretty lucky person. People always seem to be helping me and pushing me along. So I have a lot of outside help. For example, my parents knew they didn’t have enough money to send us away to school. And so they moved to Lawrence. That’s how we ended up in Lawrence. where the University of Kansas is, and I could go to the university and stay at home. Back in those days, housing costs was the big driver of costs, and they wouldn’t allow me to go to college at all. And I’m really thankful to my parents for arranging all of that. And then I had teachers along the way, Mrs. McReynolds. I’d taken calculus my senior year, and I didn’t do very well on the final exam in the first semester. So I decided to drop out of the math program. I was in my new class and Mrs. McReynolds had gone to the effort. She noticed I wasn’t in the class in the second semester. She went all the way down to the principal. found out where I transferred to, then proceeded to go to my new classroom and call me out in the hallway and tell me she wanted me back. And it turns out a lot of my progress is because I’m known for being rather quantitative. And I sailed through all the math programs and econometrics at Kansas and University of Chicago. But it wouldn’t happen without Mrs. McReynolds.
Adam: What a great lesson. Anyone has the ability to make an impact. Could be a parent, could be a teacher. You mentioned a high school teacher. I know another mentor for you, someone who made a huge impact in your life. A Nobel Prize winner who you were a research assistant to at the University of Chicago. And like you was one of the pioneers in transforming the way people invest.
David: When I went to the University of Chicago, it was just an incredibly exciting time. The field of finance is really undergoing a revolution. It was brought on by two things, data and computers. And before, say, 1960, it was really difficult to test out anything empirically. Computers weren’t big enough and the data sometimes wasn’t there to do the analysis. Well, if you’re going to have a science, You’ve got to be able to test out hypotheses. And that changed very rapidly in the sixties. One of the key people in that transformation was Jane Fama, my mentor and Nobel prize winner in 2013. Sometimes people think of investing as you have to be an insider. People feel like they’re outsiders and you have to be an insider to win. If you’re not an insider, you’ll lose. Well. You know, this revolution of finance was, for the most part, created by people you would think of as being outsiders. I mean, Fama’s dad was a truck driver. My parents were modest means. But all of a sudden, they had data that people on Wall Street didn’t have. And they discovered things that Wall Street didn’t really know. And Fama was one of the key figures, I think, at least last I saw. He was the most often cited. economics professor and leading academic journals. So he had a huge impact. So I went to work for him. When I went to Chicago, I thought I wanted to be a professor and then eventually I decided I didn’t want to be a professor. So I went into Fama’s office and the way he tells it, I can’t believe I did it this way. He said I walked into his office one day and said, I know what you do and I don’t want to do it. I think I was probably nicer than that. Anyway, he was terrific. He said, you know, I know this guy in San Francisco, Wells Fargo, Mac McQuown. He’s wanting to get index funds started. I’ll give him a call for you. He did. Mac and I hit it off really well. And I went to work for Wells in San Francisco. McQuown, just another person, just helped me out tremendously. You need a certain amount of luck. You need to benefit from kind of unlikely event in order to get ahead. I’ve been blessed with a lot of things that I had no reason to believe would turn out and did turn out very well.
Adam: And you described some unlikely events, but a lot of what you described also entails you putting yourself in a position to be successful. You demonstrate that you can and will add value. You were a person who was adding value to Gene Fama. You clearly demonstrated that you were someone that if he connected you to a person in his network, you are going to step up. So one part of the equation is benefiting from a mentor’s generosity. The other part of the equation is doing what you can to earn the trust of the people around you so that when your number gets called, you’re there and able to step up to the plate and capitalize on it.
David: You hit on one word that I think is really important in all of this, which is trust, particularly in the investment business. I tell people we get paid for managing money, but our business really is trust. And you have to earn that trust. You have to do what you say you’re going to do. And what you say you’re going to do has to be well thought out. So getting connected at Chicago and then eventually Wells, really put me in a good place to start a career. This indexing business that McQuown helped start, he really transformed the investment landscape. Nowadays, about half the mutual fund assets are invested in index type funds. And that was a big transformation. People are getting much better deals today than when I started in 1971. A better investment experience, fees are lower, and better design portfolios and so forth. So this revolution really transformed the investment landscape and made life better for people. People are better able to retire or send their kids to college because of this change in thinking, replacing the idea that you have to be smarter than the next guy and work harder and have more resources. If you have all of that, you’ll do better in investing than the person that doesn’t have those things. It turns out not to be true. There’s no compelling evidence that professionally managed portfolios do better than simple index strategies. That was one of the conclusions that came out that’s truly remarkable. And that’s what you would hope. It says market prices that What you look at on the screen in front of you, probably a pretty good indicator of the value. Now, the markets aren’t perfect, but the market is really dominated, I think, by institutional investors, buyers and sellers on both sides. Huge trade volume comes out and both sides of a trade have to feel like they got a good deal or they don’t trade. And that’s kind of the basis of what’s going on in the market. And actively managed investors don’t seem to be able to move faster than the market. And that’s what you would hope because what it means is everybody has a good chance of having a good investment experience because everybody can buy. Let’s call it the stock market portfolio, say a portfolio with a thousand stocks and that are something like, you know, on that order, several hundred stocks get well diversified, get fees low, don’t invest more in stocks than you can live with. And if you do all that over the long haul, you’re probably going to be okay. That’s a pretty uplifting message, a democratization of investing. And there are plenty of. firms out there now that offer these kinds of strategies. So there’s no reason for people not to have a good experience. This revolution of finance really took away all the excuses. So it’s part of my reason regarding talking to people is particularly younger people. I want to encourage them to get invested early on because one of the fundamental principles of investing is this magic of compounding. If you are lucky enough to have a 10% return, which is kind of what stocks have done historically, if you get that kind of return, your money will double about every seven years. That’s pretty good. So the key to investing is being in there playing for the long haul. Don’t try to project things. Don’t try to make short term movements in the market, but come up with a sensible investment solution. And it probably is going to involve taking some amount in stocks and some amount in relatively riskless assets like money market funds, that sort of thing. And that’s the big decision to make, how much in stocks versus how much relatively riskless assets. But if you figure out the right solution for you, then over the long haul, let the market do the work for you. It’s a pretty uplifting message.
Adam: David, as you’re breaking down your investment philosophy for listeners, a key theme in everything you’re sharing is recognizing that uncertainty exists as an investor and as a human being. you have to face it head on. And how you face it is ultimately going to impact your returns financially and your returns in life. What advice do you have for anyone on how to approach uncertainty, whether they’re approaching uncertainty as an investor or as a human being?
David: That’s a great question. And that kind of gets into really why we did the movie in the first place. Our view is if we can help people understand better how markets work, then they’re going to be more likely to come up with sensible investment solutions for them and get invested and stay invested and get the benefit of this compounding over time. Now, you raised a good issue, which is about there’s uncertainty in life as well as in the market. Investing in the market is uncertain and complex. So is life. So people, by the time they’ve grown up, they’ve learned how to deal quite a bit with uncertainty. Things don’t think of it that way. But there’s a lot of parallels between dealing with uncertainty in life and dealing with uncertainty in investing. Basically, first off, on the big decisions, it’s frequently difficult to predict anything. And that’s OK. You want to plan for things typically rather than trying to rely on your prediction. And What that means, then, is pay attention to what’s going on, whatever the outcome is. Figure out how to adapt to the situation. If you have a bad outcome, how do you mitigate whatever the bad outcome is? And then figure out what’s the best solution for you going forward. Human ingenuity is really what really makes the system run. If it weren’t for human ingenuity, things could easily spiral out of control. but soon ingenuity helps you get back on track. That seems to be what’s going on with an investment world as well, that when bad news comes in, say March of 2020, the COVID hit, market prices drop as they should, and they drop to levels where going forward, the stock market returns were really quite good. That’s how the market works, and that’s how life unfolds for most of us. I mean, growing up in Kansas, I wouldn’t have protected. I would be sitting in Austin today and chairman of a firm that manages almost a hundred billion dollars. So you just got to kind of play things as they come along make the best choices, and somehow, through all of this, figure out how to trust your judgment. Or in the case of investing, usually most people need some sort of financial advisor, if they can afford one, and find an advisor that you can trust. But basically, what I’m getting at is, funny enough, you can’t trust the stock market. Not the individual stocks in the market, but the overall market over the long haul, you have a good return over the long haul.
Adam: You mentioned the sense of astonishment. Sometimes you have to take a step back and remember that I was a little boy in Kansas not that long ago and now I’m running a company that manages nearly 800 billion dollars. What were the keys to turning Dimensional Fund from a small company that no one had ever heard of to one of the largest, most successful companies in the world of finance? How did you get there? What did you learn along the way?
David: Well, we based the firm on academic science, I mean, which was revolutionary. And we kept close touch with the leading academics that created that science. For example, at our firm and our mutual funds that we run, we have independent directors. Five of these that we’ve worked closely with have gone on to get Nobel Prizes. So you start with paying attention to what the best people have to say about things and then figure out the best way to implement it. Analogy to sports, whatever sport you watch, a lot of people run the same plays. Some of them just do it better than others. Or in medicine, maybe every doctor studies the same textbooks. Some doctors are just better. So you start with a great science and then you figure out the most sensible ways of implementing those ideas and fighting for every little percentage point in return. And over the long haul, if you focus on that, your returns are probably going to be OK. And along the way, you’ll learn the trust of your clients and they’ll stay with you and That enables you to grow to these incredible levels.
Adam: What do you look for in the people who you hire and what are the most important skills to excel in the investment business?
David: Well, there’s a couple of things I look for. One is, does this person seem like they’re an honest person? And secondly, do I think they would be good team players? We’re not interested in having hotshots come into the firm. We’ve got plenty of bright people running around to think that you’re going to be the brightest person in the firm. Probably pretty unrealistic. So we want good team play. We have a variety of skills that people need to have, and we have people that organize our social activities. You know, we have seminars. And then, of course, on the other end, we have people with great qualitative skills who need to have those to keep up to date on the research that’s going on about securities prices. So it’s a wide range of skills. But for my taste, if I have a nice person that’s honest and a team player, I can usually figure out some way to create a slot for them.
Adam: And a word that you’ve used a few times now over the course of this conversation is trust. Something that you mentioned is that, and I don’t know if you use these words exactly, but the key currency in your business is trust. And that’s the key currency in virtually every business. It’s the key currency of leadership. How can anyone build trust?
David: You have to have a sensible investment approach or business strategy, if it’s not investment business, that you can explain the essence of it, at least that people will understand. And then you have to do what you say you’re going to do. I’ll give you a story there. Our first strategy that we developed when we started the firm was a strategy around investing in the stocks of smaller companies, the small cap stocks. Well, we happen to start the worst nine-year run for small stocks relative to the performance of big stocks. So almost every money manager out there was doing better than we were doing. That’s a tough way to start a business. But we were able to grow through that time period, which shocks people. And why? Well, we did what we said we were going to do. In fact, our performance was probably better than you would have expected, given the performance of small cap stocks. And our essential argument was that if you’re forming an equity portfolio, a stock portfolio, you want stocks of large companies and small. You wouldn’t put all your money just in large companies. That was the argument. And over 43 years in business now, I don’t think I’ve had anybody say, no, that’s a silly idea. So we had a sensible idea. We executed well. And it just didn’t turn out the way we’d hoped. You can keep clients with that. And that’s how you build. And in fact, Now, every time we have a market downturn, you want to call up clients and reassure them, of course. But most of our long-term clients now call up. I know what you’re going to say. You don’t need to call me. Call somebody else. I’m in this for the long haul. And that’s how you grow a business. You can keep clients when results are disappointing. And in the investment business, everybody has periods of time when the results are disappointing. If you can keep clients when the results are disappointing, then you’re on your way to having a good business.
Adam: David, you shared a lot there that I love and something you shared in particular that I think is so valuable regardless of the business that you’re in. You shared an anecdote around making a bet that didn’t work out, but it was a bet that was grounded. in really good data, it was a sensible idea that just didn’t work out. And I can tell you I’ve been in a lot of different businesses, I’ve worked for huge companies, I’ve started different companies, and no matter what business you’re in, Things are never going to work out all of the time. Sometimes it’s going to work, sometimes it isn’t going to work. But ultimately, it comes down to taking sensible bets and recognizing that if they don’t work out, you just got to move on to the next one and you can’t get too high, you can’t get too low.
Adam: You have to own it and learn from it, but you’ve got to move on.
David: That’s a great point. One of the things that we try to stress with people is at the end of it all, you want to judge yourself by the quality of the decision you made and not the outcome, because the outcomes are frequently uncertain. Control what you can control. But a lot of things are just not controllable. And so you make the best decisions you can. And if you’ve done that, that’s all you can do. And then sometimes Things won’t work out. That’s why they call it uncertainty. So to your point, give it your best shot and learn to live with the outcome.
Adam: I really love that, reframing success as how successful is the quality of your decision rather than how successful is your outcome. Because you can control what you put in, you can’t necessarily control what you get out.
David: That’s one of the keys of life. At the end of it all, you want to look back and you made good choices and they didn’t always work out, but you did everything. That’s where you knew how. That’s all you can do. And that’s where luck comes in. You know, I mean, I’ve been incredibly lucky over time. I think I made good choices. It wasn’t just random luck. I think kind of helped shape it a little bit and things just worked out. I had a thousand lifetimes. I doubt many of them would turn out as well for me as the lifetime that I’ve lived. And I appreciate that, and I don’t want to take it for granted. But at the end of the day, dealing with life and managing money, it’s all about managing uncertainty. Some days you carry an umbrella and you didn’t need to, and other days it works the other way. The point is you can’t control the weather. What you can control is whether you carry an umbrella or not. So if the weather forecast calls for rain and you carry an umbrella and it doesn’t rain, Well, you made a good choice, just didn’t work out. I love that approach.
Adam: And when you approach life that way, it allows you to be a lot easier on yourself and beating yourself up isn’t constructive. It’s wasted energy and it allows you to focus on what ultimately matters, which is making positive decisions.
David: And focusing on things that are important. Errol Morris created a movie, Tune Out the Noise. Tune out the noise, focus on the things you can control and things that seem eminently sensible to you and lead your life that way and do it the best way you can and you’ll be okay.
Adam: And a lot of what we’re talking about is really understanding how to utilize data in decision making
David: In your experience, what are the keys to leading a data-driven business? One thing is, even though you have a data-driven business, you have to be careful about how hard you push on the data. By that, I mean, you look at the data and you come to conclusions, you develop these models, so forth. Well, all of these models are inherently incomplete. One type of model, really, making just a life decision on whatever you have to decide today. You kind of have a model of how it will work out. Well, it doesn’t always work out that way. Sometimes when you go out to jump in your car, it doesn’t start. I mean, your model says if I jump in the car, I can start it. Sometimes you’re wrong. So you have a lot of data that says that a car will start. But you have to keep in mind that things don’t always work out the way you expect. And so what you’re going to have to do is adapt to whatever the results are and figure out the best way to go forward. And that’s true of the investment business. Markets go up and down, and that’s true of many parts of life. Look at the data. One of the things that gets me now is analytics. Every sporting event now I go, analytics says to do this or analytics says to do that. These models all are inherently incomplete. Analytics can be very helpful. I’m not saying you ignore them. I mean, you want to pay attention to analytics. But sometimes you gotta go, you know, I just don’t think that’s right in this particular situation. Whoever developed those analytics, I don’t think really factored into this particular situation today. So I think I’m going to just use my judgment, be old school and live with what comes.
Adam: David, you have been a leader in the world of finance for many years. In your experience, what are the keys to successful leadership and what can anyone do to become a better leader?
David: Whether you’re talking about being a leader at a firm or leader on a football team or being a parent, there are some things in common. One is to be honest with people. A second one, would be, how can I help people advance, particularly kids? Kids have to find their way. How can I help them find their way? That’s a big part of leading. And then help people have a perspective on the business or growing up or whatever it is to the extent you can give people, let’s call it data or information that can be helpful. That’s great. What I shy away from is giving people advice. My attitude about leading is to help people help themselves. Create an environment where they can succeed. They have to accomplish it. I can’t accomplish it for them. All I can do is help. Starting a firm, one of the things that hit me right away was you can either decide you want to be the big cheese or you can win. You have to choose those. You can’t say, I’m going to be the boss. It’s hard to do that and be successful. But the keys to success, I think, are how can I assemble this group of people? have us all work together somehow, make the best decisions we can, and we’ll probably be okay.
Adam: David, what can anyone listening to this conversation do to become more successful personally and professionally?
David: First off, let’s measure success. Whatever success means to you is what success is. Jack Welch wrote a book called Winning. Winning can mean many things to different people. Too often people think of success as getting rich or something. My parents were incredibly successful and they never had much money. I thought they were worth a lot. So I’ve always kept that in mind. So the keys to success, as far as I’m concerned, are what are your personal values? By the time you’re in your 20s, you ought to have a well-developed personal philosophy of what’s right and what’s wrong, what’s good and what’s bad. And if you pursue a path consistent with those values and make the best decisions you can, you’re a success. So everybody can be a success. Not everybody can win at investing or win at a sport, but everybody can be successful.
Adam: David, I love it. I’m with you 110%. I absolutely love that. David, thank you for all the great advice and thank you for being a part of Thirty Minute Mentors.
David: Oh, I hate to correct you. I didn’t give you advice. I gave you some thoughts.
Adam: David, thank you for all the great thoughts that you shared and provided and for creating an environment in which the Thirty Minute Mentor listeners can become more successful. And thank you for the fun conversation.
David: Well, thank you. I enjoyed it.
Adam: I did, too.
