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The Science Behind The Markets: Masters in Business with David Booth · Masters in Business

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  Speaker 1: Bloomberg Audio Studios.
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  Speaker 2: Podcasts.
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  Speaker 1: Radio.
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  Speaker 3: News.
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  Speaker 1: This week on the podcast, what can I say? Legendary
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  Speaker 1: investor and founder of Dimensional Funds, David Booth, talks about
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  Speaker 1: his entire career, his philosophy, philanthropy, how he helped... build
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  Speaker 1: DFA to a trillion dollar fund and why people refuse
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  Speaker 1: to just manage what they can and stay calm in
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  Speaker 1: the face of volatility and market events. I thought the
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  Speaker 1: conversation and the book Stay Calm was fascinating. And I
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  Speaker 1: think you will also. David Booth, welcome back to Bloomberg.
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  Speaker 3: Well, thanks for having me. It's always a pleasure.
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  Speaker 1: And then you go to the University of Chicago for
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  Speaker 1: a Ph.D. That very much sounds like academia was the future.
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  Speaker 3: Well, it really was. I mean, in the sense that
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  Speaker 3: like a lot of kids, when you're in college or
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  Speaker 3: even high school, you think, boy, I'd like to be
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  Speaker 3: a professor because that's all you know.
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  Speaker 1: Right. And it's a great job. You're on a campus.
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  Speaker 1: It looks like fun.
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  Speaker 3: Yeah, back in those days, it was a good professionally.
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  Speaker 3: I mean, there is a thrill of teaching kids, seeing
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  Speaker 3: the light go on. Kind of the same thing we
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  Speaker 3: have in business. When you have a client finally, when
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  Speaker 3: they get it, it's very cool.
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  Speaker 1: So at Chicago, you pivot from a Ph.D. to an M.B.A.,
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  Speaker 1: and eventually become some young professor, was not that much
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  Speaker 1: older than you, Gene Fama's assistant researcher, TA. Tell us
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  Speaker 1: a little bit about what led to that pivot.
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  Speaker 3: Well, I mean, the backdrop is, in that period of time,
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  Speaker 3: the late 60s, early 70s, that's where science really emerged,
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  Speaker 3: or finance emerged as a science, and has continued to evolve,
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  Speaker 3: you know, even today. And by that, I mean... For
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  Speaker 3: something to be a science, you need testable hypotheses. Don't worry,
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  Speaker 3: I'm not getting too heavy into this. And before 1960,
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  Speaker 3: they just didn't have the data to test things out.
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  Speaker 3: So in the early 60s, the University of Chicago developed
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  Speaker 3: this research quality database.
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  Speaker 1: CRISP.
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  Speaker 3: CRISP. It started in 1926. So now we have, they've
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  Speaker 3: updated it, so now we have over 100 years of data.
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  Speaker 1: When did Chicago first roll that out?
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  Speaker 3: About 63. While Fama, my mentor and Nobel laureate in 2013,
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  Speaker 3: he was in the PhD program. And Chicago, Jim Laurie
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  Speaker 3: and Larry Fisher developed this database. And they turned it
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  Speaker 3: over to Gene and said, look, do some paper. Do
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  Speaker 3: something with this data. And so he started. He had
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  Speaker 3: a head start on everybody, which is, and for the
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  Speaker 3: next 20 years, he was a, the most cited academic.
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  Speaker 1: Still one of the most cited academics.
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  Speaker 3: Maybe the most ever, really, in finance.
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  Speaker 1: First mover advantage, for sure. So around the time you
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  Speaker 1: finish your PhD, Fama's efficient market hypothesis, that thesis was
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  Speaker 1: starting to gain traction, at least in academia, if not
• 4:01
  Speaker 1: yet on Wall Street, Tell us a little bit about
• 4:04
  Speaker 1: what was so attractive about EMH.
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  Speaker 3: Well, it was incredibly exciting. First, let me just make
• 4:09
  Speaker 3: a slight correction. I actually didn't get a Ph.D.
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  Speaker 1: Right. You were working on your Ph.D. and then got
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  Speaker 1: an MBA.
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  Speaker 3: Yeah. And eventually I decided the world would be better
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  Speaker 3: served if Gene Fama did research and I tried to
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  Speaker 3: apply the ideas rather than the other way around. So
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  Speaker 3: I walked into his office one day and said, look,
• 4:30
  Speaker 3: I have I think I'd like to leave the program.
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  Speaker 3: So he calls up Mac McQuown out at Wells Fargo
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  Speaker 3: in San Francisco. Mac was in charge of applying qualitative
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  Speaker 3: methods for the bank, and one of the areas he
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  Speaker 3: worked on was investing. So he calls up Mac. Mac
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  Speaker 3: had always wanted one of his students, so he recommended me.
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  Speaker 3: Mac and I hit it off, and he invited me
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  Speaker 3: to go work for them, so I decided to leave
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  Speaker 3: the program.
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  Speaker 1: So the first job, did you ever get your MBA,
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  Speaker 1: by the way?
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  Speaker 3: I got the MBA on the way out. They gave
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  Speaker 3: me an MBA.
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  Speaker 1: That was nice. That was a good investment on their part.
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  Speaker 1: You worked for Mac at Wells Fargo in San Francisco.
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  Speaker 3: In San Francisco.
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  Speaker 1: I didn't realize you were on the West Coast for
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  Speaker 1: a while.
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  Speaker 3: Yeah, right. I mean, this is the early 70s, so
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  Speaker 3: it was still kind of Haight-Ashbury kind of thing. For sure.
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  Speaker 1: So Mac is the guy who's often credited with creating
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  Speaker 1: the first version of an index fund. I think if
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  Speaker 1: memory serves, it was for an institutional client's pension or
• 5:33
  Speaker 1: something like that. Right.
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  Speaker 3: It was Samsonite.
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  Speaker 1: Samsonite. That's right. And, um, walk us through that. What
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  Speaker 1: was it like?
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  Speaker 3: It, it was, it turns out it was really pivotal,
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  Speaker 3: pivotal in, uh, in kind of the history of, of finance, uh, for, uh,
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  Speaker 3: a couple of reasons. One is in, um, doing all
• 5:55
  Speaker 3: this research in finance, the fundamental question became, if you
• 6:03
  Speaker 3: can't outguess the market, how are you supposed to invest?
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  Speaker 3: I mean, most people growing up thinking, and back in
• 6:09
  Speaker 3: those days, everybody thought that investing was about trying to
• 6:12
  Speaker 3: pick the next winner stock and time markets and that
• 6:16
  Speaker 3: sort of thing. And beginning in the mid-60s, all of
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  Speaker 3: a sudden, with this burst of data, they could examine
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  Speaker 3: things like, are professional managers that try to outguess the market,
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  Speaker 3: are they worth the cost? You know, and they've been
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  Speaker 3: doing this research for years, and there's no compelling evidence
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  Speaker 3: that they're worth the cost. In fact, I think the
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  Speaker 3: most practical assumption for all your readers is, you know,
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  Speaker 3: the professional investors don't seem to be able to beat
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  Speaker 3: the market, okay? And that has a profound implication. And
• 6:48
  Speaker 3: in fact, we can get around more of the personal story.
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  Speaker 3: My parents... grew up in the Great Depression, and then
• 6:57
  Speaker 3: fought World War II and so forth, and never had
• 7:01
  Speaker 3: much money. But they never invested in public markets because
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  Speaker 3: they thought of themselves as outsiders, and the insiders would
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  Speaker 3: make all the money and just take advantage of them.
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  Speaker 3: So they never invested, and they had a little tougher
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  Speaker 3: time in retirement than they probably should have.
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  Speaker 1: And to be fair, the history before the post-World War
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  Speaker 1: II era was... They weren't so wrong.
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  Speaker 3: Right, they weren't so wrong. So now that's the breakthrough.
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  Speaker 3: One of the implications of the new science is that
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  Speaker 3: the outsiders can do as well as the insiders. Maybe
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  Speaker 3: better once fees are considered because you can buy market
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  Speaker 3: portfolios very easily and very inexpensively now. And the pros
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  Speaker 3: don't seem to be able to beat that.
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  Speaker 1: Well, the data on the pros, it doesn't matter if
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  Speaker 1: you're looking at Morningstar or Spiever or Dalbar or any
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  Speaker 1: of the annual studies, is in any given year, less
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  Speaker 1: than half of professionals beat the index, and I think
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  Speaker 1: that's net of fees.
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  Speaker 3: In fact, yesterday, sorry, but it was, there was a
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  Speaker 3: front page article in Wall Street Journal, right? Only 27%
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  Speaker 3: last year, in the last 12 months.
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  Speaker 1: It was a particularly bad year because one sector dominated,
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  Speaker 1: and if you didn't have exposure to that sector, you
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  Speaker 1: badly lagged. And the year before, the sector didn't dominate, so...
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  Speaker 1: You had to pick the sector, time it right, and
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  Speaker 1: stay invested.
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  Speaker 3: Of course, if you do all of that, you don't
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  Speaker 3: need our help.
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  Speaker 1: That's exactly right. So Mac creates the first index fund.
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  Speaker 1: I'm really curious, or one of the first. I'm curious,
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  Speaker 1: was there much of a reaction or any pushback from
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  Speaker 1: Wall Street, or did it just kind of slip by unnoticed?
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  Speaker 3: No, there was a huge pushback. It was stuff they
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  Speaker 3: didn't want to hear. I mean, they've been claiming for years, oh, yeah,
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  Speaker 3: we can beat the market. We can do. 15% or 20%
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  Speaker 3: regardless of markets, you have all these claims. It turned out, unfortunately,
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  Speaker 3: it couldn't be backed up by the data. That's a
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  Speaker 3: very powerful lesson in developing arguments. I mean, if you
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  Speaker 3: have data and the other side doesn't, it's kind of
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  Speaker 3: an unfair fight. But it gets into a lot of
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  Speaker 3: issues we'll cover as to. Why I'm still out trying
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  Speaker 3: to deliver that message. It's just so hard to believe.
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  Speaker 1: So let's talk a little bit about that message. You
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  Speaker 1: and some of your Chicago classmates, Rex Sinkveld is one,
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  Speaker 1: and he had worked on an S & P 500
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  Speaker 1: index fund at American National Bank. And then Larry Klotz
• 9:36
  Speaker 1: was also a Chicago... No, he was just.
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  Speaker 3: We worked together for A.G. Becker.
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  Speaker 1: Uh-huh. And that was also in Chicago, but not the university.
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  Speaker 3: Yeah, right, right, right.
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  Speaker 1: And then Mac basically helped fund this, hey, we want
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  Speaker 1: to apply everything we learned at Chicago and express the
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  Speaker 1: insights of Fama in an investable thesis.
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  Speaker 3: Right, exactly. the interesting thing there was that there were
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  Speaker 3: really two avenues that were being explored simultaneously. We had
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  Speaker 3: one group that I worked in and we used as
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  Speaker 3: our primary outside consultants, Fisher.
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  Speaker 1: Black and Myron Scholes. More Nobel laureates.
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  Speaker 3: Two more, yeah. But it turns out In working on
• 10:18
  Speaker 3: our project, they developed the Black-Scholes option pricing model for
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  Speaker 3: which Myron became a Nobel laureate. Fisher, unfortunately, had passed away,
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  Speaker 3: so he didn't get it. But the idea of our
• 10:31
  Speaker 3: group was, can we... Okay, we accept Michael Jensen and
• 10:35
  Speaker 3: the work of others says that the pros can't seem
• 10:37
  Speaker 3: to beat the market. So what are you supposed to do?
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  Speaker 3: So by then, we'd developed quite a bit of the science.
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  Speaker 3: And one idea... based on the models at the time.
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  Speaker 3: Sounds silly now, but it was, well, if you have
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  Speaker 3: a portfolio that has a higher beta than the market,
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  Speaker 3: it should outperform.
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  Speaker 1: But does that mean you're just taking on more risk?
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  Speaker 3: You're just taking on more risk. But, you know, on risk.
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  Speaker 3: So that's one way to beat the market is take
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  Speaker 3: more risk, but still being diversified. So that was the
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  Speaker 3: Samsonite account. They figured out a way of creating a
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  Speaker 3: higher beta portfolio. Basically, they would start out with equal
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  Speaker 3: positions in all the stocks they bought, equal dollar amounts. And,
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  Speaker 3: you know, a portfolio like that should have a somewhat
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  Speaker 3: higher beta. Let me just refresh people's memory. The market
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  Speaker 3: has a beta of one. So if you fluctuate more
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  Speaker 3: than the market, you have a beta greater than one.
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  Speaker 3: And fluctuate less than the market, beta is less than one.
• 11:45
  Speaker 3: And so if you have a, have a higher beta,
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  Speaker 3: you should outperform. That was the thinking. Incredibly naive. We
• 11:52
  Speaker 3: were kind of geeky back then. So I think Samson
• 11:55
  Speaker 3: and I was.
• 11:55
  Speaker 1: I think you guys are still a little geeky.
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  Speaker 3: Yeah, still a little geeky. Well, yeah, I've learned to
• 12:00
  Speaker 3: kind of appreciate that, actually. So that was one of
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  Speaker 3: the groups. The other group at Wells was the trust department.
• 12:08
  Speaker 3: And Mac hired somebody to head up the trust investments group.
• 12:15
  Speaker 3: and to do an S & P 500 index fund. Okay,
• 12:19
  Speaker 3: so that was the S & P.
• 12:21
  Speaker 1: Still early 70s? Yeah, still. So this is decades before BlackRock,
• 12:26
  Speaker 1: years before Vanguard. This is very, very early. Right.
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  Speaker 3: So that's what they wanted to do. And we go, look,
• 12:33
  Speaker 3: as a scientist, you wouldn't do an index fund. But
• 12:36
  Speaker 3: I think it was some marketing genius came in and said, no,
• 12:38
  Speaker 3: you want an S & P 500 index fund. Everybody
• 12:41
  Speaker 3: can understand that. You can track the index. And here again,
• 12:45
  Speaker 3: the pros don't seem to be able to beat that index.
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  Speaker 3: So why don't you at least get the index return?
• 12:53
  Speaker 1: Can't get alpha if you're not at least getting beta, right?
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  Speaker 3: Yeah, right. So those are two different points. And the
• 13:00
  Speaker 3: reason I emphasize that is that S & P 500
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  Speaker 3: index fund idea took off and it changed hands. That
• 13:07
  Speaker 3: group left and changed hands a couple of times. And
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  Speaker 3: now that's the cornerstone of BlackRock.
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  Speaker 1: It worked its way eventually to Barclays, and then BlackRock
• 13:18
  Speaker 1: bought that whole business in, what are they, 14, 15 trillion?
• 13:22
  Speaker 3: Yeah, right. I mean, it's phenomenal success. So I'm not arguing.
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  Speaker 1: And they basically proved the point, hey, it's really hard
• 13:30
  Speaker 1: to beat the market.
• 13:31
  Speaker 3: To beat the market, yeah. So hats off to them. Now,
• 13:34
  Speaker 3: keep in mind, so let's go back to the other group,
• 13:36
  Speaker 3: the one that I was working on. That really became...
• 13:39
  Speaker 3: the basis for Dimensional. So eventually our group, we ended
• 13:43
  Speaker 3: up irritating the trust department enough, they got rid of us.
• 13:47
  Speaker 1: So this was you, Rex.
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  Speaker 3: No, Rex wasn't there at the time.
• 13:50
  Speaker 1: He wasn't. So who was the initial group?
• 13:53
  Speaker 3: Well, Rex was part of the initial group of Dimensional, sorry.
• 13:58
  Speaker 3: And we brought in, to help us out, one of
• 14:03
  Speaker 3: the first two people we talked to were Gene Fama,
• 14:07
  Speaker 3: my mentor in the research side, and Mack McQuown. So
• 14:10
  Speaker 3: by that time, it left Wells as well. So that's
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  Speaker 3: how we... Then we pulled together the other leading academics
• 14:17
  Speaker 3: we worked with, people like Merton Miller, who was a
• 14:20
  Speaker 3: 1990 Nobel laureate, and Myron Scholes, a 97, along with Fama.
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  Speaker 1: So out of all of this, your first fund that
• 14:30
  Speaker 1: you launched when DFA began in Brooklyn... was a small-cap
• 14:36
  Speaker 1: or micro-cap strategy?
• 14:36
  Speaker 3: Yeah, right. We were the first people to use small-cap
• 14:38
  Speaker 3: as a term, meaning a smaller.
• 14:42
  Speaker 1: And this was based on Fama's, some of the initial factors.
• 14:47
  Speaker 1: Small seemed to have persistent performance attributes.
• 14:50
  Speaker 3: Yeah, that was documented about 10 years later. So here
• 14:53
  Speaker 3: we are, we're in some ways flying blind. We had
• 14:57
  Speaker 3: a compelling argument, because in 1981, if you looked at
• 15:00
  Speaker 3: large institutional investors, they weren't holding the stocks of smaller
• 15:04
  Speaker 3: companies in a meaningful way. So if you want to
• 15:06
  Speaker 3: be diversified, you want large and small, not just large.
• 15:11
  Speaker 1: So was that the pitch to institutions?
• 15:13
  Speaker 2: Yeah.
• 15:14
  Speaker 1: Small cap will diversify off the rest of your, against
• 15:17
  Speaker 1: the rest of your holdings. Right.
• 15:19
  Speaker 3: And then, and talking to Fama, he said, you know,
• 15:20
  Speaker 3: we had, and so we got our first clients with that.
• 15:24
  Speaker 3: So we often running with a small cap fund, we
• 15:26
  Speaker 3: had clients and Fama goes, well, you know, we have
• 15:30
  Speaker 3: a student here that did his PhD dissertation on just
• 15:32
  Speaker 3: what you're looking at, I think. He goes, uh, Ralph Bonds.
• 15:36
  Speaker 3: Ralph had done a study looking, breaking down stocks on
• 15:41
  Speaker 3: the New York Stock Exchange into size quintiles, largest to smallest.
• 15:45
  Speaker 3: And the smallest stock, smallest quintile, outperformed all the others
• 15:49
  Speaker 3: by quite a bit over time. So, putting my marketing
• 15:53
  Speaker 3: hat on, I go, I think we'll define small to
• 15:55
  Speaker 3: be the smallest quintile of companies on New York. And
• 15:58
  Speaker 3: Mama didn't raise a complete idiot here, you know? So
• 16:02
  Speaker 3: that was how we got started. And there really wasn't
• 16:07
  Speaker 3: a counter argument because people couldn't say, oh, you know,
• 16:10
  Speaker 3: I've got that covered. They knew they didn't have a
• 16:12
  Speaker 3: small cap covered. So what we were able to do
• 16:14
  Speaker 3: is provide access, which is to small companies. And that's
• 16:20
  Speaker 3: really the basis of Dimensional. Something that's really, and about
• 16:25
  Speaker 3: 10 years later, Fahm, along with his colleague, Ken French, felt,
• 16:29
  Speaker 3: you know, developed this multi-factor model. So we, when we,
• 16:34
  Speaker 3: back when I was at Wells, we just had the
• 16:36
  Speaker 3: single factor beta. So we had a couple more factors.
• 16:39
  Speaker 3: That's kidding.
• 16:39
  Speaker 1: So the Pharma French started with three, then it was five,
• 16:42
  Speaker 1: and arguably there are just hundreds, most of which are tiny.
• 16:46
  Speaker 3: Yeah. Yeah, most of which are tiny, and they kind
• 16:49
  Speaker 3: of collapsed.
• 16:51
  Speaker 1: You know, five to seven is plenty.
• 16:53
  Speaker 3: Well, three is plenty, I think. We have really four,
• 16:57
  Speaker 3: five now. But, You know, you get your big bang
• 16:59
  Speaker 3: out of the first one in the market.
• 17:01
  Speaker 1: The beta.
• 17:02
  Speaker 3: The beta. And the second factor, say, value versus growth.
• 17:09
  Speaker 3: That picks up a lot. Not as much as the first.
• 17:12
  Speaker 3: And then you get into small. Is that small? That
• 17:15
  Speaker 3: adds a little. Then you can add. Pretty soon there's
• 17:17
  Speaker 3: diminishing marginal utility like everything in life.
• 17:20
  Speaker 1: Quality, momentum. As you work your way down, each generates
• 17:23
  Speaker 1: less and less.
• 17:24
  Speaker 3: A bang.
• 17:25
  Speaker 1: But what's so fascinating to me is Nobody had taken
• 17:29
  Speaker 1: the approach that, hey, there is plenty of quantitative data
• 17:33
  Speaker 1: to back this up. Here is a testable thesis, a
• 17:38
  Speaker 1: falsifiable thesis, and we can express these ideas in a portfolio. That,
• 17:43
  Speaker 1: to me, was what set the launch of Dimensional apart
• 17:48
  Speaker 1: from everybody else. Am I stating that correctly?
• 17:51
  Speaker 3: You got it. That's it. And it shows you how
• 17:54
  Speaker 3: powerful an idea it was because here we are. Starting
• 17:57
  Speaker 3: a firm, we have no track record. I'm the first
• 17:59
  Speaker 3: portfolio manager. I'd never managed stocks or even bought stocks before.
• 18:06
  Speaker 3: And we're operating out of my spare bedroom in downtown
• 18:09
  Speaker 3: Brooklyn Heights, you know. So you figure, how can you
• 18:14
  Speaker 3: pull that off? Well, you can pull it off if
• 18:16
  Speaker 3: your idea is as profound as the idea itself is
• 18:21
  Speaker 3: so profound and backed up with incredible research. You know,
• 18:25
  Speaker 3: that's It's hard to refute.
• 18:28
  Speaker 1: So here's the key question. Given how powerful that is,
• 18:33
  Speaker 1: but at the time fairly novel, what do you think
• 18:37
  Speaker 1: Wall Street just missed about indexing investing? Because clearly there's
• 18:42
  Speaker 1: a financial opportunity. Whether or not your particular fund at
• 18:47
  Speaker 1: the moment is selling performance and active selection, no one
• 18:53
  Speaker 1: else looked at this and said, hey, there's a business
• 18:55
  Speaker 1: to be had here.
• 18:56
  Speaker 3: Well, back in those days, and fortunately this is changing now,
• 18:59
  Speaker 3: but back in those days, basically nearly all financial services
• 19:04
  Speaker 3: were distributed through commission salesmen. So Wall Street, if you
• 19:09
  Speaker 3: have a commission broker managing your money, I don't know
• 19:12
  Speaker 3: what you're going to do, but you're going to be
• 19:14
  Speaker 3: trading a lot, I can assure you. And if there's
• 19:17
  Speaker 3: anything that all this research pointed to is you don't
• 19:20
  Speaker 3: want to trade a lot. Trading is a negative expected outcome.
• 19:26
  Speaker 3: kind of like gambling in Vegas. But that's the cornerstone
• 19:31
  Speaker 3: of Wall Street. So you go, what do you mean?
• 19:34
  Speaker 3: You're telling me I shouldn't be trading a lot? You're
• 19:37
  Speaker 3: ripping my eyes out. I mean, that can't be true.
• 19:39
  Speaker 3: And you go, hey, look, all I can tell you
• 19:43
  Speaker 3: is we have logic, reason, and empirical evidence on our side.
• 19:46
  Speaker 3: You have no data. All you have is bluster on
• 19:49
  Speaker 3: your side. you know and over the long haul we're
• 19:52
  Speaker 3: winning but it's taken 50 years.
• 19:54
  Speaker 1: You know hard to make somebody understand something when their
• 19:58
  Speaker 1: income is depending on them not understanding it right to
• 20:01
  Speaker 1: paraphrase right.
• 20:03
  Speaker 3: And you don't have data to support it yeah he
• 20:06
  Speaker 3: then all you're doing is bluster and Look, Wall Street
• 20:09
  Speaker 3: firms in those days were very good at shoving product
• 20:12
  Speaker 3: down people's throats.
• 20:13
  Speaker 1: Oh, for sure. I would tell you they're still pretty
• 20:16
  Speaker 1: good at it.
• 20:17
  Speaker 3: Well, I'm softening up. Because along the way, there was developed,
• 20:23
  Speaker 3: which is an incredible development, almost as important as the
• 20:27
  Speaker 3: development of the science, was the development of the fee-only
• 20:30
  Speaker 3: financial advisor, which is we started working with in the
• 20:33
  Speaker 3: late 1980s.
• 20:36
  Speaker 1: We're going to get to that question. I want to
• 20:38
  Speaker 1: stay with farmer's insights and your ability to express that
• 20:42
  Speaker 1: in a portfolio. The fascinating thing about DFA to me
• 20:47
  Speaker 1: is that it's not simple market cap-based indexing. The approach
• 20:56
  Speaker 1: that you embraced early on was, how can we express
• 21:01
  Speaker 1: something that's a combination of what indexing would eventually become
• 21:07
  Speaker 1: married to a systematic factor-based investing strategy.
• 21:12
  Speaker 3: Right. And by the way, early on, even going back
• 21:17
  Speaker 3: to the days at Wells, we have these two groups.
• 21:19
  Speaker 3: You know, you ought to index. And then the scientists say, no,
• 21:22
  Speaker 3: you can do better than indexing. You know, and that's
• 21:28
  Speaker 3: 45 years. That's, you know, that's been our message, which,
• 21:31
  Speaker 3: you know, as a scientist, you wouldn't index for a
• 21:33
  Speaker 3: lot of reasons. One is.
• 21:38
  Speaker 3: You're putting a constraint on yourself. I want to track
• 21:40
  Speaker 3: an index. Constraints cost in economic terms. It's costly, and
• 21:44
  Speaker 3: we can get into where the cost is. The other
• 21:48
  Speaker 3: part of it is the silly way that index funds
• 21:51
  Speaker 3: have to behave.
• 21:52
  Speaker 1: Because of the announcements of additions and deletions and Y-Telegraph.
• 21:58
  Speaker 3: Y-Telegraph. Standard & Poor's, if they add a new stock
• 22:02
  Speaker 3: into their S & P 500 index today, it'll go
• 22:05
  Speaker 3: in at at tonight's closing price. If you are an
• 22:09
  Speaker 3: S & P 500 index fund manager, then you want
• 22:12
  Speaker 3: to buy that stock today at tonight's closing price.
• 22:16
  Speaker 1: Even though you know it's going to run up in anticipation. Right.
• 22:20
  Speaker 3: And even though you know that every other S &
• 22:23
  Speaker 3: P 500 index fund manager that's out there is also
• 22:26
  Speaker 3: going to want that stock at tonight's... So that's where,
• 22:31
  Speaker 3: you know, science... kind of probably all sciences are this way.
• 22:35
  Speaker 3: There's a science and there's the art of the science.
• 22:37
  Speaker 3: You know, you go to medical doctors. Let's say they
• 22:40
  Speaker 3: all study the same textbooks. Well, some of them just
• 22:43
  Speaker 3: better at execution than others. And that's what we're talking
• 22:47
  Speaker 3: about here. You know, the simplest of all ideas is
• 22:53
  Speaker 3: if you're trying to buy a stock at the same
• 22:55
  Speaker 3: time everybody else is, that's probably not a good trade.
• 22:58
  Speaker 3: You know, the intuition would tell you that. And I
• 23:01
  Speaker 3: think our most recent studies shows that the run-up was
• 23:04
  Speaker 3: about 4%. When it goes into the index, the index
• 23:07
  Speaker 3: pays about 4% more than a fair price.
• 23:11
  Speaker 1: And the flip side is the deletions have a tendency
• 23:16
  Speaker 1: to outperform the S & P over something like 12
• 23:19
  Speaker 1: or 24 months. Same thing, people sell in advance. By
• 23:22
  Speaker 1: the time it's actually deleted, it's appreciably cheaper, and maybe
• 23:26
  Speaker 1: that becomes a value.
• 23:28
  Speaker 3: Well, let me give you the downside of our approach
• 23:30
  Speaker 3: when we're talking about, which is you have to have
• 23:32
  Speaker 3: a certain amount of trust in the manager because we're
• 23:36
  Speaker 3: not slavery. I mean, the indexing, you know exactly what,
• 23:40
  Speaker 3: they track the gosh darn index. That's what they said,
• 23:43
  Speaker 3: that's all they said they would do. And our idea
• 23:46
  Speaker 3: of saying, look, we will use a little flexibility, a
• 23:49
  Speaker 3: little bit of human judgment along the way. Not a lot,
• 23:51
  Speaker 3: but you know, not like the old days of wild
• 23:55
  Speaker 3: stock picking.
• 23:55
  Speaker 1: Throwing darts.
• 23:56
  Speaker 3: Throwing darts or whatever. But so we'll use a little
• 23:59
  Speaker 3: bit of judgment. That's, requires you to have a little
• 24:04
  Speaker 3: confidence in our ability to execute. So when we started,
• 24:08
  Speaker 3: a lot of people said, look, how do we know
• 24:11
  Speaker 3: you can execute? Because when you go out and buy
• 24:14
  Speaker 3: or sell, you're going to be trading against professional investors
• 24:18
  Speaker 3: that think they know, that they think they have undiscounted information,
• 24:22
  Speaker 3: if you will. They have something special, special knowledge, and
• 24:27
  Speaker 3: you don't. Okay, well, it turns out There's a flip
• 24:30
  Speaker 3: side to that, which is if you think you have
• 24:34
  Speaker 3: special insight, if you're an active manager and you think
• 24:36
  Speaker 3: you know something special, you also realize the half-life of
• 24:40
  Speaker 3: that is really short, minutes probably.
• 24:43
  Speaker 1: Today it's probably milliseconds.
• 24:45
  Speaker 3: Probably milliseconds. So if you want to get rid of
• 24:47
  Speaker 3: a stock, you want to get rid of it right now,
• 24:50
  Speaker 3: at least by the end of the day. And so
• 24:53
  Speaker 3: we come along and we're kind of indifferent. We buy
• 24:56
  Speaker 3: 10,000 stocks on any given day, you know, we We
• 24:59
  Speaker 3: don't buy all 10,000. We buy it and we kind
• 25:02
  Speaker 3: of focus a lot on what's trading easily that day.
• 25:08
  Speaker 3: Even a small company stock, 20% of the time it
• 25:11
  Speaker 3: trades a lot.
• 25:13
  Speaker 1: In other words, you can use execution and volatility as
• 25:16
  Speaker 1: a source of better pricing.
• 25:18
  Speaker 3: Better pricing, yeah. And that's worked out over 45 years.
• 25:24
  Speaker 3: The first 45 are the toughest, I realize. But it's still...
• 25:30
  Speaker 3: You know, people slap their forehead, and that's hard to
• 25:32
  Speaker 3: believe that this professional money manager out there trading against you,
• 25:39
  Speaker 3: it's not that we take advantage of him. We provide liquidity,
• 25:42
  Speaker 3: and our clients get the benefit of providing that service.
• 25:48
  Speaker 1: And by providing liquidity, it means you're willing to be
• 25:50
  Speaker 1: a buyer at times when many other people are not. Right.
• 25:54
  Speaker 3: We're not going to pay retail for that stock, but
• 25:57
  Speaker 3: if you can talk to me, can you do something
• 25:59
  Speaker 3: for me on the price?
• 25:59
  Speaker 1: Take a little something off. Really interesting. Coming up, we
• 26:03
  Speaker 1: continue our conversation with David Booth, founder and chairman of
• 26:07
  Speaker 1: Dimensional Funds Advisor, talking about his brand new book, Stay Calm,
• 26:12
  Speaker 1: Learning to Embrace Uncertainty in Investing and Life. I'm Barry Ritholtz.
• 26:18
  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. I'm
• 26:23
  Speaker 1: Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
• 26:27
  Speaker 1: My extra special guest today is David Booth. He is
• 26:31
  Speaker 1: the founder and chairman of Dimensional Funds Advisors. His new
• 26:36
  Speaker 1: book is out probably by the time you're hearing this.
• 26:39
  Speaker 1: Stay calm. Learning to embrace uncertainty in investing and life.
• 26:45
  Speaker 1: So I want to sum up the book in a sentence,
• 26:49
  Speaker 1: and then we're going to really delve into it. uncertainty
• 26:53
  Speaker 1: isn't something to fear. It's where possibility lives. Explain that.
• 26:59
  Speaker 3: Well, that is a good quote. Every now and then,
• 27:01
  Speaker 3: you know, you write something down.
• 27:02
  Speaker 1: By the way, I have a dozen fantastic quotes and
• 27:04
  Speaker 1: I'm going to try and click through all of them
• 27:06
  Speaker 1: from you.
• 27:07
  Speaker 3: Yeah, no, it's funny. Cause I mean, you write it
• 27:09
  Speaker 3: and then you forget you wrote it. And then you
• 27:10
  Speaker 3: go back and look at it and go, Hey, that's
• 27:12
  Speaker 3: not bad. That's not bad. Yeah. Yeah, no, it's, um,
• 27:16
  Speaker 3: and not only, um, Let me talk about a breakthrough
• 27:21
  Speaker 3: that happened to us about 10 years ago. When we started,
• 27:25
  Speaker 3: we realized that there are a lot of parallels between
• 27:30
  Speaker 3: investing and your life experiences. And a lot of that
• 27:34
  Speaker 3: has to do with how you deal with uncertainty. You know,
• 27:39
  Speaker 3: as you grow, you learn how to deal with uncertainty.
• 27:42
  Speaker 3: And what you realize is uncertainty is what creates opportunity.
• 27:46
  Speaker 3: So if there were no uncertainty, you know, you wouldn't
• 27:49
  Speaker 3: have have the ability to progress. So it's not about
• 27:54
  Speaker 3: eliminating uncertainty, it's about managing uncertainty. And that's true in life.
• 28:00
  Speaker 3: And the reason I bring that up is because that's
• 28:03
  Speaker 3: also true in investing. If there are no uncertainty, in
• 28:08
  Speaker 3: other words, if all investing was riskless, then.
• 28:12
  Speaker 1: I got some 10-year treasuries at 3.5% that you can
• 28:16
  Speaker 1: hold and barely keep up with inflation.
• 28:19
  Speaker 3: Well, if there's no uncertainty in investing, every investment would
• 28:22
  Speaker 3: have the same return, the riskless return, whatever that is.
• 28:28
  Speaker 3: So in investing as well, then it's uncertainty that creates opportunity.
• 28:35
  Speaker 3: And once people start to realize that, we go, let's
• 28:39
  Speaker 3: go back. How do you deal with uncertainty? Well, first off,
• 28:45
  Speaker 3: you realize that life is not totally predictable. I mean,
• 28:51
  Speaker 3: think back 20 years ago. Could you have predicted where
• 28:54
  Speaker 3: you are today or where you'll be 20 years from now?
• 28:57
  Speaker 1: Nobody in December 2019 was predicting a pandemic the next
• 29:01
  Speaker 1: year in a market that would scream higher. So you
• 29:04
  Speaker 1: could show it every annual forecast we see, and we'll
• 29:07
  Speaker 1: talk a little bit about predictions in a minute. But
• 29:10
  Speaker 1: the future is inherently unknowable.
• 29:14
  Speaker 3: So embrace that uncertainty, though. So that's what gives us
• 29:18
  Speaker 3: the opportunity in life and investing.
• 29:21
  Speaker 1: So what do you say to people who are investors and, hey,
• 29:26
  Speaker 1: uncertainty creates opportunity. How does the average mom-and-pop investor, how
• 29:32
  Speaker 1: are they supposed to live through the regular 15%, 20%, 25% drawdowns?
• 29:38
  Speaker 1: We see all the time. in equity markets?
• 29:41
  Speaker 3: Well, the quick answer to that is stay calm. That's
• 29:44
  Speaker 3: why we call it the name of the book. Let
• 29:50
  Speaker 3: me give you an example of the fundamental problem we
• 29:57
  Speaker 3: have with helping people come to Stay invested. Let's say
• 30:02
  Speaker 3: bad news comes into the market. The pandemic. Or a
• 30:07
  Speaker 3: particular stock. And then you look at the stock or
• 30:11
  Speaker 3: the market and you see it's down 20% or whatever.
• 30:16
  Speaker 3: You go, holy cow, I've got to get out. There's
• 30:18
  Speaker 3: bad news and the market has things dropping. That is
• 30:23
  Speaker 3: human nature logic. What we'd like to have people think is, look, Okay, pandemic,
• 30:30
  Speaker 3: bad news came into the market. The market's down 20
• 30:34
  Speaker 3: or 30%. And people were saying, what are we supposed
• 30:37
  Speaker 3: to do? What are we supposed to do? What do
• 30:38
  Speaker 3: you think is going to happen? I go, hey, look,
• 30:40
  Speaker 3: I don't know what's going to happen. And anybody that
• 30:43
  Speaker 3: thinks they can predict what's going to happen, I'd be
• 30:45
  Speaker 3: a little kind of suspicious about. But here's what I
• 30:49
  Speaker 3: believe will happen. People aren't just going to sit there
• 30:52
  Speaker 3: and take it. You know, kind of the cornerstone of
• 30:56
  Speaker 3: all of my belief in markets and how they work
• 30:59
  Speaker 3: is human ingenuity. That's what ends up bailing us out.
• 31:05
  Speaker 3: You know, when bad things happen to you, you don't
• 31:07
  Speaker 3: just sit there and take it in life. You figure
• 31:09
  Speaker 3: out how to get back on track. And I go,
• 31:12
  Speaker 3: so here we have the pandemic. That's a big smash
• 31:16
  Speaker 3: in the mouth to these firms. They're not just going
• 31:18
  Speaker 3: to sit there and take it. They'll figure out how
• 31:20
  Speaker 3: to get back on track. They'll try something new and different.
• 31:22
  Speaker 3: And along the way, there'll be winners and losers. And
• 31:25
  Speaker 3: I don't know who the winners will be and the losers.
• 31:27
  Speaker 1: But.
• 31:29
  Speaker 3: What I do believe is we're likely that effort, that
• 31:32
  Speaker 3: human ingenuity will get us back on track faster than
• 31:35
  Speaker 3: most people think, which is what happened.
• 31:38
  Speaker 1: We saw that during the financial crisis, which the pandemic
• 31:41
  Speaker 1: was less than a quarter down 34 percent. And from
• 31:45
  Speaker 1: that end of the first quarter in 2020. the S &
• 31:49
  Speaker 1: P was up 69% for the rest of the year.
• 31:52
  Speaker 3: Unbelievable. So that's what we're getting at. I mean, so
• 31:55
  Speaker 3: what was going on, and this is what I get
• 31:57
  Speaker 3: back to, what do you tell people to get through
• 31:59
  Speaker 3: the tough times? Go back to first principles. Okay, we
• 32:03
  Speaker 3: have the pandemic, and there are all kinds of forecasts,
• 32:07
  Speaker 3: but the consensus was, I remember at the time, it's
• 32:10
  Speaker 3: likely about a two or three year kind of phenomenon.
• 32:15
  Speaker 3: And so, The market's down about 20% or 30%. That
• 32:17
  Speaker 3: seems about right to me. I mean, I don't know.
• 32:22
  Speaker 1: So in other words, it's already in the price, and
• 32:24
  Speaker 1: trying to act in response to something everybody knows seems
• 32:28
  Speaker 1: like a waste of time.
• 32:30
  Speaker 3: Yeah, I learned that really in the late 90s. I
• 32:34
  Speaker 3: was on an investment committee. I used to sit on
• 32:36
  Speaker 3: investment committees. I don't anymore, other than our own. And
• 32:42
  Speaker 3: the chairman of that investment committee went around the world.
• 32:44
  Speaker 3: It was 1998. I don't know if you remember.
• 32:47
  Speaker 1: Sure, long-term capital management.
• 32:48
  Speaker 3: Yeah, long-term capital.
• 32:49
  Speaker 1: I was on a trading desk. I remember that vividly.
• 32:51
  Speaker 3: Yeah, right. You had the Russian default. You have Asia contagion.
• 32:55
  Speaker 3: He goes around the world, the chairman of the committee,
• 32:58
  Speaker 3: and eventually talks about all the problems around the world.
• 33:02
  Speaker 3: He concludes, so why should we invest in stocks at all?
• 33:06
  Speaker 3: And I said, well, you know, I think you've characterized
• 33:10
  Speaker 3: what was going on in these different countries okay, but
• 33:12
  Speaker 3: I think all you've done is explain why the market's
• 33:15
  Speaker 3: down 35%, you know? And he goes, and we stayed invested.
• 33:20
  Speaker 3: And of course, you know, we were amply rewarded. So
• 33:23
  Speaker 3: if people could just go through first principles, and by
• 33:27
  Speaker 3: that I mean, bad news comes into the market. They
• 33:30
  Speaker 3: look and they say, aha, the stock is down. Now
• 33:33
  Speaker 3: I want to get out because I'm stressed. If we
• 33:36
  Speaker 3: can get them to change their opinion and say, look,
• 33:39
  Speaker 3: the market's down. I mean, the price is down quite
• 33:42
  Speaker 3: a bit. That's probably about right, given the bad news
• 33:46
  Speaker 3: that we have. Therefore, I need to stay invested. I
• 33:51
  Speaker 3: was thinking the other day, if I come out with
• 33:53
  Speaker 3: a second book, maybe I'll call it Stay Invested, so
• 33:56
  Speaker 3: we'd have Stay Calm and Stay Invested.
• 33:57
  Speaker 1: I think your second book should be named What Would
• 34:00
  Speaker 1: Gene Fama Say?
• 34:01
  Speaker 3: Yeah, right.
• 34:02
  Speaker 1: If market's down 30%, what would Fama say? He'd say
• 34:05
  Speaker 1: it's in the price and just sit there and relax
• 34:08
  Speaker 1: and stay calm.
• 34:09
  Speaker 3: That's the science.
• 34:12
  Speaker 1: Really interesting. So you mentioned some forecasts and predictions. Another
• 34:17
  Speaker 1: aspect of the book is plan, don't predict. You can't
• 34:21
  Speaker 1: foresee the future. So making decisions based on predictions is
• 34:27
  Speaker 1: you're essentially engaging in wishful thinking.
• 34:30
  Speaker 3: Well, that's right. I mean, you need to have a
• 34:32
  Speaker 3: plan for going forward in life and investing. But don't
• 34:37
  Speaker 3: waste time on trying to predict the unpredictable. Markets are unpredictable.
• 34:42
  Speaker 3: That's why I the pros can't beat the market because
• 34:44
  Speaker 3: the market's unpredictable. And yet over the long haul, it's
• 34:48
  Speaker 3: been able, if you go back, we haven't talked about
• 34:51
  Speaker 3: the history, but 100 years of returns, that covers the
• 34:57
  Speaker 3: Great Depression, World War II, you know, Korean War, high inflation,
• 35:02
  Speaker 3: great financial crisis, pandemic. Through all of that, 10% a year.
• 35:07
  Speaker 3: I think A lot of what I do now, particularly
• 35:11
  Speaker 3: talking to students, is talk about the miracle of the
• 35:14
  Speaker 3: stock and bond markets. These public markets are truly miracles.
• 35:19
  Speaker 1: Really, really fascinating. Here's another thesis that I think is
• 35:24
  Speaker 1: really very, very insightful. Control what you can, manage what
• 35:31
  Speaker 1: you can't. You can't control crashes, recessions, interest rates, or
• 35:35
  Speaker 1: any of that century of terrible events. but you can
• 35:39
  Speaker 1: manage yourself, your allocation, your ongoing saving. Discuss that a
• 35:44
  Speaker 1: little bit.
• 35:44
  Speaker 3: Well, that's right. I mean, in terms of dealing with it,
• 35:49
  Speaker 3: so it's all about managing uncertainty. So control what you
• 35:51
  Speaker 3: can and manage what you can't. Manage the uncertain part
• 35:56
  Speaker 3: as best you can. You can't eliminate it, but you
• 35:59
  Speaker 3: can manage it.
• 36:00
  Speaker 1: But by managing it, you're talking about having a financial
• 36:04
  Speaker 1: plan and sticking to it, continuing to dollar cost average
• 36:08
  Speaker 1: into it. There are things within your control. That's what
• 36:12
  Speaker 1: you should be managing. And the things outside of your control,
• 36:15
  Speaker 1: just accept you can't control what the Fed does or
• 36:18
  Speaker 1: what's happening in the straight or moves.
• 36:20
  Speaker 3: Yeah, a lot of people, they make portfolio decisions based
• 36:24
  Speaker 3: on their forecast of what the market's going to do.
• 36:27
  Speaker 3: That's a waste of time. You want to pay attention
• 36:30
  Speaker 3: to what's going on because, you know, over your lifetime,
• 36:33
  Speaker 3: there are going to be situations when you need to
• 36:35
  Speaker 3: change your investment policy around. But it's not based on
• 36:38
  Speaker 3: what's going on in the market. You need to change,
• 36:41
  Speaker 3: you know, you get a new job, you want to retire,
• 36:44
  Speaker 3: you know, you have a family. All these things cause
• 36:47
  Speaker 3: you to invest differently. But at every point, you want
• 36:52
  Speaker 3: to have a long-term plan in place and manage to that.
• 36:56
  Speaker 3: So you can't control the stock market. you can control
• 37:00
  Speaker 3: how much risk you take, basically. There are two basic
• 37:04
  Speaker 3: paths you go down. First is the split, how much
• 37:07
  Speaker 3: do you have in stocks at all versus relatively riskless
• 37:10
  Speaker 3: assets like a money market fund or a bond. So
• 37:15
  Speaker 3: you get that right. And then the second part is then,
• 37:18
  Speaker 3: to the extent you're investing in stocks, buy the whole market.
• 37:23
  Speaker 3: That makes you as good as the insiders. People that
• 37:27
  Speaker 3: think of themselves as outsiders That's another miracle of markets.
• 37:31
  Speaker 3: Right now you have it, unlike from my parents who
• 37:34
  Speaker 3: never had that available to them, you know, now everybody
• 37:37
  Speaker 3: has access. The market is good for everyone.
• 37:41
  Speaker 1: So let's talk a little bit about financial media, which
• 37:43
  Speaker 1: you write extensively about in the book. Another quote of yours,
• 37:48
  Speaker 1: modern financial media is designed to capture your attention, presenting commentary, stories,
• 37:55
  Speaker 1: and expert forecasts that are nothing more than distracting noise.
• 38:01
  Speaker 3: Yeah, that's right. I mean, today we have undoubtedly, we
• 38:04
  Speaker 3: have a lot more data thrown at us than ever before.
• 38:10
  Speaker 3: I don't know how we have a lot more meaningful information,
• 38:12
  Speaker 3: but we have a lot more data, that's for sure.
• 38:15
  Speaker 3: And so it's important these days for people to think critically.
• 38:20
  Speaker 3: Always go back to first principles. You know, this year
• 38:23
  Speaker 3: in particular, been a lot of anxiety. We have, you know,
• 38:26
  Speaker 3: some wars, you know, we have all kinds of things.
• 38:28
  Speaker 1: Tariffs.
• 38:30
  Speaker 3: Any number of things. But I tell people, look, do
• 38:36
  Speaker 3: you think you have more anxiety today or people have
• 38:38
  Speaker 3: more anxiety today than during the Great Depression or during, say,
• 38:42
  Speaker 3: World War II when it looked like we were losing
• 38:44
  Speaker 3: at first? Those are real serious anxieties. So I'm not
• 38:48
  Speaker 3: making light of the anxiety, but what the 100 years
• 38:52
  Speaker 3: of data shows us is the market does really a
• 38:55
  Speaker 3: good job of, of pricing out all that uncertainty and
• 38:58
  Speaker 3: the risks.
• 38:59
  Speaker 1: So another quote in the same section, in investing, success
• 39:05
  Speaker 1: often comes not from doing more, but from tuning out more.
• 39:10
  Speaker 1: So I have to share this with you because every
• 39:12
  Speaker 1: time I write, tune out the noise, I get a
• 39:16
  Speaker 1: ton of pushback. Hey, you can't just ignore all this.
• 39:19
  Speaker 1: You can't tune it out. It's really difficult. And just
• 39:23
  Speaker 1: telling people to tune out the noise is a waste
• 39:26
  Speaker 1: of time. What's your argument back?
• 39:29
  Speaker 3: Well, first off, I'm glad to see you get your
• 39:31
  Speaker 3: share of that, just like I do. Basically, what we've
• 39:41
  Speaker 3: outlined is you want to have sensible portfolios on the
• 39:45
  Speaker 3: equity side by the whole market. And the market does
• 39:50
  Speaker 3: a great job of pricing. So all the anxieties that
• 39:56
  Speaker 3: you can express, and there are plenty of things to
• 39:57
  Speaker 3: be concerned about. I'm not making light of them at all.
• 40:01
  Speaker 3: But that's why the prices are doing whatever it is
• 40:03
  Speaker 3: they're doing. And so unless you're faster than the market,
• 40:06
  Speaker 3: unless you think you're smarter than the market, you just
• 40:10
  Speaker 3: have to assume that whatever it is you're concerned about
• 40:12
  Speaker 3: has already been priced in. You're too late. By the
• 40:16
  Speaker 3: time you get a certain piece of information, the market's
• 40:21
  Speaker 3: already reflected it.
• 40:23
  Speaker 1: It's already in the price.
• 40:24
  Speaker 3: It's already in the price. You're too late.
• 40:26
  Speaker 1: So this quote might be one of the most profound
• 40:29
  Speaker 1: things I read in the book. And it was, you know,
• 40:33
  Speaker 1: you read it and you're like, wow, that's really insightful.
• 40:36
  Speaker 1: At least that was my response. This isn't a book
• 40:39
  Speaker 1: about how to invest. It's a book about how to
• 40:43
  Speaker 1: think about investing. It's not about picking stocks. It's about
• 40:48
  Speaker 1: taking stock of what really matters. Like, right? I mean,
• 40:53
  Speaker 1: that's an example. If you go back and reread it,
• 40:55
  Speaker 1: I'm like, I wrote that. That's really, really good.
• 40:57
  Speaker 3: That's not bad.
• 40:58
  Speaker 1: No, that's damn fine.
• 40:59
  Speaker 2: And it's because you are implying, hey, this is about
• 41:05
  Speaker 2: securing your family's future, but it's not just about money.
• 41:09
  Speaker 1: It's about all the things that really matter.
• 41:12
  Speaker 3: Well, yeah, we have a segment in there about what you...
• 41:15
  Speaker 3: think is, what is true worth about? Worth isn't true wealth.
• 41:22
  Speaker 3: My parents, I describe as being wealthy. They just didn't
• 41:25
  Speaker 3: have much money. So you want to focus on what's
• 41:32
  Speaker 3: really important to you.
• 41:33
  Speaker 1: The quiet dividend of patient compounding in both life and investing.
• 41:38
  Speaker 3: Yeah. I mean, one of the first things you'll learn
• 41:41
  Speaker 3: about it, in finance is the magic of compounding. If
• 41:45
  Speaker 3: you get that 10% return, it means your portfolio doubles
• 41:51
  Speaker 3: every seven years. And you double it six times if
• 41:56
  Speaker 3: you have a 42-year rise. That's six seven-year periods. And
• 42:06
  Speaker 3: life is the same way. You are the result of
• 42:08
  Speaker 3: the effects of the compounding of decisions that you've made
• 42:12
  Speaker 3: in life all the way through. And maybe that's where
• 42:16
  Speaker 3: wisdom comes from, is that compounding of the effects of decisions,
• 42:21
  Speaker 3: you know?
• 42:21
  Speaker 1: Really, really interesting. I really enjoyed the book, Stay Calm,
• 42:24
  Speaker 1: Learn to Embrace Uncertainty in Investing and Life. Coming up,
• 42:29
  Speaker 1: we continue our conversation with David Booth, author of Stay
• 42:33
  Speaker 1: Calm and founder of Dimensional Fund Advisors, talking about philosophy
• 42:38
  Speaker 1: and philanthropy. I'm Barry Ritholtz. You're listening to Masters in
• 42:42
  Speaker 1: Business on Bloomberg Radio. I'm Barry Ritholtz. You're listening to
• 42:47
  Speaker 1: Masters in Business on Bloomberg Radio. My extra special guest
• 42:51
  Speaker 1: today is David Booth. He is founder and chairman of
• 42:55
  Speaker 1: Dimensional Fund Advisors and author of the new book, Stay Calm,
• 42:59
  Speaker 1: Learn to Embrace Uncertainty in Investing and Life. So I
• 43:05
  Speaker 1: wanted to talk a little bit about both your philosophy
• 43:09
  Speaker 1: and how it developed and philanthropy. We'll circle back to
• 43:13
  Speaker 1: philanthropy in a minute. But let's talk a little bit
• 43:18
  Speaker 1: about Dimensional. You guys didn't want to participate in ETFs
• 43:23
  Speaker 1: for a long time because you preferred to offer your
• 43:27
  Speaker 1: products through advisors to investing customers. What was the idea
• 43:34
  Speaker 1: of working through the advisor side of it as opposed
• 43:39
  Speaker 1: to marketing directly to Main Street?
• 43:42
  Speaker 3: Well, first off, any business, you know, the marketing is
• 43:47
  Speaker 3: a big component to any business. Now, you have to
• 43:51
  Speaker 3: understand we're starting out of my brownstone in my apartment.
• 43:55
  Speaker 3: It wasn't like we had a big marketing machine. And
• 43:58
  Speaker 3: we didn't know anything about selling to the retail public.
• 44:03
  Speaker 3: We did know institutional investors. And so our first clients
• 44:09
  Speaker 3: were large, typically pension funds, insurance companies, sovereign wealth funds.
• 44:16
  Speaker 3: And that was first eight years or so, that was
• 44:19
  Speaker 3: who we talked to. And then one day, Dan Wheeler
• 44:26
  Speaker 3: came along. He was a financial advisor in Sacramento.
• 44:29
  Speaker 1: In California, right. I know the name.
• 44:31
  Speaker 2: Yeah.
• 44:31
  Speaker 1: Yeah.
• 44:32
  Speaker 3: And he said, I'd like to have access to your funds.
• 44:35
  Speaker 3: And so we don't know. But at that time, it
• 44:39
  Speaker 3: was kind of unusual for a firm like ours to
• 44:43
  Speaker 3: get big institutions to invest in a mutual fund. But
• 44:47
  Speaker 3: we created a mutual fund. And because they were institutional clients,
• 44:52
  Speaker 3: our fees were very low, institutionally priced. And so it
• 44:58
  Speaker 3: made ideal for a fee-only financial advisor a fee-only advisor
• 45:04
  Speaker 3: being one that we don't pay them any money, they
• 45:07
  Speaker 3: don't pay us. I mean, it's straightly arm's length.
• 45:10
  Speaker 1: What year was that with Wheeler?
• 45:12
  Speaker 3: About 1989.
• 45:14
  Speaker 1: So that was long before advisors had taken over from stockbrokers. Right.
• 45:22
  Speaker 1: The fiduciary side of the business was still relatively tiny.
• 45:27
  Speaker 3: It was tiny, but these were highly energized financial advisors.
• 45:30
  Speaker 3: I mean, these were typically... advisor would come from a
• 45:34
  Speaker 3: warehouse felt really dirty about themselves and uh i'm just
• 45:39
  Speaker 3: repeating what they told.
• 45:39
  Speaker 1: Me oh no i i've heard it a million times.
• 45:41
  Speaker 3: Yeah and and to see this approach which is based
• 45:46
  Speaker 3: on science is you have all the data you could
• 45:49
  Speaker 3: ever want backing up what we do uh and you
• 45:53
  Speaker 3: could come up with a sensible investment approach that undoubtedly
• 45:57
  Speaker 3: would work over the long haul uh.
• 46:01
  Speaker 1: I had someone leave from a wire house, become an advisor,
• 46:06
  Speaker 1: and I asked them why. This is early 2000s, and
• 46:10
  Speaker 1: I'll never forget the line I was told was, they're
• 46:13
  Speaker 1: called brokers because they made their clients broke. And I'm like, wow,
• 46:18
  Speaker 1: talk about feeling I got to get out of this
• 46:21
  Speaker 1: side of the street.
• 46:22
  Speaker 3: Yeah, it doesn't have to be that way. But observe...
• 46:28
  Speaker 3: The ability to beat the market is such a narrow advantage,
• 46:33
  Speaker 3: you know, that it takes an incredible firm. I mean,
• 46:37
  Speaker 3: we're a professional manager, and we can do things that
• 46:41
  Speaker 3: a retail client can't do. And that has nothing to
• 46:45
  Speaker 3: do with picking stocks, let's keep in mind, but dealing
• 46:49
  Speaker 3: through market mechanisms, the way you trade, securities lending, you know,
• 46:53
  Speaker 3: so on and so forth. You know, there are things
• 46:57
  Speaker 3: we can do as a But the margins are very,
• 47:01
  Speaker 3: very slim. The idea that somebody way down the food chain,
• 47:06
  Speaker 3: a broker at a retail, would have some of that
• 47:10
  Speaker 3: magic is hard to accept.
• 47:13
  Speaker 1: So when you guys began working with advisors, it wasn't
• 47:16
  Speaker 1: to design portfolios. The advisor was there essentially to keep
• 47:21
  Speaker 1: the client from abandoning their portfolio and getting in the
• 47:25
  Speaker 1: way of compounding?
• 47:26
  Speaker 3: Yeah, absolutely. We have said that one of our advisors
• 47:30
  Speaker 3: said it right. He said, you know, I don't have
• 47:33
  Speaker 3: clients with investment problems. I've got investments with client problems.
• 47:38
  Speaker 1: That's a great line.
• 47:39
  Speaker 3: But the difference between the two is education. And we've
• 47:44
  Speaker 3: always sold, as you know, through education where we invite
• 47:47
  Speaker 3: people in for seminars and stuff. And the book. I mean,
• 47:50
  Speaker 3: that's why we do the book is to help people
• 47:53
  Speaker 3: better understand how markets work so they will be more
• 47:57
  Speaker 3: confident that they can have a, Good investment experience.
• 48:00
  Speaker 1: You guys have done a good job on the education side.
• 48:03
  Speaker 1: I'm kind of curious if that's the reason why you
• 48:06
  Speaker 1: stayed out of ETFs for so long. And for people
• 48:11
  Speaker 1: who are trying to put this in context, DFA launched
• 48:16
  Speaker 1: in 1981. In 2020 was your first ETF. And today
• 48:21
  Speaker 1: you are the largest active ETF issuer in the country.
• 48:26
  Speaker 1: So why leave all that money on the table for
• 48:30
  Speaker 1: 40 years?
• 48:30
  Speaker 3: Well, I don't know. It must have been a pandemic. Anyway,
• 48:36
  Speaker 3: because early on, our advisors said they didn't need the ETF.
• 48:40
  Speaker 3: So the beauty of a regular mutual fund is you
• 48:43
  Speaker 3: go in at net asset value at the end of
• 48:46
  Speaker 3: the day. That's about as clean as you can come
• 48:48
  Speaker 3: up with. If you buy an ETF, you're buying it
• 48:53
  Speaker 3: in the open market. And for some people, that's A
• 48:56
  Speaker 3: little scary.
• 48:57
  Speaker 1: Whatever the open market costs might be, the offset of
• 49:03
  Speaker 1: the tax advantage has to wildly out. In a non-qualified account,
• 49:09
  Speaker 1: ETFs are vastly superior to mutual funds most of the
• 49:12
  Speaker 1: time for that tax reason.
• 49:14
  Speaker 3: Well, to a conventional mutual fund, I agree with you. But,
• 49:17
  Speaker 3: we've been able to.
• 49:19
  Speaker 1: Use a dual class.
• 49:20
  Speaker 3: Yeah, we've been able to eliminate a lot of the
• 49:26
  Speaker 3: tax advantage of ETFs.
• 49:28
  Speaker 1: By the way, that's you and Vanguard seem to be
• 49:31
  Speaker 1: the leaders in that space for having an ETF and
• 49:35
  Speaker 1: a mutual fund essentially track the same holdings.
• 49:39
  Speaker 3: And now, coming out this summer and into the fall,
• 49:43
  Speaker 3: we are innovating even more, which is we're taking... Right now,
• 49:48
  Speaker 3: we have mutual funds and ETFs that do the same thing.
• 49:51
  Speaker 3: So two pools of money doing the same thing. SEC
• 49:56
  Speaker 3: has given us approval to merge those two. So it'll
• 50:00
  Speaker 3: just be one pool of assets with two ways of
• 50:04
  Speaker 3: accessing it.
• 50:04
  Speaker 1: Two different wrappers, same pool of money.
• 50:06
  Speaker 3: Same pool of money. So that will... eliminate, take away
• 50:10
  Speaker 3: the argument. I mean, you don't have to worry about
• 50:13
  Speaker 3: it anymore.
• 50:14
  Speaker 1: That's really quite... Isn't that cool?
• 50:16
  Speaker 3: Yeah, that's... That speaks to how science is developing. You know,
• 50:20
  Speaker 3: it's not like we sit on our hands after we're
• 50:24
  Speaker 3: continually trying to work through things and become more efficient.
• 50:29
  Speaker 1: So let's talk about another philosophical belief from you guys
• 50:33
  Speaker 1: that I'm fascinated by, which People have had a hard
• 50:38
  Speaker 1: time wrapping their head around, well, is DFA an indexer?
• 50:42
  Speaker 1: Are they an alpha sort of chaser? And the way
• 50:46
  Speaker 1: I kind of explained it to myself was, no, when
• 50:53
  Speaker 1: you look at traditional indexers, they're just using one factor
• 50:57
  Speaker 1: of the many French factors. And what Dimensional has said is, hey,
• 51:01
  Speaker 1: we're going to use three, four, five factors. So we're indexers.
• 51:05
  Speaker 1: plus the next four factors on the list. Is that
• 51:08
  Speaker 1: a fair philosophical breakdown?
• 51:11
  Speaker 3: Yeah, that's part of what we do is exactly that.
• 51:14
  Speaker 3: And there are some people that don't want to have
• 51:17
  Speaker 3: a bias towards value or small cap. And for those,
• 51:23
  Speaker 3: we have kind of plain vanilla funds, too, that aren't biased.
• 51:27
  Speaker 3: But in both cases... It's about execution. We talked about
• 51:34
  Speaker 3: how an index fund has to trade in a bizarre
• 51:37
  Speaker 3: sort of way. And we don't do that. So we
• 51:42
  Speaker 3: apply that thinking to all the funds. So that... Here again,
• 51:51
  Speaker 3: what we're trying to do is apply the science. And
• 51:54
  Speaker 3: by that... The way we structure portfolios, we think we
• 51:58
  Speaker 3: can do better than index providers. And then secondarily, the
• 52:02
  Speaker 3: way we trade relative to the way index funds trade.
• 52:05
  Speaker 3: That's true in everything we do. But then some clients
• 52:11
  Speaker 3: like to have a small cap bias. Some don't. So
• 52:15
  Speaker 3: it's their money. We try to come up with whatever
• 52:19
  Speaker 3: they think is sensible.
• 52:20
  Speaker 1: So let's talk a little bit about philanthropy because I
• 52:23
  Speaker 1: know Part of the book discusses legacy, and you've been
• 52:27
  Speaker 1: very involved philanthropically. A decade ago, you signed the Giving Pledge.
• 52:34
  Speaker 1: And go back two decades, you made, right around the
• 52:39
  Speaker 1: time of the financial crisis, a gift in 08 to
• 52:42
  Speaker 1: the University of Chicago's business school, which I think was
• 52:46
  Speaker 1: the largest gift ever in the country or to Chicago
• 52:49
  Speaker 1: at that time, $ 300 million. and now it's the Chicago
• 52:54
  Speaker 1: Booth School of Business. Tell us a little bit about
• 52:57
  Speaker 1: what motivated a gift of that size to that recipient,
• 53:02
  Speaker 1: and what are your thoughts 20 years later?
• 53:04
  Speaker 3: Well, okay, first let me just say it was kind
• 53:07
  Speaker 3: of funny. The announcement for that was made in November
• 53:12
  Speaker 3: of 2008, like the week after Obama got elected for
• 53:16
  Speaker 3: the first time. And so there was a big announcement
• 53:19
  Speaker 3: that said, at the school said, the big announcement's coming tonight.
• 53:22
  Speaker 3: Free food, come in. And they thought it had something
• 53:25
  Speaker 3: to do.
• 53:26
  Speaker 1: With Obama being- He's a Chicago guy, right?
• 53:27
  Speaker 3: Yeah, he's a Chicago guy. So that's when they announced
• 53:31
  Speaker 3: that the school's name was name change.
• 53:34
  Speaker 1: So it's- Which, by the way, wasn't a requirement of
• 53:37
  Speaker 1: your gift.
• 53:38
  Speaker 3: No.
• 53:39
  Speaker 1: You argued against it.
• 53:40
  Speaker 3: No, I didn't argue against it.
• 53:42
  Speaker 1: I heard through several people that you pushed back initially.
• 53:45
  Speaker 3: Well, I pushed back a little bit, but not a lot.
• 53:49
  Speaker 3: What happened was I approached the dean of the business
• 53:51
  Speaker 3: school and said, you know, it's time for payback here.
• 53:56
  Speaker 3: You know, what the university has done for me and
• 53:58
  Speaker 3: the faculty in not only training me in school, but
• 54:02
  Speaker 3: then following up over the years. over the now 45 years.
• 54:07
  Speaker 3: You know, people like, you know, we've had five Nobel
• 54:11
  Speaker 3: laureates work very closely with us. All of them have
• 54:14
  Speaker 3: been significant directors of our mutual fund or the company,
• 54:19
  Speaker 3: Fama being the founder as well. It's time for me
• 54:23
  Speaker 3: to pay back, and it's got to be a big
• 54:24
  Speaker 3: chunk of what I have. So this is what I'm
• 54:29
  Speaker 3: willing to do. And the dean looks at it and goes, whoosh.
• 54:33
  Speaker 3: You know, we were thinking about naming the school, and
• 54:35
  Speaker 3: we weren't asking for nearly this much. We'll name the
• 54:38
  Speaker 3: school after you. I go, okay, well, whatever, you know.
• 54:41
  Speaker 3: But it was about me wanting to feel good about me.
• 54:46
  Speaker 1: Well, you feel a sense of obligation to the University
• 54:50
  Speaker 1: of Chicago because of everything they gave you. Undergraduate and
• 54:55
  Speaker 1: pre-PhD MBA, you were at Kansas University. And you, similar number,
• 55:01
  Speaker 1: last year you gave them $ 300 million to the University
• 55:06
  Speaker 1: of Kansas Athletics Group. Why focus on sports there? What's
• 55:11
  Speaker 1: so significant about the Kansas Athletics? Because, by the way,
• 55:16
  Speaker 1: they were, as a school, they've been doing pretty good.
• 55:19
  Speaker 2: Oh, yeah, yeah.
• 55:19
  Speaker 1: Athletic-wise.
• 55:20
  Speaker 3: Yeah, yeah, well, no, it's, first off, Lawrence, Kansas, where
• 55:24
  Speaker 3: the University of Kansas is, is my hometown. I went
• 55:27
  Speaker 3: to Lawrence High School and, than University of Kansas. So,
• 55:31
  Speaker 3: and with all the relatives, it's in my blood. And
• 55:37
  Speaker 3: for a school, a big state school like that, what's
• 55:40
  Speaker 3: really important is to have a great competitive athletic program.
• 55:45
  Speaker 3: I mean, I know the arguments, some people, you know,
• 55:49
  Speaker 3: they're not so sure about that, but.
• 55:52
  Speaker 1: It doesn't hurt their marketing, their ability to recruit professors.
• 55:55
  Speaker 3: It is.
• 55:56
  Speaker 1: Make the town better. I mean, it just multiplies across everything,
• 56:01
  Speaker 1: regardless of how you feel about big football in college.
• 56:05
  Speaker 3: Yeah, right. But I happen to love it, and particularly
• 56:09
  Speaker 3: love college basketball. Kansas has always been really good at basketball,
• 56:14
  Speaker 3: and it's getting better in football. And then with NIL,
• 56:18
  Speaker 3: throwing a little dollop of NIL coming down the pike.
• 56:21
  Speaker 1: Name image likeness for get some money to the students.
• 56:25
  Speaker 3: So it puts great financial pressure on the schools. And
• 56:31
  Speaker 3: it's difficult for a state school to have a big
• 56:35
  Speaker 3: budget for athletics when their professors are not making what
• 56:41
  Speaker 3: they're making. So it's important for private, for alums and whatever,
• 56:47
  Speaker 3: to step up in order to to help them be successful.
• 56:54
  Speaker 1: And I'm going to assume that this isn't the end
• 56:57
  Speaker 1: of your academic gifts. You're going to be doing other
• 57:01
  Speaker 1: stuff in the future, and obviously the Giving Pledge is
• 57:04
  Speaker 1: a part of that. But I have to ask about
• 57:06
  Speaker 1: a purchase you made in 2010, which is you bought
• 57:12
  Speaker 1: Naismith's original document of, essentially, here are the rules of basketball.
• 57:18
  Speaker 1: This is where basketball was invented. and I think you
• 57:21
  Speaker 1: paid over $ 4 million for that, and then you gave
• 57:24
  Speaker 1: it to the University of Kansas Athletic Department. Explain, tell
• 57:29
  Speaker 1: us about that.
• 57:30
  Speaker 3: Well, no, it was really kind of an interesting auction.
• 57:34
  Speaker 3: James Naismith invented basketball in 1891. If you think about it.
• 57:39
  Speaker 1: Peach, peach crate.
• 57:41
  Speaker 3: Yeah, the whole thing. It's the only major sport that
• 57:45
  Speaker 3: I can think of where we know who invented it.
• 57:48
  Speaker 3: So it was a class assignment for him, at the
• 57:54
  Speaker 3: YMCA in Springfield, Massachusetts. So they stayed in the family,
• 58:00
  Speaker 3: and as things happened over time, they just decided that
• 58:05
  Speaker 3: they wanted to sell it. So I decided, here again,
• 58:09
  Speaker 3: basketball is so important. If you live in Lawrence, Kansas,
• 58:14
  Speaker 3: you realize that the rules of basketball those two typewritten
• 58:21
  Speaker 3: pages need to be in Lawrence, Kansas, because Naismith, after
• 58:25
  Speaker 3: he invented the game, goes to teach at Kansas for
• 58:27
  Speaker 3: 40 years. He's buried in Lawrence. You know, you gotta...
• 58:30
  Speaker 3: So I realized.
• 58:31
  Speaker 1: Perfect match.
• 58:32
  Speaker 3: Had to buy it. So it started out, they thought
• 58:34
  Speaker 3: it would go for about $ 2 million. But along the way,
• 58:37
  Speaker 3: I started... I was bidding over the phone, and there
• 58:40
  Speaker 3: was somebody else bidding over the phone, and kept ratcheting up,
• 58:44
  Speaker 3: and ended up paying about $ 4. 5 million. The person on
• 58:47
  Speaker 3: the other.
• 58:49
  Speaker 3: Of the phone was David Rubenstein. Get out. Oh, that's hilarious.
• 58:53
  Speaker 3: Your Bloomberg co-host.
• 58:56
  Speaker 1: Fellow host.
• 58:57
  Speaker 3: That's amazing.
• 58:58
  Speaker 1: Did you explain eventually to him why you bought that
• 59:02
  Speaker 1: and why it went to Kansas? No.
• 59:05
  Speaker 3: Once I paid for it, it was announced who bought it.
• 59:10
  Speaker 3: So he sent me an email the next day saying, hey,
• 59:12
  Speaker 3: I think I cost you some money, which is funny.
• 59:15
  Speaker 3: So we still have a good chuckle about that.
• 59:18
  Speaker 1: So last piece of philanthropy I ask to ask about
• 59:21
  Speaker 1: before we get to our favorite questions, you're known as
• 59:24
  Speaker 1: an avid art collector. If you go down, I don't
• 59:29
  Speaker 1: know what river that is in Texas, but I've been
• 59:32
  Speaker 1: on that boat. You can see some of your sculptures
• 59:35
  Speaker 1: from the river if you're in a boat. You've endowed
• 59:39
  Speaker 1: a conservation center at the Museum of Modern Art. And
• 59:44
  Speaker 1: as opposed to just donating a sculpture or a painting,
• 59:49
  Speaker 1: you're essentially helping them preserve their entire collection of in perpetuity.
• 59:54
  Speaker 1: Tell us a little bit about that.
• 59:55
  Speaker 3: Well, I mean, uh, preserving the, you know, the, your
• 59:58
  Speaker 3: patrimony is important for any country and, and art is
• 1:00:02
  Speaker 3: such a big deal. And MoMA has such a great, uh, museum.
• 1:00:07
  Speaker 1: Spectacular.
• 1:00:07
  Speaker 3: Spectacular.
• 1:00:08
  Speaker 1: Of which like 3% is displayed at any time.
• 1:00:12
  Speaker 2: Yeah.
• 1:00:12
  Speaker 1: It's, um, um, it's an enormous, enormous collection.
• 1:00:17
  Speaker 3: Yeah. It's complicated. So, uh, I've sat on the board
• 1:00:22
  Speaker 3: there for about 10 years now, and it's just really
• 1:00:24
  Speaker 3: been tremendously exciting. And then endowed the conservation lab, because
• 1:00:28
  Speaker 3: that's easy to overlook, conservation. But taking care of particularly
• 1:00:33
  Speaker 3: modern art, which could be some fiberglass or something, who
• 1:00:39
  Speaker 3: knows what kind of stuff goes in.
• 1:00:41
  Speaker 1: To say nothing about how paint decays, how canvas decay, paper.
• 1:00:46
  Speaker 1: All that stuff is problematic over time.
• 1:00:51
  Speaker 3: Yeah, in the old days, probably it was kind of
• 1:00:54
  Speaker 3: conservation was somebody kind of having a couple sips of
• 1:00:58
  Speaker 3: alcohol and dobbing some paint on a painting and trying
• 1:01:02
  Speaker 3: to clean or whatever. That's changed now. It's incredibly sophisticated.
• 1:01:07
  Speaker 3: You take x-rays of the painting or whatnot. It's studying
• 1:01:11
  Speaker 3: the chemistry of it. So I'm I've headed up that
• 1:01:15
  Speaker 3: conservation committee for quite a while now. It's very exciting
• 1:01:18
  Speaker 3: to see what they've done to maintain the art.
• 1:01:21
  Speaker 1: Really interesting. All right, I only have you for a
• 1:01:23
  Speaker 1: couple of more minutes. And you and I can continue
• 1:01:27
  Speaker 1: this conversation in Southern California and Huntington Beach in a
• 1:01:32
  Speaker 1: few weeks. For now, let's jump to our favorite questions
• 1:01:35
  Speaker 1: we ask all of our guests, starting with, Tell us
• 1:01:38
  Speaker 1: about the mentors who helped shape your career, and I
• 1:01:41
  Speaker 1: have a pretty good idea who they are.
• 1:01:44
  Speaker 3: Well, no, that's right. Let's just start with the Nobel laureates,
• 1:01:46
  Speaker 3: Merton Miller, Gene Fama, Myron Scholes, Bob Merton, and Doug Diamond.
• 1:01:54
  Speaker 3: Kind of an impressive group of characters.
• 1:01:56
  Speaker 1: That's a murderer's row, right?
• 1:01:58
  Speaker 3: Murderer's row, yeah. Then I had Mack McQuown, who really
• 1:02:03
  Speaker 3: started indexing. All right.
• 1:02:06
  Speaker 1: And then really was the initial, was he the first
• 1:02:09
  Speaker 1: check into DFA?
• 1:02:11
  Speaker 3: No, he was a founder. In fact, more important than
• 1:02:15
  Speaker 3: investing in the funds, he helped us raise the money,
• 1:02:18
  Speaker 3: the risk capital for the firm. And then I always
• 1:02:23
  Speaker 3: have to throw in my parents. I mean, it ties
• 1:02:27
  Speaker 3: into what true wealth is about. They never had much money,
• 1:02:33
  Speaker 3: but they were wealthy. They They'd figured out what life
• 1:02:38
  Speaker 3: was about.
• 1:02:41
  Speaker 1: Really, really interesting. Let's talk about books. In addition to yours,
• 1:02:45
  Speaker 1: what are some of your favorites? What are you reading currently?
• 1:02:48
  Speaker 3: Well, I mean, I just finished 1929, Andrew Ross Sorkin's
• 1:02:52
  Speaker 3: new book. That's very interesting.
• 1:02:54
  Speaker 1: That is on my nightstand. It's up in a few
• 1:02:57
  Speaker 1: books in my queue.
• 1:02:59
  Speaker 3: Then I, in the last couple of years, the book
• 1:03:02
  Speaker 3: I've really liked a lot was Paris 1919. by Margaret Macmillan.
• 1:03:08
  Speaker 3: And she takes through what became known as the Treaty
• 1:03:12
  Speaker 3: of Paris. When the armistice was signed at the end
• 1:03:14
  Speaker 3: of World War I, that's just when all kinds of
• 1:03:18
  Speaker 3: crazy things happened because the Ottoman Empire collapsed, the Russian
• 1:03:23
  Speaker 3: Empire collapsed, Austro-Hungarian Empire collapsed. So all of these So
• 1:03:30
  Speaker 3: you had to create new countries all over the place,
• 1:03:32
  Speaker 3: all through Central Europe and the Middle East. These were,
• 1:03:37
  Speaker 3: it took about six months to develop the Treaty of Paris.
• 1:03:41
  Speaker 3: The first five or so they didn't do much and
• 1:03:44
  Speaker 3: then all of a sudden in the last month they
• 1:03:45
  Speaker 3: just got together and great. I don't know if they
• 1:03:48
  Speaker 3: could have done much better but it was pretty chaotic.
• 1:03:52
  Speaker 1: Really interesting, I'm gonna add that to my list. Tell us,
• 1:03:56
  Speaker 1: are you streaming anything? What do you do to relax, podcasts, movies?
• 1:04:01
  Speaker 1: What entertains you?
• 1:04:02
  Speaker 3: Well, I mean, your podcast, but we have a new
• 1:04:05
  Speaker 3: season of Ted Lasso, which I'm really all over.
• 1:04:09
  Speaker 1: You are. My wife and I are waiting for there
• 1:04:11
  Speaker 1: to be more than three or four in the queue.
• 1:04:13
  Speaker 1: It's just too frustrating to watch one a week.
• 1:04:16
  Speaker 3: By the way, he's a KU alum as well.
• 1:04:18
  Speaker 1: Yes, yes, I knew that.
• 1:04:23
  Speaker 3: And we have any number of.
• 1:04:26
  Speaker 3: What happened was when the pandemic hit and he couldn't
• 1:04:29
  Speaker 3: go out much, I watched more TV in that two-year
• 1:04:32
  Speaker 3: period than I ever watched before or since.
• 1:04:34
  Speaker 1: Same, absolutely the same. I was mentioning the other day
• 1:04:41
  Speaker 1: that 6.30 is the new 7.30. It used to be
• 1:04:44
  Speaker 1: if you tried to make a dinner reservation around 7, 7.30,
• 1:04:47
  Speaker 1: it was the toughest reservation to get. And now it
• 1:04:52
  Speaker 1: seems the hard reservation is to get dinner. is 6
• 1:04:54
  Speaker 1: or 6.30.
• 1:04:55
  Speaker 3: Yeah, right.
• 1:04:56
  Speaker 1: And it's not just that we're aging and heading towards
• 1:04:58
  Speaker 1: the early bird special. I think people want to go
• 1:05:01
  Speaker 1: to dinner and then come home and watch whatever it is,
• 1:05:04
  Speaker 1: Ted Lasso or Lioness or Yellowstone, whatever their thing is.
• 1:05:08
  Speaker 1: It's so funny you say that. But the pandemic was
• 1:05:12
  Speaker 1: absolutely the most TV I've watched in my life. Our
• 1:05:17
  Speaker 1: final two questions. I think this book offers a lot
• 1:05:21
  Speaker 1: of interesting advice but I want to ask you specifically
• 1:05:25
  Speaker 1: for a recent college grad who is interested in a
• 1:05:29
  Speaker 1: career in either investing or wealth management or anything along
• 1:05:35
  Speaker 1: those lines. What sort of advice would you give them
• 1:05:37
  Speaker 1: about building a career?
• 1:05:39
  Speaker 3: Well, first off, I don't give advice, but here's some thoughts.
• 1:05:45
  Speaker 3: First is thoughts that probably everybody will tell you. Figure
• 1:05:49
  Speaker 3: out where do you have some skill, right? some comparative
• 1:05:53
  Speaker 3: advantage or competitive advantage. And what are you passionate about?
• 1:06:01
  Speaker 3: So marry those two things, passion and skill, and work
• 1:06:04
  Speaker 3: really hard. Now, the part that I don't think it's
• 1:06:09
  Speaker 3: emphasized enough is by the time you get out of school,
• 1:06:15
  Speaker 3: you develop a set of values, your personal set of values.
• 1:06:18
  Speaker 3: Pay attention to that.
• 1:06:19
  Speaker 2: So.
• 1:06:22
  Speaker 3: Find something you're passionate about that you have a skill
• 1:06:24
  Speaker 3: in that kind of maps into your values. And pay
• 1:06:32
  Speaker 3: attention to those values and don't deviate from them in
• 1:06:38
  Speaker 3: pursuit of just short-term job. I mean, when you get
• 1:06:43
  Speaker 3: out of school, like when I got out of school,
• 1:06:45
  Speaker 3: most people, you're just lucky, find any good job. But
• 1:06:49
  Speaker 3: over time, you can You kind of iterate towards what
• 1:06:54
  Speaker 3: you think is really valuable.
• 1:06:58
  Speaker 1: Good advice or good insight. I know you don't like
• 1:07:02
  Speaker 1: to call it advice. Our final question, what do you
• 1:07:06
  Speaker 1: know about the world of markets and investing today that
• 1:07:10
  Speaker 1: might have been useful back in 1981 when you were
• 1:07:14
  Speaker 1: first launching dimensional funds?
• 1:07:16
  Speaker 3: Well, I think one of the big things there is
• 1:07:18
  Speaker 3: that if I... I didn't realize how difficult it would
• 1:07:21
  Speaker 3: be to persuade people about this new way of thinking
• 1:07:25
  Speaker 3: about investing. I mean, because I'm sitting there, of course,
• 1:07:30
  Speaker 3: I'm totally wound up with all the University of Chicago stuff.
• 1:07:33
  Speaker 3: I mean, have all the science, the data, and so forth.
• 1:07:36
  Speaker 3: I go, once you explain that to people, they'll flock
• 1:07:39
  Speaker 3: to it. You know, I've been doing this for 55 years.
• 1:07:44
  Speaker 3: I mean, people don't flock to new ideas just based on.
• 1:07:50
  Speaker 3: On new research or new ideas, you have to soak
• 1:07:53
  Speaker 3: the ground down around them, let them sink into it.
• 1:07:56
  Speaker 3: So I guess if I'd known how hard it was,
• 1:07:59
  Speaker 3: I don't know if I would have pursued it, but
• 1:08:00
  Speaker 3: I think we're getting close. So that's what, now I'm
• 1:08:03
  Speaker 3: in this phase where it's exciting to explain all this
• 1:08:06
  Speaker 3: stuff to people, because they're starting to respond to it.
• 1:08:09
  Speaker 3: And I really find that great.
• 1:08:10
  Speaker 1: You're getting close. Keep at it, eventually you'll convince a
• 1:08:13
  Speaker 1: few people.
• 1:08:14
  Speaker 3: Good.
• 1:08:15
  Speaker 1: David, thank you for being so generous with your time.
• 1:08:18
  Speaker 1: This has been absolutely delightful. We have been speaking with
• 1:08:21
  Speaker 1: David Booth. He is the founder and chairman of Dimensional
• 1:08:25
  Speaker 1: Funds and the author of Stay Calm, Learn to Embrace
• 1:08:30
  Speaker 1: Uncertainty in Investing and Life. I would be remiss if
• 1:08:34
  Speaker 1: I didn't thank the crack team that helps put this
• 1:08:36
  Speaker 1: conversation together each week. Alexis Noriega is my video producer.
• 1:08:43
  Speaker 1: Sean Russo is my researcher. Anna Luke is my podcast producer.
• 1:08:48
  Speaker 1: I'm Barry Ritholtz and before I say so long, I
• 1:08:53
  Speaker 1: just want to thank Alexis for being a fantastic video
• 1:08:57
  Speaker 1: producer and helping to put this podcast in the world
• 1:09:02
  Speaker 1: of YouTube and videos. She is departing to take a
• 1:09:07
  Speaker 1: full-time gig. That's a big promotion for her, and we
• 1:09:10
  Speaker 1: wish her the best of luck going forward. I'm Barry Ritholtz.
• 1:09:14
  Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.