Podcast Title: The Long View

Episode: David Booth: ‘Usually the Great Ideas Start Out as Small Ideas and Then You Build on Them’

Release Date: April 29, 2025

Host/Author: Morningstar

Guest: David Booth, Chairman of Dimensional Fund Advisors

1. Introduction to David Booth and Dimensional Fund Advisors

The episode opens with hosts Christine Benz and Amy Arnott introducing David Booth, the founder and chairman of Dimensional Fund Advisors (DFA). David Booth brings a wealth of experience from founding DFA in 1981 and pioneering one of the world’s first index funds in the 1970s. With academic credentials from the University of Kansas and an MBA from the University of Chicago, Booth has been instrumental in developing passively managed small company strategies.

David Booth: “Oh, thank you. Thanks for having me.” [01:35]

2. Collaboration on “Tune out the Noise” with Errol Morris

Booth discusses DFA’s collaboration with renowned filmmaker Errol Morris on the documentary Tune out the Noise. The partnership aimed to educate the public on how markets function, emphasizing the benefits of long-term investment strategies.

David Booth: “We have a big interest here in helping people learn more about how markets work... He [Errol Morris] was the first person that I've known that saw that connection, and it was really well done.” [01:53]

The collaboration also showcased Booth's extensive art collection, enhancing the film's aesthetic and character.

David Booth: “In the movie, you'll see a lot of art and pictures which added certain character to the movie...” [03:10]

3. Intersection of Art and Investing

Booth elaborates on his passion for minimal art and its parallels to investment strategies, highlighting the meticulous detail required in both art creation and investment implementation.

David Booth: “I kind of gravitate towards what they call minimal art... The little flourish that makes all the difference between great art and not so great art. And investing... you still have to implement it. The details make all the difference.” [03:56]

4. Documenting the Financial Revolution

The conversation shifts to the financial revolution of the late 1960s and 1970s, emphasizing the contributions of key figures like Merton Miller and Gene Fama. Booth underscores the importance of documenting these pioneers before their passing.

David Booth: “We thought it was time to tell the story... They came from pretty modest backgrounds. That's very interesting as well.” [05:14]

5. The Influence of Gene Fama and Efficient Market Hypothesis

Booth recounts his academic journey and the profound impact of Gene Fama’s Efficient Market Hypothesis (EMH) on his investment philosophy. This foundational theory posits that it’s challenging to outperform the market through active management.

David Booth: “My very first course was a course taught by Fama, and that just changed everything... the market represents the aggregate performance of everybody in the market minus whatever fees they pay.” [06:30]

David Booth: “If you have a well constructed story... people are likely to stay with you over time.” [30:27]

6. Serendipitous Moments Shaping Booth’s Career

Booth shares a pivotal moment when he narrowly avoided the Vietnam War draft, allowing him to pursue his PhD at the University of Chicago. This serendipitous event redirected his career towards finance.

David Booth: “Usually the great ideas start as small ideas, and you build on them... everything connected in a serendipitous way.” [09:37]

7. Contributions of Mac McQuown to Indexing

Booth highlights the significant role of Mac McQuown in advancing indexing strategies. McQuown’s work at Wells Fargo and his collaboration with academic luminaries laid the groundwork for DFA’s indexing approach.

David Booth: “Mac was larger than life himself, very urbane and sophisticated... our first index linked portfolio went live.” [12:02]

8. Jack Bogle and the Popularization of Index Funds

Discussing Vanguard founder Jack Bogle, Booth acknowledges Bogle’s critical role in making index funds accessible to individual investors, thereby transforming the mutual fund industry.

David Booth: “Jack played a critical role... he stayed the course and turned it into having a huge impact on the mutual fund industry.” [14:56]

David Booth: “When we started Dimensional, I went down to Valley Ford to talk to Jack... that's how we got started.” [16:15]

9. Challenges of Early Efficient Market Pioneers

Booth reflects on the technological and data limitations faced by early EMH proponents, emphasizing how the advent of robust databases at the University of Chicago facilitated groundbreaking research.

David Booth: “Before 1960, computers weren't big enough... everything you did was new and exciting and different.” [18:04]

10. Founding Dimensional Fund Advisors with Rex and Jeannie Sinquefield

Booth narrates the partnership with Rex Sinquefield and the pivotal role Jeannie Sinquefield played in DFA’s operations, highlighting their complementary skills in investment and business management.

David Booth: “Rex was our chief investment officer and I was our CEO... Jeannie headed up our operations activities.” [20:00]

11. Strategic Focus on Small Cap and Value Tilts

Booth explains DFA’s strategic decision to tilt funds towards small-cap and value stocks, differentiating their approach from traditional cap-weighted indices. This strategy was grounded in academic research demonstrating the superior long-term returns of these segments.

David Booth: “We had the data based on Ralph Bonds’ work on the performance of small companies. We inadvertently created the first factor-based fund.” [23:43]

David Booth: “Our core funds hold more small cap and value stocks than they represent in the overall market index.” [26:22]

12. Transition to Serving Financial Advisors and Institutions

Originally catering to institutional clients, DFA broadened its reach to include financial advisors, enhancing accessibility for individual investors without compromising on fee structures.

David Booth: “When Dan Wheeler called us in 1989... now more of our assets come in through financial advisors than come through our big institutions.” [30:44]

13. Expansion into ETFs and Concerns Over Active Trading

With DFA’s foray into Exchange-Traded Funds (ETFs), Booth expresses concerns about increased trading activity potentially diminishing fund performance due to capital loss from active trading.

David Booth: “A concern I have about ETFs is whether people are buying them for the right reason... it's been associated with a rise in trading volume.” [35:01]

Amy Arnott: “Jeff Patak at Morningstar found evidence that some ETF investors trade actively and hurt their returns.” [36:54]

14. Human Behavior and Investment Challenges

Booth delves into behavioral finance, discussing how human tendencies to seek patterns can impede sound investment decisions. He advocates for focusing on personal financial goals over market timing.

David Booth: “People need to connect what's going on in their personal life with what's going on in their investment life... don't waste your time timing short-term moves in the market.” [37:21]

15. Reflections on the Legacy and Future of Passive Management

Booth shares his vision for his legacy, hoping that his efforts have significantly advanced the passive management movement. He expresses both pride in the growth of index investing and disappointment over its association with increased trading volumes.

David Booth: “I hope people wake up sooner rather than later... Only a small fraction of people still believe in this stuff.” [39:37]

16. Perspectives on Current and Future Academic Finance

Booth comments on the evolution of academic finance, recognizing the high caliber of current research while expressing skepticism about achieving groundbreaking revolutions similar to those of the past.

David Booth: “It's unlikely we'll have the second revolution comparable to the first... markets would be efficiently priced.” [40:21]

17. Personal Interests and Art Collection

Booth touches on his passion for art, relating it to his financial success and personal fulfillment. He emphasizes buying art for pleasure rather than investment.

David Booth: “I bought it because I liked it... you can use money to really appreciate life.” [44:21]

18. Closing Thoughts and Legacy

In concluding remarks, Booth expresses gratitude towards those who have utilized DFA’s strategies for their retirement and investment needs. He highlights the accessibility and positive reception of DFA’s philosophies, as evidenced by the widespread viewership of their film.

David Booth: “Hopefully, people come up to my kids and say thank you for what your dad did for me.” [46:03]

David Booth: “We put the movie up on YouTube about two weeks ago and we have basically 3 million views already.” [47:10]

Notable Quotes with Timestamps

• David Booth [01:53]: “If we can help people understand better how markets work, they'll be in a better position to come up with sensible investment solutions that they can live with over the long haul.”

• David Booth [06:30]: “The market represents the aggregate performance of everybody in the market minus whatever fees they pay.”

• David Booth [09:37]: “Usually the great ideas start as small ideas, and you build on them.”

• David Booth [14:56]: “Jack stayed the course and turned it into having a huge impact on the mutual fund industry.”

• David Booth [23:43]: “We inadvertently created the first factor-based fund.”

• David Booth [35:01]: “A concern I have about ETFs is whether people are buying them for the right reason.”

• David Booth [37:21]: “Don't waste your time timing short-term moves in the market.”

• David Booth [39:37]: “Only a small fraction of people still believe in this stuff.”

• David Booth [44:21]: “You can use money to really appreciate life.”

• David Booth [46:03]: “Hopefully, people come up to my kids and say thank you for what your dad did for me.”

• David Booth [47:10]: “We have basically 3 million views already. So these ideas can be exciting to people if they pursue them.”

Conclusion

David Booth’s conversation on The Long View offers an insightful journey through the evolution of passive investing, the foundational theories that underpin Dimensional Fund Advisors, and the personal experiences that shaped his investment philosophy. Through anecdotes of collaboration, serendipitous events, and reflections on human behavior, Booth underscores the importance of understanding market mechanisms, maintaining long-term strategies, and aligning personal financial goals with investment practices. His legacy, as he envisions, is the widespread adoption of sensible investment strategies that prioritize data-driven decisions over speculative market timing.