← The Long View
The Long View
David Booth: ‘Usually the Great Ideas Start Out as Small Ideas and Then You Build on Them’
00:49:08
The DFA chairman and co-founder reflects on the Tune Out the Noise documentary and the revolution in modern finance.
Loading summary
Transcript84 lines
- [00:00]
Unknown Speaker (Schwab/ThinkOrSwim Advertisement)
Trading at Schwab is now powered by Ameritrade. Unlocking the power of thinkorswim. The award winning trading platforms loaded with features that let you dive deeper into the market. Visualize your trades in a new light on thinkorswim desktop with robust charting and analysis tools all while you uncover new opportunities with up to the minute market news and insights. ThinkOrSwim is available on desktop, web and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly. Learn more@schwab.com trading please stay tuned for.
- [00:32]
Unknown Speaker (Disclosure Information)
Important disclosure information at the conclusion of this episode.
- [00:36]
Christine Benz
Hi and welcome to the Longview. I'm Christine Benz, Director of Personal Finance and Retirement Planning for Morningstar.
- [00:42]
Amy Arnott
And I'm Amy Arnott, Portfolio Strategist for Morningstar.
- [00:46]
Christine Benz
Our guest on the podcast today is David Booth. He's the chairman of Dimensional Fund Advisors, a firm he founded in 1981. David led Dimensional as CEO and later co CEO until 2017 when he stepped back from the daily management of the firm. David helped create one of the world's first index funds in the 1970s and launched the first passively managed small company strategy in the early 1980s. He received a bachelor's degree in economics in 1968 and a master's degree in business in 1969 from the University of Kansas. In 1971, he received an MBA from the University of Chicago. Over the years, David has been a benefactor to both schools and the University of Chicago Booth School of Business is named in David's honor. David, welcome to the Longview.
- [01:35]
David Booth
Oh, thank you. Thanks for having me.
- [01:37]
Christine Benz
Well, thanks so much for being here. We want to start by discussing this film that Errol Morris created called Tune out the Noise. Maybe you can talk about Dimensional's collaboration with Errol Morris on that film. How did it come about?
- [01:53]
David Booth
Well, we have a big interest here in helping people learn more about how markets work. Our view is if we can help people understand better how markets work, they'll be in a better position to come up with sensible investment solutions that they can live with over the long haul. And if they can do that, they'll benefit from the magic of compounding over time. So anyway, we approached Erol because he's one of the great communicators and talked about doing something together and he got inspired. He had very little investment background, but he's done these incredible documentaries like Fog of War and the Thin Blue Line and somehow he got really hooked on the idea of doing a film together and he Ends up drawing a parallel between what's gone on in the investment space over the last 60 years with what went on in the 16th and 17th century in astronomy. And he's the first person that I've known that saw that connection, and it was really well done.
- [03:04]
Amy Arnott
Were there any other aspects of the story that seemed to intrigue him the most?
- [03:11]
David Booth
Well, I'm situated on a nice property, and I've been able to accumulate a lot of outdoor sculpture. And where we did the interviews with Errol was in my barn on. On the property. And, you know, during breaks, he would walk around the property looking at the sculpture and go, wow. So he. In the movie, you'll see a lot of art and pictures which added certain character to the movie, I think that. That I wouldn't have thought about anyway.
- [03:41]
Christine Benz
Yeah, Amy and I enjoyed that aspect of the film. And I wanted to ask you. You make the point in the film that your preferences kind of align with your preferences and the type of art that you like and collect. Can you talk about that?
- [03:56]
David Booth
Yeah, I kind of gravitate towards what they call minimal art. And one of the things that's fascinating, particularly when you talk about big sculptures, this minimal art, sometimes people look at it and they go, well, I could have done that. Well, you couldn't have. I mean, it's, particularly in big sculptures, an incredible amount of work and structural thought that goes into it, and implementing the last little bit of art, you know, the little detail that. The little flourish that makes all the difference between great art and not so great art. And investing in the same way you come up with the best ideas, the best science, which I think that's our background, and then you still have to implement it. The details, the flourish on the implementation side, that makes all the difference.
- [04:47]
Amy Arnott
So the film really focuses on the revolution in finance that took place in the late 1960s and 1970s. And many of the people who were involved in the development in modern finance and dimensional history are now getting a bit older. Was that part of the motivation for the film, to sort of document and commemorate their contributions while they're still here to talk about them?
- [05:15]
David Booth
Yeah, I mean, it's. We lost Merton Miller in 2000. He was a Nobel laureate and longtime supporter of the firm. He was kind of our main independent director for a long time, and everybody loved Merton. And we don't have any film of him. We don't have any photographs, really. So we thought it was time to tell the story. And Harold does a great job making these people look human. You know, you don't think of it. You wonder what a Nobel Prize winner in economics would say about something, this or that or whatever. You're curious and you find out that most of these people that changed the world came from pretty modest backgrounds. And that's. I think people find that very interesting as well.
- [06:04]
Christine Benz
Yeah, that was one thing I noticed. Gene Fama noted in the film that he rather liked proving that active management, it didn't really add value. He felt like kind of an outsider in the world of finance. Did you feel similarly as you approached investing? Was it a little bit fun when you discovered that active management really hadn't added much and in fact had subtracted quite a lot for investors over the years?
- [06:31]
David Booth
Well, I was basically a blank slate. I went to the University of Chicago in 1969 and knew nothing about investing. And I really wasn't all that focused on investing. But my very first course was a course taught by Fama, and that just changed everything. It all tied together so beautifully, the theory and the empirical work. And, you know, I had a hard time understanding how anybody would think anything differently than what Gene taught. I mean, that was my problem. I guess I was surprised at really about the democratization of investing. One of the implications of Gene's efficient market hypothesis is that everybody can have a good experience because everybody can buy the market. The market represents the aggregate performance of everybody in the market minus whatever fees they pay. So that's pretty cool and uplifting. And looking at stocks and let's say they have about a 10% return a year over long period of time, that's perfectly good return for people in most cases. And it's also, on the other side of the coin, a reasonable cost of capital for companies issuing capital. So markets. The implication of all this is that markets seem, at least in the US seem to work the way you would hope they would.
- [07:59]
Amy Arnott
It seems kind of serendipitous that you ended up at the University of Chicago, which turned out to be sort of the epicenter of this huge revolution in finance. How did you decide to go there or identify the University of Chicago as a place that you wanted to pursue your PhD?
- [08:19]
David Booth
Well, I'd gone to the University of Kansas and actually was getting my master's there when I had to take a finance course. And along the way I read Fama's PhD dissertation, and it turns out that my professor had just gotten his PhD from the University of Chicago, and that's all he wanted to talk about. And so I decided I thought I wanted to be a professor. And so I applied to Chicago. And with the help of my professor at Kansas, Frank Riley, I went to Chicago. And so the serendipity came before me. I mean, it was getting people like Merton Miller and Gene Fama and Myron Scholz and, you know, all the. I don't want to be exhaustive. Those are a few of the names. They were already there. And my part was pretty easy. I go, wow, those people are amazing. I can't believe I can go study with them. So that's how it came about.
- [09:16]
Christine Benz
I liked your story about showing up for the draft. You said they were hot on your heels or something like that. And you already had kind of these plans to enter the PhD program at the UFC. Can you talk about that? Because you talk about serendipity there.
- [09:31]
David Booth
Oh, yeah.
- [09:32]
Christine Benz
And I noticed that several people talked about the role of serendipity and the way things played out.
- [09:38]
David Booth
Well, first off, I think it's amazing how much of the big things that happen in life are somehow connected to serendipity. You know, usually the great ideas start as small ideas, and you build on them. And my particular case, you know, in the fall of 1969, the Vietnam War was raging, and the army, the various parts of the armed services were really aggressive and getting people drafted. And I was working in New York for Exxon, and my draft notice came in. And in New York, they Scotch tape a subway token onto your draft notice, which I thought was humorous. Anyway, I show up for the. For the draft, and I get processed through. And I called home, said I had been drafted and into the army and went back after lunch. And this is where serendipity comes in. As I'm walking through the halls of the induction center, coming the other direction was the chief medical officer who had processed me through in the morning. And I had negotiated with him quite a while, so he recognized me. We struck up a conversation, and he said, you know, what were you going to do if I hadn't drafted you? And I said, well, I was going to go to the University of Chicago and into a PhD program. He said, let me see your file one more time. So I handed it to him. He goes, I've decided to reject you for a year. That was it. So I got out of there as fast as I could, went to Chicago, and the next month they put in the draft lottery. I drew a huge number. So I knew I was never going to get drafted. I mean, you speak of serendipity. By November, I was in a much different spot than I thought I would be at the beginning of October.
- [11:44]
Amy Arnott
So people who aren't as steeped in the development of passive investing might not be as familiar with the contributions of Mac McQuoan, who passed away late last year. Can you talk about how you came to know him and what his contributions were to indexing as we know it today?
- [12:03]
David Booth
Yeah, he was an amazing guy and really important in the development of investing. So my second year at Chicago, I was working for Gene Fama as a research assistant, and I decided I didn't want to be a professor. And I talked to Gene and he goes, okay, well, I'll call up Mac McQuown for you. Mac ran a think tank at Wells Fargo called the Management Sciences Department, and he was trying to play all the great new science that was coming out in a way that almost nobody else was trying to do it. And along the way, he used a lot of the main academics that were involved in this change, one of them being Gene. And in fact, the consultants that Mac used, six of them went on to become Nobel laureates. So, I mean, it was a pretty heady atmosphere and I was excited to join. Mac, of course, was larger than life himself, very urbane and sophisticated, but he ran a highly talented group. And that's what appealed to me. You know, as they teach you in school, about comparative advantage, my comparative advantage wasn't in developing the next great academic idea. I felt my comparative advantage was in trying to apply the ideas. And Mac was wanting to apply the ideas, and so I went to work for him at Wells. The month that the first index linked portfolio went live, it was an account for Samsung, and Mac had also led the way to get the trust department at the bank to offer the first S&P 500 indexed portfolio. I don't know if it was the first one that actually went live. They were the first to offer one, and it was slow going at first. I mean, it's quite a shock when you tell people, look, the way you've been approaching investing is all wrong. Doesn't make any sense. You know, they're things you can do to improve your investment, results that tie into how to make life better overall. You know, that it comes from this new way of thinking, passive management. You know, the implication of passive management is fees are much lower and you get better structured portfolios. So individuals today are much better off investing today because the fees are lower and the. The portfolio designs are better. And now we have Morningstar. I didn't have that back in 1971.
- [14:42]
Christine Benz
Either, you know, so Vanguard founder Jack Bogle receives just A passing mention in the film. Can you talk about what you view as his key contributions to the popularization of index based strategies?
- [14:57]
David Booth
Well, he played a critical role. You know, at Wells we were working with institutional investors, you know, big pension funds and insurance companies and so forth. Because of what was enforced at the time, Glass, Steagall, they couldn't really sell to individual investors. So that was Bogle's idea for the create a mutual fund company that would provide people with access to an S and P index fund. And you know, it was real slow going for him at first as well. I mean, I remember going to his offices and he would tell me how much money was coming in and he was pleased. It was you know, typically, you know, a few hundred thousand or a few million every day and. But he stayed the course and turned it into having a huge impact on the mutual fund industry. And as a side note, when we decided to start Dimensional, I went down Valley Ford to talk to Jack about doing all the administrative work for the fund. You know, once you, as a portfolio manager, once you decide to buy and sell whatever you're going to do, then that's when really all the work starts. You gotta come in and, you know, verify that the trade you thought you made was what the broker on the other side thought the trade was and so forth. So the incredible number of administrative issues. So I said to Jack, hey, why don't you do all that stuff? I mean, we'll do the trading and it seems strange today, but we'll fax down what our trades were for the day. From that point on, you do the managing of the fund for a fee. And I don't know why he did it, but he said okay. And so that's how we got started when the mutual fund business, with Jack's help and after a few years they decided they'd want to do it anymore, which was fine. But by that time we'd learned how to run a mutual fund. The years went by and one of the things I feel good about was shortly before he died, I happened to run into him at a conference and I pulled him over for bought him a cup of coffee and I said, look Jack, I just want to say thank you. I don't know what we would have done had you not been there. We probably would have figured out something, but you made everything much easier for us, so thank you. And he passed away not long after.
- [17:24]
Amy Arnott
That's great. That's another kind of serendipitous event is that you were able to touch base with him. Shortly before he died. One of the key messages in the film is just how painstaking the pursuit of truth in finance was in the early days. And you had computers just being developed and data was very limited and often hand curated. You had the CRISP database just being put together in the 1960s at the university of Chicago. Can you talk about some of the challenges that the original efficient markets pioneers were confronting back then?
- [18:04]
David Booth
Well, I mean, you hit on it. I mean, data and computers. Before 1960, computers weren't big enough. And until the University of Chicago created, you know, the first research quality database, and I think it came out in 1963, you know, it was, it was really the dark ages of investing. People could claim anything they wanted to claim about investing and without the ability to test it, you know, it was all kind of meaningless. So that changed with the data. And you're right, he mentioned Fama's PhD dissertation, for example, used data that he hadn't collected. So it was just a different world then. And as Gene Fama says, for him it was like shooting fish in a barrel. Once you have the data and the computers, the work hadn't been done before. Everything you did was new and exciting and different. So it was really just an incredibly stimulating time, particularly at the University of Chicago. You look over the last 50 years or so, all the Nobel laureates and economics that came from Chicago, a lot of them were there back then. Incredible, incredible buzz, you know, really at the end of the day of being overly simplistic. It was about data. Without data, you can't have a science because you need to be able to test out hypotheses and so forth. And so with data, all of a sudden this science got kickstarted.
- [19:41]
Christine Benz
We wanted to talk about Rex Sinquefield, with whom you co founded Dimensional. You were both efficient markets, true believers, and you had both conceived of similar products and firms. What made you think you'd work well together? And how did you two divide up your responsibilities when you were launching the firm?
- [20:00]
David Booth
Well, Rex and I met at Chicago. It was my second year there. He was his first year. And Thoma arranged for Roger Ibbotson and Stan Smith and me to hold a question and answer session on Fridays for any student that wanted to come in, talk about Thomas class. Well, one person that always showed up was Rex. He was one of these overachieving guys that you admire as a fellow student, but as a teaching assistant he took a lot of time. So anyway, we developed this friendship and he developed a friendship with Roger Ibbotson as well. In fact, The Ibbotson and Sinquefield studies on the performance of stocks, bonds and bills was legendary and really important to people in the 1980s to learn more about how markets work. Anyway, when we started to decided to start Dimensional, Rex gave me a call. He had taken American national bank in Chicago from being a sleepy little trust department to be one of the country's 25 largest trust departments. And he was interested in doing something different, something that lined up perfectly with what we wanted to do, which was to come out with a fund that invested just in stocks of small companies. At that time, institutional investors, which were our first clients, they only invested in stocks of large companies because if you were stuck with active management, then most of your alternatives were pretty small firms because active managers couldn't invest that much money in small cap stocks. So this was an idea that was. It was like pouring water on a dry sponge or something. You know, the idea just clicked immediately and Rex was our chief investment officer and I was our CEO. And so I focused more on the business side and he focused more on the investment side, although I was our first portfolio manager. So back in those days when you have a firm of six or eight people, everybody did everything, you know, so it wasn't like today.
- [22:19]
Amy Arnott
Jeannie Sinkfield is another seminal and probably less well known figure in the development of Dimensional. Can you talk about some of her contributions?
- [22:31]
David Booth
Yeah. Jeannie Sinquefield, who was Rex's wife, played a, you know, a key role in the progress of the firm. She had a PhD in demography and an MBA from Chicago. In fact, Fama I think said one time said he thought between Rex, Jeanne and me, maybe Jeanne was the best student. Anyway, as we started getting off the ground we needed all kinds of help and Jeanne was helping Rex out at night doing some programming. She had a quantitative and systems background and I persuaded her to join the firm and really head up our operations activities. She for about 24 years she ran portfolio management and various operations reported up to her. And she ran the firm while Rex and I were on the road talking to clients and prospects.
- [23:29]
Christine Benz
So Dimensional has never offered capitalization index funds as Vanguard and BlackRock and others have. Can you discuss, discuss the decision to style Dimensionals products with tilts towards small cap and value?
- [23:44]
David Booth
Yeah, this. So we had a number of breakthroughs that helped us get going. Early on, Fama pointed me to a dissertation done by Ralph Bonds at the University of Chicago which examined the relation between company size and investment returned. And we use that. That was a breakthrough. So we have the data then Based on his work of the performance of small companies. And that led us to create the small company, our small company fund. We call it the micro cap portfolio now. And it's had 43 years of history and it was really the first. Now about 40 years later, 30 years later, all of a sudden there was a term for that which was a factor based fund. So we had inadvertently created the first factor based fund. And that really kind of went big time in 1992 with a publication of some research by Gene Fama and Ken French. They call this their cross section of expected returns if anybody wants to look that up. Anyway, it said it looks like, you know, risk is kind of a multidimensional story. This is an empirical model, but it was based on theory developed, you know, a couple of decades earlier by Bob Merton. The unfortunate thing about Merton's theory was it was so complicated it took people a long time to understand it. Famas himself said it took several years for him to understand it. So it was a great theory with no empirical model to support it. And then in 92, Fama and French provided that support. And one of the implications was that low price stocks seem to be a different dimension than high priced stocks. Value stocks versus growth stocks. And that led to the creation of our value strategies. So now we had two dimensions. We focused on the small in value and then eventually we decided we need to offer somebody the ability to manage their whole equity portfolio. Which led to the creation of our core funds. Our core funds are basically market portfolios but it differ from a market portfolio like a Russell 3000 in that instead of holding those 3000 names on a strictly capitalization weighted basis, we held more in small cap stocks, are more in value stocks than they represented in the overall market index.
- [26:23]
Unknown Speaker (Schwab/ThinkOrSwim Advertisement)
Trading at Schwab is now powered by Ameritrade. Unlocking the power of thinkorswim. The award winning trading platforms loaded with features that let you dive deeper into the market. Visualize your trades in a new light on thinkorswim desktop with robust charting and analysis tools all while you uncover new opportunities with up to the minute market news and insights. ThinkOrSwim is available on desktop, web and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly. Learn more@schwab.com trading so there was a.
- [26:55]
Amy Arnott
Long period of time when both small cap stocks and value stocks kind of fell behind with large growth having a pretty big performance advantage. Do you think that people who look at that period of underperformance and are skeptical about small value. Is that just recency bias or has something fundamentally changed in the market that's made it more difficult for small in value?
- [27:25]
David Booth
It's too early to conclude that. I think all of these ideas, for example, I think almost everybody listening would think that stocks have a higher returns than money market funds over the long haul. Well, that's true. But to quantify that with meaningful results, it usually takes 20 or 30 years to statistically validate that idea that we already believe. So whatever conclusions you come from, you get from the research. And by now we've had 60 years of research using the CRSP data. You know, your first instincts are to be skeptical anyway. But if you have a well constructed story, and that was kind of the key of the Merton Fama French work, is we had a sensible story for why small in value should be considered separate dimensions. Now, that being said, I do have to tell you that our firm, our first few years, all we had was a US small cap strategy. And we happen to start at the worst nine year run for small stocks relative to large stocks. And we learned something from that, which was if you have a sensible idea supported by great research, then if you have really a sensible story, people aren't as hung up on the most recent performance. Now you clearly want to pay attention to what's going on and so forth. But we continue to update that kind of research. And so you in our portfolios, our overall portfolios, our core portfolios, we do have large stocks and growth stocks in it as well as small in value. It's just a question of overall portfolio structure and coming up with the best solution that you've come up with, and there'll be long periods of time when those results are disappointing. But what we've learned is if you have a sensible story for why you're doing what you're doing, and if you also deliver on, if you do what you said you were going to do, then people are likely to stay with you over time. That contrasts sharply with the old active management, which is, you know, invest with me, I'm a genius. And then we go through difficult times. People go, you know, I don't, I'm not so sure you're that genius I thought you were. So we base our strategies on what we think to be the dimensions of returns. And these dimensions are well documented. So we enjoy the good times and our clients seem to be able to stick with us during the tough times. Frequently when, you know, as a manager, when your results are disappointing, you call up clients and Try to explain what's going on. Well, our long term clients frequently say, oh, you don't need to talk to me. I know what you're going to say and I believe it. So I'm okay, go talk to some of your other clients. So I think that's kind of unique in the industry.
- [30:27]
Christine Benz
So Dimensionals funds had historically only been available to financial advisors and institutions. And I think that was kind of the rationale there that you would be able to inculcate those folks in sort of your overall philosophy. Can you expound on that a little bit?
- [30:44]
David Booth
Yeah. At first all we taught as we, we only had large institutional clients partly because we were a small firm and we had no expertise in selling to the public. And that all changed in 1989 with an advisor up in Sacramento named Dan Wheeler. He said, look, I'd like to have access to your funds. And you could see why. I mean, our clients are institutional clients. So our fees were really low and you know, institutions aren't going to pay high fees for anything, which is appropriate. So we said, okay, we'll give you access to those funds, but we'll monitor you, which we did. And a year later he came back and he was a, did what he said he was going to do and behave sensibly. So he said, I think there's a business in this. And that really excited us because if we're really going to help people long term, we're going to help the average investor, you know, the big institutional investor we can help, but we don't help them as much as we help the smaller investor, you know, because we have institutionally priced funds. And that's really kind of been the direction of the firm. Now more of our assets come in through financial advisors than come through our big institutions. We chose to work with fee only financial advisors. I mean, the history of the mutual fund industry is funds getting started as load funds. But we didn't want to do that because of potential conflicts of interest. Not that selling loads is inherently bad, but it creates the wrong incentives. There's no need to, no need to do that. But we didn't know anything about selling retail and that's very expensive. And so we started working with fee only advisors. Even there, we insisted that they come in to one of our two day seminars to get trained on how well we believed. And then we even had them develop a business plan how they planned on using us. And if everything connected, then we gave them access to our funds. It sounds like we were trying to be tough or something, but it was really quite the opposite. Once you do get a client, you want to stand up for their interest and you don't want a lot of people coming in and getting out. And so we handle that by making sure people understood exactly what we're doing. And we do monitor trading activity, but we really haven't had a problem with it in 43 years now. In fact, it's just the opposite. By commingling, you do get the benefit of scale. And so we kind of stumble and we talk about serendipity. This was serendipity once again. You know, Dan Wheeler calling us. We had no plans to sell retail, but going forward, we really are excited about working with advisors. And then a breakthrough a few years ago came with when we started offering ETFs, we were able to convert a number of our regular mutual funds over to ETFs, and right now that's created a lot of interest and excitement. The ETF world has exploded and I think it will continue to advance, although I think the SEC is thinking about changing some rules around. It'll take away some of the advantages of ETFs, but either way, whether it's ETF or mutual funds, we want to be there for our clients. Whichever one works better for them, you know, we're happy to give them access.
- [34:18]
Amy Arnott
Yeah. So related to ETFs, when we were preparing for this podcast, we ran some quick data looking at dollar weighted returns for dimensional funds, which account for the timing of inflows and outflows. And it looks like as a group, dimensional funds have fared pretty well in that regard in that shareholders typically aren't trading excessively. And because of that, they've been able to keep a large port portion of their funds, total returns. Are you concerned that with the ETF format that people might be more apt to trade actively and end up hurting their results?
- [35:02]
David Booth
Yeah, it's a concern. Like I say, it's something we monitor. By now, though, we've had the good fortune of having huge funds. So on any given day, there are a lot of people coming in, a lot of people going out, and we don't have much problem with the net flows, but it's something we monitor. A concern I have about ETFs is just that what you bring up is that are people buying ETFs for the right reason? And I just observed that there's been an explosion in the growth of indexing over the last 30 years. And if people were buying index funds because they didn't think they could time markets, then Seems like common sense to me is that trading volumes would have declined a lot. If now indexing is half of the world. You would think maybe trading would be half as great. It's even greater than it was before. So it's grown. So it says to me that people, a lot of people buying index funds or trading them, like a lot of technologies, indexing can be used for good or for bad. I mean, you can.
- [36:10]
Amy Arnott
Right.
- [36:10]
David Booth
I think the sales pitch sometimes is to investors is, okay, I can't pick stocks, but I can time markets. And so we'll put you into a bunch of index funds and we'll get out of those before decline and get back into them before they take off. You know, it's the same sort of nonsense that we railed against with when we did with stock picking.
- [36:32]
Amy Arnott
Right.
- [36:32]
David Booth
So there'll likely be some good studies about that. That sounds like a good research project for somebody.
- [36:38]
Amy Arnott
Yeah. I think Jeff Patak at Morningstar actually did look at dollar weighted returns for index funds and found that especially on the ETF side, that there is some evidence that people are trading actively and ending up with lower returns.
- [36:54]
David Booth
Yeah, right. People just don't want to believe. I mean, it's human behavior. Danny Kunneman, who's a Nobel laureate, said it's unrealistic to think people would think anything differently given the huge amount of advertising for actively managed funds and so forth.
- [37:10]
Amy Arnott
Right.
- [37:11]
David Booth
But people just think that if they work harder or smarter than the guy next to them, that somehow they'll pick stocks better than that person. There's no evidence of that.
- [37:22]
Amy Arnott
Right. And in the film, you talk about how, as human beings, we tend to look for patterns and find them even if there isn't really a pattern, which can be an obstacle when it comes to investing.
- [37:36]
David Booth
Yeah. As Ken French pointed out in the movie, you know, it may be key to survival, you know, if you kind of make a guess as what that thing is behind a tree. So, you know, thinking that it might be a lion and, you know, getting out of there maybe part of self protection that you need, but it doesn't seem to help you in picking stocks.
- [38:00]
Amy Arnott
Right.
- [38:01]
David Booth
So I think what people need to spend more time in is connecting what's going on in their personal life with what's going on in their investment life. People want to talk about, what do you think of the market's going to do? Well, I mean, I don't know. I can't predict that. But what's going on in your personal life? Are you getting ready to retire or if we Have a recession, Will you lose your job? I mean, these are things that are worth thinking about and maybe it causes you to adjust your portfolio around. So we're not suggesting that people just, you know, invest in something and forget about it. Pay attention to what's going on, but don't waste your time timing short term moves in the market. Now I'm beginning to lecture. I'm sorry about that.
- [38:44]
Amy Arnott
No, that's okay. I think it's worth repeating and it can definitely be challenging to stay focused on your own goals and your own financial situation when there's so much going on externally. So toward the end of the film, you seem almost regretful that it's only a teeny tiny percentage of the population that actually believes this stuff or this approach to investing. But would you count the uptake of traditional index funds as sort of a victory in your column? Even, even if it's not exactly how you'd like to see people invest?
- [39:22]
David Booth
Well, in there somewhere is something to celebrate. But if the overall effect is that we've had an explosion in index funds has been associated with a rise in trading volume, that takes away some of the buzz.
- [39:37]
Amy Arnott
Yeah.
- [39:37]
David Booth
And that's why I think there's only really a small fraction of people actually really still believe this stuff. And the reason, I guess it's disappointing to me is I've worked pretty hard on this, trying to live the message the last 53 years. I don't have 53 more to put into it, but so I hope people wake up sooner rather than later.
- [39:59]
Amy Arnott
So one thing Gene Fama says in the film is that we're really not making the same type of quantum leaps in finance that were made back in the 1970s. Do you see any promising areas in academic finance now or is there any research that, that you think is interesting for future academics?
- [40:22]
David Booth
Well, I mean, we've built an incredible research team here. I mean, we relied heavily on Fama and French to build up our research capability. And we have, you know, our research team would be a very good finance faculty almost anywhere. And it's hard to get into a lot of the things they're working on now where they're getting pretty boring. But in terms of research, things seem to be getting better and better over time. Fama points out there are a lot of good people doing great research now. Back when he started out, I mean, there was just all the important people in a room together, which is what we did at Wells Fargo. We have a seminar once a year and invite all the key people doing research in this area, and we could then sit down, present papers to each other, and have dinner together, and then we'd go home. You can't do that anymore. There's too much good stuff. I think Paul was really kind of alluding to, though, is, look, it's unlikely that we'll have the second revolution anywhere comparable to the first revolution, which was the idea of going from saying, look, the way you think about investing is just wrong. I mean, that's a huge revelation. And I can't imagine there'll be anything come in and shock people, because it's a good example of how you would hope markets work and why you think they work, which is, look, if you have enough transparency, if everybody has access to similar data and you have enough trading volume and you have a good rule of law, it's hard to believe that markets wouldn't be efficiently priced. You know, that the only way that would happen would be if some, you know, segments of the population have. And we see this with insider trading, for example, you know, that insiders do a pretty good job of trading. Okay. That's why we outlaw insider trading. And so, yeah, there's going to be improvements in the future. And just like right now, I mean, when I tell people how I ran the portfolio when we first started, oh, man, that is so primitive. And it was. But it was cutting edge at the time, you know, and So I imagine 40 years from now, people will look back at what we're doing now and go, ah, pretty good, but really primitive.
- [42:45]
Amy Arnott
So I'm curious, when you first had the idea for making a film about dimensional, were you inspired by any other films or do you have a favorite film about money and investing?
- [42:59]
David Booth
I really don't. I think those kinds of films are largely dominated by people trying to sell you something, getting you to trade. But I did like the Madoff documentary. You know, here's a guy, you know, a total fraud, that he went down to the SEC twice and explained exactly what he was doing. They go, okay. You know, so I think that was pretty funny.
- [43:24]
Amy Arnott
Yeah.
- [43:24]
David Booth
I mean, it's sad. It's one of those things you laugh at because it's so bad.
- [43:27]
Amy Arnott
Yeah. But it's striking how he claimed to have this amazing performance record and nobody really questioned it.
- [43:36]
David Booth
Well, that's right. He made it. Evidently, in our portfolio, team said he made a sales call on us one time and they just looked at it and go, this can't be true. Too good to be true. But it ties in with human behavior. Again, I think a lot of people realize that there's probably some hanky panky going on there, but as long as they were making the return, they didn't want to say anything.
- [44:02]
Amy Arnott
Right.
- [44:02]
David Booth
You know, so honesty is still always the best policy.
- [44:06]
Amy Arnott
Well, Christine mentioned some of the amazing sculptures that are shown in the film earlier. And I'm curious. You're a very avid art collector. I'm curious about when you first started getting interested in art.
- [44:22]
David Booth
Well, I think my interest in art probably kind of paralleled my interest as my income went up. You know, I remember my first apartment out of school. I had this great poster from MoMA, you know, a Mondrian painting poster of that, you know, with plastic wrap on it. You know, whatever it takes. Two things. It takes an interest in the art and takes the ability to afford it, you know, so as you get older, you're better able to afford those kinds of things. And I will say that you hear all the time, you know, you can't take it with you. Well, that's true. One way you can enjoy your money is through art. I didn't buy the art because I thought it was a good investment. I bought it because I liked it.
- [45:05]
Amy Arnott
Right. Yeah. So I think that's another important message, is that money isn't just strictly functional, you know, to support your basic needs, but you can use money to really appreciate life and, you know, support different causes that you believe in.
- [45:23]
David Booth
Yeah. And that's a side benefit. Sometimes I worry about the other side. You know, my parents never had any money, and I thought they were worth a lot. They were fantastic parents. Just no money.
- [45:37]
Amy Arnott
Right.
- [45:37]
David Booth
So you don't want to overstate the benefit of acquiring enough money that you can collect art. You know, if they went through the Great Depression and World War II, you know, so they didn't have the opportunity. They just made that opportunity happen for me.
- [45:55]
Amy Arnott
Right. So for our last question, I wanted to ask, what would you like your legacy to be?
- [46:03]
David Booth
Well, hopefully that I did the best I could, you know, I hopefully kind of help this movement towards passive management come alive. I feel a little good about that. It's. I really get a kick out of having people come up to me at a conference or whatever and say, you know, this has happened a few times. You know, I'm. I get a pension fund or my 401k is invested in your funds. And I just want to say thank you. So hopefully, I guess I want my legacy to be that people come up to my kids and say, thank what your dad did for me, you know.
- [46:45]
Amy Arnott
Yeah. Well, thank you so much, David. This has been a great conversation and I really enjoyed the film. I think it's you don't have to be a finance geek to enjoy watching it. I think it's accessible to a much broader audience and it's really not just the story of finance, but the story of a group of people kind of getting together and pursuing their goals.
- [47:10]
David Booth
One final comment. It seems to have excited people. We put the movie up on YouTube about two weeks ago and we have basically 3 million views already. So these ideas can be exciting to people if they, if they pursue them.
- [47:28]
Amy Arnott
Yeah, I think they are. And thank you again. This has been great.
- [47:32]
David Booth
Thank you.
- [47:38]
Christine Benz
Thank you for joining us on the Long View. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts, you can follow me on social media, Hristinebenz on X, orstine Benz.
- [47:55]
Amy Arnott
On LinkedIn and Amy Arnott on LinkedIn.
- [48:00]
Christine Benz
George Cassidy is our engineer for the podcast and Carrie Gretchik produces the show Notes each week. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com until next time. Thanks for joining us.
- [48:20]
Unknown Speaker (Disclosure Information)
This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. And its affiliates, which together we refer to as Morningstar Morningstar. Morningstar is not affiliated with guests or their business affiliates. Unless otherwise stated. Morningstar does not guarantee the accuracy or the completeness of the data presented herein. This recording is for informational purposes only and the information, data analysis or opinion it includes or their use should not be considered investment or tax advice and therefore is not an offer to buy or sell a security. Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analyses or opinions for their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision. Please consult a tax and or financial professional for advice specific to your individual circumstances.
- [50:09]
Unknown Speaker (Morningstar Investment Conference Announcement)
Advisors and financial experts. This one's for you. Registration is now open for the Morningstar Investment Conference on June 25th and 26th. Join thousands of your peers in Chicago for two days packed with cutting edge research, expert insights and thorough interactions analysis. Advisors can even attend for free and earn CE credits. Learn more about the MIC conferences@morningstar.com events MIC.