Dimensional Fund CEO David Booth: Masters in Business (Audio)

Booth School of Business, David Booth the Booth School at Chicago. UH. David made a fairly tremendous gift to the Booth School of At the time, it was valued at three hundred million dollars, but considering it was a mix of cash and stock spread out over a number of years, it might even be worth closer to half a billion, is my back of the envelope guess, based on the assets under management in Chicago. I mean at Dimensional what that means to the Chicago school and um, it's it's really

worked out tremendously well. David really credits Chicago for all of the success he's had in his career. Dimensional is just a monster uh fund. They've done really well, starting out with literally zero dollars in there, now coming up on half a trillion dollars. They don't sell directly to the public. About a little less than half of what they do is institutional. The other half is sold through financial advisors. In full disclosure, my office is the Dimensional shop.

We've we've been using them as part of our core portfolios and and we've been really happy with them both as a service provider and the performance of the funds. I think you'll find David is really a fascinating guy. He doesn't usually do these sorts of interviews. He's more of a print guy. So it was really interesting to hear him unedited, unvarnished in his own words, very very savvy and individual and when you look at at the success, when you look at what he's built over the years,

it's really quite amazing. So rather than have me babbyl on and on with no further ado, here is my conversation with David Booth. This is Masters in Business with Barry Ridholds on Bloomberg Radio Today. My special guest is David Booth. David is the founder, chairman and co CEO of Dimensional Funds and asset management firm running over four

hundred billion dollars. Little background about David. He got his degree in economics in n at Kansas, where he also got a master was in business the following year, and then ended up going to the University of Chicago for his m b a. In nineteen seventy one. As of now, the University of Chicago is known as the David Booth Graduate School of Business, following a major endowment made. Um, I should really call you doctor Booth, but I know that I don't have the the official Well, David, welcome

to the show. Well, thank you very much, glad to be here. Um, so let's talk a little bit about your your background. In your your from Kansas, did you have and you and you obviously focused on business and got your masters in business. Did you ever have any plans on going into the world of investment before your m b A. Uh No, Actually I went to I

went to Chicago, I went into the PhD program. Uh. I went there with the idea of becoming a professor eventually going back to Kansas, went back to Kansas and teaching. So how on Earth. Did you make that pivot from being a professor to running a very large and successful

investment firm. Well, my um, Um, how it came about was in my second year in the program, I was working for Jane Fama, the Nobel laureate famous for developing the efficient market hypothesis, and it was a phenomenally great experience. But I I realized I didn't, Um, yeah, I no longer want to be a professor. And as he tells the story, UM, I walked into his office one day and said, I know what you do, and I don't

want to do it. Now. Why is that? I've read you said that he's the smartest, most intuitive, most competitive person you met at the time, Right, and you didn't want to enter field where you're up against the hundreds of guys like that. Well, I think it's not more than that. It's Um, I love the competition because you know, we chose to go into money meagument business, which is

highly competitive. So it's not so much about the competition is as it is that, Uh, I'm not very good at studying something for years in order to really come out with these great research um projects. Uh, you know that it requires and an ability to sit there and study for years on end the same subject. And I realized I didn't have that, So you didn't want to just focus on that one niche and and do that

deep dive. Let's talk a little bit about UM. You mentioned the course you took with Fama was life changing. Is that that's not an exaggeration, is it? No, it's not an exaggeration at all. I mean, I'm was twenty two year old, never grew up in a very modest household like most people of the time, and um, the my first course in investing was was taught by Jeane Fama, and it all made sense to me. It Uh, it wasn't until later I found out almost nobody else believed that, uh,

you know what he was teaching. But so I really was. It was transformative to me, and it was a period of time that was really transformative for the field of finance. The field of finance really I went through with their score of years from the mid fifties of the mid seventies were it kind of really went from a nothing field to a true academic discipline with models and theories and good research. So let's talk about UM. Some time after you left, uh, I was gonna call it booth,

but I guess I really can't. Um mc McCowen hired you at Will's Fargo, where pretty much he created what was the first practical index fund. Tell us about your experience working with McAllen. Okay, Well, I'll start with a

connection first. So when I talked to FOM and said I wanted to leave the program, he called up Mac and UH said, because Mac could, I always wanted to hire one of his students, and so uh Uh and Mac wanted to come out with a what was seemingly crazy idea at the time, of an index fund, and UH and he and I hit it off, and we went out and UH and UH started the first index funded in nine mostly for institutions that it was only institutional in And we really didn't funny enough. We weren't

successful enough or quickly enough. So eventually the Wells Fargo shut down our group and UH not a great decision. They're not a great decision. Well, it continued on. It turned out to be good for them because the Trust Department then picked it up then to try. After a number of years, Wells Fargo UH sold half the business to Nico and then the whole business to Nico, and then Nico sold it to Barclays and then Solid Black Rocks. Yeah. Yeah, So what was the I recall reading Samsonite Luggage was

somehow involved in the original index fund. What what was their relationship there? Well, they called the University of Chicago and a professor there, Jim Laurian, said, who's it trying to apply these ideas? And Laurie said, well, well, as Fargo this group out there. So so Samson I called us up and said if this makes a lot of sense, uh, why don't we go with it? So that was for their pension pension. Really the first a practical index one was it just the SMB or what was the index

based on? It was an equally equally waited index Fonte, Yeah, it was kind of That's interesting. Well, you have to it's a product of the times, you know, and the

early seventies. Uh, the people promised all kinds of wild performance objectives and and so you're always trying to figure out how can you we're using come from the passive side of things, how can you create something that has a chance of beating the market and by holding equally weighted securities instead of the SMP five hundred, which is market that that got more the smaller companies and greater emphasis to hire beta stock. So and the old joke is that the mad desk for alpha often leaves not

only no alpha, but no beta. Yeah, there you go. I'm Barry rid Hult. You're listening to Masters in Business on Bloomberg Radio. My special guest today is David Booth. He is the co CEO and chairman of Dimensional Fund Advisors, a four hundred billion asset management business. And and before the break we were talking about, UM, how you founded the company, and the company legend is this was begun in a brown stone in Brooklyn. Well, that's right, it was.

I wouldn't say that the idea was destined for success, and necessarily it wasn't pretty determined that it will be successful. The act the idea we started with was a small company. UH, index linked type portfolio. UM. I say index linked type because there were no small cap indices, so it's hard to was index fund if there's no indices. This was pre Russell two thousands around all right, And what's the story with the phone company not giving you phone lines?

They thought you were running a bookie joiners. Well, the world wasn't quite ready for a money management firm in Brooklyn at the time, back before it became fashionable. Um. And so we started with the idea that, uh, there's a simple proposition that we went in and talked to big institutions about. It was that informing an equity portfolio, you ought to have stocks of large companies and small companies. He should invest all your money just in large I

mean makes sense, and it makes sense. Uh. So that was the proposition. I'll observe. We didn't have a track record. Actually nobody did, because institutions weren't holding the stocks of smaller companies in any great proportion. About the only small companies stocks they were holding, or stocks of companies that once have been big companies. Uh and so so they had the odds and the small company exposure. But this was the first systematic way of accessing a small cap universe.

And these were really relative to what the typical pension funds or mutual fund was holding. These were really microcaps. These were my Yeah, these were um, very small companies. But it would you know, it's roughly about uh six of the total stocks and that are publicly traded but inaggregate they only represent about, you know, five percent of

the market. Did you run into any special challenges trying to either trade these things, find coverage on these companies, or the whole idea of microcaps the big pension funds. How was it received well? It was received well, but there was a lot of opticism. Uh, first off, we

didn't have a track record, even though nobody did. Ours our first portfolio manager and actually I've never managed money before, and uh so there were uh the reason but the big skepticism was about the trading, the execution that you're talking about big wide spreads, big spreads, and we are going to the marketplace because we come from the efficient market side of things, we come to the marketplace knowing we don't have any special information about the company who

were trading with, largely with institutional investors that think they do have special information. So the question and leading academics, uh were you know, brought this up. You know, why won't you just get skinned going in and trading with people that are much more knowledgeable about the companies that you're investing in. So so what's the answer to that question? Well,

we turned what was the problem into kind of an advantage. Uh, people that think they have the discounted information realized that whatever chill insights they have will not be lasting for long, and so there's an anxiety to trade, and that's what we worked on. We approached the marketplace basically waiting for sellers wanting to come to us. So so you're saying

patients is actually a virtue for investors. Absolutely, patients and flexibility, so uh, and coming to the marketplace, if you can get the other person to move first, then uh you can Uh you win that particular trade and win that trade. We're speaking with David Booth, Coco and chairman of Dimensional Funds. Let's talk a little bit about your explosive growth since I know in hindsight it looks like a long, gradual process,

but when you look at some of these numbers. So so when you launched the firm in one you essentially launched with zero assets, zero assets, right, I began with nothing. How long did it take before you were at a hundred million dollars? Oh, it was about Well, it took us about nine months to get registered with all the and come out with it. And the first year I think we had something like eighty millions. So it was it was about a year and a half, right, I

go to get und millions. So so here's the numbers I came up with, and I tried to look at it by decade. So by the time you finished your first decade, were up to four billion. By right in the peak of the boom, you're thirty billion. Two thousand and nine, you're at a hundred and twenty four billion, and then around was a little over two hundred billion and four hundred billion. Today when you look back at the past, you know, forty years, that's the thirty years.

That's an amazing run of of acid accumulation. Well, it's obviously been very fortunate. I think, um, a lot of the reason for it is this notion of indexing, and and I'm a fan of index and we don't exactly do indexing, but indexing is worked very well, and the principles of indexing are such that people can stay with it. Uh So the idea is that we attract new clients coming in, and um, a few clients leave. So let's let's describe what you mean by indexing. So there's not

individual stock picking. I like this management. I like that product. It's We're gonna buy a group of stocks with these characteristics, and there's no market timing. You're long and fully invested. There's no I feel that a ten percent correction is coming, so I'm gonna move to the side and pay some big taxes. Is none of that. So so you're you're

essentially about long term broad ownership of equities. Right. The key to investing, uh, Well, the first key to investing is find a philosophy that you can stick with through thick and thin. The reason are const One of the reasons they've been so successful, in addition to the we've been able to have a performance advantage over index funds. But the other main reason they've been they've had a

good experiences. They were able to stick with the UH investment philosophy through that very difficult two thousand seven two thousand nine period. We we notice just watching the world of investing that the retail investor has a tendency too. We call it the flavor of the month. Oh this fund manager is doing well this month. Oh look at this sector. You clearly you have no interest in that, So no innest and that sort of thing. You know.

There there's been something like seven or billion dollars of outflows from US equity mutual funds over the last uh since the peak of the market in two thousand and seven. That's that's a huge outflow. Yeah, we're every year we've had positive flows because people can understand the process. They realize basically we're we go up and down with the markets, and it shouldn't come as a surprise at every now and then there's a down market in the last thirty

seconds we have. How is the firm managing this phenomenal growth? What's your secret to staying true to your your principles when money is just flowing in the doors like that, Well, it's it's operating extremely efficiently efficiently. I'm Barry Ritult. You're listening to Masters in Business on Bloomberg Radio. My special guest today is David Booth. He is the chairman and co CEO of Dimensional Funds Advisors. And let's talk a little bit about this quote from mc McGowan, who you

worked with earlier in your career. We were talking about that before at Wells Fargo. McGowan said, it's all thanks to Jim Laurie, Gene Farma and Martin Miller. What does that mean, well, these are the key people and and and developing the finance department of the University of Chicago.

Going back to the mid fifties, Jim Laurie was an associate dean or assistant team of the Business School, and he realized that the field of finance was changing rapidly and they needed to bring in some of these new young hot turks two h power up the school and the first personally brought in was Merton Miller. UM. Merton Miller eventually got his Nobel Prize for his work on capital structure cost capital H and one of Merton Miller's students was Gene Fama. And Gene's he mentioned they got

his Nobel Prize for his work and market efficiency. Ah. So they were the uh. They really not only helped determine the um the path that Chicago took, but they also Miller and Fama really set the established the culture of the place, UH, which is been an amazing, amazingly productive school for economics and finance over the last you know, forty years. Who else were your early mentors, Well, I mean the UH may you have to go back to before business school, I guess for mentors, big mentors are

are Fama and McQuown. You know they Fama, um, you know, taught me all the basics of investing, and they and gave me the capability of reading, you know, uh, academic research even today. And do you still read a lot of academic research today? I wouldn't say a lot. I kind of cheat a bit. I wait for Fama or Ken French or Bob Marton to pass along what they think is good research, and then I cherry pick. You could do worse with those three as curators. Yeah. So,

so you were also Eugene Farmer's assistant research assistant. What was it like working with him? Well, it was amazing. First off, he's uh uh still you know, just works incredibly hard seven days really. Yeah. In fact, there's a one of my favorite stories is uh uh about Fama and his colleague Ken French. Over the last thirty years or so, uh, Fama and French have collaborated on numerous

landmark papers, and they're worked together all the time. Ken's and at Dartmouth Tough School Business and and uh Jeans at Chicago. So one day they're they're they're having a conversation and Jean notices that Ken is not being too responsive. So he says, well, Ken, what's going on today? And Ken says, Jean, it's Christmas. I mean he's Uh, it's a work like that that, uh, you know as as enabled those guys to succeed. So so as long as you bring up Ken French, let's talk about the French

FAMA or the Fama French three factor model. Why was that such a breakthrough? And and for listeners who may not be familiar with it, it's essentially the kind sept of looking at market beta plus the small cap premium plus the advantage one gets by valuing value stocks over other, let's say, more expensive stocks. Um, why was that such

a huge breakthrough? Well, um, you know investing inequities. Um, you know, there involves many different types of risks that most of which will ever be able to identify exactly. But uh, a lot of many different kinds of risk. Well. Uh, the model until Farmer French came along, the model that all eating academics used to do research was just a single factor model beta. And it was a great model, elegant theory. It had one drawback and that it never

described reality. So they could and we have a saying that you know, if you torture the data enough, you can get it confess to anything. But as much as uh they tortured the data they could could they could never get I beta stocks that have systematically have higher

average returns than low beta stocks. So this what Foman French did was actually pull together a lot of research have been going on over about a twenty year period, and UM concluded that they have a simple three factor model instead of one that seemed and that did a much better job of of describing, you know, why one portfolio as a higher average returned than another. So in the last thirty seconds we have in this segment, everybody now understands the small capt premium, the value premium. Why

haven't these been arbitraged away? Why do they still persist? Well, we think of these as being risk premium, and we've known for years that stocks have higher average returns than the money market funds on average, but that and that hasn't caused the premium to disappear. I'm Barry, which helps you listening to Masters in Business on Bloomberg Radio. My special guest today and I know I say that every week, but I really mean it. My special guest this week

is David Booth. He is the founder, chair in and co CEO of Dimensional Fund Advisors with about four billion in asset under management. Let's talk a little bit about the rise of indexing. You you hinted at that in the last segment, but this is really very very significant. UM, let's begin with what you guys do it. I know you don't love d f A, but I always hear d f A as opposed to dimensional people. That's the

shorthand people use. What does dimensional funds do with their indexing that's so significantly different from the typical plane vanilla market cap weighted index. Well, the underlying premise of of the firm around around which we started is that indexing is UH is terrific and I think people benefit a lot buy it. It's also a relatively mechanical strategy. If if a stock goes out of an index, you have to sell it. If if a stock comes into an index, you have to buy it, and you have to buy

it on the days it comes and goes. So that's UH. That never appealed to us because we thought that mechanical approaches UH in terms of generating trading costs, it makes them very expensive to trade. You know when you have to trade relatively mechanically. And so what about the dimensions When we talk about demend dimensional, we're really talking about dimensions which began with small small cap then added value. What does the dimensions due to the return of of

the index? Well there there. The notion of dimensionality is that there are some factors that can uh uh lead to higher average returns in the market than just buying the overall market. If you start with an index fund and you decide, well, why don't I give a little great greater weight to the smaller companies, and why don't I give a little bit of greater weight to the lower price stocks, uh with correspondingly, us wait to higher price stocks and bigger companies. That's a really that's the

notion of dimensionality. It's just it's not if you think of portfolio management as being a function of of two things, stock selection and then uh, how much you wait each stock in a portfolio. Stock selection, we really don't spend much time on. That's we hold nearly all the stocks in an index, but we hold the stocks in different proportions than they represent in an index fund. And And to put that into a little context, as to what

that does to the performance. I'm going to quote an article from not too long ago in barrens of d f A funds have beaten their category benchmarks over the past fifteen years. Of dimensional funds have been in over the past five years. That's a heck of a great

track record, isn't it. Yeah, it's really kind of startling it When we first, uh we started you know with so primitively I guess so, you know, with a out of the ms Stone in Brooklyn that and it never occurred to us that we could actually outperform an index. We thought, because of trading costs, that would always have a certain lag and so we we worked really hard to try to do what we thought was minimizing that

that that that dragon performance. It turns out we exceeded expectations and we actually uh started adding value over index one. So actually, let's talk about that a little bit. Because you guys have a very sophisticated way of trading. Um, you're very methodical, you're very opportunistic. We talked earlier and said you're especially patient. Uh, there's an emphasis towards taff sufficiency and an emphasis towards low expenses. How did you

create that trading methodology and what impact does it have. Well, the way we traded it was we just recognized, look a marketplaces where buyers and sellers come together and they both have to feel like they got a good deal or they don't trade well. Um on the other side of our trades typically are institutional investors that are they have an idea for change. You know, it's either buy this or sell that, whatever it is that they've decided to do, and whatever their decision is, they realize the

benefit of that is really really short lived. So as we go to the marketplace and we look at you know, the bid ask spread, you know the that's really kind of a lot of people's measure of trading costs, the bid ask spread. Uh, what we realize is if we could get the other side to act first, we could trade closer to the bid in today's terms and stock maybe trading ten dollars to ten dollars and two cents or whatever. It makes a It makes a difference if you can buy it at ten dollars or versus ten

dollars and two cents. So that was that was the thing that went into it. And since you guys are such long term holders and their short term traders. You could afford to be patient. They can't. They right to hit the bid while you can wait. And it's a win win deal. It's not like we're ripping their eyes out.

It's they they they want They want immediacy in trading and are willing to pay for it, and we, in essence, are providing a service to them by if they're wanting to sell something, we take it off their hands, you know, we take it down a couple of cents. They think it's it's well worth it, and it makes over the for a long term investor like us, it makes a huge difference over the long haul. We're speaking with David Booth of Dimensional Fund Advisors, So let's talk a little

bit about how successful indexing has become. Why is this something that seemingly has taken the public so long to discover? Well, Uh, I think that the idea behind indexing is not intuitively obvious to people at first. UH. Most people approach investing the way they approach business in general. The idea that if you're smarter and harder, and you know, you ought to be able to do better than than somebody else. Uh, And that's just not true of of investing in public markets.

When you buy a publicly traded stock, you're buying a piece of paper, and and the investing in the public markets is a zero sum game about whatever the around uh, whatever the market does. So if one investor has a higher average return than the market, another investor has to have a return less than the market. It's just simple arithmetic.

Then you work in a little friction from trading costs and from fees and commissions, and you probably end up with a significantly lower a number of people on the below beta side, greater number of people making less. So it's worse than a zero sum it's worse than zero sum game. Yeah, but it's really hard. When you see somebody with a great track record, it's tempting to say, look, I think this manager you know, as a chance of

consistently beating the market. I mean, or stated differently, if you're gonna invest with something you know, you probably won't pick somebody has a poor track record. You're likely to

pick somebody with a good track record. Unfortunately, as his research has shown, the number of people with good track records are fewer than you'd expect by chance, just randomly we would expect more investors to have a good track record than than than there are, and so as a result, you can't there's no way of telling that personally good tracker, good track record, got it by luck or by skill.

And then there's the issue of what happens when suddenly everybody piles into that one segment because this person is on the cover of some magazine. And then what we invariably see this in four oh one case where people are just flavor of the month whoever's not at that quarter, and usually it's because some segment has done really well and it's about to stop doing really well well. People have a tendency to, as we say, skate to where

the puck was. That's right, not to The famous quote is skates where the puck is going to be, not to where where it is. Now, let let me mix this up a little bit with you and talk about something in general about mutual funds that I've always complained about the lack of involvement in in corporate governance on behalf of their shareholders. You guys recently started doing something

or I don't know how recently. This is sending warning letters to companies who's um stock you own and whose management is debating, uh putting in a poison pill into place. Tell us about that, Well, we think it's very important to uh work hard for shareholder rights. UM. You know, our capitalist system requires monitoring, you know, it's uh and being an investor and part owner of a of a company through our clients, UH, we think it's important to

do that monitoring and stand up for shareholder rights. Professor's fam and French are very active and this this part

of the business. We take it very seriously. UM, you know we have and what we did recently was we sent a letter two the companies we invest in, which is basically every public stait company, and said, these are the principles that we along which we vote and you're actually voting your proxies because you know, you look back over the past few decades, mutual funds were notorious for hands off relationship and they really are the ones who

own most of the shares on behalf of their their shareholders. Yeah, we just had one a case where a company was UM had a hostile bid another company was going to take it over, so they decided that they were going to put in a poison pill and uh, and a staggered board. And this was about the time that their annual shareholder meeting was coming up, and we told them

we would vote against them. Well, our policy is we would vote against the directors in that case, and we look to see where those directors are directors and other companies, and we vote against against them. There crust the board, the whole wherever they So, how do you guys have any view on executive compensation? We keep seeing stories about these CEOs and CFOs for public companies, tremendous, tremendous compensation packages. Yeah, it's it's a really complex area. We know we don't

have uh. We like to make our decisions based on good and perical research. There's abundant evidence that poison pills are bad. Um in general, there are some net operating a lost poison pills, but the typical poison pill is bad for shareholders, so that's why we vote against it. Thank you so much, David for being so generous with your time. If you've enjoyed this conversation, please check out the rest of our discussion. You can find that on Apple, iTunes, SoundCloud,

and of course Bloomberg dot com. Check out my daily column on Bloomberg view dot com. Follow me on Twitter at rid Halts. I'm Barry rid Haults. You're listening to Masters in Business on Bloomberg Radio. Welcome back to the podcast portion of the show. This is where I take off the headphones and not worry about I love this like cinema verite. You can hear the headphones come off, you can hear the papers rattling. Um. But this part

is where we kinda get a little less formal. Don't worry about the radio length segments, which are always an annoying interruption, and just let the tape recorder role and have a little fun. Um. I have so many questions to ask you. You're not gonna get back to Austin for for days if I go through everything. So I'm really going to focus on on really the most important ones because I've been looking forward to chatting with you

for so long. Let's let's start with one about Dimensional When when you began, um, it was purely an institutional business, wasn't it. That's how did your relationship with financial advisors come about? Hunt tells me there's actually a good story behind this. Well, it's um. Sometimes when people achieve a bit of success. Uh. People assumed that it was it was planned. This was one of these uh fortunate pieces of good luck that happened to us. Nothing wrong with

a little sendipity again, right. What happened was by nine, Uh, we've gotten up to about four or five day dollars in our management and we thought we were smoking and and so you were one percent of the shot size of the company today and you thought, we've made it. We've made it. So we had an advisor, there was an advisor in Sacramento approached us and said, what's his name, Dan Wheeler, Dan Weel because people love to hear the name on the race. Dan, if you're listening, this is

about you. Yeah, no, it was. So Dan approaches with the idea getting of getting access to our funds because they're low cost and there their price for institutions. And we said, well, you know, we don't know about that because we've heard about individuals and how they get in and out of the market and flavor of the month, flavor of the month and all of that and that really, um, it wasn't the kind of our thing. And he said, oh no, no, no, no no he he he didn't he

didn't do that. Sort of thing. So he said, okay, well we'll give you, we'll try it, and uh but if we find that you're trading a lot of of our funds, then we're gonna get rid of you. Done so he said, okay, Well a year went by. Next year he comes back, he goes, hey, look, I think, uh there's a business in this. There's a number of advive talked to a lot of advisors. They're very interested in getting access to your funds. And once again we said, well that's ok, but we we need to talk to

him first. We need to be convinced that they're like you, that they won't be just trading willy nilly. And and so year two, how many people does he bring in, as you know, the next group of financial advisors. Well it was enough. It was a small enough group. We can all sit around the table. Let me put it that way. I think they're ten or twelve advisors. And so when did this um take off as an actual business within dimensional funds? Well, it, uh, it picked up.

It picked up his team pretty quickly. Uh it wasn't you overnight by any means, but you know, it's been twenty five years and uh, twenty six years and it's uh, it's um, yeah, just kind of taking a life on his own. It's uh. Gentleman's name was Dan, Dan Wheeler, Dan Wheeler. And what's your relationship with with Dan? Now? Well Dan retired a couple of years ago. We you know, what's one of the problems we're facing now is that all these people have been good friends over the years.

We're all getting a little older. You know, Um, he did he work directly with with you guys that he worked for you or was he just he uh worked with us and built the business up? And you know it? What it is is that the difference in approach between us and then most firms is, Um, we built a firm around a set of ideas there's notion market efficiency and uh, and developed our investment philosophy has has the

empirical research and entero dimensions evolved. So um what Uh we kind of wait for advisors to that share that opinion and then those those ideas we wait for them to contact us. Really because it's very difficult if you go out to all the advisors out there, it's you know, it's a difficult to find out which ones in advance would be interested in hearing this kind of story, so we kind of wait until they're ready to hear the story before we talk to him. How many advisors do

you work with? Now? They're about um three thousand advisory firms and now some firms have a lot of advisors, some just a one person advisory shop. What percentage of of the four billion are the advisors actually working with? They're about our business now? Really? Yeah, talk about so really you guys tacked to a different direction and became the majority of your A. U. M. Well, part of it is um that the institutional business when we started

was our our clients were the large defined benefit plan. Uh. Well those have been systematically shut down over the years. That isn't make a business as it once was, and you know, more of it's coming into the individual market. So let's talk a little bit about UM. Let's look a little bit about you. You run a four hundred billion dollar farm. You're the chairman and the co CEO. What's a day in the life of David Booth Like, Well, it's uh, it's a it's a really a lot of fun.

I think the culture of the firm is that, you know, people have a spirit that we can we can change things, and so it's a lot of client work. It can be there can be any one of the beauties is every day is different than there can be problems like, uh, you know Argentina shuts down, you know, Capital Control shuts closes the market, or it could be uh some sort of trade error or something. There's always some kind of concerns. But the fund is really working with the clients and

you know, ultimately we're working with individuals. And the enthusiasm comes from taking these new ideas around which we built a firm and seeing the light go on for people as they come in and say that aha moment, that's uh, that's the excitement in the business. Uh, people go, I get it now. So so let's talk about a decidedly not a moment. You guys did fairly well throughout the financial crisis. What was it like running an asset management firm when you know, the markets get she lacked and

people are panicking. Well, it's it's very stressful. Obviously, Um, we're not immune distress. Sometimes people say, well you're because you're not trying to time the markets. You don't care. I mean, we care just that there's not and we don't We're not a control the markets. Did you see a lot of outflows? Did you get a lot of panicked calls? How? How did that? What was the day to day like when you were in the midst of

oh eight oh nine. Well, the distinct, distinguishing characteristic is that our clients stayed the course when there were massive flows out of equity funds across the industry. We were one of the few firms that actually had positive flows every year, positive flows through oh seven, no eight or not.

And that explains why over the past five years you've doubled in uh in size in terms of so this in hindsight, I don't mean this as a positive because everybody wishes it never happened, But net net you guys came out fairly well after the crisis. Yeah, well you could see the benefit of having a story about equilibrium, which is what we believe. You know, sometimes people would panic and go, gosh, you have markets are efficient? You know, why are they down? And and the answer is that

markets are efficient. They're not perfect. You know, markets have always gone up and down, and they'll continue to go up and down. That's why you have a positive expected outcome from investing in stocks people. You know, you have to have a positive expected outcome where people wouldn't invest in stocks. So it was we had great traction just going to reviewing the basics with people when they come in totally stressed out. Would say, hey, look, markets are

where buyers and sellers come together. They both have to in a voluntary transaction. They both have to have I feel like they got a good deal or they don't trade. Now, if you look at the market, what's going on now, they're trading. Volumes are huge, So a lot of buyers coming into the market. Now, as to whether it's voluntary or not, I think there are a lot of voluntary uh, the buyers, but there are a lot of forced sellers,

people who have margin calls and whatnot. So, without being a market forecaster, I did this video in late two thousand and eight, beginning of two thousand nine. It turns out it it was right pretty close to the bottom of the market. Um. But it wasn't about timing at all. It was about explaining how markets work and just reviewing that. And you say, look, Warren Buffett's out there buying after he had a number of transactions he reported at this time.

So and isn't too bad. This tracker is not too bad. So he said, if we had to make a guess, if anything, probably the buyers are getting too good a deal now. And you know, I've watched my mouth out with soap. I really said that they got it was inefficiently priced, but they got a good deal of buyers. Because you look at the tepid recovery since the recession over six years ago, stock market has done great and their recovery has been relatively modest. So you might ask

yourself why how would that happen? Well, I think prices got to really attractive levels so it didn't take much of a recovery to have them pop back up. So so, in other words, markets are efficient, but people may not be the most efficient, the most rational sellers when emotions reared head. Absolutely. We have an advisor who says, I don't have people with investment problems. I've got investments with people problems. That's perfect. That really that really makes UM

sums it up perfectly. You know who I've been meaning to ask you about, and I actually skipped over it earlier. Is UM one of the earliest people you were working with? Um when you begin how did you meet. I want to pronounce his name correctly, Rex Sinquifield Um. He and I were classmates of business school. Actually my second year in the program at Chicago, I was a teaching assistant for FAMA and Rex took Fauma's course and so um

I can great at his papers. But on Fridays we would have a Q and A with a teaching assistance and Rex always showed up. He was a zealot over you know, really a scholar, and so he after he graduated from from Chicago with his NBA, he went to work for American National in Chicago and there he developed the first SMP five index Farmah, so so you launch d f A in Brooklyn. You reach out to Rex at a certain point. Yeah, he had got wind of

what we were doing and we just started. We were very far along at all, and he said he had been thinking about doing something similar on his own. So we said, well, look, uh, why don't we do this together? So it was yourself Rex, who else was one of the early co founders. Well, we had a number of several colleagues I'd worked with in my assistant from before.

There's a couple of key people as well. And actually a part of the story of the firm is really all the outside directors we had, which are academics, well, not all of them are academics, because I have a little further down my list to ask you about your relationship with one of my favorite nicks, former Senator Bill Bradley. Okay, well, um, you know, we've been working with Senator Bradley about five years. Um,

he's uh, uh, you have been a terrific you know. Addition, uh, he's works on a consoling basis, he's not uh is he a director or just well, he's a you know, an outside advisor, and he's yeah, deeply concerned about retirement income for people. And we've been doing a lot of work head headed by Bob Martin on helping people think through and prepare for retirement. And uh, there's a budding, a bit of a budding retirement crisis. The the average

baby boomer does not have enough money saved for their retirement. Now, they don't end there and there's not there. They're not short by a little, they're short by a lot. So what's gonna end up happening twenty years? Hence, when I think the number is something like forty or sixty thousand boomers a day are retiring over the next ten years. Is that about right? And that sounds that sounds right, and it's um It's just, you know, it's a huge crisis.

It's hard to make up if somebody's close to retirement and and hasn't saved enough, it's it's hard to save a lot in just a few years. The important thing is to train people and think about retirement over there over their lifetime. We have a friend Patrick O'Shaughnessy who wrote a book called Millennial Money and basically says, the advantage that twentysomethings have is they have a fifty year runway to save and the advantage of compounding is enormous.

You will never again in your life have that much of a runway. And most people look, I think I'm pretty typical. I was interested investing for many years, but I never really got serious until my late thirties. It didn't hurt to be earning a little more, but you know, you think about what that twenty years of compounding could have done. Even a little bit would have made a huge difference totally. It's so the magic of compounding is

one of the most important aspects of investing. So we talked about your trading strategy, and we talked about, um, what was like running running the firm. Someone said to me that, and I want you to clarify this. You guys are effectively market makers for fourteen thousand stocks. I think that's somewhat of an overstatement. You're not truly market makers. You're you're just providing liquidly by by offering slightly better prices than the bid. Is that is that a fair

way to describe it. Yeah, we tried to trade as close to the bid as we can. Um, if we were a market maker, we would be actively trading every day. I mean, one of the one of the principles we have is we don't want to see much turnover in the portfolios. Uh. The best way to save on trading costs is not trade very often. Uh. And then uh, my colleague says, the solution to high frequency trading is low frequency trade. There, Well, you know these high frequency

traders are out there, and that you know. I'm we don't do high frequency trading. I uh, Uh. As long as everybody has access to the same information, I don't have a problem with high frequency trading. So let's talk a little bit about your co CEO, Eduardo Rappetto. What's his role? How has he influenced the growth at Dimensional Funds. Well, he's been he's been spectacular. Edwardo's background was he got his pH d and uh some form of aeronautical engineering

at Caltech. Uh. He's explained it to me, but I don't uh it goes beyond. I can make paper airplanes and that's about it. But anyway, he got tired of um uh of that area, and I thought about doing uh finance, and he approached us. He joined our research team. It turns out academic research and finance is very similar to the academic We do academic research and and there a nautical engineering. It's uh, you know research, there's some general principles you following a lot of the same man

and so forth. So he uh and being as bright, he'sn't phenomenally bright, and he picked up what he needed to learn about finance, uh in a very short period of time. And so what's so you guys are co C E O S which is somewhat of a unusual arrangement in finance. How do you guys divide the responsibilities? Well, he he does the work and I take the credit. That's basically the way it works. I have to I have to see if I can get that done in

my own my own office. So you would you say he's more operations and you're really more strategic or well, I would say he's more hands on. I've tried to get out of day to day management. Um and uh. And we have a you know, a huge bench, a lot of depth in the firm and uh, it's you

need to make that generational transfer. It's really important in running a business that that you, you know, hand off and so ed Ward O had you know, heads up the next generation and you know of brilliant, hard working people that that's nice to have that sort of deep bench behind you. Let's let's talk a little bit about the research paper you did with gene Farma Diversification, Returns and Asset Management. I want a Graham and Dot award.

Didn't it back in r not too bad? So what motivated you to say to your OPE professor, Hey, let's do a paper. Well it Uh, you know what you know, basically one of the biggest principles we have at the firm is diversification. As your buddy, you know, and it's difficult for people to see the benefit diversification, you know what you know? Uh? On TV sometimes they say if you have five stocks, you know you're diversified. You know. Uh, yes, you have five large cap tech stocks perfectly, that's it.

You don't need anything else. And so people need to help thinking through uh, you know the importance of diversification. That's really what that paper was about, is measuring, uh, how much your compound return. We we've talked about compounding. How much your compound return has improved over time through diversification. So there's diversification and there's rebalancing. Pretty close to a

free lunch. If I would say that anything is a free lunch on on Wall Street, that's that's the closest that that would be the first that would be the candidate, right, doesn't caution anything, You're not taking additional risk or whatever cost is tiny, and you basically over a period of decades compound and extra let's call it hundred basis points. Is that is that a fair assessment? Yeah, that'd be that probably a little high, but it's pretty close to that.

And a hundred basis points, uh, over the long haul can make a huge difference, right, especially with no additional risk and the minimus costs. Um. So let's let's continue along along those same lines. Um. You guys first started with dimensions we mentioned earlier, it was there was beta plus small cap, and then after small cap was value.

What other dimensions might potentially be coming down the pike. Well, we've been doing a lot of work with UH, a couple of measures on profitability, and it turns out that adds UH quite a bit. UH and and reinvestment or investment company investment. So there's always a lot of research coming along. It takes it seems like it takes about every ten years for a new idea to come along. So so let's look at each of those. So we'll

start with profitability. Pretty intuitive. The more profitable company is is it straight up profits or is it change? Is a growth of profits? It's it's a it's a it's a measure of profitability. The what And you're right, people, I think that's intuitive of the you have to throw in the caveat though, which is uh, gosh, it seems like common sense. Why would I get paid more if a company's more profitable? Seems like that its lower risk, and that's not really, that's not really what's going on.

What's going on as you say, Look, suppose I have two stocks and and they're selling at the same price, but they have the same kind of characteristics wanted, and one of them has a greater profitability measure. How do you explain uh, uh that it's they're selling at the same you know, the same price. Well, that the earnings must be risk here, So it's, uh, there's something about

that company that's risk here. That's the thought process. That's a thought process where you can make well, you're saying that's wrong what I'm saying, that's uh, that's right if you um by, It's just it's just another way of getting at this notion of risk. If too, there are stated differently. If two companies have the same expected cash flows, the ones that's uh, that's that's less certain will sell attle lower price. And what was the other dimension, the

other new dimension you said you were just investment. It turns out reinvestment is that R and D or is that share buy backs and dividing. It can be all the people that companies, the companies that have the lowest return are those that have uh, small companies that have UM that are selling at high prices, that have low profitability measure and invest a lot of money. That's uh, those are the low profitability and are investing a lot of it. And those that's another dimension that actually just

fairly well, well, we don't know. That's the ones that they're Okay, let me get the ones that are not profitable and they're investing a lot their returns that turn out to be horrible. It's okay, hemage in cash and they're not making Yeah, yeah, that's that's about one percent of the markets. And so even though we're not stock pickers where there's their behavior is so unusual that we've

chosen not to invest in those. Uh so you're just screening them out as low quality and you want nothing to do with that, right, And then the reinvest aessement? How do you define reinvestments? UM? Just the normal UM R and D or it's everything all right, So let's let's go back a little bit to the University of Chicago. Because that was such a short segment, I didn't get a chance to answer you some questions. So the Booth

School was was named. You made an unrestricted grant to them and At the time it was worth about three million dollars, but I suspect it was worth more because the structure of the deal was really kind of interesting. It was it was cash and a what was described as a considerable share of stock and mentional holdings, which is what owns um dimensional funds, and that has to be worth significantly more money today. Then when that that

grant was made, what was the thinking behind that structure. Well, the structure was I I owed the university a lot. Uh you credit them with you are You've said this in many interviews. You credit them with opening your eyes, changing your life, responsible for your success. I mean these are your words. Yeah right, No, No, They've been a partner every step along the way, you know, working with Fall And then when we started the firm, Fama joined

us as a director right away and founding shareholder. Then we went to uh, we had we created this mutual fund. Mutual fund has to have an independent board of directors. Uh, those are all there. All of our independent directors either teach at Chicago or half taught at Chicago. And when we started this was incredibly important because you know, we're operating out of my brownstone in Brooklyn, and and without a track record. So people sometimes ask how did you

get those first clients? And I think we had I think we were reasonably persuasive, But I think a lot of it has to do with this association and we the people could see all these people, you know, farm Shoals, uh Miller, you know, it's an you know it's uh, that's right, Roder Ribertson, it's another one of your outside of it. So that's a tremendous amount of credibility between between the the nobel laureates and and everybody else. So so I owed him, and so the questions now structuring

the deal then, Uh, I was long. I had a huge debt and a little cash because we hadn't really you know, it took a long time to get get to get profitability. So it's basically cut him in on an income stream, you know, uh, give him the income on on on some shares going forward, rather than I didn't write him a check for one big momp sum. It's uh, so they'll have it earned out as you described. And it's you know, in terms of the valuation, I

never got involved in the valuation to begin with. I don't want to get involved in it now it is. This is what it is. There's a phrase I read about UM Chicago and and you described yourself. I'm looking in my notes as someone someone described Dimensional Funds as the applied brain trust of the Chicago School. Is that a fair statement? Well, we've we've Yeah, we are about implementation and really the application of the ideas. That is

what the firm is about. And I can maybe it were stated a bit to say we were applying the brain power. I mean, there's well, I guess it's not too much of an overstatement. But how about applied think tank from the University of Chicago. Okay, there we go. Yeah, it's I think the important thing is we build a

firm around a set of ideas. Most of those ideas were deal out and leading business schools, and and that's what we ask our clients to do is share you know that, uh, share are those ideas, that point of view and we can all work together. You mentioned Jim Lourie earlier. He developed the Chicago Center for Research and Security Prices with Lawrence Fisher or some people just call that CRISP for it's uh, how significant is that? It's amazing when you go to do some research and you

you look for certain data. That's an amazing database. It is the only reasse is the research quality database that uh nearly all academics you who's in doing research, and its significance cannot be overstated. Because let's go back, uh to nineteen if you went around and asked people, what's been the historical rate of return on stocks? But what he knew? You know, all kinds of wild guests and some people get a zero. Some people say fifteen percent a year. I don't know what that is, but we

could kill that. Um okay, that was That was an odd interruption that wasn't for us. Um let me if I can kill that. You're gonna pause this second? Is that this there? You go? Okay, I got it. It was It was one of the headphones started squawking at us. That's funny. That's never happened before. Um okay, because I'm not fine? No, so oh you know what I just did. I just turned on the phone again. Glad, This isn't live. Yeah, right, Charlie, you're gonna edit that out? And where wire we we're

talking about Crisp Crisp. Yeah, let's go back to three. Have you asked people, um, what's been the long term performance of stocks the stock market? You know, what's been the rate of return? Nobody had a clue because nobody never collected the data. That's amazing that people did not know what the returns of the market, right. So Chris Uh did this study and found that I think for the period in long term performance has been like nine

point three percent per year. And it's been it's been amazingly Uh, it's been about that in the years since sixty three, which is very unusual in economics to have something that I worked in one data set that shows up again very similarly in the next data set. It almost never happens. So so it's pretty consistent. And clearly it's a function of a number of factors that apparently

um are are not changing. Well, that's right, and so and there was never back in those days, there wasn't a standard way of measuring your time weighted rate to return in other words, of you start with, you know, a certain investment, and then over the years you add and you had more money to it, take money out, whatever, and then he end up with a certain amount of money. The question is how calculating that rate of return adjusting for the flows is very complicated, and so that's one

of the things that had to come. They had to be created. And so in nineteen sixty three, for example, there were no really there were no consulting firms that dealt in the business because there was no there was no standard way of measuring performance and doing performance measurement. So that's an industry that's just you know, exploded, uh in the last fifty years. That that's really amazing that we could call those the good old days, of the good old bad days. I can't imagine that they're just

simply wasn't a history of of data. It's that's amazing. So so what does that mean for people like you know, Jeremy Siegill Stocks for the long run? When that came out, CRISP had already been around for a while, right, So so he's basically building on the work that that they had originally put together, right, and he he found data going back even even longer. But it's you know, if you ignore the history, you're doomed to relive it, I guess for sure. So I keep hearing people talk about

we're in a low expected return environment. Stocks have had a great run bonds have had a great run, but everybody should throttle back their their expectations going forward. What what are your thoughts on that? Well, there's some loose evidence that there's a relation between let's say the overall price earnings on the market and and sous going returns. Have an interesting story of that. So the so I fam infringe to this research and ad at UH and

their their their draft at the research um. We talked about in one of our board meetings that when dividend yields or lower price dividents are high, you know, uh if if valuation ratios are high, the expected returns are low in the market. So this was meeting we had in September of eighty seven. So I said to Genevama, so, well, does this mean we should At that time the evaluations were high. I said, does this mean we should do something? He said, oh no, no, all the variance around that

is so high you don't really have any information. Uh. The next month was a crash of what's in the day between friends. Yeah, so he got he mistaken for being a market timer when he obviously wasn't trying to say that at all. Now, when he says the variance is so large. Is he just saying this is such a noisy series that we can't derive any information, right, That's it. So we know that higher PE is a little price here, and lower P and other metrics are

less expensive. But there's only so much we could do with this. There's much much you can do with it. And you know, people frequently also ask a related question, which is, gosh, we're kind of at a peak in the market. Is this really a time to get in because we're all time high and you know, you would expect to be at all time high. I mean, that's just the kind of way markets work, something like I don't know, some big fraction. Most of the month ends, uh,

historically have been at at historical highs. I did a column not too long ago. Yeah, I want to say in ten we started with the SMP five and the Dow got over the pre crisis highs, and people started writing articles that, oh, markets at a new high, it's toppy, it's dangerous. So we went back and looked at the data. It turns out that market is at or near highs much of the time, unless you're in a bear market where you're you know, the Dowd kissed a thousand and

sixty six didn't get over it to lady two. But from eighty two to two thousand, you're you're making a series of fresh eyes every year. You know. We we talked about earlier about one unfortunate circumstance the person that got out at the bottom of the market when the money market funes now can't get back in. And the other there's a similar kind of related to person, the person that wants to invest. It's gonna wait for a crash before getting in and the market takes off now

they go, well the trains are you left the station now? Now? So they they never seemed to uh get caught up. And that's emphasizes once again the importance of having a particular investment philosophy, usually translating into an asset mix, an asset allocation, and sticking with it. The psychology we hear from people with that is, look, I miss so much of this run. If I put my money to work now, I'll feel doubly stupid if the next day the market crashes.

There there's almost this risk aversion like their investment is going to crash in the market. Well, there is kind of Murphy's law and translated into investing, which is, uh, you know, whenever I put the money and that's the that's going to be the peak of the market. As so break it up into four pieces and spreading and you don't have to worry about You don't have to worry what you want to do. I think talking to

people for years is UH. And I counsel people you want to invest in a way and you can kind of relax. Markets are going to go up and down, that's what they do, and you shouldn't invest more in the market than you can. UH. Then you can accept and uh and just ride those ups and downs. That's the natural order of things. And over the long haul you're probably gonna be Okay, what what was the great JP Morgan quote? Markets will fluctuates, asking Congress where where's

the market go? Markets will fluctuate, which is which I think is is a fair statement. Well, but speaking fairness is actually one of the things that needs to be emphasized a bit more in terms of what well this whole notion of fishing markets or equilibrium point of view of investing, it says that, um, if you take the profacial investor versus the average joe. They have the same

expected outcome UH orient trading costs. I mean, maybe the institution can trade cheaper on it, but ignoring the costs, UH expected outcome UH for each is the same. That's about as fair as it life gets. In other words, it's not the case that the average Joe going in to invest or Jane, I don't uh, the average family has UH is not getting ripped off by the professional investor. I think that's really cool. That's one of the it's

one of the implications. And that's why I think those of us to share this point of view, you know, I feel this kind of missionary zeal to spread the word that. There's been a number of discussions, a number of people have said, you know, individuals actually have an advantage. An individual doesn't have someone at the end of the quarter or these days the end of the month saying how'd you do? Why am I into performing the benchmark? Why an't you doing better? An individual can ride the

ups and downs without somebody breathing down their neck. Well they can, but they don't. Yeah, I mean, uh, you know, it's um. One way to think about the market is just kind of and and the role of indexing. It's just simple arithmetic um index funds by a slice of the whole market. Uh, you know. And so since they buy just a slice of the market, then the non index portion, i mean, the active portion, has got to be buying a slice of the market because it's got

to add up to the market. So by simple arithmetic, you know, the the active people are trading with themselves largely trading with each other more or less. Yeah, so it's a zero sum game and minus the costs. So so you mentioned diversification. What else should investors be thinking about things like asset allocation, stocks and and bonds as well as valuation? How how should they contextualize that? Well, I think first off they need to figure out it

sounds some well, but what's the objective here? Is a retirement? Are you saving for uh, college or house? What? What is? And each of those he would manage the money is a little bit differently depending on what the objective is. That would be your tilt. So it's a little more stop or a little yeah, right, But it is about the an asset allocation and and and risk and and uh. And in the case of retirement, it's about maintaining a

standard of living in retirement UH and UM. Having an objective of I want a certain retire income in retirement adjusted for inflation lead you to manage money a little differently than UH, than the typical firm, firm or person just seeking to maximize wealth. You know, you talked earlier

about the upcoming retirement crisis we're gonna be facing. And I'm trying to remember the name of Charlie Ellis's book which was about that, just that subject, UM, which is, we have a day of reckoning coming and no one really seems to be prepared for it. And the math is pretty clear most Americans are not going to be able to afford a comfortable retirement without some radical change

in their spending and saving behaviors. Yeah. I think I haven't checked out recently, but I think you can buy a real annuity has about a five percent yield and buy real annuity meaning that as long as you live it, it pays you that five percent adjusted for UH, you know, adjusted for inflation. Five. Yeah, and UM, so that means I mean, it's a simple math. You figure out how much you want to have multiplied by twenty and and that's what how much, that's how much you need, So

let's go. We've talked a little bit about corporate governance earlier about poison pill adaptation. Um. There's some some agitation out of the SEC and and d C about the post financial crisis cities systatic systemically important financial institutions. How on earth did mutual funds which had nothing whatsoever to do with the last any of the last crisis either oh, seven oh eight or two thousand or I don't remember if mutual for other than the mutual fund timing scandal,

which really had nothing to do with them being systemic. Um, How did how did mutual funds get dragged in? And what do you guys doing about this in terms of of that regulatory Can I call it overreach? Yeah you can? Okay, Yeah,

it's um. Um. Somehow in the it seems like in rein the press one would I think that part of the reason we had a financial crisis was that we didn't have enough regulation or regular If there's any are any institution that are heavily regulated as banks and insurance companies, it's insurance. Other than a I G, which was kind of a unique creature. The rest of the insurance industry had nothing to do with this. And I'm a critic of hedge funds. They cost too much, most of them

don't deliver on what they promised. But hedge funds didn't have a whole lot to do with this crisis either. But of all the entities in the world to finance, mutual funds were bystanders, they were observers. They had nothing to do with this. And there's no evidence that there was any kind of panic and it was that. No, I didn't, it's um, but there is there is a theory that we need to have a lot more regulation.

I don't know why, but the mutual fund you know, the money sitting in a in a the assets are in a vault somewhere, but we're running off with them. Um. And I think they kind of helped prevent a bigger panic. You know, back in two thousand and eight, two thousand nine, if you recall those the the anxiety that was stress people were experiencing them, you know, that's uh. We were worried that people would panic and you know, rush for the door all at the same time. And it just

didn't happen with mutual funds. It happened with people's individual moneys. But it didn't happen with h didn't happen with mutual funds, and especially you guys. You guys are notorious for having very long perspective and your financial advisors. Full disclosure, we own dimensional funds in in my office. But you know, we watched, we went through that whole training process. We know how you guys operate. It made us think that

other advisors is always that sort of game of chicken. Well, I don't want to sell, but I gotta sell before that guy. You don't have that situation, no, don't. I think a lot a lot of it stems from the fact that there was, you know, one or two money market funds that had to break the bus. Sure, and that's what this is all about. They go, Okay, that's those are really that's really banking the Skuy's money market fund.

And keep in mind, for tax reasons, they're always quoted as a dollar, whether we know it fluctuates up and down, so that's should be a relatively simple thing to fix. There's no such thing as risk free return, but that's what they were promising. I don't know why taxpayers are suddenly on the hook for backing people's risk investments. In money market. Hey, you could park your money in short

term treasuries if you want risk free, low returns. So you think that, let me, yeah, I know, I mean I I'm on the same same So so you're about to say something about well, risk I mean that's that's Um, it's important as as ties into retirement. Uh, there's a retirement discussion. Treasury bills are riskless in the sense that there's really you're gonna get paid, and if it's short term,

there's not much price risk. They are extremely risky when you think about a person retiring because uh, you know, um, and an example would be somebody retired twenty years ago. We probably got a five percent yield and they bought bonds. Now, whatever they're getting dependent on which bondy by you know, one too, maybe three. You have to reinvestment. And the risk is if you're getting a higher yield, you're also getting higher inflation. So there's a real risk that the

value of your assets are going to be worth less. Right, So it's for a retired person, they can be actually pretty risky, which all points back to how underinvested much of America is in their own own retime. So this this leads to a couple of of questions that are on my list. What is hurting investors today? What are they doing that's getting in their own way? Well, I think, um,

I haven't done. This is not science at all, but I think one of the concerns that I have is that people are desperate for yield and they look at at money market funds and basically a zero return. I mean, you know, uh, and they go, I gotta, I gotta, I gotta do something. I get a better yield than that you get on Greek bonds today, if that's what

you really look. Yeah, so there we go. There we have a bracketed somewhere between treasury bills and Greek So people forget about the risk and they chase yield, and that leads to disaster. And you know, inflation, you know it's probably real interest rates are negative two you know, uh something like that, but meaning that we're zero and you throw in two percent. So once you get once

you adjust that, you're you're really negative. Yeah. And when we started firm, I think interest rates were like fift and eighty one and inflation was like eighteen percent, so you have negative three percent. So yeah, so it's better. I mean, it's uh, the difference is, you know, no longer have bonds risk free rate to return at least nominally competing with equities. So that, to me, that explains a big chunk of why we have such elevated prices

and equities. Yeah, so I think people are um maybe two. Maybe there's I haven't looked, I haven't seen any studies, but I'd be worried that people might be invested in too much inequities because of you know, the if you look at the dividend, yield's higher than the interest rate,

which makes it seem like a free lunch. Well, we've seen a lot of people take assets that otherwise, under normal circumstances would have found that way to fixed income, and they say, let me just put into a dividend portfolio and I'll get my coupon and if this goes up and down, I don't worry about it. Some risk in that as well. Yeah, that's right. As long as the company is paying the dividends, you're okay. But you know, let's most of them don't pay dividends in so let's

talk a little bit about um your perspectives. You've had a thirty plus year window since you launched dimensional Funds in eighty one. We're coming up on your thirty fifth anniversary. Yeah, next year. That's amazing. So what has changed, um, in your perspective? What what has changed in the industry and how has dimensional Funds changed along the way? Well, UM, I would say a couple of things. First off, we understand a lot more about what causes returns or where

returns come from in this dimensionality, um. And the second aspect though, is really this movement towards indexing, you know, the ideas that were started in the academic world in the sixties that led to the creation of index funds in the seventies, you know, has really gained traction over there since the eighties. And it's really uh uh you know, I'm surprised it hasn't gotten you know, you know, more assets.

It's amazing that it's taken half a century for something that a heres to be obvious to really have gotten on. Which leads to the next question, how much room is there for indexing to grow? What? What? It's not especially huge today, but how big is too big? Well, we don't know that, I mean at some point if but in general, index funds just take a provide of slice on everything, and so they're about they're the most neutral strategy out there as opposed to you know, somebody wanting

growth or income or whatever they object. All of those slants that cause you to get away from the market have capacity constraints. But your your basic market index fund UH, you know, UH should be pretty neutral, could absorb kind of an untold amounts, lots of upside and and no ceiling anytime soon. Right, So here we are, we're six years into this bull market. There's plenty of skepticism out there.

Why no euphoria? Why has the investing public I don't want to say shunned, but clearly they haven't jumped aboard this bull market the way they did in the nineteen nineties, well even the nineteen nineties. Uh, I don't know if they really jumped on or not. It seems to me like I've been in the business four or four years or whatever, I think, UH people are always there's always kept.

People are always nervous. I mean that's good, which is good, you know, that's ah UM and markets being what they are, it seems like UH, prices over the long haul gets set fairly and people have a reasonable return of a if they stick with it. Not so, so let me go to now to my favorite three questions. These are the three that I ask all of my guests, and

and the the answers are always so instructive. Someone coming out of we're not too far from graduation weekend all across the country, someone graduating college today, what sort of advice would you give them about their career and about their approach to investment. Well, a career, I'd say, follow your passion. I don't think I have any great new

insights that you know, it's the standard bromides. I think in terms of investing, the key to investing is save a lot there you go, So start early and uh, you know through the the benefits of compounding over the long haul. Uh, it's a powerful force. Next question is you said you've been in the industry for forty four years. We talked about what you saw change over that time period. So let me change this question up. What changes do

you think are coming over the next forty four years. Well, I think a couple of the trends that we see now we will continue. One is globalization. People. When I started in the business, it was we had the interest equalization tax. Another thing, it was very difficult to invest international, So I think that's changing, which is which is good. Um. The other is, uh is I think a very positive trend, which is a lot of the administrative costs and transaction

costs are really coming down a lot. Kind of it's related to technology, so I'm sure. So I think the costs of investing are coming down, and I think that's uh more than just move it to indexing. But I think in general costs are coming down. So I think it's you know, you know, very encouraging. And then my last question, and this may um, you may be the only person this question doesn't apply to, but I'm gonna

ask it anyway. What do you know about investing today that you wish you knew when you began forty four years ago? Well, and by the way, the reason I say it may not apply to you is you began with an idea that most people don't discover it til way late. So no, I mean that part of investing is what I wish I I UM new back then, is that what investing is about is as an overall experience.

It's not just the science. Sure, you want good returns and that's but when it started out, I think I thought, if you can give people good returns, that's all you need to worry about. But it's also you're dealing with people and helping them get through difficult times like two thousand and two thousand nine and come out the other side with a with a consistent investment approach. I wish I knew you know that that was That's really uh,

that's what it's really all about. It's the philosophy and a consistent approach so people can feel they need to not only have good returns, they need to feel good and not beat so stressed out and they don't you know that. I wish I had figured that out earlier on David, thank you so much for being so generous with your time. This was really a fascinating um discussion and I appreciate you spending so much time with us. Okay, well, thank you very much. You've been listening to Masters in

Business on Bloomberg Radio with Barry Ridholts. We've been speaking with David Booth. He's the founder, chairman and co CEO of Dimensional Funds. David, if they want to find some of your research, will learn more about Dimensional funds. Where would they go on our website? You know it under dimensional dot Com or Dimensional fund Advisors. There you have it. I want to thank Mike Batnick for his help with research, Charlie Vollmer as my engineer, and thank you Sarah for

recording this. I'm Barry Ridhults. You've been listening to Masters in Business. I'm Bloomberg Radio