How's your weekend? Nope. Nothing good happened yet. Was your birthday this week? I don't count those. That's a bad example.
The best part about being an interviewer is you get to meet a lot of interesting people. Very often you have a chance to meet people you wouldn't otherwise get to meet and to see what makes them tick. I didn't really see myself as an interviewer initially. What's very interesting to me is finding out why certain people who became leaders became leaders. How did they rise up from nowhere to somewhere? One of the most successful money managers of the last 40 years was David Booth. David Booth built Dimensional Fund Advisors into one of the world's most successful money management companies, now managing more than a trillion. He is best known, as some people say, as the person who gave the gift to rename the University of Chicago School of Business, the Booth School of Business. I had a chance to sit down with David recently to talk about his new book, Stay Calm, which contains his investment philosophy and his secrets of life.
But David, when you started this in 1981 out of a brownstone in Brooklyn, in your wildest imagination, did you think this was going to be a trillion-dollar asset management company?
Oh, I thought that was way beyond what we were thinking. We were just trying to survive. The firm was built around the idea that finance had developed into a science in the 60s and 70s, and we wanted to figure out how to apply the science. It's because these ideas, if you don't apply the ideas, they aren't very useful.
So your role in the beginning was everything — you were helping to raise the money, you came up with the idea. But in the end, over the last 40-plus years or so, your role has been to be what, the CEO, principally?
I've been CEO. Now I'm just chairman. We have two co-CEOs now really running the firm day to day. So I kind of bring some institutional memory and meet with them regularly, but they really run it.
That name came from the idea at the start of the firm was what we call a small-cap fund back in 1981. If you look at big institutional investors, they weren't holding the stocks of small companies at all. And so we said, we'll develop a small-cap fund, which back in those days there were about, say, 4,000 — the smallest 3,000 — what we mean by small-cap. And collectively they represent about 10% of the universe, 5 to 10%. And we said, look, it seems sensible if you're forming a stock portfolio to have stocks of large companies and small. And in 45 years, everybody's nodded, yeah, that makes sense. Say, well, you're not holding the small. Oh, well, that's true too. So what we'll do is we'll give you access to small.
So in 1981, if somebody had said, David, you have a nice idea, but I'm not going to give you that much of my money, but I'll give you $1,000, and they kept it with you since 1981, what would that thousand dollars be worth today?
If you didn't pay taxes, it'd be worth about over $40,000. So it's gone up 140 times. Yeah. They never had to pay taxes. They kept it in. Yeah, yeah. Up 140 times. Yeah. Amazing, huh? That's the magic of compounding. You know, that's one of the big lessons in finance, of course, compounding. And you read about it theoretically. But when it's your money, you go, holy cow, that was real money.
But the premise was, as I understand it, maybe it's changed, is that if you buy an index of stocks and particularly smaller companies, not the bigger ones, if you hold that for quite some time, you're going to probably beat the market averages. Really should do very well. Is that right?
That's right. And actually, getting the name of the firm, Dimensional, came up this idea that we thought of small-cap stocks as a separate dimension of returns.
So, David, when people who are smaller investors wanted to, traditionally at, say, 10, 20 years ago, they wanted to invest in Dimensional, could they come in if they were very small? And today, if they want to come in, do they come in through an ETF?
If they're a very small investor, they would come in through the ETF. We've never developed a marketing program for the small investor. We're there, but we don't have toll-free telephone lines for people to call into.
What's the difference between a traditional index fund and a Dimensional fund? A traditional index fund is obsessed with one thing: tracking the benchmark index. At Dimensional, we say, look, flexibility has economic value. So instead of slavishly trying to have zero tracking error relative to an index, we use a little bit of human judgment in there, and particularly in trading and the way we structure portfolios. So we're willing to deviate a little bit from straight index tracking.
Now, you've written a book, and this is a book called Stay Calm. And that is your investment philosophy. Stay calm. You don't get nervous about where the market's going up and the gyrations of the market and so forth.
I'm always curious, and I always have a certain level of anxiety. And that's why I go back to first principles, the things we learned in school. You know, control what you can control as a first. And we can't control the markets. Investing is complex and uncertain. So is life. So, you know, people have gotten where they are by learning how to manage uncertainty, which largely means predict what you can. But once you can't predict, control what you can control to a considerable degree. For example, in investing, you can't predict the stock market. You can control how much risk you take. You know, how much you have in stocks versus money market funds, that sort of thing.
So when the markets are going down and plummeting hundreds of points, you don't panic and you don't get upset when that happens. No. You take the most recent big downturn in 2020, when the pandemic had just hit and markets down 30%. People are stressed out. They go, you know, what's going to happen? I go, I don't know what's going to happen. Here's what I believe in. People aren't just going to sit there and take it. They're going to figure out how to get back on track and they're going to innovate. Their firms are going to innovate. They're going to be doing new and different things. You know, we probably will get back on track faster than you might think, which is what happened. The recession was only like one quarter long. I mean, that's human ingenuity in some sense. That's really what I'm preaching now. Human ingenuity is what will bail us out.
What is the principal mistake that the average investor makes? Well, the principal mistake is they think they can predict things, or they think they have to try to predict things in order to be successful. They have to figure out which stocks to buy, when to get in the market, when to get out. And the evidence is none of that kind of makes sense.
Now this book, Stay Calm. How long did it take you to write this book?
It was a couple of years. You know, all of this dealing with uncertainty, how to manage uncertainty in investing, there's a parallel to personal life that was overwhelming. So why not talk about, you know, life experiences and dealing with uncertainty? And once you went down that path, then all of a sudden I thought we had a message that could appeal to everybody. In fact, one of the things that's been really rewarding over the last few weeks as the book is starting to get circulating is how many people have come up to me and say, I want to give this book to my kids. I think that's pretty cool.
Let's go through your background. How you came to be the founder of Dimensional when you grew up in a farm in Kansas initially.
Well, I grew up in a farming community. My parents lived in town, but my relatives were mainly farmers.
And what city were you in? What was it? Garnett, Kansas. And you have two siblings? Yeah, a brother and sister.
Now, when you and your siblings were ready to go to college, your father moved so you'd be closer to the University of Kansas.
They knew they didn't have enough money to send us away to college, so they came up with an elegant solution. They just moved to Lawrence, which is where the University of Kansas is. And we could live at home and go to school, because the big cost of school in those days was the cost of living.
Now, not that many college-age kids really want to live at home, but I guess you and your siblings realized if you didn't do that, you weren't going to get a college education. No, we felt blessed that we were able to go to school at all. Right.
So you went to college, University of Kansas. And what did you major in? Finance?
No. My undergraduate was economics and math, and my year in graduate school at Kansas, I took a finance course, and I go, wow, that's me. And like a lot of kids that age, I wanted to be a professor. My finance professor said, well, if you're serious about wanting to study finance, you need to go to the University of Chicago to the PhD program. So I applied, and that put me on my way to do a PhD at the Business School, the University of Chicago Graduate School of Business. And now that graduate school of business is called the Booth School. Yeah. Chicago Booth. Okay.
So when you went there, did you think the people were smarter than you thought they were going to be, or not as smart as you thought they were going to be?
I'd never met that many incredibly smart people in my whole life back in those days. And none of my professors had gotten Nobel Prizes.
Now, you write in your book that there's a professor named Gene Fama, who was a professor at the University of Chicago. And he changed your life because he came up with a thesis that inspired you to start Dimensional. Is that fair?
First year in the program, first course was Fama's course. And basically he outlined how markets work. You know, this here, he called it the efficient market hypothesis. That's a market does a really good job of setting prices. So what pops out are fair prices so people can get a fair return if they invest, you know, in the broad market. Well, before he came up with this theory, the conventional wisdom at that time on Wall Street was, if you hire really smart people that buy good stocks for you, stock pickers can beat the market averages. But he kind of showed that it's very difficult to beat the market. Is that fair? That's fair.
Before 1960, people didn't really have an idea of what the returns on stocks and bonds were. And that changed with the development of data at the University of Chicago. So he showed that overall, if you go into an index fund, in effect, you're going to make 9 or 10%, maybe 9% overall and 10% of its smaller companies, something like that. Yeah, something like that. And the point is, it's not only a fair return to investors, it's a fair cost of capital for the companies issuing stock and bonds.
All right. So you ultimately were inspired by him. Did you actually get to know him? Yeah, I know. The second year in the program, I was his research assistant. And which is good and bad news. So good news is working side by side with him was just an incredible experience. The downside was I realized that wasn't what I was cut out to do. That's what he was cut out to do. In fact, he still works 6 or 7 days a week doing research. It's amazing.
You got an MBA and then you went to work for Wells Fargo? Yeah. So here I left, you know, in Chicago and working and being in the PhD program, you could present papers to the faculty and sit in on their papers they were developing. So I got to know the faculty really very well. And then I went to Wells and they were trying to apply the ideas. So these ideas are brand new, ideas are floating around and I realize nobody is trying to apply them. Well, the world's best served if Gene Fama does the research and I figure out how to apply the ideas.
So you did that for a while, but then you ultimately decided to leave to go to AG Becker. Yeah. Well, they shut down the group I was working on, so I wanted to join AG Becker. They were large at that time, a pension consulting firm, and it was a great exposure to pension health and business works.
And then what propelled you to think that you should start your own firm after working for big firms? And did you have any money to start the firm with?
I had something I really wanted to do, which is this idea for small stocks. One of my clients at the time was AT&T at that time. This was before the divestiture. They were the biggest pension fund in the world. And they had 110 managers picking stocks. None of them were investing in the stocks of smaller companies. So if you want to help yourself out, why don't you create a small-cap portfolio? And they did. And the idea took off.
Right. So you started Dimensional. You were living in Brooklyn. Yeah. And you started in a brownstone. Right. So you moved the beds out and you just sort of working there? Yeah.
Did you have anybody that capitalized the company with any venture capitalist or said, I think it's a good idea, I'll give you some money to start?
We had a little bit of outside money. Schroder Capital Management, a UK firm. Okay. Provided a little bit of money. We only raised enough to just get through all the registrations and find out if we had clients. We went to call for telephone lines, you know, to run the... I thought I need six telephone lines to do the portfolio management. They wouldn't give me the lines because they thought I was a book. Because in those days, they weren't prepared for a startup firm. And in Brooklyn.
So you start this company in 1981. And with how many people did you start it up there? About 4 or 5 of us.
Your basic concept was that if you buy smaller stocks in an index kind of pooled account, that you'll probably do better than if you just pick stocks here and there, isn't it?
Well, it was even simpler than that. You ought to have large and small. You shouldn't just have all your money in large and you don't have access to small. But this was a portfolio concept. You know, individually small stocks are pretty risky. They can go to zero. As a group, it's pretty compelling.
All right. So you did that. And after how many years before you realize, hey, this is a real business, or you would go out of business after a year or two? I was worried about that. Yeah. We had great feedback. A lot of people loved what we were doing, but being a startup firm with no track record, people just gave small amounts of money to invest.
What did your Kansas parents say about this? I overheard my dad once telling people that I was in high finance. They were shocked that I would leave a good job to do a startup.
So the firm is taking off and you're starting at '81. And so by the end of the '80s, is it clear it's going to work?
The whole concern was, can we last long enough to be profitable? You know, because the money dribbling. Yeah. It wasn't very fast.
So today let's talk about Dimensional today. Dimensional has how much money does it manage now? Over a trillion. Trillion dollars. And how many employees do you have? About 1,700.
And why is your customer base individuals or is it institutions?
When we started, it was only large institutions, firms like IBM and Boeing and sovereign wealth funds. Along about 1989, I believe it was, we had a financial advisor approach us. He wanted access to our funds. We were unusual in that even though we were an institutional money manager, we commingled people into mutual funds. We had institutionally priced portfolios for low-cost funds. Advisors started approaching us, getting access to our funds. We found that was really terrific.
Let's suppose I like the concept of an index and not just picking stocks. If I buy an S&P 500 index, I show called Vanguard 500 Index. What would I do better with a Dimensional fund because of the way you're doing it, than a standard S&P 500 index?
Well, we hope that's the case. And there's like all ideas, there are periods of time when it looks really great and periods of time when not so good. Our first nine years actually, we started a period of time when performance wasn't so good relative to the S&P. Fortunately, the last 35 years have been terrific.
So can anybody call up and say, I want to be your investor in your fund?
Well, we have these ETFs now that are publicly available. And we started applying this research. And there were other ideas particularly coming from Fama and French. Our capability now basically handling the whole stock market. We have large company portfolios, small.
You're the current chairman. And but at some point, do you think the firm will ever go public or be sold, or are you just going to keep it where you have it now?
Well, I don't know. What I do believe is if we keep our focus on doing what's really right for our clients and for our employees, we'll probably be okay over the long haul.
You're worried about the future in terms of what will come on, who's going to run it, or it's not your day-to-day worry?
I think it's already been solved. We have two co-CEOs. They're young, 50s and 60s. In fact, I think about this all the time now. I think the firm's running much better now than it would have had I stayed on being the CEO.
Now, your father was always worried that the world would fall apart. So he always kept some money in his safe deposit box. Right. When he passed away, you went into a safe deposit box. And what did you find? Found $15,000. A huge fraction of their net worth. And I realized right away, I mean, here's a family couple that grew up during the Great Depression, fought World War II, you know, went through all these different cycles. That was their safety net, you know, and that's what enabled them to stay calm. They knew that they had that $15,000.
Now, your parents didn't leave this your success. I mean, they may not have understood exactly what you did, but they realized you have been very successful, I assume. Yeah. I was glad to see that, you know, they got to see a glimpse of it anyway. But, you know, part of the story. I went back and looked at $15,000. What if dad had put it in the stock market when he got back from the war? And at the end of '45, now we're 40 years later. What would it be worth? $15,000 if we got the market return would be worth a million.
When you look back on your career, what are you most proud of? You know, we've never had to compromise. Our goal was never to be the biggest money management firm. It's in some sense just to be the coolest.
Now, in every interview conducted by anybody today about the business world, there's one question that everybody always asks: how is artificial intelligence changing your business?
Well, it's changing it the way it's changing every business in the sense that it's making us much more efficient. A lot of tools at our disposal we didn't have before. Now, sometimes the question comes about, how do you think it'll help people pick stocks? And, you know, it's the same old story. You know, your AI algorithm has to be better and faster than everybody else's AI algorithm, which that seems a bit unlikely. You know, the whole premise of Gene Fama is that stocks already reflect all available information, and no AI algorithm can do any better than that.
The next chapter for Dimensional. What do you see? Its future next 10 years?
We're still on this growth curve. You know, implementing new ideas, new ideas continue to come along. Most recently it's been ETFs and ETF share classes. So the next generation I think will be developing more and more quantitative methods to help people in their planning and so forth. It's really important that individual investors get good financial advice. I think there'll be more and better tools to help people get that advice.
When people become successful in the money management world, they make a fair amount of money, and they then often become involved with philanthropy. You made a gift to the University of Chicago in honor of the professors there who had helped you with this concept, and they renamed the school after you. Now, I thought you had told me once that now when you go anywhere in the world, people may know Dimensional, and they may not, but they certainly know Booth.
Yeah, that is kind of funny. I went to talk to the dean, and I said, look, it's unbelievable how much my experience at Chicago helped me and helped me be where I am today. And so I want to make a gift. That's a big part of what I have, not just contributing to the annual fund. And they said, oh, you know, we've been thinking about naming the school, and we weren't asking for as much as you're willing to give. So we'll name the school after you.
So today, I think when you go around the world, when people meet you there, they say, oh, you're the founder of Dimensional, or you're the head of the Booth School of Business at the University of Chicago. It's more likely they'll say, yeah, the Booth School. I'm really proud to be connected with. University of Chicago is more than just the business school, but this whole, the way they operate the school and the idea of no safe places, it's still, I think, the best place for intellectual thought.
So you've been involved in a number of philanthropies. So let me mention one other one. The University of Kansas. Yes. You were a Kansas fan, and you gave them some money to fix up their football stadium, and they named it after you. Right, right.
And so what is it like when you go to a stadium when the stadium is named after you? No, it's really a thrill. You know, I realized early on, even though I've been successful, I mean, I don't have enough money to cure cancer, but I've been able to have an impact, I think, in two different universities: Chicago and the business school, and the University of Kansas with their athletic program.
And when you go to the University of Kansas football and basketball games, you get a standing ovation when you walk in. I do get a lot of acclaim. And when I do that, I most often really think back to my parents. You know, what would it have been like had they been able to see this?
You know, the biggest challenge that people have to make a lot of money, or not the biggest, but how do you not spoil your children when you have so much money? What have you done to keep your kids' feet on the ground?
We set up trust funds early on, but I never told them they had those until they turned 21. And I had to tell them, this is what I'm giving. You know, if you want to do for your kids what I've done for you, then you'll guard this money carefully. And instead of being profligate the way they spent, they ended up being too frugal. So eventually I had to pull them aside. Look, you know, this is my... you can spend some money. It's okay. You ought to buy a nice house, for example.
So when you look back on your career, what are you most proud of? Been able to accomplish a lot doing things the right way. Never had to compromise, which is why we're still a lot smaller than some of the giants. I mean, our goal was never to be the biggest money management firm. It's in some sense it's to be the coolest. I mean, what we think is the best. I'm proud to be able to be associated with all these great minds and that they wanted to stay connected to us.
As you look back on what Dimensional has become, what would you want most people who are going to watch this interview to know about Dimensional that they might not otherwise already know?
Feel really trust in the firm. I mean, I think I tell our employees that providing investment solutions is our business and trust is our product. So that's what I hope people would think. You know, I think that's a firm we can trust to.
