David Booth: The First Index Fund, Competing Fiercely, and Keeping it Simple (EP.131)

Jan 7, 2021

David Booth, Co-founder and Executive Chairman of Dimensional Fund Advisors, discusses his journey from shoe salesman to a pioneer of index funds. He shares insights on the importance of evidence-based investment strategies and the role of academic research in asset management. Booth reflects on the challenges of early small-cap fund performance and the significance of client communication. He also delves into the rise of value portfolios, the evolution into the ETF market, and the need for simplicity in investing. Luck, culture, and defining success are key themes throughout their conversation.

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INSIGHT

Don't Overreact To Short-Term Disappointments

Reevaluate strategies after extreme outcomes, but short periods rarely overturn decades of evidence.
Use global, long-term data and a sensible economic story before changing approaches.

ADVICE

Help Clients Stick To Their Plan

Build an investment philosophy you can stick with and help clients endure inevitable drawdowns.
Prioritize empathy, monitoring, and keeping clients invested through tough periods.

ANECDOTE

Advisors Entered After A Careful Pilot

Dimensional first let a financial advisor access funds in 1988 after vetting behavior and requiring training.
That pilot with Dan Wheeler opened advisor distribution while protecting fund investors from churn.

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At its core, managing wealth is about finding the best solutions for your clients. As he mentions in today's discussion with him, this sentiment has guided David Booth's storied career. As the Co-Founder and Executive Chairman of Dimensional Fund Advisors, David's career is so illustrious that he's been called the father of evidence-based investment products. We open our conversation by exploring David's career, beginning with his job as a shoe salesman in Kansas to developing the first index fund. We ask David if he had been able to foresee the power that "geeks" would have over the asset management business. His answers highlight how immature the industry was when he founded Dimensional Fund Advisors and how they had to first convince people before selling them on small cap funds. Reflecting on his early successes and challenges, David opens up about how his clients reacted when small caps underperformed. A key theme this episode, David emphasizes the importance of making decisions that are grounded in academic research. We then dive into several topics ranging from David's views on value portfolios to the stroke of luck that led Dimensional to open their products to financial advisors. After chatting about why Dimensional is now entering the ETF space, David shares his take on direct indexing and why he still favors simplicity over complexity. Near the end of the episode, we discuss how David built his company culture, how luck factored into his life, and how he defines success. An incredible conversation that touches on pivotal moments in the history of financial services, tune for more insights into the life and work of David Booth.

Key Points From This Episode:

Introducing today's guest, Dimensional Fund Advisor Co-Founder David Booth. [0:00:14]
David talks about how his background informed his professional career. [0:03:57]
Hear about David's role in developing one of the first index funds. [0:06:13]
Why David's work creating index funds for Wells Fargo came to a close. [0:07:28]
Exploring the origins of Dimensional Fund Advisors. [0:10:24]
How David saw the future of his industry when he started Dimensional and how they created the first small cap funds. [0:15:18]
The reaction from David's early clients when small caps underperformed. [0:27:04]
David recalls the "borderline character assassination" that he faced when pushing for small caps. [0:24:16]
How and why Dimensional first added value portfolios. [0:26:03]
Unpacking David's view that values struggle relative to growth. [0:28:37]
The recent lessons that Dimensional has learned about value relative to growth stocks. [0:33:17]
What it would take for Dimensional to reconsider their entire approach. [0:37:50]
The importance of flexibility and believing in your solutions when dealing with uncertainty. [0:43:19]
David emphasizes that your financial solutions should be based on robust data. [0:47:00]
How Dimensional began giving financial advisors access to their products. [0:48:46]
Why, after so many years, Dimensional is now entering the ETF space. [0:52:25]
With widespread fee compression, hear how Dimensional is handling fee cuts. [0:55:53]
Answering the question — what's the next big thing for Dimensional? [0:57:29]
David shares his take on direct indexing and customizable portfolios. [1:00:59]
How David built his company culture and the role that luck plays in his life and in business outcomes. [01:02:59]
We ask David how he defines success in his life. [01:06:48]