Josh Matthews in Conversation with David Booth: The man who changed the world of investing

Written by Josh Matthews, HBA

A few weeks ago, I attended the DFA (Dimensional Fund Advisor) CEO Conference in Kennebunkport, Maine and spent a few days interacting with CEOs from other wealth management firms, as well as the team at DFA. I had the privilege of having lunch, dinner and spending some quality time with David Booth, who is a pioneer of passive and factor-based investing. His career is very interesting, and within this blog, I share a part of his amazing story.

After narrowly avoiding the Vietnam draft, David entered the University of Chicago PhD program, under Eugene Fama. Before completing the PhD, he and DFA Co-Founder, Rex Sinquefield, discovered that investors had grossly over estimated fund managers’ stock-picking abilities, and so he left and set out on creating better investment solutions for investors. Whilst working at Wells Fargo, Dimensional’s founders helped launch the first index funds in the 1970s. As research advanced, they pioneered factor investing, starting the firm [DFA] in 1981 with the idea that they could do better than indexing.’’

“Dimensional’s investment approach is grounded in economic theory and backed by more than 50 years of academic and empirical research.’’ Booth’s approach to investing, known as “Dimensional Investing”, is based on the belief that markets are efficient and that investors can benefit from capturing the dimensions of higher expected returns through systematic investment strategies. The firm focuses on capturing market factors, such as value, size, profitability and momentum, that target the drivers of higher expected returns to deliver long-term investment solutions. DFA has been successful in doing this and the DFA equity funds we recommended to clients (where possible) 15 years ago have outperformed their respective benchmark; a feat that only a small percentage of managers can claim.

Over the years, DFA has gained a reputation for its disciplined and research-driven approach to portfolio management. “After [David] and Sinquefield started Dimensional, they put Eugene Fama on its management board and [University of Chicago] faculty members Merton Miller and Myron Scholes, MBA ’64, PhD ’69, on its mutual fund board, and all three men would go on to win Nobel Prizes. In 2008 David Booth gave a gift to the school valued at $300 million, and the Graduate School of Business was renamed after him.”

Booth’s influence extends beyond the realm of finance. He has been actively involved in promoting investor education and providing resources for individuals to make informed investment decisions. Booth has also contributed to the development of educational programs and research initiatives focused on advancing the understanding of markets and investment strategies.

In recognition of his achievements, Booth has received numerous accolades. His name was added to the Institutional Investor’s “Investment Management Hall of Fame” in 2017 and has been featured in publications such as Forbes and Barron’s. Furthermore, Booth has served on various advisory boards, including the Investment Company Institute and the University of Chicago’s Financial Mathematics Program.

David G. Booth’s contributions to the investment industry, investor education, and philanthropy have left a lasting impact. His commitment to evidence-based investing and promoting financial literacy has empowered individuals and institutions to make more informed decisions about their investments.

Today, DFA manages more than $600 billion for institutional and individual investors around the world and, in 2022, Barron’s magazine named DFA the fund manager of the year. 

Here are some key principles that guide DFA’s investment philosophy. Many of these principles will be familiar to our clients who have benefited from the implementation of these beliefs:

1. Markets are efficient: DFA believes that markets are highly competitive and that securities prices reflect all available information. They emphasize that trying to consistently outperform the market through stock picking or market timing is challenging.
2. Emphasis on dimensions of higher expected returns: DFA focuses on capturing dimensions of higher expected returns in the equity markets, such as value, size, profitability and momentum. They believe that these factors can lead to long-term outperformance.
3. Systematic investing: DFA follows a systematic investment approach rather than relying on individual stock selection or market timing. They use rules-based strategies to implement their investment philosophy, seeking to capture market premiums efficiently.
4. Diversification and risk management: DFA emphasizes the importance of diversification to manage risk. They believe that a well-diversified portfolio can help reduce exposure to idiosyncratic risks and potentially enhance risk-adjusted returns.
5. Cost-consciousness: DFA emphasizes controlling investment costs, as they believe that expenses erode investment returns over time. They aim to provide cost-effective investment solutions to investors.
6. Long-term perspective: DFA encourages investors to adopt a long-term perspective and stay committed to their investment strategy, even during periods of market volatility. They emphasize the importance of discipline and avoiding emotional reactions to short-term market fluctuations.

These beliefs shape DFA’s approach to portfolio construction, investment strategy and client education. By focusing on empirical evidence, systematic investing and risk management, DFA seeks to deliver long-term investment solutions aligned with their core principles.

For more information on DFA and your portfolio, please speak with your Wealth Manager at MASECO. 

SPIVA | S&P Dow Jones Indices (spglobal.com) 
https://www.dimensional.com/us-en/financial-professionals 
https://www.chicagobooth.edu/magazine/eugene-fama-david-booth-fireside-chat 

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