David Booth

David Rubenstein (0:02)

One of the most successful money managers the last 40 years is 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 dollars. He's best known to some people 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. Well, David, when you started this in 1981 out of a brownstone in Brooklyn, in your wildest imagination, do you think this was going to be a trillion dollar asset management company?

David Booth (0:38)

No, 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. Because these ideas, if you don't apply the ideas, they aren't very useful.

David Rubenstein (0:57)

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?

David Booth (1:11)

I've been CEO. Now, I'm just chairman. We have two co-CEOs now really running the firm day to day. So I bring some institutional memory and meet with them regularly. But they really run it.

David Rubenstein (1:23)

Dimensional, where did that name come from?

David Booth (1:25)

The idea, the start of the firm was what we called 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, oh, ha, we'll develop a small cap fund, which back in those days, there were about, say, 4,000, the smallest 3,000 is 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 that would 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. They go, well, that's true, too. So what we'll do is we'll give you access to small.

David Rubenstein (2:15)

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 $1,000 be worth today?

David Booth (2:29)

Well, if you didn't pay taxes, it'd be worth about over $140,000.

David Rubenstein (2:33)

So it's gone up 140 times. Yeah. They never had to pay taxes. They kept it in.

David Booth (2:37)

Yeah.

David Rubenstein (2:37)

It's up 140 times.

David Booth (2:38)

Yeah. Amazing. 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's real money.

David Rubenstein (2:52)

What Dimensional's 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 biggest ones, if you hold that for quite some time, you're going to probably beat the market averages, or at least you'll do very well. Is that right?

David Booth (3:09)

That's right, and actually the name of the firm Dimensional came up, this idea that we thought of small cap stocks as a separate dimension of returns.

David Rubenstein (3:20)

So David, when people who are smaller investors want to traditionally, let's 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?

David Booth (3:34)

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 in.

David Rubenstein (3:47)

What's the difference between a traditional index fund and a dimensional fund?

David Booth (3:52)

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.