David Booth: 45 Years to $1 Trillion at Dimensional | #646

David Booth traces Dimensional Fund Advisors' origins to his work at Wells Fargo in the early 1970s, where he was part of a cutting-edge group developing some of the first index funds. Working alongside Gene Fama, Fisher Black, and Myron Scholes, Booth helped create indexed portfolio strategies when the concept was revolutionary. After Wells Fargo's index fund business was eventually sold (eventually becoming part of BlackRock), Booth and his colleagues regrouped in 1981 to launch Dimensional.

The firm's early years were torturous. Starting with only a small-cap fund, DFA entered the worst nine-year period for small stocks in history relative to large stocks. From launch through 1990, the fund compounded at 2% annually while the S&P 500 returned 14% annually. Despite delivering exactly what small-cap stocks delivered (slightly outperforming the Russell 2000 benchmark), the strategy was brutal to sell. Booth recounts being accosted in a client's hallway and told he was the worst-performing manager in any asset category. His response was to ask which part of the fundamental argument—that small stocks are riskier and risk-reward are related—the client no longer believed in.

The turning point came with the Fama-French three-factor model (published in 1992), which provided empirical validation for multiple dimensions of return: market factor, size factor (large vs. small), and value vs. growth. Booth received a draft from Gene Fama in September 1991 and used it to convince a major client to launch value strategies with DFA before the paper was even published.

Booth emphasizes that the core challenge in investing is behavioral, not analytical. Investors claim to be long-term but typically give strategies one to three years before abandoning them. He argues it takes "at least one year longer than you're willing to give it" to properly evaluate an investment strategy. The real problem emerges at the sell decision: while investors are process-oriented when buying (reading prospectuses, doing due diligence), 90% have no predetermined criteria for selling. When inevitable underperformance occurs, emotional motivation to sell intensifies.

He draws parallels between investing and life generally, arguing that both are complex and uncertain. Rather than trying to predict outcomes, people should develop sensible plans, pay attention to results, and adapt flexibly—making maybe half a dozen major shifts over a lifetime rather than constantly trading.

Booth notes that the greatest breakthrough in investing has been the combination of empirical evidence that professional managers can't consistently beat markets plus the ability to buy market exposure cheaply. He references his family history: his parents, Depression-era and post-WWII generation, kept $15,000 in cash in a safe deposit box. Booth calculates that $15,000 invested in 1945 would have grown to over $1 million by 1985 (40 years), and another $1 million by 2025 (another 40 years). His parents, thinking of themselves as outsiders vulnerable to insider manipulation, never invested.

Regarding current market concerns like AI, Booth suggests the technology's inevitability doesn't predict which companies will win or lose, comparing it to the California gold rush where Levi Strauss (selling to miners) often outperformed the miners themselves. This reinforces the case for holding broad market portfolios rather than picking individual stocks or trends.

On financial education, Booth laments that high school graduates lack basic knowledge about balancing checkbooks, understanding stock and bond returns, and basic economics. He argues this gap contributes to anti-capitalist sentiment and that economics fundamentally teaches decision-making under uncertainty—applicable to all life decisions.

Booth also discusses his acquisition of James Naismith's original 1891 handwritten rules of basketball (two typewritten pages), which he donated to the University of Kansas. He describes the experience of seeing these two pages that "changed the world."

On sustaining a business through early unprofitable years, Booth stresses absolute conviction in the value proposition. DFA didn't pay dividends for its first 15 years but survived by maintaining belief in the fundamental ideas while working hard and playing the long game. He never doubted the firm had a great idea—only whether they could survive long enough until performance normalized.